[Federal Register Volume 80, Number 28 (Wednesday, February 11, 2015)]
[Notices]
[Pages 7663-7665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-02748]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74210; File No. SR-BOX-2014-28]
Self-Regulatory Organizations; BOX Options Exchange LLC; Order
Approving Proposed Rule Change Adopt BOX Rule 7300 To Allow the
Exchange To Trade Preferenced Orders
February 5, 2015.
I. Introduction
On December 8, 2014, BOX Options Exchange LLC (``BOX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder,\2\ to permit BOX Options Participants
(``Participants'') to submit orders for which a Market Maker is
designated to receive an Preferred allocation on the Exchange
(``Preferenced Orders''). The proposed rule change was published in the
Federal Register on December 24, 2014.\3\ This order approves the
proposed rule change.
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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. 73878 (December 18,
2014), 79 FR 77579 (``Notice'').
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II. Description of the Proposed Rule Change
As described in more detail below, the Exchange proposes to adopt
new BOX Rule 7300 to establish a program that will permit Participants
to submit Preferenced Orders to Market Makers and for Maker Makers to
receive Preferred allocations on such orders.\4\ As proposed, a
Preferenced Order is any order, whether on a single options instrument
or on a Complex Order Strategy, for which a Preferred Market Maker is
designated with respect to such order, upon submission of such order to
BOX.\5\ A Preferred Market Maker is a Market Maker designated as such
by a Participant with respect to an order submitted by such Participant
to BOX.\6\
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\4\ See Notice, supra note 3 at 77579.
\5\ Proposed BOX Rule 7300(a)(1).
\6\ Proposed BOX Rule 7300(a)(2).
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All order types and designations available on BOX will be eligible
to be entered as Preferenced Orders, except for Customer Cross Orders
(which do not involve market makers) and Directed Orders (which relate
to BOX's PIP and COPIP matching algorithms).\7\
[[Page 7664]]
Preferenced Orders will be treated the same as other orders submitted
to the Exchange, including being executed in price/time priority in
accordance with the existing matching algorithm on the Exchange,\8\
with some exceptions as described below and in proposed Rule 7300.\9\
Although Complex Orders may be submitted as Preferenced Orders, such
orders will be given the same treatment as Complex Orders submitted
without designation.\10\
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\7\ Proposed BOX Rule 7300(d).
\8\ See Notice, supra note 3 at 77579.
\9\ Proposed BOX Rule 7300(b).
\10\ See Notice, supra note 3 at 77581.
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Proposed BOX Rule 7300(c)(2) requires that a Preferred Market Maker
maintain a continuous two-sided market, pursuant to BOX Rule
8050(c)(1), throughout the trading day, in options classes for which it
accepts Preferenced Orders, for 99% of the time the Exchange is open
for trading in each such option class.\11\ However, a Preferred Market
Maker will not be required to quote in intra-day add-on series or
series that have an expiration of nine months or greater in the classes
for which it receives Preferenced Orders.\12\
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\11\ Proposed BOX Rule 7300(a)(2).
\12\ Id. Compliance with this requirement will be determined on
a monthly basis, however, this does not relieve a Preferred Market
Maker from meeting the quoting requirement on a daily basis, nor
does it prohibit the Exchange from taking disciplinary action
against a Preferred Market Maker for failing to meet this
requirement each trading day. The Exchange will determine compliance
with these obligations on a monthly basis. Id.
If a technical failure or limitation of a system of the Exchange
prevents a Market Maker from maintaining, or prevents a Market Maker
from communicating to the Exchange, timely and accurate electronic
quotes in an issue, the duration of such failure shall not be
considered in determining whether the Market Maker has satisfied its
quoting obligation. The Exchange may consider other exceptions to
this obligation based on a demonstrated legal or regulatory
requirement or other mitigating circumstances. Id.
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Preferred Allocation
Pursuant to proposed BOX Rule 7300(c), when the total quantity of
all orders available for execution on the Exchange against a
Preferenced Order on a single options series is less than or equal to
the executable quantity of the Preferenced Order at a given price
level, all such orders at that price will be filled and the balance of
the Preferenced Order, if any, will be executed, if possible, against
orders at the next best price level.\13\ At the final price level,
where the remaining quantity of the Preferenced Order is less than the
total quantity of orders on the Exchange available for execution, and
after all Public Customer orders have been filled, the Preferred Market
Maker will receive a Preferred allocation set forth below, provided
that: (1) The price level is at the NBBO, (2) the Preferred Market
Maker has an existing quote on the opposite side of the Preferenced
Order that is at the NBBO at the time the Preferenced Order is
received, and (3) the Preferred Market Maker would not receive an
allocation greater than 40% if allocated according to the Exchange's
normal price/time priority.\14\
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\13\ Proposed BOX Rule 7300(c).
\14\ Proposed BOX Rule 7300(c)(2).
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The Preferred allocation will be limited by the total quantity of
the Preferred Market Maker's quote and will be 40% of the remaining
quantity of the Preferenced Order after all Public Customer orders are
filled, or 50% of the remaining quantity if only one other executable,
non-Public Customer order matches the Preferenced Order at the final
price level.\15\ Under the Exchange's proposal, Legging Orders will not
be considered when determining whether the Preferred Market Maker
receives its 40% or 50% allocation.\16\
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\15\ Proposed BOX Rule 7300(c)(2); See Notice, supra note 3 at
77580.
\16\ Proposed BOX Rule 7300(c)(2).
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Once the Preferenced Order is allocated to the Preferred Market
Maker, or if no Preferred Allocation is made, BOX will distribute any
remaining unallocated quantity of the Preferenced Order to all
remaining orders and quotes, not including any Legging Order, that have
not already received an allocation.\17\ This includes any quote by a
Preferred Market Maker if no Preferred allocation was previously made.
Allocations will be made in order of time priority. Following the
allocation of all remaining order and quotes described above, any
remaining unallocated quantity of the Preferenced Order will be
allocated to any Legging Order at the same price.\18\
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\17\ Proposed BOX Rule 7300(c)(3).
\18\ Proposed BOX Rule 7300(c)(4).
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III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and
finds that the proposed rule change is consistent with the Act and the
rules and regulations thereunder applicable to a national securities
exchange.\19\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b) of the Act,\20\ in general,
and furthers the objectives of Section 6(b)(5) of the Act.\21\ Section
6(b)(5) requires, among other things, that the rules of the 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
facilitating transactions in securities, and to remove impediments to
and perfect the mechanism of a free and open market and a national
market system.
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\19\ 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).
\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
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The Commission has previously approved rules of other national
securities exchanges that provide for enhanced participation
guarantees.\22\ The Commission has closely scrutinized such exchange
rule proposals where the percentage of enhanced participation would
rise to a level that could have a material adverse impact on quote
competition within a particular exchange.\23\
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\22\ See Securities Exchange Act Release No. 51759 (May 27,
2005), 70 FR 32860 (June 6, 2005) (SR-Phlx-2004-91) (``Phlx
Order''); see also e.g., Securities Exchange Act Release Nos. 47628
(April 3, 2003), 68 FR 17697 (April 10, 2003) (SR-CBOE-00-55)
(``CBOE Order''); 52331 (August 24, 2005), 70 FR 51856 (August 31,
2005) (SR-ISE-2004-16) (``ISE Order''); 52506 (September 23, 2005),
70 FR 57340 (September 30, 2005) (SR-CBOE-2005-58); 59472 (February
27, 2009) 74 FR 9843 (March 6, 2009) (SRNYSEALTR-2008-14)(``NYSEALTR
Order''); 60469 (August 10, 2009), 74 FR 41478 (August 17, 2009)(SR-
NYSEArca-2009-73) (``NYSE Arca Notice''); 68070 (October 18, 2012),
77 FR 65037 (October 18, 2012) (SR-C2-2012-24) (``C2 Order''); and
74129 (January 23, 2015), 80 FR 4954 (January 29, 2015) (``BX
Order'').
\23\ See Phlx Order, supra note 22 at 32861.
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BOX's proposal to permit Preferred Market Makers to receive a 40%
allocation (or 50% where there is only one other non-public customer
order at the same price as the Preferenced Order) will not increase the
overall percentage of an order that is guaranteed to the Preferred
Market Maker beyond the currently acceptable threshold.\24\ Under the
proposal, the remaining portion of each order will be available for
allocation based on the competitive bidding of market participants.
Therefore, the Commission does not believe that the proposal will
negatively impact quote competition or order flow on BOX.
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\24\ Id. See also CBOE Order, supra note 22 at 17708 (citing
Securities Exchange Act Release No. 45936 (May 15, 2002), 67 FR
36279, 26280 (May 23, 2002); Securities Exchange Act Release No.
42835 (May 26, 2000), 65 FR 35683, 35685-66 (June 5, 2000);
Securities Exchange Act Release No. 42455 (February 24, 2000), 65 FR
11388, 11398 (March 2, 2000); Securities Exchange Act Release No.
43100 (July 31, 2000), 65 FR 48778, 48787-88 (August 9, 2000)).
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A Preferred Market Maker will have to be quoting at, or better
than, the NBBO at the time a Preferenced Order is received in order to
obtain the 40% or 50% guarantee. The Commission
[[Page 7665]]
believes that it is critical that a Preferred Market Maker must not be
permitted to step up and match the NBBO after it receives a directed
order in order to receive the Preferred Allocation. In this regard,
BOX's proposal prohibits notifying a DMM of an intention to submit a
Directed Order so that such DMM could change its quotation to match the
NBBO immediately prior to submission of the Directed Order, and then
fade its quote. BOX submitted a letter to the Commission representing
that it will provide the necessary protections against that type of
conduct, and will proactively conduct surveillance for, and enforce
against, such violations.\25\
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\25\ See Letter from Bruce Goodhue, Chief Regulatory Officer,
BOX, to David Hsu, Assistant Director, Commission, dated February 4,
2015.
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BOX's proposed rules will require Preferred Market Makers to quote
at a higher level than other marker makers who are not Preferred Market
Makers. Currently, market makers on BOX are required to quote 60% of
the trading day.\26\ In order to receive the participation entitlement,
Preferred Market Makers will be required to quote 99% of the trading
day. The Commission believes that requiring heightened quoting by a
market maker in order to be eligible to receive a Preferred Allocation
is consistent with what other exchanges have required as part of their
directed order programs.\27\
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\26\ BOX Rule 8050(e).
\27\ See supra note 22.
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The Commission emphasizes that approval of this proposal does not
affect a broker-dealer's duty of best execution. A broker-dealer has a
legal duty to seek to obtain best execution of customer orders, and any
decision to preference a particular Preferred Market Maker must be
consistent with this duty.\28\ A broker-dealer's duty of best execution
derives from common law agency principles and fiduciary obligations,
and is incorporated in SRO rules and, through judicial and Commission
decisions, the antifraud provisions of the federal securities laws.\29\
The duty of best execution requires broker-dealers to execute
customers' trades at the most favorable terms reasonably available
under the circumstances, i.e., at the best reasonably available
price.\30\ The duty of best execution requires broker-dealers to
periodically assess the quality of competing markets to assure that
order flow is directed to the markets providing the most beneficial
terms for their customer orders.\31\ Broker-dealers must examine their
procedures for seeking to obtain best execution in light of market and
technology changes and modify those practices if necessary to enable
their customers to obtain the best reasonably available prices.\32\ In
doing so, broker-dealers must take into account price improvement
opportunities, and whether different markets may be more suitable for
different types of orders or particular securities.\33\
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\28\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525
U.S. 811 (1998); Certain Market Making Activities on Nasdaq,
Securities Exchange Act Release No. 40900 (Jan. 11, 1999) (settled
case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); Arleen
Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 174
F.2d 969 (D.C. Cir. 1949)). See also Order Execution Obligations,
Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR
48290 (Sept. 12, 1996) (``Order Handling Rules Release''); 51808
(June 9, 2005), 70 FR 37496, 37537-8 (June 29, 2005).
\29\ Order Handling Rules Release, supra note 28 at 48322. See
also Newton, 135 F.3d at 270. Failure to satisfy the duty of best
execution can constitute fraud because a broker-dealer, in agreeing
to execute a customer's order, makes an implied representation that
it will execute it in a manner that maximizes the customer's
economic gain in the transaction. See Newton, 135 F.3d at 273
(``[T]he basis for the duty of best execution is the mutual
understanding that the client is engaging in the trade--and
retaining the services of the broker as his agent--solely for the
purpose of maximizing his own economic benefit, and that the broker
receives her compensation because she assists the client in reaching
that goal.''); Marc N. Geman, Securities Exchange Act Release No.
43963 (Feb. 14, 2001) (citing Newton, but concluding that respondent
fulfilled his duty of best execution). See also Payment for Order
Flow, Securities Exchange Act Release No. 34902 (Oct. 27, 1994), 59
FR 55006, 55009 (Nov. 2, 1994) (``Payment for Order Flow Final
Rules''). If the broker-dealer intends not to act in a manner that
maximizes the customer's benefit when he accepts the order and does
not disclose this to the customer, the broker-dealer's implied
representation is false. See Newton, 135 F.3d at 273-274.
\30\ Newton, 135 F.3d at 270. Newton also noted certain factors
relevant to best execution--order size, trading characteristics of
the security, speed of execution, clearing costs, and the cost and
difficulty of executing an order in a particular market. Id. at 270
n. 2 (citing Payment for Order Flow, Securities Exchange Act Release
No. 33026 (Oct. 6, 1993), 58 FR 52934, 52937-38 (Oct. 13, 1993)
(Proposed Rules)). See In re E.F. Hutton & Co., Securities Exchange
Act Release No. 25887 (July 6, 1988). See also Payment for Order
Flow Final Rules, 59 FR at 55008-55009.
\31\ Order Handling Rules Release, supra note 28 48322-48333
(``In conducting the requisite evaluation of its internal order
handling procedures, a broker-dealer must regularly and rigorously
examine execution quality likely to be obtained from different
markets or market makers trading a security.''). See also Newton,
135 F.3d at 271; Market 2000: An Examination of Current Equity
Market Developments V-4 (SEC Division of Market Regulation January
1994) (``Without specific instructions from a customer, however, a
broker-dealer should periodically assess the quality of competing
markets to ensure that its order flow is directed to markets
providing the most advantageous terms for the customer's order.'');
Payment for Order Flow Final Rules, 59 FR at 55009.
\32\ Order Handling Rules, supra note 28 at 48323.
\33\ Order Handling Rules, supra note 28 at 48323. For example,
in connection with orders that are to be executed at a market
opening price, ``[b]roker-dealers are subject to a best execution
duty in executing customer orders at the opening, and should take
into account the alternative methods in determining how to obtain
best execution for their customer orders.'' Disclosure of Order
Execution and Routing Practices, Securities Exchange Act Release No.
43590 (Nov.17, 2000), 65 FR 75414, 75422 (Dec. 1, 2000) (adopting
new Exchange Act Rules 11Ac1-5 and 11Ac1-6 and noting that
alternative methods offered by some Nasdaq market centers for pre-
open orders included the mid-point of the spread or at the bid or
offer).
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For these reasons, the Commission believes that the proposal is
consistent with the requirements of Section 6(b)(5) of the Act.\34\
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\34\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\35\ that the proposed rule change (SR-BOX-2014-28) be, and it
hereby is, approved.
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\35\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
Brent J. Fields,
Secretary.
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\36\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2015-02748 Filed 2-10-15; 8:45 am]
BILLING CODE 8011-01-P