
[Federal Register Volume 78, Number 248 (Thursday, December 26, 2013)]
[Notices]
[Pages 78437-78445]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30769]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71148; File No. SR-BOX-2013-43]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Amendment Nos. 1 and 2 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, to Permit Complex Orders to Participate in Price Improvement Periods

December 19, 2013.

I. Introduction

    On September 5, 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 add new BOX Rule 7245 to permit Complex Orders 
to participate in Price Improvement Period auctions (the ``COPIP'') and 
make certain other conforming changes to accommodate the new COPIP 
Rule. The proposed rule change was published for comment in the Federal 
Register on September 23, 2013.\3\ On November 1, 2013, the Commission 
extended the time period for Commission action on the proposal to 
December 20, 2013.\4\ On December 16, 2013, BOX filed Amendment No. 1 
to the proposal.\5\ On December 19, 2013, BOX filed Amendment No. 2 to 
the proposal.\6\ The Commission received no comments regarding the 
proposal, as amended. The Commission is publishing this notice to 
solicit comments on Amendment Nos. 1 and 2 from interested persons and 
is approving the proposed rule change, as modified by Amendment Nos. 1 
and 2, on an accelerated basis.
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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. 70427 (September 17, 
2013), 78 FR 58364 (``Notice'').
    \4\ See Securities Exchange Act Release No. 70799 (November 1, 
2013), 78 FR 66980 (November 7, 2013).
    \5\ In Amendment No. 1, BOX added further information relating 
to the ability of BOX members (``Options Participants'') to respond 
adequately within the 100 millisecond COPIP period and the effect of 
Unrelated Orders received during overlapping PIP and COPIP auctions, 
including additional rule text in proposed BOX IM-7245-3 to describe 
such effect. BOX also provided an analysis of whether the proposed 
COPIP rules are consistent with Section 11(a) of the Act and the 
rules thereunder and additional rule text in existing BOX IM-7245-
2(b) regarding prohibited conduct. In addition, BOX also modified 
its proposed rule text for BOX Rule 7130(a) to reflect a proposed 
rule change (see Securities Exchange Act Release No. 70395 
(September 15, 2013), 78 FR 57911 (September 20, 2013)) that was 
approved after the initial filing of this proposed rule change. 
Amendment No. 1 has been placed in the public comment file for SR-
BOX-2013-43 at http://www.sec.gov/comments/sr-box-2013-43/box201343.shtml (see letter from Lisa J. Fall, President, BOX, to 
Elizabeth M. Murphy, Secretary, Commission, dated December 16, 2013) 
and also is available on the Exchange's Web site at https://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2013-43_Amendment_1.pdf.
    \6\ In Amendment No. 2, BOX corrected one sentence to conform it 
to discussion elsewhere in the Amendment No. 1 analysis of whether 
the proposed COPIP rules are consistent with Section 11(a) of the 
Act and the rules thereunder. Amendment No. 2 has been placed in the 
public comment file for SR-BOX-2013-43 at http://www.sec.gov/comments/sr-box-2013-43/box201343.shtml (see letter from Lisa J. 
Fall, President, BOX, to Elizabeth M. Murphy, Secretary, Commission, 
dated December 19, 2013) and also is available on the Exchange's Web 
site at https://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2013-43_Amendment_2.pdf.
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II. Description of the Proposal

    Under proposed BOX Rule 7245, Options Participants would be 
permitted to submit Complex Orders \7\ to the COPIP in substantially 
the same manner as they currently submit orders for single options 
series instruments to the Price Improvement Period (``PIP''), except as 
necessary to account for distinctions between non-Complex Orders on the 
BOX Book \8\ and Complex Orders. COPIP also would preserve the already 
established execution priority of interest on the BOX Book over Complex 
Orders \9\ by providing that the bids and offers on the BOX Book for 
the individual legs of a Strategy (``BOX Book Interest'') will execute 
in priority over Complex Orders at the same price.\10\


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    \7\ As defined in proposed BOX Rule 7240(a)(5), the term 
``Complex Order'' means any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, for the same account, in a ratio that is 
equal to or greater than one-to-three (.333) and less than or equal 
to three-to-one (3.00) and for the purpose of executing a particular 
investment strategy.
    \8\ The ``BOX Book'' is defined as the ``electronic book of 
orders on each single option series maintained by the BOX Trading 
Host.'' BOX Rule 100(a)(10).
    \9\ The execution priority of interest on the BOX Book over 
Complex Orders is consistent with existing BOX Rules 7240(b)(3)(i). 
See also Notice, 78 FR at 58366-67 for an example illustrating the 
execution and allocation of a COPIP with BOX Book Interest.
    \10\ See proposed BOX Rule 7245(f)(3)(i). The term ``Strategy'' 
is defined as a particular combination of components of a Complex 
Order and their ratios to one another. See BOX Rule 7240(a)(7).
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A. Auction Eligibility and Auction Process

    Under proposed BOX Rule 7245, an Options Participant executing 
agency

[[Page 78438]]

orders for single options series instruments may designate for price 
improvement and submission to the COPIP a Customer Order that is a BOX-
Top Order, Market Order or marketable Limit Order. Specifically, to 
initiate a COPIP, the Options Participant would submit a Customer Order 
(the ``COPIP Order'') to BOX with a matching contra order on the 
opposite side of the market from the COPIP Order (``Primary Improvement 
Order'') equal to the full size of the initiating COPIP Order. The 
Primary Improvement Order must represent either: (1) A single price 
(``Single-Priced Primary Improvement Order'') that is equal to or 
better than cNBBO,\11\ cBBO \12\ and BBO on the Complex Order Book for 
the strategy at the time of the commencement of the COPIP; or (2) an 
auto-match submission that will automatically match both the price and 
size of all competing orders, including Improvement Orders \13\ and 
Unrelated Orders \14\ at any price level achieved during the COPIP or 
only up to a limit price (``Max Improvement Primary Improvement 
Order'').\15\
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    \11\ As defined in Rule 7240(a)(3), the term ``cNBBO'' means the 
best net bid and offer price for a Complex Order Strategy based on 
the NBBO for the individual options components of such Strategy.
    \12\ As defined in Rule 7240(a)(1), the term ``cBBO'' means the 
best net bid and offer price for a Complex Order Strategy based on 
the BBO on the BOX Book for the individual options components of 
such Strategy.
    \13\ For purposes of the COPIP, the term ``Improvement Order'' 
is defined as a competing Complex Order submitted to BOX by an Order 
Flow Provider or BOX Market Maker during a COPIP. See proposed BOX 
Rule 7245(a)(1).
    \14\ The term ``Unrelated Order'' is defined as a non-
Improvement Order entered on BOX during a COPIP or BOX Book Interest 
during a COPIP. See proposed BOX Rule 7245(a)(2).
    \15\ See proposed BOX Rule 7245(f).
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    In order to initiate a COPIP, the Primary Improvement Order must 
designate the auction start price for the COPIP (``COPIP Start 
Price''), which price must be equal to or better than cNBBO, cBBO and 
BBO on the Complex Order Book for the Strategy at the time of 
commencement of the COPIP.\16\ As with the PIP for single options 
series, an Initiating Participant in a COPIP is not permitted to cancel 
or to modify the size of a Single-Priced Primary Improvement Order or 
the COPIP Order at any time during a COPIP, and may modify only the 
price of its Single-Priced Primary Improvement Order by improving 
it.\17\ The subsequent price modifications to a Single-Priced Primary 
Improvement Order are treated as new Improvement Orders for the sake of 
establishing priority in the COPIP process.\18\ Similarly, the 
Initiating Participant is not permitted to cancel or modify the Max 
Improvement Primary Improvement Order, including the COPIP Start Price, 
the designated limit price or the size.\19\
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    \16\ See id.
    \17\ See proposed BOX Rule 7245(f)(2).
    \18\ See id.
    \19\ See id.
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    BOX will commence a COPIP by broadcasting a message via the High 
Speed Vendor Feed (``HSVF'') (``the ``COPIP Broadcast'') that: (1) 
States that a Primary Improvement Order has been processed; (2) 
contains information concerning the strategy, size, COPIP Start Price, 
and side of the market; and (3) states when the COPIP will 
conclude.\20\ During the COPIP, Improvement Orders are also broadcast 
via the HSVF data feed.\21\ All market participants are able to receive 
the COPIP Broadcast and notification of Improvement Orders via the 
HSVF.\22\
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    \20\ See proposed BOX Rule 7245(f).
    \21\ See proposed BOX Rule 7245(f)(1).
    \22\ See Notice 78 FR at 58366.
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    As in the PIP, unless the COPIP terminates early, the COPIP 
duration is one hundred milliseconds,\23\ commencing upon the 
dissemination of the COPIP Broadcast. The Exchange notes its belief 
that, because the 100 millisecond COPIP duration would be the same as 
the current duration of the PIP, the COPIP duration is adequate and 
would not create any additional burden for Options Participants 
participating in a COPIP.\24\
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    \23\ See proposed BOX Rule 7245(f)(1).
    \24\ Id. See also Amendment No. 1, supra note 5. The Exchange 
also notes that it surveyed all Participants that had responded to 
at least one PIP during the past six months, inquiring whether the 
100 millisecond duration for the COPIP provided adequate time to 
response. The Exchange received responses from eighty percent of the 
Options Participants contacted, all of which indicated that they 
believe they will be able to receive, process, and communicate 
multiple COPIP Broadcast responses back to BOX within substantially 
less than 100 milliseconds. See id.
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    During a COPIP, Order Flow Providers (``OFPs'') and Market Makers 
(except for the Initiating Participant) may submit Improvement Orders 
for their own account. OFPs may submit Improvement Orders for the 
account of a Public Customer under any type of instruction they wish to 
accept.\25\ An Improvement Order submitted to the COPIP for the account 
of a Public Customer must be identified as a Public Customer Order.\26\ 
Options Participants who submit Improvement Orders for a COPIP will be 
deemed ``COPIP Participants'' for that specific COPIP only, and may 
continually submit competing Improvement Orders during that COPIP.\27\
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    \25\ See proposed BOX Rule 7245(f)(1).
    \26\ Id.
    \27\ Id.
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    Just as in a PIP, Options Participants that submit Improvement 
Orders in a COPIP may: (1) Submit competing Improvement Order(s) for 
any size up to the size of the COPIP Order; (2) submit competing 
Improvement Order(s) for any price equal to or better than the COPIP 
Start Price; (3) improve the price of their Improvement Order(s) at any 
point during the COPIP; and (4) decrease the size of their Improvement 
Order(s) only by improving the price of that Complex Order.\28\ 
Improvement Orders may be submitted in one-cent increments.\29\ Unlike 
a PIP, the COPIP will not include Customer COPIP Orders (``CPOs'') as 
defined in BOX Rule 7150(h).
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    \28\ See proposed BOX Rule 7245(f)(2). Generally, Improvement 
Orders may not be executed unless the price is equal to or better 
than the cNBBO at the commencement of the COPIP. See proposed BOX 
Rule 7245(k). However, where an Exchange Official (as defined in BOX 
Rule 100(a)(24)) determines that quotes from one or more particular 
markets in one or more classes of options are not reliable, the 
Exchange Official may direct the senior person in charge of the BOX 
Market Operations Center (as defined in BOX Rule 100(a)(31)) to 
exclude the unreliable quotes from the Improvement Period 
determination of the cNBBO for Complex Order Strategies of which 
such option class(es) are a component. The Exchange Official may 
determine quotes in one or more particular options classes in a 
market are not reliable only in the following circumstances: (1) 
Quotes Not Firm: A market's quotes in a particular options class are 
not firm based upon direct communication to the Exchange from the 
market or the dissemination through OPRA of a message indicating 
that disseminated quotes are not firm; (2) Confirmed Quote Problems: 
A market has directly communicated to the Exchange or otherwise 
confirmed that the market is experiencing systems or other problems 
affecting the reliability of its disseminated quotes. See proposed 
BOX Rule 7245(k)(1). Improvement Orders may be executed at a price 
that is not equal to or better than the cNBBO at the commencement of 
the COPIP where the away options exchange posting orders on a single 
option series comprising the cNBBO is conducting a trading rotation 
in that options class. See proposed BOX Rule 7245(k)(2).
    \29\ See proposed BOX Rule 7245(f)(2).
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B. COPIP Order Execution and Allocation

    As with a PIP, a COPIP will conclude at the end of the auction 
period.\30\ Order execution and allocation in a COPIP is similar to 
order execution and allocation in a simple order PIP.\31\ The COPIP 
Order will execute against the best prevailing order(s) on BOX, except 
any proprietary order from the Initiating Participant sent prior to the 
COPIP Broadcast in accordance with price/time priority, subject to the 
exceptions describe below. The ``best prevailing order(s) on BOX 
includes Improvement Order(s) or Unrelated Order(s) received by BOX 
during the COPIP, but excludes all Unrelated Orders that were

[[Page 78439]]

immediately executed during the interval of the COPIP. Such Unrelated 
Orders may include agency orders on behalf of Public Customers, market 
makers at away exchanges and non-BOX Options Participant broker-
dealers, as well as non-COPIP proprietary orders submitted by BOX 
Options Participants. Any unfilled portion of an Improvement Order will 
be cancelled.\32\
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    \30\ See proposed BOX Rule 7245(f)(3).
    \31\ See BOX Rule 7150(f)(3).
    \32\ See proposed BOX Rule 7245(f)(3).
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1. Priority and Allocation
    The priority and trade allocation privileges retained by Initiating 
Participants in a COPIP are substantially similar to those currently 
afforded Initiating Participants in a PIP.\33\ Notwithstanding the 
foregoing execution rules for a COPIP, BOX Book Interest will execute 
in priority over Complex Orders at the same price,\34\ so as to 
preserve the already established execution priority of interest on the 
BOX Book over Complex Orders.\35\ Further, no Complex Order for a non-
Market Maker broker-dealer account of an Options Participant will be 
executed before all Public Customer Complex Order(s), whether 
Improvement Order(s) or non-Improvement Order(s), and all non-BOX 
Options Participant broker-dealer Complex Order(s) at the same price 
have been filled; provided however, that all Complex Orders on the 
Complex Order Book prior to the COPIP Broadcast, excluding any 
proprietary order(s) from the Initiating Participant, will be filled in 
time priority before any other Complex Order at the same price.\36\
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    \33\ See BOX Rule 7150(g). For example, Quotes are included in 
the PIP rules but are not part of the COPIP rules because quotes are 
not provided on Complex Orders. See BOX Rule 7250(g)(3).
    \34\ See proposed BOX Rule 7245(f)(3)(i).
    \35\ The execution priority of interest on the BOX Book over 
Complex Orders is consistent with existing BOX Rules 7240(b)(3)(i). 
See also Notice, 78 FR at 58366-67 for an example illustrating the 
execution and allocation of a COPIP with BOX Book Interest.
    \36\ See proposed BOX Rule 7245(f)(3)(ii).
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    Subject to the execution priority of BOX Book Interests described 
above, the Initiating Participant will retain certain priority and 
trade allocation privileges upon conclusion of a COPIP.\37\ In 
instances in which a Single-Priced Primary Improvement Order, as 
modified (if at all), is matched by or matches any Complex Order(s) or 
BOX Book Interest at any price level, the Initiating Participant would 
retain priority for up to forty percent (40%) of the original size of 
the COPIP Order, notwithstanding the time priority of the Primary 
Improvement Order or Complex Order(s). However, if only one Complex 
Order or BOX Book Interest matches or is better than the Initiating 
Participant's Single-Priced Primary Improvement Order, then the 
Initiating Participant may retain priority for up to fifty percent 
(50%) of the original size of the COPIP Order. The Initiating 
Participant will receive additional allocation only after all other 
Complex Orders have been filled at that price level.\38\ For purposes 
of determining whether the Initiating Participant is entitled to 
receive a forty percent (40%) or a fifty percent (50%) priority 
allocation, BOX will count BOX Book Interest as a single competing 
order in a COPIP.
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    \37\ See proposed BOX Rules 7245(f)(3)(iii) and 7245(g).
    \38\ See proposed BOX Rule 7245(g)(1). See also Notice, 78 FR at 
58367-68 for examples illustrating the execution and allocation of a 
COPIP with Primary Improvement Order priority.
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    In instances in which a Max Improvement Primary Improvement Order 
is submitted by the Initiating Participant, the Initiating Participant 
would be allocated its full size at each price level, except where 
restricted by the designated limit price and subject to the limitations 
discussed in the next following paragraph below, until a price level is 
reached where the balance of the COPIP Order can be fully executed. 
Only at such price level would the Initiating Participant retain 
priority for up to forty percent (40%) of the remaining size of the 
COPIP Order. However, if only one competing Complex Order or BOX Book 
Interest matches the Initiating Participant at the final price level, 
then the Initiating Participant may retain priority for up to fifty 
percent (50%) of the remaining size of the COPIP Order.\39\ As with 
Single-Priced Primary Improvement Orders,\40\ for purposes of 
determining whether the Initiating Participant is entitled to receive a 
forty percent (40%) or a fifty percent (50%) priority allocation, BOX 
will count BOX Book Interest as a single competing order in a COPIP.
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    \39\ See proposed BOX Rule 7245(g)(2). See also Notice, 78 FR at 
58368 for an example illustrating the execution and allocation of a 
COPIP with Max Improvement Primary Improvement Order.
    \40\ See proposed BOX Rule 7245(g)(1). See also Notice, 78 FR at 
58367-68 for examples illustrating the execution and allocation of a 
COPIP with Primary Improvement Order priority.
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    The Primary Improvement Order will follow, in time priority, all 
Complex Orders on the Complex Order Book prior to the COPIP Broadcast 
that are equal to the Single Priced Primary Improvement Order price; or 
the execution price of a Max Improvement Primary Improvement Order that 
results in the balance of the COPIP Order being fully executed, except 
any proprietary order(s) from the Initiating Participant. Such 
proprietary order(s) would not be executed against the COPIP Order 
during or at the conclusion of the COPIP.\41\
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    \41\ See proposed BOX Rule 7245(g)(3).
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    The Primary Improvement Order will yield priority to certain 
competing Complex Orders in substantially the same circumstances as 
occurs in the PIP.\42\ When a Single-Priced or Max Improvement Primary 
Improvement Order for the proprietary account of an OFP is matched by 
or matches any competing Public Customer Complex Order(s), whether 
Improvement Order(s), Unrelated Order(s) or any non-BOX Options 
Participant broker-dealer Complex Order(s) at any price level, it will 
yield priority to them.\43\ When an unmodified Single-Priced Primary 
Improvement Order for the account of a Market Maker is matched by any 
competing Public Customer Complex Order(s), whether Improvement 
Order(s), Unrelated Order(s) or any non-BOX Options Participant broker-
dealer Complex Order(s) at the initial COPIP price level, it will yield 
priority to them.\44\ When a Max Improvement or a modified Single-
Priced Primary Improvement Order for the account of a Market Maker 
matches any competing Public Customer Complex Order(s), whether 
Improvement Order(s), Unrelated Order(s) or any non-BOX Options 
Participant broker-dealer Complex Order(s) at subsequent price levels, 
it will yield priority to them.\45\
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    \42\ See BOX Rule 7150(g)(4).
    \43\ See proposed BOX Rule 7245(g)(4)(i). See also Notice, 78 FR 
at 58368-69 for an example illustrating the execution and allocation 
of a COPIP with an Initiating Participant yielding to a Public 
Customer Order.
    \44\ See proposed BOX Rule 7245(g)(4)(ii). See also Notice, 78 
FR at 58369 for an example illustrating the execution and allocation 
of a COPIP with an Initiating Market Maker yielding to a Public 
Customer Order at a single price level.
    \45\ See proposed BOX Rule 7245(g)(4)(iii). See also Notice, 78 
FR at 58369-70 for an example illustrating the execution and 
allocation of a COPIP with an order from a Market Maker Initiating 
Participant yielding to a Public Customer Order at any price level.
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    Consistent with the PIP, when the Primary Improvement Order 
receives a trade allocation, it will be entitled to a trade allocation 
of at least one (1) Strategy.\46\ At its option, the Initiating 
Participant may designate a lower (but not higher) minimum priority and 
trade allocation privilege percentage upon the conclusion of the COPIP 
auction than it is otherwise entitled to receive. When starting a 
COPIP, the Initiating Participant may submit to BOX the Primary 
Improvement Order with a designation of the total amount of the COPIP 
Order it is willing to ``surrender'' to the other COPIP Participants 
(``COPIP

[[Page 78440]]

Surrender Quantity''). Under no circumstances will the Initiating 
Participant receive an allocation percentage preference of more than 
fifty percent (50%) with one competing order, including counting BOX 
Book Interest as a competing order, or forty percent (40%) with 
multiple competing orders, including counting BOX Book Interest as a 
competing order.\47\ Upon the conclusion of the COPIP auction, trade 
allocations will be adjusted to the other COPIP Participants will be 
allocated up to the COPIP Surrender Quantity. The Primary Improvement 
Order will be allocated the remaining size of the COPIP Order above the 
COPIP Surrender Quantity, if any, as described above. If the aggregate 
size of other COPIP Participants' contra Complex Orders is not equal to 
or greater than the COPIP Surrender Quantity, then the remaining COPIP 
Surrender Quantity will be left unfilled and the Primary Improvement 
Order will be allocated the remaining size of the COPIP Order described 
above.\48\
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    \46\ See proposed BOX Rule 7245(g)(5).
    \47\ See proposed BOX Rule 7245(g)(6)(i).
    \48\ See proposed BOX Rule 7245(g)(6)(ii). See also Notice, 78 
FR at 58370-71 for an example illustrating the execution and 
allocation of a COPIP with a COPIP Surrender Quantity.
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2. Early Executions and Early Termination
    Executions prior to the regular ending time of a COPIP are handled 
substantially the same as in a PIP,\49\ with necessary changes to 
account for differences between Complex Orders and orders on single 
series options instruments. In cases where an Unrelated Order is 
submitted to BOX on the same side as the COPIP Order such that it would 
cause an execution to occur prior to the end of the COPIP, the COPIP 
will be deemed concluded and the COPIP Order will be executed pursuant 
to BOX Rule 7245(f). Specifically, the submission to BOX of a BOX-Top 
Complex Order or Market Complex Order on the same side as a COPIP Order 
will prematurely terminate the COPIP when, at the time of the 
submission of such orders, the best Complex Order or BOX Book Interest 
is equal to or better than the cNBBO on the opposite side of the COPIP 
Order. The submission to BOX of executable BOX Book Interest or an 
executable Limit Complex Order on the same side as a COPIP Order will 
prematurely terminate the COPIP if: (1) At the time of submission of 
the Limit Complex Order, the Limit Complex Order price is equal to or 
better than cNBBO, and BBO on the Complex Order Book or cBBO is equal 
to or better than the cNBBO, on the opposite side of the market or (2) 
at the time of submission of the BOX Book Interest, the BOX Book 
Interest is executable against the Complex Order Book. Following the 
conclusion of the COPIP, any remaining Improvement Orders are 
cancelled, any remaining non-Improvement Orders are filtered pursuant 
to BOX Rule 7240(b)(3)(iii) and any remaining BOX Book Interest is 
filtered pursuant to BOX Rule 7130(b).\50\
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    \49\ See BOX Rule 7150(i) and (j).
    \50\ See proposed BOX Rule 7245(h). See also Notice, 78 FR at 
58371-72 for examples illustrating the execution and allocation for 
the early termination of COPIP due to Unrelated Orders on the same 
side as a COPIP Order.
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    In cases where an Unrelated Order that is a non-Improvement Order 
is submitted to BOX on the opposite side of the COPIP order, such that 
it would cause an execution to occur prior to the end of the COPIP, the 
non-Improvement Order will be immediately executed against the COPIP 
Order up to the lesser of the size of the COPIP Order or the size of 
the non-Improvement Order, at a price equal to either: (1) At least one 
penny better than the cBBO, if the cBBO on the opposite side of the 
market from the non-Improvement Order is equal to or better than the 
cNBBO at the time of execution; or (2) the cNBBO. Specifically, a BOX-
Top Complex Order or a Market Complex Order on the opposite side of a 
COPIP Order will immediately execute against the COPIP Order when, at 
the time of the submission of such Complex Order, the best Improvement 
Order does not cross the cNBBO on the same side of the market as the 
COPIP Order. The submission to BOX of an executable Limit Complex Order 
on the opposite side of a COPIP Order will immediately execute against 
a COPIP Order when the Limit Complex Order price is equal to or crosses 
any of the cNBBO, cBBO or BBO on the Complex Order Book for the 
Strategy.\51\ In cases where an Unrelated Order that is a BOX Book 
Interest exists on the opposite side of the COPIP order, such that it 
would cause an execution to occur prior to the end of the COPIP, the 
BOX Book Interest will immediately be executed against the COPIP Order 
up to the lesser of the size of the COPIP Order or the size of the BOX 
Book Interest, at a price equal to the BOX Book Interest price.\52\ The 
remainder of the Unrelated Order, if any, will be filtered according to 
the existing Complex Order filter rules.\53\ The remainder of the COPIP 
Order, if any, will be executed at the conclusion of the COPIP pursuant 
to BOX Rule 7245(f). Following the conclusion of the COPIP, any 
remaining Improvement Orders are cancelled.\54\
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    \51\ See proposed BOX Rule 7245(i)(1).
    \52\ See proposed BOX Rule 7245(i)(2).
    \53\ See BOX Rule 7240(b)(3)(iii) for existing Complex Order 
filter rules.
    \54\ See proposed BOX Rule 7245(i)(3). See also Notice, 78 FR at 
58372-73 for examples illustrating the execution and allocation for 
the early termination of COPIP due to Unrelated Orders on the 
opposite side as a COPIP Order.
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C. Overlapping Auctions

    A COPIP will not run simultaneously with another COPIP in the same 
Complex Order Strategy, nor will COPIPs interact, queue or overlap in 
any manner.\55\ Any request to initiate a COPIP while another COPIP is 
already in progress in the same Strategy will be rejected.\56\ The 
Exchange, however, will operate price improvement auctions in both 
single option series and Complex Orders at the same time.\57\ 
Specifically, BOX will accept orders designated for the PIP on a single 
option series where a COPIP on a Complex Order Strategy that includes 
such a series may be in progress. BOX also will accept Complex Orders 
designated for the COPIP where a PIP on either of the component series 
may be in progress. Order execution at the conclusion of any such PIPs 
will occur as described in the current PIP rules \58\ and Complex Order 
execution at the conclusion of any such COPIPs will occur as set forth 
in proposed BOX Rule 7245.\59\ The Exchange believes this simultaneous 
price improvement auction functionality will reduce order cancelation 
and, thereby remove impediments to, and perfect the mechanism of, a 
free and open market and a national market system.\60\
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    \55\ See BOX IM-7150-3.
    \56\ See proposed BOX IM-7245-3.
    \57\ BOX notes that processes on the BOX system are sequential 
and all orders receive a unique time stamp. As a result, no two 
orders (include PIP and COPIP Orders) or events may be treated as 
occurring simultaneously on the BOX system. See Amendment No. 1, 
supra note 5.
    \58\ PIP execution rules are set forth in BOX Rule 7150.
    \59\ See proposed BOX IM-7245-3.
    \60\ See Amendment No. 1, supra note 5. Amendment No. 1 also 
contains detailed examples outlining the operation of the PIP and 
COPIP in several multiple auction situations.
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    BOX's current rules provide that, when an Unrelated Order on a 
single option series is submitted to BOX, the Unrelated Order first 
interacts with an ongoing PIP, if any, prior to being entered on the 
BOX Book.\61\ Any unexecuted quantity of the order remaining after 
interacting with the PIP is then filtered as provided in BOX Rule 
7130(b) prior to entry on the BOX

[[Page 78441]]

Book.\62\ Once entered on the BOX Book, the order may be combined with 
other orders on other single options series (thereby becoming BOX Book 
Interest) \63\ and, as such, will be available to interact with the 
Complex Order Book, including any ongoing COPIP, if possible.\64\
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    \61\ See BOX Rule 7150(i) for Unrelated Orders on the same side 
as the PIP Order. See BOX Rule 7150(j) for Unrelated Orders on the 
opposite side of the PIP Order.
    \62\ BOX Rules 7150(i) and 7150(j) each provide that, after the 
Unrelated Order interacts with the PIP, any remainder of the 
Unrelated Order is filtered pursuant to BOX Rule 7130(b). BOX Rule 
7130(b) describes the filtering process used by the BOX Trading Host 
to ensure that the Unrelated Order will not execute outside the NBBO 
price (see BOX Rule 7130(b)(1)). Upon completion of the filtering 
process, BOX Rule 7130(b)(4)(i) provides that any remainder of the 
Unrelated Order is entered on the BOX Book.
    \63\ See proposed BOX Rule 7245(a)(3).
    \64\ See Amendment No. 1, Examples 10(a) and (b), illustrating 
the operation of the proposed rules when a single option instrument 
order is received during a PIP and a COPIP on the same side as the 
PIP Order and on the opposite side of the PIP Order, respectively.
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    The proposed COPIP rules provide that when an Unrelated Order that 
is a Complex Order is submitted to BOX, the Unrelated Order first 
interacts with an ongoing COPIP, if any, prior to being entered on the 
Complex Order Book.\65\ Any unexecuted quantity of the Complex Order 
remaining after interacting with the COPIP is then filtered as provided 
in BOX Rule 7240(b)(3) prior to entry on the Complex Order Book.\66\ 
The Exchange's current Complex Order rules provide that one or more 
Legging Orders will be generated from Complex Orders on the BOX Book if 
the other leg for the Complex Order can be executed on BOX at the NBBO 
for the series.\67\ Once a Legging Order is generated, it will be 
available to interact with the BOX Book, including any ongoing PIP, if 
possible.\68\
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    \65\ See proposed BOX Rule 7245(h) for Unrelated Orders on the 
same side as the COPIP Order; see also proposed BOX Rule 7245(i)(1) 
for Unrelated Orders on the opposite side of the COPIP Order.
    \66\ Proposed BOX Rules 7245(h) and 7245(i)(3) each provide 
that, after the Unrelated Order interacts with the COPIP, any 
remainder of the Unrelated Order is filtered pursuant to Rule 
7240(b)(3)(iii). BOX Rule 7240(b)(3)(iii) describes the filtering 
process used by the BOX Trading Host. Upon completion of the 
filtering process, BOX Rule 7240(b)(3)(iii) provides that any 
remainder of the Unrelated Order is entered on the Complex Order 
Book. See also Amendment No. 1, Example 10(c) and (d) illustrating 
the operation of the proposed rules when a Complex Order is received 
during the PIP and COPIP on the same side of the COPIP Order and on 
the opposite side of the COPIP Order.
    \67\ See BOX Rule 7240(c)(1).
    \68\ BOX Rule 7240(c)(1) describes how Legging Orders are priced 
and ranked on the BOX Book and displayed and executed on BOX. BOX 
Rule 7150(i) describes how Legging Orders on the same side as the 
PIP Order may immediately execute against a PIP and BOX Rule 7150(j) 
describes how Legging Orders on the opposite side of the PIP Order 
may immediately execute against a PIP. BOX Rule 7150(f)(3) describes 
how Legging Orders are executed at the conclusion of a PIP.
---------------------------------------------------------------------------

    A single option instrument simultaneously may be a component of 
more than one different Complex Order Strategy. Because a COPIP may be 
initiated on each different Strategy, multiple COPIPs sharing the same 
component single option instrument may run simultaneously. In this 
case, and assuming that the necessary prices and quantities exist on 
each leg, BOX Book interest will generate an Unrelated Order on each 
such Strategy to interact with each of the ongoing COPIPs. In the event 
the same order on the BOX Book could interact with multiple COPIPs 
simultaneously, the order will interact with the COPIP on the Strategy 
for which the greatest difference exists between the price of the 
resulting BOX Book Interest and the corresponding best price Complex 
Order on the Complex Order Book on the same side as the COPIP 
Order.\69\ If this calculation produces the same result for each COPIP, 
then the order will interact with the COPIP on the Strategy that was 
created first on the BOX System.\70\ The execution price will be at a 
price equal to the BOX Book Interest price.\71\
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    \69\ This calculation is for the purpose of identifying the 
Strategy with which the BOX Book Interest will interact and not the 
price at which the actual execution will occur. See Amendment No. 1, 
Example 11, illustrating the operation of the rules when the same 
order could interact with two COPIPs.
    \70\ See proposed BOX IM-7245-3(b). See also Amendment No. 1, 
supra note 5.
    \71\ See proposed BOX Rule 7245(i)(2).
---------------------------------------------------------------------------

    As in the PIP, COPIP Options Participants must ensure that they 
comply with all the procedures set forth in the BOX Rules; that they 
act with due skill, care and diligence; and that the interests of their 
Customers are not prejudiced.\72\ An Options Participant must not use 
the COPIP process to create a misleading impression of market activity 
(i.e., the facilities may be used only where there is a genuine 
intention to execute a bona fide transaction).\73\
---------------------------------------------------------------------------

    \72\ See proposed BOX Rule 7245(c).
    \73\ See proposed BOX Rule 7245(e).
---------------------------------------------------------------------------

D. COPIP Pilot Program

    The Exchange proposes a COPIP Pilot Program that expires on July 
18, 2014, during which there will be no minimum size requirement for 
Customer Orders to be eligible for the COPIP process.\74\ During the 
COPIP pilot period, the Exchange will provide certain information, 
periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size COPIP orders, that there is significant price improvement for 
all orders executed through the COPIP and that an active and liquid 
market is functioning on BOX outside of the COPIP mechanism.\75\
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    \74\ See proposed BOX IM-7245-1.
    \75\ See id. BOX will provide the following information each 
month to the Commission: (1) The number of orders of 50 Strategies 
or greater entered into the COPIP; (2) the percentage of all orders 
of 50 Strategies or greater submitted to the Exchange that are 
entered into the COPIP; (3) the spread, at the time a Complex Order 
of 50 Strategies or greater is submitted to the COPIP; (4) the 
percentage of COPIP trades executed at cNBBO, plus $.01, plus $.02, 
plus $.03, etc.; and (5) the number of COPIP Orders submitted by 
OFPs when the spread was at a particular increment (e.g., $.05, 
$.10, $.15, etc.). Also, with respect to item (5) above, for each 
spread increment, the Exchange proposes to provide the percentage of 
orders of fewer than 50 Strategies submitted to the COPIP that were 
traded: (a) By the OFP that submitted the order to the COPIP; (b) by 
an Options Participant other than the OFP that submitted the order 
to the COPIP; (c) by a Public Customer; and (d) as an Unrelated 
Order. Additionally, for each spread increment, the Exchange 
proposes to provide the percentage of orders of 50 Strategies or 
greater submitted to the COPIP that were traded: (a) by the OFP that 
submitted the order to the COPIP; (b) by an Options Participant 
other than the OFP that submitted the order to the COPIP; (c) by a 
Public Customer; and (d) as an Unrelated Order. See Notice, 78 FR at 
58373.
    BOX will further provide for the first and third Wednesday of 
each month: (a) The total number of COPIP auctions on that date; (b) 
the number of COPIP auctions where the order submitted to the COPIP 
was fewer than 50 Strategies; (c) the number of COPIP auctions where 
the order submitted to the COPIP was 50 Strategies or greater; (d) 
the number of COPIP auctions where the number of Options 
Participants (excluding the Initiating Participant) was each of 
zero, one, two, three, four, etc. See id. at 58374.
    Finally, during the COPIP pilot period, BOX will provide 
information each month with respect to situations in which the COPIP 
is terminated prematurely or in which a Market Order, Limit Order, 
BOX-Top Order or BOX Book Interest immediately execute with a COPIP 
Order before the conclusion of the COPIP. The following information 
is proposed to be provided: (1) the number of times that a Market 
Order, Limit Order, BOX-Top Order or BOX Book Interest on the same 
side of the market as the COPIP Order prematurely terminated the 
COPIP, and (a) the number of times such orders were entered by the 
same (or affiliated) firm that initiated the COPIP 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 COPIP Order; (2) For the orders addressed in each 
of (1)(a) and (1)(b) above, the percentage of COPIP premature 
terminations due to the receipt, during the COPIP, of a Market 
Order, Limit Order, BOX-Top Order or BOX Book Interest on the same 
side of the market as the COPIP Order; and the average amount of 
price improvement provided to the COPIP Order where the COPIP is 
prematurely terminated; (3) the number of times that a Market Order, 
Limit Order, BOX-Top Order or BOX Book Interest on the opposite side 
of the market as the COPIP Order immediately executed against the 
COPIP Order, and (a) the number of times such orders were entered by 
the same (or affiliated) firm that initiated the COPIP, 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 COPIP Order; 
(4) for the orders addressed in each of (3)(a) and (3)(b) above, the 
percentage of COPIP early executions due to the receipt, during the 
COPIP, of a Market Order, Limit Order, BOX-Top Order or BOX Book 
Interest on the opposite side of the market as the COPIP Order; and 
the average amount of price improvement provided to the COPIP Order 
where the COPIP Order is immediately executed; and (5) the average 
amount of price improvement provided to the COPIP Order when the 
COPIP runs for one hundred milliseconds. See id.

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[[Page 78442]]

E. Additional Changes

    The Exchange proposes to make certain miscellaneous conforming and 
clarifying changes to its rules consistent with the adoption of the 
COPIP rule as described in more detail in the Notice.\76\ BOX Rule 
100(a)(19) will be amended to limit the term Directed Order to 
contracts on a single options series. BOX Rules 3000(b), 7070(a), 
7110(e), 7130(a), 7140, 7150, and 7240(b) will be amended to conform 
the application of these rules to the operation of the COPIP. BOX Rule 
7070(a) will be further amended to reflect that Fill and Kill orders do 
not participate in the Pre-Opening Phase. BOX Rule 7150 will be further 
amended to explain that: (i) The PIP Broadcast is disseminated via the 
HSVF; and (ii) a PIP on a single option series and a COPIP on a Complex 
Order Strategy that includes such series may operate simultaneously.
---------------------------------------------------------------------------

    \76\ See Notice, 78 FR at 58374.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment Nos. 1 and 2, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, with 
Section 6(b) of the Act.\77\ In particular, the Commission finds that 
the proposed rule change is consistent with Sections 6(b)(5) of the 
Act,\78\ 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 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 of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
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    \77\ 15 U.S.C. 78f(b). 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).
    \78\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission believes that allowing BOX Options Participants to 
enter complex orders into the COPIP could provide opportunities for 
complex orders to receive price improvement. The Commission notes that 
the COPIP Start Price will be equal to or better than cNBBO, cBBO and 
BBO on the Complex Order Book for the Strategy at the time of 
commencement of the COPIP and that a Options Participant that enters a 
COPIP Order in the COPIP must submit a Primary Improvement Order for 
the full size of that COPIP Order.\79\ The Commission also notes that 
once an order has been submitted as a COPIP Order or Primary 
Improvement Order, it may not be cancelled.\80\ Therefore, a COPIP 
Order submitted to the COPIP Auction, regardless of its size, will be 
guaranteed an execution price of at least the cNBBO, cBBO or BBO on the 
Complex Order Book for the Strategy at the time the COPIP commences 
and, moreover, will be given an opportunity for execution at a better 
price. The Commission also notes that established priority of interest 
on the BOX Book over Complex Orders contained in BOX Rule 7240(b)(3)(i) 
will apply to the COPIP.\81\
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    \79\ Proposed BOX Rule 7245(f).
    \80\ Proposed BOX Rule 7245(f).
    \81\ Proposed BOX Rule 7245(f)(3)(i).
---------------------------------------------------------------------------

IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \82\ 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. For 
the reasons set forth below, the Commission believes that the proposed 
COPIP rules will satisfy the requirements of Section 11(a) of the Act. 
Specifically, other than the portions of the proposal that will satisfy 
Rule 11a2-2(T) under the Act as discussed below, the Commission 
believes that the proposed COPIP rules will satisfy the requirements of 
11(a)(1)(G) of the Act because the proposed COPIP rules will cause 
Complex Orders for the account of non-Market Maker BOX Options 
Participants to yield priority to Complex Orders of non-Options 
Participants, provided that BOX Options Participants comply with the 
requirements set forth in Rule 11a1-1(T) thereunder. The Commission 
further believes that the execution against a COPIP Order of orders on 
the Complex Order Book prior to the COPIP Broadcast or on the BOX Book 
(whether prior to or after the COPIP Broadcast) will satisfy the 
conditions of Rule 11a2-2(T) under the Act.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

A. Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) Thereunder

    Section 11(a)(1)(G) of the Act \83\ 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 
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.\84\ 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.\85\
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78k(a)(1)(G).
    \84\ Id.
    \85\ 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 such 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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[[Page 78443]]

    Under the proposed COPIP rules, other than for Complex Orders on 
the Complex Order Book prior to the COPIP Broadcast, Complex Orders for 
non-Market Maker broker-dealer accounts of Options Participants are 
required to yield priority to all Public Customer Complex Orders and 
all non-BOX Options Participant broker-dealer Complex Orders at the 
same price when executing against a COPIP Order.\86\ In addition, the 
proposed COPIP rules require the Primary Improvement Order to yield 
priority to Public Customer Complex Orders and non-BOX Options 
Participant broker-dealer Complex Orders at the same price.\87\ Because 
the proposed COPIP rules will require BOX Options Participants that are 
not market makers \88\ to yield priority in the COPIP to all non-member 
orders, the Commission believes that the proposal with respect to 
transactions effected through COPIP, other than the portions of the 
proposal that will satisfy Rule 11a2-2(T) under the Act as discussed 
below, is consistent with the requirements in Section 11(a) of the Act 
and Rule 11a1-1(T) thereunder.\89\ The Commission also reminds 
exchanges and their members, however, that, in addition to yielding 
priority to non-member orders (including complex 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.
---------------------------------------------------------------------------

    \86\ See proposed BOX Rule 7245(f)(3)(ii).
    \87\ See proposed BOX Rule 7245(g)(4).
    \88\ Section 11(a)(1)(A) of the Act provides an 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).
    \89\ The Commission notes that, other than with respect to 
quotes and orders on the BOX Book prior to the PIP Broadcast, which 
the Commission has stated are consistent with Section 11(a) and Rule 
11a2-2(T) thereunder, the Commission determined that transactions 
effected through the PIP are consistent with Section 11(a) and Rule 
11a1-1(T) thereunder because Options Participants that are not 
market makers are required to yield priority in the PIP to non-
member orders (i.e., to Public Customer Orders and non-BOX Options 
Participant broker-dealer orders) at the same price transactions 
effected through the PIP. See Securities Exchange Act Release No. 
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 Approval Order''). See also 
Securities Exchange Act Release No. 68177 (November 7, 2012), 77 FR 
67851 (November 14, 2012) (SR-BOX-2012-003) (Order Approving 
Proposed Rule Change to Amend the Price Improvement Period) 
(``November 2012 Order'').
---------------------------------------------------------------------------

B. Rule 11a2-2(T) under the Act (``Effect versus Execute'' Rule)

    Rule 11a2-2(T) under the Act,\90\ 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; \91\ 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. For the reasons set forth below, the Commission 
believes that the execution against a COPIP Order of orders on the 
Complex Order Book prior to the COPIP Broadcast or on the BOX Book 
(whether prior to or after the COPIP Broadcast) will satisfy the 
conditions of Rule 11a2-2(T) under the Act.\92\
---------------------------------------------------------------------------

    \90\ 17 CFR 240.11a2-2(T).
    \91\ 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 
Designated Order Turnaround System of the New York Stock Exchange 
(``1978 Release'')).
    \92\ The Commission notes that it has previously found that the 
priority and allocation rules for electronic trading on the Exchange 
are consistent with Section 11(a) of the Act because such rules 
satisfy the ``effect versus execute'' exception provided by Rule 
11a2-2(T). The Commission determined that BOX Options Participants 
entering orders into the BOX Trading Host, excluding those 
transactions effected through the PIP process, would satisfy the 
conditions of the effect versus execute rule. See BOX Approval 
Order.
---------------------------------------------------------------------------

    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 BOX, 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.\93\ The Exchange represents 
that, with respect to the execution against a COPIP Order of orders on 
the Complex Order Book prior to the COPIP Broadcast or on the BOX Book 
(whether prior to or after the COPIP Broadcast), the design of the 
Complex Order Book and the BOX Book ensures that broker-dealers do not 
have any special or unique trading advantages in handling their orders 
after transmission.
---------------------------------------------------------------------------

    \93\ 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's Post 
Execution Reporting System and 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 Automated Communications 
and Execution System (``1979 Release'')).
---------------------------------------------------------------------------

    According to the Exchange, all orders submitted to BOX, including 
orders on the Complex Order Book and on the BOX Book, are transmitted 
from remote terminals directly to the system by electronic means and 
are centrally processed and executed automatically by BOX. Once an 
order is submitted to BOX, the order is executed against one or more 
other orders based on the established matching algorithms of the 
Exchange.\94\ The execution does not depend on the Options Participant 
but rather upon what other orders are entered into BOX at or around the 
same time as the subject order, what orders are on the Complex Order 
Book and on the BOX Book, whether a PIP or COPIP is initiated, and 
where the order is ranked based on the priority ranking algorithm. 
Orders will be ranked and maintained on the Complex Order Book and on 
the BOX Book according to established automatic priority rules. Under 
the proposal, the execution against a COPIP Order of orders on the 
Complex Order Book prior to the COPIP Broadcast or on the BOX Book 
(whether prior to or after the COPIP Broadcast) will be determined 
automatically, according to the proposed matching, priority and 
allocation rules. Based on the proposed COPIP rules and on the 
Exchange's representations, the Commission believes that the design of 
the trading platform used by BOX ensures that no Options Participant 
has any special or unique trading advantage

[[Page 78444]]

in the handling of its orders, including for the execution against a 
COPIP Order of orders on the Complex Order Book prior to the COPIP 
Broadcast or on the BOX Book (whether prior to or after the COPIP 
Broadcast), after transmitting such orders to the Exchange. As such, 
the Commission believes that the proposal satisfies this requirement of 
Rule 11a2-2(T).
---------------------------------------------------------------------------

    \94\ Under the proposed COPIP rules, orders on the Complex Order 
Book prior to the COPIP Broadcast or on the BOX Book (whether prior 
to or after the COPIP Broadcast) may also trade with one or more 
other orders, including COPIP Orders, based on the established 
matching algorithms of the Exchange.
---------------------------------------------------------------------------

    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.\95\ The Exchange states that, like these other 
automated systems, orders sent to BOX, regardless of where it executes 
within the BOX system, including the Complex Order Book, the BOX Book, 
a PIP or a COPIP, will be transmitted from remote terminals directly to 
BOX by electronic means. OFPs and BOX Market Makers will only submit 
orders and quotes to BOX from electronic systems from remote locations, 
separate from BOX. There are no other Options Participants that are 
able to submit orders to BOX other than OFPs or Market Makers. 
Accordingly, the Commission believes that Options Participants' orders 
electronically received by BOX satisfy the off-floor transmission 
requirement for the purposes of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \95\ See, e.g., BOX Approval Order; 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) 
(granting the registration of 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.
---------------------------------------------------------------------------

    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 BOX, would an Options 
Participant be able to acquire control or influence over the result or 
timing of order execution.\96\ According to the Exchange, upon 
submission to BOX, an order will be ranked and maintained on the 
Complex Order Book and on the BOX Book according to established 
automatic priority rules. In addition, under the proposal, the 
execution against a COPIP Order of orders on the Complex Order Book 
prior to the COPIP Broadcast or on the BOX Book (whether prior to or 
after the COPIP Broadcast) will be determined automatically, according 
to the proposed matching, priority and allocation rules. The execution 
does not depend on the Options Participant but rather upon what other 
orders are entered into BOX at or around the same time as the subject 
order, what orders are on the Complex Order Book and on the BOX Book, 
whether a PIP or COPIP is initiated, and where the order is ranked 
based on the priority ranking algorithm. Accordingly, Options 
Participants do not control or influence the result or timing of an 
order submitted to BOX, even if such Options Participant's order is on 
the Complex Order Book prior to the COPIP Broadcast or on the BOX Book 
(whether prior to or after the COPIP Broadcast) and, in either case, 
executes against a COPIP Order.\97\ Based on the Exchange's 
representations, the Commission believes that the proposal satisfies 
the non-participation requirement of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \96\ 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'').
    \97\ In addition, the Exchange stated in its proposal that, at 
no time following the submission of a COPIP Order, will a 
Participant manipulate, control, or influence the result or timing 
of order execution on the Exchange by entering Orders on the BOX 
Book for a component leg of the COPIP that could result in the 
creation of BOX Book Interest that would take priority over Complex 
Orders interacting with the COPIP, and thus has proposed to add rule 
text that provides that it would be inconsistent with just and 
equitable principles of trade for an Options Participant to submit 
an order on the BOX Book, during a COPIP initiated by the Options 
Participant, for the purpose of disrupting or manipulating the 
COPIP. See proposed BOX IM-7245-2(b). See also Amendment No. 1, 
supra note 5.
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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).\98\ The Exchange represents that Options Participants trading for 
covered accounts over which they exercise investment discretion must 
comply with this condition in order to rely on the exception of Rule 
11a2-2(T), and the Exchange states that it will enforce this 
requirement pursuant to its obligation under Section 6(b)(1) of the Act 
to enforce compliance with federal securities laws.
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    \98\ 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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 1 
and 2 are 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-2013-43 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-2013-43. 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

[[Page 78445]]

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 publicly available. All 
submissions should refer to File Number SR-BOX-2013-43 and should be 
submitted on or before January 16, 2014.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment Nos. 1 and 2

    The Commission finds good cause for approving the proposed rule 
change, as amended by Amendment Nos. 1 and 2, prior to the 30th day 
after the date of publication of notice in the Federal Register. 
Amendment No. 1 revises the proposal to provide greater detail with 
respect to: (1) The ability of Participants to respond adequately 
within the 100 millisecond COPIP period; (2) the effect of unrelated 
orders received during overlapping PIP and COPIP auctions; and (3) the 
Exchange's analysis regarding whether the proposed COPIP rules are 
consistent with Section 11(a) of the Act and the rules thereunder.\99\ 
As to the first item, Amendment No. 1 merely provides additional 
support regarding the adequacy of the 100 millisecond response time 
interval for Options Participants. As to the second item, the 
Commission notes that the original filing proposed that PIP and COPIP 
auctions could run simultaneously and that Unrelated Orders could 
interact with PIP and COPIP auctions. Amendment No. 1 provides details 
and examples illustrating how those interactions would occur under the 
original proposal. Amendment No. 1 also provides details and an example 
explaining what happens if single option instrument that is a component 
of more than one different Complex Order Strategy an order on the BOX 
Book interacts with COPIPs on the different Complex Order Strategies. 
As to the third item, Amendment No. 1 adds one specific example of 
conduct that would be prohibited in the COPIP and otherwise provides an 
analysis of the original proposal's compliance with the requirements of 
Section 11(a) of the Act.\100\ COPIPs will function in a manner 
substantially similar to that described in the Notice and Amendment No. 
1 provides additional clarity on the proposal. Amendment No. 2 corrects 
one sentence to conform it to discussion elsewhere in Amendment No. 1 
concerning the analysis of the original proposal's compliance with the 
requirements of Section 11(a) of the Act. Accordingly, the Commission 
finds good cause for approving the proposed rule change, as amended, on 
an accelerated basis, pursuant to Section 19(b)(2) of the Act.\101\
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    \99\ In addition, Amendment No. 1 made a non-substantive change 
in order to update the proposal to also reflect change made to BOX 
Rule 7130(a) in Securities Exchange Act Release No. 70395 (September 
15, 2013), 78 FR 57911 (September 20, 2013).
    \100\ 15 U.S.C. 78k.
    \101\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\102\ that the proposed rule change (SR-BOX-2013-43), as modified 
by Amendment Nos. 1 and 2, is approved on an accelerated basis.
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    \102\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\103\
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    \103\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-30769 Filed 12-24-13; 8:45 am]
BILLING CODE 8011-01-P


