Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Regarding Complex Orders, 15093-15109 [2013-05413]

Download as PDF Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices A proposed rule change filed under Rule 19b–4(f)(6) normally does not become operative for 30 days after the date of filing. However, Rule 19b– 4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange requests that the Commission waive the 30-day operative delay so that it can list and trade the proposed Mini Options as soon as it is able.16 The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest.17 The Commission notes the proposal is substantively identical to proposals that were recently approved by the Commission, and does not raise any new regulatory issues.18 For these reasons, the Commission designates the proposed rule change as operative upon filing. 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. 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 to rulecomments@sec.gov. Please include File Number SR–BATS–2013–013 on the subject line. Paper Comments mstockstill on DSK4VPTVN1PROD with NOTICES • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. 16 The Commission notes that the Exchange’s current options pricing in the fee schedule will not apply to Mini Options, and the Exchange will not commence trading of Mini Options until specific fees for Mini Options trading have been filed with the Commission. 17 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 18 See supra note 10. VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 All submissions should refer to File Number SR–BATS–2013–013. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 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; 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–BATS– 2013–013 and should be submitted on or before March 29, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Kevin M. O’Neill, Deputy Secretary. 15093 (the ‘‘Exchange’’ or ‘‘BOX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. On February 27, 2013, the Exchange filed Amendment No. 1 to the proposed rule change. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules related to complex orders. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission’s Public Reference Room and also on the Exchange’s Internet Web site at http:// boxexchange.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. BILLING CODE 8011–01–P (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION 1. Purpose [Release No. 34–69027; File No. SR–BOX– 2013–01] The Exchange proposes to amend the rules related to trading Complex Orders 3 on BOX Market LLC (‘‘BOX’’), the options trading facility of the Exchange. In particular, the Exchange is proposing rules to facilitate interaction on a continuous and real-time basis among orders on BOX, consisting of [FR Doc. 2013–05408 Filed 3–7–13; 8:45 am] Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Regarding Complex Orders March 4, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 20, 2013, BOX Options Exchange LLC 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4 . 1 15 PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 3 ‘‘Complex Order’’ is defined as ‘‘any order involving the simultaneous purchase and/or sale of two or more different options series in the same underlying security, for the same account, in a ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00) and for the purpose of executing a particular investment strategy.’’ See proposed Rule 7240(a)(5). E:\FR\FM\08MRN1.SGM 08MRN1 15094 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices Complex Orders on the Complex Order Book 4 and interest on the BOX Book.5 The proposed rule change generally sets forth rules to facilitate and permit (i) Complex Orders to trade with interest on the BOX Book and (ii) the combination of a Complex Order and an order on one of its component single option series trading on the BOX Book (each a ‘‘Leg’’) to trade with orders on the other component Leg on the BOX Book. The Exchange believes this proposal is a reasonable modification to its rules, designed to facilitate increased interaction between orders on the BOX Book and orders on the Complex Order Book, and to do so in such a manner as to ensure a dynamic, real-time trading mechanism that maximizes the opportunity for trade executions for both Complex Orders and orders on single option series. The Exchange believes that it is appropriate and consistent with the Act, for the purpose of clarity and in the public interest, to (i) adopt the proposed amendments to Rules 100(a)(10) and 100(a)(33), (ii) adopt the proposed amendments to Rule 7110(c)(2), (iii) adopt the proposed amendments to Rule 7130(a)(2)(iv), (iv) adopt the proposed amendments to Rules 7150(f)(3), 7150(i) and 7150(j), and (v) delete in its entirety the existing provisions of Rule 7240 (Complex Orders) and adopt the proposed Rule 7240. a. Principles of Complex Orders and Interaction With the BOX Book mstockstill on DSK4VPTVN1PROD with NOTICES The proposed rule change will require that, before executing against another Complex Order, an executable inbound Complex Order on BOX will execute first against interest on the BOX Book if the net price of such interest on the BOX Book is equal to the best price on the Complex Order Book,6 provided that each of its component Legs is equal to or better than its respective NBBO. The Exchange believes this proposed rule change represents two improvements to the rules on other options exchanges regarding Complex Order trading: (i) The priority of the BOX Book is not limited to ‘‘if any of the bids or offers established in the marketplace consist of a Customer 4 ‘‘Complex Order Book’’ is defined as ‘‘the electronic book of Complex Orders maintained by the BOX Trading Host.’’ See proposed Rule 7240(a)(6). 5 ‘‘BOX Book’’ (also the ‘‘Central Order Book’’) is defined as ‘‘the electronic book of orders on each single series of options maintained by the BOX Trading Host.’’ See proposed Rule 100(a)(10). 6 See proposed Rule 7240(b)(3)(i). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 Order’’ 7 and (ii) any Complex Order execution, whether against another Complex Order or against interest on the BOX Book, will be at a price at least equal to the cNBBO.8 Consequently, a Complex Order will execute against other Complex Orders resting on the Complex Order Book only if the net price is better than cBBO 9 and is equal to or better than the cNBBO,10 except in the case of Complex Orders on Non-standard Strategies (as defined below). Complex Order executions on BOX will be subject to an NBBO price control filtering process similar to that presently provided for the trading of individual options series on BOX.11 Thus, where two Complex Orders trade against each other, the resulting execution prices will be at a price equal to or better than NBBO and BOX best bid or offer (‘‘BBO’’) for each of the component Legs.12 The exception to the priority of the BOX Book is the execution of a Complex Order on Strategies 13 that have a Leg ratio other than one-to-one (herein referred to as ‘‘Non-standard Strategies’’) as provided in proposed Rule 7240(b)(2)(ii). Complex Orders for Non-standard Strategies will execute against interest on the BOX Book for the individual Legs of the Strategy for all of the quantity available at the best price in a permissible ratio until the quantities remaining on the BOX Book are insufficient to execute against the Complex Order while respecting the ratio. Following such execution, the remaining quantity of the Complex Order may execute against other Complex Orders and the component Legs of the Complex Order may trade at prices equal to the corresponding prices on the BOX Book (for more detail, see discussion in 2(d) and Example 5 below related to Non-standard Strategies). 7 See, e.g., International Securities Exchange (‘‘ISE’’) Rule 722(b)(2) and Commentary .08(c)(iii)(A) to PHLX Rule 1080. 8 ‘‘cNBBO’’ is defined as the ‘‘the best net bid and offer price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy.’’ See proposed Rule 7240(a)(3). 9 ‘‘cBBO’’ is defined as ‘‘the best net bid and offer price for a Complex Order Strategy based on the BBO on the BOX Book for the individual options components of such Strategy.’’ See proposed Rule 7240(a)(1). 10 See proposed Rules 7240(b)(3)(i) and 7240(b)(3)(iii)(A). 11 See proposed Rule 7240(b)(3)(iii). See existing Rule 7130(b) for a more detailed description of the current filtering process for orders inbound for the BOX Book. 12 See proposed Rule 7240(b)(3)(ii). 13 ‘‘Complex Order Strategy’’ or ‘‘Strategy’’ is defined as ‘‘a particular combination of components of a Complex Order and their ratios to one another. BOX will assign a strategy identifier to each Strategy.’’ See proposed Rule 7240(a)(7). PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 The Exchange proposes to apply the straightforward principle of allowing execution of a Complex Order against another Complex Order when interest on the BOX Book at the same net price has already been executed. Thus, the execution price will be at a price better than cBBO (except in the case of insufficient quantity for Non-standard Strategies where the execution could occur at a price equal to cBBO). In the case of Non-standard Strategies, interest on the BOX Book will still have priority and be executed before a Complex Order, to the extent that there is sufficient quantity on the BOX Book to respect the ratio of the Strategy. b. Complex Order Priority and Execution The Exchange proposes new provisions in Rule 7240(b)(2) and (3) regarding Complex Order Priority and Execution. Where multiple Complex Orders are at the same price and eligible for execution, they will execute in time priority. BOX will ensure that any such executions are at a price at least equal to cNBBO. The following discussion describes the interaction between orders on the Complex Order Book and interest on the BOX Book. (1) Priority of Interest on the BOX Book Over Complex Orders Proposed Rule 7240(b)(3) provides that a Complex Order will be automatically executed first against interest on the BOX Book for the individual Legs of the Strategy to the extent the Complex Order can be executed in the permissible ratio (as defined by the Strategy) and the price is equal to or better than both the cNBBO and the best price on the Complex Order Book.14 A Complex Order may be 14 BOX operates a single order queue for execution processing that precludes the possibility of a Complex Order and an order on the BOX Book for a component Leg instrument receiving the same time stamp. In other words, since orders on Legs and Complex Orders are all received and processed in the same order queue, there is no possibility, on BOX, of an order on a Leg and a Complex Order having the same time stamp. For the same reason, an Implied Order on a Strategy cannot have the same time stamp as a Complex Order on the same Strategy. Similarly, a Legging Order cannot have the same time stamp as an order on the same Leg because Legging Orders are executed in time priority based on the time stamp of the Complex Order causing the Legging Order to be generated (See discussion in Section 3(b) ‘‘Priority of Legging Orders’’ of this Statement of Purpose and the associated Example 8 for a more detailed explanation of Legging Order execution priority). In any case, having the same time stamp (even though impossible) would be irrelevant due to the fact that interest on the BOX Book has priority over Complex Orders at the same price and outright orders on Legs have priority over Legging Orders at the same price. E:\FR\FM\08MRN1.SGM 08MRN1 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices executed at a net credit or debit price with one other Participant; provided, however, that, except as set forth in Rule 7240(b)(2)(ii), the price of at least one Leg of the Complex Order must trade at a price that is at least one cent better than the corresponding bid or offer in the marketplace.15 Since a Complex Order will execute against another Complex Order once all interest on the BOX Book at the same price has been executed, any executions of two Complex Orders against each other will necessarily be at a price better than cBBO (except in the case of Complex Orders on Non-standard Strategies where the execution could occur at a price equal to cBBO). This is because, having given priority to the BOX Book, an opposite side Complex Order may execute against a Complex Order once all interest at the same price on the Strategy has been filled on the BOX Book (except in the case of Complex Orders on Non-standard Strategies where, following execution against interest on the BOX Book at the best price in a permissible ratio until the quantities remaining on the BOX Book are insufficient to execute against the Complex Order, the Complex Order may execute against another Complex Order); thus, by definition, any subsequent trade of the remaining quantity of the Complex Order takes place at a price better than the cBBO updated for the executions against the BOX Book (except in the case of Complex Orders on Non-standard Strategies where the execution could occur at a price equal to cBBO). For additional discussion of the applicability of certain priority rules, see Priority Rules section below. Example 1: Priority of Interest on the BOX Book Over Complex Orders mstockstill on DSK4VPTVN1PROD with NOTICES BOX Book for Option A is: Order to buy 10 at $1.00 Order to buy 5 at $0.99 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Order to buy 15 at $1.00 Order to buy 5 at $0.98 Order to sell 50 at $1.05 BOX Book for Option C is: Order to buy 10 at $1.00 ‘‘Implied Order’’ is defined as ‘‘a Complex Order at the cNBBO that is derived from the orders at the BBO on the BOX Book for each component Leg of a Strategy.’’ See proposed Rule 7240(d)(1). ‘‘Legging Order’’ is defined as ‘‘a limit order on the BOX Book that represents one side of a Complex Order that is to buy or sell an equal quantity of two options series resting on the BOX Complex Order Book.’’ See proposed Rule 7240(c)(1). 15 See proposed Rule 7240(b)(2)(i). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 Order to buy 12 at $0.99 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B+C: Complex Order to buy 20 at $3.00 An order to sell 10 A+B+C at $3.00 is received. Prior to execution of this order against the order to buy A+B+C at $3.00 on the Complex Order Book, BOX will determine whether it is possible to execute the inbound Complex Order to sell against interest on the BOX Book at a price equal to or better than the best bid on the Complex Order Book. Since this is the case, the sell order will execute against the bids on A, B and C at $1.00 each for 10 contracts each. As this execution will exhaust the inbound sell order, the Complex Order to buy 20 at $3.00 receives no trade allocation. The remaining order books are then as follows: BOX Book for Option A is: Order to buy 5 at $0.99 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Order to buy 5 at $1.00 Order to buy 5 at $0.98 Order to sell 50 at $1.05 BOX Book for Option C is: Order to buy 12 at $0.99 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B+C: Complex Order to buy 20 at $3.00 Example 2: Priority of Interest on the BOX Book Over Complex Orders Beginning with the initial scenario in Example 1, an order to sell 30 (rather than 10 in Example 1) A+B+C at $3.00 is received. For purposes of this example, assume that BOX is at NBBO on A, B and C and that the NBBO bid for each of A, B and C after these trades is equal to BBO. The first 10 contracts execute against the BOX Book as in Example 1 above but an order to sell 20 A+B+C at $3.00 remains. The cBBO for 5 A+B+C is then $2.98 (A: $0.99 + B: $1.00 + C: $0.99) while the best bid on the Complex Order Book is for 20 at $3.00. Since the Complex Order is at a price equal to cNBBO and better than the new cBBO, the remaining 20 to sell at $3.00 will match with the Complex Order bid. The resulting prices for each of the Legs will respect the requirement of ‘‘at least one Leg price better than BBO’’ 16 since each Leg will execute at $1.00. The remaining order books are then as follows: 16 See PO 00000 proposed Rule 7240(b)(2)(i). Frm 00137 Fmt 4703 Sfmt 4703 15095 BOX Book for Option A is: Order to buy 5 at $0.99 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Order to buy 5 at $1.00 Order to buy 5 at $0.98 Order to sell 50 at $1.05 BOX Book for Option C is: Order to buy 12 at $0.99 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B+C: None (2) Complex Order Filter Against NBBO All inbound Complex Orders to BOX will be filtered to ensure that each Leg of a Complex Order will be executed at a price that is equal to or better than the NBBO and the BOX BBO for each of the component Legs.17 If an inbound Complex Order is executable (against either opposite side Complex Orders on the Complex Order Book or interest on the BOX Book) on BOX, BOX will determine if the potential execution price is equal to or better than both cNBBO and cBBO. If so, the inbound Complex Orders will be automatically executed against bids and offers on the Complex Order Book in price/time priority; provided, however, that Complex Orders will execute against other Complex Orders only after interest at the same net price on the BOX Book for the individual Legs have been executed.18 If an inbound Complex Order is executable (against either opposite side Complex Orders on the Complex Order Book or interest on the BOX Book) on BOX at a price that is not equal to or better than both cNBBO and cBBO, the incoming Complex Order will be exposed on the Complex Order Book for a period of up to one second at a price that is equal to cNBB 19 (in the case of a sell order) or cNBO 20 (in the case of a buy order). Any executable, opposite side orders received during the exposure period, including interest on the BOX Book, will immediately execute against the exposed Complex Order. Any unexecuted quantity of the Complex Order remaining at the end of the exposure period will be cancelled.21 17 See proposed Rule 7240(b)(3)(iii). proposed Rule 7240(b)(3)(iii)(A). 19 ‘‘cNBB’’ is defined as ‘‘the best net bid price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy.’’ See proposed Rule 7240(a)(2). 20 ‘‘cNBO’’ is defined as ‘‘the best net offer price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy.’’ See proposed Rule 7240(a)(4). 21 See proposed Rule 7240(b)(3)(iii)(B). 18 See E:\FR\FM\08MRN1.SGM 08MRN1 15096 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices If an inbound Complex Order is not executable on BOX but is executable against cNBBO, Complex Limit Orders will be entered on the BOX Complex Order Book and BOX-Top Complex Orders and Market Complex Orders will be exposed on the BOX Complex Order Book at cNBB (in the case of a sell order) or cNBO (in the case of a buy order) for a period of up to one second; any executable, opposite side orders received during the exposure period, including interest on the BOX Book, will immediately execute against the exposed Complex Order and any unexecuted quantity remaining at the end of the exposure period will be cancelled.22 If an inbound Complex Order is not executable on BOX and is not executable against cNBBO, it will be entered on the BOX Complex Order Book.23 Example 3: Filtering of Complex Orders Against NBBO Begin with the initial scenario in Example 1. However, in Examples 1 and 2, it was assumed that each of the orders on a Leg were equal to NBBO for the related options series. For this example, suppose instead that the NBBO for Option B is $1.01 and $1.05 (better than BBO) and that Options A and C on the BOX Book are equal to NBBO. Accordingly, cNBBO for A+B+C would be $3.01–$3.15. An order to sell 30 A+B+C at $3.00 is received. In this case, the inbound order to sell 30 A+B+C at $3.00 would not be able to execute against either the BOX Book or the resting Complex Order bid because of the Complex Order filter.24 Instead, the inbound sell order would be exposed on the Complex Order Book at $3.01; any unexecuted quantity after the exposure would be cancelled. mstockstill on DSK4VPTVN1PROD with NOTICES (3) Implied Order Calculation, Broadcast and Priority Proposed Rule 7240(d)(1) defines an Implied Order to mean ‘‘a Complex Order at the cNBBO, derived from the orders at the BBO on the BOX Book for each component Leg of a Strategy, provided each component Leg is at a price equal to NBBO for that series.’’ In other words, an Implied Order for a Strategy is calculated and broadcast if each of the prices of the component Legs is equal to NBBO. Implied Orders are executed in the same manner as regular Complex Orders, including with 22 See proposed Rule 7240(b)(3)(iii)(C). proposed Rule 7240(b)(3)(iii)(D). 24 See proposed Rule 7240(b)(3)(iii). 23 See VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 respect to priority of the BOX Book.25 At the same price on the BOX Complex Order Book, an Implied Order has priority over a resting Complex Order.26 An Implied Order is broadcast to Participants as an order on the Complex Order Book. Implied Orders are only generated and broadcast for Strategies with two Legs and with a ratio of oneto-one.27 Also, an Implied Order is not generated if the subject series order is going through NBBO exposure pursuant to Rule 7130(b), or using orders in the PIP, Facilitation Auction, or Solicitation Auction.28 The quantity associated with the Implied Order is limited to the smaller quantity of the two Legs comprising the Strategy to ensure a oneto-one ratio is maintained. As shown in the example below, if there exists an order to buy 10 contracts of Option A and an order to buy 15 contracts of Option B, BOX will only generate an Implied Order to buy 10 of Strategy A+B. When an Implied Order is no longer at the cNBBO, the Implied Order will be removed and a new Implied Order will be generated, provided there is interest on the BOX Book to generate an Implied Order at the new cNBBO.29 Implied Orders will be removed if either component order on a Leg is executed in full, in part, or cancelled and, where appropriate, recalculated.30 Subsequently, a Complex Order to sell 20 A+B is received, which could trade with both the Implied Order to buy and the Complex Order to buy. Because, at the same price on the Complex Order Book, an Implied Order has priority over a resting Complex Order even if the Complex Order was entered first,31 the first 10 contracts of the order to sell Strategy A+B will be executed against orders on A and B, respectively, on the BOX Book: 10 of A are sold at $1.00 and 10 of B are sold at $1.00. After this execution, the order books would be as follows: BOX Book for Option A is: Order to buy 5 at $0.99 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Order to buy 5 at $1.00 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B: Complex Order to buy 20 at $2.00 Implied Order to sell 10 at $2.10 The remaining 10 of the Complex Order to sell Strategy A+B at $2.00 will be executed against the resting Complex Order to buy A+B at $2.00 ($1.00 for each component Leg). Note that no Implied Order for 5 A+B at $1.99 is generated since this would be worse than cNBBO of $2.00. Example 4: Calculation and Execution of Implied Order (4) Price Improvement Requirement Except in the case of Complex Orders on Non-standard Strategies which may execute at a price equal to cBBO after executions against the BOX Book, the Exchange proposes to allow two Complex Orders to execute against each other at a net price that is better than cBBO by one cent.32 On some options exchanges that provide auctions for Complex Orders, a Complex Order may execute against another Complex Order if one leg of the Complex Order trades at a price that is at least one cent better than customer orders in the same series.33 On one options exchange that has no auction for Complex Orders, a Complex Order may execute against another Complex Order if one leg of the Complex Order trades at a price that is better than priority customer interest in that series by at least one minimum trading increment.34 Although BOX is not proposing to establish an auction for Complex Orders BOX Book for Option A is: Order to buy 10 at $1.00 Order to buy 5 at $0.99 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Order to buy 15 at $1.00 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B: Complex Order to buy 20 at $2.00 Implied Order to buy 10 at $2.00 Implied Order to sell 10 at $2.10 Assume the bids on A and B on BOX are equal to NBBO for each such that cNBBO is $2.00. Suppose in this example that the Complex Order to buy 20 at $2.00 is received prior to the receipt of the order to buy 15 B at $1.00. Thus, the Complex Order to buy 20 at $2.00 has time priority over the Implied Order to buy 10 at $2.00. 25 See proposed Rule 7240(d)(6)(i). proposed Rule 7240(d)(6)(ii). 27 See proposed Rule 7240(d)(3). 28 See proposed Rule 7140(d)(4). 29 See proposed Rule 7240(d)(2). 30 See proposed Rule 7240(d)(5). 26 See PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 31 See proposed Rule 7240(d)(6)(ii). proposed Rule 7240(b)(2)(i). 33 See, e.g., Securities Exchange Act Release Nos. 57556 (March 26, 2008), 73 FR 18018 (April 2, 2008) (Order Approving CBOE–2008–03) and 63558 (December 16, 2010) 75 FR 80553 (December 22, 2010) (Order Approving NYSEAmex–2010–100). 34 See ISE Rule 722(b)(2). 32 See E:\FR\FM\08MRN1.SGM 08MRN1 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices at this time, the Exchange believes that it is consistent with the protection of investors and the public interest to permit Complex Orders (other than Non-standard Strategies) to execute against each other at a price that is better than cBBO by one cent, rather than the minimum trading increment for one of the component series for the following reasons. First, BOX will always execute Complex Orders first against interest on the BOX Book to the extent the Complex Order can be executed in full or in a permissible ratio by such interest.35 Second, the Exchange believes that one cent is a significant and material improvement to customers.36 While the Exchange is not currently proposing a Complex Order auction, the Exchange believes its proposal is appropriate in light of the price competition for Complex Orders on BOX driven by other features in the proposal. For example, the Exchange believes that the generation of Legging Orders will provide enhanced price competition and greater integration of the BOX Book and Complex Order Book. Also, the Exchange notes that each leg of a Complex Order must be executed at a price equal to NBBO. The Exchange believes these benefits will enhance the efficiency of the BOX Book and the Complex Order Book, and therefore, is consistent with the protection of investors and the public interest.37 Third, the Exchange believes that permitting price improvement by one cent rather than by the minimum trading increment could permit more active Complex Order trading by allowing execution where participants may not otherwise be willing to offer better prices in larger increments. Fourth, since the implementation of the Penny Pilot Program, many of the options instruments involved in Complex Order trading now already have a minimum increment of one cent.38 As a result, even though the 35 See proposed Rule 7240(b)(3)(i) and (ii). options mechanisms such as the BOX PIP and the NOM price improving order have been implemented because it is recognized that one cent is a significant and material improvement to customers. See Securities Exchange Act Release Nos. 49068 (January 13, 2004), 69 FR 2775, 2799 (January 20, 2004) (SR–BSE–2002–15) (Order Approving BOX Facility), and 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR– NASDAQ–2007–004) (Order Approving NASDAQ Options Market). 37 The Chicago Board Options Exchange, Inc. permits trading Complex Orders in one cent minimum increments, providing additional price points at which Complex Orders could be executed. See Securities Exchange Act Release Nos. 57556 (March 26, 2008), 73 FR 18018 (April 2, 2008) (Order Approving CBOE–2008–03) 38 The Penny Pilot Program has been in effect since January 26, 2007. See Securities Exchange Act mstockstill on DSK4VPTVN1PROD with NOTICES 36 Various VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 initial implementation of complex order trading rules on other exchanges largely pre-dates the Penny Pilot Program, the effect of the Exchange’s proposal is already implemented in a significant portion of Complex Order trading on other options exchanges. In the case of Non-standard Strategies, the execution of two Complex Orders against each other could occur at prices where the condition that ‘‘at least one Leg of the Complex Order must trade at a price that is better than the corresponding bid or offer in the marketplace’’ is not met. A Complex Order for a Non-standard Strategy will execute against the bids and offers on the BOX Book for the individual Legs of the Strategy for all of the quantity available at the best price in a permissible ratio until the quantities remaining on the BOX Book are insufficient to execute against the Complex Order. Following such execution, a Complex Order may execute against other Complex Orders, and the component Legs of the Complex Order may trade at prices equal to the corresponding prices on the BOX Book.39 In other words, the fact that interest on the BOX Book for a Nonstandard Strategy is not sufficient to execute an opposite side Complex Order in its entirety does not mean there is no interaction or a loss of priority. Interest on the BOX Book will execute against a Complex Order for a Non-standard Strategy to the extent possible, after which the Complex Order may be executed against another Complex Order at a price equal to, but not worse than, the corresponding price on the BOX Book. This treatment of Non-standard Strategies promotes just and equitable principles of trade, removes impediments to and perfects the mechanism of a free and open market and national market system and otherwise is consistent with the requirements of Section 6(b)(5) of the Act 40 because the alternatives to this proposal would be either to create a locked market on the Complex Order Book or to reject an incoming Complex Order that is readily executable against a resting Complex Order. The Exchange does not believe that either of these alternatives is consistent with the Release No. 55155 (Jan. 23, 2007), 72 FR 4741 (Feb. 1, 2007) (SR–BSE–2006–49). At the beginning of 2013, more than 350 classes of options are included in the Penny Pilot Program. See BOX Regulatory Circular 2012–30, available online at http:// boxexchange.com/f_circulars/_RC-201230_Penny_Pilot_Classes_Listed_on_BOX.pdf 39 See proposed Rule 7240(b)(2)(ii). 40 15 U.S.C. 78f(b)(5). PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 15097 requirements of Section 6(b)(5) 41 of the Act because the two Complex Orders would miss an opportunity for execution, but the orders on the BOX Book gain no benefit because these orders cannot interact with the incoming Complex Order either. The Exchange believes, therefore, that its proposal is the best solution to the dilemma. Furthermore, the Exchange believes this procedure is consistent with the intent of the principle that a Complex Order execute ‘‘at least one Leg better than BBO for each options instrument’’ as this principle assumes there is sufficient quantity to respect the ratio of a Complex Order when prices are otherwise in line. In other words, orders are executable only against one another where both match at a price and a quantity. Therefore, the Exchange believes its proposal is consistent with the rationale for otherwise having one Leg price better than BBO since it will give priority to interest on the BOX Book over Complex Orders where the quantity on the BOX Book is sufficient to respect the ratio of the executable Complex Order for a Non-standard Strategy. Example 5: Execution of Leg Orders on Non-Standard Strategy Assume a Non-standard Strategy consisting of the simultaneous purchase of one Option A instrument and two Option B instruments (A+2B). The order books are initially as follows: BOX Book for Option A is: Order to buy 2 at $1.00 Order to buy 5 at $0.99 Order to sell 20 at $1.06 Order to sell 2 at $1.10 BOX Book for Option B is: Order to buy 3 at $1.00 Order to sell 3 at $1.10 Complex Order Book for Strategy A+2B: Complex Order to buy 2 at $3.00 Complex Order to buy 5 at $2.90 Complex Order to sell 10 at $3.20 Since A+2B is a Non-standard Strategy (a one-for-two ratio), no Implied Order for A+2B is broadcast. The cBBO is $3.00 bid, $3.26 offered. In this example, a Complex Order is received to sell 2 A+2B at $3.00. This order can match with the existing bid for three Strategies at $3.00 on A+2B. However, as the Exchange proposes to give priority to interest on the BOX Book over executable Complex Orders even where no Implied Order is being broadcast for the Strategy, 1 of the 2 41 15 E:\FR\FM\08MRN1.SGM U.S.C. 78f(b)(5). 08MRN1 15098 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices contracts to sell A+2B at $3.00 will execute against the orders on the respective Legs (selling 1 A and 2 B at $1.00 each ($1.00 + 2($1.00) = $3.00)). After this initial execution against the BOX Book, the order books are as follows: BOX Book for Option A is: Order to buy 1 at $1.00 Order to buy 5 at $0.99 Order to sell 20 at $1.06 Order to sell 2 at $1.10 BOX Book for Option B is: Order to buy 1 at $1.00 Order to sell 3 at $1.10 Complex Order Book for Strategy A+2B: Complex Order to buy 2 at $3.00 Complex Order to buy 5 at $2.90 Complex Order to sell 10 at $3.20 One Complex Order to sell A+2B at $3.00 remains. Because insufficient quantity remains on the bid of B at $1.00 to combine with the bid on A to respect the Complex Order ratio, the remaining order to sell 1 A+2B at $3.00 will be executed against the resting Complex Order to buy at $3.00. In this case, the proposed rules for trading Complex Orders on BOX may result in the match of two Complex Orders without at least one Leg having a price better than the best prices on the BOX Book.42 mstockstill on DSK4VPTVN1PROD with NOTICES (5) Valid Order Types for Complex Orders Proposed Rule 7240(b)(4)(i) provides that Complex Orders may be entered as Fill-and-Kill orders, Limit Orders, BOXTop Orders, Market Orders, or Session Orders, each as defined in existing Rule 7110. The Exchange proposes to delete the provision in existing Rule 7240(b)(4) that provides that Complex Orders may be entered as all-or-none orders because BOX does not have such orders. BOX currently permits Fill-and-Kill Orders which are immediately executed against any existing orders at the specified price or better, up to the volume of the Filland-Kill Order. Any residual volume left is cancelled.43 The Exchange proposes Rule 7240(b)(4)(i) to add Limit Orders, BOX-Top Orders, Market Orders and Session Orders as order types permitted for Complex Orders. Each of these order types are currently permitted on BOX for single option series and are defined in existing Rule 7110. The Exchange proposes Rule 7240(b)(4)(ii) to specify that BOX-Top Complex Orders are executed at the best price available in the market for the 42 See 43 See proposed Rule 7240(b)(2)(ii). existing Rule 7110(e)(1)(ii). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 total quantity available from any contra bid (offer). Any residual volume left after part of a BOX-Top Complex Order has been executed is automatically converted to a limit order on the Complex Order Book at the net Strategy price at which the original BOX-Top Complex Order was executed. See the additional discussion in Section 3(c) and Example 11 below for details on the handling of BOX-Top Orders which partially execute against a Legging Order on a non-penny series. c. Legging Order Execution and Priority The Exchange proposes Rule 7240(c) to permit the implementation of Legging Orders. Proposed Rule 7240(c)(1) defines a Legging Order as ‘‘a Limit Order on the BOX Book that represents one side of a Complex Order that is to buy or sell an equal quantity of two options series resting on the BOX Complex Order Book.’’ A Legging Order is a firm order that is included in the BBO if it is equal to, or better than, the existing BBO. The Exchange proposes that Legging Orders will only be generated for Complex Orders with two Legs and with a ratio of one-to-one.44 As a result, no Legging Orders will be generated for Complex Orders with more than two Legs or with a ratio other than one-toone. Legging Orders will be automatically generated on behalf of a Complex Order so that they are represented on the BOX Book.45 Unlike Implied Orders, a Legging Order will not necessarily be equal to or better than NBBO; however, the usual Exchange rules regarding filtering against NBBO 46 will continue to apply to the BOX Book to ensure no Legging Order will be executed at a price outside NBBO. A Legging Order may be automatically generated for one Leg of a Complex Order at a price at which the net price can be achieved when the other Leg is executed against the best displayed bid or offer on the BOX Book at a price equal to or better than NBBO.47 In other words, a Legging Order to buy Option A, derived from a Complex Order to buy A+B, will only be generated if the outright best offer on BOX for Option B is equal to or better than NBBO.48 This 44 See proposed Rule 7240(c)(1). proposed Rule 7240(b)(3)(ii). 46 See existing Rule 7130(b). 47 See proposed Rule 7240(c)(2). The proposed Legging Order rules are based on ISE Rules 715(k) and 722(b)(3)(ii). A market participant on the NASDAQ Options Market (‘‘NOM’’) may enter Price Improving Orders on NOM that would potentially execute at a one cent increment within the NBBO. See NOM Approval Order, SEC Release No. 34–57478 (March 12, 2008) 73 FR 14521 at 14528–14530 (March 18, 2008). 48 See proposed Rule 7240(c)(2). 45 See PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 does not necessarily mean that the Legging Order bid on Option A will be equal to the best bid on Option A on the BOX Book, nor that it will be equal to or better than NBBO for Option A. However, due to the NBBO filtering rules already in place for interest on the BOX Book,49 the Legging Order on Option A will only be eligible for execution if it is equal to NBBO and at a better price than any outright bid on Option A on the BOX Book. Similar to price improving orders on the NASDAQ Options Market (‘‘NOM’’), the Exchange believes that automatically generating Legging Orders, which will not be executed until after all other executable interest on the BOX Book at the same price is executed in full, will provide additional execution opportunities for Complex Orders without negatively impacting any investors in the regular market.50 In fact, the generation of Legging Orders may enhance execution quality for investors in the regular market by improving the price and/or size of the BBO and by providing additional execution opportunity for resting orders on the BOX Book. (1) Calculation and Display of Legging Orders A Legging Order may be priced and ranked on the BOX Book at a price other than its generated price to buy (sell) and may be displayed at a different price in the following two cases. First, where the Legging Order price does not respect the price increment of the option series, for display purposes, it will be rounded down (in the case of a buy order) or up (in the case of a sell order) to the nearest valid trading increment. Legging Orders will be automatically generated at prices in one cent increments but, for series trading in nickels or larger increments, will be displayed at the nearest minimum trading increment. Legging Orders to buy (sell) in an options series with a minimum trading increment greater than one cent are displayed at the appropriate minimum trading increment permitted for the series below (above) the price of the automatically generated Legging Order, (rounding down to the proper increment for buy orders and up to the proper increment for sell orders). While a Legging Order will be displayed at the rounded price in the case of non-penny series, any execution of the Legging Order will occur at the price at which 49 See existing Rule 7130(b). NOM Approval Order, SEC Release No. 34– 57478 (March 12, 2008) 73 FR 14521 at 14529–14530 (March 18, 2008). 50 See E:\FR\FM\08MRN1.SGM 08MRN1 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices it is generated and will be in a one cent increment.51 Second, where the generated price of a Legging Order locks or crosses the best bid or offer of another exchange it will be ranked at the opposite side NBBO price and displayed on the BOX Book at a price rounded down (up) in the case of a buy (sell) Legging Order to the nearest trading increment for the options instrument. The displayed price of the Legging Order will be adjusted for subsequent changes to the opposite side NBBO in accordance with these principles if the adjustment will result in an improvement to the previously displayed price. If an incoming order is executable against such Legging Order, it will be executed at the NBBO.52 mstockstill on DSK4VPTVN1PROD with NOTICES Example 6: Display and Execution of Legging Order That Locks/Crosses NBBO Assume the following for Option A: NBBO for Option A is: NBBO Bid is $1.03 NBBO Offer is $1.04 BOX Book for Option A is: Order to buy 10 at $1.03 Order to sell 10 at $1.05 First Event: A Complex Order to buy 10 A+B is received. The best BOX offer on Option B generates a Legging Order to buy 10 A at $1.04. Since this would lock the opposite side NBBO, it is displayed on the BOX Book as an order to buy at $1.03. The BOX Book for Option A then is as follows: BOX Book for Option A is: Legging Order to buy 10 at $1.03 Order to buy 10 at $1.03 Order to sell 10 at $1.05 Second Event: Following the First Event, an order to sell 5 A at $1.03 is received. This executes against the Legging Order at $1.04. Even though the Legging Order and the outright order to buy Option A were displayed at the same price, the Legging Order trades first because the price at which it can trade (opposite side NBBO of $1.04) gives it price priority. The NBBO and BOX Book for Option A then are as follows: NBBO for Option A is: NBBO Bid is $1.03 NBBO Offer is $1.04 BOX Book for Option A is: Legging Order to buy 5 at $1.03 Order to buy 10 at $1.03 Order to sell 10 at $1.05 Third Event: 51 See proposed Rule 7240(c)(2). 52 See proposed Rule 7240(c)(2). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 Following the Second Event, the NBBO offer subsequently changes to $1.05 and the remaining 5 contracts of Option A on the Legging Order will be displayed at $1.04. The NBBO and BOX Book for Option A are then as follows: NBBO for Option A is: NBBO Bid is $1.04 NBBO Offer is $1.05 BOX Book for Option A is: Legging Order to buy 5 at $1.04 Order to sell 10 at $1.05 Order to buy 10 at $1.03 Where an options instrument is part of two or more distinct strategies, multiple Legging Orders may be generated. In this case, the principles above regarding display and ranking prices in the case of locked or crossed opposite side NBBO will be observed. The example below illustrates how trade allocations will be performed in the case where several Legging Orders are displayed and ranked at the same price. Example 7: Display and Execution of Legging Orders From Multiple Complex Orders Assume the following for Option A: NBBO for Option A is: NBBO Bid is $1.03 NBBO Offer is $1.04 BOX Book for Option A is: Order to buy 10 at $1.03 Order to sell 10 at $1.07 First Event: A Complex Order to buy 10 A+B is received. The best BOX offer on Option B generates a Legging Order (‘‘Order 1’’) to buy 10 A at $1.04. Order 1 is ranked on the BOX Book at $1.04 and displayed on the BOX Book as an order to buy at $1.03. Next, a Complex Order to buy 10 A+C is received. The best BOX offer on Option C generates a Legging Order (‘‘Order 2’’) to buy 10 A at $1.05. Order 2 is ranked on the BOX Book at $1.04 and displayed on the BOX Book as an order to buy at $1.03. Next, a Complex Order to buy 10 A+D is received. The best BOX offer on Option D generates a Legging Order (‘‘Order 3’’) to buy 10 A at $1.06. Order 3 is ranked on the BOX Book at $1.04 and displayed on the BOX Book as an order to buy at $1.03. After the foregoing three Complex Orders have been entered, and the resulting Legging Orders generated, the BOX Book for Option A then is as follows: BOX Book for Option A is: Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.03) Legging Order to buy 10 at $1.04 (Order 2, displayed at $1.03) PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 15099 Legging Order to buy 10 at $1.04 (Order 3, displayed at $1.03) Order to buy 10 at $1.03 Order to sell 10 at $1.07 Second Event: Following the First Event, the NBBO Offer for Option A changes from $1.04 to $1.05. The NBBO and BOX Book for Option A, in order of priority, then are as follows: NBBO for Option A is: NBBO Bid is $1.03 NBBO Offer is $1.05 BOX Book for Option A is: Legging Order to buy 10 at $1.05 (Order 2, displayed at $1.04) Legging Order to buy 10 at $1.05 (Order 3, displayed at $1.04) Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.04) Order to buy 10 at $1.03 Order to sell 10 at $1.07 Third Event: Following the Second Event, the NBBO Offer for Option A changes from $1.05 to $1.06. The NBBO and BOX Book for Option A, in order of priority, then are as follows: NBBO for Option A is: NBBO Bid is $1.03 NBBO Offer is $1.06 BOX Book for Option A is: Legging Order to buy 10 at $1.06 (Order 3, displayed at $1.05) Legging Order to buy 10 at $1.05 (Order 2, displayed at $1.05) Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.04) Order to buy 10 at $1.03 Order to sell 10 at $1.07 Fourth Event: Following the Third Event, an order to buy 10 A at $1.05 is received. The NBBO and BOX Book for Option A, in order of priority, then are as follows: NBBO for Option A is: NBBO Bid is $1.03 NBBO Offer is $1.06 BOX Book for Option A is: Legging Order to buy 10 at $1.06 (Order 3, displayed at $1.05) Order to buy 10 at $1.05 Legging Order to buy 10 at $1.05 (Order 2, displayed at $1.05) Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.04) Order to buy 10 at $1.03 Order to sell 10 at $1.07 (2) Priority of Legging Orders A Legging Order may execute against an incoming order only after all other executable orders and quotes at the E:\FR\FM\08MRN1.SGM 08MRN1 15100 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices same price are executed in full.53 Legging Orders will only be eligible for execution after being filtered against NBBO pursuant to existing Rule 7130(b).54 When a Legging Order is executed, the other component Leg of the Complex Order will be automatically executed against the displayed BBO.55 The following example illustrates the interaction of orders on the BOX Book, Complex Orders and Legging Orders. mstockstill on DSK4VPTVN1PROD with NOTICES Example 8: Legging Order Execution BOX Book for Option A is: Order to buy 10 at $1.00 Order to buy 5 at $0.99 Order to sell 20 at $1.20 Order to sell 20 at $1.25 BOX Book for Option B is: Order to buy 10 at $1.00 Order to sell 20 at $1.20 Complex Order Book for Strategy A+B: Complex Order to buy 10 at $2.25 Implied Order to buy 10 at $2.00 Implied Order to sell 20 at $2.40 Legging Orders to buy 10 A at $1.05 (resulting from the Complex Order to buy 10 A+B at $2.25 minus the order to sell 20 B at $1.20) and 10 B at $1.05 (resulting from the Complex Order to buy 10 A+B at $2.25 minus the order to sell 20 A at $1.20) may be automatically generated, improving the BOX best bid for each of Leg A and Leg B, respectively, to $1.05. The resulting order books are as follows: BOX Book for Option A is: Legging Order to buy 10 at $1.05 Order to buy 10 at $1.00 Order to buy 5 at $0.99 Order to sell 20 at $1.20 Order to sell 20 at $1.25 BOX Book for Option B is: Legging Order to buy 10 at $1.05 Order to buy 10 at $1.00 Order to sell 20 at $1.20 Complex Order Book for Strategy A+B: Complex Order to buy 10 at $2.25 Implied Order to buy 10 at $2.00 Implied Order to sell 20 at $2.40 Subsequently, an outright order to sell 10 of A is received. This order will execute against the Legging Order to buy A at $1.05 and there will be an automatic execution of the other Leg of the Complex Order against the displayed offer for B at $1.20. As a result, the net price of $2.25 is achieved for the Complex Order (buy A at $1.05 + buy B at $1.20 = $2.25 net). Since the 53 See 54 See proposed Rule 7240(c)(3). proposed Rule 7240(c)(3). VerDate Mar<15>2010 18:44 Mar 07, 2013 Complex Order to buy 10 at $2.25 has been filled, the Legging Order to buy B at $1.05 will be automatically cancelled. In addition to enabling the execution of the Complex Order at a net price of $2.25, which otherwise would not have been possible, the Legging Order also enhanced execution for outright orders on the BOX Book because (i) the incoming outright order to sell A received a better price ($1.05 instead of $1.00); and (ii) additional liquidity to execute resting interest to sell 10 of B at $1.20 was provided by the Complex Order. Example 9: Priority of Legging Orders at Same Price BOX Book for Option A is: Legging Order to buy 10 at $1.00 Order to buy 10 at $1.00 Order to buy 5 at $0.99 Order to sell 20 at $1.20 Order to sell 20 at $1.25 BOX Book for Option B is: Legging Order to buy 10 at $1.00 Order to buy 10 at $1.00 Order to sell 20 at $1.20 Complex Order Book for Strategy A+B: Complex Order to buy 10 at $2.20 Implied Order to buy 10 at $2.00 Implied Order to sell 20 at $2.40 The Complex Order to buy A+B at $2.20 results in Legging Orders on each of Option A and Option B equal to the best outright orders on the BOX Book for each Leg at $1.00. Assume the Complex Order to buy 10 A+B at $2.20 was received prior to the receipt of the outright order to buy 10 A at $1.00. Thus, the Legging Order at $1.00 would have ‘‘time priority’’ over the outright order to buy A at $1.00. Subsequently, an order to sell 15 A at $1.00 is received. Since interest on the BOX Book have priority over Legging Orders at the same price,56 10 contracts on Option A are executed against the order to buy 10 A at $1.00. The remaining 5 contracts to sell Option A are then executed, together with a matching 5 contracts of Option B purchased at $1.20, against the Complex Order. The order books then are as follows: BOX Book for Option A is: Legging Order to buy 5 at $1.00 Order to buy 5 at $0.99 Order to sell 20 at $1.20 Order to sell 20 at $1.25 BOX Book for Option B is: Legging Order to buy 5 at $1.00 Order to buy 10 at $1.00 55 See 56 See Jkt 229001 PO 00000 proposed Rule 7240(c)(3). proposed Rule 7240(c)(3). Frm 00142 Fmt 4703 Sfmt 4703 Order to sell 15 at $1.20 Complex Order Book for Strategy A+B: Complex Order to buy 5 at $2.20 Implied Order to buy 5 at $1.99 Implied Order to sell 15 at $2.40 A Legging Order may be generated when at least one Complex Order and at least one order on the other component Leg of such Complex Order(s) are received. Where there are multiple Complex Orders on the same Strategy at the same price, which is also the best price on the Complex Order Book, generated Legging Orders will be aggregated such that only one Legging Order will exist, relating to that Strategy, with respect to any single option series at any time on the BOX Book. Partial executions against a Legging Order that is generated from multiple Complex Orders will be allocated among such Complex Orders and the related orders on the component Leg based on time priority of such Complex Orders and orders on the BOX Book,57 regardless of when the Legging Order is generated. The following Example 10 illustrates the allocation of orders when a Legging Order is generated from multiple Complex Orders. Example 10: Time Priority of Legging Orders Assume the following orders on A+B bids and B offers (orders below are shown in descending time priority with the earliest orders at the top): Bids on A+B: 10 at $2.00 (order x) 7 at $2.00 (order y) 12 at $2.00 (order z) Total: 29 Bids on A+B Offers on B: 5 at $1.00 (order a) 8 at $1.00 (order b) 10 at $1.00 (order c) 23 Offers on B The above results in the generation of a Legging Order to buy 23 A at $1.00 since sufficient bids on A+B exist to accommodate all 23 existing offers on B. Assume no outright order to buy A at $1.00 exists and that, subsequently, an order to sell 20 A at $1.00 (order m) is received. BOX will allocate trades on A+B and B according to the time priority of each until the first 20 orders have been filled. The resulting trade executions are as follows (all trades at $1.00): 57 See E:\FR\FM\08MRN1.SGM proposed Rule 7240(c)(3). 08MRN1 15101 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices Option A Option B Qty Buyer 5 5 3 4 3 .................................................. .................................................. .................................................. .................................................. .................................................. order order order order order x x y y z order order order order order Total .................................... (3) Other Rules for Legging Orders A Legging Order is automatically removed from the BOX Book if: (i) Execution of the Legging Order would no longer achieve the net price of the Complex Order when the other component Leg is executed against the best displayed bid or offer on the BOX Book, (ii) the other component Leg of the Complex Order cannot be executed at a price equal to the NBBO, (iii) the Complex Order is executed in full or in part, or (iv) the Complex Order is cancelled or modified.58 The Exchange proposes to amend Rule 7110(c)(2) regarding BOX-Top Orders to account for a unique result that occurs when a BOX-Top Order executes with a Legging Order at a one cent increment in a series traded in a larger increment. Under existing Exchange rules, BOX-Top Orders entered into the BOX Book are executed at the best price available in the market for the total quantity available from any contra bid (offer), and any residual volume is automatically converted to a limit order at the price at which the BOX-Top Order was executed.59 When a BOX-Top Order executes against a Legging Order at a one cent increment in a series traded in a larger increment, the Exchange proposes that any remaining BOX-Top Order quantity will be priced, ranked and displayed on the mstockstill on DSK4VPTVN1PROD with NOTICES 58 See proposed Rule 7240(c)(4). Exchange notes for comparison that Market Orders are executed at the best price obtainable for the total quantity available when the order reaches the BOX market and any remaining quantity is executed at the next best price available for the total quantity available. This process continues until the Market Order is fully executed. Use of a BOX-Top Order maintains the initial execution price as a limit on the execution of the remainder of an order. See existing Rule 7110(c)(2). 59 The 20:15 Mar 07, 2013 Jkt 229001 Buyer m m m m m order order order order order x x y y z Example 11: Partial Execution of BOXTop Order on Non-Penny Series Instrument With Legging Order Assume Option A is a non-penny series with a trading increment at five cent intervals. The BOX Book for Option A is as follows: BOX Book for Option A is: Legging Order to buy 10 at $5.02 (Legging Order displayed at $5.00) Order to buy 10 at $5.00 Order to sell 15 at $5.10 Order to sell 10 at $5.15 A BOX-Top Order to sell 15 A is received. The order will execute for 10 contracts of A against the Legging Order at $5.02. The remaining quantity will be booked as a sell order for 5 at $5.05. The resulting BOX Book for Option A would then be: BOX Book for Option A is: Order to buy 10 at $5.00 Order to sell 5 at $5.05 (ex BOX-Top Order) Order to sell 15 at $5.10 Order to sell 10 at $5.15 The unexecuted quantity of a BOXTop Order that executes against a Legging Order on a non-penny series at the Legging Order’s generated (not displayed) price will be rounded up (down) for sell (buy) orders to the nearest valid price increment. The unexecuted portion of a BOX-Top Order will be booked at the same price as its displayed price. (4) Proposed Amendments to PIP on Legging Orders At the conclusion of a PIP, any Legging Order with a price eligible for execution against the PIP Order will cede priority to all quotes and orders, including the Primary Improvement Order and any other Improvement Orders at the same price. In other words, a Legging Order may execute against a PIP Order at the end of a PIP PO 00000 proposed Rule 7110(c)(2). Frm 00143 Fmt 4703 a b b c c 20 Option B executions BOX Book at the nearest increment tick permitted for the series (rounding down to the proper increment for buy orders and up to the proper increment for sell orders).60 60 See Seller order order order order order 20 Option A executions The allocation of orders to buy A+B is determined by time priority because all are at the same price ($2.00). Similarly, the allocation of orders to sell B is determined by time priority because all are at the same price ($1.00). In this Example 8, note that each buyer of Option A is also buying an equal number of Option B because such buyer is actually buying A+B. VerDate Mar<15>2010 Seller Sfmt 4703 once all other interest at the same price has been fully executed.61 The exception would be that a Legging Order on the same side and at the same price as the Primary Improvement Order at the end of a PIP may receive trade allocation if the Primary Improvement Order has included a ‘‘surrender quantity’’ as set forth in existing Rule 7150(g)(6). Note that in the case of a surrender quantity submitted by the Primary Improvement Order, such a Legging Order will trade with the PIP Order only after all other interest (e.g., Unrelated Orders 62 and Improvement Orders) at the same price has been filled. In other words, such Legging Order will only receive a trade allocation after all other interest at same price at the end of a PIP has been filled. Example 12: ‘‘Surrender Quantity’’ at End of PIP With Legging Order at Price Equal to Primary Improvement Order Assume at the end of a PIP to sell 30 contracts of A, the Order Book is as follows: BOX Book for Option A is: Improvement Order to buy 20 at $1.02 Legging Order to buy 10 at $1.02 Primary Improvement Order to buy 30 at $1.02 PIP Order to sell 30 at $1.02 Absent a ‘‘surrender quantity’’ submitted with the Improvement Order, the 30 contracts on Option A would be allocated as follows: • 18 (60%) to the Improvement Order. • 12 (40%) to the Primary Improvement Order. • None to the Complex Order which generated the Legging Order. Suppose instead that the Primary Improvement Order had included a surrender quantity of 6 contracts (e.g., the Primary Improvement Order wishes to only trade 24 contracts at end of PIP). In this case, the trade allocation would be: • 20 to the Improvement Order. 61 See proposed Rule 7150(f)(3). 7150(a) defines Unrelated Order as a nonImprovement Order entered in the BOX market during a PIP. 62 Rule E:\FR\FM\08MRN1.SGM 08MRN1 15102 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices • 6 to the Primary Improvement Order. • 4 to the Complex Order which generated the Legging Order. The proposed amendments to Rules 7150(i) and 7150(j) provide that Legging Orders on the BOX Book will be treated in the PIP in the same manner as Unrelated Orders are currently. While a PIP is underway on a Leg which is itself part of a Strategy, it is possible that a new order on the Strategy or on the other component Leg (in the case of a Strategy with two Legs and with a ratio of one-to-one) will cause a new Legging Order to be generated for the Leg for which the PIP is in progress. Legging Orders generated on the BOX Book during a PIP will interact with orders in the PIP in the same manner as Unrelated Orders are currently.63 Like Unrelated Orders, a Legging Order must be executable to prematurely terminate the PIP or execute with the PIP Order. If a Legging Order is not executable, the PIP will continue through its duration. Executable Orders on Same Side as a PIP Order The generation of a Legging Order that is on the same side as the PIP Order and whose price is executable against the opposite side BBO, an Improvement Order, a Legging Order, or the Primary Improvement Order, will cause the PIP to terminate early and the PIP Order will execute pursuant to proposed Rule 7150(f)(3).64 The following example shows how Legging Orders on the same side as the PIP Order will interact in a PIP on a single Leg: mstockstill on DSK4VPTVN1PROD with NOTICES Example 13: Executable Legging Order on Same Side as PIP Order BOX Book for Option A is: Primary Improvement Order to buy 15 at $1.01 Legging Order to buy 10 at $1.02 Order to buy 10 at $1.00 Order to buy 5 at $0.99 PIP Order to sell 15 at $1.01 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Legging Order to buy 10 at $1.02 Order to buy 15 at $1.00 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B: 63 No amendments to existing Rules 7150(g) or (h) are necessary. Proposed Rule 7150(f)(3) describes the execution of orders at the end of the PIP, including Legging Orders. A Legging Order is executed only after all other executable orders and quotes at the same price are executed in full. 64 See proposed Rule 7150(i). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 Complex Order to buy 10 at $2.07 Implied Order to sell 10 at $2.10 The Complex Order to buy 10 A+B at $2.07 was received after the start of the PIP. Subsequently, an order on the BOX Book to sell 5 A at $1.02 is received prior to the end of the PIP on A. As this order is executable against the Legging Order at $1.02, the PIP will terminate prematurely and the PIP Order will execute to sell 10 at $1.02 against the Legging Order to buy 10 at $1.02. Thereafter, the BOX Trading Host will execute a purchase of 10 B at $1.05 to complete the Complex Order. The 5 remaining contracts of the PIP Order will execute at $1.01 with the PIP Primary Improvement Order. Example 14: Executable Legging Order on Same Side as PIP Order Assume the same initial facts as in Example 13 above, except that the Complex Order received after the start of the PIP is to buy 10 A+B at $2.06, in which case the Legging Orders on Option A and Option B are generated to buy 10 at $1.01 each. The order books would be as follows: BOX Book for Option A is: Primary Improvement Order to buy 15 at $1.01 Legging Order to buy 10 at $1.01 Order to buy 10 at $1.00 Order to buy 5 at $0.99 PIP Order to sell 15 at $1.01 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Legging Order to buy 10 at $1.01 Order to buy 15 at $1.00 Order to sell 50 at $1.05 Complex Order Book for Strategy A+B: Complex Order to buy 10 at $2.06 Implied Order to sell 10 at $2.10 Subsequently, an order to sell 5 A at $1.01 is received, causing the PIP to terminate early. However, in this case, the PIP Order would trade with the Primary Improvement Order at $1.01 because all other orders have priority over Legging Orders at the same price. After the completion of the PIP, the sell order for 5 at $1.01 would execute against the Legging Order to buy 5 at $1.01. Thereafter, the BOX Trading Host will execute a purchase of 5 B at $1.05 to complete the Complex Order. Executable Orders on Opposite Side of a PIP Order The generation of a Legging Order that is on the opposite side of the PIP Order and can be executed against the opposite side NBBO, BBO, or a Legging Order, will trade against the PIP Order PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 at one cent better than NBBO if BBO is equal to NBBO, or at NBBO if BBO is worse than NBBO.65 The following example shows how Legging Orders on the opposite side of the PIP Order will interact in a PIP on a single Leg. Example 15: Executable Legging Order on Opposite Side of PIP Order BOX Book for Option A is: Primary Improvement Order to buy 15 at $1.01 Order to buy 10 at $1.00 Order to buy 5 at $0.99 PIP Order to sell 15 at $1.01 Order to sell 10 at $1.05 Order to sell 20 at $1.06 BOX Book for Option B is: Order to buy 15 at $1.00 Order to sell 50 at $1.03 Complex Order Book for Strategy A+B: Implied Order to buy 10 at $2.00 Assume NBBO for A is $1.00 and $1.04. While the PIP is underway, a Complex Order on A+B to buy 10 at $2.07 is received, generating a Legging Order to buy 10 A at $1.04. Since the Legging Order can execute against the NBBO offer on A at $1.04, the Legging Order to buy 10 A at $1.04 will execute with the PIP Order. Thereafter, the BOX Trading Host will execute a purchase of 10 B at $1.03 to complete the Complex Order. d. Related Modifications to Rules The following discusses proposed additional changes to the rules necessitated by the rule changes discussed above. (1) HSVF Broadcast The Exchange proposes to amend Rule 7130(a)(2)(iv) (Execution and Price/Time Priority) to add Implied Orders and Legging Orders to the specific items that are displayed to BOX Options Participants through the proprietary High Speed Vendor Feed (‘‘HSVF’’). The HSVF is made available to all BOX Options Participants at no charge and, currently, the five best limit prices for single Legs on BOX are provided through the HSVF. The proposed amendment to Rule 7130(a)(2)(iv) will provide that the five best price limit prices and the bestranked Legging Order (if any), as applicable and defined in Rule 7240(c)(1), will be provided through HSVF for each Leg. Additionally, the Exchange proposes that the five best limit prices and the best-ranked Implied Order (if any), as defined in Rule 65 See E:\FR\FM\08MRN1.SGM proposed Rule 7150(j). 08MRN1 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices 7240(d)(1), will be provided through HSVF for each Strategy. All the other items in the HSVF as set forth in Rule 7130(a)(2) will also apply to Complex Orders. mstockstill on DSK4VPTVN1PROD with NOTICES (2) Definitions The Exchange proposes to amend the definition of ‘‘Central Order Book’’ or ‘‘BOX Book’’ in Rule 100(a)(10) to mean the electronic book of orders on each single option series maintained by the BOX Trading Host. The Exchange believes this clarifying change will convey the intended meaning to exclude Complex Orders from this definition. The Exchange proposes to amend existing Rule 100(a)(33) to include definitions of ‘‘NBB’’ to mean the national best bid and ‘‘NBO’’ to mean the national best offer, each as calculated by BOX based on market information received by BOX from OPRA. These definitions are necessary to support the definitions of ‘‘cNBB’’ and ‘‘cNBO’’ in proposed Rule 7240(a). The Exchange proposes that the terms ‘‘cBBO’’ be defined to mean the best net bid and offer price for a Complex Order Strategy based on the BBO on the BOX Book for the individual options components of such Strategy, ‘‘cNBB’’ be defined to mean the best net bid price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy, ‘‘cNBBO’’ be defined to mean the best net bid and offer price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy, and ‘‘cNBO’’ be defined to mean the best net offer price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy.66 The Exchange proposes to amend the definition of ‘‘Complex Order’’ in Rule 7240(a)(5) to mean any order involving the simultaneous purchase and/or sale of two or more different options series in the same underlying security, for the same account, in a ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00) and for the purpose of executing a particular investment strategy.67 The Exchange proposes that the term ‘‘Complex Order Book’’ be defined to mean the electronic book of Complex 66 See proposed Rule 7240(a)(1)–(4). proposed Rule 7240(a)(5). See ISE Rule 722(a)(1). See also, the definition of ‘‘Complex Trade’’ in the Options Order Protection and Locked/Crossed National Market System Plan Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009). See also Exchange Rule 15000(e) and ISE Rule 1900(d). 67 See VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 Orders maintained by the BOX Trading Host.68 The Exchange proposes that the term ‘‘Complex Order Strategy’’ or ‘‘Strategy’’ be defined to mean a particular combination of components of a Complex Order and their ratios to one another.69 The Exchange also specifies in this rule that BOX will assign a Strategy identifier to each Strategy. (3) Minimum Increments The Exchange proposes Rule 7240(b)(1) to provide that bids and offers on a Strategy (i.e., any Complex Order) may be expressed in any decimal price, and that the Legs of a Complex Order may be executed in one cent increments, regardless of the minimum increments otherwise applicable to the individual Legs of the Complex Order. The Exchange also proposes to delete a reference to Stock-Option Order consistent with the change to existing Rule 7240(b)(3) discussed below. Further, the Exchange proposes to delete a reference to priority for Complex Orders at a net price that is not a multiple of the minimum increment. The Exchange believes that this provision is unnecessary if Complex Orders may be expressed in any decimal price. (4) Elimination of Unnecessary Order Types The Exchange proposes to delete existing Rule 7240(b)(3) regarding Execution of Complex Orders and is proposing various new provisions discussed above regarding Complex Order execution. In connection with amending the definition of Complex Order, the Exchange proposes to delete references to the various types of Complex Orders previously included in the rules (Spread, Straddle, Strangle, Combination, Ratio, Butterfly Spread, BOX Spread and Collar) because these designations will be unnecessary upon implementation of the other proposed rule changes. References to certain order types (Stock-Option Orders and SSFoption Orders) are proposed to be deleted because BOX does not have these order types. If these order types are to be traded on BOX in the future, the Exchange will file an appropriate rule change under Section 19(b)(1) of the Act.70 The Exchange proposes deleting Rule 7240(b)(4) regarding Types of Complex Orders, to be replaced by newly proposed 7240(b)(4) discussed above. Additionally, the Exchange proposes 68 See proposed Rule 7240(a)(6). proposed Rule 7240(a)(7). 70 15 U.S.C. 78s(b)(1). 69 See PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 15103 renumbering Rule 7240(b)(5), which prohibits Complex Orders being submitted to BOX as Directed Orders or to the PIP, to proposed 7240(b)(4)(iii). The Exchange also proposes deleting Rule 7240(c) regarding how a Participant may propose trading a Strategy on BOX. The planned implementation of the new BOX functionality for Complex Orders will permit Participants to create a Strategy simply by submitting a Complex Order for that Strategy to BOX. The current provision describes a more manual process for establishing a Strategy that will now be unnecessary and thus, not applicable. As such, the Exchange believes it is appropriate to delete this provision. The Exchange proposes to also delete IM–7240–1 regarding trading Stock-Option Orders and SSF-option Orders as inapplicable because BOX does not have these order types. (5) BOX Trading System Capacity The number of Strategies created on a Complex Order Book requires adequate systems support and overhead and the number of different Strategies that could be created is nearly endless. Complex Order transactions represent approximately one-fourth of overall options industry volume. Complex Order trading is generally concentrated in a limited number of classes. However, the Complex Order market relies on orders rather than the standard options market reliance on quoted liquidity. As a result, message traffic for Complex Orders is only a fraction of the overall options market. BOX maintains a rigorous capacity planning program that monitors system performance and projected capacity demands. This program is designed to ensure that the system has sufficient capacity to support existing and future trading needs of BOX. As a general matter, the Exchange considers the potential impact on systems capacity of all new initiatives. In particular, the Exchange analyzed the potential for additional message traffic resulting from implementation of this Complex Order proposal and concluded that the Exchange has sufficient systems capacity to handle this implementation without degrading systems performance. Consistent with the limitations set forth in proposed Rule 7240(d) and above, the Exchange will closely monitor the generation of Implied Orders to ensure that they do not negatively impact system capacity and performance. The Exchange also will closely monitor the generation of Legging Orders to ensure that they do not negatively impact system capacity and performance. While generating E:\FR\FM\08MRN1.SGM 08MRN1 15104 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices amendments to Rule 7110(c)(2), (iii) adopt the proposed amendments to Rule 7130(a)(2)(iv), (iv) adopt the proposed amendments to Rules 7150(f)(3), 7150(i) and 7150(j), and (v) delete in its entirety the existing provisions of Rule 7240 (Complex Orders) and adopt the proposed Rule 7240. 2. Statutory Basis mstockstill on DSK4VPTVN1PROD with NOTICES Implied Orders and Legging Orders does require additional systems processes, the Exchange expects the impact of these activities to be negligible under all but the most severe market conditions. Therefore, the Exchange believes that it possesses sufficient capacity to meet investor demand. b. Complex Order Execution and Priority The Exchange believes the proposed rule changes will result in more efficient trading and reduce the risk that Complex Orders fail to execute for investors by providing additional opportunities to fill Complex Orders, and that the changes are consistent with the Act. The Exchange believes that increased interaction, where possible, on a continuous and real-time basis of the bids and offers on each Leg comprising a Strategy with the bids and offers on the corresponding Strategy and vice versa, through Implied Orders and Legging Orders, will benefit market participants and investors. The proposed rule changes will allow Complex Orders to interact with interest on the BOX Book and, conversely, allow interest on the BOX Book to interact with Complex Orders in an efficient and orderly manner. Orders on the BOX Book comprising a Strategy may interact with Complex Orders on the Strategy and a combination of a Complex Order and an order on a Leg comprising the Complex Order may also interact with orders on other Legs comprising the Strategy. The Exchange also believes the interaction of orders will benefit investors by increasing the opportunity for Complex Orders to receive execution, while also enhancing execution quality for orders on the BOX Book. Generally, the options industry rules for the execution of Complex Orders, and the current Exchange Rules, provide that two Complex Orders may execute against one another if the execution prices of the component Legs result in a net price that is better than the best customer limit order available for the individual component Legs. This permits an exchange, when executing two Complex Orders against one another, to execute each component Leg on the market’s best bid or offer so long as the execution does not trade ahead of customer interest. The Exchange believes the proposed rule change for trading Complex Orders on BOX is a step forward in options Complex Order execution. The proposed rules require that, before executing against another Complex Order, a Complex Order on BOX will execute first against orders on the BOX a. Principles of Complex Orders and Interaction With the BOX Book The proposed rule change is consistent with the requirements of the Act and the rules and regulation thereunder applicable to the Exchange as required by Section 19(b)(2) of the Act.71 As described more fully below, the Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Act,72 in general, and furthers the objectives of Section 6(b)(5) of the Act 73 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The proposed rule changes are consistent with the Act and further the foregoing objectives of Section 6(b)(5) of the Act 74 by increasing interaction between Complex Orders and interest on the BOX Book, including components of Complex Order Strategies; providing greater liquidity by providing increased opportunity for order execution; and improving execution prices compared to those otherwise available in the market. The Exchange believes this proposal is a reasonable modification to its rules, designed to facilitate increased interaction between orders on the Complex Order Book and orders on the BOX Book, and to do so in such a manner as to ensure a dynamic, realtime trading mechanism that maximizes the opportunity for trade executions for both Legs and Complex Orders. The Exchange believes that it is appropriate and consistent with the Act, for the purpose of clarity and in the public interest, to (i) adopt the proposed amendments to Rules 100(a)(10) and 100(a)(33), (ii) adopt the proposed 71 15 U.S.C. 78s(b)(2). U.S.C. 78f(b). 73 15 U.S.C. 78f(b)(5). 74 15 U.S.C. 78f(b)(5). 72 15 VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 Book if the net price of such orders is equal to the best price on the Complex Order Book, provided that all of the orders on the BOX Book are equal to or better than their respective NBBO.75 The Exchange believes this is consistent with the Act and represents two improvements to the rules on other options exchanges regarding Complex Order trading: (i) The priority of the BOX Book is not limited to ‘‘if any of the bids or offers established in the marketplace consist of a Customer Order’’ 76 and (ii) any Complex Order execution, whether against another Complex Order or against interest on the BOX Book, will be at a price at least equal to the cNBBO.77 Thus, each Leg of a Complex Order will be executed at a price that is equal to or better than NBBO and BBO for that series. A Complex Order will execute against other Complex Orders resting on the Complex Order Book if the net price is better than cBBO 78 and is equal to or better than the cNBBO,79 except in the case of Complex Orders on Nonstandard Strategies as described below. The proposed definitions of cBBO and cNBBO are consistent with the rules of another options exchange as previously approved by the Commission. Therefore, the Exchange believes this proposed change is consistent with the goals of the Act that an Exchange’s rules be designed to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The exception to the priority of the BOX Book is the execution of a Complex Order on Non-standard Strategies,80 as provided in proposed Rule 7240(b)(2)(ii). Complex Orders for Nonstandard Strategies will execute against interest on the BOX Book for the individual Legs of the Strategy for all of 75 See proposed Rule 7240(b)(3). e.g., ISE Rule 722(b)(2). 77 ‘‘cNBBO’’ is defined as the ‘‘the best net bid and offer price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy.’’ See proposed Rule 7240(a)(3). 78 ‘‘cBBO’’ is defined as ‘‘the best net bid and offer price for a Complex Order Strategy based on the BBO on the BOX Book for the individual options components of such Strategy.’’ See proposed Rule 7240(a)(1) and Commentary .08(a)(iv) to PHLX Rule 1080. 79 ‘‘cNBBO’’ is defined as ‘‘the best net bid and offer price for a Complex Order Strategy based on the NBBO for the individual options components of such Strategy.’’ See proposed Rules 7240(a)(3) and 7240(b)(3)(iii)(A). See also, Commentary .08(a)(vi) to PHLX Rule 1080. 80 ‘‘Complex Order Strategy’’ or ‘‘Strategy’’ is defined as ‘‘a particular combination of components of a Complex Order and their ratios to one another. BOX will assign a strategy identifier to each Strategy.’’ See proposed Rule 7240(a)(7). 76 See, E:\FR\FM\08MRN1.SGM 08MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices the quantity available at the best price in a permissible ratio until the quantities remaining on the BOX Book are insufficient to execute against the Complex Order while respecting the ratio. Following such execution, the remaining quantity of the Complex Order may execute against other Complex Orders and the component Legs of the Complex Order may trade at prices equal to the corresponding prices on the BOX Book (for more detail, see Example 5 above related to Nonstandard Strategies). The Exchange proposes to apply the straightforward principle of allowing execution of a Complex Order against another Complex Order when interest on the BOX Book at the same net price has already been executed. Thus, the execution price will be at a price better than cBBO (except in the case of insufficient quantity for Non-standard Strategies where the execution could occur at a price equal to cBBO). In the case of Non-standard Strategies, interest on the BOX Book will still have priority and be executed before a Complex Order, to the extent that there is sufficient quantity on the BOX Book to respect the ratio of the Strategy. The Exchange believes its proposed rules regarding executions of Nonstandard Strategies are consistent with the goals of the Act to remove impediments to and perfect the mechanism of a free and open market and a national market system; and, in general, to protect investors and the public interest. In particular, the proposed rules ensure that interest on the BOX Book will have priority to the extent sufficient quantity exists on each Leg to respect the ratio of the Strategy.81 Thereafter, Complex Orders for a Nonstandard Strategy may execute against one another and the component Legs of the Complex Orders may trade at prices equal to the corresponding prices on the BOX Book. The proposed rules prevent circumstances that may otherwise create a locked market on the Complex Order Book or require rejection of an incoming Complex Order that is executable against a resting Complex Order. In the absence of these safeguards, otherwise executable Complex Orders would lose opportunities for execution without any compensating benefit to interest on the BOX Book that are unable to interact with the incoming Complex Order. Accordingly, the Exchange believes that it proposes the best solution to the dilemma consistent with the requirements of the Act, and specifically Section 6(b)(5) thereof.82 Furthermore, the Exchange believes this procedure is consistent with the intent of the principle that a Complex Order execute ‘‘at least one Leg better than BBO for each options instrument’’ as this principle obviously assumes that there is sufficient quantity to respect the ratio of a Complex Order when prices are otherwise in line. In other words, orders can only execute against orders and an order must have both a price and a quantity. Therefore, the Exchange believes the proposed rules regarding executions of Non-standard Strategies will benefit market participants and investors, provide additional opportunities for market participants to obtain executions of their Non-standard Strategies and thus, create a more efficient market. As such, the Exchange believes the proposal is consistent with the goals of the Act. In requiring this, the principle is designed to ensure that at least one Leg will execute at a price better than BBO, except in the limited circumstance where there is insufficient quantity, with respect to one of the Legs, on the BOX Book to respect the ratio of the Complex Order. The Exchange believes the proposed rule change is a step forward in Complex Order execution because Implied Orders and Legging Orders will increase the interaction of orders on BOX and increase opportunities for order execution. Additionally, the proposed rules for filtering Complex Orders against NBBO should provide Complex Order executions at prices comparably better than otherwise available in the market.83 As such, the Exchange believes the proposed rule change regarding Complex Order execution and priority is consistent with the goals of the Act to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and to protect investors and the public interest. Other exchange rules currently provide that an incoming Complex Order would trade with a Complex Order that is resting on the Complex Order Book, unless the best bid/offer on either of the component Legs of the Strategy were a customer.84 For the reason stated below, the Exchange is proposing no such limitation to restrict Complex Order execution on BOX. Because of the priority of the BOX Book over the Complex Order Book in the proposed rule change, a Complex Order will execute first against the BOX Book with respect to each component Leg, proposed Rule 7240(b)(2)(ii). 82 15 U.S.C. 78f(b)(5). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 proposed Rule 7240(b)(3)(iii). e.g., ISE Rule 722(b)(2) and Commentary .08(c)(iii) to PHLX Rule 1080. and any subsequent execution of the remaining quantity of the Complex Order will be at a price that ensures that ‘‘at least one Leg of the Complex Order must trade at a price that is better than the corresponding bid or offer in the marketplace,’’ 85 (i.e., on BOX, at least one Leg of the Complex Order will execute at a price better than BBO), except for Complex Orders on Nonstandard Strategies, which may be executed against other Complex Orders and the component Legs of the Complex Orders may trade at prices equal to the corresponding prices on the BOX Book. This principle is not limited to instances where a customer limit order is at a price equal to the BBO. Because the component Leg Orders of a Complex Order will have priority and this interest on the BOX Book can execute with a Complex Order on the opposite side of the market, the proposed rule change would ensure that no resting Complex Orders trade before orders on the BOX Book for the component Legs. The Exchange believes this will provide greater opportunities for executions of Complex Orders on BOX, and will benefit the overall BOX market for the component Legs as well. For the reasons set forth above, the Exchange believes the proposed rule change regarding Complex Order execution, and the priority proposed for interest on the BOX Book, is consistent with the goals of the Act to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and to protect investors and the public interest. (1) Implied Orders and Priority of the BOX Book The Exchange proposes to define an Implied Order to mean ‘‘a Complex Order at the cNBBO, derived from the orders at the BBO on the BOX Book for each component Leg of a Strategy, provided each component Leg is at a price equal to NBBO for that series.’’ 86 The Exchange believes the generation of Implied Orders is consistent with the goals of the Act to remove the impediments to and perfect the mechanism of a free and open market because their addition to the marketplace should facilitate additional transactions and interaction between orders on the Complex Order Book and orders on the BOX Book. The Exchange believes the addition of Implied Orders to the BOX market will benefit market makers, traders, and retail investors trading on BOX by enhancing execution quality and the likelihood and 83 See 81 See 84 See, PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 15105 85 See 86 See E:\FR\FM\08MRN1.SGM proposed Rule 7240(b)(2)(i). proposed Rule 7240(d)(1). 08MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES 15106 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices efficiency of trade execution. In the absence of the proposed rule, Complex Orders that would otherwise execute against interest on the BOX Book would not trade. Implied Orders are generated and broadcast for Strategies with two Legs and with a ratio of one-to-one.87 This limitation results in a manageable and useful set of possible Implied Orders, removing impediments to and perfecting the mechanism of a free and open market. Limiting Implied Orders to Strategies with two Legs and with a ratio of one-to-one is consistent with the purposes of the Act because the massive number of different, potential Strategies for which Implied Orders could otherwise be generated would be unwieldy and consume significant system resources generating, screening and displaying unnecessary Implied Orders, resulting in a less efficient market. An Implied Order for a Strategy is calculated and broadcast if each of the prices of the component Leg Orders is equal to NBBO.88 When an Implied Order is no longer at the cNBBO, the Implied Order will be removed and a new Implied Order will be generated, provided there is interest on the BOX Book to generate an Implied Order at the new cNBBO.89 Also, an Implied Order is not generated if the subject series is going through NBBO exposure pursuant to Rule 7130(b), or using orders in the PIP, Facilitation Auction, or Solicitation Auction.90 Implied Orders will be removed if either component Leg Order is executed in full, or in part, or cancelled.91 Until such removal, Implied Orders provide additional likelihood and efficiency of trade execution in furtherance of the goals of the Act. Applying the limitations set forth in proposed Rule 7240(d) and above, the Exchange will closely monitor the generation of Implied Orders to ensure they do not negatively impact system capacity and performance. The Exchange believes automatically generating Implied Orders will provide additional execution opportunities for Complex Orders and interest on the BOX Book and thus, enhance execution quality for investors on BOX. The Exchange believes the additional opportunities for potential execution through the interaction of orders on the Complex Order Book and orders on the 87 See proposed Rule 7240(d)(3). proposed Rules 7130(a)(2)(iv) and 7240(d)(1). 89 See proposed Rule 7240(d)(2). 90 See proposed Rule 7240(d)(4). 91 See proposed Rule 7240(d)(5). 88 See VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 BOX Book as achieved through Implied Orders, and the potential for enhanced execution quality, as outlined above, promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market, are in the public interest and, therefore, consistent with the Act. The Exchange believes the principles set forth in this proposal regarding Complex Order execution and priority are an improvement over the existing rules in the marketplace, and further, are consistent with the goals of the Act to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts, to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. (2) Valid Complex Order Types The Exchange proposes that Complex Orders may be entered as Fill-and-Kill Orders, Limit Orders, BOX-Top Orders, Market Orders, or Session Orders, each as defined in Rule 7110.92 The proposed order types currently exist on BOX today with regard to orders on the BOX Book and the Exchange proposes to apply them to Complex Orders. In particular, the Exchange believes that Fill-and-Kill Orders, Limit Orders, BOXTop Orders, and Session Orders all provide valuable limitations on execution price and time that may protect Participants and investors. Additionally, Session Orders reduce the risk of erroneous or stale orders on the Complex Order Book in the event that a Participant encounters unforeseen systems issues with its connectivity with BOX. The Exchange believes that permitting Complex Orders to be entered with these varying order types will give Participants greater control and flexibility over the manner and circumstances in which their orders may be executed, modified, or cancelled, and thus, will provide for the protection of investors and contribute to market efficiency. Accordingly, the Exchange believes the proposed rule change is consistent with the Act. c. Legging Orders Legging Orders may be automatically generated on behalf of a Complex Order so they are represented at the BBO on individual Legs.93 A Legging Order is executed after all other executable orders and quotes at the same price are executed in full.94 When a Legging 92 See proposed Rule 7240(b)(4)(i). proposed Rule 7240(c)(2). 94 See proposed Rule 7240(c)(3). 93 See PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 Order is executed, the other component Leg of the Complex Order will be automatically executed against the BBO.95 At the same price on the BOX Book, Legging Orders will be executed in time priority according to the corresponding Complex Order entry time.96 Legging Orders will only be eligible for execution after being filtered against NBBO pursuant to 7130(b).97 The Exchange believes that automatically generating Legging Orders, which will be executed after all other executable interest at the same price is executed in full, will provide additional execution opportunities for Complex Orders without negatively impacting any investors in the regular market.98 In fact, the generation of Legging Orders may enhance execution quality for investors on the BOX Book by improving the price and/or size of the BBO and by providing additional execution opportunity for resting interest on the BOX Book. The Exchange also believes that the generation of Legging Orders is compliant with Rule 602 of Regulation NMS (the ‘‘Quote Rule’’) because each Legging Order is a firm order that is included in the BBO if it is equal to or better than the otherwise existing BBO.99 The Quote Rule requires responsible brokers and dealers to be firm for their quotes. (1) Increments The Exchange proposes that a Legging Order will be placed on the BOX Book at its generated price to buy (sell) and will be displayed at the minimum trading increment permitted for the series (rounding down to the nearest valid increment for the series for buy orders and up to the nearest valid increment for the series for sell orders). Legging Orders will be automatically generated at prices in one cent increments but, for series trading in nickels or other larger increments, will be displayed at the nearest minimum trading increment for the series.100 The Exchange believes Legging Orders will provide market participants greater ability to execute trades at prices between the minimum trading increments for these series.101 95 See proposed Rule 7240(c)(3). proposed Rule 7240(c)(3). 97 See proposed Rule 7240(c)(3). 98 See NOM Approval Order, SEC Release No. 34– 57478 (March 12, 2008) 73 FR 14521 at 14529– 14530 (March 18, 2008). 99 See NOM Approval Order, SEC Release No. 34– 57478 (March 12, 2008) 73 FR 14521 at 14528– 14529 (March 18, 2008). 100 See proposed Rule 7240(c)(1). 101 See NOM Approval Order, SEC Release No. 34–57478 (March 12, 2008) 73 FR 14521 at 14529– 14530 (March 18, 2008). 96 See E:\FR\FM\08MRN1.SGM 08MRN1 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES The Exchange believes Legging Orders will increase opportunities for execution of Complex Orders, potentially increase executions of interest on the BOX Book, and will lead to tighter spreads and finer pricing on BOX. While Legging Orders may not always be displayed at their actual penny increment price, Legging Orders will provide investors the opportunity to trade at a better price than would otherwise be available—inside the disseminated best bid and offer for a particular Leg. The Exchange believes that this opportunity for investors to receive executions inside the disseminated BBO could result in better executions for investors, and that Legging Orders are consistent with the Act.102 When a BOX-Top Order executes against a Legging Order at a one cent increment in a series traded in a larger increment, the Exchange proposes that any remaining BOX-Top Order quantity will be priced, ranked and displayed on the BOX Book at the nearest increment tick permitted for the series (rounded up (down) in the case of a sell (buy) order).103 The Exchange notes for comparison that market orders are executed at the best price obtainable for the total quantity available when the order reaches the BOX market and any remaining quantity is executed at the next best price available for the total quantity available. This process continues until the Market Order is fully executed. Use of a BOX-Top Order maintains the initial execution price as a limit on the execution of the remainder of an order. BOX-Top Orders have existed on BOX since its inception because they are designed to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and, in general, protect investors and the public interest and the Exchange believes the continued use of this order type is consistent with the Act.104 (2) Proposed Amendments to PIP on Legging Orders Legging Orders may be automatically generated on behalf of a Complex Order so they are represented on the BOX Book at the BBO for the individual Legs, and will be eligible for execution after being filtered against NBBO. At the conclusion of a PIP, Legging Orders will be executed after all other executable 102 See NOM Approval Order, SEC Release No. 34–57478 (March 12, 2008) 73 FR 14521 at 14529 (March 18, 2008). 103 See proposed Rule 7110(c)(2). 104 See Securities Exchange Act Release No. 49068 (January 13, 2004) 69 FR 2796 (January 20, 2004). VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 orders and quotes at the same price are executed in full.105 Therefore, the Exchange believes it is appropriate and consistent with the Act that Legging Orders be treated as other orders on the BOX Book are treated in connection with the PIP, subject to the same process and priority. Proposed amendments to Rules 7150(i) and 7150(j) reflect that Legging Orders on the BOX Book will be treated, in connection with the PIP, in the same manner as Unrelated Orders are treated currently. Existing Rule 7150(a) defines Unrelated Order as a non-Improvement Order entered in the BOX market during a PIP. A Legging Order may be generated on the BOX Book for a Leg while a PIP on that Leg is underway. The Commission has previously found the Exchange’s treatment of Unrelated Orders received during the PIP consistent with the Act.106 Legging Orders generated during a PIP are treated in the same manner as Unrelated Orders received during a PIP and will interact with orders in the PIP in the same manner as Unrelated Orders.107 A Legging Order is executed only after all other executable orders and quotes at the same price are executed in full. As a result, the Exchange believes the proposed changes regarding Legging Orders and their interaction with a PIP on a Leg is consistent with the Act. d. Related Modifications to Rules (1) HSVF The Exchange proposes to add Complex Orders, Implied Orders and Legging Orders to the specific items that are displayed to Participants through the proprietary HSVF.108 In adopting Regulation NMS, the Commission granted self-regulatory organizations and broker-dealers increased authority and flexibility to offer new and unique market data to the public. It was believed that this authority would expand the amount of data available to consumers, and also spur innovation and competition for the provision of market data. The Exchange believes that the proposed rule change to add certain order information to the HSVF adheres to those principles by promoting increased transparency through the dissemination of more useful proprietary data and also by clarifying its availability to Participants. The HSVF is made available to all market 105 See proposed Rule 7150(f)(3). Securities Exchange Act Release No. 55415 (March 7, 2007) 72 FR 11411 (March 13, 2007) (Approval Order Relating to the Treatment of Limit Orders Submitted to BOX During a PIP). 107 See proposed Rules 7150(f)(3) and 7150(i)—(j). 108 See proposed Rule 7130(a)(2)(iv). 106 See PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 15107 participants at no charge. The Exchange is making a voluntary decision to make this data available, unlike the BBO which must be made available under the Act. The Exchange chooses to make the data available as proposed in order to improve market quality, to attract order flow, and to increase transparency. The Exchange believes this proposed change to make certain additional order information available through the HSVF is designed to remove impediments to and to perfect the mechanism of a free and open market and a national market system, and, in general, will protect investors and the public interest, consistent with the Act. (2) Complex Order Definition The Exchange believes that amending the definition of a Complex Order in Rule 7240(a) is consistent with the Act. The Exchange notes that the definition is consistent with the rules of other options exchanges and with the definition of ‘‘Complex Trade’’ in the Options Order Protection and Locked/ Crossed National Market System Plan.109 Therefore, the Exchange believes this proposed change is consistent with the goals of the Act that an Exchange’s rules be designed to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. (3) Price Improvement Requirement Except in the case of Complex Orders on Non-standard Strategies which may execute at a price equal to cBBO after executions against the BOX Book, the Exchange proposes to allow two Complex Orders to execute against each other at a net price that is better than cBBO by one cent.110 On some options exchanges that provide auctions for Complex Orders, a Complex Order may execute against another Complex Order if one leg of the Complex Order trades at a price that is at least one cent better than customer orders in the same series.111 On one options exchange that has no auction for Complex Orders, a Complex Order may execute against another Complex Order if one leg of the 109 See ISE Rule 722(a)(1). See also, the definition of ‘‘Complex Trade’’ in the Options Order Protection and Locked/Crossed National Market System Plan, Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009). See also Exchange Rule 15000(e) and ISE Rule 1900(d). 110 See proposed Rule 7240(b)(2)(i). 111 See, e.g., Securities Exchange Act Release Nos. 57556 (March 26, 2008), 73 FR 18018 (April 2, 2008) (Order Approving CBOE–2008–03) and 63558 (December 16, 2010) 75 FR 80553 (December 22, 2010) (Order Approving NYSEAmex–2010–100). E:\FR\FM\08MRN1.SGM 08MRN1 15108 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices Complex Order trades at a price that is better than priority customer interest in that series by at least one minimum trading increment.112 Although BOX is not proposing to establish an auction for Complex Orders at this time, the Exchange believes that it is consistent with the protection of investors and the public interest to permit Complex Orders (other than Non-standard Strategies) to execute against each other at a price that is better than cBBO by one cent, rather than the minimum trading increment for one of the component series for the following reasons. First, BOX will always execute Complex Orders first against interest on the BOX Book to the extent the Complex Order can be executed in full or in a permissible ratio by such interest.113 Second, the Exchange believes that one cent is a significant and material improvement to customers.114 While BOX is not currently proposing a Complex Order auction, the Exchange believes the BOX Complex Order proposal is appropriate in light of the price competition for Complex Orders on BOX driven by other features in the proposal. For example, the Exchange believes that the generation of Legging Orders will provide enhanced price competition and greater integration of the BOX Book and BOX COB. Also, the Exchange notes that each leg of a Complex Order must be executed at a price equal to NBBO. The Exchange believes these benefits will enhance the efficiency of the BOX Book and the BOX COB, and therefore, is consistent with the protection of investors and the public interest.115 Third, the Exchange believes that permitting price improvement by one cent rather than by the minimum trading increment could permit more active Complex Order trading by allowing execution where participants may not otherwise be willing to offer better prices in larger increments. 112 See ISE Rule 722(b)(2). proposed Rule 7240(b)(3)(i) and (ii). 114 Various options mechanisms such as the BOX PIP and the NOM price improving order have been implemented because it is recognized that one cent is a significant and material improvement to customers. See Securities Exchange Act Release Nos. 49068 (January 13, 2004), 69 FR 2775, 2799 (January 20, 2004) (SR–BSE–2002–15) (Order Approving BOX Facility), and 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR– NASDAQ–2007–004) (Order Approving NASDAQ Options Market). 115 The Chicago Board Options Exchange, Inc. permits trading Complex Orders in $0.01 minimum increments, providing additional price points at which Complex Orders could be executed. See Securities Exchange Act Release Nos. 57556 (March 26, 2008), 73 FR 18018 (April 2, 2008) (Order Approving CBOE–2008–03). mstockstill on DSK4VPTVN1PROD with NOTICES 113 See VerDate Mar<15>2010 18:44 Mar 07, 2013 Jkt 229001 Fourth, since the implementation of the Penny Pilot Program, many of the options instruments involved in Complex Order trading now already have a minimum increment of one cent.116 As a result, even though the initial implementation of complex order trading rules on other exchanges largely pre-dates the Penny Pilot Program, the effect of the Exchange’s proposal is already implemented in a significant portion of Complex Order trading on other options exchanges. For all of the foregoing reasons, the Exchange believes the proposed rule changes are consistent with the requirements of the Act and the rules and regulations thereunder applicable to the Exchange. (B) Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not currently trade Complex Orders. While the proposed rule changes would permit BOX to trade and display Complex Orders, the Exchange expects that no market participant or investor will have any additional cost or obligation with respect to the Exchange, BOX or Complex Orders relating to the proposed rule changes. No duties are imposed on any party by the proposed rule changes. The Exchange believes any impact of the proposed rule changes on market participants or investors would be at least neutral and could result in improved liquidity, finer pricing, better executions and increased competition. The Exchange further believes the proposed rule changes may facilitate additional executions for all BOX Options Participants. Moreover, the Exchange believes the proposal will enhance competition among the various markets for Complex Order execution, potentially resulting in more active Complex Order trading. For these reasons, the Exchange does not believe the proposed rule change will have any negative impact, and will not impose any burden, on competition not necessary or appropriate in furtherance of the purposes of the Act. 116 The Penny Pilot Program has been in effect since January 26, 2007. See Securities Exchange Act Release No. 55155 (Jan. 23, 2007), 72 FR 4741 (Feb. 1, 2007) (SR–BSE–2006–49). At the beginning of 2013, more than 350 classes of options are included in the Penny Pilot Program. See BOX Regulatory Circular 2012–30, available online at http:// boxexchange.com/f_circulars/_RC-201230_Penny_Pilot_Classes_Listed_on_BOX.pdf. PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 (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 written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Exchange 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 to rulecomments@sec.gov. Please include File Number SR–BOX–2013–01 on the subject line. 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–BOX–2013–01. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the E:\FR\FM\08MRN1.SGM 08MRN1 Federal Register / Vol. 78, No. 46 / Friday, March 8, 2013 / Notices 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 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; 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–BOX– 2013–01 and should be submitted on or before March 29, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.117 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–05413 Filed 3–7–13; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #13404 and #13405] New Hampshire Disaster Number NH– 00024 U.S. Small Business Administration. ACTION: Amendment 1. AGENCY: This is an amendment of the Presidential declaration of a major disaster for Public Assistance Only for the State of New Hampshire (FEMA– 4095–DR), dated 11/28/2012. Incident: Hurricane Sandy. Incident Period: 10/26/2012 through 11/08/2012. Effective Date: 02/27/2013. Physical Loan Application Deadline Date: 01/28/2013. Economic Injury (EIDL) Loan Application Deadline Date: 08/28/2013. 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: The notice of the President’s major disaster mstockstill on DSK4VPTVN1PROD with NOTICES SUMMARY: declaration for Private Non-Profit organizations in the State of New Hampshire, dated 11/28/2012, is hereby amended to include the following areas as adversely affected by the disaster. Primary Counties: Rockingham. All other information in the original declaration remains unchanged. SMALL BUSINESS ADMINISTRATION (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) SUMMARY: This is an amendment of the Presidential declaration of a major disaster for the State of New Jersey (FEMA–4086–DR), dated 10/30/2012. Incident: Hurricane Sandy. Incident Period: 10/26/2012 through 11/08/2012. Effective Date: 02/28/2013. Physical Loan Application Deadline Date: 04/01/2013. 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: The notice of the President’s major disaster declaration for the State of New Jersey, dated 10/30/2012 is hereby amended to extend the deadline for filing applications for physical damages as a result of this disaster to 04/01/2013. All other information in the original declaration remains unchanged. James E. Rivera, Associate Administrator for Disaster Assistance. [FR Doc. 2013–05381 Filed 3–7–13; 8:45 am] BILLING CODE 8025–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #13492 and #13493] Mississippi Disaster Number MS– 00064 U.S. Small Business Administration. ACTION: Amendment 2. AGENCY: SUMMARY: This is an amendment of the Presidential declaration of a major disaster for the State of Mississippi (FEMA–4101–DR), dated 02/13/2013. Incident: Severe storms, tornadoes, and flooding. Incident Period: 02/10/2013. Physical Loan Application Deadline Date: 04/15/2013. EIDL Loan Application Deadline Date: 11/13/2013. 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: The notice of the President’s major disaster declaration for the State of Mississippi, dated 02/13/2013 is hereby amended to establish the incident period for this disaster as beginning 02/10/2013 and continuing through 02/22/2013. All other information in the original declaration remains unchanged. (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) James E. Rivera, Associate Administrator for Disaster Assistance. [FR Doc. 2013–05384 Filed 3–7–13; 8:45 am] 117 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 18:44 Mar 07, 2013 BILLING CODE 8025–01–P Jkt 229001 15109 PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 [Disaster Declaration #13367 and #13368] New Jersey Disaster Number NJ–00033 U.S. Small Business Administration. ACTION: Amendment 6. AGENCY: (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) James E. Rivera, Associate Administrator for Disaster Assistance. [FR Doc. 2013–05383 Filed 3–7–13; 8:45 am] BILLING CODE 8025–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #13365 and #13366] New York Disaster Number NY–00130 U.S. Small Business Administration. ACTION: Amendment 6. AGENCY: SUMMARY: This is an amendment of the Presidential declaration of a major disaster for the State of New York (FEMA–4085–DR), dated 10/30/2012. Incident: Hurricane Sandy. Incident Period: 10/27/2012 through 11/08/2012. Effective Date: 02/27/2013. Physical Loan Application Deadline Date: 03/29/2013. E:\FR\FM\08MRN1.SGM 08MRN1

Agencies

[Federal Register Volume 78, Number 46 (Friday, March 8, 2013)]
[Notices]
[Pages 15093-15109]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-05413]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69027; File No. SR-BOX-2013-01]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Regarding Complex Orders

March 4, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on February 20, 2013, BOX Options Exchange LLC (the ``Exchange'' 
or ``BOX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
February 27, 2013, the Exchange filed Amendment No. 1 to the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4 .
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules related to complex orders. 
The text of the proposed rule change is available from the principal 
office of the Exchange, at the Commission's Public Reference Room and 
also on the Exchange's Internet Web site at http://boxexchange.com.

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

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

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

1. Purpose
    The Exchange proposes to amend the rules related to trading Complex 
Orders \3\ on BOX Market LLC (``BOX''), the options trading facility of 
the Exchange. In particular, the Exchange is proposing rules to 
facilitate interaction on a continuous and real-time basis among orders 
on BOX, consisting of

[[Page 15094]]

Complex Orders on the Complex Order Book \4\ and interest on the BOX 
Book.\5\
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    \3\ ``Complex Order'' is defined as ``any order involving the 
simultaneous purchase and/or sale of two or more different options 
series in the same underlying security, for the same account, in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) and for the purpose of 
executing a particular investment strategy.'' See proposed Rule 
7240(a)(5).
    \4\ ``Complex Order Book'' is defined as ``the electronic book 
of Complex Orders maintained by the BOX Trading Host.'' See proposed 
Rule 7240(a)(6).
    \5\ ``BOX Book'' (also the ``Central Order Book'') is defined as 
``the electronic book of orders on each single series of options 
maintained by the BOX Trading Host.'' See proposed Rule 100(a)(10).
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    The proposed rule change generally sets forth rules to facilitate 
and permit (i) Complex Orders to trade with interest on the BOX Book 
and (ii) the combination of a Complex Order and an order on one of its 
component single option series trading on the BOX Book (each a ``Leg'') 
to trade with orders on the other component Leg on the BOX Book.
    The Exchange believes this proposal is a reasonable modification to 
its rules, designed to facilitate increased interaction between orders 
on the BOX Book and orders on the Complex Order Book, and to do so in 
such a manner as to ensure a dynamic, real-time trading mechanism that 
maximizes the opportunity for trade executions for both Complex Orders 
and orders on single option series. The Exchange believes that it is 
appropriate and consistent with the Act, for the purpose of clarity and 
in the public interest, to (i) adopt the proposed amendments to Rules 
100(a)(10) and 100(a)(33), (ii) adopt the proposed amendments to Rule 
7110(c)(2), (iii) adopt the proposed amendments to Rule 7130(a)(2)(iv), 
(iv) adopt the proposed amendments to Rules 7150(f)(3), 7150(i) and 
7150(j), and (v) delete in its entirety the existing provisions of Rule 
7240 (Complex Orders) and adopt the proposed Rule 7240.
a. Principles of Complex Orders and Interaction With the BOX Book
    The proposed rule change will require that, before executing 
against another Complex Order, an executable inbound Complex Order on 
BOX will execute first against interest on the BOX Book if the net 
price of such interest on the BOX Book is equal to the best price on 
the Complex Order Book,\6\ provided that each of its component Legs is 
equal to or better than its respective NBBO.
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    \6\ See proposed Rule 7240(b)(3)(i).
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    The Exchange believes this proposed rule change represents two 
improvements to the rules on other options exchanges regarding Complex 
Order trading: (i) The priority of the BOX Book is not limited to ``if 
any of the bids or offers established in the marketplace consist of a 
Customer Order'' \7\ and (ii) any Complex Order execution, whether 
against another Complex Order or against interest on the BOX Book, will 
be at a price at least equal to the cNBBO.\8\
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    \7\ See, e.g., International Securities Exchange (``ISE'') Rule 
722(b)(2) and Commentary .08(c)(iii)(A) to PHLX Rule 1080.
    \8\ ``cNBBO'' is defined as the ``the best net bid and offer 
price for a Complex Order Strategy based on the NBBO for the 
individual options components of such Strategy.'' See proposed Rule 
7240(a)(3).
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    Consequently, a Complex Order will execute against other Complex 
Orders resting on the Complex Order Book only if the net price is 
better than cBBO \9\ and is equal to or better than the cNBBO,\10\ 
except in the case of Complex Orders on Non-standard Strategies (as 
defined below). Complex Order executions on BOX will be subject to an 
NBBO price control filtering process similar to that presently provided 
for the trading of individual options series on BOX.\11\ Thus, where 
two Complex Orders trade against each other, the resulting execution 
prices will be at a price equal to or better than NBBO and BOX best bid 
or offer (``BBO'') for each of the component Legs.\12\
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    \9\ ``cBBO'' is defined as ``the best net bid and offer price 
for a Complex Order Strategy based on the BBO on the BOX Book for 
the individual options components of such Strategy.'' See proposed 
Rule 7240(a)(1).
    \10\ See proposed Rules 7240(b)(3)(i) and 7240(b)(3)(iii)(A).
    \11\ See proposed Rule 7240(b)(3)(iii). See existing Rule 
7130(b) for a more detailed description of the current filtering 
process for orders inbound for the BOX Book.
    \12\ See proposed Rule 7240(b)(3)(ii).
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    The exception to the priority of the BOX Book is the execution of a 
Complex Order on Strategies \13\ that have a Leg ratio other than one-
to-one (herein referred to as ``Non-standard Strategies'') as provided 
in proposed Rule 7240(b)(2)(ii). Complex Orders for Non-standard 
Strategies will execute against interest on the BOX Book for the 
individual Legs of the Strategy for all of the quantity available at 
the best price in a permissible ratio until the quantities remaining on 
the BOX Book are insufficient to execute against the Complex Order 
while respecting the ratio. Following such execution, the remaining 
quantity of the Complex Order may execute against other Complex Orders 
and the component Legs of the Complex Order may trade at prices equal 
to the corresponding prices on the BOX Book (for more detail, see 
discussion in 2(d) and Example 5 below related to Non-standard 
Strategies).
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    \13\ ``Complex Order Strategy'' or ``Strategy'' is defined as 
``a particular combination of components of a Complex Order and 
their ratios to one another. BOX will assign a strategy identifier 
to each Strategy.'' See proposed Rule 7240(a)(7).
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    The Exchange proposes to apply the straightforward principle of 
allowing execution of a Complex Order against another Complex Order 
when interest on the BOX Book at the same net price has already been 
executed. Thus, the execution price will be at a price better than cBBO 
(except in the case of insufficient quantity for Non-standard 
Strategies where the execution could occur at a price equal to cBBO). 
In the case of Non-standard Strategies, interest on the BOX Book will 
still have priority and be executed before a Complex Order, to the 
extent that there is sufficient quantity on the BOX Book to respect the 
ratio of the Strategy.
b. Complex Order Priority and Execution
    The Exchange proposes new provisions in Rule 7240(b)(2) and (3) 
regarding Complex Order Priority and Execution. Where multiple Complex 
Orders are at the same price and eligible for execution, they will 
execute in time priority. BOX will ensure that any such executions are 
at a price at least equal to cNBBO. The following discussion describes 
the interaction between orders on the Complex Order Book and interest 
on the BOX Book.
(1) Priority of Interest on the BOX Book Over Complex Orders
    Proposed Rule 7240(b)(3) provides that a Complex Order will be 
automatically executed first against interest on the BOX Book for the 
individual Legs of the Strategy to the extent the Complex Order can be 
executed in the permissible ratio (as defined by the Strategy) and the 
price is equal to or better than both the cNBBO and the best price on 
the Complex Order Book.\14\ A Complex Order may be

[[Page 15095]]

executed at a net credit or debit price with one other Participant; 
provided, however, that, except as set forth in Rule 7240(b)(2)(ii), 
the price of at least one Leg of the Complex Order must trade at a 
price that is at least one cent better than the corresponding bid or 
offer in the marketplace.\15\
---------------------------------------------------------------------------

    \14\ BOX operates a single order queue for execution processing 
that precludes the possibility of a Complex Order and an order on 
the BOX Book for a component Leg instrument receiving the same time 
stamp. In other words, since orders on Legs and Complex Orders are 
all received and processed in the same order queue, there is no 
possibility, on BOX, of an order on a Leg and a Complex Order having 
the same time stamp. For the same reason, an Implied Order on a 
Strategy cannot have the same time stamp as a Complex Order on the 
same Strategy. Similarly, a Legging Order cannot have the same time 
stamp as an order on the same Leg because Legging Orders are 
executed in time priority based on the time stamp of the Complex 
Order causing the Legging Order to be generated (See discussion in 
Section 3(b) ``Priority of Legging Orders'' of this Statement of 
Purpose and the associated Example 8 for a more detailed explanation 
of Legging Order execution priority). In any case, having the same 
time stamp (even though impossible) would be irrelevant due to the 
fact that interest on the BOX Book has priority over Complex Orders 
at the same price and outright orders on Legs have priority over 
Legging Orders at the same price.
    ``Implied Order'' is defined as ``a Complex Order at the cNBBO 
that is derived from the orders at the BBO on the BOX Book for each 
component Leg of a Strategy.'' See proposed Rule 7240(d)(1).
    ``Legging Order'' is defined as ``a limit order on the BOX Book 
that represents one side of a Complex Order that is to buy or sell 
an equal quantity of two options series resting on the BOX Complex 
Order Book.'' See proposed Rule 7240(c)(1).
    \15\ See proposed Rule 7240(b)(2)(i).
---------------------------------------------------------------------------

    Since a Complex Order will execute against another Complex Order 
once all interest on the BOX Book at the same price has been executed, 
any executions of two Complex Orders against each other will 
necessarily be at a price better than cBBO (except in the case of 
Complex Orders on Non-standard Strategies where the execution could 
occur at a price equal to cBBO). This is because, having given priority 
to the BOX Book, an opposite side Complex Order may execute against a 
Complex Order once all interest at the same price on the Strategy has 
been filled on the BOX Book (except in the case of Complex Orders on 
Non-standard Strategies where, following execution against interest on 
the BOX Book at the best price in a permissible ratio until the 
quantities remaining on the BOX Book are insufficient to execute 
against the Complex Order, the Complex Order may execute against 
another Complex Order); thus, by definition, any subsequent trade of 
the remaining quantity of the Complex Order takes place at a price 
better than the cBBO updated for the executions against the BOX Book 
(except in the case of Complex Orders on Non-standard Strategies where 
the execution could occur at a price equal to cBBO).
    For additional discussion of the applicability of certain priority 
rules, see Priority Rules section below.

Example 1: Priority of Interest on the BOX Book Over Complex Orders

    BOX Book for Option A is:

Order to buy 10 at $1.00
Order to buy 5 at $0.99
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Order to buy 15 at $1.00
Order to buy 5 at $0.98
Order to sell 50 at $1.05

    BOX Book for Option C is:

Order to buy 10 at $1.00
Order to buy 12 at $0.99
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B+C:

Complex Order to buy 20 at $3.00

    An order to sell 10 A+B+C at $3.00 is received.
    Prior to execution of this order against the order to buy A+B+C at 
$3.00 on the Complex Order Book, BOX will determine whether it is 
possible to execute the inbound Complex Order to sell against interest 
on the BOX Book at a price equal to or better than the best bid on the 
Complex Order Book. Since this is the case, the sell order will execute 
against the bids on A, B and C at $1.00 each for 10 contracts each. As 
this execution will exhaust the inbound sell order, the Complex Order 
to buy 20 at $3.00 receives no trade allocation.
    The remaining order books are then as follows:
    BOX Book for Option A is:

Order to buy 5 at $0.99
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Order to buy 5 at $1.00
Order to buy 5 at $0.98
Order to sell 50 at $1.05

    BOX Book for Option C is:

Order to buy 12 at $0.99
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B+C:

Complex Order to buy 20 at $3.00

Example 2: Priority of Interest on the BOX Book Over Complex Orders

    Beginning with the initial scenario in Example 1, an order to sell 
30 (rather than 10 in Example 1) A+B+C at $3.00 is received.
    For purposes of this example, assume that BOX is at NBBO on A, B 
and C and that the NBBO bid for each of A, B and C after these trades 
is equal to BBO.
    The first 10 contracts execute against the BOX Book as in Example 1 
above but an order to sell 20 A+B+C at $3.00 remains.
    The cBBO for 5 A+B+C is then $2.98 (A: $0.99 + B: $1.00 + C: $0.99) 
while the best bid on the Complex Order Book is for 20 at $3.00. Since 
the Complex Order is at a price equal to cNBBO and better than the new 
cBBO, the remaining 20 to sell at $3.00 will match with the Complex 
Order bid. The resulting prices for each of the Legs will respect the 
requirement of ``at least one Leg price better than BBO'' \16\ since 
each Leg will execute at $1.00.
---------------------------------------------------------------------------

    \16\ See proposed Rule 7240(b)(2)(i).
---------------------------------------------------------------------------

    The remaining order books are then as follows:
    BOX Book for Option A is:

Order to buy 5 at $0.99
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Order to buy 5 at $1.00
Order to buy 5 at $0.98
Order to sell 50 at $1.05

    BOX Book for Option C is:

Order to buy 12 at $0.99
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B+C:

None
(2) Complex Order Filter Against NBBO
    All inbound Complex Orders to BOX will be filtered to ensure that 
each Leg of a Complex Order will be executed at a price that is equal 
to or better than the NBBO and the BOX BBO for each of the component 
Legs.\17\
---------------------------------------------------------------------------

    \17\ See proposed Rule 7240(b)(3)(iii).
---------------------------------------------------------------------------

    If an inbound Complex Order is executable (against either opposite 
side Complex Orders on the Complex Order Book or interest on the BOX 
Book) on BOX, BOX will determine if the potential execution price is 
equal to or better than both cNBBO and cBBO. If so, the inbound Complex 
Orders will be automatically executed against bids and offers on the 
Complex Order Book in price/time priority; provided, however, that 
Complex Orders will execute against other Complex Orders only after 
interest at the same net price on the BOX Book for the individual Legs 
have been executed.\18\
---------------------------------------------------------------------------

    \18\ See proposed Rule 7240(b)(3)(iii)(A).
---------------------------------------------------------------------------

    If an inbound Complex Order is executable (against either opposite 
side Complex Orders on the Complex Order Book or interest on the BOX 
Book) on BOX at a price that is not equal to or better than both cNBBO 
and cBBO, the incoming Complex Order will be exposed on the Complex 
Order Book for a period of up to one second at a price that is equal to 
cNBB \19\ (in the case of a sell order) or cNBO \20\ (in the case of a 
buy order). Any executable, opposite side orders received during the 
exposure period, including interest on the BOX Book, will immediately 
execute against the exposed Complex Order. Any unexecuted quantity of 
the Complex Order remaining at the end of the exposure period will be 
cancelled.\21\
---------------------------------------------------------------------------

    \19\ ``cNBB'' is defined as ``the best net bid price for a 
Complex Order Strategy based on the NBBO for the individual options 
components of such Strategy.'' See proposed Rule 7240(a)(2).
    \20\ ``cNBO'' is defined as ``the best net offer price for a 
Complex Order Strategy based on the NBBO for the individual options 
components of such Strategy.'' See proposed Rule 7240(a)(4).
    \21\ See proposed Rule 7240(b)(3)(iii)(B).

---------------------------------------------------------------------------

[[Page 15096]]

    If an inbound Complex Order is not executable on BOX but is 
executable against cNBBO, Complex Limit Orders will be entered on the 
BOX Complex Order Book and BOX-Top Complex Orders and Market Complex 
Orders will be exposed on the BOX Complex Order Book at cNBB (in the 
case of a sell order) or cNBO (in the case of a buy order) for a period 
of up to one second; any executable, opposite side orders received 
during the exposure period, including interest on the BOX Book, will 
immediately execute against the exposed Complex Order and any 
unexecuted quantity remaining at the end of the exposure period will be 
cancelled.\22\
---------------------------------------------------------------------------

    \22\ See proposed Rule 7240(b)(3)(iii)(C).
---------------------------------------------------------------------------

    If an inbound Complex Order is not executable on BOX and is not 
executable against cNBBO, it will be entered on the BOX Complex Order 
Book.\23\
---------------------------------------------------------------------------

    \23\ See proposed Rule 7240(b)(3)(iii)(D).
---------------------------------------------------------------------------

Example 3: Filtering of Complex Orders Against NBBO

    Begin with the initial scenario in Example 1. However, in Examples 
1 and 2, it was assumed that each of the orders on a Leg were equal to 
NBBO for the related options series. For this example, suppose instead 
that the NBBO for Option B is $1.01 and $1.05 (better than BBO) and 
that Options A and C on the BOX Book are equal to NBBO. Accordingly, 
cNBBO for A+B+C would be $3.01-$3.15.
    An order to sell 30 A+B+C at $3.00 is received.
    In this case, the inbound order to sell 30 A+B+C at $3.00 would not 
be able to execute against either the BOX Book or the resting Complex 
Order bid because of the Complex Order filter.\24\ Instead, the inbound 
sell order would be exposed on the Complex Order Book at $3.01; any 
unexecuted quantity after the exposure would be cancelled.
---------------------------------------------------------------------------

    \24\ See proposed Rule 7240(b)(3)(iii).
---------------------------------------------------------------------------

(3) Implied Order Calculation, Broadcast and Priority
    Proposed Rule 7240(d)(1) defines an Implied Order to mean ``a 
Complex Order at the cNBBO, derived from the orders at the BBO on the 
BOX Book for each component Leg of a Strategy, provided each component 
Leg is at a price equal to NBBO for that series.'' In other words, an 
Implied Order for a Strategy is calculated and broadcast if each of the 
prices of the component Legs is equal to NBBO. Implied Orders are 
executed in the same manner as regular Complex Orders, including with 
respect to priority of the BOX Book.\25\ At the same price on the BOX 
Complex Order Book, an Implied Order has priority over a resting 
Complex Order.\26\ An Implied Order is broadcast to Participants as an 
order on the Complex Order Book. Implied Orders are only generated and 
broadcast for Strategies with two Legs and with a ratio of one-to-
one.\27\ Also, an Implied Order is not generated if the subject series 
order is going through NBBO exposure pursuant to Rule 7130(b), or using 
orders in the PIP, Facilitation Auction, or Solicitation Auction.\28\ 
The quantity associated with the Implied Order is limited to the 
smaller quantity of the two Legs comprising the Strategy to ensure a 
one-to-one ratio is maintained. As shown in the example below, if there 
exists an order to buy 10 contracts of Option A and an order to buy 15 
contracts of Option B, BOX will only generate an Implied Order to buy 
10 of Strategy A+B.
---------------------------------------------------------------------------

    \25\ See proposed Rule 7240(d)(6)(i).
    \26\ See proposed Rule 7240(d)(6)(ii).
    \27\ See proposed Rule 7240(d)(3).
    \28\ See proposed Rule 7140(d)(4).
---------------------------------------------------------------------------

    When an Implied Order is no longer at the cNBBO, the Implied Order 
will be removed and a new Implied Order will be generated, provided 
there is interest on the BOX Book to generate an Implied Order at the 
new cNBBO.\29\ Implied Orders will be removed if either component order 
on a Leg is executed in full, in part, or cancelled and, where 
appropriate, recalculated.\30\
---------------------------------------------------------------------------

    \29\ See proposed Rule 7240(d)(2).
    \30\ See proposed Rule 7240(d)(5).
---------------------------------------------------------------------------

Example 4: Calculation and Execution of Implied Order

    BOX Book for Option A is:

Order to buy 10 at $1.00
Order to buy 5 at $0.99
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Order to buy 15 at $1.00
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B:

Complex Order to buy 20 at $2.00
Implied Order to buy 10 at $2.00
Implied Order to sell 10 at $2.10

    Assume the bids on A and B on BOX are equal to NBBO for each such 
that cNBBO is $2.00.
    Suppose in this example that the Complex Order to buy 20 at $2.00 
is received prior to the receipt of the order to buy 15 B at $1.00. 
Thus, the Complex Order to buy 20 at $2.00 has time priority over the 
Implied Order to buy 10 at $2.00.
    Subsequently, a Complex Order to sell 20 A+B is received, which 
could trade with both the Implied Order to buy and the Complex Order to 
buy. Because, at the same price on the Complex Order Book, an Implied 
Order has priority over a resting Complex Order even if the Complex 
Order was entered first,\31\ the first 10 contracts of the order to 
sell Strategy A+B will be executed against orders on A and B, 
respectively, on the BOX Book: 10 of A are sold at $1.00 and 10 of B 
are sold at $1.00. After this execution, the order books would be as 
follows:
---------------------------------------------------------------------------

    \31\ See proposed Rule 7240(d)(6)(ii).
---------------------------------------------------------------------------

    BOX Book for Option A is:

Order to buy 5 at $0.99
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Order to buy 5 at $1.00
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B:

Complex Order to buy 20 at $2.00
Implied Order to sell 10 at $2.10

    The remaining 10 of the Complex Order to sell Strategy A+B at $2.00 
will be executed against the resting Complex Order to buy A+B at $2.00 
($1.00 for each component Leg). Note that no Implied Order for 5 A+B at 
$1.99 is generated since this would be worse than cNBBO of $2.00.
(4) Price Improvement Requirement
    Except in the case of Complex Orders on Non-standard Strategies 
which may execute at a price equal to cBBO after executions against the 
BOX Book, the Exchange proposes to allow two Complex Orders to execute 
against each other at a net price that is better than cBBO by one 
cent.\32\ On some options exchanges that provide auctions for Complex 
Orders, a Complex Order may execute against another Complex Order if 
one leg of the Complex Order trades at a price that is at least one 
cent better than customer orders in the same series.\33\ On one options 
exchange that has no auction for Complex Orders, a Complex Order may 
execute against another Complex Order if one leg of the Complex Order 
trades at a price that is better than priority customer interest in 
that series by at least one minimum trading increment.\34\
---------------------------------------------------------------------------

    \32\ See proposed Rule 7240(b)(2)(i).
    \33\ See, e.g., Securities Exchange Act Release Nos. 57556 
(March 26, 2008), 73 FR 18018 (April 2, 2008) (Order Approving CBOE-
2008-03) and 63558 (December 16, 2010) 75 FR 80553 (December 22, 
2010) (Order Approving NYSEAmex-2010-100).
    \34\ See ISE Rule 722(b)(2).
---------------------------------------------------------------------------

    Although BOX is not proposing to establish an auction for Complex 
Orders

[[Page 15097]]

at this time, the Exchange believes that it is consistent with the 
protection of investors and the public interest to permit Complex 
Orders (other than Non-standard Strategies) to execute against each 
other at a price that is better than cBBO by one cent, rather than the 
minimum trading increment for one of the component series for the 
following reasons.
    First, BOX will always execute Complex Orders first against 
interest on the BOX Book to the extent the Complex Order can be 
executed in full or in a permissible ratio by such interest.\35\
---------------------------------------------------------------------------

    \35\ See proposed Rule 7240(b)(3)(i) and (ii).
---------------------------------------------------------------------------

    Second, the Exchange believes that one cent is a significant and 
material improvement to customers.\36\ While the Exchange is not 
currently proposing a Complex Order auction, the Exchange believes its 
proposal is appropriate in light of the price competition for Complex 
Orders on BOX driven by other features in the proposal. For example, 
the Exchange believes that the generation of Legging Orders will 
provide enhanced price competition and greater integration of the BOX 
Book and Complex Order Book. Also, the Exchange notes that each leg of 
a Complex Order must be executed at a price equal to NBBO. The Exchange 
believes these benefits will enhance the efficiency of the BOX Book and 
the Complex Order Book, and therefore, is consistent with the 
protection of investors and the public interest.\37\
---------------------------------------------------------------------------

    \36\ Various options mechanisms such as the BOX PIP and the NOM 
price improving order have been implemented because it is recognized 
that one cent is a significant and material improvement to 
customers. See Securities Exchange Act Release Nos. 49068 (January 
13, 2004), 69 FR 2775, 2799 (January 20, 2004) (SR-BSE-2002-15) 
(Order Approving BOX Facility), and 57478 (March 12, 2008), 73 FR 
14521 (March 18, 2008) (SR-NASDAQ-2007-004) (Order Approving NASDAQ 
Options Market).
    \37\ The Chicago Board Options Exchange, Inc. permits trading 
Complex Orders in one cent minimum increments, providing additional 
price points at which Complex Orders could be executed. See 
Securities Exchange Act Release Nos. 57556 (March 26, 2008), 73 FR 
18018 (April 2, 2008) (Order Approving CBOE-2008-03)
---------------------------------------------------------------------------

    Third, the Exchange believes that permitting price improvement by 
one cent rather than by the minimum trading increment could permit more 
active Complex Order trading by allowing execution where participants 
may not otherwise be willing to offer better prices in larger 
increments.
    Fourth, since the implementation of the Penny Pilot Program, many 
of the options instruments involved in Complex Order trading now 
already have a minimum increment of one cent.\38\ As a result, even 
though the initial implementation of complex order trading rules on 
other exchanges largely pre-dates the Penny Pilot Program, the effect 
of the Exchange's proposal is already implemented in a significant 
portion of Complex Order trading on other options exchanges.
---------------------------------------------------------------------------

    \38\ The Penny Pilot Program has been in effect since January 
26, 2007. See Securities Exchange Act Release No. 55155 (Jan. 23, 
2007), 72 FR 4741 (Feb. 1, 2007) (SR-BSE-2006-49). At the beginning 
of 2013, more than 350 classes of options are included in the Penny 
Pilot Program. See BOX Regulatory Circular 2012-30, available online 
at http://boxexchange.com/f_circulars/_RC-2012-30_Penny_Pilot_Classes_Listed_on_BOX.pdf
---------------------------------------------------------------------------

    In the case of Non-standard Strategies, the execution of two 
Complex Orders against each other could occur at prices where the 
condition that ``at least one Leg of the Complex Order must trade at a 
price that is better than the corresponding bid or offer in the 
marketplace'' is not met. A Complex Order for a Non-standard Strategy 
will execute against the bids and offers on the BOX Book for the 
individual Legs of the Strategy for all of the quantity available at 
the best price in a permissible ratio until the quantities remaining on 
the BOX Book are insufficient to execute against the Complex Order. 
Following such execution, a Complex Order may execute against other 
Complex Orders, and the component Legs of the Complex Order may trade 
at prices equal to the corresponding prices on the BOX Book.\39\ In 
other words, the fact that interest on the BOX Book for a Non-standard 
Strategy is not sufficient to execute an opposite side Complex Order in 
its entirety does not mean there is no interaction or a loss of 
priority. Interest on the BOX Book will execute against a Complex Order 
for a Non-standard Strategy to the extent possible, after which the 
Complex Order may be executed against another Complex Order at a price 
equal to, but not worse than, the corresponding price on the BOX Book.
---------------------------------------------------------------------------

    \39\ See proposed Rule 7240(b)(2)(ii).
---------------------------------------------------------------------------

    This treatment of Non-standard Strategies promotes just and 
equitable principles of trade, removes impediments to and perfects the 
mechanism of a free and open market and national market system and 
otherwise is consistent with the requirements of Section 6(b)(5) of the 
Act \40\ because the alternatives to this proposal would be either to 
create a locked market on the Complex Order Book or to reject an 
incoming Complex Order that is readily executable against a resting 
Complex Order. The Exchange does not believe that either of these 
alternatives is consistent with the requirements of Section 6(b)(5) 
\41\ of the Act because the two Complex Orders would miss an 
opportunity for execution, but the orders on the BOX Book gain no 
benefit because these orders cannot interact with the incoming Complex 
Order either. The Exchange believes, therefore, that its proposal is 
the best solution to the dilemma. Furthermore, the Exchange believes 
this procedure is consistent with the intent of the principle that a 
Complex Order execute ``at least one Leg better than BBO for each 
options instrument'' as this principle assumes there is sufficient 
quantity to respect the ratio of a Complex Order when prices are 
otherwise in line. In other words, orders are executable only against 
one another where both match at a price and a quantity. Therefore, the 
Exchange believes its proposal is consistent with the rationale for 
otherwise having one Leg price better than BBO since it will give 
priority to interest on the BOX Book over Complex Orders where the 
quantity on the BOX Book is sufficient to respect the ratio of the 
executable Complex Order for a Non-standard Strategy.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f(b)(5).
    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Example 5: Execution of Leg Orders on Non-Standard Strategy

    Assume a Non-standard Strategy consisting of the simultaneous 
purchase of one Option A instrument and two Option B instruments 
(A+2B).
    The order books are initially as follows:

    BOX Book for Option A is:

Order to buy 2 at $1.00
Order to buy 5 at $0.99
Order to sell 20 at $1.06
Order to sell 2 at $1.10

    BOX Book for Option B is:

Order to buy 3 at $1.00
Order to sell 3 at $1.10

    Complex Order Book for Strategy A+2B:

Complex Order to buy 2 at $3.00
Complex Order to buy 5 at $2.90
Complex Order to sell 10 at $3.20

    Since A+2B is a Non-standard Strategy (a one-for-two ratio), no 
Implied Order for A+2B is broadcast. The cBBO is $3.00 bid, $3.26 
offered.
    In this example, a Complex Order is received to sell 2 A+2B at 
$3.00. This order can match with the existing bid for three Strategies 
at $3.00 on A+2B.
    However, as the Exchange proposes to give priority to interest on 
the BOX Book over executable Complex Orders even where no Implied Order 
is being broadcast for the Strategy, 1 of the 2

[[Page 15098]]

contracts to sell A+2B at $3.00 will execute against the orders on the 
respective Legs (selling 1 A and 2 B at $1.00 each ($1.00 + 2($1.00) = 
$3.00)). After this initial execution against the BOX Book, the order 
books are as follows:
    BOX Book for Option A is:

Order to buy 1 at $1.00
Order to buy 5 at $0.99
Order to sell 20 at $1.06
Order to sell 2 at $1.10

    BOX Book for Option B is:

Order to buy 1 at $1.00
Order to sell 3 at $1.10

    Complex Order Book for Strategy A+2B:

Complex Order to buy 2 at $3.00
Complex Order to buy 5 at $2.90
Complex Order to sell 10 at $3.20

    One Complex Order to sell A+2B at $3.00 remains.
    Because insufficient quantity remains on the bid of B at $1.00 to 
combine with the bid on A to respect the Complex Order ratio, the 
remaining order to sell 1 A+2B at $3.00 will be executed against the 
resting Complex Order to buy at $3.00. In this case, the proposed rules 
for trading Complex Orders on BOX may result in the match of two 
Complex Orders without at least one Leg having a price better than the 
best prices on the BOX Book.\42\
---------------------------------------------------------------------------

    \42\ See proposed Rule 7240(b)(2)(ii).
---------------------------------------------------------------------------

(5) Valid Order Types for Complex Orders
    Proposed Rule 7240(b)(4)(i) provides that Complex Orders may be 
entered as Fill-and-Kill orders, Limit Orders, BOX-Top Orders, Market 
Orders, or Session Orders, each as defined in existing Rule 7110. The 
Exchange proposes to delete the provision in existing Rule 7240(b)(4) 
that provides that Complex Orders may be entered as all-or-none orders 
because BOX does not have such orders. BOX currently permits Fill-and-
Kill Orders which are immediately executed against any existing orders 
at the specified price or better, up to the volume of the Fill-and-Kill 
Order. Any residual volume left is cancelled.\43\ The Exchange proposes 
Rule 7240(b)(4)(i) to add Limit Orders, BOX-Top Orders, Market Orders 
and Session Orders as order types permitted for Complex Orders. Each of 
these order types are currently permitted on BOX for single option 
series and are defined in existing Rule 7110.
---------------------------------------------------------------------------

    \43\ See existing Rule 7110(e)(1)(ii).
---------------------------------------------------------------------------

    The Exchange proposes Rule 7240(b)(4)(ii) to specify that BOX-Top 
Complex Orders are executed at the best price available in the market 
for the total quantity available from any contra bid (offer). Any 
residual volume left after part of a BOX-Top Complex Order has been 
executed is automatically converted to a limit order on the Complex 
Order Book at the net Strategy price at which the original BOX-Top 
Complex Order was executed. See the additional discussion in Section 
3(c) and Example 11 below for details on the handling of BOX-Top Orders 
which partially execute against a Legging Order on a non-penny series.
c. Legging Order Execution and Priority
    The Exchange proposes Rule 7240(c) to permit the implementation of 
Legging Orders. Proposed Rule 7240(c)(1) defines a Legging Order as ``a 
Limit Order on the BOX Book that represents one side of a Complex Order 
that is to buy or sell an equal quantity of two options series resting 
on the BOX Complex Order Book.'' A Legging Order is a firm order that 
is included in the BBO if it is equal to, or better than, the existing 
BBO.
    The Exchange proposes that Legging Orders will only be generated 
for Complex Orders with two Legs and with a ratio of one-to-one.\44\ As 
a result, no Legging Orders will be generated for Complex Orders with 
more than two Legs or with a ratio other than one-to-one. Legging 
Orders will be automatically generated on behalf of a Complex Order so 
that they are represented on the BOX Book.\45\ Unlike Implied Orders, a 
Legging Order will not necessarily be equal to or better than NBBO; 
however, the usual Exchange rules regarding filtering against NBBO \46\ 
will continue to apply to the BOX Book to ensure no Legging Order will 
be executed at a price outside NBBO.
---------------------------------------------------------------------------

    \44\ See proposed Rule 7240(c)(1).
    \45\ See proposed Rule 7240(b)(3)(ii).
    \46\ See existing Rule 7130(b).
---------------------------------------------------------------------------

    A Legging Order may be automatically generated for one Leg of a 
Complex Order at a price at which the net price can be achieved when 
the other Leg is executed against the best displayed bid or offer on 
the BOX Book at a price equal to or better than NBBO.\47\ In other 
words, a Legging Order to buy Option A, derived from a Complex Order to 
buy A+B, will only be generated if the outright best offer on BOX for 
Option B is equal to or better than NBBO.\48\ This does not necessarily 
mean that the Legging Order bid on Option A will be equal to the best 
bid on Option A on the BOX Book, nor that it will be equal to or better 
than NBBO for Option A. However, due to the NBBO filtering rules 
already in place for interest on the BOX Book,\49\ the Legging Order on 
Option A will only be eligible for execution if it is equal to NBBO and 
at a better price than any outright bid on Option A on the BOX Book.
---------------------------------------------------------------------------

    \47\ See proposed Rule 7240(c)(2). The proposed Legging Order 
rules are based on ISE
    Rules 715(k) and 722(b)(3)(ii). A market participant on the 
NASDAQ Options Market (``NOM'') may enter Price Improving Orders on 
NOM that would potentially execute at a one cent increment within 
the NBBO. See NOM Approval Order, SEC Release No. 34-57478 (March 
12, 2008) 73 FR 14521 at 14528-14530 (March 18, 2008).
    \48\ See proposed Rule 7240(c)(2).
    \49\ See existing Rule 7130(b).
---------------------------------------------------------------------------

    Similar to price improving orders on the NASDAQ Options Market 
(``NOM''), the Exchange believes that automatically generating Legging 
Orders, which will not be executed until after all other executable 
interest on the BOX Book at the same price is executed in full, will 
provide additional execution opportunities for Complex Orders without 
negatively impacting any investors in the regular market.\50\ In fact, 
the generation of Legging Orders may enhance execution quality for 
investors in the regular market by improving the price and/or size of 
the BBO and by providing additional execution opportunity for resting 
orders on the BOX Book.
---------------------------------------------------------------------------

    \50\ See NOM Approval Order, SEC Release No. 34-57478 (March 12, 
2008) 73 FR 14521 at
    14529-14530 (March 18, 2008).
---------------------------------------------------------------------------

(1) Calculation and Display of Legging Orders
    A Legging Order may be priced and ranked on the BOX Book at a price 
other than its generated price to buy (sell) and may be displayed at a 
different price in the following two cases.
    First, where the Legging Order price does not respect the price 
increment of the option series, for display purposes, it will be 
rounded down (in the case of a buy order) or up (in the case of a sell 
order) to the nearest valid trading increment. Legging Orders will be 
automatically generated at prices in one cent increments but, for 
series trading in nickels or larger increments, will be displayed at 
the nearest minimum trading increment.
    Legging Orders to buy (sell) in an options series with a minimum 
trading increment greater than one cent are displayed at the 
appropriate minimum trading increment permitted for the series below 
(above) the price of the automatically generated Legging Order, 
(rounding down to the proper increment for buy orders and up to the 
proper increment for sell orders). While a Legging Order will be 
displayed at the rounded price in the case of non-penny series, any 
execution of the Legging Order will occur at the price at which

[[Page 15099]]

it is generated and will be in a one cent increment.\51\
---------------------------------------------------------------------------

    \51\ See proposed Rule 7240(c)(2).
---------------------------------------------------------------------------

    Second, where the generated price of a Legging Order locks or 
crosses the best bid or offer of another exchange it will be ranked at 
the opposite side NBBO price and displayed on the BOX Book at a price 
rounded down (up) in the case of a buy (sell) Legging Order to the 
nearest trading increment for the options instrument. The displayed 
price of the Legging Order will be adjusted for subsequent changes to 
the opposite side NBBO in accordance with these principles if the 
adjustment will result in an improvement to the previously displayed 
price. If an incoming order is executable against such Legging Order, 
it will be executed at the NBBO.\52\
---------------------------------------------------------------------------

    \52\ See proposed Rule 7240(c)(2).
---------------------------------------------------------------------------

Example 6: Display and Execution of Legging Order That Locks/Crosses 
NBBO

    Assume the following for Option A:
    NBBO for Option A is:

NBBO Bid is $1.03
NBBO Offer is $1.04

    BOX Book for Option A is:

Order to buy 10 at $1.03
Order to sell 10 at $1.05

    First Event:
    A Complex Order to buy 10 A+B is received. The best BOX offer on 
Option B generates a Legging Order to buy 10 A at $1.04. Since this 
would lock the opposite side NBBO, it is displayed on the BOX Book as 
an order to buy at $1.03. The BOX Book for Option A then is as follows:
    BOX Book for Option A is:

Legging Order to buy 10 at $1.03
Order to buy 10 at $1.03
Order to sell 10 at $1.05

    Second Event:
    Following the First Event, an order to sell 5 A at $1.03 is 
received. This executes against the Legging Order at $1.04. Even though 
the Legging Order and the outright order to buy Option A were displayed 
at the same price, the Legging Order trades first because the price at 
which it can trade (opposite side NBBO of $1.04) gives it price 
priority.
    The NBBO and BOX Book for Option A then are as follows:
    NBBO for Option A is:

NBBO Bid is $1.03
NBBO Offer is $1.04

    BOX Book for Option A is:
Legging Order to buy 5 at $1.03
    Order to buy 10 at $1.03
Order to sell 10 at $1.05

    Third Event:
    Following the Second Event, the NBBO offer subsequently changes to 
$1.05 and the remaining 5 contracts of Option A on the Legging Order 
will be displayed at $1.04. The NBBO and BOX Book for Option A are then 
as follows:
    NBBO for Option A is:

NBBO Bid is $1.04
NBBO Offer is $1.05

    BOX Book for Option A is:

Legging Order to buy 5 at $1.04
Order to sell 10 at $1.05
Order to buy 10 at $1.03

    Where an options instrument is part of two or more distinct 
strategies, multiple Legging Orders may be generated. In this case, the 
principles above regarding display and ranking prices in the case of 
locked or crossed opposite side NBBO will be observed. The example 
below illustrates how trade allocations will be performed in the case 
where several Legging Orders are displayed and ranked at the same 
price.

Example 7: Display and Execution of Legging Orders From Multiple 
Complex Orders

    Assume the following for Option A:
    NBBO for Option A is:

NBBO Bid is $1.03
NBBO Offer is $1.04

    BOX Book for Option A is:

Order to buy 10 at $1.03
Order to sell 10 at $1.07

    First Event:
    A Complex Order to buy 10 A+B is received. The best BOX offer on 
Option B generates a Legging Order (``Order 1'') to buy 10 A at $1.04. 
Order 1 is ranked on the BOX Book at $1.04 and displayed on the BOX 
Book as an order to buy at $1.03.
    Next, a Complex Order to buy 10 A+C is received. The best BOX offer 
on Option C generates a Legging Order (``Order 2'') to buy 10 A at 
$1.05. Order 2 is ranked on the BOX Book at $1.04 and displayed on the 
BOX Book as an order to buy at $1.03.
    Next, a Complex Order to buy 10 A+D is received. The best BOX offer 
on Option D generates a Legging Order (``Order 3'') to buy 10 A at 
$1.06. Order 3 is ranked on the BOX Book at $1.04 and displayed on the 
BOX Book as an order to buy at $1.03. After the foregoing three Complex 
Orders have been entered, and the resulting Legging Orders generated, 
the BOX Book for Option A then is as follows:
    BOX Book for Option A is:

Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.03)
Legging Order to buy 10 at $1.04 (Order 2, displayed at $1.03)
Legging Order to buy 10 at $1.04 (Order 3, displayed at $1.03)
Order to buy 10 at $1.03
Order to sell 10 at $1.07

    Second Event:
    Following the First Event, the NBBO Offer for Option A changes from 
$1.04 to $1.05.
    The NBBO and BOX Book for Option A, in order of priority, then are 
as follows:
    NBBO for Option A is:

NBBO Bid is $1.03
NBBO Offer is $1.05

    BOX Book for Option A is:

Legging Order to buy 10 at $1.05 (Order 2, displayed at $1.04)
Legging Order to buy 10 at $1.05 (Order 3, displayed at $1.04)
Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.04)
Order to buy 10 at $1.03
Order to sell 10 at $1.07

    Third Event:
    Following the Second Event, the NBBO Offer for Option A changes 
from $1.05 to $1.06.
    The NBBO and BOX Book for Option A, in order of priority, then are 
as follows:
    NBBO for Option A is:

NBBO Bid is $1.03
NBBO Offer is $1.06

    BOX Book for Option A is:

Legging Order to buy 10 at $1.06 (Order 3, displayed at $1.05)
Legging Order to buy 10 at $1.05 (Order 2, displayed at $1.05)
Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.04)
Order to buy 10 at $1.03
Order to sell 10 at $1.07

    Fourth Event:
    Following the Third Event, an order to buy 10 A at $1.05 is 
received.
    The NBBO and BOX Book for Option A, in order of priority, then are 
as follows:
    NBBO for Option A is:

NBBO Bid is $1.03
NBBO Offer is $1.06

    BOX Book for Option A is:

Legging Order to buy 10 at $1.06 (Order 3, displayed at $1.05)
Order to buy 10 at $1.05
Legging Order to buy 10 at $1.05 (Order 2, displayed at $1.05)
Legging Order to buy 10 at $1.04 (Order 1, displayed at $1.04)
Order to buy 10 at $1.03
Order to sell 10 at $1.07
(2) Priority of Legging Orders
    A Legging Order may execute against an incoming order only after 
all other executable orders and quotes at the

[[Page 15100]]

same price are executed in full.\53\ Legging Orders will only be 
eligible for execution after being filtered against NBBO pursuant to 
existing Rule 7130(b).\54\ When a Legging Order is executed, the other 
component Leg of the Complex Order will be automatically executed 
against the displayed BBO.\55\
---------------------------------------------------------------------------

    \53\ See proposed Rule 7240(c)(3).
    \54\ See proposed Rule 7240(c)(3).
    \55\ See proposed Rule 7240(c)(3).
---------------------------------------------------------------------------

    The following example illustrates the interaction of orders on the 
BOX Book, Complex Orders and Legging Orders.

Example 8: Legging Order Execution

    BOX Book for Option A is:

Order to buy 10 at $1.00
Order to buy 5 at $0.99
Order to sell 20 at $1.20
Order to sell 20 at $1.25

    BOX Book for Option B is:

Order to buy 10 at $1.00
Order to sell 20 at $1.20
    Complex Order Book for Strategy A+B:
Complex Order to buy 10 at $2.25
Implied Order to buy 10 at $2.00
Implied Order to sell 20 at $2.40

    Legging Orders to buy 10 A at $1.05 (resulting from the Complex 
Order to buy 10 A+B at $2.25 minus the order to sell 20 B at $1.20) and 
10 B at $1.05 (resulting from the Complex Order to buy 10 A+B at $2.25 
minus the order to sell 20 A at $1.20) may be automatically generated, 
improving the BOX best bid for each of Leg A and Leg B, respectively, 
to $1.05.
    The resulting order books are as follows:
    BOX Book for Option A is:

Legging Order to buy 10 at $1.05
Order to buy 10 at $1.00
Order to buy 5 at $0.99
Order to sell 20 at $1.20
Order to sell 20 at $1.25

    BOX Book for Option B is:

Legging Order to buy 10 at $1.05
Order to buy 10 at $1.00
Order to sell 20 at $1.20

    Complex Order Book for Strategy A+B:

Complex Order to buy 10 at $2.25
Implied Order to buy 10 at $2.00
Implied Order to sell 20 at $2.40

    Subsequently, an outright order to sell 10 of A is received. This 
order will execute against the Legging Order to buy A at $1.05 and 
there will be an automatic execution of the other Leg of the Complex 
Order against the displayed offer for B at $1.20. As a result, the net 
price of $2.25 is achieved for the Complex Order (buy A at $1.05 + buy 
B at $1.20 = $2.25 net). Since the Complex Order to buy 10 at $2.25 has 
been filled, the Legging Order to buy B at $1.05 will be automatically 
cancelled.
    In addition to enabling the execution of the Complex Order at a net 
price of $2.25, which otherwise would not have been possible, the 
Legging Order also enhanced execution for outright orders on the BOX 
Book because (i) the incoming outright order to sell A received a 
better price ($1.05 instead of $1.00); and (ii) additional liquidity to 
execute resting interest to sell 10 of B at $1.20 was provided by the 
Complex Order.

Example 9: Priority of Legging Orders at Same Price

    BOX Book for Option A is:

Legging Order to buy 10 at $1.00
Order to buy 10 at $1.00
Order to buy 5 at $0.99
Order to sell 20 at $1.20
Order to sell 20 at $1.25

    BOX Book for Option B is:

Legging Order to buy 10 at $1.00
Order to buy 10 at $1.00
Order to sell 20 at $1.20

    Complex Order Book for Strategy A+B:

Complex Order to buy 10 at $2.20
Implied Order to buy 10 at $2.00
Implied Order to sell 20 at $2.40

    The Complex Order to buy A+B at $2.20 results in Legging Orders on 
each of Option A and Option B equal to the best outright orders on the 
BOX Book for each Leg at $1.00.
    Assume the Complex Order to buy 10 A+B at $2.20 was received prior 
to the receipt of the outright order to buy 10 A at $1.00. Thus, the 
Legging Order at $1.00 would have ``time priority'' over the outright 
order to buy A at $1.00.
    Subsequently, an order to sell 15 A at $1.00 is received. Since 
interest on the BOX Book have priority over Legging Orders at the same 
price,\56\ 10 contracts on Option A are executed against the order to 
buy 10 A at $1.00. The remaining 5 contracts to sell Option A are then 
executed, together with a matching 5 contracts of Option B purchased at 
$1.20, against the Complex Order.
---------------------------------------------------------------------------

    \56\ See proposed Rule 7240(c)(3).
---------------------------------------------------------------------------

    The order books then are as follows:
    BOX Book for Option A is:

Legging Order to buy 5 at $1.00
Order to buy 5 at $0.99
Order to sell 20 at $1.20
Order to sell 20 at $1.25

    BOX Book for Option B is:

Legging Order to buy 5 at $1.00
Order to buy 10 at $1.00
Order to sell 15 at $1.20

    Complex Order Book for Strategy A+B:

Complex Order to buy 5 at $2.20
Implied Order to buy 5 at $1.99
Implied Order to sell 15 at $2.40

    A Legging Order may be generated when at least one Complex Order 
and at least one order on the other component Leg of such Complex 
Order(s) are received. Where there are multiple Complex Orders on the 
same Strategy at the same price, which is also the best price on the 
Complex Order Book, generated Legging Orders will be aggregated such 
that only one Legging Order will exist, relating to that Strategy, with 
respect to any single option series at any time on the BOX Book. 
Partial executions against a Legging Order that is generated from 
multiple Complex Orders will be allocated among such Complex Orders and 
the related orders on the component Leg based on time priority of such 
Complex Orders and orders on the BOX Book,\57\ regardless of when the 
Legging Order is generated.
---------------------------------------------------------------------------

    \57\ See proposed Rule 7240(c)(3).
---------------------------------------------------------------------------

    The following Example 10 illustrates the allocation of orders when 
a Legging Order is generated from multiple Complex Orders.

Example 10: Time Priority of Legging Orders

    Assume the following orders on A+B bids and B offers (orders below 
are shown in descending time priority with the earliest orders at the 
top):
    Bids on A+B:

10 at $2.00 (order x)
7 at $2.00 (order y)
12 at $2.00 (order z)
Total: 29 Bids on A+B

    Offers on B:

5 at $1.00 (order a)
8 at $1.00 (order b)
10 at $1.00 (order c)
23 Offers on B

    The above results in the generation of a Legging Order to buy 23 A 
at $1.00 since sufficient bids on A+B exist to accommodate all 23 
existing offers on B.
    Assume no outright order to buy A at $1.00 exists and that, 
subsequently, an order to sell 20 A at $1.00 (order m) is received. BOX 
will allocate trades on A+B and B according to the time priority of 
each until the first 20 orders have been filled. The resulting trade 
executions are as follows (all trades at $1.00):

[[Page 15101]]



----------------------------------------------------------------------------------------------------------------
                                                  Option A                                Option B
               Qty                ------------------------------------------------------------------------------
                                          Buyer              Seller               Buyer              Seller
----------------------------------------------------------------------------------------------------------------
5................................  order x             order m             order x             order a
5................................  order x             order m             order x             order b
3................................  order y             order m             order y             order b
4................................  order y             order m             order y             order c
3................................  order z             order m             order z             order c
                                  ------------------------------------------------------------------------------
    Total........................          20 Option A executions
                                           20 Option B executions
----------------------------------------------------------------------------------------------------------------

The allocation of orders to buy A+B is determined by time priority 
because all are at the same price ($2.00). Similarly, the allocation of 
orders to sell B is determined by time priority because all are at the 
same price ($1.00). In this Example 8, note that each buyer of Option A 
is also buying an equal number of Option B because such buyer is 
actually buying A+B.
(3) Other Rules for Legging Orders
    A Legging Order is automatically removed from the BOX Book if: (i) 
Execution of the Legging Order would no longer achieve the net price of 
the Complex Order when the other component Leg is executed against the 
best displayed bid or offer on the BOX Book, (ii) the other component 
Leg of the Complex Order cannot be executed at a price equal to the 
NBBO, (iii) the Complex Order is executed in full or in part, or (iv) 
the Complex Order is cancelled or modified.\58\
---------------------------------------------------------------------------

    \58\ See proposed Rule 7240(c)(4).
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 7110(c)(2) regarding BOX-Top 
Orders to account for a unique result that occurs when a BOX-Top Order 
executes with a Legging Order at a one cent increment in a series 
traded in a larger increment. Under existing Exchange rules, BOX-Top 
Orders entered into the BOX Book are executed at the best price 
available in the market for the total quantity available from any 
contra bid (offer), and any residual volume is automatically converted 
to a limit order at the price at which the BOX-Top Order was 
executed.\59\ When a BOX-Top Order executes against a Legging Order at 
a one cent increment in a series traded in a larger increment, the 
Exchange proposes that any remaining BOX-Top Order quantity will be 
priced, ranked and displayed on the BOX Book at the nearest increment 
tick permitted for the series (rounding down to the proper increment 
for buy orders and up to the proper increment for sell orders).\60\
---------------------------------------------------------------------------

    \59\ The Exchange notes for comparison that Market Orders are 
executed at the best price obtainable for the total quantity 
available when the order reaches the BOX market and any remaining 
quantity is executed at the next best price available for the total 
quantity available. This process continues until the Market Order is 
fully executed. Use of a BOX-Top Order maintains the initial 
execution price as a limit on the execution of the remainder of an 
order. See existing Rule 7110(c)(2).
    \60\ See proposed Rule 7110(c)(2).
---------------------------------------------------------------------------

Example 11: Partial Execution of BOX-Top Order on Non-Penny Series 
Instrument With Legging Order

    Assume Option A is a non-penny series with a trading increment at 
five cent intervals. The BOX Book for Option A is as follows:
    BOX Book for Option A is:

Legging Order to buy 10 at $5.02 (Legging Order displayed at $5.00)
Order to buy 10 at $5.00
Order to sell 15 at $5.10
Order to sell 10 at $5.15

    A BOX-Top Order to sell 15 A is received. The order will execute 
for 10 contracts of A against the Legging Order at $5.02. The remaining 
quantity will be booked as a sell order for 5 at $5.05. The resulting 
BOX Book for Option A would then be:
    BOX Book for Option A is:

Order to buy 10 at $5.00
Order to sell 5 at $5.05 (ex BOX-Top Order)
Order to sell 15 at $5.10
Order to sell 10 at $5.15

    The unexecuted quantity of a BOX-Top Order that executes against a 
Legging Order on a non-penny series at the Legging Order's generated 
(not displayed) price will be rounded up (down) for sell (buy) orders 
to the nearest valid price increment. The unexecuted portion of a BOX-
Top Order will be booked at the same price as its displayed price.
(4) Proposed Amendments to PIP on Legging Orders
    At the conclusion of a PIP, any Legging Order with a price eligible 
for execution against the PIP Order will cede priority to all quotes 
and orders, including the Primary Improvement Order and any other 
Improvement Orders at the same price. In other words, a Legging Order 
may execute against a PIP Order at the end of a PIP once all other 
interest at the same price has been fully executed.\61\ The exception 
would be that a Legging Order on the same side and at the same price as 
the Primary Improvement Order at the end of a PIP may receive trade 
allocation if the Primary Improvement Order has included a ``surrender 
quantity'' as set forth in existing Rule 7150(g)(6). Note that in the 
case of a surrender quantity submitted by the Primary Improvement 
Order, such a Legging Order will trade with the PIP Order only after 
all other interest (e.g., Unrelated Orders \62\ and Improvement Orders) 
at the same price has been filled. In other words, such Legging Order 
will only receive a trade allocation after all other interest at same 
price at the end of a PIP has been filled.
---------------------------------------------------------------------------

    \61\ See proposed Rule 7150(f)(3).
    \62\ Rule 7150(a) defines Unrelated Order as a non-Improvement 
Order entered in the BOX market during a PIP.
---------------------------------------------------------------------------

Example 12: ``Surrender Quantity'' at End of PIP With Legging Order at 
Price Equal to Primary Improvement Order

    Assume at the end of a PIP to sell 30 contracts of A, the Order 
Book is as follows:
    BOX Book for Option A is:

Improvement Order to buy 20 at $1.02
Legging Order to buy 10 at $1.02
Primary Improvement Order to buy 30 at $1.02
PIP Order to sell 30 at $1.02

    Absent a ``surrender quantity'' submitted with the Improvement 
Order, the 30 contracts on Option A would be allocated as follows:
     18 (60%) to the Improvement Order.
     12 (40%) to the Primary Improvement Order.
     None to the Complex Order which generated the Legging 
Order.
    Suppose instead that the Primary Improvement Order had included a 
surrender quantity of 6 contracts (e.g., the Primary Improvement Order 
wishes to only trade 24 contracts at end of PIP). In this case, the 
trade allocation would be:
     20 to the Improvement Order.

[[Page 15102]]

     6 to the Primary Improvement Order.
     4 to the Complex Order which generated the Legging Order.
    The proposed amendments to Rules 7150(i) and 7150(j) provide that 
Legging Orders on the BOX Book will be treated in the PIP in the same 
manner as Unrelated Orders are currently. While a PIP is underway on a 
Leg which is itself part of a Strategy, it is possible that a new order 
on the Strategy or on the other component Leg (in the case of a 
Strategy with two Legs and with a ratio of one-to-one) will cause a new 
Legging Order to be generated for the Leg for which the PIP is in 
progress. Legging Orders generated on the BOX Book during a PIP will 
interact with orders in the PIP in the same manner as Unrelated Orders 
are currently.\63\
---------------------------------------------------------------------------

    \63\ No amendments to existing Rules 7150(g) or (h) are 
necessary. Proposed Rule 7150(f)(3) describes the execution of 
orders at the end of the PIP, including Legging Orders. A Legging 
Order is executed only after all other executable orders and quotes 
at the same price are executed in full.
---------------------------------------------------------------------------

    Like Unrelated Orders, a Legging Order must be executable to 
prematurely terminate the PIP or execute with the PIP Order. If a 
Legging Order is not executable, the PIP will continue through its 
duration.
Executable Orders on Same Side as a PIP Order
    The generation of a Legging Order that is on the same side as the 
PIP Order and whose price is executable against the opposite side BBO, 
an Improvement Order, a Legging Order, or the Primary Improvement 
Order, will cause the PIP to terminate early and the PIP Order will 
execute pursuant to proposed Rule 7150(f)(3).\64\
---------------------------------------------------------------------------

    \64\ See proposed Rule 7150(i).
---------------------------------------------------------------------------

    The following example shows how Legging Orders on the same side as 
the PIP Order will interact in a PIP on a single Leg:

Example 13: Executable Legging Order on Same Side as PIP Order

    BOX Book for Option A is:

Primary Improvement Order to buy 15 at $1.01
Legging Order to buy 10 at $1.02
Order to buy 10 at $1.00
Order to buy 5 at $0.99
PIP Order to sell 15 at $1.01
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Legging Order to buy 10 at $1.02
Order to buy 15 at $1.00
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B:

Complex Order to buy 10 at $2.07
Implied Order to sell 10 at $2.10

    The Complex Order to buy 10 A+B at $2.07 was received after the 
start of the PIP. Subsequently, an order on the BOX Book to sell 5 A at 
$1.02 is received prior to the end of the PIP on A. As this order is 
executable against the Legging Order at $1.02, the PIP will terminate 
prematurely and the PIP Order will execute to sell 10 at $1.02 against 
the Legging Order to buy 10 at $1.02. Thereafter, the BOX Trading Host 
will execute a purchase of 10 B at $1.05 to complete the Complex Order. 
The 5 remaining contracts of the PIP Order will execute at $1.01 with 
the PIP Primary Improvement Order.

Example 14: Executable Legging Order on Same Side as PIP Order

    Assume the same initial facts as in Example 13 above, except that 
the Complex Order received after the start of the PIP is to buy 10 A+B 
at $2.06, in which case the Legging Orders on Option A and Option B are 
generated to buy 10 at $1.01 each. The order books would be as follows:
    BOX Book for Option A is:

Primary Improvement Order to buy 15 at $1.01
Legging Order to buy 10 at $1.01
Order to buy 10 at $1.00
Order to buy 5 at $0.99
PIP Order to sell 15 at $1.01
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Legging Order to buy 10 at $1.01
Order to buy 15 at $1.00
Order to sell 50 at $1.05

    Complex Order Book for Strategy A+B:

Complex Order to buy 10 at $2.06
Implied Order to sell 10 at $2.10

    Subsequently, an order to sell 5 A at $1.01 is received, causing 
the PIP to terminate early. However, in this case, the PIP Order would 
trade with the Primary Improvement Order at $1.01 because all other 
orders have priority over Legging Orders at the same price. After the 
completion of the PIP, the sell order for 5 at $1.01 would execute 
against the Legging Order to buy 5 at $1.01. Thereafter, the BOX 
Trading Host will execute a purchase of 5 B at $1.05 to complete the 
Complex Order.
Executable Orders on Opposite Side of a PIP Order
    The generation of a Legging Order that is on the opposite side of 
the PIP Order and can be executed against the opposite side NBBO, BBO, 
or a Legging Order, will trade against the PIP Order at one cent better 
than NBBO if BBO is equal to NBBO, or at NBBO if BBO is worse than 
NBBO.\65\
---------------------------------------------------------------------------

    \65\ See proposed Rule 7150(j).
---------------------------------------------------------------------------

    The following example shows how Legging Orders on the opposite side 
of the PIP Order will interact in a PIP on a single Leg.

Example 15: Executable Legging Order on Opposite Side of PIP Order

    BOX Book for Option A is:

Primary Improvement Order to buy 15 at $1.01
Order to buy 10 at $1.00
Order to buy 5 at $0.99
PIP Order to sell 15 at $1.01
Order to sell 10 at $1.05
Order to sell 20 at $1.06

    BOX Book for Option B is:

Order to buy 15 at $1.00
Order to sell 50 at $1.03

    Complex Order Book for Strategy A+B:

Implied Order to buy 10 at $2.00
    Assume NBBO for A is $1.00 and $1.04. While the PIP is underway, a 
Complex Order on A+B to buy 10 at $2.07 is received, generating a 
Legging Order to buy 10 A at $1.04. Since the Legging Order can execute 
against the NBBO offer on A at $1.04, the Legging Order to buy 10 A at 
$1.04 will execute with the PIP Order. Thereafter, the BOX Trading Host 
will execute a purchase of 10 B at $1.03 to complete the Complex Order.
d. Related Modifications to Rules
    The following discusses proposed additional changes to the rules 
necessitated by the rule changes discussed above.
(1) HSVF Broadcast
    The Exchange proposes to amend Rule 7130(a)(2)(iv) (Execution and 
Price/Time Priority) to add Implied Orders and Legging Orders to the 
specific items that are displayed to BOX Options Participants through 
the proprietary High Speed Vendor Feed (``HSVF''). The HSVF is made 
available to all BOX Options Participants at no charge and, currently, 
the five best limit prices for single Legs on BOX are provided through 
the HSVF. The proposed amendment to Rule 7130(a)(2)(iv) will provide 
that the five best price limit prices and the best-ranked Legging Order 
(if any), as applicable and defined in Rule 7240(c)(1), will be 
provided through HSVF for each Leg. Additionally, the Exchange proposes 
that the five best limit prices and the best-ranked Implied Order (if 
any), as defined in Rule

[[Page 15103]]

7240(d)(1), will be provided through HSVF for each Strategy. All the 
other items in the HSVF as set forth in Rule 7130(a)(2) will also apply 
to Complex Orders.
(2) Definitions
    The Exchange proposes to amend the definition of ``Central Order 
Book'' or ``BOX Book'' in Rule 100(a)(10) to mean the electronic book 
of orders on each single option series maintained by the BOX Trading 
Host. The Exchange believes this clarifying change will convey the 
intended meaning to exclude Complex Orders from this definition.
    The Exchange proposes to amend existing Rule 100(a)(33) to include 
definitions of ``NBB'' to mean the national best bid and ``NBO'' to 
mean the national best offer, each as calculated by BOX based on market 
information received by BOX from OPRA. These definitions are necessary 
to support the definitions of ``cNBB'' and ``cNBO'' in proposed Rule 
7240(a).
    The Exchange proposes that the terms ``cBBO'' be defined to mean 
the best net bid and offer price for a Complex Order Strategy based on 
the BBO on the BOX Book for the individual options components of such 
Strategy, ``cNBB'' be defined to mean the best net bid price for a 
Complex Order Strategy based on the NBBO for the individual options 
components of such Strategy, ``cNBBO'' be defined to mean the best net 
bid and offer price for a Complex Order Strategy based on the NBBO for 
the individual options components of such Strategy, and ``cNBO'' be 
defined to mean the best net offer price for a Complex Order Strategy 
based on the NBBO for the individual options components of such 
Strategy.\66\
---------------------------------------------------------------------------

    \66\ See proposed Rule 7240(a)(1)-(4).
---------------------------------------------------------------------------

    The Exchange proposes to amend the definition of ``Complex Order'' 
in Rule 7240(a)(5) to mean any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, for the same account, in a ratio that is 
equal to or greater than one-to-three (.333) and less than or equal to 
three-to-one (3.00) and for the purpose of executing a particular 
investment strategy.\67\
---------------------------------------------------------------------------

    \67\ See proposed Rule 7240(a)(5). See ISE Rule 722(a)(1). See 
also, the definition of ``Complex Trade'' in the Options Order 
Protection and Locked/Crossed National Market System Plan Securities 
Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 
6, 2009). See also Exchange Rule 15000(e) and ISE Rule 1900(d).
---------------------------------------------------------------------------

    The Exchange proposes that the term ``Complex Order Book'' be 
defined to mean the electronic book of Complex Orders maintained by the 
BOX Trading Host.\68\
---------------------------------------------------------------------------

    \68\ See proposed Rule 7240(a)(6).
---------------------------------------------------------------------------

    The Exchange proposes that the term ``Complex Order Strategy'' or 
``Strategy'' be defined to mean a particular combination of components 
of a Complex Order and their ratios to one another.\69\ The Exchange 
also specifies in this rule that BOX will assign a Strategy identifier 
to each Strategy.
---------------------------------------------------------------------------

    \69\ See proposed Rule 7240(a)(7).
---------------------------------------------------------------------------

(3) Minimum Increments
    The Exchange proposes Rule 7240(b)(1) to provide that bids and 
offers on a Strategy (i.e., any Complex Order) may be expressed in any 
decimal price, and that the Legs of a Complex Order may be executed in 
one cent increments, regardless of the minimum increments otherwise 
applicable to the individual Legs of the Complex Order. The Exchange 
also proposes to delete a reference to Stock-Option Order consistent 
with the change to existing Rule 7240(b)(3) discussed below. Further, 
the Exchange proposes to delete a reference to priority for Complex 
Orders at a net price that is not a multiple of the minimum increment. 
The Exchange believes that this provision is unnecessary if Complex 
Orders may be expressed in any decimal price.
(4) Elimination of Unnecessary Order Types
    The Exchange proposes to delete existing Rule 7240(b)(3) regarding 
Execution of Complex Orders and is proposing various new provisions 
discussed above regarding Complex Order execution. In connection with 
amending the definition of Complex Order, the Exchange proposes to 
delete references to the various types of Complex Orders previously 
included in the rules (Spread, Straddle, Strangle, Combination, Ratio, 
Butterfly Spread, BOX Spread and Collar) because these designations 
will be unnecessary upon implementation of the other proposed rule 
changes. References to certain order types (Stock-Option Orders and 
SSF-option Orders) are proposed to be deleted because BOX does not have 
these order types. If these order types are to be traded on BOX in the 
future, the Exchange will file an appropriate rule change under Section 
19(b)(1) of the Act.\70\
---------------------------------------------------------------------------

    \70\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    The Exchange proposes deleting Rule 7240(b)(4) regarding Types of 
Complex Orders, to be replaced by newly proposed 7240(b)(4) discussed 
above. Additionally, the Exchange proposes renumbering Rule 7240(b)(5), 
which prohibits Complex Orders being submitted to BOX as Directed 
Orders or to the PIP, to proposed 7240(b)(4)(iii). The Exchange also 
proposes deleting Rule 7240(c) regarding how a Participant may propose 
trading a Strategy on BOX. The planned implementation of the new BOX 
functionality for Complex Orders will permit Participants to create a 
Strategy simply by submitting a Complex Order for that Strategy to BOX. 
The current provision describes a more manual process for establishing 
a Strategy that will now be unnecessary and thus, not applicable. As 
such, the Exchange believes it is appropriate to delete this provision. 
The Exchange proposes to also delete IM-7240-1 regarding trading Stock-
Option Orders and SSF-option Orders as inapplicable because BOX does 
not have these order types.
(5) BOX Trading System Capacity
    The number of Strategies created on a Complex Order Book requires 
adequate systems support and overhead and the number of different 
Strategies that could be created is nearly endless. Complex Order 
transactions represent approximately one-fourth of overall options 
industry volume. Complex Order trading is generally concentrated in a 
limited number of classes. However, the Complex Order market relies on 
orders rather than the standard options market reliance on quoted 
liquidity. As a result, message traffic for Complex Orders is only a 
fraction of the overall options market. BOX maintains a rigorous 
capacity planning program that monitors system performance and 
projected capacity demands. This program is designed to ensure that the 
system has sufficient capacity to support existing and future trading 
needs of BOX. As a general matter, the Exchange considers the potential 
impact on systems capacity of all new initiatives. In particular, the 
Exchange analyzed the potential for additional message traffic 
resulting from implementation of this Complex Order proposal and 
concluded that the Exchange has sufficient systems capacity to handle 
this implementation without degrading systems performance.
    Consistent with the limitations set forth in proposed Rule 7240(d) 
and above, the Exchange will closely monitor the generation of Implied 
Orders to ensure that they do not negatively impact system capacity and 
performance. The Exchange also will closely monitor the generation of 
Legging Orders to ensure that they do not negatively impact system 
capacity and performance. While generating

[[Page 15104]]

Implied Orders and Legging Orders does require additional systems 
processes, the Exchange expects the impact of these activities to be 
negligible under all but the most severe market conditions. Therefore, 
the Exchange believes that it possesses sufficient capacity to meet 
investor demand.
2. Statutory Basis
a. Principles of Complex Orders and Interaction With the BOX Book
    The proposed rule change is consistent with the requirements of the 
Act and the rules and regulation thereunder applicable to the Exchange 
as required by Section 19(b)(2) of the Act.\71\ As described more fully 
below, the Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act,\72\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act \73\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \71\ 15 U.S.C. 78s(b)(2).
    \72\ 15 U.S.C. 78f(b).
    \73\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The proposed rule changes are consistent with the Act and further 
the foregoing objectives of Section 6(b)(5) of the Act \74\ by 
increasing interaction between Complex Orders and interest on the BOX 
Book, including components of Complex Order Strategies; providing 
greater liquidity by providing increased opportunity for order 
execution; and improving execution prices compared to those otherwise 
available in the market.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes this proposal is a reasonable modification to 
its rules, designed to facilitate increased interaction between orders 
on the Complex Order Book and orders on the BOX Book, and to do so in 
such a manner as to ensure a dynamic, real-time trading mechanism that 
maximizes the opportunity for trade executions for both Legs and 
Complex Orders. The Exchange believes that it is appropriate and 
consistent with the Act, for the purpose of clarity and in the public 
interest, to (i) adopt the proposed amendments to Rules 100(a)(10) and 
100(a)(33), (ii) adopt the proposed amendments to Rule 7110(c)(2), 
(iii) adopt the proposed amendments to Rule 7130(a)(2)(iv), (iv) adopt 
the proposed amendments to Rules 7150(f)(3), 7150(i) and 7150(j), and 
(v) delete in its entirety the existing provisions of Rule 7240 
(Complex Orders) and adopt the proposed Rule 7240.
b. Complex Order Execution and Priority
    The Exchange believes the proposed rule changes will result in more 
efficient trading and reduce the risk that Complex Orders fail to 
execute for investors by providing additional opportunities to fill 
Complex Orders, and that the changes are consistent with the Act. The 
Exchange believes that increased interaction, where possible, on a 
continuous and real-time basis of the bids and offers on each Leg 
comprising a Strategy with the bids and offers on the corresponding 
Strategy and vice versa, through Implied Orders and Legging Orders, 
will benefit market participants and investors. The proposed rule 
changes will allow Complex Orders to interact with interest on the BOX 
Book and, conversely, allow interest on the BOX Book to interact with 
Complex Orders in an efficient and orderly manner. Orders on the BOX 
Book comprising a Strategy may interact with Complex Orders on the 
Strategy and a combination of a Complex Order and an order on a Leg 
comprising the Complex Order may also interact with orders on other 
Legs comprising the Strategy.
    The Exchange also believes the interaction of orders will benefit 
investors by increasing the opportunity for Complex Orders to receive 
execution, while also enhancing execution quality for orders on the BOX 
Book. Generally, the options industry rules for the execution of 
Complex Orders, and the current Exchange Rules, provide that two 
Complex Orders may execute against one another if the execution prices 
of the component Legs result in a net price that is better than the 
best customer limit order available for the individual component Legs. 
This permits an exchange, when executing two Complex Orders against one 
another, to execute each component Leg on the market's best bid or 
offer so long as the execution does not trade ahead of customer 
interest.
    The Exchange believes the proposed rule change for trading Complex 
Orders on BOX is a step forward in options Complex Order execution. The 
proposed rules require that, before executing against another Complex 
Order, a Complex Order on BOX will execute first against orders on the 
BOX Book if the net price of such orders is equal to the best price on 
the Complex Order Book, provided that all of the orders on the BOX Book 
are equal to or better than their respective NBBO.\75\ The Exchange 
believes this is consistent with the Act and represents two 
improvements to the rules on other options exchanges regarding Complex 
Order trading: (i) The priority of the BOX Book is not limited to ``if 
any of the bids or offers established in the marketplace consist of a 
Customer Order'' \76\ and (ii) any Complex Order execution, whether 
against another Complex Order or against interest on the BOX Book, will 
be at a price at least equal to the cNBBO.\77\ Thus, each Leg of a 
Complex Order will be executed at a price that is equal to or better 
than NBBO and BBO for that series.
---------------------------------------------------------------------------

    \75\ See proposed Rule 7240(b)(3).
    \76\ See, e.g., ISE Rule 722(b)(2).
    \77\ ``cNBBO'' is defined as the ``the best net bid and offer 
price for a Complex Order Strategy based on the NBBO for the 
individual options components of such Strategy.'' See proposed Rule 
7240(a)(3).
---------------------------------------------------------------------------

    A Complex Order will execute against other Complex Orders resting 
on the Complex Order Book if the net price is better than cBBO \78\ and 
is equal to or better than the cNBBO,\79\ except in the case of Complex 
Orders on Non-standard Strategies as described below. The proposed 
definitions of cBBO and cNBBO are consistent with the rules of another 
options exchange as previously approved by the Commission. Therefore, 
the Exchange believes this proposed change is consistent with the goals 
of the Act that an Exchange's rules be designed to remove impediments 
to and to perfect the mechanism of a free and open market and a 
national market system, and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \78\ ``cBBO'' is defined as ``the best net bid and offer price 
for a Complex Order Strategy based on the BBO on the BOX Book for 
the individual options components of such Strategy.'' See proposed 
Rule 7240(a)(1) and Commentary .08(a)(iv) to PHLX Rule 1080.
    \79\ ``cNBBO'' is defined as ``the best net bid and offer price 
for a Complex Order Strategy based on the NBBO for the individual 
options components of such Strategy.'' See proposed Rules 7240(a)(3) 
and 7240(b)(3)(iii)(A). See also, Commentary .08(a)(vi) to PHLX Rule 
1080.
---------------------------------------------------------------------------

    The exception to the priority of the BOX Book is the execution of a 
Complex Order on Non-standard Strategies,\80\ as provided in proposed 
Rule 7240(b)(2)(ii). Complex Orders for Non-standard Strategies will 
execute against interest on the BOX Book for the individual Legs of the 
Strategy for all of

[[Page 15105]]

the quantity available at the best price in a permissible ratio until 
the quantities remaining on the BOX Book are insufficient to execute 
against the Complex Order while respecting the ratio. Following such 
execution, the remaining quantity of the Complex Order may execute 
against other Complex Orders and the component Legs of the Complex 
Order may trade at prices equal to the corresponding prices on the BOX 
Book (for more detail, see Example 5 above related to Non-standard 
Strategies).
---------------------------------------------------------------------------

    \80\ ``Complex Order Strategy'' or ``Strategy'' is defined as 
``a particular combination of components of a Complex Order and 
their ratios to one another. BOX will assign a strategy identifier 
to each Strategy.'' See proposed Rule 7240(a)(7).
---------------------------------------------------------------------------

    The Exchange proposes to apply the straightforward principle of 
allowing execution of a Complex Order against another Complex Order 
when interest on the BOX Book at the same net price has already been 
executed. Thus, the execution price will be at a price better than cBBO 
(except in the case of insufficient quantity for Non-standard 
Strategies where the execution could occur at a price equal to cBBO). 
In the case of Non-standard Strategies, interest on the BOX Book will 
still have priority and be executed before a Complex Order, to the 
extent that there is sufficient quantity on the BOX Book to respect the 
ratio of the Strategy.
    The Exchange believes its proposed rules regarding executions of 
Non-standard Strategies are consistent with the goals of the Act to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system; and, in general, to protect 
investors and the public interest. In particular, the proposed rules 
ensure that interest on the BOX Book will have priority to the extent 
sufficient quantity exists on each Leg to respect the ratio of the 
Strategy.\81\ Thereafter, Complex Orders for a Non-standard Strategy 
may execute against one another and the component Legs of the Complex 
Orders may trade at prices equal to the corresponding prices on the BOX 
Book. The proposed rules prevent circumstances that may otherwise 
create a locked market on the Complex Order Book or require rejection 
of an incoming Complex Order that is executable against a resting 
Complex Order. In the absence of these safeguards, otherwise executable 
Complex Orders would lose opportunities for execution without any 
compensating benefit to interest on the BOX Book that are unable to 
interact with the incoming Complex Order. Accordingly, the Exchange 
believes that it proposes the best solution to the dilemma consistent 
with the requirements of the Act, and specifically Section 6(b)(5) 
thereof.\82\ Furthermore, the Exchange believes this procedure is 
consistent with the intent of the principle that a Complex Order 
execute ``at least one Leg better than BBO for each options 
instrument'' as this principle obviously assumes that there is 
sufficient quantity to respect the ratio of a Complex Order when prices 
are otherwise in line. In other words, orders can only execute against 
orders and an order must have both a price and a quantity. Therefore, 
the Exchange believes the proposed rules regarding executions of Non-
standard Strategies will benefit market participants and investors, 
provide additional opportunities for market participants to obtain 
executions of their Non-standard Strategies and thus, create a more 
efficient market. As such, the Exchange believes the proposal is 
consistent with the goals of the Act.
---------------------------------------------------------------------------

    \81\ See proposed Rule 7240(b)(2)(ii).
    \82\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In requiring this, the principle is designed to ensure that at 
least one Leg will execute at a price better than BBO, except in the 
limited circumstance where there is insufficient quantity, with respect 
to one of the Legs, on the BOX Book to respect the ratio of the Complex 
Order. The Exchange believes the proposed rule change is a step forward 
in Complex Order execution because Implied Orders and Legging Orders 
will increase the interaction of orders on BOX and increase 
opportunities for order execution. Additionally, the proposed rules for 
filtering Complex Orders against NBBO should provide Complex Order 
executions at prices comparably better than otherwise available in the 
market.\83\ As such, the Exchange believes the proposed rule change 
regarding Complex Order execution and priority is consistent with the 
goals of the Act to remove impediments to and to perfect the mechanism 
of a free and open market and a national market system, and to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \83\ See proposed Rule 7240(b)(3)(iii).
---------------------------------------------------------------------------

    Other exchange rules currently provide that an incoming Complex 
Order would trade with a Complex Order that is resting on the Complex 
Order Book, unless the best bid/offer on either of the component Legs 
of the Strategy were a customer.\84\ For the reason stated below, the 
Exchange is proposing no such limitation to restrict Complex Order 
execution on BOX. Because of the priority of the BOX Book over the 
Complex Order Book in the proposed rule change, a Complex Order will 
execute first against the BOX Book with respect to each component Leg, 
and any subsequent execution of the remaining quantity of the Complex 
Order will be at a price that ensures that ``at least one Leg of the 
Complex Order must trade at a price that is better than the 
corresponding bid or offer in the marketplace,'' \85\ (i.e., on BOX, at 
least one Leg of the Complex Order will execute at a price better than 
BBO), except for Complex Orders on Non-standard Strategies, which may 
be executed against other Complex Orders and the component Legs of the 
Complex Orders may trade at prices equal to the corresponding prices on 
the BOX Book.
---------------------------------------------------------------------------

    \84\ See, e.g., ISE Rule 722(b)(2) and Commentary .08(c)(iii) to 
PHLX Rule 1080.
    \85\ See proposed Rule 7240(b)(2)(i).
---------------------------------------------------------------------------

    This principle is not limited to instances where a customer limit 
order is at a price equal to the BBO. Because the component Leg Orders 
of a Complex Order will have priority and this interest on the BOX Book 
can execute with a Complex Order on the opposite side of the market, 
the proposed rule change would ensure that no resting Complex Orders 
trade before orders on the BOX Book for the component Legs. The 
Exchange believes this will provide greater opportunities for 
executions of Complex Orders on BOX, and will benefit the overall BOX 
market for the component Legs as well.
    For the reasons set forth above, the Exchange believes the proposed 
rule change regarding Complex Order execution, and the priority 
proposed for interest on the BOX Book, is consistent with the goals of 
the Act to remove impediments to and to perfect the mechanism of a free 
and open market and a national market system, and to protect investors 
and the public interest.
(1) Implied Orders and Priority of the BOX Book
    The Exchange proposes to define an Implied Order to mean ``a 
Complex Order at the cNBBO, derived from the orders at the BBO on the 
BOX Book for each component Leg of a Strategy, provided each component 
Leg is at a price equal to NBBO for that series.'' \86\ The Exchange 
believes the generation of Implied Orders is consistent with the goals 
of the Act to remove the impediments to and perfect the mechanism of a 
free and open market because their addition to the marketplace should 
facilitate additional transactions and interaction between orders on 
the Complex Order Book and orders on the BOX Book. The Exchange 
believes the addition of Implied Orders to the BOX market will benefit 
market makers, traders, and retail investors trading on BOX by 
enhancing execution quality and the likelihood and

[[Page 15106]]

efficiency of trade execution. In the absence of the proposed rule, 
Complex Orders that would otherwise execute against interest on the BOX 
Book would not trade.
---------------------------------------------------------------------------

    \86\ See proposed Rule 7240(d)(1).
---------------------------------------------------------------------------

    Implied Orders are generated and broadcast for Strategies with two 
Legs and with a ratio of one-to-one.\87\ This limitation results in a 
manageable and useful set of possible Implied Orders, removing 
impediments to and perfecting the mechanism of a free and open market. 
Limiting Implied Orders to Strategies with two Legs and with a ratio of 
one-to-one is consistent with the purposes of the Act because the 
massive number of different, potential Strategies for which Implied 
Orders could otherwise be generated would be unwieldy and consume 
significant system resources generating, screening and displaying 
unnecessary Implied Orders, resulting in a less efficient market.
---------------------------------------------------------------------------

    \87\ See proposed Rule 7240(d)(3).
---------------------------------------------------------------------------

    An Implied Order for a Strategy is calculated and broadcast if each 
of the prices of the component Leg Orders is equal to NBBO.\88\ When an 
Implied Order is no longer at the cNBBO, the Implied Order will be 
removed and a new Implied Order will be generated, provided there is 
interest on the BOX Book to generate an Implied Order at the new 
cNBBO.\89\ Also, an Implied Order is not generated if the subject 
series is going through NBBO exposure pursuant to Rule 7130(b), or 
using orders in the PIP, Facilitation Auction, or Solicitation 
Auction.\90\ Implied Orders will be removed if either component Leg 
Order is executed in full, or in part, or cancelled.\91\ Until such 
removal, Implied Orders provide additional likelihood and efficiency of 
trade execution in furtherance of the goals of the Act. Applying the 
limitations set forth in proposed Rule 7240(d) and above, the Exchange 
will closely monitor the generation of Implied Orders to ensure they do 
not negatively impact system capacity and performance.
---------------------------------------------------------------------------

    \88\ See proposed Rules 7130(a)(2)(iv) and 7240(d)(1).
    \89\ See proposed Rule 7240(d)(2).
    \90\ See proposed Rule 7240(d)(4).
    \91\ See proposed Rule 7240(d)(5).
---------------------------------------------------------------------------

    The Exchange believes automatically generating Implied Orders will 
provide additional execution opportunities for Complex Orders and 
interest on the BOX Book and thus, enhance execution quality for 
investors on BOX. The Exchange believes the additional opportunities 
for potential execution through the interaction of orders on the 
Complex Order Book and orders on the BOX Book as achieved through 
Implied Orders, and the potential for enhanced execution quality, as 
outlined above, promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market, are 
in the public interest and, therefore, consistent with the Act.
    The Exchange believes the principles set forth in this proposal 
regarding Complex Order execution and priority are an improvement over 
the existing rules in the marketplace, and further, are consistent with 
the goals of the Act to promote just and equitable principles of trade, 
to prevent fraudulent and manipulative acts, to remove impediments to 
and to perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
(2) Valid Complex Order Types
    The Exchange proposes that Complex Orders may be entered as Fill-
and-Kill Orders, Limit Orders, BOX-Top Orders, Market Orders, or 
Session Orders, each as defined in Rule 7110.\92\ The proposed order 
types currently exist on BOX today with regard to orders on the BOX 
Book and the Exchange proposes to apply them to Complex Orders. In 
particular, the Exchange believes that Fill-and-Kill Orders, Limit 
Orders, BOX-Top Orders, and Session Orders all provide valuable 
limitations on execution price and time that may protect Participants 
and investors. Additionally, Session Orders reduce the risk of 
erroneous or stale orders on the Complex Order Book in the event that a 
Participant encounters unforeseen systems issues with its connectivity 
with BOX. The Exchange believes that permitting Complex Orders to be 
entered with these varying order types will give Participants greater 
control and flexibility over the manner and circumstances in which 
their orders may be executed, modified, or cancelled, and thus, will 
provide for the protection of investors and contribute to market 
efficiency. Accordingly, the Exchange believes the proposed rule change 
is consistent with the Act.
---------------------------------------------------------------------------

    \92\ See proposed Rule 7240(b)(4)(i).
---------------------------------------------------------------------------

c. Legging Orders
    Legging Orders may be automatically generated on behalf of a 
Complex Order so they are represented at the BBO on individual 
Legs.\93\ A Legging Order is executed after all other executable orders 
and quotes at the same price are executed in full.\94\ When a Legging 
Order is executed, the other component Leg of the Complex Order will be 
automatically executed against the BBO.\95\ At the same price on the 
BOX Book, Legging Orders will be executed in time priority according to 
the corresponding Complex Order entry time.\96\ Legging Orders will 
only be eligible for execution after being filtered against NBBO 
pursuant to 7130(b).\97\
---------------------------------------------------------------------------

    \93\ See proposed Rule 7240(c)(2).
    \94\ See proposed Rule 7240(c)(3).
    \95\ See proposed Rule 7240(c)(3).
    \96\ See proposed Rule 7240(c)(3).
    \97\ See proposed Rule 7240(c)(3).
---------------------------------------------------------------------------

    The Exchange believes that automatically generating Legging Orders, 
which will be executed after all other executable interest at the same 
price is executed in full, will provide additional execution 
opportunities for Complex Orders without negatively impacting any 
investors in the regular market.\98\ In fact, the generation of Legging 
Orders may enhance execution quality for investors on the BOX Book by 
improving the price and/or size of the BBO and by providing additional 
execution opportunity for resting interest on the BOX Book.
---------------------------------------------------------------------------

    \98\ See NOM Approval Order, SEC Release No. 34-57478 (March 12, 
2008) 73 FR 14521 at 14529-14530 (March 18, 2008).
---------------------------------------------------------------------------

    The Exchange also believes that the generation of Legging Orders is 
compliant with Rule 602 of Regulation NMS (the ``Quote Rule'') because 
each Legging Order is a firm order that is included in the BBO if it is 
equal to or better than the otherwise existing BBO.\99\ The Quote Rule 
requires responsible brokers and dealers to be firm for their quotes.
---------------------------------------------------------------------------

    \99\ See NOM Approval Order, SEC Release No. 34-57478 (March 12, 
2008) 73 FR 14521 at 14528-14529 (March 18, 2008).
---------------------------------------------------------------------------

(1) Increments
    The Exchange proposes that a Legging Order will be placed on the 
BOX Book at its generated price to buy (sell) and will be displayed at 
the minimum trading increment permitted for the series (rounding down 
to the nearest valid increment for the series for buy orders and up to 
the nearest valid increment for the series for sell orders). Legging 
Orders will be automatically generated at prices in one cent increments 
but, for series trading in nickels or other larger increments, will be 
displayed at the nearest minimum trading increment for the series.\100\ 
The Exchange believes Legging Orders will provide market participants 
greater ability to execute trades at prices between the minimum trading 
increments for these series.\101\
---------------------------------------------------------------------------

    \100\ See proposed Rule 7240(c)(1).
    \101\ See NOM Approval Order, SEC Release No. 34-57478 (March 
12, 2008) 73 FR 14521 at 14529-14530 (March 18, 2008).

---------------------------------------------------------------------------

[[Page 15107]]

    The Exchange believes Legging Orders will increase opportunities 
for execution of Complex Orders, potentially increase executions of 
interest on the BOX Book, and will lead to tighter spreads and finer 
pricing on BOX. While Legging Orders may not always be displayed at 
their actual penny increment price, Legging Orders will provide 
investors the opportunity to trade at a better price than would 
otherwise be available--inside the disseminated best bid and offer for 
a particular Leg. The Exchange believes that this opportunity for 
investors to receive executions inside the disseminated BBO could 
result in better executions for investors, and that Legging Orders are 
consistent with the Act.\102\
---------------------------------------------------------------------------

    \102\ See NOM Approval Order, SEC Release No. 34-57478 (March 
12, 2008) 73 FR 14521 at 14529 (March 18, 2008).
---------------------------------------------------------------------------

    When a BOX-Top Order executes against a Legging Order at a one cent 
increment in a series traded in a larger increment, the Exchange 
proposes that any remaining BOX-Top Order quantity will be priced, 
ranked and displayed on the BOX Book at the nearest increment tick 
permitted for the series (rounded up (down) in the case of a sell (buy) 
order).\103\ The Exchange notes for comparison that market orders are 
executed at the best price obtainable for the total quantity available 
when the order reaches the BOX market and any remaining quantity is 
executed at the next best price available for the total quantity 
available. This process continues until the Market Order is fully 
executed. Use of a BOX-Top Order maintains the initial execution price 
as a limit on the execution of the remainder of an order. BOX-Top 
Orders have existed on BOX since its inception because they are 
designed to remove impediments to and to perfect the mechanism of a 
free and open market and a national market system, and, in general, 
protect investors and the public interest and the Exchange believes the 
continued use of this order type is consistent with the Act.\104\
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    \103\ See proposed Rule 7110(c)(2).
    \104\ See Securities Exchange Act Release No. 49068 (January 13, 
2004) 69 FR 2796 (January 20, 2004).
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(2) Proposed Amendments to PIP on Legging Orders
    Legging Orders may be automatically generated on behalf of a 
Complex Order so they are represented on the BOX Book at the BBO for 
the individual Legs, and will be eligible for execution after being 
filtered against NBBO. At the conclusion of a PIP, Legging Orders will 
be executed after all other executable orders and quotes at the same 
price are executed in full.\105\ Therefore, the Exchange believes it is 
appropriate and consistent with the Act that Legging Orders be treated 
as other orders on the BOX Book are treated in connection with the PIP, 
subject to the same process and priority.
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    \105\ See proposed Rule 7150(f)(3).
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    Proposed amendments to Rules 7150(i) and 7150(j) reflect that 
Legging Orders on the BOX Book will be treated, in connection with the 
PIP, in the same manner as Unrelated Orders are treated currently. 
Existing Rule 7150(a) defines Unrelated Order as a non-Improvement 
Order entered in the BOX market during a PIP. A Legging Order may be 
generated on the BOX Book for a Leg while a PIP on that Leg is 
underway. The Commission has previously found the Exchange's treatment 
of Unrelated Orders received during the PIP consistent with the 
Act.\106\ Legging Orders generated during a PIP are treated in the same 
manner as Unrelated Orders received during a PIP and will interact with 
orders in the PIP in the same manner as Unrelated Orders.\107\ A 
Legging Order is executed only after all other executable orders and 
quotes at the same price are executed in full. As a result, the 
Exchange believes the proposed changes regarding Legging Orders and 
their interaction with a PIP on a Leg is consistent with the Act.
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    \106\ See Securities Exchange Act Release No. 55415 (March 7, 
2007) 72 FR 11411 (March 13, 2007) (Approval Order Relating to the 
Treatment of Limit Orders Submitted to BOX During a PIP).
    \107\ See proposed Rules 7150(f)(3) and 7150(i)--(j).
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d. Related Modifications to Rules
(1) HSVF
    The Exchange proposes to add Complex Orders, Implied Orders and 
Legging Orders to the specific items that are displayed to Participants 
through the proprietary HSVF.\108\ In adopting Regulation NMS, the 
Commission granted self-regulatory organizations and broker-dealers 
increased authority and flexibility to offer new and unique market data 
to the public. It was believed that this authority would expand the 
amount of data available to consumers, and also spur innovation and 
competition for the provision of market data. The Exchange believes 
that the proposed rule change to add certain order information to the 
HSVF adheres to those principles by promoting increased transparency 
through the dissemination of more useful proprietary data and also by 
clarifying its availability to Participants. The HSVF is made available 
to all market participants at no charge. The Exchange is making a 
voluntary decision to make this data available, unlike the BBO which 
must be made available under the Act. The Exchange chooses to make the 
data available as proposed in order to improve market quality, to 
attract order flow, and to increase transparency. The Exchange believes 
this proposed change to make certain additional order information 
available through the HSVF is designed to remove impediments to and to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, will protect investors and the public 
interest, consistent with the Act.
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    \108\ See proposed Rule 7130(a)(2)(iv).
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(2) Complex Order Definition
    The Exchange believes that amending the definition of a Complex 
Order in Rule 7240(a) is consistent with the Act. The Exchange notes 
that the definition is consistent with the rules of other options 
exchanges and with the definition of ``Complex Trade'' in the Options 
Order Protection and Locked/Crossed National Market System Plan.\109\ 
Therefore, the Exchange believes this proposed change is consistent 
with the goals of the Act that an Exchange's rules be designed to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \109\ See ISE Rule 722(a)(1). See also, the definition of 
``Complex Trade'' in the Options Order Protection and Locked/Crossed 
National Market System Plan, Securities Exchange Act Release No. 
60405 (July 30, 2009), 74 FR 39362 (August 6, 2009). See also 
Exchange Rule 15000(e) and ISE Rule 1900(d).
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(3) Price Improvement Requirement
    Except in the case of Complex Orders on Non-standard Strategies 
which may execute at a price equal to cBBO after executions against the 
BOX Book, the Exchange proposes to allow two Complex Orders to execute 
against each other at a net price that is better than cBBO by one 
cent.\110\ On some options exchanges that provide auctions for Complex 
Orders, a Complex Order may execute against another Complex Order if 
one leg of the Complex Order trades at a price that is at least one 
cent better than customer orders in the same series.\111\ On one 
options exchange that has no auction for Complex Orders, a Complex 
Order may execute against another Complex Order if one leg of the

[[Page 15108]]

Complex Order trades at a price that is better than priority customer 
interest in that series by at least one minimum trading increment.\112\
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    \110\ See proposed Rule 7240(b)(2)(i).
    \111\ See, e.g., Securities Exchange Act Release Nos. 57556 
(March 26, 2008), 73 FR 18018 (April 2, 2008) (Order Approving CBOE-
2008-03) and 63558 (December 16, 2010) 75 FR 80553 (December 22, 
2010) (Order Approving NYSEAmex-2010-100).
    \112\ See ISE Rule 722(b)(2).
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    Although BOX is not proposing to establish an auction for Complex 
Orders at this time, the Exchange believes that it is consistent with 
the protection of investors and the public interest to permit Complex 
Orders (other than Non-standard Strategies) to execute against each 
other at a price that is better than cBBO by one cent, rather than the 
minimum trading increment for one of the component series for the 
following reasons.
    First, BOX will always execute Complex Orders first against 
interest on the BOX Book to the extent the Complex Order can be 
executed in full or in a permissible ratio by such interest.\113\
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    \113\ See proposed Rule 7240(b)(3)(i) and (ii).
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    Second, the Exchange believes that one cent is a significant and 
material improvement to customers.\114\ While BOX is not currently 
proposing a Complex Order auction, the Exchange believes the BOX 
Complex Order proposal is appropriate in light of the price competition 
for Complex Orders on BOX driven by other features in the proposal. For 
example, the Exchange believes that the generation of Legging Orders 
will provide enhanced price competition and greater integration of the 
BOX Book and BOX COB. Also, the Exchange notes that each leg of a 
Complex Order must be executed at a price equal to NBBO. The Exchange 
believes these benefits will enhance the efficiency of the BOX Book and 
the BOX COB, and therefore, is consistent with the protection of 
investors and the public interest.\115\
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    \114\ Various options mechanisms such as the BOX PIP and the NOM 
price improving order have been implemented because it is recognized 
that one cent is a significant and material improvement to 
customers. See Securities Exchange Act Release Nos. 49068 (January 
13, 2004), 69 FR 2775, 2799 (January 20, 2004) (SR-BSE-2002-15) 
(Order Approving BOX Facility), and 57478 (March 12, 2008), 73 FR 
14521 (March 18, 2008) (SR-NASDAQ-2007-004) (Order Approving NASDAQ 
Options Market).
    \115\ The Chicago Board Options Exchange, Inc. permits trading 
Complex Orders in $0.01 minimum increments, providing additional 
price points at which Complex Orders could be executed. See 
Securities Exchange Act Release Nos. 57556 (March 26, 2008), 73 FR 
18018 (April 2, 2008) (Order Approving CBOE-2008-03).
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    Third, the Exchange believes that permitting price improvement by 
one cent rather than by the minimum trading increment could permit more 
active Complex Order trading by allowing execution where participants 
may not otherwise be willing to offer better prices in larger 
increments.
    Fourth, since the implementation of the Penny Pilot Program, many 
of the options instruments involved in Complex Order trading now 
already have a minimum increment of one cent.\116\ As a result, even 
though the initial implementation of complex order trading rules on 
other exchanges largely pre-dates the Penny Pilot Program, the effect 
of the Exchange's proposal is already implemented in a significant 
portion of Complex Order trading on other options exchanges.
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    \116\ The Penny Pilot Program has been in effect since January 
26, 2007. See Securities Exchange Act Release No. 55155 (Jan. 23, 
2007), 72 FR 4741 (Feb. 1, 2007) (SR-BSE-2006-49). At the beginning 
of 2013, more than 350 classes of options are included in the Penny 
Pilot Program. See BOX Regulatory Circular 2012-30, available online 
at http://boxexchange.com/f_circulars/_RC-2012-30_Penny_Pilot_Classes_Listed_on_BOX.pdf.
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    For all of the foregoing reasons, the Exchange believes the 
proposed rule changes are consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the Exchange.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not currently trade Complex Orders. While the 
proposed rule changes would permit BOX to trade and display Complex 
Orders, the Exchange expects that no market participant or investor 
will have any additional cost or obligation with respect to the 
Exchange, BOX or Complex Orders relating to the proposed rule changes. 
No duties are imposed on any party by the proposed rule changes.
    The Exchange believes any impact of the proposed rule changes on 
market participants or investors would be at least neutral and could 
result in improved liquidity, finer pricing, better executions and 
increased competition. The Exchange further believes the proposed rule 
changes may facilitate additional executions for all BOX Options 
Participants. Moreover, the Exchange believes the proposal will enhance 
competition among the various markets for Complex Order execution, 
potentially resulting in more active Complex Order trading.
    For these reasons, the Exchange does not believe the proposed rule 
change will have any negative impact, and will not 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 written comments on 
the proposed rule change.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Exchange 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 to rule-comments@sec.gov. Please include 
File Number SR-BOX-2013-01 on the subject line.

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-BOX-2013-01. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the

[[Page 15109]]

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 
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; 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-BOX-2013-01 and should be submitted on or before March 
29, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\117\
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    \117\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05413 Filed 3-7-13; 8:45 am]
BILLING CODE 8011-01-P