FR 2021-00196

The Securities and Exchange Commission (SEC) recently released a notice concerning a proposed rule change by MEMX LLC, a securities exchange. This particular proposal involves modifying a rule about how the exchange processes limit orders when the National Best Bid or Offer (NBBO) is not available. The implication of this change is that it will allow for more flexibility in handling limit orders, thereby potentially increasing market liquidity and offering more opportunities for setting the NBBO.

General Summary

The proposed rule change aims to enhance the efficiency of the marketplace by allowing MEMX to accept and process limit orders even when the NBBO is temporarily unavailable. Unlike market orders, which are generally executed at the current NBBO, limit orders come with specific price constraints set by the trader. This built-in protection helps prevent the execution of orders at unintended price levels when the usual market reference point, the NBBO, is not available. By enabling the submission of limit orders during these times, the exchange intends to increase liquidity and potentially help establish a new NBBO.

Significant Issues or Concerns

1. Complex Terminology: The document includes technical finance terms, such as "NBBO," "Market Orders," and "Pegged Orders," without simplifying these for general understanding. This can make it difficult for readers unfamiliar with finance to grasp the full implications of the changes.

2. Lack of Practical Examples: There are no concrete scenarios presented that show the potential impact of the rule change. Practical examples would help illustrate how this proposal could function in real-world trading scenarios.

3. Competition Explanation: The rationale for why the rule change doesn’t burden competition is briefly addressed. A more detailed explanation would help clarify the competitive landscape's nuances.

Impact on the Public

Broadly speaking, the proposed change might hold nuanced implications for both regular investors and more experienced traders. For the general public, increased liquidity can mean more stable and predictable markets. However, understanding how these rule changes affect their investment strategies requires a basic grasp of how securities exchanges function, which is not directly offered in the document.

Impact on Specific Stakeholders

• Exchange Members and Traders: For exchange members and traders, the change represents an opportunity to increase the volume and type of transactions executed on the exchange. It reduces restrictions during times when market conditions disrupt standard pricing reference points, thus offering more versatility in trading options.

• Market Regulators: The SEC's approval and rapid implementation suggest confidence that this rule change adheres to regulatory frameworks designed to protect investors. This support might imply similar future proposals could receive expedited processing.

• Competitors: Other exchanges might see this as a push to evaluate their own rules regarding handling orders when the NBBO is unavailable, potentially leading to more competitive market practices.

In conclusion, while the proposed rule change seems aligned with enhancing market efficiency, understanding its implications fully may challenge casual investors due to the technical nature of the language used and the need for familiarity with market mechanisms. However, stakeholders directly involved in the securities market might view these changes as a positive step towards optimizing market operations and competitive positioning.

In examining the financial references within the document, the focus primarily lies on the handling of different types of orders, particularly Limit Orders. Although the document does not explicitly reference any spending, appropriations, or financial allocations in the traditional sense, it touches upon the financial mechanics of how orders are processed in securities trading.

Financial Mechanics of Limit Orders

The document outlines that, unlike Market Orders and Pegged Orders, a Limit Order requires the entering user to specify a dollar price at which the order must be executed or better. This means that the execution of such orders is not directly tied to the availability of the National Best Bid or Offer (NBBO). Given that a Limit Order involves a predetermined price, users retain a measure of financial control, as they establish the most aggressive price they are willing to pay or accept for a trade.

Context of Financial References

This particular reference to dollar pricing in Limit Orders is crucial amid the proposed rule change by the MEMX exchange. The rule modification involves accepting Limit Orders even when the NBBO is unavailable—providing flexibility in how these financial transactions might proceed. The specifics of dollar pricing emerge as central to the argument that the absence of NBBO does not lead to unintended financial consequences due to users' ability to preset their desired execution prices.

Relating Financial References to Document Issues

Several issues were identified regarding the complexity of financial jargon and lack of explanation for terms like Limit Orders. The single financial reference highlights the necessity for users to understand the financial implications of specifying dollar amounts in Limit Orders, which could become clearer with more straightforward language and specific examples. While financial allocations in terms of dollar pricing offer order protection, clearer articulation of these mechanics could aid in addressing reader confusion regarding order types and their corresponding executions.

Overall, by concentrating on user-specified dollar pricing within Limit Orders, the document underscores the broader financial implications of handling securities orders without direct NBBO reference, tying back to the necessity for user education and simplified communication in financial regulation discussions.