
[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Notices]
[Pages 91227-91230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79531; File No. SR-BOX-2016-58]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Amend Interpretive Material to 
Rule 7150 (Price Improvement Period ``PIP'') and Interpretive Material 
to Rule 7245 (Complex Order Price Improvement Period ``COPIP'') To Make 
Permanent the Pilot Programs That Permit the Exchange To Have No 
Minimum Size Requirement for Orders Entered Into the PIP (``PIP Pilot 
Program'') and COPIP (``COPIP Pilot Program'')

December 12, 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 December 9, 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 Interpretive Material to Rule 7150 
(Price Improvement Period ``PIP'') and Interpretive Material to Rule 
7245 (Complex Order Price Improvement Period ``COPIP'') to make 
permanent the pilot programs that permit the Exchange to have no 
minimum size requirement for orders entered into the PIP (``PIP Pilot 
Program'') and COPIP (``COPIP Pilot Program''). 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 purpose of the proposed rule change is to amend the BOX Rules 
to make permanent the pilot programs that permit the Exchange to have 
no minimum size requirement for orders entered into the PIP (``PIP 
Pilot Program'') and COPIP (``COPIP Pilot Program''), collectively 
known as the (``Programs''). In addition, BOX proposes to modify the 
requirements for the PIP where the National Best Bid and Offer 
(``NBBO'') is only $0.01 wide.
Background
    The PIP Pilot Program was approved on a pilot basis with the 
establishment of BOX and the PIP in January 2004 \3\ and the COPIP 
Pilot Program was approved on a pilot basis with introduction of the 
COPIP in December 2013.\4\ Both Programs are scheduled to

[[Page 91228]]

expire on January 18, 2017.\5\ The Exchange believes that both the PIP 
and COPIP Pilot Programs have been successful and well-received by 
Participants and the investing public.
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    \3\ See Securities Exchange Act Release Nos. 49068 (January 13, 
2004), 69 FR 2775 (January 20, 2004) (SR-BSE-2003-04) (``Order 
Granting Approval to Proposed Rule Change and Amendment No. 3 and 
Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 4 Thereto by the Boston Stock Exchange, Inc. 
Establishing Trading Rules for the Boston Options Exchange 
Facility''); 66871 (April 27, 2012) 77 FR 26323 (May 3, 2012) (File 
No. 10-206, In the Matter of the Application of BOX Options Exchange 
LLC for Registration as a National Securities Exchange Findings, 
Opinion, and Order of the Commission), 67255 (June 26, 2012) 77 FR 
39315 (July 2, 2013) (SR-BOX-2012-009) (Notice of Filing and 
Immediate Effectiveness of a Proposal To Extend a Pilot Program That 
Permits BOX to Have No Minimum Size Requirement for Orders Entered 
Into the Price Improvement Period), 69846 (June 25, 2013) 78 FR 
39365 (July 1, 2013) (SR-BOX-2013-33) (Notice of Filing and 
Immediate Effectiveness of a Proposal To Extend a Pilot Program That 
Permits BOX to Have No Minimum Size Requirement for Orders Entered 
Into the Price Improvement Period), 72545 (July 7, 2014), 79 FR 
40182 (July 11, 2014) (SR-BOX-2014-19) (Notice of Filing and 
Immediate Effectiveness of a Proposal To Extend a Pilot Program That 
Permits BOX to Have No Minimum Size Requirement for Orders Entered 
Into the Price Improvement Period and Complex Order Price 
Improvement Period), 75480 (July 17, 2015), 80 FR 43803 (July 23, 
2015) (SR-BOX-2015-27) (Notice of Filing and Immediate Effectiveness 
of a Proposal To Extend a Pilot Program That Permits BOX to Have No 
Minimum Size Requirement for Orders Entered Into the Price 
Improvement Period and Complex Order Price Improvement Period).
    \4\ See Securities Exchange Act Release No. 71148 (December 19, 
2013) 78 FR 78437 (December 26, 2013) (Notice of Filing of Amendment 
Nos. 1 and 2 and Order Granting Accelerated Approval of a Proposed 
Rule Change, as Modified by Amendment Nos. 1 and 2, to Permit 
Complex Orders to Participate in Price Improvement Periods).
    \5\ See Securities Exchange Act Release No. 78353 (July 18, 
2016), 81 FR 47843 (July 22, 2016) (SR-BOX-2016-32).
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    The PIP and COPIP Pilot Programs guarantee Participants the right 
to trade with their customer orders that are less than 50 contracts. In 
particular, any order entered into the PIP is guaranteed an execution 
at the end of the auction at a price at least equal to the NBBO. Any 
order entered into the COPIP is guaranteed an execution at the end of 
the auction at a price at least equal to or better than the cNBBO,\6\ 
cBBO \7\ and BBO on the Complex Order Book for the Strategy at the time 
of commencement.
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    \6\ As defined in BOX Rule 7240(a)(3), 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.
    \7\ As defined in BOX Rule 7240(a)(1), the term ``cBBO'' means 
the best net bid and offer price for a Complex Order Strategy based 
on the BBO on the BOX Book for the individual options components of 
such Strategy.
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    BOX first introduced the PIP auction process for obtaining customer 
price improvement to the options market place when it launched in 2004. 
As part of BOX's commitment to price improvement, the Exchange sought 
to provide small customer orders with benefits not available under the 
rules of the other exchanges by having no minimum size requirements for 
orders entered into the PIP. After concerns were raised that this lack 
of size requirement would promote internalization and inferior price 
improvement within the PIP and also lead to reduced order flow and 
market quality on the regular BOX Book,\8\ BOX began the PIP Pilot 
Program.
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    \8\ See September 12, 2003 Letter from Michael J. Simon, Vice 
President and Secretary, ISE, to Jonathan Katz, Secretary, 
Commission regarding SR-BSE-2002-15; and see generally letters to 
Jonathan Katz, Secretary, Commission regarding SR-BSE-2002-15, 
February 28, 2003 Letter from Philip DeFeo, Chairman and Chief 
Executive Officer, PCX; February 14, 2003 Letter from William 
Brodsky, Chairman and Chief Executive Officer, CBOE; February 14, 
2003 Letter from Michael Ryan, General Counsel, AMEX; February 12, 
2003 Letter from Michael J. Simon, Secretary, ISE; February 12, 2003 
Letter from Meyer S. Frucher, Chairman and Chief Executive Officer, 
PHLX.
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    In June of 2005 concerns were also raised when BOX introduced 
Market Orders \9\ to the Exchange and detailed how these orders, as 
well BOX-Top Orders,\10\ would be treated when entered while a PIP is 
in progress. Specifically, submission to BOX of a Market Order or BOX-
Top Order on the same side as a PIP Order prematurely terminates the 
PIP when, at the time of submission of the Market Order or BOX-Top 
Order, the best Improvement Order is equal to or better than the NBBO 
on the same side of the market as the best Improvement Order. The 
Commission was concerned that this premature termination of the PIP 
could result in a PIP Order being disadvantaged by the early conclusion 
of a PIP, in that the PIP Order would not have received the full 
exposure period in which to receive price improvement. BOX then agreed 
to include in its monthly reports additional information with respect 
to situations in which the PIP is terminated prematurely or a Market 
Order or BOX-Top Order interacts with a PIP Order before the PIP's 
conclusion.\11\
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    \9\ See Securities Exchange Act Release No. 51821 (June 10, 
2005), 70 FR 35143 (June 16, 2005) (Order Approving SR-BSE-2004-51).
    \10\ BOX-Top Orders have since been removed from the BOX 
Rulebook. See Securities Exchange Act Release No. 71374 (January 23, 
2014), 79 FR 4783 (January 29, 2014) (Notice of Filing and Immediate 
Effectiveness of SR-BOX-2014-05).
    \11\ See supra, note 9.
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    The Exchange then established the COPIP in January 2014 to further 
BOX's commitment to price improvement.\12\ The COPIP mechanism allows 
Complex Orders to be submitted to the COPIP in substantially the same 
manner as orders for single options series instruments currently are 
submitted to the PIP. Because of the similarities between the PIP and 
COPIP, the Exchange proposed a COPIP Pilot Program and agreed to 
provide certain information, periodically as required by the 
Commission, to support that, among other things, there is meaningful 
competition for all size COPIP orders, that there is significant price 
improvement for all orders executed through the COPIP and that an 
active and liquid market is functioning on BOX outside of the COPIP 
mechanism.
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    \12\ See Securities Exchange Act Release No. 71148 (December 19, 
2013), 78 FR 78437 (December 26, 2013) (Order Approving SR-BOX-2013-
43).
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PIP Pilot Program
    The Exchange believes that the data submitted to the Commission on 
a monthly and confidential basis for the PIP Pilot Program, as well as 
the data reference [sic] below covering January through June 2015 
establishes that it has not placed an undue burden on competition; 
lessened the amount of price improvement in the PIP; nor reduced order 
flow and liquidity to the BOX Book. The Exchange therefore believes 
that it appropriate to approve the no minimum size requirement on a 
permanent basis. In fact, since the launch of the PIP customers have 
received over $841 million in savings through better executions on BOX, 
including $12.6 million in October 2016. Order flow and liquidity on 
BOX has also remained strong through this entire period, with an 
average daily volume of approximately 434,000 contracts for the first 
six ten months of 2016. Further, many of the exchanges which first 
raised concerns have recognized the benefits of price improvement 
auctions, and have adopted similar mechanisms with no minimum order 
size since 2004.\13\ Approving the PIP Pilot Program on a permanent 
basis will allow the PIP to continue to offer meaningful price 
improvement and will not have an adverse effect on the market 
functioning on the Exchange outside of the PIP.
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    \13\ See Securities Exchange Act Release Nos. 53222 (February 3, 
2006), 71 FR 7089 (February 10, 2006) (SR-CBOE-2005-60) (Order 
Granting Approval of Proposed Rule Change and Amendment No. 1 
Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 2 to the Proposed Rule Change Relating to an 
Automated Improvement Mechanism); 63238 (November 3, 2010), 75 FR 
68844 (November 9, 2010) (SR-C2-2010-008) (Notice of Filing and 
Immediate Effectiveness of a Proposed Rule Change to Update Rules 
Based on Chicago Board Options Exchange, Inc. Rules and Recent 
Chicago Board Options Exchange, Inc. Rule Filings); 72009 (April 23, 
2014), 79 FR 24032 (April 29, 2014) (SR-MIAX-2014-09) (Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt the 
MIAX PRIME Price Improvement Mechanism and the MIAX PRIME 
Solicitation Mechanism); 63027 (October 1, 2010), 75 FR 62160 
(October 7, 2010) (SR-Phlx-2010-108) (Order Granting Approval to a 
Proposed Rule Change Relating to a Proposed Price Improvement 
System, Price Improvement XL); 50819 (December 8, 2004), 69 FR 75093 
(December 15, 2004) (SR-ISE-2003-06) (Order Granting Approval of 
Proposed Rule Change and Amendment No. 1 Thereto and Notice of 
Filing and Order Granting Accelerated Approval to Amendments No. 2 
and 3 Thereto by the International Securities Exchange, Inc. To 
Establish Rules Implementing a Price Improvement Mechanism); and 
70050 (July 26, 2013), 78 FR 46622 (August 1, 2013) (Order Granting 
the Application of Topaz Exchange, LLC for Registration as a 
National Securities Exchange).
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    The Exchange provided the Commission with a summary report, 
included herein as Exhibit 3, which demonstrates the price improvement 
benefits of the PIP. Specifically, the Report contains eight categories 
of non-customer and customer auction data, as well as three categories 
of summary auction data, during the period January 2015 through June 
2015. Each of the eight categories is divided into subcategories based 
on the spread of the NBBO at the time an auction was initiated. The 
data is further divided into the number of orders that were

[[Page 91229]]

auctioned within each particular subcategory. Finally, for each 
subcategory, Exchange identified the per contract price improvement 
that occurred at each NBBO spread; the average number of participants 
responding to the auctions plus the initiator; the total volume the 
initiator received; the average percentage of orders the initiator 
received; and the percentage of contracts received by the auction 
initiator.
    The various categories contained in the Report include:

(1) Non-Public Customer Auction/Under 50 Contracts/BOX not at NBBO
(2) Non-Customer Auction/Under 50 Contracts/BOX at NBBO
(3) Non-Customer Auction/50 Contracts and over/BOX not at NBBO
(4) Non-Customer Auction/50 Contracts and over/BOX at NBBO
(5) Customer Auction/Under 50 Contracts/BOX not at NBBO
(6) Customer Auction/Under 50 Contracts/BOX at NBBO
(7) Customer Auction/50 Contracts and over/BOX not at NBBO
(8) Customer Auction/50 Contracts and over/BOX at NBBO
(9) Summary of all Non-Customer Auctions for the Period
(10) Summary of all Customer Auctions for the Period
(11) Summary of all Auctions for the Period

    BOX believes that the data gathered demonstrates there is an active 
and liquid market functioning on the Exchange outside of the auction 
mechanism. In the period between January and June 2015, 30.5 million 
contracts were executed through the BOX PIP, approximately 64% of BOX 
total contract volume. While during this period average daily contract 
volume traded through the PIP fell from 339,088 contracts per day in 
January 2015 to 255,150 contracts per day in June 2015, overall 
contract volume outside of the PIP also fell during that period. 
Additionally, with an average number of 4.0 participants in each 
auction, the data shows there is meaningful competition in PIP auctions 
for all size orders.
    The Exchange also believes there is significant price improvement 
and significant opportunity for price improvement in the PIP with one 
modification. Currently, a PIP Order may be submitted to BOX with a 
matching contra order (``Primary Improvement Order'') that is equal to 
the full size of the PIP Order and at a price equal to or better than 
that of the NBBO at the time of the commencement of the PIP (the ``PIP 
Start Price''), at any NBBO spread. BOX proposes to amend the PIP 
auction to reject any auction where the quoted NBBO spread \14\ is less 
than or equal to $0.01.\15\ While the Exchange believes that 
opportunities remain for price improvement where the NBBO spread is 
less than or equal to $0.01, the Exchange notes that the data for the 
current pilot shows small amounts of price improvement in these 
orders.\16\
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    \14\ The NBBO spread is the difference between the NBBO Bid and 
the NBBO Ask.
    \15\ All PIP Auctions where the NBBO spread is more than $0.01 
will continue to be allowed.
    \16\ During the six month time period, .05% of auctions where 
the NBBO spread was less than or equal to $0.01 received price 
improvement.
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    The Exchange does believe, however, that based on the data there is 
significant price improvement and significant opportunity for price 
improvement when the NBBO spread is greater than $0.01. During the 
period, there was an average price improvement of $0.05 per contract 
for contracts executed through the PIP when BOX was at the NBBO, and 
$0.01 per contract for contracts executed through the PIP when BOX was 
not at the NBOO regardless of size.
    The Exchange has also gathered data on the premature terminations 
in the PIP to determine if these could result in a PIP Order being 
disadvantaged by the early conclusion of a PIP. Between January and 
June 2015, the number of auctions that terminated early was less than 
0.05% of all PIP auctions.
COPIP
    The Exchange believes that the data submitted to the Commission on 
a monthly and confidential basis for the COPIP Pilot Program 
establishes that it has not placed an undue burden on competition; 
lessened the amount of price improvement in the COPIP; nor reduced 
order flow and liquidity to the Complex Order Book.\17\ From January 
2015 through June 2015 COPIP volume accounted for 41% of all Complex 
Order volume on BOX. Further, the average price improvement amount 
(when improved) was $0.11 for this same period. The Exchange believes 
the COPIP Pilot program does not place an undue burden on competition. 
In fact, the average number of responders is higher for COPIP Orders of 
50 contracts and under (0.23) when compared to COPIP Orders greater 
than 50 contracts (0.01). While the average numbers of responders in 
the COPIP is lower than that of the PIP, the Exchange believes that as 
volume in the COPIP increases, the overall average number of responders 
will also increase.
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    \17\ The Exchange notes that the COPIP has been in place for 
significantly less time than the PIP and therefore has generated 
significantly less data. Given the similarities between the two 
mechanisms, the Exchange expects the COPIP, if operated on a pilot 
basis over a longer period of time, would generate data that is 
comparable to the PIP.
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    The Exchange has also gathered data on the premature terminations 
in the COPIP to determine if these could result in a COPIP Order being 
disadvantaged by the early conclusion of or COPIP. Between January and 
June 2015, the number of auctions that terminated early was less than 
0.09% of all COPIP auctions.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\18\ in general, and Section 
6(b)(5) of the Act,\19\ 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, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed change will allow the Exchange to 
continue the Programs free of any pilot conditions which the Exchange 
believes are no longer necessary. The Programs were put in place to 
determine the full impact that the lack of minimum size requirement 
would have on competitiveness and price improvement in the PIP and 
COPIP. The PIP Pilot Program has been in place for over ten years,\20\ 
and the COPIP PIP Program has been in place for over two years. During 
these time periods there has been no evidence to suggest that the 
Programs have had the negative effects predicted in the comment 
letters.\21\ As such, removal of the pilot restrictions is the logical 
next step.
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    \20\ See supra, note 3.
    \21\ See supra, note 8.
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    The Exchange believes that the change to the PIP auction which will 
reject any auction where the quoted NBBO spread is less than or equal 
to $0.01 will further price improvement for PIP Orders overall. The 
Exchange notes that statistics for the current pilot show relatively 
small amounts of price improvement for these orders. The Exchange 
believes the proposed change will therefore increase the price 
improvement that orders may receive in the PIP overall.

[[Page 91230]]

    Permanent approval of the Pilot Programs would continue to provide 
investors with real and significant price improvement regardless of the 
size of the order. The Exchange believes that allowing price 
improvement to any size order removes impediments to a free and open 
market and national market system, therefore creating more competition 
for the best execution of all orders. The Exchange also believes that 
making the Pilot Programs permanent does not raise any unique 
regulatory concerns.
    Lastly, the Exchange also believes that the proposed rule change, 
which provides all market participants, including public investors, 
with opportunity to trade with small customer orders of less than 50 
contracts in the PIP and COPIP, is appropriate in the public interest 
and for the protection of investors

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 either among BOX Participants, or 
among the various options exchanges, which is not necessary or 
appropriate in furtherance of the purposes of the Act. Specifically, 
the PIP and COPIP mechanisms are offered to all BOX Participants and 
making the Pilot Programs permanent will not impose a competitive 
burden on any participant. Additionally, the Exchange believes that the 
proposed change will not have impact on intermarket competition, as 
noted above many other exchanges have similar pilot programs in place 
in their auction mechanisms and are free to file to make these 
permanent as well.

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-2016-58 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-2016-58. 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-2016-58 and should be 
submitted on or before January 6, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30258 Filed 12-15-16; 8:45 am]
 BILLING CODE 8011-01-P


