
[Federal Register Volume 78, Number 39 (Wednesday, February 27, 2013)]
[Notices]
[Pages 13387-13389]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04545]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68965; File No. SR-BOX-2013-08]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Reduce the Directed Order Exposure 
Period on BOX From Three Seconds to One Second

February 21, 2013.
    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 February 15, 2013, BOX Options Exchange LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule from 
interested persons.
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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 reduce the exposure period for Directed 
Orders from three seconds to one second. The text of the proposed rule 
change is available from the principal office of the Exchange, at the 
Commission's Public Reference Room and also on the Exchange's Internet 
Web site at http://boxexchange.com.

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

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

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

1. Purpose
    The Exchange proposes to amend Rules [sic] 8040(d)(6) (Obligations 
of Market Makers) to reduce the exposure period for Directed Orders 
from three seconds to one second.\3\ Based on trading systems 
technology today, an exposure period of multiple seconds is simply 
unnecessary.\4\ Additionally, such lengthy time periods expose market 
participants to additional, and because of current systems technology, 
unnecessary, market risk.
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    \3\ A Directed Order is any Customer Order to buy or sell which 
has been directed to a particular Market Maker by an Order Flow 
Provider (``OFP''). See Rule 100(a)(19). Note that the Exchange is 
not proposing any change to the 3 second period in Rule 8040(d)(4) 
that an Executing Participant has to take action after receipt of a 
Directed Order. The exposure period that the Exchange proposes 
amending in this proposal occurs after a Directed Order is sent to 
the BOX Book.
    \4\ See Securities Exchange Act Release Nos. 59638 (March 27, 
2009), 74 FR 15020 (April 2, 2009) (SR-BX-2009-015) (Order Granting 
Approval of Reduction of Certain Order Handling and Exposure Periods 
on BOX From Three Seconds to One Second), and 66306 (February 2, 
2012), 77 FR 6608 (February 8, 2012) (SR-BX-2011-084) (Order 
Granting Approval to Reduce the PIP From One Second to One Hundred 
Milliseconds). Note that in connection with both proposals, BOX 
distributed a survey to Participants. The results indicated that the 
time it takes a message to travel between BOX and the Participants 
typically is not more than 50 milliseconds each way, and that it 
typically takes not more than 10 milliseconds for Participant 
systems to process the information and generate a response. The 
speed at which technology systems can process information has only 
increased since then. As such, the Exchange believes that the 
information gathered from Participants supports the assertion that 
reducing the exposure period from 3 seconds to 1 second will 
continue to provide Participants with sufficient time to ensure 
effective interaction with orders.
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    Currently, upon receipt of a Directed Order, an Executing 
Participant (``EP'') must either submit the Directed Order to the Price 
Improvement Period (``PIP'') \5\ or send the Directed Order to the BOX 
Book. When the EP sends the Directed Order to the BOX Book and the EP's 
quotation on the opposite side of the market from the Directed Order is 
equal to the National Best Bid or Offer (``NBBO'') and the Directed 
Order is also executable against the NBBO, the BOX Trading Host 
immediately takes down the EP's quote and guarantees the EP's execution 
of the Directed Order for at least the price and size of the EP's quote 
(``Guaranteed Directed Order'' or ``GDO''). Once the GDO has been 
generated by the Trading Host, the EP is systemically prohibited from 
posting a quotation for three seconds. The Exchange proposes to reduce 
the time period of the GDO from three seconds to one second. This 
proposed change will reduce the EP's market risk related to the GDO and 
accommodate faster processing as current technology systems allow.
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    \5\ See Rule 8040(d).
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    The EP's pending quote will not be released until either (i) the 
Directed Order is modified by the submitting OFP; \6\ (ii) the EP 
submits the Directed Order to the PIP; or (iii) the Directed Order is 
submitted to the BOX Book, and one of the following occurs: (a) the 
Directed Order trades in full; (b) the Directed Order exposition ends; 
or (c) the Directed Order is modified or cancelled by the submitting 
OFP during such exposition.
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    \6\ See 8040(d)(5). If the Directed Order is modified once the 
Trading Host has automatically established the GDO, then the 
modified Directed Order is no longer considered a Directed Order and 
is immediately released to the BOX Book and treated as a regular 
order. Upon modification or cancellation of the Directed Order, the 
Trading Host immediately reestablish the EP's quote, including any 
of the EP's pending quote modifications, with a new time priority; 
or in the case of a pending quote cancellation, the EP's quote is 
cancelled. Also, it is considered conduct inconsistent with just and 
equitable principles of trade for any Options Participant or person 
to communicate with an EP about the terms or conditions of a 
Directed Order prior to its outcome in the BOX Trading Host (e.g. 
execution, cancellation).
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    When the EP does not submit the Directed Order to the PIP, but 
rather, releases it to the BOX Book, the Directed Order immediately 
executes against the BOX Book if the BOX Best Bid or Offer is equal to 
or better than the NBBO and GDO. Any remaining quantity not executed is 
exposed to BOX Participants at the better of the NBBO or GDO price for 
three (3) seconds, during which time any Options Participant, except 
for the EP as outlined above, may submit an order to the BOX Book in 
response. Any orders submitted to the BOX Book during the three second 
exposure period execute immediately against any remaining quantity of 
the Directed Order, in time priority. The Exchange proposes to reduce 
this exposure and response period to one second as the three second 
processing time is unnecessary.\7\
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    \7\ Supra, note 4.
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    If a Directed Order is not executable against the current NBBO, 
then the Trading Host exposes the order at the better GDO price for 
three (3) seconds. During the exposure period when the Directed Order 
is executable against the current NBBO, the EP must not decrement the 
size, worsen the price of his GDO or submit a contra order. Because the 
Trading Host automatically creates the GDO and shelves the EP's quote, 
it does not process such changes

[[Page 13388]]

to the GDO or pending quote, except a decrementation of the GDO size 
down to the size of the remaining Directed Order after execution with 
the BOX Book.\8\ The Exchange proposes to reduce this exposure period 
to one second. As discussed, BOX believes the longer exposure period is 
unnecessary for current technology systems, and reducing the period 
will reduce market risk for all market participants.
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    \8\ During the exposure period, the EP also may increase the 
size or better the price of his GDO. The EP may also modify his 
pending quote to be reestablished, but the Trading Host will not 
apply such modifications until the quote is reestablished.
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    When approving the existing one second exposure periods on the BOX 
Book and in the PIP, the Commission concluded that, in the electronic 
environment of BOX, reducing these time periods to one second was fully 
consistent with the electronic nature of the BOX market.\9\ BOX is not 
proposing any change to the requirement in Rule 7140 and related 
Interpretive Material that requires an OFP to expose its customer's 
order on the BOX Book for at least one second before executing its own 
principal order against such customer order. BOX recognizes that one 
second, as three seconds is now, is not long enough to allow human 
interaction with orders. Rather, BOX believes that Participants operate 
sufficiently automated electronic systems so that they can react and 
respond to orders in a meaningful way within fractions of a second. BOX 
fully anticipates that this will continue within the one second 
exposure period proposed for Directed Orders.
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    \9\ See Securities Exchange Act Release No. 59638 (March 27, 
2009), 74 FR 15020 (April 2, 2009) (SR-BX-2009-015) Order Granting 
Approval of Reduction of Certain Order Handling and Exposure Periods 
on BOX From Three Seconds to One Second.
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    BOX believes that further reducing its Directed Order exposure 
period from three seconds to one second will benefit all market 
participants. BOX believes it is in all participants' best interests to 
minimize the time of any exposure period while continuing to allow 
Participants adequate time to electronically respond, as both the order 
being exposed and Participants responding are subject to market risk 
during the exposure period of an order. Indeed, most participants wait 
until the end of the last second of the current three second period 
before responding to exposed orders so as to minimize market risk. BOX 
believes that even reducing the Directed Order exposure period to one 
second will continue to provide market participants with sufficient 
time to respond and compete for Directed Orders sent to the BOX Book. 
Additionally, a one second exposure period will provide investors and 
other market participants with more timely executions, thereby reducing 
their market risk. BOX believes that reducing the Directed Order 
exposure period from three seconds to one second will provide all 
market participants sufficient time for effective interaction with 
Directed Orders. BOX Participants are able to respond to orders in 
fractions of a second and BOX does not believe it is necessary or 
beneficial to orders being exposed to continue to subject them to 
market risk for three seconds.
    After the notice of effectiveness of the proposed rule change, and 
at least one week prior to the operative date, the Exchange will issue 
a regulatory circular to inform BOX Participants of the operative date 
for the reduction of the Directed Order exposure period from three 
seconds to one second. BOX believes this will give Participants an 
opportunity to change any system settings to coincide with the 
implementation date so as to comply with the requirement in Rule 
8040(d)(6)(i) that an EP not submit to BOX a contra order to the 
Directed Order for his proprietary account during the 1 second 
following his submission of the Directed Order to BOX.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\10\ in general, and Section 
6(b)(5) of the Act,\11\ in particular, in that it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and 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 proposed rule change will facilitate and provide 
investors with prompt and timely execution of their options orders, 
while continuing to provide market participants with an opportunity to 
compete for exposed Directed Orders on BOX.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Additionally, the proposed change will reduce market risk for BOX 
Participants submitting and responding to Directed Orders. As such, BOX 
believes the proposed rule change would help perfect the mechanism for 
a free and open national market system, and generally help protect 
investors' and the public interest. The Exchange believes the proposed 
rule change is not unfairly discriminatory because the exposure time 
period for responding to Directed Orders would be the same for all 
Participants. All Participants on BOX have today, and will continue to 
have, an equal opportunity to respond to Directed Orders exposed on 
BOX.\12\ As such, the Exchange believes that a reduction in the 
Directed Order exposure period on BOX would not be unfairly 
discriminatory and would benefit investors.
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    \12\ Directed Orders exposed as set forth in Exchange Rule 
8040(d)(6) are displayed through the BOX High Speed Vendor Feed 
(``HSVF''). The HSVF is a proprietary feed of BOX market information 
made available to all market participants. See Rule 7130(a)(2).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes the proposed change will reduce market risk 
for BOX Participants submitting and responding to Directed Orders, and 
that the proposed rule change is not unfairly discriminatory because 
the exposure time period for responding to Directed Orders would be the 
same for all Participants. All Participants on BOX have today, and will 
continue to have, an equal opportunity to respond to Directed Orders 
exposed on BOX. As such, the Exchange believes that a reduction in the 
Directed Order exposure period on BOX would not be unfairly 
discriminatory and would benefit investors. For these reasons, 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.

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

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

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the

[[Page 13389]]

Act \13\ and Rule 19b-4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, 
at least five business days prior to the date of filing of the 
proposed rule change, or such shorter time as designated by the 
Commission. The Exchange has fulfilled this requirement.
     The Commission notes that the Exchange asserted in its filing 
that
     The proposed change brings the Directed Order exposure period 
closer in line with the exposure periods already in existence on 
BOX. The time period for Participants to respond in the BOX 
Solicitation Auction and Facilitation Auction is one second. 
[footnote omitted] Additionally, the PIP duration is 100 
milliseconds. [footnote omitted] The BOX trading system that 
processes Directed Orders is the same BOX system that processes 
Solicitation and Facilitation Auctions and the PIP. The proposed 
rule change makes no substantive change to the operation of BOX, or 
the execution of Directed Orders on BOX, other than reducing the 
Directed Order exposure period to be more in line with the time 
periods already in existence in other mechanisms on BOX.
    See SR-BOX-2013-08 (Form 19b-4).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2013-08 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 Number SR-BOX-2013-08. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2013-08 and should be 
submitted on or before March 20, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04545 Filed 2-26-13; 8:45 am]
BILLING CODE 8011-01-P


