[Federal Register Volume 85, Number 154 (Monday, August 10, 2020)]
[Notices]
[Pages 48274-48295]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17355]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89476; File No. SR-BX-2020-017]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Various BX
Rules in Connection With a Technology Migration
August 4, 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 23, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``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 1, Section 1 (Definitions);
Options 2, Section 4 (Obligations of Market Makers and Lead Market
Makers); Options 2, Section 5 (Market Maker Quotations); Options 3,
Section 5 (Entry and Display of Orders); Options 3, Section 7 (Types of
Orders and Quote Protocols); Options 3, Section 10 (Order Book
Allocation); Options 3, Section 13 (Price Improvement Auction
(``PRISM'')); Options 3, Section 22 (Limitations on Order Entry); and
Options 3, Section 23 (Data Feeds and Trade Information). The Exchange
also proposes to adopt a new Options 3, Section 12 titled ``Crossing
Orders.''
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Options 1, Section 1 (Definitions);
Options 2, Section 4 (Obligations of Market Makers and Lead Market
Makers); Options 2, Section 5 (Market Maker Quotations); Options 3,
Section 5 (Entry and Display of Orders); Options 3, Section 7 (Types of
Orders and Quote Protocols); Options 3, Section 10 (Order Book
Allocation); Options 3, Section 13 (Price Improvement Auction
(``PRISM'')); Options 3, Section 22 (Limitations on Order Entry); and
Options 3, Section 23 (Data Feeds and Trade Information) and adopt a
new Options 3, Section 12 titled ``Crossing Orders'' in connection with
a technology migration to an enhanced Nasdaq, Inc. (``Nasdaq'')
functionality which results in higher performance, scalability, and
more robust architecture. With this system migration, the Exchange
intends to adopt certain trading functionality currently utilized at
Nasdaq Exchanges.
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 Participants to provide notification of the symbols
that will migrate, the relevant dates and operative dates for specific
functionalities.
Options 1, Section 1
The Exchange proposes to amend the definition of ``Public
Customer'' to conform to Nasdaq PHLX LLC's (``Phlx'') definition at
Options 1, Section 1(b)(46). The Exchange believes that making clear
that a Public Customer could be a person or entity and stating that a
Public Customer is not a Professional, as defined within Options 1,
Section 1(a)(48),\3\ will make clear what it meant by that term. Today,
a Public Customer is not a Professional. The term ``Professional'' is
separately defined, within BX Options 1, Section 1(a)(48). In order to
properly represent orders entered on the Exchange, Participants are
required to indicate whether orders are ``Professional Orders.'' To
comply with this requirement, Participants are required to review their
Public Customers' activity on at least a quarterly basis to determine
whether orders, that are not for the account of a broker-dealer, should
be represented as Public Customer Orders or Professional Orders.\4\ A
Public
[[Page 48275]]
Customer may be a Professional, provided they meet the requirements
specified within BX Options 1, Section 1(a)(48). If the Professional
definition is not met, the order is treated as a Public Customer order.
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\3\ BX Options 1, Section 1(a)(48) provides that, ``The term
``Professional'' means any person or entity that (i) is not a broker
or dealer in securities, and (ii) places more than 390 orders in
listed options per day on average during a calendar month for its
own beneficial account(s). A Participant or a Public Customer may,
without limitation, be a Professional. All Professional orders shall
be appropriately marked by Participants.''
\4\ Participants conduct a quarterly review and make any
appropriate changes to the way in which they are representing orders
within five days after the end of each calendar quarter. While
Participants only will be required to review their accounts on a
quarterly basis, if during a quarter the Exchange identifies a
customer for which orders are being represented as Public Customer
Orders but that has averaged more than 390 orders per day during a
month, the Exchange will notify the Participant and the Participant
will be required to change the manner in which it is representing
the customer's orders within five days.
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The Exchange also proposes to remove a sentence within Options 1,
Section 1(a)(48) which provides, ``A Participant or a Public Customers
may, without limitation, be a Professional.'' This sentence is
confusing, unnecessary, and adds no information to this defined term.
Phlx Options 1, Section 1(b)(46) does not contain a similar sentence.
BX proposes removing this sentence.
The Exchange also proposes to remove sentences, within Options 3,
Sections 10(a)(1)(C)(1)(a) and 10(a)(2)(i), Options 3, Section 13, in
the introductory paragraph, and Options 3, Sections 13(ii)(E)(1) and
(F)(1), which allocation and PRISM rules, respectively, provide that a
Public Customer does not include a Professional. Today, the definition
of a Public Customer does not explicitly exclude a Professional. The
language that the Exchange proposes to delete currently indicates that
Professionals would not be treated the same as a Public Customer in
terms of priority and, therefore, would not receive the same allocation
that is reserved for Public Customer orders. Since BX is amending the
definition of a Public Customer to explicitly exclude Professionals,
the language in the PRISM and allocation rules are no longer necessary
to distinguish these two types of market participants.
Bid/Ask Differentials
Currently, BX Market Maker intra-day quoting requirements, within
Options 2, Section 5(d)(2), provide,
Bid/ask Differentials (Quote Spread Parameters). Options on
equities (including Exchange-Traded Fund Shares), and on index
options must be quoted with a difference not to exceed $5 between
the bid and offer regardless of the price of the bid, including
before and during the opening. 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 spread between
the national best bid and offer in the underlying security. The
Exchange may establish differences other than the above for one or
more series or classes of options.
The Exchange proposes to amend BX Options 2, Section 5(d)(2) to add the
words ``Intra-Day'' before the title ``Bid/ask Differentials (Quote
Spread Parameters)'' to make clear that these requirements are intra-
day. Additionally the Exchange is deleting the words ``including before
and during the opening.'' The bid/ask differentials, within BX Options
2, Section 5(d)(2), will apply intra-day only. The bid/ask
differentials applicable to the opening are noted within current
Options 3, Section 8(a)(6).\5\ It is not necessary to discuss the
opening bid/ask differentials within Options 2, Section 5, as those
differentials are set forth within current Options 3, Section
8(a)(6).\6\ The bid/ask differentials, within BX Options 2, Section
5(d)(2), will apply intra-day only.
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\5\ Current BX Options 3, Section 8(a)(6) provides, ``Valid
Width National Best Bid or Offer'' or ``Valid Width NBBO'' shall
mean the combination of all away market quotes and any combination
of BX Options-registered Market Maker orders and quotes received
over the SQF Protocols within a specified bid/ask differential as
established and published by the Exchange. The Valid Width NBBO will
be configurable by underlying, and tables with valid width
differentials will be posted by BX on its website. Away markets that
are crossed will void all Valid Width NBBO calculations. If any
Market Maker orders or quotes on BX Options are crossed internally,
then all such orders and quotes will be excluded from the Valid
Width NBBO calculation.''
\6\ Id.
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The Exchange also proposes to amend BX Rules at Options 2, Section
4(f)(4)-(6) (Obligations of Market Makers and Lead Market Makers),
which specify quoting requirements for Lead Market Makers. Today, BX's
Rules at Options 2, Section 4(f)(4)-(6) provides,
(4) Options traded on the Trading System may be quoted with a
difference not to exceed $5 between the bid and offer regardless of
the price of the bid.
(5) BX Regulation may establish quote width differences other
than as provided in subparagraph (iv) for one or more options
series.
(6) In the event the bid/ask differential in the underlying
security is greater than the bid/ask differential set forth in
subsections (f)(4) and (5), the permissible price differential for
any in-the-money option series may be identical to those in the
underlying security market. In the case of the at-the-money and out-
of-the-money series, BX Regulation may waive the requirements of
subsections (f)(4) and (5) on a case-by-case basis when the bid/ask
differential for the underlying security is greater than .50. In
such instances, the bid/ask differentials for the at-the-money
series and the out-of-the-money series may be half as wide as the
bid/ask differential in the underlying security in the primary
market. Exemptions from subsections (f)(4) and (5) are subject to
Exchange review. BX Regulation must file a report with BX operations
setting forth the time and duration of such exemptive relief and the
reasons therefore.
Today, Options 2, Section 4(f)(5) indicates that Exchange may establish
other quote differences. Options 2, Section 4(f)(6) explains the manner
in which such quote differences may be established by the Exchange. BX
proposes to amend BX's Lead Market Maker quoting requirements by
conforming the rule to proposed BX Options 2, Section 5(d)(2), which
applies to BX Market Makers. Specifically, the Exchange proposes to
replace Options 2, Section 4(f)(4)-(6) with the same rule text
proposed, within BX Options 2, Section 5(d)(2), in order that BX Market
Makers and Lead Market Makers have the same standards apply to their
intra-day quotes.
With this change, BX would continue to require Lead Market Makers
to quote with a difference not to exceed $5 between the bid and offer
regardless of the price of the bid. However, instead of requiring Lead
Market Makers to quote a price differential for any in-the-money option
series identical to those in the underlying security market, in the
event the bid/ask differential in the underlying security is greater
than the bid/ask differential set forth in subsections (f)(4) and (5),
the Exchange would now permit the bid/ask differential to be as wide as
the spread between the national best bid and offer in the underlying
security when the market for the underlying security is wider than $5,
as is the case today for BX Market Makers. This amendment would permit
Lead Market Makers to quote as wide as Market Makers on BX quote
today.\7\ Further, the Exchange would have discretion, as on other
options markets, to widen the bid/ask differential.\8\
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\7\ Phlx Options 2, Section 4(c)(1) describes bid/ask
differential requirements for Market Makers and Lead Market Makers
on Phlx. Phlx's standards are similar to the standards proposed for
BX Lead Market Makers. Phlx Options 2, Section 4(c)(1) provides,
``Options on equities (including Exchange-Traded Fund Shares), index
options and options on U.S. dollar-settled FCOs may be quoted
electronically with a difference not to exceed $5 between the bid
and offer regardless of the price of the bid, provided that the
foregoing bid/ask differentials 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 spread between the national best
bid and offer in the underlying security, 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.''
\8\ Today, all options exchanges grant relief to market making
participants, based on current market conditions, to enable those
participants to provide liquidity in the marketplace without the
need to constantly refresh their quotes to balance their risk in
markets where stock prices are unstable. See https://www.miaxoptions.com/alerts; http://markets.cboe.com/us/options/notices/system/; https://boxoptions.com/system-alerts/ and https://www.nyse.com/market-status/history.
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[[Page 48276]]
As proposed, the Exchange would remove the rule text which
describes the additional allowance for at-the-money and out-of-the-
money series, where BX Regulation may waive the requirements of
subsections (f)(4) and (5) on a case-by-case basis when the bid/ask
differential for the underlying security is greater than .50. In these
cases, pursuant to paragraph (f)(6), the bid/ask differentials for the
at-the-money series and the out-of-the-money series may be half as wide
as the bid/ask differential in the underlying security in the primary
market. Today, exemptions from subsections (f)(4) and (5) are subject
to Exchange review.\9\ The additional allowance and exemptions are no
longer necessary because the Exchange proposes to add rule text,
similar to BX Options 2, Section 4(f)(5) and BX Options 5, Section
5(d)(2), which permits BX to establish differences other than the
stated bid/ask differentials, for one or more series or classes of
options. 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 is limited by BX Options 2, Section
4(f)(6).\10\ 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, including exemptions for BX Market Makers.
Decisions to grant exemptions 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. The additional steps that are currently required on BX are not
conducive to granting relief in fast changing markets. In addition, the
proposed quoting requirements for BX Lead Market Makers and Market
Makers is consistent with requirements on other Nasdaq Affiliated
Markets that have both Lead Market Makers and Market Makers.\11\ 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. Today, BX limits its Lead Market Makers to quote
relief which may not be greater than half as wide as the bid/ask
differential.\12\
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\9\ BX Regulation must file a report with BX operations setting
forth the time and duration of such exemptive relief and the reasons
therefore.
\10\ See BX Options 2, Section 4(f)(5).
\11\ See Phlx at Options 2, Section 4(c) and ISE, GEMX and MRX
Rules at Options 2, Section 4(b)(4). ISE, GEMX and MRX utilize the
term Primary Market Maker instead of Lead Market Maker.
\12\ See ISE and GEMX at Options 2, Section 5, Miami
International Securities Exchange LLC Rule 503(e)(2), BOX Exchange
LLC Rule 8040 and NYSE American LLC Rule 925NY(b)(5) and (c).
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Options 3, Section 5
The Exchange proposes to amend Options 3, Section 5(c) to add
additional rule text similar to Phlx Options 3, Section 5(c). BX's
current Options 3, Section 5(c) states, ``The System automatically
executes eligible orders using the Exchange's displayed best bid an
offer (``BBO'').'' The Exchange proposes to state, ``The System
automatically executes eligible orders using the Exchange's displayed
best bid and offer (``BBO'') or the Exchange's non-displayed order book
(``internal BBO'') if the best bid and/or offer on the Exchange has
been repriced pursuant to subsection (d) below.'' Today, BX re-prices
certain orders to avoid locking and crossing away markets, consistent
with its Trade-Through Compliance and Locked or Crossed Markets
obligations.\13\ Orders which lock or cross an away market will
automatically re-price one minimum price improvement inferior to the
original away best bid/offer price to one minimum trading increment
away from the new away best bid/offer price or its original limit
price.\14\ The re-priced order is displayed on OPRA. The order remains
on BX's Order Book and is accessible at the non-displayed price. For
example, a limit order may be accessed on BX by a Participant if the
limit order is priced better than the NBBO. The Exchange believes that
the addition of this rule text will allow BX to define an ``internal
BBO'' within its rules when describing re-priced orders that remain on
the Order Book and are available at non-displayed prices, which are
resting on the Order Book.
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\13\ BX Options 3, Section 5(d) provides, ``An order will not be
executed at a price that trades through another market or displayed
at a price that would lock or cross another market. An order that is
designated by the member as routable will be routed in compliance
with applicable Trade-Through and Locked and Crossed Markets
restrictions. An order that is designated by a member as non-
routable will be re-priced in order to comply with applicable Trade-
Through and Locked and Crossed Markets restrictions. If, at the time
of entry, an order that the entering party has elected not to make
eligible for routing would cause a locked or crossed market
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the national best
price.''
\14\ See Options 5, Section 4 (Order Routing), which describes
the repricing of orders for both routable and non-routable orders
within Options 5, Section 4(a)(iii)(A), (B) and (C).
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Options 3, Section 7
The Exchange proposes to amend the Cancel-Replacement Order, within
Options 3, Section 7(a)(1). By way of background with respect to
cancelling and replacing an order, a Participant has the option of
either submitting a cancel order and then separately submitting a new
order, which serves as a replacement of the original order, in two
separate messages, or submitting a single cancel and replace order in
one message (``Cancel-Replacement Order''). Submitting a cancel order
and then separately submitting a new order will not retain the priority
of the original order.
Currently, the rule text for Cancel-Replacement Order provides,
``Cancel-Replacement Order shall mean a single message for the
immediate cancellation of a previously received order and the
replacement of that order with a new order with new terms and
conditions. If the previously placed order is already filled partially
or in its entirety, the replacement order is automatically canceled or
reduced by the number of contracts that were executed. The replacement
order will not retain the priority of the cancelled order except when
the replacement order reduces the size of the order and all other terms
and conditions are retained.'' The Exchange proposes to replace the
words ``shall mean'' with ``is'' and remove the final sentence of the
rule text.\15\ The Exchange proposes to add a new sentence to the end
of the rule which provides, ``The replacement order will retain the
priority of the cancelled order, if the order posts to the Order Book,
provided the price is not amended, and the size is not increased.''
Unlike the sentence proposed for deletion, the proposed sentence states
in the affirmative the conditions under which the Cancel-Replacement
Order will retain priority. Price and size are the terms that will
determine if the Cancel-Replacement Order retains its priority, as is
the case today, other terms and conditions do not amend the priority of
the Cancel-Replacement Order.
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\15\ The final sentence of current BX Options 3, Section 7(a)(1)
provides, ``The replacement order will not retain the priority of
the cancelled order except when the replacement order reduces the
size of the order and all other terms and conditions are retained.''
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The Exchange is not amending the current System functionality of a
[[Page 48277]]
Cancel-Replacement Order with respect to the terms that will cause the
order to lose priority. Both today, and with the proposed change, if a
Participant did not change the size of the order, it would not trigger
a loss in priority. Today the Exchange's rule describes changes to
priority with respect to reducing size. The proposed rule describes
changes to priority with respect to increasing size. If the Participant
does not change the size of the order, a consideration of loss in
priority is not relevant. The rule is intended to provide transparency
regarding changes to an a Cancel-Replacement Order which would trigger
a loss in priority. Today, and with the proposal, the price of the
order may not be changed when submitting a Cancel-Replacement Order;
that would be a new order.
The Exchange further proposes to provide, ``If the replacement
portion of a Cancel-Replacement Order does not satisfy the System's
price or other reasonability checks (e.g. Limit Order Price Protection
and Market Order Spread Protection, within Options 3, Section 15(a)(1)
and (a)(2), respectively); the existing order shall be cancelled and
not replaced.'' The Limit Order Price Protection and Market Order
Spread Protection are the only risk protections within Options 3,
Section 15 (Risk Protections) that are applicable. Price or other
reasonability checks consider the current market at the time the
Cancel-Replacement Order is entered. The Exchange proposes to begin
applying price or other reasonability checks to all Cancel-Replacement
Orders, similar to Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC
(``GEMX'') and Nasdaq MRX, LLC (``MRX'') to provide market participants
with additional risk protection checks with the re-entry of the Cancel-
Replacement Order. This proposed rule is similar to ISE, GEMX and MRX
Rules at Options 3, Section 7 at Supplementary Material .02, except
that ISE, GEMX and MRX discuss Reserve Orders, which are not available
on BX.\16\ All risk protections are noted within Options 3, Section 15.
Those risk protections apply throughout the Rulebook, except where
otherwise noted.
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\16\ ISE, GEMX and MRX Options 3, Section 7 at Supplementary
Material .02, provides, ``Cancel and Replace Orders shall mean a
single message for the immediate cancellation of a previously
received order and the replacement of that order with a new order.
If the previously placed order is already filled partially or in its
entirety, the replacement order is automatically canceled or reduced
by the number of contracts that were executed. The replacement order
will retain the priority of the cancelled order, if the order posts
to the Order Book, provided the price is not amended, size is not
increased, or in the case of Reserve Orders, size is not changed. If
the replacement portion of a Cancel and Replace Order does not
satisfy the System's price or other reasonability checks (e.g.
Options 3, Section 15(b)(1)(A) and (b)(1)(B); and Supplementary
Material .07 (a)(1)(A), (b) and (c)(1) to Options 8, Section 14) the
existing order shall be cancelled and not replaced.''
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The Exchange proposes to amend ``Directed Order,'' within Options
3, Section 7(a)(2). The Exchange proposes to remove the text,
``Directed Order, The term'' and replace ``means'' with ``is.'' These
amendments are technical and non-substantive. The Exchange is otherwise
not amending the Directed Order rule text.
The Exchange proposes to amend ``Limit Order,'' within Options 3,
Section 7(a)(3). The Exchange proposes to style ``Limit Orders'' in the
singular and change ``are'' to ``is an'' and ``orders'' to ``order.'' A
Limit Order on BX operates in the same manner as a Limit Order on ISE,
GEMX and MRX. The Exchange proposes to conform the rule text of BX's
Limit Order to ISE, GEMX and MRX Options 3, Section 7(b) and add the
sentence describing marketable limit orders. The Exchange proposes to
state, ``A marketable limit order is a limit order to buy (sell) at or
above (below) the best offer (bid) on the Exchange.'' The Exchange
believes that the rule amendment more aptly describes a marketable
limit order as compared to the current rule text, which is confusing,
but was intended to convey the substance of the proposed text. The new
sentence does not substantively amend the current rule text.
The Exchange proposes to amend ``Minimum Quantity Orders,'' within
Options 3, Section 7(a)(4). The Exchange proposes to style ``Minimum
Quantity Orders'' in the singular and change ``are'' to ``is an'' and
``orders'' to ``order.'' These amendments are technical and non-
substantive. The Exchange is otherwise not amending the Minimum
Quantity Order rule text.
The Exchange proposes to amend ``Market Orders,'' within Options 3,
Section 7(a)(5). The Exchange proposes to style ``Market Orders'' in
the singular and change ``are'' to ``is an'' and ``orders'' to
``order.'' These amendments are technical and non-substantive. The
Exchange also proposes to add a notation at the end of the rule to make
clear that ``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, once an option
series has opened for trading.'' Market Orders submitted during the
opening may be executed, routed (depending on instructions from the
market participant) or cancelled if the Market Order is priced through
the opening price. The Exchange would only cancel those Market Orders
that remained on the Order Book once an option series opened. The pre-
established period of time would commence once the intra-day trading
session begins for that options series and the order would be cancelled
back to the Participant, provided the Participant elected to cancel
back its Market Orders. The Exchange proposes to make clear that while
the opening is on-going, and the intra-day trading session has not
commenced, the pre-established period of time would not commence.
Further, the Exchange proposes to note that ``Market Orders on the
Order Book would be immediately cancelled if an options series halted,
provided the Participant designated the cancellation of Market
Orders.'' Once an options series halts for trading, the Exchange
conducts another Opening Process. In the case where a Market Order was
resting on the Order Book, and the Participant had designated the
cancellation of Market Orders, in the event of a halt, the Market
Orders resting on the Order Book would immediately cancel. The Exchange
believes that this additional rule text brings greater clarity to the
Market Order type.\17\
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\17\ See The Nasdaq Options Market (``NOM'') Rules at Options 3,
Section 7(a)(4), which provides, ``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.''
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The Exchange proposes to amend ``Intermarket Sweep Order'' or
``ISO,'' within Options 3, Section 7(a)(6). Today, the rule text
provides,
(6) ``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.
(1) Simultaneously with the routing of an ISO to the System, one
or more additional limit orders, as necessary, are routed by the
entering party to execute against the full displayed size of any
protected bid or offer (as defined in Options 5, Section 1) in the
case of a limit order to sell or buy with a price that is superior
to the limit price of the limit order identified as an intermarket
[[Page 48278]]
sweep order (as defined in Options 5, Section 1). These additional
routed orders must be identified as ISOs.
The Exchange proposes to replace the current rule, within Options 3,
Section 7(a)(6), with the following text to describe an ISO Order, ``is
a Limit Order that meets the requirements of Options 5, Section 1(8).
Orders submitted to the Exchange as ISO are not routable and will
ignore the ABBO and trade at allowable prices on the Exchange. ISOs may
be entered on the Order Book or into the PRISM Mechanism pursuant to
Options 3, Section 13(ii)(K). ISOs must have a time-in-force
designation of Immediate-or-Cancel. ISO Orders may not be submitted
during the opening.'' This rule text is identical to Phlx Options 3,
Section 7(b)(3), except that BX Rules provide that an ISO must have a
time-in-force designation of Immediate-or-Cancel, as proposed.
The Phlx rules do not have this restriction on ISO Orders.\18\ An
ISO Order is a Limit Order, as noted in the current text and Options 5,
Section 1 continues to be referenced in the proposed text. The Exchange
continues to note that the orders are not routable. The additional
text, ``. . . will ignore the ABBO and trade at allowable prices on the
Exchange'' is more precise than the current rule text and describes
current functionality. The Exchange further proposes to state, ``ISOs
maybe entered on the Order Book or into the PRISM Mechanism pursuant to
Options 3, Section 13(ii)(K).'' That is also the case today. The
remainder of the current rule text is not necessary as Options 5,
Section 1 is cited. Removing the current rule text and replacing it
with rule text similar to Phlx, is not proposed to change the
functionality of an ISO Order. The proposed text merely describes the
ISO Order similar to Phlx. The Exchange believes the proposed
description provides a more succinct description.
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\18\ Phlx Options 3, Section 7(b)(3) provides, ``Intermarket
Sweep Order. An Intermarket Sweep Order (ISO) is a Limit Order that
meets the requirements of Options 5, Section 1. Orders submitted to
the Exchange as ISO are not routable and will ignore the ABBO and
trade at allowable prices on the Exchange. ISOs may be entered on
the regular order book or into PIXL pursuant to Options 3, Section
13 (b)(11). ISO Orders may not be submitted during the Opening
Process pursuant to Options 3, Section 8.''
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The Exchange does propose to amend the current functionality of an
ISO Order to require that ISOs have a time-in-force designation of
Immediate-or-Cancel (``IOC'') within Options 3, Section 7(b)(2). Today,
the rule provides that ISOs may have any time-in-force designation,
except WAIT, and further requires that ISOs with a time-in-force
designation of GTC are treated as having a time-in-force designation of
Day.\19\ With this proposal, the Exchange would only continue to allow
a time-in-force of IOC. The Exchange proposes to remove the WAIT time-
in-force within this proposed rule change and, therefore, WAIT no
longer needs to be cited. The Exchange is proposing a TIF designation
of IOC for an ISO Order, which would cause an ISO Order to cancel in
whole or in part upon receipt, in the event that the ISO Order does not
execute or does not entirely execute, because an ISO is generally used
when trying to sweep a price level across multiple exchanges in an
effort to post the balance of an order without locking an away market.
ISO Orders have a limited purpose and should be cancelled if they do
not execute or do not entirely execute.
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\19\ Today, BX's System does not treat an ISO with a time-in-
force designation of GTC as having a time-in-force designation of
Day, as provided for within BX's current rule at Options 3, Section
7(a)(6). The Exchange's proposed amendment would prevent ISOs from
having any designation, other than IOC.
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The Exchange proposes to no longer offer the ``One-Cancels-the-
Other Order.'' The Exchange will no longer permit this order type with
the technology migration. This order type is not in demand on BX. The
Exchange would file a rule change with the Commission if it decides to
offer this order type in the future.
The Exchange proposes to amend the ``All-or-None Order,'' within
Options 3, Section 7(a)(8). The Exchange proposes to renumber this rule
text as Options 3, Section 7(a)(7) The Exchange proposes to replace
``shall mean'' with ``is'' and change ``opening cross'' to simply
``opening.'' These proposed amendments are technical and non-
substantive.
The Exchange proposes to add a ``PRISM Order'' to the list of order
types at proposed Options 3, Section 7(a)(10). The Exchange proposes to
define this existing order type by cross-referencing Options 3, Section
13, which explains the order type.
The Exchange proposes to add a ``Customer Cross Order'' to the list
of order types at proposed Options 3, Section 7(a)(11). The Exchange
proposes to define this existing order type by cross-referencing
Options 3, Section 12(a), which explains the order type.
The Exchange proposes to amend Options 3, Section 7(b) to define
``Time in Force'' as ``TIF''.
The Exchange proposes to amend an ``Immediate-Or-Cancel'' Order or
``IOC,'' within Options 3, Section 7(b)(2) to add hyphens and make
``Or'' lowercase. The Exchange proposes to remove the current
description which provides that an IOC Order, ``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.'' The Exchange proposes to replace
this description with rule text similar to Phlx Options 3, Section
7(c)(2) as these order types are identical. The Exchange proposes to
state that an Immediate-or-Cancel Order or ``IOC'' Order is a Market
Order or Limit Order to be executed in whole or in part upon receipt.
Any portion not so executed is cancelled. Further, with respect to IOC
Orders,
(A) Orders entered with a TIF of IOC are not eligible for
routing.
(B) IOC orders may be entered through FIX or SQF, provided that
an IOC Order entered by a Market Maker through SQF is not subject to
the Limit Order Price Protection or the Market Order Spread
Protection in Options 3, Section 15(a)(1) and (a)(2), respectively;
(C) Orders entered into the Price Improvement Auction
(``PRISM'') Mechanism are considered to have a TIF of IOC. By their
terms, these orders will be: (1) Executed after an exposure period,
or (2) cancelled.
Options 5, Section 4(a) provides, that IOC Orders will be cancelled
immediately if not executed, and will not be routed. The Exchange is
proposing to memorialize this information within the description of an
IOC Order. The Exchange also proposes to note that IOC Orders may be
entered through FIX or SQF.\20\ The Exchange
[[Page 48279]]
also proposes to note that an IOC Order entered by a Market Maker
through SQF is not subject to the Limit Order Price Protection or the
Market Order Spread Protection in Options 3, Section 15(a)(1) and
(a)(2), respectively. The Order Price Protection and Market Order
Spread Protection, while available for orders, are not available on
SQF. These exceptions are provided for within this proposed rule to
ensure that this information is available to market participants within
the description of IOC.
---------------------------------------------------------------------------
\20\ BX Options 3, Section 7(d)(1)(A) notes that orders may be
entered through FIX and Options 3, Section 7(d)(1)(B) specifies that
``Immediate-or-Cancel Orders may be entered through SQF.
``Financial Information eXchange'' or ``FIX'' is described in
Options 3, Section 7(d)(1)(A) as an interface that allows
Participants and their Sponsored Customers to connect, send, and
receive messages related to orders and auction orders and responses
to and from the Exchange. Features include the following: (1)
Execution messages; (2) order messages; and (3) risk protection
triggers and cancel notifications.
``Specialized Quote Feed'' or ``SQF'' is described in Options
3, Section 7(d)(1)(B) as 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.
---------------------------------------------------------------------------
The Exchange proposes to add rule text to the SQF protocol, within
proposed Options 3, Section 7(e)(1)(B), which provides, ``Immediate-or-
Cancel Orders entered into SQF are not subject to the Limit Order Price
Protection or the Market Order Spread Protection in Options 3, Section
15(a)(1) and (a)(2), respectively.'' Adding this exception to the SQF
protocol as well as the TIF of ``IOC'' will make clear that these order
protections shall not apply to IOC Orders entered through SQF.
Also, the proposed rule would also specify that orders entered into
the PRISM Mechanism are considered to have a TIF of IOC. By their
terms, these orders will be: (1) Executed after an exposure period, or
(2) cancelled.\21\ The Exchange believes that adding these new details
to the manner in which IOC Orders are handled within the System will
bring greater transparency to these order types.
---------------------------------------------------------------------------
\21\ The TIF of IOC is applied to all PRISM Orders today.
---------------------------------------------------------------------------
The Exchange proposes to amend the TIF of ``DAY'' at Options 5,
Section 7(b)(3) to remove the words ``shall mean for orders'' and add
``is an order'' to conform the rule text to other text in this rule.
The Exchange also proposes to conform the description of a TIF of
``DAY'' similar to Phlx Options 3, Section 7(c)(1).\22\ The Exchange
believes that the remainder of the description for a Day Order, ``if
after entry into the System, the order is not fully executed, the order
(or unexecuted portion thereof) shall remain available for potential
display and/or execution until market close, unless canceled by the
entering party, after which it shall be returned to the entering party.
Day 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,'' is
unnecessarily verbose and proposes to remove this rule text. The
Exchange proposes to state, ``Day'' is an order entered with a TIF of
``Day'' that expires at the end of the day on which it was entered, if
not executed. All orders by their terms are Day Orders unless otherwise
specified. Day Orders may be entered through FIX. A Day Order on Phlx
functions in the same way as a Day Order on BX. The Phlx rule text is
more succinct in describing this order type.
---------------------------------------------------------------------------
\22\ Phlx Options 3, Section 7(c)(1) provides, ``Day. If not
executed, an order entered with a TIF of ``Day'' expires at the end
of the day on which it was entered. All orders by their terms are
Day Orders unless otherwise specified. Day orders may be entered
through FIX.''
---------------------------------------------------------------------------
The Exchange proposes to amend the TIF of ``Good Til Cancelled'' or
``GTC'' at Options 5, Section 7(b)(4). The Exchange proposes to remove
the words ``shall mean for orders'' and add ``is an order.'' The
Exchange also proposes to conform the rule text similar to Phlx Options
3, Section 7(c)(4),\23\ and provide that a ``Good Til Cancelled'' or
``GTC'' is ``an order entered with a TIF of ``GTC'' that, if not fully
executed, will 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 until market
close.'' The Exchange would remove the rule text which provides, ``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.'' A GTC Order on Phlx functions in
the same way as a GTC Order on BX. The Exchange is not proposing to
amend the functionality of a GTC Order, rather the Exchange believes
the proposed description is more succinct.
---------------------------------------------------------------------------
\23\ Phlx Options 3, Section 7(c)(4) provides, ``A Good Til
Cancelled (``GTC'') Order entered with a TIF of GTC, if not fully
executed, will 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 until market close.''
---------------------------------------------------------------------------
The Exchange proposes to no longer offer a TIF of ``WAIT.'' The
Exchange would remove the rule text at BX Options 3, Section 7(b)(5).
If the Exchange desires to offer this TIF in the future, it would file
a proposed rule change with the Commission pursuant to Section 19(b)(1)
of the Act.\24\
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
The Exchange proposes to note, within BX Options 3, Section 7(c),
the various routing options which are available. The Exchange proposes
to add rule text which provides, ``Routing Strategies. Orders may be
entered on the Exchange with a routing strategy of FIND, SRCH or Do-
Not-Route (``DNR'') as provided in Options 5, Section 4 through FIX
only.'' These routing strategies are consistent with a recent rule
change filed to amend routing strategies.\25\
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\25\ The Exchange separately filing to amend the routing
strategies and adopt ``FIND''. See SR-BX-2020-7P.
---------------------------------------------------------------------------
Finally, the Exchange proposes to re-letter current Options 3,
Section 7(c) and (d).
Options 3, Section 10
The Exchange proposes to amend its Order Book allocation rule,
within Options 3, Section 10, to amend the manner in which rounding
occurs.
Today, BX rounds up or down to the nearest integer when it
allocates and any residual contract after rounding, if rounding would
result in an allocation of less than one contract, would be allocated
to the Lead Market Maker. The Exchange is amending the rounding
methodology to round up to the nearest integer. Options 3, Section 10
is being amended to reflect the new methodology. Each exchange has a
different rounding methodology.\26\ The Exchange is opting to round up
and not down, uniformly for all Participants, and disclose that
rounding methodology directly within Options 3, Section 10, so that all
Participants are aware of the rounding methodology that would be
utilized by the System. Today, rounding is down, as specified in the
Exchange's Rules. In addition, if the result of an allocation is not a
whole number, it will now be rounded up to the nearest whole number
instead of down. Finally, with respect to rounding, because it is
rounding up, the provisions which describe allocations for remainders
of
[[Page 48280]]
less than one contract cannot occur and therefore this rule text is
being removed, as such remainders would not be mathematically possible.
The Exchange believes that rounding up uniformly is consistent with the
Act because it provides for the equitable allocation of contracts among
the Exchange's market participants. The Exchange proposes to provide
market participants with transparency as to the number of contracts
that they are entitled to receive as the result of rounding. Further,
the Exchange believes that this methodology produces an equitable
outcome during allocation that is consistent with the protection of
investors and the public interest because all market participants are
aware of the methodology that will be utilized to calculate outcomes
for allocation purposes.
---------------------------------------------------------------------------
\26\ Phlx rounds down. See Options 3, Section 10. See also
Securities Exchange Act Release No. 85876 (May 16, 2019), 84 FR
23595 (May 22, 2019) (SR-Phlx-2019-20) (Notice of Filing of Proposed
Rule Change Relating to the Allocation and Prioritization of
Automatically Executed Trades.
---------------------------------------------------------------------------
Options 3, Sections 12 and 22
Today, the Exchange permits an Initiating Participant to enter a
PRISM Order for the account of a Public Customer paired with an order
for the account of a Public Customer and such paired orders will be
automatically executed without a PRISM Auction.\27\ The execution price
for such a PRISM Order must be expressed in the quoting increment
applicable to the affected series. Such an execution may not trade
through the NBBO or trade at the same price as any resting Public
Customer order.\28\ The Exchange proposes to remove the ability to
enter Public Customer-to-Public Customer paired orders directly into
PRISM for automatic execution and instead require them to be entered
through FIX, directly as Customer Cross Orders. Today, a Public
Customer-to-Public Customer paired order could only be entered into
PRISM to receive the treatment described within proposed Options 3,
Section 13(vi). With this proposal, the manner in which Public
Customer-to-Public Customer paired orders are being processed by the
System is changing. With this proposal, Participants may enter Public
Customer-to-Public Customer paired orders directly into FIX and receive
the same treatment that these orders receive today when entered into
PRISM. The only difference to a Participant is the manner in which the
order must now be submitted, via FIX, to post a Public Customer-to-
Public Customer Cross.
---------------------------------------------------------------------------
\27\ See Options 3, Section 13(vi).
\28\ Id.
---------------------------------------------------------------------------
The Exchange proposes to adopt the term ``Crossing Orders'' within
Options 3, Section 12, which is currently reserved, to describe this
process. Today, ISE, GEMX and MRX permit Customer Cross Orders as
proposed herein.\29\ The Exchange proposes to adopt Customer Cross
Orders, within Options 3, Section 12(a), similar to ISE, GEMX and MRX
Options 3, Section 12(a) as follows:
---------------------------------------------------------------------------
\29\ See ISE, GEMX and MRX Options 3, Section 12(a).
Public Customer-to-Public Customer Cross Orders are
automatically executed upon entry provided that the execution is at
or between the best bid and offer on the Exchange and (i) is not at
the same price as a Public Customer Order on the Exchange's limit
order book and (ii) will not trade through the NBBO. Public
Customer-to-Public Customer Cross Orders must be entered through
FIX.
(1) Public Customer-to-Public Customer Cross Orders will be
rejected if they cannot be executed.
(2) Public Customer-to-Public Customer Cross Orders may only be
entered in the regular trading increments applicable to the options
class under Options 3, Section 3.
(3) Options 3, Section 22(b)(1) applies to the entry and
execution of Customer Cross Orders.
In particular, the Exchange proposes to add a definition of a
Customer Cross Order specifying that a Customer Cross Order is
comprised of a Public Customer Order to buy and a Public Customer Order
to sell at the same price and for the same quantity. The Exchange
proposes to adopt Options 3, Section 12(a) specifying that Public
Customer-to-Public Customer Cross Orders are automatically executed
upon entry provided that the execution is at or between the best bid
and offer on the Exchange. Further, the execution would not be at the
same price as a Public Customer Order on the Exchange's limit order
book, nor trade through the NBBO. Public Customer-to-Public Customer
Cross Orders must be entered through FIX for execution pursuant to
proposed Options 3, Section 12(a). As noted below in the PRISM
discussion, a Public Customer-to-Public Customer order submitted into
PRISM directly would be subject to execution pursuant to Options 3,
Section 13(i) and (ii). The Exchange is removing the current provisions
within Options 3, Section 13(vi) with this proposed rule change. The
proposed rule also specifies that Public Customer-to-Public Customer
Cross Orders will be rejected if they cannot be executed and Public
Customer-to-Public Customer Cross Orders may only be entered in the
regular trading increments applicable to the options class under
Options 3, Section 3.
Current BX Options 3, Section 13(vi) provides,
In lieu of the procedures in paragraphs (i)-(ii) above, an
Initiating Participant may enter a PRISM Order for the account of a
Public Customer paired with an order for the account of a Public
Customer and such paired orders will be automatically executed
without a PRISM Auction, provided there is not currently another
auction in progress in the same series, in which case the orders
will be cancelled. The execution price for such a PRISM Order must
be expressed in the quoting increment applicable to the affected
series. Such an execution may not trade through the NBBO or trade at
the same price as any resting Public Customer order.
The Exchange is eliminating BX Options 3, Section 13(vi) because Public
Customer-to-Public Customer Cross Orders would no longer be entered as
PRISM Orders. With this proposal Public Customer-to-Public Customer
Cross Orders would be entered through FIX as a Customer Cross Order.
The prohibition expressed within current BX Options 3, Section 13(vi)
provided for only one PRISM Auction to be conducted at a time in any
given series. Today, to initiate the Auction, the Initiating
Participant must mark the PRISM Order for Auction processing. With this
proposal, Public Customer-to-Public Customer Cross Orders would not be
tagged as a PRISM Auction. The Public Customer-to-Public Customer Cross
Orders would be entered as a separate cross and therefore would not
potentially cause more than one PRISM Auction to occur in the same
series.
BX also proposes to add that Options 3, Section 22(a)(1),\30\ which
is similar to ISE Supplementary Material .01 to Options 3, Section 22,
applies to the execution of Customer Cross Orders. In conjunction with
this change, BX proposes to add Customer Cross Order to Options 3,
Section 22(a) and (c) as an exception to the rules for limitations on
principal transactions and solicitation orders, which require
Participants to expose trading interest to the market before executing
agency orders as principal or before executing agency
[[Page 48281]]
orders against orders that were solicited from other broker-dealers.
---------------------------------------------------------------------------
\30\ BX Options 3, Section 22(a)(1) provides, ``This Rule
prevents Options Participants from executing agency orders to
increase its economic gain from trading against the order without
first giving other trading interest on BX Options an opportunity to
either trade with the agency order or to trade at the execution
price when the Options Participant was already bidding or offering
on the book. However, the Exchange recognizes that it may be
possible for an Options Participant to establish a relationship with
a customer or other person to deny agency orders the opportunity to
interact on BX Options and to realize similar economic benefits as
it would achieve by executing agency orders as principal. It will be
a violation of this Rule for an Options Participant to be a party to
any arrangement designed to circumvent this Rule by providing an
opportunity for a customer to regularly execute against agency
orders handled by the Options Participant immediately upon their
entry into BX Options.''
---------------------------------------------------------------------------
Options 3, Section 22(a)(1) contains language similar to current BX
Options 3, Section 13(vi)(A) and, therefore, would continue to prevent
a Participant from executing agency orders to increase its economic
gain from trading against the order without first giving other trading
interests on the Exchange an opportunity to either trade with the
agency order or to trade at the execution price when the Participant
was already bidding or offering on the book. The Exchange proposes to
add a sentence to the end of current BX Options 3, Section 22(a)(1),
which currently exists within BX Options 3, Section 13(vi)(A).\31\
Specifically, the Exchange proposes to add ``Further, it would be a
violation of this Rule for an Options Participant to circumvent this
Rule by providing an opportunity for (A) a Public Customer affiliated
with the Participant, or (B) a Public Customer with whom the
Participant has an arrangement that allows the Participant to realize
similar economic benefits from the transaction as the Participant would
achieve by executing agency orders as principal, to regularly execute
against agency orders handled by the firm immediately upon their entry
as Public Customer-to-Public Customer immediate crosses.'' The addition
of this sentence to BX Options 3, Section 22(a)(1) will continue to
make clear the type of behavior that is prohibited when executing
Public Customer-to-Public Customer Cross Orders. Specifically, the
Exchange notes that Options 3, Section 22 may not be circumvented by
providing an opportunity for (A) a Public Customer affiliated with the
Participant, or (B) a Public Customer with whom the Participant has an
arrangement that allows the Participant to realize similar economic
benefits from the transaction as the Participant would achieve by
executing agency orders as principal. The Exchange would surveil Public
Customer-to-Public Customer Cross Orders in the same fashion that it
already surveils for these orders on ISE, GEMX and MRX. ISE
Supplementary Material .01 to Options 3, Section 22 on ISE, GEMX and
MRX and proposed BX Options 3, Section 22(a)(1) both prevent a
executions of agency orders to increase its economic gain from trading
against the order without first giving other trading interests on the
exchange an opportunity to either trade with the agency order or to
trade at the execution price when a market participant was already
bidding or offering on the book.
---------------------------------------------------------------------------
\31\ Current Options 3, Section 13(vi)(A) provides, ``Options 3,
Section 22 prevents a Participant from executing agency orders to
increase its economic gain from trading against the order without
first giving other trading interests on the Exchange an opportunity
to either trade with the agency order or to trade at the execution
price when the Participant was already bidding or offering on the
book. However, the Exchange recognizes that it may be possible for a
Participant to establish a relationship with a Public Customer or
other person to deny agency orders the opportunity to interact on
the Exchange and to realize similar economic benefits as it would
achieve by executing agency orders as principal. It would be a
violation of Options 3, Section 22 for a Participant to circumvent
Options 3, Section 22 by providing an opportunity for (i) a Public
Customer affiliated with the Participant, or (ii) a Public Customer
with whom the Participant has an arrangement that allows the
Participant to realize similar economic benefits from the
transaction as the Participant would achieve by executing agency
orders as principal, to regularly execute against agency orders
handled by the firm immediately upon their entry as PRISM Public
Customer-to-Public Customer immediate crosses.''
---------------------------------------------------------------------------
Options 3, Section 13
The Exchange proposes to amend Options 3, Section 13, which
describes the Price Improvement Auction or ``PRISM.''
Similar to ISE, GEMX and MRX Options 3, Section 13, the Exchange
proposes to amend its System functionality to better any limit order or
quote on the limit order book on the same side of the market as the
PRISM Order, within Options 3, Section 13(i)(A) and (B). Today, Options
3, Section 13 only considers orders. With the technology migration, the
Exchange proposes, similar to ISE, GEMX and MRX's rules at Options 3,
Section 13, to consider quotes as well. The Exchange is proposing to
add ``or quote,'' within Options 3, Sections 13(i) and (A) and (B) and
(ii)(A)(1). The addition of ``quotes,'' similar to ISE, GEMX and MRX at
Options 3, Section 13, will enable the Exchange to consider additional
interest on the Order Book at time a PRISM Auction is initiated. The
Exchange believes expanding its consideration to both quotes and orders
will consider a greater amount of interest present on BX's Order Book
when initiating a PRISM.
In various places, within Options 3, Section 13, where the Exchange
cites to the minimum increment rule at Options 3, Section 3, the
Exchange proposes to instead simply state the minimum increment
allowable directly within the rule. For example, BX proposes to amend
Options 3, Section 13(i)(A) and (B) to remove the rule text which
states, ``at one minimum price improvement increment,'' and ``at least
one minimum trading increment specified in Options 3, Section 3
(``Minimum Increment'')'' and ``the Minimum Increment,'' respectively,
and instead simply state ``$0.01'' within the rule text. This amendment
does not amend the current System operation, rather it more simply
states what that minimum increment is today. The Exchange proposes a
similar change at Options 3, Section 13(ii)(A)(1) by proposing to
remove ``one Minimum Increment'' and replace that text with ``$0.01.''
Finally, the Exchange proposes to amend Options 3, Section 13(ii)(A)(6)
to replace a reference to ``the minimum price improvement increment
established pursuant to subparagraph (i)(A) above'' with ``$0.01.''
The Exchange also proposes technical amendments to capitalized the
``if'' within Options 3, Section 13(i)(A) and add an ``If'' before
Options 3, Section 13(i)(B) to conform the rule text.
The final amendment proposed to Options 3, Section 13(ii)(A)(1) is
to amend the System functionality with respect to Surrender. Today, a
Surrender feature is available on BX, which permits the Initiating
Participant to forfeit completely its priority and trade allocation
privileges. The text related to Surrender, within Options 3, Section
13(ii)(A)(1), currently provides,
When starting an Auction, the Initiating Participant may submit
the Initiating Order with a designation of ``surrender'' to the
other PRISM Participants (``Surrender''), which will result in the
Initiating Participant forfeiting the priority and trade allocation
privileges which he is otherwise entitled to as per Section
9(ii)(E)(2)(a) and Section 9(ii)(F)(2)(a). If Surrender is specified
the Initiating Order will only trade if there is not enough interest
available to fully execute the PRISM Order at prices which are equal
to or improve upon the stop price. The Surrender function will never
result in more than the maximum allowable allocation percentage to
the Initiating Participant than that which the Initiating
Participant would have otherwise received in accordance with the
allocation procedures set forth in this Rule. Surrender will not be
applied if both the Initiating Order and PRISM Order are Public
Customer orders. Surrender information will not be available to
other market participants and may not be modified.
The Exchange proposes to amend the first sentence of the above-
referenced paragraph to describe ``Surrender.'' The Exchange proposes
to state, ``For purposes of this Rule, Surrender shall mean the target
allocation percentage the contra-side requests to be allocated from 0%
to 39%. If the Participant requests 40%, then the Participant would
receive its full priority and trade allocation provisions that it would
be entitled to pursuant to Section 13(ii)(E)(2)(a) and Section
13(ii)(F)(2)(a).'' The Exchange believes that this will make clear the
manner in which the System will handle the percentage designation. The
Exchange then proposes to amend the next sentence to provide, ``When
starting an
[[Page 48282]]
Auction, the Initiating Participant may submit the Initiating Order
with a percentage designation (a percentage from 0% up to 40% as noted
above) of ``Surrender'', which will result in the Initiating
Participant being allocated its designated percentage pursuant to
Section 13(ii)(E)(2)(a) and Section 13(ii)(F)(2)(a).'' This proposed
text would permit an Initiating Participant to submit an Initiating
Order with a percentage for ``Surrender'' up to 40%, although the
percentage may be lower. Today, the System permits a Participant to
have either a Surrender of 0% or 40%. Today, ISE, GEMX and MRX Options
3, Section 13(e)(5)(iii), related to PIM Complex Orders, has a
configurable Surrender provision.\32\ The proposed text indicates that
the percentage could be 40% or a lower percentage for priority and
allocation by stating, ``. . .which will result in the Initiating
Participant being allocated its designated percentage pursuant to
Section 13(ii)(E)(2)(a) and Section 13(ii)(F)(2)(a).'' This text
similarly proposes to amend Section 13(ii)(E)(2)(a) and Section
13(ii)(F)(2)(a) which describe Surrender percentages.
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\32\ See ISE, GEMX and MRX Options 3, Section 13(e)(5)(iii)
which provides, ``In the case where the Counter-Side Complex Order
is at the same net price as Professional interest on the Complex
Order Book in (ii) above, the Counter-Side Complex Order will be
allocated the greater of one (1) contract or forty percent (40%) (or
such lower percentage requested by the Member) of the initial size
of the Agency Complex Order before other Professional interest on
the Complex Order Book are executed. Upon entry of Counter-Side
Complex Orders, Members can elect to automatically match the price
and size of Complex Orders, Improvement Complex Orders received on
the Complex Order Book during the exposure period up to a specified
limit net price or without specifying a limit net price. This
election will also automatically match the net price available from
the ISE best bids and offers on the individual legs for the full
size of the order; provided that with notice to Members the Exchange
may determine whether to offer this option only for Complex Options
Orders, Stock-Option Orders, and/or Stock Complex Orders. If a
Member elects to auto-match, the Counter-Side Complex Order will be
allocated its full size at each price point, or at each price point
within its limit net price if a limit is specified, until a price
point is reached where the balance of the order can be fully
executed. At such price point, the Counter-Side Complex Order shall
be allocated the greater of one contract or forty percent (40%) (or
such lower percentage requested by the Member) of the original size
of the Agency Complex Order, but only after Priority Customer
Complex Orders and Improvement Complex Orders at such price point
are executed in full. Thereafter, all Professional Complex Orders
and Improvement Complex Orders at the price point will participate
in the execution of the Agency Complex Order based upon the
percentage of the total number of contracts available at the price
that is represented by the size of the Professional Complex Order or
Improvement Complex Order on the Complex Order Book.''
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By way of example, an Initiating Participant may submit an
Initiating Order with a ``Surrender'' percentage designation of up to
forty percent (40%). If a surrender percentage designation of 40% is
submitted, this would indicate no surrender.\33\ If a surrender
percentage designation between 0-39% is elected, this would indicate
the Initiating Participant has surrendered their full 40% allocation
entitlement and would retain only a lesser percentage designation that
the Participant elected (between 0% and 39%). In this instance, the
Initiating Participant will not be eligible to receive the highest
possible allocation of fifty percent (50%). The 50% allocation is
possible if only one other quote, or PAN response matches the stop
price and the Initiating Participant has not chosen to designate any
percentage designation of ``Surrender.'' A designation of Surrender
will result in the Initiating Participant forfeiting all or a portion
of their 40% enhanced allocation carve out to the other PRISM
Participants. The percentage that is being submitted represents the
percentage of allocation being requested by the contra-side party.
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\33\ Initiating Participants may submit a percentage for
Surrender into the System, prior to submitting paired orders into
PRISM. If the Initiating Participant submitted a percentage of 40%
into the System, the Participant would receive its full priority and
trade allocation provisions that it would be entitled to pursuant to
Section 13(ii)(E)(2)(a) and Section 13(ii)(F)(2)(a). Of note, if the
Initiating Participant does not select a percentage, the System will
populate the field with 40%, the default Surrender percentage.
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The Exchange proposes to amend the current rule text, within
Options 3, Section 13(ii)(A)(1), which provides, ``. . .forfeiting the
priority and trade allocation privileges which he is otherwise entitled
to as per. . .''. This rule text is being removed in favor of simply
citing directly to the allocation provisions (Section 13(ii)(E)(2)(a)
and Section 13(ii)(F)(2)(a)). Also, the current rule text, ``with a
designation of ``surrender'' to the other PRISM Participants
(``Surrender'')'' is being removed because the proposed rule text
defines ``Surrender'' as the percentage designation, which the Exchange
believes more accurately defines ``Surrender'' within the rule text.
The Exchange is revising the second sentence of Options 3, Section
13(ii)(A)(1), which currently provides, ``If Surrender is specified the
Initiating Order will only trade if there is not enough interest
available to fully execute the PRISM Order at prices which are equal to
or improve upon the stop price.'' The Exchange proposes to instead
provide, ``If zero (0%) is specified, the Initiating Order will only
trade if there is not enough interest available to fully execute the
PRISM Order at prices which are equal to or improve upon the stop
price.'' The Exchange believes that explaining if no percentage were
elected for Surrender (0%) more clearly describes the remainder of the
sentence which provides the Initiating Order will only trade if there
is not enough interest available to fully execute the PRISM Order at
prices which are equal to or improve upon the stop price, in light of
the ability to configure the Surrender percentage with this proposal.
The Exchange proposes to amend Options 3, Section 13(ii)(A)(2) to
add ``price'' as a detail which is specified today for a PRISM Auction
Notification or ``PAN.'' Current Options 3, Section 13(ii)(A)(2)
states, ``When the Exchange receives a PRISM Order for Auction
processing, a PAN detailing the side, size, and options series of the
PRISM Order will be sent over the BX Depth feed and the Exchange's
Specialized Quote Feed.'' The Exchange is amending the current
functionality of PRISM to disseminate ``price'' in addition to side,
size, and options series similar to ISE, GEMX and MRX.\34\ Adding
``price'' to the list of details will provide Participants with greater
transparency and could encourage more competition in PRISM and greater
opportunity for potential price improvement in PRISM.
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\34\ See ISE, GEMX and MRX Options 3, Section 13(c).
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The Exchange proposes to amend Options 3, Section 13(ii)(A)(7),
which currently provides, ``A PAN response size at any given price
point may not exceed the size of the PRISM Order. A PAN response with a
size greater than the size of the PRISM Order will be immediately
cancelled.'' The Exchange is amending this rule in conjunction with the
technology migration to conform the behavior of PAN responses to ISE,
GEMX and MRX System behavior.\35\ As noted above, the Exchange is
amending the System to accept oversized responses. These responses will
no longer cancel back, rather, PRISM will cap the response at the size
of the PRISM Order for purposes of allocation. Any remaining interest
from responses not filled during the PRISM Order allocation, including
any response quantity in excess of the PRISM Order quantity, will be
cancelled back to the Participant at the conclusion of the auction
timer.
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\35\ See ISE, GEMX and MRX Options 3, Section 13(c)(2).
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The Exchange proposes to amend Options 3, Section 13(ii)(A)(8) and
(9) to replace the words ``immediately cancelled'' with ``rejected.''
These technical amendments are intended to
[[Page 48283]]
conform the text of the rule where a response would be sent back as
unacceptable by the System by uniformly noting the order would be
``rejected.''
The Exchange proposes to amend Options 3, Section 13(ii)(C) \36\ to
replace ``the Minimum Increment,'' with ``$0.01'', which is the actual
increment.
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\36\ BX Options 3, Section 13(ii)(C) provides, ``If the
situations described in sub-paragraphs (B)(2) or (3) above occur,
the entire PRISM Order will be executed at: (1) In the case of the
BX BBO crossing the PRISM Order stop price, the best response
price(s) or, if the stop price is the best price in the Auction, at
the stop price, unless the best response price is equal to or better
than the price of a limit order resting on the Order Book on the
same side of the market as the PRISM Order, in which case the PRISM
Order will be executed against that response, but at a price that is
at least the Minimum Increment better than the price of such limit
order at the time of the conclusion of the Auction; or (2) in the
case of a trading halt on the Exchange in the affected series, the
stop price, in which case the PRISM Order will be executed solely
against the Initiating Order. Any unexecuted PAN responses will be
cancelled.''
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The Exchange proposes to amend Options 3, Section 13(ii)(E)(2)(a)
to amend the System allocation to the Initiating Participant after
Public Customer orders have been allocated. Today, the Exchange rule
provides,
If the Initiating Participant selected the single stop price
option of the PRISM Auction, PRISM executions will occur at prices
that improve the stop price, and then at the stop price with up to
40% of the remaining contracts after Public Customer interest is
satisfied being allocated to the Initiating Participant at the stop
price. However, if only one other quote, order or PAN response
matches the stop price, then the Initiating Participant may be
allocated up to 50% of the contracts executed at such price.
Remaining contracts shall be allocated, pursuant to Options 3,
Section 13(ii)(E)(3) through (5) below, among remaining quotes,
orders and PAN responses at the stop price. Thereafter, remaining
contracts, if any, shall be allocated to the Initiating Participant.
The allocation will account for Surrender, if applicable.
The Exchange proposes, similar to ISE, GEMX and MRX Options 3, Section
13(d)(3),\37\ to base the priority allocation of the Initiating
Participant on the initial size of the Initiating Order after Public
Customer interest is satisfied. The proposed rule text, within Options
3, Section 13(ii)(E)(2)(a), would provide, ``If the Initiating
Participant selected the single stop price option of the PRISM Auction,
PRISM executions will occur at prices that improve the stop price, and
then at the stop price with up to 40% (or such lower percentage
requested by the Initiating Participant) of the initial size of the
PRISM Order after Public Customer interest is satisfied being allocated
to the Initiating Participant at the stop price.'' The Exchange states,
``. . . or such lower percentage requested by the Initiating
Participant'' because as stated previously, the Surrender percentage
can be a percentage up to 40%. The caveat in the second sentence also
accounts for Surrender. The proposed second sentence provides,
``However, if only one other quote, order or PAN response matches the
stop price, then the Initiating Participant may be allocated up to 50%
of the contracts executed at such price, provided the Initiating
Participant had not designated a percentage designation of
``Surrender'' when initiating the Auction.'' The Exchange proposes
similar changes to Options 3, Section 13(ii)(E)(2)(b), Section
13(ii)(E)(2)(c)(ii), in two places, Section 13(ii)(F)(2)(a) and (b),
and Section 13(ii)(F)(2)(c)(ii), in two places. The proposed changes do
not impact the manner in which the Exchange allocates pursuant to
price/time, size pro-rata and auto-match. In each of these places the
Exchange is amending the rule text to remove the phrase ``contracts
remaining'' and instead providing ``initial size of the PRISM Order.''
By way of example,
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\37\ ISE, GEMX and MRX Options 3, Section 13(d)(3), provides,
``In the case where the Counter-Side Order is at the same price as
Professional Interest in (d)(2), the Counter-Side order will be
allocated the greater of one (1) contract or forty percent (40%) of
the initial size of the Agency Order before Professional Interest is
executed. Upon entry of Counter-Side orders, Members can elect to
automatically match the price and size of orders, quotes and
responses received during the exposure period up to a specified
limit price or without specifying a limit price. In this case, the
Counter-Side order will be allocated its full size at each price
point, or at each price point within its limit price if a limit is
specified, until a price point is reached where the balance of the
order can be fully executed. At such price point, the Counter-Side
order shall be allocated the greater of one contract or forty
percent (40%) of the original size of the Agency Order, but only
after Priority Customer Interest at such price point are executed in
full. Thereafter, all Professional Interest at the price point will
participate in the execution of the Agency Order based upon the
percentage of the total number of contracts available at the price
that is represented by the size of the Professional Interest. An
election to automatically match better prices cannot be cancelled or
altered during the exposure period.'' See also NYSE American Rule
971 1NY(c)(5)(B)(i)(b) (order allocation for single stop price).
The NBBO and BX BBO are both 1 x 1.50
PRISM to buy 1000 is submitted with an Initiating Order to stop the
PRISM Order at 1.20
PRISM begins. During the PRISM Auction:
Public Customer PAN arrives to sell 600 @1.20
Firm 1 PAN to sell 1000 @1.20 arrives
Firm 2 PAN to sell 1000 @1.20 arrives
Current Rule: Public Customer allocated 600 @1.20, contra-side
allocated 160 @1.20, Firm 1 and 2 each allocated 170 @1.20 (in this
case contra-side allocated 40% of 400 contracts which remained after
Public Customer allocation of 600 contracts, for a remainder of 160
contracts)
Proposed Rule: Public Customer allocated 600 @1.20 and contra-side
allocated 400 @1.20 (in this case contra-side allocated 40% of 1000
contracts (initial size of the Initiating Order) which is 400
contracts)
Additional example to illustrate ``initial size'' allocation with step
up utilizing size pro-rata allocation pursuant to Options 3, Section
13(ii)(E):
The NBBO and BX BBO are both 1 x 1.50
PRISM to buy 1000 is submitted with an Initiating Order to stop the
PRISM Order at 1.20, and the Initiating Order step up price of 1.19
PRISM begins. During the PRISM Auction:
Public Customer PAN arrives to sell 200 @1.19 and 40% allocation
elected
Firm 1 PAN to sell 1000 @1.20 arrives
Firm 2 PAN to sell 1000 @1.20 arrives
Current Rule: Public Customer allocated 200 @1.19, contra-side
allocated 200 @1.19, contra-side allocated 240 @1.20 (40% of
remaining 600), Firm 1 allocated 180 @1.20, Firm 2 allocated 180
@1.20
Proposed Rule: Public Customer allocated 200 @1.19, contra-side
allocated 200 @1.19, contra-side allocated 400 @1.20 (40% of initial
1000), Firm 1 allocated 100 @1.20, Firm 2 allocated 100 @1.20.
The Exchange proposes to amend rounding, within Options 3, Section
13(ii)(G). Today, BX PRISM rounds up or down to the nearest integer
when it allocates. The Exchange is amending the rounding methodology to
round up to the nearest integer. Options 3, Section 13(ii)(G) is being
amended to reflect the new methodology. As a result of changing the
rounding methodology, residual odd lots will no longer exist. If the
result of an allocation is not a whole number, it will now be rounded
up to the nearest whole number instead of down. Finally, with respect
to rounding, because it is rounding up, the provisions which describe
allocations for remainders of less than one contract cannot occur and,
therefore, this rule text is being removed because such remainders
would not be possible.
The Exchange proposes to amend Options 3, Section 13(ii)(H) to
remove the phrase ``then-existing.'' Current Options 3, Section
13(ii)(H) provides, ``If there are PAN responses that cross the then-
existing NBBO (provided such NBBO is not crossed), such PAN responses
will be executed, if possible, at their limit price(s).'' The Exchange
is not amending the current operation of the System, rather the
Exchange is amending its rules to more accurately state, ``If there are
PAN responses that cross the NBBO at the time of execution (provided
such NBBO is not crossed), such PAN responses will be executed, if
possible, at their limit price(s).'' The
[[Page 48284]]
current text appeared to state that the System was utilizing the NBBO
upon entry to check if the PAN responses crossed the NBBO, however, the
System utilizes the NBBO at the time of execution to check if the PAN
responses cross the NBBO. The Exchange believes this revised text
better expresses the manner in which the current System operates. This
change does not amend the current System operation.
The Exchange proposes to amend Options 3, Section 13(ii)(I), which
currently provides:
If the price of the PRISM Auction is the same as that of an
order on the limit order book on the same side of the market as the
PRISM Order, the PRISM Order may only be executed at a price that is
at least one minimum trading increment better than the resting
order's limit price or, if such resting order's limit price is equal
to or crosses the stop price, then the entire PRISM Order will trade
at the stop price with all better priced interest being considered
for execution at the stop price.
The Exchange proposes to add some context to the rule to better reflect
the current System operation. First, the Exchange purposes to add the
word ``execution'' in the first sentence of Options 3, Section
13(ii)(I). The execution price of the PRISM Auction is utilized to
compare to the price of an order on the limit Order Book. The Exchange
utilizes the execution price today on BX. Adding the word ``execution''
makes clear to Participants that the initial PRISM Order stop price is
not utilized to compare the same side of the market transactions. If
the potential execution price of the PRISM Order would be the same or
better than the price of an order on the limit Order Book on the same
side of the market as the PRISM Order then, today, would be executed at
a price $0.01 better than such limit order, regardless of whether such
limit was a Public or Non-Public Customer Order. While ``or better'' is
not clearly specified, it is the case today and its inclusion is meant
to capture cases where PAN responses provide price improvement for the
PRISM Order at prices that are crossed with the same side interest
mentioned above. The remainder of the changes are grammatical and
technical in nature, to the extent the Exchange is creating two
separate sentences.
The Exchange proposes to amend Options 3, Section 13(ii)(K) to add
the following introductory text which describes a PRISM ISO.
A PRISM ISO Order is the transmission of two orders for crossing
pursuant to this Rule without regard for better priced Protected
Bids or Protected Offers (as defined in Options 5, Section 1)
because the Participant transmitting the PRISM ISO to the Exchange
has, simultaneously with the routing of the PRISM ISO, routed one or
more ISOs, as necessary, to execute against the full displayed size
of any Protected Bid or Protected Offer that is superior to the
starting PRISM Auction price and has swept all interest in the
Exchange's Order Book priced better than the proposed auction
starting price. Any execution(s) resulting from such sweeps shall
accrue to the PRISM Order.
Phlx similarly describes a Price Improvement XL Mechanism (``PIXL'')
ISO in its rule text at Options 3, Section 13(b)(11).\38\ This text
does not amend the current System functionality, rather it adds context
to the current PRISM rule in describing a PRISM ISO. BX also proposes
to amend the title of Options 3, Section 13(ii)(K) from ``ISO Orders''
to ``PRISM ISO Orders.'' The Exchange also proposes to utilize this
proposed term within Options 3, Section 13(ii)(K).
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\38\ Phlx Options 3, Section 13(b)(11) states, ``PIXL ISO Order.
A PIXL ISO order (PIXL ISO) is the transmission of two orders for
crossing pursuant to this Rule without regard for better priced
Protected Bids/Offers (as defined in Options 5, Section 1) because
the member transmitting the PIXL ISO to the Exchange has,
simultaneously with the routing of the PIXL ISO, routed one or more
ISOs, as necessary, to execute against the full displayed size of
any Protected Bid/Offer that is superior to the starting PIXL
Auction price and has swept all interest in the Exchange's book
priced better than the proposed Auction starting price. Any
execution(s) resulting from such sweeps shall accrue to the PIXL
Order.''
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The Exchange proposes to correct Options 3, Section 13(ii)(K) to
clearly describe the current System operation. The Exchange proposes to
amend the first sentence of current Options 3, Section 13(ii)(K) to
provide:
If a PRISM Auction is initiated for an order designated as a
PRISM ISO Order, all executions which are at a price inferior to the
Initial NBBO (on the contra-side of the PRISM Order) shall be
allocated pursuant to the Size Pro-Rata execution algorithm, as
described in Options 3, Section 10(a)(1)(C)(2), or Price/Time
execution algorithm, as described in Options 3, Section 10
(a)(1)(C)(1), and the aforementioned priority in Options 3, Section
13(ii)(E) and (F) shall not apply, with the exception of allocating
to the Initiating Participant which will be allocated in accordance
with the priority as specified in Options 3, Section 13(ii)(E) and
(F).
The Exchange states ``on the contra-side of the PRISM Order'' to
distinguish the contra-side from the same side of the PRISM Order,
which receives different treatment in allocation. This proposed
amendment is intended to clarify the current System operation, not
amend the System.
Finally, the Exchange proposes to renumber Options 3, Section
13(vi) to ``(v).'' This reflects the deletion of section ``vi'' which
was described above in this proposal with respect to Public Customer-
to-Public Customer orders. Public Customer-to-Public Customer orders
submitted into PRISM would be subject to the procedures, within Options
3, Section 12(a).
Options 3, Section 23
The Exchange proposes to amend Options 3, Section 23, Data Feeds
and Trade Information, to update its descriptions of the BX Depth of
Market (BX Depth) and BX Top of Market (BX Top) data feeds. The
Exchange proposes to amend the BX Depth data feed at Options 3, Section
23(a)(1) to more closely align with current System operation. The
Exchange proposes a technical amendment to the first sentence to
replace a comma with the word ``and.'' The Exchange also proposes to
relocate rule text concerning order imbalances to the end of the
description. The Exchange proposes to amend the first sentence to state
``BX Depth of Market (BX Depth) is a data feed that provides full order
and quote depth information for individual orders and quotes on the BX
Options book, and last sale information for trades executed on BX
Options.'' The Exchange would amend and relocate the rule text that
provides, ``and Order Imbalance Information as set forth in BX Options
Rules Options 3, Section 8'' to the end of the first sentence. The
Exchange proposes to add a sentence at the end of the description which
states, ``The feed also provides order imbalances on opening/re-opening
(size of matched contracts and size of the imbalance), auction and
exposure notifications.'' This sentence makes clear that order
imbalance information is provided for both an opening and re-opening
process. Today, a re-opening process initiates after a trading halt has
occurred intra-day. Also, the proposed rule provides the specific
information that would be provided in the data feed, namely the size of
matched contracts and size of the imbalance. Finally, auction \39\ and
exposure notifications \40\ are also provided in the data feed. The
Exchange believes that this additional context to imbalance messages as
well as also noting that auction and exposure notifications are
provided will provide market participants with more complete
information about what is contained in the data feed. This information
is available today and the rule text is being
[[Page 48285]]
amended to make clear what information is currently provided.\41\
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\39\ Auctions notifications refer to PANs within Options 3,
Section 13.
\40\ Exposure notifications refer to those messages that are
disseminated as part of routing within Options 5, Section 4.
\41\ Fees related to BX TOP are noted within BX Options 7,
Section 3.
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The Exchange also proposes to amend the description of the BX Top
data feed, within Options 3, Section 23(a)(2). The Exchange proposes to
amend the first sentence to provide that the BX Top ``calculates and
disseminates BX's best bid and offer and last sale information for
trades executed on BX Options.'' The current sentence provides that the
BX Top, ``is a data feed that provides the BX Options Best Bid and
Offer and last sale information for trades executed on BX Options.''
The Exchange believes that the amended description more clearly
describes the BX Top data feed. Further, the Exchange proposes to amend
the second sentence to provide, ``The feed also provides last trade
information and for each options series includes the symbols (series
and underlying security), put or call indicator, expiration date, the
strike price of the series, and whether the option series is available
for trading on BX and identifies if the series is available for closing
transactions only.'' The current second sentence provides, ``The data
provided for each options series includes the symbols (series and
underlying security), put or call indicator, expiration date, the
strike price of the series, and whether the option series is available
for trading on BX and identifies if the series is available for closing
transactions only.'' The Exchange believes noting that the last trade
information is provided will make clear to market participants the data
that is currently available on BX Top. This information is available
today and the rule text is being amended to make clear what information
is currently provided.\42\
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\42\ Fees related to BX Depth are noted within BX Options 7,
Section 3.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\43\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\44\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest.
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\43\ 15 U.S.C. 78f(b)
\44\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Options 1, Section 1
The Exchange's proposal to amend the definition of ``Public
Customer'' to conform to Phlx's definition is intended to provide
greater specificity regarding what is meant by the term ``Public
Customer.'' Specifically, the Exchange proposes to provide that a
``Public Customer'' could be a person or entity and is not a
Professional as defined within Options 1, Section 1(a)(48).\45\ Today,
a Public Customer is not a Professional. The term `Professional'' is
separately defined, within BX Options 1, Section 1(a)(48). In order to
properly represent orders entered on the Exchange, Participants are
required to indicate whether orders are ``Professional Orders.'' To
comply with this requirement, Participants are required to review their
Public Customers' activity on at least a quarterly basis to determine
whether orders that are not for the account of a broker-dealer should
be represented as Public Customer Orders or Professional Orders.\46\ A
Public Customer may be a Professional if they meet the requirements
specified within BX Options 1, Section 1(a)(48). If the Professional
definition is not met, the order is treated as a Public Customer order.
The Exchange believes that it is consistent with the Act to state
within the definition of ``Public Customers'' that a Professional is
not a Public Customer. As noted above, there is a process for
determining if a market participant qualifies as a ``Professional.''
This specificity will serve to protect investors and the public
interest in that the terms ``Public Customer'' and ``Professional'' are
separate categories of market participants, as defined. Also, this
definition conforms to Phlx's definition at Options 1, Section
1(b)(46).
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\45\ BX Options 1, Section 1(a)(48) provides that, ``The term
``Professional'' means any person or entity that (i) is not a broker
or dealer in securities, and (ii) places more than 390 orders in
listed options per day on average during a calendar month for its
own beneficial account(s). A Participant or a Public Customer may,
without limitation, be a Professional. All Professional orders shall
be appropriately marked by Participants.''
\46\ Participants conduct a quarterly review and make any
appropriate changes to the way in which they are representing orders
within five days after the end of each calendar quarter. While
Participants only will be required to review their accounts on a
quarterly basis, if during a quarter the Exchange identifies a
customer for which orders are being represented as Public Customer
Orders but that has averaged more than 390 orders per day during a
month, the Exchange will notify the Participant and the Participant
will be required to change the manner in which it is representing
the customer's orders within five days.
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The Exchange's proposal to remove a sentence within Options 1,
Section 1(a)(48) which provides, ``A Participant or a Public Customers
may, without limitation, be a Professional,'' is consistent with the
Act. This sentence is confusing and not necessary. Phlx Options 1,
Section 1(b)(46) does not contain a similar sentence. BX proposes
removing this sentence because it does not add useful information to
understanding who may qualify as a Professional.
The Exchange's proposal to remove sentences, within Options 3,
Section 10(a)(1)(C)(1)(a), Options 3, Section 10(a)(2)(i), Options 3,
Section 13, in the introductory paragraph, and Options 3, Section
13(ii)(E)(1) and (F)(1), which allocation and PRISM rules,
respectively, provide that a Public Customer does not include a
Professional, are consistent with the Act. Today, the definition of a
Public Customer does not explicitly exclude a Professional. The
language that the Exchange proposes to delete, today, indicates that
Professionals would not be treated the same as a Public Customer in
terms of priority and, therefore, would not receive the same allocation
that is reserved for Public Customer orders. Because BX is amending the
definition of a Public Customer to explicitly exclude Professionals,
the language in the PRISM and allocation rules are no longer necessary
to distinguish these two types of market participants.
Bid/Ask Differentials
The Exchange's proposal to amend BX Options 2, Section 5(d)(2) to
add the words ``Intra-Day'' before the title ``Bid/ask Differentials
(Quote Spread Parameters)'' and remove references to the opening, will
make clear for Market Makers their intra-day requirements. The bid/ask
differentials, within BX Options 2, Section 5(d)(2), will apply intra-
day only. The bid/ask differentials applicable to the opening are noted
within current BX Options 3, Section 8(a)(6).\47\ It is not necessary
to discuss the opening bid/ask differentials within Options 2, Section
5. The bid/ask differentials, within BX Options 2, Section 5(d)(2), are
not otherwise being amended. This clarification is consistent with the
Act because it is designed to avoid any confusion for Market Makers as
to their intra-day requirements versus their opening requirements.
---------------------------------------------------------------------------
\47\ See note 5 above.
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The Exchange's proposal to amend BX Rules at Options 2, Section
4(f)(4)-(6) (Obligations of Market Makers and Lead Market Makers),
which specifies quoting requirements for Lead Market Makers, to conform
the rule to proposed BX Options 2, Section 5(d)(2), which applies to BX
Market Makers, is consistent with the Act. The Exchange believes it is
consistent with the Act to permit Lead Market Makers to quote as wide
as Market Makers on BX.
[[Page 48286]]
Today, Lead Market Makers have higher quoting requirements and
other obligations noted within Options 2, Section 3, than Market
Makers, which accounts for their priority allocations, within Options
3, Section 10.\48\ The Exchange is proposing to allow Lead Market
Makers to obtain similar quoting relief as, today, may be provided to
Market Makers. There is no limitation on the quoting relief that may be
afforded to Market Makers today, the Exchange is proposing to conform
the ability for the Exchange to grant quoting relief equally to Market
Makers and Lead Market Makers in the same option series. Today, while a
Lead Market Maker has higher quoting obligations they have less
opportunity for quoting relief in a certain options series as compared
to a Market Maker who is quoting in the same options series. In periods
of market volatility, similar to those experienced in the first half of
2020, BX's ability to grant quote relief was limited as compared to
other options markets.
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\48\ See BX Options 3, Section 10(a)(1)(C)(1)(b) and Section
10(a)(2)(ii) which describe Lead Market Maker Priority.
---------------------------------------------------------------------------
Replacing Options 2, Section 4(f)(4)--(6) with the rule text,
within BX Options 2, Section 5(d)(2), would continue to require Lead
Market Makers to quote with a difference not to exceed $5 between the
bid and offer regardless of the price of the bid. However, instead of
requiring Lead Market Makers to quote a price differential for any in-
the-money option series identical to those in the underlying security
market, in the event the bid/ask differential in the underlying
security is greater than the bid/ask differential set forth in
subsections (f)(4) and (5), the Exchange would now permit the bid/ask
differential to be as wide as the spread between the national best bid
and offer in the underlying security when the market for the underlying
security is wider than $5. Further, replacing the exemptions from
subsections (f)(4) and (5) and permitting BX to establish quote width
differentials similar to BX Market Makers with this provision is
consistent with the Act, because it would align the bid/ask
differentials for BX Market Makers and BX Lead Market Makers with
quoting requirements of other Nasdaq Affiliated Markets that have both
Market Makers and Lead Market Makers.\49\ Further, the additional
allowance and exemptions are no longer necessary because the Exchange
proposes to add rule text, similar to BX Options 2, Section 4(f)(5) and
BX Options 5, Section 5(d)(2), which permits BX to establish
differences other than the stated bid/ask differentials, for one or
more series or classes of options. 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 is limited
by BX Options 2, Section 4(f)(6).\50\ The Exchange's proposal would
align the procedural BX would follow with other options exchanges,
which notify members in writing 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, including exemptions for BX Market Makers. Decisions to
grant exemptions are made based on current market conditions. Exchanges
need to be able to react when market conditions change dramatically and
require the Exchange to grant relief. The additional steps that are
currently required on BX, are not conducive to granting relief in fast
changing markets. In addition, the quoting requirements for BX Lead
Market Makers and Makers is consistent with requirements on other
Nasdaq Affiliated Markets that have both Market Makers and Lead Market
Makers.\51\ Other options markets do not limit their lead market makers
to quote relief as BX limits quote relief today for its Lead Market
Makers. Today, BX limits its Lead Market Makers to quote relief which
may not be greater than half as wide as the bid/ask differential.\52\
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\49\ See Nasdaq Phlx LLC Rules at Options 2, Section 4(c) and
ISE, GEMX and MRX Rules at Options 2, Section 4(b)(4). ISE, GEMX and
MRX utilize the term Primary Market Maker instead of Lead Market
Maker.
\50\ See BX Options 2, Section 4(f)(5).
\51\ See Phlx at Options 2, Section 4(c) and ISE, GEMX and MRX
Rules at Options 2, Section 4(b)(4). ISE, GEMX and MRX utilize the
term Primary Market Maker instead of Lead Market Maker.
\52\ See ISE and GEMX at Options 2, Section 5, Miami
International Securities Exchange LLC Rule 503(e)(2), BOX Exchange
LLC Rule 8040 and NYSE American LLC Rule 925NY(b)(5) and (c).
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Options 3, Section 5
The Exchange's proposal to amend Options 3, Section 5(c) to add
additional rule text similar to Phlx Options 3, Section 5(c) is
consistent with the Act. Today, BX re-prices certain orders to avoid
locking and crossing away markets, consistent with its Trade-Through
Compliance and Locked or Crossed Markets obligations.\53\ Orders which
lock or cross an away market will automatically re-price one minimum
price improvement inferior to the original away best bid/offer price to
one minimum trading increment away from the new away best bid/offer
price or its original limit price.\54\ The re-priced order is displayed
on OPRA. The order remains on BX's Order Book and is accessible at the
non-displayed price. For example, a limit order may be accessed on BX
by a Participant if the limit order is priced better than the NBBO. The
Exchange believes that the addition of this rule text will allow BX to
define an ``internal BBO'' within its rules when describing re-priced
orders that remain on the Order Book and are available at non-displayed
prices, which are resting on the Order Book.
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\53\ BX Options 3, Section 5(d) provides, ``An order will not be
executed at a price that trades through another market or displayed
at a price that would lock or cross another market. An order that is
designated by the member as routable will be routed in compliance
with applicable Trade-Through and Locked and Crossed Markets
restrictions. An order that is designated by a member as non-
routable will be re-priced in order to comply with applicable Trade-
Through and Locked and Crossed Markets restrictions. If, at the time
of entry, an order that the entering party has elected not to make
eligible for routing would cause a locked or crossed market
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the national best
price.''
\54\ See Options 5, Section 4 (Order Routing), which describes
the repricing of orders for both routable and non-routable orders
within Options 5, Section 4(a)(iii)(A), (B) and (C).
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Options 3, Section 7
The Exchange's proposal to amend the Cancel-Replacement Order,
within Options 3, Section 7(a)(1), is consistent with the Act. The
Exchange's proposal to amend its System functionality for Cancel-
Replacement Orders that do not meet price or other reasonability
checks, which consider the current market at the time of the Cancel-
Replacement Order, is consistent with the Act, because, with this
proposal, all Cancel-Replacement Orders would receive price or other
reasonability checks as a result of being viewed as new orders. Price
and size are the terms that will determine if the Cancel-Replacement
Order retains its priority, as is the case today, other terms and
conditions do not amend the priority of the Cancel-Replacement Order.
The Exchange is not amending the current System functionality of a
Cancel-Replacement Order with respect to the terms that will cause the
order to lose priority. Today, the price of the order may not be
changed when submitting a Cancel-Replacement Order, that would be a new
order.
If a Cancel-Replacement Order does not pass a price or other
reasonability check, the order will cancel, but it will not be replaced
with a new order. The Limit Order Price Protection and Market Order
Spread Protection are the only
[[Page 48287]]
risk protections within Options 3, Section 15 (Risk Protections) that
are applicable. Price or other reasonability checks consider the
current market at the time the Cancel-Replacement Order is entered. The
Exchange proposes to begin applying price or other reasonability checks
to all Cancel-Replacement Orders, similar to ISE, GEMX and MRX, to
provide market participants with additional risk protection checks with
the re-entry of the Cancel-Replacement Order. This proposed rule is
similar to ISE, GEMX and MRX Rules at Options 3, Section 7 at
Supplementary Material .02, except that ISE, GEMX and MRX discuss
Reserve Orders, which are not available on BX.\55\ All risk protections
are noted within Options 3, Section 15. Those risk protections apply
throughout the Rulebook, except where otherwise noted. The Exchange
believes that it is consistent with the Act to treat such orders as new
orders which will be subject to price or other reasonability checks.
The Exchange believes that conducting price or other reasonability
checks for all Cancel and Replace Orders will protect investors and the
public interest by validating the order against the current market
conditions prior to proceeding with the request to modify the order.
---------------------------------------------------------------------------
\55\ ISE, GEMX and MRX Options 3, Section 7 at Supplementary
Material .02, provides, ``Cancel and Replace Orders shall mean a
single message for the immediate cancellation of a previously
received order and the replacement of that order with a new order.
If the previously placed order is already filled partially or in its
entirety, the replacement order is automatically canceled or reduced
by the number of contracts that were executed. The replacement order
will retain the priority of the cancelled order, if the order posts
to the Order Book, provided the price is not amended, size is not
increased, or in the case of Reserve Orders, size is not changed. If
the replacement portion of a Cancel and Replace Order does not
satisfy the System's price or other reasonability checks (e.g.
Options 3, Section 15(b)(1)(A) and (b)(1)(B); and Supplementary
Material .07 (a)(1)(A), (b) and (c)(1) to Options 8, Section 14) the
existing order shall be cancelled and not replaced.''
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The Exchange's proposal to amend ``Directed Order,'' within Options
3, Section 7(a)(2), is non-substantive and makes technical edits that
do not change the meaning of the term.
The Exchange's proposal to amend ``Limit Order,'' within Options 3,
Section 7(a)(3), to add the sentence for marketable limit orders
currently within ISE, GEMX and MRX Options 3, Section 7(b)(1) is
consistent with the Act. The Exchange believes that this description
more aptly informs participants about a marketable limit order as
compared to the current rule text, which may be confusing. The new
sentence does not substantively amend the manner in which a Limit Order
operates.
The Exchange's proposal to amend ``Minimum Quantity Orders,''
within Options 3, Section 7(a)(4), is non-substantive and makes
technical edits that do not change the meaning of the term.
The Exchange's proposal to amend ``Market Orders,'' within Options
3, Section 7(a)(5), is consistent with the Act. The Exchange's proposes
to style ``Market Orders'' in the singular and change ``are'' to ``is
an'' and ``orders'' to ``order'' are technical and non-substantive
amendments. The Exchange's proposal to add a notation at the end of the
rule to provide that ``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,
once an option series has opened for trading'' adds specificity
regarding the opening. Market Orders submitted during the opening may
be executed, routed (depending on instructions from the market
participant) or cancelled if the Market Order is priced through the
opening price. The Exchange would only cancel those Market Orders that
remained on the Order Book once an option series opened. The pre-
established period of time would commence once the intra-day trading
session begins for that options series and the order would be cancelled
back to the Participant, provided the Participant elected to cancel
back its Market Orders. The Exchange's proposal differentiates when the
opening is on-going, and the intra-day trading session has not
commenced, the manner in which the pre-established period of time would
commence.
The proposal to note that ``Market Orders on the Order Book would
be immediately cancelled if an options series halted, provided the
Participant designated the cancellation of Market Orders'' specifically
addresses trading halts within the rule. Once an options series halts
for trading, the Exchange conducts another Opening Process. In the case
where a Market Order was resting on the Order Book, and the Participant
had designated the cancellation of Market Orders, in the event of a
halt, the Market Orders resting on the Order Book would immediately
cancel. The Exchange believes that this text provides more detail for
market participants to understand the manner in which the System
handles Market Orders.
The Exchange's proposal to amend ``Intermarket Sweep Order'' or
``ISO'' Orders, within Options 3, Section 7(a)(6), is consistent with
the Act. The Exchange is amending the current functionality of an ISO
Order to require that ISOs have a time-in-force designation of
Immediate-or-Cancel. Today, ISOs may have any time-in-force designation
except WAIT, except that ISOs with a time-in-force designation of GTC
are treated as having a time-in-force designation of ``Day.'' With this
proposal, the Exchange would only continue to allow a time-in-force of
IOC. A TIF designation of IOC that would cause an ISO Order to cancel
in whole or in part upon receipt, in the event that the ISO Order does
not execute or does not entirely execute, is consistent with the Act
because an ISO is generally used when trying to sweep a price level
across multiple exchanges in an effort to post the balance of an order
without locking an away market.
The Exchange's proposal to remove the ``One-Cancels-the-Other
Order'' is consistent with the Act because it will remove an order type
that is not in demand on BX and simply the offerings provided by BX.
The Exchange would file a proposed rule change with the Commission
pursuant to Section 19b1 of the Act,\56\ if it decides to offer this
order type in the future. It will provide notice to Participants that
this order type will no longer be available.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
The Exchange's amendment to ``All-or-None Order,'' within Options
3, Section 7(a)(7), is non-substantive and does not change the meaning
of the term. The amendment makes technical changes and replaces the
words ``opening cross'' with ``opening''.
The Exchange's proposal to include a ``PRISM Order'' and ``Customer
Cross Order'' in the list of order types is consistent with the Act
because the addition of these terms within the list of order types
simply cross-references the existing order types and does not change
the functionality of the order types. The Exchange's proposal defines
this existing order type by cross-referencing Options 3, Section 13 and
Options 3, Section 12(a), respectively, which explains these existing
order types. The Exchange believes that adding these order types,
within Options 7, Section 3, will bring greater clarity to the list of
order types available on BX for the protection of investors and the
general public.
The Exchange's proposal to amend an ``Immediate-Or-Cancel'' Order
or ``IOC,'' within Options 3, Section 7(b)(2), is consistent with the
Act. The Exchange's proposal replaces the current description with
Phlx's description at Options 3, Section 7(c)(2) as these order types
are identical. The Exchange's proposal to state that an Immediate-or-
[[Page 48288]]
Cancel Order or ``IOC'' Order is a Market Order or Limit Order to be
executed in whole or in part upon receipt will bring greater clarity to
the rule. Further the Exchange's proposal to add that any portion not
so executed is cancelled is consistent with the current description.
The Exchange is adding additional context, similar to Phlx, with
respect to routing, submission through FIX or SQF and the price
protections that apply when utilizing SQF. The Exchange believes that
this additional clarity will provide market participants with greater
information for the protection of investors and the general public. SQF
is not subject to the Limit Order Price Protection or the Market Order
Spread Protection in Options 3, Section 15(a)(1) and (a)(2),
respectively, because SQF is a quoting protocol. The Order Price
Protection and Market Order Spread Protection, while available for
orders, are not available on SQF. These exceptions within this rule to
make clear that this information is available to market participants
within the description of IOC. Market Makers utilize IOC Orders to
trade out of accumulated positions and manage their risk when providing
liquidity on the Exchange. Proper risk management, including using
these IOC Orders to offload risk, is vital for Market Makers, and
allows them to maintain tight markets and meet their quoting and other
obligations to the market. The Exchange believes that allowing Market
Makers to submit IOC Orders though their preferred protocol increases
their efficiency in submitting such orders and thereby allow them to
maintain quality markets to the benefit of all market participants that
trade on the Exchange. Further, unlike other market participants,
Market Makers provide liquidity to the market and have obligations.\57\
The Exchange believes not offering Order Price Protection and Market
Order Spread Protection for IOC Orders entered through SQF is
consistent with the Act, because Market Makers have more sophisticated
infrastructures than other market participants and are able to manage
their risk, particularly with respect to quoting, using tools that are
not available to other market participants.\58\
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\57\ Market Makers have quoting obligations as specified in
Options 2, Section 5(d).
\58\ Market quotes are subject to various protections listed in
Options 3, Section 15(c). These additional quoting protections
permit Market Makers to manage their exposure at the Exchange. Other
market participants would not be subject to these risk protections
because they do not submit quotes or utilize SQF.
---------------------------------------------------------------------------
Finally, orders entered into the PRISM Mechanism are considered to
have a TIF of IOC; this is also true of the PIXL Mechanism on Phlx.\59\
The Exchange believes that adding these new details to the manner in
which IOC Orders are handled within the System will bring greater
transparency to these order types and provide Participants with greater
detail as to the manner in which the System will handle a TIF of IOC.
---------------------------------------------------------------------------
\59\ See Phlx Options 3, Section 7(c)(2).
---------------------------------------------------------------------------
The Exchange's proposal to amend the TIF of ``DAY'' at Options 5,
Section 7(b)(3) to conform the description of a TIF of ``DAY'' to Phlx
Options 3, Section 7(c)(1) \60\ is consistent with the Act. The
Exchange believes the current text describing BX's Day TIF is
unnecessarily verbose and proposes to remove this language. A DAY Order
on Phlx functions in the same way as a DAY Order on BX. The proposal is
not amending the System functionality of a DAY Order.
---------------------------------------------------------------------------
\60\ Phlx Options 3, Section 7(c)(1) provides, ``Day. If not
executed, an order entered with a TIF of ``Day'' expires at the end
of the day on which it was entered. All orders by their terms are
Day Orders unless otherwise specified. Day orders may be entered
through FIX.''
---------------------------------------------------------------------------
The Exchange's proposal to amend the TIF of ``Good Til Cancelled''
or ``GTC'' at Options 5, Section 7(b)(4) is consistent with the Act.
The Exchange proposes to conform the rule text to Phlx Options 3,
Section 7(c)(4).\61\ The Exchange is not amending the manner in which
the System function with respect to GTC Orders. GTC Orders, if not
fully executed, will 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, as specified by the Exchange, until
market close, as is the case today. Also, today, a GTC Order may only
be entered through FIX. A GTC Order on Phlx functions in the same way
as a GTC Order on BX. The Exchange believes that the amended rule text
will bring greater transparency to its rules for the protection of
investors and the general public.
---------------------------------------------------------------------------
\61\ Phlx Options 3, Section 7(c)(4) provides, ``A Good Til
Cancelled (``GTC'') Order entered with a TIF of GTC, if not fully
executed, will 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 until market close.''
---------------------------------------------------------------------------
The Exchange's proposal to no longer offer a TIF of ``WAIT'' is
consistent with the Act because it will remove an order type that is
not in demand on BX and simply the offerings provided by BX. The
Exchange would file a proposed rule change with the Commission pursuant
to Section 19b1 of the Act,\62\ if it decides to offer this order type
in the future. It will provide notice to Participants that this order
type will no longer be available.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
The Exchange's proposal to note, within BX Options 3, Section 7(c),
the various routing options which are available is consistent with the
Act. These routing strategies are consistent with a recent rule change
filed by BX to amend routing strategies.\63\
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\63\ See SR-BX-2020-7P.
---------------------------------------------------------------------------
Options 3, Section 10
The Exchange's proposal to amend its Order Book allocation rule,
within Options 3, Section 10, to amend the manner in which rounding
occurs is consistent with the Act because the Exchange is proposing to
make transparent the manner in which rounding will occur once the
technology migration occurs. Today, BX rounds up or down to the nearest
integer. With this proposal, the Exchange would round up to the nearest
integer. Also, corresponding changes are being made, within Options 3,
Section 10, to update the rounding methodology. Removing unnecessary
language regarding remainders is also consistent with the Act because
remainders of less than one contract cannot occur with the new rounding
method.
The Exchange believes that rounding up uniformly is consistent with
the Act because it provides for the equitable allocation of contracts
among the Exchange's market participants. The Exchange proposes to
provide market participants with transparency as to the number of
contracts that they are entitled to receive as the result of rounding.
Further, the Exchange believes that this methodology produces an
equitable outcome during allocation that is consistent with the
protection of investors and the public interest because all market
participants are aware of the methodology that will be utilized to
calculate outcomes for allocation purposes.
Options 3, Section 12 and 22
The adoption of Customer Cross Orders is consistent with the Act
because this proposal would permit Participants to enter and execute
paired Public Customer-to-Public Customer Orders automatically outside
of a PRISM Auction, while also protecting Public Customer Orders on the
book at the same price. Today, the Exchange permits an Initiating
Participant to enter a PRISM Order for the account of a Public Customer
paired with an order
[[Page 48289]]
for the account of a Public Customer and such paired orders will be
automatically executed without a PRISM Auction.\64\ The Exchange's
proposal would continue to permit the ability to enter Public Customer-
to-Public Customer paired orders to be automatically executed, however,
not require these orders to be first entered into PRISM. A Public
Customer-to-Public Customer order submitted into PRISM directly would
be subject to execution pursuant to Options 3, Section 13(i) and (ii).
The Exchange is removing the current provisions within Options 3,
Section (iv) with this proposed rule change. Similar to ISE, GEMX and
MRX rules,\65\ BX would require Customer Crossing Orders to be entered
into the Order Book. The Exchange's proposal would require executions
to be at or between the best bid and offer on the Exchange and not at
the same price as a Public Customer Order on the Exchange's Order Book.
Finally, the execution may not be through the NBBO.
---------------------------------------------------------------------------
\64\ See Options 3, Section 13(vi). The execution price for such
a PRISM Order must be expressed in the quoting increment applicable
to the affected series. Such an execution may not trade through the
NBBO or trade at the same price as any resting Public Customer
order.
\65\ See ISE, GEMX and MRX Options 3, Section 12(a).
---------------------------------------------------------------------------
While the Exchange is limiting these orders to be entered through
FIX, any market participant may utilize FIX. The Exchange believes that
this proposal would allow all Participants the ability to continue
automatically execute paired to enter Public Customer-to-Public
Customer Orders as they do today, without the need to utilize PRISM.
Public Customer-to-Public Customer Cross Orders will be rejected if
they cannot be executed, as is the case today. Finally, Public
Customer-to-Public Customer Cross Orders may only be entered in the
regular trading increments applicable to the options class under
Options 3, Section 3, as is the case today. Today, a Public Customer-
to-Public Customer paired order could only be entered into PRISM to
receive the treatment described within proposed Options 3, Section
13(vi). With this proposal, the manner in which Public Customer-to-
Public Customer paired orders are being processed by the System is
changing. With this proposal, Participants may enter Public Customer-
to-Public Customer paired orders directly into FIX and receive the same
treatment that these orders receive today when entered into PRISM. The
only difference to a Participant is the manner in which the order must
now be submitted directly into FIX to initiate a Customer Cross Order.
Further, the elimination of BX Options 3, Section 13(vi) is
consistent with the Act because Public Customer-to-Public Customer
Cross Orders would no longer be entered as PRISM Orders. With this
proposal Public Customer-to-Public Customer Cross Orders would be
entered through FIX as Customer Cross Order. The prohibition expressed
within current BX Options 3, Section 13(vi) provided for only one PRISM
Auction to be conducted at a time in any given series. Today, to
initiate the Auction, the Initiating Participant must mark the PRISM
Order for Auction processing. With this proposal, Public Customer-to-
Public Customer Cross Orders would not be tagged as a PRISM Auction.
The Public Customer-to-Public Customer Cross Orders would be entered as
a separate order type and therefore would not potentially cause more
than one PRISM Auction to occur in the same series.
In conjunction with this change, BX proposes to add the Customer
Cross Order to Options 3, Section 22(a) and (c) as an exception to the
rules for limitations on principal transactions and solicitation
orders, which require Participants to expose trading interest to the
market before executing agency orders as principal or before executing
agency orders against orders that were solicited from other broker-
dealers. Options 3, Section 22 contains language similar to current BX
Options 3, Section 13(vi)(A). The Exchange believes that its proposal
continue to protect customers and the general public by affirming that
it is a violation of BX Options 3, Section 22(a)(1) for a Participant
from executing agency orders to increase its economic gain from trading
against the order without first giving other trading interests on the
Exchange an opportunity to either trade with the agency order or to
trade at the execution price when the Participant was already bidding
or offering on the book.\66\ The Exchange would surveil Public
Customer-to-Public Customer Cross Orders in the same fashion that it
already surveils for these orders on ISE, GEMX and MRX.
---------------------------------------------------------------------------
\66\ See Options 3, Section 22(a)(1).
---------------------------------------------------------------------------
Options 3, Section 13
The Exchange's proposal to amend the System functionality, within
Options 3, Section 13, similar to ISE, GEMX and MRX Options 3, Section
13, to better any limit order or quote on the limit order book on the
same side of the market as the PRISM Order, within Options 3, Section
13(i)(A) and (B), is consistent with the Act because expanding its
consideration to both quotes and orders will consider a greater amount
of interest present on BX's Order Book when initiating a PRISM. The
addition of ``quotes,'' similar to ISE, GEMX and MRX at Options 3,
Section 13, will enable the Exchange to consider additional interest in
determining eligibility for PRISM. Today, BX Options 3, Section 13 only
considers orders. With this System change, quotes and orders would be
considered in determining the execution price of the PRISM order. This
change will not impact the handling of orders and quotes and their
respective priority on the limit order book. The Exchange is proposing
to add ``or quote,'' within proposed Options 3, Sections 13(i) and (A)
and (B) and (ii)(A)(1).
The Exchange's proposal to state the minimum increment allowable
directly within the rule and not utilize references to Options 3,
Section 3 is consistent with the Act because the Exchange will note the
exact increment within the rule. This amendment does not amend the
current System operation, rather it more simply states what that
minimum increment is today. The Exchange proposes similar changes at
Options 3, Section 13(ii)(A)(1), Options 3, Section 13(ii)(A)(6),
Options 3, Section 13(ii)(C) and Options 3, Section 13(ii)(I).
The Exchange's proposal to amend the System functionality, within
Options 3, Section 13(ii)(A)(1), for Surrender language is consistent
with the Act because an Initiating Participant will be able to submit
an Initiating Order with a configurable percentage designation of
``Surrender'' up to 40% or such lower percentage requested by the
Participant. Today, the System permits an Initiating Participant to
elect to receive either the full 40% allocation entitlement or no
allocation at all. The Exchange believes that the proposed feature will
provide an Initiating Participant with more flexibility to choose its
priority allocation percentage, similar to functionality currently
offered on ISE, GEMX and MRX at Options 3, Section 13(e)(5)(iii). Any
Initiating Participant may elect to use the PRISM Surrender feature.
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(1) to
remove the following rule text, ``. . . forfeiting the priority and
trade allocation privileges which he is otherwise entitled to as per. .
.'', is consistent with the Act, because the proposed text defines
``Surrender'' as the percentage designation, which the Exchange
believes more accurately defines ``Surrender.''
[[Page 48290]]
The Exchange's proposal to amend the second sentence of Options 3,
Section 13(ii)(A)(1) to instead provide, ``If zero (0%) is specified,
the Initiating Order will only trade if there is not enough interest
available to fully execute the PRISM Order at prices which are equal to
or improve upon the stop price,'' is consistent with the Act. The
proposed text makes clear that if no percentage were elected for
Surrender (0%) then the Initiating Order will only trade if there is
not enough interest available to fully execute the PRISM Order at
prices which are equal to or improve upon the stop price.
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(2) to
add ``price'' to the PRISM Auction Notification or ``PAN,'' as part of
the technology migration, is consistent with the Act because adding
``price'' to the list of details will provide Participants with greater
transparency with respect to the PRISM and could encourage more
competition in PRISM and greater opportunity for potential price
improvement in PRISM. This rule change is similar to the behavior of
PAN responses on ISE, GEMX and MRX.\67\
---------------------------------------------------------------------------
\67\ See ISE, GEMX and MRX Options 3, Section 13(c)(2).
---------------------------------------------------------------------------
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(7) to
conform the behavior of PAN responses to ISE, GEMX and MRX System
behavior \68\ is consistent with the Act. As noted above, the Exchange
is amending the System to accept oversized responses. These responses
will no longer cancel back, rather, PRISM will cap the response at the
size of the Initiating Order for purposes of allocation and then cancel
any remaining quantity not allocated in the PRISM, including any
quantity in excess of the original PRISM quantity, back to the
originator of the PAN response at the end of the auction timer.
Responses are a source of liquidity and potential price improvement,
the Exchange believes it is appropriate to accept these responses and
cap them at the size of the Initiating Order.
---------------------------------------------------------------------------
\68\ See ISE, GEMX and MRX Options 3, Section 13(c)(2).
---------------------------------------------------------------------------
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(8)
and (9) to replace the words ``immediately cancelled'' with
``rejected'' is a non-substantive technical amendment. Non-eligible and
non-compliant orders that are submitted into PRISM are rejected as
those orders are reviewed for compliance with Exchange Rules, these
orders are not immediately cancelled, as technically there is time,
however miniscule, between the submission of the order and the
rejection of the order. The Exchange believes this non-substantive
change adds more clarity to the rule text.
The Exchange's proposal to amend Options 3, Section 13(ii)(E)(2)(a)
to provide the Initiating Participant with a priority allocation based
on the initial size of the Initiating Order after Public Customer
interest has been satisfied is consistent with the Act. Allocating
based on the ``initial size of the Initiating Order'' provides an
expectation for Participants that respond to PRISM Orders, whether that
allocation is price/time,\69\ size pro-rata \70\ or auto-match.\71\
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\69\ At the conclusion of the Auction, for option classes
governed under BX's Price/Time execution algorithm, the PRISM Order
will be allocated at the best price(s), pursuant to the priority set
forth in proposed Options 3, Section 13(ii)(F)(1) through (4).
First, Public Customer orders would have time priority at each price
level. Next, the Initiating Participant would receive an allocation
after Public Customer orders.
\70\ At the conclusion of the Auction, for option classes
governed under BX's Size Pro-Rata execution algorithm, the PRISM
Order will be allocated at the best price(s), pursuant to the
priority set forth in Options 3, Section 13(ii)(E)(1) through (5).
\71\ If the Initiating Participant selected the auto-match
option, the Initiating Participant would be allocated a number of
contracts equal to the aggregate size of all other quotes, orders,
and PAN responses at each price point until a price point is reached
where the balance of the order can be fully executed, except that
the Initiating Participant would be entitled to receive up to 40%
(if there are multiple competing quotes, orders or PAN responses) or
50% (if there is only one competing quote, order or PAN response) of
the contracts remaining at the final price point (including
situations where the stop price is the final price) after Public
Customer interest has been satisfied but before remaining interest
receives an allocation.
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With this proposed change, the Exchange believes that Participants
are better able to determine their allocation when responding with a
PAN if the Initiating Participant's allocation is based on the initial
size of the Initiating Order after Public Customer interest is
satisfied, rather than the remaining contracts after Public Customer
interest is satisfied. The Exchange's proposal provides greater
transparency to market participants in that when they respond to the
PRISM, they are aware of the initiating size, as compared to an
undetermined remaining size which is unknown as responses are not
visible to all market participants. The Exchange's proposal is similar
to ISE, GEMX and MRX Options 3, Section 13(d)(3).\72\
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\72\ ISE, GEMX and MRX Options 3, Section 13(d)(3), provides,
``In the case where the Counter-Side Order is at the same price as
Professional Interest in (d)(2), the Counter-Side order will be
allocated the greater of one (1) contract or forty percent (40%) of
the initial size of the Agency Order before Professional Interest is
executed. Upon entry of Counter-Side orders, Members can elect to
automatically match the price and size of orders, quotes and
responses received during the exposure period up to a specified
limit price or without specifying a limit price. In this case, the
Counter-Side order will be allocated its full size at each price
point, or at each price point within its limit price if a limit is
specified, until a price point is reached where the balance of the
order can be fully executed. At such price point, the Counter-Side
order shall be allocated the greater of one contract or forty
percent (40%) of the original size of the Agency Order, but only
after Priority Customer Interest at such price point are executed in
full. Thereafter, all Professional Interest at the price point will
participate in the execution of the Agency Order based upon the
percentage of the total number of contracts available at the price
that is represented by the size of the Professional Interest. An
election to automatically match better prices cannot be cancelled or
altered during the exposure period.''
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The Exchange's proposal to amend rounding, within Options 3,
Section 13(ii)(G), is consistent with the Act. Today, BX PRISM rounds
up or down to the nearest integer when it allocates. The Exchange is
amending the rounding methodology to round up to the nearest integer.
Options 3, Section 13(ii)(G) will reflect the new methodology and
provide notice to Participants of this change to the methodology. The
rounding methodology will be uniformly applied when allocating PRISM
Orders.
The Exchange's proposal to amend Options 3, Section 13(ii)(H) to
remove the phrase ``then-existing'' and instead note ``at time of
execution'' to describe the NBBO is consistent with the Act. The
Exchange is not amending the current operation of the System, rather
the Exchange is amending its rules to more accurately state, ``If there
are PAN responses that cross the NBBO at the time of execution
(provided such NBBO is not crossed), such PAN responses will be
executed, if possible, at their limit price(s).'' The current text
appeared to state that the System was utilizing the NBBO upon execution
to check if the PAN responses crossed the NBBO, however, the System
utilizes the NBBO at the time of arrival to check of the PAN responses
cross the NBBO. This amendment promotes just and equitable principles
of trade, because it will ensure the execution price does not cross the
Initial NBBO in accordance with linkage rules. This proposed
clarification is not changing current functionality, and this
functionality applies in the same manner to the responses of all
Participants.
The Exchange's proposal to amend Options 3, Section 13(ii)(I) is
consistent with the Act, because the Exchange seeks to make clear the
current text contained in this section. The Exchange's proposal to add
context to the rule to better reflect the current System operation is
consistent with the Act because without the word
[[Page 48291]]
``execution'' in this sentence, a comparison of the ``price of the
PRISM auction'' does not clearly differentiate the price in question as
the execution price of the PRISM Auction or the original stop price of
the PRISM Order. Without this clear differentiation, current Options 3,
Section 13(ii)(I) can be interpreted to describe scenarios that cannot
happen. The Exchange's proposed addition of the word ``execution'' in
the first sentence of Options 3, Section 13(ii)(I) reflects current
System handling. The execution price of the PRISM Auction is utilized
to compare to the price of an order on the limit Order Book. Adding the
word ``execution'' makes clear to Participants that the initial PRISM
stop price is not utilized to compare the same side of the market
transactions. Also, if the potential execution price of the PRISM Order
would be the same or better than the price of an order on the limit
Order Book on the same side of the market as the PRISM Order then,
today, would be executed at a price $0.01 better than such limit order,
regardless of whether such limit was a Public or Non-Public Customer
Order. While ``or better'' is not clearly specified, it is the case
today and its inclusion is meant to capture cases where PAN responses
provide price improvement for the PRISM Order at prices that are
crossed with the same side interest mentioned above. The proposed
wording is intended to provide greater clarity to Participants for
System handling with respect to same side of the market executions
against the Order Book and is consistent with the Act and the
protection of investors and the general public. The proposed amendments
reflect current System handling are would not result in changes to the
System. The remaining amendments are technical in that the change and
non-substantive as the change merely structures the paragraph into two
sentences.
The Exchange's proposal to amend Options 3, Section 13(ii)(K) to
add introductory text which defines a PRISM ISO is consistent with the
Act. Phlx similarly describes a PIXL ISO in its rule text at Options 3,
Section 13(b)(11).\73\ This text does not amend the current System
functionality, rather it adds context to the current PRISM rule in
describing a PRISM ISO.
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\73\ Phlx Options 3, Section 13(b)(11) states, ``PIXL ISO Order.
A PIXL ISO order (PIXL ISO) is the transmission of two orders for
crossing pursuant to this Rule without regard for better priced
Protected Bids/Offers (as defined in Options 5, Section 1) because
the member transmitting the PIXL ISO to the Exchange has,
simultaneously with the routing of the PIXL ISO, routed one or more
ISOs, as necessary, to execute against the full displayed size of
any Protected Bid/Offer that is superior to the starting PIXL
Auction price and has swept all interest in the Exchange's book
priced better than the proposed Auction starting price. Any
execution(s) resulting from such sweeps shall accrue to the PIXL
Order.''
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The Exchange's proposal to correct Options 3, Section 13(ii)(K) to
add ``on the contra-side of the PRISM Order'' is consistent with the
Act, because this rule text clearly describes the current System
operation. The Exchange states ``on the contra-side of the PRISM
Order'' to distinguish the contra-side from the same side of the order,
which receives different treatment in allocation. This proposed
amendment is intended to clarify the current System operation, not
amend the System.
Finally, the Exchange's proposal to renumber Options 3, Section
13(vii) to ``(vi)'' is a technical non-substantive amendment.
Options 3, Section 23
The Exchange's proposal to amend Options 3, Section 23, Data Feeds
and Trade Information, to update its descriptions of the BX Depth of
Market (BX Depth) and BX Top of Market (BX Top) data feeds is
consistent with the Act, because the updated descriptions will bring
greater transparency to the Exchange's rules.
The Exchange's proposal will make clear that order imbalance
information is provided for both an opening and re-opening process
within BX Depth. Today, a re-opening process initiates after a trading
halt has occurred intra-day. Also, the Exchange's proposal notes the
specific information that would be provided in the data feed, namely
the size of matched contracts and size of the imbalance. Finally the
auction and exposure notifications are also provided in the data feed.
The Exchange believes that this additional context to imbalance
messages as well as also noting that auction and exposure notifications
are provided will provide market participants with more complete
information about what is contained in the data feed. This information
is available today within the data feed. The proposed rule text is
being amended to make clear what information is currently provided.
With respect to the BX Top data feed, within Options 3, Section
23(a)(2), the amended description more clearly describes the BX Top
data feed. Further, the Exchange believes noting that the last trade
information is provided will make clear to market participants the data
that is currently available on BX Top. This information is available in
the data feed today and the rule text is being amended to make clear
what information is currently provided.
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.
Options 1, Section 1
The Exchange's proposal to amend the definition of ``Public
Customer'' to conform to Phlx's definition does not impose an undue
burden on competition because it will make clear that a Public Customer
could be a person or entity and clarifying that a Public Customer is
not a Professional, as defined within Options 1, Section 1(a)(48),\74\
will make clear what it meant by that term. Today, a Public Customer is
not a Professional. The term `Professional'' is separately defined,
within BX Options 1, Section 1(a)(48). In order to properly represent
orders entered on the Exchange, Participants are required to indicate
whether orders are ``Professional Orders.''
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\74\ BX Options 1, Section 1(a)(48) provides that, ``The term
``Professional'' means any person or entity that (i) is not a broker
or dealer in securities, and (ii) places more than 390 orders in
listed options per day on average during a calendar month for its
own beneficial account(s). A Participant or a Public Customer may,
without limitation, be a Professional. All Professional orders shall
be appropriately marked by Participants.''
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Further, the Exchange's proposal to remove a sentence within
Options 1, Section 1(a)(48) which provides, ``A Participant or a Public
Customers may, without limitation, be a Professional,'' does not impose
an undue burden on competition. This sentence is confusing and not
necessary. Phlx Options 1, Section 1(b)(46) does not contain a similar
sentence. BX proposes removing this sentence because it does not add
useful information to understanding who may qualify as a Professional.
Bid/Ask Differentials
The Exchange's proposal to amend BX's Lead Market Maker quotation
rules to conform to those of other BX Market Makers does not impose an
undue burden on competition. This proposal conforms the requirements
for all Market Makers. Today, Lead Market Makers have higher quoting
requirements and other obligations noted within Options 2, Section 3,
than Market Makers, which accounts for their priority allocations,
within Options 3, Section 10.\75\ The Exchange is proposing
[[Page 48292]]
to allow Lead Market Makers to obtain similar quoting relief as, today,
may be provided to Market Makers. There is no limitation on the quoting
relief that may be afforded to Market Makers today, the Exchange is
proposing to conform the ability for the Exchange to grant quoting
relief equally to Market Makers and Lead Market Makers in the same
option series. Today, while a Lead Market Maker has higher quoting
obligations they have less opportunity for quoting relief in a certain
options series as compared to a Market Maker who is quoting in the same
options series.
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\75\ See BX Options 3, Section 10(a)(1)(C)(1)(b) and Section
10(a)(2)(ii) which describe Lead Market Maker Priority.
---------------------------------------------------------------------------
Replacing Options 2, Section 4(f)(4)-(6) with the rule text, within
BX Options 2, Section 5(d)(2), would continue to require Lead Market
Makers to quoted with a difference not to exceed $5 between the bid and
offer regardless of the price of the bid. However, instead of requiring
Lead Market Makers to quote a price differential for any in-the-money
option series identical to those in the underlying security market, in
the event the bid/ask differential in the underlying security is
greater than the bid/ask differential set forth in subsections (f)(4)
and (5), the Exchange would now permit the bid/ask differential to be
as wide as the spread between the national best bid and offer in the
underlying security when the market for the underlying security is
wider than $5.
Further, the additional allowance and exemptions are no longer
necessary because the Exchange proposes to add rule text, similar to BX
Options 2, Section 4(f)(5) and BX Options 5, Section 5(d)(2), which
permits BX to establish differences other than the stated bid/ask
differentials, for one or more series or classes of options. 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 is limited by BX Options 2, Section 4(f)(6).\76\ The
Exchange's proposal would align the procedural BX would follow with
other options exchanges, which notify members in writing 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, including exemptions for BX Market
Makers. Decisions to grant exemptions are made based on current market
conditions. Exchanges need to be able to react when market conditions
change dramatically and require the Exchange to grant relief.
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\76\ See BX Options 2, Section 4(f)(5).
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Options 3, Section 5
The Exchange's proposal to amend Options 3, Section 5(c) to add
additional rule text similar to Phlx Options 3, Section 5(c) does not
impose an undue burden on competition. Today, BX re-prices certain
orders to avoid locking and crossing away markets, consistent with its
Trade-Through Compliance and Locked or Crossed Markets obligations.\77\
Orders which lock or cross an away market will automatically re-price
one minimum price improvement inferior to the original away best bid/
offer price to one minimum trading increment away from the new away
best bid/offer price or its original limit price.\78\ The re-priced
order is displayed on OPRA. The order remains on BX's Order Book and is
accessible at the non-displayed price.
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\77\ BX Options 3, Section 5(d) provides, ``An order will not be
executed at a price that trades through another market or displayed
at a price that would lock or cross another market. An order that is
designated by the member as routable will be routed in compliance
with applicable Trade-Through and Locked and Crossed Markets
restrictions. An order that is designated by a member as non-
routable will be re-priced in order to comply with applicable Trade-
Through and Locked and Crossed Markets restrictions. If, at the time
of entry, an order that the entering party has elected not to make
eligible for routing would cause a locked or crossed market
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the national best
price.''
\78\ See Options 5, Section 4 (Order Routing), which describes
the repricing of orders for both routable and non-routable orders
within Options 5, Section 4(a)(iii)(A), (B) and (C).
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Options 3, Section 7
The Exchange's proposal to amend the Cancel-Replacement Order,
within Options 3, Section 7(a)(1), does not impose an undue burden on
competition. Price and size are the terms that will determine if the
Cancel-Replacement Order retains its priority, as is the case today,
other terms and conditions do not amend the priority of the Cancel-
Replacement Order. The Exchange is not amending the current System
functionality of a Cancel-Replacement Order with respect to the terms
that will cause the order to lose priority. Today, the price of the
order may not be changed when submitting a Cancel-Replacement Order,
that would be a new order.
With this proposal, all Cancel-Replacement Orders would receive
price or other reasonability checks as a result of being viewed as new
orders. If a Cancel-Replacement Order does not pass a price or other
reasonability check, the order will cancel, but it will not be replaced
with a new order. The Limit Order Price Protection and Market Order
Spread Protection are the only risk protections within Options 3,
Section 15 (Risk Protections) that are applicable. Price or other
reasonability checks consider the current market at the time the
Cancel-Replacement Order is entered. The Exchange proposes to begin
applying price or other reasonability checks to all Cancel-Replacement
Orders, similar to ISE, GEMX and MRX, to provide market participants
with additional risk protection checks with the re-entry of the Cancel-
Replacement Order. This proposed rule is similar to ISE, GEMX and MRX
Rules at Options 3, Section 7 at Supplementary Material .02, except
that ISE, GEMX and MRX discuss Reserve Orders, which are not available
on BX.\79\ All risk protections are noted within Options 3, Section 15.
Those risk protections apply throughout the Rulebook, except where
otherwise noted.
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\79\ ISE, GEMX and MRX Options 3, Section 7 at Supplementary
Material .02, provides, ``Cancel and Replace Orders shall mean a
single message for the immediate cancellation of a previously
received order and the replacement of that order with a new order.
If the previously placed order is already filled partially or in its
entirety, the replacement order is automatically canceled or reduced
by the number of contracts that were executed. The replacement order
will retain the priority of the cancelled order, if the order posts
to the Order Book, provided the price is not amended, size is not
increased, or in the case of Reserve Orders, size is not changed. If
the replacement portion of a Cancel and Replace Order does not
satisfy the System's price or other reasonability checks (e.g.
Options 3, Section 15(b)(1)(A) and (b)(1)(B); and Supplementary
Material .07 (a)(1)(A), (b) and (c)(1) to Options 8, Section 14) the
existing order shall be cancelled and not replaced.''
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The Exchange's proposal to amend ``Market Orders,'' within Options
3, Section 7(a)(5) does not amend the manner in which a Market Order
operates today on BX. The Exchange's proposal to add a notation at the
end of the rule to provide that ``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,
once an option series has opened for trading'' adds specificity
regarding the opening. Market Orders submitted during the opening may
be executed, routed (depending on instructions from the market
participant) or cancelled if the Market Order is priced through the
opening price. The Exchange would only cancel those Market Orders that
remained on the Order Book once an option series opened. The pre-
established period of time would commence once the intra-
[[Page 48293]]
day trading session begins for that options series and the order would
be cancelled back to the Participant, provided the Participant elected
to cancel back its Market Orders. The Exchange's proposal
differentiates when the opening is on-going, and the intra-day trading
session has not commenced, the manner in which the pre-established
period of time would commence.
The proposal to note that ``Market Orders on the Order Book would
be immediately cancelled if an options series halted, provided the
Participant designated the cancellation of Market Orders'' specifically
addresses trading halts within the rule. Once an options series halts
for trading, the Exchange conducts another Opening Process. In the case
where a Market Order was resting on the Order Book, and the Participant
had designated the cancellation of Market Orders, in the event of a
halt, the Market Orders resting on the Order Book would immediately
cancel. Market Orders would apply uniformly to all market participants.
The Exchange's proposal to amend ``Intermarket Sweep Order'' Order
or ``ISO,'' within Options 3, Section 7(a)(6), does no impose an undue
burden on competition. The Exchange is amending the current
functionality of an ISO Order to require that ISOs have a time-in-force
designation of Immediate-or-Cancel. Today, ISOs with a time-in-force
designation of GTC are treated as having a time-in-force designation of
Day. All ISO Orders would be treated in a uniform manner.
The Exchange's proposal to remove the ``One-Cancels-the-Other
Order'' and ``WAIT'' TIF do not impose an undue burden on competition.
The Exchange will no longer permit this order type and TIF for any
market participant with the technology migration. Further, it will
remove an order type that is not in demand on BX and simply the
offerings provided by BX.
The Exchange's proposal to include a ``PRISM Order'' and ``Customer
Cross Order'' in the list of order types does not impose an undue
burden on competition because the addition of these terms within the
list of order types simply cross-references the existing order types
and does not change the functionality of the order types.
The Exchange's proposal to amend an ``Immediate-Or-Cancel'' Order
or ``IOC,'' within Options 3, Section 7(b)(2), does not impose an undue
burden on competition. The Exchange is adding additional context,
similar to Phlx, with respect to routing, submission through FIX or SQF
and the price protections that apply when utilizing SQF, which will
provide market participants with greater information for the protection
of investors and the general public. Market Makers utilize IOC Orders
to trade out of accumulated positions and manage their risk when
providing liquidity on the Exchange. Proper risk management, including
using these IOC Orders to offload risk, is vital for Market Makers, and
allows them to maintain tight markets and meet their quoting and other
obligations to the market. The Exchange believes that allowing Market
Makers to submit IOC Orders though their preferred protocol increases
their efficiency in submitting such orders and thereby allow them to
maintain quality markets to the benefit of all market participants that
trade on the Exchange. Further, unlike other market participants,
Market Makers provide liquidity to the market place and have
obligations.\80\ The Exchange believes not offering Order Price
Protection and Market Order Spread Protection for IOC Orders entered
through SQF does not create a burden on competition because Market
Makers have more sophisticated infrastructures than other market
participants and are able to manage their risk, particularly with
respect to quoting, using tools that are not available to other market
participants.\81\
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\80\ Market Makers have quoting obligations as specified in
Options 2, Section 5(d).
\81\ Market quotes are subject to various protections listed in
Options 3, Section 15(c). These additional quoting protections
permit Market Makers to manage their exposure at the Exchange. Other
market participants would not be subject to these risk protections
because they do not submit quotes or utilize SQF.
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The remainder of the amendments, within Options 3, Section 7, are
technical in nature or non-substantive.
Options 3, Section 10
The Exchange's proposal to amend its Order Book allocation rule,
within Options 3, Section 10, to amend the manner in which rounding
occurs does not create a burden on competition because the Exchange is
proposing to make transparent the manner in which rounding will occur
once the technology migration occurs. All Participants will be subject
to the rounding methodology when PRISM Orders allocate.
Options 3, Section 12 and 22
The adoption of Customer Cross Orders does not impose an undue
burden on competition. This proposal would continue to permit any
Participant to enter and execute paired Public Customer-to-Public
Customer Orders automatically outside of a PRISM Auction, while also
protecting Public Customer Orders on the book at the same price. Today,
the Exchange permits an Initiating Participant to enter a PRISM Order
for the account of a Public Customer paired with an order for the
account of a Public Customer and such paired orders will be
automatically executed without a PRISM Auction.\82\ While the Exchange
is limiting these orders to be entered through FIX, any market
participant may utilize FIX. The Exchange's proposal would continue to
permit the ability to enter Public Customer-to-Public Customer paired
orders to be automatically executed, however, not require these orders
to be first entered into PRISM. A Public Customer-to-Public Customer
order submitted into PRISM directly would be subject to execution
pursuant to Options 3, Section 13(i) and (ii). With this proposal, all
Participants may enter Public Customer-to-Public Customer paired orders
into FIX and receive the same treatment that these orders receive today
when entered into PRISM. The elimination of Options 3, Section 13(vi)
does not impose an undue burden on competition because Public Customer-
to-Public Customer Cross Orders would be entered as a separate order
type and therefore would not potentially cause more than one PRISM
Auction to occur in the same series.
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\82\ See BX Options 3, Section 13(vi). The execution price for
such a PRISM Order must be expressed in the quoting increment
applicable to the affected series. Such an execution may not trade
through the NBBO or trade at the same price as any resting Public
Customer order.
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Options 3, Section 13
The Exchange's proposal to amend the System functionality, within
Options 3, Section 13, similar to ISE, GEMX and MRX Options 3, Section
13, to better any limit order or quote on the limit order book on the
same side of the market as the PRISM Order, within Options 3, Section
13(i)(A) and (B), does not impose an undue burden on competition. The
addition of ``quotes,'' similar to ISE, GEMX and MRX at Options 3,
Section 13, will enable the Exchange to consider additional interest in
determining eligibility for PRISM.
The Exchange's proposal to state the minimum increment allowable
directly within the rule and not utilize references to Options 3,
Section 3 does not impose an undue burden on competition as these
amendments merely restate the current increment.
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(1),
for Surrender language does not impose an undue burden on competition
because, with this proposal, all Participants will be able to submit an
Initiating Order
[[Page 48294]]
with a configurable percentage designation of ``Surrender'' up to 40%
or such lower percentage requested by the Participant. Today, the
System permits a Participant to have either a Surrender of 0% or 40%.
The Exchange believes that the proposed feature will provide all
Participants with more flexibility, similar to functionality currently
offered on ISE, GEMX and MRX at Options 3, Section 13(e)(5)(iii).
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(1) to
remove the following rule text, ``. . .forfeiting the priority and
trade allocation privileges which he is otherwise entitled to as per. .
.'', does not impose a burden on competition because the proposed text
defines ``Surrender'' as the percentage designation, which the Exchange
believes more accurately defines ``Surrender''.
The Exchange's proposal to amend the second sentence of Options 3,
Section 13(ii)(A)(1) to instead provide, ``If zero (0%) is specified,
the Initiating Order will only trade if there is not enough interest
available to fully execute the PRISM Order at prices which are equal to
or improve upon the stop price,'' does not impose a burden on
competition. The proposed text makes clear that if no percentage were
elected for Surrender (0%) then the Initiating Order will only trade if
there is not enough interest available to fully execute the PRISM Order
at prices which are equal to or improve upon the stop price.
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(2) to
add ``price'' as a detail, which is specified today for a PRISM Auction
Notification or ``PAN,'' does not impose a burden on competition
because adding ``price'' to a PAN will be greater transparency with
respect to the PRISM and could encourage more competition in PRISM and
greater opportunity for potential price improvement in PRISM.
The Exchange's proposal to amend Options 3, Section 13(ii)(A)(7) to
conform the behavior of PAN responses to ISE, GEMX and MRX System
behavior \83\ does not impose a burden on competition. As noted above,
the Exchange is amending the System to accept oversized responses.
These responses will no longer cancel back, rather, PRISM will cap the
response at the size of the Initiating Order for purposes of allocation
for all Participants.
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\83\ See ISE, GEMX and MRX Options 3, Section 13(c)(2).
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The Exchange's proposal amend Options 3, Section 13(ii)(A)(8) and
(9) to replace the words ``immediately cancelled'' with ``rejected'' is
a non-substantive technical amendment.
The Exchange's proposal to amend Options 3, Section 13(ii)(E)(2)(a)
to provide the Initiating Participant with a priority allocation based
on the initial size of the Initiating Order after Public Customer
interest has been satisfied does not impose a burden on competition.
With this proposed amendment, all Participants would be allocated based
on the initial size of the Initiating Order after Public Customer
interest has been satisfied. The Exchange's proposal is similar to ISE,
GEMX and MRX Options 3, Section 13(d)(3).\84\
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\84\ ISE, GEMX and MRX Options 3, Section 13(d)(3), provides,
``In the case where the Counter-Side Order is at the same price as
Professional Interest in (d)(2), the Counter-Side order will be
allocated the greater of one (1) contract or forty percent (40%) of
the initial size of the Agency Order before Professional Interest is
executed. Upon entry of Counter-Side orders, Members can elect to
automatically match the price and size of orders, quotes and
responses received during the exposure period up to a specified
limit price or without specifying a limit price. In this case, the
Counter-Side order will be allocated its full size at each price
point, or at each price point within its limit price if a limit is
specified, until a price point is reached where the balance of the
order can be fully executed. At such price point, the Counter-Side
order shall be allocated the greater of one contract or forty
percent (40%) of the original size of the Agency Order, but only
after Priority Customer Interest at such price point are executed in
full. Thereafter, all Professional Interest at the price point will
participate in the execution of the Agency Order based upon the
percentage of the total number of contracts available at the price
that is represented by the size of the Professional Interest. An
election to automatically match better prices cannot be cancelled or
altered during the exposure period.''
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The Exchange's proposal to amend rounding, within Options 3,
Section 13(ii)(G), does not impose a burden on competition. The
rounding methodology will be uniformly applied when allocating PRISM
Orders.
The Exchange's proposal to amend Options 3, Section 13(ii)(H) to
remove the phrase ``then-existing'' and instead note ``at time of
execution'' to describe the NBBO does not impose a burden on
competition. The Exchange is not amending the current operation of the
System. The Exchange will uniformly check if the PAN responses crossed
the NBBO at the time of execution.
The Exchange's proposal to amend Options 3, Section 13(ii)(I) does
not impose an undue burden on competition. Without the word
``execution'' in this sentence, a comparison of the ``price of the
PRISM auction'' does not clearly differentiate the price in question as
the execution price of the PRISM Auction or the original stop price of
the PRISM Order. Without this clear differentiation, Options 3, Section
13(ii)(I) can be interpreted to describe scenarios that cannot happen.
The Exchange's proposed addition of the word ``execution'' in the first
sentence of Options 3, Section 13(ii)(I) reflects current System
handling. The execution price of the PRISM Auction is utilized to
compare to the price of an order on the limit Order Book. Adding the
word ``execution'' makes clear to Participants that the initial PRISM
stop price is not utilized to compare the same side of the market
transactions. While ``or better'' is not clearly specified, it is the
case today and its inclusion is meant to capture cases where PAN
responses provide price improvement for the PRISM Order at prices that
are crossed with the same side interest mentioned above. The proposed
wording is intended to provide greater clarity to Participants for
System handling with respect to same side of the market executions
against the Order Book. The proposed amendments reflect current System
handling are would not result in changes to the System. The remaining
amendments are technical and non-substantive.
The Exchange's proposal to amend Options 3, Section 13(ii)(K) to
add introductory text which defines a PRISM ISO does not impose a
burden on competition. Phlx similarly describes a PIXL ISO in its rule
text at Options 3, Section 13(b)(11).\85\ This text does not amend the
current System functionality, rather it adds context to the current
PRISM rule in describing a PRISM ISO.
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\85\ Phlx Options 3, Section 13(b)(11) states, ``PIXL ISO Order.
A PIXL ISO order (PIXL ISO) is the transmission of two orders for
crossing pursuant to this Rule without regard for better priced
Protected Bids/Offers (as defined in Options 5, Section 1) because
the member transmitting the PIXL ISO to the Exchange has,
simultaneously with the routing of the PIXL ISO, routed one or more
ISOs, as necessary, to execute against the full displayed size of
any Protected Bid/Offer that is superior to the starting PIXL
Auction price and has swept all interest in the Exchange's book
priced better than the proposed Auction starting price. Any
execution(s) resulting from such sweeps shall accrue to the PIXL
Order.''
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The Exchange's proposal to correct Options 3, Section 13(ii)(K) to
add ``on the contra-side of the PRISM Order'' does not impose a burden
on competition because this rule text clearly describes the current
System operation. The Exchange provides that ``on the contra-side of
the PRISM Order'' to distinguish the contra-side from the same side of
the order, which receives different treatment in allocation. This
proposed amendment is intended to clarify the current System operation,
not amend the System.
[[Page 48295]]
Finally, the Exchange's proposal to renumber Options 3, Section
13(vi) to ``(v)'' is technical and non-substantive.
Options 3, Section 23
The Exchange's proposal to amend Options 3, Section 23, Data Feeds
and Trade Information, to update its descriptions of the BX Depth of
Market (BX Depth) and BX Top of Market (BX Top) data feeds does not
impose an undue burden on competition because the updated descriptions
will bring greater transparency to the Exchange's rules.
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \86\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\87\
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\86\ 15 U.S.C. 78s(b)(3)(A)(iii).
\87\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of its
intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BX-2020-017 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-2020-017. 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-2020-017 and should be submitted on
or before August 31, 2020.
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\88\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\88\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17355 Filed 8-7-20; 8:45 am]
BILLING CODE 8011-01-P