
[Federal Register Volume 78, Number 180 (Tuesday, September 17, 2013)]
[Notices]
[Pages 57191-57195]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22509]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70369; File No. SR-BOX-2013-44]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend the Fee Schedule To Make Permanent the Pilot Program of Liquidity 
Fees and Credits for Certain Transactions in the BOX Price Improvement 
Period

September 11, 2013.
    Pursuant to Section 19(b)(1) under the Securities Exchange Act of 
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 30, 2013, BOX Options Exchange LLC (the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Exchange filed the proposed rule change pursuant to Section 
19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to amend the Fee Schedule to 
amend the Fee Schedule [sic] to make permanent the pilot program of 
Liquidity Fees and Credits for certain transactions in the BOX Price 
Improvement Period (``PIP'') on the BOX Market LLC (``BOX'') options 
facility. 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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the

[[Page 57192]]

proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The Exchange 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, Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the BOX Fee 
Schedule to make permanent the pilot program of Liquidity Fees and 
Credits for certain transactions in the BOX PIP or (the ``Program''). 
The Program was approved on a pilot basis in February 2012 and is 
scheduled to expire on August 31, 2013.\5\ The Exchange believes the 
data collected on PIP transactions over the past two years demonstrates 
that the Program does not place an undue burden on competition and 
proposes to make the applicable fees and credits free from any pilot 
restrictions.
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    \5\ See Securities Exchange Act Release Nos. 66278 (January 30, 
2012), 77 FR 5590 (February 3, 2012) Commission Order Granting 
Accelerated Approval of the BOX Credits and Fees for PIP 
Transactions on a pilot basis (SR-BX-2011-046), 66979 (May 14, 
2012), 77 FR 29740 (May 18, 2012) (Notice of Filing and Immediate 
Effectiveness to adopt the Fee Schedule for trading on BOX which 
included the Program) (SR-BOX-2012-002), and 69054 (March 7, 2013), 
78 FR 16025(March 13, 2013) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change To Amend the Fee Schedule for 
Trading on BOX) (SR-BOX-2013-09).
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    Under the Program, transactions in the BOX PIP are assessed either 
a fee for adding liquidity or provided a credit for removing liquidity 
regardless of account type. PIP Orders (i.e., the agency orders 
opposite the Primary Improvement Order \6\) receive the ``removal'' 
credit and Improvement Orders \7\ are charged the ``add'' fee. In 
particular, the Program permits a fee for adding liquidity or a credit 
for removing liquidity of $0.75, regardless of account type, for PIP 
transactions where the minimum price variation is greater than $0.01 
(i.e., all non-Penny Pilot Classes, and Penny Pilot Classes where the 
trade price is equal to or greater than $3.00, excluding QQQ, SPY, and 
IWM).\8\ The liquidity fees and credits are in addition to any 
applicable Exchange Fees as described in Section I of the Fee Schedule.
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    \6\ A Primary Improvement Order is the matching contra order 
submitted to the PIP on the opposite side of an agency order.
    \7\ An Improvement Order is a response to a PIP auction. An 
Unrelated Order that is not immediately marketable will be charged 
as an Improvement Order when it executes against a PIP Order.
    \8\ The Exchange notes that the Program also includes a fee for 
adding liquidity or a credit for removing liquidity of $0.30, 
regardless of account type, for PIP transactions where the minimum 
price variation is $0.01 (Penny Pilot classes where trade price is 
less than $3.00, and all series in QQQ, SPY & IWM).
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    During the pilot period the Exchange has submitted to the 
Commission, and made publicly available on the Exchange Web site, 
monthly reports containing statistics on percent and amount of price 
improvement, the number of responders to a PIP auction, and the 
retention rates of Initiating Participants and those market makers who 
received PIP directed orders. Specifically, each report contains the 
following PIP transaction data in series traded in penny increments 
compared to series traded in nickel increments, subdivided by when BOX 
is at the NBBO and when BOX is not at the NBBO, including: (1) Volume 
by number of contracts traded; (2) number of contracts executed by the 
Initiating Participant as compared to others (``retention rate''); (3) 
percentage of contracts receiving price improvement when the Initiating 
Participant is the contra party and when others are the contra party; 
(4) average number of responders in the PIP; (5) average price 
improvement amount when the Initiating Participant is the contra party; 
(6) average price improvement amount when others are the contra party; 
and (7) percentage of contracts receiving price improvement greater 
than $0.01, $0.02 and $0.03 when the Initiating Participant is the 
contra party and when others are the contra party.\9\
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    \9\ In June 2013 the Exchange posted revised reports for 
November 2011 through April 2013.
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    BOX provided these reports so the Commission could assess the 
impact of the Program on the competitiveness of the PIP and the extent 
of price improvement obtained for customers. Exhibit 3 to the Form 19b-
4 contains PIP transaction data sets from June 2011 through July 
2013.\10\ The Exchange has evaluated these reports to determine the 
impact of the Program on competition and price improvement, and 
believes the data confirms that the Program has not placed an undue 
burden on competition or lessened the amount of price improvement in 
the aggregate for customers in the PIP.\11\
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    \10\ The Exchange believes the data gathered over this time 
period adequately represents the impact of the Program. While fees 
and credits applicable under the Program first went into effect on 
August 1, 2011, the Program was suspended by the Commission on 
September 13, 2011. The Exchange then filed a notice of intention to 
petition for review on September 20, 2011, which triggered an 
automatic stay of the suspension and the previous fee schedule was 
reinstated. On October 19, 2011, the Commission denied the 
Exchange's petition and the applicable fees and credits were once 
again suspended. The Commission approved the proposed fee change on 
a pilot basis on January 30, 2012 and the Program has been in effect 
on the Exchange since February 1, 2012. See Securities Exchange 
Commission Release Nos. 65330 (September 13, 2011), 76 FR 58065, 
58066 (September 19, 2011) (SR-BX-2011-046) (Suspension of and Order 
Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Amend the BOX Fee Schedule With 
Respect to Credits and Fees for Transactions in the BOX Price 
Improvement Period); and 66278 (January 30, 2012), 77 FR 5590 
(February 3, 2012) (SR-BX-2011-46) (``Approval Order'').
    \11\ The Commission released a memorandum with graphical 
representations of the BOX PIP data, which match the reports 
provided by the Exchange and referenced in this filing. See 
Memorandum on File No. SR-BOX-2013-09 from August, 16, 2013; https://www.sec.gov/rules/sro/box/2012/box-2013-09-2012-002-pipmemo.pdf.
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    Overall, the Exchange believes that in the aggregate, the long term 
data trends demonstrate there has not been a decline in market quality. 
BOX's PIP auction continues to provide significant opportunities for 
price improvement and the data provided by BOX does not suggest any 
significant adverse impact of the Program on the competitiveness of the 
PIP auction or the extent of price improvement for orders executed in 
the PIP. Instead, the Exchange believes the Program has been successful 
at encouraging Participants to submit their customer orders to the PIP 
and allowing those orders the opportunity to benefit from its potential 
price improvement.
    Before discussing the general trends below, the Exchange 
acknowledges that certain data points have seen significant fluctuation 
during the course of the Program. These variations are a result of 
conditions which the Exchange has no control over, such as Participant 
behavior changes, competitor pricing changes and overall market 
volatility. For example, market volatility creates wider spreads and 
can lead to significant growth in price improvement. Similarly, a 
change in Participant behavior can also have a considerable impact on 
specific data points in these reports.
    Since the Program went into effect in February 2012, \12\ the 
Exchange has focused its analysis on the average data from two three-
month periods; one before the Program began (November 2011 through 
January 2012) and one that reflects the most recent impact of the 
Program (May 2013 through July 2013). The Exchange believes that using 
these two periods offers the best comparison of the PIP data because 
the first period reveals PIP data trends from when the Program was not 
yet in place, compared directly with the most recent PIP data trends. 
Additionally, averaging the data over a three-month period

[[Page 57193]]

helps to negate any of the significant fluctuations discussed in the 
preceding paragraph.
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    \12\ See supra, note 10 [sic].
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    A key indicator of competition is the average number of responders 
to the PIP auction. One of the central concerns expressed by commenters 
at the outset of the Program was that the increased fees and credits 
would burden competition by effectively barring certain participants 
from competing with initiators.\13\ Instead of declining, as predicted 
in the comment letters, the average number of responders has risen 
throughout the length of the Program. From November 2011 through 
January 2012 the average number of responders for PIP transactions when 
BOX was at the NBBO was 1.63 for penny classes and 2.41 for non-penny 
classes, and when BOX was not at the NBBO the average number of 
responders was 1.53 for penny classes and 2.21 for non-penny classes. 
From May 2013 through July 2013, the same data points rose to 3.14 and 
4.05 when BOX was at the NBBO and 2.24 and 2.86 when BOX was not at the 
NBBO. This growth is also clear in the graphical representations 
created by the Commission based on the BOX PIP data.\14\ The Exchange 
believes this growth proves that the fees and credits assessed under 
the Program are not prohibitively high and therefore do not prevent 
responders from competing in the auction with the firm that submitted 
the original PIP order.
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    \13\ See Letters to Elizabeth Murphy, Secretary, Commission, 
from John C. Nagel, Managing Director and General Counsel, Citadel 
Securities LLC, dated August 12, 2011 (``Citadel Letter''); Andrew 
Stevens, Legal Counsel, IMC Financial Markets dated August 15, 2011 
(``IMC Letter''); Michael J. Simon, Secretary, ISE, dated August 22, 
2011 (``ISE Letter), and Christopher Nagy, Managing Director Order 
Strategy, TD Ameritrade Inc., dated September 12, 2011 (``TD 
Ameritrade Letter'').
    \14\ See supra, note 10 at page 9.
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    Similarly, the number of PIP transactions in non-penny classes, the 
class affected by the Program, has continued to grow. From November 
2011 through January 2012, the monthly volume averaged approximately 
650,000 contracts when BOX was at the NBBO and 550,000 when BOX was not 
at the NBBO. From May 2013 through July 2013, the same data points 
averaged 850,000 contracts when BOX was at the NBBO and 900,000 
contracts when BOX was not at the NBBO.
    The reports also showed growth in the average percentage of orders 
receiving price improvement when BOX was at the NBBO when compared to 
the total monthly trade volume on BOX.\15\ In fact, in the last three 
months of the Program (May 2013 through July 2013) more than 75% of all 
orders on non-penny series have received at least some improvement. 
From November 2011 through January 2012, this number never rose above 
56% and averaged 53%. Clearly the Program did not make it more 
challenging for market participants to offer price improvement in the 
PIP auctions, as some critics argued in their comment letters.\16\
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    \15\ BOX trade volume can be found on the BOX Web site: http://boxexchange.com/box-trade-volumes/.
    \16\ See supra, note 13.
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    Finally, while the overall average price improvement, when 
improved, in non-penny classes fell slightly throughout the Program, 
most of this decline came from orders that were improved by the 
Initiator. From November 2011 through January 2012, the average price 
improvement of non-penny PIP transactions was $0.037 for those orders 
receiving improvement. In comparable data from May 2013 through July 
2013, the average price improvement for those orders receiving 
improvement fell to $0.029. However, this same data indicator increased 
for orders improved by Directed Non-Affiliate responders, both when BOX 
was at the NBBO and not at the NBBO. This number also rose for 
``Other'' responders when BOX was not at the NBBO. The Exchange 
believes this data demonstrates that the Program did not have an 
adverse impact on the extent of price improvement by making it 
``economically prohibitive for anyone other than the initiator to 
respond'' to the PIP Auction.\17\
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    \17\ See Citadel Letter, supra note 13 at page 2.
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    Another key indicator of competition, the average retention rate, 
measures the retention of the PIP order by the PIP initiator. While 
this data point has increased over the life of the Program, the average 
retention rate in non-penny classes was 38% from November 2011 through 
January 2012, and 51% from May 2013 through July 2013; the growth has 
centered in non-penny transactions where BOX was at the NBBO and 
retention rates where BOX was not at the NBBO have remained relatively 
inline. The Exchange believes this uptick was a result of the reduced 
penny transaction volume in the PIP, where lower volume signals fewer 
participants in the PIP process, and does not indicate that the Program 
gives Initiators a competitive edge to retain a greater percentage of 
their orders.
    For the reasons cited above, the Exchange believes the data 
confirms that competition did not decrease as a result of the 
additional fees and credits placed on non-penny PIP transactions. In 
fact, the reports show that in the aggregate, competition has remained 
inline and even grown throughout the length of the Program and there 
has been no adverse impact on price improvement.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\18\ in general, and Section 
6(b)(4) of the Act,\19\ in particular, in that it provides for the 
equitable allocation of reasonable dues, fees, and other charges among 
BOX Options Participants and other persons using its facilities. The 
Exchange also believes that the proposal is consistent with Section 
6(b)(5) of the Act,\20\ which, among other things, requires that rules 
of a national securities exchange be designed 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, to 
protect investors and the public interest, and to not permit unfair 
discrimination between customers, issuers, brokers, or dealers, and 
Section 6(b)(8) of the Act,\21\ which requires that the rules of a 
national securities exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act. In 
particular, the proposed change will result in permanent fees and 
credits for PIP transactions, which will in turn give BOX Participants 
greater certainty with regard to the potential fees and credits they 
will be assessed when participating in the PIP.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78f(b)(8).
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    As stated in previous filings \22\, the Exchange believes that it 
is reasonable and equitable to provide the proposed credit to any 
Participant that removes liquidity from the BOX PIP. The Exchange 
further believes these credits will continue to attract order flow to 
BOX, resulting in greater liquidity to the benefit of all market 
participants. The Exchange believes that the proposed fees for adding 
liquidity and credits for removing liquidity are equitable and not 
unfairly discriminatory because such fees and credits apply uniformly 
to all categories of Participants, across all account types.
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    \22\ See supra, note 5.
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    Further, the Exchange believes the proposed fees for PIP 
transactions to be reasonable. BOX operates within a highly competitive 
market in which market participants can readily direct order flow to 
any of several other

[[Page 57194]]

competing venues if they deem fee levels at a particular venue to be 
excessive. The BOX credits and fees for PIP transactions are intended 
to attract order flow to BOX by offering incentives to all market 
participants to submit their orders to the PIP for potential price 
improvement. BOX notes that the fees collected will not necessarily 
result in additional revenue to BOX, but will simply allow BOX to 
provide the credit incentive to Participants to attract additional 
order flow to the PIP. BOX believes it is appropriate to provide 
incentives to market participants to use PIP, resulting in benefit to 
customers through potential price improvement, and to all market 
participants from greater liquidity on BOX.
    In particular, the proposed change will allow the Exchange to 
continue the Program free of any pilot conditions which the Exchange 
believes are no longer necessary. The Program was put in place to 
determine the full impact of the liquidity fees and credits on 
competitiveness and price improvement in the PIP. The applicable fees 
and credits have been in place for eighteen months,\23\ and there is no 
evidence to suggest that the Program has had any of the negative 
effects on the PIP that were predicted in the comment letters.\24\ As 
such, removal of the pilot restrictions is the logical next step.
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    \23\ See supra, note 5
    \24\ See supra, note 13.
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    In conclusion, the Exchange believes the data provided over the 
length of the Program demonstrates that there has been no adverse 
impact on the competitiveness of the PIP auction or the extent of price 
improvement in series that trade in non-penny increments. As such, the 
Exchange believes the proposed rule change is consistent with the Act.

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

    While some have argued that the Program creates a disparity between 
the fees an Initiating Participant pays and the fees a competitive 
responder pays in the PIP that may make the Program discriminatory and 
an undue burden on competition, the Exchange believes the Program 
provides incentives for market participants to submit customer order 
flow to BOX and thus, creates a greater opportunity for retail 
customers to receive additional price improvement. The PIP provides the 
opportunity for market participants to compete for customer orders, and 
has no limitations regarding the number of Market Makers, Options 
Participants that are not Market Makers, and customers that can 
participate and compete for orders in the PIP. BOX asserts that 
Participants are actively competing for customer orders, which is 
clearly supported by the simple fact that price improvement has 
continued to occur in the PIP through the length of the Program.
    BOX notes that its market model and fees are generally intended to 
benefit retail customers by providing incentives for Participants to 
submit their customer order flow to BOX, and to the PIP in particular. 
BOX makes a substantial amount of PIP-related data and statistics 
available to the public on its Web site www.boxexchange.com. 
Specifically, daily PIP volumes and average price improvement are 
available at: http://boxexchange.com/box-trade-volumes/; and BOX 
execution quality reports at: http://boxexchange.com/execution-quality-report/. The data indisputably supports that the PIP provides price 
improvement for customer orders.
    Additionally, the Exchange believes the Program is more transparent 
than payment for order flow (``PFOF'') arrangements and notes its 
belief that the credit to remove liquidity on BOX is generally less 
than what firms receive through PFOF.
    For the reasons stated above, the Exchange does not believe that 
the proposed rule change will impose any burden on competition either 
among BOX Participants, or among the various options exchanges, which 
is 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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Exchange Act \25\ and Rule 19b-4(f)(2) 
thereunder,\26\ because it establishes or changes a due, or fee.
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    \25\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \26\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend the rule 
change if it appears to the Commission that the action is necessary or 
appropriate in the public interest, for the protection of investors, or 
would otherwise further the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 Number SR-BOX-2013-44 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-2013-44. 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-2013-44 and should be 
submitted on or before October 8, 2013.


[[Page 57195]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-22509 Filed 9-16-13; 8:45 am]
BILLING CODE 8011-01-P


