[Federal Register Volume 85, Number 174 (Tuesday, September 8, 2020)]
[Notices]
[Pages 55524-55529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19718]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89731; File No. SR-BX-2020-016]


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

September 1, 2020.

I. Introduction

    On July 20, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend the Exchange's opening process in connection with a technology 
migration. The proposed rule change was published for comment in the 
Federal Register on July 27, 2020.\3\ The Commission received no 
comment letters on the proposed rule change. This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89356 (July 21, 
2020), 85 FR 45243 (``Notice'').
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II. Description of the Proposal

    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 (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.\4\
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    \4\ The Exchange represents that in connection with the 
technology migration, BX is adopting certain opening functionality 
that is similar to the process used by Nasdaq Phlx LLC (``Phlx'') at 
Options 3, Section 8 (Options Opening Process). See Notice, supra 
note 3, 85 FR at 45243.
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A. Proposed Opening Process 5
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    \5\ In connection with the new opening process, the Exchange 
proposes to adopt a new ``Definitions'' section in proposed BX 
Options 3, Section 8(a), similar to Phlx Options 3, Section 8(a), to 
define several terms that are used throughout the opening rule. 
Proposed BX Options 3, Section 8 will define: ``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.'' For definitions of these terms, see Notice, 
supra note 3, 85 FR at 45244-45.
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    The Exchange proposes to delete the entirety of current BX Options 
3, Section 8 and replace the current Exchange opening process with an 
opening process described in Phlx Options 3, Section 8,\6\ while 
retaining certain elements of its current process and making conforming 
changes to reflect particularlities to the BX market.\7\
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    \6\ 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.''
    \7\ For example, unlike the Phlx opening process, BX does not: 
(1) Require its Lead Market Makers to quote during the opening; (2) 
require a Valid Width Quote/Quality Opening Market to trigger the 
opening process and instead relies on a Valid Width NBBO designed to 
similarly ensure the price at which the Exchange opens reflects 
current market conditions; (3) have a trading floor and related 
opening rules; or (4) allow All-or-None Orders to rest on the order 
book. See Notice, supra note 3.
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1. Opening Sweeps
    The Exchange proposes to define a new order type, ``Opening 
Sweep,'' for the new opening process.\8\ A Market Maker assigned in a 
particular option may only submit an Opening Sweep if, at the time of 
entry, that Market Maker has already submitted and maintained a Valid 
Width Quote.\9\ 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.\10\ A single Market Maker may enter multiple 
Opening Sweeps, with each Opening Sweep at a different price level.\11\ 
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 
(described below).\12\ Unexecuted Opening Sweeps will be cancelled once 
the affected series is open.\13\
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    \8\ The Exchange proposes to define an ``Opening Sweep'' as a 
one-sided order entered by a Market Maker through SQF for execution 
against eligible interest in the system during the Opening Process. 
The Opening Sweep 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. See proposed BX Options 3, Section 7(a)(9). In 
connection with the new definition of Opening Sweep, the Exchange 
proposes to remove a similar order type described as ``On the Open 
Order'' in current BX Options 3, Section 7(a)(9).
    \9\ Proposed BX Options 3, Section 8(b)(1)(A). 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. 
See proposed BX Options 3, Section 8(b)(1)(A).
    \10\ See proposed BX Options 3, Section 8(b)(1)(B).
    \11\ See id.
    \12\ See id. The Exchange proposes to define ``Opening Price'' 
by cross-referencing proposed BX Options 3, Section 8(i) and (k). 
See proposed BX Options 3, Section 8(a)(4).
    \13\ See proposed BX Options 3, Section 8(b)(1)(B).
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2. Opening Only Orders
    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.\14\ 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.\15\ BX proposes to replace 
the ``On the Open Order'' \16\ TIF with an ``Opening Only'' or ``OPG'' 
TIF, which can only be executed in the Opening Process pursuant to 
Options 3, Section 8.\17\ This order type is not subject to any 
protections listed in Options 3, Section 15.\18\ Any portion of the 
order that is not executed during the Opening Process is cancelled.\19\ 
OPG orders also may not route.\20\
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    \14\ See current BX Options 3, Section 7(b)(1).
    \15\ See id.
    \16\ See id.
    \17\ See proposed BX Options 3, Section 7(b).
    \18\ See id.
    \19\ See id.
    \20\ See id.
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3. Interest Included in the Opening Process
    The first part of the Opening Process determines what constitutes 
eligible interest. Proposed BX Options 3, Section 8(b) explains the 
eligible interest that will be accepted during the Opening Process,\21\ 
which includes Valid Width Quotes,\22\ Opening

[[Page 55525]]

Sweeps,\23\ and orders. Quotes, other than Valid Width Quotes, will not 
be included in the Opening Process. The system will allocate interest 
pursuant to Options 3, Section 10.\24\
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    \21\ The Exchange proposes to define ``Opening Process'' by 
cross-referencing proposed BX Options 3, Section 8(d). See proposed 
BX Options 3, Section 8(a)(5). The proposed ``Opening Process'' term 
is replacing the current term, ``BX Opening Cross.''
    \22\ The Exchange proposes to define ``Valid Width Quotes'' 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. 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 See proposed BX Options 3, Section 8(a)(9).
    \23\ See proposed BX Options 3, Section 7(a)(9).
    \24\ See proposed BX Options 3, Section 8(b)(2).
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    Market Maker Valid Width Quotes and Opening Sweeps received 
starting at 9:25 a.m. Eastern Time are included in the Opening 
Process.\25\ Orders entered at any time before an option series opens 
are included in the Opening Process.\26\
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    \25\ See proposed BX Options 3, Section 8(d).
    \26\ See id.
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4. Opening Process and Reopening After a Trading Halt
    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. Eastern Time, when the system has received the 
opening trade or quote on the market for the underlying security \27\ 
in the case of equity options or in the case of index options. This 
requirement is intended to tie the Opening Process to receipt of 
liquidity.\28\
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    \27\ The Exchange proposes to define ``market for the underlying 
security'' as either the primary listing market or an alternative 
market designated by the primary market. In the event that the 
primary market is unable to open and an alternative market is not 
designated by the primary market and/or the alternative market 
designated by the primary 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 alternative markets. See 
proposed BX Options 3, Section 8(a)(3).
    \28\ See Notice, supra note 3, 85 FR at 45247.
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    For all options, the underlying security, including indexes, must 
be open on the market for the underlying security for a certain time 
period, as determined by the Exchange, for the Opening Process to 
commence.\29\ The Opening Process will stop and an option series will 
not open if the ABBO \30\ becomes crossed.\31\ Once this condition no 
longer exists, the Opening Process in the affected option series will 
start again pursuant proposed BX Options 3, Section 8(f)-(k).\32\ 
Furthermore, the Opening Process will stop and an options series will 
not open if a Valid Width NBBO \33\ is no longer present, pursuant to 
Options 3, Section 8(i)(2).\34\ Once this condition no longer exists, 
the Opening Process in the affected options series will start again, 
pursuant to Options 3, Section 8(j) and (k) below. The Exchange would 
wait for the ABBO to become uncrossed before initiating the Opening 
Process to ensure that there is stability in the marketplace as the 
Exchange determines the Opening Price, or for a Valid Width Quote to be 
submitted.\35\
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    \29\ See proposed BX Options 3, Section 8(d)(2). Proposed BX 
Options 3, Section 8(d)(2) stipulates that this time period will be 
no less than 100 milliseconds and no more than 5 seconds. The 
Exchange represents that it will set the timer initially at 100 
milliseconds and will issue a notice to provide the initial setting 
and will thereafter issue a notice if it were to change the timing. 
See Notice, supra note 3, 85 FR at 45247, n.30. If the Exchange were 
to select a time not between 100 milliseconds and 5 seconds, it will 
be required to file a rule proposal with the Commission. See id.
    \30\ The Exchange proposes to define ``Away Best Bid or Offer'' 
or ``ABBO'' as the displayed National Best Bid or Offer not included 
in the Exchange's Best Bid or Offer. See proposed BX Options 3, 
Section 8(a)(1).
    \31\ See proposed BX Options 3, Section 8(d)(3).
    \32\ See id.
    \33\ The Exchange proposes to define ``Valid Width NBBO'' as 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. See proposed BX Options 3, Section 8(a)(8).
    \34\ Today, BX would not open with a trade unless there is a 
Valid Width NBBO present. The Exchange represents that this would 
remain the case with the proposed Opening Process. See Notice, supra 
note 3, 85 FR at 45259.
    \35\ See Notice, supra note 3, 85 FR at 45247.
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    Proposed Options 3, Section 8(e) states that the procedure 
described in the proposed Options 3, Section 8 will be used to reopen 
an options series after a trading halt. If there is a trading halt or 
pause in the underlying security, the Opening Process will recommence 
irrespective of the specific times listed in proposed Options 3, 
Section 8(d).
5. Opening With a BBO (No Trade)
    Under proposed BX Options 3, Section 8(f), the Exchange will first 
see if the option series will open for trading with a best bid or offer 
(``BBO''). 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 following 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; \36\ or (3) a certain period of time (as determined 
by the Exchange) has elapsed.\37\
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    \36\ The Exchange states that it will require at least two other 
options exchanges to open, which is the existing practice on the 
Exchange. See Notice, supra note 3, 85 FR at 45258, n.33.
    \37\ The Exchange states that it will require 15 minutes to pass 
with respect to this setting, which is the existing practice on the 
Exchange. See Notice, supra note 3, 85 FR at 45258, n.34.
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6. Further Opening Process
    If, as proposed, an opening does not occur pursuant to proposed 
Options 3, Section 8(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.\38\ The Exchange states 
that it 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.\39\ The Exchange also states that it 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.\40\
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    \38\ See proposed BX Options 3, Section 8(g). The Exchange 
proposes to define ``Pre-Market BBO'' as the highest bid and the 
lowest offer among Valid Width Quotes. See proposed BX Options 3, 
Section 8(a)(7).
    \39\ See Notice, supra note 3, 85 FR at 45248.
    \40\ See id.
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7. Opening with a Trade
    If there are Valid Width Quotes or orders that lock or cross each 
other, the system will try to open with a trade. Options 3, Section 
8(i) provides that the Exchange will open the option series with a 
trade of Exchange interest only at the Opening Price, if any of the 
following conditions occur: (1) The Potential Opening Price \41\ 
(described below) is at or within the best of the Pre-Market BBO and 
the ABBO, which is also a Valid Width NBBO; (2) 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 (3) where there is no 
ABBO, the Potential Opening Price is at or within the Pre-Market BBO, 
which is also a Valid Width NBBO.\42\
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    \41\ The Exchange proposes to define ``Potential Opening Price'' 
by cross-referencing proposed BX Options 3, Section 8(h). See 
proposed BX Options 3, Section 8(a)(6).
    \42\ See proposed BX Options 3, Section 8(i)(1).
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    To undertake the above described process, the Exchange will 
calculate the Potential Opening Price by taking into

[[Page 55526]]

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'').\43\
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    \43\ See proposed BX Options 3, Section 8(h).
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    Under proposed Options 3, Section 8(h)(1), when two or more 
Potential Opening Prices would satisfy the maximum quantity criterion 
and leave no contracts unexecuted, the system will take the highest and 
lowest of those prices and takes the mid-point. If such mid-point 
cannot be expressed as a permitted minimum price variation, the mid-
point 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.\44\ 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.\45\
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    \44\ See proposed BX Options 3, Section 8(h)(1).
    \45\ See id.
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    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.\46\ Furthermore, 
the Potential Opening Price calculation will be bounded by the better 
away market price that may not be satisfied with the Exchange routable 
interest.\47\ According to the Exchange, this would 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.\48\
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    \46\ See proposed BX Options 3, Section 8(h)(2).
    \47\ See id.
    \48\ See Notice, supra note 3, 85 FR at 45249.
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    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 proposed BX Options 3, 
Section 8(g)) would cross either: (i) The Pre-Market BBO or (ii) the 
ABBO, then, for purposes of calculating the midpoint, the Exchange will 
use the better of the Pre-Market BBO or ABBO as a boundary price and 
will open the option series for trading with an execution at the 
resulting Potential Opening Price. If these aforementioned conditions 
are not met, but a Valid Width NBBO is present, an Opening Quote Range 
(``OQR'') is calculated as described in proposed BX Options 3, Section 
8(j) and the price discovery mechanism (``PDM''), described in proposed 
BX Options 3, Section 8(k), will commence.
8. Price Discovery Mechanism
    If the Exchange has not opened with a BBO or trade pursuant to 
proposed Options 3, Section 8(f) or (i), the Exchange will conduct a 
PDM pursuant to proposed Options 3, Section 8(j) to determine the 
Opening Price. According to the Exchange, the purpose of the PDM is to 
satisfy the maximum number of contracts possible by applying wider 
price boundaries and seeking additional liquidity.\49\
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    \49\ See Notice, supra note 3, 85 FR at 45251.
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    Before conducting a PDM, however, the Exchange will calculate the 
OQR under proposed Options 3, Section 8(j). The OQR, which is used 
during PDM, is an additional boundary beyond the boundaries described 
in proposed BX Options 3, Section 8(h) and (i), designed to limit the 
Opening Price to a reasonable price and reduce the potential for 
erroneous trades during the Opening Process.\50\ The OQR is constrained 
by the least aggressive limit prices within the broader limits of 
OQR.\51\ 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.\52\
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    \50\ See Notice, supra note 3, 85 FR at 45250.
    \51\ See proposed BX Options 3, Section 8(j).
    \52\ See id.
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    To determine the minimum value for the OQR, an amount, as defined 
in a table to be 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).\53\ 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).\54\ If one or more away markets are collectively disseminating a 
BBO that is not crossed, however, and there are Valid Width Quotes on 
the Exchange that are executable against each other or that are 
executable against the ABBO, then the minimum value of the OQR will be 
the highest away bid and the maximum value will be the lowest away 
offer.\55\
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    \53\ See proposed Options 3, Section 8(j)(1).
    \54\ See proposed BX Options 3, Section 8(j)(2).
    \55\ See proposed BX Options 3, Section 8(j)(3). Proposed BX 
Options 3, Section 8(j)(3)(A) further notes that the Opening Process 
will stop and an option series will not open if the ABBO becomes 
crossed, pursuant to proposed BX Options 3, Section 8(d)(3).
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    The Exchange will use the OQR to help calculate the Opening Price. 
For example, 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.\56\
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    \56\ See proposed BX Options 3, Section 8(j)(4).
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    During PDM, the Exchange will take into consideration the away 
market prices in calculating the Potential Opening Price. For example, 
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.\57\ Moreover, 
proposed Options 3, Section 8(h)(6) provides that 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). The system will route all routable 
interest pursuant to Options 3, Section 10(a)(1).\58\
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    \57\ See proposed BX Options 3, Section 8(j)(5).
    \58\ In contrast, Phlx routes Public Customer and Professional 
orders, while BX will route orders for all market participants. See 
Notice, supra note 3, 85 FR at 45251, n.46.
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    After the OQR is calculated, the system will broadcast an Imbalance 
Message for the affected series \59\ to attract additional liquidity 
and begin an ``Imbalance Timer,'' not to exceed three seconds to notify 
Participants of available interest that may be crossed

[[Page 55527]]

during the Opening Process.\60\ The Imbalance Timer will be for the 
same number of seconds for all options traded on the Exchange, and each 
Imbalance Message will be subject to an Imbalance Timer.\61\ The 
Exchange may have up to four Imbalance Messages which each run its own 
Imbalance Timer pursuant to the PDM process.\62\
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    \59\ Imbalance Message 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. See proposed 
BX Options 3, Section 8(k)(1). In connection with the proposed 
handling of imbalance, the Exchange proposes to eliminate the term 
``Order Imbalance Indicator'' at current BX Options 3, Section 
8(a)(2).
    \60\ See proposed BX Options 3, Section 8(k)(1). The Imbalance 
Timer will initially be set 200 milliseconds. See Notice, supra note 
3, 85 FR at 45252.
    \61\ See proposed BX Options 3, Section 8(k)(1).
    \62\ See Notice, supra note 3, 85 FR at 45260. 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. See proposed BX Options 3, Section 8(k)(1)(A).
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    Proposed BX Options 3, Section 8(k)(2) states that any new interest 
received by the system will update the Potential Opening Price. 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 the 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 the 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.
    If the option series has not opened pursuant to proposed BX Options 
3, Section 8(k)(2) described above, the system will concurrently: (i) 
Send 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 the 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 (ii) initiate a Route Timer, not to 
exceed one second.\63\ As proposed, the Route Timer will operate as a 
pause before an order is routed to an away market.\64\ The Exchange 
states that the Route Timer is intended to give participants an 
opportunity to respond to an Imbalance Message before any opening 
interest is routed to away markets and thereby maximize trading on the 
Exchange.\65\ If during the Route Timer, interest is received by the 
system which would allow the Opening Price to be within the OQR without 
trading through away markets and without trading through the limit 
price(s) of interest within the OQR, which is unable to be fully 
executed at the Opening Price, the system will open with trades, and 
the Route Timer will simultaneously end.\66\ The system will monitor 
quotes received during the Route Timer and make ongoing corresponding 
changes to the permitted OQR and Potential Opening Price to reflect 
them.\67\
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    \63\ See proposed BX Options 3, Section 8(k)(3)(A)-(B).
    \64\ See proposed BX Options 3, Section 8(k)(3)(B).
    \65\ See Notice, supra note 3, 85 FR at 45253.
    \66\ See proposed BX Options 3, Section 8(k)(3)(B).
    \67\ See id.
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    Proposed BX Options 3, Section 8(k)(3)(C) provides that, if no 
trade occurs pursuant to proposed BX Options 3, Section 8(k)(3)(B), 
when the Route Timer expires, and if the Potential Opening Price is 
within the OQR (and would not trade through the limit price(s) of 
interest within the 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. 
The Exchange will then open the option series by routing and/or trading 
on the Exchange, pursuant to proposed BX Options 3, Section 8(k)(3)(C) 
paragraphs (i) through (iii).
    Proposed BX Options 3, Section 8(k)(3)(i) provides that, 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 an Intermarket Sweep 
Order (``ISO'') designated as Immediate-or-Cancel (``IOC'') order(s) 
and determine an opening 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. The Exchange states that 
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.\68\
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    \68\ See Notice, supra note 3, 85 at 45253.
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    Proposed Options 3, Section 8(k)(3)(C)(ii) provides that, if the 
total number of better priced away contracts would not satisfy the 
number of marketable contracts on the Exchange, 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 Opening 
Price and trade available contracts on the Exchange at the Exchange 
Opening Price.\69\ 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 proposed Options 3, Section 8(k)(3)(C)(ii).\70\ 
The Exchange states that this proposed rule is designed to maximize 
execution of interest on the Exchange or away markets.\71\
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    \69\ See proposed BX Options 3, Section 8(k)(3)(C)(ii).
    \70\ See id.
    \71\ See id.
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    Proposed Options 3, Section 8(k)(3)(C)(iii) provides that, if the 
total number of better priced away contracts, plus the number of 
contracts available at the Opening Price, plus the contracts available 
at away markets at the Exchange Opening Price would satisfy the number 
of marketable contracts on 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 
such away market interest (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 Opening Price. The 
Exchange states that routing at the better of the Exchange Opening 
Price or the order's limit price is intended to achieve the best 
possible price available at the time the order is received by the away 
market and that routing at the order's limit price ensures that the 
order's limit price is not violated.\72\
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    \72\ See Notice, supra note 3, 85 FR at 45253-54.
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    Proposed Options 3, Section 8(k)(3)(D) provides that the system may 
send up to two additional Imbalance Messages (which may occur while the 
Route Timer is operating) bounded by the OQR and reflecting away market 
interest in the volume. After the Route Timer has expired, the 
processes in proposed Options 3, Section 8(k)(3)(C)

[[Page 55528]]

will repeat (except no new Route Timer will be initiated).\73\
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    \73\ See proposed BX Options 3, Section 8(k)(3)(D).
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9. Forced Opening
    Proposed Options 3, Section 8(k)(3)(E) describes the process that 
occurs if the steps described above have not resulted in an opening of 
the options series. After all additional Imbalance Messages have been 
broadcasted pursuant to proposed Options 3, Section 8(k)(3)(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).\74\ The system will also route 
contracts to away markets at prices equal to the Exchange Opening Price 
at their disseminated size.\75\ 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.\76\ 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.\77\ All other interest will be eligible for trading after 
opening, if consistent with the Participant's instruction.\78\
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    \74\ See proposed BX Options 3, Section 8(k)(3)(E).
    \75\ See id.
    \76\ See id.
    \77\ See id. 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. See Notice, supra 
note 3, 85 FR at 45254. In comparison, 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. See id.
    \78\ See id.
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    Proposed Options 3, Section 8(k)(3)(F) provides that the system 
will execute non-routable orders, such as ``Do-Not-Route'' or ``DNR'' 
Orders,\79\ to the extent possible. The system will only route non-
contingency orders.\80\
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    \79\ A Do-Not-Route Order is described within BX Options 5, 
Section 4(a)(iii)(A).
    \80\ See proposed BX Options 3, Section 8(k)(3)(F).
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    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. Proposed BX 
Options 3, Section 8(k)(5) provides that the system will cancel any 
order or quote that is priced through the Opening Price. All other 
interest will be eligible for trading after the opening. Proposed BX 
Options 3, Section 8(k)(6), provides that during the opening of the 
option series, where there is an execution possible, the system will 
give priority to Market Orders \81\ first, then to resting Limit Orders 
\82\ and quotes. BX's Order Book allocation provisions in Options 3, 
Section 10 will apply.\83\ Proposed BX Options 3, Section 8(k)(7) 
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). 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.
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    \81\ BX Options 3, Section 7(a)(5) defines ``Market Orders.''
    \82\ BX Options 3, Section 7(a)(3) defines ``Limit Orders.''
    \83\ See proposed BX Options 3, Section 8(k)(6).
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10. 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 to Options 3, Section 
8(l), and rename it ``Opening Process Cancel Timer.'' \84\ The Opening 
Process Cancel Timer represents a period of time since the underlying 
market has opened, and is established and disseminated by the Exchange 
on its website.\85\ If an option 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.\86\ These orders include all non-Good Til Cancelled Orders 
received over the FIX protocol.\87\
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    \84\ The Exchange states that while it is retaining the timer, 
the Exchange proposes to amend the rule text to conform the language 
to Phlx's rule text. See Notice, supra note 3, 85 FR at 45255
    \85\ See proposed BX Options 3, Section 8(l).
    \86\ See id.
    \87\ See id.
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B. Other Changes

    The Exchange proposes to remove the rule text from BX Options 2, 
Section 4(g) (Unusual Conditions--Opening Auction) and reserve the 
subparagraph. As described above, the Exchange proposes to state within 
the definition of ``Valid Width Quote'' at proposed BX Options 3, 
Section 8(a)(9), that the Exchange may establish bid/ask differentials 
other than those listed in proposed BX Options 3, Section 8(a)(9) for 
one or more series or classes of options. The rule text of current 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 the rules of BX Options. The Exchange proposes 
to delete the rule text from BX Options 2, Section 4(g) in order to 
conform its rules to the proposed Opening Process and align BX with the 
procedures of other Nasdaq options exchanges follow, which notify 
members in writing, via an Options Regulatory Alert, of any discretion 
that is being granted by the Exchange.\88\
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    \88\ See Notice, supra note 3, 85 FR at 45256.
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C. Implementation

    The Exchange states that it intends to begin implementation of the 
proposed rule change prior to October 30, 2020.\89\ The Exchange 
represents that it will issue an Options Trader Alert to Members to 
provide notification of the symbols that will migrate and the relevant 
dates.\90\
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    \89\ See id.
    \90\ See id. For a more detailed description of the proposed 
rule change, see Notice, supra note 3.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\91\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\92\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \91\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \92\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes to delete in its entirety the current opening 
process and replace it with an opening process

[[Page 55529]]

similar to the process in place on Phlx, with conforming changes to 
reflect particularlities to the BX market.\93\ In making this change, 
the Exchange delineates detailed steps of the opening process. By 
providing more clearly each sequence of the opening process, the 
Commission notes that the proposed rule helps market participants 
understand how the new opening process will operate. To that extent, 
the new opening process may promote transparency, reduce the potential 
for investor confusion, and assist market participants in deciding 
whether to participate in BX's opening process. Further, if they do 
participate in the new opening process, the proposed rule may help 
provide market participants with the confidence and certainty as to how 
their orders or quotes will be processed.
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    \93\ See, e.g., supra note 7.
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    Further, the Commission believes that the proposed rule change is 
designed to promote just and equitable principles of trade by seeking 
to ensure that option series open in a fair and orderly manner. For 
example, the Commission notes that the proposed rule change is designed 
to mitigate the effects of the underlying security's volatility as the 
overlying option series undergoes the opening process. Specifically, 
the proposed rule provides for a range of no less than 100 milliseconds 
and no more than 5 seconds in order to ensure that the Exchange has the 
ability to adjust the period for which the underlying must be open on 
the primary market before the opening process commences.\94\ Moreover, 
the Commission notes that the proposed rule provides an orderly process 
for handling eligible interests during the opening process, while 
seeking to avoid opening executions at suboptimal prices. For instance, 
the proposed rule ensures that the Opening Process will stop and an 
option series will not open if the ABBO becomes crossed, which can be 
indicative of price uncertainty with respect to an option series. 
Likewise, the Exchange will not open an option series with a trade 
unless any of the following conditions occur: (1) The Potential Opening 
Price is at or within the Pre-Market BBO and the ABBO, which is also a 
Valid Width NBBO; (2) 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 (3) where there is no ABBO, the Potential Opening 
Price is at or within the Pre-Market BBO, which is also a Valid Width 
NBBO. While the proposed opening process attempts to maximize the 
number of contracts executed on the Exchange during such process, 
including by seeking additional liquidity, if necessary, the Commission 
notes that the proposed opening process takes into consideration away 
market interests and ensures that better away prices are not traded 
through.
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    \94\ See supra note 29.
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    For these reasons, the Commission believes that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\95\ that the proposed rule change (SR-BX-2020-016), be, 
and it hereby is, approved.
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    \95\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\96\
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    \96\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19718 Filed 9-4-20; 8:45 am]
BILLING CODE 8011-01-P


