Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 3, Section 10, Order Book Allocation

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 April 7, 2021, Nasdaq BX, Inc. (“BX” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I 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 Options 3, Section 10, Order Book Allocation.

The text of the proposed rule change is available on the Exchange's website at https://listingcenter.nasdaq.com/rulebook/bx/rules,, 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 Options 3, Section 10, Order Book Allocation. Today, pursuant to Options 3, Section 10, BX determines for each option whether to apply the Price/Time or the Size Pro-Rata execution algorithm. This proposal seeks to amend BX's Price/Time execution algorithm.

Price/Time Execution Algorithm

Today, there are 5 priority overlays for the Price/Time execution algorithm: (1) Public Customer Priority; (2) Lead Market Maker (“LMM”) Priority; (3) Entitlement for Orders of 5 contracts or fewer; (4) Directed Market Maker (“DMM”) Priority; and (5) All Other Remaining Interest. The Exchange proposes to amend the LMM Priority overlay with this proposal.

Today, Public Customer orders shall have priority over non-Public Customer orders at the same price. Public Customer Priority is always in effect when the Price/Time execution algorithm is in effect. The LMM participant entitlements shall only be in effect when the Public Customer Priority Overlay is also in effect.

Today, Options 3, Section 10(a)(1)(C)(1)(b) provides, in part, After all Public Customer orders have been fully executed, upon receipt of an order, provided the LMM's bid/offer is at or improves on the Exchange's disseminated price, the LMM will be afforded a participation entitlement. The LMM shall not be entitled to receive a number of contracts that is greater than the displayed size associated with such LMM. LMM participation entitlements will be considered after the Opening Process. The LMM participation entitlement is as follows:

(1) A BX Options LMM shall receive the greater of:

(a) Contracts the LMM would receive if the allocation was based on time priority pursuant to subparagraph (C)(1)(a) above with Public Customer priority;

(b) 50% of remaining interest if there is one or no other Market Maker at that price;

(c) 40% of remaining interest if there is two other Market Makers at that price;

(d) 30% of remaining interest if there are more than two other Market Makers at that price; or

(e) the Directed Market Maker (“DMM”) participation entitlement, if any, set forth in subsection (C)(1)(c) below (if the order is a Directed Order and the LMM is also the DMM).

The Exchange notes that the System does not operate as provided for above today. At this time, the Exchange proposes to amend the LMM Priority to instead provide the following:

. . . The LMM participation entitlement is as follows:

(1) A BX Options LMM shall receive the greater of:

(a) Contracts the LMM would receive if the allocation was based on time priority pursuant to subparagraph (C)(1)(a) above with Public Customer priority;

(b) 50% of remaining interest if there is one other non-Public Customer Order or Market Maker order or quote at that price;

(c) 40% of remaining interest if there are two other non-Public Customer Order or Market Maker orders or quotes at that price;

(d) 30% of remaining interest if there are more than two other non-Public Customer Order or Market Maker orders or quotes at that price; or

(e) the Directed Market Maker (“DMM”) participation entitlement, if any, set forth in subsection (C)(1)(c) below (if the order is a Directed Order and the LMM is also the DMM).

Specifically, the Exchange proposes to determine an LMM's allocation percentage (50%/40%/30%), if applicable, by how many Market Maker orders and quotes and non-Public Customer orders are present at the best price. After all Public Customer orders have been satisfied, the System would allocate to an LMM the applicable percentage based on non-Public Customer orders and Market Maker quotes and orders at the best price at the time the incoming order was received by the System. This proposed change would align the System with the rule. This amendment differs from the manner in which the LMM was allocated prior to the Migration. Prior to the Migration, only other Market Maker orders or quotes present at the same price would have determined the percentage of allocation for an LMM. With this amendment, non-Public Customers orders present at the same price would also be considered in determining the percentage. The proposed amendment is similar to functionality on Nasdaq ISE, LLC (“ISE”), Nasdaq GEMX, LLC (“GEMX”), Nasdaq MRX, LLC (“MRX”) and the Cboe Exchange, Inc (“Cboe”).

The Exchange is not considering Public Customer orders in determining the LMM allocation because, as noted above, Public Customer orders shall have priority over all other interest at the same price and those orders would have been executed prior to any LMM allocation.

With respect to LMMS, unlike other market participants, LMMs have unique obligations to the market which include, among other things, quoting obligations. However, similar to other market participants, an LMM cannot receive any portion of an allocation, regardless of its participation rights, unless it is quoting at the best price at the time the executable order is received by the System. With this proposal LMM's would continue to be entitled to an enhanced allocation, once Public Customer orders have been satisfied, except that allocation would be subject to the amount of other Market Maker interest as well as non-Public Customer orders. The Exchange seeks to consider non-Public Customer orders in its LMM allocation to recognize other market participant interest, except for Public Customer, that was present in the Order Book at the same price at the time of execution. By considering this interest, non-Public Customers allocated in the “All Other Remaining Interest” category would be entitled to potentially higher allocations. The Exchange's proposal is intended to encourage LMMs to continue to quote at or improve the NBBO in order to be afforded the highest allocation attainable. The proposal also seeks to recognize other non-Public Customer interest that was at the same price at the time of execution by permitting those market participants to capture a potentially higher allocation. Below are some examples.

LMM Allocation Example—Which Only Considers Market Maker Interest

Assume the option below is open and away markets are wider than BX's interest that arrives in sequence as specified below:

LMM Quote: 1.00 (10) × 2.00 (10)

Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO updates to 1.00 × 1.95)

Broker Dealer Order to Sell 10 @ 1.95 arrives

LMM Updates Quote: 1.00 (10) × 1.95 (10)

Priority Customer Order Firm B to buy 12 @ 1.95 arrives

Allocation

In this scenario, Priority Customer Firm A is allocated 2 @ 1.95 and the LMM is allocated remaining 10 @ 1.95.

LMM Allocation Example Which Considers Market Maker and Non-Public Customer Interest

Assume the option below is open and any away markets are wider than BX's interest that arrives in sequence as specified below:

LMM Quote: 1.00 (10) × 2.00 (10)

Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO updates to 1.00 × 1.95)

Broker Dealer Order to Sell 10 @ 1.95 arrives

LMM Updates Quote: 1.00 (10) × 1.95 (10)

Priority Customer Order Firm B to buy 12 @ 1.95 arrives

Allocation

In this scenario, Priority Customer Firm A is allocated 2 @ 1.95, the LMM is allocated 5 @ 1.95 (1 other non-public customer = 50%) and the Broker Dealer is allocated 5 @ 1.95.

At this time, a similar proposed change is not being made to BX's Size Pro-Rata execution algorithm, which today only considers Market Maker quotes and orders within the LMM Priority, and has an additional Market Maker Priority allocation within the Size Pro-Rata execution algorithm as compared to the Price/Time execution algorithm. If BX were to consider non-Public Customer Orders in the LMM Priority for BX's Size Pro-Rata execution algorithm, because there is a Market Maker Priority allocation in this model, which does not exist in the Price/Time execution algorithm, the Market Maker Priority would benefit. In the Price/Time execution algorithm, the All Other Remaining Interest allocation benefits because there is no Market Maker Priority in that model. In the Price/Time execution algorithm all Participants are on parity after the LMM Priority. This is not the case with the Size Pro-Rata execution algorithm because Market Makers have priority ahead of All Other Remaining Interest being allocated; there is not the same concept of parity. Therefore, making a similar change to BX's Size Pro-Rata execution algorithm would only serve to advantage other Market Makers at the expense of the LMM. Of note, the Lead Market Maker has higher quoting obligations both intra-day and during the Opening Process as compared to the Market Maker. See below example for illustration.

LMM Size Pro-Rata Allocation Example With Market Maker Overlay

Assume the option below is open and any away markets are wider than BX's interest that arrives in sequence as specified below:

LMM Quote: 1.00 (10) × 2.00 (10)

Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO updates to 1.00 × 1.95)

Broker Dealer Order to Sell 10 @ 1.95 arrives

Market Maker B Quotes 1.05 × 1.95 (10)

Market Maker C Quotes 1.05 × 1.95 (10)

LMM Updates Quote: 1.00 (20) × 1.95 (20)

Priority Customer Order Firm B to buy 12 @ 1.95 arrives

Allocation

In this scenario, Priority Customer Firm A is allocated 2 contracts @ 1.95, the LMM is allocated 4 contracts @ 1.95 (2 other Market Maker quotes present = 40% LMM allocation), both Market Makers B and C are allocated 3 contracts at @ 1.95, and Broker Dealer is not allocated any contracts. In this example, the Broker Dealer order cannot be allocated. If the Exchange were to consider the Broker Dealer order within the LMM Priority, as proposed for the Price/Time execution algorithm, it would have resulted in a higher allocation for one of the Market Makers, to the detriment of the LMM.

The Exchange notes that all symbols on BX are currently designated as Price/Time. In the event that the Exchange determines to designate options symbols as eligible for Size Pro-Rata allocation, a similar change would be considered by the Exchange and, if the Exchange determines to amend its rule, a proposed rule change would be submitted to the Commission.

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.

The Exchange's proposal to amend the Price/Time LMM execution algorithm to consider non-Public Customer orders in addition to Market Maker quotes and orders when allocating a percentage to an LMM is consistent with the Act. The Exchange is not considering Public Customer orders in determining the LMM allocation because, as noted above, Public Customer orders shall have priority over non-Public Customer orders at the same price and those orders would have been executed prior to any LMM allocation. With respect to LMMs, unlike other market participants, LMMs have unique obligations to the market which include, among other things, quoting obligations. However, similar to other market participants, an LMM cannot receive any portion of an allocation, regardless of its participation rights, unless it is quoting at the best price at the time the executable order is received by the System.

With this proposal LMM's would continue to be entitled to an enhanced allocation, once Public Customer orders have been satisfied, except that allocation would be subject to the amount of other Market Maker interest as well as non-Public Customer orders. The Exchange seeks to consider non-Public Customer orders in its LMM allocation to recognize other market participant interest, except for Public Customer, that was present in the Order Book at the same price at the time of execution. By considering this interest, non-Public Customers allocated in the “All Other Remaining Interest” category would be entitled to potentially higher allocations. The Exchange believes that this amendment will encourage other non-Public Customers to submit interest into the Order Book, at the same price, in order to receive a potentially higher allocation after all Maker Makers have been allocated. With this proposal LMMs would be encouraged to quote at or improve the NBBO in more cases in order to be afforded the highest allocation attainable. Creating competition which rewards Participants that continuously add liquidity to the Order Book benefits all market participants.

The Exchange notes that at this time a similar proposed change is not being made to the Size Pro-Rata execution algorithm, which today only considers Market Maker quotes and orders within the LMM Enhancement. The Exchange notes that all symbols on BX are currently designated as Price/Time. Unlike the Price/Time execution algorithm, the Size Pro-Rata execution algorithm has 6 overlays: (1) Public Customer Priority; (2) LMM Priority; (3) Entitlement for Orders of 5 contracts or fewer; (4) Directed Market Maker Priority; (5) Market Maker Priority; and (6) All Other Remaining Interest. The Price/Time execution algorithm does not have a Market Maker Priority allocation similar to the Size Pro-Rata execution algorithm. The current Market Maker Priority considers all other Participant orders at the same price and, therefore, rewards Participants at that price in a similar fashion as proposed for the Price/Time execution algorithm, albeit at the Market Maker allocation instead of the LMM allocation. The Exchange believes that the proposal would serve to align the two allocation models and reward Participants at the same price by considering non-Public Customer interest as well as Market Maker interest before non-Public Customers are allocated. An example of how the same scenario presented above for the Price/Time model would allocated within the current Size Pro Rata model is below.

LMM Allocation Example—Size Pro-Rata Overlay Example

Assume the option below is open and away markets are wider than BX's interest that arrives in sequence as specified below:

LMM Quote: 1.00 (10) × 2.00 (10)

Priority Customer Order Firm A to Sell 2 @ 1.95 arrives (BX BBO updates to 1.00 × 1.95)

Broker Dealer Order to Sell 10 @ 1.95 arrives

Market Maker B quote 1.00 (10) × 1.95 (10) arrives

Market Maker C quote 1.00 (10) × 1.95 (10) arrives

LMM Updates Quote: 1.00 (10) × 1.95 (10)

Priority Customer Order Firm B to buy 22 @ 1.95 arrives

Allocation

In this scenario:

• Priority Customer Firm A is allocated 2 @ 1.95
• Lead Market Maker is allocated 8 @ 1.95 (40% of remaining 20 contracts after priority customer overlay)
• Market Maker B is allocated 6 @ 1.95 (50% of remaining 12 contracts after LMM overlay)
• Market Maker C is allocated 6 @ 1.95 (50% of remaining 12 contracts after LMM overlay)

In this scenario, the Broker Dealer is not allocated as the Market Maker was allocated the remaining 12 contracts. Even if the LMM overlay considered the Broker Dealer in its allocation, the Broker Dealer will still not be allocated. The LMM would get 6 contracts (30% of 20 contracts), and each of the Market Makers would get 7 contracts, which only reduces the LMM allocation as the LMM was quoting at the same price as the other Market Makers.

The Exchange notes that the System does not operate as provided for above today. This proposed change would align the System with the rule. The proposed amendment is similar to functionality on Nasdaq ISE, LLC (“ISE”), Nasdaq GEMX, LLC (“GEMX”), Nasdaq MRX, LLC (“MRX”) and the Cboe Exchange, Inc (“Cboe”).

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 Exchange is not considering Public Customer orders in determining the LMM allocation because, as noted above, Public Customer orders shall have priority over non-Public Customer orders at the same price and those orders would have been executed prior to any LMM allocation.

The Exchange seeks to consider non-Public Customer orders in its LMM allocation to recognize other market participant interest, except for Public Customer, that was present in the Order Book at the same price at the time of execution. By considering this interest, non-Public Customers allocated in the “All Other Remaining Interest” category would be entitled to potentially higher allocations. The amendment will encourage other non-Public Customers to submit interest into the Order Book, at the same price, in order to receive a potentially higher allocation after all Maker Makers have been allocated. With this proposal LMMs would be encouraged to quote at or improve the NBBO in more cases in order to be afforded the highest allocation attainable. Creating competition which rewards Participants that continuously add liquidity to the Order Book benefits all market participants. The Exchange does not believe its proposal imposes an undue burden on competition because with this change, non-Public Customer orders would be entitled to potentially higher allocations.

With respect to LMMs, unlike other market participants, LMMs have unique obligations to the market which include, among other things, quoting obligations. However, similar to other market participants, an LMM cannot receive any portion of an allocation, regardless of its participation rights, unless it is quoting at the best price at the time the executable order is received by the System. LMM's would continue to be entitled to an enhanced allocation, once Public Customer orders have been satisfied, except that allocation would be subject to the amount of other Market Maker interest as well as non-Public Customer orders.

Today, LMMs may receive higher allocations as only other Market Maker interest is considered when allocating to an LMM. With this proposal, the Exchange would consider not only other Market Maker interest but also non-Public Customer orders. Considering all other interest, except Public Customer interest, that was at the same price at the time of execution results in LMMs potentially receiving lower allocations. LMMs add value through continuous quoting and are subject to additional requirements and obligations unlike other market participants. The Exchange incentivizes LMMs to provide liquidity on BX through enhanced allocations and pricing. The Exchange believes that this proposal will continue to incentivize LMMs to add liquidity while also benefitting all market participants through the quality of order interaction.

Unlike the Price/Time execution algorithm, the Size Pro-Rata execution algorithm has 6 overlays: (1) Public Customer Priority; (2) LMM Priority; (3) Entitlement for Orders of 5 contracts or fewer; (4) DMM Priority; (5) Market Maker Priority; and (6) All Other Remaining Interest. The Price/Time execution algorithm does not have a Market Maker Priority allocation similar to the Size Pro-Rata execution algorithm. The current Market Maker Priority considers all other Participant orders at the same price and, therefore, rewards Participants at that price in a similar fashion as proposed for the Price/Time execution algorithm, albeit at the Market Maker allocation instead of the LMM allocation. The Exchange believes that the proposal does not impose an undue burden on competition as it aligns the two models and reward Participants at the same price by considering non-Public Customer interest as well as Market Maker interest before non-Public Customers are allocated.

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 and Rule 19b-4(f)(6) thereunder.

A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the Act normally does not become operative for 30 days after the date of its 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 requested that the Commission waive the 30-day operative delay. As the proposed rule change raises no novel issues and more accurately describes the System's treatment of LMM allocation, the Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Accordingly, the Commission hereby waives the operative delay and designates the proposed rule change 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 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 rule-comments@sec.gov. Please include File Number SR-BX-2021-013 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-2021-013. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( 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 website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BX-2021-013, and should be submitted on or before May 14, 2021.