[Federal Register Volume 77, Number 23 (Friday, February 3, 2012)]
[Notices]
[Pages 5590-5595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2395]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66278; File No. SR-BX-2011-046]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Amendment No. 1, and Order Granting Accelerated Approval of
Proposed Rule Change as Modified by Amendment No. 1, To Amend the BOX
Fee Schedule With Respect to Credits and Fees for Transactions in the
BOX PIP
January 30, 2012.
On July 15, 2011, NASDAQ OMX BX, Inc. (the ``Exchange'') filed with
the Securities and Exchange Commission (the ``Commission''), pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to amend the Fee Schedule of the Boston Options Exchange Group,
LLC (``BOX'') to increase the credits and fees for certain transactions
in the BOX Price Improvement Period (``PIP'').\3\ The proposed rule
change was immediately effective upon filing with the Commission
pursuant to Section 19(b)(3)(A) of the Act.\4\ Notice of filing of the
proposed rule change was published in the Federal Register on August 3,
2011.\5\ The Commission received four comment letters on the Notice \6\
and a response from BOX.\7\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The PIP is a mechanism in which a BOX Options Participant
submits an agency order on behalf of a customer for price
improvement, paired with a contra-order guaranteeing execution of
the agency order at or better than the National Best Bid or Offer
(``NBBO''). The contra-order could be for the account of the Options
Participant, or an order solicited from someone else. The agency
order is exposed for a one-second auction in which other BOX Options
Participants (``Initiating Participant'') may submit competing
interest at the same price or better. The initiating BOX Options
Participant is guaranteed 40% of the order (after public customers)
at the final price for the PIP order, assuming it is at the best
price. See Chapter V, Section 18 of the BOX Rules.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ See Securities Exchange Act Release No. 64981 (July 28,
2011), 76 FR 46858 (``Notice'').
\6\ See Letters to Elizabeth Murphy, Secretary, Commission, from
John C. Nagel, Managing Director and General Counsel, Citadel
Securities LLC (``Citadel''), dated August 12, 2011 (``Citadel
Letter''); Andrew Stevens, Legal Counsel, IMC Financial Markets
(``IMC''), dated August 15, 2011 (``IMC Letter''); Michael J. Simon,
Secretary, International Securities Exchange (``ISE''), dated August
22, 2011 (``ISE Letter''), and Christopher Nagy, Managing Director
Order Strategy, TD Ameritrade, Inc. (``TD Ameritrade''), dated
September 12, 2011 (``TD Ameritrade Letter'').
\7\ See Letter to Elizabeth Murphy, Secretary, Commission, from
Anthony D. McCormick, Chief Executive Officer, BOX, dated September
9, 2011 (``BOX Letter'').
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On September 13, 2011, the Commission temporarily suspended BOX's
proposal and simultaneously instituted proceedings to determine whether
to approve or disapprove the proposed rule change.\8\ On September 20,
2011, the Commission received notice of BOX's intention to petition for
review of the Division's action by delegated authority to suspend its
PIP fee filing, which triggered a stay of the suspension order. On
September 27, 2011, the Commission received BOX's petition to review
the Division of Trading and Markets' suspension by delegated
authority.\9\ On October 19, 2011, the Commission issued an order
denying BOX's petition, lifting the
[[Page 5591]]
automatic stay, and designating a longer comment period for the
proceedings.\10\
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\8\ See Securities Exchange Act Release No. 65330 (September 13,
2011), 76 FR 58065 (September 19, 2011) (``Suspension Order'').
\9\ Petition for Review of Action by Delegated Authority from
BOX, dated September 27, 2011 (``BOX Petition'').
\10\ See Securities Exchange Act Release No. 65592, 76 FR 66103
(October 25, 2011).
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The Commission thereafter received an additional four comment
letters on the proposal.\11\ The Exchange submitted a response letter
to the comments on December 9, 2011.\12\ The Exchange also submitted
data for the Commission's consideration under separate cover.\13\
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\11\ See Letters to Elizabeth Murphy, Secretary, Commission,
from Anthony J. Saliba, Chief Executive Officer, LiquidPoint, LLC
(``LiquidPoint''), dated October 10, 2011 (``LiquidPoint Letter'');
Christopher Nagy, Managing Director Order Strategy, TD Ameritrade,
dated November 14, 2011 (``TD Ameritrade Letter II''); Michael J.
Simon, Secretary, ISE, dated November 17, 2011 (``ISE Letter II'');
and John C. Nagel, Managing Director and General Counsel, Citadel,
dated November 17, 2011 (``Citadel Letter II'').
\12\ See Letter to Elizabeth Murphy, Secretary, Commission, from
Anthony D. McCormick, Chief Executive Officer, BOX, dated December
9, 2011 (``BOX Response Letter'').
\13\ See Letter to Heather Seidel, Associate Director, Division
of Trading and Markets, Commission, from Michael J. Burbach, Vice
President, Legal Affairs, BOX, dated December 9, 2011 (``BOX Data
Letter'').
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On January 30, 2012, the Exchange submitted Amendment No. 1 to the
proposed rule change. In Amendment No. 1, the Exchange proposed to put
its fee change on a formal pilot and undertook to provide the
Commission with data during the course of such pilot. The Commission is
publishing this notice to solicit comments on Amendment No. 1 from
interested persons and is approving the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
I. Description of the Proposal
The Exchange proposes to increase the credits and fees for certain
transactions in the PIP by modifying Section 7d of the BOX Fee
Schedule. Specifically, the Exchange proposes to: (1) Increase both the
credits and the fees for PIP transactions in classes that are not
subject to the Penny Pilot (``Non-Penny classes'') from $0.30 to $0.75
per contract; and (2) increase both the credits and the fees for PIP
transactions in Penny Pilot classes (other than in QQQQ, SPY, and IWM)
where the trade price is equal to or greater than $3.00 per contract
from $0.30 to $0.75 per contract. The credits and the fees for PIP
transactions QQQQ, SPY, and IWM and in all other Penny Pilot classes
where the trade price is less than $3.00 per contract will remain at
$0.30 per contract. The credits are paid by the Exchange on the agency
order that is submitted to the PIP auction on behalf of a customer. The
fees are charged by the Exchange to the order that is executed against
the agency order, whether such order is the contra order submitted by
the Initiating Participant or an order submitted by another BOX Options
Participant in response to the PIP auction (``Responding
Participant''). The credits and fees are in addition to any applicable
trading fees, as described in Sections 1 through 3 of the BOX Fee
Schedule.\14\
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\14\ Sections 1 through 3 of the BOX Fee Schedule include a
$0.25 per contract transaction fee for contracts traded in the PIP.
Depending on its average daily volume (``ADV''), a Participant who
initiates PIP auctions may be charged a lower per contract fee. See
Section 7d. of the BOX Fee Schedule.
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In addition, on January 30, 2012, BOX submitted Amendment No. 1 to
the proposed rule change, which added language to make the proposed
rule change, subject to Commission approval, operative on a pilot basis
beginning February 1, 2012, and continuing until February 28, 2013.
Further, BOX agreed to submit to the Commission on a quarterly basis
during the pilot period certain monthly PIP transaction data in series
traded in penny increments compared to series traded in nickel
increments, subdivided by when BOX is at the NBBO and when BOX is not
at the NBBO, including: (1) Volume by number of contracts traded; (2)
number of contracts executed by the Initiating Participant as compared
to others (``retention rate''); (3) percentage of contracts receiving
price improvement when the Initiating Participant is the contra party
and when others are the contra party; (4) average number of
participants responding in the PIP; (5) average price improvement
amount when the Initiating Participant is the contra party; (6) average
price improvement amount when others are the contra party; and (7)
percentage of contracts receiving price improvement greater than $0.01,
$0.02 and $0.03 when the Initiating Participant is the contra party and
when others are the contra party.\15\ BOX also agreed to make such data
publicly available.
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\15\ The data set forth in Amendment No. 1 to be provided during
the pilot period includes substantially the same information as the
Order Size Cumulative data provided by BOX in pages 26 through 30 of
the BOX Data Letter.
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II. Discussion
After careful review of the proposal and consideration of the
comment letters, the Commission finds that the proposed rule change to
amend the BOX Fee Schedule to increase the credits and fees for certain
transactions in the PIP is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange and, in particular, the requirements of Section 6
of the Act.\16\ Specifically, the Commission finds that the proposal,
as modified by Amendment No. 1, is consistent with Section 6(b)(5) of
the Act,\17\ which, among other things, requires that rules of a
national securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, to protect
investors and the public interest, and to not permit unfair
discrimination between customers, issuers, brokers, or dealers, and
Section 6(b)(8) of the Act, \18\ which requires that the rules of a
national securities exchange not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act. In
addition, the Commission finds that the proposal, as modified by
Amendment No. 1, is consistent with Section 6(b)(4) of the Act,\19\
which requires that an exchange have rules that provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities.
Further, as discussed below, in approving this proposed rule change,
the Commission considered the proposal's impact on efficiency,
competition, and capital formation.\20\
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\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(5).
\18\ 15 U.S.C. 78f(b)(8).
\19\ 15 U.S.C. 78f(b)(4).
\20\ See 15 U.S.C. 78c(f).
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As noted above, the Exchange's proposal increased: (1) Both the
credits and the fees for PIP transactions in classes that are not
subject to the Penny Pilot from $0.30 to $0.75 per contract; and (2)
both the credits and the fees for PIP transactions in Penny Pilot
classes where the trade price is equal to or greater than $3.00 per
contract (other than transactions in QQQQ, SPY, and IWM) from $0.30 to
$0.75 per contract. In other words, the Exchange's proposal applies
only to options with a minimum price variation larger than one cent.
The Exchange's proposal did not modify its existing PIP-related fees
that apply to transactions in series that have a minimum pricing
variation of one cent. Accordingly, the issue before the Commission in
this filing is whether the PIP fee changes applicable to options
quoting in an increment larger than a penny are consistent with the
Act.
Prior to the institution of proceedings, the Commission received
four comment letters on the Exchange's proposed rule change.\21\ Three
commenters
[[Page 5592]]
recommended that the Commission temporarily suspend SR-BX-2011-046 and
institute proceedings to disapprove the filing.\22\ The fourth
commenter supported the Exchange's proposed rule change and urged the
Commission not to institute proceedings to disapprove the filing.\23\
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\21\ See Citadel Letter, supra note 6, IMC Letter, supra note 6,
ISE Letter, supra note 6, and TD Ameritrade Letter, supra note 6.
\22\ See Citadel Letter, supra note 6, at 4; IMC Letter, supra
note 6, at 1 and 4; and ISE Letter, supra note 6, at 5.
\23\ See TD Ameritrade Letter, supra note 6, at 2.
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Citadel argued that the magnitude of the disparity between the fees
an initiator pays and the fees a competitive responder pays, on a net
basis,\24\ make it ``economically prohibitive for anyone other than the
initiator to respond'' to a PIP auction.\25\ Citadel also argued that
the fees proposed by SR-BX-2011-046 are ``solely structured to benefit
one group of BOX participants over another,'' and thus are
discriminatory and an undue burden on competition.\26\
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\24\ Under the proposed rule change, the Exchange would charge
both the Initiating Participant and the Responding Participant the
same fee for executing an order in the PIP. However, if the
Initiating Participant also submits the agency order into the PIP,
the Initiating Participant receives the rebate paid to the agency
order that is auctioned in the PIP. As a result, if the fee the
Initiating Participant pays is aggregated with the rebate the
Initiating Participant receives for the agency order (i.e., a
``net'' fee), the Initiating Participant would pay a lower net fee
compared to Responding Participants.
\25\ See Citadel Letter, supra note 6, at 2.
\26\ Id. at 3.
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IMC also noted its belief that the BOX PIP fee structure unduly
burdened competition and unreasonably discriminated amongst
participants.\27\ It argued that the increase in fees is borne solely
by PIP competitive responders and effectively bars certain participants
from competing with initiators.\28\
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\27\ See IMC Letter, supra note 6, at 1-2.
\28\ See id.
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ISE challenged BOX's assertion that the fees proposed in SR-BX-
2011-046 have a uniform application across all members, noting that the
differential in net fees between PIP initiator and competitive
responders is between $0.75 and $0.90 per contract.\29\ ISE also argued
that SR-BX-2011-046 was deficient in that it failed to: Provide an
adequate basis to determine that the proposed rule change is consistent
with the Act because it did not address the pricing differential for
participants who seek to compete with a PIP initiator; discuss the
burden on competition imposed by the pricing structure; or provide
support for its assertion that the fee change will allow it to compete
with other exchanges.\30\
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\29\ See ISE Letter, supra note 6, at 2.
\30\ See ISE Letter, supra note 6, at 5.
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TD Ameritrade strongly supported the proposed rule change, noting
that it had already seen significant benefits to its retail
investors.\31\ TD Ameritrade stated that the BOX fee structure provides
incentives for market participants to submit customer order flow to BOX
and thus, creates a greater opportunity for retail customers to receive
additional price improvement.\32\
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\31\ See TD Ameritrade Letter, supra note 6, at 1.
\32\ See id.
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In its response letter, BOX argued that its market model and fee
structure are intended to benefit retail customers.\33\ BOX stated that
its fee structure in the PIP is more transparent than payment for order
flow (``PFOF'') arrangements and notes its belief that the credit to
remove liquidity on BOX is generally less than what firms receive
through PFOF.\34\ BOX stated that since the PIP began operating in
2004, customers have received more than $355 million in savings through
better executions on BOX, including $7.3 million in August 2011, and
stated its belief that the proposal is consistent with the public
interest, and with the Exchange Act.\35\
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\33\ See BOX Letter, supra note 7, at 2.
\34\ See id.
\35\ See id.
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As noted above, the Commission received an additional four comment
letters on the proposal during the proceedings,\36\ in addition to
rebuttal comment from the Exchange \37\ and a separate data letter.\38\
Of these comment letters, one supported the proposal \39\ and three
opposed the proposal.\40\
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\36\ See TD Ameritrade Letter II, supra note 11, LiquidPoint
Letter, supra note 11, ISE Letter II, supra note 11, and Citadel
Letter II, supra note 11.
\37\ See BOX Response Letter, supra note 12.
\38\ See BOX Data Letter, supra note 13.
\39\ See TD Ameritrade Letter II, supra note 11.
\40\ See LiquidPoint Letter, supra note 11, ISE Letter II, supra
note 11, and Citadel Letter II, supra note 11.
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In support of the proposal, both BOX and TD Ameritrade stated that
they believed that the proposed fees did not inhibit competition or
foster internalization.\41\ TD Ameritrade stated that its experience
with the BOX PIP has shown ``price improvement rates superior to that
available through other programs in the market.'' \42\
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\41\ See BOX Response Letter, supra note 12, at 3-5; TD
Ameritrade Letter II, supra note 11, at 2.
\42\ TD Ameritrade Letter II, supra note 11, at 2.
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The commenters opposed to the proposal all expressed concern about
the impact of the net fees on competition in the PIP, and thus on the
opportunity for price improvement for the customer order being exposed
in the auction.\43\ Citadel argues that because of the disparity
between the net fee charged to competitive responders and the
initiators, BOX effectively is discouraging competition in the PIP and
is thereby encouraging internalization at worse prices for
investors.\44\ Citadel further argues that BOX's PIP fees are not
equitably allocated and unfairly discriminate in violation of the
Act.\45\ Citadel claims that BOX's PIP fees, which it believes have
reduced competition, have resulted in PIP auctions offering price
improvement to fewer numbers of contracts and by lower amounts.\46\
Likewise, LiquidPoint maintains that the filing imposes a burden on
competition because of the higher net costs to a competitive responder
in a PIP auction, which it believes prevents responders from competing
on equal footing in the auction with the firm that submitted the
original PIP order.\47\ ISE argues that BOX's PIP fees impose an
unreasonable burden on competition and that BOX appears to be using its
PIP fees to increase interaction rates, thereby denying investors the
opportunity to receive the best possible prices for their orders.\48\
ISE notes that BOX data shows that only 15% of orders in penny classes
in the PIP receive price improvement over the NBBO and that BOX data
shows a 58% retention rate in the penny classes.\49\
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\43\ Some of the commenters opposed to the proposal expressed
concerns about the competitiveness of the PIP in general and did not
limit their comments to the fee change applicable to non-penny
series that is before the Commission in this particular proposal.
See, e.g., Citadel Letter II, supra note 11, at 3 and ISE Letter II,
supra note 11, at 1-2.
\44\ See Citadel Letter II, supra note 11, at 2.
\45\ See Citadel Letter II, supra note 11, at 1.
\46\ See Citadel Letter II, supra note 11, at 3. Citadel
provided statistics on the amount and percent of average price
improvement per month for BOX's PIP and compared it to similar price
improvement mechanisms on ISE, Phlx, and CBOE, for February to
October 2011. Although these statistics provided do show a downward
trend for price improvement on BOX's PIP during the period covered
by Citadel's statistics, the Commission notes they are not broken
out by penny and non-penny series, and thus do not show the
statistics only for the specific options subject to the fee change
in this proposed rule change.
Citadel also argues that other BOX fees, in particular the fee
to add liquidity to the BOX book, have increased quoted spreads on
BOX and amplified the negative impact of the PIP fee by facilitating
internalization at the NBBO through PIP auctions. See Citadel Letter
II, supra note 11, at 6-7. Although the Commission has considered
the proposed fee change that is the subject of this proposed rule
change in the context of these other fees, the Commission notes that
these other BOX fees are not within the scope of this proposed rule
change.
\47\ See LiquidPoint Letter, supra note 11, at 2.
\48\ See ISE Letter II, supra note 11, at 2.
\49\ See ISE Letter II, supra note 11, at 1. ISE notes that this
level of retention exceeds the 40% execution guarantee. In contrast,
ISE notes that 81% of the contracts executed through the ISE's Price
Improvement Mechanism received price improvement over the NBBO
during September 2011, whereas only 23% of PIP transactions were
executed at a price that improved the NBBO in September 2011. We
note that the BOX PIP retention rate statistics cited by ISE refer
to data on penny series, which are not affected by the fee change in
this proposed rule change.
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[[Page 5593]]
To assess the impact of the proposed fee change, the Commission's
review of the data focused on issues relating to the competitiveness of
the PIP auction and extent of price improvement obtained for customers.
In the BOX Data Letter, BOX provided monthly PIP execution quality
statistics for the period of June through October 2011, broken down by
order size (1-10 contracts, 11-25 contracts, 26-50 contracts, 51-100
contracts, and 101 or more contracts). BOX also provided summary data
for the period when the fee was in effect (August 1, 2011 to October
18, 2011, excluding September 13-20, 2011), as well as NBBO data for
BOX for the period of June through October 2011. The data provided by
BOX covers the few months before and after the fee change, and includes
statistics on percent and amount of price improvement, the number of
responders to a PIP auction, and the retention rates of Initiating
Participants and those market makers who received PIP directed orders.
This data included information on both penny and non-penny series,
although, as noted, this proposed rule change only applies to PIP
transactions in non-penny series.
The data provided by BOX in the BOX Data Letter does not
demonstrate a decline in the execution quality of orders executed in
the PIP auction, in series trading in an increment larger than a penny,
during the period that the proposed rule change was in effect as
compared to the months immediately preceding the proposed rule change.
The data does show that the nature of the PIP auction and the execution
of orders within the auction varies significantly depending on whether
the auction relates to a penny series or series with a larger
increment, and on whether BOX is quoting at the NBBO or outside the
NBBO when the auction is initiated. The following discussion of the
data focuses on the non-penny series, which are the series affected by
the proposed rule change.
With respect to the non-penny series that were affected by the PIP
fee change, the data show that the initiated order and directed order
retention rate remained largely the same (both when BOX was outside the
NBBO and when BOX was at the NBBO) during the period the fee change was
in effect as compared to the two months prior.\50\ Specifically,
although the retention rate varied significantly between when BOX was
outside the NBBO (52%) and when BOX was at the NBBO (22%), it remained
relatively stable within those categories during the period covered by
the BOX Data Letter, varying no more than 3%.\51\
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\50\ See BOX Data Letter, supra note 13, at 32.
\51\ See id. The Commission does recognize that, in the non-
penny series, the number of responders declined in auctions that
were initiated when BOX was quoting outside the NBBO and increased
in auctions that were initiated when BOX was quoting at the NBBO
during this time period, as compared to the two months prior to the
fee change. For example, in July 2011, the average number of
responders when BOX was at the NBBO was 1.31. In contrast, during
the entire period that the proposed fee change was in effect, the
average number of responders when BOX was at the NBBO was 3.11.
Further, in July 2011, the average number of responders when BOX was
not at the NBBO was 2.12. In contrast, during the entire period that
the proposed fee change was in effect, the average number of
responders when BOX was not at the NBBO was 1.75. See BOX Data
Letter, supra note 13, at 29 and 31. However, as noted, even with
these changes, the retention rate during these time periods did not
change significantly.
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For non-penny series, the price improvement percentages declined
slightly for transactions when BOX was at the NBBO (despite the
increase in the number of responders), and increased slightly when BOX
was not at the NBBO (despite the decrease in the number of responders).
Overall, the data shows that BOX's PIP provided very significant price
improvement for non-penny series both before and after the PIP fee
change.\52\ As noted below in connection with BOX's agreement to
continue to make publicly available PIP execution quality data during
the pilot period, such data is relevant for the consideration of
broker-dealers when managing their best execution obligations.
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\52\ See BOX Data Letter, supra note 13, at 32-33. The
percentage of contracts receiving price improvement in non-penny
series ranged from 55%-57% and the average price improvement amount
ranged from $0.02 to $0.0269. See id.
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Thus, the data provided by BOX for the non-penny series do not
suggest any significant adverse impact of the proposed PIP fee change
on the competitiveness of the PIP auction or the extent of price
improvement for orders executed in the PIP in those series.\53\ Both
ISE and Citadel emphasized low price improvement and high retention
rates, but their statistics focus on either penny classes, only part of
which are affected by the proposed rule change, or overall price
improvement statistics, which are heavily influenced by the penny
series because of the high volumes in the penny series in the BOX
PIP.\54\
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\53\ Although the proposed rule change does not affect the PIP
fee for options series in penny classes quoting in a penny
increment, data for those series included in the BOX Data Letter
does show that the majority of BOX's PIP volume is in the series in
penny classes quoting in penny increments when BOX is quoting
outside the NBBO. See BOX Data Letter, supra note 13, at 32.
Commission staff examined the total number of contracts executed in
the PIP compared to the total number of contracts executed in penny
series when BOX is not at the NBBO, as provided by BOX. Staff
calculated that the following percentages of total monthly volume in
the PIP occurred in penny series when BOX is outside the NBBO: June
2011, 66.3%; July 2011, 63.0%; August 2011, 64.5%; September 2011,
67.0%; and October 2011, 70.9%.
In these series, the data show high retention rates by the
Initiating Participant along with a low rate of price improvement.
See BOX Data Letter, supra note 13, at 32. The retention rates in
penny series when BOX is not at the NBBO ranges from 62% to 64%
during the time period covered by the data. Further, the overall
percentage of contracts receiving price improvement in the penny
series ranges from 15% to 21% during the time period covered by the
data (with the highest percentage being in August 2011). See id. ISE
also notes high retention rates and low price improvement
percentages in the BOX PIP in the penny classes. See ISE Letter II,
supra note 11, at 1.
This should be considered against the low percentage of time
that BOX is at the NBBO, which one commenter argued is a result of
BOX's overall fee structure. See Citadel Letter II, supra note 11,
at 8. BOX's data show that the percentage of time BOX was at the
NBBO in all options classes ranges from 30.00% to 32.70%. See BOX
Data Letter, supra note 13, at 34. Citadel provided statistics for
60 penny pilot symbols in September and October 2011 that calculate
BOX's percentage of time at the NBBO at 18% for each month. See
Citadel Letter II, supra note 11, at 8.
The data suggests that some market participants may seek to
route orders to BOX's PIP when BOX is not at the NBBO. We note that
BOX established comparably structured PIP fees in the penny series
in August 2010 and subsequently increased the levels of in April
2011. See Securities Exchange Act Release Nos. 62632 (August 3,
2010), 75 FR 47869 (August 9, 2010) (SR-BX-2010-049) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change) and
64198 (April 6, 2011), 76 FR 20426 (April 12, 2011) (SR-BX-2011-020)
(Notice of Filing and Immediate Effectiveness of Proposed Rule
Change).
\54\ See BOX Data Letter, supra note 13, at 32. During the
period covered by the BOX data provided, the volume in the penny
series ranged from 77% to 82% of total volume in the PIP. See id.
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The Commission acknowledges that data BOX provided is based on a
sample period that was both short and included an anomalous month,
August 2011, which was characterized by extraordinarily high
volatility. This fact was noted by Citadel, which stated that during
periods of high volatility, spreads tend to widen, which in turn
provides more opportunity for price improvement.\55\ Citadel also
provided data showing spikes in price improvement in price improvement
mechanisms on other exchanges during the month of August 2011.\56\ Two
commenters also cautioned that it takes time for the market to react to
fee changes.\57\ One noted that the full
[[Page 5594]]
impact of the proposal might not be reflected in recent data.\58\
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\55\ See Citadel Letter II, supra note 11, at 10.
\56\ See Citadel Letter II, supra note 11, at 12.
\57\ See Citadel Letter II, supra note 11, at note 28 and ISE
Letter II, supra note 11, at 1.
\58\ See Citadel Letter II, supra note 11, at note 28.
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In the BOX Response Letter, BOX offered to put the fee change on a
pilot.\59\ As noted above, BOX filed Amendment No. 1 to the proposed
rule change on January 30, 2012, which amended the filing so that if
the Commission approved the changes to the BOX Fee Schedule, although
such changes would become effective upon any such Commission approval,
BOX would make the changes operative on a pilot basis beginning
February 1, 2012, and continuing until February 28, 2013. BOX also
represented that it will provide publicly-available data to the
Commission on a quarterly basis for the duration of the pilot, which
data would be substantially similar to that provided in the BOX Data
Letter. This will allow the Commission to further evaluate the effect
of the fee structure on competition and the extent of price improvement
for orders executed in the PIP, in the affected series, over a longer
period of time with a data set that should be more representative and
less subject to the effect of potentially anomalous periods.
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\59\ See BOX Response Letter, supra note 12, at 6.
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In light of the data received, which showed no adverse impact of
the proposed rule change on the competitiveness of the PIP auction or
the extent of price improvement in series that trade in non-penny
increments that are the subject of the current proposal before the
Commission, and the Exchange's commitment to provide data during the
course of a pilot, which will allow the Commission to further evaluate
the impact of the fee during the course of the pilot, the Commission
finds that the proposed rule change, as modified by Amendment No. 1, is
consistent with the Act.
Further, because BOX provided data to the Commission and agreed to
make the data publicly available, broker-dealers now have access to
data on execution quality for BOX's PIP that they did not previously
have, which is relevant for their consideration when managing their
best execution obligations.\60\ On numerous occasions, the Commission
has articulated that in meeting their best-execution obligations,\61\
broker-dealers should regularly and rigorously examine execution
quality likely to be obtained from different markets trading a
security.\62\ The Commission welcomes BOX's willingness to make public
data available, and notes that the data assisted the Commission in
evaluating the proposal.
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\60\ This proposal, the comment letters it has generated, and
the proceedings the Commission has conducted, have highlighted the
lack of visibility into publicly-available options execution quality
statistics across all of the exchanges, including for price
improvement mechanisms. See also Citadel Letter II, supra note 11,
at note 7 (advocating the adoption of rules mandating publication of
listed options execution quality metrics similar to Regulation NMS
Rules 605 and 606) and TD Ameritrade Letter II, supra note 11, at 2-
3 (recommending expansion of Rule 605 to the options markets).
Although certain exchanges provide price improvement statistics to
the Commission for their price improvement mechanisms, the
statistics are not made publicly available.
\61\ See, e.g., Rule 2320 of the NASD's Conduct Rules, NASD
Notice to Members 06-58, Best Execution, http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p017607.pdf (Oct.
2006) and NASD Notice to Members 01-22, Best Execution, http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p005080.pdf (April 2001).
\62\ See, e.g., Securities Exchange Release Nos. 37619A
(September 6, 1996), 61 FR 48290, (September 12, 1996); 37046 (March
29, 1996), 61 FR 15322, (April 5, 1996) and 34902 (October 27,
1994), 59 FR 55066 (November 22, 1994). See also Securities Exchange
Act Release No. 43590 (November 17, 2000), 65 FR 75414 (December 1,
2000).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 1
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-2011-046 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-2011-046. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal 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 publicly available. All
submissions should refer to File Number SR-BX-2011-046 and should be
submitted on or before February 24, 2012.
IV. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
Amendment No. 1 revised the proposed rule change to, among other
things, specify that the proposed rule change will be operative on a
pilot basis, beginning February 1, 2012, and continuing until February
28, 2013. Also in Amendment No. 1, BOX committed to provide to the
Commission, on a quarterly basis, certain monthly PIP transaction data
in series traded in penny increments compared to series traded in
nickel increments, subdivided by when BOX is at the NBBO and when BOX
is not at the NBBO, including: (1) Volume by number of contracts
traded; (2) retention rate; (3) percentage of contracts receiving price
improvement when the Initiating Participant is the contra party and
when others are the contra party; (4) average number of participants
responding in the PIP; (5) average price improvement amount when the
Initiating Participant is the contra party; (6) average price
improvement amount when others are the contra party; and (7) percentage
of contracts receiving price improvement greater than $0.01, $0.02 and
$0.03 when the Initiating Participant is the contra party and when
others are the contra party. The amendment addresses potential concerns
that the data is based on a sample period that was both short and
included an anomalous month (August 2011), and will provide the
Commission with additional data with which to continue to assess the
proposed rule change during the pilot period. Accordingly, the
Commission also finds good cause, pursuant to Section 19(b)(2)
[[Page 5595]]
of the Act,\63\ for approving the proposed rule change, as modified by
Amendment No. 1, prior to the 30th day after the date of publication of
notice in the Federal Register.
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\63\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\64\ that the proposed rule change (SR-BX-2011-046), as modified by
Amendment No. 1, be, and hereby is, approved on an accelerated basis.
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\64\ 15 U.S.C. 78s(b)(2).
\65\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-2395 Filed 2-2-12; 8:45 am]
BILLING CODE 8011-01-P