Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Detection of Loss of Connection, 46739-46744 [2016-16857]
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Federal Register / Vol. 81, No. 137 / Monday, July 18, 2016 / Notices
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BZX Equities and BZX Options liquidity
pools, offering additional flexibility for
all investors to enjoy cost savings,
supporting the quality of price
discovery, promoting market
transparency and improving investor
protection. Such pricing programs
thereby reward a Member’s growth
pattern on the Exchange and such
increased volume increases potential
revenue to the Exchange, and will allow
the Exchange to continue to provide and
potentially expand the incentive
programs operated by the Exchange. To
the extent a Member participates on the
Exchange but not on BZX Options, the
Exchange does believe that the proposal
is still reasonable, equitably allocated
and non-discriminatory with respect to
such Member based on the overall
benefit to the Exchange resulting from
the success of BZX Options. As noted
above, such success allows the
Exchange to continue to provide and
potentially expand its existing incentive
programs to the benefit of all
participants on the Exchange, whether
they participate on BZX Options or not.
The proposed pricing program is also
fair and equitable in that membership in
BZX Options is available to all market
participants which would provide them
with access to the benefits on BZX
Options provided by the proposed
changes, as described above, even where
a member of BZX Options is not
necessarily eligible for the proposed
increased rebates on the Exchange.
Further, the proposed changes will
result in Members receiving either the
same or an increased rebate than they
would currently receive.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe its
proposed amendment to its Fee
Schedule would impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The Exchange does
not believe that the proposed change
represents a significant departure from
previous pricing offered by the
Exchange or pricing offered by the
Exchange’s competitors. Additionally,
Members may opt to disfavor the
Exchange’s pricing if they believe that
alternatives offer them better value.
Accordingly, the Exchange does not
believe that the proposed change will
impair the ability of Members or
competing venues to maintain their
competitive standing in the financial
markets.
The Exchange notes that it operates in
a highly competitive market in which
market participants can readily direct
order flow to competing venues if they
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deem fee structures to be unreasonable
or excessive. The proposed changes are
generally intended to enhance the
rebates for liquidity added to the
Exchange, which is intended to draw
additional liquidity to the Exchange.
The Exchange does not believe the
proposed amendments would burden
intramarket competition as they would
be available to all Members uniformly.
The Exchange does not believe that
the proposed new Cross-Asset Add
Volume Tier would burden competition,
but instead, enhances competition, as it
is intended to increase the
competitiveness of and draw additional
volume to the Exchange.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
Members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to section 19(b)(3)(A)
of the Act 9 and paragraph (f) of Rule
19b–4 thereunder.10 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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–
BatsBZX–2016–33 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.
PO 00000
All submissions should refer to File
Number SR–BatsBZX–2016–33. 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–
BatsBZX–2016–33 and should be
submitted on or before August 8, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–16850 Filed 7–15–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78298; File No. SR–BX–
2016–040]
Self-Regulatory Organizations;
NASDAQ BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Detection of
Loss of Connection
July 12, 2016.
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 July 8,
2016, NASDAQ BX, Inc. (‘‘BX’’ or
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
9 15
U.S.C. 78s(b)(3)(A).
10 17 CFR 240.19b–4(f).
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Federal Register / Vol. 81, No. 137 / Monday, July 18, 2016 / Notices
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II,
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Chapter VI, Section 6, entitled
‘‘Acceptance of Quotes and Orders’’ to
adopt functionality which is designed to
assist BX Participants in the event that
they lose communication with their
assigned Financial Information
eXchange (‘‘FIX’’) 3 or Specialized Quote
Feed (‘‘SQF’’) 4 Ports due to a loss of
connectivity.
The text of the proposed rule change
is available on the Exchange’s Web site
at https://nasdaqbx.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
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The Exchange proposes to amend
Chapter VI, Section 6, entitled
‘‘Acceptance of Quotes and Orders’’ to
adopt a new section ‘‘e’’ entitled
‘‘Detection of Loss of Connection,’’ a
new automated process which BX
proposes to adopt for its SQF 5 and FIX
3 FIX
permits the entry of orders.
permits the transmission of quotes to the
Exchange by a BX Options Market Makers using its
Client Application. SQF Auction Responses would
not be cancelled pursuant to this Chapter VI,
Section 6(e) because other rules govern auction
specific responses, see Chapter VI, Section 9,
entitled ‘‘Price Improvement Auction (‘‘PRISM’’).
5 Today, SQF and FIX have the capability to
disconnect and cancel quotes and orders,
4 SQF
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Ports in the event that they lose
communication with a Client
Application due to a loss of
connectivity. This feature is designed to
protect BX Options Market Makers 6 and
other market participants from
inadvertent exposure to excessive risk.
By way of background, BX
Participants currently enter quotes and
orders utilizing either an SQF or FIX
Port. SQF is utilized by BX Options
Market Makers and FIX is utilized by all
market participants. These ports are
System 7 components through which a
BX Participant communicates its quotes
and/or orders to the BX match engine
through the BX Participant’s Client
Application.
Under the proposed rule change, an
SQF Port would be defined as the
Exchange’s System component through
which BX Participants communicate
their quotes from the BX Participant’s
Client Application at proposed Chapter
VI, Section 6(e)(i)(B). A FIX Port would
be defined as the Exchange’s System
component through which BX
Participants communicate their orders
from the BX Participant’s Client
Application at proposed Chapter VI,
Section 6(e)(i)(C). BX Options Market
Makers may submit quotes to the
Exchange from one or more SQF Ports.
Similarly, market participants may
submit orders to the Exchange from one
or more FIX Ports. The proposed
cancellation feature will be mandatory
for each BX Options Market Maker
utilizing SQF for the removal of quotes
and optional for any market participant
utilizing FIX for the removal of orders.
When the SQF Port detects the loss of
communication with a BX Participant’s
Client Application because the
Exchange’s server does not receive a
Heartbeat message 8 for a certain period
of time (a period of ‘‘nn’’ seconds), the
Exchange will automatically logoff the
BX Participant’s affected Client
respectively, for technical disconnects although
there is no automated process triggered by pre-set
conditions. The rule change would adopt a
formalized process to automatically disconnect and
cancel quotes for SQF and disconnect and cancel
orders, if elected, for FIX when there is a loss of
communication with the BX Participant’s Client
Application.
6 The term ‘‘BX Options Market Makers’’ or
‘‘Options Market Makers’’ (herein ‘‘BX Options
Market Makers’’) means an Options Participant
registered with the Exchange for the purpose of
making markets in options contracts traded on the
Exchange and that is vested with the rights and
responsibilities specified in Chapter VII of these
Rules.’’ See BX Rules at Chapter I, Section 1(a)(9).
7 The term ‘‘System’’ shall mean the automated
system for order execution and trade reporting
owned and operated by BX as the BX Options
market. See Chapter VI, Section 1(a).
8 It is important to note that the Exchange
separately sends a connectivity message to the BX
Participant as evidence of connectivity.
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Application and automatically cancel
all of the BX Participant’s open quotes.
Quotes will be cancelled across all
Client Applications that are associated
with the same BX Options Market
Makers ID and underlying issues.
The Exchange proposes to define
‘‘Client Application’’ as the System
component of the BX Participant
through which the BX Participant
communicates its quotes and orders to
the Exchange at proposed Chapter VI,
Section 6(e)(i)(D). The Exchange
proposes to define a ‘‘Heartbeat’’
message as a communication which acts
as a virtual pulse between the SQF or
FIX Port and the Client Application at
proposed Chapter VI, Section 6(e)(i)(A).
The Heartbeat message sent by the BX
Participant and subsequently received
by the Exchange allows the SQF or FIX
Port to continually monitor its
connection with the BX Participant.
SQF Ports
The Exchange’s System has a default
time period, which will trigger a
disconnect from the Exchange and
remove quotes, set to fifteen (15)
seconds for SQF Ports. A BX Participant
may change the default period of ‘‘nn’’
seconds of no technical connectivity to
trigger a disconnect from the Exchange
and remove quotes to a number between
one hundred (100) milliseconds and
99,999 milliseconds for SQF Ports prior
to each session of connectivity to the
Exchange. This feature is enabled for
each BX Options Market Maker and may
not be disabled.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
Systemically or (2) by contacting the
Exchange’s operations staff. If the BX
Participant systemically changes the
default number of ‘‘nn’’ seconds, that
new setting shall be in effect throughout
the current session of connectivity 9 and
will then default back to fifteen
seconds.10 The BX Participant may
change the default setting systemically
prior to each session of connectivity.
The BX Participant may also
communicate the time to the Exchange
by calling the Exchange’s operations
staff. If the time period is communicated
9 Each time the BX Participant connects to the
Exchange’s System is a new period of connectivity.
For example, if the BX Participant were to connect
and then disconnect within a trading day several
times, each time the BX Participant disconnected
the next session would be a new session of
connectivity.
10 The Exchange’s System would capture the new
setting information that was changed by the BX
Participant and utilize the amended setting for that
particular session. The setting would not persist
beyond the current session of connectivity and the
setting would default back to 15 seconds for the
next session if the BX Participant did not change
the setting again.
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to the Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the BX Participant shall
persist for each subsequent session of
connectivity until the BX Participant
either contacts Exchange operations and
changes the setting or the BX Participant
systemically selects another time period
prior to the next session of connectivity.
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FIX Ports
The Exchange’s System has a default
time period, which will trigger a
disconnect from the Exchange and
remove orders, set to thirty (30) seconds
for FIX Ports. The BX Participant may
disable the removal of orders feature but
not the disconnect feature. If the BX
Participant elects to have its orders
removed, in addition to the disconnect,
the BX Participant may determine a
time period of no technical connectivity
to trigger the disconnect and removal of
orders between one (1) second and
thirty (30) seconds for FIX Ports prior to
each session of connectivity to the
Exchange.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
Systemically or (2) by contacting the
Exchange’s operations staff. If the BX
Participant systemically changes the
default number of ‘‘nn’’ seconds, that
new setting shall be in effect throughout
that session of connectivity and will
then default back to thirty seconds at
the end of that session. The BX
Participant may change the default
setting systemically prior to each
session of connectivity. The BX
Participant may also communicate the
time to the Exchange by calling the
Exchange’s operations staff. If the time
period is communicated to the
Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the BX Participant shall
persist for each subsequent session of
connectivity until the BX Participant
either contacts Exchange operations and
changes the setting or the BX Participant
systemically selects another time period
prior to the next session of connectivity.
Similar to SQF Ports, when a FIX Port
detects the loss of communication with
a Participant’s Client Application for a
certain time period (a period of ‘‘nn’’
seconds), the Exchange will
automatically logoff the BX Participant’s
affected Client Application and if
elected, automatically cancel all open
orders. The BX Participant may have an
order which has routed away prior to
the cancellation, in the event that the
order returns to the Order Book, because
it was either not filled or partially filled,
that order will be subsequently
cancelled.
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The disconnect feature is mandatory
for FIX users however the user has the
ability to elect to also enable a removal
feature, which will cancel all open
orders submitted through that FIX Port.
If the removal of orders feature is not
enabled, the System will simply
disconnect the FIX user and not cancel
any orders. The FIX user would have to
commence a new session to add, modify
or cancel its orders once disconnected.
The Exchange will issue an Options
Trader Alert advising BX Participants
on the manner in which they should
communicate the number of ‘‘nn’’
seconds to the Exchange for SQF and
FIX Ports.
The trigger for the SQF and FIX Ports
is event and Client Application specific.
The automatic cancellation of the BX
Options Market Maker’s quotes for SQF
Ports and open orders, if elected by the
BX Participant for FIX Ports entered into
the respective SQF or FIX Ports via a
particular Client Application will
neither impact nor determine the
treatment of the quotes of other BX
Options Market Makers entered into
SQF Ports or orders of the same or other
BX Participants entered into the FIX
Ports via a separate and distinct Client
Application. In other words, with
respect to quotes, each BX Options
Market Maker only maintains one quote
in a given option in the order book. A
new quote would replace the existing
quote. Orders on the other hand do not
replace each other in the order book as
multiple orders may exist in a given
option at once. Therefore the difference
in the impact as between BX Options
Market Makers submitting quotes and
BX Participants submitting orders is that
quotes may continue to be submitted
and/or refreshed by unaffected BX
Options Market Makers because these
market participants are cancelled based
on ID when an SQF Port disconnects,
whereas all of the open orders
submitted by a given firm will be
impacted when a FIX port disconnects,
if the firm elected to have orders
cancelled.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,11 in general, and furthers the
objectives of Section 6(b)(5) of the Act,12
in particular, in that it is designed to
promote just and equitable principles of
trade, 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, by
PO 00000
11 15
12 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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46741
imposing this mandatory removal
functionality on BX Options Market
Makers to prevent disruption in the
marketplace and also offering this
removal feature to other market
participants.
BX Options Market Makers will be
required to utilize this removal
functionality with respect to SQF Ports.
This feature will remove impediments
to and perfect the mechanism of a free
and open market and a national market
system and protect investors and the
public interest by requiring BX Options
Market Makers quotes to be removed in
the event of a loss of connectivity with
the Exchange’s System. BX Options
Market Makers provide liquidity to the
market place and have obligations
unlike other market participants.13 This
risk feature is important because it will
enable BX Options Market Makers to
avoid risks associated with inadvertent
executions in the event of a loss of
connectivity with the Exchange. The
proposed rule change is designed to not
permit unfair discrimination among
market participants, as it would apply
uniformly to all BX Options Market
Makers utilizing SQF.
The disconnect feature of FIX is
mandatory, however market participants
will have the option to either enable or
disable the cancellation feature, which
would result in the cancellation of all
orders submitted over a FIX port when
such port disconnects. It is appropriate
to offer this removal feature as optional
to all market participants utilizing FIX,
because unlike BX Options Market
Makers who are required to provide
quotes in all products in which they are
registered, market participants utilizing
FIX do not bear the same magnitude of
risk of potential erroneous or
unintended executions. In addition,
market participants utilizing FIX may
desire their orders to remain on the
order book despite a technical
disconnect, so as not to miss any
opportunities for execution of such
orders while the FIX session is
disconnected.
Utilizing a time period for SQF Ports
of fifteen (15) seconds and permitting
the BX Options Market Maker to modify
13 Pursuant to BX Rules at Chapter VII, Section 5,
entitled ‘‘Obligations of BX Options Market
Makers,’’ in registering as a market maker, an
Options Participant commits himself to various
obligations. Transactions of a BX Options Market
Makers must constitute a course of dealings
reasonably calculated to contribute to the
maintenance of a fair and orderly market, and BX
Options Market Makers should not make bids or
offers or enter into transactions that are inconsistent
with such course of dealings. Further, all BX
Options Market Makers are designated as specialists
on BX for all purposes under the Act or rules
thereunder.
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the setting to between 100 milliseconds
and 99,999 milliseconds is consistent
with the Act because the Exchange does
not desire to trigger unwarranted logoffs
of BX Options Market Makers and
therefore allows BX Options Market
Makers the ability to set their time in
order to enable the Exchange the
authority to disconnect the BX Options
Market Maker with this feature. Each BX
Options Market Maker has different
levels of sensitivity with respect to this
disconnect setting and each BX Options
Market Maker has their own system
safeguards as well. A default setting of
fifteen (15) seconds is appropriate to
capture the needs of all BX Options
Market Makers and high enough not to
trigger unwarranted removal of quotes.
Further, BX Options Market Makers
are able to customize their setting. The
Exchange’s proposal to permit a
timeframe for SQF Ports between 100
milliseconds and 99,999 milliseconds is
consistent with the Act and the
protection of investors because the
purpose of this feature is to mitigate the
risk of potential erroneous or
unintended executions associated with
a loss in communication with a Client
Application. BX Options Market Makers
are able to better anticipate the
appropriate time within which they may
require prior to a logoff as compared to
the Exchange. BX Options Market
Makers are offered a timeframe by the
Exchange within which to select the
appropriate time. The Exchange does
not desire to trigger unwarranted logoffs
of BX Options Market Makers and
therefore permits BX Options Market
Makers to provide an alternative time to
the Exchange, within the Exchange’s
prescribed timeframe, which authorized
the Exchange to disconnect the BX
Options Market Maker. The ‘‘nn’’
seconds serve as the BX Options Market
Maker’s instruction to the Exchange to
act upon the loss of connection and
remove quotes from the System. This
range will accommodate BX Options
Market Makers in selecting their
appropriate times within the prescribed
timeframes.
Also, BX Options Market Makers have
quoting obligations 14 and are more
sensitive to price movements as
compared to other market participants.
It is consistent with the Act to provide
a wider timeframe within which to
customize settings for FIX Ports as
compared to SQF Ports. BX Options
Market Makers need to remain vigilant
of market conditions and react more
quickly to market movements as
compared to other BX Participants
entering orders into the System. The
14 Id.
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proposal acknowledges this sensitivity
borne by BX Options Market Makers
and reflects the reaction time of BX
Options Market Makers as compared to
other BX Participants entering orders.
Of note, the proposed customized
timeframe for FIX would be too long for
BX Options Market Makers given their
quoting requirements and sensitivity to
price movements. BX Options Market
Makers would be severely impacted by
a loss of connectivity of more than
several seconds. The BX Options Market
Maker would have exposure during the
time period in which they are unable to
manage their quote and update that
quote. The BX Options Market Maker is
best positioned to determine their
setting.
The Exchange’s proposal is further
consistent with the Act because it will
mitigate the risk of potential erroneous
or unintended executions associated
with a loss in communication with a
Client Application which protects
investors and the public interest. Also,
any interest that is executable against a
BX Options Market Maker’s quotes that
is received 15 by the Exchange prior to
the trigger of the disconnect to the
Client Application, which is processed
by the System, automatically executes at
the price up to the BX Options Market
Maker’s size. In other words, the System
will process the request for cancellation
in the order it was received by the
System.
The System operates consistently
with the firm quote obligations of a
broker-dealer pursuant to Rule 602 of
Regulation NMS. Specifically, with
respect to BX Options Market Makers,
their obligation to provide continuous
two-sided quotes on a daily basis is not
diminished by the removal of such
quotes triggered by the disconnect. BX
Options Market Makers are required to
provide continuous two-sided quotes on
a daily basis.16 BX Options Market
Makers will not be relieved of the
obligation to provide continuous twosided quotes on a daily basis, nor will
it prohibit the Exchange from taking
disciplinary action against a BX Options
Market Makers for failing to meet the
continuous quoting obligation each
trading day as a result of disconnects.
Today, BOX Options Exchange LLC
offers its market makers a similar feature
to the one proposed by the Exchange for
the automatic removal of quotes when
connectivity issues arise.17 BOX
automatically cancels a market maker’s
15 The time of receipt for an order or quote is the
time such message is processed by the Exchange
book.
16 See note 13 above.
17 See BOX Rule 8140.
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quotes for all appointed classes when
BOX loses communication with a
market maker’s trading host for a
specified time period. BX also proposes
to similarly cancel BX Options Market
Makers open quotes associated with the
same BX Options Market Makers ID and
underlyings. BX proposes to cancel all
BX Options Market Maker’s quotes in
options which are assigned to that
particular BX Options Market Makers.
BOX appears to similarly cancel all
open quotes in options which are
assigned to a specific market maker.
BOX’s timeframe is no less than 1
second or no greater than 9 seconds. BX
proposes a default timeframe for SQF
Ports of fifteen (15) seconds with the
ability to modify this setting with a
value between 100 milliseconds and
99,999 milliseconds. The proposal to
permit BX Options Market Makers to
amend the default setting at the
beginning of each session of
connectivity is consistent with the Act
because it avoids unwarranted logoffs of
BX Options Market Makers and
provides BX Options Market Makers the
opportunity to set a time, within the
prescribed timeframe, to authorize the
Exchange to disconnect the BX Options
Market Maker.
Another distinction to note is that
while BOX sets the time for
participants, BX permits BX Participants
to modify the default setting for SQF
Ports to a more appropriate time within
a set of parameters. While BOX does not
offer the cancellations of orders,
Chicago Board Options Exchange,
Incorporated’s (‘‘CBOE’’) does offer its
participants a similar mechanism to
cancel orders. CBOE’s proposal is
discussed further below.
With respect to FIX Ports, the
Exchange will offer this optional
removal functionality to all market
participants. Offering the removal
feature on a voluntary basis to all other
non-BX Options Market Makers is
consistent with the Act because it
permits them an opportunity to utilize
this risk feature, if desired, and avoid
risks associated with inadvertent
executions in the event of a loss of
connectivity with the Exchange. The
removal feature is designed to mitigate
the risk of missed and/or unintended
executions associated with a loss in
communication with a Client
Application. The proposed rule change
is designed to not permit unfair
discrimination among market
participants, as this removal feature will
be offered uniformly to all BX
Participants utilizing FIX.
The Exchange will disconnect BX
Participants from the Exchange and not
cancel its orders if the removal feature
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is disabled. The disconnect feature is
mandatory and will cause the BX
Participant to be disconnected within
the default timeframe or the timeframe
otherwise specified by the BX
Participant. This feature is consistent
with the Act because it enables FIX
users the ability to disconnect from the
Exchange, assess the situation and make
a determination concerning their risk
exposure. The Exchange notes that in
the event that orders need to be
removed, the BX Participant may elect
to utilize the Kill Switch 18 feature. It is
consistent with the Act to require other
market participants to be disconnected
because the BX Participant is otherwise
not connected to the Exchange’s System
and the BX Participant simply needs to
reconnect to commence submitting and
cancelling orders. Requiring a
disconnect when a loss of
communication is detected is a rational
course of action for the Exchange to
alert the BX Participant of the technical
connectivity issue.
The Exchange’s proposal to set a
default timeframe of thirty (30) seconds
and permit a FIX user to modify the
timeframe for FIX ports to between 1
second and 30 seconds for the removal
of orders is consistent with the Act and
the protection of investors because the
purpose of this optional feature is to
mitigate the risk of potential erroneous
or unintended executions associated
with a loss in communication with a
Client Application. BX Participants
selecting the removal feature are able to
better anticipate the appropriate time
that they require prior to a logoff as
compared to the Exchange, within the
Exchange’s prescribed timeframes. The
Exchange does not desire to trigger
unwarranted logoffs of BX Participants
and therefore permits BX Participants to
provide a time to the Exchange, within
the Exchange’s prescribed timeframe, to
authorize the Exchange to disconnect
the BX Participant and remove orders.
The ‘‘nn’’ seconds serve as the BX
Participant’s instruction to the Exchange
to act upon the loss of connection and
remove orders from the System. The BX
Participant is also best positioned to
determine that they only desire the
disconnect feature, which is mandatory,
and do not desire to have their orders
removed.
The Exchange’s proposal to offer other
market participants the removal feature
on a voluntary basis is similar to CBOE’s
Rule.19 CBOE offers market participants,
on a voluntary basis, the ability to
cancel orders entered through FIX when
a technical disconnect occurs, similar to
18 See
19 See
BX Rule at Chapter VI, Section 6(d).
CBOE Rule 6.23C.
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the BX proposal. CBOE’s Rule offers
participants the opportunity to cancel
orders within a timeframe determined
by the Trading Permit Holder. The
default value selected by the CBOE is no
less than 5 seconds. The Exchange’s
default timeframe for the disconnect
and removal of orders for FIX is 30
seconds with the ability to modify that
timeframe to between 1 second and 30
seconds, on a session by session basis,
in contrast to CBOE. Also, in contrast to
CBOE, FIX users may choose to enable
or disable the cancellation feature when
a disconnect occurs. The proposed
timeframe for the FIX feature is
consistent with the Act because the
Exchange seeks to provide BX
Participants with the ability to select the
amount of time that they desire for a
loss of communication prior to taking
action to cancel open orders or simply
disconnect. The BX Participant should
have the ability to select the appropriate
time, within a prescribed timeframe, for
authorizing the Exchange to cancel its
open orders or simply disconnect from
the Exchange. Inadvertent cancellations
may create a greater risk of harm to
investors and the BX Participant is
better positioned to determine the
appropriate time, with the prescribed
timeframe, to remove orders or
disconnect. CBOE’s rule also offers
participants the ability to cancel orders
as proposed by BX, on a voluntary basis.
The proposed rule change will help
maintain a fair and orderly market
which promotes efficiency and protects
investors. This mandatory removal
feature for BX Options Market Makers
and optional removal for all other
market participants will mitigate the
risk of potential erroneous or
unintended executions associated with
a loss in communication with a Client
Application.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange does not believe the
proposed rule change will cause an
undue burden on intra-market
competition because BX Options Market
Makers, unlike other market
participants, have greater risks in the
market place. Quoting across many
series in an option creates large
principal positions that expose BX
Options Market Makers, who are
required to continuously quote in
assigned options, to potentially
significant market risk. Providing a
broader timeframe for the disconnect
PO 00000
Frm 00104
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Sfmt 4703
46743
and removal of orders for FIX as
compared to the removal of quotes for
SQF Ports does not create an undue
burden on competition. BX Options
Market Makers have quoting
obligations 20 and are more sensitive to
price movements as compared to other
market participants. The proposal is
consistent with the Act because it
provides a tighter timeframe for the
disconnect and removal of quotes for
SQF Ports as compared to the removal
of orders for FIX Ports.
BX Options Market Makers need to
remain vigilant of market conditions
and react more quickly to market
movements as compared to other BX
Participants entering multiple orders
into the System. The proposal reflects
this sensitivity borne by BX Options
Market Makers and reflects the reaction
time of BX Options Market Makers as
compared to other BX Participants
entering orders. Offering the removal
feature to other market participants on
an optional basis does not create an
undue burden on intra-market
competition because unlike BX Options
Market Makers, other market
participants do not bear the same risks
of potential erroneous or unintended
executions. FIX users have the
opportunity to disable the cancellation
feature and simply disconnect from the
Exchange. FIX users may also set a
timeframe that is appropriate for their
business. It is appropriate to offer this
optional cancellation functionality to
other market participants for open
orders, because those orders are subject
to risks of missed and/or unintended
executions due to a lack of connectivity
which the BX Participants need to
weigh. Finally, the Exchange does not
believe that such change will impose
any burden on inter-market competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
Other options exchanges offer similar
functionality.21
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
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
20 See
21 See
E:\FR\FM\18JYN1.SGM
note 13 above.
BOX’s Rule 8140 and CBOE’s Rule 6.23C.
18JYN1
46744
Federal Register / Vol. 81, No. 137 / Monday, July 18, 2016 / Notices
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 22 and
subparagraph (f)(6) of Rule 19b–4
thereunder.23
A proposed rule change filed under
Rule 19b–4(f)(6) normally does not
become operative for 30 days from the
date of filing. However, Rule 19b–
4(f)(6)(iii) 24 permits the Commission to
designate a shorter time if such action
is consistent with the protection of
investors and the public interest. The
Exchange has asked the Commission to
waive the 30-day operative delay so that
it may immediately offer the proposed
risk protection feature. The Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest. The Exchange proposes to
adopt a functionality designed to assist
BX Participants with managing certain
risks in the event that a BX Participant
loses communication with its FIX or
SQF Ports due to a loss of connectivity.
The Commission notes that two other
options exchanges currently have
similar risk protection functionalities
for their members.25 Therefore, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.26 At any
time within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
22 15
U.S.C. 78s(b)(3)(a)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
24 17 CFR 240.19b–4(f)(6)(iii).
25 See BOX Rule 8140 and CBOE Rule 6.23C.
26 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
asabaliauskas on DSK3SPTVN1PROD with NOTICES
23 17
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17:52 Jul 15, 2016
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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–2016–040 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–2016–040. 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–
2016–040 and should be submitted on
or before August 8, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–16857 Filed 7–15–16; 8:45 am]
BILLING CODE 8011–01–P
PO 00000
27 17
CFR 200.30–3(a)(12).
Frm 00105
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78308; File No. 265–29]
Equity Market Structure Advisory
Committee
Securities and Exchange
Commission.
ACTION: Notice of Meeting.
AGENCY:
The Securities and Exchange
Commission Equity Market Structure
Advisory Committee is providing notice
that it will hold a public meeting on
Tuesday, August 2, 2016, in MultiPurpose Room LL–006 at the
Commission’s headquarters, 100 F
Street NE., Washington, DC. The
meeting will begin at 9:30 a.m. (EDT)
and will be open to the public. The
public portions of the meeting will be
webcast on the Commission’s Web site
at www.sec.gov. Persons needing special
accommodations to take part because of
a disability should notify the contact
person listed below. The public is
invited to submit written statements to
the Committee. The meeting will focus
on updates and potential
recommendations from the four
subcommittees.
DATES: The public meeting will be held
on Tuesday, August 2, 2016. Written
statements should be received on or
before July 27, 2016.
ADDRESSES: The meeting will be held at
the Commission’s headquarters, 100 F
Street NE., Washington, DC. Written
statements may be submitted by any of
the following methods:
SUMMARY:
Electronic Statements
• Use the Commission’s Internet
submission form (https://www.sec.gov/
rules/other.shtml); or
• Send an email message to rulecomments@sec.gov. Please include File
Number 265–29 on the subject line; or
Paper Statements
• Send paper statements in triplicate
to Brent J. Fields, Federal Advisory
Committee Management Officer,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File No.
265–29. This file number should be
included on the subject line if email is
used. To help us process and review
your statement more efficiently, please
use only one method. The Commission
will post all statements on the
Commission’s Internet Web site at SEC
Web site at (https://www.sec.gov/
comments/265-29/265-29.shtml).
Statements also will be available for
Web site viewing and printing in the
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]]>Agencies
[Federal Register Volume 81, Number 137 (Monday, July 18, 2016)]
[Notices]
[Pages 46739-46744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-16857]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78298; File No. SR-BX-2016-040]
Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Relating to
Detection of Loss of Connection
July 12, 2016.
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 July 8, 2016, NASDAQ BX, Inc. (``BX'' or
[[Page 46740]]
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\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 amend Chapter VI, Section 6, entitled
``Acceptance of Quotes and Orders'' to adopt functionality which is
designed to assist BX Participants in the event that they lose
communication with their assigned Financial Information eXchange
(``FIX'') \3\ or Specialized Quote Feed (``SQF'') \4\ Ports due to a
loss of connectivity.
---------------------------------------------------------------------------
\3\ FIX permits the entry of orders.
\4\ SQF permits the transmission of quotes to the Exchange by a
BX Options Market Makers using its Client Application. SQF Auction
Responses would not be cancelled pursuant to this Chapter VI,
Section 6(e) because other rules govern auction specific responses,
see Chapter VI, Section 9, entitled ``Price Improvement Auction
(``PRISM'').
---------------------------------------------------------------------------
The text of the proposed rule change is available on the Exchange's
Web site at https://nasdaqbx.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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Chapter VI, Section 6, entitled
``Acceptance of Quotes and Orders'' to adopt a new section ``e''
entitled ``Detection of Loss of Connection,'' a new automated process
which BX proposes to adopt for its SQF \5\ and FIX Ports in the event
that they lose communication with a Client Application due to a loss of
connectivity. This feature is designed to protect BX Options Market
Makers \6\ and other market participants from inadvertent exposure to
excessive risk.
---------------------------------------------------------------------------
\5\ Today, SQF and FIX have the capability to disconnect and
cancel quotes and orders, respectively, for technical disconnects
although there is no automated process triggered by pre-set
conditions. The rule change would adopt a formalized process to
automatically disconnect and cancel quotes for SQF and disconnect
and cancel orders, if elected, for FIX when there is a loss of
communication with the BX Participant's Client Application.
\6\ The term ``BX Options Market Makers'' or ``Options Market
Makers'' (herein ``BX Options Market Makers'') means an Options
Participant registered with the Exchange for the purpose of making
markets in options contracts traded on the Exchange and that is
vested with the rights and responsibilities specified in Chapter VII
of these Rules.'' See BX Rules at Chapter I, Section 1(a)(9).
---------------------------------------------------------------------------
By way of background, BX Participants currently enter quotes and
orders utilizing either an SQF or FIX Port. SQF is utilized by BX
Options Market Makers and FIX is utilized by all market participants.
These ports are System \7\ components through which a BX Participant
communicates its quotes and/or orders to the BX match engine through
the BX Participant's Client Application.
---------------------------------------------------------------------------
\7\ The term ``System'' shall mean the automated system for
order execution and trade reporting owned and operated by BX as the
BX Options market. See Chapter VI, Section 1(a).
---------------------------------------------------------------------------
Under the proposed rule change, an SQF Port would be defined as the
Exchange's System component through which BX Participants communicate
their quotes from the BX Participant's Client Application at proposed
Chapter VI, Section 6(e)(i)(B). A FIX Port would be defined as the
Exchange's System component through which BX Participants communicate
their orders from the BX Participant's Client Application at proposed
Chapter VI, Section 6(e)(i)(C). BX Options Market Makers may submit
quotes to the Exchange from one or more SQF Ports. Similarly, market
participants may submit orders to the Exchange from one or more FIX
Ports. The proposed cancellation feature will be mandatory for each BX
Options Market Maker utilizing SQF for the removal of quotes and
optional for any market participant utilizing FIX for the removal of
orders.
When the SQF Port detects the loss of communication with a BX
Participant's Client Application because the Exchange's server does not
receive a Heartbeat message \8\ for a certain period of time (a period
of ``nn'' seconds), the Exchange will automatically logoff the BX
Participant's affected Client Application and automatically cancel all
of the BX Participant's open quotes. Quotes will be cancelled across
all Client Applications that are associated with the same BX Options
Market Makers ID and underlying issues.
---------------------------------------------------------------------------
\8\ It is important to note that the Exchange separately sends a
connectivity message to the BX Participant as evidence of
connectivity.
---------------------------------------------------------------------------
The Exchange proposes to define ``Client Application'' as the
System component of the BX Participant through which the BX Participant
communicates its quotes and orders to the Exchange at proposed Chapter
VI, Section 6(e)(i)(D). The Exchange proposes to define a ``Heartbeat''
message as a communication which acts as a virtual pulse between the
SQF or FIX Port and the Client Application at proposed Chapter VI,
Section 6(e)(i)(A). The Heartbeat message sent by the BX Participant
and subsequently received by the Exchange allows the SQF or FIX Port to
continually monitor its connection with the BX Participant.
SQF Ports
The Exchange's System has a default time period, which will trigger
a disconnect from the Exchange and remove quotes, set to fifteen (15)
seconds for SQF Ports. A BX Participant may change the default period
of ``nn'' seconds of no technical connectivity to trigger a disconnect
from the Exchange and remove quotes to a number between one hundred
(100) milliseconds and 99,999 milliseconds for SQF Ports prior to each
session of connectivity to the Exchange. This feature is enabled for
each BX Options Market Maker and may not be disabled.
There are two ways to change the number of ``nn'' seconds: (1)
Systemically or (2) by contacting the Exchange's operations staff. If
the BX Participant systemically changes the default number of ``nn''
seconds, that new setting shall be in effect throughout the current
session of connectivity \9\ and will then default back to fifteen
seconds.\10\ The BX Participant may change the default setting
systemically prior to each session of connectivity. The BX Participant
may also communicate the time to the Exchange by calling the Exchange's
operations staff. If the time period is communicated
[[Page 46741]]
to the Exchange by calling Exchange operations, the number of ``nn''
seconds selected by the BX Participant shall persist for each
subsequent session of connectivity until the BX Participant either
contacts Exchange operations and changes the setting or the BX
Participant systemically selects another time period prior to the next
session of connectivity.
---------------------------------------------------------------------------
\9\ Each time the BX Participant connects to the Exchange's
System is a new period of connectivity. For example, if the BX
Participant were to connect and then disconnect within a trading day
several times, each time the BX Participant disconnected the next
session would be a new session of connectivity.
\10\ The Exchange's System would capture the new setting
information that was changed by the BX Participant and utilize the
amended setting for that particular session. The setting would not
persist beyond the current session of connectivity and the setting
would default back to 15 seconds for the next session if the BX
Participant did not change the setting again.
---------------------------------------------------------------------------
FIX Ports
The Exchange's System has a default time period, which will trigger
a disconnect from the Exchange and remove orders, set to thirty (30)
seconds for FIX Ports. The BX Participant may disable the removal of
orders feature but not the disconnect feature. If the BX Participant
elects to have its orders removed, in addition to the disconnect, the
BX Participant may determine a time period of no technical connectivity
to trigger the disconnect and removal of orders between one (1) second
and thirty (30) seconds for FIX Ports prior to each session of
connectivity to the Exchange.
There are two ways to change the number of ``nn'' seconds: (1)
Systemically or (2) by contacting the Exchange's operations staff. If
the BX Participant systemically changes the default number of ``nn''
seconds, that new setting shall be in effect throughout that session of
connectivity and will then default back to thirty seconds at the end of
that session. The BX Participant may change the default setting
systemically prior to each session of connectivity. The BX Participant
may also communicate the time to the Exchange by calling the Exchange's
operations staff. If the time period is communicated to the Exchange by
calling Exchange operations, the number of ``nn'' seconds selected by
the BX Participant shall persist for each subsequent session of
connectivity until the BX Participant either contacts Exchange
operations and changes the setting or the BX Participant systemically
selects another time period prior to the next session of connectivity.
Similar to SQF Ports, when a FIX Port detects the loss of
communication with a Participant's Client Application for a certain
time period (a period of ``nn'' seconds), the Exchange will
automatically logoff the BX Participant's affected Client Application
and if elected, automatically cancel all open orders. The BX
Participant may have an order which has routed away prior to the
cancellation, in the event that the order returns to the Order Book,
because it was either not filled or partially filled, that order will
be subsequently cancelled.
The disconnect feature is mandatory for FIX users however the user
has the ability to elect to also enable a removal feature, which will
cancel all open orders submitted through that FIX Port. If the removal
of orders feature is not enabled, the System will simply disconnect the
FIX user and not cancel any orders. The FIX user would have to commence
a new session to add, modify or cancel its orders once disconnected.
The Exchange will issue an Options Trader Alert advising BX
Participants on the manner in which they should communicate the number
of ``nn'' seconds to the Exchange for SQF and FIX Ports.
The trigger for the SQF and FIX Ports is event and Client
Application specific. The automatic cancellation of the BX Options
Market Maker's quotes for SQF Ports and open orders, if elected by the
BX Participant for FIX Ports entered into the respective SQF or FIX
Ports via a particular Client Application will neither impact nor
determine the treatment of the quotes of other BX Options Market Makers
entered into SQF Ports or orders of the same or other BX Participants
entered into the FIX Ports via a separate and distinct Client
Application. In other words, with respect to quotes, each BX Options
Market Maker only maintains one quote in a given option in the order
book. A new quote would replace the existing quote. Orders on the other
hand do not replace each other in the order book as multiple orders may
exist in a given option at once. Therefore the difference in the impact
as between BX Options Market Makers submitting quotes and BX
Participants submitting orders is that quotes may continue to be
submitted and/or refreshed by unaffected BX Options Market Makers
because these market participants are cancelled based on ID when an SQF
Port disconnects, whereas all of the open orders submitted by a given
firm will be impacted when a FIX port disconnects, if the firm elected
to have orders cancelled.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\11\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\12\ in particular, in that it is designed to
promote just and equitable principles of trade, 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, by imposing this mandatory removal functionality on BX
Options Market Makers to prevent disruption in the marketplace and also
offering this removal feature to other market participants.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
BX Options Market Makers will be required to utilize this removal
functionality with respect to SQF Ports. This feature will remove
impediments to and perfect the mechanism of a free and open market and
a national market system and protect investors and the public interest
by requiring BX Options Market Makers quotes to be removed in the event
of a loss of connectivity with the Exchange's System. BX Options Market
Makers provide liquidity to the market place and have obligations
unlike other market participants.\13\ This risk feature is important
because it will enable BX Options Market Makers to avoid risks
associated with inadvertent executions in the event of a loss of
connectivity with the Exchange. The proposed rule change is designed to
not permit unfair discrimination among market participants, as it would
apply uniformly to all BX Options Market Makers utilizing SQF.
---------------------------------------------------------------------------
\13\ Pursuant to BX Rules at Chapter VII, Section 5, entitled
``Obligations of BX Options Market Makers,'' in registering as a
market maker, an Options Participant commits himself to various
obligations. Transactions of a BX Options Market Makers must
constitute a course of dealings reasonably calculated to contribute
to the maintenance of a fair and orderly market, and BX Options
Market Makers should not make bids or offers or enter into
transactions that are inconsistent with such course of dealings.
Further, all BX Options Market Makers are designated as specialists
on BX for all purposes under the Act or rules thereunder.
---------------------------------------------------------------------------
The disconnect feature of FIX is mandatory, however market
participants will have the option to either enable or disable the
cancellation feature, which would result in the cancellation of all
orders submitted over a FIX port when such port disconnects. It is
appropriate to offer this removal feature as optional to all market
participants utilizing FIX, because unlike BX Options Market Makers who
are required to provide quotes in all products in which they are
registered, market participants utilizing FIX do not bear the same
magnitude of risk of potential erroneous or unintended executions. In
addition, market participants utilizing FIX may desire their orders to
remain on the order book despite a technical disconnect, so as not to
miss any opportunities for execution of such orders while the FIX
session is disconnected.
Utilizing a time period for SQF Ports of fifteen (15) seconds and
permitting the BX Options Market Maker to modify
[[Page 46742]]
the setting to between 100 milliseconds and 99,999 milliseconds is
consistent with the Act because the Exchange does not desire to trigger
unwarranted logoffs of BX Options Market Makers and therefore allows BX
Options Market Makers the ability to set their time in order to enable
the Exchange the authority to disconnect the BX Options Market Maker
with this feature. Each BX Options Market Maker has different levels of
sensitivity with respect to this disconnect setting and each BX Options
Market Maker has their own system safeguards as well. A default setting
of fifteen (15) seconds is appropriate to capture the needs of all BX
Options Market Makers and high enough not to trigger unwarranted
removal of quotes.
Further, BX Options Market Makers are able to customize their
setting. The Exchange's proposal to permit a timeframe for SQF Ports
between 100 milliseconds and 99,999 milliseconds is consistent with the
Act and the protection of investors because the purpose of this feature
is to mitigate the risk of potential erroneous or unintended executions
associated with a loss in communication with a Client Application. BX
Options Market Makers are able to better anticipate the appropriate
time within which they may require prior to a logoff as compared to the
Exchange. BX Options Market Makers are offered a timeframe by the
Exchange within which to select the appropriate time. The Exchange does
not desire to trigger unwarranted logoffs of BX Options Market Makers
and therefore permits BX Options Market Makers to provide an
alternative time to the Exchange, within the Exchange's prescribed
timeframe, which authorized the Exchange to disconnect the BX Options
Market Maker. The ``nn'' seconds serve as the BX Options Market Maker's
instruction to the Exchange to act upon the loss of connection and
remove quotes from the System. This range will accommodate BX Options
Market Makers in selecting their appropriate times within the
prescribed timeframes.
Also, BX Options Market Makers have quoting obligations \14\ and
are more sensitive to price movements as compared to other market
participants. It is consistent with the Act to provide a wider
timeframe within which to customize settings for FIX Ports as compared
to SQF Ports. BX Options Market Makers need to remain vigilant of
market conditions and react more quickly to market movements as
compared to other BX Participants entering orders into the System. The
proposal acknowledges this sensitivity borne by BX Options Market
Makers and reflects the reaction time of BX Options Market Makers as
compared to other BX Participants entering orders. Of note, the
proposed customized timeframe for FIX would be too long for BX Options
Market Makers given their quoting requirements and sensitivity to price
movements. BX Options Market Makers would be severely impacted by a
loss of connectivity of more than several seconds. The BX Options
Market Maker would have exposure during the time period in which they
are unable to manage their quote and update that quote. The BX Options
Market Maker is best positioned to determine their setting.
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\14\ Id.
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The Exchange's proposal is further consistent with the Act because
it will mitigate the risk of potential erroneous or unintended
executions associated with a loss in communication with a Client
Application which protects investors and the public interest. Also, any
interest that is executable against a BX Options Market Maker's quotes
that is received \15\ by the Exchange prior to the trigger of the
disconnect to the Client Application, which is processed by the System,
automatically executes at the price up to the BX Options Market Maker's
size. In other words, the System will process the request for
cancellation in the order it was received by the System.
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\15\ The time of receipt for an order or quote is the time such
message is processed by the Exchange book.
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The System operates consistently with the firm quote obligations of
a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically,
with respect to BX Options Market Makers, their obligation to provide
continuous two-sided quotes on a daily basis is not diminished by the
removal of such quotes triggered by the disconnect. BX Options Market
Makers are required to provide continuous two-sided quotes on a daily
basis.\16\ BX Options Market Makers will not be relieved 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
BX Options Market Makers for failing to meet the continuous quoting
obligation each trading day as a result of disconnects.
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\16\ See note 13 above.
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Today, BOX Options Exchange LLC offers its market makers a similar
feature to the one proposed by the Exchange for the automatic removal
of quotes when connectivity issues arise.\17\ BOX automatically cancels
a market maker's quotes for all appointed classes when BOX loses
communication with a market maker's trading host for a specified time
period. BX also proposes to similarly cancel BX Options Market Makers
open quotes associated with the same BX Options Market Makers ID and
underlyings. BX proposes to cancel all BX Options Market Maker's quotes
in options which are assigned to that particular BX Options Market
Makers. BOX appears to similarly cancel all open quotes in options
which are assigned to a specific market maker. BOX's timeframe is no
less than 1 second or no greater than 9 seconds. BX proposes a default
timeframe for SQF Ports of fifteen (15) seconds with the ability to
modify this setting with a value between 100 milliseconds and 99,999
milliseconds. The proposal to permit BX Options Market Makers to amend
the default setting at the beginning of each session of connectivity is
consistent with the Act because it avoids unwarranted logoffs of BX
Options Market Makers and provides BX Options Market Makers the
opportunity to set a time, within the prescribed timeframe, to
authorize the Exchange to disconnect the BX Options Market Maker.
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\17\ See BOX Rule 8140.
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Another distinction to note is that while BOX sets the time for
participants, BX permits BX Participants to modify the default setting
for SQF Ports to a more appropriate time within a set of parameters.
While BOX does not offer the cancellations of orders, Chicago Board
Options Exchange, Incorporated's (``CBOE'') does offer its participants
a similar mechanism to cancel orders. CBOE's proposal is discussed
further below.
With respect to FIX Ports, the Exchange will offer this optional
removal functionality to all market participants. Offering the removal
feature on a voluntary basis to all other non-BX Options Market Makers
is consistent with the Act because it permits them an opportunity to
utilize this risk feature, if desired, and avoid risks associated with
inadvertent executions in the event of a loss of connectivity with the
Exchange. The removal feature is designed to mitigate the risk of
missed and/or unintended executions associated with a loss in
communication with a Client Application. The proposed rule change is
designed to not permit unfair discrimination among market participants,
as this removal feature will be offered uniformly to all BX
Participants utilizing FIX.
The Exchange will disconnect BX Participants from the Exchange and
not cancel its orders if the removal feature
[[Page 46743]]
is disabled. The disconnect feature is mandatory and will cause the BX
Participant to be disconnected within the default timeframe or the
timeframe otherwise specified by the BX Participant. This feature is
consistent with the Act because it enables FIX users the ability to
disconnect from the Exchange, assess the situation and make a
determination concerning their risk exposure. The Exchange notes that
in the event that orders need to be removed, the BX Participant may
elect to utilize the Kill Switch \18\ feature. It is consistent with
the Act to require other market participants to be disconnected because
the BX Participant is otherwise not connected to the Exchange's System
and the BX Participant simply needs to reconnect to commence submitting
and cancelling orders. Requiring a disconnect when a loss of
communication is detected is a rational course of action for the
Exchange to alert the BX Participant of the technical connectivity
issue.
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\18\ See BX Rule at Chapter VI, Section 6(d).
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The Exchange's proposal to set a default timeframe of thirty (30)
seconds and permit a FIX user to modify the timeframe for FIX ports to
between 1 second and 30 seconds for the removal of orders is consistent
with the Act and the protection of investors because the purpose of
this optional feature is to mitigate the risk of potential erroneous or
unintended executions associated with a loss in communication with a
Client Application. BX Participants selecting the removal feature are
able to better anticipate the appropriate time that they require prior
to a logoff as compared to the Exchange, within the Exchange's
prescribed timeframes. The Exchange does not desire to trigger
unwarranted logoffs of BX Participants and therefore permits BX
Participants to provide a time to the Exchange, within the Exchange's
prescribed timeframe, to authorize the Exchange to disconnect the BX
Participant and remove orders. The ``nn'' seconds serve as the BX
Participant's instruction to the Exchange to act upon the loss of
connection and remove orders from the System. The BX Participant is
also best positioned to determine that they only desire the disconnect
feature, which is mandatory, and do not desire to have their orders
removed.
The Exchange's proposal to offer other market participants the
removal feature on a voluntary basis is similar to CBOE's Rule.\19\
CBOE offers market participants, on a voluntary basis, the ability to
cancel orders entered through FIX when a technical disconnect occurs,
similar to the BX proposal. CBOE's Rule offers participants the
opportunity to cancel orders within a timeframe determined by the
Trading Permit Holder. The default value selected by the CBOE is no
less than 5 seconds. The Exchange's default timeframe for the
disconnect and removal of orders for FIX is 30 seconds with the ability
to modify that timeframe to between 1 second and 30 seconds, on a
session by session basis, in contrast to CBOE. Also, in contrast to
CBOE, FIX users may choose to enable or disable the cancellation
feature when a disconnect occurs. The proposed timeframe for the FIX
feature is consistent with the Act because the Exchange seeks to
provide BX Participants with the ability to select the amount of time
that they desire for a loss of communication prior to taking action to
cancel open orders or simply disconnect. The BX Participant should have
the ability to select the appropriate time, within a prescribed
timeframe, for authorizing the Exchange to cancel its open orders or
simply disconnect from the Exchange. Inadvertent cancellations may
create a greater risk of harm to investors and the BX Participant is
better positioned to determine the appropriate time, with the
prescribed timeframe, to remove orders or disconnect. CBOE's rule also
offers participants the ability to cancel orders as proposed by BX, on
a voluntary basis.
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\19\ See CBOE Rule 6.23C.
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The proposed rule change will help maintain a fair and orderly
market which promotes efficiency and protects investors. This mandatory
removal feature for BX Options Market Makers and optional removal for
all other market participants will mitigate the risk of potential
erroneous or unintended executions associated with a loss in
communication with a Client Application.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Specifically, the Exchange does
not believe the proposed rule change will cause an undue burden on
intra-market competition because BX Options Market Makers, unlike other
market participants, have greater risks in the market place. Quoting
across many series in an option creates large principal positions that
expose BX Options Market Makers, who are required to continuously quote
in assigned options, to potentially significant market risk. Providing
a broader timeframe for the disconnect and removal of orders for FIX as
compared to the removal of quotes for SQF Ports does not create an
undue burden on competition. BX Options Market Makers have quoting
obligations \20\ and are more sensitive to price movements as compared
to other market participants. The proposal is consistent with the Act
because it provides a tighter timeframe for the disconnect and removal
of quotes for SQF Ports as compared to the removal of orders for FIX
Ports.
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\20\ See note 13 above.
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BX Options Market Makers need to remain vigilant of market
conditions and react more quickly to market movements as compared to
other BX Participants entering multiple orders into the System. The
proposal reflects this sensitivity borne by BX Options Market Makers
and reflects the reaction time of BX Options Market Makers as compared
to other BX Participants entering orders. Offering the removal feature
to other market participants on an optional basis does not create an
undue burden on intra-market competition because unlike BX Options
Market Makers, other market participants do not bear the same risks of
potential erroneous or unintended executions. FIX users have the
opportunity to disable the cancellation feature and simply disconnect
from the Exchange. FIX users may also set a timeframe that is
appropriate for their business. It is appropriate to offer this
optional cancellation functionality to other market participants for
open orders, because those orders are subject to risks of missed and/or
unintended executions due to a lack of connectivity which the BX
Participants need to weigh. Finally, the Exchange does not believe that
such change will impose any burden on inter-market competition that is
not necessary or appropriate in furtherance of the purposes of the Act.
Other options exchanges offer similar functionality.\21\
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\21\ See BOX's Rule 8140 and CBOE's Rule 6.23C.
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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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become
[[Page 46744]]
operative for 30 days from the date on which it was filed, or such
shorter time as the Commission may designate, it has become effective
pursuant to Section 19(b)(3)(A)(iii) of the Act \22\ and subparagraph
(f)(6) of Rule 19b-4 thereunder.\23\
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\22\ 15 U.S.C. 78s(b)(3)(a)(iii).
\23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days from the date of filing. However, Rule
19b-4(f)(6)(iii) \24\ permits the Commission to designate a shorter
time if such action is consistent with the protection of investors and
the public interest. The Exchange has asked the Commission to waive the
30-day operative delay so that it may immediately offer the proposed
risk protection feature. The Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and
the public interest. The Exchange proposes to adopt a functionality
designed to assist BX Participants with managing certain risks in the
event that a BX Participant loses communication with its FIX or SQF
Ports due to a loss of connectivity. The Commission notes that two
other options exchanges currently have similar risk protection
functionalities for their members.\25\ Therefore, the Commission hereby
waives the 30-day operative delay and designates the proposal operative
upon filing.\26\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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\24\ 17 CFR 240.19b-4(f)(6)(iii).
\25\ See BOX Rule 8140 and CBOE Rule 6.23C.
\26\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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-2016-040 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-2016-040. 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-2016-040 and should be
submitted on or before August 8, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-16857 Filed 7-15-16; 8:45 am]
BILLING CODE 8011-01-P
