[Federal Register Volume 81, Number 150 (Thursday, August 4, 2016)]
[Notices]
[Pages 51533-51536]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18471]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78444; File No. SR-BOX-2016-37]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Detail How Complex Orders Will Execute Through the Facilitation Auction 
Mechanism

July 29, 2016.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that on July 26, 2016, BOX Options Exchange LLC (``BOX'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in

[[Page 51534]]

Items I and II below, which Items have been prepared by the Exchange. 
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\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to detail how Complex Orders will execute 
through the Facilitation Auction mechanism. The text of the proposed 
rule change is available from the principal office of the Exchange, at 
the Commission's Public Reference Room and also on the Exchange's 
Internet Web site at http://boxexchange.com.

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 parts of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to detail how the 
Facilitation Auction mechanism will treat Complex Orders on the 
Exchange.\4\ Pursuant to BOX Rule 7270, the Exchange has two block-
sized auction mechanisms, the Facilitation Auction Mechanism and the 
Solicitation Auction Mechanism whereby Order Flow Providers (OFPs) can 
provide price improvement opportunities for a transaction where the OFP 
seeks to facilitate an order it represents as agent, and/or a 
transaction where the OFP solicited interest to execute against an 
order it represents as agent. Transactions executed through the 
Facilitation or Solicitation auction mechanisms are comprised of the 
order the OFP represents as agent (the ``Agency Order'') and the contra 
order for the full size of the Agency Order (either the 
``Facilitation'' or ``Solicitation'' Order).\5\ The contra order may 
represent interest for the Participant's own account or interest the 
Participant has solicited from one or more other parties, or a 
combination of both.
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    \4\ Complex Orders are not currently traded through the 
Facilitation Auction mechanism. Prior to implementation, BOX will 
issue an informational circular to inform Participants of the 
implementation date for Complex Orders to trade through the 
Facilitation Auction.
    \5\ The Exchange notes that it does not trade stock option 
orders.
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    This proposal only addresses how the Facilitation Auction mechanism 
will treat Complex Orders on the Exchange. Similar to the ISE's Block-
Trade rules,\6\ Complex Orders \7\ executed through the Facilitation 
auction on BOX function in substantially the same manner as single-leg 
orders executed through this mechanism. To detail how this mechanism 
treats Complex Orders, the Exchange proposes to insert IM-7270-7. IM-
7270-7 will state that Participants may use the Facilitation Mechanism 
according to paragraph (a) of Rule 7270 to execute block-size Complex 
Orders at a net price. The OFP must be willing to execute the entire 
size of the Agency Order through the submission of a contra order; and 
block-size Complex Orders executed through the Facilitation Mechanism 
will continue to be limited to Complex Orders of fifty (50) contracts 
per leg or more.\8\
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    \6\ See International Securities Exchange Rule 716 and 
Supplementary Material .08 to Rule 716.
    \7\ Under Rule 7240(a)(5) a ``Complex Order'' is defined as 
``any order involving the simultaneous purchase and/or sale of two 
or more different options series in the same underlying security, 
for the same account, in a ratio that is equal to or greater than 
one-to-three (.333) and less than or equal to three-to-one (3.00) 
and for the purpose of executing a particular investment strategy.) 
A Complex Order that does not meet this definition will be 
automatically rejected.
    \8\ Complex Orders comprised of less than fifty (50) contracts 
on each leg will automatically be rejected.
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    Upon the entry of a block-sized order into the Facilitation 
mechanism, a broadcast message will be sent to Options Participants, 
giving them one second to enter responses with the prices and sizes at 
which they would be willing to participate opposite the Agency Order 
(``Responses'').\9\ Responses to a Complex Order within the 
Facilitation Auction mechanism may be submitted for any size up to the 
size of the entire Complex Order, however, the Responses must be for 
all Legs of the unique Complex Order. Responses must be priced at the 
price of the Agency Order or at a better price and must not exceed the 
size of the Agency Order.\10\ At the end of the one second period for 
the entry of Responses, the block-sized Facilitation Complex Order will 
be automatically executed with the Agency Order.\11\ However, as is 
also the case for single-leg orders executed through the Facilitation 
mechanism, if the Facilitation Price is outside the NBBO at the end of 
the auction, the auction will be canceled.
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    \9\ The Exchange believes that 1 second is an adequate duration 
for the Facilitation Auction. Specifically, the Exchange believes 
customers are capable of responding within this duration and has not 
received any complaints regarding the duration of the Facilitation 
Auction broadcast since the mechanism was adopted in 2011.
    \10\ A Response that doesn't meet the requirements will be 
automatically rejected
    \11\ Assuming there are no Responses to the auction or interest 
on the BOX Book that could execute against the Agency Order.
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    Identical to the process for single-leg orders, Participants may 
enter Responses for Complex Orders in these auctions at net prices, and 
bids and offers for Complex Orders will participate in the execution of 
an order being executed as provided in paragraphs (a) and (b) of Rule 
7270. However, the execution rules for Complex Orders detailed in BOX 
Rule 7240(b)(2) and (3) will continue to apply.\12\ For example, if 
there is sufficient interest on the BOX Book for the individual legs to 
be executed at a permissible ratio, this ``Implied Order'' \13\ will 
have priority here and will execute against the Agency Order, provided 
that each of its component Legs is equal to or better than its 
respective NBBO.
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    \12\ The Exchange notes that this includes the Complex Order 
Filter outlined in BOX Rule 7240(b)(3)(iii).
    \13\ An ``Implied Order' is a Complex Order that is derived from 
the orders on the BOX Book for each component leg of a strategy.
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    If there is no execution against the Implied Order, the Agency 
Order can execute against the Complex Order interest. The priority 
rules for the Facilitation Auction,\14\ including the surrender 
quantity designation, will continue to apply. The following example 
illustrates the execution priority of interest on the BOX Book for a 
Complex Order within the Facilitation Auction. An OFP submits a Complex 
Order through the Facilitation Order to sell 500 A+B+C at $3.00. During 
the one second auction, BOX receives the following bids (offers) in 
time priority:
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    \14\ See BOX Rule 7270(a)(3).

(1) Market Maker Complex Order Response to buy 500 of A+B+C at $3.00
(2) Public Customer Complex Order Response to buy 40 A+B+C at $3.00

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 500 at $1.00
 Market Maker Option B--Order to buy 500 at $1.00
 Broker Dealer Option C--Order to buy 500 at $1.00


[[Page 51535]]


    Since it is possible to execute the entire Complex Order against 
interest on the BOX Book (Implied Order) at the same price, the sell 
order will execute against the bids on A, B and C at $1.00 for 100 
contracts each. And since this execution will exhaust the sell order, 
all the Responses, including the Public Customer's Response and the 
OFP's Facilitation Order will receive no trade allocation.
    The pricing provision in BOX Rule 7270(a)(3)(i) will apply to 
Public Customer Complex Orders and Public Customer Responses. If there 
is not sufficient size to execute the entire Agency Order at a better 
price and there are Public Customer Complex Order bids (offers) and 
Public Customer Responses on BOX at the time the Agency Order is 
executed that are priced higher (lower) than the facilitation price, 
these will maintain their price priority but execute at the 
Facilitation Price.\15\ Non-Public Customer and Market Maker bids 
(offers) and Non-Public Customer and Market Maker Responses on BOX at 
the time the Agency Order is executed that are priced higher (lower) 
than the facilitation price will be executed against the Agency Order 
at their stated price, providing the Agency Order [sic] execution at a 
better price for the number of contracts associated with such higher 
bids (lower offers) and Responses. When an Implied Order executes 
against an Agency Order, the Implied Order will be executed at its 
stated price.\16\
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    \15\ If there is sufficient interest to execute the Agency Order 
at a better price, Public Customer Complex Order bids (offers) will 
receive their stated price.
    \16\ See IM-7270-7. The Exchange notes that the provisions of 
BOX Rule 7270(a)(3)(i) do not apply to Implied Orders created from 
BOX Book interest.
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    The following example illustrates the allocation priority of BOX 
Rule 7270(a)(3)(ii). An OFP submits a Complex Order through the 
Facilitation auction to sell 500 A+B+C at $3.00. During the one second 
auction, BOX receives the following bids (offers) in time priority:

(1) Public Customer #1 Complex Order Response to buy 100 A+B+C at $3.00
(2) Public Customer #2 Complex Order Response to buy 100 A+B+C at $3.02
(3) Market Maker #1 Complex Order Response to buy 105 of A+B+C at $3.06
(4) Market Maker #2 Complex Order Response to buy 95 of A+B+C at $3.04

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 125 at $1.00
 Market Maker Option B--Order to buy 125 at $1.00
 Public Customer Option C--Order to buy 125 at $1.00

The Facilitated Complex Order will be allocated in the following order:

(1) 105 contracts at $3.06 to Market Maker #1 (price priority)
(2) 95 contracts at $3.04 to Market Maker #2 (price priority)
(3) 100 contracts at $3.00 to Public Customer #2 (the Public Customer 
retains its price priority, but executes at the facilitation price 
because there was not sufficient interest to execute the entire Agency 
Order at a Better Price)
(4) 125 contracts at $3.00 to BOX Book Interest (Implied Order) \17\
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    \17\ The Exchange notes that once an Implied Order is created 
from BOX Book interest, the Participant types composing the Implied 
Order are no longer relevant, and have no impact on execution and 
allocation priority.
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(5) 75 contracts at $3.00 to Public Customer #1 (remaining interest is 
allocated to the Public Customer at the facilitation price)

    The following example illustrates allocation priority of interest 
on the BOX Book over an OFP's allocation priority.\18\ An OFP submits a 
Complex Order through the Facilitation auction to sell 500 A+B+C at 
$3.00. During the one second auction, BOX receives the following bids 
(offers) in time priority:
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    \18\ Under BOX Rule 7270(a)(3)(ii) the OFP is entitled to at 
least 40% of the original size of the Facilitation Order after 
better-priced bids (offers) and Responses on BOX, as well as Public 
Customer bids (offers) and Responses at the facilitation price.

(1) Market Maker #1 Complex Order Response to buy 95 of A+B+C at $3.02
(2) Market Maker #2 Complex Order Response to buy 150 of A+B+C at $3.00

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 300 at $1.00
 Market Maker Option B--Order to buy 300 at $1.00
 Public Customer Option C--Order to buy 300 at $1.00

The Facilitated Complex Order will be allocated in the following order:

(1) 95 contracts at $3.02 to Market Maker #1 (price priority)
(2) 300 contracts at $3.00 to BOX Book Interest (Implied Order)
(3) 105 contracts at $3.00 to OFP's Facilitation Order (the OFP 
receives the remaining contracts as there is insufficient size to 
satisfy the full 40% allocation)

    The final example below illustrates allocation priority when the 
OFP has designated a surrender quantity under BOX Rule 7270(a)(3)(iii). 
An OFP submits a Complex Order through the Facilitation auction to sell 
300 A+B+C at $3.00 with a surrender quantity of 220. During the one 
second auction, BOX receives the following bids (offers) in time 
priority:

(1) Market Maker #1 Complex Order Response to buy 120 of A+B+C at $3.00

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 100 at $1.00
 Market Maker Option B--Order to buy 100 at $1.00
 Public Customer Option C--Order to buy 100 at $1.00

The Facilitated Complex Order will be allocated in the following order:

(1) 100 contracts at $3.00 to BOX Book Interest (Implied Order 
Priority)
(2) 80 contracts at $3.00 to OFP's Facilitation Order with a Surrender 
Quantity
(3) 120 contracts at $3.00 to Market Maker #1
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of section 6(b) of the Act,\19\ in general, and section 
6(b)(5) of the Act,\20\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to, and 
perfect the mechanism of, a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
In particular, the Exchange believes that the proposed rule change to 
amend BOX Rule 7270 to provide for the execution of Complex Orders 
through the Facilitation Auction mechanism on BOX. [sic] This proposed 
rule change is designed to help BOX remain competitive among options 
exchanges and provide market participants additional opportunities to 
execute block-size crossing transactions.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The proposed change provides for the execution of Complex Orders 
through the Facilitation auction mechanism. As such, the Exchange does 
not believe that the proposed rule change will impose any burden on 
competition not

[[Page 51536]]

necessary or appropriate in furtherance of the purposes of the Act. The 
Exchange does not believe the proposal will impose any burden on 
intermarket competition, as the proposed rule will allow BOX to compete 
with other options exchanges in the industry. Specifically, ISE has a 
similar mechanism in place.\21\ Additionally, the Exchange does not 
believe the proposal will impose any burden on intramarket competition, 
as the Facilitation Auction mechanism is available to all Participants 
and all OFPs may submit orders through the mechanism.
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    \21\ See supra note 5.
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(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    (a) This proposed rule change is filed pursuant to paragraph (A) of 
section 19(b)(3) of the Exchange Act \22\ and Rule 19b-4(f)(6) 
thereunder.\23\
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
under the Exchange Act requires the Exchange to give the Commission 
written notice of the Exchange's intent to file the proposed rule 
change, along with a brief description and text of 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. BOX has satisfied this requirement.
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    (b) Because this proposed rule change does not significantly affect 
the protection of investors or the public interest, does not impose any 
significant burden on competition, and, by its terms, does not become 
operative for 30 days after the date of the filing, or such shorter 
time as the Commission may designate, it has become effective pursuant 
to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
    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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

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-2016-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2016-37. 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 will also 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-2016-37 and should be 
submitted on or before August 25, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18471 Filed 8-3-16; 8:45 am]
 BILLING CODE 8011-01-P