Self-Regulatory Organizations; BOX Options Exchange LLC; Order Granting Approval of a Proposed Rule Change To Adopt New Trade Allocation Algorithms for Matching Trades at the Conclusion of the PIP and the COPIP, 49361-49367 [2014-19704]
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Federal Register / Vol. 79, No. 161 / Wednesday, August 20, 2014 / Notices
industry practice. As such, the proposed
rule change is designed to promote the
prompt and accurate clearance and
settlement of securities transactions and
derivatives agreements, contracts, and
transactions within the meaning of
Section 17A(b)(3)(F) 7 of the Act.
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:
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed changes to the Rules in
order to incorporate references to the
2014 ISDA Definitions will apply
consistently across all Participants and
Non-Participant Parties and facilitate
changes sought to be made throughout
the CDS market. Furthermore, the
proposed changes to the Rules in order
to incorporate references to the 2014
ISDA Definitions do not preclude other
market participants from making similar
changes (and indeed it is expected that
other market participants will do so,
including for uncleared transactions).
ICE Clear Europe does not expect that
the proposed changes will affect access
to clearing for Participants or their
customers, or materially affect the cost
of clearing. As a result, ICE Clear Europe
does not believe the proposed rule
change will have any impact, or impose
any burden, on competition not
appropriate in furtherance of the
purposes of the Act.
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml ) or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ICEEU–2014–13 on the subject line.
emcdonald on DSK67QTVN1PROD with NOTICES
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments relating to the
proposed changes to the rules have not
been solicited or received. ICE Clear
Europe will notify the Commission of
any written comments received by ICE
Clear Europe.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
7 15
16:44 Aug 19, 2014
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BILLING CODE 8011–01–P
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ICEEU–2014–13. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings will also be available for
inspection and copying at the principal
office of ICE Clear Europe and on ICE
Clear Europe’s Web site at https://
www.theice.com/clear-europe/
regulation.
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–ICEEU2014–13 and should
be submitted on or before September 10,
2014.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–19705 Filed 8–19–14; 8:45 am]
Electronic Comments
U.S.C. 78q–1(b)(3)(F).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–72848; File No. SR–BOX–
2014–16]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Order
Granting Approval of a Proposed Rule
Change To Adopt New Trade
Allocation Algorithms for Matching
Trades at the Conclusion of the PIP
and the COPIP
August 14, 2014.
I. Introduction
On June 16, 2014, BOX Options
Exchange LLC (‘‘Exchange’’ or ‘‘BOX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend its rules regarding the
Price Improvement Period (‘‘PIP’’) and
Complex Order Price Improvement
Period (‘‘COPIP’’) (‘‘auction
mechanisms’’). The proposed rule
change was published for comment in
the Federal Register on July 2, 2014.3
The Commission received no comments
on the proposed rule change. This order
approves the proposed rule change.
II. Description of the Proposal
The PIP 4 and COPIP 5 are electronic
auction mechanisms that permit an
Options Participant to expose an agency
order (‘‘PIP Order’’ for PIP and ‘‘COPIP
Order’’ for COPIP, each, an ‘‘Agency
Order’’) and provide such order an
opportunity for price improvement.
Currently, the PIP and COPIP rules
permit an initiating Options Participant
(‘‘Initiating Participant’’) to submit an
Agency Order into the PIP or COPIP
along with a matching contra order
(‘‘Primary Improvement Order’’). The
Exchange will commence a PIP or
COPIP by broadcasting a message to
other Options Participants that contains
information concerning series, size,
auction start price, side of market, and
8 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 72477
(June 26, 2014), 79 FR 37798 (‘‘Notice’’).
4 See BOX Rule 7150.
5 See BOX Rule 7245.
1 15
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time of conclusion. The PIP or the
COPIP will last 100 milliseconds, unless
terminated earlier due to certain
circumstances. At the conclusion of the
PIP or the COPIP, the Agency Order is
matched against the best prevailing
quotes or orders on BOX, including
Improvement Orders 6 and any
Unrelated Orders,7 on a price/time
priority basis, subject to certain
exceptions.8
The PIP is utilized for the submission
of agency orders for single options series
instruments, while the COPIP is utilized
for the submission of Complex Orders.
BOX proposes to amend the PIP and the
COPIP to amend the priority and
allocation algorithms at the conclusion
of the auction mechanisms. BOX further
proposes to eliminate the broadcast of
Improvement Order responses
submitted during the PIP and the
COPIP. In addition, BOX proposes to
remove the Market Maker Prime 9
designation and Customer PIP Order
type (‘‘CPO’’) from the PIP.
A. Priority and Allocation at the
Conclusion of the PIP
BOX proposes to amend the priority
and trade allocation algorithm for
matching orders at the conclusion of the
PIP.10 The PIP Order will continue to be
matched with opposite side competing
orders and quotes in price priority. If
the total quantity of orders, quotes,
Improvement Orders, Legging Orders 11
and the Primary Improvement Order is
equal to or less than the quantity of the
PIP Order at a given price level, all
orders at the price will be filled and the
balance of the PIP Order will be
executed at the next best price. If the
total quantity of orders, quotes,
Improvement Orders, Legging Orders,
and the Primary Improvement Order is
greater than the quantity of the PIP
Order at a given price level, the
allocation will be as described below.
emcdonald on DSK67QTVN1PROD with NOTICES
Public Customer Allocation
BOX proposes that all orders, other
than Legging Orders and the Primary
Improvement Order, for the account of
6 Improvement Orders are competing order
submitted to the auction mechanisms by order flow
providers and market makers. See Box Rule
7150(f)(1).
7 See BOX Rules 7150(a) (defining an Unrelated
Order for purposes of the PIP auction as a nonImprovement Order entered into the BOX market
during a PIP) and 7245(a) (defining an Unrelated
Order for purposes of a COPIP auction as a nonImprovement Order entered on BOX during a
COPIP or BOX Book Interest during a COPIP).
8 See BOX Rules 7150(f)(4) and 7245(f)(3).
9 See BOX Rule 7160.
10 See Notice, supra note 3, at 37799, for a
detailed description of the current PIP allocation
process.
11 See BOX Rule 7240(c)(1).
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Public Customers,12 whether
Improvement Orders or Unrelated
Orders, including quotes and orders on
the BOX Book prior to the PIP
Broadcast, will be allocated for
execution against the PIP Order first.13
Where there are multiple such orders for
the account of Public Customers at the
same price, the trade allocation will be
by time priority.14 BOX has represented
that this allocation methodology is the
same as the allocation for the price
improvement auction on NASDAQ
OMX PHLX (‘‘Phlx’’).15
Primary Improvement Order Allocation
After the Public Customer allocation,
the Primary Improvement Order will
receive its applicable trade allocation.16
Specifically, when a Single-Priced
Primary Improvement Order 17 is
matched by or matches any competing
Improvement Orders and/or non-Public
Customers’ Unrelated Orders at the final
price level, the Initiating Participant’s
Primary Improvement Order retains
priority for up to forty percent (40%) of
the remaining size of the PIP Order after
Public Customer orders are satisfied.
However, if only one competing order
matches the Initiating Participant’s
Single-Priced Primary Improvement
Order at the final price level, then the
Initiating Participant may retain priority
for up to fifty percent (50%) of the
remaining size of the PIP Order after
Public Customer orders are satisfied.18
When an Initiating Participant
submits a Max Improvement Primary
12 As discussed below under the heading
‘‘Professional Customers,’’ upon approval of the
proposed rule change, Professionals would be
treated in the same manner as broker-dealers for
purposes of the PIP and COPIP, and not in the same
manner as non-Professional Public Customers. See
proposed BOX Rules 100(a)(50), 7150(a)(2) and
7245(a)(4).
13 See proposed BOX Rule 7150(g)(1).
14 See Notice, supra note 3, at 37800, for
examples illustrating trade allocations where the
Primary Improvement Order is for the account of a
Public Customer.
15 See Notice, supra note 3, at 37800. See also
Phlx Rule 1080(n)(ii)(E).
16 See proposed BOX Rule 7150(g)(2). When
starting a PIP, the Initiating Participant may submit
to the Exchange the Primary Improvement Order
with a designation of the total amount of the PIP
Order it is willing to hat this is.to the other PIP
Participants (‘‘PIP Surrender Quantity’’). If the
Primary Improvement Order has designated a PIP
Surrender Quantity, the Primary Improvement
Order allocation will be reduced, if necessary, by
the amount of the PIP Surrender Quantity. See
Notice, supra note 3, at 37799–800.
17 See BOX Rule 7150(f) (defining the term as ‘‘a
single price order that is equal to or better than that
of the National Best Bid Offer (‘‘NBBO’’) at the time
of the commencement of the PIP.
18 See proposed BOX Rule 7150(h)(1). See Notice,
supra note 3, at 37801, for an example illustrating
allocation of 50% rather than 40% to the Primary
Improvement Order.
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Improvement Order,19 the Initiating
Participant will be allocated its full size
at each price level, except where
restricted by the designated limit price,
until a price level is reached where the
balance of the PIP Order can be fully
executed. At the final price level, the
Initiating Participant will be entitled to
receive up to forty percent (40%) of the
remaining size of the PIP Order after
Public Customer orders are satisfied.
However, if only one competing order
matches the Initiating Participant’s Max
Improvement Primary Improvement
Order at the final price level, then the
Initiating Participant may retain priority
for up to fifty percent (50%) of the
remaining size of the PIP Order after
Public Customer orders are satisfied.20
Pursuant to proposed BOX Rule
7150(h), Public Customer orders and
Legging Orders will not be considered
when determining whether the
Initiating Participant retains 40% or
50% because neither Public Customer
order allocation nor Legging Order
allocation will be affected by the
Initiating Participant retaining the
difference between 40% and 50%.
Market Maker Allocation
After the Primary Improvement Order
allocation, any remaining unallocated
quantity of the PIP Order will be
allocated to orders and quotes,
including Improvement Orders and
quotes and orders on the BOX Book
prior to the PIP Broadcast for the
account of Market Makers.21 Where
there are orders/quotes for the accounts
of more than one Market Maker at the
same price, the trade allocation formula
for Market Makers will provide for the
allocation of contracts among Market
Makers based on size pro rata for the
remaining contracts.
The proposed Market Maker
allocation would follow the formula:
(B * C), where component B is derived
by dividing the quantity of contracts for
the Market Maker at the price level by
the total quantity of contracts of all
Market Makers at the price level, while
component C is the remaining quantity
of the PIP Order to be allocated after the
Primary Improvement Order allocation.
If the quantity of contracts for the
Market Maker order in B is greater than
the original quantity of the PIP Order,
19 See BOX Rule 7150(f) (defining the term as ‘‘an
auto-match submission that will automatically
match both the price and size of all competing
quotes and orders at any price level achieved
during the PIP or only up to a limit price’’).
20 See proposed BOX Rule 7150(h)(2). See Notice,
supra note 3, at 37801, for an example illustrating
allocation to the Primary Improvement Order with
a specified auto-match limit price.
21 See proposed BOX Rule 7150(g)(3).
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the Market Maker’s quantity will be
capped at the size of the original PIP
Order for purposes of calculating B. If
the trade allocation for a Market Maker
would be greater than the quantity of
the Market Maker order/quote at a price
level, the Market Maker’s trade
allocation will not exceed the size of the
Market Maker order/quote at that price
level. If the trade allocation for a Market
Maker would result in a fraction of a
contract, it will be rounded down. In
certain circumstances, due to rounding
down, it is possible that some Market
Maker orders will not be filled even
though there is sufficient quantity of the
PIP Order to be allocated.22
Remaining Orders Allocation
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After the Market Maker allocation,
any remaining unallocated quantity of
the PIP Order will be allocated to any
remaining orders, other than Legging
Orders and Market Maker orders,
including orders for the account of
Professionals and orders on the BOX
Book prior to the PIP Broadcast, not
receiving allocation in the rounds
described above.23
Where there is more than one
remaining unallocated order, including
Improvement Orders, at the same price,
the trade allocation to each such order
will follow the formula: (B * C) where
component B is derived by dividing the
quantity of contracts for the order at the
price level by the total quantity of
contracts for all remaining orders at the
price level, while component C is the
remaining quantity of the PIP Order to
be allocated after the Market Maker
allocation. If the quantity of contracts
for the order in B is greater than the
original quantity of the PIP Order, the
quantity of contracts for the order will
be capped at the size of the original PIP
Order for purposes of calculating B. If
the trade allocation for an order/quote
would be greater than the quantity of
the order/quote at the price level, the
trade allocation will not exceed the size
of the order/quote at the price level. If
the trade allocation would result in a
22 See Notice, supra note 3, at 37802, for an
example illustrating Market Maker trade
allocations.
23 See proposed BOX Rule 7150(g)(4). Currently,
Professionals are treated like Public Customers in
circumstances where BOX yields priority to Public
Customers under SEC Rule 11a1–1(T). Under the
proposed rule change, pursuant to which
Improvement Orders will not be broadcast,
transactions executed on BOX will qualify under
SEC Rule 11a2–2(T) as described below. As a result,
Professionals will no longer be treated like Public
Customers for purposes of priority. See Notice,
supra note 3, at 37802, for an example showing a
comparison of Professional Customer PIP trade
allocation (before and after the proposed rule
change).
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fraction of a contract, it will be rounded
down.24
Additional Allocation
If, at the end of the remaining orders
allocation, there remains any
unallocated quantity of the PIP Order,
the balance will be allocated to all
remaining quotes and orders, if any,
other than Legging Orders and the
Primary Improvement Order. The
allocation method will be to allocate
one contract of the PIP Order per quote/
order sequentially until each remaining
quote/order has received one contract or
until the PIP Order is fully allocated.
The allocation sequence among quotes/
orders in this step will be in order of
size with the largest remaining quote/
order allocated first. Where two or more
such quotes/orders are the same size,
the trade allocation sequence will be by
time priority.25
Legging Order Allocation
If, after the allocation of all orders,
quotes and Improvement Orders, there
remains any unallocated quantity of the
PIP Order, to the extent of any
Surrender Quantity, allocation will be
made to any Legging Orders at the same
price in time priority.26 If, at the end of
the Legging Order allocation, there
remains any unallocated quantity of the
PIP Order, the balance will be allocated
to the Initiating Participant regardless of
any applicable PIP Surrender Quantity.
Quotes and Orders on the BOX Book
Currently, all quotes and orders on
the BOX Book prior to the PIP
Broadcast, excluding any proprietary
quotes or orders from the Initiating
Participant, are filled at the end of the
PIP in time priority before any other
order at the same price.27 In addition,
current BOX Rule 7150(g)(3) states that
the Primary Improvement Order follows
in time priority all quotes and orders on
24 See Notice, supra note 3, at 37802, for an
example illustrating Market Maker trade
allocations.
25 See proposed BOX Rule 7150(g)(5). See Notice,
supra note 3, at 37803, for an example illustrating
additional allocation when limited by a PIP
Surrender Quantity with multiple Market Maker
orders.
26 See proposed BOX Rule 7150(g)(6). Legging
Orders may receive allocations of a PIP Order when
the Legging Order is at a price better than the final
price level or at the final price level in the event
the Initiating Participant has specified a Surrender
Quantity. See Notice, supra note 3, at 37803–4, for
examples illustrating trade allocations where the
Primary Improvement Order’s PIP Surrender
Quantity is: (i) greater than, and (ii) less than, the
sum of Legging Orders at the final price level.
27 See BOX Rule 7150(f)(4)(i). See Notice, supra
note 3, at 37804–5, for an example illustrating trade
allocations for orders on the BOX Book prior to the
PIP Broadcast, which are eligible for execution at
the conclusion of the PIP.
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49363
the BOX Book prior to the PIP Broadcast
that are equal to the: (A) Single-Priced
Primary Improvement Order price; or
(B) execution price of a Max
Improvement Primary Improvement
Order that results in the balance of the
PIP Order being fully executed, except
any proprietary quote or order from the
Initiating Participant.
BOX proposes that quotes and orders
on the BOX Book prior to the PIP
Broadcast no longer be allocated against
the PIP Order at the end of the PIP in
time priority before any other order at
the same price. Instead, as described
above in the Market Maker Allocation
Section above,28 quotes and orders on
the BOX Book prior to the PIP Broadcast
will now be considered alongside all
other quotes and orders, whether
Improvement Order(s), Legging Order(s),
or Unrelated Order(s) received by BOX
during the PIP (excluding all Legging
Orders and Unrelated Orders that were
immediately executed during the
interval of the PIP), for matching at the
conclusion of the PIP. Consequently,
BOX is proposing to remove the
exceptions for quotes and orders on the
BOX Book prior to the PIP Broadcast in
BOX Rules 7150(f)(4)(i) and (g)(3). BOX
has represented that this is consistent
with Phlx.29 Proprietary quotes or
orders from the Initiating Participant at
the Primary Improvement Order price
shall not be executed against the PIP
Order during or at the conclusion of the
PIP.
B. Priority and Allocation at the
Conclusion of the COPIP
Pursuant to current BOX Rule 7245,
Complex Orders may be submitted to
the COPIP, which is substantially
similar to the PIP except as necessary to
account for distinctions between regular
orders on the BOX Book and Complex
Orders.30 BOX proposes to amend the
COPIP priority and allocation rule to
adopt similar changes to those being
proposed to the PIP allocation.31
Complex Orders on the Complex Order
Book will continue to be executed in
price/time priority, but in the event an
execution opportunity occurs for a
Complex Order on the Complex Order
Book against a COPIP Order at the end
of a COPIP, the COPIP execution will
28 See
Section II.A., supra.
Phlx Rule 1080(n)(ii)(E)(2).
30 References to Legging Orders do not appear in
the COPIP rules because Legging Orders interact
only with the PIP. However, the COPIP rules do
include other provisions for interacting with
interest on the BOX Book.
31 See Notice, supra note 3, at 37806–7, for a
detailed description of the current COPIP
allocation.
29 See
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occur according to the priority
algorithm described below.
Specifically, BOX has proposed that,
at the end of the COPIP, the COPIP
Order will continue to be matched with
opposite side competing orders in price
priority. If the total quantity of orders,
Improvement Orders, BOX Book Interest
and the Primary Improvement Order is
equal to or less than the quantity of the
COPIP Order at a given price level, all
orders at the price will be filled and the
balance of the COPIP Order will be
executed at the next best price.
If the total quantity of orders,
Improvement Orders, BOX Book Interest
and the Primary Improvement Order is
greater than the quantity of the COPIP
Order at a given price level, the
allocation will be as follows:
BOX Book Interest Allocation
BOX Book Interest is currently
executed in priority over Complex
Orders. BOX Book Interest 32 will
continue to be allocated for execution
against the COPIP Order in priority over
Complex Orders and in time priority.33
Public Customer Allocation
After the BOX Book Interest
allocation, Complex Orders, other than
the Primary Improvement Order, for the
account of Public Customers, including
Improvement Orders and orders on the
Complex Order Book prior to the COPIP
Broadcast, will be allocated for
execution against the COPIP Order in
priority over other Complex Orders.
Where there are multiple such Complex
Orders for the account of Public
Customers, allocation among all Public
Customers, other than the Initiating
Participant, at the same price will be by
time priority.34
Primary Improvement Order Allocation
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After the Public Customer allocation,
the Primary Improvement Order will
receive its applicable trade allocation.35
Specifically, when a Single-Priced
Primary Improvement Order 36 is
32 ‘‘BOX Book Interest’’ is defined as bids and
offers on the BOX Book for the individual legs of
a Strategy. See BOX Rule 7245(a)(3).
33 See proposed BOX Rule 7245(g)(1). See Notice,
supra note 3, at 37807, for an example illustrating
allocations of BOX Book Interest at multiple price
levels eligible for execution at the end of a COPIP.
34 See proposed BOX Rule 7245(g)(2). See Notice,
supra note 3, at 37808, for examples illustrating
allocations of Primary Improvement Orders for the
accounts of Public Customers in two different
scenarios.
35 See proposed BOX Rule 7150(h). If the Primary
Improvement Order has designated a COPIP
Surrender Quantity, the Primary Improvement
Order allocation will be reduced, if necessary, in
accordance with the COPIP Surrender Quantity.
36 See BOX Rule 7245(f) (defining the term as ‘‘a
single price order that is equal to or better than
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matched by or matches any Complex
Order(s) at the final price level, the
Initiating Participant’s Primary
Improvement Order retains priority for
up to forty percent (40%) of the
remaining size of the COPIP Order after
BOX Book Interest and Public Customer
orders are satisfied. However, if only
one Complex Order matches the
Initiating Participant’s Single-Priced
Primary Improvement Order at the final
price level, then the Initiating
Participant may retain priority for up to
fifty percent (50%) of the remaining size
of the COPIP Order after BOX Book
Interest and Public Customer orders are
satisfied.37
When the Initiating Participant
submits a Max Improvement Primary
Improvement Order,38 the Initiating
Participant shall be allocated its full size
at each price level, except where
restricted by the designated limit price,
until a price level is reached where the
balance of the COPIP Order can be fully
executed. At the final price level, the
Initiating Participant will be entitled to
receive up to forty percent (40%) of the
remaining size of the COPIP Order after
BOX Book Interest and Public Customer
orders are satisfied. However, if only
one competing Complex Order matches
the Initiating Participant’s Max
Improvement Primary Improvement
Order at the final price level, then the
Initiating Participant may retain priority
for up to fifty percent (50%) of the
remaining size of the COPIP Order after
BOX Book Interest and Public Customer
orders are satisfied.39 Public Customer
orders and BOX Book Interest will not
be considered when determining
whether the Initiating Participant
retains 40% or 50% in proposed BOX
Rule 7245(h) because neither Public
Customer order allocation nor BOX
Book Interest allocation will be affected
by the Initiating Participant retaining
the difference between 40% and 50%.40
cNBBO, cBBO (each as defined in [BOX] Rule
7240(a)) and BBO on the Complex Order Book for
the Strategy at the time of the commencement of the
COPIP.
37 See proposed BOX Rule 7245(h)(1). See Notice,
supra note 3, at 37809, for an example illustrating
allocation of 50% rather than 40% to the Primary
Improvement Order.
38 See BOX Rule 7245(f) (defining the term as ‘‘an
auto-match submission that will automatically
match both the price and size of all competing
orders, including Improvement Orders and
Unrelated Orders, at any price level achieved
during the COPIP or only up to a limit price’’).
39 See proposed BOX Rule 7245(h)(2). See Notice,
supra note 3, at 37809–10, for examples illustrating
COPIP allocation with and without auto-matching.
40 The first sentence of proposed BOX Rule
7245(h)(1) deletes from the current rule the words
‘‘or BOX Book Interest’’ in order to be consistent
with the proposal not to consider BOX Book
Interest for purposes of determining the Primary
Improvement Order’s trade allocation percentage.
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Market Maker Allocation
After the Primary Improvement Order
allocation, any remaining unallocated
quantity of the COPIP Order will be
allocated to Complex Orders, including
Improvement Orders and orders on the
Complex Order Book prior to the COPIP
Broadcast, for the account of Market
Makers.41 Where there are Complex
Orders for the accounts of more than
one Market Maker at the same price, the
trade allocation formula for Market
Makers will provide for the allocation of
contracts among Market Makers based
on size pro rata for the remaining
Strategies. The proposed Market Maker
allocation would follow the formula:
(B * C) where component B is derived
by dividing the quantity of Strategies for
the Market Maker at the price level by
the total quantity of Strategies for all
Market Makers at the price level, while
component C is the remaining quantity
of the COPIP Order to be allocated after
the Primary Improvement Order
allocation. If the quantity of Strategies
for the Market Maker order in B is
greater than the original quantity of the
COPIP Order, the Market Maker’s
quantity will be capped at the size of the
original COPIP Order for purposes of
calculating B. If the trade allocation for
a Market Maker would be greater than
the quantity of the Market Maker order
at the price level, the Market Maker’s
trade allocation will not exceed the size
of the Market Maker order at the price
level. If the trade allocation for a Market
Maker would result in a fraction of a
Strategy, it will be rounded down. In
certain circumstances, due to rounding
down, it is possible that some Market
Maker orders will not be filled even
though there is sufficient quantity of the
COPIP Order to be allocated.42
Remaining Complex Orders Allocation
After the Market Maker allocation,
any remaining unallocated quantity of
the COPIP Order will be allocated to any
remaining Complex Orders, other than
Market Maker orders, including orders
for the account of Professionals and
orders on the Complex Order Book prior
to the COPIP Broadcast, not receiving
allocation above.43
Where there is more than one
remaining unallocated Complex Order,
including Improvement Orders, at the
same price, the trade allocation to each
41 See
proposed BOX Rule 7245(g)(4).
Notice, supra note 3, at 37810, for an
example illustrating COPIP allocations to Market
Makers.
43 See proposed BOX Rule 7245(g)(5). See Notice,
supra note 3, at 37810–1, for an example illustrating
comparison of COPIP trade allocations to
Professionals before and after the proposed rule
change.
42 See
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such Complex Order will follow the
formula: (B * C) where component B is
derived by dividing the quantity of
Strategies for the Complex Order at the
price level by the total quantity of
Strategies for all remaining Complex
Orders at the price level, while
component C is the remaining quantity
of the COPIP Order to be allocated after
the Market Maker allocation. If the
quantity of Strategies for the Complex
Order in B is greater than the original
quantity of the COPIP Order, the
quantity of Strategies for the Complex
Order will be capped at the size of the
original COPIP Order for purposes of
calculating B. If the trade allocation for
a Complex Order would be greater than
the quantity of Strategies for the
Complex Order at the price level, the
trade allocation will not exceed the
quantity of Strategies for the Complex
Order at the price level. If the trade
allocation would result in a fraction of
a Strategy, it will be rounded down.
emcdonald on DSK67QTVN1PROD with NOTICES
Additional Allocation
The balance of the COPIP Order will
be allocated to all remaining orders, if
any, other than the Primary
Improvement Order. The allocation
method will be to allocate one Strategy
of the COPIP Order per order
sequentially until each remaining order
has received one Strategy or until the
COPIP Order is fully allocated. The
allocation sequence among orders in
this step will be in order of size with the
largest remaining order allocated first.
Where two or more such orders are the
same size, trade allocation sequence
will be by time priority. If, at the end
of the additional allocation, there
remains any unallocated quantity of the
COPIP Order, the balance will be
allocated to the Initiating Participant
regardless of any applicable COPIP
Surrender Quantity.44
Complex Orders on the Complex Order
Book
Currently, all Complex Orders on the
Complex Order Book prior to the COPIP
Broadcast, excluding any proprietary
orders from the Initiating Participant,
are filled at the end of the COPIP in time
priority before any other Complex
Orders at the same price.45 Further,
BOX Rule 7245(g)(3) states that the
Primary Improvement Order follows in
time priority all Complex Orders on the
Complex Order Book prior to the COPIP
Broadcast that are equal to the: (A)
44 See proposed BOX Rule 7245(g)(6). See Notice,
supra note 3, at 37811, for an example illustrating
additional allocation to multiple market maker
orders when limited by a COPIP Surrender
Quantity.
45 See BOX Rule 7245(f)(3)(ii).
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Single Priced Primary Improvement
Order price; or (B) execution price of a
Max Improvement Primary
Improvement Order that results in the
balance of the COPIP Order being fully
executed, except any proprietary
order(s) from the Initiating Participant.
BOX proposes that quotes and orders
on the Complex Order Book prior to the
COPIP Broadcast will no longer be
allocated against the COPIP Order at the
end of the COPIP in time priority before
any other order at the same price.
Specifically, quotes and orders on the
Complex Order Book prior to the COPIP
Broadcast will now be considered
alongside all other orders, whether
Improvement Order(s), including
Unrelated Order(s) received by BOX
during the COPIP (excluding all
Unrelated Orders that were immediately
executed during the interval of the
COPIP), for matching at the conclusion
of the COPIP.46 Therefore, BOX has
proposed removing the exceptions for
quotes and orders on the BOX Book
prior to the COPIP Broadcast in BOX
Rules 7245(f)(3)(ii) and (g)(3). BOX has
represented that this proposed change is
consistent with Phlx.47 Proprietary
quotes or orders from the Initiating
Participant at the Primary Improvement
Order price shall not be executed
against the COPIP Order during or at the
conclusion of the COPIP.
C. Professional Customer Priority in the
PIP and COPIP
Pursuant to BOX Rule 100(a)(50), a
‘‘Professional’’ is a person or entity that
(i) is not a broker or dealer in securities,
and (ii) places more than 390 orders in
listed options per day on average during
a calendar month for its own beneficial
account(s). Under current BOX rules,
Public Customers, including
Professionals, benefit from certain order
priority advantages in PIP and COPIP
transactions on BOX (‘‘Order Priority’’).
BOX proposes to amend Rule 100(a)(50),
and related cross references in BOX
Rules 7150(a)(2) and 7145(a)(4), to limit
the availability of order priority
advantages in PIP and COPIP
transactions to non-Professional, Public
Customers on BOX.48 Thus
46 See Notice, supra note 3, at 37811–2, for an
example illustrating allocation to orders on the
Complex Order Book prior to the COPIP Broadcast
for orders eligible for execution at the conclusion
of the COPIP.
47 See Phlx Rule 1080(n)(ii)(E)(2)(d).
48 See proposed BOX Rule 7150(g)(4). Currently,
Professionals are treated like Public Customers in
circumstances where BOX yields priority to Public
Customers under SEC Rule 11a1–1(T). Under the
proposed rule change, pursuant to which
Improvement Orders will not be broadcast,
transactions executed on BOX will qualify under
SEC Rule 11a2–2(T) as described below. As a result,
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49365
Professionals will now be treated like
non-Public Customers for order priority
in PIP and COPIP transactions instead of
receiving the same order priority
afforded to non-Professional, Public
Customers. According to BOX, the
order-sending behavior and trading
activity of Professionals tend to be more
similar to broker-dealers trading on a
proprietary basis, and therefore it is not
unfairly discriminatory to give
Professional orders the same priority as
broker-dealers for allocation purposes.
BOX has represented that other
exchanges also treat Professionals as
non-Public Customers for Order Priority
in auction transactions.49
D. Improvement Orders in PIP and
COPIP
Currently, Improvement Order
responses submitted during the PIP and
COPIP are broadcast via the High Speed
Vendor Feed (‘‘HSVF’’) but are not
disseminated through OPRA.50 The
Exchange proposes to no longer
broadcast Improvement Orders received
during the PIP or the COPIP. The
Exchange believes that this proposed
change will encourage greater
participation in the PIP and the COPIP,
which may lead to greater price
improvement because a Participant will
be encouraged to submit Improvement
Orders at the best possible price at
which the Participant is willing to
participate.51
BOX does not currently allow
Participants to cancel their
Improvement Orders and only allows
them to decrease the size of their
Improvement Order by improving the
price of that order.52 BOX proposes to
allow Participants to cancel their
Improvement Orders at any time up to
the end of the PIP or COPIP.
Additionally, because a Participant will
be able to cancel its Improvement Order
and submit a new modified
Improvement Order, BOX proposes to
not allow a Participant to decrease the
size of its Improvement Order by
improving the price of that order. BOX
believes that by allowing a Participant
to cancel its Improvement Order, the
Participant will be more willing to enter
aggressively priced responses. BOX has
represented that these proposed changes
are consistent with Phlx’s Rules.53
Professionals will no longer be treated like Public
Customers for purposes of priority.
49 See Phlx Rule 1000(b)(14).
50 See BOX Rules 7150(f)(1) and 7245(f)(1).
51 See Notice, supra note 3, at 37814.
52 See BOX Rules 7150(f)(2) and 7245(f)(2).
53 See NASDAQ OMX PHLX LLC (‘‘Phlx’’) Rule
1080(n)(ii)(6) and (n)(ii)(9). See Notice, supra note
3, at 37814.
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E. PIP Market Maker Prime Designation
and CPO Order Type
Current BOX Rule 7160 provides that
at the commencement of each PIP, a
single Market Maker Prime may be
designated for that PIP only. When the
PIP was first adopted, BOX introduced
the Market Maker Prime designation to
encourage Market Makers to quote
aggressively on the BOX Book and not
wait for a PIP to begin.54 BOX proposes
to eliminate the Market Maker Prime
designation because, according to BOX,
Market Makers rarely use the Market
Maker Prime functionality.55
Current BOX Rule 7150(h) provides
for a CPO order type. A CPO allows a
Public Customer to submit an order on
a single options series, through an order
flow provider (‘‘OFP’’),56 specifying one
price for entry on the BOX Book (in the
applicable minimum increment for that
series) and a different price for
interaction with a PIP (in one cent
increments). The CPO was intended to
provide access to the PIP on behalf of
a Public Customer. However, according
to BOX, because CPOs are rarely
submitted, BOX proposes to eliminate
the CPO order type.57 Public Customers
may continue to submit orders to the
BOX Book and Improvement Orders
during the PIP.
emcdonald on DSK67QTVN1PROD with NOTICES
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 and, in particular,
with Section 6(b) of the Act.58 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,59 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 foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
54 See Securities Exchange Act Release No. 47186
(January 14, 2003), 78 FR 3062 (January 22, 2003)
(Notice of Filing SR–BSE–2002–15).
55 See Notice, supra note 3, at 37805.
56 As defined in BOX Rule 100(a)(45), the term
Order Flow Provider or ‘‘OFP’’ means those Options
Participants representing as agent Customer Orders
on BOX and those non-Market Maker Participants
conducting proprietary trading.
57 See Notice, supra note 3, at 37805.
58 15 U.S.C. 78f(b). 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).
59 15 U.S.C. 78f(b)(5).
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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 customers, issuers,
brokers and dealers.
Under the proposed rule change, at
the conclusion of a PIP, Public
Customer orders have first priority to
trade against the Agency Order. After
the execution of Public Customer
orders, the Primary Improvement Order
may be allocated up to 40% of the
remaining size of the PIP Order
(however, if only one competing order
matches the Primary Improvement
Order, then the Primary Improvement
Order may be allocated up to 50% of the
PIP Order). Market Maker orders and
quotes next have priority. After the
Market Maker allocation, any remaining
unallocated quantity of the PIP Order
will be allocated to any remaining
orders (other than Legging Orders and
Market Maker orders), including orders
for the account of Professionals. Legging
Orders have final priority. Under the
proposed rule change, the allocation at
the conclusion of a COPIP auction is
substantially the same as the allocation
at the conclusion of a PIP auction except
BOX Book Interest has priority over all
orders at the end of a COPIP auction.
The Commission believes that the
proposed matching algorithm set forth
in the PIP and the COPIP rules are
sufficiently clear regarding how orders
are to be allocated in the PIP and the
COPIP auctions and do not raise any
novel issues. The proposed changes to
the PIP and COPIP mechanisms are
similar in many aspects to the features
found in the price improvement
mechanisms of other options exchanges,
including: the ability to cancel
Improvement Orders; 60 the nondissemination of Improvement Orders to
OPRA; 61 and the execution allocation
scheme which gives Public Customers
and the Initiating Participant priority
over other Participants and Professional
Customers;62 and the execution of
orders on the book at the end of the PIP
auction.63
Under the proposed rule change,
Improvement Orders will no longer be
disseminated to Participants and to
OPRA. The Commission notes that,
according to the Exchange, this may
encourage Participants to submit
Improvement Orders at the best possible
60 See, e.g., Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’) Rule 6.74A(b)(1)(I).
61 See,e.g., CBOE Rule 6.74A(b)(1)(F), Phlx Rule
1080(n)(ii)(A)(6).
62 See, e.g., ISE Rule 723(d), Miami International
Securities Exchange LLC (‘‘MIAX’’) Rule
515A(a)(2)(iii), and Phlx Rule 1080(n)(ii)(E).
63 See id.
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Sfmt 4703
price that the Participant is willing to
interact with the Agency Order, which
could lead to greater price improvement
for the Agency Order. 64
Finally, BOX will eliminate the
Market Maker Prime designation and
CPO order type. According to the
Exchange, Market Makers rarely use the
Market Maker Prime functionality. The
Commission notes that Public
Customers currently have and will
continue to have opportunities to
participation in the PIP and COPIP,
without the limitations that the CPO
order type would impose.
IV. Section 11(a) of the Act
Section 11(a)(1) of the Act 65 prohibits
a member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises discretion (collectively,
‘‘covered accounts’’) unless an
exception applies. Rule 11a2–2(T) under
the Act,66 known as the ‘‘effect versus
execute’’ rule, provides exchange
members with an exemption from the
Section 11(a)(1) prohibition. Rule 11a2–
2(T) permits an exchange member,
subject to certain conditions, to effect
transactions for covered accounts by
arranging for an unaffiliated member to
execute transactions on the exchange.
To comply with Rule 11a2–2(T)’s
conditions, a member: (i) must transmit
the order from off the exchange floor;
(ii) may not participate in the execution
of the transaction once it has been
transmitted to the member performing
the execution; (iii) may not be affiliated
with the executing member; and (iv)
with respect to an account over which
the member has investment discretion,
neither the member nor its associated
person may retain any compensation in
connection with effecting the
transaction except as provided in the
Rule. For the reasons set forth below,
the Commission believes that BOX’s
Participants effecting transactions
through the PIP and COPIP, including
executions of PIP Orders and COPIP
Orders against orders on the BOX Book
and the Complex Order Book, would
satisfy the requirements of Rule 11a2–
2(T).67
64 See
Notice, supra note 3, at 37814.
U.S.C. 78k(a)(1).
66 17 CFR 240.11a2–2(T).
67 The Commission notes that it has previously
found that transactions effected through the BOX
PIP and COPIP are consistent with the requirements
of Section 11(a), relying in part upon Rule 11a1–
1(T) and in part upon Rule 11a2–2(T) thereunder.
See Securities Exchange Act Release Nos. 68177
(November 7, 2012), 77 FR 67851 (November 14,
2012) and 71148 (December 19, 2013), 78 FR 78437
(December 26, 2013).
65 15
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emcdonald on DSK67QTVN1PROD with NOTICES
The Rule’s first condition is that
orders for covered accounts be
transmitted from off the exchange floor.
The Commission has previously found
that the off-floor transmission
requirement is met if a covered account
order is transmitted from a remote
location directly to an exchange’s floor
by electronic means.68 The Exchange
has represented that orders sent to BOX,
regardless of where it executes within
the BOX system, including the Complex
Order Book, the BOX Book, a PIP or a
COPIP, will be transmitted from remote
terminals directly to BOX by electronic
means. The Exchange also represents
that orders for covered accounts from
OFPs and BOX Market Makers will only
be submitted from electronic systems
from remote locations, separate from
BOX. Because the Exchange has
represented that there are no other
Options Participants that are able to
submit order to BOX other than OFPs or
Market Makers, the Commission
believes that orders received through
the PIP and COPIP would satisfy the offfloor transmission requirement.
Second, the Rule requires that the
member not participate in the execution
of its order. The Exchange represents
that at no time following the submission
of an order is a Participant able to
acquire control or influence over the
result or timing of an order’s
execution.69 According to the Exchange,
the execution of an order is determined
by what other orders are entered into
BOX at or around the same time, what
orders are on the Complex Order Book
and on the BOX Book, whether a PIP or
COPIP is initiated and where the order
is ranked based on the priority ranking
algorithm.70 In addition, as noted above,
BOX proposes to no longer broadcast
Improvement Orders received during
the PIP and COPIP. As a result,
responses to the PIP and COPIP auctions
would no longer be visible to
Participants.71 Accordingly, the
68 See, e.g., Securities Exchange Act Release Nos.
61419 (January 26, 2010), 75 FR 5157 (February 1,
2010) (SR–BATS–2009–031) (approving BATS
options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR–BSE–2008–48)
(approving equity securities listing and trading on
BSE); 57478 (March 12, 2008), 73 FR 14521 (March
18, 2008) (SR–NASDAQ–2007–004 and SR–
NASDAQ–2007–080) (approving NOM options
trading); 53128 (January 13, 2006), 71 FR 3550
(January 23, 2006) (File No. 10–131) (approving The
Nasdaq Stock Market LLC); 44983 (October 25,
2001), 66 FR 55225 (November 1, 2001) (SR–PCX–
00–25) (approving Archipelago Exchange); 29237
(May 24, 1991), 56 FR 24853 (May 31, 1991) (SR–
NYSE–90–52 and SR–NYSE–90–53) (approving
NYSE’s Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979)
(‘‘1979 Release’’).
69 See Notice, supra note 3, 79 FR at 37816.
70 See id.
71 See Notice, supra note 3, 79 FR at 37814.
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Commission believes that a member
does not participate in the execution of
an order submitted through the PIP or
the COPIP, including orders that
execute against an order on the BOX
Book or the Complex Order Book.
Third, Rule 11a2–2(T) requires that
the order be executed by an exchange
member who is unaffiliated with the
member initiating the order. The
Commission has stated that this
requirement is satisfied when
automated systems facilities are used, as
long as the design of these systems
ensures that members do not possess
any special or unique trading
advantages in handling their orders after
transmitting them to the exchange.72
BOX has represented that the PIP and
COPIP are designed so that no brokerdealer has any special or unique trading
advantage in the handling of its orders
after transmitting its orders to BOX.73
Based on the Exchange’s representation,
the Commission believes that the PIP
and COPIP satisfy this requirement.
Fourth, in the case of a transaction
effected for an account with respect to
which the initiating member or an
associated person thereof exercises
investment discretion, neither the
initiating member nor any associated
person thereof may retain any
compensation in connection with
effecting the transaction, unless the
person authorized to transact business
for the account has expressly provided
otherwise by written contract referring
to Section 11(a) of the Act and Rule
11a2–2(T) thereunder.74 BOX represents
that Participants relying on Rule 11a2–
2(T) for transactions effected through
the PIP and COPIP must comply with
this condition of the Rule and that the
Exchange has represented that it will
enforce this requirement pursuant to its
72 In considering the operation of automated
execution systems operated by an exchange, the
Commission noted that, while there is not an
independent executing exchange member, the
execution of an order is automatic once it has been
transmitted into the system. Because the design of
these systems ensures that members do not possess
any special or unique trading advantages in
handling their orders after transmitting them to the
exchange, the Commission has stated that
executions obtained through these systems satisfy
the independent execution requirement of Rule
11a2–2(T). See 1979 Release, supra note 55.
73 See Notice, supra note 3, 79 FR at 37815.
74 See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition,
Rule 11a2–2(T)(d) requires a member or associated
person authorized by written contract to retain
compensation, in connection with effecting
transactions for covered accounts over which such
member or associated persons thereof exercises
investment discretion, to furnish at least annually
to the person authorized to transact business for the
account a statement setting forth the total amount
of compensation retained by the member in
connection with effecting transactions for the
account during the period covered by the statement.
See 17 CFR 240.11a2–2(T)(d).
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49367
obligation under Section 6(b)(1) of the
Act to enforce compliance with federal
securities laws.75
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,76 that the
proposed rule change (SR–BOX–2014–
16), be and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.77
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–19704 Filed 8–19–14; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 8829]
Culturally Significant Objects Imported
for Exhibition Determinations:
‘‘Treasures From India: Jewels From
the Al-Thani Collection’’
Notice is hereby given of the
following determinations: Pursuant to
the authority vested in me by the Act of
October 19, 1965 (79 Stat. 985; 22 U.S.C.
2459), Executive Order 12047 of March
27, 1978, the Foreign Affairs Reform and
Restructuring Act of 1998 (112 Stat.
2681, et seq.; 22 U.S.C. 6501 note, et
seq.), Delegation of Authority No. 234 of
October 1, 1999, and Delegation of
Authority No. 236–3 of August 28, 2000
(and, as appropriate, Delegation of
Authority No. 257 of April 15, 2003), I
hereby determine that the objects to be
included in the exhibition ‘‘Treasures
from India: Jewels from the Al-Thani
Collection,’’ imported from abroad for
temporary exhibition within the United
States, are of cultural significance. The
objects are imported pursuant to a loan
agreement with the foreign owner or
custodian. I also determine that the
exhibition or display of the exhibit
objects at the Metropolitan Museum of
Art, New York, New York, from on or
about October 28, 2014, until on or
about January 25, 2015, and at possible
additional exhibitions or venues yet to
be determined, is in the national
interest. I have ordered that Public
Notice of these Determinations be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: For
further information, including a list of
the imported objects, contact Paul W.
Manning, Attorney-Adviser, Office of
the Legal Adviser, U.S. Department of
State (telephone: 202–632–6469). The
SUMMARY:
75 See
Notice, supra note 3, 79 FR at 37817.
U.S.C. 78s(b)(2).
77 17 CFR 200.30–3(a)(12).
76 15
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Agencies
[Federal Register Volume 79, Number 161 (Wednesday, August 20, 2014)]
[Notices]
[Pages 49361-49367]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19704]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72848; File No. SR-BOX-2014-16]
Self-Regulatory Organizations; BOX Options Exchange LLC; Order
Granting Approval of a Proposed Rule Change To Adopt New Trade
Allocation Algorithms for Matching Trades at the Conclusion of the PIP
and the COPIP
August 14, 2014.
I. Introduction
On June 16, 2014, BOX Options Exchange LLC (``Exchange'' or
``BOX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend its rules regarding the Price Improvement
Period (``PIP'') and Complex Order Price Improvement Period (``COPIP'')
(``auction mechanisms''). The proposed rule change was published for
comment in the Federal Register on July 2, 2014.\3\ The Commission
received no comments on the proposed rule change. This order approves
the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 72477 (June 26,
2014), 79 FR 37798 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
The PIP \4\ and COPIP \5\ are electronic auction mechanisms that
permit an Options Participant to expose an agency order (``PIP Order''
for PIP and ``COPIP Order'' for COPIP, each, an ``Agency Order'') and
provide such order an opportunity for price improvement. Currently, the
PIP and COPIP rules permit an initiating Options Participant
(``Initiating Participant'') to submit an Agency Order into the PIP or
COPIP along with a matching contra order (``Primary Improvement
Order''). The Exchange will commence a PIP or COPIP by broadcasting a
message to other Options Participants that contains information
concerning series, size, auction start price, side of market, and
[[Page 49362]]
time of conclusion. The PIP or the COPIP will last 100 milliseconds,
unless terminated earlier due to certain circumstances. At the
conclusion of the PIP or the COPIP, the Agency Order is matched against
the best prevailing quotes or orders on BOX, including Improvement
Orders \6\ and any Unrelated Orders,\7\ on a price/time priority basis,
subject to certain exceptions.\8\
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\4\ See BOX Rule 7150.
\5\ See BOX Rule 7245.
\6\ Improvement Orders are competing order submitted to the
auction mechanisms by order flow providers and market makers. See
Box Rule 7150(f)(1).
\7\ See BOX Rules 7150(a) (defining an Unrelated Order for
purposes of the PIP auction as a non-Improvement Order entered into
the BOX market during a PIP) and 7245(a) (defining an Unrelated
Order for purposes of a COPIP auction as a non-Improvement Order
entered on BOX during a COPIP or BOX Book Interest during a COPIP).
\8\ See BOX Rules 7150(f)(4) and 7245(f)(3).
---------------------------------------------------------------------------
The PIP is utilized for the submission of agency orders for single
options series instruments, while the COPIP is utilized for the
submission of Complex Orders. BOX proposes to amend the PIP and the
COPIP to amend the priority and allocation algorithms at the conclusion
of the auction mechanisms. BOX further proposes to eliminate the
broadcast of Improvement Order responses submitted during the PIP and
the COPIP. In addition, BOX proposes to remove the Market Maker Prime
\9\ designation and Customer PIP Order type (``CPO'') from the PIP.
---------------------------------------------------------------------------
\9\ See BOX Rule 7160.
---------------------------------------------------------------------------
A. Priority and Allocation at the Conclusion of the PIP
BOX proposes to amend the priority and trade allocation algorithm
for matching orders at the conclusion of the PIP.\10\ The PIP Order
will continue to be matched with opposite side competing orders and
quotes in price priority. If the total quantity of orders, quotes,
Improvement Orders, Legging Orders \11\ and the Primary Improvement
Order is equal to or less than the quantity of the PIP Order at a given
price level, all orders at the price will be filled and the balance of
the PIP Order will be executed at the next best price. If the total
quantity of orders, quotes, Improvement Orders, Legging Orders, and the
Primary Improvement Order is greater than the quantity of the PIP Order
at a given price level, the allocation will be as described below.
---------------------------------------------------------------------------
\10\ See Notice, supra note 3, at 37799, for a detailed
description of the current PIP allocation process.
\11\ See BOX Rule 7240(c)(1).
---------------------------------------------------------------------------
Public Customer Allocation
BOX proposes that all orders, other than Legging Orders and the
Primary Improvement Order, for the account of Public Customers,\12\
whether Improvement Orders or Unrelated Orders, including quotes and
orders on the BOX Book prior to the PIP Broadcast, will be allocated
for execution against the PIP Order first.\13\ Where there are multiple
such orders for the account of Public Customers at the same price, the
trade allocation will be by time priority.\14\ BOX has represented that
this allocation methodology is the same as the allocation for the price
improvement auction on NASDAQ OMX PHLX (``Phlx'').\15\
---------------------------------------------------------------------------
\12\ As discussed below under the heading ``Professional
Customers,'' upon approval of the proposed rule change,
Professionals would be treated in the same manner as broker-dealers
for purposes of the PIP and COPIP, and not in the same manner as
non-Professional Public Customers. See proposed BOX Rules
100(a)(50), 7150(a)(2) and 7245(a)(4).
\13\ See proposed BOX Rule 7150(g)(1).
\14\ See Notice, supra note 3, at 37800, for examples
illustrating trade allocations where the Primary Improvement Order
is for the account of a Public Customer.
\15\ See Notice, supra note 3, at 37800. See also Phlx Rule
1080(n)(ii)(E).
---------------------------------------------------------------------------
Primary Improvement Order Allocation
After the Public Customer allocation, the Primary Improvement Order
will receive its applicable trade allocation.\16\ Specifically, when a
Single-Priced Primary Improvement Order \17\ is matched by or matches
any competing Improvement Orders and/or non-Public Customers' Unrelated
Orders at the final price level, the Initiating Participant's Primary
Improvement Order retains priority for up to forty percent (40%) of the
remaining size of the PIP Order after Public Customer orders are
satisfied. However, if only one competing order matches the Initiating
Participant's Single-Priced Primary Improvement Order at the final
price level, then the Initiating Participant may retain priority for up
to fifty percent (50%) of the remaining size of the PIP Order after
Public Customer orders are satisfied.\18\
---------------------------------------------------------------------------
\16\ See proposed BOX Rule 7150(g)(2). When starting a PIP, the
Initiating Participant may submit to the Exchange the Primary
Improvement Order with a designation of the total amount of the PIP
Order it is willing to hat this is.to the other PIP Participants
(``PIP Surrender Quantity''). If the Primary Improvement Order has
designated a PIP Surrender Quantity, the Primary Improvement Order
allocation will be reduced, if necessary, by the amount of the PIP
Surrender Quantity. See Notice, supra note 3, at 37799-800.
\17\ See BOX Rule 7150(f) (defining the term as ``a single price
order that is equal to or better than that of the National Best Bid
Offer (``NBBO'') at the time of the commencement of the PIP.
\18\ See proposed BOX Rule 7150(h)(1). See Notice, supra note 3,
at 37801, for an example illustrating allocation of 50% rather than
40% to the Primary Improvement Order.
---------------------------------------------------------------------------
When an Initiating Participant submits a Max Improvement Primary
Improvement Order,\19\ the Initiating Participant will be allocated its
full size at each price level, except where restricted by the
designated limit price, until a price level is reached where the
balance of the PIP Order can be fully executed. At the final price
level, the Initiating Participant will be entitled to receive up to
forty percent (40%) of the remaining size of the PIP Order after Public
Customer orders are satisfied. However, if only one competing order
matches the Initiating Participant's Max Improvement Primary
Improvement Order at the final price level, then the Initiating
Participant may retain priority for up to fifty percent (50%) of the
remaining size of the PIP Order after Public Customer orders are
satisfied.\20\
---------------------------------------------------------------------------
\19\ See BOX Rule 7150(f) (defining the term as ``an auto-match
submission that will automatically match both the price and size of
all competing quotes and orders at any price level achieved during
the PIP or only up to a limit price'').
\20\ See proposed BOX Rule 7150(h)(2). See Notice, supra note 3,
at 37801, for an example illustrating allocation to the Primary
Improvement Order with a specified auto-match limit price.
---------------------------------------------------------------------------
Pursuant to proposed BOX Rule 7150(h), Public Customer orders and
Legging Orders will not be considered when determining whether the
Initiating Participant retains 40% or 50% because neither Public
Customer order allocation nor Legging Order allocation will be affected
by the Initiating Participant retaining the difference between 40% and
50%.
Market Maker Allocation
After the Primary Improvement Order allocation, any remaining
unallocated quantity of the PIP Order will be allocated to orders and
quotes, including Improvement Orders and quotes and orders on the BOX
Book prior to the PIP Broadcast for the account of Market Makers.\21\
Where there are orders/quotes for the accounts of more than one Market
Maker at the same price, the trade allocation formula for Market Makers
will provide for the allocation of contracts among Market Makers based
on size pro rata for the remaining contracts.
---------------------------------------------------------------------------
\21\ See proposed BOX Rule 7150(g)(3).
---------------------------------------------------------------------------
The proposed Market Maker allocation would follow the formula: (B *
C), where component B is derived by dividing the quantity of contracts
for the Market Maker at the price level by the total quantity of
contracts of all Market Makers at the price level, while component C is
the remaining quantity of the PIP Order to be allocated after the
Primary Improvement Order allocation. If the quantity of contracts for
the Market Maker order in B is greater than the original quantity of
the PIP Order,
[[Page 49363]]
the Market Maker's quantity will be capped at the size of the original
PIP Order for purposes of calculating B. If the trade allocation for a
Market Maker would be greater than the quantity of the Market Maker
order/quote at a price level, the Market Maker's trade allocation will
not exceed the size of the Market Maker order/quote at that price
level. If the trade allocation for a Market Maker would result in a
fraction of a contract, it will be rounded down. In certain
circumstances, due to rounding down, it is possible that some Market
Maker orders will not be filled even though there is sufficient
quantity of the PIP Order to be allocated.\22\
---------------------------------------------------------------------------
\22\ See Notice, supra note 3, at 37802, for an example
illustrating Market Maker trade allocations.
---------------------------------------------------------------------------
Remaining Orders Allocation
After the Market Maker allocation, any remaining unallocated
quantity of the PIP Order will be allocated to any remaining orders,
other than Legging Orders and Market Maker orders, including orders for
the account of Professionals and orders on the BOX Book prior to the
PIP Broadcast, not receiving allocation in the rounds described
above.\23\
---------------------------------------------------------------------------
\23\ See proposed BOX Rule 7150(g)(4). Currently, Professionals
are treated like Public Customers in circumstances where BOX yields
priority to Public Customers under SEC Rule 11a1-1(T). Under the
proposed rule change, pursuant to which Improvement Orders will not
be broadcast, transactions executed on BOX will qualify under SEC
Rule 11a2-2(T) as described below. As a result, Professionals will
no longer be treated like Public Customers for purposes of priority.
See Notice, supra note 3, at 37802, for an example showing a
comparison of Professional Customer PIP trade allocation (before and
after the proposed rule change).
---------------------------------------------------------------------------
Where there is more than one remaining unallocated order, including
Improvement Orders, at the same price, the trade allocation to each
such order will follow the formula: (B * C) where component B is
derived by dividing the quantity of contracts for the order at the
price level by the total quantity of contracts for all remaining orders
at the price level, while component C is the remaining quantity of the
PIP Order to be allocated after the Market Maker allocation. If the
quantity of contracts for the order in B is greater than the original
quantity of the PIP Order, the quantity of contracts for the order will
be capped at the size of the original PIP Order for purposes of
calculating B. If the trade allocation for an order/quote would be
greater than the quantity of the order/quote at the price level, the
trade allocation will not exceed the size of the order/quote at the
price level. If the trade allocation would result in a fraction of a
contract, it will be rounded down.\24\
---------------------------------------------------------------------------
\24\ See Notice, supra note 3, at 37802, for an example
illustrating Market Maker trade allocations.
---------------------------------------------------------------------------
Additional Allocation
If, at the end of the remaining orders allocation, there remains
any unallocated quantity of the PIP Order, the balance will be
allocated to all remaining quotes and orders, if any, other than
Legging Orders and the Primary Improvement Order. The allocation method
will be to allocate one contract of the PIP Order per quote/order
sequentially until each remaining quote/order has received one contract
or until the PIP Order is fully allocated. The allocation sequence
among quotes/orders in this step will be in order of size with the
largest remaining quote/order allocated first. Where two or more such
quotes/orders are the same size, the trade allocation sequence will be
by time priority.\25\
---------------------------------------------------------------------------
\25\ See proposed BOX Rule 7150(g)(5). See Notice, supra note 3,
at 37803, for an example illustrating additional allocation when
limited by a PIP Surrender Quantity with multiple Market Maker
orders.
---------------------------------------------------------------------------
Legging Order Allocation
If, after the allocation of all orders, quotes and Improvement
Orders, there remains any unallocated quantity of the PIP Order, to the
extent of any Surrender Quantity, allocation will be made to any
Legging Orders at the same price in time priority.\26\ If, at the end
of the Legging Order allocation, there remains any unallocated quantity
of the PIP Order, the balance will be allocated to the Initiating
Participant regardless of any applicable PIP Surrender Quantity.
---------------------------------------------------------------------------
\26\ See proposed BOX Rule 7150(g)(6). Legging Orders may
receive allocations of a PIP Order when the Legging Order is at a
price better than the final price level or at the final price level
in the event the Initiating Participant has specified a Surrender
Quantity. See Notice, supra note 3, at 37803-4, for examples
illustrating trade allocations where the Primary Improvement Order's
PIP Surrender Quantity is: (i) greater than, and (ii) less than, the
sum of Legging Orders at the final price level.
---------------------------------------------------------------------------
Quotes and Orders on the BOX Book
Currently, all quotes and orders on the BOX Book prior to the PIP
Broadcast, excluding any proprietary quotes or orders from the
Initiating Participant, are filled at the end of the PIP in time
priority before any other order at the same price.\27\ In addition,
current BOX Rule 7150(g)(3) states that the Primary Improvement Order
follows in time priority all quotes and orders on the BOX Book prior to
the PIP Broadcast that are equal to the: (A) Single-Priced Primary
Improvement Order price; or (B) execution price of a Max Improvement
Primary Improvement Order that results in the balance of the PIP Order
being fully executed, except any proprietary quote or order from the
Initiating Participant.
---------------------------------------------------------------------------
\27\ See BOX Rule 7150(f)(4)(i). See Notice, supra note 3, at
37804-5, for an example illustrating trade allocations for orders on
the BOX Book prior to the PIP Broadcast, which are eligible for
execution at the conclusion of the PIP.
---------------------------------------------------------------------------
BOX proposes that quotes and orders on the BOX Book prior to the
PIP Broadcast no longer be allocated against the PIP Order at the end
of the PIP in time priority before any other order at the same price.
Instead, as described above in the Market Maker Allocation Section
above,\28\ quotes and orders on the BOX Book prior to the PIP Broadcast
will now be considered alongside all other quotes and orders, whether
Improvement Order(s), Legging Order(s), or Unrelated Order(s) received
by BOX during the PIP (excluding all Legging Orders and Unrelated
Orders that were immediately executed during the interval of the PIP),
for matching at the conclusion of the PIP. Consequently, BOX is
proposing to remove the exceptions for quotes and orders on the BOX
Book prior to the PIP Broadcast in BOX Rules 7150(f)(4)(i) and (g)(3).
BOX has represented that this is consistent with Phlx.\29\ Proprietary
quotes or orders from the Initiating Participant at the Primary
Improvement Order price shall not be executed against the PIP Order
during or at the conclusion of the PIP.
---------------------------------------------------------------------------
\28\ See Section II.A., supra.
\29\ See Phlx Rule 1080(n)(ii)(E)(2).
---------------------------------------------------------------------------
B. Priority and Allocation at the Conclusion of the COPIP
Pursuant to current BOX Rule 7245, Complex Orders may be submitted
to the COPIP, which is substantially similar to the PIP except as
necessary to account for distinctions between regular orders on the BOX
Book and Complex Orders.\30\ BOX proposes to amend the COPIP priority
and allocation rule to adopt similar changes to those being proposed to
the PIP allocation.\31\ Complex Orders on the Complex Order Book will
continue to be executed in price/time priority, but in the event an
execution opportunity occurs for a Complex Order on the Complex Order
Book against a COPIP Order at the end of a COPIP, the COPIP execution
will
[[Page 49364]]
occur according to the priority algorithm described below.
---------------------------------------------------------------------------
\30\ References to Legging Orders do not appear in the COPIP
rules because Legging Orders interact only with the PIP. However,
the COPIP rules do include other provisions for interacting with
interest on the BOX Book.
\31\ See Notice, supra note 3, at 37806-7, for a detailed
description of the current COPIP allocation.
---------------------------------------------------------------------------
Specifically, BOX has proposed that, at the end of the COPIP, the
COPIP Order will continue to be matched with opposite side competing
orders in price priority. If the total quantity of orders, Improvement
Orders, BOX Book Interest and the Primary Improvement Order is equal to
or less than the quantity of the COPIP Order at a given price level,
all orders at the price will be filled and the balance of the COPIP
Order will be executed at the next best price.
If the total quantity of orders, Improvement Orders, BOX Book
Interest and the Primary Improvement Order is greater than the quantity
of the COPIP Order at a given price level, the allocation will be as
follows:
BOX Book Interest Allocation
BOX Book Interest is currently executed in priority over Complex
Orders. BOX Book Interest \32\ will continue to be allocated for
execution against the COPIP Order in priority over Complex Orders and
in time priority.\33\
---------------------------------------------------------------------------
\32\ ``BOX Book Interest'' is defined as bids and offers on the
BOX Book for the individual legs of a Strategy. See BOX Rule
7245(a)(3).
\33\ See proposed BOX Rule 7245(g)(1). See Notice, supra note 3,
at 37807, for an example illustrating allocations of BOX Book
Interest at multiple price levels eligible for execution at the end
of a COPIP.
---------------------------------------------------------------------------
Public Customer Allocation
After the BOX Book Interest allocation, Complex Orders, other than
the Primary Improvement Order, for the account of Public Customers,
including Improvement Orders and orders on the Complex Order Book prior
to the COPIP Broadcast, will be allocated for execution against the
COPIP Order in priority over other Complex Orders. Where there are
multiple such Complex Orders for the account of Public Customers,
allocation among all Public Customers, other than the Initiating
Participant, at the same price will be by time priority.\34\
---------------------------------------------------------------------------
\34\ See proposed BOX Rule 7245(g)(2). See Notice, supra note 3,
at 37808, for examples illustrating allocations of Primary
Improvement Orders for the accounts of Public Customers in two
different scenarios.
---------------------------------------------------------------------------
Primary Improvement Order Allocation
After the Public Customer allocation, the Primary Improvement Order
will receive its applicable trade allocation.\35\ Specifically, when a
Single-Priced Primary Improvement Order \36\ is matched by or matches
any Complex Order(s) at the final price level, the Initiating
Participant's Primary Improvement Order retains priority for up to
forty percent (40%) of the remaining size of the COPIP Order after BOX
Book Interest and Public Customer orders are satisfied. However, if
only one Complex Order matches the Initiating Participant's Single-
Priced Primary Improvement Order at the final price level, then the
Initiating Participant may retain priority for up to fifty percent
(50%) of the remaining size of the COPIP Order after BOX Book Interest
and Public Customer orders are satisfied.\37\
---------------------------------------------------------------------------
\35\ See proposed BOX Rule 7150(h). If the Primary Improvement
Order has designated a COPIP Surrender Quantity, the Primary
Improvement Order allocation will be reduced, if necessary, in
accordance with the COPIP Surrender Quantity.
\36\ See BOX Rule 7245(f) (defining the term as ``a single price
order that is equal to or better than cNBBO, cBBO (each as defined
in [BOX] Rule 7240(a)) and BBO on the Complex Order Book for the
Strategy at the time of the commencement of the COPIP.
\37\ See proposed BOX Rule 7245(h)(1). See Notice, supra note 3,
at 37809, for an example illustrating allocation of 50% rather than
40% to the Primary Improvement Order.
---------------------------------------------------------------------------
When the Initiating Participant submits a Max Improvement Primary
Improvement Order,\38\ the Initiating Participant shall be allocated
its full size at each price level, except where restricted by the
designated limit price, until a price level is reached where the
balance of the COPIP Order can be fully executed. At the final price
level, the Initiating Participant will be entitled to receive up to
forty percent (40%) of the remaining size of the COPIP Order after BOX
Book Interest and Public Customer orders are satisfied. However, if
only one competing Complex Order matches the Initiating Participant's
Max Improvement Primary Improvement Order at the final price level,
then the Initiating Participant may retain priority for up to fifty
percent (50%) of the remaining size of the COPIP Order after BOX Book
Interest and Public Customer orders are satisfied.\39\ Public Customer
orders and BOX Book Interest will not be considered when determining
whether the Initiating Participant retains 40% or 50% in proposed BOX
Rule 7245(h) because neither Public Customer order allocation nor BOX
Book Interest allocation will be affected by the Initiating Participant
retaining the difference between 40% and 50%.\40\
---------------------------------------------------------------------------
\38\ See BOX Rule 7245(f) (defining the term as ``an auto-match
submission that will automatically match both the price and size of
all competing orders, including Improvement Orders and Unrelated
Orders, at any price level achieved during the COPIP or only up to a
limit price'').
\39\ See proposed BOX Rule 7245(h)(2). See Notice, supra note 3,
at 37809-10, for examples illustrating COPIP allocation with and
without auto-matching.
\40\ The first sentence of proposed BOX Rule 7245(h)(1) deletes
from the current rule the words ``or BOX Book Interest'' in order to
be consistent with the proposal not to consider BOX Book Interest
for purposes of determining the Primary Improvement Order's trade
allocation percentage.
---------------------------------------------------------------------------
Market Maker Allocation
After the Primary Improvement Order allocation, any remaining
unallocated quantity of the COPIP Order will be allocated to Complex
Orders, including Improvement Orders and orders on the Complex Order
Book prior to the COPIP Broadcast, for the account of Market
Makers.\41\ Where there are Complex Orders for the accounts of more
than one Market Maker at the same price, the trade allocation formula
for Market Makers will provide for the allocation of contracts among
Market Makers based on size pro rata for the remaining Strategies. The
proposed Market Maker allocation would follow the formula: (B * C)
where component B is derived by dividing the quantity of Strategies for
the Market Maker at the price level by the total quantity of Strategies
for all Market Makers at the price level, while component C is the
remaining quantity of the COPIP Order to be allocated after the Primary
Improvement Order allocation. If the quantity of Strategies for the
Market Maker order in B is greater than the original quantity of the
COPIP Order, the Market Maker's quantity will be capped at the size of
the original COPIP Order for purposes of calculating B. If the trade
allocation for a Market Maker would be greater than the quantity of the
Market Maker order at the price level, the Market Maker's trade
allocation will not exceed the size of the Market Maker order at the
price level. If the trade allocation for a Market Maker would result in
a fraction of a Strategy, it will be rounded down. In certain
circumstances, due to rounding down, it is possible that some Market
Maker orders will not be filled even though there is sufficient
quantity of the COPIP Order to be allocated.\42\
---------------------------------------------------------------------------
\41\ See proposed BOX Rule 7245(g)(4).
\42\ See Notice, supra note 3, at 37810, for an example
illustrating COPIP allocations to Market Makers.
---------------------------------------------------------------------------
Remaining Complex Orders Allocation
After the Market Maker allocation, any remaining unallocated
quantity of the COPIP Order will be allocated to any remaining Complex
Orders, other than Market Maker orders, including orders for the
account of Professionals and orders on the Complex Order Book prior to
the COPIP Broadcast, not receiving allocation above.\43\
---------------------------------------------------------------------------
\43\ See proposed BOX Rule 7245(g)(5). See Notice, supra note 3,
at 37810-1, for an example illustrating comparison of COPIP trade
allocations to Professionals before and after the proposed rule
change.
---------------------------------------------------------------------------
Where there is more than one remaining unallocated Complex Order,
including Improvement Orders, at the same price, the trade allocation
to each
[[Page 49365]]
such Complex Order will follow the formula: (B * C) where component B
is derived by dividing the quantity of Strategies for the Complex Order
at the price level by the total quantity of Strategies for all
remaining Complex Orders at the price level, while component C is the
remaining quantity of the COPIP Order to be allocated after the Market
Maker allocation. If the quantity of Strategies for the Complex Order
in B is greater than the original quantity of the COPIP Order, the
quantity of Strategies for the Complex Order will be capped at the size
of the original COPIP Order for purposes of calculating B. If the trade
allocation for a Complex Order would be greater than the quantity of
Strategies for the Complex Order at the price level, the trade
allocation will not exceed the quantity of Strategies for the Complex
Order at the price level. If the trade allocation would result in a
fraction of a Strategy, it will be rounded down.
Additional Allocation
The balance of the COPIP Order will be allocated to all remaining
orders, if any, other than the Primary Improvement Order. The
allocation method will be to allocate one Strategy of the COPIP Order
per order sequentially until each remaining order has received one
Strategy or until the COPIP Order is fully allocated. The allocation
sequence among orders in this step will be in order of size with the
largest remaining order allocated first. Where two or more such orders
are the same size, trade allocation sequence will be by time priority.
If, at the end of the additional allocation, there remains any
unallocated quantity of the COPIP Order, the balance will be allocated
to the Initiating Participant regardless of any applicable COPIP
Surrender Quantity.\44\
---------------------------------------------------------------------------
\44\ See proposed BOX Rule 7245(g)(6). See Notice, supra note 3,
at 37811, for an example illustrating additional allocation to
multiple market maker orders when limited by a COPIP Surrender
Quantity.
---------------------------------------------------------------------------
Complex Orders on the Complex Order Book
Currently, all Complex Orders on the Complex Order Book prior to
the COPIP Broadcast, excluding any proprietary orders from the
Initiating Participant, are filled at the end of the COPIP in time
priority before any other Complex Orders at the same price.\45\
Further, BOX Rule 7245(g)(3) states that the Primary Improvement Order
follows in time priority all Complex Orders on the Complex Order Book
prior to the COPIP Broadcast that are equal to the: (A) Single Priced
Primary Improvement Order price; or (B) execution price of a Max
Improvement Primary Improvement Order that results in the balance of
the COPIP Order being fully executed, except any proprietary order(s)
from the Initiating Participant.
---------------------------------------------------------------------------
\45\ See BOX Rule 7245(f)(3)(ii).
---------------------------------------------------------------------------
BOX proposes that quotes and orders on the Complex Order Book prior
to the COPIP Broadcast will no longer be allocated against the COPIP
Order at the end of the COPIP in time priority before any other order
at the same price. Specifically, quotes and orders on the Complex Order
Book prior to the COPIP Broadcast will now be considered alongside all
other orders, whether Improvement Order(s), including Unrelated
Order(s) received by BOX during the COPIP (excluding all Unrelated
Orders that were immediately executed during the interval of the
COPIP), for matching at the conclusion of the COPIP.\46\ Therefore, BOX
has proposed removing the exceptions for quotes and orders on the BOX
Book prior to the COPIP Broadcast in BOX Rules 7245(f)(3)(ii) and
(g)(3). BOX has represented that this proposed change is consistent
with Phlx.\47\ Proprietary quotes or orders from the Initiating
Participant at the Primary Improvement Order price shall not be
executed against the COPIP Order during or at the conclusion of the
COPIP.
---------------------------------------------------------------------------
\46\ See Notice, supra note 3, at 37811-2, for an example
illustrating allocation to orders on the Complex Order Book prior to
the COPIP Broadcast for orders eligible for execution at the
conclusion of the COPIP.
\47\ See Phlx Rule 1080(n)(ii)(E)(2)(d).
---------------------------------------------------------------------------
C. Professional Customer Priority in the PIP and COPIP
Pursuant to BOX Rule 100(a)(50), a ``Professional'' is a person or
entity that (i) is not a broker or dealer in securities, and (ii)
places more than 390 orders in listed options per day on average during
a calendar month for its own beneficial account(s). Under current BOX
rules, Public Customers, including Professionals, benefit from certain
order priority advantages in PIP and COPIP transactions on BOX (``Order
Priority''). BOX proposes to amend Rule 100(a)(50), and related cross
references in BOX Rules 7150(a)(2) and 7145(a)(4), to limit the
availability of order priority advantages in PIP and COPIP transactions
to non-Professional, Public Customers on BOX.\48\ Thus Professionals
will now be treated like non-Public Customers for order priority in PIP
and COPIP transactions instead of receiving the same order priority
afforded to non-Professional, Public Customers. According to BOX, the
order-sending behavior and trading activity of Professionals tend to be
more similar to broker-dealers trading on a proprietary basis, and
therefore it is not unfairly discriminatory to give Professional orders
the same priority as broker-dealers for allocation purposes. BOX has
represented that other exchanges also treat Professionals as non-Public
Customers for Order Priority in auction transactions.\49\
---------------------------------------------------------------------------
\48\ See proposed BOX Rule 7150(g)(4). Currently, Professionals
are treated like Public Customers in circumstances where BOX yields
priority to Public Customers under SEC Rule 11a1-1(T). Under the
proposed rule change, pursuant to which Improvement Orders will not
be broadcast, transactions executed on BOX will qualify under SEC
Rule 11a2-2(T) as described below. As a result, Professionals will
no longer be treated like Public Customers for purposes of priority.
\49\ See Phlx Rule 1000(b)(14).
---------------------------------------------------------------------------
D. Improvement Orders in PIP and COPIP
Currently, Improvement Order responses submitted during the PIP and
COPIP are broadcast via the High Speed Vendor Feed (``HSVF'') but are
not disseminated through OPRA.\50\ The Exchange proposes to no longer
broadcast Improvement Orders received during the PIP or the COPIP. The
Exchange believes that this proposed change will encourage greater
participation in the PIP and the COPIP, which may lead to greater price
improvement because a Participant will be encouraged to submit
Improvement Orders at the best possible price at which the Participant
is willing to participate.\51\
---------------------------------------------------------------------------
\50\ See BOX Rules 7150(f)(1) and 7245(f)(1).
\51\ See Notice, supra note 3, at 37814.
---------------------------------------------------------------------------
BOX does not currently allow Participants to cancel their
Improvement Orders and only allows them to decrease the size of their
Improvement Order by improving the price of that order.\52\ BOX
proposes to allow Participants to cancel their Improvement Orders at
any time up to the end of the PIP or COPIP. Additionally, because a
Participant will be able to cancel its Improvement Order and submit a
new modified Improvement Order, BOX proposes to not allow a Participant
to decrease the size of its Improvement Order by improving the price of
that order. BOX believes that by allowing a Participant to cancel its
Improvement Order, the Participant will be more willing to enter
aggressively priced responses. BOX has represented that these proposed
changes are consistent with Phlx's Rules.\53\
---------------------------------------------------------------------------
\52\ See BOX Rules 7150(f)(2) and 7245(f)(2).
\53\ See NASDAQ OMX PHLX LLC (``Phlx'') Rule 1080(n)(ii)(6) and
(n)(ii)(9). See Notice, supra note 3, at 37814.
---------------------------------------------------------------------------
[[Page 49366]]
E. PIP Market Maker Prime Designation and CPO Order Type
Current BOX Rule 7160 provides that at the commencement of each
PIP, a single Market Maker Prime may be designated for that PIP only.
When the PIP was first adopted, BOX introduced the Market Maker Prime
designation to encourage Market Makers to quote aggressively on the BOX
Book and not wait for a PIP to begin.\54\ BOX proposes to eliminate the
Market Maker Prime designation because, according to BOX, Market Makers
rarely use the Market Maker Prime functionality.\55\
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\54\ See Securities Exchange Act Release No. 47186 (January 14,
2003), 78 FR 3062 (January 22, 2003) (Notice of Filing SR-BSE-2002-
15).
\55\ See Notice, supra note 3, at 37805.
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Current BOX Rule 7150(h) provides for a CPO order type. A CPO
allows a Public Customer to submit an order on a single options series,
through an order flow provider (``OFP''),\56\ specifying one price for
entry on the BOX Book (in the applicable minimum increment for that
series) and a different price for interaction with a PIP (in one cent
increments). The CPO was intended to provide access to the PIP on
behalf of a Public Customer. However, according to BOX, because CPOs
are rarely submitted, BOX proposes to eliminate the CPO order type.\57\
Public Customers may continue to submit orders to the BOX Book and
Improvement Orders during the PIP.
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\56\ As defined in BOX Rule 100(a)(45), the term Order Flow
Provider or ``OFP'' means those Options Participants representing as
agent Customer Orders on BOX and those non-Market Maker Participants
conducting proprietary trading.
\57\ See Notice, supra note 3, at 37805.
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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
and, in particular, with Section 6(b) of the Act.\58\ In particular,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\59\ 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 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 customers, issuers, brokers and dealers.
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\58\ 15 U.S.C. 78f(b). 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).
\59\ 15 U.S.C. 78f(b)(5).
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Under the proposed rule change, at the conclusion of a PIP, Public
Customer orders have first priority to trade against the Agency Order.
After the execution of Public Customer orders, the Primary Improvement
Order may be allocated up to 40% of the remaining size of the PIP Order
(however, if only one competing order matches the Primary Improvement
Order, then the Primary Improvement Order may be allocated up to 50% of
the PIP Order). Market Maker orders and quotes next have priority.
After the Market Maker allocation, any remaining unallocated quantity
of the PIP Order will be allocated to any remaining orders (other than
Legging Orders and Market Maker orders), including orders for the
account of Professionals. Legging Orders have final priority. Under the
proposed rule change, the allocation at the conclusion of a COPIP
auction is substantially the same as the allocation at the conclusion
of a PIP auction except BOX Book Interest has priority over all orders
at the end of a COPIP auction. The Commission believes that the
proposed matching algorithm set forth in the PIP and the COPIP rules
are sufficiently clear regarding how orders are to be allocated in the
PIP and the COPIP auctions and do not raise any novel issues. The
proposed changes to the PIP and COPIP mechanisms are similar in many
aspects to the features found in the price improvement mechanisms of
other options exchanges, including: the ability to cancel Improvement
Orders; \60\ the non-dissemination of Improvement Orders to OPRA; \61\
and the execution allocation scheme which gives Public Customers and
the Initiating Participant priority over other Participants and
Professional Customers;\62\ and the execution of orders on the book at
the end of the PIP auction.\63\
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\60\ See, e.g., Chicago Board Options Exchange, Incorporated
(``CBOE'') Rule 6.74A(b)(1)(I).
\61\ See,e.g., CBOE Rule 6.74A(b)(1)(F), Phlx Rule
1080(n)(ii)(A)(6).
\62\ See, e.g., ISE Rule 723(d), Miami International Securities
Exchange LLC (``MIAX'') Rule 515A(a)(2)(iii), and Phlx Rule
1080(n)(ii)(E).
\63\ See id.
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Under the proposed rule change, Improvement Orders will no longer
be disseminated to Participants and to OPRA. The Commission notes that,
according to the Exchange, this may encourage Participants to submit
Improvement Orders at the best possible price that the Participant is
willing to interact with the Agency Order, which could lead to greater
price improvement for the Agency Order. \64\
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\64\ See Notice, supra note 3, at 37814.
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Finally, BOX will eliminate the Market Maker Prime designation and
CPO order type. According to the Exchange, Market Makers rarely use the
Market Maker Prime functionality. The Commission notes that Public
Customers currently have and will continue to have opportunities to
participation in the PIP and COPIP, without the limitations that the
CPO order type would impose.
IV. Section 11(a) of the Act
Section 11(a)(1) of the Act \65\ prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion
(collectively, ``covered accounts'') unless an exception applies. Rule
11a2-2(T) under the Act,\66\ known as the ``effect versus execute''
rule, provides exchange members with an exemption from the Section
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member,
subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute
transactions on the exchange. To comply with Rule 11a2-2(T)'s
conditions, a member: (i) must transmit the order from off the exchange
floor; (ii) may not participate in the execution of the transaction
once it has been transmitted to the member performing the execution;
(iii) may not be affiliated with the executing member; and (iv) with
respect to an account over which the member has investment discretion,
neither the member nor its associated person may retain any
compensation in connection with effecting the transaction except as
provided in the Rule. For the reasons set forth below, the Commission
believes that BOX's Participants effecting transactions through the PIP
and COPIP, including executions of PIP Orders and COPIP Orders against
orders on the BOX Book and the Complex Order Book, would satisfy the
requirements of Rule 11a2-2(T).\67\
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\65\ 15 U.S.C. 78k(a)(1).
\66\ 17 CFR 240.11a2-2(T).
\67\ The Commission notes that it has previously found that
transactions effected through the BOX PIP and COPIP are consistent
with the requirements of Section 11(a), relying in part upon Rule
11a1-1(T) and in part upon Rule 11a2-2(T) thereunder. See Securities
Exchange Act Release Nos. 68177 (November 7, 2012), 77 FR 67851
(November 14, 2012) and 71148 (December 19, 2013), 78 FR 78437
(December 26, 2013).
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[[Page 49367]]
The Rule's first condition is that orders for covered accounts be
transmitted from off the exchange floor. The Commission has previously
found that the off-floor transmission requirement is met if a covered
account order is transmitted from a remote location directly to an
exchange's floor by electronic means.\68\ The Exchange has represented
that orders sent to BOX, regardless of where it executes within the BOX
system, including the Complex Order Book, the BOX Book, a PIP or a
COPIP, will be transmitted from remote terminals directly to BOX by
electronic means. The Exchange also represents that orders for covered
accounts from OFPs and BOX Market Makers will only be submitted from
electronic systems from remote locations, separate from BOX. Because
the Exchange has represented that there are no other Options
Participants that are able to submit order to BOX other than OFPs or
Market Makers, the Commission believes that orders received through the
PIP and COPIP would satisfy the off-floor transmission requirement.
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\68\ See, e.g., Securities Exchange Act Release Nos. 61419
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031)
(approving BATS options trading); 59154 (December 23, 2008), 73 FR
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity
securities listing and trading on BSE); 57478 (March 12, 2008), 73
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979
Release'').
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Second, the Rule requires that the member not participate in the
execution of its order. The Exchange represents that at no time
following the submission of an order is a Participant able to acquire
control or influence over the result or timing of an order's
execution.\69\ According to the Exchange, the execution of an order is
determined by what other orders are entered into BOX at or around the
same time, what orders are on the Complex Order Book and on the BOX
Book, whether a PIP or COPIP is initiated and where the order is ranked
based on the priority ranking algorithm.\70\ In addition, as noted
above, BOX proposes to no longer broadcast Improvement Orders received
during the PIP and COPIP. As a result, responses to the PIP and COPIP
auctions would no longer be visible to Participants.\71\ Accordingly,
the Commission believes that a member does not participate in the
execution of an order submitted through the PIP or the COPIP, including
orders that execute against an order on the BOX Book or the Complex
Order Book.
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\69\ See Notice, supra note 3, 79 FR at 37816.
\70\ See id.
\71\ See Notice, supra note 3, 79 FR at 37814.
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Third, Rule 11a2-2(T) requires that the order be executed by an
exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that this requirement is satisfied
when automated systems facilities are used, as long as the design of
these systems ensures that members do not possess any special or unique
trading advantages in handling their orders after transmitting them to
the exchange.\72\ BOX has represented that the PIP and COPIP are
designed so that no broker-dealer has any special or unique trading
advantage in the handling of its orders after transmitting its orders
to BOX.\73\ Based on the Exchange's representation, the Commission
believes that the PIP and COPIP satisfy this requirement.
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\72\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release, supra note 55.
\73\ See Notice, supra note 3, 79 FR at 37815.
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Fourth, in the case of a transaction effected for an account with
respect to which the initiating member or an associated person thereof
exercises investment discretion, neither the initiating member nor any
associated person thereof may retain any compensation in connection
with effecting the transaction, unless the person authorized to
transact business for the account has expressly provided otherwise by
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\74\ BOX represents that Participants relying on Rule
11a2-2(T) for transactions effected through the PIP and COPIP must
comply with this condition of the Rule and that the Exchange has
represented that it will enforce this requirement pursuant to its
obligation under Section 6(b)(1) of the Act to enforce compliance with
federal securities laws.\75\
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\74\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement. See 17 CFR 240.11a2-2(T)(d).
\75\ See Notice, supra note 3, 79 FR at 37817.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\76\ that the proposed rule change (SR-BOX-2014-16), be and hereby
is, approved.
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\76\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
Kevin M. O'Neill,
Deputy Secretary.
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\77\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-19704 Filed 8-19-14; 8:45 am]
BILLING CODE 8011-01-P