[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45521-45523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18386]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72712; File No. SR-BX-2014-037]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Disclose 
Publicly the Sources of Data Used for Exchange Functions

July 29, 2014.
    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 16, 2014, NASDAQ OMX BX, Inc. (``Exchange'' or ``BX'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    BX proposes a rule change to disclose publicly the sources of data, 
whether from the network processors or from direct data feeds, that BX 
utilizes when performing (1) order handling and execution; (2) order 
routing; and (3) related compliance processes.

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

    In its filing with the Commission, BX is requesting a waiver of the 
requirement to provide notice of the proposed rule change.\3\ [sic] 
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 those 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 parts of such statements.
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    \3\ On July 14, 2014, NASDAQ OMX did provide notice of an 
identical filing on behalf of the NASDAQ Stock Market LLC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In her June 5, 2014 market structure speech, the Chair requested 
that all national securities exchanges review and disclose their 
policies and procedures governing the market data used when performing 
important exchange functions.\4\ In a letter dated June 20, 2014, the 
Director of the Division of Trading and Markets codified this request:
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    \4\ See Mary Jo White, Chair, Securities and Exchange 
Commission, Speech at the Sandler O'Neill & Partners L.P. Global 
Exchange and Brokerage Conference (June 5, 2014).

    We believe there is a need for clarity regarding whether (1) the 
SIP data feeds, (2) proprietary data feeds, or (3) a combination 
thereof, are used by the exchanges for purposes of (1) order 
handling and execution (e.g., with pegged or midpoint orders), (2) 
order routing, and (3) regulatory compliance, as applicable. . . . 
Accordingly, we ask that proposed rule changes be filed that 
disclose the particular market data feeds that are used for each of 
these purposes. Consistent with your recent discussions with 
Commission staff, we ask that each SRO file these proposed rule 
changes with the Commission by July 15, 2014.\5\
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    \5\ See Letter from Steven Luparello, Director, SEC Division of 
Trading and Markets, to Robert Greifeld, Chief Executive Officer, 
NASDAQ OMX Group, Inc., dated June 20, 2014.

    BX fully supports the Commission's efforts to provide more clarity 
in this area. Through this proposed rule change, BX is publicly 
clarifying on a market-by-market basis the specific network processor 
and proprietary data feeds that BX utilizes for the handling, routing, 
and execution of orders, and for performing the regulatory compliance 
checks related to each of those functions. These complex practices are 
governed by a few, simple principles that are designed to ensure that 
BX has the most accurate view of the trading interest available across 
multiple markets, and to maximize the synchronization of the many 
exchange functions that depend upon the calculation of an accurate NBBO 
and top-of-book for each market. These principles are:
    1. BX uses a proprietary data feed from each exchange that provides 
a reliable proprietary data feed. Where no reliable proprietary data 
feed is available, BX uses the network processor feed;
    2. Where BX uses a proprietary data feed for an exchange quote, it 
also maintains access to the network processor feed as a back-up in the 
event a specific proprietary feed become unavailable or unusable for 
any reason;
    3. BX uses the same proprietary data feed when performing order 
handling, routing, and execution functions, and also when the execution 
and routing system performs internal compliance checks related to those 
functions; and
    4. BX acquires and processes all proprietary and network processor 
feeds via the same technological configuration (i.e., telecommunication 
circuitry, switches, and feed handlers) to the greatest extent 
possible.
    5. BX calculates the National Best Bid and Offer (``NBBO'') and 
top-of-book for each exchange at a single point within the BX system, 
and then distributes that data simultaneously to numerous applications 
performing order handling,\6\ routing, execution, and internal 
compliance functions throughout the BX system.
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    \6\ With respect to order handling, the NBBO and top-of-book 
calculation feeds applications governing the proper processing 
midpoint orders, pegged orders, price-to-comply orders, and retail 
orders.
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    As of the date of this filing, BX utilizes the following data feeds 
for the handling, execution and routing of

[[Page 45522]]

orders, as well as for performing related compliance checks:

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              Market center                       Primary source                     Secondary source
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A--NYSE MKT (AMEX).......................  CQS/UQDF....................  n/a.
B--NASDAQ OMX BX.........................  BX ITCH 4.1.................  CQS/UQDF.
D--FINRA ADF.............................  CQS/UQDF....................  n/a.
J--DirectEdge A..........................  EdgeBook....................  CQS/UQDF.
K--DirectEdge X..........................  EdgeBook....................  CQS/UQDF.
M--CSX...................................  CQS/UQDF....................  n/a.
N--NYSE..................................  NYSE OpenBook Ultra.........  CQS/UQDF.
P--NYSE Arca.............................  ArcaBook Binary uncompacted.  CQS/UQDF.
T/Q--NASDAQ..............................  ITCH 4.1....................  CQS/UQDF.
W--CBOE..................................  CQS/UQDF....................  n/a.
X--NASDAQ OMX PSX........................  PSX ITCH 4.1................  CQS/UQDF.
Y--BATS Y-Exchange.......................  BATS PITCH..................  CQS/UQDF.
Z--BATS Exchange.........................  BATS PITCH..................  CQS/UQDF.
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    BX uses these feeds to calculate the NBBO via an application called 
the ``NMSFeed.'' The NMSFeed consumes the BX Protected Quote Service 
(``NPQS''), which provides an internal view of that exchange's own 
market data as ITCH, plus the proprietary and network processor market 
data feeds listed above. The NMSFeed calculates a Regulation NMS-
Compliant ``Best Bid or Offer'' (``Compliant BBO''), and then delivers 
that information throughout the BX System, including to the ``OUCH'' 
order entry ports,\7\ the routing system, and various compliance 
applications described below.
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    \7\ OUCH is a protocol that allows BX participants to enter, 
replace and cancel orders and receive executions. In addition to 
OUCH, BX offers the FLITE protocol as an option for participants. In 
this document, references to OUCH also include FLITE because they 
are interchangeable for these purposes.
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    Upon receipt of an update to a protected quote for a specific 
venue, the NMSFeed updates its quote for that venue, recalculates the 
consolidated BBO based upon the update, and recalculates the Compliant 
BBO after applying BX's own BBO. Any quote that crosses BX's BBO is 
ignored. BX odd lot orders at the same price are aggregated and 
considered in the NBBO calculation if the sum is greater than or equal 
to a round lot. Otherwise, they are not considered in the NBBO 
calculation. Out of the remaining quotes, the most aggressive remaining 
bid and offer (excluding BX \8\ and any destination which has been 
excluded from the NBBO in compliance with the self-help procedures 
under Regulation NMS) is selected and reported as the best quote. If 
away markets are crossing the market after applying BX's BBO, orders 
will be accepted as originally priced and have the potential to 
execute. Any order sent to BX that is not an Intermarket Sweep Order 
(``ISO'') will have the Compliant BBO check enforced by the system.\9\
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    \8\ Deletion of BX's quote at this stage of the process is 
necessary because otherwise the system would prevent valid 
executions on BX in the erroneous belief that such executions would 
be ``trade throughs'' in violation of Regulation NMS.
    \9\ In general, any order that is sent to BX with an ISO flag is 
not re-priced and will be processed at its original price. There are 
a limited number of circumstances in which an order marked as an ISO 
will be determined not to be executable at its original price and 
will be re-priced. These include re-pricing under the Plan to 
Address Extraordinary Market Volatility, re-pricing to comply with 
Regulation SHO, and the re-pricing of an order with a post-only 
condition if BX has an order at that price at the time the order is 
accepted.
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    The BX OMX Routing and Special Handling System (``RASH'') utilizes 
the Compliant BBO to determine if and when an order with special 
processing directives is marketable either against one or more orders 
in either the Core Matching System or a remote trading venue. RASH also 
receives market data feeds from certain venues not displaying protected 
quotes in the national market system for use in ``QDRK'' [sic] and 
``QCST'' [sic] routing strategies set forth in BX Rule 
4758(a)(1)(A)(iiiv) [sic] and (ix), respectively. RASH maintains a 
number of routing processes, or Routers, unique to each venue that the 
System accesses. These Routers maintain a limited set of details for 
orders that are configured as routable by the user, while also 
monitoring the current best bid and best offer prices on each exchange.
    The BX system includes internal compliance applications related to 
locked and crossed markets, trade throughs, limit-up/limit-down, and 
Regulation SHO compliance. Each of these applications utilizes the 
Compliant BBO to ensure compliance with applicable regulations. BX 
operates a separate real-time surveillance system that is external to 
the execution systems and that monitors the execution system's 
compliance with applicable rules and regulations. The real-time 
surveillance system utilizes a ``mirrored'' version of the internal 
NMSFeed in various realtime surveillance patterns, including (1) Lock/
Cross, which detects lock/cross events across all markets, regardless 
of whether or not BX is a participant in the event; (2) Trade Through, 
which detects potential trade through events for all three BX equity 
markets; and (3) RegSho, which detects potential RegSho violations, 
alerting when a trade executes at or below the NBB at the time of order 
entry while the stock is in a RegSho restricted state.
    In addition to the operational transparency provided above, BX is 
also proposing to add Rule 4759, which will provide for the public 
display of the proprietary and network processor feeds that BX utilizes 
in the order handling, routing, and execution processes described 
above, as well as in the compliance functions described above. BX will 
display this information on www.nasdaqtrader.com, which is heavily used 
by BX members and their customers.
2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\10\ in general and with Sections 
6(b)(5) of the Act,\11\ in particular in that it is 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 regulating, clearing, settling, processing 
information with respect to, and 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. The Exchange believes that 
this proposal is

[[Page 45523]]

in keeping with those principles by enhancing transparency through the 
dissemination of the most accurate quotations data and by clarifying 
its contents.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) \13\ thereunder.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Commission deems this requirement to have been met.
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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. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
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-2014-037 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2014-037. 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 the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; 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-2014-037 and should be 
submitted on or before August 26, 2014.

    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. 2014-18386 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P