
[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Notices]
[Pages 8235-8238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01467]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79812; File No. SR-BX-2016-063]


Self-Regulatory Organizations; NASDAQ BX, Inc.; Order Granting 
Approval of Proposed Rule Change To Amend the PRISM Price Improvement 
Auction in BX Chapter VI, Section 9 and To Make Pilot Program Permanent

January 17, 2017.

I. Introduction

    On November 21, 2016, NASDAQ BX, Inc. (``BX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the eligibility requirements for its 
Price Improvement Auction mechanism (``PRISM'' or ``Auction'') and make 
permanent those aspects of the PRISM auction that are currently 
operating on a pilot basis. The proposed rule change was published for 
comment in the Federal Register on December 9, 2016.\3\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79465 (December 5, 
2016), 81 FR 89167 (``Notice'').
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II. Description of the Proposal

    The Exchange established PRISM in November 2015 as a price 
improvement mechanism.\4\ Pursuant to Chapter VI, Section 9 of the BX 
Options Rules, a Participant (an ``Initiating Participant'') may 
electronically submit for execution an order it represents as agent on 
behalf of a Public Customer,\5\ Professional customer, broker dealer, 
or any other entity (``PRISM Order'') against principal interest or 
against any other order it represents as agent (an ``Initiating 
Order''), provided it submits the PRISM Order for electronic execution 
into the Auction. Parts of PRISM are currently operating on a pilot 
basis (``Pilot''),\6\ which is set to expire on January 18, 2017.\7\ 
The Exchange proposes to make the Pilot permanent, and also proposes to 
amend the Auction eligibility requirements for certain PRISM Orders of 
less than 50 option contracts.
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    \4\ See Securities Exchange Release No. 76301 (October 29, 
2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032) (``PRISM 
Approval Order'').
    \5\ A Public Customer means a person that is not a broker or 
dealer in securities. See Chapter I, Section 1(a)(50) of the BX 
Options Rules. A ``Professional'' means any person or entity that 
(i) is not a broker or dealer in securities, and (ii) places more 
than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). A Participant or a 
Public Customer may, without limitation, be a Professional. All 
Professional orders shall be appropriately marked by Participants. 
See Chapter I, Section 1(a)(49) of the BX Options Rules. For 
purposes of PRISM rule, a Public Customer order does not include a 
Professional order. See Chapter VI, Section 9 of the BX Options 
Rules.
    \6\ Three components of PRISM were approved by the Commission on 
a pilot basis: (1) The early conclusion of the PRISM Auction; (2) 
the provision that an unrelated market or marketable limit order 
(against the BX BBO) on the opposite side of the market from the 
PRISM Order received during the Auction will not cause the Auction 
to end early and will execute against interest outside of the 
Auction; and (3) no minimum size requirement of orders.
    \7\ See Securities Exchange Act Release No. 78249 (July 7, 
2016), 81 FR 45334 (July 13, 2016) (SR-BX-2016-038).
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A. PRISM Eligibility Requirements for PRISM Orders of Fewer Than 50 
Contracts

    Currently, a PRISM Auction may be initiated if certain conditions 
are met. If the PRISM Order is for the account of a Public Customer, 
the Initiating Participant must stop the entire PRISM Order at a price 
that is equal to or better than the National Best Bid/Offer (``NBBO'') 
on the opposite side of the market from the PRISM Order, provided that 
such price must be at least one minimum trading increment (specified in 
Chapter VI, Section 5 of the BX Options Rules) better than any limit 
order on the limit order book on the same side of the market as the 
PRISM Order.\8\ If the PRISM Order is for the account of a broker 
dealer or any other person or entity that is not a Public Customer, the 
Initiating Participant must stop the entire PRISM Order at a price that 
is the better of: (i) The BX BBO price improved by at least the minimum 
trading increment on the same side of the market as the PRISM Order, or 
(ii) the PRISM Order's limit price (if the order is a limit order), 
provided in either case that such price is at or better than the 
NBBO.\9\
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    \8\ See Chapter VI, Section 9(i)(A) of the BX Options Rules.
    \9\ See Chapter VI, Section 9(i)(B) of the BX Options Rules.
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    BX proposes to amend the Auction eligibility requirements to 
require that, if the PRISM Order is for less than 50 option contracts, 
and if the difference between the NBBO is $0.01, the Initiating 
Participant must stop the entire PRISM Order at one minimum price 
improvement increment better than the NBBO on the opposite side of the 
market from the PRISM Order, and better than any limit order on the 
limit order book on the same side of the market as the PRISM Order. 
Thus, BX would require that the PRISM Order receive at least $0.01 
price improvement if that PRISM Order is for less than 50 contracts and 
if the difference between the NBBO is $0.01. This requirement will 
apply regardless of whether the PRISM Order is for the account of a 
Public Customer, or where the PRISM Order is for the account of a 
broker dealer or any other person or entity that is not a Public 
Customer.
    The Exchange will retain the current requirements for Auction 
eligibility in all other instances. Accordingly, if the PRISM Order is 
for the account of a Public Customer and such order is for 50 option 
contracts or more or if the difference between the NBBO is greater than 
$0.01, the Initiating Participant must stop the entire PRISM Order at a 
price that is equal to or better than the NBBO on the opposite side of 
the market from the PRISM Order, provided that such price must be at 
least one minimum trading increment better than any limit order on the 
limit order book on the same side of the market as the PRISM Order. If 
the PRISM Order is for the account of a broker dealer or any other 
person or entity that is not a Public Customer and such order is for 50 
option contracts or more, or if the difference between the NBBO is 
greater than $0.01, the Initiating Participant must stop the entire 
PRISM Order at a price that is the better of: (i) The BX BBO price 
improved by at least the Minimum Increment on the same side of the 
market as the PRISM Order, or (ii) the PRISM Order's limit price (if 
the order is a limit order), provided in

[[Page 8236]]

either case that such price is at or better than the NBBO.\10\
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    \10\ The Exchange also proposes to add language to Chapter VI, 
Section 9(i) of the BX Options Rules to clarify that, if any of the 
auction eligibility criteria are not met, the PRISM Order will be 
rejected. The Exchange will also add language to Chapter VI, Section 
9(i) to clarify the treatment of paired Public Customer-to-Public 
Customer orders pursuant to subparagraph (vi) as a result of these 
proposed changes. Specifically, Exchange will allow a PRISM Order to 
trade on either the bid or offer, pursuant to subparagraph (vi), if 
the NBBO is $0.01 wide, provided (1) the execution price is equal to 
or within the NBBO, (2) there is no resting customer at the 
execution price, and (3) $0.01 is the Minimum Price Variation (MPV) 
of the option. The Exchange also proposes to add language that it 
will continue to reject a PRISM Order to buy (sell) if the NBBO is 
only $0.01 wide and the Agency order is stopped on the bid (offer) 
if there is a resting order on the bid (offer). These requirements 
are unchanged from the Exchange's current handling practices of 
paired Public Customer-to-Public Customer PRISM Orders per 
subparagraph (vi), and the Exchange's current practice of rejecting 
PRISM Orders to buy (sell) if the NBBO is only $0.01 wide and the 
Agency order is stopped on the bid (offer) if there is a resting 
order on the bid (offer).
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    The Exchange believes that these changes to PRISM may provide 
additional opportunities for PRISM Orders of fewer than 50 option 
contracts to receive price improvement over the NBBO where the 
difference in the NBBO is $0.01 and therefore encourage the increased 
submission of orders of fewer than 50 option contracts.\11\ The 
Exchange notes that the statistics for the current pilot, which 
include, among other things, price improvement for orders of fewer than 
50 option contracts under the current auction eligibility requirements, 
show relatively small amounts of price improvement for such orders.\12\ 
BX believes that the proposed requirements will therefore increase the 
price improvement that orders of fewer than 50 option contracts may 
receive in PRISM.\13\ The Exchange also notes that NASDAQ PHLX LLC 
(``Phlx'') operates a similar price improvement mechanism, PIXL, which 
has been operating for a longer period of time and has generated 
similar pilot data.\14\ Given the similarly between the two mechanisms, 
the Exchange expects that PRISM, if operated on a pilot basis over a 
longer period of time, would continue to generate data that is 
comparable to PIXL.\15\
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    \11\ See Notice, supra note 3, at 89169.
    \12\ See id.
    \13\ See id.
    \14\ See Securities Exchange Act Release No. 63027 (October 1, 
2010), 75 FR 62160 (October 7, 2010) (SR-Phlx-2010-108).
    \15\ See Notice, supra note 3, at 89169.
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B. Pilot Program

    Three components of PRISM were approved by the Commission on a 
pilot basis: (1) The early conclusion of the PRISM Auction; \16\ (2) 
the provision that an unrelated market or marketable limit order 
(against the BX BBO) on the opposite side of the market from the PRISM 
Order received during the Auction will not cause the Auction to end 
early and will execute against interest outside of the Auction; \17\ 
and (3) no minimum size requirement of orders. The provisions were 
approved for a pilot period that currently expires on January 18, 
2017.\18\ The Exchange proposes to have the Pilot approved on a 
permanent basis.
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    \16\ See Chapter VI, Section 9(ii)(B)(4) of the BX Options 
Rules.
    \17\ See Chapter VI, Section 9(ii)(D) of the BX Options Rules.
    \18\ See PRISM Approval Order, supra note 4.
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    During the Pilot period, the Exchange submitted certain data 
periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders, there is significant price improvement available 
through PRISM, and that there is an active and liquid market 
functioning on the Exchange outside of the Auction mechanism.\19\
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    \19\ See Chapter VI, Section 9(vii).
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1. No Minimum Size Requirement
    Chapter VI, Section 9(vii) provides that, as part of the current 
Pilot, there will be no minimum size requirement for orders to be 
eligible for the Auction. The Exchange believes that the data gathered 
since the approval of the Pilot, which it discussed in the Notice, 
establishes that there is liquidity and competition both within PRISM 
and outside of PRISM, and that there are opportunities for significant 
price improvement within PRISM.\20\
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    \20\ See Notice, supra note 3, at 89169. See also Exhibit 3 to 
SR-BX-2016-063.
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    The Exchange also has gathered information about activity in orders 
for less than 50 and 50 contracts or greater for PRISM auctions between 
January and June 2016. For auctions occurring during that period, 87.8% 
of auctions were for orders for less than 50 contracts, a percentage 
that remained stable over that time period. Auctions for orders of less 
than 50 contracts accounted for 30.0% of the contract volume traded in 
PRISM. Auctions of 50 contracts or more made up 12.2% of all PRISM 
auctions and accounted for 70.0% of contracts traded in PRISM.\21\
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    \21\ See Notice, supra note 3, at 89369.
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    With respect to price improvement, 60.5% of PRISM auctions between 
January and June 2016 executed at a price that was better than the NBBO 
at the time the auction began.\22\ For auctions of less than 50 
contracts, 64.7% received price improvement, while 30.5% of auctions 
for 50 contracts or more received price improvement.\23\
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    \22\ See id.
    \23\ See Notice, supra note 3, at 89170.
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    BX believes that the data gathered during the Pilot period 
indicates that there is meaningful competition in PRISM auctions for 
all size orders, there is an active and liquid market functioning on 
the Exchange outside of the auction mechanism, and that there are 
opportunities for price improvement for orders executed through 
PRISM.\24\ The Exchange therefore has requested that the Commission 
approve the no minimum size requirement on a permanent basis.
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    \24\ See id.
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2. Early Conclusion of the PRISM Auction
    Chapter VI, Section 9(ii)(B)(4) of the BX Options Rules provides 
that the PRISM Auction shall conclude at the earlier of (1) the end of 
the Auction period; (2) any time the BX BBO crosses the PRISM Order 
stop price on the same side of the market as the PRISM Order; or (3) 
any time there is a trading halt on the Exchange in the affected 
series.\25\ The latter two conditions are operating as part of the 
current Pilot.
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    \25\ If the situations described in either of the two latter 
conditions occur, the entire PRISM Order will be executed at: (1) In 
the case of the BX BBO crossing the PRISM Order stop price, the best 
response price(s) or, if the stop price is the best price in the 
Auction, at the stop price, unless the best response price is equal 
to or better than the price of a limit order resting on the Order 
Book on the same side of the market as the PRISM Order, in which 
case the PRISM Order will be executed against that response, but at 
a price that is at least the Minimum Increment better than the price 
of such limit order at the time of the conclusion of the Auction; or 
(2) in the case of a trading halt on the Exchange in the affected 
series, the stop price, in which case the PRISM Order will be 
executed solely against the Initiating Order. Any unexecuted PAN 
responses will be cancelled.
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    As with the no minimum size requirement, the Exchange has gathered 
data on these latter two conditions. Between January and June 2016, one 
auction terminated early because the BX BBO crossed the PRISM Order 
stop price. No auctions terminated early because of halts. The number 
of auctions that terminated early was less than 1/100th of 1% of all 
PRISM auctions over the period. The auctions that terminated early were 
less than 1/100th of 1% of contracts traded in PRISM auctions.\26\
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    \26\ See Notice, supra note 3, at 89170.
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    Based on the data gathered during the pilot, the Exchange does not 
anticipate that either of these conditions will occur with significant 
frequency, or will otherwise disrupt the functioning of

[[Page 8237]]

PRISM auctions.\27\ The Exchange therefore has requested that the 
Commission approve this aspect of the Pilot on a permanent basis.
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    \27\ See id.
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3. Unrelated Market or Marketable Limit Order
    Chapter VI, Section 9(ii)(D) of the BX Options Rules provides that 
an unrelated market or marketable limit order (against the BX BBO) on 
the opposite side of the market from the PRISM Order received during 
the Auction will not cause the Auction to end early and will execute 
against interest outside of the Auction. If contracts remain from such 
unrelated order at the time the auction ends, they will be considered 
for participation in the order allocation process described elsewhere 
in the Rule.
    The Exchange states that the provision is based on a similar 
provision in the Phlx PIXL mechanism.\28\ In approving this feature on 
PIXL, also on a pilot basis, the Commission found that ``allowing the 
PIXL auction to continue for the full auction period despite receipt of 
unrelated orders outside the Auction would allow the auction to run its 
full course and, in so doing, will provide a full opportunity for price 
improvement to the PIXL Order. Further, the unrelated order would be 
available to participate in the PIXL order allocation.'' \29\ The 
Exchange does not believe that this provision has had a significant 
impact on either the unrelated order or the PRISM auction process.\30\ 
The Exchange therefore has requested that the Commission approve this 
aspect of the Pilot on a permanent basis.
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    \28\ See Phlx Rule 1080(n)(ii)(D).
    \29\ See Securities Exchange Act Release No. 63027 (October 1, 
2010), 75 FR 62160 (October 7, 2010) (SR-PHLX-2010-108).
    \30\ See Notice, supra note 3, at 89170.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\31\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\32\ which requires, among other things, 
that the rules of a national securities exchange be 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 regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect customers, issuers, brokers and dealers.
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    \31\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \32\ 15 U.S.C. 78f(b)(5).
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    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2016, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the auction, in particular for orders for 
fewer than 50 contracts; the degree of competition for order flow in 
such auctions; and a comparison of liquidity in the auctions with 
liquidity on the Exchange generally.\33\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\34\ Recognizing this, the Exchange 
has proposed to amend the auction eligibility requirements to require 
price improvement of at least one minimum price improvement increment 
over the NBBO for PRISM Orders of less than 50 option contracts where 
the difference in the NBBO is $0.01.
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    \33\ See Exhibit 3 to SR-BX-2016-063.
    \34\ See Notice, supra note 3, at 89169.
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    The Exchange's proposal to modify the auction eligibility 
requirements for orders of fewer than 50 contracts and seek permanent 
approval of the Pilot, as amended with the new provision, will, in the 
Commission's view, promote opportunities for price improvement for such 
orders when the NBBO is $0.01 wide, while continuing to provide 
opportunities for price improvement when spreads are wider than $0.01.
    In addition, the Commission has carefully evaluated the PRIME Pilot 
data and has determined that it would be beneficial to customers and to 
the options market as a whole to approve on a permanent basis the 
provisions concerning early conclusion of the PRISM Auction, and the 
receipt of an unrelated market or marketable limit order (against the 
BX BBO) on the opposite side of the market from the PRISM Order during 
the Auction. The Commission notes that there have been few instances of 
early termination of the PRISM. The Commission further notes that 
permitting the PRISM Auction to continue despite receipt of unrelated 
orders outside the Auction would allow the Auction to run its full 
course and provide a full opportunity for price improvement to the 
PRISM Order, while allowing the unrelated order to seek an execution, 
including in the Auction's order allocation.
    The Commission believes that, particularly for auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the 
Pilot permanent. The data demonstrate that the auction generally 
provides price improvement opportunities to orders, including orders of 
retail customers and particularly when the bid/ask differential is 
wider than $0.01, that there is meaningful competition for orders on 
the Exchange; and that there exists an active and liquid market 
functioning on the Exchange outside of the auction.\35\ The Commission 
further believes that the proposed revisions to the eligibility 
requirements for PRISM Orders of fewer than 50 contracts with respect 
to circumstances when the NBBO is $0.01 wide should help to enhance the 
operation of the auction by providing meaningful opportunities for 
price improvement in such circumstances, and should benefit investors 
and others in a manner that is consistent with the Act. Thus, the 
Commission has determined to approve the Exchange's proposed revisions 
to Chapter VI, Section 9(i) of the BX Options Rules and to approve the 
Pilot, as proposed to be modified, on a permanent basis.
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    \35\ See Exhibit 3 to SR-BX-2016-063.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-BX-2016-063), be and hereby 
is approved.
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    \36\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01467 Filed 1-23-17; 8:45 am]
 BILLING CODE 8011-01-P


