Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt a New Price Improvement Auction, BX PRISM, 68347-68354 [2015-28024]
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Federal Register / Vol. 80, No. 213 / Wednesday, November 4, 2015 / Notices
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest as it will allow the
Exchange to incorporate changes
required under Regulation SCI, such as
establishing standards for designating
BCP/DR Participants, prior to the
November 3, 2015 compliance date.
Therefore, the Commission designates
the proposed rule change to be operative
upon filing.22
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
asabaliauskas on DSK5VPTVN1PROD with NOTICES
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–
C2–2015–030 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–C2–2015–030. 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–C2–
2015–030, and should be submitted on
or before November 25, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–28023 Filed 11–3–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76301; File No. SR–BX–
2015–032]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
of Amendment No. 2 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Adopt a
New Price Improvement Auction, BX
PRISM
October 29, 2015.
I. Introduction
On August 19, 2015, NASDAQ OMX
BX, Inc. (‘‘BX’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to establish an options price
improvement mechanism (‘‘PRISM’’).
On September 2, 2015, BX filed
Amendment No. 1 to the proposal. The
proposed rule change, as modified by
Amendment No. 1, was published for
comment in the Federal Register on
September 10, 2015.3 The Commission
received no substantive comments
regarding the proposal.4 On October 22,
23 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 75827
(September 3, 2015), 80 FR 54601 (‘‘Notice’’).
4 See infra note 5 (noting that when BX submitted
Amendment No. 2, it also submitted the document
1 15
22 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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68347
2015, BX granted an extension of time
for Commission action until October 30,
2015. On October 23, 2015, BX filed
Amendment No. 2 to the proposal.5 The
Commission is publishing this notice to
solicit comment on Amendment No. 2
from interested persons and is
approving the proposed rule change, as
modified by Amendment Nos. 1 and 2,
on an accelerated basis, with certain
provisions subject to a pilot period
scheduled to expire on July 18, 2016.
II. Description of the Proposal
BX proposes to establish a priceimprovement mechanism, ‘‘PRISM,’’ on
the Exchange’s options platform, in
which a BX Participant (an ‘‘Initiating
Participant’’) may electronically submit
for execution a two-sided paired order,
where one side is an order it represents
as agent on behalf of a Public
Customer,6 Professional customer,
broker-dealer, or any other entity
(‘‘PRISM Order’’) and the other side is
principal interest or any other order it
represents as agent (an ‘‘Initiating
Order’’) provided that the member first
exposes the PRISM Order in the PRISM
Auction (‘‘Auction’’) pursuant to the
proposed Rule.
as a comment letter to the file to promote the public
dissemination of its Amendment).
5 In Amendment No. 2, BX makes certain
technical and clarifying changes to the proposal,
which BX believes does not result in any material
differences over its original filing as modified by
Amendment No. 1. Specifically, BX proposes to: (i)
Remove the term ‘‘displayed’’; (ii) describe
‘‘rejected’’ orders more accurately as ‘‘immediately
cancelled’’ in certain circumstances; (iii) provide
more specificity as to the amounts of allocations for
which an Initiating Participant is entitled to be
allocated; (iv) remove an incorrect reference to
‘‘orders’’ and define interest more specifically; (v)
add more specificity related to Customer-toCustomer orders; (vi) correct a citation error; and
(vii) correct typographical errors. Amendment 2
amends and replaces the original filing, as modified
by Amendment 1, in its entirety. To promote
transparency of its proposed amendment, when BX
filed Amendment No. 2 with the Commission, it
also submitted Amendment No. 2 as a comment
letter to the file, which the Commission posted on
its Web site and placed in the public comment file
for SR–BX–2015–032. The Exchange also posted a
copy of its Amendment No. 2 on its Web site when
it filed the amendment with the Commission.
6 For purposes of this Rule, a Public Customer
order does not include a Professional order, and
therefore a Professional would not be entitled to
Public Customer priority as described herein. A
Public Customer means a person that is not a broker
or dealer in securities. See BX Chapter I, Section
1(a)(50). A Public Customer order does not include
a Professional order for purposes of BX Chapter VI,
Section 10(a)(C)(1)(a), which governs allocation
priority. A ‘‘Professional’’ means any person or
entity that (i) is not a broker or dealer in securities,
and (ii) places more than 390 orders in listed
options per day on average during a calendar month
for its own beneficial account(s). A Participant or
a Public Customer may, without limitation, be a
Professional. All Professional orders shall be
appropriately marked by Participants. See BX
Chapter I, Section 1(a)(49).
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A. Auction Eligibility Requirements
All options traded on the Exchange
are eligible for PRISM.7 To initiate a
PRISM Auction, an Initiating Participant
first must ‘‘stop’’ the PRISM Order at a
price that is equal to or better than the
NBBO. In addition, the proposed rules
governing the eligible stop price
recognize a distinction between PRISM
Orders for Public Customers and PRISM
Orders for non-Public Customers.
Specifically, a PRISM Order that is a
Public Customer Order must be stopped
at an improved price over any resting a
limit orders on the book on the same
side as the PRISM Order. A PRISM
Order that is for a non-Customer
(account of a broker-dealer or any other
person or entity that is not a Public
Customer) is always required to improve
the same side BX BBO as the PRISM
Order, even if there is no resting limit
order on the book. PRISM Orders that
do not comply with the aforementioned
auction eligibility requirements will be
immediately cancelled. In addition,
PRISM Orders submitted at or before the
opening of trading are not eligible to
initiate an Auction and will be rejected.
PRISM Orders submitted during the
final two seconds of the trading session
are not eligible to initiate an Auction
and will be immediately cancelled.
Finally, an Initiating Order may not be
a solicited order for the account of any
BX Options Market Maker assigned in
the affected series.8
B. Auction Process
To initiate the Auction, the Initiating
Participant must mark the PRISM Order
for Auction processing, and specify
either: (a) A single price at which it
seeks to execute the PRISM Order (a
‘‘stop price’’); (b) that it is willing to
automatically match as principal or as
agent on behalf of an Initiating Order
the price and size of all PRISM Auction
Notifications (‘‘PAN’’) responses, and
trading interest (‘‘auto-match’’) in which
case the PRISM Order will be stopped
at the NBBO on the Initiating Order
side; 9 or (c) that it is willing to either:
(i) Stop the entire order at a single stop
price and auto-match PAN responses
and trading interest at a price or prices
that improve the stop price up to a
maximum specified price (a ‘‘No Worse
Than’’ or ‘‘NWT’’ price); (ii) stop the
entire order at a single stop price and
auto-match all PAN responses and
trading interest at or better than the stop
price; or (iii) stop the entire order at the
7 See
proposed BX Chapter VI, Section 9(i).
8 See proposed BX Chapter VI, Section 9(i)(C)
through (F).
9 This is accomplished by marking the Initiating
Order with a market (MKT) price.
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NBBO on the Initiating Order side, and
auto-match PAN responses and trading
interest at a price or prices that improve
the stop price up to the NWT price. In
all cases, if the BX BBO on the same
side of the market as the PRISM Order
represents a limit order on the book, the
stop price must be at least one
minimum trading increment (specified
in Chapter VI, Section 5) better than the
booked limit order’s limit price.
Only one Auction would be
conducted at a time in any given series.
Once the Initiating Participant has
submitted a PRISM Order for exposure
in the Auction, such PRISM Order may
not be modified or cancelled, nor may
any Auction be cancelled once it has
commenced. Under any of the
circumstances described above, the stop
price or NWT price may be improved to
the benefit of the PRISM Order during
the Auction, but may not be cancelled.
Under the proposal, except for
rounding purposes, the Initiating
Participant would not receive an
allocation percentage of more than 50%
with one competing quote, order or PAN
response, or 40% with multiple
competing quotes, orders or PAN
responses at the final price point, when
competing quotes, orders or PAN
responses have contracts available for
execution.10 However, when starting an
Auction, the Initiating Participant may
submit the Initiating Order with a
designation of ‘‘surrender’’ to other
PRISM Participants (‘‘Surrender’’),
which will result in the Initiating
Participant forfeiting priority and trade
allocation privileges. If Surrender is
specified, the Initiating Participant
would trade only if there were not
enough interest available to fully
execute the PRISM Order at prices
which are equal to or improve upon the
stop price.11 Surrender information
would not be available to other market
participants and may not be modified
after the order is submitted to the
Auction.
When the Exchange receives a PRISM
Order for Auction, a PAN detailing the
side, size and options series of the
PRISM Order would be sent over the
Exchange’s Specialized Quote Feed and
BX Depth Feed. PRISM Auctions would
be for a specified duration of no less
than one hundred milliseconds and no
more than one second, as determined by
the Exchange and announced on the
10 See proposed BX Chapter VI, Section
9(ii)(A)(1).
11 Surrender will not be permitted if both the
Initiating Order and PRISM Order are Public
Customer Orders. See proposed BX Chapter VI,
Section 9(ii)(A)(1).
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Nasdaq Trader Web site.12 Any person
or entity may submit a response to the
PAN, provided such response is
properly marked specifying price, size,
and side of the market. PAN responses
would not be visible to Auction
participants, including the initiator, and
would not be disseminated to OPRA.
The minimum price increment for PAN
responses and for an Initiating
Participant’s stop price and/or NWT
price would be the minimum price
improvement increment established
pursuant to proposed Rule Chapter VI,
Section 9(i)(A).13
A PAN response size at any given
price point may not exceed the size of
the PRISM Order. Any such oversized
response would be immediately
cancelled. A PAN response must be
equal to or better than the NBBO at the
time of receipt of the PAN response or
it would be immediately cancelled. PAN
responses may be modified or cancelled
during the Auction. PAN responses on
the same side of the market as the
PRISM Order are considered invalid and
will be immediately cancelled. Finally,
multiple PAN responses from the same
Participant may be submitted during the
Auction. However, multiple orders at a
particular price point submitted by a
Participant in response to a PAN may
not exceed, in the aggregate, the size of
the PRISM Order.14
C. Conclusion of an Auction
The PRISM Auction would conclude
at the earlier of: (i) The end of the
Auction period; (ii) any time the BX
12 In May 2014, NASDAQ OMX PHLX LLC’s
(‘‘Phlx’’) staff distributed a survey to all Phlx market
maker firms inquiring as to the timeframe within
which these market participants respond to an
auction with a duration time ranging from less than
fifty (50) milliseconds to more than one (1) second.
According to BX, the market marker firms on Phlx
represent membership similar to BX Market Makers,
and 90 percent of the BX Market Maker firms
participated in the survey. Of the thirty five (35)
Phlx market maker firms that were surveyed,
twenty (20) of these market makers responded to
the survey and of those respondents 100%
indicated that that their firm could respond to
auctions with a duration time of at least 50
milliseconds. Based on the results of the survey, the
Exchange believes that allowing for an auction
period of no less than one hundred (100)
milliseconds and no more than one (1) second
would provide a meaningful opportunity for BX
Participants to respond to the PRISM Auction while
at the same time facilitating the prompt execution
of orders. Based on experience with the Phlx’s PIXL
mechanism on BX’s affiliated exchange, BX believes
that 100 milliseconds will continue to provide all
market participants with sufficient time to respond,
compete, and provide price improvement for orders
and will provide investors and other market
participants with more timely executions, thereby
reducing their market risk.
13 See proposed BX Chapter VI, Section 9(ii)(A)(2)
through (6).
14 See proposed BX Chapter VI, Section 9(ii)(A)(7)
through (10).
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BBO crosses the PRISM Order stop price
on the same side of the market as the
PRISM Order; 15 or (iii) any time there
is a trading halt 16 on the Exchange in
the affected series.17
If the PRISM Auction concludes
earlier than the end of the prescribed
Auction period, the entire PRISM Order
will be executed at: (i) In the case of the
BX BBO crossing the PRISM Order stop
price, the best response price(s) or, if the
stop price is the best price in the
Auction, at the stop price, unless the
best response price is equal to or better
than the price of a limit order resting on
the Order Book on the same side of the
market as the PRISM Order, in which
case the PRISM Order will be executed
against that response, but at a price that
is at the minimum trading increment
better than the price of such limit order
at the time of the conclusion of the
Auction; or (ii) in the case of a trading
halt on the Exchange in the affected
series, the stop price, in which case the
PRISM Order will be executed solely
against the Initiating Order.18
Any unexecuted PAN responses will
be cancelled.19 An unrelated market or
marketable limit order (against the BX
BBO) on the opposite side of the market
from the PRISM Order received during
the Auction will not cause the Auction
to end early and will execute against
interest outside of the Auction.20 If
contracts remain from such unrelated
order at the time the auction ends, they
will be considered for participation in
the order allocation process.
1. Order Allocation—Size Pro-Rata
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At the conclusion of the Auction, for
option classes governed under BX’s Size
Pro-Rata execution algorithm, the
PRISM Order will be allocated at the
best price(s), pursuant to the priority set
forth in Chapter VI, 9(ii)(E)(1) through
(5).21 First, Public Customer orders
would have time priority at each price
level. Next, the Initiating Participant
15 This provision regarding the BX BBO crossing
the PRISM Order stop price on the same side of the
market as the PRISM Order, as a conclusion to a
PRISM Auction, would be subject to a pilot period
scheduled to expire July 18, 2016.
16 This provision regarding the trading halt, as a
conclusion to a PRISM Auction, would be subject
to a pilot period scheduled to expire July 18, 2016.
17 See proposed BX Chapter VI, Section 9(ii)(B).
18 See proposed BX Chapter VI, Rule 9(ii)(C).
19 See id.
20 See proposed BX Chapter VI, Section 9(ii)(D).
This provision would be subject to a pilot period
scheduled to expire on July 18, 2016. The
Commission notes that this provision is based on
a similar provision in Phlx’s Price Improvement XL
(‘‘PIXL’’) auction. See Phlx Rule 1080(n).
21 See Notice, supra note 3, at 54607–54610, for
examples illustrating trade allocations under the
Size Pro-Rata execution algorithm.
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would receive an allocation after Public
Customer orders.22
If the Initiating Participant selected
the single stop price option, PRISM
executions will occur first at prices that
improve the stop price, and then at the
stop price with up to 40% of the
remaining contracts after Public
Customer interest is satisfied being
allocated to the Initiating Participant at
the stop price. However, if only one
other quote, order or PAN response
matches the stop price, then the
Initiating Participant may be allocated
up to 50% of the contracts executed at
such price.
If the Initiating Participant selected
the auto-match option, the Initiating
Participant would be allocated a number
of contracts equal to the aggregate size
of all other quotes, orders, and PAN
responses at each price point until a
price point is reached where the balance
of the order can be fully executed,
except that the Initiating Participant
would be entitled to receive up to 40%
(if there are multiple competing quotes,
orders or PAN responses) or 50% (if
there is only one competing quote, order
or PAN response) of the contracts
remaining at the final price point
(including situations where the stop
price is the final price) after Public
Customer interest has been satisfied but
before remaining interest receives an
allocation.
If the Initiating Participant selected
the ‘‘stop and NWT’’ option, contracts
would be allocated as follows: (i) First
to quotes, orders, and PAN responses at
prices better than the NWT price (if
any), beginning with the best price,
pursuant to proposed Chapter VI,
Section 9(ii)(E)(3) through (5), at each
price point; and (ii) next, to quotes,
orders, and PAN responses at prices at
the Initiating Participant’s NWT price
and better than the Initiating
Participant’s stop price, beginning with
the NWT price. The Initiating
Participant would be allocated a number
of contracts equal to the aggregate size
of all other quotes, orders, and PAN
responses at each price point, except
that the Initiating Participant would be
entitled to receive up to 40% (if there
are multiple competing quotes, orders or
PAN responses) or 50% (if there is only
one competing quote, order or PAN
response) of the contracts remaining at
the final price point (including
situations where the final price is the
stop price), after Public Customer
interest has been satisfied but before
22 The Initiating Participant shall receive
additional allocation only if contracts remain after
any allocation pursuant to proposed BX Chapter VI,
Section 9(ii)(E)(3) through (5).
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68349
remaining interest receives an
allocation. In the case of an Initiating
Order with a NWT price at the market,
the Initiating Participant would be
allocated a number of contracts equal to
the aggregate size of all other quotes,
orders, and PAN responses at all price
points, except that the Initiating
Participant would be entitled to receive
up to 40% or 50% of the contracts
remaining at the final price point
(including situations where the final
price is the stop price), after Public
Customer interest has been satisfied but
before remaining interest receives an
allocation.23
After Public Customers and the
Initiating Participant receive their
allocations, BX Options Market Makers
that were at a price equal to the NBBO
on the opposite side of the market from
the PRISM Order at the time of
initiation of the PRISM Auction
(‘‘Priority Market Makers’’) would have
priority up to their quote size in the
NBBO which was present when the
PRISM Auction was initiated (‘‘Initial
NBBO’’) at each price level at or better
than such Initial NBBO.24 Priority
Market Maker quotes and PAN
responses will be allocated pursuant to
the Size Pro-Rata algorithm set forth in
BX Chapter VI, Section 10(1)(B).25
Priority Market Maker status is valid
only for the duration of the particular
PRISM auction.
Next, Non-Priority Market Makers, as
well as Priority Market Maker PRISM
Auction interest which exceeded the
Priority Market Maker’s size in the
Initial NBBO, would have priority at
each price level at or better than the
Initial NBBO after Public Customers, the
Initiating Participant and Priority
Market Makers have received
allocations. Non-Priority Market Maker
and such excess Priority Market Maker
interest will be allocated pursuant to the
Size Pro-Rata algorithm set forth in BX
Chapter VI, Section 10(1)(B).26
Finally, all other interest will receive
an allocation after the interest discussed
above has been satisfied. Such interest
will be allocated pursuant to the Size
23 See proposed BX Chapter VI, Section
9(ii)(E)(2)(a) through (c).
24 Miami International Securities Exchange, LLC
(‘‘MIAX’’) allocates executions resulting from
Priority Public Customer interest and priority
Market Maker quotes ahead of other interest.
MIAX’s system may designate Market Maker quotes
as either priority quotes or non-priority quotes in
accordance with the provisions in MIAX Rule
517(b). BX is prioritizing Priority Market Maker
allocations in the proposed BX PRISM Auction in
a similar manner, ahead of other non-Public
Customer interest.
25 See proposed BX Chapter VI, Section 9(ii)(E)(3).
26 See proposed BX Chapter VI, Section 9(ii)(E)(4).
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Pro-Rata algorithm set forth in BX
Chapter VI, Section 10(1)(B).27
2. Order Allocation—Price/Time
At the conclusion of the Auction, for
option classes governed under BX’s
Price/Time execution algorithm, the
PRISM Order will be allocated at the
best price(s), pursuant to the priority set
forth in proposed Chapter VI, Section
9(ii)(F)(1) through (4).28 First, Public
Customer orders would have time
priority at each price level. Next, the
Initiating Participant would receive an
allocation after Public Customer
orders.29
If the Initiating Participant selected
the single stop price option, PRISM
executions will occur first at prices that
improve the stop price, and then at the
stop price with up to 40% of the
remaining contracts after Public
Customer interest is satisfied being
allocated to the Initiating Participant at
the stop price. However, if only one
other quote, order or PAN response
matches the stop price, the Initiating
Participant may be allocated up to 50%
of the contracts executed at such price.
If the Initiating Participant selected
the auto-match option, the Initiating
Participant would be allocated a number
of contracts equal to the aggregate size
of all other quotes, orders, and PAN
responses at each price point until a
price point is reached where the balance
of the order can be fully executed,
except that the Initiating Participant
would be entitled to receive up to 40%
(if there are multiple competing quotes,
orders or PAN responses) or 50% (if
there is only one competing quote, order
or PAN response) of the contracts
remaining at the final price point
(including situations where the stop
price is the final price), after Public
Customer interest has been satisfied but
before remaining interest receives an
allocation.
If the Initiating Participant selected
the ‘‘stop and NWT’’ option, contracts
would be allocated as follows: (i) First
to quotes, orders, and PAN responses at
prices better than the NWT price (if
any), beginning with the best price,
pursuant to proposed Chapter VI,
Section 9(ii)(F)(3) and (4), at each price
point; and (ii) next, to quotes, orders,
and PAN responses at prices at the
Initiating Participant’s NWT price and
better than the Initiating Participant’s
27 See
proposed BX Chapter VI, Section 9(ii)(E)(5).
Notice, supra note 3, at 54607–54610, for
examples illustrating trade allocations under the
Price/Time execution algorithm.
29 The Initiating Participant shall receive
additional allocation only if contracts remain after
any allocation pursuant to proposed BX Chapter VI,
Section 9(ii)(F)(3) and (4).
28 See
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stop price, beginning with the NWT
price. The Initiating Participant would
be allocated a number of contracts equal
to the aggregate size of all other quotes,
orders, and PAN responses at each price
point, except that the Initiating
Participant would be entitled to receive
up to 40% (if there are multiple
competing quotes, orders or PAN
responses) or 50% (if there is only one
competing quote, order or PAN
response) of the contracts remaining at
the final price point (including
situations where the final price is the
stop price), after Public Customer
interest has been satisfied but before
remaining interest receives an
allocation. In the case of an Initiating
Order with a NWT price at the market,
the Initiating Participant would be
allocated a number of contracts equal to
the aggregate size of all other quotes,
orders, and PAN responses at all price
points, except that the Initiating
Participant would be entitled to receive
up to 40% multiple competing quotes,
orders or PAN responses) or 50% (one
competing quote, order or PAN
response) of the contracts remaining at
the final price point (including
situations where the final price is the
stop price), after Public Customer
interest has been satisfied but before
remaining interest receives an
allocation.
After Public Customers and the
Initiating Participant receive their
allocations, Priority Market Makers that
were at a price equal to the NBBO on
the opposite side of the market from the
PRISM Order at the time of initiation of
PRISM Auction would have priority up
to their quote size in the Initial NBBO
at each price level better than the Initial
NBBO. Priority Market Maker interest at
prices better than the Initial NBBO will
be allocated pursuant to the Size ProRata algorithm set forth in BX Chapter
VI, Section 10(1)(B). Priority Market
Maker interest at a price equal to or
inferior to the Initial NBBO will not
have priority over other participants and
will be allocated pursuant to the Price/
Time algorithm set forth in BX Chapter
VI, Section 10(1)(A).30
Finally, all other interest will receive
an allocation, after the interest
discussed above has been satisfied.
Such interest will be allocated pursuant
to the Price/Time algorithm set forth in
BX Chapter VI, Section 10(1)(A).31
D. Crossing Agency Orders
The Exchange also proposes, in lieu of
the PRISM Auction procedures set forth
in proposed Chapter VI, Section 9(i)–
30 See
31 See
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proposed BX Chapter VI, Section 9(ii)(F)(4).
Frm 00059
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(ii), to allow an Initiating Participant to
enter a PRISM Order for the account of
a Public Customer paired with an order
for the account of another Public
Customer, and such paired orders will
be automatically executed without a
PRISM Auction, provided there is not
currently an Auction in progress in the
same series, in which case the paired
orders would be cancelled.32 In its
proposal, the Exchange notes that it
would be a violation of BX Chapter VII,
Section 12 for a Participant to
circumvent Chapter VII, Section 12 by
providing an opportunity for (i) a Public
Customer affiliated with the Participant,
or (ii) a Public Customer with whom the
Participant has an arrangement that
allows the Participant to realize similar
economic benefits from the transaction
as the Participant would achieve by
executing agency orders as principal, to
regularly execute against agency orders
handled by the firm immediately upon
their entry as PRISM Public Customerto-Public Customer immediate
crosses.33
E. Pilot Program Information to the
Commission
Subject to a pilot program expiring
July 18, 2016,34 there will be no
minimum size requirement for orders to
be eligible for the Auction. The
Exchange also has proposed two
additional components of its rules on a
pilot basis, expiring on July 18, 2016: (i)
The early conclusion of the PRISM
Auction; and (ii) an unrelated market or
marketable limit order (against the BX
BBO) on the opposite side of the market
from the PRISM Order received during
the Auction will not cause the Auction
to end early and will execute against
interest outside of the Auction.35 During
this pilot period, the Exchange
represents that it periodically will
submit certain data, as requested by the
Commission staff, to provide supporting
evidence that, among other things, there
is meaningful competition in PRISM
Auctions for all size orders, there are
opportunities for significant price
improvement for orders executed
through PRISM, and that there is an
active and liquid market functioning on
the Exchange outside of the Auction
32 See discussion infra Section VI, Amendment
No. 2. As noted in proposed BX Chapter VI, Section
9(ii), only one Auction may be conducted at a time
in any given series.
33 See Notice, supra note 3, at 54606. See also
proposed BX Chapter VI, Section 9(vi)(a).
34 See proposed BX Chapter VI, Section 9(viii).
35 See proposed BX Chapter VI, Section 9(ii)(B)(2)
through (4) (governing the early conclusion of a
PRISM auction) and proposed BX Chapter VI,
Section 9(ii)(D) (governing the treatment of
unrelated orders on the opposite side of the market
from the PRISM Order).
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mechanism.36 The Exchange further
noted that it would seek to request
confidential treatment for any raw data
that it submits to the Commission.37
The Exchange represented that it will
provide the following additional
information on a monthly basis:
(i) The number of contracts (of orders
of 50 contracts or greater) entered into
the PRISM;
(ii) The number of contracts (of orders
of fewer than 50 contracts) entered into
the PRISM;
(iii) The number of orders of 50
contracts or greater entered into the
PRISM; and
(iv) The number of orders of fewer
than 50 contracts entered into the
PRISM.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
III. Amendment No. 2
In Amendment No. 2, the Exchange
proposes to revise its proposal to make
certain clarifications and
representations relating to the use of
Price Improving and Post-Only Orders
and to make other clarifying revisions to
the rule text.
The Exchange proposes to amend its
rule text to delete the term ‘‘displayed’’
which modifies ‘‘BX BBO’’ in proposed
Chapter VI, Section 9(i)(B) and the term
‘‘or better than’’ in proposed Chapter VI,
Section 9(ii)(E)(3) because these
references represent the impact of
repricing resulting from Price Improving
and Post-Only Orders. The Exchange
represents that it will file a rule change
separately with the Commission to
remove Price Improving and Post-Only
Order types from its Rules.38 The
Exchange also represents that it will not
commence offering BX PRISM until
such time as it has an effective and
operative rule in place from the
Commission to remove Price Improving
and Post-Only Orders and removes the
ability to submit Price Improving and
Post-Only Orders into the Auction.39 In
the event the Exchange determines in
the future to allow the entry of any type
of non-displayed order types, the
Exchange represents that it will file a
proposed rule change pursuant to
Section 19(b)(2) under the Exchange Act
with the Commission to seek approval
for such rule change.40 As there will be
no longer be any repricing order types
on BX due to BX’s elimination of Price
Improving and Post Only Orders, the
Exchange proposes to delete these terms
from the rule text. The Exchange also
36 See
Notice, supra note 3, at 54606–07.
id. See also proposed BX Chapter VI,
Section 6(vii).
38 See Amendment No. 2, supra note 5, at 3.
39 See id.
40 See id. at 3–4.
37 See
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proposes to delete the term ‘‘displayed’’
in other parts of the rule where it
modifies the term ‘‘NBBO,’’ ‘‘quote
size,’’ or ‘‘size’’ because the Exchange
believes the modifier ‘‘displayed’’ is
redundant and unnecessary and wishes
to avoid any inference that the NBBO or
quote size may be non-displayed, which
it represents is not the case.41
The Exchange also proposes to
replace certain uses of the term
‘‘rejected’’ in the rule text with the term
‘‘immediately cancelled.’’ In
Amendment No. 2, BX notes that noneligible and non-compliant orders that
are submitted into PRISM will be
immediately cancelled when those
orders are reviewed for compliance with
Exchange Rules. These orders will not
technically be rejected as there will be
time, however miniscule, between the
submission of the order and the
cancellation of the order. The Exchange
believes this non-substantive change
adds more clarity to the rule text. The
Exchange also proposes to amend the
rule text to provide more specificity
concerning the allocation guarantee to
which an Initiating Participant is
entitled. While the current rule text
clearly states that the Initiating
Participant may receive up to 40% if
there is multiple competing interest or
50% of there is one competing quote,
order, or response, the amendments add
this detail to other places in the rule
where the 40% and 50% guarantees are
referenced to consistently make clear
the conditions under which they apply.
The Exchange believes this nonsubstantive change adds more clarity to
the rule text.
Further, the Exchange proposes to
amend the rule text at proposed Chapter
VI, Section 9(ii)(E)(3) to delete the term
‘‘orders.’’ This amendment will correct
the reference to the types of interest that
would be attributed to a Priority Market
Maker. While quotes and PAN
responses will be allocated according to
Priority Marker Maker status, orders
will be accepted but will not receive
Priority Market Maker status. Therefore,
BX proposes to delete the term ‘‘orders’’
to make clear which interest shall be
included for calculation within the
allocation.
In addition, the Exchange proposes to
replace the terms ‘‘orders’’ or
41 See id. at 5. The Exchange states that the term
‘‘displayed’’ prior to NBBO is simply redundant as
the NBBO is always displayed and therefore
unnecessary. The term ‘‘displayed’’ before the terms
‘‘quote size’’ and ‘‘size’’ is not necessary as such
references may create an inference that the quote
size may be non-displayed in certain circumstances,
which is not the case. Additionally, the term
‘‘displayed’’ is not utilized in the Phlx PIXL rule
text (Phlx Rule 1080(n)), which auction is similar
to PRISM.
PO 00000
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68351
‘‘participants’’ in certain places within
the rule text that reference the Initiating
Participant’s guarantee with the terms
‘‘quote(s), order(s) or PAN response(s),’’
which more fully and explicitly
represent the types of interest that is
considered when PRISM allocates 40%
or 50% of the PRISM Order to the
Initiating Participant. The Exchange
believes these amendments are nonsubstantive changes that add more
clarity to the rule text.
The Exchange also proposes to amend
the rule text at proposed Chapter VI,
Section 9(vi) to clarify that a Participant
cannot submit a Public Customer-toPublic customer paired order when
there is a PRISM Auction in progress in
the same series. Any attempt to do so
will result in the Exchange canceling
the Public Customer-to-Public customer
paired order. In its original notice, the
Exchange noted that only one Auction
may be conducted at a time in any given
series,42 and this additional text just
makes clear that the general prohibition
also applies when a Participant seeks to
submit a Public Customer-to-Public
customer paired order. The remaining
proposed changes in Amendment No. 2
correct a cross-reference and some
typographical errors.
IV. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange and, in particular,
with Section 6(b) of the Act.43 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,44 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect customers, issuers,
brokers and dealers. The Commission
believes that the Exchange’s proposal to
establish the PRISM Auction may
increase competition among those
42 See
Notice, supra note 3, at 54602.
U.S.C. 78f(b). In approving this proposed
rule change, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
44 15 U.S.C. 78f(b)(5).
43 15
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options exchanges that offer similar
price improvement mechanisms. The
Commission further believes that
allowing BX members to enter orders
into the PRISM Auction could provide
additional opportunities for such orders
to receive price improvement over the
NBBO. The Commission also believes
that the BX’s proposal to give priority to
a Priority Market Maker who is quoting
at the NBBO before an Auction is
initiated may provide an incentive for
BX Market Makers to publicly display
their best quotes with size on the
Exchange, which would benefit all
options market participants.
BX’s proposed PRISM Auction is
based in large part on Phlx’s PIXL, and
also is similar to existing functionality
at other options exchanges, except that,
as discussed further below, it adds a
new type of allocation for Priority
Market Makers.45 All options traded on
BX are eligible for the PRISM Auction,
and PRISM Orders are given the
opportunity for price improvement over
the NBBO by being exposed to members
during the PRISM Auction. In addition,
BX’s proposal protects resting interest
on its limit order book as the Initiating
Participant’s stop price 46 must be at
least one minimum trading increment
better than any booked order’s limit
price on the same side of the market as
the PRISM Order, when the PRISM
Order is for a Public Customer. A
PRISM Order for any entity other than
a Public Customer must be stopped at a
price better than the same side of the BX
BBO even if there is no resting limit
order on the book.
BX will not accept PRISM Orders
during certain times, including during
the final two seconds of the regular
trading session, as well as at or before
the opening of trading. BX also would
cancel any PRISM Order that does not
meet the Auction eligibility
requirements specified in the proposed
rule. Further, once a PRISM Auction has
commenced, it cannot be cancelled.
When the BX receives an eligible
PRISM Order for submission to the
PRISM Auction, it will broadly
45 See, e.g., Phlx Rule 1080(n) (Phlx’s PIXL),
Chicago Board Options Exchange (‘‘CBOE’’) Rule
6.74A (CBOE’s Automated Improvement
Mechanism (‘‘AIM’’) auction), and MIAX Rule 515A
(MIAX’s Price Improvement Mechanism (‘‘PRIME’’)
auction).
46 The Initiating Participant may forfeit priority
and trade allocation privileges by designating the
Initiating Order as Surrender, in which case the
Initiating Participant would trade only if there were
not enough interest available to fully execute the
PRISM Order at prices which are equal to or
improve upon the stop price. The Commission
notes that this feature may encourage use of the
PRISM Auction to provide certain orders with an
opportunity for price improvement that such orders
may not otherwise receive.
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announce the Auction by sending a
PAN over the BX Depth feed and the
Exchange’s Specialized Quote Feed
detailing the option, side, and size.47
This message is designed to help attract
competitive responses to a PRISM
Auction. The PRISM rules also permit
any person or entity to submit responses
to the PAN on behalf of all types of
interest.48 The Commission believes
that these requirements provide the
opportunity for a PRISM Order to be
exposed in an auction designed to
attract competitive responses and
facilitate price improvement, and thus
may result in ultimately better prices for
the PRISM Order to the extent the PAN
is successful in attracting competitive
responses.
All PRISM Auctions will last for a
period for a predefined time of no less
than 100 milliseconds and no more than
1 second as determined by the Exchange
and announced on the Nasdaq Trader
Web site. As the Exchange discussed in
its proposal, in May 2014, Phlx
surveyed its Market Maker members as
to the timeframe within which these
firms could respond to an auction with
a duration time ranging from less than
50 milliseconds to more than 1
second.49 Of the 20 Market Maker
firms 50 that responded to the question,
100% indicated that their firm could
respond to auctions with a duration
time of at least 50 milliseconds.51 Based
on BX’s statements, the Commission
believes that proposed duration of the
PRISM Auction could facilitate the
prompt execution of orders in the
PRISM auction, while providing market
participants with an opportunity to
compete for exposed bids and offers.
The Commission notes that other
exchanges’ price improvement
mechanisms provide for auction
response periods within the range of the
response duration proposed by BX.52
47 According to the Exchange, SQF is available to
Market Makers at no cost. The Depth Feed is
available to all other market participants that pay
to subscribe to the service to receive broadcast
information regarding auctions.
48 Cf. CBOE Rule 6.74A(b)(1)(D)–(E) (only CBOE
Market Makers with an appointment in the relevant
option class, and CBOE Members acting as agent for
orders resting at the top of the CBOE book opposite
the Agency Order, may submit responses to the
AIM RFR).
49 See Notice, supra note 3, at 54602.
50 The Exchange represents that 90% of the BX
market maker firms participated in the survey (i.e.,
90% of BX market maker firms were also market
makers on Phlx who participated in the Phlx
survey). See Notice, supra note 3, at 5460203, n. 19.
51 See Notice, supra note 3, at 54602–03, n. 19–
20 and accompanying text.
52 See International Securities Exchange Rule
723(c)(5) (auction period of 500 milliseconds),
CBOE Rule 6.74A(b)(1)(C) (auction period of 1
second), Boston Options Exchange Rule 7150(f)(1)
(auction period of 100 milliseconds).
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At the conclusion of a PRISM
Auction, Public Customer orders have
first priority to trade against the PRISM
Order. After Public Customer orders
receive their allocation, the Initiating
Participant next may be allocated a
limited percentage of the PRISM Order,
not to exceed 40% of the contracts at the
applicable final price point if competing
quotes, orders or PAN responses have
contracts available for execution
(however, if only one other competing
quote, order or PAN response matches
the Initiating Participant’s submission at
the best price, then the Initiating
Participant may be allocated up to 50%
of the PRISM Order). After the Initiating
Participant’s primary allocation, quotes
and PAN responses from Priority Market
Makers have next priority. Thereafter,
Non-Priority Market Makers, as well as
Priority Market Maker interest which
exceeded their displayed size in the
Initial NBBO, would have the next
priority at each price level at or better
than the Initial NBBO. Finally, all other
interest would receive an allocation if
contracts remained. The Commission
believes that the BX PRISM’s proposed
matching algorithm is sufficiently clear
regarding how orders are to be allocated
in the PRISM Auction and is designed
in a manner that should facilitate a
competitive auction process.
As noted above, the proposed BX
rules grant a BX Market Maker
‘‘priority’’ status for the duration of an
Auction when the Market Maker is
quoting at the NBBO at the time the
PRISM Auction was initiated, up to the
size of its quote. The Commission
believes that this provision is designed
to encourage BX Market Makers to quote
aggressively with additional size outside
of the PRISM Auction and, therefore,
may enhance competition and liquidity
on the BX market. The Commission
notes that another exchange, the Miami
International Securities Exchange, offers
a similar ‘‘priority quote’’ feature in its
general matching system,53 and also
provides for enhanced priority for
‘‘priority quotes’’ in its PRIME price
improvement auction in a substantially
similar manner as to what BX proposes
for PRISM.54
The Exchange has represented its
commitment to submit certain data on
PRISM Auctions at the request of
Commission staff. The Commission
expects such data to be used, by both
the Exchange and the Commission staff,
to assess the performance of PRISM
Auction, including, among other things,
to study whether there is meaningful
competition for all size orders with the
53 See
54 See
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PRISM, the degree of price improvement
for all orders executed through the
PRISM, and whether there is an active
and liquid market functioning on the
Exchange outside of the PRISM. The
data provided will enable the
Commission, as well as the Exchange
itself, to evaluate the PRISM Auction to
determine its performance and possible
impact on BX and options market
structure in general and the degree to
which it is beneficial to customers and
to the options market as a whole.
asabaliauskas on DSK5VPTVN1PROD with NOTICES
V. Section 11(a) of the Act
Section 11(a)(1) of the Act 55 prohibits
a member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises investment discretion
(collectively, ‘‘covered accounts’’)
unless an exception applies. Rule 11a2–
2(T) under the Act,56 known as the
‘‘effect versus execute’’ rule, provides
exchange members with an exemption
from the Section 11(a)(1) prohibition.
Rule 11a2–2(T) permits an exchange
member, subject to certain conditions,
to effect transactions for covered
accounts by arranging for an unaffiliated
member to execute transactions on the
exchange. To comply with Rule 11a2–
2(T)’s conditions, a member: (i) Must
transmit the order from off the exchange
floor; (ii) may not participate in the
execution of the transaction once it has
been transmitted to the member
performing the execution; 57 (iii) may
not be affiliated with the executing
member; and (iv) with respect to an
account over which the member or an
associated person has investment
discretion, neither the member nor its
associated person may retain any
compensation in connection with
effecting the transaction except as
provided in the Rule. For the reasons set
forth below, the Commission believes
that Exchange members entering orders
into the PRISM Auction would satisfy
the requirements of Rule 11a2–2(T).
The Rule’s first condition is that
orders for covered accounts be
transmitted from off the exchange floor.
In the context of automated trading
systems, the Commission has found that
the off-floor transmission requirement is
met if a covered account order is
transmitted from a remote location
directly to an exchange’s floor by
55 15
U.S.C. 78k(a)(1).
CFR 240.11a2–2(T).
57 This prohibition also applies to associated
persons. The member may, however, participate in
clearing and settling the transaction.
56 17
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electronic means.58 BX has represented
that the BX trading system and the
proposed PRISM Auction receive all
orders electronically through remote
terminals or computer-to-computer
interfaces.59 The Exchange also
represents that orders for covered
accounts from Participants will be
transmitted from a remote location
directly to the proposed PRISM
mechanism by electronic means.
Because no Exchange members may
submit orders into the PRISM Auction
from on the floor of the Exchange, the
Commission believes that the PRISM
Auction satisfies the off-floor
transmission requirement.
Second, the Rule requires that the
member and any associated person not
participate in the execution of its order
after the order has been transmitted. The
Exchange represents that at no time
following the submission of an order is
a Participant able to acquire control or
influence over the result or timing of the
order’s execution.60 According to the
Exchange, the execution of an order is
determined by what other orders are
present in the PRISM and the priority of
those orders.61 Accordingly, the
58 See, e.g., Securities Exchange Act Release Nos.
61419 (January 26, 2010), 75 FR 5157 (February 1,
2010) (SR–BATS–2009–031) (approving BATS
options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR–BSE–2008–48)
(approving equity securities listing and trading on
BSE); 57478 (March 12, 2008), 73 FR 14521 (March
18, 2008) (SR–NASDAQ–2007–004 and SR–
NASDAQ–2007–080) (approving NOM options
trading); 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10–131) (approving The
Nasdaq Stock Market LLC); 44983 (October 25,
2001), 66 FR 55225 (November 1, 2001) (SR–PCX–
00–25) (approving Archipelago Exchange); 29237
(May 24, 1991), 56 FR 24853 (May 31, 1991) (SR–
NYSE–90–52 and SR–NYSE–90–53) (approving
NYSE’s Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979)
(‘‘1979 Release’’).
59 See Notice, supra note 3, at 54612. See also
Amendment No. 2, supra note 5.
60 See Notice, supra note 3, at 54612. See also
Amendment No. 2, supra note 5 (also representing,
among other things, that: (1) No Participant,
including the Initiating Participant, will see a PAN
response submitted into PRISM and therefore and
will not be able to influence or guide the execution
of their PRISM Orders, (2) the Surrender feature
will not permit a Participant to have any control
over an order, and that the election to Surrender an
order is available prior to the submission of the
order, will not be broadcast and further, that the
Surrender option may not be modified by the
market participant during the auction).
61 See Notice, supra note 3, at 54612. See also
Amendment No. 2, supra note 5. The Exchange
notes that a Member may cancel or modify the
order, or modify the instructions for executing the
order, but that such instructions would be
transmitted from off the floor of the Exchange. The
Commission has stated that the non-participation
requirement is satisfied under such circumstances
so long as such modifications or cancellations are
also transmitted from off the floor. See Securities
Exchange Act Release No. 14563 (March 14, 1978),
43 FR 11542 (March 17, 1978) (‘‘1978 Release’’)
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68353
Commission believes that a member
does not participate in the execution of
an order submitted to the PRISM
mechanism.
Third, Rule 11a2–2(T) requires that
the order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that this
requirement is satisfied when
automated exchange facilities, such as
the PRISM mechanism, are used, as long
as the design of these systems ensures
that members do not possess any special
or unique trading advantages in
handling their orders after transmitting
them to the exchange.62 BX represents
that the PRISM is designed so that no
Member has any special or unique
trading advantage in the handling of its
orders after transmitting its orders to the
mechanism.63 Based on the Exchange’s
representation, the Commission believes
that the PRISM mechanism satisfies this
requirement.
Fourth, in the case of a transaction
effected for an account with respect to
which the initiating member or an
associated person thereof exercises
investment discretion, neither the
initiating member nor any associated
person thereof may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract referring
to Section 11(a) of the Act and Rule
11a2–2(T) thereunder.64 BX represents
(stating that the ‘‘non-participation requirement
does not prevent initiating members from canceling
or modifying orders (or the instructions pursuant to
which the initiating member wishes orders to be
executed) after the orders have been transmitted to
the executing member, provided that any such
instructions are also transmitted from off the
floor’’).
62 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that, while there is not an
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release, supra note 58.
63 See Notice, supra note 3, at 54612. See also
Amendment No. 2, supra note 5.
64 In addition, Rule 11a2–2(T)(d) requires a
member or associated person authorized by written
contract to retain compensation, in connection with
effecting transactions for covered accounts over
which such member or associated persons thereof
exercises investment discretion, to furnish at least
annually to the person authorized to transact
business for the account a statement setting forth
the total amount of compensation retained by the
member or any associated person thereof in
connection with effecting transactions for the
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that Members relying on Rule 11a2–2(T)
for transactions effected through the
PRISM must comply with this condition
of the Rule and that the Exchange will
enforce this requirement pursuant to its
obligations under Section 6(b)(1) of the
Act to enforce compliance with federal
securities laws.65
VI. Accelerated Approval of Proposal,
as Modified by Amendment No. 2
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Exchange Act, to approve the proposal,
as modified by Amendment Nos. 1 and
2, prior to the 30th day after publication
of Amendment No. 2 in the Federal
Register. In Amendment No. 2, BX
revised the original proposal, which had
been previously amended by
Amendment No. 1 before it was
published in the Federal Register, to
make the changes discussed in detail
above. Notably, in Amendment No. 2,
BX represents that Price Improving and
Post-Only Order types will be removed
from its Rules before BX implements the
PRISM Auction mechanism. BX also
made changes to clarify and add detail
to the rule text. The Commission
believes that Amendment No. 2 does not
raise any novel regulatory issues and
instead provides additional clarity in
the rule text, which is consistent with
BX’s original proposal, as modified by
Amendment No. 1, and supports BX’s
analysis of how its proposal is
consistent with the Act, thus facilitating
the Commission’s ability to make the
findings set forth above to approve the
proposal. Accordingly, the Commission
finds that good cause exists to approve
the proposal, as modified by
Amendment No. 2, on an accelerated
basis.
VII. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether Amendment No. 2 is
consistent with the Act. Comments may
be submitted by any of the following
methods:
asabaliauskas on DSK5VPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
account during the period covered by the statement.
See 17 CFR 240.11a2–2(T)(d). See also 1978
Release, supra note 61 (stating ‘‘[t]he contractual
and disclosure requirements are designed to assure
that accounts electing to permit transaction-related
compensation do so only after deciding that such
arrangements are suitable to their interests’’).
65 See Notice, supra note 3, at 54612. See also
Amendment No. 2, supra note 5.
VerDate Sep<11>2014
17:00 Nov 03, 2015
Jkt 238001
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2015–032 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–2015–032. 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 20549–1090, 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–
2015–032 and should be submitted on
or before November 25, 2015.
VIII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,66 that the
proposed rule change (SR–BX–2015–
032), as modified by Amendment Nos.
1 and 2, be and hereby is approved on
an accelerated basis, except that BX
Chapter VI, Section 9(ii)(B)(2)–(3),
Section 9(ii)(D), and Section 9(vii) are
approved on a pilot basis until July 18,
2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.67
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–28024 Filed 11–3–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76310; File No. 4–551]
Program for Allocation of Regulatory
Responsibilities Pursuant to Rule
17d–2; Notice of Filing and Order
Approving and Declaring Effective an
Amendment to the Plan for the
Allocation of Regulatory
Responsibilities Among NYSE MKT
LLC, BATS Exchange, Inc., BOX
Options Exchange LLC, C2 Options
Exchange, Incorporated, the Chicago
Board Options Exchange,
Incorporated, the EDGX Exchange,
Inc., the International Securities
Exchange LLC, ISE Gemini, LLC,
Financial Industry Regulatory
Authority, Inc., NYSE Arca, Inc., The
NASDAQ Stock Market LLC, NASDAQ
OMX BX, Inc., the NASDAQ OMX PHLX,
Inc., and Miami International Securities
Exchange, LLC Concerning OptionsRelated Market Surveillance
October 29, 2015.
Notice is hereby given that the
Securities and Exchange Commission
(‘‘Commission’’) has issued an Order,
pursuant to Section 17(d) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 approving and declaring
effective an amendment to the plan for
allocating regulatory responsibility
(‘‘Plan’’) filed on October 27, 2015,
pursuant to Rule 17d–2 of the Act,2 by
NYSE MKT LLC (‘‘MKT’’), BATS
Exchange, Inc., (‘‘BATS’’), the BOX
Options Exchange LLC (‘‘BOX’’), C2
Options Exchange, Incorporated (‘‘C2’’),
the Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’), the EDGX
Exchange, Inc. (‘‘EDGX’’) the
International Securities Exchange LLC
(‘‘ISE’’), ISE Gemini, LLC (‘‘Gemini’’),
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’), NYSE Arca,
Inc. (‘‘Arca’’), The NASDAQ Stock
Market LLC (‘‘Nasdaq’’), NASDAQ OMX
BX, Inc. (‘‘BX’’), NASDAQ OMX PHLX,
Inc. (‘‘PHLX’’), and Miami International
Securities Exchange (‘‘MIAX’’)
(collectively, ‘‘Participating
Organizations’’ or ‘‘parties’’).
67 17
CFR 200.30–3(a)(12).
U.S.C. 78q(d).
2 17 CFR 240.17d–2.
1 15
66 15
PO 00000
U.S.C. 78s(b)(2).
Frm 00063
Fmt 4703
Sfmt 4703
E:\FR\FM\04NON1.SGM
04NON1
]]>Agencies
[Federal Register Volume 80, Number 213 (Wednesday, November 4, 2015)]
[Notices]
[Pages 68347-68354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-28024]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76301; File No. SR-BX-2015-032]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt a
New Price Improvement Auction, BX PRISM
October 29, 2015.
I. Introduction
On August 19, 2015, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
establish an options price improvement mechanism (``PRISM''). On
September 2, 2015, BX filed Amendment No. 1 to the proposal. The
proposed rule change, as modified by Amendment No. 1, was published for
comment in the Federal Register on September 10, 2015.\3\ The
Commission received no substantive comments regarding the proposal.\4\
On October 22, 2015, BX granted an extension of time for Commission
action until October 30, 2015. On October 23, 2015, BX filed Amendment
No. 2 to the proposal.\5\ The Commission is publishing this notice to
solicit comment on Amendment No. 2 from interested persons and is
approving the proposed rule change, as modified by Amendment Nos. 1 and
2, on an accelerated basis, with certain provisions subject to a pilot
period scheduled to expire on July 18, 2016.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 75827 (September 3,
2015), 80 FR 54601 (``Notice'').
\4\ See infra note 5 (noting that when BX submitted Amendment
No. 2, it also submitted the document as a comment letter to the
file to promote the public dissemination of its Amendment).
\5\ In Amendment No. 2, BX makes certain technical and
clarifying changes to the proposal, which BX believes does not
result in any material differences over its original filing as
modified by Amendment No. 1. Specifically, BX proposes to: (i)
Remove the term ``displayed''; (ii) describe ``rejected'' orders
more accurately as ``immediately cancelled'' in certain
circumstances; (iii) provide more specificity as to the amounts of
allocations for which an Initiating Participant is entitled to be
allocated; (iv) remove an incorrect reference to ``orders'' and
define interest more specifically; (v) add more specificity related
to Customer-to-Customer orders; (vi) correct a citation error; and
(vii) correct typographical errors. Amendment 2 amends and replaces
the original filing, as modified by Amendment 1, in its entirety. To
promote transparency of its proposed amendment, when BX filed
Amendment No. 2 with the Commission, it also submitted Amendment No.
2 as a comment letter to the file, which the Commission posted on
its Web site and placed in the public comment file for SR-BX-2015-
032. The Exchange also posted a copy of its Amendment No. 2 on its
Web site when it filed the amendment with the Commission.
---------------------------------------------------------------------------
II. Description of the Proposal
BX proposes to establish a price-improvement mechanism, ``PRISM,''
on the Exchange's options platform, in which a BX Participant (an
``Initiating Participant'') may electronically submit for execution a
two-sided paired order, where one side is an order it represents as
agent on behalf of a Public Customer,\6\ Professional customer, broker-
dealer, or any other entity (``PRISM Order'') and the other side is
principal interest or any other order it represents as agent (an
``Initiating Order'') provided that the member first exposes the PRISM
Order in the PRISM Auction (``Auction'') pursuant to the proposed Rule.
---------------------------------------------------------------------------
\6\ For purposes of this Rule, a Public Customer order does not
include a Professional order, and therefore a Professional would not
be entitled to Public Customer priority as described herein. A
Public Customer means a person that is not a broker or dealer in
securities. See BX Chapter I, Section 1(a)(50). A Public Customer
order does not include a Professional order for purposes of BX
Chapter VI, Section 10(a)(C)(1)(a), which governs allocation
priority. A ``Professional'' means any person or entity that (i) is
not a broker or dealer in securities, and (ii) places more than 390
orders in listed options per day on average during a calendar month
for its own beneficial account(s). A Participant or a Public
Customer may, without limitation, be a Professional. All
Professional orders shall be appropriately marked by Participants.
See BX Chapter I, Section 1(a)(49).
---------------------------------------------------------------------------
[[Page 68348]]
A. Auction Eligibility Requirements
All options traded on the Exchange are eligible for PRISM.\7\ To
initiate a PRISM Auction, an Initiating Participant first must ``stop''
the PRISM Order at a price that is equal to or better than the NBBO. In
addition, the proposed rules governing the eligible stop price
recognize a distinction between PRISM Orders for Public Customers and
PRISM Orders for non-Public Customers. Specifically, a PRISM Order that
is a Public Customer Order must be stopped at an improved price over
any resting a limit orders on the book on the same side as the PRISM
Order. A PRISM Order that is for a non-Customer (account of a broker-
dealer or any other person or entity that is not a Public Customer) is
always required to improve the same side BX BBO as the PRISM Order,
even if there is no resting limit order on the book. PRISM Orders that
do not comply with the aforementioned auction eligibility requirements
will be immediately cancelled. In addition, PRISM Orders submitted at
or before the opening of trading are not eligible to initiate an
Auction and will be rejected. PRISM Orders submitted during the final
two seconds of the trading session are not eligible to initiate an
Auction and will be immediately cancelled. Finally, an Initiating Order
may not be a solicited order for the account of any BX Options Market
Maker assigned in the affected series.\8\
---------------------------------------------------------------------------
\7\ See proposed BX Chapter VI, Section 9(i).
\8\ See proposed BX Chapter VI, Section 9(i)(C) through (F).
---------------------------------------------------------------------------
B. Auction Process
To initiate the Auction, the Initiating Participant must mark the
PRISM Order for Auction processing, and specify either: (a) A single
price at which it seeks to execute the PRISM Order (a ``stop price'');
(b) that it is willing to automatically match as principal or as agent
on behalf of an Initiating Order the price and size of all PRISM
Auction Notifications (``PAN'') responses, and trading interest
(``auto-match'') in which case the PRISM Order will be stopped at the
NBBO on the Initiating Order side; \9\ or (c) that it is willing to
either: (i) Stop the entire order at a single stop price and auto-match
PAN responses and trading interest at a price or prices that improve
the stop price up to a maximum specified price (a ``No Worse Than'' or
``NWT'' price); (ii) stop the entire order at a single stop price and
auto-match all PAN responses and trading interest at or better than the
stop price; or (iii) stop the entire order at the NBBO on the
Initiating Order side, and auto-match PAN responses and trading
interest at a price or prices that improve the stop price up to the NWT
price. In all cases, if the BX BBO on the same side of the market as
the PRISM Order represents a limit order on the book, the stop price
must be at least one minimum trading increment (specified in Chapter
VI, Section 5) better than the booked limit order's limit price.
---------------------------------------------------------------------------
\9\ This is accomplished by marking the Initiating Order with a
market (MKT) price.
---------------------------------------------------------------------------
Only one Auction would be conducted at a time in any given series.
Once the Initiating Participant has submitted a PRISM Order for
exposure in the Auction, such PRISM Order may not be modified or
cancelled, nor may any Auction be cancelled once it has commenced.
Under any of the circumstances described above, the stop price or NWT
price may be improved to the benefit of the PRISM Order during the
Auction, but may not be cancelled.
Under the proposal, except for rounding purposes, the Initiating
Participant would not receive an allocation percentage of more than 50%
with one competing quote, order or PAN response, or 40% with multiple
competing quotes, orders or PAN responses at the final price point,
when competing quotes, orders or PAN responses have contracts available
for execution.\10\ However, when starting an Auction, the Initiating
Participant may submit the Initiating Order with a designation of
``surrender'' to other PRISM Participants (``Surrender''), which will
result in the Initiating Participant forfeiting priority and trade
allocation privileges. If Surrender is specified, the Initiating
Participant would trade only if there were not enough interest
available to fully execute the PRISM Order at prices which are equal to
or improve upon the stop price.\11\ Surrender information would not be
available to other market participants and may not be modified after
the order is submitted to the Auction.
---------------------------------------------------------------------------
\10\ See proposed BX Chapter VI, Section 9(ii)(A)(1).
\11\ Surrender will not be permitted if both the Initiating
Order and PRISM Order are Public Customer Orders. See proposed BX
Chapter VI, Section 9(ii)(A)(1).
---------------------------------------------------------------------------
When the Exchange receives a PRISM Order for Auction, a PAN
detailing the side, size and options series of the PRISM Order would be
sent over the Exchange's Specialized Quote Feed and BX Depth Feed.
PRISM Auctions would be for a specified duration of no less than one
hundred milliseconds and no more than one second, as determined by the
Exchange and announced on the Nasdaq Trader Web site.\12\ Any person or
entity may submit a response to the PAN, provided such response is
properly marked specifying price, size, and side of the market. PAN
responses would not be visible to Auction participants, including the
initiator, and would not be disseminated to OPRA. The minimum price
increment for PAN responses and for an Initiating Participant's stop
price and/or NWT price would be the minimum price improvement increment
established pursuant to proposed Rule Chapter VI, Section 9(i)(A).\13\
---------------------------------------------------------------------------
\12\ In May 2014, NASDAQ OMX PHLX LLC's (``Phlx'') staff
distributed a survey to all Phlx market maker firms inquiring as to
the timeframe within which these market participants respond to an
auction with a duration time ranging from less than fifty (50)
milliseconds to more than one (1) second. According to BX, the
market marker firms on Phlx represent membership similar to BX
Market Makers, and 90 percent of the BX Market Maker firms
participated in the survey. Of the thirty five (35) Phlx market
maker firms that were surveyed, twenty (20) of these market makers
responded to the survey and of those respondents 100% indicated that
that their firm could respond to auctions with a duration time of at
least 50 milliseconds. Based on the results of the survey, the
Exchange believes that allowing for an auction period of no less
than one hundred (100) milliseconds and no more than one (1) second
would provide a meaningful opportunity for BX Participants to
respond to the PRISM Auction while at the same time facilitating the
prompt execution of orders. Based on experience with the Phlx's PIXL
mechanism on BX's affiliated exchange, BX believes that 100
milliseconds will continue to provide all market participants with
sufficient time to respond, compete, and provide price improvement
for orders and will provide investors and other market participants
with more timely executions, thereby reducing their market risk.
\13\ See proposed BX Chapter VI, Section 9(ii)(A)(2) through
(6).
---------------------------------------------------------------------------
A PAN response size at any given price point may not exceed the
size of the PRISM Order. Any such oversized response would be
immediately cancelled. A PAN response must be equal to or better than
the NBBO at the time of receipt of the PAN response or it would be
immediately cancelled. PAN responses may be modified or cancelled
during the Auction. PAN responses on the same side of the market as the
PRISM Order are considered invalid and will be immediately cancelled.
Finally, multiple PAN responses from the same Participant may be
submitted during the Auction. However, multiple orders at a particular
price point submitted by a Participant in response to a PAN may not
exceed, in the aggregate, the size of the PRISM Order.\14\
---------------------------------------------------------------------------
\14\ See proposed BX Chapter VI, Section 9(ii)(A)(7) through
(10).
---------------------------------------------------------------------------
C. Conclusion of an Auction
The PRISM Auction would conclude at the earlier of: (i) The end of
the Auction period; (ii) any time the BX
[[Page 68349]]
BBO crosses the PRISM Order stop price on the same side of the market
as the PRISM Order; \15\ or (iii) any time there is a trading halt \16\
on the Exchange in the affected series.\17\
---------------------------------------------------------------------------
\15\ This provision regarding the BX BBO crossing the PRISM
Order stop price on the same side of the market as the PRISM Order,
as a conclusion to a PRISM Auction, would be subject to a pilot
period scheduled to expire July 18, 2016.
\16\ This provision regarding the trading halt, as a conclusion
to a PRISM Auction, would be subject to a pilot period scheduled to
expire July 18, 2016.
\17\ See proposed BX Chapter VI, Section 9(ii)(B).
---------------------------------------------------------------------------
If the PRISM Auction concludes earlier than the end of the
prescribed Auction period, the entire PRISM Order will be executed at:
(i) In the case of the BX BBO crossing the PRISM Order stop price, the
best response price(s) or, if the stop price is the best price in the
Auction, at the stop price, unless the best response price is equal to
or better than the price of a limit order resting on the Order Book on
the same side of the market as the PRISM Order, in which case the PRISM
Order will be executed against that response, but at a price that is at
the minimum trading increment better than the price of such limit order
at the time of the conclusion of the Auction; or (ii) in the case of a
trading halt on the Exchange in the affected series, the stop price, in
which case the PRISM Order will be executed solely against the
Initiating Order.\18\
---------------------------------------------------------------------------
\18\ See proposed BX Chapter VI, Rule 9(ii)(C).
---------------------------------------------------------------------------
Any unexecuted PAN responses will be cancelled.\19\ An unrelated
market or marketable limit order (against the BX BBO) on the opposite
side of the market from the PRISM Order received during the Auction
will not cause the Auction to end early and will execute against
interest outside of the Auction.\20\ If contracts remain from such
unrelated order at the time the auction ends, they will be considered
for participation in the order allocation process.
---------------------------------------------------------------------------
\19\ See id.
\20\ See proposed BX Chapter VI, Section 9(ii)(D). This
provision would be subject to a pilot period scheduled to expire on
July 18, 2016. The Commission notes that this provision is based on
a similar provision in Phlx's Price Improvement XL (``PIXL'')
auction. See Phlx Rule 1080(n).
---------------------------------------------------------------------------
1. Order Allocation--Size Pro-Rata
At the conclusion of the Auction, for option classes governed under
BX's Size Pro-Rata execution algorithm, the PRISM Order will be
allocated at the best price(s), pursuant to the priority set forth in
Chapter VI, 9(ii)(E)(1) through (5).\21\ First, Public Customer orders
would have time priority at each price level. Next, the Initiating
Participant would receive an allocation after Public Customer
orders.\22\
---------------------------------------------------------------------------
\21\ See Notice, supra note 3, at 54607-54610, for examples
illustrating trade allocations under the Size Pro-Rata execution
algorithm.
\22\ The Initiating Participant shall receive additional
allocation only if contracts remain after any allocation pursuant to
proposed BX Chapter VI, Section 9(ii)(E)(3) through (5).
---------------------------------------------------------------------------
If the Initiating Participant selected the single stop price
option, PRISM executions will occur first at prices that improve the
stop price, and then at the stop price with up to 40% of the remaining
contracts after Public Customer interest is satisfied being allocated
to the Initiating Participant at the stop price. However, if only one
other quote, order or PAN response matches the stop price, then the
Initiating Participant may be allocated up to 50% of the contracts
executed at such price.
If the Initiating Participant selected the auto-match option, the
Initiating Participant would be allocated a number of contracts equal
to the aggregate size of all other quotes, orders, and PAN responses at
each price point until a price point is reached where the balance of
the order can be fully executed, except that the Initiating Participant
would be entitled to receive up to 40% (if there are multiple competing
quotes, orders or PAN responses) or 50% (if there is only one competing
quote, order or PAN response) of the contracts remaining at the final
price point (including situations where the stop price is the final
price) after Public Customer interest has been satisfied but before
remaining interest receives an allocation.
If the Initiating Participant selected the ``stop and NWT'' option,
contracts would be allocated as follows: (i) First to quotes, orders,
and PAN responses at prices better than the NWT price (if any),
beginning with the best price, pursuant to proposed Chapter VI, Section
9(ii)(E)(3) through (5), at each price point; and (ii) next, to quotes,
orders, and PAN responses at prices at the Initiating Participant's NWT
price and better than the Initiating Participant's stop price,
beginning with the NWT price. The Initiating Participant would be
allocated a number of contracts equal to the aggregate size of all
other quotes, orders, and PAN responses at each price point, except
that the Initiating Participant would be entitled to receive up to 40%
(if there are multiple competing quotes, orders or PAN responses) or
50% (if there is only one competing quote, order or PAN response) of
the contracts remaining at the final price point (including situations
where the final price is the stop price), after Public Customer
interest has been satisfied but before remaining interest receives an
allocation. In the case of an Initiating Order with a NWT price at the
market, the Initiating Participant would be allocated a number of
contracts equal to the aggregate size of all other quotes, orders, and
PAN responses at all price points, except that the Initiating
Participant would be entitled to receive up to 40% or 50% of the
contracts remaining at the final price point (including situations
where the final price is the stop price), after Public Customer
interest has been satisfied but before remaining interest receives an
allocation.\23\
---------------------------------------------------------------------------
\23\ See proposed BX Chapter VI, Section 9(ii)(E)(2)(a) through
(c).
---------------------------------------------------------------------------
After Public Customers and the Initiating Participant receive their
allocations, BX Options Market Makers that were at a price equal to the
NBBO on the opposite side of the market from the PRISM Order at the
time of initiation of the PRISM Auction (``Priority Market Makers'')
would have priority up to their quote size in the NBBO which was
present when the PRISM Auction was initiated (``Initial NBBO'') at each
price level at or better than such Initial NBBO.\24\ Priority Market
Maker quotes and PAN responses will be allocated pursuant to the Size
Pro-Rata algorithm set forth in BX Chapter VI, Section 10(1)(B).\25\
Priority Market Maker status is valid only for the duration of the
particular PRISM auction.
---------------------------------------------------------------------------
\24\ Miami International Securities Exchange, LLC (``MIAX'')
allocates executions resulting from Priority Public Customer
interest and priority Market Maker quotes ahead of other interest.
MIAX's system may designate Market Maker quotes as either priority
quotes or non-priority quotes in accordance with the provisions in
MIAX Rule 517(b). BX is prioritizing Priority Market Maker
allocations in the proposed BX PRISM Auction in a similar manner,
ahead of other non-Public Customer interest.
\25\ See proposed BX Chapter VI, Section 9(ii)(E)(3).
---------------------------------------------------------------------------
Next, Non-Priority Market Makers, as well as Priority Market Maker
PRISM Auction interest which exceeded the Priority Market Maker's size
in the Initial NBBO, would have priority at each price level at or
better than the Initial NBBO after Public Customers, the Initiating
Participant and Priority Market Makers have received allocations. Non-
Priority Market Maker and such excess Priority Market Maker interest
will be allocated pursuant to the Size Pro-Rata algorithm set forth in
BX Chapter VI, Section 10(1)(B).\26\
---------------------------------------------------------------------------
\26\ See proposed BX Chapter VI, Section 9(ii)(E)(4).
---------------------------------------------------------------------------
Finally, all other interest will receive an allocation after the
interest discussed above has been satisfied. Such interest will be
allocated pursuant to the Size
[[Page 68350]]
Pro-Rata algorithm set forth in BX Chapter VI, Section 10(1)(B).\27\
---------------------------------------------------------------------------
\27\ See proposed BX Chapter VI, Section 9(ii)(E)(5).
---------------------------------------------------------------------------
2. Order Allocation--Price/Time
At the conclusion of the Auction, for option classes governed under
BX's Price/Time execution algorithm, the PRISM Order will be allocated
at the best price(s), pursuant to the priority set forth in proposed
Chapter VI, Section 9(ii)(F)(1) through (4).\28\ First, Public Customer
orders would have time priority at each price level. Next, the
Initiating Participant would receive an allocation after Public
Customer orders.\29\
---------------------------------------------------------------------------
\28\ See Notice, supra note 3, at 54607-54610, for examples
illustrating trade allocations under the Price/Time execution
algorithm.
\29\ The Initiating Participant shall receive additional
allocation only if contracts remain after any allocation pursuant to
proposed BX Chapter VI, Section 9(ii)(F)(3) and (4).
---------------------------------------------------------------------------
If the Initiating Participant selected the single stop price
option, PRISM executions will occur first at prices that improve the
stop price, and then at the stop price with up to 40% of the remaining
contracts after Public Customer interest is satisfied being allocated
to the Initiating Participant at the stop price. However, if only one
other quote, order or PAN response matches the stop price, the
Initiating Participant may be allocated up to 50% of the contracts
executed at such price.
If the Initiating Participant selected the auto-match option, the
Initiating Participant would be allocated a number of contracts equal
to the aggregate size of all other quotes, orders, and PAN responses at
each price point until a price point is reached where the balance of
the order can be fully executed, except that the Initiating Participant
would be entitled to receive up to 40% (if there are multiple competing
quotes, orders or PAN responses) or 50% (if there is only one competing
quote, order or PAN response) of the contracts remaining at the final
price point (including situations where the stop price is the final
price), after Public Customer interest has been satisfied but before
remaining interest receives an allocation.
If the Initiating Participant selected the ``stop and NWT'' option,
contracts would be allocated as follows: (i) First to quotes, orders,
and PAN responses at prices better than the NWT price (if any),
beginning with the best price, pursuant to proposed Chapter VI, Section
9(ii)(F)(3) and (4), at each price point; and (ii) next, to quotes,
orders, and PAN responses at prices at the Initiating Participant's NWT
price and better than the Initiating Participant's stop price,
beginning with the NWT price. The Initiating Participant would be
allocated a number of contracts equal to the aggregate size of all
other quotes, orders, and PAN responses at each price point, except
that the Initiating Participant would be entitled to receive up to 40%
(if there are multiple competing quotes, orders or PAN responses) or
50% (if there is only one competing quote, order or PAN response) of
the contracts remaining at the final price point (including situations
where the final price is the stop price), after Public Customer
interest has been satisfied but before remaining interest receives an
allocation. In the case of an Initiating Order with a NWT price at the
market, the Initiating Participant would be allocated a number of
contracts equal to the aggregate size of all other quotes, orders, and
PAN responses at all price points, except that the Initiating
Participant would be entitled to receive up to 40% multiple competing
quotes, orders or PAN responses) or 50% (one competing quote, order or
PAN response) of the contracts remaining at the final price point
(including situations where the final price is the stop price), after
Public Customer interest has been satisfied but before remaining
interest receives an allocation.
After Public Customers and the Initiating Participant receive their
allocations, Priority Market Makers that were at a price equal to the
NBBO on the opposite side of the market from the PRISM Order at the
time of initiation of PRISM Auction would have priority up to their
quote size in the Initial NBBO at each price level better than the
Initial NBBO. Priority Market Maker interest at prices better than the
Initial NBBO will be allocated pursuant to the Size Pro-Rata algorithm
set forth in BX Chapter VI, Section 10(1)(B). Priority Market Maker
interest at a price equal to or inferior to the Initial NBBO will not
have priority over other participants and will be allocated pursuant to
the Price/Time algorithm set forth in BX Chapter VI, Section
10(1)(A).\30\
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\30\ See proposed BX Chapter VI, Section 9(ii)(F)(3).
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Finally, all other interest will receive an allocation, after the
interest discussed above has been satisfied. Such interest will be
allocated pursuant to the Price/Time algorithm set forth in BX Chapter
VI, Section 10(1)(A).\31\
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\31\ See proposed BX Chapter VI, Section 9(ii)(F)(4).
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D. Crossing Agency Orders
The Exchange also proposes, in lieu of the PRISM Auction procedures
set forth in proposed Chapter VI, Section 9(i)-(ii), to allow an
Initiating Participant to enter a PRISM Order for the account of a
Public Customer paired with an order for the account of another Public
Customer, and such paired orders will be automatically executed without
a PRISM Auction, provided there is not currently an Auction in progress
in the same series, in which case the paired orders would be
cancelled.\32\ In its proposal, the Exchange notes that it would be a
violation of BX Chapter VII, Section 12 for a Participant to circumvent
Chapter VII, Section 12 by providing an opportunity for (i) a Public
Customer affiliated with the Participant, or (ii) a Public Customer
with whom the Participant has an arrangement that allows the
Participant to realize similar economic benefits from the transaction
as the Participant would achieve by executing agency orders as
principal, to regularly execute against agency orders handled by the
firm immediately upon their entry as PRISM Public Customer-to-Public
Customer immediate crosses.\33\
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\32\ See discussion infra Section VI, Amendment No. 2. As noted
in proposed BX Chapter VI, Section 9(ii), only one Auction may be
conducted at a time in any given series.
\33\ See Notice, supra note 3, at 54606. See also proposed BX
Chapter VI, Section 9(vi)(a).
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E. Pilot Program Information to the Commission
Subject to a pilot program expiring July 18, 2016,\34\ there will
be no minimum size requirement for orders to be eligible for the
Auction. The Exchange also has proposed two additional components of
its rules on a pilot basis, expiring on July 18, 2016: (i) The early
conclusion of the PRISM Auction; and (ii) an unrelated market or
marketable limit order (against the BX BBO) on the opposite side of the
market from the PRISM Order received during the Auction will not cause
the Auction to end early and will execute against interest outside of
the Auction.\35\ During this pilot period, the Exchange represents that
it periodically will submit certain data, as requested by the
Commission staff, to provide supporting evidence that, among other
things, there is meaningful competition in PRISM Auctions for all size
orders, there are opportunities for significant price improvement for
orders executed through PRISM, and that there is an active and liquid
market functioning on the Exchange outside of the Auction
[[Page 68351]]
mechanism.\36\ The Exchange further noted that it would seek to request
confidential treatment for any raw data that it submits to the
Commission.\37\
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\34\ See proposed BX Chapter VI, Section 9(viii).
\35\ See proposed BX Chapter VI, Section 9(ii)(B)(2) through (4)
(governing the early conclusion of a PRISM auction) and proposed BX
Chapter VI, Section 9(ii)(D) (governing the treatment of unrelated
orders on the opposite side of the market from the PRISM Order).
\36\ See Notice, supra note 3, at 54606-07.
\37\ See id. See also proposed BX Chapter VI, Section 6(vii).
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The Exchange represented that it will provide the following
additional information on a monthly basis:
(i) The number of contracts (of orders of 50 contracts or greater)
entered into the PRISM;
(ii) The number of contracts (of orders of fewer than 50 contracts)
entered into the PRISM;
(iii) The number of orders of 50 contracts or greater entered into
the PRISM; and
(iv) The number of orders of fewer than 50 contracts entered into
the PRISM.
III. Amendment No. 2
In Amendment No. 2, the Exchange proposes to revise its proposal to
make certain clarifications and representations relating to the use of
Price Improving and Post-Only Orders and to make other clarifying
revisions to the rule text.
The Exchange proposes to amend its rule text to delete the term
``displayed'' which modifies ``BX BBO'' in proposed Chapter VI, Section
9(i)(B) and the term ``or better than'' in proposed Chapter VI, Section
9(ii)(E)(3) because these references represent the impact of repricing
resulting from Price Improving and Post-Only Orders. The Exchange
represents that it will file a rule change separately with the
Commission to remove Price Improving and Post-Only Order types from its
Rules.\38\ The Exchange also represents that it will not commence
offering BX PRISM until such time as it has an effective and operative
rule in place from the Commission to remove Price Improving and Post-
Only Orders and removes the ability to submit Price Improving and Post-
Only Orders into the Auction.\39\ In the event the Exchange determines
in the future to allow the entry of any type of non-displayed order
types, the Exchange represents that it will file a proposed rule change
pursuant to Section 19(b)(2) under the Exchange Act with the Commission
to seek approval for such rule change.\40\ As there will be no longer
be any repricing order types on BX due to BX's elimination of Price
Improving and Post Only Orders, the Exchange proposes to delete these
terms from the rule text. The Exchange also proposes to delete the term
``displayed'' in other parts of the rule where it modifies the term
``NBBO,'' ``quote size,'' or ``size'' because the Exchange believes the
modifier ``displayed'' is redundant and unnecessary and wishes to avoid
any inference that the NBBO or quote size may be non-displayed, which
it represents is not the case.\41\
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\38\ See Amendment No. 2, supra note 5, at 3.
\39\ See id.
\40\ See id. at 3-4.
\41\ See id. at 5. The Exchange states that the term
``displayed'' prior to NBBO is simply redundant as the NBBO is
always displayed and therefore unnecessary. The term ``displayed''
before the terms ``quote size'' and ``size'' is not necessary as
such references may create an inference that the quote size may be
non-displayed in certain circumstances, which is not the case.
Additionally, the term ``displayed'' is not utilized in the Phlx
PIXL rule text (Phlx Rule 1080(n)), which auction is similar to
PRISM.
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The Exchange also proposes to replace certain uses of the term
``rejected'' in the rule text with the term ``immediately cancelled.''
In Amendment No. 2, BX notes that non-eligible and non-compliant orders
that are submitted into PRISM will be immediately cancelled when those
orders are reviewed for compliance with Exchange Rules. These orders
will not technically be rejected as there will be time, however
miniscule, between the submission of the order and the cancellation of
the order. The Exchange believes this non-substantive change adds more
clarity to the rule text. The Exchange also proposes to amend the rule
text to provide more specificity concerning the allocation guarantee to
which an Initiating Participant is entitled. While the current rule
text clearly states that the Initiating Participant may receive up to
40% if there is multiple competing interest or 50% of there is one
competing quote, order, or response, the amendments add this detail to
other places in the rule where the 40% and 50% guarantees are
referenced to consistently make clear the conditions under which they
apply. The Exchange believes this non-substantive change adds more
clarity to the rule text.
Further, the Exchange proposes to amend the rule text at proposed
Chapter VI, Section 9(ii)(E)(3) to delete the term ``orders.'' This
amendment will correct the reference to the types of interest that
would be attributed to a Priority Market Maker. While quotes and PAN
responses will be allocated according to Priority Marker Maker status,
orders will be accepted but will not receive Priority Market Maker
status. Therefore, BX proposes to delete the term ``orders'' to make
clear which interest shall be included for calculation within the
allocation.
In addition, the Exchange proposes to replace the terms ``orders''
or ``participants'' in certain places within the rule text that
reference the Initiating Participant's guarantee with the terms
``quote(s), order(s) or PAN response(s),'' which more fully and
explicitly represent the types of interest that is considered when
PRISM allocates 40% or 50% of the PRISM Order to the Initiating
Participant. The Exchange believes these amendments are non-substantive
changes that add more clarity to the rule text.
The Exchange also proposes to amend the rule text at proposed
Chapter VI, Section 9(vi) to clarify that a Participant cannot submit a
Public Customer-to-Public customer paired order when there is a PRISM
Auction in progress in the same series. Any attempt to do so will
result in the Exchange canceling the Public Customer-to-Public customer
paired order. In its original notice, the Exchange noted that only one
Auction may be conducted at a time in any given series,\42\ and this
additional text just makes clear that the general prohibition also
applies when a Participant seeks to submit a Public Customer-to-Public
customer paired order. The remaining proposed changes in Amendment No.
2 correct a cross-reference and some typographical errors.
---------------------------------------------------------------------------
\42\ See Notice, supra note 3, at 54602.
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IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b) of the Act.\43\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\44\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect customers, issuers, brokers and dealers. The Commission
believes that the Exchange's proposal to establish the PRISM Auction
may increase competition among those
[[Page 68352]]
options exchanges that offer similar price improvement mechanisms. The
Commission further believes that allowing BX members to enter orders
into the PRISM Auction could provide additional opportunities for such
orders to receive price improvement over the NBBO. The Commission also
believes that the BX's proposal to give priority to a Priority Market
Maker who is quoting at the NBBO before an Auction is initiated may
provide an incentive for BX Market Makers to publicly display their
best quotes with size on the Exchange, which would benefit all options
market participants.
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\43\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\44\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
BX's proposed PRISM Auction is based in large part on Phlx's PIXL,
and also is similar to existing functionality at other options
exchanges, except that, as discussed further below, it adds a new type
of allocation for Priority Market Makers.\45\ All options traded on BX
are eligible for the PRISM Auction, and PRISM Orders are given the
opportunity for price improvement over the NBBO by being exposed to
members during the PRISM Auction. In addition, BX's proposal protects
resting interest on its limit order book as the Initiating
Participant's stop price \46\ must be at least one minimum trading
increment better than any booked order's limit price on the same side
of the market as the PRISM Order, when the PRISM Order is for a Public
Customer. A PRISM Order for any entity other than a Public Customer
must be stopped at a price better than the same side of the BX BBO even
if there is no resting limit order on the book.
---------------------------------------------------------------------------
\45\ See, e.g., Phlx Rule 1080(n) (Phlx's PIXL), Chicago Board
Options Exchange (``CBOE'') Rule 6.74A (CBOE's Automated Improvement
Mechanism (``AIM'') auction), and MIAX Rule 515A (MIAX's Price
Improvement Mechanism (``PRIME'') auction).
\46\ The Initiating Participant may forfeit priority and trade
allocation privileges by designating the Initiating Order as
Surrender, in which case the Initiating Participant would trade only
if there were not enough interest available to fully execute the
PRISM Order at prices which are equal to or improve upon the stop
price. The Commission notes that this feature may encourage use of
the PRISM Auction to provide certain orders with an opportunity for
price improvement that such orders may not otherwise receive.
---------------------------------------------------------------------------
BX will not accept PRISM Orders during certain times, including
during the final two seconds of the regular trading session, as well as
at or before the opening of trading. BX also would cancel any PRISM
Order that does not meet the Auction eligibility requirements specified
in the proposed rule. Further, once a PRISM Auction has commenced, it
cannot be cancelled.
When the BX receives an eligible PRISM Order for submission to the
PRISM Auction, it will broadly announce the Auction by sending a PAN
over the BX Depth feed and the Exchange's Specialized Quote Feed
detailing the option, side, and size.\47\ This message is designed to
help attract competitive responses to a PRISM Auction. The PRISM rules
also permit any person or entity to submit responses to the PAN on
behalf of all types of interest.\48\ The Commission believes that these
requirements provide the opportunity for a PRISM Order to be exposed in
an auction designed to attract competitive responses and facilitate
price improvement, and thus may result in ultimately better prices for
the PRISM Order to the extent the PAN is successful in attracting
competitive responses.
---------------------------------------------------------------------------
\47\ According to the Exchange, SQF is available to Market
Makers at no cost. The Depth Feed is available to all other market
participants that pay to subscribe to the service to receive
broadcast information regarding auctions.
\48\ Cf. CBOE Rule 6.74A(b)(1)(D)-(E) (only CBOE Market Makers
with an appointment in the relevant option class, and CBOE Members
acting as agent for orders resting at the top of the CBOE book
opposite the Agency Order, may submit responses to the AIM RFR).
---------------------------------------------------------------------------
All PRISM Auctions will last for a period for a predefined time of
no less than 100 milliseconds and no more than 1 second as determined
by the Exchange and announced on the Nasdaq Trader Web site. As the
Exchange discussed in its proposal, in May 2014, Phlx surveyed its
Market Maker members as to the timeframe within which these firms could
respond to an auction with a duration time ranging from less than 50
milliseconds to more than 1 second.\49\ Of the 20 Market Maker firms
\50\ that responded to the question, 100% indicated that their firm
could respond to auctions with a duration time of at least 50
milliseconds.\51\ Based on BX's statements, the Commission believes
that proposed duration of the PRISM Auction could facilitate the prompt
execution of orders in the PRISM auction, while providing market
participants with an opportunity to compete for exposed bids and
offers. The Commission notes that other exchanges' price improvement
mechanisms provide for auction response periods within the range of the
response duration proposed by BX.\52\
---------------------------------------------------------------------------
\49\ See Notice, supra note 3, at 54602.
\50\ The Exchange represents that 90% of the BX market maker
firms participated in the survey (i.e., 90% of BX market maker firms
were also market makers on Phlx who participated in the Phlx
survey). See Notice, supra note 3, at 5460203, n. 19.
\51\ See Notice, supra note 3, at 54602-03, n. 19-20 and
accompanying text.
\52\ See International Securities Exchange Rule 723(c)(5)
(auction period of 500 milliseconds), CBOE Rule 6.74A(b)(1)(C)
(auction period of 1 second), Boston Options Exchange Rule
7150(f)(1) (auction period of 100 milliseconds).
---------------------------------------------------------------------------
At the conclusion of a PRISM Auction, Public Customer orders have
first priority to trade against the PRISM Order. After Public Customer
orders receive their allocation, the Initiating Participant next may be
allocated a limited percentage of the PRISM Order, not to exceed 40% of
the contracts at the applicable final price point if competing quotes,
orders or PAN responses have contracts available for execution
(however, if only one other competing quote, order or PAN response
matches the Initiating Participant's submission at the best price, then
the Initiating Participant may be allocated up to 50% of the PRISM
Order). After the Initiating Participant's primary allocation, quotes
and PAN responses from Priority Market Makers have next priority.
Thereafter, Non-Priority Market Makers, as well as Priority Market
Maker interest which exceeded their displayed size in the Initial NBBO,
would have the next priority at each price level at or better than the
Initial NBBO. Finally, all other interest would receive an allocation
if contracts remained. The Commission believes that the BX PRISM's
proposed matching algorithm is sufficiently clear regarding how orders
are to be allocated in the PRISM Auction and is designed in a manner
that should facilitate a competitive auction process.
As noted above, the proposed BX rules grant a BX Market Maker
``priority'' status for the duration of an Auction when the Market
Maker is quoting at the NBBO at the time the PRISM Auction was
initiated, up to the size of its quote. The Commission believes that
this provision is designed to encourage BX Market Makers to quote
aggressively with additional size outside of the PRISM Auction and,
therefore, may enhance competition and liquidity on the BX market. The
Commission notes that another exchange, the Miami International
Securities Exchange, offers a similar ``priority quote'' feature in its
general matching system,\53\ and also provides for enhanced priority
for ``priority quotes'' in its PRIME price improvement auction in a
substantially similar manner as to what BX proposes for PRISM.\54\
---------------------------------------------------------------------------
\53\ See MIAX Rule 517(b)(1)(i).
\54\ See MIAX Rule 515A(a)(2)(iii)(C).
---------------------------------------------------------------------------
The Exchange has represented its commitment to submit certain data
on PRISM Auctions at the request of Commission staff. The Commission
expects such data to be used, by both the Exchange and the Commission
staff, to assess the performance of PRISM Auction, including, among
other things, to study whether there is meaningful competition for all
size orders with the
[[Page 68353]]
PRISM, the degree of price improvement for all orders executed through
the PRISM, and whether there is an active and liquid market functioning
on the Exchange outside of the PRISM. The data provided will enable the
Commission, as well as the Exchange itself, to evaluate the PRISM
Auction to determine its performance and possible impact on BX and
options market structure in general and the degree to which it is
beneficial to customers and to the options market as a whole.
V. Section 11(a) of the Act
Section 11(a)(1) of the Act \55\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises investment discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\56\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) Must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
\57\ (iii) may not be affiliated with the executing member; and (iv)
with respect to an account over which the member or an associated
person has investment discretion, neither the member nor its associated
person may retain any compensation in connection with effecting the
transaction except as provided in the Rule. For the reasons set forth
below, the Commission believes that Exchange members entering orders
into the PRISM Auction would satisfy the requirements of Rule 11a2-
2(T).
---------------------------------------------------------------------------
\55\ 15 U.S.C. 78k(a)(1).
\56\ 17 CFR 240.11a2-2(T).
\57\ This prohibition also applies to associated persons. The
member may, however, participate in clearing and settling the
transaction.
---------------------------------------------------------------------------
The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. In the context of automated
trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\58\ BX has represented that the BX trading system and
the proposed PRISM Auction receive all orders electronically through
remote terminals or computer-to-computer interfaces.\59\ The Exchange
also represents that orders for covered accounts from Participants will
be transmitted from a remote location directly to the proposed PRISM
mechanism by electronic means. Because no Exchange members may submit
orders into the PRISM Auction from on the floor of the Exchange, the
Commission believes that the PRISM Auction satisfies the off-floor
transmission requirement.
---------------------------------------------------------------------------
\58\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
\59\ See Notice, supra note 3, at 54612. See also Amendment No.
2, supra note 5.
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Second, the Rule requires that the member and any associated person
not participate in the execution of its order after the order has been
transmitted. The Exchange represents that at no time following the
submission of an order is a Participant able to acquire control or
influence over the result or timing of the order's execution.\60\
According to the Exchange, the execution of an order is determined by
what other orders are present in the PRISM and the priority of those
orders.\61\ Accordingly, the Commission believes that a member does not
participate in the execution of an order submitted to the PRISM
mechanism.
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\60\ See Notice, supra note 3, at 54612. See also Amendment No.
2, supra note 5 (also representing, among other things, that: (1) No
Participant, including the Initiating Participant, will see a PAN
response submitted into PRISM and therefore and will not be able to
influence or guide the execution of their PRISM Orders, (2) the
Surrender feature will not permit a Participant to have any control
over an order, and that the election to Surrender an order is
available prior to the submission of the order, will not be
broadcast and further, that the Surrender option may not be modified
by the market participant during the auction).
\61\ See Notice, supra note 3, at 54612. See also Amendment No.
2, supra note 5. The Exchange notes that a Member may cancel or
modify the order, or modify the instructions for executing the
order, but that such instructions would be transmitted from off the
floor of the Exchange. The Commission has stated that the non-
participation requirement is satisfied under such circumstances so
long as such modifications or cancellations are also transmitted
from off the floor. See Securities Exchange Act Release No. 14563
(March 14, 1978), 43 FR 11542 (March 17, 1978) (``1978 Release'')
(stating that the ``non-participation requirement does not prevent
initiating members from canceling or modifying orders (or the
instructions pursuant to which the initiating member wishes orders
to be executed) after the orders have been transmitted to the
executing member, provided that any such instructions are also
transmitted from off the floor'').
---------------------------------------------------------------------------
Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated exchange facilities, such as the PRISM mechanism, are
used, as long as the design of these systems ensures that members do
not possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange.\62\ BX represents that
the PRISM is designed so that no Member has any special or unique
trading advantage in the handling of its orders after transmitting its
orders to the mechanism.\63\ Based on the Exchange's representation,
the Commission believes that the PRISM mechanism satisfies this
requirement.
---------------------------------------------------------------------------
\62\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 58.
\63\ See Notice, supra note 3, at 54612. See also Amendment No.
2, supra note 5.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\64\ BX represents
[[Page 68354]]
that Members relying on Rule 11a2-2(T) for transactions effected
through the PRISM must comply with this condition of the Rule and that
the Exchange will enforce this requirement pursuant to its obligations
under Section 6(b)(1) of the Act to enforce compliance with federal
securities laws.\65\
---------------------------------------------------------------------------
\64\ In addition, Rule 11a2-2(T)(d) requires a member or
associated person authorized by written contract to retain
compensation, in connection with effecting transactions for covered
accounts over which such member or associated persons thereof
exercises investment discretion, to furnish at least annually to the
person authorized to transact business for the account a statement
setting forth the total amount of compensation retained by the
member or any associated person thereof in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra
note 61 (stating ``[t]he contractual and disclosure requirements are
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
\65\ See Notice, supra note 3, at 54612. See also Amendment No.
2, supra note 5.
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VI. Accelerated Approval of Proposal, as Modified by Amendment No. 2
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act, to approve the proposal, as modified by Amendment
Nos. 1 and 2, prior to the 30th day after publication of Amendment No.
2 in the Federal Register. In Amendment No. 2, BX revised the original
proposal, which had been previously amended by Amendment No. 1 before
it was published in the Federal Register, to make the changes discussed
in detail above. Notably, in Amendment No. 2, BX represents that Price
Improving and Post-Only Order types will be removed from its Rules
before BX implements the PRISM Auction mechanism. BX also made changes
to clarify and add detail to the rule text. The Commission believes
that Amendment No. 2 does not raise any novel regulatory issues and
instead provides additional clarity in the rule text, which is
consistent with BX's original proposal, as modified by Amendment No. 1,
and supports BX's analysis of how its proposal is consistent with the
Act, thus facilitating the Commission's ability to make the findings
set forth above to approve the proposal. Accordingly, the Commission
finds that good cause exists to approve the proposal, as modified by
Amendment No. 2, on an accelerated basis.
VII. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 2
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-2015-032 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-2015-032. 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 20549-1090, 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-2015-032 and should be
submitted on or before November 25, 2015.
VIII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\66\ that the proposed rule change (SR-BX-2015-032), as modified by
Amendment Nos. 1 and 2, be and hereby is approved on an accelerated
basis, except that BX Chapter VI, Section 9(ii)(B)(2)-(3), Section
9(ii)(D), and Section 9(vii) are approved on a pilot basis until July
18, 2016.
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\66\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\67\
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\67\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-28024 Filed 11-3-15; 8:45 am]
BILLING CODE 8011-01-P
