Document ID: SEC-2020-1452-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq BX, Inc.
Posted Date: 2020-09-10T04:00Z

[Federal Register Volume 85, Number 176 (Thursday, September 10, 2020)]
[Notices]
[Pages 55877-55886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19941]

[[Page 55877]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89759; File No. SR-BX-2020-023]

Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its Rules 
in Connection With a Technology Migration To Enhanced Nasdaq, Inc. 
Functionality

September 3, 2020.
    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 August 21, 2020, 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 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules in connection with a 
technology migration to enhanced Nasdaq, Inc. (``Nasdaq'') 
functionality. Each change is discussed below.
    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 in Options 3 (Options Trading Rules) to amend 
Section 7 (Types of Orders and Order and Quote Protocols) and Section 
15 (Risk Protections), and to adopt new Section 11 titled ``Auction 
Mechanisms'' and new Section 28 titled ``Optional Risk Protections,'' 
each in connection with a technology migration to enhanced Nasdaq 
functionality, which will result in higher performance, scalability, 
and more robust architecture. With this system migration, the Exchange 
intends to adopt certain trading functionality currently utilized at 
affiliated Nasdaq exchanges or other options exchanges.
    The Exchange intends to begin implementation of the proposed rule 
change on September 14, 2020. The Exchange will issue an Options Trader 
Alert to Participants to provide notification of the symbols that will 
migrate, the relevant milestones, and operative dates for specific 
functionalities.
Block Order Mechanism
    The Exchange proposes to adopt a new Block Order Mechanism in 
Options 3, Section 11, which will be entitled ``Auction Mechanisms.'' 
The proposed mechanism will provide a means for handling ``block-sized 
orders'' (i.e., orders for fifty (50) contracts or more) on BX, and 
will be materially identical to the Block Order Mechanism currently 
offered by the Exchange's affiliate, Nasdaq ISE (``ISE'').
    Specifically, proposed Options 3, Section 11(a) will state that the 
Block Order Mechanism is a process by which a Participant can obtain 
liquidity for the execution of block-size orders (``Block Order''). The 
Block Order Mechanism is for single leg transactions only. As discussed 
above, the Rule will further define block-size orders as orders for 
fifty (50) contracts or more. These provisions are consistent with ISE 
Options 3, Section 11(a).
    Proposed subparagraph (a)(1) of Options 3, Section 11 will provide 
that upon entry of an order into the Block Order Mechanism, a broadcast 
message will be sent that includes the series, and may include price, 
size and/or size, as specified by the Participant entering the Block 
Order, and Participants will be given an opportunity to enter Responses 
with the prices and sizes at which they would be willing to trade with 
the Block Order.\3\ This is similar to ISE's process in ISE Options 3, 
Section 11(a)(1). The Exchange also proposes to add similar definitions 
of ``broadcast message'' and ``Response'' within the Rule. 
Specifically, for purposes of the Rule, a broadcast message will mean 
an electronic message that is sent by the Exchange to all Participants, 
and a Response means an electronic message that is sent by Participants 
in response to a broadcast message. Also for purposes of the Rule, the 
time given to Participants to enter Responses for any of the below 
auction mechanisms shall be designated by the Exchange via an Options 
Trader Alert, but no less than 100 milliseconds and no more than 1 
second.\4\
---------------------------------------------------------------------------

    \3\ The Exchange notes that similar to current ISE 
functionality, the proposed functionality on BX will allow all 
Participants, except for the initiating Participant, to respond to 
the block auction.
    \4\ See proposed Options 3, Section 11. See also ISE Options 3, 
Section 11.
---------------------------------------------------------------------------

    Proposed subparagraph (a)(2) will provide that at the conclusion of 
the time given to Participants to enter Responses, either an execution 
will occur automatically, or the Block Order will be cancelled. 
Proposed subparagraph (a)(2)(A) will explain the price at which orders 
entered into the Block Order Mechanism are executed. Specifically, 
Responses, orders, and quotes will be executed at a single block 
execution price that is the price for the Block Order at which the 
maximum number of contracts can be executed consistent with the 
Participant's instruction. Bids (offers) on the Exchange at the time 
the Block Order is executed that are priced higher (lower) than the 
block execution price, as well as Responses that are priced higher 
(lower) than the block execution price, will be executed in full at the 
block execution price up to the size of the Block Order. This is 
functionally identical to how ISE's block orders are priced at 
execution pursuant to ISE Options 3, Section 11(a)(2)(A).\5\
---------------------------------------------------------------------------

    \5\ While the existing ISE Block rule does not contain the ``up 
to the size of the Block Order'' language, this is being added to 
the BX Block rule to make clear that better priced interest gets 
executed in full only if there is sufficient size to execute against 
such interest. This is identical to how ISE Block Orders are 
executed and priced today.
---------------------------------------------------------------------------

    Proposed subparagraph (a)(2)(B) will describe the proposed auction 
allocation methodology. The proposed allocation for block auctions will 
follow a Size Pro-Rata \6\ methodology that prioritizes

[[Page 55878]]

Public Customers,\7\ similar to the Public Customer Size Pro-Rata 
allocation process for the BX's Price Improvement Auction (``PRISM''), 
except PRISM as a paired auction also allocates contracts against the 
contra order.\8\ This is also similar to how Size Pro-Rata allocation 
normally takes place pursuant to Options 3, Section 10 for interest on 
the Exchange's order book.\9\ As proposed, at the block execution 
price, Public Customer Orders and Public Customer Responses will be 
executed first in price time priority, and then quotes, non-Public 
Customer Orders, and non-Public Customer Responses will participate in 
the execution of the Block Order based upon the percentage of the total 
number of contracts available at the block execution price that is 
represented by the size of the quote, non-Public Customer Order, or 
non-Public Customer Response. This is functionally identical to ISE's 
block auction allocation methodology.\10\ Similar to ISE, the proposed 
Block Order Mechanism is designed to provide an opportunity for 
Participants to receive liquidity for their Block Orders, and will 
therefore trade at a price that allows the maximum number of contracts 
of the Block Order to be executed against both Responses entered to 
trade against the order and unrelated interest on the Exchange's order 
book.
---------------------------------------------------------------------------

    \6\ The Exchange is amending the definition of Size Pro-Rata 
within Options 3, Section 10(a)(1)(B) in a concurrent filing. As 
amended, Size Pro-Rata will mean that the System shall execute 
trading interest within the System in price priority, meaning it 
will execute all trading interest at the best price level within the 
System before executing trading interest at the next best price. 
Within each price level, if there are two or more quotes or orders 
at the best price, trading interest will be executed based on the 
size of each Participant's quote or order as a percentage of the 
total size of all orders and quotes resting at that price. If the 
result is not a whole number, it will be rounded up to the nearest 
whole number. See Securities Exchange Act Release No. 89476 (August 
4, 2020), 85 FR 48274 (August 10, 2020) (SR-BX-2020-017).
    \7\ The term ``Public Customer'' means a person that is not a 
broker or dealer in securities. See Options 1, Section 1(a)(49). The 
Exchange is also concurrently amending this rule to provide that a 
Public Customer is not a Professional as defined within the BX 
rules. See Securities Exchange Act Release No. 89476 (August 4, 
2020), 85 FR 48274 (August 10, 2020) (SR-BX-2020-017).
    \8\ See Options 3, Section 13(ii)(E).
    \9\ See Options 3, Section 10(a)(1)(C)(2)(i).
    \10\ See ISE Options 3, Section 11(a)(2)(B). The reference to 
``Professional'' interest in ISE's rule essentially means non-
Priority Customer interest. See ISE Options 1, Section 1(a)(39), 
which defines a Professional Order as an order that is for the 
account of a person or entity that is not a Priority Customer.
---------------------------------------------------------------------------

    For example, if a Participant enters a Block Order to buy 100 
contracts at $1.00 into the Block Order Mechanism, and Participants 
enter Response A to sell 50 contracts at $0.90 and Response B to sell 
40 contracts at $0.95, the block execution price would be $0.95 as this 
is the price at which the maximum number of contracts could be 
executed. The Block Order and both Responses would then be executed at 
this single block execution price. Responses A and B would be executed 
in full since there is sufficient size to execute both Responses 
against the Block Order. In addition, if two other Participants also 
enter Responses C (Public Customer) and D (non-Public Customer) to sell 
at $0.98 for 10 contracts each, the block execution price would be 
$0.98 as additional contracts could be executed at that price. In that 
instance, Responses A and B, which are priced better than the block 
execution price, would be executed in full, while Responses C and D, 
which are priced at the block execution price, would participate in 
accordance with the allocation methodology described in the proposed 
rule--i.e., the remaining 10 contracts would go to Response C, which is 
the Public Customer Response.
    The Exchange proposes in subparagraph (a)(3) that if a trading halt 
is initiated after an order is entered into the Block Order Mechanism, 
such auction will be automatically terminated without execution. This 
mirrors ISE Options 3, Section 11(a)(3). Lastly, the Exchange proposes 
to amend Options 3, Section 7 to add Block Orders to the list of order 
types. As proposed, Options 3, Section 7(a)(12) will provide that a 
Block Order is an order entered into the Block Order Mechanism as 
described in Options 3, Section 11(a).\11\ ISE Options 3, Section 7(v) 
similarly defines Block Order as an order type.
---------------------------------------------------------------------------

    \11\ The Exchanges notes that it is concurrently amending 
Options 3, Section 7(a) in SR-BX-2020-017. The proposed changes 
herein to add Block Orders in Section 7(a) assumes the Section 7(a) 
rule changes in SR-BX-2020-017 are effective prior to the 
effectiveness of this filing.
---------------------------------------------------------------------------

Order Price Protection
    The Exchange proposes to amend its Order Price Protection (``OPP,'' 
also known as the fat finger check) in Options 3, Section 15(a)(1) to 
align certain features with the OPP functionality currently offered by 
its affiliate, The Nasdaq Options Market (``NOM''). The Exchange's 
proposal will introduce an alternative method to determine parameters 
for this risk protection. The Exchange notes that OPP is intended to 
prevent erroneous executions of orders on BX. This proposal seeks to 
further this objective by introducing a fixed dollar threshold that, in 
combination with the existing percentage threshold, will provide a 
modified approach to order rejection based on the price of the order.
    The Exchange's current OPP feature prevents certain day limit, good 
til cancelled, and immediate or cancel orders at prices outside of pre-
set standard limits from being accepted by the System. OPP applies to 
all options but currently does not apply to market orders or 
Intermarket Sweep Orders. OPP is operational each trading day after the 
opening until the close of trading, except during trading halts. OPP 
assists Participants in controlling risk by checking each order, before 
it is accepted into the System, against certain parameters. Today, as 
set forth in Options 3, Section 15(a)(1)(B), OPP rejects incoming 
orders that exceed certain parameters according to the following 
algorithm:

    (i) If the better of the NBBO or the internal market BBO (the 
``Reference BBO'') on the contra-side of an incoming order is 
greater than $1.00, orders with a limit more than 50% through such 
contra-side Reference BBO will be rejected by the System upon 
receipt.
    (ii) If the Reference BBO on the contra-side of an incoming 
order is less than or equal to $1.00, orders with a limit more than 
100% through such contra-side Reference BBO will be rejected by the 
System upon receipt.

    The Exchange now proposes to expand the algorithm for OPP to 
introduce a fixed dollar threshold as an alternative to the percentage 
specified within the current rule. To effect this change, the Exchange 
proposes to amend Options 3, Section 15(a)(1)(B) to provide that OPP 
will reject incoming orders that exceed certain parameters according to 
the following algorithm:

    (i) If the better of the NBBO or the internal market BBO (the 
``Reference BBO'') on the contra-side of an incoming order is 
greater than $1.00, orders with a limit more than the greater of the 
below will cause the order to be rejected by the System upon 
receipt.
    (A) 50% through such contra-side Reference BBO; or
    (B) a configurable dollar amount not to exceed $1.00 through 
such contra-side Reference BBO as specified by the Exchange 
announced via an Options Trader Alert.
    (ii) If the Reference BBO on the contra-side of an incoming 
order is less than or equal to $1.00, orders with a limit more than 
the greater of the below will cause the order to be rejected by the 
System upon receipt.
    (A) 100% through such contra-side Reference BBO; or
    (B) a configurable dollar amount not to exceed $1.00 through 
such contra-side Reference BBO as specified by the Exchange 
announced via an Options Trader Alert.

    The proposed alternative would permit for a range of prices to be 
executed where the incoming order is up to $1.00 from the Reference 
BBO. The parameters are identical to NOM Options 3, Section 
15(a)(1)(B). Similar to NOM, the Exchange believes that utilizing the 
greater of a fixed dollar amount or percentage would expand the

[[Page 55879]]

applicability of OPP while still providing a reasonable limit to the 
range where orders will be accepted. By implementing a functionality 
that applies the greater of a fixed dollar amount not to exceed $1.00 
or a percentage, the Exchange would ensure that this protection would 
be able to accommodate all orders based on a determination of how far 
from the Reference BBO the order is priced.
    The Exchange notes that certain securities in lower price ranges 
would not benefit from the application of a percentage as would 
securities with higher prices. For instance, the application of a 50% 
threshold to a $50 security would provide a rejection if a limit order 
was priced $75 or greater compared to a 100% threshold for a $0.02 
security which would be rejected if a limit order was priced $0.04 or 
greater. As such, certain orders could be rejected under the current 
framework because the percentage threshold is applied to the contra-
side of an incoming order, including in cases where the order is not 
erroneously priced. Below are additional examples to illustrate the 
application of the current and proposed rule:
Example: An Option Priced Less Than $1.00
    For a penny MPV option with a BBO on BX of $0.01 x $0.02, consider 
that the configurable dollar amount is set to $0.05.
    Current Rule: Reject buy orders of more than $0.04 bid if incoming 
order was less than $1.00, and it was more than 100% through the 
contra-side of the Reference BBO.
    Proposed Rule: A buy order priced up to $0.07 ($0.02 offer + $0.05 
configuration) would not be rejected because a configurable dollar 
amount from $0.00 to $0.05 would allow the order to be entered into the 
System for execution.
    This order was marketable upon entry and was not priced far from 
the current bid. The Exchange believes in this example, the order 
should be permitted to trade instead of being rejected.
Example: An Option Priced Greater Than $1.00
    For a penny MPV option with a BBO on BX of $1.01 x $1.02, consider 
that the configurable dollar amount is set to $0.60
    Current Rule: Reject buy orders 50% through $1.02--orders priced 
greater than $1.53 ($1.02 + $0.51).
    Proposed Rule: Reject buy orders priced greater than $1.62--$0.60 
through 1.02 (this would be greater than 50% through 1.02).
    This order was marketable upon entry and was not priced far from 
the current bid. The Exchange believes in this example, the order 
should be permitted to trade instead of being rejected.
    As the above examples illustrate, the Exchange believes that 
securities in the lower price range could benefit by the proposed 
alternative method because the fixed amount provides for additional 
executions in certain situations where a percentage would reject an 
order that was intentional and not erroneous. This approach has been 
successful for NOM in limiting erroneous executions while permitting 
intentional executions at reasonable prices, and the Exchange therefore 
proposes to adopt this approach for its options market as well. Similar 
to NOM, the Exchange will post the configurable amount on its website 
and announce any changes to the amount in an Options Trader Alert.
    The Exchange also proposes to add language similar to NOM, which 
will provide the Exchange with discretion to temporarily deactivate OPP 
from time to time on an intra-day basis if it determined that unusual 
market conditions warranted deactivation in the interest of a fair and 
orderly market. Like NOM, the Exchange believes that it will be useful 
to have the flexibility to temporarily disable OPP intra-day in 
response to an unusual market event (for example, if dissemination of 
data was delayed and resulted in unreliable underlying values needed 
for the Reference BBO). Participants would be notified of intra-day OPP 
deactivation and any subsequent reactivation by the Exchange through 
the issuance of System status messages. Specifically, the Exchange 
proposes to add in Options 3, Section 15(a)(1)(A) that OPP may be 
temporarily deactivated on an intra-day basis at the Exchange's 
discretion.
    Lastly, the Exchange proposes to amend Options 3, Section 15(a)(1) 
to remove the current exclusion of Intermarket Sweep Orders (``ISOs'') 
from the OPP rule. With the proposed amendment, OPP will apply to ISOs. 
The Exchange does not apply OPP to ISOs today because the intent of an 
ISO is to sweep as many prices as possible at the top of the book, so 
market participants need to cast as wide a net as possible to get those 
prices and fill the ISO. With the current OPP functionality, lower 
priced ISOs are more likely to get rejected for the reasons discussed 
above, and the Exchange determined at the time to exclude ISOs when 
adopting OPP. The proposal to add a fixed dollar threshold as an 
alternative OPP parameter, however, would provide more flexibility for 
more lower-priced options (including lower-priced ISOs) to get 
executed, and the Exchange therefore believes it is no longer necessary 
to exclude ISOs from OPP going forward. The Exchange further believes 
extending the protection to ISOs will promote the goal of limiting 
erroneous executions on the Exchange while permitting intentional 
executions at reasonable prices, and in general, extend more 
protections to ISOs.
Market Wide Risk Protection
    The Exchange proposes to introduce new order entry and execution 
rate checks that are currently available on ISE.\12\ The proposed risk 
protections will be substantially similar to the current risk 
protections on ISE except to account for certain functional differences 
relating to the ability of ISE's protections to apply cross-market 
across ISE and Nasdaq GEMX (``GEMX'').\13\ These two new risk 
protections are designed to aid Participants in their order risk 
management by supplementing current price reasonability checks with 
activity based order protections.\14\ The Exchange proposes to detail 
these risk protections in proposed Options 3, Section 15(a)(3), 
entitled ``Market Wide Risk Protection.''
---------------------------------------------------------------------------

    \12\ See ISE Options 3, Section 15(a)(1)(C).
    \13\ The Exchange also notes that ISE's current functionality 
applies to complex orders, which BX does not offer today.
    \14\ The Exchange currently provides Participants with price 
protections for orders such as the OPP and the Market Order Spread 
Protection, which prevent limit orders and market orders from being 
executed at far away and potentially erroneous prices.
---------------------------------------------------------------------------

    Pursuant to the proposed Market Wide Risk Protection (``MWRP'') 
rule, the Exchange's trading system (``System'') will maintain one or 
more counting programs for each Participant that count orders entered 
and contracts traded on BX.\15\ Participants can use multiple counting 
programs to separate risk protections for different groups established 
within the Participant. The counting programs will maintain separate 
counts, over rolling time periods specified by the Participant for each 
count, of: (1) The total number of orders entered in the order book; 
and (2) the total number of contracts traded.
---------------------------------------------------------------------------

    \15\ Unlike ISE's MWRP, which may apply cross-market across ISE 
and GEMX, the MWRP on BX will not apply cross-market to other 
affiliated exchanges.
---------------------------------------------------------------------------

    All Participants must provide parameters for the order entry and 
execution rate protections as described in (1) and (2) above. While the 
MWRP is mandatory for all Participants, the Exchange is not proposing 
to establish minimum or maximum values for the

[[Page 55880]]

order entry and execution parameters described above. The Exchange 
believes that this approach will give Participants the flexibility 
needed to appropriately tailor the MWRP to their respective risk 
management needs. In this regard, the Exchange notes that each 
Participant is in the best position to determine risk settings 
appropriate for their firm based on the Participant's trading activity 
and business needs. In the interest of maintaining a fair and orderly 
market, however, the Exchange will also establish default values for 
each of these parameters that apply to Participants that do not submit 
their own parameters for the MWRP, and will announce these default 
values in an Options Trader Alert to be distributed to Participants. 
The Exchange notes that this is consistent with ISE's approach on 
providing ISE members with the flexibility to establish their own MWRP 
order entry and execution rate parameters, as set forth in ISE Options 
3, Section 15(a)(1)(C). The Exchanges also notes that similar to ISE, 
Participants will have the discretion to establish the applicable time 
period for each of the counts maintained under the proposed MWRP, 
provided that the selected time period must be within minimum and 
maximum duration of the applicable time period established by the 
Exchange and announced via an Options Trader Alert.\16\
---------------------------------------------------------------------------

    \16\ See proposed Options 3, Section 15(a)(3). See also ISE 
Options 3, Section 15(a)(1)(C).
---------------------------------------------------------------------------

    Pursuant to proposed Options 3, Section 15(a)(3)(A)-(C), if, during 
the applicable time period, the Participant exceeds the thresholds that 
it has set for any of the order entry or execution counts described 
above on BX, the System will automatically reject all subsequent 
incoming orders entered by the Participant. Participants may also 
choose to have the System automatically cancel all of their existing 
orders on BX when the MWRP is triggered. The MWRP will remain engaged 
until the Participant manually notifies the Exchange to enable the 
acceptance of new orders. For Participants that still have open orders 
on the order book that have not been cancelled pursuant to proposed 
subparagraph (B), the System will continue to allow those Participants 
to interact with existing orders entered before the protection was 
triggered, including sending cancel order messages and receiving trade 
executions for those orders. The action taken in proposed subparagraphs 
(A)-(C) is similar to ISE Options 3, Section 15(a)(1)(C)(i)-(iii).
    The Exchange believes that the proposed MWRP will assist 
Participants in better managing their risk when trading on BX. In 
particular, the proposed rule change provides functionality that allows 
Participants to set risk management thresholds for the number of orders 
or contracts executed on the Exchange during a specified period. As 
discussed above, this is similar to how ISE has implemented the MWRP on 
ISE, and the Exchange believes this functionality will likewise be 
beneficial for BX Participants.
    The examples below illustrate how the MWRP would work both for 
order entry and order execution protections:
Example: Order Entry Rate Protection
    Broker Dealer 1 (``BD1'') designates an allowable order rate of 499 
orders/1 second.

@0 milliseconds, BD1 enters 200 orders. (Order total: 200 orders)
@450 milliseconds, BD1 enters 250 orders. (Order total: 450 orders)
@950 milliseconds, BD1 enters 50 orders. (Order total: 500 orders)

    Market Wide Risk Protection is triggered on BX due to exceeding 499 
orders in 1 second. All subsequent orders are rejected, and if BD1 has 
opted in to this functionality, all existing orders are cancelled. BD1 
must contact the Exchange to resume trading.
Example: Order Execution Rate Protection
    BD1 designates an allowable execution rate of 15,000 contracts/2 
seconds.

@0 milliseconds, BD1 receives executions for 5,000 contracts. 
(Execution total: 5,000 contracts)
@600 milliseconds, BD1 receives executions for 10,000 contracts. 
(Execution total: 15,000 contracts)
@1550 milliseconds, BD1 receives executions for 2,000 contracts. 
(Execution total: 17,000 contracts)

    Market Wide Risk Protection is triggered on BX due to exceeding 
15,000 contracts in 2 seconds. All subsequent orders are rejected, and 
if BD1 has opted in to this functionality, all existing orders are 
cancelled. BD1 must contact the Exchange to resume trading.
Anti-Internalization
    The Exchange proposes to enhance the anti-internalization (``AIQ'') 
functionality provided to Market Makers on the Exchange by giving 
Participants the flexibility to choose to have this protection apply at 
the Market Maker identifier level (i.e., existing functionality), at 
the Exchange account level, or at the Participant firm level. The 
Exchange believes that this enhancement will provide helpful 
flexibility for Market Makers that wish to prevent trading against all 
quotes and orders entered by their firm, or Exchange account, instead 
of just quotes and orders that are entered under the same market 
participant identifier. Similar functionality is currently available on 
ISE pursuant to ISE Options 3, Section 15(a)(3)(A).
    Currently, as provided in Options 3, Section 15(c)(1), the Exchange 
provides mandatory AIQ functionality that prevents Market Makers from 
trading against their own quotes and orders. In particular, quotes and 
orders entered by Market Makers using the same market participant 
identifier will not be executed against quotes and orders entered on 
the opposite side of the market by the same Market Maker using the same 
identifier. In such a case, the System cancels the oldest of the quotes 
or orders back to the entering party prior to execution. This 
functionality does not apply in any auction.
    Today, this protection prevents Market Makers from trading against 
their own quotes and orders at the market participant identifier level. 
The proposed enhancement to this functionality would allow Participants 
to choose to have this protection applied at the market participant 
identifier level as implemented today, at the Exchange account level, 
or at the Participant firm level. If Participants choose to have this 
protection applied at the Exchange account level, AIQ would prevent 
quotes and orders from different market participant identifiers 
associated with the same Exchange account from trading against one 
another. Similarly, if the Participants choose to have this protection 
applied at the Participant firm level, AIQ would prohibit quotes and 
orders from different market participant identifiers within the 
Participant firm from trading against one another. The Exchange 
believes that the proposed AIQ enhancement will provide Participants 
with more tailored functionality that allows them to manage their 
trading as appropriate based on the Participants' business needs. While 
the Exchange believes that some firms may want to restrict AIQ to 
trading against interest from the same Market Maker identifier (i.e., 
as implemented today), other firms may find it helpful to be able to 
configure AIQ to apply at the Exchange account level or at the 
Participant firm level so that they are protected regardless of which 
Market Maker identifier the order or quote originated from. ISE Options 
3, Section 15(a)(3)(A) offers similar flexibility. Lastly, the Exchange 
proposes to clarify that AIQ does not apply during the opening process 
or

[[Page 55881]]

reopening process following a trading halt pursuant to Options 3, 
Section 8 to provide more specificity on how this functionality 
currently operates. The Exchange notes that the same procedures used 
during the opening process are used to reopen an option series after a 
trading halt, and therefore proposes to specify that AIQ will not apply 
during an Opening Process (i.e., the opening and halt reopening 
process) in addition to an auction, as currently within the Rule.\17\ 
AIQ is unnecessary during an Opening Process due to the high level of 
control that Market Makers exercise over their quotes during this 
process.
---------------------------------------------------------------------------

    \17\ While ISE Options 3, Section 15(a)(3)(A) does not currently 
specify that ISE's AIQ would not apply during an Opening Process, 
the Exchange notes that ISE's functionality operates in the same 
manner today.
---------------------------------------------------------------------------

    The examples below illustrate how AIQ would operate based on the 
market participant identifier level protection, the Exchange account 
level, or for Participants that choose to apply AIQ at the Participant 
firm level:
Example: Market Participant Identifier Level
    Participant ABC (market participant identifiers 123A & 555B) with 
AIQ configured at the market participant identifier level.

123A Quote: $1.00 (5) x $1.10 (20)
555B Buy Order entered for 10 contracts at $1.10

    555B Buy Order executes 10 contracts against 123A Quote. 123A and 
555B are not prevented by the System from trading against one another 
because Participant ABC has configured AIQ to apply at the market 
participant identifier level. This is the same as existing 
functionality.
Example: Exchange Account Level
    Participant ABC (Account 999 with market participant identifiers 
123A and 555B, and Account 888 with market participant identifier 789A) 
with AIQ configured at the Exchange account level.

123A Quote: $1.00 (5) x $1.10 (20)
789A Quote: $1.05(10) x $1.10 (20)
555B Buy Order entered for 30 contracts at $1.10

    555B Buy Order executes against 789A Quote but 555B Buy Order does 
not execute against 123A Quote. AIQ purges the 123A Quote and the 
remaining contracts of the 555B Buy Order rests on the book at $1.10. 
123A and 555B are not permitted trade against one another because 
Participant ABC has configured AIQ to apply at the Exchange account 
level. This is new functionality as the Participant has opted to have 
AIQ operate at the Exchange account level.
Example: Participant Firm Level
    Participant ABC (Account 999 with market participant identifiers 
123A and 555B, and Account 888 with market participant identifier 789A) 
with AIQ configured at the Participant firm level.

123A Quote: $1.00 (5) x $1.10 (20)
789A Quote: $1.05(10) x $1.10 (20)
555B Buy Order entered for 30 contracts at $1.10

    AIQ purges the 123A Quote and the 789A Quote and the 555B Buy Order 
rests on the book at $1.10. This is new functionality as the member has 
opted to have AIQ operate at the Participant firm level.
Quotation Adjustments
    The Exchange proposes to amend Options 3, Section 15(c)(2), which 
sets forth the Exchange's ``Rapid Fire'' risk protection for quotes, to 
expand existing functionality by introducing optional Delta and Vega 
(as defined below) curtailment measures in addition to the current 
percentage-based and volume-based curtailments. The new curtailment 
measures will be functionally similar to the Delta and Vega thresholds 
currently offered by ISE pursuant to ISE Options 3, Section 
15(a)(3)(B), except the Exchange will offer the new thresholds as 
optional risk protections.\18\ In connection with this change, the 
Exchange also proposes to restructure its rules regarding Rapid Fire 
and ``Multi-Trigger'' risk protections to more closely align with the 
ISE's rule structure.\19\ With the proposed changes, Rapid Fire and 
Multi-Trigger will be triggered only when a Market Maker exceeds its 
designated thresholds similar to ISE's approach, instead of when the 
thresholds are met or exceeded (as is currently the case).
---------------------------------------------------------------------------

    \18\ The Delta and Vega thresholds on ISE are currently 
mandatory protections.
    \19\ As presently set forth in Options 3, Section 15(c)(2)(C), 
the Exchange's Multi-Trigger functionality removes Market Maker 
quotes in all options series in all underlying issues when a 
specified number of Rapid Fire thresholds are triggered over a 
chosen interval.
---------------------------------------------------------------------------

    Today, Rapid Fire is a risk protection that removes a Market 
Maker's quotes in all options series of an underlying security from the 
marketplace when certain designated percentage-based or volume-based 
thresholds are met or exceeded. Market Makers are required to utilize 
either the percentage-based threshold or the volume-based 
threshold.\20\ The Exchange now proposes to introduce two optional 
thresholds which, in addition to the existing percentage-based and 
volume-based thresholds, will make up the suite of Rapid Fire 
thresholds that will be offered to Market Makers upon the technology 
migration. First, in new subparagraph (c)(2)(A)(iii) of Options 3, 
Section 15, the Exchange proposes to add:
---------------------------------------------------------------------------

    \20\ See Options 3, Section 15(c)(2)(G). In contrast, the Multi-
Trigger threshold is optional.

    (iii) Delta Threshold. A Market Maker may provide a Delta 
Threshold by which the System will automatically remove a Market 
Maker's quotes in all series of an options class. For each class of 
options, the System will maintain a Delta counter, which tracks the 
absolute value of the difference between (1) purchased call 
contracts plus sold put contracts and (2) sold call contracts plus 
purchased put contracts. If the Delta counter exceeds the Delta 
Threshold established by the Member, the System will automatically 
---------------------------------------------------------------------------
remove a Market Maker's quotes in all series of the options class.

    The proposed rule text for Delta Threshold is identical to ISE 
Options 3, Section 15(a)(3)(B)(i)(c), except to indicate that the 
Exchange's threshold will be an optional feature.
    Second, in new subparagraph (c)(2)(A)(iv) of Options 3, Section 15, 
the Exchange proposes to add:

    (iv) Vega Threshold. A Market Maker may provide a Vega Threshold 
by which the System will automatically remove a Market Maker's 
quotes in all series of an options class. For each class of options, 
the System will maintain a Vega counter, which tracks the absolute 
value of purchased contracts minus sold contracts. If the Vega 
counter exceeds the Vega Threshold established by the Member, the 
System will automatically remove a Market Maker's quotes in all 
series of the options class.

    The proposed rule text for Vega Threshold is identical to ISE 
Options 3, Section 15(a)(3)(B)(i)(d), except to indicate that the 
Exchange's threshold will be an optional feature.
    With the proposed changes to add the Delta and Vega Thresholds 
described above, the Exchange also proposes to amend its Rapid Fire and 
Multi-Trigger rules to align the rule structure with ISE Options 3, 
Section 15(a)(3)(B). In restructuring these rules, the existing BX 
functionality will remain unchanged except with respect to when the 
Rapid Fire and Multi-Trigger thresholds will be triggered, and a minor 
change to the specified time period. Each will be discussed in more 
detail below.
    To effect this change, the Exchange proposes to adopt new rule text 
in Options 3, Section 15(c)(2)(A), which will provide that Market 
Makers are required to utilize the Percentage Threshold or Volume 
Threshold. The Exchange will also replace each instance of 
``Percentage-Based

[[Page 55882]]

Threshold'' and ``Volume-Based Threshold'' with ``Percentage 
Threshold'' and ``Volume Threshold'' throughout Options 3, Section 
15(c)(2) to align with ISE terminology. The Exchange further proposes 
to add that Market Makers may utilize the new Delta and Vega Thresholds 
to make clear that these thresholds are optional for Market Makers. As 
noted above, this is different from ISE's approach, which currently 
requires ISE Market Makers to utilize all four thresholds. The Exchange 
has determined not to make the new Delta and Vega Thresholds mandatory 
under this proposal, and will continue to require Market Makers to 
utilize either the Percentage or Volume Threshold.
    For each of these features, the System will automatically remove a 
Market Maker's quotes in all series in an options class when any of the 
Percentage Threshold, Volume Threshold, Delta Threshold or Vega 
Threshold has been exceeded. As noted above, this is a change from 
current functionality where as amended, Rapid Fire will be triggered 
only when the Market Maker exceeds any of the designated thresholds. 
Currently, Rapid Fire is triggered when the designated thresholds are 
met or exceeded.\21\ In addition, a Market Maker is required to specify 
a period of time not to exceed 30 seconds (``Specified Time Period'') 
during which the System will automatically remove a Market Maker's 
quotes in all series of an options class. This is another change from 
current functionality where today, the Specified Time Period 
established by the Market Maker for the Percentage and Volume 
Thresholds must not exceed 15 seconds.\22\ The proposed changes on BX 
relating to when Rapid Fire will be triggered and the Specified Time 
Periods will align with ISE Options 3, Section 15(a)(3)(B)(i). By 
harmonizing BX's Rapid Fire rule to ISE's rule in this manner, the 
Exchange seeks to simplify the regulatory requirements and increase the 
understanding of the Exchange's operations related to Rapid Fire for 
market participants on BX that are also participants on ISE. The 
Exchange believes more consistent rules with its affiliated exchange 
will contribute to less complexity for market participants and more 
efficient regulatory compliance.
---------------------------------------------------------------------------

    \21\ See Options 3, Section 15(c)(2)(A) and (B).
    \22\ Id.
---------------------------------------------------------------------------

    Otherwise, the new rule text in Options 3, Section 15(c)(2)(A) will 
not change existing Rapid Fire functionality. In particular, the 
Specified Time Period will commence for an options class every time an 
execution occurs in any series in such option class and will continue 
until the System removes quotes as described in the Rule or the 
Specified Time Period expires. The Specified Time Period operates on a 
rolling basis among all series in an options class in that there may be 
Specified Time Periods occurring simultaneously for each Threshold and 
such Specified Time Periods may overlap. The Specified Time Periods 
will be the same value for each of the Percentage Threshold, Volume 
Threshold, Delta Threshold, and Vega Threshold.\23\
---------------------------------------------------------------------------

    \23\ See id. for similar features in the current Percentage and 
Volume Thresholds.
---------------------------------------------------------------------------

    The Exchange also proposes to replace the description of the 
existing Percentage Threshold in Options 3, Section 15(c)(2)(A) with 
new rule text in Options 3, Section 15(c)(2)(A)(i) as follows:

    (i) Percentage Threshold. A Market Maker must provide a 
specified percentage (``Percentage Threshold''), of not less than 
1%, by which the System will automatically remove a Market Maker's 
quotes in all series of an options class. For each series in an 
options class, the System will determine (1) during a Specified Time 
Period and for each side in a given series, a percentage calculated 
by dividing the size of a Market Maker's quote size executed in a 
particular series (the numerator) by the Marker Maker's quote size 
available at the time of execution plus the total number of the 
Market Marker's quote size previously executed during the unexpired 
Specified Time Period (the denominator) (``Series Percentage''); and 
(2) the sum of the Series Percentage in the options class (``Issue 
Percentage'') during a Specified Time Period. The System tracks and 
calculates the net impact of positions in the same options class; 
long call percentages are offset by short call percentages, and long 
put percentages are offset by short put percentages in the Issue 
Percentage. If the Issue Percentage exceeds the Percentage Threshold 
the System will automatically remove a Market Maker's quotes in all 
series of the options class during the Specified Time Period.

    With the proposed changes, the Percentage Threshold will be applied 
in the same manner as today, except with respect to the differences 
discussed above (i.e., when the Percentage Threshold will be triggered 
and the threshold's Specified Time Period). The proposed rule text is 
identical to ISE Options 3, Section 15(a)(3)(B)(i)(a).
    The Exchange also proposes to replace the description of the 
existing Volume Threshold in Options 3, Section 15(c)(2)(B) with new 
rule text in Options 3, Section 15(c)(2)(A)(ii) as follows:

    (ii) Volume Threshold. A Market Maker must provide a Volume 
Threshold by which the System will automatically remove a Market 
Maker's quotes in all series of an options class when the Market 
Maker executes a number of contracts which exceeds the designated 
number of contracts in all series in an options class.

    With the proposed changes, the Volume Threshold will be applied in 
the same manner as today, except with respect to the differences 
discussed above (i.e., when the Volume Threshold will be triggered and 
the threshold's Specified Time Period). The proposed rule text is 
identical to ISE Options 3, Section 15(a)(3)(B)(i)(b).
    In connection with the foregoing changes, current Options 3, 
Section 15(c)(2)(C), which describes the Exchange's Multi-Trigger risk 
protection, will be renumbered to Section 15(c)(2)(B) and amended 
throughout to add the Delta and Vega Thresholds wherever the Rule 
references Percentage and Volume Thresholds. In addition, the Exchange 
proposes to amend the Multi-Trigger Specified Time Period from 15 
seconds to 30 seconds to align with the Specified Time Periods proposed 
above. The Exchange further proposes in the Multi-Trigger rule to amend 
when Multi-Trigger will be triggered to align with the Rapid Fire 
changes proposed above. Specifically, the Exchange proposes to amend 
the provision, ``[o]nce the System determines that the number of 
triggers equals or exceeds a number . . .'' to instead state, ``[o]nce 
the System determines that the number of triggers exceeds a number . . 
.'' to make clear that Multi-Trigger will no longer remove Market Maker 
quotes when the Multi-Trigger threshold is met (and not exceeded).
    Options 3, Section 15(c)(2)(D) (renumbered to Section 15(c)(2)(C)), 
which explains how the System purges quotes once the Rapid Fire and 
Multi-Trigger thresholds are triggered, will be amended to conform with 
the changes proposed above. In particular, the Exchange proposes 
conforming changes to add the Delta and Vega Thresholds wherever these 
provisions reference Percentage and Volume Thresholds, and to replace 
``reached'' with ``exceeded'' in each instance where the language 
indicates that the Rapid Fire and Multi-Trigger thresholds have been 
reached.
    Options 3, Section 15(c)(2)(E) (renumbered to Section 15(c)(2)(D)) 
will likewise be amended to add references to the Delta and Vega 
Thresholds, and will state that if a BX Market Maker requests the 
System to remove quotes in all options series in an underlying issue, 
the System will automatically reset the

[[Page 55883]]

Specified Time Period(s) for the Percentage, Volume, Delta, or Vega 
Threshold.\24\ As is the case today, the Multi-Trigger Specified Time 
Period(s) will not automatically reset for the Multi-Trigger Threshold.
---------------------------------------------------------------------------

    \24\ The Specified Time Period(s) will also be automatically 
reset if Rapid Fire is triggered (and the System automatically 
removes quotes).
---------------------------------------------------------------------------

    Options 3, Section 15(c)(2)(F) (renumbered to Section 15(c)(2)(E)), 
which sets forth the re-entry process once Rapid Fire and Multi-Trigger 
are triggered, the Exchange will likewise add references to the Delta 
and Vega Thresholds wherever the provision refers to the Percentage and 
Volume Thresholds. The Exchange also proposes a clarifying change in 
the first sentence to add, ``[w]hen the System removes quotes as a 
result of exceeding . . .'' in order to align with ISE Options 3, 
Section 15(a)(3)(B)(iv). The Exchange further proposes a non-
substantive change in the first sentence to amend ``reentry'' to ``re-
entry''.
    Lastly, Options 3, Section 15(c)(2)(G) (renumbered to Section 
15(c)(2)(F)), will be amended to specify that the Delta and Vega 
Thresholds, in addition to the Multi-Trigger Threshold, are optional.
    The following are examples to illustrate how the proposed Delta and 
Vega Thresholds would apply on BX:
Example: Delta Threshold
MM1 has Delta Threshold set to 10 contracts
MM1 quotes IBM Call Option 2.55 (100) x 3.00 (1000)
FIX Order to Sell 11 @MKT trades with MM quote
Trade occurs for 11 @2.55, triggers Rapid Fire for MM1 since 11 calls 
purchased for MM1 > MM1's Delta Threshold of 10
Example: Vega Threshold
MM1 has Vega Threshold set to 10 contracts
MM1 quotes IBM Call Option 2.55 (100) x 3.00 (1000)
FIX Order to Sell 11 @MKT trades with MM quote
Trade occurs for 11 @2.55, triggers Rapid Fire for MM1 since 11 calls 
purchased for MM1 > MM1's Vega Threshold of 10
Notional Value Protections
    The Exchange proposes to introduce optional notional value checks 
in new Options 3, Section 28, entitled ``Optional Risk Protections.'' 
Participants may use this voluntary functionality through their FIX 
\25\ protocols to limit the quantity and notional value they can send 
per order and on aggregate for the day. Specifically, Participants may 
establish limits for the following parameters, as set forth in proposed 
subparagraphs (a)(1)-(4):
---------------------------------------------------------------------------

    \25\ ``Financial Information eXchange'' or ``FIX'' is the 
Exchange's order entry protocol, and is defined as an interface that 
allows Participants and their Sponsored Customers to connect, send, 
and receive messages related to orders and auction orders and 
responses to and from the Exchange. Features include the following: 
(1) Execution messages; (2) order messages; and (3) risk protection 
triggers and cancel notifications. See Options 3, Section 
7(d)(1)(A).
---------------------------------------------------------------------------

     Notional dollar value per order, which will be calculated 
as quantity multiplied by limit price multiplied by number of 
underlying shares;
     Aggregate notional dollar value;
     Quantity per order; and
     Aggregate quantity
    Proposed paragraph (b) will provide that Participants may elect one 
or more of the above optional risk protections by contacting Market 
Operations and providing a per order and/or daily aggregate value for 
an order protection. Participants may modify their settings through 
Market Operations. Proposed paragraph (c) will provide that the System 
will reject all incoming aggregated Participant orders through FIX if 
the value configured by the Participant, for any of the above-
referenced risk protections, is exceeded. Lastly, proposed paragraph 
(d) will specify that if a Participant sets a notional dollar value, a 
Market Order would not be accepted from that Participant as notional 
dollar value is calculated by using an order's specified limit price, 
and Market Orders by definition are priced at the best available price 
upon execution. The Exchange notes that similar notional value checks 
are currently offered as optional risk protections by other options 
markets.\26\
---------------------------------------------------------------------------

    \26\ For example, Cboe Options (``Cboe'') offers voluntary 
functionality that, if enabled by the user, provides that the Cboe 
trading system would cancel or reject an incoming order or quote 
with a notional value that exceeds the maximum notional value a user 
establishes for each of its ports. See Cboe Rule 5.34(c)(3). Cboe 
also offers voluntary functionality in which a user may establish 
risk limits defined by certain parameters, of which the notional 
value of executions is a parameter option. See Cboe Rule 5.34(c)(4).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\27\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\28\ 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.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange's proposal is generally intended to add or align 
certain System functionality with functionality currently offered by 
ISE and NOM in order to provide a more consistent technology offering 
across affiliated Nasdaq exchanges. A more harmonized technology 
offering, in turn, will simplify the technology implementation, 
changes, and maintenance by market participants of BX that are also 
participants on Nasdaq affiliated exchanges. The Exchange's proposal 
will also provide market participants with access to optional notional 
risk protections that are available on other markets other than the 
Nasdaq affiliated exchanges, and may provide more efficient risk 
management and additional flexibility to the Exchange's System and its 
market participants. The proposed rule change seeks to provide greater 
harmonization between the rules of the Exchange and its affiliates, 
which would result in greater uniformity, and less burdensome and more 
efficient regulatory compliance by market participants. As such, the 
proposed rule change would foster cooperation and coordination with 
persons engaged in facilitating transactions in securities and would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system. The Exchange also believes that 
more consistent rules will increase the understanding of the Exchange's 
operations for Participants that are also participants on the Nasdaq 
affiliated exchanges, thereby contributing to the protection of 
investors and the public interest.
Block Order Mechanism
    The Exchange believes that the proposed rule change to adopt the 
Block Order Mechanism will offer market participants with additional 
functionality for seeking out liquidity for larger-sized orders, which 
will provide greater flexibility in pricing such block-sized orders and 
may provide more opportunities for price improvement. The proposed 
auction is functionally identical to ISE's Block Order Mechanism. 
Similar to ISE, the proposed Block Order Mechanism will provide equal 
access to Block Orders for all market participants, as all Participants 
that subscribe to the Exchange's data feeds will have the opportunity 
to interact with Block Orders entered through this

[[Page 55884]]

mechanism.\29\ The proposed auction is intended to benefit investors 
because it is designed to provide investors seeking to execute any 
block-sized orders with opportunities to access additional liquidity 
and potentially receive price improvement. The proposed rule change may 
result in increased liquidity available at improved prices for 
Participants' orders. The Exchange believes that the Block Order 
Mechanism will promote and foster competition and provide more options 
contracts with the opportunity to seek liquidity and potential price 
improvement.
---------------------------------------------------------------------------

    \29\ Auction notifications will be disseminated through the BX 
Depth of Market (``BX Depth'') data feed. See Options 3, Section 
23(a). The Exchange is amending this Rule to provide that BX Depth 
will also provide auction notifications. See Securities Exchange Act 
Release No. 89476 (August 4, 2020), 85 FR 48274 (August 10, 2020) 
(SR-BX-2020-017). Any Participant can subscribe to the options data 
disseminated through this feed and through all of the Exchange's 
other data feeds.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because the Block Order Mechanism will be 
functionally identical to the mechanism currently available on the ISE. 
The Exchange believes that the consistency will benefit investors by 
promoting a fair and orderly national options market system.
    The Exchange believes that the proposed rule change will result in 
efficient trading and reduce the risk for investors that seek to access 
additional liquidity and potential price improvement for block-sized 
orders by providing additional opportunity to do so. The proposed 
priority and allocation rules for the Block Order Mechanism are similar 
to the Exchange's current customer priority size pro-rata allocation 
methodology that gives priority to Public Customer orders. The Exchange 
believes this will ensure a fair and orderly market by maintaining 
priority of orders and quotes and protecting Public Customer orders, 
while still affording the opportunity to seek liquidity and for 
potential price improvement during each Block auction commenced on the 
Exchange.
    By keeping the priority and allocation rules for a Block auction 
similar to the standard allocation used on the Exchange, the proposed 
rule change will reduce the ability of market participants to misuse 
this mechanism to circumvent standard priority rules in a manner 
designed to prevent fraudulent and manipulative acts and practices, and 
to promote just and equitable principles of trade on the Exchange. The 
proposed execution and allocation rules will allow Block Orders to 
interact with interest on the Exchange's order book in an efficient and 
orderly manner. The Exchange believes this interaction of orders will 
benefit investors by increasing the opportunity for options orders to 
receive executions.
Order Price Protection
    The Exchange believes that the proposed changes to OPP to introduce 
an alternative threshold that uses a configurable dollar amount, as 
discussed above, will allow BX to establish appropriate boundaries for 
rejecting potentially erroneous orders while continuing to allow 
Participants to access liquidity. As discussed above, OPP is intended 
to prevent orders entered at clearly unintended prices from executing 
in the System to the detriment of market participants. OPP was not 
intended to reject legitimate orders which are otherwise capable to 
execution at a fair price. The Exchange's proposal will establish a 
fixed dollar amount as an alternative threshold in addition to the 
current percentage-based threshold, similar to NOM Options 3, Section 
15(a)(1). The Exchange believes its proposal will continue to protect 
investors and the public interest against erroneous executions while 
also allowing orders, including lower-priced orders, to execute where 
appropriate when the incoming order is $1.00 from the Reference BBO.
    The Exchange believes that its proposal is consistent with the Act 
because the fixed amount provides for a larger range of executions 
within the $1.00 variance that would otherwise be rejected by the 
application of a percentage which would not capture the potential 
incremental executions. As illustrated above, orders could be rejected 
that were intentional and not erroneous. Similar to NOM, the Exchange 
believes that the proposed approach will accomplish the goal of 
limiting erroneous executions while permitting intentional executions 
at reasonable prices.
    The Exchange also believes that its proposal to add rule text 
relating to Exchange discretion to temporarily deactivate OPP on an 
intra-day basis is consistent with the Act. As noted above, NOM has 
identical language in NOM Options 3, Section 15(a)(1)(A), and similar 
to NOM, the Exchange believes that having this discretion will be 
useful if the Exchange determined that unusual market conditions 
warranted deactivation in the interest of a fair and orderly market. 
Like NOM, the Exchange believes that it will be useful to have the 
flexibility to temporarily disable OPP intra-day in response to an 
unusual market event (for example, if dissemination of data was delayed 
and resulted in unreliable underlying values needed for the Reference 
BBO) to maintain a fair and orderly market. This will promote just and 
equitable principles of trade and ultimately protect investors.
    Lastly, the proposed changes to remove the exclusion of ISOs so 
that OPP would apply to them going forward is consistent with the Act 
as this will promote the goal of limiting erroneous executions on the 
Exchange and in general, extend more protections to ISOs. As discussed 
above, the Exchange believes this is appropriate given that the 
proposed alternative threshold will permit more lower-priced ISOs to 
execute at reasonable prices.
Market Wide Risk Protection
    The Exchange believes that the proposed rule change to adopt MWRP 
would assist with the maintenance of a fair and orderly market by 
establishing new activity based risk protections for orders. The 
proposed MWRP is similar to risk management functionality provided in 
ISE Options 3, Section 15(a)(1)(C). Similar to ISE, the Exchange 
believes that the proposed rule change may reduce Participant risk by 
allowing them to properly manage their exposure to excessive risk. In 
particular, the proposed rule change would implement two new risk 
protections based on the rate of order entry and order execution, 
respectively. The Exchange believes that both of these new protections, 
which together encompass the proposed MWRP, would enable Participants 
to better manage their risk when trading options on the Exchange by 
limiting the Participant's risk exposure when systems or other issues 
result in orders being entered or executed at a rate that exceeds 
predefined thresholds. In today's market, the Exchange believes that 
robust risk management is becoming increasingly more important for all 
Participants. The proposed rule change would provide an additional 
layer of risk protection for market participants that trade on the 
Exchange.
    In particular, the MWRP is designed to reduce risk associated with 
system errors or market events that may cause Participants to send a 
large number of orders, or receive multiple, automatic executions, 
before they can adjust their exposure in the market. Without adequate 
risk management tools, such as those proposed in this filing, 
Participants could reduce the amount of order flow and liquidity that 
they provide. Such actions may undermine the quality of the markets 
available to

[[Page 55885]]

customers and other market participants. Accordingly, the proposed 
functionality is designed to encourage Participants to submit 
additional order flow and liquidity to the Exchange, thereby removing 
impediments to and perfect the mechanisms of a free and open market and 
a national market system and, in general, protecting investors and the 
public interest.
Anti-Internalization
    The Exchange believes that the proposed rule change to enhance AIQ 
is consistent with the protection of investors and the public interest 
as it is designed to provide Market Makers with additional flexibility 
with respect to how to implement self-trade protections provided by 
AIQ. Currently, all Market Makers are provided functionality that 
prevents quotes and orders from one market participant identifier from 
trading with quotes and orders from the same market participant 
identifier. This allows Market Makers to better manage their order flow 
and prevent undesirable executions where the Market Maker, using the 
same market participant identifier, would be on both sides of the 
trade. While this functionality is helpful to Participants, some 
Participants may prefer not to trade with quotes and orders entered by 
different market participant identifiers within the same Exchange 
account or Participant firm. The Exchange is therefore proposing to 
provide Participants with flexibility with respect to how AIQ is 
implemented. As such, Participants can continue to use current 
functionality, or Participants that prefer to prevent self-trades 
across different market participant identifiers within the same 
Exchange account or at the Participant firm level will now be provided 
with the means to do so under this proposal. Similar flexibility is 
offered on ISE.\30\ Similar to ISE, the Exchange believes that 
flexibility to apply AIQ at the Exchange account or Participant firm 
level would be useful for the Exchange's Participants as well. The 
Exchange believes that the proposed rule change is designed to promote 
just and equitable principles of trade and will remove impediments to 
and perfect the mechanisms of a free and open market as it will further 
enhance self-trade protections provided to Market Makers similar to 
those protections provided on other markets. Lastly, the Exchange 
believes its proposal to clarify that AIQ will not apply during an 
Opening Process is consistent with the Act as it would provide more 
specificity on how this functionality currently operates. As discussed 
above, AIQ is unnecessary during an Opening Process due to the high 
level of control that Market Makers exercise over their quotes during 
this process.
---------------------------------------------------------------------------

    \30\ See ISE Options 3, Section 15(a)(3)(A). See also NOM 
Options 3, Section 15(c)(1), which provides similar flexibility for 
NOM's AIQ.
---------------------------------------------------------------------------

Quotation Adjustments
    The Exchange believes that the proposed rule change is consistent 
with the Act because it will enhance the risk protection tools 
available to Market Makers by introducing new Delta and Vega Thresholds 
that will be offered in conjunction with the current Percentage and 
Volume Thresholds, thereby strengthening a Market Maker's ability to 
manage their risk on the Exchange. The proposed thresholds are 
functionally identical to the Delta and Vega Thresholds provided in ISE 
Options 3, Section 15(a)(3)(B). Similar to ISE, the Exchange believes 
that the proposed rule change may reduce Market Maker risk by allowing 
them to properly manage their exposure to excessive risk. Accordingly, 
the Exchange believes that the proposal removes impediments to, and 
perfects the mechanism of, a free and open market and a national market 
system, and protects investors and the public interest.
    The proposed changes to amend when Rapid Fire and Multi-Trigger 
will be triggered and the modification to the Specified Time Periods, 
as discussed above, will bring greater harmonization between the 
Exchange's rules and ISE's rules. With the proposed changes, BX's Rapid 
Fire and Multi-Trigger will be triggered when their respective 
thresholds are exceeded (instead of when they are met or exceeded, as 
is currently the case) and the Specified Time Periods will be amended 
from 15 to 30 seconds, all of which will be substantially similar to 
ISE's current approach. The Exchange believes that having more 
consistent rules will result in greater uniformity as well as less 
burdensome and more efficient regulatory compliance. In addition, 
offering more consistent functionality across BX and ISE will 
contribute to less complexity and reduce potential confusion for market 
participants on BX that are also participants on ISE. As such, the 
Exchange believes that the proposed changes would foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities and would remove impediments to and perfect the mechanism of 
a free and open market and a national market system.
Notional Value Protections
    The Exchange believes that introducing the optional notional value 
risk protections as described above will protect investors and the 
public interest, and maintain fair and orderly markets, by providing 
market participants with another tool to manage their order risk. As 
noted above, other options exchanges such as Cboe offer similar 
optional notional risk protections.\31\ In addition, providing 
Participants with more tools for managing risk will facilitate 
transactions in securities because Participants will have more 
confidence that risk protections are in place. As a result, the new 
functionality has the potential to promote just and equitable 
principles of trade.
---------------------------------------------------------------------------

    \31\ See supra note 26.
---------------------------------------------------------------------------

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 does not believe that the proposed rule change will 
impose any burden on intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. As it relates to 
the proposed Block Order Mechanism, the proposed functionality is 
designed to increase competition for order flow on the Exchange in a 
manner intended to be beneficial to investors seeking to effect block-
sized orders with an opportunity to access additional liquidity and 
potentially receive price improvement. The Exchange will offer this 
mechanism to all Participants, and use of the proposed functionality 
will be completely voluntary.
    The Exchange further believes that all of the proposed changes 
related to the risk protections described above do not impose an undue 
burden on intramarket competition as they are all aimed at mitigating 
market participant risk associated with trading on the Exchange. The 
proposed changes are designed to benefit market participants in that 
they will provide a more consistent technology offering for market 
participants on Nasdaq affiliated exchanges. The Exchange also notes 
that some of the proposed risk controls (e.g., Delta and Vega 
Thresholds, and notional value checks) are completely voluntary.
    As it relates to inter-market competition, the Exchange notes that 
the basis for the majority of the proposed rule changes in this filing 
are

[[Page 55886]]

the rules of ISE and NOM, which have been previously filed with the 
Commission, and therefore promotes fair competition among the options 
exchanges. The Exchange anticipates that the proposed Block Order 
Mechanism will create new opportunities for the Exchange to attract new 
business and compete on an equal footing with other options exchanges 
with similar auctions. As noted above, the proposed changes to the risk 
protections will provide more consistent technology offerings across 
the Nasdaq affiliated exchanges, and for this reason, the Exchange does 
not believe its proposal will impose an undue burden on intermarket 
competition. The Exchange also notes that market participants on other 
exchanges are welcome to become participants on the Exchange if they 
determine if this proposed rule change has made BX a more attractive or 
favorable venue.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \32\ and Rule 19b-4(f)(6) thereunder.\33\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\34\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \33\ 17 CFR 240.19b-4(f)(6).
    \34\ 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 Commission has waived the pre-filing requirement.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) \35\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\36\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the proposal 
may become operative immediately upon filing. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. The proposed rule 
change is related to a technology integration that the Exchange states 
will align BX's system functionality with functionality currently 
offered on other Nasdaq-affiliated exchanges and is expected to begin 
on September 14, 2020. The Commission believes that waiver of the 
operative delay will permit the proposed rule change to be operative by 
that date. Accordingly, the Commission waives the 30-day operative 
delay and designates the proposed rule change operative upon 
filing.\37\
---------------------------------------------------------------------------

    \35\ 17 CFR 240.19b-4(f)(6).
    \36\ 17 CFR 240.19b-4(f)(6)(iii).
    \37\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \38\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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-2020-023 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-2020-023. 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-2020-023 and 
should be submitted on or before October 1, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19941 Filed 9-9-20; 8:45 am]
BILLING CODE 8011-01-P