Notice2022-00154
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt an Add Liquidity Order and Post-Only Quote Configuration Functionality
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 10, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 6 (Monday, January 10, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 6 (Monday, January 10, 2022)]
[Notices]
[Pages 1231-1238]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-00154]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93896; File No. SR-BX-2021-054]
Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Adopt an Add
Liquidity Order and Post-Only Quote Configuration Functionality
January 4, 2021.
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 December 22, 2021, 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, 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.
---------------------------------------------------------------------------
\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 Options 3, Section 1 (Days and Hours
of
[[Page 1232]]
Business), Section 7 (Types of Orders and Quote Protocols), Section 13
(Price Improvement Auction (``PRISM'')) and Section 15 (Risk
Protections).
The text of the proposed rule change is available on the Exchange's
website at <a href="https://listingcenter.nasdaq.com/rulebook/bx/rules">https://listingcenter.nasdaq.com/rulebook/bx/rules</a>, 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 to amend the following rules: Options 3,
Section 1 (Days and Hours of Business), Section 7 (Types of Orders and
Quote Protocols), Section 13 (Price Improvement Auction (``PRISM''))
and Section 15 (Risk Protections). Each change will be described below.
Options 3, Section 1
The Exchange proposes to amend Options 3, Section 1 concerning the
Days and Hours of Business. The Exchange proposes to amend the title
from ``Days and Hours of Business'' to ``Hours of Business.'' BX
recently filed to establish General 3, Section 1030, which governs the
days the Exchange will be open for business.\3\ At this time the
Exchange proposes to amend Options 3, Section 1(c) which provides, ``BX
Options shall not be open for business on any holiday observed by BX.''
The Exchange proposes to instead provide, ``BX Options shall not be
open for business as provided within General 3, Section 1030.'' This
proposed text will make clear that while General 3, Section 1030
governs the days the Exchange will be open for business, the remainder
of the rule addresses the hours of operation of the System and specific
products. Finally, the Exchange proposes to update citations to the
Options 4 rules related to Exchange-Traded Fund Shares and Index-Linked
Securities.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 93675 (November 29,
2021), 86 FR 68714 (December 3, 2021) (SR-NASDAQ-2021-69) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To
Include Juneteenth National Independence Day as a Holiday). BX's
General 3 rules incorporate by reference The Nasdaq Stock Market
LLC's General 3 Rules. Rule 1030 of General 3 memorialized all
current Exchange holidays and added a provision to permit the
Exchange the authority to halt or suspend trading or close Exchange
facilities for certain unanticipated closures.
---------------------------------------------------------------------------
Options 3, Section 7
The Exchange proposes to amend Options 3, Section 7 to add a new
order type entitled ``Add Liquidity Order'' within Options 3, Section
7(a)(12). Today, Nasdaq ISE, LLC (``ISE''), Nasdaq GEMX, LLC (``GEMX'')
and Nasdaq MRX, LLC (``MRX'') have a similar order type within Options
3, Section 7(n). ISE adopted the Add Liquidity Order to provide an
additional order type that will give market participants greater
control over the circumstances in which their orders are executed.\4\
ISE's 2012 rule change explained that
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 66617 (March 19,
2012), 77 FR 17102 (March 23, 2012) (SR-ISE-2012-20) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Adopt
a New Order Type).
[s]ome investors and market participants wish only to provide
liquidity in certain circumstances, such as to receive a maker fee
(rebate) upon execution of an order. To accommodate this strategy,
the Exchange proposed to adopt a new order type called an add
liquidity order (``ALO''). ALOs are limit orders that will only be
executed as a ``maker'' on the ISE. Members can choose whether an
ALO that is executable on the ISE upon entry (or that locks or
crosses an away market upon entry) will be cancelled or re-priced to
one minimum price variation above the national best bid or below the
national best offer. An Add Liquidity Order will only be re-priced
once and will be executed at the re-priced price.\5\
---------------------------------------------------------------------------
\5\ Id at 17103.
ISE subsequently amended this order type in 2012 such that, if at
the time of entry, an ALO would lock or cross one or more non-displayed
orders on the Exchange, the ALO will be cancelled or re-priced to the
minimum price variation \6\ (``MPV'') above the best non-displayed bid
price (for sell orders) or below the best non-displayed offer price
(for buy orders).\7\ ISE noted in that filing that it believed that
adding this functionality was imperative to ensure that ALOs are only
executed when providing liquidity. Without the ability to re-price an
ALO that locks or crosses a non-displayed order, under certain
circumstances, an incoming ALO could execute against a non-displayed
order resting on the ISE limit order book, which would be in direct
contravention with the purpose of an ALO--to provide liquidity, not
take liquidity.\8\
---------------------------------------------------------------------------
\6\ See Options 3, Section 3 (Minimum Increments).
\7\ See Securities Exchange Act Release No. 67353 (July 5,
2012), 77 FR 40935 (July 11, 2012) (SR-ISE-2012-61) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change by
International Securities Exchange To Amend ISE Rule 715 To Reflect a
Modification in the Functionality of the Add Liquidity Order).
\8\ Id at 40935.
---------------------------------------------------------------------------
At this time, the Exchange proposes to adopt an Add Liquidity Order
similar to ISE, GEMX and MRX Options 3, Section 7(n). The proposed Add
Liquidity Order would be a limit order that is to be executed in whole
or in part on the Exchange (i) only after being displayed on the
Exchange's limit order book; and (ii) without routing any portion of
the order to another market center. Participants would be able to
specify whether an Add Liquidity Order shall be cancelled or re-priced
to the MPV above the national best bid price (for sell orders) or below
the national best offer price (for buy orders) if, at the time of
entry, the order (i) is executable on the Exchange; or (ii) the order
is not executable on the Exchange but would lock or cross the national
best bid or offer. If at the time of entry, an Add Liquidity Order
would lock or cross one or more non-displayed orders or quotes on the
Exchange, the Add Liquidity Order shall be cancelled or re-priced to
the MPV above the best non-displayed bid price (for sell orders) or
below the best non-displayed offer price (for buy orders).
Notwithstanding the aforementioned, if an Add Liquidity Order would not
lock or cross an order or quote on the System but would lock or cross
the NBBO,\9\ the order will be handled pursuant to Options 3, Section
5(d).\10\ This repricing of Add Liquidity Orders is the way other order
types are currently re-priced on ISE, GEMX and
[[Page 1233]]
MRX. The Exchange notes that the same sentence does not appear in the
ISE, GEMX and MRX Add Liquidity Order description.\11\
---------------------------------------------------------------------------
\9\ The term ``NBBO'' means the national best bid or offer as
calculated by BX Options based on market information received by BX
Options from OPRA. See Options 3, Section 1(a)(33).
\10\ Options 3, Section 5(d) provides, ``An order will not be
executed at a price that trades through another market or displayed
at a price that would lock or cross another market. An order that is
designated by the member as routable will be routed in compliance
with applicable Trade-Through and Locked and Crossed Markets
restrictions. An order that is designated by a member as non-
routable will be re-priced in order to comply with applicable Trade-
Through and Locked and Crossed Markets restrictions. If, at the time
of entry, an order that the entering party has elected not to make
eligible for routing would cause a locked or crossed market
violation or would cause a trade-through violation, it will be re-
priced to the current national best offer (for bids) or the current
national best bid (for offers) and displayed at one minimum price
variance above (for offers) or below (for bids) the national best
price.''
\11\ See ISE, GEMX and MRX Options 3, Section 5(d). The Exchange
will amend the ISE, GEMX and MRX rules in separate rule changes.
---------------------------------------------------------------------------
Finally, BX proposes to add rule text that is not currently in the
ISE, GEMX and MRX rule. Add Liquidity Orders may only be submitted when
an options series is open for trading.\12\ Therefore, an Add Liquidity
Order would not be accepted during the Opening Process when the order
book is not available.
---------------------------------------------------------------------------
\12\ ISE, GEMX and MRX will propose a change to Options 3,
Section 7(n) to add similar rule text.
---------------------------------------------------------------------------
The Exchange believes that, similar to ISE, GEMX and MRX, the
adoption of an Add Liquidity Order will give market participants
greater control over the circumstances in which their orders are
executed in addition to the order types which are currently offered
today on BX. Below are some examples of the Add Liquidity Order.
Add Liquidity Only Order Re-Price Example
<bullet> Non-Penny Program MPV Option in open trading state
<bullet> Market Maker A quote $0.90 (10) x $1.00 (10)
<bullet> ABBO $0.85 x $1.05
<bullet> Firm A sends Add Liquidity Only Order to buy 5 arrives at
$1.00
[cir] Reprices on book to $0.95
[cir] Displays on $0.95 bid, which is National Best displayed bid with
5 quantity
<bullet> Order to sell 10 arrives at $0.90
[cir] 5 execute with Firm A @ $0.95
[cir] 5 execute with Market A @ $0.90
[cir] NBBO updates back to $0.90 x $1.00
Add Liquidity Only Reject Example
<bullet> Non-Penny Program MPV Option in open trading state
<bullet> Market Maker A quote $0.90 (10) x $1.00 (10)
<bullet> ABBO $0.85 x $1.05
<bullet> Firm A sends Add Liquidity Only Order to buy 5 arrives at
$1.00
[cir] Order is rejected back to sender because the sender configured
the order for reject instead of re-price
The Exchange also proposes to amend Options 3, Section 7(a)(11) to
remove the title ``Block Order'' at the beginning of the sentence to
conform the style of the description to the remaining order types
within Options 3, Section 7.
Options 3, Section 13
The Exchange proposes to amend the Exchange's PRISM rule in Options
3, Section 13 to delete an obsolete auction eligibility requirement and
clarify existing rule text.
Today, Options 3, Section 13(i) describes the various eligibility
criteria under which a PRISM auction may be initiated, including
requirements for when PRISM orders may be submitted. In particular,
Section 13(i)(F) provides that PRISM orders submitted during the final
two seconds of the trading session in the affected series are not
eligible to initiate a PRISM auction and will be immediately cancelled.
This restriction was introduced when PRISM was first adopted on the
Exchange,\13\ and was based on certain technical restraints from BX's
original technical design which required no ongoing auctions to begin
preparing for the end of trading day transition to closing state.
However, with the Exchange's recent technology migration,\14\ this
system restriction was removed in order to be more consistent with the
price improvement mechanisms on the Exchange's affiliated options
markets, Nasdaq ISE, GEMX, and MRX.\15\ The corresponding rule text in
Options 3, Section 13(i)(F) should have likewise been deleted with the
legacy functionality. Accordingly, the Exchange now proposes to delete
the obsolete rule text in Section 13(i)(F) in its entirety, and
renumber Section 13(i)(G) as (F).
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 76301 (October 29,
2015), 80 FR 68347 (November 4, 2015) (SR-BX-2015-032) (Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To
Adopt a New Price Improvement Auction, BX PRISM).
\14\ See Securities Exchange Act Release No. 89476 (August 4,
2020), 85 FR 48274 (SR-BX-2020-017) (August 10, 2020) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Amend
Various BX Rules in Connection With a Technology Migration).
\15\ None of these markets have similar system restrictions
preventing the submission of orders in their respective price
improvement mechanisms during the last two seconds of the trading
day. See Nasdaq ISE, GEMX, and MRX Options 3, Section 13.
---------------------------------------------------------------------------
Additionally, the Exchange proposes to amend rule text regarding
the PRISM Auction process. Currently, Options 3, Section 13(ii)
describes the manner in which a PRISM auction may be conducted.
Specifically, with respect to an unrelated market or marketable limit
order, Options 3, Section 13(a)(ii)(D) provides,
An unrelated market or marketable limit order (against the BX
BBO) on the opposite side of the market from the PRISM Order
received during the Auction will not cause the Auction to end early
and will execute against interest outside of the Auction. If
contracts remain from such unrelated order at the time the auction
ends, they will be considered for participation in the order
allocation process described in sub-paragraphs (E) and (F) below.
The term ``marketable limit order'' is too narrow a term as both
orders and quotes on the opposite side of the market from the PRISM
Order received during the PRISM auction would not cause the PRISM
auction to end early and will execute against interest outside of the
PRISM auction. Therefore, the Exchange proposes to replace the term
``marketable limit order'' with the broader term ``marketable
interest'' to accurately describe the interest a PRISM auction would
interact with in the order book on the opposite side of the market from
the PRISM Order. The Exchange believes that this amendment will bring
greater clarity to the PRISM rule. The proposed new rule text would
provide,
Unrelated market or marketable interest (against the BX BBO) on
the opposite side of the market from the PRISM Order received during
the Auction will not cause the Auction to end early and will execute
against interest outside of the Auction. If contracts remain from
such unrelated interest at the time the auction ends, they will be
considered for participation in the order allocation process
described in sub-paragraphs (E) and (F) below.
The Exchange notes that Nasdaq PHLX LLC's Price Improvement XL
(``PIXL'') auction does not early terminate from contra-side unrelated
marketable interest.\16\
---------------------------------------------------------------------------
\16\ See Phlx Options 3, Section 13(b)(4). The Exchange will
separately amend Phlx's rule to make a similar change to the rule
text.
---------------------------------------------------------------------------
Options 3, Section 15
The Exchange proposes to amend Options 3, Section 15, Risk
Protections, to adopt an optional quoting protection for BX Market
Makers. This optional risk protection would allow BX Market Makers to
prevent their quotes from removing liquidity from the Exchange's order
book upon entry.
Specifically, the Exchange proposes to adopt a new risk protection
within Options 3, Section 15(c)(3). With this risk protection, NOM
Market Makers may elect to configure their SQF \17\ protocols to
prevent their quotes from
[[Page 1234]]
removing liquidity (``Post-Only Quote Configuration''). This Post-Only
Quote Configuration would re-price or cancel a BX Market Maker's quote
that would otherwise lock or cross any resting order \18\ or quote on
the BX order book upon entry. The Exchange notes that this
functionality does not apply during an Opening Process \19\ because the
order book is established once options series are open for trading.
---------------------------------------------------------------------------
\17\ ``Specialized Quote Feed'' or ``SQF'' is an interface that
allows Market Makers to connect, send, and receive messages related
to quotes, Immediate-or-Cancel Orders, and auction responses into
and from the Exchange. Features include the following: (1) Options
symbol directory messages (e.g., underlying instruments); (2) system
event messages (e.g., start of trading hours messages and start of
opening); (3) trading action messages (e.g., halts and resumes); (4)
execution messages; (5) quote messages; (6) Immediate-or-Cancel
Order messages; (7) risk protection triggers and purge
notifications; (8) opening imbalance messages; (9) auction
notifications; and (10) auction responses. The SQF Purge Interface
only receives and notifies of purge requests from the Market Maker.
Market Makers may only enter interest into SQF in their assigned
options series. See Options 3, Section 7(e)(1)(B).
\18\ This would include any re-priced orders as described in
Options 3, Section 5(d), any re-priced quotes as described in
Options 3, Section 4(b)(6), and the proposed Add Liquidity Orders
within proposed Options 3, Section 7(a)(12). As noted herein, Add
Liquidity Orders may re-price.
\19\ The Exchange's Opening Process is described at Options 3,
Section 8.
---------------------------------------------------------------------------
Participants may elect whether to re-price or cancel their quotes
with this functionality. When configured for re-price, quotes would be
re-priced to one MPV below the current low offer (for bids) or above
the current best bid (for offers) and displayed by the System at one
MPV below the current low offer (for bids) or above the current best
bid (for offers). Notwithstanding the aforementioned, if a quote with a
Post-Only Quote Configuration would not lock or cross an order or quote
on the System but would lock or cross the NBBO, the quote will be
handled pursuant to Options 3, Section 4(b)(6).\20\ When configured for
cancel, Participants will have their quotes returned whenever the quote
would lock or cross the NBBO or be placed on the book at a price other
than its limit price.
---------------------------------------------------------------------------
\20\ Options 3, Section 4(b)(6) provides, ``A quote will not be
executed at a price that trades through another market or displayed
at a price that would lock or cross another market. If, at the time
of entry, a quote would cause a locked or crossed market violation
or would cause a trade-through, violation, it will be re-priced to
the current national best offer (for bids) or the current national
best bid (for offers) and displayed at one minimum price variance
above (for offers) or below (for bids) the national best price.''
---------------------------------------------------------------------------
This optional risk protection would enable BX Market Makers to
better manage their risk when quoting on BX. Today, BOX Exchange LLC
(``BOX''),\21\ NYSE Arca, Inc. (``NYSE Arca''),\22\ and MIAX Emerald,
LLC (``MIAX Emerald'') \23\ have similar functionality. BOX does not
permit Market Maker's quotes to take liquidity and will reject the
quote. Other options markets, unlike BOX, continue to permit their
market makers to add or remove liquidity from the order book.\24\ NYSE
Arca and MIAX Emerald will re-price quotes one MPV to avoid the quote
from trading as a liquidity taker against the resting order similar to
BX's proposal. Also, the Exchange's proposal permits a BX Market Maker
a choice as to whether to cancel or re-price its quote when using the
Post-Only Quote Configuration.
---------------------------------------------------------------------------
\21\ BOX Rules provide, ``Notwithstanding Rule 100(a)(56), all
quotes and quote updates on BOX after the opening are liquidity
adding only. Specifically, after the Opening Match pursuant to Rule
7070, a Market Maker's quote will not execute against a resting
order or quote on the BOX Book. If an incoming quote is marketable
against the BOX Book and will execute against a resting order or
quote, it will be rejected.'' See BOX IM-8050-3. See also Securities
Exchange Act Release No. 79311 (November 15, 2016), 81 FR 83322
(November 21, 2016) (SR-BOX-2016-45) (Order Approving a Proposed
Rule Change To Amend the Treatment of Quotes To Provide That All
Quotes on BOX Are Liquidity Adding Only).
\22\ NYSE Arca permits a market maker to optionally designate a
quote as ``Add Liquidity Only.'' See NYSE Arca Rule 6.37A-
O(a)(3)(B).
\23\ See MIAX Emerald Rule 517(a)(1)(i).
\24\ Miami International Securities Exchange LLC (``MIAX'')
permits its market makers to add and remove liquidity from the order
book. See MIAX's Fee Schedule which delineates Maker and Taker
pricing. Nasdaq ISE, LLC (``ISE'') also permits market makers to add
and remove liquidity from the order book. See ISE's Pricing Schedule
at Options 7.
---------------------------------------------------------------------------
Finally, the Nasdaq Options Market LLC (``NOM'') recently codified
\25\ a similar risk protection, however, unlike BX, NOM reprices $.01
below the current low offer (for bids) or above the current best bid
(for offers) and displays the quote at one MPV below the current low
offer (for bids) or above the current best bid (for offers). The
Exchange notes that, unlike BX, NOM does not offer auction
functionality. Because an auction mechanism may interact adversely with
Add Liquidity Only Orders or quotes with a Post-Only Quote
Configuration that are re-priced in $0.01 increments and displayed at
MPV increments, the Exchange proposes to re-price at one MPV.\26\ BX
has the PRISM auction.\27\ The Exchange believes that it is consistent
with the protection of investors and the general public to utilize one
MPV to re-price an Add Liquidity Only Order or quote with a Post-Only
Quote Configuration to avoid a PRISM auction rejecting against a non-
displayed Add Liquidity Only Order or quote with a Post-Only Quote
Configuration. The Exchange notes that a similar result could not be
obtained on NOM as there are no auctions. The Add Liquidity Order on
ISE, GEMX and MRX \28\ also re-prices in one MPV as those markets have
a price improvement auction.\29\
---------------------------------------------------------------------------
\25\ See Securities and Exchange Release No. 93662 (November 23,
2021), 86 FR 68009 (November 30, 2021) (SR-NASDAQ-2021-094) (Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt a Post-Only Quote Configuration Risk Protection).
\26\ For example, the inbound auction would reject against the
non-displayed Add Liquidity Only Order or quote with a Post-Only
Quote Configuration with an auction mechanism.
\27\ See Options 3, Section 13.
\28\ See Options 3, Section 7(n).
\29\ Id.
---------------------------------------------------------------------------
Further, with the adoption of Add Liquidity Orders as proposed
herein within Options 3, Section 7, all BX Participants may utilize the
Add Liquidity Order. The Post-Only Quote Configuration is available to
Market Makers only as a risk protection.
Below are some examples of the Post-Only Quote Configuration
functionality.
Post-Only Quote Configuration Reprice Example
<bullet> Penny Interval Program MPV in open trading state
<bullet> Market Makers A and C do not have Post-Only Quote
Configuration risk protection configured
<bullet> Market Maker B is configured for Post-Only Quote Configuration
re-price
<bullet> Market Maker A quote $0.98 (10) x $1.00 (10)
<bullet> ABBO $0.96 x $1.03
<bullet> Market Maker B quote $1.00 (10) x $1.01 (10) arrives
[cir] Bid side of quote re-prices onto order book @ 0.99 and updates
displayed NBBO to 20 quantity
[cir] Offer side rests at 1.01 without issue
<bullet> Market Maker C quote $0.97 (20) x 0.98 (20) arrives
Trades 10 with Market Maker A and 10 with Market Maker B
Market Maker B avoids taking liquidity while Market Maker C, who
chose not to be configured for such, removes liquidity by interacting
with re-priced interest on BX's order book.
Re-Priced Post-Only Quote Configuration--Penny Interval Program Display
and Execution Example--Non-Penny Interval Program (Options 3, Section
7(a)(9))
<bullet> Non-Penny Interval Program MPV in open trading state
<bullet> Market Maker A quote $0.95 (10) x $1.00 (10)
<bullet> ABBO $0.85 x $1.05
<bullet> Market Maker B (configured at the badge level for Post-Only
Quote Configuration and selection of re-price upon quote) quote arrives
1.00 (5) x $1.05 (5)
[cir] Bid side quote re-prices on order book to $0.95
[cir] Displays on order book @ $0.95 (bid), which now shows (15
quantity)
[cir] Offer side quote books and displays at $1.05
<bullet> Order to sell 10 contracts arrives @ $0.95
[cir] 5 contracts execute with Market Maker B @ $0.95
[cir] 5 contracts execute with Market A @ $0.95
[[Page 1235]]
In this example, the Market Maker avoided taking liquidity by deploying
the Post-Only Quote Configuration with re-price.
Implementation
The Exchange will issue an Options Trader Alert to Participants
with the date of implementation for the Add Liquidity Order and the
Post-Only Quote Configuration functionality.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\30\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\31\ 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.
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78f(b).
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Options 3, Section 1
The Exchange's proposal to amend Options 3, Section 1 concerning
the Days and Hours of Business is consistent with the Act. The proposal
to amend the title from ``Days and Hours of Business'' to ``Hours of
Business'' will bring greater clarity to the rule. BX recently filed to
establish General 3, Section 1030, which governs the days the Exchange
will be open for business.\32\ Amending Options 3, Section 1(c) to
reference General 3, Section 1030 will provide Participants with a
guidepost as to where to locate the rule that applies to the days the
Exchange is open for business. The proposed updated citations to the
Options 4 rules will provide correct references for Participants and
thereby bring greater clarity to the rules.
---------------------------------------------------------------------------
\32\ See note 3 above.
---------------------------------------------------------------------------
Options 3, Section 7
The Exchange's proposal to amend Options 3, Section 7 to add a new
order type entitled ``Add Liquidity Order'' within Options 3, Section
7(a)(12) is consistent with the Act. Today, ISE, GEMX and MRX have a
similar order type within Options 3, Section 7(n). The Add Liquidity
Order will provide an additional order type that will give market
participants greater control over the circumstances in which their
orders are executed. For investors and market participants that elect
only to provide liquidity in certain circumstances, such as to receive
a maker fee (rebate) upon execution of an order, the proposed order
type will accommodate this strategy. Add Liquidity Orders will only be
executed as a ``maker'' if elected.
Participants may choose to cancel or re-price Add Liquidity Orders
if, at the time of entry, the order is executable on BX or the order is
not executable on BX but would lock or cross the national best bid or
offer. Allowing Add Liquidity Order to re-price ensures that Add
Liquidity Orders are only executed when providing liquidity and avoid
executing against a non-displayed order or quote resting on BX's order
book, which would be in direct contravention with the purpose of the
order type--to provide liquidity, not take liquidity. The Add Liquidity
Order type is one of the order types that Participants may elect to
utilize on BX to accomplish their trading strategies. The Exchange
believes that adoption of the Add Liquidity Order will protect
investors and the general public by making clear the manner in which
the order would re-price on BX's order book if re-price is elected,
that is to the MPV above the best non-displayed bid price (for sell
orders) or below the best non-displayed offer price (for buy orders).
As is the case today, if an order would not lock or cross an order or
quote on the System but would lock or cross the NBBO, the order will be
handled pursuant to Options 3, Section 5(d).
Add Liquidity Orders may only be submitted when an options series
is open for trading.\33\ Therefore, an Add Liquidity Order would not be
accepted during the Opening Process as the order book is not available.
The Exchange believes that similar to ISE, GEMX and MRX, the adoption
of an Add Liquidity Order will give market participants greater control
over the circumstances in which their orders are executed in addition
to the order types which are currently offered today on BX.
---------------------------------------------------------------------------
\33\ ISE, GEMX and MRX will propose a change to Options 3,
Section 7(n) to add similar rule text.
---------------------------------------------------------------------------
The Exchange's proposal to amend Options 3, Section 7(a)(11) to
remove the title ``Block Order'' at the beginning of the sentence will
conform the style of the description to the remaining order types
within Options 3, Section 7.
Options 3, Section 13
With respect to amendments to Options 3, Section 13, first, the
proposed rule change deletes a PRISM auction eligibility requirement
that restricts PRISM orders from being submitted during the final two
seconds of the trading day. As discussed above, this system restriction
is legacy functionality that was removed as part of the Exchange's
technology migration in 2020. The Exchange is therefore proposing to
remove the corresponding rule text in Options 3, Section 13(i)(F) as
obsolete. The Exchange believes that the proposed changes will align
the PRISM rule with the current operation of the Exchange's system and
will reduce potential confusion about when PRISM orders may be
submitted. As noted above, the Exchange's affiliated options markets,
Nasdaq ISE, GEMX, and MRX, do not have similar system restrictions for
their respective price improvement mechanisms.\34\ Furthermore, the
Exchange believes that removing this system restriction may encourage
greater participation in PRISM as Participants are no longer restricted
from submitting PRISM orders during the last two seconds of the trading
day, thereby increasing the opportunity for options orders to receive
executions and price improvement on the Exchange.
---------------------------------------------------------------------------
\34\ See note 15 above.
---------------------------------------------------------------------------
Second, the proposed rule change amends Options 3, Section
13(a)(ii)(D) which describes the manner in which a PRISM auction may be
conducted. As noted herein, the term ``marketable limit order'' is too
narrow a term as both orders and quotes on the opposite side of the
market from the PRISM Order received during the PRISM auction would not
cause the PRISM auction to end early and execute against interest
outside of the PRISM auction. Amending Options 3, Section 13(a)(ii)(D)
to replace the term ``marketable limit order'' with the broader term
``marketable interest'' will more accurately describe the way a PRISM
auction would interact with interest in the order book on the opposite
side of the market from the PRISM Order. The Exchange believes that
this amendment is consistent with the Act as it will bring greater
clarity to the PRISM rule.
Options 3, Section 15
The Exchange's proposal to amend Options 3, Section 15, Risk
Protections, to codify new paragraph (c)(3) to permit BX Market Makers
to prevent their quotes from removing liquidity from the Exchange's
order book promotes equitable principles of trade and protects
investors and the public interest by enhancing the risk protections
available to BX Market Makers. The proposal also promotes the policy
goals of the Commission which has encouraged execution venues,
exchanges, and non-exchanges alike, to enhance risk protection tools
and other mechanisms to decrease risk and increase stability.
[[Page 1236]]
While BX Market Makers may manage their risk by utilizing the Post-
Only Quote Configuration to avoid removing liquidity from the
Exchange's order book if their quote would otherwise lock or cross any
resting order or quote on the BX order book upon entry, there are also
downstream benefits to market participants. Re-priced interest on the
order book provides price improvement for market participants that
interact with that non-displayed interest that is priced better than
the NBBO. For example, the proposed Add Liquidity Order may re-price to
the MPV above the national best bid price (for sell orders) or below
the national best offer price (for buy orders) resulting in better-
priced non-displayed interest that is available on the order book.
Market participants are entitled to the better-priced interest when
they interact with the re-priced Add Liquidity Order on the order book.
Additionally, the benefits of enhanced risk protections flow downstream
to counterparties both within and away from the Exchange, thereby
increasing systemic protections as well.
The proposed risk protection allows BX Market Makers the ability to
avoid removing liquidity from the Exchange's order book if their quote
would otherwise lock or cross any resting order or quote on BX's order
book upon entry, thereby protecting investors and the general public as
BX Market Makers transact a large number of orders on the Exchange and
bring liquidity to the marketplace. BX Market Makers would utilize the
proposed risk protection to avoid unexpectedly taking liquidity with
non-displayed, non-transparent interest \35\ on the order book. As a
result of taking liquidity, BX Market Makers would incur a taker fee
that may impact the BX Market Maker's ability to provide liquidity and
meet quoting obligations. BX Market Makers are required to add
liquidity on NOM and, in turn, are rewarded with lower pricing \36\ and
enhanced allocations.\37\ Specifically, the risk protection would
permit BX Market Makers to add liquidity only and avoid removing non-
displayed interest on the order book thereby maximizing the benefit of
their quoting to bring liquidity to BX by allowing BX Market Makers to
provide as much liquidity as possible, thereby removing impediments to
and perfecting the mechanism of a free and open market and a national
market system and protecting investors and the public interest. There
is no impact to other market participants by introducing this Post-Only
Quote Configuration as other non-Market Makers may utilize the proposed
Add Liquidity Only order type that will continue to benefit downstream
counterparties, both within and away from the Exchange, who may
interact with non-displayed interest on BX's order book and thereby
interact with order flow that is priced better than the NBBO. Also,
other market participants may interact with the liquidity provided by
BX Market Makers.
---------------------------------------------------------------------------
\35\ See note 18 above.
\36\ See Options 7, Section 2.
\37\ See Options 3, Section 10.
---------------------------------------------------------------------------
This optional risk protection enables BX Market Makers to better
manage their risk when quoting on BX. Today, BOX,\38\ NYSE Arca,\39\
MIAX Emerald \40\ and NOM \41\ have similar functionality. BOX does not
permit Market Maker's quotes to take liquidity and will reject the
quote. Other options markets, unlike BOX, continue to permit their
market makers to add or remove liquidity from the order book.\42\ NYSE
Arca and MIAX Emerald will re-price quotes one MPV to avoid the quote
from trading as a liquidity taker against the resting order similar to
BX's proposal. Also, the Exchange's proposal permits a BX Market Maker
a choice as to whether to cancel or re-price its quote when using the
Post-Only Quote Configuration.
---------------------------------------------------------------------------
\38\ BOX Rules provide, ``Notwithstanding Rule 100(a)(56), all
quotes and quote updates on BOX after the opening are liquidity
adding only. Specifically, after the Opening Match pursuant to Rule
7070, a Market Maker's quote will not execute against a resting
order or quote on the BOX Book. If an incoming quote is marketable
against the BOX Book and will execute against a resting order or
quote, it will be rejected.'' See BOX IM-8050-3. See also Securities
Exchange Act Release No. 79311 (November 15, 2016), 81 FR 83322
(November 21, 2016) (SR-BOX-2016-45) (Order Approving a Proposed
Rule Change To Amend the Treatment of Quotes To Provide That All
Quotes on BOX Are Liquidity Adding Only).
\39\ NYSE Arca permits a market maker to optionally designate a
quote as ``Add Liquidity Only.'' See NYSE Arca Rule 6.37A-
O(a)(3)(B).
\40\ See MIAX Emerald Rule 517(a)(1)(i).
\41\ See Securities and Exchange Release No. 93662 (November 23,
2021), 86 FR 68009 (November 30, 2021) (SR-NASDAQ-2021-094) (Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt a Post-Only Quote Configuration Risk Protection).
\42\ Miami International Securities Exchange LLC (``MIAX'')
permits its market makers to add and remove liquidity from the order
book. See MIAX's Fee Schedule which delineates Maker and Taker
pricing. Nasdaq ISE, LLC (``ISE'') also permits market makers to add
and remove liquidity from the order book. See ISE's Pricing Schedule
at Options 7.
---------------------------------------------------------------------------
Finally, NOM recently codified \43\ a similar risk protection,
however, unlike BX which re-prices in MPVs, NOM reprices $.01 below the
current low offer (for bids) or above the current best bid (for offers)
and displays the quote at one MPV below the current low offer (for
bids) or above the current best bid (for offers). The Exchange notes
that, unlike BX, NOM does not offer auction functionality. Because an
auction mechanism may interact adversely with Add Liquidity Only Orders
or quotes with a Post-Only Quote Configuration that are re-priced in
$0.01 increments and displayed at MPV increments, the Exchange proposes
to re-price at one MPV.\44\ BX has the PRISM auction.\45\ The Exchange
believes that it is consistent with the protection of investors and the
general public to utilize one MPV to re-price an Add Liquidity Only
Order or quote with a Post-Only Quote Configuration to avoid a PRISM
auction rejecting against a non-displayed Add Liquidity Only Order or
quote with a Post-Only Quote Configuration. The Exchange notes that a
similar result could not be obtained on NOM as it has no auctions. The
Add Liquidity Order on ISE, GEMX and MRX \46\ also re-prices in one MPV
as those markets have a price improvement auction.\47\
---------------------------------------------------------------------------
\43\ See Securities and Exchange Release No. 93662 (November 23,
2021), 86 FR 68009 (November 30, 2021) (SR-NASDAQ-2021-094) (Notice
of Filing and Immediate Effectiveness of Proposed Rule Change To
Adopt a Post-Only Quote Configuration Risk Protection).
\44\ For example, the inbound auction would reject against the
non-displayed Add Liquidity Only Order or quote with a Post-Only
Quote Configuration with an auction mechanism.
\45\ See Options 3, Section 13.
\46\ See Options 3, Section 7(n).
\47\ Id.
---------------------------------------------------------------------------
Further, with the adoption of Add Liquidity Orders as proposed
herein within Options 3, Section 7, all BX Participants may utilize the
Add Liquidity Order. The Post-Only Quote Configuration is available to
Market Makers only as a risk protection.
Unlike other market participants, BX Market Makers have certain
obligations on the market. BX Market Makers are required to provide
continuous two-sided quotes on a daily basis \48\ and are subject to
various obligations associated with providing liquidity on the
market.\49\ BX Market Makers are the sole liquidity providers on the
Exchange and, therefore, are offered certain quote risk protections
noted within Options 3, Section 15 to allow them to manage their risk
more effectively.\50\ The proposed Post-Only Quote Configuration is
another risk protection afforded to BX Market Makers to assist them in
managing their risk while continuing to comply with their obligations.
The Exchange notes that
[[Page 1237]]
enhancing the ability of BX Market Makers to add liquidity and avoid
taking liquidity from the order book promotes just and equitable
principles of trade on BX and protects investors and the public
interest, thereby enhancing market structure by allowing BX Market
Makers to add liquidity only. Greater liquidity benefits all market
participants by providing more trading opportunities and attracting
greater participation by BX Market Makers. Also, an increase in the
activity of BX Market Makers in turn facilitates tighter spreads.
---------------------------------------------------------------------------
\48\ See BX Options 2, Section 4(j) and Section 5(d).
\49\ See BX Options 2, Section 4.
\50\ Options 3, Section 15(c) describes the Anti-Internalization
and Quotation Adjustments Protections that are available today to BX
Market Makers.
---------------------------------------------------------------------------
Finally, with the proposed addition of Add Liquidity Orders, all
Participants may utilize similar functionality for orders and quotes.
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.
Options 3, Section 1
The Exchange's proposal to amend Options 3, Section 1 concerning
the Days and Hours of Business does not impose an undue burden on
competition. The proposal to amend the title from ``Days and Hours of
Business'' to ``Hours of Business'' will bring greater clarity to the
rule. Amending Options 3, Section 1(c) to reference General 3, Section
1030 will provide Participants with a guidepost as to where to locate
the rule that applies to the days the Exchange is open for business.
The proposed updated citations to the Options 4 rules will provide
correct references for Participants and thereby bring greater clarity
to the rules.
Options 3, Section 7
The Exchange's proposal to amend Options 3, Section 7 to add a new
order type entitled ``Add Liquidity Order'' within Options 3, Section
7(a)(12) does not impose an undue burden on competition. Today, ISE,
GEMX and MRX have a similar order type within Options 3, Section 7(n).
The Add Liquidity Order will provide an additional order type that will
give market participants greater control over the circumstances in
which their orders are executed. All Participants may utilize the Add
Liquidity Order type.
The Exchange's proposal to amend Options 3, Section 7(a)(11) to
remove the title ``Block Order'' at the beginning of the sentence will
conform the style of the description to the remaining order types
within Options 3, Section 7.
Options 3, Section 13
Removing Options 3, Section 13(i)(F) does not impose an undue
burden on competition as the rule text is obsolete and the removal of
the rule text will bring greater transparency to and reducing potential
confusion about the Exchange's Rulebook.
Amending Options 3, Section 13(a)(ii)(D) to utilize the broader
term ``marketable interest'' does not impose an undue burden on
competition as it will more accurately describe the way a PRISM auction
would interact with interest in the order book on the opposite side of
the market from the PRISM Order.
Options 3, Section 15
Adopting a Post-Only Quote Configuration within Options 3, Section
15(c)(3) does not impose an undue burden on competition, rather the
proposal provides BX Market Makers with the opportunity to continue to
avail themselves of functionality that currently exists on BOX, NYSE
Arca, MIAX Emerald and NOM.\51\
---------------------------------------------------------------------------
\51\ See notes 21-25 above.
---------------------------------------------------------------------------
The proposal does not impose a burden on inter-market competition,
because Participants may choose to become market makers on a number of
other options exchanges, which may have similar but not identical
features. The Post-Only Quote Configuration functionality will continue
to benefit downstream counterparties, both within and away from the
Exchange, who may interact with non-displayed interest on BX's order
book and thereby interact with order flow that is priced better than
the NBBO.
The proposal does not impose a burden on intra-market competition.
BX proposes to adopt an Add Liquidity Order herein which will permit
all Participants to receive similar treatment for their orders.
Offering BX Market Makers the ability to configure their quotes as
Post-Only will allow all market participants on BX to add liquidity
only if desired.
The proposed risk protection allows BX Market Makers the ability to
avoid removing liquidity from the Exchange's order book if their quote
would otherwise lock or cross any resting order or quote on BX's order
book upon entry, thereby protecting investors and the general public as
BX Market Makers transact a large number of orders on the Exchange and
bring liquidity to the marketplace. BX Market Makers are required to
add liquidity on BX and, in turn, are rewarded with lower pricing \52\
and enhanced allocations.\53\ Specifically, the risk protection would
permit BX Market Makers to add liquidity only and avoid removing non-
displayed interest on the order book thereby maximizing the benefit of
their quoting to bring liquidity to BX by allowing BX Market Makers to
provide as much liquidity as possible. Unlike other market
participants, BX Market Makers have certain obligations on the market.
BX Market Makers are required to provide continuous two-sided quotes on
a daily basis \54\ and are subject to various obligations associated
with providing liquidity on the market.\55\ BX Market Makers are the
sole liquidity providers on the Exchange and, therefore, are offered
certain quote risk protections noted within Options 3, Section 15 to
allow them to manage their risk more effectively.\56\ The proposed
Post-Only Quote Configuration is another risk protection afforded to BX
Market Makers to assist them in managing their risk while continuing to
comply with their obligations.
---------------------------------------------------------------------------
\52\ See Options 7, Section 2.
\53\ See Options 3, Section 10.
\54\ See BX Options 2, Section 4(j) and Section 5(d).
\55\ See BX Options 2, Section 4.
\56\ Options 3, Section 15(c) describes the Anti-Internalization
and Quotation Adjustments Protections that are available today to BX
Market Makers.
---------------------------------------------------------------------------
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)(iii) of the Act \57\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\58\
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78s(b)(3)(A)(iii).
\58\ 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.
---------------------------------------------------------------------------
At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may
[[Page 1238]]
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 should be approved or 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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e694938a83cb85898b8b83889295a6958385c8818990"><span class="__cf_email__" data-cfemail="c7b5b2aba2eaa4a8aaaaa2a9b3b487b4a2a4e9a0a8b1">[email protected]</span></a>. Please include
File Number SR-BX-2021-054 on the subject line.
Paper Comments
<bullet> 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-2021-054. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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-2021-054 and
should be submitted on or before January 31, 2022.
---------------------------------------------------------------------------
\59\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00154 Filed 1-7-22; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on January 10, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.