Document ID: SEC-2017-0360-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange, LLC
Posted Date: 2017-03-07T05:00Z

[Federal Register Volume 82, Number 43 (Tuesday, March 7, 2017)]
[Notices]
[Pages 12864-12869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-04350]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80134; File No. SR-BOX-2016-48]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Amendment No. 1 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 1, To Adopt Rules for an Open-Outcry Trading 
Floor

March 1, 2017.

I. Introduction

    On November 16, 2016, BOX Options Exchange LLC (the ``Exchange'' or 
``BOX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to adopt rules for an open-outcry trading floor. The proposed 
rule change was published for comment in the Federal Register on 
December 05, 2016.\3\ On January 10, 2017, the Commission extended the 
time period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change to 
March 05, 2017.\4\ The Commission received three comment letters on the 
proposed rule change \5\ and one response letter from BOX.\6\ On 
February 21, 2017, the Exchange filed Amendment No. 1 to the proposed 
rule change.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79421 (November 29, 
2016), 81 FR 87607 (December 5, 2016) (``Notice'').
    \4\ See Securities Exchange Act Release No. 79768 (January 10, 
2017), 82 FR 4956 (January 17, 2017).
    \5\ See letters to Brent J. Fields, Secretary, Commission, from 
Angelo Evangelou, Deputy General Counsel, The Chicago Board Options 
Exchange, Inc., dated January 10, 2017 (``CBOE Letter''); Steve 
Crutchfield, Head of Market Structure, CTC Trading Group, LLC, dated 
December 31, 2016 (``CTC Letter''); and Joan C. Conley, Senior Vice 
President and Corporate Secretary, The Nasdaq Stock Market LLC, 
dated December 22, 2016 (``Nasdaq Letter'').
    \6\ See letter to Brent J. Fields, Secretary, Commission, from 
Lisa J. Fall, President, BOX Options, received February 21, 2017 
(``BOX Response Letter'').
    \7\ Amendment No. 1 partially amends the filing, SR-BOX-2016-48. 
In Amendment No. 1, the Exchange removed proposed rule language 
relating to its minor rule violation plan, proposed disciplinary 
process for the trading floor, and proposed rules for split price 
transactions. In addition, the Exchange clarified various aspects of 
how orders will be handled on the trading floor, revised its 
discussion of compliance with Section 11(a) of the Act, and made 
other clarifying changes to the filing and proposed rule text. 
Amendment No. 1 has been placed in the public comment file for SR-
BOX-2016-048 at https://www.sec.gov/comments/sr-box-2016-48/box201648.shtml and also is available on the Exchange's Web site at 
http://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2016-48_Amendment_1.pdf.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons and to institute proceedings under Section 19(b)(2)(B) of the 
Act \8\ to determine whether to approve or disapprove the proposed rule 
change, as modified by Amendment No. 1. The institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved, nor does it mean that the 
Commission will ultimately disapprove the proposed rule change. Rather, 
as described in Section V below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
change in order to inform the Commission's analysis of whether to 
approve or disapprove the proposed

[[Page 12865]]

rule change, as modified by Amendment No. 1.
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    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change, As Modified by Amendment 
No. 1

    The Exchange proposes to adopt rules to establish an open-outcry 
trading floor.\9\ Currently the Exchange only offers electronic 
trading, and proposes to add a physical trading floor to create a 
hybrid system that integrates both electronic and open-outcry 
trading.\10\
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    \9\ See Notice, supra note 3, at 87607.
    \10\ See id. Other exchanges that currently offer a combination 
of open-outcry and electronic trading are NYSE Arca, Inc. (``NYSE 
Arca''), NASDAQ PHLX LLC (``PHLX''), Chicago Board Options Exchange, 
Incorporated (``CBOE''), and NYSE MKT LLC (``NYSE MKT'').
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A. Proposed BOX Floor Procedure

    Under the proposed rules, upon receipt of an order, a Floor Broker 
\11\ wishing to execute an order on the floor would be required to 
record specific information regarding the order into the Floor Broker's 
order entry mechanism.\12\ All orders executed on the trading floor 
would be Qualified Open Outcry orders (``QOO Orders''),\13\ which must 
be entered as a two-sided order. Each two-sided order contains an 
initiating side (``agency order''), which must be filled in its 
entirety, and a ``contra-side,'' which must guarantee the full size of 
the initiating side of the QOO Order.\14\ A Floor Broker may, but is 
not required to, provide a ``book sweep size'' for the contra-side of 
the QOO Order, which is the number of contracts, if any, of the contra-
side order that the Floor Broker is willing to relinquish to orders and 
quotes on the BOX Book that have priority pursuant to proposed BOX Rule 
7600(c).\15\
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    \11\ See proposed BOX Rule 7540. A Floor Broker is an individual 
who is registered with the Exchange for the purpose, while on the 
trading floor, of accepting and handling options orders. Id. 
Proposed BOX Rule 7550 provides that the Exchange shall review 
applications for registration as a Floor Broker on such form or 
forms as the Exchange may prescribe, and that the Exchange shall 
consider an applicant's ability as demonstrated by his passing a 
Floor Broker's examination, if prescribed by the Exchange, and such 
other factors as the Exchange deems appropriate.
    \12\ See proposed BOX Rule 7580(e). The specific information 
required includes: (i) The order type (i.e., customer, firm, broker-
dealer, professional, or Market Maker) and order receipt time; (ii) 
the option symbol; (iii) buy, sell, cross or cancel; (iv) call, put, 
complex (i.e., spread, straddle), or contingency order; (v) number 
of contracts; (vi) limit price or market order or, in the case of a 
multi-leg order, net debit or credit, if applicable; (vii) whether 
the transaction is to open or close a position; and (viii) the 
Options Clearing Corporation clearing number of the broker-dealer 
that submitted the order. See id.
    \13\ See proposed BOX Rule 7600(a)(1). QOO Orders may be multi-
leg orders, including Complex Orders, as defined in BOX Rule 
7240(a)(5) and tied to hedge orders as defined in IM-7600-2.
    \14\ See proposed BOX Rule 7600(a)(1).
    \15\ See proposed BOX Rule 7600(h).
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    Prior to execution, the Floor Broker would be required to represent 
the order in the specific Crowd Area \16\ designated for trading that 
particular options class in a process called the ``market probe'' (also 
known as ``open outcry'').\17\ The proposed BOX floor would consist of 
at least one ``Crowd Area,'' each marked with specific visible 
boundaries, as determined by the Exchange.\18\ All series for a 
particular option class would be allocated to the same Crowd Area.\19\ 
During the market probe, Floor Market Makers \20\ physically located in 
the specific Crowd Area would be considered participants in the crowd 
and would be able to express interest in trading against the agency 
order. The Floor Broker would be responsible for determining the 
sequence in which bids or offers are vocalized on the trading floor in 
response to the Floor Broker's bid, offer, or call for a market.\21\
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    \16\ BOX's proposed trading floor will consist of at least one 
``Crowd Area'' or ``Pit.'' See proposed BOX Rule 100(a)(67).
    \17\ See proposed BOX Rule 7600(b). Under the proposed rules, an 
Options Exchange Official would be required to certify that the 
Floor Broker adequately represented the QOO Order to the trading 
crowd. See id.
    \18\ See proposed BOX Rule 100(a)(67).
    \19\ See id.
    \20\ See proposed BOX Rule 8510(b).
    \21\ See proposed BOX Rule 7600(d)(1). Any disputes regarding a 
Floor Broker's determination of time priority sequence will be 
resolved by the Options Exchange Official. See id.
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    After the market probe, the Floor Broker would submit the QOO Order 
through the BOX Order Gateway (``BOG'').\22\ Once an order is received 
by the BOG, it would be immediately sent to the Trading Host \23\ for 
execution.\24\ The QOO Order would not be deemed executed until it is 
received and processed by the Trading Host.\25\ For a non-complex QOO 
Order, the execution price must be equal to or better than the 
NBBO.\26\ Additionally, the following BOX Book interest would have 
priority over the contra-side of the QOO Order: (i) Any equal or better 
priced Public Customer \27\ bids or offers on the BOX Book; (ii) any 
non-Public Customer bids or offers on the BOX Book that are ranked 
ahead of such equal or better priced Public Customer bids or offers; 
and (iii) any non-Public Customer bids or offers on the BOX Book that 
are priced better than the proposed execution price.\28\ If the number 
of contracts on the BOX Book that have priority over the contra-side of 
the QOO Order is greater than the book sweep size set by the Floor 
Broker, then the QOO Order will be rejected.\29\ Otherwise, after 
priority interest on the BOX Book, if any, is executed, the remaining 
balance will be matched against the contra-side of the QOO Order, 
regardless of whether the contra-side order submitted by the Floor 
Broker is ultimately entitled to receive an allocation.\30\
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    \22\ See proposed BOX Rule 100(b)(2). All transactions occurring 
on the trading floor would be required to be processed through the 
BOG. See proposed BOX Floor Rule 7580(e)(1).
    \23\ ``Trading Host'' means the automated trading system used by 
BOX for the trading of options contracts. See BOX Rule 100(a)(66).
    \24\ See proposed BOX Rule 7580(e)(1). Under the proposal, 
orders on the trading floor would not route to an away exchange. See 
proposed BOX Rule 7580(e)(2).
    \25\ See proposed Rule 7600(c).
    \26\ See proposed BOX Rule 7600(c). The relevant priority BOX 
Book interest for complex QOO Orders is described in proposed BOX 
Rule 7600(c).
    \27\ ``Public Customer'' means a person that is not a broker or 
dealer in securities. See BOX Rule 100(a)(51).
    \28\ See proposed Rule 7600(c).
    \29\ See proposed Rule 7600(h). The Exchange believes that the 
book sweep size feature will assist Floor Brokers in executing 
orders when there are bids or offers on the BOX Book that have 
priority over the QOO Order, which BOX believes will result in a 
greater number of executions. See Notice, supra note 3, at 87612.
    \30\ See proposed BOX Rule 7600(d).
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    The executing Floor Broker would also be responsible for ensuring 
that any Floor Participant \31\ that responded with interest during the 
market probe receives their allocation, and if interest was discovered 
during the market probe, the Floor Broker is required to enter the 
correct allocations into the Exchange's system where the trade will be 
recorded.\32\ If the QOO Order is a certain size, determined by the 
Exchange on an option by option basis (at a size that may not be less 
than 500 contracts), the Floor Broker would be entitled to cross, after 
all equal or better priced Public Customer bids or offers on the BOX 
Book and any non-Public Customer bids or offers that are ranked ahead 
of such Public Customer bids or offers are filled, 40% of the remaining 
contracts in the order.\33\ The Floor Broker is permitted to trade more 
than their percentage entitlement if other Floor Participants in the 
trading crowd do not choose to trade the remaining portion of the 
order.\34\ Additionally, Floor Brokers would be responsible for 
handling all orders in accordance with

[[Page 12866]]

the Exchange's priority and trade-through rules.\35\
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    \31\ The term ``Floor Participant'' means Floor Brokers as 
defined in Rule 7540 and Floor Market Makers as defined in Rule 
8510(b). See proposed BOX Rule 100(a)(26).
    \32\ See proposed BOX Rule 7600(d).
    \33\ See proposed BOX Rule 7600(f).
    \34\ See proposed BOX Rule 7600(f)(4).
    \35\ See proposed BOX Rule 7580(e)(2).
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B. Floor Market Makers

    Proposed BOX Rule 8500(a) would require market makers on the BOX 
Floor to also be registered with BOX as a market maker on its 
electronic trading platform. As market makers on BOX's electronic 
trading platform, Floor Market Makers would have a continuous 
electronic quoting obligation pursuant to proposed BOX Rule 8510(c)(1), 
which would require Floor Market Makers to quote electronically in all 
classes that they quote on the trading floor.\36\ The Exchange believes 
that these electronic quoting requirements will preserve liquidity in 
BOX's electronic marketplace, which might otherwise decrease with the 
launch of BOX's trading floor.\37\ The Exchange also notes that the 
electronic quoting requirements are already in place on BOX's 
electronic book, and would be uniformly applied to all BOX market 
makers, both floor and electronic.\38\
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    \36\ See proposed BOX Rule 8510(c)(1).
    \37\ See Notice, supra note 3, at 87627.
    \38\ See id. at 87627-28.
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    In addition, proposed BOX Rule 100(b)(5) would require a Floor 
Market Maker to be considered ``in'' on a bid or offer only if the 
Floor Market Maker makes an affirmative assertion that he is ``in.'' 
\39\ Specifically, the proposed rule states that a Floor Market Maker 
``shall be considered `out' on a bid or offer if he does not respond to 
the Floor Broker who is announcing the order.'' \40\ The Exchange 
believes that requiring an affirmative response from Floor Market 
Makers will enhance the efficiency of order execution on the trading 
floor because it will prevent unnecessary delays associated with 
requiring every Floor Market Maker to affirmatively opt ``out'' of an 
order before it is executed.\41\
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    \39\ See proposed BOX Rule 100(b)(5).
    \40\ See id.
    \41\ See Notice, supra note 3, at 87608, n.9.
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    The BOX proposal would not impose a requirement on market makers to 
be present in the trading crowd before a Floor Broker may represent an 
order to the trading crowd.\42\ The Exchange notes that even if a Floor 
Market Maker is not present, any orders executed by a Floor Broker 
without exposure to participants in the trading crowd will still have 
to respect priority interest on the BOX Book, and that all classes 
listed on BOX must have at least one Market Maker quoting 
electronically. Therefore, the Exchange believes that there will be 
electronic quotes in the particular class even if no Floor Market Maker 
is present when the QOO Order is announced. Additionally, the Exchange 
notes that all orders executed on the trading floor must trade at a 
price equal to or better than the NBBO regardless of whether a Floor 
Market Maker is present in the Crowd Area when the order is announced. 
The Exchange further states that the robust electronic quoting of 
options that will be traded on the trading floor ``eliminates any 
concerns of not having a Floor Market Maker present when the order is 
executed by the Floor Broker due to the fact that there are other 
Market Makers providing electronic quotations.'' \43\
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    \42\ See id. at 87610, n.32.
    \43\ See Notice, supra note 3, at 87625.
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III. Summary of Comments

    As previously noted, the Commission received three comment letters 
on the proposed rule change, and one response letter from BOX. All 
three commenters raised specific concerns with respect to the proposed 
rule change,\44\ and two of the three commenters raised concerns about 
issues relating to options trading floors in general.\45\ No commenter 
expressed support for the proposed rule change.
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    \44\ See CBOE Letter, CTC Letter, and Nasdaq Letter, supra note 
5.
    \45\ See CTC Letter and Nasdaq Letter, supra note 5. The 
Commission notes that these commenters expressed concerns about 
options floors in general and requested Commission action on certain 
issues related to existing options trading floors that are beyond 
the scope of the BOX proposal.
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    Commenters raised concerns about the following aspects of the 
proposal, each of which is discussed in greater detail below: (1) 
Whether the proposal would impede opportunities for price improvement; 
(2) the requirement that Floor Market Makers quote electronically in 
all classes offered on the proposed BOX trading floor; (3) the ability 
for a Floor Broker to execute a trade in the absence of any Floor 
Market Maker; (4) the restriction of Floor Market Makers to a ``single 
crowd area at a time;'' (5) the book sweep size feature; (6) the lack 
of clarity regarding compliance with trade-through and priority rules; 
(7) the lack of a single-sided order type on the proposed floor; and 
(8) the potential impact on options market structure.

A. Opportunities for Price Improvement

    Two commenters expressed concern that the proposed rule change 
would negatively impact opportunities for orders to receive price 
improvement.\46\ Specifically, one commenter stated that the proposed 
rule change is ``structured to minimize the ability of market maker and 
public customer trading interest to interact with, and provide price 
improvement to, orders being crossed on the BOX floor.'' \47\ This 
commenter claimed that the proposed rule change ``is simply offering a 
frictionless crossing mechanism, which can be utilized to the detriment 
of customers.'' \48\ Another commenter stated that the proposed rule 
change will not ensure robust market maker participation on the 
proposed BOX floor, and this would provide a way for internalizers to 
avoid exposure to market makers who might otherwise provide price 
improvement.\49\
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    \46\ See CBOE Letter and CTC Letter, supra note 5.
    \47\ See CBOE Letter, supra note 5, at 1-2.
    \48\ See id. at 2.
    \49\ See CTC Letter, supra note 5, at 4-5.
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B. Requirement for Floor Market Makers To Quote Electronically in All 
Classes Offered on the Proposed BOX Floor

    Two commenters expressed concern with the proposed requirement that 
Floor Market Makers would have to quote electronically in all classes 
offered on the proposed trading floor.\50\ One commenter stated that 
the ``imposition'' of an electronic quoting requirement could limit 
potential market maker price improvement.\51\ Another commenter 
suggested that the proposed requirement appears to ``be a means to 
impose a costly and unprofitable burden on would-be Market Makers, 
thereby discouraging them from establishing a presence on the BOX floor 
and preserving the value of the proposed floor as a crossing venue 
devoid of meaningful order exposure or price improvement.'' \52\ This 
commenter further argued that the proposed rule change would discourage 
competitive market maker participation on the proposed BOX floor.\53\
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    \50\ See CBOE Letter and CTC Letter, supra note 5.
    \51\ See CBOE Letter, supra note 5, at 2, n.2.
    \52\ See CTC Letter, supra note 5, at 5.
    \53\ See id. at 5.
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    In response to the commenter's suggestion that the requirement to 
quote electronically would discourage market makers from establishing a 
presence on the BOX floor, BOX stated that to the contrary, it believes 
the proposed rule change will ensure that electronic quoting keeps pace 
with the robust level of activity anticipated on the trading floor.\54\ 
In this regard, BOX further stated that the requirement to quote 
electronically can help ensure that market making activity on the 
trading

[[Page 12867]]

floor does not diminish electronic quoting on BOX.\55\
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    \54\ See BOX Response Letter, supra note 6, at 3. BOX also noted 
its belief that commenter's concerns about the finite resources 
available to firms to staff another physical trading floor are 
beyond the scope of this proposal. See id. at 4.
    \55\ See id. at 3.
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C. Ability To Execute a Trade in the Absence of a Floor Market Maker

    One commenter expressed concern that the proposed rule change would 
allow a Floor Broker to execute crossing orders on the BOX Floor when 
no Floor Market Makers are present.\56\ The commenter argued that 
existing options trading floors grew from crowded equities or futures 
floors and so were certain to have robust and active market maker 
populations.\57\ The commenter further stated that the lack of rules to 
ensure robust market maker participation on the proposed BOX floor 
would provide a way for internalizers to avoid exposure to market 
makers, and would act directly counter to investor protection and the 
public interest.\58\
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    \56\ See CTC Letter, supra note 5, at 4.
    \57\ See id.
    \58\ See id. at 5.
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    In response to the commenter's concern regarding the absence of a 
requirement that Floor Market Makers be present when an order is 
represented, BOX stated that allowing a Floor Broker to execute an 
order when no Floor Market Maker is present is ``simply a safeguard to 
ensure that the trading floor operates efficiently and without undue 
delays or interruptions.'' \59\ BOX further stated that there are other 
protections in place even if a pit may not have a Market Maker present 
when a Floor Broker crosses an order.\60\ According to BOX, these 
protections include a requirement that orders must not trade at a price 
worse than the NBBO, orders must respect the BOX Book, and orders 
represented to the trading crowd must be certified by an options 
exchange official as being adequately represented to the crowd.\61\ 
Additionally, BOX noted that Floor Brokers may not violate priority and 
trade-through rules and must honor their obligations to their 
customers, including their best execution obligations.
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    \59\ See BOX Response Letter, supra note 6, at 3.
    \60\ See id.
    \61\ See id.
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D. Restriction of Floor Market Makers to a Single Crowd Area

    Two commenters expressed concern regarding the proposed rule 
change's description and application of physical boundary 
requirements.\62\ One commenter suggested that ``physical boundary 
requirements'' in the proposed rule change would limit potential 
opportunities for market maker price improvement.\63\ Another commenter 
suggested that the proposal to allow a Floor Market Maker to 
participate in a crowd only if he or she is physically located in a 
specific Crowd Area ``at the time the order is represented in the 
crowd'' is designed to discourage Floor Market Makers from providing 
liquidity.\64\ The commenter suggested that the Exchange could open a 
trading floor comprised of a single Crowd Area with rules permitting 
all Floor Market Makers to trade all issues as a means to help ensure 
opportunities for price improvement.\65\
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    \62\ See CBOE Letter and CTC Letter, supra note 5.
    \63\ See CBOE Letter, supra note 5, at 2, n.2.
    \64\ See CTC Letter, supra note 5, at 6.
    \65\ See id. at 6.
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    In response, BOX stated that the ability to divide the trading 
floor into multiple pits or crowd areas would aid BOX in monitoring 
trading activity and ensuring the trading floor operates in an orderly 
manner.\66\ BOX also noted that trading floors on other exchanges also 
have multiple crowd areas or pits.\67\
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    \66\ See BOX Response Letter, supra note 6, at 2.
    \67\ See id. at 2. BOX noted its belief that CBOE, PHLX, and 
NYSE Arca all have multiple crowd areas or pits on their respective 
trading floors. See id. at 2, n.11.
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E. Book Sweep Size Mechanism

    One commenter expressed concern about the proposed ``book sweep 
size'' mechanism in the proposed rule change.\68\ This commenter 
suggested that the book sweep size would be a feature that ``explicitly 
prevents executions of orders on the BOX Book.'' \69\ The commenter 
further stated that the book sweep mechanism could prevent orders from 
executing in circumstances where there are orders on the BOX Book that 
could fill the order, possibly at a better price, and thus the 
mechanism ``puts its participants' compliance with best-execution 
obligations at risk and unfairly discriminates against investors with 
executable orders resting in the BOX Book.'' \70\
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    \68\ See CTC Letter, supra note 5, at 7.
    \69\ See id. at 7.
    \70\ See id. at 7-8.
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    In response to the commenter's concerns regarding the book sweep 
size aspect of the proposal, BOX stated that the book sweep size is a 
tool that will aid Floor Brokers in satisfying duties owed to their 
customers, such as best execution.\71\ For example, according to BOX, 
when a Floor Broker needs an order to be executed immediately, the 
broker could opt either to provide a book sweep size equal to the 
entire size of the order, which provides liquidity to the BOX Book, or 
to provide an execution price that is better than the current best 
price on BOX, which presents an opportunity for potential price 
improvement.\72\ BOX also noted that it believes functionality similar 
to the book sweep size mechanism is available on at least one other 
trading floor, so the book sweep size aspect of its proposal is not 
unique.\73\
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    \71\ See BOX Response Letter, supra note 6, at 3-4.
    \72\ See id. at 4.
    \73\ See id. at 4. BOX states that the book sweep size mechanism 
is comparable to the PHLX Floor Broker Management System.
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F. Compliance With Trade-Through and Priority Rules

    One commenter stated that the proposed rule change is unclear 
regarding whether or not the proposed BOG trading system would 
systematically prevent violations of priority and trade-through 
requirements.\74\ This commenter further stated that it is unclear 
whether exposure in the trading crowd is required and whether the 
market against which trades are validated differs depending on the 
method of execution.\75\ Specifically, the commenter claimed that the 
proposed rule change ``does not describe the process for validation of 
trades and whether validation occurs at the time of the Verbal 
Agreement or Reported Trade.'' \76\ Additionally, this commenter stated 
that the proposed rule change does not discuss the specific manner in 
which surveillance reviews transactions for violations of Exchange 
rules or the manner in which the BOG or the Exchange enforces 
compliance for on-floor transactions.\77\
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    \74\ See Nasdaq Letter, supra note 5, at 2.
    \75\ See id.
    \76\ See id.
    \77\ See id. at 3.
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    In response to the commenter's concern that the proposed rule 
change is unclear about whether the BOG would systematically prevent 
violations of priority and trade-through requirements, BOX stated that 
the method by which trades are received and processed by the Trading 
Host serves as a safeguard to prevent violations of the priority and 
trade-through requirements.\78\ BOX further stated that it ``has 
specifically designed the Proposal to prevent trade-through violations 
and protect priority interest on the BOX Book.\79\ In response to the 
commenter's suggestion that the proposed rule change does not 
adequately discuss surveillance, BOX stated it has ``robust 
surveillance procedures in place to monitor

[[Page 12868]]

compliance with the Exchange's rules.'' \80\ BOX further stated that 
their surveillance procedures will be used to monitor transactions 
occurring on the trading floor.
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    \78\ See BOX Response Letter, supra note 6, at 1.
    \79\ See id. at 2.
    \80\ See id.
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G. Lack of Single-Sided Floor Order Type

    One commenter raised concerns about the inability of floor 
participants to represent single sided orders on the proposed BOX 
Floor.\81\ In response to the commenter's concern about floor 
participants not being able to represent a single-sided order on the 
proposed BOX Floor, BOX stated that a Floor Broker may bring any 
unmatched order to the trading floor to seek liquidity, and then enter 
the order into the BOX system using the QOO order type.\82\ BOX noted 
that Floor Brokers also may enter single-sided orders into the BOX Book 
using BOX's electronic interface.\83\
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    \81\ See CBOE Letter, supra note 5, at 2, n.2.
    \82\ See BOX Response Letter, supra note 6, at 4.
    \83\ See id. at 4.
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H. Potential Impact on Options Market Structure

    Two commenters expressed concern that the proposed rule change 
would increase fragmentation of the options market.\84\ One commenter 
stated that ``[f]ragmentation is a growing concern in the U.S. 
securities markets,'' and that the proposed BOX floor would ``add[] yet 
another trading venue that must be staffed by firms with finite 
resources and liquidity without offering anything unique or beneficial 
to customers.'' \85\ Another commenter stated that opening a new 
trading floor will exacerbate the practice of ``venue shopping,'' and 
noted that the ``number of market making firms is limited,'' and that 
``market making firms lack infinite resources to staff an arbitrary 
number of physical trading floors with dedicated personnel.'' \86\ This 
commenter further suggested that the proposed rule could ``open the 
floodgates'' for new options trading floors, ``engendering serious 
fragmentation of liquidity, imposing significant new costs on market 
making firms by obliging them to staff every floor or incur large 
opportunity costs.'' \87\
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    \84\ See CBOE Letter and CTC Letter, supra note 5.
    \85\ See CBOE Letter, supra note 5, at 1.
    \86\ See CTC Letter, supra note 5, at 3.
    \87\ See CTC Letter, supra note 5, at 4.
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    In response, BOX argued that concerns about the general success of 
options trading floors is beyond the scope of its proposal.\88\ BOX 
further asserted that commenters' general concerns about options 
trading floors lack merit or are an attempt to delay the approval of 
its proposal.\89\
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    \88\ See BOX Response Letter, supra note 6, at 4.
    \89\ See id.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-BOX-
2016-48 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act,\90\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described in greater detail below, the 
Commission seeks and encourages interested persons to comment on the 
proposed rule change to inform the Commission's analysis of whether to 
approve or disapprove the proposed rule change, as modified by 
Amendment No. 1.
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    \90\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\91\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings because the proposal raises 
important issues that warrant further public comment and Commission 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
proposed rule change's consistency with Section 6(b)(5) of the Act,\92\ 
which requires that the rules of a national securities exchange be 
designed, among other things, to prevent fraudulent and manipulative 
acts and practices, 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 and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. In 
addition, the Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, 
whether or not the proposed rule change is consistent with Section 
6(b)(8) of the Act, which requires the rules a national securities 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\93\
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    \91\ Id. Section 19(b)(2)(B) of the Act provides that 
proceedings to determine whether to disapprove a proposed rule 
change must be concluded within 180 days of the date of publication 
of the notice of the filing of the proposed rule change. The time 
for conclusion of the proceedings may be extended for up to 60 days 
if the Commission finds good cause for such extension and publishes 
its reasons for so finding. See id.
    \92\ 15 U.S.C. 78f(b)(5).
    \93\ 15 U.S.C. 78f(b)(8).
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    Specifically, the Commission notes that aspects of the proposed 
rule change may not be consistent with Section 6(b)(5) of the Act in 
that they could effectively limit the exposure of floor orders to a 
bona fide open outcry auction process, which could lead to, among other 
things, inefficient pricing for crossing transactions executed on the 
proposed BOX floor. In addition, the Commission notes that the 
impediments to becoming, and restrictions on, Floor Market Makers may 
impose a burden on competition that is inconsistent with 6(b)(8) of the 
Act. The Commission also notes that the proposed rule change raises 
questions regarding the ability of the Exchange and participants on the 
BOX trading floor to comply with the Act, Commission and/or Exchange 
rules regarding intramarket priority and intermarket trade-through.
    Finally, under the Commission's rules of procedure, a self-
regulatory organization that proposes to amend its rules bears the 
burden of demonstrating that its proposal is consistent with the 
Act.\94\ In this regard:
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    \94\ Rule 700(b)(3), 17 CFR 201.700(b)(3).

the description of the proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
the applicable requirements must all be sufficiently detailed and 
specific to support an affirmative Commission finding. Any failure 
of the self-regulatory organization to provide the information 
elicited by Form 19b-4 may result in the Commission not having a 
sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations thereunder that are applicable to the self-regulation 
organization.\95\
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    \95\ Id.

V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal, as modified by Amendment No. 1. In particular, the 
Commission invites the written views of interested persons concerning 
whether the proposal, as modified by Amendment No. 1, is consistent 
with Sections

[[Page 12869]]

6(b)(5) \96\ and 6(b)(8),\97\ or any other provision of the Act, or the 
rules and regulations thereunder. Although there do not appear to be 
any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\98\ In particular, the 
Commission seeks comment on the following:
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    \96\ 15 U.S.C. 78f(b)(5).
    \97\ 15 U.S.C. 78f(b)(8).
    \98\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Reps. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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     Commenters' views on the proposed requirement that a Floor 
Market Maker may only quote in classes on the trading floor which the 
market maker is already quoting electronically; \99\
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    \99\ See proposed BOX Rule 8500(a).
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     Commenters' views on the aspect of the proposal that would 
allow a BOX Floor Broker to execute a crossing transaction without 
first exposing the order to any other Floor Participant;
     Commenters' views on whether a minimum number of Floor 
Market Makers should be required to be present when an order is 
represented to the trading crowd, and if so, how many Floor Market 
Makers in each class should be required;
     Commenters' views on the proposed book sweep size feature; 
\100\
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    \100\ See proposed BOX Rule 7600(h).
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     Commenters' views on the aspect of the proposal that would 
require a Floor Market Maker to be physically located in a specific 
Crowd Area to be deemed participating in the crowd; \101\
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    \101\ See proposed BOX Rule IM-8510-2.
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     Commenters' views on the Exchange's argument that 
requiring ``an affirmative response by a Floor Market Maker will allow 
for a more efficient process for executing orders on the Trading 
Floor'' and that requiring a Floor Market Maker to affirmatively be 
``out'' on every order ``will lead to unnecessary delays on the Trading 
Floor and has the potential to cause disruptions.'' \102\
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    \102\ See Notice, supra note 3, at 87608, n.9.
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     Commenters' views on whether the provision allowing the 
Exchange the discretion to determine whether a Floor Broker examination 
could be required as a prerequisite to becoming a Floor Broker is 
consistent with the Act; \103\
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    \103\ See proposed BOX Rule 7550.
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     Whether the Exchange adequately describes how it will 
validate a trade for purposes of compliance with trade-through, 
priority and other Exchange rules; and
     Whether the Exchange adequately describes the mechanics of 
how orders will be received and executed on the proposed BOX trading 
floor.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 and regarding whether the proposed 
rule change, as modified by Amendment No. 1, should be approved or 
disapproved by March 28, 2017. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 11, 
2017.
    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-2016-48 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-2016-48. 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 accommodation proposal that are 
filed with the Commission, and all written communications relating to 
the accommodation proposal 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 filings 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-2016-48 and should be 
submitted on or before March 28, 2017. Rebuttal comments should be 
submitted by April 11, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\104\
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    \104\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-04350 Filed 3-6-17; 8:45 am]
 BILLING CODE 8011-01-P