Document ID: SEC-2013-0481-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange LLC
Posted Date: 2013-03-13T04:00Z

[Federal Register Volume 78, Number 49 (Wednesday, March 13, 2013)]
[Notices]
[Pages 16025-16028]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05715]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69054; File No. SR-BOX-2013-09]

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

March 7, 2013.
    Pursuant to Section 19(b)(1) under the Securities Exchange Act of 
1934 (the

[[Page 16026]]

``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 28, 2013, BOX Options Exchange LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Exchange filed the 
proposed rule change pursuant to Section 19(b)(3)(A)(ii) of the Act,\3\ 
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the Fee Schedule for 
trading on the BOX Market LLC (``BOX'') options facility. In 
particular, the Exchange proposes to extend a pilot program applicable 
to Liquidity Fees and Credits for PIP Transactions through August 31, 
2013 (the ``Program''). The Program has been in effect on BOX since 
February 2012 and is scheduled to expire February 28, 2013. While 
changes to the Fee Schedule pursuant to this proposal will be effective 
upon filing, the changes will become operative on March 1, 2013. The 
text of the proposed rule change is available from the principal office 
of the Exchange, at the Commission's Public Reference Room and also on 
the Exchange's Internet Web site at http://boxexchange.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant 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 amend the Fee Schedule for trading on BOX. 
In particular, the Exchange proposes to extend a pilot program 
applicable to Liquidity Fees and Credits for PIP Transactions through 
August 31, 2013 (the ``Program''). The Program has been in effect on 
BOX since February 2012 and is scheduled to expire February 28, 
2013.\5\
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    \5\ See Securities Exchange Act Release Nos. 62512 (January 31, 
2012), 77 FR 5590 (February 3, 2012) (Commission Order Granting 
Accelerated Approval of the BOX Credits and Fees for PIP 
Transactions on a pilot basis) (SR-BX-2011-046), and 66979 (May 14, 
2012), 77 FR 29740 (May 18, 2012) (Notice of Filing and Immediate 
Effectiveness to adopt the Fee Schedule for trading on BOX which 
included the Program) (SR-BOX-2012-002).
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    Transactions in the BOX PIP are assessed either a fee for adding 
liquidity or provided a credit for removing liquidity regardless of 
account type. PIP Orders (i.e., the agency orders opposite the Primary 
Improvement Order \6\) receive the ``removal'' credit and Improvement 
Orders \7\ are charged the ``add'' fee. In particular, the Program 
permits a fee for adding liquidity or a credit for removing liquidity 
of $0.75, regardless of account type, for PIP transactions where the 
minimum price variation is greater than $0.01 (i.e., all non-Penny 
Pilot Classes, and Penny Pilot Classes where the trade price is equal 
to or greater than $3.00, excluding QQQ, SPY, and IWM).\8\ The Exchange 
proposes that this $0.75 liquidity fee and credit applicable to these 
PIP transactions continue to be operative on a pilot basis until August 
31, 2013, in addition to any applicable Exchange Fees as described in 
Section I of the Fee Schedule.
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    \6\ An Improvement Order is a response to a PIP auction.
    \7\ A Primary Improvement Order is the matching contra order 
submitted to the PIP on the opposite side of an agency order.
    \8\ The Exchange notes that the Program also includes a fee for 
adding liquidity or a credit for removing liquidity of $0.30, 
regardless of account type, for PIP transactions where the minimum 
price variation is $0.01 (Penny Pilot classes where trade price is 
less than $3.00, and all series in QQQ, SPY & IWM).
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    In connection with the pilot, the Exchange agrees to submit to the 
Commission on a monthly basis during the pilot period, and make 
publicly available on the Exchange Web site: (A) PIP transaction data 
in series traded in penny increments compared to series traded in 
nickel increments, subdivided by when BOX is at the NBBO and when BOX 
is not at the NBBO, including: (1) Volume by number of contracts 
traded; (2) number of contracts executed by the Initiating Participant 
as compared to others (``retention rate''); (3) percentage of contracts 
receiving price improvement when the Initiating Participant is the 
contra party and when others are the contra party; (4) average number 
of participants responding in the PIP; (5) average price improvement 
amount when the Initiating Participant is the contra party; (6) average 
price improvement amount when others are the contra party; and (7) 
percentage of contracts receiving price improvement greater than $0.01, 
$0.02 and $0.03 when the Initiating Participant is the contra party and 
when others are the contra party; and (B) effective spread data for PIP 
transactions, specifically (1) average effective spread; (2) median 
effective spread; and (3) mode of the effective spread.\9\ This data 
will allow the Commission to further evaluate the effect of the fee 
structure on competition and the extent of price improvement for orders 
executed in the PIP, in the affected series, over a longer period of 
time with a data set less subject to the effect of potentially 
anomalous periods.
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    \9\ ``Effective spread'' as provided will be the execution price 
of the PIP Order to buy less the midpoint of the NBBO at the time 
the PIP begins, multiplied by two, and the midpoint of the NBBO at 
the time the PIP begins less the execution price of the PIP Order to 
sell, multiplied by two.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\10\ in general, and Section 
6(b)(4) of the Act,\11\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees, and other charges among 
BOX Options Participants and other persons using its facilities. 
Specifically, the Exchange believes that the proposal is consistent 
with Section 6(b)(5) of the Act,\12\ which, among other things, 
requires that rules of a national securities exchange be 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, to protect investors and the public interest, and to not 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, and Section 6(b)(8) of the Act,\13\ which requires that the 
rules of a national securities exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the

[[Page 16027]]

purposes of the Act. In particular, the proposed extension will allow 
the Program to remain in effect without interruption.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(4).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78f(b)(8).
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    The Exchange believes that it is reasonable and equitable to 
provide the proposed credit to any Participant that removes liquidity 
from the BOX PIP. The Exchange further believes these credits will 
attract order flow to BOX, resulting in greater liquidity to the 
benefit of all market participants. The Exchange believes that the 
proposed fees for adding liquidity and credits for removing liquidity 
are equitable and not unfairly discriminatory because such fees and 
credits apply uniformly to all categories of Participants, across all 
account types.
    Further, the Exchange believes the proposed fees for PIP 
transactions to be reasonable. BOX operates within a highly competitive 
market in which market participants can readily direct order flow to 
any of several other competing venues if they deem fee levels at a 
particular venue to be excessive. The BOX credits and fees for PIP 
transactions are intended to attract order flow to BOX by offering 
incentives to all market participants to submit their orders to the PIP 
for potential price improvement. BOX notes that the fees collected will 
not necessarily result in additional revenue to BOX, but will simply 
allow BOX to provide the credit incentive to Participants to attract 
additional order flow to the PIP. BOX believes it is appropriate to 
provide incentives to market participants to use PIP, resulting in 
potential benefit to customers through potential price improvement, and 
to all market participants from greater liquidity on BOX.
    In particular, the proposed change will allow the fees charged on 
BOX to remain competitive with other exchanges as well as apply such 
fees in a manner which is equitable among all BOX Participants. The 
Exchange believes that the PIP transaction fees and credits it assesses 
are fair and reasonable and must be competitive with fees and credits 
in place on other exchanges.
    During the Program, BOX has provided the Commission data so the 
Commission could assess the impact of the Program on the 
competitiveness of the PIP auction and extent of price improvement 
obtained for customers. The reports in Exhibit 3 to the Form 19b-4 
include statistics on percent and amount of price improvement, the 
number of responders to a PIP auction, and the retention rates of 
Initiating Participants and those market makers who received PIP 
directed orders. This data also includes information on both penny and 
non-penny series, although the Program only applies to PIP transactions 
in non-penny series.
    Overall, the data shows that BOX's PIP provides very significant 
price improvement for non-penny series both before and during the 
Program. Thus, the data provided by BOX for the non-penny series does 
not suggest any significant adverse impact of the Program on the 
competitiveness of the PIP auction or the extent of price improvement 
for orders executed in the PIP in those series. PIP execution quality 
data is relevant for the consideration of broker-dealers when managing 
their best execution obligations.
    The Exchange believes the data provided reflects no adverse impact 
of the Program on the competitiveness of the PIP auction or the extent 
of price improvement in series that trade in non-penny increments. As 
such, the Exchange believes the proposed rule change is consistent with 
the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    While some have argued that the Program creates a disparity between 
the fees an Initiating Participant pays and the fees a competitive 
responder pays in the PIP that may make the Program discriminatory and 
an undue burden on competition, the Exchange believes the Program 
provides incentives for market participants to submit customer order 
flow to BOX and thus, creates a greater opportunity for retail 
customers to receive additional price improvement. The PIP provides the 
opportunity for market participants to compete for customer orders, and 
has no limitations regarding the number of Market Makers, Options 
Participants that are not Market Makers, and customers that can 
participate and compete for orders in the PIP. BOX asserts that 
Participants are actively competing for customer orders, which is 
clearly supported by the simple fact that price improvement occurs in 
the PIP. Since the PIP began in 2004, customers have received more than 
$400 million in savings through better executions on BOX, a monthly 
average of more than $3.5 million over that time.
    BOX notes that its market model and fees are generally intended to 
benefit retail customers by providing incentives for Participants to 
submit their customer order flow to BOX, and the PIP in particular. BOX 
makes a substantial amount of PIP-related data and statistics available 
to the public on its Web site www.boxexchange.com. Specifically, daily 
PIP volumes and average price improvement are available at: http://boxexchange.com/volumes_en; and BOX execution quality reports at: 
http://boxexchange.com/executionQualityReport_en. The data 
indisputably supports that the PIP provides price improvement for 
customer orders.
    Additionally, the Exchange believes the Program is more transparent 
than payment for order flow (``PFOF'') arrangements and notes its 
belief that the credit to remove liquidity on BOX is generally less 
than what firms receive through PFOF.
    For the reasons stated above, the Exchange does not believe that 
the proposed rule change will impose any burden on competition either 
among BOX Participants, or among the various options exchanges, that is 
not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Exchange Act \14\ and Rule 19b-4(f)(2) 
thereunder,\15\ because it establishes or changes a due, fee, or other 
charge applicable only to a member.
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    \14\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \15\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 16028]]

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-2013-09 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549.

All submissions should refer to File Number SR-BOX-2013-09. 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 information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2013-09 and should be 
submitted on or before April 3, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05715 Filed 3-12-13; 8:45 am]
BILLING CODE 8011-01-P