81 FR 46135 - Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Automated Removal of Quotes
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 136 (July 15, 2016)
Federal Register Volume 81, Issue 136 (July 15, 2016)
| Page Range | 46135-46139 | |
| FR Document | 2016-16725 |
[Federal Register Volume 81, Number 136 (Friday, July 15, 2016)] [Notices] [Pages 46135-46139] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-16725] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78286; File No. SR-BX-2016-032] Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Automated Removal of Quotes July 11, 2016. 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 July 1, 2016, 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 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. --------------------------------------------------------------------------- \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 Chapter VII, Section 6(f), entitled ``Automated Removal of Quotes.'' The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqomxbx.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 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 BX Rules at Chapter VII, Section 6(f), entitled ``Automated Removal of Quotes'' to modify the minimum Specified Percentage (as described below). A BX Options Market Maker \3\ sets the Specified Percentage to enhance its risk management for an underlying security as market conditions warrant, based on its own risk tolerance level and quoting behavior. The Exchange proposes to permit the BX Options Market Maker to set the Specified Percentage more broadly, no less than 1%, with this rule change. The Exchange also proposes to replace the definition of ``disseminated size'' \4\ with a quantitative description to add transparency with respect to the calculation of Series Percentage. --------------------------------------------------------------------------- \3\ The term ``BX Options Market Maker'' or ``Options Market Maker'' (herein ``BX Options Market Maker'') means an Options Participant registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter VII of these Rules.'' [sic] See BX Rules at Chapter I, Section 1(a)(9). \4\ See Securities Exchange Act Release No. 76317 (October 30, 2015), 80 FR 68586 at 68587 (November 5, 2015) (SR-BX-2015-060). The Exchange defined disseminated size in this rule change in footnote 12, as the original size quoted by the Participant. --------------------------------------------------------------------------- Background Today, Chapter VII, Section 6(f) permits BX Options Market Makers to monitor risk arising from multiple executions across multiple options series of a single underlying security. A BX Options Market Maker may provide a specified time period and a specified percentage by which the Exchange's System will automatically remove a BX Options Market Maker's quotes in all series of an underlying security submitted through designated BX protocols, as specified by the Exchange, during a specified time period not to exceed 15 seconds (``Percentage-Based Specified Time Period'').\5\ --------------------------------------------------------------------------- \5\ A specified time period commences for an option when a transaction occurs in any series in such option. --------------------------------------------------------------------------- For each series in an option, the System determines: (i) The percentage that the number of contracts executed in that series represents relative to the BX Options Market Maker's disseminated size of each side in that series (``Series Percentage''); and (ii) the sum of the Series Percentage in the option issue (``Issue Percentage''). The Exchange proposes herein to replace the term ``disseminated size'' with the more precise phrase ``number of contracts available at the time of execution plus the number of contracts executed in unexpired prior executions.'' The System tracks and calculates the net impact of positions in the same option issue during the Percentage-Based Specified Time Period. Specifically, the System tracks transactions, i.e., the sum of buy-side put percentages, the sum of sell-side put percentages, the sum of buy- side call percentages, and the sum of sell-side call percentages. The System then calculates the absolute value of the difference between the buy-side puts and the sell-side puts plus the absolute value of the difference between the buy-side calls and the sell-side calls. If the Issue Percentage, rounded to the nearest integer, equals or exceeds a percentage established by the BX Options Market Maker, not less than 100% (``Specified Percentage''), the System automatically removes a BX Options Market Maker's quotes in all series of an underlying security submitted through designated BX protocols, as specified by the Exchange, during the Percentage-Based Specified Time. The Percentage-Based Specified Time Period commences for an option every time an execution occurs in any series in such option and continues until the System removes quotes as described in Chapter VII, Section 6(f)(iv) or (v) or the Percentage-Based Specified Time Period expires. The Percentage-Based Specified Time Period operates on a rolling basis among all series in an option in that there may be multiple Percentage-Based Specified Time Periods occurring simultaneously and such Percentage-Based Specified Time periods may overlap. Proposal The Exchange proposes to lower the minimum Specified Percentage, which [[Page 46136]] is set by the BX Options Market Maker, from 100% to 1%. The proposal would amend the rule text to state, if the Issue Percentage, rounded to the nearest integer, equals or exceeds a percentage established by the BX Options Market Maker, not less than 1% (``Specified Percentage''), the System automatically removes a BX Options Market Maker's quotes in all series of an underlying security submitted through designated BX protocols, as specified by the Exchange, during the Percentage-Based Specified Time. This proposal would allow a BX Options Market Maker to establish a Specified Percentage at any percentage level greater than or equal to 1% for an option in which the BX Options Market Maker is appointed. Today, the Specified Percentage would be set by the BX Options Market Maker at greater than or equal to 100%. This amendment will allow BX Options Market Makers to better manage their risk and assist them to avoid trading a number of contracts that exceeds the BX Options Marker Maker's risk tolerance level across multiple series of a single underlying when such series are executed in rapid succession. BX Options Market Makers will be able to more precisely customize their risk settings within the System. BX Options Market Makers will be able to consider factors such as present and anticipated market conditions, news in an option, and a sudden change in volatility of an option. BX Options Market Makers are required to utilize either the Percentage Based Threshold or the Volume Based Threshold. BX Options Market Makers that select to utilize the Percentage-Based Threshold will be able to adopt more precise controls with this proposal based on the BX Options Market Maker's risk tolerance level. BX Options Market Makers must utilize either the Percentage-Based \6\ or Volume-Based risk controls. BX Options Market Makers may contact Market Operations to set their percentage, which is 1% or greater with this proposal, and specified time period. --------------------------------------------------------------------------- \6\ BX Options Market Makers selecting the Percentage-Based risk control in Rule 1095(i) [sic] are required to provide a specified time period, up to 15 seconds, and a specified percentage with a number of 1% or greater, as proposed herein, to the BX Market Operations staff to select this risk control. If a BX Options Market Maker does not desire to utilize the Percentage-Based risk control the BX Options Market Maker must utilize the Volume-Based risk control which is similarly set-up by contacting Market Operations and providing certain settings. --------------------------------------------------------------------------- By way of example, if a BX Options Market Maker has set the percentage setting to 50% and a Specified Time Period of 15 seconds and the Order Book reflects: MM1 has a displayed quote of 1.10 (100) x 1.20 (100) for IBM May 20, 2016 70 puts and MM1 is the only displayed size on BX and an order is submitted to buy 75 IBM May 20, 2016 70 Puts for 1.20. Chapter VII, Section 6(f) would cause the following: (1) Provide MM1 with an execution --Sld [sic] 75 @ 1.20; and (2) Trigger the Percentage-Based Threshold and remove MM1's quotes in IBM. Another example is with multiple executions. Presume the following: MM1 has set the percentage setting to 80% by 5 seconds and MM1 has a displayed quote of 2.00 (100) x 2.25 (100) for IBM May 20, 2016 70 puts and he is the only displayed size on the BX. Also, presume an order comes in to buy 50 IBM May 20, 2016 70 puts for 2.25. Chapter VII, Section 6(f) would cause the following: (1) Provide MM1 with an execution--Sold 50 @ 2.25; (2) Update MMI [sic] quote to 2.00 (100) x 2.25 (50); (3) Within 1 second an order comes in to buy 45 IBM May 20, 2016 70 puts for 2.25; (4) Provide MM1 with an execution--Sold 45 @ 2.25; and (5) Trigger the Percentage-Based Threshold and remove MM1's quotes in IBM. The Exchange also proposes to replace the term ``disseminated size'' with a quantitative description to add transparency with respect to the calculation of Series Percentage. The language proposed amends the original definition of disseminated size. With respect to the disseminated size, the Exchange previously defined disseminated size as ``. . . the original size quoted by the Participant.'' \7\ --------------------------------------------------------------------------- \7\ See note 4 above. --------------------------------------------------------------------------- The Exchange proposes to amend the definition as follows: ``For each series in an option, the System will determine: (i) The percentage that the number of contracts executed in that series represents relative to the number of contracts available at the time of execution plus the number of contracts executed in unexpired prior executions of each side in that series (``Series Percentage''); and (ii) the sum of the Series Percentage in the option issue (``Issue Percentage'').'' The Exchange counts Specialized Quote Feed (``SQF'') \8\ quotes in determining the number of contracts traded and removed by the System. SQF permits a two-sided quote for each BX Options Market Maker. --------------------------------------------------------------------------- \8\ SQF permits the receipt of quotes. SQF Auction Responses and market sweeps are also not included. --------------------------------------------------------------------------- By way of example, with the proposed definition, if a BX Options Market Maker with a Percentage-Based Specified Time Period of 10 seconds and a Specified Percentage of 100% submits a quote over SQF of 1.00 (100) x 1.10 (100) and a buy order executes 75, the remaining size would be 1.00 (100) x 1.10 (25). Thereafter a new Percentage-Based Specified Time Period begins and current Series Percentage executed is 75 and three seconds pass and the BX Options Market Maker re-quotes 1.00 (100) x 1.10 (100), an incoming buy order of 43 would cause the Issue Percentage to meet the Percentage-Based Threshold. This is due to a counted size of 175 (the executed 75 plus the newly quoted 100) and rounding (0.75 + 43/175 = 0.9957 rounds up to 100%). If the former definition applied, the size would have been 100 and an execution of only 25 contracts on the same side would have caused the Issue Percentage to meet the Percentage-Based Threshold, which is not the case. In other words, the current SQF quote on that side for that series (for that BX Options Market Maker) in addition to all the executions that have occurred on that side for that series (for that BX Options Market Maker) within the Percentage-Based Specified Time Period would comprise the size. This new definition accurately represents the manner in which the Issue Percentage is calculated. Also, the more precise language within the rule text will provide BX Options Market Makers with a more accurate description of the operation of this risk mechanism. The Exchange has always calculated the BX Options Market Maker's size in this fashion. The definition, as described in the prior rule change, was not accurate and the Exchange seeks to amend the definition with this proposal and memorialize the definition within the rule. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \9\ in general, and furthers the objectives of Section 6(b)(5) of the Act \10\ 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, by [[Page 46137]] offering BX Options Market Makers the ability to better manage their own risk with this risk feature. --------------------------------------------------------------------------- \9\ 15 U.S.C. 78f(b). \10\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- BX Options Market Makers are obligated to submit continuous two- sided quotations in a certain number of series in their appointed option classes for a certain percentage of each trading session.\11\ This obligation renders them vulnerable to risk from unusual market condition, volatility in specific options, and other market events that may cause them to receive multiple, extremely rapid automatic executions before they can adjust their quotations and overall risk exposure in the market. Without adequate risk management tools in place on the Exchange, the incentive for BX Options Market Makers to quote aggressively, respecting both price and size could be diminished. Such a result may undermine the quality of the markets, which are enhanced by the depth and liquidity such Market Makers provide in the marketplace. --------------------------------------------------------------------------- \11\ Pursuant to BX Rules at Chapter VII, Section 5, entitled ``Obligations of Market Makers'', in registering as a market maker, an Options Participant commits himself to various obligations. Transactions of a BX Options Market Maker must constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market, and Market Makers should not make bids or offers or enter into transactions that are inconsistent with such course of dealings. Further, all Market Makers are designated as specialists on BX for all purposes under the Act or rules thereunder. See Chapter VII, Section 5. --------------------------------------------------------------------------- By allowing the Specified Percentage provided by the BX Options Market Maker to be reduced from 100% to 1%, the Exchange provides its BX Options Market Makers the desired flexibility to take into account such factors as present and anticipated market conditions, news in an option or sudden change in volatility of an option without any limitation regarding the Specified Percentage. This should encourage BX Options Market Makers to provide additional depth and liquidity to the Exchange's markets, thereby removing impediments to and perfecting the mechanisms of a free and open market and a national market system and, in general, protecting investors and the public interest. The proposal is consistent with the Act because the reduction of the Specified Percentage to not less than 1% provides more alternatives to BX Options Market Makers in setting their percentage without impacting their firm quote obligations. The System operates consistently with the firm quote obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically, with respect to BX Options Market Makers, their obligation to provide continuous two- sided quotes on a daily basis is not diminished by the removal of such quotes by the Percentage-Based Threshold. BX Options Market Makers are required to provide continuous two-sided quotes on a daily basis.\12\ BX Options Market Makers that utilize the Percentage-Based Threshold will not be relieved of the obligation to provide continuous two-sided quotes on a daily basis, nor will the change prohibit the Exchange from taking disciplinary action against a BX Options Market Maker for failing to meet the continuous quoting obligation each trading day. All quotes entered into the System are considered firm. Quotes will only be removed from the System once the Percentage-Based Threshold has been met if the quote was not otherwise executed by an incoming order. --------------------------------------------------------------------------- \12\ Id. --------------------------------------------------------------------------- This risk feature will continue to remove impediments to and perfect the mechanism of a free and open market and a national market system and protect investors and the public interest by allowing BX Options Market Makers to remove their quotes in the event that market conditions warrant, based on their own risk tolerance level. BX Options Market Makers provide liquidity to the market place and have obligations unlike other market participants.\13\ This risk feature is important because it will enable BX Options Market Makers to manage their exposure at the Exchange. Further, permitting BX Options Market Makers to enter a broader setting would continue to allow BX Options Market Makers to have flexibility in setting their risk exposure to prevent unintended triggers of the Percentage-Based Threshold. This proposal continues to allow BX Options Market Makers to also select a Percentage-Based Specified Time Period. Each BX Options Market Maker has different levels of sensitivity and its own system safeguards as well. The proposed setting would permit each BX Options Market Maker to select a setting that is appropriate to capture the needs of that BX Options Market Maker. --------------------------------------------------------------------------- \13\ Id. --------------------------------------------------------------------------- Further, it is important to note that any interest that is executable against a BX Options Market Maker's quotes and orders that are received \14\ by the Exchange prior to the trigger of the Percentage-Based Threshold, which is processed by the System, automatically executes at a price up to the BX Options Market Maker's size. The system-generated Purge Notification Message is accepted by the System in the order of receipt in the queue and is processed in that order so that interest that is already accepted into the System is processed prior to the message. Incoming orders received prior to the Purge Notification Message would not be cancelled, rather they be [sic] executed at a price up to the BX Options Market Maker's size. --------------------------------------------------------------------------- \14\ The time of receipt for an order or quote is the time such message is processed by the Exchange book. --------------------------------------------------------------------------- The Exchange notes that Miami International Securities Exchange, LLC (``MIAX'') implemented a rule that changed its Allowable Engagement Percentage from a minimum of 100% to any percentage established by the Market Maker.\15\ The BX rule is similar to MIAX's in that a member is required to have a setting, although MIAX has a default setting in place in the instance that no percentage is provided. BX Options Market Makers that select the Percentage-Based risk tool must provide the Exchange with a Percentage-Based Specified Time Period and a Specified Percentage greater than or equal to 1%. --------------------------------------------------------------------------- \15\ See Securities Exchange Act Release No. 77817 (May 12, 2016), 81 FR 31286 (May 18, 2016) (SR-MIAX-2016-10). --------------------------------------------------------------------------- Amending the definition of disseminated size will provide market participants with greater information on the manner in which the Exchange computes the Issue Percentage. The Exchange believes that the manner in which the Exchange calculates the number of contracts, which are counted for the Issue Percentage, is consistent with the Act. The counting method permits the Exchange to update the reference number to include the executed contracts. While this method differs from the method previously described, the Exchange believes that there is no industry standard for counting and its method permits market participants to achieve the desired risk protection. With the proposed definition, each execution uses the Percentage-Based Specified Time Period that existed at the time of the execution. BX Options Market Makers can change the Percentage-Based Specified Time Period at any time. If a BX Options Market Maker is using a Percentage-Based Specified Time Period of 15 seconds when an execution happens, then changes the Percentage-Based Specified Time Period to half a second, that first execution will not expire until 15 seconds have passed. The selected Percentage-Based Specified Time Period will persist for 15 seconds and the number of executed contracts will be included in the denominator of subsequent executions for a full 15 seconds. [[Page 46138]] 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 Percentage-Based Threshold is intended to protect BX Options Market Makers from exposure to excessive risk. The Exchange believes this proposal will foster competition by providing BX Options Market Makers with the ability to enhance and customize their percentage in order to compete for executions and order flow. Specifically, the proposal does not impose a burden on intra-market or inter-market competition; rather, it provides BX Options Market Makers with the opportunity to avail themselves of similar risk tools, which are currently available on other exchanges.\16\ BX Options Market Makers quote across many series in an option creating the possibility of ``rapid fire'' executions that can create large, unintended principal positions that expose BX Options Market Makers. The Percentage-Based Threshold permits BX Options Market Makers to monitor risk arising from multiple executions across multiple options series of a single underlying security. --------------------------------------------------------------------------- \16\ See Section 8 of the 19b4. --------------------------------------------------------------------------- The Exchange is proposing this rule change to continue to permit BX Options Market Makers to reduce their risk in the event the BX Options Market Maker is suffering from a system issue or due to the occurrence of unusual or unexpected market activity. Reducing such risk will enable BX Options Market Makers to enter quotations without any fear of inadvertent exposure to excessive risk, which in turn will benefit investors through increased liquidity for the execution of their orders. Reducing risk by utilizing the proposed risk protections enables BX Options Market Makers, specifically, to enter quotations with larger size, which in turn will benefit investors through increased liquidity for the execution of their orders. Such increased liquidity benefits investors because they receive better prices and because it lowers volatility in the options market. The Exchange believes that amending the definition of disseminated size does not create an undue burden on competition because the Exchange will uniformly calculate the Percentage-Based Threshold in a uniform manner for all BX Options Market Makers. The Exchange is memorializing the definition within the Rule. 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 \17\ and Rule 19b- 4(f)(6) thereunder.\18\ The Exchange has requested that the Commission waive the thirty-day operative delay so that the proposal may become operative immediately. The Commission believes that waiving the thirty- day operative delay is consistent with the protection of investors and the public interest. The Exchange proposes to change a setting in an existing risk protection feature to enhance market makers' ability to protect against excessive risk arising from multiple executions across multiple options series of a single underlying security. The Commission notes that another options exchange currently has a similar setting for a like risk protection feature for market makers. Moreover, the Commission notes that the proposal to replace the term ``disseminated size'' with an accurate and more precise description would add transparency with respect to the operation of the risk protection feature. Therefore, the Commission hereby waives the thirty-day operative delay and designates the proposal operative upon filing.\19\ --------------------------------------------------------------------------- \17\ 15 U.S.C. 78s(b)(3)(A). \18\ 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, along with a brief description and the 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. \19\ For purposes 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). --------------------------------------------------------------------------- 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. 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-BX-2016-032 on the subject line. 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-2016-032. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site 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; 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-2016-032 and should be submitted on or before August 5, 2016. [[Page 46139]] For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\20\ --------------------------------------------------------------------------- \20\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Robert W. Errett, Deputy Secretary. [FR Doc. 2016-16725 Filed 7-14-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices 46135
Washington, DC 20549 on official II. Self-Regulatory Organization’s submitted through designated BX
business days between the hours of Statement of the Purpose of, and protocols, as specified by the Exchange,
10:00 a.m. and 3:00 p.m. Copies of such Statutory Basis for, the Proposed Rule during a specified time period not to
filing also will be available for Change exceed 15 seconds (‘‘Percentage-Based
inspection and copying at the principal In its filing with the Commission, the Specified Time Period’’).5
office of FINRA. All comments received Exchange included statements For each series in an option, the
will be posted without change; the concerning the purpose of and basis for System determines: (i) The percentage
Commission does not edit personal the proposed rule change and discussed that the number of contracts executed in
identifying information from any comments it received on the that series represents relative to the BX
submissions. You should submit only proposed rule change. The text of these Options Market Maker’s disseminated
information that you wish to make statements may be examined at the size of each side in that series (‘‘Series
available publicly. All submissions places specified in Item IV below. The Percentage’’); and (ii) the sum of the
should refer to File Number SR–FINRA– Exchange has prepared summaries, set Series Percentage in the option issue
2016–025, and should be submitted on forth in sections A, B, and C below, of (‘‘Issue Percentage’’). The Exchange
or before August 5, 2016. the most significant aspects of such proposes herein to replace the term
For the Commission, by the Division of statements. ‘‘disseminated size’’ with the more
Trading and Markets, pursuant to delegated precise phrase ‘‘number of contracts
authority.11
A. Self-Regulatory Organization’s available at the time of execution plus
Statement of the Purpose of, and the number of contracts executed in
Robert W. Errett,
Statutory Basis for, the Proposed Rule unexpired prior executions.’’
Deputy Secretary. Change The System tracks and calculates the
[FR Doc. 2016–16722 Filed 7–14–16; 8:45 am]
1. Purpose net impact of positions in the same
BILLING CODE 8011–01–P
option issue during the Percentage-
The Exchange proposes to amend BX Based Specified Time Period.
Rules at Chapter VII, Section 6(f), Specifically, the System tracks
SECURITIES AND EXCHANGE entitled ‘‘Automated Removal of
transactions, i.e., the sum of buy-side
COMMISSION Quotes’’ to modify the minimum
put percentages, the sum of sell-side put
Specified Percentage (as described
percentages, the sum of buy-side call
[Release No. 34–78286; File No. SR–BX– below). A BX Options Market Maker 3
percentages, and the sum of sell-side
2016–032] sets the Specified Percentage to enhance
call percentages. The System then
its risk management for an underlying
Self-Regulatory Organizations; calculates the absolute value of the
security as market conditions warrant,
NASDAQ BX, Inc.; Notice of Filing and difference between the buy-side puts
based on its own risk tolerance level
Immediate Effectiveness of Proposed and the sell-side puts plus the absolute
and quoting behavior. The Exchange
Rule Change Relating to the value of the difference between the buy-
proposes to permit the BX Options
Automated Removal of Quotes Market Maker to set the Specified side calls and the sell-side calls. If the
Percentage more broadly, no less than Issue Percentage, rounded to the nearest
July 11, 2016.
1%, with this rule change. The integer, equals or exceeds a percentage
Pursuant to Section 19(b)(1) of the Exchange also proposes to replace the established by the BX Options Market
Securities Exchange Act of 1934 definition of ‘‘disseminated size’’ 4 with Maker, not less than 100% (‘‘Specified
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 a quantitative description to add Percentage’’), the System automatically
notice is hereby given that on July 1, transparency with respect to the removes a BX Options Market Maker’s
2016, NASDAQ BX, Inc. (‘‘BX’’ or calculation of Series Percentage. quotes in all series of an underlying
‘‘Exchange’’) filed with the Securities security submitted through designated
and Exchange Commission (‘‘SEC’’ or Background BX protocols, as specified by the
‘‘Commission’’) the proposed rule Today, Chapter VII, Section 6(f) Exchange, during the Percentage-Based
change as described in Items I and II permits BX Options Market Makers to Specified Time.
below, which Items have been prepared monitor risk arising from multiple The Percentage-Based Specified Time
by the Exchange. The Commission is executions across multiple options Period commences for an option every
publishing this notice to solicit series of a single underlying security. A time an execution occurs in any series
comments on the proposed rule change BX Options Market Maker may provide in such option and continues until the
from interested persons. a specified time period and a specified System removes quotes as described in
percentage by which the Exchange’s Chapter VII, Section 6(f)(iv) or (v) or the
I. Self-Regulatory Organization’s System will automatically remove a BX Percentage-Based Specified Time Period
Statement of the Terms of Substance of Options Market Maker’s quotes in all expires. The Percentage-Based Specified
the Proposed Rule Change series of an underlying security Time Period operates on a rolling basis
The Exchange proposes to amend among all series in an option in that
Chapter VII, Section 6(f), entitled
3 The term ‘‘BX Options Market Maker’’ or there may be multiple Percentage-Based
‘‘Automated Removal of Quotes.’’
‘‘Options Market Maker’’ (herein ‘‘BX Options Specified Time Periods occurring
Market Maker’’) means an Options Participant simultaneously and such Percentage-
The text of the proposed rule change registered with the Exchange for the purpose of
making markets in options contracts traded on the Based Specified Time periods may
is available on the Exchange’s Web site
Exchange and that is vested with the rights and overlap.
sradovich on DSK3GMQ082PROD with NOTICES
at http://nasdaqomxbx.cchwall responsibilities specified in Chapter VII of these
street.com/, at the principal office of the Rules.’’ [sic] See BX Rules at Chapter I, Section Proposal
Exchange, and at the Commission’s 1(a)(9).
The Exchange proposes to lower the
Public Reference Room. 4 See Securities Exchange Act Release No. 76317
minimum Specified Percentage, which
(October 30, 2015), 80 FR 68586 at 68587
(November 5, 2015) (SR–BX–2015–060). The
11 17 CFR 200.30–3(a)(12). Exchange defined disseminated size in this rule 5 A specified time period commences for an
1 15 U.S.C. 78s(b)(1). change in footnote 12, as the original size quoted option when a transaction occurs in any series in
2 17 CFR 240.19b–4. by the Participant. such option.
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![46136 Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices
is set by the BX Options Market Maker, Period of 15 seconds and the Order number of contracts traded and removed
from 100% to 1%. The proposal would Book reflects: by the System. SQF permits a two-sided
amend the rule text to state, if the Issue MM1 has a displayed quote of 1.10 quote for each BX Options Market
Percentage, rounded to the nearest (100) × 1.20 (100) for IBM May 20, 2016 Maker.
integer, equals or exceeds a percentage 70 puts and MM1 is the only displayed By way of example, with the proposed
established by the BX Options Market size on BX and an order is submitted to definition, if a BX Options Market
Maker, not less than 1% (‘‘Specified buy 75 IBM May 20, 2016 70 Puts for Maker with a Percentage-Based
Percentage’’), the System automatically 1.20. Specified Time Period of 10 seconds
removes a BX Options Market Maker’s Chapter VII, Section 6(f) would cause and a Specified Percentage of 100%
quotes in all series of an underlying the following: submits a quote over SQF of 1.00 (100)
security submitted through designated (1) Provide MM1 with an execution × 1.10 (100) and a buy order executes
BX protocols, as specified by the —Sld [sic] 75 @ 1.20; and 75, the remaining size would be 1.00
Exchange, during the Percentage-Based (2) Trigger the Percentage-Based (100) × 1.10 (25). Thereafter a new
Specified Time. This proposal would Threshold and remove MM1’s quotes in Percentage-Based Specified Time Period
allow a BX Options Market Maker to IBM. begins and current Series Percentage
establish a Specified Percentage at any Another example is with multiple executed is 75 and three seconds pass
percentage level greater than or equal to executions. Presume the following: and the BX Options Market Maker re-
1% for an option in which the BX MM1 has set the percentage setting to quotes 1.00 (100) × 1.10 (100), an
Options Market Maker is appointed. 80% by 5 seconds and MM1 has a incoming buy order of 43 would cause
Today, the Specified Percentage would displayed quote of 2.00 (100) × 2.25 the Issue Percentage to meet the
be set by the BX Options Market Maker (100) for IBM May 20, 2016 70 puts and Percentage-Based Threshold. This is due
at greater than or equal to 100%. This he is the only displayed size on the BX. to a counted size of 175 (the executed
amendment will allow BX Options Also, presume an order comes in to buy 75 plus the newly quoted 100) and
Market Makers to better manage their 50 IBM May 20, 2016 70 puts for 2.25. rounding (0.75 + 43/175 = 0.9957
risk and assist them to avoid trading a Chapter VII, Section 6(f) would cause rounds up to 100%). If the former
number of contracts that exceeds the BX the following: definition applied, the size would have
Options Marker Maker’s risk tolerance (1) Provide MM1 with an execution— been 100 and an execution of only 25
level across multiple series of a single Sold 50 @ 2.25; contracts on the same side would have
underlying when such series are (2) Update MMI [sic] quote to 2.00 caused the Issue Percentage to meet the
executed in rapid succession. (100) × 2.25 (50); Percentage-Based Threshold, which is
(3) Within 1 second an order comes in not the case. In other words, the current
BX Options Market Makers will be
to buy 45 IBM May 20, 2016 70 puts for SQF quote on that side for that series
able to more precisely customize their
2.25; (for that BX Options Market Maker) in
risk settings within the System. BX
(4) Provide MM1 with an execution— addition to all the executions that have
Options Market Makers will be able to
Sold 45 @ 2.25; and occurred on that side for that series (for
consider factors such as present and
(5) Trigger the Percentage-Based that BX Options Market Maker) within
anticipated market conditions, news in
Threshold and remove MM1’s quotes in the Percentage-Based Specified Time
an option, and a sudden change in
IBM. Period would comprise the size.
volatility of an option. BX Options This new definition accurately
Market Makers are required to utilize The Exchange also proposes to
replace the term ‘‘disseminated size’’ represents the manner in which the
either the Percentage Based Threshold Issue Percentage is calculated. Also, the
or the Volume Based Threshold. BX with a quantitative description to add
transparency with respect to the more precise language within the rule
Options Market Makers that select to text will provide BX Options Market
utilize the Percentage-Based Threshold calculation of Series Percentage. The
language proposed amends the original Makers with a more accurate
will be able to adopt more precise description of the operation of this risk
controls with this proposal based on the definition of disseminated size. With
respect to the disseminated size, the mechanism. The Exchange has always
BX Options Market Maker’s risk calculated the BX Options Market
tolerance level. BX Options Market Exchange previously defined
disseminated size as ‘‘. . . the original Maker’s size in this fashion. The
Makers must utilize either the definition, as described in the prior rule
Percentage-Based 6 or Volume-Based size quoted by the Participant.’’ 7
The Exchange proposes to amend the change, was not accurate and the
risk controls. BX Options Market Exchange seeks to amend the definition
Makers may contact Market Operations definition as follows: ‘‘For each series in
an option, the System will determine: (i) with this proposal and memorialize the
to set their percentage, which is 1% or definition within the rule.
greater with this proposal, and specified The percentage that the number of
time period. contracts executed in that series 2. Statutory Basis
represents relative to the number of
By way of example, if a BX Options contracts available at the time of The Exchange believes that its
Market Maker has set the percentage execution plus the number of contracts proposal is consistent with Section 6(b)
setting to 50% and a Specified Time executed in unexpired prior executions of the Act 9 in general, and furthers the
of each side in that series (‘‘Series objectives of Section 6(b)(5) of the Act 10
6 BX Options Market Makers selecting the
Percentage’’); and (ii) the sum of the in particular, in that it is designed to
Percentage-Based risk control in Rule 1095(i) [sic] promote just and equitable principles of
are required to provide a specified time period, up Series Percentage in the option issue
sradovich on DSK3GMQ082PROD with NOTICES
to 15 seconds, and a specified percentage with a (‘‘Issue Percentage’’).’’ The Exchange trade, to remove impediments to and
number of 1% or greater, as proposed herein, to the counts Specialized Quote Feed perfect the mechanism of a free and
BX Market Operations staff to select this risk
(‘‘SQF’’) 8 quotes in determining the open market and a national market
control. If a BX Options Market Maker does not system, and, in general to protect
desire to utilize the Percentage-Based risk control
the BX Options Market Maker must utilize the 7 See
note 4 above. investors and the public interest, by
Volume-Based risk control which is similarly set- 8 SQF
permits the receipt of quotes. SQF Auction
9 15 U.S.C. 78f(b).
up by contacting Market Operations and providing Responses and market sweeps are also not
certain settings. included. 10 15 U.S.C. 78f(b)(5).
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![Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices 46137
offering BX Options Market Makers the a daily basis is not diminished by the generated Purge Notification Message is
ability to better manage their own risk removal of such quotes by the accepted by the System in the order of
with this risk feature. Percentage-Based Threshold. BX receipt in the queue and is processed in
BX Options Market Makers are Options Market Makers are required to that order so that interest that is already
obligated to submit continuous two- provide continuous two-sided quotes on accepted into the System is processed
sided quotations in a certain number of a daily basis.12 BX Options Market prior to the message. Incoming orders
series in their appointed option classes Makers that utilize the Percentage-Based received prior to the Purge Notification
for a certain percentage of each trading Threshold will not be relieved of the Message would not be cancelled, rather
session.11 This obligation renders them obligation to provide continuous two- they be [sic] executed at a price up to
vulnerable to risk from unusual market sided quotes on a daily basis, nor will the BX Options Market Maker’s size.
condition, volatility in specific options, the change prohibit the Exchange from The Exchange notes that Miami
and other market events that may cause taking disciplinary action against a BX International Securities Exchange, LLC
them to receive multiple, extremely Options Market Maker for failing to (‘‘MIAX’’) implemented a rule that
rapid automatic executions before they meet the continuous quoting obligation changed its Allowable Engagement
can adjust their quotations and overall each trading day. All quotes entered Percentage from a minimum of 100% to
risk exposure in the market. Without into the System are considered firm. any percentage established by the
adequate risk management tools in place Quotes will only be removed from the Market Maker.15 The BX rule is similar
on the Exchange, the incentive for BX System once the Percentage-Based to MIAX’s in that a member is required
Options Market Makers to quote Threshold has been met if the quote was to have a setting, although MIAX has a
aggressively, respecting both price and not otherwise executed by an incoming default setting in place in the instance
size could be diminished. Such a result order. that no percentage is provided. BX
may undermine the quality of the This risk feature will continue to Options Market Makers that select the
markets, which are enhanced by the remove impediments to and perfect the Percentage-Based risk tool must provide
depth and liquidity such Market Makers mechanism of a free and open market the Exchange with a Percentage-Based
provide in the marketplace. and a national market system and Specified Time Period and a Specified
By allowing the Specified Percentage protect investors and the public interest Percentage greater than or equal to 1%.
provided by the BX Options Market by allowing BX Options Market Makers
Maker to be reduced from 100% to 1%, to remove their quotes in the event that Amending the definition of
the Exchange provides its BX Options market conditions warrant, based on disseminated size will provide market
Market Makers the desired flexibility to their own risk tolerance level. BX participants with greater information on
take into account such factors as present Options Market Makers provide the manner in which the Exchange
and anticipated market conditions, liquidity to the market place and have computes the Issue Percentage. The
news in an option or sudden change in obligations unlike other market Exchange believes that the manner in
volatility of an option without any participants.13 This risk feature is which the Exchange calculates the
limitation regarding the Specified important because it will enable BX number of contracts, which are counted
Percentage. This should encourage BX Options Market Makers to manage their for the Issue Percentage, is consistent
Options Market Makers to provide exposure at the Exchange. Further, with the Act. The counting method
additional depth and liquidity to the permitting BX Options Market Makers permits the Exchange to update the
Exchange’s markets, thereby removing to enter a broader setting would reference number to include the
impediments to and perfecting the continue to allow BX Options Market executed contracts. While this method
mechanisms of a free and open market Makers to have flexibility in setting differs from the method previously
and a national market system and, in their risk exposure to prevent described, the Exchange believes that
general, protecting investors and the unintended triggers of the Percentage- there is no industry standard for
public interest. Based Threshold. This proposal counting and its method permits market
The proposal is consistent with the continues to allow BX Options Market participants to achieve the desired risk
Act because the reduction of the Makers to also select a Percentage-Based protection. With the proposed
Specified Percentage to not less than 1% Specified Time Period. Each BX Options definition, each execution uses the
provides more alternatives to BX Market Maker has different levels of Percentage-Based Specified Time Period
Options Market Makers in setting their sensitivity and its own system that existed at the time of the execution.
percentage without impacting their firm safeguards as well. The proposed setting BX Options Market Makers can change
quote obligations. The System operates would permit each BX Options Market the Percentage-Based Specified Time
consistently with the firm quote Maker to select a setting that is Period at any time. If a BX Options
obligations of a broker-dealer pursuant appropriate to capture the needs of that Market Maker is using a Percentage-
to Rule 602 of Regulation NMS. BX Options Market Maker. Based Specified Time Period of 15
Specifically, with respect to BX Options Further, it is important to note that seconds when an execution happens,
Market Makers, their obligation to any interest that is executable against a then changes the Percentage-Based
provide continuous two-sided quotes on BX Options Market Maker’s quotes and Specified Time Period to half a second,
orders that are received 14 by the that first execution will not expire until
11 Pursuant to BX Rules at Chapter VII, Section 5,
Exchange prior to the trigger of the 15 seconds have passed. The selected
entitled ‘‘Obligations of Market Makers’’, in
Percentage-Based Threshold, which is Percentage-Based Specified Time Period
registering as a market maker, an Options will persist for 15 seconds and the
Participant commits himself to various obligations. processed by the System, automatically
sradovich on DSK3GMQ082PROD with NOTICES
Transactions of a BX Options Market Maker must executes at a price up to the BX Options number of executed contracts will be
constitute a course of dealings reasonably Market Maker’s size. The system- included in the denominator of
calculated to contribute to the maintenance of a fair subsequent executions for a full 15
and orderly market, and Market Makers should not seconds.
12 Id.
make bids or offers or enter into transactions that
13 Id.
are inconsistent with such course of dealings.
Further, all Market Makers are designated as 14 The time of receipt for an order or quote is the 15 See Securities Exchange Act Release No. 77817
specialists on BX for all purposes under the Act or time such message is processed by the Exchange (May 12, 2016), 81 FR 31286 (May 18, 2016) (SR–
rules thereunder. See Chapter VII, Section 5. book. MIAX–2016–10).
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![Federal Register / Vol. 81, No. 136 / Friday, July 15, 2016 / Notices 46139
For the Commission, by the Division of II. Self-Regulatory Organization’s strike all of the arbitrators appearing on
Trading and Markets, pursuant to delegated Statement of the Purpose of, and the non-public list, FINRA returns to the
authority.20 Statutory Basis for, the Proposed Rule public list to select the next highest
Robert W. Errett, Change ranked available arbitrator to fill the
Deputy Secretary. In its filing with the Commission, seat. If no public arbitrators remain
[FR Doc. 2016–16725 Filed 7–14–16; 8:45 am] FINRA included statements concerning available to fill the vacancy, FINRA
returns to the chair-qualified public list
BILLING CODE 8011–01–P the purpose of and basis for the
to select the next highest ranked public
proposed rule change and discussed any
chair. In doing so, there is a likelihood
comments it received on the proposed
that FINRA will appoint an arbitrator
SECURITIES AND EXCHANGE rule change. The text of these statements
who the parties accepted, but ranked
COMMISSION may be examined at the places specified
lower on the public or chair-qualified
in Item IV below. FINRA has prepared
public lists.
[Release No. 34–78279; File No. SR–FINRA– summaries, set forth in sections A, B,
2016–022] and C below, of the most significant FINRA Dispute Resolution Task Force
aspects of such statements. In 2014, FINRA formed the FINRA
Self-Regulatory Organizations; A. Self-Regulatory Organization’s Dispute Resolution Task Force (‘‘Task
Financial Industry Regulatory Statement of the Purpose of, and Force’’) to suggest strategies to enhance
Authority, Inc.; Notice of Filing of a Statutory Basis for, the Proposed Rule the transparency, impartiality, and
Proposed Rule Change To Amend Rule Change efficiency of FINRA’s securities dispute
12403 (Cases With Three Arbitrators) resolution forum for all participants.
of the Code of Arbitration Procedure 1. Purpose The Task Force discussed panel
for Customer Disputes Relating to the Background selection in customer cases. During its
Panel Selection Process in Arbitration discussions, the Task Force reviewed
FINRA allows parties to participate in statistics on how often parties were
July 11, 2016. selecting the arbitrators who serve on striking all of the non-public arbitrators
Pursuant to Section 19(b)(1) of the their cases. Parties select their on the list. The data indicated that
Securities Exchange Act of 1934 arbitration panel from computer between September 30, 2013 (the
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 generated lists of arbitrators that FINRA effective date of the rule change
notice is hereby given that on July 1, sends them. Under FINRA Rule providing for all public panels) and
2016, Financial Industry Regulatory 12403(a), in customer cases with three January 16, 2015, claimants struck all
Authority, Inc. (‘‘FINRA’’) filed with the arbitrators,3 FINRA sends the parties non-public arbitrators in 69 percent of
Securities and Exchange Commission three lists: A list of 10 chair-qualified cases. Given the data on strikes, the
(‘‘Commission’’) the proposed rule public arbitrators, a list of 10 public Task Force concluded that in many
change as described in Items I, II, and arbitrators, and a list of 10 non-public cases, the parties are selecting the three
III below, which Items have been arbitrators.4 The parties select their public arbitrators from the 20
prepared by FINRA. The Commission is panel through a process of striking and candidates appearing on the public lists.
publishing this notice to solicit ranking the arbitrators on the lists.5 The Task Force recommended that in
comments on the proposed rule change Under Rule 12403(c)(2), each party is instances where parties collectively
from interested persons. allowed to strike up to four arbitrators strike all the non-public arbitrators,
on the chair-qualified public list and FINRA should provide a new list of 10
I. Self-Regulatory Organization’s four arbitrators on the public list. At public arbitrators to fill the third public
Statement of the Terms of Substance of least six names must remain on each arbitrator seat.
the Proposed Rule Change list. However, Rule 12403(c)(1) provides
for unlimited strikes on the non-public Proposed Rule Change
FINRA is proposing to amend Rule list so that any party may select a panel FINRA agrees with the Task Force
12403 of the Code of Arbitration of all public arbitrators in a customer that FINRA should provide parties with
Procedure for Customer Disputes case. greater choice of public arbitrators in
(‘‘Code’’) concerning customer cases When parties collectively strike all of cases with all public panels. However,
with three arbitrators, to increase the the non-public arbitrators from the list, if FINRA waits until the parties
number of public arbitrators on the list FINRA fills all three panel seats from collectively strike all the non-public
that FINRA sends parties during the the two 10-person lists of public arbitrators from the list before it
arbitration panel selection process from arbitrators. Specifically, the Code provides the parties with additional
10 arbitrators to 15 arbitrators. FINRA provides that when parties collectively names of public arbitrators, the panel
would also increase the number of selection process is likely to take at least
strikes that parties may make to the 3 See FINRA Rule 12401 which provides that if
one additional month to complete. Also,
public list from four to six strikes to the amount of a claim is more than $100,000, FINRA is concerned about the
keep the proportion of strikes the same exclusive of interest and expenses, or is
unspecified, or if the claim does not request money additional time and expense the parties
under the amended rule as it is under damages, the panel will consist of three arbitrators, would incur in vetting an additional list
the current rule. unless the parties agree in writing to one arbitrator. of 10 public arbitrators.
The text of the proposed rule change 4 Public arbitrators do not have an affiliation with
To address the Task Force’s
the financial industry. The non-public arbitrator recommendation without delaying the
sradovich on DSK3GMQ082PROD with NOTICES
is available on FINRA’s Web site at roster includes individuals who: (1) Are employed
http://www.finra.org, at the principal in the financial industry; (2) provide services to panel selection process, or unduly
office of FINRA and at the industry entities and their employees; or (3) devote burdening the parties, FINRA is
Commission’s Public Reference Room. a significant part of their business to representing proposing to amend Rule 12403(a)(1) to
or providing services to parties in disputes increase the number of arbitrators on the
concerning investments or employment
20 17 CFR 200.30–3(a)(12). relationships. public arbitrator list FINRA sends the
1 15 U.S.C. 78s(b)(1). 5 See FINRA Rule 12403(c) (Striking and Ranking parties from 10 to 15. In doing so,
2 17 CFR 240.19b–4. Arbitrators). FINRA would provide greater choice of
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Document Created: 2016-07-15 02:53:03
Document Modified: 2016-07-15 02:53:03
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 46135 |
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