Pursuant to Section 19(b)(1)
The Exchange proposes to amend Rule 928NY (Risk Limitation Mechanism) to expand the risk limitation mechanism to all orders, including Complex Orders. The proposed rule change is available on the Exchange's Web site at
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.
The Exchange proposes to amend Rule 928NY (Risk Limitation Mechanism) to expand the risk limitation mechanism to all orders, including Complex Orders.
Rule 928NY sets forth the risk-limitation system, which is designed to help Market Makers, as well as ATP Holders, better manage risk related to quoting and submitting orders, respectively, during periods of increased and significant trading
Pursuant to Rule 928NY, the Exchange establishes a time period during which the System calculates for quotes and orders, respectively: (1) The number of trades executed by the Market Maker or ATP Holder in a particular options class; (2) the volume of contracts traded by the Market Maker or ATP Holder in a particular options class; or (3) the aggregate percentage of the Market Maker's quoted size or ATP Holder's order size(s) executed in a particular options class (collectively, the “risk settings”).
Currently, ATP Holders may voluntarily utilize risk settings for PNP Orders and PNP-Blind Orders submitted via ArcaDirect, which are defined as “Applicable Orders”.
The Exchange believes that expanding the availability of the risk settings to all orders would reduce the likelihood of unintended trades and would enable ATP Holders to re-evaluate their positions before requesting to re-enter the market if a risk setting is triggered. The proposed expansion would, for example, prevent the execution of a large set of orders that are improperly priced for any number of reasons (
To effect this change, the Exchange proposes to amend Rule 928NY(a)(1) to provide that the Exchange would maintain separate “trade counters” for each of the following scenarios: (i) When any order, including a single-leg order or any leg of a Complex Order submitted by an ATP Holder is executed in any series in a specified class; and (ii) when a Market Maker quote is executed in any series in an appointed class.
The Exchange proposes to amend paragraphs (b), (c), (d), (e), and (f) to make similar changes so that each of these paragraphs would have two sub-paragraphs that would be parallel to the proposed changes to Rule 928NY(a)(1):
• The first sub-paragraph of each paragraph would address how the specific risk setting would be applied to an ATP Holder's orders, which would
• The proposed second sub-paragraph of each paragraph would address how the specific risk setting would be applied to a Market Marker's quotes, as further described below. Accordingly, current sub-paragraph (3) to each of paragraphs (b), (c), (d), (e), and (f) would be re-numbered as sub-paragraph (2).
In addition to the substantive change to expand risk settings to all orders, the Exchange further proposes to make non-substantive amendments to each of the proposed sub-paragraphs to paragraphs (b), (c), and (d). The Exchange believes that the proposed rule text would simplify and streamline the rule by describing a risk setting being triggered when an ATP Holder's orders or Market Marker's quotes “have traded” rather than using the more cumbersome text that an order or quote has been traded “against.” When addressing an ATP Holder's orders, the proposed rules would provide that the risk setting would be applicable to all orders in a specific class. When addressing a Market Maker's quotes, the proposed rules would provide that the risk setting would be applicable to all of the Market Maker's quotes in an appointed class. For each risk setting, the proposed new text would provide as follows.
• The Transaction-Based Risk Limitation Mechanism, described in Rule 928NY(b), would be triggered under the following conditions:
○ When a trade counter indicates that within a time period specified by the Exchange, “n” executions of an ATP Holder's open orders have traded in a specific class (proposed Rule 928NY(b)(1)); or
○ when a trade counter indicates that within a time period specified by the Exchange, “n” executions of a Market Marker's quotes have traded in an appointed class (proposed Rule 928NY(b)(2)).
• The Volume-Based Risk Limitation Mechanism, described in Rule 928NY(c), would be triggered under the following conditions:
○ When a trade counter indicates that within a time period specified by the Exchange, “k” contracts of an ATP Holder's open orders have traded in a specific class (proposed Rule 928NY(c)(1)); or
○ when a trade counter indicates that within a time period specified by the Exchange, “k” contracts of a Market Maker's quotes have traded in an appointed class (proposed Rule 928NY(c)(2)).
• The Percentage-Based Risk Limitation Mechanism, described in Rule 928NY(d), would be triggered under the following conditions:
○ When a trade counter has calculated that within a time period specified by the Exchange, “p” percentage of an ATP Holder's open orders have traded in a specific class (proposed Rule 928NY(d)(1)); or
○ when a trade counter has calculated that within a time period specified by the Exchange, “p” percentage of a Market Maker's quotes have traded in an appointed class (proposed Rule 928NY(d)(2)).
The Exchange also proposes clarifying changes to how the Percentage-Based Risk Limitation Mechanism operates. The Exchange proposes to modify Rule 928NY(d)(2)(i)–(ii) to make clear that the trade counter would first calculate, for each series of an option class, “the percentage(s) of an ATP Holder's order size(s) or a Market Maker's quote size that is executed on each side of the market, including both displayed and non-displayed size,” and would then “sum the overall percentages of the size(s) for the entire option class to calculate the `p' percentage.” The proposed changes are designed to account for the fact that ATP Holders may submit multiple orders on each side of the market that may be counted by the risk settings (whereas Market Makers have only one quote on each side of the market) and to reduce excess verbiage to streamline and condense the rule text, which the Exchange believes adds clarity and transparency to the Rule.
Because the proposed expansion of risk settings for orders would include routable orders, the Exchange proposes to amend Rule 928NY to address the counting and cancellation of such orders (or unexecuted portions thereof). First, the Exchange proposes to add rule text to Commentary .07 to Rule 928NY to provide that executions of routable orders on away markets would be considered by a trade counter once the execution report is received by the Exchange.
Regarding cancellations, the Exchange proposes to amend Commentary .01 to Rule 928NY to provide that once the risk settings have been triggered, pursuant to paragraphs (e) and (f) of the Rule, the System would automatically generate a “bulk cancel” message to cancel Market Maker quotes and electronic orders, or portions thereof, that have not been routed to away markets, excluding intraday and prior day Good-Till-Cancel (“GTC”), All-or-None (“AON”), Customer Best Execution (“CUBE”) orders, and orders entered in response to an electronic auction that are valid only for the duration of the auction (“GTX”).
In addition to the foregoing changes to paragraphs (e) and (f) of Rule 928NY, the Exchange also proposes to amend these paragraphs to address the action (
The Exchange also proposes to amend Commentary .04 to Rule 928NY to specify the persistence of the risk settings, once activated, by an ATP Holder for orders to conform this Commentary to the changes described above to delineate risk settings between an ATP Holder's orders and a Market Maker's quotes. Specifically, the Exchange proposes to divide Commentary .04 into two paragraphs to make it easier to navigate—paragraph (a) would address the persistence of risk settings for quotes, and paragraph (b) would address the persistence of risk settings for orders.
Current Commentary .04 to Rule 928NY provides that an ATP Holder must activate its risk settings for orders on a daily basis. The Exchange proposes to amend this Commentary .04 to specify that “[o]nce an ATP Holder activates a Risk Limitation Mechanism for its orders in a specified class, the mechanism and the settings established will remain active unless, and until, the ATP Holder deactivates the Risk Limitation Mechanism or changes the settings.”
The Exchange proposes to adjust the minimum and maximum parameters for the Risk Limitation Mechanism as set forth in Commentary .03 to the Rule. The current Rule provides that the Exchange would not exceed the following minimum and maximum parameters, applicable to quotes and orders:
• Minimum of 1 and maximum of 100 for transaction-based risk setting;
• Minimum of 20 and a maximum of 5,000 for volume-based risk setting; and
• Minimum of 100 and a maximum of 2,000 for percentage-based risk setting.
The existing parameters have been in place since 2012 and the Exchange has not modified or increased these parameters in the past four years.
• Minimum of 3 and maximum of 2,000 for the transaction-based setting;
• Minimum of 20 and a maximum of 500,000 for volume-based setting; and
• Minimum of 100 and a maximum of 200,000 for percentage-based setting.
Although this proposal establishes the outside parameters of allowable settings, Rule 928NY would still obligate the Exchange to announce via Trader Update “any applicable minimum, maximum and/or default settings for the Risk Limitation Mechanisms,” which would afford Market Makers and ATP Holders the opportunity to adjust their own risk settings within the announced parameters.
The Exchange will announce by Trader Update the implementation date of the proposed rule change to expand the availability of the Risk Limitation Mechanism to all orders, which implementation will be no later than 90 days after the effectiveness of this rule change.
The Exchange believes that its proposal is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the “Act”),
ATP Holders are vulnerable to the risk from a system or other error or a market event that may cause them to send a large number of orders or receive multiple, automatic executions before they can adjust their order exposure in the market. Without adequate risk management tools, such as the proposed expanded risk settings for orders, ATP Holders may opt to reduce the amount of order flow and liquidity that they provide to the market, which could undermine the quality of the markets available to market participants. Thus, the Exchange believes that the proposed rule change to expand the availability of the risk settings to all orders removes impediments to and perfects the mechanism of a free and open market by providing ATP Holders with greater control and flexibility over setting their risk tolerance and more protection over risk exposure, if the market moves in an unexpected direction. The proposed expansion of the risk settings to all orders would promote just and equitable principles of trade because it would help ATP Holders not only avoid transacting against their interests but would also reduce the potential for executions at erroneous prices, which should encourage OTPs [sic] to submit additional order flow and liquidity to the Exchange.
This proposed expansion, which was specifically requested by some ATP Holders, would foster cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in, securities as it will be available to all ATP Holders for all orders entered on the Exchange. In addition, the expanded risk settings may prevent the execution of erroneously priced trades, which would help parties (including clearing members) avoid large trading losses, thereby fostering cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in, securities.
The Exchange believes the proposed adjustments to the minimum/maximum parameters for each risk limitation mechanism, which have not been increased since 2012, are consistent with the Act because they would allow the Exchange to strike the appropriate balance to ensure that risk settings could be established at a level that is consistent with existing market conditions, which would enable the risk settings to operate in the manner intended. The Exchange believes that setting the parameters within the broad range, as proposed, would provide OTPs [sic] with ample flexibility in setting their tolerance for risk. For example, OTPs [sic] with a lower risk tolerance may opt to select a lower threshold within the range established by the Exchange, thereby optimizing the protection afforded by this proposed rule change, whereas OTPs [sic] with a higher risk tolerance may select the maximum allowable parameter afforded by the proposed rule change. Moreover, because the Exchange would not be permitted to adjust the settings below the minimum or above the maximum proposed, the settings should remain at all times within a reasonable range. Finally, given that the risk settings would now be available for all order types, the Exchange believes it would be prudent to provide ample flexibility for setting the maximum thresholds.
Consistent with the ability to better manage risk, the Exchange anticipates that the proposed enhancement to the existing Risk Limitation Mechanism would likewise enhance the Exchange's overall market quality as a result of narrowed quote widths and increased liquidity for series traded on the Exchange, which would benefit investors and the public interest because they receive better prices and because it lowers volatility in the options market. Moreover, the Exchange believes that the proposal is consistent with the protection of investors and the public interests because it would permit ATP Holders to better manage the potential risks of multiple executions against an ATP Holder's proprietary interest that, in today's highly automated and electronic trading environment, can occur simultaneously across multiple series and multiple option classes.
Finally, the Exchange believes that the proposed changes to streamline and clarify the rule text, including updated cross references that conform rule text to proposed changes, promotes just and equitable principles of trade, fosters cooperation and coordination among persons engaged in facilitating securities transactions, and removes impediments to and perfects the mechanism of a free and open market by ensuring that members, regulators and the public can more easily navigate the Exchange's rulebook and better understand the defined terms used by the Exchange.
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange is proposing a market enhancement that would provide ATP Holders with greater control and flexibility over setting their risk tolerance and more protection over risk exposure, if the market moves in an unexpected direction. The Exchange believes the proposal would provide market participants with additional protection from unintended executions. The proposal is structured to offer the same enhancement to all ATP Holders, regardless of size, and would not impose a competitive burden on any participant. The Exchange does not believe that the proposed enhancement to the existing risk limitation mechanism would impose a burden on competing options exchanges. Rather, the availability of this mechanism may foster more competition. Specifically, the Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues. When an exchange offers enhanced functionality that distinguishes it from the competition and participants find it useful, it has been the Exchange's experience that competing exchanges will move to adopt similar functionality. Thus, the Exchange believes that this type of competition amongst exchanges is beneficial to the market place as a whole as it can result in enhanced processes, functionality, and technologies.
No written comments were solicited or received with respect to the proposed rule change.
The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act
At any time within 60 days of the filing of such 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 under Section 19(b)(2)(B)
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:
• Use the Commission's Internet comment form (
• Send an email to
• Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.