81 FR 95713 - Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rule 3220, Disruptive Quoting and Trading Activity Prohibited and Rule 12160, Expedited Suspension Proceeding
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 249 (December 28, 2016)
Federal Register Volume 81, Issue 249 (December 28, 2016)
| Page Range | 95713-95719 | |
| FR Document | 2016-31307 |
[Federal Register Volume 81, Number 249 (Wednesday, December 28, 2016)] [Notices] [Pages 95713-95719] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-31307] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79646; File No. SR-BOX-2016-59] Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt Rule 3220, Disruptive Quoting and Trading Activity Prohibited and Rule 12160, Expedited Suspension Proceeding December 21, 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 December 14, 2016, BOX Options Exchange LLC (``BOX'' or 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 adopt (i) BOX Rule 3220 (Disruptive Quoting and Trading Activity Prohibited) to clearly prohibit disruptive quoting and trading activity on the Exchange and (ii) BOX Rule 12160 (Expedited Suspension Proceeding) to permit the Exchange to take prompt action to suspend Option Participants or their clients that violate Rule 3220. 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 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 the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adopt BOX Rule 3220 (Disruptive Quoting and Trading Activity Prohibited) to clearly prohibit disruptive quoting and trading activity on the Exchange and to adopt a new Exchange Rule 12160 (Expedited Suspension Proceeding), to permit the Exchange to take prompt action to suspend Options Participants \3\ and their clients that violate such rule. --------------------------------------------------------------------------- \3\ The term ``Options Participant'' or ``Participant'' means a firm, or organization that is registered with the Exchange pursuant to the Rule 2000 Series for purposes of participating in options trading on BOX as an ``Order Flow Provider'' or ``Market Maker''. --------------------------------------------------------------------------- Background As a national securities exchange registered pursuant to Section 6 of the Act, the Exchange is required to be organized and to have the capacity to enforce compliance by its members and persons associated with its members, with the Act, the rules and regulations [[Page 95714]] thereunder, and the Exchange's Rules. Further, the Exchange's Rules are required to be ``designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest.'' \4\ In fulfilling these requirements, the Exchange has developed a comprehensive regulatory program that includes automated surveillance of trading activity that is both operated directly by Exchange staff and by staff of the Financial Industry Regulatory Authority (``FINRA'') pursuant to a Regulatory Services Agreement (``RSA''). When disruptive and potentially manipulative or improper quoting and trading activity is identified, the Exchange or FINRA (acting as an agent of the Exchange) conducts an investigation into the activity, requesting additional information from the Options Participant or Options Participants involved. To the extent violations of the Act, the rules and regulations thereunder, or Exchange Rules have been identified and confirmed, the Exchange or FINRA as its agent will commence the enforcement process, which might result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business activities, a monetary fine, or even a temporary or permanent ban from the securities industry. --------------------------------------------------------------------------- \4\ 15 U.S.C. 78f(b)(1). --------------------------------------------------------------------------- The process described above, from the identification of disruptive and potentially manipulative or improper quoting and trading activity to a final resolution of the matter, can often take several years. The Exchange believes that this time period is generally necessary and appropriate to afford the subject Options Participant adequate due process, particularly in complex cases. However, as described below, the Exchange believes that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange. In recent years, several cases have been brought and resolved by the Exchange and other SROs that involved allegations of wide-spread market manipulation, much of which was ultimately being conducted by foreign persons and entities using relatively rudimentary technology to access the markets and over which the Exchange and other SROs had no direct jurisdiction. In each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering \5\ or spoofing.\6\ The Exchange and other SROs were able to identify the disruptive quoting and trading activity in real-time or near real-time; nonetheless, in accordance with Exchange Rules and the Act, the Members responsible for such conduct or responsible for their customers' conduct were allowed to continue the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of the subsequent lengthy investigation and enforcement process. The Exchange believes that it should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange if an Options Participant is engaging in or facilitating disruptive quoting and trading activity and the Options Participant has received sufficient notice with an opportunity to respond, but such activity has not ceased. --------------------------------------------------------------------------- \5\ ``Layering'' is a form of market manipulation in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels in order to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are cancelled. \6\ ``Spoofing'' is a form of market manipulation that involves the market manipulator placing non-bona fide orders that are intended to trigger some type of market movement and/or response from other market participants, from which the market manipulator might benefit by trading bona fide orders. --------------------------------------------------------------------------- The following two examples are instructive on the Exchange's rationale for the proposed rule change. In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, Inc.) (the ``Firm'') and its CEO were barred from the industry for, among other things, supervisory violations related to a failure by the Firm to detect and prevent disruptive and allegedly manipulative trading activities, including layering, short sale violations, and anti-money laundering violations.\7\ The Firm's sole business was to provide trade execution services via a proprietary day trading platform and order management system to day traders located in foreign jurisdictions. Thus, the disruptive and allegedly manipulative trading activity introduced by the Firm to U.S. markets originated directly or indirectly from foreign clients of the Firm. The pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008. Although the Firm and its principals were on notice of the disruptive and allegedly manipulative quoting and trading activity that was occurring, the Firm took little to no action to attempt to supervise or prevent such quoting and trading activity until at least 2009. Even when it put some controls in place, they were deficient and the pattern of disruptive and allegedly manipulative trading activity continued to occur. As noted above, the final resolution of the enforcement action to bar the Firm and its CEO from the industry was not concluded until 2012, four years after the disruptive and allegedly manipulative trading activity was first identified. --------------------------------------------------------------------------- \7\ See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. --------------------------------------------------------------------------- In September of 2012, Hold Brothers On-Line Investment Services, Inc. (the ``Firm'') settled a regulatory action in connection with the Firm's provision of a trading platform, trade software and trade execution, support and clearing services for day traders.\8\ Many traders using the Firm's services were located in foreign jurisdictions. The Firm ultimately settled the action with FINRA and several exchanges, including the Exchange, for a total monetary fine of $3.4 million. In a separate action, the Firm settled with the Commission for a monetary fine of $2.5 million.\9\ Among the alleged violations in the case were disruptive and allegedly manipulative quoting and trading activity, including spoofing, layering, wash trading, and pre-arranged trading. Through its conduct and insufficient procedures and controls, the Firm also allegedly committed anti-money laundering violations by failing to detect and report manipulative and suspicious trading activity. The Firm was alleged to have not only provided foreign traders with access to the U.S. markets to engage in such activities, but that [sic] its principals also owned and funded foreign subsidiaries that engaged in the disruptive and allegedly manipulative quoting and trading activity. Although the pattern of disruptive and allegedly manipulative quoting and trading activity was identified in 2009, as noted above, the enforcement action was not concluded until 2012. Thus, although disruptive and allegedly manipulative [[Page 95715]] quoting and trading was promptly detected, it continued for several years. --------------------------------------------------------------------------- \8\ See Hold Brothers On-Line Investment Services, LLC, FINRA Letter of Acceptance, Waiver and Consent No. 2010023771001, September 25, 2012. \9\ In the Matter of Hold Brothers On-Line Investment Services, LLC, Exchange Act Release No. 67924, September 25, 2012. --------------------------------------------------------------------------- The Exchange also notes the criminal proceedings against Navinder Singh Sarao. Mr. Sarao's for [sic] manipulative trading activity, which included forms of layering and spoofing in the futures markets, which has been linked as a contributing factor to the ``Flash Crash'' of 2010, and yet continued through 2015. The Exchange believes that the activities described in the cases above provide justification for the proposed rule change, which is described below. In addition, while the examples provided are related to the equities market, the Exchange believes that this type of conduct should be prohibited for options as well. The Exchange believes that these patterns of disruptive and allegedly manipulative quoting and trading activity need to be addressed and the product should not limit the action taken by the Exchange. Rule 12160--Expedited Suspension Proceeding The Exchange proposes to adopt new Rule 12160, titled ``Expedited Suspension Proceeding,'' to set forth procedures for issuing suspension orders, immediately prohibiting an Options Participant from conducting continued disruptive quoting and trading activity on the Exchange. Importantly, these procedures would also provide the Exchange the authority to order an Options Participant to cease and desist from providing access to the Exchange to a client of the Options Participant that is conducting disruptive quoting and trading activity in violation of proposed Rule 3220. Proposed Rule 3220 would be titled, ``Disruptive Quoting and Trading Activity Prohibited.'' Under proposed paragraph (a) of Rule 12160, with the prior written authorization of the Chief Regulatory Officer (``CRO'') or such other senior officers as the CRO may designate, the Office of General Counsel or Regulatory Department of the Exchange (such departments generally referred to as the ``Exchange'' for purposes of proposed Rule 12160) may initiate an expedited suspension proceeding with respect to alleged violations of Rule 3220, which is proposed as part of this filing and described in detail below. Proposed paragraph (a) would also set forth the requirements for notice and service of such notice pursuant to the Rule, including the required method of service and the content of notice. Proposed paragraph (b) of Rule 12160 would govern the appointment of a Hearing Panel as well as potential disqualification or recusal of Panel Members. The proposed provision is consistent with existing Exchange Rule 12060(a). The proposed rule provides for a Panel Member to be recused in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned in accordance with Rules [sic]12160(b)(2). In addition to recusal initiated by such a Panel Member, a party to the proceeding will be permitted to file a motion to disqualify a Panel Member. However, due to the compressed schedule pursuant to which the process would operate under Rule 12160, the proposed rule would require such motion to be filed no later than 5 days after the announcement of the Hearing Panel and the Exchange's brief in opposition to such motion would be required to be filed no later than 5 days after service thereof. Pursuant to existing Rule 12060(a)(3), any time a person serving on a Panel has a conflict of interest or bias or circumstances otherwise exist where his fairness might be reasonably questioned, the person must withdraw from the Panel. The applicable Panel Member shall remove himself or herself and the Panel Chairman may request the Chairman of the Hearing Committee to select a replacement such that the Hearing Panel still meets the compositional requirements described in Rule 12060(a). Under paragraph (c) of the proposed Rule, the hearing would be held not later than 15 days after service of the notice initiating the suspension proceeding, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. In the event of a recusal or disqualification of a Panel Member, the hearing shall be held not later than five days after a replacement Panel Member is appointed. Proposed paragraph (c) would also govern how the hearing is conducted, including the authority of Panel Members, witnesses, additional information that may be required by the Hearing Panel, the requirement that a transcript of the proceeding be created and details related to such transcript, and details regarding the creation and maintenance of the record of the proceeding. Proposed paragraph (c) would also state that if a Respondent fails to appear at a hearing for which it has notice, the allegations in the notice and accompanying declaration may be deemed admitted, and the Hearing Panel may issue a suspension order without further proceedings. Finally, as proposed, if the Exchange fails to appear at a hearing for which it has notice, the Hearing Panel may order that the suspension proceeding be dismissed. Under paragraph (d) of the proposed Rule, the Hearing Panel would be required to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision not later than 10 days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. The Rule would state that a suspension order shall be imposed if the Hearing Panel finds by a preponderance of the evidence that the alleged violation specified in the notice has occurred and that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Proposed paragraph (d) would also describe the content, scope and form of a suspension order. As proposed, a suspension order shall be limited to ordering a Respondent to cease and desist from violating proposed Rule 3220 and/or to ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of Rule 3220. Under the proposed rule, a suspension order shall also set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order. The order shall describe in reasonable detail the act or acts the Respondent is to take or refrain from taking, and suspend such Respondent unless and until such action is taken or refrained from. Finally, the order shall include the date and hour of its issuance. As proposed, a suspension order would remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to proposed paragraph (e), as described below. Finally, paragraph (d) would require service of the Hearing Panel's decision and any suspension order consistent with other portions of the proposed rule related to service. Proposed paragraph (e) of Rule 12160 would state that at any time after the Hearing Panel served the Respondent with a suspension order, a Party could apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. If any part of a suspension order is modified, set aside, limited, or revoked, proposed paragraph (e) of Rule 12160 provides the Hearing Panel discretion to leave the cease and desist part of the order in place. For example, if a suspension order suspends Respondent unless and until Respondent ceases and desists [[Page 95716]] providing access to the Exchange to a client of Respondent, and after the order is entered the Respondent complies, the Hearing Panel is permitted to modify the order to lift the suspension portion of the order while keeping in place the cease and desist portion of the order. With its broad modification powers, the Hearing Panel also maintains the discretion to impose conditions upon the removal of a suspension-- for example, the Hearing Panel could modify an order to lift the suspension portion of the order in the event a Respondent complies with the cease and desist portion of the order but additionally order that the suspension will be re-imposed if Respondent violates the cease and desist provisions modified [sic] order in the future. The Hearing Panel generally would be required to respond to the request in writing within 10 days after receipt of the request. An application to modify, set aside, limit or revoke a suspension order would not stay the effectiveness of the suspension order. Finally, proposed paragraph (f) would provide that sanctions issued under the proposed Rule 12160 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, and that the right to have any action under the Rule reviewed by the Commission would be governed by Section 19 of the Act. The filing of an application for review would not stay the effectiveness of a suspension order unless the Commission otherwise ordered. Rule 3220--Disruptive Quoting and Trading Activity Prohibited The Exchange currently has authority to prohibit and take action against manipulative trading activity, including disruptive quoting and trading activity, pursuant to its general market manipulation rules, including Rules 3000, Just and Equitable Principles of Trade, and 3050, Manipulation. The Exchange proposes to adopt new Rule 3220, which would more specifically define and prohibit disruptive quoting and trading activity on the Exchange. As noted above, the Exchange proposes to apply the proposed suspension rules to proposed Rule 3220. Proposed Rule 3220 would prohibit Option Participants from engaging in or facilitating disruptive quoting and trading activity on the Exchange, as described in proposed Rule 3220(a)(1) and (2), including acting in concert with other persons to effect such activity. The Exchange believes that it is necessary to extend the prohibition to situations when persons are acting in concert to avoid a potential loophole where disruptive quoting and trading activity is simply split between several brokers or customers. The Exchange believes, that with respect to persons acting in concert perpetrating an abusive scheme, it is important that the Exchange have authority to act against the parties perpetrating the abusive scheme, whether it is one person or multiple persons. To provide proper context for the situations in which the Exchange proposes to utilize its proposed authority, the Exchange believes it is necessary to describe the types of disruptive quoting and trading activity that would cause the Exchange to use its authority. Accordingly, the Exchange proposes to adopt Rule 3220(a)(1) and (2) providing additional details regarding disruptive quoting and trading activity. Proposed Rule 3220(a)(1)(i) describes disruptive quoting and trading activity containing many of the elements indicative of layering. It would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: (i) A party enters multiple limit orders on one side of the market at various price levels (the ``Displayed Orders''); and (ii) following the entry of the Displayed Orders, the level of supply and demand for the security changes; and (iii) the party enters one or more orders on the opposite side of the market of the Displayed Orders (the ``Contra-Side Orders'') that are subsequently executed; and (iv) following the execution of the Contra-Side Orders, the party cancels the Displayed Orders. Proposed Rule 3220(a)(1)(ii) describes disruptive quoting and trading activity containing many of the elements indicative of spoofing and would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: (i) a party narrows the spread for a security by placing an order inside the national best bid or offer; and (ii) the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the order described in proposed 3220(a)(1)(ii)(A) that narrowed the spread. The Exchange believes that the proposed descriptions of disruptive quoting and trading activity articulated in the rule are consistent with the activities that have been identified and described in the client access cases described above. The Exchange further believes that the proposed descriptions will provide Option Participants with clear descriptions of disruptive quoting and trading activity that will help them to avoid engaging in such activities or allowing their clients to engage in such activities. The Exchange proposes to make clear in proposed Rule 3220(a)(2), unless otherwise indicated, the descriptions of disruptive quoting and trading activity do not require the facts to occur in a specific order in order for the rule to apply. For instance, with respect to the pattern defined in proposed Rule 3220(a)(1)(i) it is of no consequence whether a party first enters Displayed Orders and then Contra-side Orders or vice-versa. However, as proposed, it is required for supply and demand to change following the entry of the Displayed Orders. The Exchange also proposes to make clear that disruptive quoting and trading activity includes a pattern or practice in which some portion of the disruptive quoting and trading activity is conducted on the Exchange and the other portions of the disruptive quoting and trading activity are conducted on one or more other exchanges. The Exchange believes that this authority is necessary to address market participants who would otherwise seek to avoid the prohibitions of the proposed Rule by spreading their activity amongst various execution venues. In sum, proposed Rule 3220 coupled with proposed Rule 12160 would provide the Exchange with authority to promptly act to prevent disruptive quoting and trading activity from continuing on the Exchange. Below is an example of how the proposed rule would operate. Assume that through its surveillance program, Exchange staff identifies a pattern of potentially disruptive quoting and trading activity. After an initial investigation the Exchange would then contact the Option Participant responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, including the source of the activity. If the Exchange were to continue to see the same pattern from the same Option Participant and the source of the activity is the same or has been previously identified as a frequent source of disruptive quoting and trading activity then the Exchange could initiate an expedited suspension proceeding by serving notice on the Option Participant that would include details regarding the alleged violations as well as the proposed sanction. In such a case the proposed sanction would likely be to order the Option Participant to cease and desist providing access to the Exchange to the client that is responsible for the disruptive quoting and trading activity and to suspend such Options Participant unless and until such action is taken. [[Page 95717]] The Options Participant would have the opportunity to be heard in front of a Hearing Panel at a hearing to be conducted within 15 days of the notice. If the Hearing Panel determined that the violation alleged in the notice did not occur or that the conduct or its continuation would not have the potential to result in significant market disruption or other significant harm to investors, then the Hearing Panel would dismiss the suspension order proceeding. If the Hearing Panel determined that the violation alleged in the notice did occur and that the conduct or its continuation is likely to result in significant market disruption or other significant harm to investors, then the Hearing Panel would issue the order including the proposed sanction, ordering the Options Participant to cease providing access to the client at issue and suspending such Options Participant unless and until such action is taken. If such Option Participant wished for the suspension to be lifted because the client ultimately responsible for the activity no longer would be provided access to the Exchange, then such Option Participant could apply to the Hearing Panel to have the order modified, set aside, limited or revoked. The Exchange notes that the issuance of a suspension order would not alter the Exchange's ability to further investigate the matter and/or later sanction the Options Participant pursuant to the Exchange's standard disciplinary process for supervisory violations or other violations of Exchange rules or the Act. The Exchange reiterates that it already has broad authority to take action against an Options Participant in the event that such Options Participant is engaging in or facilitating disruptive or manipulative trading activity on the Exchange. For the reasons described above, and in light of recent cases like the client access cases described above, as well as other cases currently under investigation, the Exchange believes that it is equally important for the Exchange to have the authority to promptly initiate expedited suspension proceedings against any Options Participant who has demonstrated a clear pattern or practice of disruptive quoting and trading activity, as described above, and to take action including ordering such Options Participant to terminate access to the Exchange to one or more of such Options Participant's clients if such clients are responsible for the activity. The Exchange recognizes that its proposed authority to issue a suspension order is a powerful measure that should be used very cautiously. Consequently, the proposed rules have been designed to ensure that the proceedings are used to address only the most clear and serious types of disruptive quoting and trading activity and that the interests of Respondents are protected. For example, to ensure that proceedings are used appropriately and that the decision to initiate a proceeding is made only at the highest staff levels, the proposed rules require the CRO or another senior officer of the Exchange to issue written authorization before the Exchange can institute an expedited suspension proceeding. In addition, the rule by its terms is limited to violations of Rules [sic] 3220, when necessary to protect investors, other Options Participants and the Exchange. The Exchange will initiate disciplinary action for violations of Rule 3220, pursuant to Rule 12160. Further, the Exchange believes that the proposed expedited suspension provisions described above that provide the opportunity to respond as well as a Hearing Panel determination prior to taking action will ensure that the Exchange would not utilize its authority in the absence of a clear pattern or practice of disruptive quoting and trading activity. 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''),\10\ in general, and Section 6(b)(5) of the Act,\11\ 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. Pursuant to the proposal, the Exchange will have a mechanism to promptly initiate expedited suspension proceedings in the event the Exchange believes that it has sufficient proof that a violation of Rule 3220 has occurred and is ongoing. --------------------------------------------------------------------------- \10\ 15 U.S.C. 78f(b). \11\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Further, the Exchange believes that the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act,\12\ which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of the Commission and Exchange rules. The Exchange also believes that the proposal is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act because the proposal helps to strengthen the Exchange's ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where awaiting the conclusion of a full disciplinary proceeding is unsuitable in view of the potential harm to other Options Participants and their customers. Also, the Exchange notes that if this type of conduct is allowed to continue on the Exchange, the Exchange's reputation could be harmed because it may appear to the public that the Exchange is not acting to address the behavior. The expedited process would enable the Exchange to address the behavior with greater speed. --------------------------------------------------------------------------- \12\ 15 U.S.C. 78f(b)(1) and 78f(b)(6). --------------------------------------------------------------------------- As explained above, the Exchange notes that it has defined the prohibited disruptive quoting and trading activity by modifying the traditional definitions of layering and spoofing \13\ to eliminate an express intent element that would not be proven on an expedited basis and would instead require a thorough investigation into the activity. As noted throughout this filing, the Exchange believes it is necessary for the protection of investors to make such modifications in order to adopt an expedited process rather than allowing disruptive quoting and trading activity to occur for several years. --------------------------------------------------------------------------- \13\ See supra, notes 5 and 6. --------------------------------------------------------------------------- Through this proposal, the Exchange does not intend to modify the definitions of spoofing and layering that have generally been used by the Exchange and other regulators in connection with actions like those cited above. The Exchange believes that the pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008 in the equities markets.\14\ The Exchange believes that this proposal will provide the Exchange with the necessary means to enforce against such behavior in an expedited manner while providing Options Participants with the necessary due process. The Exchange believes that its proposal is consistent with the Act because it provides the Exchange with the ability to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect [[Page 95718]] investors and the public interest from such ongoing behavior. --------------------------------------------------------------------------- \14\ See Section 3 herein, the Purpose section, for examples of conduct referred to herein. --------------------------------------------------------------------------- Further, the Exchange believes that adopting a rule applicable to Options Participants is consistent with the Act because the Exchange believes that this type of behavior should be prohibited for all Options Participants. The type of product should not be the determining factor, rather the behavior which challenges the market structure is the primary concern for the Exchange. While this behavior may not be as prevalent on the options market today, the Exchange does not believe that the possibility of such behavior in the future would not have the same market impact and thereby warrant an expedited process. The Exchange further believes that the proposal is consistent with Section 6(b)(7) of the Act,\15\ which requires that the rules of an exchange ``provide a fair procedure for the disciplining of members and persons associated with members . . . and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.'' Finally, the Exchange also believes the proposal is consistent with Sections 6(d)(1) and 6(d)(2) of the Act,\16\ which require that the rules of an exchange with respect to a disciplinary proceeding or proceeding that would limit or prohibit access to or membership in the exchange require the exchange to: Provide adequate and specific notice of the charges brought against a member or person associated with a member, provide an opportunity to defend against such charges, keep a record, and provide details regarding the findings and applicable sanctions in the event a determination to impose a disciplinary sanction is made. The Exchange believes that each of these requirements is addressed by the notice and due process provisions included within Rule 12160. Importantly, as noted above, the Exchange will use the authority only in clear and egregious cases when necessary to protect investors, other Options Participants and the Exchange, and in such cases, the Respondent will be afforded due process in connection with the suspension proceedings. --------------------------------------------------------------------------- \15\ 15 U.S.C. 78f(b)(7). \16\ U.S.C. 78f(d)(1) and (d)(2). --------------------------------------------------------------------------- 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. To the contrary, the Exchange believes that each self-regulatory organization should be empowered to regulate trading occurring on its market consistent with the Act and without regard to competitive issues. The Exchange is requesting authority to take appropriate action if necessary for the protection of investors, other Options Participants and the Exchange. The Exchange also believes that it is important for all exchanges to be able to take similar action to enforce their rules against manipulative conduct thereby leaving no exchange prey to such conduct. The Exchange does not believe that the proposed rule change imposes an undue burden on competition, rather this process will provide the Exchange with the necessary means to enforce against violations of manipulative quoting and trading activity in an expedited manner, while providing Options Participants with the necessary due process. The Exchange's proposal would treat all Options Participants in a uniform manner with respect to the type of disciplinary action that would be taken for violations of manipulative quoting and trading activity. 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. --------------------------------------------------------------------------- \17\ 15 U.S.C. 78s(b)(3)(A)(iii). \18\ 17 CFR 240.19b-4(f)(6). --------------------------------------------------------------------------- At any time within 60 days of the filing of such 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 under Section 19(b)(2)(B) \19\ of the Act to determine whether the proposed rule change should be approved or disapproved. --------------------------------------------------------------------------- \19\ 15 U.S.C. 78s(b)(2)(B). --------------------------------------------------------------------------- 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 CommentsUse 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-2016-59 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-BOX-2016-59. 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 [[Page 95719]] information that you wish to make available publicly. All submissions should refer to File Number SR-BOX-2016-59, and should be submitted on or before January 18, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\20\ --------------------------------------------------------------------------- \20\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016-31307 Filed 12-27-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Notices 95713
competitive with other exchanges. For submission, all subsequent solicit comments on the proposed rule
the reasons described above, the amendments, all written statements change from interested persons.
Exchange believes that the proposed fee with respect to the proposed rule
I. Self-Regulatory Organization’s
changes reflect this competitive change that are filed with the
Statement of the Terms of Substance of
environment. Commission, and all written
the Proposed Rule Change
communications relating to the
C. Self-Regulatory Organization’s The Exchange proposes to adopt (i)
proposed rule change between the
Statement on Comments on the BOX Rule 3220 (Disruptive Quoting and
Commission and any person, other than
Proposed Rule Change Received From Trading Activity Prohibited) to clearly
those that may be withheld from the
Members, Participants, or Others prohibit disruptive quoting and trading
public in accordance with the
No written comments were either provisions of 5 U.S.C. 552, will be activity on the Exchange and (ii) BOX
solicited or received. available for Web site viewing and Rule 12160 (Expedited Suspension
III. Date of Effectiveness of the printing in the Commission’s Public Proceeding) to permit the Exchange to
Proposed Rule Change and Timing for Reference Room, 100 F Street NE., take prompt action to suspend Option
Commission Action Washington, DC 20549, on official Participants or their clients that violate
business days between the hours of Rule 3220. The text of the proposed rule
The foregoing rule change has become 10:00 a.m. and 3:00 p.m. Copies of the change is available from the principal
effective pursuant to Section filing also will be available for office of the Exchange, at the
19(b)(3)(A)(ii) of the Act,22 and Rule inspection and copying at the principal Commission’s Public Reference Room
19b–4(f)(2) 23 thereunder. At any time office of the Exchange. All comments and also on the Exchange’s Internet Web
within 60 days of the filing of the received will be posted without change; site at http://boxexchange.com.
proposed rule change, the Commission the Commission does not edit personal
summarily may temporarily suspend II. Self-Regulatory Organization’s
identifying information from Statement of the Purpose of, and
such rule change if it appears to the submissions. You should submit only
Commission that such action is: (i) Statutory Basis for, the Proposed Rule
information that you wish to make Change
Necessary or appropriate in the public available publicly. All submissions
interest; (ii) for the protection of should refer to File Number SR– In its filing with the Commission, the
investors; or (iii) otherwise in ISEGemini–2016–22 and should be self-regulatory organization included
furtherance of the purposes of the Act. submitted on or before January 18, 2017. statements concerning the purpose of,
If the Commission takes such action, the and basis for, the proposed rule change
Commission shall institute proceedings For the Commission, by the Division of
Trading and Markets, pursuant to delegated
and discussed any comments it received
to determine whether the proposed rule on the proposed rule change. The text
authority.24
should be approved or disapproved. of these statements may be examined at
Eduardo A. Aleman,
IV. Solicitation of Comments the places specified in Item IV below.
Assistant Secretary.
The self-regulatory organization has
Interested persons are invited to [FR Doc. 2016–31305 Filed 12–27–16; 8:45 am]
prepared summaries, set forth in
submit written data, views, and BILLING CODE 8011–01–P Sections A, B, and C below, of the most
arguments concerning the foregoing, significant aspects of such statements.
including whether the proposed rule
change is consistent with the Act. SECURITIES AND EXCHANGE A. Self-Regulatory Organization’s
Comments may be submitted by any of COMMISSION Statement of the Purpose of, and the
the following methods: Statutory Basis for, the Proposed Rule
[Release No. 34–79646; File No. SR–BOX– Change
Electronic Comments 2016–59]
1. Purpose
• Use the Commission’s Internet Self-Regulatory Organizations; BOX
comment form (http://www.sec.gov/ Options Exchange LLC; Notice of The Exchange proposes to adopt BOX
rules/sro.shtml); or Filing and Immediate Effectiveness of Rule 3220 (Disruptive Quoting and
• Send an email to rule-comments@ Proposed Rule Change To Adopt Rule Trading Activity Prohibited) to clearly
sec.gov. Please include File Number SR– 3220, Disruptive Quoting and Trading prohibit disruptive quoting and trading
ISEGemini–2016–22 on the subject line. Activity Prohibited and Rule 12160, activity on the Exchange and to adopt a
Expedited Suspension Proceeding new Exchange Rule 12160 (Expedited
Paper Comments
Suspension Proceeding), to permit the
• Send paper comments in triplicate December 21, 2016. Exchange to take prompt action to
to Secretary, Securities and Exchange Pursuant to Section 19(b)(1) of the suspend Options Participants 3 and their
Commission, 100 F Street, NE., Securities Exchange Act of 1934 clients that violate such rule.
Washington, DC 20549–1090. (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 Background
All submissions should refer to File notice is hereby given that on December
Number SR–ISEGemini–2016–22. This 14, 2016, BOX Options Exchange LLC As a national securities exchange
file number should be included on the (‘‘BOX’’ or the ‘‘Exchange’’) filed with registered pursuant to Section 6 of the
subject line if email is used. To help the the Securities and Exchange Act, the Exchange is required to be
Commission process and review your Commission (‘‘Commission’’) the organized and to have the capacity to
enforce compliance by its members and
sradovich on DSK3GMQ082PROD with NOTICES
comments more efficiently, please use proposed rule change as described in
only one method. The Commission will Items I and II below, which Items have persons associated with its members,
post all comments on the Commission’s been prepared by the Exchange. The with the Act, the rules and regulations
Internet Web site (http://www.sec.gov/ Commission is publishing this notice to
3 The term ‘‘Options Participant’’ or ‘‘Participant’’
rules/sro.shtml). Copies of the means a firm, or organization that is registered with
24 17 CFR 200.30–3(a)(12). the Exchange pursuant to the Rule 2000 Series for
22 15 U.S.C. 78s(b)(3)(A)(ii). 1 15 U.S.C. 78s(b)(1). purposes of participating in options trading on BOX
23 17 CFR 240.19b–4(f)(2). 2 17 CFR 240.19b–4. as an ‘‘Order Flow Provider’’ or ‘‘Market Maker’’.
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thereunder, and the Exchange’s Rules. and other SROs had no direct activity was widespread across multiple
Further, the Exchange’s Rules are jurisdiction. In each case, the conduct exchanges, and the Exchange, FINRA,
required to be ‘‘designed to prevent involved a pattern of disruptive quoting and other SROs identified clear patterns
fraudulent and manipulative acts and and trading activity indicative of of the behavior in 2007 and 2008.
practices, to promote just and equitable manipulative layering 5 or spoofing.6 Although the Firm and its principals
principles of trade . . . and, in general, The Exchange and other SROs were able were on notice of the disruptive and
to protect investors and the public to identify the disruptive quoting and allegedly manipulative quoting and
interest.’’ 4 In fulfilling these trading activity in real-time or near real- trading activity that was occurring, the
requirements, the Exchange has time; nonetheless, in accordance with Firm took little to no action to attempt
developed a comprehensive regulatory Exchange Rules and the Act, the to supervise or prevent such quoting
program that includes automated Members responsible for such conduct and trading activity until at least 2009.
surveillance of trading activity that is or responsible for their customers’ Even when it put some controls in
both operated directly by Exchange staff conduct were allowed to continue the place, they were deficient and the
and by staff of the Financial Industry disruptive quoting and trading activity pattern of disruptive and allegedly
Regulatory Authority (‘‘FINRA’’) on the Exchange and other exchanges manipulative trading activity continued
pursuant to a Regulatory Services during the entirety of the subsequent to occur. As noted above, the final
Agreement (‘‘RSA’’). When disruptive lengthy investigation and enforcement resolution of the enforcement action to
and potentially manipulative or process. The Exchange believes that it bar the Firm and its CEO from the
improper quoting and trading activity is should have the authority to initiate an industry was not concluded until 2012,
identified, the Exchange or FINRA expedited suspension proceeding in
four years after the disruptive and
(acting as an agent of the Exchange) order to stop the behavior from
allegedly manipulative trading activity
conducts an investigation into the continuing on the Exchange if an
was first identified.
activity, requesting additional Options Participant is engaging in or
information from the Options facilitating disruptive quoting and In September of 2012, Hold Brothers
Participant or Options Participants trading activity and the Options On-Line Investment Services, Inc. (the
involved. To the extent violations of the Participant has received sufficient ‘‘Firm’’) settled a regulatory action in
Act, the rules and regulations notice with an opportunity to respond, connection with the Firm’s provision of
thereunder, or Exchange Rules have but such activity has not ceased. a trading platform, trade software and
been identified and confirmed, the The following two examples are trade execution, support and clearing
Exchange or FINRA as its agent will instructive on the Exchange’s rationale services for day traders.8 Many traders
commence the enforcement process, for the proposed rule change. using the Firm’s services were located
which might result in, among other In July 2012, Biremis Corp. (formerly in foreign jurisdictions. The Firm
things, a censure, a requirement to take Swift Trade Securities USA, Inc.) (the ultimately settled the action with
certain remedial actions, one or more ‘‘Firm’’) and its CEO were barred from FINRA and several exchanges, including
restrictions on future business activities, the industry for, among other things, the Exchange, for a total monetary fine
a monetary fine, or even a temporary or supervisory violations related to a of $3.4 million. In a separate action, the
permanent ban from the securities failure by the Firm to detect and prevent Firm settled with the Commission for a
industry. disruptive and allegedly manipulative monetary fine of $2.5 million.9 Among
The process described above, from the trading activities, including layering, the alleged violations in the case were
identification of disruptive and short sale violations, and anti-money disruptive and allegedly manipulative
potentially manipulative or improper laundering violations.7 The Firm’s sole quoting and trading activity, including
quoting and trading activity to a final business was to provide trade execution spoofing, layering, wash trading, and
resolution of the matter, can often take services via a proprietary day trading pre-arranged trading. Through its
several years. The Exchange believes platform and order management system conduct and insufficient procedures and
that this time period is generally to day traders located in foreign controls, the Firm also allegedly
necessary and appropriate to afford the jurisdictions. Thus, the disruptive and committed anti-money laundering
subject Options Participant adequate allegedly manipulative trading activity violations by failing to detect and report
due process, particularly in complex introduced by the Firm to U.S. markets manipulative and suspicious trading
cases. However, as described below, the originated directly or indirectly from activity. The Firm was alleged to have
Exchange believes that there are certain foreign clients of the Firm. The pattern not only provided foreign traders with
obvious and uncomplicated cases of of disruptive and allegedly access to the U.S. markets to engage in
disruptive and manipulative behavior or manipulative quoting and trading such activities, but that [sic] its
cases where the potential harm to
principals also owned and funded
investors is so large that the Exchange 5 ‘‘Layering’’ is a form of market manipulation in
foreign subsidiaries that engaged in the
should have the authority to initiate an which multiple, non-bona fide limit orders are
entered on one side of the market at various price disruptive and allegedly manipulative
expedited suspension proceeding in
order to stop the behavior from levels in order to create the appearance of a change quoting and trading activity. Although
in the levels of supply and demand, thereby the pattern of disruptive and allegedly
continuing on the Exchange. artificially moving the price of the security. An
In recent years, several cases have order is then executed on the opposite side of the
manipulative quoting and trading
been brought and resolved by the market at the artificially created price, and the non- activity was identified in 2009, as noted
Exchange and other SROs that involved bona fide orders are cancelled. above, the enforcement action was not
6 ‘‘Spoofing’’ is a form of market manipulation
concluded until 2012. Thus, although
sradovich on DSK3GMQ082PROD with NOTICES
allegations of wide-spread market that involves the market manipulator placing non-
manipulation, much of which was disruptive and allegedly manipulative
bona fide orders that are intended to trigger some
ultimately being conducted by foreign type of market movement and/or response from
persons and entities using relatively other market participants, from which the market 8 See Hold Brothers On-Line Investment Services,
manipulator might benefit by trading bona fide LLC, FINRA Letter of Acceptance, Waiver and
rudimentary technology to access the orders. Consent No. 2010023771001, September 25, 2012.
markets and over which the Exchange 7 See Biremis Corp. and Peter Beck, FINRA Letter 9 In the Matter of Hold Brothers On-Line
of Acceptance, Waiver and Consent No. Investment Services, LLC, Exchange Act Release
4 15 U.S.C. 78f(b)(1). 2010021162202, July 30, 2012. No. 67924, September 25, 2012.
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quoting and trading was promptly Members. The proposed provision is Hearing Panel may order that the
detected, it continued for several years. consistent with existing Exchange Rule suspension proceeding be dismissed.
The Exchange also notes the criminal 12060(a). The proposed rule provides Under paragraph (d) of the proposed
proceedings against Navinder Singh for a Panel Member to be recused in the Rule, the Hearing Panel would be
Sarao. Mr. Sarao’s for [sic] manipulative event he or she has a conflict of interest required to issue a written decision
trading activity, which included forms or bias or other circumstances exist stating whether a suspension order
of layering and spoofing in the futures where his or her fairness might would be imposed. The Hearing Panel
markets, which has been linked as a reasonably be questioned in accordance would be required to issue the decision
contributing factor to the ‘‘Flash Crash’’ with Rules [sic]12160(b)(2). In addition not later than 10 days after receipt of the
of 2010, and yet continued through to recusal initiated by such a Panel hearing transcript, unless otherwise
2015. Member, a party to the proceeding will extended by the Chairman of the
The Exchange believes that the be permitted to file a motion to Hearing Panel with the consent of the
activities described in the cases above disqualify a Panel Member. However, Parties for good cause shown. The Rule
provide justification for the proposed due to the compressed schedule would state that a suspension order
rule change, which is described below. pursuant to which the process would shall be imposed if the Hearing Panel
In addition, while the examples operate under Rule 12160, the proposed finds by a preponderance of the
provided are related to the equities rule would require such motion to be evidence that the alleged violation
market, the Exchange believes that this filed no later than 5 days after the specified in the notice has occurred and
type of conduct should be prohibited for announcement of the Hearing Panel and that the violative conduct or
options as well. The Exchange believes the Exchange’s brief in opposition to continuation thereof is likely to result in
that these patterns of disruptive and such motion would be required to be significant market disruption or other
allegedly manipulative quoting and filed no later than 5 days after service significant harm to investors.
trading activity need to be addressed thereof. Pursuant to existing Rule Proposed paragraph (d) would also
and the product should not limit the 12060(a)(3), any time a person serving describe the content, scope and form of
action taken by the Exchange. on a Panel has a conflict of interest or a suspension order. As proposed, a
bias or circumstances otherwise exist suspension order shall be limited to
Rule 12160—Expedited Suspension
where his fairness might be reasonably ordering a Respondent to cease and
Proceeding
questioned, the person must withdraw desist from violating proposed Rule
The Exchange proposes to adopt new 3220 and/or to ordering a Respondent to
Rule 12160, titled ‘‘Expedited from the Panel. The applicable Panel
Member shall remove himself or herself cease and desist from providing access
Suspension Proceeding,’’ to set forth to the Exchange to a client of
procedures for issuing suspension and the Panel Chairman may request the
Respondent that is causing violations of
orders, immediately prohibiting an Chairman of the Hearing Committee to
Rule 3220. Under the proposed rule, a
Options Participant from conducting select a replacement such that the
suspension order shall also set forth the
continued disruptive quoting and Hearing Panel still meets the
alleged violation and the significant
trading activity on the Exchange. compositional requirements described
market disruption or other significant
Importantly, these procedures would in Rule 12060(a).
harm to investors that is likely to result
also provide the Exchange the authority Under paragraph (c) of the proposed without the issuance of an order. The
to order an Options Participant to cease Rule, the hearing would be held not order shall describe in reasonable detail
and desist from providing access to the later than 15 days after service of the the act or acts the Respondent is to take
Exchange to a client of the Options notice initiating the suspension or refrain from taking, and suspend such
Participant that is conducting disruptive proceeding, unless otherwise extended Respondent unless and until such
quoting and trading activity in violation by the Chairman of the Hearing Panel action is taken or refrained from.
of proposed Rule 3220. Proposed Rule with the consent of the Parties for good Finally, the order shall include the date
3220 would be titled, ‘‘Disruptive cause shown. In the event of a recusal and hour of its issuance. As proposed,
Quoting and Trading Activity or disqualification of a Panel Member, a suspension order would remain
Prohibited.’’ Under proposed paragraph the hearing shall be held not later than effective and enforceable unless
(a) of Rule 12160, with the prior written five days after a replacement Panel modified, set aside, limited, or revoked
authorization of the Chief Regulatory Member is appointed. Proposed pursuant to proposed paragraph (e), as
Officer (‘‘CRO’’) or such other senior paragraph (c) would also govern how described below. Finally, paragraph (d)
officers as the CRO may designate, the the hearing is conducted, including the would require service of the Hearing
Office of General Counsel or Regulatory authority of Panel Members, witnesses, Panel’s decision and any suspension
Department of the Exchange (such additional information that may be order consistent with other portions of
departments generally referred to as the required by the Hearing Panel, the the proposed rule related to service.
‘‘Exchange’’ for purposes of proposed requirement that a transcript of the Proposed paragraph (e) of Rule 12160
Rule 12160) may initiate an expedited proceeding be created and details would state that at any time after the
suspension proceeding with respect to related to such transcript, and details Hearing Panel served the Respondent
alleged violations of Rule 3220, which regarding the creation and maintenance with a suspension order, a Party could
is proposed as part of this filing and of the record of the proceeding. apply to the Hearing Panel to have the
described in detail below. Proposed Proposed paragraph (c) would also state order modified, set aside, limited, or
paragraph (a) would also set forth the that if a Respondent fails to appear at a revoked. If any part of a suspension
hearing for which it has notice, the order is modified, set aside, limited, or
sradovich on DSK3GMQ082PROD with NOTICES
requirements for notice and service of
such notice pursuant to the Rule, allegations in the notice and revoked, proposed paragraph (e) of Rule
including the required method of accompanying declaration may be 12160 provides the Hearing Panel
service and the content of notice. deemed admitted, and the Hearing discretion to leave the cease and desist
Proposed paragraph (b) of Rule 12160 Panel may issue a suspension order part of the order in place. For example,
would govern the appointment of a without further proceedings. Finally, as if a suspension order suspends
Hearing Panel as well as potential proposed, if the Exchange fails to appear Respondent unless and until
disqualification or recusal of Panel at a hearing for which it has notice, the Respondent ceases and desists
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![95716 Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Notices
providing access to the Exchange to a disruptive quoting and trading activity allowing their clients to engage in such
client of Respondent, and after the order is simply split between several brokers activities.
is entered the Respondent complies, the or customers. The Exchange believes, The Exchange proposes to make clear
Hearing Panel is permitted to modify that with respect to persons acting in in proposed Rule 3220(a)(2), unless
the order to lift the suspension portion concert perpetrating an abusive scheme, otherwise indicated, the descriptions of
of the order while keeping in place the it is important that the Exchange have disruptive quoting and trading activity
cease and desist portion of the order. authority to act against the parties do not require the facts to occur in a
With its broad modification powers, the perpetrating the abusive scheme, specific order in order for the rule to
Hearing Panel also maintains the whether it is one person or multiple apply. For instance, with respect to the
discretion to impose conditions upon persons. pattern defined in proposed Rule
the removal of a suspension—for To provide proper context for the 3220(a)(1)(i) it is of no consequence
example, the Hearing Panel could situations in which the Exchange whether a party first enters Displayed
modify an order to lift the suspension proposes to utilize its proposed Orders and then Contra-side Orders or
portion of the order in the event a authority, the Exchange believes it is vice-versa. However, as proposed, it is
Respondent complies with the cease necessary to describe the types of required for supply and demand to
and desist portion of the order but disruptive quoting and trading activity change following the entry of the
additionally order that the suspension that would cause the Exchange to use its Displayed Orders. The Exchange also
will be re-imposed if Respondent authority. Accordingly, the Exchange proposes to make clear that disruptive
violates the cease and desist provisions proposes to adopt Rule 3220(a)(1) and quoting and trading activity includes a
modified [sic] order in the future. The (2) providing additional details pattern or practice in which some
Hearing Panel generally would be regarding disruptive quoting and trading portion of the disruptive quoting and
required to respond to the request in activity. Proposed Rule 3220(a)(1)(i) trading activity is conducted on the
writing within 10 days after receipt of describes disruptive quoting and trading Exchange and the other portions of the
the request. An application to modify, activity containing many of the disruptive quoting and trading activity
set aside, limit or revoke a suspension elements indicative of layering. It would are conducted on one or more other
order would not stay the effectiveness of describe disruptive quoting and trading exchanges. The Exchange believes that
the suspension order. activity as a frequent pattern in which this authority is necessary to address
Finally, proposed paragraph (f) would the following facts are present: (i) A market participants who would
provide that sanctions issued under the party enters multiple limit orders on otherwise seek to avoid the prohibitions
proposed Rule 12160 would constitute one side of the market at various price of the proposed Rule by spreading their
final and immediately effective levels (the ‘‘Displayed Orders’’); and (ii) activity amongst various execution
disciplinary sanctions imposed by the following the entry of the Displayed venues. In sum, proposed Rule 3220
Exchange, and that the right to have any Orders, the level of supply and demand coupled with proposed Rule 12160
action under the Rule reviewed by the for the security changes; and (iii) the would provide the Exchange with
Commission would be governed by party enters one or more orders on the authority to promptly act to prevent
Section 19 of the Act. The filing of an opposite side of the market of the disruptive quoting and trading activity
application for review would not stay Displayed Orders (the ‘‘Contra-Side from continuing on the Exchange.
the effectiveness of a suspension order Orders’’) that are subsequently Below is an example of how the
unless the Commission otherwise executed; and (iv) following the proposed rule would operate.
ordered. execution of the Contra-Side Orders, the Assume that through its surveillance
party cancels the Displayed Orders. program, Exchange staff identifies a
Rule 3220—Disruptive Quoting and Proposed Rule 3220(a)(1)(ii) describes pattern of potentially disruptive quoting
Trading Activity Prohibited disruptive quoting and trading activity and trading activity. After an initial
The Exchange currently has authority containing many of the elements investigation the Exchange would then
to prohibit and take action against indicative of spoofing and would contact the Option Participant
manipulative trading activity, including describe disruptive quoting and trading responsible for the orders that caused
disruptive quoting and trading activity, activity as a frequent pattern in which the activity to request an explanation of
pursuant to its general market the following facts are present: (i) a the activity as well as any additional
manipulation rules, including Rules party narrows the spread for a security relevant information, including the
3000, Just and Equitable Principles of by placing an order inside the national source of the activity. If the Exchange
Trade, and 3050, Manipulation. The best bid or offer; and (ii) the party then were to continue to see the same pattern
Exchange proposes to adopt new Rule submits an order on the opposite side of from the same Option Participant and
3220, which would more specifically the market that executes against another the source of the activity is the same or
define and prohibit disruptive quoting market participant that joined the new has been previously identified as a
and trading activity on the Exchange. As inside market established by the order frequent source of disruptive quoting
noted above, the Exchange proposes to described in proposed 3220(a)(1)(ii)(A) and trading activity then the Exchange
apply the proposed suspension rules to that narrowed the spread. The Exchange could initiate an expedited suspension
proposed Rule 3220. believes that the proposed descriptions proceeding by serving notice on the
Proposed Rule 3220 would prohibit of disruptive quoting and trading Option Participant that would include
Option Participants from engaging in or activity articulated in the rule are details regarding the alleged violations
facilitating disruptive quoting and consistent with the activities that have as well as the proposed sanction. In
trading activity on the Exchange, as such a case the proposed sanction
sradovich on DSK3GMQ082PROD with NOTICES
been identified and described in the
described in proposed Rule 3220(a)(1) client access cases described above. The would likely be to order the Option
and (2), including acting in concert with Exchange further believes that the Participant to cease and desist providing
other persons to effect such activity. The proposed descriptions will provide access to the Exchange to the client that
Exchange believes that it is necessary to Option Participants with clear is responsible for the disruptive quoting
extend the prohibition to situations descriptions of disruptive quoting and and trading activity and to suspend
when persons are acting in concert to trading activity that will help them to such Options Participant unless and
avoid a potential loophole where avoid engaging in such activities or until such action is taken.
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The Options Participant would have that should be used very cautiously. The Exchange also believes that the
the opportunity to be heard in front of Consequently, the proposed rules have proposal is consistent with the public
a Hearing Panel at a hearing to be been designed to ensure that the interest, the protection of investors, or
conducted within 15 days of the notice. proceedings are used to address only the otherwise in furtherance of the purposes
If the Hearing Panel determined that the most clear and serious types of of the Act because the proposal helps to
violation alleged in the notice did not disruptive quoting and trading activity strengthen the Exchange’s ability to
occur or that the conduct or its and that the interests of Respondents are carry out its oversight and enforcement
continuation would not have the protected. For example, to ensure that responsibilities as a self-regulatory
potential to result in significant market proceedings are used appropriately and organization in cases where awaiting the
disruption or other significant harm to that the decision to initiate a proceeding conclusion of a full disciplinary
investors, then the Hearing Panel would is made only at the highest staff levels, proceeding is unsuitable in view of the
dismiss the suspension order the proposed rules require the CRO or potential harm to other Options
proceeding. another senior officer of the Exchange to Participants and their customers. Also,
If the Hearing Panel determined that issue written authorization before the the Exchange notes that if this type of
the violation alleged in the notice did Exchange can institute an expedited conduct is allowed to continue on the
occur and that the conduct or its suspension proceeding. In addition, the Exchange, the Exchange’s reputation
continuation is likely to result in rule by its terms is limited to violations could be harmed because it may appear
significant market disruption or other of Rules [sic] 3220, when necessary to to the public that the Exchange is not
significant harm to investors, then the protect investors, other Options acting to address the behavior. The
Hearing Panel would issue the order Participants and the Exchange. The expedited process would enable the
including the proposed sanction, Exchange will initiate disciplinary Exchange to address the behavior with
ordering the Options Participant to action for violations of Rule 3220, greater speed.
cease providing access to the client at pursuant to Rule 12160. Further, the As explained above, the Exchange
issue and suspending such Options Exchange believes that the proposed notes that it has defined the prohibited
Participant unless and until such action expedited suspension provisions disruptive quoting and trading activity
is taken. If such Option Participant described above that provide the by modifying the traditional definitions
wished for the suspension to be lifted opportunity to respond as well as a
of layering and spoofing 13 to eliminate
because the client ultimately Hearing Panel determination prior to
responsible for the activity no longer an express intent element that would
taking action will ensure that the
would be provided access to the not be proven on an expedited basis and
Exchange would not utilize its authority
Exchange, then such Option Participant would instead require a thorough
in the absence of a clear pattern or
could apply to the Hearing Panel to investigation into the activity. As noted
practice of disruptive quoting and
have the order modified, set aside, throughout this filing, the Exchange
trading activity.
limited or revoked. The Exchange notes believes it is necessary for the
that the issuance of a suspension order 2. Statutory Basis protection of investors to make such
would not alter the Exchange’s ability to The Exchange believes that the modifications in order to adopt an
further investigate the matter and/or proposal is consistent with the expedited process rather than allowing
later sanction the Options Participant requirements of Section 6(b) of the disruptive quoting and trading activity
pursuant to the Exchange’s standard Securities Exchange Act of 1934 (the to occur for several years.
disciplinary process for supervisory ‘‘Act’’),10 in general, and Section 6(b)(5) Through this proposal, the Exchange
violations or other violations of of the Act,11 in particular, in that it is does not intend to modify the
Exchange rules or the Act. designed to prevent fraudulent and definitions of spoofing and layering that
The Exchange reiterates that it already manipulative acts and practices, to have generally been used by the
has broad authority to take action promote just and equitable principles of Exchange and other regulators in
against an Options Participant in the trade, to foster cooperation and connection with actions like those cited
event that such Options Participant is coordination with persons engaged in above. The Exchange believes that the
engaging in or facilitating disruptive or facilitating transactions in securities, to pattern of disruptive and allegedly
manipulative trading activity on the remove impediments to and perfect the manipulative quoting and trading
Exchange. For the reasons described mechanism of a free and open market activity was widespread across multiple
above, and in light of recent cases like and a national market system, and, in exchanges, and the Exchange, FINRA,
the client access cases described above, general to protect investors and the and other SROs identified clear patterns
as well as other cases currently under public interest. Pursuant to the of the behavior in 2007 and 2008 in the
investigation, the Exchange believes that proposal, the Exchange will have a equities markets.14 The Exchange
it is equally important for the Exchange mechanism to promptly initiate believes that this proposal will provide
to have the authority to promptly expedited suspension proceedings in the Exchange with the necessary means
initiate expedited suspension the event the Exchange believes that it to enforce against such behavior in an
proceedings against any Options has sufficient proof that a violation of expedited manner while providing
Participant who has demonstrated a Rule 3220 has occurred and is ongoing. Options Participants with the necessary
clear pattern or practice of disruptive Further, the Exchange believes that due process. The Exchange believes that
quoting and trading activity, as the proposal is consistent with Sections its proposal is consistent with the Act
described above, and to take action 6(b)(1) and 6(b)(6) of the Act,12 which because it provides the Exchange with
sradovich on DSK3GMQ082PROD with NOTICES
including ordering such Options require that the rules of an exchange the ability to remove impediments to
Participant to terminate access to the enforce compliance with, and provide and perfect the mechanism of a free and
Exchange to one or more of such appropriate discipline for, violations of open market and a national market
Options Participant’s clients if such the Commission and Exchange rules. system, and, in general to protect
clients are responsible for the activity.
The Exchange recognizes that its 10 15 U.S.C. 78f(b). 13 See
supra, notes 5 and 6.
proposed authority to issue a 11 15 U.S.C. 78f(b)(5). 14 See
Section 3 herein, the Purpose section, for
suspension order is a powerful measure 12 15 U.S.C. 78f(b)(1) and 78f(b)(6). examples of conduct referred to herein.
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![Federal Register / Vol. 81, No. 249 / Wednesday, December 28, 2016 / Notices 95719
information that you wish to make and basis for, the proposed rule change exception to Rule 122—Equities
available publicly. All submissions and discussed any comments it received requirements if Floor Official
should refer to File Number SR–BOX– on the proposed rule change. The text permission is obtained.6 In connection
2016–59, and should be submitted on or of those statements may be examined at with trading halts, the Exchange is
before January 18, 2017. the places specified in Item IV below. responsible for determining whether to
For the Commission, by the Division of The Exchange has prepared summaries, halt trading in a security under Section
Trading and Markets, pursuant to delegated set forth in sections A, B, and C below, 402 of the Company Guide. Thus,
authority.20 of the most significant parts of such requiring Floor Official approval before
Eduardo A. Aleman, statements. a trading halt can be invoked is an
Assistant Secretary. unnecessary pro forma step rather than
A. Self-Regulatory Organization’s a substantive requirement. Moreover,
[FR Doc. 2016–31307 Filed 12–27–16; 8:45 am] Statement of the Purpose of, and the obtaining Floor Governor approval adds
BILLING CODE 8011–01–P Statutory Basis for, the Proposed Rule an extra manual step to the process,
Change which could impede the timely
SECURITIES AND EXCHANGE 1. Purpose dissemination of a trading halt. Finally,
COMMISSION given market fragmentation and highly
The Exchange proposes to amend
automated equities trading
[Release No. 34–79642; File No. SR– Rule 123D—Equities and the Company
environment, the Exchange does not
NYSEMKT–2016–118] Guide to eliminate the requirement for
believe that Floor Governors, who do
Floor Official 4 approval before halting
not have contact with the listed
Self-Regulatory Organizations; NYSE trading in a security. The Exchange
company, should be in a position to
MKT LLC; Notice of Filing and believes that in today’s trading
override an Exchange determination to
Immediate Effectiveness of Proposed environment, the requirement for Floor
halt trading in a security. Consequently,
Rule Change Amending Rule 123D— Official approval before halting trading
the Exchange proposes to delete Rule
Equities and the Listed Company in a security is unnecessary and
123D(d)—Equities in its entirety as
Manual duplicative of Exchange obligations to unnecessary and duplicative of existing
assess whether to halt trading in a Exchange obligations specified in the
December 21, 2016. security under Section 402 of the NYSE
Pursuant to Section 19(b)(1) 1 of the Company Guide.
MKT Company Guide. The Exchange also proposes to make
Securities Exchange Act of 1934 (the Current Rule 123D(d)—Equities
‘‘Act’’) 2 and Rule 19b–4 thereunder,3 a related change to Section 402 of the
provides that once trading has Company Guide to delete a reference to
notice is hereby given that on December commenced, trading may only be halted
13, 2016, NYSE MKT LLC (the Rule 123D—Equities that would be
with the approval of a Floor Governor rendered obsolete by the proposed
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with or two Floor Officials and that an
the Securities and Exchange deletion of Rule 123D(d)—Equities. In
Executive Floor Governor, or in their addition, the Exchange also proposes to
Commission (‘‘Commission’’) the absence a Senior Floor Governor, should
proposed rule change as described in make a related change to Section 404 of
be consulted if it is felt that trading the Company Guide to delete a reference
Items I, II, and III below, which Items should be halted in a bank or brokerage
have been prepared by the self- to a consultation with trading floor
stock due to a potential misperception officials that would be rendered
regulatory organization. The regarding the company’s financial
Commission is publishing this notice to obsolete by the proposed deletion of
viability.5 The rule further provides that Rule 123D(d)—Equities. In addition, the
solicit comments on the proposed rule if a listed company notifies the
change from interested persons. Exchange proposes to re-letter the
Exchange in advance of publication remaining subsections of Rule 123D—
I. Self-Regulatory Organization’s concerning news which might have a Equities to account for the deletion of
Statement of the Terms of Substance of substantial market impact, the Exchange Rule 123D(d)—Equities.
the Proposed Rule Change should advise an Executive Floor The Exchange proposes to make a
Governor or Floor Governor, or in their related change to eliminate the
The Exchange proposes to amend
absence, a Floor Official, and specifies requirement in Rule 123D(e)—Equities
Rule 123D—Equities and the Listed
procedures for Floor Governors to that an ‘‘Equipment Changeover’’ halt in
Company Manual to eliminate the
overrule the Exchange’s determination trading requires the approval of a Floor
requirement for Floor Official approval
that a security should be halted. Governor or two Floor Officials as such
for halts in trading. The proposed rule Commensurate with the evolution of
change is available on the Exchange’s approval is no longer necessary. An
the equities markets and trading on the Equipment Changeover halt is a non-
Web site at www.nyse.com, at the Exchange towards more automated
principal office of the Exchange, and at regulatory halt condition that only halts
processes, the procedures and situations trading on the Exchange. The Exchange
the Commission’s Public Reference requiring approvals by Floor Officials
Room. believes that if circumstances arise
have also evolved. For example, the warranting an Equipment Changeover
II. Self-Regulatory Organization’s Exchange previously eliminated the halt, obtaining Floor Official approval
Statement of the Purpose of, and ability of a Floor broker to seek an before halting trading adds an
Statutory Basis for, the Proposed Rule unnecessary step that is no longer
Change 4 ‘‘Floor Official’’ encompasses Floor Governor,
needed in today’s automated markets.
Floor Official, Executive Floor Governor and Senior
sradovich on DSK3GMQ082PROD with NOTICES
In its filing with the Commission, the Floor Governor, as their responsibilities are
Because of the procedural changes
self-regulatory organization included currently assigned in connection with trading halts. associated with the proposed rule
statements concerning the purpose of, See also Rules 46—Equities and 46A—Equities
defining Floor Governor, Floor Official, and 6 See also Securities Exchange Act Release No.
Executive Floor Governor. 67346 (July 3, 2012), 77 FR 40671 (July 10, 2012)
20 17 CFR 200.30–3(a)(12). 5 See Rules 46—Equities and 46A—Equities (SR–NYSEMKT–2012–15) (notice of filing and
1 15 U.S.C. 78s(b)(1).
(defining the terms Floor Official, Senior Floor immediate effectiveness of proposed rule change
2 15 U.S.C. 78a.
Official, Executive Floor Official, Floor Governor, amending certain Exchange rules related to floor
3 17 CFR 240.19b–4. and Executive Floor Governor). official duties and responsibilities).
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Document Created: 2016-12-28 02:16:38
Document Modified: 2016-12-28 02:16:38
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 95713 |
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