Document ID: SEC-2009-1498-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to Chapter XII of the BOX Rules
Posted Date: 2009-10-22T04:00Z

[Federal Register: October 22, 2009 (Volume 74, Number 203)]
[Notices]               
[Page 54607-54610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22oc09-102]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60832; File No. SR-BX-2009-066]

 
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
Relating to Chapter XII of the BOX Rules

October 16, 2009.
    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 October 14, 2009, 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 Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons, 
and is approving the proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Chapter XII of the Boston Options 
Exchange (``BOX'') Rules by adding a new Section 5. The text of the 
proposed rule change is available at the Commission's Public Reference 
Room, the principal office of the Exchange, and on its Web site at 
http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings.

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 in the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange amended Chapter XII of the BOX Rules to reflect the 
Exchange's filing to become a participant in the Options Order 
Protection and Locked/Crossed Market Plan (``Decentralized Plan'').\3\ 
The Decentralized Plan applies many of the Regulation NMS \4\ price-

[[Page 54608]]

protection provisions to the options markets. Similar to Regulation 
NMS, the Decentralized Plan requires Plan Participants to, among other 
things, adopt rules ``reasonably designed to prevent Trade-Throughs \5\ 
in Eligible Options Classes \6\'', while providing exceptions for 
certain transactions that track those provided under Regulation NMS, 
correspond with unique aspects of the options market, or both.\7\
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    \3\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (Order 
Approving the National Market System Plan Relating to Options Order 
Protection and Locked/Crossed Market Plan). Terms not otherwise 
defined herein shall have the meaning proscribed in the BOX Rules.
    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \5\ A ``Trade-Through'' is defined as a transaction in an 
options series, either as principal or agent, at a price that is 
lower than a Protected Bid or higher than a Protected Offer. See 
Section 2(21) of the Decentralized Plan; see also Chapter XII, 
Section 1(q) of the BOX Rules. A ``Protected Bid'' or a ``Protected 
Offer'' means a Bid or Offer in an option series, respectively, that 
is disseminated pursuant to the OPRA Plan and is the Best Bid or 
Best Offer, respectively, displayed by an Eligible Exchange. See 
Section 2(17) of the Decentralized Plan; see also Chapter XII, 
Section 1(n) of the BOX Rules. A ``Best Bid'' or ``Best Offer'' 
means the highest priced Bid or the lowest priced Offer. See Section 
2(1) of the Decentralized Plan; see also Chapter XII, Section 1(a) 
of the BOX Rules. A ``Bid'' or ``Offer'' means the bid price or the 
offer price communicated by a member of an Eligible Exchange to any 
Broker/Dealer, or to any customer, at which it is willing to buy or 
sell, as either principal or agent, but would not include 
indications of interest. See Section 2(2) of the Decentralized Plan; 
see also Chapter XII, Section 1(b) of the BOX Rules.
    \6\ An ``Eligible Options Class'' is defined as all options 
series overlying a security (as that term is defined in Section 
3(a)(10) of the Exchange Act) or group of securities, including both 
put options and call options, which class is traded on BOX and at 
least one other Eligible Exchange. See Section 2(7) of the 
Decentralized Plan; see also Chapter XII, Temporary Section 4(g)(2) 
of the BOX Rules. An ``Eligible Exchange'' means a national 
securities exchange registered with the Commission in accordance 
with Section 6(a) of the Securities Exchange Act of 1934 (``Act'') 
that is a Participant Exchange in OCC (as that term is defined in 
Section VII of the OCC by-laws), is a party to the OPRA Plan (as 
that term is defined in Section I of the OPRA Plan), and if the 
national securities exchange is not a party to the Plan, is a 
participant in another plan approved by the Commission providing for 
comparable Trade-Through and Locked and Crossed Market protection. 
See Section 2(6) of the Decentralized Plan; see also Chapter XII, 
Section 1(f).
    \7\ See Section 5(b) of the Decentralized Plan.
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    The Commission previously approved certain Exchange rules and 
definitions necessary to implement the Decentralized Plan.\8\ The 
purpose of this filing is to amend Chapter XII of the BOX Rules to 
provide for the use by BOX of certain non-affiliated third party 
routing broker/dealers (``Routing Broker(s)'') to route options orders 
to one or more Away Exchange(s) when such Away Exchange(s) display the 
Best Bid or Best Offer in accordance with the Decentralized Plan. In 
particular, the Exchange proposes to add to Chapter XII of the BOX 
Rules, a new rule that would govern the outbound order routing process 
(``Order Routing Rule'').\9\
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    \8\ See Securities Exchange Act Release No. 60530 (August 18, 
2009), 74 FR 43200 (August 26, 2009) (SR-BX-2009-028).
    \9\ See proposed Chapter XII, Section 5 of the BOX Rules.
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    The use of the Routing Broker to route orders to one or more Away 
Exchange(s) will be optional and available only to BOX Options 
Participants. In the event an Options Participant does not want to use 
the Routing Broker it must simply designate the order as do not 
route.\10\ Only orders that are specifically designated by Options 
Participants as eligible for routing will be routed to an Away Exchange 
(``Eligible Orders''). However, Market-on-Opening Orders, any 
Improvement Auction orders or any order identified with the condition 
``Fill and Kill'' shall not be eligible for routing. BOX would only 
route an Eligible Order in order to avoid a Trade-Through or a locked 
or crossed market, pursuant to the requirements of Chapter XII, 
Sections 2 and 3 of the BOX Rules and consistent with the Decentralized 
Plan, when the order has not been executed in its entirety on BOX.\11\ 
All Eligible Orders entered on BOX that are routed via the Routing 
Broker that result in an execution shall be binding on the Options 
Participant that entered such Eligible Order.
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    \10\ Options Participants must indicate for each order whether 
the order is eligible for routing or not.
    \11\ At this time BOX will not be sending ISOs to Away Markets, 
as defined in Chapter V, Section 14(c)(vi) of the BOX Rules.
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    The full or remaining quantity of an Eligible Order will be routed 
to one or more Away Exchange(s) as Immediate or Cancel (``IOC'') limit 
order(s) priced at the current NBBO. Multiple IOC limit order(s) may be 
routed to Away Exchanges with the best Protected Bid or Protected Offer 
until the Eligible Order quantity is fully executed or the limit price 
is reached. If the Eligible Order is not executed in its entirety at 
the Away Exchange(s) or its limit price is reached, then it will be 
returned to BOX and the remainder of the Eligible Order will be treated 
as a new order. While an Eligible Order remains outside BOX, it would 
have no time standing relative to other orders received from Options 
Participants at the same price that could be executed against interest 
on the BOX Book. Requests from Options Participants to cancel their 
Eligible Order while routed to one or more Away Exchange(s) would be 
processed subject to the applicable trading rules of the Away 
Exchange(s).
    As stated above, the Exchange proposes that BOX would route 
Eligible Orders to Away Exchanges under certain circumstances 
(``Routing Services''). BOX would provide its Routing Services pursuant 
to the terms of an agreement between BOX and each Routing Broker that 
provides Routing Services (``BOX Routing Agreement'').
    The Exchange proposes that BOX provide its Routing Services in 
compliance with its own rules and with the provisions of the Act and 
the rules thereunder, including, but not limited to, the requirements 
in Sections 6(b)(4) and (5) of the Act \12\ that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities, and not be designed to permit 
unfair discrimination between customers, issuers, brokers, or dealers.
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    \12\ 15 U.S.C. 78f(b)(4) and (5).
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    As a provider of Routing Services, the Exchange proposes that BOX 
would enter into a Routing Agreement for the necessary routing 
technology to be used in connection with its own systems and 
accordingly would control the logic that determines when, how, and 
where orders are routed to Away Exchanges. The Routing Broker cannot 
change the routing logic.
    The Exchange also proposes that BOX establish and maintain 
procedures and internal controls reasonably designed to adequately 
restrict the flow of confidential and proprietary information between 
BOX and the Routing Broker, and any other entity, including any 
affiliate of the Routing Broker, and, to the extent the Routing Broker 
reasonably receives confidential and proprietary information, that 
adequately restrict the use of such information by the Routing Broker 
to legitimate business purposes necessary for routing orders at the 
direction of BOX; and, if the Routing Broker or any of its affiliates 
engages in any other business activities other than providing routing 
services to BOX, between the segment of the Routing Broker or affiliate 
that provides the other business activities and the segment of the 
Routing Broker that provides the routing services.\13\ The Routing 
Agreement would include terms and conditions that enable BOX to comply 
with these proposed requirements.
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    \13\ BOX may not use a Routing Broker for which the Exchange or 
any affiliate of the Exchange is the designated examining authority.
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    The Exchange requests that this proposal be approved on a pilot 
basis for three (3) months starting from the date of the approval of 
this filing.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b) of the

[[Page 54609]]

Act,\14\ in general, and Section 6(b)(5) of the Act,\15\ in particular, 
in that it will promote just and equitable principles of trade; 
facilitate transactions in securities; remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, protect investors and the public interest. The 
Exchange believes that the proposed rule change also is designed to 
support the principles of Section 11A(a)(1) \16\ in that it seeks to 
assure economically efficient execution of securities transactions. In 
particular, the proposed rule change will allow BOX to establish and 
implement mechanisms to remain fully compliant with the Decentralized 
Plan, BOX Rules, and its best execution obligations.
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    \14\ 15 U.S.C. 78(f)(b).
    \15\ 15 U.S.C. 78(f)(b)(5).
    \16\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

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. 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 rule-comments@sec.gov. Please include 
File Number SR-BX-2009-066 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-2009-066. 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 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 inspection and 
copying in the Commission's Public Reference Room, on official business 
days between the hours of 10 a.m. and 3 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-
2009-066 and should be submitted on or before November 12, 2009.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\17\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\18\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices; to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities; to remove impediments to and perfect the 
mechanism of a free and open market and a national market system; and, 
in general, to protect investors and the public interest; and are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \17\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    As described above, BOX Options Participants may designate orders 
to be routed to another market center when trading interest is not 
available on BOX. Orders designated for routing will be routed to avoid 
a Trade-Through or a locked or crossed market, when an order has not 
been executed in its entirety on BOX. Orders routed to other markets do 
not retain time priority with respect to orders on BOX. If a routed 
order is returned to BOX in whole or in part, that order (or remainder) 
will be treated as a new order, with a new time stamp. All orders 
entered on BOX that are routed via the Routing Broker that result in an 
execution shall be binding on the BOX Options Participant that entered 
such order.
    Use of the Exchange's Routing Services will be optional,\19\ and 
the Exchange will be responsible for routing decisions and will retain 
control of the routing logic.\20\ Neither the Exchange, nor any 
affiliate of the Exchange, may be the designated examining authority 
for a Routing Broker.\21\ The Commission also notes that the rule 
contemplates procedures and internal controls designed to protect 
confidential and proprietary information, which should help ensure that 
a Routing Broker does not misuse routing information obtained from the 
Exchange. In addition, the Exchange will provide its Routing Services 
in compliance with its own rules and with the provisions of the Act and 
the rules thereunder, including, but not limited to, the requirements 
in Sections 6(b)(4) and (5) of the Act \22\ that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities, and not be designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers.\23\ In light of these protections, the Commission believes 
that BOX's rules and procedures regarding the Routing Services are 
consistent with the Act.
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    \19\ See supra note 10.
    \20\ See supra note 13.
    \21\ See proposed BOX Rule Chapter XII, Section 5, Supplementary 
Material .01(d).
    \22\ 15 U.S.C. 78f(b)(4) and (5).
    \23\ See proposed BOX Rule Chapter XII, Section 5, Supplementary 
Material .01(a).
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    The Exchange has asked the Commission to accelerate approval of the 
proposed rule change. The Exchange notes that its proposal is 
consistent with prior Commission action,\24\ and that accelerated 
approval will allow BOX to establish and implement mechanisms to remain 
fully compliant with the

[[Page 54610]]

Decentralized Plan and BOX Rules. The Exchange also states that 
accelerated approval will allow BOX to be fully compliant with the 
Decentralized Plan and no longer rely on a Commission-granted exemption 
\25\ from Rule 608(c) of Regulation NMS, which requires BOX to comply 
with, and enforce compliance by its members with, certain provisions of 
the Decentralized Plan.\26\ The exemption is currently set to expire on 
October 31, 2009.\27\ The Commission finds good cause for approving the 
proposed rule change before the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission notes that the Exchange's proposal is consistent with rules 
approved for other national securities exchanges.\28\ Also, approval on 
an accelerated basis will allow BOX an opportunity to comply with the 
terms of the Decentralized Plan prior to the expiration of its 
exemption, while the proposed pilot period will allow interested 
parties an opportunity to comment on the proposal before permanent 
approval. Accordingly, the Commission finds good cause, consistent with 
Section 19(b)(2) of the Act,\29\ to approve the proposed rule change on 
an accelerated basis for a pilot period expiring January 15, 2010.
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    \24\ See SR-BX-2009-066, Item 7; see also Securities Exchange 
Act Release No. 60551 (August 20, 2009), 73 FR 43196 (August 26, 
2009) (SR-CBOE-2009-040).
    \25\ See letter from Elizabeth K. King, Associate Director, 
Division of Trading and Markets, Commission, to Maura A. Looney, 
Associate Vice President. NASDAQ OMX BX, Inc., dated August 28, 2009 
(granting the Exchange's request under Rule 608(e) of Regulation NMS 
for a Temporary Exemption from Certain Provisions of the Options 
Order Protection and Locked/Crossed Market Plan) (``Exemption 
Letter'').
    \26\ See SR-BX-2009-066, Item 7.
    \27\ See Exemption Letter, supra note 25.
    \28\ See, e.g., supra note 24.
    \29\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-BX-2009-066) is hereby approved on an 
accelerated basis for a pilot period to expire on January 15, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-25338 Filed 10-21-09; 8:45 am]

BILLING CODE 8011-01-P