Document ID: SEC-2017-2107-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange, LLC
Posted Date: 2017-12-19T05:00Z

[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60256-60259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27234]

[[Page 60256]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82315; File No. SR-BOX-2017-36]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Adopt Rule 7600(i) To Allow Split-
Price Transactions on the Trading Floor

December 13, 2017.
    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 November 30, 2017, BOX Options Exchange LLC (``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 allow split-price 
transactions on the 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
    The Exchange proposes to adopt Rule 7600(i). Specifically, the 
Exchange is proposing to adopt rules for split-price transactions on 
the Trading Floor. The proposal is based on the rules of another 
options exchange with an open outcry trading floor.\3\
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    \3\ See Cboe Rule 6.47. See also NYSE Arca Rule 6.75-O(h), NYSE 
American Rule 963NY(f), and Phlx Rule 1014(g)(i)(B).
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    Proposed Rule 7600(i) establishes priority principles for split-
price transactions occurring in open outcry on the Trading Floor. 
Generally, 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.\4\
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    \4\ See proposed Rule 7600(i)(1).
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    In order to execute a split-price transaction, a Floor Broker will 
submit a Qualified Open Outcry (``QOO'') Order to the system in the 
same manner as done today on the Trading Floor, with the exception that 
the QOO Order will be entered at a sub-minimum trading increment.\5\ 
After receiving the QOO Order, the system will split the QOO Order into 
two transactions. The transactions are separated by one tick that, when 
combined, will yield a net price equal to the original price entered by 
the Floor Broker. For example, assume a Floor Broker submits a QOO 
Order with a price of $1.025 for 100 contracts in a series with a 
minimum trading increment of $0.05. The system will split the QOO Order 
into two transactions; a transaction for the purchase of 50 contracts 
at $1.00 and a transaction for the purchase of 50 contracts at $1.05.
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    \5\ For example, entering a QOO Order at a price of $1.03 when 
the minimum trading increment for the series is $0.05.
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    The manner in which a Floor Broker brings an order to the Trading 
Floor is the same for a split-price QOO Order as it is for all other 
QOO Orders. Specifically, a Floor Broker may bring a single-sided order 
(i.e., the initiating side of a QOO Order) to the Trading Floor in 
order to seek liquidity (i.e., contra-side of a QOO Order). In such 
case, the Floor Broker announces the single-sided order to the trading 
crowd in an attempt to source contra-side liquidity. After finding 
sufficient liquidity for the single-sided order, the Floor Broker would 
be able to submit a two-sided QOO Order to the system as required.\6\ 
If a Floor Participant responds by providing liquidity at two separate 
prices, then the Floor Broker would submit the QOO Order at a sub-
minimum trading increment resulting in a split-price transaction.\7\ 
For example, a Floor Market Maker might be willing to buy half of the 
contracts at one price provided that the Floor Market Maker could buy 
the other half at one tick lower. Alternatively, the Floor Broker may 
have had both sides of the QOO Order (i.e., the initiating side and the 
contra-side) when the order is brought to the Trading Floor and desires 
to execute the order at two separate prices in an attempt to have a net 
execution price with a sub-minimum trading increment. In such 
situation, the Floor Broker will announce the QOO Order to the trading 
crowd as required by Rule 7580(e)(2) and Floor Participants will be 
able to respond. Specifically, the Floor Broker will announce they are 
attempting to execute a QOO Order as a split-price transaction.
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    \6\ See Rule 7600(a).
    \7\ The Exchange notes that nothing prevents a Floor Participant 
from responding for the full amount of the order at the better price 
for the Floor Broker's customer. For example if a Floor Broker 
announces an order for a customer looking to buy at $0.30 and $0.35, 
a Floor Participant could respond to sell the full quantity at $0.30 
instead of selling part at $0.30 and part at $0.35.
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    For example, assume the market for a series is $0.25-$0.35 (with a 
minimum trading increment of $0.05), and a Floor Broker receives an 
order from a customer who would like to buy 50 contracts at a price or 
prices no higher than $0.35. The Floor Broker will announce the single-
sided order (i.e., the initiating side of the QOO Order) to the crowd 
in order to solicit contra-side interest. Assume a Floor Market Maker 
is willing to sell 25 contracts at $0.30 provided that he can also sell 
the remaining 25 contracts at $0.35. Under the proposed Rule, that 
Floor Market Maker could offer $0.30 for 25 contracts and then, by 
virtue of the proposed split-price priority, he will have priority for 
the balance of the order (up to 25 contracts) over all other 
Participants, except Public Customer Orders resting on the BOX Book. 
The Floor Broker will enter a QOO Order at a price of $0.325, now that 
the Floor Broker has a two-sided order. The system will then split the 
QOO Order. The first transaction will be for 25 contracts at $0.30. The 
second transaction will be for 25 contracts at $0.35, the next best 
price for the Floor Broker 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 $0.35, except Public Customer 
Orders resting on the BOX Book. Two trades will be reported to the 
tape; a purchase of 25 contracts at $0.30 and a purchase of 25 at 
$0.35. The Floor Broker's customer will receive a net

[[Page 60257]]

purchase price of $0.325 for 50 contracts,\8\ which is the price that 
the Floor Broker entered when submitting the QOO Order.
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    \8\ The Floor Broker's customer would receive 25 contracts at 
$0.30 and 25 contracts at $0.35. The net price that the customer 
paid for the contracts would be $0.325 ((25* $0.30 + 25* $0.35)/50).
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    If an order or offer (bid) of 100 or more contracts of a series is 
represented to the trading crowd, a Floor Participant that buys (sells) 
50 or more of the contracts of that order or offer (bid) at one price 
will have priority over all other orders and quotes 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.\9\ If the bids or offers 
of two or more Floor Participants are both entitled to split-price 
priority, it will be afforded to the extent practicable on a pro-rata 
basis.\10\ Further, the Exchange may increase the minimum qualifying 
size of 100 contracts. These changes will be announced to Participants 
via Regulatory Circular.
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    \9\ See proposed Rule 7600(i)(2).
    \10\ See proposed Rule 7600(i)(3).
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    For example, assume the market for a series is $0.25-$0.35, and a 
Floor Broker receives an order from a customer who would like to buy 
100 contracts at a price or prices no higher than $0.35. Assume a Floor 
Market Maker is willing to sell 50 contracts at $0.30 provided that he 
can also sell the remaining 50 contracts at $0.35. Under the proposed 
Rule, that Floor Market Maker could offer $0.30 for 50 contracts then, 
by virtue of the proposed split-price priority, he will have priority 
for the balance of the order (up to 50 contracts) over all other 
Participants, including any resting Public Customer Orders on the BOX 
Book. The Floor Broker will enter a QOO Order with a price of $0.325. 
The system will then split the QOO Order. The first transaction will be 
for 50 contracts at $0.30. The second transaction will be for 50 
contracts at $0.35, the next best price for the Floor Broker's 
customer. The Floor Market Maker will have priority over all other 
Participants to sell the 50 contracts at $0.35, including any resting 
Public Customer Orders on the BOX Book. Two trades will be reported to 
the tape; a purchase of 50 contracts at $0.30 and a purchase of 50 at 
$0.35. The Floor Broker's customer will receive a net purchase price of 
$0.325 for 100 contracts, which is the price that the Floor Broker 
entered when submitting the QOO Order.
    In order for a Floor Participant to avail himself to split-price 
priority, there are certain requirements. First, the priority is 
available for open outcry transactions only (i.e., QOO Orders) and does 
not apply to Complex 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).
    The Exchange further proposes that if the width of the quote for a 
series is the minimum increment for that series (e.g., $1.00-$1.05 for 
a series with a minimum increment of $0.05, or $1.00-$1.01 for a series 
with a minimum increment of $0.01), and both the bid and offer 
represent Public Customer Orders resting in the BOX Book, split-price 
priority pursuant to this rule is not available to Floor Participant 
until the Public Customer Order(s) resting in the BOX Book on either 
side of the market trades. 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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    \11\ See Rules 7600(c) and (d).
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    For example, assume the market for a series with a minimum 
increment of $0.05 is $1.00-$1.05 (with the $1.00 bid and $1.05 offer 
each representing a Public Customer Order for 25 contracts), and a 
Floor Broker receives an order from a customer who would like to buy 
100 contracts at a price or prices no higher than $1.05. Assume a Floor 
Market Maker is willing to sell 50 contracts at $1.00 and 50 contracts 
at $1.05. The Floor Broker will enter a QOO Order at a price of $1.025. 
The system will then attempt to split the QOO Order. The first 
transaction would be for 50 contracts at $1.00. However, there is 
Public Customer interest resting at $1.00 on the BOX Book, which will 
have priority to trade at $1.00. Therefore, the system will reject the 
QOO Order entered at $1.025.\12\ In this situation, if the Floor Market 
Maker wants to receive split-price priority at $1.05, the Floor Market 
Maker will not be able to execute the first part of a split-price 
transaction with the order being represented by the Floor Broker until 
after the resting Public Customer Order at $1.00 trades.
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    \12\ If, however, the resting interest at $1.00 on the BOX Book 
was for non-Public Customer interest, the system would accept the 
QOO Order entered at $1.025. This is in line with the priority rules 
applicable to the Trading Floor as outlined in Rule 7600(c).
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    The proposed rule change provides that ``either side of the 
market'' must trade for split-price priority to become available. The 
proposal provides that a Floor Participant is eligible to receive 
split-price priority, which could include the Floor Participant 
representing the order or offer (quote). Thus, the proposal allows for 
the Floor Participant on either side of a transaction to be eligible 
for split-price priority. Assume the market for a series with a minimum 
increment of $0.05 is $1.00-$1.05 (with the $1.00 bid representing a 
Public Customer order for 25 contracts), and a Floor Broker receives an 
order from a customer who would like to buy 100 contracts at a price or 
prices no higher than $1.05. After receiving no interest from the 
trading crowd to sell 100 contracts at $1.00, the Floor Broker 
represents to the trading crowd that he would like to buy 50 contracts 
at $1.00 and 50 contracts at $1.05 for a net execution price of $1.025. 
Assume a Floor Market Maker is willing to sell 50 contracts at $1.00 
and 50 contracts at $1.05. The Floor Broker will enter a QOO Order at a 
price of $1.025. The system will then split the QOO Order. The first 
transaction will be for 50 contracts at $1.05 (at which price there is 
no resting Public Customer offer). The second transaction will be for 
50 contracts at $1.00, the next best price for the Floor Broker. In 
this situation, the Floor Broker's customer (i.e., the initiating side 
of the QOO Order) is eligible to receive split-price priority at $1.00 
over the resting Public Customer interest at $1.00 and achieve a better 
net price execution of $1.025 for its customer order, which is the 
price that the Floor Broker entered when submitting the QOO Order. Two 
trades will be reported to the tape; a purchase of 50 contracts at 
$1.00 and a purchase of 50 at $1.05.
    The Floor Broker may utilize the book sweep size, as provided in 
Rule 7600(h), when entering a split-price QOO Order. For example, 
assume the market for a series is $0.30-$0.35 (with a minimum trading 
increment of $0.05 and the $0.35 offer is a Public Customer Order for 
10 contracts). A Floor Broker intends to execute a split-price QOO 
Order for a customer looking to buy 80 contracts (i.e., the initiating 
side) at $0.325 with a Floor Market Maker willing to sell 80 contracts 
(i.e., the contra-side). The QOO Order will be split by the system into 
transactions for 40 contracts at $0.30 and 40 contracts at $0.35. A QOO 
Order entered at $0.325 will be accepted as long as the Floor Broker 
provided a book sweep size of at least 10 contracts which would sweep 
the resting Public

[[Page 60258]]

Customer interest on the contra-side. Assuming the Floor Broker entered 
a book sweep size of 10 contracts for the QOO Order, the second 
transaction at $0.35 will result in an allocation of the initiating 
side of the QOO Order to the Public Customer Order for 10 contracts and 
the remaining 30 contracts will be allocated to the Floor Market Maker.
    To address potential concerns regarding Section 11(a) of the 
Act,\13\ the Exchange is proposing IM-7600-6. Section 11(a) generally 
prohibits members of national securities exchanges from effecting 
transactions for the member's own account, absent an exemption. With 
respect to the proposal, there could be situations where because of the 
limited exception to Public Customer priority, orders on behalf of 
members could trade ahead of orders of nonmembers in violation of 
Section 11(a).\14\ The proposal would make clear that Floor Brokers may 
avail themselves of the split-price priority rule, but they would be 
obligated to ensure compliance with Section 11(a). Specifically, the 
Exchange is proposing that a Floor Broker who bids (offers) on behalf 
of a non-Market-Maker BOX Participant broker-dealer (``BOX Participant 
BD'') must ensure that the BOX Participant BD qualifies for an 
exemption from Section 11(a)(1) of the Exchange Act or the transaction 
satisfies the requirements of Exchange Act Rule 11a2-2(T). Pursuant to 
IM-7600-5, a Participant shall not utilize the Trading Floor to effect 
any transaction for its own account, the account of an associated 
person, or an account with respect to which it or an associated person 
thereof exercises investment discretion by relying on an exemption 
under Section 11(a)(1)(G) of the Exchange Act (the ``G 
Exemption'').\15\ Therefore, a Floor Broker bidding or offering on 
behalf of a BOX Participant must rely on other exceptions from Section 
11(a).\16\ Otherwise a Floor Broker cannot execute a split-price 
transaction on the Trading Floor. The Exchange notes that the proposed 
rule change would not limit in any way the obligation of a BOX 
Participant, while acting as a Floor Broker or otherwise, to comply 
with Section 11(a) or the rules thereunder.
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    \13\ 15 U.S.C. 78k(a).
    \14\ For example, assume Floor Broker A walks into the trading 
crowd attempting to find a crowd member willing to effect a split-
price transaction. Floor Broker B, who is representing either a 
proprietary or Participant broker-dealer order, expresses interest. 
In this instance, Section 11(a) could be implicated, absent an 
exemption.
    \15\ See Securities Exchange Act Release No. 80720 (May 18, 
2017), 82 FR 23657 (May 23, 2017) (Notice of Amendment 2 to SR-BOX-
2016-48) at 23674 and 23681. See also Securities Exchange Act 
Release No. 81292 (August 2, 2017), 82 FR 37144 (August 8, 2017) 
(Order Approving SR-BOX-2016-48).
    \16\ For example, other Section 11(a)(1) exemptions include, the 
``effect vs. execute'' exemption, the market maker exemption, and 
the error account exemption.
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    The Exchange will provide at least two weeks' notice to 
Participants via Circular prior to the launch of split-price priority. 
The Exchange anticipates launching in the first quarter of 2018.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \17\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \18\ 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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes the proposed rule change is 
consistent with the existing split-price priority on another options 
exchange.\19\ The proposed rule 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 
orders), which will result in a better average price for the 
originating Floor Participant (or its customer).
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    \19\ See supra note 3.
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    Further, the Exchange believes that the proposal should lead to 
more aggressive quoting by Floor Participants, which in turn could lead 
to better executions. A Floor Participant might be willing to trade at 
a better price for a portion of an order if he were assured of trading 
with the balance of the order at the next pricing increment. As a 
result, Floor Brokers representing 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 substantially similar to the split-price priority rules at 
another options exchange with open outcry trading floor.\20\ As such, 
the Exchange believes that the proposed change would remove impediments 
to and perfect the mechanism of a free and open market because the 
proposed rules establishing split-price priority on the BOX Trading 
Floor would further promote competition among options exchange with 
open outcry trading floors. As such, the Exchange believes that the 
proposed change is consistent with the Act.
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    \20\ Id.
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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. As discussed above, the 
proposed change aligns the rules of the Exchange with those of another 
options exchange \21\ and will allow the Exchange to compete with the 
options exchanges that have open outcry floors. The Exchange believes 
it will help Floor Brokers at the Exchange to compete for executions 
against floor brokers at other exchanges by providing an additional 
tool to Floor Brokers that allows them to provide better executions for 
their customers. This, in turn, helps the Exchange compete against 
exchanges in a deeply competitive landscape.
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    \21\ Id.
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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

    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:

[[Page 60259]]

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-2017-36 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-2017-36. 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-2017-36 and should be submitted on 
or before January 9, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27234 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P