[Federal Register Volume 84, Number 111 (Monday, June 10, 2019)]
[Notices]
[Pages 26921-26924]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12091]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86030; File No. SR-BOX-2019-17]


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 Qualified Contingent Cross Orders and 
Make a Modification to the Execution Requirements for Complex Customer 
Cross Orders

June 4, 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 May 23, 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 Qualified Contingent Cross Orders and make a modification to 
the execution requirements for 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 BOX. Specifically, 
the Exchange is proposing rules to codify Complex Qualified Contingent 
Cross (``QCC'') Orders on the Exchange.\3\ The Exchange notes that the 
proposed changes are similar to the rules of other exchanges.\4\ The 
Exchange also proposes to modify the requirements for Complex Customer 
Cross Orders on the Exchange. Lastly, the Exchange is proposing to 
expand certain Complex Order protections to Complex QCC Orders.
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    \3\ See https://boxoptions.com/assets/RC-2017-11-CC_QCC_cNBBO-July-10-Implementation-1.pdf.
    \4\ See Nasdaq ISE, LLC (``ISE'') Rule 721(d). See also MIAX 
Rules 515(h)(4) and 518(b)(6).
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Complex Customer Cross Orders
    First, the Exchange is proposing to modify requirements related to 
Complex Customer Cross Orders.\5\ The Exchange notes that the only 
modification being made is that each leg of a Complex Customer Cross 
Order must execute at least $0.01 better than any Public Customer Order 
on the BOX Book. All other requirements remain the same as the current 
functionality in place.
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    \5\ 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.
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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. Accordingly under Proposed 
Rule 7110(c)(7), 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; (ii) is at least $0.01 better than the cBBO; (iii) is at or 
better than any non-Public Customer Complex Order on the Complex Order 
Book; (iv) is at or between the cNBBO as defined in Rule 7240(a)(3) and 
further provided that each leg is at least $0.01 better than any Public 
Customer Order on the BOX Book.
Complex QCC Orders
    Next, the Exchange is proposing to add text related to Complex QCC 
Orders. Pursuant to proposed Rule 7240(b)(4)(iv), 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 \6\ coupled 
with a contra-side Complex Order or orders totaling an equal number of 
contracts.\7\
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    \6\ 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 IM-7110-2.
    \7\ Proposed Rule 7240(b)(4)(iv) is based on MIAX Rule 518(b)(6) 
and ISE Rule 715(j).
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    The Exchange uses the same crossing mechanism for the processing 
and execution of Complex QCC Orders that is used for QCC Orders in the 
regular market.\8\ Accordingly, proposed Rule 7110(c)(8) shall govern 
trading of Complex QCC Orders, as defined in Rule 7240(b)(4)(iv), on 
BOX. Proposed Rule 7110(c)(8) describes the execution price 
requirements that are specific for Complex QCC Orders.\9\ Specifically, 
Complex QCC 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; (ii) is at least $0.01 better 
than the cBBO; (iii) is at or better than any non-Public Customer 
Complex Order on the Complex Order Book and further provided that each 
option leg executes at a price that is at least $0.01 better than any 
Public Customer Order on the BOX Book and each option leg executes at 
or between the NBBO. The purpose of the requirement that the execution 
must be at least $0.01 better than the cBBO is to ensure that the 
Exchange is respecting the implied market price. The purpose of the 
requirement that each option leg must be at least $0.01 better than any

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Public Customer Complex Order on the Complex Order Book is to ensure 
that the Complex QCC Order does not trade in front of any resting 
Public Customer Complex Orders. Similarly, the purpose of the 
requirement that each option leg be at least $0.01 better than any 
Public Customer Order on the BOX Book is to ensure that the Complex QCC 
Order does not trade in front of any resting regular Public Customer 
Orders. The purpose of the requirement that the individual options legs 
of the Complex QCC Order be executed at or between the NBBO is to 
ensure that the execution price of each option leg is within the best 
price available in the market and is in line with the requirement that 
simple QCC Orders must execute at or within the NBBO.
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    \8\ See Securities Exchange Act Release No. 80661 (May 11, 
2017), 82 FR 22682 (May 17, 2017) (SR-BOX-2017-14). The Exchange 
notes that regular QCC Orders on BOX are allowed to execute 
automatically on entry without exposure provided the execution: (1) 
Is not at the same price as a Public Customer Order on the BOX Book; 
and (2) is at or between the NBBO.
    \9\ Proposed Rule 7110(c)(8) is based on ISE Rule 721(d).
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    The system does not consider the NBBO price for the stock component 
because the Exchange does not execute the stock component; the Exchange 
executes the option components at a net price and ensures that, among 
other things, the execution (i) is at least $0.01 better than any 
Public Customer Complex Order on the Complex Order Book; (ii) is at 
least $0.01 better than the cBBO; (iii) is at or better than any non-
Public Customer Complex Order on the Complex Order Book; (iv) each 
option leg executes $0.01 better than any Public Customer Order on the 
BOX Book; and (v) 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 Rule 
7240(b)(3)(B). The purpose of this provision is to maintain an orderly 
market by avoiding the execution of Complex QCC Order with components 
that are involved in other system functions that could affect the 
execution price of the Complex QCC Order, and by avoiding concurrent 
processing on the Exchange involving the same strategy.
    Proposed Rule 7110(c)(8)(A) states that Complex QCC Orders will be 
automatically cancelled if they cannot be executed. Proposed Rule 
7110(c)(8)(B) provides that Complex QCC Orders may only be entered in 
the minimum trading increments applicable to Complex Orders under Rule 
7240(b)(1).
    The following example illustrates the execution of a Complex QCC 
Order:

Example 1--Execution of a Complex QCC Order

BOX Leg A Book: 6.00-6.60 (no Public Customer interest)
BOX Leg B Book: 3.00-3.30 (no Public Customer interest)
Leg A NBBO: 6.00-6.60
Leg B NBBO: 3.00-3.30

Strategy: Buy A Call, Sell B Call

The cBBO is 2.70-3.60
The cNBBO is 2.70-3.60

    The Complex Order Book contains a broker-dealer order to sell the 
strategy at 3.29.
    The Exchange receives a Complex QCC Order for the simultaneous 
purchase and sale of the strategy at a net price of 3.29, 1,000 times. 
Since the order can be executed at or between the NBBO for each leg of 
the strategy, is not at a worse price than the non-Public Customer 
Order on the Complex Order Book, is at least $0.01 better than the 
cBBO, is not at the same price as a Public Customer Order on the BOX 
Book, and the order size is met, the Complex QCC Order is automatically 
executed upon entry.

Example 2--Execution of a Complex QCC Order

BOX Leg A Book: 6.00-6.60 (no Public Customer interest)
BOX Leg B Book: 3.00-3.30 (Public Customer Order to sell at 3.30)
Leg A NBBO: 6.00-6.60
Leg B NBBO: 3.00-3.30

Strategy: Buy A Call, Sell B Call

The cBBO is 2.70-3.60
The cNBBO is 2.70-3.60

    The Exchange receives a Complex QCC Order for the simultaneous 
purchase and sale of the strategy at a net price of 3.30, 1,000 times. 
Since there is a Public Customer Order on the BOX Book for Leg B to 
sell at 3.30 and the incoming Complex QCC Order is not at least $0.01 
better than the resting Public Customer Order on the BOX Book, the 
Complex QCC Order is rejected.

    The proposed rules governing Complex QCC Orders are based on the 
rules of another exchange with certain differences.\10\ The Exchange is 
proposing the additional requirement that the execution price is at or 
better than any non-Public Customer Complex Order on the Complex Order 
Book. The Exchange believes that this additional requirement is 
reasonable because the Exchange is respecting resting Complex Orders. 
Further, the Exchange proposes that the execution is at least $0.01 
better than the cBBO. The Exchange believes that this additional 
requirement is reasonable because the Exchange is respecting the 
implied market price. Further, the Exchange believes that this 
additional requirement will encourage Participants to add liquidity 
because incoming orders will not trade ahead of resting interest on the 
BOX Book. Lastly, MIAX rejects a Complex QCC 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.\11\ 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.\12\ Further, the Exchange notes that orders on 
the regular book are protected by the fact that the execution price 
must be at least $0.01 better than the cBBO. Additionally, in order to 
ensure orderly markets involving multiple Complex Orders with common 
components, the Exchange is proposing additional circumstances in which 
a Complex QCC Order will be rejected, specifically, when there is an 
exposed order on the strategy, there is an ongoing Facilitation or 
Solicitation auction on the strategy or when there is a COPIP.
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    \10\ See supra note 4.
    \11\ 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.
    \12\ See IM-7245-2.
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    Lastly, the Exchange proposes to expand certain Complex Order 
protections to Complex QCC Orders. Specifically, the Exchange proposes 
to amend Rule IM-7240-1(a)(5) and IM-7240-1(b)(5) to apply these price 
protection checks to Complex QCC Orders. The Exchange notes that 
another options exchange has similar price checks.\13\
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    \13\ See Chicago Board Options Exchange, Incorporated (``Cboe'') 
Interpretations and Polices .08(c) and (g) to Rule 6.53C.
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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''),\14\ in general, and Section 6(b)(5) of the Act,\15\ 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

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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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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed change requiring each leg 
of a Complex Customer Cross order to execute at least $0.01 better than 
any Public Customer Order on the BOX Book promotes just and equitable 
principles of trade and protects investors and the public interest by 
further protecting resting Public Customer interest.
    The proposal to amend Rules 7110 and 7240 to codify rules covering 
Complex QCC Orders 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 requiring the execution to be at least $0.01 better than 
any Public Customer Complex Order on the Complex Order Book protects 
investors and the public interest as it will ensure that the Complex 
QCC Order does not trade in front of any resting Public Customer 
Complex Orders. The Exchange also believes that requiring the execution 
to be at least $0.01 better than the cBBO will further protect 
investors as it ensures that the implied market prices are respected. 
Further, the Exchange believes that requiring the individual legs of a 
Complex QCC Order to execute at least $0.01 better than any resting 
Public Customer interest further protects Public Customers on the 
Exchange. Lastly, the Exchange believes that requiring each option leg 
to execute at or between the NBBO protects investors and the public 
interest because it ensures that the execution price of each option leg 
is within the best price available in the market and is in line with 
the requirement that simple QCC Orders must execute at or within the 
NBBO.
    The Exchange also believes that the proposed Complex QCC 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 QCC Orders remove 
impediments to and perfect 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 an additional order type. Providing rules 
that make QCC 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 QCC Orders and Complex 
Orders remains consistent with the processing and execution of these 
order types, unless otherwise specifically set forth in the rules.
    The system does not consider the NBBO price for the stock component 
because the Exchange does not execute the stock component; the Exchange 
executes the option components at a net price and ensures that the net 
execution (i) is at least $0.01 better than any Public Customer Complex 
Order on the Complex Order Book; (ii) is at least $0.01 better than the 
cBBO; (iii) is at or better than any non-Public Customer Complex Order 
on the Complex Order Book; (iv) each option leg executes $0.01 better 
than any Public Customer Order on the BOX Book; and (v) each option leg 
executes at or between the NBBO.
    The Exchange believes that the proposal to reject a Complex QCC 
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 
Complex QCC 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 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 QCC 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 rule changes 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 other exchanges.\16\ Additionally, 
the proposed rule change is intended to promote competition by adding 
rules for a new order type 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. Further, the Exchange does not believe the 
proposed change will impose a burden on intramarket competition because 
it is available to all Participants.
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    \16\ See supra note 4.
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    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 other 
exchanges.\17\ 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

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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 impose a burden 
on intramarket competition because the price protections are available 
to all Complex QCC Orders.
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    \17\ Id.
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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 \18\ and Rule 19b-4(f)(6) thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 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 rule-comments@sec.gov. Please include 
File Number SR-BOX-2019-17 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-2019-17. 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-2019-17, and should be submitted on 
or before July 1, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12091 Filed 6-7-19; 8:45 am]
 BILLING CODE 8011-01-P


