Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 3, Section 10, Order Book Allocation, 21775-21780 [2021-08421]
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Federal Register / Vol. 86, No. 77 / Friday, April 23, 2021 / Notices
not significant price improvement when
the NBBO has a bid/ask differential of
$0.01. Accordingly, the Exchange
believes the proposed rule change to
continue to require price improvement
of at least one minimum price
increment over the NBBO for Agency
orders for less than 50 standard options
contracts (or 500 mini-option contracts)
when the difference in NBBO is $0.01
will help ensure that these small orders
receive at least minimal price
improvement, while also providing
further price improvement
opportunities in smaller-sized orders
that have a NBBO spread wider than
$0.01, which ultimately benefits
investors and retail customers in
particular.
Lastly, the Exchange notes the
proposed rule change is generally
intended to align system functionality
currently offered by the Exchange with
Cboe EDGX functionality in order to
provide a consistent technology offering
across the Exchange’s affiliated
exchanges. A consistent technology
offering, in turn, will simplify the
technology implementation, changes,
and maintenance by TPHs that are also
participants on Cboe EDGX. The
Exchange believes this consistency will
promote a fair and orderly national
options market system.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange does not believe the proposed
rule change will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, because it
will apply uniformly to TPHs.
Additionally, the Exchange notes that
participation in the AIM process is
completely voluntary. The Exchange
believes all market participants may
benefit from any additional liquidity
and price improvement in the AIM
Auctions that may result from the
proposed rule change.
The Exchange does not believe the
proposed rule change will impose any
burden on intermarket competition that
is not necessary or appropriate in
furtherance of the purposes of the Act,
as the proposed rule change relates to an
Exchange-specific auction mechanism.
The Exchange also notes that other
options exchanges maintain similar
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requirements for their respective price
improvement auctions.13
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 14 and Rule 19b–4(f)(6) 15
thereunder. At any time within 60 days
of the filing of the proposed rule change,
the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
21775
All submissions should refer to File
Number SR–CBOE–2021–024. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CBOE–2021–024, and
should be submitted on or before May
14, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–08420 Filed 4–22–21; 8:45 am]
BILLING CODE 8011–01–P
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–
CBOE–2021–024 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
Self-Regulatory Organizations; Nasdaq
BX, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Options 3,
Section 10, Order Book Allocation
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
[Release No. 34–91610; File No. SR–BX–
2021–013]
April 19, 2021.
13 See
Cboe EDGX Rule 21.19(b)(1). See also, e.g.,
Nasdaq PHLX LLC Options 3, Section 13(a) and
Nasdaq ISE LLC Options 3, Section 13(b).
14 15 U.S.C. 78s(b)(3)(A).
15 17 CFR 240.19b–4(f)(6).
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Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
16 17
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CFR 200.30–3(a)(12).
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(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 7,
2021, Nasdaq BX, Inc. (‘‘BX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Options 3, Section 10, Order Book
Allocation.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/bx/rules, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
Options 3, Section 10, Order Book
Allocation. Today, pursuant to Options
3, Section 10, BX determines for each
option whether to apply the Price/
Time 3 or the Size Pro-Rata execution
algorithm.4 This proposal seeks to
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The System shall execute trading interest within
the System in price/time priority, meaning it will
execute all trading interest at the best price level
within the System before executing trading interest
at the next best price. Within each price level, if
there are two or more quotes or orders at the best
price, trading interest will be executed in time
priority. See Options 3, Section 10(a)(1)(A).
4 The System shall execute trading interest within
the System in price priority, meaning it will execute
all trading interest at the best price level within the
System before executing trading interest at the next
best price. Within each price level, if there are two
amend BX’s Price/Time execution
algorithm.
Price/Time Execution Algorithm
Today, there are 5 priority overlays
for the Price/Time execution algorithm:
(1) Public Customer Priority; (2) Lead
Market Maker (‘‘LMM’’) Priority; (3)
Entitlement for Orders of 5 contracts or
fewer; (4) Directed Market Maker
(‘‘DMM’’) Priority; and (5) All Other
Remaining Interest. The Exchange
proposes to amend the LMM Priority
overlay with this proposal.
Today, Public Customer orders shall
have priority over non-Public Customer
orders at the same price.5 Public
Customer Priority is always in effect
when the Price/Time execution
algorithm is in effect. The LMM
participant entitlements shall only be in
effect when the Public Customer
Priority Overlay is also in effect.6
Today, Options 3, Section
10(a)(1)(C)(1)(b) provides, in part, After
all Public Customer orders have been
fully executed, upon receipt of an order,
provided the LMM’s bid/offer is at or
improves on the Exchange’s
disseminated price, the LMM will be
afforded a participation entitlement.
The LMM shall not be entitled to
receive a number of contracts that is
greater than the displayed size
associated with such LMM. LMM
participation entitlements will be
considered after the Opening Process.
The LMM participation entitlement is as
follows:
(1) A BX Options LMM shall receive
the greater of:
(a) Contracts the LMM would receive
if the allocation was based on time
priority pursuant to subparagraph
(C)(1)(a) above with Public Customer
priority;
(b) 50% of remaining interest if there
is one or no other Market Maker at that
price;
(c) 40% of remaining interest if there
is two other Market Makers at that price;
(d) 30% of remaining interest if there
are more than two other Market Makers
at that price; or
(e) the Directed Market Maker
(‘‘DMM’’) participation entitlement, if
1 15
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or more quotes or orders at the best price, trading
interest will be executed based on the size of each
Participant’s quote or order as a percentage of the
total size of all orders and quotes resting at that
price. If the result is not a whole number, it will
be rounded up to the nearest whole number. See
Options 3, Section 10(a)(1)(B).
5 If there are two or more Public Customer orders
for the same options series at the same price,
priority shall be afforded to such Public Customer
orders in the sequence in which they are received
by the System. See Options 3, Section
10(a)(1)(C)(1)(a).
6 See Options 3, Section 10(a)(1)(C)(1)(b).
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any, set forth in subsection (C)(1)(c)
below (if the order is a Directed Order
and the LMM is also the DMM).7
The Exchange notes that the System
does not operate as provided for above
today.8 At this time, the Exchange
proposes to amend the LMM Priority to
instead provide the following:
. . . The LMM participation
entitlement is as follows:
(1) A BX Options LMM shall receive
the greater of:
(a) Contracts the LMM would receive
if the allocation was based on time
priority pursuant to subparagraph
(C)(1)(a) above with Public Customer
priority;
(b) 50% of remaining interest if there
is one other non-Public Customer Order
or Market Maker order or quote at that
price;
(c) 40% of remaining interest if there
are two other non-Public Customer
Order or Market Maker orders or quotes
at that price;
(d) 30% of remaining interest if there
are more than two other non-Public
Customer Order or Market Maker orders
or quotes at that price; or
(e) the Directed Market Maker
(‘‘DMM’’) participation entitlement, if
any, set forth in subsection (C)(1)(c)
below (if the order is a Directed Order
and the LMM is also the DMM).
Specifically, the Exchange proposes to
determine an LMM’s allocation
percentage (50%/40%/30%), if
applicable, by how many Market Maker
orders and quotes and non-Public
Customer orders are present at the best
price. After all Public Customer orders
have been satisfied, the System would
allocate to an LMM the applicable
percentage based on non-Public
Customer orders and Market Maker
quotes and orders at the best price at the
time the incoming order was received
by the System. This proposed change
would align the System with the rule.
This amendment differs from the
manner in which the LMM was
allocated prior to the Migration. Prior to
the Migration, only other Market Maker
orders or quotes present at the same
price would have determined the
7 Rounding will be up to the nearest integer.
Notwithstanding the foregoing, when a Directed
Order is received and the DMM’s bid/offer is at or
improves on the NBBO and the LMM is at the same
price level and is not the DMM, the LMM
participation entitlement set forth in this subsection
(C)(1)(b)(1) will not apply with respect to such
Directed Order. See Options 3, Section
10(a)(1)(C)(1).
8 As of September 14, 2020 and September 21,
2021 (depending on the options symbol) the LMM
allocation operated as described in the proposed
rule text. The migration occurred in two stages as
symbols were made available on the new BX
platform (‘‘Migration’’) on the two days noted.
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percentage of allocation for an LMM.
With this amendment, non-Public
Customers orders present at the same
price would also be considered in
determining the percentage. The
proposed amendment is similar to
functionality on Nasdaq ISE, LLC
(‘‘ISE’’), Nasdaq GEMX, LLC (‘‘GEMX’’),
Nasdaq MRX, LLC (‘‘MRX’’) and the
Cboe Exchange, Inc (‘‘Cboe’’).9
The Exchange is not considering
Public Customer orders in determining
the LMM allocation because, as noted
above, Public Customer orders shall
have priority over all other interest at
the same price and those orders would
have been executed prior to any LMM
allocation.
With respect to LMMS, unlike other
market participants, LMMs have unique
obligations 10 to the market which
include, among other things, quoting
obligations.11 However, similar to other
market participants, an LMM cannot
receive any portion of an allocation,
regardless of its participation rights,
unless it is quoting at the best price at
the time the executable order is received
by the System. With this proposal
LMM’s would continue to be entitled to
an enhanced allocation, once Public
Customer orders have been satisfied,
except that allocation would be subject
to the amount of other Market Maker
interest as well as non-Public Customer
orders. The Exchange seeks to consider
non-Public Customer orders in its LMM
allocation to recognize other market
participant interest, except for Public
Customer, that was present in the Order
Book at the same price at the time of
execution. By considering this interest,
non-Public Customers allocated in the
‘‘All Other Remaining Interest’’ category
would be entitled to potentially higher
allocations. The Exchange’s proposal is
intended to encourage LMMs to
continue to quote at or improve the
NBBO in order to be afforded the
highest allocation attainable. The
proposal also seeks to recognize other
non-Public Customer interest that was at
the same price at the time of execution
by permitting those market participants
to capture a potentially higher
allocation. Below are some examples.
LMM Allocation Example—Which Only
Considers Market Maker Interest
Assume the option below is open and
away markets are wider than BX’s
interest that arrives in sequence as
specified below:
D LMM Quote: 1.00 (10) × 2.00 (10)
9 See ISE, GEMX and MRX Options 3, Section
10(c)(1)(B)(i) and Cboe Rule 5.32(a)(2)(B).
10 See Options 2, Section 4.
11 See Options 2, Section 5.
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D Priority Customer Order Firm A to
Sell 2 @ 1.95 arrives (BX BBO updates
to 1.00 × 1.95)
D Broker Dealer Order to Sell 10 @ 1.95
arrives
D LMM Updates Quote: 1.00 (10) × 1.95
(10)
D Priority Customer Order Firm B to buy
12 @ 1.95 arrives
Allocation
In this scenario, Priority Customer
Firm A is allocated 2 @ 1.95 and the
LMM is allocated remaining 10 @ 1.95.
LMM Allocation Example Which
Considers Market Maker and NonPublic Customer Interest
Assume the option below is open and
any away markets are wider than BX’s
interest that arrives in sequence as
specified below:
D LMM Quote: 1.00 (10) × 2.00 (10)
D Priority Customer Order Firm A to
Sell 2 @ 1.95 arrives (BX BBO updates
to 1.00 × 1.95)
D Broker Dealer Order to Sell 10 @ 1.95
arrives
D LMM Updates Quote: 1.00 (10) × 1.95
(10)
D Priority Customer Order Firm B to buy
12 @ 1.95 arrives
Allocation
In this scenario, Priority Customer
Firm A is allocated 2 @ 1.95, the LMM
is allocated 5 @ 1.95 (1 other non-public
customer = 50%) and the Broker Dealer
is allocated 5 @ 1.95.
At this time, a similar proposed
change is not being made to BX’s Size
Pro-Rata execution algorithm, which
today only considers Market Maker
quotes and orders within the LMM
Priority, and has an additional Market
Maker Priority allocation within the
Size Pro-Rata execution algorithm as
compared to the Price/Time execution
algorithm. If BX were to consider nonPublic Customer Orders in the LMM
Priority for BX’s Size Pro-Rata execution
algorithm, because there is a Market
Maker Priority allocation in this model,
which does not exist in the Price/Time
execution algorithm, the Market Maker
Priority would benefit. In the Price/
Time execution algorithm, the All Other
Remaining Interest allocation benefits
because there is no Market Maker
Priority in that model. In the Price/Time
execution algorithm all Participants are
on parity after the LMM Priority. This
is not the case with the Size Pro-Rata
execution algorithm because Market
Makers have priority ahead of All Other
Remaining Interest being allocated;
there is not the same concept of parity.
Therefore, making a similar change to
BX’s Size Pro-Rata execution algorithm
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21777
would only serve to advantage other
Market Makers at the expense of the
LMM. Of note, the Lead Market Maker
has higher quoting obligations both
intra-day and during the Opening
Process as compared to the Market
Maker.12 See below example for
illustration.
LMM Size Pro-Rata Allocation Example
With Market Maker Overlay
Assume the option below is open and
any away markets are wider than BX’s
interest that arrives in sequence as
specified below:
D LMM Quote: 1.00 (10) × 2.00 (10)
D Priority Customer Order Firm A to
Sell 2 @ 1.95 arrives (BX BBO updates
to 1.00 × 1.95)
D Broker Dealer Order to Sell 10 @ 1.95
arrives
D Market Maker B Quotes 1.05 × 1.95
(10)
D Market Maker C Quotes 1.05 × 1.95
(10)
D LMM Updates Quote: 1.00 (20) × 1.95
(20)
D Priority Customer Order Firm B to buy
12 @ 1.95 arrives
Allocation
In this scenario, Priority Customer
Firm A is allocated 2 contracts @ 1.95,
the LMM is allocated 4 contracts @ 1.95
(2 other Market Maker quotes present =
40% LMM allocation), both Market
Makers B and C are allocated 3 contracts
at @ 1.95, and Broker Dealer is not
allocated any contracts. In this example,
the Broker Dealer order cannot be
allocated. If the Exchange were to
consider the Broker Dealer order within
the LMM Priority, as proposed for the
Price/Time execution algorithm, it
would have resulted in a higher
allocation for one of the Market Makers,
to the detriment of the LMM.
The Exchange notes that all symbols
on BX are currently designated as Price/
Time. In the event that the Exchange
determines to designate options symbols
as eligible for Size Pro-Rata allocation,
a similar change would be considered
by the Exchange and, if the Exchange
determines to amend its rule, a
proposed rule change would be
submitted to the Commission.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,13 in general, and furthers the
objectives of Section 6(b)(5) of the Act,14
in particular, in that it is designed to
12 See Options 2, Section 5 and Options 3, Section
8, respectively.
13 15 U.S.C. 78f(b).
14 15 U.S.C. 78f(b)(5).
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promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest.
The Exchange’s proposal to amend
the Price/Time LMM execution
algorithm to consider non-Public
Customer orders in addition to Market
Maker quotes and orders when
allocating a percentage to an LMM is
consistent with the Act. The Exchange
is not considering Public Customer
orders in determining the LMM
allocation because, as noted above,
Public Customer orders shall have
priority over non-Public Customer
orders at the same price and those
orders would have been executed prior
to any LMM allocation. With respect to
LMMs, unlike other market participants,
LMMs have unique obligations 15 to the
market which include, among other
things, quoting obligations.16 However,
similar to other market participants, an
LMM cannot receive any portion of an
allocation, regardless of its participation
rights, unless it is quoting at the best
price at the time the executable order is
received by the System.
With this proposal LMM’s would
continue to be entitled to an enhanced
allocation, once Public Customer orders
have been satisfied, except that
allocation would be subject to the
amount of other Market Maker interest
as well as non-Public Customer orders.
The Exchange seeks to consider nonPublic Customer orders in its LMM
allocation to recognize other market
participant interest, except for Public
Customer, that was present in the Order
Book at the same price at the time of
execution. By considering this interest,
non-Public Customers allocated in the
‘‘All Other Remaining Interest’’ category
would be entitled to potentially higher
allocations. The Exchange believes that
this amendment will encourage other
non-Public Customers to submit interest
into the Order Book, at the same price,
in order to receive a potentially higher
allocation after all Maker Makers have
been allocated.17 With this proposal
LMMs would be encouraged to quote at
or improve the NBBO in more cases in
order to be afforded the highest
allocation attainable. Creating
competition which rewards Participants
that continuously add liquidity to the
15 See
note 10 above.
note 11 above.
17 There are 5 priority overlays for the Price/Time
execution algorithm: (1) Public Customer Priority;
(2) LMM Priority; (3) Entitlement for Orders of 5
contracts or fewer; (4) DMM Priority; and (5) All
Other Remaining Interest.
16 See
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Order Book benefits all market
participants.
The Exchange notes that at this time
a similar proposed change is not being
made to the Size Pro-Rata execution
algorithm, which today only considers
Market Maker quotes and orders within
the LMM Enhancement. The Exchange
notes that all symbols on BX are
currently designated as Price/Time.
Unlike the Price/Time execution
algorithm, the Size Pro-Rata execution
algorithm has 6 overlays: (1) Public
Customer Priority; (2) LMM Priority; (3)
Entitlement for Orders of 5 contracts or
fewer; (4) Directed Market Maker
Priority; (5) Market Maker Priority; and
(6) All Other Remaining Interest. The
Price/Time execution algorithm does
not have a Market Maker Priority
allocation similar to the Size Pro-Rata
execution algorithm. The current Market
Maker Priority considers all other
Participant orders at the same price and,
therefore, rewards Participants at that
price in a similar fashion as proposed
for the Price/Time execution algorithm,
albeit at the Market Maker allocation
instead of the LMM allocation. The
Exchange believes that the proposal
would serve to align the two allocation
models and reward Participants at the
same price by considering non-Public
Customer interest as well as Market
Maker interest before non-Public
Customers are allocated. An example of
how the same scenario presented above
for the Price/Time model would
allocated within the current Size Pro
Rata model is below.
LMM Allocation Example—Size ProRata Overlay Example
Assume the option below is open and
away markets are wider than BX’s
interest that arrives in sequence as
specified below:
D LMM Quote: 1.00 (10) × 2.00 (10)
D Priority Customer Order Firm A to
Sell 2 @ 1.95 arrives (BX BBO updates
to 1.00 × 1.95)
D Broker Dealer Order to Sell 10 @ 1.95
arrives
D Market Maker B quote 1.00 (10) × 1.95
(10) arrives
D Market Maker C quote 1.00 (10) × 1.95
(10) arrives
D LMM Updates Quote: 1.00 (10) × 1.95
(10)
D Priority Customer Order Firm B to buy
22 @ 1.95 arrives
Allocation
In this scenario:
• Priority Customer Firm A is allocated
2 @ 1.95
• Lead Market Maker is allocated 8 @
1.95 (40% of remaining 20 contracts
after priority customer overlay)
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• Market Maker B is allocated 6 @ 1.95
(50% of remaining 12 contracts after
LMM overlay)
• Market Maker C is allocated 6 @ 1.95
(50% of remaining 12 contracts after
LMM overlay)
In this scenario, the Broker Dealer is
not allocated as the Market Maker was
allocated the remaining 12 contracts.
Even if the LMM overlay considered the
Broker Dealer in its allocation, the
Broker Dealer will still not be allocated.
The LMM would get 6 contracts (30%
of 20 contracts), and each of the Market
Makers would get 7 contracts, which
only reduces the LMM allocation as the
LMM was quoting at the same price as
the other Market Makers.
The Exchange notes that the System
does not operate as provided for above
today.18 This proposed change would
align the System with the rule. The
proposed amendment is similar to
functionality on Nasdaq ISE, LLC
(‘‘ISE’’), Nasdaq GEMX, LLC (‘‘GEMX’’),
Nasdaq MRX, LLC (‘‘MRX’’) and the
Cboe Exchange, Inc (‘‘Cboe’’).19
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange is not considering Public
Customer orders in determining the
LMM allocation because, as noted
above, Public Customer orders shall
have priority over non-Public Customer
orders at the same price and those
orders would have been executed prior
to any LMM allocation.
The Exchange seeks to consider nonPublic Customer orders in its LMM
allocation to recognize other market
participant interest, except for Public
Customer, that was present in the Order
Book at the same price at the time of
execution. By considering this interest,
non-Public Customers allocated in the
‘‘All Other Remaining Interest’’ category
would be entitled to potentially higher
allocations. The amendment will
encourage other non-Public Customers
to submit interest into the Order Book,
at the same price, in order to receive a
potentially higher allocation after all
Maker Makers have been allocated. With
this proposal LMMs would be
encouraged to quote at or improve the
NBBO in more cases in order to be
afforded the highest allocation
attainable. Creating competition which
rewards Participants that continuously
18 See
note 8 above.
ISE, GEMX and MRX Options 3, Section
10(c)(1)(B)(i) and Cboe Rule 5.32(a)(2)(B).
19 See
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add liquidity to the Order Book benefits
all market participants. The Exchange
does not believe its proposal imposes an
undue burden on competition because
with this change, non-Public Customer
orders would be entitled to potentially
higher allocations.
With respect to LMMs, unlike other
market participants, LMMs have unique
obligations 20 to the market which
include, among other things, quoting
obligations.21 However, similar to other
market participants, an LMM cannot
receive any portion of an allocation,
regardless of its participation rights,
unless it is quoting at the best price at
the time the executable order is received
by the System. LMM’s would continue
to be entitled to an enhanced allocation,
once Public Customer orders have been
satisfied, except that allocation would
be subject to the amount of other Market
Maker interest as well as non-Public
Customer orders.
Today, LMMs may receive higher
allocations as only other Market Maker
interest is considered when allocating to
an LMM. With this proposal, the
Exchange would consider not only other
Market Maker interest but also nonPublic Customer orders. Considering all
other interest, except Public Customer
interest, that was at the same price at the
time of execution results in LMMs
potentially receiving lower allocations.
LMMs add value through continuous
quoting 22 and are subject to additional
requirements and obligations 23 unlike
other market participants. The Exchange
incentivizes LMMs to provide liquidity
on BX through enhanced allocations
and pricing. The Exchange believes that
this proposal will continue to
incentivize LMMs to add liquidity while
also benefitting all market participants
through the quality of order interaction.
Unlike the Price/Time execution
algorithm, the Size Pro-Rata execution
algorithm has 6 overlays: (1) Public
Customer Priority; (2) LMM Priority; (3)
Entitlement for Orders of 5 contracts or
fewer; (4) DMM Priority; (5) Market
Maker Priority; and (6) All Other
Remaining Interest. The Price/Time
execution algorithm does not have a
Market Maker Priority allocation similar
to the Size Pro-Rata execution
algorithm. The current Market Maker
Priority considers all other Participant
orders at the same price and, therefore,
rewards Participants at that price in a
similar fashion as proposed for the
Price/Time execution algorithm, albeit
at the Market Maker allocation instead
20 See
note 10 above.
note 11 above.
22 See Options 2, Section 5.
23 See Options 2, Section 4.
21 See
VerDate Sep<11>2014
18:15 Apr 22, 2021
Jkt 253001
of the LMM allocation. The Exchange
believes that the proposal does not
impose an undue burden on
competition as it aligns the two models
and reward Participants at the same
price by considering non-Public
Customer interest as well as Market
Maker interest before non-Public
Customers are allocated.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 24 and Rule 19b–
4(f)(6) thereunder.25
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 26 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 27
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has
requested that the Commission waive
the 30-day operative delay. As the
proposed rule change raises no novel
issues and more accurately describes the
System’s treatment of LMM allocation,
the Commission believes that waiver of
the 30-day operative delay is consistent
with the protection of investors and the
public interest. Accordingly, the
Commission hereby waives the
operative delay and designates the
proposed rule change operative upon
filing.28
24 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
26 17 CFR 240.19b–4(f)(6).
27 17 CFR 240.19b–4(f)(6)(iii).
28 For purposes only of waiving the 30-day
operative delay, the Commission also has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
25 17
PO 00000
Frm 00097
Fmt 4703
Sfmt 4703
21779
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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–2021–013 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–2021–013. 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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
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Federal Register / Vol. 86, No. 77 / Friday, April 23, 2021 / Notices
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BX–2021–013, and should
be submitted on or before May 14, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–08421 Filed 4–22–21; 8:45 am]
BILLING CODE 8011–01–P
SURFACE TRANSPORTATION BOARD
[Docket No. FD 36486 (Sub-No. 1)]
khammond on DSKJM1Z7X2PROD with NOTICES
Grainbelt Corporation—Trackage
Rights Exemption—BNSF Railway
Company
By petition filed on February 26,
2021, Grainbelt Corporation (GNBC)
requests that the Board partially revoke
the trackage rights exemption granted to
it under 49 CFR 1180.2(d)(7) in Docket
No. FD 36486, as necessary to permit
that trackage rights arrangement to
expire twelve months from the effective
date of the exemption. GNBC filed its
verified notice of exemption in Docket
No. FD 36486 on February 26, 2021, and
simultaneously filed its petition for
partial revocation in this docket. Notice
of the exemption was served and
published in the Federal Register (86
FR 14,176) on March 12, 2021, and the
exemption became effective on March
28, 2021.
As explained by GNBC in its verified
notice of exemption in Docket No.
36486, GNBC and BNSF Railway
Company (BNSF) have entered into an
amendment to their existing trackage
rights agreement covering trackage
between approximately milepost 668.73
in Long, Okla., and approximately
milepost 723.30 in Quanah, Tex. (the
Line), allowing GNBC to (1) use the Line
to access the Plains Cotton Cooperative
Association (PCCA) facility near BNSF
Chickasha Subdivision milepost 688.6
at Altus, Okla., and (2) to operate
additional trains on the Line to
accommodate the movement of trains
transporting BNSF customers’ railcars
(loaded or empty) located along the
Line, to unit train facilities on the Line.1
29 17
CFR 200.30–3(a)(12).
states that it already holds overhead
trackage rights granted by BNSF’s predecessor
between Snyder Yard at milepost 664.00 and
Quanah at milepost 723.30, allowing GNBC to
interchange at Quanah with BNSF and Union
Pacific Railroad Company. GNBC Verified Notice of
1 GNBC
VerDate Sep<11>2014
18:15 Apr 22, 2021
Jkt 253001
GNBC Verified Notice of Exemption 1–
3, Grainbelt Corp.—Trackage Rts.
Exemption—BNSF Ry., FD 36486.
GNBC explains that the trackage
rights covered by the verified notice in
Docket No. FD 36486 are local rather
than overhead rights and therefore they
do not qualify for the Board’s class
exemption for temporary trackage rights
under 49 CFR 1180.2(d)(8). (GNBC Pet.
4.) GNBC therefore filed its verified
notice of exemption under the Board’s
class exemption procedures at 49 CFR
1180.2(d)(7) and, in this sub-docket,
filed a petition for partial revocation of
the exemption as necessary to permit
the amendment to the trackage rights to
expire twelve months from the effective
date, on March 28, 2022,2 pursuant to
the parties’ agreement.3 (Id. at 3.) GNBC
argues that the requested relief will
promote the rail transportation policy
and is limited in scope. (Id. at 4–6.)
GNBC also asserts that the Board has
routinely granted similar petitions to
allow trackage rights to expire on a
negotiated date. (Id. at 4–5.)
On March 4, 2021, GNBC filed in
Docket Nos. FD 36486 and FD 36486
(Sub-No. 1) letters of support from
PCCA and Cargill Cotton asking that the
Board promptly grant GNBC’s requests
in both dockets.
Discussion and Conclusions
Although GNBC and BNSF have
expressly agreed on the duration of the
proposed trackage rights, trackage rights
approved under the class exemption at
§ 1180.2(d)(7) typically remain effective
indefinitely, regardless of any contract
provisions. At times, however, the
Board has partially revoked a trackage
Exemption 2, Grainbelt Corp.—Trackage Rts.
Exemption—BNSF Ry., FD 36486. According to
GNBC, these original trackage rights were
supplemented in 2009 to allow GNBC to operate
between Snyder, Okla., and Altus, with the right to
perform limited local service at Long, Okla. Id.
(citing Grainbelt Corp.—Trackage Rts. Exemption—
BNSF Ry., FD 35332 (STB served Dec. 17, 2009)).
GNBC states that the trackage rights were further
amended in 2013 to allow GNBC to provide local
service to a grain shuttle facility in Headrick, Okla.,
and again in 2014 to allow GNBC to provide local
service to a grain shuttle facility in Eldorado, Okla.
Id. (citing Grainbelt Corp.—Trackage Rts.
Exemption—BNSF Ry., FD 35719 (STB served Mar.
15, 2013), and Grainbelt Corp.—Trackage Rts.
Exemption—BNSF Ry., FD 35831 (STB served June
12, 2014)).
2 On March 5, 2021, GNBC filed a supplement to
clarify that the ‘‘effective date’’ referred to in the
petition is the effective date of the exemption,
which it identifies as March 29, 2021. (GNBC
Suppl. 1.) However, the effective date of the
exemption was March 28, 2021 (30 days from the
filing of the verified notice); accordingly, the Board
will interpret the petition as seeking to allow the
trackage rights to expire on March 28, 2022.
3 GNBC states that the expiration of the trackage
rights amendment sought here will not affect the
termination date of the underlying trackage rights
as supplemented and amended. (GNBC Pet. 3.)
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
rights exemption to allow those rights to
expire after a limited time rather than
lasting in perpetuity. See, e.g., BNSF
Ry.—Trackage Rts. Exemption—Union
Pac. R.R., FD 36377 (Sub-No. 3) (STB
served Feb. 23, 2021); BNSF Ry.—
Trackage Rts. Exemption—Union Pac.
R.R., FD 36377 (Sub-No. 1) (STB served
Mar. 11, 2020); New Orleans Pub. Belt
R.R.—Trackage Rts. Exemption —Ill.
Cent. R.R., FD 36198 (Sub-No. 1) (STB
served June 20, 2018).
Under 49 U.S.C. 10502, the Board
may exempt a person, class of persons,
or a transaction or service, in whole or
in part, when the Board finds that: (1)
Continued regulation is not necessary to
carry out the rail transportation policy
of 49 U.S.C. 10101; and (2) either the
transaction or service is of limited
scope, or regulation is not necessary to
protect shippers from the abuse of
market power.
Granting partial revocation in these
circumstances to permit the trackage
rights to expire twelve months after the
exemption’s effective date would
eliminate the need for GNBC to file a
second pleading seeking discontinuance
when the agreement expires, thereby
promoting the rail transportation policy
at 49 U.S.C. 10101(2), (7), and (15).
Moreover, partially revoking the
exemption to limit the term of the
trackage rights is consistent with the
limited scope of the transaction
previously exempted.4 Therefore, the
Board will grant the petition and permit
the trackage rights exempted in Docket
No. FD 36486 to expire twelve months
after the effective date of the exemption,
on March 28, 2022.
To provide the statutorily mandated
protection to any employee adversely
affected by the discontinuance of
trackage rights, the Board will impose
the employee protective conditions set
forth in Oregon Short Line Railroad—
Abandonment Portion Goshen Branch
Between Firth & Ammon, in Bingham &
Bonneville Counties, Idaho, 360 I.C.C.
91 (1979).
This action is categorically excluded
from environmental review under 49
CFR 1105.6(c).
It is ordered:
1. The petition for partial revocation
of the trackage rights class exemption is
granted.
2. As discussed above, the trackage
rights in Docket No. FD 36486 are
permitted to expire on March 28, 2022,
subject to the employee protective
conditions set forth in Oregon Short
Line.
4 Because the proposed transaction is of limited
scope, the Board need not make a market power
finding. See 49 U.S.C. 10502(a).
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[Federal Register Volume 86, Number 77 (Friday, April 23, 2021)]
[Notices]
[Pages 21775-21780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-08421]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91610; File No. SR-BX-2021-013]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Options 3,
Section 10, Order Book Allocation
April 19, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 21776]]
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 7, 2021, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Options 3, Section 10, Order Book
Allocation.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 3, Section 10, Order Book
Allocation. Today, pursuant to Options 3, Section 10, BX determines for
each option whether to apply the Price/Time \3\ or the Size Pro-Rata
execution algorithm.\4\ This proposal seeks to amend BX's Price/Time
execution algorithm.
---------------------------------------------------------------------------
\3\ The System shall execute trading interest within the System
in price/time priority, meaning it will execute all trading interest
at the best price level within the System before executing trading
interest at the next best price. Within each price level, if there
are two or more quotes or orders at the best price, trading interest
will be executed in time priority. See Options 3, Section
10(a)(1)(A).
\4\ The System shall execute trading interest within the System
in price priority, meaning it will execute all trading interest at
the best price level within the System before executing trading
interest at the next best price. Within each price level, if there
are two or more quotes or orders at the best price, trading interest
will be executed based on the size of each Participant's quote or
order as a percentage of the total size of all orders and quotes
resting at that price. If the result is not a whole number, it will
be rounded up to the nearest whole number. See Options 3, Section
10(a)(1)(B).
---------------------------------------------------------------------------
Price/Time Execution Algorithm
Today, there are 5 priority overlays for the Price/Time execution
algorithm: (1) Public Customer Priority; (2) Lead Market Maker
(``LMM'') Priority; (3) Entitlement for Orders of 5 contracts or fewer;
(4) Directed Market Maker (``DMM'') Priority; and (5) All Other
Remaining Interest. The Exchange proposes to amend the LMM Priority
overlay with this proposal.
Today, Public Customer orders shall have priority over non-Public
Customer orders at the same price.\5\ Public Customer Priority is
always in effect when the Price/Time execution algorithm is in effect.
The LMM participant entitlements shall only be in effect when the
Public Customer Priority Overlay is also in effect.\6\
---------------------------------------------------------------------------
\5\ If there are two or more Public Customer orders for the same
options series at the same price, priority shall be afforded to such
Public Customer orders in the sequence in which they are received by
the System. See Options 3, Section 10(a)(1)(C)(1)(a).
\6\ See Options 3, Section 10(a)(1)(C)(1)(b).
---------------------------------------------------------------------------
Today, Options 3, Section 10(a)(1)(C)(1)(b) provides, in part,
After all Public Customer orders have been fully executed, upon receipt
of an order, provided the LMM's bid/offer is at or improves on the
Exchange's disseminated price, the LMM will be afforded a participation
entitlement. The LMM shall not be entitled to receive a number of
contracts that is greater than the displayed size associated with such
LMM. LMM participation entitlements will be considered after the
Opening Process. The LMM participation entitlement is as follows:
(1) A BX Options LMM shall receive the greater of:
(a) Contracts the LMM would receive if the allocation was based on
time priority pursuant to subparagraph (C)(1)(a) above with Public
Customer priority;
(b) 50% of remaining interest if there is one or no other Market
Maker at that price;
(c) 40% of remaining interest if there is two other Market Makers
at that price;
(d) 30% of remaining interest if there are more than two other
Market Makers at that price; or
(e) the Directed Market Maker (``DMM'') participation entitlement,
if any, set forth in subsection (C)(1)(c) below (if the order is a
Directed Order and the LMM is also the DMM).\7\
---------------------------------------------------------------------------
\7\ Rounding will be up to the nearest integer. Notwithstanding
the foregoing, when a Directed Order is received and the DMM's bid/
offer is at or improves on the NBBO and the LMM is at the same price
level and is not the DMM, the LMM participation entitlement set
forth in this subsection (C)(1)(b)(1) will not apply with respect to
such Directed Order. See Options 3, Section 10(a)(1)(C)(1).
---------------------------------------------------------------------------
The Exchange notes that the System does not operate as provided for
above today.\8\ At this time, the Exchange proposes to amend the LMM
Priority to instead provide the following:
---------------------------------------------------------------------------
\8\ As of September 14, 2020 and September 21, 2021 (depending
on the options symbol) the LMM allocation operated as described in
the proposed rule text. The migration occurred in two stages as
symbols were made available on the new BX platform (``Migration'')
on the two days noted.
---------------------------------------------------------------------------
. . . The LMM participation entitlement is as follows:
(1) A BX Options LMM shall receive the greater of:
(a) Contracts the LMM would receive if the allocation was based on
time priority pursuant to subparagraph (C)(1)(a) above with Public
Customer priority;
(b) 50% of remaining interest if there is one other non-Public
Customer Order or Market Maker order or quote at that price;
(c) 40% of remaining interest if there are two other non-Public
Customer Order or Market Maker orders or quotes at that price;
(d) 30% of remaining interest if there are more than two other non-
Public Customer Order or Market Maker orders or quotes at that price;
or
(e) the Directed Market Maker (``DMM'') participation entitlement,
if any, set forth in subsection (C)(1)(c) below (if the order is a
Directed Order and the LMM is also the DMM).
Specifically, the Exchange proposes to determine an LMM's
allocation percentage (50%/40%/30%), if applicable, by how many Market
Maker orders and quotes and non-Public Customer orders are present at
the best price. After all Public Customer orders have been satisfied,
the System would allocate to an LMM the applicable percentage based on
non-Public Customer orders and Market Maker quotes and orders at the
best price at the time the incoming order was received by the System.
This proposed change would align the System with the rule. This
amendment differs from the manner in which the LMM was allocated prior
to the Migration. Prior to the Migration, only other Market Maker
orders or quotes present at the same price would have determined the
[[Page 21777]]
percentage of allocation for an LMM. With this amendment, non-Public
Customers orders present at the same price would also be considered in
determining the percentage. The proposed amendment is similar to
functionality on Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC
(``GEMX''), Nasdaq MRX, LLC (``MRX'') and the Cboe Exchange, Inc
(``Cboe'').\9\
---------------------------------------------------------------------------
\9\ See ISE, GEMX and MRX Options 3, Section 10(c)(1)(B)(i) and
Cboe Rule 5.32(a)(2)(B).
---------------------------------------------------------------------------
The Exchange is not considering Public Customer orders in
determining the LMM allocation because, as noted above, Public Customer
orders shall have priority over all other interest at the same price
and those orders would have been executed prior to any LMM allocation.
With respect to LMMS, unlike other market participants, LMMs have
unique obligations \10\ to the market which include, among other
things, quoting obligations.\11\ However, similar to other market
participants, an LMM cannot receive any portion of an allocation,
regardless of its participation rights, unless it is quoting at the
best price at the time the executable order is received by the System.
With this proposal LMM's would continue to be entitled to an enhanced
allocation, once Public Customer orders have been satisfied, except
that allocation would be subject to the amount of other Market Maker
interest as well as non-Public Customer orders. The Exchange seeks to
consider non-Public Customer orders in its LMM allocation to recognize
other market participant interest, except for Public Customer, that was
present in the Order Book at the same price at the time of execution.
By considering this interest, non-Public Customers allocated in the
``All Other Remaining Interest'' category would be entitled to
potentially higher allocations. The Exchange's proposal is intended to
encourage LMMs to continue to quote at or improve the NBBO in order to
be afforded the highest allocation attainable. The proposal also seeks
to recognize other non-Public Customer interest that was at the same
price at the time of execution by permitting those market participants
to capture a potentially higher allocation. Below are some examples.
---------------------------------------------------------------------------
\10\ See Options 2, Section 4.
\11\ See Options 2, Section 5.
---------------------------------------------------------------------------
LMM Allocation Example--Which Only Considers Market Maker Interest
Assume the option below is open and away markets are wider than
BX's interest that arrives in sequence as specified below:
[ssquf] LMM Quote: 1.00 (10) x 2.00 (10)
[ssquf] Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO
updates to 1.00 x 1.95)
[ssquf] Broker Dealer Order to Sell 10 @ 1.95 arrives
[ssquf] LMM Updates Quote: 1.00 (10) x 1.95 (10)
[ssquf] Priority Customer Order Firm B to buy 12 @ 1.95 arrives
Allocation
In this scenario, Priority Customer Firm A is allocated 2 @ 1.95
and the LMM is allocated remaining 10 @ 1.95.
LMM Allocation Example Which Considers Market Maker and Non-Public
Customer Interest
Assume the option below is open and any away markets are wider than
BX's interest that arrives in sequence as specified below:
[ssquf] LMM Quote: 1.00 (10) x 2.00 (10)
[ssquf] Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO
updates to 1.00 x 1.95)
[ssquf] Broker Dealer Order to Sell 10 @ 1.95 arrives
[ssquf] LMM Updates Quote: 1.00 (10) x 1.95 (10)
[ssquf] Priority Customer Order Firm B to buy 12 @ 1.95 arrives
Allocation
In this scenario, Priority Customer Firm A is allocated 2 @ 1.95,
the LMM is allocated 5 @ 1.95 (1 other non-public customer = 50%) and
the Broker Dealer is allocated 5 @ 1.95.
At this time, a similar proposed change is not being made to BX's
Size Pro-Rata execution algorithm, which today only considers Market
Maker quotes and orders within the LMM Priority, and has an additional
Market Maker Priority allocation within the Size Pro-Rata execution
algorithm as compared to the Price/Time execution algorithm. If BX were
to consider non-Public Customer Orders in the LMM Priority for BX's
Size Pro-Rata execution algorithm, because there is a Market Maker
Priority allocation in this model, which does not exist in the Price/
Time execution algorithm, the Market Maker Priority would benefit. In
the Price/Time execution algorithm, the All Other Remaining Interest
allocation benefits because there is no Market Maker Priority in that
model. In the Price/Time execution algorithm all Participants are on
parity after the LMM Priority. This is not the case with the Size Pro-
Rata execution algorithm because Market Makers have priority ahead of
All Other Remaining Interest being allocated; there is not the same
concept of parity. Therefore, making a similar change to BX's Size Pro-
Rata execution algorithm would only serve to advantage other Market
Makers at the expense of the LMM. Of note, the Lead Market Maker has
higher quoting obligations both intra-day and during the Opening
Process as compared to the Market Maker.\12\ See below example for
illustration.
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\12\ See Options 2, Section 5 and Options 3, Section 8,
respectively.
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LMM Size Pro-Rata Allocation Example With Market Maker Overlay
Assume the option below is open and any away markets are wider than
BX's interest that arrives in sequence as specified below:
[ssquf] LMM Quote: 1.00 (10) x 2.00 (10)
[ssquf] Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO
updates to 1.00 x 1.95)
[ssquf] Broker Dealer Order to Sell 10 @ 1.95 arrives
[ssquf] Market Maker B Quotes 1.05 x 1.95 (10)
[ssquf] Market Maker C Quotes 1.05 x 1.95 (10)
[ssquf] LMM Updates Quote: 1.00 (20) x 1.95 (20)
[ssquf] Priority Customer Order Firm B to buy 12 @ 1.95 arrives
Allocation
In this scenario, Priority Customer Firm A is allocated 2 contracts
@ 1.95, the LMM is allocated 4 contracts @ 1.95 (2 other Market Maker
quotes present = 40% LMM allocation), both Market Makers B and C are
allocated 3 contracts at @ 1.95, and Broker Dealer is not allocated any
contracts. In this example, the Broker Dealer order cannot be
allocated. If the Exchange were to consider the Broker Dealer order
within the LMM Priority, as proposed for the Price/Time execution
algorithm, it would have resulted in a higher allocation for one of the
Market Makers, to the detriment of the LMM.
The Exchange notes that all symbols on BX are currently designated
as Price/Time. In the event that the Exchange determines to designate
options symbols as eligible for Size Pro-Rata allocation, a similar
change would be considered by the Exchange and, if the Exchange
determines to amend its rule, a proposed rule change would be submitted
to the Commission.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\13\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\14\ in particular, in that it is designed to
[[Page 21778]]
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
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The Exchange's proposal to amend the Price/Time LMM execution
algorithm to consider non-Public Customer orders in addition to Market
Maker quotes and orders when allocating a percentage to an LMM is
consistent with the Act. The Exchange is not considering Public
Customer orders in determining the LMM allocation because, as noted
above, Public Customer orders shall have priority over non-Public
Customer orders at the same price and those orders would have been
executed prior to any LMM allocation. With respect to LMMs, unlike
other market participants, LMMs have unique obligations \15\ to the
market which include, among other things, quoting obligations.\16\
However, similar to other market participants, an LMM cannot receive
any portion of an allocation, regardless of its participation rights,
unless it is quoting at the best price at the time the executable order
is received by the System.
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\15\ See note 10 above.
\16\ See note 11 above.
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With this proposal LMM's would continue to be entitled to an
enhanced allocation, once Public Customer orders have been satisfied,
except that allocation would be subject to the amount of other Market
Maker interest as well as non-Public Customer orders. The Exchange
seeks to consider non-Public Customer orders in its LMM allocation to
recognize other market participant interest, except for Public
Customer, that was present in the Order Book at the same price at the
time of execution. By considering this interest, non-Public Customers
allocated in the ``All Other Remaining Interest'' category would be
entitled to potentially higher allocations. The Exchange believes that
this amendment will encourage other non-Public Customers to submit
interest into the Order Book, at the same price, in order to receive a
potentially higher allocation after all Maker Makers have been
allocated.\17\ With this proposal LMMs would be encouraged to quote at
or improve the NBBO in more cases in order to be afforded the highest
allocation attainable. Creating competition which rewards Participants
that continuously add liquidity to the Order Book benefits all market
participants.
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\17\ There are 5 priority overlays for the Price/Time execution
algorithm: (1) Public Customer Priority; (2) LMM Priority; (3)
Entitlement for Orders of 5 contracts or fewer; (4) DMM Priority;
and (5) All Other Remaining Interest.
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The Exchange notes that at this time a similar proposed change is
not being made to the Size Pro-Rata execution algorithm, which today
only considers Market Maker quotes and orders within the LMM
Enhancement. The Exchange notes that all symbols on BX are currently
designated as Price/Time. Unlike the Price/Time execution algorithm,
the Size Pro-Rata execution algorithm has 6 overlays: (1) Public
Customer Priority; (2) LMM Priority; (3) Entitlement for Orders of 5
contracts or fewer; (4) Directed Market Maker Priority; (5) Market
Maker Priority; and (6) All Other Remaining Interest. The Price/Time
execution algorithm does not have a Market Maker Priority allocation
similar to the Size Pro-Rata execution algorithm. The current Market
Maker Priority considers all other Participant orders at the same price
and, therefore, rewards Participants at that price in a similar fashion
as proposed for the Price/Time execution algorithm, albeit at the
Market Maker allocation instead of the LMM allocation. The Exchange
believes that the proposal would serve to align the two allocation
models and reward Participants at the same price by considering non-
Public Customer interest as well as Market Maker interest before non-
Public Customers are allocated. An example of how the same scenario
presented above for the Price/Time model would allocated within the
current Size Pro Rata model is below.
LMM Allocation Example--Size Pro-Rata Overlay Example
Assume the option below is open and away markets are wider than
BX's interest that arrives in sequence as specified below:
[ssquf] LMM Quote: 1.00 (10) x 2.00 (10)
[ssquf] Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO
updates to 1.00 x 1.95)
[ssquf] Broker Dealer Order to Sell 10 @ 1.95 arrives
[ssquf] Market Maker B quote 1.00 (10) x 1.95 (10) arrives
[ssquf] Market Maker C quote 1.00 (10) x 1.95 (10) arrives
[ssquf] LMM Updates Quote: 1.00 (10) x 1.95 (10)
[ssquf] Priority Customer Order Firm B to buy 22 @ 1.95 arrives
Allocation
In this scenario:
Priority Customer Firm A is allocated 2 @ 1.95
Lead Market Maker is allocated 8 @ 1.95 (40% of remaining 20
contracts after priority customer overlay)
Market Maker B is allocated 6 @ 1.95 (50% of remaining 12
contracts after LMM overlay)
Market Maker C is allocated 6 @ 1.95 (50% of remaining 12
contracts after LMM overlay)
In this scenario, the Broker Dealer is not allocated as the Market
Maker was allocated the remaining 12 contracts. Even if the LMM overlay
considered the Broker Dealer in its allocation, the Broker Dealer will
still not be allocated. The LMM would get 6 contracts (30% of 20
contracts), and each of the Market Makers would get 7 contracts, which
only reduces the LMM allocation as the LMM was quoting at the same
price as the other Market Makers.
The Exchange notes that the System does not operate as provided for
above today.\18\ This proposed change would align the System with the
rule. The proposed amendment is similar to functionality on Nasdaq ISE,
LLC (``ISE''), Nasdaq GEMX, LLC (``GEMX''), Nasdaq MRX, LLC (``MRX'')
and the Cboe Exchange, Inc (``Cboe'').\19\
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\18\ See note 8 above.
\19\ See ISE, GEMX and MRX Options 3, Section 10(c)(1)(B)(i) and
Cboe Rule 5.32(a)(2)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange is not considering
Public Customer orders in determining the LMM allocation because, as
noted above, Public Customer orders shall have priority over non-Public
Customer orders at the same price and those orders would have been
executed prior to any LMM allocation.
The Exchange seeks to consider non-Public Customer orders in its
LMM allocation to recognize other market participant interest, except
for Public Customer, that was present in the Order Book at the same
price at the time of execution. By considering this interest, non-
Public Customers allocated in the ``All Other Remaining Interest''
category would be entitled to potentially higher allocations. The
amendment will encourage other non-Public Customers to submit interest
into the Order Book, at the same price, in order to receive a
potentially higher allocation after all Maker Makers have been
allocated. With this proposal LMMs would be encouraged to quote at or
improve the NBBO in more cases in order to be afforded the highest
allocation attainable. Creating competition which rewards Participants
that continuously
[[Page 21779]]
add liquidity to the Order Book benefits all market participants. The
Exchange does not believe its proposal imposes an undue burden on
competition because with this change, non-Public Customer orders would
be entitled to potentially higher allocations.
With respect to LMMs, unlike other market participants, LMMs have
unique obligations \20\ to the market which include, among other
things, quoting obligations.\21\ However, similar to other market
participants, an LMM cannot receive any portion of an allocation,
regardless of its participation rights, unless it is quoting at the
best price at the time the executable order is received by the System.
LMM's would continue to be entitled to an enhanced allocation, once
Public Customer orders have been satisfied, except that allocation
would be subject to the amount of other Market Maker interest as well
as non-Public Customer orders.
---------------------------------------------------------------------------
\20\ See note 10 above.
\21\ See note 11 above.
---------------------------------------------------------------------------
Today, LMMs may receive higher allocations as only other Market
Maker interest is considered when allocating to an LMM. With this
proposal, the Exchange would consider not only other Market Maker
interest but also non-Public Customer orders. Considering all other
interest, except Public Customer interest, that was at the same price
at the time of execution results in LMMs potentially receiving lower
allocations. LMMs add value through continuous quoting \22\ and are
subject to additional requirements and obligations \23\ unlike other
market participants. The Exchange incentivizes LMMs to provide
liquidity on BX through enhanced allocations and pricing. The Exchange
believes that this proposal will continue to incentivize LMMs to add
liquidity while also benefitting all market participants through the
quality of order interaction.
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\22\ See Options 2, Section 5.
\23\ See Options 2, Section 4.
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Unlike the Price/Time execution algorithm, the Size Pro-Rata
execution algorithm has 6 overlays: (1) Public Customer Priority; (2)
LMM Priority; (3) Entitlement for Orders of 5 contracts or fewer; (4)
DMM Priority; (5) Market Maker Priority; and (6) All Other Remaining
Interest. The Price/Time execution algorithm does not have a Market
Maker Priority allocation similar to the Size Pro-Rata execution
algorithm. The current Market Maker Priority considers all other
Participant orders at the same price and, therefore, rewards
Participants at that price in a similar fashion as proposed for the
Price/Time execution algorithm, albeit at the Market Maker allocation
instead of the LMM allocation. The Exchange believes that the proposal
does not impose an undue burden on competition as it aligns the two
models and reward Participants at the same price by considering non-
Public Customer interest as well as Market Maker interest before non-
Public Customers are allocated.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \24\ and Rule 19b-
4(f)(6) thereunder.\25\
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\24\ 15 U.S.C. 78s(b)(3)(A).
\25\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \26\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \27\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has requested that the Commission waive the 30-day operative delay. As
the proposed rule change raises no novel issues and more accurately
describes the System's treatment of LMM allocation, the Commission
believes that waiver of the 30-day operative delay is consistent with
the protection of investors and the public interest. Accordingly, the
Commission hereby waives the operative delay and designates the
proposed rule change operative upon filing.\28\
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\26\ 17 CFR 240.19b-4(f)(6).
\27\ 17 CFR 240.19b-4(f)(6)(iii).
\28\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BX-2021-013 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-2021-013. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
[[Page 21780]]
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BX-2021-013, and should be submitted on
or before May 14, 2021.
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\29\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-08421 Filed 4-22-21; 8:45 am]
BILLING CODE 8011-01-P