Document ID: SEC-2015-1282-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2015-08-03T04:00Z

[Federal Register Volume 80, Number 148 (Monday, August 3, 2015)]
[Notices]
[Pages 46074-46078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-18882]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75536; File No. SR-BX-2015-042]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Rule 4702 To Introduce a Market Maker Peg Order for Use on BX

July 28, 2015.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 17, 2015, 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

[[Page 46075]]

Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 4702 to introduce a Market 
Maker Peg Order for use on BX.
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to introduce a Market Maker Peg Order 
(``MMPO'') for use on BX by registered BX Market Makers. The MMPO, 
which is currently available for use on The NASDAQ Stock Market 
(``NASDAQ'') \3\ and NASDAQ OMX Phlx (``PHLX'') PSX System,\4\ is an 
order type that provides a means by which a market maker may comply 
with its market making obligations under applicable Exchange rules.\5\ 
Although the Exchange has rules allowing market making on BX, it does 
not currently have any market makers registered with the Exchange. In 
an effort to attract market makers, BX is proposing to introduce the 
MMPO, which will facilitate BX market maker compliance with BX quoting 
obligations.\6\ The MMPO is available for use only by BX Market Makers 
because these obligations are not applicable to other market 
participants. The MMPO is available only through the Exchange's RASH 
and FIX connectivity protocols, because these are the only protocols 
that support continuous pegging functionality.
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    \3\ See NASDAQ Rule 4702(b)(7).
    \4\ See PHLX Rule 3301A(b)(5).
    \5\ See Rule 4613. The MMPO is a ``one-sided'' order. Therefore 
a member firm exclusively employing the order type to comply with 
its market making obligations must enter both a buy and sell MMPO.
    \6\ Id.
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    BX Rule 4613 requires a member firm registered as a Market Maker in 
a particular security to be willing to buy and sell such security for 
its own account on a continuous basis during regular market hours and 
to enter and maintain a two-sided trading interest (``Two-Sided 
Obligation'') that is identified to the Exchange as the interest 
meeting the obligation and is displayed in BX's quotation montage at 
all times. Interest eligible to be considered part of a Market Maker's 
Two-Sided Obligation must have a displayed quotation size of at least 
one normal unit of trading.\7\ After an execution against its Two-Sided 
Obligation, a Market Maker must ensure that it has additional trading 
interest to satisfy its Two-Sided Obligation either by immediately 
entering new interest to comply with this obligation to maintain 
continuous two-sided quotations or by identifying existing interest on 
the BX book that will satisfy this obligation.
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    \7\ Unless otherwise designated, 100 shares.
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    BX Market Makers must also adhere to certain pricing obligations 
established by Rule 4613, which are premised on entering quotation 
prices that are not more than a ``Designated Percentage'' \8\ away from 
the National Best Bid or National Best Offer \9\ (as applicable), and 
that must be refreshed if a change in the National Best Bid or National 
Best Offer causes the quotation price to be more than a ``Defined 
Limit'' \10\ away from the National Best Bid or National Best 
Offer.\11\ The pricing obligations established by the Rule apply during 
regular trading hours (i.e., 9:30 a.m. to 4:00 p.m.), but do not 
commence during any trading day until after the first regular way 
transaction on the primary listing market in the security. Moreover, 
the obligations are suspended during a trading halt, suspension, or 
pause, and do not re-commence until after the first regular way 
transaction on the primary listing market in the security following 
such halt, suspension, or pause, as reported by the responsible single 
plan processor. When the halt is lifted, the order will remain on the 
book unless cancelled by the market maker or if the displayed price is 
outside the permitted pricing range the order will be cancelled.
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    \8\ The ``Designated Percentage'' is: (i) 8% for securities 
subject to Rule 4120(a)(11) and are securities included in the S&P 
500[supreg] Index, Russell 1000[supreg] Index, and a pilot list of 
Exchange Traded Products (``Tier 1 Securities''); 28% for securities 
subject to Rule 4120(a)(11) and that are all NMS stocks not Tier 1 
Securities with a price equal to or greater than $1 (``Tier 2 
Securities''); and 30% for securities subject to Rule 4120(a)(11) 
and that are all NMS stocks not Tier 1 Securities with a price less 
than $1 (``Tier 3 Securities''), except that between 9:30 a.m. and 
9:45 a.m. and between 3:35 p.m. and the close of trading, when Rule 
4120(a)(11) is not in effect, the Designated Percentage shall be 20% 
for Tier 1 Securities, 28% for all Tier 2 Securities, and 30% for 
Tier 3 Securities. See Rule 4613(a)(2)(D).
    \9\ As determined by the Exchange in accordance with its 
procedures for determining Protected Quotations under SEC Rule 600 
under Regulation NMS.
    \10\ The ``Defined Limit'' is 9.5% for Tier 1 Securities, 29.5% 
for Tier 2 Securities, and 31.5% for Tier 3 Securities, except that 
between 9:30 a.m. and 9:45 a.m. and between 3:35 p.m. and the close 
of trading, when Rule 4120(a)(11) is not in effect, the Defined 
Limit shall be 21.5% Tier 1 Securities, 29.5% for Tier 2 Securities, 
and 31.5% for Tier 3 Securities. See Rule 4613(a)(2)(E).
    \11\ Nothing in Rule 4613 precludes a BX Market Maker from 
quoting at price levels that are closer to the National Best Bid and 
Offer than the levels required by the rule.
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    For bid quotations, at the time of entry of bid interest satisfying 
the Two-Sided Obligation, the displayed price of the bid interest may 
not be more than the applicable Designated Percentage away from the 
then current National Best Bid, or if no National Best Bid, not more 
than the Designated Percentage away from the last reported sale from 
the responsible single plan securities information processor. In the 
event that the National Best Bid (or if no National Best Bid, the last 
reported sale) increases to a level that would cause the bid interest 
of the Two-Sided Obligation to be more than the Defined Limit away from 
the National Best Bid (or if no National Best Bid, the last reported 
sale), or if the bid is executed or cancelled, the Market Maker must 
enter new bid interest at a displayed price not more than the 
Designated Percentage away from the then current National Best Bid (or 
if no National Best Bid, the last reported sale), or identify to the 
Exchange current resting interest that satisfies the Two-Sided 
Obligation. Similarly, for offer quotations, at the time of entry of 
offer interest satisfying the Two-Sided Obligation, the displayed price 
of the offer interest may not be more than the Designated Percentage 
away from the then current National Best Offer, or if no National Best 
Offer, not more than the Designated Percentage away from the last 
reported sale received from the responsible single plan securities 
information processor. In the event that the National Best Offer (or if 
no National Best Offer, the last reported sale) decreases to a level 
that would cause the offer interest of the Two-Sided Obligation to be 
more than

[[Page 46076]]

the Defined Limit away from the National Best Offer (or if no National 
Best Offer, the last reported sale), or if the offer is executed or 
cancelled, the Market Maker must enter new offer interest at a 
displayed price not more than the Designated Percentage away from the 
then current National Best Offer (or if no National Best Offer, the 
last reported sale), or identify to the Exchange current resting 
interest that satisfies the Two-Sided Obligation.
    The MMPO is designed to assist Market Makers in complying with 
these requirements by being repriced in accordance with the parameters 
required by Rule 4613. Thus, use of the order will allow market makers 
to make liquidity available at prices reasonably related to the 
National Best Bid and National Best Offer, even in circumstances where 
they are not themselves quoting at the best price or have more limited 
liquidity available at the best price. Specifically, the MMPO is a 
limit order that, upon entry, is automatically priced by the BX System 
at the Designated Percentage away from the Reference Price to keep the 
displayed price of the order bounded within a price range, thereby 
allowing the market maker to comply with the quotation requirements 
under Rule 4613(a)(2). The Reference Price is the then current National 
Best Bid (National Best Offer), or if no National Best Bid (National 
Best Offer), the most recent reported last-sale eligible trade from the 
responsible single plan processor for that day, or if none, the 
previous closing price of the security as adjusted to reflect any 
corporate actions (e.g., dividends or stock splits) in the security. 
For example, if the National Best Bid was $10 in a Tier 1 Security, the 
Designated Percentage would be 8%, an MMPO to buy entered between 9:45 
a.m. and 3:45 p.m. would be priced at $9.20.\12\ Because the order is 
designed to post to the book at the Designated Percentage, it would not 
be marketable upon entry and therefore may not be entered with a time-
in-force of Immediate-or-Cancel. As a result, an MMPO would provide, 
rather than access, liquidity. The order may not be assigned any 
special conditions governing its terms of execution, other than time-
in-force, limit price, and the pegging functionality described herein.
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    \12\ As noted above, the MMPO is a limit order and therefore 
must be assigned a limit priced beyond which it will not execute. If 
the repricing mechanism of the order would result in the order being 
priced at a level inconsistent with its limit price, the order will 
be rejected or cancelled.
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    Upon reaching the Defined Limit, the displayed price of an MMPO 
will be repriced by the System to the Designated Percentage away from 
the then current Reference Price. Thus, if the National Best Bid in the 
above example increased to $10.17, the MMPO priced at $9.20 would now 
be more than 9.5%, the Defined Limit, away from the National Best Bid, 
and would be repriced to $9.35, the Designated Percentage away from 
$10.17.
    An MMPO order could execute in the circumstances shown below. The 
best bid in a particular security is currently $10.00 and all MMPO's in 
the security are currently priced at $9.50 with no other bids resting 
between those two prices. If the $10.00 bid were cancelled or executed, 
the MMPO's resting at $9.50 would become the inside market and would 
then be available for execution against any order willing to sell at 
$9.50 or lower. Alternatively, assume there is a bid for 100 shares at 
$10.00 and the next order on the book is the MMPO resting at $9.50 for 
100 shares. If a 200 share order to sell at $9.50 is received, it would 
execute 100 shares against the $10.00 bid and 100 shares against the 
MMPO that is posted at $9.50.
    If as a result of a change to the Reference Price, the displayed 
price of a Market Maker Peg Order to buy (sell) is at least one minimum 
price variation more than (less than) a price that is 4% less than 
(more than) the Reference Price, rounded up (down), then the price of 
the Market Maker Peg Order to buy (sell) will be re-priced to the 
Designated Percentage away from the Reference Price. Thus, if the 
National Best Bid was initially $10 in a Tier 1 Security, and an MMPO 
to buy was initially entered at $9.20, if the National Best Bid 
decreased to $9.57 (such that the displayed price of the MMPO would be 
at least $0.01 more than a price that is 4% less than the National Best 
Bid, rounded up (i.e., $9.57 - ($9.57 x 0.04) = $9.1872, rounding up to 
$9.19), the MMPO would be repriced to $8.81 (8% away from the National 
Best Bid).\13\
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    \13\ If the resulting calculated price is $9.185, the price 
would round up or down to the compliant price for the entering 
party, up for a buyer and down for a seller.
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    For a given MMPO, a Market Maker may designate a more aggressive 
offset from the National Best Bid or National Best Offer than the given 
Designated Percentage, but such an offset will be expressed as a price 
difference from the Reference Price. Thus, for example, the Market 
Maker could designate an offset of $0.25, in which case the order would 
be continually repriced to maintain the $0.25 offset as the Reference 
Price moved. Thus, if the National Best Bid was $10, an MMPO to buy 
with a $0.25 offset would initially be priced at $9.75, with the price 
rising or falling continually as the Reference Price moved.\14\ If 
there is no Reference Price, an MMPO with a designated offset amount 
will be sent back to the Market Maker.
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    \14\ An MMPO with an offset operates in a manner similar to a 
Primary Pegged Order with an offset amount (see Rule 4702(b(4)), but 
an MMPO is always displayed. Note also that if the repricing of an 
order with an offset amount would result in the order being priced 
at a level inconsistent with its limit price, the order will be 
rejected or cancelled.
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    In the absence of a Reference Price, a Market Maker Peg Order will 
be cancelled (if on the BX Book) or rejected (if it is an incoming 
Order). If, after entry, a Market Maker Peg Order has a displayed price 
based on a Reference Price other than the National Best Bid or National 
Best Offer and such Market Maker Peg Order is established as the 
National Best Bid or National Best Offer, the Market Maker Peg Order 
will not be subsequently repriced in accordance with this rule until a 
new Reference Price is established. Thus, if the last sale price on the 
consolidated tape was $10 and an MMPO to buy is priced at $9.20 and 
establishes the National Best Bid, the order will not then be repriced 
to maintain an offset from itself. Rather, the order will be repriced 
only once there is an independent basis pricing the order. In the event 
of an execution against an MMPO that reduces the size of the order 
below one round lot, the Market Maker would need to enter a new order 
(after performing required regulatory checks, as discussed below) to 
satisfy its obligations under Rule 4613.\15\ If a Market Maker Peg 
Order is repriced 1,000 times, it will be cancelled.\16\
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    \15\ Rule 4613 generally sets forth BX Market Maker 
requirements, which include quotation and pricing obligations, and 
the firm quote obligation.
    \16\ BX limits the total number of repricings to 1,000 to 
control message traffic in the System. For example, a MMPO may be 
affected by a flickering quotation, which is a condition whereby the 
displayed quotation (off of which the MPPO is pegged) can change 
multiple times in a single second. The Exchange determined that, if 
the MMPO repricing was unlimited, the flickering quotation may cause 
unnecessary System traffic as the MMPO continually reprices in 
reaction to each rapid change of the quotation.
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    MMPOs are not eligible for routing pursuant to Rule 4758 and are 
always displayed on BX. Notwithstanding the availability of MMPO 
functionality, a Market Maker remains responsible for entering, 
monitoring, and resubmitting, as applicable, quotations that meet the 
requirements of Rule 4613. A new timestamp is created for an MMPO each 
time that its displayed price is automatically repriced. At a 
particular price, the order would be processed in regular price/time 
priority, with better

[[Page 46077]]

priced interest being executed prior to the MMPO and with the MMPO 
being executed behind similarly priced orders entered before the MMPO 
is repriced.
    Although Rule 4613 does not govern the pre-market trading session 
before 9:30 a.m. and the post-market trading session after 4:00 p.m., a 
Market Maker may enter an MMPO during such periods. In that case, the 
Designated Percentage and Defined Limit applicable to the MMPO will be 
the same as for the periods from 9:30 a.m. through 9:45 a.m., as 
described in Rule 4613.\17\ As BX does not have a special market 
opening or closing process, an MMPO does not behave differently at 9:30 
a.m. or 4:00 p.m. than it does immediately before or after such times.
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    \17\ Supra notes 8 and 10.
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    Use of the MMPO does not frustrate compliance with any broker-
dealer risk management obligations required by SEC Rule 15c3-5 (the 
``Market Access Rule''), or any Regulation SHO marking and locate 
requirement prior to order entry. As such, use of the order is not 
inconsistent with Market Makers fulfilling their obligations under 
these rules, while also meeting their Exchange market making 
obligations. It should be noted, however, that use of the order does 
not ensure that the Market Maker is in compliance with its regulatory 
obligations under the Market Access Rule or Regulation SHO.
2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of section 6 of the Act,\18\ in general, and with section 
6(b)(5) of the Act,\19\ in particular, in that the proposal 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 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 also in that it is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange believes that the MMPO will aid 
Market Makers in complying with the requirements of Rule 4613. The 
Exchange further believes that compliance with this rule will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and protect investors and the public 
interest, because it will provide a means by which Market Makers may 
offer liquidity at prices that are reasonably related to the National 
Best Bid and National Best Offer, even in circumstances where they are 
not willing to quote at the inside market. As a result, in 
circumstances where liquidity available at displayed prices closer to 
the inside than the price of an MMPO is exhausted, the MMPO will 
nevertheless be available to support executions at prices that are not 
widely at variance with the prior inside market. Moreover, a Market 
Maker may elect to set a more aggressive offset from the National Best 
Bid or National Best Offer than the given Designated Percentage, which 
would support executions as prices closer to the prior inside market. 
Because the MMPO is repriced to avoid triggering a limit-up, limit-down 
restriction or a trading pause, it will not contribute to aberrant 
volatility in a particular stock.
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    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(5).
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    The methodology for repricing an MMPO is consistent with the 
requirements of the Act because it will ensure that the displayed price 
of the order bears a reasonable relationship to the inside market and 
is less likely to execute at a price that would trigger a limit-up, 
limit-down restriction or a trading pause. Moreover, because the 
repricing of an MMPO results in a new timestamp being attached to the 
order, the MMPO does not provide a means by which an MMPO may achieve 
an execution priority superior to an order entered at that price 
earlier in time. In addition, the use of the MMPO would not be 
inconsistent with Market Makers fulfilling their obligations under the 
Market Access Rule and Regulation SHO.
    The Exchange also believes that although the order may be used only 
by Market Makers, this restriction is not unfairly discriminatory 
because only Market Makers are subject to the requirements of Rule 
4613; accordingly, the order is not needed to assist other market 
participants in fulfilling regulatory obligations. To the extent that a 
market participant wishes to maintain an order at a displayed price 
that deviates from the inside market by a particular amount, however, 
it may use the Primary Peg Order to achieve this purpose. Accordingly, 
an alternative to the MMPO is already available to market participants.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. Specifically, 
the Exchange believes that the proposal will enhance BX's 
competitiveness by providing Market Makers on BX with a means to offer 
liquidity at prices reasonably related to the inside market. The 
Exchange believes that this functionality will be appealing to 
potential Market Makers, and therefore will make it more likely that 
market participants will choose to become active on BX. This may, in 
turn, increase the extent of liquidity available on BX and increase its 
ability to compete with other execution venues to attract orders that 
are seeking liquidity. The Exchange further believes that the 
introduction of the MMPO will not impair in any manner the ability of 
market participants or other execution venues to compete.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A)(iii) of the Act \20\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

[[Page 46078]]

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-2015-042 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-2015-042. 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 such filing also will be available 
for inspection and copying at the principal offices 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-2015-042, 
and should be submitted on or before August 24, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-18882 Filed 7-31-15; 8:45 am]
BILLING CODE 8011-01-P