
[Federal Register Volume 78, Number 90 (Thursday, May 9, 2013)]
[Notices]
[Pages 27271-27274]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11002]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69511; File No. SR-BOX-2013-06


Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Granting Approval of Proposed Rule Change To List and Trade Option 
Contracts Overlying 1,000 Shares of the SPDR S&P 500 Exchange-Traded 
Fund

May 3, 2013.

I. Introduction

    On January 18, 2013, BOX Options Exchange LLC (``Exchange'' or 
``BOX) filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade option contracts overlying 1,000 
shares of the SPDR S&P 500 Exchange-Traded Fund (``Jumbo SPY 
Options''). The proposed rule change was published for comment in the 
Federal Register on February 4, 2013.\3\ The Commission initially 
received two comment letters on the proposed rule change.\4\ On March 
20, 2013, the Commission extended the time period for Commission action 
to May 5, 2013.\5\ The Commission subsequently received one additional 
comment letter on the proposed rule change.\6\ On April 19, 2013, BOX

[[Page 27272]]

submitted a response to the comment letters.\7\ This order grants 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 68759 (January 29, 
2013), 78 FR 7835 (``Notice'').
    \4\ See letters to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, EVP & Corporate Secretary, General Counsel, 
NYSE Markets, NYSE Euronext (``NYSE''), dated February 25, 2013 
(``NYSE Letter'') and Edward T. Tilly, President and Chief Operating 
Officer, Chicago Board Options Exchange, Incorporated (``CBOE''), 
dated February 25, 2013 (``CBOE Letter'').
    \5\ See Securities Exchange Act Release No. 69193, 78 FR 18403 
(March 26, 2013).
    \6\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Joan C. Conley, Senior Vice President & Corporate Secretary, 
NASDAQ OMX Group, Inc. (``Nasdaq''), dated March 21, 2013 (``Nasdaq 
Letter'').
    \7\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Lisa J. Fall, President, BOX, dated April 19, 2013 (``BOX 
Response Letter'').
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Jumbo SPY Options, which 
are option contracts that overlie 1,000 SPDR S&P 500 Exchange-Traded 
Fund (``SPY'') shares. Under the Exchange's proposal, Jumbo SPY Options 
would be assigned different trading symbols (SPYJ) than the 
corresponding standard options on SPY.\8\ In addition, the Exchange 
proposes to list Jumbo SPY Options for all expirations applicable to 
standard options on SPY,\9\ and proposes that strike prices for Jumbo 
SPY Options be set at the same level as standard options on SPY.\10\ 
Bids and offers for Jumbo SPY Options would be expressed in terms of 
dollars per 1/1000th part of the total value of the options 
contract.\11\ The table below, which was included by the Exchange in 
its filing, demonstrates the proposed differences between a Jumbo SPY 
Option and a standard SPY option with a strike price of $45 per share 
and a bid or offer of $3.20 per share:
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    \8\ See Notice, supra note 3, at 7836.
    \9\ See BOX Rule 5050(e)(1).
    \10\ See BOX Rule 5050(e)(2).
    \11\ See BOX Rule 5050(e)(3).

------------------------------------------------------------------------
                                       Standard              Jumbo
------------------------------------------------------------------------
Shares Deliverable Upon Exercise  100 shares........  1,000 shares.
Strike Price....................  45................  45.
Bid or Offer....................  3.20..............  3.20.
Premium Multiplier..............  $100..............  $1,000.
Total Value of Deliverable......  $4,500............  $45,000.
Total Value of Contract.........  $320..............  $3,200.
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    The Exchange states that it has analyzed its capacity and 
represents that it and the Options Price Reporting Authority have the 
necessary systems capacity to handle the potential additional traffic 
associated with the listing and trading of Jumbo SPY Options.\12\
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    \12\ See Notice, supra note 3, at 7836. The Exchange also states 
that it has discussed the proposed listing and trading of Jumbo SPY 
Options with the Options Clearing Corporation (``OCC''), and the OCC 
has represented that it is able to accommodate Jumbo SPY Options. 
See id.
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III. Discussion and Commission Findings

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\14\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest. Commenters raised and the Exchange addressed in its response 
several issues related to the proposal, which are discussed below.
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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    All three commenters express concern that the proposal did not 
specify the minimum price variation that would be applicable to Jumbo 
SPY Options and that market participants could not understand how this 
new product would trade without this information.\15\ In particular, 
NYSE expresses concern that if BOX imposes a higher minimum price 
variation for Jumbo SPY Options as compared to existing SPY options, 
the marketplace would have no ability to provide tight and competitive 
markets in Jumbo SPY Options, using standard SPY options as a 
reference.\16\ Similarly, Nasdaq also questions the merit of BOX's 
conclusion that because of the liquidity in SPY and options on SPY, 
existing market forces should keep the prices between standard SPY 
options and Jumbo SPY Options consistent.\17\
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    \15\ See NYSE Letter, supra note 4, at 1-2; CBOE Letter, supra 
note 4, at 3; and Nasdaq Letter, supra note 6, at 2.
    \16\ See NYSE Letter, supra note 4, at 2.
    \17\ See Nasdaq Letter, supra note 6, at 2.
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    NYSE and Nasdaq also state that the proposal fails to discuss Jumbo 
SPY Options in the context of BOX's price improvement process 
(``PIP'').\18\ NYSE further states that if Jumbo SPY Options would be 
eligible for the PIP, a different minimum price variation would be of 
even greater concern.\19\ In addition, NYSE points out that the 
proposal does not discuss the treatment of Jumbo SPY Options for 
purposes of complex orders, market maker appointments, and market maker 
quoting obligations.\20\ Lastly, CBOE states that the proposal fails to 
state whether BOX's existing fee schedule will apply to Jumbo SPY 
Options.\21\
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    \18\ See NYSE Letter, supra note 4, at 2 and Nasdaq Letter, 
supra note 6, at 2.
    \19\ See NYSE Letter, supra note 4, at 2-3.
    \20\ See id., at 5.
    \21\ See CBOE Letter, supra note 4, at 4.
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    In its response letter, BOX states that it will file a rule change 
before the launch of Jumbo SPY Options to provide that the minimum 
price variation for Jumbo SPY Options will be the same as the minimum 
price variation for standard options on SPY (i.e., penny 
increments).\22\ BOX also states that it will file a rule change before 
the launch of Jumbo SPY Options to provide additional details with 
respect to complex orders, PIP, minimum contract thresholds for 
solicitation and facilitation auctions, market maker appointments and 
obligations, and fees.\23\
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    \22\ See BOX Response Letter, supra note 7, at 1.
    \23\ See id., at 3.
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    Specifically, BOX notes that Jumbo SPY Options will interact with 
complex orders in the same manner as mini options.\24\ Further, Jumbo 
SPY Options will be eligible for PIP auctions.\25\ With respect to 
minimum contract thresholds in the solicitation and facilitation 
auctions, BOX will adjust the thresholds for Jumbo SPY Options to 1/
10th of its current requirement for standard options.\26\ With respect 
to market maker appointment and quoting obligations, Jumbo SPY Options 
will be treated in the same manner as mini options.\27\ Finally, BOX 
states that its current transaction fees will not apply to Jumbo SPY 
Options, and BOX will not commence trading of Jumbo SPY

[[Page 27273]]

Options until specific fees have been filed with the Commission.\28\
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    \24\ See id.
    \25\ See id.
    \26\ See id.
    \27\ See id.
    \28\ See id.
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    NYSE argues that the proposal provides no explanation for why Jumbo 
SPY Options would make options on large blocks of the SPY ETF more 
available as an investing tool, particularly for institutional 
investors.\29\ NYSE also states that, unlike mini options, Jumbo SPY 
Options do not enable any trade to take place that cannot already take 
place because an institutional investor looking to purchase 1,000 
contracts of a given SPY option is already able to do so in the 
standard-sized SPY options market.\30\ Nasdaq similarly comments that 
Jumbo SPY Options bring no benefits to investors or the market.\31\
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    \29\ See NYSE Letter, supra note 4, at 4.
    \30\ See id.
    \31\ See Nasdaq Letter, supra note 6, at 3.
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    In its response letter, BOX states its belief that Jumbo SPY 
Options would benefit investors by providing additional methods to 
trade highly liquid options on SPY and providing greater ability to 
hedge risk in managing larger portfolios.\32\ BOX also states its 
belief that the market will decide the issue of whether or not Jumbo 
SPY Options add value, and that market participants may elect not to 
trade Jumbo SPY options if they find these options to not add value to 
the marketplace.\33\ In addition, in its response letter, BOX 
represents that its current transaction fees will not apply to Jumbo 
SPY Options, and it will not commence trading of Jumbo SPY Options 
until specific fees have been filed with the Commission.\34\ The 
Commission believes that the listing and trading of Jumbo SPY Options 
could benefit investors by providing them with an additional investment 
alternative. In addition, the Commission believes, as noted by BOX in 
the proposal, that the listing and trading of Jumbo SPY Options could 
benefit investors by providing another means to mitigate risk in 
managing large portfolios, particularly for institutional 
investors.\35\
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    \32\ See BOX Response Letter, supra note 7, at 2.
    \33\ See id.
    \34\ See id., at 3.
    \35\ See Notice, supra note 3, at 7836.
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    All three commenters express concern that the proposal can cause 
investor confusion.\36\ In its response letter, BOX states that it does 
not believe that the listing of a third product on SPY will lead to any 
more confusion than having two options on SPY.\37\ BOX notes that Jumbo 
SPY Options will be designated with a different trading symbol 
(SPYJ).\38\ BOX also states that the marketplace and investors have 
matured and become more sophisticated, and investors will easily be 
able to differentiate between standard, mini, and Jumbo SPY 
options.\39\ The Commission agrees that the use of different trading 
symbols for Jumbo SPY Options should help investors and other market 
participants to distinguish those options from the corresponding 
standard and mini options. The Commission also believes that the 
proposed treatment of strike prices \40\ and bids and offers \41\ for 
Jumbo SPY Options is consistent with the Act, as these amendments 
should make clear how Jumbo SPY Options would be quoted and traded.
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    \36\ See NYSE Letter, supra note 4, at 5-6; CBOE Letter, supra 
note 4, at 2-3; and Nasdaq Letter, supra note 6, at 1.
    \37\ See BOX Response Letter, supra note 7, at 1.
    \38\ See id., at 2.
    \39\ See id., at 1-2.
    \40\ See BOX Rule 5050(e)(2).
    \41\ See BOX Rule 5050(e)(3).
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    NYSE states that Jumbo SPY Options are designed specifically for 
large institutional investors and are generally too large for average 
retail investors and, thus, could create a two-tiered market for SPY 
options.\42\ According to NYSE, today, when an institutional investor 
trades 10 standard SPY options, it helps to foster transparency and 
price discovery, which directly benefits retail investors.\43\ NYSE 
expresses the concern that Jumbo SPY Options will likely result in some 
of the institutional activity migrating away from the standard SPY 
options, to the direct detriment of retail investors.\44\ Similarly, 
CBOE argues that the potential for market fragmentation increases with 
each additional and different contract on a single security, even if 
that security is highly liquid with a well-established trading 
history.\45\ Nasdaq also raises questions regarding the potential for a 
two-tiered market for SPY options and the impact of Jumbo SPY Options 
on the existing market for standard and mini SPY options.\46\ Further, 
Nasdaq raises the question of whether Jumbo SPY Options could 
materially fragment liquidity and harm or weaken the price discovery 
process.\47\
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    \42\ See NYSE Letter, supra note 4, at 3-4.
    \43\ See id., at 4.
    \44\ See id.
    \45\ See CBOE Letter, supra note 4, at 3.
    \46\ See Nasdaq Letter, supra note 6, at 2. See also CBOE 
Letter, supra note 4, at n.2 (commenting that the proposal does not 
reference the potential impact on the marketplace of having three 
different contracts trading concurrently on the same security) and 4 
(stating that the introduction of several contracts on the same 
security with differing deliverable share amounts warrants an 
incremental and measured approach by the Commission and that the 
Commission should consider a studied analysis of the marketplace's 
reception to and any possible confusion that could result from 
having different contracts on the same security that expire on the 
same day and that deliver varying share amounts).
    \47\ See Nasdaq Letter, supra note 6, at 2.
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    In the case of the market for SPY options, BOX notes in its 
response letter that there generally exists a critical mass of willing 
buyers and sellers both for the options and for the underlying 
securities that mitigate the concerns raised by the commenters.\48\ 
Specifically, BOX notes in its filing that standard options on SPY are 
currently the most actively traded options in terms of average daily 
volume.\49\ Further, in its filing, BOX states its understanding that 
the OCC's portfolio margining process will be set to have positions in 
a standard contract and a jumbo contract set against each other, and 
that consistent cross margining will be available between standard and 
jumbo options.\50\ BOX concludes that the availability of Jumbo SPY 
Options would likely result in more efficient pricing through arbitrage 
with standard SPY options.\51\ In its response letter, BOX also states 
that the trading of Jumbo SPY Options has the potential of providing 
greater liquidity by providing increased opportunity for trading and, 
consequently, increasing price transparency by providing additional 
information to market participants.\52\
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    \48\ See BOX Response Letter, supra note 7, at 2.
    \49\ See Notice, supra note 3, at 7836. According to BOX, the 
average daily volume for SPY options was 2,156,482 contracts in 
April 2012. See id., at n.5. The average daily volume for the same 
period for the next four most actively traded options was: Apple 
Inc.--1,074,351; S&P 500 Index--656,250; PowerShares QQQ Trust\SM\, 
Series 1--573,790; and iShares[supreg] Russell 2000[supreg] Index 
Fund--550,316. See id. See also OCC Exchange Volume by Class, 
available at http://theocc.com/webapps/volbyclass-reports 
(indicating that SPY options are currently the most actively traded 
options in terms of volume).
    \50\ See id., at 7836.
    \51\ See id.
    \52\ See BOX Response Letter, supra note 7, at 3.
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    The Commission notes that price protection would not apply across 
standard and Jumbo SPY Options on an intramarket basis, as they are 
separate products. The Commission recognizes that trading different 
options products that overlie the same security could disperse trading 
interest across the products to some extent. In illiquid or nascent 
markets, increased dispersion across products may cause particular 
concern, as the markets for the separate products may lack the critical 
mass of buyers and sellers to allow such a market to become established 
or, once established, to thrive. The Commission believes that the high 
trading volume

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and liquidity in the market for SPY and SPY options should mitigate the 
market fragmentation and price protection concerns that commenters 
raised.\53\ Moreover, the Commission notes that the proposal is limited 
to jumbo options on SPY and in order to expand the trading of jumbo 
options beyond those overlying SPY, BOX would be required to file new 
proposed rule changes with the Commission pursuant to Section 19(b) of 
the Act.\54\ Proposals to expand jumbo options to cover other 
underlying securities that do not exhibit the depth and liquidity of 
the SPY and SPY options markets potentially could give rise to concern. 
Finally, the Commission expects BOX to monitor the trading of Jumbo SPY 
Options to evaluate whether any issues develop.
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    \53\ See OCC Exchange Volume by Class, available at http://theocc.com/webapps/volbyclass-reports (indicating that SPY options 
are currently the most actively traded options in terms of volume).
    \54\ See Notice, supra note 3, at n.5.
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    As a national securities exchange, the Exchange is required, under 
Section 6(b)(1) of the Act,\55\ to enforce compliance by its members 
and persons associated with its members with the provisions of the Act, 
Commission rules and regulations thereunder, and its own rules. In this 
regard, the Commission notes that the Exchange's rules that apply to 
the trading of standard options would apply to Jumbo SPY Options. The 
Commission also notes that the Exchange's existing market maker quoting 
obligations would apply to Jumbo SPY Options.\56\ In addition, the 
Commission notes that intermarket trade-through protection would apply 
to Jumbo SPY Options to the extent that they are traded on more than 
one market.
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    \55\ 15 U.S.C. 78f(b)(1).
    \56\ See BOX Rule 8050.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\57\ that the proposed rule change (SR-BOX-2013-06) be, and hereby 
is, approved.
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    \57\ 15 U.S.C. 78s(b)(2).
    \58\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11002 Filed 5-8-13; 8:45 am]
BILLING CODE 8011-01-P


