Document ID: SEC-2021-0244-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq BX, Inc.
Posted Date: 2021-02-19T05:00Z

[Federal Register Volume 86, Number 32 (Friday, February 19, 2021)]
[Notices]
[Pages 10363-10364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-03341]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91124; File No. SR-BX-2020-033]

Self-Regulatory Organizations; Nasdaq BX, Inc.; Order Granting 
Approval of a Proposed Rule Change To Utilize the FIX Protocol To 
Submit Orders to BX's Price Improvement Auction Mechanism

February 12, 2021.

I. Introduction

    On October 27, 2020, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to utilize the 
``Financial Information eXchange'' (``FIX'') \3\ protocol for BX 
Participants \4\ seeking to submit orders into the Price Improvement 
Auction (``PRISM'') mechanism. The proposed rule change was published 
for comment in the Federal Register on November 16, 2020.\5\ On 
December 29, 2020, the Commission extended the time period within which 
to approve, disapprove, or institute proceedings to determine whether 
to approve or disapprove the proposed rule changes.\6\ The Commission 
received no comments on the proposed rule change. The Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See BX Options 3, Section 7(e)(1). ``FIX'' is an interface 
that allows BX 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.
    \4\ BX Options 1, Section 1(a)(40) defines ``Participant'' to 
mean a firm, or organization that is registered with the Exchange 
pursuant to Options 2A of BX Rules for purposes of participating in 
options trading on the BX options market as a ``BX Options Order 
Entry Firm,'' as defined in BX Options 1, Section 1(a)(11), or ``BX 
Options Market Maker,'' as defined in BX Options 1, Section 
1(a)(10).
    \5\ See Securities Exchange Act Release No. 90383 (November 9, 
2020), 85 FR 73095 (``Notice'').
    \6\ See Securities Exchange Act Release Nos. 90815, 86 FR 353 
(January 5, 2021), in which the Commission designated February 14, 
2021 as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove these 
proposed rule changes
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II. Description of the Proposed Rule Change

    Pursuant to BX Options 3, Section 13, a BX Participant may 
electronically submit for execution an order it represents as agent on 
behalf of a Public Customer,\7\ broker dealer, or any other entity 
(``PRISM Order'') against principal interest or against any other order 
\8\ it represents as agent (an ``Initiating Order''), provided it 
submits the PRISM Order for electronic execution into the Auction. 
According to the Exchange, BX Participants currently solicit contra-
side Initiating Orders to pair with their PRISM Orders using methods 
such as telephone, electronically using an external order management 
system, or utilizing instant message.\9\ BX proposes to provide BX 
Participants (``sender'') the option to use the FIX protocol to send a 
message, which includes a PRISM Order, to one or more BX Participants 
(``recipient'') requesting that they provide a contra-side Initiating 
Order in response, which would result in the start of a PRISM auction 
(``Request for PRISM''). BX Participants must opt-in in order to 
receive Requests for PRISM. A Request for PRISM would be sent 
simultaneously to all BX Participants who opted in to receive Requests 
for PRISM,\10\ and a BX Participant who opts-in would receive all 
Requests for PRISM from all senders.\11\
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    \7\ A ``Public Customer'' means a person that is not a broker or 
dealer in securities and is not a Professional as defined within BX 
Options 1, Section 1(a)(48). See BX Options 1, Section 1(a)(49). A 
``Professional'' means any person or entity that (i) is not a broker 
or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its 
own beneficial account(s). All Professional orders shall be 
appropriately marked by Participants. See BX Options 1, Section 
1(a)(48).
    \8\ PRISM Orders submitted during the final two seconds of the 
trading session in the affected series are not eligible to initiate 
an Auction and will be immediately cancelled. See BX Options 3, 
Section 13(i)(F).
    \9\ See Notice, supra note 5, at 73095 n.7.
    \10\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(c).
    \11\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(a).
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    The Exchange proposes to establish a certain time period up to one 
second \12\ within which a recipient, if it chooses to respond to the 
Request for PRISM, may utilize FIX to submit the sender's PRISM Order, 
along with its Initiating Order, into the System for execution into 
PRISM pursuant to Options 3, Section 13 (``response'').\13\ The System 
would enter the PRISM Order and the Initiation Order of the first 
recipient to respond into the PRISM through FIX to start a PRISM 
auction and would send a reject message to subsequent responders.\14\ 
Any Initiating Order must match the PRISM Order and is not permitted to 
improve the price, or else it would be rejected.\15\ However, the 
Initiating Order may be configured to improve the PRISM Order stop 
price pursuant to Options 3, Section 13(ii)(A)(1)(c); \16\ the 
configuration would apply only if the System initiated a PRISM 
auction.\17\ If there are no responses to the Request for PRISM, the 
PRISM Order would be placed on the Order Book as a Limit Order or 
cancelled, consistent with the sending BX Participant's 
instruction.\18\
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    \12\ The Exchange will initially set the time period to 100 
milliseconds to respond to the Request for PRISM or otherwise not 
respond before the Request for PRISM would become unavailable. The 
Exchange will post the time period on its System settings page. See 
Notice, supra note 5, at 73096 n.8.
    \13\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(b).
    \14\ Id.
    \15\ Id.
    \16\ Id. BX Options 3, Section 13(ii)(A)(1) provides three 
options to submit a PRISM Order and initiate the PRISM Auction. 
Specifically, the Initiating Participant must mark the PRISM Order 
for Auction processing, and specify either: (a) A single price at 
which it seeks to execute the PRISM Order (a ``stop price''); (b) 
that it is willing to automatically match as principal or as agent 
on behalf of an Initiating Order the price and size of all PAN 
responses, and trading interest (``auto-match'') in which case the 
PRISM Order will be stopped at the NBBO on the Initiating Order 
side; or (c) that it is willing to either: (i) Stop the entire order 
at a single stop price and auto-match PAN responses and trading 
interest at a price or prices that improve the stop price to a 
specified price (a ``No Worse Than'' or ``NWT'' price); (ii) stop 
the entire order at a single stop price and auto-match all PAN 
responses and trading interest at or better than the stop price; or 
(iii) stop the entire order at the NBBO on the Initiating Order 
side, and auto-match PAN responses and trading interest at a price 
or prices that improve the stop price up to the NWT price.
    \17\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(b).
    \18\ Id.
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    Once a recipient of a Request for PRISM has responded to the 
Request for PRISM by adding the Initiating Order, the PRISM may not be 
cancelled.\19\ The sender may not cancel a Request for PRISM once that 
Request for PRISM has

[[Page 10364]]

been sent.\20\ The identity of the sender and recipients will not be 
known to any party,\21\ and the Exchange will not disclose a list of BX 
Participants that have opted-in to receive Requests for PRISM.\22\
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    \19\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(d).
    \20\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(e).
    \21\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(f).
    \22\ Id.
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    It would be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Options 9, Section 1, and other 
Exchange Rules, to utilize non-public information in connection with a 
Request for PRISM to a BX Participant's economic advantage.\23\ The 
Exchange intends to begin implementation of the proposed rule change by 
June 30, 2021. The Exchange will issue an Options Trader Alert to BX 
Participants with the date of implementation.\24\
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    \23\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(g).
    \24\ See Notice, supra note 5, at 73097.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\25\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\26\ which requires that the 
rules of an exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest, and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers. The Commission also finds that the proposed rule change is 
consistent with Section 6(b)(8) of the Act,\27\ which requires that the 
rules of a national securities exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \25\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 78f(b)(8).
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    The proposed rule change appears reasonably designed to offer 
Participants an efficient process to solicit an Initiating Order among 
other BX Participants for entry into the PRISM auction.\28\ The 
Commission believes that by permitting BX Participants to use FIX to 
send a Request for PRISM (with a PRISM Order) simultaneously to all BX 
Participants that have opted-in, the proposed Request for PRISM process 
would provide BX Participants with another means of soliciting interest 
for a PRISM auction from a potentially broader group of market 
participants, potentially providing price improvement to the PRISM 
Order. The Commission further notes that the proposal would not amend 
the manner in which PRISM auction operates. Any paired order entered 
into PRISM must comply with the eligibility requirements of BX Options 
3, Section 13(i) to commence the auction and the auction process will 
operate as it does today.
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    \28\ See Notice, supra note 5, at 73095-96 (describing the 
current methods Participants use to find a paired order).
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    The Commission also believes that the proposal appears to be 
designed to provide an objective process for the selection of the 
contra-side to the PRISM Order. Any BX Participant may choose to opt-
in, and those who opt-in would receive any Request for PRISM sent from 
BX Participants.\29\ Further, any BX Participant that chooses to opt-in 
may subsequently opt-out.\30\ In addition, the Exchange has proposed 
that the identity of the sender and recipients would not be known to 
any party and that it would not disclose a list of the BX Participants 
that opted-in to receive a Request for PRISM.\31\ Thus, the decision of 
which Participant is chosen to provide the Initiating Order will be 
based solely on which recipient responded first to the Request for 
PRISM.
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    \29\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(c).
    \30\ Notice, supra note 5, at 73097.
    \31\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(f).
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    The Commission also believes that the proposed rule change appears 
designed to prevent the misuse of information related to the proposed 
Request for PRISM and create an audit trail for surveilling Requests 
for PRISM. The Exchange represents that it will employ surveillances to 
prevent misuse of non-public information related to a Request for PRISM 
similar to how it employs surveillances today to ensure that 
information available in auctions is not misused.\32\ The Exchange also 
represents that the communications that would occur, through FIX, would 
be available to and maintained by the Exchange, and that it would be 
able to monitor entries into both the order book and the PRISM 
auction.\33\ Further, the Exchange proposes in Options 3, Section 13 
that it would be deemed conduct inconsistent with just and equitable 
principles of trade and a violation of Options 9, Section 1, and other 
Exchange Rules for BX Participants receiving Requests for PRISM to 
utilize the information to a BX Participant's economic advantage.\34\ 
In addition, a Request for PRISM would be subject to the restrictions 
set forth in BX Options 3, Section 22 (Limitations on Order Entry), and 
any paired order resulting from a Request for PRISM would be subject to 
the PRISM auction requirements in BX Options 3, Section 13.\35\
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    \32\ Notice, supra note 5, at 73097.
    \33\ Notice, supra note 5, at 73098.
    \34\ Proposed BX Options 3, Section 7(d)(1)(A)(1)(f).
    \35\ Notice, supra note 5, at 73098.
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    For the reasons set forth above, the Commission believes that the 
proposed rule changes are consistent with the requirements of the Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-BX-2020-033) hereby is 
approved.
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    \36\ See id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-03341 Filed 2-18-21; 8:45 am]
BILLING CODE 8011-01-P