73930 Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices 

5 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See BX Options Rules at Chapter VII. 

4Options market makers receive certain benefits 

for carrying out their duties. For example, a lender 

may extend credit to a broker-dealer without regard 

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 

such proposed rule change, or 

(B) institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

The proposal shall not take effect 

until all regulatory actions required 

with respect to the proposal are 

completed. 

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 rule-comment@

sec.gov. Please include File No. SR– 

FICC–2014–06 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE., 

Washington DC 20549. 

All submissions should refer to File 

Number SR–FICC–2014–06. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of FICC and on its Web site at 

http://www.dtcc.com/∼/media/Files/

Downloads/legal/rule-filings/2014/ficc/

SR-FICC-2014-06.pdf. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–FICC– 

2014–06 and should be submitted on or 

before January 2, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.5

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–29179 Filed 12–11–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73784; File No. SR–BX– 

2014–049] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Notice of Filing 

of Proposed Rule Change Relating to 

Directed Market Makers 

December 8, 2014. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on November 

25, 2014, NASDAQ OMX BX, Inc. (‘‘BX’’ 

or ‘‘Exchange’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to add 

definitions of Directed Order and 

Directed Market Maker (‘‘DMM’’), as 

well as provisions concerning the 

designation of an order as a Directed 

Order and DMM market making 

obligations. The proposal also revises 

priority rules to provide for a DMM 

participation entitlement. Finally, the 

rule makes certain clarifications to the 

text of rules governing Lead Market 

Makers (‘‘LMMs’’). The proposal seeks 

to enable BX to compete with the many 

options exchanges that offer directed 

orders in their respective markets. 

The text of the proposed rule change 

is available on the Exchange’s Web site 

at http://

nasdaqomxbx.cchwallstreet.com, at the 

principal office of the Exchange, and at 

the Commission’s Public Reference 

Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The purpose of the proposed rule 

change is to adopt rules to permit BX 

Market Makers to act as Designated 

Market Makers, or DMMs, in their 

appointed options classes, provided the 

DMM meets certain obligations and 

quoting requirements as provided for in 

the new proposed Exchange Rules. The 

Exchange proposes to provide DMMs 

with certain participation entitlements. 

The Exchange believes that these 

amendments, described below in greater 

detail, will enhance competition by 

affording the BX Options market the 

opportunity to compete for directed 

order flow. 

Current Categories of BX Options 

Participants 

Today on BX there are three types of 

Options Participants: Options Order 

Entry Firms, Options market makers and 

LMMs. Options Order Entry Firms, or 

OEFs, are Options Participants who 

represent customer orders as agent on 

BX Options and non-market maker 

Participants conducting proprietary 

trading as principal. 

Options market makers are Options 

Participants registered with the 

Exchange as options market makers in 

one or more listed options on BX.3 BX 

Options market makers are required to 

electronically engage in a course of 

dealing to enhance liquidity available 

on BX and to assist in the maintenance 

of fair and orderly markets.4 Among 

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Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices 73931 

to the restrictions in Regulation T of the Board of 

Governors of the Federal Reserve System if the 

credit is to be used to finance the broker-dealer’s 

activities as market maker on a national securities 

exchange. Thus, an Options market maker has a 

corresponding obligation to hold itself out as 

willing to buy and sell options for its own account 

on a regular or continuous basis to justify this 

favorable treatment. 

5BX Regulation may consider exceptions to the 

requirement to quote 60 percent (or higher) of the 

trading day based on demonstrated legal or 

regulatory requirements or other mitigating 

circumstances. Market makers are not required to 

make two-sided markets pursuant to Section 5(a)(i) 

of Chapter VII in any Quarterly Option Series, 

adjusted option series, or any option series until the 

time to expiration for such series is less than nine 

months. Accordingly, the continuous quotation 

obligations set forth in this rule do not apply to 

market makers respecting Quarterly Option Series, 

adjusted option series, or any series with an 

expiration of nine months or greater. If a technical 

failure or limitation of a system of BX prevents a 

market maker from maintaining, or prevents a 

market maker from communicating to BX Options, 

timely and accurate quotes, the duration of such 

failure or limitation shall not be included in any of 

these calculations with respect to the affected 

quotes. Substantial or continued failure by an 

Options market maker to meet any of its obligations 

and duties, will subject the Options market maker 

to disciplinary action, suspension, or revocation of 

the Options market maker’s registration in one or 

more options series. See obligations of Options 

market makers in Chapter VII, Section 6. 

6See Chapter VII, Section 13. 

7See Chapter VII, Section 14. 

8See proposed Chapter VI, Section 1(e)(1), which 

replaces a Reserved section with a definition of 

Directed Order. The new provision also states that 

Directed Orders are handled within the System 

pursuant to Chapter VI, Section 10. 9See Chapter VI, Section 1(e)(2). ‘‘Limit Orders’’ 

are orders to buy or sell an option at a specified 

price or better. A limit order is marketable when, 

for a limit order to buy, at the time it is entered into 

the System, the order is priced at the current inside 

offer or higher, or for a limit order to sell, at the 

time it is entered into the System, the order is 

priced at the inside bid or lower. 10See Chapter VI, Section 1(e)(3). ‘‘Minimum 

Quantity Orders’’ are orders that require that a 

specified minimum quantity of contracts be 

obtained, or the order is cancelled. Minimum 

Quantity Orders are treated as having a time-inforce designation of Immediate or Cancel. Minimum 

Quantity Orders received prior to the opening cross 

or after market close will be rejected. 11See Chapter VI, Section 1(e)(5). ‘‘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. 12See Chapter VI, Section 1(a)(6). ‘‘Price 

Improving Orders’’ are orders to buy or sell an 

option at a specified price at an increment smaller 

than the minimum price variation in the security. 

Price Improving Orders may be entered in 

increments as small as one cent. Price Improving 

Orders that are available for display shall be 

displayed at the minimum price variation in that 

security and shall be rounded up for sell orders and 

rounded down for buy orders. 

13See Chapter VI, Section 1(e)(10). ‘‘All-or-none’’ 

shall mean a market or limit order which is to be 

executed in its entirety or not at all. All-or-None 

Orders are treated as having a time-in-force 

designation of Immediate or Cancel. All-or-None 

Orders received prior to the opening cross or after 

market close will be rejected. 14See Chapter VI, Section 1(e)(11). ‘‘Post-Only 

Orders’’ are orders that will not remove liquidity 

from the System. Post-Only Orders are to be ranked 

and executed on the Exchange or cancelled, as 

appropriate, without routing away to another 

market. Post-Only Orders are evaluated at the time 

of entry with respect to locking or crossing other 

orders as follows: (i) If a Post-Only Order would 

lock or cross an order on the System, the order will 

be re-priced to $.01 below the current low offer (for 

bids) or above the current best bid (for offers) and 

displayed by the System at one minimum price 

increment below the current low offer (for bids) or 

above the current best bid (for offers); and (ii) if a 

Post-Only Order would not lock or cross an order 

on the System but would lock or cross the NBBO 

as reflected in the protected quotation of another 

market center, the order will be handled pursuant 

to Chapter VI, Section 7(b)(3)(C). Participants may 

choose to have their Post-Only Orders returned 

whenever the order would lock or cross the NBBO 

or be placed on the book at a price other than its 

limit price. Post-Only Orders received prior to the 

opening cross or after market close will be rejected. 

Post-Only Orders may not have a time-in-force 

designation of Good Til Cancelled or Immediate or 

Cancel. Although a Post-Only Order may be 

designated as a Directed Order, because it is not 

executed immediately upon receipt it will never 

result in the awarding of a DMM participation 

entitlement as discussed below. 

15See Chapter VI, Section 1(g)(2). ‘‘Immediate Or 

Cancel’’ or ‘‘IOC’’ shall mean for orders so 

designated, that if after entry into the System a 

marketable order (or unexecuted portion thereof) 

becomes non-marketable, the order (or unexecuted 

portion thereof) shall be canceled and returned to 

the entering participant. IOC Orders shall be 

available for entry from the time prior to market 

open specified by the Exchange on its Web site 

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 

Web site 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. IOC orders can be routed if designated 

as routable. 

16See Chapter VI, Section 1(g)(4). ‘‘Good Til 

Cancelled’’ or ‘‘GTC’’ shall mean for orders so 

designated, that if after entry into System, the order 

is not fully executed, the order (or unexecuted 

portion thereof) shall remain available for potential 

display and/or execution unless cancelled by the 

entering party, or until the option expires, 

whichever comes first. GTC Orders shall be 

available for entry from the time prior to market 

open specified by the Exchange on its Web site 

until market close and for potential execution from 

9:30 a.m. until market close. 

17See Chapter VI, Section 1(g)(3). ‘‘DAY’’ shall 

mean for orders so designated, that 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 Web site until market close 

and for potential execution from 9:30 a.m. until 

market close. 

18See Chapter VI, Section 1(g)(5). ‘‘WAIT’’ shall 

mean for orders so designated, that upon entry into 

the System, the order is held for one second 

without processing for potential display and/or 

execution. After one second, the order is processed 

for potential display and/or execution in 

accordance with all order entry instructions as 

determined by the entering party. 

19The Exchange would specify via an Options 

Trader Alert which options would be subject to the 

Directed Orders provisions specified herein. 

20Today, BX Options Participants enter Price 

Improving Orders, which orders have a specified 

price smaller than the minimum price variation 

(‘‘MPV’’) in the option. Price Improving Orders may 

Continued 

other things, Options market makers 

must quote 60 percent of the trading day 

(as a percentage of the total number of 

minutes in such trading day) or such 

higher percentage as BX may announce 

in advance.5

Recently, the Exchange adopted rules 

providing that an approved BX Options 

market maker may become an LMM in 

one or more listed options, provided 

that each class is limited to one LMM.6

BX does not limit the number of entities 

that may become LMMs. LMMs are 

subject to more extensive obligations 

than other BX Options market makers, 

including an obligation to provide 

continuous two-sided quotations 

meeting certain quote width 

requirements throughout the trading day 

in its appointed issues for 90 percent of 

the time the Exchange is open for 

trading in each issue.7 The Exchange 

provides LMMs with specific 

participation entitlements in Chapter VI 

(Trading Systems) at Section 10, entitled 

‘‘Book Processing.’’ 

DMM Designation and Directed Orders 

The Exchange is now proposing to 

define Directed Orders and to provide 

for another category of market maker, 

the DMM. A ‘‘Directed Order’’ would be 

defined as an order to buy or sell which 

has been directed (pursuant to the 

Exchange’s instructions on how to 

direct an order) to a particular market 

maker (the DMM with respect to that 

Directed Order).8 Pursuant to a 

proposed amendment to Chapter VI, 

Section 6(a)(2), Limit Orders,9

Minimum Quantity Orders,10 Market 

Orders,11 Price Improving Orders,12 Allor-None Orders 13 and Post-Only 

Orders 14 may all be designated as 

Directed Orders. A Directed Order may 

also be designated as Immediate or 

Cancel (‘‘IOC’’),15 Good-till-Cancelled 

(‘‘GTC’’),16 Day (‘‘DAY’’) 17 or a WAIT18

order pursuant to Chapter VI, Section 

6(a)(1) as proposed to be amended. New 

Section 15, DMMs, of Chapter VII, 

Market Participants, provides that 

market makers may receive Directed 

Orders in their appointed classes as 

provided therein, provided they 

indicated to the Exchange, in a form 

specified, that they will receive Directed 

Orders. Directed Orders may be 

available only in certain options.19

Pursuant to new Chapter VII, Market 

Participants, Section 15, when the 

Exchange’s disseminated price is the 

NBBO at the time of receipt of the 

Directed Order, and the DMM is quoting 

at or improving 20 the Exchange’s 

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73932 Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices 

be entered in increments as small as one cent. Price 

Improving Orders will be displayed at the MPV in 

that security and rounded up for sell orders and 

down for buy orders. Without this order type, 

market participants would not be able to submit 

orders priced between the MPV. Instead, orders, if 

submitted, would be priced (and displayed) at the 

MPV. The treatment of Price Improving Orders is 

not altered by this rule change. It is consistent to 

account for the possibility that the DMM improves 

the Exchange’s disseminated price by submitting a 

marketable order in a non-standard increment, 

which in this case, would aggressively improve the 

NBBO. Awarding a participation entitlement to a 

DMM will not otherwise change the manner in 

which Price Improving Orders will be displayed at 

the MPV and available to be executed at price 

improving increments. 

21Chapter VII, Market Participants, Section 15, 

Directed Market Makers, subsection (i) Price 

Improving Orders from a DMM participant which 

are reflected on OPRA at the NBBO retain price 

priority and are eligible for a DMM participation 

entitlement. 

22See Chapter VII, Market Participants, Section 

15, Directed Market Makers, subsection (ii). 

23Chapter VII, Market Participants, Section 15, 

Directed Market Makers, subsection (iii). 

24An adjusted option series is an option series 

wherein, as a result of a corporate action by the 

issuer of the underlying security, one option 

contract in the s [sic] 

25See Chapter I, Section 1(a)(49). 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. 

26See Chapter I, Section 1(50). The term ‘‘Public 

Customer’’ means a person that is not a broker or 

dealer in securities. 27Price Improving Orders retain price priority 

before an LMM participation entitlement is 

provided at the Exchange’s disseminated price. See 

Chapter VI, Sections 1(a)(6) and 7(b)(3)(B). 28When the decimal is exactly 0.5, the rounding 

direction is up to the nearest integer. 29Chapter VI, Trading Systems, Section 10, Book 

Processing, subsection (C)(2)(ii)(1). 30As is the case with Size Pro-Rata executions 

discussed above, Price Improving Orders retain 

price priority before an LMM participation 

entitlement is provided at the Exchange’s 

disseminated price. See Chapter VI, Sections 1(a)(6) 

and 7(b)(3)(B). 

disseminated price, the Directed Order 

will be automatically executed and 

allocated in accordance with Chapter 

VI, Section 10 such that the DMM will 

receive a DMM participation 

entitlement provided for in Chapter VI, 

Section 10, discussed below.21 If the 

DMM participation entitlement is not 

awarded at the time of receipt of the 

Directed Order, no DMM participation 

entitlement will apply and the order 

will be handled as though it were not a 

Directed Order for the remainder of the 

life of the order. However, when (a) the 

Exchange’s disseminated price is the 

NBBO, and the quotation disseminated 

by the DMM on the opposite side of the 

market from the Directed Order is 

inferior to the NBBO at the time of 

receipt of the Directed Order, or (b) the 

Exchange’s disseminated price is not the 

NBBO at the time of receipt of the 

Directed Order, the Directed Order will 

be processed as though it were not a 

Directed Order.22

New Section 15 requires a DMM to 

provide continuous two-sided 

quotations throughout the trading day in 

all options issues in which the DMM is 

assigned for 90 percent of the time the 

Exchange is open for trading in each 

issue. Such quotations must meet the 

legal quote width requirements of 

Chapter VII, Section 6. These 

obligations will apply collectively to all 

series in all of the issues, rather than on 

an issue-by-issue basis once the market 

maker has indicated to the Exchange 

that the market maker will be receiving 

Directed Orders. While the Market 

Maker’s quoting requirement is a daily 

obligation, the Exchange is able to 

determine compliance with these 

obligations on a monthly basis. BX 

Regulation may consider exceptions to 

the requirement to quote 90% (or 

higher) of the trading day based on 

demonstrated legal or regulatory 

requirements or other mitigating 

circumstances.23 If a technical failure or 

limitation of a system of the Exchange 

prevents a DMM from maintaining, or 

prevents a DMM from communicating to 

the Exchange, timely and accurate 

electronic quotes in an issue, the 

duration of such failure shall not be 

considered in determining whether the 

DMM has satisfied the 90 percent 

quoting standard with respect to that 

option issue. Further, these obligations 

shall not apply to DMMs with respect to 

Quarterly Options Series, adjusted 

option series,24 or any series with a time 

to expiration of nine months or greater. 

However, a DMM may still receive a 

participation entitlement in such series 

if it elects to quote in such series and 

otherwise satisfies the requirements of 

Chapter VI, Section 10. 

LMM and New DMM Participation 

Entitlements 

By way of background, Chapter VI, 

Trading System, Section 10, Book 

Processing, currently provides that the 

Exchange will determine to apply, for 

each option, either a Price/Time or a 

Size Pro-Rata execution algorithm. In 

addition to describing each execution 

algorithm, Chapter VI, Section 10 also 

describes certain priority overlays 

applicable to each of those algorithms. 

Currently, under both Price/Time and 

Size Pro-Rata algorithms, Public 

Customer Priority is always in effect and 

provides that the highest bid and lowest 

offer have priority except that Public 

Customer orders have priority over nonPublic Customer orders at the same 

price. If there are two or more Public 

Customer orders for the same options 

series at the same price, priority is 

afforded to such Public Customers 

orders in the sequence in which they are 

received by the System. For purposes of 

the Public Customer Priority overlay, a 

Public Customer order does not include 

a Professional 25 order. 

Chapter VI, Section 10 also currently 

provides for a LMM priority overlay 

after all Public Customer orders have 

been fully executed, upon receipt of an 

order, provided the LMM’s bid/offer is 

at the Exchange’s disseminated price. 

The LMM priority overlay applies under 

both the Price/Time and the Size ProRata execution algorithms, if applicable. 

Specifically, with respect to Size ProRata executions, the Exchange affords 

an LMM a participation entitlement if 

the LMM’s bid/offer is at or better than 

the Exchange’s disseminated price and 

all Public Customer 26 orders have been 

fully executed.27 The LMM is not 

entitled to receive a number of contracts 

that is greater than the displayed size 

associated with such LMM. LMM 

participation entitlements are 

considered after the opening process. 

The LMM participation entitlement 

provides a BX Options LMM with the 

greater of: The LMM’s Size Pro-Rata 

share; 50 percent of remaining interest 

if there is one or no other market maker 

at that price; 40 percent of remaining 

interest if there are two other market 

makers at that price; or 30 percent of 

remaining interest if there are more than 

two other market makers at that price; 

or if rounding would result in an 

allocation of less than one contract, a 

BX Options LMM receives one contract. 

Rounding is up or down to the nearest 

integer.28 After all Public Customer 

orders have been fully executed and 

LMM participation entitlements 

applied, if applicable, BX Options 

market makers then have priority over 

all other Participant orders at the same 

price.29

For symbols trading under the Price/ 

Time algorithm, the Public Customer 

Priority Overlay is always in effect. 

Chapter VI, Section 10 also currently 

provides for a LMM priority overlay 

after all Public Customer orders have 

been fully executed, upon receipt of an 

order, provided the LMM’s bid/offer is 

at or better than the Exchange’s 

disseminated price, the LMM is afforded 

a participation entitlement.30 The LMM 

is not entitled to receive a number of 

contracts that is greater than the 

displayed size associated with such 

LMM. After Public Customers orders 

have been executed, a BX Options LMM 

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Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices 73933 

31Chapter VI, Trading Systems, Section 10, Book 

Processing, subsection (C)(1)(b)(1). 

32Chapter VI, Trading Systems, Section 10, Book 

Processing, subsections (C)(1)(b)(2) and (C)(2)(ii)(2). 

33As with the LMM participation entitlements 

discussed above, Price Improving Orders retain 

price priority. A DMM participation entitlement 

will only be provided at the last price executed 

which is equal to or better than the Exchange’s 

disseminated price. See Chapter VI, Sections 1(a)(6) 

and 7(b)(3)(B). 

34Chapter VI, Trading Systems, Section 10, Book 

Processing, subsection (C)(1)(b). 

35Chapter VI, Trading Systems, Section 10, Book 

Processing, subsections (C)(1)(c). 

36Chapter VI, Trading Systems, Section 10, Book 

Processing, subsection (C)(2)(iii). 

37See note 20. 

38Chapter VI, Trading Systems, Section 10, Book 

Processing, subsections (C)(1)(b)(1) (with respect to 

Price/Time symbols) and (C)(2)(ii)(1) (with respect 

to Size Pro-Rata Symbols). 

39Chapter VI, Trading Systems, Section 10, Book 

Processing, subsections (C)(1)(b)(2) (with respect to 

Price/Time symbols) and (C)(2)(ii)(2) (with respect 

to Size Pro-Rata Symbols). 

40Chapter VI, Trading Systems, Section 10, Book 

Processing, subsection (C)(2)(iv). 

receives the greater of: (a) Contracts the 

LMM would receive if the allocation 

was based on time priority with Public 

Customer priority; (b) 50 percent of 

remaining interest if there is one or no 

other market maker at that price; (c) 40 

percent of remaining interest if there are 

two other market makers at that price; 

or (d) 30 percent of remaining interest 

if there are more than two other market 

makers at that price or if rounding 

would result in an allocation of less 

than one contract, a BX Options LMM 

receives one contract. Rounding is up or 

down to the nearest integer.31

Under both the Price/Time algorithm 

and the Size Pro-Rata algorithm, Orders 

for 5 contracts or fewer are allocated to 

the LMM. The Exchange reviews this 

provision quarterly and maintains the 

small order size at a level that will not 

allow orders of 5 contracts or less 

executed by the LMM to account for 

more than 40 percent of the volume 

executed on the Exchange.32

The Exchange is now proposing to 

amend its rules to provide for a DMM 

priority entitlement under both the 

Price/Time and the Size Pro-Rata 

algorithm, and to make certain 

corresponding changes and 

clarifications to the current LMM 

participation entitlements. Under both 

Price/Time and Size Pro-Rata 

algorithms, a market maker which 

receives a Directed Order is a DMM 

with respect to that Directed Order. 

After all Public Customer orders at a 

given price point have been fully 

executed, upon receipt of a Directed 

Order, provided the DMM’s bid/offer is 

at or improves the NBBO, the DMM will 

be afforded a participation 

entitlement 33 at the last execution price, 

which is equal to or better than the 

NBBO if the DMM executed the order at 

such price. The DMM shall not be 

entitled to receive a number of contracts 

that is greater than the displayed size at 

a given price point associated with such 

DMM. DMM participation entitlements 

will be considered after the opening 

process. Chapter VI, Section 10(C)(1)(c) 

specifies that under the Price/Time 

execution algorithm, DMM participant 

entitlements (like LMM participation 

entitlements) 34 shall only be in effect 

when the Public Customer Priority 

Overlay is also in effect. 

Pursuant to the DMM participation 

entitlement in effect under the Price/

Time algorithm, the DMM would 

receive, with respect to a Directed 

Order, the greater of: (1) Contracts the 

DMM would receive if the allocation 

was based on time priority pursuant to 

subparagraph (C)(1)(a) with Public 

Customer priority; (2) after Public 

Customer orders are executed, 40 

percent of remaining interest; or (3) the 

LMM participation entitlement (if the 

DMM is also the LMM). If there are 

multiple DMM quotes at the same price 

which are at or improve the NBBO 

when the Directed Order is received, the 

DMM participation entitlement would 

apply only once to the one which has 

the highest time priority at the last price 

executed upon receipt of the Directed 

Order which is equal to or better than 

the NBBO. If rounding would result in 

an allocation of less than one contract, 

the DMM would receive one contract. 

Rounding would be up or down to the 

nearest integer.35 Under no 

circumstances would the DMM receive 

an allocation of greater than 40% of an 

order at a price at which they receive a 

directed entitlement, unless it resulted 

from rounding. 

Pursuant to the DMM participation 

entitlement in effect under the Size ProRata algorithm, the DMM would receive, 

with respect to a Directed Order, the 

greater of: (1) The DMM’s Size Pro-Rata 

share under subsection (1)(C)(2)(iv); (2) 

after Public Customer orders are 

executed, 40 percent of remaining 

interest; or (3) the LMM participation 

entitlement (if the DMM is also the 

LMM). If there are multiple DMM 

quotes at the same price which are at or 

improve the NBBO when the Directed 

Order is received, the DMM 

participation entitlement would apply 

only to the one which has the highest 

time priority at the last price executed 

upon receipt of the Directed Order 

which is equal to or better than the 

NBBO. Additional DMM quotes at such 

price will receive no further allocation 

of the Directed Order. Like the DMM 

participation entitlement applicable to 

executions under the Price/Time 

algorithm, if rounding would result in 

an allocation of less than one contract, 

the DMM would receive one contract, 

and rounding would be up or down to 

the nearest integer.36 Under no 

circumstances would the DMM receive 

an allocation of greater than 40% of an 

order at a price at which they receive a 

directed entitlement, unless it resulted 

from rounding. 

As noted above, under both execution 

algorithms only one participation 

entitlement, LMM or DMM, may be 

applied on a given order. The Exchange 

is amending the current LMM 

entitlements under each algorithm to 

provide with respect to a Directed Order 

that if the LMM is also the DMM, the 

LMM shall receive the DMM 

participation entitlement applicable to 

that algorithm, if any, if such DMM 

participation entitlement is greater than 

the LMM participation entitlement the 

LMM would otherwise receive pursuant 

to Chapter VI, Section 10, subsections 

(C)(1)(b)(1)(a)–(d) (in the case of Price/ 

Time symbols) or (C)(2)(ii)(1)(a)–(d) (in 

the case of Size Pro-Rata symbols). The 

Exchange is also modifying the LMM 

priority rules so that the LMM 

participation entitlement will not apply 

to a Directed Order if when it is 

received the DMM’s bid/offer is at or 

improves 37 the NBBO and the LMM is 

at the same price level and the LMM is 

not the DMM.38

The Exchange is also proposing to 

revise the current allocation to the LMM 

of orders for five contracts or fewer 

(which applies under both algorithms). 

As revised, the provision would not 

apply if the order of 5 contracts or fewer 

is directed to a DMM who is quoting at 

the NBBO.39

Currently, with respect to executions 

under the Size Pro-Rata algorithm, BX 

Options market makers have priority 

over all other Participant orders at the 

same price after all Public Customer 

orders have been fully executed and 

LMM participation entitlements 

applied. The Exchange proposes to 

amend this provision so that this BX 

Options market maker priority applies 

only after any DMM participation 

entitlements have been applied as 

well.40

Finally, the Exchange proposes to 

clarify with respect to LMMs under both 

execution algorithms that after all 

Public Customer orders have been fully 

executed, upon receipt of an order, the 

LMM will be afforded a participation 

entitlement provided that LMM’s bid/

offer is at or improves upon the 

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41See note 20. 

Exchange’s disseminated price. The 

addition of the reference to an improved 

bid/offer will conform the LMM 

provision to the corresponding new 

DMM provision.41 The Exchange is also 

making a clarifying change in Chapter 

VI, Section 10(1)(C)(1)(b)(1)(a) by 

changing ‘‘subparagraph (1)(a) above’’ to 

‘‘subparagraph (C)(1)(a) above.’’ 

Examples of DMM Participation 

Entitlement Under Price/Time 

Algorithm 

Examples 1 through 3 below illustrate 

the manner in which a DMM will be 

allocated pursuant to the Price/Time 

model. 

Example Number 1 

Assume an LMM has been assigned 

and that the DMM is not the LMM. 

ABBO = 1.00–1.10 

BX BBO = 1.00–1.10 comprised of the 

following in order of receipt 

Market Maker 1 (‘‘MM1’’) 1.00 (10)– 

1.10 (10) 

Customer A 5 offered at 1.10 

Firm 5 offered at 1.10 

DMM 1.00 (10)–1.10 (20) 

LMM 1.00 (10)–1.10 (10) 

Customer B 2 offered at 1.10 

Incoming Directed Order to pay 1.10 

for 40 contracts. 

Determination of Allocation: 

Price/Time with Customer Priority 

would result in Customer A trading 5, 

Customer B trading 2, MM1 trading 10, 

Firm trading 5, and DMM trading 18. 

The DMM allocation would result in 

Customer A trading 5, Customer B 

trading 2, and DMM trading 40% of 

remaining 33 = 13 (13.2 rounded down); 

then normal price/time would resume 

and MM1 would trade 10, Firm would 

trade 5, and LMM would trade 5. 

The LMM allocation is not calculated. 

In this example, Price/Time with 

Customer Priority would prevail since 

the DMM would receive a greater 

allocation this way. 

Example Number 2 

Assume an LMM is assigned and that 

the DMM is not the LMM. 

ABBO = 1.00–1.10 

BX BBO = 1.00–1.10 comprised of the 

following in order of receipt 

MM1 1.00 (10)–1.10 (10) 

Customer A 5 offered at 1.10 

Firm 5 offered at 1.10 

Market Maker 2 (‘‘MM2’’) 1.00 (10)– 

1.10 (10) 

DMM 1.00 (10)–1.10 (20) 

Customer B 2 offered at 1.10 

Incoming Directed Order to pay 1.10 

for 40 contracts. 

Determination of Allocation: 

Price/Time with Customer Priority 

would result in Customer A trading 5, 

Customer B trading 2, MM1 trading 10, 

Firm trading 5, MM2 trading 10 and 

DMM trading 8. 

The DMM allocation would result in 

Customer A trading 5, Customer B 

trading 2, DMM trading 40% of 

remaining 33 = 13 (13.2 rounded down); 

then normal price/time would resume 

with MM1 trading 10, Firm trading 5 

and MM2 trading 5. 

The LMM allocation would not be 

calculated. 

In this example, the DMM allocation 

would prevail since the DMM receives 

a greater allocation this way. 

Example Number 3 

Assume an LMM is assigned and that 

the DMM is also the LMM. 

ABBO = 1.00–1.10 

BX BBO = 1.00–1.10 comprised of the 

following in order of receipt: 

MM1 1.00 (10)–1.10 (10) 

Firm 25 offered at 1.10 

DMM/LMM 1.00 (10)–1.10 (20) 

Customer B 2 offered at 1.10 

Incoming Directed Order to pay 1.10 

for 40 contracts. 

Determination of Allocation: 

Price/Time with Customer Priority 

would result in Customer B trading 2, 

MM1 trading 10, Firm trading 25, and 

DMM/LMM trading 3. 

DMM allocation would result in 

Customer B trading 2 and DMM/LMM 

trading 40% of remaining 38 = 15 (15.2 

rounded down); then normal price/time 

would resume and MM1 would trade 10 

and Firm would trade 13. 

LMM allocation would result in 

Customer B trading 2 and DMM/LMM 

trading 50% of remaining 38 = 19; then 

normal price time would resume and 

MM1 would trade 10 and Firm would 

trade 9. 

In this example, the LMM allocation 

would prevail since the DMM/LMM 

would receive a greater allocation this 

way. 

Examples of DMM Participation 

Entitlement Under Size Pro-Rata 

Algorithm 

Examples 4 through 6 below illustrate 

the manner in which a DMM will be 

allocated pursuant to the Size Pro-Rata 

model. 

Example Number 4 

Assume an LMM is assigned and the 

DMM is not the LMM. 

ABBO = 1.00–1.10 

BX BBO = 1.00–1.10 comprised of the 

following in order of receipt: 

LMM 1.00 (10)–1.10 (15) 

Customer A 5 offered at 1.10 

Firm 5 offered at 1.10 

DMM 1.00 (10)–1.10 (20) 

MM1 1.00 (10)–1.10 (10) 

Customer B 2 offered at 1.10 

Incoming Directed Order to pay 1.10 

for 40 contracts. 

Determination of Allocation: 

Size Pro-Rata would result in 

Customer A trading 5, Customer B 

trading 2, LMM trading 11 (15/

45*33remaining), DMM trading 14 (20/ 

45*33), MM1 trading 7 (10/45*33), and 

then LMM based on time receiving the 

residual 1 lot. 

The DMM allocation would result in 

Customer A trading 5, Customer B 

trading 2, and DMM trading 40% of 

remaining 33 = 13 (13.2 rounded down); 

then normal Size Pro-Rata for remaining 

with the LMM trading 12 (15/25*20) 

and MM1 trading 8 (10/25*20). 

The LMM allocation would not be 

calculated. 

In this example, the Size Pro-Rata 

allocation would prevail since the DMM 

would receive the greater allocation this 

way. 

Example Number 5 

Assume that no LMM is assigned. 

ABBO = 1.00–1.10 

BX BBO = 1.00–1.10 comprised of the 

following in order of receipt: 

DMM 1.00 (10)–1.10 (15) 

Customer A 5 offered at 1.10 

Firm 5 offered at 1.10 

MM1 1.00 (10)–1.10 (20) 

MM2 1.00 (10)–1.10 (10) 

Customer B 2 offered at 1.10 

Incoming Directed Order to pay 1.10 

for 40 contracts. 

Determination of Allocation: 

Size Pro-Rata would result in 

Customer A trading 5, Customer B 

trading 2, DMM trading 11 (15/

45*33remaining), MM1 trading 14 (20/ 

45*33), MM2 trading 7 (10/45*33), and 

the DMM based on time receiving the 

residual 1 lot. 

The DMM allocation would result in 

Customer A trading 5, Customer B 

trading 2, and DMM trading 40% of 

remaining 33 = 13 (13.2 rounded down); 

then normal Size Pro-Rata for remaining 

with MM1 trading 13 (20/30*20) and 

MM2 trading 6 (10/30*20), and the 

DMM based on time receiving the 

residual 1 lot. 

The LMM allocation would not be 

calculated. 

In this example, the DMM allocation 

would prevail since the DMM would 

receive the greater allocation this way. 

Example Number 6 

Assume that an LMM is assigned and 

that the DMM is also the LMM. 

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42 15 U.S.C. 78f(b). 

43 15 U.S.C. 78f(b)(5). 

ABBO = 1.00–1.10 

BX BBO = 1.00–1.10 comprised of the 

following in order of receipt: 

DMM/LMM 1.00 (10)–1.10 (15) 

Customer A 5 offered at 1.10 

Firm 5 offered at 1.10 

MM1 1.00 (10)–1.10 (30) 

Customer B 2 offered at 1.10 

Incoming Directed Order to pay 1.10 

for 40 contracts. 

Determination of Allocation: 

Size Pro-Rata would result in 

Customer A trading 5, Customer B 

trading 2, DMM/LMM trading 11 (15/

45*33 remaining), MM1 trading 22 (30/ 

45*33). 

The DMM allocation would result in 

Customer A trading 5, Customer B 

trading 2, and DMM/LMM trading 40% 

of remaining 33 = 13 (13.2 rounded 

down); then Size Pro-Rata for remaining 

with MM1 trading full size of 20. 

The LMM allocation would result in 

Customer A trading 5, Customer B 

trading 2, and DMM/LMM entitled to 

50% of remaining 33 = 17 (16.5 rounded 

up) but capped at his size of 15 thus 

trading 15; then normal Size Pro-Rata 

for remaining with MM1 trading 18. 

In this example, the LMM allocation 

would prevail since the DMM is the 

LMM and would receive a greater 

allocation this way. 

Examples of Price Improving Orders 

Example Number 1 

For this scenario assume the NBBO is 

at 1.00 (bid) and 1.20 (offer). 

Assume a Price Improving Order (O1) 

from a Customer is present on BX to sell 

20 contracts at 1.18. Also assume a 

Directed Market Maker (DMM1) and two 

other Market Makers (MM2 and MM3) 

are each quoting 1.00–1.20 with a size 

of 50 contracts on each side. O1 and the 

Market Maker quotes are reflected in the 

BX BBO as 1.00–1.20 with a size of 150 

contracts on the bid and 170 contracts 

on the offer. If an order (O2) is received 

to buy 50 contracts at a limit of 1.20 

which is directed to DMM1, the order 

will execute upon receipt with 20 

contracts trading against O1 at 1.18, 12 

contracts trading against DMM1 at 1.20 

(40% of remaining 30 contracts), 9 

contracts trading against MM2 at 1.20, 

and 9 contracts trading against MM3 at 

1.20. 

Example Number 2 

For this scenario assume the NBBO is 

at 1.00 (bid) and 1.20 (offer). 

Assume two Price Improving Orders 

(O1 and O2) from a Customer (C1) and 

Directed Market Maker (DMM1), 

respectively, are present on BX to sell 

10 contracts each at 1.18. Also assume 

the Directed Market Maker (DMM1) and 

two other Market Makers (MM2 and 

MM3) are each quoting 1.00–1.20 with 

a size of 50 contracts on each side. O1, 

O2, and the Market Maker quotes are 

reflected in the BX BBO as 1.00–1.20 

with a size of 150 contracts on the bid 

and 170 contracts on the offer. If an 

order (O3) is received to buy 50 

contracts at a limit of 1.20 which is 

directed to DMM1, the order will 

execute upon receipt with 10 contracts 

trading against O1 at 1.18 and 10 

contracts trading against DMM1’s Price 

Improving Order (O2) at 1.18. The 

remaining 30 contracts will trade at 1.20 

with 12 contracts trading against DMM1 

(40% of remaining 30 contracts), 9 

contracts trading against MM2, and 9 

contracts trading against MM3. 

Example Number 3 

Assume the following orders exist in 

the Order book for Market Maker 2 and 

3 (MM2 and MM3 respectively) and the 

following DMM quotes: 

1.19 offer 10 MM2 (Price Improving 

Order) 

1.20 offer 20 MM3 

1.20 offer 10 DMM Quote 1 

1.20 offer 10 DMM Quote 2 

If an order was directed to the DMM 

to buy 15 contracts at 1.20, 10 contracts 

would be executed at 1.19 contra MM2. 

The DMM would receive 40% of the 

remaining 5 contracts (2 contracts) 

which would be allocated to DMM 

Quote 1. The remaining 3 contracts 

would be allocated as per Price Time 

priority to MM3. 

Example Number 4 

Assume the following orders exist in 

the Order book for Market Maker 2 and 

3 (MM2 and MM3 respectively) and the 

following DMM quotes: 

1.18 offer 10 MM2 (Price Improving 

Order) 

1.19 offer 20 MM3 

1.19 offer 10 DMM Quote 1 

1.19 offer 10 DMM Quote 2 

1.20 offer 10 MM3 

If an order directed to the DMM to 

buy 15 contracts for 1.20, 10 contracts 

would be executed at 1.18 contra MM2. 

The DMM would receive 40% of 

remaining 5 contracts (2 contracts), 

because it was the last price executed 

pursuant to Chapter VI, Section 

10(1)(C)(1)(c), which would be allocated 

to DMM Quote 1. The remaining 3 

contracts would be allocated as per 

Price Time priority to MM3. 

Priority Overlays 

The Exchange is proposing to amend 

language in Chapter VI, Section 

10(1)(C)(2) which applies to priority 

overlays. The language currently states 

that ‘‘the Exchange will apply the 

following designated Participant 

priority overlays, which are always in 

effect when the Size Pro-Rata execution 

algorithm is in effect.’’ The priority 

overlays which are references are Public 

Customer, LMM, DMM and market 

maker priority. The Exchange is 

proposing to amend the sentence to 

state, ‘‘the Exchange may apply the 

following designated Participant 

priority overlays, when the Size ProRata execution algorithm is in effect.’’ 

The amendment is intended to provide 

more specificity to the rule text as 

Public Customer priority will be in 

effect always for Size Pro-Rata, but may 

be in effect for the other types of 

priorities. The amendment also 

conforms the language to the Price/Time 

rule text in Chapter VI, Section 

10(1)(C)(1). 

Implementation. 

Within thirty (30) days the Exchange 

will begin to implement the proposal 

and will issue an Options Trader Alert 

in advance to inform market 

participants of such date. 

2. Statutory Basis 

The Exchange believes that its 

proposal is consistent with Section 6(b) 

of the Act 42 in general, and furthers the 

objectives of Section 6(b)(5) of the Act 43

in particular, in that it is designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, to foster 

cooperation and coordination with 

persons engaged in facilitating 

transactions in securities, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system and, in 

general, to protect investors and the 

public interest, because it will establish 

a Directed Order process similar to what 

operates on other exchanges, as 

explained herein, which will provide 

Participants with additional choices 

among the many competing exchanges 

with regard to their execution needs and 

strategies. BX Options operates in an 

intensely competitive environment and 

seeks to offer the same services that its 

competitors offer and in which its 

customers find value. 

In its approval of other options 

exchange directed order programs, the 

Commission has, like proposals to 

amend a specialist guarantee, focused 

on whether the percentage of the 

‘‘entitlement’’ would rise to a level that 

could have a material adverse impact on 

quote competition within a particular 

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73936 Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices 

44See Securities Exchange Act Release No. 51759 

(May 27, 2005), 70 FR 32860 (June 6, 2005) (SR– 

Phlx–2004–91). 

45See note 20. Price Improving Orders, provide 

for investors the opportunity to trade at a better 

price than would otherwise be available—inside the 

disseminated best bid and offer for a security. The 

opportunity for investors to receive executions 

inside the disseminated best bid or offer could 

result in better executions for investors. 

46See BX Chapter III, Section 4, Prevention of the 

Misuse of Material Nonpublic Information. BX 

prohibits an order flow provider from notifying a 

DMM of its intention to submit a directed order so 

that the DMM could change its quotation to match 

the national best bid or offer (‘‘NBBO’’) immediately 

prior to the submission of the directed order. 

47The Exchange will submit a letter detailing its 

surveillance and enforcement to the Commission. 

48See, e.g., Newton v. Merrill, Lynch, Pierce, 

Fenner & Smith, Inc., 135 F.3d 266, 269–70, 274 (3d 

Cir.), cert. denied, 525 U.S. 811 (1998); Certain 

Market Making Activities on Nasdaq, Securities 

Exchange Act Release No. 40900 (January 11, 1999) 

(settled case) (citing Sinclair v. SEC, 444 F.2d 399 

(2d Cir. 1971); Arleen Hughes, 27 SEC 629, 636 

(1948), aff’d sub nom. Hughes v. SEC, 174 F.2d 969 

(D.C. Cir. 1949)). See also Order Execution 

Obligations, Securities Exchange Act Release No. 

37619A (September 6, 1996), 61 FR 48290 

(September 12, 1996) (‘‘Order Handling Rules 

Release’’). 

49Order Handling Rules Release, 61 FR at 48322. 

See also Newton, 135 F.3d at 270. Failure to satisfy 

the duty of best execution can constitute fraud 

because a broker-dealer, in agreeing to execute a 

customer’s order, makes an implied representation 

that it will execute it in a manner that maximizes 

the customer’s economic gain in the transaction. 

See Newton, 135 F.3d at 273 (‘‘[T]he basis for the 

duty of best execution is the mutual understanding 

that the client is engaging in the trade—and 

retaining the services of the broker as his agent— 

solely for the purpose of maximizing his own 

economic benefit, and that the broker receives her 

compensation because she assists the client in 

reaching that goal.’’); Marc N. Geman, Securities 

Exchange Act Release No. 43963 (February 14, 

2001) (citing Newton, but concluding that 

respondent fulfilled his duty of best execution). See 

also Payment for Order Flow, Securities Exchange 

Act Release No. 34902 (October 27, 1994), 59 FR 

55006, 55009 (Nov. 2, 1994) (‘‘Payment for Order 

Flow Final Rules’’). If the broker-dealer intends not 

to act in a manner that maximizes the customer’s 

benefit when he accepts the order and does not 

disclose this to the customer, the broker-dealer’s 

implied representation is false. See Newton, 135 

F.3d at 273–274. 

50Newton, 135 F.3d at 270. Newton also noted 

certain factors relevant to best execution—order 

size, trading characteristics of the security, speed of 

execution, learning costs, and the cost and 

difficulty of executing an order in a particular 

market. Id. at 270 n. 2 (citing Payment for Order 

Flow, Securities Exchange Act Release No. 33026 

(October 6, 1993), 58 FR 52934, 52937–38 (October 

13, 1993) (Proposed Rules)). See In re E.F. Hutton 

& Co. (‘‘Manning’’), Securities Exchange Act 

Release No. 25887 (July 6, 1988). See also Payment 

for Order Flow Final Rules, 59 FR at 55008–55009. 

51Order Handling Rules Release, 61 FR at 48322– 

48333 (‘‘In conducting the requisite evaluation of its 

internal order handling procedures, a broker-dealer 

must regularly and rigorously examine execution 

quality likely to be obtained from different markets 

or market makers trading a security.’’). See also 

Newton, 135 F.3d at 271; Market 2000: An 

Examination of Current Equity Market 

Developments V–4 (SEC Division of Market 

Regulation January 1994) (‘‘Without specific 

instructions from a customer, however, a brokerdealer should periodically assess the quality of 

competing markets to ensure that its order flow is 

directed to markets providing the most 

advantageous terms for the customer’s order.’’); 

Payment for Order Flow Final Rules, 59 FR at 

55009. 

52Order Handling Rules, 61 FR at 48323. 

53Order Handling Rules, 61 FR at 48323. For 

example, in connection with orders that are to be 

executed at a market opening price, ‘‘[b]rokerdealers are subject to a best execution duty in 

executing customer orders at the opening, and 

should take into account the alternative methods in 

determining how to obtain best execution for their 

customer orders.’’ Disclosure of Order Execution 

and Routing Practices, Securities Exchange Act 

Release No. 43590 (November 17, 2000), 65 FR 

75414, 75422 (December 1, 2000) (adopting new 

Exchange Act Rules 11Ac1–5 and 11Ac1–6 and 

noting that alternative methods offered by some 

Nasdaq market centers for pre-open orders included 

the mid-point of the spread or at the bid or offer). 

exchange, and concluded that such 

programs do not jeopardize market 

integrity or the incentive for market 

participants to post competitive 

quotes.44 BX’s proposed DMM 

participation entitlement of 40 percent, 

is consistent with the directed order 

allocations of other options exchanges. 

BX notes that the remaining portion of 

each order will continue to be allocated 

based on the competitive bids/offers of 

market participants. In addition, at the 

time of receipt of the Directed Order, a 

DMM will have to be quoting at or 

improving 45 the NBBO which is 

intended to incent the DMM to quote 

aggressively. BX also notes that DMMs 

will have heightened quoting 

obligations as compared to other BX 

Options market makers. 

A DMM will have to be quoting at or 

improving the NBBO at the time the 

order is received to capitalize on the 

guarantee and will only receive a 

participation entitlement at one such 

price point. The DMM must be publicly 

quoting at that price when the order is 

received. In this regard, the proposal 

prohibits an order flow provider from 

notifying a DMM regarding its intention 

to submit a Directed Order so that such 

DMM could change its quotation 

immediately prior to submission of the 

directed order. The Exchange’s rules 

already provide the necessary 

protections against coordinated action 

as between a DMM and an order entry 

firm.46 Furthermore, BX will proactively 

conduct surveillance for, and enforce 

against, such violations.47

In addition, this proposal does not 

affect a broker-dealer’s duty of best 

execution. A broker-dealer has a legal 

duty to seek to obtain best execution of 

customer orders, and any decision to 

preference a particular DMM must be 

consistent with this duty.48 A brokerdealer’s duty of best execution derives 

from common law agency principles 

and fiduciary obligations, and is 

incorporated in SRO rules and, through 

judicial and Commission decisions, the 

antifraud provisions of the federal 

securities laws.49 The duty of best 

execution requires broker-dealers to 

execute customer trades at the most 

favorable terms reasonably available 

under the circumstances, i.e., at the best 

reasonably available price.50 The duty 

of best execution requires broker-dealers 

to periodically assess the quality of 

competing markets to assure that order 

flow is directed to the markets 

providing the most beneficial terms for 

their customer orders.51 Broker-dealers 

must examine their procedures for 

seeking to obtain best execution in light 

of market and technology changes and 

modify those practices if necessary to 

enable their customers to obtain the best 

reasonably available prices.52 In doing 

so, broker-dealers must take into 

account price improvement 

opportunities, and whether different 

markets may be more suitable for 

different types of orders or particular 

securities.53

With respect to a DMM’s obligations, 

the Exchange would require DMMs be 

subject to heightened standards as 

compared to other market makers. A 

DMM must provide continuous twosided quotations throughout the trading 

day in all options classes in which the 

DMM is assigned, once the market 

maker indicates to the Exchange an 

intent to receive Directed Orders, for 

90% of the time the Exchange is open 

for trading in each issue. Such 

quotations must meet the legal quote 

width requirements herein. These 

obligations will apply to all of the 

DMM’s option issues collectively, rather 

than on an option-by-option basis. 

While the Market Maker’s quoting 

requirement is a daily obligation, the 

Exchange is able to determine 

compliance with these obligations on a 

monthly basis. BX Regulation may 

consider exceptions to the requirement 

to quote 90% (or higher) of the trading 

day based on demonstrated legal or 

regulatory requirements or other 

mitigating circumstances. However, 

determining compliance with the 

continuous quoting requirement on a 

monthly basis does not relieve a DMM 

of the obligation to provide continuous 

two-sided quotes on a daily basis, nor 

will it prohibit the Exchange from 

taking disciplinary action against a 

DMM for failing to meet the continuous 

quoting obligation each trading day. 

The Exchange believes that offering 

DMMs participation entitlements 

promotes just and equitable principles 

of trade because DMMs will be held to 

a higher standard as compared to other 

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54Pursuant to Chapter VII (Market Participants), 

Section 5 (Obligations of Market Makers), in 

registering as a market maker, an Options 

Participant commits himself to various obligations. 

Transactions of a market maker in its market 

making capacity must constitute a course of 

dealings reasonably calculated to contribute to the 

maintenance of a fair and orderly market, and 

market makers should not make bids or offers or 

enter into transactions that are inconsistent with 

such course of dealings. See Chapter VII, Section 5. 

Further, all market makers are designated as 

specialists on BX for all purposes under the Act or 

rules thereunder. See Chapter VII, Section 2. 

market participants including market 

makers. A market maker would be 

required, pursuant to this proposal, to 

quote 60% of the trading day. DMMs are 

being held to a higher obligation and 

therefore are being rewarded with 

participation entitlements. Similar to 

market makers, DMMs add value 

through continuous quoting 54 and the 

commitment of capital. In addition, the 

DMM quoting requirements promote 

liquidity and continuity in the 

marketplace in requiring DMMs to be 

held to a higher standard of quoting. 

The Exchange also believes that the 

proposed rule change supports the 

quality of the Exchange’s markets 

because it maintains the quoting 

obligations of market makers as DMMs 

at 90%. DMM transactions must 

constitute a course of dealings 

reasonably calculated to contribute to 

the maintenance of a fair and orderly 

market. Accordingly, the proposed rule 

change supports the quality of the 

Exchange’s trading markets by helping 

to ensure that DMMs will be required to 

meet a higher quoting standard in order 

to reap the benefits of the participation 

entitlements. The Exchange believes 

this proposed change to offer 

participation entitlements to DMMs is 

offset by DMMs’ continued 

responsibilities to provide significant 

liquidity to the market to the benefit of 

market participants. 

The Exchange also notes that it 

believes that while rounding is up or 

down to the nearest integer, thereby 

having the potential to result in an 

allocation that is slightly greater than 

40% of the remaining interest, this 

concept is not novel. Today, the 

rounding is computed in the same 

manner for LMM allocations, thereby 

resulting in the potential for slightly 

greater than 40% of remaining 

allocation for the LMM. It is also 

important to note that if the rounding 

results in computing the nearest lower 

integer, the DMM would receive slightly 

less than the percentages noted herein. 

The Exchange believes that the manner 

in which it rounds is not an impediment 

to a free and open market and a national 

market system. The rounding 

computation described herein is 

consistent with the manner in which 

rounding is computed on BX’s System, 

where appropriate. The Exchange 

applies the rounding methodology in all 

BX functionality related to allocation 

computations, not just in relation to 

DMM allocation computations. The 

Exchange believes that its method of 

rounding is transparent, just and 

equitable. The rounding provisions, 

unlike the allocation provisions, are not 

a guarantee but simply the result of a 

mathematical computation that can only 

be computed after the transactions are 

executed. The Exchange’s proposal is 

focused on the guarantees that a DMM 

could expect as a result of quoting 

competitively, that is, quoting at or 

better than the NBBO. The rounding 

outcome is not guaranteed and is only 

the result of necessity of allocating 

shares in a just, equitable and 

transparent manner to market 

participants. 

The proposed rule change also 

removes impediments to and allows for 

a free and open market, while protecting 

investors, by promoting transparency 

regarding DMMs’ obligations and 

benefits in the Exchange Rules. In 

addition, the Exchange believes that the 

proposed rule change is designed to not 

permit unfair discrimination among 

DMMs. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The proposed rule change does not 

impose any burden on competition that 

is not necessary or appropriate in 

furtherance of the purposes of the Act. 

The competition among the options 

exchanges is vigorous and this proposal 

is intended to afford the BX Options 

market the opportunity to compete for 

directed order flow. In that regard, the 

proposal is pro-competitive and will 

offer market participants an additional 

venue for the execution of Directed 

Orders. The Exchange does not believe 

the proposal imposes a burden on intramarket competition not necessary or 

appropriate in furtherance of the 

purposes of the Act, because the ability 

to send Directed Orders is available to 

all Participants, and the ability to 

become a DMM is available to all market 

makers. Further, the Exchange does not 

believe the proposal will negatively 

impact quote competition on BX and 

create an unfair burden on competition. 

The directed order will be allocated 

based on the competitive bidding of 

market participants. A DMM will have 

to be quoting at the NBBO at the time 

the order is received to capitalize on the 

guarantee. 

DMMs will be subject to enhanced 

quoting obligations and the obligations 

would apply to all options classes, once 

the market maker indicates to the 

Exchange an intent to receive Directed 

Orders, for 90% of the time the 

Exchange is open for trading in each 

issue collectively to all appointed 

issues, rather than on an option-byoption basis and compliance with this 

obligation will be determined on a 

monthly basis. Further, the proposal 

will not diminish, and in fact may 

increase, market making activity on the 

Exchange and thereby enhance 

intermarket competition. Moreover, the 

proposed rule change will not impose 

any burden on intra-market competition 

because it will affect all DMMs the 

same. DMMs will be subject to 

heightened quoting obligations as 

compared to other BX market makers. 

All market makers may become DMMs. 

The Exchange does not believe the 

proposed rule change will cause any 

unnecessary burden on intra-market 

competition because it provides all 

market makers the opportunity to 

benefit from participation entitlements 

as a DMM. The Exchange believes that 

the proposed rule change will promote 

competition among market participants 

to the benefit of the Exchange, its 

Members, and market participants. This 

proposal puts in place a structure by 

which all Options Participants can both 

compete for order flow by contributing 

to price and size discovery for the entire 

market. Further, market makers must 

enter orders that assume the risk of 

trading with all participants at NBBO 

without knowing the details of the 

particular order. Market makers are 

incentivized to aggressively quote at the 

NBBO with this proposal to the benefit 

of all market participants, while 

maintaining their quoting obligations. 

The Exchange believes the proposal will 

encourage greater order flow to be sent 

to the Exchange through Directed 

Orders and that this increased order 

flow will benefit all market participants 

on the Exchange. The Exchange is not 

limiting the class of market participants 

that can be directed orders, any market 

maker may apply to receive directed 

orders and those market participants 

would be required to meet the 

heightened standards for quoting. 

DMMs must meet additional quoting 

and other regulatory obligations 

compared to certain other Exchange 

Participants and have thus 

demonstrated a commitment to 

providing liquidity on the Exchange. 

The Exchange believes that limiting the 

benefit of the participation entitlement 

to DMMs is fair and reasonable because 

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73938 Federal Register / Vol. 79, No. 239 / Friday, December 12, 2014 / Notices 

55 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

these DMMs must satisfy additional 

quoting and other obligations. 

The Exchange does not believe the 

proposed change will cause any 

unnecessary burden on inter-market 

competition because all market makers 

are entitled to receive participation 

entitlements provided they direct orders 

and those orders are executed by those 

DMMs. In addition, the Exchange 

believes that the proposed rule change 

will in fact promote competition. The 

Exchange believes allowing DMMs to 

receive participation entitlements will 

promote trading activity on the 

Exchange because it will provide 

incentives to DMMs to quote in series 

which they are not obligated to do so, 

to the benefit of the Exchange, its 

Members, and market participants. 

The Exchange does not believe that 

the method in which it rounds up or 

down to the nearest integer creates an 

undue burden on competition. The 

rounding outcome is not guaranteed and 

is only the result of necessity of 

allocating shares in a just, equitable and 

transparent manner to market 

participants. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments were either 

solicited or received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 45 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the Exchange consents, 

the Commission shall: (a) By order 

approve or disapprove such proposed 

rule change, or (b) institute proceedings 

to determine whether the proposed rule 

change should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

BX–2014–049 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–BX–2014–049. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

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

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE., 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–BX– 

2014–049, and should be submitted on 

or before January 2, 2015. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.55

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2014–29109 Filed 12–11–14; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–73779; File No. SR–NSCC– 

2014–12] 

Self-Regulatory Organizations; 

National Securities Clearing 

Corporation; Notice of Filing of 

Proposed Rule Change to Amend 

NSCC’s Rules and Procedures in 

Connection with the Discontinuance of 

the Analytic Reporting Service 

December 8, 2014. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on November 

25, 2014, National Securities Clearing 

Corporation (‘‘NSCC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Item I, II and III 

below, which Items have been prepared 

by NSCC. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Clearing Agency’s Statement of the 

Terms of Substance of the Proposed 

Rule Change 

The proposed rule change consists of 

amendments to Rule 57 (Insurance and 

Retirement Processing Services) and 

Addendum A (Fee Structure) of NSCC’s 

Rules & Procedures in connection with 

the discontinuance of the Analytic 

Reporting Service, as more fully 

described below. The text of the 

proposed rule change is available on 

NSCC’s Web site at http://

www.dtcc.com/legal/sec-rulefilings.aspx, at the principal office of 

NSCC, and at the Commission’s Public 

Reference Room. 

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, 

NSCC 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. NSCC has prepared 

summaries, set forth in sections A, B 

and C below, of the most significant 

aspects of such statements. 

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