Self-Regulatory Organizations; BOX Options Exchange, LLC; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to Complex Orders, 24449-24455 [2013-09770]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 80 (Thursday, April 25, 2013)]
[Notices]
[Pages 24449-24455]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09770]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69419; File No. SR-BOX-2013-01]


Self-Regulatory Organizations; BOX Options Exchange, LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to Complex Orders

April 19, 2013.

I. Introduction

    On February 20, 2013, BOX Options Exchange LLC (the ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
to amend the rules governing the trading of Complex Orders on BOX 
Market LLC (``BOX''), the options trading facility of the Exchange. On 
February 27, 2013, the Exchange filed Amendment No. 1 to the proposal. 
The proposed rule change, as modified by Amendment No. 1, was published 
for comment in the Federal Register on March 8, 2013.\3\ The Commission 
received no comment letters regarding the proposed rule change, as 
amended. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69027 (March 4, 
2013), 78 FR 15093 (March 8, 2013) (``Notice'').
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II. Description

    BOX proposes to amend its rules governing the trading of Complex 
Orders to: (i) Adopt definitions applicable to Complex Orders; (ii) 
specify additional order types for Complex Orders; (iii) revise the 
priority rules for Complex Orders; (iv) revise the rules governing the 
execution of Complex Orders and establish a filtering process for 
Complex Orders to assure that each leg of a Complex Order is executed 
at a price that is equal to or better than the National Best Bid or 
Offer (``NBBO'') and the BOX best bid or offer (``BBO'') for that 
series; (v) provide for the generation of Legging Orders (as defined 
below); (vi) describe the treatment of Legging Orders in the Price 
Improvement Period (``PIP'') auction; (vii) provide for the generation 
of Implied Orders (as defined below); (viii) delete or update 
miscellaneous provisions and rules; and (ix) provide for the display of 
Legging Orders, Complex Orders, and Implied Orders in BOX's proprietary 
High Speed Vendor Feed (``HSVF'').

A. Definitions

    BOX proposes to amend BOX Rule 7240(a) to define a Complex Order 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.\4\ BOX notes 
that its proposed definition of Complex Order is consistent with the 
definition of Complex Order in the rules of another options exchange, 
and with the definition of Complex Trade for purposes of the trade-
through exception under Options Order Protection and Locked/Crossed 
National Market System Plan.\5\ BOX also proposes to delete references 
to Stock-Option Orders and Single Stock Future-Option Orders (``SFF-
Option Order'') in the definition of Complex Order because BOX does not 
have these order types.\6\
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    \4\ BOX Rule 7240(a) currently defines a Complex Order as a 
Spread Order, Straddle Order, Strangle Order, Combination Order, 
Stock-Option Order, Single Stock Future-Option Order, Ratio Order, 
Butterfly Spread Order, BOX Spread Order, and Collar Order.
    \5\ See ISE Rule 722(a)(1) (definition of Complex Order); and 
ISE Rule 1900(d) and BOX Rule 1500(e) (definition of Complex Trade).
    \6\ See Notice, 78 FR at 15103. Similarly, BOX proposes to 
delete IM-7240-1, which addresses Stock-Option Orders and SFF-Option 
Orders. BOX noted that it will file a proposed rule change pursuant 
to Section 19(b)(1) of the Act if it plans to provide for the 
trading of Stock-Option Orders or SSF-Option Orders on BOX in the 
future. See id.
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    In addition, BOX proposes to add the following defined terms to BOX 
Rule 7240(a): Complex Order Strategy; cBBO; cNBB; cNBBO; cNBO; and 
Complex Order Book.\7\ Complex Order Strategy or Strategy is proposed 
to be defined as a particular combination of components of a Complex 
Order and their ratios to one another.\8\ cBBO is proposed to be 
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 the Strategy. cNBBO is proposed to be defined as the best 
net bid and offer price for a Complex Order Strategy based on the NBBO 
for the individual options components of the Strategy.\9\ cNBB and cNBO 
are proposed to be defined, respectively, as the best net bid price for 
a Complex Order Strategy and the best net offer price for a Complex 
Order Strategy, in each case based on the NBBO for the individual 
options components of the Strategy. Complex Order Book is proposed to 
be defined as the electronic book of Complex Orders maintained by the 
BOX Trading Host. Finally, ``Central Order Book'' or ``BOX Book'' in 
BOX Rule 100(a)(10), would be amended to clarify that these terms refer 
to the electronic book of orders on each single option series 
maintained by the BOX Trading Host.
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    \7\ See BOX Rule 7240(a).
    \8\ BOX will assign a strategy identifier to each Strategy.
    \9\ BOX also proposes to add references to the ``NBB'' and the 
``NBO'' to the existing definition of ``NBBO'' in BOX Rule 
100(a)(33). NBB and NBO are proposed to be defined as the national 
best bid and the national best offer, respectively. See BOX Rule 
100(a)(33). BOX believes that these definitions are necessary to 
support the definitions of cNBB and cNBO in BOX Rule 7240(a). See 
Notice, 78 FR at 15103.
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B. Order Types for Complex Orders

    BOX proposes to amend BOX Rule 7240(b)(4) to allow Complex Orders 
to be entered not only as Fill-and-Kill orders, as currently permitted, 
but also as Limit Orders, BOX-Top Orders, Market Orders, or Session 
Orders, as defined in BOX Rule 7110.\10\ BOX notes that it currently 
permits each of these order types for single option series.\11\ BOX 
proposes to delete a provision allowing Complex Orders to be entered

[[Page 24450]]

as all-or-none orders because BOX does not have all-or-none orders.\12\
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    \10\ See BOX Rule 7420(b)(4)(i) and (ii).
    \11\ See Notice, 78 FR at 15098.
    \12\ See id.
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    As proposed, a BOX-Top Complex Orders will be executed at the best 
price available in the market for the total quantity available from any 
contra bid (offer).\13\ Any residual volume left after the partial 
execution of a BOX-Top Complex Order will be converted automatically 
into a limit order on the Complex Order Book at the net Strategy price 
at which the original BOX-Top Complex Order was executed.\14\
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    \13\ See BOX Rule 7240(b)(4)(ii).
    \14\ See id.
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    BOX believes that Fill-and-Kill orders, Limit Orders, BOX-Top 
Orders, and Session Orders provide valuable limitations on execution 
price and time that may protect Participants and investors.\15\ In 
addition, BOX notes that Session Orders reduce the risk of erroneous or 
stale orders on the Complex Order Book if a Participant encounters 
unforeseen systems issues with its connectivity to BOX.\16\ BOX 
believes that allowing 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, thereby protecting investors and contributing 
to market efficiency.\17\
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    \15\ See Notice, 78 FR at 15106.
    \16\ See id.
    \17\ See id.
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C. Priority Rules for Complex Orders

1. Complex Orders with a One-to-One Ratio
    Currently, BOX Rule 7240(b)(2) provides that a Complex Order may be 
executed at a total net debit or credit price with another 
Participant's Complex Order without giving priority to bids or offers 
in the marketplace that are no better than the bids or offers 
comprising the total net debit or credit price, provided that, if one 
of the bids or offers in the marketplace is a Customer Limit Order, the 
price of 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.
    BOX proposes to amend BOX Rule 7240(b)(2) to provide that, except 
in the case of a Complex Order with a leg ratio other than one-to-one 
(a ``Non-Standard Strategy''), a Complex Order may be executed at a net 
credit or debit price with another Participant's Complex Order, 
provided that at least one leg of the Complex Order trades at a price 
that is better than the corresponding bid or offer in the marketplace 
by a least one minimum trading increment, as set forth in BOX Rule 
7240(b)(1) (i.e., one cent).\18\ BOX believes that giving priority at 
the same price to all established interest on the BOX Book--Customer 
and non-Customer--for the individual legs of a Complex Order represents 
an improvement over the existing practice in the options markets, where 
leg market interest has priority over a Complex Order at the same price 
only if at least one of the bids and offers in the marketplace is a 
Customer Limit Order.\19\ Because BOX will give priority to interest on 
the BOX Book, no resting Complex Order with a one-to-one ratio will 
trade before orders at the same price on the BOX Book for the component 
legs of the Complex Order.\20\
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    \18\ See BOX Rule 7240(b)(2)(i). For a discussion of Non-
Standard Strategies, see infra Section II.C.2.
    \19\ See Notice, 78 FR at 15104.
    \20\ See Notice, 78 FR at 15105.
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2. Complex Order with a Non-Standard Strategy
    BOX proposes to amend Rule 7240(b)(3) to provide that a Complex 
Order with 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.\21\ Following this execution against 
the interest on the BOX Book, the Complex Order may execute against 
another Complex Order, and the component legs of these Complex Orders 
may trade at prices that are equal to the corresponding prices on the 
BOX Book.\22\
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    \21\ See BOX Rule 7240(b)(2)(ii).
    \22\ See id. See Notice, 78 FR at 15097-15098, Example 5, for an 
example of the execution of a Complex Order with a Non-Standard 
Strategy.
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    Thus, a Complex Order with a Non-Standard Strategy would be able to 
execute against another Complex Order at the same price as interest on 
the BOX Book only after the Complex Order has executed against interest 
on the BOX Book to the extent possible, i.e., until the remaining 
quantities on the BOX Book are insufficient to execute against the 
Complex Order. BOX notes that this process assures that interest on the 
BOX Book will have priority over Complex Order interest at the same 
price to the extent that there is sufficient quantity on the BOX Book 
to execute against each leg of the Complex Order with a Non-Standard 
Strategy.\23\ BOX believes that this process could prevent a locked 
market on the Complex Order Book or the rejection of an incoming 
Complex Order that is executable against a resting Complex Order.\24\ 
Without this process, BOX believes that otherwise executable Complex 
Orders would lose execution opportunities without any compensating 
benefit to interest on the BOX Book that is unable to interact with the 
incoming Complex Order.\25\ BOX states, further, that the requirement 
to execute one leg of a Complex Order at a price better than the 
corresponding leg market price assumes not only that the leg market 
provides a price at which the Complex Order could be executed, but also 
that the leg market provides sufficient quantity to respect the ratio 
of the Complex Order.\26\
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    \23\ See Notice, 78 FR at 15105.
    \24\ See id.
    \25\ See id.
    \26\ See id.
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3. Required Amount of Price Improvement
    BOX notes that 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. 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.
    Although BOX is not proposing to establish an auction for Complex 
Orders at this time, BOX believes that it is consistent with the 
protection of investors and the public interest to permit Complex 
Orders (other than Complex Orders on Non-Standard Strategies \27\) to 
execute against each other if one leg of the Complex Order trades at a 
price that is better than the corresponding bid or offer on the BOX 
Book by one cent, rather than the minimum trading increment, for 
several reasons. First, BOX notes that it 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 that 
interest. Second, BOX believes that one cent is a significant and 
material improvement to customers. In this regard, BOX states that 
various options mechanisms, such as BOX's PIP auction and the Nasdaq 
Options

[[Page 24451]]

Market's (``NOM'') price improving order, have been implemented because 
of the recognition that one cent is a significant and material 
improvement to customers. Third, BOX notes that there is price 
competition for Complex Orders on BOX driven by other features of the 
proposal. In this regard, BOX believes that the generation of Legging 
Orders (as discussed below) will provide enhanced price competition and 
greater integration of the BOX Book and BOX Complex Order Book. In 
addition, BOX notes that each leg of a Complex Order must be executed 
at a price that is equal to or better than the NBBO for that series. 
Fourth, BOX believes that permitting price improvement by one cent 
rather than by the minimum trading increment could permit more active 
Complex Order trading by allowing executions where participants may not 
otherwise be willing to offer better prices in larger increments. 
Finally, BOX notes that since the implementation of the Penny Pilot 
Program, many of the options instruments involved in Complex Order 
trading now have a minimum trading increment of one cent. As a result, 
BOX believes that the effect of its proposal has already been 
implemented in a significant number of options instruments involved in 
Complex Order trading.
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    \27\ See supra Section II.C.1. for a discussion of the execution 
of Complex Orders on Non-Standard Strategies (noting that the 
Complex Order will first execute against interest on the BOX Book to 
the extent possible, i.e., until the remaining quantities on the BOX 
Book are insufficient to execute against the Complex Order, before 
executing against another Complex Order).
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D. Execution of Complex Orders

    BOX Rule 7240(b)(3) currently states that Complex Orders will be 
executed without consideration of any prices that might be available on 
other exchanges trading the same options contracts. BOX proposes to 
amend BOX Rule 7240(b)(3) to refer to prices on the same Strategy. 
Specifically, BOX Rule 7240(b)(3), as amended, states that Complex 
Orders will be executed without consideration of any prices on the same 
Strategy that might be available on other exchanges. In addition, BOX 
proposes to add several provisions to BOX Rule 7240(b)(3) to describe 
the execution of Complex Orders on BOX. BOX Rule 7240(b)(3)(i) states 
that Complex Orders will be executed automatically against bids and 
offers on the Complex Order Book in price/time priority, provided that 
Complex Orders will execute against each other only after bids and 
offers at the same net price on the BOX Book for the individual legs of 
the Complex Order have been executed.\28\ Complex Orders will be 
executed automatically against bids and offers on the BOX Book for the 
individual legs of the Complex Order to the extent that the Complex 
Order can be executed in full or in a permissible ratio by such bids 
and offers.\29\
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    \28\ However, as described above, a Complex Order with a Non-
Standard Strategy could execute against another Complex Order at the 
same price as the corresponding leg market prices after the Complex 
Order has executed against leg market interest until the quantities 
remaining in the leg market are insufficient to execute against the 
Complex Order. See also BOX Rule 7240(b)(2)(ii).
    \29\ See BOX Rule 7240(b)(3)(ii). See Notice, 78 FR at 15095, 
Examples 1 and 2, for examples of the execution of Complex Orders 
interest on the BOX Book and on the Complex Order Book.
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    BOX proposes to amend BOX Rule 7240(b)(3)(iii) to filter all 
inbound Complex Orders to ensure that each leg of a Complex Order is 
executed at a price that is equal to or better than the NBBO and the 
BOX BBO for each component leg of the Complex Order.\30\ Under the 
filtering process, if an inbound Complex Order is executable on BOX, 
BOX will determine whether the potential execution price is equal to or 
better than both the cNBBO and the cBBO and, if so, BOX will execute 
the inbound Complex Order according to the priority described in the 
preceding paragraph.\31\
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    \30\ See BOX Rule 7240(b)(3)(iii). See Notice, 78 FR 15096, 
Example 3, for an example of the Complex Order NBBO filtering 
process.
    \31\ See BOX Rule 7240(b)(3)(iii)(A). See also BOX Rule 
7240(a)(3)(defining ``cNBBO'') and (1)(defining ``cBBO).
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    Under BOX Rule 7240(b)(3)(iii)(B), an inbound Complex Order that 
would be executable on BOX at a price that is not equal to or better 
than both the cNBBO and the cBBO will be exposed on the Complex Order 
Book for a period of up to one second at a price that is equal to the 
cNBB (in the case of a sell order) or the cNBO (in the case of a buy 
order).\32\ Any executable opposite side orders received during the 
exposure period, including interest on the BOX Book, will execute 
immediately against the exposed Complex Order.\33\ Any unexecuted 
quantity of the Complex Order remaining at the end of the exposure 
period will be cancelled.\34\
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    \32\ See BOX Rule 7240(b)(3)(iii)(B).
    \33\ See id.
    \34\ See id.
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    Under BOX Rule 7240(b)(3)(iii), an inbound Complex Limit Order that 
is not executable on BOX but is executable against the cNBBO will be 
entered on the Complex Order Book.\35\ A BOX-Top Complex Order or a 
market Complex Order that is not executable on BOX but is executable 
against the cNBBO will be exposed on the Complex Order Book for a 
period of up to one second at a price that is equal to the cNBB (in the 
case of a sell order) or the cNBO (in the case of a buy order).\36\ Any 
executable opposite side orders received during the exposure period, 
including interest on the BOX Book, will execute immediately against 
the exposed Complex Order.\37\ Any unexecuted quantity of the Complex 
Order remaining at the end of the exposure period will be 
cancelled.\38\ An inbound Complex Order that is not executable on BOX 
and is not executable against the cNBBO will be entered on the Complex 
Order Book.\39\
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    \35\ See BOX Rule 7240(b)(3)(iii)(C)(I).
    \36\ See BOX Rule 7240(b)(3)(iii)(C)(II).
    \37\ See id.
    \38\ See id.
    \39\ See BOX Rule 7240(b)(3)(iii)(D).
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    BOX believes that the requirement that each leg of a Complex Order 
execute at a price that is equal to or better than the BOX BBO and the 
NBBO for that series represents a step forward in the execution of 
Complex Orders and improves upon the rules of other options 
exchanges.\40\
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    \40\ See Notice, 78 FR at 15104.
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E. Legging Orders

1. Generation and Removal of Legging Orders; Ranking and Display
    BOX proposes to adopt BOX Rule 7240(c) relating to Legging Orders. 
A Legging Order, which is a Limit Order on the BOX Book that represents 
one side of a Complex Order, is a firm order that will be included in 
the BOX BBO if it is equal to, or better than, the existing BOX 
BBO.\41\ A Legging Order will be generated only for a Complex Order 
with two legs and a one-to-one ratio, and only if the other leg of the 
Complex Order can be executed on BOX at the NBBO for the series.\42\ 
The price of a Legging Order is the price at which the net price of the 
Complex Order can be achieved when the other leg of the Complex Order 
is executed against the best displayed bid or offer on the BOX Book at 
a price that is equal to or better than the NBBO.\43\ Although a 
Legging Order may be generated at a price that is not equal to or 
better than the NBBO, it will be eligible for execution only after 
being filtered against the NBBO.\44\
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    \41\ See BOX Rule 7240(c)(1).
    \42\ See id.
    \43\ See BOX Rule 7240(c)(2)(i).
    \44\ See BOX Rule 7240(c)(3).
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    Except in cases in which a Legging Order locks or crosses the 
opposite side NBBO, a Legging Order will be priced and ranked on the 
BOX Book at its generated price to buy (sell) and displayed at the 
minimum trading increment permitted for the series below (above) the 
price of the Legging Order.\45\ Under BOX Rule 7240(c)(2)(i), a Legging 
Order that would lock or cross the opposite side NBBO will be ranked on

[[Page 24452]]

the BOX Book at the locking price and displayed at one minimum trading 
increment below the current NBO (for bids) or one minimum trading 
increment above the current NBB (for offers) for the applicable series 
(``display price sliding'').\46\ If the NBO increases or the NBB 
decreases, as applicable, the ranking and display prices of the Legging 
Order will be adjusted to conform with BOX Rule 7240(c)(2)(i) and will 
be displayed at the most aggressive permissible price.\47\ The 
recalculation of the display and ranking prices for a Legging Order 
will be performed to the extent it achieves a more aggressive price, 
and the ranked and displayed prices of the Legging Order may be 
adjusted one or more times as required by changes to the prevailing 
NBBO.\48\ A Legging Order subject to display price-sliding will retain 
its original generated price irrespective of the price(s) at which the 
Legging Order is ranked and displayed.\49\ In addition, all Legging 
Orders that are re-ranked and re-displayed pursuant to the display-
price sliding process will retain their priority, as compared to other 
Legging Orders subject to display-price sliding, based upon the time 
the Exchange received the Complex Orders from which the Legging Orders 
were generated.\50\
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    \45\ See BOX Rule 7240(c)(1).
    \46\ See Notice, 78 FR at 15099, Example 6, for an example of 
the operation of the display-price sliding process.
    \47\ See BOX Rule 7240(c)(2)(ii).
    \48\ See BOX Rule 7240(c)(2)(ii) and (iii).
    \49\ See BOX Rule 7240(c)(2)(ii).
    \50\ See id.
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    BOX proposes that, under BOX Rule 7240(b)(4) a Legging Order will 
be removed automatically from the BOX Book if: (i) the execution of the 
Legging Order would no longer achieve the net price of the Complex 
Order when the other 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.\51\
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    \51\ See BOX Rule 7240(c)(4).
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2. Execution of Legging Orders
    BOX proposes that, under BOX Rule 7240(c), a Legging Order will be 
executed at its generated price and only after all other executable 
orders and quotes at the same price are executed in full.\52\ When a 
Legging Order is executed, the other component leg of the Complex Order 
will be executed automatically against the displayed BOX BBO.\53\ 
Executions of a Legging Order generated by multiple Complex Orders at 
the same price will be allocated among the Complex Orders in time 
priority based on the respective timestamps of the Complex Orders.\54\ 
An incoming order that is executable against the Legging Order will be 
executed at the Legging Order's generated price.\55\
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    \52\ See BOX Rule 7240(c)(1) and (3). See Notice, 78 FR at 
15100, Examples 8 and 9, for examples of the execution and priority 
of Legging Orders.
    \53\ See BOX Rule 7240(c)(3).
    \54\ See id. See Notice, 78 FR at 15100, Example 10, for an 
example of the allocation of orders when a Legging Order is 
generated from multiple Complex Orders.
    \55\ See BOX Rule 7240(c)(1).
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    BOX believes that Legging Orders will provide additional execution 
opportunities for Complex Orders without negatively impacting investors 
in the regular market.\56\ BOX also believes that the generation of 
Legging Orders may enhance execution quality for investors in the 
regular market by improving the price and/or size of the BOX BBO and by 
providing additional execution opportunities for resting orders on the 
BOX Book.\57\
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    \56\ See Notice, 78 FR at 15098.
    \57\ See id.
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3. Execution of a BOX-Top Order in a Non-Penny Series Against a Legging 
Order
    BOX proposes to amend BOX Rule 7110(c)(2) to address a result that 
occurs when a BOX-Top Order that is not a Complex Order executes 
against a Legging Order in a one cent increment in a series traded in a 
larger increment. Under current BOX Rule 7110(c)(2), BOX-Top Orders 
that are 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.\58\ BOX proposes that, under BOX Rule 7110(c)(2), as amended, 
when a BOX-Top Order that is not a Complex Order executes against a 
Legging Order in a one-cent increment in a series that trades in a 
larger increment, the 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.\59\
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    \58\ See Notice, 78 FR at 15101.
    \59\ See id. and BOX Rule 7110(c)(2). Example 11, 78 FR at 
15101, describes the partial execution of a BOX-Top Complex Order in 
a non-penny series against a Legging Order.
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F. Legging Orders in the PIP

    BOX proposes to amend BOX Rule 7150 to describe the treatment of 
Legging Orders in the PIP. Legging Orders generated during a PIP will 
be 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.\60\ However, at the conclusion of a PIP, a Legging 
Order may execute against the PIP Order only after all other quotes and 
orders at the same price, including the Primary Improvement Order and 
any other Improvement Orders, have been executed in full, except in the 
case of a Primary Improvement Order with a ``surrender quantity,'' as 
provided in BOX Rule 7150(g)(5).\61\
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    \60\ See Notice, 78 FR at 15107. An Unrelated Order is a non-
Improvement Order entered into the BOX market during a PIP. See BOX 
Rule 7150(a).
    \61\ See BOX Rule 7150(f)(3) and Notice, 78 FR at 15101. Example 
12, 78 FR at 15101-15102, provides an example of the execution of a 
Legging Order and a Primary Improvement Order with a surrender 
quantity.
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    Like an Unrelated Order, a Legging Order must be executable to 
prematurely terminate the PIP or execute with the PIP Order.\62\ The 
generation of a Legging Order on the same side as the PIP Order with a 
price that 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.\63\ The generation of a Legging Order on 
the opposite side of the PIP Order that could execute against the 
opposite side NBBO, BBO, or a Legging Order will trade against the PIP 
Order at one cent better than the NBBO if the BOX BBO is equal to the 
NBBO, or at the NBBO if the BOX BBO is worse than the NBBO.\64\
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    \62\ See Notice, 78 FR at 15102.
    \63\ See id and BOX Rule 7150(i). Examples 13 and 14, 78 FR at 
15102, demonstrate the execution of orders when an executable 
Legging Order is on the same side as a PIP Order.
    \64\ See Notice, 78 FR at 15102, and BOX Rule 7150(j). Example 
15, 78 FR at 15102, demonstrates the execution of orders when an 
executable Legging Order is on the opposite side of a PIP Order.
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G. Implied Order

    BOX proposes to adopt BOX Rule 7240(d) to provide for the 
generation of Implied Orders. An Implied Order is a Complex Order at 
the cNBBO that is derived from orders at the BBO on the BOX Book for 
each component leg of a Strategy, provided that each component leg is 
at a price that is equal to the NBBO for that series.\65\ BOX will 
generate Implied Orders only for Strategies with two legs and a one-to-
one ratio.\66\ An Implied Order will be

[[Page 24453]]

removed when it is no longer at the cNBBO, 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 and each component leg is at a price 
that is equal to the NBBO for that series.\67\ An Implied Order will be 
removed if either component leg of the order is executed, in full or in 
part, or cancelled.\68\
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    \65\ See BOX Rule 7240(d)(1).
    \66\ See BOX Rule 7240(d)(3). BOX will not generate an Implied 
Order for a series going through NBBO exposure pursuant to BOX Rule 
7130(b), or using orders in the PIP, the Facilitation Auction, or 
the Solicitation Auction. See BOX Rule 7240(d)(4).
    \67\ See BOX Rule 7240(d)(2).
    \68\ See BOX Rule 7240(d)(5).
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    An Implied Order on the Complex Order Book will execute when a 
Complex Order matches the Implied Order.\69\ An Implied Order has 
priority over a resting Complex Order at the same price, and Implied 
Orders at the same price will execute in time priority according to the 
order entry time of each component leg of the order on the BOX 
Book.\70\
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    \69\ See BOX Rule 7240(d)(6)(i).
    \70\ See BOX Rule 7240(d)(6)(ii) and (iii). See Notice, 78 FR 
15096, Example 4, for an example of the generation and execution of 
an Implied Order.
---------------------------------------------------------------------------

    BOX believes that the generation of Implied Orders should 
facilitate additional transactions and interaction between orders on 
the Complex Order Book and orders on the BOX Book, and will benefit 
market makers, traders, and retail customers by enhancing the 
likelihood and efficiency of trade execution.\71\ BOX also believes 
that Implied Orders will provide additional execution opportunities for 
Complex Orders and interest on the BOX Book.\72\ BOX believes, further, 
that generating Implied Orders only for Strategies with two legs and a 
one-for-one ratio will produce a manageable and useful set of possible 
Implied Orders.\73\ BOX represents that it will closely monitor the 
generation of Implied Orders to ensure that they do not negatively 
impact system capacity and performance.\74\
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    \71\ See Notice, 78 FR at 15105-15106.
    \72\ See Notice, 78 FR at 15106.
    \73\ See id.
    \74\ See id.
---------------------------------------------------------------------------

H. Additional Changes

    BOX Rule 7240(b)(1) currently provides that bids and offers on 
Complex Orders may be expressed in any decimal price pursuant to BOX 
Rule 7050 (Minimum Trading Increments), and the options leg(s) of a 
stock-option order may be executed in one cent increments, regardless 
of the minimum increments otherwise applicable to the individual option 
legs of the order. Current BOX Rule 7240(b)(1) also provides that 
Complex Orders expressed in net price increments that are not multiples 
of the minimum increment are not entitled to the same priority as 
Complex Orders expressed in increments that are multiples of the 
minimum increment.
    BOX proposes to retain the provision that provides that bids and 
offers on Complex Orders may be expressed in any decimal price, and the 
leg(s) of a Complex Order maybe executed in one cent increments, 
regardless of the minimum increments otherwise applicable to the 
individual legs of the order. In addition, BOX proposes to amend BOX 
Rule 7240(b)(1) in two ways. First, as discussed above, BOX proposes to 
delete the reference to stock-option order as BOX does not have stock-
option orders. Second, BOX proposes to delete the reference to Complex 
Orders priced in increments that are not multiples of the minimum 
increment because BOX believes that this provision is unnecessary if 
Complex Orders may be expressed in any decimal price.
    Currently BOX Rule 7240(b)(5) prohibits a Complex Order from being 
submitted to the PIP or submitted to BOX as a Directed Order. BOX 
proposes to renumber BOX Rule 7240(b)(5) as BOX Rule 7240(b)(4)(iii) 
but not change the prohibition under the current Rule. BOX also 
proposes to delete BOX Rule 7240(c), which describes a manual process 
for establishing a Strategy on BOX.\75\
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    \75\ According to the Exchange, BOX Rule 7240(c) will be 
unnecessary following the implementation of the new BOX 
functionality for Complex Orders that will allow Participants to 
create a Strategy by submitting a Complex Order for that Strategy to 
BOX.
---------------------------------------------------------------------------

I. Display of Legging Orders, Complex Orders, and Implied Orders in the 
HSVF

    BOX proposes to amend BOX Rule 7130(a)(2)(iv) to provide that BOX's 
proprietary HSVF vendor feed will include the best-ranked Legging Order 
and the five best-priced Complex Orders and the best-ranked Implied 
Order (if any) for each Complex Order Strategy. BOX makes the HSVF 
available to all market participants at no charge.\76\ BOX believes 
that adding information about Legging Orders, Complex Orders, and 
Implied Orders to the HSVF could improve market quality, attract order 
flow, and increase transparency.\77\
---------------------------------------------------------------------------

    \76\ See Notice, 78 FR at 15107. See also BOX Rule 7130(a)(2).
    \77\ See id.
---------------------------------------------------------------------------

J. BOX Trading System Capacity

    BOX represents that it has analyzed the potential for additional 
message traffic that could result from the proposal and has concluded 
that it has sufficient system capacity to handle the implementation of 
the proposed changes without degrading system performance.\78\ BOX 
represents that it will closely monitor the generation of both Implied 
Orders and Legging Orders to ensure that they do not negatively impact 
system capacity and performance.\79\ BOX notes that although the 
generation of Implied Orders and Legging Orders will require additional 
systems processes, BOX believes that the impact of these activities 
will be negligible under all but the most severe market conditions.\80\ 
Accordingly, BOX believes that it possesses sufficient capacity to meet 
investor demand.\81\
---------------------------------------------------------------------------

    \78\ See Notice, 78 FR at 15103.
    \79\ See id.
    \80\ See Notice, 78 FR at 15103-15104.
    \81\ See Notice, 78 FR at 15104.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\82\ In particular, for the reasons discussed below, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\83\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to 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.
---------------------------------------------------------------------------

    \82\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \83\ 15 U.S.C. 78f(b)(5).

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[[Page 24454]]

A. Definitions

    The proposal revises or adopts several defined terms used in BOX's 
rules. The Commission notes that BOX's new definition of Complex Order 
\84\ is consistent with the definition of Complex Order adopted by 
other options exchanges.\85\ The Commission also believes that 
eliminating references to Stock-Option Orders and Stock-SSF Orders in 
the definition of Complex Order could eliminate potential confusion and 
help to assure the accuracy of BOX's rules because BOX does not have 
these order types.\86\ Similarly, the Commission believes that the 
revised definition of Central Order Book or BOX Book and the new 
definition of Complex Order Book are designed to clearly identify and 
distinguish between, respectively, the electronic book of orders on 
single option series and the electronic book of Complex Orders.\87\ The 
Commission believes that the definitions of NBB and NBO would identify 
these terms and specify BOX's method for calculating them, i.e., 
through information that BOX receives from OPRA.\88\ In addition, BOX 
states that the definitions of NBB and NBO are necessary to support its 
definitions of cNBB and cNBO.\89\ The Commission notes that BOX's 
definitions of cBBO, cNBBO, and Complex Order Strategy are comparable 
to definitions adopted by another options exchange.\90\
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    \84\ See BOX Rule 7240(a)(5).
    \85\ See, e.g., ISE Rule 721(a)(1) and CBOE Rule 6.53C(a)(1).
    \86\ See Notice, 78 FR at 15103. BOX acknowledged that it must 
file a proposed rule change with the Commission pursuant to Section 
19(b)(1) of the Act if it plans to provide for the trading of Stock-
Option Order or SSF-Option Orders on BOX in the future. See id.
    \87\ See BOX Rules 100(a)(10) and 7240(a)(6).
    \88\ See BOX Rule 100(a)(33).
    \89\ See Notice, 78 FR at 15103.
    \90\ See Phlx Rule 1080, Commentary .08(a)(ii), (iv), and (vi).
---------------------------------------------------------------------------

B. Order Types for Complex Orders

    The Commission believes that amending BOX Rule 7240(b)(4) to allow 
Complex Orders to be entered as Limit Orders, BOX-Top Orders, Market 
Orders, and Session Orders could provide market participants with 
flexibility in trading Complex Orders on BOX and provide a means to 
limit execution price or time.\91\ The Commission notes, in addition, 
that BOX currently permits each of these orders types for orders on 
single option series.\92\ The Commission believes that deleting the 
reference in BOX Rule 7240(b)(4) to all-or-none orders, an order type 
that BOX does not have, could eliminate potential confusion and help to 
assure the accuracy of BOX's rules.
---------------------------------------------------------------------------

    \91\ See Notice, 78 FR at 15106.
    \92\ See Notice, 78 FR at 15106, and BOX Rule 7110.
---------------------------------------------------------------------------

C. Priority Rules for Complex Orders

    As described more fully above, BOX Rule 7240(b)(2) addresses the 
priority of Complex Orders. The Commission believes that BOX Rule 
7240(b)(2)(i), which addresses the priority of Complex Orders with a 
one-to-one ratio, is designed to protect the priority of customer and 
non-customer established interest in the leg market by providing that a 
Complex Order with a one-to-one ratio that trades with another Complex 
Order must execute at a price that is better than established interest 
in the leg market by one penny.
    The Commission also believes that BOX Rule 7240(b)(2)(ii), which 
applies to Complex Orders with a Non-Standard Strategy, is designed to 
protect the priority of orders on the BOX Book by requiring a Complex 
Order to execute first against interest on the BOX Book at the best 
price to the extent possible, and only then permitting Complex Orders 
to execute against each other at that price. Thus, following the 
executions against the best-priced interest on the BOX Book, a Complex 
Order would no longer be executable against interest on the BOX Book at 
the best price because the BOX Book would lack sufficient quantity to 
fill the Complex Order at a permissible ratio at that price.\93\
---------------------------------------------------------------------------

    \93\ As BOX notes, orders are executable against each other only 
when both the price and the quantity of the orders match. See 
Notice, 78 FR at 15097.
---------------------------------------------------------------------------

D. Execution of Complex Orders

    The Commission notes that BOX Rule 7240(b)(3), as amended, which 
will allow a Complex Order to be executed without consideration of the 
prices on a Strategy that might be available on other exchanges, is 
consistent with the rules of another options exchange.\94\
---------------------------------------------------------------------------

    \94\ See CBOE Rules 6.53C(c)(ii) and (d)(v) (allowing complex 
orders submitted to the Complex Order Book and the Complex Order 
Auction to be executed without consideration to the prices of the 
same complex orders that might be available on other exchanges).
---------------------------------------------------------------------------

    BOX Rules 7240(b)(3)(i) and (ii) provide that Complex Orders will 
be executed in price/time priority and that, at the same net price, a 
Complex Order will execute first against interest on the BOX Book to 
the extent that the Complex Order can be executed in full or in a 
permissible ratio by interest on the BOX Book. The Commission notes 
that these provisions are designed to protect the priority of interest 
on the BOX Book by requiring a Complex Order to execute first against 
interest on the BOX Book to the extent possible before executing 
against another Complex Order at the same price.
    Under BOX Rule 7240(b)(3)(iii), all inbound Complex Orders 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 component series of the Complex Order. The Commission previously 
approved BOX's NBBO filtering process for orders for individual options 
series.\95\ The Commission believes that BOX's filtering process for 
Complex Orders could benefit investors by ensuring that no leg of a 
Complex Order trades at a price that is worse than the BOX BBO and the 
NBBO for that series.
---------------------------------------------------------------------------

    \95\ See BOX Rule 7310(b)(3) and Securities Exchange Act Release 
No. 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004) (order 
approving File No. SR-BSE-2002-15).
---------------------------------------------------------------------------

E. Legging Orders

1. Generation, Display, and Execution of Legging Orders
    As described more fully above, BOX proposes to provide for the 
generation of Legging Orders on behalf of certain Complex Orders. The 
Commission believes that Legging Orders could facilitate the execution 
of Complex Orders on BOX by increasing the opportunities for Complex 
Orders to execute against interest in the leg market, thereby 
benefitting investors seeking to execute Complex Orders. In addition, 
the Commission believes that Legging Orders could benefit participants 
in the leg market by providing additional liquidity, and potentially 
more favorable executions, for leg market interest. The Commission 
notes that it previously approved a similar proposal by another options 
exchange to implement Legging Orders.\96\
---------------------------------------------------------------------------

    \96\ See Securities Exchange Act Release No. 66234 (January 25, 
2012), 77 FR 4852 (January 31, 2012) (order approving File No. SR-
ISE-2011-82).
---------------------------------------------------------------------------

    The Commission notes that, on BOX, a Legging Order may be generated 
in a $0.01 increment in an options series that trades in larger 
increments. A Legging Order in a non-penny series will be priced and 
ranked on the BOX Book at its generated price to buy (sell) but will be 
displayed at the minimum trading increment permitted for the series 
below (above) the price of the Legging Order (except as may be 
described in Section II.E.1 above).\97\ The

[[Page 24455]]

Commission believes that Legging Orders in non-penny classes would 
allow orders to be executed at a better price than would otherwise be 
available--inside the disseminated best bid and offer for the 
security--potentially resulting in better executions for investors.
---------------------------------------------------------------------------

    \97\ See BOX Rule 7240(c)(1). The Commission notes that Price 
Improving Orders on NOM also may be entered at a price that is 
smaller than the minimum price variation for the series and are 
rounded to the nearest minimum price variation for display. See NOM 
Rules, Chapter VI, Section 1(e)(6). See also Securities Exchange Act 
Release No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) 
(order approving File Nos. SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080).
---------------------------------------------------------------------------

2. Display Price-Sliding Process
    As described more fully above, a Legging Order that would lock or 
cross the opposite side NBBO will be ranked on the BOX Book at the 
locking price and displayed at one minimum trading increment below the 
current NBO (for bids) or one minimum trading increment above the 
current NBB (for offers) for the applicable series.\98\ The ranked and 
displayed prices of a Legging Order subject to display-price sliding 
may be adjusted one or more times as required by changes to the 
prevailing NBBO.\99\ The Commission notes that BOX's display price-
sliding process for Legging Orders is consistent with the display-price 
sliding process of another options market, which the Commission has 
approved.\100\ The Commission notes, further, that Rule 608(c) of 
Regulation NMS \101\ requires BOX to comply with and enforce compliance 
by its members with the Options Order Protection and Locked/Crossed 
Markets Plan, including the requirement to avoid displaying locked and 
crossed markets.\102\ The Commission believes that BOX's display-price 
sliding process for Legging Orders is designed to help assure 
compliance with this requirement.
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    \98\ See BOX Rule 7240(c)(2)(i).
    \99\ See BOX Rule 7240(c)(2)(ii).
    \100\ See BATS Rule 21.1(h) and Securities Exchange Act Release 
No. 61419 (January 26, 2010), 75 FR 5157 (February 1, 2010) (File 
No. SR-BATS-2009-31) (order approving rules governing options 
trading on BATS Options Exchange).
    \101\ 17 CFR 242.608(c).
    \102\ See 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).
---------------------------------------------------------------------------

3. Execution of a Legging Order Against a BOX-Top Order
    Under BOX Rule 7110(c)(2), as amended, when a BOX-Top Order in a 
non-penny series executes in part against a Legging Order in a one-cent 
increment, the remaining quantity of the BOX-Top Order 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. The Commission believes that this provision could help to 
preserve the intent of the sender of the BOX-Top Order to limit the 
price at which its order can be executed while assuring that the 
remaining quantity of the BOX-Top Order is priced, ranked, and 
displayed on the BOX Book in a permissible trading increment.

F. Legging Orders in the PIP

    Although Complex Orders may not be submitted to the PIP,\103\ 
Legging Orders may participate in the PIP. At the conclusion of a PIP, 
a Legging Order will cede priority to all other executable orders and 
quotes at the same price, including the Primary Improvement Order and 
any other Improvement Orders, except that a Legging Order on the same 
side and at the same price as the Primary Improvement Order could 
receive an allocation if the Primary Improvement Order includes a 
surrender quantity.\104\ The Commission notes that the priority 
treatment of Legging Orders in the PIP is consistent with the priority 
treatment of Legging Orders outside of the PIP, which are executed only 
after all other executable orders and quotes at the same price are 
executed in full.\105\
---------------------------------------------------------------------------

    \103\ See BOX Rule 7240(b)(4)(iii).
    \104\ See BOX Rule 7240(c)(2)(ii).
    \105\ See BOX Rule 7240(c)(3).
---------------------------------------------------------------------------

    BOX Rules 7150(i) and (j), as amended, identify circumstances in 
which a Legging Order, like an Unrelated Order, could cause a PIP to 
terminate early. BOX represents that Legging Orders generated during a 
PIP will be treated in the same manner as Unrelated Orders received 
during a PIP are treated currently and will interact with orders in the 
PIP in the same manner as Unrelated Orders.\106\ The Commission 
previously has found the treatment of Unrelated Orders received during 
the PIP to be consistent with the Act.\107\
---------------------------------------------------------------------------

    \106\ See Notice, 78 FR at 15107.
    \107\ See Notice, 78 FR at 15107 and Securities Exchange Act 
Release No. 55415 (March 7, 2007), 72 FR 11411 (March 13, 2007) 
(order approving File No. SR-BSE-2006-03).
---------------------------------------------------------------------------

G. Implied Orders

    As described more fully above, BOX proposes to provide for Implied 
Orders. The Commission believes that Implied Orders could benefit 
investors by providing additional execution opportunities for both 
Complex Orders and interest on the BOX Book. In addition, the 
Commission believes that Implied Orders could facilitate interaction 
between the Complex Order Book and the BOX Book, potentially resulting 
in a more competitive and efficient market, and better executions for 
investors.

H. Additional Changes

    The proposal deletes BOX Rule 7240(c), which refers to a manual 
process for establishing a Strategy that will no longer be necessary 
following the implementation of BOX's new Complex Order functionality, 
and IM-7240-1, which addresses Stock-Option Orders and SSF-Option 
Orders that, according to BOX, do not currently trade on the Exchange. 
The Commission believes that deleting these provisions could help to 
assure the accuracy of BOX's rules and eliminate potential confusion. 
In addition, the Commission notes that BOX Rule 7240(b)(1), as amended, 
regarding the minimum trading increment for Complex Orders, is 
consistent with rules adopted by other options exchanges.\108\
---------------------------------------------------------------------------

    \108\ See, e.g., ISE Rule 722(b)(1) and NYSE MKT Rule 980NY, 
Commentary .01.
---------------------------------------------------------------------------

I. Display of Legging Orders, Complex Orders, and Implied Orders in the 
HSVF

    BOX proposes to include information regarding Legging Orders, 
Complex Orders, and Implied Orders in its proprietary HSVF vendor feed, 
which BOX makes available to all market participants at no charge.\109\ 
The Commission believes that including this additional information in 
the HSVF could protect investors and the public interest by increasing 
the transparency of BOX's market and facilitating price discovery.
---------------------------------------------------------------------------

    \109\ See BOX Rule 7130(a)(2) and (a)(2)(iv) and Notice, 78 FR 
at 15107.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\110\ that the proposed rule change (SR-BOX-2013-01), as amended, 
is approved.
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\111\
---------------------------------------------------------------------------

    \111\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-09770 Filed 4-24-13; 8:45 am]
BILLING CODE 8011-01-P