
[Federal Register: April 2, 2010 (Volume 75, Number 63)]
[Notices]               
[Page 16891-16894]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02ap10-133]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61797; File No. SR-BX-2010-009]

 
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order 
Approving Proposed Rule Change, as Modified by Amendments No. 1 and 3 
Thereto, Relating to the Directed Order Process on the Boston Options 
Exchange Facility

March 29, 2010.

I. Introduction

    On January 25, 2010, NASDAQ OMX BX, Inc. (``Exchange'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act

[[Page 16892]]

of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change amending the rules of the Boston Options Exchange Group, LLC 
(``BOX'') to modify the Directed Order process on BOX. The Exchange 
filed Amendment No 1. to the proposed rule change on February 10, 2010. 
The proposed rule change, as modified by Amendment No. 1, was published 
in the Federal Register on February 24, 2010.\3\ On March 22, 2010, the 
Exchange filed Partial Amendment No. 2 (``Amendment No. 2'') to the 
proposed rule change, and on March 24, 2010, the Exchange filed Partial 
Amendment No. 3 (``Amendment No. 3'') to the proposed rule change.\4\ 
The Commission received no comments on the proposal. This order 
approves the proposed rule change, as modified by Amendments No. 1 and 
3.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 61531 (February 17, 
2010), 75 FR 8416 (hereinafter referred to as ``Notice'').
    \4\ Amendment No. 3 replaced and superseded Amendment No. 2 in 
its entirety. In Amendment No. 3, the Exchange made conforming 
changes to its rule text to reflect a recently approved proposed 
rule change. See Securities Exchange Act Release No. 61577 (February 
24, 2010), 75 FR 9496 (March 2, 2010) (SR-BX-2010-017). This 
technical amendment does not require notice and comment as it did 
not materially affect the substance of the rule filing.
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II. Description of the Proposal

    The Exchange is proposing modifications to the Directed Order 
process on BOX.\5\ Specifically, the Exchange is proposing to automate 
the creation of the Guaranteed Directed Order (``GDO'') and the manner 
in which the quote of an Executing Participant (``EP'') \6\ is handled 
during the Directed Order process.
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    \5\ See Chapter VI, Section 5(c). A Directed Order is any 
Customer Order to buy or sell which has been directed to a 
particular Market Maker by an OFP. See Chapter I, Section 1(a)(21) 
of the BOX Rules. Terms not otherwise defined herein shall have the 
meaning assigned to them in the BOX Rules.
    \6\ When a BOX Market Maker indicates its interest in receiving 
Directed Orders, the receiving Market Maker is referred to as the 
EP.
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A. Quote Shelving and GDO

    Currently, upon receipt of a Directed Order an EP must either 
submit the Directed Order to the PIP \7\ or send the Directed Order to 
the BOX Book. When the EP sends the Directed Order to the BOX Book and 
the EP's quotation on the opposite side of the market from the Directed 
Order is equal to the National Best Bid or Offer (``NBBO'') and the 
Directed Order is also executable against the NBBO, the EP must 
guarantee execution of the Directed Order at the current NBBO for at 
least the size of his quote. This guarantee is called the GDO. Under 
the current rule, the EP must immediately send the Directed Order with 
the GDO to the Trading Host. Sending the GDO to the Trading Host 
enables it to simultaneously take down or ``shelve'' the EP's quote and 
any pending quote updates while the Directed Order is being exposed on 
the BOX Book.
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    \7\ See Chapter V, Section 18 of the BOX Rules.
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    Under the proposal, if the Directed Order is executable against the 
current NBBO and the EP is also quoting at such NBBO on the opposite 
side of the Directed Order, the GDO will be automatically created by 
the Trading Host and the EP's quote will be automatically shelved. In 
addition, the GDO creation and the quote shelving will be moved to an 
earlier point in the Directed Order process. Where presently they occur 
only when the Directed Order is sent to the BOX Book by the EP, they 
will now take place immediately upon the Trading Host's receipt of the 
Directed Order from the submitting order flow provider (``OFP'').\8\
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    \8\ The proposal clarifies that if a GDO has been automatically 
generated and is pending, then upon receipt by the Trading Host of a 
subsequent Directed Order for the same EP for the same series and 
side of the market, such subsequent order will not be considered a 
Directed Order but will be treated as a regular order. The Trading 
Host will not send the order to the EP, but will immediately release 
it to the BOX Book as a regular order. If no GDO has been 
automatically generated, then such subsequent order will be sent to 
the EP and treated as a new Directed Order. See electronic mail from 
Wayne Pestone, Chief Legal Officer, BOX, to Heather Seidel, Terri 
Evans and Sarah Schandler, Division of Trading and Markets, 
Commission, dated February 3, 2010 (confirming that the Directed 
Order process currently functions in this manner on BOX).
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    Once the GDO has been generated by the Trading Host, the EP will 
systemically be prohibited from posting a quotation. The EP's pending 
quote that was taken down by the Trading Host will not be released 
until: (i) The Directed Order is modified by the submitting OFP; (ii) 
the EP sends the Directed Order to the PIP; or (iii) the EP submits the 
Directed Order to the BOX Book, and either one of the following occurs: 
(a) the Directed Order trades in full; (b) the Directed Order 
exposition ends; or (c) the Directed Order is modified or cancelled by 
the submitting OFP during such exposition.
    Under the proposal, if the Directed Order is modified by the 
submitting OFP once the Trading Host has automatically established the 
GDO, then the modified Directed Order shall no longer be considered a 
Directed Order and shall be immediately released to the BOX Book and 
treated as a regular order.\9\ If no GDO had been established, then the 
modified Directed Order shall be resubmitted to the EP. The proposal 
provides that it shall be considered by the Exchange to be conduct 
inconsistent with just and equitable principles of trade for any 
Options Participant or person to communicate with an EP about the terms 
or conditions of a Directed Order prior to its outcome in the BOX 
Trading Host (e.g. execution, cancellation).
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    \9\ Upon modification or cancellation of the Directed Order, the 
Trading Host will immediately reestablish the EP's quote, including 
any of the EP's pending quote modifications, with a new time 
priority; or in the case of a pending quote cancellation, the EP's 
quote will be cancelled.
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    Under the proposal, the EP's obligations when using the PIP remain 
the same as under the current rule, however in some instances the 
obligation will be met automatically by the Trading Host. For example, 
if a GDO has been automatically generated, then the Trading Host will 
prohibit the EP from adjusting his quotation prior to submitting the 
Directed Order to the PIP process. Moreover, upon submission of the 
Directed Order to the PIP, the Trading Host will only accept a Primary 
Improvement Order priced at or better than (i) the GDO or (ii) the NBBO 
at the time the EP sent the Directed Order to the PIP, whichever is 
better for the Directed/PIP Order.
    The Exchange proposes to add certain details and clarifications to 
the rule regarding the treatment of Directed Orders that have been 
released to the BOX Book for exposure when a GDO has been automatically 
generated. The proposal clarifies that when the EP does not PIP the 
Directed Order and releases it to the BOX Book, if a GDO has been 
automatically generated and the Directed Order is not executable 
against the current NBBO, then the Trading Host will expose the order 
at the better GDO price for three (3) seconds.\10\ Under the proposal, 
if a GDO has been automatically generated and the Directed Order is 
executable against the current NBBO, the Directed Order will 
immediately execute against the BOX Book if the BOX Best Bid or Offer 
is equal to or better than the NBBO and GDO. Any remaining quantity not 
executed will immediately be exposed to BOX Participants at the better 
of the NBBO or GDO price. As is the case under the current rule, this 
exposure period will last three (3) seconds, during which time any 
Options Participant,

[[Page 16893]]

except for the EP, may submit an order to the BOX Book in response, and 
any orders submitted to the BOX Book during this period will execute 
immediately against any remaining quantity of the Directed Order, in 
time priority. Also as is the case under the current rule, after 
exposure of the Directed Order for three (3) seconds, the Trading Host 
will release the GDO, where it will be able to execute against any 
remaining quantity of the Directed Order.
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    \10\ See electronic mail from Wayne Pestone, Chief Legal 
Officer, BOX, to Heather Seidel, Terri Evans and Sarah Schandler, 
Division of Trading and Markets, Commission, dated February 3, 2010 
(confirming that the Directed Order process currently functions in 
this manner on BOX).
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    During the exposure period, the EP may not decrement the size, 
worsen the price of his GDO or submit a contra order. Because the 
Trading Host will now automatically create the GDO and shelve the EP's 
quote, it will not process such changes to the GDO or pending quote, 
except a decrementation of the GDO size down to the size of the 
remaining Directed Order after execution with the BOX Book. The EP may 
increase the size of his GDO, the same as today. Under the proposal the 
EP also may better the price of his GDO or modify his pending quote to 
be reestablished, but the Trading Host will not apply such modification 
until the quote is reestablished. Following execution of the Directed 
Order, the Trading Host will reestablish the quote of the EP with a new 
time priority, decremented by any executed portion of the GDO or as 
modified by the EP.
    The Exchange also proposes to make several additional changes to 
the text of Chapter VI, Section 5(c). The Exchange proposes to change 
several references to ``Market Maker'' to ``EP'' to more closely align 
the rule text with the terminology used to describe the Directed Order 
process. In addition, the Exchange proposes to add the word ``current'' 
before certain instances of the term ``NBBO'' in order to clarify which 
NBBO is being referenced at a particular stage in the Directed Order 
process. The Exchange also is proposing to remove from Section 
5(c)(iii)(1) certain language about the function of the NBBO filter 
process pursuant to Chapter V, Section 16(b), which the Exchange views 
as unnecessary and duplicative.

B. Market Maker Quoting Obligations

    The Exchange proposes to add new Supplementary Material .02 to 
Chapter VI, Section 5(c)(ii). The proposed Supplementary Material .02 
states that when a Market Maker's quote is shelved while acting as EP, 
such time without posting a quote will not count towards fulfilling his 
obligations for purposes of the Market Maker's quoting obligations 
under Chapter VI, Section 6(d) of the BOX Rules.

C. Implementation

    The Exchange has represented that after Commission approval and at 
least one week prior to implementation of the rule change, Boston 
Options Exchange Regulation LLC will issue a regulatory circular to all 
Participants that will inform Participants of the implementation date 
and will give Participants an opportunity to make any necessary 
modifications to coincide with the implementation date.

III. Discussion and Commission's 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. 
Specifically, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\11\ which requires, among other things, 
that the rules of an exchange are 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 investors and the public interest.\12\
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(4). In approving the 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).
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    As noted above, BOX Rules currently provide that if an EP is at the 
NBBO and the Directed Order is marketable, the EP must guarantee 
execution of that order at the NBBO for at least the size of his quote. 
Under the current rule, the EP is responsible for submitting a GDO to 
the Trading Host. Pursuant to the proposed rule change, the Exchange is 
proposing to automate the GDO process. The Commission believes that 
automating the GDO process, including ``shelving'' the EP's quote, 
should help ensure that GDOs are generated in compliance with BOX 
rules. Further, the Commission believes that automating the creation of 
the GDO by the Trading Host will aid Market Makers in complying with 
the BOX rules regarding Directed Orders.
    The Exchange has proposed the addition of language to the rule text 
to describe the treatment of a Directed Order when the Directed Order 
is subsequently modified or cancelled, depending upon whether a GDO has 
been automatically generated. The Commission believes that the 
Exchange's proposed treatment of modified or cancelled Directed Orders 
is consistent with the Act. As discussed above, the Exchange has 
proposed that it would be conduct inconsistent with just and equitable 
principles of trade for any Options Participant or person to 
communicate with an EP about the terms or conditions of a Directed 
Order prior to its outcome in the BOX Trading Host. Moreover, when a 
Directed Order is modified or cancelled after a GDO has been 
automatically generated, the EP's quote will be reestablished with a 
new time priority. The Commission believes that these provisions should 
ensure that Directed Orders are not modified or cancelled in a manner 
that would be inconsistent with the Act.
    As set forth above, the Exchange has proposed the addition of 
language to the rule text to describe what occurs on BOX when a GDO has 
been automatically generated and is pending and the Trading Host 
receives a subsequent Directed Order for the same EP. The Exchange has 
also proposed the addition of language to the rule text to clarify the 
treatment of Directed Orders that have been released to the Box Book 
for exposure after a GDO has been automatically generated. The Exchange 
has represented that the processes described by this additional and 
clarifying language are currently a part of the Directed Order process 
on BOX although not specifically set forth in the current rule text. 
The Exchange also proposes to make several non-substantive changes in 
the text of Chapter VI, Section 5(c) to more closely align the rule 
text with the terminology used to describe the Directed Order process 
and to remove duplicative language. The Commission believes that these 
changes and additions, which will provide greater clarity throughout 
the Directed Order process for Market Makers, OFPs and other 
Participants on BOX and will more closely align the rule text with the 
Directed Order process as it occurs on BOX, are consistent with the 
Act.
    The Commission also believes that the Exchange's proposed addition 
of Supplementary Material .02, clarifying that the time that a Market 
Maker's quote is shelved does not count towards fulfilling his quoting 
obligations under Chapter VI, Section 6(d) of the BOX Rules, is 
appropriate and consistent with the Act. The Commission notes that 
Market Makers are subject to quoting requirements under Chapter VI, 
Section 6(d). Specifically, Market Makers are required on a daily basis 
to post quotes at least 80 percent of the

[[Page 16894]]

time an options class is open for trading in 90 percent of their 
appointed classes. Furthermore, Market Makers must post valid 
quotations at least 60 percent of the time in each of their appointed 
classes during the time that the class is open for trading. 
Accordingly, the Commission believes that it is appropriate for the 
Exchange to exclude the time a Market Maker's quote is shelved under 
the Directed Order process in determining whether a Market Maker has 
satisfied his quoting obligations as no quote will be posted by the 
Market Maker during such time the quote is shelved.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-BX-2010-009), as modified by 
Amendments No. 1 and 3 thereto, be, and it hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-7431 Filed 4-1-10; 8:45 am]
BILLING CODE 8011-01-P

