Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Approving Proposed Rule Change To Amend Chapter IV of the BOX Rules To Allow Executing Participants To Provide BOX a List of the Order Flow Providers for Which the Executing Participants Will Provide Directed Order Services, 16650-16652 [2011-6909]

Download as PDF 16650 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Notices 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 The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.41 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 change is consistent with the Act. Comments may be submitted by any of the following methods: emcdonald on DSK2BSOYB1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–Phlx-2011–34 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–Phlx–2011–34. This file number should be included on the subject line if e-mail 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 (http://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 on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal offices 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–Phlx-2011–34, and should be submitted on or before April 14, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.42 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–6908 Filed 3–23–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64097; File No. SR–BX– 2010–079] Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Approving Proposed Rule Change To Amend Chapter IV of the BOX Rules To Allow Executing Participants To Provide BOX a List of the Order Flow Providers for Which the Executing Participants Will Provide Directed Order Services March 18, 2011. I. Introduction On December 3, 2010, NASDAQ OMX BX, Inc. (the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposal to amend the rules governing its Directed Order process to: (i) Allow an Executing Participant (‘‘EP’’) to provide BOX a list of the Order Flow Providers (‘‘OFPs’’) for which the EP will provide Directed Order services and (ii) provide that BOX would reveal to the EP the participant ID of the OFP sending the Directed 42 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 41 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Mar<15>2010 16:17 Mar 23, 2011 Jkt 223001 PO 00000 Frm 00054 Fmt 4703 Sfmt 4703 Order.3 The proposed rule change was published for comment in the Federal Register on December 20, 2010.4 The Commission received no comments on the proposal. This order approves the proposal. II. Description of the Proposal Under the BOX’s Directed Order process, Market Makers on BOX are able to handle orders on an agency basis directed to them by OFPs. An OFP sends a Directed Order to BOX with a designation of the Market Maker to whom the order is to be directed. BOX then routes the Directed Order to the appropriate Market Maker. Under Chapter VI, Section 5(c)(ii) of the BOX Rules, a Market Maker only has two choices when receiving a Directed Order: (1) Submit the order to the Price Improvement Period auction process (‘‘PIP’’); 5 or (2) send the order back to BOX for placement onto the BOX Book. A Market Maker who desires to accept Directed Orders must systemically indicate that it is an EP whenever the Market Maker wishes to receive Directed Orders from the BOX Trading Host. If a Market Maker does not systemically indicate that it is an EP, then the BOX Trading Host will not forward any Directed Orders to that Market Maker. In such a case, the BOX Trading Host will send the order directly to the BOX Book. If a Market Maker has systemically indicated that it wishes to receive Directed Orders, it shall not, under any circumstances, reject the receipt of a Directed Order from the BOX Trading Host nor reject the Directed Order back to the OFP who sent it.6 The Exchange proposes to amend Chapter VI, Section 5(c)(i) of the BOX Rules to allow EPs to provide BOX a list of OFPs for which the EP will provide Directed Order services. Under the proposal, prior to accepting any Directed Order through the Trading Host, an EP must inform BOX of the OFPs from whom it has agreed to accept Directed Orders (‘‘Listed OFPs’’ or ‘‘LOFPs’’). The Trading Host will then only send to the EP Directed Orders from LOFPs. Further, under the proposal, the BOX Trading Host would 3 Shortly after the filing of the proposed rule change, the Exchange withdrew an earlier proposal relating to the non-anonymity of Directed Orders (SR–BSE–2005–52). See Securities Exchange Act Release No. 53357 (February 23, 2006), 71 FR 10730 (March 2, 2006) (SR–BSE–2005–52). 4 See Securities Exchange Act Release No. 63539 (December 14, 2010), 75 FR 79429 (‘‘Notice’’). 5 See Chapter V, Section 18 of the BOX Rules. 6 See Chapter VI, Section 5(c)(i) of the BOX Rules. E:\FR\FM\24MRN1.SGM 24MRN1 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Notices reveal to the EP the participant ID of the OFP sending the Directed Order.7 emcdonald on DSK2BSOYB1PROD with NOTICES III. Discussion After careful review of the proposal, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange 8 and, in particular, the requirements of Section 6 of the Act.9 Specifically, as discussed below, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,10 which requires, among other things, that the rules of a national securities exchange be 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 regulating, clearing, settling, and processing information with respect to, and 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; and are not designed to permit unfair discrimination among customers, issuers, brokers, or dealers. Section 6(b)(5) of the Act prohibits an exchange from establishing rules that treat market participants in an unfairly discriminatory manner. Section 6(b)(5) of the Act does not prohibit exchange members or other broker-dealers from discriminating, so long as their activities are otherwise consistent with the Federal securities laws. Nor does Section 6(b)(5) of the Act require exchanges to preclude discrimination by broker-dealers. Broker-dealers commonly differentiate between customers based on the nature and profitability of their business. Currently under BOX’s rules, an Options Participant that is not a Market Maker may provide an opportunity for price improvement to a customer order 7 Pursuant to an existing pilot program, Directed Orders are not anonymous. See e.g., Securities Exchange Act Release Nos. 63540 (December 14, 2010), 75 FR 79432 (December 20, 2010) (continuing the practice of non-anonymous Directed Orders, originally established in SR–BSE– 2006–14, as a pilot program until December 31, 2010 (‘‘Directed Order Pilot Program’’)) and 63591 (December 21, 2010), 75 FR 81687 (December 28, 2010) (extending the date of the Directed Order Pilot Program until June 30, 2011). The proposed rule change would make permanent this feature of the Directed Order process. 8 In approving the proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 9 15 U.S.C. 78f. 10 15 U.S.C. 78f(b)(5). VerDate Mar<15>2010 16:17 Mar 23, 2011 Jkt 223001 by submitting it to the PIP. An Options Participant may decide who to accept as its customers and further choose to provide price improvement to some customer orders, but not others, by exercising discretion as to whether it chooses to send a particular order to the PIP auction.11 An Options Participant would know the identity of its customer in deciding whether to provide this opportunity for price improvement. Market Makers may also provide an opportunity for price improvement to Directed Orders by submitting them into the PIP. The proposed rule change, by permitting a Market Maker to designate those OFPs from which it will accept Directed Orders and to be provided with the identity of the OFP sending a Directed Order, would allow a Market Maker to decide in advance that it will provide an opportunity for price improvement only to orders from certain OFPs.12 Thus, the proposal will provide information to Market Makers that are EPs that is the same information available to other BOX members when they decide whether to provide price improvement to a particular order. While customer anonymity may be valuable in ensuring that broker-dealers comply with legal obligations in a variety of circumstances, such as market makers’ firm quote obligations, customer anonymity is not required of exchanges, particularly when disclosure of customer identity could provide benefits to certain customers beyond those required by the Federal securities laws or exchange rules. In particular, market makers may be willing to offer better execution prices to certain customers’ orders (e.g., retail customers’ orders). The Commission does not believe that it would be inconsistent with the Federal securities laws for the Exchange to provide, under the circumstances set forth in this proposal, the means for its Market Makers to differentiate between customers in providing price improvement or other non-required advantages to certain customers. The Exchange’s proposal treats all Market Makers the same and establishes no requirements for which 11 See also Rule 723 of the International Securities Exchange, LLC (Price Improvement Mechanism) and Rule 6.74A of the Chicago Board Options Exchange, Incorporated (Automated Improvement Mechanism). 12 Specialists and other market makers may establish payment for order flow relationships with firms on a discretionary basis. A specialist or market maker may pay varying amounts for order flow received from different firms or different customers within firms. Unlike payment for order flow, which principally benefits intermediaries and, indirectly, their customers through possibly lower fees and better services, customers’ orders executed through the PIP auction directly benefit customers with the opportunity for an improved price. PO 00000 Frm 00055 Fmt 4703 Sfmt 4703 16651 OFPs a Market Maker designates as LOFPs or for which orders a Market Maker chooses to provide an opportunity for price improvement. The Commission does not believe that the absence of Exchange rules specifying which orders a Market Maker may execute at prices better that its public quote is unfairly discriminatory. The Commission notes that allowing a Market Maker to know the identity of firms sending Directed Orders may provide further incentive to that Market Maker to provide price improvement. A Market Maker that receives a Directed Order would be required to decide whether to send the order to the PIP and guarantee a price equal to or better than the NBBO to such order, or to release the order to the BOX book. The Market Maker’s decision about whether to choose to guarantee a particular order at a price equal to or better than the NBBO may be affected by this proposal because it provides Market Makers with information to differentiate between orders from informed traders (i.e., their competitors) and orders from uninformed traders. It is well known in academic literature and industry practice that prices tend to move against market makers after trades with informed traders, often resulting in losses for market makers.13 Thus, there is a strong economic rationale for market makers not providing informed traders price improvement. Uninformed investors end up bearing the cost of these market maker losses through wider spreads that market makers need to quote to uninformed investors due to informed order flow.14 Accordingly, while the Exchange’s proposal would permit a BOX Market Maker to discriminate among customers in providing prices better than its quote, the Commission does not believe that this discrimination is inconsistent with Section 6(b)(5) of the Act. The Commission continues to believe that under the proposal, a Market Maker would maintain the incentive to quote aggressively to gain priority with respect to orders entered on the BOX book. Further, the Commission believes that there is rigorous competition for order flow across options exchanges, such that any widening of quotes on one market is an opportunity for another option 13 See Stoll, H. R., ‘‘The supply of dealer services in securities of markets,’’ Journal of Finance 33 (1978), at 1133–51; Glosten, L. and P. Milgrom, ‘‘Bid ask and transaction prices in a specialist market with heterogeneously informed agents,’’ Journal of Financial Economics 14 (1985), at 71–100; and Copeland, T., and D. Galai, ‘‘Information effects on the bid-ask spread,’’ Journal of Finance 38 (1983), at 1457–69. 14 Id. E:\FR\FM\24MRN1.SGM 24MRN1 16652 Federal Register / Vol. 76, No. 57 / Thursday, March 24, 2011 / Notices market to capture order flow.15 In fact, the Options Order Protection and Locked/Crossed Market Plan provides protection from one exchange ignoring better quoted prices on another market and will continue to promote quote competition across options exchanges.16 For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular with Section 6(b)(5) of the Act.17 IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,18 that the proposed rule change (File No. SR–BX– 2010–079) is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–6909 Filed 3–23–11; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice 7328] Defense Trade Advisory Group; Notice of Open Meeting Summary: The Defense Trade Advisory Group (DTAG) will meet in open session from 10 a.m. to 1:30 p.m. on Tuesday, May 3, 2011, in the Dean Acheson Auditorium at the U.S. Department of State, Harry S. Truman Building, Washington, DC. Entry and registration will begin at 9 a.m. Please use the building entrance located at 23rd Street, NW., Washington, DC, between C & D Streets. The membership of this advisory committee consists of private sector defense trade representatives, appointed by the Assistant Secretary of State for PoliticalMilitary Affairs, who advise the Department on policies, regulations, and technical issues affecting defense trade. The purpose of the meeting will be to discuss current defense trade issues and topics for further study. Agenda topics will be posted on the Directorate of emcdonald on DSK2BSOYB1PROD with NOTICES 15 See Robert Battalio, ‘‘Third Market BrokerDealers: Cost Competitors or Cream Skimmers?’’ Journal of Finance, 1997; and Robert Battalio, Robert Jason Greene, and Robert Jennings, ‘‘How do Competing Specialists and Preferencing Dealers Affect Market Quality?’’ Review of Financial Studies, 1997. 16 See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009). 17 15 U.S.C. 78f(b)(5). 18 15 U.S.C. 78s(b)(2). 19 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 16:17 Mar 23, 2011 Jkt 223001 Defense Trade Controls’ Web site, at http://www.pmddtc.state.gov approximately 2 weeks prior to the meeting. Members of the public may attend this open session and will be permitted to participate in the discussion in accordance with the Chair’s instructions. Members of the public may, if they wish, submit a brief statement to the committee in writing. As access to the Department of State facilities is controlled, persons wishing to attend the meeting must notify the DTAG Alternate Designated Federal Officer (DFO) by close of business Friday, April 22, 2011. If notified after this date, the Department’s Bureau of Diplomatic Security may not be able to complete the necessary processing required to attend the plenary session. A person requesting reasonable accommodation should notify the Alternate DFO by the same date. Each non-member observer or DTAG member that wishes to attend this plenary session should provide: his/her name; company or organizational affiliation; phone number; date of birth; and identifying data such as driver’s license number, U.S. Government ID, or U.S. Military ID, to the DTAG Alternate DFO, Patricia Slygh, via e-mail at SlyghPC@state.gov. A RSVP list will be provided to Diplomatic Security. One of the following forms of valid photo identification will be required for admission to the Department of State building: U.S. driver’s license, passport, U.S. Government ID or other valid photo ID. Personal data is requested pursuant to Public Law 99–399 (Omnibus Diplomatic Security and Antiterrorism Act of 1986), as amended; Pub. L. 107– 56 (USA PATRIOT Act); and Executive Order 13356. The purpose of the collection is to validate the identity of individuals who enter Department facilities. The data will be entered into the Visitor Access Control System (VACS–D) database. Please see the Privacy Impact Assessment for VACS–D at http://www.state.gov/documents/ organization/100305.pdf for additional information. For additional information, contact Patricia Slygh, PM/DDTC, SA–1, 12th Floor, Directorate of Defense Trade Controls, Bureau of Political-Military Affairs, U.S. Department of State, Washington, DC 20522–0112; telephone (202) 663–2830; FAX (202) 261–8199; or e-mail SlyghPC@state.gov. Dated: March 16, 2011. Robert S. Kovac, Designated Federal Officer, Defense Trade Advisory Group, Department of State. [FR Doc. 2011–6982 Filed 3–23–11; 8:45 am] BILLING CODE 4710–25–P PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 DEPARTMENT OF STATE [Public Notice 7381] In the Matter of the Designation of Miguel de Garikoitz Aspiazu Rubina, Also Known as Miguel de Garikoitz Aspiazu Urbina, Also Known as Txeroki, Also Known as Cherokee, as a Specially Designated Global Terrorist Pursuant to Section 1(b) of Executive Order 13224, as Amended Acting under the authority of and in accordance with section 1(b) of Executive Order 13224 of September 23, 2001, as amended by Executive Order 13268 of July 2, 2002, and Executive Order 13284 of January 23, 2003, I hereby determine that the individual known as Miguel de Garikoitz Aspiazu Rubina, also known as Miguel de Garikoitz Aspiazu Urbina, also known as Txeroki, also known as Cherokee, committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the United States. Consistent with the determination in section 10 of Executive Order 13224 that ‘‘prior notice to persons determined to be subject to the Order who might have a constitutional presence in the United States would render ineffectual the blocking and other measures authorized in the Order because of the ability to transfer funds instantaneously,’’ I determine that no prior notice needs to be provided to any person subject to this determination who might have a constitutional presence in the United States, because to do so would render ineffectual the measures authorized in the Order. This notice shall be published in the Federal Register. Dated: February 22, 2011. Hillary Rodham Clinton, Secretary of State. [FR Doc. 2011–6984 Filed 3–23–11; 8:45 am] BILLING CODE 4710–10–P DEPARTMENT OF STATE [Public Notice 7382] In the Matter of the Designation of Jose Ignacio Reta de Frutos, Also Known as Joseba Inaki Reta de Frutos, ˜ Also Known as Joseba Inaki Reta Fruit, as a Specially Designated Global Terrorist Pursuant to Section 1(b) of Executive Order 13224, as Amended Acting under the authority of and in accordance with section 1(b) of Executive Order 13224 of September 23, 2001, as amended by Executive Order E:\FR\FM\24MRN1.SGM 24MRN1

Agencies

[Federal Register Volume 76, Number 57 (Thursday, March 24, 2011)]
[Notices]
[Pages 16650-16652]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6909]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64097; File No. SR-BX-2010-079]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Approving 
Proposed Rule Change To Amend Chapter IV of the BOX Rules To Allow 
Executing Participants To Provide BOX a List of the Order Flow 
Providers for Which the Executing Participants Will Provide Directed 
Order Services


March 18, 2011.

I. Introduction

    On December 3, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposal to amend the rules 
governing its Directed Order process to: (i) Allow an Executing 
Participant (``EP'') to provide BOX a list of the Order Flow Providers 
(``OFPs'') for which the EP will provide Directed Order services and 
(ii) provide that BOX would reveal to the EP the participant ID of the 
OFP sending the Directed Order.\3\ The proposed rule change was 
published for comment in the Federal Register on December 20, 2010.\4\ 
The Commission received no comments on the proposal. This order 
approves the proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Shortly after the filing of the proposed rule change, the 
Exchange withdrew an earlier proposal relating to the non-anonymity 
of Directed Orders (SR-BSE-2005-52). See Securities Exchange Act 
Release No. 53357 (February 23, 2006), 71 FR 10730 (March 2, 2006) 
(SR-BSE-2005-52).
    \4\ See Securities Exchange Act Release No. 63539 (December 14, 
2010), 75 FR 79429 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    Under the BOX's Directed Order process, Market Makers on BOX are 
able to handle orders on an agency basis directed to them by OFPs. An 
OFP sends a Directed Order to BOX with a designation of the Market 
Maker to whom the order is to be directed. BOX then routes the Directed 
Order to the appropriate Market Maker. Under Chapter VI, Section 
5(c)(ii) of the BOX Rules, a Market Maker only has two choices when 
receiving a Directed Order: (1) Submit the order to the Price 
Improvement Period auction process (``PIP''); \5\ or (2) send the order 
back to BOX for placement onto the BOX Book.
---------------------------------------------------------------------------

    \5\ See Chapter V, Section 18 of the BOX Rules.
---------------------------------------------------------------------------

    A Market Maker who desires to accept Directed Orders must 
systemically indicate that it is an EP whenever the Market Maker wishes 
to receive Directed Orders from the BOX Trading Host. If a Market Maker 
does not systemically indicate that it is an EP, then the BOX Trading 
Host will not forward any Directed Orders to that Market Maker. In such 
a case, the BOX Trading Host will send the order directly to the BOX 
Book. If a Market Maker has systemically indicated that it wishes to 
receive Directed Orders, it shall not, under any circumstances, reject 
the receipt of a Directed Order from the BOX Trading Host nor reject 
the Directed Order back to the OFP who sent it.\6\
---------------------------------------------------------------------------

    \6\ See Chapter VI, Section 5(c)(i) of the BOX Rules.
---------------------------------------------------------------------------

    The Exchange proposes to amend Chapter VI, Section 5(c)(i) of the 
BOX Rules to allow EPs to provide BOX a list of OFPs for which the EP 
will provide Directed Order services. Under the proposal, prior to 
accepting any Directed Order through the Trading Host, an EP must 
inform BOX of the OFPs from whom it has agreed to accept Directed 
Orders (``Listed OFPs'' or ``LOFPs''). The Trading Host will then only 
send to the EP Directed Orders from LOFPs. Further, under the proposal, 
the BOX Trading Host would

[[Page 16651]]

reveal to the EP the participant ID of the OFP sending the Directed 
Order.\7\
---------------------------------------------------------------------------

    \7\ Pursuant to an existing pilot program, Directed Orders are 
not anonymous. See e.g., Securities Exchange Act Release Nos. 63540 
(December 14, 2010), 75 FR 79432 (December 20, 2010) (continuing the 
practice of non-anonymous Directed Orders, originally established in 
SR-BSE-2006-14, as a pilot program until December 31, 2010 
(``Directed Order Pilot Program'')) and 63591 (December 21, 2010), 
75 FR 81687 (December 28, 2010) (extending the date of the Directed 
Order Pilot Program until June 30, 2011). The proposed rule change 
would make permanent this feature of the Directed Order process.
---------------------------------------------------------------------------

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange \8\ and, in particular, the requirements of Section 
6 of the Act.\9\ Specifically, as discussed below, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\10\ which requires, among other things, that the rules of a 
national securities exchange be 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 regulating, clearing, settling, and processing 
information with respect to, and 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; and are not designed to 
permit unfair discrimination among customers, issuers, brokers, or 
dealers.
---------------------------------------------------------------------------

    \8\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Section 6(b)(5) of the Act prohibits an exchange from establishing 
rules that treat market participants in an unfairly discriminatory 
manner. Section 6(b)(5) of the Act does not prohibit exchange members 
or other broker-dealers from discriminating, so long as their 
activities are otherwise consistent with the Federal securities laws. 
Nor does Section 6(b)(5) of the Act require exchanges to preclude 
discrimination by broker-dealers. Broker-dealers commonly differentiate 
between customers based on the nature and profitability of their 
business.
    Currently under BOX's rules, an Options Participant that is not a 
Market Maker may provide an opportunity for price improvement to a 
customer order by submitting it to the PIP. An Options Participant may 
decide who to accept as its customers and further choose to provide 
price improvement to some customer orders, but not others, by 
exercising discretion as to whether it chooses to send a particular 
order to the PIP auction.\11\ An Options Participant would know the 
identity of its customer in deciding whether to provide this 
opportunity for price improvement. Market Makers may also provide an 
opportunity for price improvement to Directed Orders by submitting them 
into the PIP. The proposed rule change, by permitting a Market Maker to 
designate those OFPs from which it will accept Directed Orders and to 
be provided with the identity of the OFP sending a Directed Order, 
would allow a Market Maker to decide in advance that it will provide an 
opportunity for price improvement only to orders from certain OFPs.\12\ 
Thus, the proposal will provide information to Market Makers that are 
EPs that is the same information available to other BOX members when 
they decide whether to provide price improvement to a particular order.
---------------------------------------------------------------------------

    \11\ See also Rule 723 of the International Securities Exchange, 
LLC (Price Improvement Mechanism) and Rule 6.74A of the Chicago 
Board Options Exchange, Incorporated (Automated Improvement 
Mechanism).
    \12\ Specialists and other market makers may establish payment 
for order flow relationships with firms on a discretionary basis. A 
specialist or market maker may pay varying amounts for order flow 
received from different firms or different customers within firms. 
Unlike payment for order flow, which principally benefits 
intermediaries and, indirectly, their customers through possibly 
lower fees and better services, customers' orders executed through 
the PIP auction directly benefit customers with the opportunity for 
an improved price.
---------------------------------------------------------------------------

    While customer anonymity may be valuable in ensuring that broker-
dealers comply with legal obligations in a variety of circumstances, 
such as market makers' firm quote obligations, customer anonymity is 
not required of exchanges, particularly when disclosure of customer 
identity could provide benefits to certain customers beyond those 
required by the Federal securities laws or exchange rules. In 
particular, market makers may be willing to offer better execution 
prices to certain customers' orders (e.g., retail customers' orders). 
The Commission does not believe that it would be inconsistent with the 
Federal securities laws for the Exchange to provide, under the 
circumstances set forth in this proposal, the means for its Market 
Makers to differentiate between customers in providing price 
improvement or other non-required advantages to certain customers. The 
Exchange's proposal treats all Market Makers the same and establishes 
no requirements for which OFPs a Market Maker designates as LOFPs or 
for which orders a Market Maker chooses to provide an opportunity for 
price improvement. The Commission does not believe that the absence of 
Exchange rules specifying which orders a Market Maker may execute at 
prices better that its public quote is unfairly discriminatory.
    The Commission notes that allowing a Market Maker to know the 
identity of firms sending Directed Orders may provide further incentive 
to that Market Maker to provide price improvement. A Market Maker that 
receives a Directed Order would be required to decide whether to send 
the order to the PIP and guarantee a price equal to or better than the 
NBBO to such order, or to release the order to the BOX book. The Market 
Maker's decision about whether to choose to guarantee a particular 
order at a price equal to or better than the NBBO may be affected by 
this proposal because it provides Market Makers with information to 
differentiate between orders from informed traders (i.e., their 
competitors) and orders from uninformed traders. It is well known in 
academic literature and industry practice that prices tend to move 
against market makers after trades with informed traders, often 
resulting in losses for market makers.\13\ Thus, there is a strong 
economic rationale for market makers not providing informed traders 
price improvement. Uninformed investors end up bearing the cost of 
these market maker losses through wider spreads that market makers need 
to quote to uninformed investors due to informed order flow.\14\
---------------------------------------------------------------------------

    \13\ See Stoll, H. R., ``The supply of dealer services in 
securities of markets,'' Journal of Finance 33 (1978), at 1133-51; 
Glosten, L. and P. Milgrom, ``Bid ask and transaction prices in a 
specialist market with heterogeneously informed agents,'' Journal of 
Financial Economics 14 (1985), at 71-100; and Copeland, T., and D. 
Galai, ``Information effects on the bid-ask spread,'' Journal of 
Finance 38 (1983), at 1457-69.
    \14\ Id.
---------------------------------------------------------------------------

    Accordingly, while the Exchange's proposal would permit a BOX 
Market Maker to discriminate among customers in providing prices better 
than its quote, the Commission does not believe that this 
discrimination is inconsistent with Section 6(b)(5) of the Act.
    The Commission continues to believe that under the proposal, a 
Market Maker would maintain the incentive to quote aggressively to gain 
priority with respect to orders entered on the BOX book. Further, the 
Commission believes that there is rigorous competition for order flow 
across options exchanges, such that any widening of quotes on one 
market is an opportunity for another option

[[Page 16652]]

market to capture order flow.\15\ In fact, the Options Order Protection 
and Locked/Crossed Market Plan provides protection from one exchange 
ignoring better quoted prices on another market and will continue to 
promote quote competition across options exchanges.\16\
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    \15\ See Robert Battalio, ``Third Market Broker-Dealers: Cost 
Competitors or Cream Skimmers?'' Journal of Finance, 1997; and 
Robert Battalio, Robert Jason Greene, and Robert Jennings, ``How do 
Competing Specialists and Preferencing Dealers Affect Market 
Quality?'' Review of Financial Studies, 1997.
    \16\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009).
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular with Section 6(b)(5) of the Act.\17\
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    \17\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (File No. SR-BX-2010-079) is 
approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-6909 Filed 3-23-11; 8:45 am]
BILLING CODE 8011-01-P