On January 6, 2026, Nasdaq GEMX, LLC submitted a proposed rule change to the Securities and Exchange Commission, which was filed for immediate effectiveness under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. The notice appeared in the Federal Register on January 16, 2026, inviting public comments. This filing amends specific sections of GEMX's options trading rules to align them more closely with those of Nasdaq Phlx, LLC, while ensuring the rules accurately describe current system behaviors. The updates address order execution mechanics and communication protocols, potentially enhancing clarity for market participants without introducing substantive changes to trading operations. This development underscores ongoing efforts by self-regulatory organizations to harmonize rules across affiliated exchanges, which could streamline compliance for members operating on multiple platforms.
Background and Context
Nasdaq GEMX operates as a self-regulatory organization under the oversight of the SEC, facilitating electronic trading in options. The proposed changes target Options 3, Section 5, which governs the entry and display of orders, and Options 3, Section 7, which details types of orders and related protocols. These amendments stem from GEMX's intent to mirror language used by Phlx, another Nasdaq-affiliated exchange, to promote consistency in rulebooks. According to the filing, the revisions do not alter how the system functions but rather refine the descriptive text to better reflect existing practices. This aligns with broader industry trends where exchanges periodically update rules to ensure precision and reduce ambiguity, as seen in similar filings by other options exchanges. No prior comments were solicited or received on this specific proposal, and it builds on established precedents like Phlx's own rule texts.
Key Amendments to Options 3, Section 5
The primary change in Options 3, Section 5(c) clarifies the automatic execution of eligible orders. The revised text states that the system executes orders using the exchange's displayed best bid and offer, known as the BBO, or the non-displayed order book, termed the internal BBO, if non-displayed orders exist on the book or if the best bid or offer has been repriced under subsection (d) and Options 3, Section 4(b)(6). This adjustment explicitly acknowledges that executions occur at the best available price, whether displayed or not, which matches current system operations. As noted in the filing, 'today, a non-displayed order on the order book will be executed at the best price on the Exchange whether that best price is displayed or non-displayed.' This harmonization with Phlx's rule language aims to eliminate potential confusion in interpreting execution priorities.
Updates to Options 3, Section 7 Protocols
Supplementary Material .03 to Options 3, Section 7 receives updates to three key interfaces. For the Financial Information eXchange, or FIX, the rule now specifies that it allows members and their sponsored customers to connect, send, and receive messages related to orders, auction orders, and responses to and from the exchange. Similarly, the Ouch to Trade Options, or OTTO, interface is updated to include messages for orders, auction orders, and auction responses. The Specialized Quote Feed, or SQF, is amended to note that it enables market makers to send and receive messages for quotes, immediate-or-cancel orders, and auction responses. These changes, as stated in the filing, 'reflect current System operation' and align directly with Phlx's corresponding supplementary material. By incorporating bidirectional communication aspects, the rules provide a more complete description of how these protocols facilitate trading interactions.
Statutory Basis and Justification
GEMX asserts in its filing that the proposal complies with Section 6(b)(5) of the Securities Exchange Act, which requires rules to promote just and equitable principles of trade, remove impediments to a free and open market, and protect investors. The exchange argues that the amendments enhance rule clarity without imposing undue burdens on competition. For intra-market competition, automatic executions at the best price apply uniformly to all participants. On an inter-market level, the changes mirror those of other exchanges like Phlx, fostering consistency across venues. The filing emphasizes that no significant impact on investor protection or public interest arises, and the proposal qualifies for immediate effectiveness as it is non-controversial and aligns with existing practices.
Implications and Perspectives
From a short-term perspective, these amendments could immediately improve rulebook transparency, aiding members in understanding execution and protocol mechanics without needing supplemental guidance. Legal professionals and compliance officers might view this as a minor but beneficial update, reducing interpretive risks in audits or disputes. Policymakers could see it as part of Nasdaq's strategy to integrate its exchange family, potentially easing multi-venue operations. However, some market participants might question whether such alignments inadvertently favor larger firms with resources to navigate multiple platforms. Long-term, consistent rules across exchanges may contribute to a more efficient national market system, though they highlight the influence of affiliated groups like Nasdaq in shaping industry standards. No legal precedents are directly cited in the filing, but the approach echoes prior SEC approvals of similar harmonization efforts, such as those in Phlx filings.
In summary, GEMX's proposed rule changes refine existing language to better describe order handling and communication protocols, promoting alignment with Phlx. Potential next steps include the SEC's review of any public comments submitted by February 6, 2026, which could lead to further proceedings if concerns emerge. Ongoing debates may center on the balance between rule harmonization and exchange-specific innovations, with challenges arising if future technological shifts require more substantive updates. These developments reflect the evolving regulatory landscape for options trading, where precision in rule text supports broader market integrity goals.
