[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Notices]
[Pages 78437-78445]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-30769]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71148; File No. SR-BOX-2013-43]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and
2, to Permit Complex Orders to Participate in Price Improvement Periods
December 19, 2013.
I. Introduction
On September 5, 2013, BOX Options Exchange LLC (``Exchange'' or
``BOX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to add new BOX Rule 7245 to permit Complex Orders
to participate in Price Improvement Period auctions (the ``COPIP'') and
make certain other conforming changes to accommodate the new COPIP
Rule. The proposed rule change was published for comment in the Federal
Register on September 23, 2013.\3\ On November 1, 2013, the Commission
extended the time period for Commission action on the proposal to
December 20, 2013.\4\ On December 16, 2013, BOX filed Amendment No. 1
to the proposal.\5\ On December 19, 2013, BOX filed Amendment No. 2 to
the proposal.\6\ The Commission received no comments regarding the
proposal, as amended. The Commission is publishing this notice to
solicit comments on Amendment Nos. 1 and 2 from interested persons and
is approving the proposed rule change, as modified by Amendment Nos. 1
and 2, on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 70427 (September 17,
2013), 78 FR 58364 (``Notice'').
\4\ See Securities Exchange Act Release No. 70799 (November 1,
2013), 78 FR 66980 (November 7, 2013).
\5\ In Amendment No. 1, BOX added further information relating
to the ability of BOX members (``Options Participants'') to respond
adequately within the 100 millisecond COPIP period and the effect of
Unrelated Orders received during overlapping PIP and COPIP auctions,
including additional rule text in proposed BOX IM-7245-3 to describe
such effect. BOX also provided an analysis of whether the proposed
COPIP rules are consistent with Section 11(a) of the Act and the
rules thereunder and additional rule text in existing BOX IM-7245-
2(b) regarding prohibited conduct. In addition, BOX also modified
its proposed rule text for BOX Rule 7130(a) to reflect a proposed
rule change (see Securities Exchange Act Release No. 70395
(September 15, 2013), 78 FR 57911 (September 20, 2013)) that was
approved after the initial filing of this proposed rule change.
Amendment No. 1 has been placed in the public comment file for SR-
BOX-2013-43 at http://www.sec.gov/comments/sr-box-2013-43/box201343.shtml (see letter from Lisa J. Fall, President, BOX, to
Elizabeth M. Murphy, Secretary, Commission, dated December 16, 2013)
and also is available on the Exchange's Web site at https://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2013-43_Amendment_1.pdf.
\6\ In Amendment No. 2, BOX corrected one sentence to conform it
to discussion elsewhere in the Amendment No. 1 analysis of whether
the proposed COPIP rules are consistent with Section 11(a) of the
Act and the rules thereunder. Amendment No. 2 has been placed in the
public comment file for SR-BOX-2013-43 at http://www.sec.gov/comments/sr-box-2013-43/box201343.shtml (see letter from Lisa J.
Fall, President, BOX, to Elizabeth M. Murphy, Secretary, Commission,
dated December 19, 2013) and also is available on the Exchange's Web
site at https://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2013-43_Amendment_2.pdf.
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II. Description of the Proposal
Under proposed BOX Rule 7245, Options Participants would be
permitted to submit Complex Orders \7\ to the COPIP in substantially
the same manner as they currently submit orders for single options
series instruments to the Price Improvement Period (``PIP''), except as
necessary to account for distinctions between non-Complex Orders on the
BOX Book \8\ and Complex Orders. COPIP also would preserve the already
established execution priority of interest on the BOX Book over Complex
Orders \9\ by providing that the bids and offers on the BOX Book for
the individual legs of a Strategy (``BOX Book Interest'') will execute
in priority over Complex Orders at the same price.\10\
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\7\ As defined in proposed BOX Rule 7240(a)(5), the term
``Complex Order'' means any order involving the simultaneous
purchase and/or sale of two or more different options series in the
same underlying security, for the same account, in a ratio that is
equal to or greater than one-to-three (.333) and less than or equal
to three-to-one (3.00) and for the purpose of executing a particular
investment strategy.
\8\ The ``BOX Book'' is defined as the ``electronic book of
orders on each single option series maintained by the BOX Trading
Host.'' BOX Rule 100(a)(10).
\9\ The execution priority of interest on the BOX Book over
Complex Orders is consistent with existing BOX Rules 7240(b)(3)(i).
See also Notice, 78 FR at 58366-67 for an example illustrating the
execution and allocation of a COPIP with BOX Book Interest.
\10\ See proposed BOX Rule 7245(f)(3)(i). The term ``Strategy''
is defined as a particular combination of components of a Complex
Order and their ratios to one another. See BOX Rule 7240(a)(7).
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A. Auction Eligibility and Auction Process
Under proposed BOX Rule 7245, an Options Participant executing
agency
[[Page 78438]]
orders for single options series instruments may designate for price
improvement and submission to the COPIP a Customer Order that is a BOX-
Top Order, Market Order or marketable Limit Order. Specifically, to
initiate a COPIP, the Options Participant would submit a Customer Order
(the ``COPIP Order'') to BOX with a matching contra order on the
opposite side of the market from the COPIP Order (``Primary Improvement
Order'') equal to the full size of the initiating COPIP Order. The
Primary Improvement Order must represent either: (1) A single price
(``Single-Priced Primary Improvement Order'') that is equal to or
better than cNBBO,\11\ cBBO \12\ and BBO on the Complex Order Book for
the strategy at the time of the commencement of the COPIP; or (2) an
auto-match submission that will automatically match both the price and
size of all competing orders, including Improvement Orders \13\ and
Unrelated Orders \14\ at any price level achieved during the COPIP or
only up to a limit price (``Max Improvement Primary Improvement
Order'').\15\
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\11\ As defined in Rule 7240(a)(3), the term ``cNBBO'' means the
best net bid and offer price for a Complex Order Strategy based on
the NBBO for the individual options components of such Strategy.
\12\ As defined in Rule 7240(a)(1), the term ``cBBO'' means the
best net bid and offer price for a Complex Order Strategy based on
the BBO on the BOX Book for the individual options components of
such Strategy.
\13\ For purposes of the COPIP, the term ``Improvement Order''
is defined as a competing Complex Order submitted to BOX by an Order
Flow Provider or BOX Market Maker during a COPIP. See proposed BOX
Rule 7245(a)(1).
\14\ The term ``Unrelated Order'' is defined as a non-
Improvement Order entered on BOX during a COPIP or BOX Book Interest
during a COPIP. See proposed BOX Rule 7245(a)(2).
\15\ See proposed BOX Rule 7245(f).
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In order to initiate a COPIP, the Primary Improvement Order must
designate the auction start price for the COPIP (``COPIP Start
Price''), which price must be equal to or better than cNBBO, cBBO and
BBO on the Complex Order Book for the Strategy at the time of
commencement of the COPIP.\16\ As with the PIP for single options
series, an Initiating Participant in a COPIP is not permitted to cancel
or to modify the size of a Single-Priced Primary Improvement Order or
the COPIP Order at any time during a COPIP, and may modify only the
price of its Single-Priced Primary Improvement Order by improving
it.\17\ The subsequent price modifications to a Single-Priced Primary
Improvement Order are treated as new Improvement Orders for the sake of
establishing priority in the COPIP process.\18\ Similarly, the
Initiating Participant is not permitted to cancel or modify the Max
Improvement Primary Improvement Order, including the COPIP Start Price,
the designated limit price or the size.\19\
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\16\ See id.
\17\ See proposed BOX Rule 7245(f)(2).
\18\ See id.
\19\ See id.
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BOX will commence a COPIP by broadcasting a message via the High
Speed Vendor Feed (``HSVF'') (``the ``COPIP Broadcast'') that: (1)
States that a Primary Improvement Order has been processed; (2)
contains information concerning the strategy, size, COPIP Start Price,
and side of the market; and (3) states when the COPIP will
conclude.\20\ During the COPIP, Improvement Orders are also broadcast
via the HSVF data feed.\21\ All market participants are able to receive
the COPIP Broadcast and notification of Improvement Orders via the
HSVF.\22\
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\20\ See proposed BOX Rule 7245(f).
\21\ See proposed BOX Rule 7245(f)(1).
\22\ See Notice 78 FR at 58366.
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As in the PIP, unless the COPIP terminates early, the COPIP
duration is one hundred milliseconds,\23\ commencing upon the
dissemination of the COPIP Broadcast. The Exchange notes its belief
that, because the 100 millisecond COPIP duration would be the same as
the current duration of the PIP, the COPIP duration is adequate and
would not create any additional burden for Options Participants
participating in a COPIP.\24\
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\23\ See proposed BOX Rule 7245(f)(1).
\24\ Id. See also Amendment No. 1, supra note 5. The Exchange
also notes that it surveyed all Participants that had responded to
at least one PIP during the past six months, inquiring whether the
100 millisecond duration for the COPIP provided adequate time to
response. The Exchange received responses from eighty percent of the
Options Participants contacted, all of which indicated that they
believe they will be able to receive, process, and communicate
multiple COPIP Broadcast responses back to BOX within substantially
less than 100 milliseconds. See id.
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During a COPIP, Order Flow Providers (``OFPs'') and Market Makers
(except for the Initiating Participant) may submit Improvement Orders
for their own account. OFPs may submit Improvement Orders for the
account of a Public Customer under any type of instruction they wish to
accept.\25\ An Improvement Order submitted to the COPIP for the account
of a Public Customer must be identified as a Public Customer Order.\26\
Options Participants who submit Improvement Orders for a COPIP will be
deemed ``COPIP Participants'' for that specific COPIP only, and may
continually submit competing Improvement Orders during that COPIP.\27\
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\25\ See proposed BOX Rule 7245(f)(1).
\26\ Id.
\27\ Id.
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Just as in a PIP, Options Participants that submit Improvement
Orders in a COPIP may: (1) Submit competing Improvement Order(s) for
any size up to the size of the COPIP Order; (2) submit competing
Improvement Order(s) for any price equal to or better than the COPIP
Start Price; (3) improve the price of their Improvement Order(s) at any
point during the COPIP; and (4) decrease the size of their Improvement
Order(s) only by improving the price of that Complex Order.\28\
Improvement Orders may be submitted in one-cent increments.\29\ Unlike
a PIP, the COPIP will not include Customer COPIP Orders (``CPOs'') as
defined in BOX Rule 7150(h).
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\28\ See proposed BOX Rule 7245(f)(2). Generally, Improvement
Orders may not be executed unless the price is equal to or better
than the cNBBO at the commencement of the COPIP. See proposed BOX
Rule 7245(k). However, where an Exchange Official (as defined in BOX
Rule 100(a)(24)) determines that quotes from one or more particular
markets in one or more classes of options are not reliable, the
Exchange Official may direct the senior person in charge of the BOX
Market Operations Center (as defined in BOX Rule 100(a)(31)) to
exclude the unreliable quotes from the Improvement Period
determination of the cNBBO for Complex Order Strategies of which
such option class(es) are a component. The Exchange Official may
determine quotes in one or more particular options classes in a
market are not reliable only in the following circumstances: (1)
Quotes Not Firm: A market's quotes in a particular options class are
not firm based upon direct communication to the Exchange from the
market or the dissemination through OPRA of a message indicating
that disseminated quotes are not firm; (2) Confirmed Quote Problems:
A market has directly communicated to the Exchange or otherwise
confirmed that the market is experiencing systems or other problems
affecting the reliability of its disseminated quotes. See proposed
BOX Rule 7245(k)(1). Improvement Orders may be executed at a price
that is not equal to or better than the cNBBO at the commencement of
the COPIP where the away options exchange posting orders on a single
option series comprising the cNBBO is conducting a trading rotation
in that options class. See proposed BOX Rule 7245(k)(2).
\29\ See proposed BOX Rule 7245(f)(2).
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B. COPIP Order Execution and Allocation
As with a PIP, a COPIP will conclude at the end of the auction
period.\30\ Order execution and allocation in a COPIP is similar to
order execution and allocation in a simple order PIP.\31\ The COPIP
Order will execute against the best prevailing order(s) on BOX, except
any proprietary order from the Initiating Participant sent prior to the
COPIP Broadcast in accordance with price/time priority, subject to the
exceptions describe below. The ``best prevailing order(s) on BOX
includes Improvement Order(s) or Unrelated Order(s) received by BOX
during the COPIP, but excludes all Unrelated Orders that were
[[Page 78439]]
immediately executed during the interval of the COPIP. Such Unrelated
Orders may include agency orders on behalf of Public Customers, market
makers at away exchanges and non-BOX Options Participant broker-
dealers, as well as non-COPIP proprietary orders submitted by BOX
Options Participants. Any unfilled portion of an Improvement Order will
be cancelled.\32\
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\30\ See proposed BOX Rule 7245(f)(3).
\31\ See BOX Rule 7150(f)(3).
\32\ See proposed BOX Rule 7245(f)(3).
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1. Priority and Allocation
The priority and trade allocation privileges retained by Initiating
Participants in a COPIP are substantially similar to those currently
afforded Initiating Participants in a PIP.\33\ Notwithstanding the
foregoing execution rules for a COPIP, BOX Book Interest will execute
in priority over Complex Orders at the same price,\34\ so as to
preserve the already established execution priority of interest on the
BOX Book over Complex Orders.\35\ Further, no Complex Order for a non-
Market Maker broker-dealer account of an Options Participant will be
executed before all Public Customer Complex Order(s), whether
Improvement Order(s) or non-Improvement Order(s), and all non-BOX
Options Participant broker-dealer Complex Order(s) at the same price
have been filled; provided however, that all Complex Orders on the
Complex Order Book prior to the COPIP Broadcast, excluding any
proprietary order(s) from the Initiating Participant, will be filled in
time priority before any other Complex Order at the same price.\36\
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\33\ See BOX Rule 7150(g). For example, Quotes are included in
the PIP rules but are not part of the COPIP rules because quotes are
not provided on Complex Orders. See BOX Rule 7250(g)(3).
\34\ See proposed BOX Rule 7245(f)(3)(i).
\35\ The execution priority of interest on the BOX Book over
Complex Orders is consistent with existing BOX Rules 7240(b)(3)(i).
See also Notice, 78 FR at 58366-67 for an example illustrating the
execution and allocation of a COPIP with BOX Book Interest.
\36\ See proposed BOX Rule 7245(f)(3)(ii).
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Subject to the execution priority of BOX Book Interests described
above, the Initiating Participant will retain certain priority and
trade allocation privileges upon conclusion of a COPIP.\37\ In
instances in which a Single-Priced Primary Improvement Order, as
modified (if at all), is matched by or matches any Complex Order(s) or
BOX Book Interest at any price level, the Initiating Participant would
retain priority for up to forty percent (40%) of the original size of
the COPIP Order, notwithstanding the time priority of the Primary
Improvement Order or Complex Order(s). However, if only one Complex
Order or BOX Book Interest matches or is better than the Initiating
Participant's Single-Priced Primary Improvement Order, then the
Initiating Participant may retain priority for up to fifty percent
(50%) of the original size of the COPIP Order. The Initiating
Participant will receive additional allocation only after all other
Complex Orders have been filled at that price level.\38\ For purposes
of determining whether the Initiating Participant is entitled to
receive a forty percent (40%) or a fifty percent (50%) priority
allocation, BOX will count BOX Book Interest as a single competing
order in a COPIP.
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\37\ See proposed BOX Rules 7245(f)(3)(iii) and 7245(g).
\38\ See proposed BOX Rule 7245(g)(1). See also Notice, 78 FR at
58367-68 for examples illustrating the execution and allocation of a
COPIP with Primary Improvement Order priority.
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In instances in which a Max Improvement Primary Improvement Order
is submitted by the Initiating Participant, the Initiating Participant
would be allocated its full size at each price level, except where
restricted by the designated limit price and subject to the limitations
discussed in the next following paragraph below, until a price level is
reached where the balance of the COPIP Order can be fully executed.
Only at such price level would the Initiating Participant retain
priority for up to forty percent (40%) of the remaining size of the
COPIP Order. However, if only one competing Complex Order or BOX Book
Interest matches the Initiating Participant at the final price level,
then the Initiating Participant may retain priority for up to fifty
percent (50%) of the remaining size of the COPIP Order.\39\ As with
Single-Priced Primary Improvement Orders,\40\ for purposes of
determining whether the Initiating Participant is entitled to receive a
forty percent (40%) or a fifty percent (50%) priority allocation, BOX
will count BOX Book Interest as a single competing order in a COPIP.
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\39\ See proposed BOX Rule 7245(g)(2). See also Notice, 78 FR at
58368 for an example illustrating the execution and allocation of a
COPIP with Max Improvement Primary Improvement Order.
\40\ See proposed BOX Rule 7245(g)(1). See also Notice, 78 FR at
58367-68 for examples illustrating the execution and allocation of a
COPIP with Primary Improvement Order priority.
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The Primary Improvement Order will follow, in time priority, all
Complex Orders on the Complex Order Book prior to the COPIP Broadcast
that are equal to the Single Priced Primary Improvement Order price; or
the execution price of a Max Improvement Primary Improvement Order that
results in the balance of the COPIP Order being fully executed, except
any proprietary order(s) from the Initiating Participant. Such
proprietary order(s) would not be executed against the COPIP Order
during or at the conclusion of the COPIP.\41\
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\41\ See proposed BOX Rule 7245(g)(3).
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The Primary Improvement Order will yield priority to certain
competing Complex Orders in substantially the same circumstances as
occurs in the PIP.\42\ When a Single-Priced or Max Improvement Primary
Improvement Order for the proprietary account of an OFP is matched by
or matches any competing Public Customer Complex Order(s), whether
Improvement Order(s), Unrelated Order(s) or any non-BOX Options
Participant broker-dealer Complex Order(s) at any price level, it will
yield priority to them.\43\ When an unmodified Single-Priced Primary
Improvement Order for the account of a Market Maker is matched by any
competing Public Customer Complex Order(s), whether Improvement
Order(s), Unrelated Order(s) or any non-BOX Options Participant broker-
dealer Complex Order(s) at the initial COPIP price level, it will yield
priority to them.\44\ When a Max Improvement or a modified Single-
Priced Primary Improvement Order for the account of a Market Maker
matches any competing Public Customer Complex Order(s), whether
Improvement Order(s), Unrelated Order(s) or any non-BOX Options
Participant broker-dealer Complex Order(s) at subsequent price levels,
it will yield priority to them.\45\
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\42\ See BOX Rule 7150(g)(4).
\43\ See proposed BOX Rule 7245(g)(4)(i). See also Notice, 78 FR
at 58368-69 for an example illustrating the execution and allocation
of a COPIP with an Initiating Participant yielding to a Public
Customer Order.
\44\ See proposed BOX Rule 7245(g)(4)(ii). See also Notice, 78
FR at 58369 for an example illustrating the execution and allocation
of a COPIP with an Initiating Market Maker yielding to a Public
Customer Order at a single price level.
\45\ See proposed BOX Rule 7245(g)(4)(iii). See also Notice, 78
FR at 58369-70 for an example illustrating the execution and
allocation of a COPIP with an order from a Market Maker Initiating
Participant yielding to a Public Customer Order at any price level.
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Consistent with the PIP, when the Primary Improvement Order
receives a trade allocation, it will be entitled to a trade allocation
of at least one (1) Strategy.\46\ At its option, the Initiating
Participant may designate a lower (but not higher) minimum priority and
trade allocation privilege percentage upon the conclusion of the COPIP
auction than it is otherwise entitled to receive. When starting a
COPIP, the Initiating Participant may submit to BOX the Primary
Improvement Order with a designation of the total amount of the COPIP
Order it is willing to ``surrender'' to the other COPIP Participants
(``COPIP
[[Page 78440]]
Surrender Quantity''). Under no circumstances will the Initiating
Participant receive an allocation percentage preference of more than
fifty percent (50%) with one competing order, including counting BOX
Book Interest as a competing order, or forty percent (40%) with
multiple competing orders, including counting BOX Book Interest as a
competing order.\47\ Upon the conclusion of the COPIP auction, trade
allocations will be adjusted to the other COPIP Participants will be
allocated up to the COPIP Surrender Quantity. The Primary Improvement
Order will be allocated the remaining size of the COPIP Order above the
COPIP Surrender Quantity, if any, as described above. If the aggregate
size of other COPIP Participants' contra Complex Orders is not equal to
or greater than the COPIP Surrender Quantity, then the remaining COPIP
Surrender Quantity will be left unfilled and the Primary Improvement
Order will be allocated the remaining size of the COPIP Order described
above.\48\
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\46\ See proposed BOX Rule 7245(g)(5).
\47\ See proposed BOX Rule 7245(g)(6)(i).
\48\ See proposed BOX Rule 7245(g)(6)(ii). See also Notice, 78
FR at 58370-71 for an example illustrating the execution and
allocation of a COPIP with a COPIP Surrender Quantity.
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2. Early Executions and Early Termination
Executions prior to the regular ending time of a COPIP are handled
substantially the same as in a PIP,\49\ with necessary changes to
account for differences between Complex Orders and orders on single
series options instruments. In cases where an Unrelated Order is
submitted to BOX on the same side as the COPIP Order such that it would
cause an execution to occur prior to the end of the COPIP, the COPIP
will be deemed concluded and the COPIP Order will be executed pursuant
to BOX Rule 7245(f). Specifically, the submission to BOX of a BOX-Top
Complex Order or Market Complex Order on the same side as a COPIP Order
will prematurely terminate the COPIP when, at the time of the
submission of such orders, the best Complex Order or BOX Book Interest
is equal to or better than the cNBBO on the opposite side of the COPIP
Order. The submission to BOX of executable BOX Book Interest or an
executable Limit Complex Order on the same side as a COPIP Order will
prematurely terminate the COPIP if: (1) At the time of submission of
the Limit Complex Order, the Limit Complex Order price is equal to or
better than cNBBO, and BBO on the Complex Order Book or cBBO is equal
to or better than the cNBBO, on the opposite side of the market or (2)
at the time of submission of the BOX Book Interest, the BOX Book
Interest is executable against the Complex Order Book. Following the
conclusion of the COPIP, any remaining Improvement Orders are
cancelled, any remaining non-Improvement Orders are filtered pursuant
to BOX Rule 7240(b)(3)(iii) and any remaining BOX Book Interest is
filtered pursuant to BOX Rule 7130(b).\50\
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\49\ See BOX Rule 7150(i) and (j).
\50\ See proposed BOX Rule 7245(h). See also Notice, 78 FR at
58371-72 for examples illustrating the execution and allocation for
the early termination of COPIP due to Unrelated Orders on the same
side as a COPIP Order.
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In cases where an Unrelated Order that is a non-Improvement Order
is submitted to BOX on the opposite side of the COPIP order, such that
it would cause an execution to occur prior to the end of the COPIP, the
non-Improvement Order will be immediately executed against the COPIP
Order up to the lesser of the size of the COPIP Order or the size of
the non-Improvement Order, at a price equal to either: (1) At least one
penny better than the cBBO, if the cBBO on the opposite side of the
market from the non-Improvement Order is equal to or better than the
cNBBO at the time of execution; or (2) the cNBBO. Specifically, a BOX-
Top Complex Order or a Market Complex Order on the opposite side of a
COPIP Order will immediately execute against the COPIP Order when, at
the time of the submission of such Complex Order, the best Improvement
Order does not cross the cNBBO on the same side of the market as the
COPIP Order. The submission to BOX of an executable Limit Complex Order
on the opposite side of a COPIP Order will immediately execute against
a COPIP Order when the Limit Complex Order price is equal to or crosses
any of the cNBBO, cBBO or BBO on the Complex Order Book for the
Strategy.\51\ In cases where an Unrelated Order that is a BOX Book
Interest exists on the opposite side of the COPIP order, such that it
would cause an execution to occur prior to the end of the COPIP, the
BOX Book Interest will immediately be executed against the COPIP Order
up to the lesser of the size of the COPIP Order or the size of the BOX
Book Interest, at a price equal to the BOX Book Interest price.\52\ The
remainder of the Unrelated Order, if any, will be filtered according to
the existing Complex Order filter rules.\53\ The remainder of the COPIP
Order, if any, will be executed at the conclusion of the COPIP pursuant
to BOX Rule 7245(f). Following the conclusion of the COPIP, any
remaining Improvement Orders are cancelled.\54\
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\51\ See proposed BOX Rule 7245(i)(1).
\52\ See proposed BOX Rule 7245(i)(2).
\53\ See BOX Rule 7240(b)(3)(iii) for existing Complex Order
filter rules.
\54\ See proposed BOX Rule 7245(i)(3). See also Notice, 78 FR at
58372-73 for examples illustrating the execution and allocation for
the early termination of COPIP due to Unrelated Orders on the
opposite side as a COPIP Order.
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C. Overlapping Auctions
A COPIP will not run simultaneously with another COPIP in the same
Complex Order Strategy, nor will COPIPs interact, queue or overlap in
any manner.\55\ Any request to initiate a COPIP while another COPIP is
already in progress in the same Strategy will be rejected.\56\ The
Exchange, however, will operate price improvement auctions in both
single option series and Complex Orders at the same time.\57\
Specifically, BOX will accept orders designated for the PIP on a single
option series where a COPIP on a Complex Order Strategy that includes
such a series may be in progress. BOX also will accept Complex Orders
designated for the COPIP where a PIP on either of the component series
may be in progress. Order execution at the conclusion of any such PIPs
will occur as described in the current PIP rules \58\ and Complex Order
execution at the conclusion of any such COPIPs will occur as set forth
in proposed BOX Rule 7245.\59\ The Exchange believes this simultaneous
price improvement auction functionality will reduce order cancelation
and, thereby remove impediments to, and perfect the mechanism of, a
free and open market and a national market system.\60\
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\55\ See BOX IM-7150-3.
\56\ See proposed BOX IM-7245-3.
\57\ BOX notes that processes on the BOX system are sequential
and all orders receive a unique time stamp. As a result, no two
orders (include PIP and COPIP Orders) or events may be treated as
occurring simultaneously on the BOX system. See Amendment No. 1,
supra note 5.
\58\ PIP execution rules are set forth in BOX Rule 7150.
\59\ See proposed BOX IM-7245-3.
\60\ See Amendment No. 1, supra note 5. Amendment No. 1 also
contains detailed examples outlining the operation of the PIP and
COPIP in several multiple auction situations.
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BOX's current rules provide that, when an Unrelated Order on a
single option series is submitted to BOX, the Unrelated Order first
interacts with an ongoing PIP, if any, prior to being entered on the
BOX Book.\61\ Any unexecuted quantity of the order remaining after
interacting with the PIP is then filtered as provided in BOX Rule
7130(b) prior to entry on the BOX
[[Page 78441]]
Book.\62\ Once entered on the BOX Book, the order may be combined with
other orders on other single options series (thereby becoming BOX Book
Interest) \63\ and, as such, will be available to interact with the
Complex Order Book, including any ongoing COPIP, if possible.\64\
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\61\ See BOX Rule 7150(i) for Unrelated Orders on the same side
as the PIP Order. See BOX Rule 7150(j) for Unrelated Orders on the
opposite side of the PIP Order.
\62\ BOX Rules 7150(i) and 7150(j) each provide that, after the
Unrelated Order interacts with the PIP, any remainder of the
Unrelated Order is filtered pursuant to BOX Rule 7130(b). BOX Rule
7130(b) describes the filtering process used by the BOX Trading Host
to ensure that the Unrelated Order will not execute outside the NBBO
price (see BOX Rule 7130(b)(1)). Upon completion of the filtering
process, BOX Rule 7130(b)(4)(i) provides that any remainder of the
Unrelated Order is entered on the BOX Book.
\63\ See proposed BOX Rule 7245(a)(3).
\64\ See Amendment No. 1, Examples 10(a) and (b), illustrating
the operation of the proposed rules when a single option instrument
order is received during a PIP and a COPIP on the same side as the
PIP Order and on the opposite side of the PIP Order, respectively.
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The proposed COPIP rules provide that when an Unrelated Order that
is a Complex Order is submitted to BOX, the Unrelated Order first
interacts with an ongoing COPIP, if any, prior to being entered on the
Complex Order Book.\65\ Any unexecuted quantity of the Complex Order
remaining after interacting with the COPIP is then filtered as provided
in BOX Rule 7240(b)(3) prior to entry on the Complex Order Book.\66\
The Exchange's current Complex Order rules provide that one or more
Legging Orders will be generated from Complex Orders on the BOX Book if
the other leg for the Complex Order can be executed on BOX at the NBBO
for the series.\67\ Once a Legging Order is generated, it will be
available to interact with the BOX Book, including any ongoing PIP, if
possible.\68\
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\65\ See proposed BOX Rule 7245(h) for Unrelated Orders on the
same side as the COPIP Order; see also proposed BOX Rule 7245(i)(1)
for Unrelated Orders on the opposite side of the COPIP Order.
\66\ Proposed BOX Rules 7245(h) and 7245(i)(3) each provide
that, after the Unrelated Order interacts with the COPIP, any
remainder of the Unrelated Order is filtered pursuant to Rule
7240(b)(3)(iii). BOX Rule 7240(b)(3)(iii) describes the filtering
process used by the BOX Trading Host. Upon completion of the
filtering process, BOX Rule 7240(b)(3)(iii) provides that any
remainder of the Unrelated Order is entered on the Complex Order
Book. See also Amendment No. 1, Example 10(c) and (d) illustrating
the operation of the proposed rules when a Complex Order is received
during the PIP and COPIP on the same side of the COPIP Order and on
the opposite side of the COPIP Order.
\67\ See BOX Rule 7240(c)(1).
\68\ BOX Rule 7240(c)(1) describes how Legging Orders are priced
and ranked on the BOX Book and displayed and executed on BOX. BOX
Rule 7150(i) describes how Legging Orders on the same side as the
PIP Order may immediately execute against a PIP and BOX Rule 7150(j)
describes how Legging Orders on the opposite side of the PIP Order
may immediately execute against a PIP. BOX Rule 7150(f)(3) describes
how Legging Orders are executed at the conclusion of a PIP.
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A single option instrument simultaneously may be a component of
more than one different Complex Order Strategy. Because a COPIP may be
initiated on each different Strategy, multiple COPIPs sharing the same
component single option instrument may run simultaneously. In this
case, and assuming that the necessary prices and quantities exist on
each leg, BOX Book interest will generate an Unrelated Order on each
such Strategy to interact with each of the ongoing COPIPs. In the event
the same order on the BOX Book could interact with multiple COPIPs
simultaneously, the order will interact with the COPIP on the Strategy
for which the greatest difference exists between the price of the
resulting BOX Book Interest and the corresponding best price Complex
Order on the Complex Order Book on the same side as the COPIP
Order.\69\ If this calculation produces the same result for each COPIP,
then the order will interact with the COPIP on the Strategy that was
created first on the BOX System.\70\ The execution price will be at a
price equal to the BOX Book Interest price.\71\
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\69\ This calculation is for the purpose of identifying the
Strategy with which the BOX Book Interest will interact and not the
price at which the actual execution will occur. See Amendment No. 1,
Example 11, illustrating the operation of the rules when the same
order could interact with two COPIPs.
\70\ See proposed BOX IM-7245-3(b). See also Amendment No. 1,
supra note 5.
\71\ See proposed BOX Rule 7245(i)(2).
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As in the PIP, COPIP Options Participants must ensure that they
comply with all the procedures set forth in the BOX Rules; that they
act with due skill, care and diligence; and that the interests of their
Customers are not prejudiced.\72\ An Options Participant must not use
the COPIP process to create a misleading impression of market activity
(i.e., the facilities may be used only where there is a genuine
intention to execute a bona fide transaction).\73\
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\72\ See proposed BOX Rule 7245(c).
\73\ See proposed BOX Rule 7245(e).
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D. COPIP Pilot Program
The Exchange proposes a COPIP Pilot Program that expires on July
18, 2014, during which there will be no minimum size requirement for
Customer Orders to be eligible for the COPIP process.\74\ During the
COPIP pilot period, the Exchange will provide certain information,
periodically as required by the Commission, to provide supporting
evidence that, among other things, there is meaningful competition for
all size COPIP orders, that there is significant price improvement for
all orders executed through the COPIP and that an active and liquid
market is functioning on BOX outside of the COPIP mechanism.\75\
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\74\ See proposed BOX IM-7245-1.
\75\ See id. BOX will provide the following information each
month to the Commission: (1) The number of orders of 50 Strategies
or greater entered into the COPIP; (2) the percentage of all orders
of 50 Strategies or greater submitted to the Exchange that are
entered into the COPIP; (3) the spread, at the time a Complex Order
of 50 Strategies or greater is submitted to the COPIP; (4) the
percentage of COPIP trades executed at cNBBO, plus $.01, plus $.02,
plus $.03, etc.; and (5) the number of COPIP Orders submitted by
OFPs when the spread was at a particular increment (e.g., $.05,
$.10, $.15, etc.). Also, with respect to item (5) above, for each
spread increment, the Exchange proposes to provide the percentage of
orders of fewer than 50 Strategies submitted to the COPIP that were
traded: (a) By the OFP that submitted the order to the COPIP; (b) by
an Options Participant other than the OFP that submitted the order
to the COPIP; (c) by a Public Customer; and (d) as an Unrelated
Order. Additionally, for each spread increment, the Exchange
proposes to provide the percentage of orders of 50 Strategies or
greater submitted to the COPIP that were traded: (a) by the OFP that
submitted the order to the COPIP; (b) by an Options Participant
other than the OFP that submitted the order to the COPIP; (c) by a
Public Customer; and (d) as an Unrelated Order. See Notice, 78 FR at
58373.
BOX will further provide for the first and third Wednesday of
each month: (a) The total number of COPIP auctions on that date; (b)
the number of COPIP auctions where the order submitted to the COPIP
was fewer than 50 Strategies; (c) the number of COPIP auctions where
the order submitted to the COPIP was 50 Strategies or greater; (d)
the number of COPIP auctions where the number of Options
Participants (excluding the Initiating Participant) was each of
zero, one, two, three, four, etc. See id. at 58374.
Finally, during the COPIP pilot period, BOX will provide
information each month with respect to situations in which the COPIP
is terminated prematurely or in which a Market Order, Limit Order,
BOX-Top Order or BOX Book Interest immediately execute with a COPIP
Order before the conclusion of the COPIP. The following information
is proposed to be provided: (1) the number of times that a Market
Order, Limit Order, BOX-Top Order or BOX Book Interest on the same
side of the market as the COPIP Order prematurely terminated the
COPIP, and (a) the number of times such orders were entered by the
same (or affiliated) firm that initiated the COPIP that was
terminated, and (b) the number of times such orders were entered by
a firm (or an affiliate of such firm) that participated in the
execution of the COPIP Order; (2) For the orders addressed in each
of (1)(a) and (1)(b) above, the percentage of COPIP premature
terminations due to the receipt, during the COPIP, of a Market
Order, Limit Order, BOX-Top Order or BOX Book Interest on the same
side of the market as the COPIP Order; and the average amount of
price improvement provided to the COPIP Order where the COPIP is
prematurely terminated; (3) the number of times that a Market Order,
Limit Order, BOX-Top Order or BOX Book Interest on the opposite side
of the market as the COPIP Order immediately executed against the
COPIP Order, and (a) the number of times such orders were entered by
the same (or affiliated) firm that initiated the COPIP, and (b) the
number of times such orders were entered by a firm (or an affiliate
of such firm) that participated in the execution of the COPIP Order;
(4) for the orders addressed in each of (3)(a) and (3)(b) above, the
percentage of COPIP early executions due to the receipt, during the
COPIP, of a Market Order, Limit Order, BOX-Top Order or BOX Book
Interest on the opposite side of the market as the COPIP Order; and
the average amount of price improvement provided to the COPIP Order
where the COPIP Order is immediately executed; and (5) the average
amount of price improvement provided to the COPIP Order when the
COPIP runs for one hundred milliseconds. See id.
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[[Page 78442]]
E. Additional Changes
The Exchange proposes to make certain miscellaneous conforming and
clarifying changes to its rules consistent with the adoption of the
COPIP rule as described in more detail in the Notice.\76\ BOX Rule
100(a)(19) will be amended to limit the term Directed Order to
contracts on a single options series. BOX Rules 3000(b), 7070(a),
7110(e), 7130(a), 7140, 7150, and 7240(b) will be amended to conform
the application of these rules to the operation of the COPIP. BOX Rule
7070(a) will be further amended to reflect that Fill and Kill orders do
not participate in the Pre-Opening Phase. BOX Rule 7150 will be further
amended to explain that: (i) The PIP Broadcast is disseminated via the
HSVF; and (ii) a PIP on a single option series and a COPIP on a Complex
Order Strategy that includes such series may operate simultaneously.
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\76\ See Notice, 78 FR at 58374.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment Nos. 1 and 2, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange and, in particular, with
Section 6(b) of the Act.\77\ In particular, the Commission finds that
the proposed rule change is consistent with Sections 6(b)(5) of the
Act,\78\ which requires, among other things, that the rules of a
national securities exchange be 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; and not be designed to
permit unfair discrimination between customers, issuers, brokers or
dealers.
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\77\ 15 U.S.C. 78f(b). In approving this proposed rule change,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\78\ 15 U.S.C. 78f(b)(5).
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The Commission believes that allowing BOX Options Participants to
enter complex orders into the COPIP could provide opportunities for
complex orders to receive price improvement. The Commission notes that
the COPIP Start Price will be equal to or better than cNBBO, cBBO and
BBO on the Complex Order Book for the Strategy at the time of
commencement of the COPIP and that a Options Participant that enters a
COPIP Order in the COPIP must submit a Primary Improvement Order for
the full size of that COPIP Order.\79\ The Commission also notes that
once an order has been submitted as a COPIP Order or Primary
Improvement Order, it may not be cancelled.\80\ Therefore, a COPIP
Order submitted to the COPIP Auction, regardless of its size, will be
guaranteed an execution price of at least the cNBBO, cBBO or BBO on the
Complex Order Book for the Strategy at the time the COPIP commences
and, moreover, will be given an opportunity for execution at a better
price. The Commission also notes that established priority of interest
on the BOX Book over Complex Orders contained in BOX Rule 7240(b)(3)(i)
will apply to the COPIP.\81\
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\79\ Proposed BOX Rule 7245(f).
\80\ Proposed BOX Rule 7245(f).
\81\ Proposed BOX Rule 7245(f)(3)(i).
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IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \82\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts''), unless an exception applies. For
the reasons set forth below, the Commission believes that the proposed
COPIP rules will satisfy the requirements of Section 11(a) of the Act.
Specifically, other than the portions of the proposal that will satisfy
Rule 11a2-2(T) under the Act as discussed below, the Commission
believes that the proposed COPIP rules will satisfy the requirements of
11(a)(1)(G) of the Act because the proposed COPIP rules will cause
Complex Orders for the account of non-Market Maker BOX Options
Participants to yield priority to Complex Orders of non-Options
Participants, provided that BOX Options Participants comply with the
requirements set forth in Rule 11a1-1(T) thereunder. The Commission
further believes that the execution against a COPIP Order of orders on
the Complex Order Book prior to the COPIP Broadcast or on the BOX Book
(whether prior to or after the COPIP Broadcast) will satisfy the
conditions of Rule 11a2-2(T) under the Act.
---------------------------------------------------------------------------
\82\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------
A. Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) Thereunder
Section 11(a)(1)(G) of the Act \83\ provides an exception from the
general prohibition set forth in Section 11(a)(1), for any transaction
for a member's own account, provided that: (i) Such member is primarily
engaged in the business of underwriting and distributing securities
issued by other persons, selling securities to customers, and acting as
broker, or any one or more of such activities, and whose gross income
is derived principally from such business and related activities; and
(ii) the transaction is effected in compliance with the rules of the
Commission, which, at a minimum, assure that the transaction is not
inconsistent with the maintenance of fair and orderly markets and
yields priority, parity, and precedence in execution to orders for the
account of persons who are not members or associated with members of
the exchange.\84\ In addition, Rule 11a1-1(T) under the Act specifies
that a transaction effected on a national securities exchange for the
account of a member which meets the requirements of Section
11(a)(1)(G)(i) of the Act is deemed, in accordance with the
requirements of Section 11(a)(1)(G)(ii), to be not inconsistent with
the maintenance of fair and orderly markets and to yield priority,
parity, and precedence in execution to orders for the account of non-
members or persons associated with non-members of the exchange, if such
transaction is effected in compliance with certain requirements.\85\
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\83\ 15 U.S.C. 78k(a)(1)(G).
\84\ Id.
\85\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the
following requirements must be met: (1) A member must disclose that
a bid or offer for its account is for its account to any member with
whom such bid or offer is placed or to whom it is communicated, and
any such member through whom that bid or offer is communicated must
disclose to others participating in effecting the order that it is
for the account of a member; (2) immediately before executing the
order, a member (other than the specialist in such security)
presenting any order for the account of a member on the exchange
must clearly announce or otherwise indicate to the specialist and to
other members then present for the trading in such security on the
exchange that he is presenting an order for the account of a member;
and (3) notwithstanding rules of priority, parity, and precedence
otherwise applicable, any member presenting for execution a bid or
offer for its own account or for the account of another member must
grant priority to any bid or offer at the same price for the account
of a person who is not, or is not associated with, a member,
irrespective of the size of any such bid or offer or the time when
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
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[[Page 78443]]
Under the proposed COPIP rules, other than for Complex Orders on
the Complex Order Book prior to the COPIP Broadcast, Complex Orders for
non-Market Maker broker-dealer accounts of Options Participants are
required to yield priority to all Public Customer Complex Orders and
all non-BOX Options Participant broker-dealer Complex Orders at the
same price when executing against a COPIP Order.\86\ In addition, the
proposed COPIP rules require the Primary Improvement Order to yield
priority to Public Customer Complex Orders and non-BOX Options
Participant broker-dealer Complex Orders at the same price.\87\ Because
the proposed COPIP rules will require BOX Options Participants that are
not market makers \88\ to yield priority in the COPIP to all non-member
orders, the Commission believes that the proposal with respect to
transactions effected through COPIP, other than the portions of the
proposal that will satisfy Rule 11a2-2(T) under the Act as discussed
below, is consistent with the requirements in Section 11(a) of the Act
and Rule 11a1-1(T) thereunder.\89\ The Commission also reminds
exchanges and their members, however, that, in addition to yielding
priority to non-member orders (including complex orders) at the same
price, members must also meet the other requirements under Section
11(a)(1)(G) of the Act and Rule 11a1-1(T) thereunder (or satisfy the
requirements of another exception) to effect transactions for their own
accounts.
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\86\ See proposed BOX Rule 7245(f)(3)(ii).
\87\ See proposed BOX Rule 7245(g)(4).
\88\ Section 11(a)(1)(A) of the Act provides an exception to the
general prohibition in Section 11(a) on an exchange member effecting
transactions for its own account if such member is a dealer acting
in the capacity of a market maker. See 15 U.S.C. 78k(a)(1)(A).
\89\ The Commission notes that, other than with respect to
quotes and orders on the BOX Book prior to the PIP Broadcast, which
the Commission has stated are consistent with Section 11(a) and Rule
11a2-2(T) thereunder, the Commission determined that transactions
effected through the PIP are consistent with Section 11(a) and Rule
11a1-1(T) thereunder because Options Participants that are not
market makers are required to yield priority in the PIP to non-
member orders (i.e., to Public Customer Orders and non-BOX Options
Participant broker-dealer orders) at the same price transactions
effected through the PIP. See Securities Exchange Act Release No.
66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (File No. 10-206)
(In the Matter of the Application of BOX Options Exchange LLC for
Registration as a National Securities Exchange Findings, Opinion,
and Order of the Commission) (``BOX Approval Order''). See also
Securities Exchange Act Release No. 68177 (November 7, 2012), 77 FR
67851 (November 14, 2012) (SR-BOX-2012-003) (Order Approving
Proposed Rule Change to Amend the Price Improvement Period)
(``November 2012 Order'').
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B. Rule 11a2-2(T) under the Act (``Effect versus Execute'' Rule)
Rule 11a2-2(T) under the Act,\90\ known as the ``effect versus
execute'' rule, provides exchange members with another exception from
the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange
member, subject to certain conditions, to effect transactions for
covered accounts by arranging for an unaffiliated member to execute the
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (1) May not be affiliated with the executing
member; (2) must transmit the order from off the exchange floor; (3)
may not participate in the execution of the transaction once it has
been transmitted to the member performing the execution; \91\ and (4)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule. For the reasons set forth below, the Commission
believes that the execution against a COPIP Order of orders on the
Complex Order Book prior to the COPIP Broadcast or on the BOX Book
(whether prior to or after the COPIP Broadcast) will satisfy the
conditions of Rule 11a2-2(T) under the Act.\92\
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\90\ 17 CFR 240.11a2-2(T).
\91\ The member may, however, participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the
Designated Order Turnaround System of the New York Stock Exchange
(``1978 Release'')).
\92\ The Commission notes that it has previously found that the
priority and allocation rules for electronic trading on the Exchange
are consistent with Section 11(a) of the Act because such rules
satisfy the ``effect versus execute'' exception provided by Rule
11a2-2(T). The Commission determined that BOX Options Participants
entering orders into the BOX Trading Host, excluding those
transactions effected through the PIP process, would satisfy the
conditions of the effect versus execute rule. See BOX Approval
Order.
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Rule 11a2-2(T)'s first condition is that the order be executed by
an exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that the requirement is satisfied when
automated exchange facilities, such as BOX, are used, as long as the
design of these systems ensures that members do not possess any special
or unique trading advantages over non-members in handling their orders
after transmitting them to the Exchange.\93\ The Exchange represents
that, with respect to the execution against a COPIP Order of orders on
the Complex Order Book prior to the COPIP Broadcast or on the BOX Book
(whether prior to or after the COPIP Broadcast), the design of the
Complex Order Book and the BOX Book ensures that broker-dealers do not
have any special or unique trading advantages in handling their orders
after transmission.
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\93\ In considering the operation of automated execution systems
operated by an exchange, the Commission has noted that, while there
is no independent executing exchange member, the execution of an
order is automatic once it has been transmitted into each system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See Securities
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084
(January 31, 1979) (regarding the American Stock Exchange's Post
Execution Reporting System and Switching System, the Intermarket
Trading System, the Multiple Dealer Trading Facility of the
Cincinnati Stock Exchange, the PCX Communications and Execution
System, and the Philadelphia Stock Exchange Automated Communications
and Execution System (``1979 Release'')).
---------------------------------------------------------------------------
According to the Exchange, all orders submitted to BOX, including
orders on the Complex Order Book and on the BOX Book, are transmitted
from remote terminals directly to the system by electronic means and
are centrally processed and executed automatically by BOX. Once an
order is submitted to BOX, the order is executed against one or more
other orders based on the established matching algorithms of the
Exchange.\94\ The execution does not depend on the Options Participant
but rather upon what other orders are entered into BOX at or around the
same time as the subject order, what orders are on the Complex Order
Book and on the BOX Book, whether a PIP or COPIP is initiated, and
where the order is ranked based on the priority ranking algorithm.
Orders will be ranked and maintained on the Complex Order Book and on
the BOX Book according to established automatic priority rules. Under
the proposal, the execution against a COPIP Order of orders on the
Complex Order Book prior to the COPIP Broadcast or on the BOX Book
(whether prior to or after the COPIP Broadcast) will be determined
automatically, according to the proposed matching, priority and
allocation rules. Based on the proposed COPIP rules and on the
Exchange's representations, the Commission believes that the design of
the trading platform used by BOX ensures that no Options Participant
has any special or unique trading advantage
[[Page 78444]]
in the handling of its orders, including for the execution against a
COPIP Order of orders on the Complex Order Book prior to the COPIP
Broadcast or on the BOX Book (whether prior to or after the COPIP
Broadcast), after transmitting such orders to the Exchange. As such,
the Commission believes that the proposal satisfies this requirement of
Rule 11a2-2(T).
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\94\ Under the proposed COPIP rules, orders on the Complex Order
Book prior to the COPIP Broadcast or on the BOX Book (whether prior
to or after the COPIP Broadcast) may also trade with one or more
other orders, including COPIP Orders, based on the established
matching algorithms of the Exchange.
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Second, Rule 11a2-2(T) requires orders for covered accounts be
transmitted from off the exchange floor. In the context of other
automated trading systems, the Commission has found that the off-floor
transmission requirement is met if a covered account order is
transmitted from a remote location directly to an exchange's floor by
electronic means.\95\ The Exchange states that, like these other
automated systems, orders sent to BOX, regardless of where it executes
within the BOX system, including the Complex Order Book, the BOX Book,
a PIP or a COPIP, will be transmitted from remote terminals directly to
BOX by electronic means. OFPs and BOX Market Makers will only submit
orders and quotes to BOX from electronic systems from remote locations,
separate from BOX. There are no other Options Participants that are
able to submit orders to BOX other than OFPs or Market Makers.
Accordingly, the Commission believes that Options Participants' orders
electronically received by BOX satisfy the off-floor transmission
requirement for the purposes of Rule 11a2-2(T).
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\95\ See, e.g., BOX Approval Order; Securities Exchange Act
Release Nos. 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010)
(SR-BATS-2009-031) (approving BATS options trading); 59154 (December
28, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48)
(approving equity securities listing and trading on BSE); 53128
(January 13, 2006), 71 FR 3550 (January 23, 2006) (File No. 10-131)
(granting the registration of The Nasdaq Stock Market LLC); 44983
(October 25, 2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25)
(approving Archipelago Exchange); 29237 (May 24, 1991), 56 FR 24853
(May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-53) (approving NYSE's
Off-Hours Trading Facility). See also 1978 Release and 1979 Release.
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Third, Rule 11a2-2(T) requires that the member not participate in
the execution of its order once it has been transmitted to the member
performing the execution. The Exchange represents that, at no time
following the submission of an order to BOX, would an Options
Participant be able to acquire control or influence over the result or
timing of order execution.\96\ According to the Exchange, upon
submission to BOX, an order will be ranked and maintained on the
Complex Order Book and on the BOX Book according to established
automatic priority rules. In addition, under the proposal, the
execution against a COPIP Order of orders on the Complex Order Book
prior to the COPIP Broadcast or on the BOX Book (whether prior to or
after the COPIP Broadcast) will be determined automatically, according
to the proposed matching, priority and allocation rules. The execution
does not depend on the Options Participant but rather upon what other
orders are entered into BOX at or around the same time as the subject
order, what orders are on the Complex Order Book and on the BOX Book,
whether a PIP or COPIP is initiated, and where the order is ranked
based on the priority ranking algorithm. Accordingly, Options
Participants do not control or influence the result or timing of an
order submitted to BOX, even if such Options Participant's order is on
the Complex Order Book prior to the COPIP Broadcast or on the BOX Book
(whether prior to or after the COPIP Broadcast) and, in either case,
executes against a COPIP Order.\97\ Based on the Exchange's
representations, the Commission believes that the proposal satisfies
the non-participation requirement of Rule 11a2-2(T).
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\96\ The member may only cancel or modify the order, or modify
the instructions for executing the order, but only from off the
Exchange floor. The Commission has stated that the non-participation
requirement is satisfied under such circumstances, so long as such
modifications or cancellations are also transmitted from off the
floor. See 1978 Release (stating that the ``non-participation
requirement does not prevent initiating members from canceling of
modifying orders (or the instructions pursuant to which the
initiating member wishes orders to be executed) after the orders
have been transmitted to the executing member, provided that any
such instructions are also transmitted from off the floor'').
\97\ In addition, the Exchange stated in its proposal that, at
no time following the submission of a COPIP Order, will a
Participant manipulate, control, or influence the result or timing
of order execution on the Exchange by entering Orders on the BOX
Book for a component leg of the COPIP that could result in the
creation of BOX Book Interest that would take priority over Complex
Orders interacting with the COPIP, and thus has proposed to add rule
text that provides that it would be inconsistent with just and
equitable principles of trade for an Options Participant to submit
an order on the BOX Book, during a COPIP initiated by the Options
Participant, for the purpose of disrupting or manipulating the
COPIP. See proposed BOX IM-7245-2(b). See also Amendment No. 1,
supra note 5.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\98\ The Exchange represents that Options Participants trading for
covered accounts over which they exercise investment discretion must
comply with this condition in order to rely on the exception of Rule
11a2-2(T), and the Exchange states that it will enforce this
requirement pursuant to its obligation under Section 6(b)(1) of the Act
to enforce compliance with federal securities laws.
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\98\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated person thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release
(stating ``[t]he contractual and disclosure requirements are
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such
arrangements are suitable to their interests'').
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment Nos. 1
and 2 are 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-BOX-2013-43 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 Number SR-BOX-2013-43. 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
[[Page 78445]]
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 publicly available. All
submissions should refer to File Number SR-BOX-2013-43 and should be
submitted on or before January 16, 2014.
VI. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2
The Commission finds good cause for approving the proposed rule
change, as amended by Amendment Nos. 1 and 2, prior to the 30th day
after the date of publication of notice in the Federal Register.
Amendment No. 1 revises the proposal to provide greater detail with
respect to: (1) The ability of Participants to respond adequately
within the 100 millisecond COPIP period; (2) the effect of unrelated
orders received during overlapping PIP and COPIP auctions; and (3) the
Exchange's analysis regarding whether the proposed COPIP rules are
consistent with Section 11(a) of the Act and the rules thereunder.\99\
As to the first item, Amendment No. 1 merely provides additional
support regarding the adequacy of the 100 millisecond response time
interval for Options Participants. As to the second item, the
Commission notes that the original filing proposed that PIP and COPIP
auctions could run simultaneously and that Unrelated Orders could
interact with PIP and COPIP auctions. Amendment No. 1 provides details
and examples illustrating how those interactions would occur under the
original proposal. Amendment No. 1 also provides details and an example
explaining what happens if single option instrument that is a component
of more than one different Complex Order Strategy an order on the BOX
Book interacts with COPIPs on the different Complex Order Strategies.
As to the third item, Amendment No. 1 adds one specific example of
conduct that would be prohibited in the COPIP and otherwise provides an
analysis of the original proposal's compliance with the requirements of
Section 11(a) of the Act.\100\ COPIPs will function in a manner
substantially similar to that described in the Notice and Amendment No.
1 provides additional clarity on the proposal. Amendment No. 2 corrects
one sentence to conform it to discussion elsewhere in Amendment No. 1
concerning the analysis of the original proposal's compliance with the
requirements of Section 11(a) of the Act. Accordingly, the Commission
finds good cause for approving the proposed rule change, as amended, on
an accelerated basis, pursuant to Section 19(b)(2) of the Act.\101\
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\99\ In addition, Amendment No. 1 made a non-substantive change
in order to update the proposal to also reflect change made to BOX
Rule 7130(a) in Securities Exchange Act Release No. 70395 (September
15, 2013), 78 FR 57911 (September 20, 2013).
\100\ 15 U.S.C. 78k.
\101\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\102\ that the proposed rule change (SR-BOX-2013-43), as modified
by Amendment Nos. 1 and 2, is approved on an accelerated basis.
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\102\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\103\
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\103\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30769 Filed 12-24-13; 8:45 am]
BILLING CODE 8011-01-P