Skip to Content

Notice

Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Add Definitions to Chapter I, Section 1, Titled General Provisions and Also Amend Chapter VI, Section 18, Titled Risk Protections

Document Details

Information about this document as published in the Federal Register.

Document Statistics
Document page views are updated periodically throughout the day and are cumulative counts for this document including its time on Public Inspection. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day.
Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble November 1, 2018.

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 October 18, 2018, Nasdaq BX, Inc. (“BX” or “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.

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

The Exchange proposes to add definitions to Chapter I, Section 1, titled “General Provisions” and also amend Chapter VI, Section 18, titled, “Risk Protections.”

The text of the proposed rule change is available on the Exchange's website at http://nasdaqbx.cchwallstreet.com/​, 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 Start Printed Page 55766statements 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 purpose of this rule change is to adopt certain definitions within Chapter I, Section 1, titled “General Provisions” and also amend Chapter VI, Section 18, titled, “Risk Protections.” Each change is described in more detail below.

Definitions

The Exchange proposes to amend Chapter I, Section 1 to add three new definitions into its Rulebook. These definitions are utilized in technical documents issued by the Exchange and will provide an ease of reference for understanding these terms. Specifically, Chapter I, Section 1(a)(70) would define an account number as a number assigned to a Participant. Participants may have more than one account number. Chapter I, Section 1(a)(71) would define a badge as an account number, which may contain letters and/or numbers, assigned to BX Market Makers. A BX Market Maker account may be associated with multiple badges. Finally, Chapter I, Section 1(a)(72) would define a mnemonic as an acronym comprised of letters and/or numbers assigned to Participants. A Participant account may be associated with multiple mnemonics.

Risk Protections

Order Price Protection

The Exchange proposes a minor amendment to Chapter VI, Section 18(1) to add punctuation and “OPP” at the beginning of that sentence to conform the text to the remainder of the rule. The Exchange proposes to remove the example within Rule Chapter VI, Section 18(1)(B)(i) which states, “For example, if the Reference BBO on the offer side is $1.10, an order to buy options for more than $1.65 would be rejected. Similarly, if the Reference BBO on the bid side is $1.10, an order to sell options for less than $0.55 will be rejected.” The Exchange also proposes to remove the example within Chapter VI, Section 18(1)(B)(ii) which states, “For example, if the Reference BBO on the offer side is $1.00, an order to buy options for more than $2.00 would be rejected. However, if the Reference BBO of the bid side of an incoming order to sell is less than or equal to $1.00, the OPP limits set forth above will result in all incoming sell orders being accepted regardless of their limit.” The Exchange notes that while the examples remain accurate, the Exchange proposes to remove the text to conform the rule text to other risk protections. The Exchange does not believe it is necessary to have these examples within the rule text.

Market Order Spread Protection

The Exchange proposes to amend the Market Order Spread Protection Rule in Chapter VI, Section 18(a)(2) to permit BX to establish different thresholds for one or more series or classes of options similar to Phlx.[3] The Exchange desires, similar to Phlx, to be permitted the flexibility to allow it to determine a threshold suitable for each series or class of option. The Exchange's current rule provides no discretion to permit different thresholds for one or more series or classes of options. By adding this rule text, the Exchange proposes to permit one or more series or classes of options to set a different threshold, which the Exchange would announce via an Options Trader Alert, similar to Phlx. The Exchange desires to conform this protection to Phlx so that it could set the same threshold across affiliated markets. The Phlx Rule Change provided that the $5 threshold is appropriate because it seeks to ensure that the displayed bid and offer are within reasonable ranges and do not represent erroneous prices. Further the Exchange noted that this protection will bolster the normal resilience and market behavior that persistently produces robust reference prices. This feature should create a level of protection that prevents Market Orders from entering the Order Book outside of an acceptable range for the Market Order to execute. The Exchange notes that those goals remain consistent with the Exchange's goals today for this risk feature. The Exchange would establish different thresholds for one or more series or classes of options if it believed that the threshold should differ to retain these goals.

Anti-Internalization

The Exchange proposes to add a new sentence to Anti-Internalization Rule at Chapter VI, Section 18(c)(1) to provide that Anti-Internalization functionality shall not apply in any auction. This is the current practice today. With respect to an auction,[4] the Exchange notes that Anti-Internalization functionality is difficult to apply during auctions, and there is limited benefit in doing so. There is limited benefit because, generally speaking, auctions do not raise the same policy concerns for wash sales and ERISA [5] due to the semi-random manner in which trades are matched. Also, the Exchange notes that with respect to entering quotes in an auction, a Market Maker could not start an auction in symbols in which they are assigned. With respect to orders, Market Makers can only commence a PRISM in a non-assigned symbol.[6] It is not common for a Market Maker to commence such an auction. Finally, the Exchange notes that Nasdaq ISE, LLC Rule 714(b)(3)(A) contains the same constraint in that it does not apply the Anti-Internalization protection in any auction.

Automated Removal of Quotes

Finally, the Exchange proposes to amend the title of Chapter VI, Section 18(c)(2) from “Automated Removal of Quotes” to “Quotation Adjustments” to conform the title across Nasdaq markets.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act,[7] in general, and furthers the objectives of Section 6(b)(5) of the Act,[8] in particular, in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest by adding greater transparency to the Exchange's rules. The Exchange's proposal to add definitions to Chapter I, Section 1 will bring greater clarity to the Anti-Internalization functionality and to the Rulebook. Amendments to remove examples from the OPP rule text will conform the rule text to other rules. The Exchange believes that it is unnecessary to have examples in the rule text. Adding the word “trading” before the word “halt” within the Market Order Start Printed Page 55767Spread Protection rule text will bring conformity to Chapter VI, Section 18.

The Exchange's proposal to expand the Market Order Spread Protection permits the Exchange to establish different thresholds for one or more series or classes of options similar to Phlx. The Exchange desires this flexibility to allow it, similar to Phlx,[9] to determine a threshold suitable for each series or class of option. The Exchange believes that expanding this capability is consistent with the Act because it would allow the Exchange to consider thresholds for Market Order Spread Protection at a more granular level, per series or class, to ensure that the displayed bid and offer are within reasonable ranges and do not represent erroneous prices. The Exchange intends that this risk protection would bolster the normal resilience and market behavior that persistently produces robust reference prices, while creating a level of protection that prevents Market Orders from entering the Order Book outside of an acceptable range for the Market Order to execute.

The Exchange's proposal to make clear that the Anti-Internalization functionality will not apply in any auction will also bring greater transparency to the rules and the limitation of this functionality. With respect to an auction,[10] the Exchange notes that Anti-Internalization functionality is difficult to apply during auctions, and there is limited benefit in doing so. There is limited benefit because, generally speaking, auctions do not raise the same policy concerns for wash sales and ERISA [11] due to the semi-random manner in which trades are matched. Also, the Exchange notes that with respect to entering quotes in an auction, a Market Maker could not start an auction in symbols in which they are assigned. With respect to orders, Market Makers can only commence a PRISM in a non-assigned symbol. It is not common for a Market Maker to commence such an auction.

Finally, the Exchange's proposal to amend the title of Chapter VI, Section 18(c)(2) from “Automated Removal of Quotes” to “Quotation Adjustments” should better describe the rule and conform the title to other Nasdaq affiliate markets. The proposals noted herein are consistent with the Act because they provide more detail and transparency to the Exchange's rules noted herein to the benefit of market participants.

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 believes that the proposed amendments do not impose an undue burden on competition because the definitions and amendments to conform the rule text will provide greater clarity as to the meaning of those terms. Removing examples from the OPP rule text does not impose an undue burden on competition because this text is not necessary within the rule text. Adding the word “trading” before the word “halt” within the Market Order Spread Protection rule text will bring conformity to Chapter VI, Section 18. The Exchange's proposal to expand the Market Order Spread Protection to permit the Exchange to establish different thresholds for one or more series or classes of options, similar to Phlx, would apply uniformly to all market participants.

The Exchange's proposal to make clear that the Anti-Internalization functionality will not apply in any auction will also bring greater transparency to the rules and the limitation of this functionality. With respect to an auction, the Exchange notes that Anti-Internalization functionality is difficult to apply during auctions, and there is limited benefit in doing so. There is limited benefit because, generally speaking, auctions do not raise the same policy concerns for wash sales and ERISA [12] due to the semi-random manner in which trades are matched. Finally, the Exchange's proposal to amend the title of Rule Chapter VI, Section 18(c)(2) is non-substantive.

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

No written comments were either solicited or received.

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

Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act [13] and Rule 19b-4(f)(6) thereunder.[14]

A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act [15] normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) [16] permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has requested that the Commission waive the 30-day operative delay so that the proposed rule change may become operative upon filing. The Exchange believes that waiver of the operative delay would allow the Exchange to update its rules without delay to remove inconsistent rule language, make clarifying changes to reflect current and accurate information, and bring greater transparency to the Exchange's risk protections and Anti-Internalization rule. Additionally, the Commission notes that the changes relating to the Anti-Internalization functionality and Market Order Spread Protection are based on the operation of similar functionality on Nasdaq ISE and Phlx, respectively. Therefore, the Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Accordingly, the Commission hereby waives the operative delay and designates the proposed rule change operative upon filing.[17]

At any time within 60 days of the filing of the 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 to determine whether the proposed rule change should be approved or disapproved.Start Printed Page 55768

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

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-2018-050. 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-2018-050, and should be submitted on or before November 28, 2018.

Start Signature

For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[18]

Eduardo A. Aleman,

Assistant Secretary.

End Signature End Preamble

Footnotes

3.  Securities Exchange Act Release No. 83141 (May 1, 2018), 83 FR 20123 (May 7, 2018) (SR-Phlx-2018-32). Footnote 11 of this filing provides that Exchange may establish differences other than the referenced threshold for one or more series or classes of options.

Back to Citation

4.  PRISM is the Exchange's Price Improvement Auction. See BX Rules at Chapter VI, Section 9.

Back to Citation

5.  AIQ is designed to assist market participants in complying with certain rules and regulations of the Employee Retirement Income Security Act (“ERISA”) that preclude and/or limit managing broker-dealers of such accounts from trading as principal with orders generated for those accounts. It can also assist Market Makers in reducing trading costs from unwanted executions potentially resulting from the interaction of executable buy and sell trading interest from the same firm when performing the same market making function.

Back to Citation

6.  Specialists and ROTs can only quote in symbols in which they are assigned.

Back to Citation

9.  See note 4 above.

Back to Citation

10.  PIXL is the Exchange's Price Improvement XL auction. See Phlx Rule 1087.

Back to Citation

11.  See note 6 above.

Back to Citation

12.  See note 6 above.

Back to Citation

14.  17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of 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.

Back to Citation

16.  17 CFR 240.19b-4(f)(6)(iii).

Back to Citation

17.  For purposes only of waiving the 30-day operative delay, the Commission also has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f).

Back to Citation

[FR Doc. 2018-24308 Filed 11-6-18; 8:45 am]

BILLING CODE 8011-01-P