82 FR 37144 - Self-Regulatory Organizations; BOX Options Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Rules for an Open-Outcry Trading Floor
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 151 (August 8, 2017)
Federal Register Volume 82, Issue 151 (August 8, 2017)
| Page Range | 37144-37154 | |
| FR Document | 2017-16638 |
[Federal Register Volume 82, Number 151 (Tuesday, August 8, 2017)] [Notices] [Pages 37144-37154] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-16638] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-81292; File No. SR-BOX-2016-48] Self-Regulatory Organizations; BOX Options Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Rules for an Open-Outcry Trading Floor August 2, 2017. I. Introduction On November 16, 2016, BOX Options Exchange LLC (the ``Exchange'' or ``BOX'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to adopt rules for an open-outcry trading floor. The proposed rule change was published for comment in the Federal Register on December 05, 2016.\3\ The Commission received three comment letters on the proposed rule change.\4\ On January 10, 2017, the Commission extended the time period within which to approve, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to March 05, 2017.\5\ On February 21, 2017, the Commission received a response letter from the Exchange, as well as Amendment No. 1 to the proposed rule change.\6\ On March 1, 2017, the Commission instituted proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.\7\ In response to the Order Instituting Proceedings, the Commission received five additional comment letters.\8\ On May 17, 2017, the Exchange filed Amendment No. 2 to the proposed rule change, which replaced and superseded the original filing, as modified by Amendment No.1, in its entirety.\9\ On May 18, 2016, the Commission extended the time period for Commission action on the proceedings to determine whether to disapprove the proposed rule change to August 2, 2017.\10\ Amendment No. 2 was published for comment in the Federal Register on May 23, 2017.\11\ On May 25, 2017, the Commission received a second response letter from the Exchange.\12\ The Commission received two comment letters in response to the publication of Amendment No. 2.\13\ On July 14, 2017, the Commission received a third response letter from the Exchange.\14\ This order approves the proposed rule change, as modified by Amendment Nos. 1 and 2. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ See Securities Exchange Act Release No. 79421 (November 29, 2016), 81 FR 87607 (``Notice''). \4\ See letters to Brent J. Fields, Secretary, Commission, from Angelo Evangelou, Deputy General Counsel, The Chicago Board Options Exchange, Inc. (``CBOE''), dated January 10, 2017 (``CBOE Letter I''); Steve Crutchfield, Head of Market Structure, CTC Trading Group, LLC (``CTC Trading''), dated December 31, 2016 (``CTC Letter I''); and Joan C. Conley, Senior Vice President and Corporate Secretary, The Nasdaq Stock Market LLC (``Nasdaq''), dated December 22, 2016 (``Nasdaq Letter I''). \5\ See Securities Exchange Act Release No. 79768, 82 FR 4956 (January 17, 2017). \6\ See letter to Brent J. Fields, Secretary, Commission, from Lisa J. Fall, President, Exchange, received February 21, 2017 (``BOX Response Letter I''), and Amendment No. 1, dated February 21, 2017. \7\ See Securities Exchange Act Release No. 80134, 82 FR 12864 (March 7, 2017) (``Order Instituting Proceedings''). \8\ See letters to Brent J. Fields, Secretary, Commission, from Angelo Evangelou, Deputy General Counsel, CBOE, dated April 21, 2017 (``CBOE Letter II''); Steve Crutchfield, Head of Market Structure, CTC Trading, dated April 13, 2017 (``CTC Letter II''); John Kinahan, CEO, Group One Trading, LP, dated April 11, 2017 (``Group One Letter''); Elizabeth King, General Counsel and Corporate Secretary, New York Stock Exchange, dated March 28, 2017 (``NYSE Letter''); and Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, dated March 27, 2017 (``Nasdaq Letter II''). \9\ See Amendment No. 2, dated May 17, 2017. \10\ See Securities Exchange Act Release No. 80719, 82 FR 23935 (May 24, 2017). \11\ See Securities Exchange Act Release No. 80720 (May 18, 2017), 82 FR 23657 (``Notice of Amendment No. 2''). \12\ See letter to Brent J. Fields, Secretary, Commission, from Lisa J. Fall, President, Exchange, received May 25, 2017 (``BOX Response Letter II''). \13\ See letters to Brent J. Fields, Secretary, Commission, from Steve Crutchfield, Head of Market Structure, CTC Trading, dated July 10, 2017 (``CTC Letter III''); and Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, dated July 6, 2017 (``Nasdaq Letter III''). \14\ See letter to Brent J. Fields, Secretary, Commission, from Lisa J. Fall, President, Exchange, received July 14, 2017 (``BOX Response Letter III''). --------------------------------------------------------------------------- II. Description of the Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 The Exchange proposes to adopt rules that would allow for open- outcry trading on BOX's physical trading floor, located in Chicago (``Trading Floor'') as described below.\15\ --------------------------------------------------------------------------- \15\ See proposed BOX Rule 100(a)(67). --------------------------------------------------------------------------- A. BOX Floor Procedure The Exchange proposes to allow two categories of market participants (``Floor Participants'') \16\ to transact business on the Trading Floor.\17\ One of these categories of market participants [[Page 37145]] consists of individuals (``Floor Broker'') \18\ who will be registered as such with the Exchange and who will be permitted to accept and handle options orders, including representing such orders on the Trading Floor and entering those orders using the BOX Order Gateway (``BOG'') \19\ for execution in the Exchange's automated trading system (the ``Trading Host'').\20\ The second category of market participants consists of Options Participants of the Exchange located on the Trading Floor who receive permission from the Exchange to trade in options for their own account (``Floor Market Makers'').\21\ --------------------------------------------------------------------------- \16\ See proposed BOX Rule 100(a)(26). \17\ See proposed BOX Rule 100(a)(67). \18\ See proposed BOX Rule 7540. \19\ See proposed BOX Rules 100(b)(2) and 7580(e). \20\ See BOX Rule 100(a)(66). \21\ See proposed BOX Rule 8510(b). --------------------------------------------------------------------------- Contemporaneously upon receipt of an order and prior to the announcement of an order in the trading crowd, a Floor Broker wishing to execute an order will be required to record certain information about the order in the Floor Broker's order entry mechanism.\22\ Specifically, the Floor Broker will be required to record: (i) The order type and order receipt time; (ii) the option symbol; (iii) buy, sell, cross or cancel; (iv) call, put, complex (i.e., spread, straddle), or contingency order; (v) number of contracts; (vi) limit price or market order or, in the case of a multi-leg order, net debit or credit, if applicable; (vii) whether the transaction is to open or close a position; and (viii) the Options Clearing Corporation clearing number of the broker-dealer that submitted the order.\23\ --------------------------------------------------------------------------- \22\ See proposed BOX Rule 7580(e). \23\ See proposed BOX Rule 7580(e)(1). --------------------------------------------------------------------------- The Floor Broker will then be required to ascertain that at least one Floor Market Maker is present in the Crowd Area \24\ and announce the order to the trading crowd, in a process called open outcry.\25\ During open outcry, Floor Market Makers physically located in the Crowd Area will be permitted to express interest in trading against the initiating order.\26\ To do so, a Floor Market Maker will be required to verbalize that he is ``in'' after a Floor Broker announces an order, even if a Floor Market Maker had previously provided a valid quote prior to the Floor Broker's announcement of the order.\27\ A Floor Market Maker will be considered ``out'' on a bid or offer if he does not affirmatively respond to the Floor Broker who announces the order, provided that the Floor Broker will be required to give a Floor Participant a reasonable amount of time within which to respond.\28\ --------------------------------------------------------------------------- \24\ See proposed BOX Rules 100(a)(67) and 7580(a). \25\ See proposed BOX Rules 7600(b) and 7580(e)(2). This will be required whether the Floor Broker is representing a single-sided order and is soliciting contra-side interest, or the Floor Broker has sufficient interest to match against the order already. See proposed BOX Rule 7580(e)(2). \26\ See proposed BOX Rule IM-8510-2(b). It will be considered conduct inconsistent with just and equitable principles of trade for any Floor Broker or Floor Market Maker to intentionally disrupt the open outcry process. See proposed BOX Rule IM-7580-4. \27\ A Floor Broker will be permitted to request a market prior to announcing an order on the Trading Floor (``Market Probe''). When a Floor Broker announces a Market Probe, any responses from Floor Participants will be public to all Floor Participants. When a Floor Broker conducts a Market Probe, he must probe all Floor Participants. See Notice of Amendment No. 2, supra note 11, at 23662 n.75. \28\ See proposed BOX Rule 100(b)(5). A ``reasonable amount of time'' will be interpreted on a case-by-case basis by an Options Exchange Official, based on the current market conditions and trading activity on the Trading Floor. See id. --------------------------------------------------------------------------- Under the proposal, after an order is announced to the trading crowd, the Floor Broker will be permitted to submit a Qualified Open Outcry Order (``QOO Order'') through the BOG to the Trading Host for execution. QOO Orders are two-sided orders \29\ comprised of an ``initiating side'' (the ``agency order''), which must be filled in its entirety, and a ``contra-side,'' which must guarantee the full size of the agency order.\30\ The order announced by the Floor Broker on the Trading Floor will be considered the agency order. At the time of the announcement, the Floor Broker may be representing only that agency order (i.e., a single-sided or unmatched order) on the Trading Floor in order to seek a contra-side, or the Floor Broker may already have a contra-side that guarantees the full size of that agency order.\31\ If the Floor Broker does not have a contra-side and is therefore soliciting interest from the trading crowd when the initiating side is announced or to the extent the trading crowd provides a better price, the contra-side of the QOO Order will be the solicited interest from the trading crowd; \32\ otherwise, the Floor Broker interest will be the contra-side of the QOO Order, subject to the allocation procedure as described below.\33\ --------------------------------------------------------------------------- \29\ A Floor Participant who wishes to place a limit order on the BOX Book will be required to submit such order electronically. See proposed BOX Rules IM-7580-1 and IM-8510-8. The BOX Book is defined as the electronic book of orders on each single option series maintained by the Trading Host. See BOX Rule 100(a)(10). \30\ See proposed BOX Rule 7600(a)(1). \31\ See proposed BOX Rule IM-7600-4. If a Floor Broker is holding two agency orders, he will choose which order will be the initiating side. See proposed BOX Rule 7580(e)(2). \32\ See proposed BOX Rule 7600(a)(1). \33\ See id. --------------------------------------------------------------------------- For a non-complex QOO Order, the execution price must be equal to or better than the National Best Bid or Offer (``NBBO'').\34\ A Complex QOO Order may be executed at a price without giving priority to equivalent bids or offers in the individual series legs on the initiating side, provided at least one options leg betters the corresponding bid or offer on the BOX Book by at least one minimum trading increment.\35\ Under the proposed rules, an Options Exchange Official \36\ will be required to certify that the Floor Broker adequately announced the QOO Order to the trading crowd.\37\ --------------------------------------------------------------------------- \34\ See proposed BOX Rule 7600(c). \35\ See proposed BOX Rule 7600(c). \36\ See proposed BOX Rule 100(b)(6). The QOO Order will not be deemed executed until it is processed by the Trading Host. See proposed BOX Rule 7600(c). \37\ See proposed BOX Rule 7600(b). --------------------------------------------------------------------------- Once a QOO Order is submitted through the BOG, it would be immediately processed by the Trading Host.\38\ The order would be executed based on market conditions at the time that the order is received by the Trading Host and in accordance with the Exchange's rules.\39\ If there is an ongoing auction in the option series when the QOO Order is received by the Trading Host the QOO Order will be rejected.\40\ --------------------------------------------------------------------------- \38\ See proposed BOX Rule 100(b)(2). Under the proposal, orders on the Trading Floor will not route to an away exchange and may not be considered in the determination of the opening price or participate in the opening trade. See proposed BOX Rules 7070(d) and 7600(e). \39\ See proposed BOX Rule 7600(a). Once a Floor Broker submits a QOO Order to the BOG, neither the submitting Floor Broker, nor anyone else, will be allowed to alter the terms of the QOO Order. See proposed BOX Rule 7600(c). \40\ See proposed BOX Rule 7600(a)(5). A Complex QOO Order will not be rejected if there is an ongoing auction in the options series of some, but not all, of the components of the Complex QOO Order. See id. --------------------------------------------------------------------------- Under the proposal, the highest bid (lowest offer) in the trading crowd will have priority.\41\ If there are two or more bids (offers) for the same options contract that represent the highest bid (lowest offer), priority will be afforded to such bids (offers) in the sequence in which they are made.\42\ If a Floor Broker's bid or offer is accepted by more than one Floor Participant, the Floor Broker will be required to designate the priority order of the Floor Participants based on when each Floor Participant responds.\43\ Starting with the Floor Participant with first priority, each Floor Participant will be entitled to buy or sell as many contracts as the Floor Broker may have available to trade until the Floor Broker's order has been filled [[Page 37146]] entirely.\44\ However, if bids or offers are made by more than one Floor Participant simultaneously, such bids or offers will be deemed to be on parity and priority will be afforded to them, insofar as practicable, on an equal basis.\45\ If Floor Participants provide a collective response to a Floor Broker's request for a market in order to fill a large order, the order will be allocated pro rata pursuant to proposed BOX Rule 7610(d)(5).\46\ The Floor Broker will be responsible for determining the sequence in which bids or offers are vocalized on the Trading Floor in response to the Floor Broker's bid, offer, or call for a market.\47\ --------------------------------------------------------------------------- \41\ See proposed BOX Rule 7610(a) and (b). \42\ See id. \43\ See proposed BOX Rule 7610(d)(2). \44\ See id. For Complex QOO Orders, Floor Participants will not be permitted to give a competing bid or offer for one component of the order to prevent the Complex QOO Order from being executed. See proposed BOX Rule IM-7600-1(d). \45\ See proposed BOX Rule 7610(d)(4). Each Floor Participant on parity will receive an equal number of contracts, to the extent mathematically possible. \46\ Specifically, proposed BOX Rule 7610(d)(5) states that if the size of the trading crowd's market, in the aggregate, is less than or equal to the size of the order to be filled, the Floor Participants will each receive a share of the order that is equal to the size of their respective bids. However, if the size of the trading crowd's market exceeds the size of the order to be filled, that order will be allocated on a size pro rata basis, with the Floor Participants in the trading crowd each receiving, to the extent practicable, the percentage of the order that is the ratio of the size of their respective bids or offers to the total size of all bids or offers. \47\ See proposed BOX Rule 7610(d)(1). Any disputes regarding a Floor Broker's determination of time priority sequence will be resolved by an Options Exchange Official. See id. An Options Exchange Official may nullify a transaction or adjust its terms if the Official determines the transaction to have been in violation of Exchange's Rules. See id. --------------------------------------------------------------------------- The following BOX Book interest will have priority over the contra- side of the QOO Order: (i) Any equal or better priced bids or offers on the BOX Book that were submitted on behalf of persons who are not brokers or dealers in securities (``Public Customers''); \48\ (ii) any non-Public Customer bids or offers on the BOX Book that are ranked ahead of such equal or better priced Public Customer bids or offers; and (iii) any non-Public Customer bids or offers on the BOX Book that are priced better than the proposed execution price.\49\ When submitting the QOO Order to the BOG, a Floor Broker may, but will not be required to, provide a ``book sweep size.'' \50\ The book sweep size is the number of contracts, if any, of the initiating side of the QOO Order that the Floor Broker is willing to relinquish to orders and quotes on the BOX Book that have priority pursuant to proposed BOX Rule 7600(c).\51\ If the number of contracts on the BOX Book that have priority over the contra-side of the QOO Order is greater than the book sweep size set by the Floor Broker, then the QOO Order will be rejected.\52\ --------------------------------------------------------------------------- \48\ See BOX Rule 100(a)(51). \49\ See proposed BOX Rule 7600(c). For Complex QOO Orders, the following Complex Order Book interest will have priority: (i) Any equal or better priced Public Customer Complex bids or offers on the Complex Order Book or any non-Public Customer Complex bids or offers on the Complex Order Book that are ranked ahead of such equal or better priced Public Customer Complex bids or offers; and (ii) any non-Public Customer bids or offers on the Complex Order Book that are priced better than the proposed execution price. See id. \50\ See proposed BOX Rule 7600(h). \51\ See proposed BOX Rule 7600(h). Proposed BOX Rule IM-7600-3 states that it will be considered conduct inconsistent with just and equitable principles of trade for any Floor Broker to use the book sweep size for the purpose of violating the Floor Broker's duties and obligations. \52\ See proposed BOX Rule 7600(h). --------------------------------------------------------------------------- The proposed rule change also describes the allocation process for QOO Orders.\53\ First, under the proposal, the initiating side of the QOO Order will match against any bids or offers on the BOX Book that have priority as outlined above, provided that an adequate book sweep size is provided by the Floor Broker.\54\ The remaining balance, if any, will be matched against the contra-side of the QOO Order, regardless of whether the Floor Broker is ultimately entitled to receive an allocation.\55\ If the QOO Order is of a certain size, which size will be determined by the Exchange on an option by option basis (at a size that may not be less than 500 contracts), the Floor Broker will be entitled to cross, after all equal or better priced Public Customer bids or offers on the BOX Book and any non-Public Customer bids or offers that are ranked ahead of such Public Customer bids or offers are filled, 40% of the remaining contracts in the order.\56\ Next, Floor Participants that respond with interest when the executing Floor Broker announces the QOO Order to the trading crowd will be allocated.\57\ If interest remains, the remaining quantity of the initiating side of the QOO Order will be allocated to the executing Floor Broker.\58\ If the QOO Order executes, the executing Floor Broker will be responsible for providing the correct allocations of the initiating side of the QOO Order to an Options Exchange Official or his or her designee, if necessary, who will properly record the order in the Exchange's system.\59\ Floor Brokers also will be responsible for handling all orders in accordance with the Exchange's priority and trade-through rules.\60\ --------------------------------------------------------------------------- \53\ See also Notice of Amendment No. 2, supra note 11, at 23668-74 (providing a detailed description and examples of how orders will be allocated). \54\ See proposed BOX Rule 7600(d)(1) and (2). \55\ See proposed BOX Rule 7600(d)(3). \56\ See proposed BOX Rule 7600(f). See also proposed BOX Rule 7600(d)(3)(i). In determining whether a Complex QOO Order satisfies the eligible order size requirement, the Complex QOO Order must contain one leg which, standing alone, is for the eligible size or greater. See proposed BOX Rule IM-7600-1(d). \57\ See proposed BOX Rule 7600(d)(3)(ii). \58\ See proposed BOX Rule 7600(d)(3)(iii). \59\ See proposed BOX Rule 7600(d)(4). The executing Floor Broker must provide the correct allocations to an Options Exchange Official or his or her designee, in writing, without unreasonable delay. See id. \60\ See proposed BOX Rule 7600. Proposed BOX Rule 8510(h)(4) provides that it will be considered conduct inconsistent with just and equitable principles of trade for: (i) A Floor Broker to allocate orders other than in accordance with the Exchange's priority rules applicable to floor trades; (ii) a Floor Participant to enter into any agreement with another Floor Participant concerning allocation of trades; or (iii) a Floor Participant to harass, intimidate or coerce another Floor Participant to make or refrain from making any complaint or appeal. --------------------------------------------------------------------------- The Floor Participants who established the market will have priority over all other orders that were not announced in the trading crowd at the time that the market was established (but not over Public Customer orders on the BOX Book or any non-Public Customer orders that have priority over such Public Customer orders on the BOX Book) and will maintain priority over such orders except for orders that improve upon the market.\61\ --------------------------------------------------------------------------- \61\ See proposed BOX Rule IM-7600-1(c). It will be the responsibility of the Floor Participant that established the market to alert the Floor Broker of the fact that the Floor Participant has priority when an order is announced. See id. --------------------------------------------------------------------------- B. Additional Floor Broker Obligations A Floor Broker handling an order will be required to use due diligence to cause the order to be executed at the best price or prices available to him in accordance with the Rules of the Exchange.\62\ All orders provided to Floor Brokers will be considered Not Held Orders \63\ unless otherwise specified by the Floor Broker's client.\64\ However, the proposed rule change would prohibit Floor Brokers from engaging in certain discretionary transactions.\65\ An Options Floor Broker [[Page 37147]] handling a contingency order that is dependent upon the price of the underlying security will be responsible for satisfying the dependency requirement on the basis of the last reported price of the underlying security in the primary market that is generally available on the Trading Floor at any given time.\66\ --------------------------------------------------------------------------- \62\ See proposed BOX Rule 7570. \63\ See proposed BOX Rule 7600(g). A Not Held Order gives a Floor Broker discretion as to the price or time at which such order will be executed. See id. \64\ See proposed BOX Rule IM-7580-3. \65\ See proposed BOX Rules 7590, IM-7590-1 and IM-7590-2. Proposed BOX Rule 7590 will prohibit Floor Brokers from executing or causing to be executed any order or orders for which the Floor Broker is vested with discretion as to: (i) The choice of the class of options to be bought or sold; (ii) the number of contracts to be bought or sold; or (iii) whether any such transaction shall be one of purchase or sale. Proposed BOX Rule IM-7590-1 will prohibit the holding or acceptance of certain orders that could be interpreted as allowing the Floor Broker discretion with respect to whether to purchase or sell options. Proposed BOX Rule IM-7590-2 will prohibit Floor Brokers from exercising any discretion with respect to the order of an options market maker registered on any exchange. \66\ See proposed BOX Rule 7580(b). --------------------------------------------------------------------------- Floor Brokers will be required to make reasonable efforts to ascertain whether each order entrusted to them is for the account of a Public Customer or a broker-dealer.\67\ For broker-dealer orders, a Floor Broker must advise the trading crowd of the fact that it is an order for the account of a broker-dealer prior to open outcry and prior to submitting the order for execution, as well as note such fact in the Floor Broker's system.\68\ Additionally, a Floor Broker will be required to inform the trading crowd when he is representing an order for a Market Maker and will be required to comply with proposed BOX Rules IM-8510-6 and IM-8510-9.\69\ For Public Customer orders, a Floor Broker must disclose all securities that are components of the Public Customer order which is subject to crossing before requesting bids and offers for the execution of all components of the order.\70\ --------------------------------------------------------------------------- \67\ See proposed BOX Rule IM-7580-2. \68\ See proposed BOX Rule IM-7580-2. \69\ See proposed BOX Rule 7580(d). Proposed BOX Rule 8510-6 will allow the Exchange to temporarily limit the number of Floor Market Makers in the trading crowd who are establishing or increasing a position when the interests of a fair and orderly market require such limitation. Proposed BOX Rule 8510-9 will prohibit a Floor Market Maker from acquiring a ``long'' position by pairing off with a sell order before the opening, unless all off- Floor bids at that price are filled. \70\ See proposed BOX Rule IM-7600-1(a). A Floor Broker crossing a Public Customer order with an order that is not a Public Customer order, when providing for a reasonable opportunity for the trading crowd to participate in the transaction, will be required to disclose the Public Customer order that is subject to crossing. See proposed BOX Rule IM-7600-1(e). --------------------------------------------------------------------------- C. Floor Market Makers Proposed BOX Rule 8500(a) will require a Floor Market Maker to register as a Market Maker with the Exchange, and such registration could be revoked or suspended at any time. The proposed rules will require Floor Market Maker transactions to constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market.\71\ Additionally, a Floor Market Maker will be prohibited from effecting on the Exchange purchases or sales of any option in which such Floor Market Maker is registered, for any account in which he or his Options Participant is directly or indirectly interested, unless such dealings are reasonably necessary to permit such Floor Market Maker to maintain a fair and orderly market.\72\ --------------------------------------------------------------------------- \71\ See proposed BOX Rule 8510(a). \72\ See proposed BOX Rule 8500(c). --------------------------------------------------------------------------- A Floor Market Maker will have certain affirmative obligations in classes of options contracts to which the Floor Market Maker is assigned.\73\ Floor Market Makers will be subject to a Continuous Open Outcry Quoting Obligation, which will require Floor Market Makers to provide a two-sided market complying with the quote spread parameter requirements contained in proposed Rule 8510(d)(1), in response to any request for a quote by a Floor Broker or Options Exchange Official.\74\ Floor Market Maker quotations must be in a size of at least 10 contracts.\75\ Additionally, Floor Market Makers will be subject to a maximum option price change, and will not be permitted to bid more than $1 lower and/or offer more than $1 higher than the last preceding transaction price for a particular option contract.\76\ --------------------------------------------------------------------------- \73\ See proposed BOX Rule 8510(d). Proposed BOX Rule 8610(e) describes the obligations of a Floor Market Maker with respect to classes of options to which the Floor Market Maker is not appointed. The obligations of a Floor Market Maker with respect to those classes of options to which he is assigned will take precedence over his other activities. See proposed BOX Rule IM-8510-1. \74\ See proposed BOX Rule 8510(c)(2). Quotations in open outcry may not be made with $5 bid/ask differentials provided in BOX Rule 8040(a)(7). See proposed BOX Rule 8510(d)(1). \75\ See proposed BOX Rule 8510(c)(2). \76\ See proposed BOX Rule 8510(d)(2). This standard will not ordinarily apply if the price per share of the underlying stock or Exchange-Traded Fund Share has changed by more than $1 since the last preceding transaction for the particular option contract. See id. --------------------------------------------------------------------------- The proposed rule change imposes other limitations on Floor Market Makers. Specifically, subject to certain exceptions, no Floor Market Maker will be allowed to initiate an Exchange options transaction while on the Trading Floor for any account in which he has an interest and execute as Floor Broker an off-floor order in options on the same underlying interest during the same trading session, or retain priority over an off-floor order while establishing or increasing a position for an account in which he has an interest while on the Trading Floor of the Exchange.\77\ The proposed rule change also describes what Floor Market Maker orders will be considered ``on the Floor'' and which Floor Market Maker orders will be subject to certain restrictions of the proposed rule change.\78\ --------------------------------------------------------------------------- \77\ See proposed BOX Rule 8510(f) and (g). \78\ See proposed BOX Rules IM-8510-3(b), IM-8510-4 and IM-8510- 5. --------------------------------------------------------------------------- D. Options Exchange Officials and Supervision of the Trading Floor Under the proposed rule change, the President of the Exchange and his or her designated staff will be responsible for monitoring: (1) Dealings of Floor Participants and their associated persons on the Trading Floor, and of the premises of the Exchange immediately adjacent thereto; (2) the activities of Floor Participants and their associated persons, in addition to establishing standards and procedures for the training and qualification of Floor Participants and their associated persons active on the Trading Floor; (3) all Trading Floor employees of Floor Brokers and Floor Market Makers, and will make and enforce such rules with respect to such employees as may be deemed necessary; (4) all connections or means of communications with the Trading Floor, and may require the discontinuance of any such connection or means of communication when, in the opinion of the President or his or her designee, it is contrary to the welfare or interest of the Exchange; (5) the location of equipment and the assignment and use of space on the Trading Floor; and (6) relations with other options exchanges.\79\ --------------------------------------------------------------------------- \79\ See proposed BOX Rule 100(b)(1). The Exchange states that it will submit a separate filing to the Commission to amend the Exchange's Minor Rule Violation Plan in BOX Rule 12140 to cover minor rule violations on the Trading Floor. The Exchange represents that it will not commence operation of the Trading Floor until the Exchange's Minor Rule Violation Plan has been amended to include violations which may occur on the Trading Floor. --------------------------------------------------------------------------- The proposed rule change provides for the designation of Options Exchange Officials. Specifically, any Exchange employee or officer may be designated as an Options Exchange Official and will have the ability to recommend and enforce rules and regulations relating to trading access, order, decorum, health, safety and welfare on the Exchange.\80\ An Options Exchange Official will be required to, among other things, certify that Floor Brokers adequately announce QOO Orders to the trading crowd,\81\ resolve disputes regarding a Floor Broker's determination of time priority sequence,\82\ and properly record the allocation of the initiating side of a QOO Order as provided by a Floor Broker.\83\ Options Exchange Officials will also be [[Page 37148]] allowed to temporarily limit the number of Floor Market Makers in the trading crowd who are establishing or increasing a position when the interests of a fair and orderly market are served by such limitation,\84\ as well as call upon a Floor Market Maker to make a market.\85\ --------------------------------------------------------------------------- \80\ See proposed BOX Rule 100(b)(6). \81\ See proposed BOX Rule 7600(b). \82\ See proposed BOX Rule 7610(d)(1). \83\ See proposed BOX Rule 7600(d)(4). \84\ See proposed BOX Rule IM-8510-6. \85\ See proposed BOX Rule 8510(d). See also proposed BOX Rule 7610(d)(3). --------------------------------------------------------------------------- In addition, disputes occurring on and relating to the Trading Floor, if not settled by agreement between the interested Floor Participants, will be settled by an Options Exchange Official.\86\ Options Exchange Officials will have the authority to direct the execution of an order, adjust the transaction terms or Participants to an executed order, or nullify a transaction if the Options Exchange Official determines the transaction to have been in violation of Exchange Rules.\87\ All Options Exchange Official rulings are effective immediately and failure to comply with such a ruling may result in an additional violation.\88\ All Options Exchange Official rulings are reviewable by the Chief Regulatory Officer or his or her designee, and the proposed rule change provides procedures regarding review of rulings by Options Exchange Officials.\89\ --------------------------------------------------------------------------- \86\ See proposed BOX Rule 7640(a). The Exchange will be permitted to determine that an Options Exchange Official is ineligible to participate in a particular ruling where it appears such Options Exchange Official has a conflict of interest. See proposed BOX Rule IM-7640-1. \87\ See proposed BOX Rule 7640(b). \88\ See proposed BOX Rule 7640(c). \89\ See proposed BOX Rule 7640(e). --------------------------------------------------------------------------- E. Clerks The Exchange will permit Clerks--defined as any registered on-floor persons employed by or associated with a Floor Broker or Floor Market Maker and who are not eligible to effect transactions on the Trading Floor as a Floor Market Maker or Floor Broker--on the Trading Floor.\90\ Proposed Rule 7630 sets forth identification requirements, registration requirements, and provisions relating to conduct on the Trading Floor with respect to Clerks.\91\ A Floor Broker Clerk will be permitted to enter an order under the direction of a Floor Broker by way of any order handling device.\92\ A Floor Market Maker Clerk will be permitted to communicate verbal market information (i.e., bid, offer, and size) in response to requests for such information, provided that such information is communicated under the direct supervision of his or her Floor Market Maker employer, and such bids and offers are binding as if made by the Floor Market Maker employer.\93\ All Trading Floor personnel, including clerks, interns, stock execution clerks and any other associated persons, of a Floor Participant not required to register pursuant to proposed Rule 2020(h) must be registered as a ``Floor Employee'' under ``BOX'' on Form U4.\94\ --------------------------------------------------------------------------- \90\ See proposed BOX Rule 7630(a). \91\ See proposed BOX Rule 7630. Among other things, proposed BOX Rule 7630 will require Clerks to display prominently at all time badge(s) supplied to them by the Exchange while on the Trading Floor and specifies that Clerks will be primarily located at a workstation assigned to his employer unless the Clerk is (i) entering or leaving the Trading Floor; (ii) transmitting, correcting, or checking the status of an order or reporting or correcting an executed trade; or (iii) supervising other Clerks. See id. \92\ See proposed BOX Rule 7630(e). \93\ See proposed BOX Rule 7630(f)(2). \94\ See proposed BOX Rule 2020(i). --------------------------------------------------------------------------- F. Communications and Equipment The Exchange proposes BOX Rule 7660 to govern communications and equipment on the Trading Floor, including registration requirements, restrictions on use, capacity and functionality, recordkeeping requirements and exchange liability. Among other things, the proposed rule will allow Floor Market Makers to use their own cellular and cordless phones to place calls to any person at any location (whether on or off the Trading Floor) and allow Floor Brokers to use any communication device on the Trading Floor and in the Crowd Area to receive orders, provided that the Exchange's audit trail and record retention requirements are satisfied.\95\ In addition, the Exchange represents that it has established a Communications Devices policy and violations of this policy may result in disciplinary action by the Exchange.\96\ Proposed BOX Rule 7660 and any relevant Exchange policy are intended to apply to all communication and other electronic devices on the Trading Floor, including, but not limited to, wireless, wired, tethered, voice, and data.\97\ --------------------------------------------------------------------------- \95\ See proposed BOX Rule 7660(h) and (i). \96\ See proposed BOX Rule IM-7660-1. \97\ See proposed BOX Rule IM-7660-2. --------------------------------------------------------------------------- G. Other Changes The Exchange's proposal includes several other provisions relating to the proposed Trading Floor, including Trading Floor hours; \98\ Trading Floor admittance; \99\ the term ``on the Floor,'' which means the Trading Floor, the rooms, lobbies and other premises immediately adjacent thereto made available by the Exchange for use by Floor Participants generally; other rooms, lobbies and premises made available by the Exchange primarily for use by Floor Participants; and the telephone and other facilities in any such place;'' \100\ and the location of Floor Participants on the Trading Floor.\101\ The proposal also includes provisions relating generally to Floor Participants, including the registration of Floor Participants; \102\ excepting Floor Participants who do not conduct business with the public from brokers' blanket bond requirements; \103\ requiring Floor Participants to procure and maintain liability insurance; \104\ generally prohibiting trading for joint accounts without the prior approval of the exchange; \105\ prohibiting Floor Participants from relying on an exemption under Section 11(a)(1)(G) of the Act; \106\ and procedures governing the resolution of uncompared trades between Floor Participants.\107\ To accommodate new definitions relevant to the proposed Trading Floor, the Exchange is also renumbering certain subparts of Rule 100, Definitions, and making corresponding changes to update cross-references to such definitions where appropriate.\108\ --------------------------------------------------------------------------- \98\ See proposed BOX Rule 7500. \99\ See proposed BOX Rules 7510 and 7520. \100\ See proposed BOX Rule IM-8510-3(a). \101\ See proposed BOX Rule IM-8510-7. \102\ See BOX Rule 2020(h). \103\ See proposed BOX Rule 4180(g). \104\ See proposed BOX Rule 7230(f). \105\ See proposed BOX Rule 7650. \106\ See proposed BOX Rule IM-7600-5. \107\ See proposed BOX Rule 8530(a). \108\ See, e.g., proposed BOX Rules 100, 7130, 7150, 7245. --------------------------------------------------------------------------- H. Trading Floor Data The Exchange represents that it will provide the Commission with data related to activity on the Trading Floor.\109\ Specifically, the Exchange will provide information regarding size, participation, price improvement by spread and trade type, effective spread, Floor Market Maker participation, and BOX Book participation.\110\ Firm-specific information will be provided to the Commission on a confidential basis each quarter and non-firm specific information will be made available to the public quarterly on the Exchange's Web site.\111\ --------------------------------------------------------------------------- \109\ See Notice of Amendment No. 2, supra note 11, at 23679. \110\ See id. \111\ See id. --------------------------------------------------------------------------- III. Discussion and Commission Findings After careful review and consideration of the comments received, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with the [[Page 37149]] requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\112\ In particular, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with Sections 6(b)(1) and 6(b)(5) of the Act.\113\ Section 6(b)(1) of the Act \114\ requires an exchange to be so organized and have the capacity to be able to carry out the purposes of the Act and to comply, and to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. Section 6(b)(5) of the Act \115\ requires, among other things, that the rules of a national securities exchange be 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 regulating, clearing, settling, processing information with respect to, and 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; and not be designed to permit unfair discrimination between customers, issuers, brokers or dealers. --------------------------------------------------------------------------- \112\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \113\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5). \114\ 15 U.S.C. 78f(b)(1). \115\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- As previously noted, the Commission received three comment letters on the initial proposed rule change, and one response letter from BOX.\116\ Subsequently, the Commission received five comment letters on the Order Instituting Proceedings and the proposed rule change as modified by Amendment No. 1, as well as a second response letter from BOX. Of these five comment letters, two urged disapproval of the proposed rule change,\117\ while the remaining three requested clarity or more specificity on various aspects of the proposal.\118\ Finally, in response to the publication of Amendment No. 2, two prior commenters submitted additional letters and BOX submitted an additional response letter.\119\ One of these commenters raised concerns with several aspects of the proposal for which it requested further consideration,\120\ while the other commenter urged disapproval of the proposed rule change, as amended.\121\ --------------------------------------------------------------------------- \116\ These comments, as well as BOX's initial response, are described in detail in the Order Instituting Proceedings. See Order Instituting Proceedings, supra note 7. \117\ See CBOE Letter II and CTC Letter II, supra note 8. \118\ See Group One Letter, Nasdaq Letter II, and NYSE Letter, supra note 8. \119\ See Nasdaq Letter III and CTC Letter III, supra note 13 and BOX Response Letter III, supra note 14. \120\ See Nasdaq Letter III, supra note 13. \121\ See CTC Letter III, supra note 13. --------------------------------------------------------------------------- A. BOX Floor Participation 1. Floor Market Maker Presence Requirement Four commenters expressed concern that BOX's initial proposal would allow a Floor Broker to execute trades on the Trading Floor when no Floor Market Makers are present.\122\ One commenter argued that options exchange trading floors grew from crowded equities or futures floors and therefore were certain to have robust and active market maker populations.\123\ The commenter further stated that the lack of rules to ensure robust market maker participation on the proposed Trading Floor would provide a way for internalizers to avoid exposure to market makers who might otherwise provide price improvement, which is contrary to investor protection and the public interest.\124\ One commenter stated that allowing orders to be crossed without meaningful exposure to other market participants deprives floor orders of the opportunity for exposure to a bona fide open-outcry auction process.\125\ Another commenter suggested that orders should be exposed to any Floor Participant that is eligible to interact as part of the crossing transaction.\126\ Another commenter argued that any proposed new options trading floor should be required to electronically expose all orders originating on the trading floor to qualified market participants off the trading floor before such orders would be permitted to execute.\127\ --------------------------------------------------------------------------- \122\ See CTC Letters I & II, CBOE Letter II, Group One Letter, and Nasdaq Letter II, supra notes 4 and 8. \123\ See CTC Letter I, supra note 4, at 4. \124\ See id. at 4-5. See also Group One Letter and NYSE Letter, supra note 8. \125\ See Group One Letter, supra note 8, at 2. \126\ See NYSE Letter, supra note 8, at 2. \127\ See CTC Letter I, supra note 4, at 3-4. --------------------------------------------------------------------------- One commenter suggested that prior to the commencement of trading, BOX should be required to demonstrate that the Trading Floor is sufficiently populated with market participants, particularly Floor Market Makers, to ensure that a reasonable amount of liquidity exists.\128\ This commenter further noted that a well-populated trading floor is important for fostering price competition.\129\ --------------------------------------------------------------------------- \128\ See Nasdaq Letter III, supra note 13, at 3. \129\ See id. at 2. --------------------------------------------------------------------------- In response to concerns about the potential for trades to be executed in the absence of a Floor Market Maker on the Trading Floor, BOX submitted Amendment No. 2 to require a Floor Broker to ascertain that at least one Floor Market Maker is present in the trading crowd prior to announcing an order to the trading crowd.\130\ In addition, in response to concerns regarding a potential lack of order exposure to other Floor Participants, BOX stated that proposed Rules 7580(e)(2) and 7600(b) require all orders from the Trading Floor to be exposed to the trading crowd prior to execution in the Trading Host and to require a Floor Broker to give Floor Participants a reasonable amount of time to respond once an order is announced to the trading crowd.\131\ BOX further stated that the proposal has always required orders to be exposed to the trading crowd prior to execution.\132\ In addition, BOX stated that it plans to launch its trading operations on the Trading Floor as soon as the requisite number of Floor Market Makers and Floor Brokers are registered and able to participate on the Trading Floor.\133\ --------------------------------------------------------------------------- \130\ See BOX Response Letter II, supra note 12, at 3. See also Notice of Amendment No. 2, supra note 11, at 23663. \131\ See BOX Response Letter II, supra note 12, at 2-3. \132\ See id. \133\ See BOX Response Letter III, supra note 14, at 2. --------------------------------------------------------------------------- The Commission notes that the Exchange amended its proposal to require a Floor Broker to ascertain that at least one Floor Market Maker be present in the Crowd Area prior to announcing an order to the trading crowd. The Commission believes that this requirement--along with the BOX's other amendments to the proposal, such as the changes to the crowd area presence requirement and the Floor Market Maker quoting requirement, described below--are designed to increase the opportunities for another Floor Participant to compete to interact with the orders on the Trading Floor.\134\ --------------------------------------------------------------------------- \134\ See proposed BOX Rule 7580(a). --------------------------------------------------------------------------- 2. Crowd Area Presence Requirement Four commenters raised concerns with the proposed requirement in BOX's initial proposed rule change that a Floor Market Maker must be physically located in a specific Crowd Area to be deemed participating in the Crowd.\135\ [[Page 37150]] Two commenters expressed concern regarding the proposed rule change's description and application of physical boundary requirements.\136\ One commenter suggested that this aspect of the proposed rule change would limit potential opportunities for market maker price improvement.\137\ Another commenter suggested that the proposal to allow a Floor Market Maker to participate in a crowd only if he or she is physically located in a specific Crowd Area ``at the time the order is represented in the crowd'' is designed to discourage Floor Market Makers from providing liquidity.\138\ The commenter suggested that the Exchange could instead open a Trading Floor comprised of a single Crowd Area with rules permitting all Floor Market Makers to trade all issues as a means to help ensure opportunities for price improvement.\139\ Another commenter stated that, without knowledge of the order, it will be impossible for market makers to position themselves in advance in the appropriate pit, and therefore, multiple crowd areas will limit the ability of Floor Market Makers to participate, potentially threatening the best execution of customer orders.\140\ --------------------------------------------------------------------------- \135\ See CBOE Letters I & II, CTC Letters I & II, Group One Letter, and NYSE Letter, supra notes 4 and 8. \136\ See CBOE Letter I and CTC Letter I, supra note 4. \137\ See CBOE Letter I, supra note 4, at 2, n.2. \138\ See CTC Letter I, supra note 4, at 6. \139\ See id. \140\ See Group One Letter, supra note 8, at 2. --------------------------------------------------------------------------- In response to these concerns, BOX submitted Amendment No. 2 to provide that the Trading Floor will be comprised of a single Crowd Area.\141\ BOX further noted that all options classes will be located in that Crowd Area, and Floor Brokers must expose orders via open outcry in the Crowd Area.\142\ --------------------------------------------------------------------------- \141\ See BOX Response Letter II, supra note 12, at 2. \142\ See id. --------------------------------------------------------------------------- The Commission believes that providing all Floor Market Makers the opportunity to respond to all orders on the Trading Floor is designed to increase the potential for competition for an order, which may increase the quality of order executions on BOX.\143\ --------------------------------------------------------------------------- \143\ See proposed BOX Rule 100(b)(5). --------------------------------------------------------------------------- 3. Market Makers Must Opt-In To Participate Four commenters expressed concern about the aspect of the proposal that requires market makers to affirmatively opt-in to participate in a floor trade.\144\ One commenter opposed the concept of assuming a market maker to be ``out'' by default and expressed their preference that BOX be required to allow Floor Market Makers to respond to a Floor Broker's request for a quote before a cross is executed.\145\ Another commenter stated its belief that the proposed default ``out'' is unnecessary so long as the proposed rules support ample opportunities for Floor Market Maker participation.\146\ Another commenter requested clarification as to what would constitute participation for Floor Market Makers,\147\ while a different commenter suggested that a Floor Market Maker's failure to bid or offer in ``immediate and rapid succession'' could be treated the same way as the Floor Market Maker not responding at all--with the result that the Floor Market Maker will be considered ``out'' on the trade.\148\ --------------------------------------------------------------------------- \144\ See CTC Letter II, Group One Letter, Nasdaq Letter II, and NYSE Letter, supra note 8. \145\ See CTC Letter II, supra note 8, at 6. \146\ See Group One Letter, supra note 8, at 3. \147\ See Nasdaq Letter II, supra note 8, at 3. \148\ See NYSE Letter, supra note 8, at 2. --------------------------------------------------------------------------- In response, BOX submitted Amendment No. 2 to provide that a Floor Broker will be required to give Floor Participants a reasonable amount of time to respond once the Floor Broker announces an order to the trading crowd.\149\ BOX also clarified that after a Floor Broker announces an order, a Floor Participant must verbalize that he is ``in'' even if the Floor Participant has already provided a valid quote prior to the announcement of the order by the Floor Broker.\150\ --------------------------------------------------------------------------- \149\ See Notice of Amendment No. 2, supra note 11, at 23659. See also proposed BOX Rule 100(b)(5). \150\ See Notice of Amendment No. 2, supra note 11, at 23660. In addition, the Exchange noted that at least one other options exchange with an options floor also requires members of its trading crowd to respond to participate in a floor crossing transaction. See CBOE Rule 6.74(a). See also NYSE Arca Rule 6.47(a); and NYSE American LLC Rule 934NY. --------------------------------------------------------------------------- The Commission believes the proposal should ensure that Floor Participants may respond to orders announced in the trading crowd. In addition, the Commission notes that Amendment No. 2 will require an Options Exchange Official to certify that a Floor Broker adequately announced a QOO Order to the trading crowd.\151\ --------------------------------------------------------------------------- \151\ See proposed BOX Rule 7600(b). --------------------------------------------------------------------------- 4. Floor Market Maker Quoting Requirement Five commenters expressed concern with the proposed requirement in BOX's initial proposed rule change that Floor Market Makers would have to quote electronically in all classes offered on the proposed Trading Floor.\152\ One commenter stated that the imposition of an electronic quoting requirement could limit potential market maker price improvement.\153\ This commenter further argued that the quoting requirement creates a barrier to entry that they believe will limit market-maker participation on the Trading Floor.\154\ Another commenter suggested that the proposed requirement appears to impose a costly and unprofitable burden on would-be market makers, which will discourage them from participating on the Trading Floor and which in turn will create a trading floor which is devoid of opportunities for meaningful order exposure and price improvement.\155\ This commenter further argued that the proposed rule change will discourage competitive market maker participation on the proposed Trading Floor.\156\ In response to commenters' concerns, in Amendment No. 2, BOX eliminated the requirement to quote electronically in the classes that the Floor Market Maker quotes on the Trading Floor.\157\ --------------------------------------------------------------------------- \152\ See CBOE Letters I & II, CTC Letters I & II, Group One Letter, Nasdaq Letters I & II, and NYSE Letter, supra notes 4 and 8. \153\ See CBOE Letter I, supra note 4, at 2 n.2. \154\ See CBOE Letter II, supra note 8, at 2. \155\ See CTC Letter I, supra note 4, at 5. See also CTC Letter III, supra note 13, at 2. \156\ See CTC Letter I, supra note 4, at 5. \157\ See Notice of Amendment No. 2, supra note 11, at 23658. See also BOX Response Letter II, supra note 12, at 2. --------------------------------------------------------------------------- The Commission believes that BOX's proposal to require a Floor Market Maker to provide a two-sided market that complies with certain delineated quote spread parameters in response to any request for quote by a Floor Broker or Options Exchange Official, is consistent with the Act. B. Single-Sided Floor Orders Two commenters raised concerns about the inability of Floor Participants to represent single-sided orders on the proposed BOX Floor.\158\ One commenter noted that some language in Amendment No. 1 ``welcomes'' Floor Brokers to bring unmatched orders to the Trading Floor, while other language stated that ``orders on the floor must be two-sided orders,'' which the commenter found to be contradictory and confusing.\159\ In response, the Exchange submitted Amendment No. 2 to specifically state that Floor Brokers will be permitted to bring an unmatched order to the Trading Floor in order to seek a contra-side, and then enter the order into the BOX system using the QOO order type.\160\ --------------------------------------------------------------------------- \158\ See CBOE Letter I and CTC Letters I & II, supra notes 4 and 8. \159\ See CTC Letter II, supra note 8, at 8. \160\ See proposed BOX Rules 7580(e)(2), 7600(b), IM-7600-4. See also BOX Response Letter I, supra note 6, at 4. --------------------------------------------------------------------------- Specifically, the Exchange noted that, as was true in its initial proposed rule [[Page 37151]] change, Floor Brokers will be permitted to bring single-sided orders to the Trading Floor in order to find contra-side liquidity.\161\ The Commission notes that the Exchange's proposed rules state that Floor Brokers will have the ability to represent single-sided orders on the Trading Floor, will be permitted to solicit bids and offers from Floor Market Makers to provide a contra-side order, and set forth rules governing the handling and execution of single-sided orders originating on the Trading Floor. --------------------------------------------------------------------------- \161\ See Notice of Amendment No. 2, supra note 11, at 23660. --------------------------------------------------------------------------- C. Trade-Through and Priority Rules One commenter stated that the proposed rule change is unclear regarding how the proposed BOG would systematically prevent violations of priority and trade-through requirements.\162\ This commenter further stated that it is unclear whether exposure in the trading crowd is required and whether the market against which trades are validated differs depending on the method of execution.\163\ Specifically, the commenter claimed that the proposed rule change does not sufficiently describe the timing and process for validating trades.\164\ In addition, this commenter stated that the proposed rule change does not discuss the specific manner in which surveillance reviews transactions for violations of Exchange rules or the manner in which the BOG or the Exchange enforces compliance for on-floor transactions.\165\ --------------------------------------------------------------------------- \162\ See Nasdaq Letter I, supra note 4, at 2. See also Nasdaq Letter II, supra note 8, at 3-4. \163\ See Nasdaq Letter I, supra note 4, at 2. \164\ See id. \165\ See id. at 3. --------------------------------------------------------------------------- In response to the commenter's concern that the proposed rule change is unclear about whether the BOG would systematically prevent violations of priority and trade-through requirements, BOX stated that the method by which trades are received and processed by the Trading Host serves as a safeguard to prevent violations of the priority and trade-through requirements.\166\ BOX also noted that the execution does not occur when there is verbal agreement in the trading crowd, but rather when the executing Floor Broker sends the order from the Trading Floor to the Trading Host for execution.\167\ BOX further stated that it structured the proposal to prevent trade-through violations and protect priority interest on the BOX Book.\168\ --------------------------------------------------------------------------- \166\ See BOX Response Letter I, supra note 6, at 1-2. See also BOX Response Letter II, supra note 12, at 3 (stating that since the execution does not occur until the order is processed by the Trading Host, the system will enforce compliance with trade-through, priority, and other rules). \167\ See BOX Response Letter II, supra note 12, at 3. \168\ See BOX Response Letter I, supra note 6, at 2. --------------------------------------------------------------------------- In response to the commenter's suggestion that the proposed rule change does not adequately discuss surveillance, BOX stated that it currently has surveillance procedures in place to monitor compliance with the Exchange's rules and that these procedures will be used to monitor transactions originating from the Trading Floor.\169\ --------------------------------------------------------------------------- \169\ See id. --------------------------------------------------------------------------- In response to BOX's assurances regarding its proposed surveillance procedures, the commenter stated that it is unclear whether BOX would have real-time surveillance coverage on the trading floor in addition to other types of surveillance coverage.\170\ The commenter suggested that real-time surveillance is necessary to monitor the unique aspects of member floor trading, such as negotiating open-outcry trades, handling floor disputes, and maintaining the ability to manually intervene in the floor environment.\171\ --------------------------------------------------------------------------- \170\ See Nasdaq Letter III, supra note 13, at 1-2. \171\ See id. --------------------------------------------------------------------------- In response, BOX stated that it will have both a real-time surveillance presence on the trading floor and other surveillance coverage.\172\ BOX further noted that proposed Rule 7600(b) will require an Options Exchange Official to certify that a Floor Broker adequately announced a QOO Order to the trading crowd and stated that such certification is only possible if the Official is physically present on the Trading Floor.\173\ Finally, BOX reiterated that because all orders from the Trading Floor will be processed by the Trading Host, the Exchange also will electronically monitor all orders from the Trading Floor in the same manner as it does with electronic orders.\174\ --------------------------------------------------------------------------- \172\ See BOX Response Letter III, supra note 14, at 2. \173\ See id. \174\ See id. --------------------------------------------------------------------------- The Commission notes that the Exchange represents that the Trading Host will establish an electronic audit trail for options orders represented and executed by Floor Brokers, that according to the Exchange, will provide an accurate time-sequenced record of all orders from the Trading Floor, beginning with the receipt of an order by the Exchange and documenting all stages of the order.\175\ The Commission believes that the proposed systematization of all orders submitted to the Trading Floor is designed to provide a more complete audit trail and allow the Exchange to better monitor compliance with applicable Commission regulations and Exchange Rules.\176\ In addition, the Commission notes that the proposal requires all QOO Orders to be submitted through the BOG to be immediately processed by the Trading Host.\177\ The Commission further notes that orders are not deemed executed until they are processed by the Trading Host. The Commission believes that the automation provided by the BOG and the Trading Host may benefit the Exchange, its members and users, and other market participants by, for example, producing more accurate and timely trade reports and should ensure compliance with trade-through and priority rules. For example, the Trading Host will automatically prohibit a QOO Order from executing if such execution would trade-through a better priced order on the BOX Book (and the Floor Broker does not provide an adequate book sweep size) or on another market.\178\ In addition, processing and executing all QOO Orders by the Trading Host could provide a more accurate timestamp for audit trail and recordkeeping purposes than a manual alternative.\179\ The Commission believes that the functionality provided by the BOG and the Trading Host is reasonably designed to assist Floor Participants in complying with applicable Commission rules and regulations, and with the Exchange's Rules. --------------------------------------------------------------------------- \175\ See Notice of Amendment No. 2, supra note 11, at 23661. \176\ See proposed BOX Rule 7580(e)(1). \177\ See proposed BOX Rule 100(b)(2). \178\ See proposed BOX Rule 7600. \179\ The Commission notes that the proposed rule change does not permit trades to occur on the Trading Floor if there is a malfunction with the Trading Host or related Trading Floor systems such as the BOG. See proposed BOX Rule 7580(e)(1). --------------------------------------------------------------------------- D. Book Sweep Three commenters expressed concern about the proposed ``book sweep size'' mechanism.\180\ One commenter suggested that the book sweep size would be a feature that prevents executions of orders on the BOX Book.\181\ The commenter further stated that the book sweep mechanism could prevent orders from executing in circumstances where there are orders on the BOX Book that could fill the order, possibly at a better price, and thus the mechanism potentially compromises its participants' compliance with best-execution obligations and unfairly discriminates against investors with [[Page 37152]] executable orders resting in the BOX Book.\182\ Another commenter suggested that the book sweep size functionality could allow Floor Brokers to ensure the internalization of orders by not designating a book sweep size.\183\ --------------------------------------------------------------------------- \180\ See CBOE Letter II, CTC Letters I, II, & III, and NYSE Letter, supra notes 4, 8 and 13. \181\ See CTC Letter I, supra note 4, at 7. See also CTC Letter III, note 13, at 3. \182\ See CTC Letter I, supra note 4, at 7-8. See also CTC Letter III, note 13, at 3. \183\ See CBOE Letter II, supra note 8, at 2. --------------------------------------------------------------------------- In response to the commenters' concerns regarding the book sweep size aspect of the proposal, BOX stated that the book sweep size is a voluntary tool that will aid Floor Brokers in satisfying duties owed to their customers, such as best execution.\184\ For example, according to BOX, when a Floor Broker needs an order to be executed immediately, the broker could opt either to provide a book sweep size equal to the entire size of the order, which provides liquidity to the BOX Book, or to provide an execution price that is better than the current best price on BOX, which presents an opportunity for potential price improvement.\185\ BOX also noted that it believes functionality similar to the book sweep size mechanism is available on at least one other trading floor, so the book sweep size aspect of its proposal is not unique.\186\ BOX further stated that any Floor Broker that uses the book sweep size for the purpose of violating his or her duties and obligations will be considered to have engaged in conduct inconsistent with just and equitable principles of trade.\187\ --------------------------------------------------------------------------- \184\ See BOX Response Letter I, supra note 6, at 3-4. See also BOX Response Letter II, supra note 12, at 3-4; BOX Response Letter III, supra note 14, at 3. \185\ See BOX Response Letter I, supra note 6, at 4. \186\ See id. See also BOX Response Letter II, supra note 12, at 4; BOX Response Letter III, supra note 14, at 3. BOX states that it believes the proposed book sweep size mechanism is comparable to the PHLX Floor Broker Management System. \187\ See BOX Response Letter II, supra note 8, at 4. --------------------------------------------------------------------------- The Commission believes that the book sweep size functionality should provide Floor Brokers with an efficient mechanism to automatically execute orders (provided they designate a sufficient book sweep size) without having to send a separate order to clear orders on the BOX Book that have priority. The Commission reminds broker-dealers that they have a legal duty to seek to obtain best execution of customer orders.\188\ A broker- dealer's duty of best execution derives from common law agency principles and fiduciary obligations, and is incorporated in SRO rules and, through judicial and Commission decisions, the antifraud provisions of the federal securities laws.\189\ The duty of best execution requires broker-dealers to periodically assess the quality of competing markets to assure that order flow is directed to the markets providing the most beneficial terms for their customer orders.\190\ Broker-dealers must examine their procedures for seeking to obtain best execution in light of market and technology changes and modify those practices if necessary to enable their customers to obtain the best reasonably available prices.\191\ In doing so, broker-dealers must take into account price improvement opportunities, and whether different markets may be more suitable for different types of orders or particular securities.\192\ --------------------------------------------------------------------------- \188\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) (settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); In re Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules Release''). \189\ Order Handling Rules Release, supra note 188, at 48322. See also Newton, 135 F.3d at 270. Failure to satisfy the duty of best execution can constitute fraud because a broker-dealer, in agreeing to execute a customer's order, makes an implied representation that it will execute it in a manner that maximizes the customer's economic gain in the transaction. See Newton, 135 F.3d at 273 (``[T]he basis for the duty of best execution is the mutual understanding that the client is engaging in the trade--and retaining the services of the broker as his agent--solely for the purpose of maximizing his own economic benefit, and that the broker receives her compensation because she assists the client in reaching that goal.''); In re Marc N. Geman, Securities Exchange Act Release No. 43963 (Feb. 14, 2001) (citing Newton, but concluding that respondent fulfilled his duty of best execution). See also Payment for Order Flow, Securities Exchange Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994) (``Payment for Order Flow Final Rules''). If the broker-dealer intends not to act in a manner that maximizes the customer's benefit when he accepts the order and does not disclose this to the customer, the broker-dealer's implied representation is false. See Newton, 135 F.3d at 273-274. \190\ Order Handling Rules Release, supra note 188, at 48322-33 (``In conducting the requisite evaluation of its internal order handling procedures, a broker-dealer must regularly and rigorously examine execution quality likely to be obtained from different markets or market makers trading a security.''). See also Newton, 135 F.3d at 271; Market 2000: An Examination of Current Equity Market Developments, at V-4 (SEC Division of Market Regulation January 1994) (``Without specific instructions from a customer, however, a broker-dealer should periodically assess the quality of competing markets to ensure that its order flow is directed to markets providing the most advantageous terms for the customer's order.''); Payment for Order Flow Final Rules, supra note 189, at 55009. \191\ Order Handling Rules, supra note 188 at 48323. \192\ See id. --------------------------------------------------------------------------- E. Compliance With Section 11(a) of the Act One commenter expressed concern that BOX may not have adequately explained how options participants would comply with Section 11(a)(1) of the Act when effecting transactions through the BOG.\193\ More specifically, this commenter noted that BOX did not explain how a BOX member that is the counterparty to a QOO Order would comply with Section 11(a) of the Act.\194\ In response, BOX amended its proposal to help ensure compliance with Section 11(a)(1) of the Act.\195\ --------------------------------------------------------------------------- \193\ See NYSE Letter, supra note 8, at 5-6. \194\ See id. \195\ See BOX Response Letter II, supra note 12, at 4. --------------------------------------------------------------------------- Section 11(a)(1) of the Act \196\ prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, ``covered accounts''), unless an exception applies. Sections 11(a)(1)(A)-(I) of the Act \197\ and the rules thereunder provide certain exemptions from this general prohibition, including the exemption set forth in Rule 11a2-2(T) under the Act.\198\ The Exchange represents that its proposed rule change is consistent with Section 11(a) of the Act and the rules thereunder.\199\ The Exchange also states that the proposed rule change would not limit in any way the obligation of a Participant to comply with Section 11(a) of the Act or the rules thereunder.\200\ --------------------------------------------------------------------------- \196\ 15 U.S.C. 78k(a)(1). \197\ 15 U.S.C. 78k(a)(1)(A)-(I). \198\ 17 CFR 240.11a2-2(T). \199\ See Notice of Amendment No. 2, supra note 11, at 23681. \200\ See id. --------------------------------------------------------------------------- The Commission notes that the Exchange proposes to adopt IM-7600-5, which states that a Participant shall not utilize the Trading Floor to effect any transaction for a covered account by relying on an exemption under Section 11(a)(1)(G) of the Act (``G Exemption'').\201\ As the Exchange notes, [[Page 37153]] because no covered account transactions utilizing the Trading Floor may rely on the G Exemption, Participants utilizing the Trading Floor to effect transactions for covered accounts may only rely upon other exemptions to the Section 11(a)(1) prohibition.\202\ --------------------------------------------------------------------------- \201\ 15 U.S.C. 78k(a)(1)(G). Section 11(a)(1)(G) of the Act provides an exemption from the general prohibition in Section 11(a)(1) of the Act for any transaction for a member's own account, provided that: (i) Such member is primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, and acting as broker, or any one or more of such activities, and whose gross income normally is derived principally from such business and related activities; and (ii) such transaction is effected in compliance with rules of the Commission which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields priority, parity, and precedence in execution to orders for the account of persons who are not members or associated with members of the exchange. See also 17 CFR 240.11a1-1(T) (setting forth requirements for relying on the G Exemption). \202\ See Notice of Amendment No. 2, supra note 11, at 23681. Section 11(a) of the Act and the rules thereunder provide other exemptions to the Section 11(a)(1) prohibition, including, for example, the ``effect versus execute'' exemption (as discussed below), the exemption for transactions by a dealer acting in the capacity of a market maker, and the exemption for transactions to offset a transaction made in error. --------------------------------------------------------------------------- In addition to statutory exemptions, Rule 11a2-2(T) under the Act,\203\ known as the ``effect versus execute'' rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute transactions on the exchange. To comply with Rule 11a2-2(T)'s conditions, a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once the order has been transmitted to the member performing the execution; \204\ (iii) may not be affiliated with the executing member; and (iv) with respect to an account over which the member or an associated person has investment discretion, neither the member nor an associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. For the reasons set forth below, the Commission believes that Participants utilizing the Trading Floor may comply with the conditions of Rule 11a2-2(T) under the Act.\205\ --------------------------------------------------------------------------- \203\ 17 CFR 240.11a2-2(T). \204\ This prohibition also applies to associated persons of the initiating member. The member may, however, participate in clearing and settling the transaction. \205\ The Commission has previously found that the all- electronic transactions effected through the Trading Host are consistent with the requirements of Section 11(a) of the Act and Rule 11a2-2(T) thereunder. See, e.g., Securities Exchange Act Release Nos. 72848 (August 14, 2014), 79 FR 49361 (August 20, 2014) (SR-BOX-2014-16) (order approving the Exchange's proposal to adopt new trade allocation algorithms for matching trades at the conclusion of the PIP and the COPIP); and 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (order granting the Exchange's application for registration as a national securities exchange). As part of the current proposal, the Exchange represents that the Trading Host will enforce trade-through and priority rules in the same manner for QOO orders as the Trading Host does for all other orders on the Exchange. See Notice of Amendment No. 2, supra note 11, at 23659. --------------------------------------------------------------------------- Rule 11a2-2(T)'s first requirement is that orders for covered accounts be transmitted from off the exchange floor. The Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange's floor by electronic means.\206\ The Exchange states that Floor Brokers will receive matched or unmatched orders either via telephone, or electronically to the Floor Broker's order entry mechanism.\207\ Moreover, the Exchange states that a Participant could submit an order for a covered account from off the Trading Floor to an unaffiliated Floor Broker for representation on the Trading Floor and use the ``effect versus execute'' exemption (assuming the other conditions of the rule are satisfied).\208\ The Commission notes that a Participant that submits an order for a covered account that utilizes the Trading Floor, and who wishes to rely on the ``effect versus execute'' exemption, must submit the order from off the Trading Floor. --------------------------------------------------------------------------- \206\ See, e.g., Securities Exchange Act Release Nos. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979); and 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (``1978 Release''). \207\ See Notice of Amendment No. 2, supra note 11, at 23666. \208\ See id. at 23681. --------------------------------------------------------------------------- Second, Rule 11a2-2(T) requires that neither the initiating member nor an associated person of the initiating member participate in the execution of the transaction at any time after the order for the transaction has been transmitted. The Exchange represents that at no time following the submission of an order utilizing the Trading Floor will the submitting Participant or any associated person of such Participant acquire control or influence over the result or timing of the order's execution.\209\ In addition, the Exchange states that once a Floor Broker submits a QOO order to the BOG for execution, neither the Floor Broker nor anyone else may alter the terms of the order.\210\ Moreover, when a Floor Broker submits a QOO Order for execution, the order will be executed in accordance with Exchange rules and based on market conditions of when the order is received by the Trading Host.\211\ Accordingly, based on the Exchange's representations, the Commission believes that a Participant and its associated persons would not participate in the execution of an order submitted for execution utilizing the Trading Floor. --------------------------------------------------------------------------- \209\ See id. The Commission notes that a Participant may cancel or modify the order, or modify the instructions for executing the order. The Commission has stated that the non-participation requirement is satisfied under such circumstances so long as the modifications or cancellations are also transmitted from off the floor. See 1978 Release, supra note 206, at 11547 (stating that the ``non-participation requirement does not prevent initiating members from canceling of modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor''). \210\ See proposed Rule 7600(c) and Notice of Amendment No. 2, supra note 11, at 23666. \211\ See proposed Rule 7600(a) and Notice of Amendment No. 2, supra note 11, at 23665. --------------------------------------------------------------------------- Third, Rule 11a2-2(T) requires that the order be executed by an exchange member that is not associated with the member initiating the order. According to the Exchange, to rely on the exemption in Rule 11a2-2(T), a Participant could submit an order for a covered account from off the Trading Floor to an unaffiliated Floor Broker.\212\ The Exchange also states that a Participant relying on Rule 11a2-2(T) could not submit an order for a covered account to its ``house'' Floor Broker on the Trading Floor for execution.\213\ The Commission notes that if a Participant sends its order from off the floor to an affiliated Participant that is on the floor, who then directs the order into the Trading Host for execution, the off-floor Participant may not rely on the exemption in Rule 11a2-2(T). --------------------------------------------------------------------------- \212\ See Notice of Amendment No. 2, supra note 11, at 23681. \213\ See id. --------------------------------------------------------------------------- Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2-2(T) thereunder.\214\ The [[Page 37154]] Commission notes that Participants and their associated persons trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule's exemption. --------------------------------------------------------------------------- \214\ In addition, Rule 11a2-2(T)(d) requires that, if a member or associated person is authorized by written contract to retain compensation in connection with effecting transactions for covered accounts over which the member or associated person thereof exercises investment discretion, the member or associated person must furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member or any associated person thereof in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2- 2(T)(d). See also 1978 Release, supra note 206, at 11548 (stating that ``[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests''). --------------------------------------------------------------------------- F. Options Market Structure: Price Improvement, Fragmentation and Trading Floor Data Three commenters expressed concern that the proposed rule change would negatively impact opportunities for orders to receive price improvement.\215\ Specifically, one commenter stated that the proposed rule change is designed to minimize opportunities for market maker and public customer trading interest to interact with, and provide price improvement to, orders being crossed on the BOX floor.\216\ This commenter asserts that the proposed rule change is designed to offer a frictionless crossing mechanism, which can be utilized to the detriment of customers.\217\ --------------------------------------------------------------------------- \215\ See CBOE Letters I & II, CTC Letters I & II, and Nasdaq Letter II, supra notes 4, 8 and 13. \216\ See CBOE Letter I, supra note 4, at 1-2. \217\ See id. at 2. --------------------------------------------------------------------------- Two commenters expressed concern that the proposed rule change would increase fragmentation in the options trading market. One commenter stated that the proposed BOX floor would add an additional trading venue that firms, who have finite resources, would be required to staff and which would further fragment liquidity without offering anything unique or beneficial to customers.\218\ Another commenter stated that opening a new trading floor will exacerbate the practice of ``venue shopping,'' and noted that the number of market making firms is limited, and that market making firms lack the resources necessary to staff an escalating number of physical trading floors with dedicated personnel.\219\ --------------------------------------------------------------------------- \218\ See CBOE Response Letter I, supra note 4, at 1. \219\ See CTC Letter I, supra note 4, at 3. --------------------------------------------------------------------------- In response, BOX argues that concerns about the general success of options trading floors are beyond the scope of its proposal.\220\ BOX further asserts that raising concerns about options trading floors either lacks merit or is an attempt to delay the approval of its proposal.\221\ In addition, BOX commits to provide the Commission with data related to activity on the Trading Floor, specifically information regarding size, participation, price improvement by spread and trade type, effective spread, Floor Market Maker participation, and BOX Book participation.\222\ This information could be used to evaluate, among other things, the levels of participation and amount of price improvement on the Trading Floor. Finally, BOX indicated that it believes a new trading floor will be good for the markets by providing increased competition which may lead to improvements in the market, which will inure to the benefit of all market participants.\223\ --------------------------------------------------------------------------- \220\ See BOX Response Letter I, supra note 6, at 4. \221\ See id. \222\ See Notice of Amendment No. 2, supra note 11, at 23679. \223\ See BOX Response Letter III, supra note 14, at 3-4. --------------------------------------------------------------------------- The Commission believes that the proposed rule change is consistent with the Act. Under the proposed rule change, the Exchange will establish an ``open outcry'' trading floor where orders will be sent to Floor Brokers who will represent those orders in an agency capacity, and who will be required to announce such orders to a trading crowd composed of Floor Market Makers prior to any execution. In this regard, the Commission notes that the Exchange made modifications to the initial proposal that are designed to remove or reduce the potential impediments to order interaction on the BOX Floor and which are designed to increase opportunities for price improvement. The Commission also notes that the data the Exchange has committed to provide may assist the Commission in assessing the level of participation in crossing transactions by market makers and other market participants, aside from the firm that initiated the cross, and to better review whether existing exchange rules appropriately allow for robust and beneficial competition on the options trading floors. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\224\ that the proposed rule change (SR-BOX-2016-48), as modified by Amendment Nos. 1 and 2, be, hereby is, approved. --------------------------------------------------------------------------- \224\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\225\ --------------------------------------------------------------------------- \225\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-16638 Filed 8-7-17; 8:45 am] BILLING CODE 8011-01-P
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is consistent with the Clearing SECURITIES AND EXCHANGE five additional comment letters.8 On
Supervision Act. Comments may be COMMISSION May 17, 2017, the Exchange filed
submitted by any of the following Amendment No. 2 to the proposed rule
methods: [Release No. 34–81292; File No. SR–BOX– change, which replaced and superseded
2016–48] the original filing, as modified by
Electronic Comments Amendment No.1, in its entirety.9 On
Self-Regulatory Organizations; BOX May 18, 2016, the Commission extended
• Use the Commission’s Internet Options Exchange LLC; Order the time period for Commission action
comment form (http://www.sec.gov/ Approving a Proposed Rule Change, on the proceedings to determine
rules/sro.shtml); or as Modified by Amendment Nos. 1 and whether to disapprove the proposed
• Send an email to rule-comments@ 2, To Adopt Rules for an Open-Outcry rule change to August 2, 2017.10
sec.gov. Please include File Number SR– Trading Floor Amendment No. 2 was published for
NSCC–2017–804 on the subject line. comment in the Federal Register on
August 2, 2017.
May 23, 2017.11 On May 25, 2017, the
Paper Comments I. Introduction Commission received a second response
• Send paper comments in triplicate letter from the Exchange.12 The
On November 16, 2016, BOX Options
to Secretary, Securities and Exchange Commission received two comment
Exchange LLC (the ‘‘Exchange’’ or
letters in response to the publication of
Commission, 100 F Street NE., ‘‘BOX’’) filed with the Securities and
Amendment No. 2.13 On July 14, 2017,
Washington, DC 20549. Exchange Commission (‘‘Commission’’),
the Commission received a third
pursuant to Section 19(b)(1) of the
All submissions should refer to File response letter from the Exchange.14
Securities Exchange Act of 1934
Number SR–NSCC–2017–804. This file This order approves the proposed rule
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
number should be included on the change, as modified by Amendment
proposed rule change to adopt rules for
subject line if email is used. To help the Nos. 1 and 2.
an open-outcry trading floor. The
Commission process and review your proposed rule change was published for II. Description of the Proposed Rule
comments more efficiently, please use comment in the Federal Register on Change, as Modified by Amendment
only one method. The Commission will December 05, 2016.3 The Commission Nos. 1 and 2
post all comments on the Commission’s received three comment letters on the The Exchange proposes to adopt rules
Internet Web site (http://www.sec.gov/ proposed rule change.4 On January 10, that would allow for open-outcry
rules/sro.shtml). Copies of the 2017, the Commission extended the trading on BOX’s physical trading floor,
submission, all subsequent time period within which to approve, located in Chicago (‘‘Trading Floor’’) as
amendments, all written statements disapprove the proposed rule change, or described below.15
with respect to the Advance Notice that institute proceedings to determine
are filed with the Commission, and all whether to approve or disapprove the A. BOX Floor Procedure
written communications relating to the proposed rule change to March 05, The Exchange proposes to allow two
Advance Notice between the 2017.5 On February 21, 2017, the categories of market participants (‘‘Floor
Commission and any person, other than Commission received a response letter Participants’’) 16 to transact business on
those that may be withheld from the from the Exchange, as well as the Trading Floor.17 One of these
public in accordance with the Amendment No. 1 to the proposed rule categories of market participants
provisions of 5 U.S.C. 552, will be change.6 On March 1, 2017, the
available for Web site viewing and Commission instituted proceedings to 8 See letters to Brent J. Fields, Secretary,
determine whether to approve or Commission, from Angelo Evangelou, Deputy
printing in the Commission’s Public General Counsel, CBOE, dated April 21, 2017
Reference Room, 100 F Street NE., disapprove the proposed rule change, as (‘‘CBOE Letter II’’); Steve Crutchfield, Head of
modified by Amendment No. 1.7 In Market Structure, CTC Trading, dated April 13,
Washington, DC 20549 on official
response to the Order Instituting 2017 (‘‘CTC Letter II’’); John Kinahan, CEO, Group
business days between the hours of One Trading, LP, dated April 11, 2017 (‘‘Group One
Proceedings, the Commission received
10:00 a.m. and 3:00 p.m. Copies of the Letter’’); Elizabeth King, General Counsel and
Corporate Secretary, New York Stock Exchange,
filing also will be available for 1 15 dated March 28, 2017 (‘‘NYSE Letter’’); and Joan C.
U.S.C. 78s(b)(1).
inspection and copying at the principal 2 17 CFR 240.19b–4. Conley, Senior Vice President and Corporate
office of NSCC and on DTCC’s Web site 3 See Securities Exchange Act Release No. 79421 Secretary, Nasdaq, dated March 27, 2017 (‘‘Nasdaq
(http://dtcc.com/legal/sec-rule- (November 29, 2016), 81 FR 87607 (‘‘Notice’’). Letter II’’).
9 See Amendment No. 2, dated May 17, 2017.
4 See letters to Brent J. Fields, Secretary,
filings.aspx). All comments received 10 See Securities Exchange Act Release No. 80719,
Commission, from Angelo Evangelou, Deputy
will be posted without change; the General Counsel, The Chicago Board Options 82 FR 23935 (May 24, 2017).
Commission does not edit personal Exchange, Inc. (‘‘CBOE’’), dated January 10, 2017 11 See Securities Exchange Act Release No. 80720
identifying information from (‘‘CBOE Letter I’’); Steve Crutchfield, Head of (May 18, 2017), 82 FR 23657 (‘‘Notice of
Market Structure, CTC Trading Group, LLC (‘‘CTC Amendment No. 2’’).
submissions. You should submit only 12 See letter to Brent J. Fields, Secretary,
Trading’’), dated December 31, 2016 (‘‘CTC Letter
information that you wish to make I’’); and Joan C. Conley, Senior Vice President and Commission, from Lisa J. Fall, President, Exchange,
available publicly. All submissions Corporate Secretary, The Nasdaq Stock Market LLC received May 25, 2017 (‘‘BOX Response Letter II’’).
should refer to File Number SR–NSCC– (‘‘Nasdaq’’), dated December 22, 2016 (‘‘Nasdaq 13 See letters to Brent J. Fields, Secretary,
Letter I’’). Commission, from Steve Crutchfield, Head of
asabaliauskas on DSKBBXCHB2PROD with NOTICES
2017–804 and should be submitted on 5 See Securities Exchange Act Release No. 79768, Market Structure, CTC Trading, dated July 10, 2017
or before August 23, 2017. 82 FR 4956 (January 17, 2017). (‘‘CTC Letter III’’); and Joan C. Conley, Senior Vice
6 See letter to Brent J. Fields, Secretary, President and Corporate Secretary, Nasdaq, dated
By the Commission. July 6, 2017 (‘‘Nasdaq Letter III’’).
Commission, from Lisa J. Fall, President, Exchange,
Eduardo A. Aleman, received February 21, 2017 (‘‘BOX Response Letter 14 See letter to Brent J. Fields, Secretary,
I’’), and Amendment No. 1, dated February 21, Commission, from Lisa J. Fall, President, Exchange,
Assistant Secretary. received July 14, 2017 (‘‘BOX Response Letter III’’).
2017.
[FR Doc. 2017–16631 Filed 8–7–17; 8:45 am] 7 See Securities Exchange Act Release No. 80134, 15 See proposed BOX Rule 100(a)(67).
16 See proposed BOX Rule 100(a)(26).
BILLING CODE 8011–01–P 82 FR 12864 (March 7, 2017) (‘‘Order Instituting
Proceedings’’). 17 See proposed BOX Rule 100(a)(67).
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executable orders resting in the BOX duty of best execution derives from E. Compliance With Section 11(a) of the
Book.182 Another commenter suggested common law agency principles and Act
that the book sweep size functionality fiduciary obligations, and is One commenter expressed concern
could allow Floor Brokers to ensure the incorporated in SRO rules and, through that BOX may not have adequately
internalization of orders by not judicial and Commission decisions, the explained how options participants
designating a book sweep size.183 antifraud provisions of the federal would comply with Section 11(a)(1) of
In response to the commenters’ securities laws.189 The duty of best the Act when effecting transactions
concerns regarding the book sweep size execution requires broker-dealers to through the BOG.193 More specifically,
aspect of the proposal, BOX stated that periodically assess the quality of this commenter noted that BOX did not
the book sweep size is a voluntary tool competing markets to assure that order explain how a BOX member that is the
that will aid Floor Brokers in satisfying
flow is directed to the markets counterparty to a QOO Order would
duties owed to their customers, such as
providing the most beneficial terms for comply with Section 11(a) of the Act.194
best execution.184 For example,
according to BOX, when a Floor Broker their customer orders.190 Broker-dealers In response, BOX amended its proposal
needs an order to be executed must examine their procedures for to help ensure compliance with Section
immediately, the broker could opt either seeking to obtain best execution in light 11(a)(1) of the Act.195
to provide a book sweep size equal to of market and technology changes and Section 11(a)(1) of the Act 196
the entire size of the order, which modify those practices if necessary to prohibits a member of a national
provides liquidity to the BOX Book, or enable their customers to obtain the best securities exchange from effecting
to provide an execution price that is reasonably available prices.191 In doing transactions on that exchange for its
better than the current best price on so, broker-dealers must take into own account, the account of an
BOX, which presents an opportunity for account price improvement associated person, or an account over
potential price improvement.185 BOX opportunities, and whether different which it or its associated person
also noted that it believes functionality markets may be more suitable for exercises investment discretion
similar to the book sweep size different types of orders or particular (collectively, ‘‘covered accounts’’),
mechanism is available on at least one securities.192 unless an exception applies. Sections
other trading floor, so the book sweep 11(a)(1)(A)–(I) of the Act 197 and the
size aspect of its proposal is not rules thereunder provide certain
969 (D.C. Cir. 1949)). See also Order Execution
unique.186 BOX further stated that any Obligations, Securities Exchange Act Release No. exemptions from this general
Floor Broker that uses the book sweep 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, prohibition, including the exemption set
size for the purpose of violating his or 1996) (‘‘Order Handling Rules Release’’). forth in Rule 11a2–2(T) under the
189 Order Handling Rules Release, supra note 188,
her duties and obligations will be Act.198 The Exchange represents that its
at 48322. See also Newton, 135 F.3d at 270. Failure
considered to have engaged in conduct to satisfy the duty of best execution can constitute
proposed rule change is consistent with
inconsistent with just and equitable fraud because a broker-dealer, in agreeing to Section 11(a) of the Act and the rules
principles of trade.187 execute a customer’s order, makes an implied thereunder.199 The Exchange also states
representation that it will execute it in a manner that the proposed rule change would not
The Commission believes that the that maximizes the customer’s economic gain in the
book sweep size functionality should transaction. See Newton, 135 F.3d at 273 (‘‘[T]he
limit in any way the obligation of a
provide Floor Brokers with an efficient basis for the duty of best execution is the mutual Participant to comply with Section 11(a)
mechanism to automatically execute understanding that the client is engaging in the of the Act or the rules thereunder.200
trade—and retaining the services of the broker as The Commission notes that the
orders (provided they designate a his agent—solely for the purpose of maximizing his
sufficient book sweep size) without own economic benefit, and that the broker receives
Exchange proposes to adopt IM–7600–5,
having to send a separate order to clear her compensation because she assists the client in which states that a Participant shall not
orders on the BOX Book that have reaching that goal.’’); In re Marc N. Geman, utilize the Trading Floor to effect any
priority. Securities Exchange Act Release No. 43963 (Feb. 14, transaction for a covered account by
2001) (citing Newton, but concluding that
The Commission reminds broker- respondent fulfilled his duty of best execution). See
relying on an exemption under Section
dealers that they have a legal duty to also Payment for Order Flow, Securities Exchange 11(a)(1)(G) of the Act (‘‘G
seek to obtain best execution of Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006, Exemption’’).201 As the Exchange notes,
customer orders.188 A broker-dealer’s 55009 (Nov. 2, 1994) (‘‘Payment for Order Flow
Final Rules’’). If the broker-dealer intends not to act 193 See NYSE Letter, supra note 8, at 5–6.
in a manner that maximizes the customer’s benefit 194 See
182 See CTC Letter I, supra note 4, at 7–8. See also id.
when he accepts the order and does not disclose 195 See BOX Response Letter II, supra note 12, at
CTC Letter III, note 13, at 3. this to the customer, the broker-dealer’s implied
183 See CBOE Letter II, supra note 8, at 2.
representation is false. See Newton, 135 F.3d at 4.
184 See BOX Response Letter I, supra note 6, at 196 15
U.S.C. 78k(a)(1).
273–274.
3–4. See also BOX Response Letter II, supra note 190 Order Handling Rules Release, supra note 188, 197 15
U.S.C. 78k(a)(1)(A)–(I).
12, at 3–4; BOX Response Letter III, supra note 14, at 48322–33 (‘‘In conducting the requisite 198 17 CFR 240.11a2–2(T).
at 3. evaluation of its internal order handling 199 See Notice of Amendment No. 2, supra note
185 See BOX Response Letter I, supra note 6, at
procedures, a broker-dealer must regularly and 11, at 23681.
4. rigorously examine execution quality likely to be 200 See id.
186 See id. See also BOX Response Letter II, supra obtained from different markets or market makers 201 15 U.S.C. 78k(a)(1)(G). Section 11(a)(1)(G) of
note 12, at 4; BOX Response Letter III, supra note trading a security.’’). See also Newton, 135 F.3d at the Act provides an exemption from the general
14, at 3. BOX states that it believes the proposed 271; Market 2000: An Examination of Current prohibition in Section 11(a)(1) of the Act for any
book sweep size mechanism is comparable to the Equity Market Developments, at V–4 (SEC Division transaction for a member’s own account, provided
PHLX Floor Broker Management System. of Market Regulation January 1994) (‘‘Without
asabaliauskas on DSKBBXCHB2PROD with NOTICES
that: (i) Such member is primarily engaged in the
187 See BOX Response Letter II, supra note 8, at specific instructions from a customer, however, a business of underwriting and distributing securities
4. broker-dealer should periodically assess the quality issued by other persons, selling securities to
188 See, e.g., Newton v. Merrill, Lynch, Pierce, of competing markets to ensure that its order flow customers, and acting as broker, or any one or more
Fenner & Smith, Inc., 135 F.3d 266, 269–70, 274 (3d is directed to markets providing the most of such activities, and whose gross income normally
Cir.), cert. denied, 525 U.S. 811 (1998); Certain advantageous terms for the customer’s order.’’); is derived principally from such business and
Market Making Activities on Nasdaq, Securities Payment for Order Flow Final Rules, supra note related activities; and (ii) such transaction is
Exchange Act Release No. 40900 (Jan. 11, 1999) 189, at 55009. effected in compliance with rules of the
191 Order Handling Rules, supra note 188 at
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 Commission which, as a minimum, assure that the
(2d Cir. 1971); In re Arleen Hughes, 27 SEC 629, 48323. transaction is not inconsistent with the
636 (1948), aff’d sub nom. Hughes v. SEC, 174 F.2d 192 See id. maintenance of fair and orderly markets and yields
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![Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices 37153
because no covered account transactions Rule 11a2–2(T)’s first requirement is Moreover, when a Floor Broker submits
utilizing the Trading Floor may rely on that orders for covered accounts be a QOO Order for execution, the order
the G Exemption, Participants utilizing transmitted from off the exchange floor. will be executed in accordance with
the Trading Floor to effect transactions The Commission has found that the off- Exchange rules and based on market
for covered accounts may only rely floor transmission requirement is met if conditions of when the order is received
upon other exemptions to the Section a covered account order is transmitted by the Trading Host.211 Accordingly,
11(a)(1) prohibition.202 from a remote location directly to an based on the Exchange’s
In addition to statutory exemptions, exchange’s floor by electronic means.206 representations, the Commission
Rule 11a2–2(T) under the Act,203 known The Exchange states that Floor Brokers believes that a Participant and its
as the ‘‘effect versus execute’’ rule, will receive matched or unmatched associated persons would not
provides exchange members with an orders either via telephone, or participate in the execution of an order
exemption from the Section 11(a)(1) electronically to the Floor Broker’s order submitted for execution utilizing the
prohibition. Rule 11a2–2(T) permits an entry mechanism.207 Moreover, the Trading Floor.
exchange member, subject to certain Exchange states that a Participant could Third, Rule 11a2–2(T) requires that
conditions, to effect transactions for submit an order for a covered account the order be executed by an exchange
covered accounts by arranging for an from off the Trading Floor to an member that is not associated with the
unaffiliated member to execute unaffiliated Floor Broker for member initiating the order. According
transactions on the exchange. To representation on the Trading Floor and to the Exchange, to rely on the
comply with Rule 11a2–2(T)’s use the ‘‘effect versus execute’’ exemption in Rule 11a2–2(T), a
conditions, a member: (i) Must transmit exemption (assuming the other Participant could submit an order for a
the order from off the exchange floor; conditions of the rule are satisfied).208 covered account from off the Trading
(ii) may not participate in the execution The Commission notes that a Participant Floor to an unaffiliated Floor Broker.212
of the transaction once the order has that submits an order for a covered The Exchange also states that a
been transmitted to the member account that utilizes the Trading Floor, Participant relying on Rule 11a2–2(T)
performing the execution; 204 (iii) may and who wishes to rely on the ‘‘effect could not submit an order for a covered
not be affiliated with the executing versus execute’’ exemption, must account to its ‘‘house’’ Floor Broker on
member; and (iv) with respect to an submit the order from off the Trading the Trading Floor for execution.213 The
account over which the member or an Floor. Commission notes that if a Participant
associated person has investment Second, Rule 11a2–2(T) requires that sends its order from off the floor to an
discretion, neither the member nor an neither the initiating member nor an affiliated Participant that is on the floor,
associated person may retain any associated person of the initiating who then directs the order into the
compensation in connection with member participate in the execution of Trading Host for execution, the off-floor
effecting the transaction except as the transaction at any time after the Participant may not rely on the
provided in the Rule. For the reasons set order for the transaction has been exemption in Rule 11a2–2(T).
forth below, the Commission believes transmitted. The Exchange represents Fourth, in the case of a transaction
that Participants utilizing the Trading that at no time following the submission effected for an account with respect to
Floor may comply with the conditions of an order utilizing the Trading Floor which the initiating member or an
of Rule 11a2–2(T) under the Act.205 will the submitting Participant or any associated person thereof exercises
associated person of such Participant investment discretion, neither the
priority, parity, and precedence in execution to acquire control or influence over the initiating member nor any associated
orders for the account of persons who are not result or timing of the order’s person may retain any compensation in
members or associated with members of the execution.209 In addition, the Exchange connection with effecting the
exchange. See also 17 CFR 240.11a1–1(T) (setting states that once a Floor Broker submits
forth requirements for relying on the G Exemption).
transaction, unless the person
202 See Notice of Amendment No. 2, supra note a QOO order to the BOG for execution, authorized to transact business for the
11, at 23681. Section 11(a) of the Act and the rules neither the Floor Broker nor anyone else account has expressly provided
thereunder provide other exemptions to the Section may alter the terms of the order.210 otherwise by written contract referring
11(a)(1) prohibition, including, for example, the to Section 11(a) of the Act and Rule
‘‘effect versus execute’’ exemption (as discussed orders on the Exchange. See Notice of Amendment
below), the exemption for transactions by a dealer 11a2–2(T) thereunder.214 The
No. 2, supra note 11, at 23659.
acting in the capacity of a market maker, and the 206 See, e.g., Securities Exchange Act Release Nos.
exemption for transactions to offset a transaction 211 See proposed Rule 7600(a) and Notice of
15533 (January 29, 1979), 44 FR 6084 (January 31,
made in error. 1979); and 14563 (March 14, 1978), 43 FR 11542 Amendment No. 2, supra note 11, at 23665.
203 17 CFR 240.11a2–2(T). 212 See Notice of Amendment No. 2, supra note
(March 17, 1978) (‘‘1978 Release’’).
204 This prohibition also applies to associated 207 See Notice of Amendment No. 2, supra note 11, at 23681.
persons of the initiating member. The member may, 11, at 23666.
213 See id.
however, participate in clearing and settling the 208 See id. at 23681. 214 In addition, Rule 11a2–2(T)(d) requires that, if
transaction. 209 See id. The Commission notes that a a member or associated person is authorized by
205 The Commission has previously found that the written contract to retain compensation in
Participant may cancel or modify the order, or
all-electronic transactions effected through the modify the instructions for executing the order. The connection with effecting transactions for covered
Trading Host are consistent with the requirements Commission has stated that the non-participation accounts over which the member or associated
of Section 11(a) of the Act and Rule 11a2–2(T) requirement is satisfied under such circumstances person thereof exercises investment discretion, the
thereunder. See, e.g., Securities Exchange Act so long as the modifications or cancellations are member or associated person must furnish at least
Release Nos. 72848 (August 14, 2014), 79 FR 49361 also transmitted from off the floor. See 1978 annually to the person authorized to transact
asabaliauskas on DSKBBXCHB2PROD with NOTICES
(August 20, 2014) (SR–BOX–2014–16) (order Release, supra note 206, at 11547 (stating that the business for the account a statement setting forth
approving the Exchange’s proposal to adopt new ‘‘non-participation requirement does not prevent the total amount of compensation retained by the
trade allocation algorithms for matching trades at initiating members from canceling of modifying member or any associated person thereof in
the conclusion of the PIP and the COPIP); and orders (or the instructions pursuant to which the connection with effecting transactions for the
66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) initiating member wishes orders to be executed) account during the period covered by the statement.
(order granting the Exchange’s application for after the orders have been transmitted to the See 17 CFR 240.11a2–2(T)(d). See also 1978
registration as a national securities exchange). As executing member, provided that any such Release, supra note 206, at 11548 (stating that ‘‘[t]he
part of the current proposal, the Exchange instructions are also transmitted from off the contractual and disclosure requirements are
represents that the Trading Host will enforce trade- floor’’). designed to assure that accounts electing to permit
through and priority rules in the same manner for 210 See proposed Rule 7600(c) and Notice of transaction-related compensation do so only after
QOO orders as the Trading Host does for all other Amendment No. 2, supra note 11, at 23666. Continued
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![37154 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices
Commission notes that Participants and spread and trade type, effective spread, SECURITIES AND EXCHANGE
their associated persons trading for Floor Market Maker participation, and COMMISSION
covered accounts over which they BOX Book participation.222 This [Release No. 34–81291; File No. SR–
exercise investment discretion must information could be used to evaluate, BatsEDGA–2017–19]
comply with this condition in order to among other things, the levels of
rely on the rule’s exemption. participation and amount of price Self-Regulatory Organizations; Bats
F. Options Market Structure: Price improvement on the Trading Floor. EDGA Exchange, Inc.; Notice of Filing
Improvement, Fragmentation and Finally, BOX indicated that it believes and Immediate Effectiveness of a
Trading Floor Data a new trading floor will be good for the Proposed Rule Change Related to Fees
markets by providing increased for Use on Bats EDGA Exchange, Inc.
Three commenters expressed concern
competition which may lead to August 2, 2017.
that the proposed rule change would
negatively impact opportunities for improvements in the market, which will Pursuant to Section 19(b)(1) of the
orders to receive price improvement.215 inure to the benefit of all market Securities Exchange Act of 1934 (the
Specifically, one commenter stated that participants.223 ‘‘Act’’),1 and Rule 19b–4 thereunder,2
the proposed rule change is designed to The Commission believes that the notice is hereby given that on July 24,
minimize opportunities for market proposed rule change is consistent with 2017, Bats EDGA Exchange, Inc. (the
maker and public customer trading the Act. Under the proposed rule ‘‘Exchange’’ or ‘‘EDGA’’) filed with the
interest to interact with, and provide change, the Exchange will establish an Securities and Exchange Commission
price improvement to, orders being ‘‘open outcry’’ trading floor where (‘‘Commission’’) the proposed rule
crossed on the BOX floor.216 This orders will be sent to Floor Brokers who change as described in Items I, II and III
commenter asserts that the proposed will represent those orders in an agency below, which Items have been prepared
rule change is designed to offer a capacity, and who will be required to by the Exchange. The Exchange has
frictionless crossing mechanism, which announce such orders to a trading designated the proposed rule change as
can be utilized to the detriment of one establishing or changing a member
crowd composed of Floor Market
customers.217 due, fee, or other charge imposed by the
Makers prior to any execution. In this
Two commenters expressed concern Exchange under Section 19(b)(3)(A)(ii)
regard, the Commission notes that the of the Act 3 and Rule 19b–4(f)(2)
that the proposed rule change would
Exchange made modifications to the thereunder,4 which renders the
increase fragmentation in the options
trading market. One commenter stated initial proposal that are designed to proposed rule change effective upon
that the proposed BOX floor would add remove or reduce the potential filing with the Commission. The
an additional trading venue that firms, impediments to order interaction on the Commission is publishing this notice to
who have finite resources, would be BOX Floor and which are designed to solicit comments on the proposed rule
required to staff and which would increase opportunities for price change from interested persons.
further fragment liquidity without improvement. The Commission also
notes that the data the Exchange has I. Self-Regulatory Organization’s
offering anything unique or beneficial to Statement of the Terms of Substance of
customers.218 Another commenter committed to provide may assist the
the Proposed Rule Change
stated that opening a new trading floor Commission in assessing the level of
will exacerbate the practice of ‘‘venue participation in crossing transactions by The Exchange filed a proposal to
shopping,’’ and noted that the number market makers and other market amend the fee schedule applicable to
of market making firms is limited, and participants, aside from the firm that Members 5 and non-Members of the
that market making firms lack the initiated the cross, and to better review Exchange pursuant to EDGA Rules
resources necessary to staff an escalating whether existing exchange rules 15.1(a) and (c).
number of physical trading floors with The text of the proposed rule change
appropriately allow for robust and
dedicated personnel.219 is available at the Exchange’s Web site
beneficial competition on the options
In response, BOX argues that concerns at www.bats.com, at the principal office
trading floors. of the Exchange, and at the
about the general success of options
trading floors are beyond the scope of its IV. Conclusion Commission’s Public Reference Room.
proposal.220 BOX further asserts that II. Self-Regulatory Organization’s
raising concerns about options trading It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,224 that the Statement of the Purpose of, and
floors either lacks merit or is an attempt Statutory Basis for, the Proposed Rule
to delay the approval of its proposal.221 proposed rule change (SR–BOX–2016–
Change
In addition, BOX commits to provide 48), as modified by Amendment Nos. 1
and 2, be, hereby is, approved. In its filing with the Commission, the
the Commission with data related to
Exchange included statements
activity on the Trading Floor, For the Commission, by the Division of
concerning the purpose of and basis for
specifically information regarding size, Trading and Markets, pursuant to delegated
the proposed rule change and discussed
participation, price improvement by authority.225
any comments it received on the
Eduardo A. Aleman, proposed rule change. The text of these
deciding that such arrangements are suitable to
their interests’’). Assistant Secretary. statements may be examined at the
asabaliauskas on DSKBBXCHB2PROD with NOTICES
215 See CBOE Letters I & II, CTC Letters I & II, and [FR Doc. 2017–16638 Filed 8–7–17; 8:45 am] places specified in Item IV below. The
Nasdaq Letter II, supra notes 4, 8 and 13. BILLING CODE 8011–01–P
216 See CBOE Letter I, supra note 4, at 1–2. 1 15 U.S.C. 78s(b)(1).
217 See id. at 2. 2 17
222 See
CFR 240.19b–4.
218 See CBOE Response Letter I, supra note 4, at Notice of Amendment No. 2, supra note 3 15 U.S.C. 78s(b)(3)(A)(ii).
1. 11, at 23679. 4 17 CFR 240.19b–4(f)(2).
219 See CTC Letter I, supra note 4, at 3. 223 See BOX Response Letter III, supra note 14, at
5 The term ‘‘Member’’ is defined as ‘‘any
220 See BOX Response Letter I, supra note 6, at 3–4. registered broker or dealer that has been admitted
224 15 U.S.C. 78s(b)(2).
4. to membership in the Exchange.’’ See Exchange
221 See id. 225 17 CFR 200.30–3(a)(12). Rule 1.5(n).
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Document Created: 2017-08-08 00:18:04
Document Modified: 2017-08-08 00:18:04
| 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 | 82 FR 37144 |
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