
[Federal Register Volume 77, Number 220 (Wednesday, November 14, 2012)]
[Notices]
[Pages 67851-67856]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27600]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68177; File No. SR-BOX-2012-003]


Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Approving Proposed Rule Change To Amend the Price Improvement Period

November 7, 2012.

I. Introduction

    On July 25, 2012, BOX Options Exchange LLC (``Exchange'' or 
``BOX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a 
proposed rule change to amend Rule 7150, which relates to the 
Exchange's Price Improvement Period (``PIP''), by modifying the order 
of execution of quotes and orders that are on the BOX Book prior to the 
start of a PIP. The proposed rule change was published for comment in 
the Federal Register on August 9, 2012.\4\ The Commission received one 
comment letter on the proposed rule change \5\ and a response to the 
comment letter from the Exchange.\6\ This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 67592 (August 3, 
2012), 77 FR 47681 (``Notice'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Kurt Eckert, Principal, Wolverine Trading, LLC dated August 30, 
2012 (``Wolverine Letter'').
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Anthony D. McCormick, Chief Executive Officer, Exchange, dated 
October 4, 2012 (``Exchange Response'').
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II. Description of the Proposal

    Currently, Rule 7150(f) permits a PIP to begin at or better than 
the National Best Bid or Offer (``NBBO''). Further, Rule 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 (i) the Single-Priced Primary Improvement Order price, or (ii) the 
PIP Start Price of a Max Improvement Primary Improvement Order, except 
any proprietary quote or order from the Initiating Participant, will be 
executed immediately against the customer order designated for the PIP 
(``PIP Order'') in price/time priority.\7\ As a result, if an order is 
submitted to the PIP and there is sufficient quantity on the BOX Book 
prior to the PIP Broadcast to execute the

[[Page 67852]]

PIP Order, the PIP does not commence. The Exchange proposes to delete 
the provision in Rule 7150(f)(1) relating to the execution of quotes 
and orders on the BOX Book prior to the PIP's commencement and to amend 
Rules 7150(f)(1) \8\ and (f)(4) to specify the priority for executing 
such quotes and orders at the conclusion of the PIP.
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    \7\ Capitalized terms that are not otherwise defined herein are 
defined as in the Exchange's Rules.
    \8\ The Exchange proposes to amend Rule 7150(f)(1) to specify 
that at the conclusion of the PIP, the PIP Order shall be executed 
as set forth in paragraphs (f)(3), (f)(4), (g), and (j).
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    Rule 7150(f)(4) sets forth exceptions to time priority in the 
execution of the PIP Order. The Rule currently provides that no order 
for a non-market maker broker-dealer account of an Options Participant 
may be executed before all Public Customer order(s), whether an 
Improvement Order, including a Customer PIP Order (``CPO''), or an 
Unrelated Order,\9\ and all non-BOX Options participant broker-dealer 
order(s) at the same price have been filled. The Exchange proposes to 
amend Rule 7150(f)(4)(i) to specify further 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.
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    \9\ The Exchange proposes a technical change to Rule 
7150(f)(4)(i) to correct the current reference to ``unrelated'' by 
replacing it with the term ``Unrelated Order.''
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    The Exchange also proposes to add new Rule 7150(g)(3). New Rule 
7150(g)(3) provides that the Primary Improvement Order follows in time 
priority all quotes and orders on the BOX Book prior to the PIP 
Broadcast that are equal to the (i) Single-Priced Primary Improvement 
Order price; or (ii) 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. Any such proprietary quote or order from the 
Initiating Participant will not be executed against the PIP Order 
during or at the conclusion of the PIP.
    The Exchange noted that, among the quotes or orders on the BOX Book 
prior to the PIP Broadcast at the final execution price level, the PIP 
Order will be matched against the best prevailing quotes or orders on 
BOX (except any pre-PIP Broadcast proprietary quote or order from the 
Initiating Participant) in accordance with price/time priority, as set 
forth in Rule 7130.\10\
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    \10\ See Notice, supra note 4, for examples of how quotes and 
orders on the BOX Book prior to the PIP Broadcast would be executed 
at the PIP's conclusion.
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    Under the proposal, Unrelated Orders submitted to BOX will continue 
to execute as they do currently under Rules 7150(i) and 7150(j). 
Accordingly, Unrelated Orders received after a PIP Broadcast will 
execute in time priority after quotes and orders at the same price that 
were on the BOX Book prior to the PIP Broadcast.
    The Exchange stated that in connection with this proposed rule 
change, it will provide to the Commission the following monthly data, 
and corresponding analysis, related to the PIP:\11\ (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 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.
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    \11\ See id. For orders of less than 50 contracts, the PIP is 
currently operating on a pilot basis. See Securities Exchange Act 
Release Nos. 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004) 
(Order Approving Proposed Rule Change Establishing Trading Rules for 
Boston Options Exchange facility) and 66871 (April 27, 2012), 77 FR 
26323 (May 3, 2012) (File No.10-206, 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) (``BOX Exchange Application Order''). The pilot program 
is currently set to expire on July 18, 2013. See Securities Exchange 
Act Release No. 67255 (June 26, 2012), 77 FR 39315 (July 2, 2012).
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    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 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 
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 
items (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 items (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.
    BOX stated that, upon Commission approval of the proposal and at 
least one week prior to implementation of the proposed rule change, it 
will issue an Informational Circular to Options Participants informing 
them of the proposal's implementation date.

III. Discussion and Commission Findings

    After careful review of the proposal, the comment letter, and the 
Exchange Response, the Commission finds that the proposed rule change 
is consistent with the requirements of the Act and the

[[Page 67853]]

rules and regulations thereunder applicable to a national securities 
exchange and, in particular with Section 6(b)(5) \12\ of the Act, which 
requires the rules of an exchange be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and 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 addition, the Commission finds the proposed rule change consistent 
with Section 6(b)(8) \13\ of the Act, which requires that the rules of 
the exchange do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\14\
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78f(b)(8).
    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    The Commission believes that the proposal is designed to provide 
additional opportunities for customers to receive price improvement for 
their PIP Orders. Under the current rule, if an 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 at the PIP Start Price, the PIP 
Order will execute against the BOX Book (assuming it is at the NBBO), 
and the PIP will never commence.\15\ The Exchange's proposal to modify 
the handling of such pre-existing quotes and orders on the BOX Book 
will provide customers with a greater opportunity to receive price 
improvement above the NBBO on BOX for their PIP Order because those 
pre-existing quotes and orders on the BOX Book no longer will execute 
against the PIP Order before the PIP can begin. Thus, the proposal may 
benefit customers who submit PIP Orders priced at the NBBO by allowing 
their orders to be exposed to competition in the PIP. The PIP Order 
will continue to be guaranteed an execution price of at least the NBBO 
and, as a result of the Exchange's proposal, will be given an 
opportunity for execution at a price better than the NBBO. At the same 
time, all quotes and orders on the BOX Book prior to the PIP Broadcast 
at the PIP Start Price (excluding any proprietary quote or order from 
the Initiating Participant) will be filled in time priority before any 
other order at the same price at the conclusion of the PIP, assuming 
they have not already been executed.
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    \15\ If the quotes and orders on the BOX Book at the PIP Start 
Price are smaller in size than the PIP Order, then the portion of 
the PIP Order that does not execute against such pre-existing quotes 
and orders on the BOX Book will be submitted to the PIP auction.
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    The Commission received one comment letter from a BOX Options 
Participant opposing the proposed rule change.\16\ According to the 
commenter, the current requirement that the top of the BOX Book be 
``swept'' prior to the PIP's commencement incentivizes market 
participants to quote aggressively on BOX and allows retail orders to 
interact with quotes on the Exchange. In addition, the commenter noted 
that market participants could initiate a PIP without having a quote 
either at the NBBO on any exchange or at the BBO on BOX.\17\ Therefore, 
according to the commenter, the proposal diminishes the incentive for 
robust quoting on BOX or the resting of public customer limit orders on 
the BOX Book.\18\ The commenter suggested that the proposal be amended 
to require that BOX must sweep the top of the BOX Book if the PIP 
starts at the BOX BBO and that the Initiating Participant must be 
quoting at the BOX BBO.\19\
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    \16\ See Wolverine Letter, supra note 5.
    \17\ With respect to the comment that market participants could 
initiate a PIP without having a quote either at the NBBO on any 
exchange or at the BBO on BOX, the Commission notes that this 
feature is currently part of the PIP. The Exchange has not proposed 
to revise this aspect of the PIP, and thus this issue is not before 
the Commission.
    \18\ See Wolverine Letter, supra note 5, at 1-2.
    \19\ See Wolverine Letter, supra note 5, at 2.
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    The Exchange responded that, in its view, a customer's entire PIP 
Order should have the opportunity for competing market participants to 
provide price improvement to that customer order.\20\ The Exchange 
stated that that if ``competing participants step up to provide a 
better price for the customer order, it is appropriate, and consistent 
with the federal securities laws, for that customer to receive an 
execution at the best price available (price improvement through the 
PIP auction) rather than the market maker quote on the book that is no 
longer the best bid or offer.'' \21\
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    \20\ See Exchange Response, supra note 6, at 1.
    \21\ See Exchange Response, supra note 6, at 2.
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    The Commission recognizes the concern regarding the impact of the 
proposed rule change on the overall incentives for market participants 
to rest liquidity on the BOX Book. However, as discussed above, the 
Commission also recognizes the potential benefit from the proposed rule 
change with respect to customer PIP Orders priced at the NBBO by 
providing customers with a greater opportunity to receive price 
improvement on BOX for their PIP Orders by allowing those orders to be 
exposed to competition in the PIP, before interacting with pre-existing 
quotes and orders on the BOX Book at the PIP Start Price. In the 
Commission's view, the Exchange's proposal is reasonably designed to 
balance the potential for customers to receive price improvement in the 
PIP, rather than to have their orders immediately executed against a 
pre-existing quote on the BOX Book at the NBBO, with the potential to 
impact Market Makers' or other market participants' incentives to quote 
aggressively because they no longer will have the assurance that their 
quotes at the NBBO will execute against the PIP Order before the PIP 
begins. Quotes and orders that are on the BOX Book prior to the PIP 
Broadcast will continue to be able to interact with non-PIP order flow 
during the auction period. In addition, under the proposal, such quotes 
and orders will have priority to interact with any PIP order flow at 
the end of the auction period, unless the entire PIP order is price 
improved. Moreover, Market Makers or other market participants that 
wish to interact with the PIP Order can do so by submitting their own 
Improvement Orders into the PIP auction. For these reasons, the 
Commission believes that the proposal is consistent with the Act.
    The commenter also remarked that the proposal is defective because 
it would allow a PIP auction to begin at the NBBO rather than requiring 
at least a penny of price improvement over the BOX BBO.\22\ The 
commenter suggested that the proposal be amended so that the PIP start 
price would be at least a penny better than the BOX BBO.\23\ The 
Commission notes, however, that instant proposal relates solely to the 
priority and allocation of quotes and orders that are on the BOX Book 
prior to a PIP's commencement. The Exchange has not proposed to revise 
the start price of the PIP and thus this issue is not before the 
Commission.\24\ Further, as discussed above, the Commission believes 
that the proposed rule change, as submitted, is consistent with the 
Act.
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    \22\ See Wolverine Letter, supra note 5, at 2.
    \23\ Id.
    \24\ Under Rule 7150(f), the PIP start price must be equal to or 
better than the NBBO at the time of commencement of the PIP. 
Accordingly, if the BOX BBO does not equal the NBBO, then the PIP 
must start at a price that is better than the BOX BBO. See 
Securities Exchange Act Release No. 59654 (March 30, 2009), 74 FR 
15551 (April 6, 2009).
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    In addition, the commenter stated its belief that the proposal has 
the potential to harm retail investors.\25\ According to the commenter, 
the proposal serves ``to remove real orders from interaction with

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lit markets at exchanges'' and reduces the NBBO to ``little more than a 
reference price that is not the best available for retail investors.'' 
\26\ The commenter further noted that, to the extent price competition 
decreases on an exchange, the NBBO increasingly loses value as a 
reference price.\27\ The commenter stated its view that the proposal is 
harmful to market efficiency in that it ``turns the exchange into an 
internalization facilitator rather than a bona fide market with 
multiple participants competing to offer the best prices to 
customers.'' \28\
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    \25\ See Wolverine Letter, supra note 5, at 2.
    \26\ Id.
    \27\ Id.
    \28\ See Wolverine Letter, supra note 5, at 2.
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    The Exchange responded that the proposal promotes transparent 
competition to ensure that customer orders receive the best price 
possible.\29\ The Exchange noted that the PIP Broadcast is sent to any 
Options Participant that wishes to receive it. According to the 
Exchange, the PIP permits Market Makers to submit competing orders into 
the PIP auction for their own account, and all non-market maker Options 
Participants also may submit competing orders into the PIP auction for 
their own account or for their customer accounts. The Exchange also 
responded that Options Participants are actively competing for customer 
orders in the PIP.\30\ Moreover, the Exchange noted that its Market 
Makers are the Options Participants most likely to compete for 
execution against customer orders in the PIP, even though their quotes 
that are on the BOX Book at the NBBO currently execute prior to a PIP's 
start.\31\ Any Options Participant (except for the Initiating 
Participant), including Options Participants that have placed quotes 
and orders on the BOX Book, may choose to submit Improvement Orders 
into the PIP and compete for the PIP Order.\32\
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    \29\ See Exchange Response, supra note 6, at 2.
    \30\ According to the Exchange, for the eight-plus years that 
the PIP has been in effect, approximately 70% of PIP auctions have 
included competition for execution (i.e., at least one other Options 
Participant has competed with the Initiating Participant for 
execution of a customer order). The Exchange stated that almost 50% 
of all PIP auctions included three or more Participants competing 
for the PIP execution. Id.
    \31\ Id.
    \32\ Id.
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    The Commission believes that these features of the PIP are designed 
to provide the opportunity for a competitive auction, which benefits 
customers by giving them the chance for price improvement better than 
the NBBO and thus the Exchange's proposal should not result in a 
harmful impact on market efficiency. As discussed above, the proposal 
is intended to provide increased opportunities for price improvement of 
customer PIP Orders priced at the NBBO by permitting a PIP to go 
forward without those quotes and orders on the BOX Book at the PIP 
start price being executed against the PIP Order before the PIP auction 
commences. Quotes and orders on the BOX Book prior to a PIP Broadcast 
will retain their priority at the same price at the conclusion of the 
PIP (assuming they have not already been executed on the BOX Book). 
However, as noted above, the Exchange has committed to provide the 
Commission with monthly data and corresponding analysis related to the 
PIP, including statistics with respect to the execution of quotes and 
orders on the BOX Book prior to the start of the PIP.\33\ This data 
will assist the Commission and the Exchange in monitoring the impact of 
the proposed rule change.
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    \33\ See supra note 11.
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IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \34\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts''), unless an exception applies. The 
Exchange represents that the proposed rule change is consistent with 
Section 11(a) of the Act. Specifically, the Exchange believes that the 
PIP is generally consistent with Section 11(a)(1)(G) of the Act and 
Rule 11a1-1(T) thereunder because Options Participants that are not 
Market Makers must 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.\35\ In addition, the Exchange 
believes that the proposed change to execute, against the PIP Order and 
at the end of a PIP auction, those quotes and orders on the BOX Book 
prior to the PIP Broadcast (if at the PIP Start Price) satisfies the 
conditions of Rule 11a2-2(T) under the Act. For the reasons set forth 
below, the Commission believes that the proposed rule change is 
consistent with the requirements of Section 11(a) of the Act and the 
rules thereunder.
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    \34\ 15 U.S.C. 78k(a)(1).
    \35\ See Notice, supra note 4 at n.12.
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A. Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) Thereunder

    Section 11(a)(1)(G) of the Act provides an exception from the 
general prohibition set forth in Section 11(a)(1) for any transaction 
for a member's own account, provided that: (i) such member 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; and (ii) the transaction is effected in compliance with the 
rules of the Commission, which, at a minimum, assure that the 
transaction is not inconsistent with the maintenance of fair and 
orderly markets and yields priority, parity, and precedence in 
execution to orders for the account of persons who are not members or 
associated with members of the exchange.\36\ In addition, Rule 11a1-
1(T) under the Act specifies that a transaction effected on a national 
securities exchange for the account of a member which meets the 
requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in 
accordance with the requirements of Section 11(a)(1)(G)(ii), to be not 
inconsistent with the maintenance of fair and orderly markets and to 
yield priority, parity, and precedence in execution to orders for the 
account of non-members or persons associated with non-members of the 
exchange, if such transaction is effected in compliance with certain 
requirements.\37\
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    \36\ See 15 U.S.C. 78k(a)(1)(G).
    \37\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the 
following requirements must be met: (1) A member must disclose that 
a bid or offer for its account is for its account to any member with 
whom such bid or offer is placed or to whom it is communicated, and 
any member through whom that bid or offer is communicated must 
disclose to others participating in effecting the order that it is 
for the account of a member; (2) immediately before executing the 
order, a member (other than the specialist in such security) 
presenting any order for the account of a member on the exchange 
must clearly announce or otherwise indicate to the specialist and to 
other members then present for the trading in such security on the 
exchange that he is presenting an order for the account of a member; 
and (3) notwithstanding rules of priority, parity, and precedence 
otherwise applicable, any member presenting for execution a bid or 
offer for its own account or for the account of another member must 
grant priority to any bid or offer at the same price for the account 
of a person who is not, or is not associated with, a member, 
irrespective of the size of any such bid or offer or the time when 
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
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    With respect to the PIP, the rules of the Exchange currently 
prohibit any orders for the accounts of non-Marker Maker Options 
Participants from being executed prior to the execution of Public 
Customer Orders, whether an Improvement Order, including a Customer PIP 
Order, or Unrelated Order, and non-BOX Participant broker-

[[Page 67855]]

dealer orders at the same price.\38\ The current proposed rule change 
revises the treatment of quotes and orders on the BOX Book prior to the 
PIP Broadcast, which orders will now be executed against the PIP Order 
at the end of the PIP (if at the same price). However, the execution of 
these quotes and orders against the PIP Order qualifies for a separate 
exception to the Section 11(a) restrictions.\39\ Thus, because current 
Exchange rules require Options Participants that are not Market Makers 
\40\ to yield priority in the PIP to all non-member orders, the 
Commission believes that the proposal with respect to transactions 
effected through the PIP, other than for quotes and orders on the BOX 
Book prior to the PIP Broadcast, is consistent with the requirements in 
Section 11(a) of the Act and Rule 11a1-1(T) thereunder.\41\ The 
Commission reminds exchanges and their members, however, that, in 
addition to yielding priority to non-member orders at the same price, 
members 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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    \38\ See BOX Rules 7150(f)(4) and 7150(g)(3)(i).
    \39\ See infra Section IV. B.
    \40\ Section 11(a)(1)(A) of the Act provides an additional 
exception to the general prohibition in Section 11(a) on an exchange 
member effecting transactions for its own account if such member is 
a dealer acting in the capacity of a market maker. See 15 U.S.C. 
78k(a)(1)(A).
    \41\ The Commission has previously found that transactions 
effected through the 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-Options Participant broker-dealer 
orders) at the same price. See BOX Exchange Application Order, supra 
note 11. The Commission believes that transactions effected through 
the PIP, as amended by the proposed rule change, remain consistent 
with the requirements Section 11(a) of the Act and Rule 11a1-1(T) 
thereunder.
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B. ``Effect versus Execute'' and Rule 11a2-2(T) under the Act

    Rule 11a2-2(T) under the Act,\42\ known as the ``effect versus 
execute'' rule, provides exchange members with another exception from 
the Section 11(a)(1) prohibition. 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 Rule 11a2-2(T)'s 
conditions, a member: (1) May not be affiliated with the executing 
member; (2) must transmit the order from off the exchange floor; (3) 
may not participate in the execution of the transaction once it has 
been transmitted to the member performing the execution; \43\ and (4) 
with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule. The Exchange believes that the execution of 
quotes and orders that are on the BOX Book prior to a PIP Broadcast 
against a PIP Order will satisfy the requirements of Rule 11a2-
2(T).\44\ For the reasons set forth below, the Commission believes 
that, under the proposed rule change, such executions will satisfy the 
conditions of Rule 11a2-2(T).\45\
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    \42\ 17 CFR 240.11a2-2(T).
    \43\ The member may, however, participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the 
NYSE's Designated Order Turnaround System (``1978 Release'')).
    \44\ For a more detailed discussion, see the description of the 
proposed rule change in the Notice, supra note 4 and supra Section 
II.
    \45\ See BOX Exchange Application Order, supra note 11.
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    Rule 11a2-2(T)'s first condition is that the order be executed by 
an exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that the requirement is satisfied when 
automated exchange facilities, such as the Trading Host, are used, as 
long as the design of these systems ensures that members do not possess 
any special or unique trading advantages over non-members in handling 
their orders after transmitting them to the Exchange.\46\ The Exchange 
represents that the design of the BOX Book, including the mechanism 
that executes quotes and orders resting on the Book prior to a PIP 
against the PIP order at the conclusion of a PIP auction, 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 member 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.
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    \46\ In considering the operation of automated execution systems 
operated by an exchange, the Commission has noted that, while there 
is no independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into each system. 
Because 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 exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See Securities 
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 
(January 31, 1979) (regarding the American Stock Exchange (``Amex'') 
Post Execution Reporting System, the Amex Switching System, the 
Intermarket Trading System, the Multiple Dealer Trading Facility of 
the Cincinnati Stock Exchange, the PCX Communications and Execution 
System, and the Philadelphia Stock Exchange (``Phlx'') Automated 
Communications and Execution System (``1979 Release'')).
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    According to the Exchange, the design of BOX ensures that no 
Options Participant would enjoy any special control over the timing of 
execution or special order handling advantages after order transmission 
to the BOX Book. All orders on the BOX Book are centrally processed and 
executed automatically by BOX. Orders sent to BOX would be transmitted 
from remote terminals directly to the system by electronic means. Once 
an order is submitted to the BOX Book, the order would be executed 
against another order based on the established matching algorithms for 
the BOX Book. In addition, as proposed, those quotes and orders on the 
BOX Book prior to a PIP may trade with the PIP Order, or would execute 
when orders or quotations on BOX match one another based on price/time 
priority. The execution would 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 what responses are received in response to the 
PIP, 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 would an Options Participant be able to acquire control or 
influence over the result or timing of order execution, including 
whether it is executed against an order in the PIP. Accordingly, 
Options Participants could 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. Based on the Exchange's representations, 
the Commission believes that the proposal satisfies this requirement of 
Rule 11a2-2(T).
    Second, Rule 11a2-2(T) requires orders for covered accounts be 
transmitted from off the exchange floor. In the context of other 
automated trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\47\ The Exchange

[[Page 67856]]

states that orders sent to the BOX Book, regardless of where it 
executes within the BOX system, including the Book or the PIP, would be 
transmitted from remote terminals directly to BOX by electronic means. 
OFPs and Market Makers would only submit orders and quotes to BOX from 
electronic systems from remote locations, separate from BOX. The 
Exchange further represents that there are no other Options 
Participants that would be able to submit orders to BOX other than OFPs 
or Market Makers. Accordingly, the Commission believes that Options 
Participants' orders electronically received by BOX satisfy the off-
floor transmission requirement for the purposes of the Rule.
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    \47\ See, e.g., Securities Exchange Act Release Nos. 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); 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). See also 1978 
Release and 1979 Release.
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    Third, Rule 11a2-2(T) requires that the member not participate in 
the execution of its order once it has been transmitted to the member 
performing the execution. The Exchange represents that, at no time 
following the submission of an order to the BOX Book, would an Options 
Participant be able to acquire control or influence over the result or 
timing of order execution, even if its order on the BOX Book may 
execute with a PIP Order.\48\ According to the Exchange, upon 
submission to BOX, an order would be executed against another order on 
the BOX Book or against the PIP Order based on an established matching 
algorithm. The execution would 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, 
whether a PIP is initiated and what responses are received in response 
to the PIP, and where the order is ranked based on the priority ranking 
algorithm. As such, the Commission believes that the non-participation 
requirement is met when orders are executed automatically on the BOX 
Book, including if they execute against a PIP order.
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    \48\ The member may only cancel or modify the order, or modify 
the instructions for executing the order, but only from off the 
Exchange floor. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances, so long as such 
modifications or cancellations are also transmitted from off the 
floor. See 1978 Release (stating that the ``non-participation 
requirement does not prevent initiating members from canceling of 
modifying orders (or the instructions pursuant to which the 
initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\49\ The Exchange has represented that, as a prerequisite for BOX 
usage, if an Options Participant is to rely on Rule 11a2-2(T) for a 
covered account transaction, the Options Participant must comply with 
the limitations on compensation set forth in Rule 11a2-2(T).
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    \49\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated person thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release 
(stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\50\ that the proposed rule change (SR-BOX-2012-003) be, and hereby 
is, approved.
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    \50\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27600 Filed 11-13-12; 8:45 am]
BILLING CODE 8011-01-P


