Self-Regulatory Organizations; BOX Options Exchange LLC; Order Approving Proposed Rule Change To Amend the Price Improvement Period, 67851-67856 [2012-27600]
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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Notices
system, and, in general, to protect
investors and the public interest.
Adding JBO as a potential origin for
orders to the appropriate sections on the
Fees Schedule will ensure that market
participants entering orders for a JBO
account to be cleared into the Firm
range at the OCC will easily be able to
discern the fees that apply to such
orders. This will eliminate any potential
confusion, thereby removing a potential
impediment to and perfecting the
mechanism for a free and open market
and a national market system, and, in
general, protecting investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
C2 does not believe that the proposed
rule change will impose any burden on
competition that is 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 neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A) 6 of the Act and paragraph
(f)(2) of Rule 19b–4 7 thereunder. 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.
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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:
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–C2–2012–037. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–C2–
2012–037 and should be submitted on
or before December 5, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–27599 Filed 11–13–12; 8:45 am]
BILLING CODE 8011–01–P
7 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
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[Release No. 34–68177; File No. SR–BOX–
2012–003]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Order
Approving Proposed Rule Change To
Amend the Price Improvement Period
November 7, 2012.
I. Introduction
On July 25, 2012, BOX Options
Exchange LLC (‘‘Exchange’’ or ‘‘BOX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) 1 of the Securities
Exchange Act of 1934 (‘‘Act’’),2 and
Rule 19b–4 thereunder,3 a proposed rule
change to amend Rule 7150, which
relates to the Exchange’s Price
Improvement Period (‘‘PIP’’), by
modifying the order of execution of
quotes and orders that are on the BOX
Book prior to the start of a PIP. The
proposed rule change was published for
comment in the Federal Register on
August 9, 2012.4 The Commission
received one comment letter on the
proposed rule change 5 and a response
to the comment letter from the
Exchange.6 This order approves the
proposed rule change.
II. Description of the Proposal
Currently, Rule 7150(f) permits a PIP
to begin at or better than the National
Best Bid or Offer (‘‘NBBO’’). Further,
Rule 7150(f)(1) provides that, at the
commencement of the PIP, all quotes
and orders on the BOX Book prior to the
PIP Broadcast that are equal to or better
than (i) the Single-Priced Primary
Improvement Order price, or (ii) the PIP
Start Price of a Max Improvement
Primary Improvement Order, except any
proprietary quote or order from the
Initiating Participant, will be executed
immediately against the customer order
designated for the PIP (‘‘PIP Order’’) in
price/time priority.7 As a result, if an
order is submitted to the PIP and there
is sufficient quantity on the BOX Book
prior to the PIP Broadcast to execute the
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 67592
(August 3, 2012), 77 FR 47681 (‘‘Notice’’).
5 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Kurt Eckert, Principal,
Wolverine Trading, LLC dated August 30, 2012
(‘‘Wolverine Letter’’).
6 See Letter to Elizabeth M. Murphy, Secretary,
Commission, from Anthony D. McCormick, Chief
Executive Officer, Exchange, dated October 4, 2012
(‘‘Exchange Response’’).
7 Capitalized terms that are not otherwise defined
herein are defined as in the Exchange’s Rules.
2 15
8 17
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SECURITIES AND EXCHANGE
COMMISSION
1 15
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–C2–2012–037 on the subject
line.
6 15
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CFR 200.30–3(a)(12).
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PIP Order, the PIP does not commence.
The Exchange proposes to delete the
provision in Rule 7150(f)(1) relating to
the execution of quotes and orders on
the BOX Book prior to the PIP’s
commencement and to amend Rules
7150(f)(1) 8 and (f)(4) to specify the
priority for executing such quotes and
orders at the conclusion of the PIP.
Rule 7150(f)(4) sets forth exceptions
to time priority in the execution of the
PIP Order. The Rule currently provides
that no order for a non-market maker
broker-dealer account of an Options
Participant may be executed before all
Public Customer order(s), whether an
Improvement Order, including a
Customer PIP Order (‘‘CPO’’), or an
Unrelated Order,9 and all non-BOX
Options participant broker-dealer
order(s) at the same price have been
filled. The Exchange proposes to amend
Rule 7150(f)(4)(i) to specify further that
all quotes and orders on the BOX Book
prior to the PIP Broadcast, excluding
any proprietary quote or order from the
Initiating Participant, will be filled in
time priority before any other order at
the same price.
The Exchange also proposes to add
new Rule 7150(g)(3). New Rule
7150(g)(3) provides that the Primary
Improvement Order follows in time
priority all quotes and orders on the
BOX Book prior to the PIP Broadcast
that are equal to the (i) Single-Priced
Primary Improvement Order price; or
(ii) execution price of a Max
Improvement Primary Improvement
Order that results in the balance of the
PIP Order being fully executed, except
any proprietary quote or order from the
Initiating Participant. Any such
proprietary quote or order from the
Initiating Participant will not be
executed against the PIP Order during or
at the conclusion of the PIP.
The Exchange noted that, among the
quotes or orders on the BOX Book prior
to the PIP Broadcast at the final
execution price level, the PIP Order will
be matched against the best prevailing
quotes or orders on BOX (except any
pre-PIP Broadcast proprietary quote or
order from the Initiating Participant) in
accordance with price/time priority, as
set forth in Rule 7130.10
8 The Exchange proposes to amend Rule
7150(f)(1) to specify that at the conclusion of the
PIP, the PIP Order shall be executed as set forth in
paragraphs (f)(3), (f)(4), (g), and (j).
9 The Exchange proposes a technical change to
Rule 7150(f)(4)(i) to correct the current reference to
‘‘unrelated’’ by replacing it with the term
‘‘Unrelated Order.’’
10 See Notice, supra note 4, for examples of how
quotes and orders on the BOX Book prior to the PIP
Broadcast would be executed at the PIP’s
conclusion.
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Under the proposal, Unrelated Orders
submitted to BOX will continue to
execute as they do currently under
Rules 7150(i) and 7150(j). Accordingly,
Unrelated Orders received after a PIP
Broadcast will execute in time priority
after quotes and orders at the same price
that were on the BOX Book prior to the
PIP Broadcast.
The Exchange stated that in
connection with this proposed rule
change, it will provide to the
Commission the following monthly
data, and corresponding analysis,
related to the PIP:11 (1) The number of
orders of 50 contracts or greater entered
into the PIP auction; (2) the percentage
of all orders of 50 contracts or greater
sent to BOX that are entered into the PIP
auction; (3) the spread in the option at
the time an order of 50 contracts or
greater is submitted to the PIP auction;
(4) the percentage of PIP trades executed
at the NBBO plus $.01, plus $.02, plus
$.03, etc.; and (5) the number of orders
submitted by Order Flow Providers
(‘‘OFPs’’) and Market Makers when the
spread was at a particular increment
(e.g., $.05, $.10, $.15, etc.). Also, relative
to item (5) above, for each spread, the
Exchange will provide the percentage of
contracts in orders of fewer than 50
contracts and for orders of 50 contracts
or greater submitted to the PIP that were
traded by: (a) the OFP or Market Maker
that submitted the order to the PIP; (b)
BOX Market Makers assigned to the
class; (c) other BOX Participants; (d)
Public Customer Orders (including
CPOs); (e) Unrelated Orders (orders in
standard increments entered during the
PIP), and (f) quotes and orders on the
BOX Book prior to the PIP Broadcast.
Further, BOX will provide, for the
first and third Wednesday of each
month, the: (a) Total number of PIP
auctions on that date; (b) number of PIP
auctions where the order submitted to
the PIP was fewer than 50 contracts; (c)
number of PIP auctions where the order
submitted to the PIP was 50 contracts or
greater; (d) number of PIP auctions
where the number of Participants
(excluding the Initiating Participant)
was zero, one, two, three, four, etc.
Finally, the Exchange will provide
11 See id. For orders of less than 50 contracts, the
PIP is currently operating on a pilot basis. See
Securities Exchange Act Release Nos. 49068
(January 13, 2004), 69 FR 2775 (January 20, 2004)
(Order Approving Proposed Rule Change
Establishing Trading Rules for Boston Options
Exchange facility) and 66871 (April 27, 2012), 77
FR 26323 (May 3, 2012) (File No.10–206, In the
Matter of the Application of BOX Options Exchange
LLC for Registration as a National Securities
Exchange Findings, Opinion, and Order of the
Commission) (‘‘BOX Exchange Application Order’’).
The pilot program is currently set to expire on July
18, 2013. See Securities Exchange Act Release No.
67255 (June 26, 2012), 77 FR 39315 (July 2, 2012).
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information each month with respect to
situations in which the PIP is
terminated prematurely or a Market
Order, Limit Order, or BOX-Top Order
immediately execute with a PIP Order
before the PIP’s conclusion. The
following information will be provided:
(1) The number of times that a Market
Order, Limit Order, or BOX-Top Order
in the same series on the same side of
the market as the PIP Order prematurely
terminated the PIP, and (a) the number
of times such orders were entered by the
same (or affiliated) firm that initiated
the PIP that was terminated, and (b) the
number of times such orders were
entered by a firm (or an affiliate of such
firm) that participated in the execution
of the PIP Order; (2) for the orders
addressed in each of items (1)(a) and
(1)(b) above, the percentage of PIP
premature terminations due to the
receipt, during the PIP, of a Market
Order, Limit Order, or BOX-Top Order
in the same series on the same side of
the market as the PIP Order, and the
average amount of price improvement
provided to the PIP Order where the PIP
is prematurely terminated; (3) the
number of times that a Market Order,
Limit Order, or BOX-Top Order in the
same series on the opposite side of the
market as the PIP Order immediately
executed against the PIP Order, and (a)
the number of times such orders were
entered by the same (or affiliated) firm
that initiated the PIP, and (b) the
number of times such orders were
entered by a firm (or an affiliate of such
firm) that participated in the execution
of the PIP Order; (4) for the orders
addressed in each of items (3)(a) and
(3)(b) above, the percentage of PIP early
executions due to the receipt, during the
PIP, of a Market Order, Limit Order, or
BOX-Top Order in the same series on
the opposite side of the market as the
PIP Order; and the average amount of
price improvement provided to the PIP
Order where the PIP Order is
immediately executed; and (5) the
average amount of price improvement
provided to the PIP Order when the PIP
runs for 100 milliseconds.
BOX stated that, upon Commission
approval of the proposal and at least one
week prior to implementation of the
proposed rule change, it will issue an
Informational Circular to Options
Participants informing them of the
proposal’s implementation date.
III. Discussion and Commission
Findings
After careful review of the proposal,
the comment letter, and the Exchange
Response, the Commission finds that
the proposed rule change is consistent
with the requirements of the Act and the
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rules and regulations thereunder
applicable to a national securities
exchange and, in particular with Section
6(b)(5) 12 of the Act, which requires the
rules of an exchange be designed,
among other things, to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and to perfect the
mechanism for a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. In addition, the
Commission finds the proposed rule
change consistent with Section 6(b)(8) 13
of the Act, which requires that the rules
of the exchange do not impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.14
The Commission believes that the
proposal is designed to provide
additional opportunities for customers
to receive price improvement for their
PIP Orders. Under the current rule, if an
order is submitted to the PIP and there
is sufficient quantity on the BOX Book
prior to the PIP Broadcast to execute the
PIP Order at the PIP Start Price, the PIP
Order will execute against the BOX
Book (assuming it is at the NBBO), and
the PIP will never commence.15 The
Exchange’s proposal to modify the
handling of such pre-existing quotes
and orders on the BOX Book will
provide customers with a greater
opportunity to receive price
improvement above the NBBO on BOX
for their PIP Order because those preexisting quotes and orders on the BOX
Book no longer will execute against the
PIP Order before the PIP can begin.
Thus, the proposal may benefit
customers who submit PIP Orders
priced at the NBBO by allowing their
orders to be exposed to competition in
the PIP. The PIP Order will continue to
be guaranteed an execution price of at
least the NBBO and, as a result of the
Exchange’s proposal, will be given an
opportunity for execution at a price
better than the NBBO. At the same time,
all quotes and orders on the BOX Book
prior to the PIP Broadcast at the PIP
Start Price (excluding any proprietary
quote or order from the Initiating
Participant) will be filled in time
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12 15
U.S.C. 78f(b)(5).
U.S.C. 78f(b)(8).
14 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).
15 If the quotes and orders on the BOX Book at
the PIP Start Price are smaller in size than the PIP
Order, then the portion of the PIP Order that does
not execute against such pre-existing quotes and
orders on the BOX Book will be submitted to the
PIP auction.
13 15
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priority before any other order at the
same price at the conclusion of the PIP,
assuming they have not already been
executed.
The Commission received one
comment letter from a BOX Options
Participant opposing the proposed rule
change.16 According to the commenter,
the current requirement that the top of
the BOX Book be ‘‘swept’’ prior to the
PIP’s commencement incentivizes
market participants to quote
aggressively on BOX and allows retail
orders to interact with quotes on the
Exchange. In addition, the commenter
noted that market participants could
initiate a PIP without having a quote
either at the NBBO on any exchange or
at the BBO on BOX.17 Therefore,
according to the commenter, the
proposal diminishes the incentive for
robust quoting on BOX or the resting of
public customer limit orders on the
BOX Book.18 The commenter suggested
that the proposal be amended to require
that BOX must sweep the top of the
BOX Book if the PIP starts at the BOX
BBO and that the Initiating Participant
must be quoting at the BOX BBO.19
The Exchange responded that, in its
view, a customer’s entire PIP Order
should have the opportunity for
competing market participants to
provide price improvement to that
customer order.20 The Exchange stated
that that if ‘‘competing participants step
up to provide a better price for the
customer order, it is appropriate, and
consistent with the federal securities
laws, for that customer to receive an
execution at the best price available
(price improvement through the PIP
auction) rather than the market maker
quote on the book that is no longer the
best bid or offer.’’ 21
The Commission recognizes the
concern regarding the impact of the
proposed rule change on the overall
incentives for market participants to rest
liquidity on the BOX Book. However, as
discussed above, the Commission also
recognizes the potential benefit from the
proposed rule change with respect to
customer PIP Orders priced at the NBBO
by providing customers with a greater
opportunity to receive price
improvement on BOX for their PIP
16 See
Wolverine Letter, supra note 5.
respect to the comment that market
participants could initiate a PIP without having a
quote either at the NBBO on any exchange or at the
BBO on BOX, the Commission notes that this
feature is currently part of the PIP. The Exchange
has not proposed to revise this aspect of the PIP,
and thus this issue is not before the Commission.
18 See Wolverine Letter, supra note 5, at 1–2.
19 See Wolverine Letter, supra note 5, at 2.
20 See Exchange Response, supra note 6, at 1.
21 See Exchange Response, supra note 6, at 2.
67853
Orders by allowing those orders to be
exposed to competition in the PIP,
before interacting with pre-existing
quotes and orders on the BOX Book at
the PIP Start Price. In the Commission’s
view, the Exchange’s proposal is
reasonably designed to balance the
potential for customers to receive price
improvement in the PIP, rather than to
have their orders immediately executed
against a pre-existing quote on the BOX
Book at the NBBO, with the potential to
impact Market Makers’ or other market
participants’ incentives to quote
aggressively because they no longer will
have the assurance that their quotes at
the NBBO will execute against the PIP
Order before the PIP begins. Quotes and
orders that are on the BOX Book prior
to the PIP Broadcast will continue to be
able to interact with non-PIP order flow
during the auction period. In addition,
under the proposal, such quotes and
orders will have priority to interact with
any PIP order flow at the end of the
auction period, unless the entire PIP
order is price improved. Moreover,
Market Makers or other market
participants that wish to interact with
the PIP Order can do so by submitting
their own Improvement Orders into the
PIP auction. For these reasons, the
Commission believes that the proposal
is consistent with the Act.
The commenter also remarked that
the proposal is defective because it
would allow a PIP auction to begin at
the NBBO rather than requiring at least
a penny of price improvement over the
BOX BBO.22 The commenter suggested
that the proposal be amended so that the
PIP start price would be at least a penny
better than the BOX BBO.23 The
Commission notes, however, that
instant proposal relates solely to the
priority and allocation of quotes and
orders that are on the BOX Book prior
to a PIP’s commencement. The
Exchange has not proposed to revise the
start price of the PIP and thus this issue
is not before the Commission.24 Further,
as discussed above, the Commission
believes that the proposed rule change,
as submitted, is consistent with the Act.
In addition, the commenter stated its
belief that the proposal has the potential
to harm retail investors.25 According to
the commenter, the proposal serves ‘‘to
remove real orders from interaction with
17 With
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22 See
Wolverine Letter, supra note 5, at 2.
23 Id.
24 Under Rule 7150(f), the PIP start price must be
equal to or better than the NBBO at the time of
commencement of the PIP. Accordingly, if the BOX
BBO does not equal the NBBO, then the PIP must
start at a price that is better than the BOX BBO. See
Securities Exchange Act Release No. 59654 (March
30, 2009), 74 FR 15551 (April 6, 2009).
25 See Wolverine Letter, supra note 5, at 2.
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lit markets at exchanges’’ and reduces
the NBBO to ‘‘little more than a
reference price that is not the best
available for retail investors.’’ 26 The
commenter further noted that, to the
extent price competition decreases on
an exchange, the NBBO increasingly
loses value as a reference price.27 The
commenter stated its view that the
proposal is harmful to market efficiency
in that it ‘‘turns the exchange into an
internalization facilitator rather than a
bona fide market with multiple
participants competing to offer the best
prices to customers.’’ 28
The Exchange responded that the
proposal promotes transparent
competition to ensure that customer
orders receive the best price possible.29
The Exchange noted that the PIP
Broadcast is sent to any Options
Participant that wishes to receive it.
According to the Exchange, the PIP
permits Market Makers to submit
competing orders into the PIP auction
for their own account, and all nonmarket maker Options Participants also
may submit competing orders into the
PIP auction for their own account or for
their customer accounts. The Exchange
also responded that Options
Participants are actively competing for
customer orders in the PIP.30 Moreover,
the Exchange noted that its Market
Makers are the Options Participants
most likely to compete for execution
against customer orders in the PIP, even
though their quotes that are on the BOX
Book at the NBBO currently execute
prior to a PIP’s start.31 Any Options
Participant (except for the Initiating
Participant), including Options
Participants that have placed quotes and
orders on the BOX Book, may choose to
submit Improvement Orders into the PIP
and compete for the PIP Order.32
The Commission believes that these
features of the PIP are designed to
provide the opportunity for a
competitive auction, which benefits
customers by giving them the chance for
price improvement better than the
NBBO and thus the Exchange’s proposal
should not result in a harmful impact on
market efficiency. As discussed above,
26 Id.
27 Id.
28 See
Wolverine Letter, supra note 5, at 2.
Exchange Response, supra note 6, at 2.
30 According to the Exchange, for the eight-plus
years that the PIP has been in effect, approximately
70% of PIP auctions have included competition for
execution (i.e., at least one other Options
Participant has competed with the Initiating
Participant for execution of a customer order). The
Exchange stated that almost 50% of all PIP auctions
included three or more Participants competing for
the PIP execution. Id.
31 Id.
32 Id.
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29 See
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the proposal is intended to provide
increased opportunities for price
improvement of customer PIP Orders
priced at the NBBO by permitting a PIP
to go forward without those quotes and
orders on the BOX Book at the PIP start
price being executed against the PIP
Order before the PIP auction
commences. Quotes and orders on the
BOX Book prior to a PIP Broadcast will
retain their priority at the same price at
the conclusion of the PIP (assuming
they have not already been executed on
the BOX Book). However, as noted
above, the Exchange has committed to
provide the Commission with monthly
data and corresponding analysis related
to the PIP, including statistics with
respect to the execution of quotes and
orders on the BOX Book prior to the
start of the PIP.33 This data will assist
the Commission and the Exchange in
monitoring the impact of the proposed
rule change.
IV. Section 11(a) of the Act
Section 11(a)(1) of the Act 34 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 discretion (collectively,
‘‘covered accounts’’), unless an
exception applies. The Exchange
represents that the proposed rule change
is consistent with Section 11(a) of the
Act. Specifically, the Exchange believes
that the PIP is generally consistent with
Section 11(a)(1)(G) of the Act and Rule
11a1–1(T) thereunder because Options
Participants that are not Market Makers
must yield priority in the PIP to all nonmember orders (i.e., to all Public
Customer Orders and non-BOX
Participant broker-dealer orders) at the
same price.35 In addition, the Exchange
believes that the proposed change to
execute, against the PIP Order and at the
end of a PIP auction, those quotes and
orders on the BOX Book prior to the PIP
Broadcast (if at the PIP Start Price)
satisfies the conditions of Rule 11a2–
2(T) under the Act. For the reasons set
forth below, the Commission believes
that the proposed rule change is
consistent with the requirements of
Section 11(a) of the Act and the rules
thereunder.
A. Section 11(a)(1)(G) of the Act and
Rule 11a1–1(T) Thereunder
Section 11(a)(1)(G) of the Act provides
an exception from the general
prohibition set forth in Section 11(a)(1)
33 See
supra note 11.
U.S.C. 78k(a)(1).
35 See Notice, supra note 4 at n.12.
34 15
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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) the transaction is effected in
compliance with the rules of the
Commission, which, at 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.36 In addition, Rule 11a1–1(T)
under the Act specifies that a
transaction effected on a national
securities exchange for the account of a
member which meets the requirements
of Section 11(a)(1)(G)(i) of the Act is
deemed, in accordance with the
requirements of Section 11(a)(1)(G)(ii),
to be not inconsistent with the
maintenance of fair and orderly markets
and to yield priority, parity, and
precedence in execution to orders for
the account of non-members or persons
associated with non-members of the
exchange, if such transaction is effected
in compliance with certain
requirements.37
With respect to the PIP, the rules of
the Exchange currently prohibit any
orders for the accounts of non-Marker
Maker Options Participants from being
executed prior to the execution of
Public Customer Orders, whether an
Improvement Order, including a
Customer PIP Order, or Unrelated
Order, and non-BOX Participant broker36 See
15 U.S.C. 78k(a)(1)(G).
11a1–1(T)(a)(1)–(3) provides that each of
the following requirements must be met: (1) A
member must disclose that a bid or offer for its
account is for its account to any member with
whom such bid or offer is placed or to whom it is
communicated, and any member through whom
that bid or offer is communicated must disclose to
others participating in effecting the order that it is
for the account of a member; (2) immediately before
executing the order, a member (other than the
specialist in such security) presenting any order for
the account of a member on the exchange must
clearly announce or otherwise indicate to the
specialist and to other members then present for the
trading in such security on the exchange that he is
presenting an order for the account of a member;
and (3) notwithstanding rules of priority, parity,
and precedence otherwise applicable, any member
presenting for execution a bid or offer for its own
account or for the account of another member must
grant priority to any bid or offer at the same price
for the account of a person who is not, or is not
associated with, a member, irrespective of the size
of any such bid or offer or the time when entered.
See 17 CFR 240.11a1–1(T)(a)(1)–(3).
37 Rule
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Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Notices
dealer orders at the same price.38 The
current proposed rule change revises the
treatment of quotes and orders on the
BOX Book prior to the PIP Broadcast,
which orders will now be executed
against the PIP Order at the end of the
PIP (if at the same price). However, the
execution of these quotes and orders
against the PIP Order qualifies for a
separate exception to the Section 11(a)
restrictions.39 Thus, because current
Exchange rules require Options
Participants that are not Market
Makers 40 to yield priority in the PIP to
all non-member orders, the Commission
believes that the proposal with respect
to transactions effected through the PIP,
other than for quotes and orders on the
BOX Book prior to the PIP Broadcast, is
consistent with the requirements in
Section 11(a) of the Act and Rule 11a1–
1(T) thereunder.41 The Commission
reminds exchanges and their members,
however, that, in addition to yielding
priority to non-member orders at the
same price, members must also meet the
other requirements under Section
11(a)(1)(G) of the Act and Rule 11a1–
1(T) thereunder (or satisfy the
requirements of another exception) to
effect transactions for their own
accounts.
B. ‘‘Effect versus Execute’’ and Rule
11a2–2(T) under the Act
Rule 11a2–2(T) under the Act,42
known as the ‘‘effect versus execute’’
rule, provides exchange members with
another exception 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 the
transactions on the exchange. To
comply with Rule 11a2–2(T)’s
conditions, a member: (1) May not be
affiliated with the executing member;
(2) must transmit the order from off the
38 See
BOX Rules 7150(f)(4) and 7150(g)(3)(i).
infra Section IV. B.
40 Section 11(a)(1)(A) of the Act provides an
additional exception to the general prohibition in
Section 11(a) on an exchange member effecting
transactions for its own account if such member is
a dealer acting in the capacity of a market maker.
See 15 U.S.C. 78k(a)(1)(A).
41 The Commission has previously found that
transactions effected through the PIP are consistent
with the requirements in Section 11(a) of the Act
and Rule 11a1–1(T) thereunder because Options
Participants that are not Market Makers are required
to yield priority in the PIP to all non-member
orders, (i.e., to all Public Customer Orders and nonOptions Participant broker-dealer orders) at the
same price. See BOX Exchange Application Order,
supra note 11. The Commission believes that
transactions effected through the PIP, as amended
by the proposed rule change, remain consistent
with the requirements Section 11(a) of the Act and
Rule 11a1–1(T) thereunder.
42 17 CFR 240.11a2–2(T).
emcdonald on DSK67QTVN1PROD with NOTICES
39 See
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exchange floor; (3) may not participate
in the execution of the transaction once
it has been transmitted to the member
performing the execution; 43 and (4)
with respect to an account over which
the member has investment discretion,
neither the member nor its associated
person may retain any compensation in
connection with effecting the
transaction except as provided in the
Rule. The Exchange believes that the
execution of quotes and orders that are
on the BOX Book prior to a PIP
Broadcast against a PIP Order will
satisfy the requirements of Rule 11a2–
2(T).44 For the reasons set forth below,
the Commission believes that, under the
proposed rule change, such executions
will satisfy the conditions of Rule 11a2–
2(T).45
Rule 11a2–2(T)’s first condition is that
the order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that the
requirement is satisfied when
automated exchange facilities, such as
the Trading Host, are used, as long as
the design of these systems ensures that
members do not possess any special or
unique trading advantages over nonmembers in handling their orders after
transmitting them to the Exchange.46
The Exchange represents that the design
of the BOX Book, including the
mechanism that executes quotes and
orders resting on the Book prior to a PIP
against the PIP order at the conclusion
of a PIP auction, ensures that brokerdealers do not have any special or
43 The member may, however, participate in
clearing and settling the transaction. See Securities
Exchange Act Release No. 14563 (March 14, 1978),
43 FR 11542 (March 17, 1978) (regarding the
NYSE’s Designated Order Turnaround System
(‘‘1978 Release’’)).
44 For a more detailed discussion, see the
description of the proposed rule change in the
Notice, supra note 4 and supra Section II.
45 See BOX Exchange Application Order, supra
note 11.
46 In considering the operation of automated
execution systems operated by an exchange, the
Commission has noted that, while there is no
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into each system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See Securities Exchange Act Release No.
15533 (January 29, 1979), 44 FR 6084 (January 31,
1979) (regarding the American Stock Exchange
(‘‘Amex’’) Post Execution Reporting System, the
Amex Switching System, the Intermarket Trading
System, the Multiple Dealer Trading Facility of the
Cincinnati Stock Exchange, the PCX
Communications and Execution System, and the
Philadelphia Stock Exchange (‘‘Phlx’’) Automated
Communications and Execution System (‘‘1979
Release’’)).
PO 00000
Frm 00066
Fmt 4703
Sfmt 4703
67855
unique trading advantages in handling
their orders after transmission.
Accordingly, the Exchange believes that
a member effecting a transaction
through the BOX Book, even where the
quote or order on the Book prior to a PIP
executes against the PIP Order, satisfies
the requirement for execution through
an unaffiliated member.
According to the Exchange, the design
of BOX ensures that no Options
Participant would enjoy any special
control over the timing of execution or
special order handling advantages after
order transmission to the BOX Book. All
orders on the BOX Book are centrally
processed and executed automatically
by BOX. Orders sent to BOX would be
transmitted from remote terminals
directly to the system by electronic
means. Once an order is submitted to
the BOX Book, the order would be
executed against another order based on
the established matching algorithms for
the BOX Book. In addition, as proposed,
those quotes and orders on the BOX
Book prior to a PIP may trade with the
PIP Order, or would execute when
orders or quotations on BOX match one
another based on price/time priority.
The execution would not depend on the
Options Participant but rather upon
what other orders are entered into BOX
at or around the same time as the
subject order, what orders are on the
BOX Book, or if a PIP is initiated and
what responses are received in response
to the PIP, and where the order is
ranked based on the priority ranking
algorithm. At no time following the
submission of an order to the BOX Book
would an Options Participant be able to
acquire control or influence over the
result or timing of order execution,
including whether it is executed against
an order in the PIP. Accordingly,
Options Participants could not control
or influence the result or timing of
orders submitted to the BOX Book, even
if such an order were to match with the
PIP Order. Based on the Exchange’s
representations, the Commission
believes that the proposal satisfies this
requirement of Rule 11a2–2(T).
Second, Rule 11a2–2(T) requires
orders for covered accounts be
transmitted from off the exchange floor.
In the context of other automated
trading systems, 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.47 The Exchange
47 See, e.g., Securities Exchange Act Release Nos.
61419 (January 26, 2010), 75 FR 5157 (February 1,
2010) (SR–BATS–2009–031) (approving BATS
E:\FR\FM\14NON1.SGM
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14NON1
67856
Federal Register / Vol. 77, No. 220 / Wednesday, November 14, 2012 / Notices
states that orders sent to the BOX Book,
regardless of where it executes within
the BOX system, including the Book or
the PIP, would be transmitted from
remote terminals directly to BOX by
electronic means. OFPs and Market
Makers would only submit orders and
quotes to BOX from electronic systems
from remote locations, separate from
BOX. The Exchange further represents
that there are no other Options
Participants that would be able to
submit orders to BOX other than OFPs
or Market Makers. Accordingly, the
Commission believes that Options
Participants’ orders electronically
received by BOX satisfy the off-floor
transmission requirement for the
purposes of the Rule.
Third, Rule 11a2–2(T) requires that
the member not participate in the
execution of its order once it has been
transmitted to the member performing
the execution. The Exchange represents
that, at no time following the
submission of an order to the BOX
Book, would an Options Participant be
able to acquire control or influence over
the result or timing of order execution,
even if its order on the BOX Book may
execute with a PIP Order.48 According
to the Exchange, upon submission to
BOX, an order would be executed
against another order on the BOX Book
or against the PIP Order based on an
established matching algorithm. The
execution would not depend on the
Options Participant, but rather upon
what other orders are entered into BOX
at or around the same time as the
subject order, what orders are on the
BOX Book, whether a PIP is initiated
and what responses are received in
response to the PIP, and where the order
is ranked based on the priority ranking
algorithm. As such, the Commission
believes that the non-participation
requirement is met when orders are
executed automatically on the BOX
Book, including if they execute against
a PIP order.
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 thereof 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).49 The Exchange has
represented that, as a prerequisite for
BOX usage, if an Options Participant is
to rely on Rule 11a2–2(T) for a covered
account transaction, the Options
Participant must comply with the
limitations on compensation set forth in
Rule 11a2–2(T).
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,50 that the
proposed rule change (SR–BOX–2012–
003) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.51
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–27600 Filed 11–13–12; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #13369 and #13370]
emcdonald on DSK67QTVN1PROD with NOTICES
Connecticut Disaster #CT–00028
options trading); 59154 (December 28, 2008), 73 FR
80468 (December 31, 2008) (SR–BSE–2008–48)
(approving equity securities listing and trading on
BSE); 53128 (January 13, 2006), 71 FR 3550 (January
23, 2006) (File No. 10–131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR
55225 (November 1, 2001) (SR–PCX–00–25)
(approving Archipelago Exchange); 29237 (May 24,
1991), 56 FR 24853 (May 31, 1991) (SR–NYSE–90–
52 and SR–NYSE–90–53) (approving NYSE’s OffHours Trading Facility). See also 1978 Release and
1979 Release.
48 The member may only cancel or modify the
order, or modify the instructions for executing the
order, but only from off the Exchange floor. The
Commission has stated that the non-participation
requirement is satisfied under such circumstances,
so long as such modifications or cancellations are
also transmitted from off the floor. See 1978 Release
(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’’).
VerDate Mar<15>2010
14:41 Nov 13, 2012
Jkt 229001
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
This is a Notice of the
Presidential declaration of a major
disaster for the State of Connecticut
(FEMA–4087–DR), dated 10/30/2012.
Incident: Hurricane Sandy.
Incident Period: 10/27/2012 and
continuing.
SUMMARY:
Effective Date: 10/30/2012.
Physical Loan Application Deadline
Date: 12/31/2012.
Economic Injury (EIDL) Loan
Application Deadline Date: 07/31/2013.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing And
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW., Suite 6050,
Washington, DC 20416.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
10/30/2012, applications for disaster
loans may be filed at the address listed
above or other locally announced
locations.
The following areas have been
determined to be adversely affected by
the disaster:
Primary Counties (Physical Damage and
Economic Injury Loans): Fairfield,
Middlesex, New Haven, New
London and the Mashantucket
Pequot Tribal Nation and Mohegan
Tribal Nation located within New
London County.
Contiguous Counties (Economic Injury
Loans Only):
Connecticut: Hartford, Litchfield,
Tolland, Windham.
New York: Dutchess, Putnam,
Westchester.
Rhode Island: Kent, Washington.
The Interest Rates are:
DATES:
Percent
49 17
CFR 240.11a2–2(T)(a)(2)(iv). In addition,
Rule 11a2–2(T)(d) requires a member or associated
person authorized by written contract to retain
compensation, in connection with effecting
transactions for covered accounts over which such
member or associated person thereof exercises
investment discretion, to 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 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
(stating ‘‘[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’’).
50 15 U.S.C. 78s(b)(2).
51 17 CFR 200.30–3(a)(12).
PO 00000
Frm 00067
Fmt 4703
Sfmt 4703
For Physical Damage:
Homeowners With Credit Available Elsewhere ......................
Homeowners Without Credit
Available Elsewhere ..............
Businesses With Credit Available Elsewhere ......................
Businesses
Without
Credit
Available Elsewhere ..............
Non-Profit Organizations With
Credit Available Elsewhere ...
Non-Profit Organizations Without Credit Available Elsewhere .....................................
For Economic Injury:
Businesses & Small Agricultural
Cooperatives Without Credit
Available Elsewhere ..............
E:\FR\FM\14NON1.SGM
14NON1
3.375
1.688
6.000
4.000
3.125
3.000
4.000
]]>Agencies
[Federal Register Volume 77, Number 220 (Wednesday, November 14, 2012)]
[Notices]
[Pages 67851-67856]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-27600]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68177; File No. SR-BOX-2012-003]
Self-Regulatory Organizations; BOX Options Exchange LLC; Order
Approving Proposed Rule Change To Amend the Price Improvement Period
November 7, 2012.
I. Introduction
On July 25, 2012, BOX Options Exchange LLC (``Exchange'' or
``BOX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change to amend Rule 7150, which relates to the
Exchange's Price Improvement Period (``PIP''), by modifying the order
of execution of quotes and orders that are on the BOX Book prior to the
start of a PIP. The proposed rule change was published for comment in
the Federal Register on August 9, 2012.\4\ The Commission received one
comment letter on the proposed rule change \5\ and a response to the
comment letter from the Exchange.\6\ This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 67592 (August 3,
2012), 77 FR 47681 (``Notice'').
\5\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Kurt Eckert, Principal, Wolverine Trading, LLC dated August 30,
2012 (``Wolverine Letter'').
\6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Anthony D. McCormick, Chief Executive Officer, Exchange, dated
October 4, 2012 (``Exchange Response'').
---------------------------------------------------------------------------
II. Description of the Proposal
Currently, Rule 7150(f) permits a PIP to begin at or better than
the National Best Bid or Offer (``NBBO''). Further, Rule 7150(f)(1)
provides that, at the commencement of the PIP, all quotes and orders on
the BOX Book prior to the PIP Broadcast that are equal to or better
than (i) the Single-Priced Primary Improvement Order price, or (ii) the
PIP Start Price of a Max Improvement Primary Improvement Order, except
any proprietary quote or order from the Initiating Participant, will be
executed immediately against the customer order designated for the PIP
(``PIP Order'') in price/time priority.\7\ As a result, if an order is
submitted to the PIP and there is sufficient quantity on the BOX Book
prior to the PIP Broadcast to execute the
[[Page 67852]]
PIP Order, the PIP does not commence. The Exchange proposes to delete
the provision in Rule 7150(f)(1) relating to the execution of quotes
and orders on the BOX Book prior to the PIP's commencement and to amend
Rules 7150(f)(1) \8\ and (f)(4) to specify the priority for executing
such quotes and orders at the conclusion of the PIP.
---------------------------------------------------------------------------
\7\ Capitalized terms that are not otherwise defined herein are
defined as in the Exchange's Rules.
\8\ The Exchange proposes to amend Rule 7150(f)(1) to specify
that at the conclusion of the PIP, the PIP Order shall be executed
as set forth in paragraphs (f)(3), (f)(4), (g), and (j).
---------------------------------------------------------------------------
Rule 7150(f)(4) sets forth exceptions to time priority in the
execution of the PIP Order. The Rule currently provides that no order
for a non-market maker broker-dealer account of an Options Participant
may be executed before all Public Customer order(s), whether an
Improvement Order, including a Customer PIP Order (``CPO''), or an
Unrelated Order,\9\ and all non-BOX Options participant broker-dealer
order(s) at the same price have been filled. The Exchange proposes to
amend Rule 7150(f)(4)(i) to specify further that all quotes and orders
on the BOX Book prior to the PIP Broadcast, excluding any proprietary
quote or order from the Initiating Participant, will be filled in time
priority before any other order at the same price.
---------------------------------------------------------------------------
\9\ The Exchange proposes a technical change to Rule
7150(f)(4)(i) to correct the current reference to ``unrelated'' by
replacing it with the term ``Unrelated Order.''
---------------------------------------------------------------------------
The Exchange also proposes to add new Rule 7150(g)(3). New Rule
7150(g)(3) provides that the Primary Improvement Order follows in time
priority all quotes and orders on the BOX Book prior to the PIP
Broadcast that are equal to the (i) Single-Priced Primary Improvement
Order price; or (ii) execution price of a Max Improvement Primary
Improvement Order that results in the balance of the PIP Order being
fully executed, except any proprietary quote or order from the
Initiating Participant. Any such proprietary quote or order from the
Initiating Participant will not be executed against the PIP Order
during or at the conclusion of the PIP.
The Exchange noted that, among the quotes or orders on the BOX Book
prior to the PIP Broadcast at the final execution price level, the PIP
Order will be matched against the best prevailing quotes or orders on
BOX (except any pre-PIP Broadcast proprietary quote or order from the
Initiating Participant) in accordance with price/time priority, as set
forth in Rule 7130.\10\
---------------------------------------------------------------------------
\10\ See Notice, supra note 4, for examples of how quotes and
orders on the BOX Book prior to the PIP Broadcast would be executed
at the PIP's conclusion.
---------------------------------------------------------------------------
Under the proposal, Unrelated Orders submitted to BOX will continue
to execute as they do currently under Rules 7150(i) and 7150(j).
Accordingly, Unrelated Orders received after a PIP Broadcast will
execute in time priority after quotes and orders at the same price that
were on the BOX Book prior to the PIP Broadcast.
The Exchange stated that in connection with this proposed rule
change, it will provide to the Commission the following monthly data,
and corresponding analysis, related to the PIP:\11\ (1) The number of
orders of 50 contracts or greater entered into the PIP auction; (2) the
percentage of all orders of 50 contracts or greater sent to BOX that
are entered into the PIP auction; (3) the spread in the option at the
time an order of 50 contracts or greater is submitted to the PIP
auction; (4) the percentage of PIP trades executed at the NBBO plus
$.01, plus $.02, plus $.03, etc.; and (5) the number of orders
submitted by Order Flow Providers (``OFPs'') and Market Makers when the
spread was at a particular increment (e.g., $.05, $.10, $.15, etc.).
Also, relative to item (5) above, for each spread, the Exchange will
provide the percentage of contracts in orders of fewer than 50
contracts and for orders of 50 contracts or greater submitted to the
PIP that were traded by: (a) the OFP or Market Maker that submitted the
order to the PIP; (b) BOX Market Makers assigned to the class; (c)
other BOX Participants; (d) Public Customer Orders (including CPOs);
(e) Unrelated Orders (orders in standard increments entered during the
PIP), and (f) quotes and orders on the BOX Book prior to the PIP
Broadcast.
---------------------------------------------------------------------------
\11\ See id. For orders of less than 50 contracts, the PIP is
currently operating on a pilot basis. See Securities Exchange Act
Release Nos. 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004)
(Order Approving Proposed Rule Change Establishing Trading Rules for
Boston Options Exchange facility) and 66871 (April 27, 2012), 77 FR
26323 (May 3, 2012) (File No.10-206, In the Matter of the
Application of BOX Options Exchange LLC for Registration as a
National Securities Exchange Findings, Opinion, and Order of the
Commission) (``BOX Exchange Application Order''). The pilot program
is currently set to expire on July 18, 2013. See Securities Exchange
Act Release No. 67255 (June 26, 2012), 77 FR 39315 (July 2, 2012).
---------------------------------------------------------------------------
Further, BOX will provide, for the first and third Wednesday of
each month, the: (a) Total number of PIP auctions on that date; (b)
number of PIP auctions where the order submitted to the PIP was fewer
than 50 contracts; (c) number of PIP auctions where the order submitted
to the PIP was 50 contracts or greater; (d) number of PIP auctions
where the number of Participants (excluding the Initiating Participant)
was zero, one, two, three, four, etc. Finally, the Exchange will
provide information each month with respect to situations in which the
PIP is terminated prematurely or a Market Order, Limit Order, or BOX-
Top Order immediately execute with a PIP Order before the PIP's
conclusion. The following information will be provided: (1) The number
of times that a Market Order, Limit Order, or BOX-Top Order in the same
series on the same side of the market as the PIP Order prematurely
terminated the PIP, and (a) the number of times such orders were
entered by the same (or affiliated) firm that initiated the PIP that
was terminated, and (b) the number of times such orders were entered by
a firm (or an affiliate of such firm) that participated in the
execution of the PIP Order; (2) for the orders addressed in each of
items (1)(a) and (1)(b) above, the percentage of PIP premature
terminations due to the receipt, during the PIP, of a Market Order,
Limit Order, or BOX-Top Order in the same series on the same side of
the market as the PIP Order, and the average amount of price
improvement provided to the PIP Order where the PIP is prematurely
terminated; (3) the number of times that a Market Order, Limit Order,
or BOX-Top Order in the same series on the opposite side of the market
as the PIP Order immediately executed against the PIP Order, and (a)
the number of times such orders were entered by the same (or
affiliated) firm that initiated the PIP, and (b) the number of times
such orders were entered by a firm (or an affiliate of such firm) that
participated in the execution of the PIP Order; (4) for the orders
addressed in each of items (3)(a) and (3)(b) above, the percentage of
PIP early executions due to the receipt, during the PIP, of a Market
Order, Limit Order, or BOX-Top Order in the same series on the opposite
side of the market as the PIP Order; and the average amount of price
improvement provided to the PIP Order where the PIP Order is
immediately executed; and (5) the average amount of price improvement
provided to the PIP Order when the PIP runs for 100 milliseconds.
BOX stated that, upon Commission approval of the proposal and at
least one week prior to implementation of the proposed rule change, it
will issue an Informational Circular to Options Participants informing
them of the proposal's implementation date.
III. Discussion and Commission Findings
After careful review of the proposal, the comment letter, and the
Exchange Response, the Commission finds that the proposed rule change
is consistent with the requirements of the Act and the
[[Page 67853]]
rules and regulations thereunder applicable to a national securities
exchange and, in particular with Section 6(b)(5) \12\ of the Act, which
requires the rules of an exchange be designed, among other things, to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and to
perfect the mechanism for a free and open market and a national market
system, and, in general, to protect investors and the public interest.
In addition, the Commission finds the proposed rule change consistent
with Section 6(b)(8) \13\ of the Act, which requires that the rules of
the exchange do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.\14\
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\12\ 15 U.S.C. 78f(b)(5).
\13\ 15 U.S.C. 78f(b)(8).
\14\ 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).
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The Commission believes that the proposal is designed to provide
additional opportunities for customers to receive price improvement for
their PIP Orders. Under the current rule, if an order is submitted to
the PIP and there is sufficient quantity on the BOX Book prior to the
PIP Broadcast to execute the PIP Order at the PIP Start Price, the PIP
Order will execute against the BOX Book (assuming it is at the NBBO),
and the PIP will never commence.\15\ The Exchange's proposal to modify
the handling of such pre-existing quotes and orders on the BOX Book
will provide customers with a greater opportunity to receive price
improvement above the NBBO on BOX for their PIP Order because those
pre-existing quotes and orders on the BOX Book no longer will execute
against the PIP Order before the PIP can begin. Thus, the proposal may
benefit customers who submit PIP Orders priced at the NBBO by allowing
their orders to be exposed to competition in the PIP. The PIP Order
will continue to be guaranteed an execution price of at least the NBBO
and, as a result of the Exchange's proposal, will be given an
opportunity for execution at a price better than the NBBO. At the same
time, all quotes and orders on the BOX Book prior to the PIP Broadcast
at the PIP Start Price (excluding any proprietary quote or order from
the Initiating Participant) will be filled in time priority before any
other order at the same price at the conclusion of the PIP, assuming
they have not already been executed.
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\15\ If the quotes and orders on the BOX Book at the PIP Start
Price are smaller in size than the PIP Order, then the portion of
the PIP Order that does not execute against such pre-existing quotes
and orders on the BOX Book will be submitted to the PIP auction.
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The Commission received one comment letter from a BOX Options
Participant opposing the proposed rule change.\16\ According to the
commenter, the current requirement that the top of the BOX Book be
``swept'' prior to the PIP's commencement incentivizes market
participants to quote aggressively on BOX and allows retail orders to
interact with quotes on the Exchange. In addition, the commenter noted
that market participants could initiate a PIP without having a quote
either at the NBBO on any exchange or at the BBO on BOX.\17\ Therefore,
according to the commenter, the proposal diminishes the incentive for
robust quoting on BOX or the resting of public customer limit orders on
the BOX Book.\18\ The commenter suggested that the proposal be amended
to require that BOX must sweep the top of the BOX Book if the PIP
starts at the BOX BBO and that the Initiating Participant must be
quoting at the BOX BBO.\19\
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\16\ See Wolverine Letter, supra note 5.
\17\ With respect to the comment that market participants could
initiate a PIP without having a quote either at the NBBO on any
exchange or at the BBO on BOX, the Commission notes that this
feature is currently part of the PIP. The Exchange has not proposed
to revise this aspect of the PIP, and thus this issue is not before
the Commission.
\18\ See Wolverine Letter, supra note 5, at 1-2.
\19\ See Wolverine Letter, supra note 5, at 2.
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The Exchange responded that, in its view, a customer's entire PIP
Order should have the opportunity for competing market participants to
provide price improvement to that customer order.\20\ The Exchange
stated that that if ``competing participants step up to provide a
better price for the customer order, it is appropriate, and consistent
with the federal securities laws, for that customer to receive an
execution at the best price available (price improvement through the
PIP auction) rather than the market maker quote on the book that is no
longer the best bid or offer.'' \21\
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\20\ See Exchange Response, supra note 6, at 1.
\21\ See Exchange Response, supra note 6, at 2.
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The Commission recognizes the concern regarding the impact of the
proposed rule change on the overall incentives for market participants
to rest liquidity on the BOX Book. However, as discussed above, the
Commission also recognizes the potential benefit from the proposed rule
change with respect to customer PIP Orders priced at the NBBO by
providing customers with a greater opportunity to receive price
improvement on BOX for their PIP Orders by allowing those orders to be
exposed to competition in the PIP, before interacting with pre-existing
quotes and orders on the BOX Book at the PIP Start Price. In the
Commission's view, the Exchange's proposal is reasonably designed to
balance the potential for customers to receive price improvement in the
PIP, rather than to have their orders immediately executed against a
pre-existing quote on the BOX Book at the NBBO, with the potential to
impact Market Makers' or other market participants' incentives to quote
aggressively because they no longer will have the assurance that their
quotes at the NBBO will execute against the PIP Order before the PIP
begins. Quotes and orders that are on the BOX Book prior to the PIP
Broadcast will continue to be able to interact with non-PIP order flow
during the auction period. In addition, under the proposal, such quotes
and orders will have priority to interact with any PIP order flow at
the end of the auction period, unless the entire PIP order is price
improved. Moreover, Market Makers or other market participants that
wish to interact with the PIP Order can do so by submitting their own
Improvement Orders into the PIP auction. For these reasons, the
Commission believes that the proposal is consistent with the Act.
The commenter also remarked that the proposal is defective because
it would allow a PIP auction to begin at the NBBO rather than requiring
at least a penny of price improvement over the BOX BBO.\22\ The
commenter suggested that the proposal be amended so that the PIP start
price would be at least a penny better than the BOX BBO.\23\ The
Commission notes, however, that instant proposal relates solely to the
priority and allocation of quotes and orders that are on the BOX Book
prior to a PIP's commencement. The Exchange has not proposed to revise
the start price of the PIP and thus this issue is not before the
Commission.\24\ Further, as discussed above, the Commission believes
that the proposed rule change, as submitted, is consistent with the
Act.
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\22\ See Wolverine Letter, supra note 5, at 2.
\23\ Id.
\24\ Under Rule 7150(f), the PIP start price must be equal to or
better than the NBBO at the time of commencement of the PIP.
Accordingly, if the BOX BBO does not equal the NBBO, then the PIP
must start at a price that is better than the BOX BBO. See
Securities Exchange Act Release No. 59654 (March 30, 2009), 74 FR
15551 (April 6, 2009).
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In addition, the commenter stated its belief that the proposal has
the potential to harm retail investors.\25\ According to the commenter,
the proposal serves ``to remove real orders from interaction with
[[Page 67854]]
lit markets at exchanges'' and reduces the NBBO to ``little more than a
reference price that is not the best available for retail investors.''
\26\ The commenter further noted that, to the extent price competition
decreases on an exchange, the NBBO increasingly loses value as a
reference price.\27\ The commenter stated its view that the proposal is
harmful to market efficiency in that it ``turns the exchange into an
internalization facilitator rather than a bona fide market with
multiple participants competing to offer the best prices to
customers.'' \28\
---------------------------------------------------------------------------
\25\ See Wolverine Letter, supra note 5, at 2.
\26\ Id.
\27\ Id.
\28\ See Wolverine Letter, supra note 5, at 2.
---------------------------------------------------------------------------
The Exchange responded that the proposal promotes transparent
competition to ensure that customer orders receive the best price
possible.\29\ The Exchange noted that the PIP Broadcast is sent to any
Options Participant that wishes to receive it. According to the
Exchange, the PIP permits Market Makers to submit competing orders into
the PIP auction for their own account, and all non-market maker Options
Participants also may submit competing orders into the PIP auction for
their own account or for their customer accounts. The Exchange also
responded that Options Participants are actively competing for customer
orders in the PIP.\30\ Moreover, the Exchange noted that its Market
Makers are the Options Participants most likely to compete for
execution against customer orders in the PIP, even though their quotes
that are on the BOX Book at the NBBO currently execute prior to a PIP's
start.\31\ Any Options Participant (except for the Initiating
Participant), including Options Participants that have placed quotes
and orders on the BOX Book, may choose to submit Improvement Orders
into the PIP and compete for the PIP Order.\32\
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\29\ See Exchange Response, supra note 6, at 2.
\30\ According to the Exchange, for the eight-plus years that
the PIP has been in effect, approximately 70% of PIP auctions have
included competition for execution (i.e., at least one other Options
Participant has competed with the Initiating Participant for
execution of a customer order). The Exchange stated that almost 50%
of all PIP auctions included three or more Participants competing
for the PIP execution. Id.
\31\ Id.
\32\ Id.
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The Commission believes that these features of the PIP are designed
to provide the opportunity for a competitive auction, which benefits
customers by giving them the chance for price improvement better than
the NBBO and thus the Exchange's proposal should not result in a
harmful impact on market efficiency. As discussed above, the proposal
is intended to provide increased opportunities for price improvement of
customer PIP Orders priced at the NBBO by permitting a PIP to go
forward without those quotes and orders on the BOX Book at the PIP
start price being executed against the PIP Order before the PIP auction
commences. Quotes and orders on the BOX Book prior to a PIP Broadcast
will retain their priority at the same price at the conclusion of the
PIP (assuming they have not already been executed on the BOX Book).
However, as noted above, the Exchange has committed to provide the
Commission with monthly data and corresponding analysis related to the
PIP, including statistics with respect to the execution of quotes and
orders on the BOX Book prior to the start of the PIP.\33\ This data
will assist the Commission and the Exchange in monitoring the impact of
the proposed rule change.
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\33\ See supra note 11.
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IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \34\ 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 discretion
(collectively, ``covered accounts''), unless an exception applies. The
Exchange represents that the proposed rule change is consistent with
Section 11(a) of the Act. Specifically, the Exchange believes that the
PIP is generally consistent with Section 11(a)(1)(G) of the Act and
Rule 11a1-1(T) thereunder because Options Participants that are not
Market Makers must yield priority in the PIP to all non-member orders
(i.e., to all Public Customer Orders and non-BOX Participant broker-
dealer orders) at the same price.\35\ In addition, the Exchange
believes that the proposed change to execute, against the PIP Order and
at the end of a PIP auction, those quotes and orders on the BOX Book
prior to the PIP Broadcast (if at the PIP Start Price) satisfies the
conditions of Rule 11a2-2(T) under the Act. For the reasons set forth
below, the Commission believes that the proposed rule change is
consistent with the requirements of Section 11(a) of the Act and the
rules thereunder.
---------------------------------------------------------------------------
\34\ 15 U.S.C. 78k(a)(1).
\35\ See Notice, supra note 4 at n.12.
---------------------------------------------------------------------------
A. Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) Thereunder
Section 11(a)(1)(G) of the Act provides an exception from the
general prohibition set forth in Section 11(a)(1) 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) the transaction is effected in compliance with the
rules of the Commission, which, at 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.\36\ In addition, Rule 11a1-
1(T) under the Act specifies that a transaction effected on a national
securities exchange for the account of a member which meets the
requirements of Section 11(a)(1)(G)(i) of the Act is deemed, in
accordance with the requirements of Section 11(a)(1)(G)(ii), to be not
inconsistent with the maintenance of fair and orderly markets and to
yield priority, parity, and precedence in execution to orders for the
account of non-members or persons associated with non-members of the
exchange, if such transaction is effected in compliance with certain
requirements.\37\
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\36\ See 15 U.S.C. 78k(a)(1)(G).
\37\ Rule 11a1-1(T)(a)(1)-(3) provides that each of the
following requirements must be met: (1) A member must disclose that
a bid or offer for its account is for its account to any member with
whom such bid or offer is placed or to whom it is communicated, and
any member through whom that bid or offer is communicated must
disclose to others participating in effecting the order that it is
for the account of a member; (2) immediately before executing the
order, a member (other than the specialist in such security)
presenting any order for the account of a member on the exchange
must clearly announce or otherwise indicate to the specialist and to
other members then present for the trading in such security on the
exchange that he is presenting an order for the account of a member;
and (3) notwithstanding rules of priority, parity, and precedence
otherwise applicable, any member presenting for execution a bid or
offer for its own account or for the account of another member must
grant priority to any bid or offer at the same price for the account
of a person who is not, or is not associated with, a member,
irrespective of the size of any such bid or offer or the time when
entered. See 17 CFR 240.11a1-1(T)(a)(1)-(3).
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With respect to the PIP, the rules of the Exchange currently
prohibit any orders for the accounts of non-Marker Maker Options
Participants from being executed prior to the execution of Public
Customer Orders, whether an Improvement Order, including a Customer PIP
Order, or Unrelated Order, and non-BOX Participant broker-
[[Page 67855]]
dealer orders at the same price.\38\ The current proposed rule change
revises the treatment of quotes and orders on the BOX Book prior to the
PIP Broadcast, which orders will now be executed against the PIP Order
at the end of the PIP (if at the same price). However, the execution of
these quotes and orders against the PIP Order qualifies for a separate
exception to the Section 11(a) restrictions.\39\ Thus, because current
Exchange rules require Options Participants that are not Market Makers
\40\ to yield priority in the PIP to all non-member orders, the
Commission believes that the proposal with respect to transactions
effected through the PIP, other than for quotes and orders on the BOX
Book prior to the PIP Broadcast, is consistent with the requirements in
Section 11(a) of the Act and Rule 11a1-1(T) thereunder.\41\ The
Commission reminds exchanges and their members, however, that, in
addition to yielding priority to non-member orders at the same price,
members must also meet the other requirements under Section 11(a)(1)(G)
of the Act and Rule 11a1-1(T) thereunder (or satisfy the requirements
of another exception) to effect transactions for their own accounts.
---------------------------------------------------------------------------
\38\ See BOX Rules 7150(f)(4) and 7150(g)(3)(i).
\39\ See infra Section IV. B.
\40\ Section 11(a)(1)(A) of the Act provides an additional
exception to the general prohibition in Section 11(a) on an exchange
member effecting transactions for its own account if such member is
a dealer acting in the capacity of a market maker. See 15 U.S.C.
78k(a)(1)(A).
\41\ The Commission has previously found that transactions
effected through the PIP are consistent with the requirements in
Section 11(a) of the Act and Rule 11a1-1(T) thereunder because
Options Participants that are not Market Makers are required to
yield priority in the PIP to all non-member orders, (i.e., to all
Public Customer Orders and non-Options Participant broker-dealer
orders) at the same price. See BOX Exchange Application Order, supra
note 11. The Commission believes that transactions effected through
the PIP, as amended by the proposed rule change, remain consistent
with the requirements Section 11(a) of the Act and Rule 11a1-1(T)
thereunder.
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B. ``Effect versus Execute'' and Rule 11a2-2(T) under the Act
Rule 11a2-2(T) under the Act,\42\ known as the ``effect versus
execute'' rule, provides exchange members with another exception 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 the
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (1) May not be affiliated with the executing
member; (2) must transmit the order from off the exchange floor; (3)
may not participate in the execution of the transaction once it has
been transmitted to the member performing the execution; \43\ and (4)
with respect to an account over which the member has investment
discretion, neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule. The Exchange believes that the execution of
quotes and orders that are on the BOX Book prior to a PIP Broadcast
against a PIP Order will satisfy the requirements of Rule 11a2-
2(T).\44\ For the reasons set forth below, the Commission believes
that, under the proposed rule change, such executions will satisfy the
conditions of Rule 11a2-2(T).\45\
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\42\ 17 CFR 240.11a2-2(T).
\43\ The member may, however, participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the
NYSE's Designated Order Turnaround System (``1978 Release'')).
\44\ For a more detailed discussion, see the description of the
proposed rule change in the Notice, supra note 4 and supra Section
II.
\45\ See BOX Exchange Application Order, supra note 11.
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Rule 11a2-2(T)'s first condition is that the order be executed by
an exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that the requirement is satisfied when
automated exchange facilities, such as the Trading Host, are used, as
long as the design of these systems ensures that members do not possess
any special or unique trading advantages over non-members in handling
their orders after transmitting them to the Exchange.\46\ The Exchange
represents that the design of the BOX Book, including the mechanism
that executes quotes and orders resting on the Book prior to a PIP
against the PIP order at the conclusion of a PIP auction, ensures that
broker-dealers do not have any special or unique trading advantages in
handling their orders after transmission. Accordingly, the Exchange
believes that a member effecting a transaction through the BOX Book,
even where the quote or order on the Book prior to a PIP executes
against the PIP Order, satisfies the requirement for execution through
an unaffiliated member.
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\46\ In considering the operation of automated execution systems
operated by an exchange, the Commission has noted that, while there
is no independent executing exchange member, the execution of an
order is automatic once it has been transmitted into each system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See Securities
Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084
(January 31, 1979) (regarding the American Stock Exchange (``Amex'')
Post Execution Reporting System, the Amex Switching System, the
Intermarket Trading System, the Multiple Dealer Trading Facility of
the Cincinnati Stock Exchange, the PCX Communications and Execution
System, and the Philadelphia Stock Exchange (``Phlx'') Automated
Communications and Execution System (``1979 Release'')).
---------------------------------------------------------------------------
According to the Exchange, the design of BOX ensures that no
Options Participant would enjoy any special control over the timing of
execution or special order handling advantages after order transmission
to the BOX Book. All orders on the BOX Book are centrally processed and
executed automatically by BOX. Orders sent to BOX would be transmitted
from remote terminals directly to the system by electronic means. Once
an order is submitted to the BOX Book, the order would be executed
against another order based on the established matching algorithms for
the BOX Book. In addition, as proposed, those quotes and orders on the
BOX Book prior to a PIP may trade with the PIP Order, or would execute
when orders or quotations on BOX match one another based on price/time
priority. The execution would not depend on the Options Participant but
rather upon what other orders are entered into BOX at or around the
same time as the subject order, what orders are on the BOX Book, or if
a PIP is initiated and what responses are received in response to the
PIP, and where the order is ranked based on the priority ranking
algorithm. At no time following the submission of an order to the BOX
Book would an Options Participant be able to acquire control or
influence over the result or timing of order execution, including
whether it is executed against an order in the PIP. Accordingly,
Options Participants could not control or influence the result or
timing of orders submitted to the BOX Book, even if such an order were
to match with the PIP Order. Based on the Exchange's representations,
the Commission believes that the proposal satisfies this requirement of
Rule 11a2-2(T).
Second, Rule 11a2-2(T) requires orders for covered accounts be
transmitted from off the exchange floor. In the context of other
automated trading systems, 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.\47\ The Exchange
[[Page 67856]]
states that orders sent to the BOX Book, regardless of where it
executes within the BOX system, including the Book or the PIP, would be
transmitted from remote terminals directly to BOX by electronic means.
OFPs and Market Makers would only submit orders and quotes to BOX from
electronic systems from remote locations, separate from BOX. The
Exchange further represents that there are no other Options
Participants that would be able to submit orders to BOX other than OFPs
or Market Makers. Accordingly, the Commission believes that Options
Participants' orders electronically received by BOX satisfy the off-
floor transmission requirement for the purposes of the Rule.
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\47\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 28, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility). See also 1978
Release and 1979 Release.
---------------------------------------------------------------------------
Third, Rule 11a2-2(T) requires that the member not participate in
the execution of its order once it has been transmitted to the member
performing the execution. The Exchange represents that, at no time
following the submission of an order to the BOX Book, would an Options
Participant be able to acquire control or influence over the result or
timing of order execution, even if its order on the BOX Book may
execute with a PIP Order.\48\ According to the Exchange, upon
submission to BOX, an order would be executed against another order on
the BOX Book or against the PIP Order based on an established matching
algorithm. The execution would not depend on the Options Participant,
but rather upon what other orders are entered into BOX at or around the
same time as the subject order, what orders are on the BOX Book,
whether a PIP is initiated and what responses are received in response
to the PIP, and where the order is ranked based on the priority ranking
algorithm. As such, the Commission believes that the non-participation
requirement is met when orders are executed automatically on the BOX
Book, including if they execute against a PIP order.
---------------------------------------------------------------------------
\48\ The member may only cancel or modify the order, or modify
the instructions for executing the order, but only from off the
Exchange floor. The Commission has stated that the non-participation
requirement is satisfied under such circumstances, so long as such
modifications or cancellations are also transmitted from off the
floor. See 1978 Release (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'').
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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 thereof 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).\49\ The Exchange has represented that, as a prerequisite for BOX
usage, if an Options Participant is to rely on Rule 11a2-2(T) for a
covered account transaction, the Options Participant must comply with
the limitations on compensation set forth in Rule 11a2-2(T).
---------------------------------------------------------------------------
\49\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated person thereof exercises investment discretion, to
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 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
(stating ``[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'').
---------------------------------------------------------------------------
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\50\ that the proposed rule change (SR-BOX-2012-003) be, and hereby
is, approved.
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\50\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\51\
---------------------------------------------------------------------------
\51\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27600 Filed 11-13-12; 8:45 am]
BILLING CODE 8011-01-P
