
[Federal Register Volume 79, Number 127 (Wednesday, July 2, 2014)]
[Notices]
[Pages 37798-37820]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15472]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72477; File No. SR-BOX-2014-16]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Adopt New Trade Allocation 
Algorithms for Matching Trades at the Conclusion of the PIP and COPIP

June 26, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 16, 2014, BOX Options Exchange LLC (``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend BOX Rules 7150 (Price Improvement 
Period (``PIP'')) and 7245 (Complex Order Price Improvement Period 
(``COPIP'')) to adopt new trade allocation algorithms for matching 
trades at the conclusion of the PIP and COPIP. The text of the proposed 
rule change is available from the principal office of the Exchange, at 
the Commission's Public Reference Room and also on the Exchange's 
Internet Web site at http://boxexchange.com.

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

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

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

1. Purpose
    The Exchange proposes to amend BOX Rules 7150 (Price Improvement 
Period (``PIP'')) and 7245 (Complex Order Price Improvement Period 
(``COPIP'')) to adopt new trade allocation algorithms for matching 
trades at the conclusion of the PIP and COPIP. This is a competitive 
filing based on the rules of NASDAQ OMX PHLX LLC (``Phlx'').\3\
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    \3\ See Phlx Rule 1080(n).
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PIP
    The Exchange currently offers Participants the possibility of price 
improvement via its innovative electronic auction process known as the 
PIP. The PIP has saved investors more than $467 million versus the 
prevailing NBBO since 2004, a monthly average of more than $3.8 
million. BOX believes that the proposed rule change will result in 
additional PIP transactions, and give customers a greater opportunity 
to benefit from price improvement.
    Options Participants executing agency orders for single options 
series instruments may designate Customer Orders for price improvement 
and submission to the PIP. Customer Orders designated for the PIP 
(``PIP Orders'') may be submitted to BOX with a matching contra order 
(``Primary Improvement Order'') equal to the full size of the PIP 
Order. The Primary Improvement Order is on the opposite side of the 
market from the PIP Order and at a price equal to or better than that 
of the National Best Bid Offer (``NBBO'') at the time of the 
commencement of the PIP (the ``PIP Start Price''). BOX begins a PIP by 
broadcasting a message to market participants via the Exchange's High 
Speed Vendor Feed (``HSVF''). During the PIP, order flow providers 
(``OFPs'') and Market Makers (other than the Initiating Participant) 
may submit competing orders (``Improvement Orders'') for their own 
account and OFPs may also provide access to the PIP for the account of 
a Public Customer \4\ or for any account except Market Maker. Options 
Participants may continually

[[Page 37799]]

submit competing Improvement Orders during the PIP and Improvement 
Orders are disseminated to market participants.
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    \4\ The term ``Public Customer'' means a person that is not a 
broker or dealer in securities. See BOX Rule 100(a)(51).
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    Unrelated Orders \5\ and Legging Orders \6\ on the same side as the 
PIP Order received during the PIP may cause the PIP to terminate early 
under certain circumstances.\7\ During a PIP, when an Unrelated Order 
is submitted to BOX or a Legging Order is generated on the same side as 
the PIP Order that would cause an execution to occur prior to the end 
of the PIP, the PIP ends early and the PIP Order is matched as if the 
PIP terminated on its regular schedule. Following the execution of the 
PIP Order, any remaining Improvement Orders are cancelled and the 
Unrelated Order or Legging Order is filtered normally.\8\
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    \5\ As defined in Rule 7150(a), the term ``Unrelated Order'' 
with respect to a PIP means a non-Improvement Order entered into the 
BOX market during a PIP.
    \6\ As defined in Rule 7240(c)(1), the term ``Legging Order'' 
means a Limit Order on the BOX Book that represents one side of a 
Complex Order that is to buy or sell an equal quantity of two 
options series resting on the Complex Order Book.
    \7\ See Rule 7150(i).
    \8\ See Rule 7130(b).
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    Unrelated Orders and Legging Orders on the opposite side of the PIP 
Order received during the PIP may be immediately executed under certain 
circumstances.\9\ During a PIP, when such an Unrelated Order is 
submitted to BOX or a Legging Order is generated on the opposite side 
of the PIP Order such that it would cause an execution to occur prior 
to the end of the PIP, the Unrelated Order or Legging Order is 
immediately executed against the PIP Order. Any remaining portion of 
the Unrelated Order or Legging Order is filtered normally.\10\ Any 
remaining portion of the PIP Order is executed at the conclusion of the 
PIP normally.\11\ Following the execution of the PIP Order, any 
remaining Improvement Orders are cancelled.
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    \9\ See Rule 7150(j).
    \10\ See Rule 7130(b).
    \11\ See Rule 7150(f)(3).
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Current PIP Allocation
    At the conclusion of a PIP, the PIP Order is currently matched 
against the best prevailing quote(s) or order(s) on BOX (except any 
pre-PIP Broadcast proprietary quote or order from the Initiating 
Participant), in accordance with price/time priority as set forth in 
Rule 7130, whether Improvement Order(s) or Unrelated Order(s) received 
by BOX, or Legging Orders generated, during the PIP (excluding 
Unrelated Orders that were immediately executed during the interval of 
the PIP). Such 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-PIP proprietary orders 
submitted by Options Participants.
    The Exchange's Rules currently provide certain exceptions to the 
price/time priority set forth in Rule 7130. Specifically, Rule 
7150(f)(4)(i) provides that no order for a non-market maker broker-
dealer account of an Options Participant may be executed before all 
Public Customer orders, whether an Improvement Order, including a CPO, 
or an Unrelated Order, and all non- BOX Options Participant broker-
dealer orders at the same price have been filled.
    Rules 7150(g)(1) and (2) provide the Initiating Participant with 
certain priority and trade allocation privileges upon conclusion of the 
PIP, subject to certain exceptions.\12\ In instances in which a Single-
Priced Primary Improvement Order, as modified (if at all), is matched 
by or matches any competing Improvement Orders and/or non-Public 
Customers' Unrelated Orders at any price level, the Initiating 
Participant retains priority for only forty percent (40%) of the 
original size of the PIP Order. However, if only one competing order 
matches 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 PIP Order.
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    \12\ Rule 7150(g)(4) provides that the Primary Improvement 
Orders shall yield priority to certain competing orders in the 
following circumstances: (i) 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 order(s), 
whether an Improvement Order, including a CPO, or Unrelated Order, 
or any non-BOX Options Participant broker-dealer order(s) at any 
price level, it shall yield priority to them, including any priority 
provided pursuant to 7150(g)(1) or (2), (ii) when the unmodified 
Single-Priced Primary Improvement Order for the account of a Market 
Maker is matched by any competing Public Customer order(s), whether 
an Improvement Order, including a CPO, or Unrelated Order, or any 
non-BOX Options Participant broker-dealer order(s) at the initial 
PIP price level, it shall yield priority to all competing Public 
Customer order(s) or non-BOX Options Participant broker-dealer 
order(s), including any priority provided pursuant to 7150(g)(1) or 
(2), or (iii) when the Max Improvement or the modified Single-Priced 
Primary Improvement Order for the account of a Market Maker matches 
any competing Public Customer order(s), whether an Improvement 
Order, including a CPO, or Unrelated Order, or any non-BOX Options 
Participant broker-dealer order(s) at subsequent price levels, it 
shall yield priority to all competing Public Customer order(s) or 
non-BOX Options Participant broker-dealer order(s), including any 
priority provided pursuant to 7150(g)(1) or (2).
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    In instances in which a Max Improvement Primary Improvement Order 
is submitted by the Initiating Participant, the Initiating Participant 
shall be allocated its full size at each price level, except where 
restricted by the designated limit price and subject to the limitations 
in 7150(g)(3), until a price level is reached where the balance of the 
PIP Order can be fully executed. Only at such a price level will the 
Initiating Participant retain priority for only forty percent (40%) of 
the remaining size of the PIP Order. However, if only one competing 
order 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 PIP Order.
    At its option, the Initiating Participant may designate a lower 
amount for which it retains certain priority and trade allocation 
privileges upon the conclusion of the PIP auction than it is entitled 
to pursuant to the provisions of 7150(h)(1) [sic] or 7150(h)(2) [sic], 
mentioned above.\13\ When starting a PIP, the Initiating Participant 
may submit to the Exchange the Primary Improvement Order with a 
designation of the total amount of the PIP Order it is willing to 
``surrender'' to the other PIP Participants (``PIP Surrender 
Quantity''). Under no circumstances will the Initiating Participant 
receive an allocation percentage of more than 50% with one competing 
order or 40% with multiple competing orders. Upon the conclusion of the 
PIP auction, when the Trading Host determines the priority and trade 
allocation amounts for the Initiating Participant pursuant to 
7150(h)(1) [sic] or 7150(h)(2) [sic], the Trading Host will 
automatically adjust the trade allocations to the other PIP 
Participants, according to the priority set forth in 7150(g) [sic], up 
to the PIP Surrender Quantity. The Primary Improvement Order is 
allocated the remaining size of the PIP Order above the PIP Surrender 
Quantity, if any, pursuant to 7150(g). If the aggregate size of other 
PIP Participants' contra orders is not equal to or greater than the PIP 
Surrender Quantity, then the remaining PIP Surrender Quantity shall be 
left unfilled and the Primary Improvement Order shall be allocated the 
remaining size of the PIP Order pursuant to 7150(h)(1) [sic] or 
7150(h)(2) [sic].
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    \13\ See Rule 7150(g)(6)(i).
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Proposed PIP Allocation
    The Exchange is now proposing to amend the trade allocation 
algorithm for matching orders at the conclusion of the PIP. The PIP 
Order will continue to be matched with opposite side competing orders 
and quotes in price priority. While quotes and orders on the BOX Book 
will continue to execute in price/

[[Page 37800]]

time priority, in the event an execution opportunity occurs for a quote 
or order on the BOX Book against a PIP Order at the end of a PIP, the 
PIP execution will occur according to the priority algorithm described 
below. Specifically, if the total quantity of orders, quotes, 
Improvement Orders, Legging Orders and the Primary Improvement Order is 
equal to or less than the quantity of the PIP Order at a given price 
level, all orders at the price will be filled and the balance of the 
PIP Order will be executed at the next best price. If the total 
quantity of orders, quotes, Improvement Orders, Legging Orders and the 
Primary Improvement Order is greater than the quantity of the PIP Order 
at a given price level, the allocation will be as follows:

Public Customer Allocation

    Whereas, currently, Public Customers do not have absolute execution 
priority when certain orders have time priority at the same price, the 
Exchange now proposes that all orders, other than Legging Orders and 
the Primary Improvement Order, for the account of Public Customers,\14\ 
whether Improvement Orders or Unrelated Orders, including quotes and 
orders on the BOX Book prior to the PIP Broadcast, will be allocated 
for execution against the PIP Order first.\15\ Where there are multiple 
such orders for the account of Public Customers at the same price, the 
trade allocation will be by time priority. The Exchange notes that this 
is the same as Phlx.\16\
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    \14\ As discussed below under the heading ``Professional 
Customers,'' upon approval of the proposed Rule change, 
Professionals would be treated in the same manner as broker-dealers 
for purposes of the PIP and COPIP, and not in the same manner as 
non-Professional Public Customers. See proposed Rules 100(a)(50), 
7150(a)(2) and 7245(a)(4).
    \15\ See proposed Rule 7150(g)(1).
    \16\ See Phlx Rule 1080(n)(ii)(E).
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    If, at the end of the Public Customer allocation, there remains any 
unallocated quantity of the PIP Order, the balance will be allocated as 
described below.
Example 1: Primary Improvement Order for the Account of a Public 
Customer
    Suppose at the end of a PIP to sell 100 contracts, where the 
Primary Improvement Order is for the account of a Public Customer that 
has elected a PIP Surrender Quantity of 80, the BOX Book is as follows 
in order of time priority:

------------------------------------------------------------------------
        NBBO Buy at 2.00                       Sell at 2.08
------------------------------------------------------------------------
Public Customer 1 order to buy    PIP Order to sell 100.
 20 at 2.04.
Public Customer 2 Primary
 Improvement Order to buy 100 at
 2.04
Market Maker Improvement Order
 to buy 30 at 2.04
Public Customer 3 Improvement
 Order to buy 30 at 2.04
Trade allocation is as follows:
Public Customer 1: 20 at 2.04
Public Customer 3: 30 at 2.04
Public Customer 2 Primary
 Improvement Order: 20 at 2.04
 (the PIP Surrender Quantity of
 80 contracts results in Public
 Customer 2 receiving an
 allocation of 20 contracts,
 which is less than 50% of the
 remaining 50 contracts
 (50%*50=25) to which the
 Primary Improvement Order would
 otherwise be entitled since
 there is only one responder)
Market Maker: 30 at 2.04
------------------------------------------------------------------------

    Allocation among all Public Customers, other than the Initiating 
Participant, at the same price is by time priority.

Example 2: PIP Trade Allocation When Primary Improvement Order is for 
the Account of a Public Customer

    Suppose the Primary Improvement Order, in a PIP to sell 100 
contracts of options instrument A, is for the account of a Public 
Customer. At the end of the PIP, the BOX Book for instrument A is as 
follows in order of time priority:

------------------------------------------------------------------------
        NBBO Buy at 2.00                       Sell at 2.08
------------------------------------------------------------------------
Public Customer 1 order to buy    PIP Order to sell 100.
 10 at 2.03.
Public Customer 2 Primary
 Improvement order to buy 100 at
 2.03
Market Maker order to buy 100 at
 2.03
At the end of the PIP, the trade
 allocation is as follows:
    Public Customer 1: 10 at
     2.03
    Public Customer 2 Primary
     Improvement Order: 45 at
     2.03 (50% of the remaining
     90 contracts since there is
     only one responder)
Market Maker: 45 at 2.03
------------------------------------------------------------------------

Primary Improvement Order Allocation
    After the Public Customer allocation, the applicable trade 
allocation described below will be allocated to the Primary Improvement 
Order.\17\ If the Primary Improvement Order has designated a PIP 
Surrender Quantity, the Primary Improvement Order allocation will be 
reduced, if necessary, in accordance with the PIP Surrender Quantity.
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    \17\ See proposed Rule 7150(g)(2).
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    When a Single-Priced Primary Improvement Order is matched by or 
matches any competing Improvement Orders and/or non-Public Customers' 
Unrelated Orders at the final price level, the Initiating Participant 
retains priority for up to forty percent (40%) of the remaining size of 
the PIP Order after Public Customer orders are satisfied. However, if 
only one competing order matches the Initiating Participant's Single-
Priced Primary Improvement Order at the final price level, then the 
Initiating Participant may retain priority for up to fifty percent 
(50%) of the remaining size of the PIP Order after Public Customer 
orders are satisfied.\18\ When a Max Improvement Primary Improvement 
Order is submitted by the Initiating Participant, the Initiating 
Participant shall be allocated its full size at each price level, 
except where restricted by the designated limit price, until a price 
level is reached where the balance of the PIP Order can be fully 
executed. At such price level, the

[[Page 37801]]

Initiating Participant will be entitled to receive up to forty percent 
(40%) of the remaining size of the PIP Order after Public Customer 
orders are satisfied. However, if only one competing order matches the 
Initiating Participant's Max Improvement Primary Improvement Order at 
the final price level, then the Initiating Participant may retain 
priority for up to fifty percent (50%) of the remaining size of the PIP 
Order after Public Customer orders are satisfied.\19\ Neither Public 
Customer orders nor Legging Orders will be considered when determining 
whether the Initiating Participant retains 40% or 50% in proposed Rule 
7150(h) because neither Public Customer order allocation (which are 
executed in priority over the Initiating Participant) nor Legging Order 
allocation (which receive allocations at the final price level only 
when the Initiating Participant declines its full allocation by 
electing a PIP Surrender Quantity) will be affected by the Initiating 
Participant retaining the difference between 40% and 50%. The Exchange 
notes that this is similar to Phlx in treatment of Public Customer 
orders.\20\
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    \18\ See proposed Rule 7150(h)(1).
    \19\ See proposed Rule 7150(h)(2).
    \20\ See Phlx Rule 1080(n)(ii)(E). Note that, in its Rule 
1080(n)(ii)(E)(2)(b), the Phlx auto-match feature limits the 
Initiating Participant to 40% allocation and that Phlx does not 
address Legging Orders.
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    The balance will be allocated as described below.
Example 3: PIP with Auto-Matching
    Suppose a PIP Order to sell 150 contracts of options instrument A. 
Suppose, further, at the end of the PIP auction, the BOX Book is as 
follows in order of price/time priority:

------------------------------------------------------------------------
         NBBO Buy at 2.00                       Sell at 2.09
------------------------------------------------------------------------
Broker-dealer 1 order to buy 10 at  PIP Order to sell 150.
 2.06.
Market Maker 1 Improvement Order    Order to sell 10 at 2.09.
 to buy 8 at 2.05.
Market Maker 2 Improvement Order
 to buy 2 at 2.05
Broker-dealer 2 Improvement Order
 to buy 5 at 2.05
Primary Improvement Order to buy
 150 at 2.04
Broker-dealer 3 Improvement Order
 to buy 8 at 2.04
Market Maker 3 Improvement Order
 to buy 25 at 2.04
Public Customer order to buy 10 at
 2.04
Suppose the Primary Improvement
 Order specified an auto-match
 limit price of 2.05. The trade
 allocation at the best available
 price (at 2.06) is as follows:
    Broker-dealer 1 order: 10       140 remaining to allocate.
     contracts at 2.06.
The Primary Improvement Order is
 not willing to auto-match the
 2.06 price level, so it goes to
 the next price available. The
 trade allocation at the 2.05
 price level is as follows:
Market Maker 1 Improvement Order:
 8 contracts at 2.05
Market Maker 2 Improvement Order:
 2 contracts at 2.05
Broker-dealer 2 Improvement Order:
 5 contracts at 2.05
Primary Improvement Order: auto-    110 remaining to allocate
 match 15 contracts at 2.05.
As there is a remaining PIP Order
 quantity to be filled, it goes to
 the next price available. The
 trade allocation at the 2.04
 price level is as follows (this
 is the price level where the PIP
 Order will be completely filled):
    Public Customer Order: 10
     contracts at 2.04
    Primary Improvement Order: 40
     contracts at 2.04 (40% of 100
     = 40, use 40% because there
     are 2 responders at this
     price level)
    Market Maker 3 Improvement
     Order: 25 contracts at 2.04
    Broker-dealer 3 Improvement
     Order: 8 contracts at 2.04
    Primary Improvement Order will
     take the remaining 27
     contracts at 2.04 (for a
     total of 67 contracts at
     2.04)
------------------------------------------------------------------------


Example 4: Allocating 50%, Rather than 40%, to Primary Improvement 
Order

    Suppose a PIP Order to sell 100 contracts of options instrument A. 
Suppose, further, at the end of the PIP auction, the BOX Book is as 
follows in order of time priority:

------------------------------------------------------------------------
         NBBO Buy at 2.00                       Sell at 2.07
------------------------------------------------------------------------
Public Customer 1 order to buy 10   PIP Order to sell 100.
 at 2.02.
Public Customer 2 order to buy 15
 at 2.02
Primary Improvement Order to buy
 100 at 2.02
Market Maker order to buy 100 at
 2.02
At the end of the PIP, the trade
 allocation is as follows:
10 contracts at 2.02 to Public
 Customer 1
15 contracts at 2.02 to Public
 Customer 2
37 contracts at 2.02 to Primary
 Improvement Order (50%
 allocation)
38 contracts at 2.02 to Market
 Maker
------------------------------------------------------------------------

    Note that the Primary Improvement Order received an allocation 
priority of 50% of the remaining PIP Order size (50%*(100-25) = 37, 
rounded down) \21\ in this case because Public Customer orders are not 
included in the determination of the 50%/40% allocation rule.
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    \21\ Contracts are allocated in whole numbers and, to ensure the 
allocation priority to Primary Improvement Orders does not exceed 
the applicable 40% or 50% specified in proposed Rule 7150(h), 
allocations of fractional contracts to the Primary Improvement Order 
in the Primary Improvement Order allocation step are rounded down.
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Market Maker Allocation
    After the Primary Improvement Order allocation, any remaining 
unallocated quantity of the PIP Order will be allocated to orders and 
quotes, including Improvement Orders and quotes and orders on the BOX 
Book prior to the PIP Broadcast for the account of Market Makers.\22\ 
Where

[[Page 37802]]

there are orders/quotes for the accounts of more than one Market Maker 
at the same price, the trade allocation formula for Market Makers will 
provide for the allocation of contracts among Market Makers based on 
size pro rata for the remaining contracts. The proposed Market Maker 
allocation would follow the formula: B * C where component B is derived 
by dividing the quantity of contracts for the Market Maker at the price 
level by the total quantity of contracts of all Market Makers at the 
price level, and component C is the remaining quantity of the PIP Order 
to be allocated after the Primary Improvement Order allocation. If the 
quantity of contracts for the Market Maker order in B is greater than 
the original quantity of the PIP Order, the Market Maker's quantity 
will be capped at the size of the original PIP Order for purposes of 
calculating B. If the trade allocation for a Market Maker would be 
greater than the quantity of the Market Maker order/quote at the price 
level, the Market Maker's trade allocation will not exceed the size of 
the Market Maker order/quote at the price level. If the trade 
allocation for a Market Maker would result in a fraction of a contract, 
it will be rounded down.
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    \22\ See proposed Rule 7150(g)(3).
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Example 5: Market Maker Allocation Formula
    In certain circumstances, due to rounding down, it is possible that 
some Market Maker orders will not be filled even though there is 
sufficient quantity of the PIP Order to be allocated. Suppose at the 
end of a PIP Order to sell 200 contracts of options instrument A, the 
BOX Book is as follows in order of time priority:
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    \23\ The Market Maker allocation formula is: 2 contracts for 
Market Maker 1 divided by 222 contracts for all Market Makers, 
multiplied by 120 remaining contracts to be allocated from the PIP 
Order and rounded down = 1.

------------------------------------------------------------------------
         NBBO Buy at 2.00                       Sell at 2.06
------------------------------------------------------------------------
Primary Improvement Order to buy    PIP Order to sell 200.
 200 at 2.02.
Market Maker 1 order to buy 2 at
 2.02
Market Maker 2 order to buy 20 at
 2.02
Market Maker 3 order to buy 80 at
 2.02
Market Maker 4 order to buy 120 at
 2.02
Professional Customer to buy 20 at
 2.02
At the end of the PIP, the trade
 allocation will be as follows:
First, to the Primary Improvement
 Order for 80 contracts and then
 to the Market Makers, pursuant to
 the formula provided in Rule
 7150(g)(3), as follows:
    Market Maker 1-1 contract \23\
    Market Maker 2-10 contracts
    Market Maker 3-43 contracts
    Market Maker 4-64 contracts
------------------------------------------------------------------------

    As a result, a total of 118 contracts are allocated to all Market 
Makers even though there were, in total, 120 contracts available to be 
allocated to Market Makers from the remaining PIP Order. The remaining 
PIP Order quantity of 2 contracts will be allocated to the Professional 
Customer order.
Remaining Orders Allocation
    After the Market Maker allocation, any remaining unallocated 
quantity of the PIP Order will be allocated to any remaining orders, 
other than Legging Orders and Market Maker orders, including orders for 
the account of Professionals and orders on the BOX Book prior to the 
PIP Broadcast, not receiving allocation in the above rounds.\24\
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    \24\ See proposed Rule 7150(g)(4). Currently, Professionals are 
treated like Public Customers in circumstances where the Exchange 
yields priority to Public Customers under SEC Rule 11a1-1(T). Under 
the proposed rule change, pursuant to which Improvement Orders will 
not be broadcast, transactions executed on the Exchange will qualify 
under SEC Rule 11a2-2(T) as described below. As a result, 
Professionals will no longer be treated like Public Customers for 
purposes of priority.

Example 6: Comparison of Professional Customer PIP Trade Allocation 
---------------------------------------------------------------------------
(Before and After Proposed Rule Change)

    Suppose at the end of a PIP to sell 100 contracts of Instrument A, 
where the Primary Improvement Order is for the account of a Market 
Maker, the BOX Book for Instrument A is as follows in order of time 
priority:

------------------------------------------------------------------------
        NBBO Buy at 2.00                       Sell at 2.07
------------------------------------------------------------------------
Public Customer 1 order to buy    PIP Order to sell 100.
 10 at 2.04.
Professional Customer 1 order to
 buy 10 at 2.04
Primary Improvement Order to buy
 100 at 2.04
Market Maker 1 Improvement Order
 to buy 30 at 2.04
Broker-dealer 1 Improvement
 Order to buy 20 at 2.04
Market Maker 2 Improvement Order
 to buy 30 at 2.04
Trade allocation at the end of
 the PIP under current BOX rules
 is as follows:
 
Current Rules
 
Public Customer 1: 10 contracts
 at 2.04
Professional Customer 1: 10
 contracts at 2.04
Primary Improvement Order: 40
 contracts at 2.04
Market Maker 1 Improvement
 Order: 30 contracts at 2.04
Broker-dealer 1 Improvement
 Order: 10 contracts at 2.04
Trade allocation at the end of
 the PIP under the proposed
 rules is as follows:
 
Proposed Rules
Public Customer 1: 10 contracts
 at 2.04
Primary Improvement Order: 36
 contracts at 2.04

[[Page 37803]]

 
Market Maker 1 Improvement
 Order: 27 contracts at 2.04
 \25\
Market Maker 2 Improvement
 Order: 27 contracts at 2.04
------------------------------------------------------------------------

    Where there are more than one remaining unallocated orders, 
including Improvement Orders, at the same price, the trade allocation 
to each such order will follow the formula: B * C where component B is 
derived by dividing the quantity of contracts for the order at the 
price level by the total quantity of contracts for all remaining orders 
at the price level, and component C is the remaining quantity of the 
PIP Order to be allocated after the Market Maker allocation. If the 
quantity of contracts for the order in B is greater than the original 
quantity of the PIP Order, the quantity of contracts for the order will 
be capped at the size of the original PIP Order for purposes of 
calculating B. If the trade allocation for an order/quote would be 
greater than the quantity of the order/quote at the price level, the 
trade allocation will not exceed the size of the order/quote at the 
price level. If the trade allocation would result in a fraction of a 
contract, it will be rounded down.
---------------------------------------------------------------------------

    \25\ The Market Maker allocation formula is: 30 contracts for 
Market Maker 1 divided by 60 contracts for all Market Makers, 
multiplied by 54 remaining contracts to be allocated from the PIP 
Order = 27.
---------------------------------------------------------------------------

    If, at the end of the remaining orders allocation, there remains 
any unallocated quantity of the PIP Order, the balance will be 
allocated as described below.
Additional Allocation
    The balance of the PIP Order will be allocated to all remaining 
quotes and orders, if any, other than Legging Orders and the Primary 
Improvement Order. The allocation method will be to allocate one 
contract of the PIP Order per quote/order in sequence until each 
remaining quote/order has received one contract or until the PIP Order 
is fully allocated. Allocation sequence among quotes/orders in this 
step will be in order of size with the largest remaining quote/order 
allocated first. Where two or more such quotes/orders are the same 
size, trade allocation sequence will be by time priority. If, at the 
end of the additional allocation, there remains any unallocated 
quantity of the PIP Order, the balance will be allocated as described 
in the Legging Order allocation below.\26\
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    \26\ See proposed Rule 7150(g)(5).
---------------------------------------------------------------------------

Example 7: Additional Allocation When Limited by PIP Surrender Quantity 
With Multiple Market Maker Orders
    Suppose at the end of a PIP to sell 177 contracts, where the PIP 
Surrender Quantity for the Primary Improvement Order is 177, the BOX 
Book is as follows in order of time priority:

------------------------------------------------------------------------
        NBBO Buy at 2.00                       Sell at 2.06
------------------------------------------------------------------------
Public Customer 1 order to buy    PIP Order to sell 177.
 10 at 2.04.
Primary Improvement Order to buy  Order to sell 10 at 2.06.
 177 at 2.04.
Market Maker 1 Improvement Order
 to buy 114 at 2.04
Market Maker 2 Improvement Order
 to buy 115 at 2.04
Market Maker 3 Improvement Order
 to buy 117 at 2.04
At the end of the PIP, the trade
 allocation is as follows:
    Public Customer 1: 10         167 remaining to allocate.
     contracts at 2.04.
    Primary Improvement Order: 0
     contracts (all are
     surrendered)
    Market Maker 1 Improvement
     Order: 55 contracts at 2.04
    Market Maker 2 Improvement
     Order: 55 contracts at 2.04
    Market Maker 3 Improvement
     Order: 56 contracts at 2.04
    The PIP Order has 1
     remaining contract to
     allocate at 2.04.
    The Market Maker orders have
     the following contracts
     remaining to be filled at
     2.04:
    Market Maker 1 Improvement
     Order: 59 contracts
     remaining at 2.04
    Market Maker 2 Improvement
     Order: 60 contracts
     remaining at 2.04
    Market Maker 3 Improvement
     Order: 61 contracts
     remaining at 2.04
The Market Maker orders are
 ranked in order of size, with
 Market Maker 3 being the
 largest, and allocated on a
 rotating basis one by one until
 either the Market Maker order
 or the PIP Order is exhausted.
 In this case, the remaining 1
 contract is allocated as
 follows:
    Market Maker 3 Improvement
     Order: 1 contract at 2.04
------------------------------------------------------------------------

Legging Order Allocation
    If, after the allocation of all orders, quotes and Improvement 
Orders in proposed Rules 7150(g)(1) through (5), there remains any 
unallocated quantity of the PIP Order, to the extent of any Surrender 
Quantity, allocation will be made to any Legging Orders at the same 
price in time priority.\27\
---------------------------------------------------------------------------

    \27\ See proposed Rule 7150(g)(6). Legging Orders may receive 
allocations of a PIP Order when the Legging Order is at a price 
better than the final price level or at the final price level in the 
event the Initiating Participant has specified a surrender quantity.

Example 8: Primary Improvement Order's PIP Surrender Quantity Is 
---------------------------------------------------------------------------
Greater Than the Sum of Legging Orders at the Price Level

    Suppose at the end of a PIP to sell 100 contracts, where the PIP 
Surrender Quantity for the Primary Improvement Order is 70 contracts, 
the BOX Book is as follows in order of time priority:

------------------------------------------------------------------------
        NBBO Buy at 2.00                       Sell at 2.06
------------------------------------------------------------------------
Public Customer order to buy 10   PIP Order to sell 100.
 at 2.04.
Legging Order to buy 50 at 2.04.  Order to sell 10 at 2.06.
Primary Improvement Order to buy
 100 at 2.04

[[Page 37804]]

 
At the end of the PIP, the trade
 allocation is as follows:
    Public Customer: 10           90 remaining to allocate
     contracts at 2.04
    Primary Improvement Order:    60 remaining to allocate.
     30 contracts at 2.04
    Legging Order: 50 contracts   10 remaining to allocate.
     at 2.04
The remaining 10 contracts are
 allocated to the Primary
 Improvement Order at 2.04 (40
 contracts total) because all
 other orders have been filled.
------------------------------------------------------------------------


Example 9: Primary Improvement Order's PIP Surrender Quantity is Less 
Than the Sum of Legging Orders at the Price Level

    Suppose at the end of a PIP to sell 100 contracts, where the PIP 
Surrender Quantity for the Primary Improvement Order is 70 contracts, 
the BOX Book is as follows in order of time priority:

------------------------------------------------------------------------
        NBBO Buy at 2.00                       Sell at 2.06
------------------------------------------------------------------------
Public Customer order to buy 10   PIP Order to sell 100.
 at 2.04.
Legging Order to buy 100 at 2.04  Order to sell 10 at 2.06.
Primary Improvement Order to buy
 100 at 2.04
At the end of the PIP, the trade
 allocation is as follows:
    Public Customer: 10           90 remaining to allocate.
     contracts at 2.04
    Primary Improvement Order:    60 remaining to allocate.
     30 contracts at 2.04
    Legging Order: 60 contracts
     at 2.04
------------------------------------------------------------------------

    If, at the end of the Legging Order allocation, there remains any 
unallocated quantity of the PIP Order, the balance will be allocated to 
the Initiating Participant regardless of any applicable PIP Surrender 
Quantity.
Example 10: Orders on the BOX Book Prior to the PIP Broadcast, Which 
are Eligible for Execution at the Conclusion of the PIP
    Suppose the following orders (listed in time priority) are on the 
BOX Book prior to the broadcast of a PIP Order to sell 100 contracts of 
options instrument A.

------------------------------------------------------------------------
        NBBO Buy at 2.02                       Sell at 2.09
------------------------------------------------------------------------
Broker-dealer order to buy 100    Market Maker quote to sell 10 at 2.09.
 at 2.02.
Public Customer order to buy 5
 at 2.02
Market Maker quote to buy 15 at
 2.02
Public Customer order to buy 12
 at 2.02
Market Maker quote to buy 30 at
 2.02
Primary Improvement Order to buy
 100 at 2.02
------------------------------------------------------------------------

    Suppose at the end of the PIP, only one Improvement Order has been 
received from a Market Maker to buy 10 at 2.03 and one Unrelated Order 
from a Professional Customer to buy 15 at 2.03. The BOX Book, including 
the PIP Order, is as follows at the end of the PIP:

------------------------------------------------------------------------
        NBBO Buy at 2.02                       Sell at 2.09
------------------------------------------------------------------------
Market Maker Improvement Order    PIP Order to sell 100.
 to buy 10 at 2.03.
Professional order to buy 15 at   Market Maker quote to sell 10 at 2.09.
 2.03.
Broker-dealer order to buy 100
 at 2.02
Public Customer order to buy 5
 at 2.02
Market Maker quote to buy 15 at
 2.02
Public Customer order to buy 12
 at 2.02
Market Maker quote to buy 30 at
 2.02
Primary Improvement Order to buy
 100 at 2.02
The trade allocation will be as
 follows:
First, because the orders at the
 first/best price level are, in
 total, less than the size of
 the PIP Order, such orders are
 filled for their entire 25
 contracts at 2.03.
Second, at the next best price
 level (2.02), the remaining 75
 contracts of the PIP Order will
 be allocated as follows:
    Public Customer Order to buy
     5 at 2.02
    Public Customer Order to buy
     12 at 2.02
As the total of the orders for
 the account of Public Customers
 (17) is less than the remaining
 PIP Order quantity (75), the
 two Public Customer orders are
 filled, leaving 58 contracts
 remaining.
Third, the remaining 58
 contracts of the PIP Order are
 allocated as follows:
    Primary Improvement Order to
     buy 23 at 2.02.
    23 contracts (40% of the
     remaining quantity of 58)
     are allocated to the
     Primary Improvement Order
     at 2.02, leaving 35
     contracts remaining.

[[Page 37805]]

 
Fourth, the remaining 35
 contracts of the PIP Order are
 allocated as follows:
    Market Maker quote to buy 15
     at 2.02
    Market Maker quote to buy 30
     at 2.02
As there are remaining
 unallocated quotes and orders
 for the accounts of more than
 one Market Maker at the same
 price, the trade allocation to
 each Market Maker will follow
 the formula provided in
 proposed Rule 7150(g)(3). The
 first Market Maker quote will
 be allocated 33.3% (15/45) of
 the 35 contracts, which is 11
 contracts (allocation of
 partial quantities are rounded
 down in this step). The second
 Market Maker quote will be
 allocated 66.67% (30/45) of the
 35 contracts or 23.
Fifth, the one remaining
 contract will be allocated to
 the broker-dealer Order to buy
 100 at 2.02.
------------------------------------------------------------------------

    Note: if the PIP Order had instead been a simple limit order to 
sell 100 contracts of A at 2.02, the broker-dealer order would have 
been filled first on the BOX Book due to its time priority.
Example 11: Valid Starting Prices for PIP Auctions
    A Participant wishes to enter a PIP Order to sell 50 contracts of 
options instrument A:
    (a) Suppose the NBBO and the BOX Book for instrument A are as 
follows:

 
------------------------------------------------------------------------
             NBBO Buy at 2.02                       Sell at 2.09
------------------------------------------------------------------------
Quote to buy 10 at 2.02...................  Order to sell 5 at 2.09.
------------------------------------------------------------------------

    The PIP auction start price can be any price between 2.02 and 2.08 
inclusive.\28\
---------------------------------------------------------------------------

    \28\ The PIP Start Price shall, on the opposite side of the PIP 
Order, be equal to or better than the NBBO and, on the same side of 
the PIP Order, be equal to or better than NBBO, provided that, if 
BBO is equal to NBBO, then the PIP Start Price must also be better 
than BBO on the same side at the time of commencement of the PIP 
(Proposed Rule 7150(f)).
---------------------------------------------------------------------------

    (b) Suppose, instead, the NBBO and the BOX Book for instrument A 
are as follows:

------------------------------------------------------------------------
             NBBO Buy at 2.02                       Sell at 2.09
------------------------------------------------------------------------
Quote to buy 10 at 2.02...................  Order to sell 5 at 2.10.
------------------------------------------------------------------------

    The PIP auction start price can be any price between 2.02 and 2.09 
inclusive.\29\
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

Quotes and Orders on the BOX Book
    Currently, all quotes and orders on the BOX Book prior to the PIP 
Broadcast, excluding any proprietary quotes or orders from the 
Initiating Participant, are filled at the end of the PIP in time 
priority before any other order at the same price.\30\ Further, Rule 
7150(g)(3) states that the Primary Improvement Order follows in time 
priority all quotes and orders on the BOX Book prior to the PIP 
Broadcast that are equal to the (A) Single-Priced Primary Improvement 
Order price; or (B) execution price of a Max Improvement Primary 
Improvement Order that results in the balance of the PIP Order being 
fully executed, except any proprietary quote or order from the 
Initiating Participant.
---------------------------------------------------------------------------

    \30\ See Rule 7150(f)(4)(i).
---------------------------------------------------------------------------

    The Exchange is now proposing that quotes and orders on the BOX 
Book prior to the PIP Broadcast will no longer be allocated against the 
PIP Order at the end of the PIP in time priority before any other order 
at the same price. Specifically, quotes and orders on the BOX Book 
prior to the PIP Broadcast will now be considered alongside all other 
quotes and orders, whether Improvement Order(s), Legging Order(s), or 
Unrelated Order(s) received by BOX during the PIP (excluding all 
Legging Orders and Unrelated Orders that were immediately executed 
during the interval of the PIP), for matching at the conclusion of the 
PIP. Therefore, the Exchange is proposing to remove the exceptions for 
quotes and orders on the BOX Book prior to the PIP Broadcast in Rules 
7150(f)(4)(i) and (g)(3). The Exchange notes that this is consistent 
with Phlx.\31\ Proprietary quotes or orders from the Initiating 
Participant at the Primary Improvement Order price shall not be 
executed against the PIP Order during or at the conclusion of the PIP.
---------------------------------------------------------------------------

    \31\ See Phlx Rule 1080(n)(ii)(E)(2).
---------------------------------------------------------------------------

Market Maker Prime
    Current Rule 7160 provides that at the commencement of each PIP, a 
single Market Maker Prime may be designated for that PIP only. The 
Market Maker Prime is a Market Maker participating in the PIP who has 
partial time priority over all other Market Maker Improvement Orders, 
CPOs, PPOs and Unrelated Orders at the same limit price in a single 
PIP. The Market Maker Prime must satisfy the following criteria: (i) 
The Market Maker must have a quote that is equal to or better than the 
NBBO on the same side of the market as the Primary Improvement Order at 
the instant the PIP is initiated, (ii) the Market Maker's quote must 
represent an order in the BOX Book with the best price/time priority, 
and (iii) the Market Maker Prime must not have submitted the Primary 
Improvement Order to commence the relevant PIP. If more than one Market 
Maker meets the criteria, the Market Maker whose quote has time 
priority would be the Market Maker Prime for that PIP.
    When the PIP was first adopted the Exchange introduced the Market 
Maker Prime designation to encourage Market Makers to quote 
aggressively on the BOX Book and not wait for a PIP to begin.\32\ The 
Exchange is now proposing to remove the Market Maker Prime designation 
from the Exchange's Rulebook as this designation is obsolete. Market 
Makers rarely use the Market Maker Prime functionality and the Exchange 
believes the continued presence of the designation will only complicate 
the Exchange's Rules, and provides little or no benefit.
---------------------------------------------------------------------------

    \32\ See Securities Exchange Act Release No. 47186 (January 14, 
2003), 78 FR 3062 (January 22, 2003) (Notice of Filing SR-BSE-2002-
15).
---------------------------------------------------------------------------

Customer PIP Order
    Current Rule 7150(h) provides for a Customer PIP Order (``CPO''). A 
CPO allows a Public Customer to submit an order on a single options 
series, through an OFP, specifying one price for entry on the BOX Book 
(in the applicable minimum increment for that series) and a different 
price for interaction with a PIP (in one cent increments).
    The CPO was intended to provide access to the PIP on behalf of a 
Public Customer, however, CPOs are rarely submitted to the Exchange. 
The Exchange has determined that CPOs have not provided the desired 
benefit that they were intended to, therefore the Exchange is proposing 
to remove CPOs from its Rules. Public Customers may continue to submit 
orders to the Exchange and Improvement Orders to interact with a PIP.
Additional PIP Changes
    The Exchange is proposing to remove various provisions of Rule 7150 
to accommodate the proposed change in the PIP allocation. Currently, 
Rule 7150(f)(4) provides certain exceptions to the price/time priority 
currently applicable to the PIP allocation. Since

[[Page 37806]]

the Exchange is now proposing to change the allocation at the end of 
the PIP so it is no longer based on price/time priority, these 
exceptions are no longer applicable because transactions on the 
Exchange will comply with Rule 11a2-2(T) as described below; therefore 
the Exchange is proposing to remove these sections of Rule 7150.
    As part of the proposed changes to the PIP allocation, the Exchange 
is also making various non-substantive changes to its rules to 
accommodate these proposed changes. Most of these are the renumbering 
of sections to account for a new subsection (g) being proposed to Rule 
7150 and the removal of certain sections. The Exchange proposes to 
include language to provide clarity regarding the execution price in 
Rule 7130(b)(5) and the PIP Start Price in Rule 7150(f) to ensure that 
the PIP does not trade ahead of resting same-side orders. Additionally, 
the Exchange also proposes to amend various cross-references in Rules 
7000, 7130 and 7150 to take into account the renumbering.
    The Exchange must also correct references in two additional rules 
that reference provisions in the current Rule 7150 that are being 
renumbered. Specifically, Rule 7000(c)(6) references Rule 7150(g), 
which is being corrected to reference IM-7150-2, and Rule 7130(b)(5) 
references Rule 7150(i) which is being renumbered to Rule 7150(j). 
Additional detail is also being added to Rule 7130(b)(5) to provide 
clarity.
COPIP
    The Exchange recently amended its Rules to permit Complex Orders to 
be submitted to a price improvement period auction mechanism similar to 
the existing PIP mechanism for single options series on BOX.\33\
---------------------------------------------------------------------------

    \33\ See Securities Exchange Act Release No. 71148 (December 19, 
2013), 78 FR 78437 (December 26, 2013) (Order Approving SR-BOX-2013-
43).
---------------------------------------------------------------------------

    Exchange Rule 7245 allows the submission of Complex Orders to a 
COPIP mechanism that is substantially similar to the PIP except as 
necessary to account for distinctions between regular orders on the BOX 
Book and Complex Orders or as otherwise noted below. References to 
Legging Orders do not appear in the COPIP rules because Legging Orders 
interact only with the PIP. However, the COPIP rules do include other 
provisions for interacting with interest on the BOX Book.
Current COPIP Allocation
    At the conclusion of a COPIP, just as with a PIP,\34\ the COPIP 
Order is executed against the best prevailing order(s) on BOX (except 
any pre-COPIP Broadcast proprietary order from the Initiating 
Participant), in accordance with price/time priority, whether 
Improvement Order(s) or Unrelated Order(s) received by BOX during the 
COPIP (excluding all Unrelated Orders that were immediately executed 
during the interval of the COPIP).\35\ 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 Options Participants. Any 
portion of an Improvement Order left unfilled will be cancelled.
---------------------------------------------------------------------------

    \34\ See Rule 7150(f)(3).
    \35\ See Rule 7245(f)(3).
---------------------------------------------------------------------------

    Notwithstanding the foregoing execution rules for a COPIP, BOX Book 
Interest is executed in priority over Complex Orders at the same price 
so as to preserve the already established execution priority of 
interest on the BOX Book over Complex Orders.\36\
---------------------------------------------------------------------------

    \36\ See Rule 7245(f)(3)(i).
---------------------------------------------------------------------------

    Further, no Complex Order for a non-market maker broker-dealer 
account of an Options Participant is executed before any 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, are filled in time priority before any other Complex Order 
at the same price.\37\
---------------------------------------------------------------------------

    \37\ See Rule 7245(f)(3)(ii).
---------------------------------------------------------------------------

    Subject to the execution priority of BOX Book Interest described 
above, the Initiating Participant retains certain priority and trade 
allocation privileges upon conclusion of a COPIP.\38\
---------------------------------------------------------------------------

    \38\ See Rule 7245(g).
---------------------------------------------------------------------------

    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. For purposes of 
calculating the Initiating Participant's priority allocation, BOX Book 
Interest is included as competing orders in a COPIP.
    In instances in which a Max Improvement Primary Improvement Order 
is submitted by the Initiating Participant, the Initiating Participant 
is allocated its full size at each price level, except where restricted 
by the designated limit price and subject to the limitations discussed 
in the following paragraph, until a price level is reached where the 
balance of the COPIP Order can be fully executed. Only at such price 
level will 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. As with Single-Priced Primary 
Improvement Orders discussed above, for purposes of calculating the 
Initiating Participant's priority allocation, BOX Book Interest is 
included as competing orders in a COPIP.
    At its option, the Initiating Participant may designate a lower 
amount for which it retains certain priority and trade allocation 
privileges upon the conclusion of the COPIP auction than it is entitled 
to pursuant to the provisions of Rule 7245(h)(1) or (2) [sic] mentioned 
above. When starting a COPIP, the Initiating Participant may submit to 
the Exchange 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 Surrender Quantity''). Under no 
circumstances does the Initiating Participant receive an allocation 
percentage preference of more than 50% with one competing order, 
including counting BOX Book Interest as a competing order, or 40% with 
multiple competing orders, including counting BOX Book Interest as a 
competing order. The COPIP Surrender Quantity function will not result 
in more than the maximum allowable allocation percentage to the 
Initiating Participant than that which the Initiating Participant would 
have otherwise received in accordance with the allocation procedures 
set forth in Rule 7245.
    Upon the conclusion of the COPIP auction, when the Trading Host 
determines the priority and trade allocation amounts for the Initiating

[[Page 37807]]

Participant pursuant to Rule 7245(h)(1) or (2) [sic], the Trading Host 
will automatically adjust the trade allocations to the other COPIP 
Participants, according to the priority set forth in Rule 7245(g) 
[sic], up to the COPIP Surrender Quantity. The Primary Improvement 
Order shall be allocated the remaining size of the COPIP Order above 
the COPIP Surrender Quantity, if any, pursuant to Rule 7245(g). 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 shall be left unfilled and the 
Primary Improvement Order shall be allocated the remaining size of the 
COPIP Order pursuant to Rule 7245(h)(1) or (2) [sic].
    As in a PIP, the Primary Improvement Order follows, 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) do no execute against the COPIP 
Order during or at the conclusion of the COPIP.
    The Primary Improvement Order yields priority to certain competing 
Complex Orders, including the priority of the Initiating Participant 
described above, as follows.
    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 yields priority to them.
    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.
    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 yields priority 
to them.
Proposed COPIP Allocation
    Similar to the changes being proposed to the PIP allocation above, 
the Exchange is now proposing to amend the COPIP allocation. While 
Complex Orders on the Complex Order Book will continue to execute in 
price/time priority, in the event an execution opportunity occurs for a 
Complex Order on the Complex Order Book against a COPIP Order at the 
end of a COPIP, the COPIP execution will occur according to the 
priority algorithm described below. Specifically, the Exchange is 
proposing that, at the end of the COPIP, the COPIP Order will continue 
to be matched with opposite side competing orders in price priority. If 
the total quantity of orders, Improvement Orders, BOX Book Interest and 
the Primary Improvement Order is equal to or less than the quantity of 
the COPIP Order at a given price level, all orders at the price will be 
filled and the balance of the COPIP Order will be executed at the next 
best price. If the total quantity of orders, Improvement Orders, BOX 
Book Interest and the Primary Improvement Order is greater than the 
quantity of the COPIP Order at a given price level, the allocation will 
be as follows:

BOX Book Interest Allocation

    BOX Book Interest is executed in priority over Complex Orders. 
Accordingly, BOX Book Interest \39\ will continue to be allocated for 
execution against the COPIP Order in priority over Complex Orders and 
in time priority.\40\ If, after the BOX Book Interest allocation, there 
remains any unallocated quantity of the COPIP Order, the balance will 
be allocated as described below.
---------------------------------------------------------------------------

    \39\ ``BOX Book Interest'' is defined as bids and offers on the 
BOX Book for the individual legs of a Strategy. See Rule 7245(a)(3).
    \40\ See proposed Rule 7245(g)(1).
---------------------------------------------------------------------------

Example 12: BOX Book Interest at Multiple Price Levels is Eligible for 
Execution at the End of a COPIP
    Suppose at the end of a COPIP to sell 100 Strategies A+B, the 
orders on BOX for Strategy A+B are as follows:

------------------------------------------------------------------------
        cNNBO Buy at 2.00                      Sell at 2.10
------------------------------------------------------------------------
BOX Book Interest to buy 10 at    COPIP Order to sell 100.
 2.03.
Public Customer 1 order to buy
 20 at 2.03
Primary Improvement Order to buy
 100 at 2.02
Market Maker 1 Improvement Order
 to buy 30 at 2.02
At the end of the COPIP, both
 the BOX Book Interest and the
 Public Customer order (each at
 2.03) are executed against the
 COPIP Order, leaving 70
 contracts to be executed at
 2.02. Prior to the execution of
 any order at 2.02, the BOX
 trading engine determines that
 BOX Book Interest exists to buy
 10 contracts at 2.02. Only
 after the execution of this BOX
 Book Interest will any other
 trades at the same price occur.
------------------------------------------------------------------------

    Trade allocation is as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
BOX Book Interest: 10 Strategies  90 remaining to allocate.
 at 2.03.
Public Customer 1: 20 Strategies  70 remaining to allocate.
 at 2.03.
BOX Book Interest: 10 Strategies  60 remaining to allocate.
 at 2.02.
Primary Improvement Order: 30     30 remaining to allocate.
 Strategies (50%) at 2.02.
Market Maker 1: 30 Strategies at
 2.02
------------------------------------------------------------------------


[[Page 37808]]

Public Customer Allocation
    After the BOX Book Interest allocation, Complex Orders, other than 
the Primary Improvement Order, for the account of Public Customers, 
including Improvement Orders and orders on the Complex Order Book prior 
to the COPIP Broadcast, will be allocated for execution against the 
COPIP Order in priority over other Complex Orders.\41\ Where there are 
multiple such Complex Orders for the account of Public Customers at the 
same price, the trade allocation will be by time priority.
---------------------------------------------------------------------------

    \41\ See proposed Rule 7245(g)(2).
---------------------------------------------------------------------------

    If, at the end of the Public Customer allocation, there remains any 
unallocated quantity of the COPIP Order, the balance will be allocated 
as described below.
Example 13: Primary Improvement Order for the Account of a Public 
Customer
    Suppose at the end of a COPIP to sell 100 Strategies, where the 
Primary Improvement Order is for the account of a Public Customer that 
has elected a COPIP Surrender Quantity of 80, the Complex Order Book is 
as follows in order of time priority:

------------------------------------------------------------------------
        cNBBO Buy at 2.00                      Sell at 2.08
------------------------------------------------------------------------
Public Customer 1 order to buy    COPIP Order to sell 100.
 20 at 2.04.
Public Customer 2 Primary
 Improvement Order to buy 100 at
 2.04
Market Maker Improvement Order
 to buy 30 at 2.04
Public Customer 3 Improvement
 Order to buy 30 at 2.04
Trade allocation is as follows:
Public Customer 1: 20 at 2.04
Public Customer 3: 30 at 2.04
Public Customer 2 Primary
 Improvement Order: 20 at 2.04
 (the COPIP Surrender Quantity
 of 80 Strategies results in
 Public Customer 2 receiving an
 allocation of 20 Strategies,
 which is less than 50% of the
 remaining 50 Strategies (50%*50
 = 25) to which the Primary
 Improvement Order would
 otherwise be entitled since
 there is only one responder)
Market Maker: 30 at 2.04
Allocation among all Public
 Customers, other than the
 Initiating Participant, at the
 same price is by time priority.
------------------------------------------------------------------------


Example 14: COPIP Trade Allocation When Primary Improvement Order is 
for the Account of a Public Customer

    Suppose the Primary Improvement Order, in a COPIP to sell 100 of 
Strategy A+B, is for the account of a Public Customer. At the end of 
the COPIP, the Complex Order Book for Strategy A+B is as follows in 
order of time priority:

------------------------------------------------------------------------
        cNNBO Buy at 2.00                      Sell at 2.10
------------------------------------------------------------------------
Public Customer 1 order to buy    COPIP Order to sell 100.
 10 at 2.03.
Public Customer 2 Primary
 Improvement Order to buy 100 at
 2.03
Market Maker order to buy 100 at
 2.03
At the end of the COPIP, the
 trade allocation is as follows:
Public Customer 1: 10 at 2.03
Public Customer 2 Primary
 Improvement Order: 45 at 2.03
 (50% of the remaining 90
 Strategies since there is only
 one responder)
Market Maker: 45 at 2.03
------------------------------------------------------------------------

Primary Improvement Order Allocation

    After the Public Customer allocation, the applicable trade 
allocation described below will be allocated to the Primary Improvement 
Order.\42\ If the Primary Improvement Order has designated a COPIP 
Surrender Quantity, the Primary Improvement Order allocation will be 
reduced, if necessary, in accordance with the COPIP Surrender Quantity.
---------------------------------------------------------------------------

    \42\ See proposed Rule 7150(h).
---------------------------------------------------------------------------

    When a Single-Priced Primary Improvement Order is matched by or 
matches any Complex Order(s) at the final price level, the Initiating 
Participant retains priority for up to forty percent (40%) of the 
remaining size of the COPIP Order after BOX Book Interest and Public 
Customer orders are satisfied. However, if only one Complex Order 
matches the Initiating Participant's Single-Priced Primary Improvement 
Order 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 after BOX Book Interest and Public Customer orders are 
satisfied.\43\ When a Max Improvement Primary Improvement Order is 
submitted by the Initiating Participant, the Initiating Participant 
shall be allocated its full size at each price level, except where 
restricted by the designated limit price, until a price level is 
reached where the balance of the COPIP Order can be fully executed. At 
such price level, the Initiating Participant will be entitled to 
receive up to forty percent (40%) of the remaining size of the COPIP 
Order after BOX Book Interest and Public Customer orders are satisfied. 
However, if only one competing Complex Order matches the Initiating 
Participant's Max Improvement Primary Improvement Order 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 after 
BOX Book Interest and Public Customer orders are satisfied.\44\ Neither 
Public Customer orders nor BOX Book Interest will be considered when 
determining whether the Initiating Participant retains 40% or 50% in 
proposed Rule 7245(h) because neither Public Customer order allocation 
nor BOX Book Interest allocation (which are executed in priority over 
the Initiating Participant) will be affected by the Initiating 
Participant retaining the difference between 40% and 50%.\45\ The 
Exchange notes that this is similar

[[Page 37809]]

to Phlx in treatment of Public Customer orders.\46\ The balance will be 
allocated as described below.
---------------------------------------------------------------------------

    \43\ See proposed Rule 7245(h)(1).
    \44\ See proposed Rule 7245(h)(2).
    \45\ The first sentence of proposed Rule 7245(h)(1) deletes from 
the current rule the words ``or BOX Book Interest'' in order to be 
consistent with the proposal not to consider BOX Book Interest for 
purposes of determining the Primary Improvement Order's preference 
percentage.
    \46\ See Phlx Rule 1080(n)(ii)(E). Note that, in its Rule 
1080(n)(ii)(E)(2)(b), the Phlx auto-match feature limits the 
Initiating Participant to 40% allocation.
---------------------------------------------------------------------------

Example 15: COPIP with Auto-Matching
    Suppose a COPIP Order to sell 150 Strategies on A+B. Suppose, 
further, at the end of the COPIP auction, the Complex Order Book is as 
follows in order of price/time priority:

------------------------------------------------------------------------
        cNBBO Buy at 2.00                      Sell at 2.09
------------------------------------------------------------------------
Broker-dealer 1 order to buy 10   COPIP Order to sell 150
 at 2.06.
Market Maker 1 Improvement Order  Order to sell 10 at 2.09.
 to buy 8 at 2.05.
Market Maker 2 Improvement Order
 to buy 2 at 2.05
Broker-dealer 2 Improvement
 Order to buy 5 at 2.05
Primary Improvement Order to buy
 150 at 2.04
Broker Dealer 3 Improvement
 Order to buy 8 at 2.04
Market Maker 3 Improvement Order
 to buy 25 at 2.04
Public Customer Order to buy 10
 at 2.04
Suppose the Primary Improvement
 Order specified an auto-match
 limit price of 2.05. The trade
 allocation at the best
 available price (at 2.06) is as
 follows:
    Broker-dealer 1 order: 10     140 remaining to allocate.
     Strategies at 2.06.
The Primary Improvement Order is
 not willing to auto-match the
 2.06 price level, so it goes to
 the next price available. The
 trade allocation at the 2.05
 price level is as follows:
    Market Maker 1 Improvement
     Order: 8 Strategies at 2.05
    Market Maker 2 Improvement
     Order: 2 Strategies at 2.05
    Broker-dealer 2 Improvement
     Order: 5 Strategies at 2.05
    Primary Improvement Order:
     auto-match 15 Strategies at
     2.05 110 remaining to
     allocate
As there is remaining COPIP
 Order quantity to be filled, it
 goes to the next price
 available. The trade allocation
 at the 2.04 price level is as
 follows (this is the price
 level where the COPIP Order
 will be completely filled):
    Public Customer order: 10
     Strategies at 2.04
Primary Improvement Order: 40
 Strategies at 2.04 (40% of 100
 = 40, use 40% because there are
 2 responders at this price
 level)
Market Maker 3 Improvement
 Order: 25 Strategies at 2.04
Broker-dealer 3 Improvement
 Order: 8 Strategies at 2.04
Primary Improvement Order will
 take the remaining 27
 Strategies at 2.04 (for a total
 of 67 Strategies at 2.04)
------------------------------------------------------------------------


Example 16: Allocating 50%, Rather than 40%, to Primary Improvement 
Order

    Suppose a COPIP Order to sell 100 of Strategy A+B. Suppose, 
further, at the end of the COPIP auction, the Complex Order Book is as 
follows in order of time priority:

------------------------------------------------------------------------
        cNNBO Buy at 2.00                      Sell at 2.10
------------------------------------------------------------------------
Public Customer 1 order to buy    COPIP Order to sell 100.
 10 at 2.02.
Public Customer 2 order to buy
 15 at 2.02
Primary Improvement Order to buy
 100 at 2.02
Market Maker order to buy 100 at
 2.02
At the end of the COPIP, the
 trade allocation is as follows:
    10 Strategies at 2.02 to
     Public Customer 1
    15 Strategies at 2.02 to
     Public Customer 2
    37 Strategies at 2.02 to
     Primary Improvement Order
     (50% allocation)
    38 Strategies at 2.02 to
     Market Maker
------------------------------------------------------------------------

    Note that the Primary Improvement Order received an allocation 
priority of 50% of the remaining COPIP Order size (50%*(100 - 25) = 38, 
rounded down) \47\ in this case because Public Customer orders are not 
included in the determination of the 50%/40% allocation rule.
---------------------------------------------------------------------------

    \47\ Strategies are allocated in whole numbers and, to ensure 
the allocation priority to Primary Improvement Orders does not 
exceed the applicable 40% or 50% specified in proposed Rule 7245(h), 
allocations of fractional Strategies to the Primary Improvement 
Order in the Primary Improvement Order allocation step are rounded 
down.

---------------------------------------------------------------------------
Example 17: COPIP Allocation

    Suppose a COPIP to sell 150 contracts of Strategy A+B. At the end 
of the COPIP, the Complex Order Book for Strategy A+B is as follows in 
order of time priority:

------------------------------------------------------------------------
        cNBBO Buy at 2.00                      Sell at 2.06
------------------------------------------------------------------------
Public Customer order to buy 10   COPIP Order to sell 150.
 at 2.04.
Primary Improvement Order to buy  Order to sell 10 at 2.06.
 150 at 2.04.
Market Maker 1 Improvement Order
 to buy 5 at 2.04
Market Maker 2 Improvement Order
 to buy 25 at 2.04
Market Maker 3 Improvement Order
 to buy 60 at 2.04
Market Maker 4 Improvement Order
 to buy 5 at 2.04
Market Maker 5 Improvement Order
 to buy 5 at 2.04
Broker-dealer 1 Improvement
 Order to buy 8 at 2.04
Trade allocation (all at 2.04)
 is as follows:
Public Customer order: 10         140 remaining to allocate.
 Strategies.

[[Page 37810]]

 
Primary Improvement Order: 56     84 remaining to allocate.
 Strategies.
Market Maker 1 Improvement
 Order: 4 Strategies
Market Maker 2 Improvement
 Order: 21 Strategies
Market Maker 3 Improvement
 Order: 50 Strategies
Market Maker 4 Improvement
 Order: 4 Strategies
Market Maker 4 Improvement        1 remaining to allocate
 Order: 4 Strategies.
Broker-dealer 1 Improvement
 Order: 1 Strategy
------------------------------------------------------------------------

Market Maker Allocation
    After the Primary Improvement Order allocation, any remaining 
unallocated quantity of the COPIP Order will be allocated to Complex 
Orders, including Improvement Orders and orders on the Complex Order 
Book prior to the COPIP Broadcast, for the account of Market 
Makers.\48\ Where there are Complex Orders for the accounts of more 
than one Market Maker at the same price, the trade allocation formula 
for Market Makers will provide for the allocation of contracts among 
Market Makers based on size pro rata for the remaining Strategies. The 
proposed Market Maker allocation would follow the formula: B * C where 
component B is derived by dividing the quantity of Strategies for the 
Market Maker at the price level by the total quantity of Strategies for 
all Market Makers at the price level, and component C is the remaining 
quantity of the COPIP Order to be allocated after the Primary 
Improvement Order allocation. If the quantity of Strategies for the 
Market Maker order in B is greater than the original quantity of the 
COPIP Order, the Market Maker's quantity will be capped at the size of 
the original COPIP Order for purposes of calculating B. If the trade 
allocation for a Market Maker would be greater than the quantity of the 
Market Maker order at the price level, the Market Maker's trade 
allocation will not exceed the size of the Market Maker order at the 
price level. If the trade allocation for a Market Maker would result in 
a fraction of a Strategy, it will be rounded down.
---------------------------------------------------------------------------

    \48\ See proposed Rule 7245(g)(4).

---------------------------------------------------------------------------
Example 18: Market Maker Allocation Formula

    In certain circumstances, due to rounding down, it is possible that 
some Market Maker orders will not be filled even though there is 
sufficient quantity of the COPIP Order to be allocated. Suppose at the 
end of a COPIP Order to sell 200 Strategies of A+B, the Complex Order 
Book is as follows in order of time priority:

------------------------------------------------------------------------
        cNNBO Buy at 2.00                      Sell at 2.10
------------------------------------------------------------------------
Primary Improvement Order to buy  COPIP Order to sell 200.
 200 at 2.02.
Market Maker 1 order to buy 2 at
 2.02
Market Maker 2 order to buy 20
 at 2.02
Market Maker 3 order to buy 80
 at 2.02
Market Maker 4 order to buy 120
 at 2.02
Professional Customer order to
 buy 20 at 2.02
At the end of the COPIP, the
 trade allocation will be as
 follows:
First, to the Primary
 Improvement Order for 80
 Strategies and then to the
 Market Makers, pursuant to the
 formula provided in Rule
 7245(g)(4), as follows:
    Market Maker 1-1 Strategy
     \49\
    Market Maker 2-10 Strategies
    Market Maker 3-43 Strategies
    Market Maker 4-64 Strategies
As a result, a total of 118
 Strategies are allocated to all
 Market Makers even though there
 were, in total, 120 Strategies
 available to be allocated to
 Market Makers from the
 remaining COPIP Order. The
 remaining COPIP Order quantity
 of 2 Strategies will be
 allocated to the Professional
 Customer order.
------------------------------------------------------------------------

Remaining Complex Orders Allocation
    After the Market Maker allocation, any remaining unallocated 
quantity of the COPIP Order will be allocated to any remaining Complex 
Orders, other than Market Maker orders, including orders for the 
account of Professionals and orders on the Complex Order Book prior to 
the COPIP Broadcast, not receiving allocation above.\50\
---------------------------------------------------------------------------

    \49\ The Market Maker allocation formula is: 2 Strategies for 
Market Maker 1 divided by 222 Strategies for all Market Makers, 
multiplied by 120 remaining Strategies to be allocated from the 
COPIP Order and rounded down = 1.
    \50\ See Proposed Rule 7245(g)(5).

Example 19: Comparison of Professional Customer COPIP Trade Allocation 
---------------------------------------------------------------------------
(Before and After Proposed Rule Change)

    Suppose at the end of a COPIP to sell 100 Strategies on A+B, where 
the Primary Improvement Order is for the account of a Market Maker, the 
Complex Order Book for Strategy A+B is as follows in order of time 
priority:

------------------------------------------------------------------------
        cNBBO Buy at 2.00                      Sell at 2.07
------------------------------------------------------------------------
Public Customer 1 order to buy    COPIP Order to sell 100.
 10 at 2.04.
Professional Customer 1 order to
 buy 10 at 2.04
Primary Improvement Order to buy
 100 at 2.04
Market Maker 1 Improvement Order
 to buy 30 at 2.04
Broker-dealer 1 Improvement
 Order to buy 20 at 2.04
Market Maker 2 Improvement Order
 to buy 30 at 2.04
Trade allocation at the end of
 the COPIP under current BOX
 rules is as follows:
 

[[Page 37811]]

 
Current Rules
 
Public Customer 1: 10 Strategies
 at 2.04
Professional Customer 1: 10
 Strategies at 2.04
Primary Improvement Order: 40
 Strategies at 2.04
Market Maker 1 Improvement
 Order: 30 Strategies at 2.04
Broker-dealer 1 Improvement
 Order: 10 Strategies at 2.04
Trade allocation at the end of
 the COPIP under the proposed
 rules is as follows:
 
Proposed Rules
 
Public Customer 1: 10 Strategies
 at 2.04
Primary Improvement Order: 36
 Strategies at 2.04
Market Maker 1 Improvement
 Order: 27 Strategies at 2.04
 \51\
Market Maker 2 Improvement
 Order: 27 Strategies at 2.04
------------------------------------------------------------------------

    Where there are more than one remaining unallocated Complex Orders, 
including Improvement Orders, at the same price, the trade allocation 
to each such Complex Order will follow the formula: B * C where 
component B is derived by dividing the quantity of Strategies for the 
Complex Order at the price level by the total quantity of Strategies 
for all remaining Complex Orders at the price level, and component C is 
the remaining quantity of the COPIP Order to be allocated after the 
Market Maker allocation. If the quantity of Strategies for the Complex 
Order in B is greater than the original quantity of the COPIP Order, 
the quantity of Strategies for the Complex Order will be capped at the 
size of the original COPIP Order for purposes of calculating B. If the 
trade allocation for a Complex Order would be greater than the quantity 
of Strategies for the Complex Order at the price level, the trade 
allocation will not exceed the quantity of Strategies for the Complex 
Order at the price level. If the trade allocation would result in a 
fraction of a Strategy, it will be rounded down.
    If, at the end of the remaining Complex Orders allocation, there 
remains any unallocated quantity of the COPIP Order, the balance will 
be allocated as described below.

Additional Allocation

    The balance of the COPIP Order will be allocated to all remaining 
orders, if any, other than the Primary Improvement Order. The 
allocation method will be to allocate one Strategy of the COPIP Order 
per order in sequence until each remaining order has received one 
Strategy or until the COPIP Order is fully allocated. Allocation 
sequence among orders in this step will be in order of size with the 
largest remaining order allocated first. Where two or more such orders 
are the same size, trade allocation sequence will be by time priority.
---------------------------------------------------------------------------

    \51\ The Market Maker allocation formula is: 30 Strategies for 
Market Maker 1 divided by 60 Strategies for all Market Makers, 
multiplied by 54 remaining Strategies to be allocated from the PIP 
Order = 27.
---------------------------------------------------------------------------

    If, at the end of the additional allocation, there remains any 
unallocated quantity of the COPIP Order, the balance will be allocated 
to the Initiating Participant regardless of any applicable COPIP 
Surrender Quantity.\52\
---------------------------------------------------------------------------

    \52\ See proposed Rule 7245(g)(6).

Example 20: Additional Allocation When Limited by COPIP Surrender 
---------------------------------------------------------------------------
Quantity with Multiple Market Maker Orders

    Suppose at the end of a COPIP to sell 177 Strategies on A+B, where 
the COPIP Surrender Quantity for the Primary Improvement Order is 177, 
the Complex Order Book for Strategy A+B is as follows in order of time 
priority:

------------------------------------------------------------------------
        cNBBO Buy at 2.00                      Sell at 2.06
------------------------------------------------------------------------
Public Customer 1 order to buy    COPIP Order to sell 177.
 10 at 2.04.
Primary Improvement Order to buy  Order to sell 10 at 2.06.
 177 at 2.04.
Market Maker 1 Improvement Order
 to buy 114 at 2.04
Market Maker 2 Improvement Order
 to buy 115 at 2.04
Market Maker 3 Improvement Order
 to buy 117 at 2.04
At the end of the COPIP, the
 trade allocation is as follows:
    Public Customer 1: 10         167 remaining to allocate.
     Strategies at 2.04.
    Primary Improvement Order: 0
     Strategies (all are
     surrendered)
    Market Maker 1 Improvement
     Order: 55 Strategies at
     2.04
    Market Maker 2 Improvement
     Order: 55 Strategies at
     2.04
    Market Maker 3 Improvement
     Order: 56 Strategies at
     2.04
    The COPIP Order has 1
     remaining Strategy to
     allocate at 2.04.
The Market Maker orders have the
 following Strategies remaining
 to be filled at 2.04:
    Market Maker 1 Improvement
     Order: 59 Strategies
     remaining at 2.04
    Market Maker 2 Improvement
     Order: 60 Strategies
     remaining at 2.04
    Market Maker 3 Improvement
     Order: 61 Strategies
     remaining at 2.04
The Market Maker orders are
 ranked in order of size, with
 Market Maker 3 being the
 largest, and allocated on a
 rotating basis one by one until
 either the Market Maker order
 or the COPIP Order is
 exhausted. In this case, the
 remaining 1 Strategy is
 allocated as follows:
    Market Maker 3 Improvement
     Order: 1 Strategy at 2.04
------------------------------------------------------------------------


Example 21: Orders on the Complex Order Book Prior to the COPIP 
Broadcast, Which are Eligible for Execution at the Conclusion of the 
COPIP


[[Page 37812]]


    Suppose the following Complex Orders (listed in order of time 
priority) are on the Complex Order Book prior to the broadcast of a 
COPIP Order to sell 100 Strategies of A+B.

------------------------------------------------------------------------
        cNBBO Buy at 2.02                      Sell at 2.09
------------------------------------------------------------------------
Broker-dealer order to buy 100    Market Maker order to sell 10 at 2.09.
 at 2.02.
Public Customer order to buy 5
 at 2.02
Market Maker order to buy 15 at
 2.02
Public Customer order to buy 12
 at 2.02
Market Maker order to buy 30 at
 2.02
Primary Improvement Order to buy
 100 at 2.02
------------------------------------------------------------------------

    Suppose at the end of the COPIP, only one Improvement Order has 
been received from a Market Maker to buy 10 at 2.03 and one Unrelated 
Order from a Professional Customer to buy 15 at 2.03. The Complex Order 
Book, including the COPIP Order, is as follows at the end of the COPIP:

------------------------------------------------------------------------
        cNBBO Buy at 2.02                      Sell at 2.09
------------------------------------------------------------------------
Market Maker Improvement Order    COPIP Order to sell 100.
 to buy 10 at 2.03.
Professional order to buy 15 at   Market Maker order to sell 10 at 2.09.
 2.03.
Broker-dealer order to buy 100
 at 2.02
Public Customer order to buy 5
 at 2.02
Market Maker order to buy 15 at
 2.02
Public Customer order to buy 12
 at 2.02
Market Maker order to buy 30 at
 2.02
Primary Improvement Order to buy
 100 at 2.02
The trade allocation will be as
 follows:
First, because the orders at the
 first/best price level are, in
 total, less than the size of
 the COPIP Order, such orders
 are filled for their entire 25
 Strategies at 2.03.
Second, at the next best price
 level (2.02), the remaining 75
 Strategies of the COPIP Order
 will be allocated as follows:
    Public Customer order to buy
     5 at 2.02
    Public Customer order to buy
     12 at 2.02
As the total of the orders for
 the account of Public Customers
 (17) is less than the remaining
 COPIP Order quantity (75), the
 two Public Customer orders are
 filled, leaving 58 Strategies
 remaining.
Third, the remaining 58
 Strategies of the COPIP Order
 are allocated as follows:
Primary Improvement Order to buy
 23 at 2.02.
23 Strategies (40% of the
 remaining quantity of 58) are
 allocated to the Primary
 Improvement Order at 2.02,
 leaving 35 Strategies
 remaining.
Fourth, the remaining 35
 Strategies of the COPIP Order
 are allocated as follows:
Market Maker order to buy 15 at
 2.02
Market Maker order to buy 30 at
 2.02
------------------------------------------------------------------------

    As there are remaining unallocated orders for the accounts of more 
than one Market Maker at the same price, the trade allocation to each 
Market Maker will follow the formula provided in proposed Rule 
7245(g)(4). The first Market Maker order will be allocated 33.3% (15/
45) of the 35 Strategies, which is 11 Strategies (allocation of partial 
quantities are rounded down in this step). The second Market Maker 
order will be allocated 66.67% (30/45) of the 35 Strategies or 23.
    Fifth, the one remaining contract will be allocated to the broker-
dealer Order to buy 100 at 2.02. Note: if the COPIP Order had instead 
been a simple limit order to sell 100 Strategies of A+B at 2.02, the 
broker-dealer Order would have been filled first on the Complex Order 
Book due to its time priority.

Example 22: Valid Starting Prices for COPIP Auctions

    A Participant wishes to enter a COPIP Order to sell 50 of Strategy 
A+B.
    (a) Suppose the cNBBO and the Complex Order Book for Strategy A+B 
are as follows:

------------------------------------------------------------------------
             cNBBO Buy at 2.02                      Sell at 2.09
------------------------------------------------------------------------
Quote to buy 10 at 2.02...................  Order to sell 5 at 2.09
------------------------------------------------------------------------

    The COPIP auction start price can be any price between 2.02 and 
2.08 inclusive.\53\
---------------------------------------------------------------------------

    \53\ The COPIP Start Price shall, on the opposite side of the 
COPIP Order, be equal to or better than the best of the BBO on the 
Complex Order Book for the Strategy, the cNBBO, and the cBBO and, on 
the same side of the COPIP Order, be equal to or better than the 
cNBBO. In addition to the foregoing requirements, if the better of 
the BBO on the Complex Order Book for the Strategy and the cBBO is 
equal to or better than cNBBO on the same side of the COPIP Order, 
the COPIP Start Price must also be better than the better of the BBO 
on the Complex Order Book for the Strategy and the cBBO on the same 
side on the Complex Order Book for the Strategy at the time of 
commencement of the COPIP (Proposed Rule 7245(f)).
---------------------------------------------------------------------------

    (b) Suppose, instead, that the cNBBO, cBBO and the Complex Order 
Book for Strategy A+B are as follows:

------------------------------------------------------------------------
             cNBBO Buy at 2.02                      Sell at 2.09
------------------------------------------------------------------------
cBBO Buy at 2.02..........................  Sell at 2.09
Quote to buy 10 at 2.02...................  Order to sell 5 at 2.07.
------------------------------------------------------------------------

    The COPIP auction start price can be any price between 2.02 and 
2.06 inclusive.\54\
---------------------------------------------------------------------------

    \54\ Id.
---------------------------------------------------------------------------

    (c) Suppose, instead, that there is no BOX Book Interest that could 
generate a sell price of 2.09 and the cNBBO and the Complex Order Book 
for Strategy A+B are as follows:

[[Page 37813]]



------------------------------------------------------------------------
             cNBBO Buy at 2.02                      Sell at 2.09
------------------------------------------------------------------------
Quote to buy 10 at 2.02...................  Order to sell 5 at 2.10.
------------------------------------------------------------------------

    The COPIP auction start price can be any price between 2.02 and 
2.09 inclusive.\55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

Complex Orders on the Complex Order Book
    Currently, all Complex Orders on the Complex Order Book prior to 
the COPIP Broadcast, excluding any proprietary orders from the 
Initiating Participant, are filled at the end of the COPIP in time 
priority before any other Complex Orders at the same price.\56\ 
Further, Rule 7245(g)(3) states that the Primary Improvement Order 
follows in time priority all Complex Orders on the Complex Order Book 
prior to the COPIP Broadcast that are equal to the (A) Single Priced 
Primary Improvement Order price; or (B) 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.
---------------------------------------------------------------------------

    \56\ See Rule 7245(f)(3)(ii).
---------------------------------------------------------------------------

    The Exchange is now proposing that quotes and orders on the Complex 
Order Book prior to the COPIP Broadcast will no longer be allocated 
against the COPIP Order at the end of the COPIP in time priority before 
any other order at the same price. Specifically, quotes and orders on 
the Complex Order Book prior to the COPIP Broadcast will now be 
considered alongside all other orders, whether Improvement Order(s), 
including Unrelated Order(s) received by BOX during the COPIP 
(excluding all Unrelated Orders that were immediately executed during 
the interval of the COPIP), for matching at the conclusion of the 
COPIP. Therefore, the Exchange is proposing to remove the exceptions 
for quotes and orders on the BOX Book prior to the COPIP Broadcast in 
Rules 7245(f)(3)(ii) and (g)(3). The Exchange notes that this proposed 
change is consistent with Phlx.\57\ Proprietary quotes or orders from 
the Initiating Participant at the Primary Improvement Order price shall 
not be executed against the COPIP Order during or at the conclusion of 
the COPIP.
---------------------------------------------------------------------------

    \57\ See Phlx Rule 1080(n)(ii)(E)(2)(d).
---------------------------------------------------------------------------

Additional COPIP Changes
    The Exchange is proposing to amend various provisions of Rule 7245 
to accommodate the proposed change in the COPIP allocation and amend 
certain sections that are no longer relevant with the proposed changes. 
The Exchange is also making various non-substantive changes to its 
rules to accommodate the changes to the COPIP allocation. Most of these 
changes deal with renumbering of sections to account for the new 
subsection (g) being proposed to Rule 7245 and the removal of certain 
sections. The Exchange proposes to include language to provide clarity 
regarding the COPIP Start Price in Rule 7245(f) to ensure that the 
COPIP does not trade ahead of resting same-side orders. Additionally, 
the Exchange must amend various cross-references within Rule 7245 to 
take into account the renumbering of sections.
Professional Customers
    The Exchange proposes to amend Rule 100(a)(50) to distinguish 
between Professionals and other Public Customers (``non-Professional, 
Public Customers'') for proposes of the Exchange's priority rules in 
the PIP and COPIP auctions. Pursuant to Rule 100(a)(50), a 
``Professional'' is a person or entity that (i) is not a broker or 
dealer in securities, and (ii) places more than 390 orders in listed 
options per day on average during a calendar month for its own 
beneficial account(s).
    Under existing Exchange rules, Public Customers benefit from 
certain order priority advantages in PIP and COPIP transactions on the 
Exchange (``Order Priority''). Rule 7150(f)(4) currently provides that, 
at the conclusion of a PIP, Public Customer orders have Order Priority. 
Rule 7245(f)(3)(ii) currently provides that, at the conclusion of a 
COPIP, Public Customer Complex Orders have Order Priority. Rules 
7150(g)(4) and 7245(g)(4) currently provide that Public Customer orders 
have priority over Primary Improvement Orders.
    Order Priority is a marketplace advantage provided to Public 
Customers on the Exchange. Order Priority means that Public Customer 
orders are given execution priority over non-Public Customer orders as 
provided in the Exchange rules. The purpose of providing Order Priority 
to Public Customers is to attract retail order flow to the Exchange by 
leveling the playing field for retail investors as compared with market 
professionals.
    Professionals in today's marketplace are more akin to broker-
dealers in some respects than to non-Professional, Public 
Customers.\58\ As a result, the Exchange believes that providing Order 
Priority simply based upon whether the order is for the account of a 
Public Customer is no longer appropriate in today's marketplace. 
Professionals now have access to information and technology that 
enables them to trade listed options in the same manner as broker-
dealers. Moreover, because Professionals are included in the definition 
of Public Customers under Exchange rules, Professionals currently have 
the same priority in PIP and COPIP transactions as non-Professional, 
Public Customers. Therefore, non-Professional, Public Customers are 
prevented from benefitting fully from the intended Order Priority 
advantage when Professionals are afforded the same Order Priority.
---------------------------------------------------------------------------

    \58\ Professionals have access to sophisticated trading systems 
that contain functionality not available to retail customers, 
including things such as continuously updated pricing models based 
upon real-time streaming data, access to multiple markets 
simultaneously and order and risk management tools.
---------------------------------------------------------------------------

    Accordingly, the Exchange proposes to amend Rule 100(a)(50), and 
related cross references in Rules 7150(a)(2) and 7145(a)(4), to more 
appropriately limit the availability of Order Priority advantages in 
PIP and COPIP transactions to non-Professional, Public Customers on the 
Exchange.\59\ Under the proposal, a Professional will now be treated 
like non-Public Customers for Order Priority in PIP and COPIP 
transactions. The effect of the enactment of this proposal will be that 
Professionals will no longer receive the same Order Priority that is 
afforded to non-Professional, Public Customers in PIP and COPIP 
transactions and, instead, will be treated like broker-dealers in this 
regard.
---------------------------------------------------------------------------

    \59\ See proposed Rule 7150(g)(4). Currently, Professionals are 
treated like Public Customers in circumstances where the Exchange 
yields priority to Public Customers under SEC Rule 11a1-1(T). Under 
the proposed rule change, pursuant to which Improvement Orders will 
not be broadcast, transactions executed on the Exchange will qualify 
under SEC Rule 11a2-2(T) as described below. As a result, 
Professionals will no longer be treated like Public Customers for 
purposes of priority.
---------------------------------------------------------------------------

    The order-sending behavior and trading activity of Professionals 
tend to be more similar to broker-dealers trading on a proprietary 
basis. This is particularly true of orders placed in response to the 
Exchange's PIP and COPIP mechanisms. Accordingly, the Exchange believes 
it is not unfairly discriminatory to give Professional orders the same 
priority as broker-dealers for allocation purposes. The Exchange notes 
that it is not a novel proposal to treat Professional's as non-Public 
Customers for Order Priority in auction transactions and that other 
exchanges currently do this.\60\
---------------------------------------------------------------------------

    \60\ See Phlx Rule 1000(b)(14).

---------------------------------------------------------------------------

[[Page 37814]]

Cancel Improvement Orders
    The Exchange is proposing to allow Participants to cancel their 
Improvement Orders at any time up to the end of the PIP or COPIP. 
Currently, the Exchange does not allow Participants to cancel their 
Improvement Orders and only allows them to decrease the size of their 
Improvement Order by improving the price of that order.\61\
---------------------------------------------------------------------------

    \61\ See Rules 7150(f)(2) and 7245(f)(2).
---------------------------------------------------------------------------

    The Exchange believes that since the PIP Order is guaranteed to 
execute at a price that is at least equal to, if not better than, the 
NBBO, that allowing Participants to cancel their Improvement Orders 
will not affect the ability of an order to receive an execution at the 
NBBO. Additionally, the Exchange believes that not allowing 
Participants to cancel their Improvement Order during a PIP or COPIP 
exposes a Participant to the risk of the market moving against them 
after they submit their Improvement Order. The Exchange believes that 
by allowing a Participant to cancel their Improvement Order 
Participants will be more willing to enter aggressively priced 
responses. The Exchange notes that this proposed change is consistent 
with Phlx's Rules.\62\
---------------------------------------------------------------------------

    \62\ See Phlx Rule 1080(n)(ii)(6).
---------------------------------------------------------------------------

    Additionally, the Exchange is proposing that Participants will no 
longer be able to decrease the size of their Improvement Order by 
improving the price of that order. The Exchange believes that this is 
no longer needed now that Participants can cancel their Improvement 
Orders because under the proposal a Participant will be able to cancel 
their Improvement Order and submit a new Improvement Order with a 
better price and a smaller size, therefore achieving the same result as 
they can under the current rule.
Removal of Broadcast
    Currently, during a PIP and COPIP, Improvement Orders are broadcast 
via the HSVF but are not disseminated through OPRA.\63\ The Exchange is 
proposing that it will no longer broadcast Improvement Orders received 
during and PIP and COPIP via the HSVF.
---------------------------------------------------------------------------

    \63\ See Rules 7150(f)(1) and 7245(f)(1).
---------------------------------------------------------------------------

    The Exchange believes that this proposed change will encourage 
greater participation in the PIP and COPIP which should lead to greater 
price improvement. The Exchange believes that this should encourage 
Participants to submit Improvement Orders at the best possible price at 
which the Participant is willing to participate. This, in turn, should 
result in better execution prices, which is the ``price improvement'' 
that the PIP and COPIP functionalities offer. The Exchange notes that 
this is similar to the rules of other exchanges.\64\
---------------------------------------------------------------------------

    \64\ See Phlx Rule 1080(n)(ii)(A)(6) and CBOE Rule 
6.74A(b)(1)(F).
---------------------------------------------------------------------------

Section 11(a)
    As discussed above, the rule changes proposed herein would change 
the Exchange's PIP and COPIP auction processes to blind auctions by 
eliminating the broadcast of Improvement Orders. As a result, responses 
to the PIP and COPIP auctions would no longer be visible to 
Participants. Upon implementing this change, the Exchange believes that 
transactions executed through the PIP and COPIP processes will be 
consistent with the requirements in Section 11(a) of the Act by 
satisfying what is known as the ``effect versus execute'' exemption 
provided by Rule 11a2-2(T) (``the Effect Versus Execute Rule'').
    Section 11(a)(1) of the Act \65\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts''), unless an exception applies. The 
purpose of Section 11(a) is to address trading advantages enjoyed by 
the exchange members and conflicts of interest in money management.\66\ 
In particular, as the Commission has stated, Congress enacted Section 
11(a) out of concern about members benefiting in their principal 
transactions from special ``time and place'' advantages associated with 
floor trading--such as the ability to ``execute decisions faster than 
public investors.'' \67\
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78k(a)(1).
    \66\ See Securities Reform Act of 1975, Report of the House 
Comm. On Interstate and Foreign Commerce, H.R. Rep. No. 94-123, 94th 
Cong., 1st Sess. (1975); Securities Acts Amendments of 1975, Report 
of the Senate Comm. on Banking, Housing, and Urban Affairs, S. Rep. 
No. 94-75, 94th Cong., 1st Sess. (1975).
    \67\ See Securities Exchange Act Release Nos. 14563 (March 14, 
1978), 43 FR 11542, 11543 (March 17, 1978); 14713 (April 27, 1978), 
43 FR 18557 (``April 1978 Release''); 15533 (January 29, 1979), 44 
FR 6084 (``1979 Release'').
---------------------------------------------------------------------------

    Section 11(a) includes several exceptions from the general 
prohibition for principal transactions that contribute to the fairness 
and orderliness of exchange transactions or do not reflect any time and 
place advantages. For example, Section 11(a)(1) provides that the 
prohibition on principal transactions does not apply to transactions by 
a dealer acting in the capacity of a market maker,\68\ bona fide 
arbitrage, risk arbitrage or hedge transactions,\69\ transactions by an 
odd lot dealer,\70\ and transactions made to offset errors.\71\
---------------------------------------------------------------------------

    \68\ Section 11(a)(1)(A).
    \69\ Section 11(a)(1)(D).
    \70\ Section 11(a)(1)(B).
    \71\ Section 11(a)(1)(F).
---------------------------------------------------------------------------

    The Commission has previously stated that it believes that 
transactions effected through the BOX PIP and COPIP are consistent with 
the requirements in Section 11(a) of the Act, relying in part upon Rule 
11a1-1(T) and in part upon Rule 11a2-2(T) thereunder.\72\
---------------------------------------------------------------------------

    \72\ See Securities Exchange Act Release No. 68177 (November 7, 
2012), 77 FR 67851, at 67851 (November 14, 2012) (the ``November 
2012 Order''). See Securities Exchange Act Release No. 71148 
(December 19, 2013), 78 FR 78437, at 78442 (December 26, 2013).
---------------------------------------------------------------------------

    For the reasons set forth below, under the proposed rule change, 
the Exchange believes that BOX Options Participants effecting 
transactions through the PIP and COPIP, including executions of PIP 
Orders and COPIP Orders against orders on the BOX Book and the Complex 
Order Book (whether prior to or after the respective PIP or COPIP 
Broadcast), are consistent with the requirements of Section 11(a) of 
the Act by satisfying the conditions of Rule 11a2-2(T) under the Act.
Effect Versus Execute--Rule 11a2-2(T)
    The Commission previously has 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 Rule.\73\ The Commission also found that executions of 
PIP Orders and COPIP Orders against orders on the BOX Book and the 
Complex Order Book, excluding certain executions of PIP Orders and 
COPIP Orders permitted pursuant to Rule 11a1-1(T), satisfy the 
conditions of the Effect Versus Execute Rule.\74\ Under the proposed 
rule changes, as described above, the Exchange believes the procedures 
for the execution of orders submitted through the PIP and COPIP, 
including the execution of PIP Orders and COPIP Orders against orders 
on the BOX Book or on the Complex Order Book (whether prior to or after 
the respective PIP or COPIP Broadcast), would satisfy the conditions of 
the

[[Page 37815]]

Effect Versus Execute Rule for the same reasons previously determined 
by the Commission for other categories of electronic trading on the 
Exchange.
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 66871 (April 27, 
2012), 77 FR 26323, at 26336 (May 3, 2012), 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 (the ``BOX Approval Order'').
    \74\ See November 2012 Order.
---------------------------------------------------------------------------

    The Effect Versus Execute Rule provides exchange members with an 
exemption from the Section 11(a)(1) prohibition on principal trading, 
in addition to the exceptions delineated in the statute. The Effect 
Versus Execute Rule 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 the Effect Versus Execute Rule'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; \75\ 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.
---------------------------------------------------------------------------

    \75\ The member may, however, participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the 
NYSE's Designated Order Turnaround System (``1978 Release'')).
---------------------------------------------------------------------------

    The Commission has stated that these four requirements of the 
Effect Versus Execute Rule are ``designed to put members and non-
members on the same footing, to the extent practicable, in light of the 
purposes of Section 11(a).'' \76\ If a transaction meets the four 
conditions of the Effect Versus Execute Rule, it will be deemed to be 
in compliance with Section 11(a)(1) consistent with the protection of 
investors and the maintenance of fair and orderly markets.\77\ The 
Exchange believes the proposed structural and operational 
characteristics of the PIP and COPIP are consistent with the stated 
objectives of Section 11(a) of the Act, and that all users would be 
placed on the ``same footing,'' as intended by the Effect Versus 
Execute Rule, for the execution of orders submitted through the PIP and 
COPIP, including the execution of PIP Orders and COPIP Orders against 
orders on the BOX Book or on the Complex Order Book (whether prior to 
or after the respective PIP or COPIP Broadcast).
---------------------------------------------------------------------------

    \76\ April 1978 Release at 18560.
    \77\ 17 C.F.R. 240.11a2-2(T)(e).
---------------------------------------------------------------------------

    The Commission has recognized and accommodated the functioning of 
electronic exchange facilities under the Effect Versus Execute 
Rule.\78\ In addition, the Commission and its staff have permitted 
exchanges to sponsor innovative trading systems in reliance on the 
Effect Versus Execute Rule, based on the exchanges' representations 
that such facilities, by design, do not provide any special time and 
place advantage to members.\79\ In particular, the Commission has 
stated, in the context of certain automated execution systems, that 
where the execution is performed on an automated basis by the facility 
itself, ``the member would not retain any ability to control the timing 
of the execution or otherwise enjoy the kind of special order-handling 
advantages inherent in being on an exchange floor.\80\ The Commission 
has applied the Effect Versus Execute Rule in a functional manner, 
taking into account the structural characteristics that distinguish the 
operation of an automated execution system from traditional exchange 
floor activities. This approach represents the sensible conclusion by 
the Commission and its Staff that implementation of Section 11(a) 
should reflect the ``continuing rapid pace of economic, technological 
and regulatory changes in the market.'' \81\
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release Nos. 61152 (December 
10, 2009), 74 FR 66699 (December 16, 2009) (File No. 10-191) 
(Findings, Opinion, and Order of the Commission In the Matter of the 
Application of C2 Options Exchange, Incorporated for Registration as 
a National Securities Exchange) (``C2 Approval Order'') at note 170; 
57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (File No. SR-
NASDAQ-2007-004) (approval order concerning the establishment of the 
NASDAQ Options Market LLC (``NOM'')) (``NOM Approval Order''); Order 
approving the rules of the Boston Options Exchange, supra n.11; 
54552 (September 29, 2006) (AMEX AEMI trading system), 71 FR 59546 
(October 10, 2006); 54550 (September 29, 2006), 71 FR 59563 (October 
10, 2006) (Chicago Stock Exchange trading system); 54528 (September 
28, 2006), 71 FR 58650 (October 4, 2006) (International Securities 
Exchange trading system); and 49747 (May 20, 2004), 69 FR 30344 (May 
27, 2004) (AMEX electronic options trading system)
    \79\ See e.g., Securities Exchange Act Release No. 44983 
(October 25, 2001) (Archipelago Exchange), citing Letter from Paula 
R. Jensen, Deputy Chief Counsel, Division of Market Regulation, SEC, 
to Kathryn L. Beck, Senior Vice President, Special Counsel and 
Antitrust Compliance Officer, Pacific Exchange, Inc. (October 25, 
2001); Letter from Larry E. Bergmann, Senior Associate Director, 
Division of Market Regulation, SEC, to Edith Hallahan, Associate 
General Counsel, Philadelphia Stock Exchange, Inc. (March 24, 1999); 
Letter from Catherine McGuire, Chief Counsel, Division of Market 
Regulation, SEC, to David E. Rosedahl, PCX (November 30. 1998); 
Letter from Brandon Becker, Director, Division of Market Regulation, 
SEC, to George T. Simon, Partner, Foley & Lardner (November 30, 
1994); Securities Exchange Act Release No. 29237 (May 24, 1991), 56 
FR 24853 (May 31, 1991) (NYSE's Off-Hours Trading Facility (October 
25, 2001).
    \80\ See 1979 Release at 6087.
    \81\ See 1979 Release at 6087.
---------------------------------------------------------------------------

    The Effect Versus Execute Rule's first condition is that the order 
be executed by an exchange member that is unaffiliated with the member 
initiating the order.\82\ The Commission has stated that this 
requirement is satisfied when automated exchange facilities, such as 
BOX, are used, so long as 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 system.\83\ In 
considering the operation of NOM and C2, the Commission noted, while 
there is no independent executing exchange member, the execution of an 
order is automatic once it has been transmitted to the system.\84\ 
Because the design of these systems ensures members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated executions 
obtained through these systems satisfy the independent execution 
requirement of Rule 11a2-2(T).\85\
---------------------------------------------------------------------------

    \82\ 17 C.F.R. 240.11a2-2(T)(a)(2)(i).
    \83\ See, e.g., C2 Approval Order, NOM Approval Order and 
Securities Exchange Act Release No. 49068 (January 13, 2004), 69 FR 
2775, at 2790 (January 20, 2004) (establishing, among other things, 
the Boston Options Exchange, LLC options trading facility of BSE).
    \84\ See NOM Approval Order and C2 Approval Order.
    \85\ See NOM Approval Order and C2 Approval Order.
---------------------------------------------------------------------------

    This principle is directly applicable to BOX, including the 
execution of PIP Orders and COPIP Orders under the proposed rule 
change. The design of the PIP and COPIP, as proposed, ensures that 
broker-dealers do not have any special or unique trading advantages in 
handling their orders after transmission to BOX. Accordingly, the 
Exchange believes that a broker-dealer effecting the execution of PIP 
Orders and COPIP Orders under the proposed rule change, including 
against orders on the BOX Book or the Complex Order Book, satisfies the 
requirement for execution through an unaffiliated member.
    The design of BOX ensures that no BOX Options Participant will 
enjoy any special control over the timing of execution or special order 
handling advantages after order transmission. All orders submitted to 
BOX, including orders on the Complex Order Book and on the BOX Book, 
are centrally processed and executed automatically by BOX. Orders sent 
to BOX are transmitted from remote terminals directly to the system by 
electronic means. Once an order is submitted to BOX, the order is 
executed against one or more other orders based on the

[[Page 37816]]

established matching algorithms of the Exchange. Under the proposed 
rules, orders on the BOX Book or on the Complex Order Book may also 
trade with one or more other orders, including PIP Orders and COPIP 
Orders, based on the established matching algorithms of the Exchange. 
The execution in each combination 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 
BOX Book and on the Complex Order Book, whether a PIP or COPIP is 
initiated and where the order is ranked based on the priority ranking 
algorithm. At no time following its submission of an order to BOX will 
an Options Participant be able to acquire control or influence over the 
result or timing of order execution. Accordingly, Participants do not 
control or influence the result or timing of execution of orders 
submitted to BOX, including PIP Orders and COPIP Orders. Orders will be 
ranked and maintained on the BOX Book, the Complex Order Book, the PIP 
and the COPIP according to established automatic priority rules. A 
Participant relinquishes any ability to influence or guide the 
execution of its order at the time the order is transmitted into the 
BOX system. Trades will execute when orders or quotations entered on 
BOX match one another, and the priority of orders at the same price 
will be determined, according to an established algorithm based on the 
order's characteristics determined at time it is entered.\86\
---------------------------------------------------------------------------

    \86\ See November 2012 Order.
---------------------------------------------------------------------------

    Upon adoption of the proposal, the execution of a PIP Order or a 
COPIP Order against orders on the BOX Book or on the Complex Order Book 
will be determined automatically, according to the proposed matching, 
priority and allocation rules described in detail above. The Exchange 
notes that existing BOX rules provide that a Participant initiating a 
PIP or a COPIP is prohibited from subsequently entering an Order on the 
BOX Book for the purpose of disrupting or manipulating the ongoing 
COPIP.\87\
---------------------------------------------------------------------------

    \87\ See IM-7150(b) and IM-7245-2(b).
---------------------------------------------------------------------------

    Under the proposal, no Participant has any special or unique 
trading advantage in the execution of PIP Orders and COPIP Orders, 
including against orders on the BOX Book and the Complex Order Book. As 
a result, the Exchange believes the proposal satisfies this 
requirement.
    Second, the Effect Versus Execute Rule requires that orders for a 
covered account transaction be transmitted from off the exchange 
floor.\88\ Again, the Commission has considered this requirement in the 
context of various automated trading and electronic order-handling 
facilities operated by national securities exchanges.\89\ In these 
contexts, the Commission determined that a covered account order sent 
through such an exchange facility would be deemed to be transmitted 
from off the floor. 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. Therefore, the Exchange believes that 
Participants' orders electronically received by BOX satisfy the off-
floor transmission requirement for the purposes of the Effect Versus 
Execute Rule.\90\
---------------------------------------------------------------------------

    \88\ 17 C.F.R. 240.11a2-2(T)(a)(2)(ii).
    \89\ See e.g., Release Nos. 29237 (May 24, 1991), 56 FR 24853 
(May 31, 1991) (File Nos. SR-NYSE-90-52 and SR-NYSE-90-53) 
(regarding NYSE's Off-Hours Trading Facility); 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); NOM Approval Order; 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (File No. 10-131) (approving 
The Nasdaq Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 
(November 1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 
29237 (May 24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and 
SR-NYSE-90-53) (approving NYSE's Off-Hours Trading Facility); and 
1979 Release.
    \90\ The Commission has not considered the lack of a traditional 
physical floor to be an impediment to the satisfaction of the off-
floor requirement. See, e.g., 1979 Release. Also see November 2012 
Order.
---------------------------------------------------------------------------

    Third, the Effect Versus Execute Rule provides that the exchange 
member and his associated person not participate in the execution of 
the order once it has been transmitted.\91\ This requirement originally 
was intended to prevent members with their own floor brokers from using 
those persons to influence or guide their orders' executions.\92\ A 
member is not precluded from canceling or modifying orders, or from 
modifying instructions for executing orders, after they have been 
transmitted; provided, however, such cancellations or modifications are 
transmitted from off the exchange floor.\93\
---------------------------------------------------------------------------

    \91\ 17 C.F.R. 240.11a2-2(T)(a)(2)(iii).
    \92\ See April 1978 Release.
    \93\ See April 1978 Release.
---------------------------------------------------------------------------

    In analyzing the application of the non-participation requirement 
to automated execution facilities, the Commission has specifically 
noted, in regard to BOX, that the execution does not depend on the 
Participant but rather upon what other orders are entered into BOX at 
or around the same time as the subject order, what orders are on the 
BOX Book, and where the order is ranked based on the priority ranking 
and execution algorithm.\94\ Orders submitted electronically to the BOX 
Book will similarly meet the non-participation requirement. Upon 
submission to BOX, an order is executed against one or more other 
orders on the BOX Book or the Complex Order Book or with orders 
submitted through the PIP or the COPIP based on an established matching 
algorithm. The execution does not depend on the 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. At no time following 
the submission of an order to BOX is an Options Participant able to 
acquire control or influence over the result or timing of order 
execution. Accordingly, Participants do not control or influence the 
result or timing of the execution of orders submitted to BOX through 
the PIP or the COPIP, including whether such Participant's order 
executes against an order on the BOX Book or the Complex Order Book. As 
such, the Exchange believes the non-participation requirement is met 
with respect to all orders submitted to BOX, including orders on the 
BOX Book, the Complex Order Book, a PIP or a COPIP.
---------------------------------------------------------------------------

    \94\ See November 2012 Order.
---------------------------------------------------------------------------

    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).\95\ Participants trading for

[[Page 37817]]

covered accounts over which they exercise investment discretion must 
comply with this condition in order to rely on the rule's exemption and 
the Exchange will enforce this requirement pursuant to its obligation 
under Section 6(b)(1) of the Act to enforce compliance with federal 
securities laws.
---------------------------------------------------------------------------

    \95\ 17 C.F.R. 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 C.F.R. 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'').
---------------------------------------------------------------------------

    In light of the automated execution of orders submitted to BOX, no 
Options Participant will enjoy any special control over the timing and 
execution or special order handling advantages in effecting 
transactions in orders submitted to BOX. All orders are electronically 
executed, rather than being handled manually by an Options Participant. 
Because these processes prevent Options Participants from gaining any 
time and place advantage once an order is submitted to BOX, the 
Exchange believes that the execution of orders submitted through the 
PIP and COPIP, including the execution of PIP Orders and COPIP Orders 
against orders on the BOX Book or on the Complex Order Book, will 
satisfy three of the four conditions of the Effect Versus Execute Rule. 
The Exchange notes that BOX Options Participants also must comply with 
the fourth condition of the Effect Versus Execute Rule with respect to 
discretionary accounts and the Exchange will enforce this requirement 
pursuant to its obligation under Section 6(b)(1) of the Act to enforce 
compliance with federal securities laws.
    The Exchange believes the proposal promotes just and equitable 
principles of trade and is consistent with the general policy 
objectives of Section 11(a) of the Act. The Exchange believes that the 
execution of orders submitted through the PIP and COPIP, including the 
execution of PIP Orders and COPIP Orders against orders on the BOX Book 
or on the Complex Order Book (whether prior to or after the respective 
PIP or COPIP Broadcast) satisfy the requirements of the Effect Versus 
Execute Rule. Further, the Exchange believes the policy concerns 
Congress sought to address in Section 11(a) of the Act, the time and 
place advantage members on exchange floors have over non-members off 
the floor and the general public, are not present for transactions 
entered into BOX whether the transaction is executed on the BOX Book, 
the Complex Order Book, through a PIP or through a COPIP.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Securities Exchange Act of 1934 
(the ``Act''),\96\ in general, and Section 6(b)(5) of the Act,\97\ in 
particular, in that it is 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 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.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78f(b).
    \97\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In particular, the Exchange believes this proposed rule change is a 
reasonable modification designed to provide additional opportunities 
for Participants to obtain executions with price improvement for their 
customers while continuing to provide meaningful competition within the 
PIP and COPIP. The Exchange also believes that the proposed rule change 
will increase the number of PIP and COPIP transactions on the Exchange 
and participation in the PIP and COPIP, which will ultimately enhance 
competition and provide customers with additional opportunities for 
price improvement. The Exchange believes these changes are consistent 
with the goals to remove impediments to and to perfect the mechanism 
for a free and open market and a national market system.
    Specifically, the Exchange believes that the proposal will result 
in increased liquidity available at improved prices, with competitive 
pricing outside the control of the Initiating Participant. The proposed 
rule change should promote and foster competition and provide more 
options contracts with the opportunity for price improvement. As a 
result of the increased opportunities for price improvement, the 
Exchange believes that Participants will increasingly use the PIP and 
COPIP so that more customer orders are provided the opportunity to 
receive price improvement.
PIP and COPIP Allocation
    The Exchange believes the proposed changes to the PIP and COPIP 
allocations is an improvement over the current allocations, and will 
benefit all market participants submitting PIP and COPIP orders on the 
Exchange. As a result of the proposed changes, the Exchange believes 
that additional Participants will use the PIP and COPIP to increase the 
number of orders that are provided with the opportunity to receive 
price improvement. Additionally, the Exchange believes that the 
proposed allocation algorithm will encourage greater participation in 
the PIP and COPIP process by encouraging additional Participants to 
respond to the PIP and COPIP. The Exchange believes that the proposed 
pro rata allocation encourages additional Participants to respond at a 
particular price in size, even if that Participant did not set the 
price. These additional responses should encourage greater competition 
in the PIP and COPIP, which should, in turn, benefit and protect 
investors and the public interest through the potential for greater 
price improvement.
    The proposed rule changes preserve the priority of Public Customer 
orders over non-Public Customer orders at the same price. The Exchange 
believes this priority remains consistent with the purposes of the Act. 
The Exchange believes that the new PIP and COPIP allocations are 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest, because it continues to 
recognizes the unique status of customers in the marketplace by 
continuing to afford Public Customers certain priority advantages.
    The Exchange believes that the proposed Primary Improvement Order 
allocation is reasonable, equitable and not unfairly discriminatory to 
customers and Participants. Giving Primary Improvement Orders 
allocation priority for 40% or 50% of the remaining quantity of the PIP 
or COPIP Order will continue to provide incentive for Participants to 
initiate PIP and COPIP auctions on BOX, which provides greater 
opportunity to receive price improvement by encouraging participation 
in the PIP and COPIP process. The Exchange believes that disregarding 
Public Customer orders and Legging Orders when determining whether the 
Initiating Participant retains 40% or 50% under proposed Rule 7150(h) 
is reasonable, equitable and not unfairly discriminatory to customers 
and Participants because neither Public Customer order allocation nor 
Legging Order allocation will be affected by the Initiating Participant 
retaining the difference between 40% or 50% as discussed above.
    The Exchange believes that the Market Maker Allocation is designed 
to promote just and equitable principles of trade and to protect 
investors and the

[[Page 37818]]

public interest, because it strikes a reasonable balance between 
encouraging vigorous price competition and rewarding Market Makers for 
their unique obligations. Overall, the proposed PIP and COPIP 
allocations represent a careful balancing by the Exchange of the 
rewards and obligations of various types of market participants.
    The Exchange believes that the proposal to give Legging Orders last 
priority is reasonable, equitable and not unfairly discriminatory to 
customers and Participants. Giving Legging Orders last priority 
preserves the established priority of Legging Orders since they 
currently have last priority during the current PIP allocation.
    The Exchange believes that providing priority to BOX Book Interest 
in the proposed COPIP allocation is reasonable as it preserves the 
established priority of BOX Book Interest when executing with Complex 
Orders. Therefore the Exchange believes the proposal will reduce 
investor confusion when executing orders on the Exchange.
Orders and Quotes on the BOX Book
    The Exchange believes its proposal to no longer give quotes and 
orders on the BOX Book prior to the PIP Broadcast priority for purposes 
of the PIP allocation is reasonable, equitable and not unfairly 
discriminatory. As stated above, with the current PIP allocation, 
orders and quotes on the BOX Book prior to the PIP Broadcast have time 
priority and therefore execute before PIP responses. Since, with this 
proposal, the Exchange is changing the allocation at the end of the PIP 
from a price/time allocation to a pro rata allocation, the Exchange 
believes that continuing to give orders and quotes on the BOX Book 
prior to the commencement of a PIP priority would contradict the new 
PIP allocation. Therefore the Exchange believes it is reasonable to 
remove the provisions of the rules that give interest on the BOX Book 
prior to the commencement of a PIP priority in order to avoid investor 
confusion.
    Additionally, the Exchange believes its proposal to no longer give 
Complex Orders on the Complex Order Book prior to the COPIP Broadcast 
priority for purposes of the COPIP allocation is reasonable, equitable 
and not unfairly discriminatory. As mentioned above, with the proposed 
changes to the COPIP allocation from a price/time allocation to a pro 
rata allocation, the Exchange believes that continuing to give Complex 
Orders on the Complex Order Book prior to the COPIP Broadcast priority 
would contradict the new COPIP allocations. Therefore the Exchange 
believes it is reasonable to remove the provisions of the rules that 
give Complex Orders on the Complex Order Book prior to the COPIP 
Broadcast priority in order to avoid investor confusion.
    Additionally, the Exchange believes these proposed changes will 
encourage additional Participants to response to the PIP and COPIP. The 
Exchange believes that under the current rules Participants are 
discouraged from responding to the PIP and COPIP since certain orders 
on the book were executed before a Participants response at the same 
price level. By no longer giving interest on the book priority, the 
Exchange believes that additional Participants will respond to the PIP 
and COPIP. These additional responses should encourage greater 
competition, which should, in turn, benefit and protect investors and 
the public interest through greater price improvement.
Broadcast of Improvement Orders
    The Exchange believes the proposal to remove the broadcast of 
Improvement Orders via the HSVF is reasonable, equitable and not 
unfairly discriminatory to customers and Participants because under the 
proposal no market participants will be able to receive broadcast 
notification of Improvement Orders. As a result, no Participants will 
have an information advantage, therefore the proposal serves to promote 
just and equitable principles of trade and to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system. Additionally, the Exchange believes that this proposed change 
will encourage greater participation in the PIP and COPIP which should 
lead to greater price improvement. The Exchange believes that this 
should encourage Participants to submit Improvement Orders at the best 
possible price that the Participant is willing to participate. This, in 
turn, should result in better execution prices which should, in turn, 
benefit and protect investors and the public interest through greater 
price improvement. The Exchange notes that this is similar to the rules 
of other exchanges.\98\
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    \98\ See Phlx Rule 1080(n)(ii)(A)(6) and CBOE Rule 
6.74A(b)(1)(F).
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Cancel Improvement Orders
    The Exchange believes that the proposal to allow Participants to 
cancel Improvement Orders during the PIP and COPIP is reasonable, 
equitable and not unfairly discriminatory. The Exchange believes that 
since the PIP and COPIP Orders are guaranteed to execute at a price 
that is at least equal to, if not better, than the NBBO, that allowing 
Participants to cancel their Improvement Orders will not affect the 
ability of an order to receive an execution at the NBBO. Additionally, 
the Exchange believes that allowing Participants to cancel Improvement 
Orders will protect Participants from the risk of the market moving 
against them. The Exchange believes that this protection for 
Participants should lead to more aggressive responses, which, should 
lead to greater price improvement for investors. Therefore the Exchange 
believes that the proposed change will not affect investor protection 
and investors will continue to benefit from the potential for price 
improvement. The Exchange notes that this is consistent with the rules 
of Phlx.\99\
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    \99\ See Phlx Rule 1080(n)(ii)(A)(9).
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Removal of Market Maker Prime
    As stated above, the Exchange is removing the Market Maker Prime 
designation because it has not achieved the intended results. 
Specifically, the Market Maker Prime designation has not incentivized 
Market Makers to quote aggressively on the BOX Book as it was intended. 
The Exchange believes that the continued presence of the Market Maker 
Prime designation will only serve to confuse and complicate the 
Exchange's Rules, while providing little or no benefit. Therefore the 
Exchange believes that removing the Market Maker Prime will promote 
just and equitable principles of trade and protect investors and the 
public interest.
Customer PIP Order
    The Exchange is removing the CPO functionality because it has not 
achieved the intended results. The Exchange believes that the continued 
presence of the CPO will only serve to confuse and complicate the 
Exchange's Rules, while providing little or no benefit. The Exchange 
notes that Public Customers will continue to have opportunities to 
participate in PIP auctions without limits imposed by CPOs. Therefore, 
the Exchange believes that removing the CPO will avoid investor 
confusion when executing orders on the Exchange.
Professional Priority
    The Exchange believes the proposal to treat Professionals as 
broker-dealers for the purposes of the PIP and COPIP will ensure that 
non-Professional, Public Customers continue to receive the appropriate 
order priority marketplace advantages on BOX, while furthering

[[Page 37819]]

fair competition among marketplace professionals.
    The Exchange believes the proposed change to the priority rules for 
Professionals in the PIP and COPIP is reasonable, equitable and not 
unfairly discriminatory because it treats Professionals, whose activity 
on BOX is akin to the order flow activity and system usage of broker-
dealers, the same priority for competing in the PIP and COPIP as the 
priority given to broker-dealers. As noted above, the order sending 
behavior, trading activity and available technology and information of 
Professionals tend to be more similar to broker-dealers trading on a 
proprietary basis than to non-Professional, Public Customers. This can 
be particularly true of orders placed in response to the PIP and COPIP. 
As such, the Exchange believes it is not unfairly discriminatory to 
treat Professionals like broker-dealers for order priority purposes 
when competing for customer order flow in auction transactions.
    Further, the Exchange believes the proposed change to the priority 
rules is equitable and not unfairly discriminatory because it will 
assure that non-Professional, Public Customers continue to receive the 
appropriate order priority marketplace advantages on BOX, while 
furthering fair competition among marketplace professionals (both 
Professionals and Broker-Dealers) by treating them equally in order 
priority when they compete for these desirable customer orders. The 
Exchange believes it is reasonable and equitable to treat Professionals 
in the PIP and COPIP like broker-dealers because it applies an order 
priority structure that groups these sophisticated market participants 
together when they are competing in this manner.
    The Exchange believes it is equitable and not unfairly 
discriminatory for non-Professional, Public Customers to have priority 
over Professionals and broker-dealers for the PIP and COPIP. The 
securities markets generally, and the Exchange in particular, have 
historically aimed to improve markets for retail investors and develop 
various features within the market structure for the benefit of non-
Professional, Public Customers.
    The Exchange proposes to make certain miscellaneous conforming and 
clarifying changes to Rules 7000, 7130, 7150, and 7245 to make them 
consistent with the adoption of the proposed PIP and COPIP allocations. 
These conforming and clarifying changes are required to make the rules 
consistent and are necessary to promote just and equitable principles 
of trade, to foster cooperation and coordination with persons engaged 
in facilitating transactions in securities, and to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system.
    For the foregoing reasons, the Exchange believes this proposal is a 
reasonable modification to its rules, designed to facilitate increased 
interaction of PIP and COPIP on the Exchange, and to do so in a manner 
that ensures a dynamic, real-time trading mechanism that maximizes 
opportunities for trade executions for orders. The Exchange believes it 
is appropriate and consistent with the Act to adopt the proposed rule 
changes.

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

    The Exchange does not believe the proposed rule change represents 
any undue burden on competition or will impose any burden on 
competition among exchanges in the listed options marketplace not 
necessary or appropriate in furtherance of the purposes of the Act. To 
the contrary, the proposal is pro-competitive because it will enable 
the Exchange to better compete with another options exchange that 
provides a similar allocation algorithm within its auctions.\100\
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    \100\ See supra, note 3.
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    With respect to intra-market competition, the PIP and COPIP will 
still be available to all Participants. The Exchange believes that the 
proposal should encourage Participants to compete amongst each other by 
responding with the best price in each auction. Submitting an order to 
the PIP or a Complex Order to the COPIP is entirely voluntary and 
Participants will determine whether they wish to submit these orders to 
the Exchange. The Exchange operates in a highly competitive marketplace 
with other competing exchanges and market participants can readily 
direct their order flow to other exchanges if they so choose.

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

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

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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-2014-16 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2014-16. 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

[[Page 37820]]

available publicly. All submissions should refer to File Number SR-BOX-
2014-16 and should be submitted on or before July 23, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\101\
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    \101\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15472 Filed 7-1-14; 8:45 am]
BILLING CODE 8011-01-P


