
[Federal Register: October 25, 2011 (Volume 76, Number 206)]
[Notices]               
[Page 66103-66105]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25oc11-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Securities Exchange Act of 1934 Release No. 65592; File No. SR-BX-
2011-046]

 
In the Matter of NASDAQ OMX BX, Inc.: Order Denying NASDAQ OMX 
BX, Inc.'s Petition for Review of Division of Trading and Markets 
Suspension of and Institution of Proceedings by Delegated Authority of 
SR-BX-2011-046; Lifting the Automatic Stay; and Notice of Designation 
of a Longer Comment Period for the Proceedings

Before the Securities and Exchange Commission October 19, 2011.

    Pursuant to Rule 431(b)(2) of the Rules of Practice,\1\ It is 
ordered that the petition \2\ of Boston Options Exchange Group LLC, an 
options trading facility of NASDAQ OMX BX, Inc., (``BOX'') for review 
of the temporary suspension and institution of proceedings by the 
Division of Trading and Markets (the ``Division'') by delegated 
authority of SR-BX-2011-046 \3\ is hereby denied. It is further ordered 
that the automatic stay of delegated action pursuant to Rule 431(e) of 
the Rules of Practice \4\ is hereby lifted.
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    \1\ 17 CFR 201.431(b)(2).
    \2\ Petition for Review of Action by Delegated Authority from 
BOX, dated September 27, 2011 (``BOX Petition'').
    \3\ See Securities Exchange Act Release No. 65330 (September 13, 
2011), 76 FR 58065 (September 19, 2011) (``Suspension Order'').
    \4\ 17 CFR 201.431(e).
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    The Commission hereby is also extending the length of the period 
for market participants to submit comments related to SR-BX-2011-046 
until November 17, 2011 and the length of the period for submission of 
rebuttal comments until December 14, 2011.
    On July 15, 2011, NASDAQ OMX BX, Inc. filed, pursuant to Section 
19(b)(1) of the Exchange Act \5\ and Rule 19b-4 thereunder, \6\ a 
proposed rule change that amended the BOX Fee Schedule to increase the 
credits and fees for certain transactions in the BOX Price Improvement 
Period (``PIP'').\7\
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    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ The PIP is a mechanism in which members submit an agency 
order on behalf of a customer for price improvement over the BOX 
BBO, paired with a contra-order guaranteeing execution of the agency 
order at or better than the NBBO. The contra-order could be for the 
account of the member, or an order solicited from someone else. The 
agency order is exposed for a 1-second auction in which members may 
submit competing interest at the same price or better. The 
initiating member 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.

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[[Page 66104]]

    The Division, pursuant to delegated authority,\8\ published BOX's 
proposed rule change for notice and comment on August 3, 2011.\9\ The 
Commission received four comment letters on the proposal, three urging 
the Commission to suspend the proposal and institute proceedings, and 
one urging the Commission not to take such action.\10\ BOX filed a 
response to comments.\11\ As evidenced by these letters, market 
participants have differing views on the impact of the proposal and 
whether it is consistent with the Act. In recognition of the issues 
raised by commenters and in view of the significant legal and policy 
issues raised by the proposal, on September 13, 2011, the Division, 
pursuant to delegated authority,\12\ temporarily suspended BOX's 
proposal and simultaneously instituted proceedings to determine whether 
to approve or disapprove the proposal.\13\
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    \8\ 17 CFR 200.30-3(a)(12).
    \9\ See Securities Exchange Act Release No. 64981 (July 28, 
2011), 76 FR 46858 (August 3, 2011).
    \10\ 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'').
    \11\ See letter to Elizabeth Murphy, Secretary, Commission, from 
Anthony D. McCormick, Chief Executive Officer, BOX, dated September 
9, 2011 (``BOX Letter''). BOX filed its response to comments on 
Friday, September 9, 2011, two business days prior to the end of the 
60 day period during which the Commission could act to suspend the 
filing and institute proceedings, and 16 days after the close of the 
original comment period for the filing.
    \12\ 17 CFR 200.30-3(a)(57) and (58).
    \13\ See Suspension Order, supra note 3. Section 19(b)(3)(C) of 
the Act, 15 U.S.C. 78s(b)(3)(C), provides the statutory standard by 
which the Commission may temporarily suspend an immediately 
effective proposed rule change. Specifically, Section 19(b)(3)(C) 
provides that the Commission may take such action ``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].'' 15 U.S.C. 78s(b)(3)(C). 
If the Commission temporarily suspends a rule change, it must 
institute proceedings under Section 19(b)(2)(B) of the Act. See 15 
U.S.C. 78s(b)(3)(C).
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    In the Suspension Order, the Division, pursuant to delegated 
authority, states its belief that it is appropriate to evaluate the 
effect of the proposed rule change on competition among different types 
of market participants and on market quality, and that it intends to 
assess whether the potential fee disparity between BOX Participants who 
initiate a PIP auction (``PIP Initiators'') and BOX Participants who 
respond to a PIP auction (``PIP Responders'') is consistent with the 
statutory requirements applicable to a national securities exchange 
under the Act,\14\ in particular the standards 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.\15\ The Suspension Order 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 and that it is appropriate in the 
public interest to institute disapproval proceedings in view of the 
significant legal and policy issues raised by the proposal.\16\
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    \14\ See Suspension Order, supra note 3, at 58067. Under the 
proposed rule change, the Exchange would charge 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. 
The disparity between the net fees charged to a PIP Initiator and 
those charged to a PIP Responder could be as high at $0.90 per 
contract. See id. at 58066-58067.
    \15\ See id. at 58067.
    \16\ See id.
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    On September 20, 2011, BOX filed a notice of intention to petition 
for review from BOX stating that, pursuant to the Commission Rule of 
Practice 430(b),\17\ BOX appeals to the Commission the Division's 
action to institute proceedings by delegated authority. Pursuant to 
Rule of Practice 431(e), a notice of intention to petition for review 
results in an automatic stay of the action by delegated authority.\18\ 
On September 27, 2011, BOX filed a petition to review the Division's 
action by delegated authority instituting proceedings to determine 
whether to approve or disapprove the filing.\19\
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    \17\ 17 CFR 201.430(b).
    \18\ 17 CFR 201.431(e).
    \19\ See BOX Petition, supra note 2.
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    In considering whether to accept or reject the BOX Petition, Rule 
411(b)(2) of the Rules of Practice \20\ requires that the Commission 
determine whether:
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    \20\ 17 CFR 201.411(b)(2).
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    (i) A prejudicial error was committed by the Division in the 
conduct of the proceeding; or
    (ii) The Division's decision embodies:
    (A) A finding or conclusion of material fact that is clearly 
erroneous; or
    (B) A conclusion of law that is erroneous; or
    (C) An exercise of discretion or decision of law or policy that is 
important and that the Commission should review.
    For the reasons discussed below, the Commission finds that BOX has 
not made a reasonable showing that the Division committed a prejudicial 
error or that the Division's delegated action involved an error of fact 
or law that would provide an appropriate basis for Commission review.
    First, the BOX Petition does not allege that the Division committed 
any prejudicial error in the conduct of the proceedings, including the 
decision to temporarily suspend and institute proceedings to determine 
whether to approve or disapprove the proposal. The Commission 
recognizes the issues raised as to the impact of the fee change and the 
differing views of market participants outlined in the comments 
received. The Division's action through the Suspension Order provides 
an opportunity for the Commission to receive more focused comment and 
data on the issues raised, as well as an opportunity for the Commission 
to more fully assess the issues raised and whether the filing is 
consistent with the Act. Based on the proposed rule change as filed, 
the comments received, and BOX's response to comments, the Commission 
finds that the Division acted appropriately in finding 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 filing.\21\ Accordingly, the Commission finds that the 
Division did not commit any prejudicial error in temporarily suspending 
and instituting proceedings with respect to BOX's proposed rule change.
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    \21\ Pursuant to the provisions of Section 19(b)(3)(C) of the 
Act, the Commission must institute proceedings to determine whether 
to approve or disapprove an immediately effective rule change if it 
suspends such rule change. See 15 U.S.C. 78s(b)(3)(C).
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    Second, the Division's action to suspend the filing and institute 
proceedings is an interim step in the Commission's consideration of 
substantive issues raised by the filing, and one that did not embody a 
finding of material fact. The Suspension Order therefore is incapable 
of embodying a finding or conclusion of material fact that is 
erroneous. Although BOX notes that it provided the Division with data 
relating to six weeks of trading in the BOX PIP that BOX believes 
supports a finding that its fees are consistent with

[[Page 66105]]

the Act,\22\ the Division also received data from a commenter 
purporting to show a decline in average price improvement and average 
percentage of contracts price improved in the PIP.\23\ The Suspension 
Order states that the Commission has not reached any conclusions with 
respect to the issues involved.\24\ To the contrary, the Suspension 
Order seeks additional comment and data with respect to the issues 
raised by the filing,\25\ and the institution of proceedings will 
provide the Commission the opportunity to more fully assess the issues 
raised, including a further assessment of the facts underlying the 
issues.
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    \22\ The Division noted this data in the Suspension Order. See 
Suspension Order, supra note 3, at 58067.
    \23\ See Citadel Letter, supra note 10, at 3.
    \24\ See Suspension Order, supra note 3, at 58067.
    \25\ See id. at 58067-68.
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    Third, the Division's action pursuant to delegated authority to 
suspend the filing and institute proceedings is an interim step that 
does not involve a conclusion of law that is clearly erroneous. The 
Suspension Order states that the Commission has not reached any 
conclusions with respect to the issues involved,\26\ and no finding as 
to whether the proposed rule change is consistent with the Act was made 
in the Suspension Order. To the contrary, the Suspension Order seeks 
additional comment and data with respect to the issues raised by the 
filing, which will help the Commission further assess the proposed rule 
change and inform its ultimate decision as to whether the proposed rule 
change is consistent with the Act. Based on the proposed rule change as 
filed, the comments received, and BOX's response to comments, the 
Commission finds that the Division acted appropriately in finding 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 filing.\27\
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    \26\ See id. at 58067.
    \27\ Pursuant to the provisions of Section 19(b)(3)(C) of the 
Act, the Commission must institute proceedings to determine whether 
to approve or disapprove an immediately effective rule change if it 
suspends such rule change. See 15 U.S.C. 78s(b)(3)(C).
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    Fourth, the BOX Petition does not specifically allege that the 
Division's action pursuant to delegated authority was an exercise of 
discretion or decision of law or policy that is important and that the 
Commission should review pursuant to the standard of Rule 431(b)(2). 
For purposes of determining whether to grant de novo review of the 
Division's exercise of delegated authority with respect to the 
Suspension Order, the Commission does not believe that the act of 
suspending and instituting proceedings in this filing embodies an 
exercise of discretion or a decision of law or policy that is important 
and that the Commission should review. The Commission believes that the 
Division acted appropriately, based on the record, in determining that 
the underlying BOX proposed rule change does merit additional 
opportunity for comment and Commission consideration. The Division's 
Suspension Order is the proper statutory mechanism to commence that 
process and conduct such review.
    Finally, in its petition, BOX requests, if the Commission does 
determine to institute proceedings to determine whether to approve or 
disapprove the proposal, that the Commission not stay the effectiveness 
of the PIP fee during the course of the proceedings.\28\ BOX notes its 
belief that the proposed fees allow it to compete with larger options 
exchanges that charge payment for order flow fees that, in BOX's view, 
are substantially similar to the proposed fees and that suspension of 
the fees would cause unfair harm to BOX.\29\ However, under Section 
19(b)(3)(C) of the Act,\30\ the Commission cannot institute proceedings 
to determine whether to approve or disapprove an immediately effective 
rule change unless it first suspends the rule change. The Commission 
does not find a sufficient basis in the BOX Petition to diverge from 
the process contemplated in the statute in this case by lifting the 
suspension of the BOX PIP fee while it conducts the proceedings to 
determine whether to approve or disapprove BOX's proposed rule change. 
Importantly, commenters have raised material concerns (including one 
who presented supporting data) that call into question whether BOX's 
proposal unduly burdens competition and whether it is consistent with 
the Act. Among other things, the Commission will consider these issues, 
as well as BOX's assertion that its proposed fees are comparable to 
fees in effect at other options exchanges, during the conduct of the 
proceedings on BOX's proposal.
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    \28\ See BOX Petition, supra note 2, at 10.
    \29\ See id. at 9-10.
    \30\ See 15 U.S.C. 78s(b)(3)(C).

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-27517 Filed 10-24-11; 8:45 am]
BILLING CODE 8011-01-P

