
[Federal Register Volume 81, Number 30 (Tuesday, February 16, 2016)]
[Notices]
[Pages 7853-7856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02987]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77095; File No. SR-BOX-2016-04]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 7070 (Opening the Market) To Implement a New Price 
Protection Feature for the Opening

February 9, 2016.
    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 January 27, 2016, BOX Options Exchange LLC (the ``Exchange'') filed 
with the Securities and Exchange Commission

[[Page 7854]]

(``Commission'') the proposed rule change as described in Items I and 
II 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 Rule 7070 (Opening the Market) to 
implement a new price protection feature for the opening. 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 Rule 7070 (Opening the Market) to 
enhance the price protections available during the opening by providing 
a process that helps mitigate the potential risk associated with orders 
and quotes trading at prices substantially away from the best available 
prices on other exchanges.
Background
    The Exchange currently employs certain protections during opening. 
Specifically, from the time that the Trading Host \3\ commences 
accepting orders and quotes at the start of the Pre-Opening Phase,\4\ 
the Trading Host will calculate and provide the Theoretical Opening 
Price (``TOP'') for the current resting orders and quotes on the BOX 
Book \5\ during the Pre-Opening Phase. The TOP is that price at which 
the Opening Match \6\ would occur at the current time, if that time 
were the opening, according to the Opening Match procedures described 
in Rule 7070(e). The quantity that would trade at this price is also 
calculated. The TOP is re-calculated and disseminated every time a new 
order or quote is received, modified or cancelled and where such event 
causes the TOP price or quantity to change. A TOP can only be 
calculated if an opening trade is possible. An opening trade is 
possible if: i) the BOX Book is crossed (highest bid is higher than the 
lowest offer) or locked (highest bid equals lowest offer), or ii) there 
are Market or Market-on-Opening Orders in the BOX Book and at least one 
order or quote on the opposite side of the market.
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    \3\ The term ``Trading Host'' means the automated trading system 
used by BOX for the trading of options contracts. See Rule 
100(a)(66).
    \4\ For some period of time of not less than one hour before the 
opening in the underlying security, the Trading Host will accept 
orders and quotes. During this period, known as the Pre-Opening 
Phase, orders and quotes are placed on the BOX Book but do not 
generate trade executions. Complex Orders and contingency orders 
(except ``Market-on-Opening'' orders) do not participate in the 
opening and are not accepted by the BOX Trading Host during this 
Pre-Opening Phase. Price Improvement Period orders and Complex Order 
Price Improvement Period orders are not accepted during the Pre-
Opening Phase.
    \5\ The term ``BOX Book'' means the electronic book of orders on 
each single option series maintained by the Trading Host. See Rule 
100(a)(10).
    \6\ The Opening Match is the process employed by the Exchange to 
open a series for trading. See Rule 7070(e).
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    Complex Orders and contingency orders do not participate in the 
Opening Match or in the determination of the opening price. The Trading 
Host establishes the opening price at the time of the Opening Match. 
The opening price is the TOP at the moment of the Opening Match. The 
Trading Host will process the series of a class in a random order, 
starting promptly after the opening for trading of the underlying 
security in the primary market. The TOP/opening price of a series is 
the ``market clearing'' price which will leave bids and offers which 
cannot trade with each other. In determining the priority of orders to 
be filled, the Trading Host gives priority to Market Orders first, then 
to Market-on-Opening orders, then to Limit Orders whose price is better 
than the opening price, and then to resting orders on the BOX Book at 
the opening price.
    The Exchange currently applies a protection mechanism that delays 
the opening of trading in the event of unusual quoting activity in a 
particular series or class of options. The BOX Trading Host will not 
open a series if one of the following conditions is met: (i) A Market 
Maker's quote crosses the TOP by more than ``P'' percent plus ``x'' 
amount \7\ of the theoretical opening price, or (ii) if the sum of the 
volume for all of the series within a class exceeds ``y'' series or 
``z'' contracts.\8\
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    \7\ The Market Regulation Center (``MRC'') shall distribute what 
the appropriate ``P'' percent and ``x'' amount is for each series 
via Regulatory Circular.
    \8\ The MRC shall distribute what the appropriate ``y'' series 
and ``z'' contracts are for each class via Regulatory Circular.
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Proposal
    The Exchange is now proposing to enhance the opening protections on 
the Exchange. Specifically, BOX is proposing to implement a new price 
protection feature designed to prevent orders and quotes on the opening 
from trading at prices that are away from the best available prices on 
other exchanges. The Exchange believes that the below-described 
protection feature will enhance the existing functionality and assist 
with the maintenance of fair and orderly markets by providing an 
automated process that helps mitigate the potential risks associated 
with orders and quotes trading at prices that are substantially away 
from the best available prices on other exchanges (thereby resulting in 
executions at prices that are extreme and potentially erroneous).
    As mentioned above, the Exchange calculates a TOP which is the 
price that the Opening Match would occur at the current time, if that 
time were the opening. The Exchange is now proposing to enhance the 
opening procedures to add a price protection which will validate the 
TOP against the best available prices on other exchanges, or if no TOP 
can be calculated because an opening trading is not possible, validate 
the highest Bid (lowest Ask) Limit Order or quote price against the 
best available prices on other exchanges. Specifically, the Exchange 
will not open trading if the TOP, or when there is no TOP, the highest 
Bid (lowest Ask) Limit Order or quote, is not at a valid price. For 
purposes of this rule filing, a valid price is a price that is equal to 
or within the High Limit and Low Limit; these Limits give a range of 
the acceptable prices that the opening can occur (``Acceptable Price 
Range'').\9\ The High Limit is the Away Best Offer (``ABO'') \10\ plus 
the Price Collar and the Low Limit

[[Page 7855]]

is the Away Best Bid (``ABB'') \11\ minus the Price Collar. If there is 
no ABB, the Low Limit is calculated by subtracting the Price Collar 
from the ABO. The proposed price protection feature will only apply to 
options that are multiply listed; it will not cover options that are 
exclusive to the Exchange. This is because the proposed price 
protection requires there to be prices available on other exchanges 
that can be used to calculate the Acceptable Price Range.
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    \9\ For Limit Orders and quotes when there is no TOP, if the Bid 
(Ask) price is equal to or lower than (higher than) the High (Low) 
Limit, then the Bid (Ask) price is valid and the series can open. 
See Proposed Rule 7070(m)(2).
    \10\ The ``ABO'' is the NBO not including the Exchange's Best 
Offer.
    \11\ The ``ABB'' is the NBB not including the Exchange's Best 
Bid.
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Price Collar
    The Price Collar is calculated by taking the acceptable number of 
ticks \12\ that the order or quote can trade away from the ABBO.\13\ 
The acceptable number of ticks is then multiplied by the minimum 
trading increment \14\ applicable to that series. The acceptable number 
of ticks will be determined by the Exchange on an underlying security 
basis.\15\ Unless determined otherwise by the Exchange and announced to 
Participants via Informational Circular, the acceptable number of ticks 
for all option series shall be three (3) ticks. The Price Collar is 
designed to give an acceptable range for orders or quotes to execute 
based on the best available market prices on other exchanges.
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    \12\ The term ``tick'' refers to one minimum trading increment 
for that option series.
    \13\ The ``ABBO'' is the NBBO not including the Exchange's Best 
Bid/Offer.
    \14\ See Rule 7050.
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    For example, if the Exchange determines that the acceptable number 
of ticks for a series that has a minimum trading increment of a penny 
($0.01) is three (3), the Price Collar applicable to that series will 
be $0.03 (3 * $0.01). If the series has an ABO of $1.25 and ABB of 
$1.20, then the High Limit would be $1.28 and the Low Limit would be 
$1.17 giving an Acceptable Price Range of $1.28 to $1.17. If the TOP is 
within or equal to the outside limits of the Acceptable Price Range, 
the TOP is at a valid price and the Exchange can open the series. If, 
however, no TOP is available but there is a Limit Order or quote 
present, it will be evaluated. Specifically, if the Bid (Ask) price of 
the highest Bid (lowest Ask) Limit Order or quote price is equal to or 
lower than (higher than) the High (Low) Limit, then the Bid (Ask) price 
is valid and the series can open.\16\
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    \16\ For example, if there is a Limit Order to buy at $1.25 it 
would be less than or equal to the High Limit of $1.30, therefore it 
would be at a valid price and the Exchange could open the series.
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Dynamic Opening Process
    If the proposed price protection prevents a series from opening, 
the Exchange will initiate a dynamic opening iteration process.\17\ 
Specifically, if the TOP, or if a TOP is not present, the highest Bid 
(lowest Ask) Limit Order or quote price, is not at a valid price the 
Exchange will initiate the dynamic opening iteration process outlined 
below. The Exchange will also initiate the dynamic opening process when 
the ABO and ABB prices are crossed or no ABO for the series exists.\18\ 
This proposed process will reevaluate whether a series can open for 
trading whenever there is an update to the TOP, ABO, ABB, or the 
highest Bid (lowest Ask) Limit Order or quote price, when applicable. 
When an update is received by the Exchange, the Exchange will 
reevaluate whether the TOP (or the highest Bid (lowest Ask) Limit 
Order/quote price) is now within or equal to the limits of the 
Acceptable Price Range. If the ABO and/or the ABB are updated, the 
system will recalculate the High Limit and Low Limit and therefore an 
updated Acceptable Price Range will be calculated by the system. If the 
TOP (or the highest Bid (lowest Ask) Limit Order/quote price) is now 
within or equal to the limits of the new Acceptable Price Range, the 
system will allow the series to open at the price of the TOP (or the 
highest Bid (lowest Ask) Limit Order/quote price). If, instead, the 
system receives an update to the TOP or, the highest Bid (lowest Ask) 
Limit Order or quote price, when applicable, the system will evaluate 
the updated price to determine if it is within or equal to the limits 
of the Acceptable Price Range. If the updated price is now within or 
equal to the limits of the Acceptable Price Range, the system will 
allow the series to open at the updated price. This proposed process 
will continue until the TOP (or the highest Bid (lowest Ask) Limit 
Order/quote price) is within or equal to the limits of the Acceptable 
Price Range, or the Exchange intervenes and manually opens the series.
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    \17\ See proposed Rule 7070(m)(3).
    \18\ See proposed Rule 7070(m)(1)(C).
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    For example, assume again that a series has an ABO of $1.25 and ABB 
of $1.20 and a Price Collar of $0.03, thereby giving it an Acceptable 
Price Range of $1.28 to $1.17. Assume the TOP is at $1.33 so the system 
will not allow the series to open because it is outside of the 
Acceptable Price Range. If the system receives an updated ABO of $1.30, 
the new High Limit will be $1.33 and the Acceptable Price Range will be 
$1.33 to $1.17. The TOP will now be within or equal to the limits of 
the Acceptable Price Range so the series can open. If instead of 
receiving an update to the ABO, assume the system receives an updated 
TOP of $1.25. The new TOP is within the Acceptable Price Range of $1.28 
to $1.17 so the series will be allowed to open.
    The Exchange notes that the current protections at the opening will 
continue to apply; the proposed opening protections are designed to 
enhance the Exchange's current offerings, not replace them.\19\ 
Additionally, the Exchange may deviate from the proposed price 
protections at the open. Specifically, the Exchange can deviate from 
the standard manner of the opening procedure when it believes it is 
necessary in the interest of a fair and orderly market.\20\
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    \19\ The current protection in Rule 7070(g), that prevents a 
series from opening when a Market Maker's quote crosses the TOP by a 
certain amount, will occur after the TOP is validated by the 
proposed price protection.
    \20\ See Rule 7070(k).
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    The Exchange will provide Participants with notice, via Information 
Circular, about the implementation date of the proposed enhancements to 
the price protections.
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''),\21\ in general, and Section 6(b)(5) of the Act,\22\ 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, by enhancing the risk protections available to 
Participants. In particular, the propose [sic] rule change is 
consistent with these requirements in that it will reduce the negative 
impacts of sudden, unanticipated volatility in individual options, and 
serve to preserve an orderly market in a transparent and uniform 
manner, increase overall market confidence, and promote fair and 
orderly markets and the protection of investors. Specifically, BOX 
believes that the ABBO is a fair representation of then-available 
prices at the opening and accordingly the proposal helps to avoid 
executions at prices that are significantly worse than the ABBO. 
Additionally, the Exchange believes the proposal promotes policy goals 
of the Commission which has encouraged execution venues, exchange

[[Page 7856]]

and non-exchange alike, to enhance risk protection tools and other 
mechanisms to decrease risk and increase stability.
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    \21\ 15 U.S.C. 78f(b).
    \22\ 15 U.S.C. 78f(b)(5).
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    BOX believes the proposed price protection functionality will 
remove impediments to and perfect the mechanism of a free and open 
market by providing greater control over the prices at which the 
opening occurs. Additionally, the Exchange believes that the proposed 
protection feature for the opening will enhance the existing 
functionality and assist with the maintenance of fair and orderly 
markets by providing an automated process that helps mitigate the 
potential risks associated with orders and quotes trading at prices 
that are substantially away from the best available prices on other 
exchanges (thereby resulting in executions at prices that are extreme 
and potentially erroneous).

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. BOX believes the proposal will 
provide market participants with additional price protection while 
submitting orders and quotes to the Exchange. The Exchange does not 
believe the proposal will impose a burden on competition among the 
options exchanges, because of vigorous competition for order flow among 
the options exchanges. The Exchange competes with many other options 
exchanges. In this highly competitive market, market participants can 
easily and readily direct order flow to competition venues.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \23\ and Rule 19b-4(f)(6) thereunder.\24\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \23\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \24\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed under Rule 19b-4(f)(6) \25\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\26\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has asked 
the Commission to waive the 30-day operative delay so that the Exchange 
may implement the proposed price protections as soon as possible, which 
will benefit all market participants. In support of its request, the 
Exchange states the proposed rule change is designed to prevent 
executions on the opening at prices substantially away from the best 
prices available on other exchanges. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest. Therefore, the Commission hereby 
waives the operative delay and designates the proposed rule change 
operative upon filing.\27\
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    \25\ 17 CFR 240.19b-4(f)(6).
    \26\ 17 CFR 240.19b-4(f)(6)(iii).
    \27\ For purposes only of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2016-04 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-2016-04. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2016-04 and should be 
submitted on or before March 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-02987 Filed 2-12-16; 8:45 am]
BILLING CODE 8011-01-P


