
[Federal Register Volume 80, Number 96 (Tuesday, May 19, 2015)]
[Notices]
[Pages 28745-28757]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12022]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74949; File No. SR-EDGX-2015-18]


Self-Regulatory Organizations; EDGX Exchange, Inc.; Notice of 
Filing of Proposed Rule Change To Establish Rules Governing the Trading 
of Options on the EDGX Options Exchange

May 13, 2015.
    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 April 30, 2015, EDGX Exchange, Inc. (the ``Exchange'' or 
``EDGX'') filed with the Securities and Exchange Commission (``SEC'' or 
``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 filed a proposal to adopt rules to govern the trading 
of options on the Exchange (referred to herein as ``EDGX Options 
Exchange'' or ``EDGX Options''). As described more fully below, the 
EDGX Options Exchange will operate a fully automated, Customer 
priority/pro rata allocation model. The fundamental premise of the 
proposal is that the Exchange will operate its options market in a 
similar manner to the options exchange operated by the Exchange's 
affiliate, BATS Exchange, Inc. (``BZX Options''), with the exception of 
the proposed priority model and certain other limited differences.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.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

[[Page 28746]]

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to adopt a series of rules in connection 
with EDGX Options, which will be a facility of the Exchange. EDGX 
Options will operate an electronic trading system developed to trade 
options (``System'') that will provide for the electronic display and 
execution of orders, as described below. All Exchange Members will be 
eligible to participate in EDGX Options provided that the Exchange 
specifically authorizes them to trade in the System. The System will 
provide a routing service for orders when trading interest is not 
present on EDGX Options, and will comply with the obligations of the 
Options Order Protection and Locked/Crossed Market Plan.
EDGX Options Members
    The Exchange will authorize any Exchange Member who meets certain 
enumerated qualification requirements to obtain access to EDGX Options 
(any such Member, an ``Options Member'').
    There will be two basic types of Options Members, Options Order 
Entry Firms (``OEFs'') and Options Market Makers. Options Market 
Makers, in turn, will be eligible to participate as Directed Market 
Makers, Primary Market Makers and Market Makers. OEFs will be those 
Options Members representing orders as agent on EDGX Options and non-
market maker participants conducting proprietary trading as principal. 
Options Market Makers are Options Members registered with the Exchange 
as Options Market Makers.
    To become an Options Market Maker, an Options Member is required to 
register by filing a written application with the Exchange, and then 
must register to make markets in individual series of options. Pursuant 
to proposed Rule 22.2, the Exchange may appoint one Primary Market 
Maker per option class. Market Makers may select from among any option 
issues traded on the Exchange to request appointment as a Primary 
Market Maker, subject to the approval of the Exchange. In considering 
the approval of the appointment of a Primary Market Maker in each 
security, the Exchange will consider: the Market Maker's preference; 
the financial resources available to the Market Maker; the Market 
Maker's experience, expertise and past performance in making markets, 
including the Market Maker's performance in other securities; the 
Market Makers [sic] operational capability; and the maintenance and 
enhancement of competition among Market Makers in each security in 
which they are registered, including pursuant to the performance 
standards set forth in proposed Rule 22.2(i).\3\
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    \3\ The Exchange notes that proposed Rule 22.2 is based in part 
on BZX Options Rule 22.2 (paragraphs (a) and (b)) and in part on 
Amex Rule 923NY (paragraphs (c) through (i)).
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    An unlimited number of Market Makers may be registered in each 
class unless the number of Market Makers registered to make a market in 
a particular option class should be limited whenever, in the Exchange's 
judgment, quotation system capacity in an option class or classes is 
not sufficient to support additional Market Makers in such class or 
classes. The Exchange will not restrict access in any particular option 
class until such time as the Exchange has submitted objective standards 
for restricting access to the SEC for its review and approval.
    EDGX Options Market Makers will be required to electronically 
engage in a course of dealing to enhance liquidity available on EDGX 
Options and to assist in the maintenance of fair and orderly markets. 
Among other things, an Options Market Maker would have to satisfy the 
following responsibilities and duties during trading: (1) On a daily 
basis maintain a two-sided market on a continuous basis in at least 75% 
of the individual options series in which it is registered; (2) engage, 
to a reasonable degree under the existing circumstances, in dealings 
for their own accounts when there exists, or it is reasonably 
anticipated that there will exist, a lack of price continuity, a 
temporary disparity between the supply of (or demand for) a particular 
option contract, or a temporary distortion of the price relationships 
between option contracts of the same class; (3) compete with other 
Market Makers in all series in which the Market Maker is registered to 
trade; and (4) maintain minimum net capital in accordance with 
Commission and the Exchange rules. The Exchange proposes to specify 
numerically the meaning of ``continuous'' with respect to Market 
Makers' obligation to maintain continuous, two-sided quotes. For the 
purposes of Rule 22.6, the Exchange will consider the continuous 
quoting requirement fulfilled if a Market Maker provides two-sided 
quotes for 90% of the time the Market Maker is required to provide 
quotes in an appointed options series on a given trading day, or such 
higher percentage as the Exchange may announce in advance. Substantial 
or continued failure by an Options Market Maker to meet any of its 
obligations and duties, will subject the Options Market Maker to 
disciplinary action, suspension, or revocation of the Options Market 
Maker's registration in one or more options series.
    Options Market Makers receive certain benefits for carrying out 
their duties. For example, a Market Maker may be designated by the 
Exchange as a Primary Market Maker or may have orders directed to it in 
its capacity as a Directed Market Maker, in each case receiving a 
priority advantage over other non-Customer orders to the extent 
applicable priority overlays have been implemented, as described below. 
In addition, a lender may extend credit to a broker-dealer without 
regard to the restrictions in Regulation T of the Board of Governors of 
the Federal Reserve System if the credit is to be used to finance the 
broker-dealer's activities as a specialist or market maker on a 
national securities exchange. Thus, an Options Market Maker has a 
corresponding obligation to hold itself out as willing to buy and sell 
options for its own account on a regular or continuous basis to justify 
this favorable treatment. The Exchange believes that the proposed 90% 
continuous quoting requirement for all Market Makers is consistent with 
that typically required of Primary Market Makers and market makers of 
similar status.
    Every Options Member shall at all times maintain membership in 
another registered options exchange that is not registered solely under 
Section 6(g) of the Securities Exchange Act of 1934 or in FINRA. OEF's 
that transact business with customers must at all times be members of 
FINRA. Pursuant to proposed EDGX Rule 17.2(g), every Options Member 
will be required to have at least one registered Options Principal who 
satisfies the criteria of that Rule, including the satisfaction of a 
proper qualification examination. An OEF may only transact business 
with Public Customers if such Options Member also is an Options Member 
of another registered national securities exchange or association with 
which the Exchange has entered into an agreement under Rule 17d-2 under 
the Exchange Act pursuant to which such other exchange or association 
shall be the designated options examining authority for the OEF.

[[Page 28747]]

    As provided in EDGX Rule 16.2, existing Exchange Rules applicable 
to the EDGX equity market contained in Chapters I through XV of the 
Exchange Rules will apply to Options Members unless a specific Exchange 
Rule applicable to the options market (Chapters XVI through XXIX of the 
Exchange Rules) governs or unless the context otherwise requires. 
Options Members can therefore provide sponsored access to the EDGX 
Options Exchange to a nonmember (``Sponsored Participant'') pursuant to 
Rule 11.3 of the Exchange Rules.
Execution System
    The Exchange's options trading system will leverage the Exchange's 
current state of the art technology, including its customer 
connectivity, messaging protocols, quotation and execution engine, 
order router, data feeds, and network infrastructure. This approach 
minimizes the technical effort required for existing Exchange Members 
to begin trading options on the EDGX Options Exchange. The EDGX Options 
Exchange will closely resemble the Exchange's affiliate, BZX Options, 
but will differ in that EDGX Options will maintain a pro rata 
allocation model with execution priority dependent on the capacity of 
an order (e.g., Customer or non-Customer) as well as status as a 
Primary Market Maker or Directed Market Maker, as applicable. The 
proposed model for EDGX Options is similar to other options exchanges 
such as NYSE Amex Options (``Amex''), the MIAX Options Exchange 
(``MIAX''), and other exchanges, which are sometimes referred to as 
``classic'' exchanges.
    Like the Exchange system for equities, all trading interest entered 
into the System will be automatically executable. Orders entered into 
the System will be displayed either with attribution or anonymously. 
The Exchange will become an exchange member of the Options Clearing 
Corporation (``OCC''). The System will be linked to OCC for the 
Exchange to transmit locked-in trades for clearance and settlement.
    Hours of Operation. The Exchange will begin accepting orders at 
8:00 a.m. Eastern Time, as described below. The options trading system 
will operate between the hours of 9:30 a.m. Eastern Time and 4:00 p.m. 
Eastern Time, with all orders being available for execution during that 
timeframe.
    Minimum Quotation and Trading Increments. The Exchange is proposing 
to apply the following quotation increments: (1) If the options series 
is trading at less than $3.00, five (5) cents; (2) if the options 
series is trading at $3.00 or higher, ten (10) cents; and (3) if the 
options series is trading pursuant to the Penny Pilot program one (1) 
cent if the options series is trading at less than $3.00, five (5) 
cents if the options series is trading at $3.00 or higher, except for 
QQQQ, SPY, or IWM where the minimum quoting increment will be one cent 
for all series. In addition, the Exchange is proposing that the minimum 
trading increment for options contracts traded on EDGX Options will be 
one (1) cent for all series. The Exchange also proposes to offer 
trading of Mini Options, and that the minimum trading increment for 
Mini Options shall be the same as the minimum trading increment 
permitted for standard options on the same underlying security.
    Penny Pilot Program. Upon initial operation of EDGX Options the 
Exchange proposes to commence trading, pursuant to the Penny Pilot 
Program (the ``Penny Pilot''), all classes that are, on that date, 
traded by other options exchanges pursuant to the Penny Pilot, which is 
currently scheduled to expire on June 30, 2015, unless extended.
    The Exchange represents that it has the necessary system capacity 
to support any additional series listed as part of the Penny Pilot.
    The Exchange agrees to submit semi-annual reports to the Commission 
that will include sample data and written analysis of information 
collected from April 1 through September 30, and from October 1 through 
March 31, for each year, for the ten most active and twenty least 
active option classes added to the Penny Pilot. In addition, for 
comparison purposes, the reports include data from a control group 
consisting of the ten least active option classes from the initial 
group of 63 option classes in the program. This report will include, 
but is not limited to: (1) Data and written analysis on the number of 
quotations generated for options included in the report; (2) an 
assessment of the quotation spreads for the options included in the 
report; (3) an assessment of the impact of the Penny Pilot on the 
capacity of the Exchange's automated systems; (4) data reflecting the 
size and depth of markets; and (5) any capacity problems or other 
problems that arose related to the operation of the Penny Pilot and how 
the Exchange addressed them.
    Additionally, the Exchange proposes that any Penny Pilot issues 
that have been delisted may be replaced on a semi-annual basis by the 
next most actively traded multiply listed options classes that are not 
yet included in the Penny Pilot, based on trading activity in the 
previous six months. The replacement issues, as applicable, would be 
added to the Penny Pilot Program on the second trading day following 
January 1 and July 1 of each year. The Exchange will employ the same 
parameters to prospective replacement issues as approved and applicable 
under the Penny Pilot Program, including excluding high-priced 
underlying securities. The replacement issues will be announced in 
Information Circulars distributed to Members.
    Order Types. The proposed System will make available to Options 
Members the following order types: Limit Orders, Minimum Quantity 
Orders, Market Orders, Price Improving Orders, Book Only Orders, Post 
Only Orders, and Intermarket Sweep Orders, with characteristics and 
functionality similar to what is currently approved for use on BZX 
Options. Each of the proposed rules regarding the order types and order 
type modifiers described below is substantively identical to the 
applicable rule for a corresponding order type or order type modifier 
offered by BZX Options with the exception of the Post Only Order, to 
which the Exchange has proposed some substantive modification. The 
Exchange has also proposed minor corrections and improvements to the 
descriptions of the IOC and FOK time-in-force and Price Improving 
Orders, as compared to the corresponding BZX Options Rules. The 
Exchange notes that it has not proposed initially to adopt all of the 
order types and order type modifiers currently offered by BZX 
Options.\4\ The Exchange has not proposed to adopt any new order types 
or order type modifiers that are not currently offered by BZX Options.
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    \4\ The Exchange has not proposed to adopt stop orders or stop 
limit orders, reserve orders, partial post only at limit orders or 
the WAIT time-in-force, each of which is offered by BZX Options.
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    ``Limit Orders'' are orders to buy or sell an option at a specified 
price or better. A limit order is marketable when, for a limit order to 
buy, at the time it is entered into the System, the order is priced at 
the current inside offer or higher, or for a limit order to sell, at 
the time it is entered into the System, the order is priced at the 
inside bid or lower.
    ``Minimum Quantity Orders'' are orders that require that a 
specified minimum quantity of contracts be obtained, or the order is 
cancelled. Minimum Quantity Orders will only execute against multiple, 
aggregated orders if such execution would occur simultaneously. The 
Exchange will only

[[Page 28748]]

honor a specified minimum quantity on a Book Only Order entered with a 
time-in-force designation of Immediate or Cancel and will disregard a 
minimum quantity on any other order.
    ``Market Orders'' are orders to buy or sell at the best price 
available at the time of execution. Market Orders to buy or sell an 
option traded on EDGX Options will be rejected if they are received 
when the underlying security is subject to a ``Limit State'' or 
``Straddle State'' as defined in the Plan to Address Extraordinary 
Market Volatility Pursuant to Rule 608 of Regulation NMS under the Act 
(the ``Limit Up-Limit Down Plan'').\5\ Any portion of a Market Order 
that would execute at a price more than $0.50 or 5 percent worse than 
the national best bid and offer (``NBBO'') at the time the order 
initially reaches EDGX Options, whichever is greater, will be 
cancelled.
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    \5\ Securities Exchange Act Release No. 67091 (May 31, 2012), 77 
FR 33498 (June 6, 2012) (order approving the Plan on a pilot basis).
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    ``Price Improving Orders'' are orders to buy or sell an option at a 
specified price at an increment smaller than the minimum price 
variation in the security. Price Improving Orders may be entered in 
increments as small as (1) one cent. Price Improving Orders shall be 
displayed at the minimum price variation in that security and shall be 
rounded up for sell orders and rounded down for buy orders. Unless a 
User \6\ has entered instructions not to do so, Price Improving Orders 
will be subject to the ``display-price sliding process,'' as described 
below. The display-price sliding process is contained in proposed Rule 
21.1(h).
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    \6\ As proposed in Rule 16.1(a)(63), the term ``User'' means any 
Options Member or Sponsored Participant who is authorized to obtain 
access to the System pursuant to Rule 11.3 (Access).
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    ``Book Only Orders'' are orders that are to be ranked and executed 
on the Exchange pursuant to Rule 21.8 (Order Display and Book 
Processing) or cancelled, as appropriate, without routing away to 
another options exchange. A Book Only Order will be subject to the 
display-price sliding process unless a User has entered instructions 
not to use the display-price sliding process.
    ``Post Only Orders'' are orders that are to be ranked and executed 
on the Exchange pursuant to proposed Rule 21.8 or cancelled, as 
appropriate, without routing away to another options exchange except 
that the order will not remove liquidity from the EDGX Options Book. A 
Post Only Order cannot be designated with instructions to use the 
display-price sliding process, and any such order will be rejected. A 
Post Only Order that is not subject to the Price Adjust process, as 
described below, that would lock or cross a Protected Quotation of 
another options exchange or the Exchange will be cancelled. The 
Exchange notes that Post Only Orders on BZX Options are permitted to 
remove liquidity under certain circumstances and can be designated for 
the display-price sliding process under BZX Options Rules. The Exchange 
has not proposed to adopt these features.
    ``Intermarket Sweep Orders'' or ``ISOs'' are orders that shall have 
the meaning provided in proposed Rule 27.1, which relates to 
intermarket trading. Such orders may be executed at one or multiple 
price levels in the System without regard to Protected Quotations at 
other options exchanges (i.e., may trade through such quotations). The 
Exchange relies on the marking of an order by a User as an ISO order 
when handling such order, and thus, it is the entering Options Member's 
responsibility, not the Exchange's responsibility, to comply with the 
requirements relating to ISOs. ISOs are not eligible for routing 
pursuant to Rule 21.9.
    Time in Force Designations. Options Members entering orders into 
the System may designate such orders to remain in force and available 
for display and/or potential execution for varying periods of time. 
Unless cancelled earlier, once these time periods expire, the order (or 
the unexecuted portion thereof) is returned to the entering party.
    ``Good Til Day'' or ``GTD'' shall mean, for orders so designated, 
that if after entry into the System, the order is not fully executed, 
the order (or the unexecuted portion thereof) shall remain available 
for potential display and/or execution for the amount of time during 
such trading day specified by the entering User unless canceled by the 
entering party.
    ``Immediate Or Cancel'' or ``IOC'' shall mean, for an order so 
designated, a limit order that is to be executed in whole or in part as 
soon as such order is received. The portion not so executed immediately 
on the Exchange or another options exchange is cancelled and is not 
posted to the EDGX Options Book. IOC limit orders that are not 
designated as Book Only Orders and that cannot be executed in 
accordance with Rule 21.8 on the System when reaching the Exchange will 
be eligible for routing away pursuant to Rule 21.9.
    ``DAY'' shall mean, for an order so designated, a limit order to 
buy or sell which, if not executed expires at market close.
    ``Fill-or-Kill'' or ``FOK'' shall mean, for an order so designated, 
a limit order that is to be executed in its entirety as soon as it is 
received and, if not so executed, cancelled. A limit order designated 
as FOK is not eligible for routing away pursuant to Rule 21.9.
    One Second Exposure Period. Proposed Rule 22.12 would prohibit 
Options Members from executing as principal on EDGX Options orders they 
represent as agent unless (i) agency orders are first exposed on EDGX 
Options for at least one (1) second or (ii) the Options Member has been 
bidding or offering on EDGX Options for at least one (1) second prior 
to receiving an agency order that is executable against such bid or 
offer. As noted above, proposed Rule 22.12 would require Options 
Members to expose their customers' orders on the Exchange for at least 
one second under certain circumstances. During this one second exposure 
period, other Options Members will be able to enter orders to trade 
against the exposed order. In adopting a one-second order exposure 
period, the Exchange is proposing a requirement that is consistent with 
the Rules of other options exchanges, including BZX Options.\7\ Thus, 
the exposure period will allow Options Members that are members of 
other options exchanges to comply with Rule 22.12 without programming 
separate time parameters into their systems for order entry or 
compliance purposes. The Exchange believes that market participants are 
sufficiently automated that a one second exposure period allows an 
adequate time for market participants to electronically respond to an 
order. Also, it is possible that market participants might wait until 
the end of the exposure period, no matter how long, before responding. 
Thus, the Exchange believes that any longer than one second would not 
further the protection of investors or market participants, but rather, 
would potentially increase market risk to investors and other market 
participants by creating a longer period of time for the exposed order 
to be subject to market risk.
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    \7\ See, e.g., Chicago Board Options Exchange (``CBOE'') Rules 
6.45A, 6.45B, 6.74A and 6.74B; International Securities Exchange 
(``ISE'') Rule 717(d); NOM Chapter VII, Sec. 12.
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    The technology for the Exchange's trading system for EDGX Options 
will be comparable to the technology used for the trading system 
currently used for equities trading on the Exchange today. The Exchange 
has had ample experience with that trading system to believe that one 
second is an adequate exposure

[[Page 28749]]

period. Further, the Exchange believes that many of its current Members 
will be Options Members and that such current Members have demonstrated 
an ability to respond to orders in a timely fashion.
    Match Trade Prevention Modifiers. As is true for BZX Options, the 
Exchange will allow Options Members to use Match Trade Prevention 
(``MTP'') Modifiers. Any incoming order designated with an MTP modifier 
will be prevented from executing against a resting opposite side order 
also designated with an MTP modifier and originating from the same 
market participant identifier (``MPID''), Exchange Member identifier, 
trading group identifier, or Exchange Sponsored Participant identifier.
    Re-Pricing Mechanisms. The Exchange, like BZX Options, proposes to 
offer two re-pricing mechanisms for Users of EDGX Options, the display-
price sliding process and the Price Adjust process. In turn, under each 
type of price sliding, Users will be able to select between either 
single price sliding or multiple price sliding. The Exchange will offer 
display-price sliding (including multiple display-price sliding) and 
Price Adjust (including multiple Price Adjust) to ensure compliance 
with locked and crossed market rules relevant to participation on EDGX 
Options. The proposed display-price sliding functionality for EDGX 
Options is identical to functionality for BZX Options, with the 
exception of language related to Post Only Order functionality, which 
is not applicable. Specifically, as noted above, the Exchange omitted 
language regarding Post Only Orders contained in the BZX Options 
description of display-price sliding because the Exchange has proposed 
to reject orders that are designated as Post Only Orders and subject to 
display-price sliding. Similarly, because the Exchange has not proposed 
to adopt functionality that results in executions of Post Only Orders 
against resting liquidity under certain circumstances, the Exchange has 
omitted from the Exchange's proposed Price Adjust rule certain language 
contained in the corresponding BZX Options rule regarding such 
circumstances.
    Market Opening Procedures. The System shall open options, other 
than index options, for trading after 9:30 a.m. Eastern Time as 
described below. With respect to index options, the System shall open 
such options for trading at 9:30 a.m. Eastern Time.
    As proposed, the Exchange will accept market and limit orders and 
quotes for inclusion in the opening process (the ``Opening Process'') 
beginning at 8:00 a.m. Eastern Time or immediately upon trading being 
halted in an option series due to the primary listing market for the 
applicable underlying security declaring a regulatory trading halt, 
suspension, or pause with respect to such security (a ``Regulatory 
Halt'') and will continue to accept market and limit orders and quotes 
until such time as the Opening Process is initiated in that option 
series (the ``Order Entry Period''), other than index options. The 
Exchange will not accept IOC or FOK orders for queuing prior to the 
completion of the Opening Process. The Exchange will convert all ISOs 
entered for queuing prior to the completion of the Opening Process into 
non-ISOs.
    After the first transaction on the primary listing market after 
9:30 a.m. Eastern Time in the securities underlying the options as 
reported on the first print disseminated pursuant to an effective 
national market system plan (``First Listing Market Transaction'') or 
the Regulatory Halt has been lifted, the related option series will be 
opened automatically as described below. The System will determine a 
single price at which a particular option series will be opened (the 
``Opening Price'') as calculated by the System within 30 seconds of the 
First Listing Market Transaction or the Regulatory Halt being lifted. 
Where there are no contracts in a particular series that would execute 
at any price, the System shall open such options for trading without 
determining an Opening Price. After establishing an Opening Price that 
is also a Valid Price,\8\ orders and quotes in the System that are 
priced equal to or more aggressively than the Opening Price will be 
matched based on the Exchange's proposed priority rule, Rule 21.8. 
Matches will occur until there is no remaining volume or there is an 
imbalance of orders. All orders and quotes or portions thereof that are 
matched pursuant to the Opening Process will be executed at the Opening 
Price. An imbalance of orders on the buy side or sell side may result 
in orders that are not executed in whole or in part. Such orders will 
be handled in time sequence, beginning with the order with the oldest 
time stamp and may, in whole or in part, be placed on the EDGX Options 
Book, cancelled, executed, or routed in accordance with proposed Rule 
21.9.
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    \8\ Valid Price is defined in proposed Rule 21.7(a)(2).
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    Order Display/Matching System. Other than the differences with 
respect to the market model described below, the System will be based 
upon technology and functionality currently approved for use in the 
Exchange's equities trading system and the Exchange's affiliate, BZX 
Options. Specifically, the System will allow Options Members to enter 
market orders and priced limit orders to buy and sell options listed on 
EDGX Options. The orders will be designated for display (price and 
size) in the order display service of the System.
    Book Processing/Priority. After the opening, trades on the Exchange 
will occur when a buy order/quote and a sell order/quote match on the 
Exchange's order book. The System shall execute trading interest within 
the System in price priority, meaning it will execute all trading 
interest at the best price level within the System before executing 
trading interest at the next best price. Pursuant to proposed Rule 
21.8(c), after considering price priority, all orders are matched 
according to pro-rata priority. In addition, Customer, Primary Market 
Maker and/or Directed Market Maker priority overlays are also available 
at the Exchange's discretion on a class-by-class basis pursuant to 
proposed Rule 21.8(d). For example, (i) the Customer Overlay provides 
Customers with priority over all non-Customer interest at the same 
price; (ii) the Directed Market Maker overlay (which may only be in 
effect if the Customer Overlay is also in effect) provides the Directed 
Market Maker with priority over other Market Makers for a certain 
percentage of contracts allocated at the same price (60% or 40% 
depending upon the number of other Market Makers at the NBBO) and for 
small size orders; and (iii) the Primary Market Maker overlay (which 
may only be in effect if the Customer Overlay is also in effect) 
provides Primary Market Makers with priority over other Market Makers 
for a certain percentage of contracts allocated at the same price (60% 
or 40% depending upon the number of other Market Makers at the NBBO) 
and for small size orders.
    After executions resulting from the Priority Overlays described 
above, Orders and Quotes within the System for the accounts of non-
Customers, including Professional Customers, have next priority. If 
there is more than one highest bid or more than one lowest offer in the 
Consolidated Book for the account of a non-Customer, then such bids or 
offers will be afforded priority on a ``size pro rata'' basis.
    In allocating the participation entitlements set forth in proposed 
Rule 21.8 to the Directed Market Maker and the Primary Market Maker, 
the following shall apply. In a class of options where both the Primary 
Market

[[Page 28750]]

Maker and the Directed Market Maker participation entitlements are in 
effect and an Options Member has directed an order to a Directed Market 
Maker: (a) if the Directed Market Maker's priority quote is at the 
NBBO, the Directed Market Maker's participation entitlement will 
supersede the Primary Market Maker's participation entitlements for an 
order directed to such Directed Market Maker; (b) if the Directed 
Market Maker's priority quote is not at the NBBO, the Primary Market 
Maker's participation entitlement will apply to that order, provided 
the Primary Market Maker's priority quote is at the NBBO: and (c) if 
neither the Directed Market Maker's nor the Primary Market Maker's 
priority quote is at the NBBO then executed contracts will be allocated 
in accordance with the pro-rata allocation methodology as described in 
paragraphs (c) and (e) above without regard to any participation 
entitlement. If an incoming order has not been directed to a Directed 
Market Maker by an Options Member, however, then the Primary Market 
Maker's participation entitlement will apply to that order, provided 
the Primary Market Maker's priority quote is at the NBBO.
    As proposed and as noted above, the participation entitlements of 
proposed Rule 21.8 shall not be in effect unless the Customer Overlay 
is also in effect and the participation entitlements shall only apply 
to any remaining balance after Customer orders have been satisfied.
    Neither the Primary Market Maker nor the Directed Market Maker may 
be allocated a total quantity greater than the quantity they are 
quoting at the execution price. If the Primary Market Maker's or the 
Directed Market Maker's allocation of an order pursuant to its 
participation entitlement is greater than its pro-rata share of 
priority quotes at the best price at the time that the participation 
entitlement is granted, neither the Primary Market Maker nor the 
Directed Market Maker shall receive any further allocation of that 
order.
    In establishing the counterparties to a particular trade, the 
participation entitlements must first be counted against the Primary 
Market Maker's highest priority bids and offers or the Directed Market 
Maker's highest priority bids or offers.
    The proposed participation entitlements only apply to the 
allocation of executions among competing Market Maker priority quotes 
existing on the EDGX Options Book at the time the order is received by 
the Exchange. No market participant is allocated any portion of an 
execution unless it has an existing interest at the execution price. 
Moreover, no market participant can execute a greater number of 
contracts than is associated with its interest at a given price. 
Accordingly, the Primary Market Maker and the Directed Market Maker 
participation entitlements contained in the proposed Rule are not 
guarantees.
    The Exchange believes that proposed Rule 21.8 governing priority on 
the Exchange is consistent with other options exchanges that have 
similar market models, including Amex and MIAX.\9\
---------------------------------------------------------------------------

    \9\ See, e.g., Amex Rule 964NY; MIAX Rule 514.
---------------------------------------------------------------------------

    Routing. The EDGX Options Exchange will support orders that are 
designated to be routed to the NBBO as well as orders that will execute 
only within EDGX Options. Orders that are designated to execute at the 
NBBO will be routed to other options markets to be executed when the 
Exchange is not at the NBBO consistent with the Options Order 
Protection and Locked/Crossed Market Plan. Subject to the exceptions 
contained in proposed Rule 27.2(b), the System will ensure that an 
order will not be executed at a price that trades through another 
options exchange. An order that is designated by an Options Member as 
routable will be routed in compliance with applicable Trade-Through 
restrictions. Any order entered with a price that would lock or cross a 
Protected Quotation that is not eligible for either routing, or the 
display-price sliding process or the Price Adjust process will be 
cancelled.
    EDGX Options shall route orders in options via BATS Trading, Inc. 
(``BATS Trading''), which serves as the Outbound Router of the 
Exchange, as defined in current Rule 2.11. The function of the Outbound 
Router will be to route orders in options listed and open for trading 
on EDGX Options to other options exchanges pursuant to EDGX Options 
rules solely on behalf of EDGX Options. The Outbound Router is subject 
to regulation as a facility of the Exchange, including the requirement 
to file proposed rule changes under Section 19 of the Act. Use of BATS 
Trading or Routing Services (as described below) to route orders to 
other market centers is optional. Parties that do not desire to use 
BATS Trading or other Routing Services provided by the Exchange must 
designate orders as not available for routing.
    In the event the Exchange is not able to provide order routing 
services through its affiliated broker-dealer, the Exchange will route 
orders to other options exchanges in conjunction with one or more 
routing brokers that are not affiliated with the Exchange (``Routing 
Services'').
    EDGX Options will offer a variety of routing options that will be 
identical to the routing options offered by BZX Options. Routing 
options may be combined with all available order types and times-in-
force, with the exception of order types and times-in-force whose terms 
are inconsistent with the terms of a particular routing option. The 
System will consider the quotations only of accessible markets. The 
term ``System routing table'' refers to the proprietary process for 
determining the specific options exchanges to which the System routes 
orders and the order in which it routes them. The Exchange reserves the 
right to maintain a different System routing table for different 
routing options and to modify the System routing table at any time 
without notice. The proposed System routing options are Parallel D, 
Parallel 2D, Destination Specific and Directed ISO. The Exchange notes 
that Destination Specific and Directed ISO are both offered by BZX 
Options but that such options are currently listed in both the routing 
section and the order description section. The Exchange believes that 
these options are more appropriately listed as routing strategies, and 
thus has proposed to include them in Rule 21.9.
    The Exchange also proposes to offer two optional Re-Route 
instructions, Aggressive Re-Route and Super Aggressive Re-Route, either 
of which can be assigned to routable orders. Pursuant to the Aggressive 
Re-Route instruction, to the extent the unfilled balance of a routable 
order has been posted to the EDGX Options Book, should the order 
subsequently be crossed by another accessible options exchange, the 
System shall route the order to the crossing options exchange. Pursuant 
to the Super Aggressive Re-Route instruction, to the extent the 
unfilled balance of a routable order has been posted to the EDGX 
Options Book, should the order subsequently be locked or crossed by 
another accessible options exchange, the System shall route the order 
to the locking or crossing options Exchange.
    Data Feed; Anonymity. The System will include a proprietary data 
feed, Multicast PITCH, which will display depth of book quotations and 
execution information based on orders received by EDGX Options using 
the minimum price variation applicable to that security. The Exchange 
will make available to all market participants through the Options 
Price Reporting Authority (``OPRA'') an indication that there is 
Customer interest included in the best bid and

[[Page 28751]]

offer disseminated by the Exchange. The Exchange will also identify 
Customer orders and trades as such on messages disseminated by the 
Exchange through its Multicast PITCH data feed. To the extent a User 
has submitted an Attributable Order, which is the default property for 
all orders entered into the System, the Multicast PITCH data feed will 
indicate the User's MPID along with the price and size of their order 
or quote.
    The intra-day transaction reports produced by the System will 
indicate the details of the transactions, and will not reveal contra 
party identities. However, the Exchange does anticipate generating 
daily, weekly and/or monthly reports containing aggregate information 
regarding Market Maker and Customer executions, and thus, has proposed 
to make clear in Rule 21.10 that such identifying information will be 
made available. The Exchange believes that this practice is common on 
other options exchanges that operate market models similar to that 
proposed by the Exchange.
    Risk Monitor Mechanism. The Exchange also proposes to offer to all 
Users of EDGX Options the ability to establish certain risk control 
parameters via the Exchange's Risk Monitor Mechanism. The proposed Risk 
Monitor Mechanism is identical to that offered by BZX Options pursuant 
to Rule 21.16. The Risk Monitor Mechanism provides protection from the 
risk of multiple executions across multiple series of an option or 
across multiple options. The risk to Users is not limited to a single 
series in an option or even to all series of an option; Users that 
quote in multiple series of multiple options have significant exposure, 
requiring them to offset or hedge their overall positions.
    In particular, the Risk Monitor Mechanism will be useful for EDGX 
Options Market Makers, who are required to continuously quote in 
assigned options. Quoting across many series in an option creates the 
possibility of ``rapid fire'' executions that can create large, 
unintended principal positions that expose the Market Maker to 
unnecessary market risk. The Risk Monitor Mechanism is intended to 
assist such Users in managing their market risk.
    Though the Risk Monitor Mechanism will be most useful to Market 
Makers, the Exchange proposes to offer the functionality to all 
participant types. There may be other firms that trade on a proprietary 
basis and provide liquidity to the Exchange; these firms could 
potentially benefit, similarly to Market Makers, from the Risk Monitor 
Mechanism. The Exchange believes that the Risk Monitor Mechanism should 
help liquidity providers generally, market makers and other 
participants alike, in managing risk and providing deep and liquid 
markets to investors.
Options Order Protection and Locked/Crossed Market Plan Rules
    The Exchange will participate in the approved Options Order 
Protection and Locked/Crossed Market Plan (``Plan''), and therefore 
will be required to comply with the obligations of Participants under 
the Plan. The Exchange proposes to adopt rules relating to the Plan 
that are substantially similar to the rules in place on all of the 
options exchanges that are Participants to the Plan.
    The Plan replaced the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage (``Old Plan''). The Old Plan 
required its participant exchanges to operate a stand-alone system or 
``Linkage'' for sending order-flow between exchanges to limit trade-
throughs, and the Linkage was operated by the Options Clearing 
Corporation (``OCC''). The Plan essentially applies the Regulation NMS 
price-protection provisions to the options markets. Similar to 
Regulation NMS, the Plan requires the Plan Participants to adopt rules 
``reasonably designed to prevent Trade-Throughs,'' while exempting 
Intermarket Sweep Orders (``ISOs'') from that prohibition. The Plan's 
definition of an ISO is essentially the same as under Regulation NMS. 
The remaining exceptions to the trade-through prohibition, discussed 
more specifically below, either track those under Regulation NMS or 
correspond to unique aspects of the options market, or both.
    The Rules in proposed Chapter XXVII conform to the requirements of 
the Plan. Rule 27.1 sets forth the defined terms for use under the 
Plan. Rule 27.2 prohibits trade-throughs and exempts ISOs from that 
prohibition. Rule 27.2 also contains additional exceptions to the 
trade-through prohibition that track the exceptions under Regulation 
NMS or correspond to unique aspects of the EDGX Options Exchange, or 
both.
    Proposed Rule 27.3 sets forth the general prohibition against 
locking/crossing other eligible exchanges as well as several exceptions 
that permit locked markets in limited circumstances; such exceptions 
have been approved by the Commission for inclusion in the rules of 
other options exchanges. Specifically, the exceptions to the general 
prohibition on locking and crossing occur when (1) the locking or 
crossing quotation was displayed at a time when the Exchange was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment; (2) the locking or crossing quotation was displayed at a 
time when there is a Crossed Market; or (3) the Member simultaneously 
routed an ISO to execute against the full displayed size of any locked 
or crossed Protected Bid or Protected Offer.
Securities Traded on EDGX Options
    General Listing Standards. The Exchange proposes to adopt listing 
standards for Options traded on EDGX Options (Chapter XIX) as well as 
for Index Options (Chapter XXIX) that are identical to the approved 
rules of BZX Options.\10\ The Exchange will join the Options Listings 
Procedures Plan and will list and trade options already listed on other 
options exchanges. The Exchange will gradually phase-in its trading of 
options, beginning with a selection of actively traded options. At 
least initially, the Exchange does not plan to develop new options 
products or listing standards.
---------------------------------------------------------------------------

    \10\ See Rules of BZX Options, Chapters XIX and XXIX.
---------------------------------------------------------------------------

    $1 Strike Program. Pursuant to proposed Rule 19.6, Supplementary 
Material .02, the interval between strike prices of series of options 
on individual stocks may be $1.00 or greater (``$1 Strike Prices'') 
provided the strike price is $50 or less, but not less than $1. The 
listing of $1 strike prices shall be limited to option classes 
overlying no more than one hundred fifty (150) individual stocks (the 
``$1 Strike Price Program'') as specifically designated by EDGX 
Options. As proposed, EDGX Options may list $1 Strike Prices on any 
other option classes if those classes are specifically designated by 
other national securities exchanges that employ a similar $1 Strike 
Price Program under their respective rules.
    To be eligible for inclusion into the $1 Strike Price Program, an 
underlying security must close below $50 in the primary market on the 
previous trading day. After a security is added to the $1 Strike Price 
Program, EDGX Options may list $1 Strike Prices from $1 to $50 that are 
no more than $5 from the closing price of the underlying on the 
preceding day. For example, if the underlying security closes at $13, 
EDGX Options may list strike prices from $8 to $18. EDGX Options may 
not list series with $1 intervals within $0.50 of an existing strike 
price in the same series, except that strike prices of $2, $3, $4, $5 
and $6 shall be permitted within $0.50 of an existing strike price for 
classes also selected to participate in the $0.50 Strike Program. 
Additionally, for an option class selected for the $1 Strike Price 
Program, EDGX Options may not

[[Page 28752]]

list $1 Strike Prices on any series having greater than nine (9) months 
until expiration. A security shall remain in the $1 Strike Price 
Program until otherwise designated by EDGX Options.
    For options classes selected to participate in the $1 Strike 
Program, the Exchange will, on a monthly basis, review series that were 
originally listed under the $1 Strike Program with strike prices that 
are more than $5 from the current value of an options class and delist 
those series with no open interest in both the put and the call series 
having a: (1) strike higher than the highest strike price with open 
interest in the put and/or call series for a given expiration month; 
and (2) strike lower than the lowest strike price with open interest in 
the put and/or call series for a given expiration month. If the 
Exchange identifies series for delisting pursuant to this policy, the 
Exchange shall notify other options exchanges with similar delisting 
policies regarding the eligible series for delisting, and shall work 
jointly with such other exchanges to develop a uniform list of series 
to be delisted so as to ensure uniform series delisting of multiply 
listed options classes.
    Notwithstanding the above delisting policy, the Exchange may grant 
member requests to add strikes and/or maintain strikes in series of 
options classes traded pursuant to the $1 Strike Program that are 
eligible for delisting.
    In addition to $1 strikes as proposed above, the Exchange proposes 
to offer options trading on series of options with $0.50, $2.50 and 
$5.00 strike price intervals, consistent with other options exchanges, 
including BZX Options.
    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of option 
series that may be listed and traded in the strike price intervals 
described above, including $0.50, $1, $2.50 and $5.00 strikes.
    Mini Options. After an option class on a stock, Exchange-Traded 
Fund Share, Trust Issued Receipt, Exchange Traded Note, and other Index 
Linked Security with a 100 share deliverable has been approved for 
listing and trading on the Exchange, the Exchange proposes to permit 
listing of series of option contracts with a 10 share deliverable on 
that stock, Exchange-Traded Fund Share, Trust Issued Receipt, Exchange 
Traded Note, and other Index Linked Security for all expirations opened 
for trading on the Exchange. Pursuant to proposed Interpretation and 
Policy .07 to Rule 19.6, Mini Option contracts could be listed on SPDR 
S&P 500 (``SPY''), Apple Inc. (``AAPL''), SPDR Gold Trust (``GLD''), 
Google Inc. (``GOOG''), and Amazon.com Inc. (``AMZN''). Strike prices 
for Mini Options shall be set at the same level as for regular options. 
For example, a call series strike price to deliver 10 shares of stock 
at $125 per share has a total deliverable value of $1250 and the strike 
price will be set at 125. No additional series of Mini Options may be 
added if the underlying security is trading at $90 or less. The 
underlying security must trade above $90 for five consecutive days 
prior to listing Mini Options contracts in an additional expiration 
month.
    Quarterly Options Series Program. Pursuant to proposed Rule 19.6, 
Interpretation and Policy .04 and proposed Rule 29.11(g) the Exchange 
may list and trade options series that expire at the close of business 
on the last business day of a calendar quarter (``Quarterly Options 
Series''). As proposed, the Exchange may list Quarterly Options Series 
for up to five (5) currently listed options classes that are either 
options on exchange traded funds (``ETF'') or index options. In 
addition, the Exchange may also list Quarterly Options Series on any 
options classes that are selected by other securities exchanges that 
employ a similar program under their respective rules.
    The Exchange may list series that expire at the end of the next 
consecutive four (4) calendar quarters, as well as the fourth quarter 
of the next calendar year. For example, if the Exchange is trading 
Quarterly Options Series in the month of May 2016, it may list series 
that expire at the end of the second, third, and fourth quarters of 
2016, as well as the first and fourth quarters of 2017. Following the 
second quarter 2016 expiration, the Exchange could add series that 
expire at the end of the second quarter of 2017.
    For each class of ETF options selected for the Quarterly Options 
Series program, the Exchange may list strike prices within $5 from the 
previous day's closing price of the underlying security at the time of 
initial listing. Subsequently, the Exchange may list up to 60 
additional strike prices that are within thirty percent (30%) of the 
previous day's close, or more than 30% away from the previous day's 
close provided demonstrated customer interest exists for such series.
    The Exchange has also proposed a delisting policy with respect to 
Quarterly Options Series in ETF options. On a monthly basis, the 
Exchange will review series that are outside of a range of five (5) 
strikes above and five (5) strikes below the current price of the ETF, 
and delist series with no open interest in both the call and the put 
series having a (1) strike higher than the highest price with open 
interest in the put and/or call series for a given expiration month; 
and (2) strike lower than the lowest strike price with open interest in 
the put and/or the call series for a given expiration month. 
Notwithstanding the delisting policy, customer requests to add strikes 
and/or maintain strikes in Quarterly Options Series eligible for 
delisting shall be granted.
    The Exchange also may list Quarterly Option Series based on an 
underlying index pursuant to similar provisions in Rule 29.11. There 
are two noteworthy distinctions between the rules for listing Quarterly 
Options Series based on an ETF versus Quarterly Options Series based on 
an index. First, whereas the initial listing of Quarterly Options 
Series based on an underlying ETF is restricted to strike prices within 
$5 from the previous day's closing price of the underlying security, 
the initial listing of strikes for Quarterly Options Series based on an 
underlying index is restricted to: (i) a price that is within thirty 
percent (30%) of the current index value, and (ii) no more than five 
strikes above and five strikes below the value of the underlying index. 
Second, whereas the Exchange may list up to 60 additional strike prices 
for each Quarterly Options Series based on an ETF, there is no firm cap 
on the additional listing of strikes for Quarterly Options Series based 
on an underlying index; rather, additional strike prices may be listed 
provided the new listings do not result in more than five strike prices 
on the same side of the underlying index value as the new listings.
    The interval between strike prices on Quarterly Options Series 
shall be the same as the interval for strike prices for series in that 
same options class that expire in accordance with the normal monthly 
expiration cycle.
    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of options 
series pursuant to the above-described Quarterly Options Series 
program.
    Short Term Option Series Program. The Exchange plans to operate a 
Short-Term Options Series Program similar to other Short Term Options 
Programs, including that of BZX Options. Pursuant

[[Page 28753]]

to proposed Rule 19.6, Interpretation and Policy .05 for equity options 
and Rule 29.11(h) for index options in, the Exchange intends to open 
for trading on any Thursday or Friday that is a business day (``Short 
Term Option Opening Date'') series of options on that class that expire 
on each of the next five (5) Fridays that are business days and are not 
Fridays in which monthly options series or Quarterly Options Series 
expire (``Short Term Option Expiration Dates''). As proposed, the 
Exchange may have no more than a total of five Short Term Option 
Expiration Dates. If EDGX Options is not open for business on the 
respective Thursday or Friday, the Short Term Option Opening Date will 
be the first business day immediately prior to that respective Thursday 
or Friday. Similarly, if EDGX Options is not open for business on the 
Friday that the options are set to expire, the Short Term Option 
Expiration Date will be the first business day immediately prior to 
that Friday.
    As proposed, the Exchange may select up to fifty (50) option 
classes in which Short Term Option Series may be traded. In addition to 
those fifty option classes the Exchange may also list Short Term Option 
Series on any option classes that are selected by other securities 
exchanges that employ a similar program. For each option class eligible 
for participation in the Short Term Option Series Program, the Exchange 
may open up to thirty (30) Short Term Option Series for each expiration 
date in that class. The Exchange may also open Short Term Option Series 
that are opened by other securities exchanges in option classes 
selected by such exchanges under their respective short term option 
rules.
    As noted above, the remaining parameters of the proposed Short Term 
Options Program are identical to those of BZX Options and similar to 
those operated by other options exchanges.
    With regard to the impact on system capacity, the Exchange has 
analyzed its capacity and represents that it and the Options Price 
Reporting Authority have the necessary systems capacity to handle the 
additional traffic associated with the listing and trading of option 
series pursuant to the Short Term Option Series Program.
Conduct and Operational Rules for Options Members
    EDGX proposes to adopt rules that are nearly identical to the 
approved rules of other options exchanges, including BZX Options. Thus, 
EDGX proposes to adopt rules that are based on the rules of BZX Options 
regarding: Business Conduct Rules (Chapter XVIII); exercises and 
deliveries (Chapter XXIII); records, reports and audits (Chapter XXIV); 
minor rule violations (Chapter XXV); doing business with the public 
(Chapter XXVI); and margin (Chapter XXVIII).
    The Exchange notes that certain requirements that will be 
applicable to Options Members are contained in other sections of the 
Exchange's existing Rules. For example, the Exchange has included 
applicable rules requiring options principal registration into proposed 
EDGX Rule 17.2(g) but also proposes to include reference to applicable 
registration requirements that are already contained in EDGX Rule 2.5. 
The Exchange also proposes to expand EDGX Rule 2.5 to clearly include 
options principal registration. The Exchange intends to require 
Authorized Traders of Options Members to comply with existing Exchange 
registration requirements applicable to all Authorized Traders.\11\ 
Accordingly, the Exchange has not proposed specific rules applicable to 
registration of representatives other than options principals.
---------------------------------------------------------------------------

    \11\ See Exchange Rule 2.5, Interpretation and Policy .01 and 
Exchange Rule 11.4.
---------------------------------------------------------------------------

    As is true for BZX Options, with respect to Position Limits (Rule 
18.7) and Exercise Limits (Rule 18.9), the Exchange is proposing to 
apply the limits established pursuant to the rules of the CBOE, 
although the Exchange will establish such limits for products not 
traded on the CBOE. By expressly incorporating an already-approved 
limit, the Exchange will ensure that an appropriate limit is in place 
at all times without the need to continually adjust its rule manually 
or to disrupt the operations of its Members.
National Market System
    The EDGX Options Exchange will operate as a full and equal 
participant in the national market system for options trading 
established under Section 11A of the Exchange Act, just as its equities 
market participates today. The EDGX Options Exchange will become a 
member of OPRA, the Options Linkage Authority (``OLA''), the Options 
Regulatory Surveillance Authority (``ORSA''), and the Options Listing 
Procedures Plan (``OLPP'').
    The Exchange expects to participate in those plans on the same 
terms currently applicable to current members of those plans, and it 
expects little or no plan impact due to the fact that the Exchange's 
market will operate in a manner similar to several other existing 
options exchanges.
Regulation
    The Exchange will leverage many of the structures it established to 
operate a national securities exchange in compliance with Section 6 of 
the Exchange Act. As described in more detail below, there will be 
three elements of that regulation: (1) the Exchange will join the 
existing options industry agreements pursuant to Section 17(d) of the 
Exchange Act, as it has with respect to its equities market, (2) the 
Exchange's Regulatory Services Agreement (``RSA'') with FINRA will 
govern many aspects of the regulation and discipline of Members that 
participate in options trading, just as it does for equities market 
regulation, and (3) the Exchange will perform options listing 
regulation, as well as authorize Options Members to trade on EDGX 
Options, and conduct surveillance of options trading as it does today 
for equities.
    Section 17(d) of the Exchange Act and the related Exchange Act 
rules permit SROs to allocate certain regulatory responsibilities to 
avoid duplicative oversight and regulation. Under Exchange Act Rule 
17d-1, the SEC designates one SRO to be the Designated Examining 
Authority, or DEA, for each broker-dealer that is a member of more than 
one SRO. The DEA is responsible for the financial aspects of that 
broker-dealer's regulatory oversight. Because EDGX Options Members also 
must be members of at least one other SRO, the Exchange would generally 
not be designated as the DEA for any of its members.
    Rule 17d-2 under the Act permits SROs to file with the Commission 
plans under which the SROs allocate among each other the responsibility 
to receive regulatory reports from, and examine and enforce compliance 
with specified provisions of the Act and rules thereunder and SRO rules 
by, firms that are members of more than one SRO (``common members''). 
If such a plan is declared effective by the Commission, an SRO that is 
a party to the plan is relieved of regulatory responsibility as to any 
common member for whom responsibility is allocated under the plan to 
another SRO.
    All of the options exchanges and FINRA have entered into the 
Options Sales Practices Agreement, a Rule 17d-2 agreement. Under this 
Agreement, the examining SROs will examine firms that are common 
members of the Exchange and the particular examining SRO for compliance 
with certain provisions of the Act, certain of the rules and 
regulations adopted thereunder, certain examining SRO rules, and 
certain EDGX

[[Page 28754]]

Options Rules. In addition, EDGX Options Rules contemplate 
participation in this Agreement by requiring that any Options Member 
also be a member of at least one of the examining SROs.
    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements, the Exchange will retain full regulatory 
responsibility under the Exchange Act. However, as noted above, the 
Exchange has entered into an RSA with FINRA, pursuant to which FINRA 
personnel operate as agents for the Exchange in performing certain of 
these functions. As is the case with the EDGX equities market, the 
Exchange will supervise FINRA and continue to bear ultimate regulatory 
responsibility for the EDGX Options Exchange. The Exchange intends to 
amend the existing RSA in order to capture certain aspects of 
regulation specifically applicable to EDGX Options and the regulation 
and discipline of Options Members.
    As a member of the Intermarket Surveillance Group, the Exchange 
will comply with the specifications of the Consolidated Options Audit 
Trail System (``COATS'') in submitting data for purposes of creating a 
consolidated audit trail. The Exchange will also receive COATS data for 
purposes of its surveillance operations.
    Consistent with the Exchange's existing regulatory structure, the 
Exchange's Chief Regulatory Officer shall have general supervision of 
the regulatory operations of EDGX Options, including responsibility for 
overseeing the surveillance, examination, and enforcement functions and 
for administering all regulatory services agreements applicable to EDGX 
Options. Similarly, the Exchange's existing Regulatory Oversight 
Committee will be responsible for overseeing the adequacy and 
effectiveness of Exchange's regulatory and self-regulatory organization 
responsibilities, including those applicable to EDGX Options.
    Finally, as is true with respect to equities, the Exchange, and 
FINRA pursuant to the RSA referenced above, will perform automated 
surveillance of trading on EDGX Options for the purpose of maintaining 
a fair and orderly market at all times. Specifically, EDGX Options will 
be monitored to identify unusual trading patterns and determine whether 
particular trading activity requires further regulatory investigation 
by FINRA.
    In addition, the Exchange will oversee the process for determining 
and implementing trade halts, identifying and responding to unusual 
market conditions, and administering the Exchange's process for 
identifying and remediating ``obvious errors'' by and among its Options 
Members. EDGX proposed rules (Chapter XX) regarding halts, unusual 
market conditions, extraordinary market volatility, obvious errors, and 
audit trail are identical to the approved rules of BZX Options.\12\
---------------------------------------------------------------------------

    \12\ See BZX Options Rules Chapter XX; see also Rules of NOM, 
Chapter V, and BOX, Chapter V.
---------------------------------------------------------------------------

    The Exchange notes that the obvious error rule of BZX Options was 
recently approved \13\ and that other options exchanges are in the 
process of implementing similar rules. The Exchange has not proposed 
any changes as compared to the recently approved obvious error rule of 
BZX Options. Thus, in addition to the general provisions for reviewing 
and handling transactions that potentially qualify for adjustment or 
nullification as Obvious Errors or Catastrophic Errors, the Exchange 
proposes to adopt Interpretation and Policy .01 to provide for how the 
Exchange will treat Obvious and Catastrophic Errors in response to the 
Limit Up-Limit Down Plan, which is applicable to all NMS stocks, as 
defined in Regulation NMS Rule 600(b)(47).\14\ As proposed, during a 
pilot period to coincide with the pilot period for the Plan, including 
any extensions to the pilot period for the Plan, an execution will not 
be subject to review as an Obvious Error or Catastrophic Error pursuant 
to paragraph (c) or (d) of the Proposed Rule if it occurred while the 
underlying security was in a ``Limit State'' or ``Straddle State,'' as 
defined in the Plan. During a Limit or Straddle State, options prices 
may deviate substantially from those available immediately prior to or 
following such States. Thus, determining a Theoretical Price in such 
situations would often be very subjective, creating unnecessary 
uncertainty and confusion for investors. Because of this uncertainty, 
the Exchange is proposing to provide in Rule 20.6 that the Exchange 
will not review transactions as Obvious Errors or Catastrophic Errors 
when the underlying security is in a Limit or Straddle State.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 74556 (March 20, 
2015), 80 FR 16031 (March 26, 2015) (SR-BATS-2014-067).
    \14\ 17 CFR 242.600(b)(47).
---------------------------------------------------------------------------

    The Exchange represents that it will conduct its own analysis 
concerning the elimination of the Obvious Error and Catastrophic Error 
provisions during Limit and Straddle States and agrees to provide the 
Commission with relevant data to assess the impact of this proposed 
rule change. As part of its analysis, the Exchange will evaluate (1) 
the options market quality during Limit and Straddle States, (2) assess 
the character of incoming order flow and transactions during Limit and 
Straddle States, and (3) review any complaints from Members and their 
customers concerning executions during Limit and Straddle States. The 
Exchange also agrees to provide to the Commission data requested to 
evaluate the impact of the inapplicability of the Obvious Error and 
Catastrophic Error provisions, including data relevant to assessing the 
various analyses noted above.
    In connection with this proposal, the Exchange will provide to the 
Commission and the public a dataset containing the data for each 
Straddle State and Limit State in NMS Stocks underlying options traded 
on the Exchange beginning in the month during which the proposal is 
approved, limited to those option classes that have at least one (1) 
trade on the Exchange during a Straddle State or Limit State. For each 
of those option classes affected, each data record will contain the 
following information:

     Stock symbol, option symbol, time at the start of the 
Straddle or Limit State, an indicator for whether it is a Straddle 
or Limit State.
    [cir] For activity on the Exchange:
    [cir] Executed volume, time-weighted quoted bid-ask spread, 
time-weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer;
    [cir] high execution price, low execution price;
    [cir] number of trades for which a request for review for error 
was received during Straddle and Limit States;
    [cir] an indicator variable for whether those options outlined 
above have a price change exceeding 30% during the underlying 
stock's Limit or Straddle State compared to the last available 
option price as reported by OPRA before the start of the Limit or 
Straddle State (1 if observe 30% and 0 otherwise). Another indicator 
variable for whether the option price within five minutes of the 
underlying stock leaving the Limit or Straddle state (or halt if 
applicable) is 30% away from the price before the start of the Limit 
or Straddle State.

    In addition, the Exchange shall provide to the Commission and the 
public assessments relating to the impact of the operation of the 
Obvious Error rules during Limit and Straddle States as follows: (1) 
Evaluate the statistical and economic impact of Limit and Straddle 
States on liquidity and market quality in the options markets; and (2) 
Assess whether the lack of Obvious Error rules in effect during the 
Straddle and Limit States are problematic. The timing of this 
submission would coordinate with Participants' proposed time frame to 
submit to the Commission assessments as required under Appendix B of 
the Plan. The Exchange notes that the pilot

[[Page 28755]]

program is intended to run concurrent with the pilot period of the 
Plan, which currently expires to October 23, 2015. The Exchange 
proposes to reflect this date in the Proposed Rule.
Minor Rule Violation Plan
    The Exchange's disciplinary rules, including Exchange Rules 
applicable to ``minor rule violations,'' are set forth in Chapter VIII 
of the Exchange's current Rules. Such disciplinary rules will apply to 
Options Members and their associated persons.
    The Commission approved the EDGX Exchange's Minor Rule Violation 
Plan (``MRVP'') in 2010.\15\ The Exchange's MRVP specifies those 
uncontested minor rule violations with sanctions not exceeding $2,500 
that would not be subject to the provisions of Rule 19d-1(c)(1) under 
the Act \16\ requiring that an SRO promptly file notice with the 
Commission of any final disciplinary action taken with respect to any 
person or organization.\17\ The Exchange's MRVP includes the policies 
and procedures included in Exchange Rule 8.15 (Imposition of Fines for 
Minor Violation(s) of Rules) and in Rule 8.15, Interpretation and 
Policy .01.
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    \15\ See Release No. 34-62036 (May 5, 2010), 75 FR 26822 (May 
12, 2010) (File No. 4-594) (``MRVP Order'').
    \16\ 17 CFR 240.19d-1(c)(1).
    \17\ The Commission adopted amendments to paragraph (c) of Rule 
19d-1 to allow SROs to submit for Commission approval plans for the 
abbreviated reporting of minor disciplinary infractions. See Release 
No. 34-21013 (June 1, 1984), 49 FR 23828 (June 8, 1984). Any 
disciplinary action taken by an SRO against any person for violation 
of a rule of the SRO which has been designated as a minor rule 
violation pursuant to such a plan filed with and declared effective 
by the Commission will not be considered ``final'' for purposes of 
Section 19(d)(1) of the Act if the sanction imposed consists of a 
fine not exceeding $2,500 and the sanctioned person has not sought 
an adjudication, including a hearing, or otherwise exhausted his 
administrative remedies.
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    The Exchange proposes to amend its MRVP and Rule 8.15, 
Interpretation and Policy .01 to include proposed Rule 25.3 (Penalty 
for Minor Rule Violations).\18\ The rules included in proposed Rule 
25.3 as appropriate for disposition under the Exchange's MRVP are: 
violations of applicable Position Limit and Exercise Limit rules; order 
entry violations regarding restrictions on orders entered by Market 
Makers; violations of Market Maker continuous bid and offer rules; 
violations of rules applicable to expiring exercise declarations; and 
violations of Exchange requirements to provide trade data. The rules 
included in Rule 25.3 are the same as the rules included in the MRVPs 
of BZX Options and other options exchanges.\19\
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    \18\ In the MRVP Order, the Commission noted that the Exchange 
proposed that any amendments to Rule 8.15.01 made pursuant to a rule 
filing submitted under Rule 19b-4 of the Act would automatically be 
deemed a request by the Exchange for Commission approval of a 
modification to its MRVP. See MRVP Order, supra note 15, at note 5.
    \19\ See BZX Options Rule 25.3; see also, NOM, Chapter X, 
Section 7, and BOX, Chapter X, Section 2.
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    Upon implementation of this proposal, the Exchange will include the 
enumerated options trading rule violations in the Exchange's standard 
quarterly report of actions taken on minor rule violations under the 
MRVP. The quarterly report includes: the Exchange's internal file 
number for the case, the name of the individual and/or organization, 
the nature of the violation, the specific rule provision violated, the 
sanction imposed, the number of times the rule violation has occurred, 
and the date of disposition.
    Although the Exchange has not proposed fees for EDGX Options in 
connection with this proposal, the Exchange does anticipate filing a 
separate proposal prior to the launch of EDGX Options to establish 
applicable fees. The Exchange notes that pursuant to both the Act and 
existing Exchange Rule 15.1, the Exchange has the authority to 
prescribe dues, fees, assessments and other charges (collectively, 
``Fees'') so long as such Fees are equitably allocated, reasonable and 
not unreasonably discriminatory.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of the Act,\20\ in general and with Section 6(b)(5) 
of the Act,\21\ in particular, in that it is designed 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 are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \20\ 15 U.S.C. 78a et seq.
    \21\ 15 U.S.C. 78f(b)(5).
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    As described above, the fundamental premise of the proposal is that 
the Exchange will operate its options market in a similar manner to its 
affiliated options exchange, BZX Options, with the exception of the 
priority model and certain other limited differences. The Exchange 
believes that EDGX Options will benefit individual investors, options 
trading firms, and the options market generally. The entry of an 
innovative, low-cost competitor such as EDGX Options will promote 
competition, spurring existing markets to improve their own execution 
systems and reduce trading costs.
    The basis for the majority of the rules of EDGX Options are [sic] 
the approved rules of BZX Options, which have already been found to be 
consistent with the Act. For instance, the Exchange does not believe 
that any of the proposed order types or order type functionality raise 
any new or novel issues that have not previously been considered. Thus, 
the Exchange further believes that the functionality that it proposes 
to offer is consistent with Section 6(b)(5) of the Act,\22\ because the 
System is designed to be efficient and its operation transparent, 
thereby facilitating transactions in securities, removing impediments 
to and perfecting the mechanism of a free and open market and a 
national market system. As noted above, the Exchange will participate 
in the approved Options Order Protection and Locked/Crossed Market 
Plan, and therefore will be required to comply with the obligations of 
Participants under the Plan.
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    \22\ 15 U.S.C. 78f(b)(5).
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    Similarly, the Exchange proposes to adopt initial and continued 
listing standards for equity and index options that are substantially 
similar to the listing standards adopted by BZX Options and other 
options exchanges. The Exchange has also proposed to adopt rules that 
are substantially similar to those of BZX Options with respect to the 
Penny Pilot Program and various other strike price programs, including 
the program regarding the listing of $0.50, $1, $2.50 and $5.00 
strikes, the Quarterly Options Series Program and the Short Term 
Options Series program. The Exchange believes that general consistency 
amongst options exchanges with respect to the series of options 
available for listings and trading is consistent with Section 6(b)(5) 
of the Act,\23\ in particular, in that it is designed 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 by avoiding unnecessary 
confusion.
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    \23\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the rules of EDGX Options as well as the 
proposed method of monitoring for

[[Page 28756]]

compliance with and enforcing such rules is also consistent with the 
Act, particularly Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, 
which require, in part, that an exchange have the capacity to enforce 
compliance with, and provide appropriate discipline for, violations of 
the rules of the Commission and of the exchange.\24\ The Exchange has 
proposed to adopt rules necessary to regulation Options Members that 
are nearly identical to the approved Rules of BZX Options as well as 
numerous other options exchanges. The Exchange proposes to regulate 
activity on EDGX Options in the same way it regulates activity on its 
equities market, specifically through various Exchange specific 
functions, an RSA with FINRA, as well as participation in industry 
plans, including plans pursuant to Rule 17d-2 under the Exchange Act.
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    \24\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
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    More specifically, the Exchange's MRVP, as proposed to be amended, 
is also consistent with Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the 
Act, which require, in part, that an exchange have the capacity to 
enforce compliance with, and provide appropriate discipline for, 
violations of the rules of the Commission and of the exchange.\25\ In 
addition, because amended Rule 8.15 will offer procedural rights to a 
person sanctioned for a violation listed in proposed Rule 25.3, the 
Exchange will provide a fair procedure for the disciplining of members 
and associated persons, consistent with Section 6(b)(7) of the Act.\26\ 
The proposal to include the rules listed in proposed Rule 25.3 in the 
Exchange's MRVP is also consistent with the public interest, the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act, as required by Rule 19d-1(c)(2) under the Act,\27\ because it 
should strengthen the Exchange's ability to carry out its oversight and 
enforcement responsibilities as an SRO in cases where full disciplinary 
proceedings are unsuitable in view of the minor nature of the 
particular violation.
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    \25\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
    \26\ 15 U.S.C. 78f(b)(7).
    \27\ 17 CFR 240.19d-1(c)(2).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
operates in an intensely competitive global marketplace for transaction 
services. Relying on its array of services and benefits, the Exchange 
competes for the privilege of providing market services to broker-
dealers. The Exchange's ability to compete in this environment is based 
in large part on the quality of its trading systems, the overall 
quality of its market and its attractiveness to the largest number of 
investors, as measured by speed, likelihood and cost of executions, as 
well as spreads, fairness, and transparency.
    The Exchange notes that most U.S. options exchanges are owned and 
operated by companies that operate more than one options exchange.\28\ 
The primary reason to operate multiple options exchanges, as is true 
with respect to the proposed launch of EDGX Options, is that it allows 
an exchange operator to offer multiple market models, including a 
price-time market and a pro rata market, often with Customer priority 
as a critical component of the latter. Accordingly, the proposed rule 
change is intended to enhance competition by allowing the Exchange to 
compete with existing options exchanges that operate models based on 
Customer priority and pro rata allocations.
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    \28\ The IntercontinentalExchange Group, Inc. (``ICE'') operates 
two options exchanges, Amex and Arca; NASDAQ OMX Group, Inc. 
operates three options exchanges, NOM, Phlx and NASDAQ OMX BX; 
International Securities Exchange Holding, Inc. operates two options 
exchanges, ISE and ISE Gemini; and CBOE Holdings operates two 
options exchanges, CBOE and C2 Options Exchange.
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    The proposed rule change will reduce overall trading costs and 
increase price competition, both pro-competitive developments, and will 
promote further initiative and innovation among market centers and 
market participants.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will: (a) By order approve 
or disapprove such 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 rule-comments@sec.gov. Please include 
File Number SR-EDGX-2015-18 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-EDGX-2015-18. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-EDGX-2015-18 and should be 
submitted on or before June 9, 2015.


[[Page 28757]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12022 Filed 5-18-15; 8:45 am]
 BILLING CODE 8011-01-P


