
[Federal Register Volume 79, Number 209 (Wednesday, October 29, 2014)]
[Notices]
[Pages 64447-64452]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25670]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73410; File No. SR-BX-2014-048]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of a Proposed Rule Change To Establish the Retail Price 
Improvement Program on a Pilot Basis Expiring Twelve Months From the 
Date of Implementation

October 23, 2014.
    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 17, 2014, NASDAQ OMX BX, Inc. (``BX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
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 is filing with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change that would adopt new 
BX Rule 4780 to establish a Retail Price Improvement (``RPI'') Program 
(the ``Program'' or ``proposed rule change'') to attract additional 
retail order flow to the Exchange while also providing the potential 
for price improvement to such order flow.
    The Exchange has designated December 1, 2014 as the date the 
proposed rule change becomes effective.
    The text of the proposed rule change is available from the 
Exchange's Web site at http://nasdaqomxbx.cchwallstreet.com/Filings/, 
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
Background
    The Exchange is proposing a one-year pilot program that would add 
new BX Rule 4780 to establish an RPI Program to attract additional 
retail order flow to the Exchange while also providing the potential 
for price improvement to such order flow.\3\ Under the proposed rule 
change, the Exchange would create a new class of market participant 
called a Retail Member Organization (``RMO''), which would be eligible 
to submit certain retail order flow (``Retail Orders'') to the 
Exchange. As proposed, BX members (``Members'') will be permitted to 
provide potential price improvement for Retail Orders in the form of 
non-displayed interest that is priced more aggressively than the 
Protected National Best Bid or Offer (``Protected NBBO'').\4\
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    \3\ This filing is substantially the same to the one 
establishing the RPI pilot by The NASDAQ Stock Market LLC 
(``NASDAQ''). The NASDAQ pilot program expires on December 31, 2014. 
See Securities Exchange Act Release No. 68937 (February 15, 2013), 
78 FR 12397 (February 22, 2013) (``RPI Approval Order'') (SR-NASDAQ-
2012-129).
    \4\ The term Protected Quotation is defined in Chapter XII, Sec. 
1(19) and has the same meaning as is set forth in Regulation NMS 
Rule 600(b)(58). The Protected NBBO is the best-priced protected bid 
and offer. Generally, the Protected NBBO and the national best bid 
and offer (``NBBO'') will be the same. However, a market center is 
not required to route to the NBBO if that market center is subject 
to an exception under Regulation NMS Rule 611(b)(1) or if such NBBO 
is otherwise not available for an automatic execution. In such case, 
the Protected NBBO would be the best-priced protected bid or offer 
to which a market center must route interest pursuant to Regulation 
NMS Rule 611.
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Definitions
    The Exchange proposes to adopt the following definitions under 
proposed BX Rule 4780. First, the term ``Retail Member Organization'' 
(or ``RMO'') would be defined as a Member (or a division thereof) that 
has been approved by the Exchange to submit Retail Orders.
    Second, the term ``Retail Order'' would be defined as an agency 
order, or riskless principal order that satisfies the criteria of FINRA 
Rule 5320.03, that originates from a natural person and is submitted to 
the Exchange by an RMO, provided that no change is made to the terms of 
the order with respect to price (except in the case of a market order 
being changed to a marketable limit order) or side of market and the 
order does not originate from a trading algorithm or any other 
computerized methodology. The criteria set forth in FINRA Rule 5320.03 
adds additional precision to the definition of ``Retail Order'' by 
clarifying that an RMO may enter Retail Orders on a riskless principal 
basis, provided that (i) the entry of such riskless principal orders 
meet the requirements of FINRA Rule 5320.03, including that the RMO 
maintains supervisory systems to reconstruct, in a 
time[hyphen]sequenced manner, all Retail Orders that are entered on a 
riskless principal basis; and (ii) the RMO submits a report, 
contemporaneously with the execution of the facilitated order, that 
identifies the trade as riskless principal.
    The term ``Retail Price Improvement Order'' or ``RPI Order'' or 
collectively ``RPI interest'' would be defined as non-displayed 
liquidity on the Exchange that is priced more aggressively than the 
Protected NBBO by at least $0.001 and that is identified as an RPI 
Order in a

[[Page 64448]]

manner prescribed by the Exchange.\5\ RPI orders can be priced either 
as an explicitly priced limit order or implicitly priced as relative to 
the NBBO with an offset of at least $0.001. The price of an RPI Order 
with an offset would be determined by a Member's entry of the following 
into the Exchange: (1) RPI buy or sell interest; (2) an offset from the 
Protected NBBO, if any; and (3) a ceiling or floor price. RPI Orders 
submitted with an offset would be similar to other peg orders available 
to Members in that the order is tied or ``pegged'' to a certain price, 
and would have its price automatically set and adjusted upon changes in 
the Protected NBBO, both upon entry and any time thereafter. The 
Exchange expects that RPI sell or buy interest typically would be 
entered to track the Protected NBBO, that is, RPI Orders typically 
would be submitted with an offset. The offset would be a predetermined 
amount by which the Member is willing to improve the Protected NBBO, 
subject to a ceiling or floor price. The ceiling or floor price would 
be the amount above or below which the Member does not wish to trade. 
RPI Orders in their entirety (the buy or sell interest, the offset, and 
the ceiling or floor) will remain non-displayed. The Exchange will also 
allow Members to enter RPI Orders which establish the exact limit 
price, which is similar to a non-displayed limit order currently 
accepted by the Exchange today except the Exchange will accept sub-
penny limit prices on RPI Orders in increments of $0.001. The Exchange 
will monitor whether RPI buy or sell interest, adjusted by any offset 
and subject to the ceiling or floor price, is eligible to interact with 
incoming Retail Orders.
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    \5\ Exchange systems would prevent Retail Orders from 
interacting with RPI Orders if the RPI Order is not priced at least 
$0.001 better than the Protected NBBO. The Exchange notes, however, 
that price improvement of $0.001 would be a minimum requirement and 
Members could enter RPI Orders that better the Protected NBBO by 
more than $0.001. Exchange systems will accept RPI Orders without a 
minimum price improvement value; however, such interest will execute 
at its floor or ceiling price only if such floor or ceiling price is 
better than the Protected NBBO by $0.001 or more. Concurrently with 
this filing, the Exchange has submitted a request for an exemption 
under Regulation NMS Rule 612 that would permit it to accept and 
rank the non-displayed RPI Orders. As outlined in the request, the 
Exchange believes that the minimum price improvement available under 
the Program, which would amount to $0.50 on a 500 share order, would 
be meaningful to the small retail investor. See Letter from Jeffrey 
S. Davis, Deputy General Counsel, NASDAQ OMX BX, Inc.to Brent J. 
Fields, Secretary, Securities and Exchange Commission dated October 
10, 2014 (``Sub-Penny Rule Exemption Request'').
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    Members and RMOs may enter odd lots, round lots or mixed lots as 
RPI Orders and as Retail Orders respectively. As discussed below, RPI 
Orders will be ranked and allocated according to price and time of 
entry into the System consistent with BX Rule 4757 and therefore 
without regard to whether the size entered is an odd lot, round lot or 
mixed lot amount. Similarly, Retail Orders will interact with RPI 
Orders and other price-improving orders available on the Exchange 
(e.g., non-displayed liquidity priced more aggressively than the NBBO) 
\6\ according to the Priority and Allocation rules of the Program and 
without regard to whether they are odd lots, round lots or mixed lots. 
Finally, Retail Orders may be designated as Type 1 or Type 2 without 
regard to the size of the order.
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    \6\ Other price improving liquidity may include, but is not 
limited to: booked non-displayed orders with a limit price that is 
more aggressive than the then-current NBBO; midpoint-pegged orders 
(which are by definition non-displayed and priced more aggressively 
than the NBBO); non-displayed orders pegged to the NBBO with an 
aggressive offset, as defined in BX Rule 4780(a)(4) as Other Price 
Improving Contra-Side Interest. Orders that do not constitute other 
price improving liquidity include, but are not limited to: orders 
with a time-in-force instruction of IOC; displayed orders; limit 
orders priced less aggressively than the NBBO.
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    RPI Orders would interact with Retail Orders as follows. Assume a 
Member enters RPI sell interest with an offset of $0.001 and a floor of 
$10.10 while the Protected NBO is $10.11. The RPI Order could interact 
with an incoming buy Retail Order at $10.109. If, however, the 
Protected NBO was $10.10, the RPI Order could not interact with the 
Retail Order because the price required to deliver the minimum $0.001 
price improvement ($10.099) would violate the Member's floor of $10.10. 
If a Member otherwise enters an offset greater than the minimum 
required price improvement and the offset would produce a price that 
would violate the Member's floor, the offset would be applied only to 
the extent that it respects the Member's floor. By way of illustration, 
assume RPI buy interest is entered with an offset of $0.005 and a 
ceiling of $10.112 while the Protected NBBO is at $10.11. The RPI Order 
could interact with an incoming sell Retail Order at $10.112, because 
it would produce the required price improvement without violating the 
Member's ceiling, but it could not interact above the $10.112 ceiling. 
Finally, if a Member enters an RPI Order without an offset (i.e., an 
explicitly priced limit order), the RPI Order will interact with Retail 
Orders at the level of the Member's limit price as long as the minimum 
required price improvement is produced. Accordingly, if RPI sell 
interest is entered with a limit price of $10.098 and no offset while 
the Protected NBBO is $10.11, the RPI Order could interact with the 
Retail Order at $10.098, producing $0.012 of price improvement. The 
System will not cancel RPI interest when it is not eligible to interact 
with incoming Retail Orders; such RPI interest will remain in the 
System and may become eligible again to interact with Retail Orders 
depending on the Protected NBBO. RPI Orders will not be accepted during 
halts.
RMO Qualifications and Approval Process
    Under proposed BX Rule 4780(b), any Member could qualify as an RMO 
if it conducts a retail business or handles retail orders on behalf of 
another broker-dealer. Any Member that wishes to obtain RMO status 
would be required to submit: (i) An application form; (ii) supporting 
documentation sufficient to demonstrate the retail nature and 
characteristics of the applicant's order flow \7\and (iii) an 
attestation, in a form prescribed by the Exchange, that substantially 
all orders submitted by the Member as a Retail Order would meet the 
qualifications for such orders under proposed BX Rule 4780(b). The 
Exchange shall notify the applicant of its decision in writing.
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    \7\ For example, a prospective RMO could be required to provide 
sample marketing literature, Web site screenshots, other publicly 
disclosed materials describing the retail nature of their order 
flow, and such other documentation and information as the Exchange 
may require to obtain reasonable assurance that the applicant's 
order flow would meet the requirements of the Retail Order 
definition.
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    An RMO would be required to have written policies and procedures 
reasonably designed to assure that it will only designate orders as 
Retail Orders if all requirements of a Retail Order are met. Such 
written policies and procedures must require the Member to (i) exercise 
due diligence before entering a Retail Order to assure that entry as a 
Retail Order is in compliance with the requirements of this rule, and 
(ii) monitor whether orders entered as Retail Orders meet the 
applicable requirements. If the RMO represents Retail Orders from 
another broker-dealer customer, the RMO's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order. The RMO must (i) obtain an annual written 
representation, in a form acceptable to the Exchange, from each broker-
dealer customer that sends it orders to be designated as Retail

[[Page 64449]]

Orders that entry of such orders as Retail Orders will be in compliance 
with the requirements of this rule, and (ii) monitor whether its 
broker-dealer customers' Retail Order flow continues to meet the 
applicable requirements.\8\
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    \8\ The Exchange or another self-regulatory organization on 
behalf of the Exchange will review an RMO's compliance with these 
requirements through an exam based review of the RMO's internal 
controls.
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    If the Exchange disapproves the application, the Exchange would 
provide a written notice to the Member. The disapproved applicant could 
appeal the disapproval by the Exchange as provided in proposed BX Rule 
4780(d), and/or reapply for RMO status 90 days after the disapproval 
notice is issued by the Exchange. An RMO also could voluntarily 
withdraw from such status at any time by giving written notice to the 
Exchange.
Failure of RMO To Abide by Retail Order Requirements
    Proposed BX Rule 4780(c) addresses an RMO's failure to abide by 
Retail Order requirements. If an RMO designates orders submitted to the 
Exchange as Retail Orders and the Exchange determines, in its sole 
discretion, that those orders fail to meet any of the requirements of 
Retail Orders, the Exchange may disqualify a Member from its status as 
an RMO. When disqualification determinations are made, the Exchange 
would provide a written disqualification notice to the Member. A 
disqualified RMO could appeal the disqualification as provided in 
proposed BX Rule 4780(d) and/or reapply for RMO status 90 days after 
the disqualification notice is issued by the Exchange.
Appeal of Disapproval or Disqualification
    Proposed BX Rule 4780(d) provides appeal rights to Members. If a 
Member disputes the Exchange's decision to disapprove it as an RMO 
under BX Rule 4780(b) or disqualify it under BX Rule 4780(c), such 
Member (``appellant'') may request, within five business days after 
notice of the decision is issued by the Exchange, that the Retail Price 
Improvement Program Panel (``RPI Panel'') review the decision to 
determine if it was correct.
    The RPI Panel would consist of the Exchange's Chief Regulatory 
Officer (``CRO''), or a designee of the CRO, and two officers of the 
Exchange designated by the Chief Executive Officer of BX. The RPI Panel 
would review the facts and render a decision within the time frame 
prescribed by the Exchange. The RPI Panel could overturn or modify an 
action taken by the Exchange and all determinations by the RPI Panel 
would constitute final action by the Exchange on the matter at issue.
Retail Liquidity Identifier
    Under proposed BX Rule 4780(e), the Exchange proposes to 
disseminate an identifier when RPI interest priced at least $0.001 
better than the Exchange's Protected Bid or Protected Offer for a 
particular security is available in the System (``Retail Liquidity 
Identifier''). The Retail Liquidity Identifier will be disseminated 
through consolidated data streams (i.e., pursuant to the Consolidated 
Tape Association Plan/Consolidated Quotation System, or CTA/CQS, for 
Tape A and Tape B securities, and the Nasdaq UTP Plan for Tape C 
securities) as well as through proprietary Exchange data feeds.\9\ The 
Retail Liquidity Identifier will reflect the symbol and the side (buy 
or sell) of the RPI interest, but will not include the price or size of 
the RPI interest. In particular, CQS and UTP quoting outputs will 
include a field for codes related to the Retail Liquidity Identifier. 
The codes will indicate RPI interest that is priced better than the 
Exchange's Protected Bid or Protected Offer by at least the minimum 
level of price improvement as required by the Program.
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    \9\ The Exchange notes that the Retail Liquidity Identifier for 
Tape A and Tape B securities will be disseminated pursuant to the 
CTA/CQS Plan as soon as the Program, if approved, becomes 
operational. The identifier will also be available through the 
consolidated public market data stream for Tape C securities. The 
processor for the Nasdaq UTP quotation stream will disseminate the 
Retail Liquidity Identifier and analogous identifiers from other 
market centers that operate programs similar to the RPI Program.
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Retail Order Designations
    Under proposed BX Rule 4780(f), an RMO can designate how a Retail 
Order would interact with available contra-side interest as follows.
    As proposed, a Type 1-designated Retail Order would interact with 
available contra-side RPI Orders and other price improving liquidity 
but would not interact with other available contra-side interest in the 
System or route to other markets. The shares remaining from a Type 1-
designated Retail Order that do not fully execute against contra-side 
RPI Orders or other price improving liquidity, if any, would be 
immediately and automatically cancelled.
    A Type 2-designated Retail Order would also interact first with 
available contra-side RPI Orders and other price improving liquidity, 
but would also be eligible to interact with other available contra-side 
interest in the System or optionally route to other market centers 
pursuant to Rule 4758. Accordingly, the shares remaining from a Type 2-
designated Retail Order that do not fully execute against contra-side 
RPI Orders or other price improving liquidity, if any, would execute 
against other liquidity available on the Exchange or be routed to other 
market centers for execution. The remaining unexecuted portion would 
then be cancelled.
Priority and Order Allocation
    Under proposed BX Rule 4780(g), the Exchange proposes that 
competing RPI Orders in the same security would be ranked and allocated 
according to price then time of entry into the System. The Exchange 
further proposes that executions will occur in price/time priority in 
accordance with BX Rule 4757. Any remaining unexecuted RPI interest 
will remain available to interact with other incoming Retail Orders if 
such interest is at an eligible price. Any remaining unexecuted portion 
of the Retail Order will cancel or execute in accordance with proposed 
BX Rule 4780(f). The following example illustrates this proposed 
method:

Protected NBBO for security ABC is $10.00-$10.05
Member 1 enters an RPI Order to buy ABC at $10.015 for 500
Member 2 then enters an RPI Order to buy ABC at $10.02 for 500
Member 3 then enters an RPI Order to buy ABC at $10.035 for 500

    An incoming Retail Order to sell 1,000 shares of ABC for $10.00 
executes first against Member 3's bid for 500 at $10.035, because it is 
the best priced bid, then against Member 2's bid for 500 at $10.02, 
because it is the next best priced bid. Member 1 is not filled because 
the entire size of the Retail Order to sell 1,000 is depleted. The 
Retail Order executes against RPI Orders in price/time priority.
    However, assume the same facts above, except that Member 2's RPI 
Order to buy ABC at $10.02 is for 100. The incoming Retail Order to 
sell 1,000 executes first against Member 3's bid for 500 at $10.035, 
because it is the best priced bid, then against Member 2's bid for 100 
at $10.02, because it is the next best priced bid. Member 1 then 
receives an execution for 400 of its bid for 500 at $10.015, at which 
point the entire size of the Retail Order to sell 1,000 is depleted.
    As a final example, assume the same facts as above, except that 
Member 3's order was not an RPI Order to buy ABC at $10.035, but 
rather, a non-displayed order to buy ABC at $10.03. The result

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would be similar to the result immediately above, in that the incoming 
Retail Order to sell 1,000 executes first against Member 3's bid for 
500 at $10.03, because it is the best priced bid, then against Member 
2's bid for 100 at $10.02, because it is the next best priced bid. 
Member 1 then receives an execution for 400 of its bid for 500 at 
$10.015, at which point the entire size of the Retail Order to sell 
1,000 is depleted.
Implementation
    The Exchange proposes that all Regulation NMS securities traded on 
the Exchange would be eligible for inclusion in the RPI Program. The 
Exchange proposes to limit the Program during the pilot period to 
trades occurring at prices equal to or greater than $1.00 per share. 
Toward that end, Exchange trade validation systems would prevent the 
interaction of RPI buy or sell interest (adjusted by any offset) and 
Retail Orders at a price below $1.00 per share.\10\ For example, if 
there was RPI buy interest tracking the Protected NBB at $0.99 with an 
offset of $0.001 and a ceiling of $1.02, Exchange trade validation 
systems would prevent the execution of the RPI Order at $0.991 with a 
sell Retail Order with a limit of $0.99. However, if the Retail Order 
was Type 2 as defined in the Program,\11\ it would be able to interact 
at $0.99 with liquidity outside the Program in the Exchange's order 
book. In addition to facilitating an orderly \12\ and operationally 
intuitive pilot, the Exchange believes that limiting the Program to 
trades equal to or greater than $1.00 per share during the pilot will 
enable it better to focus its efforts to monitor price competition and 
to assess any indications that data disseminated under the Program is 
potentially disadvantaging retail orders. As part of that review, the 
Exchange will produce data throughout the pilot, which will include 
statistics about participation, the frequency and level of price 
improvement provided by the Program, and any effects on the broader 
market structure.
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    \10\ As discussed above, the price of an RPI would be determined 
by a Member's entry of buy or sell interest, an offset (if any) and 
a ceiling or floor price. The Exchange expects that RPI sell or buy 
interest typically would track the Protected NBBO.
    \11\ Type 2 Retail Orders are treated as IOC orders that execute 
against displayed and non-displayed liquidity in the Exchange's 
order book where there is no available liquidity in the Program. 
Type 2 Retail Orders can either be designated as eligible for 
routing or as non-routable, as described above.
    \12\ Given the proposed limitation, the pilot Program would have 
no impact on the minimum pricing increment for orders priced less 
than $1.00 and therefore no effect on the potential of markets 
executing those orders to lock or cross. In addition, the non-
displayed nature of the liquidity in the Program simply has no 
potential to disrupt displayed, protected quotes. In any event, the 
Program would do nothing to change the obligation of exchanges to 
avoid and reconcile locked and crossed markets under NMS Rule 
610(d).
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Comparison to Existing Programs
    Proposed BX Rule 4780 is substantially the same to the one 
establishing NASDAQ Rule 4780 governing NASDAQ's ``Retail Price 
Improvement Program'', which was approved by the Commission and 
commenced operations on March 28, 2013.\13\ NASDAQ's program, in turn, 
is based on NYSE Rule 107C, governing NYSE's ``Retail Liquidity 
Program,'' which was approved by the Commission and commenced 
operations on August 1, 2012 \14\ and on BATS Y-Exchange, Inc. 
(``BATS'') Rule 11.24, which was approved by the Commission and 
commenced operations on 12/17/12.\15\ Proposed BX Rule 4780 is similar 
to both BATS Rule 11.24 and NYSE Rule 107C with three key distinctions 
to the latter.\16\ The first distinction is that NYSE Rule 107C 
includes a class of participant that is registered as a provider of 
liquidity and provides specific procedures and rules related to such 
participants and their role in the NYSE RLP. NYSE Rule 107C does permit 
all participants to submit RPI Orders to NYSE, but provides the 
specific class of registered retail liquidity providers with execution 
fees that are lower than fees charged to other participants in exchange 
for a requirement to maintain RPI Orders on NYSE at least 5% of the 
trading day.\17\ The Exchange believes that equal treatment for all 
Exchange Members that enter RPI Orders will result in a higher level of 
competition and maximize price improvement to incoming Retail Orders. 
Accordingly, the Exchange has not proposed to adopt a special category 
of retail liquidity provider.
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    \13\ Securities Exchange Act Release No. 68836 [sic] (December 
3, 2012), 77 FR 73097, 73100 (December 7, 2012) (SR-NASDAQ-2012-129 
Notice) and Securities Exchange Act Release No. 68937 (February 15, 
2013) 77 [sic] FR 12397 (February 22, 2013) (SR-NASDAQ-2012-129 
Approval Order).
    \14\ Securities Exchange Act Release No. 67347 (July 3, 2012), 
77 FR 40673 (July 10, 2012) (SR-NYSE-2011-55; SR-NYSEAmex-2011-84) 
(the ``RLP Approval Order''). In conjunction with the approval of 
the NYSE Retail Liquidity Program, a nearly identical program was 
proposed and approved to operate on NYSE MKT LLC (formerly, the 
American Stock Exchange). For ease of reference, the comparisons 
made in this section only refer to NYSE Rule 107C, but apply equally 
to NYSE MKT Rule 107C.
    \15\ Securities Exchange Act Release No. 68303 (November 27, 
2012) 77 FR 71652 (December 3, 2012) (SR-BYX-2012-019).
    \16\ The Exchange has proposed to accept RPIs in a manner 
similar to the explicitly accepted method at NYSE and NYSE MKT, 
specifically, with an offset as well as a ceiling or a floor (i.e., 
the entry of an RPI bid with an offset of $0.015 and a ceiling of 
$10.04; when the NBBO is $10.02 by $10.04, an incoming sell order 
would execute against such RPI at $10.035). The Exchange notes that 
like NYSE and NYSE MKT, Members will be able to submit retail price 
improving orders with an explicit sub-penny floor or ceiling and no 
offset, effectively creating a static sub-penny limit order, and the 
Exchange has proposed rule text to make this ability clear.
    \17\ NYSE Rule 107C(f).
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    The second distinction between proposed BX Rule 4780 and NYSE Rule 
107C is that the Exchange proposes to in all cases execute incoming 
Retail Orders against resting RPI Orders and other resting non-
displayed liquidity to maximize the price improvement available to the 
incoming Retail Order. As proposed, the Exchange will maintain its 
strict price/time priority model and will provide all available price 
improvement to incoming Retail Orders, whether such price improvement 
is submitted pursuant to the Program or as an order type currently 
accepted by the Exchange, such as non-displayed orders. In contrast, 
pursuant to NYSE Rule 107C(k)(1), a Type 1-designated Retail Order, 
``will interact only with available contra-side Retail Price 
Improvement Orders and will not interact with other available contra-
side interest in Exchange systems.'' \18\ The Exchange is proposing in 
all cases to provide the maximum price improvement available to 
incoming Retail Orders. Accordingly, Retail Orders under the Exchange's 
Program will always interact with available contra-side RPI Orders and 
any other price improving contra-side interest, in price/time priority 
consistent with BX Rule 4780(b). Such ``other'' price improving contra-
side interest will of course remain available to all participants, as 
it is today, while RPI Orders will only be available to RMOs, as 
described above.
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    \18\ Moreover, although pursuant to NYSE Rules 107C(k)(2) and 
107C(k)(3), a Type 2-designated Retail Order and a Type 3-designated 
Retail Order can interact with other non-RPI interest in the NYSE 
systems, such interaction only occurs after a Retail Order first 
executes against RPI Orders.
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    Finally, as proposed the Exchange will provide applicable price 
improvement to incoming Retail Orders at potentially multiple price 
levels. In contrast, pursuant to NYSE Rule 107C an incoming Retail 
Order to NYSE will execute at the single clearing price level at which 
the incoming order will be fully executed. To illustrate, assume the 
same facts set forth in the second example above, where Member 2's RPI 
Order to buy ABC at $10.02 was for 100 shares. Pursuant to NYSE Rule 
107C, an incoming Retail Order to sell 1,000 shares at $10.00 would 
execute first

[[Page 64451]]

against Member 3's bid for 500 shares, because it is the best priced 
bid, then against Member 2's bid for 100 shares, because it is the next 
best priced bid, then against 400 of the 500 shares bid by Member 1. 
However, rather than executing at each of these price levels for the 
number of shares available (i.e., 500 shares at $10.035, 100 shares at 
$10.02 and 400 shares at $10.015), as it would under proposed BX Rule 
4780(b), the Retail Order submitted to NYSE pursuant to NYSE Rule 107C 
executes at the single clearing price that completes the order's 
execution, which is $10.015 to complete the entire order to sell 1,000 
shares. The Exchange intends to provide all of the price improvement in 
these examples to the incoming Retail Order, and thus has proposed to 
execute orders under the Program consistent with its existing price/
time market model.
Fee Structure of Program
    The Exchange will submit a separate proposal to amend its fee 
schedule in connection with the proposed RPI Program. Under that 
proposal, the Exchange expects to charge Members a fee for executions 
of their RPI Orders against Retail Orders and in turn would provide a 
credit or free executions to RMOs for executions of their Retail Orders 
against RPI Orders. The fees and credits for liquidity providers and 
RMOs may be adjusted from time to time as the Exchange gains experience 
with the Program.
    As explained above, the Exchange proposes to execute incoming 
Retail Orders against all available contra-side interest that will 
provide price improvement to the Retail Order, including non-displayed 
orders other than RPI Orders. In the event non-displayed interest 
priced better than the NBBO other than an RPI Order interacts with a 
Retail Order, the Exchange anticipates proposing to rebate the Member 
that entered such non-displayed interest a credit rather than the 
charge which is imposed for an RPI Order execution. In such cases, the 
rebate credited to the Member that entered the non-displayed interest 
may be less than the rebate credited that same Member for an execution 
against a non-Retail Order.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of Section 6(b) of the Act.\19\ In particular, 
the Exchange believes the proposed change furthers the objectives of 
Section 6(b)(5) of the Act,\20\ 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 mechanism of a free and open 
market and a national market system. The Exchange believes that the 
proposed rule change is consistent with these principles because it 
would increase competition among execution venues, encourage additional 
liquidity, and offer the potential for price improvement to retail 
investors. The Exchange notes that a significant percentage of the 
orders of individual investors are executed over-the-counter.\21\ The 
Exchange believes that it is appropriate to create a financial 
incentive to bring more retail order flow to a public market. The 
Exchange also notes that the Commission recently approved a similar 
proposal by NYSE and NYSE MKT.\22\ Accordingly, the proposal generally 
encourages competition between exchange venues. In this connection, the 
Exchange believes that the proposed distinctions between the Exchange's 
proposal and the approved programs for NYSE and NYSE MKT, as well as 
the similar program proposed by BATS, will both enhance competition 
amongst market participants and encourage competition amongst exchange 
venues.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ See Concept Release on Equity Market Structure, Securities 
Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 
(January 21, 2010) (noting that dark pools and internalizing broker-
dealers executed approximately 25.4% of share volume in September 
2009). See also Mary L. Schapiro, Strengthening Our Equity Market 
Structure (Speech at the Economic Club of New York, Sept. 7, 2010) 
(available on the Commission's Web site). In her speech, Chairman 
Schapiro noted that nearly 30 percent of volume in U.S.-listed 
equities was executed in venues that do not display their liquidity 
or make it generally available to the public and the percentage was 
increasing nearly every month.
    \22\ See RLP Approval Order, supra note 14.
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    The Exchange understands that Section 6(b)(5) of the Act \23\ 
prohibits an exchange from establishing rules that treat market 
participants in an unfairly discriminatory manner. However, Section 
6(b)(5) of the Act does not prohibit exchange members or other broker-
dealers from making distinctions, so long as their activities are 
otherwise consistent with the federal securities laws and the 
distinctions are not unfair. Nor does Section 6(b)(5) of the Act 
require exchanges to preclude broker-dealers from making distinctions 
that are not unfair. Broker-dealers commonly differentiate between 
customers based on the nature and profitability of their business.
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    \23\ 15 U.S.C. 78f(b)(5).
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    While the Exchange believes that markets and price discovery 
optimally function through the interactions of diverse flow types, it 
also believes that growth in internalization has required 
differentiation of retail order flow from other order flow types. The 
differentiation proposed herein by the Exchange is not designed to 
permit unfair discrimination, but instead to promote a competitive 
process around retail executions such that retail investors would 
receive better prices than they currently do through bilateral 
internalization arrangements. The Exchange believes that the 
transparency and competitiveness of operating a program such as the RPI 
Program on an exchange market would result in better prices for retail 
investors. The Exchange recognizes that sub-penny trading and pricing 
could potentially result in undesirable market behavior. The Exchange 
will monitor the Program in an effort to identify and address any such 
behavior.
    The Exchange will separately propose fees applicable to the 
Program, including fees or rebates for non-displayed orders offering 
price improvement other than RPI Orders that interact with Retail 
Orders. The Exchange believes any such proposal to treat such non-
displayed orders differently depending on the parties with whom they 
interact is consistent with Section 6(b)(5) of the Act,\24\ which 
requires that the rules of an exchange are not designed to permit 
unfair discrimination. The Exchange believes that such a differential 
pricing structure for non-displayed orders is not unfairly 
discriminatory. As stated in the NYSE RLP Approval Order, the 
``Commission has previously recognized that the markets generally 
distinguish between individual retail investors, whose orders are 
considered desirable by liquidity providers because such retail 
investors are presumed on average to be less informed about short-term 
price movements, and professional traders, whose orders are presumed on 
average to be more informed.'' \25\ The Exchange's

[[Page 64452]]

proposed differential pricing structure for non-displayed orders raises 
substantively identical policy considerations as the rules approved by 
the Commission in the NYSE RLP Approval Order, which account for the 
difference of assumed information and sophistication level between 
different trading participants by providing Retail Orders access to 
better execution prices as well as more favorable access fees.
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    \24\ 15 U.S.C. 78f(b)(5).
    \25\ See RLP Approval Order, supra note 14, at 40679-40680 
(citing Concept Release on Equity Market Structure and approval of 
an options exchange program related to price improvement for retail 
orders). Certain options exchanges deploy this same rationale today 
through pricing structures that vary for a trading participant based 
on the capacity of the contra-side trading participant. See, e.g., 
Securities Exchange Act Release No. 67171 (June 8, 2012), 77 FR 
35732 (June 14, 2012) (SR-NASDAQ-2012-068) (notice of filing and 
immediate effectiveness of proposal to modify fees for the NASDAQ 
Options Market, including certain fees and rebates that are variable 
depending on the capacity of the contra-party to the transaction); 
see also Securities Exchange Act Release No. 63632 (January 3, 
2011), 76 FR 1205 (January 7, 2011) (SR-BATS-2010-038) (notice of 
filing and immediate effectiveness of proposal to modify fees for 
BATS Options, including liquidity rebates that are variable 
depending on the capacity of the contra-party to the transaction).
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    Finally, the Exchange proposes that the Commission approve the 
proposed rule for a pilot period of twelve months from the date of 
implementation, which shall occur no later than 90 days after 
Commission approval of BX Rule 4780. The Program shall expire on [Date 
to be determined upon adoption of BX Rule 4780]. The Exchange believes 
that this pilot period is of sufficient length to permit both the 
Exchange and the Commission to assess the impact of the rule change 
described herein.

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.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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-2014-048 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2014-048. 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 offices 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-2014-048, 
and should be submitted on or before November 19, 2014.
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    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25670 Filed 10-28-14; 8:45 am]
BILLING CODE 8011-01-P


