[Federal Register Volume 84, Number 207 (Friday, October 25, 2019)]
[Notices]
[Pages 57506-57509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23261]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87375; File No. SR-BOX-2019-31]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange 
Rule IM-7170-1, To Make Permanent the Exchange Rule That Is Linked to 
the Equity Market Plan To Address Extraordinary Market Volatility

October 21, 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 October 18, 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 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Exchange Rule IM-7170-1, to make 
permanent the Exchange Rule that is linked to the equity market Plan to 
Address Extraordinary Market Volatility

[[Page 57507]]

(the ``Limit Up-Limit Down Plan'' or the ``Plan''). 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 proposes to amend BOX Rule IM-7170-1 to make permanent 
the Exchange Rule that is connected to the Plan. This change is being 
proposed in connection with the recently approved amendment to the 
Limit Up-Limit Down Plan that allows the Plan to continue to operate on 
a permanent basis (``Amendment 18'').\3\
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    \3\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No. 
18).
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    In an attempt to address extraordinary market volatility in NMS 
stocks, and, in particular, events like the severe volatility on May 6, 
2010, U.S. national securities exchanges and the Financial Industry 
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the 
Plan pursuant to Rule 608 of Regulation NMS under the Act.\4\ On May 
31, 2012, the Commission approved the Plan, as amended, on a one-year 
pilot basis.\5\ Though the Plan was primarily designed for equity 
markets, the Exchange believed it would, indirectly, potentially impact 
the options markets as well. Thus, the Exchange has previously adopted 
and amended Rule IM-7170-1 to ensure the option markets were not harmed 
as a result of the Plan's implementation and implemented the rule on a 
pilot basis that has coincided with the pilot period for the Plan 
(``Options Pilot'').\6\
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    \4\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \5\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012) 77 FR 33498 (June 6, 2012).
    \6\ See Securities Exchange Act Release Nos. 34-76233 (October 
22, 2015), 80 FR 66087 (October 28, 2015) (SR-BOX-2015-34) 
(proposing to extend pilot program to coincide with the pilot period 
for the Plan).
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    Rule IM-7170-1 provides that transactions executed during a limit 
or straddle state are not subject to the obvious and catastrophic error 
rules. A limit or straddle state occurs when at least one side of the 
National Best Bid (``NBB'') or Offer (``NBO'') bid/ask is priced at a 
non-tradable level. Specifically, a straddle state exists when the NBB 
is below the lower price band while the NBO is inside the prices band 
or when the NBO is above the upper price band and the NBB is within the 
band, while a limit state occurs when the NBO equals the lower price 
band (without crossing the NBB), or the NBB equals the upper price band 
(without crossing the NBO). The Exchange adopted the Options Pilot to 
protect investors because when an underlying security is in a limit or 
straddle state, there will not be a reliable price for the security to 
serve as a benchmark for the price of the option. Specifically, the 
Exchange adopted Rule IM-7170-1 because the application of the obvious 
and catastrophic error rules would be impracticable given the potential 
for lack of a reliable NBBO in the options market during limit and 
straddle states. When adjusting or busting a trade pursuant to the 
obvious error rule, the determination of theoretical value of a trade 
generally references the NBB (for erroneous sell transactions) or NBO 
(for erroneous buy transactions) just prior to the trade in question, 
and is therefore not reliable when at least one side of the NBBO is 
priced at a non-tradeable level, as is the case in limit and straddle 
states. In such a situation, determining theoretical value may often 
times be a very subjective rather than an objective determination and 
could give rise to additional uncertainty and confusion for investors. 
As a result, application of the obvious and catastrophic error rules 
would be impracticable given the lack of a reliable NBBO in the options 
market during limit and straddle states, and may produce undesirable 
effects or unanticipated consequences. The Exchange adopted IM-7170-1 
as an additional measure designed to protect investors during limit and 
straddle states. For example, the Exchange believes that eliminating 
the application of obvious error rules during a limit or straddle state 
eliminates the re-evaluation of a transaction executed during such a 
state that could potentially create an unreasonable adverse selection 
opportunity due to lack of a reliable reference price on one side of 
the market or another and discourage participants from providing 
liquidity during limit and straddle states, which is contrary to the 
goal in limiting participants' adverse selection with the application 
of the obvious error rule during normal trading states. The Exchange 
believes the Options Pilot is designed to add certainty on the options 
markets, which encourages more investors to participate in light of the 
changes associated with the Plan. The Plan was originally implemented 
on a pilot-basis in order to allow the public, the participating 
exchanges, and the Commission to assess the operation of the Plan and 
whether the Plan should be modified prior to approval on a permanent 
basis. As stated, the Exchange adopted the Option Pilot to coincide 
with this pilot; to continue the protections therein while the industry 
gains further experience operating the Plan.
    In connection with the order approving the establishment of the 
obvious error pilot, as well as the extensions of the obvious error 
pilot, the Exchange committed to submit monthly data regarding the 
program and to submit an overall analysis of the obvious error pilot in 
conjunction with the data submitted under the Plan and any other data 
as requested by the Commission. Pursuant to a rule filing, approved on 
May 8, 2015, each month, the Exchange committed to provide the 
Commission, and the public, a dataset containing the data for each 
straddle and limit state in optionable stocks that had at least one 
trade on the Exchange.\7\ The Exchange has continued to provide the 
Commission with this data on a monthly basis from May 2015. For each 
trade on the Exchange, the Exchange provides (a) the stock symbol, 
option symbol, time at the start of the straddle or limit state, an 
indicator for whether it is a straddle or limit state, and (b) for the 
trades on the Exchange, the executed volume, time-weighted quoted bid-
ask spread, time-weighted average quoted depth at the bid, time-
weighted average quoted depth at the offer, high execution price, low 
execution price, number of trades for which a request for review for 
error was received during straddle and limit states, an indicator 
variable for whether those options outlined above have a price change

[[Page 57508]]

exceeding 30% during the underlying stock's limit or straddle state 
compared to the last available option price as reported by OPRA before 
the start of the limit or straddle state. In addition, to help evaluate 
the impact of the pilot program, the Exchange has provided to the 
Commission assessments evaluating the options market quality during 
Limit and Straddle States, the character of incoming order flow and 
transactions during Limit and Straddle States, and reviews of any 
complaints from members and their customers concerning executions 
during Limit and Straddle States. The Exchange has concluded that the 
obvious error pilot does not negatively impact market quality during 
normal market conditions, and that there has been insufficient data to 
assess whether a lack of obvious error rules is problematic, however, 
the Exchange believes the continuation of Rule IM-7170-1 functions to 
protect against any unanticipated consequences in the options markets 
during a limit or straddle state and add certainty on the options 
markets.
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    \7\ See Securities Exchange Act Release No. 34-74911 (May 8, 
2015), 80 FR 27717 (May 14, 2019) (SR-BOX-2015-18); see also BOX 
Limit Up Limit Down Reports https://boxoptions.com/regulatory/governing-documents-related-information-nms-plans/pilot-reports/limit-up-down/.
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    The Commission recently approved the Plan on a permanent basis 
(Amendment 18).\8\ In connection with this approval, the Exchange now 
proposes to amend the Exchange Rule IM-7170-1 that currently implement 
the provisions of the Plan on a pilot basis to eliminate the pilot 
basis, which effectiveness expires on October 18, 2019, and to make 
such rules permanent. In its approval order to make the Plan permanent, 
the Commission recognized that, as a result of the Participants' and 
industry analysis of the Plan's operation, the Limit Up-Limit Down 
mechanism effectively addresses extraordinary market volatility. 
Indeed, the Plan benefits markets and market participants by helping to 
ensure orderly markets, but also, the Exchange believes, based on the 
data made available to the public and the Commission during the pilot 
period, that the obvious error pilot does not negatively impact market 
quality during normal market conditions. Rather, the Exchange believes 
the obvious error pilot functions to protect against any unanticipated 
consequences in the options markets during a limit or straddle state 
and add certainty on the options markets. This removes impediments to 
and perfects the mechanism of a free and open market and national 
market system by encouraging more investors to participate in light of 
the changes associated with the Plan. The Exchange believes that if 
approved on a permanent basis, the Options Pilot would permanently 
provide investors with the above-described additional certainty of 
market prices and mitigation of unanticipated consequences and 
unreasonable adverse selection risk during limit and straddle states.
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    \8\ See supra note 3.
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    The Exchange understands that the other national securities 
exchanges will also file similar proposals to make permanent their 
respective pilot programs. Since the Commission's approval of Amendment 
18 allowing the Plan to operate on a permanent basis, the Exchange and 
other national securities exchanges have determined that no further 
amendments should be made to the Options Pilot; the current Option 
Pilot effectively addresses extraordinary market volatility, is 
reasonably designed to comply with the requirements of the Plan, 
facilitates compliance with the Plan and should now operate on a 
permanent basis, consistent with the Plan. The Exchange does not 
propose any substantive or additional changes to Exchange Rule IM-7170-
1.
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''),\9\ in general, and Section 6(b)(5) of the Act,\10\ 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. Additionally, the Exchange believes the proposed rule 
change is consistent with the Section 6(b)(5) \11\ requirement that the 
rules of an exchange not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, The Exchange believes that the proposed rule 
supports the objectives of perfecting the mechanism of a free and open 
market and the national market system because it promotes transparency 
and uniformity across markets concerning rules for options markets 
adopted to coincide with the Plan. The Exchange believes that 
eliminating the pilot basis for the Options Pilot and making the rule 
permanent facilitates compliance with the Plan by adding certainty to 
the markets during periods of market volatility, which has been 
approved and found by the Commission to be reasonably designed to 
prevent potentially harmful price volatility in NMS Stocks. It has been 
determined by the Commission that the Plan benefits markets and market 
participants by helping to ensure orderly markets, and, based on the 
data made available to the public and the Commission during the pilot 
period for Rule IM-7170-1, the Plan does not negatively impact options 
market quality during normal market conditions. Rather, the Plan, as it 
is implemented under the obvious error pilot, functions to protect 
against any unanticipated consequences in the options markets during a 
limit or straddle state and adds certainty on the options markets. 
During a limit or straddle state, determining theoretical value of an 
option may be a subjective rather than an objective determination given 
the lack of a reliable NBBO, which may create an unreasonable adverse 
selection opportunity and discourage participants from providing 
liquidity during limit and straddle states. Therefore, the Exchange 
believes eliminating obvious error review in such states would, in 
turn, eliminate uncertainty and confusion for investors and benefit 
investors by encouraging more participation in light of the changes 
associated with the Plan.
    Accordingly, the Exchange believes that making the Options Pilot 
permanent will further the goals of investor protection and fair and 
orderly markets as the rule effectively addresses extraordinary market 
volatility pursuant to the Plan.

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

    The Exchange does not believe that the proposed rule change 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, this change is being proposed in connection with the recently 
approved amendment to the Limit Up-Limit Down Plan that allows the Plan 
to continue to operate on a permanent basis.\12\ The proposed rule 
change is necessary to reflect that the Plan no longer operates as a 
pilot and has been approved to operate on a permanent basis by the 
Commission. As such, Exchange Rule IM-7170-1, which implements 
protections in connection

[[Page 57509]]

with the Plan, should be amended to operate on a permanent basis. The 
Exchange understands that the other national securities exchanges will 
also file similar proposals to make permanent their respective pilot 
programs. Thus, the proposed rule change will help to ensure 
consistency across market centers without implicating any competitive 
issues.
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    \12\ See supra, note 3.
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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 foregoing 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)(iii) of the Act \13\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and 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. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \16\ 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 effective and operative immediately upon filing. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the current Options Pilots to continue on a permanent 
basis without any changes, prior to the pilot expiration on October 18, 
2019. For this reason, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change as operative 
upon filing.\17\
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 17 CFR 240.19b-4(f)(6)(iii).
    \17\ 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-2019-31 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-2019-31. 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 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 Number SR-BOX-2019-31 and should be submitted on 
or before November 15, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23261 Filed 10-24-19; 8:45 am]
 BILLING CODE 8011-01-P


