Document ID: SEC-2010-1468-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2010-09-27T04:00Z

[Federal Register: September 27, 2010 (Volume 75, Number 186)]
[Notices]               
[Page 59305-59309]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27se10-142]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62954; File No. SR-BX-2010-066]

 
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of a Proposed Rule Change To Enhance Quotation Requirements for 
Market Makers

September 20, 2010.
    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 September 17, 2010, NASDAQ OMX

[[Page 59306]]

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

    The Exchange is filing with the Commission a proposed rule change 
to enhance quotation requirements for market makers. The text of the 
proposed rule change is below. Proposed new language is in italics; 
proposed deletions are in [brackets].\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http:// 
nasdaqomxbx.cchwallstreet.com.
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* * * * *

[4613. Character of Quotations]

    A member registered as an Equities Market Maker shall engage in a 
course of dealings for its own account to assist in the maintenance, 
insofar as reasonably practicable, of fair and orderly markets in 
accordance with this Rule.

(a) Quotation Requirements and Obligations

    (1) Two-Sided Quote Obligation. For each security in which a member 
is registered as an Equities Market Maker, the member shall be willing 
to buy and sell such security for its own account on a continuous basis 
and shall enter and maintain a two-sided quotation (``Principal 
Quote''), which is attributed to the market maker by a special market 
participant identifier (``MPID'') and is displayed in the NASDAQ OMX BX 
Equities Market at all times, subject to the procedures for excused 
withdrawal set forth in Rule 4619.
    (A) A registered Equities Market Maker must display a quotation 
size for at least one normal unit of trading (or a larger multiple 
thereof) when it is not displaying a limit order in compliance with SEC 
Rule 604, provided, however, that a registered Equities Market Maker 
may augment its displayed quotation size to display limit orders priced 
at the Equities Market Maker's quotation. Unless otherwise designated, 
a ``normal unit of trading'' shall be 100 shares.
    (B) The minimum quotation increment for quotations of $1.00 or 
above in all System Securities shall be $0.01. The minimum quotation 
increment in the System for quotations below $1.00 in System Securities 
shall be $0.0001.
    (2) The first MPID issued to a member pursuant to subparagraph (1) 
of this rule, or Rule 4623, shall be referred to as the member's 
``Primary MPID.'' Market makers and ECNs may request the use of 
additional MPIDs that shall be referred to as ``Supplemental MPIDs.'' A 
market maker may request the use of a Supplemental MPIDs for displaying 
Attributable Quotes/Orders in the Exchange's Quotation Montage for any 
security in which it is registered and meets the obligations set forth 
in subparagraph (1) of this rule. An ECN may request the use of 
Supplemental MPIDS for displaying Attributable Quotes/Orders in the 
Exchange's Quotation Montage for any security in which it meets the 
obligations set forth in Rule 4623. A market maker or ECN that ceases 
to meet the obligations appurtenant to its Primary MPID in any security 
shall not be permitted to use a Supplemental MPID for any purpose in 
that security.
    (3) Market makers and ECNs that are permitted the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders pursuant 
to subparagraph (2) of this rule are subject to the same rules 
applicable to the member's first quotation, with two exceptions: (a) 
The continuous two-sided quote requirement and excused withdrawal 
procedures described in subparagraph (1) above do not apply to market 
maker's Supplemental MPIDs; and (b) Supplemental MPIDs may not be used 
by market makers to enter stabilizing bids pursuant to Equity Rule 
4614.]

4613. Market Maker Obligations

    A member registered as an Equities Market Maker shall engage in a 
course of dealings for its own account to assist in the maintenance, 
insofar as reasonably practicable, of fair and orderly markets in 
accordance with this Rule.

(a) Quotation Requirements and Obligations

    (1) Two-Sided Quote Obligation. For each security in which a member 
is registered as a Equities Market Maker, the member shall be willing 
to buy and sell such security for its own account on a continuous basis 
during regular market hours and shall enter and maintain a two-sided 
trading interest (``Two-Sided Obligation'') that is identified to the 
Exchange as the interest meeting the obligation and is displayed in the 
Exchange's quotation montage at all times. Interest eligible to be 
considered as part of an Equities Market Maker's Two-Sided Obligation 
shall have a displayed quotation size of at least one normal unit of 
trading (or a larger multiple thereof); provided, however, that an 
Equities Market Maker may augment its Two-Sided Obligation size to 
display limit orders priced at the same price as the Two-Sided 
Obligation. Unless otherwise designated, a ``normal unit of trading'' 
shall be 100 shares. After an execution against its Two-Sided 
Obligation, Equities a Market Maker must ensure that additional trading 
interest exists in the Exchange to satisfy its Two-Sided Obligation 
either by immediately entering new interest to comply with this 
obligation to maintain continuous two-sided quotations or by 
identifying existing interest on the Exchange book that will satisfy 
this obligation.
    (2) Pricing Obligations. For NMS stocks (as defined in Rule 600 
under Regulation NMS) an Equities Market Maker shall adhere to the 
pricing obligations established by this Rule during Regular Market 
Hours.
    (A) Bid Quotations. At the time of entry of bid interest satisfying 
the Two-Sided Obligation, the price of the bid interest shall be not 
more than the Designated Percentage away from the then current National 
Best Bid, or if no National Best Bid, not more than the Designated 
Percentage away from the last reported sale from the responsible single 
plan processor. In the event that the National Best Bid (or if no 
National Best Bid, the last reported sale) increases to a level that 
would cause the bid interest of the Two-Sided Obligation to be more 
than the Defined Limit away from the National Best Bid (or if no 
National Best Bid, the last reported sale), or if the bid is executed 
or cancelled, the Equities Market Maker shall enter new bid interest at 
a price not more than the Designated Percentage away from the then 
current National Best Bid (or if no National Best Bid, the last 
reported sale), or identify to the Exchange current resting interest 
that satisfies the Two-Sided Obligation.
    (B) Offer Quotations.--At the time of entry of offer interest 
satisfying the Two-Sided Obligation, the price of the offer interest 
shall be not more than the Designated Percentage away from the then 
current National Best Offer, or if no National Best Offer, not more 
than the Designated Percentage away from the last reported sale 
received from the responsible single plan processor. In the event that 
the National Best Offer (or if no National Best Offer, the last 
reported sale) decreases to a level that would cause the offer interest 
of the Two-Sided Obligation to be more than the Defined

[[Page 59307]]

Limit away from the National Best Offer (or if no National Best Offer, 
the last reported sale), or if the offer is executed or cancelled, the 
Equities Market Maker shall enter new offer interest at a price not 
more than the Designated Percentage away from the then current National 
Best Offer (or if no National Best Offer, the last reported sale), or 
identify to the Exchange current resting interest that satisfies the 
Two-Sided Obligation.
    (C) The National Best Bid and Offer shall be determined by the 
Exchange in accordance with its procedures for determining protected 
quotations under Rule 600 under Regulation NMS.
    (D) For purposes of this Rule, the term ``Designated Percentage'' 
shall mean the individual stock pause trigger percentage under Rule 
4120(a)(11) (or comparable rule of another exchange) less two (2) 
percentage points. For times during regular market hours when stock 
pause triggers are not in effect under Rule 4120(a)(11) (or comparable 
rule of another exchange), the Designated Percentage calculation will 
assume a trigger percentage of 22%. For NMS stocks that are not subject 
to such stock pause triggers the Designated Percentage will assume a 
trigger percentage of 32%.
    (E) For purposes of this Rule, the term ``Defined Limit'' shall 
mean the individual stock pause trigger percentage under Rule 
4120(a)(11) (or comparable rule of another exchange) less one-half (\1/
2\) percentage point. For times during regular market hours when stock 
pause triggers are not in effect under Rule 4120(a)(11) (or comparable 
rule of another exchange), the Defined Limit calculation will assume a 
trigger percentage of 22%. For NMS stocks that are not subject to such 
stock pause triggers the Defined Limit calculation will assume a 
trigger percentage of 32%.
    (F) Quotation Creation and Adjustment. For each Issue in which an 
Equities Market Maker is registered, the System shall automatically 
create a quotation for display to comply with this Rule. System-created 
compliant displayed quotations will thereafter be allowed to rest and 
not be further adjusted by the System unless the relationship between 
the quotation and its related National Best Bid or National Best Offer, 
as appropriate, shrinks to the greater of: (a) 4 percentage points, or, 
(b) one-quarter the applicable percentage necessary to trigger an 
individual stock trading pause as described in NASDAQ OMX BX Rule 
4120(a)(11), or expands to within that same percentage less 0.5%, 
whereupon the System will immediately re-adjust and display the 
Equities Market Maker's quote to the appropriate Designated Percentage 
set forth in section (D) above. As the System allows for multiple 
attributable quotations by a Equities Market Maker in an issue, 
quotations originally entered by Equities Market Makers shall be 
allowed to move freely towards or away from the National Best Bid or 
National Best Offer, as appropriate, for potential execution.
    (G) Quotation Refresh After Execution. In the event of an execution 
against a System-created compliant quotation, the Equities Market Maker 
shall have its quote refreshed by the System on the executed side of 
the market at the applicable Designated Percentage away from the then 
National Best Bid (Offer) (or if no National Best Bid (Offer), the last 
reported sale).
    (H) Nothing in this Rule shall preclude an Equities Market Maker 
from quoting at price levels that are closer to the National Best Bid 
and Offer than the levels required by this Rule.
    (I) The minimum quotation increment for quotations of $1.00 or 
above in all System Securities shall be $0.01. The minimum quotation 
increment in the System for quotations below $1.00 in System Securities 
shall be $0.0001.
    (J) The individual Market Participant Identifier (``MPID'') 
assigned to a member to meet its Two-Sided Obligation pursuant to 
subparagraph (a)(1) of this Rule, or Rule 4623, shall be referred to as 
the member's ``Primary MPID.'' Equities Market Makers and ECNs may 
request the use if additional MPIDs that shall be referred to as 
``Supplemental MPIDs.'' An Equities Market Maker may request the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders in the 
Quotation Montage for any security in which it is registered and meets 
the obligations set forth in subparagraph (1) of this rule. An ECN may 
request the use of Supplemental MPIDs for displaying Attributable 
Quotes/Orders in the Quotation Montage for any security in which it 
meets the obligations set forth in Rule 4623. An Equities Market Maker 
or ECN that ceases to meet the obligations appurtenant to its Primary 
MPID in any security shall not be permitted to use a Supplemental MPID 
for any purpose in that security.
    (K) Equities Market Makers and ECNs that are permitted the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders pursuant 
to subparagraph (2) of this rule are subject to the same rules 
applicable to the members' first quotation, with two exceptions: (a) 
The continuous two-sided quote requirement and excused withdrawal 
procedures described in subparagraph (1) above do not apply to Equities 
Market Makers' Supplemental MPIDs; and (b) Supplemental MPIDs may not 
be used by Equities Market Makers to engage in passive market making or 
to enter stabilizing bids pursuant to Rule 4614.
    (b)-(e) No Change.
* * * * *
    (b) Not applicable.
    (c) Not applicable.

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
    Market Maker Quote Obligations:
    The Exchange proposes to adopt rules to enhance minimum quotation 
requirements for market makers. Under the proposal, the Exchange will 
require market makers for each stock in which they are registered to 
continuously maintain a two-sided quotation within a designated 
percentage of the National Best Bid and National Best Offer as 
appropriate. These enhanced market maker quotation requirements are 
intended to eliminate trade executions against market maker placeholder 
quotations traditionally priced far away from the inside market, 
commonly known as ``stub quotes.'' They are also intended to augment 
and work in relation to the single stock pause standards already in 
place on a pilot basis for stocks in the S&P 500, Russell 1000, and 
specified ETFs.\4\ Under the proposal, the Exchange will require 
registered market makers to enter and maintain quotes priced at no more 
than a certain percentage away from the national inside bid and offer. 
Permissible quotes are determined by the individual character of the 
security, the time of day in which the quote is entered, and other 
factors which are summarized below:
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    \4\ See Exchange Act Release No. 62884 (September 10, 2010).

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[[Page 59308]]

    For issues subject to an individual stock trading trigger pause, a 
permissible quote is determined by first looking at the applicable 
stock trading pause trigger percentage of the security and then 
reducing that number by 2%. Since currently the stock pause trigger 
percentage across all exchanges is 10%, a market maker's quote in such 
a security may not be more than 8% away from the national best bid or 
best offer as appropriate. Once a compliant quote is entered, it may 
rest without adjustment until such time as it moves to within \1/2\ of 
1% of the applicable trigger pause percentage (i.e., currently 9.5%) 
whereupon the market maker must immediately move its quote back to at 
least the permissible default level of 8% away from the national best 
bid or best offer. During times in which a trigger pause percentage is 
not applicable (e.g. before 9:45 a.m. and after 3:35 p.m.), a market 
maker must maintain a quote no further than 20% away from the inside 
(i.e. it may rest without adjustment until it reaches 21.5%). In the 
absence of national best or best offer, the above calculations will 
remain the same, but will use the national last sale instead of the 
absent bid or offer.
    For securities not subject to any individual stock pause trigger, 
the proposal will a [sic] assume a hypothetical 32% trigger pause, 
apply a 2% reduction, and require market makers in those issues to 
maintain quotes no more than 30% away from the national best and 
national best offer. Like securities subject to stock trading pauses, 
once a compliant quote is entered, it may rest without adjustment until 
such time as it moves to within \1/2\ of 1% of its applicable trigger 
pause percentage (31.5%) whereupon the market maker must immediately 
move its quote back to at least the permissible default level of 30%. 
These requirements shall apply to Regulation NMS securities during 
normal market hours.
    Nothing in the above precludes a market maker from voluntarily 
quoting at price levels that are closer to the national best bid and 
best offer than required under the proposal.
    Automated Quote Management:
    In order to assist market makers in meeting their enhanced 
quotation obligations, the Exchange will also provide automated quote 
management functionality. For each issue in which a market maker is 
registered, the Exchange will automatically create a quotation for 
display to comply with this standard set forth in this proposal. 
Compliant displayed quotations will thereafter be allowed to rest and 
not be further adjusted by the Exchange unless the relationship between 
the quotation and its related national best bid or national best offer, 
as appropriate, shrinks to the greater of: (a) 4 percentage points, or, 
(b) one-quarter the applicable percentage necessary to trigger an 
individual stock trading pause as described in NASDAQ OMX BX Rule 
4120(a)(11), or expands to within that same percentage less 0.5%, 
whereupon the Exchange will immediately re-adjust and display the 
market maker's quote to the appropriate designated percentage. 
Quotations originally entered by market makers shall be allowed to move 
freely towards the national best bid or national best offer, as 
appropriate, for potential execution.
    In the event of an execution against a System-created compliant 
quotation, the market maker shall have its quote refreshed by the 
System on the executed side of the market at the applicable designated 
percentage away from the then national best bid (offer), or if no 
national best bid (offer), the last reported sale.
    Previously Approved Rule Text:
    Finally, the sections (I), (J) and (K) of the proposed rule are 
portions of previously approved text of Rule 4613 that have moved so as 
to group the proposed market making standard sections together within 
the rule.
2. Statutory Basis
    The statutory basis for the proposed rule change is Section 6(b)(5) 
of the Securities Exchange Act of 1934 (the ``Act''),\5\ which requires 
the rules of an exchange 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. The proposed rule change also is 
designed to support the principles of Section 11A(a)(1) \6\ of the Act 
in that it seeks to assure fair competition among brokers and dealers 
and among exchange markets. The Exchange believes that the proposed 
rule meets these requirements in that it promotes transparency and 
uniformity across markets concerning minimum market maker quotation 
requirements.
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    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-BX-2010-066 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2010-066. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the

[[Page 59309]]

provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-BX-2010-066 and should be 
submitted on or before October 18, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-24059 Filed 9-24-10; 8:45 am]
BILLING CODE 8010-01-P