Document ID: SEC-2010-0513-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2010-04-06T04:00Z

[Federal Register: April 6, 2010 (Volume 75, Number 65)]
[Notices]               
[Page 17454-17456]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06ap10-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61805; File No. SR-BX-2010-022]

 
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
the Price Improvement Period

March 31, 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 March 25, 2010, NASDAQ OMX BX, Inc. (the ``Exchange'') filed with 
the Securities and Exchange Commission (``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Chapter V, Section 18 (The Price 
Improvement Period (``PIP'')) of the Rules of the Boston Options 
Exchange Group, LLC (``BOX''). The text of the proposed rule change is 
available from the principal office of the Exchange, at the 
Commission's Public Reference Room and also on the Exchange's Internet 
Web site at http://nasdaqomxbx.cchwallstreet.com/NASDAQOMXBX/Filings/.

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 PIP currently allows Initiating Participants \3\ to enter two-
sided orders for execution with the possibility of receiving a price 
that improves upon the National Best Bid or Offer (``NBBO'') (``price 
improvement''). The customer side of these orders (``PIP Order'') is 
exposed \4\ to Options Participants to give them an opportunity to 
compete for allocations in the PIP by entering orders (``Improvement 
Orders'') at the proposed cross price or better. This provides an 
opportunity for the PIP Order to receive price improvement. PIP Orders 
are submitted to BOX with a matching guaranteed contra order (``Primary 
Improvement Order''), equal to the full size of the PIP Order. The 
Primary Improvement Order currently must represent a single price 
(``Single-Priced Primary Improvement Order'') \5\ that is equal to or 
better than that of the NBBO at the time of the commencement of the 
PIP.
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    \3\ Options Participants, both OFPs and Market Makers, who 
submit PIP Orders for price improvement.
    \4\ BOX commences a PIP by broadcasting a message to all Options 
Participants that (1) states that a Primary Improvement Order has 
been processed; (2) contains information concerning series, size, 
PIP Start Price and side of the market, and; (3) states when the PIP 
will conclude (``PIP Broadcast'').
    \5\ Presently, a Single-Priced Submission is the only manner in 
which an Options Participant may start a PIP.
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    The purpose of this proposed rule change is to add an auto-match 
functionality within the PIP for the Initiating Participant to submit a 
Primary Improvement Order that will automatically match both the price 
and size of all competing quotes and orders at any price level achieved 
during the PIP auction or only up to a designated limit price (``Max 
Improvement Primary Improvement Order''). Either the Single-Priced 
Primary Improvement Order or the Max Improvement Primary Improvement 
Order will designate the PIP auction start price (``PIP Start Price''), 
which shall be equal to or better than the NBBO at the time of 
commencement of the PIP. With a Max Improvement Primary Improvement 
Order the Initiating Participant does not respond at all, but instead 
must honor the prices set forth by the competing orders, including 
booked unrelated orders, received from other Options Participants. 
After the commencement of a PIP, the Initiating Participant would not 
be able to cancel or modify the Max Improvement Primary Improvement 
Order. In this case, the Initiating Participant would not have control 
over the prices at which it receives an allocation at the conclusion of 
the PIP auction.
    Under the proposal, at the conclusion of the PIP, the Max 
Improvement Primary Improvement Order shall be allocated its full size 
at each price level where there are competing quotes or orders, except 
where restricted by any designated max improvement limit price, until a 
price level is reached where the balance of the PIP Order can be fully 
executed. Only at such price level will the Initiating Participant 
retain priority for the greater of one contract or 40% of the remaining 
size of the PIP Order.
    The following example illustrates how the proposed PIP auto-match 
functionality will operate for the Max Improvement Primary Improvement 
Order:

    At the commencement of the PIP the NBBO is 2.00 (bid)--2.10 
(offer). The Initiating Participant submits to the PIP a customer 
order to sell 155 contracts at $2.01 (``the PIP Order'') while 
simultaneously submitting a guaranteed contra Max Improvement 
Primary Improvement Order with a PIP Start Price of $2.01 (bid) and 
a designated max improvement limit price of $2.04 (bid). During the 
PIP auction the following competing orders were received from 
Options Participants: PIP Participant A: $2.05 (bid) for 5 contracts 
(a booked unrelated order); PIP Participant B: $2.03 (bid) for 15 
contracts; PIP Participant C: $2.02 (bid) for 10 contracts; and PIP 
Participant D: $2.01 (bid) for 155 contracts.
    The following allocations shall occur at the conclusion of the 
PIP auction:

 Participant A is allocated 5 contracts at $2.05.
    [cir] Remaining size of PIP Order is 150.
    [cir] Note that Initiating Participant is not allocated any 
quantity at this price level because it exceeds the Max Improvement 
Primary Improvement Order designated limit price of $2.04.
 Initiating Participant and Participant B are each allocated 
15 contracts at $2.03.

[[Page 17455]]

    [cir] Remaining size of PIP Order is 120.
 Initiating Participant and Participant C are each allocated 
10 contracts at $2.02.
    [cir] Remaining size of PIP Order is 100.
 Initiating Participant is allocated 40 contracts at $2.01 
(40% of the remaining quantity of 100 contracts) and Participant D 
is allocated 60 contracts (balance of the remaining quantity of the 
PIP Order after the Initiating Participant's allocation at this 
price level).

    BOX's PIP allows for broad participation in its competitive auction 
by all types of market participants (e.g. Public Customers, Broker 
Dealers and Market Makers).\6\ All Options Participants are able to 
receive the PIP Broadcasts and may respond by submitting competing 
Improvement Orders. All PIP Orders entered into the PIP will continue 
to be broadly exposed in the auction before the Initiating Participant 
can execute against the PIP Order via the Max Improvement Primary 
Improvement Order.
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    \6\ The Exchange notes that no changes to the priority of Public 
Customer Orders within the PIP auction are being proposed.
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    BOX notes that when the Initiating Participant selects the Max 
Improvement Primary Improvement Order prior to the start of the 
auction, the available liquidity at improved prices would be 
automatically doubled and competitive final pricing would be out of the 
Initiating Participant's control. The Exchange believes that the 
proposal, if approved, will increase competition in the PIP auction, 
will provide more options contracts with price improvement and incent 
Options Participants to initiate more such Max Improvement PIP 
auctions. Increases in the number of PIP auctions initiated by BOX 
Options Participants will directly correlate with an increase in the 
number of customer orders that are provided with the opportunity to 
receive price improvement over the NBBO.
    The Exchange also notes that a similar auto-match function is 
currently in place on at least one other options exchange.\7\
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    \7\ See CBOE Rule 6.74A Automated Improvement Mechanism 
(``AIM''). See also Securities Exchange Act Release No. 53222 
(February 3, 2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) 
(Order Granting Approval of Proposed Rule Change and Amendment No. 1 
Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 2 to the Proposed Rule Change Relating to an 
Automated Improvement Mechanism).
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    The Exchange represents that BOX shall provide the Commission with 
the following data: The percentage of all BOX trades effected through 
the PIP in which the Initiating Participant has submitted a Max 
Improvement Primary Improvement Order with a limit price and the 
percentage without a limit price, and the average amount of price 
improvement provided to the PIP Order when the Initiating Participant 
has submitted a Max Improvement Primary Improvement Order with a limit 
price and the average without a limit price, versus the average amount 
of price improvement provided to the PIP Order when the Initiating 
Participant has chosen a Single-Priced Primary Improvement Order.
    After effectiveness of the proposal, and at least one week prior to 
implementation of the rule change, BOXR will issue a regulatory 
circular to Options Participants. The regulatory circular will inform 
Options Participants of the implementation date of the Max Improvement 
function. This will give Options Participants an opportunity to make 
any necessary modifications to coincide with the implementation date.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\8\ in general, and Section 
6(b)(5) of the Act,\9\ in particular, in that it is designed to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism for a free and open market and a national market 
system and, in general, to protect investors and the public interest. 
In particular, the Exchange believes that the proposal, if approved, 
will result in double the liquidity available at improved prices with 
competitive final pricing out of the Initiating Participant's control, 
thus increasing competition in the PIP auction and providing more 
options contracts with price improvement. As a result of the increased 
opportunity for price improvement, the Exchange believes that Options 
Participants will be incented to initiate more such Max Improvement PIP 
auctions. Increases in the number of PIP auctions initiated by BOX 
Options Participants will directly correlate with an increase in the 
number of customer orders that are provided with the opportunity to 
receive price improvement over the NBBO.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \10\ and Rule 19b-
4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \12\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \13\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay because the 
changes to the PIP auction will allow immediate increases in the 
liquidity available at improved prices. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest and designates the proposal operative 
upon filing.\14\
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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 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).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.

[[Page 17456]]

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-2010-022 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2010-022. 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,\15\ all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, on 
official business days between the hours of 10 a.m. and 3 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; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-BX-2010-022 and should be submitted on or before April 
27, 2010.
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    \15\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/rules/sro.shtml.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-7693 Filed 4-5-10; 8:45 am]
BILLING CODE 8011-01-P