
[Federal Register Volume 81, Number 30 (Tuesday, February 16, 2016)]
[Notices]
[Pages 7873-7876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-02985]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77092; File No. SR-BOX-2016-03]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To Add 
Rule 7310 (Drill-Through Protection) To Implement a New Price 
Protection Feature

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 (``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 add Rule 7310 (Drill-through Protection) 
to implement a new price protection feature. 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 is proposing to adopt a mechanism that will prevent 
BOX from experiencing dramatic price swings. Specifically, the Exchange 
proposes to add Rule 7310 (Drill-through Protection) to implement a new 
price protection feature on BOX. The new price protection feature is 
designed to prevent orders and quotes from drilling through and 
executing at multiple price points. This circumstance can exist if, for 
example, a Market Order,\3\ or aggressively priced Limit Order \4\ or 
quote is entered that is larger than the total volume of contracts 
quoted at the top-of-book across all U.S. options exchanges.\5\ 
Currently, without any protections in place, this could result in 
options executing at prices that have little or no relation to the 
theoretical price of the option.
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    \3\ Market Orders submitted to BOX are executed at the best 
price obtainable for the total quantity available when the order 
reaches the BOX market. Any remaining quantity is executed at the 
next best price available for the total quantity available. This 
process continues until the Market Order is fully executed. Prior to 
execution at each price level, Market Orders are filtered pursuant 
to the procedures set forth in Rule 7130(b) to avoid trading through 
the NBBO. See Rule 7110(c)(3).
    \4\ Limit Orders entered into the BOX Book are executed at the 
price stated or better. Any residual volume left after part of a 
Limit Order has traded is retained in the BOX Book until it is 
withdrawn or traded (unless a designation described in Rule7110(d) 
is added which prevents the untraded part of a limit order from 
being retained). All Limit Orders (with the exception of those with 
a Good 'Til Cancelled (``GTC'') designation as described in Rule 
7110(d)(1)) are automatically withdrawn by the Trading Host at 
market close.
    \5\ There are currently 12 options exchanges.
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    For example, in a thinly traded option:

                                                 Away Exchanges
----------------------------------------------------------------------------------------------------------------
                    Exchange                         Bid size        Bid price      Offer price     Offer size
----------------------------------------------------------------------------------------------------------------
Away Exchange #1................................               5           $2.00           $2.05               5
Away Exchange #2................................               5            2.00            2.10               5
Away Exchange #3................................               5            2.00            2.10               5
Away Exchange #4................................               5            2.00            2.15               5
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[[Page 7874]]


                                                BOX Price Levels
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                    Exchange                         Bid size        Bid price      Offer price     Offer size
----------------------------------------------------------------------------------------------------------------
BOX order.......................................               5           $2.00           $2.05               5
BOX order.......................................  ..............  ..............            2.10               5
BOX order.......................................  ..............  ..............            3.20               5
BOX order.......................................  ..............  ..............            6.00               5
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    If the Exchange receives a routable Market Order to buy 50 
contracts, the system will respond as described below:
    5 Contracts will be executed at $2.05 against BOX.
    5 contracts will be executed at $2.05 against Away Exchange #1.\6\
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    \6\ Prior to routing an order to an Away Exchange, the order is 
first exposed on the BOX Book at the NBBO. See Rule 7130(b)(3).
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    5 contracts will be executed at $2.10 against BOX.
    5 contracts will be executed at $2.10 against Away Exchange #2.
    5 contracts will be executed at $2.10 against Away Exchange #3.
    5 contracts will be executed at $2.15 against Away Exchange #4.
    After these executions, there are no other known valid away 
exchange quotes. The National Best Bid/Offer (``NBBO'') is therefore 
comprised of the remaining interest on the BOX Book,\7\ specifically 
five (5) contracts at $3.20 and five (5) contracts at $6.00. In the 
absence of a price protection mechanism, the order would execute 
against the remaining interest at $3.20 and $6.00, resulting in a 
potential unexpected fill price.
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    \7\ The term ``BOX Book'' means the electronic book of orders on 
each single option series maintained by the BOX Trading Host. See 
Rule 100(a)(10).
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    To bolster the normal resilience and market behavior that 
persistently produces robust reference prices, BOX is proposing to 
create a level of protection that prevents the market from moving 
beyond set thresholds. The thresholds consist of a High Limit and Low 
Limit \8\ which give an acceptable range for the order or quote to 
execute. When an order or quote is initially received by the Trading 
Host,\9\ the Exchange will calculate the High Limit and Low Limit. 
These Limits present the applicable trading range within which the 
order or quote may execute (``Acceptable Trade Range''); an order or 
quote to buy (sell) will be allowed to execute up (down) to and 
including the maximum (minimum) price within the Acceptable Trade 
Range. The High Limit is calculated by adding the Price Collar,\10\ as 
defined in further detail below, to the National Best Offer (``NBO'') 
and the Low Limit is calculated by subtracting the Price Collar from 
the National Best Bid (``NBB'').\11\ If the NBBO on the opposite side 
of the order or quote is not available, the NBBO on the same side will 
be used for calculating the Limits.\12\ For Complex Orders, the cNBBO 
\13\ will be used when calculating the Limits. The High Limit and Low 
Limit are established upon initial entry of the order or quote; 
therefore, the Acceptable Trade Range remains the same for the complete 
processing of the order or quote.
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    \8\ See Proposed Rule 7310(b).
    \9\ The term ``Trading Host'' means the automated trading system 
used by BOX for the trading of options contracts. See Rule 
100(a)(66).
    \10\ See Proposed Rule 7310(b)(1).
    \11\ See propose Rule 7310(b).
    \12\ See proposed Rule 7310(b)(4).
    \13\ The term ``cNBBO'' means the best net bid and offer price 
for a Complex Order Strategy based on the NBBO for the individual 
options components of such Strategy.
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    The Price Collar is calculated by first determining the acceptable 
number of ticks \14\ that an order or quote can trade away from the 
NBBO at the time the order or quote was received. The acceptable number 
of ticks is then multiplied by the minimum trading increment \15\ 
applicable to that option series. Under the proposed price protection, 
Participants will be allowed to submit values for the acceptable number 
of ticks that their orders or quotes can trade away from the NBBO at 
the time the order or quote was received.\16\ The Exchange will also 
supply default values on an underlying security basis. Unless 
determined otherwise by the Exchange and announced to Participants via 
Information Circular, the Exchange default value shall be three (3) 
ticks. The Exchange determined the default values based on Participant 
feedback and its own analysis. When calculating the Price Collar, and 
therefore the High Limit and Low Limit, the Exchange will use the most 
restrictive value for the acceptable number of ticks between the 
Participant-provided and the Exchange default.\17\ This is designed to 
give Participants flexibility in the level of protection that they want 
while allowing the Exchange to provide a minimum level of protection 
for orders and quotes on BOX. Participants will be able to set the 
value for the acceptable number of ticks on an underlying security 
basis and may update the values on a daily basis with such changes 
taking effect on the following trading day. Any changes to the Exchange 
default values would take effect no earlier than the following trading 
day.
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    \14\ The term ``tick'' refers to one minimum trading increment 
for that options series.
    \15\ See Rule 7050.
    \16\ For non-complex orders, Participants will be permitted to 
provide values for this price protection mechanism based on the 
underlying security. For example, a Participant can provide 
different values for all series of Google and Apple options. For 
Complex Orders, Participants will be able to provide a value that 
will be applicable to all Complex Orders submitted by that 
Participant.
    \17\ The Participant must enter a value greater than zero (0).
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    The proposed price protection mechanism will prevent eligible 
orders and quotes that are marketable from trading outside of the 
Acceptable Trade Range.\18\ Specifically, the Exchange will not 
automatically execute, expose, or route eligible orders or quotes that 
are marketable if the price that the execution, exposure or route would 
occur at is outside of the Acceptable Trade Range. If, after an initial 
execution within the Acceptable Trade Range, an order or quote reaches 
outside the Acceptable Trade Range, then the remaining quantity of the 
incoming order or quote will be cancelled.
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    \18\ If an inbound order or quote trades against a Legging or an 
Implied Order, the proposed price protection mechanism will only 
apply to the incoming order or quote and not to any other order or 
quote of the other leg components or of the Complex Order Book 
involved in completing the trade. See proposed IM-7300-2 to Rule 
7300.
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    For the following examples, assume that a Participant provides that 
the acceptable number of ticks an order or quote can trade is two (2) 
and the Exchange default is three (3) ticks. The price protection will 
use the acceptable number of ticks provided by the Participant because 
it is more restrictive than the Exchange default. Assume also that the 
series is quoted in $0.01 increments so the Price Collar would be $0.02 
(2*$0.01). If the series has a NBO of $1.25 and NBB of $1.20, then the 
High Limit would be $1.27 and the Low Limit would be $1.18 giving an 
Acceptable Trade Range of $1.27-$1.18.

[[Page 7875]]

Example #1
    Assume the following interest is available in the applicable 
series:

------------------------------------------------------------------------
                Exchange                    Offer price        Size
------------------------------------------------------------------------
BOX order...............................           $1.25              10
BOX order...............................            1.26              30
Away Exchange...........................            1.35              60
------------------------------------------------------------------------

    If the Exchange receives a Market Order to buy 100 contracts, the 
Exchange will respond as described below:
     10 Contracts will be executed at $1.25 against the order 
on BOX.
     30 contracts will be executed at $1.26 against the order 
on BOX.
     The remaining 60 contracts will be canceled because there 
is no available interest within the Acceptable Trade Range. The order 
on the Away Exchange to sell 60 contracts at $1.35 is above the High 
Limit of $1.27 and therefore the order cannot trade at that level and 
the Exchange will not route the order to the Away Exchange.
Example #2
    Assume the following interest is available in the applicable 
series:

------------------------------------------------------------------------
                Exchange                    Offer price        Size
------------------------------------------------------------------------
BOX order...............................           $1.25              50
BOX order...............................            1.26             100
Away Exchange...........................            1.27              50
BOX order...............................            1.32              50
------------------------------------------------------------------------

    If the Exchange receives a Market Order to buy 200 contracts, the 
Exchange will respond as described below:
     50 contracts will execute at $1.25 against the order on 
BOX.
     100 contracts will execute at $1.26 against the order on 
BOX.
     50 contracts will be routed to the Away Exchange to 
execute at $1.27.
Example #3
    For this example, assume the same book interest exists as in 
example #2 above. However, assume that when the order is routed to the 
Away Exchange only 25 out of the 50 contracts are available to execute. 
The remaining 25 contracts would be returned to BOX. These 25 contracts 
would still have the same Acceptable Trade Range as when the order was 
first received by BOX ($1.27-$1.18); the Acceptable Trade Range does 
not get recalculated when an order returns from being routed. 
Therefore, the Exchange would cancel the remaining 25 orders because 
the only remaining interest is the order on BOX to sell at $1.32, which 
is outside the Acceptable Trade Range.
    The proposed price protection feature will be available to all 
Participants and will be mandatory. If a Participant does not provide 
values for this feature, the Exchange's default values will be applied. 
Additionally, this proposed price protection feature will be available 
each trading day after the opening until the close of trading.\19\
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    \19\ The proposed price protection feature will not cover the 
opening of the market. The opening of the market is covered by Rule 
7070.
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    The Exchange notes that the proposed price protections are intended 
to protect market participants from executions at prices that are 
significantly through the market. BOX believes that Participants who 
submit orders and quotes on the Exchange generally intend to receive 
executions at or near where the market was when the order or quote was 
received. Accordingly, the Exchange believes that the propose price 
protections will help prevent orders and quotes from trading at an 
excessive number of price points. BOX also believes that orders and 
quotes which trade at an excessive number of price points have the 
potential to create market volatility. As such, the Exchange believes 
these enhancements to the price protections available on BOX may also 
help limit unnecessary volatility.
    The Exchange will provide Participants with notice, via Information 
Circular, about the implementation date of these 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''),\20\ in general, and Section 6(b)(5) of the Act,\21\ 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. 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 NBBO is a fair representation of then-available 
prices and accordingly the proposal helps to avoid executions at prices 
that are significantly worse than the NBBO.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 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 Participants with greater flexibility and control 
over how orders and quotes interact. Instead of imposing a rigid one-
size-fits-all price protection mechanism, the proposed functionality 
allows for customization and choice on the part of the Participant 
entering orders and quotes. As proposed, the Participant can select how 
many price points beyond the NBBO at the time the Exchange receives the 
order or quote

[[Page 7876]]

that the Participant would like the order to trade.
    BOX believes that providing default values and using the most 
restrictive value between the Participant-provided and default values 
is consistent with the stated goals of this feature and is necessary to 
achieve the proposed expansion of price protection on the Exchange. 
Providing default values will benefit the options market as a whole as 
this will ensure that all eligible orders and quotes have a minimal 
level of price protection.

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. The Exchange believes the 
proposal will provide market participants with additional price 
protection. The Exchange does not believe the proposed rule change 
imposes any burden on intramarket competition as the feature is 
available to all orders and quotes of all Participants. Nor will the 
proposal impose a burden on competition among the options exchanges 
because of the vigorous competition for order flow among the options 
exchanges. BOX competes with many other options exchanges. In this 
highly competitive market, market participants can easily and readily 
direct order flow to competing venues. Additionally, the proposed price 
protections are similar to those available on competing exchanges.\22\
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    \22\ See PHLX Rule 1080(p).
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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 will help to prevent dramatic 
price swings. 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-2016-03 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-2016-03. 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-2016-03 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. 2016-02985 Filed 2-12-16; 8:45 am]
 BILLING CODE 8011-01-P


