
[Federal Register Volume 81, Number 191 (Monday, October 3, 2016)]
[Notices]
[Pages 68069-68071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23749]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78946; File No. SR-BOX-2016-45]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Amend the Treatment of Quotes To 
Provide That All Quotes on BOX Are Liquidity Adding Only

September 27, 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 September 13, 2016, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Rule 8050 to amend the treatment of 
quotes to provide that all quotes on BOX are liquidity adding only. 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

[[Page 68070]]

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 the treatment of incoming quotes to 
BOX so that they are only accepted if they are liquidity adding.\3\ 
Specifically, the Exchange is proposing that all quotes and quote 
updates after the opening that are submitted by Market Makers on the 
Exchange will only be accepted by the Trading Host \4\ if they will add 
liquidity to the BOX Book.\5\
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    \3\ See proposed IM-8050-3 to Rule 8050.
    \4\ The term ``Trading Host'' means the automated trading system 
used by BOX for the trading of options contracts. See Rule 
100(a)(66).
    \5\ The term ``Central Order Book'' or ``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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    Currently, on the Exchange, an incoming quote from a Market Maker 
can take liquidity. Specifically, an incoming quote that is executable 
against an interest on the BOX Book, whether it is a resting order or 
quote, will execute against such interest. The Exchange is now 
proposing that if an incoming quote or quote update is marketable 
because it would execute against a resting order or quote on the BOX 
Book, it will be rejected. The Exchange will not reject incoming quotes 
during the opening of the market.\6\ Therefore, all quotes accepted by 
the Trading Host after the opening will be liquidity adding only. As is 
the case today, rejected quotes will not be considered when determining 
a Market Maker's quoting obligations.\7\
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    \6\ Transactions occurring on the opening are deemed to neither 
add nor remove liquidity and therefore are exempt from the liquidity 
fees and credits on the Exchange. See Section II.C. of the BOX Fee 
Schedule.
    \7\ On a daily basis, a Market Maker must, during regular market 
hours, make markets and enter into any resulting transactions 
consistent with the applicable quoting requirements, such that on a 
daily basis a Market Maker must post valid quotes at least sixty 
percent (60%) of the time that the classes are open for trading. 
These obligations apply to all of the Market Maker's appointed 
classes collectively, rather than on a class-by-class basis. See 
Rule 8050(e). See also Rule 8040.
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    The Exchange believes that this proposed change will strengthen the 
market at BOX and better align market making activity with its intended 
purpose, which is to provide liquidity to the market.\8\ This proposal 
will benefit market participants as it has the potential to provide for 
more robust quoting on the Exchange. The Exchange notes that Market 
Makers will still be able to execute against resting orders and quotes 
on the BOX Book. Specifically, a Market Maker can still submit an order 
to execute against resting liquidity on the BOX Book.\9\ Additionally, 
Market Makers will still be permitted to submit orders in and out of 
their appointed classes. This will provide Market Makers with the 
ability to take liquidity on BOX.
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    \8\ The concept of having liquidity adding only mechanisms 
available for market participants is not a new one; other exchanges 
currently offer liquidity adding only order types. See International 
Securities Exchange, LLC (``ISE'') Rule 715(n) and NYSE Arca 
Options, Inc. (``NYSE Arca'') Rule 6.62(t).
    \9\ Market Makers will have one interface to submit quotes to 
BOX and another interface they can utilize for submitting orders.
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    The proposed rule change also amends the treatment of incoming 
quotes after they interact with the Price Improvement Period (``PIP''). 
Currently, when an incoming quote is on the same side as a PIP 
Order,\10\ it may cause the PIP to end early, if, at the time of 
submission, the price of the incoming quote satisfies certain criteria 
outlined in Rule 7150(i). Under the proposal, the incoming quote will 
continue to cause the PIP to end early if the conditions of Rule 
7150(i) exist. However, after the PIP is concluded, if the incoming 
quote would execute against resting orders or quotes on the BOX Book, 
it will be rejected. Additionally, when an incoming quote on the 
opposite side of the PIP Order is received such that it would cause an 
execution to occur prior to the end of the PIP, the incoming quote 
shall be immediately executed pursuant to Rule 7150(j). In order for 
the incoming quote on the opposite side of the PIP Order to execute 
against the PIP Order, the conditions of Rule 7150(j) must be met. 
Under the proposal, any remaining balance of the incoming quote that 
did not execute against the PIP Order, and that would execute against a 
resting order or quote on the BOX Book, will be rejected. The Exchange 
is not proposing to change the interaction of an incoming quote with a 
PIP Order; the Exchange is simply clarifying how the proposal will 
affect quotes after they interact with the PIP Order.
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    \10\ Options Participants, both Order Flow Providers and Market 
Makers, executing agency orders may designate Market Orders and 
marketable limit Customer Orders for price improvement and 
submission to the PIP. Customer Orders designated for the PIP (``PIP 
Orders'') shall be submitted to BOX with a matching contra order 
equal to the full size of the PIP Order. See Rule 7150.
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    The Exchange will provide Participants with notice, via Information 
Circular, about the implementation date of this proposed change.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed change will better align market making 
on BOX with its intended purpose of providing liquidity to the market. 
A Market Maker that is submitting quotes is doing so to create a 
market, not take a market. As such, the Exchange believes that the 
proposed change will add value to market making on BOX, which will 
benefit investors and the public, and therefore, the Exchange believes 
that the proposed change will remove impediments to and perfect the 
mechanism of a free and open market and a national market system. The 
Exchange believes that if a Market Maker's quote takes liquidity 
against the BOX Book, it was unintentional. If the Market Maker wanted 
to take the order or quote on the BOX Book, he would do so with an 
order, not a quote. As such, the Exchange believes that the proposed 
rule change will remove impediments to and perfect the mechanism of a 
free and open market and a national market system. The Exchange notes 
that Market Makers will still be permitted to submit orders in and out 
of their appointed classes. This will provide Market Makers with the 
ability to take liquidity on BOX. Lastly, Market Makers will still be 
subject to the obligations detailed in BOX Rules 8040 and 8050. The 
Exchange believes that the proposed changes have no material impact on 
a Market Maker's obligations pursuant to BOX Rules 8040 and 8050.
    The Exchange believes that the proposed change will protect 
investors and the public interest by providing a more robust market. 
The Exchange believes that the proposed rule change will lead to 
enhanced liquidity on the Exchange, which in turn will benefit and 
protect investors and the public interest through the potential for 
greater

[[Page 68071]]

volume of orders and executions on BOX.
    The Exchange notes that a Market Maker's obligation to provide 
continuous two-sided quotes on a daily basis is not diminished by the 
proposed change. A Market Maker will still be required to provide 
continuous two-sided quotes on a daily basis and quotes will still 
expire at the end of the day. Even though rejected quotes will not be 
considered when determining a Market Maker's quoting obligations, due 
to the fact that a Market Maker's quote very rarely ever takes 
liquidity on BOX,\13\ the Exchange believes that the proposed rule 
change will not have a material effect on a Market Maker's quoting 
ability or a Market Maker's quoting requirements outlined in BOX Rule 
8050. Lastly, the Exchange notes that Market Makers will still be able 
to send orders in and out of classes to which they are appointed.
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    \13\ It is the Exchange's understanding that generally when a 
Market Maker's quote takes liquidity, it was done unintentionally. 
Specifically, it occurs when the price of the underlying security 
updates, but the Market Maker did not update the incoming quote to 
reflect the new price of the underlying security. When Market Makers 
wish to take liquidity they do so by sending an order to the 
Exchange, not a quote. When a Market Maker sends a quote to the 
Exchange it is done as part of a bulk quote message with numerous 
other quotes and quote updates; this is why it is more efficient for 
a Market Maker to use an order when it is looking to take liquidity.
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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 
add value to market making on BOX. 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 competing venues. The proposal 
does not impose an undue burden on intramarket competition because the 
proposed change will apply to all Market Makers on BOX. The Exchange 
does not believe that the proposed restriction on Market Maker quotes 
will impose an undue burden on Market Makers because they will continue 
to be permitted to submit orders which can take liquidity. The Exchange 
does not believe that the proposed rule change will provide Market 
Makers with any advantage over other Participants. The Exchange notes 
that although it does not have liquidity adding orders, Participants 
can easily add liquidity by submitting orders as they currently do 
today. The Exchange also notes that other exchanges already have 
liquidity adding only mechanisms for market participants; \14\ 
therefore, the Exchange does not believe this proposal imposes an undue 
burden on inter-market competition.
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    \14\ See supra note 8.
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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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2016-45 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-2016-45. 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 will also 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-2016-45 and should be 
submitted on or before October 24, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-23749 Filed 9-30-16; 8:45 am]
 BILLING CODE 8011-01-P


