[Federal Register Volume 78, Number 50 (Thursday, March 14, 2013)]
[Notices]
[Pages 16303-16306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05866]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69070; File No. SR-BX-2013-022]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of
Filing of Proposed Rule Change To Adopt Chapter V, Section 3(d)(iii)
Regarding Quoting Obligations
March 7, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 5, 2013, NASDAQ OMX 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt a new Chapter V, Section 3(d)(iii)
to provide for how the Exchange proposes to treat options market-making
quoting obligations, in response to the Regulation NMS Plan to Address
Extraordinary Market Volatility.
The text of the proposed rule change is below; proposed new
language is italicized.
* * * * *
Chapter V Regulation of Trading on BX Options
* * * * *
Sec. 3 Trading Halts
(a)-(c) No change.
(d) This paragraph shall be in effect during a pilot period to
coincide with the pilot period for the Plan to Address Extraordinary
Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be
amended from time to time (``LULD Plan''). Capitalized terms used in
this paragraph shall have the same meaning as provided for in the LULD
Plan. During a Limit State and Straddle State in the Underlying NMS
stock:
(i)-(ii) No change.
(iii) When evaluating whether a Market Maker has met the continuous
quoting obligations of Chapter VII, Section 6(d) in options overlying
NMS stocks, the Exchange will not consider as part of the trading day
the time that an NMS stock underlying an option was in a Limit State or
Straddle State.
(e) No change.
* * * * *
[[Page 16304]]
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt Chapter V, Section 3(d)(iii) \3\ to
provide for how the Exchange will treat options market making quoting
obligations in response to the Regulation NMS Plan to Address
Extraordinary Market Volatility (the ``Plan''), which is applicable to
all NMS stocks, as defined in Regulation NMS Rule 600(b)(47). The
Exchange proposes to adopt new Chapter V, Section 3(d)(iii) for a pilot
period that coincides with the pilot period for the Plan.
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\3\ The provisions of Chapter V, Sections 3(d)(i)-(ii) and 3(e)
were filed and became effective on February 28, 2013, with a 30 day
operative delay, on a pilot basis. See SR-BX-2013-021.
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Background
Since May 6, 2010, when the markets experienced excessive
volatility in an abbreviated time period, i.e., the ``flash crash,''
the equities exchanges and the Financial Industry Regulatory Authority
(``FINRA'') have implemented market-wide measures designed to restore
investor confidence by reducing the potential for excessive market
volatility. Among the measures adopted include pilot plans for stock-
by-stock trading pauses,\4\ related changes to the equities market
clearly erroneous execution rules,\5\ and more stringent equities
market maker quoting requirements.\6\ On May 31, 2012, the Commission
approved the Plan, as amended, on a one-year pilot basis.\7\ In
addition, the Commission approved changes to the equities market-wide
circuit breaker rules on a pilot basis to coincide with the pilot
period for the Plan.\8\
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\4\ See e.g., BX Rule 4120.
\5\ See e.g., BX Rule 4762.
\6\ See e.g., NASDAQ Rule 4613.
\7\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving
the Plan on a Pilot Basis).
\8\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
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The Plan is designed to prevent trades in individual NMS stocks
from occurring outside of specified Price Bands.\9\ As described more
fully below, the requirements of the Plan are coupled with Trading
Pauses to accommodate more fundamental price moves (as opposed to
erroneous trades or momentary gaps in liquidity). All trading centers
in NMS stocks, including both those operated by Participants and those
operated by members of Participants, are required to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to comply with the requirements specified in the
Plan.
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\9\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
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As set forth in more detail in the Plan, Price Bands consisting of
a Lower Price Band and an Upper Price Band for each NMS Stock are
calculated by the Processors.\10\ When the National Best Bid (Offer) is
below (above) the Lower (Upper) Price Band, the Processors shall
disseminate such National Best Bid (Offer) with an appropriate flag
identifying it as unexecutable. When the National Best Bid (Offer) is
equal to the Upper (Lower) Price Band, the Processors shall distribute
such National Best Bid (Offer) with an appropriate flag identifying it
as a Limit State Quotation.\11\ All trading centers in NMS stocks must
maintain written policies and procedures that are reasonably designed
to prevent the display of offers below the Lower Price Band and bids
above the Upper Price Band for NMS stocks. Notwithstanding this
requirement, the Processor shall display an offer below the Lower Price
Band or a bid above the Upper Price Band, but with a flag that it is
non-executable. Such bids or offers shall not be included in the
National Best Bid or National Best Offer calculations.\12\ Trading in
an NMS stock immediately enters a Limit State if the National Best
Offer (Bid) equals but does not cross the Lower (Upper) Price Band.\13\
Trading for an NMS stock exits a Limit State if, within 15 seconds of
entering the Limit State, all Limit State Quotations were executed or
canceled in their entirety. If the market does not exit a Limit State
within 15 seconds, then the Primary Listing Exchange would declare a
five-minute trading pause pursuant to Section VII of the Plan, which
would be applicable to all markets trading the security.\14\ In
addition, the Plan defines a Straddle State as when the National Best
Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS
stock is not in a Limit State. For example, assume the Lower Price Band
for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS
stock would be in a Straddle State if the National Best Bid were below
$9.50, and therefore unexecutable, and the National Best Offer were
above $9.50 (including a National Best Offer that could be above
$10.50). If an NMS stock is in a Straddle State and trading in that
stock deviates from normal trading characteristics, the Primary Listing
Exchange may declare a trading pause for that NMS stock if such Trading
Pause would support the Plan's goal to address extraordinary market
volatility.
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\10\ See Section V(A) of the Plan.
\11\ See Section VI(A) of the Plan.
\12\ See Section VI(A)(3) of the Plan.
\13\ See Section VI(B)(1) of the Plan.
\14\ The primary listing market would declare a Trading Pause in
an NMS stock; upon notification by the primary listing market, the
Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed. See Section VII(A) of the
Plan.
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Proposal
The Exchange proposes to adopt Chapter V, Section 3(d)(iii) to
provide that the Exchange shall exclude the amount of time an NMS stock
underlying a BX option is in a Limit State or Straddle State from the
total amount of time in the trading day when calculating the percentage
of the trading day Options Market Makers are required to quote.
Currently, the quoting requirements appear in Chapter VII, Sections
5 and 6, which generally require that, on a daily basis, a Market Maker
must during regular market hours make markets consistent with the
applicable quoting requirements specified in these rules, on a
continuous basis in at least sixty percent (60%) of the series in
options in which the Market Maker is registered. To satisfy this
requirement with respect to quoting a series, a Market Maker must quote
such series 90% of the trading day (as a percentage of the total number
of minutes in such trading day) or such higher percentage as BX may
announce in advance.\15\
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\15\ The Exchange has filed a proposed rule change to adopt a
directed order process and change its market maker quoting
obligations. See SR-BX-2013-016.
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[[Page 16305]]
The Exchange now proposes to subtract from the total number of
minutes in a trading day the time period for an option when the
underlying NMS stock was in a Limit State or Straddle State. The
Exchange believes that this is appropriate for the same reasons
discussed above, in light of the limited price discovery in the
underlying stock and the direct relationship between an options price
and the price of the underlying security. During a Limit State or
Straddle State, the bid price or offer price of the underlying security
will be unexecutable and the ability to hedge the purchase or sale of
an option will be jeopardized. Recognizing that it may be impossible to
hedge to offset the risk created by trading options, the Exchange
expects that Options Market Makers will, as a result, modify their
quoting behavior. The Exchange believes it is reasonable and
appropriate to exclude this time period, which the Exchange believes
will generally be limited.
The Exchange has considered waiving its bid/ask differential
requirement (also known as quote spread parameters), but ultimately
determined that those requirements should be maintained in order to
promote liquidity and the operation of a fair and orderly market.
Accordingly, even when the quoting obligation is not in effect, Options
Market Makers who choose to quote must do so within the applicable bid-
ask differentials. The Exchange believes that this should help ensure
the quality of the quotes that are entered and preserves one of the
obligations of being a market maker.\16\
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\16\ Because they will continue to be subject to the market
maker obligation of maintaining quotes within a certain bid/ask
differential, Options Market Makers will continue to be eligible for
the size pro-rata ``guarantee'' (and the directed order process,
once approved by the Commission). See Chapter VI, Section 10 and SR-
BX-2013-016. The Exchange notes that it is technically complex, and
therefore, impractical, to address such guarantees.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the provisions of Section 6 of the Act,\17\ in general, and with
Section 6(b)(5) of the Act,\18\ in particular, which requires that the
rules of an exchange be designed to prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest,
because the Exchange believes that excluding the Limit and Straddle
State from an Options Market Maker's quoting obligation calculation
should promote just and equitable principles of trade by recognizing
the particular risk that arises for liquidity providers who cannot
hedge. Whenever an NMS stock is in a Limit State or Straddle State,
trading continues; however, there will not be a reliable price for a
security to serve as a benchmark for the price of the option.
Accordingly, the Exchange seeks to expressly remove these periods from
consideration in order to enable Options Market Makers to provide the
necessary liquidity and facilitate transactions on the Exchange.
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\17\ 15 U.S.C. 78f.
\18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Specifically, the proposal does not impose an intra-market burden on
competition, because it will apply to all Participants subject to those
obligations in the same manner. Nor will the proposal impose a burden
on competition among the options exchanges, because, in addition to the
vigorous competition for order flow among the options exchanges, the
proposal addresses a regulatory situation common to all options
exchanges. To the extent that market participants disagree with the
particular approach taken by the Exchange herein, market participants
can easily and readily operate on competing venues. The Exchange
believes this proposal will not impose a burden on competition and will
help provide liquidity during periods of extraordinary volatility in an
NMS stock.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-BX-2013-022 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-BX-2013-022. 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 such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make
[[Page 16306]]
available publicly. All submissions should refer to File No. SR-BX-
2013-022 and should be submitted on or before March 29, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
Kevin M. O'Neill,
Deputy Secretary.
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\19\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-05866 Filed 3-13-13; 8:45 am]
BILLING CODE 8011-01-P