
[Federal Register Volume 79, Number 161 (Wednesday, August 20, 2014)]
[Notices]
[Pages 49361-49367]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19704]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72848; File No. SR-BOX-2014-16]


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

August 14, 2014.

I. Introduction

    On June 16, 2014, BOX Options Exchange LLC (``Exchange'' or 
``BOX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its rules regarding the Price Improvement 
Period (``PIP'') and Complex Order Price Improvement Period (``COPIP'') 
(``auction mechanisms''). The proposed rule change was published for 
comment in the Federal Register on July 2, 2014.\3\ The Commission 
received no comments on the proposed rule change. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 72477 (June 26, 
2014), 79 FR 37798 (``Notice'').
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II. Description of the Proposal

    The PIP \4\ and COPIP \5\ are electronic auction mechanisms that 
permit an Options Participant to expose an agency order (``PIP Order'' 
for PIP and ``COPIP Order'' for COPIP, each, an ``Agency Order'') and 
provide such order an opportunity for price improvement. Currently, the 
PIP and COPIP rules permit an initiating Options Participant 
(``Initiating Participant'') to submit an Agency Order into the PIP or 
COPIP along with a matching contra order (``Primary Improvement 
Order''). The Exchange will commence a PIP or COPIP by broadcasting a 
message to other Options Participants that contains information 
concerning series, size, auction start price, side of market, and

[[Page 49362]]

time of conclusion. The PIP or the COPIP will last 100 milliseconds, 
unless terminated earlier due to certain circumstances. At the 
conclusion of the PIP or the COPIP, the Agency Order is matched against 
the best prevailing quotes or orders on BOX, including Improvement 
Orders \6\ and any Unrelated Orders,\7\ on a price/time priority basis, 
subject to certain exceptions.\8\
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    \4\ See BOX Rule 7150.
    \5\ See BOX Rule 7245.
    \6\ Improvement Orders are competing order submitted to the 
auction mechanisms by order flow providers and market makers. See 
Box Rule 7150(f)(1).
    \7\ See BOX Rules 7150(a) (defining an Unrelated Order for 
purposes of the PIP auction as a non-Improvement Order entered into 
the BOX market during a PIP) and 7245(a) (defining an Unrelated 
Order for purposes of a COPIP auction as a non-Improvement Order 
entered on BOX during a COPIP or BOX Book Interest during a COPIP).
    \8\ See BOX Rules 7150(f)(4) and 7245(f)(3).
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    The PIP is utilized for the submission of agency orders for single 
options series instruments, while the COPIP is utilized for the 
submission of Complex Orders. BOX proposes to amend the PIP and the 
COPIP to amend the priority and allocation algorithms at the conclusion 
of the auction mechanisms. BOX further proposes to eliminate the 
broadcast of Improvement Order responses submitted during the PIP and 
the COPIP. In addition, BOX proposes to remove the Market Maker Prime 
\9\ designation and Customer PIP Order type (``CPO'') from the PIP.
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    \9\ See BOX Rule 7160.
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A. Priority and Allocation at the Conclusion of the PIP

    BOX proposes to amend the priority and trade allocation algorithm 
for matching orders at the conclusion of the PIP.\10\ The PIP Order 
will continue to be matched with opposite side competing orders and 
quotes in price priority. If the total quantity of orders, quotes, 
Improvement Orders, Legging Orders \11\ 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 described below.
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    \10\ See Notice, supra note 3, at 37799, for a detailed 
description of the current PIP allocation process.
    \11\ See BOX Rule 7240(c)(1).
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Public Customer Allocation
    BOX proposes that all orders, other than Legging Orders and the 
Primary Improvement Order, for the account of Public Customers,\12\ 
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.\13\ Where there are multiple 
such orders for the account of Public Customers at the same price, the 
trade allocation will be by time priority.\14\ BOX has represented that 
this allocation methodology is the same as the allocation for the price 
improvement auction on NASDAQ OMX PHLX (``Phlx'').\15\
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    \12\ 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 BOX Rules 
100(a)(50), 7150(a)(2) and 7245(a)(4).
    \13\ See proposed BOX Rule 7150(g)(1).
    \14\ See Notice, supra note 3, at 37800, for examples 
illustrating trade allocations where the Primary Improvement Order 
is for the account of a Public Customer.
    \15\ See Notice, supra note 3, at 37800. See also Phlx Rule 
1080(n)(ii)(E).
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Primary Improvement Order Allocation
    After the Public Customer allocation, the Primary Improvement Order 
will receive its applicable trade allocation.\16\ Specifically, when a 
Single-Priced Primary Improvement Order \17\ is matched by or matches 
any competing Improvement Orders and/or non-Public Customers' Unrelated 
Orders at the final price level, the Initiating Participant's Primary 
Improvement Order 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\
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    \16\ See proposed BOX Rule 7150(g)(2). 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 hat this is.to the other PIP Participants 
(``PIP Surrender Quantity''). If the Primary Improvement Order has 
designated a PIP Surrender Quantity, the Primary Improvement Order 
allocation will be reduced, if necessary, by the amount of the PIP 
Surrender Quantity. See Notice, supra note 3, at 37799-800.
    \17\ See BOX Rule 7150(f) (defining the term as ``a single price 
order that is equal to or better than that of the National Best Bid 
Offer (``NBBO'') at the time of the commencement of the PIP.
    \18\ See proposed BOX Rule 7150(h)(1). See Notice, supra note 3, 
at 37801, for an example illustrating allocation of 50% rather than 
40% to the Primary Improvement Order.
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    When an Initiating Participant submits a Max Improvement Primary 
Improvement Order,\19\ the Initiating Participant will 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 the final price 
level, the 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.\20\
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    \19\ See BOX Rule 7150(f) (defining the term as ``an auto-match 
submission that will automatically match both the price and size of 
all competing quotes and orders at any price level achieved during 
the PIP or only up to a limit price'').
    \20\ See proposed BOX Rule 7150(h)(2). See Notice, supra note 3, 
at 37801, for an example illustrating allocation to the Primary 
Improvement Order with a specified auto-match limit price.
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    Pursuant to proposed BOX Rule 7150(h), Public Customer orders and 
Legging Orders will not be considered when determining whether the 
Initiating Participant retains 40% or 50% because neither Public 
Customer order allocation nor Legging Order allocation will be affected 
by the Initiating Participant retaining the difference between 40% and 
50%.
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.\21\ 
Where 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.
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    \21\ See proposed BOX Rule 7150(g)(3).
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    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, while 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,

[[Page 49363]]

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 a price level, the Market Maker's trade allocation will 
not exceed the size of the Market Maker order/quote at that price 
level. If the trade allocation for a Market Maker would result in a 
fraction of a contract, it will be rounded down. 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.\22\
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    \22\ See Notice, supra note 3, at 37802, for an example 
illustrating Market Maker trade allocations.
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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 rounds described 
above.\23\
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    \23\ See proposed BOX Rule 7150(g)(4). Currently, Professionals 
are treated like Public Customers in circumstances where BOX 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 BOX 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. 
See Notice, supra note 3, at 37802, for an example showing a 
comparison of Professional Customer PIP trade allocation (before and 
after the proposed rule change).
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    Where there is more than one remaining unallocated order, 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, while 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.\24\
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    \24\ See Notice, supra note 3, at 37802, for an example 
illustrating Market Maker trade allocations.
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Additional Allocation
    If, at the end of the remaining orders allocation, there remains 
any unallocated quantity of the PIP Order, the balance 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 
sequentially until each remaining quote/order has received one contract 
or until the PIP Order is fully allocated. The 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, the trade allocation sequence will be 
by time priority.\25\
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    \25\ See proposed BOX Rule 7150(g)(5). See Notice, supra note 3, 
at 37803, for an example illustrating additional allocation when 
limited by a PIP Surrender Quantity with multiple Market Maker 
orders.
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Legging Order Allocation
    If, after the allocation of all orders, quotes and Improvement 
Orders, 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.\26\ 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.
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    \26\ See proposed BOX 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. See Notice, supra note 3, at 37803-4, for examples 
illustrating trade allocations where the Primary Improvement Order's 
PIP Surrender Quantity is: (i) greater than, and (ii) less than, the 
sum of Legging Orders at the final price level.
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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.\27\ In addition, 
current BOX 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.
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    \27\ See BOX Rule 7150(f)(4)(i). See Notice, supra note 3, at 
37804-5, for an example illustrating trade allocations for orders on 
the BOX Book prior to the PIP Broadcast, which are eligible for 
execution at the conclusion of the PIP.
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    BOX proposes that quotes and orders on the BOX Book prior to the 
PIP Broadcast 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. 
Instead, as described above in the Market Maker Allocation Section 
above,\28\ 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. Consequently, BOX is 
proposing to remove the exceptions for quotes and orders on the BOX 
Book prior to the PIP Broadcast in BOX Rules 7150(f)(4)(i) and (g)(3). 
BOX has represented that this is consistent with Phlx.\29\ 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.
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    \28\ See Section II.A., supra.
    \29\ See Phlx Rule 1080(n)(ii)(E)(2).
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B. Priority and Allocation at the Conclusion of the COPIP

    Pursuant to current BOX Rule 7245, Complex Orders may be submitted 
to the COPIP, which is substantially similar to the PIP except as 
necessary to account for distinctions between regular orders on the BOX 
Book and Complex Orders.\30\ BOX proposes to amend the COPIP priority 
and allocation rule to adopt similar changes to those being proposed to 
the PIP allocation.\31\ Complex Orders on the Complex Order Book will 
continue to be executed in price/time priority, but 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

[[Page 49364]]

occur according to the priority algorithm described below.
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    \30\ 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.
    \31\ See Notice, supra note 3, at 37806-7, for a detailed 
description of the current COPIP allocation.
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    Specifically, BOX has proposed 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 currently executed in priority over Complex 
Orders. BOX Book Interest \32\ will continue to be allocated for 
execution against the COPIP Order in priority over Complex Orders and 
in time priority.\33\
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    \32\ ``BOX Book Interest'' is defined as bids and offers on the 
BOX Book for the individual legs of a Strategy. See BOX Rule 
7245(a)(3).
    \33\ See proposed BOX Rule 7245(g)(1). See Notice, supra note 3, 
at 37807, for an example illustrating allocations of BOX Book 
Interest at multiple price levels eligible for execution at the end 
of a COPIP.
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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. Where there are 
multiple such Complex Orders for the account of Public Customers, 
allocation among all Public Customers, other than the Initiating 
Participant, at the same price will be by time priority.\34\
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    \34\ See proposed BOX Rule 7245(g)(2). See Notice, supra note 3, 
at 37808, for examples illustrating allocations of Primary 
Improvement Orders for the accounts of Public Customers in two 
different scenarios.
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Primary Improvement Order Allocation
    After the Public Customer allocation, the Primary Improvement Order 
will receive its applicable trade allocation.\35\ Specifically, when a 
Single-Priced Primary Improvement Order \36\ is matched by or matches 
any Complex Order(s) at the final price level, the Initiating 
Participant's Primary Improvement Order 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.\37\
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    \35\ See proposed BOX Rule 7150(h). 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.
    \36\ See BOX Rule 7245(f) (defining the term as ``a single price 
order that is equal to or better than cNBBO, cBBO (each as defined 
in [BOX] Rule 7240(a)) and BBO on the Complex Order Book for the 
Strategy at the time of the commencement of the COPIP.
    \37\ See proposed BOX Rule 7245(h)(1). See Notice, supra note 3, 
at 37809, for an example illustrating allocation of 50% rather than 
40% to the Primary Improvement Order.
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    When the Initiating Participant submits a Max Improvement Primary 
Improvement Order,\38\ 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 the final 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.\39\ Public Customer 
orders and BOX Book Interest will not be considered when determining 
whether the Initiating Participant retains 40% or 50% in proposed BOX 
Rule 7245(h) because neither Public Customer order allocation nor BOX 
Book Interest allocation will be affected by the Initiating Participant 
retaining the difference between 40% and 50%.\40\
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    \38\ See BOX Rule 7245(f) (defining the term as ``an auto-match 
submission that will automatically match both the price and size of 
all competing orders, including Improvement Orders and Unrelated 
Orders, at any price level achieved during the COPIP or only up to a 
limit price'').
    \39\ See proposed BOX Rule 7245(h)(2). See Notice, supra note 3, 
at 37809-10, for examples illustrating COPIP allocation with and 
without auto-matching.
    \40\ The first sentence of proposed BOX 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 trade 
allocation percentage.
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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.\41\ 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, while 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. 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.\42\
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    \41\ See proposed BOX Rule 7245(g)(4).
    \42\ See Notice, supra note 3, at 37810, for an example 
illustrating COPIP allocations to Market Makers.
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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.\43\
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    \43\ See proposed BOX Rule 7245(g)(5). See Notice, supra note 3, 
at 37810-1, for an example illustrating comparison of COPIP trade 
allocations to Professionals before and after the proposed rule 
change.
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    Where there is more than one remaining unallocated Complex Order, 
including Improvement Orders, at the same price, the trade allocation 
to each

[[Page 49365]]

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, while 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.
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 sequentially until each remaining order has received one 
Strategy or until the COPIP Order is fully allocated. The 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. 
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.\44\
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    \44\ See proposed BOX Rule 7245(g)(6). See Notice, supra note 3, 
at 37811, for an example illustrating additional allocation to 
multiple market maker orders when limited by a COPIP Surrender 
Quantity.
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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.\45\ 
Further, BOX 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.
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    \45\ See BOX Rule 7245(f)(3)(ii).
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    BOX proposes 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.\46\ Therefore, BOX 
has proposed removing the exceptions for quotes and orders on the BOX 
Book prior to the COPIP Broadcast in BOX Rules 7245(f)(3)(ii) and 
(g)(3). BOX has represented that this proposed change is consistent 
with Phlx.\47\ 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.
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    \46\ See Notice, supra note 3, at 37811-2, for an example 
illustrating allocation to orders on the Complex Order Book prior to 
the COPIP Broadcast for orders eligible for execution at the 
conclusion of the COPIP.
    \47\ See Phlx Rule 1080(n)(ii)(E)(2)(d).
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C. Professional Customer Priority in the PIP and COPIP

    Pursuant to BOX 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 current BOX 
rules, Public Customers, including Professionals, benefit from certain 
order priority advantages in PIP and COPIP transactions on BOX (``Order 
Priority''). BOX proposes to amend Rule 100(a)(50), and related cross 
references in BOX Rules 7150(a)(2) and 7145(a)(4), to limit the 
availability of order priority advantages in PIP and COPIP transactions 
to non-Professional, Public Customers on BOX.\48\ Thus Professionals 
will now be treated like non-Public Customers for order priority in PIP 
and COPIP transactions instead of receiving the same order priority 
afforded to non-Professional, Public Customers. According to BOX, the 
order-sending behavior and trading activity of Professionals tend to be 
more similar to broker-dealers trading on a proprietary basis, and 
therefore it is not unfairly discriminatory to give Professional orders 
the same priority as broker-dealers for allocation purposes. BOX has 
represented that other exchanges also treat Professionals as non-Public 
Customers for Order Priority in auction transactions.\49\
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    \48\ See proposed BOX Rule 7150(g)(4). Currently, Professionals 
are treated like Public Customers in circumstances where BOX 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 BOX 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.
    \49\ See Phlx Rule 1000(b)(14).
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D. Improvement Orders in PIP and COPIP

    Currently, Improvement Order responses submitted during the PIP and 
COPIP are broadcast via the High Speed Vendor Feed (``HSVF'') but are 
not disseminated through OPRA.\50\ The Exchange proposes to no longer 
broadcast Improvement Orders received during the PIP or the COPIP. The 
Exchange believes that this proposed change will encourage greater 
participation in the PIP and the COPIP, which may lead to greater price 
improvement because a Participant will be encouraged to submit 
Improvement Orders at the best possible price at which the Participant 
is willing to participate.\51\
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    \50\ See BOX Rules 7150(f)(1) and 7245(f)(1).
    \51\ See Notice, supra note 3, at 37814.
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    BOX does not currently 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.\52\ BOX 
proposes to allow Participants to cancel their Improvement Orders at 
any time up to the end of the PIP or COPIP. Additionally, because a 
Participant will be able to cancel its Improvement Order and submit a 
new modified Improvement Order, BOX proposes to not allow a Participant 
to decrease the size of its Improvement Order by improving the price of 
that order. BOX believes that by allowing a Participant to cancel its 
Improvement Order, the Participant will be more willing to enter 
aggressively priced responses. BOX has represented that these proposed 
changes are consistent with Phlx's Rules.\53\
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    \52\ See BOX Rules 7150(f)(2) and 7245(f)(2).
    \53\ See NASDAQ OMX PHLX LLC (``Phlx'') Rule 1080(n)(ii)(6) and 
(n)(ii)(9). See Notice, supra note 3, at 37814.

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[[Page 49366]]

E. PIP Market Maker Prime Designation and CPO Order Type

    Current BOX Rule 7160 provides that at the commencement of each 
PIP, a single Market Maker Prime may be designated for that PIP only. 
When the PIP was first adopted, BOX 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.\54\ BOX proposes to eliminate the 
Market Maker Prime designation because, according to BOX, Market Makers 
rarely use the Market Maker Prime functionality.\55\
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    \54\ See Securities Exchange Act Release No. 47186 (January 14, 
2003), 78 FR 3062 (January 22, 2003) (Notice of Filing SR-BSE-2002-
15).
    \55\ See Notice, supra note 3, at 37805.
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    Current BOX Rule 7150(h) provides for a CPO order type. A CPO 
allows a Public Customer to submit an order on a single options series, 
through an order flow provider (``OFP''),\56\ 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, according to BOX, because CPOs 
are rarely submitted, BOX proposes to eliminate the CPO order type.\57\ 
Public Customers may continue to submit orders to the BOX Book and 
Improvement Orders during the PIP.
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    \56\ As defined in BOX Rule 100(a)(45), the term Order Flow 
Provider or ``OFP'' means those Options Participants representing as 
agent Customer Orders on BOX and those non-Market Maker Participants 
conducting proprietary trading.
    \57\ See Notice, supra note 3, at 37805.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\58\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\59\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect customers, issuers, brokers and dealers.
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    \58\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \59\ 15 U.S.C. 78f(b)(5).
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    Under the proposed rule change, at the conclusion of a PIP, Public 
Customer orders have first priority to trade against the Agency Order. 
After the execution of Public Customer orders, the Primary Improvement 
Order may be allocated up to 40% of the remaining size of the PIP Order 
(however, if only one competing order matches the Primary Improvement 
Order, then the Primary Improvement Order may be allocated up to 50% of 
the PIP Order). Market Maker orders and quotes next have priority. 
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. Legging Orders have final priority. Under the 
proposed rule change, the allocation at the conclusion of a COPIP 
auction is substantially the same as the allocation at the conclusion 
of a PIP auction except BOX Book Interest has priority over all orders 
at the end of a COPIP auction. The Commission believes that the 
proposed matching algorithm set forth in the PIP and the COPIP rules 
are sufficiently clear regarding how orders are to be allocated in the 
PIP and the COPIP auctions and do not raise any novel issues. The 
proposed changes to the PIP and COPIP mechanisms are similar in many 
aspects to the features found in the price improvement mechanisms of 
other options exchanges, including: the ability to cancel Improvement 
Orders; \60\ the non-dissemination of Improvement Orders to OPRA; \61\ 
and the execution allocation scheme which gives Public Customers and 
the Initiating Participant priority over other Participants and 
Professional Customers;\62\ and the execution of orders on the book at 
the end of the PIP auction.\63\
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    \60\ See, e.g., Chicago Board Options Exchange, Incorporated 
(``CBOE'') Rule 6.74A(b)(1)(I).
    \61\ See,e.g., CBOE Rule 6.74A(b)(1)(F), Phlx Rule 
1080(n)(ii)(A)(6).
    \62\ See, e.g., ISE Rule 723(d), Miami International Securities 
Exchange LLC (``MIAX'') Rule 515A(a)(2)(iii), and Phlx Rule 
1080(n)(ii)(E).
    \63\ See id.
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    Under the proposed rule change, Improvement Orders will no longer 
be disseminated to Participants and to OPRA. The Commission notes that, 
according to the Exchange, this may encourage Participants to submit 
Improvement Orders at the best possible price that the Participant is 
willing to interact with the Agency Order, which could lead to greater 
price improvement for the Agency Order. \64\
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    \64\ See Notice, supra note 3, at 37814.
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    Finally, BOX will eliminate the Market Maker Prime designation and 
CPO order type. According to the Exchange, Market Makers rarely use the 
Market Maker Prime functionality. The Commission notes that Public 
Customers currently have and will continue to have opportunities to 
participation in the PIP and COPIP, without the limitations that the 
CPO order type would impose.

IV. Section 11(a) of the Act

    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. Rule 
11a2-2(T) under the Act,\66\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
(iii) may not be affiliated with the executing member; and (iv) with 
respect to an account over which the member has investment discretion, 
neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule. For the reasons set forth below, the Commission 
believes that BOX's 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, would satisfy the 
requirements of Rule 11a2-2(T).\67\
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    \65\ 15 U.S.C. 78k(a)(1).
    \66\ 17 CFR 240.11a2-2(T).
    \67\ The Commission notes that it has previously found that 
transactions effected through the BOX PIP and COPIP are consistent 
with the requirements of Section 11(a), relying in part upon Rule 
11a1-1(T) and in part upon Rule 11a2-2(T) thereunder. See Securities 
Exchange Act Release Nos. 68177 (November 7, 2012), 77 FR 67851 
(November 14, 2012) and 71148 (December 19, 2013), 78 FR 78437 
(December 26, 2013).

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[[Page 49367]]

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. The Commission has previously 
found that the off-floor transmission requirement is met if a covered 
account order is transmitted from a remote location directly to an 
exchange's floor by electronic means.\68\ The Exchange has represented 
that 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. The Exchange also represents that orders for covered 
accounts from OFPs and BOX Market Makers will only be submitted from 
electronic systems from remote locations, separate from BOX. Because 
the Exchange has represented that there are no other Options 
Participants that are able to submit order to BOX other than OFPs or 
Market Makers, the Commission believes that orders received through the 
PIP and COPIP would satisfy the off-floor transmission requirement.
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    \68\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 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 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
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    Second, the Rule requires that the member not participate in the 
execution of its order. The Exchange represents that at no time 
following the submission of an order is a Participant able to acquire 
control or influence over the result or timing of an order's 
execution.\69\ According to the Exchange, the execution of an order is 
determined by what other orders are entered into BOX at or around the 
same time, 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.\70\ In addition, as noted 
above, BOX proposes to no longer broadcast Improvement Orders received 
during the PIP and COPIP. As a result, responses to the PIP and COPIP 
auctions would no longer be visible to Participants.\71\ Accordingly, 
the Commission believes that a member does not participate in the 
execution of an order submitted through the PIP or the COPIP, including 
orders that execute against an order on the BOX Book or the Complex 
Order Book.
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    \69\ See Notice, supra note 3, 79 FR at 37816.
    \70\ See id.
    \71\ See Notice, supra note 3, 79 FR at 37814.
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated systems facilities are used, as 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 exchange.\72\ BOX has represented that the PIP and COPIP are 
designed so that no broker-dealer has any special or unique trading 
advantage in the handling of its orders after transmitting its orders 
to BOX.\73\ Based on the Exchange's representation, the Commission 
believes that the PIP and COPIP satisfy this requirement.
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    \72\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 55.
    \73\ See Notice, supra note 3, 79 FR at 37815.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\74\ BOX represents that Participants relying on Rule 
11a2-2(T) for transactions effected through the PIP and COPIP must 
comply with this condition of the Rule and that the Exchange has 
represented that it will enforce this requirement pursuant to its 
obligation under Section 6(b)(1) of the Act to enforce compliance with 
federal securities laws.\75\
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    \74\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d).
    \75\ See Notice, supra note 3, 79 FR at 37817.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\76\ that the proposed rule change (SR-BOX-2014-16), be and hereby 
is, approved.
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    \76\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\77\
Kevin M. O'Neill,
Deputy Secretary.
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    \77\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-19704 Filed 8-19-14; 8:45 am]
BILLING CODE 8011-01-P


