[Federal Register Volume 85, Number 144 (Monday, July 27, 2020)]
[Notices]
[Pages 45243-45263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16165]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89356; File No. SR-BX-2020-016]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
of Proposed Rule Change To Amend BX's Opening Process in Connection 
With a Technology Migration

July 21, 2020.
    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 July 20, 2020, Nasdaq BX, Inc. (``BX'' or ``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 proposes to amend Options 2, Section 4, ``Obligations 
of Market Makers and Lead Market Makers''; Options 3, Section 7, 
``Types of Orders and Order and Quote Protocols''; Options 3, Section 
8, titled ``Opening and Halt Cross''; Options 4A, Section 11, ``Trading 
Sessions''; and Options 6B, Section 1, ``Exercise of Options 
Contracts''.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, at the 
principal office of the Exchange, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Options 2, Section 4, ``Obligations 
of Market Makers and Lead Market Makers''; Options 3, Section 7, 
``Types of Orders and Order and Quote Protocols''; Options 3, Section 
8, titled ``Opening and Halt Cross''; Options 4A, Section 11, ``Trading 
Sessions''; and Options 6B, Section 1, ``Exercise of Options 
Contracts'' in connection with a technology migration to an enhanced 
Nasdaq, Inc. (``Nasdaq'') architecture which results in higher 
performance, scalability, and more robust functionality. With this 
System migration, BX intends to adopt certain opening functionality, 
which currently exists on Nasdaq Phlx LLC (``Phlx'') at Options 3, 
Section 8, ``Options Opening Process.''
    These proposed enhancements will allow BX to continue to have a 
robust Opening Process. Broadly, the Exchange's proposal is intended to 
create an opening process similar to Phlx, however, unlike Phlx, BX 
will not require its Lead Market Makers to enter Valid Width Quotes 
during the opening.\3\ Today, BX Lead Market Makers are not required to 
quote during the opening, that will remain unchanged. Today, BX Lead 
Market Makers may quote during the opening, but they are not obligated 
to quote.\4\ BX Lead Market Makers are required to quote intra-day.\5\ 
The Exchange proposes to retain the Valid Width NBBO requirements with 
respect to Opening With a Trade pursuant to proposed Options 3, Section 
8(i) and (j). The Exchange's proposal would maintain BX's ability to 
open with a BBO (no trade) pursuant to proposed Options 3, Section 8(f) 
either with: (1) A Valid Width NBBO; (2) upon the opening of a certain 
number of away markets; or (3) if a certain amount of time has passed 
since the commencement of the Opening Process. When opening with a 
trade, BX's proposal will adopt Phlx's Opening Processes to further 
limit the current opening price boundaries on BX.\6\ The proposal would 
align BX's current Valid Width NBBO requirements to Phlx's Quality 
Opening Markets requirements.\7\ Phlx's Opening Process requires 
tighter Valid Width Quotes to open Phlx as compared to the proposed 
opening for BX.\8\ Today, Phlx's Opening Process is

[[Page 45244]]

more stringent than BX's current opening. This proposal seeks to 
provide a process for BX, when opening with a trade, that requires 
tighter boundaries similar to Phlx. The Exchange's proposal is 
described in greater detail below.
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    \3\ See Phlx Options 3, Section 8(d)(i).
    \4\ Other options markets do not require their lead market 
makers to quote during the opening. See Cboe Exchange, Inc. Rule 
5.31. See also The Nasdaq Options Market LLC Options 3, Section 8.
    \5\ See BX Options 2, Section 4(j).
    \6\ See proposed BX Options 3, Section 8(i).
    \7\ Phlx's Quality Opening Market is a bid/ask differential 
applicable to the best bid and offer from all Valid Width Quotes 
defined in a table to be determined by the Exchange and published on 
the Exchange's website. The calculation of Quality Opening Market is 
based on the best bid and offer of Valid Width Quotes. The 
differential between the best bid and offer are compared to reach 
this determination. The allowable differential, as determined by the 
Exchange, takes into account the type of security (for example, 
Penny Pilot versus non-Penny Pilot issue), volatility, option 
premium, and liquidity. The Quality Opening Market differential is 
intended to ensure the price at which the Exchange opens reflects 
current market conditions. See Phlx Options 3, Section 8(a)(viii).
    Similarly, BX's Valid Width NBBO is the combination of all away 
market quotes and Valid Width Quotes received over the SQF. The 
Valid Width NBBO will be configurable by the underlying security, 
and tables with valid width differentials, which will be posted by 
the Exchange on its website. Away markets that are crossed will void 
all Valid Width NBBO calculations. If any Market Maker quotes on the 
Exchange are crossed internally, then all Exchange quotes will be 
excluded from the Valid Width NBBO calculation. These two concepts 
both provide the applicable bid/ask differential and ensure the 
price at which the Exchange opens reflects current market 
conditions.
    \8\ BX's Valid Width Quote is a two-sided electronic quotation, 
submitted by a Market Maker, quoted with a difference not to exceed 
$5 between the bid and offer regardless of the price of the bid. See 
proposed BX Options 3, Section 8(a)(9). This is compared to Phlx's 
Valid Width Quote which is a two-sided electronic quotation 
submitted by a Phlx Electronic Market Maker that meets the following 
requirements: Options on equities and index options bidding and/or 
offering so as to create differences of no more than $.25 between 
the bid and the offer for each option contract for which the 
prevailing bid is less than $2; no more than $.40 where the 
prevailing bid is $2 or more but less than $5; no more than $.50 
where the prevailing bid is $5 or more but less than $10; no more 
than $.80 where the prevailing bid is $10 or more but less than $20; 
and no more than $1 where the prevailing bid is $20 or more, 
provided that, in the case of equity options, the bid/ask 
differentials stated above shall not apply to in-the-money series 
where the market for the underlying security is wider than the 
differentials set forth above. For such series, the bid/ask 
differentials may be as wide as the quotation for the underlying 
security on the primary market, or its decimal equivalent rounded 
down to the nearest minimum increment. The Exchange may establish 
differences other than the above for one or more series or classes 
of options. See Phlx Options 3, Section 8(a)(ix).
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    The Exchange proposes to amend the title of Options 3, Section 8 
from ``Opening and Halt Cross'' to ``Options Opening Process'' to 
conform the title to Phlx's Rule at Options 3, Section 8, ``Options 
Opening Process.'' The Exchange also proposes to amend the title of 
Options 3, Section 8, within Options 4A, Section 11, Trading Session, 
and Options 6B, Section 1, Exercise of Options Contracts, to conform 
the title to ``Options Opening Process'' as proposed herein.
Definitions
    The Exchange proposes to amend the current ``Definitions'' section 
at proposed BX Options 3, Section 8(a). The Exchange proposes to remove 
the text ``For purposes of this Rule the term:'' and instead state, 
``The Exchange conducts an opening for all option series traded on the 
Exchange using its System.'' This rule text change is intended to 
conform to Phlx Options 3, Section 8(a).
    The Exchange proposes to amend and alphabetize the current 
definitions within Options 3, Section 8(a). The Exchange proposes to 
set forth the following terms, which are described below: ``Away Best 
Bid or Offer'' or ``ABBO;'' ``imbalance;'' ``market for the underlying 
security;'' ``Opening Price;'' ``Opening Process;'' ``Potential Opening 
Price;'' ``Pre-Market BBO;'' ``Valid Width National Best Bid or Offer'' 
or ``Valid Width NBBO;'' ``Valid Width Quote,'' and ``Zero Bid 
Market.'' The Exchange is conforming the definitions within Options 3, 
Section 8(a) to start with ``A'' or ``An,'' as appropriate.
    The Exchange proposes to relocate and amend the term ``Away Best 
Bid or Offer'' or ``ABBO'' from current BX Options 3, Section 8(a)(7) 
to proposed Options 3, Section 8(a)(1). The words ``shall mean'' are 
replaced by ``is,'' but otherwise the description remains the same.
    The Exchange proposes to relocate ``imbalance'' from current BX 
Options 3, Section 8(a)(1) to proposed Options 3, Section 8(a)(2) and 
amend the language to provide that an imbalance is the number of 
unmatched contracts priced through the Potential Opening Price. 
Currently, the term ``imbalance'' is defined as ``the number of 
contracts of eligible interest that may not be matched with other order 
contracts at a particular price at any given time.'' The Exchange 
proposes to adopt the Phlx definition.\9\ The Exchange will be defining 
Potential Opening Price within this rule change and therefore the new 
proposed imbalance definition would be more applicable with that 
definition.
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    \9\ See Phlx Options 3, Section 8(a)(xi).
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    The Exchange proposes to relocate ``market for the underlying 
security'' from current BX Options 3, Section 8(a)(5) to proposed 
Options 3, Section 8(a)(3).\10\ Today Options 3, Section 8(a)(5) 
describes ``market for the underlying security'' as ``. . .either the 
primary listing market, the primary volume market (defined as the 
market with the most liquidity in that underlying security for the 
previous two calendar months), or the first market to open the 
underlying security, as determined by the Exchange on an issue-by-issue 
basis and announced to the membership on the Exchange's website.'' The 
Exchange proposes to amend this definition by replacing the term 
``primary volume market'' with ``an alternative market designated by 
the primary market.'' The Exchange anticipates that an alternative 
market would be necessary if the primary listing market were 
impaired.\11\ In the event that a primary market is impaired and 
utilizes its designated alternative market, the Exchange would utilize 
that market as the underlying.\12\ The Exchange further proposes an 
additional contingency, in the event that the primary market is unable 
to open, and an alternative market is not designated (and/or the 
designated alternative market does not open), the Exchange may utilize 
a non-primary market to open all underlying securities from the primary 
market. The Exchange will select the non-primary market with the most 
liquidity in the aggregate for all underlying securities that trade on 
the primary market for the previous two calendar months, excluding the 
primary and alternate markets. In order to open an option series it 
would require an equity market's underlying quote. If another equity 
market displays opening prices for the underlying security, the 
Exchange proposes to utilize those quotes. This proposed change to the 
current System would allow the Exchange to open in situations, where 
the primary market is experiencing an issue, and also where an 
alternative market designated by the primary market may not be 
designated by the primary market, or is unable to open. Utilizing a 
non-primary market with the most liquidity in the aggregate for all 
underlying securities for the previous two calendar months will ensure 
that the Exchange opens with quotes which are representative of the 
volume on that primary market. The Exchange believes that this proposal 
will enable it to open in the event that there are issues with the 
primary market or the alternate market assigned by the primary.
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    \10\ This term is identical to Phlx's Options 3, Section 
8(a)(ii).
    \11\ The primary listing market and the primary volume market, 
as defined in BX's Rules, could be the same market and therefore an 
alternative market is not available under the current Rule.
    \12\ For example, in the event that the New York Stock Exchange 
LLC was unable to open because of an issue with its market and it 
designated NYSE Arca, Inc. (``NYSE Arca'') as its alternative 
market, then BX would utilize NYSE Arca as the market for the 
underlying.
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    The Exchange proposes a new definition, ``Opening Price,'' at 
proposed Options 3, Section 8(a)(4). This proposed definition would 
state that the Opening Price is described in sections (i) and (k). This 
proposed definition is the same as Phlx Options 3, Section 8(a)(iii).
    The Exchange proposes a new definition, ``Opening Process,'' at 
proposed Options 3, Section 8(a)(5). This proposed definition would 
state that ``Opening Process'' is described in section (d). This 
proposed definition is the same as Phlx Options 3, Section 8(a)(iv).
    The Exchange proposes a new definition, ``Potential Opening 
Price,'' at proposed Options 3, Section 8(a)(6). This proposed 
definition would state that Potential Opening Price is described in 
section (h). This proposed definition is the same as Phlx Options 3, 
Section 8(a)(vi).
    The Exchange proposes a new definition, ``Pre-Market BBO,'' at 
Options 3, Section 8(a)(7). This proposed definition would state that 
Pre-Market BBO is the highest bid and lowest offer among Valid Width 
Quotes. The term ``Valid Width Quote'' is defined below. This proposed 
definition is the same as Phlx Options 3, Section 8(a)(vii).
    The Exchange proposes to relocate and amend the definition of 
``Valid Width National Best Bid or Offer'' or

[[Page 45245]]

``Valid Width NBBO'' from current BX Options 3, Section 8(a)(6) to 
proposed Options 3, Section 8(a)(8). The Exchange proposes to replace 
the words ``shall mean'' with ``is'' and also replace the rule text 
which states, ``any combination of BX Options-registered Market Maker 
order and quotes received over the SQF \13\ Protocols within a 
specified bid/ask differential as established and published by the 
Exchange,'' with the proposed term ``Valid Width Quote.'' The Exchange 
also proposes a grammatical correction to add ``the underlying 
security'' instead of ``underlying'' and also add ``which'' in the 
second sentence. Finally, the Exchange proposes to amend the last 
sentence to: (1) Replace ``BX Options'' with ``Exchange;'' (2) remove 
references to Market Maker ``orders'' and only refer to quotes; and (3) 
change the term ``such'' to ``Exchange'' to make clear that all local 
quotes would be excluded from the Valid Width NBBO, when any local 
quotes are crossed. This proposed change to the definition will align 
BX's consideration of only Market Maker quotes, and not orders, with 
Phlx Options 3, Section 8. BX's current rule includes Market Maker 
orders, Market Maker quotes and away market quotes as part of the Valid 
Width NBBO calculation. The Exchange proposes to amend the Valid Width 
NBBO to exclude Market Maker orders and only include Market Maker Valid 
Width Quotes and away market quotes. This would exclude Opening Sweeps, 
which are orders that are entered by Market Makers through SQF.\14\ The 
Exchange proposes to exclude such orders from the Valid Width NBBO 
because Opening Sweeps are considered eligible interest during the 
Opening Process.
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    \13\ ``Specialized Quote Feed'' or ``SQF'' is an interface that 
allows Market Makers to connect, send, and receive messages related 
to quotes, Immediate-or-Cancel Orders, and auction responses into 
and from the Exchange. Features include the following: (1) Options 
symbol directory messages (e.g underlying instruments); (2) System 
event messages (e.g., start of trading hours messages and start of 
opening); (3) trading action messages (e.g., halts and resumes); (4) 
execution messages; (5) quote messages; (6) Immediate-or-Cancel 
Order messages; (7) risk protection triggers and purge 
notifications; (8) opening imbalance messages; (9) auction 
notifications; and (10) auction responses. The SQF Purge Interface 
only receives and notifies of purge request from the Market Maker. 
Market Makers may only enter interest into SQF in their assigned 
options series. See Options 3, Section 7(d)(1)(B).
    \14\ Proposed BX Options 3, Section 7(a)(9) provides, ``Opening 
Sweep'' is a one-sided order entered by a Market Maker through SQF 
for execution against eligible interest in the System during the 
Opening Process. This order type is not subject to any protections 
listed in Options 3, Section 15, except for Automated Quotation 
Adjustments. The Opening Sweep will only participate in the Opening 
Process pursuant to Options 3, Section 8 and will be cancelled upon 
the open if not executed.''
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    The Exchange proposes a new definition, ``Valid Width Quote,'' at 
proposed Options 3, Section 8(a)(9). This proposed definition would 
state that a Valid Width Quote is a two-sided electronic quotation, 
submitted by a Market Maker, quoted with a difference not to exceed $5 
between the bid and offer regardless of the price of the bid. 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, or its 
decimal equivalent rounded down to the nearest minimum increment. The 
Exchange may establish differences other than the above for one or more 
series or classes of options. The bid/ask differentials on BX differ 
from Phlx. Phlx Options 3, Section 8(a)(ix), similar to proposed BX 
Options 3, Section 8(a)(9), permits the bid/ask differential to be as 
wide as the quotation for the underlying security on the primary 
market, or its decimal equivalent rounded down to the nearest minimum 
increment. Also, both markets would permit the Exchange to establish 
differences, other than as stated for one or more series or classes of 
options. Both markets refer back to their respective intra-day 
differentials. BX refers to a difference not to exceed $5 between the 
bid and offer, similar to BX Options 2, Section 4(f) and 5(d)(2). Phlx 
refers to differentials so as to create differences of no more than 
$.25 between the bid and the offer for each option contract for which 
the prevailing bid is less than $2; no more than $.40 where the 
prevailing bid is $2 or more but less than $5; no more than $.50 where 
the prevailing bid is $5 or more but less than $10; no more than $.80 
where the prevailing bid is $10 or more but less than $20; and no more 
than $1 where the prevailing bid is $20 or more, similar to Phlx 
Options 8, Section 27(c)(1)(A).\15\
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    \15\ Phlx's bid/ask differentials in the opening are similar to 
those for the trading floor.
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    Finally, the Exchange proposes a new definition, ``Zero Bid 
Market,'' at proposed Options 5, Section 8(a)(10). This proposed new 
definition would state that a Zero Bid Market is where the best bid for 
an options series is zero. This proposed definition is the same as Phlx 
Options 3, Section 8(a)(x).
    The Exchange believes that these definitions will bring additional 
clarity to the proposed rule.
    The Exchange proposes to eliminate the term ``Order Imbalance 
Indicator'' at current BX Options 3, Section 8(a)(2).\16\ This term is 
no longer necessary as the Exchange is amending the manner in which 
imbalances are handled on BX. Today, the Order Imbalance Indicator 
describes a message that is disseminated by electronic means, and 
contains information about Eligible Interest and the price in penny 
increments at which such interest would execute at the time of 
dissemination. BX would disseminate the number of unmatched contracts 
priced through the Potential Opening Price, similar to Phlx.\17\
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    \16\ The Order Imbalance Indicator shall disseminate the 
following information: (A) ``Current Reference Price'' shall mean an 
indication of what the opening cross price would be at a particular 
point in time; (B) the number of contracts of Eligible Interest that 
are paired at the Current Reference Price; (C) the size of any 
Imbalance; and (D) the buy/sell direction of any Imbalance. See BX 
Options 3, Section 8(a)(2).
    \17\ BX's proposed imbalance message would include the symbol, 
side of the imbalance, size of matched contracts, size of the 
imbalance, and Potential Opening Price bounded by the Pre-Market 
BBO. See proposed BX Options 3, Section 8(k)(1).
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    The Exchange proposes to eliminate the term ``BX Opening Cross'' at 
current BX Options 3, Section 8(a)(3).\18\ This term is being replaced 
by the new term ``Opening Process'' at proposed BX Options 3, Section 
8(a)(5) and provides, ``An Opening Process is described herein in 
section (d).''
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    \18\ ``BX Opening Cross'' shall mean the process for opening or 
resuming trading pursuant to this Rule and shall include the process 
for determining the price at which Eligible Interest shall be 
executed at the open of trading for the day, or the open of trading 
for a halted option, and the process for executing that Eligible 
Interest.
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    The Exchange proposes to eliminate the term ``Eligible Interest'' 
at current BX Options 3, Section 8(a)(4).\19\ The Exchange describes 
eligible interest within proposed BX Options 3, Section 8(b), similar 
to Phlx. The defined term is no longer necessary.
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    \19\ ``Eligible Interest'' shall mean any quotation or any order 
that may be entered into the system and designated with a time-in-
force of IOC (immediate-or-cancel), DAY (day order), GTC (good-till-
cancelled), and OPG (On the Open Order). However, orders received 
via FIX protocol prior to the BX Opening Cross designated with a 
time-in-force of IOC will be rejected and shall not be considered 
eligible interest. Orders received via SQF prior to the BX Opening 
Cross designated with a time-in-force of IOC will remain in-force 
through the opening and shall be cancelled immediately after the 
opening.
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Eligible Interest
    The first part of the Opening Process determines what constitutes 
eligible interest. The Opening Process is a price discovery process 
which considers interest, both on BX and away markets, to determine the 
optimal bid and offer with which to open the market. The Opening 
Process seeks the price point at which the most number of contracts

[[Page 45246]]

may be executed, while protecting away market interest.
    Proposed BX Options 3, Section 8(b) explains the eligible interest 
that will be accepted during the Opening Process which includes, Valid 
Width Quotes, Opening Sweeps \20\ and orders. Quotes,\21\ other than 
Valid Width Quotes, will not be included in the Opening Process. This 
rule text is identical to Phlx Options 3, Section 8(b), except that 
certain text not relevant to BX is not included.\22\ Opening Sweeps may 
be submitted through the Specialized Quote Feed or ``SQF'' protocol, 
which permits one-sided orders to be entered by a Market Maker.\23\
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    \20\ See proposed BX Options 3, Section 7(a)(9).
    \21\ The term quotes shall refer to a two-sided quote.
    \22\ Phlx describes what a Non-SQT Market Maker may submit. An 
``SQT'' is a Streaming Quote Trader. That term is defined within 
Phlx Options 1, Section 1(b)(54) and is specific to Phlx. No such 
term exists on BX. Further, Phlx has All-or-None Orders which are 
permitted to rest on the Order Book. See Phlx Options 3, Section 
7(b)(5). BX's All-or-None Orders must be executed in its entirety or 
not at all, and do not rest on the Order Book. See BX Options 3, 
Section 7(a)(8). The behavior of All-or-None Orders is not relevant 
for BX's Opening because they do not rest on the Order Book and are 
rejected pre-opening.
    \23\ See note 13 above.
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    The Exchange proposes to define an ``Opening Sweep'' within BX 
Options 3, Section 8(b)(9) as defined at proposed BX Options 3, Section 
7(a)(9). This description for an Opening Sweep is the same as Phlx 
Options 3, Section 8(b)(i), which cites to a similar provision in 
Phlx's rules at Options 3, Section 7(b)(6). As proposed, an Opening 
Sweep is a Market Maker order submitted for execution against eligible 
interest in the System during the Opening Process. Market participants 
may specify orders for the Opening Process by placing a TIF of ``OPG'' 
on the order as explained below. All Participants may submit interest 
into the Opening Process.
    Additionally, the Exchange proposes to amend current BX Options 3, 
Section 7(a)(9) to remove the current order type described as ``On the 
Open Order'' and instead adopt an ``Opening Sweep'' order type similar 
to Phx at Options 3, Section 7(b)(6). While the ``On the Open Order'' 
and ``Opening Sweep'' are similar, in that both order types may only be 
entered during the Opening Process, and both cancel back the unexecuted 
portion of the order, the Exchange believes that utilizing the same 
terminology and level of detail in describing this order type, as 
Phlx's current description of an Opening Sweep, will conform the 
Opening Process of these two Nasdaq affiliated markets. As is the case 
today, only a Market Maker may enter an Opening Sweep into SQF for 
execution against eligible interest in the System during the Opening 
Process. The Exchange provides additional information about the order 
type, similar to Phlx. This order type is not subject to any 
protections listed in Options 3, Section 15, except for Automated 
Quotation Adjustments.\24\ The Opening Sweep will only participate in 
the Opening Process, pursuant to Options 3, Section 8, and will be 
cancelled upon the open if not executed. This sentence provides 
additional context to the Opening Sweep, and is the same as Phlx's 
rule.
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    \24\ Automated Quotation Adjustments are described within BX 
Options 3, Section 15(c)(2).
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    Further, BX currently permits orders marked with a ``Time In 
Force'' or ``TIF'' of ``On the Open Order'' or ``OPG'' to be utilized 
to specify orders for submission into the Opening Cross.\25\ This TIF 
of ``OPG'' means for orders so designated, that if after entry into the 
System, the order is not fully executed in its entirety during the 
Opening Cross, the order, or any unexecuted portion of such order, will 
be cancelled back to the entering participant. Similar to Phlx Options 
3, Section 7(c)(3), BX proposes to replace the ``On the Open Order'' 
\26\ TIF with an ``Opening Only'' or ``OPG'' TIF, which can only be 
executed in the Opening Process pursuant to Options 3, Section 8. Any 
portion of the order that is not executed during the Opening Process is 
cancelled. This order type is not subject to any protections listed in 
Options 3, Section 15.\27\ Finally, the Exchange proposes to note that 
OPG orders may not route.
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    \25\ See current BX Options 3, Section 7(a)(9).
    \26\ See current BX Options 3, Section 7(b)(1).
    \27\ Phlx Options 3, Section 7(c)(3) provides that an OPG Order 
is not subject to any protections listed in Options 3, Section 15, 
except for Automated Quotation Adjustments. Today, OPG Orders on 
Phlx are not subject to any protections, including Automated 
Quotation Adjustments protections. Phlx intends to file a rule 
change to remove the rule text which provides, ``except for 
Automated Quotation Adjustments,'' as OPG Orders are not subject to 
that risk protection. BX will not include the exception in the 
proposed rule text. OPG Orders are handled in the same manner by the 
Phlx System today and the BX System, as proposed.
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    The Exchange also proposes rule text within Options 3, Section 
8(b)(1)(A) which is similar to Phlx Options 3, Section 8(b)(i)(A). BX 
proposes to state within Options 3, Section 8(b)(1)(A):

    A Market Maker assigned in a particular option may only submit 
an Opening Sweep if, at the time of entry of the Opening Sweep, the 
Market Maker has already submitted and maintained a Valid Width 
Quote. All Opening Sweeps in the affected series entered by a Market 
Maker will be cancelled immediately if that Market Maker fails to 
maintain a continuous quote with a Valid Width Quote in the affected 
series.

    The proposed rule text is similar to Phlx Options 3, Section 
8(b)(i)(A). Since the protocol over which an Opening Sweep is submitted 
is used for Market Maker quoting, the acceptance of an Opening Sweep 
was structured to rely on the Valid Width Quote. An Opening Sweep may 
only be submitted by a Market Maker when he/she has a Valid Width Quote 
in the affected series.
    The Exchange proposes rule text within Options 3, Section 
8(b)(1)(B), which is similar to Phlx Options 3, Section 8(b)(i)(B). BX 
proposes to state within Options 3, Section 8(b)(1)(B):

    Opening Sweeps may be entered at any price with a minimum price 
variation applicable to the affected series, on either side of the 
market, at single or multiple price level(s), and may be cancelled 
and re-entered. A single Market Maker may enter multiple Opening 
Sweeps, with each Opening Sweep at a different price level. If a 
Market Maker submits multiple Opening Sweeps, the System will 
consider only the most recent Opening Sweep at each price level 
submitted by such Market Maker in determining the Opening Price. 
Unexecuted Opening Sweeps will be cancelled once the affected series 
is open.

    The Exchange proposes to state at proposed BX Options 3, Section 
8(b)(2) that, ``The System will allocate interest pursuant to Options 
3, Section 10.'' Options 3, Section 10 is the Exchange's allocation 
methodology which would apply to allocation in the Opening Process. 
This rule text is similar to Phlx Options 3, Section 8(b)(ii).\28\ 
Today, BX allocates pursuant to Options 3, Section 10 within its 
opening. The allocation methodology is not being amended with this 
proposal.
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    \28\ Current BX Options 3, Section 8(b)(5) states, ``If the BX 
Opening Cross price is selected and fewer than all contracts of 
Eligible Interest that are available in BX Options would be 
executed, all Eligible Interest shall be executed at the BX Opening 
Cross price in accordance with the execution algorithm assigned to 
the associated underlying option.'' The Exchange would continue to 
allocate pursuant to the Exchange's allocation methodology within 
Options 3, Section 10. Further, in accordance with current BX 
Options 3, Section 8(b)(6), all eligible interest will be executed 
at the Opening Price and disseminated on OPRA.
---------------------------------------------------------------------------

    The Exchange proposes to reserve Options 3, Section 8(c). Phlx 
discusses Floor Broker orders within Options 3, Section 8(c). BX does 
not have a Trading Floor and is reserving this section to retain 
similar lettering/numbering as compared to Phlx.
    Pursuant to proposed BX Options 3, Section 8(d), eligible interest 
may be submitted into BX's System and will be received starting at the 
times noted herein. Specifically, Market Maker Valid Width Quotes and 
Opening Sweeps

[[Page 45247]]

received starting at 9:25 a.m. will be included in the Opening Process. 
Orders entered at any time before an option series opens are included 
in the Opening Process. This proposed language adds specificity to the 
rule regarding the submission of Valid Width Quotes and Opening Sweeps. 
The 9:25 a.m. trigger is intended to tie the option Opening Process to 
quoting in the majority of the underlying securities; it presumes that 
option quotes submitted before any indicative quotes have been 
disseminated for the underlying security may not be reliable or 
intentional. Therefore, the Exchange has chosen a reasonable timeframe 
at which to begin utilizing option quotes, based on the Exchange's 
experience when underlying quotes start becoming available. BX's 
current rule at Options 3, Section 8(b) provides the Opening Cross 
shall occur at or after 9:30 if the dissemination of a regular market 
hours quote or trade by the market for the underlying security has 
occurred or in the case of index options the Exchange has received the 
opening price of the underlying index. The Exchange continues to rely 
on the underlying price with this proposal.
    Proposed BX Options 3, Section 8(d)(1) describes when the Opening 
Process may begin with specific time-related triggers. The proposed 
rule provides that the Opening Process for an option series will be 
conducted pursuant to proposed Options 3, Section 8 (f) through (k) on 
or after 9:30 a.m., when the System has received the opening trade or 
quote on the market for the underlying security in the case of equity 
options or in the case of index options. This requirement is intended 
to tie the option Opening Process to receipt of liquidity. This rule 
text differs from Phlx's rule at Options 3, Section 8(d)(i).\29\ Phlx's 
rule describes quoting requirements for Lead Market Makers. Today, BX, 
unlike Phlx, does not require its Lead Market Makers to submit Valid 
Width Quotes. BX is not proposing to adopt the same quoting 
requirements during the Opening Process that exist on Phlx. Therefore, 
the Phlx requirement for Lead Market Makers would not be applicable to 
BX. Further, proposed BX Options 3, Section 8(d)(3) makes clear that 
the Opening Process will stop and an option series will not open if the 
ABBO becomes crossed. Therefore, the Exchange does not note within 
proposed Options 3, Section 8(d)(1) that the ABBO may not be crossed.
---------------------------------------------------------------------------

    \29\ Phlx Options 3 Section 8(d)(i) provides, ``The Opening 
Process for an option series will be conducted pursuant to 
paragraphs (f)--(k) below on or after 9:30 a.m. if: the ABBO, if 
any, is not crossed; and the System has received, within two minutes 
(or such shorter time as determined by the Exchange and disseminated 
to membership on the Exchange's website) of the opening trade or 
quote on the market for the underlying security in the case of 
equity options or, in the case of index options, within two minutes 
of the receipt of the opening price in the underlying index (or such 
shorter time as determined by the Exchange and disseminated to 
membership on the Exchange's website), or within two minutes of 
market opening for the underlying currency in the case of U.S. 
dollar-settled FCO (or such shorter time as determined by the 
Exchange and disseminated to membership on the Exchange's website) 
any of the following: (A) the Lead Market Maker's Valid Width Quote; 
(B) the Valid Width Quotes of at least two Phlx Electronic Market 
Makers other than the Lead Market Maker; or (C) if neither the Lead 
Market Maker's Valid Width Quote nor the Valid Width Quotes of two 
Phlx Electronic Market Makers have been submitted within such 
timeframe, one Phlx Electronic Market Maker has submitted a Valid 
Width Quote.''
---------------------------------------------------------------------------

    The Exchange is proposing to state in proposed BX Options 3, 
Section 8(d)(2), similar to Phlx Options 3, Section 8(d)(ii), that for 
all options, the underlying security, including indexes, must be open 
on the market for the underlying security for a certain time period to 
be determined by the Exchange for the Opening Process to commence. The 
Exchange is proposing that the time period be no less than 100 
milliseconds and no more than 5 seconds.\30\ This proposal is intended 
to permit the price of the underlying security to settle down and not 
flicker back and forth among prices after its opening. It is common for 
a stock to fluctuate in price immediately upon opening; such volatility 
reflects a natural uncertainty about the ultimate Opening Price, while 
the buy and sell interest is matched. The Exchange is proposing a range 
of no less than 100 milliseconds and no more than 5 seconds, in order 
to ensure that it has the ability to adjust the period for which the 
underlying security must be open on the primary market. The Exchange 
may determine that in periods of high/low volatility that allowing the 
underlying to be open for a longer/shorter period of time may help to 
ensure more stability in the marketplace prior to initiating the 
Opening Process.
---------------------------------------------------------------------------

    \30\ The Phlx Opening Process is set at 100 milliseconds. The 
Exchange believes that 100 milliseconds is the appropriate amount of 
time given the experience with the Phlx market. The Exchange would 
set the timer for BX initially at 100 milliseconds. The Exchange 
will issue a notice to provide the initial setting and, would, 
thereafter, issue a notice if it were to change the timing, which 
may be between 100 milliseconds and 5 seconds. If the Exchange were 
to select a time not between 100 milliseconds and 5 seconds, it 
would be required to file a rule proposal with the Commission.
---------------------------------------------------------------------------

    BX is not adopting Phlx Rules at Options 3, Section 8(d)(iii) and 
(iv), which describe quoting obligations for Phlx Lead Market Makers 
once an underlying security in the assigned option series has opened 
for trading. As noted above, the quoting obligations described in 
Phlx's rule do not apply in BX's current rule, as BX does not require 
Lead Market Makers to quote in the Opening Process today. The 
Exchange's proposal does not require Lead Market Makers to quote during 
the Opening Process.
    Similar to Phlx Options 3, Section 8(d)(v), BX proposed within 
Options 3, Section 8(d)(3) to provide that the Opening Process will 
stop and an option series will not open if the ABBO becomes crossed. 
Once this condition no longer exists, the Opening Process in the 
affected option series will start again pursuant to paragraphs (f)-(k). 
All eligible opening interest will continue to be considered during the 
Opening Process when the process is re-started. The proposed rule 
reflects that the ABBO cannot be crossed for the Opening Process to 
proceed. These events are indicative of uncertainty in the marketplace 
of where the option series should be valued. In these cases, the 
Exchange will wait for the ABBO to become uncrossed before initiating 
the Opening Process to ensure that there is stability in the 
marketplace in order to assist the Exchange in determining the Opening 
Price, or for a Valid Width Quote to be submitted. Unlike Phlx Options 
3, Section 8(d)(v),\31\ BX will not consider if a Valid Width Quote(s) 
is no longer present. Unlike Phlx, BX does not require its Lead Market 
Makers to quote in the Opening Process. This requirement is not 
necessary for BX as BX's market would open with a BBO, pursuant to 
Options 3, Section 8(f), unless the ABBO becomes crossed. While, BX is 
not adopting Phlx's requirement to quote in the Opening Process, 
certain protections exist within proposed Options 3, Section 8(d)(4). A 
Valid Width NBBO must be present for BX to open with a trade pursuant 
to this proposal.
---------------------------------------------------------------------------

    \31\ Phlx Options 3, Section 8(d)(v) provides, ``The Opening 
Process will stop and an option series will not open if the ABBO 
becomes crossed or when a Valid Width Quote(s) pursuant to paragraph 
(d)(i) is no longer present. Once each of these conditions no longer 
exist, the Opening Process in the affected option series will start 
again pursuant to paragraphs (f)-(k) below.''
---------------------------------------------------------------------------

    The Exchange proposes to add rule text within proposed Options 3, 
Section 8(d)(4) to provide a scenario, which is specific to BX, and 
would not be applicable to Phlx. The Exchange proposes that an Opening 
Process will stop and an options series will not open, if a Valid Width 
NBBO is no longer present, pursuant to paragraph (i)(2). Once this 
condition no longer exists, the

[[Page 45248]]

Opening Process in the affected options series will start again, 
pursuant to paragraphs (j) and (k) below. Today, BX would not open with 
a trade unless there is a Valid Width NBBO present. This would remain 
the case with this proposal. The Exchange believes that the addition of 
this text provides market participants with an expectation of the 
circumstances under which the Exchange would open an option series, as 
well as price protection afforded to interest attempting to participate 
in the Opening Process on BX.
Reopening After a Trading Halt
    Proposed BX Options 3, Section 8(e) is intended to provide 
information regarding the manner in which a trading halt would impact 
the Opening Process similar to Phlx Options 3, Section 8(e). Proposed 
BX Options 3, Section 8(e) states that ``[t]he procedure described in 
this Rule will be used to reopen an option series after a trading halt. 
If there is a trading halt or pause in the underlying security, the 
Opening Process will start again irrespective of the specific times 
listed in paragraph (d).'' This last sentence makes clear that this 
rule applies to openings related to the normal market opening, as well 
as intra-day re-openings following a trading halt. Current BX Options 
3, Section 8(b) similarly provides that an Opening Cross shall occur 
when trading resumes after a trading halt. The Exchange is not amending 
this provision, rather the text is being presented similar to Phlx's 
Options 3, Section 8.
Opening With a BBO
    Proposed BX Options 3, Section 8(f) describes when the Exchange may 
open with a quote on its market (no trade). The proposed rule states,
    Opening with a BBO (No Trade). If there are no opening quotes or 
orders that lock or cross each other, and no routable orders locking or 
crossing the ABBO, the System will open with an opening quote by 
disseminating the Exchange's best bid and offer among quotes and orders 
(``BBO'') that exist in the System at that time, if any of the below 
conditions are satisfied:
    (1) A Valid Width NBBO is present;
    (2) A certain number of other options exchanges (as determined by 
the Exchange) have disseminated a firm quote on OPRA; or
    (3) A certain period of time (as determined by the Exchange) has 
elapsed.
    Unlike Phlx, which provides that certain conditions may not 
exist,\32\ BX's proposal affirmatively states that the System will open 
with no trade provided one of the three conditions within Options 3, 
Section 8(f) are met. These three conditions are similar to BX's 
current rule text within Options 3, Section 8(b). BX's proposal at 
proposed Options 3, Section (f)(1) provides that that the System will 
open, provided any one of the three conditions are met, and one of 
those conditions is a Valid Width NBBO, as noted in (f)(1). Subject to 
Options 3, Section 8(f)(2), an options series may open if a certain 
number of other options exchanges (as determined by the Exchange) have 
disseminated a firm quote on OPRA.\33\ Also, an options series will 
open if a certain period of time, as determined by the Exchange, has 
elapsed pursuant to Options 3, Section 8(f)(3).\34\ Unlike Phlx which 
requires a Lead Market Maker to quote during the Opening Process, BX 
requires a Valid Width NBBO to open. Phlx's rule will open with a Valid 
Width Quote, unless all of the conditions in Phlx Options 3, Section 
8(f) exist. The three conditions noted in Phlx, (i) a Zero Bid Market; 
(ii) no ABBO; and (iii) no Quality Opening Market, would cause Phlx to 
calculate an OQR because it could not open with a trade. The Exchange 
notes that the concept is similar for Phlx and BX, except that the 
triggers for opening are different, a Valid Width Quote as compared to 
a Valid Width NBBO (e.g. BX does not require a Lead Market Maker to 
quote to open an option series and, thus does not require a Valid Width 
Quote to open). BX does not require a Valid Width Quote and, therefore, 
requires the conditions within proposed BX Options 3, Section 8(f) to 
open with a BBO Conversely, Phlx requires a Valid Width Quote and, 
therefore, once that Valid Width Quote is available, Phlx would 
consider if all of the three conditions noted within Phlx Options 3, 
Section 8(f) exist to ensure there are no impediments to opening with a 
PBBO (Phlx's BBO).
---------------------------------------------------------------------------

    \32\ Phlx Options 3, Section 8(f) states, ``Opening with a PBBO 
(No Trade). If there are no opening quotes or orders that lock or 
cross each other and no routable orders locking or crossing the 
ABBO, the System will open with an opening quote by disseminating 
the Exchange's best bid and offer among quotes and orders (``PBBO'') 
that exist in the System at that time, unless all three of the 
following conditions exist: (i) A Zero Bid Market; (ii) no ABBO; and 
(iii) no Quality Opening Market. If all of these conditions exist, 
the Exchange will calculate an Opening Quote Range pursuant to 
paragraph (j) and conduct the Price Discovery Mechanism pursuant to 
paragraph (k) below.''
    \33\ BX currently requires at least two other options exchanges 
to open. The setting will be initially set at two away options 
exchanges with this new proposal.
    \34\ BX currently requires 15 minutes to pass with respect to 
this setting, The setting will remain at 15 minutes with this 
proposal.
---------------------------------------------------------------------------

    Current BX Options 3, Section 8(b)(2) provides that ``[i]f no trade 
is possible on BX, then BX will open dependent upon one of the 
following: (A) A Valid Width NBBO is present; (B) A certain number of 
other options exchanges (as determined by the Exchange) have 
disseminated a firm quote on OPRA; or (C) A certain period of time (as 
determined by the Exchange) has elapsed.'' It will continue to permit 
one of these 3 scenarios to open an options series on BX. The Exchange 
also notes that a Valid Width NBBO must be present to open, pursuant to 
Options 3, Section 8(j) or (k), which are described below.
Further Opening Processes
    If, as proposed, an opening did not occur pursuant to proposed 
paragraph (e) (Reopening After a Trading Halt) and there are opening 
Valid Width Quotes, or orders, that lock or cross each other, the 
System will calculate the Pre-Market BBO.\35\ The Pre-Market BBO only 
uses Valid Width Quotes, which provide both a bid and offer as compared 
to orders which are one-sided. The rule text of proposed BX Options 3, 
Section 8(g) provides, ``If there are opening Valid Width Quotes or 
orders that lock or cross each other, the System will calculate the 
Pre-Market BBO.'' This rule text is the same as Phlx Options 3, Section 
8(g). The Exchange calculates a Pre-Market BBO in order for the 
Exchange to open with a trade pursuant to proposed Options 3, Section 
8(i), to ensure that the Pre-Market BBO is a Valid Width NBBO, which is 
required to open the market.\36\ The Exchange does not disseminate a 
Pre-Market BBO, rather, the Exchange disseminates imbalance messages to 
notify Participants of available trading opportunities on BX during the 
Opening Process.
---------------------------------------------------------------------------

    \35\ See proposed BX Options 3, Section 8(g).
    \36\ The Pre-Market BBO is calculated to ensure, when the 
Exchange opens with a trade, a Valid Width NBBO is present, 
particularly when there is no away market quote or when the away 
market quote is not a Valid Width NBBO.
---------------------------------------------------------------------------

Potential Opening Price
    Current BX Options 3, Section 8(b)(4) provides that the ``[t]he BX 
Opening Cross shall occur at the price that maximizes the number of 
contracts of eligible interest in BX Options to be executed at or 
within the ABBO and within a defined range, as established and 
published by the Exchange, of the Valid Width NBBO.'' The proposed 
Opening Process seeks to maximize the

[[Page 45249]]

number of number of contracts of eligible interest that will execute 
during the Opening Process. The Exchange proposes to establish 
boundaries, similar to Phlx, to establish the Opening Price. The ABBO 
will continue to be considered as part of the Potential Opening Price. 
Proposed BX Options 3, Section 8(i) describes the manner in which the 
ABBO is considered in arriving at the Potential Opening Price.
    Proposed BX Options 3, Section 8(h), similar to Phlx Options 3, 
Section 8(h), describes the general concept of how the System 
calculates the Potential Opening Price under all circumstances, once 
the Opening Process is triggered. The first sentence of that paragraph 
describes a Potential Opening Price as a price where the System may 
open once all other Opening Process criteria is met. Next, the rule 
text provides, ``[t]o calculate the Potential Opening Price, the System 
will take into consideration all Valid Width Quotes and orders 
(including Opening Sweeps) for the option series and identify the price 
at which the maximum number of contracts can trade (``maximum quantity 
criterion''). In addition, paragraphs (i)(1)(C) and (j)(5)-(7) below 
contain additional provisions related to the Potential Opening Price.'' 
The proposal attempts to maximize the number of contracts that can 
trade, and is intended to find the most reasonable and suitable price, 
relying on the maximization to reflect the best price.
    Proposed BX Options 3, Section 8(h)(1) presents the scenario for 
more than one Potential Opening Price. Proposed Options 3, Section 
8(h)(1) provides,

    More Than One Potential Opening Price. When two or more 
Potential Opening Prices would satisfy the maximum quantity 
criterion and leave no contracts unexecuted, the System takes the 
highest and lowest of those prices and takes the mid-point; if such 
mid-point is not expressed as a permitted minimum price variation, 
it will be rounded to the minimum price variation that is closest to 
the closing price for the affected series from the immediately prior 
trading session. If there is no closing price from the immediately 
prior trading session, the System will round up to the minimum price 
variation to determine the Opening Price.

    Proposed BX Options 3, Section 8(h)(2) presents the scenario for 
two or more Potential Opening Prices. Proposed Options 3, Section 
8(h)(2) provides, ``If two or more Potential Opening Prices for the 
affected series would satisfy the maximum quantity criterion and leave 
contracts unexecuted, the Opening Price will be either the lowest 
executable bid or highest executable offer of the largest sized side.'' 
This, again, bases the Potential Opening Price on the maximum quantity 
that is executable.
    Proposed BX Options 3, Section 8(h)(3) provides that ``[t]he 
Opening Price is bounded by the better away market price that cannot be 
satisfied with the Exchange routable interest.'' The Exchange does not 
open with a trade at a price that trades through another market's BBO. 
This process, importantly, breaks a tie by considering the largest 
sized side and away markets, which are relevant to determining a fair 
Opening Price.
    The System applies certain boundaries to the Potential Opening 
Price to help ensure that the price is a reasonable one by identifying 
the quality of that price; if a well-defined, fair price can be found 
within these boundaries, the option series can open at that price 
without going through a further price discovery mechanism.
    Proposed BX Options 3, Section 8(i), Opening with a Trade, 
provides:

    The Exchange will open the option series for trading with a 
trade on Exchange interest only at the Opening Price, if any of 
these conditions occur:
    (A) The Potential Opening Price is at or within the best of the 
Pre-Market BBO and the ABBO, which is also a Valid Width NBBO;
    (B) the Potential Opening Price is at or within the non-zero bid 
ABBO, which is also a Valid Width NBBO, if the Pre-Market BBO is 
crossed; or
    (C) where there is no ABBO, the Potential Opening Price is at or 
within the Pre-Market BBO, which is also a Valid Width NBBO.

    For the purposes of calculating the mid-point the Exchange will use 
the better of the Pre-Market BBO or ABBO as a boundary price and will 
open that options series for trading with an execution at the resulting 
Potential Opening Price.\37\
---------------------------------------------------------------------------

    \37\ BX's current rule at Options 3, Section 8(b)(4)(B) states, 
``If more than one price exists under subparagraph (A), and there 
are no contracts that would remain unexecuted in the cross, the BX 
Opening Cross shall occur at the midpoint price, rounded to the 
penny closest to the price of the last execution in that series (and 
in the absence of a previous execution price, the price will round 
up, if necessary) of (1) the National Best Bid or the last offer on 
BX Options against which contracts will be traded whichever is 
higher, and (2) the National Best Offer or the last bid on BX 
Options against which contracts will be traded whichever is lower.'' 
This process for considering the mid-point is being eliminated in 
favor of Phlx's methodology for calculating the mid-point as 
described in proposed BX Options 3, Section 8(h).
---------------------------------------------------------------------------

    These boundaries serve to validate the quality of the Opening 
Price. Proposed BX Options 3, Section 8(i), provides that the Exchange 
will open the option series for trading with an execution at the 
resulting Potential Opening Price, as long as it is within the defined 
boundaries regardless of any imbalance. The Exchange believes that 
since the Opening Price can be determined within a well-defined 
boundary and not trading through other markets, it is fair to open the 
market immediately with a trade and to have the remaining interest 
available to remain on the Order Book to be potentially executed in the 
displayed market. Using a boundary-based price counterbalances opening 
faster at a less bounded and perhaps less expected price and reduces 
the possibility of leaving an imbalance.
    Proposed BX Options 3, Section 8(i)(2), provides that if there is 
more than one Potential Opening Price which meets the conditions set 
forth in proposed BX Options 3, Section 8(i)(1)(A), (B) or (C), where 
(A) no contracts would be left unexecuted and (B) any value used for 
the mid-point calculation (which is described in subparagraph (g)) 
would cross either: (i) The Pre-Market BBO or (ii) the ABBO, then the 
Exchange will open the option series for trading with an execution and 
use the best price which the Potential Opening Price crosses as a 
boundary price for the purpose of the mid-point calculation. If these 
aforementioned conditions are not met, but a Valid Width NBBO is 
present, an Opening Quote Range is calculated as described in proposed 
BX Options 3, Section 8(j) and the price discovery mechanism, described 
in proposed BX Options 3, Section 8(k), would commence. The proposed 
rule explains the boundary, as well as the price basis for the mid-
point calculation, to enable the market to immediately open with a 
trade, which improves the detail included in the rule. The Exchange 
believes that this process is logical because it seeks to select a fair 
and balanced price. This rule text is similar to Phlx Options 3, 
Section 8(i).
    Today, BX has the concept of a Valid Width NBBO in its current 
rule. Rather than adopt Phlx's notion of a Quality Opening Market,\38\ 
which is very similar

[[Page 45250]]

to the concept of a Valid Width NBBO, BX retained the concept of a 
Valid Width NBBO. Phlx's rules at Options 3, Section 8(d), require a 
Valid Width Quote. The calculation of Phlx's Quality Opening Market is 
based on the best bid and offer of Valid Width Quotes. BX's proposed 
rule will only require a Valid Width NBBO, which is the combination of 
all away market quotes and Valid Width Quotes received over SQF. Unlike 
Phlx's requirements in Options 3, Section 8(d), which require a Lead 
Market Maker's quote, a BX Lead Market Maker may quote during the 
Opening Process, but is not required to quote in the Opening Process. 
BX's proposed rule retained the concept of a Valid Width NBBO because 
there is no requirement for Lead Market Makers to submit a Valid Width 
Quote. In contrast, Phlx utilized a Quality Opening Market concept.
---------------------------------------------------------------------------

    \38\ Phlx's Quality Opening Market is a bid/ask differential 
applicable to the best bid and offer from all Valid Width Quotes 
defined in a table to be determined by the Exchange and published on 
the Exchange's website. The calculation of Quality Opening Market is 
based on the best bid and offer of Valid Width Quotes. The 
differential between the best bid and offer are compared to reach 
this determination. The allowable differential, as determined by the 
Exchange, takes into account the type of security (for example, 
Penny Pilot versus non-Penny Pilot issue), volatility, option 
premium, and liquidity. The Quality Opening Market differential is 
intended to ensure the price at which the Exchange opens reflects 
current market conditions. See Phlx Options 3, Section 8(a)(viii).
    Similarly, BX's Valid Width NBBO is the combination of all away 
market quotes and Valid Width Quotes received over the SQF. The 
Valid Width NBBO will be configurable by the underlying security, 
and tables with valid width differentials, which will be posted by 
the Exchange on its website. Away markets that are crossed will void 
all Valid Width NBBO calculations. If any Market Maker quotes on the 
Exchange are crossed internally, then all Exchange quotes will be 
excluded from the Valid Width NBBO calculation. These two concepts 
both provide the applicable bid/ask differential and ensure the 
price at which the Exchange opens reflects current market 
conditions.
---------------------------------------------------------------------------

    BX's Valid Width NBBO is configurable by underlying, and a table 
with valid width differentials is available on BX's web page.\39\ Away 
markets that are crossed (e.g. Cboe crosses MIAX, BOX crosses CBOE) 
will void all Valid Width NBBO calculations. If any Market Maker quotes 
on BX Options are crossed internally, then all such quotes will be 
excluded from the Valid Width NBBO calculation. Within the Valid Width 
NBBO, all away market quotes and any combination of Market Maker Valid 
Width Quotes, whether they include the Exchange's Best Bid or Offer or 
not, are represented. The price discovery on BX currently includes not 
only Market Maker quotes, but also away market interest, this will 
remain the same with the proposal. The following examples illustrate 
the calculation of the Valid Width NBBO:
---------------------------------------------------------------------------

    \39\ See https://www.nasdaqtrader.com/Content/TechnicalSupport/BXOptions_SystemSettings.pdf.
---------------------------------------------------------------------------

Example 1: (away markets are crossed)
    Assume the Valid Width NBBO bid/ask differential is set by BX at 
.10.

Market Maker1 is quoting on the Exchange 1.05-1.15
Market Maker2 is quoting on the Exchange 1.00-1.10
BX BBO 1.05-.1.10
Assume Cboe is quoting .90-1.10
    Assume MIAX is quoting .70-.85.
    Since the ABBO is crossed (.90-.85), Valid Width NBBO calculations 
are not taken into account until the away markets are no longer 
crossed. Once the away markets are no longer crossed, the Exchange will 
determine if a Valid Width NBBO can be calculated. Assume the ABBO 
uncrosses because MIAX updates their quote to .90-1.15, the BX BBO of 
1.05-1.10 is considered a Valid Width NBBO. Pursuant to proposed 
Options 3, Section 8(f), BX Options will open with no trade and BBO 
disseminated as 1.05-1.10.

Example 2: (BX Options orders/quotes are crossed, ABBO is Valid Width 
NBBO)
    Assume that the Valid Width NBBO bid/ask differential is set by the 
Exchange at .10.

Market Maker1 is quoting on the Exchange 1.05-1.15 (10x10 contracts)
Market Maker2 is quoting on the Exchange .90-.95 (10x10 contracts)
    BX BBO crossed, 1.05-.95, while another Market Maker3 is quoting on 
the Exchange at .90-1.15 (10x10 contracts).
    Since the BX BBO is crossed, the crossing quotes are excluded from 
the Valid Width NBBO calculation. However, assume Cboe is quoting .95-
1.10 and MIAX is quoting .95-1.05, resulting in an uncrossed ABBO of 
.95-1.05.
    The ABBO of .95-1.05 meets the required .10 bid/ask differential 
and is considered a Valid Width NBBO. As Market Maker1 and Market 
Maker2 have 10 contracts each, these contracts will cross because there 
is more than one price at which those contracts could execute. The 
opening will occur with 10 contracts executing at 1.00, which is the 
mid-point of the NBBO.
    At the end of the Opening Process, only the quote from Market 
Maker3 remains so the BX Options disseminated quote at the end of 
Opening Process will be .90-1.15 (10x10 contracts).
    The requirement of a Valid Width NBBO being present continues to 
ensure that the Opening Price is rationally based on what is present in 
the broader marketplace during the Opening Process. As noted herein, 
the Valid Width NBBO includes all away market quotes. A Potential 
Opening Price must be at or within the ABBO, provided the market opened 
prior to calculation an OQR as discussed below.
    Proposed BX Options 3, Section 8(j) provides that the System will 
calculate an Opening Quote Range (``OQR'') for a particular option 
series that will be utilized in the price discovery mechanism if the 
Exchange has not opened subject to any of the provisions described 
above. Provided the Exchange has been unable to open the option series 
\40\ the OQR would broaden the range of prices at which the Exchange 
may open. This would allow additional interest to be eligible for 
consideration in the Opening Process. The OQR is an additional type of 
boundary beyond the boundaries mentioned in proposed BX Options 3, 
Section 8(h) and (i). OQR is intended to limit the Opening Price to a 
reasonable, middle ground price and thus reduce the potential for 
erroneous trades during the Opening Process. Although the Exchange 
applies other boundaries such as the BBO, the OQR provides a range of 
prices that may be able to satisfy additional contracts, while still 
ensuring a reasonable Opening Price. The Exchange seeks to execute as 
much volume as is possible at the Opening Price. OQR is constrained by 
the least aggressive limit prices within the broader limits of OQR. The 
least aggressive buy order or Valid Width Quote bid and least 
aggressive sell order or Valid Width Quote offer within the OQR will 
further bound the OQR. Although the Exchange applies other boundaries 
such as the BBO, the OQR is outside of the BBO. It is meant to provide 
a price that can satisfy more size without becoming unreasonable. Below 
is an example of the manner in which OQR is constrained.
---------------------------------------------------------------------------

    \40\ This would refer to an opening pursuant to proposed BX 
Options 3, Section 8(f) or (i).
---------------------------------------------------------------------------

    OQR Example: Assume the below pre-opening interest:

Lead Market Maker quotes 4.10 (100) x 4.20 (50)
Order1: Public Customer Buy 300 @4.39
Order2: Public Customer Sell 50 @4.13
Order3: Public Customer Sell 5 @4.29
Opening Quote Range configuration in this scenario is +/-0.10
9:30 a.m. events occur, underlying opens
First imbalance message: Buy imbalance @4.20, 100 matched, 200 
unmatched
Next 3 imbalance messages: Buy imbalance @4.29, 105 matched, 195 
unmatched
Potential Opening Price calculation would have been 4.20 + 0.10 = 4.30, 
but OQR is further bounded by the least aggressive Sell order @4.29
Order1 executes against Order 2 50 @4.29
Order1 executes against Lead Market Maker quote 50 @4.29
Order1 executes against Order 3 5 @4.29
Remainder of Order1 cancels as it is through the Opening Price
Lead Market Maker quote purges as its entire offer side volume has been 
exhausted
    Specifically, to determine the minimum value for the OQR, an 
amount, as defined in a table to be

[[Page 45251]]

determined by the Exchange, will be subtracted from the highest quote 
bid among Valid Width Quotes on the Exchange and on the away market(s), 
if any, except as provided in proposed BX Options 3, Section 8(j) 
paragraphs (3) and (4). To determine the maximum value for the OQR, an 
amount, as defined in a table to be determined by the Exchange, will be 
added to the lowest quote offer among Valid Width Quotes on the 
Exchange and on the away market(s), if any, except as provided in 
proposed BX Options 3, Section 8(j) paragraphs (3) and (4).\41\ 
However, if one or more away markets are disseminating a BBO that is 
not crossed, and there are Valid Width Quotes on the Exchange that 
cross each other or are marketable against the ABBO, then the minimum 
value for the OQR will be the highest away bid.\42\ It should be noted 
that the Opening Process would stop and an option series will not open 
if the ABBO becomes crossed, pursuant to proposed Options 3, Section 
8(d)(3). In addition, the maximum value for the OQR will be the lowest 
away offer.\43\
---------------------------------------------------------------------------

    \41\ See proposed BX Options 3, Section 8(j)(2).
    \42\ See proposed BX Options 3, Section 8(j)(3)(A).
    \43\ See proposed BX Options 3, Section 8(j)(3)(B).
---------------------------------------------------------------------------

    If there is more than one Potential Opening Price possible, where 
no contracts would be left unexecuted, any price used for the mid-point 
calculation (which is described in proposed BX Options 3, Section 
8(h)(3)), that is outside of the OQR, will be restricted to the OQR 
price on that side of the market for the purposes of the mid-point 
calculation. BX Options 3, Section 8(j)(4) continues the theme of 
relying on both maximizing executions and looking at the correct side 
of the market to determine a fair price.
    Proposed BX Options 3, Section 8(j)(5) deals with the situation 
where there is an away market price involved. If there is more than one 
Potential Opening Price possible, where no contracts would be left 
unexecuted, pursuant to proposed BX Options 3, Section 8(h)(3), when 
contracts will be routed, the System will use the away market price as 
the Potential Opening Price. The Exchange is seeking to execute the 
maximum amount of volume possible at the Opening Price. The Exchange 
will enter into the Order Book any unfilled interest at a price equal 
to or inferior to the Opening Price.\44\ It should be noted, the 
Exchange will not trade through an away market.\45\
---------------------------------------------------------------------------

    \44\ See proposed BX Options 3, Section 8(k)(5).
    \45\ See current BX Options 3, Section 5(d).
---------------------------------------------------------------------------

    Finally, proposed BX Options 3, Section 8(j)(6) provides if the 
Exchange determines that non-routable interest can execute the maximum 
number of Exchange contracts against Exchange interest, after routable 
interest has been determined by the System to satisfy the away market, 
then the Potential Opening Price is the price at which the maximum 
number of contracts can execute, excluding the interest which will be 
routed to an away market, which may be executed on the Exchange as 
described in proposed BX Options 3, Section 8(h). This continues the 
theme of trying to satisfy the maximum amount of interest during the 
Opening Process. This is similar to Phlx Options 3, Section 8(j). BX's 
proposed rule at Options 3, Section 8(j)(6) provides that the System 
will route all routable interest pursuant to Options 3, Section 
10(a)(1).\46\ Both Phlx and the proposed BX rule cite to their 
respective allocation rules.\47\
---------------------------------------------------------------------------

    \46\ Phlx Options 3, Section 8(k)(C)(6) provides, ``The System 
will execute orders at the Opening Price that have contingencies 
(such as, without limitation, all-or-none) and non-routable orders, 
such as a ``Do Not Route'' or ``DNR'' Orders, to the extent 
possible. The System will only route non-contingency Public Customer 
and Professional orders.'' Phlx routes Public Customer and 
Professional orders, while BX would route orders for all market 
participants.
    \47\ Phlx Options 3, Section 8(k)(E) provides that the 
allocation provisions of Options 3, Section 10 will apply.
---------------------------------------------------------------------------

Price Discovery Mechanism
    If the Exchange has not opened pursuant to proposed paragraphs (f) 
or (i), after the OQR is calculated, pursuant to proposed BX Options 3, 
Section 8(j), the Exchange will conduct a price discovery mechanism, 
pursuant to proposed BX Options 3, Section 8(k), which is similar to 
Phlx Options 3, Section 8(k). The price discovery mechanism is the 
process by which the Exchange seeks to identify an Opening Price having 
not been able to do so following the process outlined thus far herein. 
The principles behind the price discovery mechanism are, as described 
above, to satisfy the maximum number of contracts possible by 
identifying a price that may leave unexecuted contracts. However, the 
price discovery mechanism applies a proposed, wider boundary to 
identify the Opening Price, and the price discovery mechanism involves 
seeking additional liquidity.
    The Exchange believes that conducting the price discovery process 
in these situations protects orders from receiving a random price that 
does not reflect the totality of what is happening in the markets on 
the opening, and also further protects opening interest from receiving 
a potentially erroneous execution price on the opening. Opening 
immediately has the benefit of speed and certainty, but that benefit 
must be weighed against the quality of the execution price, and whether 
orders were left unexecuted. The Exchange believes that the proposed 
rule strikes an appropriate balance.
    The proposed rule attempts to open using Exchange interest only to 
determine an Opening Price, provided certain conditions contained in 
proposed BX Options 3, Section 8(j) are present, to ensure market 
participants receive a quality execution in the opening. The proposed 
rule does not consider away market liquidity, for purposes of routing 
interest to other markets, until the price discovery mechanism pursuant 
to proposed paragraph (k). Rather, away market prices are considered 
for purposes of avoiding trade-throughs. As a result, the Exchange 
might open without routing, if all of the conditions described above 
are met. The Exchange believes that the benefit of this process is a 
more rapid opening with quality execution prices. Opening with a quote, 
pursuant to Options 3, Section 8(f), would not require consideration of 
away market quotes because BX would have opened with a local quote that 
was not locked or crossed with the away market, provided there are no 
opening quotes or orders that lock or cross each other, and no routable 
orders locking or crossing the ABBO.\48\ With respect to Opening with a 
Trade, pursuant to Options 3, Section 8(i), the Exchange would not 
consider away market interest if it could open immediately with a 
trade, provided that the Exchange would not trade-through an away 
market. If BX is locked and crossed with an away market, then the 
Exchange would require additional price discovery, pursuant to Options 
3, Section 8(j) and (k). Finally, the Exchange considers away market 
interest in the Valid Width NBBO.
---------------------------------------------------------------------------

    \48\ See BX Options 3, Section 8(f).
---------------------------------------------------------------------------

    Today, pursuant to current BX Options 3, Section 8(b)(3) and (7), 
BX disseminates, by electronic means, an Order Imbalance Indicator 
every 5 seconds beginning between 9:20 and 9:28, or a shorter 
dissemination interval as established by the Exchange, with the default 
being set at 9:25 a.m. The start of dissemination, and a dissemination 
interval, are posted by BX on its website. Also, BX would disseminate 
an Order Imbalance Indicator for an imbalance containing marketable

[[Page 45252]]

routable interest.\49\ The Exchange proposes to continue to disseminate 
an imbalance, but instead of the manner in which BX utilizes an Order 
Imbalance Indicator today, BX would instead post up to 4 Imbalance 
Messages which each run its own Imbalance Timer, similar to Phlx. 
Today, BX's imbalance process begins, even if it has no interest. With 
this proposal, BX's imbalance message will serve to notify Participants 
of the availability of interest to cross in the opening. The Exchange 
believes that the proposed methodology will attract interest during the 
Opening Process, because the imbalance message will highlight for 
Participants the available size that may be crossed. The Exchange 
believes that Phlx's process attracts additional liquidity, because the 
proposed amendments are intended to create a more robust experience for 
market participants seeking to have their orders executed during the 
Opening Process. The Exchange believes adopting Phlx's process improves 
the quality of execution of BX Options' opening by attracting more 
liquidity through more meaningful imbalance notifications that 
broadcast trading opportunities during BX's Opening Process. The 
proposed changes give Participants more transparency into BX's Opening 
Process that would afford them a better experience.
---------------------------------------------------------------------------

    \49\ See current BX Options 3, Section 8(b)(3).
---------------------------------------------------------------------------

    Specifically, proposed BX Options 3, Section 8(k)(1) provides that 
the System will broadcast an Imbalance Message for the affected series 
(which includes the symbol, side of the imbalance, size of matched 
contracts, size of the imbalance, and Potential Opening Price bounded 
by the Pre-Market BBO) to participants, and begin an ``Imbalance 
Timer,'' not to exceed three seconds to notify Participants of 
available interest that may be crossed during the Opening Process. The 
Imbalance Timer would initially be set 200 milliseconds.\50\ The 
Imbalance Message is intended to attract additional liquidity, much 
like an auction, using an auction message and timer. The Imbalance 
Timer would be for the same number of seconds for all options traded on 
the Exchange. Pursuant to this proposed rule, as described in more 
detail below, the Exchange may have up to 4 Imbalance Messages which 
each run its own Imbalance Timer.
---------------------------------------------------------------------------

    \50\ The Phlx timer is currently set at 200 milliseconds. The 
Exchange will issue a notice to provide the initial setting and 
would thereafter issue a notice if it were to change the timing. If 
the Exchange were to select a time which exceeds 3 seconds, it would 
be required file a rule proposal with the Commission.
---------------------------------------------------------------------------

    The Exchange proposes to provide at BX Options 3, Section 
8(k)(1)(A), An Imbalance Message will be disseminated showing a ``0'' 
volume and a $0.00 price if: (i) No executions are possible but 
routable interest is priced at or through the ABBO; or (ii) internal 
quotes are crossing each other. Where the Potential Opening Price is 
through the ABBO, an imbalance message will display the side of 
interest priced through the ABBO.
    This rule text explains the information that is being conveyed when 
an imbalance message indicates ``0'' volume, such as (i) when no 
executions are possible and routable interest is priced at or through 
the ABBO; or (ii) internal quotes are crossing each other. The 
Imbalance Message provides detail regarding the potential state of the 
interest available. Where the Potential Opening Price is through the 
ABBO, an imbalance message will display the side of interest priced 
through the ABBO. The Imbalance Message provides transparency to market 
participants during the Opening Process. This rule text differs from 
Phlx Options 3, Section 8(k)(A)(1),\51\ which also provides, ``. . . or 
there is a Valid Width Quote, but there is no Quality Opening Market.'' 
BX, as noted herein, does not have a concept of a Quality Opening 
Market, but does have a concept of a Valid Width NBBO, which is always 
required, when attempting to open with a trade pursuant to Options 3 
Section 8(d)(4). In addition, a Valid Width Quote is always required on 
Phlx pursuant to Options 3, Section 8(d), but the open is not required 
to be quoted by a Lead Market Maker on BX. Therefore, the third prong, 
a Valid Width Quote from a local Market Maker, in the Phlx rule text is 
unnecessary for BX.
---------------------------------------------------------------------------

    \51\ Phlx Options 3, Section 8(k)(A)(1) provides, ``An Imbalance 
Message will be disseminated showing a ``0'' volume and a $0.00 
price if: (i) No executions are possible but routable interest is 
priced at or through the ABBO; (ii) internal quotes are crossing 
each other; or (iii) there is a Valid Width Quote, but there is no 
Quality Opening Market. Where the Potential Opening Price is through 
the ABBO, an imbalance message will display the side of interest 
priced through the ABBO.''
---------------------------------------------------------------------------

    Proposed BX Options 3, Section 8(k)(2), states that any new 
interest received by the System will update the Potential Opening 
Price. An update may not result in an immediate change to the Potential 
Opening Price, however, the Exchange will consider new interest as it 
arrives and update the Potential Opening Price accordingly based on 
existing interest and new interest. By way of example:
Case 1--An Update Which Does Not Result in a Change to Potential 
Opening Price
Valid Width NBBO = 0.20
CBOE market maker quotes 1.15 x 1.30 (10)
BX Market Maker quotes 1 x 1.25 (10)
Order to sell arrives for 1 contract @1.26 (Potential Opening Price 
updates, but determines there is no match, and therefore no change to 
lack of Potential Opening Price)
Order to buy arrives for 100 contracts @1.26 (Potential Opening Price 
updates, and changes to 1.26)
Order to buy arrives for 1000 contracts @1.24 (Potential Opening Price 
updates, but remains unchanged from 1.26)
    Case 2--An Update Results in a Change to the Potential Opening 
Price
Valid Width NBBO = 0.20
CBOE market maker quotes 1.15 x 1.30 (10)
BX Market Maker quotes 1 x 1.25 (10)
Order to sell arrives for 1 contract @1.26 (Potential Opening Price 
updates, but determines there is no match, and therefore no change to 
lack of Potential Opening Price)
Order to buy arrives for 1000 contracts @1.24 (Potential Opening Price 
updates, but determines there is no match, and therefore no change to 
lack of Potential Opening Price)
Order to sell arrives for 1000 contracts @1.24 (Potential Opening Price 
updates and changes to 1.24)
    If during or at the end of the Imbalance Timer, the Opening Price 
is at or within the OQR, the Imbalance Timer will end and the System 
will open with a trade at the Opening Price if the executions consist 
of Exchange interest only without trading through the ABBO, and without 
trading through the limit price(s) of interest within OQR, which is 
unable to be fully executed at the Opening Price. If no new interest 
comes in during the Imbalance Timer, and the Potential Opening Price is 
at or within OQR and does not trade through the ABBO, the Exchange will 
open with a trade at the end of the Imbalance Timer at the Potential 
Opening Price. This reflects that the Exchange is seeking to identify a 
price on the Exchange without routing away, yet which price may not 
trade through another market and the quality of which is addressed by 
applying the OQR boundary.
    Provided the option series has not opened pursuant to proposed 
Options 3, Section 8(k)(2),\52\ the System will send

[[Page 45253]]

a second Imbalance Message with a Potential Opening Price that is 
bounded by the OQR (and would not trade through the limit price(s) of 
interest within OQR, which is unable to be fully executed at the 
Opening Price) and includes away market volume in the size of the 
imbalance to Participants; and concurrently initiate a Route Timer, not 
to exceed one second.\53\ The Route Timer is intended to give Exchange 
users an opportunity to respond to an Imbalance Message before any 
opening interest is routed to away markets and, thereby, maximize 
trading on the Exchange. If during the Route Timer, interest is 
received by the System, which would allow the Opening Price to be 
within OQR, without trading through away markets and without trading 
through the limit price(s) of interest within OQR, which is unable to 
be fully executed, the System will open with trades and the Route Timer 
will simultaneously end. The System will monitor quotes and orders 
received during the Route Timer period and make ongoing corresponding 
changes to the permitted OQR and Potential Opening Price to reflect 
them.\54\ This proposal serves to widen the boundary of available 
Opening Prices, which should similarly increase the likelihood that an 
Opening Price can be determined. The Route Timer, like the Imbalance 
Timer, is intended to permit responses to be submitted and considered 
by the System in calculating the Potential Opening Price. The System 
does not route away until the Route Timer ends.
---------------------------------------------------------------------------

    \52\ The System would not open pursuant to proposed Options 3, 
Section 8(k)(2) if the Potential Opening Price is outside of the 
OQR, or if the Potential Opening Price is at or within the OQR, but 
would otherwise trade through the ABBO, or through the limit 
price(s) of interest within the OQR, which is unable to be fully 
executed at the Potential Opening Price.
    \53\ The Route Timer would be a brief timer that operates as a 
pause before an order is routed to an away market. Currently, the 
Phlx Route Timer is set to one second. BX's Route Timer will also be 
initially set to one second. The Exchange will issue a notice to 
Members to provide the initial setting and would thereafter issue a 
notice to Members, if it were to change the timing within the range 
of up to one second. If the Exchange were to select a time beyond 
one second, it would be required file a rule proposal with the 
Commission.
    \54\ See proposed BX Options 3, Section 8(k)(3)(B).
---------------------------------------------------------------------------

    Proposed Options 3, Section 8(k)(3)(C) provides if no trade 
occurred pursuant to proposed Section 8(k)(3)(B), when the Route Timer 
expires, if the Potential Opening Price is within OQR (and would not 
trade through the limit price(s) of interest within OQR, which is 
unable to be fully executed at the Opening Price), the System will 
determine if the total number of contracts displayed at better prices 
than the Exchange's Potential Opening Price on away markets (``better 
priced away contracts'') would satisfy the number of marketable 
contracts available on the Exchange. This provision protects the 
unexecuted interest and should result in a fairer price.\55\ The 
Exchange will open the option series by routing and/or trading on the 
Exchange, pursuant to proposed Options 3, Section 8(k)(3)(C) paragraphs 
(i) through (iii).
---------------------------------------------------------------------------

    \55\ Current BX Options 3, Section 8(b)(4)(C) considers 
unexecuted contracts. The proposed Opening Process likewise serves 
to protect unexecuted interest and also execute as many contract as 
possible during the Opening Process. The System will price any 
contracts routed to away markets at the better of the Exchange 
Opening Price or the order's limit price. Any unexecuted contracts 
from the imbalance not traded or routed will be cancelled back to 
the entering participant if they remain unexecuted and priced 
through the Opening Price. All other interest will be eligible for 
trading after opening, if consistent with the Participant's 
instruction as provided for within proposed Options 3, Section 
8(k)(3)(E) pursuant to a Forced Opening.
---------------------------------------------------------------------------

    Proposed Options 3, Section 8(k)(3)(C)(i) provides if the total 
number of better priced away contracts would satisfy the number of 
marketable contracts available on the Exchange on either the buy or 
sell side, the System will route all marketable contracts on the 
Exchange to such better priced away markets as Intermarket Sweep Order 
(``ISO''),\56\ designated as Immediate-or-Cancel (``IOC'') \57\ 
Order(s), and determine an opening BX Best Bid or Offer (``BBO'') that 
reflects the interest remaining on the Exchange. The System will price 
any contracts routed to away markets at the Exchange's Opening Price or 
pursuant to proposed Options 3, Section 8(k)(3)(C)(ii) or (iii) 
described below. Routing away at the Exchange's Opening Price is 
intended to achieve the best possible price available at the time the 
order is received by the away market.
---------------------------------------------------------------------------

    \56\ BX Options 3, Section 7(a)(6) provides that an 
``Intermarket Sweep Order'' or ``ISO'' are limit orders that are 
designated as ISOs in the manner prescribed by BX and are executed 
within the System by Participants at multiple price levels without 
respect to Protected Quotations of other Eligible Exchanges as 
defined in Options 5, Section 1. ISOs may have any time-in-force 
designation except WAIT, are handled within the System pursuant to 
Options 3, Section 10 and shall not be eligible for routing as set 
out in Options 3, Section 19. ISOs with a time-in-force designation 
of GTC are treated as having a time-in-force designation of Day.
    \57\ BX Options 3, Section 7(b)(2) provides that an ``Immediate 
Or Cancel'' or ``IOC'' shall mean for orders so designated, that if 
after entry into the System a marketable order (or unexecuted 
portion thereof) becomes non-marketable, the order (or unexecuted 
portion thereof) shall be canceled and returned to the entering 
participant. IOC Orders shall be available for entry from the time 
prior to market open specified by the Exchange on its website until 
market close and for potential execution from 9:30 a.m. until market 
close. IOC Orders entered between the time specified by the Exchange 
on its website and 9:30 a.m. Eastern Time will be held within the 
System until 9:30 a.m. at which time the System shall determine 
whether such orders are marketable.
---------------------------------------------------------------------------

    Proposed Options 3, Section 8(k)(3)(C)(ii) provides if the total 
number of better priced away contracts would not satisfy the number of 
marketable contracts the Exchange has, the System will determine how 
many contracts it has available at the Exchange Opening Price. If the 
total number of better priced away contracts, plus the number of 
contracts available at the Exchange Opening Price, would satisfy the 
number of marketable contracts on the Exchange on either the buy or 
sell side, the System will contemporaneously route, based on price/time 
priority of routable interest, a number of contracts that will satisfy 
interest at away markets at prices better than the Exchange Opening 
Price and trade available contracts on the Exchange at the Exchange 
Opening Price. The System will price any contracts routed to away 
markets at the better of the Exchange Opening Price or the order's 
limit price pursuant to this subparagraph. This continues with the 
theme of maximum possible execution of the interest on the Exchange or 
away markets.
    Proposed Options 3, Section 8(k)(3)(C)(iii) provides if the total 
number of better priced away contracts, plus the number of contracts 
available at the Exchange Opening Price, plus the contracts available 
at away markets at the Exchange Opening Price would satisfy the number 
of marketable contracts the Exchange has on either the buy or sell 
side, the System will contemporaneously route, based on price/time 
priority of routable interest, a number of contracts that will satisfy 
interest at away markets at prices better than the Exchange Opening 
Price (pricing any contracts routed to away markets at the better of 
the Exchange Opening Price or the order's limit price), trade available 
contracts on the Exchange at the Exchange Opening Price, and route a 
number of contracts that will satisfy interest at away markets at 
prices equal to the Exchange Opening Price. This provision is intended 
to introduce routing to away markets potentially both at a better price 
than the Exchange Opening Price, as well as at the Exchange Opening 
Price to access as much liquidity as possible to maximize the number of 
contracts able to be traded as part of the Opening Process. The 
Exchange routes at the better of the Exchange's Opening Price or the 
order's limit price to first ensure the order's limit price is not 
violated. Routing away at the Exchange's Opening Price is intended to 
achieve the best possible price for the routed order,

[[Page 45254]]

at the time the order is received by the away market. By way of 
example:

Example of Interest ``Better Than'' and ``Better of the Exchange 
Opening Price'' rule text: Options 3, Section 8(k)(3)(C)(ii), Options 
3, Section 8(k)(3)(C)(iii) and Options 3, Section 8(k)(5)
BX Market Maker 1 BBO 4.00 x 4.15 (100 contracts)
Cboe 4.00 x 4.14 (100 contracts)
DNR Order to buy 105 @4.20
Routable SRCH Order to buy 100 contracts at 4.18
Sell 2 contracts @4.21
After imbalance process:
SRCH Order routes at limit price of 4.18 (better than Opening Price of 
4.20) and executes at 4.14 on Cboe's offer.
DNR Order trades 100 with BX Market Maker quote (quote purges)

    Proposed Options 3, Section 8(k)(3)(D) provides that the System may 
send up to two additional Imbalance Messages \58\ (which may occur 
while the Route Timer is operating) bounded by OQR and reflecting away 
market interest in the volume. These boundaries are intended to assist 
in determining a reasonable price at which an option series might open. 
This provision is proposed to further state that after the Route Timer 
has expired, the processes in proposed Options 3, Section 8(k)(3)(C)(3) 
will repeat (except no new Route Timer will be initiated). No new Route 
Timer is initiated, because after the Route Timer has been initiated 
and subsequently expired, no further delay is needed before routing 
contracts. This is the case if at any point thereafter the Exchange is 
able to satisfy the total number of marketable contracts the Exchange 
has by executing on the Exchange and routing to other markets.
---------------------------------------------------------------------------

    \58\ The first two Imbalance Messages always occur if there is 
interest which will route to an away market. If the Exchange is 
thereafter unable to open at a price without trading through the 
ABBO, up to two more Imbalance Messages may occur based on whether 
or not the Exchange has been able to open before repeating the 
Imbalance Process. The Exchange may open prior to the end of the 
first two Imbalance Messages provided routing is not necessary.
---------------------------------------------------------------------------

    Proposed Options 3, Section 8(k)(3)(E), entitled ``Forced 
Opening,'' will describe what happens as a last resort in order to open 
an options series when the processes described above have not resulted 
in an opening of the options series. Under this process, called a 
Forced Opening, after all additional Imbalance Messages have occurred, 
pursuant to proposed subparagraph (D), the System will open the series 
by executing as many contracts as possible by routing to away markets 
at prices better than the Exchange Opening Price for their disseminated 
size, trading available contracts on the Exchange at the Exchange 
Opening Price bounded by OQR (without trading through the limit 
price(s) of interest within OQR, which is unable to be fully executed 
at the Opening Price). The System will also route contracts to away 
markets at prices equal to the Exchange Opening Price at their 
disseminated size. In this situation, the System will price any 
contracts routed to away markets at the better of the Exchange Opening 
Price or the order's limit price. Any unexecuted interest from the 
imbalance not traded or routed will be cancelled back to the entering 
Participant, if they remain unexecuted and priced through the Opening 
Price, otherwise orders will remain in the Order Book. All other 
interest will be eligible for trading after opening, if consistent with 
the Participant's instruction. The boundaries of OQR and limit prices 
within the OQR are intended to ensure a quality Opening Price as well 
as protect unexecutable interest, which may not be able to be fully 
executed. This rule differs from Phlx's rule.\59\ On Phlx, unless the 
member that submitted the original order has instructed the Exchange in 
writing to reenter the remaining size, the remaining size will be 
automatically submitted as a new order, whereas BX's proposed rule will 
cancel the order back to the entering party. The Exchange believes that 
cancelling the order back to the Participant allows for the Participant 
to determine how its customer would like its order to be handled. The 
Exchange believes that there are many methods in which to handle an 
order that is not executed. BX proposes to cancel back to provide 
certainty to its Participants, in line with current handling on BX.
---------------------------------------------------------------------------

    \59\ Phlx Options 3, Section 8(k)(C)(5), ``Forced Opening. After 
all additional Imbalance Messages have occurred pursuant to 
paragraph (4) above, the System will open the series by executing as 
many contracts as possible by routing to away markets at prices 
better than the Exchange Opening Price for their disseminated size, 
trading available contracts on the Exchange at the Exchange Opening 
Price bounded by OQR (without trading through the limit price(s) of 
interest within OQR which is unable to be fully executed at the 
Opening Price), and routing contracts to away markets at prices 
equal to the Exchange Opening Price at their disseminated size. In 
this situation, the System will price any contracts routed to away 
markets at the better of the Exchange Opening Price or the order's 
limit price. Any unexecuted interest from the imbalance not traded 
or routed will be cancelled back to the entering participant if they 
remain unexecuted and priced through the Opening Price, unless the 
member that submitted the original order has instructed the Exchange 
in writing to reenter the remaining size, in which case the 
remaining size will be automatically submitted as a new order. All 
other interest will be eligible for trading after opening, if 
consistent with the member's instructions.''
---------------------------------------------------------------------------

    Proposed Options 3, Section 8(k)(3)(F), provides the System will 
execute non-routable orders, such as ``Do-Not-Route'' or ``DNR'' 
Orders,\60\ to the extent possible. The System will only route non-
contingency orders.\61\ Unlike Phlx,\62\ which describes contingency 
orders, BX does not have contingency orders that participate in the 
Opening Process.\63\ The Exchange is adding this detail to memorialize 
the manner in which the System will execute non-routable orders at the 
opening. The Exchange desires to provide certainty to market 
participants as to which contingency orders will execute, and which 
orders will route during the Opening Process.
---------------------------------------------------------------------------

    \60\ A Do-Not-Route Order is described within BX Options 5, 
Section 4(a)(iii)(A).
    \61\ Phlx's Rule at Options 3, Section 8(k)(6) states that the 
System will only route Public Customer and Professional orders. BX 
will allow all orders to route not just Public Customer and 
Professional orders.
    \62\ See Phlx Options 3, Section 8(k)(C)(6).
    \63\ BX Minimum Quantity Orders and All-or-None Orders, which 
are described within Options 3, Section 7(a)(4) and (8), 
respectively, are both Immediate or Cancel Orders, which are 
rejected pre-opening and therefore do not participate in the Opening 
Process.
---------------------------------------------------------------------------

    The Exchange proposes to state at Options 3, Section 8(k)(4) that, 
pursuant to Options 3, Section 8(k)(3)(F), the System will re-price Do 
Not Route Orders (that would otherwise have to be routed to the 
exchange(s) disseminating the ABBO for an opening to occur) to a price 
that is one minimum trading increment inferior to the ABBO, and 
disseminate the re-priced DNR Order as part of the new BBO. This 
paragraph explains the treatment of DNR Orders, similar to Phlx Options 
3, Section 8(k)(3)(D). The System will re-price a DNR Order when any 
residual DNR Order interest, which was not satisfied in the Opening 
Process, crosses the ABBO.\64\
---------------------------------------------------------------------------

    \64\ See proposed BX Options 3, Section 8(k)(4).
---------------------------------------------------------------------------

    Proposed BX Options 3, Section 8(k)(5) provides that the System 
will cancel any order or quote priced through the Opening Price. All 
other interest will be eligible for trading after the opening. This 
rule text is similar to Phlx Options 3, Section 8(k)(G). This rule text 
makes clear that interest priced through the Opening will be cancelled.
    Proposed BX Options 3, Section 8(k)(6), which is identical to Phlx 
Options 3, Section 8(k)(E), provides that during the opening of the 
option series, where there is an execution possible, the System will 
give priority to Market Orders \65\ first, then to resting Limit

[[Page 45255]]

Orders \66\ and quotes. The allocation provisions of Options 3, Section 
10 will apply. Options 3, Section 10 describes BX's Order Book 
allocation. The Exchange is providing certainty to market participants 
as to the priority scheme during the Opening Process. Market Orders 
will be immediately executed first, because these orders have no 
specified price and Limit Orders will be executed, thereafter, in 
accordance with the prices specified.
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    \65\ BX Options 3, Section 7(a)(5) provides that ``Market 
Orders'' are orders to buy or sell at the best price available at 
the time of execution. Participants can designate that their Market 
Orders not executed after a pre-established period of time, as 
established by the Exchange, will be cancelled back to the 
Participant.
    \66\ BX Options 3, Section 7(a)(3) provides that ``Limit 
Orders'' are orders to buy or sell an option 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.
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    Proposed BX Options 3, Section 8(k)(7),which is identical to Phlx 
Options 3, Section 8(k)(F), provides that upon opening of an option 
series, regardless of an execution, the System disseminates the price 
and size of the Exchange's best bid and offer (BBO). This provision 
simply makes known the manner in which the Exchange establishes the BBO 
for purposes of reference upon opening.
    Finally, proposed BX Options 3, Section 8(k)(8) provides that any 
remaining contracts, which are not priced through the Exchange Opening 
Price after routing a number of contracts to satisfy better priced away 
contracts, will be posted to the Order Book at the better of the away 
market price or the order's limit price. This includes DNR Orders that 
are not crossed with the Opening Price. Only in the event that ABBO 
interest, which the DNR Order would otherwise be crossing, has been 
satisfied by routable interest during the Opening Process would DNR 
Orders be included within the remaining contracts described in proposed 
BX Options 3, Section 8(k)(8).\67\ This rule text accounts for orders 
which have routed away and returned unsatisfied, and also accounts for 
interest that remains unfilled during the Opening Process, provided 
that interest was not priced through the Opening Price.
---------------------------------------------------------------------------

    \67\ DNR Orders that are not crossed with the Opening Price rest 
on the Order Book at the better of the ABBO price or the DNR Order's 
limit order price.
---------------------------------------------------------------------------

    The Exchange cancels orders, which are priced through the Opening 
Price, since it lacks enough liquidity to satisfy these orders on the 
opening, yet their limit price gives the appearance that they should 
have been executed. The Exchange believes that market participants 
would prefer to have these orders returned to them for further 
assessment, rather than have these orders immediately entered onto the 
Order Book at a price which is more aggressive than the price at which 
the Exchange opened.
Opening Process Cancel Timer
    The Exchange proposes to retain BX's Opening Order Cancel Timer, 
which is currently described within Options 3, Section 8(c). The 
Exchange proposes to relocate this rule text within Options 3, Section 
8(l), similar to Phlx Options 3, Section 8(l), and rename it ``Opening 
Process Cancel Timer.'' While the Exchange is retaining the timer, the 
Exchange proposes to amend the rule text to conform the language to 
Phlx's rule text. This process specifies that if an options series has 
not opened before the conclusion of the Opening Process Cancel Timer, a 
Participant may elect to have orders returned by providing written 
notification to the Exchange. The Opening Process Cancel Timer will 
continue to be posted by the Exchange on its website. Orders submitted 
through FIX with a TIF of Good-Till-Canceled \68\ or ``GTC'' may not be 
cancelled, as is the case today. This provision would provide for the 
continued return of orders for un-opened options symbols. As is the 
case today, Participants would have the ability to elect to have orders 
returned, except for non-GTC orders, when options do not open. This 
functionality provides Participants with choice about where, and when, 
they can send orders for the opening that would afford them the best 
experience.
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    \68\ BX Options 3, Section 7(b)(4) provides that a ``Good Til 
Cancelled'' or ``GTC'' shall mean for orders so designated, that if 
after entry into System, the order is not fully executed, the order 
(or unexecuted portion thereof) shall remain available for potential 
display and/or execution unless cancelled by the entering party, or 
until the option expires, whichever comes first. GTC Orders shall be 
available for entry from the time prior to market open specified by 
the Exchange on its website until market close and for potential 
execution from 9:30 a.m. until market close.
---------------------------------------------------------------------------

Opening Process Examples
    The following examples are intended to demonstrate the Opening 
Process.
    Example 1. Proposed Options 3, Section 8(f) Opening with a BBO (No 
Trade). Suppose the Lead Market Maker (``LMM'') in an option enters a 
quote, 2.00 (100) bid and 2.10 (100) offer and a buy order to pay 2.05 
for 10 contracts is present in the System. The System also observes an 
ABBO is present with CBOE quoting a spread of 2.05 (100) and 2.15 
(100). Given the Exchange has no interest which locks or crosses each 
other and does not cross the ABBO, the option opens for trading with an 
Exchange BBO of 2.05 (10) x 2.10 (100) and no trade. Since there is a 
Valid Width NBBO, the System does not conduct the price discovery 
mechanism and the option opens without delay.
    Example 2a. Proposed Options 3, Section 8(i) Opening with Trade. 
Suppose the LMM enters the same quote in an option, 2.00 (100) bid and 
2.10 (100) offer. This quote defines the Pre-Market BBO. CBOE 
disseminates a quote of 2.01 (100) by 2.09 (100), making up the ABBO. 
Firm A enters a buy order at 2.04 for 50 contracts. Firm B enters a 
sell order at 2.04 for 50 contracts. The Exchange opens with the Firm A 
and Firm B orders fully trading at an Opening Price of 2.04 which 
satisfies the condition defined in proposed Options 3, Section 8(i), 
the Potential Opening Price is at or within the best of the Pre-Market 
BBO and the ABBO, which is a Valid Width NBBO.
    Example 2b. Proposed Options 3, Section 8(i) Opening with Trade. 
Similarly, suppose the LMM enters the same quote in an option, 2.00 
(100) bid and 2.10 (100) offer. A Market Maker enters a quote of 2.00 
(100) x 2.12 (100). The Pre-Market BBO is therefore 2.00 bid and 2.10 
offer. CBOE disseminates a quote of 2.05 (100) by 2.15 (100), making up 
the ABBO. Firm A enters a buy order at 2.11 for 300 contracts. Firm B 
enters a sell order at 2.11 for 100 contracts. The option does not open 
for trading because the Potential Opening Price of 2.11 does not 
satisfy the condition defined in proposed Options 3, Section 8(i) as 
the Potential Opening Price is outside the Pre-Market BBO. The System 
thereafter calculates the OQR and initiates the price discovery 
mechanism, as discussed in proposed Options 3, Section 8(k) to 
facilitate the Opening Process for the option.
    Assume an allowable OQR of 0.04. When the price discovery mechanism 
is initiated:
    The System broadcasts the first Imbalance Message with a Potential 
Opening Price of 2.10 and a sell side imbalance of 200 and 100 matched.
    The System opens with a trade @2.11 with Firm A buying 100 from the 
LMM and another 100 from Firm B; invoking OQR of 0.04 (the maximum 
value for OQR is the lowest quote offer (2.10) plus 0.04).
    Example 3. Proposed Options 3, Section 8(k) Price Discovery 
Mechanism and second iteration with routing. Suppose the LMM enters a 
quote, 2.00 (100) bid and 2.10 (100) offer and the defined allowable 
OQR is 0.04. If CBOE disseminates a quote of 2.00 (100) by

[[Page 45256]]

2.09 (100), the away offer is better than the LMM quote. Public 
Customer A enters a routable buy order at 2.10 for 150 contracts. The 
price discovery mechanism initiates because the Potential Opening Price 
(2.10) is equal to the Pre-Market BBO but outside of the ABBO. The 
Potential Opening Price is 2.10 because there is both buy and sell 
interest at that price point. The System is unable to open after the 
first iteration of Imbalance since the Potential Opening Price is 
within the OQR but outside of the ABBO. The System proceeds with the 
price discovery mechanism and initiates a Route Timer and broadcasts a 
second Imbalance Message (assume no additional interest is received 
during the imbalance period). The System opens the option for trading 
after the Route Timer has expired and the Imbalance Timer has completed 
since the Potential Opening Price is within OQR. The System routes 100 
contracts of the Public Customer order to the better priced away offer 
at CBOE. The Exchange would route to CBOE at an Opening Price of 2.10 
to execute against the interest at 2.09 on CBOE. The 50 options 
contracts open and execute on the Exchange with an Opening Price of 
2.10. The Exchange routes to CBOE using the Exchange's Opening Price to 
ensure, if there is market movement, that the routed order is able to 
access any price point equal to or better than the Exchange's Opening 
Price.
Options 2, Section 4
    The Exchange proposed to define a ``Valid Width Quote'' within 
proposed Options 3, Section 8(a)(9) as ``a two-sided electronic 
quotation, submitted by a Market Maker, quoted with a difference not to 
exceed $5 between the bid and offer regardless of the price of the 
bid.'' The Exchange proposed to state within proposed BX Options 3, 
Section 8(a)(9), similar to Phlx's Rule at Options 3, Section 8(a)(ix), 
that the ``The Exchange may establish differences other than the above 
for one or more series or classes of options.'' The Exchange proposes 
to remove the rule text from Options 2, Section 4(g) and reserve that 
subparagraph. Options 2, Section 4(g) provides,
    (g) Unusual Conditions--Opening Auction. If the interest of 
maintaining a fair and orderly market so requires, BX Regulation may 
declare that unusual market conditions exist in a particular issue and 
allow LMMs in that issue to make auction bids and offers with spread 
differentials of up to two times, or in exceptional circumstances, up 
to three times, the legal limits permitted under this Rule. In making 
such determinations to allow wider markets, BX Regulation should 
consider the following factors: (A) Whether there is pending news, a 
news announcement or other special events; (B) whether the underlying 
security is trading outside of the bid or offer in such security then 
being disseminated; (C) whether Options Participants receive no 
response to orders placed to buy or sell the underlying security; and 
(D) whether a vendor quote feed is clearly stale or unreliable.
    (1) In the event that BX Regulation determines that unusual market 
conditions exist in any option, it will be the responsibility of BX 
Regulation to file a report with Exchange Operations setting forth the 
relief granted for the unusual market conditions, the time and duration 
of such relief and the reasons therefore.
    Phlx's Rule at Options 3, Section 8(a)(ix) allows the Exchange to 
establish differences, other than those noted within Options 3, Section 
8(a)(ix), for one or more series or classes of options. The Exchange is 
proposing to add similar discretion to proposed BX Options 3, Section 
8(a)(9). The rule text of BX Options 2, Section 4(g) permits spread 
differentials of up to two times, or in exceptional circumstances, up 
to three times, the legal limits permitted under this Rule. This 
limitation does not exist today on Phlx, Nasdaq ISE, LLC (``ISE''), 
Nasdaq GEMX, LLC (``GEMX'') or Nasdaq MRX, LLC (``MRX'').\69\ Today, BX 
Regulation takes into account: (A) Whether there is pending news, a 
news announcement or other special events; (B) whether the underlying 
security is trading outside of the bid or offer in such security then 
being disseminated; (C) whether Options Participants receive no 
response to orders placed to buy or sell the underlying security; and 
(D) whether a vendor quote feed is clearly stale or unreliable, in 
making such determinations when granting quoting discretion. The 
ability to establish differences, other than the stated bid/ask 
differentials, for one or more series or classes of options already 
exists today for BX Lead Market Maker quoting requirements, however 
this discretion in the opening is limited by BX Options 2, Section 
4(g).\70\ The Exchange's proposal would align the procedure BX would 
follow with procedures of other Nasdaq options exchanges, which notify 
members in writing, via an Options Regulatory Alert, of any discretion 
that is being granted by the Exchange. BX would no longer file a report 
with BX operations. Today, no other Nasdaq exchange files a report when 
it grants exemptions in the opening, including exemptions for BX Market 
Makers. The Exchange notes that decisions to grant exemptions in the 
opening are made based on current market conditions. BX is required to 
react swiftly when market conditions change dramatically and, thereby, 
may require BX to grant quoting relief in the opening. The additional 
steps that are currently required on BX are not conducive to granting 
relief in fast changing markets. The Exchange notes that other options 
markets do not limit the quote relief they would grant their lead 
market makers in the same manner as BX limits quote relief for its Lead 
Market Makers. The Exchange believes that permitting BX to have the 
same discretion as Phlx, ISE, GEMX and MRX will assist the Exchange in 
making similar determinations to affected options series.
---------------------------------------------------------------------------

    \69\ ISE, GEMX and MRX Rules at Options 3, Section 8(a)(8) 
provides the same discretionary language as exists on Phlx today.
    \70\ See BX Options 2, Section 4(f)(5).
---------------------------------------------------------------------------

Implementation
    The Exchange intends to begin implementation of the proposed rule 
change prior to October 30, 2020. The Exchange will issue an Options 
Trader Alert to Members to provide notification of the symbols that 
will migrate and the relevant dates.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\71\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\72\ in particular, in that it is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest for the reasons stated below.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78f(b).
    \72\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange's proposal to amend BX's Opening Process is consistent 
with the Act. The Exchange believes that adopting some methodologies 
similar to Phlx Options 3, Section 8 will enhance BX's current Opening 
Process, while retaining certain elements of its current process, such 
as the Valid Width NBBO \73\ and not requiring its Lead Market Makers 
to quote during the Opening Process.\74\ Also, the proposed amendments 
will continue to allow BX

[[Page 45257]]

to open with an optimal price, as the proposed rule further limits the 
opening price boundaries. At a high level, the proposal would permit 
the price of the underlying security to settle down and not flicker 
back and forth among prices after its opening. It is common for a stock 
to fluctuate in price immediately upon opening; such volatility 
reflects a natural uncertainty about the ultimate Opening Price, while 
the buy and sell interest is matched. The proposed rule provides for a 
range of no less than 100 milliseconds and no more than 5 seconds, in 
order to ensure that it has the ability to adjust the period for which 
the underlying security must be open on the primary market. The 
Exchange may determine that in periods of high/low volatility that 
allowing the underlying to be open for a longer/shorter period of time 
may help to ensure more stability in the marketplace prior to 
initiating the Opening Process.
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    \73\ The Exchange proposes to retain the Valid Width NBBO 
requirements with respect to Opening With a Trade pursuant to 
proposed Options 3, Section 8(i) and (j).
    \74\ Today, BX Lead Market Makers may quote during the opening, 
but they are not obligated to quote. BX Lead Market Makers are 
required to quote intra-day. See BX Options 2, Section 4(j).
---------------------------------------------------------------------------

Definitions
    The Exchange's proposal amends and alphabetizes the current 
definitions within Options 3, Section 8(a). The Exchange proposes to 
set forth the following terms: ``Away Best Bid or Offer'' or ``ABBO;'' 
``imbalance;'' ``market for the underlying security;'' ``Opening 
Price;'' ``Opening Process;'' ``Potential Opening Price;'' ``Pre-Market 
BBO;'' ``Valid Width National Best Bid or Offer'' or ``Valid Width 
NBBO;'' ``Valid Width Quote,'' and ``Zero Bid Market.'' The amendment 
of the ``Definitions'' section is consistent with the Act because the 
terms will assist market participants in understanding the meaning of 
terms used throughout the proposed Rule.
    With respect to the amendment to the definition of the term, 
``market for the underlying security,'' the Exchange's proposal would 
remove the concept of a primary volume market and replace that concept 
with an alternative market designated by the primary market. It is most 
likely the case that the primary market is the primary volume market, 
so this term offers no contingency in most cases. The primary market 
has the ability to designate an alternate primary market when the 
primary market is experiencing difficulties. In those situations, the 
Exchange proposes to utilize the alternate primary market to open its 
market. For example, in the event that the New York Stock Exchange LLC 
was unable to open because of an issue with its market and it 
designated NYSE Arca as its alternative market, then BX would utilize 
NYSE Arca as the market for the underlying security.
    Second, the Exchange proposes another alternative in the event that 
the primary market does not open, and an alternate primary market is 
not designated and/or is also unable to open. In this situation, the 
Exchange proposes to utilize a non-primary market to open its market. 
The Exchange will select the non-primary market with the most liquidity 
in the aggregate for all underlying securities from the primary market 
for the previous two calendar months, excluding the primary and 
alternate markets. For example, in the event that the New York Stock 
Exchange LLC was unable to open because of an issue with its market and 
it designated NYSE Arca as its alternative market, and the alternate 
primary was unable to open or NYSE was unable to designate an alternate 
market because of system difficulties, then BX would determine which 
non-primary market had the most liquidity in the aggregate for all 
underlying securities for the previous two calendar months, excluding 
the primary and alternate markets. The Exchange would utilize that 
market to open all underlying securities from the primary market. In 
order to open an option series it would require an equity market's 
underlying quote. Utilizing a non-primary market with the most 
liquidity in the aggregate for all underlying securities for the 
previous two calendar months will ensure that the Exchange opens based 
on the next best alternative to the primary market given the 
circumstances. This contingency will provide the Exchange with the 
ability to open in situations where the primary market is experiencing 
an issue, and also where an alternative primary market may also be 
impacted. The Exchange believes that this proposal would protect 
investors and the general public by providing additional venues for BX 
to utilize as part of its Opening Process and thereby allow investors 
to transact on its market. The Exchange desires to open its market 
despite any issues that may arise with the underlying market. The 
Exchange is proposing alternate methods to open its market to account 
for situations which may arise if the primary market is unable to open, 
and if the proposed alternate designated market is unable to open. Once 
the market opens with an underlying price, the options market may 
continue to trade for the remainder of the trading day. The Exchange 
believes it benefits investors and the general public to have the 
options market available to enter new positions, or close open 
positions. This term is identical to Phlx's Options 3, Section 
8(a)(ii).
Eligible Interest
    The first part of the proposed BX Opening Process determines what 
constitutes eligible interest. The Exchange's proposal seeks to make 
clear what type of eligible opening interest is included. Valid Width 
Quotes, Opening Sweeps, and orders are included. The Exchange further 
notes that Market Makers may submit quotes, Opening Sweeps and orders, 
but quotes other than Valid Width Quotes will not be included in the 
Opening Process. The Exchange believes that defining what qualifies as 
eligible interest is consistent with the Act because market 
participants will be provided with certainty, when submitting interest, 
as to which type of interest will be considered in the Opening Process.
    Unlike the regular session where orders route if they cannot 
execute on BX, the Opening Process is a price discovery process which 
considers interest, both on BX and away markets, to determine the 
optimal bid and offer with which to open the market. The Opening 
Process seeks the price point at which the most number of contracts may 
be executed while protecting away market interest.
    The Exchange's proposal to define an ``Opening Sweep'' within BX 
Options 3, Section 7(b)(9), similar to Phlx Options 3, Section 7(b)(i), 
will also align the BX and Phlx rules. Specifically, the Exchange 
proposes to remove the current order type described as ``On the Open 
Order'' and instead adopt an ``Opening Sweep'' order type, similar to 
Phlx at Options 3, Section 7(b)(6). The adoption of an Opening Sweep is 
consistent with the Act because the order type will permit Market 
Makers to continue to submit orders during the Opening Process for 
execution against eligible interest in the System. Other market 
participants may continue to also submit orders with a TIF of ``OPG'' 
for the Opening Process. As is the case today, only a Market Maker may 
enter an Opening Sweep into SQF for execution against eligible interest 
in the System during the Opening Process. Therefore, all Participants 
will continue to be able to enter orders into the Opening Process. The 
order types are very similar; both order types are cancelled upon the 
open if not executed. A difference is that the Opening Sweep is not 
subject to any risk protections listed within Options 3, Section 15, 
except for Automated Quotation Adjustments.\75\
---------------------------------------------------------------------------

    \75\ Automated Quotation Adjustments are described within BX 
Options 3, Section 15(c)(2).
---------------------------------------------------------------------------

    BX also proposes to replace its current ``TIF'' of ``On the Open 
Order'' or

[[Page 45258]]

``OPG'' to an ``Opening Only'' or ``OPG'' TIF, which can only be 
executed in the Opening Process pursuant to Options 3, Section 8.\76\ 
This TIF is similar to Phlx, in that, any portion of the order that is 
not executed during the Opening Process is cancelled. This order type 
is not subject to any protections listed in Options 3, Section 15.\77\ 
The Exchange believes that the adoption of the Opening Sweep and OPG 
Order is consistent with the Act in that Participants will be able to 
continue to submit orders to be entered into the Opening Process. The 
two orders types will conform Phlx's order types, which are relevant to 
the Opening Process, with those of BX. These order types would continue 
to not be not valid outside of the Opening Process; they may not be 
submitted in the regular trading session.
---------------------------------------------------------------------------

    \76\ See current BX Options 3, Section 7(a)(9).
    \77\ Phlx Options 3, Section 7(c)(3) provides that an OPG Order 
is not subject to any protections listed in Options 3, Section 15, 
except for Automated Quotation Adjustments. Today, OPG Orders on 
Phlx are not subject to any protections, including Automated 
Quotation Adjustments protections. Phlx intends to file a rule 
change to remove the rule text which provides, ``except for 
Automated Quotation Adjustments,'' as OPG Orders are subject to that 
risk protection. BX will not include the exception in the proposed 
rule text. OPG Orders are handled in the same manner by the Phlx 
System today and the BX System, as proposed.
---------------------------------------------------------------------------

    With respect to an Opening Sweep, the Exchange further provides the 
manner in which Opening Sweeps may be entered into the System. The 
Exchange proposes rule text within Options 3, Section 8(b)(1)(B), which 
is similar to Phlx Options 3, Section 8(b)(i)(B). An Opening Sweep may 
be entered at any price with a minimum price variation applicable to 
the affected series, on either side of the market, at single or 
multiple price level(s), and may be cancelled and re-entered. A single 
Market Maker may enter multiple Opening Sweeps, with each Opening Sweep 
at a different price level. If a Market Maker submits multiple Opening 
Sweeps, the System will consider only the most recent Opening Sweep at 
each price level submitted by such Market Maker. Unexecuted Opening 
Sweeps will be cancelled once the affected series is open.\78\ The 
Exchange believes that the addition of Opening Sweeps will also provide 
certainty to market participants as to the manner in which the System 
will handle such interest.
---------------------------------------------------------------------------

    \78\ See proposed BX Options 3, Section 8(b)(1)(B). See also 
proposed BX Options 3, Section 7(a)(9).
---------------------------------------------------------------------------

    With respect to trade allocation, the proposal notes at proposed BX 
Options 3, Section 8(b)(2) that the System will allocate pursuant to BX 
Options 3, Section 10, as is the case today. This rule text is similar 
to Phlx Options 3, Section 8(b)(ii).\79\ The allocation methodology is 
not being amended with this proposal.
---------------------------------------------------------------------------

    \79\ Current BX Options 3, Section 8(b)(5) states, ``If the BX 
Opening Cross price is selected and fewer than all contracts of 
Eligible Interest that are available in BX Options would be 
executed, all Eligible Interest shall be executed at the BX Opening 
Cross price in accordance with the execution algorithm assigned to 
the associated underlying option.'' The Exchange would continue to 
allocate pursuant to the Exchange's allocation methodology within 
Options 3, Section 10. Further, in accordance with current BX 
Options 3, Section 8(b)(6), all eligible interest will be executed 
at the Opening Price and displayed on OPRA.
---------------------------------------------------------------------------

    The Exchange believes that this allocation is consistent with the 
Act because it mirrors the current allocation process on BX in other 
trading sessions.
    The Exchange proposes at BX Options 3, Section 8(d) the specific 
times that eligible interest may be submitted into BX's System. The 
Exchange's proposed time for entering Market Maker Valid Width Quotes 
and Opening Sweeps (9:25 a.m.) eligible to participate in the Opening 
Process, are consistent with the Act because the times are intended to 
tie the option Opening Process to quoting in certain underlying 
securities; \80\ it presumes that option quotes submitted before any 
indicative quotes have been disseminated for the underlying security 
may not be reliable or intentional. The Exchange believes the time 
represents a reasonable timeframe at which to begin utilizing option 
quotes, based on the Exchange's experience when underlying quotes start 
becoming available. The proposed language adds specificity to the rule 
regarding the submission of orders.
---------------------------------------------------------------------------

    \80\ For purposes of this rule, the underlying security can also 
be an index.
---------------------------------------------------------------------------

    The Exchange's proposal at BX Options 3, Section 8(d)(1) describes 
when the Opening Process can begin with specific time-related triggers. 
The proposed rule, which provides that the Opening Process for an 
option series will be conducted on or after 9:30 a.m., when the System 
has received an opening trade or quote on the market for the underlying 
security in the case of equity options or in the case of index options 
is consistent with the Act. This requirement is intended to tie the 
option Opening Process to receipt of liquidity. If the System has not 
received an opening trade or quote on the market for the underlying 
security, the Exchange will not initiate the Opening Process or 
continue an ongoing Opening Process. The Exchange's proposal to amend 
its Opening Process is consistent with the Act because the new rule 
continues to seek the best price. Phlx Rules at Options 3, Section 
8(d)(iii) and (iv) describe quoting requirements for Lead Market Makers 
once an underlying security in the assigned option series has opened 
for trading. Today, BX, unlike Phlx, does not require its Lead Market 
Makers to submit Valid Width Quotes. BX is not proposing to adopt the 
same quoting requirements during the Opening Process that exist on 
Phlx. Therefore, the Phlx requirement for Lead Market Makers would not 
be applicable to BX. Further, proposed BX Options 3, Section 8(d)(3) 
makes clear that the Opening Process will stop and an option series 
will not open if the ABBO becomes crossed. Therefore, the Exchange does 
not note within proposed Options 3, Section 8(d)(1) that the ABBO may 
not be crossed. While, BX is not adopting Phlx's requirement to quote 
in the Opening Process, protections exist within proposed Options 3, 
Section 8(d)(4). A Valid Width NBBO must be present for BX to Open with 
a Trade pursuant to this proposal.
    The Exchange's proposed rule considers the underlying security, 
including indexes, which must be open on the primary market for a 
certain time period for all options to be determined by the Exchange 
for the Opening Process to commence. The Exchange proposes a time 
period be no less than 100 milliseconds and no more than 5 seconds to 
permit the price of the underlying security to settle down and not 
flicker back and forth among prices after its opening. Since it is 
common for a stock to fluctuate in price immediately upon opening, the 
Exchange accounts for such volatility in its process. The volatility 
reflects a natural uncertainty about the ultimate Opening Price, while 
the buy and sell interest is matched. The Exchange's proposed range is 
consistent with the Act, because it ensures that it has the ability to 
adjust the period for which the underlying security must be open on the 
primary market. The Exchange may determine that in periods of high/low 
volatility that allowing the underlying to be open for a longer/shorter 
period of time may help to ensure more stability in the marketplace 
prior to initiating the Opening Process.
    Similar to Phlx Options 3, Section 8(d)(v), BX Options 3, Section 
8(d)(3) provides that the Opening Process will stop and an option 
series will not open if the ABBO becomes crossed. Once this condition 
no longer exists, the Opening Process in the affected option series 
will start again pursuant to paragraphs (f)-(k) of Options 3, Section 
8. All eligible opening interest will continue to be considered during 
the Opening Process when the process is re-started. Not opening if the 
ABBO becomes crossed is

[[Page 45259]]

consistent with the Act and the protection of investors and the public 
interest because a crossed ABBO is indicative of uncertainty in the 
marketplace with respect to where the option series should be valued. 
Waiting for the ABBO to become uncrossed before initiating the Opening 
Process ensures that there is stability in the marketplace and will 
assist the Exchange in determining the Opening Price. Unlike Phlx 
Options 3, Section 8(d)(v),\81\ BX will not consider if a Valid Width 
Quote(s) is no longer present. Unlike Phlx, BX does not require its 
Lead Market Makers to quote in the Opening Process. This requirement is 
not necessary for BX as BX's market would open with a BBO, pursuant to 
Options 3, Section 8(f), unless the ABBO becomes crossed.
---------------------------------------------------------------------------

    \81\ Phlx Options 3, Section 8(d)(v) provides, ``The Opening 
Process will stop and an option series will not open if the ABBO 
becomes crossed or when a Valid Width Quote(s) pursuant to paragraph 
(d)(i) is no longer present. Once each of these conditions no longer 
exist, the Opening Process in the affected option series will start 
again pursuant to paragraphs (f)-(k) below.''
---------------------------------------------------------------------------

    The Exchange's proposal to add rule text, within proposed Options 
3, Section 8(d)(4), to make clear that the Exchange would not open with 
a trade, pursuant to paragraph (i)(2), if a Valid Width NBBO is not 
present is consistent with the Act. Once this condition no longer 
exists, the Opening Process in the affected options series will start 
again pursuant to paragraphs (j) and (k) below. Today, BX would not 
open with a trade unless there is a Valid Width NBBO present. This 
would remain the case with this proposal. The Exchange believes that 
the addition of this text provides market participants with an 
expectation of the circumstances under which the Exchange would open an 
option series, as well as price protection afforded to interest 
attempting to participate in the Opening Process on BX.
Reopening After a Trading Halt
    In order to provide certainty to market participants in the event 
of a trading halt, the Exchange provides in its proposal information 
regarding the manner in which a trading halt would impact the Opening 
Process. Proposed BX Options 3, Section 8(e) provides if there is a 
trading halt or pause in the underlying security, the Opening Process 
will start again, irrespective of the specific times listed in 
paragraph (d). The Exchange's proposal to restart, in the event of a 
trading halt, is consistent with the Act and promotes just and 
equitable principles of trade because the proposed rule ensures that 
there is stability in the marketplace in order to assist the Exchange 
in determining the Opening Price. Current BX Options 3, Section 8(b) 
similarly provides that an Opening Cross shall occur when trading 
resumes after a trading halt. The Exchange is not amending this 
provision, rather the text is being presented similar to Phlx's Options 
3, Section 8.
Opening With a BBO
    The Exchange's proposed rule accounts for a situation where there 
are no opening quotes or orders that lock or cross each other and no 
routable orders locking or crossing the ABBO. In this situation, the 
System will open with an opening quote by disseminating the Exchange's 
best bid and offer among quotes and orders (``BBO'') that exist in the 
System at that time, if any of the conditions are met (1) a Valid Width 
NBBO is present; (2) a certain number of other options exchanges (as 
determined by the Exchange) have disseminated a firm quote on OPRA; or 
(3) a certain period of time (as determined by the Exchange) has 
elapsed. These three conditions are similar to BX's current rule text 
within Options 3, Section 8(b). The Exchange desires to maintain these 
three potential conditions which it believes are valid sources of 
liquidity to determine an Opening Price.
Further Opening Processes and Price Discovery Mechanism
    The proposed rule promotes just and equitable principles of trade 
because, in arriving at the Potential Opening Price, the rule considers 
the maximum number of contracts that can be executed, which results in 
a price that is logical and reasonable in light of away markets and 
other interest present in the System. As noted herein, the Exchange's 
Opening Price is bounded by the OQR without trading through the limit 
price(s) of interest within OQR, which is unable to fully execute at 
the Opening Price, in order to provide Participants with assurance that 
their orders will not be traded through. Although the Exchange applies 
other boundaries such as the BBO, the OQR provides a range of prices 
that may be able to satisfy additional contracts while still ensuring a 
reasonable Opening Price. The Exchange seeks to execute as much volume 
as is possible at the Opening Price. When choosing between multiple 
Opening Prices when some contracts would remain unexecuted, using the 
lowest bid or highest offer of the largest sized side of the market 
promotes just and equitable principles of trade because it uses size as 
a tie breaker.
    The System will calculate an OQR for a particular option series 
that will be utilized in the price discovery mechanism if the Exchange 
has not opened, pursuant to the provisions in Options 3, Section 8(d)-
(i). OQR would broaden the range of prices at which the Exchange may 
open to allow additional interest to be eligible for consideration in 
the Opening Process. OQR is intended to limit the Opening Price to a 
reasonable, middle ground price, and thus reduce the potential for 
erroneous trades during the Opening Process. Although the Exchange 
applies other boundaries such as the BBO, the OQR provides a range of 
prices that may be able to satisfy additional contracts while still 
ensuring a reasonable Opening Price. More specifically, the Exchange's 
Opening Price is bounded by the OQR without trading through the limit 
price(s) of interest within OQR, which is unable to fully execute at 
the Opening Price in order to provide participants with assurance that 
their orders will not be traded through. The Exchange seeks to execute 
as much volume as is possible at the Opening Price.
    The Exchange's method for determining the Potential Opening Price 
and Opening Price is consistent with the Act because the proposed 
process seeks to discover a reasonable price and considers both 
interest present in BX's System as well as away market interest. The 
Exchange's method seeks to validate the Opening Price and avoid opening 
at aberrant prices. The rule provides for opening with a trade, which 
is consistent with the Act, because it enables an immediate opening to 
occur within a certain boundary without need for the price discovery 
process. The boundary provides protections while still ensuring a 
reasonable Opening Price.
    The proposed rule considers more than one Potential Opening Price, 
which is consistent with the Act, because it forces the Potential 
Opening Price to fall within the OQR boundary, thereby providing price 
protection. Specifically, the mid-point calculation balances the price 
among interest participating in the Opening, when there is more than 
one price at which the maximum number of contracts could execute. 
Limiting the mid-point calculation to the OQR, when a price would 
otherwise fall outside of the OQR, ensures the final mid-point price 
will be within the protective OQR boundary. If there is more than one 
Potential Opening Price possible, where no contracts would be left 
unexecuted and any price used for the mid-point calculation is an away 
market price,

[[Page 45260]]

when contracts will be routed, the System will use the away market 
price as the Potential Opening Price.
    The Exchange's proposal to route all interest, pursuant to Options 
3, Section 10(a)(1), is consistent with the Act. The Exchange believes 
that it routing all routable interest will provide all market 
participants the opportunity to have their interest executed on away 
markets.
    The price discovery mechanism reflects what is generally known as 
an imbalance process and is intended to attract liquidity to improve 
the price at which an option series will open as well as to maximize 
the number of contracts that can be executed on the opening. This 
process will only occur if the Exchange has not been able to otherwise 
open an option series utilizing the other processes available in 
proposed BX Options 3, Section 8. The Exchange believes the process 
presented in the price discovery mechanism is consistent with just and 
equitable principles of trade because the process applies a proposed, 
wider boundary to identify the Opening Price and seeks additional 
liquidity. The price discovery mechanism also promotes just and 
equitable principles of trade by taking into account whether all 
interest can be fully executed, which helps investors by including as 
much interest as possible in the Opening Process. The Exchange believes 
that conducting the price discovery process in these situations 
protects opening orders from receiving a random price that does not 
reflect the totality of what is happening in the markets on the opening 
and also further protects opening interest from receiving a potentially 
erroneous execution price on the opening. Opening immediately has the 
benefit of speed and certainty, but that benefit must be weighed 
against the quality of the execution price and whether orders were left 
unexecuted. The Exchange believes that the proposed rule strikes an 
appropriate balance. Today, BX would start imbalance messages even 
without a Valid Width NBBO. With the proposed amendments, BX would not 
start the imbalance process unless a Valid Width NBBO was present.
    It is consistent with the Act to not consider away market 
liquidity, i.e. away market volume, until the price discovery mechanism 
occurs because this proposed process provides for a swift, yet 
conservative opening. The Exchange is bounded by the Pre-Market BBO 
when determining an Opening Price. The away market prices would be 
considered, albeit not immediately. It is consistent with the Act to 
consider interest on the Exchange prior to routing to an away market, 
because the Exchange is utilizing the interest currently present on its 
market to determine a quality Opening Price.\82\ The Exchange will 
attempt to match interest in the System, which is within the OQR, and 
not leave interest unsatisfied that was otherwise at that price. The 
Exchange will not trade-through the away market interest in satisfying 
this interest at the Exchange. The proposal attempts to maximize the 
number of contracts that can trade, and is intended to find the most 
reasonable and suitable price, relying on the maximization to reflect 
the best price.
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    \82\ Opening with a quote, pursuant to proposed Options 3, 
Section 8(f), would not require consideration of away market quotes 
because BX would have opened with a local quote that was not locked 
or crossed with the away market, provided there are no opening 
quotes or orders that lock or cross each other, and no routable 
orders locking or crossing the ABBO. With respect to Opening with a 
Trade, pursuant to Options 3, Section 8(i), the Exchange would not 
consider away market interest if it could open immediately with a 
trade, provided that the Exchange would never trade-through an away 
market. If BX is locked and crossed with an away market, then the 
Exchange would require additional price discovery, pursuant to 
paragraphs (j) and (k).
---------------------------------------------------------------------------

    With respect to the manner in which the Exchange disseminates an 
Imbalance Message, as proposed within BX Options 3, Section 8(k)(A), 
the Imbalance Message is intended to attract additional liquidity, much 
like an auction, using an auction message and timer. The Imbalance 
Timer is consistent with the Act because it would provide a reasonable 
time for participants to respond to the Imbalance Message before any 
opening interest is routed to away markets and, thereby, maximize 
trading on the Exchange. The Imbalance Timer would be for the same 
number of seconds for all options traded on the Exchange. This process 
will repeat, up to four iterations, until the options series opens. The 
Exchange believes that this process is consistent with the Act because 
the Exchange is seeking to identify a price on the Exchange without 
routing away, yet which price may not trade through another market and 
the quality of which is addressed by applying the OQR boundary.
    Proposed Options 3, Section 8(k)(3)(C)(i) provides if the total 
number of better priced away contracts, plus the number of contracts 
available at the Exchange Opening Price, plus the contracts available 
at away markets at the Exchange Opening Price, would satisfy the number 
of marketable contracts the Exchange has on either the buy or sell 
side, the System will contemporaneously route a number of contracts 
that will satisfy interest at away markets at prices better than the 
Exchange Opening Price (pricing any contracts routed to away markets at 
the better of the Exchange Opening Price or the order's limit price), 
trade available contracts on the Exchange at the Exchange Opening 
Price, and route a number of contracts that will satisfy interest at 
other markets at prices equal to the Exchange Opening Price. This 
provision is consistent with the Act because it considers routing to 
away markets potentially both at a better price than the Exchange 
Opening Price, as well as at the Exchange Opening Price, to access as 
much liquidity as possible to maximize the number of contracts able to 
be traded as part of the Opening Process. The Exchange routes at the 
better of the Exchange's Opening Price or the order's limit price to 
first ensure the order's limit price is not violated. Routing away at 
the Exchange's Opening Price is intended to achieve the best possible 
price available at the time the order is received by the away market.
    Proposed BX Options 3, Section 8(k)(3)(E), entitled ``Forced 
Opening,'' provides for the situation where, as a last resort, the 
Exchange may open an options series when the processes described above 
have not resulted in an opening of the options series. Under a Forced 
Opening, the System will open the series executing as many contracts as 
possible by routing to away markets at prices better than the Exchange 
Opening Price for their disseminated size, trading available contracts 
on the Exchange at the Exchange Opening Price, bounded by OQR (without 
trading through the limit price(s) of interest within OQR, which is 
unable to be fully executed at the Opening Price). The System will also 
route interest to away markets at prices equal to the Exchange Opening 
Price at their disseminated size. In this situation, the System will 
price any contracts routed to away markets at the better of the 
Exchange Opening Price or the order's limit price. Any unexecuted 
interest from the imbalance not traded or routed will be cancelled back 
to the entering participant, if they remain unexecuted and priced 
through the Opening Price, otherwise orders will remain in the Order 
Book. The Exchange believes that this process is consistent with the 
Act because after attempting to open by soliciting interest on BX and 
considering other away market interest and considering interest 
responding to Imbalance Messages, the Exchange could not otherwise 
locate a fair and reasonable price with which to open options series.
    The Exchange's proposal to memorialize the manner in which

[[Page 45261]]

proposed rule will cancel and prioritize interest provides certainty to 
market participants as to the priority scheme during the Opening 
Process.\83\ The Exchange's proposal to execute Market Orders first and 
then Limit Orders is consistent with the Act because these orders have 
no specified price and Limit Orders will be executed, thereafter, in 
accordance with the prices specified due to the nature of these order 
types. This is consistent with the manner in which these orders execute 
after the opening today.
---------------------------------------------------------------------------

    \83\ See proposed BX Options 3, Section 8(j) and (k)(6)(B).
---------------------------------------------------------------------------

    Proposed BX Options 3, Section 8(k)(7), which provides upon opening 
of the option series, regardless of an execution, the System 
dissemination of the price and size of the Exchange's BBO, is 
consistent with the Act because it clarifies the manner in which the 
Exchange establishes the BBO for purposes of reference upon opening.
    Proposed BX Options 3, Section 8(k)(8) accounts for remaining 
contracts, which did not price through the Opening Price. These 
contracts would post on the Order Book at the better of the away market 
price or the order's limit price. Specifically, any remaining 
contracts, which are not priced through the Exchange Opening Price 
after routing a number of contracts to satisfy better priced away 
contracts, will be posted to the Order Book at the better of the away 
market price or the order's limit price. This includes DNR Orders that 
are not crossed with the Opening Price. Only in the event that ABBO 
interest, which the DNR Order would otherwise be crossing, has been 
satisfied by routable interest during the Opening Process would DNR 
Orders be included within the remaining contracts described in proposed 
BX Options 3, Section 8(k)(8).\84\ This rule text accounts for orders 
which have routed away and returned unsatisfied, and also accounts for 
interest that remains unfilled during the Opening Process, provided 
that interest was not priced through the Opening Price. The Exchange 
believes that the proposed text in Options 3, Section 8(k)(8) is 
consistent with the Act in that the Exchange is accounting for the 
handling of all interest in the Opening Process with this rule text.
---------------------------------------------------------------------------

    \84\ DNR Orders that are not crossed with the Opening Price rest 
on the Order Book at the better of the ABBO price or the DNR Order's 
limit order price.
---------------------------------------------------------------------------

Opening Process Cancel Timer
    The Exchange's proposal to retain its renamed ``Opening Process 
Cancel Timer'' within proposed BX Options 3, Section 8(l), with rule 
text modifications to conform the rule text similar to Phlx Options 3, 
Section 8(l), is consistent with the Act. The cancel timer will 
continue to provide Participants with the ability to elect to have 
orders returned, except for non-GTC orders. This functionality provides 
Participants with choice, when symbols do not open, about where, and 
when, they can send orders for the opening that would afford them the 
best experience.
Options 2, Section 4
    The Exchange's proposal to remove the rule text from Options 2, 
Section 4(g) and permit BX to establish differences, other than noted 
within proposed BX Options 3, Section 8(a)(9), for one or more series 
or classes of options, similar to other Nasdaq affiliated 
exchanges,\85\ is consistent with the Act. Today, BX Regulation takes 
into account: (A) Whether there is pending news, a news announcement or 
other special events; (B) whether the underlying security is trading 
outside of the bid or offer in such security then being disseminated; 
(C) whether Options Participants receive no response to orders placed 
to buy or sell the underlying security; and (D) whether a vendor quote 
feed is clearly stale or unreliable, in making such determinations 
regarding quoting discretion. The Exchange believes that permitting BX 
to have the same discretion as Phlx, ISE, GEMX and MRX will assist the 
Exchange in making similar determinations to affected options series. 
The Exchange's proposal to amend Options 2, Section 4(g) and instead 
permit the Exchange to grant discretion based on proposed BX Options 3, 
Section 8(a)(9) is consistent with the Act because such discretion 
would permit the Exchange the ability to attract liquidity from Market 
Makers, while also maintaining a fair and orderly market. Market Makers 
accept a certain amount of risk when quoting on the Exchange. The 
Exchange imposes quoting and other obligations on Market Makers.\86\ 
These risks, which Market Makers accept each trading day are calculated 
risks. The Exchange considers certain factors, which are likely 
unforeseen, in determining whether to grant relief, either in 
individual options classes or for all option classes based upon 
specific criteria. The Exchange believes that it is necessary to grant 
quote relief in certain circumstances where a Market Maker may not have 
enough information to maintain fair and orderly markets.
---------------------------------------------------------------------------

    \85\ ISE, GEMX and MRX Rules at Options 3, Section 8(a)(8), and 
Phlx Rules at Options 3, Section 8(a)(ix), provide the same 
discretionary language.
    \86\ See BX Options 2, Sections 4 and 5.
---------------------------------------------------------------------------

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.
Definitions
    The Exchange's proposal to amend and alphabetize the current 
definitions within Options 3, Section 8(a) does not impose a burden on 
competition. The definitions will assist market participants in 
understanding the meaning of terms used throughout the proposed Rule.
    Amending the definition of ``market for the underlying security'' 
within Options 3, Section 8(a)(ii) does not impose a burden on 
competition. The Exchange's proposal offers alternative paths to open 
BX in the event that the primary market or even a designated alternate 
primary market experiences an issue. The Exchange's proposal is 
intended to create additional certainty in the event that an issue with 
the primary market arises. With this proposal, the Exchange would have 
other equity markets to look to with respect to underlying prices on 
which to open BX. This proposal also does not impact the ability of 
other options markets to open.
Eligible Interest
    Defining what qualifies as eligible interest does not impose a 
burden on competition because Participants will be provided with 
certainty, when submitting interest, as to which type of interest will 
be considered in the Opening Process. Unlike the regular session, where 
orders route if they cannot execute on BX, the Opening Process is a 
price discovery process which considers interest, both on BX and away 
markets, to determine the optimal bid and offer with which to open the 
market. The Opening Process seeks the price point at which the most 
number of contracts may be executed while protecting away market 
interest.
    The Exchange's proposal to define an ``Opening Sweep'' within BX 
Options 3, Section 7(a)(9), similar to Phlx Options 3, Section 7(b)(i), 
does not impose a burden on competition. Removing the current order 
type described as ``On the Open Order'' and instead adopting an 
``Opening Sweep'' order type, similar to Phx at Options 3, Section 
7(b)(6), will permit Market Makers to continue to submit orders during 
the Opening Process for execution against eligible

[[Page 45262]]

interest in the System. Other market participants will continue to also 
submit orders that enter with a TIF of ``OPG'' for the Opening Process.
    Likewise, replacing the current ``TIF'' of ``On the Open Order'' or 
``OPG'' to an ``Opening Only'' or ``OPG'' TIF, which can only be 
executed in the Opening Process, pursuant to Options 3, Section 8, and 
is similar to Phlx Options 3, Section 7(b)(6), does not burden 
competition. This TIF is similar to Phlx, in that, any portion of the 
order that is not executed during the Opening Process is cancelled. 
This order type is not subject to any protections listed in Options 3, 
Section 15.\87\ Participants will be able to continue to submit orders 
to be entered into the Opening Process. The two orders types will 
conform to Phlx's order types, which are relevant to the Opening 
Process, with those of BX. These order types would continue to not be 
valid outside of an Opening Process; they may not be submitted in the 
regular trading session.
---------------------------------------------------------------------------

    \87\ Phlx Options 3, Section 7(c)(3) provides that an OPG Order 
is not subject to any protections listed in Options 3, Section 15, 
except for Automated Quotation Adjustments. Today, OPG Orders on 
Phlx are not subject to any protections, including Automated 
Quotation Adjustments protections. Phlx intends to file a rule 
change to remove the rule text which provides, ``except for 
Automated Quotation Adjustments,'' as OPG Orders are subject to that 
risk protection. BX will not include the exception in the proposed 
rule text. OPG Orders are handled in the same manner by the Phlx 
System today and the BX System, as proposed.
---------------------------------------------------------------------------

    With respect to trade allocation, the proposal notes at proposed BX 
Options 3, Section 8(b)(2) that the System will allocate pursuant to BX 
Options 3, Section 10. The Exchange believes that this allocation does 
not impose a burden on competition because it mirrors the current 
allocation process on BX in other trading sessions.
    Permitting the Opening Process for an option series to be conducted 
on or after 9:30 a.m., when the System has received an opening trade or 
quote on the market for the underlying security in the case of equity 
options or in the case of index options \88\ does not impose a burden 
on competition because this requirement will tie the option Opening 
Process to receipt of liquidity. The Exchange's proposed rule considers 
the liquidity present on its market before initiating other processes 
to obtain additional pricing information. Today, BX, unlike Phlx, does 
not require its Lead Market Makers to submit Valid Width Quotes. BX is 
not proposing to adopt the same quoting requirements during the Opening 
Process that exist on Phlx.
---------------------------------------------------------------------------

    \88\ See proposed BX Options 3, Section 8(d)(1).
---------------------------------------------------------------------------

    Similar to Phlx Options 3, Section 8(d)(v), proposed BX Options 3, 
Section 8(d)(3) provides that the Opening Process will stop and an 
option series will not open if the ABBO becomes crossed. This proposal 
does not impose a burden on competition. Once this condition no longer 
exists, the Opening Process in the affected option series will start 
again pursuant to paragraphs (f)-(k) below. Unlike Phlx Options 3, 
Section 8(d)(v),\89\ BX will not consider if a Valid Width Quote(s) is 
no longer present. Unlike Phlx, BX does not require its Lead Market 
Makers to quote in the Opening Process. This requirement is not 
necessary for BX as BX's market would open with a BBO, pursuant to 
Options 3, Section 8(f), unless the ABBO becomes crossed.
---------------------------------------------------------------------------

    \89\ Phlx Options 3, Section 8(d)(v) provides, ``The Opening 
Process will stop and an option series will not open if the ABBO 
becomes crossed or when a Valid Width Quote(s) pursuant to paragraph 
(d)(i) is no longer present. Once each of these conditions no longer 
exist, the Opening Process in the affected option series will start 
again pursuant to paragraphs (f)-(k) below.''
---------------------------------------------------------------------------

    The Exchange's proposal to add rule text within proposed Options 3, 
Section 8(d)(4) to make clear that the Exchange would not open with a 
trade, pursuant to paragraph (i)(2), if a Valid Width NBBO does not 
impose an undue burden on competition. Today, BX would not open with a 
trade unless there is a Valid Width NBBO present. This would remain the 
case with this proposal. The addition of this rule text provides market 
participants with an expectation of the circumstances under which the 
Exchange would open an option series.
Reopening After a Trading Halt
    Proposed BX Options 3, Section 8(e) provides if there is a trading 
halt or pause in the underlying security, the Opening Process will 
start again irrespective of the specific times listed in paragraph (d). 
The Exchange's proposal to restart in the event of a trading halt does 
not impose a burden on competition because the proposed rule ensures 
that there is stability in the marketplace in order to assist the 
Exchange in determining the Opening Price.
Opening With a BBO
    The Exchange's proposal to validate the Opening Price against away 
markets or by attracting additional interest to address the specific 
condition does not impose a burden on competition. It should avoid 
opening executions in very wide or unusual markets where an opening 
execution price cannot be validated.
Further Opening Processes and Price Discovery Mechanism
    The proposed rule continues to consider the maximum number of 
contracts that can be executed, which results in a price that is 
logical and reasonable in light of away markets and other interest 
present in the System. The Exchange's method seeks to validate the 
Opening Price and avoid opening at aberrant prices does not impose a 
burden on competition. The Opening Price would be applied to all 
eligible interest.
Options 2, Section 4
    The Exchange's proposal to remove the rule text from Options 2, 
Section 4(g) and permit BX to establish differences as noted within 
proposed Options 3, Section 8(a)(9), for one or more series or classes 
of options, similar to other Nasdaq Affiliated Exchanges,\90\ does not 
create a burden on competition.
---------------------------------------------------------------------------

    \90\ ISE, GEMX and MRX Rules at Options 3, Section 8(a)(8) 
provides the same discretionary language as exists on Phlx today.
---------------------------------------------------------------------------

    Finally, the proposed amendments do not create a burden on inter-
market competition because other options markets have the same intra-
day requirements.

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 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 will:
    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:

[[Page 45263]]

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-2020-016 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-2020-016. 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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BX-2020-016 and should be submitted on 
or before August 17, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\91\
---------------------------------------------------------------------------

    \91\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16165 Filed 7-24-20; 8:45 am]
BILLING CODE 8011-01-P


