The Securities Industry Association is arguing that a recent proposal by the Boston Options Exchange (BOX) could lead to violations of Regulation NMS. The SIA stated in a comment letter to the Securities and Exchange Commission that the BOX proposal allows market makers too much discretion over which orders they receive during its price improvement period (PIP), a three-second, automated auction that increases the price of an order in penny increments. The proposal allows BOX's market makers to deny other markets equal access to sending order flows. The SIA argued that allowing market makers to use "selective discrimination" during the PIP auction would violate Rule 610 of Regulation NMS, which prohibits trading centers from unfairly inhibiting equal access to markets.
To provide equal access to the market, the entire PIP transaction must be anonymous and not just at the point of trade execution, the SIA stated. "The [BOX] proposal...will permit selective discrimination against certain order flow providers," the SIA argued. The International Stock Exchange recently filed for a similar change to its Market Operations Information Circular, the SIA pointed out in a footnote to the comment letter, adding that it also objected to the ISE's proposal. Christopher Nagy, chairman of the SIA Options Committee who signed the letter, referred inquiries to a spokesman, who declined to comment. Action on the BOX proposal is pending, said a staff attorney at the SEC's Division of Market Regulation. She declined to comment on the SIA letter.