81 FR 7879 - Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 7290 (Price Protection for Limit Orders) To Enhance the Protections Provided to Participants Executing Orders and Quotes on the Exchange

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 30 (February 16, 2016)

[Federal Register Volume 81, Number 30 (Tuesday, February 16, 2016)]
[Notices]
[Pages 7879-7882]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-02988]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77096; File No. SR-BOX-2016-05]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change To 
Amend Rule 7290 (Price Protection for Limit Orders) To Enhance the 
Protections Provided to Participants Executing Orders and Quotes on the 
Exchange

February 9, 2016.
    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 January 27, 2016, BOX Options 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 Rule 7290 (Price Protection for 
Limit Orders) to enhance the protections provided to Participants 
executing orders and quotes on the Exchange. 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 Web site at http://boxexchange.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

[[Page 7880]]

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 amend Rule 7290 to 
enhance the protections provided to Participants executing orders and 
quotes on the Exchange. Specifically, BOX is proposing to expand the 
current price protections to (i) cover quotes, (ii) allow Participants 
to provide their own parameters, and (iii) make these price protections 
mandatory.
Background
    Currently, the Exchange employs a filter on all incoming Limit 
Orders, including Limit Order modifications, pursuant to which the 
Trading Host \3\ will reject these orders if priced outside an 
acceptable price range based on price parameters set by BOX. 
Specifically, as the Exchange receives Limit Orders, the Trading Host 
compares the price of each order against the contra-side National Best 
Bid/Offer (``NBBO'') at the time of order entry to determine if the 
price is outside the acceptable price parameter.\4\ If the order is 
priced outside of the acceptable price parameter, it will be rejected.
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    \3\ The term ``Trading Host'' means the automated trading system 
used by BOX for the trading of options contracts. See Rule 
100(a)(66).
    \4\ The price parameter is set by the Exchange and is percentage 
of the NBBO on the opposite side of the incoming order.
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    Unless determined otherwise by the Exchange and announced to the 
Participants via Informational Circular, the price parameters are 
currently set at the price 100% greater than the National Best Offer 
(``NBO'') (for incoming buy orders), and 100% less than the National 
Best Bid (``NBB'') (for incoming sell orders), when the NBB/NBO is 
priced at or below $0.25; and the price parameters are set at the price 
50% greater than the NBO (for incoming orders), and 50% less than the 
NBB (for incoming sell orders), when the NBB/NBO is priced above $0.25. 
The Exchange rejects incoming buy (sell) orders that are priced above 
(below) these parameters. For example, if the NBO is $1.20, a buy order 
priced above $1.80 ($1.20 * 1.50) will be rejected. Likewise, if the 
NBB is $1.10, a sell order priced below $0.55 ($1.10 * 0.50) will be 
rejected. If the NBO is $0.10, a buy order priced above $0.20 ($0.10 * 
2.00) will be rejected. However, for non-Complex Orders, if the NBB is 
less than or equal to $0.25, the default limits set above will result 
in all incoming sell orders being accepted regardless of their limit.
    The price protection feature is operational each trading day after 
the opening until the close of trading, and only applies to Limit 
Orders. This feature is available to all Participants; however, it is 
disabled until the Participant enables it by contacting the Exchange.
Proposal
    BOX is now proposing to amend this price protection to expand and 
enhance the protections to Participants submitting orders and quotes to 
the Exchange. Specifically, the Exchange is proposing to: (i) Expand 
this price protection to cover quotes, (ii) allow Participants to 
provide their own parameters, and (iii) make these price protections 
mandatory. These proposed changes are designed to help Participants 
further control risk by checking prices against certain parameters.
Quotes
    As previously mentioned, the current price protection is only 
available for Limit Orders. BOX is now proposing to expand this price 
protection to cover incoming quotes, including quote updates. Incoming 
quotes will be processed in the same way that Limit Orders are 
currently processed by this mechanism. Specifically, under the proposed 
rule, if an incoming quote is priced outside the price parameter it 
will be rejected by the Exchange.\5\ Under the proposed change, when 
the Exchange receives quotes, the Trading Host will compare the price 
of each quote against the contra-side NBBO at the time of quote entry 
to determine if the price is outside the acceptable price parameter. 
Therefore, the proposed price protection will now cover all incoming 
Limit Orders and quotes. The proposed price protection mechanism for 
quotes will be applied in the same manner as the price protections 
currently applicable to Limit Orders; all quotes will be evaluated 
against the contra-side NBBO to determine whether it is within an 
acceptable price range before it is accepted by the Trading Host.
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    \5\ See Proposed Rule 7290(a).
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    The Exchange believes that expanding this price protection 
mechanism to quotes will greatly enhance the risk protections available 
on the Exchange. The proposed enhancement will allow the Trading Host 
to reject quotes that likely resulted from human or operation error.
Parameters
    The Exchange currently provides the values for the price parameters 
and Participants are not able to override them with their own more 
restrictive values. The Exchange is now expanding this price protection 
to allow Participants to provide their own parameters. Specifically, 
Participants will be allowed to provide values, on an underlying 
security basis, for: (i) The cut-off price,\6\ (ii) the price 
parameters, and (iii) minimum price variation, as described in further 
detail below. Participants will be able to update the values on a daily 
basis with such changes taking effect on the following trading day. The 
Exchange will still provide Exchange default values on an underlying 
security basis and will use the most restrictive parameters between the 
Participant-provided values and the Exchange defaults. Unless 
determined otherwise by the Exchange and announced to Participants via 
Informational Circular, the Exchange defaults shall be: 100% for the 
contra-side NBB or NBO priced at or below $0.25; and 50% for the 
contra-side NBB or NBO priced above $0.25. Any changes to the Exchange 
default values would take effect no earlier than the following trading 
day. For example, assume for a particular option series the NBO is 
$0.80 and the NBB is $0.70. Also assume that the cut-off price provided 
by the Participant is $0.50 and the Exchange default is $0.25. The 
Participant provides a price parameter of 20% for options above the 
cut-off price and the Exchange default for above the cut-off price is 
50%. The Exchange will use the 20% price parameter when validating 
incoming orders and quotes from the Participant because it is the most 
restrictive between the Exchange default and Participant-provided 
parameter. Therefore, the Exchange will reject any order or quote to 
buy at a price above $0.96 (0.80 * 1.20) or any order or quote to sell 
at a price below $0.56 (0.70 * .80).
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    \6\ The ``cut-off price'' is the price level where options 
priced above and below it will have different price parameters. It 
is designed to allow Participants to have additional control by 
being able to apply different price parameters depending how high or 
low the price of the options series is.
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    A minimum price variation will apply when using the price 
parameters from either the Participant or Exchange to

[[Page 7881]]

calculate the acceptable price range.\7\ Specifically, the minimum 
price variation is the minimum amount that can be added or subtracted 
from the contra-side NBB or NBO. The Exchange will apply the smallest 
minimum price variation between the Exchange default and the value 
provided by the Participant. For example, assume in the example above 
that instead of providing a price parameter of 20% the Participant 
provides a price parameter of 5%. Also, assume that the Participant 
provides a minimum price variation of $0.05 and the Exchange default is 
$0.10. The 5% price parameter would provide an acceptable price range 
of $0.84 to $0.665. However, the Exchange would use the minimum price 
variation provided by the Participant so the acceptable price range for 
incoming Limit Orders and quotes would be $0.85 to $0.65.
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    \7\ See Proposed IM-7290-1 to Rule 7290.
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Mandatory
    The current price protections for Limit Orders are not mandatory; a 
Participant may elect to use them but they are not required. BOX is now 
proposing that use of this price protection mechanism will be mandatory 
for all Limit Orders \8\ and quotes on the Exchange. Additionally, as 
mentioned above, the Exchange will provide default values to ensure 
that all orders and quotes receive a baseline of protection. By 
providing Exchange default values and making this price protection 
mandatory, BOX is attempting to ensure that orders and quotes will have 
a minimum level of protection from executing at potentially erroneous 
prices even if a Participant does not provide its own price parameters 
or selects price parameters that are not restrictive enough.
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    \8\ The proposed price protections will cover Intermarket Sweep 
Orders (``ISO''), as defined in Rule 15000(h).
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Additional Changes
    The rule change also clarifies what happens when the NBBO on the 
opposite side is not available and how the acceptable price range is 
calculated for complex orders. First, proposed Rule 7290(b)(3) will 
clarify that for Limit Complex Orders the cNBBO \9\ will be used when 
calculating the acceptable price range. The Exchange will apply the 
price parameters to the cNBBO when determining the acceptable price 
range for an incoming Limit Complex Order. Next, the Exchange is 
proposing to clarify how the acceptable price range will be calculated 
when the NBBO on the opposite side of an incoming order or quote is not 
available. In this situation, the Exchange will use the NBBO on the 
same side of the incoming order or quote when calculating the 
acceptable price range.\10\ If there is also no NBBO on the same side 
of the order or quote, no price protection will apply to such incoming 
order or quote.\11\
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    \9\ 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).
    \10\ See Propose Rule 7290(b)(2).
    \11\ For Complex Orders, there is always a cNBBO calculated even 
if no NBBO exists on the individual options components of such 
Complex Order.
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    The Exchange notes that these proposed enhancements to the 
Exchange's price protections are intended to protect market 
participants from executions at prices that are significantly outside 
the Exchange's displayed market. BOX believes that Participants that 
submit orders and quotes on the Exchange generally intend to receive 
executions at or near the Exchange's displayed market. An order or 
quote that is priced significantly outside the Exchange's displayed 
market could be indicative of an error (e.g., mistake in intended 
price, series, put/call) and could result in executions occurring at 
prices that have little or no relation to the theoretical price of the 
option. Accordingly, the Exchange believes these enhancements will help 
prevent erroneous orders and quotes, dramatic price swings and, 
potentially, executions qualifying as obvious errors \12\ on the 
Exchange. The Exchange also believes that orders that are significantly 
priced outside the Exchange's displayed market have the potential to 
create market volatility by trading at different price levels until 
executed in their entirety. As such, BOX believes these enhancements to 
the price protections may also help limit unnecessary volatility.
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    \12\ See Rule 7170.
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    The Exchange also proposes to fix a typographical error with the 
original rule text of Rule 7290. Specifically, BOX is proposing to 
capitalize Limit Orders in the text of Rule 7290 to make it consistent 
with the rest of the Exchange's Rulebook.
    The Exchange will provide Participants with notice, via Information 
Circular, about the implementation date of these proposed enhancements 
to the price protections.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\13\ in general, and Section 
6(b)(5) of the Act,\14\ in particular, in that it 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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    In particular, BOX believes that expanding the price protection to 
incoming quotes assures that executions will not occur at erroneous 
prices, thereby promoting fair and orderly markets. The Exchange 
believes that this proposed change is reasonable as it will protect 
Participants by mitigating the risk of having orders executed at 
erroneous prices.
    BOX believes the propose rule change furthers the objectives of 
Section 6(b)(5) of the Act in that it permits the Exchange to address 
the entry of orders and quotes that are priced significantly away from 
the market that are likely to have resulted from human or operational 
error.\15\ By being able to quickly and efficiently reject orders that 
likely resulted from such error, the proposed use of the price 
protections would promote a fair and orderly market. Additionally, by 
providing Participants with the flexibility to determine the price 
parameters while still providing Exchange defaults, the Exchange is 
ensuring that all Limit Orders and quotes will have at least a minimum 
level of protection while, at the same time, allowing Participants to 
apply more restrictive controls when needed.
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    \15\ The Exchange believes that these principles are equally 
applicable to ISOs. In an effort to protect market participants from 
the consequences of such order entry errors and prevent market 
disruptions that may be caused by erroneously placed orders, the 
Exchange has determined to apply price protections to ISOs on the 
Exchange.
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    The proposed price protections are similar to the protections 
available at other exchanges.\16\ Accordingly, the Exchange believes 
that this proposal is designed to promote just and equitable principles 
of trade, remove impediments to, and perfect the mechanism of, a free 
and open market.
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    \16\ See NYSE Arca Rules 6.60 and 6.61, and NYSE MKT Rules 967NY 
and 967.1NY. The price protections at NYSE Arca and NYSE MKT are 
different in that the exchanges provide the price parameters and 
does not allow for a Participant to provide their own values.
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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. BOX believes

[[Page 7882]]

the proposal will provide market participants with additional 
protection against erroneous executions. The Exchange does not believe 
the proposed rule change imposes any burden on intramarket competition 
as the feature is available to all Limit Orders and quotes of all 
Participants. Nor will the proposal impose a burden on competition 
among the options exchanges, because of the vigorous competition for 
order flow among the options exchanges. The Exchange competes with many 
other options exchanges. In this highly competitive market, market 
participants can easily and readily direct order flow to competing 
venues.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \17\ and Rule 19b-4(f)(6) thereunder.\18\ 
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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 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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    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b4(f)(6)(iii),\20\ the Commission 
may 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 Exchange 
may implement the proposed rule change without undue delay. In support 
of its request, the Exchange states the proposed rule change will 
provide additional protections against executions that are priced 
significantly away from the market as a result of human or operational 
error. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest. 
Therefore, the Commission hereby waives the operative delay and 
designates the proposed rule change operative upon filing.\21\
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    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ For purposes only of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 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 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-2016-05 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-2016-05. 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 Web site (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 Web site 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; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2016-05 and should be 
submitted on or before March 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-02988 Filed 2-12-16; 8:45 am]
BILLING CODE 8011-01-P