Introduction
This Regulatory Notice (the “Notice”) serves to inform Members of EDGA Exchange and EDGX Exchange (together, the “Exchanges”) that the Exchanges’ rule filings on market making were approved by the Securities and Exchange Commission.i
In particular, Chapter XI of the Exchanges’ rules (the “Rules”) was amended to add Rules 11.18, 11.19, 11.20 and 11.21 regarding the registration and obligations of Members who wish to become market makers (“Market Makers”). The Exchanges also amended Rules 1.5 to add definitions of “Market Maker” and “Market Maker Authorized Trader”. In addition, the Exchanges amended Rules 8.15, Interpretation .01 to add violations of Rules 11.21(a)(1) to the list of violations eligible for disposition under the Exchanges’ Minor Rule Violation Plans. Finally, the Exchanges amended Rules 14.1, entitled “Unlisted Trading Privileges”, to restrict certain trading activities of Market Makers and impose a series of reporting and record-keeping requirements.
These Rule changes become effective on Tuesday, January 17, 2012. The purpose of this Notice is to inform Market Makers of their obligations under the new Rules (see attachedAddendum I).
Registration as a Market Maker
Registration as a Market Maker is purely optional. Rule 11.18 contains the process for registration and provides that an applicant must submit to the Exchanges’ Member Services department (“Member Services”) a completed Market Maker Registration Application, its most recent quarterly FOCUS report and most recent annual audited financial statement. The applicant must also update the Financial Industry Regulatory Authority’s (“FINRA”) Web CRD® (“Web CRD®”) for registration of at least one Market Maker Authorized Trader (“MMAT”).ii
General Obligations of Registered Market Makers
Once registered, and pursuant to Rules 11.21, the responsibilities of a Market Maker include, but are not limited to, the following: (i) remaining in good standing with the Exchanges and in compliance with all applicable rules of the Exchanges; (ii) informing the Exchanges of any material change in financial or operational condition or personnel by concurrently sending a copy to the Exchanges of a notice sent to the SEC pursuant to Rule 17a-11 under the Securities Exchange Act of 1934; (iii) maintaining a current list of MMATs and providing any updates to the Exchanges upon any change in MMATs; and clearing and settling transactions through the facilities of a registered clearing agency. A Market Maker will also be responsible for the acts and omissions of its MMATs and, notably, MMATs are only permitted to enter orders for the account(s) of the Market Maker for which they are registered.
Specific Obligations of Registered Market Makers
I. Maintaining Continuous, Two-Sided Quotations
Pursuant to Rules 11.21(d), a Market Maker registered with the Exchanges must maintain continuous, two-sided quotations with a displayed quotation size of at least one normal unit of trading (100 shares) or a larger multiple thereof. Following an execution against its quotations, a Market Maker must immediately refresh its quotations.
Market Maker quotations must be within a designated percentage of the National Best Bid (“NBB”) and National Best Offer (“NBO”, and together with the NBB, the “NBBO”) or, if there is no NBB or NBO, the last reported sale. This requirement is intended to eliminate executions against Market Maker quotations priced far away from the inside market, commonly known as stub quotes. They are also intended to augment and work in conjunction with the single stock pause standards for all National Market System (“NMS”) securities.
For symbols subject to an individual stock trading pause trigger under the applicable rules of a primary listing market, permissible quotes are as follows: (i) a Market Maker’s quotes in the Original Circuit Breaker Securitiesiii shall not be more than 8% away from the NBBO; (ii) a Market Maker’s quotes in NMS securities that are not Original Circuit Breaker Securities with a price equal to or greater than $1 shall not be more than 28% away from the NBBO; and (iii) a Market Maker’s quotes in NMS securities that are not Original Circuit Breaker Securities with a price less than $1 shall not be more than 30% away from the NBBO. For times during Regular Trading Hoursiv when stock pause triggers are not in effect under the rules of the primary listing market (e.g., before 9:45 a.m. and after 3:35 p.m. ET), the designated percentage shall be 20% for Original Circuit Breaker Securities, 28% for all NMS securities that are not Original Circuit Breaker Securities with a price equal to or greater than $1 and 30% for all NMS securities that are not Original Circuit Breaker Securities with a price less than $1.
Once a permissible quote is entered by a Market Maker, it may rest without adjustment until such time as it moves to within 9.5% away from the NBBO for Original Circuit Breaker Securities, 29.5% away from the NBBO for NMS securities that are not Original Circuit Breaker Securities with a price equal to or greater than $1 and 31.5% away from the NBBO for all NMS securities that are not Original Circuit Breaker Securities with a price less than $1, whereupon the Market Maker must immediately adjust its quote to at least the permissible default level of 8%, 28%, or 30%, respectively, away from the NBBO.
In the absence of a NBB or NBO, the above calculations will remain the same but will use the national last sale instead of the absent bid or offer. The above designated percentages and defined limits are illustrated in the following table:
Stock Pause Triggers |
Security Type |
Designated Percentage |
Defined Limit |
Regular Trading Hours when stock pause triggers are in effect under the rules of the primary listing market (i.e., between 9:45 a.m. and 3:35 p.m. ET) |
Original Circuit Breaker Securities |
8% |
9.5% |
Other NMS securities, priced equal to or greater than $1 |
28% |
29.5% |
|
Other NMS securities, priced less than $1 |
30% |
31.5% |
|
Regular Trading Hours when stock pause triggers are not in effect under the rules of the primary listing market (i.e., prior to 9:45 a.m. and after 3:35 p.m. ET) |
Original Circuit Breaker Securities |
20% |
21.5% |
Other NMS securities, priced equal to or greater than $1 |
28% |
29.5% |
|
Other NMS securities, priced less than $1 |
30% |
31.5% |
II. Pricing Differentials
Scenarios may occur in which pricing at the commencement of a trading day, or at the re-opening of trading in a security that has been halted, suspended or paused, is significantly different from pricing for the security at the close of the previous trading day or immediately prior to the halt, suspension or pause, respectively. The Exchanges do not subject its registered Market Makers to the pricing obligations, as described above, when the last sale of the previous trading day, or immediately prior to a halt, is the only available NBBO.
As such, for NMS stocks, a Market Maker shall adhere to the pricing obligations established above during Regular Trading Hours, provided that such pricing obligations: (i) shall not commence during any trading day until after the first regular way transaction on the primary listing market in the security, as reported by the responsible single plan processor (the “SIP”) and (ii) shall be suspended during a trading halt, suspension or pause, and shall not recommence until after the first regular-way transaction on the primary listing market in the security following such halt, suspension or pause, as reported by the SIP. Nothing in the above, however, precludes a Market Maker from voluntarily quoting at price levels that are closer to the NBBO than are required by the Exchanges.
III. Minor Violation(s) of Rules
The Exchanges amended Rules 8.15, entitled “Imposition of Fines for Minor Violation(s) of Rules”, to add Rules 11.21(a)(1) to the list of rules appropriate for disposition under the Exchanges’ Minor Rule Violation Plans. This addition allows the Exchanges to impose a $100 fine for each violation of the Rules.
IV. Restricted Market Makers
The Exchanges also amended Rules 14.1, entitled “Unlisted Trading Privileges”, to restrict certain trading activities of Market Makers and impose a series of reporting and record-keeping requirements. Amended Rules 14.1(c)(5) impose restrictions on any Market Maker registered in a derivative securities product (each, a “UTP Derivative Security”) that derives its value from one or more currencies or commodities, or from a derivative overlying one or more currencies or commodities, or is based on a basket or index comprised of currencies or commodities (collectively, “Reference Assets”). Such Market Makers are known as Restricted Market Makers and are prohibited from acting or registering as a Market Maker on any other exchange in any Reference Asset of that UTP Derivative Security or any derivative instrument based on a Reference Asset of that UTP Derivative Security (collectively, with Reference Assets, “Related Instruments”).
A Restricted Market Maker shall provide Member Services via email atmemberservices@directedge.com, and keep current a list identifying any accounts (“Related Instrument Trading Accounts”) in or for which Related Instruments are traded (i) in which the Restricted Market Maker holds an interest; (ii) over which it has investment discretion; or (iii) in which it shares in the profits and/or losses. In addition, a Restricted Market Maker may not have an interest in, exercise investment discretion over, or share in the profits and/or losses of a Related Instrument Trading Account that has not been reported to the Exchanges. A Restricted Market Maker shall also, upon request by the Exchanges, make available to the Exchanges any books, records or other information pertaining to any Related Instrument Trading Account or to the account of any registered or non-registered employee affiliated with the Restricted Market Maker in or for which Related Instruments are traded. Finally, a Restricted Market Maker shall not use any material, non-public information in connection with trading a Related Instrument.
Suspension, Termination and Withdrawal
I. Suspension, Termination and Withdrawal of a Market Maker
Rules 11.18 provide that the registration of a Market Maker may be suspended or terminated if the Exchanges determine that the Market Maker: (i) has substantially or continually failed to engage in dealings in accordance with Rules of the Exchanges; (ii) has failed to meet the minimum net capital conditionsv; (iii) has failed to maintain fair and orderly markets; or (iv) does not have at least one registered MMAT qualified to perform market making activities as set forth in Rules 11.19(b)(5).
After a Market Maker has been registered, it may voluntarily withdraw its registration by contacting Member Services. However, the Exchanges may: (i) require certain minimum notice for withdrawal or place other conditions on withdrawal, as determined and communicated by the Exchanges to the Market Maker, or (ii) require re-registration following a withdrawal, as it deems appropriate to maintain fair and orderly markets. If a Member wishes to re-register as a Market Maker after it has already been de-registered, it will have to repeat each of the steps required during the initial application process.
II. Suspension and Withdrawal of an MMAT
Under Rules 11.19, the Exchanges may suspend or terminate the registration of a MMAT if it determines that the person has: (i) caused the Market Maker to fail to comply with the federal securities laws or rules thereunder or Rules of the Exchanges; (ii) failed to properly perform his or her regulatory responsibilities, as discussed below, properly; or (iii) failed to maintain fair and orderly markets. If a MMAT is suspended or terminated, the Market Maker may not allow the MMAT to continue to submit orders to the Exchanges in the capacity of a MMAT. A Member may also voluntarily withdraw the registration of a MMAT by submitting to the Exchanges, via Web CRD®, an updated Form U-4 reflecting the same.
More Information
- All questions regarding this Notice should be directed to Direct Edge Member Services at 201.942.8220, option #3.
- Addendum 1
- EDGA Exchange Rules
- EDGX Exchange Rules
iSee Securities Exchange Act Release No. 65964 (December 15, 2011), 76 FR 79254 (SR-EDGA-2011-29; SR-EDGX-2011-28).
iiSee Direct Edge Information Circular 2011-05
iiiThe term “Original Circuit Breaker Securities” means securities subject to an individual stock pause trigger under the applicable rules of a primary listing market.
ivThe term “Regular Trading Hours” means the time between 9:30 a.m. and 4:00 p.m. ET.
v17 C.F.R. § 240.15c3-1.