Document ID: SEC-2016-1991-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange LLC
Posted Date: 2016-11-15T05:00Z

[Federal Register Volume 81, Number 220 (Tuesday, November 15, 2016)]
[Notices]
[Pages 80125-80132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27363]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79258; File No. SR-BOX-2016-50]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Amend Rule 5050 Series of Options 
Contracts Open for Trading To Provide for the Listing and Trading on 
the Exchange of RealDayTM Options Pursuant to a Pilot Program

November 8, 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 October 26, 2016, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule 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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[[Page 80126]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 5050 to provide for the listing 
and trading on the Exchange of RealDay\TM\ Options pursuant to a pilot 
program. 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 its rules to provide for the listing 
and trading on the Exchange of a new type of standardized option 
product on the SPDR[supreg] S&P 500[supreg] Exchange Traded Fund 
(``ETF'') (this security is known by its symbol ``SPY'') called 
RealDay\TM\ Options (``RealDay Options'') pursuant to a pilot program 
ending 12 months after approval of all necessary changes to the 
applicable BOX Rules has been received from the Securities and Exchange 
Commission (the ``SEC'' or ``Commission''). RealDay Options will 
possess many of the characteristics of existing standardized options 
with some important variations. Most notably, at the commencement of 
trading of a particular RealDay Option and until the close of trading 
on the last trading day before its expiration, the numerical value of 
the strike price will not be known. However, the formula used to 
calculate the strike price will be fixed and known from the time of 
listing.\3\
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    \3\ The Exchange notes that this is not a new concept. See 
Chicago Board Options Exchange, Incorporated (``CBOE'') Rule 
24.1(aa).
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    RealDay Options are a propriety product that are designed and 
exclusively licensed by the RealDay Options Corporation.\4\ RealDay 
Options will be exclusively listed on BOX. RealDay Options are designed 
to have an active period, where the numerical value of the strike 
prices is known, for exactly one trading day but can be listed far in 
advance of their expiration date. Although the active period is only 
one trading day, RealDay options can still be traded during the 
anticipatory period which is the period of time from listing until the 
close of trading on the trading day prior to expiration. The Exchange 
believes that there is interest for options designed to cover a single 
trading day across all market participants, including institutional 
investors and the public. RealDay Options are true, or real, one-day 
options, because they are forward-start (or delayed start \5\) options 
whose strike increments and strike price setting formula are fixed from 
the time they are listed, but whose numerical strike prices are 
determined based on the formula which uses the closing price of SPY 
from the last trading day before expiration. This unique structure of 
having the strike intervals and strike price setting formula fixed from 
the time they are listed but not knowing the numerical value of the 
strike price until the exercise price setting date--which is after the 
close of trading on the last trading day before expiration--is what 
makes these options one-day options.
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    \4\ The RealDay Options Corporation is a design and product 
development company specializing in innovative exchange-listed 
derivative instruments. For more information visit http://realdayoptions.com/.
    \5\ Delayed start options are options that do not have an 
exercise price when first introduced for trading, but instead have 
an exercise price setting formula pursuant to which the exercise 
price will be fixed on a specified future date. The price setting 
formula is fixed and known from the time of listing.
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    Initially, RealDay Options will only be listed on SPY but the 
Exchange may seek to list RealDay Options on additional securities in 
the future,\6\ provided that the Exchange receives the necessary 
approval from the Commission. The Exchange has selected SPY as the 
initial security to list RealDay Options on due to the vast liquidity 
in the security. Specifically, SPY is the largest and most actively 
traded ETF in the United States. According to State Street Global 
Advisor, the Trustee of SPY, as of October 5, 2016, the total net 
assets of SPY were approximately $198 billion, and the weighted average 
market capitalization of the portfolio components was approximately 
$146 billion.\7\ For the three months ending October 5, 2016, the 
average daily volume in SPY shares was approximately 85 million.\8\
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    \6\ The Exchange would use the SEC's form 19b-4 approval process 
in order to list RealDay Options on additional securities.
    \7\ See https://www.spdrs.com/product/fund.seam?ticker=SPY.
    \8\ Calculated using data from Yahoo as of October 5, 2016.
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    RealDay Options will be P.M. cash-settled and have European-style 
exercise provisions.\9\ These options may expire every trading day, 
including days on which monthly options series, Short Term Options 
Series, and Quarterly Options Series on SPY expire. The Exchange 
believes that cash settlement is more appropriate than physical 
settlement and therefore is best suited for this product. Physical 
settlement possesses certain risks with respect to volatility and 
movement of the underlying security at expiration that the recipient 
may need to hedge against. Cash settlement does not have any of these 
risks associated with the underlying security. If an issue with the 
delivery of the underlying security arises, it may become more 
expensive to reverse due to a change in the price of the underlying 
security; such risk does not exist with reversing a cash payment. 
Additionally, with physical settlement, the recipient has to sell the 
underlying security if they desire cash, which would cause them to 
incur costs associated with liquidating the position and has risks 
related to movement of the underlying price before it can be 
liquidated. Further, if RealDay Options were physically settled, an 
investor would need to carry the security overnight and liquidate the 
next trading day; this would defeat the purpose of having an option 
where the active period is designed to cover only a single trading day. 
If an investor had to liquate the next trading day, there would be a 
risk that the price of the security could change overnight before the 
investor would be able to liquidate their position.\10\ The Exchange 
notes that there are still certain risks with cash settlement, however, 
these risks are minimal and will continue to be monitored. The Exchange 
notes that cash settlement for options is not a unique feature and 
other options exchanges have cash settled options.\11\ Additionally, 
the Exchange has discussed RealDay Options with market participants and 
they have expressed

[[Page 80127]]

their preference for the product to be cash-settled.
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    \9\ See Proposed Rule 5050(f)(4).
    \10\ If an investor was required to wait until the next trading 
day to liquidate, RealDay Options would essentially be A.M.-settled 
options instead of P.M.-settled, as designed.
    \11\ See e.g. NASDAQ's FX Options and CBOE's SPX Options.
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    RealDay Options are P.M.-settled due to the nature of the product. 
Specifically, RealDay Options are designed to cover a single trading 
day due to the fact they are only active for one trading day. The only 
way to ensure that the option covers one trading day is to have it be 
P.M.-settled, as opposed to A.M.-settlement where additional factors 
may have an effect on the settlement price. Specifically, A.M.-settled 
options use the opening price for settlement which means they will 
price in after-hours news and events and therefore do not cover only 
one trading day. If RealDay Options were A.M.-settled, they would not 
cover only a single trading day because the settlement price would 
include events occurring after the close, which is not the intended 
goal of RealDay Options. Additionally, the Exchange notes that standard 
options in SPY are already P.M.-settled.
Listing
    Although RealDay Options are designed to cover one trading day, 
they will be listed at least two weeks prior to their expiration but no 
greater than nine (9) months prior to their expiration.\12\ The options 
are in essence divided into two periods: The anticipatory period and 
the active period.\13\ The anticipatory period is the period of time 
from the day the option is listed up until the close of trading on the 
last trading day before expiration. The active period is the expiration 
day of the option. During the anticipatory period the strike intervals 
and strike price setting formula are known, but not the numerical value 
of the strike prices, because they depend on the closing price of SPY 
from the last trading day before expiration. RealDay Options may still 
be traded in the anticipatory period in the same manner as standard 
options on SPY. The fact that the numerical strike prices will only be 
known for the active period, which is one trading day, is how RealDay 
Options are designed to be active for one trading day.
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    \12\ See Proposed Rule 5050(f).
    \13\ See Exhibit 3-2 for a chart illustrating the two periods.
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Strike Prices
    The numerical value of the strike prices for RealDay Options will 
not be known until the close of trading on the last trading day before 
expiration, although the strike intervals and strike price setting 
formula will be fixed from inception.\14\ As described in greater 
detail below, the formula will involve multiplying the closing price of 
SPY from the last trading day before expiration (``Strike Setting 
Price'') by the Strike Multiplier.\15\ The Exchange notes that 
calculating strike prices based on a previous close is not an entirely 
new concept.\16\ In effect, the strike price will stay at the same 
percentage relationship to the price of SPY from the time of listing. 
Further, the Exchange may only list up to a maximum of seven strike 
prices for each expiration date. The seven strike prices will consist 
of up to three (3) strike prices with a price greater than the Strike 
Setting Price, three (3) strike prices with a price less than the 
Strike Setting Price, and one (1) strike price equal to the Strike 
Setting Price.\17\ The Exchange will have discretion in determining the 
number of strike prices it will list per expiration, provided that the 
strike prices listed satisfy the restrictions above. Additionally, the 
Exchange must list the strike price that is equal to the Strike Setting 
Price for every RealDay Option expiration. For example, the Exchange 
could not list four (4) strike prices at a price greater than the 
Strike Setting Price, one (1) strike price equal to the Strike Setting 
Price and two (2) options that have a strike price less than the Strike 
Setting Price. However, the Exchange could list three (3) strike prices 
at a price greater than the Strike Setting Price, one (1) strike price 
equal to the Strike Setting Price and two (2) strike prices that are 
less than the Strike Setting Price.
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    \14\ See Proposed Rule 5050(f)(8).
    \15\ The ``Strike Multiplier'' is the decimal equivalent of the 
percentage strike of the specific option. The Strike Multiplier will 
be expressed with three decimal places. For example, an option that 
is equal to the Strike Setting price would be 100%, making the 
Strike Multiplier 1.000.
    \16\ See CBOE Rule 24.9(d). The exercise price of CBOE Delayed 
Start Options Series is determined in relation to the closing price 
of the underlying index on the date on which the exercise price is 
fixed.
    \17\ See Proposed Rule 5050(f)(2).
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    The Exchange may, in its sole discretion, determine to not list in-
the-money (``ITM'') put or call options for any of the seven (7) strike 
prices.\18\ The ITM puts that the Exchange may decide to not list are 
those corresponding to the three strike prices that are greater than 
the Strike Setting Price and the ITM call options are those 
corresponding to the three strike prices that are less than the Strike 
Setting Price. The Exchange notes that nothing in its Rules prohibits 
the Exchange from deciding to list only a put or call option for a 
specific strike price. The Exchange also notes that the listing of only 
a put or call option for a specific strike price will allow for quote 
mitigation. Additionally, the Exchange believes it will be beneficial 
to have this discretion because it will allow the Exchange to limit the 
number of instruments listed. Additionally, the Exchange believes that 
the value of RealDay Options is in the instruments that are at-the-
money (``ATM'') and out-of-the-money (``OTM'').
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    \18\ See Proposed Rule 5050(f)(2)(ii).
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    As is the case with other options that the Exchange lists, the 
Exchange may add additional strike prices after the initial listing of 
a RealDay Option, provided that the Exchange does not list more than 
the seven strike prices as described above. For example, if the 
Exchange lists a RealDay Option at the beginning of March with only the 
strike price equal to the Strike Setting Price that expires on June 29, 
2017, the Exchange could list up to six additional strike prices at the 
beginning of June for the same expiration.\19\ When listing the 
additional strike prices, the Exchange must follow the guidelines above 
with respect to only being allowed to list up to three strike prices 
above and three strike prices below the Strike Setting Price.
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    \19\ For example, on June 1, 2017, the Exchange could list three 
strike prices greater than the Strike Setting Price and three strike 
prices lower than the Strike Setting Price. The threes [sic] strike 
prices greater than the Strike Setting Price will be the strike 
prices calculated by adding 0.5%, 1.0%, and 1.5%, respectively, to 
the Strike Setting Price. The three strike prices less than the 
strike Setting Price will be the strike prices calculated by 
subtracting 0.5%, 1.0%, and 1.5%, respectively, from the Strike 
Setting Price.
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    The strike price formula will be used after the close of trading on 
the last trading day before expiration in order to calculate the 
numerical values of the strike prices. Specifically, the strike prices 
will be determined by multiplying the Strike Setting Price by the 
Strike Multiplier. Additionally, the strike prices will have fixed 
strike intervals of 0.50%; therefore the Exchange's general strike 
price interval rules shall not apply to RealDay Options.\20\ This means 
there will be one strike price equal to 100% of the Strike Setting 
Price.\21\ The three strike prices greater than then Strike Setting 
Price will be determined by adding 0.5%, 1.0%, and 1.5%,\22\ 
respectively, to the Strike Setting Price. The three strike prices less 
than the Strike Setting Price will be determined by subtracting 0.5%, 
1.0%, and 1.5%,\23\ respectively, from the Strike Setting Price. The 
strike prices will be rounded to the nearest

[[Page 80128]]

minimum trading increment, if necessary.
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    \20\ See Proposed Rule 5050(f)(3).
    \21\ The Strike Multiplier would be 1.000.
    \22\ The Strike Multipliers would be 1.005, 1.010 and 1.015, 
respectively.
    \23\ The Strike Multiplies would be 0.995, 0.990 and 0.985 
respectively.
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Example #1
    On Tuesday, SPY's closing price is 180.15, which will be the Strike 
Setting Price. RealDay Options on SPY expiring on the next trading day, 
Wednesday, may have the following strike prices computed by multiplying 
the Strike Setting Price by the Strike Multiplier.

------------------------------------------------------------------------
                                     Formula  (strike
             Option              setting price *  strike   Strike prices
                                       multiplier)
------------------------------------------------------------------------
Strike Setting Price +1.5%.....           180.15 * 1.015          182.85
Strike Setting Price +1.0%.....           180.15 * 1.010          181.95
Strike Setting Price +0.5%.....           180.15 * 1.005          181.05
Strike Setting Price...........           180.15 * 1.000          180.15
Strike Setting Price -0.5%.....           180.15 * 0.995          179.25
Strike Setting Price -1.0%.....           180.15 * 0.990          178.35
Strike Setting Price -1.5%.....           180.15 * 0.985          177.45
------------------------------------------------------------------------

    If SPY does not open for trading on the trading day before the 
options expiration date, then the last available closing price for SPY 
will be the Strike Setting Price. For Example, if a RealDay Option is 
expiring on Friday but SPY does not open for trading on Thursday, which 
is the last trading day before the expiration date, the Strike Setting 
Price used for the RealDay Option expiring on Friday will be the 
closing price of SPY from Wednesday, provided that SPY is open for 
trading on Wednesday.
    The Exchange is proposing to list RealDay Options on SPY with the 
symbol ``SPYZ.'' During the anticipatory period, the strike prices will 
be listed as the Strike Multiplier, since the numerical value of the 
strike price is not yet known. The table below illustrates how this 
will work.

------------------------------------------------------------------------
                                                           Strike price
                                                              during
                         Option                            anticipatory
                                                          period (strike
                                                            multiplier)
------------------------------------------------------------------------
Strike Setting Price +1.5%..............................           1.015
Strike Setting Price +1.0%..............................           1.010
Strike Setting Price +0.5%..............................           1.005
Strike Setting Price....................................           1.000
Strike Setting Price -0.5%..............................           0.995
Strike Setting Price -1.0%..............................           0.990
Strike Setting Price -1.5%..............................           0.985
------------------------------------------------------------------------

    The Exchange believes that using three decimal places will minimize 
the potential for investor confusion.\24\ Specifically, since three 
decimal places is unique and not currently used for options, investors 
will be on notice and aware that the Strike Multiplier does not 
represent a strike price of a typical standard option. The Exchange 
notes that it will also provide information and education to market 
participants via circular prior to the launch of RealDay Options to 
further minimize any investor confusion. Additionally, since the 
Exchange will never list RealDay Options on an underlying security with 
a price below $10.00, there will be no confusion that the decimal 
equivalent is actually a strike price around $1.00. For example, if the 
underlying security was trading around $2.00, a strike price of 1.005 
during the anticipatory period may be confused as a strike price equal 
to $1.005 instead of .05% above the Strike Setting Price. Below is an 
example of how RealDay Options will be listed.
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    \24\ The Exchange notes that it has confirmed with data vendors, 
the Options Clearing Corporation and various market participants to 
confirm that they will be able to handle three decimal places when 
RealDay Options are launched. The Exchange also explained what the 
three decimal places would represent.

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                                   Symbol       Strike (%)        CALL/PUT               Expiration date
----------------------------------------------------------------------------------------------------------------
SPYZ 161021C1.000............  SPYZ                  100     CALL.............  10/21/2016
SPYZ 161021C.995.............  SPYZ                   99.50  CALL.............  10/21/2016
----------------------------------------------------------------------------------------------------------------

    After the close of trading on the last trading day before 
expiration, the decimal will be converted into the numerical strike 
price by multiplying the Strike Setting Price by the Strike 
Multiplier.\25\ For example, if SPY closes at $190.00 on the last 
trading day before expiration, the 1.005 strike price will be converted 
to $190.95 ($190.00 * 1.005).
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    \25\ An adjustment to the Strike Setting Price may be needed in 
order to remove the effects of corporate actions, such as cash 
dividends. If a dividend is declared, the Strike Setting Price would 
be adjusted by subtracting the declared dividend before multiplying 
it by the Strike multiplier.
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    Although the Exchange will have some discretion in determining the 
exact number of strike prices that can be listed, the Exchange will 
follow additional procedures \26\ based on the price of the underlying 
security. Specifically, if the underlying security is at or above 
$25.00 per share, the Exchange may list all seven strike prices. If the 
underlying security is at or below $10.00 per share, the Exchange will 
not list any RealDay Option on the underlying security. If the 
underlying security is between $10.00 and $25.00 per share, the 
Exchange will only list one strike price. In such a case, the one 
strike price will be equal to the Strike Setting Price.
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    \26\ See Proposed Rule 5050(f)(2).
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    These unique strike price features are designed to minimize 
excessive quoting traffic that would come from listing standard options 
that expire every trading day and are listed at least two weeks prior 
to their expiration. If the Exchange were to list standard options on 
an underlying security that expire every trading day, there would be an 
enormous increase in quoting trading traffic due to the sheer number of 
strike prices that would have to be listed for each series. This is in 
part due to the fact that the price of the underlying security will 
fluctuate between when a standard option is listed and its expiration 
date. For example, on March 1, 2016 there were 127 strike prices listed 
for the weekly SPY option expiring on March 4, 2016 and 232 strike 
prices listed for the standard SPY option expiring on March 18, 2016. 
The number of strike prices further increases as the options expiration 
date

[[Page 80129]]

approaches, as well as in response to any price swings. Listing a 
maximum of seven strike prices, instead of over 100 strike prices for 
each expiration date, is designed to mitigate issues associated with 
RealDay Option quoting traffic interfering with Exchange messaging by 
minimizing the additional quoting traffic. Additionally, having the 
strike prices based on a percentage of the underlying security up to 
the expiration date will eliminate any issue around the underlying 
security moving drastically from the period of time between listing and 
expiration, which would lead to the need to list additional strike 
prices so that there are strike prices near the price of the underlying 
security.
Exercise and Settlement
    The exercise and settlement price will be calculated based on the 
closing price of SPY on the trading day of expiration. The exercise-
settlement amount is equal to the difference between the settlement 
price and the exercise price of the option multiplied by 100. Exercise 
will result in the delivery of cash on the business day following 
expiration.
Example #2
    On Monday, a trader purchased a 1.005 (0.50%) call for expiration 
on Thursday. The Strike Multiplier is 1.005. When he purchased the call 
he did not know the numerical value of the strike price, only that he 
will get a call option whose strike price is fixed at 0.50% above the 
close of SPY on Wednesday. On Wednesday, SPY closed at 177.43 (the 
Strike Setting Price). All RealDay strike prices for expiration on 
Thursday are determined as follows:

------------------------------------------------------------------------
                                              Strike
                 Option                     multiplier     Strike price
------------------------------------------------------------------------
Strike Setting Price +1.5%..............           1.015          180.09
Strike Setting Price +1.0%..............           1.010          179.20
Strike Setting Price +0.5%..............           1.005          178.32
Strike Setting Price....................           1.000          177.43
Strike Setting Price -0.5%..............           0.995          176.54
Strike Setting Price -1.0%..............           0.990          175.66
Strike Setting Price -1.5%..............           0.985          174.77
------------------------------------------------------------------------

    Since the trader purchased the RealDay SPY 1.005 call, the strike 
price is now set at 178.32. Upon the close on Thursday, if SPY has 
risen above 178.32, the option expires in the money. Assume that SPY 
closes at 178.75 on Thursday, the call option purchased by the trader 
will be $0.43 in the money (178.75 - 178.32 = 0.43), and the trader 
will receive $43.00 (100 * 0.43).
    If SPY does not open for trading on the trading day of expiration, 
then the last available closing price for SPY will be used to determine 
the settlement price of the expiring RealDay Options. Specifically, if 
SPY does not open for trading, at the close of trading on expiration, 
RealDay Options will have an exercise price that is equal to the 
closing price from the last trading day before expiration. This will 
result in all RealDay Options expiring either ATM, OTM, or ITM; 
depending on whether an ATM, OTM, or ITM option was purchased. This is 
due to the nature of options that are designed to have an active period 
of one trading day. For example, if a trader purchases an ATM RealDay 
call option, which is equal to the closing price of SPY from the last 
trading day before expiration (1.000 call), and SPY does not open for 
trading on the expiration day of that RealDay Options, then the call 
option purchased by the trader would expire ATM. This is because the 
exercise price would be equal to the closing price which, in this case, 
is equal to the closing price from the last trading day before 
expiration, since SPY did not open for trading on the expiration day. 
This is the same procedure used for standard options. Specifically, 
when an option does not open for trading on an expiration date, the 
last available closing price is used for settlement purposes.

Contract Specifications

    The contract specifications for RealDay Options are set forth in 
Exhibit 3-1. RealDay Options will be European-style and P.M. cash-
settled. As mentioned above, the Exchange believes that having a P.M. 
settlement is the best way to adequately represent the goal of RealDay 
Options, which are designed to cover one trading day. The Exchange does 
not believe that having a P.M. settlement will raise any issues since 
the market for SPY is so large that any attempt to alter the closing 
price would be extremely difficult and would subject the manipulator to 
regulatory scrutiny. As previously mentioned, BOX is only proposing to 
list RealDay Options on SPY, the most actively traded ETF in the U.S. 
Due to the vast liquidity and diversity in market participants trading 
SPY, any attempt to manipulate the closing price of SPY would be near 
impossible to accomplish. Additionally, the Exchange has surveillance 
measures in place to monitor such behavior. RealDay Options will 
overlie 100 shares of SPY in the same manner as standard options on 
SPY. The Exchange's standard trading hours for SPY options will apply 
to trading in RealDay Options.
    With respect to margin requirements \27\ for RealDay Options, the 
Exchange proposes to apply margin requirements for the purchase and 
sale of RealDay Options that are identical to the margin requirements 
for standard options on SPY.\28\ Margin requirements for RealDay 
Options will be calculated in the same manner as margins for standard 
options on SPY. Margins should be calculated in the same manner during 
the anticipatory and active periods. The Exchange notes that even 
though the numerical value of the strike price is not known until the 
close of trading on the trading day before expiration, the margins will 
still be calculated the same way as standard options. Specifically, the 
strike price used for calculating the margin will just be the numerical 
value of the strike price using the current price of SPY for the strike 
setting formula. For example, if on Monday, a RealDay SPY Call Option 
with a strike of 100% expiring on Friday is purchased where the price 
of SPY is $200, the strike price used for calculating margins will be 
$200 (100% * current SPY price).
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    \27\ Options Participants and associated persons are bound by 
the initial and maintenance margin requirements of either the CBOE 
or the New York Stock Exchange. See Rule 10120, see also CBOE Rule 
12.3.
    \28\ See Proposed Rule 5050(f)(6).
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    The minimum trading increments for RealDay Options will be the same 
as the minimum trading increments applicable to standard options on 
SPY.\29\ Specifically, RealDay Options on SPY will have a minimum 
trading increment

[[Page 80130]]

of $0.01. The Exchange believes that, since SPY options have a minimum 
trading increment of $0.01, also having a minimum trading increment of 
$0.01 for RealDay Options on SPY will avoid investor confusion. The 
Exchange notes that this is similar to the treatment of Mini Options 
for which the minimum trading increment is the same as the minimum 
trading increment permitted for standard options on the same underlying 
security.\30\
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    \29\ See Proposed Rule 5050(f)(5).
    \30\ See IM-5050-10(d) to Rule 5050.
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Position Limits
    The Exchange proposes that the position limits for RealDay Options 
will be the same as the position limits for standard options on 
SPY.\31\ For example, the Exchange proposes that there shall be no 
position or exercise limits for RealDay Options on SPY. As noted above, 
RealDay Options will settle using the published closing price from SPY. 
Given that there are currently no position limits for SPY options,\32\ 
the Exchange believes it is appropriate for there to be no position or 
exercise limits for RealDay Options on SPY. Since the removal of any 
position limits on SPY is subject to a pilot program, if the pilot is 
discontinued or cancelled and therefore SPY becomes subject to position 
limits, then RealDay Options would become subject to the same position 
limits as SPY options. Positions in RealDay Options shall be aggregated 
with positions in all other options on SPY.
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    \31\ See Proposed Rule 5050(f)(10).
    \32\ See Securities Exchange Act Release No. 67936 (September 
27, 2012), 77 FR 60491 (October 3, 2012) (Notice of Filing and 
Immediate Effectiveness of SR-BOX-2012-013).
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Customer Trading
    Section 4000 of the Exchange's rules is designed to protect public 
customer trading and shall apply to trading in RealDay Options. 
Specifically, Rules 4020(a) and (b) prohibit Order Flow Providers 
(``OFP'') \33\ from accepting a Public Customer order to purchase or 
write an option, including RealDay Options, unless such customer's 
account has been approved in writing by a designated Options Principal 
of the OFP. Additionally, Rule 4040 regarding suitability is designed 
to ensure that options, including RealDay Options, are sold only to 
customers capable of evaluating and bearing the risks associated with 
trading in the instrument. Further, Rule 4050 permits OFPs to exercise 
discretionary power with respect to trading options, including RealDay 
Options, in a Public Customer's account only if the OFP has received 
prior written authorization from the customer and the account has been 
accepted in writing by a designated Options Principal. Finally, Rule 
4030 Supervision of Accounts, Rule 4060 Confirmation to Public 
Customers, and Rule 4100 Delivery of Current Options Disclosure 
Documents and Prospectus, will also apply to trading in RealDay 
Options.
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    \33\ See Rule 100(a)(45). The terms ``Order Flow Provider'' or 
``OFP'' mean those Options Participants representing as agent 
Customer Orders on BOX and those non-Market Maker Participants 
conducting proprietary trading.
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Surveillance
    The Exchange has an adequate surveillance program in place for 
RealDay Options and intends to apply the same program procedures that 
it applies to the Exchange's other options products. The Exchange does 
not believe that it will have any issues with the surveillance of 
RealDay Options. Although there are certain differences with RealDay 
Options as compared to standard options, the Exchange believes its 
current surveillance procedures will adequately monitor RealDay 
Options. Additionally, the Exchange is also a member of the Intermarket 
Surveillance Group (``ISG'') under the Intermarket Surveillance Group 
Agreement dated June 20, 1994. The ISG members work together to 
coordinate surveillance and investigative information sharing in the 
stock and options markets.
    Per the proposed rule change, RealDay Options will be settled using 
a calculation based on the daily closing prices of SPY. The Exchange 
believes that manipulating the settlement price will be difficult based 
on the size of the market for SPY. As discussed above, the Exchange is 
only proposing to list RealDay Options on SPY, which is the most 
actively traded ETF in the United States. The vast liquidity of the 
equities markets ensures a multitude of market participants at any 
given time. Due to the high level of participation among market makers 
that can enter quotes in SPY, the Exchange believes it would be very 
difficult for a single participant to alter the closing price in any 
significant way without exposing the would-be manipulator to regulatory 
scrutiny and financial costs. This is especially true for SPY given the 
vast amount of liquidity in the ETF.
    The Exchange believes that there is no additional risk of 
manipulation of RealDay Options as compared to other P.M.-settled 
options. RealDay Options will be listed on the most actively traded ETF 
and should dispel any concerns of manipulation. Due to the vast 
liquidity in SPY and the diverse group of market participants that 
trade SPY, any potential manipulator would be subject to regulatory 
scrutiny.
    The Exchange represents that it has the necessary system capacity 
to support additional quotations and messages that will result from the 
listing and trading of RealDay Options. The Exchange believes that by 
limiting the listing of RealDay Options to only seven (7) strike prices 
per expiration, the Exchange will minimize the system capacity required 
to list them. Additionally, the Exchange believes that having the 
discretion to not list ITM call or put options will further minimize 
the required system capacity.
Standardized Options
    Rule 9b-1 under the Act establishes a disclosure framework for 
standardized options that are traded on a national securities exchange 
and cleared through a registered clearing agency.\34\ The exchange on 
which a standardized option is listed and traded must prepare an 
Options Disclosure Document (``ODD'') that, among other things, 
identifies the issuer and describes the uses, mechanics, and risk of 
options trading, in language that can be easily understood by the 
investing public. The ODD is treated as a substitute for the 
traditional prospectus. Pursuant to Rule 9b-1 of the Act, use of the 
ODD is limited to standardized options. The Exchange believes that 
RealDay Options are covered by the current language of the ODD. 
Specifically, the June 2008 Supplement to the ODD added a definition 
for delayed start options.\35\ The ODD describes delayed start options 
as ``an option that does not have an exercise price when first 
introduced for trading but instead has an exercise price setting 
formula pursuant to which the exercise price will be fixed on a 
specified future date.'' \36\ Although the Exchange believes that 
RealDay Options are covered by the current language of the ODD, BOX 
respectfully requests that the Commission designate RealDay Options as 
standardized options. The Exchange notes that the Commission has 
previously designated options

[[Page 80131]]

similar to RealDay Options as standardized options.\37\
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    \34\ ``Standardized options'' are defined in Rule 9b-1(a)(4) as 
``options contracts trading on a national securities exchange, an 
automated quotation system of a registered securities association, 
or a foreign securities exchange which relate to options classes the 
terms of which are limited to specific expiration dates and exercise 
prices, or such other securities as the Commission may, by order, 
designate.'' See 17 CFR 240.9b-1(a)(4).
    \35\ See pg. 129 of the Characteristics & Risks of Standardized 
Options, located at http://www.optionsclearing.com/about/publications/character-risks.jsp.
    \36\ Id.
    \37\ See Securities Exchange Act Release No. 56855 (November 28, 
2007), 72 FR 68613 (December 5, 2007)(Order Approving Proposed Rule 
Change as Modified by Amendment No. 1 Thereto to List and Trade 
Delayed Start Option Series).
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Market Participation
    The Exchange believes that RealDay Options will be a useful tool 
for all market participants. The unique strike price setting structure 
and the fact that RealDay Options may expire every trading day will 
allow investors to hedge single day events, including the release of an 
economic report or a company's earnings release (``event days''). 
Although the Exchange believes that these event days will be more 
active as compared to the non-event days, the Exchange still believes 
that investors will see value, including obtaining exposure to implied 
volatility, as described in greater detail below, and trade RealDay 
Options expiring on non-event days. Additionally, market participants 
can capture interday realized volatility when they are bundled as 
consecutive at-the-money straddles.
    Additionally, the Exchange believes that market participants will 
find value in trading RealDay Options during both the anticipatory 
period and active period. During the anticipatory period investors can 
trade RealDay Options in order to get exposure to implied volatility 
and during the active period RealDay Options will act and be traded in 
the same manner as standard options. Market participants can obtain 
exposure to implied volatility by initiating a position and then 
liquidating it prior to the expiration day.
    The Exchange believes that Market Makers will be able to price and 
quote RealDay Options effectively. Since RealDay Options will not have 
their strike prices set until the day before expiration, the Exchange 
believes that the models Market Makers use to price and quote RealDay 
Options will be simpler than the models they use for standard options. 
Specifically, Market Makers will not have to account for price 
movements in SPY or time to expiration; basically Market Makers will 
just have to deal with implied volatility when pricing RealDay Options.
Pilot Program
    As proposed, the proposal would become effective on a pilot program 
basis for a period of twelve months.\38\ If the Exchange were to 
propose an extension of the program or should the Exchange propose to 
make the program permanent, then the Exchange would submit a filing to 
the Commission proposing such amendments to the program. The Exchange 
notes that any positions established under the pilot would not be 
impacted by the expiration of the pilot. For example, a position in a 
RealDay Option series that expires beyond the conclusion of the pilot 
period could be established during the 12-month pilot. If the pilot 
program were not extended, then the position could continue to exist. 
However, the Exchange notes that any further trading in the series 
would be restricted to transactions where at least one side of the 
trade is a closing transaction.
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    \38\ See Proposed Rule 5050(f)(9).
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    The Exchange proposes to submit a pilot program report to the 
Commission two months prior to the expiration date of the Pilot Program 
(the ``pilot report''). The pilot report would contain an analysis of 
volume, open interest, and trading patterns. The analysis would examine 
trading in RealDay Options. In addition, for certain series, the pilot 
report would provide analysis of price volatility and trading activity 
in additional option series. In addition to the pilot report, the 
Exchange would provide the Commission with periodic interim reports 
while the pilot is in effect that would contain some, but not all, of 
the information contained in the pilot report. The pilot report would 
be provided to the Commission on a confidential basis.
    The pilot report would contain the following volume and open 
interest data for RealDay Options:
    (1) Daily contract trading volume aggregated for all trades, for 
all option series with less than 31 days until expiration;
    (2) daily contract trading volume aggregated by expiration date, 
for all option series with less than 31 days until expiration;
    (3) daily contract trading volume for each individual series;
    (4) daily open interest aggregated for all series, for all option 
series with less than 31 days until expiration;
    (5) daily open interest aggregated for all series by expiration 
date, for all option series with less than 31 days until expiration;
    (6) daily open interest for each individual series;
    (7) statistics on the distribution of trade sizes;
    (8) type of market participant trading (e.g., contract trading 
volume for each market participant type); and
    (9) 5-minute returns, level changes, and trading volume for the S&P 
500 Index, VIX, SPY, IVV, and expiring RealDay options between open and 
close for the first and second Wednesday of the month that is a trading 
day and trading days when standard SPY options expire.
    In addition to the pilot report, the Exchange would periodically 
provide the Commission with interim reports of the information listed 
in items (1) through (9) above as required by the Commission while the 
pilot is in effect. These interim reports would also be provided on a 
confidential basis.
Additional Changes
    The Exchange also proposes to amend Rule 5050(a). Specifically, the 
Exchange proposes to amend the rule to state that the Exchange will fix 
a specific expiration date and exercise price for RealDay Options, as 
provided in proposed Rule 5050(f).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \39\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \40\ 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. Specifically, the Exchange believes that the introduction of 
RealDay Options will attract order flow to the Exchange, increase the 
variety of listed options to investors, and provide a valuable hedge 
tool to investors.
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    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change will further the 
Exchange's goal of introducing new and innovative products to the 
marketplace. The Exchange believes that listing RealDay Options will 
provide an opportunity for investors to hedge, or speculate on, the 
market risk associated with single day events. The proposed rule change 
will allow the Exchange to list options that will allow traders to 
manage risk associated with certain events, such as a company's 
earnings or the release of an economic report. The Exchange believes 
that RealDay Options will give traders an unprecedented ability to 
hedge against single day events. As the Exchange previously noted, the 
concept of a delayed start options is not a new proposal. Specifically, 
CBOE has rules covering delayed start options.\41\ Additionally, the 
ODD already has language covering delayed start options.\42\
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    \41\ See supra notes 3 and 16.
    \42\ See supra note 35.

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[[Page 80132]]

    Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in RealDay 
Options. The Exchange believes that by initially limiting RealDay 
Options to only SPY, it will reduce the chances of manipulation due to 
the robust market and liquidity in SPY. The Exchange also represents 
that it has the necessary systems capacity to support the new options 
series; and as stated in the filing, the Exchange has rules in place 
designed to protect public customer trading.

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. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of a novel 
option product that will enhance competition among market participants, 
to the benefit of investors and the marketplace.

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 (i) as the Commission may 
designate up to 90 days of such date 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:

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-2016-50 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-2016-50. 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 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; 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-2016-50 and should be 
submitted on or before December 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27363 Filed 11-14-16; 8:45 am]
 BILLING CODE 8011-01-P