Document ID: SEC-2016-1130-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange LLC
Posted Date: 2016-07-01T04:00Z

[Federal Register Volume 81, Number 127 (Friday, July 1, 2016)]
[Notices]
[Pages 43322-43325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15711]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78171; File No. SR-BOX-2016-25]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 7150 (Price Improvement Period (``PIP'')) To Establish the 
Quality Market Maker Allocation in a PIP Order

June 28, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 15, 2016, BOX Options Exchange LLC (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 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 BOX Rule 7150 (Price Improvement 
Period (``PIP'')) to establish the Quality Market Maker allocation in a 
PIP Order. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend BOX Rule 7150 (Price Improvement 
Period (``PIP'')) to establish the Quality Market Maker allocation in a 
PIP Order. This is a competitive filing that is based on a proposal 
recently submitted by NASDAQ OMX BX, Inc. (``BX'') and approved by the 
Commission.\3\
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    \3\ See Securities Exchange Act Release No. 34-76301 (October 
29, 2015), 80 FR 68347 (November 4, 2016) (Order Approving SR-BX-
2015-032). See also BX Rule BX Chapter VI, Sec. 9(ii)(E)(3).
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PIP
    The Exchange currently offers Participants the possibility of price 
improvement via its electronic auction process known as the PIP. The 
PIP has saved investors more than $722 million versus the prevailing 
NBBO since 2004. BOX believes that the proposed rule change will result 
in tighter and deeper markets, resulting in more liquidity on BOX.
Current PIP Allocation
    At the conclusion of a PIP, the PIP Order is currently matched 
against the best prevailing quote(s) or order(s) on BOX (except any 
pre-PIP Broadcast proprietary quote or order from the Initiating 
Participant), in accordance with the priority algorithm described 
below, whether Improvement Order(s) \4\ or Unrelated Order(s) \5\ 
received by BOX, or Legging Orders \6\ generated during the PIP 
(excluding Unrelated Orders that were immediately executed during the 
interval of the PIP). Such orders may include agency orders on behalf 
of Public Customers, Market Makers at away exchanges and non-BOX 
Options Participant broker-dealers, as well as non-PIP proprietary 
orders submitted by Options Participants.
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    \4\ See BOX Rule 7150(f)(1).
    \5\ See BOX Rule 7150(a)(1).
    \6\ See BOX Rule 7240(c).
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    The Exchange's Rules currently provide the following allocations 
for when the total quantity of orders, quotes, Improvement Orders, 
Legging Orders and the Primary Improvement Order is greater than the 
quantity of the PIP Order at a given price level:
Public Customer Allocation
    All orders, other than Legging Orders and the Primary Improvement 
Order, for the account of Public Customers, whether Improvement Orders 
or Unrelated Orders, including quotes and orders on the BOX Book \7\ 
prior to the PIP Broadcast, will be allocated for execution against the 
PIP Order first.\8\ Where there are multiple such orders for the 
account of Public Customers at the same price, the trade allocation 
will be by time priority. If, at the end of the Public Customer 
allocation, there remains any unallocated quantity of the PIP Order, 
the balance will be allocated to the Primary Improvement Order 
allocation described below.
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    \7\ See BOX Rule 100(a)(10).
    \8\ See BOX Rule 7150(g)(1).
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Primary Improvement Order Allocation
    After the Public Customer allocation, the applicable trade 
allocation described below will be allocated to the Primary Improvement 
Order.\9\ After Public Customer Orders have been satisfied, the 
Initiating Participant's Primary Improvement Order retains priority for 
up to 40% of the remaining size of the PIP Order when the Primary 
Improvement Order matches any competing Improvement Orders and/or non-
Public Customers' Unrelated Orders at the final price level. If the 
Primary Improvement Order has designated a

[[Page 43323]]

PIP Surrender Quantity, the Primary Improvement Order allocation will 
be reduced, if necessary, in accordance with the PIP Surrender 
Quantity.\10\ The balance will be allocated to the Market Maker 
allocation.
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    \9\ See BOX Rule 7150(g)(2).
    \10\ See BOX Rule 7270(a)(3)(iii)(A).
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Market Maker Allocation
    After the Primary Improvement Order allocation, any remaining 
unallocated quantity of the PIP Order will be allocated to orders and 
quotes, including Improvement Orders and quotes and orders on the BOX 
Book prior to the PIP Broadcast for the account of Market Makers. Where 
there are orders and quotes for the accounts of more than one Market 
Maker at the same price, the trade allocation for Market Makers will be 
pro-rata.\11\
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    \11\ See BOX Rule 7150(g)(3).
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Proposal
    The Exchange proposes to establish the Quality Market Maker 
allocation after the Primary Improvement Order allocation and before 
the Market Maker allocation. As previously mentioned, the proposed rule 
change is based on, and substantially similar to, the rules of BX.\12\ 
In the allocation following the Primary Improvement Order, Market 
Makers that were quoting at a price that is equal to the NBBO on the 
opposite side of the market from the PIP Order at the time of 
initiation of the PIP Auction (``Quality Market Makers''),\13\ would 
have priority up to their quote size in the NBBO which was present when 
the PIP Auction was initiated (``QMM Eligibility Quantity'') at each 
price level at or better than such NBBO when the PIP Auction was 
initiated after Public Customers have received allocations. Quality 
Market Maker quotes will be allocated pro-rata. Quality Market Maker 
status is only valid for the duration of the particular PIP auction. 
Further, Non-Quality Market Makers and Quality Market Maker interest 
which exceeded their size in the QMM Eligibility Quantity would have 
priority at each price level at or better than the NBBO when the PIP 
Auction was initiated after Public Customer, Initiating Participants 
and Quality Market Makers have received allocations. Non-Quality Market 
Maker and Quality Market Maker interest which exceeded their displayed 
size of the QMM Eligibility Quantity will be allocated pro-rata.
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    \12\ See supra note 3. The Exchange's proposal is based on BX's 
Priority Market Maker allocation round of their price improvement 
auction when size pro-rata is used for the auction's allocation 
method.
    \13\ The Exchange notes, as is the case with BX, the Exchange 
does not have non-displayed interest; therefore, there is no 
distinction in the proposed rule regarding the displayed NBBO versus 
non-displayed.
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Example #1
    A PIP Order to buy 200 contracts of options instrument A is 
received. Assume the NBBO is 2.00-2.10 and Market Maker 1 is at the 
NBBO to sell 10 contracts at the start of the PIP. The following 
responses are received:

Public Customer 1 to sell 20 at 2.08
Primary Improvement Order to sell 200 at 2.08
Market Maker 1 to sell 70 at 2.08
Market Maker 2 to sell 60 at 2.08

    The PIP Order will be allocated in the following order:

Round 1: Public Customer Allocation
     20 contracts at 2.08 to Public Customer 1
Round 2: Primary Improvement Order Allocation
     72 contracts at 2.08 to the Primary Improvement Order (40% 
of the remaining quantity after Public Customer 1)
Round 3: Quality Market Maker Allocation
     10 contracts at 2.08 to Market Maker 1 as a QMM (During 
the QMM allocation round, the QMM is capped at the size of their quote 
at the NBBO at the start of the PIP. The QMM's allocation is at a price 
better than the NBBO at the start of the PIP.)
Round 4: Market Maker Allocation
     49 contracts at 2.08 to Market Maker 1 (Market Maker 1 is 
allocated during the Market Maker round any remaining quantity after 
the QMM allocation round)
     49 contracts at 2.08 to Market Maker 2
Example #2
    A PIP Order to buy 200 contracts of options instrument A is 
received. Assume the NBBO is 2.00-2.10 and Market Maker 1 is at the 
NBBO to sell 120 contracts at the start of the PIP. The following 
responses are received:

Public Customer 1 to sell 10 at 2.08
Primary Improvement Order to sell 200 at 2.08
Market Maker 1 to sell 80 at 2.08
Market Maker 2 to sell 60 at 2.08
Market Maker 3 to sell 60 at 2.08

    The PIP Order will be allocated in the following order:

Round 1: Public Customer Allocation
     10 contracts at 2.08 to Public Customer 1
Round 2: Primary Improvement Order Allocation
     76 contracts at 2.08 to the Primary Improvement (40% of 
the remaining quantity after Public Customer 1)
Round 3: Quality Market Maker Allocation
     80 contracts to Market Maker 1 at 2.08 as a QMM (Market 
Maker 1's quote at the NBBO at the start of the PIP exceeds their PIP 
response, therefore the allocation is capped at the size of their PIP 
response instead of the size of their quote at the NBBO at the start of 
the PIP. The QMM's allocation is at a price better than the NBBO at the 
start of the PIP.)
Round 4: Market Maker Allocation
     17 contracts to Market Maker 2 at 2.08 and 17 contracts to 
Market Maker 3 at 2.08 (Market Makers 2 and 3 receive a pro-rata 
allocation of the remainder of the contracts because there is 
insufficient size to satisfy the full quantity of their responses)
Example #3
    A PIP Order to sell 100 contracts of options instrument A is 
received. Assume the NBBO is 1.00--1.10 and Market Maker 1 is at the 
NBBO to buy 120 contracts at the start of the PIP. The following 
responses are received:

Primary Improvement Order to buy 100 at 1.02
Market Maker 1 to buy 100 at 1.02
Market Maker 2 to buy 80 at 1.02
Market Maker 3 to buy 20 at 1.02
Broker Dealer 1 to buy 50 at 1.02

    The PIP Order will be allocated in the following order:

Round 1: Primary Improvement Order Allocation
     40 contracts at 1.02 to the Primary Improvement Order (40% 
of the remaining quantity after Public Customer (none in this example))
Round 2: Quality Market Maker Allocation
     60 contracts to Market Maker 1 at 1.02 as a QMM (Market 
Maker 1's quote at the NBBO at the start of the PIP exceeds their PIP 
response, therefore the eligible allocation is capped at the size of 
their PIP response instead of the size of their quote at the NBBO at 
the start of the PIP. The QMM's allocation is at a price better than 
the NBBO at the start of the PIP.)
Example #4--Multiple Market Makers quoting at the NBBO
    A PIP Order to sell 250 contracts of options instrument A is 
received. Assume the NBBO is 1.00--1.10 and, at the start of the PIP, 
Market Maker 1 is at the NBBO to buy 100 contracts and Market Maker 2 
is at the NBBO to buy

[[Page 43324]]

100 contracts. The following responses are received:
Public Customer 1 to buy 40 at 1.02
Primary Improvement Order to buy 250 at 1.02
Market Maker 1 to buy 80 at 1.02
Market Maker 2 to buy 80 at 1.02
Market Maker 3 to buy 50 at 1.02
Broker Dealer 1 to buy 10 at 1.02

    The PIP Order will be allocated in the following order:
Round 1: Public Customer Allocation
     40 contracts at 1.02 to Public Customer 1
Round 2: Primary Improvement Order Allocation
     84 contracts at 1.02 to the Primary Improvement Order (40% 
of the remaining quantity after Public Customer 1)
Round 3: Quality Market Maker Allocation
     63 contracts at 1.02 to Market Maker 1 as a QMM and 63 
contracts at 1.02 to Market Maker 2 as a QMM (Market Maker 1 and 2 are 
allocated pro-rata since both had quotes at the NBBO at that start of 
the PIP and both responded to the PIP. Their eligible allocation is 
capped at the size of their response to the PIP because their quote at 
the NBBO at the start of the PIP exceeded their responses. The QMM's 
allocation is at a price better than the NBBO at the start of the PIP.)

    Note--when there are multiple QMMs, allocation in the QMM round 
will be determined based on pro-rata using the size of the QMMs quote 
at the NBBO at the start of the auction.
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''),\14\ in general, and Section 6(b)(5) of the Act,\15\ 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. In particular, the Exchange believes that the proposed 
Quality Market Maker allocation may encourage Market Makers to quote at 
the NBBO with additional size and thereby result in tighter and deeper 
markets, resulting in more liquidity on BOX. Specifically, by offering 
BOX Market Makers the ability to receive priority in the proposed 
allocation during the PIP auction, a BOX Market Maker may be encouraged 
to quote outside of the PIP auction at the their best and most 
aggressive prices with additional size. BOX believes that this 
incentive may result in a narrowing of quotes and thus further enhance 
BOX's overall market quality. Within the PIP auction, BOX believes that 
the proposed allocation may encourage BOX Market Makers to compete 
vigorously to provide the opportunity for price improvement in a 
competitive auction process. Additionally, the Exchange believes that 
providing the Quality Market Maker allocation at price levels better 
than the NBBO at the start of the PIP will incentivize quoting on BOX.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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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. In this regard, and as 
indicated above, the Exchange notes that the rule change is being 
proposed as a competitive response to a filing submitted by BX that was 
recently approved by the Commission.\16\
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    \16\ See supra, note 3.
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    The Exchange does not believe that providing BOX Market Makers with 
an opportunity to receive priority allocation will create an undue 
burden on intra-market competition. BOX Market Makers have obligations 
to the market unlike other market participants.\17\ The allocation 
seeks to reward BOX Market Makers with an opportunity to receive 
additional allocations.
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    \17\ See BOX Rule 8040.
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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

    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 for 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 \18\ and Rule 19b-4(f)(6) 
thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2016-25 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-2016-25. 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

[[Page 43325]]

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-2016-25, and should be 
submitted on or before July 22, 2016.

    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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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15711 Filed 6-30-16; 8:45 am]
 BILLING CODE 8011-01-P