Federal Register / Vol. 75, No. 243 / Monday, December 20, 2010 / Notices 79429 

14 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Capitalized terms not otherwise defined herein 

shall have the meanings prescribed within the BOX 

Rules. 

4See Securities Exchange Act Release Nos. 53516 

(March 20, 2006), 71 FR 15232 (March 27, 2006) 

(SR–BSE–2006–14); 54082 (June 30, 2006), 71 FR 

38913 (July 10, 2006) (SR–BSE–2006–29); 54469 

(September 19, 2006), 71 FR 56201 (September 26, 

2006) (SR–BSE–2006–38); 55139 (January 19, 2007), 

72 FR 3448 (January 25, 2007) (SR–BSE–2007–01); 

56014 (July 5, 2007), 72 FR 38104 (July 12, 2007) 

(SR–BSE–2007–31); 57195 (January 24, 2008), 73 FR 

5610 (January 30, 2008) (SR–BSE–2008–04); 59311 

(January 28, 2009), 74 FR 6071 (February 4, 2009) 

(SR–BX–2009–007); 59983 (May 27, 2009), 74 FR 

26445 (June 2, 2009) (SR–BX–2009–027); 61065 

(November 25, 2009), 74 FR 62860 (December 1, 

2009) (SR–BX–2009–076); 61577 (February 24, 

2010), 75 FR 9464 (March 2, 2010) (SR–BX–2010– 

017); 61929 (April 16, 2010), 75 FR 21085 (April 22, 

2010) (SR–BX–2010–031) and 62366 (June 23, 

2010), 75 FR 37863 (June 30, 2010) (SR–BX–2010– 

041). 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/sro.shtml). 

Copies of the submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of such filing 

also will be available for inspection and 

copying at the principal office of the 

Exchange. All comments received will 

be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

publicly available. All submissions 

should refer to File Number SR– 

NYSEAmex–2010–113 and should be 

submitted on or before January 10, 2011. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.14

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–31816 Filed 12–17–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63539; File No. SR–BX– 

2010–079] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Notice of Filing 

of Proposed Rule Change To Amend 

Chapter IV of the BOX Rules To Allow 

Executing Participants To Provide BOX 

a List of the Order Flow Providers for 

Which the Executing Participants Will 

Provide Directed Order Services 

December 14, 2010. 

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 December 

3, 2010, NASDAQ OMX BX, Inc. (the 

‘‘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 self-regulatory organization. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Chapter IV, Section 5 (Obligations of 

Market Makers) of the Rules of the 

Boston Options Exchange Group, LLC 

(‘‘BOX’’) to allow Executing Participants 

(‘‘EP’’) 3 to provide BOX a list of the 

Order Flow Providers (‘‘OFP’’) for which 

the EP will provide Directed Order 

services. The text of the proposed rule 

change is available on the Exchange’s 

Web site at http:// 

nasdaqomxbx.cchwallstreet.com/ 

NASDAQOMXBX/Filings/, on the 

Commission’s Web site at http:// 

www.sec.gov, at 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 

self-regulatory organization 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 self-regulatory organization 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 

Under the BOX’s Directed Order 

process, Market Makers on BOX are able 

to handle orders on an agency basis 

directed to them by OFPs. An OFP 

sends a Directed Order to BOX with a 

designation of the Market Maker to 

whom the order is to be directed. BOX 

then routes the Directed Order to the 

appropriate Market Maker. Under 

Chapter VI, Section 5(c)(ii) of the BOX 

Rules, a Market Maker only has two 

choices when he receives a Directed 

Order: (1) Submit the order to the PIP 

process; or (2) send the order back to 

BOX for placement onto the BOX Book. 

Chapter VI, Section 5(c)(i) prohibits a 

Market Maker from rejecting a Directed 

Order. This means that upon 

systematically indicating its desire to 

accept Directed Orders, the BOX system 

prevents a Market Maker that receives a 

Directed Order from either rejecting the 

receipt of the Directed Order from the 

BOX Trading Host or rejecting the 

Directed Order back to the OFP who 

sent it. A Market Maker who desires to 

accept Directed Orders must 

systemically indicate that it is an EP 

whenever the Market Maker wishes to 

receive Directed Orders from the BOX 

Trading Host. If a Market Maker does 

not systemically indicate that it is an 

EP, then the BOX Trading Host will not 

forward any Directed Orders to that 

Market Maker. In such a case, the BOX 

Trading Host will send the order 

directly to the BOX Book. 

The Exchange proposes to amend 

Chapter VI, Section 5(c)(i) (Directed 

Order Process) of the BOX Rules to 

allow EPs to provide BOX a list of OFPs 

for which the EP will provide Directed 

Order services. Under the proposal, 

prior to accepting any Directed Order 

through the Trading Host, an EP must 

inform BOX of the OFPs from whom it 

has agreed to accept Directed Orders 

(‘‘Listed OFPs’’ or ‘‘LOFPs’’). The Trading 

Host will then only send to the EP 

Directed Orders from LOFPs. In 

addition, unlike all other orders 

submitted to the BOX Trading Host, 

Directed Orders are not anonymous 

based on a pilot program discussed in 

BSE–2006–14.4 This practice will 

continue under this proposed rule 

change because BOX proposes that the 

BOX Trading Host will reveal to the EP 

the participant ID of the OFP sending 

the Directed Order. Shortly after the 

filing of this proposed rule change, the 

original proposal relating to the nonVerDate Mar<15>2010 17:18 Dec 17, 2010 Jkt 223001 PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 E:\FR\FM\20DEN1.SGM 20DEN1

jlentini on DSKJ8SOYB1PROD with NOTICES
79430 Federal Register / Vol. 75, No. 243 / Monday, December 20, 2010 / Notices 

5See Securities Exchange Act Release No. 53357 

(February 23, 2006), 71 FR 10730 (March 2, 2006) 

(SR–BSE–2005–52). 

6See Securities Exchange Act Release No. 62366 

(June 23, 2010), 75 FR 37863 (June 30, 2010) (SR– 

BX–2010–041). 

7See also Securities Exchange Act Release No. 

63540 (December 3, 2010 [sic]) (SR–BX–2010–080). 

The Commission notes that SR–BX–2010–080 was 

filed on December 13, 2010. See also supra note 4. 

BSE–2006–14 has been in effect since March 14, 

2006 as the Commission solicited comments and 

considered its effect on price improvement. 

Together these Pilots have constituted the ‘‘Directed 

Order Process Pilot Program’’. 

8See Securities Exchange Act Release No. 63540 

(December 3, 2010 [sic]) (SR–BX–2010–080). The 

Commission notes that SR–BX–2010–080 was filed 

on December 13, 2010. 

9See Securities Exchange Act Release No. 47351 

(February 11, 2003), 68 FR 8055 (February 19, 2003) 

SR–NASD–2002–60). As stated in the adopting 

release, the New York Stock Exchange comment 

letter on the Primex rule proposal argued that 

‘‘participants may selectively trade against agency 

orders alone by using a mechanism to screen out 

professional orders.’’ The Nasdaq Stock Market 

responded ‘‘that this feature ensures that any price 

improvement or enhanced liquidity opportunities 

be reserved for public customers, and not 

necessarily professional traders who could 

otherwise take advantage of the System’s benefits 

and ‘pre-empt’ the ability of a public customer to 

receive such benefits.’’ See Securities Exchange Act 

Release No. 47351 (February 11, 2003), 68 FR 8055, 

8058 (February 19, 2003) (SR–NASD–2002–60). See 

generally Securities Exchange Act Release No. 

42455 (February 24, 2000), 65 FR 11388 (March 2, 

2000) (stating that the Primary Market Makers and 

Competitive Market Makers on the ISE ‘‘will have 

the ability to set parameters regarding their 

willingness to trade generally with a broker-dealer’s 

proprietary order.’’). 

10See Securities Exchange Act Release No. 52827 

(November 23, 2005), 70 FR 72139 (December 1, 

2005) (SR–PCX–2005–56) (generally approving 

proposal by the Pacific Exchange to ‘‘add a 

provision that requires Users to be given permission 

by DMMs in order to send a Directed Order to that 

DMM.’’). 

11See supra note 5. 

12For example, in the month of August 2010, 

price improved contracts on BOX increased to an 

average of 204,090 per day, setting an all-time 

record, with total improvement to investors of $5.4 

million. From its inception to August 2010, BOX 

had provided investors over $296 million of price 

improvement. 

anonymity of Directed Orders (BSE– 

2005–52) will be withdrawn.5

Upon the withdrawal of BSE–2005– 

52, BSE–2006–14 will automatically 

expire.6 Therefore, concurrent with the 

filing of the proposal, the Exchange has 

proposed a new Pilot Program designed 

to function in exactly the same manner 

as under the original Pilot Program 

(‘‘BSE–2006–14’’) 7, which clarified that 

Directed Orders on BOX are not 

anonymous. The new Pilot Program 

allows BOX’s current Directed Order 

rule and process to continue on an 

uninterrupted basis.8 This new pilot 

period will afford the Commission the 

necessary time to consider the 

Exchange’s proposal to amend the BOX 

Rules to permit EPs to only receive 

Directed Orders through the Trading 

Host from OFPs whom the EP has 

designated. In the event the Commission 

reaches a decision with respect to the 

Exchange’s proposal to amend the BOX 

Rules before December 31, 2010, the 

Directed Order Process Pilot Program 

governing the Directed Order process on 

BOX will cease to be effective at the 

time of that decision. 

Discretionary Service 

BOX notes that in all events, whether 

a Market Maker elects to accept Directed 

Orders or chooses systematically not to 

accept any Directed Orders, its 

displayed best bid and offer are firm and 

accessible for automatic executions by 

all order submitters. In other words, the 

Directed Order process is a 

discretionary service that Market 

Makers may choose to provide or not, 

above and beyond satisfying their core 

market maker obligations of providing 

continuous two-sided firm quotations 

on a nondiscriminatory basis. Just as 

other market makers may and do choose 

to provide, or not, other discretionary 

services, such as payment for order 

flow, BOX Market Makers may identify 

the OFPs for which they may choose to 

provide such discretionary service as 

Directed Order.9

Consistent with the fact that the 

Directed Order process is a 

discretionary service, allowing EPs to 

provide BOX a list of OFPs to whom it 

will provide Directed Order services is 

not only consistent with the statute 10— 

which does not prohibit broker-dealers 

from determining which customer for 

whom it will provide a discretionary 

service, but also is highly desirable. As 

is true with respect to any discretionary 

service, without some control over the 

OFPs from whom Market Makers will 

accept Directed Orders, Market Makers 

may be expected to provide less of the 

service. This is specifically true with 

respect to the Directed Order process 

because the automated customer 

protections built into the Directed Order 

process, absent the ability to control the 

OFPs for whom it will provide the 

service, could and almost certainly 

would have the unintended 

consequences of creating an opportunity 

for Options Participants to engage in 

abusive practices that jeopardize the 

ability of all Market Makers to price 

improve customer orders. 

An EP’s quote at the NBBO is taken 

down upon BOX’s receipt of a Directed 

Order and yet is still guaranteed as a 

Firm Quote for at least three seconds 

regardless of whether market prices 

change during that time (known as the 

Guaranteed Directed Order (‘‘GDO’’)). 

Because of the three second GDO, it is 

possible that some Options Participants, 

including market makers, could send 

large numbers of Directed Orders to EP 

competitors using strategies that could 

continually cause the EP to yield 

priority (if it declines to PIP the order). 

This outcome is particularly 

problematic since, at a minimum, the EP 

is forced to forgo whatever time priority 

he may have had over his competitors 

at the top of the BOX Book for the given 

option series of the Directed Order. 

Moreover, the EP is also obligated to 

provide the GDO for at least three 

seconds and trade with any unexecuted 

Directed Order quantity (but only if no 

other Options Participant wants to trade 

with the Directed Order). Essentially 

this means the EP will trade with the 

declined Directed Order only when no 

one else wishes to interact with that 

order. Without the protection of being 

sent Directed Orders only from LOFPs, 

EPs will have to modify their risk 

assessment and therefore give less price 

improvement to everyone—or perhaps 

stop accepting any Directed Orders and 

not giving price improvement at all. 

This effect would significantly harm the 

retail investors who have benefited from 

the BOX price improvement system 

since its inception. 

Anonymity 

Under the proposal the Exchange 

seeks to reveal to the EP the Participant 

ID of the OFP sending the Directed 

Order.11 The Market Makers must 

submit this Participant ID to BOX 

whenever the Market Maker chooses to 

submit the Directed Order and his 

Primary Improvement Order to the PIP 

process. However, once the Directed 

Order is submitted to the PIP process or 

the BOX Book, the Participant ID is not 

shown to any market participant and the 

identity of the OFP will be anonymous 

pursuant to Chapter V, Section 14(e). 

A similar version of the proposed 

directed order process regarding 

anonymity has been operating 

successfully under the Directed Order 

Process Pilot Program for over four and 

a half years without negative effect to 

investors or price improvement. BOX 

believes that allowing the Participant ID 

to be revealed to the EP has had a 

positive influence on price 

improvement.12 Anonymity of market 

participants is not required under the 

Exchange Act. The identification of the 

OFP in the Directed Order process is 

consistent with the requirements set 

forth under Section 6(b)(5) of the 

Exchange Act in that it will benefit the 

marketplace and protect investors 


jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 75, No. 243 / Monday, December 20, 2010 / Notices 79431 

13 15 U.S.C. 78f(b). 

14 15 U.S.C. 78f(b)(5). 15 17 CFR 200.30–3(a)(12). 

because it will give Market Makers the 

ability to identify the firms for whom it 

will provide this discretionary service. 

This proposal will allow Options 

Participants to make better informed 

decisions in determining when and how 

to use the Directed Order process, while 

also motivating Market Makers to 

continue to provide the high levels of 

price improvement available to 

investors. 

In particular, BOX notes that the 

proposal is not designed to permit 

unfair discrimination between 

customers, brokers, or dealers, and 

satisfies the statutory mandates of 

Section 6(b)(5) of the Exchange Act 

because upon systematically indicating 

its desire to accept Directed Orders from 

LOFPs, the BOX system prevents a 

Market Maker that receives a Directed 

Order from either rejecting the receipt of 

the Directed Order from the BOX 

Trading Host or rejecting the Directed 

Order back to the OFP who sent it. 

Further, the BOX Rules guarantee equal 

access to the PIP and the BOX Book for 

customers, brokers, and dealers for 

those that do not wish to use the 

Directed Order process. 

2. Statutory Basis 

The Exchange believes that the 

proposal is consistent with the 

requirements of Section 6(b) of the 

Act,13 in general, and Section 6(b)(5) of 

the Act,14 in particular, in that it is 

designed to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities, to 

remove impediments to and perfect the 

mechanism for a free and open market 

and a national market system and, in 

general, to protect investors and the 

public interest. In particular, the 

Exchange notes that anonymity of 

market participants is not required 

under the Exchange Act and believes 

that this proposed rule change will 

benefit the marketplace and protect 

investors because it will give Market 

Makers the ability to identify the firms 

for whom it will provide this 

discretionary service. This proposal will 

allow Options Participants to make 

better informed decisions in 

determining when and how to use the 

Directed Order process, while also 

motivating Market Makers to continue 

to provide the high levels of price 

improvement available to investors in 

the BOX market. 

Additionally, the Exchange believes 

that the proposal is not designed to 

permit unfair discrimination between 

customers, brokers, or dealers, and 

satisfies the statutory mandates of 

Section 6(b)(5) of the Exchange Act 

because upon systematically indicating 

its desire to accept Directed Orders from 

LOFPs, the BOX system prevents a 

Market Maker that receives a Directed 

Order from either rejecting the receipt of 

the Directed Order from the BOX 

Trading Host or rejecting the Directed 

Order back to the OFP who sent it. 

Further, the BOX Rules guarantee equal 

access to the PIP and the BOX Book for 

customers, brokers, and dealers for 

those that do not wish to use the 

Directed Order process. 

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. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

The Exchange has neither solicited 

nor received comments on the proposed 

rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period 

up to 90 days (i) as the Commission may 

designate if it finds such longer period 

to be appropriate and publishes its 

reasons for so finding or (ii) as to which 

the self-regulatory organization 

consents, the Commission will: 

(A) By order approve or disapprove 

the proposed rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–BX–2010–079 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–BX–2010–079. This file 

number should be included on the 

subject line if e-mail 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 

Web site (http://www.sec.gov/rules/ 

sro.shtml). Copies of the submission, all 

subsequent amendments, all written 

statements with respect to the proposed 

rule change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 

10 a.m. and 3 p.m. Copies of the filing 

will also be available for inspection and 

copying at the Exchange’s principal 

office. All comments received will be 

posted without change; the Commission 

does not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make publicly available. All 

submissions should refer to File 

Number SR–BX–2010–079 and should 

be submitted on or before January 10, 

2011. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–31826 Filed 12–17–10; 8:45 am] 

BILLING CODE 8011–01–P 


jlentini on DSKJ8SOYB1PROD with NOTICES