
[Federal Register Volume 77, Number 201 (Wednesday, October 17, 2012)]
[Notices]
[Pages 63903-63905]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25541]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68041; File No. SR-BX-2012-065]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Add an 
Additional Execution Algorithm and Priority Overlays To Govern the 
Priority of Orders

 October 11, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 2, 2012, NASDAQ OMX BX, Inc. (the ``Exchange'' or ``BX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add an additional execution algorithm and 
priority overlays to govern the priority of orders. The text of the 
proposed rule change is available at http://nasdaqomxbx.cchwallstreet.com, at the Exchange'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 BX Options market launched on June 29, 2012 as a fully 
automated, price/time priority execution system built on the core 
functionality of the NASDAQ Options Market (``NOM'').\3\ BX Options 
operates as an all-electronic system (``System'' or ``Trading System'') 
with no physical trading floor and provides for the electronic display 
and execution of orders in price/time priority without regard to the 
status of the entities that are entering orders. The BX Options market 
closely resembles 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 is automatically executable.
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    \3\ See BX Options Rules, Chapter VI, Section 1(e)(11). 
Securities Exchange Act Release No. 67256 (June 26, 2012), 77 FR 
39277 (July 2, 2012) (SR-BX-2012-030) (Approving the establishment 
of the BX Options market).
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    In its proposed rule change to create the BX Options market, BX 
stated that, initially, BX Options would have the same market structure 
and rules as NOM, focusing on a price/time priority market.\4\
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    \4\ See id. at 39278.
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    BX further stated that, over time, as the BX Options market secured 
more participants, it would introduce additional, innovative 
technology.\5\ At this time, BX proposes its first enhancement to BX 
Options by offering a different priority rule. Currently, Chapter VI, 
Section 10, Book Processing, provides that 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 currently executes against 
available contra-side displayed contract amounts in full, in price/time 
priority.
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    \5\ Securities Exchange Act Release No. 66983 (May 14, 2012), 77 
FR 29730 (May 18, 2012) (Notice of filing of SR-BX-2012-030).
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    At this time, the Exchange proposes to amend Chapter VI, Section 
10, to provide for a Size Pro-Rata execution algorithm. In order to 
make clear that only one of the two execution algorithms is applicable 
to a particular option, BX proposes to add introductory language to 
Section 10(1) to state that the Exchange will determine to apply, for 
each option, one of the execution algorithms described in subparagraphs 
(A) \6\ or (B). The Exchange will issue an Options Alert specifying 
which execution algorithm will govern which options any time a change 
is made.
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    \6\ BX is also proposing to amend subparagraph (A) to provide 
that, respecting the price/time execution algorithm, within each 
price level, if there are two or more quotes or orders at the best 
price, trading interest will be executed in time priority. This is 
intended to be clearer and match the new language in subparagraph 
(B).
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    Further, BX proposes to adopt new subparagraph (B) to provide that 
when the Size Pro-Rata execution algorithm is in effect the System 
shall execute trading interest in price priority, meaning it will 
execute all trading interest at the best price level within the System 
before executing trading interest at the next best price. Within each 
price level, if there are two or more quotes or orders at the best 
price, trading interest will be executed based on the size of each 
Participant's quote or order as a percentage of the total size of all 
orders and quotes resting at that price. If this is not a whole number, 
it will be rounded down to the nearest whole number. If there are 
residual contracts remaining after rounding, such contracts will be 
distributed one contract at a time to the remaining Participants in 
time priority. The Size Pro-Rata execution algorithm will, initially, 
always operate with the priority overlays, as described further below. 
The Size Pro-Rata execution algorithm is similar to the Pro-Rata 
Priority provision in CBOE Rule 6.45A(a)(ii), which provides that 
resting quotes and orders in the book are prioritized according to 
price. CBOE Rule 6.45A(a)(ii) further provides that if there are two or 
more quotes or orders at the best price then trades are allocated 
proportionally according to size (in a pro-rata fashion). The 
executable quantity is allocated to the nearest whole number, with 
fractions \1/2\ or greater rounded up and fractions less than \1/2\ 
rounded down. If there are two market participants that both are 
entitled to an additional \1/2\ contract and there is only one contract 
remaining to be distributed, the additional contract will be 
distributed to the market participant whose quote or order has time 
priority. This is substantially similar to the proposal at hand.\7\ 
However, CBOE provides for rounding to the nearest whole number, while 
the proposal at hand provides for the BX Options market to round down 
in each case to the nearest whole number. BX does not believe this is a 
significant difference between the two methods. The following examples 
demonstrate how rounding differs between CBOE's rule and BX's proposal:
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    \7\ Meaning, BX's general pro-rata priority rule is 
substantially similar to CBOE's operating without a customer or 
market maker priority overlay, which are discussed below.
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Example 1 \8\--CBOE rounding approach
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    \8\ In each example, the orders and quotes are listed in the 
order in which they were received. Example 1 is intended to show how 
rounding works pursuant to CBOE's rules, but does not include the 
operation of the priority overlays, which will, as described below, 
initially always operate with the Size Pro-Rata execution algorithm.

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[[Page 63904]]

    Order 1: Buy 10 contracts for 1.84, Non-Market Maker broker-dealer
    Order 2: Buy 10 contracts for 1.84, Public Customer
    Quote: 1.84 (70) x 1.86 (10) MM1
    Order 3: Buy 10 contracts for 1.84, Market Maker
    Market: 1.84 (100 contracts total) x 1.86 (10 contracts)
    Sell order received: Sell 25 contracts at 1.84
Execution:
    Order 1 represents 10 of 100 (10%) total contracts at 1.84.
    10% of 25 contracts (which is the sell order) execute = 2.5, rounds 
up to 3 contracts.
    Order 2 represents 10 of 100 (10%) total contracts at 1.84.
    10% of 25 contracts (which is the sell order) execute = 2.5, rounds 
up to 3 contracts.
    MM1's quote represents 70 of 100 (70%) total contracts at 1.84.
    Again, 70% of 25 contracts execute = 17.5, rounds up to 18 
contracts but to avoid over-allocation, MM1 receives 17.
    Order 3 represents 10 of 100 (10%) total contracts at 1.84.
    10% of 25 contracts (which is the sell order) execute = 2.5, rounds 
up to 3 contracts but to avoid over-allocation, Order 3 receives 2.
Example 2--BX Options proposed rounding approach \9\
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    \9\ CBOE and BX methodology results in the same allocation in 
this example, but there could be instances where the result differs, 
depending on the number of contracts involved.
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    Order 1: Buy 10 contracts for 1.84, Non-Market Maker broker-dealer
    Order 2: Buy 10 contracts for 1.84, Public Customer
    Quote: 1.84 (70) x 1.86 (10) MM1
    Order 3: Buy 10 contracts for 1.84, Market Maker
    Market: 1.84 (100 contracts total) x 1.86 (10 contracts)
    Sell order received: Sell 25 contracts at 1.84
Execution:
    Order 1 represents 10 of 100 (10%) total contracts at 1.84.
    10% of 25 contracts (which is the sell order) execute = 2.5, rounds 
down to 2 contracts.
    Order 2 represents 10 of 100 (10%) total contracts at 1.84.
    10% of 25 contracts (which is the sell order) execute = 2.5, rounds 
down to 2 contracts.
    MM1's quote represents 70 of 100 (70%) total contracts at 1.84.
    Again, 70% of 25 contracts execute = 17.5, rounds down to 17 
contracts.
    Order 3 represents 10 of 100 (10%) total contracts at 1.84.
    10% of 25 contracts (which is the sell order) execute = 2.5, rounds 
down to 2 contracts.
    Total executed: 23. There are 2 residual contracts remaining from 
the 25 contract sell order. The remaining 2 contracts are allocated one 
at a time based on time as follows:
    Order 1 receives 1 additional residual contract.
    Order 2 receives 1 additional residual contract.
    The 25 contract sell order is now completely executed.

    BX believes that this rounding method is appropriate and fair, and 
will be clear to Participants. In particular, BX has chosen to round 
down because it is a more efficient way to calculate the distribution 
of non-whole number allocations. Rather than having to break a tie by 
time whenever there are two or more Participants entitled to \1/2\ a 
contract, BX will simply round down in all cases and distribute any 
residual one contract at a time to each Participant based on time 
priority as illustrated in Example 2 above.
    In addition, BX proposes to adopt two priority overlays. The new 
subparagraph (C), Priority Overlays Applicable to Size Pro-Rata 
Execution Algorithm, will provide that the Exchange will apply these 
priority overlays. BX plans to initially implement the Size Pro-Rata 
execution algorithm with both the Public Customer and Market Maker 
priority overlays.
    The first priority overlay, Public Customer Priority, is proposed 
to be subparagraph (1)(C)(i). Under this priority overlay, interest at 
the highest bid and lowest offer shall have priority except that Public 
Customer orders shall have priority over non-Public Customer orders at 
the same price. If there are two or more Public Customer orders for the 
same options series at the same price, priority shall be afforded to 
such Public Customer orders in the sequence in which they are received 
by the System. For purposes of this Rule, a Public Customer order does 
not include a Professional Order. This is substantially similar to CBOE 
Rule 6.45A(a)(ii)(1) and ISE Rule 713(d).
    The second proposed priority overlay is contained in subparagraph 
(1)(C)(ii), Market Maker Priority. Under this priority overlay, the 
highest bid and lowest offer shall have priority except that BX Options 
Market Maker orders, after all Public Customer orders have been fully 
executed in time priority, shall have priority over all other 
Participant orders at the same price. The Public Customer priority is 
always a part of the Market Maker Priority overlay and both overlays 
will always apply to the Size Pro-Rata execution algorithm 
initially.\10\ If there are two or more BX Options Market Maker quotes 
and orders for the same options series at the same price, those orders 
shall be executed based on the Size Pro-Rata execution algorithm.\11\ 
If there are contracts remaining after all Market Maker interest has 
been fully executed (meaning, Non-Public Customer and Non-Market 
Maker), such contracts shall be executed based on the Size Pro-Rata 
execution algorithm.\12\
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    \10\ BX may later file a proposed rule change to make available 
the Size Pro-Rata execution algorithm without the Public Customer or 
Market Maker priority overlays, or with just the Public Customer 
priority overlay.
    \11\ This is similar to Phlx Rule 1014(g)(vii)(B)(1)(b).
    \12\ This is similar to Phlx Rule 1014(g)(vii)(B)(1)(d).
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    The following is an example of the Public Customer and Market Maker 
priority overlays applied to the proposed Size Pro-Rata execution 
algorithm:
Example 3:
    Order 1: Buy 10 contracts for 1.84, Non-MM broker-dealer
    Order 2: Buy 10 contracts for 1.84, Public Customer
    Quote MM1: 1.84 (10) x 1.86 (10)
    Order 3: Buy MM 1.84 (10)
    Sell order received: Sell 21 contracts at 1.84
Execution:
    Order 2 allocated 10 contracts because of Public Customer priority
    Quote MM1 represents 10 of 20 (50%) total MM contracts at 1.84. 50% 
of 11 contracts to execute = 5.5, rounds down to 5 contracts.
    Order 3 represents 10 of 20 (50%) total MM contracts at 1.84. 50% 
of 11 contracts to execute = 5.5, rounds down to 5 contracts.
    Remaining 1 contract is allocated to MM1 based on time among MMs.
    Order 1 is not executed because Market Makers have priority over 
non-Market Maker broker-dealers. Order 1 would only be executed if all 
interest at the Public Customer priority level and the Market Maker 
level was first completely executed.

    In summary, this proposed rule change will allow for a different 
execution algorithm for BX Options. To be clear, two different 
execution algorithms will not operate in the same option. In addition, 
when the Size Pro-Rata execution algorithm is selected by BX, the 
proposed new priority overlays

[[Page 63905]]

will be applied first as part of the execution algorithm used to 
allocate the order. These additional priority overlays are Public 
Customer priority and Market Maker priority, which will only apply to 
the Size Pro-Rata execution algorithm. BX notes that the execution 
algorithm will be selected and communicated by BX to its Participants. 
The Public Customer and Market Maker priority overlays will, initially, 
always operate with the Size Pro-Rata execution algorithm.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ in particular, in that it is designed to 
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, because it will provide 
additional execution algorithms and priority overlays on BX Options, 
which operate on other exchanges, as explained in detail below. These 
additional execution algorithms and priority overlays provide 
Participants with additional choices among the many competing exchanges 
with regard to their execution needs and strategies. The Exchange 
believes that adding this flexibility to its rules will allow for 
greater customization, resulting in enhanced service to its customers 
and users, which would continue to be a purely objective method for 
allocating option trades. Furthermore, BX Options operates in an 
intensely competitive environment and seeks to offer the same services 
that its competitors offer and in which its customers would find value.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BX-2012-065 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-2012-065. 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 available publicly. All 
submissions should refer to File Number SR-BX-2012-065 and should be 
submitted on or before November 7, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25541 Filed 10-16-12; 8:45 am]
BILLING CODE 8011-01-P


