[Federal Register Volume 79, Number 161 (Wednesday, August 20, 2014)]
[Notices]
[Pages 49361-49367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-19704]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72848; File No. SR-BOX-2014-16]
Self-Regulatory Organizations; BOX Options Exchange LLC; Order
Granting Approval of a Proposed Rule Change To Adopt New Trade
Allocation Algorithms for Matching Trades at the Conclusion of the PIP
and the COPIP
August 14, 2014.
I. Introduction
On June 16, 2014, 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 amend its rules regarding the Price Improvement
Period (``PIP'') and Complex Order Price Improvement Period (``COPIP'')
(``auction mechanisms''). The proposed rule change was published for
comment in the Federal Register on July 2, 2014.\3\ The Commission
received no comments on the proposed rule change. 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. 72477 (June 26,
2014), 79 FR 37798 (``Notice'').
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II. Description of the Proposal
The PIP \4\ and COPIP \5\ are electronic auction mechanisms that
permit an Options Participant to expose an agency order (``PIP Order''
for PIP and ``COPIP Order'' for COPIP, each, an ``Agency Order'') and
provide such order an opportunity for price improvement. Currently, the
PIP and COPIP rules permit an initiating Options Participant
(``Initiating Participant'') to submit an Agency Order into the PIP or
COPIP along with a matching contra order (``Primary Improvement
Order''). The Exchange will commence a PIP or COPIP by broadcasting a
message to other Options Participants that contains information
concerning series, size, auction start price, side of market, and
[[Page 49362]]
time of conclusion. The PIP or the COPIP will last 100 milliseconds,
unless terminated earlier due to certain circumstances. At the
conclusion of the PIP or the COPIP, the Agency Order is matched against
the best prevailing quotes or orders on BOX, including Improvement
Orders \6\ and any Unrelated Orders,\7\ on a price/time priority basis,
subject to certain exceptions.\8\
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\4\ See BOX Rule 7150.
\5\ See BOX Rule 7245.
\6\ Improvement Orders are competing order submitted to the
auction mechanisms by order flow providers and market makers. See
Box Rule 7150(f)(1).
\7\ See BOX Rules 7150(a) (defining an Unrelated Order for
purposes of the PIP auction as a non-Improvement Order entered into
the BOX market during a PIP) and 7245(a) (defining an Unrelated
Order for purposes of a COPIP auction as a non-Improvement Order
entered on BOX during a COPIP or BOX Book Interest during a COPIP).
\8\ See BOX Rules 7150(f)(4) and 7245(f)(3).
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The PIP is utilized for the submission of agency orders for single
options series instruments, while the COPIP is utilized for the
submission of Complex Orders. BOX proposes to amend the PIP and the
COPIP to amend the priority and allocation algorithms at the conclusion
of the auction mechanisms. BOX further proposes to eliminate the
broadcast of Improvement Order responses submitted during the PIP and
the COPIP. In addition, BOX proposes to remove the Market Maker Prime
\9\ designation and Customer PIP Order type (``CPO'') from the PIP.
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\9\ See BOX Rule 7160.
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A. Priority and Allocation at the Conclusion of the PIP
BOX proposes to amend the priority and trade allocation algorithm
for matching orders at the conclusion of the PIP.\10\ The PIP Order
will continue to be matched with opposite side competing orders and
quotes in price priority. If the total quantity of orders, quotes,
Improvement Orders, Legging Orders \11\ and the Primary Improvement
Order is equal to or less than the quantity of the PIP Order at a given
price level, all orders at the price will be filled and the balance of
the PIP Order will be executed at the next best price. If the total
quantity of orders, quotes, Improvement Orders, Legging Orders, and the
Primary Improvement Order is greater than the quantity of the PIP Order
at a given price level, the allocation will be as described below.
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\10\ See Notice, supra note 3, at 37799, for a detailed
description of the current PIP allocation process.
\11\ See BOX Rule 7240(c)(1).
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Public Customer Allocation
BOX proposes that all orders, other than Legging Orders and the
Primary Improvement Order, for the account of Public Customers,\12\
whether Improvement Orders or Unrelated Orders, including quotes and
orders on the BOX Book prior to the PIP Broadcast, will be allocated
for execution against the PIP Order first.\13\ Where there are multiple
such orders for the account of Public Customers at the same price, the
trade allocation will be by time priority.\14\ BOX has represented that
this allocation methodology is the same as the allocation for the price
improvement auction on NASDAQ OMX PHLX (``Phlx'').\15\
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\12\ As discussed below under the heading ``Professional
Customers,'' upon approval of the proposed rule change,
Professionals would be treated in the same manner as broker-dealers
for purposes of the PIP and COPIP, and not in the same manner as
non-Professional Public Customers. See proposed BOX Rules
100(a)(50), 7150(a)(2) and 7245(a)(4).
\13\ See proposed BOX Rule 7150(g)(1).
\14\ See Notice, supra note 3, at 37800, for examples
illustrating trade allocations where the Primary Improvement Order
is for the account of a Public Customer.
\15\ See Notice, supra note 3, at 37800. See also Phlx Rule
1080(n)(ii)(E).
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Primary Improvement Order Allocation
After the Public Customer allocation, the Primary Improvement Order
will receive its applicable trade allocation.\16\ Specifically, when a
Single-Priced Primary Improvement Order \17\ is matched by or matches
any competing Improvement Orders and/or non-Public Customers' Unrelated
Orders at the final price level, the Initiating Participant's Primary
Improvement Order retains priority for up to forty percent (40%) of the
remaining size of the PIP Order after Public Customer orders are
satisfied. However, if only one competing order matches the Initiating
Participant's Single-Priced Primary Improvement Order at the final
price level, then the Initiating Participant may retain priority for up
to fifty percent (50%) of the remaining size of the PIP Order after
Public Customer orders are satisfied.\18\
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\16\ See proposed BOX Rule 7150(g)(2). When starting a PIP, the
Initiating Participant may submit to the Exchange the Primary
Improvement Order with a designation of the total amount of the PIP
Order it is willing to hat this is.to the other PIP Participants
(``PIP Surrender Quantity''). If the Primary Improvement Order has
designated a PIP Surrender Quantity, the Primary Improvement Order
allocation will be reduced, if necessary, by the amount of the PIP
Surrender Quantity. See Notice, supra note 3, at 37799-800.
\17\ See BOX Rule 7150(f) (defining the term as ``a single price
order that is equal to or better than that of the National Best Bid
Offer (``NBBO'') at the time of the commencement of the PIP.
\18\ See proposed BOX Rule 7150(h)(1). See Notice, supra note 3,
at 37801, for an example illustrating allocation of 50% rather than
40% to the Primary Improvement Order.
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When an Initiating Participant submits a Max Improvement Primary
Improvement Order,\19\ the Initiating Participant will be allocated its
full size at each price level, except where restricted by the
designated limit price, until a price level is reached where the
balance of the PIP Order can be fully executed. At the final price
level, the Initiating Participant will be entitled to receive up to
forty percent (40%) of the remaining size of the PIP Order after Public
Customer orders are satisfied. However, if only one competing order
matches the Initiating Participant's Max Improvement Primary
Improvement Order at the final price level, then the Initiating
Participant may retain priority for up to fifty percent (50%) of the
remaining size of the PIP Order after Public Customer orders are
satisfied.\20\
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\19\ See BOX Rule 7150(f) (defining the term as ``an auto-match
submission that will automatically match both the price and size of
all competing quotes and orders at any price level achieved during
the PIP or only up to a limit price'').
\20\ See proposed BOX Rule 7150(h)(2). See Notice, supra note 3,
at 37801, for an example illustrating allocation to the Primary
Improvement Order with a specified auto-match limit price.
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Pursuant to proposed BOX Rule 7150(h), Public Customer orders and
Legging Orders will not be considered when determining whether the
Initiating Participant retains 40% or 50% because neither Public
Customer order allocation nor Legging Order allocation will be affected
by the Initiating Participant retaining the difference between 40% and
50%.
Market Maker Allocation
After the Primary Improvement Order allocation, any remaining
unallocated quantity of the PIP Order will be allocated to orders and
quotes, including Improvement Orders and quotes and orders on the BOX
Book prior to the PIP Broadcast for the account of Market Makers.\21\
Where there are orders/quotes for the accounts of more than one Market
Maker at the same price, the trade allocation formula for Market Makers
will provide for the allocation of contracts among Market Makers based
on size pro rata for the remaining contracts.
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\21\ See proposed BOX Rule 7150(g)(3).
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The proposed Market Maker allocation would follow the formula: (B *
C), where component B is derived by dividing the quantity of contracts
for the Market Maker at the price level by the total quantity of
contracts of all Market Makers at the price level, while component C is
the remaining quantity of the PIP Order to be allocated after the
Primary Improvement Order allocation. If the quantity of contracts for
the Market Maker order in B is greater than the original quantity of
the PIP Order,
[[Page 49363]]
the Market Maker's quantity will be capped at the size of the original
PIP Order for purposes of calculating B. If the trade allocation for a
Market Maker would be greater than the quantity of the Market Maker
order/quote at a price level, the Market Maker's trade allocation will
not exceed the size of the Market Maker order/quote at that price
level. If the trade allocation for a Market Maker would result in a
fraction of a contract, it will be rounded down. In certain
circumstances, due to rounding down, it is possible that some Market
Maker orders will not be filled even though there is sufficient
quantity of the PIP Order to be allocated.\22\
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\22\ See Notice, supra note 3, at 37802, for an example
illustrating Market Maker trade allocations.
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Remaining Orders Allocation
After the Market Maker allocation, any remaining unallocated
quantity of the PIP Order will be allocated to any remaining orders,
other than Legging Orders and Market Maker orders, including orders for
the account of Professionals and orders on the BOX Book prior to the
PIP Broadcast, not receiving allocation in the rounds described
above.\23\
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\23\ See proposed BOX Rule 7150(g)(4). Currently, Professionals
are treated like Public Customers in circumstances where BOX yields
priority to Public Customers under SEC Rule 11a1-1(T). Under the
proposed rule change, pursuant to which Improvement Orders will not
be broadcast, transactions executed on BOX will qualify under SEC
Rule 11a2-2(T) as described below. As a result, Professionals will
no longer be treated like Public Customers for purposes of priority.
See Notice, supra note 3, at 37802, for an example showing a
comparison of Professional Customer PIP trade allocation (before and
after the proposed rule change).
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Where there is more than one remaining unallocated order, including
Improvement Orders, at the same price, the trade allocation to each
such order will follow the formula: (B * C) where component B is
derived by dividing the quantity of contracts for the order at the
price level by the total quantity of contracts for all remaining orders
at the price level, while component C is the remaining quantity of the
PIP Order to be allocated after the Market Maker allocation. If the
quantity of contracts for the order in B is greater than the original
quantity of the PIP Order, the quantity of contracts for the order will
be capped at the size of the original PIP Order for purposes of
calculating B. If the trade allocation for an order/quote would be
greater than the quantity of the order/quote at the price level, the
trade allocation will not exceed the size of the order/quote at the
price level. If the trade allocation would result in a fraction of a
contract, it will be rounded down.\24\
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\24\ See Notice, supra note 3, at 37802, for an example
illustrating Market Maker trade allocations.
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Additional Allocation
If, at the end of the remaining orders allocation, there remains
any unallocated quantity of the PIP Order, the balance will be
allocated to all remaining quotes and orders, if any, other than
Legging Orders and the Primary Improvement Order. The allocation method
will be to allocate one contract of the PIP Order per quote/order
sequentially until each remaining quote/order has received one contract
or until the PIP Order is fully allocated. The allocation sequence
among quotes/orders in this step will be in order of size with the
largest remaining quote/order allocated first. Where two or more such
quotes/orders are the same size, the trade allocation sequence will be
by time priority.\25\
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\25\ See proposed BOX Rule 7150(g)(5). See Notice, supra note 3,
at 37803, for an example illustrating additional allocation when
limited by a PIP Surrender Quantity with multiple Market Maker
orders.
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Legging Order Allocation
If, after the allocation of all orders, quotes and Improvement
Orders, there remains any unallocated quantity of the PIP Order, to the
extent of any Surrender Quantity, allocation will be made to any
Legging Orders at the same price in time priority.\26\ If, at the end
of the Legging Order allocation, there remains any unallocated quantity
of the PIP Order, the balance will be allocated to the Initiating
Participant regardless of any applicable PIP Surrender Quantity.
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\26\ See proposed BOX Rule 7150(g)(6). Legging Orders may
receive allocations of a PIP Order when the Legging Order is at a
price better than the final price level or at the final price level
in the event the Initiating Participant has specified a Surrender
Quantity. See Notice, supra note 3, at 37803-4, for examples
illustrating trade allocations where the Primary Improvement Order's
PIP Surrender Quantity is: (i) greater than, and (ii) less than, the
sum of Legging Orders at the final price level.
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Quotes and Orders on the BOX Book
Currently, all quotes and orders on the BOX Book prior to the PIP
Broadcast, excluding any proprietary quotes or orders from the
Initiating Participant, are filled at the end of the PIP in time
priority before any other order at the same price.\27\ In addition,
current BOX Rule 7150(g)(3) states that the Primary Improvement Order
follows in time priority all quotes and orders on the BOX Book prior to
the PIP Broadcast that are equal to the: (A) Single-Priced Primary
Improvement Order price; or (B) execution price of a Max Improvement
Primary Improvement Order that results in the balance of the PIP Order
being fully executed, except any proprietary quote or order from the
Initiating Participant.
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\27\ See BOX Rule 7150(f)(4)(i). See Notice, supra note 3, at
37804-5, for an example illustrating trade allocations for orders on
the BOX Book prior to the PIP Broadcast, which are eligible for
execution at the conclusion of the PIP.
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BOX proposes that quotes and orders on the BOX Book prior to the
PIP Broadcast no longer be allocated against the PIP Order at the end
of the PIP in time priority before any other order at the same price.
Instead, as described above in the Market Maker Allocation Section
above,\28\ quotes and orders on the BOX Book prior to the PIP Broadcast
will now be considered alongside all other quotes and orders, whether
Improvement Order(s), Legging Order(s), or Unrelated Order(s) received
by BOX during the PIP (excluding all Legging Orders and Unrelated
Orders that were immediately executed during the interval of the PIP),
for matching at the conclusion of the PIP. Consequently, BOX is
proposing to remove the exceptions for quotes and orders on the BOX
Book prior to the PIP Broadcast in BOX Rules 7150(f)(4)(i) and (g)(3).
BOX has represented that this is consistent with Phlx.\29\ Proprietary
quotes or orders from the Initiating Participant at the Primary
Improvement Order price shall not be executed against the PIP Order
during or at the conclusion of the PIP.
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\28\ See Section II.A., supra.
\29\ See Phlx Rule 1080(n)(ii)(E)(2).
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B. Priority and Allocation at the Conclusion of the COPIP
Pursuant to current BOX Rule 7245, Complex Orders may be submitted
to the COPIP, which is substantially similar to the PIP except as
necessary to account for distinctions between regular orders on the BOX
Book and Complex Orders.\30\ BOX proposes to amend the COPIP priority
and allocation rule to adopt similar changes to those being proposed to
the PIP allocation.\31\ Complex Orders on the Complex Order Book will
continue to be executed in price/time priority, but in the event an
execution opportunity occurs for a Complex Order on the Complex Order
Book against a COPIP Order at the end of a COPIP, the COPIP execution
will
[[Page 49364]]
occur according to the priority algorithm described below.
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\30\ References to Legging Orders do not appear in the COPIP
rules because Legging Orders interact only with the PIP. However,
the COPIP rules do include other provisions for interacting with
interest on the BOX Book.
\31\ See Notice, supra note 3, at 37806-7, for a detailed
description of the current COPIP allocation.
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Specifically, BOX has proposed that, at the end of the COPIP, the
COPIP Order will continue to be matched with opposite side competing
orders in price priority. If the total quantity of orders, Improvement
Orders, BOX Book Interest and the Primary Improvement Order is equal to
or less than the quantity of the COPIP Order at a given price level,
all orders at the price will be filled and the balance of the COPIP
Order will be executed at the next best price.
If the total quantity of orders, Improvement Orders, BOX Book
Interest and the Primary Improvement Order is greater than the quantity
of the COPIP Order at a given price level, the allocation will be as
follows:
BOX Book Interest Allocation
BOX Book Interest is currently executed in priority over Complex
Orders. BOX Book Interest \32\ will continue to be allocated for
execution against the COPIP Order in priority over Complex Orders and
in time priority.\33\
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\32\ ``BOX Book Interest'' is defined as bids and offers on the
BOX Book for the individual legs of a Strategy. See BOX Rule
7245(a)(3).
\33\ See proposed BOX Rule 7245(g)(1). See Notice, supra note 3,
at 37807, for an example illustrating allocations of BOX Book
Interest at multiple price levels eligible for execution at the end
of a COPIP.
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Public Customer Allocation
After the BOX Book Interest allocation, Complex Orders, other than
the Primary Improvement Order, for the account of Public Customers,
including Improvement Orders and orders on the Complex Order Book prior
to the COPIP Broadcast, will be allocated for execution against the
COPIP Order in priority over other Complex Orders. Where there are
multiple such Complex Orders for the account of Public Customers,
allocation among all Public Customers, other than the Initiating
Participant, at the same price will be by time priority.\34\
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\34\ See proposed BOX Rule 7245(g)(2). See Notice, supra note 3,
at 37808, for examples illustrating allocations of Primary
Improvement Orders for the accounts of Public Customers in two
different scenarios.
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Primary Improvement Order Allocation
After the Public Customer allocation, the Primary Improvement Order
will receive its applicable trade allocation.\35\ Specifically, when a
Single-Priced Primary Improvement Order \36\ is matched by or matches
any Complex Order(s) at the final price level, the Initiating
Participant's Primary Improvement Order retains priority for up to
forty percent (40%) of the remaining size of the COPIP Order after BOX
Book Interest and Public Customer orders are satisfied. However, if
only one Complex Order matches the Initiating Participant's Single-
Priced Primary Improvement Order 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 after BOX Book Interest
and Public Customer orders are satisfied.\37\
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\35\ See proposed BOX Rule 7150(h). If the Primary Improvement
Order has designated a COPIP Surrender Quantity, the Primary
Improvement Order allocation will be reduced, if necessary, in
accordance with the COPIP Surrender Quantity.
\36\ See BOX Rule 7245(f) (defining the term as ``a single price
order that is equal to or better than cNBBO, cBBO (each as defined
in [BOX] Rule 7240(a)) and BBO on the Complex Order Book for the
Strategy at the time of the commencement of the COPIP.
\37\ See proposed BOX Rule 7245(h)(1). See Notice, supra note 3,
at 37809, for an example illustrating allocation of 50% rather than
40% to the Primary Improvement Order.
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When the Initiating Participant submits a Max Improvement Primary
Improvement Order,\38\ the Initiating Participant shall be allocated
its full size at each price level, except where restricted by the
designated limit price, until a price level is reached where the
balance of the COPIP Order can be fully executed. At the final price
level, the Initiating Participant will be entitled to receive up to
forty percent (40%) of the remaining size of the COPIP Order after BOX
Book Interest and Public Customer orders are satisfied. However, if
only one competing Complex Order matches the Initiating Participant's
Max Improvement Primary Improvement Order 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 after BOX Book
Interest and Public Customer orders are satisfied.\39\ Public Customer
orders and BOX Book Interest will not be considered when determining
whether the Initiating Participant retains 40% or 50% in proposed BOX
Rule 7245(h) because neither Public Customer order allocation nor BOX
Book Interest allocation will be affected by the Initiating Participant
retaining the difference between 40% and 50%.\40\
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\38\ See BOX Rule 7245(f) (defining the term as ``an auto-match
submission that will automatically match both the price and size of
all competing orders, including Improvement Orders and Unrelated
Orders, at any price level achieved during the COPIP or only up to a
limit price'').
\39\ See proposed BOX Rule 7245(h)(2). See Notice, supra note 3,
at 37809-10, for examples illustrating COPIP allocation with and
without auto-matching.
\40\ The first sentence of proposed BOX Rule 7245(h)(1) deletes
from the current rule the words ``or BOX Book Interest'' in order to
be consistent with the proposal not to consider BOX Book Interest
for purposes of determining the Primary Improvement Order's trade
allocation percentage.
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Market Maker Allocation
After the Primary Improvement Order allocation, any remaining
unallocated quantity of the COPIP Order will be allocated to Complex
Orders, including Improvement Orders and orders on the Complex Order
Book prior to the COPIP Broadcast, for the account of Market
Makers.\41\ Where there are Complex Orders for the accounts of more
than one Market Maker at the same price, the trade allocation formula
for Market Makers will provide for the allocation of contracts among
Market Makers based on size pro rata for the remaining Strategies. The
proposed Market Maker allocation would follow the formula: (B * C)
where component B is derived by dividing the quantity of Strategies for
the Market Maker at the price level by the total quantity of Strategies
for all Market Makers at the price level, while component C is the
remaining quantity of the COPIP Order to be allocated after the Primary
Improvement Order allocation. If the quantity of Strategies for the
Market Maker order in B is greater than the original quantity of the
COPIP Order, the Market Maker's quantity will be capped at the size of
the original COPIP Order for purposes of calculating B. If the trade
allocation for a Market Maker would be greater than the quantity of the
Market Maker order at the price level, the Market Maker's trade
allocation will not exceed the size of the Market Maker order at the
price level. If the trade allocation for a Market Maker would result in
a fraction of a Strategy, it will be rounded down. In certain
circumstances, due to rounding down, it is possible that some Market
Maker orders will not be filled even though there is sufficient
quantity of the COPIP Order to be allocated.\42\
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\41\ See proposed BOX Rule 7245(g)(4).
\42\ See Notice, supra note 3, at 37810, for an example
illustrating COPIP allocations to Market Makers.
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Remaining Complex Orders Allocation
After the Market Maker allocation, any remaining unallocated
quantity of the COPIP Order will be allocated to any remaining Complex
Orders, other than Market Maker orders, including orders for the
account of Professionals and orders on the Complex Order Book prior to
the COPIP Broadcast, not receiving allocation above.\43\
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\43\ See proposed BOX Rule 7245(g)(5). See Notice, supra note 3,
at 37810-1, for an example illustrating comparison of COPIP trade
allocations to Professionals before and after the proposed rule
change.
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Where there is more than one remaining unallocated Complex Order,
including Improvement Orders, at the same price, the trade allocation
to each
[[Page 49365]]
such Complex Order will follow the formula: (B * C) where component B
is derived by dividing the quantity of Strategies for the Complex Order
at the price level by the total quantity of Strategies for all
remaining Complex Orders at the price level, while component C is the
remaining quantity of the COPIP Order to be allocated after the Market
Maker allocation. If the quantity of Strategies for the Complex Order
in B is greater than the original quantity of the COPIP Order, the
quantity of Strategies for the Complex Order will be capped at the size
of the original COPIP Order for purposes of calculating B. If the trade
allocation for a Complex Order would be greater than the quantity of
Strategies for the Complex Order at the price level, the trade
allocation will not exceed the quantity of Strategies for the Complex
Order at the price level. If the trade allocation would result in a
fraction of a Strategy, it will be rounded down.
Additional Allocation
The balance of the COPIP Order will be allocated to all remaining
orders, if any, other than the Primary Improvement Order. The
allocation method will be to allocate one Strategy of the COPIP Order
per order sequentially until each remaining order has received one
Strategy or until the COPIP Order is fully allocated. The allocation
sequence among orders in this step will be in order of size with the
largest remaining order allocated first. Where two or more such orders
are the same size, trade allocation sequence will be by time priority.
If, at the end of the additional allocation, there remains any
unallocated quantity of the COPIP Order, the balance will be allocated
to the Initiating Participant regardless of any applicable COPIP
Surrender Quantity.\44\
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\44\ See proposed BOX Rule 7245(g)(6). See Notice, supra note 3,
at 37811, for an example illustrating additional allocation to
multiple market maker orders when limited by a COPIP Surrender
Quantity.
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Complex Orders on the Complex Order Book
Currently, all Complex Orders on the Complex Order Book prior to
the COPIP Broadcast, excluding any proprietary orders from the
Initiating Participant, are filled at the end of the COPIP in time
priority before any other Complex Orders at the same price.\45\
Further, BOX Rule 7245(g)(3) states that the Primary Improvement Order
follows in time priority all Complex Orders on the Complex Order Book
prior to the COPIP Broadcast that are equal to the: (A) Single Priced
Primary Improvement Order price; or (B) 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.
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\45\ See BOX Rule 7245(f)(3)(ii).
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BOX proposes that quotes and orders on the Complex Order Book prior
to the COPIP Broadcast will no longer be allocated against the COPIP
Order at the end of the COPIP in time priority before any other order
at the same price. Specifically, quotes and orders on the Complex Order
Book prior to the COPIP Broadcast will now be considered alongside all
other orders, whether Improvement Order(s), including Unrelated
Order(s) received by BOX during the COPIP (excluding all Unrelated
Orders that were immediately executed during the interval of the
COPIP), for matching at the conclusion of the COPIP.\46\ Therefore, BOX
has proposed removing the exceptions for quotes and orders on the BOX
Book prior to the COPIP Broadcast in BOX Rules 7245(f)(3)(ii) and
(g)(3). BOX has represented that this proposed change is consistent
with Phlx.\47\ Proprietary quotes or orders from the Initiating
Participant at the Primary Improvement Order price shall not be
executed against the COPIP Order during or at the conclusion of the
COPIP.
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\46\ See Notice, supra note 3, at 37811-2, for an example
illustrating allocation to orders on the Complex Order Book prior to
the COPIP Broadcast for orders eligible for execution at the
conclusion of the COPIP.
\47\ See Phlx Rule 1080(n)(ii)(E)(2)(d).
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C. Professional Customer Priority in the PIP and COPIP
Pursuant to BOX Rule 100(a)(50), a ``Professional'' is a person or
entity that (i) is not a broker or dealer in securities, and (ii)
places more than 390 orders in listed options per day on average during
a calendar month for its own beneficial account(s). Under current BOX
rules, Public Customers, including Professionals, benefit from certain
order priority advantages in PIP and COPIP transactions on BOX (``Order
Priority''). BOX proposes to amend Rule 100(a)(50), and related cross
references in BOX Rules 7150(a)(2) and 7145(a)(4), to limit the
availability of order priority advantages in PIP and COPIP transactions
to non-Professional, Public Customers on BOX.\48\ Thus Professionals
will now be treated like non-Public Customers for order priority in PIP
and COPIP transactions instead of receiving the same order priority
afforded to non-Professional, Public Customers. According to BOX, the
order-sending behavior and trading activity of Professionals tend to be
more similar to broker-dealers trading on a proprietary basis, and
therefore it is not unfairly discriminatory to give Professional orders
the same priority as broker-dealers for allocation purposes. BOX has
represented that other exchanges also treat Professionals as non-Public
Customers for Order Priority in auction transactions.\49\
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\48\ See proposed BOX Rule 7150(g)(4). Currently, Professionals
are treated like Public Customers in circumstances where BOX yields
priority to Public Customers under SEC Rule 11a1-1(T). Under the
proposed rule change, pursuant to which Improvement Orders will not
be broadcast, transactions executed on BOX will qualify under SEC
Rule 11a2-2(T) as described below. As a result, Professionals will
no longer be treated like Public Customers for purposes of priority.
\49\ See Phlx Rule 1000(b)(14).
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D. Improvement Orders in PIP and COPIP
Currently, Improvement Order responses submitted during the PIP and
COPIP are broadcast via the High Speed Vendor Feed (``HSVF'') but are
not disseminated through OPRA.\50\ The Exchange proposes to no longer
broadcast Improvement Orders received during the PIP or the COPIP. The
Exchange believes that this proposed change will encourage greater
participation in the PIP and the COPIP, which may lead to greater price
improvement because a Participant will be encouraged to submit
Improvement Orders at the best possible price at which the Participant
is willing to participate.\51\
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\50\ See BOX Rules 7150(f)(1) and 7245(f)(1).
\51\ See Notice, supra note 3, at 37814.
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BOX does not currently allow Participants to cancel their
Improvement Orders and only allows them to decrease the size of their
Improvement Order by improving the price of that order.\52\ BOX
proposes to allow Participants to cancel their Improvement Orders at
any time up to the end of the PIP or COPIP. Additionally, because a
Participant will be able to cancel its Improvement Order and submit a
new modified Improvement Order, BOX proposes to not allow a Participant
to decrease the size of its Improvement Order by improving the price of
that order. BOX believes that by allowing a Participant to cancel its
Improvement Order, the Participant will be more willing to enter
aggressively priced responses. BOX has represented that these proposed
changes are consistent with Phlx's Rules.\53\
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\52\ See BOX Rules 7150(f)(2) and 7245(f)(2).
\53\ See NASDAQ OMX PHLX LLC (``Phlx'') Rule 1080(n)(ii)(6) and
(n)(ii)(9). See Notice, supra note 3, at 37814.
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[[Page 49366]]
E. PIP Market Maker Prime Designation and CPO Order Type
Current BOX Rule 7160 provides that at the commencement of each
PIP, a single Market Maker Prime may be designated for that PIP only.
When the PIP was first adopted, BOX introduced the Market Maker Prime
designation to encourage Market Makers to quote aggressively on the BOX
Book and not wait for a PIP to begin.\54\ BOX proposes to eliminate the
Market Maker Prime designation because, according to BOX, Market Makers
rarely use the Market Maker Prime functionality.\55\
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\54\ See Securities Exchange Act Release No. 47186 (January 14,
2003), 78 FR 3062 (January 22, 2003) (Notice of Filing SR-BSE-2002-
15).
\55\ See Notice, supra note 3, at 37805.
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Current BOX Rule 7150(h) provides for a CPO order type. A CPO
allows a Public Customer to submit an order on a single options series,
through an order flow provider (``OFP''),\56\ specifying one price for
entry on the BOX Book (in the applicable minimum increment for that
series) and a different price for interaction with a PIP (in one cent
increments). The CPO was intended to provide access to the PIP on
behalf of a Public Customer. However, according to BOX, because CPOs
are rarely submitted, BOX proposes to eliminate the CPO order type.\57\
Public Customers may continue to submit orders to the BOX Book and
Improvement Orders during the PIP.
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\56\ As defined in BOX Rule 100(a)(45), the term Order Flow
Provider or ``OFP'' means those Options Participants representing as
agent Customer Orders on BOX and those non-Market Maker Participants
conducting proprietary trading.
\57\ See Notice, supra note 3, at 37805.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change 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.\58\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\59\ 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 customers, issuers, brokers and dealers.
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\58\ 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).
\59\ 15 U.S.C. 78f(b)(5).
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Under the proposed rule change, at the conclusion of a PIP, Public
Customer orders have first priority to trade against the Agency Order.
After the execution of Public Customer orders, the Primary Improvement
Order may be allocated up to 40% of the remaining size of the PIP Order
(however, if only one competing order matches the Primary Improvement
Order, then the Primary Improvement Order may be allocated up to 50% of
the PIP Order). Market Maker orders and quotes next have priority.
After the Market Maker allocation, any remaining unallocated quantity
of the PIP Order will be allocated to any remaining orders (other than
Legging Orders and Market Maker orders), including orders for the
account of Professionals. Legging Orders have final priority. Under the
proposed rule change, the allocation at the conclusion of a COPIP
auction is substantially the same as the allocation at the conclusion
of a PIP auction except BOX Book Interest has priority over all orders
at the end of a COPIP auction. The Commission believes that the
proposed matching algorithm set forth in the PIP and the COPIP rules
are sufficiently clear regarding how orders are to be allocated in the
PIP and the COPIP auctions and do not raise any novel issues. The
proposed changes to the PIP and COPIP mechanisms are similar in many
aspects to the features found in the price improvement mechanisms of
other options exchanges, including: the ability to cancel Improvement
Orders; \60\ the non-dissemination of Improvement Orders to OPRA; \61\
and the execution allocation scheme which gives Public Customers and
the Initiating Participant priority over other Participants and
Professional Customers;\62\ and the execution of orders on the book at
the end of the PIP auction.\63\
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\60\ See, e.g., Chicago Board Options Exchange, Incorporated
(``CBOE'') Rule 6.74A(b)(1)(I).
\61\ See,e.g., CBOE Rule 6.74A(b)(1)(F), Phlx Rule
1080(n)(ii)(A)(6).
\62\ See, e.g., ISE Rule 723(d), Miami International Securities
Exchange LLC (``MIAX'') Rule 515A(a)(2)(iii), and Phlx Rule
1080(n)(ii)(E).
\63\ See id.
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Under the proposed rule change, Improvement Orders will no longer
be disseminated to Participants and to OPRA. The Commission notes that,
according to the Exchange, this may encourage Participants to submit
Improvement Orders at the best possible price that the Participant is
willing to interact with the Agency Order, which could lead to greater
price improvement for the Agency Order. \64\
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\64\ See Notice, supra note 3, at 37814.
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Finally, BOX will eliminate the Market Maker Prime designation and
CPO order type. According to the Exchange, Market Makers rarely use the
Market Maker Prime functionality. The Commission notes that Public
Customers currently have and will continue to have opportunities to
participation in the PIP and COPIP, without the limitations that the
CPO order type would impose.
IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \65\ 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. Rule
11a2-2(T) under the Act,\66\ known as the ``effect versus execute''
rule, provides exchange members with an exemption 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
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
(iii) may not be affiliated with the executing member; and (iv) 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 BOX's Participants effecting transactions through the PIP
and COPIP, including executions of PIP Orders and COPIP Orders against
orders on the BOX Book and the Complex Order Book, would satisfy the
requirements of Rule 11a2-2(T).\67\
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\65\ 15 U.S.C. 78k(a)(1).
\66\ 17 CFR 240.11a2-2(T).
\67\ The Commission notes that it has previously found that
transactions effected through the BOX PIP and COPIP are consistent
with the requirements of Section 11(a), relying in part upon Rule
11a1-1(T) and in part upon Rule 11a2-2(T) thereunder. See Securities
Exchange Act Release Nos. 68177 (November 7, 2012), 77 FR 67851
(November 14, 2012) and 71148 (December 19, 2013), 78 FR 78437
(December 26, 2013).
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[[Page 49367]]
The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. The Commission has previously
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.\68\ The Exchange has represented
that 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. The Exchange also represents that orders for covered
accounts from OFPs and BOX Market Makers will only be submitted from
electronic systems from remote locations, separate from BOX. Because
the Exchange has represented that there are no other Options
Participants that are able to submit order to BOX other than OFPs or
Market Makers, the Commission believes that orders received through the
PIP and COPIP would satisfy the off-floor transmission requirement.
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\68\ See, e.g., 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 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving 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); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
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Second, the Rule requires that the member not participate in the
execution of its order. The Exchange represents that at no time
following the submission of an order is a Participant able to acquire
control or influence over the result or timing of an order's
execution.\69\ According to the Exchange, the execution of an order is
determined by what other orders are entered into BOX at or around the
same time, 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.\70\ In addition, as noted
above, BOX proposes to no longer broadcast Improvement Orders received
during the PIP and COPIP. As a result, responses to the PIP and COPIP
auctions would no longer be visible to Participants.\71\ Accordingly,
the Commission believes that a member does not participate in the
execution of an order submitted through the PIP or the COPIP, including
orders that execute against an order on the BOX Book or the Complex
Order Book.
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\69\ See Notice, supra note 3, 79 FR at 37816.
\70\ See id.
\71\ See Notice, supra note 3, 79 FR at 37814.
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated systems facilities are used, as long as 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.\72\ BOX has represented that the PIP and COPIP are
designed so that no broker-dealer has any special or unique trading
advantage in the handling of its orders after transmitting its orders
to BOX.\73\ Based on the Exchange's representation, the Commission
believes that the PIP and COPIP satisfy this requirement.
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\72\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the 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 1979
Release, supra note 55.
\73\ See Notice, supra note 3, 79 FR at 37815.
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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) thereunder.\74\ BOX represents that Participants relying on Rule
11a2-2(T) for transactions effected through the PIP and COPIP must
comply with this condition of the Rule and that the Exchange has
represented 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.\75\
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\74\ See 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 persons 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).
\75\ See Notice, supra note 3, 79 FR at 37817.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\76\ that the proposed rule change (SR-BOX-2014-16), be and hereby
is, approved.
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\76\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
Kevin M. O'Neill,
Deputy Secretary.
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\77\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-19704 Filed 8-19-14; 8:45 am]
BILLING CODE 8011-01-P