Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing of Proposed Rule Change Relating to Directed Market Makers, 73930-73938 [2014-29109]
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Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
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:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml), or
• Send an email to rule-comment@
sec.gov. Please include File No. SR–
FICC–2014–06 on the subject line.
16:57 Dec 11, 2014
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.5
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–29179 Filed 12–11–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73784; File No. SR–BX–
2014–049]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
of Proposed Rule Change Relating to
Directed Market Makers
December 8, 2014.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington DC 20549.
All submissions should refer to File
Number SR–FICC–2014–06. 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 Web site (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 Web site 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 FICC and on its Web site at
https://www.dtcc.com/∼/media/Files/
Downloads/legal/rule-filings/2014/ficc/
SR-FICC-2014-06.pdf. All comments
VerDate Sep<11>2014
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FICC–
2014–06 and should be submitted on or
before January 2, 2015.
Pursuant to 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 November
25, 2014, NASDAQ OMX BX, Inc. (‘‘BX’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to add
definitions of Directed Order and
Directed Market Maker (‘‘DMM’’), as
well as provisions concerning the
designation of an order as a Directed
Order and DMM market making
obligations. The proposal also revises
priority rules to provide for a DMM
participation entitlement. Finally, the
rule makes certain clarifications to the
text of rules governing Lead Market
Makers (‘‘LMMs’’). The proposal seeks
to enable BX to compete with the many
options exchanges that offer directed
orders in their respective markets.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://
nasdaqomxbx.cchwallstreet.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to adopt rules to permit BX
Market Makers to act as Designated
Market Makers, or DMMs, in their
appointed options classes, provided the
DMM meets certain obligations and
quoting requirements as provided for in
the new proposed Exchange Rules. The
Exchange proposes to provide DMMs
with certain participation entitlements.
The Exchange believes that these
amendments, described below in greater
detail, will enhance competition by
affording the BX Options market the
opportunity to compete for directed
order flow.
Current Categories of BX Options
Participants
Today on BX there are three types of
Options Participants: Options Order
Entry Firms, Options market makers and
LMMs. Options Order Entry Firms, or
OEFs, are Options Participants who
represent customer orders as agent on
BX Options and non-market maker
Participants conducting proprietary
trading as principal.
Options market makers are Options
Participants registered with the
Exchange as options market makers in
one or more listed options on BX.3 BX
Options market makers are required to
electronically engage in a course of
dealing to enhance liquidity available
on BX and to assist in the maintenance
of fair and orderly markets.4 Among
3 See
BX Options Rules at Chapter VII.
market makers receive certain benefits
for carrying out their duties. For example, a lender
may extend credit to a broker-dealer without regard
5 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
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other things, Options market makers
must quote 60 percent of the trading day
(as a percentage of the total number of
minutes in such trading day) or such
higher percentage as BX may announce
in advance.5
Recently, the Exchange adopted rules
providing that an approved BX Options
market maker may become an LMM in
one or more listed options, provided
that each class is limited to one LMM.6
BX does not limit the number of entities
that may become LMMs. LMMs are
subject to more extensive obligations
than other BX Options market makers,
including an obligation to provide
continuous two-sided quotations
meeting certain quote width
requirements throughout the trading day
in its appointed issues for 90 percent of
the time the Exchange is open for
trading in each issue.7 The Exchange
provides LMMs with specific
participation entitlements in Chapter VI
(Trading Systems) at Section 10, entitled
‘‘Book Processing.’’
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DMM Designation and Directed Orders
The Exchange is now proposing to
define Directed Orders and to provide
for another category of market maker,
the DMM. A ‘‘Directed Order’’ would be
defined as an order to buy or sell which
has been directed (pursuant to the
Exchange’s instructions on how to
direct an order) to a particular market
maker (the DMM with respect to that
to the restrictions in Regulation T of the Board of
Governors of the Federal Reserve System if the
credit is to be used to finance the broker-dealer’s
activities as market maker on a national securities
exchange. Thus, an Options market maker has a
corresponding obligation to hold itself out as
willing to buy and sell options for its own account
on a regular or continuous basis to justify this
favorable treatment.
5 BX Regulation may consider exceptions to the
requirement to quote 60 percent (or higher) of the
trading day based on demonstrated legal or
regulatory requirements or other mitigating
circumstances. Market makers are not required to
make two-sided markets pursuant to Section 5(a)(i)
of Chapter VII in any Quarterly Option Series,
adjusted option series, or any option series until the
time to expiration for such series is less than nine
months. Accordingly, the continuous quotation
obligations set forth in this rule do not apply to
market makers respecting Quarterly Option Series,
adjusted option series, or any series with an
expiration of nine months or greater. If a technical
failure or limitation of a system of BX prevents a
market maker from maintaining, or prevents a
market maker from communicating to BX Options,
timely and accurate quotes, the duration of such
failure or limitation shall not be included in any of
these calculations with respect to the affected
quotes. Substantial or continued failure by an
Options market maker to meet any of its obligations
and duties, will subject the Options market maker
to disciplinary action, suspension, or revocation of
the Options market maker’s registration in one or
more options series. See obligations of Options
market makers in Chapter VII, Section 6.
6 See Chapter VII, Section 13.
7 See Chapter VII, Section 14.
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Directed Order).8 Pursuant to a
proposed amendment to Chapter VI,
Section 6(a)(2), Limit Orders,9
Minimum Quantity Orders,10 Market
Orders,11 Price Improving Orders,12 Allor-None Orders 13 and Post-Only
Orders 14 may all be designated as
8 See proposed Chapter VI, Section 1(e)(1), which
replaces a Reserved section with a definition of
Directed Order. The new provision also states that
Directed Orders are handled within the System
pursuant to Chapter VI, Section 10.
9 See Chapter VI, Section 1(e)(2). ‘‘Limit Orders’’
are orders to buy or sell an option at a specified
price or better. A limit order is marketable when,
for a limit order to buy, at the time it is entered into
the System, the order is priced at the current inside
offer or higher, or for a limit order to sell, at the
time it is entered into the System, the order is
priced at the inside bid or lower.
10 See Chapter VI, Section 1(e)(3). ‘‘Minimum
Quantity Orders’’ are orders that require that a
specified minimum quantity of contracts be
obtained, or the order is cancelled. Minimum
Quantity Orders are treated as having a time-inforce designation of Immediate or Cancel. Minimum
Quantity Orders received prior to the opening cross
or after market close will be rejected.
11 See Chapter VI, Section 1(e)(5). ‘‘Market
Orders’’ are orders to buy or sell at the best price
available at the time of execution. Participants can
designate that their Market Orders not executed
after a pre-established period of time, as established
by the Exchange, will be cancelled back to the
Participant.
12 See Chapter VI, Section 1(a)(6). ‘‘Price
Improving Orders’’ are orders to buy or sell an
option at a specified price at an increment smaller
than the minimum price variation in the security.
Price Improving Orders may be entered in
increments as small as one cent. Price Improving
Orders that are available for display shall be
displayed at the minimum price variation in that
security and shall be rounded up for sell orders and
rounded down for buy orders.
13 See Chapter VI, Section 1(e)(10). ‘‘All-or-none’’
shall mean a market or limit order which is to be
executed in its entirety or not at all. All-or-None
Orders are treated as having a time-in-force
designation of Immediate or Cancel. All-or-None
Orders received prior to the opening cross or after
market close will be rejected.
14 See Chapter VI, Section 1(e)(11). ‘‘Post-Only
Orders’’ are orders that will not remove liquidity
from the System. Post-Only Orders are to be ranked
and executed on the Exchange or cancelled, as
appropriate, without routing away to another
market. Post-Only Orders are evaluated at the time
of entry with respect to locking or crossing other
orders as follows: (i) If a Post-Only Order would
lock or cross an order on the System, the order will
be re-priced to $.01 below the current low offer (for
bids) or above the current best bid (for offers) and
displayed by the System at one minimum price
increment below the current low offer (for bids) or
above the current best bid (for offers); and (ii) if a
Post-Only Order would not lock or cross an order
on the System but would lock or cross the NBBO
as reflected in the protected quotation of another
market center, the order will be handled pursuant
to Chapter VI, Section 7(b)(3)(C). Participants may
choose to have their Post-Only Orders returned
whenever the order would lock or cross the NBBO
or be placed on the book at a price other than its
limit price. Post-Only Orders received prior to the
opening cross or after market close will be rejected.
Post-Only Orders may not have a time-in-force
designation of Good Til Cancelled or Immediate or
Cancel. Although a Post-Only Order may be
designated as a Directed Order, because it is not
executed immediately upon receipt it will never
result in the awarding of a DMM participation
entitlement as discussed below.
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Directed Orders. A Directed Order may
also be designated as Immediate or
Cancel (‘‘IOC’’),15 Good-till-Cancelled
(‘‘GTC’’),16 Day (‘‘DAY’’) 17 or a WAIT 18
order pursuant to Chapter VI, Section
6(a)(1) as proposed to be amended. New
Section 15, DMMs, of Chapter VII,
Market Participants, provides that
market makers may receive Directed
Orders in their appointed classes as
provided therein, provided they
indicated to the Exchange, in a form
specified, that they will receive Directed
Orders. Directed Orders may be
available only in certain options.19
Pursuant to new Chapter VII, Market
Participants, Section 15, when the
Exchange’s disseminated price is the
NBBO at the time of receipt of the
Directed Order, and the DMM is quoting
at or improving 20 the Exchange’s
15 See Chapter VI, Section 1(g)(2). ‘‘Immediate Or
Cancel’’ or ‘‘IOC’’ shall mean for orders so
designated, that if after entry into the System a
marketable order (or unexecuted portion thereof)
becomes non-marketable, the order (or unexecuted
portion thereof) shall be canceled and returned to
the entering participant. IOC Orders shall be
available for entry from the time prior to market
open specified by the Exchange on its Web site
until market close and for potential execution from
9:30 a.m. until market close. IOC Orders entered
between the time specified by the Exchange on its
Web site and 9:30 a.m. Eastern Time will be held
within the System until 9:30 a.m. at which time the
System shall determine whether such orders are
marketable. IOC orders can be routed if designated
as routable.
16 See Chapter VI, Section 1(g)(4). ‘‘Good Til
Cancelled’’ or ‘‘GTC’’ shall mean for orders so
designated, that if after entry into System, the order
is not fully executed, the order (or unexecuted
portion thereof) shall remain available for potential
display and/or execution unless cancelled by the
entering party, or until the option expires,
whichever comes first. GTC Orders shall be
available for entry from the time prior to market
open specified by the Exchange on its Web site
until market close and for potential execution from
9:30 a.m. until market close.
17 See Chapter VI, Section 1(g)(3). ‘‘DAY’’ shall
mean for orders so designated, that if after entry
into the System, the order is not fully executed, the
order (or unexecuted portion thereof) shall remain
available for potential display and/or execution
until market close, unless canceled by the entering
party, after which it shall be returned to the
entering party. DAY Orders shall be available for
entry from the time prior to market open specified
by the Exchange on its Web site until market close
and for potential execution from 9:30 a.m. until
market close.
18 See Chapter VI, Section 1(g)(5). ‘‘WAIT’’ shall
mean for orders so designated, that upon entry into
the System, the order is held for one second
without processing for potential display and/or
execution. After one second, the order is processed
for potential display and/or execution in
accordance with all order entry instructions as
determined by the entering party.
19 The Exchange would specify via an Options
Trader Alert which options would be subject to the
Directed Orders provisions specified herein.
20 Today, BX Options Participants enter Price
Improving Orders, which orders have a specified
price smaller than the minimum price variation
(‘‘MPV’’) in the option. Price Improving Orders may
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disseminated price, the Directed Order
will be automatically executed and
allocated in accordance with Chapter
VI, Section 10 such that the DMM will
receive a DMM participation
entitlement provided for in Chapter VI,
Section 10, discussed below.21 If the
DMM participation entitlement is not
awarded at the time of receipt of the
Directed Order, no DMM participation
entitlement will apply and the order
will be handled as though it were not a
Directed Order for the remainder of the
life of the order. However, when (a) the
Exchange’s disseminated price is the
NBBO, and the quotation disseminated
by the DMM on the opposite side of the
market from the Directed Order is
inferior to the NBBO at the time of
receipt of the Directed Order, or (b) the
Exchange’s disseminated price is not the
NBBO at the time of receipt of the
Directed Order, the Directed Order will
be processed as though it were not a
Directed Order.22
New Section 15 requires a DMM to
provide continuous two-sided
quotations throughout the trading day in
all options issues in which the DMM is
assigned for 90 percent of the time the
Exchange is open for trading in each
issue. Such quotations must meet the
legal quote width requirements of
Chapter VII, Section 6. These
obligations will apply collectively to all
series in all of the issues, rather than on
an issue-by-issue basis once the market
maker has indicated to the Exchange
that the market maker will be receiving
Directed Orders. While the Market
Maker’s quoting requirement is a daily
obligation, the Exchange is able to
determine compliance with these
obligations on a monthly basis. BX
Regulation may consider exceptions to
the requirement to quote 90% (or
higher) of the trading day based on
be entered in increments as small as one cent. Price
Improving Orders will be displayed at the MPV in
that security and rounded up for sell orders and
down for buy orders. Without this order type,
market participants would not be able to submit
orders priced between the MPV. Instead, orders, if
submitted, would be priced (and displayed) at the
MPV. The treatment of Price Improving Orders is
not altered by this rule change. It is consistent to
account for the possibility that the DMM improves
the Exchange’s disseminated price by submitting a
marketable order in a non-standard increment,
which in this case, would aggressively improve the
NBBO. Awarding a participation entitlement to a
DMM will not otherwise change the manner in
which Price Improving Orders will be displayed at
the MPV and available to be executed at price
improving increments.
21 Chapter VII, Market Participants, Section 15,
Directed Market Makers, subsection (i) Price
Improving Orders from a DMM participant which
are reflected on OPRA at the NBBO retain price
priority and are eligible for a DMM participation
entitlement.
22 See Chapter VII, Market Participants, Section
15, Directed Market Makers, subsection (ii).
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demonstrated legal or regulatory
requirements or other mitigating
circumstances.23 If a technical failure or
limitation of a system of the Exchange
prevents a DMM from maintaining, or
prevents a DMM from communicating to
the Exchange, timely and accurate
electronic quotes in an issue, the
duration of such failure shall not be
considered in determining whether the
DMM has satisfied the 90 percent
quoting standard with respect to that
option issue. Further, these obligations
shall not apply to DMMs with respect to
Quarterly Options Series, adjusted
option series,24 or any series with a time
to expiration of nine months or greater.
However, a DMM may still receive a
participation entitlement in such series
if it elects to quote in such series and
otherwise satisfies the requirements of
Chapter VI, Section 10.
LMM and New DMM Participation
Entitlements
By way of background, Chapter VI,
Trading System, Section 10, Book
Processing, currently provides that the
Exchange will determine to apply, for
each option, either a Price/Time or a
Size Pro-Rata execution algorithm. In
addition to describing each execution
algorithm, Chapter VI, Section 10 also
describes certain priority overlays
applicable to each of those algorithms.
Currently, under both Price/Time and
Size Pro-Rata algorithms, Public
Customer Priority is always in effect and
provides that the highest bid and lowest
offer have priority except that Public
Customer orders have priority over nonPublic Customer orders at the same
price. If there are two or more Public
Customer orders for the same options
series at the same price, priority is
afforded to such Public Customers
orders in the sequence in which they are
received by the System. For purposes of
the Public Customer Priority overlay, a
Public Customer order does not include
a Professional 25 order.
Chapter VI, Section 10 also currently
provides for a LMM priority overlay
after all Public Customer orders have
been fully executed, upon receipt of an
23 Chapter VII, Market Participants, Section 15,
Directed Market Makers, subsection (iii).
24 An adjusted option series is an option series
wherein, as a result of a corporate action by the
issuer of the underlying security, one option
contract in the s [sic]
25 See Chapter I, Section 1(a)(49). The term
‘‘Professional’’ means any person or entity that (i)
is not a broker or dealer in securities, and (ii) places
more than 390 orders in listed options per day on
average during a calendar month for its own
beneficial account(s). A Participant or a Public
Customer may, without limitation, be a
Professional. All Professional orders shall be
appropriately marked by Participants.
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order, provided the LMM’s bid/offer is
at the Exchange’s disseminated price.
The LMM priority overlay applies under
both the Price/Time and the Size ProRata execution algorithms, if applicable.
Specifically, with respect to Size ProRata executions, the Exchange affords
an LMM a participation entitlement if
the LMM’s bid/offer is at or better than
the Exchange’s disseminated price and
all Public Customer 26 orders have been
fully executed.27 The LMM is not
entitled to receive a number of contracts
that is greater than the displayed size
associated with such LMM. LMM
participation entitlements are
considered after the opening process.
The LMM participation entitlement
provides a BX Options LMM with the
greater of: The LMM’s Size Pro-Rata
share; 50 percent of remaining interest
if there is one or no other market maker
at that price; 40 percent of remaining
interest if there are two other market
makers at that price; or 30 percent of
remaining interest if there are more than
two other market makers at that price;
or if rounding would result in an
allocation of less than one contract, a
BX Options LMM receives one contract.
Rounding is up or down to the nearest
integer.28 After all Public Customer
orders have been fully executed and
LMM participation entitlements
applied, if applicable, BX Options
market makers then have priority over
all other Participant orders at the same
price.29
For symbols trading under the Price/
Time algorithm, the Public Customer
Priority Overlay is always in effect.
Chapter VI, Section 10 also currently
provides for a LMM priority overlay
after all Public Customer orders have
been fully executed, upon receipt of an
order, provided the LMM’s bid/offer is
at or better than the Exchange’s
disseminated price, the LMM is afforded
a participation entitlement.30 The LMM
is not entitled to receive a number of
contracts that is greater than the
displayed size associated with such
LMM. After Public Customers orders
have been executed, a BX Options LMM
26 See Chapter I, Section 1(50). The term ‘‘Public
Customer’’ means a person that is not a broker or
dealer in securities.
27 Price Improving Orders retain price priority
before an LMM participation entitlement is
provided at the Exchange’s disseminated price. See
Chapter VI, Sections 1(a)(6) and 7(b)(3)(B).
28 When the decimal is exactly 0.5, the rounding
direction is up to the nearest integer.
29 Chapter VI, Trading Systems, Section 10, Book
Processing, subsection (C)(2)(ii)(1).
30 As is the case with Size Pro-Rata executions
discussed above, Price Improving Orders retain
price priority before an LMM participation
entitlement is provided at the Exchange’s
disseminated price. See Chapter VI, Sections 1(a)(6)
and 7(b)(3)(B).
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receives the greater of: (a) Contracts the
LMM would receive if the allocation
was based on time priority with Public
Customer priority; (b) 50 percent of
remaining interest if there is one or no
other market maker at that price; (c) 40
percent of remaining interest if there are
two other market makers at that price;
or (d) 30 percent of remaining interest
if there are more than two other market
makers at that price or if rounding
would result in an allocation of less
than one contract, a BX Options LMM
receives one contract. Rounding is up or
down to the nearest integer.31
Under both the Price/Time algorithm
and the Size Pro-Rata algorithm, Orders
for 5 contracts or fewer are allocated to
the LMM. The Exchange reviews this
provision quarterly and maintains the
small order size at a level that will not
allow orders of 5 contracts or less
executed by the LMM to account for
more than 40 percent of the volume
executed on the Exchange.32
The Exchange is now proposing to
amend its rules to provide for a DMM
priority entitlement under both the
Price/Time and the Size Pro-Rata
algorithm, and to make certain
corresponding changes and
clarifications to the current LMM
participation entitlements. Under both
Price/Time and Size Pro-Rata
algorithms, a market maker which
receives a Directed Order is a DMM
with respect to that Directed Order.
After all Public Customer orders at a
given price point have been fully
executed, upon receipt of a Directed
Order, provided the DMM’s bid/offer is
at or improves the NBBO, the DMM will
be afforded a participation
entitlement 33 at the last execution price,
which is equal to or better than the
NBBO if the DMM executed the order at
such price. The DMM shall not be
entitled to receive a number of contracts
that is greater than the displayed size at
a given price point associated with such
DMM. DMM participation entitlements
will be considered after the opening
process. Chapter VI, Section 10(C)(1)(c)
specifies that under the Price/Time
execution algorithm, DMM participant
entitlements (like LMM participation
entitlements) 34 shall only be in effect
31 Chapter VI, Trading Systems, Section 10, Book
Processing, subsection (C)(1)(b)(1).
32 Chapter VI, Trading Systems, Section 10, Book
Processing, subsections (C)(1)(b)(2) and (C)(2)(ii)(2).
33 As with the LMM participation entitlements
discussed above, Price Improving Orders retain
price priority. A DMM participation entitlement
will only be provided at the last price executed
which is equal to or better than the Exchange’s
disseminated price. See Chapter VI, Sections 1(a)(6)
and 7(b)(3)(B).
34 Chapter VI, Trading Systems, Section 10, Book
Processing, subsection (C)(1)(b).
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when the Public Customer Priority
Overlay is also in effect.
Pursuant to the DMM participation
entitlement in effect under the Price/
Time algorithm, the DMM would
receive, with respect to a Directed
Order, the greater of: (1) Contracts the
DMM would receive if the allocation
was based on time priority pursuant to
subparagraph (C)(1)(a) with Public
Customer priority; (2) after Public
Customer orders are executed, 40
percent of remaining interest; or (3) the
LMM participation entitlement (if the
DMM is also the LMM). If there are
multiple DMM quotes at the same price
which are at or improve the NBBO
when the Directed Order is received, the
DMM participation entitlement would
apply only once to the one which has
the highest time priority at the last price
executed upon receipt of the Directed
Order which is equal to or better than
the NBBO. If rounding would result in
an allocation of less than one contract,
the DMM would receive one contract.
Rounding would be up or down to the
nearest integer.35 Under no
circumstances would the DMM receive
an allocation of greater than 40% of an
order at a price at which they receive a
directed entitlement, unless it resulted
from rounding.
Pursuant to the DMM participation
entitlement in effect under the Size ProRata algorithm, the DMM would receive,
with respect to a Directed Order, the
greater of: (1) The DMM’s Size Pro-Rata
share under subsection (1)(C)(2)(iv); (2)
after Public Customer orders are
executed, 40 percent of remaining
interest; or (3) the LMM participation
entitlement (if the DMM is also the
LMM). If there are multiple DMM
quotes at the same price which are at or
improve the NBBO when the Directed
Order is received, the DMM
participation entitlement would apply
only to the one which has the highest
time priority at the last price executed
upon receipt of the Directed Order
which is equal to or better than the
NBBO. Additional DMM quotes at such
price will receive no further allocation
of the Directed Order. Like the DMM
participation entitlement applicable to
executions under the Price/Time
algorithm, if rounding would result in
an allocation of less than one contract,
the DMM would receive one contract,
and rounding would be up or down to
the nearest integer.36 Under no
circumstances would the DMM receive
an allocation of greater than 40% of an
35 Chapter VI, Trading Systems, Section 10, Book
Processing, subsections (C)(1)(c).
36 Chapter VI, Trading Systems, Section 10, Book
Processing, subsection (C)(2)(iii).
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order at a price at which they receive a
directed entitlement, unless it resulted
from rounding.
As noted above, under both execution
algorithms only one participation
entitlement, LMM or DMM, may be
applied on a given order. The Exchange
is amending the current LMM
entitlements under each algorithm to
provide with respect to a Directed Order
that if the LMM is also the DMM, the
LMM shall receive the DMM
participation entitlement applicable to
that algorithm, if any, if such DMM
participation entitlement is greater than
the LMM participation entitlement the
LMM would otherwise receive pursuant
to Chapter VI, Section 10, subsections
(C)(1)(b)(1)(a)–(d) (in the case of Price/
Time symbols) or (C)(2)(ii)(1)(a)–(d) (in
the case of Size Pro-Rata symbols). The
Exchange is also modifying the LMM
priority rules so that the LMM
participation entitlement will not apply
to a Directed Order if when it is
received the DMM’s bid/offer is at or
improves 37 the NBBO and the LMM is
at the same price level and the LMM is
not the DMM.38
The Exchange is also proposing to
revise the current allocation to the LMM
of orders for five contracts or fewer
(which applies under both algorithms).
As revised, the provision would not
apply if the order of 5 contracts or fewer
is directed to a DMM who is quoting at
the NBBO.39
Currently, with respect to executions
under the Size Pro-Rata algorithm, BX
Options market makers have priority
over all other Participant orders at the
same price after all Public Customer
orders have been fully executed and
LMM participation entitlements
applied. The Exchange proposes to
amend this provision so that this BX
Options market maker priority applies
only after any DMM participation
entitlements have been applied as
well.40
Finally, the Exchange proposes to
clarify with respect to LMMs under both
execution algorithms that after all
Public Customer orders have been fully
executed, upon receipt of an order, the
LMM will be afforded a participation
entitlement provided that LMM’s bid/
offer is at or improves upon the
37 See
note 20.
VI, Trading Systems, Section 10, Book
Processing, subsections (C)(1)(b)(1) (with respect to
Price/Time symbols) and (C)(2)(ii)(1) (with respect
to Size Pro-Rata Symbols).
39 Chapter VI, Trading Systems, Section 10, Book
Processing, subsections (C)(1)(b)(2) (with respect to
Price/Time symbols) and (C)(2)(ii)(2) (with respect
to Size Pro-Rata Symbols).
40 Chapter VI, Trading Systems, Section 10, Book
Processing, subsection (C)(2)(iv).
38 Chapter
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Exchange’s disseminated price. The
addition of the reference to an improved
bid/offer will conform the LMM
provision to the corresponding new
DMM provision.41 The Exchange is also
making a clarifying change in Chapter
VI, Section 10(1)(C)(1)(b)(1)(a) by
changing ‘‘subparagraph (1)(a) above’’ to
‘‘subparagraph (C)(1)(a) above.’’
Examples of DMM Participation
Entitlement Under Price/Time
Algorithm
Examples 1 through 3 below illustrate
the manner in which a DMM will be
allocated pursuant to the Price/Time
model.
Example Number 1
Assume an LMM has been assigned
and that the DMM is not the LMM.
ABBO = 1.00–1.10
BX BBO = 1.00–1.10 comprised of the
following in order of receipt
Market Maker 1 (‘‘MM1’’) 1.00 (10)–
1.10 (10)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
DMM 1.00 (10)–1.10 (20)
LMM 1.00 (10)–1.10 (10)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10
for 40 contracts.
Determination of Allocation:
Price/Time with Customer Priority
would result in Customer A trading 5,
Customer B trading 2, MM1 trading 10,
Firm trading 5, and DMM trading 18.
The DMM allocation would result in
Customer A trading 5, Customer B
trading 2, and DMM trading 40% of
remaining 33 = 13 (13.2 rounded down);
then normal price/time would resume
and MM1 would trade 10, Firm would
trade 5, and LMM would trade 5.
The LMM allocation is not calculated.
In this example, Price/Time with
Customer Priority would prevail since
the DMM would receive a greater
allocation this way.
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Example Number 2
Assume an LMM is assigned and that
the DMM is not the LMM.
ABBO = 1.00–1.10
BX BBO = 1.00–1.10 comprised of the
following in order of receipt
MM1 1.00 (10)–1.10 (10)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
Market Maker 2 (‘‘MM2’’) 1.00 (10)–
1.10 (10)
DMM 1.00 (10)–1.10 (20)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10
for 40 contracts.
41 See
note 20.
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Determination of Allocation:
Price/Time with Customer Priority
would result in Customer A trading 5,
Customer B trading 2, MM1 trading 10,
Firm trading 5, MM2 trading 10 and
DMM trading 8.
The DMM allocation would result in
Customer A trading 5, Customer B
trading 2, DMM trading 40% of
remaining 33 = 13 (13.2 rounded down);
then normal price/time would resume
with MM1 trading 10, Firm trading 5
and MM2 trading 5.
The LMM allocation would not be
calculated.
In this example, the DMM allocation
would prevail since the DMM receives
a greater allocation this way.
Example Number 3
Assume an LMM is assigned and that
the DMM is also the LMM.
ABBO = 1.00–1.10
BX BBO = 1.00–1.10 comprised of the
following in order of receipt:
MM1 1.00 (10)–1.10 (10)
Firm 25 offered at 1.10
DMM/LMM 1.00 (10)–1.10 (20)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10
for 40 contracts.
Determination of Allocation:
Price/Time with Customer Priority
would result in Customer B trading 2,
MM1 trading 10, Firm trading 25, and
DMM/LMM trading 3.
DMM allocation would result in
Customer B trading 2 and DMM/LMM
trading 40% of remaining 38 = 15 (15.2
rounded down); then normal price/time
would resume and MM1 would trade 10
and Firm would trade 13.
LMM allocation would result in
Customer B trading 2 and DMM/LMM
trading 50% of remaining 38 = 19; then
normal price time would resume and
MM1 would trade 10 and Firm would
trade 9.
In this example, the LMM allocation
would prevail since the DMM/LMM
would receive a greater allocation this
way.
Examples of DMM Participation
Entitlement Under Size Pro-Rata
Algorithm
Examples 4 through 6 below illustrate
the manner in which a DMM will be
allocated pursuant to the Size Pro-Rata
model.
Example Number 4
Assume an LMM is assigned and the
DMM is not the LMM.
ABBO = 1.00–1.10
BX BBO = 1.00–1.10 comprised of the
following in order of receipt:
LMM 1.00 (10)–1.10 (15)
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Customer A 5 offered at 1.10
Firm 5 offered at 1.10
DMM 1.00 (10)–1.10 (20)
MM1 1.00 (10)–1.10 (10)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10
for 40 contracts.
Determination of Allocation:
Size Pro-Rata would result in
Customer A trading 5, Customer B
trading 2, LMM trading 11 (15/
45*33remaining), DMM trading 14 (20/
45*33), MM1 trading 7 (10/45*33), and
then LMM based on time receiving the
residual 1 lot.
The DMM allocation would result in
Customer A trading 5, Customer B
trading 2, and DMM trading 40% of
remaining 33 = 13 (13.2 rounded down);
then normal Size Pro-Rata for remaining
with the LMM trading 12 (15/25*20)
and MM1 trading 8 (10/25*20).
The LMM allocation would not be
calculated.
In this example, the Size Pro-Rata
allocation would prevail since the DMM
would receive the greater allocation this
way.
Example Number 5
Assume that no LMM is assigned.
ABBO = 1.00–1.10
BX BBO = 1.00–1.10 comprised of the
following in order of receipt:
DMM 1.00 (10)–1.10 (15)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
MM1 1.00 (10)–1.10 (20)
MM2 1.00 (10)–1.10 (10)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10
for 40 contracts.
Determination of Allocation:
Size Pro-Rata would result in
Customer A trading 5, Customer B
trading 2, DMM trading 11 (15/
45*33remaining), MM1 trading 14 (20/
45*33), MM2 trading 7 (10/45*33), and
the DMM based on time receiving the
residual 1 lot.
The DMM allocation would result in
Customer A trading 5, Customer B
trading 2, and DMM trading 40% of
remaining 33 = 13 (13.2 rounded down);
then normal Size Pro-Rata for remaining
with MM1 trading 13 (20/30*20) and
MM2 trading 6 (10/30*20), and the
DMM based on time receiving the
residual 1 lot.
The LMM allocation would not be
calculated.
In this example, the DMM allocation
would prevail since the DMM would
receive the greater allocation this way.
Example Number 6
Assume that an LMM is assigned and
that the DMM is also the LMM.
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ABBO = 1.00–1.10
BX BBO = 1.00–1.10 comprised of the
following in order of receipt:
DMM/LMM 1.00 (10)–1.10 (15)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
MM1 1.00 (10)–1.10 (30)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10
for 40 contracts.
Determination of Allocation:
Size Pro-Rata would result in
Customer A trading 5, Customer B
trading 2, DMM/LMM trading 11 (15/
45*33 remaining), MM1 trading 22 (30/
45*33).
The DMM allocation would result in
Customer A trading 5, Customer B
trading 2, and DMM/LMM trading 40%
of remaining 33 = 13 (13.2 rounded
down); then Size Pro-Rata for remaining
with MM1 trading full size of 20.
The LMM allocation would result in
Customer A trading 5, Customer B
trading 2, and DMM/LMM entitled to
50% of remaining 33 = 17 (16.5 rounded
up) but capped at his size of 15 thus
trading 15; then normal Size Pro-Rata
for remaining with MM1 trading 18.
In this example, the LMM allocation
would prevail since the DMM is the
LMM and would receive a greater
allocation this way.
Examples of Price Improving Orders
Example Number 1
For this scenario assume the NBBO is
at 1.00 (bid) and 1.20 (offer).
Assume a Price Improving Order (O1)
from a Customer is present on BX to sell
20 contracts at 1.18. Also assume a
Directed Market Maker (DMM1) and two
other Market Makers (MM2 and MM3)
are each quoting 1.00–1.20 with a size
of 50 contracts on each side. O1 and the
Market Maker quotes are reflected in the
BX BBO as 1.00–1.20 with a size of 150
contracts on the bid and 170 contracts
on the offer. If an order (O2) is received
to buy 50 contracts at a limit of 1.20
which is directed to DMM1, the order
will execute upon receipt with 20
contracts trading against O1 at 1.18, 12
contracts trading against DMM1 at 1.20
(40% of remaining 30 contracts), 9
contracts trading against MM2 at 1.20,
and 9 contracts trading against MM3 at
1.20.
mstockstill on DSK4VPTVN1PROD with NOTICES
Example Number 2
For this scenario assume the NBBO is
at 1.00 (bid) and 1.20 (offer).
Assume two Price Improving Orders
(O1 and O2) from a Customer (C1) and
Directed Market Maker (DMM1),
respectively, are present on BX to sell
10 contracts each at 1.18. Also assume
the Directed Market Maker (DMM1) and
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two other Market Makers (MM2 and
MM3) are each quoting 1.00–1.20 with
a size of 50 contracts on each side. O1,
O2, and the Market Maker quotes are
reflected in the BX BBO as 1.00–1.20
with a size of 150 contracts on the bid
and 170 contracts on the offer. If an
order (O3) is received to buy 50
contracts at a limit of 1.20 which is
directed to DMM1, the order will
execute upon receipt with 10 contracts
trading against O1 at 1.18 and 10
contracts trading against DMM1’s Price
Improving Order (O2) at 1.18. The
remaining 30 contracts will trade at 1.20
with 12 contracts trading against DMM1
(40% of remaining 30 contracts), 9
contracts trading against MM2, and 9
contracts trading against MM3.
Example Number 3
Assume the following orders exist in
the Order book for Market Maker 2 and
3 (MM2 and MM3 respectively) and the
following DMM quotes:
1.19 offer 10 MM2 (Price Improving
Order)
1.20 offer 20 MM3
1.20 offer 10 DMM Quote 1
1.20 offer 10 DMM Quote 2
If an order was directed to the DMM
to buy 15 contracts at 1.20, 10 contracts
would be executed at 1.19 contra MM2.
The DMM would receive 40% of the
remaining 5 contracts (2 contracts)
which would be allocated to DMM
Quote 1. The remaining 3 contracts
would be allocated as per Price Time
priority to MM3.
Example Number 4
Assume the following orders exist in
the Order book for Market Maker 2 and
3 (MM2 and MM3 respectively) and the
following DMM quotes:
1.18 offer 10 MM2 (Price Improving
Order)
1.19 offer 20 MM3
1.19 offer 10 DMM Quote 1
1.19 offer 10 DMM Quote 2
1.20 offer 10 MM3
If an order directed to the DMM to
buy 15 contracts for 1.20, 10 contracts
would be executed at 1.18 contra MM2.
The DMM would receive 40% of
remaining 5 contracts (2 contracts),
because it was the last price executed
pursuant to Chapter VI, Section
10(1)(C)(1)(c), which would be allocated
to DMM Quote 1. The remaining 3
contracts would be allocated as per
Price Time priority to MM3.
Priority Overlays
The Exchange is proposing to amend
language in Chapter VI, Section
10(1)(C)(2) which applies to priority
overlays. The language currently states
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73935
that ‘‘the Exchange will apply the
following designated Participant
priority overlays, which are always in
effect when the Size Pro-Rata execution
algorithm is in effect.’’ The priority
overlays which are references are Public
Customer, LMM, DMM and market
maker priority. The Exchange is
proposing to amend the sentence to
state, ‘‘the Exchange may apply the
following designated Participant
priority overlays, when the Size ProRata execution algorithm is in effect.’’
The amendment is intended to provide
more specificity to the rule text as
Public Customer priority will be in
effect always for Size Pro-Rata, but may
be in effect for the other types of
priorities. The amendment also
conforms the language to the Price/Time
rule text in Chapter VI, Section
10(1)(C)(1).
Implementation.
Within thirty (30) days the Exchange
will begin to implement the proposal
and will issue an Options Trader Alert
in advance to inform market
participants of such date.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 42 in general, and furthers the
objectives of Section 6(b)(5) of the Act 43
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in 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, because it will establish
a Directed Order process similar to what
operates on other exchanges, as
explained herein, which will provide
Participants with additional choices
among the many competing exchanges
with regard to their execution needs and
strategies. BX Options operates in an
intensely competitive environment and
seeks to offer the same services that its
competitors offer and in which its
customers find value.
In its approval of other options
exchange directed order programs, the
Commission has, like proposals to
amend a specialist guarantee, focused
on whether the percentage of the
‘‘entitlement’’ would rise to a level that
could have a material adverse impact on
quote competition within a particular
42 15
43 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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mstockstill on DSK4VPTVN1PROD with NOTICES
exchange, and concluded that such
programs do not jeopardize market
integrity or the incentive for market
participants to post competitive
quotes.44 BX’s proposed DMM
participation entitlement of 40 percent,
is consistent with the directed order
allocations of other options exchanges.
BX notes that the remaining portion of
each order will continue to be allocated
based on the competitive bids/offers of
market participants. In addition, at the
time of receipt of the Directed Order, a
DMM will have to be quoting at or
improving 45 the NBBO which is
intended to incent the DMM to quote
aggressively. BX also notes that DMMs
will have heightened quoting
obligations as compared to other BX
Options market makers.
A DMM will have to be quoting at or
improving the NBBO at the time the
order is received to capitalize on the
guarantee and will only receive a
participation entitlement at one such
price point. The DMM must be publicly
quoting at that price when the order is
received. In this regard, the proposal
prohibits an order flow provider from
notifying a DMM regarding its intention
to submit a Directed Order so that such
DMM could change its quotation
immediately prior to submission of the
directed order. The Exchange’s rules
already provide the necessary
protections against coordinated action
as between a DMM and an order entry
firm.46 Furthermore, BX will proactively
conduct surveillance for, and enforce
against, such violations.47
In addition, this proposal does not
affect a broker-dealer’s duty of best
execution. A broker-dealer has a legal
duty to seek to obtain best execution of
customer orders, and any decision to
preference a particular DMM must be
consistent with this duty.48 A broker44 See Securities Exchange Act Release No. 51759
(May 27, 2005), 70 FR 32860 (June 6, 2005) (SR–
Phlx–2004–91).
45 See note 20. Price Improving Orders, provide
for investors the opportunity to trade at a better
price than would otherwise be available—inside the
disseminated best bid and offer for a security. The
opportunity for investors to receive executions
inside the disseminated best bid or offer could
result in better executions for investors.
46 See BX Chapter III, Section 4, Prevention of the
Misuse of Material Nonpublic Information. BX
prohibits an order flow provider from notifying a
DMM of its intention to submit a directed order so
that the DMM could change its quotation to match
the national best bid or offer (‘‘NBBO’’) immediately
prior to the submission of the directed order.
47 The Exchange will submit a letter detailing its
surveillance and enforcement to the Commission.
48 See, e.g., Newton v. Merrill, Lynch, Pierce,
Fenner & Smith, Inc., 135 F.3d 266, 269–70, 274 (3d
Cir.), cert. denied, 525 U.S. 811 (1998); Certain
Market Making Activities on Nasdaq, Securities
Exchange Act Release No. 40900 (January 11, 1999)
(settled case) (citing Sinclair v. SEC, 444 F.2d 399
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dealer’s duty of best execution derives
from common law agency principles
and fiduciary obligations, and is
incorporated in SRO rules and, through
judicial and Commission decisions, the
antifraud provisions of the federal
securities laws.49 The duty of best
execution requires broker-dealers to
execute customer trades at the most
favorable terms reasonably available
under the circumstances, i.e., at the best
reasonably available price.50 The duty
of best execution requires broker-dealers
to periodically assess the quality of
competing markets to assure that order
flow is directed to the markets
providing the most beneficial terms for
their customer orders.51 Broker-dealers
(2d Cir. 1971); Arleen Hughes, 27 SEC 629, 636
(1948), aff’d sub nom. Hughes v. SEC, 174 F.2d 969
(D.C. Cir. 1949)). See also Order Execution
Obligations, Securities Exchange Act Release No.
37619A (September 6, 1996), 61 FR 48290
(September 12, 1996) (‘‘Order Handling Rules
Release’’).
49 Order Handling Rules Release, 61 FR at 48322.
See also Newton, 135 F.3d at 270. Failure to satisfy
the duty of best execution can constitute fraud
because a broker-dealer, in agreeing to execute a
customer’s order, makes an implied representation
that it will execute it in a manner that maximizes
the customer’s economic gain in the transaction.
See Newton, 135 F.3d at 273 (‘‘[T]he basis for the
duty of best execution is the mutual understanding
that the client is engaging in the trade—and
retaining the services of the broker as his agent—
solely for the purpose of maximizing his own
economic benefit, and that the broker receives her
compensation because she assists the client in
reaching that goal.’’); Marc N. Geman, Securities
Exchange Act Release No. 43963 (February 14,
2001) (citing Newton, but concluding that
respondent fulfilled his duty of best execution). See
also Payment for Order Flow, Securities Exchange
Act Release No. 34902 (October 27, 1994), 59 FR
55006, 55009 (Nov. 2, 1994) (‘‘Payment for Order
Flow Final Rules’’). If the broker-dealer intends not
to act in a manner that maximizes the customer’s
benefit when he accepts the order and does not
disclose this to the customer, the broker-dealer’s
implied representation is false. See Newton, 135
F.3d at 273–274.
50 Newton, 135 F.3d at 270. Newton also noted
certain factors relevant to best execution—order
size, trading characteristics of the security, speed of
execution, learning costs, and the cost and
difficulty of executing an order in a particular
market. Id. at 270 n. 2 (citing Payment for Order
Flow, Securities Exchange Act Release No. 33026
(October 6, 1993), 58 FR 52934, 52937–38 (October
13, 1993) (Proposed Rules)). See In re E.F. Hutton
& Co. (‘‘Manning’’), Securities Exchange Act
Release No. 25887 (July 6, 1988). See also Payment
for Order Flow Final Rules, 59 FR at 55008–55009.
51 Order Handling Rules Release, 61 FR at 48322–
48333 (‘‘In conducting the requisite evaluation of its
internal order handling procedures, a broker-dealer
must regularly and rigorously examine execution
quality likely to be obtained from different markets
or market makers trading a security.’’). See also
Newton, 135 F.3d at 271; Market 2000: An
Examination of Current Equity Market
Developments V–4 (SEC Division of Market
Regulation January 1994) (‘‘Without specific
instructions from a customer, however, a brokerdealer should periodically assess the quality of
competing markets to ensure that its order flow is
directed to markets providing the most
advantageous terms for the customer’s order.’’);
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must examine their procedures for
seeking to obtain best execution in light
of market and technology changes and
modify those practices if necessary to
enable their customers to obtain the best
reasonably available prices.52 In doing
so, broker-dealers must take into
account price improvement
opportunities, and whether different
markets may be more suitable for
different types of orders or particular
securities.53
With respect to a DMM’s obligations,
the Exchange would require DMMs be
subject to heightened standards as
compared to other market makers. A
DMM must provide continuous twosided quotations throughout the trading
day in all options classes in which the
DMM is assigned, once the market
maker indicates to the Exchange an
intent to receive Directed Orders, for
90% of the time the Exchange is open
for trading in each issue. Such
quotations must meet the legal quote
width requirements herein. These
obligations will apply to all of the
DMM’s option issues collectively, rather
than on an option-by-option basis.
While the Market Maker’s quoting
requirement is a daily obligation, the
Exchange is able to determine
compliance with these obligations on a
monthly basis. BX Regulation may
consider exceptions to the requirement
to quote 90% (or higher) of the trading
day based on demonstrated legal or
regulatory requirements or other
mitigating circumstances. However,
determining compliance with the
continuous quoting requirement on a
monthly basis does not relieve a DMM
of the obligation to provide continuous
two-sided quotes on a daily basis, nor
will it prohibit the Exchange from
taking disciplinary action against a
DMM for failing to meet the continuous
quoting obligation each trading day.
The Exchange believes that offering
DMMs participation entitlements
promotes just and equitable principles
of trade because DMMs will be held to
a higher standard as compared to other
Payment for Order Flow Final Rules, 59 FR at
55009.
52 Order Handling Rules, 61 FR at 48323.
53 Order Handling Rules, 61 FR at 48323. For
example, in connection with orders that are to be
executed at a market opening price, ‘‘[b]rokerdealers are subject to a best execution duty in
executing customer orders at the opening, and
should take into account the alternative methods in
determining how to obtain best execution for their
customer orders.’’ Disclosure of Order Execution
and Routing Practices, Securities Exchange Act
Release No. 43590 (November 17, 2000), 65 FR
75414, 75422 (December 1, 2000) (adopting new
Exchange Act Rules 11Ac1–5 and 11Ac1–6 and
noting that alternative methods offered by some
Nasdaq market centers for pre-open orders included
the mid-point of the spread or at the bid or offer).
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mstockstill on DSK4VPTVN1PROD with NOTICES
market participants including market
makers. A market maker would be
required, pursuant to this proposal, to
quote 60% of the trading day. DMMs are
being held to a higher obligation and
therefore are being rewarded with
participation entitlements. Similar to
market makers, DMMs add value
through continuous quoting 54 and the
commitment of capital. In addition, the
DMM quoting requirements promote
liquidity and continuity in the
marketplace in requiring DMMs to be
held to a higher standard of quoting.
The Exchange also believes that the
proposed rule change supports the
quality of the Exchange’s markets
because it maintains the quoting
obligations of market makers as DMMs
at 90%. DMM transactions must
constitute a course of dealings
reasonably calculated to contribute to
the maintenance of a fair and orderly
market. Accordingly, the proposed rule
change supports the quality of the
Exchange’s trading markets by helping
to ensure that DMMs will be required to
meet a higher quoting standard in order
to reap the benefits of the participation
entitlements. The Exchange believes
this proposed change to offer
participation entitlements to DMMs is
offset by DMMs’ continued
responsibilities to provide significant
liquidity to the market to the benefit of
market participants.
The Exchange also notes that it
believes that while rounding is up or
down to the nearest integer, thereby
having the potential to result in an
allocation that is slightly greater than
40% of the remaining interest, this
concept is not novel. Today, the
rounding is computed in the same
manner for LMM allocations, thereby
resulting in the potential for slightly
greater than 40% of remaining
allocation for the LMM. It is also
important to note that if the rounding
results in computing the nearest lower
integer, the DMM would receive slightly
less than the percentages noted herein.
The Exchange believes that the manner
in which it rounds is not an impediment
to a free and open market and a national
market system. The rounding
54 Pursuant to Chapter VII (Market Participants),
Section 5 (Obligations of Market Makers), in
registering as a market maker, an Options
Participant commits himself to various obligations.
Transactions of a market maker in its market
making capacity must constitute a course of
dealings reasonably calculated to contribute to the
maintenance of a fair and orderly market, and
market makers should not make bids or offers or
enter into transactions that are inconsistent with
such course of dealings. See Chapter VII, Section 5.
Further, all market makers are designated as
specialists on BX for all purposes under the Act or
rules thereunder. See Chapter VII, Section 2.
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16:57 Dec 11, 2014
Jkt 235001
computation described herein is
consistent with the manner in which
rounding is computed on BX’s System,
where appropriate. The Exchange
applies the rounding methodology in all
BX functionality related to allocation
computations, not just in relation to
DMM allocation computations. The
Exchange believes that its method of
rounding is transparent, just and
equitable. The rounding provisions,
unlike the allocation provisions, are not
a guarantee but simply the result of a
mathematical computation that can only
be computed after the transactions are
executed. The Exchange’s proposal is
focused on the guarantees that a DMM
could expect as a result of quoting
competitively, that is, quoting at or
better than the NBBO. The rounding
outcome is not guaranteed and is only
the result of necessity of allocating
shares in a just, equitable and
transparent manner to market
participants.
The proposed rule change also
removes impediments to and allows for
a free and open market, while protecting
investors, by promoting transparency
regarding DMMs’ obligations and
benefits in the Exchange Rules. In
addition, the Exchange believes that the
proposed rule change is designed to not
permit unfair discrimination among
DMMs.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
The competition among the options
exchanges is vigorous and this proposal
is intended to afford the BX Options
market the opportunity to compete for
directed order flow. In that regard, the
proposal is pro-competitive and will
offer market participants an additional
venue for the execution of Directed
Orders. The Exchange does not believe
the proposal imposes a burden on intramarket competition not necessary or
appropriate in furtherance of the
purposes of the Act, because the ability
to send Directed Orders is available to
all Participants, and the ability to
become a DMM is available to all market
makers. Further, the Exchange does not
believe the proposal will negatively
impact quote competition on BX and
create an unfair burden on competition.
The directed order will be allocated
based on the competitive bidding of
market participants. A DMM will have
to be quoting at the NBBO at the time
the order is received to capitalize on the
guarantee.
PO 00000
Frm 00059
Fmt 4703
Sfmt 4703
73937
DMMs will be subject to enhanced
quoting obligations and the obligations
would apply to all options classes, once
the market maker indicates to the
Exchange an intent to receive Directed
Orders, for 90% of the time the
Exchange is open for trading in each
issue collectively to all appointed
issues, rather than on an option-byoption basis and compliance with this
obligation will be determined on a
monthly basis. Further, the proposal
will not diminish, and in fact may
increase, market making activity on the
Exchange and thereby enhance
intermarket competition. Moreover, the
proposed rule change will not impose
any burden on intra-market competition
because it will affect all DMMs the
same. DMMs will be subject to
heightened quoting obligations as
compared to other BX market makers.
All market makers may become DMMs.
The Exchange does not believe the
proposed rule change will cause any
unnecessary burden on intra-market
competition because it provides all
market makers the opportunity to
benefit from participation entitlements
as a DMM. The Exchange believes that
the proposed rule change will promote
competition among market participants
to the benefit of the Exchange, its
Members, and market participants. This
proposal puts in place a structure by
which all Options Participants can both
compete for order flow by contributing
to price and size discovery for the entire
market. Further, market makers must
enter orders that assume the risk of
trading with all participants at NBBO
without knowing the details of the
particular order. Market makers are
incentivized to aggressively quote at the
NBBO with this proposal to the benefit
of all market participants, while
maintaining their quoting obligations.
The Exchange believes the proposal will
encourage greater order flow to be sent
to the Exchange through Directed
Orders and that this increased order
flow will benefit all market participants
on the Exchange. The Exchange is not
limiting the class of market participants
that can be directed orders, any market
maker may apply to receive directed
orders and those market participants
would be required to meet the
heightened standards for quoting.
DMMs must meet additional quoting
and other regulatory obligations
compared to certain other Exchange
Participants and have thus
demonstrated a commitment to
providing liquidity on the Exchange.
The Exchange believes that limiting the
benefit of the participation entitlement
to DMMs is fair and reasonable because
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these DMMs must satisfy additional
quoting and other obligations.
The Exchange does not believe the
proposed change will cause any
unnecessary burden on inter-market
competition because all market makers
are entitled to receive participation
entitlements provided they direct orders
and those orders are executed by those
DMMs. In addition, the Exchange
believes that the proposed rule change
will in fact promote competition. The
Exchange believes allowing DMMs to
receive participation entitlements will
promote trading activity on the
Exchange because it will provide
incentives to DMMs to quote in series
which they are not obligated to do so,
to the benefit of the Exchange, its
Members, and market participants.
The Exchange does not believe that
the method in which it rounds up or
down to the nearest integer creates an
undue burden on competition. The
rounding outcome is not guaranteed and
is only the result of necessity of
allocating shares in a just, equitable and
transparent manner to market
participants.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
mstockstill on DSK4VPTVN1PROD with NOTICES
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:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2014–049 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
[Release No. 34–73779; File No. SR–NSCC–
2014–12]
• 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–BX–2014–049. 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 Web site (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 Web site 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;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BX–
2014–049, and should be submitted on
or before January 2, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.55
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–29109 Filed 12–11–14; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
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16:57 Dec 11, 2014
Jkt 235001
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change to Amend
NSCC’s Rules and Procedures in
Connection with the Discontinuance of
the Analytic Reporting Service
December 8, 2014.
Pursuant to 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 November
25, 2014, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Item I, II and III
below, which Items have been prepared
by NSCC. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to Rule 57 (Insurance and
Retirement Processing Services) and
Addendum A (Fee Structure) of NSCC’s
Rules & Procedures in connection with
the discontinuance of the Analytic
Reporting Service, as more fully
described below. The text of the
proposed rule change is available on
NSCC’s Web site at https://
www.dtcc.com/legal/sec-rulefilings.aspx, at the principal office of
NSCC, and at the Commission’s Public
Reference Room.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
NSCC 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. NSCC has prepared
summaries, set forth in sections A, B
and C below, of the most significant
aspects of such statements.
1 15
55 17
PO 00000
CFR 200.30–3(a)(12).
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2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
12DEN1
]]>Agencies
[Federal Register Volume 79, Number 239 (Friday, December 12, 2014)]
[Notices]
[Pages 73930-73938]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29109]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73784; File No. SR-BX-2014-049]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Proposed Rule Change Relating to Directed Market Makers
December 8, 2014.
Pursuant to 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 November 25, 2014, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to add definitions of Directed Order and
Directed Market Maker (``DMM''), as well as provisions concerning the
designation of an order as a Directed Order and DMM market making
obligations. The proposal also revises priority rules to provide for a
DMM participation entitlement. Finally, the rule makes certain
clarifications to the text of rules governing Lead Market Makers
(``LMMs''). The proposal seeks to enable BX to compete with the many
options exchanges that offer directed orders in their respective
markets.
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqomxbx.cchwallstreet.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to adopt rules to permit
BX Market Makers to act as Designated Market Makers, or DMMs, in their
appointed options classes, provided the DMM meets certain obligations
and quoting requirements as provided for in the new proposed Exchange
Rules. The Exchange proposes to provide DMMs with certain participation
entitlements. The Exchange believes that these amendments, described
below in greater detail, will enhance competition by affording the BX
Options market the opportunity to compete for directed order flow.
Current Categories of BX Options Participants
Today on BX there are three types of Options Participants: Options
Order Entry Firms, Options market makers and LMMs. Options Order Entry
Firms, or OEFs, are Options Participants who represent customer orders
as agent on BX Options and non-market maker Participants conducting
proprietary trading as principal.
Options market makers are Options Participants registered with the
Exchange as options market makers in one or more listed options on
BX.\3\ BX Options market makers are required to electronically engage
in a course of dealing to enhance liquidity available on BX and to
assist in the maintenance of fair and orderly markets.\4\ Among
[[Page 73931]]
other things, Options market makers must quote 60 percent of the
trading day (as a percentage of the total number of minutes in such
trading day) or such higher percentage as BX may announce in
advance.\5\
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\3\ See BX Options Rules at Chapter VII.
\4\ Options market makers receive certain benefits for carrying
out their duties. For example, a lender may extend credit to a
broker-dealer without regard to the restrictions in Regulation T of
the Board of Governors of the Federal Reserve System if the credit
is to be used to finance the broker-dealer's activities as market
maker on a national securities exchange. Thus, an Options market
maker has a corresponding obligation to hold itself out as willing
to buy and sell options for its own account on a regular or
continuous basis to justify this favorable treatment.
\5\ BX Regulation may consider exceptions to the requirement to
quote 60 percent (or higher) of the trading day based on
demonstrated legal or regulatory requirements or other mitigating
circumstances. Market makers are not required to make two-sided
markets pursuant to Section 5(a)(i) of Chapter VII in any Quarterly
Option Series, adjusted option series, or any option series until
the time to expiration for such series is less than nine months.
Accordingly, the continuous quotation obligations set forth in this
rule do not apply to market makers respecting Quarterly Option
Series, adjusted option series, or any series with an expiration of
nine months or greater. If a technical failure or limitation of a
system of BX prevents a market maker from maintaining, or prevents a
market maker from communicating to BX Options, timely and accurate
quotes, the duration of such failure or limitation shall not be
included in any of these calculations with respect to the affected
quotes. Substantial or continued failure by an Options market maker
to meet any of its obligations and duties, will subject the Options
market maker to disciplinary action, suspension, or revocation of
the Options market maker's registration in one or more options
series. See obligations of Options market makers in Chapter VII,
Section 6.
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Recently, the Exchange adopted rules providing that an approved BX
Options market maker may become an LMM in one or more listed options,
provided that each class is limited to one LMM.\6\ BX does not limit
the number of entities that may become LMMs. LMMs are subject to more
extensive obligations than other BX Options market makers, including an
obligation to provide continuous two-sided quotations meeting certain
quote width requirements throughout the trading day in its appointed
issues for 90 percent of the time the Exchange is open for trading in
each issue.\7\ The Exchange provides LMMs with specific participation
entitlements in Chapter VI (Trading Systems) at Section 10, entitled
``Book Processing.''
---------------------------------------------------------------------------
\6\ See Chapter VII, Section 13.
\7\ See Chapter VII, Section 14.
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DMM Designation and Directed Orders
The Exchange is now proposing to define Directed Orders and to
provide for another category of market maker, the DMM. A ``Directed
Order'' would be defined as an order to buy or sell which has been
directed (pursuant to the Exchange's instructions on how to direct an
order) to a particular market maker (the DMM with respect to that
Directed Order).\8\ Pursuant to a proposed amendment to Chapter VI,
Section 6(a)(2), Limit Orders,\9\ Minimum Quantity Orders,\10\ Market
Orders,\11\ Price Improving Orders,\12\ All-or-None Orders \13\ and
Post-Only Orders \14\ may all be designated as Directed Orders. A
Directed Order may also be designated as Immediate or Cancel
(``IOC''),\15\ Good-till-Cancelled (``GTC''),\16\ Day (``DAY'') \17\ or
a WAIT \18\ order pursuant to Chapter VI, Section 6(a)(1) as proposed
to be amended. New Section 15, DMMs, of Chapter VII, Market
Participants, provides that market makers may receive Directed Orders
in their appointed classes as provided therein, provided they indicated
to the Exchange, in a form specified, that they will receive Directed
Orders. Directed Orders may be available only in certain options.\19\
---------------------------------------------------------------------------
\8\ See proposed Chapter VI, Section 1(e)(1), which replaces a
Reserved section with a definition of Directed Order. The new
provision also states that Directed Orders are handled within the
System pursuant to Chapter VI, Section 10.
\9\ See Chapter VI, Section 1(e)(2). ``Limit Orders'' are orders
to buy or sell an option at a specified price or better. A limit
order is marketable when, for a limit order to buy, at the time it
is entered into the System, the order is priced at the current
inside offer or higher, or for a limit order to sell, at the time it
is entered into the System, the order is priced at the inside bid or
lower.
\10\ See Chapter VI, Section 1(e)(3). ``Minimum Quantity
Orders'' are orders that require that a specified minimum quantity
of contracts be obtained, or the order is cancelled. Minimum
Quantity Orders are treated as having a time-in-force designation of
Immediate or Cancel. Minimum Quantity Orders received prior to the
opening cross or after market close will be rejected.
\11\ See Chapter VI, Section 1(e)(5). ``Market Orders'' are
orders to buy or sell at the best price available at the time of
execution. Participants can designate that their Market Orders not
executed after a pre-established period of time, as established by
the Exchange, will be cancelled back to the Participant.
\12\ See Chapter VI, Section 1(a)(6). ``Price Improving Orders''
are orders to buy or sell an option at a specified price at an
increment smaller than the minimum price variation in the security.
Price Improving Orders may be entered in increments as small as one
cent. Price Improving Orders that are available for display shall be
displayed at the minimum price variation in that security and shall
be rounded up for sell orders and rounded down for buy orders.
\13\ See Chapter VI, Section 1(e)(10). ``All-or-none'' shall
mean a market or limit order which is to be executed in its entirety
or not at all. All-or-None Orders are treated as having a time-in-
force designation of Immediate or Cancel. All-or-None Orders
received prior to the opening cross or after market close will be
rejected.
\14\ See Chapter VI, Section 1(e)(11). ``Post-Only Orders'' are
orders that will not remove liquidity from the System. Post-Only
Orders are to be ranked and executed on the Exchange or cancelled,
as appropriate, without routing away to another market. Post-Only
Orders are evaluated at the time of entry with respect to locking or
crossing other orders as follows: (i) If a Post-Only Order would
lock or cross an order on the System, the order will be re-priced to
$.01 below the current low offer (for bids) or above the current
best bid (for offers) and displayed by the System at one minimum
price increment below the current low offer (for bids) or above the
current best bid (for offers); and (ii) if a Post-Only Order would
not lock or cross an order on the System but would lock or cross the
NBBO as reflected in the protected quotation of another market
center, the order will be handled pursuant to Chapter VI, Section
7(b)(3)(C). Participants may choose to have their Post-Only Orders
returned whenever the order would lock or cross the NBBO or be
placed on the book at a price other than its limit price. Post-Only
Orders received prior to the opening cross or after market close
will be rejected. Post-Only Orders may not have a time-in-force
designation of Good Til Cancelled or Immediate or Cancel. Although a
Post-Only Order may be designated as a Directed Order, because it is
not executed immediately upon receipt it will never result in the
awarding of a DMM participation entitlement as discussed below.
\15\ See Chapter VI, Section 1(g)(2). ``Immediate Or Cancel'' or
``IOC'' shall mean for orders so designated, that if after entry
into the System a marketable order (or unexecuted portion thereof)
becomes non-marketable, the order (or unexecuted portion thereof)
shall be canceled and returned to the entering participant. IOC
Orders shall be available for entry from the time prior to market
open specified by the Exchange on its Web site until market close
and for potential execution from 9:30 a.m. until market close. IOC
Orders entered between the time specified by the Exchange on its Web
site and 9:30 a.m. Eastern Time will be held within the System until
9:30 a.m. at which time the System shall determine whether such
orders are marketable. IOC orders can be routed if designated as
routable.
\16\ See Chapter VI, Section 1(g)(4). ``Good Til Cancelled'' or
``GTC'' shall mean for orders so designated, that if after entry
into System, the order is not fully executed, the order (or
unexecuted portion thereof) shall remain available for potential
display and/or execution unless cancelled by the entering party, or
until the option expires, whichever comes first. GTC Orders shall be
available for entry from the time prior to market open specified by
the Exchange on its Web site until market close and for potential
execution from 9:30 a.m. until market close.
\17\ See Chapter VI, Section 1(g)(3). ``DAY'' shall mean for
orders so designated, that if after entry into the System, the order
is not fully executed, the order (or unexecuted portion thereof)
shall remain available for potential display and/or execution until
market close, unless canceled by the entering party, after which it
shall be returned to the entering party. DAY Orders shall be
available for entry from the time prior to market open specified by
the Exchange on its Web site until market close and for potential
execution from 9:30 a.m. until market close.
\18\ See Chapter VI, Section 1(g)(5). ``WAIT'' shall mean for
orders so designated, that upon entry into the System, the order is
held for one second without processing for potential display and/or
execution. After one second, the order is processed for potential
display and/or execution in accordance with all order entry
instructions as determined by the entering party.
\19\ The Exchange would specify via an Options Trader Alert
which options would be subject to the Directed Orders provisions
specified herein.
---------------------------------------------------------------------------
Pursuant to new Chapter VII, Market Participants, Section 15, when
the Exchange's disseminated price is the NBBO at the time of receipt of
the Directed Order, and the DMM is quoting at or improving \20\ the
Exchange's
[[Page 73932]]
disseminated price, the Directed Order will be automatically executed
and allocated in accordance with Chapter VI, Section 10 such that the
DMM will receive a DMM participation entitlement provided for in
Chapter VI, Section 10, discussed below.\21\ If the DMM participation
entitlement is not awarded at the time of receipt of the Directed
Order, no DMM participation entitlement will apply and the order will
be handled as though it were not a Directed Order for the remainder of
the life of the order. However, when (a) the Exchange's disseminated
price is the NBBO, and the quotation disseminated by the DMM on the
opposite side of the market from the Directed Order is inferior to the
NBBO at the time of receipt of the Directed Order, or (b) the
Exchange's disseminated price is not the NBBO at the time of receipt of
the Directed Order, the Directed Order will be processed as though it
were not a Directed Order.\22\
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\20\ Today, BX Options Participants enter Price Improving
Orders, which orders have a specified price smaller than the minimum
price variation (``MPV'') in the option. Price Improving Orders may
be entered in increments as small as one cent. Price Improving
Orders will be displayed at the MPV in that security and rounded up
for sell orders and down for buy orders. Without this order type,
market participants would not be able to submit orders priced
between the MPV. Instead, orders, if submitted, would be priced (and
displayed) at the MPV. The treatment of Price Improving Orders is
not altered by this rule change. It is consistent to account for the
possibility that the DMM improves the Exchange's disseminated price
by submitting a marketable order in a non-standard increment, which
in this case, would aggressively improve the NBBO. Awarding a
participation entitlement to a DMM will not otherwise change the
manner in which Price Improving Orders will be displayed at the MPV
and available to be executed at price improving increments.
\21\ Chapter VII, Market Participants, Section 15, Directed
Market Makers, subsection (i) Price Improving Orders from a DMM
participant which are reflected on OPRA at the NBBO retain price
priority and are eligible for a DMM participation entitlement.
\22\ See Chapter VII, Market Participants, Section 15, Directed
Market Makers, subsection (ii).
---------------------------------------------------------------------------
New Section 15 requires a DMM to provide continuous two-sided
quotations throughout the trading day in all options issues in which
the DMM is assigned for 90 percent of the time the Exchange is open for
trading in each issue. Such quotations must meet the legal quote width
requirements of Chapter VII, Section 6. These obligations will apply
collectively to all series in all of the issues, rather than on an
issue-by-issue basis once the market maker has indicated to the
Exchange that the market maker will be receiving Directed Orders. While
the Market Maker's quoting requirement is a daily obligation, the
Exchange is able to determine compliance with these obligations on a
monthly basis. BX Regulation may consider exceptions to the requirement
to quote 90% (or higher) of the trading day based on demonstrated legal
or regulatory requirements or other mitigating circumstances.\23\ If a
technical failure or limitation of a system of the Exchange prevents a
DMM from maintaining, or prevents a DMM from communicating to the
Exchange, timely and accurate electronic quotes in an issue, the
duration of such failure shall not be considered in determining whether
the DMM has satisfied the 90 percent quoting standard with respect to
that option issue. Further, these obligations shall not apply to DMMs
with respect to Quarterly Options Series, adjusted option series,\24\
or any series with a time to expiration of nine months or greater.
However, a DMM may still receive a participation entitlement in such
series if it elects to quote in such series and otherwise satisfies the
requirements of Chapter VI, Section 10.
---------------------------------------------------------------------------
\23\ Chapter VII, Market Participants, Section 15, Directed
Market Makers, subsection (iii).
\24\ An adjusted option series is an option series wherein, as a
result of a corporate action by the issuer of the underlying
security, one option contract in the s [sic]
---------------------------------------------------------------------------
LMM and New DMM Participation Entitlements
By way of background, Chapter VI, Trading System, Section 10, Book
Processing, currently provides that the Exchange will determine to
apply, for each option, either a Price/Time or a Size Pro-Rata
execution algorithm. In addition to describing each execution
algorithm, Chapter VI, Section 10 also describes certain priority
overlays applicable to each of those algorithms.
Currently, under both Price/Time and Size Pro-Rata algorithms,
Public Customer Priority is always in effect and provides that the
highest bid and lowest offer have priority except that Public Customer
orders have priority over non-Public Customer orders at the same price.
If there are two or more Public Customer orders for the same options
series at the same price, priority is afforded to such Public Customers
orders in the sequence in which they are received by the System. For
purposes of the Public Customer Priority overlay, a Public Customer
order does not include a Professional \25\ order.
---------------------------------------------------------------------------
\25\ See Chapter I, Section 1(a)(49). The term ``Professional''
means any person or entity that (i) is not a broker or dealer in
securities, and (ii) places more than 390 orders in listed options
per day on average during a calendar month for its own beneficial
account(s). A Participant or a Public Customer may, without
limitation, be a Professional. All Professional orders shall be
appropriately marked by Participants.
---------------------------------------------------------------------------
Chapter VI, Section 10 also currently provides for a LMM priority
overlay after all Public Customer orders have been fully executed, upon
receipt of an order, provided the LMM's bid/offer is at the Exchange's
disseminated price. The LMM priority overlay applies under both the
Price/Time and the Size Pro-Rata execution algorithms, if applicable.
Specifically, with respect to Size Pro-Rata executions, the
Exchange affords an LMM a participation entitlement if the LMM's bid/
offer is at or better than the Exchange's disseminated price and all
Public Customer \26\ orders have been fully executed.\27\ The LMM is
not entitled to receive a number of contracts that is greater than the
displayed size associated with such LMM. LMM participation entitlements
are considered after the opening process. The LMM participation
entitlement provides a BX Options LMM with the greater of: The LMM's
Size Pro-Rata share; 50 percent of remaining interest if there is one
or no other market maker at that price; 40 percent of remaining
interest if there are two other market makers at that price; or 30
percent of remaining interest if there are more than two other market
makers at that price; or if rounding would result in an allocation of
less than one contract, a BX Options LMM receives one contract.
Rounding is up or down to the nearest integer.\28\ After all Public
Customer orders have been fully executed and LMM participation
entitlements applied, if applicable, BX Options market makers then have
priority over all other Participant orders at the same price.\29\
---------------------------------------------------------------------------
\26\ See Chapter I, Section 1(50). The term ``Public Customer''
means a person that is not a broker or dealer in securities.
\27\ Price Improving Orders retain price priority before an LMM
participation entitlement is provided at the Exchange's disseminated
price. See Chapter VI, Sections 1(a)(6) and 7(b)(3)(B).
\28\ When the decimal is exactly 0.5, the rounding direction is
up to the nearest integer.
\29\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsection (C)(2)(ii)(1).
---------------------------------------------------------------------------
For symbols trading under the Price/Time algorithm, the Public
Customer Priority Overlay is always in effect. Chapter VI, Section 10
also currently provides for a LMM priority overlay after all Public
Customer orders have been fully executed, upon receipt of an order,
provided the LMM's bid/offer is at or better than the Exchange's
disseminated price, the LMM is afforded a participation
entitlement.\30\ The LMM is not entitled to receive a number of
contracts that is greater than the displayed size associated with such
LMM. After Public Customers orders have been executed, a BX Options LMM
[[Page 73933]]
receives the greater of: (a) Contracts the LMM would receive if the
allocation was based on time priority with Public Customer priority;
(b) 50 percent of remaining interest if there is one or no other market
maker at that price; (c) 40 percent of remaining interest if there are
two other market makers at that price; or (d) 30 percent of remaining
interest if there are more than two other market makers at that price
or if rounding would result in an allocation of less than one contract,
a BX Options LMM receives one contract. Rounding is up or down to the
nearest integer.\31\
---------------------------------------------------------------------------
\30\ As is the case with Size Pro-Rata executions discussed
above, Price Improving Orders retain price priority before an LMM
participation entitlement is provided at the Exchange's disseminated
price. See Chapter VI, Sections 1(a)(6) and 7(b)(3)(B).
\31\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsection (C)(1)(b)(1).
---------------------------------------------------------------------------
Under both the Price/Time algorithm and the Size Pro-Rata
algorithm, Orders for 5 contracts or fewer are allocated to the LMM.
The Exchange reviews this provision quarterly and maintains the small
order size at a level that will not allow orders of 5 contracts or less
executed by the LMM to account for more than 40 percent of the volume
executed on the Exchange.\32\
---------------------------------------------------------------------------
\32\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsections (C)(1)(b)(2) and (C)(2)(ii)(2).
---------------------------------------------------------------------------
The Exchange is now proposing to amend its rules to provide for a
DMM priority entitlement under both the Price/Time and the Size Pro-
Rata algorithm, and to make certain corresponding changes and
clarifications to the current LMM participation entitlements. Under
both Price/Time and Size Pro-Rata algorithms, a market maker which
receives a Directed Order is a DMM with respect to that Directed Order.
After all Public Customer orders at a given price point have been fully
executed, upon receipt of a Directed Order, provided the DMM's bid/
offer is at or improves the NBBO, the DMM will be afforded a
participation entitlement \33\ at the last execution price, which is
equal to or better than the NBBO if the DMM executed the order at such
price. The DMM shall not be entitled to receive a number of contracts
that is greater than the displayed size at a given price point
associated with such DMM. DMM participation entitlements will be
considered after the opening process. Chapter VI, Section 10(C)(1)(c)
specifies that under the Price/Time execution algorithm, DMM
participant entitlements (like LMM participation entitlements) \34\
shall only be in effect when the Public Customer Priority Overlay is
also in effect.
---------------------------------------------------------------------------
\33\ As with the LMM participation entitlements discussed above,
Price Improving Orders retain price priority. A DMM participation
entitlement will only be provided at the last price executed which
is equal to or better than the Exchange's disseminated price. See
Chapter VI, Sections 1(a)(6) and 7(b)(3)(B).
\34\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsection (C)(1)(b).
---------------------------------------------------------------------------
Pursuant to the DMM participation entitlement in effect under the
Price/Time algorithm, the DMM would receive, with respect to a Directed
Order, the greater of: (1) Contracts the DMM would receive if the
allocation was based on time priority pursuant to subparagraph
(C)(1)(a) with Public Customer priority; (2) after Public Customer
orders are executed, 40 percent of remaining interest; or (3) the LMM
participation entitlement (if the DMM is also the LMM). If there are
multiple DMM quotes at the same price which are at or improve the NBBO
when the Directed Order is received, the DMM participation entitlement
would apply only once to the one which has the highest time priority at
the last price executed upon receipt of the Directed Order which is
equal to or better than the NBBO. If rounding would result in an
allocation of less than one contract, the DMM would receive one
contract. Rounding would be up or down to the nearest integer.\35\
Under no circumstances would the DMM receive an allocation of greater
than 40% of an order at a price at which they receive a directed
entitlement, unless it resulted from rounding.
---------------------------------------------------------------------------
\35\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsections (C)(1)(c).
---------------------------------------------------------------------------
Pursuant to the DMM participation entitlement in effect under the
Size Pro-Rata algorithm, the DMM would receive, with respect to a
Directed Order, the greater of: (1) The DMM's Size Pro-Rata share under
subsection (1)(C)(2)(iv); (2) after Public Customer orders are
executed, 40 percent of remaining interest; or (3) the LMM
participation entitlement (if the DMM is also the LMM). If there are
multiple DMM quotes at the same price which are at or improve the NBBO
when the Directed Order is received, the DMM participation entitlement
would apply only to the one which has the highest time priority at the
last price executed upon receipt of the Directed Order which is equal
to or better than the NBBO. Additional DMM quotes at such price will
receive no further allocation of the Directed Order. Like the DMM
participation entitlement applicable to executions under the Price/Time
algorithm, if rounding would result in an allocation of less than one
contract, the DMM would receive one contract, and rounding would be up
or down to the nearest integer.\36\ Under no circumstances would the
DMM receive an allocation of greater than 40% of an order at a price at
which they receive a directed entitlement, unless it resulted from
rounding.
---------------------------------------------------------------------------
\36\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsection (C)(2)(iii).
---------------------------------------------------------------------------
As noted above, under both execution algorithms only one
participation entitlement, LMM or DMM, may be applied on a given order.
The Exchange is amending the current LMM entitlements under each
algorithm to provide with respect to a Directed Order that if the LMM
is also the DMM, the LMM shall receive the DMM participation
entitlement applicable to that algorithm, if any, if such DMM
participation entitlement is greater than the LMM participation
entitlement the LMM would otherwise receive pursuant to Chapter VI,
Section 10, subsections (C)(1)(b)(1)(a)-(d) (in the case of Price/Time
symbols) or (C)(2)(ii)(1)(a)-(d) (in the case of Size Pro-Rata
symbols). The Exchange is also modifying the LMM priority rules so that
the LMM participation entitlement will not apply to a Directed Order if
when it is received the DMM's bid/offer is at or improves \37\ the NBBO
and the LMM is at the same price level and the LMM is not the DMM.\38\
---------------------------------------------------------------------------
\37\ See note 20.
\38\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsections (C)(1)(b)(1) (with respect to Price/Time symbols) and
(C)(2)(ii)(1) (with respect to Size Pro-Rata Symbols).
---------------------------------------------------------------------------
The Exchange is also proposing to revise the current allocation to
the LMM of orders for five contracts or fewer (which applies under both
algorithms). As revised, the provision would not apply if the order of
5 contracts or fewer is directed to a DMM who is quoting at the
NBBO.\39\
---------------------------------------------------------------------------
\39\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsections (C)(1)(b)(2) (with respect to Price/Time symbols) and
(C)(2)(ii)(2) (with respect to Size Pro-Rata Symbols).
---------------------------------------------------------------------------
Currently, with respect to executions under the Size Pro-Rata
algorithm, BX Options market makers have priority over all other
Participant orders at the same price after all Public Customer orders
have been fully executed and LMM participation entitlements applied.
The Exchange proposes to amend this provision so that this BX Options
market maker priority applies only after any DMM participation
entitlements have been applied as well.\40\
---------------------------------------------------------------------------
\40\ Chapter VI, Trading Systems, Section 10, Book Processing,
subsection (C)(2)(iv).
---------------------------------------------------------------------------
Finally, the Exchange proposes to clarify with respect to LMMs
under both execution algorithms that after all Public Customer orders
have been fully executed, upon receipt of an order, the LMM will be
afforded a participation entitlement provided that LMM's bid/offer is
at or improves upon the
[[Page 73934]]
Exchange's disseminated price. The addition of the reference to an
improved bid/offer will conform the LMM provision to the corresponding
new DMM provision.\41\ The Exchange is also making a clarifying change
in Chapter VI, Section 10(1)(C)(1)(b)(1)(a) by changing ``subparagraph
(1)(a) above'' to ``subparagraph (C)(1)(a) above.''
---------------------------------------------------------------------------
\41\ See note 20.
---------------------------------------------------------------------------
Examples of DMM Participation Entitlement Under Price/Time Algorithm
Examples 1 through 3 below illustrate the manner in which a DMM
will be allocated pursuant to the Price/Time model.
Example Number 1
Assume an LMM has been assigned and that the DMM is not the LMM.
ABBO = 1.00-1.10
BX BBO = 1.00-1.10 comprised of the following in order of receipt
Market Maker 1 (``MM1'') 1.00 (10)-1.10 (10)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
DMM 1.00 (10)-1.10 (20)
LMM 1.00 (10)-1.10 (10)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts.
Determination of Allocation:
Price/Time with Customer Priority would result in Customer A
trading 5, Customer B trading 2, MM1 trading 10, Firm trading 5, and
DMM trading 18.
The DMM allocation would result in Customer A trading 5, Customer B
trading 2, and DMM trading 40% of remaining 33 = 13 (13.2 rounded
down); then normal price/time would resume and MM1 would trade 10, Firm
would trade 5, and LMM would trade 5.
The LMM allocation is not calculated.
In this example, Price/Time with Customer Priority would prevail
since the DMM would receive a greater allocation this way.
Example Number 2
Assume an LMM is assigned and that the DMM is not the LMM.
ABBO = 1.00-1.10
BX BBO = 1.00-1.10 comprised of the following in order of receipt
MM1 1.00 (10)-1.10 (10)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
Market Maker 2 (``MM2'') 1.00 (10)-1.10 (10)
DMM 1.00 (10)-1.10 (20)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts.
Determination of Allocation:
Price/Time with Customer Priority would result in Customer A
trading 5, Customer B trading 2, MM1 trading 10, Firm trading 5, MM2
trading 10 and DMM trading 8.
The DMM allocation would result in Customer A trading 5, Customer B
trading 2, DMM trading 40% of remaining 33 = 13 (13.2 rounded down);
then normal price/time would resume with MM1 trading 10, Firm trading 5
and MM2 trading 5.
The LMM allocation would not be calculated.
In this example, the DMM allocation would prevail since the DMM
receives a greater allocation this way.
Example Number 3
Assume an LMM is assigned and that the DMM is also the LMM.
ABBO = 1.00-1.10
BX BBO = 1.00-1.10 comprised of the following in order of receipt:
MM1 1.00 (10)-1.10 (10)
Firm 25 offered at 1.10
DMM/LMM 1.00 (10)-1.10 (20)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts.
Determination of Allocation:
Price/Time with Customer Priority would result in Customer B
trading 2, MM1 trading 10, Firm trading 25, and DMM/LMM trading 3.
DMM allocation would result in Customer B trading 2 and DMM/LMM
trading 40% of remaining 38 = 15 (15.2 rounded down); then normal
price/time would resume and MM1 would trade 10 and Firm would trade 13.
LMM allocation would result in Customer B trading 2 and DMM/LMM
trading 50% of remaining 38 = 19; then normal price time would resume
and MM1 would trade 10 and Firm would trade 9.
In this example, the LMM allocation would prevail since the DMM/LMM
would receive a greater allocation this way.
Examples of DMM Participation Entitlement Under Size Pro-Rata Algorithm
Examples 4 through 6 below illustrate the manner in which a DMM
will be allocated pursuant to the Size Pro-Rata model.
Example Number 4
Assume an LMM is assigned and the DMM is not the LMM.
ABBO = 1.00-1.10
BX BBO = 1.00-1.10 comprised of the following in order of receipt:
LMM 1.00 (10)-1.10 (15)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
DMM 1.00 (10)-1.10 (20)
MM1 1.00 (10)-1.10 (10)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts.
Determination of Allocation:
Size Pro-Rata would result in Customer A trading 5, Customer B
trading 2, LMM trading 11 (15/45*33remaining), DMM trading 14 (20/
45*33), MM1 trading 7 (10/45*33), and then LMM based on time receiving
the residual 1 lot.
The DMM allocation would result in Customer A trading 5, Customer B
trading 2, and DMM trading 40% of remaining 33 = 13 (13.2 rounded
down); then normal Size Pro-Rata for remaining with the LMM trading 12
(15/25*20) and MM1 trading 8 (10/25*20).
The LMM allocation would not be calculated.
In this example, the Size Pro-Rata allocation would prevail since
the DMM would receive the greater allocation this way.
Example Number 5
Assume that no LMM is assigned.
ABBO = 1.00-1.10
BX BBO = 1.00-1.10 comprised of the following in order of receipt:
DMM 1.00 (10)-1.10 (15)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
MM1 1.00 (10)-1.10 (20)
MM2 1.00 (10)-1.10 (10)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts.
Determination of Allocation:
Size Pro-Rata would result in Customer A trading 5, Customer B
trading 2, DMM trading 11 (15/45*33remaining), MM1 trading 14 (20/
45*33), MM2 trading 7 (10/45*33), and the DMM based on time receiving
the residual 1 lot.
The DMM allocation would result in Customer A trading 5, Customer B
trading 2, and DMM trading 40% of remaining 33 = 13 (13.2 rounded
down); then normal Size Pro-Rata for remaining with MM1 trading 13 (20/
30*20) and MM2 trading 6 (10/30*20), and the DMM based on time
receiving the residual 1 lot.
The LMM allocation would not be calculated.
In this example, the DMM allocation would prevail since the DMM
would receive the greater allocation this way.
Example Number 6
Assume that an LMM is assigned and that the DMM is also the LMM.
[[Page 73935]]
ABBO = 1.00-1.10
BX BBO = 1.00-1.10 comprised of the following in order of receipt:
DMM/LMM 1.00 (10)-1.10 (15)
Customer A 5 offered at 1.10
Firm 5 offered at 1.10
MM1 1.00 (10)-1.10 (30)
Customer B 2 offered at 1.10
Incoming Directed Order to pay 1.10 for 40 contracts.
Determination of Allocation:
Size Pro-Rata would result in Customer A trading 5, Customer B
trading 2, DMM/LMM trading 11 (15/45*33 remaining), MM1 trading 22 (30/
45*33).
The DMM allocation would result in Customer A trading 5, Customer B
trading 2, and DMM/LMM trading 40% of remaining 33 = 13 (13.2 rounded
down); then Size Pro-Rata for remaining with MM1 trading full size of
20.
The LMM allocation would result in Customer A trading 5, Customer B
trading 2, and DMM/LMM entitled to 50% of remaining 33 = 17 (16.5
rounded up) but capped at his size of 15 thus trading 15; then normal
Size Pro-Rata for remaining with MM1 trading 18.
In this example, the LMM allocation would prevail since the DMM is
the LMM and would receive a greater allocation this way.
Examples of Price Improving Orders
Example Number 1
For this scenario assume the NBBO is at 1.00 (bid) and 1.20
(offer).
Assume a Price Improving Order (O1) from a Customer is present on
BX to sell 20 contracts at 1.18. Also assume a Directed Market Maker
(DMM1) and two other Market Makers (MM2 and MM3) are each quoting 1.00-
1.20 with a size of 50 contracts on each side. O1 and the Market Maker
quotes are reflected in the BX BBO as 1.00-1.20 with a size of 150
contracts on the bid and 170 contracts on the offer. If an order (O2)
is received to buy 50 contracts at a limit of 1.20 which is directed to
DMM1, the order will execute upon receipt with 20 contracts trading
against O1 at 1.18, 12 contracts trading against DMM1 at 1.20 (40% of
remaining 30 contracts), 9 contracts trading against MM2 at 1.20, and 9
contracts trading against MM3 at 1.20.
Example Number 2
For this scenario assume the NBBO is at 1.00 (bid) and 1.20
(offer).
Assume two Price Improving Orders (O1 and O2) from a Customer (C1)
and Directed Market Maker (DMM1), respectively, are present on BX to
sell 10 contracts each at 1.18. Also assume the Directed Market Maker
(DMM1) and two other Market Makers (MM2 and MM3) are each quoting 1.00-
1.20 with a size of 50 contracts on each side. O1, O2, and the Market
Maker quotes are reflected in the BX BBO as 1.00-1.20 with a size of
150 contracts on the bid and 170 contracts on the offer. If an order
(O3) is received to buy 50 contracts at a limit of 1.20 which is
directed to DMM1, the order will execute upon receipt with 10 contracts
trading against O1 at 1.18 and 10 contracts trading against DMM1's
Price Improving Order (O2) at 1.18. The remaining 30 contracts will
trade at 1.20 with 12 contracts trading against DMM1 (40% of remaining
30 contracts), 9 contracts trading against MM2, and 9 contracts trading
against MM3.
Example Number 3
Assume the following orders exist in the Order book for Market
Maker 2 and 3 (MM2 and MM3 respectively) and the following DMM quotes:
1.19 offer 10 MM2 (Price Improving Order)
1.20 offer 20 MM3
1.20 offer 10 DMM Quote 1
1.20 offer 10 DMM Quote 2
If an order was directed to the DMM to buy 15 contracts at 1.20, 10
contracts would be executed at 1.19 contra MM2. The DMM would receive
40% of the remaining 5 contracts (2 contracts) which would be allocated
to DMM Quote 1. The remaining 3 contracts would be allocated as per
Price Time priority to MM3.
Example Number 4
Assume the following orders exist in the Order book for Market
Maker 2 and 3 (MM2 and MM3 respectively) and the following DMM quotes:
1.18 offer 10 MM2 (Price Improving Order)
1.19 offer 20 MM3
1.19 offer 10 DMM Quote 1
1.19 offer 10 DMM Quote 2
1.20 offer 10 MM3
If an order directed to the DMM to buy 15 contracts for 1.20, 10
contracts would be executed at 1.18 contra MM2. The DMM would receive
40% of remaining 5 contracts (2 contracts), because it was the last
price executed pursuant to Chapter VI, Section 10(1)(C)(1)(c), which
would be allocated to DMM Quote 1. The remaining 3 contracts would be
allocated as per Price Time priority to MM3.
Priority Overlays
The Exchange is proposing to amend language in Chapter VI, Section
10(1)(C)(2) which applies to priority overlays. The language currently
states that ``the Exchange will apply the following designated
Participant priority overlays, which are always in effect when the Size
Pro-Rata execution algorithm is in effect.'' The priority overlays
which are references are Public Customer, LMM, DMM and market maker
priority. The Exchange is proposing to amend the sentence to state,
``the Exchange may apply the following designated Participant priority
overlays, when the Size Pro-Rata execution algorithm is in effect.''
The amendment is intended to provide more specificity to the rule text
as Public Customer priority will be in effect always for Size Pro-Rata,
but may be in effect for the other types of priorities. The amendment
also conforms the language to the Price/Time rule text in Chapter VI,
Section 10(1)(C)(1).
Implementation.
Within thirty (30) days the Exchange will begin to implement the
proposal and will issue an Options Trader Alert in advance to inform
market participants of such date.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \42\ in general, and furthers the objectives of Section
6(b)(5) of the Act \43\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in 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, because it will establish a
Directed Order process similar to what operates on other exchanges, as
explained herein, which will provide Participants with additional
choices among the many competing exchanges with regard to their
execution needs and strategies. BX Options operates in an intensely
competitive environment and seeks to offer the same services that its
competitors offer and in which its customers find value.
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\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In its approval of other options exchange directed order programs,
the Commission has, like proposals to amend a specialist guarantee,
focused on whether the percentage of the ``entitlement'' would rise to
a level that could have a material adverse impact on quote competition
within a particular
[[Page 73936]]
exchange, and concluded that such programs do not jeopardize market
integrity or the incentive for market participants to post competitive
quotes.\44\ BX's proposed DMM participation entitlement of 40 percent,
is consistent with the directed order allocations of other options
exchanges. BX notes that the remaining portion of each order will
continue to be allocated based on the competitive bids/offers of market
participants. In addition, at the time of receipt of the Directed
Order, a DMM will have to be quoting at or improving \45\ the NBBO
which is intended to incent the DMM to quote aggressively. BX also
notes that DMMs will have heightened quoting obligations as compared to
other BX Options market makers.
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\44\ See Securities Exchange Act Release No. 51759 (May 27,
2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91).
\45\ See note 20. Price Improving Orders, provide for investors
the opportunity to trade at a better price than would otherwise be
available--inside the disseminated best bid and offer for a
security. The opportunity for investors to receive executions inside
the disseminated best bid or offer could result in better executions
for investors.
---------------------------------------------------------------------------
A DMM will have to be quoting at or improving the NBBO at the time
the order is received to capitalize on the guarantee and will only
receive a participation entitlement at one such price point. The DMM
must be publicly quoting at that price when the order is received. In
this regard, the proposal prohibits an order flow provider from
notifying a DMM regarding its intention to submit a Directed Order so
that such DMM could change its quotation immediately prior to
submission of the directed order. The Exchange's rules already provide
the necessary protections against coordinated action as between a DMM
and an order entry firm.\46\ Furthermore, BX will proactively conduct
surveillance for, and enforce against, such violations.\47\
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\46\ See BX Chapter III, Section 4, Prevention of the Misuse of
Material Nonpublic Information. BX prohibits an order flow provider
from notifying a DMM of its intention to submit a directed order so
that the DMM could change its quotation to match the national best
bid or offer (``NBBO'') immediately prior to the submission of the
directed order.
\47\ The Exchange will submit a letter detailing its
surveillance and enforcement to the Commission.
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In addition, this proposal does not affect a broker-dealer's duty
of best execution. A broker-dealer has a legal duty to seek to obtain
best execution of customer orders, and any decision to preference a
particular DMM must be consistent with this duty.\48\ A broker-dealer's
duty of best execution derives from common law agency principles and
fiduciary obligations, and is incorporated in SRO rules and, through
judicial and Commission decisions, the antifraud provisions of the
federal securities laws.\49\ The duty of best execution requires
broker-dealers to execute customer trades at the most favorable terms
reasonably available under the circumstances, i.e., at the best
reasonably available price.\50\ The duty of best execution requires
broker-dealers to periodically assess the quality of competing markets
to assure that order flow is directed to the markets providing the most
beneficial terms for their customer orders.\51\ Broker-dealers must
examine their procedures for seeking to obtain best execution in light
of market and technology changes and modify those practices if
necessary to enable their customers to obtain the best reasonably
available prices.\52\ In doing so, broker-dealers must take into
account price improvement opportunities, and whether different markets
may be more suitable for different types of orders or particular
securities.\53\
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\48\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525
U.S. 811 (1998); Certain Market Making Activities on Nasdaq,
Securities Exchange Act Release No. 40900 (January 11, 1999)
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971);
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC,
174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution
Obligations, Securities Exchange Act Release No. 37619A (September
6, 1996), 61 FR 48290 (September 12, 1996) (``Order Handling Rules
Release'').
\49\ Order Handling Rules Release, 61 FR at 48322. See also
Newton, 135 F.3d at 270. Failure to satisfy the duty of best
execution can constitute fraud because a broker-dealer, in agreeing
to execute a customer's order, makes an implied representation that
it will execute it in a manner that maximizes the customer's
economic gain in the transaction. See Newton, 135 F.3d at 273
(``[T]he basis for the duty of best execution is the mutual
understanding that the client is engaging in the trade--and
retaining the services of the broker as his agent--solely for the
purpose of maximizing his own economic benefit, and that the broker
receives her compensation because she assists the client in reaching
that goal.''); Marc N. Geman, Securities Exchange Act Release No.
43963 (February 14, 2001) (citing Newton, but concluding that
respondent fulfilled his duty of best execution). See also Payment
for Order Flow, Securities Exchange Act Release No. 34902 (October
27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994) (``Payment for Order
Flow Final Rules''). If the broker-dealer intends not to act in a
manner that maximizes the customer's benefit when he accepts the
order and does not disclose this to the customer, the broker-
dealer's implied representation is false. See Newton, 135 F.3d at
273-274.
\50\ Newton, 135 F.3d at 270. Newton also noted certain factors
relevant to best execution--order size, trading characteristics of
the security, speed of execution, learning costs, and the cost and
difficulty of executing an order in a particular market. Id. at 270
n. 2 (citing Payment for Order Flow, Securities Exchange Act Release
No. 33026 (October 6, 1993), 58 FR 52934, 52937-38 (October 13,
1993) (Proposed Rules)). See In re E.F. Hutton & Co. (``Manning''),
Securities Exchange Act Release No. 25887 (July 6, 1988). See also
Payment for Order Flow Final Rules, 59 FR at 55008-55009.
\51\ Order Handling Rules Release, 61 FR at 48322-48333 (``In
conducting the requisite evaluation of its internal order handling
procedures, a broker-dealer must regularly and rigorously examine
execution quality likely to be obtained from different markets or
market makers trading a security.''). See also Newton, 135 F.3d at
271; Market 2000: An Examination of Current Equity Market
Developments V-4 (SEC Division of Market Regulation January 1994)
(``Without specific instructions from a customer, however, a broker-
dealer should periodically assess the quality of competing markets
to ensure that its order flow is directed to markets providing the
most advantageous terms for the customer's order.''); Payment for
Order Flow Final Rules, 59 FR at 55009.
\52\ Order Handling Rules, 61 FR at 48323.
\53\ Order Handling Rules, 61 FR at 48323. For example, in
connection with orders that are to be executed at a market opening
price, ``[b]roker-dealers are subject to a best execution duty in
executing customer orders at the opening, and should take into
account the alternative methods in determining how to obtain best
execution for their customer orders.'' Disclosure of Order Execution
and Routing Practices, Securities Exchange Act Release No. 43590
(November 17, 2000), 65 FR 75414, 75422 (December 1, 2000) (adopting
new Exchange Act Rules 11Ac1-5 and 11Ac1-6 and noting that
alternative methods offered by some Nasdaq market centers for pre-
open orders included the mid-point of the spread or at the bid or
offer).
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With respect to a DMM's obligations, the Exchange would require
DMMs be subject to heightened standards as compared to other market
makers. A DMM must provide continuous two-sided quotations throughout
the trading day in all options classes in which the DMM is assigned,
once the market maker indicates to the Exchange an intent to receive
Directed Orders, for 90% of the time the Exchange is open for trading
in each issue. Such quotations must meet the legal quote width
requirements herein. These obligations will apply to all of the DMM's
option issues collectively, rather than on an option-by-option basis.
While the Market Maker's quoting requirement is a daily obligation, the
Exchange is able to determine compliance with these obligations on a
monthly basis. BX Regulation may consider exceptions to the requirement
to quote 90% (or higher) of the trading day based on demonstrated legal
or regulatory requirements or other mitigating circumstances. However,
determining compliance with the continuous quoting requirement on a
monthly basis does not relieve a DMM of the obligation to provide
continuous two-sided quotes on a daily basis, nor will it prohibit the
Exchange from taking disciplinary action against a DMM for failing to
meet the continuous quoting obligation each trading day.
The Exchange believes that offering DMMs participation entitlements
promotes just and equitable principles of trade because DMMs will be
held to a higher standard as compared to other
[[Page 73937]]
market participants including market makers. A market maker would be
required, pursuant to this proposal, to quote 60% of the trading day.
DMMs are being held to a higher obligation and therefore are being
rewarded with participation entitlements. Similar to market makers,
DMMs add value through continuous quoting \54\ and the commitment of
capital. In addition, the DMM quoting requirements promote liquidity
and continuity in the marketplace in requiring DMMs to be held to a
higher standard of quoting. The Exchange also believes that the
proposed rule change supports the quality of the Exchange's markets
because it maintains the quoting obligations of market makers as DMMs
at 90%. DMM transactions must constitute a course of dealings
reasonably calculated to contribute to the maintenance of a fair and
orderly market. Accordingly, the proposed rule change supports the
quality of the Exchange's trading markets by helping to ensure that
DMMs will be required to meet a higher quoting standard in order to
reap the benefits of the participation entitlements. The Exchange
believes this proposed change to offer participation entitlements to
DMMs is offset by DMMs' continued responsibilities to provide
significant liquidity to the market to the benefit of market
participants.
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\54\ Pursuant to Chapter VII (Market Participants), Section 5
(Obligations of Market Makers), in registering as a market maker, an
Options Participant commits himself to various obligations.
Transactions of a market maker in its market making capacity must
constitute a course of dealings reasonably calculated to contribute
to the maintenance of a fair and orderly market, and market makers
should not make bids or offers or enter into transactions that are
inconsistent with such course of dealings. See Chapter VII, Section
5. Further, all market makers are designated as specialists on BX
for all purposes under the Act or rules thereunder. See Chapter VII,
Section 2.
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The Exchange also notes that it believes that while rounding is up
or down to the nearest integer, thereby having the potential to result
in an allocation that is slightly greater than 40% of the remaining
interest, this concept is not novel. Today, the rounding is computed in
the same manner for LMM allocations, thereby resulting in the potential
for slightly greater than 40% of remaining allocation for the LMM. It
is also important to note that if the rounding results in computing the
nearest lower integer, the DMM would receive slightly less than the
percentages noted herein. The Exchange believes that the manner in
which it rounds is not an impediment to a free and open market and a
national market system. The rounding computation described herein is
consistent with the manner in which rounding is computed on BX's
System, where appropriate. The Exchange applies the rounding
methodology in all BX functionality related to allocation computations,
not just in relation to DMM allocation computations. The Exchange
believes that its method of rounding is transparent, just and
equitable. The rounding provisions, unlike the allocation provisions,
are not a guarantee but simply the result of a mathematical computation
that can only be computed after the transactions are executed. The
Exchange's proposal is focused on the guarantees that a DMM could
expect as a result of quoting competitively, that is, quoting at or
better than the NBBO. The rounding outcome is not guaranteed and is
only the result of necessity of allocating shares in a just, equitable
and transparent manner to market participants.
The proposed rule change also removes impediments to and allows for
a free and open market, while protecting investors, by promoting
transparency regarding DMMs' obligations and benefits in the Exchange
Rules. In addition, the Exchange believes that the proposed rule change
is designed to not permit unfair discrimination among DMMs.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. The competition among the options exchanges is vigorous and
this proposal is intended to afford the BX Options market the
opportunity to compete for directed order flow. In that regard, the
proposal is pro-competitive and will offer market participants an
additional venue for the execution of Directed Orders. The Exchange
does not believe the proposal imposes a burden on intra-market
competition not necessary or appropriate in furtherance of the purposes
of the Act, because the ability to send Directed Orders is available to
all Participants, and the ability to become a DMM is available to all
market makers. Further, the Exchange does not believe the proposal will
negatively impact quote competition on BX and create an unfair burden
on competition. The directed order will be allocated based on the
competitive bidding of market participants. A DMM will have to be
quoting at the NBBO at the time the order is received to capitalize on
the guarantee.
DMMs will be subject to enhanced quoting obligations and the
obligations would apply to all options classes, once the market maker
indicates to the Exchange an intent to receive Directed Orders, for 90%
of the time the Exchange is open for trading in each issue collectively
to all appointed issues, rather than on an option-by-option basis and
compliance with this obligation will be determined on a monthly basis.
Further, the proposal will not diminish, and in fact may increase,
market making activity on the Exchange and thereby enhance intermarket
competition. Moreover, the proposed rule change will not impose any
burden on intra-market competition because it will affect all DMMs the
same. DMMs will be subject to heightened quoting obligations as
compared to other BX market makers. All market makers may become DMMs.
The Exchange does not believe the proposed rule change will cause
any unnecessary burden on intra-market competition because it provides
all market makers the opportunity to benefit from participation
entitlements as a DMM. The Exchange believes that the proposed rule
change will promote competition among market participants to the
benefit of the Exchange, its Members, and market participants. This
proposal puts in place a structure by which all Options Participants
can both compete for order flow by contributing to price and size
discovery for the entire market. Further, market makers must enter
orders that assume the risk of trading with all participants at NBBO
without knowing the details of the particular order. Market makers are
incentivized to aggressively quote at the NBBO with this proposal to
the benefit of all market participants, while maintaining their quoting
obligations. The Exchange believes the proposal will encourage greater
order flow to be sent to the Exchange through Directed Orders and that
this increased order flow will benefit all market participants on the
Exchange. The Exchange is not limiting the class of market participants
that can be directed orders, any market maker may apply to receive
directed orders and those market participants would be required to meet
the heightened standards for quoting. DMMs must meet additional quoting
and other regulatory obligations compared to certain other Exchange
Participants and have thus demonstrated a commitment to providing
liquidity on the Exchange. The Exchange believes that limiting the
benefit of the participation entitlement to DMMs is fair and reasonable
because
[[Page 73938]]
these DMMs must satisfy additional quoting and other obligations.
The Exchange does not believe the proposed change will cause any
unnecessary burden on inter-market competition because all market
makers are entitled to receive participation entitlements provided they
direct orders and those orders are executed by those DMMs. In addition,
the Exchange believes that the proposed rule change will in fact
promote competition. The Exchange believes allowing DMMs to receive
participation entitlements will promote trading activity on the
Exchange because it will provide incentives to DMMs to quote in series
which they are not obligated to do so, to the benefit of the Exchange,
its Members, and market participants.
The Exchange does not believe that the method in which it rounds up
or down to the nearest integer creates an undue burden on competition.
The rounding outcome is not guaranteed and is only the result of
necessity of allocating shares in a just, equitable and transparent
manner to market participants.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be 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 rule-comments@sec.gov. Please include
File Number SR-BX-2014-049 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-BX-2014-049. 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 Web site (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 Web site 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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BX-2014-049, and should be
submitted on or before January 2, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29109 Filed 12-11-14; 8:45 am]
BILLING CODE 8011-01-P
