[Federal Register Volume 78, Number 154 (Friday, August 9, 2013)]
[Notices]
[Pages 48752-48754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-19261]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70114; File No. SR-BX-2013-044]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change to Its Excess Order Fee Under Rule 
7018(d)

August 5, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 26, 2013, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes changes to its Excess Order Fee under Rule 
7018(d). While these amendments are effective upon filing, the Exchange 
has designated the proposed amendments to be operative on August 1, 
2013. The text of the proposed rule change is also available on the 
Exchange's Web site at http://nasdaqomxbx.cchwallstreet.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    In 2012, BX introduced an Excess Order Fee, imposed on MPIDs that 
have characteristics indicative of inefficient order entry 
practices.\3\ As BX explained at the time, inefficient order entry 
practices may place excessive burdens on the systems of BX and its 
members and may negatively impact the usefulness and life cycle cost of 
market data.\4\ Market participants that flood the

[[Page 48753]]

market with orders that are rapidly cancelled or that are priced away 
from the inside market do little to support meaningful price discovery.
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    \3\ Securities Exchange Act Release Nos. 67007 (May 17, 2012), 
77 FR 30579 (May 23, 2012) (SR-BX-2012-033) (establishing fee); 
67272 (June 27, 2012), 77 FR 39530 (July 3, 2012) (SR-BX-2012-042) 
(modifying terms and conditions of fee).
    \4\ See generally Recommendations Regarding Regulatory Reponses 
to the Market Events of May 6, 2010, Joint CFTC-SEC Advisory 
Committee on Emerging Regulatory Issues, at 11 (February 18, 2011) 
(``The SEC and CFTC should also consider addressing the 
disproportionate impact that [high frequency trading] has on 
Exchange message traffic and market surveillance costs. . . . The 
Committee recognizes that there are valid reasons for algorithmic 
strategies to drive high cancellation rates, but we believe that 
this is an area that deserves further study. At a minimum, we 
believe that the participants of those strategies should properly 
absorb the externalized costs of their activity.'').
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    In general, the determination of whether to impose the fee on a 
particular MPID has been made by calculating the ratio between (i) 
entered orders, weighted by the distance of the order from the national 
best bid or offer (``NBBO''), and (ii) orders that execute in whole or 
in part. The fee has been imposed on MPIDs with an ``Order Entry 
Ratio'' of more than 100. The Order Entry Ratio is calculated, and the 
Excess Order Fee imposed, on a monthly basis. BX is now proposing to 
modify the fee, such that it will be calculated and assessed on the 
basis of all of a member's trading activity on BX, rather than on an 
MPID basis. The purpose of this change is to ensure that members do not 
act in a manner inconsistent with the intent of the fee by spreading 
inefficient order activity across multiple MPIDs in a manner that 
allows the MPIDs to avoid a charge that would not be avoided if all of 
the member's activity were aggregated. Thus, the change replaces the 
term ``MPID'' with the term ``member'' throughout the text of Rule 
7018(d). The rule, as amended, will operate as follows:
    For each member, the Order Entry Ratio will be the ratio of (i) the 
member's ``Weighted Order Total'' to (ii) the greater of one (1) or the 
number of displayed, non-marketable orders \5\ sent to BX by the member 
during the month that execute in full or in part.\6\ The Weighted Order 
Total is the number of displayed, non-marketable orders sent to BX by 
the member, as adjusted by a ``Weighting Factor.'' The applicable 
Weighting Factor is applied to each order based on its price in 
comparison to the NBBO at the time of order entry:
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    \5\ The fee focuses on displayed orders since they have the most 
significant impact on investor confusion and the quality of market 
data.
    \6\ Thus, in an extreme case where no orders entered by the 
member executed, this component of the ratio would be assumed to be 
1, so as to avoid the impossibility of dividing by zero.

------------------------------------------------------------------------
                                                              Weighting
             Order's price versus NBBO at entry                 factor
------------------------------------------------------------------------
Less than 0.20% away.......................................           0x
0.20% to 0.99% away........................................           1x
1.00% to 1.99% away........................................           2x
2.00% or more away.........................................           3x
------------------------------------------------------------------------

    Thus, in calculating the Weighted Order Total, an order that was 
more than 2.0% away from the NBBO would be equivalent to three orders 
that were 0.50% away. Due to the applicable Weighting Factor of 0x, 
orders entered less than 0.20% away from the NBBO would not be included 
in the Weighted Order Total, but would be included in the ``executed'' 
orders component of the Order Entry Ratio if they execute in full or 
part.\7\ In addition, members with a daily average Weighted Order Total 
of less than 100,000 during the month will not be subject to the Excess 
Order Fee. Finally, the fee is based on orders received by BX during 
regular market hours (generally, 9:30 a.m. to 4:00 p.m.),\8\ and will 
exclude orders received at other times, even if they execute during 
regular market hours.
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    \7\ An analogous fee of The NASDAQ Stock Market LLC (``NASDAQ'') 
includes an exclusion from both components of the ratio for orders 
sent by market makers in securities in which they are registered, 
through the MPID applicable to the registration. Although BX rules 
currently allow for market maker registration, BX does not currently 
have any registered market makers. Accordingly, BX has not deemed it 
necessary to adopt a comparable exclusion. In the event that market 
maker participation in BX increases, BX will evaluate the 
advisability of adopting an exclusion.
    \8\ Regular market hours may be different in some circumstances, 
such as on the day after Thanksgiving, when regular market hours on 
all exchanges traditionally end at 1:00 p.m.
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    The following example illustrates the calculation of the Order 
Entry Ratio:
     A member enters 15,000,000 displayed, liquidity-providing 
orders:
     10,000,000 orders are entered at the NBBO. The Weighting 
Factor for these orders is 0x.
     5,000,000 orders are entered at a price that is 1.50% away 
from the NBBO. The Weighting Factor for these orders is 2x.
     Of the 15,000,000 orders included in the calculation, 
90,000 are executed.
     The Weighted Order Total is (10,000,000 x 0) + (5,000,000 
x 2) = 10,000,000. The Order Entry Ratio is 10,000,000/90,000 = 111.
    If a member has an Order Entry Ratio of more than 100, the amount 
of the Order Entry Fee will be calculated by determining the member's 
``Excess Weighted Orders.'' Excess Weighted Orders are calculated by 
subtracting (i) the Weighted Order Total that would result in the 
member having an Order Entry Ratio of 100 from (ii) the member's actual 
Weighted Order Total. In the example above, the Weighted Order Total 
that would result in an Order Entry Ratio of 100 is 9,000,000, since 
9,000,000/90,000 = 100. Accordingly, the Excess Weighted Orders would 
be 10,000,000-9,000,000 = 1,000,000.
    The Excess Order Fee charged to the member will then be determined 
by multiplying the ``Applicable Rate'' by the number of Excess Weighted 
Orders. The Applicable Rate is determined based on the member's Order 
Entry Ratio:

------------------------------------------------------------------------
                                                              Applicable
                     Order entry ratio                           rate
------------------------------------------------------------------------
101-1,000..................................................        0.005
More than 1,000............................................        0.01
------------------------------------------------------------------------

    In the example above, the Applicable Rate would be $0.005, based on 
the member's Order Entry Ratio of 111. Accordingly, the monthly Excess 
Order Fee would be 1,000,000 x $0.005 = $5,000.
    BX continues to expect that the impact of the fee, as modified, 
will be narrow because the change will encourage potentially affected 
market participants to modify their order entry practices in order to 
avoid the fee, thereby improving the market for all participants. 
Accordingly, BX does not expect to earn significant revenues from the 
modified fee.
2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\9\ in general, and with Sections 
6(b)(4) and 6(b)(5) of the Act,\10\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility or 
system which BX operates or controls, and is not designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    With respect to the Excess Order Fee, BX stated in its original 
filing to institute the fee that it is reasonable because it is 
designed to achieve improvements in the quality of displayed liquidity 
and market data that will benefit all market participants. In addition, 
although the level of the fee may theoretically be very high, the fee 
is reasonable because market participants may readily avoid the fee by 
making improvements in their order entry practices that reduce the 
number of orders they enter, bring the prices of their orders closer to 
the NBBO, and/or increase the percentage of their orders that execute. 
Similarly, the change proposed herein is reasonable because it will 
provide further incentive to members to improve order entry practices 
by insuring that they cannot evade the fee by spreading activity across 
multiple MPIDs.
    For similar reasons, the fee is consistent with an equitable 
allocation of fees, because although the fee may apply to only a small 
number of market

[[Page 48754]]

participants, the fee would be applied to them in order to encourage 
better order entry practices that will benefit all market participants. 
The change is also equitable because it will further encourage better 
order entry practices across a wider group of market participants. 
Finally, BX believes that the fee is not unfairly discriminatory. 
Although the fee may apply to only a small number of market 
participants, it will be imposed because of the negative externalities 
that such market participants impose on others through inefficient 
order entry practices. Accordingly, BX believes that it is fair to 
impose the fee on these market participants in order to incentivize 
them to modify their behavior and thereby benefit the market. The 
change is likewise not unfairly discriminatory because it will 
negatively affect members only if they have been evading the incentives 
to improve order entry practices provided by the fee.

B. Self-Regulatory Organization's Statement on Burden on Competition

    BX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.\11\ BX notes that 
it operates in a highly competitive market in which market participants 
can readily favor competing venues if they deem fee levels at a 
particular venue to be excessive, or rebate opportunities available at 
other venues to be more favorable. In such an environment, BX must 
continually adjust its fees to remain competitive with other exchanges 
and with alternative trading systems that have been exempted from 
compliance with the statutory standards applicable to exchanges, while 
also seeking to earn a reasonable profit from its trading and routing 
services. Because competitors are free to modify their own fees in 
response, and because market participants may readily adjust their 
order routing practices, BX believes that the degree to which fee 
changes in this market may impose any burden on competition is 
extremely limited. With respect to the change to the Excess Order Fee, 
BX believes that the change, like the original fee, will constrain 
market participants from pursuing certain inefficient and potentially 
abusive trading strategies. To the extent that this change may be 
construed as a burden on competition, BX believes that it is 
appropriate in order to allow BX to better achieve this purpose.
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    \11\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \12\ and paragraph (f) of Rule 19b-4 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2013-044 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-2013-044. 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 10:00 a.m. and 3:00 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal offices 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-2013-044, and should be submitted on or before August 
30, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19261 Filed 8-8-13; 8:45 am]
BILLING CODE 8011-01-P