Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing of Proposed Rule Change To Adopt a Directed Order Process, 15385-15392 [2013-05543]
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Federal Register / Vol. 78, No. 47 / Monday, March 11, 2013 / Notices
For the Nuclear Regulatory Commission.
Osiris Siurano-Perez,
Project Manager, Uranium Enrichment
Branch, Division of Fuel Cycle Safety and
Safeguards, Office of Nuclear Material Safety
and Safeguards.
[FR Doc. 2013–05488 Filed 3–8–13; 8:45 am]
BILLING CODE 7590–01–P
NUCLEAR REGULATORY
COMMISSION
[NRC–2013–0045]
Biweekly Notice; Applications and
Amendments to Facility Operating
Licenses and Combined Licenses
Involving No Significant Hazards
Consideration; Correction
A. Accessing Information
Nuclear Regulatory
Commission.
ACTION: Notice; correction.
AGENCY:
The U.S. Nuclear Regulatory
Commission (NRC) is correcting a notice
that was published in the Federal
Register on March 4, 2013 (78 FR
14126), regarding the applications and
amendments to facility operating
licenses and combined licenses
involving no significant hazards
consideration. This action is necessary
to correct a missing NRC Docket ID in
the ADDRESSES and SUPPLEMENTARY
INFORMATION sections of this document
that was inadvertently omitted. In
addition, this action makes minor
editorial corrections to those sections.
FOR FURTHER INFORMATION CONTACT:
Cindy Bladey, Chief, Rules,
Announcements, and Directives Branch,
Office of Administration, U.S. Nuclear
Regulatory Commission, Washington,
DC 20555–0001; telephone 301–415–
3667; email: Cindy.Bladey@nrc.gov.
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SUMMARY:
Correction
In the Federal Register (FR) of March
4, 2013, in FR Doc. 2013–04885, on page
14126, second column, correct the
ADDRESSES section to read:
ADDRESSES: You may access information
and comment submissions related to
this document, which the NRC
possesses and is publicly available, by
searching on https://www.regulations.gov
under Docket ID NRC–2013–0045. You
may submit comments by the following
methods:
• Federal Rulemaking Web site: Go to
https://www.regulations.gov and search
for Docket ID NRC–2013–0045. Address
questions about NRC dockets to Carol
Gallagher; telephone: 301–492–3668;
email: Carol.Gallagher@nrc.gov.
• Mail comments to: Cindy Bladey,
Chief, Rules, Announcements, and
Directives Branch (RADB), Office of
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Administration, Mail Stop: TWB–05–
B01M, U.S. Nuclear Regulatory
Commission, Washington, DC 20555–
0001.
• Fax comments to: RADB at 301–
492–3446.
For additional direction on accessing
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see ‘‘Accessing Information and
Submitting Comments’’ in the
SUPPLEMENTARY INFORMATION section of
this document.
In the same document, on page 14126,
third column, correct Section I,
‘‘Accessing Information and Submitting
Comments,’’ of the SUPPLEMENTARY
INFORMATION section to read:
Please refer to Docket ID NRC–2013–
0045 when contacting the NRC about
the availability of information regarding
this document. You may access
information related to this document,
which the NRC possesses and is
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methods:
• Federal Rulemaking Web site: Go to
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• NRC’s Agencywide Documents
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Documents may be viewed in ADAMS
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B. Submitting Comments
Please include Docket ID NRC–2013–
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The NRC cautions you not to include
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The NRC will post all comment
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comment submissions into ADAMS,
and the NRC does not routinely edit
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comment submissions to remove
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If you are requesting or aggregating
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submissions. Your request should state
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entering the comment submissions into
ADAMS.
Dated at Rockville, Maryland, this 5th day
of March, 2013.
For the Nuclear Regulatory Commission.
Cindy Bladey,
Chief, Rules, Announcements, and Directives
Branch, Division of Administrative Services,
Office of Administration.
[FR Doc. 2013–05544 Filed 3–8–13; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69040; File No. SR–BX–
2013–016]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
of Proposed Rule Change To Adopt a
Directed Order Process
March 5, 2013.
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 February
21, 2013, NASDAQ OMX BX, Inc. (‘‘BX’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange has filed a proposed
rule change offering a new enhancement
[sic] to adopt a Direct Order process.
The text of the proposed rule change
is below. Proposed new language is in
italics; deletions are bracketed.
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Chapter VI
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1 15
2 17
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Trading Systems
*
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Federal Register / Vol. 78, No. 47 / Monday, March 11, 2013 / Notices
Sec. 1 Definitions
The following definitions apply to
Chapter VI for the trading of options
listed on BX Options.
(a)–(d) No change.
(e) The term ‘‘Order Type’’ shall mean
the unique processing prescribed for
designated orders that are eligible for
entry into the System, and shall include:
(1) [Reserved.] Directed Order. The
term ‘‘Directed Order’’ means an order
to buy or sell which has been directed
(pursuant to the Exchange’s instructions
on how to direct an order) to a
particular Market Maker (‘‘Directed
Market Maker’’) after the opening.
Directed Orders are handled within the
System pursuant to Chapter VI, Section
10(3).
(2)–(11) No change.
(f)–(h) No change.
*
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*
*
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Sec. 6 Acceptance of Quotes and
Orders
All bids or offers made and accepted
on BX Options in accordance with the
BX Options Rules shall constitute
binding contracts, subject to applicable
requirements of the Rules of the
Exchange and the Rules of the Clearing
Corporation.
(a) General—A System order is an
order that is entered into the System for
display and/or execution as appropriate.
Such orders are executable against
marketable contra-side orders in the
System.
(1) All System Orders shall indicate
whether they are a call or put and buy
or sell and a price, if any. Systems
Orders can be designated as Immediate
or Cancel (‘‘IOC’’), Good-till-Cancelled
(‘‘GTC’’), Day (‘‘DAY’’) or WAIT.
(2) A System order may also be
designated as a Directed Order, Limit
Order, a Minimum Quantity Order, a
Market Order, a Price Improving Order,
an All-or-None Order or a Post-Only
Order.
(b)–(c) No change.
*
*
*
*
*
Sec. 10 Book Processing
System orders shall be executed
through the BX Book Process set forth
below:
(1)–(2) No change.
(3) [Price Improvement—any potential
price improvement resulting from an
execution in the System shall accrue to
the party that is removing liquidity
previously posted to the Book.]
Directed Order Processing.
(i) When BX’s disseminated price is
the NBBO and the Directed Market
Maker is quoting at BX’s disseminated
price, the Directed Order shall be
executed and allocated as follows:
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(A) If the option is subject to the
Price/Time execution algorithm, the
Directed Market Maker shall receive
40% of the Directed Order at a
particular price (‘‘Directed Allocation’’),
unless such Directed Market Maker was
first in time priority, in which case such
Directed Market Maker shall receive the
amount of the Directed Order equal to
the Directed Market Maker’s quote/order
size at that price. If there are multiple
resting quotes/orders from the same
Directed Market Maker, the Directed
Allocation will be distributed among
them in time sequence. Then, the
remainder of the Directed Order shall be
allocated to other participants in price/
time priority, including any remaining
contracts of the Directed Market Maker
and multiple quotes/orders from the
same firm.
(B) If the option is subject to the ProRata execution algorithm, Public
Customer limit orders resting on the
limit order book at the execution price
will execute against the Directed Order
first. Then, the Directed Market Maker
shall receive the greater of: the pro-rata
allocation to which such Directed
Market Maker would otherwise be
entitled or the Directed Allocation of
40% of the Directed Order at a
particular price. If there are multiple
quotes/orders from the same Directed
Market Maker, the Directed Allocation
will be distributed among those quotes/
orders on a size pro rata basis. Once the
Directed Allocation is determined, any
remaining contracts associated with the
Directed Market Maker’s quotes/orders
are excluded from the remaining prorata allocation. If there are any
remaining contracts of the Directed
Order, they will be allocated on a size
pro rata basis among the remaining
Participants (except the Directed Market
Maker).
(ii) When BX’s disseminated price is
the NBBO, and the quotation
disseminated by the Directed Market
Maker on the opposite side of the
market from the Directed Order is
inferior to the NBBO, the Directed Order
shall be automatically executed and
allocated to those quotations and orders
at the NBBO in accordance with this
Section.
(iii) If BX’s disseminated price is not
the NBBO, the Directed Order shall be
processed in accordance with Chapter
VI, Sections 7, 10 and 11.
(iv) In addition, the following will
apply:
(A) A Directed Market Maker shall not
be entitled to receive a number of
contracts that is greater than the size
associated with their order or quote at
a particular price level.
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(B) Directed Allocations are rounded
up to the next whole number.
(C) The Directed Allocation is
available for the life of the order and the
Directed Market Maker is entitled to the
Directed Allocation at all price levels
that the Directed Market Maker has an
order or quote.
(D) Directed Market Makers are
subject to the quoting requirements of
Chapter VII, Section 6(d)(i)(4).
(E) The Exchange will determine
which options are subject to Directed
Allocation.
(4)–(7) No change.
(8) Price Improvement—any potential
price improvement resulting from an
execution in the System shall accrue to
the party that is removing liquidity
previously posted to the Book.
*
*
*
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Chapter VII
*
*
*
Market Participants
*
*
Sec. 6 Market Maker Quotations
(a)–(c) No change.
(d) Continuous Quotes. A Market
Maker must enter continuous bids and
offers for the options to which it is
registered, as follows:
i. On a daily basis, a Market Maker
must during regular market hours make
markets consistent with the applicable
quoting requirements specified in these
rules, on a continuous basis [in at least
sixty percent (60%) of the series] in
options in which the Market Maker is
registered.
(1) To satisfy this requirement [with
respect to quoting a series], a Market
Maker must quote[ such series] 60[90]%
of the trading day (as a percentage of the
total number of minutes in such trading
day) or such higher percentage as BX
may announce in advance. BX
Regulation may consider exceptions to
the requirement to quote 60[90]% (or
higher) of the trading day based on
demonstrated legal or regulatory
requirements or other mitigating
circumstances. This obligation will
apply to all of a Market Maker’s
registered options collectively, rather
than on an option-by-option basis.
Compliance with this obligation will be
determined on a monthly basis.
(2) Notwithstanding the foregoing,
Market Makers shall not be required to
make two-sided markets pursuant to
Section 5(a)(i) of these rules in any
Quarterly Option Series, any adjusted
option series, and any option series
until the time to expiration for such
series is less than nine months.
Accordingly, the continuous quotation
obligations set forth in this rule shall
not apply to Market Makers respecting
Quarterly Option Series, adjusted option
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Federal Register / Vol. 78, No. 47 / Monday, March 11, 2013 / Notices
series, and series with an expiration of
nine months or greater. For purposes of
this subsection (2), an adjusted option
series is an option series wherein one
option contract in the series represents
the delivery of other than 100 shares of
underlying stock or Exchange-Traded
Fund Shares.
(3) If a technical failure or limitation
of a system of BX prevents a Market
Maker from maintaining, or prevents a
Market Maker from communicating to
BX Options timely and accurate quotes,
the duration of such failure or limitation
shall not be included in any of the
calculations under this subparagraph (i)
with respect to the affected quotes.
(4) In options in which it receives
Directed Orders, a Directed Market
Maker must quote such options 90% of
the trading day (as a percentage of the
total number of minutes in such trading
day) or such higher percentage as BX
may announce in advance, applied
collectively to all series in all of the
options in which the Directed Market
Maker receives Directed Orders (rather
than on an option-by-option basis).
Compliance with this obligation will be
determined on a monthly basis.
ii.–iii. No change.
(e) No change.
*
*
*
*
*
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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
4 See
BX Options Rules, Chapter VI, Section
1(e)(11). Securities Exchange Act Release No. 67256
(June 26, 2012), 77 FR 39277 (July 2, 2012) (SR–BX–
2012–030) (Approving the establishment of the BX
Options market).
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id. at 39278.
Exchange Act Release No. 66983 (May
14, 2012), 77 FR 29730 (May 18, 2012) (Notice of
filing of SR–BX–2012–030).
6 Securities Exchange Act Release No. 68041
(October 11, 2012), 77 FR 63903 (October 17, 2012)
(SR–BX–2012–065).
7 The term directed order has a different meaning
on equities markets. See e.g., NASDAQ Rule
4751(a)(9)[sic].
8 BX also proposes to amend Chapter VI, Section
6(a)(2) to add Directed Orders to the list of System
orders.
9 Currently, Section 10(3) governs price
improvement. It is being moved to new Section
10(8).
10 Chapter VI, Section 10(1).
11 Chapter VI, Section 10(1)(A).
5 Securities
1. Purpose
The BX Options market launched on
June 29, 2012 as a fully automated,
price/time priority execution system
built on the core functionality of the
NASDAQ Options Market (‘‘NOM’’).3
BX Options operates as an all-electronic
system (‘‘System’’) with no physical
3 See
trading floor and provides for the
electronic display and execution of
orders. In its proposed rule change to
create the BX Options market, BX stated
that, initially, BX Options would have
the same market structure and rules as
NOM, focusing on a price/time priority
market.4 BX further stated that, over
time, as the BX Options market secured
more participants, it would introduce
additional, innovative functionality.5
Accordingly, BX recently introduced a
Size Pro-Rata execution algorithm for
BX Options,6 which executes orders at
a particular price level based on the size
of each Participant’s quote or order as a
percentage of the total size of all orders
and quotes resting at that price. BX
intends for some options to employ one
algorithm while others employ a
different one.
At this time, BX proposes its next
enhancement to BX Options by offering
a directed order process.7 BX proposes
to amend various rules to establish the
process. First, BX proposes to define a
Directed Order in Chapter VI, Section
1(e)(1) as an order to buy or sell which
has been directed (pursuant to the
Exchange’s instructions on how to
direct an order) to a particular Market
Maker (‘‘Directed Market Maker’’) after
the opening.8 It further provides that
Directed Orders are handled within the
System pursuant to Chapter VI, Section
10(3), which is proposed new language.9
Pursuant to proposed Chapter VI,
Section 10(3)(i), when BX’s
disseminated price is the National Best
Bid/Offer (‘‘NBBO’’) and the Directed
Market Maker is quoting at BX’s
disseminated price, the Directed Order
shall be executed and allocated
pursuant to one of BX’s two execution
algorithms for options.10 If the option is
subject to the Price/Time execution
algorithm,11 the Directed Market Maker
shall receive 40% of the Directed Order
(‘‘Directed Allocation’’), unless such
Directed Market Maker was first in time
priority, in which case such Directed
Market Maker shall receive the amount
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15387
of the Directed Order equal to the
Directed Market Maker’s quote/order
size at that price. If there are multiple
resting quotes/orders from the same
Directed Market Maker, the Directed
Allocation will be distributed among
them in time sequence. Then, the
remainder of the Directed Order shall be
allocated to other participants in price/
time priority, including any remaining
contracts of the Directed Market Maker
and multiple quotes/orders from the
same firm.12
Example 1 (Price/Time)
NBBO: $1.00 × $1.05
BX Options Book 13
Firm1 Order A Sell 20 at $1.05
Firm2 Order B Sell 20 at $1.05
MM3 Quote C $1.00 × $1.05 (size 100 ×
100)
Firm4 Order D Sell 50 at $1.05
BX Options Best Offer: 190 at $1.05
BX receives a Directed Order to buy 100
contracts at $1.05 directed to MM3:
40 contracts execute against MM3
Quote C as a Directed Allocation:
40% of 100 contracts
20 contracts execute against Firm1
Order A based on time priority
20 contracts execute against Firm2
Order B based on time priority
20 additional contracts execute
against MM3 Quote C based on time
priority
The Directed Order is fully executed
No contracts execute against Firm4
because it is behind Firm1, Firm2,
and MM3 in time priority and no
more contracts remain
BX notes that, in this example, MM3
receives additional contracts beyond the
Directed Allocation under the proposed
rule, which permits the Directed Market
Maker to retain its position in time
priority for the remainder of the
contracts. BX believes that it is
reasonable and encourages Directed
Market Makers to display their entire
size, which benefits the quality of BX’s
market.
BX further notes that if a Public
Customer order is involved, the Directed
Allocation is nevertheless available to
the Directed Participant, before the
Public Customer order is executed. For
example:
12 The BX Options trading system identifies
Directed Market Makers by a particular code called
an IFI, which BX will use to consider which quotes/
orders are from the same firm.
13 In each example, quotes and orders are listed
in the sequence in which they were received.
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Federal Register / Vol. 78, No. 47 / Monday, March 11, 2013 / Notices
Example 1A (Price/Time With a Public
Customer)
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NBBO: $1.00 × $1.05
BX Options Book
Firm1 Public Customer Order A Sell 20
at $1.05
Firm2 Broker Dealer Order B Sell 20 at
$1.05
MM3 Quote C $1.00 × $1.05 (size 100 ×
100)
Firm4 Broker Dealer Order D Sell 50 at
$1.05
BX Options Best Offer: 190 at $1.05
BX receives a Directed Order to buy 100
contracts at $1.05 directed to MM3:
40 contracts execute against MM3
Quote C as a Directed Allocation:
40% of 100 contracts
20 contracts execute against Firm1
Public Customer Order A based on
time priority
20 contracts execute against Firm2
Order B based on time priority
20 additional contracts execute
against MM3 Quote C based on time
priority
The Directed Order is fully executed
No contracts execute against Firm4
because it is behind Firm1, Firm2,
and MM3 in time priority and no
more contracts remain
BX is proposing to afford a Directed
Allocation when there is a Public
Customer order eligible to trade with the
Directed Order. BX understands that
other options exchanges’ rules
respecting directed orders do not
provide a directed allocation to a
directed market maker when there is a
customer order ahead of a directed
market maker at a particular price.14
However, BX believes it is reasonable
and consistent with applicable statutory
standards for the Directed Allocation to
occur, as proposed herein. The Public
Customer order is not precluded from
participating in the trade, but rather
continues to stand in time priority once
the Directed Allocation occurs. The
Public Customer may not receive a full
execution, but had the Directed Order
not been sent to BX, the Public
Customer may not have received an
execution at all. The Directed
Participant and their relationship with
the provider of that Directed Order may
have attracted the order to BX, to the
benefit of the Public Customer order as
well as all potential contra-side orders
on the book. Accordingly, there is no
particular reason for a Directed
Allocation to operate differently just
because a Public Customer order is
involved; the very nature of the price/
14 For example, the directed order is allocated
pursuant to the price/time priority rule on NYSE
Arca. See NYSE Arca Rule 6.76A(a)(1)(A)(ii).
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time priority model is that Public
Customer orders are like all other orders
and do not jump ahead in priority. BX
does not believe that this is unfair to
Public Customer orders; it is merely a
different model.
New Section 10(3)(i)(B) provides that
if the option is subject to the Size ProRata execution algorithm,15 Public
Customer limit orders resting on the
limit order book at the execution price
will execute against the Directed Order
first. Then, the Directed Market Maker
shall receive the greater of: the pro-rata
allocation to which such Directed
Market Maker would otherwise be
entitled pursuant to the Size Pro-Rata
execution algorithm or the Directed
Allocation of 40% of the Directed Order.
If there are multiple resting quotes/
orders from the same Directed Market
Maker, the Directed Allocation will be
allocated among those quotes/orders on
a size pro-rata basis. Once the Directed
Allocation is determined, any remaining
contracts associated with the Directed
Market Maker’s quotes/orders are
excluded from the remaining pro-rata
allocation. If there are any remaining
contracts of the Directed Order, they
will be allocated on a size pro-rata basis
among the remaining Participants
(except the Directed Market Maker). For
example:
Directed Order shall be automatically
executed and allocated to those
quotations and orders at the NBBO in
accordance with this Section as follows:
Example 2 (Pro-Rata)
MM1 Quote A $1.00 × $1.06 (size 100
× 100)
MM2 Quote B $1.00 × $1.06 (size 50 ×
50)
BX Options Best Offer: 150 at $1.06
NBBO: $1.00 × $1.05 (size 160 × 10)
BX receives a Directed Order to buy 110
contracts at $1.06 directed to MM2:
10 contracts are routed and executed
against the better away offer of
$1.05 (CBOE)
Because the CBOE offer is executed,
BX Options is now the NBBO
40 contracts execute against MM2
Quote B as a Directed Allocation
(40% of 100 contracts remaining
from the Directed Order)
60 contracts execute against MM1
Quote A
In this example, BX was not initially
at the NBBO, but once the National Best
Offer (‘‘NBO’’) was exhausted, BX’s offer
of 150 contracts at $1.06 became the
NBO. BX proposes to permit the
Directed Allocation at the next price
level, even though the Directed
Participant was not at the NBBO at the
time of order receipt, as described
further below. BX understands that
other options exchanges’ directed order
programs limit directed allocations to
situations where the directed party is at
the NBBO at the time of receipt of the
NBBO: $1.00 × $1.05
BX Options Book
Firm1 Public Customer Order A Sell 20
at $1.05
MM2 Quote B $1.00 × $1.05 (size 100 ×
100)
MM3 Quote C $1.00 × $1.05 (size 50 ×
50)
MM4 Quote D $1.00 × $1.05 (size 100
× 100)
BX Options Best Offer: 270 at $1.05
BX receives a Directed Order to buy 100
contracts at $1.05 directed to MM3:
20 contracts execute against Firm1
Public Customer Order A due to
Public Customer priority
40 contracts execute against MM3
Quote C as a Directed Allocation
(40% of 100 contract buy order)
MM2 and MM4 each receive 20
contracts on a size pro-rata basis
(50% each of 40 remaining
contracts)
New Section 10(3)(ii) deals with the
situation where BX’s disseminated price
is the NBBO but the quotation
disseminated by the Directed Market
Maker on the opposite side of the
market from the Directed Order is
inferior to the NBBO. In such case, the
15 Chapter
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Example 3 (Price/Time or Pro-Rata—
Same Outcome)
NBBO: $1.00 × $1.05
BX Options Book
Firm1 Order A Sell 100 at $1.05
MM2 Quote C $1.00 × $1.06 (size 100 ×
100)
BX Options Best Offer: 100 at $1.05
BX receives a Directed Order to buy 50
contracts directed to MM2:
50 contracts execute against Firm1
Order A
The Directed Order is completely filled
MM2 does not receive a Directed
Allocation because Quote C is not
part of BX Options’ best offer nor
the NBBO
New Section 10(3)(iii) covers the
situation where BX’s disseminated price
is not the NBBO; then, the Directed
Order shall be processed in accordance
with Chapter VI, Sections 7, 10 and 11.
Example 4 (Price/Time or Pro-Rata—
Same Outcome)
CBOE Quote: $1.00 × $1.05 (size 10 ×
10)
BX Options Book
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directed order. BX believes that it is
consistent with the purpose of the
NBBO requirement to structure its
Directed Order program as proposed
herein for the following reasons.
The purpose of the requirement for
the directed participant to be at the
NBBO is to encourage such participant
to quote competitively rather than to
quote a wide market and wait for
directed orders to arrive. BX believes
that permitting the Directed Market
Maker to receive a Directed Allocation
even if such market maker was not on
the NBBO at the time of receipt of the
Directed Order still encourages
competitive quoting. The Directed Order
will trade at the NBBO at the time it was
received with whatever contracts are
available. If, and only if, contracts
remain, then the order can execute at
the next price level. At that next price
level that is the new NBBO, the Directed
Market Maker must be on the NBBO.
Under the proposal, such market maker
is being rewarded for being at the next
best price, consistent with the purposes
of the NBBO requirement. The market
maker has an incentive to quote
competitively because quoting a tick or
two away from the NBBO is likely to
result in very little trading for that
market maker, especially if other quotes
and orders are at or closer to the NBBO
and especially in more liquid options.
Providing market makers with an
enhanced allocation for order flow that
is specifically directed to that market
maker when the market maker is not
initially on the NBBO is fair and does
not create incentives to avoid quoting at
the NBBO. There is fierce competition
within the BX Options market and
within the broader options market
place. Within the BX Options market,
there are many market makers who
compete for available order flow on the
basis of their quoted price. If a market
maker’s price is not equal to or better
than all other quoted prices, they will
simply not trade until all other market
makers (and all other participants) trade
at the superior price. This creates and
supports healthy competition among
market makers to quote the best price
possible. In addition to the competition
among market makers, there are also
other market participants (broker-dealer,
Public Customer, professional, etc.) who
compete against each other and against
market makers based on price, thus
providing a further incentive for market
makers to provide the best price
possible. Finally, in the broader options
marketplace, BX Options market makers
not only have to compete with the
market makers and participants on the
BX Options market, but also with the
plethora of market makers and other
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participants who quote or post orders on
options exchanges other than BX
Options. Indeed, the incentive to
provide a competitive quote is strong
due to the inherently competitive nature
of today’s options markets. Necessarily,
a market maker who does not match or
improve the NBBO on a consistent basis
does not trade often. This proposal does
not create a disincentive for a market
maker to match or improve the NBBO.
BX believes that this is an issue of
timing of the directed allocation and not
whether it is appropriate to afford a
directed allocation at the next price
level.
Providing directed order functionality
should also add an additional layer of
competition among those market makers
who attempt to attract directed order
flow. When market makers approach
order flow providers to send directed
order flow, the order flow providers
expect clear data as evidence that
directing order flow to the market maker
will benefit the order flow provider and
more importantly the order flow
provider’s customers. As more market
makers attempt to attract order flow,
they will likely need to show ever
improving quote statistics. If a market
maker were to quote $0.01 outside the
NBBO in hopes of capturing some
miniscule amount of order flow at a
better price than everyone else, the
order flow provider would see this in
their quality of execution statistics and
simply stop directing order flow to the
market maker. Here again, there is a
strong incentive to be matching or
improving the NBBO in order to attract
order flow and trade.
BX notes that at the time of the
approval of the first directed order
programs, routing among the options
exchanges occurred through a central
linkage process and executions through
multiple price levels were not as
seamless and efficient as today. In the
current environment, executions occur
across multiple price levels with
simultaneous outbound routing. BX
believes that order execution should not
be inhibited by the artificial constraint
of limiting directed allocations to
directed participants who are on the
NBBO at the time of order receipt in an
options marketplace with vigorous
competition and actively changing
markets. It is sufficient for the directed
participant to be on the NBBO at the
time of execution.
New Section 10(3)(iv) incorporates
several additional provisions respecting
the Directed Order process. Specifically,
a Directed Market Maker shall not be
entitled to receive a number of contracts
that is greater than the size associated
with their order or quote at a particular
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15389
price level. This provision is common in
other options exchanges’ directed order
programs and is intended to incent
Directed Market Makers to show more
size. Much like a market maker has an
incentive to match or improve the
NBBO in order to trade more often, a
market maker also has the incentive to
display as much liquidity as possible in
order to trade more volume. The
resulting additional size at the NBBO
benefits investors by making the market
more liquid, which, in turn, makes it
easier for investors to enter and exit
their specific options positions.
In addition, Directed Allocations are
rounded up to the next whole number.
Example 5 (Price/Time or Pro-Rata—
Same Outcome)
NBBO: $1.00 × $1.05
BX Options Book
MM1 Quote A $1.00 × $1.05 (size 100
× 100)
MM2 Quote B $1.00 × $1.05 (size 50 ×
50)
BX Options Best Offer: 150 at $1.05
BX receives a Directed Order to buy 91
contracts at $1.05 directed to MM2:
37 contracts execute against MM2
Quote B as a Directed Allocation
(40% of 91 = 36.4 rounded up to 37)
54 contracts execute against MM1
Quote A
BX understands that the directed
order programs of other options
exchanges have generally limited the
amount of the directed allocation to
40% of the size of the directed order,
which is what BX has proposed herein.
Because BX intends to round that
allocation up to the nearest whole
number, BX acknowledges that it is
mathematically possible for its proposed
Directed Allocation to exceed 40% in
certain situations, but, of course,
because it is rounding to the nearest
whole number, rounding will
necessarily never result in more than
one additional options contract being
added to the Directed Allocation. Even
if such one additional contract caused
the Directed Allocation to exceed 40%,
BX believes that this is appropriate and
reasonable because it is only one
contract, regardless of the percentage.16
Other options entitlement programs
approved by the Commission sometimes
exceed a 40% guarantee, also in limited,
mathematically-driven situations. For
16 Generally, the larger the number of contracts
being rounded, the smaller the percentage, with
some mathematical variation. For example, an order
of 9 contracts would round up from 3.6 to 4
contracts or 44.44% of the order, whereas an order
for 91contracts would be rounded up for directed
allocation purposes from 36.4 to 37 contracts or
40.66% of the order.
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example, the specialist or lead market
maker entitlement permits the
allocation of five contracts and less to a
particular participant, which is much
greater than the one contract proposed
herein (i.e. the specialist entitlement
allows for a 100% allocation for orders
of 5 contracts or less).17 Furthermore,
specialist entitlement programs also
provide for a 60% allocation in
situations where the split is between
two participants. Furthermore, pursuant
to proposed subparagraph (iv)(C), the
Directed Allocation is available for the
life of the order. If a Directed Order is
not executed upon receipt, it retains its
status as a Directed Order, such that,
once it becomes executable, it is subject
to Directed Order Handling under new
Section 10(3).
Example 6 (Price/Time or Pro-Rata—
Same Outcome)
CBOE Quote: $1.00 × $1.05 (size 10 ×
10)
NBBO: $1.00 × $1.05 (size 160 × 10)
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BX Options Book
MM1 Quote A $1.00 × $1.06 (size 100
× 100)
MM2 Quote B $1.00 × $1.06 (size 50 ×
50)
BX Options Best Offer: 150 at $1.06
BX receives a non-routable Directed
Order to buy 100 contracts at $1.06
directed to MM2:
The order is posted on the BX Options
book at $1.05 and displayed at
$1.04 18
CBOE updates its quote to $1.00 × $1.07
(size 10 × 10)
The new NBBO is $1.00 × $1.06 (size
160 × 150)
The Directed Order can now execute
against the BX Options book at
$1.06 as follows:
40 contracts execute against MM2
Quote B as a Directed Allocation
(40% of the 100 contract buy order)
60 contracts execute against MM1
Quote A
The Exchange believes that it is useful
and beneficial for the order to retain its
status as a Directed Order, because this
handling is consistent with the order
instructions and original intent of the
submitting Participant. On other options
exchanges, the ‘‘directed order’’
designation is only considered upon
receipt of the order.19 BX believes that
17 The specialist on NYSE MKT receives a 100%
allocation on orders of 5 contracts or less and 40%
of other eligible orders, even though the specialist’s
quoting obligation is the same as the proposed BX
Options Directed Market Maker quoting obligation.
18 See Chapter VI, Section 11.
19 See e.g., Phlx Rule 1080(l)(ii), which provides:
When the Exchange’s disseminated price is the
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its Participants may find this feature
attractive; otherwise, Participants might
consider cancelling and re-entering the
order so it is treated as a Directed Order,
which would be less efficient and
would increase message traffic. BX does
not believe that retaining directed order
status on the book is controversial or
inconsistent with the Act. Nor does BX
believe that it undermines the policy
underpinnings of directed order
programs. Rather, it is an innovative
enhancement intended to make entering
directed orders more efficient and
modern. It is possible that more directed
allocations will occur because orders
retain their directed order status, but the
same result could be achieved today by,
inefficiently, reentering directed orders
rather than leaving them on the book as
non-directed orders.
In addition, the Directed Market
Maker is entitled to the Directed
Allocation at all price levels at which
the Directed Market Maker has an order
or quote. This is intended to reflect that
orders are executable at multiple price
levels, and that, today, market makers
can enter orders at multiple price levels.
Example 7 (Price/Time or Pro-Rata—
Same Outcome)
NBBO: $1.00 × $1.05
BX Options Book
MM1 Quote A $1.00 × $1.05 (size 20 ×
20)
MM2 Quote B $1.00 × $1.05 (size 10 ×
10)
MM3 Quote C $1.00 × $1.06 (size 100 ×
100)
MM2 Quote D $1.00 × $1.06 (size 50 ×
50)
BX Options Best Offer: 30 at $1.05
BX receives a Directed Order to buy 110
contracts at $1.06 directed to MM2:
20 contracts execute against MM1
Quote A
10 contracts execute against MM2
Quote B
$1.05 price level is completely
exhausted
32 contracts execute against MM2
Quote D as a Directed Allocation
(40% of 80 remaining contracts
from buy order)
48 contracts execute against MM3
Quote C
New Quoting Requirement for All
Market Makers
BX also proposes to change the
quoting obligation applicable to its
Market Makers. Currently, Chapter VII,
NBBO at the time of receipt of the Directed Order,
and the Directed Specialist, SQT or RSQT is
quoting at the Exchange’s disseminated price, the
Directed Order shall be automatically executed and
allocated in accordance with Rule 1014(g)(viii).
PO 00000
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Section 6(d) provides that on a daily
basis, a Market Maker must during
regular market hours make markets
consistent with the applicable quoting
requirements specified in these rules, on
a continuous basis in at least sixty
percent (60%) of the series in options in
which the Market Maker is registered. It
further provides that, to satisfy this
requirement with respect to quoting a
series, a Market Maker must quote such
series 90% of the trading day (as a
percentage of the total number of
minutes in such trading day) or such
higher percentage as BX may announce
in advance. BX Regulation may consider
exceptions to the requirement to quote
90% (or higher) of the trading day based
on demonstrated legal or regulatory
requirements or other mitigating
circumstances.
BX proposes to better align its market
maker quoting requirement with that of
other exchanges, such as NYSE Arca
and NYSE MKT. Specifically, BX
proposes to reduce the quoting
requirement for non-Directed BX
Options Market Makers as follows: A
Market Maker must quote such options
60% of the trading day (as a percentage
of the total number of minutes in such
trading day) or such higher percentage
as BX may announce in advance. BX
Regulation may consider exceptions to
the requirement to quote 60% (or
higher) of the trading day based on
demonstrated legal or regulatory
requirements or other mitigating
circumstances. This obligation will
apply to all of a Market Maker’s
registered options collectively, rather
than on an option-by-option basis.
Compliance with this obligation will be
determined on a monthly basis. This is
the same requirement as on other
options exchanges.20
BX believes that this is appropriate for
two reasons. First, BX’s current Market
Maker quoting requirement is much
more stringent than certain other
exchanges. Quoting each series 90% of
the trading day is much more stringent
than looking at all options in which a
Market Maker is registered, because it
allows for some number of series not to
be quoted at all, as long as the overall
standard is met. This better
accommodates the occasional issues
that may arise in a particular series,
whether technical or manual. The
existing requirement may at times
discourage liquidity in particular
options series because a market maker is
forced to focus on a momentary lapse
rather than using the appropriate
resources to focus on the options series
20 See NYSE Arca Rule 6.88 and NYSE MKT Rule
964.1NY.
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that need and consume additional
liquidity. As a new market, BX believes
that it can better attract Market Makers
to the BX Options market and grow its
market if its quoting obligation is more
in line with that of other exchanges. In
addition, as BX seeks to introduce
directed orders, the market maker
quoting obligation has become an
obstacle to crafting a competitive,
attractive directed order program.
Specifically, because the Commission
has required directed participants to be
subject to heightened quoting
obligations as compared to non-directed
market makers, BX would have to adopt
a Directed Market Maker quoting
obligation more stringent than the
current 90% of the time/60% of the
series requirement for regular BX
Options Market Makers. BX does not
believe that a quoting requirement for
greater than 90% of the time would
attract Directed Market Makers to BX
Options, as BX embarks on growing its
market with new functionality and
features. In fact, a more stringent
quoting requirement would likely
discourage new market makers from
participating in the BX Options market
and inhibit current market makers’
ability to provide liquidity effectively.
New Quoting Requirement for Directed
Market Makers
New Section 10(3)(iv)(D) makes clear
that Directed Market Makers are subject
to the quoting requirements of new
Chapter VII, Section 6(d)(iv).
Specifically, in options in which it
receives Directed Orders, a Directed
Market Maker must quote 90% of the
trading day (as a percentage of the total
number of minutes in such trading day)
or such higher percentage as BX may
announce in advance. BX Regulation
may consider exceptions to the
requirement to quote 90% (or higher) of
the trading day based on demonstrated
legal or regulatory requirements or other
mitigating circumstances. This
obligation will apply collectively to all
series in all of the options in which the
Directed Market Maker receives
Directed Orders, rather than on an
option-by-option basis. Compliance
with this obligation will be determined
on a monthly basis. This quoting
obligation is more stringent than that
which is applicable to regular BX
Options Market Makers, who will now
have to quote, under this proposal, at
least 60% of the time the Exchange is
open for trading in registered options.
Such quotations must meet the quote
width requirements of Chapter VII,
Section 6(d)(ii). Once a Directed Market
Maker receives a Directed Order, the
heightened quoting obligation is
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triggered and applies to the options in
which the Directed Market Maker
receives Directed Orders.
Lastly, Section 10(3)(iv)(E) will
provide that the Exchange will
determine which options have the
Directed Allocation functionality
available.21 BX will issue an Options
Trader Alert to inform its Participants in
which options the Directed Allocation
will be available.
Conclusion
In summary, BX seeks to compete
with the many options exchanges that
offer directed orders in their respective
markets and seeks to introduce directed
order functionality, as described above.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 22 in general, and furthers the
objectives of Section 6(b)(5) of the Act 23
in particular, in that it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in facilitating
transactions in securities, and to remove
impediments to and perfect the
mechanisms of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest, because it will establish
a directed order process similar to what
operates on other exchanges, as
explained in detail herein, which will
provide Participants with additional
choices among the many competing
exchanges with regard to their execution
needs and strategies. BX Options
operates in an intensely competitive
environment and seeks to offer the same
services that its competitors offer and in
which its customers find value.
In its approval of other options
exchange directed order programs, the
Commission has, like proposals to
amend a specialist guarantee, focused
on whether the percentage of the
‘‘entitlement’’ would rise to a level that
could have a material adverse impact on
quote competition within a particular
exchange, and concluded that such
programs do not jeopardize market
integrity or the incentive for market
participants to post competitive
quotes.24 BX’s proposed Directed
21 Directed Orders received in options where BX
Options is not offering Directed Order processing
will not be rejected; instead, such orders will be
handled normally as non-Directed Orders.
22 15 U.S.C. 78f(b).
23 15 U.S.C. 78f(b)(5).
24 See Securities Exchange Act Release No. 51759
(May 27, 2005), 70 FR 32860 (June 6, 2005) (SR–
Phlx–2004–91).
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15391
Allocation of 40% is consistent with the
directed order allocations of other
options exchanges, except for the
impact of rounding up, as described
above, which BX does not believe is
significant. BX notes that the remaining
portion of each order will still be
allocated based on the competitive
bidding of market participants. In
addition, at the time of execution, a BX
Options Directed Market Maker will
have to be quoting at the NBBO for the
size of the Directed Allocation to receive
the Directed Allocation, which is
intended to incent the Directed Market
Maker to quote aggressively, because he
cannot merely step up and match the
NBBO after the Directed Order is
received. Similarly, BX believes there is
an incentive for Directed Market Makers
to quote competitively even though they
may receive a Directed Allocation when
such Directed Market Maker is not on
the NBBO at the time of order receipt,
but is at the time of execution. BX also
notes that BX Options Directed Market
Makers will have greater quoting
obligations than other BX Options
Market Makers.
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. The
competition among the options
exchanges is vigorous and this proposal
is intended to afford the BX Options
market the opportunity to compete for
directed order flow. In that regard, the
proposal is pro-competitive and will
offer market participants an additional
venue for the execution of directed
orders. The Exchange does not believe
that the proposal imposes a burden on
intra-market competition not necessary
or appropriate in furtherance of the
purposes of the Act, because the ability
to send directed orders is available to all
Participants, and the ability to become
a Market Maker is available to all
Market Makers.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
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90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act. The
Commission also requests and
encourages interested persons to submit
comments on the following specific
questions:
• Unlike the Directed Order rules of
other options exchanges, BX’s proposed
rule would not require that a Directed
Market Maker be quoting at the NBBO
at the time a Directed Order is received.
Would the lack of the NBBO quoting
requirement impact market makers’
incentives to quote competitively? If so,
how? If not, why? If other options
exchanges eliminated the requirement
that Directed Market Makers quote at
the NBBO to receive Directed Orders as
part of their Directed Order process,
what, if any impact would there be on
market maker quoting behavior, and
more generally on the quality of
quotations in the options markets?
• Under the proposed rule, a Directed
Market Maker to whom an order is
directed in an option subject to the
exchange’s Price/Time execution
algorithm would receive a 40%
allocation ahead of orders of other
market participants, including customer
orders that had time priority over the
Directed Market Maker’s quotation.
What, if any, concerns does this raise for
the options markets?
Comments may be submitted by any
of the following methods:
mstockstill on DSK4VPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–BX–2013–016 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–BX–2013–016. This file
number should be included on the
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16:19 Mar 08, 2013
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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 such
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–
2013–016, and should be submitted on
or before April 1, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–05543 Filed 3–8–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–69039; File No. SR–
NASDAQ–2013–031]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change To
Amend the Attestation Requirement of
Rule 4780 To Allow a Retail Member
Organization To Attest That
‘‘Substantially All’’ Orders Submitted
to the Retail Price Improvement
Program Will Qualify as ‘‘Retail
Orders’’
March 5, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
25 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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notice is hereby given that on February
19, 2013, The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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
NASDAQ is filing with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) a proposed rule change
amend the attestation requirement of
NASDAQ Rule 4780 to allow a Retail
Member Organization (‘‘RMO’’) to attest
that ‘‘substantially all’’ orders submitted
to the Retail Price Improvement
Program (the ‘‘Program’’) will qualify as
‘‘Retail Orders.’’ NASDAQ Rule
4780(b)(2)(C) currently requires RMOs
to attest that ‘‘any order’’ will so qualify,
effectively preventing certain significant
retail brokers from participating in the
Program due to operational constraints.
The text of the proposed rule change
is available from NASDAQ’s Web site at
https://nasdaq.cchwallstreet.com/
Filings/, at NASDAQ’s principal office,
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,
NASDAQ 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.
NASDAQ 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 is proposing an
amendment to NASDAQ Rule
4780(b)(2)(C) to provide that an RMO
may attest that ‘‘substantially all’’ of the
orders it submits to the Program are
Retail Orders, as defined in NASDAQ
Rule 4780(a)(2), replacing the
requirement that the RMO must attest
E:\FR\FM\11MRN1.SGM
11MRN1
]]>Agencies
[Federal Register Volume 78, Number 47 (Monday, March 11, 2013)]
[Notices]
[Pages 15385-15392]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05543]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69040; File No. SR-BX-2013-016]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Proposed Rule Change To Adopt a Directed Order Process
March 5, 2013.
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 February 21, 2013, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III, below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange has filed a proposed rule change offering a new
enhancement [sic] to adopt a Direct Order process.
The text of the proposed rule change is below. Proposed new
language is in italics; deletions are bracketed.
* * * * *
Chapter VI Trading Systems
* * * * *
[[Page 15386]]
Sec. 1 Definitions
The following definitions apply to Chapter VI for the trading of
options listed on BX Options.
(a)-(d) No change.
(e) The term ``Order Type'' shall mean the unique processing
prescribed for designated orders that are eligible for entry into the
System, and shall include:
(1) [Reserved.] Directed Order. The term ``Directed Order'' means
an order to buy or sell which has been directed (pursuant to the
Exchange's instructions on how to direct an order) to a particular
Market Maker (``Directed Market Maker'') after the opening. Directed
Orders are handled within the System pursuant to Chapter VI, Section
10(3).
(2)-(11) No change.
(f)-(h) No change.
* * * * *
Sec. 6 Acceptance of Quotes and Orders
All bids or offers made and accepted on BX Options in accordance
with the BX Options Rules shall constitute binding contracts, subject
to applicable requirements of the Rules of the Exchange and the Rules
of the Clearing Corporation.
(a) General--A System order is an order that is entered into the
System for display and/or execution as appropriate. Such orders are
executable against marketable contra-side orders in the System.
(1) All System Orders shall indicate whether they are a call or put
and buy or sell and a price, if any. Systems Orders can be designated
as Immediate or Cancel (``IOC''), Good-till-Cancelled (``GTC''), Day
(``DAY'') or WAIT.
(2) A System order may also be designated as a Directed Order,
Limit Order, a Minimum Quantity Order, a Market Order, a Price
Improving Order, an All-or-None Order or a Post-Only Order.
(b)-(c) No change.
* * * * *
Sec. 10 Book Processing
System orders shall be executed through the BX Book Process set
forth below:
(1)-(2) No change.
(3) [Price Improvement--any potential price improvement resulting
from an execution in the System shall accrue to the party that is
removing liquidity previously posted to the Book.]
Directed Order Processing.
(i) When BX's disseminated price is the NBBO and the Directed
Market Maker is quoting at BX's disseminated price, the Directed Order
shall be executed and allocated as follows:
(A) If the option is subject to the Price/Time execution algorithm,
the Directed Market Maker shall receive 40% of the Directed Order at a
particular price (``Directed Allocation''), unless such Directed Market
Maker was first in time priority, in which case such Directed Market
Maker shall receive the amount of the Directed Order equal to the
Directed Market Maker's quote/order size at that price. If there are
multiple resting quotes/orders from the same Directed Market Maker, the
Directed Allocation will be distributed among them in time sequence.
Then, the remainder of the Directed Order shall be allocated to other
participants in price/time priority, including any remaining contracts
of the Directed Market Maker and multiple quotes/orders from the same
firm.
(B) If the option is subject to the Pro-Rata execution algorithm,
Public Customer limit orders resting on the limit order book at the
execution price will execute against the Directed Order first. Then,
the Directed Market Maker shall receive the greater of: the pro-rata
allocation to which such Directed Market Maker would otherwise be
entitled or the Directed Allocation of 40% of the Directed Order at a
particular price. If there are multiple quotes/orders from the same
Directed Market Maker, the Directed Allocation will be distributed
among those quotes/orders on a size pro rata basis. Once the Directed
Allocation is determined, any remaining contracts associated with the
Directed Market Maker's quotes/orders are excluded from the remaining
pro-rata allocation. If there are any remaining contracts of the
Directed Order, they will be allocated on a size pro rata basis among
the remaining Participants (except the Directed Market Maker).
(ii) When BX's disseminated price is the NBBO, and the quotation
disseminated by the Directed Market Maker on the opposite side of the
market from the Directed Order is inferior to the NBBO, the Directed
Order shall be automatically executed and allocated to those quotations
and orders at the NBBO in accordance with this Section.
(iii) If BX's disseminated price is not the NBBO, the Directed
Order shall be processed in accordance with Chapter VI, Sections 7, 10
and 11.
(iv) In addition, the following will apply:
(A) A Directed Market Maker shall not be entitled to receive a
number of contracts that is greater than the size associated with their
order or quote at a particular price level.
(B) Directed Allocations are rounded up to the next whole number.
(C) The Directed Allocation is available for the life of the order
and the Directed Market Maker is entitled to the Directed Allocation at
all price levels that the Directed Market Maker has an order or quote.
(D) Directed Market Makers are subject to the quoting requirements
of Chapter VII, Section 6(d)(i)(4).
(E) The Exchange will determine which options are subject to
Directed Allocation.
(4)-(7) No change.
(8) Price Improvement--any potential price improvement resulting
from an execution in the System shall accrue to the party that is
removing liquidity previously posted to the Book.
* * * * *
Chapter VII Market Participants
* * * * *
Sec. 6 Market Maker Quotations
(a)-(c) No change.
(d) Continuous Quotes. A Market Maker must enter continuous bids
and offers for the options to which it is registered, as follows:
i. On a daily basis, a Market Maker must during regular market
hours make markets consistent with the applicable quoting requirements
specified in these rules, on a continuous basis [in at least sixty
percent (60%) of the series] in options in which the Market Maker is
registered.
(1) To satisfy this requirement [with respect to quoting a series],
a Market Maker must quote[ such series] 60[90]% of the trading day (as
a percentage of the total number of minutes in such trading day) or
such higher percentage as BX may announce in advance. BX Regulation may
consider exceptions to the requirement to quote 60[90]% (or higher) of
the trading day based on demonstrated legal or regulatory requirements
or other mitigating circumstances. This obligation will apply to all of
a Market Maker's registered options collectively, rather than on an
option-by-option basis. Compliance with this obligation will be
determined on a monthly basis.
(2) Notwithstanding the foregoing, Market Makers shall not be
required to make two-sided markets pursuant to Section 5(a)(i) of these
rules in any Quarterly Option Series, any adjusted option series, and
any option series until the time to expiration for such series is less
than nine months. Accordingly, the continuous quotation obligations set
forth in this rule shall not apply to Market Makers respecting
Quarterly Option Series, adjusted option
[[Page 15387]]
series, and series with an expiration of nine months or greater. For
purposes of this subsection (2), an adjusted option series is an option
series wherein one option contract in the series represents the
delivery of other than 100 shares of underlying stock or Exchange-
Traded Fund Shares.
(3) If a technical failure or limitation of a system of BX prevents
a Market Maker from maintaining, or prevents a Market Maker from
communicating to BX Options timely and accurate quotes, the duration of
such failure or limitation shall not be included in any of the
calculations under this subparagraph (i) with respect to the affected
quotes.
(4) In options in which it receives Directed Orders, a Directed
Market Maker must quote such options 90% of the trading day (as a
percentage of the total number of minutes in such trading day) or such
higher percentage as BX may announce in advance, applied collectively
to all series in all of the options in which the Directed Market Maker
receives Directed Orders (rather than on an option-by-option basis).
Compliance with this obligation will be determined on a monthly basis.
ii.-iii. No change.
(e) No change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The BX Options market launched on June 29, 2012 as a fully
automated, price/time priority execution system built on the core
functionality of the NASDAQ Options Market (``NOM'').\3\ BX Options
operates as an all-electronic system (``System'') with no physical
trading floor and provides for the electronic display and execution of
orders. In its proposed rule change to create the BX Options market, BX
stated that, initially, BX Options would have the same market structure
and rules as NOM, focusing on a price/time priority market.\4\ BX
further stated that, over time, as the BX Options market secured more
participants, it would introduce additional, innovative
functionality.\5\ Accordingly, BX recently introduced a Size Pro-Rata
execution algorithm for BX Options,\6\ which executes orders at a
particular price level based on the size of each Participant's quote or
order as a percentage of the total size of all orders and quotes
resting at that price. BX intends for some options to employ one
algorithm while others employ a different one.
---------------------------------------------------------------------------
\3\ See BX Options Rules, Chapter VI, Section 1(e)(11).
Securities Exchange Act Release No. 67256 (June 26, 2012), 77 FR
39277 (July 2, 2012) (SR-BX-2012-030) (Approving the establishment
of the BX Options market).
\4\ See id. at 39278.
\5\ Securities Exchange Act Release No. 66983 (May 14, 2012), 77
FR 29730 (May 18, 2012) (Notice of filing of SR-BX-2012-030).
\6\ Securities Exchange Act Release No. 68041 (October 11,
2012), 77 FR 63903 (October 17, 2012) (SR-BX-2012-065).
---------------------------------------------------------------------------
At this time, BX proposes its next enhancement to BX Options by
offering a directed order process.\7\ BX proposes to amend various
rules to establish the process. First, BX proposes to define a Directed
Order in Chapter VI, Section 1(e)(1) as an order to buy or sell which
has been directed (pursuant to the Exchange's instructions on how to
direct an order) to a particular Market Maker (``Directed Market
Maker'') after the opening.\8\ It further provides that Directed Orders
are handled within the System pursuant to Chapter VI, Section 10(3),
which is proposed new language.\9\
---------------------------------------------------------------------------
\7\ The term directed order has a different meaning on equities
markets. See e.g., NASDAQ Rule 4751(a)(9)[sic].
\8\ BX also proposes to amend Chapter VI, Section 6(a)(2) to add
Directed Orders to the list of System orders.
\9\ Currently, Section 10(3) governs price improvement. It is
being moved to new Section 10(8).
---------------------------------------------------------------------------
Pursuant to proposed Chapter VI, Section 10(3)(i), when BX's
disseminated price is the National Best Bid/Offer (``NBBO'') and the
Directed Market Maker is quoting at BX's disseminated price, the
Directed Order shall be executed and allocated pursuant to one of BX's
two execution algorithms for options.\10\ If the option is subject to
the Price/Time execution algorithm,\11\ the Directed Market Maker shall
receive 40% of the Directed Order (``Directed Allocation''), unless
such Directed Market Maker was first in time priority, in which case
such Directed Market Maker shall receive the amount of the Directed
Order equal to the Directed Market Maker's quote/order size at that
price. If there are multiple resting quotes/orders from the same
Directed Market Maker, the Directed Allocation will be distributed
among them in time sequence. Then, the remainder of the Directed Order
shall be allocated to other participants in price/time priority,
including any remaining contracts of the Directed Market Maker and
multiple quotes/orders from the same firm.\12\
---------------------------------------------------------------------------
\10\ Chapter VI, Section 10(1).
\11\ Chapter VI, Section 10(1)(A).
\12\ The BX Options trading system identifies Directed Market
Makers by a particular code called an IFI, which BX will use to
consider which quotes/orders are from the same firm.
---------------------------------------------------------------------------
Example 1 (Price/Time)
NBBO: $1.00 x $1.05
BX Options Book \13\
---------------------------------------------------------------------------
\13\ In each example, quotes and orders are listed in the
sequence in which they were received.
---------------------------------------------------------------------------
Firm1 Order A Sell 20 at $1.05
Firm2 Order B Sell 20 at $1.05
MM3 Quote C $1.00 x $1.05 (size 100 x 100)
Firm4 Order D Sell 50 at $1.05
BX Options Best Offer: 190 at $1.05
BX receives a Directed Order to buy 100 contracts at $1.05 directed to
MM3:
40 contracts execute against MM3 Quote C as a Directed Allocation:
40% of 100 contracts
20 contracts execute against Firm1 Order A based on time priority
20 contracts execute against Firm2 Order B based on time priority
20 additional contracts execute against MM3 Quote C based on time
priority
The Directed Order is fully executed
No contracts execute against Firm4 because it is behind Firm1, Firm2,
and MM3 in time priority and no more contracts remain
BX notes that, in this example, MM3 receives additional contracts
beyond the Directed Allocation under the proposed rule, which permits
the Directed Market Maker to retain its position in time priority for
the remainder of the contracts. BX believes that it is reasonable and
encourages Directed Market Makers to display their entire size, which
benefits the quality of BX's market.
BX further notes that if a Public Customer order is involved, the
Directed Allocation is nevertheless available to the Directed
Participant, before the Public Customer order is executed. For example:
[[Page 15388]]
Example 1A (Price/Time With a Public Customer)
NBBO: $1.00 x $1.05
BX Options Book
Firm1 Public Customer Order A Sell 20 at $1.05
Firm2 Broker Dealer Order B Sell 20 at $1.05
MM3 Quote C $1.00 x $1.05 (size 100 x 100)
Firm4 Broker Dealer Order D Sell 50 at $1.05
BX Options Best Offer: 190 at $1.05
BX receives a Directed Order to buy 100 contracts at $1.05 directed to
MM3:
40 contracts execute against MM3 Quote C as a Directed Allocation:
40% of 100 contracts
20 contracts execute against Firm1 Public Customer Order A based on
time priority
20 contracts execute against Firm2 Order B based on time priority
20 additional contracts execute against MM3 Quote C based on time
priority
The Directed Order is fully executed
No contracts execute against Firm4 because it is behind Firm1, Firm2,
and MM3 in time priority and no more contracts remain
BX is proposing to afford a Directed Allocation when there is a
Public Customer order eligible to trade with the Directed Order. BX
understands that other options exchanges' rules respecting directed
orders do not provide a directed allocation to a directed market maker
when there is a customer order ahead of a directed market maker at a
particular price.\14\ However, BX believes it is reasonable and
consistent with applicable statutory standards for the Directed
Allocation to occur, as proposed herein. The Public Customer order is
not precluded from participating in the trade, but rather continues to
stand in time priority once the Directed Allocation occurs. The Public
Customer may not receive a full execution, but had the Directed Order
not been sent to BX, the Public Customer may not have received an
execution at all. The Directed Participant and their relationship with
the provider of that Directed Order may have attracted the order to BX,
to the benefit of the Public Customer order as well as all potential
contra-side orders on the book. Accordingly, there is no particular
reason for a Directed Allocation to operate differently just because a
Public Customer order is involved; the very nature of the price/time
priority model is that Public Customer orders are like all other orders
and do not jump ahead in priority. BX does not believe that this is
unfair to Public Customer orders; it is merely a different model.
---------------------------------------------------------------------------
\14\ For example, the directed order is allocated pursuant to
the price/time priority rule on NYSE Arca. See NYSE Arca Rule
6.76A(a)(1)(A)(ii).
---------------------------------------------------------------------------
New Section 10(3)(i)(B) provides that if the option is subject to
the Size Pro-Rata execution algorithm,\15\ Public Customer limit orders
resting on the limit order book at the execution price will execute
against the Directed Order first. Then, the Directed Market Maker shall
receive the greater of: the pro-rata allocation to which such Directed
Market Maker would otherwise be entitled pursuant to the Size Pro-Rata
execution algorithm or the Directed Allocation of 40% of the Directed
Order. If there are multiple resting quotes/orders from the same
Directed Market Maker, the Directed Allocation will be allocated among
those quotes/orders on a size pro-rata basis. Once the Directed
Allocation is determined, any remaining contracts associated with the
Directed Market Maker's quotes/orders are excluded from the remaining
pro-rata allocation. If there are any remaining contracts of the
Directed Order, they will be allocated on a size pro-rata basis among
the remaining Participants (except the Directed Market Maker). For
example:
---------------------------------------------------------------------------
\15\ Chapter VI, Section 10(1)(B).
---------------------------------------------------------------------------
Example 2 (Pro-Rata)
NBBO: $1.00 x $1.05
BX Options Book
Firm1 Public Customer Order A Sell 20 at $1.05
MM2 Quote B $1.00 x $1.05 (size 100 x 100)
MM3 Quote C $1.00 x $1.05 (size 50 x 50)
MM4 Quote D $1.00 x $1.05 (size 100 x 100)
BX Options Best Offer: 270 at $1.05
BX receives a Directed Order to buy 100 contracts at $1.05 directed to
MM3:
20 contracts execute against Firm1 Public Customer Order A due to
Public Customer priority
40 contracts execute against MM3 Quote C as a Directed Allocation
(40% of 100 contract buy order)
MM2 and MM4 each receive 20 contracts on a size pro-rata basis (50%
each of 40 remaining contracts)
New Section 10(3)(ii) deals with the situation where BX's
disseminated price is the NBBO but the quotation disseminated by the
Directed Market Maker on the opposite side of the market from the
Directed Order is inferior to the NBBO. In such case, the Directed
Order shall be automatically executed and allocated to those quotations
and orders at the NBBO in accordance with this Section as follows:
Example 3 (Price/Time or Pro-Rata--Same Outcome)
NBBO: $1.00 x $1.05
BX Options Book
Firm1 Order A Sell 100 at $1.05
MM2 Quote C $1.00 x $1.06 (size 100 x 100)
BX Options Best Offer: 100 at $1.05
BX receives a Directed Order to buy 50 contracts directed to MM2:
50 contracts execute against Firm1 Order A
The Directed Order is completely filled
MM2 does not receive a Directed Allocation because Quote C is not part
of BX Options' best offer nor the NBBO
New Section 10(3)(iii) covers the situation where BX's disseminated
price is not the NBBO; then, the Directed Order shall be processed in
accordance with Chapter VI, Sections 7, 10 and 11.
Example 4 (Price/Time or Pro-Rata--Same Outcome)
CBOE Quote: $1.00 x $1.05 (size 10 x 10)
BX Options Book
MM1 Quote A $1.00 x $1.06 (size 100 x 100)
MM2 Quote B $1.00 x $1.06 (size 50 x 50)
BX Options Best Offer: 150 at $1.06
NBBO: $1.00 x $1.05 (size 160 x 10)
BX receives a Directed Order to buy 110 contracts at $1.06 directed to
MM2:
10 contracts are routed and executed against the better away offer
of $1.05 (CBOE)
Because the CBOE offer is executed, BX Options is now the NBBO
40 contracts execute against MM2 Quote B as a Directed Allocation
(40% of 100 contracts remaining from the Directed Order)
60 contracts execute against MM1 Quote A
In this example, BX was not initially at the NBBO, but once the
National Best Offer (``NBO'') was exhausted, BX's offer of 150
contracts at $1.06 became the NBO. BX proposes to permit the Directed
Allocation at the next price level, even though the Directed
Participant was not at the NBBO at the time of order receipt, as
described further below. BX understands that other options exchanges'
directed order programs limit directed allocations to situations where
the directed party is at the NBBO at the time of receipt of the
[[Page 15389]]
directed order. BX believes that it is consistent with the purpose of
the NBBO requirement to structure its Directed Order program as
proposed herein for the following reasons.
The purpose of the requirement for the directed participant to be
at the NBBO is to encourage such participant to quote competitively
rather than to quote a wide market and wait for directed orders to
arrive. BX believes that permitting the Directed Market Maker to
receive a Directed Allocation even if such market maker was not on the
NBBO at the time of receipt of the Directed Order still encourages
competitive quoting. The Directed Order will trade at the NBBO at the
time it was received with whatever contracts are available. If, and
only if, contracts remain, then the order can execute at the next price
level. At that next price level that is the new NBBO, the Directed
Market Maker must be on the NBBO. Under the proposal, such market maker
is being rewarded for being at the next best price, consistent with the
purposes of the NBBO requirement. The market maker has an incentive to
quote competitively because quoting a tick or two away from the NBBO is
likely to result in very little trading for that market maker,
especially if other quotes and orders are at or closer to the NBBO and
especially in more liquid options.
Providing market makers with an enhanced allocation for order flow
that is specifically directed to that market maker when the market
maker is not initially on the NBBO is fair and does not create
incentives to avoid quoting at the NBBO. There is fierce competition
within the BX Options market and within the broader options market
place. Within the BX Options market, there are many market makers who
compete for available order flow on the basis of their quoted price. If
a market maker's price is not equal to or better than all other quoted
prices, they will simply not trade until all other market makers (and
all other participants) trade at the superior price. This creates and
supports healthy competition among market makers to quote the best
price possible. In addition to the competition among market makers,
there are also other market participants (broker-dealer, Public
Customer, professional, etc.) who compete against each other and
against market makers based on price, thus providing a further
incentive for market makers to provide the best price possible.
Finally, in the broader options marketplace, BX Options market makers
not only have to compete with the market makers and participants on the
BX Options market, but also with the plethora of market makers and
other participants who quote or post orders on options exchanges other
than BX Options. Indeed, the incentive to provide a competitive quote
is strong due to the inherently competitive nature of today's options
markets. Necessarily, a market maker who does not match or improve the
NBBO on a consistent basis does not trade often. This proposal does not
create a disincentive for a market maker to match or improve the NBBO.
BX believes that this is an issue of timing of the directed allocation
and not whether it is appropriate to afford a directed allocation at
the next price level.
Providing directed order functionality should also add an
additional layer of competition among those market makers who attempt
to attract directed order flow. When market makers approach order flow
providers to send directed order flow, the order flow providers expect
clear data as evidence that directing order flow to the market maker
will benefit the order flow provider and more importantly the order
flow provider's customers. As more market makers attempt to attract
order flow, they will likely need to show ever improving quote
statistics. If a market maker were to quote $0.01 outside the NBBO in
hopes of capturing some miniscule amount of order flow at a better
price than everyone else, the order flow provider would see this in
their quality of execution statistics and simply stop directing order
flow to the market maker. Here again, there is a strong incentive to be
matching or improving the NBBO in order to attract order flow and
trade.
BX notes that at the time of the approval of the first directed
order programs, routing among the options exchanges occurred through a
central linkage process and executions through multiple price levels
were not as seamless and efficient as today. In the current
environment, executions occur across multiple price levels with
simultaneous outbound routing. BX believes that order execution should
not be inhibited by the artificial constraint of limiting directed
allocations to directed participants who are on the NBBO at the time of
order receipt in an options marketplace with vigorous competition and
actively changing markets. It is sufficient for the directed
participant to be on the NBBO at the time of execution.
New Section 10(3)(iv) incorporates several additional provisions
respecting the Directed Order process. Specifically, a Directed Market
Maker shall not be entitled to receive a number of contracts that is
greater than the size associated with their order or quote at a
particular price level. This provision is common in other options
exchanges' directed order programs and is intended to incent Directed
Market Makers to show more size. Much like a market maker has an
incentive to match or improve the NBBO in order to trade more often, a
market maker also has the incentive to display as much liquidity as
possible in order to trade more volume. The resulting additional size
at the NBBO benefits investors by making the market more liquid, which,
in turn, makes it easier for investors to enter and exit their specific
options positions.
In addition, Directed Allocations are rounded up to the next whole
number.
Example 5 (Price/Time or Pro-Rata--Same Outcome)
NBBO: $1.00 x $1.05
BX Options Book
MM1 Quote A $1.00 x $1.05 (size 100 x 100)
MM2 Quote B $1.00 x $1.05 (size 50 x 50)
BX Options Best Offer: 150 at $1.05
BX receives a Directed Order to buy 91 contracts at $1.05 directed to
MM2:
37 contracts execute against MM2 Quote B as a Directed Allocation
(40% of 91 = 36.4 rounded up to 37)
54 contracts execute against MM1 Quote A
BX understands that the directed order programs of other options
exchanges have generally limited the amount of the directed allocation
to 40% of the size of the directed order, which is what BX has proposed
herein. Because BX intends to round that allocation up to the nearest
whole number, BX acknowledges that it is mathematically possible for
its proposed Directed Allocation to exceed 40% in certain situations,
but, of course, because it is rounding to the nearest whole number,
rounding will necessarily never result in more than one additional
options contract being added to the Directed Allocation. Even if such
one additional contract caused the Directed Allocation to exceed 40%,
BX believes that this is appropriate and reasonable because it is only
one contract, regardless of the percentage.\16\ Other options
entitlement programs approved by the Commission sometimes exceed a 40%
guarantee, also in limited, mathematically-driven situations. For
[[Page 15390]]
example, the specialist or lead market maker entitlement permits the
allocation of five contracts and less to a particular participant,
which is much greater than the one contract proposed herein (i.e. the
specialist entitlement allows for a 100% allocation for orders of 5
contracts or less).\17\ Furthermore, specialist entitlement programs
also provide for a 60% allocation in situations where the split is
between two participants. Furthermore, pursuant to proposed
subparagraph (iv)(C), the Directed Allocation is available for the life
of the order. If a Directed Order is not executed upon receipt, it
retains its status as a Directed Order, such that, once it becomes
executable, it is subject to Directed Order Handling under new Section
10(3).
---------------------------------------------------------------------------
\16\ Generally, the larger the number of contracts being
rounded, the smaller the percentage, with some mathematical
variation. For example, an order of 9 contracts would round up from
3.6 to 4 contracts or 44.44% of the order, whereas an order for
91contracts would be rounded up for directed allocation purposes
from 36.4 to 37 contracts or 40.66% of the order.
\17\ The specialist on NYSE MKT receives a 100% allocation on
orders of 5 contracts or less and 40% of other eligible orders, even
though the specialist's quoting obligation is the same as the
proposed BX Options Directed Market Maker quoting obligation.
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Example 6 (Price/Time or Pro-Rata--Same Outcome)
CBOE Quote: $1.00 x $1.05 (size 10 x 10)
NBBO: $1.00 x $1.05 (size 160 x 10)
BX Options Book
MM1 Quote A $1.00 x $1.06 (size 100 x 100)
MM2 Quote B $1.00 x $1.06 (size 50 x 50)
BX Options Best Offer: 150 at $1.06
BX receives a non-routable Directed Order to buy 100 contracts at $1.06
directed to MM2:
The order is posted on the BX Options book at $1.05 and displayed at
$1.04 \18\
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\18\ See Chapter VI, Section 11.
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CBOE updates its quote to $1.00 x $1.07 (size 10 x 10)
The new NBBO is $1.00 x $1.06 (size 160 x 150)
The Directed Order can now execute against the BX Options book at $1.06
as follows:
40 contracts execute against MM2 Quote B as a Directed Allocation
(40% of the 100 contract buy order)
60 contracts execute against MM1 Quote A
The Exchange believes that it is useful and beneficial for the
order to retain its status as a Directed Order, because this handling
is consistent with the order instructions and original intent of the
submitting Participant. On other options exchanges, the ``directed
order'' designation is only considered upon receipt of the order.\19\
BX believes that its Participants may find this feature attractive;
otherwise, Participants might consider cancelling and re-entering the
order so it is treated as a Directed Order, which would be less
efficient and would increase message traffic. BX does not believe that
retaining directed order status on the book is controversial or
inconsistent with the Act. Nor does BX believe that it undermines the
policy underpinnings of directed order programs. Rather, it is an
innovative enhancement intended to make entering directed orders more
efficient and modern. It is possible that more directed allocations
will occur because orders retain their directed order status, but the
same result could be achieved today by, inefficiently, reentering
directed orders rather than leaving them on the book as non-directed
orders.
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\19\ See e.g., Phlx Rule 1080(l)(ii), which provides: When the
Exchange's disseminated price is the NBBO at the time of receipt of
the Directed Order, and the Directed Specialist, SQT or RSQT is
quoting at the Exchange's disseminated price, the Directed Order
shall be automatically executed and allocated in accordance with
Rule 1014(g)(viii).
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In addition, the Directed Market Maker is entitled to the Directed
Allocation at all price levels at which the Directed Market Maker has
an order or quote. This is intended to reflect that orders are
executable at multiple price levels, and that, today, market makers can
enter orders at multiple price levels.
Example 7 (Price/Time or Pro-Rata--Same Outcome)
NBBO: $1.00 x $1.05
BX Options Book
MM1 Quote A $1.00 x $1.05 (size 20 x 20)
MM2 Quote B $1.00 x $1.05 (size 10 x 10)
MM3 Quote C $1.00 x $1.06 (size 100 x 100)
MM2 Quote D $1.00 x $1.06 (size 50 x 50)
BX Options Best Offer: 30 at $1.05
BX receives a Directed Order to buy 110 contracts at $1.06 directed to
MM2:
20 contracts execute against MM1 Quote A
10 contracts execute against MM2 Quote B
$1.05 price level is completely exhausted
32 contracts execute against MM2 Quote D as a Directed Allocation
(40% of 80 remaining contracts from buy order)
48 contracts execute against MM3 Quote C
New Quoting Requirement for All Market Makers
BX also proposes to change the quoting obligation applicable to its
Market Makers. Currently, Chapter VII, Section 6(d) provides that on a
daily basis, a Market Maker must during regular market hours make
markets consistent with the applicable quoting requirements specified
in these rules, on a continuous basis in at least sixty percent (60%)
of the series in options in which the Market Maker is registered. It
further provides that, to satisfy this requirement with respect to
quoting a series, a Market Maker must quote such series 90% of the
trading day (as a percentage of the total number of minutes in such
trading day) or such higher percentage as BX may announce in advance.
BX Regulation may consider exceptions to the requirement to quote 90%
(or higher) of the trading day based on demonstrated legal or
regulatory requirements or other mitigating circumstances.
BX proposes to better align its market maker quoting requirement
with that of other exchanges, such as NYSE Arca and NYSE MKT.
Specifically, BX proposes to reduce the quoting requirement for non-
Directed BX Options Market Makers as follows: A Market Maker must quote
such options 60% of the trading day (as a percentage of the total
number of minutes in such trading day) or such higher percentage as BX
may announce in advance. BX Regulation may consider exceptions to the
requirement to quote 60% (or higher) of the trading day based on
demonstrated legal or regulatory requirements or other mitigating
circumstances. This obligation will apply to all of a Market Maker's
registered options collectively, rather than on an option-by-option
basis. Compliance with this obligation will be determined on a monthly
basis. This is the same requirement as on other options exchanges.\20\
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\20\ See NYSE Arca Rule 6.88 and NYSE MKT Rule 964.1NY.
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BX believes that this is appropriate for two reasons. First, BX's
current Market Maker quoting requirement is much more stringent than
certain other exchanges. Quoting each series 90% of the trading day is
much more stringent than looking at all options in which a Market Maker
is registered, because it allows for some number of series not to be
quoted at all, as long as the overall standard is met. This better
accommodates the occasional issues that may arise in a particular
series, whether technical or manual. The existing requirement may at
times discourage liquidity in particular options series because a
market maker is forced to focus on a momentary lapse rather than using
the appropriate resources to focus on the options series
[[Page 15391]]
that need and consume additional liquidity. As a new market, BX
believes that it can better attract Market Makers to the BX Options
market and grow its market if its quoting obligation is more in line
with that of other exchanges. In addition, as BX seeks to introduce
directed orders, the market maker quoting obligation has become an
obstacle to crafting a competitive, attractive directed order program.
Specifically, because the Commission has required directed participants
to be subject to heightened quoting obligations as compared to non-
directed market makers, BX would have to adopt a Directed Market Maker
quoting obligation more stringent than the current 90% of the time/60%
of the series requirement for regular BX Options Market Makers. BX does
not believe that a quoting requirement for greater than 90% of the time
would attract Directed Market Makers to BX Options, as BX embarks on
growing its market with new functionality and features. In fact, a more
stringent quoting requirement would likely discourage new market makers
from participating in the BX Options market and inhibit current market
makers' ability to provide liquidity effectively.
New Quoting Requirement for Directed Market Makers
New Section 10(3)(iv)(D) makes clear that Directed Market Makers
are subject to the quoting requirements of new Chapter VII, Section
6(d)(iv). Specifically, in options in which it receives Directed
Orders, a Directed Market Maker must quote 90% of the trading day (as a
percentage of the total number of minutes in such trading day) or such
higher percentage as BX may announce in advance. BX Regulation may
consider exceptions to the requirement to quote 90% (or higher) of the
trading day based on demonstrated legal or regulatory requirements or
other mitigating circumstances. This obligation will apply collectively
to all series in all of the options in which the Directed Market Maker
receives Directed Orders, rather than on an option-by-option basis.
Compliance with this obligation will be determined on a monthly basis.
This quoting obligation is more stringent than that which is applicable
to regular BX Options Market Makers, who will now have to quote, under
this proposal, at least 60% of the time the Exchange is open for
trading in registered options. Such quotations must meet the quote
width requirements of Chapter VII, Section 6(d)(ii). Once a Directed
Market Maker receives a Directed Order, the heightened quoting
obligation is triggered and applies to the options in which the
Directed Market Maker receives Directed Orders.
Lastly, Section 10(3)(iv)(E) will provide that the Exchange will
determine which options have the Directed Allocation functionality
available.\21\ BX will issue an Options Trader Alert to inform its
Participants in which options the Directed Allocation will be
available.
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\21\ Directed Orders received in options where BX Options is not
offering Directed Order processing will not be rejected; instead,
such orders will be handled normally as non-Directed Orders.
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Conclusion
In summary, BX seeks to compete with the many options exchanges
that offer directed orders in their respective markets and seeks to
introduce directed order functionality, as described above.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \22\ in general, and furthers the objectives of Section
6(b)(5) of the Act \23\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system, and, in general,
to protect investors and the public interest, because it will establish
a directed order process similar to what operates on other exchanges,
as explained in detail herein, which will provide Participants with
additional choices among the many competing exchanges with regard to
their execution needs and strategies. BX Options operates in an
intensely competitive environment and seeks to offer the same services
that its competitors offer and in which its customers find value.
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\22\ 15 U.S.C. 78f(b).
\23\ 15 U.S.C. 78f(b)(5).
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In its approval of other options exchange directed order programs,
the Commission has, like proposals to amend a specialist guarantee,
focused on whether the percentage of the ``entitlement'' would rise to
a level that could have a material adverse impact on quote competition
within a particular exchange, and concluded that such programs do not
jeopardize market integrity or the incentive for market participants to
post competitive quotes.\24\ BX's proposed Directed Allocation of 40%
is consistent with the directed order allocations of other options
exchanges, except for the impact of rounding up, as described above,
which BX does not believe is significant. BX notes that the remaining
portion of each order will still be allocated based on the competitive
bidding of market participants. In addition, at the time of execution,
a BX Options Directed Market Maker will have to be quoting at the NBBO
for the size of the Directed Allocation to receive the Directed
Allocation, which is intended to incent the Directed Market Maker to
quote aggressively, because he cannot merely step up and match the NBBO
after the Directed Order is received. Similarly, BX believes there is
an incentive for Directed Market Makers to quote competitively even
though they may receive a Directed Allocation when such Directed Market
Maker is not on the NBBO at the time of order receipt, but is at the
time of execution. BX also notes that BX Options Directed Market Makers
will have greater quoting obligations than other BX Options Market
Makers.
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\24\ See Securities Exchange Act Release No. 51759 (May 27,
2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91).
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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. The competition among the
options exchanges is vigorous and this proposal is intended to afford
the BX Options market the opportunity to compete for directed order
flow. In that regard, the proposal is pro-competitive and will offer
market participants an additional venue for the execution of directed
orders. The Exchange does not believe that the proposal imposes a
burden on intra-market competition not necessary or appropriate in
furtherance of the purposes of the Act, because the ability to send
directed orders is available to all Participants, and the ability to
become a Market Maker is available to all Market Makers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to
[[Page 15392]]
90 days of such date if it finds such longer period to be appropriate
and publishes its reasons for so finding or (ii) as to which the
Exchange consents, the Commission shall: (a) By order approve or
disapprove such proposed rule change, or (b) institute proceedings to
determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. The Commission also requests and
encourages interested persons to submit comments on the following
specific questions:
Unlike the Directed Order rules of other options
exchanges, BX's proposed rule would not require that a Directed Market
Maker be quoting at the NBBO at the time a Directed Order is received.
Would the lack of the NBBO quoting requirement impact market makers'
incentives to quote competitively? If so, how? If not, why? If other
options exchanges eliminated the requirement that Directed Market
Makers quote at the NBBO to receive Directed Orders as part of their
Directed Order process, what, if any impact would there be on market
maker quoting behavior, and more generally on the quality of quotations
in the options markets?
Under the proposed rule, a Directed Market Maker to whom
an order is directed in an option subject to the exchange's Price/Time
execution algorithm would receive a 40% allocation ahead of orders of
other market participants, including customer orders that had time
priority over the Directed Market Maker's quotation. What, if any,
concerns does this raise for the options markets?
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-2013-016 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-BX-2013-016. 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 such 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-2013-016, and should be
submitted on or before April 1, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05543 Filed 3-8-13; 8:45 am]
BILLING CODE 8011-01-P
