[Federal Register Volume 84, Number 207 (Friday, October 25, 2019)]
[Notices]
[Pages 57521-57525]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23262]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87376; File No. SR-EMERALD-2019-34]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Exchange Rule 521, Nullification and Adjustment of Options Transactions 
Including Obvious Errors, Interpretation and Policy .01, and Exchange 
Rule 530, Limit Up-Limit Down

October 21, 2019.
    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 16, 2019, MIAX Emerald, LLC (``MIAX 
Emerald'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change as described in 
Items I and II 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 is filing a proposal to amend Exchange Rule 521, 
Nullification and Adjustment of Options Transactions Including Obvious 
Errors, Interpretation and Policy .01, and Exchange Rule 530, Limit Up-
Limit Down, to make permanent certain options market rules that are 
linked to the equity market Plan to Address Extraordinary Market 
Volatility.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/emerald at MIAX 
Emerald's principal office, and at the Commission's Public Reference 
Room.

[[Page 57522]]

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

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

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

1. Purpose
    The purpose of the proposed rule change is to make permanent 
certain options market rules in connection with the equity market Plan 
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down 
Plan'' or the ``Plan''). This change is being proposed in connection 
with the recently approved amendment to the Limit Up-Limit Down Plan 
that allows the Plan to continue to operate on a permanent basis 
(``Amendment 18'').\3\
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    \3\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No. 
18).
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    In an attempt to address extraordinary market volatility in NMS 
Stock, and, in particular, events like the severe volatility on May 6, 
2010, U.S. national securities exchanges and the Financial Industry 
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the 
Plan pursuant to Rule 608 of Regulation NMS and under the Act.\4\ On 
May 31, 2012, the Commission approved the Plan, as amended, on a one-
year pilot basis.\5\ Though the Plan was primarily designed for equity 
markets, the Exchange believed it would, indirectly, potentially impact 
the options markets as well. Thus, the Exchange has previously adopted 
and amended Exchange Rule 521, Interpretation and Policy .01, and 
Exchange Rule 530, to ensure the option markets were not harmed as a 
result of the Plan's implementation and implemented such rules on a 
pilot basis that has coincided with the pilot period for the Plan 
(collectively, the ``Options Pilots'').\6\ Exchange Rule 530 
essentially serves as a roadmap for the Exchange's universal changes 
due to the implementation of the Plan and provides for trading halts 
whenever a market-wide trading halt is initiated due to extraordinary 
market conditions pursuant to the Plan. Exchange Rule 521, 
Interpretation and Policy .01, provides that transactions executed 
during a limit or straddle state are not subject to the obvious and 
catastrophic error rules. A limit or straddle state occurs when at 
least one side of the National Best Bid (``NBB'') or Offer (``NBO'') 
bid/ask is priced at a non-tradable level. Specifically, a straddle 
state exists when the NBB is below the lower price band while the NBO 
is inside the price band or when the NBO is above the upper price band 
and the NBB is within the band, while a limit state occurs when the NBO 
equals the lower price band (without crossing the NBB), or the NBB 
equals the upper price band (without crossing the NBO).
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    \4\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \5\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
    \6\ See Securities Exchange Act Release No. 85568 (April 9, 
2019), 84 FR 15243 (April 15, 2019) (SR-EMERALD-2019-17).
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    The Exchange adopted the Options Pilots to protect investors 
because when an underlying security is in a limit or straddle state, 
there will not be a reliable price for the security to serve as a 
benchmark for the price of the option. Specifically, the Exchange 
adopted Exchange Rule 521, Interpretation and Policy .01, because the 
application of the obvious and catastrophic error rules would be 
impracticable given the potential for lack of a reliable NBBO in the 
options market during limit and straddle states. When adjusting or 
busting a trade pursuant to the obvious error rule, the determination 
of theoretical value of a trade generally references the NBB (for 
erroneous sell transactions) or NBO (for erroneous buy transactions) 
just prior to the trade in question, and is therefore not reliable when 
at least one side of the NBBO is priced at a non-tradeable level, as is 
the case in limit and straddle states. In such a situation, determining 
theoretical value may often times be a very subjective rather than an 
objective determination and could give rise to additional uncertainty 
and confusion for investors. As a result, application of the obvious 
and catastrophic error rules would be impracticable given the lack of a 
reliable NBBO in the options market during limit and straddle states, 
and may produce undesirable effects or unanticipated consequences.
    The Exchange adopted additional measures via other Options Pilot 
rules that are designed to protect investors during limit and straddle 
states. For example, the Exchange will reject market orders and not 
elect stop orders \7\ during a Limit Up-Limit Down state to ensure that 
only those orders with a limit price will be executed during a limit or 
straddle state given the uncertainty of market prices during such a 
state. Furthermore, the Exchange believes that eliminating the 
application of obvious error rules during a limit or straddle state 
eliminates the re-evaluation of a transaction executed during such a 
state that could potentially create an unreasonable adverse selection 
opportunity due to lack of a reliable reference price on one side of 
the market or another and discourage participants from providing 
liquidity during limit and straddle states, which is contrary to the 
goal in limiting participants' adverse selection with the application 
of the obvious error rule during normal trading states. For these 
reasons, the Exchange believes the Options Pilots are designed to add 
certainty on the options markets, which encourages more investors to 
participate in light of the changes associated with the Plan. The Plan 
was originally implemented on a pilot-basis in order to allow the 
public, the participating exchanges, and the Commission to assess the 
operation of the Plan and whether the Plan should be modified prior to 
approval on a permanent basis. As stated, the Exchange adopted the 
Option Pilots to coincide with this pilot; to continue the protections 
therein while the industry gains further experience operating the Plan.
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    \7\ This includes rules in connection with special handling for 
market orders, market-on-close orders, stop orders, and stock-option 
orders, as well as for certain electronic order handling features in 
a Limit Up-Limit Down state, the obvious error rules, and providing 
that the Exchange will not require Market-Makers to quote in series 
of options when the underlying security is in a Limit Up-Limit Down 
state.
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    In connection with the order approving the establishment of the 
obvious error pilot, as well as the extensions of the obvious error 
pilot, the Exchange committed to submit monthly data regarding the 
program and to submit an overall analysis of the obvious error pilot in 
conjunction with the data submitted under the Plan and any other data 
as requested by the Commission. Pursuant to the Exchange's Form 1 
Application for approval as a national securities exchange, approved by 
the Commission on December 20, 2018, each month since March of 2019, 
the Exchange committed to provide the Commission, and the public, a 
dataset containing the data for each straddle

[[Page 57523]]

and limit state in optionable stocks that had at least one trade on the 
Exchange.\8\ The Exchange has continued to provide the Commission with 
this data on a monthly basis since March 2019. For each trade on the 
Exchange, the Exchange provides (a) the 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, and (b) for the trades on the 
Exchange, the executed volume, time-weighted quoted bid-ask spread, 
time-weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer, high execution price, low execution price, 
number of trades for which a request for review for error was received 
during straddle and limit states, 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. In addition, to help evaluate the impact of 
the pilot program, the Exchange has provided to the Commission, and the 
public, assessments relating to the impact of the operation of the 
obvious error rules during limit and straddle states including: (1) An 
evaluation of the statistical and economic impact of limit and straddle 
states on liquidity and market quality in the options markets, and (2) 
an assessment of whether the lack of obvious error rules in effect 
during the straddle and limit states are problematic. The Exchange has 
concluded that the Options Pilots do not negatively impact market 
quality during normal market conditions,\9\ and that there has been 
insufficient data to assess whether a lack of obvious error rules is 
problematic, however, the Exchange believes the continuation of 
Exchange Rule 521, Interpretation and Policy .01 functions to protect 
against any unanticipated consequences in the options markets during a 
limit or straddle state and add certainty on the options markets.
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    \8\ See Securities Exchange Act Release No. 84891 (December 20, 
2018), 83 FR 67421 (December 28, 2018)(In the Matter of the 
Application of MIAX EMERALD, LLC for Registration as a National 
Securities Exchange); see also MIAX Emerald Form 1 Application, 
Exhibit E, Section D(1)(v)(f); MIAX Emerald, LULD Pilot Reports, 
available at https://www.miaxoptions.com/pilot-reports.
    \9\ See also MIAX Emerald, LULD Pilot Reports, available at 
https://www.miaxoptions.com/pilot-reports. During the most recent 
Review Period the Exchange did not receive any obvious error review 
requests for Limit-Up-Limit Down trades, and Limit Up-Limit Down 
trade volume accounted for nominal overall trade volume.
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    The Commission recently approved the Plan on a permanent basis 
(Amendment 18).\10\ In connection with this approval, the Exchange now 
proposes to amend Exchange Rule 521, Interpretation and Policy .01, and 
Exchange Rule 530 that currently implement the provisions of the Plan 
on a pilot basis to eliminate the pilot basis, which effectiveness 
expires on October 18, 2019, and to make such rules permanent. In its 
approval order to make the Plan permanent, the Commission recognized 
that, as a result of the Participants' and industry analysis of the 
Plan's operation, the Limit Up-Limit Down mechanism effectively 
addresses extraordinary market volatility. Indeed, the Plan benefits 
markets and market participants by helping to ensure orderly markets, 
but also, the Exchange believes, based on the data made available to 
the public and the Commission during the pilot period, that the obvious 
error pilot does not negatively impact market quality during normal 
market conditions.\11\ Rather, the Exchange believes the obvious error 
pilot functions to protect against any unanticipated consequences in 
the options markets during a limit or straddle state and add certainty 
on the options markets. The Exchange also believes the other Options 
Pilots rules provide additional measures designed to protect investors 
during limit and straddle states. For example, the Exchange will reject 
market orders and not elect stop orders \12\ during a Limit Up-Limit 
Down state to ensure that only those orders with a limit price will be 
executed during a limit or straddle state given the uncertainty of 
market prices during such a state. This removes impediments to and 
perfects the mechanism of a free and open market and national market 
system by encouraging more investors to participate in light of the 
changes associated with the Plan. The Exchange believes that if 
approved on a permanent basis, the Options Pilots would permanently 
provide investors with the above-described additional certainty of 
market prices and mitigation of unanticipated consequences and 
unreasonable adverse selection risk during limit and straddle states.
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    \10\ See supra note 3.
    \11\ See supra note 9.
    \12\ See supra note 7.
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    The Exchange understands that the other national securities 
exchanges will also file similar proposals to make permanent their 
respective pilot programs. Since the Commission's approval of Amendment 
18 allowing the Plan to operate on a permanent basis, the Exchange and 
other national securities exchanges have determined that no further 
amendments should be made to the Options Pilots; \13\ the current 
Options Pilots effectively address extraordinary market volatility, are 
reasonably designed to comply with the requirements of the Plan, 
facilitate compliance with the Plan and should now operate on a 
permanent basis, consistent with the Plan. The Exchange does not 
propose any substantive or additional changes to Exchange Rule 521, 
Interpretation and Policy .01, or Exchange Rule 530.
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    \13\ See Securities Exchange Act Release No. 85568 (April 9, 
2019), 84 FR 15243 (April 15, 2019)(SR-EMERALD-2019-17).
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    The Exchange also proposes to amend Exchange Rule 530 to remove the 
following sentence from the first paragraph: ``The Exchange will 
provide the Commission with data and analysis during the duration of 
this pilot as requested.'' The purpose of this proposed change is to 
further align the Exchange's Limit Up-Limit Down rules with competing 
options exchanges that have proposed rules consistent with this 
proposal. For example, Cboe Exchange, Inc. (``Cboe'') removed a similar 
provision in a 2015 rule filing \14\ and continued to provide the 
Commission, and the public, each month with a dataset containing the 
data for each straddle and limit state in optionable stocks that had at 
least one trade on the Exchange.
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    \14\ See Securities Exchange Act Release No. 74898 (May 7, 
2015), 80 FR 27354 (May 13, 2015(SR-CBOE-2015-039) (Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change Relating to 
Nullification and Adjustment of Options Transactions Including 
Obvious Errors).
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    Additionally, the proposed changes would align the Exchange's rules 
with the similar rule by Cboe.\15\
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    \15\ See Securities Exchange Act Release No. 87311 (October 15, 
2019)(SR-CBOE-2019-049) (Notice of Filing of Amendment No. 2 and 
Order Granting Accelerated Approval of a Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2, to Make Permanent Certain 
Options Market Rules That Are Linked to the Equity Market Plan to 
Address Extraordinary Market Volatility).
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2. Statutory Basis
    MIAX Emerald believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\16\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \17\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable

[[Page 57524]]

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. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \18\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
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    In particular, the Exchange believes that the proposed rule changes 
support the objectives of perfecting the mechanism of a free and open 
market and the national market system because they promote transparency 
and uniformity across markets concerning rules for options markets 
adopted to coincide with the Plan. The Exchange believes that 
eliminating the pilot basis for the Options Pilots and making such 
rules permanent facilitates compliance with the Plan by adding 
certainty to the markets during periods of market volatility, which has 
been approved and found by the Commission to be reasonably designed to 
prevent potentially harmful price volatility in NMS Stocks. It has been 
determined by the Commission that the Plan benefits markets and market 
participants by helping to ensure orderly markets, and, based on the 
data made available to the public and the Commission during the pilot 
period for Exchange Rule 521, Interpretation and Policy .01, the Plan 
does not negatively impact options market quality during normal market 
conditions. Rather, the Plan, as it is implemented under the obvious 
error pilot, functions to protect against any unanticipated 
consequences in the options markets during a limit or straddle state 
and add certainty on the options markets. During a limit or straddle 
state, determining theoretical value of an option may be a subjective 
rather than an objective determination given the lack of a reliable 
NBBO, which may create an unreasonable adverse selection opportunity 
and discourage participants from providing liquidity during limit and 
straddle states. Therefore, the Exchange believes eliminating obvious 
error review in such states would, in turn, eliminate uncertainty and 
confusion for investors and benefit investors by encouraging more 
participation in light of the changes associated with the Plan. As 
stated, the Exchange believes the other Options Pilots rules provide 
additional measures designed to protect investors during limit and 
straddle states. For example, the Exchange will reject market orders 
and not elect stop orders \19\ during a Limit Up-Limit Down state to 
ensure that only those orders with a limit price will be executed 
during a limit or straddle state given the uncertainty of market prices 
during such a state. Accordingly, the Exchange believes that making the 
Options Pilots permanent will further the goals of investor protection 
and fair and orderly markets as the rules effectively address 
extraordinary market volatility pursuant to the Plan.
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    \19\ See supra note 7.
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    Further, the Exchange believes that the proposed rule change to 
remove text in the first paragraph of Exchange Rule 530 regarding the 
Exchange providing the Commission with data and analysis during the 
duration of the pilot as requested supports the objectives of 
perfecting the mechanism of a free and open market and the national 
market system because it furthers aligns the Exchange's Limit Up-Limit 
Down rules with competing options exchanges.\20\
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    \20\ See supra note 14.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
necessary to reflect that the Plan no longer operates as a pilot and 
has been approved to operate on a permanent basis by the Commission. As 
such, Exchange Rule 521, Interpretation and Policy .01 and Exchange 
Rule 530, which implement protections in connection with the Plan, 
should be amended to operate on a permanent basis. The Exchange 
understands that the other national securities exchanges will also file 
similar proposals to make permanent their respective pilot programs. 
Thus, the proposed rule change will help to ensure consistency across 
market centers without implicating any competitive issues.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \21\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\22\
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    \21\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \23\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \24\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposed 
rule change may become effective and operative immediately upon filing. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the current Options Pilots to continue on a permanent 
basis without any changes, prior to the pilot expiration on October 18, 
2019. For this reason, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change as operative 
upon filing.\25\
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    \23\ 17 CFR 240.19b-4(f)(6).
    \24\ 17 CFR 240.19b-4(f)(6)(iii).
    \25\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

[[Page 57525]]

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-EMERALD-2019-34 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-EMERALD-2019-34. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-EMERALD-2019-34 and should be submitted 
on or before November 15, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23262 Filed 10-24-19; 8:45 am]
 BILLING CODE 8011-01-P


