
[Federal Register Volume 88, Number 244 (Thursday, December 21, 2023)]
[Notices]
[Pages 88429-88432]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-28042]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99191; File No. SR-BOX-2023-30]


Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing 
and Immediate Effectiveness of a Proposed Rule Change To Amend IM-7150-
1 and Rule 7250 (Quote Mitigation)

December 15, 2023.
    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 December 11, 2023, 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 Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend IM-7150-1 and Rule 7250 (Quote 
Mitigation). 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 https://rules.boxexchange.com/rulefilings.

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 purpose of the proposed rule change is to modernize and improve 
the operation of the rules. Specifically, the Exchange is proposing to 
amend: (1) IM-7150-1 to remove certain language to provide better 
consistency with the surveillance the Financial Industry Regulatory 
Authority, Inc. (``FINRA'') currently provides for the Exchange; and 
(2) Rule 7250 (Quote Mitigation) to update and clarify the quote 
mitigation process used by the Exchange. The Exchange is proposing to 
make such changes in response to requests from Exchange Regulation 
Staff in an effort to improve the efficacy of the Exchange's existing 
regulatory framework.
IM-7150-1
    IM-7150-1 (a) currently provides that: ``it shall be considered 
conduct inconsistent with just and equitable principles of trade for 
any Initiating Participant to engage in a pattern of conduct where the 
Initiating Participant submits Primary Improvement Orders into the PIP 
process for two (2) contracts or less for the purpose of manipulating 
the PIP process in order to gain a higher allocation percentage than 
the Initiating Participant would have otherwise received in accordance 
with the allocation procedures set forth in Rule 7150.'' \3\ The 
Exchange now proposes to remove the language that states, ``2 contracts 
or less.''
---------------------------------------------------------------------------

    \3\ See IM-7150-1.
---------------------------------------------------------------------------

    FINRA currently provides surveillance for this requirement for the 
Exchange and other options exchanges. FINRA's surveillance program 
monitors for manipulative activity by a market participant and includes 
surveillance designed to detect activity where an Initiating 
Participant submits Primary Improvement Orders into the PIP process for 
four (4) contracts or less for the purpose of manipulating the PIP 
process in order to gain a higher allocation percentage than the 
Initiating Participant would have otherwise received. Even though IM-
7150-1 as written, notates that a pattern of orders for two (2) 
contracts may indicate manipulation of the PIP Process, FINRA has 
identified the potential for manipulation for orders greater than two 
(2) contracts and expanded such surveillance accordingly. For example, 
unbundling an order for 50 contracts into four (4) lots may have the 
same effect as unbundling the order for two (2) contracts.\4\ Under the 
current rule

[[Page 88430]]

text, if FINRA were to discover manipulative behavior on three (3) or 
four (4) contracts it would be more difficult to prosecute and deter 
this manipulative behavior on BOX. The Exchange believes that the 
removal of the two (2) contracts or less language would help align the 
rule text with current FINRA surveillance practices and improve the 
efficacy of the Rule by allowing FINRA and the Exchange to more readily 
prosecute and deter manipulative behavior in situations where the 
Initiating Participant \5\ submits Primary Improvement Orders \6\ into 
the PIP \7\ process for three (3) or four (4) contracts, as well as one 
(1) or two (2) contracts, for the purpose of manipulating the PIP 
process.
---------------------------------------------------------------------------

    \4\ For example, for one instance of 100 contracts, the BOX Firm 
ID would be entitled to an allocation of at least 40% or 40 
contracts. If the customer order is sent as multiple small PIPs for 
2 contracts, the BOX Participant would receive at least 50% of each 
PIP sent (2 * .40 = .8, rounded up to 1 contract). Therefore, the 
total allocation of the original 100 contract order would be at 
least 50% or 50 contracts, rather than 40% or 40 contracts, a 
potential over allocation of at least 10 contracts. Similarly, if 
the customer order is sent as multiple small PIPs for 4 contracts, 
the BOX Participant would receive at least 50% of each PIP sent (4 * 
.40 = 1.6, rounded up to 2 contracts). Therefore, the total 
allocation of the original 100 contract order would be at least 50% 
or 50 contracts, rather than 40% or 40 contracts, a potential over 
allocation of at least 10 contracts.
    \5\ See BOX Rule 7150(f).
    \6\ Id.
    \7\ See BOX Rule 7150.
---------------------------------------------------------------------------

Rule 7250
    BOX Rule 7250 currently states that: ``in order to control the 
number of quotations the Exchange disseminates, the Exchange shall 
utilize a mechanism so that newly-received quotations and other changes 
to the Exchange's best bid and offer are not disseminated for a period 
of up to, but not more than one second.'' \8\ The rule as it currently 
reads, provides that the Exchange always utilizes a mechanism to 
control the number of quotations disseminated by the Exchange. The 
Exchange is now proposing to amend this language to allow the Exchange 
to utilize the mechanism when appropriate.
---------------------------------------------------------------------------

    \8\ See BOX Rule 7250.
---------------------------------------------------------------------------

    BOX's Quote Mitigation mechanism was originally adopted over 
fifteen years ago as a response to the implementation of the Penny 
Pilot Program \9\ amid concerns that market quality and system capacity 
would be overwhelmed by the increase in options market data traffic 
created by the Penny Pilot Program. The Exchange sought to reduce both 
peak and overall market data traffic by bundling order updates within a 
certain timeframe. The rule was amended in 2012 to adopt the existing 
quote mitigation mechanism that systemically limits the dissemination 
of quotations and other changes to the BOX best bid and offer according 
to prescribed time criteria (a ``holdback timer'').\10\ For example, if 
there is a change in the price of a security underlying an option, 
multiple market participants may adjust the price or size of their 
quotes. Rather than disseminating each individual change, the holdback 
timer permits BOX to wait until multiple Participants have adjusted 
their quotes and then disseminates a new quotation.
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release Nos. 55073 (January 19, 
2007) 72 FR 2047 (January 17, 2007) (SR-BSE-2006-48) (Order 
Approving BSE Quote Mitigation Plan) and 55155 (January 23, 2007) 72 
FR 4714 (February 1, 2007) (SR-BSE-2006-49) (Order Approving Penny 
Pilot Program on BSE).
    \10\ See Securities Exchange Act Release No. 68141 (November 2, 
2012) 77 FR 67040 (November 8, 2012) (Notice of Filing and Immediate 
Effectiveness of a Proposal Regarding Quote Mitigation).
---------------------------------------------------------------------------

    Through internal review, the Exchange found that, while this 
mechanism and functionality still exists on the Exchange, it is not 
always necessary. The Exchange is proposing to amend the rule to 
replace the ``shall'' with ``may'' and instead provide that ``the 
Exchange may utilize a mechanism so that newly-received quotations and 
other changes to the Exchange's best bid and offer are not disseminated 
for a period of up to, but not more than one second.'' This proposed 
amendment will modernize the Rule by still allowing the Exchange to 
control the number of quotations that the Exchange disseminates using 
the aforementioned mechanism if the need arises but will enable the 
Exchange to rely on other methods within the overall BOX quote 
mitigation strategy. For example, BOX actively monitors the quotation 
activity of its Market Makers. When the Exchange detects that a Market 
Maker is disseminating an unusual number of quotes, the Exchange 
contacts that Market Maker and alerts it to such activity. Such 
monitoring frequently reveals that the Market Maker may have internal 
system issues or has incorrectly set system parameters that were not 
immediately apparent. Alerting a Market Maker to possible excessive 
quoting usually leads the market maker to take steps to reduce the 
number of its quotes. BOX also has a policy of withdrawing approval of 
underlying securities with low trading volume, thereby eliminating the 
quotation traffic attendant to such listings.
    The Exchange believes that the rule, as written, is outdated and 
while the Exchange still has the ability to utilize the quote 
mitigation mechanism, it is not always necessary to do so. The Exchange 
believes this proposed change will better align Rule 7250 with current 
Exchange practices and provide greater efficacy and flexibility to the 
current quote mitigation strategies in place at the Exchange.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\11\ in general, and Section 
6(b)(5) of the Act,\12\ 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, the Exchange believes that the proposed amendment to 
IM-7150-1 to remove the language that limits the prohibition for any 
Initiating Participant to engage in a pattern of conduct where the 
Initiating Participant submits Primary Improvement Orders into the PIP 
process for the purpose of manipulating the PIP process to only cover 
Primary Improvement Orders of two (2) contracts or less will help 
protect investors and the public interest by allowing greater 
protection against manipulative behaviors. Although the Rule currently 
covers orders of two (2) contracts or less, FINRA currently surveils 
and reviews the submission of four (4) contracts or less for the 
Exchange. Even though IM-7150-1 as written, notates that a pattern of 
orders for two (2) contracts may indicate manipulation of the PIP 
Process, FINRA has identified the potential for manipulation for orders 
greater than two (2) contracts and now the Exchange seeks to expand the 
rule language accordingly. This proposed amendment to remove the two 
(2) contracts or less limitation from IM-7150-1 is designed to promote 
just and equitable principles of trade, remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general protect investors and the public interest, by 
aligning the Rule to current surveillance practices and allowing FINRA 
to prosecute and deter manipulative behavior in violation of this Rule 
relating to three (3) or four (4) contracts on behalf of the Exchange 
more effectively. The Exchange believes that the removal of the two (2) 
contracts or less language would improve the efficacy of FINRA's 
surveillance by helping FINRA and the Exchange prosecute and deter 
manipulative behavior in situations where the Initiating Participant 
submits Primary

[[Page 88431]]

Improvement Orders into the PIP process for three (3) or four (4) 
contracts, as well as one (1) or two (2) contracts, for the purpose of 
manipulating the PIP process. As such, the Exchange believes the 
proposed rule change is in the public interest, and therefore, 
consistent with the Act.
    The Exchange believes that amending BOX Rule 7250 to provide that 
the Exchange may utilize a mechanism so that newly-received quotations 
and other changes to the Exchange's best bid and offer are not 
disseminated for a period of up to, but not more than one second, will 
allow the Exchange to control the number of quotations that the 
Exchange disseminates through the use of the aforementioned mechanism 
but will enable the Exchange to rely on other methods within the 
overall BOX quote mitigation strategy, such as monitoring and 
delisting. The Exchange believes that the current rule, as written, is 
outdated and while the Exchange still has the ability to utilize the 
quote mitigation mechanism, it is not always necessary to do so. The 
Exchange believes this proposed change will better align the Rule with 
current Exchange practices, provide greater efficacy and flexibility to 
the current quote mitigation strategies in place at the Exchange, and 
make the Rule clearer for Participants. As such, the Exchange believes 
the proposed rule change is in the public interest, and therefore, 
consistent with the Act.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
believes that the proposed change will not impose a burden on 
intermarket or intramarket competition. While the Exchange does not 
believe that the proposed non-controversial change is a burden on 
competition, or is competitive in nature, the Exchange believes that 
proposed updates seek to modernize and improve the operation of the 
rules.
    The proposed amendment to IM-7150-1 is designed to help the 
Exchange and FINRA more effectively prosecute and deter manipulative 
behavior in violation of this Rule relating to three (3) or four (4) 
contracts. This rule change is being proposed to help deter 
manipulative behaviors on the Exchange and is not intended to address 
competitive issues. The proposed change to Rule 7250 is intended to 
modernize and help optimize the quotation mitigation practices on the 
Exchange and is not intended to address competitive issues. The 
proposed changes to IM-7150-1 and Rule 7250 will apply equally to all 
market participants.
    For the foregoing reasons, 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.

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

    Pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) \14\ thereunder, the Exchange has designated this proposal as 
one that effects a change that: (i) does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.\15\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ In addition, Rule 19b-4(f)(6) requires a self-regulatory 
organization to give the Commission written notice of its intent to 
file 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.
---------------------------------------------------------------------------

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act normally does not become operative for 30 days after the date of 
its 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 requested 
that the Commission waive the 30-day operative delay so that the 
proposal may become operative immediately upon filing. The proposed 
change raises no novel legal or regulatory issues. Therefore, the 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Accordingly, the Commission hereby waives the 30-day operative delay 
and designates the proposed rule change operative upon filing.\17\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-BOX-2023-30 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-2023-30. 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 (https://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

[[Page 88432]]

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. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-BOX-2023-30 and should be 
submitted on or before January 11, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12), (59).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-28042 Filed 12-20-23; 8:45 am]
BILLING CODE 8011-01-P


