
[Federal Register Volume 77, Number 97 (Friday, May 18, 2012)]
[Notices]
[Pages 29730-29740]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12034]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66983; File No. SR-BX-2012-030]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Establishment of a New Options Market, NASDAQ OMX BX 
Options

May 14, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on May 1, 2012, NASDAQ OMX BX, Inc. (``Exchange'' or ``BX'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II and III, below, 
which Items have been prepared by the Exchange. On May 8, 2012, the 
Exchange filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 made several technical and clarifying 
changes to the proposal, as well as minor changes to the definitions 
of the terms ``primary market'' and ``Intermarket Sweep Order.'' See 
Amendment No. 1.

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[[Page 29731]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    BX is filing with the Commission a proposal for a new options 
market. Specifically, BX proposes to adopt new trading rules, as 
explained further below, to operate a fully automated, price/time 
priority execution system built on the core functionality of the NASDAQ 
Options Market (``NOM'').
    The text of the proposed rule change is available at the Exchange's 
Web site at http://nasdaqomxbx.cchwallstreet.com/, at BX's principal 
office, 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 purpose of the proposed rule change is to operate a new options 
market, identical to (but separate from) the NASDAQ Options Market 
(``NOM'').\4\ The new market, called NASDAQ OMX BX Options, or BX 
Options, will be all-electronic with no physical trading floor and is 
described more fully below.
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    \4\ There are several differences between the rules of NOM today 
and the proposed new options market, which NASDAQ intends to amend 
by submitting a proposed rule change shortly. Once these changes are 
in place, the rules of NOM and the rules of the new market will be 
the same. See Amendment No. 1.
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    BX is a registered national securities exchange and a self-
regulatory organization (``SRO''). BX is a wholly-owned subsidiary of 
The NASDAQ OMX Group, Inc. BX will operate the BX Options market.
    BX's history dates back to the 1830s. For many years, the Boston 
Stock Exchange (``BSE'') listed the securities of companies in the 
Boston area, but then, in more recent years, BSE traded securities 
mainly on an unlisted trading privileges (``UTP'') basis with a trading 
floor and an automated order delivery and execution system. As such, 
the BSE was an active competitor among the equities markets, pioneering 
a system of competing specialists and remote competing specialists. BSE 
partnered with various investors to form Boston Options Exchange 
(``BOX'') to trade options, which launched in 2004.\5\ In 2008, BSE 
merged into a subsidiary of The NASDAQ OMX Group, Inc. creating NASDAQ 
OMX BX. BX re-launched an equities marketplace utilizing state of the 
art NASDAQ technology, having closed its floor-based market, and today 
competes with many other markets in trading NMS stocks.
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    \5\ The NASDAQ OMX Group, Inc. does not own BOX, which has 
operated as a facility of BX and is currently pursuing its own 
status as a national securities exchange and SRO. Going forward, 
once BOX becomes an exchange, BX will no longer provide regulatory 
services to BOX. See Securities Exchange Act Release No. 66242 
(January 26, 2012), 77 FR 4841 (January 31, 2012) (BOX Options 
Exchange LLC; Notice of Filing of Application, as amended, for 
Registration as a National Securities Exchange under Section 6 of 
the Act).
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    Consistent with that storied history as a long-time competitor in 
the U.S. markets, BX now proposes to launch an options market. BX 
Options will leverage the technology and infrastructure that have 
helped spawn the success of both NOM and NASDAQ OMX PHLX LLC 
(``PHLX''). Accordingly, BX believes that it can compete effectively as 
an options market, recognizing that there are nine options exchanges 
today competing vigorously. Initially, BX Options will have the same 
market structure and rules as NOM, focusing on a price/time priority 
market. Over time, as the BX Options market secures more participants, 
it will introduce additional, innovative technology.
    In connection with its BX Options market, BX is proposing to adopt 
a series of rules based on the existing rules of NOM. BX will operate 
an electronic trading system developed to trade options (``System'' or 
``Trading System'') that will provide for the electronic display and 
execution of orders in price/time priority without regard to the status 
of the entities that are entering orders.
Trading System
    BX's options trading system will leverage current state of the art 
technology, including customer connectivity, messaging protocols, 
quotation and execution engine, order router, data feeds, and network 
infrastructure of the various markets owned by The NASDAQ OMX Group, 
Inc. This approach minimizes the technical effort required for existing 
BX members to begin trading options on the BX Options market. As a 
result, the BX Options market will closely resemble NOM, including, 
most prominently, by offering true price/time priority across all 
orders and participants rather than differentiating between 
participant/trading interest.
    Like on NOM, all trading interest entered into the System will be 
automatically executable. Orders entered into the System will be 
displayed anonymously and, as such, will trade anonymously.\6\ The BX 
Options market will be a participant exchange of OCC. The System will 
be linked to OCC for BX to transmit locked-in trades for clearance and 
settlement. The System will operate between the hours of 8:00 a.m. ET 
and market close, with all orders being available for execution from 
9:30 a.m. to market close.
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    \6\ However, options trades are not completely anonymous through 
settlement. See proposed BX Options Rules Chapter VI, Section 12. 
Options trades are submitted to The Options Clearing Corporation 
(``OCC'') with contra-side OCC member information.
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    Minimum Quotation and Trading Increments. BX is proposing to apply 
the following quotation increments: (1) If the options series is 
trading at less than $3.00, five cents; (2) if the options series is 
trading at $3.00 or higher, ten cents; and (3) if the options series is 
trading pursuant to the Penny Pilot Program,\7\ one cent if the options 
series is trading at less than $3.00, and five cents if the options 
series is trading at $3.00 or higher, except for QQQQ, SPY and IWM, 
where the minimum quoting increment will be one cent for all series.\8\ 
In addition, BX is proposing that the minimum trading increment for 
options contracts traded on BX will be one cent for all series.
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    \7\ BX will participate in the Penny Pilot Program.
    \8\ See proposed BX Options Rules, Chapter VI, Section 5.
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    BX notes that allowing market participants to quote in smaller 
increments has been shown to reduce spreads, thereby lowering costs to 
investors. In addition, permitting options to be quoted in smaller 
increments pursuant to the Penny Pilot Program provides the opportunity 
for reduced spreads for a significant amount of trading volume. 
Although the Penny Pilot Program has contributed to the increase in 
quote message traffic, BX believes that its proposal is sufficiently 
limited such that it is unlikely to increase quotation message traffic 
beyond the capacity of market participants' systems and disrupt the 
timely receipt of information.

[[Page 29732]]

    Opening and Halt Crosses. The BX Options System will support a 
single price opening or re-opening via an electronic cross.\9\ The 
auctions at the opening and at the resumption of trading following a 
halt are identical to those that exist on NOM. Since NOM commenced 
trading in March of 2008, several enhancements have been made to the 
opening and re-opening cross process. The incremental changes that have 
been made to NOM's opening and re-opening cross have culminated in an 
efficient and stable process that BX plans to replicate for BX Options.
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    \9\ See proposed BX Options Rules, Chapter VI, Section 8.
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    BX Options will operate a pre-opening phase that will begin prior 
to the opening of the market at a time to be determined by the 
Exchange. Orders may be submitted, modified, and cancelled throughout 
the pre-opening phase. Prior to opening the market (or resuming trading 
in the case of a halt), BX will calculate and disseminate certain 
indicative information: opening price, order imbalance, and the size 
and direction of any imbalance.\10\ Thereafter, BX will determine via 
algorithm a single price at which a particular options series will open 
and will match via algorithm the maximum number of available orders. 
After the cross concludes, orders will be cancelled, routed, or posted 
depending on the instructions on the orders and open trading will 
commence.
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    \10\ See proposed BX Options Rules, Chapter VI, Section 8.
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    Order Types. The System will make available to Participants various 
order types, including Limit Orders, Minimum Quantity Orders, Market 
Orders, Price Improving Orders, Intermarket Sweep Orders, One-cancels-
the-other Orders, All-or-none Orders and Post-Only Orders, with 
characteristics and functionality similar to what is currently approved 
for use on NOM.\11\
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    \11\ See proposed BX Options Rules, Chapter VI, Section 1(d) 
[sic].
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    ``Limit Orders'' are orders to buy or sell options at a specified 
price or better. A limit order is marketable when, for a limit order to 
buy, at the time it is entered into the System, the order is priced at 
the current inside offer or higher, or for a limit order to sell, at 
the time it is entered into the System, the order is priced at the 
inside bid or lower.
    ``Minimum Quantity Orders'' are orders that require that a 
specified minimum quantity of contracts be obtained, or the order is 
cancelled. Minimum Quantity Orders are treated as having a time-in-
force designation of Immediate or Cancel (``IOC'').
    ``Market Orders'' are orders to buy or sell at the best price 
available at the time of execution.
    ``Price Improving Orders'' are orders to buy or sell an option at a 
specified price at an increment smaller than the minimum price 
variation in the security. Price Improving Orders may be entered in 
increments as small as one cent. Price Improving Orders that are 
available for display will be displayed at the appropriate minimum 
price variation in that security (rounding down to the proper increment 
for buys, up to the proper increment for sells). The non-displayed 
price of a Price Improving Order is therefore not included in the 
National Best Bid and Offer (``NBBO'') and not subject to trade-through 
protection, although it is available to trade against eligible incoming 
orders.
    ``Intermarket Sweep Orders'' or ``ISOs'' are limit orders that are 
designated as ISOs in the manner prescribed by BX and are executed 
within the System at multiple price levels without respect to Protected 
Quotations of other Eligible Exchanges as defined in Chapter XII, 
Section 1. ISOs are not eligible for routing as set out in Chapter VI, 
Section 11.\12\ Simultaneously with the routing of an ISO to the 
System, one or more additional limit orders, as necessary, are routed 
by the entering Participant to execute against the full displayed size 
of any protected bid or offer (as defined in Chapter XII, Section 1) in 
the case of a limit order to sell or buy with a price that is superior 
to the limit price of the limit order identified as an ISO (as defined 
in Chapter XII, Section 1). These additional routed orders must be 
identified as ISOs.
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    \12\ Intermarket Sweep Orders or ISOs can have any time-in-force 
designation except WAIT; GTC ISOs are treated as having a time-in-
force designation of Day. ISOs that are marked as Day or GTC lose 
the ISO designation once posted on the BX Options book. If an 
entering firm cancel/replaces that resting Day or GTC ISO order, the 
replacement order cannot be marked as ISO; if the replacement is 
marked as ISO, it will be rejected. See Amendment No. 1.
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    ``One-cancels-the-other'' shall mean an order entered by a Market 
Maker that consists of a buy order and a sell order treated as a unit; 
the full execution of one of the orders causes the other to be 
canceled.
    ``All-or-none'' shall mean a market or limit order which is to be 
executed in its entirety or not at all. All-or-none Orders are treated 
as having a time-in-force designation of Immediate or Cancel. All-or-
none Orders received prior to the opening cross or after market close 
will be rejected.
    ``Post-Only Orders'' are orders that will not remove liquidity from 
the System. Post-Only Orders are to be ranked and executed on the 
Exchange or cancelled, as appropriate, without routing away to another 
market. Post-Only Orders are evaluated at the time of entry with 
respect to locking or crossing other orders as follows: (i) If a Post-
Only Order would lock or cross an order on the System, the order will 
be re-priced to $.01 below the current low offer (for bids) or above 
the current best bid (for offers) and displayed by the System at one 
minimum price increment below the current low offer (for bids) or above 
the current best bid (for offers); and (ii) if a Post-Only Order would 
not lock or cross an order on the System but would lock or cross the 
NBBO as reflected in the protected quotation of another market center, 
the order will be handled pursuant to Chapter VI, Section 7(b)(3)(C). 
Post-Only Orders received prior to the opening cross or after market 
close will be rejected. Post-Only Orders may not have a time-in-force 
designation of Good Til Cancelled or Immediate or Cancel.
    Time-in-Force Designations. Participants entering orders into the 
System may designate such orders to remain in force and available for 
display and/or potential execution for varying periods of time.\13\ 
Unless cancelled earlier, once these time periods expire, the order (or 
the unexecuted portion thereof) is returned to the entering 
Participant.
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    \13\ See proposed BX Options Rules, Chapter VI, Section 1(g).
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    ``Immediate Or Cancel'' or ``IOC'' orders are orders that if after 
entry into the System a marketable order (or unexecuted portion 
thereof) becomes non-marketable, the order (or unexecuted portion 
thereof) will be canceled and returned to the entering Participant. IOC 
Orders will be available for entry from 8:00 a.m. until market close 
and for potential execution from 9:30 a.m. until market close. IOC 
Orders entered between 8:00 a.m. and 9:30 a.m. ET will be held within 
the System until 9:30 a.m. at which time the System shall determine 
whether such orders are marketable. IOC orders can be routed if 
designated as routable.
    ``DAY'' orders are orders that if after entry into the System, the 
order is not fully executed, the order (or unexecuted portion thereof) 
will remain available for potential display and/or execution until 
market close, unless canceled by the entering party, after which it 
shall be returned to the entering party. DAY

[[Page 29733]]

Orders will be available for entry from 8:00 a.m. until market close 
and for potential execution from 9:30 a.m. until market close.
    ``Good Til Cancelled'' or ``GTC'' orders are orders that if after 
entry into the System, the order is not fully executed, the order (or 
unexecuted portion thereof) will remain available for potential display 
and/or execution unless cancelled by the entering Participant, or until 
the option expires, whichever comes first. GTC Orders will be available 
for entry from 8:00 a.m. until market close and for potential execution 
from 9:30 a.m. until market close.
    ``WAIT'' shall mean for orders so designated, that upon entry into 
the System, the order is held for one second without processing for 
potential display and/or execution. After one second, the order is 
processed for potential display and/or execution in accordance with all 
order entry instructions as determined by the entering Participant.
    Order Display/Matching System The System will be based upon the 
order display and execution functionality currently approved for use on 
NOM. Specifically, the System will allow Participants to enter priced 
limit orders to buy and sell BX Options-listed options. Orders entered 
by a Participant will be displayed (price and size) on an anonymous 
basis in the order display service of the System. Options Participants 
will be permitted to enter multiple orders at single or multiple price 
levels.
    Routing. BX Options will provide routing services to its 
Participants. The BX Options market will support orders that are 
designated to be routed to the NBBO as well as orders that will execute 
only within the System. Orders that are designated as routable will be 
routed to other options markets to be executed when BX Options is not 
at the NBBO, consistent with the Options Order Protection and Locked/
Crossed Market Plan. The System will ensure that orders designated to 
only execute within the System will not create a trade through or 
locked or crossed market violation.\14\
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    \14\ See proposed BX Options Rules, Chapter VI, Section 11.
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    Orders sent by the System to other markets generally do not retain 
time priority with respect to other orders in the System and the System 
shall continue to execute other orders while routed orders are away at 
another market center. Once routed by the System, an order becomes 
subject to the rules and procedures of the destination market 
including, but not limited to, order cancellation. A routed order can 
be for less than the original incoming order's size. If a routed order 
is subsequently returned, in whole or in part, that routed order, or 
its remainder, shall receive a new time stamp reflecting the time of 
its return to the System, unless any portion of the original order 
remains on the System, in which case the routed order shall retain its 
original timestamp and its priority.
    The order routing process shall be available to Participants from 
9:30 a.m. ET until market close and shall route orders as described 
below. Participants can designate orders as either available for 
routing or not available for routing. All routing of orders shall 
comply with Chapter XII, Options Order Protection and Locked and 
Crossed Market Rules. The System provides a number of routing options 
pursuant to which orders are sent to other available market centers for 
potential execution, per the entering firm's instructions. Routing 
options may be combined with all available order types and time-in-
force designations, with the exception of order types and time-in-force 
designations whose terms are inconsistent with the terms of a 
particular routing option. The term ``System routing table'' refers to 
the proprietary process for determining the specific trading venues to 
which the System routes orders and the order in which it routes them. 
The Exchange reserves the right to maintain a different System routing 
table for different routing options and to modify the System routing 
table at any time without notice. The System routing options are SEEK 
\15\ and SRCH.\16\ BX is not proposing, at this time, to route Non-
System Securities, which are securities not listed on the BX Options 
market; the routing functionality will be limited to options listed on 
BX.
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    \15\ SEEK is a routing option pursuant to which an order will 
first check the System for available contracts for execution. After 
checking the System for available contracts, orders are sent to 
other available market centers for potential execution, per the 
entering firm's instructions. When checking the book, the System 
will seek to execute at the price at which it would send the order 
to a destination market center. If contracts remain un-executed 
after routing, they are posted on the book. Once on the book, should 
the order subsequently be locked or crossed by another market 
center, the System will not route the order to the locking or 
crossing market center.
    \16\ SRCH is a routing option pursuant to which an order will 
first check the System for available contracts for execution. After 
checking the System for available contracts, orders are sent to 
other available market centers for potential execution, per the 
entering firm's instructions. When checking the book, the System 
will seek to execute at the price at which it would send the order 
to a destination market center. If contracts remain un-executed 
after routing, they are posted on the book. Once on the book, should 
the order subsequently be locked or crossed by another market 
center, it will re-route.
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    BX Options intends to route orders in options using NASDAQ Options 
Services LLC (``NOS''), a broker-dealer that is a member of BX. NOS is 
also a member of PHLX and NASDAQ, and NOS provides routing functions 
for PHLX and NOM as well. BX, PHLX, NASDAQ, NOM and NOS are 
affiliates.\17\ Accordingly, the affiliate relationship between BX and 
NOS, its member, raises the issue of an exchange's affiliation with a 
member of such exchange. Specifically, in connection with prior 
filings, the Commission has expressed concern that the affiliation of 
an exchange with one of its members raises the potential for unfair 
competitive advantage and potential conflicts of interest between an 
exchange's self-regulatory obligations and its commercial 
interests.\18\
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    \17\ In order for BX to provide outbound options routing 
services, its affiliates, PHLX and NASDAQ/NOM, must each file a 
proposed rule change to receive inbound orders from their affiliate 
exchange, BX.
    \18\ See, e.g., Securities Exchange Act Release No. 58135 (July 
10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061) 
(Permitting NOS to be affiliated with PHLX).
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    Because BX proposes to use NOS as its outbound routing facility, 
providing outbound options routing from BX to other market centers, 
including affiliates PHLX and NOM, BX proposes to do so under the 
following conditions, which are the same as those found in NOM rules:
    (1) NOS shall route orders to other market centers as directed by 
BX. NOS will be programmed to follow the algorithm and order type 
instructions established in the BX Options Rules and will not have 
discretion to change the terms of an order or the order routing 
instructions.
    (2) NOS will not engage in any business other than: (a) As an 
outbound router for BX and (b) any other activities it may engage in as 
approved by the Commission; \19\ provided, however, that immediately 
prior to the commencement of operations of NOS as an outbound router 
for the Exchange, the Exchange may use NOS to conduct a test of its 
routing functionality. In order to ensure that the routing 
functionality is operating properly prior to making it available to 
Participants, the Exchange proposes to use NOS to perform test trades 
in an actual security, prior to launch, so as to track the

[[Page 29734]]

performance of the systems to be used by the Exchange from order entry 
to clearance and settlement. The test will be performed by entering buy 
or sell orders and then, upon execution of each, entering an offsetting 
sell order in the same security for the same quantity, in order to 
close out the test position and minimize financial impact on the 
Exchange. The Exchange will deliver the test orders to NOS, as the 
routing broker, which will route to the designated away market and 
receive an execution back. BX believes that this will allow it to 
perform adequate testing of its systems for routing member orders 
before such systems become operational. To the extent that the 
offsetting trades require the Exchange to pay out funds, the funds will 
be provided out of the cash accounts of the Exchange; to the extent 
that the trades result in a profit, the funds will be deposited in the 
cash accounts of the Exchange.
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    \19\ NOS has been approved to provide routing services for NOM 
and PHLX. See Securities Exchange Act Release Nos. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009)(SR-Phlx-2009-32); and 57478 (March 
12, 2008), 73 FR 14521 (March 18, 2008) (order approving File Nos. 
SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080).
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    (3) NOS shall operate as a facility, as defined in Section 3(a)(2) 
of the Act, of BX.
    (4) For purposes of SEC Rule 17d-1, the designated examining 
authority of NOS shall be a self-regulatory organization unaffiliated 
with BX or any of its affiliates.
    (5) BX shall be responsible for filing with the Commission proposed 
rule changes related to the operation of, and fees for services 
provided by, NOS and NOS shall be subject to exchange nondiscrimination 
requirements.
    (6) The books, records, premises, officers, agents, directors and 
employees of NOS as a facility of BX shall be deemed to be the books, 
records, premises, officers, agents, directors and employees of BX for 
purposes of, and subject to oversight pursuant to, the Act. The books 
and records of NOS as a facility of BX shall be subject at all times to 
inspection and copying by the Commission.
    (7) Use of NOS to route orders to other market centers will be 
optional. Parties who do not desire to use NOS must enter orders into 
the System as ineligible for routing.
    (8) NOS shall establish and maintain procedures and internal 
controls reasonably designed to adequately restrict the flow of 
confidential and proprietary information between BX and its facilities 
(including NOS as its routing facility) and any other entity.
    These conditions are intended to address the Commission's concerns 
regarding potential conflicts of interest in instances where a member 
firm is affiliated with an exchange.
    Furthermore, BX Rule 2140(a)(1) currently provides that BX or any 
entity with which it is affiliated shall not, directly or indirectly, 
acquire or maintain an ownership interest in, or engage in a business 
venture with, an Exchange member or an affiliate of an Exchange member 
in the absence of an effective filing under Section 19(b) of the Act. 
Because NOS is an Exchange member and BX now proposes to engage in the 
business venture of outbound routing using NOS as its routing broker, 
as well as receiving inbound orders from its affiliates, NOM and PHLX 
through NOS, the Exchange has filed this proposed rule change under 
Section 19(b) of the Act.
    In addition, pursuant to Rule 15c3-5 under the Act, NOS will 
implement certain tests designed to mitigate risks associated with 
providing the Exchange's members with access to such away trading 
centers. Pursuant to the policies and procedures developed by NOS to 
comply with Rule 15c3-5, if an order or series of orders are deemed to 
be violative of applicable pre-trade requirements under Rule 15c3-5, 
the order will be rejected prior to routing and/or NOS will seek to 
cancel the order if it has been routed.\20\
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    \20\ See proposed BX Options Rules, Chapter VI, Section 10(5).
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    BX also proposes to accept inbound orders routed by NOS from PHLX 
and from NOM. As stated above respecting outbound routing to 
affiliates, the affiliate relationship between BX and NOS, its member, 
raises the issue of an exchange's affiliation with a member of such 
exchange, and the Commission has expressed concern that the affiliation 
of an exchange with one of its members raises the potential for unfair 
competitive advantage and potential conflicts of interest between an 
exchange's self-regulatory obligations and its commercial 
interests.\21\ Accordingly, BX now proposes to permit BX to accept 
inbound orders that NOS routes in its capacity as a facility of PHLX 
and NOM, subject to certain limitations and conditions:
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    \21\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (Permitting NOS to be an 
affiliate). See also Securities Exchange Act Release Nos. 59153 
(December 23, 2008), 73 FR 80485 (December 31, 2008)(SR-NASDAQ-2008-
098); and 62736 (August 17, 2010), 75 FR 51861 (August 23, 2010) 
(SR-NASDAQ-2010-100).
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    First, BX and the Financial Industry Regulatory Authority 
(``FINRA'') will maintain a regulatory contract, as well as an 
agreement pursuant to Rule 17d-2 under the Act (``17d-2 
Agreement'').\22\ Pursuant to the regulatory contract and the 17d-2 
Agreement, FINRA will be allocated regulatory responsibilities to 
review NOS's compliance with certain BX rules.\23\ Pursuant to the 
regulatory contract, however, BX retains ultimate responsibility for 
enforcing its rules with respect to NOS. Second, FINRA will monitor NOS 
for compliance with the Exchange's trading rules, and will collect and 
maintain certain related information.\24\ Third, FINRA will provide a 
report to BX's chief regulatory officer (``CRO''), on a quarterly 
basis, that: (i) Quantifies all alerts (of which FINRA is aware) that 
identify NOS as a participant that has potentially violated Commission 
or BX rules, and (ii) lists all investigations that identify NOS as a 
participant that has potentially violated Commission or BX rules. 
Fourth, the Exchange has in place BX Rule 2140(c), which requires 
NASDAQ OMX, as the holding company owning both the BX and NOS, to 
establish and maintain procedures and internal controls reasonably 
designed to ensure that NOS does not develop or implement changes to 
its system, based on nonpublic information obtained regarding planned 
changes to BX's systems as a result of its affiliation with BX, until 
such information is available generally to similarly situated BX 
members, in connection with the provision of inbound order routing to 
the BX. Fifth, BX proposes that the routing of orders from NOS to BX, 
in NOS's capacity as a facility of PHLX and NOM, be authorized for a 
pilot period of one year. BX believes that the above-listed conditions 
protect the independence of the Exchange's regulatory responsibility 
with respect to NOS, and that these mitigate the aforementioned 
concerns about potential conflicts of interest and unfair competitive 
advantage.
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    \22\ 17 CFR 240.17d-2.
    \23\ NOS is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
    \24\ Pursuant to the regulatory contract, both FINRA and BX will 
collect and maintain all alerts, complaints, investigations and 
enforcement actions in which NOS (in its capacity as a facility of 
PHLX and NOM routing orders to BX) is identified as a participant 
that has potentially violated applicable Commission or BX rules. BX 
and FINRA will retain these records in an easily accessible manner 
in order to facilitate any potential review conducted by the 
Commission's Office of Compliance Inspections and Examinations.
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    Book Processing. All trading interest on the System will be 
automatically executable. The System, like NOM, will have a single 
execution algorithm based on price/time priority. The System and rules 
provide for the ranking, display, and execution of all orders in price/
time priority without regard to the status of the entity entering an 
order. For each order, among equally-priced or better-priced trading 
interest, the System executes against available contra-side

[[Page 29735]]

displayed contract amounts in full, in price/time priority.\25\ Any 
price improvement resulting from an execution in the System will accrue 
to the party taking liquidity.\26\
---------------------------------------------------------------------------

    \25\ See proposed BX Options Rules, Chapter VI, Section 10.
    \26\ See proposed BX Options Rules, Chapter VI, Section 10.
---------------------------------------------------------------------------

    Acceptable Trade Range. The System will employ an Acceptable Trade 
Range (``ATR'') feature to limit the range of prices at which an order 
will be allowed to execute. The ATR is calculated by taking the 
reference price, plus or minus a value to be determined by the 
Exchange. (i.e., the reference price--(x) for sell orders and the 
reference price + (x) for buy orders). Upon receipt of a new order, the 
reference price is National Best Bid (``NBB'') for sell orders and the 
National Best Offer (``NBO'') for buy orders or the last price at which 
the order is posted whichever is higher for a buy order or lower for a 
sell order. If an order reaches the outer limit of the ATR (the 
``Threshold Price'') without being fully executed, it will be posted at 
the Threshold Price for a brief period, not to exceed one second 
(``Posting Period''), to allow more liquidity to be collected. Upon 
posting, either the current Threshold Price of the order or an updated 
NBB for buy orders or the NBO for sell orders (whichever is higher for 
a buy order/lower for a sell order) then becomes the reference price 
for calculating a new ATR. If the order remains unexecuted, a New ATR 
will be calculated and the order will execute, route, or post up to the 
new ATR Threshold Price. This process will repeat until the order is 
executed, cancelled, or posted at its limit price.\27\
---------------------------------------------------------------------------

    \27\ See proposed BX Options Rules, Chapter VI, Section 10(7).
---------------------------------------------------------------------------

    Data Feed. Like NOM, BX Options will offer two proprietary data 
feeds. BX Depth of Market (``BX Depth'') will be a data feed that 
provides quotation information for individual orders on the BX Options 
book, last sale information for trades executed on BX Options, and 
order imbalance information as set forth in BX Options Rules Chapter 
VI, Section 8. In addition, BX Top of Market (``BX Top'') will be a 
data feed that provides the BX Options best bid and offer and last sale 
information for trades executed on BX Options.\28\
---------------------------------------------------------------------------

    \28\ BX offers other data feeds with respect to its equities 
market data. See BX Rule 7023.
---------------------------------------------------------------------------

BX Options Participants
    Like NOM, BX will have only one category of members, known as 
``Options Participants'' or ``Participants.'' All BX members will be 
eligible to participate in BX Options provided that BX specifically 
authorizes them to trade in the System and they become Participants; in 
other words, existing BX members will be required to comply with the 
incremental requirements of the proposed options rules. New BX members 
will be required to fulfill the requirements of the BX Rule 1000 Series 
to become a BX member as well as the incremental requirements set forth 
in the proposed options rules to become a BX Participant. The proposed 
rules avoid, to the greatest extent possible, proposing requirements 
that overlap with the rules already set forth in the Rule 1000 Series 
of the BX Rule Manual.
    Only Options Participants will be permitted to transact business on 
BX Options via the System.\29\ BX will authorize any Options 
Participant who meets certain enumerated qualification requirements to 
obtain access to BX Options. Among other things, Options Participants 
must be registered as broker-dealers pursuant to the Act and have as 
the principal purpose of being an Options Participant the conduct of a 
securities business. Every Options Participant shall at all times 
maintain membership in another registered options exchange that is not 
registered solely under Section 6(g) of the Act or FINRA.\30\ There 
will be two types of Options Participants, Options Order Entry Firms 
and Options Market Makers. Options Order Entry Firms (``OEFs'') will be 
those Options Participants representing customer orders as agent on BX 
Options and non-Market Maker Participants conducting proprietary 
trading as principal.
---------------------------------------------------------------------------

    \29\ See proposed BX Options Rules, Chapter II.
    \30\ Pursuant to BX Rule 1002(e), members that transact business 
with customers shall at all times be members of FINRA.
---------------------------------------------------------------------------

    Options Market Makers are Options Participants registered with the 
Exchange as Options Market Makers and registered with BX in one or more 
options listed on BX.\31\ BX may suspend or terminate any registration 
of an Options Market Maker when, in BX's judgment, the interests of a 
fair and orderly market are best served by such action.
---------------------------------------------------------------------------

    \31\ See proposed BX Options Rules, Chapter VII.
---------------------------------------------------------------------------

    To become an Options Market Maker, an Options Participant is 
required to register by filing a written application. BX will not place 
any limit on the number of entities that may become Options Market 
Makers. BX Options Market Makers will be required to electronically 
engage in a course of dealing to enhance liquidity available on BX and 
to assist in the maintenance of fair and orderly markets.\32\ Among 
other things, Options Market Makers would have to participate in the 
opening and maintain minimum net capital in accordance with SEC and BX 
Options Rules. Furthermore, Options Market Makers must maintain a two-
sided market for at least one contract in at least 60% of the series in 
options in which the Options Market Maker is registered. To satisfy 
this requirement with respect to quoting a series, a Market Maker must 
quote such series 90% of the trading day (as a percentage of the total 
number of minutes in such trading day) or such higher percentage as BX 
may announce in advance. BX Regulation may consider exceptions to the 
requirement to quote 90% (or higher) of the trading day based on 
demonstrated legal or regulatory requirements or other mitigating 
circumstances. Market Makers shall not be required to make two-sided 
markets pursuant to Section 5(a)(i) of Chapter VII in any Quarterly 
Option Series, any adjusted option series, and any option series until 
the time to expiration for such series is less than nine months. 
Accordingly, the continuous quotation obligations set forth in this 
rule shall not apply to Market Makers respecting Quarterly Option 
Series, adjusted option series,\33\ and series with an expiration of 
nine months or greater. If a technical failure or limitation of a 
system of BX prevents a Market Maker from maintaining, or prevents a 
Market Maker from communicating to BX Options timely and accurate 
quotes, the duration of such failure or limitation shall not be 
included in any of these calculations with respect to the affected 
quotes.\34\
---------------------------------------------------------------------------

    \32\ Options Market Makers receive certain benefits for carrying 
out their duties. For example, a lender may extend credit to a 
broker-dealer without regard to the restrictions in Regulation T of 
the Board of governors of the Federal Reserve System if the credit 
is to be used to finance the broker-dealer's activities as market 
maker on a national securities exchange. Thus, an Options Market 
Maker has a corresponding obligation to hold itself out as willing 
to buy and sell options for its own account on a regular or 
continuous basis to justify this favorable treatment.
    \33\ An adjusted option series is an option series wherein one 
option contract in the series represents the delivery of other than 
100 shares of underlying stock or Exchange-Traded Fund Shares.
    \34\ Substantial or continued failure by an Options Market Maker 
to meet any of its obligations and duties, will subject the Options 
Market Maker to disciplinary action, suspension, or revocation of 
the Options Market Maker's registration in one or more options 
series.
---------------------------------------------------------------------------

    Options Market Makers must also comply with certain bid/ask 
differentials (quote spread

[[Page 29736]]

parameters).\35\ Options on equities (including Exchange-Traded Fund 
Shares), and on index options must be quoted with a difference not to 
exceed $5 between the bid and offer regardless of the price of the bid, 
including before and during the opening. However, respecting in-the-
money series where the market for the underlying security is wider than 
$5, the bid/ask differential may be as wide as the quotation for the 
underlying security on the primary market.
---------------------------------------------------------------------------

    \35\ See proposed BX Options Rules, Chapter VI, Section 6(d)(ii) 
[sic].
---------------------------------------------------------------------------

    BX is also proposing an order exposure requirement comparable to 
that which currently applies on other registered options exchanges. 
Specifically, as set forth in Chapter VII, Section 12, with respect to 
orders routed to BX, Options Participants may not execute as principal 
orders they represent as agent unless (i) agency orders are first 
exposed on the Exchange for at least one second or (ii) the Options 
Participant has been bidding or offering on the Exchange for at least 
one second prior to receiving an agency order that is executable 
against such bid or offer.
    Quotes and orders entered by Options Market Makers using the same 
market participant identifier will not be executed against quotes and 
orders entered on the opposite side of the market by the same market 
maker using the same identifier. In such a case, the System will cancel 
the oldest of the quotes or orders back to the entering party prior to 
execution.\36\
---------------------------------------------------------------------------

    \36\ See proposed BX Options Rules, Chapter VI, Section 10(6).
---------------------------------------------------------------------------

Regulation
    The BX Options market will leverage many of the structures that BX 
has in place to operate a national securities exchange in compliance 
with Section 6 of the Act. As described in more detail below, like for 
NOM, there will be three elements of that regulation: (1) BX will join 
the existing options industry agreements pursuant to Section 17(d) of 
the Act; (2) BX's Regulatory Services Agreement with FINRA will govern 
many aspects of the regulation and discipline members that participate 
in options trading; and (3) BX will perform options listing regulation 
as well as real-time and post-trade regulation of options trading. The 
principle here, again, is that BX will regulate its options market much 
the way NOM is regulated today.
    Section 17(d) of the Act and the related rules thereunder permit 
SROs to allocate certain regulatory responsibilities to avoid 
duplicative oversight and regulation. Under Rule 17d-1 thereunder, the 
SEC designates one SRO to be the Designated Examining Authority, or 
DEA, for each broker-dealer that is a member of more than one SRO. The 
DEA is responsible for the financial aspects of that broker-dealer's 
regulatory oversight. Because BX members also must be members of at 
least one other SRO, BX would generally not be designated as the DEA 
for any of its members.
    Rule 17d-2 under the Act permits SROs to file with the Commission 
plans under which the SROs allocate among each other the responsibility 
to receive regulatory reports from, and examine and enforce compliance 
with specified provisions of the Act and rules thereunder and SRO rules 
by firms that are members of more than one SRO (``common members''). If 
such a plan is declared effective by the Commission, an SRO that is a 
party to the plan is relieved of regulatory responsibility as to any 
common member for whom responsibility is allocated under the plan to 
another SRO.
    All of the options exchanges, FINRA, and the New York Stock 
Exchange (``NYSE'') have entered into the Options Sales Practices 
Agreement, a Rule 17d-2 agreement. Under this Agreement, the examining 
SROs will examine firms that are common members of BX and the 
particular examining SRO for compliance with certain provisions of the 
Act, certain of the rules and regulations adopted thereunder, certain 
examining SRO rules, and certain BX Rules. FINRA will be the examining 
SRO for BX Options.
    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements, BX will retain full regulatory 
responsibility under the Act. However, BX has entered into a Regulatory 
Services Agreement with FINRA, pursuant to which FINRA personnel 
operate as agents for BX in performing certain of these functions. In 
addition to performing certain membership functions for the Exchange, 
FINRA performs certain disciplinary and enforcement functions for the 
Exchange. Generally, FINRA investigates members, issue complaints, and 
conducts hearings pursuant to the Exchange's rules.
    As is the case with NOM and BX equities, BX will supervise FINRA 
and continue to bear ultimate regulatory responsibility.
    Finally, as it does with equities (and the same that is done for 
NOM by NASDAQ Regulation), BX Regulation will perform real-time 
surveillance of the BX Options market for the purpose of maintaining a 
fair and orderly market at all times. As it does with BX's equities 
trading and the same that is done for NOM by NASDAQ Regulation, BX 
Regulation will monitor BX Options trading market on a real-time basis 
to identify unusual trading patterns and determine whether particular 
trading activity requires further regulatory investigation by FINRA. BX 
Regulation will also conduct post-trade surveillance to determine 
whether the trading activity requires further investigation by FINRA.
    In addition, BX Regulation will oversee the process for determining 
and implementing trade halts, identifying and responding to unusual 
market conditions, and administering BX's process for identifying and 
remediating ``obvious errors'' by and among its Options 
Participants.\37\ Appeals of disciplinary hearings will be handled by 
the Exchange Review Council.
---------------------------------------------------------------------------

    \37\ BX's proposed obvious and catastrophic error rule mirrors 
NOM's, stating that the Exchange shall either nullify a transaction 
or adjust the execution price of a transaction that meets the 
standards of the rule, which takes into account whether the 
execution price of a transaction is higher or lower than the 
Theoretical Price for the series by a certain amount. Like on NOM, 
obvious error decisions can be appealed to a panel of the Market 
Operations Review Committee, which will be comprised minimally of 
representatives of one member engaged in Market Making and two 
industry representatives not engaged in Market Making. See proposed 
BX Options Rules, Chapter V, Section 6 and BX By-Laws Article IV, 
Section 4.14(d).
---------------------------------------------------------------------------

    BX's disciplinary rules are set forth in the 9000 series of BX 
Rules; such disciplinary rules will apply to Options Participants and 
their associated persons. BX's Minor Rule Violation Plan (``MRVP'') is 
set forth in Rule 9216 and related IM-9216. At this time, BX proposes 
to amend its MRVP to cover certain BX Options rules listed in proposed 
Chapter X, Section 7.
    BX's MRVP specifies those uncontested minor rule violations with 
sanctions not exceeding $2,500 that would not be subject to the 
provisions of Rule 19d-1(c)(1) under the Act \38\ requiring that an SRO 
promptly file notice with the Commission of any final disciplinary 
action taken with respect to any person or organization. Rule 19d-1(c) 
allows SROs to submit for Commission approval plans for the abbreviated 
reporting of minor disciplinary infractions.
---------------------------------------------------------------------------

    \38\ 17 CFR 240.19d-1(c)(1).
---------------------------------------------------------------------------

    Any disciplinary action taken by an SRO against any person for 
violation of a rule of the SRO which has been designated as a minor 
rule violation pursuant to such a plan filed with and declared 
effective by the Commission will not be considered ``final'' for 
purposes of Section 19(d)(1) of the Act

[[Page 29737]]

if the sanction imposed consists of a fine not exceeding $2,500 and the 
sanctioned person has not sought an adjudication, including a hearing, 
or otherwise exhausted his administrative remedies.\39\
---------------------------------------------------------------------------

    \39\ In approving BX Rule 9216, the Commission noted that the 
Exchange proposed that any amendments to such rule made pursuant to 
a rule filing submitted under Rule 19b-4 of the Act would 
automatically be deemded a request for Commission approval of a 
modification to its MRVP. Securities Exchange Act Release No. 26737 
(April 17, 1989), 54 FR 16438 (April 24, 1989) (SR-BSE-88-2).
---------------------------------------------------------------------------

    As stated above, currently, BX has in place a MRVP,\40\ and is now 
proposing to amend that plan to cover options. In this regard, BX 
proposes to amend IM-9216, Violations Appropriate for Disposition Under 
Plan Pursuant to SEC Rule 19d-1(c)(2), in the BX Equity Rules. 
Specifically, BX proposes to add a reference to BX Options Rules, 
Chapter X, Section 7--Penalty for Minor Rule Violations for Options 
Trading, in order to make clear that these provisions are included in 
BX's MRVP. The rules included in proposed Chapter X, Section 7 are 
similar to those of other options exchanges, and include position limit 
violations of Chapter III, Section 7, order entry-related violations of 
Chapter VII, Sections 6(a)-(c), continuous quoting required by Chapter 
VII, Section 6(d), various reporting obligations in Chapter III, 
Sections 7-10, expiring exercise declaration rules in Chapter VIII, 
Sections 1-3, audit trail submission and recordkeeping requirements of 
Chapter V, Section 7 and Chapter IX, Sections 1-3, representation of 
orders, Chapter VII, Section 12, trade reporting, Chapter VI, Sections 
14 and 15, locked and crossed Market Violations, Chapter XII, Section 
3, trade-through violations, and Chapter XII, Section 2(a), failure to 
timely file amendments to Form U4, Form U5 and Form BD.\41\ Upon 
approval of the MRVP, BX will provide the Commission a quarterly report 
of actions taken on minor rule violations under the MRVP. The quarterly 
report will include BX's internal file number for the case, the name of 
the individual and/or organization, the nature of the violation, the 
specific rule provision violated, the sanction imposed, the number of 
times the rule violation has occurred, and the date of disposition. BX 
believes that adding these options rules to its MRVP should help it 
carry out its oversight and enforcement responsibilities as an SRO in 
cases where full disciplinary proceedings are unsuitable in view of the 
minor nature of the particular violation.
---------------------------------------------------------------------------

    \40\ See BX Rule 9216(b).
    \41\ See e.g. ISE Rule 1614.
---------------------------------------------------------------------------

    Accordingly, BX represents that it has the ability to discharge all 
regulatory functions related to its proposed options market. In 
connection with its regulatory functions, the Exchange represents that 
its regulatory oversight committee and its CRO will assume 
responsibility for regulating quoting and trading on BX Options and 
conduct by BX Options Participants. The Exchange's CRO has general 
supervision of the regulatory operations of the Exchange, including 
overseeing surveillance, examination, and enforcement functions, and 
administers the Regulatory Services Agreement between the Exchange and 
FINRA. BX's By-Laws and rules provide that it has disciplinary 
jurisdiction over its members so that it can enforce its members' 
compliance with its rules and the federal securities laws.\42\ The 
Exchange's rules also permit it to sanction members for violations of 
its rules and violations of the federal securities laws by, among other 
things, expelling or suspending members, limiting members' activities, 
functions, or operations, fining or censuring members, or suspending or 
barring a person from being associated with a member.\43\ BX's Rules 
also provide for the imposition of fines for minor rule violations in 
lieu of commencing disciplinary proceedings. This framework will apply 
to BX Options.\44\
---------------------------------------------------------------------------

    \42\ See e.g. Exchange By-Laws, Article XII, Section 12.2.
    \43\ See e.g. BX Rule 8310.
    \44\ BX Rules apply to Options Participants and the trading of 
options contracts on BX Options. See BX Options Rules, Chapter I, 
Section 2. Options Participants must, among other things, be an 
existing member or become a member of the Exchange, pursuant to the 
BX 1000 Rule Series, as well as maintain a membership on at least 
one other options exchange. See BX Options Rules, Chapter II, 
Sections 1 (b)(iii) and 2(f).
---------------------------------------------------------------------------

National Market System Plans
    As discussed herein, BX is a participant in the various national 
market system plans for options trading established under Section 11A 
of the Act, because BX has been the SRO for the BOX market, which 
currently operates as its facility. Because BOX is becoming its own, 
separate national securities exchange, it is pursuing its own 
membership in these various plans. BX plans to retain these plan 
memberships in order to operate BX Options. Specifically, BX is a 
member of the Options Order Protection and Locked/Crossed Market Plan, 
the Options Listings Procedures Plan (discussed below), and the Plan 
for the Reporting of Options Last Sale Reports and Quotation 
Information,\45\ through the Options Price Reporting Authority 
(``OPRA''). In addition, BX is a participant in the Options Regulatory 
Surveillance Authority (``ORSA'') and the Plan for the Selection and 
Reservation of Securities Symbols. BX is transferring its status as a 
participant exchange in OCC to BOX and securing a membership therein.
---------------------------------------------------------------------------

    \45\ See www.opradata.com.
---------------------------------------------------------------------------

Options Order Protection and Locked/Crossed Market Plan Rules
    BX will participate in the Options Order Protection and Locked/
Crossed Market Plan (``Plan''), and therefore will be required to 
comply with the obligations of Participants under the Plan. BX proposes 
to adopt rules relating to the Plan that are substantially similar to 
the rules in place on or proposed by all of the options exchanges that 
are Participants in the Plan. The Plan essentially applies the 
Regulation NMS price-protection provisions to the options markets. 
Similar to Regulation NMS, the Plan requires the Plan Participants to 
adopt rules ``reasonably designed to prevent Trade-Throughs,'' while 
exempting Intermarket Sweep Orders from that prohibition. The Plan's 
definition of an Intermarket Sweep Order is essentially the same as 
under Regulation NMS. The remaining exceptions to the trade-through 
prohibition, discussed more specifically below, either track those 
under Regulation NMS or correspond to unique aspects of the options 
market, or both. The proposed rules in Chapter XII conform to the 
requirements of the Plan. Section 1 sets forth the defined terms for 
use under the Plan. Section 2 prohibits trade-throughs and exempts 
Intermarket Sweep Orders from that prohibition. Section 2 also contains 
additional exceptions to the trade-through prohibition that track the 
exceptions under Regulation NMS or correspond to exceptions on other 
options exchanges, or both.\46\ Section 3 sets forth the general 
prohibition against locking/crossing other eligible exchanges as well 
as several exceptions that permit locked markets in limited 
circumstances; such exceptions have been approved by the Commission for 
inclusion in the rules of other options exchanges.\47\ Specifically, 
the exceptions to the general prohibition on locking and crossing occur 
when (1) the locking or crossing quotation was displayed at a time when 
the Exchange was experiencing a failure, material delay, or malfunction 
of its systems or equipment; (2) the locking or crossing

[[Page 29738]]

quotation was displayed at a time when there is a Crossed Market; or 
(3) the Member simultaneously routed an Intermarket Sweep Order to 
execute against the full displayed size of any locked or crossed 
Protected Bid or Protected Offer.
---------------------------------------------------------------------------

    \46\ See e.g., NOM Rules, Chapter XII, Section 2.
    \47\ See e.g., NOM Rules, Chapter XII, Section 3.
---------------------------------------------------------------------------

Securities Traded on BX Options
    BX proposes to adopt listing standards for options traded on BX 
(Chapter IV of proposed rules) as well as for index options (Chapter 
XIV) that are identical to the approved rules of other options 
exchanges, including NOM.\48\ These include the specific criteria for 
underlying securities in proposed Section 3 of Chapter IV, as well as 
the withdrawal of such approval. In addition, Section 6 will cover the 
series of options contracts open for trading, which spells out the 
appropriate exercise dates and strike prices. In addition, BX intends 
to participate in the $2.50 Strike Price Program,\49\ the $1.00 Strike 
Price Program,\50\ the $5 Strike Price Program \51\ and the $.50 Strike 
Program \52\ (``Programs'') on the same terms and conditions as the 
other options exchanges. BX believes that the programs will provide 
investors with flexibility in tailoring their options positions to meet 
their investment objectives while avoiding the unnecessary 
proliferation of illiquid options series. Sections 7 and 8 cover 
adjustments and long-term options, respectively. With regard to the 
impact on system capacity, BX has analyzed its capacity and represents 
that it and the Options Price Reporting Authority have the necessary 
systems capacity to handle the additional traffic associated with the 
listing and trading of option series that may be listed and traded 
pursuant to the Programs.
---------------------------------------------------------------------------

    \48\ See NOM Rules, Chapters IV and XIV.
    \49\ See proposed Chapter IV, Section 6, Supplementary Material 
.03.
    \50\ See proposed Chapter IV, Section 6, Supplementary Material 
.02.
    \51\ See proposed Chapter IV, Section 6(d)(v).
    \52\ See proposed Chapter IV, Section 6, Supplementary Material 
.05.
---------------------------------------------------------------------------

    BX is a member of the Options Listings Procedures Plan and will 
list and trade options already listed on other options exchanges. BX 
will gradually phase-in its listing and trading of options, beginning 
with a selection of actively traded options. BX will provide the 
specific list in an Options Trader Alert to its membership. At least 
initially, BX does not plan to develop new options products or listing 
standards. BX is aware that, in the event BX determines to trade an 
options class not listed on another options exchange or within BX's 
existing listing standards, BX will be required to submit a proposed 
rule change to establish listing standards.
Exemptions
    BX proposes to incorporate by reference as BX Options Rules certain 
rules of Chicago Board Options Exchange, Incorporated (``CBOE''), NYSE 
and FINRA. Specifically, BX proposes to incorporate by reference: (1) 
CBOE position and exercise limits governing position and exercise 
limits for equity and index options, which are cross-referenced in 
Chapter III, Sections 7 and 9 of the BX Options Rules and Chapter XIV, 
Sections 5 and 7 of the BX Options Rules, respectively; (2) the margin 
rules of the CBOE or the NYSE, which are referenced in Chapter XIII, 
Section 3 of the BX Options Rules; and (3) FINRA's rules governing 
communications with the public, which are referenced in Chapter XI, 
Section 22 of the BX Options Rules. BX will notify Participants 
whenever the CBOE proposes to change a position limit rule that has 
been incorporated by reference into the BX Options Rules.
    BX proposes to incorporate by reference as BX Options Rules certain 
rules of the CBOE, NYSE, and FINRA such that BX members will comply 
with a BX rule by complying with the CBOE, NYSE, or FINRA rule 
referenced. In connection with its proposal to incorporate CBOE, NYSE, 
and FINRA rules by reference, BX requests, pursuant to Rule 240.0-
12,\53\ an exemption under Section 36 of the Act from the rule filing 
requirements of Section 19(b) of the Act for changes to those BX 
Options Rules that are effected solely by virtue of a change to a 
cross-referenced CBOE, NYSE, or FINRA rule. BX proposes to incorporate 
by reference categories of rules (rather than individual rules within a 
category) that are not trading rules. BX agrees to provide written 
notice to Participants prior to the launch of BX Options of the 
specific CBOE, NYSE, and FINRA rules that it will incorporate by 
reference.\54\ BX will notify Participants whenever the CBOE, NYSE or 
FINRA propose to change a rule that has been incorporated by reference 
into the BX Options Rules.
---------------------------------------------------------------------------

    \53\ 17 CFR 240.0-12.
    \54\ BX will provide such notice through a posting on the same 
Web site location where BX posts its own rule filings pursuant to 
Rule 19b-4(1) under Act, within the time frame required by that 
Rule. The Web site posting will include a link to the location on 
the CBOE, NYSE, or FINRA Web site where those SROs' proposed rule 
changes are posted.
---------------------------------------------------------------------------

    Using its authority under Section 36 of the Act, the Commission 
previously exempted certain SROs from the requirement to file proposed 
rule changes under Section 19(b) of the Act.\55\ Each such exempt SRO 
agreed to be governed by the incorporated rules, as amended from time 
to time, but is not required to file a separate proposed rule change 
with the Commission each time the SRO whose rules are incorporated by 
reference seeks to modify its rules. In addition, each SRO incorporated 
by reference only regulatory rules (e.g., margin, suitability, 
arbitration), not trading rules, and incorporated by reference whole 
categories of rules (i.e., did not ``cherry-pick'' certain individual 
rules within a category). Each exempt SRO had reasonable procedures in 
place to provide written notice to its members each time a change is 
proposed to the incorporated rules of another SRO in order to provide 
its members with notice of a proposed rule change that affects their 
interests, so that they would have an opportunity to comment on it. BX 
believes that this exemption is appropriate in the public interest and 
consistent with the protection of investors because it will promote 
more efficient use of Commission and SRO resources by avoiding 
duplicative rule filings based on simultaneous changes to identical 
rule text sought by more than one SRO.
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 49260 (February 17, 
2004), 69 FR 8500 (February 24, 2004) (Order Granting Application 
for Exemptions Pursuant to Section 36(a) of the Exchange Act by the 
American Stock Exchange LLC, the International Securities Exchange, 
Inc., the Municipal Securities Rulemaking Board, the Pacific 
Exchange, Inc., the Philadelphia Stock Exchange, Inc., and the 
Boston Stock Exchange, Inc.).
---------------------------------------------------------------------------

No Relationship to BOX
    The new BX Options market will not be related to the BOX market. 
Although BX is currently the SRO for the BOX market, once the BOX 
market is approved as a national securities exchange, it will operate 
as a separate SRO from BX; it will not be regulated by BX or owned by 
The NASDAQ OMX Group, Inc. Accordingly, The NASDAQ OMX Group, Inc. will 
continue to own and operate BX, including the new BX Options market.
Fees
    The Exchange has proposed that Chapter XV will be titled Options 
Pricing, and provide that BX Options Participants may be subject to the 
Charges for Membership, Services and Equipment in the Rule 7000 Series 
as well as the fees in Chapter XV. Furthermore, Section 1, Collection 
of Exchange Fees and Other Claims, requires that each BX Options 
Participant, and all applicants for

[[Page 29739]]

registration, shall be required to provide a clearing account number 
for an account at the National Securities Clearing Corporation 
(``NSCC'') for purposes of permitting the Exchange to debit any 
undisputed or final fees, fines, charges and/or other monetary 
sanctions or other monies due and owing to the Exchange or other 
charges related to Rule 1002(c)(1). Sections 2-6 are reserved for the 
eventual transaction, routing and access fees that BX will impose and 
separately file as a proposed rule change. Section 7 provides that all 
fee disputes concerning fees which are billed by the Exchange must be 
submitted to the Exchange in writing and must be accompanied by 
supporting documentation; all fee disputes must be submitted no later 
than 60 days after receipt of a billing invoice. Section 8 covers the 
sales fee applicable when a sale in options occurs with respect to 
which BX is obligated to pay a fee to the SEC under Section 31 of the 
Act (``Sales Fee''). The Sales Fee is collected indirectly from members 
through their clearing firms by a designated clearing agency, as 
defined by the Act, on behalf of BX. The amount of the Sales Fee is 
equal to the Section 31 fee rate multiplied by the member's aggregate 
dollar amount of covered sales resulting from transactions through BX 
transaction execution systems during any computational period.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \56\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \57\ in particular, in that it is 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 facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, and, in general, 
to protect investors and the public interest. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers. Further, 
BX believes that the proposal is consistent with Sections 6(b)(1) of 
the Act,\58\ which requires, among other things, that a national 
securities exchange be so organized and have the capacity to carry out 
the purposes of the Act, and to comply and enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Act, the rules and regulation thereunder, and the rules of the 
exchange. The BX Options market could confer important benefits on the 
public and market participants. In particular, BX's entry into the 
marketplace will provide market participants with an additional venue 
for executing orders in standardized options, enhance innovation, and 
increase competition between and among the options exchanges, resulting 
in better prices and executions for investors.
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    \56\ 15 U.S.C. 78f(b).
    \57\ 15 U.S.C. 78f(b)(5).
    \58\ 15 U.S.C. 78f(b)(1).
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    BX believes that because BX Options is part of BX and all BX 
Options Participants are BX members, the composition and selection of 
the BX Board of Directors will continue to satisfy the requirement in 
Section 6(b)(3) of the Act that the rules of the Exchange provide for 
the fair representation of members in the selection of directors and 
administration of the Exchange.\59\
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    \59\ 15 U.S.C. 78f(b)(3).
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    In addition, BX's MRVP, as proposed to be amended, is consistent 
with Sections 6(b)(1), 6(b)(5) and 6(b)(6) of the Act, which require, 
in part, that an exchange have the capacity to enforce compliance with, 
and provide appropriate discipline for, violations of the rules of the 
Commission and of the exchange.\60\ In addition, because IM-9216 offers 
procedural rights to a person sanctioned for a violation listed in 
proposed Chapter X, Section 7, BX will provide a fair procedure for the 
disciplining of members and associated persons, consistent with Section 
6(b)(7) of the Act.\61\ This proposal to include the rules listed in 
Chapter X, Section 7 in BX's MRVP is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act, as required by Rule 19d-1(c)(2) under the 
Act,\62\ because it should strengthen BX's ability to carry out its 
oversight and enforcement responsibilities as an SRO in cases where 
full disciplinary proceedings are unsuitable in view of the minor 
nature of the particular violation. In requesting the proposed change 
to the MRVP, BX in no way minimizes the importance of compliance with 
BX Rules and all other rules subject to the imposition of fines under 
the MRVP. However, the MRVP provides a reasonable means of addressing 
rule violations that do not rise to the level of requiring formal 
disciplinary proceedings, while providing greater flexibility in 
handling certain violations. BX will continue to conduct surveillance 
with due diligence and make a determination based on its findings, on a 
case-by-case basis, whether a fine of more or less than the recommended 
amount is appropriate for a violation under the MRVP or whether a 
violation requires a formal disciplinary action.
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    \60\ 15 U.S.C. 78f(b)(1), 78f(b)(5) and 78f(b)(6).
    \61\ 15 U.S.C. 78f(b)(7).
    \62\ 17 CFR 240.19d-1(c)(2).
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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. BX operates in an intensely 
competitive global marketplace for listings, financial products, 
transaction services, and market data. Relying on its array of services 
and benefits, BX competes for the privilege of providing market and 
listing services to broker-dealers and issuers. BX's ability to compete 
in this environment is based in large part on the quality of its 
trading systems, the overall quality of its market and its 
attractiveness to the largest number of investors, as measured by 
speed, likelihood and cost of executions, as well as spreads, fairness, 
and transparency. With these aspects of competition as a guide, BX 
designed its current proposal to create, like NOM, the fastest, 
fairest, most transparent and most efficient trading venue available 
for the trading of options. The resulting system should further reduce 
overall trading costs and increase price competition, both pro-
competitive developments. BX believes that the resulting system will 
have the pro-competitive effect of spurring further initiative and 
innovation among market centers and market participants. Market 
participants that disagree and do not view these developments as pro-
competitive, will have the flexibility to use only those functions that 
improve their trading or to not use the system at all; participation in 
the system in whole or in part is completely voluntary. BX Options will 
benefit individual investors, options trading firms, and the options 
market generally. The entry of an innovative, low cost competitor such 
as BX will promote competition, further spurring existing markets to 
improve their own execution systems and reduce trading costs. BX 
Options will differentiate its market by offering innovative features 
in the future. BX Options will operate in a highly competitive market 
comprised of nine other U.S. options exchanges in which sophisticated 
and knowledgeable market participants can and do send

[[Page 29740]]

order flow to competing exchanges based on many factors, including 
technology, functionality, reliability, fees and customer service.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BX-2012-030 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-2012-030. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-BX-2012-030 and should be 
submitted on or before June 8, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\63\
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    \63\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12034 Filed 5-17-12; 8:45 am]
BILLING CODE 8011-01-P


