
[Federal Register Volume 76, Number 181 (Monday, September 19, 2011)]
[Notices]
[Pages 58065-58068]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23909]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65330; File No. SR-BX-2011-046]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Suspension of 
and Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Amend the BOX Fee Schedule With 
Respect to Credits and Fees for Transactions in the BOX Price 
Improvement Period

September 13, 2011.

I. Introduction

    On July 15, 2011, NASDAQ OMX BX, Inc. (the ``Exchange'') filed with 
the Securities and Exchange Commission (the ``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to amend the Fee Schedule of the Boston Options Exchange Group, 
LLC (``BOX'') to increase the credits and fees for certain transactions 
in the BOX Price Improvement Period (``PIP'').\3\ The proposed rule 
change was immediately effective upon filing with the Commission 
pursuant to Section 19(b)(3)(A) of the Act.\4\ Notice of filing of the 
proposed rule change was published in the Federal Register on August 3, 
2011.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The PIP is a mechanism in which a BOX Options Participant 
submits an agency order on behalf of a customer for price 
improvement, paired with a contra-order guaranteeing execution of 
the agency order at or better than the National Best Bid or Offer 
(``NBBO''). The contra-order could be for the account of the Options 
Participant, or an order solicited from someone else. The agency 
order is exposed for a one-second auction in which other BOX Options 
Participants may submit competing interest at the same price or 
better. The initiating BOX Options Participant is guaranteed 40% of 
the order (after public customers) at the final price for the PIP 
order, assuming it is at the best price. See Chapter V, Section 18 
of the BOX Rules.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ See Securities Exchange Act Release No. 64981 (July 28, 
2011) 76 FR 46858 (``Notice'').
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    Under Section 19(b)(3)(C) of the Act, the Commission is (1) hereby 
temporarily suspending File No. SR-BX-2011-046, and (2) instituting 
proceedings to determine whether to approve or disapprove File No. SR-
BX-2011-046.

II. Summary of the Proposed Rule Change

    The Exchange proposes to increase the credits and fees for certain 
transactions in the PIP by modifying Section 7d of the BOX Fee 
Schedule. Specifically, the Exchange proposes to: (1) Increase both the 
credits and the fees for PIP transactions in classes that are not 
subject to the Penny Pilot (``Non-Penny classes'') from $0.30 to $0.75 
per contract; and (2) increase both the credits and the fees for PIP 
transactions in Penny Pilot classes where the trade price is equal to 
or greater than $3.00 per contract (other than in QQQQ, SPY, and IWM) 
from $0.30 to $0.75 per contract. The credits and the fees for PIP 
transactions in QQQQ, SPY, and IWM and in all other Penny Pilot classes 
where the trade price is less than $3.00 per contract will remain at 
$0.30 per contract. The credits are paid by the Exchange on the agency 
order that is submitted to the PIP auction on behalf of a customer. The 
fees are charged by the Exchange to the order that is executed against 
the agency order, whether such order is a paired order submitted by the 
BOX Options Participant that also submitted the agency order or an 
order submitted by another BOX Options Participant in response to the 
PIP auction. The credits and fees are in addition to any applicable 
trading fees, as described in Sections 1 through 3 of the BOX Fee 
Schedule.\6\
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    \6\ Sections 1 through 3 of the Box Fee Schedule include a $0.25 
per contract transaction fee for contracts traded in the PIP. 
Depending on its average daily volume (``ADV''), a Participant who 
initiates PIP auctions may be charged a lower per contract fee. See 
Section 7d. of the Box Fee Schedule. See also infra note 9.
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III. Suspension of SR-BX-2011-046

    Pursuant to Section 19(b)(3)(C) of the Act,\7\ at any time within 
60 days of the date of filing a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\8\ the Commission summarily may 
temporarily suspend the change in the rules of a self-regulatory 
organization 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.
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    \7\ 15 U.S.C. 78s(b)(3)(C).
    \8\ 15 U.S.C. 78s(b)(1).
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    The Commission believes it is appropriate to evaluate the effect of 
the proposed rule change on competition among different types of market 
participants and on market quality, particularly with respect to the 
net fee differential that it would place on BOX Options Participants 
that respond to a PIP auction (``PIP Responders'') compared to a BOX 
Options Participant that initiated the PIP auction (``PIP Initiator''). 
Under the proposed rule change, the Exchange would charge

[[Page 58066]]

both the PIP Initiator and the PIP Responder the same fee for executing 
an order in the PIP. However, if the PIP Initiator also submits the 
agency order into the PIP, the PIP Initiator receives the rebate paid 
to the agency order that is auctioned in the PIP. As a result, if the 
fee the PIP Initiator pays is aggregated with the rebate the PIP 
Initiator receives for the agency order (i.e., a ``net'' fee), the PIP 
Initiator would pay a lower net fee compared to PIP Responders. For 
example, under the proposal, a PIP Initiator that executes 100% of the 
PIP Order in a Non-Penny class would be charged a $0.10 per contract 
base transaction fee (at the highest volume tier) \9\ plus a liquidity 
provider fee of $0.75 per contract, and would receive a credit for 
removing liquidity of $0.75 for the agency order. This results in a net 
fee of $0.10 per contract to a PIP Initiator who executes 100% of its 
customer's order. In contrast, a PIP Responder in a Non-Penny class 
would be charged a $0.25 per contract base transaction fee plus the 
liquidity provider fee of $0.75 per contract, for a net fee of $1.00 
per contract. Comparing the net fees charged to PIP Initiators to those 
charged to PIP Responders, the largest potential disparity is $0.90 per 
contract.
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    \9\ See Section 7d. of the BOX Fee Schedule. Section 7d. 
includes a tiered fee schedule that is assessed on PIP Initiators 
based on each PIP Initiator ADV for executions in the PIP. This 
charge ranges from $0.10 per contract for a PIP Initiator with an 
ADV of 150,001 or greater contracts to $0.25 per contract for a PIP 
Initiator with an ADV of less than 20,001 contracts.
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    In its filing, the Exchange notes its belief that the changes to 
the PIP transaction fees and credits are ``competitive, fair and 
reasonable, and non-discriminatory in that they apply to all categories 
of participants and across all account types.'' \10\ The Exchange 
further argues that the proposed fee change is reasonable because it 
``is fair and reasonable as applied only to the specified classes and 
transactions because such options trade at minimum increments of $0.05 
or $0.10, providing greater opportunity for market participants to 
offer additional price improvement.'' \11\ In addition, the Exchange 
noted that it believes the proposed ``credit will attract additional 
order flow to BOX and to the PIP in particular, to the benefit of all 
market participants.'' \12\ The Exchange also stated that the proposal 
``will allow the fees charged on BOX to remain competitive with other 
exchanges as well as apply such fees in a manner which is equitable 
among all BOX Participants.'' \13\
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    \10\ See Notice, supra note 5, at 46858.
    \11\ See id. at 46859.
    \12\ See id.
    \13\ See id.
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    To date, the Commission has received four comment letters on the 
Exchange's proposed rule change.\14\ Three commenters recommend that 
the Commission temporarily suspend SR-BX-2011-046 and institute 
proceedings to disapprove the filing.\15\ The fourth commenter supports 
the Exchange's proposed rule change and urges the Commission not to 
institute proceedings to disapprove the filing.\16\ The Commission also 
has received a letter from the Exchange responding to the comments 
received.\17\
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    \14\ See letters to Elizabeth Murphy, Secretary, Commission, 
from John C. Nagel, Managing Director and General Counsel, Citadel 
Securities LLC (``Citadel''), dated August 12, 2011 (``Citadel 
Letter''); Andrew Stevens, Legal Counsel, IMC Financial Markets 
(``IMC''), dated August 15, 2011 (``IMC Letter''); Michael J. Simon, 
Secretary, International Securities Exchange (``ISE''), dated August 
22, 2011 (``ISE Letter''), and Christopher Nagy, Managing Director 
Order Strategy, TD Ameritrade, Inc. (``TD Ameritrade''), dated 
September 12, 2011 (``TD Ameritrade Letter'').
    \15\ See Citadel Letter, supra note 14, at 4; IMC Letter, supra 
note 14, at 4; and ISE Letter, supra note 14, at 5.
    \16\ See TD Ameritrade Letter, supra note 14, at 2.
    \17\ See letter to Elizabeth Murphy, Secretary, Commission, from 
Anthony D. McCormick, Chief Executive Officer, Boston Options 
Exchange, dated September 9, 2011 (``BOX Letter'').
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    Citadel argues that the magnitude of the disparity between the fees 
an initiator pays and the fees a competitive responder pays, on a net 
basis, make it ``economically prohibitive for anyone other than the 
initiator to respond'' to a PIP auction. Citadel also provides 
statistics suggesting that increases to the BOX PIP fees \18\ are 
``reducing price improvement opportunities for customers and turning 
the PIP and BOX into an NBBO internalization engine.'' \19\ Based on 
its analysis, Citadel argues that the fees proposed by SR-BX-2011-046 
are ``solely structured to benefit one group of BOX participants over 
another,'' and thus are discriminatory and an undue burden one 
competition.\20\
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    \18\ See Securities Exchange Act Release Nos. 62632 (August 3, 
2010), 75 FR 47869 (August 9, 2010) (SR-BX-2010-049) (instituting 
the PIP pricing structure) and 64198 (April 6, 2011), 76 FR 20426 
(April 12, 2011) (SR-BX-2011-020) (increasing the fee and credit).
    \19\ See Citadel Letter, supra note 14, at 3. Citadel's 
statistics show that, since February 2011, the average price 
improvement per contract and average percentage of contracts price 
improved in PIP auctions has declined every month. See id. at 3.
    \20\ Id.
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    IMC also notes its belief that the BOX PIP fee structure unduly 
burdens competition and unreasonably discriminates amongst 
participants.\21\ It argues that the increase in fees is borne solely 
by PIP competitive responders and ``will deter anyone other than the 
initiator from providing liquidity via the PIP.'' \22\ IMC believes 
that ``the BOX has thus erected an unreasonable barrier to 
participation, effectively barring certain participants from competing 
with PIP initiators.'' \23\ IMC believes that BOX's fee structure is 
designed to reduce competition and increase internalization in the PIP, 
which in turn results in ``reduced opportunities for meaningful price 
improvement.'' \24\
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    \21\ See IMC Letter, supra note 14, at 1-2.
    \22\ See IMC Letter, supra note 14, at 2.
    \23\ See id.
    \24\ See IMC Letter, supra note 14, at 3.
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    ISE challenges BOX's assertion that the fees proposed in SR-BX-
2011-046 have a uniform application across all members, noting that the 
differential fees between PIP Initiators and competitive responders is 
between $0.75 and $0.90 per contract.\25\ ISE also argues that SR-BX-
2011-046 is deficient in that it fails to: provide an adequate basis to 
determine that the proposed rule change is consistent with the Act 
because it does not address the pricing differential for participants 
who seek to compete with a PIP Initiator, discuss the burden on 
competition imposed by the pricing structure, or provide support for 
its assertion that the fee change will allow it to compete with other 
exchanges.\26\
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    \25\ See ISE Letter, supra note 14, at 1.
    \26\ See ISE Letter, supra note 14, at 5.
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    TD Ameritrade applauds the proposed rule change, noting that it has 
already seen significant benefits to its retail investors.\27\ TD 
Ameritrade notes that its clients received over $600,000 in price 
improvement over the NBBO on BOX in August 2011 and believes that its 
customer experience on the BOX strongly indicates that healthy and 
robust competition exists within the PIP.\28\ TD Ameritrade states that 
the BOX fee structure provides incentives for market participants to 
submit customer order flow to BOX and thus, continues to create a 
greater opportunity for retail customers to receive additional price 
improvement.\29\
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    \27\ See TD Ameritrade Letter, supra note 14, at 1.
    \28\ See id.
    \29\ See id. TD Ameritrade suggests that the Commission should 
recognize that price improvement opportunities in the options 
markets are not transparent and easy to compare from exchange to 
exchange and notes its belief that there should be more order 
execution information transparency in the options markets. See TD 
Ameritrade Letter, supra note 14, at 2.
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    In its response letter, BOX argues that its market model and fee 
structure are intended to benefit retail customers.\30\ BOX responds to 
the assertions that the fee structure is discriminatory and

[[Page 58067]]

impedes competition by providing PIP statistics showing that the 
retention rate (the amount of an agency order allocated to a PIP 
Initiator) in nickel classes in July 2011was approximately 38%.\31\ BOX 
notes that this retention rate is lower than the 40% guarantee 
permitted to be allocated to an initiating participant and states that 
this statistic indicates ``definitive competition within the PIP.'' 
\32\ It also notes that average price improvement per contract in PIP 
transactions increased from $0.0062 in July 2011 to $0.0087 in August 
2011, in part as a result of the proposed rule change.\33\ BOX responds 
to the assertion that Initiating Participant can offset any fee with a 
credit by stating that ``most PIP transactions are initiated by a 
market maker acting independently of a Participant acting as agent for 
a customer order.'' \34\ Further BOX states that its fee structure in 
the PIP is more transparent than payment for order flow (``PFOF'') 
arrangements and notes its belief that the credit to remove liquidity 
on BOX is generally less than what firms receive through PFOF.\35\ BOX 
states that since the PIP began operating in 2004, customers have 
received more than $355 million in savings through better executions on 
BOX, including $7.3 million in August 2011, and states its belief that 
the proposal is consistent with the public interest, and with the 
Exchange Act.\36\
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    \30\ See BOX Letter, supra note 17, at 2.
    \31\ See BOX Letter, supra note 17, at 1.
    \32\ See id.
    \33\ See id.
    \34\ BOX Letter, supra note 17, at 1.
    \35\ See BOX Letter, supra note 17, at 2.
    \36\ See id.
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    The Commission intends to assess whether the potential resulting 
fee disparity between PIP Initiators and PIP Responders (as high as 
$0.90 per contract) is consistent with the statutory requirements 
applicable to a national securities exchange under the Act, as 
described below. In particular, the Commission will assess whether the 
proposal satisfies the standards under the Exchange Act and the rules 
thereunder requiring, among other things, that exchange rules: provide 
for the equitable allocation of reasonable fees among members, issuers, 
and other persons using its facilities; not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers; 
and do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule change.

IV. Proceedings To Determine Whether To Approve or Disapprove SR-BX-
2011-046

    The Commission is instituting proceedings pursuant to Sections 
19(b)(3)(C) \37\ and 19(b)(2) of the Act \38\ to determine whether the 
Exchange's proposed rule change should be approved or disapproved. 
Pursuant to Section 19(b)(2)(B) of the Act,\39\ the Commission is 
providing notice of the grounds for disapproval under consideration. As 
discussed above, under the proposal, the PIP Initiator could pay a 
lower net fee compared to PIP Responders. The Exchange Act and the 
rules thereunder require that exchange rules provide for the equitable 
allocation of reasonable fees among members, issuers, and other persons 
using its facilities; that exchange rules not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers; 
and that exchange rules do not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. The Commission intends to assess whether BOX's proposal is 
consistent with these and other Exchange Act standards.
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    \37\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \38\ 15 U.S.C. 78s(b)(2).
    \39\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
Id. The time for conclusion of the proceedings may be extended for 
up to 60 days if the Commission finds good cause for such extension 
and publishes its reasons for so findings. Id.
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    The Commission believes it is appropriate in the public interest to 
institute disapproval proceedings at this time in view of the 
significant legal and policy issues raised by the proposal. Institution 
of disapproval proceedings does not indicate, however, that the 
Commission has reached any conclusions with respect to the issues 
involved. The sections of the Act and the rules thereunder that are 
applicable to the proposed rule change include:
     Section 6(b)(4) of the Act, which requires that the rules 
of a national securities exchange ``provide for the equitable 
allocation of reasonable dues, fees, and other charges among its 
members and issuers and other persons using its facilities,'' \40\
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    \40\ 15 U.S.C. 78f(b)(4).
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     Section 6(b)(5) of the Act, which requires, among other 
things, that the rules of a national securities exchange not be 
``designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers,'' \41\ and
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    \41\ 15 U.S.C. 78f(b)(5).
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     Section 6(b)(8) of the Act, which requires that the rules 
of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of [the Exchange Act].'' \42\
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    \42\ 15 U.S.C. 78f(b)(8).
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V. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by November 3, 2011. 
Rebuttal comments should be submitted by November 18, 2011. Although 
there do not appear to be any issues relevant to approval or 
disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\43\
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    \43\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Report of the 
Senate Committee on Banking, Housing and Urban Affairs to Accompany 
S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposal, in 
addition to any other comments they may wish to submit about the 
proposed rule change. For example, the Commission seeks comment and 
specific data on the following:
     Whether, as stated by commenters, the fee structure in the 
PIP and this proposed fee change, in particular, have impacted or will 
impact incentives to compete in the PIP and, if so, how specifically 
have or will the fee structure in the PIP and this proposed fee change 
impacted incentives to compete;
     Whether the proposed fee change will affect the quality of 
execution of customer orders in the PIP or the broader market quality, 
such as quoted spreads or overall execution quality; and if so, how and 
what type of impact will this have;
     Whether the proposed fee change and PIP fee structure 
reduce the benefits

[[Page 58068]]

of exposing an order \44\ and thus potentially create a de facto 
internalization mechanism; and if so, whether, and if so, how, this 
will adversely impact overall market quality and customer execution 
quality and whether a de facto internalization mechanism should be of 
concern to the Commission;
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    \44\ The Commission has recognized the benefits of exposure to 
the market, noting in the context of facilitation mechanisms that an 
``auction [in which an order is exposed to the market] provides some 
assurance that the customer's order is executed at the best price 
any member in that market is willing to offer.'' Competitive 
Developments in the Options Markets, Securities Exchange Act Release 
No. 49175, 69 FR 6124 (February 9, 2004), at 6130. The Commission 
also noted that ``[r]ules or practices that permit or encourage 
internalization may also reduce intramarket price competition and, 
therefore, cause spreads to widen.'' Id.
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     Whether the proposed fee change, by facilitating 
internalization of orders on BOX, could or would lead to a shift of 
order flow from other exchanges and, if so, what is the nature and 
volume of such order flow and what is the extent to which such order 
flow currently receives price improvement at the other exchanges or is 
executed at prices that merely match the NBBO;
     Whether BOX's other fees, specifically the fee to add 
liquidity to the BOX book,\45\ have an impact on the application or 
effects of this proposed fee change, and if so, how and what the impact 
is or will be;
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    \45\ As of September 1, 2011, BOX charges a $0.65 fee for adding 
liquidity in the Non-Penny classes and a $0.22 fee for adding 
liquidity in the Penny Pilot classes. See Section 7a. of the BOX Fee 
Schedule, available at http://www.bostonoptions.com/pdf/BOX_Fee_Schedule.pdf.
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     Whether the filing for SR-BX-2011-046 was sufficient under 
Section 19(b) of the Act to address issues regarding the effects of the 
proposed fee change on competition in the PIP;
     Whether the PIP fees, either on a net basis or otherwise, 
are comparable to any fees or charges on other exchanges, including any 
PFOF fees and rebates, and, if so, how;
     Whether credits paid on the agency order that is submitted 
to the PIP auction on behalf of a customer are passed on to the 
customer or retained by the PIP Initiator and, if passed on, in what 
form; and
     Whether the Commission should evaluate all fees and all 
rebates (including PFOF fees and rebates) at all exchanges on a net or 
aggregate basis to assess their effects on competition or to otherwise 
assess their consistency with the Exchange Act.

Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-BX-2011-046 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2011-046. The file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-BX-2011-046 and should be 
submitted on or before November 3, 2011. Rebuttal comments should be 
submitted by November 18, 2011.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\46\ that File No. SR-BX-2011-046, be and hereby is, temporarily 
suspended. In addition, the Commission is instituting proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.
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    \46\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(57) and (58).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23909 Filed 9-16-11; 8:45 am]
BILLING CODE 8011-01-P


