Self-Regulatory Organizations; MEMX LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 19.3 (Criteria for Underlying Securities) To Accelerate the Listing of Options on Certain IPOs
| Published date | 06 September 2023 |
| Citation | 88 FR 60993 |
| Pages | 60993-60996 |
| FR Document | 2023-19123 |
| Section | Notices |
| Issuer | Securities and Exchange Commission,Securities And Exchange Commission |
Federal Register, Volume 88 Issue 171 (Wednesday, September 6, 2023)
[Federal Register Volume 88, Number 171 (Wednesday, September 6, 2023)]
[Notices]
[Pages 60993-60996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19123]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98253; File No. SR-MEMX-2023-17]
Self-Regulatory Organizations; MEMX LLC; Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change To Amend Rule 19.3
(Criteria for Underlying Securities) To Accelerate the Listing of
Options on Certain IPOs
August 30, 2023.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 22, 2023, MEMX LLC (``MEMX'' or the ``Exchange'') filed
with the Securities and Exchange Commission (the ``Commission'') the
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 proposes to amend MEMX Rule 19.3 (Criteria for
Underlying Securities) to permit an underlying security having a market
capitalization of at least $3 billion based upon the offering price of
its initial public offering, to be listed and traded starting on or
after the second business day following the initial public offering
day. The text of the proposed rule change is provided in Exhibit 5.
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
In August 2022, the Commission approved the Exchange's adoption of
rules to govern the trading of options on the Exchange by MEMX
Options,\3\ which will be a facility of the Exchange. The Exchange
plans to launch MEMX Options in September 2023, and in advance of that
launch, the Exchange is proposing a listings rule change applicable to
options that is substantially similar in all material respects to the
proposal approved from NYSE American LLC (``NYSE American'').\4\
Specifically, the Exchange proposes to amend Rule 19.3 (Criteria for
Underlying Securities) to permit an underlying security having a market
capitalization of at least $3 billion based upon the offering price of
its initial public offering, to be listed and traded starting on or
after the second business day following the initial public offering
day. This is a competitive filing that is based on a proposal recently
submitted by NYSE American and approved by the Commission.\5\
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\3\ See Securities Exchange Act Release No. 95445 (August 9,
2022), 87 FR 49884 (August 12, 2022) (SR-MEMX-2022-010).
\4\ See Securities Exchange Act Release No. 98013 (July 27,
2013) (Order Approving SR-NYSEAMER-2023-27).
\5\ Id.
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The purpose of the proposed rule change is to amend Rule 19.3
(Criteria for Underlying Securities) (the ``Rule'') as set forth below.
Following discussions with other exchanges and a cross-section of
industry participants and in coordination with the Listed Options
Market Structure Working Group (``LOMSWG'') (collectively, the
``Industry Working Group''), the Exchange proposes to modify the
standard set forth in the Rule for the listing and trading of options
on ``covered securities'' to reduce the time to market.
Rule 19.3(b)(5)(A) sets forth the guidelines to be considered in
evaluating for option transactions underlying securities that are
``covered securities,'' as defined in section 18(b)(1)(A) of the
Securities Act of 1933 (hereinafter ``covered security'' or ``covered
securities'').\6\ Currently, the Exchange permits the listing of an
option on an underlying covered security that, amongst other things,
has a market price of at least $3.00 per share for the previous three
consecutive business days preceding the date on which the Exchange
submits a certificate to The Options Clearing Corporation (``OCC'') to
list and trade options on the underlying security (the ``three-day
lookback period'').\7\ Under the current rule, if an initial public
offering (``IPO'') occurs on a Monday, the earliest date the Exchange
could submit its listing certificate to OCC would be on Thursday, with
the market price determined by the closing price over the three-day
lookback period from Monday through Wednesday. The option on the IPO'd
security would then be eligible for trading on the Exchange on Friday
(i.e., within four business days of the IPO inclusive of the day the
listing certificate is submitted to OCC).
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\6\ Rule 19.3(a) requires that, for underlying securities to be
eligible for option transactions, such securities must be duly
registered and be an ``NMS stock'' as defined in Rule 600 of
Regulation NMS under the Act and will be characterized by a
substantial number of outstanding shares which are widely held and
actively traded. See MEMX Rule 19.3(a)(1) and (2).
\7\ See MEMX Rule 19.3(b)(5)(A). The Exchange is not proposing
to make any changes to the guidelines for listing securities that
are not a ``covered security''. See MEMX Rule 19.3(b)(5)(B).
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The Exchange notes that the three-day look back period helps ensure
that options on underlying securities may be listed and traded in a
timely manner while also allowing time for OCC to accommodate the
certification request. However, there are certain large IPOs that issue
high-priced securities--well
[[Page 60994]]
above the $3.00 per share threshold--that would obviate the need for
the three-day lookback period. In this regard, the Industry Working
Group has recently identified proposed changes to Rule 19.3(b)(5)(A)
that would help options on covered securities that have a market
capitalization of at least $3 billion based upon the offering price of
its IPO come to market earlier.\8\ The proposed change, which is
intended to be harmonized across options exchanges, is designed to
provide investors the opportunity to hedge their interest in IPO
investments in a shorter amount of time than what is currently
permitted.\9\ The Exchange believes that options serve a valuable tool
to the trading community and help markets function efficiently by
mitigating risk. To that end, the Exchange believes that the absence of
options in the early days after an IPO may heighten volatility in the
trading of IPO'd securities.
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\8\ See proposed Rule 19.3(b)(5)(A)(2). The Exchange proposes a
non-substantive change to number the existing and proposed criteria
for covered securities as (1) and (2) of paragraph (5)(A). See
proposed Rule 19.3(b)(5)(A).
\9\ While the Exchange acknowledges that market participants may
utilize options for speculative purposes (in addition to as a
hedging tool), the Exchange believes (as set forth below) that its
surveillance technologies and procedures adequately address
potential violations of Exchange rules and federal securities laws
applicable to trading on the Exchange.
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Accordingly, the Exchange proposes to modify Rule 19.3 to waive the
three-day lookback period for covered securities that have a market
capitalization of at least $3 billion based upon the offering price of
the IPO of such securities and to allow options on such securities to
be listed and traded starting on or after the second business day
following the initial public offering day (i.e., not inclusive of the
day of the IPO).\10\ NYSE American has reviewed trading data for IPO'd
securities dating back to 2017 and stated that it is unaware of any
such security that achieved a market capitalization of $3 billion based
upon the offering price of its IPO that would not have also qualified
for listing options based on the three-day lookback requirement.
Specifically, NYSE American determined that 202 of the 1,179 IPOs that
took place between January 1, 2017, and October 21, 2022, met the $3
billion market capitalization/IPO offering price threshold. Options on
all 202 of those IPO shares subsequently satisfied the three-day
lookback requirement for listing and trading, i.e., none of these large
IPOs closed below the $3.00/share threshold during its first three days
of its trading. As such, the Exchange believes the proposed
capitalization threshold of $3 billion based upon the offering price of
its IPO is appropriate.
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\10\ The Exchange acknowledges that the Options Listing
Procedures Plan (or ``OLPP'') requires that the listing certificate
be provided to OCC no earlier than 12:01 a.m. and no later than
11:00 a.m. (Chicago time) on the trading day prior to the day on
which trading is to begin. See the OLPP, at p. 3., available here:
https://www.theocc.com/getmedia/198bfc93-5d51-443c-9e5bfd575a0a7d0f/options_listing_procedures_plan.pdf. The OLPP is a national market
system plan that, among other things, sets forth procedures
governing the listing of new options series.
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Under the proposed rule, if an IPO for a company with a market
capitalization of $3 billion based upon the offering price of its IPO
occurs on a Monday, the Exchange could submit its listing certificate
to OCC (to list and trade options on the IPO'd security) as soon as all
the other requirements for listing are satisfied. If, on Tuesday, all
requirements are deemed satisfied, the IPO'd security could then be
eligible for trading on the Exchange on Wednesday (i.e., starting on or
after the second business day following the IPO day). Thus, the
proposal could potentially accelerate the listing of options on IPO'd
securities by two days. The Exchange believes the proposed change would
allow options on IPO'd securities to come to market sooner without
sacrificing investor protection. The Exchange represents that trading
in IPO'd securities--like all other securities traded on the Exchange--
is subject to surveillances administered by the Exchange and to cross-
market surveillances administered by FINRA on behalf of the Exchange.
Those surveillances are designed to detect violations of Exchange rules
and applicable federal securities laws.\11\ The Exchange represents
that those surveillances are adequate to reasonably monitor Exchange
trading of IPO'd securities in all trading sessions and to reasonably
deter and detect violations of Exchange rules and federal securities
laws applicable to trading on the Exchange.\12\ As such, the Exchange
believes that its existing surveillance technologies and procedures,
coupled with NYSE American's findings related to the IPOs reviewed as
described herein, adequately address potential concerns regarding
possible manipulation or price stability.
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\11\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a Regulatory Services Agreement. The Exchange
is responsible for FINRA's performance under this Regulatory
Services Agreement.
\12\ See supra note 10.
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Implementation Date
The Exchange will announce the effective date of the proposed
change by Notice distributed to all Members.\13\ The Exchange will
coordinate the effective date to coincide with the implementation of
the proposed change on the other options exchanges.
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\13\ The term ``Member'' shall mean any registered broker or
dealer that has been admitted to membership in the Exchange. See
Rule 1.5(p).
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2. Statutory Basis
The Exchange believes that its proposal is consistent with section
6(b) of the Act,\14\ in general, and furthers the objectives of section
6(b)(5) of the Act,\15\ in particular, in that it is designed to
prevent fraudulent and manipulative practices, 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. In particular, the Exchange
believes the proposed change would facilitate options transactions and
would remove impediments to and perfect the mechanism of a free and
open market and a national market system, which would, in turn, protect
investors and the public interest by providing an avenue for options on
IPO'd securities to come to market earlier. The Exchange notes that the
three-day look back period helps ensure that options on underlying
securities may be listed and traded in a timely manner while also
allowing time for OCC to accommodate the certification request.
However, there are certain large IPOs that issue high-priced
securities--well above the $3.00 per share threshold--that would
obviate the need for the three-day lookback period. As noted above,
NYSE American has reviewed trading data for IPO'd securities dating
back to 2017 and it is unaware of an IPO'd security with a market
capitalization of $3 billion or more (based upon the offering price of
its IPO) that subsequently would have failed to qualify for listing and
trading as options under the three-day lookback requirement. The
Exchange believes that the proposed amendment, which would be
harmonized across options exchanges, would remove impediments to and
perfect the mechanism of a free and open market and a national market
system by providing an avenue for investors to hedge their interest in
IPO investments in a shorter amount of time than what is currently
permitted. The
[[Page 60995]]
Exchange believes that options serve a valuable tool to the trading
community and help markets function efficiently by mitigating risk. To
that end, the Exchange believes that the absence of options in the
early days after an IPO may heighten volatility to IPO'd
securities.\16\
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
\16\ See supra note 10.
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Further, as noted herein, the Exchange believes the proposed change
would allow options on IPO'd securities to come to market sooner (i.e.,
at least two business days post-IPO not inclusive of the day of the
IPO) without sacrificing investor protection. The Exchange represents
that trading in IPO'd securities--like all other securities traded on
the Exchange--is subject to surveillances administered by the Exchange
and to cross-market surveillances administered by FINRA on behalf of
the Exchange. Those surveillances are designed to detect violations of
Exchange rules and applicable federal securities laws.\17\ The Exchange
represents that those surveillances are adequate to reasonably monitor
Exchange trading of IPO'd securities in all trading sessions and to
reasonably deter and detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange, including
wrongful efforts to manipulate the prices of those securities in order
to bring them in compliance with the $3.00/share threshold for the
listing of options. As such, the Exchange believes that its existing
surveillance technologies and procedures, coupled with NYSE American's
findings related to the IPOs reviewed as described herein, would
adequately address potential concerns regarding possible manipulation
or price stability.
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\17\ See supra note 11.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. In this regard and as
indicated above, the Exchange notes that the rule change is being
proposed as a competitive response to a filing submitted by NYSE
American that was recently approved by the Commission.\18\ The Exchange
anticipates that the other options exchanges will adopt substantively
similar proposals,\19\ such that there would be no burden on
intermarket competition from the Exchange's proposal. Accordingly, the
proposed change is not meant to affect competition among the options
exchanges. For these reasons, the Exchange believes that the proposed
rule change reflects this competitive environment and does not impose
any undue burden on intermarket competition.
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\18\ See supra note 4.
\19\ BOX Exchange LLC (``BOX'') recently filed a similar
proposal. See Securities Exchange Act Release No. 98073 (August 7,
2023) (SR-BOX-2023-21).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
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) of the Act \20\ and Rule 19b-
4(f)(6) thereunder.\21\
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\20\ 15 U.S.C. 78s(b)(3)(A).
\21\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \22\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\23\ the Commission
may 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 operative upon filing. The Exchange requested
the waiver, stating that it would ensure fair competition among the
exchanges by allowing the Exchange to allow options on IPO'd securities
to come to market sooner (i.e., at least two business days post-IPO not
inclusive of the day of the IPO) without sacrificing investor
protection. For these reasons, and because the proposed rule change
does not raise any novel legal or regulatory issues, the Commission
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest. Therefore, the
Commission hereby waives the 30-day operative delay and designates the
proposal operative upon filing.\24\
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\22\ 17 CFR 240.19b-4(f)(6).
\23\ 17 CFR 240.19b-4(f)(6)(iii).
\24\ 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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-MEMX-2023-17 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-MEMX-2023-17. 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 (https://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
[[Page 60996]]
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-MEMX-2023-17 and should be
submitted on or before September 27, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19123 Filed 9-5-23; 8:45 am]
BILLING CODE 8011-01-P
