
[Federal Register Volume 77, Number 154 (Thursday, August 9, 2012)]
[Notices]
[Pages 47681-47688]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19489]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67592; File No. SR-BOX-2012-003]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Amend the Price Improvement Period

August 3, 2012.
    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 July 25, 2012, 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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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 7150 (The Price Improvement 
Period (``PIP'')) to modify the execution of quotes and orders that are 
on the BOX Book prior to a PIP. The text of the proposed rule change is 
available at the principal office of the Exchange, on the Exchange's 
Web site at http://boxexchange.com, at the Commission's Public 
Reference Room, and on the Commission's Web site at http://www.sec.gov.

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the BOX Price Improvement Period 
(``PIP'') \3\ Rule 7150 to modify the execution of quotes and orders 
that are on the BOX Book prior to a PIP. Currently, Rule 7150(f) 
permits a PIP to begin at or better than the National Best Bid or Offer 
(``NBBO'') and 7150(f)(1) provides that at the commencement of the PIP, 
all quotes and orders on the BOX Book prior to the PIP Broadcast that 
are equal to or better than (1) the Single-Priced Primary Improvement 
Order price or (2) the PIP Start Price of a Max Improvement Primary 
Improvement Order, except any proprietary quote or order from the 
Initiating Participant, will be immediately executed against the 
customer order designated for the PIP (``PIP Order'') in price/time 
priority. The result of the current rule is that when an

[[Page 47682]]

order is submitted to the PIP and there is sufficient quantity on the 
BOX Book prior to the PIP Broadcast to execute the PIP Order, the PIP 
never starts. For example: Submitted PIP Order to sell 100 contracts at 
NBBO of $2.00; Orders on the BOX Book prior to the PIP Broadcast:
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    \3\ Capitalized terms not otherwise defined herein shall have 
the meaning as defined in the Exchange Rules.
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     Public Customer to buy 30 contracts at $2.00;
     Market Maker A to buy 40 contracts at $2.00; and
     Broker-Dealer to buy 50 contracts at $2.00.

Under the current rule, the PIP Order executes 100 contracts against 
the orders on the Book at $2.00 in price/time priority as follows:

     Public Customer for 30 contracts;
     Market Maker A for 40 contracts; and
     Broker-Dealer for 30 contracts.
    The PIP Order misses out on any potential opportunity for an 
execution at a better price, or prices, (price improvement) because the 
PIP never begins. The Exchange proposes to delete the provision in 
7150(f)(1) noted above, amend 7150(f)(1), and 7150(f)(4), and add a new 
provision as 7150(g)(3). The proposed rule change to 7150(f)(1) would 
specify that at the conclusion of the PIP, the PIP Order shall be 
executed as set forth in 7150(f)(3), 7150(f)(4), 7150(g), and 7150(j).
    Rule 7150(f)(4) sets out certain exceptions to time priority in the 
execution of the PIP Order. First, at the same price, if better than 
the PIP Start Price, Public Customer orders, whether an Improvement 
Order or an Unrelated Order, execute before non-market maker broker-
dealer orders and all non-BOX Participant broker-dealer orders. Next, a 
proposed addition to 7150(f)(4)(i) would specify that all quotes and 
orders on the BOX Book prior to the PIP Broadcast, excluding any 
proprietary quote or order from the Initiating Participant, will be 
filled in time priority before any other order at the same price. 
Another technical, non-substantive change to 7150(f)(4)(i) inserts the 
defined term ``Unrelated Order'' in an instance where the undefined 
term ``unrelated order'' has been used.
    Proposed new 7150(g)(3) states that the Primary Improvement Order 
follows in time priority in the PIP allocation to all quotes and orders 
on the BOX Book prior to the PIP Broadcast that are equal to the (A) 
Single-Priced Primary Improvement Order price; or (B) execution price 
of a Max Improvement Primary Improvement Order that results in the 
balance of the PIP Order being fully executed, except any proprietary 
quote or order from the Initiating Participant. BOX notes that, similar 
to the current BOX Rules, such proprietary quote or order shall not be 
executed against the PIP Order during or at the conclusion of the PIP. 
As set forth above, among the quotes or orders on the BOX Book prior to 
the PIP Broadcast at the final execution price level, the PIP Order 
shall be matched against the quotes or orders in accordance with price/
time priority as set forth in Rule 7130.
    For example: Submitted PIP Order to sell 100 contracts with Single-
Priced Primary Improvement Order to buy at NBBO of $2.00. Orders on the 
BOX Book prior to the PIP Broadcast:
     Public Customer to buy 30 contracts at $2.00;
     Market Maker A to buy 40 contracts at $2.00; and
     Broker-Dealer to buy 50 contracts at $2.00.
    Improvement Orders submitted during PIP:
     Market Maker B to buy 40 contracts at $2.01, and
     Market Maker C to buy 30 contracts at $2.02.
    Under the proposed rule change, the PIP Order would execute against 
the following:
     Market Maker C for 30 contracts at $2.02;
     Market Maker B for 40 contracts at $2.01; and
     Public Customer for 30 contracts at $2.00.
    In this example, the PIP Order executes 70 contracts at a better 
price than it would under the current rule. BOX believes the proposed 
rule change will benefit Participants' customer orders by providing 
them an opportunity for price improvement they do not currently 
receive. Initiating Participants are required to guarantee an execution 
of the PIP Order at the NBBO or at a better price. The Initiating 
Participant's willingness to guarantee the customer order an execution 
at NBBO or a better price is important to the customer order gaining 
the opportunity for price improvement. Unfortunately, under the current 
BOX Rules, many PIP Orders do not have the opportunity to be exposed to 
competition in the PIP and potentially receive an execution at a better 
price. As such, BOX believes that the proposed rule change will benefit 
customers because it will ensure that more customer orders are exposed 
to that PIP competition and thus, more likely that such orders may 
receive price improvement. Orders on the BOX Book prior to the PIP, 
however, retain their priority over the Initiating Participant for 
allocation at the conclusion of the PIP at the same price. Such orders 
execute based on their time priority on the BOX Book prior to the PIP 
Broadcast. Options Participants' orders submitted to BOX are ranked and 
maintained in the BOX Book according to price/time priority, such that 
within each price level, all orders are organized by time of order 
entry. No distinction is made to this priority with regard to account 
designation (Public Customer, Broker/Dealer, or Market Maker). BOX 
believes that price/time priority provides an incentive for all market 
participants to post their best prices quickly.
    The PIP has saved investors more than $388 million versus the 
prevailing NBBO since 2004, a monthly average of more than $3.8 
million. BOX believes that the proposed rule change will result in 
additional PIP transactions, and thus, in customers having a greater 
opportunity to benefit from price improvement.
Max Improvement Primary Improvement Orders
    Currently, if an Initiating Participant enters a Max Improvement 
Primary Improvement Order as defined in 7150(f), such an order 
automatically matches both the price and size of all competing quotes 
and orders at any price level achieved during the PIP, or up to a limit 
price as set by the Initiating Participant. At the conclusion of the 
PIP, a Max Improvement Primary Improvement Order will be allocated an 
equal number of contracts as the aggregate size of competing quotes and 
orders at each price level until a price level is reached where the 
balance of the PIP Order can be fully executed, except that the 
Initiating Participant will retain priority for 40% of the remaining 
PIP Order at the final price level. Otherwise, at the conclusion of the 
PIP, the PIP Order shall be matched against quotes and orders as set 
forth in 7150(f)(3)-(4), 7150(g), and 7150(j).
    The Exchange proposes to amend 7150(g)(3) to provide that a Primary 
Improvement Order would yield priority to all quotes and orders on the 
BOX Book prior to the PIP Broadcast that are equal to or better than 
the execution price of a Max Improvement Primary Improvement Order that 
results in the balance of the PIP Order being fully executed, except 
any proprietary quote or order from the Initiating Participant. Similar 
to the current BOX Rules, such proprietary quote or order shall not be 
executed against the PIP Order during or at the conclusion of the PIP.
    For example, a PIP Order is submitted to sell 100 contracts at NBBO 
of $2.00

[[Page 47683]]

with Max Improvement Primary Improvement Order to buy at prices up to 
$2.03, with a PIP Start Price of $2.00.
    Orders on the BOX Book prior to the PIP Broadcast:
     Public Customer to buy 30 contracts at $2.00;
     Market Maker A to buy 40 contracts at $2.00; and
     Broker-Dealer to buy 50 contracts at $2.00.
    Improvement Orders submitted during PIP:
     Market Maker B to buy 20 contracts at $2.01, and
     Market Maker C to buy 10 contracts at $2.02.
    Under the proposed rule change, the PIP Order would execute against 
the following:
     Market Maker C for 10 contracts at $2.02;
     Initiating Participant for 10 contracts at $2.02;
     Market Maker B for 20 contracts at $2.01;
     Initiating Participant for 20 contracts at $2.01
     Public Customer for 30 contracts at $2.00; and
     Market Maker A for 10 contracts at $2.00.
    In this example, the PIP Order executes 60 contracts at a better 
price than it would under the current rule. It is possible that the 
orders on the Book at NBBO prior to the PIP would not execute against 
the PIP Order that is submitted to the PIP at NBBO. The PIP Order, 
however, is still guaranteed an execution by the Initiating 
Participant, and receives price improvement better than the NBBO for a 
portion of the PIP Order. BOX notes, however, that the PIP Order could 
potentially receive improvement for the entire quantity of the order.
    In the example above, the Initiating Participant is entitled to 
receive 10 contracts at $2.02 (matching the 10 contracts that are 
allocated $2.02), and 20 contracts at $2.01 (matching the 20 contracts 
allocated at $2.01). Because $2.00 is the final price level where the 
PIP Order is fully executed, the Public Customer is allocated 30 
contracts and Market Maker A is allocated 10 contracts based on their 
price/time priority on the BOX Book prior to the PIP Broadcast. These 
orders on the BOX Book, however, retain their priority over the 
Initiating Participant at the final price level.
    Rule 7150(g)(2) provides that when submitting a Max Improvement 
Primary Improvement Order, the Initiating Participant retains priority 
over other Improvement Orders for 40% of the remaining size of the PIP 
Order at the price where the PIP Order can be fully executed.
    For example, a PIP Order is submitted to sell 100 contracts at NBBO 
of $2.00 with Max Improvement Primary Improvement Order to buy at 
prices up to $2.03, with a PIP Start Price of $2.00. Orders on the BOX 
Book prior to the PIP Broadcast:
     Public Customer to buy 10 contracts at $2.00;
    Improvement Orders submitted during PIP:
     Market Maker B to buy 20 contracts at $2.01;
     Market Maker C to buy 10 contracts at $2.02;
     Broker-dealer to buy 25 contracts at $2.00.
    Under the proposed rule change, the PIP Order would execute against 
the following:
     Market Maker C for 10 contracts at $2.02;
     Initiating Participant for 10 contracts at $2.02;
     Market Maker B for 20 contracts at $2.01;
     Initiating Participant for 20 contracts at $2.01
     Public Customer for 10 contracts at $2.00;
     Initiating Participant for 12 contracts at $2.00; and
     Broker-dealer for 18 contracts at $2.00
    In this example, the PIP Order also executes 60 contracts at a 
price better than NBBO. The Initiating Participant is entitled to 
receive 10 contracts at $2.02 (matching the 10 contracts that are 
allocated $2.02), and 20 contracts at $2.01 (matching the 20 contracts 
allocated at $2.01). Because $2.00 is the final price level where the 
PIP Order is fully executed, the Public Customer on the BOX Book prior 
to the PIP Broadcast retains his priority over the Initiating 
Participant at the final price level and is allocated his 10 contracts. 
Finally, among the Improvement Orders at the final price of $2.00, the 
Initiating Participant retains priority for 40% of the remaining 30 
contracts. Thus, the Initiating Participant is allocated 12 contracts 
at $2.00 and the Broker-dealer that submitted the Improvement Order is 
allocated the final 18 contracts at $2.00. As noted above, additional 
quantity on the BOX Book at the final execution price ($2.00 in this 
instance) prior to the PIP Broadcast, regardless of account type (e.g., 
Public Customer, Market Maker, or Broker-dealer), would retain priority 
over the Initiating Participant at that price and trade in price/time 
priority in the same fashion as they otherwise would on the BOX Book.
    BOX notes that Unrelated Orders submitted to BOX will continue to 
execute with the PIP as they do within the current BOX Rules 7150(i) 
and 7150(j). The Exchange is not proposing any change to these Rules 
regarding Unrelated Orders. As stated in proposed Rule 7150(f)(4)(i), 
``* * * all quotes and orders on the BOX Book prior to the PIP 
Broadcast, excluding any proprietary quote or order from the Initiating 
Participant, will be filled in time priority before any other order at 
the same price.'' As such, Unrelated Orders received after a PIP 
Broadcast would execute in time priority after quotes and orders at the 
same price that were on the Book prior to the PIP Broadcast.
    Upon Commission approval of the proposal, and at least one week 
prior to implementation of the proposed rule change, BOX will issue an 
Informational Circular to Participants, informing them of the 
implementation date. This will give Participants an opportunity to make 
any necessary modifications to coincide with the implementation date.
    In connection with this proposed rule change, the Exchange will 
continue to provide to the Commission the following monthly data, and 
corresponding analysis, related to the PIP: (1) The number of orders of 
50 contracts or greater entered into the PIP auction; (2) the 
percentage of all orders of 50 contracts or greater sent to BOX that 
are entered into the PIP auction; (3) the spread in the option at the 
time an order of 50 contracts or greater is submitted to the PIP 
auction; (4) the percentage of PIP trades executed at the NBBO plus 
$.01, plus $.02, plus $.03, etc.; and (5) the number of orders 
submitted by Order Flow Providers (``OFPs'') and Market Makers when the 
spread was at a particular increment (e.g., $.05, $.10, $.15, etc.). 
Also, relative to item 5 above, for each spread, the Exchange will 
provide the percentage of contracts in orders of fewer than 50 
contracts and for orders of 50 contracts or greater submitted to the 
PIP that were traded by: (a) The OFP or Market Maker that submitted the 
order to the PIP; (b) BOX Market Makers assigned to the class; (c) 
other BOX Participants; (d) Public Customer Orders (including Customer 
PIP Orders (``CPOs'')); (e) Unrelated Orders (orders in standard 
increments entered during the PIP), and (f) quotes and orders on the 
BOX Book prior to the PIP Broadcast.
    Further, BOX will provide, for the first and third Wednesday of 
each month, the: (a) Total number of PIP auctions on that date; (b) 
number of PIP auctions where the order submitted to the PIP was fewer 
than 50 contracts; (c) number of PIP auctions where the order

[[Page 47684]]

submitted to the PIP was 50 contracts or greater; (d) number of PIP 
auctions where the number of Participants (excluding the Initiating 
Participant) was zero, one, two, three, four, etc. Finally, the 
Exchange will continue to provide information each month with respect 
to situations in which the PIP is terminated prematurely or a Market 
Order, Limit Order, or BOX-Top Order immediately execute with a PIP 
Order before the PIP's conclusion. The following information will be 
provided: (1) The number of times that a Market Order, Limit Order, or 
BOX-Top Order in the same series on the same side of the market as the 
PIP Order prematurely terminated the PIP, and (a) the number of times 
such orders were entered by the same (or affiliated) firm that 
initiated the PIP that was terminated, and (b) the number of times such 
orders were entered by a firm (or an affiliate of such firm) that 
participated in the execution of the PIP Order; (2) for the orders 
addressed in each of 1(a) and 1(b) above, the percentage of PIP 
premature terminations due to the receipt, during the PIP, of a Market 
Order, Limit Order, or BOX-Top Order in the same series on the same 
side of the market as the PIP Order; and the average amount of price 
improvement provided to the PIP Order where the PIP is prematurely 
terminated; (3) the number of times that a Market Order, Limit Order, 
or BOX-Top Order in the same series on the opposite side of the market 
as the PIP Order immediately executed against the PIP Order, and (a) 
the number of times such orders were entered by the same (or 
affiliated) firm that initiated the PIP, and (b) the number of times 
such orders were entered by a firm (or an affiliate of such firm) that 
participated in the execution of the PIP Order; (4) for the orders 
addressed in each of 3(a) and 3(b) above, the percentage of PIP early 
executions due to the receipt, during the PIP, of a Market Order, Limit 
Order, or BOX-Top Order in the same series on the opposite side of the 
market as the PIP Order; and the average amount of price improvement 
provided to the PIP Order where the PIP Order is immediately executed; 
and (5) the average amount of price improvement provided to the PIP 
Order when the PIP runs for 100 milliseconds.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\4\ in general, and Section 
6(b)(5) of the Act,\5\ in particular, that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, to remove impediments to and to 
perfect the mechanism for 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 this proposed rule change is a 
reasonable modification designed to provide additional opportunities 
for BOX Options Participants to obtain executions with price 
improvement for their customers while continuing to provide meaningful 
competition within the PIP. The Exchange also believes that the 
proposed rule change will increase the number of PIP transactions and 
participation in the PIP, which will ultimately enhance competition in 
the PIP and provide customers with additional opportunities for price 
improvement. The Exchange believes these changes are consistent with 
the goals to remove impediments to and to perfect the mechanism for a 
free and open market and a national market system.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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    Section 11(a) of the Act prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
his own account, the account of an associated person, or an account 
over which he or his associated person exercises investment discretion 
(collectively, ``covered accounts''), unless an exception applies. The 
purpose of Section 11(a) is to address trading advantages enjoyed by 
the exchange members and conflicts of interest in money management.\6\ 
In particular, as the Commission has stated, Congress enacted Section 
11(a) out of concern about members benefiting in their principal 
transactions from special ``time and place'' advantages associated with 
floor trading--such as the ability to ``execute decisions faster than 
public investors.'' \7\ Section 11(a) includes several exceptions from 
the general prohibition for principal transactions that contribute to 
the fairness and orderliness of exchange transactions or do not reflect 
any time and place advantages. For example, Section 11(a)(1) provides 
that the prohibition on principal transactions does not apply to 
transactions by a dealer acting in the capacity of a market maker,\8\ 
bona fide arbitrage, risk arbitrage or hedge transactions,\9\ 
transactions by an odd lot dealer,\10\ and transactions made to offset 
errors.\11\
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    \6\ See Securities Reform Act of 1975, Report of the House Comm. 
On Interstate and Foreign Commerce, H.R. Rep. No. 94-123, 94th 
Cong., 1st Sess. (1975); Securities Acts Amendments of 1975, Report 
of the Senate Comm. On Banking, Housing, and Urban Affairs, S. Rep. 
No. 94-75, 94th Cong., 1st Sess. (1975).
    \7\ See Securities Exchange Act Release Nos. 14563 (March 14, 
1978), 43 FR 11542, 11543 (March 17, 1978); 14713 (April 27, 1978), 
43 FR 18557 (``April 1978 Release''); 15533 (January 29, 1979), 44 
FR 6084 (``1979 Release'').
    \8\ Section 11(a)(1)(A).
    \9\ Section 11(a)(1)(D).
    \10\ Section 11(a)(1)(B).
    \11\ Section 11(a)(1)(F).
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    The Commission has stated that it believes that transactions 
effected through the BOX PIP are consistent with the requirements in 
Section 11(a) of the Act and Rule 11a1-1(T) thereunder because Options 
Participants that are not market makers are required to yield priority 
in the PIP to all non-member orders, (i.e., to all Public Customer 
Orders and non-BOX Participant broker-dealer orders) at the same 
price.\12\ Note that Participants, however, in addition to yielding 
priority to non-member orders at the same price, must also meet the 
other requirements under Section 11(a)(1)(G) of the Act and Rule 11a1-
1(T) thereunder (or satisfy the requirements of another exception) to 
effect transactions for their own accounts.
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    \12\ See Securities Exchange Act Release No. 66871 (April 27, 
2012), 77 FR 26323, at 26336 (May 3, 2012), In the Matter of the 
Application of BOX Options Exchange LLC for Registration as a 
National Securities Exchange Findings, Opinion, and Order of the 
Commission. See also Securities Exchange Act Release No. 49068 
(January 13, 2004), 69 FR 2775, at 2790 (January 20, 2004) 
(establishing, among other things, the Boston Options Exchange, LLC 
options trading facility of BSE).
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    As discussed below, the Exchange believes the PIP is generally 
consistent with Section 11(a)(1)(G) and Rule 11a1-1(T) under the Act 
because non-Market Maker Participant orders must yield to Public 
Customer orders.\13\ The Exchange also believes, however, that the 
proposed change to execute quotes and orders on the BOX Book prior to 
the PIP Broadcast against a PIP Order will satisfy the conditions of 
Rule 11a2-2(T) under the Act (the ``Rule'').\14\
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    \13\ 15 U.S.C. 78k(a)(1)(G) and 17 CFR. 240.11a1-1(T).
    \14\ 17 CFR 240.11a2-2(T).
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Yielding to Public Customer Orders
    Exchange Rules prohibit any orders for the accounts of non-Market 
Maker Options Participants to be executed prior to the execution of 
Public Customer Orders, whether an Improvement Order, including a CPO, 
or Unrelated Order, and non-BOX-Participant broker-dealer orders at the 
same price.\15\ Section 11(a)(1)(G) and Rule 11a1-1(T) under the Act 
provide an exception to the general prohibition

[[Page 47685]]

in Section 11(a) on an exchange member effecting transactions for its 
own account. Specifically, a member that ``is primarily engaged in the 
business of underwriting and distributing securities issued by other 
persons, selling securities to customers, and acting as broker, or any 
one or more of such activities, and whose gross income normally is 
derived principally from such business and related activities'' \16\ 
and effects a transaction in compliance with the requirements in Rule 
11a1-1(T)(a) \17\ may effect a transaction for its own account. Among 
other things, Rule 11a1-1(T)(a) requires that an exchange member 
presenting a bid or offer for its own account or the account of another 
member shall grant priority to any bid or offer at the same price for 
the account of a non-member of the exchange. Because BOX Rules require 
Options Participants that are not Market Makers to yield priority in 
the PIP to all non-member orders, BOX believes that the execution of 
PIP transactions on BOX is consistent with the requirements in Section 
11(a) and Rule 11a1-1(T) under the Act.\18\ The Exchange notes that BOX 
Options Participants, in addition to yielding priority to non-member 
orders at the same price, must also meet the other requirements under 
Section 11(a)(1)(G) and Rule 11a1-1(T) (or satisfy the requirements of 
another exception) to effect transactions for their own accounts.
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    \15\ See Rule 7150(f)(4) and 7150(g)(3).
    \16\ 15 U.S.C. 78k(a)(1)(G)(i). Paragraph (b) of Rule 11a1-1(T) 
under the Act provides that a member shall be deemed to meet the 
requirements of Section 11(a)(1)(G)(i) of the Act if during its 
preceding fiscal year more than 50% of its gross revenues was 
derived from one or more of the sources specified in that section. 
In addition to any revenue which independently meets the 
requirements of Section 11(a)(1)(G)(i), revenue derived from any 
transaction specified in paragraph (A), (B), or (D) of Section 
11(a)(1) of the Act or specified in Rule 11a1-4(T) shall be deemed 
to be revenue derived from one or more of the sources specified in 
Section 11(a)(1)(G)(i).
    \17\ 15 U.S.C. 78k(a)(1)(G)(ii).
    \18\ Supra n.12.
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    Consistent with Section 11(a) of the Act, current BOX PIP Rules 
``prohibit any orders for the accounts of non-Market Maker BOX Options 
Participants to be executed prior to the execution of Public Customer 
Orders, both Public Customer PIP Orders and unrelated Customer Orders, 
and non-BOX Options Participant broker-dealer orders at the same 
price.'' \19\ Although the Proposal would change when BOX ``sweeps'' 
the BOX Book in relation to the PIP, it would not change that Public 
Customers retain priority over certain other orders at the same price 
when executed at the end of a PIP transaction, except for quotes and 
orders on the BOX Book prior to the PIP Broadcast.
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    \19\ See Securities Exchange Act Release No. 66871 (April 27, 
2012), 77 FR 26323, at 26336 (May 3, 2012), In the Matter of the 
Application of BOX Options Exchange LLC for Registration as a 
National Securities Exchange Findings, Opinion, and Order of the 
Commission.
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Application of ``Effect Versus Execute'' Exemption From Section 11(a) 
of the Act
    The Commission has stated that it believes that BOX Option 
Participants entering orders into the BOX Trading Host, excluding those 
transactions effected through the PIP process, will satisfy the 
conditions of Rule 11a2-2(T) (``the Rule'').\20\ The Exchange believes 
that the executions of quotes and orders that are on the BOX Book prior 
to a PIP Broadcast against a PIP Order will also satisfy the conditions 
of the Rule.
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    \20\ Supra n.19 at 26335.
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    Under the proposed rule change, a PIP Order with a matching Primary 
Improvement Order submitted to the PIP would automatically initiate a 
PIP. Any Improvement Orders at a better price submitted during the PIP 
will be executed with the PIP Order, as described above, with Public 
Customer orders at that price having priority. If at the conclusion of 
the PIP, there is any remaining unexecuted size of the PIP Order, BOX 
will ``sweep'' the BOX Book for quotes and orders at the PIP start 
price, and the PIP Order remainder will be executed against those 
orders according to price/time priority.
    Rule 11a2-2(T) under the Act provides exchange members with an 
exemption from the prohibition on principal trading, in addition to the 
exceptions delineated in the statute. Known as the ``effect versus 
execute'' rule, Rule 11a2-2(T) permits an exchange member, subject to 
certain conditions, to effect transactions for covered accounts by 
arranging for an unaffiliated member to execute the transactions on the 
exchange. To comply with the Rule's conditions, a member:
    (i) May not be affiliated with the executing member;
    (ii) Must transmit the order from off the exchange floor;
    (iii) May not participate in the execution of the transaction once 
it has been transmitted to the member performing the execution; \21\ 
and
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    \21\ The member may, however, participate in clearing and 
settling the transaction.
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    (iv) With respect to an account over which the member has 
investment discretion, neither the member nor his associated person may 
retain any compensation in connection with effecting the transaction 
except as provided in the Rule.\22\
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    \22\ 17 CFR 240.11a2-2(T)(a)(2).
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    The Commission has stated that these four requirements of the Rule 
are ``designed to put members and non-members on the same footing, to 
the extent practicable, in light of the purposes of Section 11(a).'' 
\23\ If a transaction meets the four conditions of the Rule, it will be 
deemed to be in compliance with Section 11(a)(1), the protection of 
investors and the maintenance of fair and orderly markets.\24\ For the 
reasons set forth below, the Exchange believes the structural and 
operational characteristics of the BOX Book are consistent with the 
stated objectives of Section 11(a) of the Act, and that all users would 
be placed on the ``same footing'', as intended by Rule 11a2-2(T), even 
where quotes and orders on the BOX Book prior to a PIP execute against 
the PIP Order.
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    \23\ April 1978 Release at 18560.
    \24\ 17 CFR 240.11a2-2(T)(e).
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    The Commission has recognized and accommodated the functioning of 
electronic exchange facilities under the Rule.\25\ In addition, the 
Commission and its staff have permitted exchanges to sponsor innovative 
trading systems in reliance on the Rule, based on the exchanges' 
representations that such facilities, by design, do not provide any 
special time and place advantage to members.\26\ In particular, the

[[Page 47686]]

Commission has stated, in the context of certain automated execution 
systems, that where the execution is performed on an automated basis by 
the facility itself, ``the member would not retain any ability to 
control the timing of the execution or otherwise enjoy the kind of 
special order-handling advantages inherent in being on an exchange 
floor.\27\ The Commission has applied the Rule in a functional manner, 
taking into account the structural characteristics that distinguish the 
operation of an automated execution system from traditional exchange 
floor activities. This approach represents the sensible conclusion by 
the Commission and its Staff that implementation of Section 11(a) 
should reflect the ``continuing rapid pace of economic, technological 
and regulatory changes in the market.'' \28\
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    \25\ See Securities Exchange Act Release Nos. 61152 (December 
10, 2009), 74 FR 66699 (December 16, 2009) (File No. 10-191) 
(Findings, Opinion, and Order of the Commission In the Matter of the 
Application of C2 Options Exchange, Incorporated for Registration as 
a National Securities Exchange) (``C2 Approval Order'') at note 170; 
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (File No. SR-
NASDAQ-2007-004) (approval order concerning the establishment of the 
NASDAQ Options Market LLC (``NOM'')) (``NOM Approval Order''); Order 
approving the rules of the Boston Options Exchange, supra n.12; 
54552 (September 29, 2006) (AMEX AEMI trading system), 71 FR 59546 
(October 10, 2006); 54550 (September 29, 2006), 71 FR 59563 (October 
10, 2006) (Chicago Stock Exchange trading system); 54528 (September 
28, 2006), 71 FR 58650 (October 4, 2006) (International Securities 
Exchange trading system); and 49747 (May 20, 2004), 69 FR 30344 (May 
27, 2004) (AMEX electronic options trading system).
    \26\ See e.g., Securities Exchange Act Release No. 44983 
(October 25, 2001) (Archipelago Exchange), citing Letter from Paula 
R. Jenson, Deputy Chief Counsel, Division of Market Regulation, SEC, 
to Kathryn L. Beck, Senior Vice President, Special Counsel and 
Antitrust Compliance Officer, Pacific Exchange, Inc. (October 25, 
2001) (``Arca Letter''); Letter from Larry E. Bergmann, Senior 
Associate Director, Division of Market Regulation, SEC, to Edith 
Hallahan, Associate General Counsel, Philadelphia Stock Exchange, 
Inc. (March 24, 1999) (``VWAP Letter''); Letter from Catherine 
McGuire, Chief Counsel, Division of Market Regulation, SEC, to David 
E. Rosedahl, PCX (November 30, 1998) (``OptiMark Letter''); Letter 
from Brandon Becker, Director, Division of Market Regulation, SEC, 
to George T. Simon, Partner, Foley & Lardner (November 30, 1994) 
(``Chicago Match Letter''); Securities Exchange Act Release No. 
29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (NYSE's Off-Hours 
Trading Facility (October 25, 2001).
    \27\ 1979 Release, supra n. 7 at 6087, n. 35
    \28\ 1979 Release, supra n. 7 at 6087.
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Application of the Rule to Quotes and Orders on the BOX Book Prior to 
the PIP That Execute With the PIP Order
    In light of the automated execution of orders submitted to BOX, no 
Options Participant will enjoy any special control over the timing and 
execution or special order handling advantages in effecting 
transactions in orders submitted to the BOX Book. All orders are 
processed for execution by computer, rather than being handled manually 
by an Options Participant. Because these processes prevent Options 
Participants from gaining any time and place advantage once an order is 
submitted to BOX, the Exchange believes that the BOX Book process 
satisfies three of the four conditions of the Rule, as well as the 
general policy objectives of Section 11(a) of the Act. Of course, as 
discussed below, BOX Options Participants relying on the Rule also must 
comply with the fourth condition of the Rule with respect to 
discretionary accounts, and the Exchange will enforce this requirement 
pursuant to its obligation under Section 6(b)(1) of the Act to enforce 
compliance with the federal securities laws.
(i) Execution Through Unaffiliated Member
    The Rule's first condition is that the order be executed by an 
exchange member that is unaffiliated with the member initiating the 
order.\29\ The Commission has repeatedly stated that this requirement 
is satisfied when automated exchange facilities, such as BOX, are used, 
so long as the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the system.\30\ In considering the 
operation of NOM and C2, the Commission noted, while there is no 
independent executing exchange member, the execution of an order is 
automatic once it has been transmitted to the system.\31\ Because the 
design of these systems ensures members do not possess any special or 
unique trading advantages in handling their orders after transmitting 
them to the exchange, the Commission has stated executions obtained 
through these systems satisfy the independent execution requirement of 
Rule 11a2-2(T).\32\
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    \29\ 17 CFR 240.11a2-2(T)(a)(2)(i).
    \30\ See e.g., C2 Approval Order and NOM Approval Order, supra 
n. 25, and Order approving rules of the Boston Options Exchange, 
supra n. 12.
    \31\ See, NOM Approval Order and C2 Approval Order.
    \32\ Id.
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    This principle is directly applicable to the BOX Book, including 
the quotes and orders on the Book prior to a PIP that may execute 
against the PIP Order. The design of the BOX Book ensures that broker-
dealers do not have any special or unique trading advantages in 
handling their orders after transmission. Accordingly, the Exchange 
believes that a broker-dealer effecting a transaction through the BOX 
Book, even where the quote or order on the Book prior to a PIP executes 
against the PIP Order, satisfies the requirement for execution through 
an unaffiliated member.
    The design of BOX ensures that no BOX Options Participant will 
enjoy any special control over the timing of execution or special order 
handling advantages after order transmission. All orders on the BOX 
Book and through the PIP, are centrally processed and executed 
automatically by BOX. Specifically, orders sent to BOX will be 
transmitted from remote terminals directly to the system by electronic 
means. Once an order is submitted to the BOX Book, the order is 
executed against another order based on the established matching 
algorithms for the Book. And, as proposed, those quotes and orders on 
the Book prior to a PIP, may trade with the PIP Order, or will execute 
when orders or quotations on BOX match one another based on price/time 
priority. The execution does not depend on the Options Participant but 
rather upon what other orders are entered into BOX at or around the 
same time as the subject order, what orders are on the BOX Book, or if 
a PIP is initiated, and where the order is ranked based on the priority 
ranking algorithm. At no time following the submission of an order to 
the BOX Book is an Options Participant able to acquire control or 
influence over the result or timing of order execution. Accordingly, 
Participants do not control or influence the result or timing of orders 
submitted to the BOX Book, even if such an order were to match with the 
PIP Order.
(ii) Off-Floor Transmission
    The Rule requires that orders for a covered account transaction be 
transmitted from off the exchange floor.\33\ Again, the Commission has 
considered this requirement in the context of various automated trading 
and electronic order-handling facilities operated by national 
securities exchanges.\34\ In these contexts, the Commission determined 
that a covered account order sent through such an exchange facility 
would be deemed to be transmitted from off the floor. Like these other 
automated systems, orders sent to BOX, regardless of where it executes 
within the BOX system, including the Book or the PIP, will be 
transmitted from remote terminals directly to BOX by electronic means. 
OFPs and BOX Market Makers will only submit orders and quotes to BOX 
from electronic systems from remote locations, separate from BOX. There 
are no other Options Participants that are able to submit orders to BOX 
other than OFPs or Market Makers. Therefore, the Exchange believes that 
Participants' orders electronically received by BOX satisfy the off-
floor transmission requirement for the purposes of the Rule.\35\
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    \33\ 17 CFR 240.11a2-2(T)(a)(2)(ii).
    \34\ See e.g., Release Nos. 29237 (May 24, 1991), 56 FR 24853 
(May 31, 1991) (File Nos. SR-NYSE-90-52 and SR-NYSE-90-53) 
(regarding NYSE's Off-Hours Trading Facility); 61419 (January 26, 
2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) (approving 
BATS options trading); 59154 (December 28, 2008), 73 FR 80468 
(December 31, 2008) (SR-BSE-2008-48) (approving equity securities 
listing and trading on BSE); NOM Approval Order; 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (approving 
The Nasdaq Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 
(November 1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 
29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and 
SR-NYSE-90-53) (approving NYSE's Off-Hours Trading Facility); and 
1979 Release.
    \35\ The Commission has not considered the lack of a traditional 
physical floor to be an impediment to the satisfaction of the off-
floor requirement. See, e.g., 1979 Release.
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(iii) Non-Participation in Order Execution
    The Rule further provides the exchange member and his associated 
person not participate in the execution of the order once it has been

[[Page 47687]]

transmitted.\36\ This requirement originally was intended to prevent 
members with their own floor brokers from using those persons to 
influence or guide their orders' executions.\37\ A member is not 
precluded from canceling or modifying orders, or from modifying 
instructions for executing orders, after they have been transmitted; 
provided, however, such cancellations or modifications are transmitted 
from off the exchange floor.\38\
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    \36\ 17 CFR 240.11a2-2(T)(a)(2)(iii).
    \37\ See generally April 1978 Release, supra n. 7.
    \38\ Id.
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    In analyzing the application of the non-participation requirement 
to automated execution facilities, the Commission has specifically 
noted in regard to BOX that the execution does not depend on the 
Participant but rather upon what other orders are entered into BOX at 
or around the same time as the subject order, what orders are on the 
BOX Book, and where the order is ranked based on the priority ranking 
and execution algorithm.\39\ Based on prior Commission interpretations, 
orders submitted electronically to the BOX Book will similarly meet the 
non-participation requirement. Upon submission to BOX, an order is 
executed against another order on the BOX Book or with the PIP Order 
based on an established matching algorithm. The execution does not 
depend on the Participant but rather upon what other orders are entered 
into BOX at or around the same time as the subject order, what orders 
are on the BOX Book, whether a PIP is initiated, and where the order is 
ranked based on the priority ranking algorithm. At no time following 
the submission of an order to the BOX Book is an Options Participant 
able to acquire control or influence over the result or timing of order 
execution. Accordingly, Participants do not control or influence the 
result or timing of orders submitted to BOX, even if their order on the 
Book may execute with a PIP Order. As such, the Exchange believes the 
non-participation requirement is met when orders are executed 
automatically on the BOX Book.
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    \39\ See Order approving rules of Boston Options Exchange, supra 
n. 12.
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(iv) Non-Retention of Compensation
    Finally, the exemption in Rule 11a2-2(T) states, in the case of a 
transaction effected for an account with respect to which an exchange 
member or an associated person thereof exercises investment discretion, 
neither the member nor any associated person thereof, may retain any 
compensation in connection with effecting the transaction without the 
express written consent of the person authorized to transact business 
for the account, given in accordance with the Rule.\40\ As a 
prerequisite for BOX usage, if a Participant is to rely on Rule 11a2-
2(T) for a covered account transaction, the Participant must comply 
with the limitations on compensation set forth in the Rule.\41\
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    \40\ 17 CFR 240.11a2-2(T)(a)(2)(iv).
    \41\ See Exchange Rule 4140.
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    The Exchange believes that orders executed on the BOX Book, 
including those on the Book prior to a PIP that may execute against a 
PIP Order, would satisfy the requirements of the ``effect versus 
execute'' rule as well as the general policy objectives of Section 
11(a) of the Act. Additionally, the Exchange believes that BOX Options 
Participant executions that occur through the BOX PIP, would continue 
to be consistent with the requirements in Section 11(a)(1)(G) and Rule 
11a1-1(T) under the Act. Further, the Exchange believes the policy 
concerns Congress sought to address in Section 11(a) of the Act,\42\ 
the time and place advantage members on exchange floors have over non-
members off the floor and the general public, are not present for these 
various transactions entered into BOX where it is executed on the BOX 
Book or through the PIP.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is also 
consistent with Section 6(b)(8) of the Act in that it does not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act. Specifically, the Exchange believes that 
the proposal will result in increased liquidity available at improved 
prices, with competitive pricing outside the control of the Initiating 
Participant. The proposed rule change should promote and foster 
competition and provide more options contracts with the opportunity for 
price improvement. As a result of the increased opportunities for price 
improvement, the Exchange believes that Participants will increasingly 
use PIP so that more customer orders are provided the opportunity to 
receive price improvement over the NBBO.
    The Exchange notes that submitting orders to the PIP is voluntary 
for BOX Options Participants. Additionally, the Exchange notes that 
several competing options exchanges offer mechanisms similar to the 
PIP, to which any market participant may choose to submit its matched 
customer orders. Based on all of the above, the Exchange believes the 
proposed rule change does not place an undue burden on competition.

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. Specifically, the Exchange 
believes that the proposal will result in increased liquidity available 
at improved prices, with competitive pricing outside the control of the 
Initiating Participant. The proposed rule change should promote and 
foster competition and provide more options contracts with the 
opportunity for price improvement. As a result of the increased 
opportunities for price improvement, the Exchange believes that 
Participants will increasingly use PIP so that more customer orders are 
provided the opportunity to receive price improvement over the NBBO.

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 Exchange consents, the Commission will:
    A. By order approve or disapprove such 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

[[Page 47688]]

No. SR-BOX-2012-003 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-BOX-2012-003. 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 
a.m. and 3 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-2012-003 and should be 
submitted on or before August 30, 2012.
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    \43\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19489 Filed 8-8-12; 8:45 am]
BILLING CODE 8011-01-P


