Document ID: SEC-2018-1711-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq BX, Inc.
Posted Date: 2018-11-07T05:00Z

[Federal Register Volume 83, Number 216 (Wednesday, November 7, 2018)]
[Notices]
[Pages 55765-55768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24308]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84520; File No. SR-BX-2018-050]

Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Add Definitions 
to Chapter I, Section 1, Titled General Provisions and Also Amend 
Chapter VI, Section 18, Titled Risk Protections

November 1, 2018.
    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 18, 2018, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add definitions to Chapter I, Section 1, 
titled ``General Provisions'' and also amend Chapter VI, Section 18, 
titled, ``Risk Protections.''
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqbx.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

[[Page 55766]]

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

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

1. Purpose
    The purpose of this rule change is to adopt certain definitions 
within Chapter I, Section 1, titled ``General Provisions'' and also 
amend Chapter VI, Section 18, titled, ``Risk Protections.'' Each change 
is described in more detail below.
Definitions
    The Exchange proposes to amend Chapter I, Section 1 to add three 
new definitions into its Rulebook. These definitions are utilized in 
technical documents issued by the Exchange and will provide an ease of 
reference for understanding these terms. Specifically, Chapter I, 
Section 1(a)(70) would define an account number as a number assigned to 
a Participant. Participants may have more than one account number. 
Chapter I, Section 1(a)(71) would define a badge as an account number, 
which may contain letters and/or numbers, assigned to BX Market Makers. 
A BX Market Maker account may be associated with multiple badges. 
Finally, Chapter I, Section 1(a)(72) would define a mnemonic as an 
acronym comprised of letters and/or numbers assigned to Participants. A 
Participant account may be associated with multiple mnemonics.
Risk Protections
Order Price Protection
    The Exchange proposes a minor amendment to Chapter VI, Section 
18(1) to add punctuation and ``OPP'' at the beginning of that sentence 
to conform the text to the remainder of the rule. The Exchange proposes 
to remove the example within Rule Chapter VI, Section 18(1)(B)(i) which 
states, ``For example, if the Reference BBO on the offer side is $1.10, 
an order to buy options for more than $1.65 would be rejected. 
Similarly, if the Reference BBO on the bid side is $1.10, an order to 
sell options for less than $0.55 will be rejected.'' The Exchange also 
proposes to remove the example within Chapter VI, Section 18(1)(B)(ii) 
which states, ``For example, if the Reference BBO on the offer side is 
$1.00, an order to buy options for more than $2.00 would be rejected. 
However, if the Reference BBO of the bid side of an incoming order to 
sell is less than or equal to $1.00, the OPP limits set forth above 
will result in all incoming sell orders being accepted regardless of 
their limit.'' The Exchange notes that while the examples remain 
accurate, the Exchange proposes to remove the text to conform the rule 
text to other risk protections. The Exchange does not believe it is 
necessary to have these examples within the rule text.
Market Order Spread Protection
    The Exchange proposes to amend the Market Order Spread Protection 
Rule in Chapter VI, Section 18(a)(2) to permit BX to establish 
different thresholds for one or more series or classes of options 
similar to Phlx.\3\ The Exchange desires, similar to Phlx, to be 
permitted the flexibility to allow it to determine a threshold suitable 
for each series or class of option. The Exchange's current rule 
provides no discretion to permit different thresholds for one or more 
series or classes of options. By adding this rule text, the Exchange 
proposes to permit one or more series or classes of options to set a 
different threshold, which the Exchange would announce via an Options 
Trader Alert, similar to Phlx. The Exchange desires to conform this 
protection to Phlx so that it could set the same threshold across 
affiliated markets. The Phlx Rule Change provided that the $5 threshold 
is appropriate because it seeks to ensure that the displayed bid and 
offer are within reasonable ranges and do not represent erroneous 
prices. Further the Exchange noted that this protection will bolster 
the normal resilience and market behavior that persistently produces 
robust reference prices. This feature should create a level of 
protection that prevents Market Orders from entering the Order Book 
outside of an acceptable range for the Market Order to execute. The 
Exchange notes that those goals remain consistent with the Exchange's 
goals today for this risk feature. The Exchange would establish 
different thresholds for one or more series or classes of options if it 
believed that the threshold should differ to retain these goals.
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    \3\ Securities Exchange Act Release No. 83141 (May 1, 2018), 83 
FR 20123 (May 7, 2018) (SR-Phlx-2018-32). Footnote 11 of this filing 
provides that Exchange may establish differences other than the 
referenced threshold for one or more series or classes of options.
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Anti-Internalization
    The Exchange proposes to add a new sentence to Anti-Internalization 
Rule at Chapter VI, Section 18(c)(1) to provide that Anti-
Internalization functionality shall not apply in any auction. This is 
the current practice today. With respect to an auction,\4\ the Exchange 
notes that Anti-Internalization functionality is difficult to apply 
during auctions, and there is limited benefit in doing so. There is 
limited benefit because, generally speaking, auctions do not raise the 
same policy concerns for wash sales and ERISA \5\ due to the semi-
random manner in which trades are matched. Also, the Exchange notes 
that with respect to entering quotes in an auction, a Market Maker 
could not start an auction in symbols in which they are assigned. With 
respect to orders, Market Makers can only commence a PRISM in a non-
assigned symbol.\6\ It is not common for a Market Maker to commence 
such an auction. Finally, the Exchange notes that Nasdaq ISE, LLC Rule 
714(b)(3)(A) contains the same constraint in that it does not apply the 
Anti-Internalization protection in any auction.
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    \4\ PRISM is the Exchange's Price Improvement Auction. See BX 
Rules at Chapter VI, Section 9.
    \5\ AIQ is designed to assist market participants in complying 
with certain rules and regulations of the Employee Retirement Income 
Security Act (``ERISA'') that preclude and/or limit managing broker-
dealers of such accounts from trading as principal with orders 
generated for those accounts. It can also assist Market Makers in 
reducing trading costs from unwanted executions potentially 
resulting from the interaction of executable buy and sell trading 
interest from the same firm when performing the same market making 
function.
    \6\ Specialists and ROTs can only quote in symbols in which they 
are assigned.
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Automated Removal of Quotes
    Finally, the Exchange proposes to amend the title of Chapter VI, 
Section 18(c)(2) from ``Automated Removal of Quotes'' to ``Quotation 
Adjustments'' to conform the title across Nasdaq markets.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote 
just and equitable principles of trade and to protect investors and the 
public interest by adding greater transparency to the Exchange's rules. 
The Exchange's proposal to add definitions to Chapter I, Section 1 will 
bring greater clarity to the Anti-Internalization functionality and to 
the Rulebook. Amendments to remove examples from the OPP rule text will 
conform the rule text to other rules. The Exchange believes that it is 
unnecessary to have examples in the rule text. Adding the word 
``trading'' before the word ``halt'' within the Market Order

[[Page 55767]]

Spread Protection rule text will bring conformity to Chapter VI, 
Section 18.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Exchange's proposal to expand the Market Order Spread 
Protection permits the Exchange to establish different thresholds for 
one or more series or classes of options similar to Phlx. The Exchange 
desires this flexibility to allow it, similar to Phlx,\9\ to determine 
a threshold suitable for each series or class of option. The Exchange 
believes that expanding this capability is consistent with the Act 
because it would allow the Exchange to consider thresholds for Market 
Order Spread Protection at a more granular level, per series or class, 
to ensure that the displayed bid and offer are within reasonable ranges 
and do not represent erroneous prices. The Exchange intends that this 
risk protection would bolster the normal resilience and market behavior 
that persistently produces robust reference prices, while creating a 
level of protection that prevents Market Orders from entering the Order 
Book outside of an acceptable range for the Market Order to execute.
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    \9\ See note 4 above.
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    The Exchange's proposal to make clear that the Anti-Internalization 
functionality will not apply in any auction will also bring greater 
transparency to the rules and the limitation of this functionality. 
With respect to an auction,\10\ the Exchange notes that Anti-
Internalization functionality is difficult to apply during auctions, 
and there is limited benefit in doing so. There is limited benefit 
because, generally speaking, auctions do not raise the same policy 
concerns for wash sales and ERISA \11\ due to the semi-random manner in 
which trades are matched. Also, the Exchange notes that with respect to 
entering quotes in an auction, a Market Maker could not start an 
auction in symbols in which they are assigned. With respect to orders, 
Market Makers can only commence a PRISM in a non-assigned symbol. It is 
not common for a Market Maker to commence such an auction.
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    \10\ PIXL is the Exchange's Price Improvement XL auction. See 
Phlx Rule 1087.
    \11\ See note 6 above.
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    Finally, the Exchange's proposal to amend the title of Chapter VI, 
Section 18(c)(2) from ``Automated Removal of Quotes'' to ``Quotation 
Adjustments'' should better describe the rule and conform the title to 
other Nasdaq affiliate markets. The proposals noted herein are 
consistent with the Act because they provide more detail and 
transparency to the Exchange's rules noted herein to the benefit of 
market participants.

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. The Exchange believes that the 
proposed amendments do not impose an undue burden on competition 
because the definitions and amendments to conform the rule text will 
provide greater clarity as to the meaning of those terms. Removing 
examples from the OPP rule text does not impose an undue burden on 
competition because this text is not necessary within the rule text. 
Adding the word ``trading'' before the word ``halt'' within the Market 
Order Spread Protection rule text will bring conformity to Chapter VI, 
Section 18. The Exchange's proposal to expand the Market Order Spread 
Protection to permit the Exchange to establish different thresholds for 
one or more series or classes of options, similar to Phlx, would apply 
uniformly to all market participants.
    The Exchange's proposal to make clear that the Anti-Internalization 
functionality will not apply in any auction will also bring greater 
transparency to the rules and the limitation of this functionality. 
With respect to an auction, the Exchange notes that Anti-
Internalization functionality is difficult to apply during auctions, 
and there is limited benefit in doing so. There is limited benefit 
because, generally speaking, auctions do not raise the same policy 
concerns for wash sales and ERISA \12\ due to the semi-random manner in 
which trades are matched. Finally, the Exchange's proposal to amend the 
title of Rule Chapter VI, Section 18(c)(2) is non-substantive.
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    \12\ See note 6 above.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \15\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \16\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing. The 
Exchange believes that waiver of the operative delay would allow the 
Exchange to update its rules without delay to remove inconsistent rule 
language, make clarifying changes to reflect current and accurate 
information, and bring greater transparency to the Exchange's risk 
protections and Anti-Internalization rule. Additionally, the Commission 
notes that the changes relating to the Anti-Internalization 
functionality and Market Order Spread Protection are based on the 
operation of similar functionality on Nasdaq ISE and Phlx, 
respectively. Therefore, the Commission believes that waiver of the 30-
day operative delay is consistent with the protection of investors and 
the public interest. Accordingly, the Commission hereby waives the 
operative delay and designates the proposed rule change operative upon 
filing.\17\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

[[Page 55768]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BX-2018-050 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-2018-050. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BX-2018-050, and should be submitted on 
or before November 28, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-24308 Filed 11-6-18; 8:45 am]
 BILLING CODE 8011-01-P