Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),^[1] and Rule 19b-4 thereunder,^[2] notice is hereby given that on December 6, 2022, BOX Exchange LLC (“BOX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II, below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule from interested persons.

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

The Exchange proposes to amend IM-8050-3 to establish functionality that will reject Market Maker ^[3] quotes when those quotes would otherwise lock or cross the National Best Bid or Offer (“NBBO”).^[4] The text of the proposed rule change is available from the principal office of the Exchange, at the Commission's Public Reference Room and also on the Exchange's internet website at https://rules.boxexchange.com/​rulefilings.

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

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

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

1. Purpose

The purpose of the proposed rule change is to amend Rule IM-8050-3 to establish functionality that will automatically reject a Market Maker quote that would otherwise lock or cross the NBBO.

Background

Currently, all Market Maker quotes received on BOX after the opening of the market will not execute against a resting order or quote on the BOX Book.^[5] However, if there is no BOX Book for a particular option or if the BOX Book is inferior to the NBBO, a Market Maker quote could display at a price that locks or crosses the NBBO.^[6] This proposal is designed to prevent such occurrences. The following examples demonstrate the current functionality and interaction of Market Maker quotes, defined as a bid and offer, with the BOX Book depending on whether the BOX Book is on the NBBO:

Example 1: Assume that the BOX Book in an option is $1.00 bid and offered at $1.10, hereinafter expressed as 1.00/1.10, and the NBBO is 1.00/1.10. A Market Maker quote of 1.10/1.20 would remove liquidity from the BOX ( printed page 78172) Book ^[7] because the Market Maker's 1.10 bid equals the BOX Book offer at 1.10. Each side of the quote is evaluated separately to determine whether it will be accepted or rejected. As a result, the 1.10 bid will be rejected and a message will be sent to the Market Maker indicating that their bid was rejected. The Market Maker's offer will be accepted.

Example 2: Assume the BOX Book in an option is 1.00/1.20, the NBBO is 1.00/1.10, and a Market Maker sends a quote of 1.10/1.20. In this case, the BOX Book is inferior to NBBO on the offer. The Market Maker's bid of 1.10 would not execute against the BOX Book, therefore it would be displayed in the BOX Book and would be disseminated to the Options Price Reporting Authority (“OPRA”). In this example, the Market Maker's bid and offer will be accepted even though the bid of 1.10 would lock the NBO ^[8] of 1.10.

Proposal

The Exchange proposes to add functionality that will reject a Market Maker quote that would otherwise lock or cross the NBBO. Referring to Example 2 above, under the current functionality, a Market Maker quote of 1.10/1.20, when displayed in the BOX Book and disseminated to OPRA, would lock the NBO because the Market Maker's bid of 1.10 equals the NBO of 1.10. Under this proposal, the 1.10 bid will be instead rejected and a message will be sent to the Market Maker indicating that their bid was rejected. Illustrated further, assume that the BOX Book in an option is 1.00/1.20 and the NBBO is 1.10/1.20. A Market Maker quote of 1.00/1.10 would lock the NBB ^[9] because the Market Maker's offer of 1.10 equals the NBB of 1.10. Under this proposal, the 1.10 offer will be rejected and a message will be sent to the Market Maker indicating that their offer was rejected.

The Exchange notes that BOX Market Makers requested this functionality to: (1) avoid inadvertently locking or crossing the NBBO; ^[10] and (2) to give themselves the opportunity to re-evaluate their quoting in the event they are submitting quotes to BOX that are locking or crossing the NBBO. Additionally, the Exchange is seeking to address an inconsistency between quote and order handling when the quote or order would lock or cross the NBBO. Currently, pursuant to Rule 7130(b) Filtering of BOX In-Bound Orders, orders will not, in the case of a sell order, execute at a price below the NBB or, in the case of a buy order, execute at a price above the NBO.^[11] The proposal discussed herein will produce the same result for quotes on BOX. The Exchange believes that rejecting quotes that would otherwise lock or cross the NBBO is beneficial because it will avoid the display of any quotations that would lock or cross a Protected Quotation.^[12]

The Exchange notes that it is not proposing to change the interaction of an incoming quote with a PIP Order ^[13] as incoming quotes may interact with the PIP before being rejected.^[14] Under the proposal, the incoming quote will continue to cause the PIP to end early if the conditions of Rule 7150(i) ^[15] exist. Specifically, under the current functionality, after the PIP is concluded, if the incoming quote would execute against resting orders or quotes on the BOX Book, the relevant side will continue to be rejected.^[16] Further, under the proposed functionality, if the incoming quote would lock or cross the BOX Book or the NBBO,^[17] the relevant side will be rejected. Additionally, when an incoming quote on the opposite side of the PIP Order is received such that it would cause an execution to occur prior to the end of the PIP, the incoming quote shall be immediately executed pursuant to Rule 7150(j). In order for the incoming quote on the opposite side of the PIP Order to execute against the PIP Order, the conditions of Rule 7150(j) must be met.^[18] Under this proposal, any remaining balance of the incoming quote that did not execute against the PIP Order, and that would execute against a resting order or quote on the BOX Book or that would lock or cross the NBBO, will be rejected. The following examples demonstrate interaction between incoming quotes and a PIP Order both currently and under the proposal:

The incoming quote will execute 5 contracts against the PIP Order. In this case, the best BOX price on the opposite side of the market from the quote is 2.03, the NBB is 2.03, and the order will execute one penny better than the NBBO at 2.04 because the best BOX price on the opposite side of the market from the quote is equal to the NBBO.^[19] The PIP will then be terminated because the PIP Order was filled and the remaining 5 contracts of the incoming quote that would lock the NBB will be rejected. The Exchange notes that this quote would also be rejected because it would remove liquidity from the BOX Book.^[20]

The incoming quote would lock the NBO and will be rejected. The quote submitted to BOX will not interact with the PIP Order because it is on the same side as the PIP Order, such that it would cause an execution to occur prior to the end of the PIP, in which case the PIP will terminate and the PIP Order will be matched.^[21] The Exchange notes that this quote would also be rejected because it would remove liquidity from the BOX Book.^[22]

Lastly, the Exchange notes that as is the case today, rejected quotes will not be considered when determining a Market Maker's quoting obligations.^[23]

Other options exchanges provide functionality similar to the proposed changes discussed herein. Specifically, in the situation where an incoming quote would lock or cross the NBBO, other exchanges adjust quote prices to one minimum price variation (“MPV”) below the NBO for bids and one MPV above the NBB for offers.^[24] Similar to this proposal, other exchanges offer market makers a choice between having their quote rejected or repriced.^[25] For simplicity, the Exchange is proposing to reject quotes that would otherwise lock or cross the NBBO, which would allow Market Makers the opportunity to reevaluate, reprice, and resend quotes to BOX. The Exchange believes that rejecting Market Maker quotes is simpler for both BOX and BOX Market Makers because a quote sent to BOX is either added to the BOX Book or rejected. This results in no uncertainty regarding the price. Further, the Exchange chose not to add functionality that would reprice a quote that would otherwise lock or cross the NBBO so the respective Market Makers have the opportunity to resubmit their quote to BOX at a price of their choosing. Thus, the Exchange believes that the proposed change may provide Market Makers with greater control over their quotes and may encourage Market Makers to provide greater liquidity to BOX given this flexibility.

BOX plans to provide this functionality during the fourth calendar quarter of 2022. The Exchange will distribute an Informational Circular to Participants prior to implementation of this functionality.

2. Statutory Basis

The Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Act,^[26] in general, and Section 6(b)(5) of the Act,^[27] in particular, in that it is designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general protect investors and the public interest. The Exchange believes that rejecting Market Maker quotes that would otherwise lock or cross the NBBO may provide Maker Makers with greater control over their quotes on BOX because a quote sent to BOX is either added to the BOX Book or rejected. As discussed above, this results in no uncertainty regarding the price. Further, the Exchange chose not to add functionality that would reprice a quote that would otherwise lock or cross the NBBO so the respective Market Maker has the opportunity to resubmit their quote to BOX at a price of their choosing. The Exchange believes this change will assist Market Makers in reducing their regulatory risk, maintaining a fair and orderly market, and in quoting with greater confidence which may lead Market Makers to quote with larger sizes or tighter bid to offer spreads on BOX, that could then benefit all BOX Participants, increasing price discovery, and potentially increasing trading activity.

The Exchange also believes the proposed functionality will also provide Market Makers with protection from inadvertently submitting quotes that lock or cross the NBBO ^[28] and from trading on those quotes, thus promoting the policy goals of the Commission that has encouraged execution venues, exchanges, and non-exchanges alike, to enhance risk protection tools and other mechanisms to decrease regulatory risk and increase stability. Additionally, the benefits of enhanced risk protections and other mechanisms to decrease risk may flow downstream to counterparties both within and away from the Exchange, thereby increasing systemic protections as well.

The Exchange notes further, a Market Maker that produces erroneous quotes causing displayed markets to lock or cross the NBBO may cause erroneous trading activity and disrupt markets. The Exchange believes that rejecting Market Maker quotes that would otherwise lock or cross the NBBO will reduce the likelihood of BOX displaying quotes that lock or cross the NBBO, which is consistent with the Options Order Protection and Locked/Crossed Market Plan (“the Plan”).^[29] The Exchange notes that as a party to the Plan, the Exchange has agreed to comply with, and enforce compliance by BOX Options Participants, which includes avoidance of Trade-Throughs and prohibition against a pattern or practice of displaying any quotations that lock or cross a Protected Quotation.^[30] This proposal is designed ( printed page 78174) to aid the Exchange in enforcing such compliance.

Lastly, the Exchange again notes that the proposed changes have no impact on the interaction of an incoming quote with a PIP Order and have no impact on a Market Maker's obligations pursuant to current BOX Rules 8040 and 8050. Market Makers will continue to be subject to the obligations detailed in these rules.

As such, the Exchange believes the proposed rule change is in the public interest, and therefore, consistent with the Act.

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

The Exchange does not believe that the proposed rule change would impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

Market Makers are required to provide continuous two-sided quotes on a daily basis and are subject to various obligations associated with providing liquidity on BOX. BOX Participants' orders are already provided NBBO protection and either routed (if eligible) or rejected immediately.^[31] The proposed change would afford quotes a similar level of protection to assist Market Makers in managing their unique risks and obligations. Further, the proposed change will not impose any burden on intramarket competition as the proposed change will apply to all Market Makers on BOX. Lastly, the Exchange again notes that Market Makers have requested that BOX implement the proposed protections.

The Exchange believes that the proposed change will not impose any burden on intermarket competition as other exchanges offer similar functionality.^[32] Further, the proposed change may encourage intermarket competition by improving compliance with the Plan, which includes avoidance of Trade-Throughs and prohibition against a pattern or practice of displaying any quotations that lock or cross a Protected Quotation. As such, the Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.

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

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

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

Because the foregoing proposed rule change does not: (i) significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act ^[33] and Rule 19b-4(f)(6) thereunder.^[34]

A proposed rule change filed under Rule 19b-4(f)(6) ^[35] normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b-4(f)(6)(iii),^[36] the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Waiver of the operative delay would allow the Exchange to immediately offer the functionality that will reject Market Maker quotes when those quotes would otherwise lock or cross the NBBO, which is consistent with the Options Order Protection and Locked/Crossed Market Plan. Accordingly, the Commission hereby waives the operative delay and designates the proposed rule change operative upon filing.^[37]

At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change should be approved or disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (http://www.sec.gov/​rules/​sro.shtml); or
• Send an email torule-comments@sec.gov. Please include File Number SR-BOX-2022-31 on the subject line.

Paper Comments

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

Example 1: Incoming Quote Trades against PIP Order ( printed page 78173)

BOX BBO: 2.03 bid and 2.10 offer

NBBO: 2.03 bid and 2.10 offer

PIP Order: Buy 5 contracts for 2.05

Incoming Quote: Sell 10 contracts at 2.03

Example 2: Incoming Quote Terminates PIP

BOX BBO: 2.00 bid and 2.06 offer

NBBO: 2.00 bid and 2.06 offer

PIP Order: Buy 5 contracts for 2.05

Incoming Quote: Buy 10 contracts for 2.06

All submissions should refer to File Number SR-BOX-2022-31. 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 the 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 ( printed page 78175) submissions should refer to File Number SR-BOX-2022-31 and should be submitted on or before January 11, 2023.