[Federal Register Volume 84, Number 166 (Tuesday, August 27, 2019)]
[Notices]
[Pages 44954-44957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18380]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86723; File No. SR-BOX-2019-24]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change To Amend Rule 7600
August 21, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 19, 2019, BOX Exchange LLC (``BOX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 7600 to extend split-price
functionality to Complex QOO Orders on the BOX Trading Floor. 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 website at http://boxoptions.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 self-regulatory organization
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 self-regulatory organization
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
In March 2018, the Exchange adopted rules that allowed for split-
price transactions for Qualified Open Outcry (``QOO'') Orders on the
BOX Trading Floor.\3\ The Exchange now proposes to extend this
functionality to Complex QOO Orders on the BOX Trading Floor. The
Exchange believes the proposed change is reasonable as split-price
functionality applies to complex orders at another exchange with a
physical trading floor.\4\
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\3\ See Securities Exchange Act Release No. 82891 (March 16,
2018), 83 FR 12627 (March 22, 2018)(Notice of Filing of Amendment
No. 1 and Order Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment No. 1, To Adopt Rule 7600(i) To
Allow Split-Price Transactions on the BOX Trading Floor)(``Approval
Order'').
\4\ See Nasdaq PHLX LLC (``Phlx'') Floor Trading Rules Section
22(a)(2)(D)(ii). On Phlx, split price functionality for complex and
multi-leg orders are allowed on the trading floor, but due to Phlx
system limitations, require manual calculation. Under this proposal,
BOX is not requiring split price complex orders and multi-leg orders
to be manually calculated, as the BOX system has the functionality
to process these orders. Further, on Phlx, complex and multi-leg
orders that qualify for the exception in Phlx Section 22(a)(2)(D)
are afforded the priority provision in Phlx Floor Allocation Section
25(a)(2). The Exchange notes that this priority provision on Phlx is
similar to BOX's split price priority provision detailed in BOX Rule
7600(i)(2). As such, the Exchange believes that the proposed change
to expand split price priority to Complex QOO Orders and multi-leg
QOO Orders on the Exchange is appropriate as another options
exchange currently has a similar offering in place.
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Background
The industry first recognized the complexity of the split-price
order in 2005 when Nasdaq Phlx, LLC (``Phlx'') filed to create an
exception from existing priority rules for spit-price orders.\5\ The
purpose behind the split-
[[Page 44955]]
price priority exception was ``to bring about the execution of large
orders, which by virtue of their size and the need to execute them at
multiple prices may be difficult to execute without a limited exception
to the priority rules.'' \6\ The proposed exception allows a
Participant effecting a trade that betters the market to have priority
on the balance of that trade at the next pricing increment, even if
there are orders in the book at the same price.
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\5\ See Securities Exchange Act Release No. 51820 (June 10,
2005), 70 FR 35759 (June 21, 2005) (SR-Phlx-2005-028) (pilot
approval). See also Securities Exchange Act Release No. 55993 (June
29, 2007), 72 FR 37301 (July 9, 2007) (SR-Phlx-2007-044) (permanent
approval).
\6\ See Securities Exchange Act Release No. 51820 (June 10,
2005), 70 FR 35759 (June 21, 2005) (SR-Phlx-2005-028).
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BOX adopted rules for split-price transactions on the BOX Trading
Floor in March 2018.\7\ BOX's split-price priority rules are only
available for Qualified Open Outcry (``QOO'') Orders and are not
available for Complex Orders.
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\7\ See Securities Exchange Act Release No. 82891 (March 18,
2018), 83 FR 12627 (March 22, 2018) (SR-BOX-2019-36).
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Proposal
The Exchange now proposes to extend the split-price priority
functionality to Complex QOO Orders \8\ on the BOX Trading Floor.
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\8\ The Exchange also proposes to extend split-price priority
functionality to multi-leg QOO Orders on the BOX Trading Floor.
Multi-leg QOO Orders are the same as Complex QOO Orders except for
the ratio restrictions. See Securities Exchange Act Release No.
85052 (February 5, 2019), 84 FR 3265 (February 11, 2019) (SR-BOX-
2019-01).
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BOX Rule 7600(i)(1) details current priority principles for single
leg split-price transactions of less than 100 contracts occurring in
open outcry on the Trading Floor. Generally, under BOX Rule 7600(i)(1),
if an order or offer (bid) for any number of contracts of a series is
represented to the trading crowd, a Floor Participant that buys (sells)
one or more contracts of that order or offer (bid) at one price will
have priority over all other orders and quotes, except Public Customer
Orders resting in the BOX Book, to buy (sell) up to the same number of
contracts of those remaining from the same order or offer (bid) at the
next lower (higher) price. The Exchange proposes to allow the above
priority principles for split-price transactions for Complex QOO Orders
and multi-leg QOO Orders with less than 100 contracts on the BOX
Trading Floor.
Specifically, the Exchange proposes to add Rule 7600(i)(1)(i) which
states that if an order or offer (bid) for any number of units of a
Complex QOO Order or multi-leg QOO order is represented to the trading
crowd, a Floor Participant that buys (sells) one or more units of that
order or offer (bid) at one price will have priority over all other
orders and quotes, except Public Customer Orders resting in the BOX
Book or Complex Order Book, to buy (sell) up to the same number of
units of those remaining from the same order or offer (bid) at the next
lower (higher) price. The Exchange notes that the proposed language is
substantially similar to the current language of Rule 7600(i)(1),
except the proposed provision governs Complex QOO Orders and multi-leg
QOO orders of less than 100 units.
The Exchange believes that the proposal to extend the split-price
priority detailed in Rule 7600(i)(1) to Complex QOO Orders and multi-
leg QOO orders of less than 100 units is reasonable and consistent with
the Act. As stated herein, the Commission has recognized the importance
of split-price trades because they permit the execution of large
blocks, even permitting a limited exception to priority rules. As such,
due to the nature and complexity of Complex QOO Order and multi-leg QOO
orders and the occasional need to execute these orders at sub-increment
prices, the Exchange believes that extending split-price functionality
to these orders is appropriate.
For example, assume a Floor Broker is looking to execute a split
price Complex QOO Order at a price of 2.005 in strategy A+B for 50.
Assume a Floor Market Maker is willing to sell 25 units at $2.00
provided that he can also sell the remaining 25 units at $2.01. Under
the proposed change, that Floor Market Maker could offer $2.00 for 25
units and then, by virtue of the proposed split-price priority, he will
have priority for the balance of the order (up to 25 units) over all
other Participants, except Public Customer Orders resting on the BOX
Book or Complex Order Book. The Floor Broker will enter strategy A+B
for 50 at a price of $2.005. The system will then split the QOO Order.
The first transaction will be for 25 units at $2.00. The second
transaction will be for 25 units at $2.01, the next best price for the
Floor Broker [sic] customer. The Floor Market Maker (i.e., the contra-
side of the QOO Order) would have priority over all other Participants
to sell the 25 contracts at $2.01, except Public Customer Orders
resting on the BOX Book or Complex Order Book. The Floor Broker's
customer will receive a net purchase price of $2.005 for 50
contracts,\9\ which is the price that the Floor Broker entered when
submitting the QOO Order.
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\9\ The Floor Broker's customer would receive 25 contracts at
$1.00 and 25 contracts at $1.01. The net price that the customer
paid for the contracts would be $2.005 ((25 * $2.00 + 25 * $2.01)/
50)).
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Proposed Rule 7600(i)(3) details split-price priority for Complex
QOO Orders or offers (bids) and multi-leg QOO Orders or offers (bids)
of 100 or more units. If an order or offer (bid) of 100 or more units
of a Complex QOO Order or multi-leg QOO Order is represented to the
trading crowd, a Floor Participant that buys (sells) 50 or more of the
units of that Complex QOO Order or offer (bid) or multi-leg QOO Order
of offer (bid) at one price will have priority over all other orders
and quotes to buy (sell) up to the same number of units of those
remaining from the same order or offer (bid) at the next lower (higher)
price. The incoming Complex QOO Order or multi-leg QOO order will have
priority over all orders and quotes on the BOX Book and Complex Order
Book.
In order for a Floor Participant to avail himself to split-price
priority pursuant to BOX Rule 7600(i)(3) for Complex QOO Orders or
multi-leg QOO Orders, there are certain requirements. First, the
priority is available for open outcry transactions only (i.e., QOO
Orders). The Floor Participant must make its bid (offer) at the next
lower (higher) price for the second (or later) transaction at the same
time as the first bid (offer) or promptly following the announcement of
the first (or earlier) transaction. The second (or later) purchase
(sale) must represent the opposite side of a transaction with the same
order or offer (bid) as the first (or earlier) purchase (sale).
For example, assume a Floor Broker is looking to execute a split
price Complex QOO Order at a price of 2.005 in strategy A+B for 100.
Assume there is a resting Public Customer order to buy leg A at 1.00
and a resting Public Customer order to sell leg A at 1.01. Leg B has a
resting Public Customer Order to buy at 1.00 and no resting orders to
sell Leg B. The order would be split into 50 A+B at 2.01 and 50 A+B at
2.00 for a net price of 2.005 for the strategy. The strategy order for
50 A+B at 2.00 is permitted because the order is for at least 100
contracts, and the Floor Broker executed 50 contracts at the first
price (i.e., 2.01) giving the Floor Broker priority at the second price
(i.e., 2.00). The following executions would be reported: 50 Leg A at
1.00, 50 Leg A at 1.00, 50 Leg B at 1.00, and 50 Leg B at 1.01.
The Exchange further proposes that if the width of the quote is
$0.01, and both the bid and offer represent Public Customer Orders
resting in the BOX Book and/or Complex Order Book, split-price priority
pursuant to proposed Rule 7600(i)(3) is not available to a Floor
[[Page 44956]]
Participant until the Public Customer Order(s) resting in the BOX Book
and/or Complex Order Book on either side of the market trades.\10\ This
exception is consistent with the Exchange's allocation and priority
rules, which provide for Public Customer Orders to have priority at the
best price in open outcry over QOO Orders.\11\
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\10\ See proposed Rule 7600(i)(3)(i).
\11\ See Rule 7600 (c) and (d).
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For example, assume a Floor Broker is looking to execute a split
price Complex QOO Order at a price of 2.013 in strategy A+B for 100.
Assume there is a resting Market Maker order to buy A+B at 2.01 for 50
and a resting Public Customer order to buy A+B at 2.01 for 40 resting
behind it. Assume there is a resting Public Customer Order to sell at
2.02 for 1. The order would be split into 70 A+B at 2.01 and 30 A+B at
2.02 for a net price of 2.013 for the strategy. Further, assume the
Floor Broker provides a book sweep size \12\ of 100 contracts. Because
the initiating side's quantity (30) is smaller than the required 50
contracts pursuant to proposed rule 7600(i)(3), the initiating side
does not have priority over Public Customer orders on the BOX Book (the
initiating side does, however, have priority over non-Public Customer
orders on the BOX Book pursuant to BOX Rule 7600(i)(1)). As such, the
initiating side would sweep the Public Customer order on the BOX Book
up to the quantity of their first price (30) at $2.01. The initiating
side would then sweep the remaining 40 Market Maker contracts on the
BOX Book at $2.01. Because there are remaining Public Customer orders
on both sides of the bid and offer for the strategy, the Complex QOO
Order is rejected.
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\12\ The book sweep size is the number of contracts, if any, of
the initiating side of the QOO Order that the Floor Broker is
willing to relinquish to orders and quotes on the BOX Book that have
priority pursuant to Rule 7600(d)(1) and (2). If the number of
contracts on the BOX Book that have priority over the contra-side
order is greater than the book sweep size, then the QOO Order will
be rejected. If the number of contracts on the BOX Book that have
priority over the contra-side order is less than or equal to the
book sweep size, then the QOO Order will execute. See BOX Rule
7600(h).
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The Exchange also proposes that if the width of the quote for a
series is $0.01, and both the bid and offer represent Implied Orders on
both sides of the BOX BBO, split-price priority pursuant to this rule
is not available until the Implied Orders on either side of the market
trades.
For example, assume a Floor Broker is looking to execute a split
price Complex QOO Order at a price of 2.005 in strategy A+B for 100.
Assume there is a resting Public Customer order to buy leg A at 1.00
and a resting Public Customer order to sell leg A at 1.01. Leg B has a
resting Public Customer Order to buy at 1.00 and a resting Market Maker
Order to sell leg B at 1.01. The order would be split into 50 A+B at
2.01 and 50 A+B at 2.00 for a net price of 2.005 for the strategy. The
strategy order for 50 A+B at 2.00 is not permitted because there is an
Implied Order to buy A+B at 2.00. Additionally, a strategy order for 50
A+B at 2.01 would also not be permitted because of the Implied Order to
sell A+B at 2.01. Therefore, the system will reject the Complex QOO
Order entered at 2.005.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \13\ in general, and furthers the objectives of Section
6(b)(5) of the Act \14\ in particular, in that it is designed 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 the proposed rule change
is appropriate as split-price functionality exists on another options
exchange with a physical trading floor.\15\
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\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
\15\ See supra note 4.
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The Exchange believes that allowing split-price priority pursuant
to BOX Rule 7600(i)(1)(i) and BOX Rule 7600(i)(3) is reasonable and
appropriate as the proposal is similar in operation to the current
Complex Order priority exception \16\ under the Exchange rules. This
exception (which is established in the rules of many options exchanges)
was intended to facilitate the trade of complex orders, which by virtue
of their multi-legged composition could be more difficult to trade
without a limited exception to the priority rule for one of the legs.
The purpose behind the proposed split price priority for Complex QOO
Orders and multi-leg QOO Orders is the same--to facilitate the
execution of large orders, which by virtue of their size, multi-legged
composition and the need to execute them at multiple prices may be
difficult to execute without a limited exception to the priority rules.
The proposed extension of the split-price priority rule to Complex QOO
Orders and multi-leg QOO Orders will operate in the same manner as the
complex order exception by allowing a Participant effecting a trade
that betters the market to have priority on the balance of that trade
at the next pricing increment even if there are orders in the book at
the same price.
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\16\ See BOX Rule 7240(b)(2). A Complex Order may be executed at
a net credit or debit price with one other Participant; provided,
however, that the price of at least one leg of the Complex Order
must trade at a price that is better than the corresponding bid or
offer in the market place by at least one minimum trading increment.
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The proposed change is designed to induce Floor Participants to bid
(offer) at better prices for an order or offer (bid) that may require
execution at multiple prices (such as larger complex orders), which
will result in a better average price for the originating Floor
Participant (or its customer).
The Exchange believes that the proposal should lead to more
aggressive quoting of Complex QOO Orders and multi-leg QOO Orders by
Floor Participants, which in turn could lead to better executions for
market participants. A Floor Participant might be willing to trade at a
better price for a portion of a Complex QOO Order or multi-leg QOO
Order if he were assured of trading with the balance of the order at
the next pricing increment. As a result, Floor Brokers representing
Complex QOO Orders or multi-leg QOO Orders in the trading crowd might
receive better-priced executions. As such, the Exchange believes that
the proposed rule change will encourage Participants on BOX's Trading
Floor to bid or offer better prices, thus creating more opportunities
for price improvement, which ultimately enhances competition.
Lastly, as discussed above, the Exchange notes that the proposed
change is similar to functionality that exists at another options
exchange with an open outcry trading floor.\17\
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\17\ See supra note 4.
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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. The Exchange believes that the
proposal will allow it to compete with other floor-based exchanges and
help the Exchange's Floor Brokers compete with floor brokers on other
options exchanges by accommodating another type of complicated order.
Further, the Exchange believes that the proposed changes will not
impose any burden on intramarket competition as the proposed
functionality is available to all Floor Participants who wish to
execute a split price Complex QOO Order or multi-leg QOO Order on the
BOX Trading Floor.
[[Page 44957]]
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
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be 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-2019-24 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2019-24. 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 website (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 website 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BOX-2019-24 and should be submitted on
or before September 17, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18380 Filed 8-26-19; 8:45 am]
BILLING CODE 8011-01-P