[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79734-79737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32750]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65987; File No. SR-BX-2011-084]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change Relating to Amending the BOX Trading 
Rules To Reduce the PIP From One Second to 100 Milliseconds

December 16, 2011.
    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 December 7, 2011, NASDAQ OMX BX, Inc. (the ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by the self-regulatory organization. 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 Chapter V, Section 18 (The Price 
Improvement Period (``PIP'')) of the Rules of the Boston Options 
Exchange Group, LLC (``BOX'') to reduce the PIP from one second to 100 
milliseconds. The text of the proposed rule change is available from 
the principal office of the Exchange, at the Commission's Public 
Reference Room and also on the Exchange's Internet Web site at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/.

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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend Chapter V, 
Section 18(e)(i) (The Price Improvement Period (``PIP'')) of the BOX 
Rules to reduce the time period of the PIP from one second to 100 
milliseconds (1/10 of one second). The PIP allows BOX Options 
Participants to designate certain customer orders for price improvement 
and submit such orders to the PIP (``PIP Order'') with a matching 
contra order (``Primary Improvement Order''). Once such an order is 
submitted, BOX commences a PIP by broadcasting a message to Options 
Participants that (1) states that a Primary Improvement Order has been 
processed; (2) contains information concerning series, size, PIP Start 
Price and side of the market of the order; and (3) states when the PIP 
will conclude (``PIP Broadcast''). Further, responses within a PIP 
(i.e., Improvement Orders), are also broadcast to BOX Options 
Participants. This proposed rule change would reduce the duration of 
the PIP from one second to 100 milliseconds. When approving previous 
reductions in BOX exposure periods (e.g., crossing orders and the PIP) 
the Commission concluded that reducing these time periods to one second 
was fully consistent with the BOX electronic market.\3\
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    \3\ See Securities Exchange Act Release Nos. 53854 (May 24, 
2006), 71 FR 30975 (May 31, 2006) (SR-BSE-2006-23) and 59638 (March 
27, 2009), 74 FR 15020 (April 2, 2009) (BX-2009-015).
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    BOX is not proposing any change to the requirement in Chapter V, 
Section 17 of the BOX Rules that requires an Order Flow Provider 
(``OFP'') to expose its customer's order on the BOX Book for at least 
one second before executing its own principal order against such 
customer order. An exception to this requirement to expose a customer 
order for one second is provided in Chapter V, Section 18(c) of the BOX 
Rules, permitting an OFP to execute its principal order against an 
order it represents as agent if the OFP submits the agency order to the 
PIP. BOX believes this exception for PIP orders is appropriate because 
the customer order is guaranteed an execution at the National Best Bid/
Offer (``NBBO'') or a better price through the PIP. Additionally, BOX 
Options Participants are informed about the two-sided order starting 
the PIP through receipt of the PIP Broadcast. BOX Participants have the 
opportunity to compete for participation in the execution of the 
customer order by responding to the PIP Broadcast with their best-
priced Improvement Order.
    BOX believes the proposed rule change could provide more customer 
orders an opportunity for price improvement because it will reduce the 
market risk for all Participants executing trades in the PIP. BOX 
Participants that initiate a PIP (``Initiating Participants'') are 
required to guarantee an execution at the NBBO or at a better price, 
and are subject to market risk while their PIP Order is exposed to 
other BOX Participants. While other PIP Participants are also subject 
to market risk, those providing responses in the PIP through 
Improvement Orders are not permitted to cancel their orders, but can 
only modify their Improvement Order, including reducing their order 
quantity, by providing a better price. When a PIP Participant submits 
more than one Improvement Order during a PIP, doing so decreases the 
time that each Improvement Order is exposed to market risk. BOX 
believes that the Initiating Participant acts in a critical role in the 
PIP. Their willingness to guarantee the customer order an execution at 
NBBO or a better price is the keystone to the customer order gaining 
the opportunity for price improvement. As such, BOX believes that 
reducing the PIP from one second to 100 milliseconds, and the 
Participants' corresponding market risk, particularly the risk for the 
Initiating Participant, will benefit customers because it is more 
likely that additional PIP transactions will be initiated.
    BOX believes that its Options Participants operate electronic 
systems that enable them to react and respond to orders in a meaningful 
way in fractions of a second. BOX anticipates that its Participants 
will continue to compete within the proposed PIP duration of 100 
milliseconds. In particular, BOX believes that 100 milliseconds will 
continue to provide market participants with sufficient time to respond 
to,

[[Page 79735]]

compete for, and provide price improvement for orders, and will provide 
investors and other market participants with more timely executions, 
and reduce their market risk.
    BOX believes that further reducing the PIP from one second to 100 
milliseconds will benefit Participants trading in the PIP. BOX believes 
it is in these Participants' best interests to minimize the PIP while 
continuing to allow Participants adequate time to electronically 
respond. Both the order being exposed and Participants' Improvement 
Orders are subject to market risk during the PIP. While a limited 
number of Participants wait to respond until later in the PIP, 
presumably to minimize their market risk, in more than eighty percent 
(80%) of PIP executions BOX Participants respond within the first 100 
milliseconds.\4\ BOX believes that 100 milliseconds will continue to 
provide all market participants with sufficient time to respond, 
compete, and provide price improvement for orders and will provide 
investors and other market participants with more timely executions, 
thereby reducing their market risk.
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    \4\ Based on a BOX review of all PIP executions from May through 
July 2011 and a sample of PIP transactions from September through 
November 2010.
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    In consideration of this proposed rule change, BOX recently 
distributed a survey to all BOX Participants that have participated in 
the PIP in 2011. To substantiate that BOX Participants can receive, 
process, and communicate a response to a BOX PIP Broadcast within 100 
milliseconds, the survey asked Participants to identify (i) how many 
milliseconds it takes for a PIP Broadcast to reach Participant systems; 
(ii) how many milliseconds it takes their systems to generate a PIP 
Broadcast response; (iii) how many milliseconds it takes their PIP 
Broadcast response to reach BOX; and (iv) whether or not a reduction of 
the PIP to 100 milliseconds would impair Options Participants' ability 
to compete for orders in the BOX PIP. All of the Participants that 
responded to the specific timing questions in this survey indicated 
that they can receive, process, and communicate multiple PIP Broadcast 
responses back to BOX within substantially less than 100 
milliseconds.\5\ Also in consideration of this proposed rule change, 
BOX reviewed all PIP executions by its Participants for the three month 
period of May through July 2011. This review of PIP transaction 
executions indicates that approximately eighty-five percent (85%) of 
Improvement Orders that are executed at the conclusion of a PIP were 
submitted within 100 milliseconds of the initial PIP Order. 
Additionally, approximately seventy-eight percent (78%) of Improvement 
Orders executed at the end of the PIP were submitted in less than 10 
milliseconds, and seventy percent (70%) were submitted in less than 5 
milliseconds. Through the survey BOX conducted, BOX confirmed that 
those Participants whose PIP Broadcast responses currently average 
greater than 100 milliseconds do operate sufficiently automated 
electronic systems to enable them to react and respond to multiple PIP 
Broadcasts within 100 milliseconds. Based on the responses received, 
BOX confirmed that it typically takes a message less than ten 
milliseconds to travel each way between BOX and its Participants.\6\ 
Participants confirm that it typically takes not more than five 
milliseconds for Participant systems to process PIP Broadcast 
information and generate a response.\7\ If it takes less than 10 
milliseconds for a PIP Broadcast to reach a Participant's system, less 
than 5 milliseconds for the Participant system to process the message 
and generate a response, and then less than 10 milliseconds for that 
response to travel back to BOX, it is generally less than 25 
milliseconds from the time BOX sends a PIP Broadcast to the time BOX 
receives a Participant's response (in the form of an Improvement Order) 
to that Broadcast. If it takes less than 25 milliseconds for a 
Participant to receive and respond to a PIP Broadcast, then a single 
Participant could receive and respond to four iterations of PIP 
messages within 100 milliseconds. Accordingly, BOX believes that 100 
milliseconds will continue to provide all market participants with 
sufficient time to respond, compete, and provide price improvement for 
orders and will provide investors and other market participants with 
more timely executions, thereby reducing their market risk. The 85% of 
Improvement Orders executed at the end of the PIP that were received 
within 100 milliseconds of the PIP Order also demonstrates the speed of 
Participant systems. BOX's review of PIP transactions and the BOX 
survey results indicate that Participants can receive, process, and 
respond to a PIP Broadcast and multiple Improvement Orders while 
trading within a BOX PIP of 100 milliseconds.
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    \5\ Fourteen of sixteen firms responded to the survey. Nine 
firms responded to the specific timing questions.
    \6\ All Participants responding to the specific timing questions 
confirm that it typically takes a message less than ten milliseconds 
to travel each way between BOX and their system.
    \7\ Six of nine Participants responding to the specific timing 
questions confirm that it typically takes not more than five 
milliseconds for them to process PIP Broadcast information and 
generate a response.
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    Moreover, Supplementary Material .02 to Chapter V, Section 18 
provides that a PIP will not run simultaneously with or overlap another 
PIP in any manner. Because the PIP currently lasts for one second, 
Options Participants are unable to initiate another PIP during the one 
second that the PIP occurs, and BOX rejects PIP Orders during this one 
second. By reducing the PIP to 100 milliseconds and thereby decreasing 
the likelihood that a PIP is underway, and the resulting PIP Order 
rejection, BOX believes that it is likely that the number of PIP 
transactions will increase.\8\ The PIP has saved investors more than 
$350 million versus the prevailing NBBO since 2004, a monthly average 
of more than $3.5 million. BOX believes that reducing the PIP duration 
will result in additional PIP transactions, and thus, in customers 
having a greater opportunity to benefit from price improvement.
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    \8\ Less than one in every one thousand PIP orders was rejected 
for the period from January through September 2011.
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    Based on current PIP related market data and the BOX Participant 
survey, BOX believes that reducing the PIP from one second to 100 
milliseconds would not impair Participants' ability to compete in the 
PIP.\9\ More than sixty-five percent of PIP auctions include 
competition for execution (i.e., at least one other Options Participant 
competes with the Initiating Participant for execution of a customer 
order).\10\ Additionally, almost fifty percent of all PIP auctions 
include three or more Participants competing for PIP execution.\11\ BOX 
notes, however, that its market makers are the Participants most likely 
to compete with Initiating Participants for execution against customer 
orders. BOX believes the PIP provides an incentive for them to do so by 
quoting their best and most aggressive prices, inuring the benefit of 
price improvement directly to customer orders.
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    \9\ All fourteen Participants responding to the survey indicated 
that reducing the PIP to 100 milliseconds would not impair their 
ability to participate in the BOX PIP.
    \10\ Based on a sample of PIP transactions for the first and 
third Wednesday of each month, a total of more than 40 trading days, 
for the period from January 2010 through September 2011.
    \11\ Based on a sample of PIP transactions for the first and 
third Wednesday of each month, a total of more than 40 trading days, 
for the period from January 2010 through September 2011.
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    BOX believes that the information outlined above regarding PIP

[[Page 79736]]

transactions and the feedback provided by BOX Participants provides 
substantial support for its assertion that reducing the PIP duration 
from one second to 100 milliseconds will continue to provide 
Participants with sufficient time to ensure competition for PIP Orders, 
and could provide customer orders with additional opportunities for 
price improvement.
    With regard to the impact of this proposal on system capacity, BOX 
has analyzed its capacity and represents that it and the Options Price 
Reporting Authority (``OPRA'') have the necessary systems capacity to 
handle the potential additional traffic associated with the additional 
transactions that may occur with the implementation of the proposed 
reduction in the PIP duration to 100 milliseconds. Additionally, the 
Exchange represents that its systems will be able to sufficiently 
maintain an audit trail for order and trade information with the 
reduction in the PIP duration.
    Upon Commission approval of the proposal, and at least one week 
prior to implementation of the proposed rule change, BOX will issue an 
Informational Circular to Participants, informing them of the 
implementation date of the reduction of the PIP from one second to 100 
milliseconds. This will give Participants an opportunity to make any 
necessary modifications to coincide with the implementation date. 
Finally, BOX notes that the proposed rule change will have no impact on 
provisions related to Auto Auction Orders in Chapter V, Section 14 of 
the BOX Trading Rules, nor how such orders function within the PIP.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\12\ in general, and Section 
6(b)(5) of the Act,\13\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism for a free and open market and a national market system 
and, in general, to protect investors and the public interest. BOX 
notes that exposure and allocation timers for the Chicago Board Options 
Exchange's Hybrid Agency Liaison (``HAL'') and Simple Auction Liaison 
(``SAL'') mechanisms, are both currently set at 150 milliseconds.\14\ 
In particular, the proposed rule change will provide investors with 
more timely execution of their options orders, while ensuring that 
there is an adequate exposure of orders in the BOX PIP. Additionally, 
the proposed change will allow additional investors the opportunity to 
receive price improvement through the BOX PIP, and will reduce market 
risk for BOX Participants using the PIP. As such, BOX believes the 
proposed rule change would help perfect the mechanism for a free and 
open national market system, and generally help protect investors' and 
the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ See CBOE Regulatory Circular RG08-100, September 3, 2008.
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    The Exchange believes the proposed rule change is not unfairly 
discriminatory because the PIP duration would be the same for all 
Participants. All Participants in the PIP have today, and will continue 
to have, an equal opportunity to receive the PIP Broadcast and respond 
with their best prices during the PIP. As noted above, based on the 
feedback BOX has received from its Participants, they will have, within 
100 milliseconds, the opportunity to receive and respond to at least 
four iterations of PIP messages and compete for the customer order. 
Additionally, BOX believes the reduction in the PIP duration reduces 
the market risk for all PIP Participants. The reduction in time period 
reduces the market risk for the Initiating Participant as well as any 
Participant providing orders in response to a PIP Broadcast. Moreover, 
based on the responses BOX received to its survey of PIP Participants, 
BOX believes that a reduction in the PIP auction period to 100 
milliseconds would not impair Participants' ability to compete in PIP 
transactions. BOX believes these results support the assertion that a 
reduction in the PIP duration would not be unfairly discriminatory and 
would benefit investors.

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.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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 (i) as the Commission may 
designate up to 90 days of such date 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:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BX-2011-084 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2011-084. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, on official 
business days between the hours of 10 a.m. and 3 p.m., located at 100 F 
Street NE.,

[[Page 79737]]

Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BX-2011-084 and should be 
submitted on or before January 12, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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 Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32750 Filed 12-21-11; 8:45 am]
BILLING CODE 8011-01-P