[Federal Register Volume 77, Number 219 (Tuesday, November 13, 2012)]
[Notices]
[Pages 67693-67695]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27491]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68149; File No. SR-BOX-2012-017]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend the Fee Schedule for Trading on BOX

November 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 31, 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, II, and III below, 
which Items have been prepared by the Exchange. The Exchange filed the 
proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\ 
and Rule 19b-4(f)(2) thereunder,\4\ 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\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    BOX Options Exchange LLC (the ``Exchange'') proposes to amend its 
Fee Schedule for trading on its options facility, BOX Market LLC 
(``BOX''). While changes to the fee schedule pursuant to this proposal 
will be effective upon filing, the changes will become operative on 
November 1, 2012. 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 implement a change to the BOX routing fees 
in Section III of the fee schedule. BOX believes the proposed structure 
will continue to provide an incentive to BOX Options Participants 
(``Participants'') to submit their customer orders for execution on 
BOX.\5\
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    \5\ Note that BOX does not route broker-dealer proprietary 
orders and thus does not assess them any routing fees.
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    Each U.S. options exchange is obligated to ensure that any order 
executed on its market is at a price at least equal to the best price 
available at the other options exchanges (``the NBBO''). To enable 
this, the Intermarket Linkage Plan (``IML'') \6\ was implemented 
several years ago giving each exchange access to the markets on the 
other exchanges. During IML, individual customer orders were not 
actually routed to an away exchange for execution; rather, a designated 
market maker or specialist at each exchange would itself trade on the 
away market for the required price and quantity. Subsequently, an equal 
and offsetting order would be executed between the market maker/
specialist and the customer on the originating exchange.
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    \6\ Plan for the Purpose of Creating and Operating an 
Intermarket Options Linkage. See Securities Exchange Act Release No. 
43086 (July 28, 2000), 65 FR 48023 (August 4, 2000) (order approving 
the IML Plan submitted by the Amex, CBOE, and ISE).
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    This execution structure meant that the customer order execution 
was billed at the prevailing transaction fee applicable to customer 
orders on the originating exchange. The fees associated with the trade 
on the away exchange were either absorbed by the market maker/
specialist as part of his obligations to the exchange or were absorbed 
by the originating exchange.
    IML was subsequently replaced by the Options Order Protection and 
Locked/Crossed Market national market system plan.\7\ As a result, each 
exchange routes orders to an away exchange via a contractual agreement 
with an order routing broker (``third party router'' or TPR). The 
transaction fees on the away exchange are billed to the originating 
exchange by the TPR, together with any handling fees the TPR may 
charge. At present, many options exchanges other than BOX pass this 
away execution fee,

[[Page 67694]]

together with a service/handling charge, to the broker acting as agent 
for the order which was executed on the away exchange.
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    \7\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009).
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    BOX, however, charges a flat fifty cents per contract for these 
away executions and provides for an exemption from this fee for its 
Participants provided that the monthly total of such away transactions 
represents less than 45% of the Participant's total BOX non-
Professional, Public Customer \8\ account trading activity.
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    \8\ For the purposes of the discussion in this proposed rule 
change, these non-Professional, Public Customer orders will be 
referred to as Public Customer orders.
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    The purpose of this proposed rule change is to adjust the 
conditions of this routing fee exemption. BOX proposes to:
 Continue to charge all Professional customer accounts fifty 
cents per contract executed on away exchanges by BOX on their behalf;
 Charge all Public Customer accounts fifty cents per contract 
for orders executed on away exchanges by BOX on behalf of Public 
Customer accounts where such orders were non-Directed Orders; and
 Continue to exempt Public Customer accounts from the routing 
fee for orders received by BOX via Directed Order provided that:
    [cir] 33% or more of a Participant's Public Customer Directed 
Orders received during the month are executed through the BOX Price 
Improvement Period (``the PIP''), AND
    [cir] Less than 45% of a Participant's Directed Orders received are 
routed to and executed on an away exchange during the month.
The reason BOX proposes to reduce the scope of the away trade fee 
exemption is that is [sic] has proven too costly for BOX. However, BOX 
wishes to continue to provide incentives to Participants to seek price 
improvement for their Public Customer orders by entering them into the 
PIP. A majority of BOX Participants submitting orders to the PIP are 
sent to BOX via Directed Order, and therefore, BOX proposes to maintain 
the away fee exemption for Directed Orders sent to BOX for price 
improvement provided that at least 33% of the contracts submitted via 
Directed Order are executed through the PIP.

    Instructing BOX to route orders away if they are not able to be 
executed on BOX is voluntary for BOX Participants. Participants may 
choose not to route their Public Customer orders to another exchange. 
Participants may also avoid paying the proposed routing fee by choosing 
to designate their orders as Fill and Kill (``FAK''). FAK orders are 
not eligible for routing to away exchanges. FAK orders are executed on 
BOX, if possible, and then cancelled.
    Additionally, BOX believes the 45% threshold is appropriate as BOX 
has reviewed its routing costs over time and believes this is a 
reasonable percentage of Public Customer Directed Orders that BOX may 
route at no charge to the Participant, provided 33% of the 
Participant's Public Customer Directed Orders are submitted to the PIP 
during the month. Similarly, BOX's cost-benefit analysis led BOX to 
conclude that 33% of Public Customer Directed Orders submitted to the 
PIP was a reasonable level for liquidity providers accepting such 
orders on BOX. BOX believes that imposing a routing fee structure that 
provides a benefit to Participants for trading on BOX will allow BOX to 
recoup a portion of the costs incurred for providing routing services, 
while also providing an incentive to Participants to trade on BOX.
    While changes to the fee schedule pursuant to this proposal will be 
effective upon filing, the changes will become operative on November 1, 
2012.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\9\ in general, and Section 
6(b)(4) of the Act,\10\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and other persons using its facilities. The Exchange 
believes the changes proposed are an equitable allocation of reasonable 
fees and charges among BOX Options Participants.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes the proposed BOX routing fee structure is a 
reasonable attempt for BOX to recoup the costs incurred in providing 
routing services for customer orders. BOX incurs costs, including 
transaction fees at away exchanges, every time it routes a customer 
order to an away exchange for execution. The away execution fees vary, 
but may cost up to $0.45 per contract.\11\ As stated, BOX incurs this 
cost in addition to handling fees assessed by its TPR. As such, BOX 
aims to recover its costs by assessing Participants fees for routing 
Public Customer orders to away exchanges if they choose not to seek 
liquidity on BOX by sending non-Directed Orders.
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    \11\ See e.g., Take Fee of NYSE Arca Options, Options Pricing on 
BATS BZX Exchange Fee Schedule, C2 Options Exchange Fee Schedule, 
and NASDAQ Options Pricing as of October 2012.
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    For some period of time, BOX has provided optional routing services 
for certain Public Customer orders at no charge, and the Exchange 
believes it is also reasonable to continue to provide an economic 
incentive to BOX Participants to seek price improvement for their 
Public Customer orders by sending them to BOX to access the PIP. The 
Exchange believes that providing these Participants with a limited 
exemption from routing fees for continuing to send their Public 
Customer orders to BOX via Directed Orders to access the PIP, is a 
fair, reasonable and equitable incentive program for these 
Participants.
    Additionally, BOX believes the 45% threshold is appropriate as BOX 
has reviewed its routing costs over time and believes this is a 
reasonable percentage of Public Customer Directed Orders that BOX may 
route at no charge to the Participant, provided 33% of the 
Participant's Public Customer Directed Orders are submitted to the PIP 
during the month. Similarly, BOX's cost-benefit analysis led BOX to 
conclude that 33% of Public Customer Directed Orders submitted to the 
PIP was a reasonable level for liquidity providers accepting such 
orders on BOX. BOX believes that imposing a routing fee structure that 
provides a benefit to Participants for trading on BOX will allow BOX to 
recoup a portion of the costs incurred for providing routing services, 
while also providing an incentive to Participants to trade on BOX.
    BOX believes the proposed change is not unfairly discriminatory for 
the following reasons: First, any BOX Participant is welcome to enter 
an agreement with any other BOX Participant providing liquidity in 
order to send Directed Orders to seek price improvement for his 
customers. However, certain order flow providers (``OFPs) acting as 
agent for Public Customers lack the technological sophistication to 
ensure an order is not routed away by BOX; BOX fears, as a consequence, 
these firms will simply avoid sending their customer orders to BOX via 
Directed Order to seek price improvement if the OFPs' risk of higher 
trading fees due to away executions cannot be managed. As such, BOX 
believes it is appropriate and not unfairly discriminatory to provide 
an exemption from routing fees of the limited scope provided for these 
Participants.
    Secondly, BOX Participants choosing to offer price improvement to 
customers directly via internalization through the PIP (i.e., without 
using Directed Orders)

[[Page 67695]]

can avoid any potential BOX away execution fee by simply not sending 
any orders to BOX where BOX is not on the NBBO for the options series 
in question. BOX believes that any firm with the technical 
sophistication to interact with its own customer order flow via the PIP 
will encounter no difficulties in avoiding sending an order to BOX 
which risks being routed away by BOX.
    Furthermore, such Participants can ensure that this never happens 
by choosing to instruct BOX not to route their customer orders. This 
will ensure that where BOX cannot execute any portion of an order at a 
price equal to NBBO, the BOX trading system will return the order to 
the submitting Participant after the BOX quantity at NBBO has executed 
with the order.
    BOX notes that the away fee exemption will be equally available to 
order consolidator firms that are the most significant users of 
Directed Orders, using them to route orders for price improvement to 
their affiliated market maker.
    For all the reasons stated above, BOX believes that all firms 
wishing to offer price improvement to their customers will be on equal 
footing under the BOX proposal. Each is free to choose the mechanism he 
finds suits his business model best and BOX believes no firm will 
encounter unreasonable levels of away execution transaction fees.
    The Exchange believes the proposed routing fee structure is 
equitable and not unfairly discriminatory because the incentive to send 
Public Customer orders to BOX via Directed Order is available to all 
Participants on an equal basis. The Exchange believes it is reasonable 
and equitable to provide Participants (A) an incentive to trade on BOX, 
and (B) the ability to route a limited amount of customer orders at no 
cost, because transactions executed on BOX increase BOX market activity 
and market quality. Greater liquidity and additional volume executed on 
BOX aids the price and volume discovery process. Participant trading on 
BOX also results in revenue that BOX is able to use to provide routing 
services for a limited amount of customer orders at no cost to 
Participants. Accordingly, the Exchange believes that the proposal is 
not unfairly discriminatory because it promotes enhancing BOX market 
quality. As discussed above, BOX Participants can manage their own 
routing to different options exchanges or can utilize a myriad of other 
routing solutions that are available to market participants.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Exchange Act \12\ and Rule 19b-4(f)(2) 
thereunder,\13\ because it establishes or changes a due, fee, or other 
charge applicable only to a member.
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    \12\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \13\ 17 CFR 240.19b-4(f)(2).
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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 Exchange 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 Number SR-BOX-2012-017 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-2012-017. 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, 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 the 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-2012-017 and should be 
submitted on or before December 4, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27491 Filed 11-9-12; 8:45 am]
BILLING CODE 8011-01-P