[Federal Register Volume 85, Number 144 (Monday, July 27, 2020)]
[Notices]
[Pages 45243-45263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16165]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89356; File No. SR-BX-2020-016]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
of Proposed Rule Change To Amend BX's Opening Process in Connection
With a Technology Migration
July 21, 2020.
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 20, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
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
The Exchange proposes to amend Options 2, Section 4, ``Obligations
of Market Makers and Lead Market Makers''; Options 3, Section 7,
``Types of Orders and Order and Quote Protocols''; Options 3, Section
8, titled ``Opening and Halt Cross''; Options 4A, Section 11, ``Trading
Sessions''; and Options 6B, Section 1, ``Exercise of Options
Contracts''.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, 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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 2, Section 4, ``Obligations
of Market Makers and Lead Market Makers''; Options 3, Section 7,
``Types of Orders and Order and Quote Protocols''; Options 3, Section
8, titled ``Opening and Halt Cross''; Options 4A, Section 11, ``Trading
Sessions''; and Options 6B, Section 1, ``Exercise of Options
Contracts'' in connection with a technology migration to an enhanced
Nasdaq, Inc. (``Nasdaq'') architecture which results in higher
performance, scalability, and more robust functionality. With this
System migration, BX intends to adopt certain opening functionality,
which currently exists on Nasdaq Phlx LLC (``Phlx'') at Options 3,
Section 8, ``Options Opening Process.''
These proposed enhancements will allow BX to continue to have a
robust Opening Process. Broadly, the Exchange's proposal is intended to
create an opening process similar to Phlx, however, unlike Phlx, BX
will not require its Lead Market Makers to enter Valid Width Quotes
during the opening.\3\ Today, BX Lead Market Makers are not required to
quote during the opening, that will remain unchanged. Today, BX Lead
Market Makers may quote during the opening, but they are not obligated
to quote.\4\ BX Lead Market Makers are required to quote intra-day.\5\
The Exchange proposes to retain the Valid Width NBBO requirements with
respect to Opening With a Trade pursuant to proposed Options 3, Section
8(i) and (j). The Exchange's proposal would maintain BX's ability to
open with a BBO (no trade) pursuant to proposed Options 3, Section 8(f)
either with: (1) A Valid Width NBBO; (2) upon the opening of a certain
number of away markets; or (3) if a certain amount of time has passed
since the commencement of the Opening Process. When opening with a
trade, BX's proposal will adopt Phlx's Opening Processes to further
limit the current opening price boundaries on BX.\6\ The proposal would
align BX's current Valid Width NBBO requirements to Phlx's Quality
Opening Markets requirements.\7\ Phlx's Opening Process requires
tighter Valid Width Quotes to open Phlx as compared to the proposed
opening for BX.\8\ Today, Phlx's Opening Process is
[[Page 45244]]
more stringent than BX's current opening. This proposal seeks to
provide a process for BX, when opening with a trade, that requires
tighter boundaries similar to Phlx. The Exchange's proposal is
described in greater detail below.
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\3\ See Phlx Options 3, Section 8(d)(i).
\4\ Other options markets do not require their lead market
makers to quote during the opening. See Cboe Exchange, Inc. Rule
5.31. See also The Nasdaq Options Market LLC Options 3, Section 8.
\5\ See BX Options 2, Section 4(j).
\6\ See proposed BX Options 3, Section 8(i).
\7\ Phlx's Quality Opening Market is a bid/ask differential
applicable to the best bid and offer from all Valid Width Quotes
defined in a table to be determined by the Exchange and published on
the Exchange's website. The calculation of Quality Opening Market is
based on the best bid and offer of Valid Width Quotes. The
differential between the best bid and offer are compared to reach
this determination. The allowable differential, as determined by the
Exchange, takes into account the type of security (for example,
Penny Pilot versus non-Penny Pilot issue), volatility, option
premium, and liquidity. The Quality Opening Market differential is
intended to ensure the price at which the Exchange opens reflects
current market conditions. See Phlx Options 3, Section 8(a)(viii).
Similarly, BX's Valid Width NBBO is the combination of all away
market quotes and Valid Width Quotes received over the SQF. The
Valid Width NBBO will be configurable by the underlying security,
and tables with valid width differentials, which will be posted by
the Exchange on its website. Away markets that are crossed will void
all Valid Width NBBO calculations. If any Market Maker quotes on the
Exchange are crossed internally, then all Exchange quotes will be
excluded from the Valid Width NBBO calculation. These two concepts
both provide the applicable bid/ask differential and ensure the
price at which the Exchange opens reflects current market
conditions.
\8\ BX's Valid Width Quote is a two-sided electronic quotation,
submitted by a Market Maker, quoted with a difference not to exceed
$5 between the bid and offer regardless of the price of the bid. See
proposed BX Options 3, Section 8(a)(9). This is compared to Phlx's
Valid Width Quote which is a two-sided electronic quotation
submitted by a Phlx Electronic Market Maker that meets the following
requirements: Options on equities and index options bidding and/or
offering so as to create differences of no more than $.25 between
the bid and the offer for each option contract for which the
prevailing bid is less than $2; no more than $.40 where the
prevailing bid is $2 or more but less than $5; no more than $.50
where the prevailing bid is $5 or more but less than $10; no more
than $.80 where the prevailing bid is $10 or more but less than $20;
and no more than $1 where the prevailing bid is $20 or more,
provided that, in the case of equity options, the bid/ask
differentials stated above shall not apply to in-the-money series
where the market for the underlying security is wider than the
differentials set forth above. For such series, the bid/ask
differentials may be as wide as the quotation for the underlying
security on the primary market, or its decimal equivalent rounded
down to the nearest minimum increment. The Exchange may establish
differences other than the above for one or more series or classes
of options. See Phlx Options 3, Section 8(a)(ix).
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The Exchange proposes to amend the title of Options 3, Section 8
from ``Opening and Halt Cross'' to ``Options Opening Process'' to
conform the title to Phlx's Rule at Options 3, Section 8, ``Options
Opening Process.'' The Exchange also proposes to amend the title of
Options 3, Section 8, within Options 4A, Section 11, Trading Session,
and Options 6B, Section 1, Exercise of Options Contracts, to conform
the title to ``Options Opening Process'' as proposed herein.
Definitions
The Exchange proposes to amend the current ``Definitions'' section
at proposed BX Options 3, Section 8(a). The Exchange proposes to remove
the text ``For purposes of this Rule the term:'' and instead state,
``The Exchange conducts an opening for all option series traded on the
Exchange using its System.'' This rule text change is intended to
conform to Phlx Options 3, Section 8(a).
The Exchange proposes to amend and alphabetize the current
definitions within Options 3, Section 8(a). The Exchange proposes to
set forth the following terms, which are described below: ``Away Best
Bid or Offer'' or ``ABBO;'' ``imbalance;'' ``market for the underlying
security;'' ``Opening Price;'' ``Opening Process;'' ``Potential Opening
Price;'' ``Pre-Market BBO;'' ``Valid Width National Best Bid or Offer''
or ``Valid Width NBBO;'' ``Valid Width Quote,'' and ``Zero Bid
Market.'' The Exchange is conforming the definitions within Options 3,
Section 8(a) to start with ``A'' or ``An,'' as appropriate.
The Exchange proposes to relocate and amend the term ``Away Best
Bid or Offer'' or ``ABBO'' from current BX Options 3, Section 8(a)(7)
to proposed Options 3, Section 8(a)(1). The words ``shall mean'' are
replaced by ``is,'' but otherwise the description remains the same.
The Exchange proposes to relocate ``imbalance'' from current BX
Options 3, Section 8(a)(1) to proposed Options 3, Section 8(a)(2) and
amend the language to provide that an imbalance is the number of
unmatched contracts priced through the Potential Opening Price.
Currently, the term ``imbalance'' is defined as ``the number of
contracts of eligible interest that may not be matched with other order
contracts at a particular price at any given time.'' The Exchange
proposes to adopt the Phlx definition.\9\ The Exchange will be defining
Potential Opening Price within this rule change and therefore the new
proposed imbalance definition would be more applicable with that
definition.
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\9\ See Phlx Options 3, Section 8(a)(xi).
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The Exchange proposes to relocate ``market for the underlying
security'' from current BX Options 3, Section 8(a)(5) to proposed
Options 3, Section 8(a)(3).\10\ Today Options 3, Section 8(a)(5)
describes ``market for the underlying security'' as ``. . .either the
primary listing market, the primary volume market (defined as the
market with the most liquidity in that underlying security for the
previous two calendar months), or the first market to open the
underlying security, as determined by the Exchange on an issue-by-issue
basis and announced to the membership on the Exchange's website.'' The
Exchange proposes to amend this definition by replacing the term
``primary volume market'' with ``an alternative market designated by
the primary market.'' The Exchange anticipates that an alternative
market would be necessary if the primary listing market were
impaired.\11\ In the event that a primary market is impaired and
utilizes its designated alternative market, the Exchange would utilize
that market as the underlying.\12\ The Exchange further proposes an
additional contingency, in the event that the primary market is unable
to open, and an alternative market is not designated (and/or the
designated alternative market does not open), the Exchange may utilize
a non-primary market to open all underlying securities from the primary
market. The Exchange will select the non-primary market with the most
liquidity in the aggregate for all underlying securities that trade on
the primary market for the previous two calendar months, excluding the
primary and alternate markets. In order to open an option series it
would require an equity market's underlying quote. If another equity
market displays opening prices for the underlying security, the
Exchange proposes to utilize those quotes. This proposed change to the
current System would allow the Exchange to open in situations, where
the primary market is experiencing an issue, and also where an
alternative market designated by the primary market may not be
designated by the primary market, or is unable to open. Utilizing a
non-primary market with the most liquidity in the aggregate for all
underlying securities for the previous two calendar months will ensure
that the Exchange opens with quotes which are representative of the
volume on that primary market. The Exchange believes that this proposal
will enable it to open in the event that there are issues with the
primary market or the alternate market assigned by the primary.
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\10\ This term is identical to Phlx's Options 3, Section
8(a)(ii).
\11\ The primary listing market and the primary volume market,
as defined in BX's Rules, could be the same market and therefore an
alternative market is not available under the current Rule.
\12\ For example, in the event that the New York Stock Exchange
LLC was unable to open because of an issue with its market and it
designated NYSE Arca, Inc. (``NYSE Arca'') as its alternative
market, then BX would utilize NYSE Arca as the market for the
underlying.
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The Exchange proposes a new definition, ``Opening Price,'' at
proposed Options 3, Section 8(a)(4). This proposed definition would
state that the Opening Price is described in sections (i) and (k). This
proposed definition is the same as Phlx Options 3, Section 8(a)(iii).
The Exchange proposes a new definition, ``Opening Process,'' at
proposed Options 3, Section 8(a)(5). This proposed definition would
state that ``Opening Process'' is described in section (d). This
proposed definition is the same as Phlx Options 3, Section 8(a)(iv).
The Exchange proposes a new definition, ``Potential Opening
Price,'' at proposed Options 3, Section 8(a)(6). This proposed
definition would state that Potential Opening Price is described in
section (h). This proposed definition is the same as Phlx Options 3,
Section 8(a)(vi).
The Exchange proposes a new definition, ``Pre-Market BBO,'' at
Options 3, Section 8(a)(7). This proposed definition would state that
Pre-Market BBO is the highest bid and lowest offer among Valid Width
Quotes. The term ``Valid Width Quote'' is defined below. This proposed
definition is the same as Phlx Options 3, Section 8(a)(vii).
The Exchange proposes to relocate and amend the definition of
``Valid Width National Best Bid or Offer'' or
[[Page 45245]]
``Valid Width NBBO'' from current BX Options 3, Section 8(a)(6) to
proposed Options 3, Section 8(a)(8). The Exchange proposes to replace
the words ``shall mean'' with ``is'' and also replace the rule text
which states, ``any combination of BX Options-registered Market Maker
order and quotes received over the SQF \13\ Protocols within a
specified bid/ask differential as established and published by the
Exchange,'' with the proposed term ``Valid Width Quote.'' The Exchange
also proposes a grammatical correction to add ``the underlying
security'' instead of ``underlying'' and also add ``which'' in the
second sentence. Finally, the Exchange proposes to amend the last
sentence to: (1) Replace ``BX Options'' with ``Exchange;'' (2) remove
references to Market Maker ``orders'' and only refer to quotes; and (3)
change the term ``such'' to ``Exchange'' to make clear that all local
quotes would be excluded from the Valid Width NBBO, when any local
quotes are crossed. This proposed change to the definition will align
BX's consideration of only Market Maker quotes, and not orders, with
Phlx Options 3, Section 8. BX's current rule includes Market Maker
orders, Market Maker quotes and away market quotes as part of the Valid
Width NBBO calculation. The Exchange proposes to amend the Valid Width
NBBO to exclude Market Maker orders and only include Market Maker Valid
Width Quotes and away market quotes. This would exclude Opening Sweeps,
which are orders that are entered by Market Makers through SQF.\14\ The
Exchange proposes to exclude such orders from the Valid Width NBBO
because Opening Sweeps are considered eligible interest during the
Opening Process.
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\13\ ``Specialized Quote Feed'' or ``SQF'' is an interface that
allows Market Makers to connect, send, and receive messages related
to quotes, Immediate-or-Cancel Orders, and auction responses into
and from the Exchange. Features include the following: (1) Options
symbol directory messages (e.g underlying instruments); (2) System
event messages (e.g., start of trading hours messages and start of
opening); (3) trading action messages (e.g., halts and resumes); (4)
execution messages; (5) quote messages; (6) Immediate-or-Cancel
Order messages; (7) risk protection triggers and purge
notifications; (8) opening imbalance messages; (9) auction
notifications; and (10) auction responses. The SQF Purge Interface
only receives and notifies of purge request from the Market Maker.
Market Makers may only enter interest into SQF in their assigned
options series. See Options 3, Section 7(d)(1)(B).
\14\ Proposed BX Options 3, Section 7(a)(9) provides, ``Opening
Sweep'' is a one-sided order entered by a Market Maker through SQF
for execution against eligible interest in the System during the
Opening Process. This order type is not subject to any protections
listed in Options 3, Section 15, except for Automated Quotation
Adjustments. The Opening Sweep will only participate in the Opening
Process pursuant to Options 3, Section 8 and will be cancelled upon
the open if not executed.''
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The Exchange proposes a new definition, ``Valid Width Quote,'' at
proposed Options 3, Section 8(a)(9). This proposed definition would
state that a Valid Width Quote is a two-sided electronic quotation,
submitted by a Market Maker, quoted with a difference not to exceed $5
between the bid and offer regardless of the price of the bid. However,
respecting in-the-money series where the market for the underlying
security is wider than $5, the bid/ask differential may be as wide as
the quotation for the underlying security on the primary market, or its
decimal equivalent rounded down to the nearest minimum increment. The
Exchange may establish differences other than the above for one or more
series or classes of options. The bid/ask differentials on BX differ
from Phlx. Phlx Options 3, Section 8(a)(ix), similar to proposed BX
Options 3, Section 8(a)(9), permits the bid/ask differential to be as
wide as the quotation for the underlying security on the primary
market, or its decimal equivalent rounded down to the nearest minimum
increment. Also, both markets would permit the Exchange to establish
differences, other than as stated for one or more series or classes of
options. Both markets refer back to their respective intra-day
differentials. BX refers to a difference not to exceed $5 between the
bid and offer, similar to BX Options 2, Section 4(f) and 5(d)(2). Phlx
refers to differentials so as to create differences of no more than
$.25 between the bid and the offer for each option contract for which
the prevailing bid is less than $2; no more than $.40 where the
prevailing bid is $2 or more but less than $5; no more than $.50 where
the prevailing bid is $5 or more but less than $10; no more than $.80
where the prevailing bid is $10 or more but less than $20; and no more
than $1 where the prevailing bid is $20 or more, similar to Phlx
Options 8, Section 27(c)(1)(A).\15\
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\15\ Phlx's bid/ask differentials in the opening are similar to
those for the trading floor.
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Finally, the Exchange proposes a new definition, ``Zero Bid
Market,'' at proposed Options 5, Section 8(a)(10). This proposed new
definition would state that a Zero Bid Market is where the best bid for
an options series is zero. This proposed definition is the same as Phlx
Options 3, Section 8(a)(x).
The Exchange believes that these definitions will bring additional
clarity to the proposed rule.
The Exchange proposes to eliminate the term ``Order Imbalance
Indicator'' at current BX Options 3, Section 8(a)(2).\16\ This term is
no longer necessary as the Exchange is amending the manner in which
imbalances are handled on BX. Today, the Order Imbalance Indicator
describes a message that is disseminated by electronic means, and
contains information about Eligible Interest and the price in penny
increments at which such interest would execute at the time of
dissemination. BX would disseminate the number of unmatched contracts
priced through the Potential Opening Price, similar to Phlx.\17\
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\16\ The Order Imbalance Indicator shall disseminate the
following information: (A) ``Current Reference Price'' shall mean an
indication of what the opening cross price would be at a particular
point in time; (B) the number of contracts of Eligible Interest that
are paired at the Current Reference Price; (C) the size of any
Imbalance; and (D) the buy/sell direction of any Imbalance. See BX
Options 3, Section 8(a)(2).
\17\ BX's proposed imbalance message would include the symbol,
side of the imbalance, size of matched contracts, size of the
imbalance, and Potential Opening Price bounded by the Pre-Market
BBO. See proposed BX Options 3, Section 8(k)(1).
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The Exchange proposes to eliminate the term ``BX Opening Cross'' at
current BX Options 3, Section 8(a)(3).\18\ This term is being replaced
by the new term ``Opening Process'' at proposed BX Options 3, Section
8(a)(5) and provides, ``An Opening Process is described herein in
section (d).''
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\18\ ``BX Opening Cross'' shall mean the process for opening or
resuming trading pursuant to this Rule and shall include the process
for determining the price at which Eligible Interest shall be
executed at the open of trading for the day, or the open of trading
for a halted option, and the process for executing that Eligible
Interest.
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The Exchange proposes to eliminate the term ``Eligible Interest''
at current BX Options 3, Section 8(a)(4).\19\ The Exchange describes
eligible interest within proposed BX Options 3, Section 8(b), similar
to Phlx. The defined term is no longer necessary.
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\19\ ``Eligible Interest'' shall mean any quotation or any order
that may be entered into the system and designated with a time-in-
force of IOC (immediate-or-cancel), DAY (day order), GTC (good-till-
cancelled), and OPG (On the Open Order). However, orders received
via FIX protocol prior to the BX Opening Cross designated with a
time-in-force of IOC will be rejected and shall not be considered
eligible interest. Orders received via SQF prior to the BX Opening
Cross designated with a time-in-force of IOC will remain in-force
through the opening and shall be cancelled immediately after the
opening.
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Eligible Interest
The first part of the Opening Process determines what constitutes
eligible interest. The Opening Process is a price discovery process
which considers interest, both on BX and away markets, to determine the
optimal bid and offer with which to open the market. The Opening
Process seeks the price point at which the most number of contracts
[[Page 45246]]
may be executed, while protecting away market interest.
Proposed BX Options 3, Section 8(b) explains the eligible interest
that will be accepted during the Opening Process which includes, Valid
Width Quotes, Opening Sweeps \20\ and orders. Quotes,\21\ other than
Valid Width Quotes, will not be included in the Opening Process. This
rule text is identical to Phlx Options 3, Section 8(b), except that
certain text not relevant to BX is not included.\22\ Opening Sweeps may
be submitted through the Specialized Quote Feed or ``SQF'' protocol,
which permits one-sided orders to be entered by a Market Maker.\23\
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\20\ See proposed BX Options 3, Section 7(a)(9).
\21\ The term quotes shall refer to a two-sided quote.
\22\ Phlx describes what a Non-SQT Market Maker may submit. An
``SQT'' is a Streaming Quote Trader. That term is defined within
Phlx Options 1, Section 1(b)(54) and is specific to Phlx. No such
term exists on BX. Further, Phlx has All-or-None Orders which are
permitted to rest on the Order Book. See Phlx Options 3, Section
7(b)(5). BX's All-or-None Orders must be executed in its entirety or
not at all, and do not rest on the Order Book. See BX Options 3,
Section 7(a)(8). The behavior of All-or-None Orders is not relevant
for BX's Opening because they do not rest on the Order Book and are
rejected pre-opening.
\23\ See note 13 above.
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The Exchange proposes to define an ``Opening Sweep'' within BX
Options 3, Section 8(b)(9) as defined at proposed BX Options 3, Section
7(a)(9). This description for an Opening Sweep is the same as Phlx
Options 3, Section 8(b)(i), which cites to a similar provision in
Phlx's rules at Options 3, Section 7(b)(6). As proposed, an Opening
Sweep is a Market Maker order submitted for execution against eligible
interest in the System during the Opening Process. Market participants
may specify orders for the Opening Process by placing a TIF of ``OPG''
on the order as explained below. All Participants may submit interest
into the Opening Process.
Additionally, the Exchange proposes to amend current BX Options 3,
Section 7(a)(9) to remove the current order type described as ``On the
Open Order'' and instead adopt an ``Opening Sweep'' order type similar
to Phx at Options 3, Section 7(b)(6). While the ``On the Open Order''
and ``Opening Sweep'' are similar, in that both order types may only be
entered during the Opening Process, and both cancel back the unexecuted
portion of the order, the Exchange believes that utilizing the same
terminology and level of detail in describing this order type, as
Phlx's current description of an Opening Sweep, will conform the
Opening Process of these two Nasdaq affiliated markets. As is the case
today, only a Market Maker may enter an Opening Sweep into SQF for
execution against eligible interest in the System during the Opening
Process. The Exchange provides additional information about the order
type, similar to Phlx. This order type is not subject to any
protections listed in Options 3, Section 15, except for Automated
Quotation Adjustments.\24\ The Opening Sweep will only participate in
the Opening Process, pursuant to Options 3, Section 8, and will be
cancelled upon the open if not executed. This sentence provides
additional context to the Opening Sweep, and is the same as Phlx's
rule.
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\24\ Automated Quotation Adjustments are described within BX
Options 3, Section 15(c)(2).
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Further, BX currently permits orders marked with a ``Time In
Force'' or ``TIF'' of ``On the Open Order'' or ``OPG'' to be utilized
to specify orders for submission into the Opening Cross.\25\ This TIF
of ``OPG'' means for orders so designated, that if after entry into the
System, the order is not fully executed in its entirety during the
Opening Cross, the order, or any unexecuted portion of such order, will
be cancelled back to the entering participant. Similar to Phlx Options
3, Section 7(c)(3), BX proposes to replace the ``On the Open Order''
\26\ TIF with an ``Opening Only'' or ``OPG'' TIF, which can only be
executed in the Opening Process pursuant to Options 3, Section 8. Any
portion of the order that is not executed during the Opening Process is
cancelled. This order type is not subject to any protections listed in
Options 3, Section 15.\27\ Finally, the Exchange proposes to note that
OPG orders may not route.
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\25\ See current BX Options 3, Section 7(a)(9).
\26\ See current BX Options 3, Section 7(b)(1).
\27\ Phlx Options 3, Section 7(c)(3) provides that an OPG Order
is not subject to any protections listed in Options 3, Section 15,
except for Automated Quotation Adjustments. Today, OPG Orders on
Phlx are not subject to any protections, including Automated
Quotation Adjustments protections. Phlx intends to file a rule
change to remove the rule text which provides, ``except for
Automated Quotation Adjustments,'' as OPG Orders are not subject to
that risk protection. BX will not include the exception in the
proposed rule text. OPG Orders are handled in the same manner by the
Phlx System today and the BX System, as proposed.
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The Exchange also proposes rule text within Options 3, Section
8(b)(1)(A) which is similar to Phlx Options 3, Section 8(b)(i)(A). BX
proposes to state within Options 3, Section 8(b)(1)(A):
A Market Maker assigned in a particular option may only submit
an Opening Sweep if, at the time of entry of the Opening Sweep, the
Market Maker has already submitted and maintained a Valid Width
Quote. All Opening Sweeps in the affected series entered by a Market
Maker will be cancelled immediately if that Market Maker fails to
maintain a continuous quote with a Valid Width Quote in the affected
series.
The proposed rule text is similar to Phlx Options 3, Section
8(b)(i)(A). Since the protocol over which an Opening Sweep is submitted
is used for Market Maker quoting, the acceptance of an Opening Sweep
was structured to rely on the Valid Width Quote. An Opening Sweep may
only be submitted by a Market Maker when he/she has a Valid Width Quote
in the affected series.
The Exchange proposes rule text within Options 3, Section
8(b)(1)(B), which is similar to Phlx Options 3, Section 8(b)(i)(B). BX
proposes to state within Options 3, Section 8(b)(1)(B):
Opening Sweeps may be entered at any price with a minimum price
variation applicable to the affected series, on either side of the
market, at single or multiple price level(s), and may be cancelled
and re-entered. A single Market Maker may enter multiple Opening
Sweeps, with each Opening Sweep at a different price level. If a
Market Maker submits multiple Opening Sweeps, the System will
consider only the most recent Opening Sweep at each price level
submitted by such Market Maker in determining the Opening Price.
Unexecuted Opening Sweeps will be cancelled once the affected series
is open.
The Exchange proposes to state at proposed BX Options 3, Section
8(b)(2) that, ``The System will allocate interest pursuant to Options
3, Section 10.'' Options 3, Section 10 is the Exchange's allocation
methodology which would apply to allocation in the Opening Process.
This rule text is similar to Phlx Options 3, Section 8(b)(ii).\28\
Today, BX allocates pursuant to Options 3, Section 10 within its
opening. The allocation methodology is not being amended with this
proposal.
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\28\ Current BX Options 3, Section 8(b)(5) states, ``If the BX
Opening Cross price is selected and fewer than all contracts of
Eligible Interest that are available in BX Options would be
executed, all Eligible Interest shall be executed at the BX Opening
Cross price in accordance with the execution algorithm assigned to
the associated underlying option.'' The Exchange would continue to
allocate pursuant to the Exchange's allocation methodology within
Options 3, Section 10. Further, in accordance with current BX
Options 3, Section 8(b)(6), all eligible interest will be executed
at the Opening Price and disseminated on OPRA.
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The Exchange proposes to reserve Options 3, Section 8(c). Phlx
discusses Floor Broker orders within Options 3, Section 8(c). BX does
not have a Trading Floor and is reserving this section to retain
similar lettering/numbering as compared to Phlx.
Pursuant to proposed BX Options 3, Section 8(d), eligible interest
may be submitted into BX's System and will be received starting at the
times noted herein. Specifically, Market Maker Valid Width Quotes and
Opening Sweeps
[[Page 45247]]
received starting at 9:25 a.m. will be included in the Opening Process.
Orders entered at any time before an option series opens are included
in the Opening Process. This proposed language adds specificity to the
rule regarding the submission of Valid Width Quotes and Opening Sweeps.
The 9:25 a.m. trigger is intended to tie the option Opening Process to
quoting in the majority of the underlying securities; it presumes that
option quotes submitted before any indicative quotes have been
disseminated for the underlying security may not be reliable or
intentional. Therefore, the Exchange has chosen a reasonable timeframe
at which to begin utilizing option quotes, based on the Exchange's
experience when underlying quotes start becoming available. BX's
current rule at Options 3, Section 8(b) provides the Opening Cross
shall occur at or after 9:30 if the dissemination of a regular market
hours quote or trade by the market for the underlying security has
occurred or in the case of index options the Exchange has received the
opening price of the underlying index. The Exchange continues to rely
on the underlying price with this proposal.
Proposed BX Options 3, Section 8(d)(1) describes when the Opening
Process may begin with specific time-related triggers. The proposed
rule provides that the Opening Process for an option series will be
conducted pursuant to proposed Options 3, Section 8 (f) through (k) on
or after 9:30 a.m., when the System has received the opening trade or
quote on the market for the underlying security in the case of equity
options or in the case of index options. This requirement is intended
to tie the option Opening Process to receipt of liquidity. This rule
text differs from Phlx's rule at Options 3, Section 8(d)(i).\29\ Phlx's
rule describes quoting requirements for Lead Market Makers. Today, BX,
unlike Phlx, does not require its Lead Market Makers to submit Valid
Width Quotes. BX is not proposing to adopt the same quoting
requirements during the Opening Process that exist on Phlx. Therefore,
the Phlx requirement for Lead Market Makers would not be applicable to
BX. Further, proposed BX Options 3, Section 8(d)(3) makes clear that
the Opening Process will stop and an option series will not open if the
ABBO becomes crossed. Therefore, the Exchange does not note within
proposed Options 3, Section 8(d)(1) that the ABBO may not be crossed.
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\29\ Phlx Options 3 Section 8(d)(i) provides, ``The Opening
Process for an option series will be conducted pursuant to
paragraphs (f)--(k) below on or after 9:30 a.m. if: the ABBO, if
any, is not crossed; and the System has received, within two minutes
(or such shorter time as determined by the Exchange and disseminated
to membership on the Exchange's website) of the opening trade or
quote on the market for the underlying security in the case of
equity options or, in the case of index options, within two minutes
of the receipt of the opening price in the underlying index (or such
shorter time as determined by the Exchange and disseminated to
membership on the Exchange's website), or within two minutes of
market opening for the underlying currency in the case of U.S.
dollar-settled FCO (or such shorter time as determined by the
Exchange and disseminated to membership on the Exchange's website)
any of the following: (A) the Lead Market Maker's Valid Width Quote;
(B) the Valid Width Quotes of at least two Phlx Electronic Market
Makers other than the Lead Market Maker; or (C) if neither the Lead
Market Maker's Valid Width Quote nor the Valid Width Quotes of two
Phlx Electronic Market Makers have been submitted within such
timeframe, one Phlx Electronic Market Maker has submitted a Valid
Width Quote.''
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The Exchange is proposing to state in proposed BX Options 3,
Section 8(d)(2), similar to Phlx Options 3, Section 8(d)(ii), that for
all options, the underlying security, including indexes, must be open
on the market for the underlying security for a certain time period to
be determined by the Exchange for the Opening Process to commence. The
Exchange is proposing that the time period be no less than 100
milliseconds and no more than 5 seconds.\30\ This proposal is intended
to permit the price of the underlying security to settle down and not
flicker back and forth among prices after its opening. It is common for
a stock to fluctuate in price immediately upon opening; such volatility
reflects a natural uncertainty about the ultimate Opening Price, while
the buy and sell interest is matched. The Exchange is proposing a range
of no less than 100 milliseconds and no more than 5 seconds, in order
to ensure that it has the ability to adjust the period for which the
underlying security must be open on the primary market. The Exchange
may determine that in periods of high/low volatility that allowing the
underlying to be open for a longer/shorter period of time may help to
ensure more stability in the marketplace prior to initiating the
Opening Process.
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\30\ The Phlx Opening Process is set at 100 milliseconds. The
Exchange believes that 100 milliseconds is the appropriate amount of
time given the experience with the Phlx market. The Exchange would
set the timer for BX initially at 100 milliseconds. The Exchange
will issue a notice to provide the initial setting and, would,
thereafter, issue a notice if it were to change the timing, which
may be between 100 milliseconds and 5 seconds. If the Exchange were
to select a time not between 100 milliseconds and 5 seconds, it
would be required to file a rule proposal with the Commission.
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BX is not adopting Phlx Rules at Options 3, Section 8(d)(iii) and
(iv), which describe quoting obligations for Phlx Lead Market Makers
once an underlying security in the assigned option series has opened
for trading. As noted above, the quoting obligations described in
Phlx's rule do not apply in BX's current rule, as BX does not require
Lead Market Makers to quote in the Opening Process today. The
Exchange's proposal does not require Lead Market Makers to quote during
the Opening Process.
Similar to Phlx Options 3, Section 8(d)(v), BX proposed within
Options 3, Section 8(d)(3) to provide that the Opening Process will
stop and an option series will not open if the ABBO becomes crossed.
Once this condition no longer exists, the Opening Process in the
affected option series will start again pursuant to paragraphs (f)-(k).
All eligible opening interest will continue to be considered during the
Opening Process when the process is re-started. The proposed rule
reflects that the ABBO cannot be crossed for the Opening Process to
proceed. These events are indicative of uncertainty in the marketplace
of where the option series should be valued. In these cases, the
Exchange will wait for the ABBO to become uncrossed before initiating
the Opening Process to ensure that there is stability in the
marketplace in order to assist the Exchange in determining the Opening
Price, or for a Valid Width Quote to be submitted. Unlike Phlx Options
3, Section 8(d)(v),\31\ BX will not consider if a Valid Width Quote(s)
is no longer present. Unlike Phlx, BX does not require its Lead Market
Makers to quote in the Opening Process. This requirement is not
necessary for BX as BX's market would open with a BBO, pursuant to
Options 3, Section 8(f), unless the ABBO becomes crossed. While, BX is
not adopting Phlx's requirement to quote in the Opening Process,
certain protections exist within proposed Options 3, Section 8(d)(4). A
Valid Width NBBO must be present for BX to open with a trade pursuant
to this proposal.
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\31\ Phlx Options 3, Section 8(d)(v) provides, ``The Opening
Process will stop and an option series will not open if the ABBO
becomes crossed or when a Valid Width Quote(s) pursuant to paragraph
(d)(i) is no longer present. Once each of these conditions no longer
exist, the Opening Process in the affected option series will start
again pursuant to paragraphs (f)-(k) below.''
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The Exchange proposes to add rule text within proposed Options 3,
Section 8(d)(4) to provide a scenario, which is specific to BX, and
would not be applicable to Phlx. The Exchange proposes that an Opening
Process will stop and an options series will not open, if a Valid Width
NBBO is no longer present, pursuant to paragraph (i)(2). Once this
condition no longer exists, the
[[Page 45248]]
Opening Process in the affected options series will start again,
pursuant to paragraphs (j) and (k) below. Today, BX would not open with
a trade unless there is a Valid Width NBBO present. This would remain
the case with this proposal. The Exchange believes that the addition of
this text provides market participants with an expectation of the
circumstances under which the Exchange would open an option series, as
well as price protection afforded to interest attempting to participate
in the Opening Process on BX.
Reopening After a Trading Halt
Proposed BX Options 3, Section 8(e) is intended to provide
information regarding the manner in which a trading halt would impact
the Opening Process similar to Phlx Options 3, Section 8(e). Proposed
BX Options 3, Section 8(e) states that ``[t]he procedure described in
this Rule will be used to reopen an option series after a trading halt.
If there is a trading halt or pause in the underlying security, the
Opening Process will start again irrespective of the specific times
listed in paragraph (d).'' This last sentence makes clear that this
rule applies to openings related to the normal market opening, as well
as intra-day re-openings following a trading halt. Current BX Options
3, Section 8(b) similarly provides that an Opening Cross shall occur
when trading resumes after a trading halt. The Exchange is not amending
this provision, rather the text is being presented similar to Phlx's
Options 3, Section 8.
Opening With a BBO
Proposed BX Options 3, Section 8(f) describes when the Exchange may
open with a quote on its market (no trade). The proposed rule states,
Opening with a BBO (No Trade). If there are no opening quotes or
orders that lock or cross each other, and no routable orders locking or
crossing the ABBO, the System will open with an opening quote by
disseminating the Exchange's best bid and offer among quotes and orders
(``BBO'') that exist in the System at that time, if any of the below
conditions are satisfied:
(1) A Valid Width NBBO is present;
(2) A certain number of other options exchanges (as determined by
the Exchange) have disseminated a firm quote on OPRA; or
(3) A certain period of time (as determined by the Exchange) has
elapsed.
Unlike Phlx, which provides that certain conditions may not
exist,\32\ BX's proposal affirmatively states that the System will open
with no trade provided one of the three conditions within Options 3,
Section 8(f) are met. These three conditions are similar to BX's
current rule text within Options 3, Section 8(b). BX's proposal at
proposed Options 3, Section (f)(1) provides that that the System will
open, provided any one of the three conditions are met, and one of
those conditions is a Valid Width NBBO, as noted in (f)(1). Subject to
Options 3, Section 8(f)(2), an options series may open if a certain
number of other options exchanges (as determined by the Exchange) have
disseminated a firm quote on OPRA.\33\ Also, an options series will
open if a certain period of time, as determined by the Exchange, has
elapsed pursuant to Options 3, Section 8(f)(3).\34\ Unlike Phlx which
requires a Lead Market Maker to quote during the Opening Process, BX
requires a Valid Width NBBO to open. Phlx's rule will open with a Valid
Width Quote, unless all of the conditions in Phlx Options 3, Section
8(f) exist. The three conditions noted in Phlx, (i) a Zero Bid Market;
(ii) no ABBO; and (iii) no Quality Opening Market, would cause Phlx to
calculate an OQR because it could not open with a trade. The Exchange
notes that the concept is similar for Phlx and BX, except that the
triggers for opening are different, a Valid Width Quote as compared to
a Valid Width NBBO (e.g. BX does not require a Lead Market Maker to
quote to open an option series and, thus does not require a Valid Width
Quote to open). BX does not require a Valid Width Quote and, therefore,
requires the conditions within proposed BX Options 3, Section 8(f) to
open with a BBO Conversely, Phlx requires a Valid Width Quote and,
therefore, once that Valid Width Quote is available, Phlx would
consider if all of the three conditions noted within Phlx Options 3,
Section 8(f) exist to ensure there are no impediments to opening with a
PBBO (Phlx's BBO).
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\32\ Phlx Options 3, Section 8(f) states, ``Opening with a PBBO
(No Trade). If there are no opening quotes or orders that lock or
cross each other and no routable orders locking or crossing the
ABBO, the System will open with an opening quote by disseminating
the Exchange's best bid and offer among quotes and orders (``PBBO'')
that exist in the System at that time, unless all three of the
following conditions exist: (i) A Zero Bid Market; (ii) no ABBO; and
(iii) no Quality Opening Market. If all of these conditions exist,
the Exchange will calculate an Opening Quote Range pursuant to
paragraph (j) and conduct the Price Discovery Mechanism pursuant to
paragraph (k) below.''
\33\ BX currently requires at least two other options exchanges
to open. The setting will be initially set at two away options
exchanges with this new proposal.
\34\ BX currently requires 15 minutes to pass with respect to
this setting, The setting will remain at 15 minutes with this
proposal.
---------------------------------------------------------------------------
Current BX Options 3, Section 8(b)(2) provides that ``[i]f no trade
is possible on BX, then BX will open dependent upon one of the
following: (A) A Valid Width NBBO is present; (B) A certain number of
other options exchanges (as determined by the Exchange) have
disseminated a firm quote on OPRA; or (C) A certain period of time (as
determined by the Exchange) has elapsed.'' It will continue to permit
one of these 3 scenarios to open an options series on BX. The Exchange
also notes that a Valid Width NBBO must be present to open, pursuant to
Options 3, Section 8(j) or (k), which are described below.
Further Opening Processes
If, as proposed, an opening did not occur pursuant to proposed
paragraph (e) (Reopening After a Trading Halt) and there are opening
Valid Width Quotes, or orders, that lock or cross each other, the
System will calculate the Pre-Market BBO.\35\ The Pre-Market BBO only
uses Valid Width Quotes, which provide both a bid and offer as compared
to orders which are one-sided. The rule text of proposed BX Options 3,
Section 8(g) provides, ``If there are opening Valid Width Quotes or
orders that lock or cross each other, the System will calculate the
Pre-Market BBO.'' This rule text is the same as Phlx Options 3, Section
8(g). The Exchange calculates a Pre-Market BBO in order for the
Exchange to open with a trade pursuant to proposed Options 3, Section
8(i), to ensure that the Pre-Market BBO is a Valid Width NBBO, which is
required to open the market.\36\ The Exchange does not disseminate a
Pre-Market BBO, rather, the Exchange disseminates imbalance messages to
notify Participants of available trading opportunities on BX during the
Opening Process.
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\35\ See proposed BX Options 3, Section 8(g).
\36\ The Pre-Market BBO is calculated to ensure, when the
Exchange opens with a trade, a Valid Width NBBO is present,
particularly when there is no away market quote or when the away
market quote is not a Valid Width NBBO.
---------------------------------------------------------------------------
Potential Opening Price
Current BX Options 3, Section 8(b)(4) provides that the ``[t]he BX
Opening Cross shall occur at the price that maximizes the number of
contracts of eligible interest in BX Options to be executed at or
within the ABBO and within a defined range, as established and
published by the Exchange, of the Valid Width NBBO.'' The proposed
Opening Process seeks to maximize the
[[Page 45249]]
number of number of contracts of eligible interest that will execute
during the Opening Process. The Exchange proposes to establish
boundaries, similar to Phlx, to establish the Opening Price. The ABBO
will continue to be considered as part of the Potential Opening Price.
Proposed BX Options 3, Section 8(i) describes the manner in which the
ABBO is considered in arriving at the Potential Opening Price.
Proposed BX Options 3, Section 8(h), similar to Phlx Options 3,
Section 8(h), describes the general concept of how the System
calculates the Potential Opening Price under all circumstances, once
the Opening Process is triggered. The first sentence of that paragraph
describes a Potential Opening Price as a price where the System may
open once all other Opening Process criteria is met. Next, the rule
text provides, ``[t]o calculate the Potential Opening Price, the System
will take into consideration all Valid Width Quotes and orders
(including Opening Sweeps) for the option series and identify the price
at which the maximum number of contracts can trade (``maximum quantity
criterion''). In addition, paragraphs (i)(1)(C) and (j)(5)-(7) below
contain additional provisions related to the Potential Opening Price.''
The proposal attempts to maximize the number of contracts that can
trade, and is intended to find the most reasonable and suitable price,
relying on the maximization to reflect the best price.
Proposed BX Options 3, Section 8(h)(1) presents the scenario for
more than one Potential Opening Price. Proposed Options 3, Section
8(h)(1) provides,
More Than One Potential Opening Price. When two or more
Potential Opening Prices would satisfy the maximum quantity
criterion and leave no contracts unexecuted, the System takes the
highest and lowest of those prices and takes the mid-point; if such
mid-point is not expressed as a permitted minimum price variation,
it will be rounded to the minimum price variation that is closest to
the closing price for the affected series from the immediately prior
trading session. If there is no closing price from the immediately
prior trading session, the System will round up to the minimum price
variation to determine the Opening Price.
Proposed BX Options 3, Section 8(h)(2) presents the scenario for
two or more Potential Opening Prices. Proposed Options 3, Section
8(h)(2) provides, ``If two or more Potential Opening Prices for the
affected series would satisfy the maximum quantity criterion and leave
contracts unexecuted, the Opening Price will be either the lowest
executable bid or highest executable offer of the largest sized side.''
This, again, bases the Potential Opening Price on the maximum quantity
that is executable.
Proposed BX Options 3, Section 8(h)(3) provides that ``[t]he
Opening Price is bounded by the better away market price that cannot be
satisfied with the Exchange routable interest.'' The Exchange does not
open with a trade at a price that trades through another market's BBO.
This process, importantly, breaks a tie by considering the largest
sized side and away markets, which are relevant to determining a fair
Opening Price.
The System applies certain boundaries to the Potential Opening
Price to help ensure that the price is a reasonable one by identifying
the quality of that price; if a well-defined, fair price can be found
within these boundaries, the option series can open at that price
without going through a further price discovery mechanism.
Proposed BX Options 3, Section 8(i), Opening with a Trade,
provides:
The Exchange will open the option series for trading with a
trade on Exchange interest only at the Opening Price, if any of
these conditions occur:
(A) The Potential Opening Price is at or within the best of the
Pre-Market BBO and the ABBO, which is also a Valid Width NBBO;
(B) the Potential Opening Price is at or within the non-zero bid
ABBO, which is also a Valid Width NBBO, if the Pre-Market BBO is
crossed; or
(C) where there is no ABBO, the Potential Opening Price is at or
within the Pre-Market BBO, which is also a Valid Width NBBO.
For the purposes of calculating the mid-point the Exchange will use
the better of the Pre-Market BBO or ABBO as a boundary price and will
open that options series for trading with an execution at the resulting
Potential Opening Price.\37\
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\37\ BX's current rule at Options 3, Section 8(b)(4)(B) states,
``If more than one price exists under subparagraph (A), and there
are no contracts that would remain unexecuted in the cross, the BX
Opening Cross shall occur at the midpoint price, rounded to the
penny closest to the price of the last execution in that series (and
in the absence of a previous execution price, the price will round
up, if necessary) of (1) the National Best Bid or the last offer on
BX Options against which contracts will be traded whichever is
higher, and (2) the National Best Offer or the last bid on BX
Options against which contracts will be traded whichever is lower.''
This process for considering the mid-point is being eliminated in
favor of Phlx's methodology for calculating the mid-point as
described in proposed BX Options 3, Section 8(h).
---------------------------------------------------------------------------
These boundaries serve to validate the quality of the Opening
Price. Proposed BX Options 3, Section 8(i), provides that the Exchange
will open the option series for trading with an execution at the
resulting Potential Opening Price, as long as it is within the defined
boundaries regardless of any imbalance. The Exchange believes that
since the Opening Price can be determined within a well-defined
boundary and not trading through other markets, it is fair to open the
market immediately with a trade and to have the remaining interest
available to remain on the Order Book to be potentially executed in the
displayed market. Using a boundary-based price counterbalances opening
faster at a less bounded and perhaps less expected price and reduces
the possibility of leaving an imbalance.
Proposed BX Options 3, Section 8(i)(2), provides that if there is
more than one Potential Opening Price which meets the conditions set
forth in proposed BX Options 3, Section 8(i)(1)(A), (B) or (C), where
(A) no contracts would be left unexecuted and (B) any value used for
the mid-point calculation (which is described in subparagraph (g))
would cross either: (i) The Pre-Market BBO or (ii) the ABBO, then the
Exchange will open the option series for trading with an execution and
use the best price which the Potential Opening Price crosses as a
boundary price for the purpose of the mid-point calculation. If these
aforementioned conditions are not met, but a Valid Width NBBO is
present, an Opening Quote Range is calculated as described in proposed
BX Options 3, Section 8(j) and the price discovery mechanism, described
in proposed BX Options 3, Section 8(k), would commence. The proposed
rule explains the boundary, as well as the price basis for the mid-
point calculation, to enable the market to immediately open with a
trade, which improves the detail included in the rule. The Exchange
believes that this process is logical because it seeks to select a fair
and balanced price. This rule text is similar to Phlx Options 3,
Section 8(i).
Today, BX has the concept of a Valid Width NBBO in its current
rule. Rather than adopt Phlx's notion of a Quality Opening Market,\38\
which is very similar
[[Page 45250]]
to the concept of a Valid Width NBBO, BX retained the concept of a
Valid Width NBBO. Phlx's rules at Options 3, Section 8(d), require a
Valid Width Quote. The calculation of Phlx's Quality Opening Market is
based on the best bid and offer of Valid Width Quotes. BX's proposed
rule will only require a Valid Width NBBO, which is the combination of
all away market quotes and Valid Width Quotes received over SQF. Unlike
Phlx's requirements in Options 3, Section 8(d), which require a Lead
Market Maker's quote, a BX Lead Market Maker may quote during the
Opening Process, but is not required to quote in the Opening Process.
BX's proposed rule retained the concept of a Valid Width NBBO because
there is no requirement for Lead Market Makers to submit a Valid Width
Quote. In contrast, Phlx utilized a Quality Opening Market concept.
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\38\ Phlx's Quality Opening Market is a bid/ask differential
applicable to the best bid and offer from all Valid Width Quotes
defined in a table to be determined by the Exchange and published on
the Exchange's website. The calculation of Quality Opening Market is
based on the best bid and offer of Valid Width Quotes. The
differential between the best bid and offer are compared to reach
this determination. The allowable differential, as determined by the
Exchange, takes into account the type of security (for example,
Penny Pilot versus non-Penny Pilot issue), volatility, option
premium, and liquidity. The Quality Opening Market differential is
intended to ensure the price at which the Exchange opens reflects
current market conditions. See Phlx Options 3, Section 8(a)(viii).
Similarly, BX's Valid Width NBBO is the combination of all away
market quotes and Valid Width Quotes received over the SQF. The
Valid Width NBBO will be configurable by the underlying security,
and tables with valid width differentials, which will be posted by
the Exchange on its website. Away markets that are crossed will void
all Valid Width NBBO calculations. If any Market Maker quotes on the
Exchange are crossed internally, then all Exchange quotes will be
excluded from the Valid Width NBBO calculation. These two concepts
both provide the applicable bid/ask differential and ensure the
price at which the Exchange opens reflects current market
conditions.
---------------------------------------------------------------------------
BX's Valid Width NBBO is configurable by underlying, and a table
with valid width differentials is available on BX's web page.\39\ Away
markets that are crossed (e.g. Cboe crosses MIAX, BOX crosses CBOE)
will void all Valid Width NBBO calculations. If any Market Maker quotes
on BX Options are crossed internally, then all such quotes will be
excluded from the Valid Width NBBO calculation. Within the Valid Width
NBBO, all away market quotes and any combination of Market Maker Valid
Width Quotes, whether they include the Exchange's Best Bid or Offer or
not, are represented. The price discovery on BX currently includes not
only Market Maker quotes, but also away market interest, this will
remain the same with the proposal. The following examples illustrate
the calculation of the Valid Width NBBO:
---------------------------------------------------------------------------
\39\ See https://www.nasdaqtrader.com/Content/TechnicalSupport/BXOptions_SystemSettings.pdf.
---------------------------------------------------------------------------
Example 1: (away markets are crossed)
Assume the Valid Width NBBO bid/ask differential is set by BX at
.10.
Market Maker1 is quoting on the Exchange 1.05-1.15
Market Maker2 is quoting on the Exchange 1.00-1.10
BX BBO 1.05-.1.10
Assume Cboe is quoting .90-1.10
Assume MIAX is quoting .70-.85.
Since the ABBO is crossed (.90-.85), Valid Width NBBO calculations
are not taken into account until the away markets are no longer
crossed. Once the away markets are no longer crossed, the Exchange will
determine if a Valid Width NBBO can be calculated. Assume the ABBO
uncrosses because MIAX updates their quote to .90-1.15, the BX BBO of
1.05-1.10 is considered a Valid Width NBBO. Pursuant to proposed
Options 3, Section 8(f), BX Options will open with no trade and BBO
disseminated as 1.05-1.10.
Example 2: (BX Options orders/quotes are crossed, ABBO is Valid Width
NBBO)
Assume that the Valid Width NBBO bid/ask differential is set by the
Exchange at .10.
Market Maker1 is quoting on the Exchange 1.05-1.15 (10x10 contracts)
Market Maker2 is quoting on the Exchange .90-.95 (10x10 contracts)
BX BBO crossed, 1.05-.95, while another Market Maker3 is quoting on
the Exchange at .90-1.15 (10x10 contracts).
Since the BX BBO is crossed, the crossing quotes are excluded from
the Valid Width NBBO calculation. However, assume Cboe is quoting .95-
1.10 and MIAX is quoting .95-1.05, resulting in an uncrossed ABBO of
.95-1.05.
The ABBO of .95-1.05 meets the required .10 bid/ask differential
and is considered a Valid Width NBBO. As Market Maker1 and Market
Maker2 have 10 contracts each, these contracts will cross because there
is more than one price at which those contracts could execute. The
opening will occur with 10 contracts executing at 1.00, which is the
mid-point of the NBBO.
At the end of the Opening Process, only the quote from Market
Maker3 remains so the BX Options disseminated quote at the end of
Opening Process will be .90-1.15 (10x10 contracts).
The requirement of a Valid Width NBBO being present continues to
ensure that the Opening Price is rationally based on what is present in
the broader marketplace during the Opening Process. As noted herein,
the Valid Width NBBO includes all away market quotes. A Potential
Opening Price must be at or within the ABBO, provided the market opened
prior to calculation an OQR as discussed below.
Proposed BX Options 3, Section 8(j) provides that the System will
calculate an Opening Quote Range (``OQR'') for a particular option
series that will be utilized in the price discovery mechanism if the
Exchange has not opened subject to any of the provisions described
above. Provided the Exchange has been unable to open the option series
\40\ the OQR would broaden the range of prices at which the Exchange
may open. This would allow additional interest to be eligible for
consideration in the Opening Process. The OQR is an additional type of
boundary beyond the boundaries mentioned in proposed BX Options 3,
Section 8(h) and (i). OQR is intended to limit the Opening Price to a
reasonable, middle ground price and thus reduce the potential for
erroneous trades during the Opening Process. Although the Exchange
applies other boundaries such as the BBO, the OQR provides a range of
prices that may be able to satisfy additional contracts, while still
ensuring a reasonable Opening Price. The Exchange seeks to execute as
much volume as is possible at the Opening Price. OQR is constrained by
the least aggressive limit prices within the broader limits of OQR. The
least aggressive buy order or Valid Width Quote bid and least
aggressive sell order or Valid Width Quote offer within the OQR will
further bound the OQR. Although the Exchange applies other boundaries
such as the BBO, the OQR is outside of the BBO. It is meant to provide
a price that can satisfy more size without becoming unreasonable. Below
is an example of the manner in which OQR is constrained.
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\40\ This would refer to an opening pursuant to proposed BX
Options 3, Section 8(f) or (i).
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OQR Example: Assume the below pre-opening interest:
Lead Market Maker quotes 4.10 (100) x 4.20 (50)
Order1: Public Customer Buy 300 @4.39
Order2: Public Customer Sell 50 @4.13
Order3: Public Customer Sell 5 @4.29
Opening Quote Range configuration in this scenario is +/-0.10
9:30 a.m. events occur, underlying opens
First imbalance message: Buy imbalance @4.20, 100 matched, 200
unmatched
Next 3 imbalance messages: Buy imbalance @4.29, 105 matched, 195
unmatched
Potential Opening Price calculation would have been 4.20 + 0.10 = 4.30,
but OQR is further bounded by the least aggressive Sell order @4.29
Order1 executes against Order 2 50 @4.29
Order1 executes against Lead Market Maker quote 50 @4.29
Order1 executes against Order 3 5 @4.29
Remainder of Order1 cancels as it is through the Opening Price
Lead Market Maker quote purges as its entire offer side volume has been
exhausted
Specifically, to determine the minimum value for the OQR, an
amount, as defined in a table to be
[[Page 45251]]
determined by the Exchange, will be subtracted from the highest quote
bid among Valid Width Quotes on the Exchange and on the away market(s),
if any, except as provided in proposed BX Options 3, Section 8(j)
paragraphs (3) and (4). To determine the maximum value for the OQR, an
amount, as defined in a table to be determined by the Exchange, will be
added to the lowest quote offer among Valid Width Quotes on the
Exchange and on the away market(s), if any, except as provided in
proposed BX Options 3, Section 8(j) paragraphs (3) and (4).\41\
However, if one or more away markets are disseminating a BBO that is
not crossed, and there are Valid Width Quotes on the Exchange that
cross each other or are marketable against the ABBO, then the minimum
value for the OQR will be the highest away bid.\42\ It should be noted
that the Opening Process would stop and an option series will not open
if the ABBO becomes crossed, pursuant to proposed Options 3, Section
8(d)(3). In addition, the maximum value for the OQR will be the lowest
away offer.\43\
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\41\ See proposed BX Options 3, Section 8(j)(2).
\42\ See proposed BX Options 3, Section 8(j)(3)(A).
\43\ See proposed BX Options 3, Section 8(j)(3)(B).
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If there is more than one Potential Opening Price possible, where
no contracts would be left unexecuted, any price used for the mid-point
calculation (which is described in proposed BX Options 3, Section
8(h)(3)), that is outside of the OQR, will be restricted to the OQR
price on that side of the market for the purposes of the mid-point
calculation. BX Options 3, Section 8(j)(4) continues the theme of
relying on both maximizing executions and looking at the correct side
of the market to determine a fair price.
Proposed BX Options 3, Section 8(j)(5) deals with the situation
where there is an away market price involved. If there is more than one
Potential Opening Price possible, where no contracts would be left
unexecuted, pursuant to proposed BX Options 3, Section 8(h)(3), when
contracts will be routed, the System will use the away market price as
the Potential Opening Price. The Exchange is seeking to execute the
maximum amount of volume possible at the Opening Price. The Exchange
will enter into the Order Book any unfilled interest at a price equal
to or inferior to the Opening Price.\44\ It should be noted, the
Exchange will not trade through an away market.\45\
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\44\ See proposed BX Options 3, Section 8(k)(5).
\45\ See current BX Options 3, Section 5(d).
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Finally, proposed BX Options 3, Section 8(j)(6) provides if the
Exchange determines that non-routable interest can execute the maximum
number of Exchange contracts against Exchange interest, after routable
interest has been determined by the System to satisfy the away market,
then the Potential Opening Price is the price at which the maximum
number of contracts can execute, excluding the interest which will be
routed to an away market, which may be executed on the Exchange as
described in proposed BX Options 3, Section 8(h). This continues the
theme of trying to satisfy the maximum amount of interest during the
Opening Process. This is similar to Phlx Options 3, Section 8(j). BX's
proposed rule at Options 3, Section 8(j)(6) provides that the System
will route all routable interest pursuant to Options 3, Section
10(a)(1).\46\ Both Phlx and the proposed BX rule cite to their
respective allocation rules.\47\
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\46\ Phlx Options 3, Section 8(k)(C)(6) provides, ``The System
will execute orders at the Opening Price that have contingencies
(such as, without limitation, all-or-none) and non-routable orders,
such as a ``Do Not Route'' or ``DNR'' Orders, to the extent
possible. The System will only route non-contingency Public Customer
and Professional orders.'' Phlx routes Public Customer and
Professional orders, while BX would route orders for all market
participants.
\47\ Phlx Options 3, Section 8(k)(E) provides that the
allocation provisions of Options 3, Section 10 will apply.
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Price Discovery Mechanism
If the Exchange has not opened pursuant to proposed paragraphs (f)
or (i), after the OQR is calculated, pursuant to proposed BX Options 3,
Section 8(j), the Exchange will conduct a price discovery mechanism,
pursuant to proposed BX Options 3, Section 8(k), which is similar to
Phlx Options 3, Section 8(k). The price discovery mechanism is the
process by which the Exchange seeks to identify an Opening Price having
not been able to do so following the process outlined thus far herein.
The principles behind the price discovery mechanism are, as described
above, to satisfy the maximum number of contracts possible by
identifying a price that may leave unexecuted contracts. However, the
price discovery mechanism applies a proposed, wider boundary to
identify the Opening Price, and the price discovery mechanism involves
seeking additional liquidity.
The Exchange believes that conducting the price discovery process
in these situations protects orders from receiving a random price that
does not reflect the totality of what is happening in the markets on
the opening, and also further protects opening interest from receiving
a potentially erroneous execution price on the opening. Opening
immediately has the benefit of speed and certainty, but that benefit
must be weighed against the quality of the execution price, and whether
orders were left unexecuted. The Exchange believes that the proposed
rule strikes an appropriate balance.
The proposed rule attempts to open using Exchange interest only to
determine an Opening Price, provided certain conditions contained in
proposed BX Options 3, Section 8(j) are present, to ensure market
participants receive a quality execution in the opening. The proposed
rule does not consider away market liquidity, for purposes of routing
interest to other markets, until the price discovery mechanism pursuant
to proposed paragraph (k). Rather, away market prices are considered
for purposes of avoiding trade-throughs. As a result, the Exchange
might open without routing, if all of the conditions described above
are met. The Exchange believes that the benefit of this process is a
more rapid opening with quality execution prices. Opening with a quote,
pursuant to Options 3, Section 8(f), would not require consideration of
away market quotes because BX would have opened with a local quote that
was not locked or crossed with the away market, provided there are no
opening quotes or orders that lock or cross each other, and no routable
orders locking or crossing the ABBO.\48\ With respect to Opening with a
Trade, pursuant to Options 3, Section 8(i), the Exchange would not
consider away market interest if it could open immediately with a
trade, provided that the Exchange would not trade-through an away
market. If BX is locked and crossed with an away market, then the
Exchange would require additional price discovery, pursuant to Options
3, Section 8(j) and (k). Finally, the Exchange considers away market
interest in the Valid Width NBBO.
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\48\ See BX Options 3, Section 8(f).
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Today, pursuant to current BX Options 3, Section 8(b)(3) and (7),
BX disseminates, by electronic means, an Order Imbalance Indicator
every 5 seconds beginning between 9:20 and 9:28, or a shorter
dissemination interval as established by the Exchange, with the default
being set at 9:25 a.m. The start of dissemination, and a dissemination
interval, are posted by BX on its website. Also, BX would disseminate
an Order Imbalance Indicator for an imbalance containing marketable
[[Page 45252]]
routable interest.\49\ The Exchange proposes to continue to disseminate
an imbalance, but instead of the manner in which BX utilizes an Order
Imbalance Indicator today, BX would instead post up to 4 Imbalance
Messages which each run its own Imbalance Timer, similar to Phlx.
Today, BX's imbalance process begins, even if it has no interest. With
this proposal, BX's imbalance message will serve to notify Participants
of the availability of interest to cross in the opening. The Exchange
believes that the proposed methodology will attract interest during the
Opening Process, because the imbalance message will highlight for
Participants the available size that may be crossed. The Exchange
believes that Phlx's process attracts additional liquidity, because the
proposed amendments are intended to create a more robust experience for
market participants seeking to have their orders executed during the
Opening Process. The Exchange believes adopting Phlx's process improves
the quality of execution of BX Options' opening by attracting more
liquidity through more meaningful imbalance notifications that
broadcast trading opportunities during BX's Opening Process. The
proposed changes give Participants more transparency into BX's Opening
Process that would afford them a better experience.
---------------------------------------------------------------------------
\49\ See current BX Options 3, Section 8(b)(3).
---------------------------------------------------------------------------
Specifically, proposed BX Options 3, Section 8(k)(1) provides that
the System will broadcast an Imbalance Message for the affected series
(which includes the symbol, side of the imbalance, size of matched
contracts, size of the imbalance, and Potential Opening Price bounded
by the Pre-Market BBO) to participants, and begin an ``Imbalance
Timer,'' not to exceed three seconds to notify Participants of
available interest that may be crossed during the Opening Process. The
Imbalance Timer would initially be set 200 milliseconds.\50\ The
Imbalance Message is intended to attract additional liquidity, much
like an auction, using an auction message and timer. The Imbalance
Timer would be for the same number of seconds for all options traded on
the Exchange. Pursuant to this proposed rule, as described in more
detail below, the Exchange may have up to 4 Imbalance Messages which
each run its own Imbalance Timer.
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\50\ The Phlx timer is currently set at 200 milliseconds. The
Exchange will issue a notice to provide the initial setting and
would thereafter issue a notice if it were to change the timing. If
the Exchange were to select a time which exceeds 3 seconds, it would
be required file a rule proposal with the Commission.
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The Exchange proposes to provide at BX Options 3, Section
8(k)(1)(A), An Imbalance Message will be disseminated showing a ``0''
volume and a $0.00 price if: (i) No executions are possible but
routable interest is priced at or through the ABBO; or (ii) internal
quotes are crossing each other. Where the Potential Opening Price is
through the ABBO, an imbalance message will display the side of
interest priced through the ABBO.
This rule text explains the information that is being conveyed when
an imbalance message indicates ``0'' volume, such as (i) when no
executions are possible and routable interest is priced at or through
the ABBO; or (ii) internal quotes are crossing each other. The
Imbalance Message provides detail regarding the potential state of the
interest available. Where the Potential Opening Price is through the
ABBO, an imbalance message will display the side of interest priced
through the ABBO. The Imbalance Message provides transparency to market
participants during the Opening Process. This rule text differs from
Phlx Options 3, Section 8(k)(A)(1),\51\ which also provides, ``. . . or
there is a Valid Width Quote, but there is no Quality Opening Market.''
BX, as noted herein, does not have a concept of a Quality Opening
Market, but does have a concept of a Valid Width NBBO, which is always
required, when attempting to open with a trade pursuant to Options 3
Section 8(d)(4). In addition, a Valid Width Quote is always required on
Phlx pursuant to Options 3, Section 8(d), but the open is not required
to be quoted by a Lead Market Maker on BX. Therefore, the third prong,
a Valid Width Quote from a local Market Maker, in the Phlx rule text is
unnecessary for BX.
---------------------------------------------------------------------------
\51\ Phlx Options 3, Section 8(k)(A)(1) provides, ``An Imbalance
Message will be disseminated showing a ``0'' volume and a $0.00
price if: (i) No executions are possible but routable interest is
priced at or through the ABBO; (ii) internal quotes are crossing
each other; or (iii) there is a Valid Width Quote, but there is no
Quality Opening Market. Where the Potential Opening Price is through
the ABBO, an imbalance message will display the side of interest
priced through the ABBO.''
---------------------------------------------------------------------------
Proposed BX Options 3, Section 8(k)(2), states that any new
interest received by the System will update the Potential Opening
Price. An update may not result in an immediate change to the Potential
Opening Price, however, the Exchange will consider new interest as it
arrives and update the Potential Opening Price accordingly based on
existing interest and new interest. By way of example:
Case 1--An Update Which Does Not Result in a Change to Potential
Opening Price
Valid Width NBBO = 0.20
CBOE market maker quotes 1.15 x 1.30 (10)
BX Market Maker quotes 1 x 1.25 (10)
Order to sell arrives for 1 contract @1.26 (Potential Opening Price
updates, but determines there is no match, and therefore no change to
lack of Potential Opening Price)
Order to buy arrives for 100 contracts @1.26 (Potential Opening Price
updates, and changes to 1.26)
Order to buy arrives for 1000 contracts @1.24 (Potential Opening Price
updates, but remains unchanged from 1.26)
Case 2--An Update Results in a Change to the Potential Opening
Price
Valid Width NBBO = 0.20
CBOE market maker quotes 1.15 x 1.30 (10)
BX Market Maker quotes 1 x 1.25 (10)
Order to sell arrives for 1 contract @1.26 (Potential Opening Price
updates, but determines there is no match, and therefore no change to
lack of Potential Opening Price)
Order to buy arrives for 1000 contracts @1.24 (Potential Opening Price
updates, but determines there is no match, and therefore no change to
lack of Potential Opening Price)
Order to sell arrives for 1000 contracts @1.24 (Potential Opening Price
updates and changes to 1.24)
If during or at the end of the Imbalance Timer, the Opening Price
is at or within the OQR, the Imbalance Timer will end and the System
will open with a trade at the Opening Price if the executions consist
of Exchange interest only without trading through the ABBO, and without
trading through the limit price(s) of interest within OQR, which is
unable to be fully executed at the Opening Price. If no new interest
comes in during the Imbalance Timer, and the Potential Opening Price is
at or within OQR and does not trade through the ABBO, the Exchange will
open with a trade at the end of the Imbalance Timer at the Potential
Opening Price. This reflects that the Exchange is seeking to identify a
price on the Exchange without routing away, yet which price may not
trade through another market and the quality of which is addressed by
applying the OQR boundary.
Provided the option series has not opened pursuant to proposed
Options 3, Section 8(k)(2),\52\ the System will send
[[Page 45253]]
a second Imbalance Message with a Potential Opening Price that is
bounded by the OQR (and would not trade through the limit price(s) of
interest within OQR, which is unable to be fully executed at the
Opening Price) and includes away market volume in the size of the
imbalance to Participants; and concurrently initiate a Route Timer, not
to exceed one second.\53\ The Route Timer is intended to give Exchange
users an opportunity to respond to an Imbalance Message before any
opening interest is routed to away markets and, thereby, maximize
trading on the Exchange. If during the Route Timer, interest is
received by the System, which would allow the Opening Price to be
within OQR, without trading through away markets and without trading
through the limit price(s) of interest within OQR, which is unable to
be fully executed, the System will open with trades and the Route Timer
will simultaneously end. The System will monitor quotes and orders
received during the Route Timer period and make ongoing corresponding
changes to the permitted OQR and Potential Opening Price to reflect
them.\54\ This proposal serves to widen the boundary of available
Opening Prices, which should similarly increase the likelihood that an
Opening Price can be determined. The Route Timer, like the Imbalance
Timer, is intended to permit responses to be submitted and considered
by the System in calculating the Potential Opening Price. The System
does not route away until the Route Timer ends.
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\52\ The System would not open pursuant to proposed Options 3,
Section 8(k)(2) if the Potential Opening Price is outside of the
OQR, or if the Potential Opening Price is at or within the OQR, but
would otherwise trade through the ABBO, or through the limit
price(s) of interest within the OQR, which is unable to be fully
executed at the Potential Opening Price.
\53\ The Route Timer would be a brief timer that operates as a
pause before an order is routed to an away market. Currently, the
Phlx Route Timer is set to one second. BX's Route Timer will also be
initially set to one second. The Exchange will issue a notice to
Members to provide the initial setting and would thereafter issue a
notice to Members, if it were to change the timing within the range
of up to one second. If the Exchange were to select a time beyond
one second, it would be required file a rule proposal with the
Commission.
\54\ See proposed BX Options 3, Section 8(k)(3)(B).
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Proposed Options 3, Section 8(k)(3)(C) provides if no trade
occurred pursuant to proposed Section 8(k)(3)(B), when the Route Timer
expires, if the Potential Opening Price is within OQR (and would not
trade through the limit price(s) of interest within OQR, which is
unable to be fully executed at the Opening Price), the System will
determine if the total number of contracts displayed at better prices
than the Exchange's Potential Opening Price on away markets (``better
priced away contracts'') would satisfy the number of marketable
contracts available on the Exchange. This provision protects the
unexecuted interest and should result in a fairer price.\55\ The
Exchange will open the option series by routing and/or trading on the
Exchange, pursuant to proposed Options 3, Section 8(k)(3)(C) paragraphs
(i) through (iii).
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\55\ Current BX Options 3, Section 8(b)(4)(C) considers
unexecuted contracts. The proposed Opening Process likewise serves
to protect unexecuted interest and also execute as many contract as
possible during the Opening Process. The System will price any
contracts routed to away markets at the better of the Exchange
Opening Price or the order's limit price. Any unexecuted contracts
from the imbalance not traded or routed will be cancelled back to
the entering participant if they remain unexecuted and priced
through the Opening Price. All other interest will be eligible for
trading after opening, if consistent with the Participant's
instruction as provided for within proposed Options 3, Section
8(k)(3)(E) pursuant to a Forced Opening.
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Proposed Options 3, Section 8(k)(3)(C)(i) provides if the total
number of better priced away contracts would satisfy the number of
marketable contracts available on the Exchange on either the buy or
sell side, the System will route all marketable contracts on the
Exchange to such better priced away markets as Intermarket Sweep Order
(``ISO''),\56\ designated as Immediate-or-Cancel (``IOC'') \57\
Order(s), and determine an opening BX Best Bid or Offer (``BBO'') that
reflects the interest remaining on the Exchange. The System will price
any contracts routed to away markets at the Exchange's Opening Price or
pursuant to proposed Options 3, Section 8(k)(3)(C)(ii) or (iii)
described below. Routing away at the Exchange's Opening Price is
intended to achieve the best possible price available at the time the
order is received by the away market.
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\56\ BX Options 3, Section 7(a)(6) provides that an
``Intermarket Sweep Order'' or ``ISO'' are limit orders that are
designated as ISOs in the manner prescribed by BX and are executed
within the System by Participants at multiple price levels without
respect to Protected Quotations of other Eligible Exchanges as
defined in Options 5, Section 1. ISOs may have any time-in-force
designation except WAIT, are handled within the System pursuant to
Options 3, Section 10 and shall not be eligible for routing as set
out in Options 3, Section 19. ISOs with a time-in-force designation
of GTC are treated as having a time-in-force designation of Day.
\57\ BX Options 3, Section 7(b)(2) provides that an ``Immediate
Or Cancel'' or ``IOC'' shall mean for orders so designated, that if
after entry into the System a marketable order (or unexecuted
portion thereof) becomes non-marketable, the order (or unexecuted
portion thereof) shall be canceled and returned to the entering
participant. IOC Orders shall be available for entry from the time
prior to market open specified by the Exchange on its website until
market close and for potential execution from 9:30 a.m. until market
close. IOC Orders entered between the time specified by the Exchange
on its website and 9:30 a.m. Eastern Time will be held within the
System until 9:30 a.m. at which time the System shall determine
whether such orders are marketable.
---------------------------------------------------------------------------
Proposed Options 3, Section 8(k)(3)(C)(ii) provides if the total
number of better priced away contracts would not satisfy the number of
marketable contracts the Exchange has, the System will determine how
many contracts it has available at the Exchange Opening Price. If the
total number of better priced away contracts, plus the number of
contracts available at the Exchange Opening Price, would satisfy the
number of marketable contracts on the Exchange on either the buy or
sell side, the System will contemporaneously route, based on price/time
priority of routable interest, a number of contracts that will satisfy
interest at away markets at prices better than the Exchange Opening
Price and trade available contracts on the Exchange at the Exchange
Opening Price. The System will price any contracts routed to away
markets at the better of the Exchange Opening Price or the order's
limit price pursuant to this subparagraph. This continues with the
theme of maximum possible execution of the interest on the Exchange or
away markets.
Proposed Options 3, Section 8(k)(3)(C)(iii) provides if the total
number of better priced away contracts, plus the number of contracts
available at the Exchange Opening Price, plus the contracts available
at away markets at the Exchange Opening Price would satisfy the number
of marketable contracts the Exchange has on either the buy or sell
side, the System will contemporaneously route, based on price/time
priority of routable interest, a number of contracts that will satisfy
interest at away markets at prices better than the Exchange Opening
Price (pricing any contracts routed to away markets at the better of
the Exchange Opening Price or the order's limit price), trade available
contracts on the Exchange at the Exchange Opening Price, and route a
number of contracts that will satisfy interest at away markets at
prices equal to the Exchange Opening Price. This provision is intended
to introduce routing to away markets potentially both at a better price
than the Exchange Opening Price, as well as at the Exchange Opening
Price to access as much liquidity as possible to maximize the number of
contracts able to be traded as part of the Opening Process. The
Exchange routes at the better of the Exchange's Opening Price or the
order's limit price to first ensure the order's limit price is not
violated. Routing away at the Exchange's Opening Price is intended to
achieve the best possible price for the routed order,
[[Page 45254]]
at the time the order is received by the away market. By way of
example:
Example of Interest ``Better Than'' and ``Better of the Exchange
Opening Price'' rule text: Options 3, Section 8(k)(3)(C)(ii), Options
3, Section 8(k)(3)(C)(iii) and Options 3, Section 8(k)(5)
BX Market Maker 1 BBO 4.00 x 4.15 (100 contracts)
Cboe 4.00 x 4.14 (100 contracts)
DNR Order to buy 105 @4.20
Routable SRCH Order to buy 100 contracts at 4.18
Sell 2 contracts @4.21
After imbalance process:
SRCH Order routes at limit price of 4.18 (better than Opening Price of
4.20) and executes at 4.14 on Cboe's offer.
DNR Order trades 100 with BX Market Maker quote (quote purges)
Proposed Options 3, Section 8(k)(3)(D) provides that the System may
send up to two additional Imbalance Messages \58\ (which may occur
while the Route Timer is operating) bounded by OQR and reflecting away
market interest in the volume. These boundaries are intended to assist
in determining a reasonable price at which an option series might open.
This provision is proposed to further state that after the Route Timer
has expired, the processes in proposed Options 3, Section 8(k)(3)(C)(3)
will repeat (except no new Route Timer will be initiated). No new Route
Timer is initiated, because after the Route Timer has been initiated
and subsequently expired, no further delay is needed before routing
contracts. This is the case if at any point thereafter the Exchange is
able to satisfy the total number of marketable contracts the Exchange
has by executing on the Exchange and routing to other markets.
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\58\ The first two Imbalance Messages always occur if there is
interest which will route to an away market. If the Exchange is
thereafter unable to open at a price without trading through the
ABBO, up to two more Imbalance Messages may occur based on whether
or not the Exchange has been able to open before repeating the
Imbalance Process. The Exchange may open prior to the end of the
first two Imbalance Messages provided routing is not necessary.
---------------------------------------------------------------------------
Proposed Options 3, Section 8(k)(3)(E), entitled ``Forced
Opening,'' will describe what happens as a last resort in order to open
an options series when the processes described above have not resulted
in an opening of the options series. Under this process, called a
Forced Opening, after all additional Imbalance Messages have occurred,
pursuant to proposed subparagraph (D), the System will open the series
by executing as many contracts as possible by routing to away markets
at prices better than the Exchange Opening Price for their disseminated
size, trading available contracts on the Exchange at the Exchange
Opening Price bounded by OQR (without trading through the limit
price(s) of interest within OQR, which is unable to be fully executed
at the Opening Price). The System will also route contracts to away
markets at prices equal to the Exchange Opening Price at their
disseminated size. In this situation, the System will price any
contracts routed to away markets at the better of the Exchange Opening
Price or the order's limit price. Any unexecuted interest from the
imbalance not traded or routed will be cancelled back to the entering
Participant, if they remain unexecuted and priced through the Opening
Price, otherwise orders will remain in the Order Book. All other
interest will be eligible for trading after opening, if consistent with
the Participant's instruction. The boundaries of OQR and limit prices
within the OQR are intended to ensure a quality Opening Price as well
as protect unexecutable interest, which may not be able to be fully
executed. This rule differs from Phlx's rule.\59\ On Phlx, unless the
member that submitted the original order has instructed the Exchange in
writing to reenter the remaining size, the remaining size will be
automatically submitted as a new order, whereas BX's proposed rule will
cancel the order back to the entering party. The Exchange believes that
cancelling the order back to the Participant allows for the Participant
to determine how its customer would like its order to be handled. The
Exchange believes that there are many methods in which to handle an
order that is not executed. BX proposes to cancel back to provide
certainty to its Participants, in line with current handling on BX.
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\59\ Phlx Options 3, Section 8(k)(C)(5), ``Forced Opening. After
all additional Imbalance Messages have occurred pursuant to
paragraph (4) above, the System will open the series by executing as
many contracts as possible by routing to away markets at prices
better than the Exchange Opening Price for their disseminated size,
trading available contracts on the Exchange at the Exchange Opening
Price bounded by OQR (without trading through the limit price(s) of
interest within OQR which is unable to be fully executed at the
Opening Price), and routing contracts to away markets at prices
equal to the Exchange Opening Price at their disseminated size. In
this situation, the System will price any contracts routed to away
markets at the better of the Exchange Opening Price or the order's
limit price. Any unexecuted interest from the imbalance not traded
or routed will be cancelled back to the entering participant if they
remain unexecuted and priced through the Opening Price, unless the
member that submitted the original order has instructed the Exchange
in writing to reenter the remaining size, in which case the
remaining size will be automatically submitted as a new order. All
other interest will be eligible for trading after opening, if
consistent with the member's instructions.''
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Proposed Options 3, Section 8(k)(3)(F), provides the System will
execute non-routable orders, such as ``Do-Not-Route'' or ``DNR''
Orders,\60\ to the extent possible. The System will only route non-
contingency orders.\61\ Unlike Phlx,\62\ which describes contingency
orders, BX does not have contingency orders that participate in the
Opening Process.\63\ The Exchange is adding this detail to memorialize
the manner in which the System will execute non-routable orders at the
opening. The Exchange desires to provide certainty to market
participants as to which contingency orders will execute, and which
orders will route during the Opening Process.
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\60\ A Do-Not-Route Order is described within BX Options 5,
Section 4(a)(iii)(A).
\61\ Phlx's Rule at Options 3, Section 8(k)(6) states that the
System will only route Public Customer and Professional orders. BX
will allow all orders to route not just Public Customer and
Professional orders.
\62\ See Phlx Options 3, Section 8(k)(C)(6).
\63\ BX Minimum Quantity Orders and All-or-None Orders, which
are described within Options 3, Section 7(a)(4) and (8),
respectively, are both Immediate or Cancel Orders, which are
rejected pre-opening and therefore do not participate in the Opening
Process.
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The Exchange proposes to state at Options 3, Section 8(k)(4) that,
pursuant to Options 3, Section 8(k)(3)(F), the System will re-price Do
Not Route Orders (that would otherwise have to be routed to the
exchange(s) disseminating the ABBO for an opening to occur) to a price
that is one minimum trading increment inferior to the ABBO, and
disseminate the re-priced DNR Order as part of the new BBO. This
paragraph explains the treatment of DNR Orders, similar to Phlx Options
3, Section 8(k)(3)(D). The System will re-price a DNR Order when any
residual DNR Order interest, which was not satisfied in the Opening
Process, crosses the ABBO.\64\
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\64\ See proposed BX Options 3, Section 8(k)(4).
---------------------------------------------------------------------------
Proposed BX Options 3, Section 8(k)(5) provides that the System
will cancel any order or quote priced through the Opening Price. All
other interest will be eligible for trading after the opening. This
rule text is similar to Phlx Options 3, Section 8(k)(G). This rule text
makes clear that interest priced through the Opening will be cancelled.
Proposed BX Options 3, Section 8(k)(6), which is identical to Phlx
Options 3, Section 8(k)(E), provides that during the opening of the
option series, where there is an execution possible, the System will
give priority to Market Orders \65\ first, then to resting Limit
[[Page 45255]]
Orders \66\ and quotes. The allocation provisions of Options 3, Section
10 will apply. Options 3, Section 10 describes BX's Order Book
allocation. The Exchange is providing certainty to market participants
as to the priority scheme during the Opening Process. Market Orders
will be immediately executed first, because these orders have no
specified price and Limit Orders will be executed, thereafter, in
accordance with the prices specified.
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\65\ BX Options 3, Section 7(a)(5) provides that ``Market
Orders'' are orders to buy or sell at the best price available at
the time of execution. Participants can designate that their Market
Orders not executed after a pre-established period of time, as
established by the Exchange, will be cancelled back to the
Participant.
\66\ BX Options 3, Section 7(a)(3) provides that ``Limit
Orders'' are orders to buy or sell an option at a specified price or
better. A limit order is marketable when, for a limit order to buy,
at the time it is entered into the System, the order is priced at
the current inside offer or higher, or for a limit order to sell, at
the time it is entered into the System, the order is priced at the
inside bid or lower.
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Proposed BX Options 3, Section 8(k)(7),which is identical to Phlx
Options 3, Section 8(k)(F), provides that upon opening of an option
series, regardless of an execution, the System disseminates the price
and size of the Exchange's best bid and offer (BBO). This provision
simply makes known the manner in which the Exchange establishes the BBO
for purposes of reference upon opening.
Finally, proposed BX Options 3, Section 8(k)(8) provides that any
remaining contracts, which are not priced through the Exchange Opening
Price after routing a number of contracts to satisfy better priced away
contracts, will be posted to the Order Book at the better of the away
market price or the order's limit price. This includes DNR Orders that
are not crossed with the Opening Price. Only in the event that ABBO
interest, which the DNR Order would otherwise be crossing, has been
satisfied by routable interest during the Opening Process would DNR
Orders be included within the remaining contracts described in proposed
BX Options 3, Section 8(k)(8).\67\ This rule text accounts for orders
which have routed away and returned unsatisfied, and also accounts for
interest that remains unfilled during the Opening Process, provided
that interest was not priced through the Opening Price.
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\67\ DNR Orders that are not crossed with the Opening Price rest
on the Order Book at the better of the ABBO price or the DNR Order's
limit order price.
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The Exchange cancels orders, which are priced through the Opening
Price, since it lacks enough liquidity to satisfy these orders on the
opening, yet their limit price gives the appearance that they should
have been executed. The Exchange believes that market participants
would prefer to have these orders returned to them for further
assessment, rather than have these orders immediately entered onto the
Order Book at a price which is more aggressive than the price at which
the Exchange opened.
Opening Process Cancel Timer
The Exchange proposes to retain BX's Opening Order Cancel Timer,
which is currently described within Options 3, Section 8(c). The
Exchange proposes to relocate this rule text within Options 3, Section
8(l), similar to Phlx Options 3, Section 8(l), and rename it ``Opening
Process Cancel Timer.'' While the Exchange is retaining the timer, the
Exchange proposes to amend the rule text to conform the language to
Phlx's rule text. This process specifies that if an options series has
not opened before the conclusion of the Opening Process Cancel Timer, a
Participant may elect to have orders returned by providing written
notification to the Exchange. The Opening Process Cancel Timer will
continue to be posted by the Exchange on its website. Orders submitted
through FIX with a TIF of Good-Till-Canceled \68\ or ``GTC'' may not be
cancelled, as is the case today. This provision would provide for the
continued return of orders for un-opened options symbols. As is the
case today, Participants would have the ability to elect to have orders
returned, except for non-GTC orders, when options do not open. This
functionality provides Participants with choice about where, and when,
they can send orders for the opening that would afford them the best
experience.
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\68\ BX Options 3, Section 7(b)(4) provides that a ``Good Til
Cancelled'' or ``GTC'' shall mean for orders so designated, that if
after entry into System, the order is not fully executed, the order
(or unexecuted portion thereof) shall remain available for potential
display and/or execution unless cancelled by the entering party, or
until the option expires, whichever comes first. GTC Orders shall be
available for entry from the time prior to market open specified by
the Exchange on its website until market close and for potential
execution from 9:30 a.m. until market close.
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Opening Process Examples
The following examples are intended to demonstrate the Opening
Process.
Example 1. Proposed Options 3, Section 8(f) Opening with a BBO (No
Trade). Suppose the Lead Market Maker (``LMM'') in an option enters a
quote, 2.00 (100) bid and 2.10 (100) offer and a buy order to pay 2.05
for 10 contracts is present in the System. The System also observes an
ABBO is present with CBOE quoting a spread of 2.05 (100) and 2.15
(100). Given the Exchange has no interest which locks or crosses each
other and does not cross the ABBO, the option opens for trading with an
Exchange BBO of 2.05 (10) x 2.10 (100) and no trade. Since there is a
Valid Width NBBO, the System does not conduct the price discovery
mechanism and the option opens without delay.
Example 2a. Proposed Options 3, Section 8(i) Opening with Trade.
Suppose the LMM enters the same quote in an option, 2.00 (100) bid and
2.10 (100) offer. This quote defines the Pre-Market BBO. CBOE
disseminates a quote of 2.01 (100) by 2.09 (100), making up the ABBO.
Firm A enters a buy order at 2.04 for 50 contracts. Firm B enters a
sell order at 2.04 for 50 contracts. The Exchange opens with the Firm A
and Firm B orders fully trading at an Opening Price of 2.04 which
satisfies the condition defined in proposed Options 3, Section 8(i),
the Potential Opening Price is at or within the best of the Pre-Market
BBO and the ABBO, which is a Valid Width NBBO.
Example 2b. Proposed Options 3, Section 8(i) Opening with Trade.
Similarly, suppose the LMM enters the same quote in an option, 2.00
(100) bid and 2.10 (100) offer. A Market Maker enters a quote of 2.00
(100) x 2.12 (100). The Pre-Market BBO is therefore 2.00 bid and 2.10
offer. CBOE disseminates a quote of 2.05 (100) by 2.15 (100), making up
the ABBO. Firm A enters a buy order at 2.11 for 300 contracts. Firm B
enters a sell order at 2.11 for 100 contracts. The option does not open
for trading because the Potential Opening Price of 2.11 does not
satisfy the condition defined in proposed Options 3, Section 8(i) as
the Potential Opening Price is outside the Pre-Market BBO. The System
thereafter calculates the OQR and initiates the price discovery
mechanism, as discussed in proposed Options 3, Section 8(k) to
facilitate the Opening Process for the option.
Assume an allowable OQR of 0.04. When the price discovery mechanism
is initiated:
The System broadcasts the first Imbalance Message with a Potential
Opening Price of 2.10 and a sell side imbalance of 200 and 100 matched.
The System opens with a trade @2.11 with Firm A buying 100 from the
LMM and another 100 from Firm B; invoking OQR of 0.04 (the maximum
value for OQR is the lowest quote offer (2.10) plus 0.04).
Example 3. Proposed Options 3, Section 8(k) Price Discovery
Mechanism and second iteration with routing. Suppose the LMM enters a
quote, 2.00 (100) bid and 2.10 (100) offer and the defined allowable
OQR is 0.04. If CBOE disseminates a quote of 2.00 (100) by
[[Page 45256]]
2.09 (100), the away offer is better than the LMM quote. Public
Customer A enters a routable buy order at 2.10 for 150 contracts. The
price discovery mechanism initiates because the Potential Opening Price
(2.10) is equal to the Pre-Market BBO but outside of the ABBO. The
Potential Opening Price is 2.10 because there is both buy and sell
interest at that price point. The System is unable to open after the
first iteration of Imbalance since the Potential Opening Price is
within the OQR but outside of the ABBO. The System proceeds with the
price discovery mechanism and initiates a Route Timer and broadcasts a
second Imbalance Message (assume no additional interest is received
during the imbalance period). The System opens the option for trading
after the Route Timer has expired and the Imbalance Timer has completed
since the Potential Opening Price is within OQR. The System routes 100
contracts of the Public Customer order to the better priced away offer
at CBOE. The Exchange would route to CBOE at an Opening Price of 2.10
to execute against the interest at 2.09 on CBOE. The 50 options
contracts open and execute on the Exchange with an Opening Price of
2.10. The Exchange routes to CBOE using the Exchange's Opening Price to
ensure, if there is market movement, that the routed order is able to
access any price point equal to or better than the Exchange's Opening
Price.
Options 2, Section 4
The Exchange proposed to define a ``Valid Width Quote'' within
proposed Options 3, Section 8(a)(9) as ``a two-sided electronic
quotation, submitted by a Market Maker, quoted with a difference not to
exceed $5 between the bid and offer regardless of the price of the
bid.'' The Exchange proposed to state within proposed BX Options 3,
Section 8(a)(9), similar to Phlx's Rule at Options 3, Section 8(a)(ix),
that the ``The Exchange may establish differences other than the above
for one or more series or classes of options.'' The Exchange proposes
to remove the rule text from Options 2, Section 4(g) and reserve that
subparagraph. Options 2, Section 4(g) provides,
(g) Unusual Conditions--Opening Auction. If the interest of
maintaining a fair and orderly market so requires, BX Regulation may
declare that unusual market conditions exist in a particular issue and
allow LMMs in that issue to make auction bids and offers with spread
differentials of up to two times, or in exceptional circumstances, up
to three times, the legal limits permitted under this Rule. In making
such determinations to allow wider markets, BX Regulation should
consider the following factors: (A) Whether there is pending news, a
news announcement or other special events; (B) whether the underlying
security is trading outside of the bid or offer in such security then
being disseminated; (C) whether Options Participants receive no
response to orders placed to buy or sell the underlying security; and
(D) whether a vendor quote feed is clearly stale or unreliable.
(1) In the event that BX Regulation determines that unusual market
conditions exist in any option, it will be the responsibility of BX
Regulation to file a report with Exchange Operations setting forth the
relief granted for the unusual market conditions, the time and duration
of such relief and the reasons therefore.
Phlx's Rule at Options 3, Section 8(a)(ix) allows the Exchange to
establish differences, other than those noted within Options 3, Section
8(a)(ix), for one or more series or classes of options. The Exchange is
proposing to add similar discretion to proposed BX Options 3, Section
8(a)(9). The rule text of BX Options 2, Section 4(g) permits spread
differentials of up to two times, or in exceptional circumstances, up
to three times, the legal limits permitted under this Rule. This
limitation does not exist today on Phlx, Nasdaq ISE, LLC (``ISE''),
Nasdaq GEMX, LLC (``GEMX'') or Nasdaq MRX, LLC (``MRX'').\69\ Today, BX
Regulation takes into account: (A) Whether there is pending news, a
news announcement or other special events; (B) whether the underlying
security is trading outside of the bid or offer in such security then
being disseminated; (C) whether Options Participants receive no
response to orders placed to buy or sell the underlying security; and
(D) whether a vendor quote feed is clearly stale or unreliable, in
making such determinations when granting quoting discretion. The
ability to establish differences, other than the stated bid/ask
differentials, for one or more series or classes of options already
exists today for BX Lead Market Maker quoting requirements, however
this discretion in the opening is limited by BX Options 2, Section
4(g).\70\ The Exchange's proposal would align the procedure BX would
follow with procedures of other Nasdaq options exchanges, which notify
members in writing, via an Options Regulatory Alert, of any discretion
that is being granted by the Exchange. BX would no longer file a report
with BX operations. Today, no other Nasdaq exchange files a report when
it grants exemptions in the opening, including exemptions for BX Market
Makers. The Exchange notes that decisions to grant exemptions in the
opening are made based on current market conditions. BX is required to
react swiftly when market conditions change dramatically and, thereby,
may require BX to grant quoting relief in the opening. The additional
steps that are currently required on BX are not conducive to granting
relief in fast changing markets. The Exchange notes that other options
markets do not limit the quote relief they would grant their lead
market makers in the same manner as BX limits quote relief for its Lead
Market Makers. The Exchange believes that permitting BX to have the
same discretion as Phlx, ISE, GEMX and MRX will assist the Exchange in
making similar determinations to affected options series.
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\69\ ISE, GEMX and MRX Rules at Options 3, Section 8(a)(8)
provides the same discretionary language as exists on Phlx today.
\70\ See BX Options 2, Section 4(f)(5).
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Implementation
The Exchange intends to begin implementation of the proposed rule
change prior to October 30, 2020. The Exchange will issue an Options
Trader Alert to Members to provide notification of the symbols that
will migrate and the relevant dates.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\71\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\72\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest for the reasons stated below.
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\71\ 15 U.S.C. 78f(b).
\72\ 15 U.S.C. 78f(b)(5).
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The Exchange's proposal to amend BX's Opening Process is consistent
with the Act. The Exchange believes that adopting some methodologies
similar to Phlx Options 3, Section 8 will enhance BX's current Opening
Process, while retaining certain elements of its current process, such
as the Valid Width NBBO \73\ and not requiring its Lead Market Makers
to quote during the Opening Process.\74\ Also, the proposed amendments
will continue to allow BX
[[Page 45257]]
to open with an optimal price, as the proposed rule further limits the
opening price boundaries. At a high level, the proposal would permit
the price of the underlying security to settle down and not flicker
back and forth among prices after its opening. It is common for a stock
to fluctuate in price immediately upon opening; such volatility
reflects a natural uncertainty about the ultimate Opening Price, while
the buy and sell interest is matched. The proposed rule provides for a
range of no less than 100 milliseconds and no more than 5 seconds, in
order to ensure that it has the ability to adjust the period for which
the underlying security must be open on the primary market. The
Exchange may determine that in periods of high/low volatility that
allowing the underlying to be open for a longer/shorter period of time
may help to ensure more stability in the marketplace prior to
initiating the Opening Process.
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\73\ The Exchange proposes to retain the Valid Width NBBO
requirements with respect to Opening With a Trade pursuant to
proposed Options 3, Section 8(i) and (j).
\74\ Today, BX Lead Market Makers may quote during the opening,
but they are not obligated to quote. BX Lead Market Makers are
required to quote intra-day. See BX Options 2, Section 4(j).
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Definitions
The Exchange's proposal amends and alphabetizes the current
definitions within Options 3, Section 8(a). The Exchange proposes to
set forth the following terms: ``Away Best Bid or Offer'' or ``ABBO;''
``imbalance;'' ``market for the underlying security;'' ``Opening
Price;'' ``Opening Process;'' ``Potential Opening Price;'' ``Pre-Market
BBO;'' ``Valid Width National Best Bid or Offer'' or ``Valid Width
NBBO;'' ``Valid Width Quote,'' and ``Zero Bid Market.'' The amendment
of the ``Definitions'' section is consistent with the Act because the
terms will assist market participants in understanding the meaning of
terms used throughout the proposed Rule.
With respect to the amendment to the definition of the term,
``market for the underlying security,'' the Exchange's proposal would
remove the concept of a primary volume market and replace that concept
with an alternative market designated by the primary market. It is most
likely the case that the primary market is the primary volume market,
so this term offers no contingency in most cases. The primary market
has the ability to designate an alternate primary market when the
primary market is experiencing difficulties. In those situations, the
Exchange proposes to utilize the alternate primary market to open its
market. For example, in the event that the New York Stock Exchange LLC
was unable to open because of an issue with its market and it
designated NYSE Arca as its alternative market, then BX would utilize
NYSE Arca as the market for the underlying security.
Second, the Exchange proposes another alternative in the event that
the primary market does not open, and an alternate primary market is
not designated and/or is also unable to open. In this situation, the
Exchange proposes to utilize a non-primary market to open its market.
The Exchange will select the non-primary market with the most liquidity
in the aggregate for all underlying securities from the primary market
for the previous two calendar months, excluding the primary and
alternate markets. For example, in the event that the New York Stock
Exchange LLC was unable to open because of an issue with its market and
it designated NYSE Arca as its alternative market, and the alternate
primary was unable to open or NYSE was unable to designate an alternate
market because of system difficulties, then BX would determine which
non-primary market had the most liquidity in the aggregate for all
underlying securities for the previous two calendar months, excluding
the primary and alternate markets. The Exchange would utilize that
market to open all underlying securities from the primary market. In
order to open an option series it would require an equity market's
underlying quote. Utilizing a non-primary market with the most
liquidity in the aggregate for all underlying securities for the
previous two calendar months will ensure that the Exchange opens based
on the next best alternative to the primary market given the
circumstances. This contingency will provide the Exchange with the
ability to open in situations where the primary market is experiencing
an issue, and also where an alternative primary market may also be
impacted. The Exchange believes that this proposal would protect
investors and the general public by providing additional venues for BX
to utilize as part of its Opening Process and thereby allow investors
to transact on its market. The Exchange desires to open its market
despite any issues that may arise with the underlying market. The
Exchange is proposing alternate methods to open its market to account
for situations which may arise if the primary market is unable to open,
and if the proposed alternate designated market is unable to open. Once
the market opens with an underlying price, the options market may
continue to trade for the remainder of the trading day. The Exchange
believes it benefits investors and the general public to have the
options market available to enter new positions, or close open
positions. This term is identical to Phlx's Options 3, Section
8(a)(ii).
Eligible Interest
The first part of the proposed BX Opening Process determines what
constitutes eligible interest. The Exchange's proposal seeks to make
clear what type of eligible opening interest is included. Valid Width
Quotes, Opening Sweeps, and orders are included. The Exchange further
notes that Market Makers may submit quotes, Opening Sweeps and orders,
but quotes other than Valid Width Quotes will not be included in the
Opening Process. The Exchange believes that defining what qualifies as
eligible interest is consistent with the Act because market
participants will be provided with certainty, when submitting interest,
as to which type of interest will be considered in the Opening Process.
Unlike the regular session where orders route if they cannot
execute on BX, the Opening Process is a price discovery process which
considers interest, both on BX and away markets, to determine the
optimal bid and offer with which to open the market. The Opening
Process seeks the price point at which the most number of contracts may
be executed while protecting away market interest.
The Exchange's proposal to define an ``Opening Sweep'' within BX
Options 3, Section 7(b)(9), similar to Phlx Options 3, Section 7(b)(i),
will also align the BX and Phlx rules. Specifically, the Exchange
proposes to remove the current order type described as ``On the Open
Order'' and instead adopt an ``Opening Sweep'' order type, similar to
Phlx at Options 3, Section 7(b)(6). The adoption of an Opening Sweep is
consistent with the Act because the order type will permit Market
Makers to continue to submit orders during the Opening Process for
execution against eligible interest in the System. Other market
participants may continue to also submit orders with a TIF of ``OPG''
for the Opening Process. As is the case today, only a Market Maker may
enter an Opening Sweep into SQF for execution against eligible interest
in the System during the Opening Process. Therefore, all Participants
will continue to be able to enter orders into the Opening Process. The
order types are very similar; both order types are cancelled upon the
open if not executed. A difference is that the Opening Sweep is not
subject to any risk protections listed within Options 3, Section 15,
except for Automated Quotation Adjustments.\75\
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\75\ Automated Quotation Adjustments are described within BX
Options 3, Section 15(c)(2).
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BX also proposes to replace its current ``TIF'' of ``On the Open
Order'' or
[[Page 45258]]
``OPG'' to an ``Opening Only'' or ``OPG'' TIF, which can only be
executed in the Opening Process pursuant to Options 3, Section 8.\76\
This TIF is similar to Phlx, in that, any portion of the order that is
not executed during the Opening Process is cancelled. This order type
is not subject to any protections listed in Options 3, Section 15.\77\
The Exchange believes that the adoption of the Opening Sweep and OPG
Order is consistent with the Act in that Participants will be able to
continue to submit orders to be entered into the Opening Process. The
two orders types will conform Phlx's order types, which are relevant to
the Opening Process, with those of BX. These order types would continue
to not be not valid outside of the Opening Process; they may not be
submitted in the regular trading session.
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\76\ See current BX Options 3, Section 7(a)(9).
\77\ Phlx Options 3, Section 7(c)(3) provides that an OPG Order
is not subject to any protections listed in Options 3, Section 15,
except for Automated Quotation Adjustments. Today, OPG Orders on
Phlx are not subject to any protections, including Automated
Quotation Adjustments protections. Phlx intends to file a rule
change to remove the rule text which provides, ``except for
Automated Quotation Adjustments,'' as OPG Orders are subject to that
risk protection. BX will not include the exception in the proposed
rule text. OPG Orders are handled in the same manner by the Phlx
System today and the BX System, as proposed.
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With respect to an Opening Sweep, the Exchange further provides the
manner in which Opening Sweeps may be entered into the System. The
Exchange proposes rule text within Options 3, Section 8(b)(1)(B), which
is similar to Phlx Options 3, Section 8(b)(i)(B). An Opening Sweep may
be entered at any price with a minimum price variation applicable to
the affected series, on either side of the market, at single or
multiple price level(s), and may be cancelled and re-entered. A single
Market Maker may enter multiple Opening Sweeps, with each Opening Sweep
at a different price level. If a Market Maker submits multiple Opening
Sweeps, the System will consider only the most recent Opening Sweep at
each price level submitted by such Market Maker. Unexecuted Opening
Sweeps will be cancelled once the affected series is open.\78\ The
Exchange believes that the addition of Opening Sweeps will also provide
certainty to market participants as to the manner in which the System
will handle such interest.
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\78\ See proposed BX Options 3, Section 8(b)(1)(B). See also
proposed BX Options 3, Section 7(a)(9).
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With respect to trade allocation, the proposal notes at proposed BX
Options 3, Section 8(b)(2) that the System will allocate pursuant to BX
Options 3, Section 10, as is the case today. This rule text is similar
to Phlx Options 3, Section 8(b)(ii).\79\ The allocation methodology is
not being amended with this proposal.
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\79\ Current BX Options 3, Section 8(b)(5) states, ``If the BX
Opening Cross price is selected and fewer than all contracts of
Eligible Interest that are available in BX Options would be
executed, all Eligible Interest shall be executed at the BX Opening
Cross price in accordance with the execution algorithm assigned to
the associated underlying option.'' The Exchange would continue to
allocate pursuant to the Exchange's allocation methodology within
Options 3, Section 10. Further, in accordance with current BX
Options 3, Section 8(b)(6), all eligible interest will be executed
at the Opening Price and displayed on OPRA.
---------------------------------------------------------------------------
The Exchange believes that this allocation is consistent with the
Act because it mirrors the current allocation process on BX in other
trading sessions.
The Exchange proposes at BX Options 3, Section 8(d) the specific
times that eligible interest may be submitted into BX's System. The
Exchange's proposed time for entering Market Maker Valid Width Quotes
and Opening Sweeps (9:25 a.m.) eligible to participate in the Opening
Process, are consistent with the Act because the times are intended to
tie the option Opening Process to quoting in certain underlying
securities; \80\ it presumes that option quotes submitted before any
indicative quotes have been disseminated for the underlying security
may not be reliable or intentional. The Exchange believes the time
represents a reasonable timeframe at which to begin utilizing option
quotes, based on the Exchange's experience when underlying quotes start
becoming available. The proposed language adds specificity to the rule
regarding the submission of orders.
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\80\ For purposes of this rule, the underlying security can also
be an index.
---------------------------------------------------------------------------
The Exchange's proposal at BX Options 3, Section 8(d)(1) describes
when the Opening Process can begin with specific time-related triggers.
The proposed rule, which provides that the Opening Process for an
option series will be conducted on or after 9:30 a.m., when the System
has received an opening trade or quote on the market for the underlying
security in the case of equity options or in the case of index options
is consistent with the Act. This requirement is intended to tie the
option Opening Process to receipt of liquidity. If the System has not
received an opening trade or quote on the market for the underlying
security, the Exchange will not initiate the Opening Process or
continue an ongoing Opening Process. The Exchange's proposal to amend
its Opening Process is consistent with the Act because the new rule
continues to seek the best price. Phlx Rules at Options 3, Section
8(d)(iii) and (iv) describe quoting requirements for Lead Market Makers
once an underlying security in the assigned option series has opened
for trading. Today, BX, unlike Phlx, does not require its Lead Market
Makers to submit Valid Width Quotes. BX is not proposing to adopt the
same quoting requirements during the Opening Process that exist on
Phlx. Therefore, the Phlx requirement for Lead Market Makers would not
be applicable to BX. Further, proposed BX Options 3, Section 8(d)(3)
makes clear that the Opening Process will stop and an option series
will not open if the ABBO becomes crossed. Therefore, the Exchange does
not note within proposed Options 3, Section 8(d)(1) that the ABBO may
not be crossed. While, BX is not adopting Phlx's requirement to quote
in the Opening Process, protections exist within proposed Options 3,
Section 8(d)(4). A Valid Width NBBO must be present for BX to Open with
a Trade pursuant to this proposal.
The Exchange's proposed rule considers the underlying security,
including indexes, which must be open on the primary market for a
certain time period for all options to be determined by the Exchange
for the Opening Process to commence. The Exchange proposes a time
period be no less than 100 milliseconds and no more than 5 seconds to
permit the price of the underlying security to settle down and not
flicker back and forth among prices after its opening. Since it is
common for a stock to fluctuate in price immediately upon opening, the
Exchange accounts for such volatility in its process. The volatility
reflects a natural uncertainty about the ultimate Opening Price, while
the buy and sell interest is matched. The Exchange's proposed range is
consistent with the Act, because it ensures that it has the ability to
adjust the period for which the underlying security must be open on the
primary market. The Exchange may determine that in periods of high/low
volatility that allowing the underlying to be open for a longer/shorter
period of time may help to ensure more stability in the marketplace
prior to initiating the Opening Process.
Similar to Phlx Options 3, Section 8(d)(v), BX Options 3, Section
8(d)(3) provides that the Opening Process will stop and an option
series will not open if the ABBO becomes crossed. Once this condition
no longer exists, the Opening Process in the affected option series
will start again pursuant to paragraphs (f)-(k) of Options 3, Section
8. All eligible opening interest will continue to be considered during
the Opening Process when the process is re-started. Not opening if the
ABBO becomes crossed is
[[Page 45259]]
consistent with the Act and the protection of investors and the public
interest because a crossed ABBO is indicative of uncertainty in the
marketplace with respect to where the option series should be valued.
Waiting for the ABBO to become uncrossed before initiating the Opening
Process ensures that there is stability in the marketplace and will
assist the Exchange in determining the Opening Price. Unlike Phlx
Options 3, Section 8(d)(v),\81\ BX will not consider if a Valid Width
Quote(s) is no longer present. Unlike Phlx, BX does not require its
Lead Market Makers to quote in the Opening Process. This requirement is
not necessary for BX as BX's market would open with a BBO, pursuant to
Options 3, Section 8(f), unless the ABBO becomes crossed.
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\81\ Phlx Options 3, Section 8(d)(v) provides, ``The Opening
Process will stop and an option series will not open if the ABBO
becomes crossed or when a Valid Width Quote(s) pursuant to paragraph
(d)(i) is no longer present. Once each of these conditions no longer
exist, the Opening Process in the affected option series will start
again pursuant to paragraphs (f)-(k) below.''
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The Exchange's proposal to add rule text, within proposed Options
3, Section 8(d)(4), to make clear that the Exchange would not open with
a trade, pursuant to paragraph (i)(2), if a Valid Width NBBO is not
present is consistent with the Act. Once this condition no longer
exists, the Opening Process in the affected options series will start
again pursuant to paragraphs (j) and (k) below. Today, BX would not
open with a trade unless there is a Valid Width NBBO present. This
would remain the case with this proposal. The Exchange believes that
the addition of this text provides market participants with an
expectation of the circumstances under which the Exchange would open an
option series, as well as price protection afforded to interest
attempting to participate in the Opening Process on BX.
Reopening After a Trading Halt
In order to provide certainty to market participants in the event
of a trading halt, the Exchange provides in its proposal information
regarding the manner in which a trading halt would impact the Opening
Process. Proposed BX Options 3, Section 8(e) provides if there is a
trading halt or pause in the underlying security, the Opening Process
will start again, irrespective of the specific times listed in
paragraph (d). The Exchange's proposal to restart, in the event of a
trading halt, is consistent with the Act and promotes just and
equitable principles of trade because the proposed rule ensures that
there is stability in the marketplace in order to assist the Exchange
in determining the Opening Price. Current BX Options 3, Section 8(b)
similarly provides that an Opening Cross shall occur when trading
resumes after a trading halt. The Exchange is not amending this
provision, rather the text is being presented similar to Phlx's Options
3, Section 8.
Opening With a BBO
The Exchange's proposed rule accounts for a situation where there
are no opening quotes or orders that lock or cross each other and no
routable orders locking or crossing the ABBO. In this situation, the
System will open with an opening quote by disseminating the Exchange's
best bid and offer among quotes and orders (``BBO'') that exist in the
System at that time, if any of the conditions are met (1) a Valid Width
NBBO is present; (2) a certain number of other options exchanges (as
determined by the Exchange) have disseminated a firm quote on OPRA; or
(3) a certain period of time (as determined by the Exchange) has
elapsed. These three conditions are similar to BX's current rule text
within Options 3, Section 8(b). The Exchange desires to maintain these
three potential conditions which it believes are valid sources of
liquidity to determine an Opening Price.
Further Opening Processes and Price Discovery Mechanism
The proposed rule promotes just and equitable principles of trade
because, in arriving at the Potential Opening Price, the rule considers
the maximum number of contracts that can be executed, which results in
a price that is logical and reasonable in light of away markets and
other interest present in the System. As noted herein, the Exchange's
Opening Price is bounded by the OQR without trading through the limit
price(s) of interest within OQR, which is unable to fully execute at
the Opening Price, in order to provide Participants with assurance that
their orders will not be traded through. Although the Exchange applies
other boundaries such as the BBO, the OQR provides a range of prices
that may be able to satisfy additional contracts while still ensuring a
reasonable Opening Price. The Exchange seeks to execute as much volume
as is possible at the Opening Price. When choosing between multiple
Opening Prices when some contracts would remain unexecuted, using the
lowest bid or highest offer of the largest sized side of the market
promotes just and equitable principles of trade because it uses size as
a tie breaker.
The System will calculate an OQR for a particular option series
that will be utilized in the price discovery mechanism if the Exchange
has not opened, pursuant to the provisions in Options 3, Section 8(d)-
(i). OQR would broaden the range of prices at which the Exchange may
open to allow additional interest to be eligible for consideration in
the Opening Process. OQR is intended to limit the Opening Price to a
reasonable, middle ground price, and thus reduce the potential for
erroneous trades during the Opening Process. Although the Exchange
applies other boundaries such as the BBO, the OQR provides a range of
prices that may be able to satisfy additional contracts while still
ensuring a reasonable Opening Price. More specifically, the Exchange's
Opening Price is bounded by the OQR without trading through the limit
price(s) of interest within OQR, which is unable to fully execute at
the Opening Price in order to provide participants with assurance that
their orders will not be traded through. The Exchange seeks to execute
as much volume as is possible at the Opening Price.
The Exchange's method for determining the Potential Opening Price
and Opening Price is consistent with the Act because the proposed
process seeks to discover a reasonable price and considers both
interest present in BX's System as well as away market interest. The
Exchange's method seeks to validate the Opening Price and avoid opening
at aberrant prices. The rule provides for opening with a trade, which
is consistent with the Act, because it enables an immediate opening to
occur within a certain boundary without need for the price discovery
process. The boundary provides protections while still ensuring a
reasonable Opening Price.
The proposed rule considers more than one Potential Opening Price,
which is consistent with the Act, because it forces the Potential
Opening Price to fall within the OQR boundary, thereby providing price
protection. Specifically, the mid-point calculation balances the price
among interest participating in the Opening, when there is more than
one price at which the maximum number of contracts could execute.
Limiting the mid-point calculation to the OQR, when a price would
otherwise fall outside of the OQR, ensures the final mid-point price
will be within the protective OQR boundary. If there is more than one
Potential Opening Price possible, where no contracts would be left
unexecuted and any price used for the mid-point calculation is an away
market price,
[[Page 45260]]
when contracts will be routed, the System will use the away market
price as the Potential Opening Price.
The Exchange's proposal to route all interest, pursuant to Options
3, Section 10(a)(1), is consistent with the Act. The Exchange believes
that it routing all routable interest will provide all market
participants the opportunity to have their interest executed on away
markets.
The price discovery mechanism reflects what is generally known as
an imbalance process and is intended to attract liquidity to improve
the price at which an option series will open as well as to maximize
the number of contracts that can be executed on the opening. This
process will only occur if the Exchange has not been able to otherwise
open an option series utilizing the other processes available in
proposed BX Options 3, Section 8. The Exchange believes the process
presented in the price discovery mechanism is consistent with just and
equitable principles of trade because the process applies a proposed,
wider boundary to identify the Opening Price and seeks additional
liquidity. The price discovery mechanism also promotes just and
equitable principles of trade by taking into account whether all
interest can be fully executed, which helps investors by including as
much interest as possible in the Opening Process. The Exchange believes
that conducting the price discovery process in these situations
protects opening orders from receiving a random price that does not
reflect the totality of what is happening in the markets on the opening
and also further protects opening interest from receiving a potentially
erroneous execution price on the opening. Opening immediately has the
benefit of speed and certainty, but that benefit must be weighed
against the quality of the execution price and whether orders were left
unexecuted. The Exchange believes that the proposed rule strikes an
appropriate balance. Today, BX would start imbalance messages even
without a Valid Width NBBO. With the proposed amendments, BX would not
start the imbalance process unless a Valid Width NBBO was present.
It is consistent with the Act to not consider away market
liquidity, i.e. away market volume, until the price discovery mechanism
occurs because this proposed process provides for a swift, yet
conservative opening. The Exchange is bounded by the Pre-Market BBO
when determining an Opening Price. The away market prices would be
considered, albeit not immediately. It is consistent with the Act to
consider interest on the Exchange prior to routing to an away market,
because the Exchange is utilizing the interest currently present on its
market to determine a quality Opening Price.\82\ The Exchange will
attempt to match interest in the System, which is within the OQR, and
not leave interest unsatisfied that was otherwise at that price. The
Exchange will not trade-through the away market interest in satisfying
this interest at the Exchange. The proposal attempts to maximize the
number of contracts that can trade, and is intended to find the most
reasonable and suitable price, relying on the maximization to reflect
the best price.
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\82\ Opening with a quote, pursuant to proposed Options 3,
Section 8(f), would not require consideration of away market quotes
because BX would have opened with a local quote that was not locked
or crossed with the away market, provided there are no opening
quotes or orders that lock or cross each other, and no routable
orders locking or crossing the ABBO. With respect to Opening with a
Trade, pursuant to Options 3, Section 8(i), the Exchange would not
consider away market interest if it could open immediately with a
trade, provided that the Exchange would never trade-through an away
market. If BX is locked and crossed with an away market, then the
Exchange would require additional price discovery, pursuant to
paragraphs (j) and (k).
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With respect to the manner in which the Exchange disseminates an
Imbalance Message, as proposed within BX Options 3, Section 8(k)(A),
the Imbalance Message is intended to attract additional liquidity, much
like an auction, using an auction message and timer. The Imbalance
Timer is consistent with the Act because it would provide a reasonable
time for participants to respond to the Imbalance Message before any
opening interest is routed to away markets and, thereby, maximize
trading on the Exchange. The Imbalance Timer would be for the same
number of seconds for all options traded on the Exchange. This process
will repeat, up to four iterations, until the options series opens. The
Exchange believes that this process is consistent with the Act because
the Exchange is seeking to identify a price on the Exchange without
routing away, yet which price may not trade through another market and
the quality of which is addressed by applying the OQR boundary.
Proposed Options 3, Section 8(k)(3)(C)(i) provides if the total
number of better priced away contracts, plus the number of contracts
available at the Exchange Opening Price, plus the contracts available
at away markets at the Exchange Opening Price, would satisfy the number
of marketable contracts the Exchange has on either the buy or sell
side, the System will contemporaneously route a number of contracts
that will satisfy interest at away markets at prices better than the
Exchange Opening Price (pricing any contracts routed to away markets at
the better of the Exchange Opening Price or the order's limit price),
trade available contracts on the Exchange at the Exchange Opening
Price, and route a number of contracts that will satisfy interest at
other markets at prices equal to the Exchange Opening Price. This
provision is consistent with the Act because it considers routing to
away markets potentially both at a better price than the Exchange
Opening Price, as well as at the Exchange Opening Price, to access as
much liquidity as possible to maximize the number of contracts able to
be traded as part of the Opening Process. The Exchange routes at the
better of the Exchange's Opening Price or the order's limit price to
first ensure the order's limit price is not violated. Routing away at
the Exchange's Opening Price is intended to achieve the best possible
price available at the time the order is received by the away market.
Proposed BX Options 3, Section 8(k)(3)(E), entitled ``Forced
Opening,'' provides for the situation where, as a last resort, the
Exchange may open an options series when the processes described above
have not resulted in an opening of the options series. Under a Forced
Opening, the System will open the series executing as many contracts as
possible by routing to away markets at prices better than the Exchange
Opening Price for their disseminated size, trading available contracts
on the Exchange at the Exchange Opening Price, bounded by OQR (without
trading through the limit price(s) of interest within OQR, which is
unable to be fully executed at the Opening Price). The System will also
route interest to away markets at prices equal to the Exchange Opening
Price at their disseminated size. In this situation, the System will
price any contracts routed to away markets at the better of the
Exchange Opening Price or the order's limit price. Any unexecuted
interest from the imbalance not traded or routed will be cancelled back
to the entering participant, if they remain unexecuted and priced
through the Opening Price, otherwise orders will remain in the Order
Book. The Exchange believes that this process is consistent with the
Act because after attempting to open by soliciting interest on BX and
considering other away market interest and considering interest
responding to Imbalance Messages, the Exchange could not otherwise
locate a fair and reasonable price with which to open options series.
The Exchange's proposal to memorialize the manner in which
[[Page 45261]]
proposed rule will cancel and prioritize interest provides certainty to
market participants as to the priority scheme during the Opening
Process.\83\ The Exchange's proposal to execute Market Orders first and
then Limit Orders is consistent with the Act because these orders have
no specified price and Limit Orders will be executed, thereafter, in
accordance with the prices specified due to the nature of these order
types. This is consistent with the manner in which these orders execute
after the opening today.
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\83\ See proposed BX Options 3, Section 8(j) and (k)(6)(B).
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Proposed BX Options 3, Section 8(k)(7), which provides upon opening
of the option series, regardless of an execution, the System
dissemination of the price and size of the Exchange's BBO, is
consistent with the Act because it clarifies the manner in which the
Exchange establishes the BBO for purposes of reference upon opening.
Proposed BX Options 3, Section 8(k)(8) accounts for remaining
contracts, which did not price through the Opening Price. These
contracts would post on the Order Book at the better of the away market
price or the order's limit price. Specifically, any remaining
contracts, which are not priced through the Exchange Opening Price
after routing a number of contracts to satisfy better priced away
contracts, will be posted to the Order Book at the better of the away
market price or the order's limit price. This includes DNR Orders that
are not crossed with the Opening Price. Only in the event that ABBO
interest, which the DNR Order would otherwise be crossing, has been
satisfied by routable interest during the Opening Process would DNR
Orders be included within the remaining contracts described in proposed
BX Options 3, Section 8(k)(8).\84\ This rule text accounts for orders
which have routed away and returned unsatisfied, and also accounts for
interest that remains unfilled during the Opening Process, provided
that interest was not priced through the Opening Price. The Exchange
believes that the proposed text in Options 3, Section 8(k)(8) is
consistent with the Act in that the Exchange is accounting for the
handling of all interest in the Opening Process with this rule text.
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\84\ DNR Orders that are not crossed with the Opening Price rest
on the Order Book at the better of the ABBO price or the DNR Order's
limit order price.
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Opening Process Cancel Timer
The Exchange's proposal to retain its renamed ``Opening Process
Cancel Timer'' within proposed BX Options 3, Section 8(l), with rule
text modifications to conform the rule text similar to Phlx Options 3,
Section 8(l), is consistent with the Act. The cancel timer will
continue to provide Participants with the ability to elect to have
orders returned, except for non-GTC orders. This functionality provides
Participants with choice, when symbols do not open, about where, and
when, they can send orders for the opening that would afford them the
best experience.
Options 2, Section 4
The Exchange's proposal to remove the rule text from Options 2,
Section 4(g) and permit BX to establish differences, other than noted
within proposed BX Options 3, Section 8(a)(9), for one or more series
or classes of options, similar to other Nasdaq affiliated
exchanges,\85\ is consistent with the Act. Today, BX Regulation takes
into account: (A) Whether there is pending news, a news announcement or
other special events; (B) whether the underlying security is trading
outside of the bid or offer in such security then being disseminated;
(C) whether Options Participants receive no response to orders placed
to buy or sell the underlying security; and (D) whether a vendor quote
feed is clearly stale or unreliable, in making such determinations
regarding quoting discretion. The Exchange believes that permitting BX
to have the same discretion as Phlx, ISE, GEMX and MRX will assist the
Exchange in making similar determinations to affected options series.
The Exchange's proposal to amend Options 2, Section 4(g) and instead
permit the Exchange to grant discretion based on proposed BX Options 3,
Section 8(a)(9) is consistent with the Act because such discretion
would permit the Exchange the ability to attract liquidity from Market
Makers, while also maintaining a fair and orderly market. Market Makers
accept a certain amount of risk when quoting on the Exchange. The
Exchange imposes quoting and other obligations on Market Makers.\86\
These risks, which Market Makers accept each trading day are calculated
risks. The Exchange considers certain factors, which are likely
unforeseen, in determining whether to grant relief, either in
individual options classes or for all option classes based upon
specific criteria. The Exchange believes that it is necessary to grant
quote relief in certain circumstances where a Market Maker may not have
enough information to maintain fair and orderly markets.
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\85\ ISE, GEMX and MRX Rules at Options 3, Section 8(a)(8), and
Phlx Rules at Options 3, Section 8(a)(ix), provide the same
discretionary language.
\86\ See BX Options 2, Sections 4 and 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
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Definitions
The Exchange's proposal to amend and alphabetize the current
definitions within Options 3, Section 8(a) does not impose a burden on
competition. The definitions will assist market participants in
understanding the meaning of terms used throughout the proposed Rule.
Amending the definition of ``market for the underlying security''
within Options 3, Section 8(a)(ii) does not impose a burden on
competition. The Exchange's proposal offers alternative paths to open
BX in the event that the primary market or even a designated alternate
primary market experiences an issue. The Exchange's proposal is
intended to create additional certainty in the event that an issue with
the primary market arises. With this proposal, the Exchange would have
other equity markets to look to with respect to underlying prices on
which to open BX. This proposal also does not impact the ability of
other options markets to open.
Eligible Interest
Defining what qualifies as eligible interest does not impose a
burden on competition because Participants will be provided with
certainty, when submitting interest, as to which type of interest will
be considered in the Opening Process. Unlike the regular session, where
orders route if they cannot execute on BX, the Opening Process is a
price discovery process which considers interest, both on BX and away
markets, to determine the optimal bid and offer with which to open the
market. The Opening Process seeks the price point at which the most
number of contracts may be executed while protecting away market
interest.
The Exchange's proposal to define an ``Opening Sweep'' within BX
Options 3, Section 7(a)(9), similar to Phlx Options 3, Section 7(b)(i),
does not impose a burden on competition. Removing the current order
type described as ``On the Open Order'' and instead adopting an
``Opening Sweep'' order type, similar to Phx at Options 3, Section
7(b)(6), will permit Market Makers to continue to submit orders during
the Opening Process for execution against eligible
[[Page 45262]]
interest in the System. Other market participants will continue to also
submit orders that enter with a TIF of ``OPG'' for the Opening Process.
Likewise, replacing the current ``TIF'' of ``On the Open Order'' or
``OPG'' to an ``Opening Only'' or ``OPG'' TIF, which can only be
executed in the Opening Process, pursuant to Options 3, Section 8, and
is similar to Phlx Options 3, Section 7(b)(6), does not burden
competition. This TIF is similar to Phlx, in that, any portion of the
order that is not executed during the Opening Process is cancelled.
This order type is not subject to any protections listed in Options 3,
Section 15.\87\ Participants will be able to continue to submit orders
to be entered into the Opening Process. The two orders types will
conform to Phlx's order types, which are relevant to the Opening
Process, with those of BX. These order types would continue to not be
valid outside of an Opening Process; they may not be submitted in the
regular trading session.
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\87\ Phlx Options 3, Section 7(c)(3) provides that an OPG Order
is not subject to any protections listed in Options 3, Section 15,
except for Automated Quotation Adjustments. Today, OPG Orders on
Phlx are not subject to any protections, including Automated
Quotation Adjustments protections. Phlx intends to file a rule
change to remove the rule text which provides, ``except for
Automated Quotation Adjustments,'' as OPG Orders are subject to that
risk protection. BX will not include the exception in the proposed
rule text. OPG Orders are handled in the same manner by the Phlx
System today and the BX System, as proposed.
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With respect to trade allocation, the proposal notes at proposed BX
Options 3, Section 8(b)(2) that the System will allocate pursuant to BX
Options 3, Section 10. The Exchange believes that this allocation does
not impose a burden on competition because it mirrors the current
allocation process on BX in other trading sessions.
Permitting the Opening Process for an option series to be conducted
on or after 9:30 a.m., when the System has received an opening trade or
quote on the market for the underlying security in the case of equity
options or in the case of index options \88\ does not impose a burden
on competition because this requirement will tie the option Opening
Process to receipt of liquidity. The Exchange's proposed rule considers
the liquidity present on its market before initiating other processes
to obtain additional pricing information. Today, BX, unlike Phlx, does
not require its Lead Market Makers to submit Valid Width Quotes. BX is
not proposing to adopt the same quoting requirements during the Opening
Process that exist on Phlx.
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\88\ See proposed BX Options 3, Section 8(d)(1).
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Similar to Phlx Options 3, Section 8(d)(v), proposed BX Options 3,
Section 8(d)(3) provides that the Opening Process will stop and an
option series will not open if the ABBO becomes crossed. This proposal
does not impose a burden on competition. Once this condition no longer
exists, the Opening Process in the affected option series will start
again pursuant to paragraphs (f)-(k) below. Unlike Phlx Options 3,
Section 8(d)(v),\89\ BX will not consider if a Valid Width Quote(s) is
no longer present. Unlike Phlx, BX does not require its Lead Market
Makers to quote in the Opening Process. This requirement is not
necessary for BX as BX's market would open with a BBO, pursuant to
Options 3, Section 8(f), unless the ABBO becomes crossed.
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\89\ Phlx Options 3, Section 8(d)(v) provides, ``The Opening
Process will stop and an option series will not open if the ABBO
becomes crossed or when a Valid Width Quote(s) pursuant to paragraph
(d)(i) is no longer present. Once each of these conditions no longer
exist, the Opening Process in the affected option series will start
again pursuant to paragraphs (f)-(k) below.''
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The Exchange's proposal to add rule text within proposed Options 3,
Section 8(d)(4) to make clear that the Exchange would not open with a
trade, pursuant to paragraph (i)(2), if a Valid Width NBBO does not
impose an undue burden on competition. Today, BX would not open with a
trade unless there is a Valid Width NBBO present. This would remain the
case with this proposal. The addition of this rule text provides market
participants with an expectation of the circumstances under which the
Exchange would open an option series.
Reopening After a Trading Halt
Proposed BX Options 3, Section 8(e) provides if there is a trading
halt or pause in the underlying security, the Opening Process will
start again irrespective of the specific times listed in paragraph (d).
The Exchange's proposal to restart in the event of a trading halt does
not impose a burden on competition because the proposed rule ensures
that there is stability in the marketplace in order to assist the
Exchange in determining the Opening Price.
Opening With a BBO
The Exchange's proposal to validate the Opening Price against away
markets or by attracting additional interest to address the specific
condition does not impose a burden on competition. It should avoid
opening executions in very wide or unusual markets where an opening
execution price cannot be validated.
Further Opening Processes and Price Discovery Mechanism
The proposed rule continues to consider the maximum number of
contracts that can be executed, which results in a price that is
logical and reasonable in light of away markets and other interest
present in the System. The Exchange's method seeks to validate the
Opening Price and avoid opening at aberrant prices does not impose a
burden on competition. The Opening Price would be applied to all
eligible interest.
Options 2, Section 4
The Exchange's proposal to remove the rule text from Options 2,
Section 4(g) and permit BX to establish differences as noted within
proposed Options 3, Section 8(a)(9), for one or more series or classes
of options, similar to other Nasdaq Affiliated Exchanges,\90\ does not
create a burden on competition.
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\90\ ISE, GEMX and MRX Rules at Options 3, Section 8(a)(8)
provides the same discretionary language as exists on Phlx today.
---------------------------------------------------------------------------
Finally, the proposed amendments do not create a burden on inter-
market competition because other options markets have the same intra-
day requirements.
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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:
[[Page 45263]]
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-2020-016 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-2020-016. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BX-2020-016 and should be submitted on
or before August 17, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\91\
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\91\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-16165 Filed 7-24-20; 8:45 am]
BILLING CODE 8011-01-P