[Federal Register Volume 83, Number 176 (Tuesday, September 11, 2018)]
[Notices]
[Pages 46003-46005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19639]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84031; File No. SR-BOX-2018-14]


Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Adopt Rules Governing the Trading of Complex 
Qualified Contingent Cross Orders and Complex Customer Cross Orders

September 5, 2018.

I. Introduction

    On May 22, 2018, BOX Options Exchange LLC (``BOX'' or 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 adopt rules governing the trading of Complex 
Qualified Contingent Cross Orders (``QCC'') and Complex Customer Cross 
Orders. The proposed rule change was published for comment in the 
Federal Register on June 8, 2018.\3\ On July 16, 2018, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\5\ The Commission has 
received no comment letters regarding the proposed rule change. This 
order institutes proceedings pursuant to Section 19(b)(2)(B) of the Act 
\6\ to determine whether to approve or disapprove 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. 83367 (June 4, 
2018), 83 FR 26719 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 83647, 83 FR 34635 
(July 20, 2018). The Commission designated September 6, 2018, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    BOX has proposed to adopt rules governing the trading of Complex 
Customer Cross Orders \7\ and Complex QCC Orders.\8\ The proposal also 
applies two existing Complex Order price protections, the debit/credit 
check and the maximum price protection, to the proposed Complex 
Customer Cross and Complex QCC Orders.\9\
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    \7\ A Complex Customer Cross Order is comprised of one Public 
Customer Complex Order to buy and one Public Customer Complex Order 
to sell at the same price and for the same quantity. See proposed 
BOX Rule 7240(b)(4)(iii).
    \8\ A Complex QCC Order is comprised of an originating Complex 
Order to buy or sell where each component is at least 1,000 
contracts that is identified as being part of a qualified contingent 
trade, as defined in IM-7110-2, coupled with a contra-side Complex 
Order or orders totaling an equal number of contracts. See proposed 
BOX Rule 7240(b)(4)(iv). A ``qualified contingent trade'' is a 
transaction consisting of two or more component orders, executed as 
agent or principal, where: (1) At least one component is an NMS 
Stock, as defined in Rule 600 of Regulation NMS under the Exchange 
Act; (2) all components are effected with a product or price 
contingency that either has been agreed to by all the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent; (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time; (4) the 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined by the 
time the contingent order is placed; (5) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (6) the transaction is fully hedged 
(without regard to any prior existing position) as a result of other 
components of the contingent trade. See BOX IM-7110-2. See Notice, 
supra note 3, for additional description of the proposed rule 
change, including examples demonstrating the operation of the 
proposed Complex Customer Cross and Complex QCC Orders.
    \9\ See proposed BOX IM-7240-1(a)(5) and (b)(5).
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    Proposed BOX Rule 7110(c)(7) provides that a Complex Customer Cross 
order will be executed automatically upon entry provided that the 
execution (i) is at least $0.01 better than (inside) the cBBO \10\ and 
any Public Customer Complex Order on the Complex Order Book; (ii) is at 
or better than any non-Public Customer Complex Order on the Complex 
Order Book; and (iii) is at or between the cNBBO.\11\ The system will 
reject a Complex Customer Cross Order if, at the time of receipt of the 
Complex Customer Cross Order: (i) The strategy is subject to an ongoing 
auction (including the COPIP, Facilitation, and Solicitation auctions); 
or (ii) there is an exposed order on the strategy pursuant to BOX Rule 
7240(b)(3)(B).\12\ Complex Customer Cross Orders will be cancelled 
automatically if they cannot be executed, and Complex Customer Cross 
Orders may only be entered in the minimum trading increments applicable 
to Complex Orders under BOX Rule 7240(b)(1).\13\ BOX proposes to apply 
BOX IM-7140-1 to the entry and execution of Complex Customer Cross 
Orders.\14\
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    \10\ The cBBO is 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 the Strategy. See BOX Rule 7240(a)(1). The BOX 
Book is the electronic book of orders on each single option series 
maintained by the BOX Trading Host. See BOX Rule 100(a)(10).
    \11\ The cNBBO is the best net bid and offer price for a Complex 
Order Strategy based on the NBBO for the individual options 
components of the Strategy. See BOX Rule 7240(a)(3).
    \12\ See proposed BOX Rule 7110(c)(7).
    \13\ See proposed BOX Rule 7110(c)(7)(i) and (ii).
    \14\ See proposed BOX Rule 7110(c)(7)(iii). BOX IM-7140-1 
provides: ``[BOX Rule 7140(b)] prevents an Options Participant 
executing agency orders to increase its economic gain from trading 
against the order without first giving other trading interest on BOX 
an opportunity to trade with the agency order pursuant to Rule 7150 
(Price Improvement Period), Rule 7245 (Complex Order Price 
Improvement Period) or Rule 7270 (Block Trades). However, the 
Exchange recognizes that it may be possible for an Options 
Participant to establish a relationship with a Customer or other 
person (including affiliates) to deny agency orders the opportunity 
to interact on BOX and to realize similar economic benefits as it 
would achieve by executing agency orders as principal. It will be a 
violation of [BOX Rule 7140(b)] for an Options Participant to 
circumvent [BOX Rule 7140(b)] by providing an opportunity for a 
Customer or other person (including affiliates) to execute against 
agency orders handled by the Options Participant immediately upon 
their entry into the Trading Host.''

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[[Page 46004]]

    BOX also proposes to adopt rules governing Complex QCC Orders. 
Proposed BOX Rule 7110(c)(8) provides that a Complex QCC Orders will be 
automatically executed upon entry provided that the execution (i) is 
not at the same price as a Public Customer Complex Order; (ii) is at 
least $0.01 better than (inside) the cBBO; (iii) is at or better than 
any non-Public Customer Complex on the Complex Order Book; and (iv) 
each option leg executes at or between the NBBO. The system will reject 
a Complex QCC Order if, at the time of receipt of the Complex QCC 
Order, the strategy is subject to an ongoing auction (including COPIP, 
Facilitation, and Solicitation auctions) or there is an exposed order 
on the strategy pursuant to BOX Rule 7240(b)(3)(B).\15\ Complex QCC 
Orders will be automatically cancelled if they cannot be executed, and 
Complex QCC Orders may only be entered in the minimum trading 
increments applicable to Complex Orders under BOX Rule 7240(b)(1).\16\
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    \15\ See proposed BOX Rule 7110(c)(8).
    \16\ See proposed BOX Rules 7110(c)(8)(i) and (ii).
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    BOX acknowledges that, unlike the rules of the Miami International 
Securities Exchange, LLC (``MIAX''), BOX's proposed rules will not 
require that each component leg of a Complex QCC Order execute at a 
price that is better than Public Customer Orders on the BOX Book.\17\ 
Thus, BOX's proposed rule does not provide the same price protection 
for Public Customers as MIAX's Complex QCC rule.\18\ BOX notes, 
however, that its proposed requirement that a Complex QCC Order execute 
at a price that is at least $0.01 better than the cBBO is consistent 
with BOX's general approach to Complex Orders and that this approach 
respects all interest on the regular Book, not just the interest of 
Public Customers, thereby providing a level of protection to all 
Participants.\19\ BOX further notes that its proposal respects resting 
Complex Order interest by requiring a Complex QCC Order to execute at a 
price that is better than resting Public Customer Complex Orders and 
the same or better than resting non-Public Customer Complex Orders.\20\
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    \17\ See Notice, 83 FR at 26722. MIAX Rule 515(h)(4) provides 
that Complex Qualified Contingent Cross Orders (``cQCC Orders'') are 
automatically executed upon entry provided that, with respect to 
each option leg of the cQCC Order, the execution (i) is not at the 
same price as a Priority Customer Order on the Exchange's Book; and 
(ii) is at or between the NBBO.
    \18\ See supra note 17.
    \19\ See Notice, 83 FR at 26722.
    \20\ See id. and proposed BOX Rule 7110(c)(8).
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III. Proceedings To Determine Whether To Approve or Disapprove SR-BOX-
2018-14 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \21\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposal, as discussed below. Institution of proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide 
additional comment on the proposed rule change.
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    \21\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\22\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
BOX proposes to allow Complex QCC Orders to be automatically executed 
upon entry provided that the execution (i) is not at the same price as 
a Public Customer Complex Order; (ii) is at least $0.01 better than 
(inside) the cBBO; (iii) is at or better than any non-Public Customer 
Complex Order on the Complex Order Book; and (iv) each option leg 
executes at or between the NBBO. As discussed above, BOX's proposed 
rules do not require that each component options leg of a Complex QCC 
Order execute at a price that is better than resting Public Customer 
interest on the BOX Book. Thus, under BOX's proposal, if there is 
customer interest on the BOX Book at the best bid or offer on each 
component leg of a Complex QCC Order, the Complex QCC Order would be 
able to trade ahead of resting customer interest at the same price on 
one or more legs of the Complex QCC Order. The Commission is concerned 
about allowing Complex QCC Orders to execute as a ``clean'' cross ahead 
of resting Public Customer interest on the BOX Book. The Commission 
notes that, unlike in BOX's Complex Order Price Improvement Period, 
Facilitation Auction, and Solicitation Auction,\23\ Public Customer 
interest on the BOX Book would not have an opportunity to trade with a 
Complex QCC Order because Complex QCC Orders would be executed 
automatically upon entry. The Commission is concerned that Public 
Customers' inability to participate in a Complex QCC transaction, and 
the ability of Complex QCC Orders to trade ahead of resting Public 
Customer interest at the same price, would unduly disadvantage resting 
Public Customer interest on the BOX Book.
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    \22\ Id.
    \23\ See BOX Rule 7245, IM-7270-7, and IM- 7270-8.
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    The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the consistency 
of the proposal with Sections 6(b)(5) \24\ and 6(b)(8) \25\ of the Act. 
Section 6(b)(5) of the Act requires that the rules of a national 
securities exchange be designed, among other things, 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, and not 
be designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. Section 6(b)(8) of the Act requires that the rules 
of a national securities exchange not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.
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    \24\ 15 U.S.C. 78f(b)(5).
    \25\ 15 U.S.C. 78f(b)(8).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule change 
is consistent with Section 6(b)(5), 6(b)(8), or any other provisions of 
the Act, or rules and regulations thereunder. Although there does not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of data, views, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Act,\26\ 
any request for an opportunity to make an oral presentation.\27\
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    \26\ 17 CFR 240.19b-4.
    \27\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Acts Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).

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[[Page 46005]]

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by October 2, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
October 16, 2018. The Commission asks that commenters address the 
sufficiency and merit of the Exchange's statements in support of the 
proposal, in addition to any other comments they may wish to submit 
about the proposed rule change.
    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 No. SR-BOX-2018-14 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 No. SR-BOX-2018-14. The 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 a.m. and 3 
p.m. Copies of the 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 No. SR-BOX-2018-14 and should be submitted by 
October 2, 2018. Rebuttal comments should be submitted by October 16, 
2018.
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    \28\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19639 Filed 9-10-18; 8:45 am]
 BILLING CODE 8011-01-P


