Document ID: SEC-2016-0652-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BOX Options Exchange, LLC
Posted Date: 2016-04-15T04:00Z

[Federal Register Volume 81, Number 73 (Friday, April 15, 2016)]
[Notices]
[Pages 22328-22333]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-08645]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77580; File No. SR-BOX-2016-13]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend BOX Rule 100 (Definitions) Relating to Professionals

April 11, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 29, 2016, BOX Options Exchange LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend BOX Rule 100 (Definitions) relating 
to Professionals. The text of the proposed rule change is available 
from the principal office of the Exchange, at the Commission's Public 
Reference Room and also on the Exchange's Internet Web site at http://boxexchange.com.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to amend BOX Rule 100 (Definitions) to amend 
the definition of Professional. This filing that is based on a proposal 
recently submitted by Chicago Board Options Exchange, Incorporated 
(``CBOE'') and approved by the Commission.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 77450 (March 25, 
2016) (Order Approving SR-CBOE-2016-005).
---------------------------------------------------------------------------

    The Exchange proposes to amend BOX Rule 100(a)(50) relating to 
Professionals. Specifically, the Exchange proposes to adopt new 
language to the rule setting forth amended standards for calculating 
average daily order submissions for Professional order counting 
purposes. The Exchange believes that the proposed rule change would 
provide additional clarity in the BOX Rules.
Background
    In general, ``public customers'' are granted certain marketplace 
advantages over other market participants, including Market Makers, 
brokers and dealers of securities, and industry ``Professionals'' on 
most U.S. options exchanges. The U.S. options exchanges, including BOX, 
have adopted similar definitions of the term ``Professional,'' \4\ 
which commonly refers to persons or entities that are not a brokers or 
dealers in securities and who or which place more than 390 orders in 
listed options per day on average during a calendar month for their own 
beneficial account(s).\5\ Various exchanges adopted similar 
Professional rules for many of the same reasons, including, but not 
limited to the desire to create more competitive marketplaces and 
attract retail order flow.\6\ In addition, as several of the exchanges 
noted in their original Professional rule filings, their beliefs that 
disparate Professional rules and a lack of uniformity in the 
application of such rules across the options markets would not promote 
the best regulation and could, in fact, encourage regulatory 
arbitrage.\7\
---------------------------------------------------------------------------

    \4\ Some U.S. options exchanges refer to ``Professionals'' as 
``Professional Customers'' or non-``Priority Customers.'' Compare 
BATS Exchange, Inc. (``BZX'') Rule 16.1(a)(45) (Professional); BOX 
Options Exchange LLC (``BOX'') Rule 100(a)(50) (Professional); CBOE 
Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX Chapter I, Sec. 1(49) 
(Professional); NASDAQ OMX PHLX LLC (``PHLX'') Rule 1000(b)(14) 
(Professional); Nasdaq Options Market (``NOM'') Chapter I, Sec. 
1(a)(48) (Professional); with ISE Rule 100(a)(37A) (Priority 
Customer); Gemini Rule 100(a)(37A) (Priority Customer); Miami 
International Securities Exchange LLC (``MIAX'') Rule 100 (Priority 
Customer); NYSE MKT LLC (``NYSE MKT'') Rule 900.2NY(18A) 
(Professional Customer); NYSE Arca, Inc. (``Arca'') Rule 6.1A(4A) 
(Professional Customer).
    \5\ See, e.g., BZX Rule 16.1(a)(45); BOX Rule 100(a)(50); CBOE 
Rule 1.1(ggg); C2 Rule 1.1; BX Chapter I, Sec. 1(49); PHLX Rule 
1000(b)(14); NOM Chapter I, Sec. 1(a)(48); see also ISE Rule 
100(a)(37A) (Priority Customer); Gemini Rule 100(a)(37A) (Priority 
Customer); MIAX Rule 100 (Priority Customer); NYSE MKT Rule 
900.2NY(18A) (Professional Customer); Arca Rule 6.1A(4A) 
(Professional Customer).
    \6\ See, e.g., Securities Exchange Act Release No. 60931 
(November 4, 2009), 74 FR 58355, 58356 (November 12, 2009) (Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Related to Professional Orders) (SR-CBOE-2009-078); Securities 
Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694, 5694 
(January 30, 2009) (Notice of Filing of Amendment No. 2 and Order 
Granting Accelerated Approval of the Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2 Thereto, Relating to Professional 
Account Holders) (SR-ISE-2006-026); Securities Exchange Act Release 
No. 61802 (March 30, 2010), 75 FR 17193, 17194 (April 5, 2010) 
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval of the Proposed Rule Change, as Modified by Amendment No. 2 
Thereto, Relating to Professional Orders) (SR-PHLX-2010-005); 
Securities Exchange Act Release No. 61629 (March 2, 2010), 75 FR 
10851, 10851 (March 9, 2010) (Notice of Filing of Proposed Rule 
Change Relating to the Designation of a ``Professional Customer'') 
(SR-NYSEMKT-2010-018).
    \7\ See, e.g., Securities and Exchange Act Release No. 62724 
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing 
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a 
Definition of Professional and Require That All Professional Orders 
Be Appropriately Marked) (SR NASDAQ-2010-099); Securities and 
Exchange Act Release No. 65500 (October 6, 2011), 76 FR 63686 
(October 13, 2011) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Adopt a Definition of Professional and 
Require That All Professional Orders Be Appropriately Marked) (SR-
BATS-2011-041); Securities Exchange Act Release No. 65036 (August 4, 
2011), 76 FR 49517, 49518 (August 10, 2011) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Adopt a 
Definition of ``Professional'' and Require That Professional Orders 
Be Appropriately Marked by BOX Options Participants) (SR-BX-2011-
049); Securities Exchange Act Release No. 60931 (November 4, 2009), 
74 FR 58355, 58357 (November 12, 2009) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Related to Professional 
Orders) (SR-CBOE-2009-078); see also Securities Exchange Act Release 
73628 (November 18, 2014), 79 FR 69958, 69960 (November 24, 2014) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to Professional Orders) (SR-CBOE-2014-085).
---------------------------------------------------------------------------

    Similar to other U.S. options exchanges, the Exchange grants 
``Public Customers'' certain marketplace advantages over other market 
participants pursuant to the Exchange's Fee Schedule \8\ and the BOX 
Rules.\9\ Specifically, Public Customer orders are

[[Page 22329]]

generally exempt from transaction fees and certain Exchange surcharges. 
Similar to other U.S. options exchanges, the Exchange affords these 
marketplace advantages to Public Customers based on various business- 
and regulatory-related objectives, including, for example, to attract 
retail order flow to the Exchange and to provide competitive pricing.
---------------------------------------------------------------------------

    \8\ See, e.g., BOX Fee Schedule (Exchange Fees).
    \9\ Public Customers receive allocation priority above equally 
priced competing interests of Market Makers, broker-dealers, and 
other market participants in the PIP and COPIP. See, e.g., BOX Rule 
7150(g)(1) (Public Customer Allocation in PIP), BOX Rule 7245(g)(2) 
(Public Customer Allocation in COPIP).
---------------------------------------------------------------------------

    Currently, BOX Rule 100(a)(50) defines a Professional as ``any 
person or entity that (i) is not a broker or dealer in securities, and 
(ii) places more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).'' The 
Exchange's Professional order rule was adopted to distinguish non-
broker dealer individuals and entities that have access to information 
and technology that enable them to professionally trade listed options 
in a manner similar to brokers or dealers in securities from retail 
investors for order priority and/or transaction fees purposes. In 
general, Professionals are treated as brokers or dealers in securities 
under the Exchange's rules, including, but not limited to with respect 
to order priority and fees.\10\ BOX Rule 100(a)(50) is substantially 
similar to the Professional order rules of other exchanges and was 
materially based upon the preexistent Professional order rules of other 
exchanges.
---------------------------------------------------------------------------

    \10\ See BOX Rule 100(a)(50).
---------------------------------------------------------------------------

    In September 2015, the Exchange clarified its Professional order 
rule by distributing a Regulatory Circular to its Participants.\11\ 
Specifically, the Exchange codified its interpretation that, for 
Professional order counting purposes, ``parent'' orders that are placed 
on a single ticket and entered for the beneficial account(s) of a 
person or entity that is not a broker or dealer in securities and that 
are broken into multiple parts by a broker or dealer, or by an 
algorithm housed at a broker or dealer, or by an algorithm licensed 
from a broker or dealer that is housed with the customer in order to 
achieve a specific execution strategy, should count as one single order 
for Professional order counting purposes. This interpretation was a 
clarification in the Rules based on the Exchange's past interpretations 
of Rule 100 (a)(50) and similar interpretations set forth in a 
previously issued ISE/ISE Gemini, LLC (``Gemini'') Joint Regulatory 
Information Circular.\12\
---------------------------------------------------------------------------

    \11\ See RC-2015-21.
    \12\ See ISE Regulatory Information Circular 2014-007/Gemini 
Regulatory Information Circular 2014-011 (Priority Customer Orders 
and Professional Orders (FAQ)).
---------------------------------------------------------------------------

    The Exchange's Informational Circular, however, has not clarified 
the Exchange's Professional rule completely. The advent of new multi-
leg spread products and the proliferation of the use of complex orders 
and algorithmic execution strategies by both institutional and retail 
market participants continue to raise questions as to what constitutes 
an ``order'' for Professional order counting purposes. For example, do 
complex orders (which on the Exchange may be up to 4 legs) constitute a 
single order or multiple orders for Professional order counting 
purposes? The Exchange's Professional rule does not fully address these 
issues and there is no common interpretation across the U.S. options 
markets.
    Moreover, the Exchange believes that the proposed rule change would 
serve to accomplish the Exchange's stated goals for its Professional 
rule. Under current Rule 100(a)(50) many market participants using 
sophisticated execution strategies and trading algorithms who would 
typically be considered professional traders are not identified under 
the Exchange's Professional rule. The Exchange believes that these 
types of market participants have access to technology and market 
information akin to broker-dealers. The Exchange also believes that the 
proposed rule is warranted to ensure that Public Customers are afforded 
the marketplace advantages that they are intended to be afforded over 
other types of market participants on the Exchange.
    The Exchange notes that despite the adoption of materially similar 
Professional rules across the markets, exchanges' interpretations of 
their respective Professional rules vary. Although Professionals are 
similarly defined by exchanges as non-broker-dealer persons or entities 
that place more than 390 orders in listed options for their own 
beneficial account(s) per day on average during a calendar month, there 
is no consistent definition across the markets as to what constitutes 
an ``order'' for Professional order counting purposes. While several 
options exchanges, including BOX, have attempted to clarify their 
interpretations of their Professional rules through regulatory and 
information notices and circulars,\13\ many of the options exchanges 
have not issued any guidance regarding the application of their 
Professional rules. Furthermore, where exchanges have issued such 
interpretive guidance, those interpretations have not necessarily been 
consistent.\14\ As a result, the Exchange believes that the rather than 
helping to promote the best regulation and discourage regulatory 
arbitrage, the Professional rules have become a basis of intermarket 
competition.
---------------------------------------------------------------------------

    \13\ See BOX Regulatory Circulars RC-2015-21 (Professional 
Orders) and RC-2015-22 (Professional Order Implementation); 
Regulatory Circular RG09-148 (Professional Orders); ISE Regulatory 
Information Circular 2014-007/Gemini Regulatory Information Circular 
2014-011 (Priority Customer Orders and Professional Orders (FAQ)); 
MIAX Regulatory Circular 2014-69 (Priority Customer and Professional 
Interest Order Summary); NYSE Joint Regulatory Bulletin, NYSE Acra 
RBO-15-03, NYSE Amex RBO-15-06) (Professional Customer Orders).
    \14\ Compare NYSE Joint Regulatory Bulletin, NYSE Acra RBO-15-
03, NYSE Amex RBO-15-06) (Professional Customer Orders) with 
Interpretation and Policy .01 to Rule 1.1(ggg); Regulatory Circular 
RG09-148 (Professional Orders); ISE Regulatory Information Circular 
2014-007/Gemini Regulatory Information Circular 2014-011 (Priority 
Customer Orders and Professional Orders (FAQ)); and ISE Regulatory 
Information Circular 2009-179 (Priority Customer Orders and 
Professional Orders (FAQ)).
---------------------------------------------------------------------------

    The Exchange believes that a new set of standards and a more 
detailed counting regime than the Exchange's current Professional order 
rules provide would allow the Exchange to better compete for order flow 
and help ensure deeper levels of liquidity on the Exchange. The 
Exchange also believes that the proposed rule change would help to 
remove impediments to and help perfect the mechanism of a free and open 
market and a national market system by increasing competition in the 
marketplace. Accordingly, the Exchange proposes to amend the Rules by 
amending BOX Rule 100(a)(50) to adopt new rules with respect to 
Professional order counting.
Proposal
    The Exchange proposes to add additional details to Rule 100(a)(50) 
setting forth a more in depth counting regime for calculating average 
daily orders for Professional order designation purposes. Specifically, 
the Exchange's proposed rule would make clear how to count complex 
orders, ``parent/child'' orders that are broken into multiple orders, 
and ``cancel/replace'' orders for Professional order counting purposes.
    Under the Exchange's proposed rule change all orders would count as 
one single order for Professional counting purposes, unless otherwise 
specified under the Rules. Proposed Rule 100(a)(50) would provide that 
except as noted below, each order of any order type counts as one order 
for Professional order counting purposes. Paragraph (a) of proposed 
Rule 100(a)(50) would discuss Complex Orders.\15\ Under

[[Page 22330]]

paragraph (a)(1) of proposed Rule 100(a)(50), a complex order comprised 
of eight (8) legs or fewer would count as a single order. Conversely, 
paragraph (a)(2) of proposed Rule 100(a)(50) would provide that a 
complex order comprised of nine (9) legs or more counts as multiple 
orders with each option leg counting as its own separate order.\16\ The 
Exchange believes the distinction between complex orders with up to 
eight legs from those with nine or more legs is appropriate in light of 
the purposes for which Rule 100(a)(50) was adopted. In particular, the 
Exchange notes that multi-leg complex order strategies with nine or 
more legs are more complex in nature and thus, more likely to be used 
by professional traders than traditional two, three, and four leg 
complex order strategies such as the strangle, straddle, butterfly, 
collar, and condor strategies, and combinations thereof with eight legs 
or fewer, which are generally not algorithmically generated and are 
frequently used by retail investors. Thus, the types of complex orders 
traditionally placed by retail investors would continue to count as 
only one order while the more complex strategy orders that are 
typically used by professional traders would count as multiple orders 
for Professional order counting purposes.
---------------------------------------------------------------------------

    \15\ A Complex Order is defined as any order involving the 
simultaneous purchase and/or sale of two or more different options 
series in the same underlying security, for the same account, in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) and for the purpose of 
executing a particular investment strategy. See BOX Rule 7240(a)(5).
    \16\ The Exchange notes that it does not current accept complex 
orders comprised of more than four legs.
---------------------------------------------------------------------------

    Paragraph (b) of proposed Rule 100(a)(50) would provide details 
relating to the counting of ``parent/child'' orders. Under paragraph 
(b)(1), a ``parent'' order that is placed for the beneficial account(s) 
of a person or entity that is not a broker or dealer in securities that 
is broken into multiple ``child'' orders on the same side (buy/sell) 
and series as the ``parent'' order by a broker or dealer, or by an 
algorithm housed at a broker or dealer or by an algorithm licensed from 
a broker or dealer, but which is housed with the Public Customer, 
counts as one order even if the ``child'' orders are routed across 
multiple exchanges. Essentially, this paragraph would describe how 
orders placed for Public Customers, which are ``worked'' by a broker in 
order to receive best execution should be counted for Professional 
order counting purposes. Paragraph (b)(1) of proposed Rule 100(a)(50) 
would permit larger ``parent'' orders (which may be simple orders or 
complex orders consisting of up to eight legs), to be broken into 
multiple smaller orders on the same side (buy/sell) and in the same 
series (or complex orders consisting of up to eight legs) in order to 
attempt to achieve best execution for the overall order.
    For example, if a Public Customer were to enter an order to buy 
1,000 XYZ $5 January calls at a limit price of $1, which the Public 
Customer's broker then broke into four separate orders to buy 250 XYZ 
$5 January calls at a limit price of $1 in order to achieve a better 
execution, the four ``child'' orders would still only count as one 
order for Professional order counting purposes (whether or not the four 
separate orders were sent to the same or different exchanges for 
execution).\17\ Similarly, in the case of a complex order, if a Public 
Customer were to enter an order to buy 1,000 XYZ $5 January(sell)/
March(buy) calendar spreads (with a 1:1 ratio on the legs), at a net 
debit limit price of $0.20, which the Public Customer's broker then 
broke into four separate orders to buy 250 XYZ $5 January/March 
calendar spreads (each with a 1:1 ratio on the legs), each at a net 
debit limit price of $0.20, the four ``child'' orders would still only 
count as one order for Professional order counting purposes (whether or 
not the four separate orders were sent to the same or different 
exchanges for execution).
---------------------------------------------------------------------------

    \17\ Notably, however, if the customer herself were to enter the 
same four identical orders to buy 250 XYZ $5 January calls at a 
limit price of $1 prior to sending the orders, those orders would 
count as four separate orders for Professional order counting 
purposes because the orders would not have been broken into multiple 
``child'' orders on the same side (buy/sell) and series as the 
``parent'' order by a broker or dealer, or by an algorithm housed at 
a broker or dealer or by an algorithm licensed from a broker or 
dealer, but which is housed with the customer.
---------------------------------------------------------------------------

    Conversely, under paragraph (b)(2) of proposed Rule 100(a)(50), a 
``parent'' order (including a strategy order) \18\ that is broken into 
multiple ``child'' orders on both sides (buy/sell) of a series and/or 
multiple series counts as multiple orders, with each ``child'' order 
counting as a new and separate order. Accordingly, under this 
provision, strategy orders, which are most often used by sophisticated 
traders best characterized as ``Professionals,'' would count as 
multiple orders for each child order entered as part of the overall 
strategy. For example, if a customer were to enter an order with her 
broker by which multiple ``child'' orders were then sent to the 
Exchange across multiple series in a particular option class, each 
order entered would count as a separate order for Professional order 
counting purposes. Likewise, if the Public Customer instructed her 
broker to buy a variety of calls across various option classes as part 
of a basket trade, each order entered by the broker in order to obtain 
the positions making up the basket would count as a separate order for 
Professional counting purposes.\19\
---------------------------------------------------------------------------

    \18\ For purposes of this proposed Rule 100(a)(50), the term 
``strategy order'' is intended to mean an execution strategy, 
trading instruction, or algorithm whereby multiple ``child'' orders 
on both sides of a series and/or multiple series are generated prior 
to being sent to any or multiple U.S. options exchange(s).
    \19\ Notably, with respect to the types of ``parent'' orders 
(including strategy orders) described in paragraph (b)(2) to 
proposed Rule 100(a)(50), such orders would be received only as 
multiple ``child'' orders the U.S. options exchange receiving such 
orders. The ``parent'' order would be broken apart before being sent 
by the participant to the exchange(s) as multiple ``child'' orders.
---------------------------------------------------------------------------

    The Exchange believes that the distinctions between ``parent'' and 
``child'' orders in paragraph (b) to proposed Rule 100(a)(50) are 
appropriate. The Exchange notes that paragraph (b) to proposed Rule 
100(a)(50) is not aimed at capturing orders that are being ``worked'' 
or broken into multiple orders to avoid showing large orders to the 
market in an effort to elude front-running and to achieve best 
execution as is typically done by brokers on behalf of retail clients. 
Rather, paragraph (b) to proposed Rule 100(a)(50) is aimed at 
identifying ``child'' orders of ``parent'' orders generated by 
algorithms that are typically used by sophisticated traders to 
continuously update their orders in concert with market updates in 
order to keep their overall trading strategies in balance. The Exchange 
believes that these types of ``parent/child'' orders typically used by 
sophisticated traders should count as multiple orders.
    Paragraph (c) of proposed Rule 100(a)(50), would discuss the 
counting of orders that are cancelled and replaced. Similar to the 
distinctions drawn in paragraph (b) of proposed Rule 100(a)(50), 
paragraph (c) would essentially separate orders that are cancelled and 
replaced as part of an overall strategy from those that are cancelled 
and replaced by a broker that is ``working'' the order to achieve best 
execution or attempting to time the market. Specifically, paragraph 
(c)(1) of proposed Rule 100(a)(50) would provide that except as 
otherwise provided in the rule (and specifically as provided under 
paragraph (c)(2)), any order that cancels and replaces an existing 
order counts as a separate order (or multiple new orders in the case of 
a complex order comprised of nine (9) legs or more). For example, if a 
trader were to enter a non-marketable limit order to buy an option 
contract at a certain net debit price, cancel the order in response to 
market

[[Page 22331]]

movements, and then reenter the same order once it became marketable, 
those orders would count as two separate orders for Professional order 
counting purposes even though the terms of both orders were the same.
    Paragraph (c)(2) of proposed Rule 100(a)(50) would specify the 
exception to paragraph (c)(1) of proposed Rule 100(a)(50) and would 
provide that an order that cancels and replaces any ``child'' order 
resulting from a ``parent'' order that is placed for the beneficial 
account(s) of a person or entity that is not a broker, or dealer in 
securities that is broken into multiple ``child'' orders on the same 
side (buy/sell) and series as the ``parent'' order by a broker or 
dealer, by an algorithm housed at a broker or dealer, or by an 
algorithm licensed from a broker or dealer, but which is housed with 
the Public Customer, would not count as a new order. For example, if a 
Public Customer were to enter an order with her broker to buy 10,000 
XYZ $5 January calls at a limit price of $1, which the Public 
Customer's broker then entered, but could not fill and then cancelled 
to avoid having to rest the order in the book as part of a strategy to 
obtain a better execution for the Public Customer and then resubmitted 
the remainder of the order, which would be considered a ``child'' of 
the ``parent'' order, once it became marketable, such orders would only 
count as one order for Professional order counting purposes. Again, 
similar to paragraph (b) of proposed Rule 100(a)(50), the Exchange 
notes that paragraph (c) to proposed Rule 100(a)(50) is not aimed at 
capturing orders that are being ``worked'' or being cancelled and 
replaced to avoid showing large orders to the market in an effort to 
elude front-running and to achieve best execution as is typically done 
by brokers on behalf of retail clients. Rather, paragraph (c) to 
proposed Rule 100(a)(50) is aimed at identifying ``child'' orders of 
``parent'' orders generated by algorithms that are typically used by 
sophisticated traders to continuously update their orders in concert 
with market updates in order to keep their overall trading strategies 
in balance. The Exchange believes that paragraph (c)(2) to proposed 
Rule 100(a)(50) is consistent with these goals.
    Accordingly, consistent with paragraph (c)(1) of proposed Rule 
100(a)(50), under paragraph (c)(3) of proposed Rule 100(a)(50), an 
order that cancels and replaces any ``child'' order resulting from a 
``parent'' order (including a strategy order) that generates ``child'' 
orders on both sides (buy/sell) of a series and/or in multiple series 
would count as a new order. For example, if an investor were to seek to 
make a trade (or series of trades) to take a long position at a certain 
percentage limit on a basket of options, the investor may need to 
cancel and replace several of the ``child'' orders entered to achieve 
the overall execution strategy several times to account for updates in 
the prices of the underlyings. In such a case, each ``child'' order 
placed to keep the overall execution strategy in place would count as a 
new and separate order even if the particular ``child'' order were 
being used to replace a slightly different ``child'' order that was 
previously being used to keep the same overall execution strategy in 
place. The Exchange believes that the distinctions between cancel/
replace orders in paragraph (c) to proposed Rule 100(a)(50) are 
appropriate as such orders are typically generated by algorithms used 
by sophisticated traders to keep strategy orders continuously in line 
with updates in the markets. As such, the Exchange believes that in 
most cases, cancel/replace orders should count as multiple orders.
    Under current BOX Rule 100(a)(50), in order to properly represent 
orders entered on the Exchange, BOX Participants are required to 
indicate whether Public Customer orders are ``Professional'' orders. 
This requirement will remain the same. To comply with this requirement, 
Participants are required to review their customers' activity on at 
least a quarterly basis to determine whether orders that are not for 
the account of a broker or dealer should be represented as customer 
orders or Professional orders. Orders for any Public Customer that had 
an average of more than 390 orders per day during any month of a 
calendar quarter must be represented as Professional orders for the 
next calendar quarter. Participants are required to conduct a quarterly 
review and make any appropriate changes to the way in which they are 
representing orders within five days after the end of each calendar 
quarter. While Participants only will be required to review their 
accounts on a quarterly basis, if during a quarter the Exchange 
identifies a customer for which orders are being represented as public 
customer orders but that has averaged more than 390 orders per day 
during a month, the Exchange will notify the Participant and the 
Participant will be required to change the manner in which it is 
representing the Public Customer's orders within five days. Because BOX 
Rule 100(a)(50) only requires that Participants conduct a look-back to 
determine whether their Public Customers are averaging more than 390 
orders per day at the end of each calendar quarter, the Exchange 
proposes an effective date of April 1, 2016 for proposed calculation 
details to ensure that all orders during the next quarterly review will 
be counted in the same manner and that proposed language will not be 
applied retroactively.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Securities Exchange Act of 1934 
(the ``Act''),\20\ in general, and Section 6(b)(5) of the Act,\21\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general to protect investors and the 
public interest. In particular, the Exchange believes that proposed 
changes to Rule 100(a)(50) provides a more conservative order counting 
regime for Professional order counting purposes that would identify 
more traders as Professionals to which the Exchange's definition of 
Professional was designed to apply and create a better competitive 
balance for all participants on the Exchange, consistent with the Act. 
As the options markets have evolved to become more electronic and more 
competitive, the Exchange believes that the distinction between 
registered broker-dealers and professional traders who are currently 
treated as Public Customers has become increasingly blurred. More and 
more, the category of Public Customer today includes sophisticated 
algorithmic traders including former market makers and hedge funds that 
trade with a frequency resembling that of broker-dealers. The Exchange 
believes that it is reasonable under the Act to treat those customers 
who meet the high level of trading activity established in the proposal 
differently than customers who do not meet that threshold and are more 
typical retail investors to ensure that professional traders do not 
take advantage of priority and fee benefits intended for Public 
Customers.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange notes that it is not unfair to differentiate between 
different types of investors in order to achieve certain marketplace 
balances. The Rules currently differentiate between Public

[[Page 22332]]

Customers, Broker-Dealers, Market Makers, and the like. These 
differentiations have been recognized to be consistent with the Act. 
The Exchange does not believe that the current BOX Rules and other 
exchanges that accord priority to all Public Customers over broker-
dealers are unfairly discriminatory. Nor does the Exchange believe that 
it is unfairly discriminatory to accord priority to only those Public 
Customers who on average do not place more than one order per minute 
(390 per day) under the counting regime that the Exchange proposes. The 
Exchange believes that such differentiations drive competition in the 
marketplace and are within the business judgment of the Exchange. 
Accordingly, the Exchange also believes that its proposal is consistent 
with the requirement of Section 6(b)(8) of the Act that the rules of an 
exchange not impose an unnecessary or inappropriate burden upon 
competition in that it treats persons who should be deemed 
Professionals, but who may not be under current Rule 100(a)(50) in a 
manner so that they do not receive special priority benefits.
    Furthermore, the Exchange believes that the proposed rule change 
will protect investors and the public interest by helping to assure 
that retail customers continue to receive the appropriate marketplace 
advantages in the BOX marketplace as intended, while furthering 
competition among marketplace professionals by treating them in the 
same manner as other similarly situated market participants. The 
Exchange believes that it is consistent with Section 6(b)(5) of the Act 
not to afford market participants with similar access to information 
and technology as that of brokers and dealers of securities with 
marketplace advantages over such marketplace competitors. The Exchange 
also believes that the proposed rule change would help to remove 
burdens on competition and promote a more competitive marketplace by 
affording certain marketplace advantages only to those for whom they 
are intended. Finally, the Exchange believes that the proposed rule 
change sets forth a more detailed and clear regulatory regime with 
respect to calculating average daily order entry for Professional order 
counting purposes. The Exchange believes that this additional clarity 
and detail will eliminate confusion among market participants, which is 
in the interests of all investors and the general public.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In this regard and as indicated 
above, the Exchange notes that the rule change is substantially similar 
to a recent CBOE filing.\22\ As discussed above, the Exchange does not 
believe that the current BOX Rules and other exchanges that accord 
priority to all Public Customers over broker-dealers are unfairly 
discriminatory. Nor does the Exchange believe that it is unfairly 
discriminatory to accord priority to only those customers who on 
average do not place more than one order per minute (390 per day) under 
the counting regime that the Exchange proposes. The Exchange believes 
that its proposal does not impose an undue burden on competition. The 
Exchange notes that one of the purposes of the Professional rules is to 
help ensure fairness in the marketplace and promote competition among 
all market participants. The Exchange believes that proposed BOX 
Rule100(a)(50)(a) would help establish more competition among market 
participants and promote the purposes for which the Exchange's 
Professional rule was originally adopted. The Exchange does not believe 
that the Act requires it to provide the same incentives and discounts 
to all market participants equally, so as long as the exchange does not 
unfairly discriminate among participants with regard to access to 
exchange systems. The Exchange believes that here, that is clearly the 
case.
---------------------------------------------------------------------------

    \22\ See supra, note 3.
---------------------------------------------------------------------------

    Rather than burden competition, the Exchange believes that the 
proposed rule change promotes competition by ensuring that retail 
investors continue to receive the appropriate marketplace advantages in 
the BOX marketplace as intended, while furthering competition among 
marketplace professionals by treating them in the same manner under the 
BOX Rules as other similarly situated market participants by ensuring 
that market participants with similar access to information and 
technology (i.e. Professionals and broker-dealers), receive similar 
treatment under the BOX Rules while retail investors receive the 
benefits of order priority and fee waivers that are intended to apply 
to Public Customers.

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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \23\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\24\ A proposed rule 
change filed under Rule 19b-4(f)(6) normally does not become operative 
prior to 30 days after the date of filing.\25\ Rule 19b-4(f)(6)(iii), 
however, permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest.\26\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(a)(iii).
    \24\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
    \25\ 17 CFR 240.19b-4(f)(6)(iii).
    \26\ Id.
---------------------------------------------------------------------------

    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission notes that it has considered a 
substantially similar proposed rule change filed by CBOE which it 
approved after a notice and comment period.\27\ This proposed rule 
change does not raise any new or novel issues from those considered in 
the CBOE proposal. Based on the foregoing, the Commission believes that 
it is consistent with the protection of investors and the public 
interest to waive the 30-day operative date so that the proposal may 
take effect upon filing.\28\
---------------------------------------------------------------------------

    \27\ See Securities Exchange Act Release No. 77450 (March 25, 
2016) (Order Approving SR-CBOE-2016-005).
    \28\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 22333]]

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 No. SR-BOX-2016-13 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 No. SR-BOX-2016-13. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-BOX-2016-13, and should be 
submitted on or before May 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-08645 Filed 4-14-16; 8:45 am]
 BILLING CODE 8011-01-P