Document ID: SEC-2016-2317-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange, LLC
Posted Date: 2016-12-28T05:00Z

[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)]
[Notices]
[Pages 95713-95719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31307]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79646; File No. SR-BOX-2016-59]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
Rule 3220, Disruptive Quoting and Trading Activity Prohibited and Rule 
12160, Expedited Suspension Proceeding

December 21, 2016.
    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 December 14, 2016, BOX Options Exchange LLC (``BOX'' or the 
``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 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\ 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 adopt (i) BOX Rule 3220 (Disruptive 
Quoting and Trading Activity Prohibited) to clearly prohibit disruptive 
quoting and trading activity on the Exchange and (ii) BOX Rule 12160 
(Expedited Suspension Proceeding) to permit the Exchange to take prompt 
action to suspend Option Participants or their clients that violate 
Rule 3220. 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 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt BOX Rule 3220 (Disruptive Quoting 
and Trading Activity Prohibited) to clearly prohibit disruptive quoting 
and trading activity on the Exchange and to adopt a new Exchange Rule 
12160 (Expedited Suspension Proceeding), to permit the Exchange to take 
prompt action to suspend Options Participants \3\ and their clients 
that violate such rule.
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    \3\ The term ``Options Participant'' or ``Participant'' means a 
firm, or organization that is registered with the Exchange pursuant 
to the Rule 2000 Series for purposes of participating in options 
trading on BOX as an ``Order Flow Provider'' or ``Market Maker''.
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Background
    As a national securities exchange registered pursuant to Section 6 
of the Act, the Exchange is required to be organized and to have the 
capacity to enforce compliance by its members and persons associated 
with its members, with the Act, the rules and regulations

[[Page 95714]]

thereunder, and the Exchange's Rules. Further, the Exchange's Rules are 
required to be ``designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade . . . 
and, in general, to protect investors and the public interest.'' \4\ In 
fulfilling these requirements, the Exchange has developed a 
comprehensive regulatory program that includes automated surveillance 
of trading activity that is both operated directly by Exchange staff 
and by staff of the Financial Industry Regulatory Authority (``FINRA'') 
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive 
and potentially manipulative or improper quoting and trading activity 
is identified, the Exchange or FINRA (acting as an agent of the 
Exchange) conducts an investigation into the activity, requesting 
additional information from the Options Participant or Options 
Participants involved. To the extent violations of the Act, the rules 
and regulations thereunder, or Exchange Rules have been identified and 
confirmed, the Exchange or FINRA as its agent will commence the 
enforcement process, which might result in, among other things, a 
censure, a requirement to take certain remedial actions, one or more 
restrictions on future business activities, a monetary fine, or even a 
temporary or permanent ban from the securities industry.
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    \4\ 15 U.S.C. 78f(b)(1).
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    The process described above, from the identification of disruptive 
and potentially manipulative or improper quoting and trading activity 
to a final resolution of the matter, can often take several years. The 
Exchange believes that this time period is generally necessary and 
appropriate to afford the subject Options Participant adequate due 
process, particularly in complex cases. However, as described below, 
the Exchange believes that there are certain obvious and uncomplicated 
cases of disruptive and manipulative behavior or cases where the 
potential harm to investors is so large that the Exchange should have 
the authority to initiate an expedited suspension proceeding in order 
to stop the behavior from continuing on the Exchange.
    In recent years, several cases have been brought and resolved by 
the Exchange and other SROs that involved allegations of wide-spread 
market manipulation, much of which was ultimately being conducted by 
foreign persons and entities using relatively rudimentary technology to 
access the markets and over which the Exchange and other SROs had no 
direct jurisdiction. In each case, the conduct involved a pattern of 
disruptive quoting and trading activity indicative of manipulative 
layering \5\ or spoofing.\6\ The Exchange and other SROs were able to 
identify the disruptive quoting and trading activity in real-time or 
near real-time; nonetheless, in accordance with Exchange Rules and the 
Act, the Members responsible for such conduct or responsible for their 
customers' conduct were allowed to continue the disruptive quoting and 
trading activity on the Exchange and other exchanges during the 
entirety of the subsequent lengthy investigation and enforcement 
process. The Exchange believes that it should have the authority to 
initiate an expedited suspension proceeding in order to stop the 
behavior from continuing on the Exchange if an Options Participant is 
engaging in or facilitating disruptive quoting and trading activity and 
the Options Participant has received sufficient notice with an 
opportunity to respond, but such activity has not ceased.
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    \5\ ``Layering'' is a form of market manipulation in which 
multiple, non-bona fide limit orders are entered on one side of the 
market at various price levels in order to create the appearance of 
a change in the levels of supply and demand, thereby artificially 
moving the price of the security. An order is then executed on the 
opposite side of the market at the artificially created price, and 
the non-bona fide orders are cancelled.
    \6\ ``Spoofing'' is a form of market manipulation that involves 
the market manipulator placing non-bona fide orders that are 
intended to trigger some type of market movement and/or response 
from other market participants, from which the market manipulator 
might benefit by trading bona fide orders.
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    The following two examples are instructive on the Exchange's 
rationale for the proposed rule change.
    In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, 
Inc.) (the ``Firm'') and its CEO were barred from the industry for, 
among other things, supervisory violations related to a failure by the 
Firm to detect and prevent disruptive and allegedly manipulative 
trading activities, including layering, short sale violations, and 
anti-money laundering violations.\7\ The Firm's sole business was to 
provide trade execution services via a proprietary day trading platform 
and order management system to day traders located in foreign 
jurisdictions. Thus, the disruptive and allegedly manipulative trading 
activity introduced by the Firm to U.S. markets originated directly or 
indirectly from foreign clients of the Firm. The pattern of disruptive 
and allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008. Although 
the Firm and its principals were on notice of the disruptive and 
allegedly manipulative quoting and trading activity that was occurring, 
the Firm took little to no action to attempt to supervise or prevent 
such quoting and trading activity until at least 2009. Even when it put 
some controls in place, they were deficient and the pattern of 
disruptive and allegedly manipulative trading activity continued to 
occur. As noted above, the final resolution of the enforcement action 
to bar the Firm and its CEO from the industry was not concluded until 
2012, four years after the disruptive and allegedly manipulative 
trading activity was first identified.
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    \7\ See Biremis Corp. and Peter Beck, FINRA Letter of 
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
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    In September of 2012, Hold Brothers On-Line Investment Services, 
Inc. (the ``Firm'') settled a regulatory action in connection with the 
Firm's provision of a trading platform, trade software and trade 
execution, support and clearing services for day traders.\8\ Many 
traders using the Firm's services were located in foreign 
jurisdictions. The Firm ultimately settled the action with FINRA and 
several exchanges, including the Exchange, for a total monetary fine of 
$3.4 million. In a separate action, the Firm settled with the 
Commission for a monetary fine of $2.5 million.\9\ Among the alleged 
violations in the case were disruptive and allegedly manipulative 
quoting and trading activity, including spoofing, layering, wash 
trading, and pre-arranged trading. Through its conduct and insufficient 
procedures and controls, the Firm also allegedly committed anti-money 
laundering violations by failing to detect and report manipulative and 
suspicious trading activity. The Firm was alleged to have not only 
provided foreign traders with access to the U.S. markets to engage in 
such activities, but that [sic] its principals also owned and funded 
foreign subsidiaries that engaged in the disruptive and allegedly 
manipulative quoting and trading activity. Although the pattern of 
disruptive and allegedly manipulative quoting and trading activity was 
identified in 2009, as noted above, the enforcement action was not 
concluded until 2012. Thus, although disruptive and allegedly 
manipulative

[[Page 95715]]

quoting and trading was promptly detected, it continued for several 
years.
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    \8\ See Hold Brothers On-Line Investment Services, LLC, FINRA 
Letter of Acceptance, Waiver and Consent No. 2010023771001, 
September 25, 2012.
    \9\ In the Matter of Hold Brothers On-Line Investment Services, 
LLC, Exchange Act Release No. 67924, September 25, 2012.
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    The Exchange also notes the criminal proceedings against Navinder 
Singh Sarao. Mr. Sarao's for [sic] manipulative trading activity, which 
included forms of layering and spoofing in the futures markets, which 
has been linked as a contributing factor to the ``Flash Crash'' of 
2010, and yet continued through 2015.
    The Exchange believes that the activities described in the cases 
above provide justification for the proposed rule change, which is 
described below. In addition, while the examples provided are related 
to the equities market, the Exchange believes that this type of conduct 
should be prohibited for options as well. The Exchange believes that 
these patterns of disruptive and allegedly manipulative quoting and 
trading activity need to be addressed and the product should not limit 
the action taken by the Exchange.

Rule 12160--Expedited Suspension Proceeding

    The Exchange proposes to adopt new Rule 12160, titled ``Expedited 
Suspension Proceeding,'' to set forth procedures for issuing suspension 
orders, immediately prohibiting an Options Participant from conducting 
continued disruptive quoting and trading activity on the Exchange. 
Importantly, these procedures would also provide the Exchange the 
authority to order an Options Participant to cease and desist from 
providing access to the Exchange to a client of the Options Participant 
that is conducting disruptive quoting and trading activity in violation 
of proposed Rule 3220. Proposed Rule 3220 would be titled, ``Disruptive 
Quoting and Trading Activity Prohibited.'' Under proposed paragraph (a) 
of Rule 12160, with the prior written authorization of the Chief 
Regulatory Officer (``CRO'') or such other senior officers as the CRO 
may designate, the Office of General Counsel or Regulatory Department 
of the Exchange (such departments generally referred to as the 
``Exchange'' for purposes of proposed Rule 12160) may initiate an 
expedited suspension proceeding with respect to alleged violations of 
Rule 3220, which is proposed as part of this filing and described in 
detail below. Proposed paragraph (a) would also set forth the 
requirements for notice and service of such notice pursuant to the 
Rule, including the required method of service and the content of 
notice.
    Proposed paragraph (b) of Rule 12160 would govern the appointment 
of a Hearing Panel as well as potential disqualification or recusal of 
Panel Members. The proposed provision is consistent with existing 
Exchange Rule 12060(a). The proposed rule provides for a Panel Member 
to be recused in the event he or she has a conflict of interest or bias 
or other circumstances exist where his or her fairness might reasonably 
be questioned in accordance with Rules [sic]12160(b)(2). In addition to 
recusal initiated by such a Panel Member, a party to the proceeding 
will be permitted to file a motion to disqualify a Panel Member. 
However, due to the compressed schedule pursuant to which the process 
would operate under Rule 12160, the proposed rule would require such 
motion to be filed no later than 5 days after the announcement of the 
Hearing Panel and the Exchange's brief in opposition to such motion 
would be required to be filed no later than 5 days after service 
thereof. Pursuant to existing Rule 12060(a)(3), any time a person 
serving on a Panel has a conflict of interest or bias or circumstances 
otherwise exist where his fairness might be reasonably questioned, the 
person must withdraw from the Panel. The applicable Panel Member shall 
remove himself or herself and the Panel Chairman may request the 
Chairman of the Hearing Committee to select a replacement such that the 
Hearing Panel still meets the compositional requirements described in 
Rule 12060(a).
    Under paragraph (c) of the proposed Rule, the hearing would be held 
not later than 15 days after service of the notice initiating the 
suspension proceeding, unless otherwise extended by the Chairman of the 
Hearing Panel with the consent of the Parties for good cause shown. In 
the event of a recusal or disqualification of a Panel Member, the 
hearing shall be held not later than five days after a replacement 
Panel Member is appointed. Proposed paragraph (c) would also govern how 
the hearing is conducted, including the authority of Panel Members, 
witnesses, additional information that may be required by the Hearing 
Panel, the requirement that a transcript of the proceeding be created 
and details related to such transcript, and details regarding the 
creation and maintenance of the record of the proceeding. Proposed 
paragraph (c) would also state that if a Respondent fails to appear at 
a hearing for which it has notice, the allegations in the notice and 
accompanying declaration may be deemed admitted, and the Hearing Panel 
may issue a suspension order without further proceedings. Finally, as 
proposed, if the Exchange fails to appear at a hearing for which it has 
notice, the Hearing Panel may order that the suspension proceeding be 
dismissed.
    Under paragraph (d) of the proposed Rule, the Hearing Panel would 
be required to issue a written decision stating whether a suspension 
order would be imposed. The Hearing Panel would be required to issue 
the decision not later than 10 days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the Parties for good cause shown. The Rule 
would state that a suspension order shall be imposed if the Hearing 
Panel finds by a preponderance of the evidence that the alleged 
violation specified in the notice has occurred and that the violative 
conduct or continuation thereof is likely to result in significant 
market disruption or other significant harm to investors.
    Proposed paragraph (d) would also describe the content, scope and 
form of a suspension order. As proposed, a suspension order shall be 
limited to ordering a Respondent to cease and desist from violating 
proposed Rule 3220 and/or to ordering a Respondent to cease and desist 
from providing access to the Exchange to a client of Respondent that is 
causing violations of Rule 3220. Under the proposed rule, a suspension 
order shall also set forth the alleged violation and the significant 
market disruption or other significant harm to investors that is likely 
to result without the issuance of an order. The order shall describe in 
reasonable detail the act or acts the Respondent is to take or refrain 
from taking, and suspend such Respondent unless and until such action 
is taken or refrained from. Finally, the order shall include the date 
and hour of its issuance. As proposed, a suspension order would remain 
effective and enforceable unless modified, set aside, limited, or 
revoked pursuant to proposed paragraph (e), as described below. 
Finally, paragraph (d) would require service of the Hearing Panel's 
decision and any suspension order consistent with other portions of the 
proposed rule related to service.
    Proposed paragraph (e) of Rule 12160 would state that at any time 
after the Hearing Panel served the Respondent with a suspension order, 
a Party could apply to the Hearing Panel to have the order modified, 
set aside, limited, or revoked. If any part of a suspension order is 
modified, set aside, limited, or revoked, proposed paragraph (e) of 
Rule 12160 provides the Hearing Panel discretion to leave the cease and 
desist part of the order in place. For example, if a suspension order 
suspends Respondent unless and until Respondent ceases and desists

[[Page 95716]]

providing access to the Exchange to a client of Respondent, and after 
the order is entered the Respondent complies, the Hearing Panel is 
permitted to modify the order to lift the suspension portion of the 
order while keeping in place the cease and desist portion of the order. 
With its broad modification powers, the Hearing Panel also maintains 
the discretion to impose conditions upon the removal of a suspension--
for example, the Hearing Panel could modify an order to lift the 
suspension portion of the order in the event a Respondent complies with 
the cease and desist portion of the order but additionally order that 
the suspension will be re-imposed if Respondent violates the cease and 
desist provisions modified [sic] order in the future. The Hearing Panel 
generally would be required to respond to the request in writing within 
10 days after receipt of the request. An application to modify, set 
aside, limit or revoke a suspension order would not stay the 
effectiveness of the suspension order.
    Finally, proposed paragraph (f) would provide that sanctions issued 
under the proposed Rule 12160 would constitute final and immediately 
effective disciplinary sanctions imposed by the Exchange, and that the 
right to have any action under the Rule reviewed by the Commission 
would be governed by Section 19 of the Act. The filing of an 
application for review would not stay the effectiveness of a suspension 
order unless the Commission otherwise ordered.

Rule 3220--Disruptive Quoting and Trading Activity Prohibited

    The Exchange currently has authority to prohibit and take action 
against manipulative trading activity, including disruptive quoting and 
trading activity, pursuant to its general market manipulation rules, 
including Rules 3000, Just and Equitable Principles of Trade, and 3050, 
Manipulation. The Exchange proposes to adopt new Rule 3220, which would 
more specifically define and prohibit disruptive quoting and trading 
activity on the Exchange. As noted above, the Exchange proposes to 
apply the proposed suspension rules to proposed Rule 3220.
    Proposed Rule 3220 would prohibit Option Participants from engaging 
in or facilitating disruptive quoting and trading activity on the 
Exchange, as described in proposed Rule 3220(a)(1) and (2), including 
acting in concert with other persons to effect such activity. The 
Exchange believes that it is necessary to extend the prohibition to 
situations when persons are acting in concert to avoid a potential 
loophole where disruptive quoting and trading activity is simply split 
between several brokers or customers. The Exchange believes, that with 
respect to persons acting in concert perpetrating an abusive scheme, it 
is important that the Exchange have authority to act against the 
parties perpetrating the abusive scheme, whether it is one person or 
multiple persons.
    To provide proper context for the situations in which the Exchange 
proposes to utilize its proposed authority, the Exchange believes it is 
necessary to describe the types of disruptive quoting and trading 
activity that would cause the Exchange to use its authority. 
Accordingly, the Exchange proposes to adopt Rule 3220(a)(1) and (2) 
providing additional details regarding disruptive quoting and trading 
activity. Proposed Rule 3220(a)(1)(i) describes disruptive quoting and 
trading activity containing many of the elements indicative of 
layering. It would describe disruptive quoting and trading activity as 
a frequent pattern in which the following facts are present: (i) A 
party enters multiple limit orders on one side of the market at various 
price levels (the ``Displayed Orders''); and (ii) following the entry 
of the Displayed Orders, the level of supply and demand for the 
security changes; and (iii) the party enters one or more orders on the 
opposite side of the market of the Displayed Orders (the ``Contra-Side 
Orders'') that are subsequently executed; and (iv) following the 
execution of the Contra-Side Orders, the party cancels the Displayed 
Orders.
    Proposed Rule 3220(a)(1)(ii) describes disruptive quoting and 
trading activity containing many of the elements indicative of spoofing 
and would describe disruptive quoting and trading activity as a 
frequent pattern in which the following facts are present: (i) a party 
narrows the spread for a security by placing an order inside the 
national best bid or offer; and (ii) the party then submits an order on 
the opposite side of the market that executes against another market 
participant that joined the new inside market established by the order 
described in proposed 3220(a)(1)(ii)(A) that narrowed the spread. The 
Exchange believes that the proposed descriptions of disruptive quoting 
and trading activity articulated in the rule are consistent with the 
activities that have been identified and described in the client access 
cases described above. The Exchange further believes that the proposed 
descriptions will provide Option Participants with clear descriptions 
of disruptive quoting and trading activity that will help them to avoid 
engaging in such activities or allowing their clients to engage in such 
activities.
    The Exchange proposes to make clear in proposed Rule 3220(a)(2), 
unless otherwise indicated, the descriptions of disruptive quoting and 
trading activity do not require the facts to occur in a specific order 
in order for the rule to apply. For instance, with respect to the 
pattern defined in proposed Rule 3220(a)(1)(i) it is of no consequence 
whether a party first enters Displayed Orders and then Contra-side 
Orders or vice-versa. However, as proposed, it is required for supply 
and demand to change following the entry of the Displayed Orders. The 
Exchange also proposes to make clear that disruptive quoting and 
trading activity includes a pattern or practice in which some portion 
of the disruptive quoting and trading activity is conducted on the 
Exchange and the other portions of the disruptive quoting and trading 
activity are conducted on one or more other exchanges. The Exchange 
believes that this authority is necessary to address market 
participants who would otherwise seek to avoid the prohibitions of the 
proposed Rule by spreading their activity amongst various execution 
venues. In sum, proposed Rule 3220 coupled with proposed Rule 12160 
would provide the Exchange with authority to promptly act to prevent 
disruptive quoting and trading activity from continuing on the 
Exchange.
    Below is an example of how the proposed rule would operate.
    Assume that through its surveillance program, Exchange staff 
identifies a pattern of potentially disruptive quoting and trading 
activity. After an initial investigation the Exchange would then 
contact the Option Participant responsible for the orders that caused 
the activity to request an explanation of the activity as well as any 
additional relevant information, including the source of the activity. 
If the Exchange were to continue to see the same pattern from the same 
Option Participant and the source of the activity is the same or has 
been previously identified as a frequent source of disruptive quoting 
and trading activity then the Exchange could initiate an expedited 
suspension proceeding by serving notice on the Option Participant that 
would include details regarding the alleged violations as well as the 
proposed sanction. In such a case the proposed sanction would likely be 
to order the Option Participant to cease and desist providing access to 
the Exchange to the client that is responsible for the disruptive 
quoting and trading activity and to suspend such Options Participant 
unless and until such action is taken.

[[Page 95717]]

    The Options Participant would have the opportunity to be heard in 
front of a Hearing Panel at a hearing to be conducted within 15 days of 
the notice. If the Hearing Panel determined that the violation alleged 
in the notice did not occur or that the conduct or its continuation 
would not have the potential to result in significant market disruption 
or other significant harm to investors, then the Hearing Panel would 
dismiss the suspension order proceeding.
    If the Hearing Panel determined that the violation alleged in the 
notice did occur and that the conduct or its continuation is likely to 
result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would issue the order including the 
proposed sanction, ordering the Options Participant to cease providing 
access to the client at issue and suspending such Options Participant 
unless and until such action is taken. If such Option Participant 
wished for the suspension to be lifted because the client ultimately 
responsible for the activity no longer would be provided access to the 
Exchange, then such Option Participant could apply to the Hearing Panel 
to have the order modified, set aside, limited or revoked. The Exchange 
notes that the issuance of a suspension order would not alter the 
Exchange's ability to further investigate the matter and/or later 
sanction the Options Participant pursuant to the Exchange's standard 
disciplinary process for supervisory violations or other violations of 
Exchange rules or the Act.
    The Exchange reiterates that it already has broad authority to take 
action against an Options Participant in the event that such Options 
Participant is engaging in or facilitating disruptive or manipulative 
trading activity on the Exchange. For the reasons described above, and 
in light of recent cases like the client access cases described above, 
as well as other cases currently under investigation, the Exchange 
believes that it is equally important for the Exchange to have the 
authority to promptly initiate expedited suspension proceedings against 
any Options Participant who has demonstrated a clear pattern or 
practice of disruptive quoting and trading activity, as described 
above, and to take action including ordering such Options Participant 
to terminate access to the Exchange to one or more of such Options 
Participant's clients if such clients are responsible for the activity.
    The Exchange recognizes that its proposed authority to issue a 
suspension order is a powerful measure that should be used very 
cautiously. Consequently, the proposed rules have been designed to 
ensure that the proceedings are used to address only the most clear and 
serious types of disruptive quoting and trading activity and that the 
interests of Respondents are protected. For example, to ensure that 
proceedings are used appropriately and that the decision to initiate a 
proceeding is made only at the highest staff levels, the proposed rules 
require the CRO or another senior officer of the Exchange to issue 
written authorization before the Exchange can institute an expedited 
suspension proceeding. In addition, the rule by its terms is limited to 
violations of Rules [sic] 3220, when necessary to protect investors, 
other Options Participants and the Exchange. The Exchange will initiate 
disciplinary action for violations of Rule 3220, pursuant to Rule 
12160. Further, the Exchange believes that the proposed expedited 
suspension provisions described above that provide the opportunity to 
respond as well as a Hearing Panel determination prior to taking action 
will ensure that the Exchange would not utilize its authority in the 
absence of a clear pattern or practice of disruptive quoting and 
trading activity.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Securities Exchange Act of 1934 
(the ``Act''),\10\ in general, and Section 6(b)(5) of the Act,\11\ in 
particular, in that it is 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 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 investors and the 
public interest. Pursuant to the proposal, the Exchange will have a 
mechanism to promptly initiate expedited suspension proceedings in the 
event the Exchange believes that it has sufficient proof that a 
violation of Rule 3220 has occurred and is ongoing.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Further, the Exchange believes that the proposal is consistent with 
Sections 6(b)(1) and 6(b)(6) of the Act,\12\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of the Commission and Exchange rules. The 
Exchange also believes that the proposal is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act because the proposal helps to strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where 
awaiting the conclusion of a full disciplinary proceeding is unsuitable 
in view of the potential harm to other Options Participants and their 
customers. Also, the Exchange notes that if this type of conduct is 
allowed to continue on the Exchange, the Exchange's reputation could be 
harmed because it may appear to the public that the Exchange is not 
acting to address the behavior. The expedited process would enable the 
Exchange to address the behavior with greater speed.
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    \12\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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    As explained above, the Exchange notes that it has defined the 
prohibited disruptive quoting and trading activity by modifying the 
traditional definitions of layering and spoofing \13\ to eliminate an 
express intent element that would not be proven on an expedited basis 
and would instead require a thorough investigation into the activity. 
As noted throughout this filing, the Exchange believes it is necessary 
for the protection of investors to make such modifications in order to 
adopt an expedited process rather than allowing disruptive quoting and 
trading activity to occur for several years.
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    \13\ See supra, notes 5 and 6.
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    Through this proposal, the Exchange does not intend to modify the 
definitions of spoofing and layering that have generally been used by 
the Exchange and other regulators in connection with actions like those 
cited above. The Exchange believes that the pattern of disruptive and 
allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, and the Exchange, FINRA, and other SROs 
identified clear patterns of the behavior in 2007 and 2008 in the 
equities markets.\14\ The Exchange believes that this proposal will 
provide the Exchange with the necessary means to enforce against such 
behavior in an expedited manner while providing Options Participants 
with the necessary due process. The Exchange believes that its proposal 
is consistent with the Act because it provides the Exchange with the 
ability to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, and, in general to 
protect

[[Page 95718]]

investors and the public interest from such ongoing behavior.
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    \14\ See Section 3 herein, the Purpose section, for examples of 
conduct referred to herein.
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    Further, the Exchange believes that adopting a rule applicable to 
Options Participants is consistent with the Act because the Exchange 
believes that this type of behavior should be prohibited for all 
Options Participants. The type of product should not be the determining 
factor, rather the behavior which challenges the market structure is 
the primary concern for the Exchange. While this behavior may not be as 
prevalent on the options market today, the Exchange does not believe 
that the possibility of such behavior in the future would not have the 
same market impact and thereby warrant an expedited process.
    The Exchange further believes that the proposal is consistent with 
Section 6(b)(7) of the Act,\15\ which requires that the rules of an 
exchange ``provide a fair procedure for the disciplining of members and 
persons associated with members . . . and the prohibition or limitation 
by the exchange of any person with respect to access to services 
offered by the exchange or a member thereof.'' Finally, the Exchange 
also believes the proposal is consistent with Sections 6(d)(1) and 
6(d)(2) of the Act,\16\ which require that the rules of an exchange 
with respect to a disciplinary proceeding or proceeding that would 
limit or prohibit access to or membership in the exchange require the 
exchange to: Provide adequate and specific notice of the charges 
brought against a member or person associated with a member, provide an 
opportunity to defend against such charges, keep a record, and provide 
details regarding the findings and applicable sanctions in the event a 
determination to impose a disciplinary sanction is made. The Exchange 
believes that each of these requirements is addressed by the notice and 
due process provisions included within Rule 12160. Importantly, as 
noted above, the Exchange will use the authority only in clear and 
egregious cases when necessary to protect investors, other Options 
Participants and the Exchange, and in such cases, the Respondent will 
be afforded due process in connection with the suspension proceedings.
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    \15\ 15 U.S.C. 78f(b)(7).
    \16\ U.S.C. 78f(d)(1) and (d)(2).
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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. To the contrary, the Exchange 
believes that each self-regulatory organization should be empowered to 
regulate trading occurring on its market consistent with the Act and 
without regard to competitive issues. The Exchange is requesting 
authority to take appropriate action if necessary for the protection of 
investors, other Options Participants and the Exchange. The Exchange 
also believes that it is important for all exchanges to be able to take 
similar action to enforce their rules against manipulative conduct 
thereby leaving no exchange prey to such conduct. The Exchange does not 
believe that the proposed rule change imposes an undue burden on 
competition, rather this process will provide the Exchange with the 
necessary means to enforce against violations of manipulative quoting 
and trading activity in an expedited manner, while providing Options 
Participants with the necessary due process. The Exchange's proposal 
would treat all Options Participants in a uniform manner with respect 
to the type of disciplinary action that would be taken for violations 
of manipulative quoting and trading activity.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) \19\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
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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 rule-comments@sec.gov. Please include 
File Number SR-BOX-2016-59 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-2016-59. 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 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

[[Page 95719]]

information that you wish to make available publicly. All submissions 
should refer to File Number SR-BOX-2016-59, and should be submitted on 
or before January 18, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31307 Filed 12-27-16; 8:45 am]
 BILLING CODE 8011-01-P