Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing of Proposed Rule Change Relating to Market Maker Quoting Obligations and the Introduction of a Lead Market Maker, 38620-38628 [2014-15792]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 130 (Tuesday, July 8, 2014)]
[Notices]
[Pages 38620-38628]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15792]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72502; File No. SR-BX-2014-035]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change Relating to Market Maker Quoting 
Obligations and the Introduction of a Lead Market Maker

July 1, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 19, 2014, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II, below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to: (1) Amend BX Market Maker quoting 
obligations; (2) adopt new BX Rules at Chapter VII, Section 13 and 14 
to allow qualified Options Participants to act as a Lead Market Maker, 
or LMM, in one or more options classes; (3) revise priority rules to 
entitle LMMs participation entitlement; and (4) provide for a Public 
Customer priority overlay for the Price/Time Execution Algorithm.
    The text of the proposed rule change is available on the Exchange's 
Web site at https://nasdaqomxbx.cchwallstreet.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the current BX 
Market Maker quoting obligations and adopt rules to permit BX Market 
Makers to act as Lead Market Makers, or LMMs, in one or more options 
classes, provided the LMM meets certain obligations and quoting 
requirements as provided for in the new proposed Exchange Rules. The 
Exchange proposes to provide assigned LMMs with certain participation 
entitlements. Finally, the Exchange proposes to provide Public 
Customers with priority when the Price/Time execution algorithm is in 
effect. The Exchange believes that these amendments, which will be 
described below in greater detail, will enhance competition on the 
Exchange by rewarding LMMs who meet certain obligations on BX.
BX Market Maker Quoting Obligations
    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, Inc. (``NYSE Arca'') 
and NYSE MKT LLC (``NYSE MKT''). Specifically, BX proposes to reduce 
the quoting requirement for 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 quoting

[[Page 38621]]

obligation will apply to all of a Market Maker's registered options 
collectively on a daily basis, rather than on an option-by-option 
basis. This quoting obligation will be reviewed on a monthly basis, and 
allows the Exchange to review the Market Makers' daily compliance in 
the aggregate and determine the appropriate disciplinary action for 
single or multiple failures to comply with the continuous quoting 
requirement during the month period. However, determining compliance 
with the continuous quoting requirement on a monthly basis does not 
relieve a Market Maker of the obligation to provide continuous two-
sided quotes on a daily basis, nor will it prohibit the Exchange from 
taking disciplinary action against a Market Maker for failing to meet 
the continuous quoting obligation each trading day. This is the same 
requirement as on other options exchanges.\3\
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    \3\ See NYSE Arca Rule 6.37B(c) and NYSE MKT Rule 925.1NY(c).
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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 that need and 
consume additional liquidity. 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.
    The Exchange believes that the amendments to Section 6(d)(i)(1) of 
Chapter VII, which would allow applying the quoting requirements for 
Market Makers collectively across all options classes, is a fair and 
more efficient way for the Exchange and market participants to evaluate 
compliance with the continuous quoting requirements. Applying the 
continuous quoting requirement collectively across all option classes 
rather than on an issue-by-issue basis is beneficial to Market Makers 
by providing some flexibility to choose which series in their appointed 
classes they will continuously quote--increasing the continuous quoting 
obligation in the series of one class to allow for a decrease in the 
continuous quoting obligation in the series of another class. This 
flexibility does not, however, diminish the Market Maker's obligation 
to continuously quote a significant part of the trading day in a 
significant percentage of series. Flexibility is important for classes 
that have relatively few series and may prevent the Market Maker, in 
particular, from breaching the continuous quoting requirement when 
failing to meet the specified quote amount during the trading day (as 
proposed) in more than one series in an appointed class. However, this 
flexibility does not act to relieve the Market Maker of his continuous 
quoting obligations and does not, for example, relieve the Market Maker 
from providing liquidity in classes experiencing heightened volatility. 
The Exchange provides in the proposed rule that determining compliance 
with the continuous quoting requirement on a monthly basis will not 
relieve a Market Maker of the obligation to provide continuous two-
sided quotes on a daily basis, nor will it prohibit the Exchange from 
taking disciplinary action against a Market Maker for failing to meet 
the continuous quoting obligation each trading day. The Exchange 
believes that the balance between the benefits provided to Market 
Makers and the obligations imposed upon Market Makers by the proposed 
rule change is appropriate.
    The Exchange believes that the proposal will not diminish, and in 
fact may increase, market making activity on the Exchange, by 
establishing quoting compliance standards that are reasonable and are 
already in place on other options exchanges. By amending Section 6 of 
Chapter VII to state that quoting obligations apply to a Market Maker's 
appointed issues collectively, this proposal is similar to that of 
other options markets and puts the Exchange on an equal competitive 
footing.\4\ Moreover, as discussed the Exchange believes that the 
proposal may increase market making activity on the Exchange by 
establishing quoting compliance standards that are reasonable and 
already in place on other options exchanges.
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    \4\ The proposed rule text is, as noted, similar in all material 
respects to BATS Exchange, Inc. (``BATS'') Rule 22.6(d)(3) and 
NASDAQ OMX PHLX LLC (``Phlx'') Rule 1014.
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Lead Market Makers Allocations
    Today on BX there are two types of Options Participants, Options 
Order Entry Firms and Options Market Makers. Options Order Entry Firms, 
or OEFs, are Options Participants who represent customer orders as 
agent on BX Options and non-Market Maker Participants conducting 
proprietary trading as principal. Options Market Makers are Options 
Participants registered with the Exchange as Options Market Makers in 
one or more listed options on BX.\5\ BX may suspend or terminate any 
registration of an Options Market Maker when, in BX's judgment, the 
interests of a fair and orderly market are best served by such action.
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    \5\ See BX Options Rules at Chapter VII.
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    To become an Options Market Maker, an Options Participant is 
required to register by filing a written application. BX does not place 
any limit on the number of entities that may become Options Market 
Makers. BX Options Market Makers are required to electronically engage 
in a course of dealing to enhance liquidity available on BX and to 
assist in the maintenance of fair and orderly markets.\6\ Among other 
things, Options Market Makers must maintain minimum net capital in 
accordance with SEC and BX Options Rules. The Exchange is proposing 
herein that Options Market Makers must quote 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.\7\ 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. Market Makers shall not be required 
to make two-sided markets pursuant to Section 5(a)(i) of Chapter VII in 
any Quarterly Option Series, adjusted option series, or any option 
series until the time to expiration for such series is less than nine 
months. Accordingly, the continuous quotation obligations set forth in 
this rule shall not apply to Market Makers respecting Quarterly

[[Page 38622]]

Option Series, adjusted option series,\8\ or any series with an 
expiration of nine months or greater. However, a LMM may still receive 
a participation entitlement in such series if it elects to quote in 
such series and otherwise satisfies the requirements of Chapter VI, 
Section 10. If a technical failure or limitation of a system of BX 
prevents a Market Maker from maintaining, or prevents a Market Maker 
from communicating to BX Options, timely and accurate quotes, the 
duration of such failure or limitation shall not be included in any of 
these calculations with respect to the affected quotes.\9\ Options 
Market Makers must also comply with certain bid/ask differentials 
(quote spread parameters).\10\ Options on equities (including Exchange-
Traded Fund Shares), and on index options must be quoted with a 
difference not to exceed $5 between the bid and offer regardless of the 
price of the bid, including before and during the opening.\11\ However, 
respecting in-the-money series where the market for the underlying 
security is wider than $5, the bid/ask differential may be as wide as 
the quotation for the underlying security on the primary market.\12\
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    \6\ Options Market Makers receive certain benefits for carrying 
out their duties. For example, a lender may extend credit to a 
broker-dealer without regard to the restrictions in Regulation T of 
the Board of governors of the Federal Reserve System if the credit 
is to be used to finance the broker-dealer's activities as market 
maker on a national securities exchange. Thus, an Options Market 
Maker has a corresponding obligation to hold itself out as willing 
to buy and sell options for its own account on a regular or 
continuous basis to justify this favorable treatment.
    \7\ As noted herein, today BX Options Market Makers 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.
    \8\ 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.
    \9\ Substantial or continued failure by an Options Market Maker 
to meet any of its obligations and duties, will subject the Options 
Market Maker to disciplinary action, suspension, or revocation of 
the Options Market Maker's registration in one or more options 
series.
    \10\ See BX Options Rules at Chapter VII, Section 6.
    \11\ Id.
    \12\ Id.
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    At this time, the Exchange is proposing a third type of Options 
Participant, an LMM. Approved BX Options Market Makers \13\ may become 
an LMM in one or more listed options. Initial application(s) to become 
an LMM shall be in a form and/or format prescribed by the Exchange and 
shall include the following: (1) Background information on the LMM 
including experience in trading options; (2) the LMM's clearing 
arrangements; (3) adequacy of capital; and (4) adherence to Exchange 
rules and ability to meet obligations of an LMM.\14\ Subsequent 
applications shall be in a form and/or format prescribed by the 
Exchange and shall include the information requested therein, 
including, but not limited to, an account of the abilities and 
background of the applicant as well as any other special requirements 
that the Exchange may require.\15\ Once an applicant is approved by the 
Exchange as an LMM, any material change in capital shall be reported in 
writing to the Exchange within two business days after the change. BX 
will not place any limit on the number of entities that may become 
LMMs, however the Exchange notes that there will only be one LMM per 
class.
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    \13\ See Chapter VII, Section 2.
    \14\ See proposed BX Options Rules at Chapter VII, Section 
13(A)(b).
    \15\ See proposed BX Options Rules at Chapter VII, Section 
13(A)(c).
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    When an options class is to be allocated or reallocated by the 
Exchange, the Exchange will solicit applications from all eligible 
LMMs. If the Exchange determines that special qualifications should be 
sought in the successful applicant, it shall indicate such desired 
qualifications in the notice.\16\
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    \16\ See proposed BX Options Rules at Chapter VII, Section 
13(B)(a).
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    Further, the Exchange proposes to require an allocation application 
to be submitted in writing to the Exchange's designated staff and shall 
include, at a minimum, the name and background of the LMM, the LMM's 
experience and capitalization demonstrating an ability to trade the 
particular options class sought, and any other reasons why the LMM 
believes it should be assigned or allocated the security. In addition, 
the Exchange may also require that the application include other 
information such as system acceptance/execution levels and guarantees. 
The Exchange may re-solicit applications for any reason, including if 
it determines that its initial solicitation resulted in an insufficient 
number of applicants.\17\
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    \17\ See proposed BX Options Rules at Chapter VII, Section 
13(B)(b).
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    Allocation decisions and automatic allocations shall be 
communicated in writing to Exchange members. Once the LMM is allocated 
an issue, such LMM shall immediately notify the Exchange in writing of 
any change to the respective system acceptance/execution levels or any 
other material change in the application for any assigned issue. If an 
LMM seeks to withdraw from allocation in a security, it should so 
notify the Exchange at least one business day prior to the desired 
effective date of such withdrawal.\18\
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    \18\ See proposed BX Options Rules at Chapter VII, Section 
13(B)(c)(d) and (e).
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    Options on Related Securities shall be automatically allocated to 
the LMM that is already the LMM in Currently Allocated Securities (as 
defined hereafter). Only one LMM may be allocated to an options class. 
The Exchange is defining the term ``Related Securities'' for purpose of 
Chapter VII, Section 13 as follows: ``Related Securities means, but is 
not limited to: Securities of a partially or wholly owned subsidiary; 
securities that are convertible into the securities of the issuer; 
warrants on securities of the issuer; securities issued in connection 
with a name change; securities issued in a reverse stock split; 
contingent value rights; ``tracking'' securities designed to track the 
performance of the underlying security or corporate affiliate thereof; 
securities created in connection with the merger or acquisition of one 
or more companies; securities created in connection with a ``spin-off'' 
transaction; convertible on non-convertible senior securities; and 
securities into which a listed security is convertible, where such 
Related Securities emanate from or are related to securities underlying 
options that are currently allocated to a LMM on the Exchange 
(``Currently Allocated Options''). The term Related Securities does not 
include Exchange Traded Funds.\19\
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    \19\ See proposed BX Options Rules at Chapter VII, Section 
13(B)(f).
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    The Exchange shall allocate new options classes, or reallocate 
existing options classes to applicants based on the results of such 
factors as the Exchange deems appropriate. Among the factors that the 
Exchange may consider in making such decisions are: The number and type 
of securities in which applicants are currently registered; the capital 
and other resources of the applicant; recent allocation decisions 
within the past eighteen months; the desirability of encouraging the 
entry of new LMMs into the Exchange's market; order flow commitments; 
any prior transfers of LMM privileges by the applicant and the reasons 
therefore and such policies as the Board instructs the Exchange to 
follow in allocating or reallocating securities. The Exchange may also 
consider: Quality of markets data; observance of ethical standards and 
administrative responsibilities. Solely with respect to options class 
allocations or reallocations, past or contemplated voluntary delisting 
of options by LMMs, done in the best interest of the Exchange, will not 
be viewed negatively by the Exchange in making allocation and 
reallocation decisions. The Exchange is empowered to allocate option 
classes for a limited period of time or subject to such other terms and 
conditions as it deems appropriate.\20\
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    \20\ See proposed BX Options Rules at Chapter VII, Section 
13(C).
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    Requests to allocate or transfer allocation, or transfer of an 
options class request must be made in writing to the

[[Page 38623]]

Exchange and such transfer may only be made to an approved LMM. The LMM 
shall be assigned to an options class for a period defined by the 
Exchange. The Exchange will communicate such period in solicitation 
applications (notices). The Exchange may re-allocate an options class 
after the defined period has expired.\21\
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    \21\ See proposed BX Options Rules at Chapter VII, Section 
13(D).
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    The proposed rules relating to the appointment of LMMs and the 
allocation of option series are similar to rules currently in place on 
NASDAQ OMX PHLX LLC (``Phlx'') with respect to its appointment of 
specialists.\22\
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    \22\ See Phlx Rules 501, 505, 506 and 511.
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LMM Obligations and Quotations
    The Exchange also requires that LMM transactions should constitute 
a course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market, and no LMM should enter into 
transactions or make bids or offers that are inconsistent with such a 
course of dealings.\23\ Further, with respect to each class of options 
in his or her appointment, an LMM is expected to engage, to a 
reasonable degree under the existing circumstances, in dealings for his 
own account when there exists, or it is reasonably anticipated that 
there will exist, a lack of price continuity, a temporary disparity 
between the supply of and demand for a particular option contract, or a 
temporary distortion of the price relationships between option 
contracts of the same class. Without limiting the foregoing, an LMM is 
expected to perform the following activities in the course of 
maintaining a fair and orderly market pursuant to proposed Chapter VII, 
Section 14(b): (i) To compete with other Market Makers to improve the 
market in all series of options classes to which the LMM is appointed; 
(ii) to make markets that will be honored for the number of contracts 
entered into the Trading System \24\ in all series of options classes 
within the LMM's appointment; (iii) to update market quotations in 
response to changed market conditions in all series of options classes 
within the LMM's appointment; (iv) options traded on the Trading System 
may be quoted with a difference not to exceed $5 between the bid and 
offer regardless of the price of the bid; and (v) BX Regulation may 
establish quote width differences other than as provided in 
subparagraph (iv) for one or more options series. In the event the bid/
ask differential in the underlying security is greater than the bid/ask 
differential set forth in subsection (b)(iv)-(v) of Section 14 the 
permissible price differential for any in-the-money option series may 
be identical to those in the underlying security market. In the case of 
the at-the-money and out-of-the-money series, BX Regulation may waive 
the requirements of subsections (b)(iv)-(v) of Section 14 on a case-by-
case basis when the bid/ask differential for the underlying security is 
greater than .50. In such instances, the bid/ask differentials for the 
at-the-money series and the out-of-the-money series may be half as wide 
as the bid/ask differential in the underlying security in the primary 
market. Exemptions from subsections (b)(iv)-(v) are subject to Exchange 
review. BX Regulation must file a report with BX operations setting 
forth the time and duration of such exemptive relief and the reasons 
therefore.\25\
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    \23\ See proposed BX Options Rules at Chapter VII, Section 
14(a).
    \24\ See Chapter I, Section 1(62). The term ``Trading System'' 
or ``System'' means the automated trading system used by BX Options 
for the trading of options contracts.
    \25\ See proposed BX Options Rules at Chapter VII, Section 
14(b).
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    With respect to unusual conditions, if the interest of maintaining 
a fair and orderly market so requires, BX Regulation may declare that 
unusual market conditions exist in a particular issue and allow LMMs in 
that issue to make auction bids and offers with spread differentials of 
up to two times, or in exceptional circumstances, typically up to three 
times, the legal limits permitted under this Rule. In making such 
determinations to allow wider markets, BX Regulation should consider 
the following factors: (A) Whether there is pending news, a news 
announcement or other special events; (B) whether the underlying 
security is trading outside of the bid or offer in such security then 
being disseminated; (C) whether Options Participants receive no 
response to orders placed to buy or sell the underlying security; and 
(D) whether a vendor quote feed is clearly stale or unreliable.\26\ In 
the event that BX Regulation determines that unusual market conditions 
exist in any option, it will be the responsibility of BX Regulation to 
file a report with BX operations setting forth the relief granted for 
the unusual market conditions, the time and duration of such relief and 
the reasons therefore.
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    \26\ See proposed BX Options Rules at Chapter VII, Section 
14(c).
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    In classes of options other than those to which the LMM is 
appointed, LMMs should not engage in transactions for an account in 
which they have an interest that are disproportionate in relation to, 
or in derogation of, the performance of their obligations as specified 
in this Rule with respect to the classes in their appointment. 
Furthermore, LMMs should not: (1) Individually or as a group, 
intentionally or unintentionally, dominate the market in option 
contracts of a particular class; and (2) effect purchases or sales on 
the Exchange except in a reasonable and orderly manner.\27\
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    \27\ See proposed BX Options Rules at Chapter VII, Section 
14(d).
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    LMMs are prohibited from the following: (1) Any practice or 
procedure whereby LMMs trading any particular option issue determine by 
agreement the spreads or option prices at which they will trade that 
issue; and (2) any practice or procedure whereby LMMs trading any 
particular option issue determine by agreement the allocation of orders 
that may be executed in that issue.\28\
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    \28\ See proposed BX Options Rules at Chapter VII, Section 
14(e).
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    An LMM may enter quotations only in the issues included in its 
appointment. An LMM must provide continuous two-sided quotations 
throughout the trading day in its appointed issues for 90% of the time 
the Exchange is open for trading in each issue. Such quotations must 
meet the legal quote width requirements herein. These obligations will 
apply to all of the LMMs appointed issues collectively, rather than on 
an option-by-option basis. Compliance with this obligation will be 
determined on a monthly basis.\29\ BX Regulation may consider 
exceptions to the requirement to quote 90% (or higher) of the trading 
day based on demonstrated legal or regulatory requirements or other 
mitigating circumstances. However, determining compliance with the 
continuous quoting requirement on a monthly basis does not relieve an 
LMM of the obligation to provide continuous two-sided quotes on a daily 
basis, nor will it prohibit the Exchange from taking disciplinary 
action against an LMM for failing to meet the continuous quoting 
obligation each trading day.
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    \29\ See proposed BX Options Rules at Chapter VII, Section 
14(f).
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    If a technical failure or limitation of a system of the Exchange 
prevents an LMM from maintaining, or prevents a LMM from communicating 
to the Exchange, timely and accurate electronic quotes in an issue, the 
duration of such failure shall not be considered in determining whether 
the LMM has satisfied the 90% quoting standard with respect to that 
option issue. The Exchange may consider other exceptions to this 
continuous electronic quote obligation based on demonstrated

[[Page 38624]]

legal or regulatory requirements or other mitigating circumstances.\30\ 
An LMM may be called upon by BX Regulation to submit a single quote or 
maintain continuous quotes in one or more series of an option issue 
within its appointment whenever, in the judgment of BX Regulation, it 
is necessary to do so in the interest of maintaining fair and orderly 
markets.\31\
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    \30\ See proposed BX Options Rules at Chapter VII, Section 
14(f)(1).
    \31\ See proposed BX Options Rules at Chapter VII, Section 
14(f)(2).
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    An LMM shall be compelled to buy/sell a specified quantity of 
option contracts at the disseminated bid/offer pursuant to his 
obligations with respect to firm quotes. All quotes and orders entered 
into the System by Options Participants are firm under this Rule and 
Rule 602 of Regulation NMS under the Exchange Act (``SEC Rule 602'') 
for the number of contracts specified and according to the size 
requirements set forth herein. Market Maker bids and offers are not 
firm under this Rule and SEC Rule 602: (1) For the period prior to the 
Opening Cross; or (2) if any of the circumstances provided in paragraph 
(b)(3) or (c)(4) of SEC Rule 602 exist.\32\ These obligations of this 
Rule shall not apply to LMMs with respect to adjusted option series, 
quarterly options series, or any series with a time to expiration of 
nine months or greater. For purposes of this Rule, an adjusted option 
series is an option series wherein, as a result of a corporate action 
by the issuer of the underlying security, one option contract in the 
series represents the delivery of other than 100 shares of underlying 
security.\33\
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    \32\ See proposed BX Options Rules at Chapter VII, Section 
14(f)(3).
    \33\ See proposed BX Options Rules at Chapter VII, Section 
14(f)(4).
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    These LMM obligations are based on rules of NYSE Arca.\34\
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    \34\ See 6.37A and 6.37B of NYSE Arca, Inc.'s Rulebook.
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Lead Market Maker Priority
    The Exchange proposes to provide LMM participation entitlements in 
Chapter VI (Trading Systems) at Section 10, entitled ``Book 
Processing.'' Specifically, with respect to Size Pro-Rata executions, 
the Exchange would afford an LMM a participation entitlement if the 
LMM's bid/offer is at the Exchange's disseminated price and all Public 
Customer \35\ orders have been fully executed.\36\ The LMM shall not be 
entitled to receive a number of contracts that is greater than the 
displayed size associated with such LMM. LMM participation entitlements 
will be considered after the opening process. The LMM participation 
entitlement is as follows: (1) A BX Options LMM shall receive the 
greater of: the LMM's Size Pro-Rata share; 50% of remaining interest if 
there is one or no other Market Maker at that price; 40% of remaining 
interest if there are two other Market Makers at that price; or 30% of 
remaining interest if there are more than two other Market Makers at 
that price; or if rounding would result in an allocation of less than 
one contract, a BX Options LMM shall receive one contract. Rounding 
will be up or down to the nearest integer.
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    \35\ See Chapter I, Section 1(50). The term ``Public Customer'' 
means a person that is not a broker or dealer in securities.
    \36\ Price Improving Orders will retain price priority before an 
LMM participation entitlement is provided at the Exchange's 
disseminated price. See Chapter VI, Sections 1(a)(6) and 7(b)(3)(B).
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    Orders for 5 contracts or fewer shall be allocated to the LMM. The 
Exchange will review this provision quarterly and will maintain the 
small order size at a level that will not allow orders of 5 contracts 
or less executed by the LMM to account for more than 40% of the volume 
executed on the Exchange. After all Public Customer orders have been 
fully executed and LMM participation entitlements applied, if 
applicable, BX Options Market Makers shall have priority over all other 
Participant orders at the same price.
    Several examples of the manner in which an LMM will be allocated 
pursuant to the Size Pro-Rata model follow below.

Example Number 1:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10
Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Firm 5 contracts offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (20 contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer B 1 contract offered at 1.10
    Incoming Order to pay 1.10 for 5 contracts

Allocated as follows:
    Customer B trades 1 contract at 1.10
    LMM trades 4 contracts at 1.10

Example Number 2:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10

Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Firm 5 contracts offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (3 contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (30 
contracts)

    Incoming Order to pay 1.10 for 5 contracts

Allocated as follows:
    LMM trades 3 contracts at 1.10
    MM1 trades 0 contracts at 1.10 ((10/40)*2) [rounded down based 
on normal pro-rata]
    MM2 trades 1 contracts at 1.10 ((30/40)*2) [rounded down based 
on normal pro-rata]
    MM1 then trades the 1 residual contract based on time

Example Number 3:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10

Orders/Quotes entered into Trading System in the following order of 
receipt:
    LMM: 1.00 bid (10 contracts)--1.10 offer (15 contracts)
    Customer A 5 contracts offered at 1.10
    Firm 5 contracts offered at 1.10
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (20 
contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer B 2 contracts offered at 1.10

    Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Customer A trading 5 contracts, 
Customer B trading 2 contracts, LMM trading 11 contracts (15/45*33 
remaining), MM1 trading 14 contracts (20/45*33), MM2 trading 7 
contracts (10/45*33), and then LMM based on time receiving an 
additional 1 lot.
    LMM allocation would result in Customer A trading 5 contracts, 
Customer B trading 2 contracts, and LMM trading 40% of remaining 33 
contracts= 13 (13.2 rounded down); then Size Pro-Rata for remaining 
with MM1 trading 13 contracts (20/30*20) and MM2 trading 6 contracts 
(10/30*20) and LMM trading an additional 1 lot based on time.
    Pursuant to proposed Chapter VI, Section 10(1)(C)(2)(ii)(1), LMM 
allocation would prevail in this example because the LMM receives 
greater allocation.

Example Number 4:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10 comprised of the following in order of 
receipt
Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer A 10 contracts offered at 1.10
    Firm 15 offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (10 contracts)
    Market Maker 2: 1.00 bid (10contracts)--1.10 offer (10 
contracts)
    Customer B: 10 contracts offered at 1.10

    Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Customer A trading 10 contracts, 
Customer B trading 10 contracts, LMM trading 6 contracts (10/30*20 
remaining rounded down), MM1 trading 6 contracts (10/30*20), MM2 
trading 6 contracts (10/30*20), and then MM1 and LMM based on time 
each receiving an additional 1 lot.
    LMM allocation would result in Customer A trading 10 contracts, 
Customer B trading 10 contracts, and LMM trading 40% of remaining 20 
contracts = 8; then normal pro rata resumes with MM1 and MM2 each 
being allocated 6 contracts.

[[Page 38625]]

    Pursuant to proposed Chapter VI, Section 10(1)(C)(2)(ii)(1), LMM 
allocation would prevail in this example because the LMM receives 
greater allocation.
Example Number 5:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10
Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Firm 25 offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (20 contracts)
    Market Maker 2: 1.00 bid (5 contracts)--1.10 offer (10 
contracts)
    Market Maker 3 1.00 bid (10 contracts)--1.10 offer (20 
contracts)
    Customer B: 2 contracts offered at 1.10

    Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Size Pro-Rata results in Customer B trading 2 contracts, MM1 
trading 6 contracts (10/60*38), LMM trading 12 (20/60*38), MM2 
trading 6 contracts (10/60*38), and MM3 trading 12 contracts (20/
60*38) and then MM1 and LMM each trading an additional 1 contract 
based on time.
    LMM allocation would result in Customer B trading 2 contracts 
and LMM trading 30% of remaining 38 contracts = 11 (11.4 rounded 
down); then normal pro rata resumes and MM1 trades 6 contracts (10/
40*27), MM2 trades 6 (10/40*27), and MM3 trades 13 contracts (20/
40*27) and MM1 and LMM each trade an additional 1 lot based on time.
    Size Pro-Rata allocation would prevail because the LMM receives 
greater allocation that way pursuant to proposed Chapter VI, Section 
10(1)(C)(2)(ii)(1).

    With respect to Price/Time executions, the Exchange proposes to 
provide that the highest bid and lowest offer shall have priority 
except that Public Customer orders shall have priority over non-Public 
Customer orders at the same price. Today, Public Customer orders do not 
have priority over non-Public Customer orders at the same price. If 
there are two or more Public Customer orders for the same options 
series at the same price, priority shall be afforded to such Public 
Customer orders in the sequence in which they are received by the 
System. For purposes of this Rule, a Public Customer order does not 
include a Professional Order. Public Customer Priority is always in 
effect when Price/Time execution algorithm is in effect.\37\ The 
Exchange is proposing to add a sentence to the rule text at Chapter VI, 
Section 10(1)(C)(1)(a) to state that Public Customer Priority is always 
in effect when the Price/Time execution algorithm is in effect. This is 
a substantive change which will provide Public Customer orders with 
priority over non-Public Customer orders at the same price for 
executions under the Price/Time execution algorithm. Similar language 
is also being added to Chapter VI, Section 10(1)(C)(2)(i) to conform 
the Size Pro-Rata language for clarity. Public Customer priority has 
been in effect when the Size Pro-Rata execution algorithm has been in 
effect. This amendment to the Size Pro-Rata language seeks to clarify 
Public Customer priority with respect to that algorithm. The Public 
Customer priority overlay recognizes the unique status of customers in 
the marketplace and the role their orders play in price competition and 
adding depth to the marketplace.
---------------------------------------------------------------------------

    \37\ See proposed Chapter VI, Section 10(1)(C)(1)(a).
---------------------------------------------------------------------------

    The Exchange proposes that LMM participant entitlements may be in 
effect when the Public Customer Priority Overlay is also in effect. 
After all Public Customer orders have been fully executed, upon receipt 
of an order, provided the LMM's bid/offer is at the Exchange's 
disseminated price, the LMM will be afforded a participation 
entitlement.\38\ The LMM shall not be entitled to receive a number of 
contracts that is greater than the displayed size associated with such 
LMM. A BX Options LMM shall receive the greater of: (a) Contracts the 
LMM would receive if the allocation was based on time priority with 
Public Customer priority; (b) 50% of remaining interest if there is one 
or no other Market Maker at that price; (c) 40% of remaining interest 
if there are two other Market Makers at that price; or (d) 30% of 
remaining interest if there are more than two other Market Makers at 
that price or if rounding would result in an allocation of less than 
one contract, a BX Options LMM shall receive one contract. Rounding 
will be up or down to the nearest integer.
---------------------------------------------------------------------------

    \38\ Price Improving Orders will retain price priority before an 
LMM participation entitlement is provided at the Exchange's 
disseminated price. See Chapter VI, Sections 1(a)(6) and 7(b)(3)(B).
---------------------------------------------------------------------------

    Orders for 5 contracts or fewer shall be allocated to the LMM. The 
Exchange will review this provision quarterly and will maintain the 
small order size at a level that will not allow orders of 5 contracts 
or less executed by the LMM to account for more than 40% of the volume 
executed on the Exchange.
    Several examples of the manner in which an LMM will be allocated 
pursuant to the Price/Time model follow below.

Example Number 1:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10
Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer A: 5 contracts offered at 1.10
    Firm 5 contracts offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (20 contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer B: 2 contracts offered at 1.10

    Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Price/Time with Customer priority results in Customer A trading 
5 contracts, Customer B trading 2 contracts, Market Maker 1 trading 
10 contracts, LMM trading 20 contracts, and Firm trading 3 contracts
    LMM allocation would result in Customer A trading 5 contracts, 
Customer B trading 2 contracts, and LMM trading 40% of remaining 33 
contracts = 13 (13.2 rounded down); then normal price time resumes 
and Market Maker1 trades 10 contracts, Firm trades 5 contracts, and 
LMM trades an additional 5 contracts
    Price/Time with Customer priority would prevail because LMM 
allocation results in a greater allocation pursuant to proposed 
Chapter VI, Section 10(1)(a).

Example Number 2:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10
Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer A 10 contracts offered at 1.10
    Firm 15 contracts offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (10 contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer B 10 contracts offered at 1.10

    Incoming Order to pay 1.10 for 40 contracts

    Allocated as follows:
    Price/Time with Customer priority results in Customer A trading 
10 contracts, Customer B trading 10 contracts, Market Maker 1 
trading 10 contracts, Firm trading 10 contracts
    LMM allocation would results in Customer A trading 10 contracts, 
Customer B trading 10 contracts, and LMM trading 40% of remaining 20 
contracts = 8; then Price/Time resumes and Market Maker 1 trades 10 
contracts and Firm trades 2 contracts
    LMM allocation would prevail because the LMM receives a greater 
allocation with this calculation pursuant to proposed Chapter VI, 
Section 10(1)(C)(1)(b)(1).

Example Number 3:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10
Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Firm 25 contracts offered at 1.10
    LMM 1.00 bid (10 contracts)--1.10 offer (20 contracts)
    Customer B 2 contracts offered at 1.10

    Incoming Order to pay 1.10 for 40 contracts

Allocated as follows:
    Price/Time with Customer priority results in Customer B trading 
2 contracts, Market Maker 1 trading 10 contracts, Firm trading 25 
contracts, and LMM trading 3 contracts

[[Page 38626]]

    LMM allocation would result in Customer B trading 2 contracts 
and LMM trading 50% of remaining 38 contracts = 19; then normal 
price time resumes and MM1 trades 10 contracts and Firm trades 9 
contracts
    LMM allocation would prevail because the LMM receives a greater 
allocation with this calculation pursuant to proposed Chapter VI, 
Section 10(1)(C)(1)(b)(1).

Example Number 4:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10

Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Firm 5 contracts offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (20 contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer B 1 contract offered at 1.10

    Incoming Order to pay 1.10 for 5 contracts

Allocated as follows:
    Customer B trades 1 contract at 1.10
    LMM trades 4 contracts at 1.10

Example Number 5:

    ABBO = 1.00-1.10
    BX BBO = 1.00-1.10

Orders/Quotes entered into Trading System in the following order of 
receipt:
    Market Maker 1: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer A: 1 contract offered at 1.10
    Firm 5 contracts offered at 1.10
    LMM: 1.00 bid (10 contracts)--1.10 offer (3 contracts)
    Market Maker 2: 1.00 bid (10 contracts)--1.10 offer (10 
contracts)
    Customer B 2 contracts offered at 1.10

    Incoming Order to pay 1.10 for 5 contracts

Allocated as follows:
    Customer A trades 1 contract at 1.10
    Customer B trades 2 contracts at 1.10
    LMM trades 2 contracts at 1.10

    The Exchange desires to implement this rule change by rolling out 
the rule amendments on an option-by-option basis over a period of time. 
The Exchange would issue Options Trader Alerts in advance to inform 
market participants which symbols will be implemented on which dates.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \39\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \40\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. 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.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that requiring Market Makers to provide 
continuous two-sided quotations 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 continues to promote just and 
equitable principles of trade, and to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities. Further, the Exchange would apply the quoting requirement 
to all of a Market Maker's registered options collectively to all 
appointed issues, rather than on an option-by-option basis and 
compliance with this obligation will be determined on a monthly basis.
    The proposal supports the quality of the Exchange's market by 
helping to ensure that Market Makers will continue to be obligated to 
quote in series when necessary. Ultimately, the benefit the proposed 
rule change confers upon Market Makers is offset by the continued 
responsibilities to provide significant liquidity to the market to the 
benefit of market participants. While under the proposal there are 
quoting requirements changes, the Exchange does not believe that these 
changes reduce the overall obligations applicable to Market Makers.\41\ 
Moreover, the Exchange believes that the proposal may increase market 
making activity on the Exchange and the quality of the Exchange's 
market by establishing quoting compliance standards that are reasonable 
and already in place on other options exchanges.\42\
---------------------------------------------------------------------------

    \41\ In this respect, the Exchange notes that such Market Makers 
are subject to many obligations aside from quoting, including, for 
example, the obligation to maintain a fair and orderly market in 
their appointed classes, and the obligation to conduct the opening 
and enter continuous quotations in all of the series of their 
appointed options classes within maximum spread requirements.
    \42\ See supra note 4.
---------------------------------------------------------------------------

    The proposed rule change also protects investors and the public 
interest by creating more uniformity and consistency among the 
Exchange's rules related to Market Maker quoting obligations. Providing 
Market Makers with flexibility by providing the continuous quoting 
obligation collectively across all option classes will not diminish the 
Market Makers' obligation to continuously quote a significant part of 
the trading day in a significant percentage of series. Additionally, 
with respect to compliance standards, the Exchange believes that 
adopting the proposed standards will enhance compliance efforts by 
Market Makers and the Exchange, and are consistent with requirements 
currently in place on other options exchanges (e.g. BATS Rule 
22.6(d)(3) and Phlx Rule 1014). The proposal ensures that compliance 
standards for continuous quoting, in particular regarding quoting 
obligations applying to all of a Market Maker's appointed issues 
collectively, will be the same on the Exchange as on other options 
exchanges. The Exchange believes that the proposal will not diminish 
and in fact may increase, market making activity on the Exchange by 
establishing quoting compliance standards that are reasonable and 
already in place on other options exchanges.
    The proposed rules relating to LMM allocations seek to establish 
and promote just and equitable principles of trade by requiring each 
market maker who desires to be an LMM to submit an application to the 
Exchange providing certain basic information and other information as 
necessary. The solicitation process is intended to provide all LMMs an 
opportunity to seek allocations by requiring allocation applications to 
be submitted in writing to the Exchange with certain information. The 
Exchange intends to foster cooperation and coordination with LMMs by 
requiring information concerning the LMM's experience and 
capitalization and other information to ensure that an LMM is qualified 
when allocated option series. LMMs would be required to update 
information accordingly once they are assigned in an option series.
    Exchange staff seeks to allocate option series by considering a 
number of factors including but not limited to, the number and type of 
securities in which applicants are currently registered; the capital 
and other resources of the applicant; recent allocation decisions 
within the past eighteen months; the desirability of encouraging the 
entry of new LMMs into the Exchange's market; order flow commitments; 
any prior transfers of LMM privileges by the applicant and the reasons 
therefore; quality of markets data; and observance of ethical standards 
and administrative responsibilities and such policies as the Board 
instructs the Exchange to follow in allocating or reallocating 
securities. These factors are intended to assist the Exchange in 
determining which LMMs qualify for allocations and the LMM's ability to 
meet its obligations. The process of allocating securities

[[Page 38627]]

considers such factors to protect investors and the public interest by 
allocating to qualified and responsible Options Participants. Further, 
an LMM may be called upon by BX Regulation to submit a single quote or 
maintain continuous quotes in one or more series of an option issue 
within its appointment whenever, in the judgment of BX Regulation, it 
is necessary to do so in the interest of maintaining fair and orderly 
markets. An LMM will be compelled to buy/sell a specified quantity of 
option contracts at the disseminated bid/offer pursuant to his 
obligations with respect to firm quotes.
    With respect to an LMM's obligations, the Exchange would require 
LMMs be subject to heightened standards as compared to other market 
makers. An LMM must provide continuous two-sided quotations throughout 
the trading day in its appointed issues for 90% of the time the 
Exchange is open for trading in each issue. Such quotations must meet 
the legal quote width requirements herein. These obligations will apply 
to all of the LMMs appointed issues collectively, rather than on an 
option-by-option basis. Compliance with this obligation will be 
determined on a monthly basis. BX Regulation may consider exceptions to 
the requirement to quote 90% (or higher) of the trading day based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances. However, determining compliance with the continuous 
quoting requirement on a monthly basis does not relieve an LMM of the 
obligation to provide continuous two-sided quotes on a daily basis, nor 
will it prohibit the Exchange from taking disciplinary action against 
an LMM for failing to meet the continuous quoting obligation each 
trading day.
    LMM's transactions should constitute a course of dealings 
reasonably calculated to contribute to the maintenance of a fair and 
orderly market, and no LMM should enter into transactions or make bids 
or offers that are inconsistent with such a course of dealings. An LMM 
is expected to engage, to a reasonable degree under the existing 
circumstances, in dealings for his own account when there exists, or it 
is reasonably anticipated that there will exist, a lack of price 
continuity, a temporary disparity between the supply of and demand for 
a particular option contract, or a temporary distortion of the price 
relationships between option contracts of the same class. The Exchange 
will obligate an LMM to certain conduct including: (1) To compete with 
other LMMs to improve the market in all series of options classes to 
which the LMM is appointed; (2) to make markets that will be honored 
for the number of contracts entered into the Trading System in all 
series of options classes within the LMM's appointment; (3) to update 
market quotations in response to changed market conditions in all 
series of options classes within the LMM's appointment; (4) to quote 
with a difference not to exceed $5 between the bid and offer regardless 
of the price of the bid; (5) to establish quote width differences other 
than as provided in subparagraph (4) for one or more options series; 
and (6) certain permissible price differentials.
    With respect to classes of option contracts outside of their 
appointment, LMMs will not be permitted to engage in transactions for 
an account in which they have an interest that are disproportionate in 
relation to, or in derogation of, the performance of their obligations 
as specified in this Rule with respect to the classes in their 
appointment. LMMs are also prohibited from entering into certain 
agreements that may undermine the LMMs obligations.
    The Exchange believes that the obligations set forth for LMMs in 
its proposed rules will promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and, in general, to protect 
investors and the public interest.
    The Exchange believes that offering LMMs participation entitlements 
promotes just and equitable principles of trade because LMMs will be 
held to a higher standard as compared to other market participants 
including Market Makers. A Market Maker would be required, pursuant to 
this proposal, to quote 60% of the trading day. LMMs are being held to 
a higher obligation and therefore are being rewarded with participation 
entitlements. Similar to Market Makers, LMMs add value through 
continuous quoting \43\ and the commitment of capital.
---------------------------------------------------------------------------

    \43\ Pursuant to Chapter VII (Market Participants), Section 5 
(Obligations of Market Makers), in registering as a market maker, an 
Options Participant commits himself to various obligations. 
Transactions of a Market Maker in its market making capacity must 
constitute a course of dealings reasonably calculated to contribute 
to the maintenance of a fair and orderly market, and Market Makers 
should not make bids or offers or enter into transactions that are 
inconsistent with such course of dealings. See Chapter VII, Section 
5. Further, all Market Makers are designated as specialists on BX 
for all purposes under the Act or rules thereunder. See Chapter VII, 
Section 2.
---------------------------------------------------------------------------

    In addition, the LMM quoting requirements promote liquidity and 
continuity in the marketplace in requiring LMMs to be held to a higher 
standard of quoting. The Exchange also believes that the proposed rule 
change supports the quality of the Exchange's markets because it 
maintains the quoting obligations of Market Makers as LMMs at 90%. LMM 
transactions must constitute a course of dealings reasonably calculated 
to contribute to the maintenance of a fair and orderly market. 
Accordingly, the proposed rule change supports the quality of the 
Exchange's trading markets by helping to ensure that LMMs will be 
required to meet a higher quoting standard in order to reap the 
benefits of the participation entitlements. The Exchange believes this 
proposed change to offer participation entitlements to LMMs is offset 
by LMMs' continued responsibilities to provide significant liquidity to 
the market to the benefit of market participants.
    The Exchange's proposal to add a sentence to the rule text at 
Chapter VI, Section 10(1)(C)(1)(a) to state that Public Customer 
Priority is always in effect when the Price/Time execution algorithm is 
in effect and also add language to Chapter VI, Section 10(1)(C)(2)(i) 
to conform the Size Pro-Rata language for clarity recognizes the unique 
status of customers in the marketplace and the role their orders play 
in price competition and adding depth to the marketplace. The Exchange 
believes that the Public Customer priority overlay is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest.
    The proposed rule change also removes impediments to and allows for 
a free and open market, while protecting investors, by promoting 
transparency regarding LMMs' obligations and benefits in the Exchange 
Rules. In addition, the Exchange believes that the proposed rule change 
is designed to not permit unfair discrimination among LMMs.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. Market Makers will be subject to quoting obligations which are 
similar to those at other options exchanges.\44\ The obligations would 
apply to all of a Market Maker's registered options collectively to all 
appointed issues, rather than on an option-by-option basis and 
compliance with this obligation will be determined on a monthly basis.

[[Page 38628]]

Further, Exchange believes that because this proposal establishes 
quoting compliance standards that are already in place on other options 
exchanges, the proposal will not diminish, and in fact may increase, 
market making activity on the Exchange and thereby enhance intermarket 
competition. Moreover, the proposed rule change will not impose any 
burden on intra-market competition because it will affect all Market 
Makers the same. LMMs will be subject to heightened quoting obligations 
as compared to other BX Market Makers. All market makers that desire to 
apply to become LMMs will be subject to the same review and scrutiny 
with respect to their LMM application and the ultimate assignment of 
options series.
---------------------------------------------------------------------------

    \44\ See supra note 3.
---------------------------------------------------------------------------

    The Exchange does not believe the proposed rule change will cause 
any unnecessary burden on intra-market competition because it provides 
all market participants that qualify as LMMs and meet the required 
criteria and fulfill the required obligations the opportunity to 
benefit from participation entitlements. The Exchange believes that the 
proposed rule change will promote competition among LMMs who desire to 
be assigned in options series and in turn promote trading activity on 
the Exchange to the benefit of the Exchange, its Members, and market 
participants.
    The Exchange does not believe the proposed change will cause any 
unnecessary burden on inter-market competition because any qualifying 
LMM will be entitled to receive participation entitlements on options 
series they are obligated to quote in under the Rules. In addition, the 
Exchange believes that the proposed rule change will in fact promote 
competition. The Exchange believes allowing LMMs to receive 
participation entitlements will promote trading activity on the 
Exchange because it will provide incentives to LMMs to quote in series 
which they are not obligated to do so, to the benefit of the Exchange, 
its Members, and market participants.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 will:
    (A) By order approve or disapprove such proposed rule change; or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BX-2014-035 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2014-035. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    All submissions should refer to File Number SR-BX-2014-035 and 
should be submitted on or before July 29, 2014.
---------------------------------------------------------------------------

    \45\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2014-15792 Filed 7-7-14; 8:45 am]
BILLING CODE 8011-01-P