Document ID: SEC-2022-0030-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq BX, Inc.
Posted Date: 2022-01-10T05:00Z

[Federal Register Volume 87, Number 6 (Monday, January 10, 2022)]
[Notices]
[Pages 1231-1238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00154]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93896; File No. SR-BX-2021-054]

Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Adopt an Add 
Liquidity Order and Post-Only Quote Configuration Functionality

January 4, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 22, 2021, Nasdaq 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.
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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 Options 3, Section 1 (Days and Hours 
of

[[Page 1232]]

Business), Section 7 (Types of Orders and Quote Protocols), Section 13 
(Price Improvement Auction (``PRISM'')) and Section 15 (Risk 
Protections).
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/bx/rules, 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 proposes to amend the following rules: Options 3, 
Section 1 (Days and Hours of Business), Section 7 (Types of Orders and 
Quote Protocols), Section 13 (Price Improvement Auction (``PRISM'')) 
and Section 15 (Risk Protections). Each change will be described below.
Options 3, Section 1
    The Exchange proposes to amend Options 3, Section 1 concerning the 
Days and Hours of Business. The Exchange proposes to amend the title 
from ``Days and Hours of Business'' to ``Hours of Business.'' BX 
recently filed to establish General 3, Section 1030, which governs the 
days the Exchange will be open for business.\3\ At this time the 
Exchange proposes to amend Options 3, Section 1(c) which provides, ``BX 
Options shall not be open for business on any holiday observed by BX.'' 
The Exchange proposes to instead provide, ``BX Options shall not be 
open for business as provided within General 3, Section 1030.'' This 
proposed text will make clear that while General 3, Section 1030 
governs the days the Exchange will be open for business, the remainder 
of the rule addresses the hours of operation of the System and specific 
products. Finally, the Exchange proposes to update citations to the 
Options 4 rules related to Exchange-Traded Fund Shares and Index-Linked 
Securities.
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    \3\ See Securities Exchange Act Release No. 93675 (November 29, 
2021), 86 FR 68714 (December 3, 2021) (SR-NASDAQ-2021-69) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To 
Include Juneteenth National Independence Day as a Holiday). BX's 
General 3 rules incorporate by reference The Nasdaq Stock Market 
LLC's General 3 Rules. Rule 1030 of General 3 memorialized all 
current Exchange holidays and added a provision to permit the 
Exchange the authority to halt or suspend trading or close Exchange 
facilities for certain unanticipated closures.
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Options 3, Section 7
    The Exchange proposes to amend Options 3, Section 7 to add a new 
order type entitled ``Add Liquidity Order'' within Options 3, Section 
7(a)(12). Today, Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC (``GEMX'') 
and Nasdaq MRX, LLC (``MRX'') have a similar order type within Options 
3, Section 7(n). ISE adopted the Add Liquidity Order to provide an 
additional order type that will give market participants greater 
control over the circumstances in which their orders are executed.\4\ 
ISE's 2012 rule change explained that
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    \4\ See Securities Exchange Act Release No. 66617 (March 19, 
2012), 77 FR 17102 (March 23, 2012) (SR-ISE-2012-20) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
a New Order Type).

[s]ome investors and market participants wish only to provide 
liquidity in certain circumstances, such as to receive a maker fee 
(rebate) upon execution of an order. To accommodate this strategy, 
the Exchange proposed to adopt a new order type called an add 
liquidity order (``ALO''). ALOs are limit orders that will only be 
executed as a ``maker'' on the ISE. Members can choose whether an 
ALO that is executable on the ISE upon entry (or that locks or 
crosses an away market upon entry) will be cancelled or re-priced to 
one minimum price variation above the national best bid or below the 
national best offer. An Add Liquidity Order will only be re-priced 
once and will be executed at the re-priced price.\5\
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    \5\ Id at 17103.

    ISE subsequently amended this order type in 2012 such that, if at 
the time of entry, an ALO would lock or cross one or more non-displayed 
orders on the Exchange, the ALO will be cancelled or re-priced to the 
minimum price variation \6\ (``MPV'') above the best non-displayed bid 
price (for sell orders) or below the best non-displayed offer price 
(for buy orders).\7\ ISE noted in that filing that it believed that 
adding this functionality was imperative to ensure that ALOs are only 
executed when providing liquidity. Without the ability to re-price an 
ALO that locks or crosses a non-displayed order, under certain 
circumstances, an incoming ALO could execute against a non-displayed 
order resting on the ISE limit order book, which would be in direct 
contravention with the purpose of an ALO--to provide liquidity, not 
take liquidity.\8\
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    \6\ See Options 3, Section 3 (Minimum Increments).
    \7\ See Securities Exchange Act Release No. 67353 (July 5, 
2012), 77 FR 40935 (July 11, 2012) (SR-ISE-2012-61) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change by 
International Securities Exchange To Amend ISE Rule 715 To Reflect a 
Modification in the Functionality of the Add Liquidity Order).
    \8\ Id at 40935.
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    At this time, the Exchange proposes to adopt an Add Liquidity Order 
similar to ISE, GEMX and MRX Options 3, Section 7(n). The proposed Add 
Liquidity Order would be a limit order that is to be executed in whole 
or in part on the Exchange (i) only after being displayed on the 
Exchange's limit order book; and (ii) without routing any portion of 
the order to another market center. Participants would be able to 
specify whether an Add Liquidity Order shall be cancelled or re-priced 
to the MPV above the national best bid price (for sell orders) or below 
the national best offer price (for buy orders) if, at the time of 
entry, the order (i) is executable on the Exchange; or (ii) the order 
is not executable on the Exchange but would lock or cross the national 
best bid or offer. If at the time of entry, an Add Liquidity Order 
would lock or cross one or more non-displayed orders or quotes on the 
Exchange, the Add Liquidity Order shall be cancelled or re-priced to 
the MPV above the best non-displayed bid price (for sell orders) or 
below the best non-displayed offer price (for buy orders). 
Notwithstanding the aforementioned, if an Add Liquidity Order would not 
lock or cross an order or quote on the System but would lock or cross 
the NBBO,\9\ the order will be handled pursuant to Options 3, Section 
5(d).\10\ This repricing of Add Liquidity Orders is the way other order 
types are currently re-priced on ISE, GEMX and

[[Page 1233]]

MRX. The Exchange notes that the same sentence does not appear in the 
ISE, GEMX and MRX Add Liquidity Order description.\11\
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    \9\ The term ``NBBO'' means the national best bid or offer as 
calculated by BX Options based on market information received by BX 
Options from OPRA. See Options 3, Section 1(a)(33).
    \10\ Options 3, Section 5(d) provides, ``An order will not be 
executed at a price that trades through another market or displayed 
at a price that would lock or cross another market. An order that is 
designated by the member as routable will be routed in compliance 
with applicable Trade-Through and Locked and Crossed Markets 
restrictions. An order that is designated by a member as non-
routable will be re-priced in order to comply with applicable Trade-
Through and Locked and Crossed Markets restrictions. If, at the time 
of entry, an order that the entering party has elected not to make 
eligible for routing would cause a locked or crossed market 
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current 
national best bid (for offers) and displayed at one minimum price 
variance above (for offers) or below (for bids) the national best 
price.''
    \11\ See ISE, GEMX and MRX Options 3, Section 5(d). The Exchange 
will amend the ISE, GEMX and MRX rules in separate rule changes.
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    Finally, BX proposes to add rule text that is not currently in the 
ISE, GEMX and MRX rule. Add Liquidity Orders may only be submitted when 
an options series is open for trading.\12\ Therefore, an Add Liquidity 
Order would not be accepted during the Opening Process when the order 
book is not available.
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    \12\ ISE, GEMX and MRX will propose a change to Options 3, 
Section 7(n) to add similar rule text.
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    The Exchange believes that, similar to ISE, GEMX and MRX, the 
adoption of an Add Liquidity Order will give market participants 
greater control over the circumstances in which their orders are 
executed in addition to the order types which are currently offered 
today on BX. Below are some examples of the Add Liquidity Order.
Add Liquidity Only Order Re-Price Example
 Non-Penny Program MPV Option in open trading state
 Market Maker A quote $0.90 (10) x $1.00 (10)
 ABBO $0.85 x $1.05
 Firm A sends Add Liquidity Only Order to buy 5 arrives at 
$1.00
[cir] Reprices on book to $0.95
[cir] Displays on $0.95 bid, which is National Best displayed bid with 
5 quantity
 Order to sell 10 arrives at $0.90
[cir] 5 execute with Firm A @ $0.95
[cir] 5 execute with Market A @ $0.90
[cir] NBBO updates back to $0.90 x $1.00
Add Liquidity Only Reject Example
 Non-Penny Program MPV Option in open trading state
 Market Maker A quote $0.90 (10) x $1.00 (10)
 ABBO $0.85 x $1.05
 Firm A sends Add Liquidity Only Order to buy 5 arrives at 
$1.00
[cir] Order is rejected back to sender because the sender configured 
the order for reject instead of re-price

    The Exchange also proposes to amend Options 3, Section 7(a)(11) to 
remove the title ``Block Order'' at the beginning of the sentence to 
conform the style of the description to the remaining order types 
within Options 3, Section 7.
Options 3, Section 13
    The Exchange proposes to amend the Exchange's PRISM rule in Options 
3, Section 13 to delete an obsolete auction eligibility requirement and 
clarify existing rule text.
    Today, Options 3, Section 13(i) describes the various eligibility 
criteria under which a PRISM auction may be initiated, including 
requirements for when PRISM orders may be submitted. In particular, 
Section 13(i)(F) provides that PRISM orders submitted during the final 
two seconds of the trading session in the affected series are not 
eligible to initiate a PRISM auction and will be immediately cancelled. 
This restriction was introduced when PRISM was first adopted on the 
Exchange,\13\ and was based on certain technical restraints from BX's 
original technical design which required no ongoing auctions to begin 
preparing for the end of trading day transition to closing state. 
However, with the Exchange's recent technology migration,\14\ this 
system restriction was removed in order to be more consistent with the 
price improvement mechanisms on the Exchange's affiliated options 
markets, Nasdaq ISE, GEMX, and MRX.\15\ The corresponding rule text in 
Options 3, Section 13(i)(F) should have likewise been deleted with the 
legacy functionality. Accordingly, the Exchange now proposes to delete 
the obsolete rule text in Section 13(i)(F) in its entirety, and 
renumber Section 13(i)(G) as (F).
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    \13\ See Securities Exchange Act Release No. 76301 (October 29, 
2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032) (Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To 
Adopt a New Price Improvement Auction, BX PRISM).
    \14\ See Securities Exchange Act Release No. 89476 (August 4, 
2020), 85 FR 48274 (SR-BX-2020-017) (August 10, 2020) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Various BX Rules in Connection With a Technology Migration).
    \15\ None of these markets have similar system restrictions 
preventing the submission of orders in their respective price 
improvement mechanisms during the last two seconds of the trading 
day. See Nasdaq ISE, GEMX, and MRX Options 3, Section 13.
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    Additionally, the Exchange proposes to amend rule text regarding 
the PRISM Auction process. Currently, Options 3, Section 13(ii) 
describes the manner in which a PRISM auction may be conducted. 
Specifically, with respect to an unrelated market or marketable limit 
order, Options 3, Section 13(a)(ii)(D) provides,

    An unrelated market or marketable limit order (against the BX 
BBO) on the opposite side of the market from the PRISM Order 
received during the Auction will not cause the Auction to end early 
and will execute against interest outside of the Auction. If 
contracts remain from such unrelated order at the time the auction 
ends, they will be considered for participation in the order 
allocation process described in sub-paragraphs (E) and (F) below.

    The term ``marketable limit order'' is too narrow a term as both 
orders and quotes on the opposite side of the market from the PRISM 
Order received during the PRISM auction would not cause the PRISM 
auction to end early and will execute against interest outside of the 
PRISM auction. Therefore, the Exchange proposes to replace the term 
``marketable limit order'' with the broader term ``marketable 
interest'' to accurately describe the interest a PRISM auction would 
interact with in the order book on the opposite side of the market from 
the PRISM Order. The Exchange believes that this amendment will bring 
greater clarity to the PRISM rule. The proposed new rule text would 
provide,

    Unrelated market or marketable interest (against the BX BBO) on 
the opposite side of the market from the PRISM Order received during 
the Auction will not cause the Auction to end early and will execute 
against interest outside of the Auction. If contracts remain from 
such unrelated interest at the time the auction ends, they will be 
considered for participation in the order allocation process 
described in sub-paragraphs (E) and (F) below.

    The Exchange notes that Nasdaq PHLX LLC's Price Improvement XL 
(``PIXL'') auction does not early terminate from contra-side unrelated 
marketable interest.\16\
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    \16\ See Phlx Options 3, Section 13(b)(4). The Exchange will 
separately amend Phlx's rule to make a similar change to the rule 
text.
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Options 3, Section 15
    The Exchange proposes to amend Options 3, Section 15, Risk 
Protections, to adopt an optional quoting protection for BX Market 
Makers. This optional risk protection would allow BX Market Makers to 
prevent their quotes from removing liquidity from the Exchange's order 
book upon entry.
    Specifically, the Exchange proposes to adopt a new risk protection 
within Options 3, Section 15(c)(3). With this risk protection, NOM 
Market Makers may elect to configure their SQF \17\ protocols to 
prevent their quotes from

[[Page 1234]]

removing liquidity (``Post-Only Quote Configuration''). This Post-Only 
Quote Configuration would re-price or cancel a BX Market Maker's quote 
that would otherwise lock or cross any resting order \18\ or quote on 
the BX order book upon entry. The Exchange notes that this 
functionality does not apply during an Opening Process \19\ because the 
order book is established once options series are open for trading.
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    \17\ ``Specialized Quote Feed'' or ``SQF'' is an interface that 
allows Market Makers to connect, send, and receive messages related 
to quotes, Immediate-or-Cancel Orders, and auction responses into 
and from the Exchange. Features include the following: (1) Options 
symbol directory messages (e.g., underlying instruments); (2) system 
event messages (e.g., start of trading hours messages and start of 
opening); (3) trading action messages (e.g., halts and resumes); (4) 
execution messages; (5) quote messages; (6) Immediate-or-Cancel 
Order messages; (7) risk protection triggers and purge 
notifications; (8) opening imbalance messages; (9) auction 
notifications; and (10) auction responses. The SQF Purge Interface 
only receives and notifies of purge requests from the Market Maker. 
Market Makers may only enter interest into SQF in their assigned 
options series. See Options 3, Section 7(e)(1)(B).
    \18\ This would include any re-priced orders as described in 
Options 3, Section 5(d), any re-priced quotes as described in 
Options 3, Section 4(b)(6), and the proposed Add Liquidity Orders 
within proposed Options 3, Section 7(a)(12). As noted herein, Add 
Liquidity Orders may re-price.
    \19\ The Exchange's Opening Process is described at Options 3, 
Section 8.
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    Participants may elect whether to re-price or cancel their quotes 
with this functionality. When configured for re-price, quotes would be 
re-priced to one MPV below the current low offer (for bids) or above 
the current best bid (for offers) and displayed by the System at one 
MPV below the current low offer (for bids) or above the current best 
bid (for offers). Notwithstanding the aforementioned, if a quote with a 
Post-Only Quote Configuration would not lock or cross an order or quote 
on the System but would lock or cross the NBBO, the quote will be 
handled pursuant to Options 3, Section 4(b)(6).\20\ When configured for 
cancel, Participants will have their quotes returned whenever the quote 
would lock or cross the NBBO or be placed on the book at a price other 
than its limit price.
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    \20\ Options 3, Section 4(b)(6) provides, ``A quote will not be 
executed at a price that trades through another market or displayed 
at a price that would lock or cross another market. If, at the time 
of entry, a quote would cause a locked or crossed market violation 
or would cause a trade-through, violation, it will be re-priced to 
the current national best offer (for bids) or the current national 
best bid (for offers) and displayed at one minimum price variance 
above (for offers) or below (for bids) the national best price.''
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    This optional risk protection would enable BX Market Makers to 
better manage their risk when quoting on BX. Today, BOX Exchange LLC 
(``BOX''),\21\ NYSE Arca, Inc. (``NYSE Arca''),\22\ and MIAX Emerald, 
LLC (``MIAX Emerald'') \23\ have similar functionality. BOX does not 
permit Market Maker's quotes to take liquidity and will reject the 
quote. Other options markets, unlike BOX, continue to permit their 
market makers to add or remove liquidity from the order book.\24\ NYSE 
Arca and MIAX Emerald will re-price quotes one MPV to avoid the quote 
from trading as a liquidity taker against the resting order similar to 
BX's proposal. Also, the Exchange's proposal permits a BX Market Maker 
a choice as to whether to cancel or re-price its quote when using the 
Post-Only Quote Configuration.
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    \21\ BOX Rules provide, ``Notwithstanding Rule 100(a)(56), all 
quotes and quote updates on BOX after the opening are liquidity 
adding only. Specifically, after the Opening Match pursuant to Rule 
7070, a Market Maker's quote will not execute against a resting 
order or quote on the BOX Book. If an incoming quote is marketable 
against the BOX Book and will execute against a resting order or 
quote, it will be rejected.'' See BOX IM-8050-3. See also Securities 
Exchange Act Release No. 79311 (November 15, 2016), 81 FR 83322 
(November 21, 2016) (SR-BOX-2016-45) (Order Approving a Proposed 
Rule Change To Amend the Treatment of Quotes To Provide That All 
Quotes on BOX Are Liquidity Adding Only).
    \22\ NYSE Arca permits a market maker to optionally designate a 
quote as ``Add Liquidity Only.'' See NYSE Arca Rule 6.37A-
O(a)(3)(B).
    \23\ See MIAX Emerald Rule 517(a)(1)(i).
    \24\ Miami International Securities Exchange LLC (``MIAX'') 
permits its market makers to add and remove liquidity from the order 
book. See MIAX's Fee Schedule which delineates Maker and Taker 
pricing. Nasdaq ISE, LLC (``ISE'') also permits market makers to add 
and remove liquidity from the order book. See ISE's Pricing Schedule 
at Options 7.
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    Finally, the Nasdaq Options Market LLC (``NOM'') recently codified 
\25\ a similar risk protection, however, unlike BX, NOM reprices $.01 
below the current low offer (for bids) or above the current best bid 
(for offers) and displays the quote at one MPV below the current low 
offer (for bids) or above the current best bid (for offers). The 
Exchange notes that, unlike BX, NOM does not offer auction 
functionality. Because an auction mechanism may interact adversely with 
Add Liquidity Only Orders or quotes with a Post-Only Quote 
Configuration that are re-priced in $0.01 increments and displayed at 
MPV increments, the Exchange proposes to re-price at one MPV.\26\ BX 
has the PRISM auction.\27\ The Exchange believes that it is consistent 
with the protection of investors and the general public to utilize one 
MPV to re-price an Add Liquidity Only Order or quote with a Post-Only 
Quote Configuration to avoid a PRISM auction rejecting against a non-
displayed Add Liquidity Only Order or quote with a Post-Only Quote 
Configuration. The Exchange notes that a similar result could not be 
obtained on NOM as there are no auctions. The Add Liquidity Order on 
ISE, GEMX and MRX \28\ also re-prices in one MPV as those markets have 
a price improvement auction.\29\
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    \25\ See Securities and Exchange Release No. 93662 (November 23, 
2021), 86 FR 68009 (November 30, 2021) (SR-NASDAQ-2021-094) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt a Post-Only Quote Configuration Risk Protection).
    \26\ For example, the inbound auction would reject against the 
non-displayed Add Liquidity Only Order or quote with a Post-Only 
Quote Configuration with an auction mechanism.
    \27\ See Options 3, Section 13.
    \28\ See Options 3, Section 7(n).
    \29\ Id.
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    Further, with the adoption of Add Liquidity Orders as proposed 
herein within Options 3, Section 7, all BX Participants may utilize the 
Add Liquidity Order. The Post-Only Quote Configuration is available to 
Market Makers only as a risk protection.
    Below are some examples of the Post-Only Quote Configuration 
functionality.
Post-Only Quote Configuration Reprice Example
 Penny Interval Program MPV in open trading state
 Market Makers A and C do not have Post-Only Quote 
Configuration risk protection configured
 Market Maker B is configured for Post-Only Quote Configuration 
re-price
 Market Maker A quote $0.98 (10) x $1.00 (10)
 ABBO $0.96 x $1.03
 Market Maker B quote $1.00 (10) x $1.01 (10) arrives
[cir] Bid side of quote re-prices onto order book @ 0.99 and updates 
displayed NBBO to 20 quantity
[cir] Offer side rests at 1.01 without issue
 Market Maker C quote $0.97 (20) x 0.98 (20) arrives
Trades 10 with Market Maker A and 10 with Market Maker B

    Market Maker B avoids taking liquidity while Market Maker C, who 
chose not to be configured for such, removes liquidity by interacting 
with re-priced interest on BX's order book.
Re-Priced Post-Only Quote Configuration--Penny Interval Program Display 
and Execution Example--Non-Penny Interval Program (Options 3, Section 
7(a)(9))
 Non-Penny Interval Program MPV in open trading state
 Market Maker A quote $0.95 (10) x $1.00 (10)
 ABBO $0.85 x $1.05
 Market Maker B (configured at the badge level for Post-Only 
Quote Configuration and selection of re-price upon quote) quote arrives 
1.00 (5) x $1.05 (5)
[cir] Bid side quote re-prices on order book to $0.95
[cir] Displays on order book @ $0.95 (bid), which now shows (15 
quantity)
[cir] Offer side quote books and displays at $1.05
 Order to sell 10 contracts arrives @ $0.95
[cir] 5 contracts execute with Market Maker B @ $0.95
[cir] 5 contracts execute with Market A @ $0.95

[[Page 1235]]

In this example, the Market Maker avoided taking liquidity by deploying 
the Post-Only Quote Configuration with re-price.
Implementation
    The Exchange will issue an Options Trader Alert to Participants 
with the date of implementation for the Add Liquidity Order and the 
Post-Only Quote Configuration functionality.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\30\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\31\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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.
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    \30\ 15 U.S.C. 78f(b).
    \31\ 15 U.S.C. 78f(b)(5).
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Options 3, Section 1
    The Exchange's proposal to amend Options 3, Section 1 concerning 
the Days and Hours of Business is consistent with the Act. The proposal 
to amend the title from ``Days and Hours of Business'' to ``Hours of 
Business'' will bring greater clarity to the rule. BX recently filed to 
establish General 3, Section 1030, which governs the days the Exchange 
will be open for business.\32\ Amending Options 3, Section 1(c) to 
reference General 3, Section 1030 will provide Participants with a 
guidepost as to where to locate the rule that applies to the days the 
Exchange is open for business. The proposed updated citations to the 
Options 4 rules will provide correct references for Participants and 
thereby bring greater clarity to the rules.
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    \32\ See note 3 above.
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Options 3, Section 7
    The Exchange's proposal to amend Options 3, Section 7 to add a new 
order type entitled ``Add Liquidity Order'' within Options 3, Section 
7(a)(12) is consistent with the Act. Today, ISE, GEMX and MRX have a 
similar order type within Options 3, Section 7(n). The Add Liquidity 
Order will provide an additional order type that will give market 
participants greater control over the circumstances in which their 
orders are executed. For investors and market participants that elect 
only to provide liquidity in certain circumstances, such as to receive 
a maker fee (rebate) upon execution of an order, the proposed order 
type will accommodate this strategy. Add Liquidity Orders will only be 
executed as a ``maker'' if elected.
    Participants may choose to cancel or re-price Add Liquidity Orders 
if, at the time of entry, the order is executable on BX or the order is 
not executable on BX but would lock or cross the national best bid or 
offer. Allowing Add Liquidity Order to re-price ensures that Add 
Liquidity Orders are only executed when providing liquidity and avoid 
executing against a non-displayed order or quote resting on BX's order 
book, which would be in direct contravention with the purpose of the 
order type--to provide liquidity, not take liquidity. The Add Liquidity 
Order type is one of the order types that Participants may elect to 
utilize on BX to accomplish their trading strategies. The Exchange 
believes that adoption of the Add Liquidity Order will protect 
investors and the general public by making clear the manner in which 
the order would re-price on BX's order book if re-price is elected, 
that is to the MPV above the best non-displayed bid price (for sell 
orders) or below the best non-displayed offer price (for buy orders). 
As is the case today, if an order would not lock or cross an order or 
quote on the System but would lock or cross the NBBO, the order will be 
handled pursuant to Options 3, Section 5(d).
    Add Liquidity Orders may only be submitted when an options series 
is open for trading.\33\ Therefore, an Add Liquidity Order would not be 
accepted during the Opening Process as the order book is not available. 
The Exchange believes that similar to ISE, GEMX and MRX, the adoption 
of an Add Liquidity Order will give market participants greater control 
over the circumstances in which their orders are executed in addition 
to the order types which are currently offered today on BX.
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    \33\ ISE, GEMX and MRX will propose a change to Options 3, 
Section 7(n) to add similar rule text.
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    The Exchange's proposal to amend Options 3, Section 7(a)(11) to 
remove the title ``Block Order'' at the beginning of the sentence will 
conform the style of the description to the remaining order types 
within Options 3, Section 7.
Options 3, Section 13
    With respect to amendments to Options 3, Section 13, first, the 
proposed rule change deletes a PRISM auction eligibility requirement 
that restricts PRISM orders from being submitted during the final two 
seconds of the trading day. As discussed above, this system restriction 
is legacy functionality that was removed as part of the Exchange's 
technology migration in 2020. The Exchange is therefore proposing to 
remove the corresponding rule text in Options 3, Section 13(i)(F) as 
obsolete. The Exchange believes that the proposed changes will align 
the PRISM rule with the current operation of the Exchange's system and 
will reduce potential confusion about when PRISM orders may be 
submitted. As noted above, the Exchange's affiliated options markets, 
Nasdaq ISE, GEMX, and MRX, do not have similar system restrictions for 
their respective price improvement mechanisms.\34\ Furthermore, the 
Exchange believes that removing this system restriction may encourage 
greater participation in PRISM as Participants are no longer restricted 
from submitting PRISM orders during the last two seconds of the trading 
day, thereby increasing the opportunity for options orders to receive 
executions and price improvement on the Exchange.
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    \34\ See note 15 above.
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    Second, the proposed rule change amends Options 3, Section 
13(a)(ii)(D) which describes the manner in which a PRISM auction may be 
conducted. As noted herein, the term ``marketable limit order'' is too 
narrow a term as both orders and quotes on the opposite side of the 
market from the PRISM Order received during the PRISM auction would not 
cause the PRISM auction to end early and execute against interest 
outside of the PRISM auction. Amending Options 3, Section 13(a)(ii)(D) 
to replace the term ``marketable limit order'' with the broader term 
``marketable interest'' will more accurately describe the way a PRISM 
auction would interact with interest in the order book on the opposite 
side of the market from the PRISM Order. The Exchange believes that 
this amendment is consistent with the Act as it will bring greater 
clarity to the PRISM rule.
Options 3, Section 15
    The Exchange's proposal to amend Options 3, Section 15, Risk 
Protections, to codify new paragraph (c)(3) to permit BX Market Makers 
to prevent their quotes from removing liquidity from the Exchange's 
order book promotes equitable principles of trade and protects 
investors and the public interest by enhancing the risk protections 
available to BX Market Makers. The proposal also promotes the policy 
goals of the Commission which has encouraged execution venues, 
exchanges, and non-exchanges alike, to enhance risk protection tools 
and other mechanisms to decrease risk and increase stability.

[[Page 1236]]

    While BX Market Makers may manage their risk by utilizing the Post-
Only Quote Configuration to avoid removing liquidity from the 
Exchange's order book if their quote would otherwise lock or cross any 
resting order or quote on the BX order book upon entry, there are also 
downstream benefits to market participants. Re-priced interest on the 
order book provides price improvement for market participants that 
interact with that non-displayed interest that is priced better than 
the NBBO. For example, the proposed Add Liquidity Order may re-price to 
the MPV above the national best bid price (for sell orders) or below 
the national best offer price (for buy orders) resulting in better-
priced non-displayed interest that is available on the order book. 
Market participants are entitled to the better-priced interest when 
they interact with the re-priced Add Liquidity Order on the order book. 
Additionally, the benefits of enhanced risk protections flow downstream 
to counterparties both within and away from the Exchange, thereby 
increasing systemic protections as well.
    The proposed risk protection allows BX Market Makers the ability to 
avoid removing liquidity from the Exchange's order book if their quote 
would otherwise lock or cross any resting order or quote on BX's order 
book upon entry, thereby protecting investors and the general public as 
BX Market Makers transact a large number of orders on the Exchange and 
bring liquidity to the marketplace. BX Market Makers would utilize the 
proposed risk protection to avoid unexpectedly taking liquidity with 
non-displayed, non-transparent interest \35\ on the order book. As a 
result of taking liquidity, BX Market Makers would incur a taker fee 
that may impact the BX Market Maker's ability to provide liquidity and 
meet quoting obligations. BX Market Makers are required to add 
liquidity on NOM and, in turn, are rewarded with lower pricing \36\ and 
enhanced allocations.\37\ Specifically, the risk protection would 
permit BX Market Makers to add liquidity only and avoid removing non-
displayed interest on the order book thereby maximizing the benefit of 
their quoting to bring liquidity to BX by allowing BX Market Makers to 
provide as much liquidity as possible, thereby removing impediments to 
and perfecting the mechanism of a free and open market and a national 
market system and protecting investors and the public interest. There 
is no impact to other market participants by introducing this Post-Only 
Quote Configuration as other non-Market Makers may utilize the proposed 
Add Liquidity Only order type that will continue to benefit downstream 
counterparties, both within and away from the Exchange, who may 
interact with non-displayed interest on BX's order book and thereby 
interact with order flow that is priced better than the NBBO. Also, 
other market participants may interact with the liquidity provided by 
BX Market Makers.
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    \35\ See note 18 above.
    \36\ See Options 7, Section 2.
    \37\ See Options 3, Section 10.
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    This optional risk protection enables BX Market Makers to better 
manage their risk when quoting on BX. Today, BOX,\38\ NYSE Arca,\39\ 
MIAX Emerald \40\ and NOM \41\ have similar functionality. BOX does not 
permit Market Maker's quotes to take liquidity and will reject the 
quote. Other options markets, unlike BOX, continue to permit their 
market makers to add or remove liquidity from the order book.\42\ NYSE 
Arca and MIAX Emerald will re-price quotes one MPV to avoid the quote 
from trading as a liquidity taker against the resting order similar to 
BX's proposal. Also, the Exchange's proposal permits a BX Market Maker 
a choice as to whether to cancel or re-price its quote when using the 
Post-Only Quote Configuration.
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    \38\ BOX Rules provide, ``Notwithstanding Rule 100(a)(56), all 
quotes and quote updates on BOX after the opening are liquidity 
adding only. Specifically, after the Opening Match pursuant to Rule 
7070, a Market Maker's quote will not execute against a resting 
order or quote on the BOX Book. If an incoming quote is marketable 
against the BOX Book and will execute against a resting order or 
quote, it will be rejected.'' See BOX IM-8050-3. See also Securities 
Exchange Act Release No. 79311 (November 15, 2016), 81 FR 83322 
(November 21, 2016) (SR-BOX-2016-45) (Order Approving a Proposed 
Rule Change To Amend the Treatment of Quotes To Provide That All 
Quotes on BOX Are Liquidity Adding Only).
    \39\ NYSE Arca permits a market maker to optionally designate a 
quote as ``Add Liquidity Only.'' See NYSE Arca Rule 6.37A-
O(a)(3)(B).
    \40\ See MIAX Emerald Rule 517(a)(1)(i).
    \41\ See Securities and Exchange Release No. 93662 (November 23, 
2021), 86 FR 68009 (November 30, 2021) (SR-NASDAQ-2021-094) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt a Post-Only Quote Configuration Risk Protection).
    \42\ Miami International Securities Exchange LLC (``MIAX'') 
permits its market makers to add and remove liquidity from the order 
book. See MIAX's Fee Schedule which delineates Maker and Taker 
pricing. Nasdaq ISE, LLC (``ISE'') also permits market makers to add 
and remove liquidity from the order book. See ISE's Pricing Schedule 
at Options 7.
---------------------------------------------------------------------------

    Finally, NOM recently codified \43\ a similar risk protection, 
however, unlike BX which re-prices in MPVs, NOM reprices $.01 below the 
current low offer (for bids) or above the current best bid (for offers) 
and displays the quote at one MPV below the current low offer (for 
bids) or above the current best bid (for offers). The Exchange notes 
that, unlike BX, NOM does not offer auction functionality. Because an 
auction mechanism may interact adversely with Add Liquidity Only Orders 
or quotes with a Post-Only Quote Configuration that are re-priced in 
$0.01 increments and displayed at MPV increments, the Exchange proposes 
to re-price at one MPV.\44\ BX has the PRISM auction.\45\ The Exchange 
believes that it is consistent with the protection of investors and the 
general public to utilize one MPV to re-price an Add Liquidity Only 
Order or quote with a Post-Only Quote Configuration to avoid a PRISM 
auction rejecting against a non-displayed Add Liquidity Only Order or 
quote with a Post-Only Quote Configuration. The Exchange notes that a 
similar result could not be obtained on NOM as it has no auctions. The 
Add Liquidity Order on ISE, GEMX and MRX \46\ also re-prices in one MPV 
as those markets have a price improvement auction.\47\
---------------------------------------------------------------------------

    \43\ See Securities and Exchange Release No. 93662 (November 23, 
2021), 86 FR 68009 (November 30, 2021) (SR-NASDAQ-2021-094) (Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt a Post-Only Quote Configuration Risk Protection).
    \44\ For example, the inbound auction would reject against the 
non-displayed Add Liquidity Only Order or quote with a Post-Only 
Quote Configuration with an auction mechanism.
    \45\ See Options 3, Section 13.
    \46\ See Options 3, Section 7(n).
    \47\ Id.
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    Further, with the adoption of Add Liquidity Orders as proposed 
herein within Options 3, Section 7, all BX Participants may utilize the 
Add Liquidity Order. The Post-Only Quote Configuration is available to 
Market Makers only as a risk protection.
    Unlike other market participants, BX Market Makers have certain 
obligations on the market. BX Market Makers are required to provide 
continuous two-sided quotes on a daily basis \48\ and are subject to 
various obligations associated with providing liquidity on the 
market.\49\ BX Market Makers are the sole liquidity providers on the 
Exchange and, therefore, are offered certain quote risk protections 
noted within Options 3, Section 15 to allow them to manage their risk 
more effectively.\50\ The proposed Post-Only Quote Configuration is 
another risk protection afforded to BX Market Makers to assist them in 
managing their risk while continuing to comply with their obligations. 
The Exchange notes that

[[Page 1237]]

enhancing the ability of BX Market Makers to add liquidity and avoid 
taking liquidity from the order book promotes just and equitable 
principles of trade on BX and protects investors and the public 
interest, thereby enhancing market structure by allowing BX Market 
Makers to add liquidity only. Greater liquidity benefits all market 
participants by providing more trading opportunities and attracting 
greater participation by BX Market Makers. Also, an increase in the 
activity of BX Market Makers in turn facilitates tighter spreads.
---------------------------------------------------------------------------

    \48\ See BX Options 2, Section 4(j) and Section 5(d).
    \49\ See BX Options 2, Section 4.
    \50\ Options 3, Section 15(c) describes the Anti-Internalization 
and Quotation Adjustments Protections that are available today to BX 
Market Makers.
---------------------------------------------------------------------------

    Finally, with the proposed addition of Add Liquidity Orders, all 
Participants may utilize similar functionality for orders and quotes.

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.
Options 3, Section 1
    The Exchange's proposal to amend Options 3, Section 1 concerning 
the Days and Hours of Business does not impose an undue burden on 
competition. The proposal to amend the title from ``Days and Hours of 
Business'' to ``Hours of Business'' will bring greater clarity to the 
rule. Amending Options 3, Section 1(c) to reference General 3, Section 
1030 will provide Participants with a guidepost as to where to locate 
the rule that applies to the days the Exchange is open for business. 
The proposed updated citations to the Options 4 rules will provide 
correct references for Participants and thereby bring greater clarity 
to the rules.
Options 3, Section 7
    The Exchange's proposal to amend Options 3, Section 7 to add a new 
order type entitled ``Add Liquidity Order'' within Options 3, Section 
7(a)(12) does not impose an undue burden on competition. Today, ISE, 
GEMX and MRX have a similar order type within Options 3, Section 7(n). 
The Add Liquidity Order will provide an additional order type that will 
give market participants greater control over the circumstances in 
which their orders are executed. All Participants may utilize the Add 
Liquidity Order type.
    The Exchange's proposal to amend Options 3, Section 7(a)(11) to 
remove the title ``Block Order'' at the beginning of the sentence will 
conform the style of the description to the remaining order types 
within Options 3, Section 7.
Options 3, Section 13
    Removing Options 3, Section 13(i)(F) does not impose an undue 
burden on competition as the rule text is obsolete and the removal of 
the rule text will bring greater transparency to and reducing potential 
confusion about the Exchange's Rulebook.
    Amending Options 3, Section 13(a)(ii)(D) to utilize the broader 
term ``marketable interest'' does not impose an undue burden on 
competition as it will more accurately describe the way a PRISM auction 
would interact with interest in the order book on the opposite side of 
the market from the PRISM Order.
Options 3, Section 15
    Adopting a Post-Only Quote Configuration within Options 3, Section 
15(c)(3) does not impose an undue burden on competition, rather the 
proposal provides BX Market Makers with the opportunity to continue to 
avail themselves of functionality that currently exists on BOX, NYSE 
Arca, MIAX Emerald and NOM.\51\
---------------------------------------------------------------------------

    \51\ See notes 21-25 above.
---------------------------------------------------------------------------

    The proposal does not impose a burden on inter-market competition, 
because Participants may choose to become market makers on a number of 
other options exchanges, which may have similar but not identical 
features. The Post-Only Quote Configuration functionality will continue 
to benefit downstream counterparties, both within and away from the 
Exchange, who may interact with non-displayed interest on BX's order 
book and thereby interact with order flow that is priced better than 
the NBBO.
    The proposal does not impose a burden on intra-market competition. 
BX proposes to adopt an Add Liquidity Order herein which will permit 
all Participants to receive similar treatment for their orders. 
Offering BX Market Makers the ability to configure their quotes as 
Post-Only will allow all market participants on BX to add liquidity 
only if desired.
    The proposed risk protection allows BX Market Makers the ability to 
avoid removing liquidity from the Exchange's order book if their quote 
would otherwise lock or cross any resting order or quote on BX's order 
book upon entry, thereby protecting investors and the general public as 
BX Market Makers transact a large number of orders on the Exchange and 
bring liquidity to the marketplace. BX Market Makers are required to 
add liquidity on BX and, in turn, are rewarded with lower pricing \52\ 
and enhanced allocations.\53\ Specifically, the risk protection would 
permit BX Market Makers to add liquidity only and avoid removing non-
displayed interest on the order book thereby maximizing the benefit of 
their quoting to bring liquidity to BX by allowing BX Market Makers to 
provide as much liquidity as possible. Unlike other market 
participants, BX Market Makers have certain obligations on the market. 
BX Market Makers are required to provide continuous two-sided quotes on 
a daily basis \54\ and are subject to various obligations associated 
with providing liquidity on the market.\55\ BX Market Makers are the 
sole liquidity providers on the Exchange and, therefore, are offered 
certain quote risk protections noted within Options 3, Section 15 to 
allow them to manage their risk more effectively.\56\ The proposed 
Post-Only Quote Configuration is another risk protection afforded to BX 
Market Makers to assist them in managing their risk while continuing to 
comply with their obligations.
---------------------------------------------------------------------------

    \52\ See Options 7, Section 2.
    \53\ See Options 3, Section 10.
    \54\ See BX Options 2, Section 4(j) and Section 5(d).
    \55\ See BX Options 2, Section 4.
    \56\ Options 3, Section 15(c) describes the Anti-Internalization 
and Quotation Adjustments Protections that are available today to BX 
Market Makers.
---------------------------------------------------------------------------

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 \57\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\58\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \58\ 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.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may

[[Page 1238]]

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 should be approved or 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 [email protected]. Please include 
File Number SR-BX-2021-054 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-2021-054. 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-2021-054 and 
should be submitted on or before January 31, 2022.
---------------------------------------------------------------------------

    \59\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00154 Filed 1-7-22; 8:45 am]
BILLING CODE 8011-01-P