83 FR 31006 - Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change To Amend BOX Rule 7300 (Preferenced Orders) To Provide an Additional Allocation Preference to Preferred Market Makers

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 127 (July 2, 2018)

[Federal Register Volume 83, Number 127 (Monday, July 2, 2018)]
[Notices]
[Pages 31006-31009]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-14112]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83525; File No. SR-BOX-2018-20]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change To Amend BOX Rule 7300 (Preferenced 
Orders) To Provide an Additional Allocation Preference to Preferred 
Market Makers

June 26, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 13, 2018, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the self-regulatory organization. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend BOX Rule 7300 (Preferenced Orders) 
to provide an additional allocation preference to Preferred Market 
Makers. The text of the proposed rule change is available from the 
principal office of the Exchange, at the Commission's Public Reference 
Room and also on the Exchange's internet website at http://boxoptions.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend BOX Rule 7300 (Preferenced Orders) 
to provide an additional allocation preference to Preferred Market 
Makers. Specifically, the Exchange is proposing to provide Preferred 
Market Makers with a small size order allocation preference.
Background
    The Exchange has rules to allow BOX Options Participants 
(``Participants'') to submit orders for which a Market Maker is 
designated to receive an allocation preference on the Exchange 
(``Preferenced Orders'').\3\ The rules provide for the enhanced 
allocation to the Preferred Market Maker \4\ only when the Preferred 
Market Maker is quoting at NBBO.
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    \3\ See Rule 7300.
    \4\ The term ``Preferred Market Maker'' means a Market Maker 
designated as such by a Participant with respect to an order 
submitted by such Participant to BOX. See Rule 7300(a)(2).
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    A Preferenced Order is any order submitted by a Participant to the 
Exchange for which a Preferred Market Maker is designated to receive 
execution priority, with respect to a portion of the Preferenced Order, 
upon meeting certain qualifications.\5\ Preferenced Orders are 
submitted by a Participant by designating an order as such and 
identifying a Preferred Market Maker when entering the order.
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    \5\ See Rule 7300.
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    In order for a Preferred Market Maker to be eligible to receive 
Preferenced Orders, they must maintain heightened quoting activity. 
Specifically, a Preferred Market Maker must maintain a continuous two-
sided market, throughout the trading day, in 99% of the non-adjusted 
option series of each class for which it accepts Preferenced Orders, 
for 90% of the time the Exchange is open for trading in each such 
option class.\6\ A Preferred Market Maker is not required to quote in 
intra-day add-on series or series that have a time to expiration of 
nine months or more in the classes for which it receives Preferenced 
Orders.
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    \6\ See Rule 7300(a)(2).
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Small Size Orders
    The Exchange is now proposing to amend Rule 7300 to provide an 
additional allocation preference to Preferred Market Makers. 
Specifically, the Exchange is proposing that small size Preferenced 
Orders will be allocated in full to the Preferred Market Maker, subject 
to certain conditions described below.\7\ Small size orders are defined 
as five (5) or fewer contracts.
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    \7\ See proposed Rule 7300(e).
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    In order for the Preferred Market Makers to be allocated the small 
size order, they must be quoting at the NBBO when they receive the 
Preferenced Order. As is the case with the current allocation of 
Preferenced Orders, all orders from the account of Public Customers, if 
any, will continue to be allocated for execution against the 
Preferenced Order first. The Preferred Market Maker will only receive 
the small size order allocation if there are contracts remaining after 
any Public Customer orders receive an allocation against the 
Preferenced Order. A Preferred Market Maker may only be allocated up to 
the size of their quote.
    The Exchange will monitor the frequency in which Preferred Market 
Makers receive the small size order allocation. Specifically, the 
Exchange will review the proposed provision quarterly and will maintain 
the small order size at a level that will not allow small size orders 
executed by Preferred Market Makers to account for more than 40% of the 
volume executed on the Exchange.
    The Exchange does not believe the proposal raises any new or novel 
issues. Currently, the vast majority of options exchanges provide a 
small lot allocation preference to specialists,\8\ with the

[[Page 31007]]

majority of those exchanges restricting the number of specialists to 
one per class. The Exchange's proposal differs in that the Exchange is 
expanding the availability of the small lot allocation preference to 
all eligible Preferred Market Makers. The Exchange believes that 
providing this benefit to multiple Preferred Market Makers will be 
beneficial to the Exchange and the market by providing an incentive for 
vigorous quoting by multiple market makers per class since a Preferred 
Market Maker must be quoting at NBBO in order to receive the small lot 
allocation preference. Additionally, as explained above, Preferred 
Market Makers are responsible for heightened quoting obligations that 
must be met in order for them to receive Preferenced Orders.
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    \8\ Cboe EDGX Rule 21.8(g)(2) provides a small lot allocation 
preference to Primary Market Makers, Nasdaq ISE Rule 713.01(c) 
provides a small lot allocation preference for Primary Market 
Makers, NYSE American Rule 964.2NY provides a small lot allocation 
preference to the Primary Specialist, Nasdaq BX Chap. VI, Section 
10(c)(2) provides a small lot allocation preference for the Lead 
Market Maker, Nasdaq GEM [sic] Rule 713.01(c) provides a small lot 
allocation preference for Primary Market Makers, Nasdaq MRX provides 
a small lot allocation preference for Primary Market Makers, Nasdaq 
PHLX Rule 1014(g)(vii)(B)(1)(a) provides a small lot allocation 
preference to specialist, MIAX Rule 514(g)(2) provides a small lot 
allocation preference for the Primary Lead Market Maker, NYSE Arca 
Rule 6.76A-O(a)(1)(B) provides a small lot allocation preference for 
the Lead Market Maker, and Cboe Rule 6.45(c) provides a small lot 
allocation preference for the Designated Primary Market Makers or 
the Lead Market Maker.
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    Further, the numerous options exchanges that provide exclusive 
specialist assignments afford the opportunity for a market maker to be 
the sole specialist in different classes on multiple exchanges. This 
can, and most likely does, result in a market maker having an exclusive 
specialist assignment in nearly every option class spread across 
multiple exchanges. Therefore, they are entitled to a small lot 
allocation preference in every option class. As a result of this, an 
order flow provider can direct small lot orders to a specific 
specialist by submitting the order to the exchange where the specialist 
is exclusive for that specific class and the specialist would have 
priority over all orders and quotes except those of Public Customers to 
trade against the small lot. The Exchange does not believe that 
providing the small lot allocation preference to all qualified 
Preferred Market Makers will alter this current behavior because, under 
the proposal, an order flow provider can achieve the same result by 
preferencing the order on BOX to a specific Preferred Market Maker.
    In addition, the Exchange notes that it has increased quoting 
requirements for market makers to be eligible to receive the small lot 
allocation preference. Specifically, a Preferred Market Maker must 
maintain a continuous two-sided market, pursuant to Rule 8050(c)(1), 
throughout the trading day, in 99% of the non-adjusted option series of 
each class for which it accepts Preferenced Orders, for 90% of the time 
the Exchange is open for trading in each such option class.\9\ The 
Exchange notes that these quoting requirements are higher than another 
exchange that currently provides a small-lot allocation preference.\10\
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    \9\ For purposes of this requirement, a Preferred Market Maker 
is not required to quote in intra-day add-on series or series that 
have a time to expiration of nine months or more in the classes for 
which it receives Preferenced Orders and a Market Maker may still be 
a Preferred Market Maker in any such series if the Market Maker 
otherwise complies with Rule 7300(a)(2).
    \10\ See Cboe EDGX Rule 22.6(d).
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Allocation
    Currently, the Exchange's Rules provide that at the final price 
level, where the remaining quantity of the Preferenced Order is less 
than the total quantity of orders on the Exchange available for 
execution, after all orders for the account of Public Customers, if 
any, are allocated against the Preferenced Order, then the Preferred 
Market Maker receives its allocation.\11\ Specifically, a Preferred 
Market Maker shall receive an allocation equal to forty percent (40%) 
of the remaining quantity of the Preferenced Order. However, if only 
one other executable, non-public Customer order (in addition to the 
quote of the Preferred Market Maker) matches the Preferenced Order at 
the final price level, then the allocation to the Preferred Market 
Maker shall be equal to fifty percent (50%) of the remaining quantity 
of the Preferenced Order.
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    \11\ See Rule 7300(c)(2).
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    The Exchange is now proposing to amend the Preferred Market Maker 
allocation when there is only one other non-Public Customer that 
matches the Preferenced Order at the final price level. Specifically, 
the Exchange is proposing to increase the Preferred Market Maker's 
allocation to 60% when there is only one other non-Public Customer that 
matches the Preferenced Order at the final price level. The Exchange 
notes that other exchanges currently provide a 60% allocation when 
there is only one other Participant that matches the Preferenced Order 
at the final price level.\12\
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    \12\ See MIAX Rule 514(g); see also ISE Supplementary Material 
.03 to Rule 713.
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    The quantity of the allocation to the Preferred Market Maker will 
continue to be limited by the total quantity of the Preferred Market 
Maker quote. Executions are allocated in numbers of whole contracts 
and, to ensure the allocation priority afforded to Preferred Market 
Makers does not exceed the applicable 40% or proposed 60%, allocations 
of fractional contracts to Preferred Market Makers in the Preferred 
allocation step are rounded down to the nearest whole number, which is 
not less than one (1) contract. Legging Orders will not be considered 
when determining whether the Preferred Market Maker is allocated 40% or 
the proposed 60% in this step. As a result, in no case will a Preferred 
Market Maker receive an allocation preference (above what it would 
otherwise receive if executed in normal price-time priority) in excess 
of 40% of the remaining quantity of the Preferenced Order after Public 
Customer orders are filled (or the proposed 60% if only one other non-
Public Customer matches) at the final price level.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Securities Exchange Act of 1934 
(the ``Act''),\13\ in general, and Section 6(b)(5) of the Act,\14\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general to protect investors and the 
public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes this proposed rule change is a 
reasonable modification designed to provide incentives and enhanced 
allocation to Preferred Market Makers when it is quoting at NBBO. The 
Exchange also believes that the proposed rule change will increase the 
number of transactions on the Exchange by attracting additional order 
flow to the Exchange, which will ultimately enhance competition and 
provide customers with additional opportunities for execution. The 
Exchange believes these changes are consistent with the goals to remove 
impediments to and to perfect the mechanism for a free and open market 
and a national market system. Specifically, the Exchange believes that 
the proposal will result in increased liquidity available at improved 
prices, with more competitive pricing outside the control of any single 
Participant. The proposed rule change should promote and foster 
competition.
    The Exchange believes the proposed changes to the Preferenced Order 
allocation to provide a small lot

[[Page 31008]]

allocation preference is an improvement over the current allocation 
algorithm, and will benefit all market participants submitting 
Preferenced Orders on the Exchange. As a result of the proposed 
changes, the Exchange believes that existing and additional 
Participants will use Preferenced Orders to increase the number of 
orders that are submitted to the Exchange. Additionally, the Exchange 
believes that the proposed change to the Preferenced Order allocation 
algorithm will encourage greater participation by Market Makers to 
provide quotes on the Exchange as Preferred Market Makers. These 
additional responses should encourage greater competition on the 
Exchange, which should, in turn, benefit and protect investors and the 
public interest through the potential for greater volume of orders and 
executions.
    The proposed rule change continues to provide priority of Public 
Customer orders over Preferred Market Makers at the same price. The 
Exchange believes this priority is consistent with the purposes of the 
Act. The Exchange believes the Preferenced Order allocation proposal is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest, because it recognizes the 
unique status of Pubic Customers in the marketplace by ensuring Public 
Customers maintain priority before any allocations afforded to 
Preferred Market Makers.
    The Exchange believes that the proposed Preferenced Order 
allocation changes are reasonable, equitable and not unfairly 
discriminatory. Giving Preferred Market Makers the small lot allocation 
preference and allocation priority of 60% of the remaining quantity of 
the Preferenced Order in certain circumstances will provide important 
incentives for Preferred Market Makers to provide liquidity on BOX, 
which provides greater opportunity for executions, tighter spreads, and 
better pricing for all Participants. While the Commission has, in the 
past, been concerned about locking up larger portions of order flow 
from intra-market price competition, the Exchange believes that the 
proposed preferred allocation methods adequately balance the aim of 
rewarding Preferred Market Makers by limiting the volume of small size 
orders executed by Preferred Market Makers to account for no more than 
40% of the volume executed on the Exchange.
    The Exchange believes that the Preferred Market Maker allocation is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest, because it strikes a 
reasonable balance between encouraging vigorous price competition and 
rewarding Market Makers for their unique duties. In order to receive an 
allocation preference, Preferred Market Makers must meet heightened 
quoting requirements as Market Makers, and also be quoting at the NBBO 
at the time the Preferenced Order is received. Heightened quoting 
requirements mean that Preferred Market Makers must maintain a 
continuous two-sided market throughout the trading day, in 99% of the 
non-adjusted option series of each class for which it accepts 
Preferenced Orders, for 90% of the time the Exchange is open for 
trading in each such option class.\15\ Overall, the proposed changes to 
the Preferred Market Maker allocations represent a careful balancing by 
the Exchange with regard to the rewards and obligations of various 
types of market participants. The Exchange believes these requirements 
of Preferred Market Makers will provide an incentive for Market Makers 
to assume these additional responsibilities beyond those already 
required for Market Makers, which will facilitate improved trading 
opportunities on BOX for all Participants.
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    \15\ For purposes of this requirement, a Preferred Market Maker 
is not required to quote in intra-day add-on series or series that 
have a time to expiration of nine months or more in the classes for 
which it receives Preferenced Orders and a Market Maker may still be 
a Preferred Market Maker in any such series if the Market Maker 
otherwise complies with Rule 7300(a)(2).
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    The Exchange believes this proposed rule change is a reasonable 
modification designed to provide further incentives and enhanced 
allocation to a Preferred Market Maker when it is quoting at NBBO. The 
Exchange also believes that the proposed rule change will increase the 
number of transactions on the Exchange by attracting additional 
activity to the Exchange, which will ultimately enhance competition and 
provide customers with additional opportunities for execution.
    The Exchange believes the proposed changes to the Preferenced Order 
allocations are an improvement over the current allocation algorithm, 
and will benefit all market participants submitting Preferenced Orders 
on the Exchange. Additionally, the Exchange believes that the proposed 
Preferenced Order allocation algorithm will encourage greater 
participation by Market Makers to provide quotes on the Exchange as 
Preferred Market Makers. These additional responses should encourage 
greater competition on the Exchange, which should, in turn, benefit and 
protect investors and the public interest through the potential for 
greater volume of orders and executions.
    For the foregoing reasons, the Exchange believes this proposal is a 
reasonable modification to its rules, designed to facilitate increased 
interaction of orders on the Exchange, and to do so in a manner that 
ensures a dynamic, real-time trading mechanism that maximizes 
opportunities for trading executions of orders. The Exchange believes 
it is appropriate and consistent with the Act to adopt the proposed 
changes.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In this regard, the Exchange 
notes that the rule change is being proposed as a competitive response 
to the options exchanges with specialists. The Exchange believes that 
the proposed change will allow the Exchange to further compete with 
competitors that provide specialist assignments. With respect to intra-
market competition, the Exchange believes that the proposed change will 
promote competition by allowing multiple competing Preferred Market 
Makers per class.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 31009]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BOX-2018-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2018-20. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BOX-2018-20, and should be submitted on 
or before July 23, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14112 Filed 6-29-18; 8:45 am]
 BILLING CODE 8011-01-P