
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8450-8452]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01610]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79831; File No. SR-BOX-2016-58]


Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Granting Approval 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'')

January 18, 2017.

I. Introduction

    On December 9, 2016, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend the eligibility requirements for its Price Improvement Period 
auction (``PIP'' or ``Auction'') and make permanent pilot programs for 
the PIP and Complex Order Price Improvement Period (``COPIP'') 
programs. The proposed rule change was published for comment in the 
Federal Register on December 16, 2016.\3\ The Commission received no 
comments regarding the proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79531 (December 12, 
2016), 81 FR 91227 (``Notice'').
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II. Description of the Proposal

    Pursuant to BOX Rule 7150, Options Participants executing agency 
orders (``Initiating Participants'') may designate Market Orders and 
marketable limit Customer Orders for price improvement and submission 
to the PIP (``PIP Orders'') along with a matching contra order equal to 
the full size of the PIP Order. The PIP was introduced with the launch 
of the BOX Options Exchange facility (``BOX Facility'') in 2004.\4\ 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. The COPIP was 
established in January 2014.\5\
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    \4\ See Securities Exchange Act Release Nos. 49068 (January 13, 
2004), 69 FR 2775 (January 20, 2004) (SR-BSE-2003-04) (``PIP 
Approval Order'').
    \5\ See Securities Exchange Act Release No. 71148 (December 19, 
2013) 78 FR 78437 (December 26, 2013) (``COPIP Approval Order'').
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    The PIP Pilot Program and COPIP Pilot Program (``Pilot Programs'') 
guarantee Participants the right to trade with their customer orders 
that are less than 50 contracts. The rules permitting an Initiating 
Participant to enter an agency order into the PIP and COPIP with no 
minimum size requirement were approved on a pilot basis.\6\ Any order 
entered into the PIP is guaranteed an execution at the end of the 
auction at a price at least equal to the National Best Bid and Offer 
(``NBBO'').\7\ 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,\8\ cBBO \9\ and BBO on the Complex Order Book 
for the Strategy at the time of commencement.\10\ Both Pilot Programs 
are scheduled to expire on January 18, 2017.\11\
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    \6\ See PIP Approval Order, supra note 4, and COPIP Approval 
Order, supra note 5.
    \7\ See BOX Rule 7150(f).
    \8\ 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. See BOX Rule 7240(a)(3).
    \9\ 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. See BOX Rule 
7240(a)(1).
    \10\ See BOX Rule 7245(f).
    \11\ See Securities Exchange Act Release No. 78353 (July 18, 
2016), 81 FR 47843 (July 22, 2016) (SR-BOX-2016-32).

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[[Page 8451]]

    BOX proposes to amend the PIP and COPIP to make permanent the Pilot 
Programs that permit the Exchange to have no minimum size requirement 
for orders entered into the PIP. In addition, BOX proposes to modify 
the eligibility requirements for the PIP where the NBBO is only $0.01 
wide.

A. PIP Eligibility Requirements

    The Exchange proposes to amend the PIP eligibility requirements. 
Currently, a PIP Order may be submitted to BOX with a matching contra 
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, at any NBBO spread. BOX proposes to amend the 
PIP to reject any Auction where the quoted NBBO spread \12\ is less 
than or equal to $0.01.\13\ 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.\14\
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    \12\ The NBBO spread is the difference between the NBBO Bid and 
the NBBO Ask.
    \13\ All PIP Auctions where the NBBO spread is more than $0.01 
will continue to be allowed.
    \14\ See Notice, supra note 3, at 91229. During the six month 
time period, .05% of auctions where the NBBO spread was less than or 
equal to $0.01 received price improvement. See id.
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B. PIP Pilot Program

    The Exchange has provided the Commission with a summary report 
containing Auction data for the period between January through June 
2015.\15\ BOX believes that the data gathered demonstrates there is an 
active and liquid market functioning on the Exchange outside of the 
auction mechanism.\16\ 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.\17\
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    \15\ See Notice, supra note 3, at 91228. See Exhibit 3 to SR-
BOX-2016-58.
    \16\ See Notice, supra note 3, at 91229.
    \17\ See id.
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    The Exchange believes, based on the data, that there is significant 
price improvement and significant opportunity for price improvement 
when the NBBO spread is greater than $0.01.\18\ During the period 
between January through June 2015, 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 NBBO regardless of 
size.\19\
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    \18\ See id.
    \19\ See id.
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    The Exchange has also gathered data on the premature terminations 
in the PIP. Between January and June 2015, the number of auctions that 
terminated early was less than 0.05% of all PIP auctions.\20\
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    \20\ See id.
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C. COPIP Pilot Program

    With respect to the COPIP Pilot Program, the Exchange notes that 
between January through June 2015, COPIP volume accounted for 41% of 
all complex order volume on BOX.\21\ The average price improvement 
amount (when improved) was $0.11 for this same period. 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.\22\
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    \21\ See id.
    \22\ See id.
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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.\23\
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    \23\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\24\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\25\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect customers, issuers, brokers and dealers.
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    \24\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \25\ 15 U.S.C. 78f(b)(5).
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    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2015, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the auction, in particular for orders for 
fewer than 50 contracts; the degree of competition for order flow in 
such auctions; and a comparison of liquidity in the auctions with 
liquidity on the Exchange generally.\26\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\27\ Recognizing this, the Exchange 
has proposed to amend the auction eligibility requirements to reject 
any Auction where the quoted NBBO spread is less than or equal to 
$0.01. The Exchange's proposal to modify the auction eligibility 
requirements and seek permanent approval of the Pilot Programs, as 
amended with the new provision, will, in the Commission's view, promote 
opportunities for price improvement.
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    \26\ See Exhibit 3 to SR-BOX-2016-58.
    \27\ See Notice, supra note 3, at 91229.
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    The Commission believes that, particularly for auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the 
Pilot Programs permanent. The data demonstrate that the auction 
generally provides price improvement opportunities to simple and 
complex orders, including orders of retail customers and particularly 
when the bid/ask differential is wider than $0.01, that there is 
meaningful

[[Page 8452]]

competition for orders on the Exchange; and that there exists an active 
and liquid market functioning on the Exchange outside of the 
auction.\28\ The Commission further believes that the proposed 
revisions to the eligibility requirements for simple PIP Orders with 
respect to circumstances when the NBBO is $0.01 wide should help to 
enhance the operation of the auction by limiting its use to 
circumstances when there are more meaningful opportunities for price 
improvement, and should benefit investors and others in a manner that 
is consistent with the Act. Thus, the Commission has determined to 
approve the Exchange's proposed revisions to Rule 7150 and to approve 
the Pilot Programs, as proposed to be modified, on a permanent basis.
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    \28\ See Exhibit 3 to SR-BOX-2016-58.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\29\ that the proposed rule change (SR-BOX-2016-58), be and hereby 
is approved.
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    \29\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01610 Filed 1-24-17; 8:45 am]
BILLING CODE 8011-01-P


