[Federal Register Volume 84, Number 78 (Tuesday, April 23, 2019)]
[Notices]
[Pages 16925-16928]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08101]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85681; File No. SR-BOX-2019-10]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Adopt Rules 
Governing the Trading of Complex Customer Cross Orders

April 17, 2019.
    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 4, 2019, BOX 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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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt rules governing the trading of 
Complex Customer Cross 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 rules that will make existing 
functionality available to additional order types on

[[Page 16926]]

BOX. Specifically, the Exchange is proposing rules to codify Complex 
Customer Cross Orders on the Exchange.\3\ The Exchange notes that the 
proposed changes are similar to the rules of another exchange.\4\ In 
addition, the Exchange is proposing to expand certain Complex Order 
protections to the newly codified Complex Customer Cross Orders.
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    \3\ See https://boxoptions.com/assets/RC-2017-11-CC_QCC_cNBBO-July-10-Implementation-1.pdf.
    \4\ See MIAX Rules 518(b)(5) and 515(h)(3).
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Complex Customer Cross Orders
    First, the Exchange is proposing to add text related to Complex 
Customer Cross Orders. Proposed Rule 7240(b)(4)(iii) defines a Complex 
Customer Cross Order as a type of Complex Order which is comprised of 
one Public Customer Complex Order to buy and one Public Customer 
Complex Order to sell (the same strategy) at the same price and for the 
same quantity.\5\
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    \5\ Proposed Rule 7240(b)(4)(iii) is based on MIAX Rule 
518(b)(5).
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    The Exchange uses the same crossing mechanism for the processing 
and execution of Complex Customer Cross Orders that is used for 
Customer Cross Orders in the regular market.\6\ Proposed Rule 
7110(c)(7) shall govern the trading of Complex Customer Cross Orders, 
as defined in Rule 7240(b)(4)(iii), on BOX. Proposed Rule 7110(c)(7) 
describes the execution price requirements that are specific to Complex 
Customer Cross Orders.\7\ Specifically, Complex Customer Cross Orders 
are automatically executed upon entry provided that the execution (i) 
is at least $0.01 better than any Public Customer Complex Order on the 
Complex Order Book; \8\ (ii) is at least $0.01 better than the cBBO \9\ 
(iii) is at or better than any non-Public Customer Complex Order on the 
Complex Order Book; and (iv) is at or between the cNBBO.\10\ The 
purpose of the requirement that the execution must be at least $0.01 
better than any Public Customer Complex Order on the Complex Order Book 
is to ensure that the Complex Customer Cross Order does not trade in 
front of any resting Public Customer Complex Orders. The purpose of the 
requirement that the Complex Customer Cross Order be executed at or 
between the cNBBO is to ensure that net execution price is within the 
best net price available in the market and is in line with the 
requirement that simple Customer Cross Orders must execute at or within 
the NBBO.
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    \6\ See BOX Rule 7110(c)(5).
    \7\ Proposed Rule 7110(c)(7) is based on MIAX Rule 515(h)(3).
    \8\ The term ``Complex Order Book'' means the electronic book of 
Complex Orders maintained by the BOX Trading Host. See Rule 
7240(a)(8).
    \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 Rule 7240(a)(1).
    \10\ 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 Rule 7240(a)(3).
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    The system will reject a Complex Customer Cross Order if, at the 
time of receipt of the Complex Customer Cross 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 Rule 7240(b)(3)(B). The purpose of this provision is to 
maintain an orderly market by avoiding the execution of Complex 
Customer Cross Orders with components that are involved in other system 
functions that could affect the execution price of the Complex Customer 
Cross Order, and by avoiding concurrent processing on the Exchange 
involving the same strategy.
    Proposed Rule 7110(c)(7)(A) states that Complex Customer Cross 
Orders will be automatically cancelled if they cannot be executed. 
Proposed Rule 7110(c)(7)(B) provides that Complex Customer Cross Orders 
may only be entered in the minimum trading increments applicable to 
Complex Orders under Rule 7240(b)(1).
    As a regulatory matter, proposed Rule 7110(c)(7)(C) states that IM-
7140-1 applies to the entry and execution of Complex Customer Cross 
Orders.\11\
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    \11\ 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 this Rule for an Options Participant to circumvent this 
Rule 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. See IM-7140-1.
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    The following example illustrates the execution of a Complex 
Customer Cross Order:

Example 1--Execution of a Complex Customer Cross Order
    BOX Leg A Book: 6.00-6.50
    BOX Leg B Book: 3.00-3.30

    Strategy: Buy A Call, Sell B Call

    The cNBBO is 2.70-3.20
    The cBBO \12\ is 2.70-3.50
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    \12\ See supra note 9.

    The Complex Order Book contains a Public Customer order to sell 
the strategy at 3.20 and has no non-Public Customer Orders for the 
strategy.
    The Exchange receives a Complex Customer Cross Order 
representing Public Customers on both sides for the simultaneous 
purchase and sale of the strategy at a price of 3.19.
    The order price is at least $0.01 better than the Public 
Customer Complex Order on the Complex Order Book and at least $0.01 
better than the implied market price (the cBBO). Additionally, the 
order price is at or between the cNBBO and is at or better than any 
non-Public Customer Orders on the Complex Order Book. Therefore, the 
Complex Customer Cross Order is automatically executed upon entry.

    The Exchange notes that the proposed rules for Complex Customer 
Cross Orders are based on the rules of another exchange with certain 
minor differences.\13\ First, the MIAX Rule requires the execution 
price to be better than the best net price of a complex order. The 
proposal requires the execution price to be better than any Public 
Customer Complex Orders on the Complex Order Book and no worse than the 
price of any non-Public Customer Complex Orders. The Exchange believes 
this difference is minor because the execution price must respect the 
orders on the Complex Order Book and not trade ahead of Public Customer 
Orders on the Complex Order Book, which is in line with regular 
Customer Cross Orders. In addition, the Exchange notes that ISE allows 
Complex Customer Cross Orders to trade at the same price as non-
Priority Complex Customer Cross Orders on the same strategy.\14\ 
Pursuant to Rule 7110(c)(5), a Customer Cross Order must execute at a 
price that is at or between the best bid and offer on BOX and is not at 
the same price as a Public Customer Order on the BOX Book. 
Additionally, the Exchange is proposing to have the execution price be 
within the cNBBO, which MIAX does not provide. The Exchange believes 
this difference is minor because the Exchange is simply ensuring that 
the execution price respect the best net prices available in the 
market. Additionally, similar to the above, regular Customer Cross 
Orders may not trade through the NBBO.
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    \13\ See MIAX Rules 515(h)(3) and 518(b)(5).
    \14\ See Nasdaq ISE, LLC (``Nasdaq ISE'') Rule 722 Supplementary 
Material .08(d) [sic].
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    Next, MIAX's Rule requires the execution to be at least $0.01 
better than best price order on the strategy book or the derived market 
price, whichever is more aggressive. The Exchange also notes that MIAX 
includes non-displayed trading interest when determining the best price 
based on the regular books, which the Exchange is not proposing

[[Page 16927]]

because the Exchange does not have non-displayed interest.
    Further, MIAX rejects a Complex Customer Cross Order if, at the 
time of receipt, any component of the strategy is subject to a PRIME 
Auction, a Route Timer, or liquidity refresh pause. The Exchange is not 
proposing the same conditions.\15\ With respect to not rejecting when a 
component is subject to an auction, the Exchange notes that this 
approach is in line with the treatment of a COPIP when there is an 
ongoing PIP on a component of the Complex Order. Specifically, the 
Exchange will accept Complex Orders designated for the COPIP where 
there is a PIP on an individual component.\16\ Further, in order to 
ensure orderly markets involving multiple Complex Orders with common 
components, the Exchange is proposing additional circumstances in which 
a Complex Customer Cross Order will be rejected, specifically, when 
there is an exposed order on the strategy pursuant to rule 
7240(b)(4)(iii), or there is an ongoing COPIP, Facilitation or 
Solicitation auction on the strategy.
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    \15\ BOX notes that it does not have either the Route Timer or 
liquidity refresh pause features on the Exchange. As such, BOX is 
not proposing to include these features under the Proposal.
    \16\ See IM-7245-2.
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    Lastly, the Exchange proposes to delete the reference to COPIP in 
BOX Rule 7110(c)(5) to make clear that single-leg Customer Cross 
transactions may be executed when the series is involved in a COPIP. 
The Exchange notes that this is similar to functionality that exists on 
another exchange.\17\
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    \17\ See MIAX Rule 515(h). Under MIAX rule 515(h), single-leg 
Customer Cross Orders are rejected when the trading interest is 
subject to a PRIME Auction or PRIME Solicitation Auction. MIAX Rule 
515(h) does not indicate that a single-leg Customer Cross Order will 
be rejected, if the series is subject to a cPRIME Auction.
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Complex Order Protections for Complex Customer Cross Orders
    Lastly, the Exchange proposes to expand certain Complex Order 
protections to Complex Customer Cross Orders. Specifically, the 
Exchange proposes to amend Rule IM-7240-1(a)(5) and IM-7240(b)(5) to 
apply these price protection checks to Complex Customer Cross Orders. 
The Exchange notes that another options exchange has similar price 
checks for Complex Customer Cross Orders.\18\ The Exchange believes 
that these protections should be extended to Complex Customer Cross 
Orders as it will mitigate potential risks associated with market 
participants entering orders at unintended prices and orders trading at 
prices that are extreme and potentially erroneous, which may likely 
have resulted from human or operational error.
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    \18\ See Chicago Board Options Exchange, Incorporated (``Cboe'') 
Interpretations and Polices .08(c) and (g) to Rule 6.53C.
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    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.\19\
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    \19\ Due to technological delays, Complex Order price 
protections detailed in SR-BOX-2018-13 have not yet been 
implemented. The Exchange will provide notice of the exact 
implementation date of these protections, including the proposed 
protections discussed herein, at least two weeks prior to 
implementing the proposed change.
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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''),\20\ in general, and Section 6(b)(5) of the Act,\21\ 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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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    The proposal to amend Rules 7110 and 7240 to codify rules covering 
Complex Customer Cross is consistent with Section 6(b)(5) of the Act 
because this proposal promotes just and equitable principles of trade 
and protects investors and the public interest by providing increased 
opportunities for the execution of Complex Orders. The Exchange 
believes that the proposed Complex Customer Cross rules will benefit 
Participants and the marketplace as a whole by adopting rules that 
allow for the trading of these types of orders on the Exchange. The 
Exchange believes the proposed rules for Complex Customer Cross Orders 
remove impediments to and perfects the mechanism of a free and open 
market and a national market system and will result in more efficient 
trading and enhance the likelihood of the Complex Orders executing at 
the best prices by providing additional order types resulting in 
potentially greater liquidity available for trading on the Exchange.
    The proposed rule change will provide rules that make existing 
functionality available to additional order types. Providing rules that 
make Customer Cross available for Complex Orders removes impediments to 
and perfects the mechanisms of a free and open market and a national 
market system because Participants will be given additional ways in 
which they can execute Complex Orders.
    The proposed rule change will protect investors and the public 
interest by assuring the existing priority and allocation rules 
applicable to the processing and execution of Customer Cross Orders and 
Complex Orders remains consistent with the processing and execution of 
these order types, unless otherwise specifically set forth in the 
rules.
    The Exchange believes that the proposal to reject a Complex 
Customer Cross Order at the time of receipt of the order when the 
strategy is subject to an ongoing auction (including COPIP, 
Facilitation and Solicitation auctions), or there is an exposed order 
on the strategy, removes impediments to and perfects the mechanism of a 
free and open market by ensuring orderly markets involving multiple 
complex orders with common components.
    The proposed rule change to implement a debit/credit check for 
Customer Cross Orders 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 Customer Cross 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 Customer Cross 
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

[[Page 16928]]

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 rule change to 
provide rules governing the trading of Complex Customer Cross Orders 
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 is being proposed as a 
competitive response to the rules of another exchange.\22\ 
Additionally, the proposed rule change is intended to promote 
competition by adding rules for new order types that enable 
Participants to execute Complex Orders on the Exchange. The Exchange 
believes that this enhances inter-market competition by enabling the 
Exchange to compete for this type of order flow with other exchanges 
that have similar rules and functionalities in place.
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    \22\ See MIAX Rules 515(h)(3) and 518(b)(5).
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    Further, 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.\23\ 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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    \23\ See supra, note 18.
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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 \24\ and Rule 19b-4(f)(6) thereunder.\25\
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 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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    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-2019-10 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-2019-10. 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-2019-10, and should be submitted on 
or before May 14, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-08101 Filed 4-22-19; 8:45 am]
BILLING CODE 8011-01-P


