[Federal Register Volume 79, Number 150 (Tuesday, August 5, 2014)]
[Notices]
[Pages 45521-45523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18386]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72712; File No. SR-BX-2014-037]
Self-Regulatory Organizations; NASDAQ OMX BX, Inc; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Disclose
Publicly the Sources of Data Used for Exchange Functions
July 29, 2014.
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 16, 2014, NASDAQ OMX BX, Inc. (``Exchange'' or ``BX'')
filed with the Securities and Exchange Commission (``Commission'') a
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
BX proposes a rule change to disclose publicly the sources of data,
whether from the network processors or from direct data feeds, that BX
utilizes when performing (1) order handling and execution; (2) order
routing; and (3) related compliance processes.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, BX is requesting a waiver of the
requirement to provide notice of the proposed rule change.\3\ [sic]
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 those 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 parts of such statements.
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\3\ On July 14, 2014, NASDAQ OMX did provide notice of an
identical filing on behalf of the NASDAQ Stock Market LLC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In her June 5, 2014 market structure speech, the Chair requested
that all national securities exchanges review and disclose their
policies and procedures governing the market data used when performing
important exchange functions.\4\ In a letter dated June 20, 2014, the
Director of the Division of Trading and Markets codified this request:
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\4\ See Mary Jo White, Chair, Securities and Exchange
Commission, Speech at the Sandler O'Neill & Partners L.P. Global
Exchange and Brokerage Conference (June 5, 2014).
We believe there is a need for clarity regarding whether (1) the
SIP data feeds, (2) proprietary data feeds, or (3) a combination
thereof, are used by the exchanges for purposes of (1) order
handling and execution (e.g., with pegged or midpoint orders), (2)
order routing, and (3) regulatory compliance, as applicable. . . .
Accordingly, we ask that proposed rule changes be filed that
disclose the particular market data feeds that are used for each of
these purposes. Consistent with your recent discussions with
Commission staff, we ask that each SRO file these proposed rule
changes with the Commission by July 15, 2014.\5\
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\5\ See Letter from Steven Luparello, Director, SEC Division of
Trading and Markets, to Robert Greifeld, Chief Executive Officer,
NASDAQ OMX Group, Inc., dated June 20, 2014.
BX fully supports the Commission's efforts to provide more clarity
in this area. Through this proposed rule change, BX is publicly
clarifying on a market-by-market basis the specific network processor
and proprietary data feeds that BX utilizes for the handling, routing,
and execution of orders, and for performing the regulatory compliance
checks related to each of those functions. These complex practices are
governed by a few, simple principles that are designed to ensure that
BX has the most accurate view of the trading interest available across
multiple markets, and to maximize the synchronization of the many
exchange functions that depend upon the calculation of an accurate NBBO
and top-of-book for each market. These principles are:
1. BX uses a proprietary data feed from each exchange that provides
a reliable proprietary data feed. Where no reliable proprietary data
feed is available, BX uses the network processor feed;
2. Where BX uses a proprietary data feed for an exchange quote, it
also maintains access to the network processor feed as a back-up in the
event a specific proprietary feed become unavailable or unusable for
any reason;
3. BX uses the same proprietary data feed when performing order
handling, routing, and execution functions, and also when the execution
and routing system performs internal compliance checks related to those
functions; and
4. BX acquires and processes all proprietary and network processor
feeds via the same technological configuration (i.e., telecommunication
circuitry, switches, and feed handlers) to the greatest extent
possible.
5. BX calculates the National Best Bid and Offer (``NBBO'') and
top-of-book for each exchange at a single point within the BX system,
and then distributes that data simultaneously to numerous applications
performing order handling,\6\ routing, execution, and internal
compliance functions throughout the BX system.
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\6\ With respect to order handling, the NBBO and top-of-book
calculation feeds applications governing the proper processing
midpoint orders, pegged orders, price-to-comply orders, and retail
orders.
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As of the date of this filing, BX utilizes the following data feeds
for the handling, execution and routing of
[[Page 45522]]
orders, as well as for performing related compliance checks:
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Market center Primary source Secondary source
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A--NYSE MKT (AMEX)....................... CQS/UQDF.................... n/a.
B--NASDAQ OMX BX......................... BX ITCH 4.1................. CQS/UQDF.
D--FINRA ADF............................. CQS/UQDF.................... n/a.
J--DirectEdge A.......................... EdgeBook.................... CQS/UQDF.
K--DirectEdge X.......................... EdgeBook.................... CQS/UQDF.
M--CSX................................... CQS/UQDF.................... n/a.
N--NYSE.................................. NYSE OpenBook Ultra......... CQS/UQDF.
P--NYSE Arca............................. ArcaBook Binary uncompacted. CQS/UQDF.
T/Q--NASDAQ.............................. ITCH 4.1.................... CQS/UQDF.
W--CBOE.................................. CQS/UQDF.................... n/a.
X--NASDAQ OMX PSX........................ PSX ITCH 4.1................ CQS/UQDF.
Y--BATS Y-Exchange....................... BATS PITCH.................. CQS/UQDF.
Z--BATS Exchange......................... BATS PITCH.................. CQS/UQDF.
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BX uses these feeds to calculate the NBBO via an application called
the ``NMSFeed.'' The NMSFeed consumes the BX Protected Quote Service
(``NPQS''), which provides an internal view of that exchange's own
market data as ITCH, plus the proprietary and network processor market
data feeds listed above. The NMSFeed calculates a Regulation NMS-
Compliant ``Best Bid or Offer'' (``Compliant BBO''), and then delivers
that information throughout the BX System, including to the ``OUCH''
order entry ports,\7\ the routing system, and various compliance
applications described below.
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\7\ OUCH is a protocol that allows BX participants to enter,
replace and cancel orders and receive executions. In addition to
OUCH, BX offers the FLITE protocol as an option for participants. In
this document, references to OUCH also include FLITE because they
are interchangeable for these purposes.
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Upon receipt of an update to a protected quote for a specific
venue, the NMSFeed updates its quote for that venue, recalculates the
consolidated BBO based upon the update, and recalculates the Compliant
BBO after applying BX's own BBO. Any quote that crosses BX's BBO is
ignored. BX odd lot orders at the same price are aggregated and
considered in the NBBO calculation if the sum is greater than or equal
to a round lot. Otherwise, they are not considered in the NBBO
calculation. Out of the remaining quotes, the most aggressive remaining
bid and offer (excluding BX \8\ and any destination which has been
excluded from the NBBO in compliance with the self-help procedures
under Regulation NMS) is selected and reported as the best quote. If
away markets are crossing the market after applying BX's BBO, orders
will be accepted as originally priced and have the potential to
execute. Any order sent to BX that is not an Intermarket Sweep Order
(``ISO'') will have the Compliant BBO check enforced by the system.\9\
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\8\ Deletion of BX's quote at this stage of the process is
necessary because otherwise the system would prevent valid
executions on BX in the erroneous belief that such executions would
be ``trade throughs'' in violation of Regulation NMS.
\9\ In general, any order that is sent to BX with an ISO flag is
not re-priced and will be processed at its original price. There are
a limited number of circumstances in which an order marked as an ISO
will be determined not to be executable at its original price and
will be re-priced. These include re-pricing under the Plan to
Address Extraordinary Market Volatility, re-pricing to comply with
Regulation SHO, and the re-pricing of an order with a post-only
condition if BX has an order at that price at the time the order is
accepted.
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The BX OMX Routing and Special Handling System (``RASH'') utilizes
the Compliant BBO to determine if and when an order with special
processing directives is marketable either against one or more orders
in either the Core Matching System or a remote trading venue. RASH also
receives market data feeds from certain venues not displaying protected
quotes in the national market system for use in ``QDRK'' [sic] and
``QCST'' [sic] routing strategies set forth in BX Rule
4758(a)(1)(A)(iiiv) [sic] and (ix), respectively. RASH maintains a
number of routing processes, or Routers, unique to each venue that the
System accesses. These Routers maintain a limited set of details for
orders that are configured as routable by the user, while also
monitoring the current best bid and best offer prices on each exchange.
The BX system includes internal compliance applications related to
locked and crossed markets, trade throughs, limit-up/limit-down, and
Regulation SHO compliance. Each of these applications utilizes the
Compliant BBO to ensure compliance with applicable regulations. BX
operates a separate real-time surveillance system that is external to
the execution systems and that monitors the execution system's
compliance with applicable rules and regulations. The real-time
surveillance system utilizes a ``mirrored'' version of the internal
NMSFeed in various realtime surveillance patterns, including (1) Lock/
Cross, which detects lock/cross events across all markets, regardless
of whether or not BX is a participant in the event; (2) Trade Through,
which detects potential trade through events for all three BX equity
markets; and (3) RegSho, which detects potential RegSho violations,
alerting when a trade executes at or below the NBB at the time of order
entry while the stock is in a RegSho restricted state.
In addition to the operational transparency provided above, BX is
also proposing to add Rule 4759, which will provide for the public
display of the proprietary and network processor feeds that BX utilizes
in the order handling, routing, and execution processes described
above, as well as in the compliance functions described above. BX will
display this information on www.nasdaqtrader.com, which is heavily used
by BX members and their customers.
2. Statutory Basis
BX believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\10\ in general and with Sections
6(b)(5) of the Act,\11\ in particular in that it is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest. The Exchange believes that
this proposal is
[[Page 45523]]
in keeping with those principles by enhancing transparency through the
dissemination of the most accurate quotations data and by clarifying
its contents.
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\10\ 15 U.S.C. 78f.
\11\ 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.
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
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 if consistent with
the protection of investors and the public interest, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) \13\ thereunder.\14\
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6).
\14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Commission deems this requirement to have been met.
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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 will 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 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 Number SR-BX-2014-037 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-2014-037. 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-2014-037 and should be
submitted on or before August 26, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18386 Filed 8-4-14; 8:45 am]
BILLING CODE 8011-01-P