[Federal Register Volume 77, Number 217 (Thursday, November 8, 2012)]
[Notices]
[Pages 67040-67042]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27294]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68141; File No. SR-BOX-2012-016]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposal Regarding Quote 
Mitigation

November 2, 2012.
    Pursuant to Section 19(b)(1) under the Securities Exchange Act of 
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on October 26, 2012, BOX Options Exchange LLC (the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the Exchange. The Exchange has 
designated the proposed rule change as constituting a non-controversial 
rule change under Rule 19b-4(f)(6) under the Act,\3\ which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    BOX Options Exchange LLC (the ``Exchange'') proposes to amend Rule 
7250 (Quote Mitigation) and refine the current quote mitigation 
strategy for its options trading facility, BOX Market LLC (``BOX'') by 
replacing the current quote mitigation rule with a ``holdback timer'' 
mechanism. The text of the proposed rule change is available from the 
principal office of the Exchange, on the Exchange's Internet Web site 
at http://boxexchange.com, and at the Commission's Public Reference 
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to refine the BOX quote mitigation strategy. 
Specifically, the Exchange proposes to amend Rule 7250 (Quote 
Mitigation) and replace the current rule with a mechanism that 
systemically limits the dissemination of quotations and other changes 
to the BOX best bid and offer according to prescribed time criteria (a 
``holdback timer''). For instance, if there is a change in the price of 
a security underlying an option, multiple market participants may 
adjust the price or size of their quotes. Rather than disseminating 
each individual change, the holdback timer permits BOX to wait until 
multiple Participants have adjusted their quotes and then disseminates 
a new quotation. This mechanism will help to prevent the ``flickering'' 
of quotations.
    The Exchange believes the proposed modification to its holdback 
timer mechanism within the overall BOX quote mitigation strategy will 
allow the Exchange to more effectively monitor quotation traffic and 
mitigate as needed. BOX's current Quote Mitigation mechanism was 
adopted as a response to the implementation of Penny Pilot Program \4\ 
amid concerns that market

[[Page 67041]]

quality and system capacity would be overwhelmed by the increase in 
options market data traffic created by the Program. The Exchange sought 
to reduce both peak and overall market data traffic by bundling order 
updates within a certain timeframe. The current mechanism subjects all 
order updates to bundling when the underlying instrument has been 
listed for more than ten (10) trading days and for which open interest 
is fewer than 300 to 400 contracts. The frequency at which these 
updates are bundled varies from 200 to 1000 milliseconds and depends on 
a number of factors.\5\ Additionally, the current rule provides that at 
a minimum, all updates for instruments listed for at least 10 days and 
having open interest below 50 contracts will be bundled at 200 
millisecond intervals.
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    \4\ See Securities Exchange Act Release Nos. 55073 (January 19, 
2007) 72 FR 2047 (January 17, 2007)(Order Approving BSE Quote 
Mitigation Plan)(SR-BSE-2006-48), and 55155 (January 23, 2007) 72 FR 
4714 (February 1, 2007)(Order Approving Penny Pilot Program on 
BSE)(SR-BSE-2006-49).
    \5\ See BOX Rule 7250(b)(1) through (3).
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    The Exchange believes that replacing the current mechanism with a 
holdback timer will allow BOX to more efficiently reduce quotation 
traffic when necessary instead of bundling all order updates that meet 
the restrictive criteria set forth in the current rule. The Exchange 
believes that the holdback timer mechanism taken together with the 
other tools it currently employs as part of the overall BOX quote 
mitigation strategy will allow BOX to continue to effectively mitigate 
quote message traffic.
    The other tools in place are:
     Monitoring. BOX actively monitors the quotation activity 
of its market makers. When the Exchange detects that a market maker is 
disseminating an unusual number of quotes, the Exchange contacts that 
market maker and alerts it to such activity. Such monitoring frequently 
reveals that the market maker may have internal system issues or has 
incorrectly set system parameters that were not immediately apparent. 
Alerting a market maker to possible excessive quoting usually leads the 
market maker to take steps to reduce the number of its quotes.
     Delisting. BOX has a policy of withdrawing approval of 
underlying securities with low trading volume, thereby eliminating the 
quotation traffic attendant to such listings.\6\
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    \6\ See BOX Rule 5030(b)(3).
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    Further, BOX notes that the holdback timer mechanism is currently 
part of the quote mitigation strategies of the International Securities 
Exchange's (``ISE''), C2 Options Exchange (``C2''), and the Chicago 
Board Options Exchange (``CBOE'') \7\; and the Exchange believes 
implementation of this proposed change on BOX will increase uniformity 
among the exchanges and cause less confusion among market participants.
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    \7\ See Securities Exchange Act Release Nos. 55166 (January 24, 
2007) 72 FR 62024 (February 1, 2007) (Order Approving ISE Rule 
804(h)) (SR-ISE-2006-62), 61152 (December 10, 2009) 74 FR 66699 
(December 16, 2009) (Order Approving C2 Application as National 
Securities Exchange and Finding the C2 Rules, including Rule 
6.34(b), Consistent with the Act), and 55772 (May 16, 2007), 72 FR 
28732 (May 22, 2007) (SR-CBOE-2007-45) (Notice of Filing and 
Immediate Effectiveness of CBOE Rule 6.23A(b)).
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    BOX will utilize a holdback timer that delays quotation updates to 
OPRA for no longer than one (1) second. BOX may vary the holdback timer 
by option class. BOX does not intend to disclose the length of the 
holdback timer to its Participants or non-Participants. BOX notes that 
the holdback timer addresses the dissemination to OPRA of quotation 
updates and other changes to BOX's best bid and offer, and not the 
execution of orders.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\8\ in general, and Section 
6(b)(5) of the Act,\9\ in particular, that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to remove impediments to and to 
perfect the mechanism for a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Several of the options exchanges have codified their use of a holdback 
timer as a quote mitigation strategy which has been endorsed over the 
last few years by the Securities Information and Financial Markets 
Association. The Exchange believes the addition of the holdback timer 
mechanism within its quote mitigation strategy will more effectively 
allow BOX to monitor quotation traffic and mitigate as needed. 
Additionally, this mechanism is currently part of the quote mitigation 
strategies of the International Securities Exchange's (``ISE''), C2 
Options Exchange (``C2''), and the Chicago Board Options Exchange 
(``CBOE'')\10\; and the Exchange believes implementation of this 
proposed change on BOX will increase uniformity among the exchanges and 
cause less confusion among Participants. As such, the Exchange believes 
the proposed change is consistent with the Act.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See Securities Exchange Act Release Nos. 55166 (January 24, 
2007) 72 FR 62024 (February 1, 2007) (Order Approving ISE Rule 
804(h)) (SR-ISE-2006-62), 61152 (December 10, 2009) 74 FR 66699 
(December 16, 2009) (Order Approving C2 Application as National 
Securities Exchange and Finding the C2 Rules, including Rule 
6.34(b), Consistent with the Act), and 55772 (May 16, 2007), 72 FR 
28732 (May 22, 2007) (SR-CBOE-2007-45) (Notice of Filing and 
Immediate Effectiveness of CBOE Rule 6.23A(b)).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-
4(f)(6)(iii) thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Commission notes that the Exchange has satisfied this 
requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File

[[Page 67042]]

Number SR-BOX-2012-016 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-2012-016. 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 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, on official business days between 
the hours of 10 a.m. and 3 p.m., located at 100 F Street NE., 
Washington, DC 20549. 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 available publicly.
    All submissions should refer to File Number SR-BOX-2012-016 and 
should be submitted on or before November 29, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27294 Filed 11-7-12; 8:45 am]
BILLING CODE 8011-01-P