Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Detection of Loss of Connection

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on July 8, 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.

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

The Exchange proposes to amend Chapter VI, Section 6, entitled “Acceptance of Quotes and Orders” to adopt functionality which is designed to assist BX Participants in the event that they lose communication with their assigned Financial Information eXchange (“FIX”) or Specialized Quote Feed (“SQF”) Ports due to a loss of connectivity.

The text of the proposed rule change is available on the Exchange's Web site at http://nasdaqbx.cchwallstreet.com/,, at the principal office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these 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 Chapter VI, Section 6, entitled “Acceptance of Quotes and Orders” to adopt a new section “e” entitled “Detection of Loss of Connection,” a new automated process which BX proposes to adopt for its SQF and FIX Ports in the event that they lose communication with a Client Application due to a loss of connectivity. This feature is designed to protect BX Options Market Makers and other market participants from inadvertent exposure to excessive risk.

By way of background, BX Participants currently enter quotes and orders utilizing either an SQF or FIX Port. SQF is utilized by BX Options Market Makers and FIX is utilized by all market participants. These ports are System components through which a BX Participant communicates its quotes and/or orders to the BX match engine through the BX Participant's Client Application.

Under the proposed rule change, an SQF Port would be defined as the Exchange's System component through which BX Participants communicate their quotes from the BX Participant's Client Application at proposed Chapter VI, Section 6(e)(i)(B). A FIX Port would be defined as the Exchange's System component through which BX Participants communicate their orders from the BX Participant's Client Application at proposed Chapter VI, Section 6(e)(i)(C). BX Options Market Makers may submit quotes to the Exchange from one or more SQF Ports. Similarly, market participants may submit orders to the Exchange from one or more FIX Ports. The proposed cancellation feature will be mandatory for each BX Options Market Maker utilizing SQF for the removal of quotes and optional for any market participant utilizing FIX for the removal of orders.

When the SQF Port detects the loss of communication with a BX Participant's Client Application because the Exchange's server does not receive a Heartbeat message for a certain period of time (a period of “nn” seconds), the Exchange will automatically logoff the BX Participant's affected Client Application and automatically cancel all of the BX Participant's open quotes. Quotes will be cancelled across all Client Applications that are associated with the same BX Options Market Makers ID and underlying issues.

The Exchange proposes to define “Client Application” as the System component of the BX Participant through which the BX Participant communicates its quotes and orders to the Exchange at proposed Chapter VI, Section 6(e)(i)(D). The Exchange proposes to define a “Heartbeat” message as a communication which acts as a virtual pulse between the SQF or FIX Port and the Client Application at proposed Chapter VI, Section 6(e)(i)(A). The Heartbeat message sent by the BX Participant and subsequently received by the Exchange allows the SQF or FIX Port to continually monitor its connection with the BX Participant.

SQF Ports

The Exchange's System has a default time period, which will trigger a disconnect from the Exchange and remove quotes, set to fifteen (15) seconds for SQF Ports. A BX Participant may change the default period of “nn” seconds of no technical connectivity to trigger a disconnect from the Exchange and remove quotes to a number between one hundred (100) milliseconds and 99,999 milliseconds for SQF Ports prior to each session of connectivity to the Exchange. This feature is enabled for each BX Options Market Maker and may not be disabled.

There are two ways to change the number of “nn” seconds: (1) Systemically or (2) by contacting the Exchange's operations staff. If the BX Participant systemically changes the default number of “nn” seconds, that new setting shall be in effect throughout the current session of connectivity and will then default back to fifteen seconds. The BX Participant may change the default setting systemically prior to each session of connectivity. The BX Participant may also communicate the time to the Exchange by calling the Exchange's operations staff. If the time period is communicated to the Exchange by calling Exchange operations, the number of “nn” seconds selected by the BX Participant shall persist for each subsequent session of connectivity until the BX Participant either contacts Exchange operations and changes the setting or the BX Participant systemically selects another time period prior to the next session of connectivity.

FIX Ports

The Exchange's System has a default time period, which will trigger a disconnect from the Exchange and remove orders, set to thirty (30) seconds for FIX Ports. The BX Participant may disable the removal of orders feature but not the disconnect feature. If the BX Participant elects to have its orders removed, in addition to the disconnect, the BX Participant may determine a time period of no technical connectivity to trigger the disconnect and removal of orders between one (1) second and thirty (30) seconds for FIX Ports prior to each session of connectivity to the Exchange.

There are two ways to change the number of “nn” seconds: (1) Systemically or (2) by contacting the Exchange's operations staff. If the BX Participant systemically changes the default number of “nn” seconds, that new setting shall be in effect throughout that session of connectivity and will then default back to thirty seconds at the end of that session. The BX Participant may change the default setting systemically prior to each session of connectivity. The BX Participant may also communicate the time to the Exchange by calling the Exchange's operations staff. If the time period is communicated to the Exchange by calling Exchange operations, the number of “nn” seconds selected by the BX Participant shall persist for each subsequent session of connectivity until the BX Participant either contacts Exchange operations and changes the setting or the BX Participant systemically selects another time period prior to the next session of connectivity.

Similar to SQF Ports, when a FIX Port detects the loss of communication with a Participant's Client Application for a certain time period (a period of “nn” seconds), the Exchange will automatically logoff the BX Participant's affected Client Application and if elected, automatically cancel all open orders. The BX Participant may have an order which has routed away prior to the cancellation, in the event that the order returns to the Order Book, because it was either not filled or partially filled, that order will be subsequently cancelled.

The disconnect feature is mandatory for FIX users however the user has the ability to elect to also enable a removal feature, which will cancel all open orders submitted through that FIX Port. If the removal of orders feature is not enabled, the System will simply disconnect the FIX user and not cancel any orders. The FIX user would have to commence a new session to add, modify or cancel its orders once disconnected. The Exchange will issue an Options Trader Alert advising BX Participants on the manner in which they should communicate the number of “nn” seconds to the Exchange for SQF and FIX Ports.

The trigger for the SQF and FIX Ports is event and Client Application specific. The automatic cancellation of the BX Options Market Maker's quotes for SQF Ports and open orders, if elected by the BX Participant for FIX Ports entered into the respective SQF or FIX Ports via a particular Client Application will neither impact nor determine the treatment of the quotes of other BX Options Market Makers entered into SQF Ports or orders of the same or other BX Participants entered into the FIX Ports via a separate and distinct Client Application. In other words, with respect to quotes, each BX Options Market Maker only maintains one quote in a given option in the order book. A new quote would replace the existing quote. Orders on the other hand do not replace each other in the order book as multiple orders may exist in a given option at once. Therefore the difference in the impact as between BX Options Market Makers submitting quotes and BX Participants submitting orders is that quotes may continue to be submitted and/or refreshed by unaffected BX Options Market Makers because these market participants are cancelled based on ID when an SQF Port disconnects, whereas all of the open orders submitted by a given firm will be impacted when a FIX port disconnects, if the firm elected to have orders cancelled.

2. Statutory Basis

The Exchange believes that its proposal is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5) of the Act, 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 imposing this mandatory removal functionality on BX Options Market Makers to prevent disruption in the marketplace and also offering this removal feature to other market participants.

BX Options Market Makers will be required to utilize this removal functionality with respect to SQF Ports. This feature will 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 requiring BX Options Market Makers quotes to be removed in the event of a loss of connectivity with the Exchange's System. BX Options Market Makers provide liquidity to the market place and have obligations unlike other market participants. This risk feature is important because it will enable BX Options Market Makers to avoid risks associated with inadvertent executions in the event of a loss of connectivity with the Exchange. The proposed rule change is designed to not permit unfair discrimination among market participants, as it would apply uniformly to all BX Options Market Makers utilizing SQF.

The disconnect feature of FIX is mandatory, however market participants will have the option to either enable or disable the cancellation feature, which would result in the cancellation of all orders submitted over a FIX port when such port disconnects. It is appropriate to offer this removal feature as optional to all market participants utilizing FIX, because unlike BX Options Market Makers who are required to provide quotes in all products in which they are registered, market participants utilizing FIX do not bear the same magnitude of risk of potential erroneous or unintended executions. In addition, market participants utilizing FIX may desire their orders to remain on the order book despite a technical disconnect, so as not to miss any opportunities for execution of such orders while the FIX session is disconnected.

Utilizing a time period for SQF Ports of fifteen (15) seconds and permitting the BX Options Market Maker to modify the setting to between 100 milliseconds and 99,999 milliseconds is consistent with the Act because the Exchange does not desire to trigger unwarranted logoffs of BX Options Market Makers and therefore allows BX Options Market Makers the ability to set their time in order to enable the Exchange the authority to disconnect the BX Options Market Maker with this feature. Each BX Options Market Maker has different levels of sensitivity with respect to this disconnect setting and each BX Options Market Maker has their own system safeguards as well. A default setting of fifteen (15) seconds is appropriate to capture the needs of all BX Options Market Makers and high enough not to trigger unwarranted removal of quotes.

Further, BX Options Market Makers are able to customize their setting. The Exchange's proposal to permit a timeframe for SQF Ports between 100 milliseconds and 99,999 milliseconds is consistent with the Act and the protection of investors because the purpose of this feature is to mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application. BX Options Market Makers are able to better anticipate the appropriate time within which they may require prior to a logoff as compared to the Exchange. BX Options Market Makers are offered a timeframe by the Exchange within which to select the appropriate time. The Exchange does not desire to trigger unwarranted logoffs of BX Options Market Makers and therefore permits BX Options Market Makers to provide an alternative time to the Exchange, within the Exchange's prescribed timeframe, which authorized the Exchange to disconnect the BX Options Market Maker. The “nn” seconds serve as the BX Options Market Maker's instruction to the Exchange to act upon the loss of connection and remove quotes from the System. This range will accommodate BX Options Market Makers in selecting their appropriate times within the prescribed timeframes.

Also, BX Options Market Makers have quoting obligations and are more sensitive to price movements as compared to other market participants. It is consistent with the Act to provide a wider timeframe within which to customize settings for FIX Ports as compared to SQF Ports. BX Options Market Makers need to remain vigilant of market conditions and react more quickly to market movements as compared to other BX Participants entering orders into the System. The proposal acknowledges this sensitivity borne by BX Options Market Makers and reflects the reaction time of BX Options Market Makers as compared to other BX Participants entering orders. Of note, the proposed customized timeframe for FIX would be too long for BX Options Market Makers given their quoting requirements and sensitivity to price movements. BX Options Market Makers would be severely impacted by a loss of connectivity of more than several seconds. The BX Options Market Maker would have exposure during the time period in which they are unable to manage their quote and update that quote. The BX Options Market Maker is best positioned to determine their setting.

The Exchange's proposal is further consistent with the Act because it will mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application which protects investors and the public interest. Also, any interest that is executable against a BX Options Market Maker's quotes that is received by the Exchange prior to the trigger of the disconnect to the Client Application, which is processed by the System, automatically executes at the price up to the BX Options Market Maker's size. In other words, the System will process the request for cancellation in the order it was received by the System.

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 triggered by the disconnect. BX Options Market Makers are required to provide continuous two-sided quotes on a daily basis. BX Options Market Makers will not be relieved of the obligation to provide continuous two-sided quotes on a daily basis, nor will it prohibit the Exchange from taking disciplinary action against a BX Options Market Makers for failing to meet the continuous quoting obligation each trading day as a result of disconnects.

Today, BOX Options Exchange LLC offers its market makers a similar feature to the one proposed by the Exchange for the automatic removal of quotes when connectivity issues arise. BOX automatically cancels a market maker's quotes for all appointed classes when BOX loses communication with a market maker's trading host for a specified time period. BX also proposes to similarly cancel BX Options Market Makers open quotes associated with the same BX Options Market Makers ID and underlyings. BX proposes to cancel all BX Options Market Maker's quotes in options which are assigned to that particular BX Options Market Makers. BOX appears to similarly cancel all open quotes in options which are assigned to a specific market maker. BOX's timeframe is no less than 1 second or no greater than 9 seconds. BX proposes a default timeframe for SQF Ports of fifteen (15) seconds with the ability to modify this setting with a value between 100 milliseconds and 99,999 milliseconds. The proposal to permit BX Options Market Makers to amend the default setting at the beginning of each session of connectivity is consistent with the Act because it avoids unwarranted logoffs of BX Options Market Makers and provides BX Options Market Makers the opportunity to set a time, within the prescribed timeframe, to authorize the Exchange to disconnect the BX Options Market Maker.

Another distinction to note is that while BOX sets the time for participants, BX permits BX Participants to modify the default setting for SQF Ports to a more appropriate time within a set of parameters. While BOX does not offer the cancellations of orders, Chicago Board Options Exchange, Incorporated's (“CBOE”) does offer its participants a similar mechanism to cancel orders. CBOE's proposal is discussed further below.

With respect to FIX Ports, the Exchange will offer this optional removal functionality to all market participants. Offering the removal feature on a voluntary basis to all other non-BX Options Market Makers is consistent with the Act because it permits them an opportunity to utilize this risk feature, if desired, and avoid risks associated with inadvertent executions in the event of a loss of connectivity with the Exchange. The removal feature is designed to mitigate the risk of missed and/or unintended executions associated with a loss in communication with a Client Application. The proposed rule change is designed to not permit unfair discrimination among market participants, as this removal feature will be offered uniformly to all BX Participants utilizing FIX.

The Exchange will disconnect BX Participants from the Exchange and not cancel its orders if the removal feature is disabled. The disconnect feature is mandatory and will cause the BX Participant to be disconnected within the default timeframe or the timeframe otherwise specified by the BX Participant. This feature is consistent with the Act because it enables FIX users the ability to disconnect from the Exchange, assess the situation and make a determination concerning their risk exposure. The Exchange notes that in the event that orders need to be removed, the BX Participant may elect to utilize the Kill Switch feature. It is consistent with the Act to require other market participants to be disconnected because the BX Participant is otherwise not connected to the Exchange's System and the BX Participant simply needs to reconnect to commence submitting and cancelling orders. Requiring a disconnect when a loss of communication is detected is a rational course of action for the Exchange to alert the BX Participant of the technical connectivity issue.

The Exchange's proposal to set a default timeframe of thirty (30) seconds and permit a FIX user to modify the timeframe for FIX ports to between 1 second and 30 seconds for the removal of orders is consistent with the Act and the protection of investors because the purpose of this optional feature is to mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application. BX Participants selecting the removal feature are able to better anticipate the appropriate time that they require prior to a logoff as compared to the Exchange, within the Exchange's prescribed timeframes. The Exchange does not desire to trigger unwarranted logoffs of BX Participants and therefore permits BX Participants to provide a time to the Exchange, within the Exchange's prescribed timeframe, to authorize the Exchange to disconnect the BX Participant and remove orders. The “nn” seconds serve as the BX Participant's instruction to the Exchange to act upon the loss of connection and remove orders from the System. The BX Participant is also best positioned to determine that they only desire the disconnect feature, which is mandatory, and do not desire to have their orders removed.

The Exchange's proposal to offer other market participants the removal feature on a voluntary basis is similar to CBOE's Rule. CBOE offers market participants, on a voluntary basis, the ability to cancel orders entered through FIX when a technical disconnect occurs, similar to the BX proposal. CBOE's Rule offers participants the opportunity to cancel orders within a timeframe determined by the Trading Permit Holder. The default value selected by the CBOE is no less than 5 seconds. The Exchange's default timeframe for the disconnect and removal of orders for FIX is 30 seconds with the ability to modify that timeframe to between 1 second and 30 seconds, on a session by session basis, in contrast to CBOE. Also, in contrast to CBOE, FIX users may choose to enable or disable the cancellation feature when a disconnect occurs. The proposed timeframe for the FIX feature is consistent with the Act because the Exchange seeks to provide BX Participants with the ability to select the amount of time that they desire for a loss of communication prior to taking action to cancel open orders or simply disconnect. The BX Participant should have the ability to select the appropriate time, within a prescribed timeframe, for authorizing the Exchange to cancel its open orders or simply disconnect from the Exchange. Inadvertent cancellations may create a greater risk of harm to investors and the BX Participant is better positioned to determine the appropriate time, with the prescribed timeframe, to remove orders or disconnect. CBOE's rule also offers participants the ability to cancel orders as proposed by BX, on a voluntary basis.

The proposed rule change will help maintain a fair and orderly market which promotes efficiency and protects investors. This mandatory removal feature for BX Options Market Makers and optional removal for all other market participants will mitigate the risk of potential erroneous or unintended executions associated with a loss in communication with a Client Application.

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. Specifically, the Exchange does not believe the proposed rule change will cause an undue burden on intra-market competition because BX Options Market Makers, unlike other market participants, have greater risks in the market place. Quoting across many series in an option creates large principal positions that expose BX Options Market Makers, who are required to continuously quote in assigned options, to potentially significant market risk. Providing a broader timeframe for the disconnect and removal of orders for FIX as compared to the removal of quotes for SQF Ports does not create an undue burden on competition. BX Options Market Makers have quoting obligations and are more sensitive to price movements as compared to other market participants. The proposal is consistent with the Act because it provides a tighter timeframe for the disconnect and removal of quotes for SQF Ports as compared to the removal of orders for FIX Ports.

BX Options Market Makers need to remain vigilant of market conditions and react more quickly to market movements as compared to other BX Participants entering multiple orders into the System. The proposal reflects this sensitivity borne by BX Options Market Makers and reflects the reaction time of BX Options Market Makers as compared to other BX Participants entering orders. Offering the removal feature to other market participants on an optional basis does not create an undue burden on intra-market competition because unlike BX Options Market Makers, other market participants do not bear the same risks of potential erroneous or unintended executions. FIX users have the opportunity to disable the cancellation feature and simply disconnect from the Exchange. FIX users may also set a timeframe that is appropriate for their business. It is appropriate to offer this optional cancellation functionality to other market participants for open orders, because those orders are subject to risks of missed and/or unintended executions due to a lack of connectivity which the BX Participants need to weigh. Finally, the Exchange does not believe that such change will impose any burden on inter-market competition that is not necessary or appropriate in furtherance of the purposes of the Act. Other options exchanges offer similar functionality.

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

No written comments were either solicited or received.

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

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

A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days from the date of filing. However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that it may immediately offer the proposed risk protection feature. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. The Exchange proposes to adopt a functionality designed to assist BX Participants with managing certain risks in the event that a BX Participant loses communication with its FIX or SQF Ports due to a loss of connectivity. The Commission notes that two other options exchanges currently have similar risk protection functionalities for their members. Therefore, the Commission hereby waives the 30-day operative delay and designates the proposal operative upon filing. 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 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 rule-comments@sec.gov. Please include File Number SR-BX-2016-040 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-2016-040. 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-2016-040 and should be submitted on or before August 8, 2016.