[Federal Register Volume 83, Number 90 (Wednesday, May 9, 2018)]
[Notices]
[Pages 21320-21324]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09806]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83163; File No. SR-BOX-2018-13]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Adopt Price Protections for Complex Orders

May 3, 2018.
    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 April 25, 2018, 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 
change 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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[[Page 21321]]

I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt price protections for Complex 
Orders. 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 website at http://boxoptions.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 price protections for Complex 
Orders executed on BOX. The Exchange notes that the proposed change is 
similar to the rules of another exchange.\3\ The Exchange is proposing 
debit/credit checks and price validation for eligible Complex 
Orders.\4\ The proposed Complex Order price check parameters will apply 
to all Complex Orders, including auctions (COPIP, Facilitation, and 
Solicitation) and Complex Qualified Open Outcry Orders (``Complex QOO 
Orders'').\5\
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    \3\ See Chicago Board Options Exchange, Incorporated (``Cboe'') 
Interpretations and Polices .08(c) and (g) to Rule 6.53C. The 
Exchange notes that the proposed rules determine whether a Complex 
Order is debit or credit by using a slightly different process than 
that employed by Cboe. Specifically, CBOE will group the legs of a 
Complex Order into pairs and compare multiple pairs to determine 
whether the Complex Order is a credit or debit while the Exchange is 
proposing to create groups (which may include more than two legs) 
based on expiration date. However, the ultimate determination of 
whether a Complex Order is a debit or credit is the same under the 
different processes. Therefore, the Exchange believes the proposed 
rule change is substantially similar to the rules of Cboe. The 
proposed Maximum Price protection is based on Cboe Rule 6.53C.08(g).
    \4\ See proposed IM-7240-1.
    \5\ Under Exchange rules, a Complex QOO Order is not executed 
until it is processed by the system. See Rule 7600(a). The system 
applies the proposed price check parameters upon receipt of a 
Complex QOO Order. Therefore, the proposed protections apply to 
Complex QOO Orders in the same way as any other Complex Order 
received by the system.
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Debit/Credit Checks
    The Exchange is proposing a debit/credit check that will prevent 
the execution of certain Complex Orders at erroneous prices.\6\ 
Specifically, the system will reject a Complex Limit Order for a credit 
strategy with a net debit price or a Complex Limit Order for a debit 
strategy with a net credit price.
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    \6\ See proposed IM-7240-1(a).
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    The system determines whether an order is a debit or credit based 
on general options volatility and pricing principles, which the 
Exchange understands are used by market participants in their option 
pricing models. With respect to options with the same underlying:
     If two calls have the same expiration date, the price of 
the call with the lower exercise price is more than the price of the 
call with the higher exercise price;
     if two puts have the same expiration date, the price of 
the put with the higher exercise price is more than the price of the 
put with the lower exercise price; and
     if two calls (puts) have the same exercise price, the 
price of the call (put) with the near expiration is less than the price 
of the call (put) with the farther expiration.
    In other words, a call (put) with a lower (higher) exercise price 
is more expensive than a call (put) with a higher (lower) exercise 
price, because the ability to buy stock at a lower price is more 
valuable than the ability to buy stock at a higher price, and the 
ability to sell stock at a higher price is more valuable than the 
ability to sell stock at a lower price. A call (put) with a farther 
expiration is more expensive than the price of a call (put) with a 
nearer expiration, because locking in a price further in the future 
involves more risk for the buyer and seller and thus is more valuable, 
making an option (call or put) with a farther expiration more expensive 
than an option with a nearer expiration.
    Pursuant to the aforementioned principles, the Exchange will reject 
an eligible Complex Order that is a Limit Complex Order for a credit 
strategy with a net debit price, or a Limit Complex Order for a debit 
strategy with a net credit price. The system will identify the strategy 
as a debit or credit based on the potential profit or loss of the 
Complex Order. The system accomplishes this by first grouping the legs 
of the Complex Order by expiration date. The system then calculates the 
potential profit or loss of each group for a range of price levels of 
the underlying security. The specific price levels are equal to the 
strike price of each leg in the group.
    If, at all price levels, the profit or loss for the group is break-
even or profit, then the group is a debit.\7\ If, at all price levels, 
the profit or loss for the group is break-even or loss, then the group 
is a credit.\8\ If all the groups of a Complex Order are a 
debit(credit), then the Complex Order is a debit(credit).\9\
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    \7\ See proposed IM-7240-1(a)(1)(i). The reason that the group 
is a debit is because an investor would expect to pay for a strategy 
that produced a profit.
    \8\ See proposed IM-7240-1(a)(1)(ii). The reason that the group 
is a credit is because an investor would expect to be compensated 
for a strategy that produced a loss.
    \9\ See proposed IM-7240-1(a)(2).
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    For example, assume a Complex Order to buy 50 Jan $1 XYZ calls, 
sell 50 Jan $2 XYZ calls, sell 50 Jan $3 XYZ calls, and buy 50 Jan $4 
XYZ calls is entered at a net credit price (i.e., the net sale proceeds 
from the Jan $2 and $3 calls are larger than the net purchase cost from 
the Jan $1 and $4 calls). Since all legs have the same expiration, they 
will be grouped together and the potential profit or loss will be 
calculated for the group. If, at all price levels, the profit or loss 
for the group is break-even or profit, then the Complex Order is a 
debit. If, at all price levels, the profit or loss for the group is 
break-even or loss, then the Complex Order is a credit. Upon evaluating 
the group, the system will determine that the Complex Order appears to 
be erroneously priced as a net credit; it should instead be a net debit 
because the profit or loss for the group is break-even or profit for 
each price level. Specifically, as shown in the table below, the net 
purchase cost of the Jan $1 and $4 XYZ calls is larger than or equal to 
the net sale proceeds from the Jan $2 and $3 calls at each strike price 
level.

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                                                 Profit or Loss
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Strike Price Level ($)..........................               1               2               3               4
Buy $1 Call.....................................               0               1               2               3

[[Page 21322]]

 
Sell $2 Call....................................               0               0              -1              -2
Sell $3 Call....................................               0               0               0              -1
Buy $4 Call.....................................               0               0               0               0
                                                 ---------------------------------------------------------------
    Total Profit & Loss.........................               0               1               1               0
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    If not all groups of a Complex Order are a debit or credit, the 
system, for American-style options only, will determine if the Complex 
Order is a debit or a credit by comparing legs across expiration 
dates.\10\ The system will first convert all legs to the same 
expiration and then compare the profit or loss, as provided in proposed 
IM-7240-1(a)(i), while taking into account the conversion of the 
expiration date of the leg(s). The system will evaluate the converted 
leg(s) based on the fact that an option with a farther expiration has a 
higher value when compared to an option with the same exercise price 
but a closer expiration. For example, if a sell leg is converted to a 
farther expiration and the strategy still yields a profit when the 
system evaluates the potential profit or loss of the strategy, the 
strategy is a debit because even by increasing the value of a sell leg 
the strategy still yields a profit.
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    \10\ See proposed IM-7240-1(a)(3).
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    For example, assume a Complex Order to buy 50 Feb $1 XYZ calls, 
sell 50 Jan $2 XYZ calls, sell 50 Jan $3 XYZ calls, and buy 50 Feb $4 
XYZ calls, is entered at a net credit price (i.e., the net sale 
proceeds from the Jan $2 and $3 calls is larger than the net purchase 
cost from the Feb $1 and $4 calls). Since not all legs have the same 
expiration, they will be grouped by expiration date first. The Feb $1 
and $4 calls would be one group and the Jan $2 and $3 calls would be 
the other group. This would yield one group as a debit (Feb $1 and $4 
calls) and one as a credit (Jan $2 and $3 calls). Therefore, the system 
would not be able to determine if the Complex Order is a debit or 
credit based on the groups since not all of the groups are a debit or 
credit. Instead, the system will determine if the Complex Order is a 
debit or credit by comparing all the legs of the Complex Order 
together. The first step is to convert the Jan $2 and $3 calls to Feb 
$2 and $3 calls so all legs have the same expiration and therefore the 
potential profit or loss can be calculated pursuant to proposed IM-
7240-1(a)(1). Upon evaluating all legs collectively, the system will 
determine that the Complex Order appears to be erroneously priced as a 
net credit; it should instead be a net debit because the profit or loss 
for all the legs is break-even or profit for each price level. 
Specifically, as shown in the table below, the net purchase cost of the 
Feb $1 and $4 XYZ calls are larger than or equal to the net sale 
proceeds from the converted Feb $2 and$3 calls at each underlying price 
level. After calculating the profit or loss, the system will determine 
if the outcome would change based on the converted leg (i.e., the Jan 
$2 and $3 calls being converted to Feb $2 and $3 calls). The system 
will determine that the outcome is correct because the conversion of 
the Jan $2 and $3 calls to more expensive Feb $2 and $3 calls still 
yielded a break-even or profit for each price level even though the 
converted Feb $2 and $3 calls are more expensive than the actual Jan $2 
and $3 calls. Therefore, since selling more expensive call options 
(i.e., Feb $2 and $3 calls) still yielded a break-even or profit at all 
price levels, it can easily be deduced that selling the actual, less 
expensive, Jan $2 and $3 calls would yield the same result.

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                                                 Profit or Loss
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Strike Price Level ($)..........................               1               2               3               4
Buy $1 Call.....................................               0               1               2               3
Sell $2 Call....................................               0               0              -1              -2
Sell $3 Call....................................               0               0               0              -1
Buy $4 Call.....................................               0               0               0               0
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    Total Profit & Loss.........................               0               1               1               0
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    If the system cannot identify whether the Complex Order is a credit 
or debit pursuant to proposed IM-7240-1(a)(2) or (3), the system will 
not apply the check in proposed IM-7240-1(a).\11\
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    \11\ See proposed IM-7240-1(a)(4).
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Maximum Price
    After a Complex Order passes the debit/credit check, the system 
will then calculate a maximum price for certain Complex Orders.\12\ 
Specifically, the system will calculate a maximum price for true 
butterfly spreads, vertical spreads, and box spreads. After calculating 
the maximum price, the system will reject a Complex Limit Order that is 
a true butterfly spread, vertical spread, or a box spread if the 
absolute value of the Complex Order's limit price is greater than the 
maximum price. For a Complex Market Order that is a true butterfly 
spread, vertical spread, or a box spread, the system will reject the 
Complex Market Order if the absolute value of the execution price is 
greater than the maximum price. As described in greater detail below, 
the maximum price value is calculated by adding a price buffer to the 
absolute value of a true butterfly spread, vertical spread, or box 
spread.
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    \12\ See proposed IM-7240-1(b).
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    The price buffer is calculated by taking a specified percentage of 
the absolute value of the strategy.\13\ The system will provide a 
minimum and maximum value for the price buffer. If the price buffer is 
below the minimum value, then the minimum is used by the system when 
calculating the maximum price value. If the price buffer is above the 
maximum value, then the maximum is used by the system when calculating 
the maximum price value. The specified percentage, minimum value, and 
maximum value shall be the same for all classes. Unless determined 
otherwise by the Exchange and announced to Participants via Circular, 
the specified percentage is 5%, the minimum value is $0.10, and the 
maximum value is $1.00.
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    \13\ See proposed IM-7240-1(b)(1).
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    An absolute value will be calculated for those strategies to which 
the Maximum Price protection applies. The absolute value for a vertical 
spread is the absolute difference between the exercise prices of the 
two legs.\14\ The absolute value for a true butterfly spread

[[Page 21323]]

is the absolute difference between the middle leg exercise price and 
the exercise price of the leg on either side.\15\ The absolute value 
for a box spread is the absolute difference between the exercise prices 
of each pair of legs.\16\
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    \14\ See proposed IM-7240-1(b)(2).
    \15\ See proposed IM-7240-1(b)(3).
    \16\ See proposed IM-7240-1(b)(4).
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Vertical Spread Example
    Assume a Complex Limit Order to buy 10 Dec $30 XYZ puts and sell 10 
Dec $20 XYZ puts at $10.60. The absolute value for the vertical spread 
is $10 (the absolute value of 30-20). The specified percentage is set 
to 5%, the minimum value is set to $0.10, and the maximum value is set 
to $1.00. The price buffer for the vertical spread would be $0.50 
($10.00 * .05). Therefore the system will reject any Complex Limit 
Order because the price ($10.60) is greater than the Maximum Price of 
$10.50 for the strategy.
True Butterfly Spread Example
    Assume a Complex Limit Order to buy 10 Dec $10 XYZ calls, sell 20 
Dec $40 XYZ calls, and buy 10 Dec $70 XYZ calls at $30.50. The absolute 
value for the butterfly spread is $30 (the absolute value of 10-40 or 
40-70). The specified percentage is set to 5%, the minimum value is set 
to $0.10, and the maximum value is set to $1.00. The price buffer for 
the butterfly spread would be $1.50 ($30.00 * .05); however, since that 
amount is above the maximum value, the system would use the maximum 
value ($1.00) as the price buffer instead. Therefore the system would 
accept the Complex Limit Order because the price ($30.50) is less than 
the Maximum Price of $31.00 for the strategy.
Box Spread Example
    Assume a Complex Limit Order to buy 10 Dec $4 XYZ calls, sell 10 
Dec $5 XYZ calls, buy 10 Dec $5 XYZ puts, and sell 10 Dec $4 puts at 
$1.09. The absolute value for the box spread is $1.00 (the absolute 
value of 5-4). The specified percentage is set to 5%, the minimum value 
is set to $0.10, and the maximum value is set to $1.00. The price 
buffer for the box spread would be $0.05 ($1.00 * .05); however, since 
that amount is below the minimum value, the system would use the 
minimum value ($0.10) as the price buffer instead. Therefore the system 
would accept the Complex Limit Order because the price ($1.09) is less 
than the Maximum Price of $1.10 for the strategy.
    The Exchange will provide notice of the exact implementation date 
of the proposed protections, via Circular, at least two weeks prior to 
implementing the proposed change. The Exchange anticipates implementing 
the proposed protections during Q2 of 2018.
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''),\17\ in general, and Section 6(b)(5) of the Act,\18\ 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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    In particular, the proposed rule change to implement a debit/credit 
check for Complex Orders for which the Exchange can determine whether a 
Complex Order is a debit or credit is consistent with the Act. With the 
use of debit/credit checks, the Exchange can further assist with the 
maintenance of a fair and orderly market by mitigating the potential 
risks associated with Complex Orders trading at prices that are 
inconsistent with their strategies (which may result in executions at 
prices that are extreme and potentially erroneous), which ultimately 
protects investors. This proposed implementation of the debit/credit 
check promotes just and equitable principles of trade, as it is based 
on the same general option and volatility pricing principles which the 
Exchange understands are used by market participants in their option 
pricing models.
    Additionally, the Exchange also believes that calculating a maximum 
price for true butterfly spreads, vertical spreads, and box spreads 
will assist with the maintenance of fair and orderly markets by helping 
to mitigate the potential risks associated with Complex Orders trading 
at extreme and potentially erroneous prices that are inconsistent with 
particular Complex Order strategies. Further, the Exchange notes that 
the maximum price is designed to mitigate the potential risks of 
executions at prices that are not within an acceptable price range, as 
a means to help mitigate the potential risks associated with Complex 
Orders trading at prices that are inconsistent with their strategies, 
in addition to the debit/credit check. As such, the proposed rule 
change is designed to protect investors and the public interest.

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

    The Exchange does not believe that the proposed Complex Order 
protections will impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act. In this regard 
and as indicated above, the Exchange notes that the rule change is 
being proposed as a competitive response to the rules of another 
exchange.\19\ Additionally, the Exchange believes the proposed rule 
change is beneficial to Participants as it will provide increased 
protections that will prevent the execution of certain Complex Orders 
that were entered in error. The Exchange believes the proposal is pro-
competitive and should serve to attract additional Complex Orders to 
the Exchange. Further, the Exchange does not believe the proposed 
change will not impose a burden on intramarket competition because it 
is available to all Participants.
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    \19\ See supra, note 3.
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    For the reasons stated, the Exchange does not believe that the 
proposed rule changes will impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act, and 
the Exchange believes the proposed change will, in fact, enhance 
competition.

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

    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 for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \20\ and Rule 19b-4(f)(6) thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 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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[[Page 21324]]

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \22\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \23\ permits the 
Commission to 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 proposed rule change may become operative upon filing. The Exchange 
states that waiver of the operative delay would be consistent with the 
protection of investors and the public interest because it will allow 
the Exchange to immediately provide Participants with additional 
protections for Complex Orders submitted and executed on the Exchange. 
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 proposal as operative upon filing.\24\
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    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 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 [email protected]. Please include 
File Number SR-BOX-2018-13 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-2018-13. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BOX-2018-13, and should be submitted on 
or before May 30, 2018.
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    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09806 Filed 5-8-18; 8:45 am]
 BILLING CODE 8011-01-P


