Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rules for an Open-Outcry Trading Floor, 23657-23684 [2017-10588]

Download as PDF Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices NMS Plan. Therefore, this is not a competitive fee filing and, therefore, it does not raise competition issues between and among the exchanges and FINRA. Moreover, as previously described, FINRA believes that the proposed rule change fairly and equitably allocates costs among CAT Reporters. In particular, the proposed fee schedule is structured to impose comparable fees on similarly situated CAT Reporters, and lessen the impact on smaller CAT Reporters. CAT Reporters with similar levels of CAT activity will pay similar fees. For example, Industry Members (other than Execution Venue ATSs) with higher levels of message traffic will pay higher fees, and those with lower levels of message traffic will pay lower fees. Similarly, Execution Venue ATSs and other Execution Venues with larger market share will pay higher fees, and those with lower levels of market share will pay lower fees. Therefore, given that there is generally a relationship between message traffic and market share to the CAT Reporter’s size, smaller CAT Reporters generally pay less than larger CAT Reporters. Accordingly, FINRA does not believe that the CAT Fees would have a disproportionate effect on smaller or larger CAT Reporters. In addition, ATSs and exchanges will pay the same fees based on market share. Therefore, FINRA does not believe that the fees will impose any burden on the competition between ATSs and exchanges. Accordingly, FINRA believes that the proposed fees will minimize the potential for adverse effects on competition between CAT Reporters in the market. Furthermore, the tiered, fixed fee funding model limits the disincentives to providing liquidity to the market. Therefore, the proposed fees are structured to limit burdens on competitive quoting and other liquidity provision in the market. sradovich on DSK3GMQ082PROD with NOTICES C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act,57 and paragraph (f)(2) of Rule 19b–4 thereunder.58 At any time within 60 days of the filing of the proposed rule 57 15 58 17 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(2). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FINRA–2017–011 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2017–011. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 23657 available publicly. All submissions should refer to File Number SR–FINRA– 2017–011, and should be submitted on or before June 13, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.59 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–10466 Filed 5–22–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80720; File No. SR–BOX– 2016–48] Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rules for an Open-Outcry Trading Floor May 18, 2017. On November 16, 2016, BOX Options Exchange LLC (‘‘BOX’’ or the ‘‘Exchange’’) 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 adopt rules for an open-outcry trading floor. The proposed rule change was published for comment in the Federal Register on December 05, 2016.3 The Commission received three comment letters in response to the publication of the Notice.4 On January 10, 2017, the Commission extended the time period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to approve or disapprove the proposed rule change to March 05, 2017.5 On February 21, 2017, the Commission received a response letter from the Exchange, as well as Amendment No. 1 to the proposed rule change.6 On March 1, 2017, the 59 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. 79421 (November 29, 2016), 81 FR 87607 (‘‘Notice’’). 4 See letters to Brent J. Fields, Secretary, Commission, from Angelo Evangelou, Deputy General Counsel, The Chicago Board Options Exchange, Inc. (‘‘CBOE’’), dated January 10, 2017; Steve Crutchfield, Head of Market Structure, CTC Trading Group, LLC (‘‘CTC Trading’’), dated December 31, 2016; and Joan C. Conley, Senior Vice President and Corporate Secretary, The Nasdaq Stock Market LLC (‘‘Nasdaq’’), dated December 22, 2016. 5 See Securities Exchange Act Release No. 79768 (January 10, 2017), 82 FR 4956 (January 17, 2017). 6 See letter to Brent J. Fields, Secretary, Commission, from Lisa J. Fall, President, Exchange, 1 15 E:\FR\FM\23MYN1.SGM Continued 23MYN1 23658 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices Commission instituted proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1.7 In response to the OIP, the Commission received five additional comment letters.8 On May 17, 2017, the Exchange filed Amendment No. 2 to the proposed rule change, which replaced and superseded the original filing, as modified by Amendment No. 1, in its entirety.9 The Commission is publishing this notice to solicit comments from interested persons on Amendment No. 2. Items I and II below have been prepared by the Exchange. On May 18, 2017, the Commission extended the time period within which to approve or disapprove the proposed rule change to August 2, 2017.10 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change sradovich on DSK3GMQ082PROD with NOTICES The proposed rule change was filed on November 16, 2016, which was published in the Federal Register.11 The Exchange filed an Amendment 1 to this rule change on February 21, 2017, which was published in the Federal Register notice along with the Order Instituting Proceedings.12 The Exchange is proposing an Amendment 2 to provide more specificity to the rule change. This Amendment 2 amends and replaces the Original Filing and Amendment 1 in their entirety. This Amendment 2 makes the following changes to the Original Filing as modified by Amendment 1, to: (i) Clarify that the Trading Floor will have received February 21, 2017, and Amendment No. 1, dated February 21, 2017. Amendment No. 1 is available at: https://www.sec.gov/comments/sr-box2016-48/box201648.shtml. 7 See Securities Exchange Act Release No. 80134 (March 1, 2017), 82 FR 12864 (March 7, 2017) (‘‘OIP’’). 8 See letters to Brent J. Fields, Secretary, Commission, from Angelo Evangelou, Deputy General Counsel, CBOE, dated April 21, 2017; Steve Crutchfield, Head of Market Structure, CTC Trading, dated April 13, 2017; John Kinahan, CEO, Group One Trading, LP, dated April 11, 2017; Elizabeth King, General Counsel and Corporate Secretary, New York Stock Exchange, dated March 28, 2017; and Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, dated March 27, 2017. 9 See Amendment No. 2, dated May 17, 2017. Amendment 2 is available on the Exchange’s Web site at http:// lynxstorageaccount.blob.core.windows.net/boxvr/ SE_resources/SR-BOX-2016-48_Amendment_2.pdf. 10 See Securities Exchange Act Release No. 80719 (May 18, 2017). 11 See Securities Exchange Act Release No. 79421 (November 29, 2016), 81 FR 87607 (December 5, 2016) (‘‘Original Filing’’). 12 See Securities Exchange Act Release No. 80134 (March 1, 2017), 82 FR 12864 (March 7, 2017) (SR– BOX–2016–48). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 a single Crowd Area; 13 (ii) clarify that the BOX Order Gateway (‘‘BOG’’) is a component of the Trading Host; 14 (iii) clarify the public outcry process; 15 (iv) remove proposed Rule 7010(d); 16 (v) provide clarity regarding Trading Floor admittance; 17 (vi) provide more specificity on how trade-through and priority rules are enforced; 18 (vii) provide clarity on the handling of orders by Floor Brokers; 19 (viii) clarify the processing of orders by the Trading Host; 20 (ix) include the requirement of the presence of a Floor Market Maker when a Floor Broker announces an order; 21 (x) include the requirement of a Floor Broker to pass an examination as part of the registration process; 22 (xi) provide clarity on the allocation process; 23 (xii) provide additional detail on orders from the Trading Floor; 24 (xiii) clarify the submission parameters and process of a QOO Order; 25 (xiv) clarify that orders are announced on the Trading Floor; 26 (xv) clarify the guarantee provision; 27 (xvi) clarify that combination orders are Complex Orders; 28 (xvii) clarify priority in the trading crowd; 29 (xviii) clarify that single-sided orders may be represented 13 See changes in Exhibit 4 to proposed Rules 100(a)(67), 7660(i), and IM–8510–2(b). The Commission notes that Exhibits 3, 4, and 5, which were submitted with Amendment No. 2, are available on the Commission’s Web site at https:// www.sec.gov/rules/sro/box.htm. 14 See changes in Exhibit 4 to proposed Rule 100(b)(2), 7580(e)(2), 7600(c), IM–7580–2, and 8510(i). 15 See changes in Exhibit 4 to proposed Rule 100(b)(5). 16 See changes in Exhibit 4 to proposed Rule 7010(d). 17 See changes in Exhibit 4 to proposed Rule 7520. 18 See changes in Exhibit 4 to proposed Rule7600(a). 19 See changes in Exhibit 4 to proposed Rule 7580(e). 20 See changes in Exhibit 4 to proposed Rules 100(b)(2), 100(b)(3), 7240(b)(3)(iii), 7580(e), 7600(a), 7600(c), and 8510(i). 21 See changes in Exhibit 4 to proposed Rule 7580(a). 22 See changes in Exhibit 4 to proposed Rules 2020(h) and 7550. 23 See changes in Exhibit 4 to proposed Rules 7600(a), 7600(d), and 7600(h). 24 See changes in Exhibit 4 to proposed Rules 7600 and 7580(e). 25 As described in greater detail below, the Exchange is proposing to adopt a Qualified Open Outcry (‘‘QOO’’) Order type. All orders executed from the Trading Floor must be QOO Orders. See changes in Exhibit 4 to proposed Rule 7600(c). 26 See changes in Exhibit 4 to proposed Rules 7580(e)(1), 7580(e)(2), 7600(a), 7600(b), IM–7600–1, 7640(b), 8510(i), and IM–8510–2(b). 27 See changes in Exhibit 4 to proposed Rule 7600(f). 28 See changes in Exhibit 4 to proposed Rules 7580(c), IM–7590–1, 7600(f)(2), and IM–7600–1(d). 29 See changes in Exhibit 4 to proposed Rules 7610(d)(1) and IM–7600–1(c). PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 on the Trading Floor; 30 (xix) remove proposed Rule 7620; 31 (xx) remove the continuous electronic quoting obligation; 32 (xxi) clarify that orders for covered accounts 33 relying on an exemption under Section 11(a)(1)(G) of the Exchange Act (the ‘‘G Exemption’’) are not allowed when the Trading Floor is utilized; 34 (xxii) clarify the responsibilities of an Options Exchange Official; 35 (xxiii) clarify certain rules related to behavior on the Trading Floor; 36 (xxiv) provide certain data to the SEC with respect to activity on the Trading Floor; and (xxv) make grammatical changes to the rule text. The Exchange is amending the rule text to clarify that the Trading Floor will have a single Crowd Area where all option classes will be located.37 The Exchange believes this change will provide greater clarity on how the Trading Floor will be organized by removing the Exchange’s discretion to have multiple Crowd Areas. The Exchange believes this change is reasonable as it adds more clarity to the rule text by making clear in the rules the number of Crowd Areas on the Trading Floor. The Exchange is amending the rule text to clarify that the BOG is a component of the Trading Host.38 The Exchange believes that this change will provide greater clarity on the relationship between the BOG and Trading Host. Specifically, the Exchange believes clarifying that the BOG is a component of the Trading Host will provide greater detail on how QOO Orders submitted by Floor Brokers are processed by the Trading Host. The Exchange believes this change is reasonable as it adds more clarity to the rule text. The Exchange is amending rule text to clarify the public outcry process on the Trading Floor.39 The proposed change 30 See changes in Exhibit 4 to proposed Rules 7580(e)(1), 7580(e)(2), and IM–7600–4. 31 See changes in Exhibit 4 to proposed Rules 7620 and IM–7600–5. 32 See changes in Exhibit 4 to proposed Rules 8500(a) and 8510(c)(1). 33 A ‘‘covered account’’ is the member’s account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion. 34 See changes in Exhibit 4 to proposed Rules 7620(d), IM–7600–5, and 8510(h). 35 See changes in Exhibit 4 to proposed Rule 100(b)(6). 36 See changes in Exhibit 4 to proposed Rule 8510(h)(4). 37 See changes in Exhibit 4 to proposed Rules 100(a)(67), 7660(i), and IM–8510–2(b). 38 See changes in Exhibit 4 to proposed Rules 100(b)(2), 7580(e)(2), 7600(c), IM–7580–2, and 8510(i). 39 See changes in Exhibit 4 to proposed Rule 100(b)(5). E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES will provide how long a Floor Participant has to respond to a Floor Broker when an order is announced and additional details on the public outcry process. Specifically, a Floor Broker must a give a Floor Participant a reasonable amount of time to respond. The Exchange believes this change is reasonable as it adds clarity and removes any potential confusion from the rule text. The Exchange is amending the rule text to remove proposed Rule 7010(d).40 The Exchange is removing the proposed Rule because it is not necessary. Specifically, the proposed Rule provides that the Board may impose a charge upon Options Participants measured by their respective net commissions on transactions effected on the Trading Floor of the Exchange. The Exchange does not believe the provision is necessary because the Exchange does not intend to charge fees based on net commissions.41 The Exchange believes this change is reasonable as it removes a proposed Rule that is not necessary for the Trading Floor. The Exchange is amending the rule text to provide clarity regarding Trading Floor admittance.42 The proposed change makes clear that the Exchange must follow applicable disciplinary rules and procedures when the Exchange withdraws existing approval to access the Trading Floor. The Exchange believes this change is reasonable as it adds clarity to the rule text by providing additional detail on the admittance process of the Exchange and the existing disciplinary rules that are applicable. The Exchange is amending the rule text to provide more specificity on how trade-through and priority rules are enforced.43 The proposed changes will make clear that the Trading Host will enforce trade-through and priority rules in the same manner for QOO Orders as the Trading Host does for all other orders on BOX. As is the case with all orders on BOX, the QOO Order is validated when the QOO Order is received by the Trading Host. The Exchange is amending rule text to provide clarity on the handling of orders by Floor Brokers.44 The Exchange is amending the rule text to make clear 40 See changes in Exhibit 4 to proposed Rule 7010(d). 41 The Exchange notes that this proposed change does not prevent the Exchange from charging fees on the Trading Floor. 42 See changes in Exhibit 4 to proposed Rule 7520. 43 See changes in Exhibit 4 to proposed Rule 7600(a). 44 See changes in Exhibit 4 to proposed Rule 7580(e). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 that Floor Brokers must comply with certain requirements when representing an order on the Trading Floor. The Exchange notes that the proposed change does not impose any new requirements, but simply seeks to clarify the rules surrounding Floor Broker order handling requirements. As such, the Exchange believes that these changes are reasonable as they provide clarity to the rules. The Exchange is amending the rule text describing the processing of an order by the Trading Host.45 As part of this clarifying change, the Exchange is amending the rule text on how orders are submitted from the Trading Floor. The Exchange is making this change because a QOO Order is not executed until the Trading Host processes the QOO Order as opposed to when it is announced on the Trading Floor. Additionally, the Exchange is amending the rule text to make clear that all options transactions on BOX are executed automatically by the Trading Host. The Exchange believes these changes are reasonable as they eliminate confusion and provide clarity to the rules. The Exchange is amending the rule text to include the requirement of the presence of a Floor Market Maker when a Floor Broker announces an order.46 This proposed change is designed to better align the Exchange’s rules with those of another options exchange.47 The Exchange believes this change is reasonable as it enhances consistency between the Exchange’s proposed rules and existing rules at another exchange with a trading floor. The Exchange is amending the rule text to include the requirement of a Floor Broker to pass an examination as part of the registration process.48 In the Original Filing, the Exchange was proposing to make Floor Broker examinations discretionary, which was a departure from another options exchange with a trading floor. Therefore, the Exchange believes this change is reasonable as it enhances consistency between the exchange’s proposed rules and existing rules of another exchange with a trading floor.49 The Exchange is amending rule text to provide additional detail on orders from 45 See changes in Exhibit 4 to proposed Rules 100(b)(2), 100(b)(3), 7240(b)(3)(iii), 7580(e), 7600(a), 7600(c), and 8510(i). 46 See changes in Exhibit 4 to proposed Rule 7580(a). 47 See NASDAQ PHLX LLC (‘‘PHLX’’) Rule 1063(a). 48 See changes in Exhibit 4 to proposed Rules 2020(h) and 7550. 49 See PHLX Rule 1061. PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 23659 the Trading Floor.50 The proposed change provides details of how a Floor Broker may execute orders from the Trading Floor. The proposed change also provides additional details on a Floor Broker’s responsibility to announce an order to the trading crowd. Additionally, as part of this proposed change, the Exchange is moving proposed Rule 7580(e)(3) and combining it with proposed Rule 7600(a) in order to make the rule text clearer. The Exchange believes the proposed change is reasonable as it provides additional detail and clarity to the rule text. The Exchange is amending the rule text to provide clarity on the allocation process.51 The allocation process has not changed from the Original Filing; the proposed change is clarifying the timing and procedure that a Floor Broker must use on the Trading Floor. Specifically, the executing Floor Broker is responsible for providing the correct allocation of the initiating side of the QOO Order to an Options Exchange Official or his or her designee who will properly record the order in the Exchange’s system. Additionally, the proposed change reformatted the rule text to make it clearer for Participants. As part of this change, the Exchange is clearly laying out how the initiating side of the QOO Order is allocated. The Exchange is also clarifying the rule text language with respect to the book sweep size. The Exchange believes that these changes are reasonable because they add clarity and provides additional detail to the rules. The Exchange is amending the rule text to clarify the submission parameters and process of a QOO Order.52 This proposed change is designed to provide additional clarity on how the openoutcry process on the Trading Floor will occur. Specifically, the Exchange is adding rule text requiring a Floor Broker to submit the QOO Order to the BOG without undue delay. Although the Original Filing did not specifically state this, it was generally understood that a Floor Broker would submit the QOO Order to the BOG after announcement and would not unreasonably delay the submission, provided that the executing Floor Broker allows adequate time for Floor Participants to participate in the transaction as provided in proposed Rule 100(b)(5). The Exchange is also providing additional detail on the requirements for submitting a Complex 50 See changes in Exhibit 4 to proposed Rules 7600 and 7580(e). 51 See changes in Exhibit 4 to proposed Rules 7600(a), 7600(d), and 7600(h). 52 See changes in Exhibit 4 to proposed Rule 7600(c). E:\FR\FM\23MYN1.SGM 23MYN1 23660 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES QOO Order. As part of this proposed change, the Exchange is also making certain clarifying changes to the rule text. As such, the Exchange believes the change is reasonable since it provides additional clarity to the rules by codifying this requirement of Floor Brokers. The Exchange is amending the rule text to clarify that orders are announced on the Trading Floor.53 This proposed rule change is designed to clarify when an execution occurs. In the Original Filing, the Exchange used the terms ‘‘executed’’, ‘‘announced’’ and ‘‘represented’’ on the Trading Floor interchangeably. In actuality, an order is announced on the Trading Floor but not executed; the execution occurs when the QOO Order is processed by the Trading Host. Additionally, a Floor Broker may represent an order on the Trading Floor, however, this only means he is holding the order and does not necessarily mean he is announcing the order for execution. The Exchange believes that these clarifications are reasonable since they are designed to clarify and remove confusion from the rule text. The Exchange is amending the rule text related to guarantees.54 Specifically, the Exchange is amending the rule text to remove language that may lead to confusion among Floor Participants. The Exchange believes this change is reasonable as it provides clarity to the rule text. The Exchange is amending the rule text to clarify that combination orders, including spreads, straddles, and stock options, are Complex Orders.55 The Exchange is making this change in order to clarify the usage of certain terms throughout the Exchange’s Rulebook. The Exchange believes that this minor change is designed to provide clarity in the rules and is reasonable. The Exchange is amending the rule text to clarify priority in the trading crowd.56 Specifically, the proposed change clarifies that it is the responsibility of the Floor Participant who established the market to alert the Floor Broker of the fact that the Floor Participant has priority when a Floor Broker announces an order to the trading crowd. The Exchange believes this change is reasonable because it will provide clarity and guidance to Floor 53 See changes in Exhibit 4 to proposed Rules 7580(e)(2), 7600(a), 7600(b), IM–7600–1, 7640(b), 8510(i), and IM–8510–2(b). 54 See changes in Exhibit 4 to proposed Rule 7600(f). 55 See changes in Exhibit 4 to proposed Rules 7580(c), IM–7590–1, 7600(f)(2), and IM–7600–1(d). 56 See changes in Exhibit 4 to proposed Rules 7610(d)(1) and IM–7600–1(c). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Participants on the requirements of the rules. The Exchange is amending the rule text to clarify that single-sided orders may be represented on the Trading Floor.57 Single-sided orders have always been allowed on the Trading Floor; however, the Original Filing was silent on whether they may be represented on the Trading Floor. This proposed change is simply codifying that singlesided orders are allowed on the Trading Floor and, therefore, the Exchange believes the change is reasonable. The Exchange is removing proposed Rule 7620.58 Proposed Rule 7620 is not necessary since orders executed by Floor Brokers from the Trading Floor must be QOO Orders processed by the Trading Host and proposed Rule 7600 provides adequate details on the process of executing orders from the Trading Floor. Specifically, paragraph (a) of proposed Rule 7620 is covered by proposed Rule 7600(d)(2) and paragraph (b) is covered by proposed Rule 7600(d)(3)(ii). Paragraph (c) was inadvertently included. Paragraph (c) provides that bids and offers of nonPublic Customers on the BOX Book ranked behind any Public Customer Orders at the same price have last priority. This provision is not applicable to the Trading Floor because the executing Floor Broker has last priority on the Trading Floor, not bids and offers of non-Public Customers on the BOX Book ranked behind any Public Customer Orders at the same price.59 Lastly, paragraph (d) is being moved to proposed IM–7600–5. The Exchange believes this proposed change is reasonable as it removes unnecessary rule text. The Exchange is amending rule text to remove the continuous electronic quoting obligation for Floor Market Makers.60 The proposed change will better align the rule text with that of other exchanges with trading floors that do not have electronic quoting requirements for Floor Market Makers. As such, the Exchange believes this change is reasonable as it enhances consistency between the Exchange’s proposed Rule and existing rules at other exchanges with trading floors. The Exchange is amending the rule text to clarify that orders for covered 57 See changes in Exhibit 4 to proposed Rule IM– 7600–4. 58 See changes in Exhibit 4 to proposed Rules 7620 and IM–7600–5. 59 At the same price, bids and offers of non-Public Customers on the BOX Book ranked behind any Public Customer Orders are not allocated to orders from the Trading Floor. 60 See changes in Exhibit 4 to proposed Rules 8500(a) and 8510(c)(1). PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 accounts relying on an exemption under Section 11(a)(1)(G) of the Exchange Act (the ‘‘G Exemption’’) are not allowed on the Trading Floor.61 The Exchange is proposing this change to clarify that Participants may not utilize the Trading Floor to effect certain transactions. The Exchange is providing this information to Floor Brokers to provide clarity on applicable restrictions. The Exchange is amending rule text to clarify the responsibilities of an Options Exchange Official.62 The Exchange is proposing this change to make clear the authority of Options Exchange Officials on the Trading Floor. The Exchange believes the proposed change is reasonable as it is clarifying the authority of the Options Exchange Officials and not proposing any change to their authority. The Exchange is amending rule text to clarify certain rules related to behavior on the Trading Floor.63 This change is designed to clarify the rule text where the potential for confusion exists. The Exchange believes this change is reasonable as it clarifies the rule text and removes the possibility of confusion. The Exchange is proposing to provide data to the SEC with respect to activity on the Trading Floor. Specifically, the Exchange will provide information regarding size, participation, and price improvement by spread and trade type, effective spread, Floor Market Maker participation, and BOX Book participation. This information will be provided on a confidential basis with non-firm specific information being available quarterly on the Exchange’s Web site. Lastly, the Exchange is proposing to make various grammatical changes to the rule text. The changes are simply designed to correct errors in the rule text. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission’s Public Reference Room and also on the Exchange’s Internet Web site at http:// boxexchange.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change 61 See changes in Exhibit 4 to proposed Rules 7620(d), IM–7600–5, and 8510(h). 62 See changes in Exhibit 4 to proposed Rule 100(b)(6). 63 See changes in Exhibit 4 to proposed Rule 8510(h)(4). E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The self-regulatory organization has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change sradovich on DSK3GMQ082PROD with NOTICES 1. Purpose The Exchange is proposing to adopt rules to allow for open-outcry trading on a physical trading floor (‘‘Trading Floor’’). The Exchange notes that this is not a novel proposal and that other exchanges currently offer open-outcry trading in addition to electronic trading.64 The Exchange is proposing a hybrid model similar to these other exchanges. General The Exchange is proposing various changes to the definition section of the Rulebook to accommodate the proposed Trading Floor. First, the Exchange is proposing to define ‘‘Floor Participant’’ as Floor Brokers as defined in Rule 7540 and Floor Market Makers as defined in Rule 8510(b).65 The Exchange is proposing to define ‘‘Trading Floor’’ or ‘‘Options Floor’’ as the physical trading floor of the Exchange located in Chicago.66 The Trading Floor shall consist of one ‘‘Crowd Area’’ or ‘‘Pit’’ where all option classes will be located. The Crowd Area or Pit shall be marked with specific visible boundaries on the Trading Floor, as determined by the Exchange. A Floor Broker must open outcry an order in the Crowd Area. The Exchange is proposing to add the definition of ‘‘Presiding Exchange Officials.’’ 67 Specifically, the President of the Exchange and his or her designated staff shall be responsible for monitoring: (1) Dealings of Floor Participants and their associated persons on the Trading Floor, and of the premises of the Exchange immediately adjacent thereto; (2) the activities of Floor Participants and their associated persons, and shall establish standards and procedures for the training and qualification of Floor Participants and their associated persons active on the Trading Floor; (3) all Trading Floor 64 NYSE Arca, Inc. (‘‘NYSE Arca’’), PHLX, Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), and NYSE MKT LLC (‘‘NYSE MKT’’). 65 See proposed Rule 100(a)(26). 66 See proposed Rule 100(a)(67). 67 See proposed Rule 100(b)(1). Proposed Rule 100(b)(1) is based on PHLX Rule 1000(e). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 employees of Floor Brokers and Floor Market Makers, and shall make and enforce such rules with respect to such employees as may be deemed necessary; (4) all connections or means of communications with the Trading Floor and may require the discontinuance of any such connection or means of communication when, in the opinion of the President or his or her designee, it is contrary to the welfare or interest of the Exchange; (5) the location of equipment and the assignment and use of space on the Trading Floor; and (6) relations with other options exchanges. The Exchange is also proposing that any Exchange employee or officer designated as an Options Exchange Official will from time to time as provided in these rules have the ability to recommend and enforce rules and regulations relating to trading access, order, decorum, health, safety and welfare on the Exchange.68 BOX Order Gateway Next, the Exchange is proposing to add a definition for the ‘‘BOX Order Gateway.’’ The BOX Order Gateway (‘‘BOG’’) is a component of the Trading Host 69 which enables Floor Brokers and/or their employees to enter transactions on the Trading Floor.70 Specifically, a Floor Broker will have a connection to the BOG giving the Floor Broker the ability to submit orders to the Trading Host. Once orders are submitted through the BOG they are immediately processed by the Trading Host. The Trading Host will establish an electronic audit trail for options orders represented and executed by Floor Brokers.71 The audit trail will provide an accurate, time-sequenced record of all orders from the Trading Floor, beginning with the receipt of an order by the Exchange, and further documenting the life of the order. Additional information on the requirements for Floor Broker’s audit trail requirements are described in 68 See proposed Rule 100(b)(6). Proposed Rule 100(b)(6) is based on NYSE Arca Rule 6.1(b)(34). 69 The term ‘‘Trading Host’’ means the automated trading system used by BOX for the trading of options contracts. See Rule 100(a)66. 70 See proposed Rule 100(b)(2). Proposed Rule 100(b)(2) is based on PHLX Rule 1080.06. Proposed Rule 100(b)(2) is slightly different to PHLX Rule 1080.06 to account for the fact that all orders from the Trading Floor are not deemed executed until they are processed by the Trading Host. Specifically, with respect to providing a timesequenced record, the Exchange is not including the distinction between electronic and other orders, and quotations on the trading floor. The Exchange is not including these references because, as mentioned above, all orders from the Trading Floor are electronic and not deemed executed until they are processed by the Trading Host. 71 To be clear, the execution of an order represented on the Trading Floor does not occur until the order is processed by the Trading Host. PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 23661 greater detail below. Additionally, the Exchange is proposing to clarify that all transactions executed on the Exchange shall be executed automatically by the Trading Host pursuant to Rule 7130 or 7600.72 The Exchange is also proposing to clarify that bids and offers on the Trading Floor, to be effective, must be made by public outcry on the Trading Floor and that all bids and offers shall be general ones and shall not be specified for acceptance by particular Floor Participants.73 The Exchange is also proposing to provide details on how the public outcry process will work on the Trading Floor. Specifically, the Exchange is proposing that bids and offers must be made in an audible tone of voice and a Floor Market Maker shall be considered ‘‘out’’ on a bid or offer if he does not affirmatively respond to the Floor Broker who is announcing the order, provided that a Floor Broker must give a Floor Participant a reasonable amount of time to respond.74 A ‘‘reasonable 72 See proposed Rule 100(b)(3). Proposed Rule 100(b)(3) is based on PHLX Rule 1000(f). The Exchange notes that PHLX includes additional methods for executions on PHLX’s Trading Floor that BOX is not including in proposed Rule 100(b)(3). The Exchange does not believe that these methods are necessary as the Exchange believes that all transactions from the Trading Floor shall be processed by the Trading Host to ensure an accurate and complete audit trail. 73 See proposed Rule 100(b)(4). Proposed Rule 100(b)(4) is based on PHLX Rule 1000(g). The Exchange notes that PHLX includes information about bidding and offering electronically as well as in public outcry; however, the Exchange is only proposing to include information about public outcry. BOX already has rules in place that govern electronic bidding and offering and therefore there is no need to mention it in proposed Rule 100(b)(4). 74 See proposed Rule 100(b)(5). Proposed Rule 100(b)(5) is based on PHLX Rule 1000(g). The Exchange notes that proposed Rule 100(b)(5) is slightly different to PHLX Rule 1000(g). Specifically, PHLX Rule 1000(g) considers a member to be ‘‘in’’ on a bid or offer while he remains at the post, unless he shall distinctly and audibly say ‘‘out.’’ The Exchange is requiring the Floor Market Maker to make an affirmative assertion that he is ‘‘in’’. The Exchange believes that this difference is reasonable and necessary. Requiring an affirmative response by a Floor Market Maker will allow for a more efficient process for executing orders on the Trading Floor. The Exchange is concerned that requiring every Floor Market Maker to affirmatively be ‘‘out’’ on every order before it is executed will lead to unnecessary delays on the Trading Floor and has the potential to cause disruptions. The Exchange notes that CBOE Rule 6.74(a) does not consider members of the trading crowd in on the order; they must respond to the Floor Broker. Additionally, the Exchange is not including part of PHLX Rule 1000(g) that requires a member to audibly say ‘‘out’’ before the Floor Broker submits the order for execution and, if the order is not executed, the member must audibly say ‘‘out’’ before each time the Floor Broker resubmits the order for execution. The Exchange is not including this provision of PHLX’s Rule 1000(g) because, as previously stated, a Floor Participant, including a Floor Market Maker, E:\FR\FM\23MYN1.SGM Continued 23MYN1 23662 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES amount of time’’ will be interpreted on a case-by-case basis by an Options Exchange Official based on current market conditions and trading activity on the Trading Floor. A Floor Participant who is bidding and offering in immediate and rapid succession shall be deemed ‘‘in’’ until he says ‘‘out’’ on either bid or offer. Once the trading crowd has provided a quote, it will remain in effect until: (i) A reasonable amount of time has passed, or (ii) there is a significant change in the price of the underlying security, or (iii) the market given in response to the request has been improved. In the case of a dispute, the term ‘‘significant change’’ will be interpreted on a case-by-case basis by an Options Exchange Official based upon the extent of recent trading in the option and, in the case of equity and index options, in the underlying security, and any other relevant factors. A Floor Participant must verbalize that he is ‘‘in’’ after a Floor Broker announces an order, even if a valid quote has been provided by the Floor Participant prior to the announcement of the order by a Floor Broker.75 The Exchange believes that requiring the Floor Participant to confirm that they are still ‘‘in’’ after providing a valid quote will ensure that a Floor Participant is only participating in trades that he intends. The Exchange is proposing that all bids or offers made on the Trading Floor for options contracts shall be deemed to be for one options contract unless a specific number of option contracts is expressed in the bid or offer and that bid or offer for more than one option contract shall be deemed to be for the amount thereof or a smaller number of options contracts.76 The Exchange is also proposing the following process for the solicitation of quotations on the Trading Floor.77 Specifically, in response to a Floor Broker’s solicitation of a single bid or offer, Floor Participants may discuss, negotiate, and agree upon the price or prices at which an order of a size greater than the Exchange’s disseminated size can be executed at that time, or the number of contracts that could be executed at a given price or prices, subject to the provisions of the Options Order Protection and Locked/Crossed Market must provide an affirmative response if they want to be in on the trade. 75 A Floor Broker may request a market prior to announcing an order on the Trading Floor (‘‘market probe’’). When a Floor Broker conducts a market probe, any responses from Floor Participants are public to all Floor Participants. When a Floor Broker conducts a market probe, he probes all Floor Participants. 76 See proposed Rule 7040(d). Proposed Rule 7040(d) is based on PHLX Rule 1033(a). 77 See proposed Rule 7040(d)(2). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Plan 78 and the Exchange’s Rules respecting Trade-Throughs. Notwithstanding the foregoing, a single Floor Participant may voice a bid or offer independently from, and differently from, the Participants of a trading crowd. The Exchange is proposing to adopt Rule 7230(f) Limitation of Liability, which codifies that each Options Participant that physically conducts business on the Exchange’s Trading Floor is required, at its sole cost, to procure and maintain liability insurance that provides defense and indemnity coverage for itself, any person associated with it, and the Exchange for any action or proceeding brought relating to the conduct of the Options Participant or associated person.79 The insurance shall provide defense and indemnity coverage to the Exchange for the Exchange’s sole, concurrent, or contributory negligence, or other wrongdoing, relating to or in connection with such claim and the Exchange shall be expressly named by endorsement as an Additional Insured under the Insurance. The Exchange’s status and rights to coverage under the insurance shall be the same rights of the named insured of the insurance, including, without limitation, rights to the full policy limits; and the limits for the insurance shall be not less than $1,000,000 without erosion by defense costs, but under no circumstance shall the Exchange be entitled to less than the full policy limits of such insurance. The insurance shall state that it is primary to any insurance maintained by the Exchange. Each Options Participant annually shall cause a certificate of insurance to be issued directly to the Exchange demonstrating that insurance compliant with this proposed Rule has been procured and is maintained. Each Options Participant also shall furnish a copy of the insurance to the Exchange for review upon the Exchange’s request at any time. This proposed section (f) is the only section of Rule 7230 specifically limited to Options Participants physically located on the Exchange’s Trading Floor. Registration In order for a Participant to be admitted to the Trading Floor the Participant will be required to register with the Exchange. Additionally, all Floor Participants must be registered as a Participant 80 on BOX prior to 78 See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009). 79 Proposed Rule 7230(f) is based on PHLX Rule 652(c)(2). 80 The term ‘‘Participant’’ means a firm or organization that is registered with the Exchange PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 registering as either a Floor Broker or Floor Market Maker. The Exchange is proposing to adopt Rule 2020(h) Trading Floor Registration, which codifies that each Floor Broker, Floor Market Maker and registered representative on the Exchange Trading Floor must be registered as ‘‘Member Exchange’’ (‘‘ME’’) under ‘‘BOX’’ on Form U4. Each Floor Market Maker and registered representative on the Exchange Trading Floor must successfully complete the appropriate floor trading examination(s), if prescribed by the Exchange, in addition to requirements imposed by other Exchange Rules.81 Each Floor Broker on the Exchange Trading Floor is required to successfully complete the appropriate floor trading examination, in addition to the requirements imposed by other Exchange Rules. The Exchange is also proposing to adopt procedures and a timeframe for submitting changes of registration status to the Exchange. Specifically, following the termination of or the initiation of a change in the trading status of any such Floor Participant who has been issued an Exchange access card and a Trading Floor badge, the appropriate Exchange form must be completed, approved and dated by a firm principal, officer, or member of the firm with authority to do so, and submitted to the appropriate Exchange department as soon as possible, but no later than 9:30 a.m. ET the next business day by the Options Participant employer. Additionally, the Exchange proposes to specify that every effort should be made to obtain the person’s access card and Trading Floor badge and to submit these to the appropriate Exchange department. The Exchange is also proposing to add Rule 2020(i), which details NonParticipant and Clerk Registration. Specifically, all Trading Floor personnel, including clerks, interns, stock execution clerks and any other associated persons, of a Floor Participant not required to register pursuant to proposed Rule 2020(h) must be registered as ‘‘Floor Employee’’ (‘‘FE’’) under BOX on Form U4. Further, the Exchange may require successful completion of an examination in addition to requirements imposed by other Exchange Rules.82 The Exchange is also proposing to adopt procedures and a timeframe for submitting changes pursuant to the Rule 2000 Series for purposes of participating in options trading on BOX as an ‘‘Order Flow Provider’’ or ‘‘Market Maker’’. See Rule 100(a)(40). 81 See proposed Rule 2020(h). Proposed Rule 2020(h) is based on PHLX Rule 620(a). 82 See proposed Rule 2020(i). Proposed Rule 2020(i) is based on PHLX Rule 620(b). E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices of Trading Floor personnel registration status to the Exchange. Specifically, following the termination of or the initiation of a change in the status of any such personnel of a Floor Participant who has been issued an Exchange access card and a Trading Floor badge, the appropriate Exchange form must be completed, approved and dated by a Floor Participant principal, officer, or member of the Floor Participant with authority to do so, and submitted to the appropriate Exchange department as soon as possible, but no later than 9:30 a.m. ET the next business day by the Floor Participant employer. Additionally, the Exchange proposes to specify that every effort should be made to obtain the person’s access card and Trading Floor badge and to submit these to the appropriate Exchange department. Broker’s Blanket Bonds Currently, Rule 4180 Brokers’ Blanket Bond provides that every OFP 83 approved to transact business with the public and every Clearing Participant 84 shall carry Brokers’ Blanket Bonds covering officers and employees of the OFP in such form and in such amounts as the Exchange may require. The Exchange is now proposing that any Floor Participant that has registered solely to conduct business as a Floor Market Maker or a Floor Broker who does not conduct business with the public shall be exempt from the provisions of Rule 4180.85 Doing Business on BOX The majority of the proposed rules governing the activity on the Trading Floor will be contained in the 7000 series, Doing Business on BOX, of the Exchange’s Rules. sradovich on DSK3GMQ082PROD with NOTICES Trading on the Exchange Floor Dealings on the Trading Floor will be limited to the hours during which the Exchange is open for the transaction of business.86 Specifically, the Exchange’s normal trading hours for equity options are 9:30 a.m. ET to 4:00 p.m. ET and for options on Exchange-Traded Fund Shares and broad-based indexes 83 The terms ‘‘Order Flow Provider’’ or ‘‘OFP’’ mean those Options Participants representing as agent Customer Orders on BOX and those nonMarket Maker Participants conducting proprietary trading. See Rule 100(a)(45). 84 The term ‘‘Clearing Participant’’ means an Options Participant that is self-clearing or an Options Participant that clears BOX Transactions for other Options Participants of BOX. See Rule 100(a)(13). 85 See proposed Rule 4180(g). Proposed Rule 4180(g) is based on PHLX Rule 705(f)(1)(B). 86 See proposed Rule 7500. Proposed Rule 7500 is based on PHLX Rule 102. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 transactions may be effected until 4:15 p.m. ET. Additionally, to be considered in the determination of the opening price and to participate in the opening trade, the Floor Broker must submit the order into the BOX Book 87 electronically.88 The Floor Broker may do so from the Trading Floor using their terminal; however, the order will not receive any special or different treatment from any other pre-opening order submitted from off the Trading Floor. Additionally, a Floor Participant who wishes to place a Limit Order on the BOX Book must submit such a Limit Order electronically.89 The Exchange is proposing certain restrictions for dealings on the Trading Floor. Specifically, that no Options Participant shall, while on the Trading Floor, make any transactions with any non-Options Participants in any security admitted to dealing on the Exchange.90 Additionally, no employee of a Floor Participant shall be admitted to the Trading Floor unless that person is registered with and approved by the Exchange.91 The Exchange may in its discretion require the payment of a fee with respect to each employee so approved, and may at any time in its discretion withdraw any approval so given. In exercising Exchange discretion in withdrawing approval, the Exchange will follow applicable disciplinary rules and procedures, including the ability to appeal such Exchange determination.92 Floor Brokers As previously mentioned, the Exchange is proposing two categories of Participants on the Trading Floor; Floor Brokers and Floor Market Makers. A Floor Broker is an individual who is registered with the Exchange for the purpose, while on the Trading Floor, of accepting and handling option orders.93 87 The term ‘‘Central Order Book’’ or ‘‘BOX Book’’ means the electronic book of orders on each single option series maintained by the BOX Trading Host. See Rule 100(a)(10). 88 See proposed Rule 7070(d). Proposed Rule 7070(d) is based on PHLX Rule 1017(c). 89 See proposed IM–8510–8. Proposed IM–8510– 8 is based on PHLX Rule 1014.18. 90 See proposed Rule 7510. Proposed Rule 7510 is based on PHLX Rule 104. 91 See proposed rule 7520. Proposed Rule 7520 is based on PHLX Rule 443. 92 The applicable disciplinary rules and procedures are located in 13000 Series of the Exchange’s Rules. 93 See proposed Rule 7540. Proposed Rule 7540 is based on PHLX Rule 1060. In addition to the definition in the PHLX Rule, the Exchange is proposing that Floor Brokers must register as Options Participants on BOX prior to registering as a Floor Broker on the Trading Floor. The Exchange believes that this additional requirement is reasonable as it will allow the Exchange to adequately monitor Participants and have uniform registration requirements for all Participants. PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 23663 A Floor Broker who wishes to conduct business on the Trading Floor must be registered as a Participant on BOX prior to registering as a Floor Broker. A Floor Broker may take into his own account, and subsequently liquidate, any position that results from an error made while attempting to execute, as Floor Broker, an order. Prior to being admitted to the Trading Floor, a Floor Broker shall file an application in writing with the Exchange staff on such form or forms as the Exchange may prescribe.94 The applications received from potential Floor Brokers will be reviewed by the Exchange,95 which shall consider an applicant’s ability as demonstrated by his passing a Floor Broker’s examination 96 and such other factors as the Exchange deems appropriate.97 After reviewing the Floor Broker’s application, the Exchange shall either approve or disapprove the applicant’s registration as a Floor Broker. Responsibilities of Floor Brokers Floor Brokers will have certain responsibilities while conducting business on the Trading Floor. The proposed rules covering Floor Brokers’ responsibilities are based on the rules of another exchange 98 with certain differences due to the design and functionality of the Exchange’s Trading Floor. Specifically, a Floor Broker handling an order must use due diligence to cause the order to be executed at the best price or prices available to him in accordance with the Rules of the Exchange.99 In addition to the Floor Broker requirements of proposed Rule 7570 concerning due diligence, a Floor Broker shall ascertain that at least one Floor Market Maker is present in the Crowd Area prior to announcing an order for execution.100 Floor Brokers must make reasonable efforts to ascertain whether each order entrusted to them is for the account of 94 See proposed Rule 7550. Proposed Rule 7550 is based on PHLX Rule 1061. 95 The Trading Floor application for Floor Participants is attached as Exhibit 3. 96 The Floor Broker’s examination will cover Exchange-specific rules dealing with the Trading Floor. 97 A potential Floor Broker must follow the same application process as all Options Participants today. Rule 2040 provides restrictions and requirements on persons applying to become an Options Participant. 98 See PHLX Rule 1063. 99 See proposed Rule 7570. Proposed Rule 7570 is based on PHLX Rule 155. 100 See proposed Rule 7580(a). Proposed Rule 7580(a) is based on PHLX Rule 1063(a). The Exchange notes that it is not copying the provisions of PHLX Rule 1063(a) that cover foreign currency options because the Exchange does not list for trading foreign currency options. E:\FR\FM\23MYN1.SGM 23MYN1 23664 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES a Public Customer or broker-dealer.101 If it is determined the order is for the account of a broker-dealer, the responsible Floor Broker must advise the trading crowd of that fact while announcing the order via public outcry and make the appropriate notation in his order entry mechanism. The Exchange is also proposing rules for how a Floor Broker must handle contingency orders that are dependent upon the price of the underlying security and for how a Floor Broker must handle orders he is representing when they are for the account of a Market Maker.102 Specifically, for contingency orders, the Exchange is proposing that the Floor Broker shall be responsible for satisfying the dependency requirement on the basis of the last reported price of the underlying security in the primary market that is generally available on the Trading Floor at any given time. Unless mutually agreed by the Participants involved, an execution or non-execution that results shall not be altered by the fact that such reported price is subsequently found to have been erroneous. For orders from the account of a Market Maker, the Floor Broker must inform the crowd that he is handling an order for the account of a Market Maker and comply with proposed IM–8510–6 and IM–8510– 9.103 The purpose of requiring a Floor Broker, who is handling a Market Maker’s order, to comply with Proposed IM–8510–6 and IM–8510–9 is to prevent a Floor Market Maker from employing a Floor Broker in an effort to circumvent the restrictions in proposed IM–8510–6 and IM–8510–9.104 Lastly, the Exchange 101 See proposed IM–7580–2. Proposed IM–7580– 2 is based on PHLX Rule 1063.02. 102 See proposed Rules 7580(b) and (d). Proposed Rule 7580(b) is based on CBOE Rule 6.73(b). The Exchange notes that CBOE’s Rule provides for ‘‘onecancels-the-other orders,’’ which BOX is not including because the Exchange does not offer these types of orders. 103 See proposed Rule 7580(d). Proposed Rule 7580(d) is based on PHLX Rule 1063(d). PHLX’s Rule provides for additional rules to which the Floor Broker must comply than what the Exchange is proposing. Specifically, PHLX Rule 1063(d) cites commentary .10, .11, .12, and .13 to PHLX Rule 1014; however, the Exchange is only proposing to copy commentary .11 and .12 to PHLX Rule 1014, see proposed IM–8510–6 and IM–8510–9. The Exchange is not copying PHLX 1014.10 because it deals with specialists, which the Exchange is not proposing to have on the Trading Floor. Next, the Exchange is not copying PHLX Rule 1014.13, which deals with minimum quantity that a Floor Market Maker must execute in person per quarter, because the Exchange believes that having an in person requirement is an unnecessary restriction and does not fit the Exchange’s Trading Floor. 104 Proposed IM–8510–6 provides that an Options Exchange Official may temporarily limit the number of Floor Market Makers in the trading crowd who are establishing or increasing a position in the interest of a fair and orderly market. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 is proposing that a Floor Broker shall not be held responsible for the execution of a Complex Order based upon transaction prices that are established at the opening or close of trading or during any trading rotation.105 The Exchange is proposing requirements for Floor Brokers representing orders on the Trading Floor.106 These requirements are in addition to those in proposed Rule 7600. Specifically, in order to create an electronic audit trail for options orders represented by Floor Brokers on the Exchange’s Trading Floor, a Floor Broker or such Floor Broker’s employee shall, contemporaneously upon receipt of an order, including single-sided and double-sided orders, and prior to announcement of such an order in the trading crowd, record all options orders represented by such Floor Broker onto the Floor Broker’s order entry mechanism.107 The following specific information with respect to orders represented by a Floor Broker shall be recorded by such Floor Broker or such Floor Broker’s employees: (i) the order type (i.e., Public Customer, Professional, broker-dealer, Market Maker) and order receipt time; (ii) the option symbol; (iii) buy, sell, cross or cancel; (iv) call, put, complex (i.e., spread, straddle), or contingency order; (v) number of contracts; (vi) limit price or market order or, in the case of a multi-leg order, net debit or credit, if applicable; (vii) whether the transaction is to open or close a position; and (viii) The Options Clearing Corporation (‘‘OCC’’) clearing number of the broker-dealer that submitted the order.108 Additionally, a Floor Broker must enter complete identification for all orders entered on behalf of Market Makers. Any additional information with respect to the order shall be input contemporaneously upon receipt, which may occur after the announcement and execution of the Proposed IM–8510–9 prohibits a Floor Market Maker from acquiring a ‘‘long’’ position by pairing off with a sell order before the opening, unless all off-Floor bids at the price are filled. 105 See proposed Rule 7580(c). 106 See proposed Rule 7580(e). 107 See proposed Rule 7580(e)(1). Proposed Rule 7580(e)(1) is based on PHLX Rule 1063(e)(i). PHLX’s Rule provides for procedures for submitting orders on the Trading Floor in the event of a malfunction of PHLX’s floor order system, which BOX is not including. The Exchange will not allow orders on the Trading Floor in the event that there is a malfunction with the Trading Host or any other related Trading Floor systems, including the BOG. The Exchange believes that providing a trade ticket backup would raise numerous issues with the audit trail. 108 This information is also required when submitting a QOO Order. PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 order.109 In the event of a malfunction in the Trading Host or any other related Trading Floor systems, including the BOG, orders will not be allowed to execute from the Trading Floor. All orders entrusted to a Floor Broker will be considered Not Held Orders, unless otherwise specified by a Floor Broker’s client.110 A Not Held Order is an order marked ‘‘not held’’, ‘‘take time’’, or which bears any qualifying notation giving discretion as to the price or time at which such order is to be executed. An order entrusted to a Floor Broker will be considered a Not Held Order, unless otherwise specified by a Floor Broker’s client.111Additionally, the Exchange is proposing that it shall be considered conduct inconsistent with just and equitable principles of trade for any Floor Broker or Floor Market Maker to intentionally disrupt the open outcry process.112 A Floor Broker must announce an agency order that he is representing to the trading crowd before submitting the order to the BOG for execution.113 This announcement must take place whether the Floor Broker is representing a singlesided order and soliciting contra-side interest, or the Floor Broker has sufficient interest to match against the agency order already. If a Floor Broker is holding two agency orders, he will choose which order is the initiating side.114 The Exchange is proposing rules with respect to Floor Brokers and discretionary transactions.115 Specifically, no Floor Broker shall execute or cause to be executed any order on the Exchange with respect to which such Floor Broker is vested with discretion as to: (i) The choice of the class of options to be bought or sold, (ii) the number of contracts to be bought or sold, or (iii) whether any such transaction shall be one of purchase or sale. However, these proposed rules 109 For example this may include information required to properly allocate the QOO Order to Floor Participants that responded when the QOO Order was announced to the trading crowd pursuant to proposed Rules 7580(e)(2) and 7600(b). 110 See proposed IM–7580–3. Proposed IM–7580– 3 is based on CBOE Rule 6.73.06. 111 See proposed Rule 7600(g). Proposed Rule 7600(g) is based on CBOE Rule 6.53(g). 112 See proposed IM–7580–4. 113 See proposed Rule 7580(e)(2). 114 If only one of the agency orders is for the account of a Public Customer, that order must be the agency order. If both agency orders are for the accounts of Public Customers, it is the Floor Brokers sole decision to determine which order is the agency order. If neither agency order is for the account of a Public Customer, it is the Floor Brokers sole decision to determine which order is the agency order. 115 See proposed Rule 7590. Proposed Rule 7590 is based on PHLX Rule 1065. E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices shall not apply to any discretionary transactions executed by a Floor Market Maker for an account in which he has an interest. Additionally, no Floor Broker shall hold a Not Held Market Order to buy and a Not Held Market Order to sell the same series of options for the same account or for accounts of the same beneficial owner.116 Also, no Floor Broker shall leg a Complex Order for a Market Maker or accept opening or discretionary orders for a Market Maker who is associated with the same Options Participant as such Floor Broker or who is associated with another Options Participant which is affiliated with the same Options Participant as such Floor Broker. A Floor Broker may not exercise any discretion with respect to the order of a Market Maker or the order of an options market marker registered on another exchange.117 Floor Brokers may use any communication device on the Trading Floor and in the Crowd Area to receive orders, provided that audit trail and record retention requirements of the Exchange are met.118 However, no person in the Crowd Area or on the Trading Floor may use any communication device for the purpose of recording activities on the Trading Floor or maintaining an open line of continuous communication whereby a non-associated person not located in the Crowd Area may continuously monitor the activities in the Crowd Area. The ability for Floor Brokers to receive orders while in the Crowd Area is based on the rules of another exchange.119 The Exchange is not including certain PHLX rules related to Floor Broker duties to allocate, match and time stamp trades executed in open outcry and to submit the matched trade tickets to the exchange.120 BOX does not believe that these rules are necessary because all orders on the Trading Floor are only executed when they are received by the Trading Host, which will allow the Exchange to capture the required audit trail information. sradovich on DSK3GMQ082PROD with NOTICES Qualified Open Outcry Orders—Floor Crossing After an order has been announced to the trading crowd as provided in Rule 7580(e)(2), the Floor Broker must submit the agency order as part of a two-sided order (‘‘Qualified Open Outcry Order’’ or ‘‘QOO Order’’) to the Trading Host for 116 See proposed IM–7590–1. proposed IM–7590–2. 118 See proposed Rule 7660(i). 119 See CBOE Rule 6.23(c). 120 See PHLX Rule 1014(g)(vi). 117 See VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 execution.121 When a Floor Broker submits a QOO Order for execution, the order will be executed based on the market conditions of when the order is received by the Trading Host and in accordance with Exchange rules.122 A QOO Order on the Exchange is not deemed executed until it is processed by the Trading Host. All transactions occurring from the Trading Floor must be processed by the Trading Host. Floor Brokers are responsible for handling all orders in accordance with Exchange priority and trade-through rules.123 QOO Order functionality will assist the Floor Broker in respecting the BOX Book, consistent with Exchange priority rules, as described in proposed Rules 7600(c) and (d). The proposed QOO Order will only be allowed on the Trading Floor and only Floor Brokers may use the QOO Order. QOO Orders may be multi-leg orders up to four (4) legs, including Complex Orders, as defined in Rule 7240(a)(5) 124 and tied to hedge orders as defined in proposed IM–7600–2. Such hedging position is comprised of a position designated as eligible for a tied hedge transaction as determined by the Exchange and may include the same underlying stock 121 See proposed Rule 7600(a). Proposed Rule 7600(a) is based on PHLX Rule 1063(e)(iv). The Exchange notes that the Trading Host does not include all the same functionality as PHLX’s trading floor systems; the Trading Host will not attempt to execute an order multiple times if at first it cannot be executed. The Exchange also notes that Complex Orders are limited to four (4) legs on BOX. Additionally, the Exchange is not including specific functionality that will assist a Floor Broker in clearing the electronic book as PHLX does. The Exchange is not including this functionality because the QOO Order will assist Floor Brokers in respecting the BOX Book. Proposed Rule 7600(a) also includes additional information to cover the specific aspects of the QOO Order. 122 For example, a Floor Broker wishes to execute 1000 ABC at 1.03. At the time the QOO Order is announced to the trading crowd the NBBO for ABC is 1.00–1.08. When the Trading Host receives the QOO Order the NBBO is now 1.04–1.09. In this situation, the Trading Host would reject the QOO Order to avoid trading through the NBBO. Similarly, assume when the Floor Broker announced the QOO Order there were no orders on the BOX Book, the QOO Order had a book sweep size of 10, and the initiating side is to sell. When the Trading Host receives the QOO Order there is now a Public Customer Order on the BOX Book to buy 20 ABC at 1.03 and the NBBO is still 1.00–1.08. In this situation, the Trading Host would reject the QOO Order to avoid violating the priority provisions of the Exchange. 123 In addition to the Trading Host preventing trade-through and priority violations of the BOX Book, the Exchange has robust surveillance procedures in place to monitor for these violations. 124 The term ‘‘Complex Order’’ means any order involving the simultaneous purchase and/or sale of two or more different options series in the same underlying security, for the same account, in a ratio that is equal to or greater than one-to-three (.333) and less than or equal to three-to-one (3.00) and for the purpose of executing a particular investment strategy. PO 00000 Frm 00145 Fmt 4703 Sfmt 4703 23665 applicable to the option order, a security future overlying the same stock applicable to the option order or, in reference to an index or ExchangeTraded Fund Shares (‘‘ETF’’), a related instrument. A ‘‘related instrument’’ means, in reference to an index option, securities comprising ten percent or more of the component securities in the index or a futures contract on any economically equivalent index applicable to the option order. A ‘‘related instrument’’ means, in reference to an ETF option, a futures contract on any economically equivalent index applicable to the ETF underlying the option order. Also, such hedging position is offered, at the execution price received by the Floor Broker introducing the option, to any in-crowd Floor Participant who has established parity or priority for the related options. There will be an initiating side and a contra-side to the QOO Order.125 The initiating side is the order which must be filled in its entirety. The contra-side must guarantee the full size of the initiating side of the QOO Order and the Floor Broker may provide a book sweep size as provided in proposed Rule 7600(h). If the Floor Broker was soliciting interest from the trading crowd when the initiating side was announced or to the extent the trading crowd offers a better price, the contraside will be the solicited interest from the trading crowd. If the Floor Broker had sufficient interest to match against the initiating side when the agency order was announced, such Floor Broker interest will be the contra-side to the initiating side. If Floor Participants responded with interest to the initiating side where the Floor Broker provided sufficient interest to match against the initiating side, the Floor Broker will allocate the initiating side of the QOO Order(s) pursuant to Rule 7600(d). A QOO Order will be rejected if there is an ongoing auction in the option series when the QOO Order is received by the Trading Host.126 A Complex QOO Order 127 will not be rejected if there is an ongoing auction in the options series of some, but not all, of the components of the Complex QOO Order. 125 See proposed Rule 7600(a)(1). This does not prevent a Floor Broker from representing a singlesided order on the Trading Floor. Floor Brokers are permitted to bring single-sided orders to the Trading Floor in order to find contra-side liquidity. Once a contra-side is sourced pursuant to proposed Rule 7580(e)(2), the Floor Broker shall submit the two-sided QOO Order to the BOG. 126 See proposed Rule 7600(a)(5). 127 A Complex QOO Order is a Complex Order, as defined in Rule 7240(a)(5), submitted as a QOO Order. E:\FR\FM\23MYN1.SGM 23MYN1 23666 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices A Floor Broker is welcome to bring an unmatched order to the Trading Floor in order to seek liquidity. The Floor Broker may announce the unmatched order (i.e., the initiating side of a QOO Order) to the trading crowd in an attempt to source the contra-side. After finding sufficient quantity to match the initiating side pursuant to proposed Rule 7580(e)(2) and proposed Rule 7600(b), the Floor Broker would now be able to submit a two-sided QOO Order to the BOG as required.128 Floor Brokers may also enter single sided orders into the BOX Book using BOX’s electronic interface. Specifically, a Floor Broker may receive a matched or unmatched order via a telephone call on the Trading Floor 129 or may have the matched or unmatched order sent electronically to the Floor Broker’s order entry mechanism on the Trading Floor prior to submitting the QOO Order to the BOG. The Exchange is proposing that the execution price of the QOO Order must be equal to or better than the NBBO.130 Additionally, the QOO Order (1) may not trade through any equal or better priced Public Customer bids or offers on the BOX Book or any non-Public Customer bids or offers on the BOX Book that are ranked ahead of such equal or better priced Public Customer bids or offers, and (2) may not trade through any non-Public Customer bids or offers on the BOX Book that are priced better than the proposed execution price. The Exchange notes this proposed Rule is based on the rules of NYSE Arca.131 The Floor Broker must submit the QOO Order to the BOG for processing by the Trading Host, as provided in proposed Rule 7600. The Exchange is proposing that the QOO Order is not deemed executed until the QOO Order is processed by the Trading Host.132 Once the Floor Broker submits the QOO Order to the BOG there will be no opportunity for the submitting Floor Broker, or anyone else, to alter the terms of the QOO Order.133 After announcing the QOO Order to the trading crowd, the 128 See proposed IM–7600–4. a Floor Broker receives an order, matched or unmatched, via telephone, the Floor Broker must enter the order electronically into the Floor Broker’s order entry mechanism. 130 See proposed Rule 7600(c). 131 See NYSE Arca Rules 6.47 and 6.75. The Exchange notes that it is providing an additional provision that NYSE Arca does not have in its Rule. Specifically, the Exchange is providing for a book sweep size as provided in proposed Rule 7600(h). 132 The execution of the QOO Order will be reported after it is processed by the Trading Host in the same manner as all other orders on BOX. 133 The Exchange notes that the processing of an incoming QOO Order by the Exchange is instantaneous. sradovich on DSK3GMQ082PROD with NOTICES 129 When VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Floor Broker must submit the QOO Order to the BOG without undue delay, provided that the executing Floor Broker allows adequate time for Floor Participants to participate in the transaction as provided in proposed Rule 100(b)(5). The Exchange is additionally proposing that when a Floor Broker executes a Complex QOO Order, the priority and rules for Complex Orders contained in Rule 7240(b)(2) and (3) will continue to apply, except that the Floor Broker may disable the NBBO aspect of the Complex Order Filter under Rule 7240(b)(3)(iii). For Complex QOO Orders, the Complex QOO Orders (1) may not trade through any equal or better priced Public Customer Complex bids or offers on the Complex Order Book 134 or any non-Public Customer Complex bids or offers on the Complex Order Book that are ranked ahead of such equal or better priced Public Customer Complex bids or offers, and (2) may not trade through any nonPublic Customer bids or offers on the Complex Order Book that are priced better than the proposed execution price. Additionally, the Complex QOO Order may be executed at a price without giving priority to equivalent bids or offers in the individual series legs on the initiating side, provided at least one options leg betters the corresponding bid or offer on the BOX Book by at least one minimum trading increment as set forth in Rule 7240(b)(1). As mentioned above, the Exchange is also proposing to amend the current rules related to Complex Orders on the Exchange in order to incorporate the trading of Complex Orders on the Trading Floor. Currently, incoming Complex Orders to the Exchange are filtered to ensure that each leg of a Complex Order will be executed at a price that is equal to or better than the NBBO and BOX BBO.135 The Exchange is now proposing that Floor Brokers may disable, on an order by order basis, the NBBO aspect of this protection for Complex QOO Orders. The Exchange notes that other options exchanges do not require the legs of a Complex Order to be executed at a price that is equal to or better than the NBBO and exchange BBO.136 All QOO Orders must be announced to the trading crowd, as provided in proposed Rule 7580(e)(2), prior to the QOO Order being submitted to the 134 The term ‘‘Complex Order Book’’ means the electronic book of Complex Orders maintained by the BOX Trading Host. See Rule 7240(a)(6). 135 See Rule 7240(b)(3)(iii). 136 See ISE Rule 722(b)(3). PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 BOG.137 This negotiation and agreement that occurs in the trading crowd does not result in a final trade, but rather a ‘‘meeting of the minds’’ that is then submitted through the BOG for processing by the Trading Host. The submitting Floor Broker must announce the order to the trading crowd and give Floor Participants a reasonable opportunity to respond to trade against the initiating side of the QOO Order. An Options Exchange Official will certify that the Floor Broker adequately announced the QOO Order to the trading crowd.138 When a Complex QOO Order is announced on the Trading Floor, Floor Participants wishing to participate must respond to all legs of the unique Complex QOO Order. For example, if a Floor Broker is executing a Complex QOO Order in A+B, a Floor Participant may respond with interest in A+B, but may not respond to only Leg A or Leg B. The executing Floor Broker’s allocation process is identical to the process for non-Complex QOO Orders in proposed Rule 7600(d). The Exchange believes that by having the QOO Order execute when it is processed by the Trading Host, the Exchange is providing a system that will prevent executions that appear to be at prices that are worse than the NBBO due to the fact that on traditional openoutcry floors the time that the execution is printed may be substantially after the time an execution actually occurred on the trading floor. The Exchange believes that having the QOO Order execute when it is processed by the Trading Host will minimize trade-through violations and provide an accurate and sequential audit trail. The Exchange notes that this is similar to the way executions on PHLX occur.139 Priority in the Trading Crowd The Exchange is proposing rules for determining priority of bids and offers on the Trading Floor.140 Specifically, 137 See proposed Rule 7600(b). Proposed Rule 7600(b) is based on NYSE Arca Rule 6.47(a)(1). 138 The Options Exchange Official will have a terminal that will allow him to certify that the Floor Broker adequately represented the QOO Order to the trading crowd. 139 See PHLX Rule 1063(e)(iv). The Exchange is not including functionality that allows a Floor Broker to attempt to execute an order multiple times if it cannot be executed when the order is first submitted as PHLX does. 140 See proposed Rule 7610. Proposed Rule 7610 is based on NYSE Arca Rule 6.75. The Exchange notes that it is not including certain sections of the NYSE Arca rule that apply to Lead Market Maker guarantee participation because the Exchange will not have Lead Market Makers on the Trading Floor. Specifically, a Lead Market Maker on NYSE Arca that establishes first priority during the vocalization process is entitled to buy or sell as many contracts E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES the highest (lowest) bid (offer) shall have priority; when two or more bids (offers) represent the highest (lowest) price, priority shall be afforded to such bids (offers) in the sequence in which they were made. If, however, the bids (offers) of two or more Floor Participants are made simultaneously, or if it is impossible to determine clearly the order of time in which they are made, such bids (offers) will be deemed to be on parity and priority will be afforded to them, insofar as practicable, on an equal basis. BOX is proposing that the Floor Broker will be responsible for determining the sequence in which bids or offers are vocalized on the Trading Floor from Floor Participants in response to the Floor Broker’s bid, offer, or call for a market. A Floor Participant that established priority pursuant to IM– 7600–1(c) must inform the Floor Broker of such priority when the Floor Broker announces the order. Any disputes regarding a Floor Broker’s determination of time priority sequence will be resolved by the Options Exchange Official. An Options Exchange Official may nullify a transaction or adjust its terms if they determine the transaction to have been in violation of Exchange Rules. The Exchange is proposing that the Floor Participant with first priority is entitled to buy or sell as many contracts as the Floor Broker may have available to trade. If there are any contracts remaining, the Floor Participant with second priority will be entitled to buy or sell as many contracts as there are remaining in the Floor Broker’s order, and so on, until the Floor Broker’s order has been filled entirely. An Options Exchange Official has the same responsibilities as a Floor Broker when the Options Exchange Official calls for a market. as the Floor Broker may have available to trade. Additionally, on NYSE Arca, if the Lead Market Maker establishes some other priority other than first, the Lead Market Maker is entitled to buy or sell the number of contracts equal to the Lead Market Maker’s guaranteed participation level. The Exchange is also omitting sections of the NYSE Arca rule that cover manual executions on the trading floor because the Exchange is requiring that all orders on the Trading Floor will not execute until they are processed by the Trading Host. The Exchange is not including provisions of NYSE Arca’s rule that apply to stock-option orders because the Exchange does not offer this type of order. Additionally, the Exchange is not including the same level of detail as NYSE Arca does when referring to the actions that an Options Exchange Official can take when there is a dispute regarding a Floor Broker’s determination of time priority on the Trading Floor. The Exchange believes that by allowing an Options Exchange Official the ability to nullify a transaction or adjust its terms when the transaction has violated the Exchange’s Rules will provide the Exchange with the ability to better monitor and enforce the Exchange’s Rules on the Trading Floor. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 The Exchange’s proposed rules will also cover the situation where a Floor Broker requests a market in order to fill a large order and the Floor Participants provide a collective response.141 In such situation, if the size of the response, in the aggregate, is less than or equal to the size of the order to be filled, the Floor Participants will each receive a share of the order that is equal to the size of their respective bids or offers. If, however, the size of the response exceeds the size of the order to be filled, that order will be allocated on a size pro rata basis. Specifically, in such circumstances, the size of the order to be allocated is multiplied by the size of an individual Floor Participant’s quote divided by the aggregate size of all Floor Participants’ quotes. For example, assume there are 200 contracts to be allocated, Floor Market Maker #1 is bidding for 100, Floor Market Maker #2 is bidding for 200 and Floor Market Maker #3 is bidding for 500. Under the ‘‘size pro rata’’ allocation formula, Floor Market Maker #1 will be allocated 25 contracts (200 × 100 ÷ 800); Floor Market Maker #2 will be allocated 50 contracts (200 × 200 ÷ 800); and Floor Market Maker #3 will be allocated 125 contracts (200 × 500 ÷ 800). Allocation The following describes how the initiating side of a QOO Order is allocated.142 First, the initiating side of the QOO Order will match against any bids or offers on the BOX Book priced better than the contra-side, provided that an adequate book sweep size was provided by the Floor Broker pursuant to paragraph (h).143 Multiple orders at the same price are matched based on time priority. Next, at the same price as the contraside of the QOO Order, if any contracts of the initiating side remain, the initiating side of the QOO Order will match against Public Customer Orders on the BOX Book, along with bids or offers of non-Public Customers ranked ahead of such Public Customer Orders on the BOX Book, provided that an adequate book sweep size was provided by the Floor Broker pursuant to paragraph (h).144 Multiple bids or offers at the same price are matched based on time priority. The remaining balance of the initiating side of the QOO Order, if any, will then be matched by the Trading Host against the contra-side of the QOO 141 See proposed Rule 7610(d)(5). proposed Rule 7600(d). 143 See proposed Rule 7600(d)(1). 144 See proposed Rule 7600(d)(2). 142 See PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 23667 Order,145 regardless of whether the contra-side order submitted by the Floor Broker is ultimately entitled to receive an allocation,146 pursuant to proposed Rules 7600(d)(3)(i) or (iii). If no Floor Participant, other than the executing Floor Broker, is entitled to an allocation, then no further steps are necessary. If however, Floor Participants are entitled to an allocation, the remaining balance of the initiating side of the QOO Order will be allocated as described below. First, if the QOO Order satisfies the provisions of proposed Rule 7600(f), the executing Floor Broker is entitled to 40% of the remaining quantity of the initiating side of the QOO Order.147 Next, Floor Participants that responded with interest when the executing Floor Broker announced the QOO Order to the trading crowd, as outlined in proposed Rules 7580(e)(2) and 7600(b), are allocated.148 When multiple Floor Participants respond with interest, priority is established pursuant to proposed Rule 7610.149 Finally, if interest remains after Floor Participants that responded with interest receive their allocation, the remaining quantity of the initiating side of the QOO Order will be allocated to the executing Floor Broker.150 After execution of the QOO Order, the executing Floor Broker is responsible for providing the correct allocations of the initiating side of the QOO Order to an Options Exchange Official or his or her designee, if necessary, who will properly record the order in the Exchange’s system.151 The executing Floor Broker must provide the correct allocations to an Options 145 See proposed Rule 7600(d)(3). the avoidance of doubt, the Exchange would like to make clear that the matching of the initiating side of the QOO Order against interest on the BOX Book and the matching of the remaining portion of initiating side of the QOO Order against the contra-side order provided by the Floor Broker will be completed automatically by the Trading Host. 147 See proposed Rule 7600(d)(3)(i). 148 See Proposed Rule 7600(d)(3)(ii). 149 Proposed Rule 7610 provides that the highest bid or lowest offer shall have priority. Where two or more offers or bids are at the same price, priority shall be afforded in the sequence in which the offers or bids were made. If the bids or offers of more than one Floor Participant are made simultaneously, such bids or offers will be deemed to be on parity and priority will be afforded to them, insofar as practicable, on an equal basis. Accordingly, efforts will be made to assure that each Floor Participant on parity receives an equal number of contracts, to the extent mathematically possible. If the Floor Participants provide a collective response to a Floor Broker’s request for a market in order to fill a large order, then the allocation will be size pro rata, if necessary. 150 See Proposed Rule 7600(d)(3)(iii). 151 See Proposed Rule 7600(d)(4). The Options Exchange Official or his or her designee is not responsible for confirming the accuracy of the allocations provided by the executing Floor Broker. 146 For E:\FR\FM\23MYN1.SGM 23MYN1 23668 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices Exchange Official or his or her designee, in writing, without unreasonable delay. The below examples are designed to illustrate the allocation of the initiating side of a QOO Order(s). Example 1 152—Assume there is no priority interest on the contra-side of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX Book at the execution price of the QOO Order and a Floor Broker wishes to execute a QOO Order for 500 contracts. When he announces the order, Floor Market Maker 1 and Floor Market Maker 2 both respond to the QOO Order for 250 contracts each. Floor Market Maker 1 responded first so he will have time priority over Floor Market Maker 2. Since the QOO Order is for at least 500 contracts, the Floor Broker is entitled to match at least 40% of the initiating side with the Floor Broker’s contra-side.153 Result: The initiating side of the QOO Order will match against the Floor Broker’s contra-side order for the full 500 contracts. After the execution of the QOO Order, the executing Floor Broker is then responsible for providing an Options Exchange Official or his or her designee the following allocation of the initiating side of the QOO Order: 1. 200 contracts (500 * .40) for the contraside order submitted by the Floor Broker. 2. 250 for Floor Market Maker 1 with time priority. 3. Remaining 50 contracts to Floor Market Maker 2. sradovich on DSK3GMQ082PROD with NOTICES Example 2—Assume there is no priority interest on the contra-side of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX Book at the execution price of the QOO Order and a Floor Broker wishes to execute a QOO Order for 400 contracts. When he announces the order, Floor Market Maker 1 and Floor Market Maker 2 both respond to the QOO Order for 200 contracts each. Floor Market Maker 1 responded first so he will have time priority over Floor Market Maker 2. Since the QOO Order is for less than 500 contracts, the Floor Broker is not entitled to a 40% guarantee. Result: The initiating side QOO Order will match against the Floor Broker’s contra-side for the full 400 contracts. After execution of the QOO Order, the executing Floor Broker is then responsible for providing an Options 152 For the following three examples, assume the execution price of the QOO Order satisfies the submission requirements of proposed Rule 7000(c). Specifically, the execution price must be at a price (1) better than any Public Customer bids or offers on the BOX Book, and (2) no worse than any nonPublic Customer bids or offers on the BOX Book, on the initiating side. 153 The Floor Broker’s 40% guarantee is outlined in proposed Rule 7600(f). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Exchange Official or his or her designee with the following allocation of the initiating side of the QOO Order: 1. 200 contracts for Floor Market Maker 1 with time priority. 2. 200 contracts for Floor Market Maker 2. 3. The executing Floor Broker will receive no allocation. Example 3—Assume there is no priority interest on the contra-side of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX Book at the execution price of the QOO Order and a Floor Broker wishes to execute a QOO Order for 400 contracts in ABC at 1.05 (initiating side is to sell). The NBBO for ABC is 1.00–1.10. When he announces the order, Floor Market Maker 1 and Floor Market Maker 2 both respond to the QOO Order for 200 contracts each. Floor Market Maker 1 responded first at an improved price to buy 200 at 1.06 so he will have price priority over Floor Market Maker 2. Since the QOO Order is for less than 500 contracts, the Floor Broker is not entitled to a 40% guarantee. Result: The Floor Broker will submit two QOO Orders for 200 contracts each. A QOO Order at 1.06 for 200 contracts and a QOO Order at 1.05 for 200 contracts. The initiating side of the QOO Orders will match against the Floor Broker’s contra-side orders for the full 200 contracts. After execution of the QOO Orders, the executing Floor Broker is then responsible for providing an Options Exchange Official or his or her designee with the following allocation of the initiating side of the QOO Orders: 1. QOO Order at 1.06—200 contracts for Floor Market Maker 1. 2. QOO Order at 1.05—200 contracts for Floor Market Maker 2. 3. The executing Floor Broker will receive no allocation of either QOO Order. Example 4—Assume there is no priority interest on the contra-side of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX Book at the execution price of the QOO Order and a Floor Broker wishes to execute a QOO Order for 600 contracts in ABC at 1.05 (initiating side is to sell). The NBBO for ABC is 1.00–1.10. When he announces the order, Floor Market Maker 1 and Floor Market Maker 2 both respond to the QOO Order for 300 contracts each. Floor Market Maker 1 responded first at an improved price to buy 300 at 1.06 so he will have price priority over Floor Market Maker 2. Since the QOO Order is more than 500 contracts, the Floor Broker is entitled to a 40% guarantee. Result: The Floor Broker will submit two QOO Orders for 300 contracts each. A QOO Order at 1.06 for 300 contracts and a QOO Order at 1.05 for 300 PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 contracts. The initiating side of the QOO Orders will match against the Floor Broker’s contra-side orders for the full 300 contracts. After execution of the QOO Orders, the executing Floor Broker is then responsible for providing an Options Exchange Official or his or her designee with the following allocation of the initiating side of the QOO Orders: 1. QOO Order at 1.05—120 (300 *.40) contracts for the contra-side order submitted by the Floor Broker.154 2. QOO Order at 1.06—300 contracts for Floor Market Maker 1. 3. QOO Order at 1.05—180 contracts for Floor Market Maker 2. Example 5—In the same scenario as above, but there is priority interest of 100 contracts on the BOX Book, as provided in proposed Rule 7600(d)(2), at the execution price of the QOO Order and a Floor Broker elects to have a book sweep size of 100 contracts. Result: 1. The initiating side of the QOO Order will first match against the priority interest on the BOX Book for 100 contracts. 2. Then the remaining 300 contracts of the initiating side of the QOO Order will match against the executing Floor Broker’s contraside order. After execution of the QOO Order, the executing Floor Broker is then responsible for providing an Options Exchange Official or his or her designee with the following allocation of the initiating side of the QOO Order: a. 250 contracts for Floor Market Maker 1 with time priority. b. 50 contracts to Floor Market Maker 2. c. The executing Floor Broker will receive no allocation. The Exchange is also proposing that the QOO Order will not route to an away exchange and the QOO Order will not trade through any away exchange displaying a better price than the proposed execution price for the QOO Order.155 Book Sweep Size The Exchange is proposing to provide a book sweep size to help Floor Brokers execute orders when there are bids or offers on the BOX Book that have priority over the contra-side of the QOO Order.156 Specifically, a Floor Broker may, but is not required to, provide a book sweep size. The book sweep size is the number of contracts, if any, of the initiating side of the QOO Order that the Floor Broker is willing to relinquish to interest on the BOX Book that has priority pursuant to proposed Rule 7600(d)(1) and (2). Specifically, any equal or better priced Public Customer 154 The Floor Broker’s guarantee only applies to 40% of the contracts at the given price level. 155 See proposed Rule 7600(e). 156 See proposed Rule 7600(h). E:\FR\FM\23MYN1.SGM 23MYN1 23669 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices Orders on the BOX Book or any nonPublic Customer bids or offers on the BOX Book that are ranked ahead of such equal or better priced Public Customer Orders, and any non-Public Customer bids or offers on the BOX Book that are priced better than the proposed execution price. If the number of contracts on the BOX Book that have priority over the contra-side order is greater than the book sweep size, then the QOO Order will be rejected by the Trading Host. If the number of contracts on the BOX Book that have priority over the contra-side order is less than or equal to the book sweep size, then the QOO Order will be allowed to execute. In such case, the initiating side will execute against interest on the BOX Book with priority and then the remaining quantity, if any, will execute against the contra-side order. The Exchange believes that this proposed feature will aid Floor Brokers in having more of their executions accepted by the Trading Host and will benefit the market as a whole by providing a tool to assist Floor Brokers in executing orders when there is priority interest on the BOX Book. Additionally, the book sweep size will provide increased opportunity for orders on the BOX Book to be executed. The Exchange notes, however, that it shall be considered conduct inconsistent with just and equitable principles of trade for any Floor Broker to use the book sweep size for the purpose of violating the Floor Broker’s duties and obligations.157 The Exchange notes that another exchange provides functionality to help Floor Brokers clear the electronic book.158 PHLX’s system has functionality that will return the order to the Floor Broker if, after attempting to execute the order multiple times, the order cannot be executed. The Exchange believes this is similar to the proposed book sweep size that may result in a Floor Broker’s order not executing once it is submitted.159 Examples The following are examples of how the QOO Order will operate. Example #1—Execution of a QOO Order The following example is designed to illustrate a QOO Order executing. • NBBO 3.09–3.13 • QOO Order for 100 at 3.10 (initiating side is sell) • Book sweep size = 0. BOX Book Account Quantity MM1 ..................................................................................... BD1 ...................................................................................... Result: QOO Order is accepted because the price of the QOO Order ($3.10) is better than the NBBO on both the initiating side ($3.13) and the contra-side ($3.09). Buy 150 15 Sell 3.09 3.08 Example #2—Capping of the Book Sweep Size The following example illustrates how the Exchange will handle a QOO Order that is submitted with a book sweep size that is greater than the size of the QOO Order. Quantity 3.15 3.16 Account 10 10 MM2 MM3 • NBBO 3.09–3.13 • QOO Order for 100 at 3.10 (initiating side is sell) • Book sweep size = 200 (will be capped at the size of the QOO Order (100)). BOX Book Account Quantity MM1 ..................................................................................... BD1 ...................................................................................... Result: QOO Order is accepted because the price of the QOO Order ($3.10) is better than the NBBO on both the initiating side ($3.13) and the contra-side ($3.09). 157 See proposed IM–7600–3. Floor Broker Management System (‘‘FBMS’’) provides execution functionality that will assist the Floor Broker in clearing the exchange book, consistent with exchange priority rules. See PHLX Rule 1063(e)(iv). Additionally, if a Floor Broker on PHLX enters a two-sided order through the FBMS, and there is interest on the PHLX electronic book at a price that would prevent the Floor Broker’s order from executing, the FBMS will provide the Floor Broker with the quantity of contracts on the electronic book that have priority and need to be satisfied before the Floor Broker’s sradovich on DSK3GMQ082PROD with NOTICES 158 PHLX’s VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Buy 150 15 Sell 3.09 3.08 Example #3—Rejecting a QOO Order based on the NBBO The following example illustrates how the Exchange will handle a QOO Order that is priced outside of the NBBO. order can execute at the agreed upon price. If the Floor Broker wishes to still execute his order, he can cause a portion of the floor based order to trade against this priority interest on the electronic book, thereby clearing the interest and permitting the remainder of the Floor Broker’s order to trade at the desired price. The PHLX FBMS functionality is optional, and a Floor Broker can decide not to trade against the electronic book and therefore not execute his two-sided order at the particular price. See Securities Exchange Act Release No. 68960 (February 20, 2013), 78 FR 13132 (February 26, 2013) (SR–Phlx–2013–09). PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 Quantity 3.15 3.16 Account 10 10 MM2 MM3 • NBBO 3.09–3.15 • QOO Order for 100 at 3.17 (initiating side is sell) • Book sweep size = 100. 159 The Exchange notes that the proposed functionality of the Trading Host on BOX will not attempt to execute an order multiple times. Instead, if, due to the book sweep size provided by the Floor Broker, the order cannot be executed by the Trading Host immediately, it will be rejected back to the Floor Broker. The similarity is in the fact that in both situations an order will not execute and will be rejected back to the Floor Broker. The Exchange believes that this difference between the Exchange and PHLX will incentivize Floor Brokers on BOX to provide an adequate book sweep size if they want the order to immediately execute. E:\FR\FM\23MYN1.SGM 23MYN1 23670 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices BOX Book Account Quantity MM1 ..................................................................................... BD1 ...................................................................................... Result: QOO Order is rejected because the price of the QOO Order (3.17) is worse than the NBBO (3.15) on the initiating side of the QOO Order. Buy 50 20 Sell 3.09 3.08 Example #4—Executing of a QOO Order Utilizing the Book Sweep Size The following example illustrates a QOO Order that utilizes the book sweep size and therefore executes against interest on the BOX Book. Quantity 3.15 3.16 Account 10 10 MM2 MM3 • NBBO 3.09–3.15 • QOO Order for 100 at 3.09 (initiating side is sell) • Book sweep size = 100. BOX Book Account Quantity PC1 ...................................................................................... PC2 ...................................................................................... Result: QOO Order is accepted, as the Floor Broker is willing to relinquish the full quantity of the initiating side to orders and quotes on the BOX Book. The initiating side will trade 50 contracts against PC1 at 3.09, and then Buy 50 50 Sell 3.09 3.08 the remaining 50 contracts will trade at 3.09 against the contra-side. Example #5—Insufficient Book Sweep Quantity The following example is designed to illustrate the situation where an executing Floor Broker did not provide Quantity 3.15 3.16 Account 10 10 MM2 MM3 an adequate book sweep size to have the QOO Order execute immediately when it was submitted to the Trading Host. • NBBO 3.09–3.15 • QOO Order for 100 at 3.09 (initiating side is sell) • Book sweep size = 40. BOX Book Account Quantity PC1 ...................................................................................... PC2 ...................................................................................... Result: QOO Order is rejected, as the Floor Broker is not willing to relinquish adequate quantity of the initiating side. Specifically, the book sweep size of 40 is not sufficient to satisfy PC1’s 50 contracts which have priority. Upon rejection, the Floor Broker may: (i) Buy 50 50 Sell 3.09 3.08 Quantity 3.15 3.16 Account 10 10 MM2 MM3 Increase the book sweep size and resubmit the order; or (ii) not trade the order on BOX. handle a QOO Order that is submitted at a price that would trade-through an away exchange. Example #6—Trading Through an Away Exchange The following example is designed to illustrate how the Trading Host will • NBBO 3.09–3.13 • QOO Order for 100 at 3.14 (initiating side is buy) • Book sweep size = 100. BOX Book Account Quantity sradovich on DSK3GMQ082PROD with NOTICES MM1 ..................................................................................... BD1 ...................................................................................... Result: QOO Order is rejected because the price of the QOO Order (3.14) is worse than the NBBO (3.13) on the contra-side of the QOO Order. The QOO Order is rejected even though the price of the QOO is better than the BOX Book on the initiating side (3.09) and the VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Buy 50 20 Sell 3.09 3.08 contra-side (3.15). A QOO Order will not route to an away exchange and the QOO will not trade through any away exchange displaying a better price. PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 Quantity 3.15 3.16 Account 10 10 MM2 MM3 Example #7—Complex QOO Order on the Trading Floor The following is an example of an execution of a Complex QOO Order. • Complex QOO Order for 100 of A+B at 2.01 (initiating side is buy) E:\FR\FM\23MYN1.SGM 23MYN1 23671 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices • Book sweep size = 100 • NBBO for Complex Order 160 A+B is 3.06–3.20 • Floor Broker has disabled the away NBBO filter for the Complex QOO Order • BOX BBO for Complex Order 161 A+B is 2.00–3.20 BOX Book For Complex Order A+B Account Quantity Buy Sell Quantity Account Sell Quantity Account BOX Book Instrument A Account Quantity PC1 ...................................................................................... Buy 10 1.00 1.10 10 PC2 BOX Book Instrument B Account Quantity BD1 ...................................................................................... Result: Complex QOO Order is accepted because the price of the Complex QOO Order (2.01) is better than the BOX BBO on the initiating side (2.00) and the contra-side (3.20). Additionally, since the NBBO filter has been disabled by the Floor Broker, the Complex QOO Order will ignore the NBBO for Complex Order A+B Buy 10 Sell 1.00 Quantity 2.10 Account 10 BD2 (3.06–3.20). Even when the Complex QOO Order ignores the away NBBO, it must still respect interest on BOX. Broker did not provide an adequate book sweep size to satisfy the resting interest on the Complex Order Book. Example #8—Complex QOO Order Rejected Due to the Book Sweep Size • Complex QOO Order for 100 of A+B at 3.07 (initiating side is sell) • Book sweep size = 25 • NBBO for Complex Order A+B is 3.06–3.20 The following is an example of a Complex QOO Order that is rejected by the Trading Host because the Floor BOX Book For Complex Order A+B Account Quantity MM1 ..................................................................................... Buy 50 Sell Quantity Account Sell Quantity Account 3.10 BOX Book Instrument A Account Quantity PC1 ...................................................................................... Buy 10 1.06 1.10 10 PC2 BOX Book Instrument B Account Quantity sradovich on DSK3GMQ082PROD with NOTICES BD1 ...................................................................................... Result: Complex QOO Order is rejected because the book sweep size is not adequate to satisfy the resting A+B Complex Orders on the Complex Order Book at 3.10 (50). If, however, the book sweep size was for at least 50 A+B, the Complex QOO Order would execute by 160 The NBBO for Complex Orders is based on the NBBO for the individual options components of such Complex Order. 161 The BOX BBO for Complex Orders is the best net bid and offer price based on the best bid and VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Buy 100 Sell 2.00 having 50 A+B execute against the resting Complex Orders on the Complex Order Book at 3.10. The remaining 50 A+B would execute against the contraside order at 3.07. offer on the BOX Book for the individual option’s components of the Complex Order. 162 An ‘‘Implied Order’’ is a Complex Order at the cNBBO, derived from the orders at the BBO on the BOX Book for each component leg of a Strategy, PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 Quantity 2.10 100 Account BD2 Example #9—Complex QOO Order Executing Against BOX Book Interest The following example is designed to illustrate the situation where the Complex QOO Order executes against Implied Orders 162 and resting Complex Orders on the Complex Order Book. provided each component leg is at a price equal to NBBO for that series. See Rule 7240(d)(1). E:\FR\FM\23MYN1.SGM 23MYN1 23672 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices • Complex QOO Order for 100 of A+B at 3.04 (initiating side is sell) • Book sweep size = 100 • NBBO for Complex Order A+B is 3.06–3.20 BOX Book for Complex Order A+B Account Quantity MM1 ..................................................................................... Buy 60 Sell Quantity Account Sell Quantity Account 3.06 BOX Book Instrument A Account Quantity PC1 ...................................................................................... MM2 ..................................................................................... Buy 10 90 1.06 1.05 1.10 10 PC2 BOX Book Instrument B Account Quantity BD1 ...................................................................................... Result: Complex QOO Order is accepted because the Floor Broker is willing to relinquish the full quantity of the initiating side to bids and offers on the BOX Book. The initiating side will execute against resting orders of the individual legs and resting A+B Complex Orders. Specifically, 10 A+B of the initiating side will execute against an Implied Order at 3.06 (leg A at 1.06 Buy 100 Sell 2.00 and leg B at 2.00), 60 A+B will execute at 3.06 against resting A+B Complex Order and 30 A+B against an Implied Order at 3.05 (leg A at 1.05 and leg B at 2.00). Example #10—Complex QOO Order Executing Against BOX Book Interest with Remaining Interest The following example illustrates how the Exchange will handle a Quantity 2.10 Account 100 BD2 Complex QOO Order that executes against BOX Book interest first but leaves interest on the BOX Book. • Complex QOO Order for 100 of A+B at 3.04 (initiating side is sell) • Book sweep size = 100 • NBBO for Complex Order A+B is 3.06–3.20 BOX Book for Complex Order A+B Account Quantity Buy Sell Quantity Account Sell Quantity Account BOX Book Instrument A Account Quantity PC1 ...................................................................................... Buy 10 1.06 1.10 10 PC2 BOX Book Instrument B Account Quantity sradovich on DSK3GMQ082PROD with NOTICES PC3 ...................................................................................... Result: Complex QOO Order is accepted. The initiating side will execute against resting orders of the individual legs and then against the contra-side. Specifically, 10 A+B of the initiating side will execute against an Implied Order at 3.06 (leg A at 1.06 and leg B at 2.00), and 90 will execute against the contra-side at 3.04. The VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Buy 20 Sell 2.00 unexecuted interest on the BOX Book remains after the execution of the Complex QOO Order. Example #11—Multiple Public Customer and non-Public Customer Orders on the BOX Book Under Proposed Rule 7600(d), multiple Public Customer and non- PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 Quantity 2.10 100 Account BD2 Public Customer Orders on the BOX Book that have priority at the execution price of the QOO Order will be filled in the order they are ranked. The following example illustrates this situation. • NBBO 3.10—3.13 • QOO Order for 100 at 3.10 (initiating side is sell) • Surrender quantity = 100 E:\FR\FM\23MYN1.SGM 23MYN1 23673 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices BOX Book Account 163 Quantity MM1 ..................................................................................... PC1 ...................................................................................... BD1 ...................................................................................... PC2 ...................................................................................... Result: QOO Order is accepted because the price of the QOO Order ($3.10) is better than or equal to the NBBO on both the initiating side ($3.13) and the contra-side ($3.10). The initiating side will trade 50 contracts against MM1 at $3.10, then 20 against PC1 at $3.10, and then 30 against BD1 at $3.10. The remaining quantity of BD1 (20 contracts) and PC2’s order for 20 contracts will remain on the BOX Book. Guarantee sradovich on DSK3GMQ082PROD with NOTICES The Exchange is proposing to allow for a participation guarantee for certain orders executed by Floor Brokers.164 Specifically, when a Floor Broker holds an order of the eligible order size or greater, the Floor Broker is entitled to cross a certain percentage of the order with other orders that the Floor Broker is holding. The Exchange may determine, on an option by option basis, the eligible size for an order on the Trading Floor to be subject to this guarantee; however, the eligible order size may not be less than 500 contracts.165 In determining whether an order satisfies the eligible order size requirement, any multi-part or Complex Order must contain one leg alone which is for the eligible order size or greater. The percentage of the order which a Floor Broker is entitled to cross, after all equal or better priced Public Customer bids or offers on the BOX Book and any non-Public Customer bids or offers that are ranked ahead of such Public Customer bids or offers are filled, is 40% of the remaining contracts in the order. However, nothing in this proposed Rule is intended to prohibit a Floor Broker from trading more than his percentage entitlement if the other Participants of the trading crowd do not choose to trade the remaining portion of the order. 163 This is the time sequence that the orders were received by BOX (i.e., MM1 was received first). 164 See proposed Rule 7600(f). Proposed Rule 7600(f) is based on PHLX Rule 1064.02. The Exchange notes that there are certain differences from the PHLX rule due to the fact that the Exchange will not have specialists on the Trading Floor and the Exchange has different rules than PHLX when it comes to orders on the Trading Floor executing against interest on the electronic book. 165 Any changes to the eligible order size shall be communicated to Participants via circular. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Buy 50 20 50 20 Sell 3.10 3.10 3.10 3.10 Additional Requirements The Exchange is proposing additional requirements for Floor Participants while present on the Trading Floor.166 First, BOX is proposing that a Floor Broker must disclose all securities that are components of the Public Customer Order before requesting bids and offers for the execution of all components of the order. Next, the Exchange is proposing rules pertaining to treatment of quotes provided by Floor Participants. Specifically, a quote provided by a Floor Participant will remain in effect until: (1) A reasonable amount of time has passed; or (2) there is a significant change in the price of the underlying security; 167 or (3) the market given in response to the request has been improved.168 BOX is proposing that the Floor Participant who established the market will, at the given price, have priority over all other orders that were not announced in the trading crowd at the time that the market was established (but not over Public Customer orders on the BOX Book or any non-Public Customer orders that have priority over such Public Customer orders on the BOX Book) and will maintain priority over such orders except for orders that improve upon the market. Additionally, when a Floor Broker announces an order to the trading crowd pursuant to Rule 7580(e)(2), it shall be the responsibility of the Floor Participant who established the market to alert the Floor Broker of the fact that the Floor Participant has priority. The Exchange is proposing that Floor Participants may not prevent a Complex Order from being completed by giving a competing bid or offer for one component of such order. Lastly, the 166 See proposed IM–7600–1. Proposed IM–7600– 1 is based on PHLX Rule 1064.02. The Exchange notes that there are certain differences from the PHLX rule in order to account for the fact that BOX will not have specialists on the Trading Floor. Additionally, the Exchange is proposing additional language to clarify it is the responsibility of the Floor Participant who established the market to alert the executing Floor Broker of such information. 167 In the case of a dispute, the term ‘‘significant change’’ will be interpreted on a case-by-case basis by an Options Exchange Official based upon the extent of recent trading in the option and in the underlying security, and any other relevant factors. 168 See proposed IM–7600–1(b). PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 Quantity 3.15 Account 10 MM2 Exchange is proposing that if a Floor Broker is crossing a Public Customer Order with an order that is not a Public Customer Order, when providing an opportunity for the trading crowd to participate in the transaction, the Floor Broker shall disclose the Public Customer Order that is subject to crossing. Tied Hedge BOX is proposing the adoption of rules that will allow for tied hedge transactions. Tied hedge transactions are transactions that involve an option transaction and a hedging transaction occurring on a non-option market, as described in greater detail below.169 Specifically, the Exchange is proposing that nothing prohibits a Floor Broker from buying or selling a stock, security futures, or futures position following receipt of an option order, including a Complex Order, provided that prior to announcing such order to the trading crowd certain conditions are met. The option order must be in a class designated as eligible for tied hedge transactions as determined by the Exchange and is within the designated tied hedge eligibility size parameters, which parameters shall be determined by the Exchange and may not be smaller than 500 contracts per order. Additionally, there shall be no aggregation of multiple orders to satisfy the size parameter, and for Complex Orders involved in a tied hedge transaction at least one leg must meet the minimum size requirement. The Floor Broker must create an electronic record that it is engaged in a tied hedge transaction in a form and manner prescribed by the Exchange. The hedging position is comprised of a position designated as eligible for a tied hedge transaction as determined by the Exchange and may include the same underlying stock applicable to the option order, a security future overlying the same stock applicable to the option order or, in reference to an index or Exchange-Traded Fund Shares (‘‘ETF’’), a related instrument.170 Additionally, 169 See proposed IM–7600–2. Proposed IM–7600– 2 is based on NYSE Arca Rule 6.47.01. 170 A ‘‘related instrument’’ means, in reference to an index option, securities comprising ten percent E:\FR\FM\23MYN1.SGM Continued 23MYN1 23674 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES the hedging position must be brought without undue delay to the trading crowd and announced concurrently with the option order; offered to the trading crowd in its entirety; and offered, at the execution price received by the Floor Broker introducing the option, to any in-crowd Floor Participant who has established parity or priority for the related options. The hedging position must not exceed the option order on a delta basis to be eligible for treatment as a tied hedge order. The Exchange is further proposing that all tied hedge transactions (regardless of whether the option order is a simple or Complex Order) are treated the same as Complex Orders for purposes of the Exchange’s open outcry allocation and reporting procedures. Tied hedge transactions are subject to the existing NBBO trade-through requirements for options and stock, as applicable, and may qualify for various exceptions; however, when the option order is a simple order, the execution of the option leg of a tied hedge transaction does not qualify for the NBBO trade-through exception for a Complex Trade (defined in proposed Rule 7610(e)). Floor Participants that participate in the option transaction must also participate in the hedging position and may not prevent the option transaction from occurring by giving a competing bid or offer for one component of such order. In the event the conditions in the non-options market prevent the execution of the non-option leg(s) at the agreed prices, the trade representing the options leg(s) may be cancelled. BOX is proposing that prior to entering tied hedge orders on behalf of Public Customers, the Floor Broker must deliver to the Public Customer a written notification informing the Public Customer that his order may be executed using the Exchange’s tied hedge procedures. The proposed Rule dealing with tied hedge orders is based on the rules of another options exchange.171 The Exchange is also proposing language related to Section 11(a)(1)(G) of the Exchange Act.172 Specifically, a BOX Participant shall not utilize the Trading Floor to effect any transaction for its own account, the account of an associated person, or an account with or more of the component securities in the index or a futures contract on any economically equivalent index applicable to the option order. A ‘‘related instrument’’ means, in reference to an ETF option, a futures contract on any economically equivalent index applicable to the ETF underlying the option order. 171 See NYSE Arca Rule 6.47.01. 172 See proposed IM–7600–5. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 respect to which it or an associated person thereof exercises investment discretion by relying on an exemption under Section 11(a)(1)(G) of the Exchange Act. Clerks The Exchange is proposing to adopt Rule 7630 Clerks, which provides requirements for Clerks on the Trading Floor.173 The proposal defines ‘‘Clerk’’ as any registered on-floor person employed by or associated with a Floor Broker or Floor Market Maker and who is not eligible to effect transactions on the Trading Floor as a Floor Market Maker or Floor Broker. The proposed Rule codifies that Clerks must display the badge(s) supplied by the Exchange while on the Trading Floor. Further, Proposed Rule 7630(c) codifies that a Clerk shall be primarily located at a workstation assigned to his employer or assigned to his employer’s clearing firm unless such Clerk is (1) entering or leaving the Trading Floor, (2) transmitting, correcting or checking the status of an order or reporting or correcting an executed trade or (3) supervising other Clerks if he is identified as a supervisor on the registration form submitted to the Exchange’s Membership Department. The Exchange is also proposing Rule 7630(d), which details the registration requirements for a Floor Broker who employs a Clerk that performs any function other than a solely clerical or ministerial function. On the Trading Floor, a Clerk may enter an order under the direction of a Floor Broker by way of any order handling entry device.174 Proposed Rule 7630(f) defines a Floor Market Maker Clerk as any on-floor Clerk employed by or associated with a Floor Market Maker, and details the registration requirements and conduct on the Trading Floor for Floor Market Maker Clerks. A Floor Market Maker Clerk is permitted to communicate verbal market information (i.e., bid, offer, and size) in response to requests for such information, provided that such information is communicated under the direct supervision of his or her Floor Market Maker employer. A Floor Market Maker Clerk may consummate electronic transactions under the express direction of his or her Floor Market Maker employer by matching bids and offers. Such bids and offers and transactions effected under the supervision of a Floor Market Maker are 173 Proposed Rule 7630 is based on PHLX Rule 1090. 174 See proposed Rule 7630(e). PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 binding as if made by the Floor Market Maker employer. Disputes on the Trading Floor The Exchange is proposing to adopt Rule 7640 to codify the process for the resolution of trading disputes on the Trading Floor.175 Specifically, disputes occurring on and relating to the Trading Floor, if not settled by agreement between the Floor Participants interested, shall be settled by an Options Exchange Official. The Exchange is proposing that an Options Exchange Official shall institute the course of action deemed to be most fair to all parties under the circumstances at the time when issuing decisions for the resolution of trading disputes. An Options Official may direct the execution of an order or adjust the transaction terms or Participants to an executed order, and may also nullify a transaction if the transaction is determined to have been in violation of Exchange Rules. Options transactions that are the result of an Obvious Error or Catastrophic Error shall be subject to the provisions and procedures set forth in Rule 7170. The proposed Rule also states that all rulings rendered by an Options Exchange Official are effective immediately and must be complied with promptly; failure to do so may result in an additional violation. Proposed Rule 7640(e) states that all Options Exchange Official rulings are reviewable by the CRO or his or her designee, and sets forth the process for such review. Regulatory staff must be advised within 15 minutes of an Options Exchange Official’s ruling that a party to such ruling has determined to appeal from such ruling to the CRO or his or her designee. The Exchange may establish the procedures for the submission of a request for a review of an Options Exchange Official ruling. Options Exchange Official rulings (including those concerning the nullification or adjustment of transactions) may be sustained, overturned, or modified by the CRO or his or her designee. In making a determination, the CRO or his or her designee may consider facts and circumstances not available to the ruling Options Exchange Official, as well as action taken by the parties in reliance on the Options Exchange Official’s ruling (e.g., cover, hedge, and related trading activity). Further, all decisions made by the CRO or his or her designee 175 Proposed Rule 7640 is based on PHLX Rule 124. The Exchange notes that there are certain differences from the PHLX rule because the Exchange desires to have consistency with its existing rules related to reviewing an Exchange ruling. E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices in connection with initial rulings on requests for relief and with the review of an Options Exchange Official ruling pursuant to this proposed Rule 7640(e) shall be documented in writing and maintained by the Exchange in accordance with the record keeping requirements set forth in the Securities Exchange Act of 1934, as amended, and the rules thereunder. A Floor Participant seeking review of an Options Exchange Official ruling shall be assessed a fee of $250.00 for each Options Exchange Official ruling to be reviewed that is sustained and not overturned or modified by the CRO or his or her designee.176 All decisions of the CRO or his or her designee shall be final and may not be appealed to the Exchange’s Board of Directors. Additionally, all decisions of the CRO or his or her designee are effective immediately and must be complied with promptly. Failure to promptly comply with a decision of the Exchange may result in an additional violation. Lastly, as discussed in proposed IM– 7640–1, the Exchange may determine that an Options Exchange Official is ineligible to participate in a particular ruling where it appears that such Options Exchange Official has a conflict of interest. The Exchange also sets forth when a conflict of interest exists, and allows that Exchange staff may consider other circumstances, on a case-by-case basis, in determining the eligibility or ineligibility of a particular Options Exchange Official to participate in a particular ruling due to a conflict of interest.177 Trading for Joint Account sradovich on DSK3GMQ082PROD with NOTICES The Exchange is proposing Rule 7650, which will govern Trading for Joint Accounts.178 Specifically, it stipulates that while on the Trading Floor, no Options Participant shall initiate the purchase or sale on the Exchange of any security for any account in which he, his Options Participant organization or a participant therein, is directly or indirectly interested with any person other than such Options Participant or participant therein. The Exchange further clarifies that these provisions shall not apply to any purchase or sale by any Options Participant for any joint account maintained solely for effecting 176 In addition, in instances where the Exchange, on behalf of an Options Participant, requests a review by another options exchange, the Exchange will pass any resulting charges through to the relevant Options Participant. 177 See proposed IM–7640–1. 178 Proposed Rule 7650 is based on PHLX Rule 772. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 bona fide domestic or foreign arbitrage transactions. Communications and Equipment The Exchange is proposing Rule 7660 Communications and Equipment, which deals with communication and equipment on the Trading Floor. Specifically, the proposed Rule details which communication devices are prohibited; provides the Exchange with the ability to remove any communication device that is in violation; sets forth the registration requirement and process; specifies the capacity and functionality of communication devices; outlines the communication devices allowed to Floor Market Makers, Floor Brokers, and Clerks; requires the maintenance of telephone records, and excludes the Exchange from liability due to conflicts between communication devices or due to electronic interference. Additionally, the Exchange will establish a communication device policy and violations of such policy may result in disciplinary action by the Exchange.179 Proposed IM–7660–2 clarifies that proposed Rule 7660 and any relevant Exchange policy are intended to apply to all communication and other electronic devices on the Floor of the Exchange, including, but not limited to, wireless, wired, tethered, voice, and data. The Exchange notes that the proposed rules applicable to communication and equipment on the Trading Floor are based on the rules of another exchange.180 Lastly, Proposed IM–7660–3 provides the Exchange with the ability to limit or revoke the use of any communication device on the Trading Floor whenever the Exchange determines that use of such communication device: (1) Interferes with the normal operation of the Exchange’s own systems or facilities or with the Exchange’s regulatory duties, (2) is inconsistent with the public interest, the protection of investors or 179 See proposed IM–7660–1. PHLX Rule 606. The Exchange notes that it is not copying PHLX Rule 606(b)(2)(i), which prohibits any member from establishing communication devices on the floor. The Exchange believes that this provision is not necessary and would be contrary to the Exchange’s proposed Trading Floor design. Specifically, the Exchange will not be providing communication devices for Floor Participants; Floor Participants will be responsible for providing their own communication devices. Therefore, the inclusion of this provision would directly conflict with the Exchange’s plan. Additionally, proposed Rule 7660(g) contains a provision not included in PHLX’s rule that requires wireless telephone and other communication devices on the Options Floor to comply with applicable floor policies. The Exchange believes this provision is important as to make clear the restrictions and requirements applicable to communication devices on the Trading Floor. 23675 just and equitable principles of trade, or (3) interferes with the obligations of a Floor Participant to fulfill its duties under, or is used to facilitate any violation of, the Act or rules thereunder, or Exchange rules. The Exchange notes that proposed IM–7660–3 is based on the rules of another exchange.181 Floor Market Makers The Exchange is proposing Rule 8500 Floor Market Maker, which details the rules surrounding Floor Market Makers, including registration as a Market Maker and suspension and termination of a Floor Market Maker.182 Specifically, with regard to suspension or termination, the registration of any Options Participant as a Floor Market Maker may be suspended or terminated by the Exchange upon a determination that such Options Participant has failed to properly perform as a Floor Market Maker.183 The Exchange proposes that a Floor Market Maker shall not effect on the Exchange purchases or sales of any option in which such Floor Market Maker is registered, for any account in which he or his Options Participant is directly or indirectly interested, unless such dealings are reasonably necessary to permit such Floor Market Maker to maintain a fair and orderly market.184 Also, the Exchange proposes certain expectations of Floor Market Makers. Specifically, proposed Rule 8500(d) details that it is ordinarily expected that a Floor Market Maker will engage, to a reasonable degree under the existing circumstances, in dealings for his own account in options when lack of price continuity or lack of depth in the options market or temporary disparity between supply and demand in the options market exists or is reasonably to be anticipated. The Exchange is proposing that transactions effected on the Exchange by a Floor Market Maker for his own account, and in the options in which he is registered, are to constitute a course of dealings reasonably calculated to contribute to 180 See PO 00000 Frm 00155 Fmt 4703 Sfmt 4703 181 See CBOE Rule 6.23(b). The Exchange notes that although other provisions of proposed Rule 7660 are based on PHLX, PHLX does not allow Floor Brokers to receive orders while in the trading crowd; therefore, the Exchange is proposing to follow CBOE, which allows Floor Brokers to receive orders in the trading crowd. 182 See proposed Rules 8500 (a) and (b). Proposed Rules 8500 (a) and (b) are based on PHLX Rule 1020. There are certain differences with PHLX’s rule due to the fact that PHLX has additional categories of Participants that the Exchange does not. 183 The 13000 Series of the Exchange’s Rules provide procedures, including appealing, for Participants aggrieved by Exchange action, including suspension and termination. 184 See proposed Rule 8500(c). E:\FR\FM\23MYN1.SGM 23MYN1 23676 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices the maintenance of price continuity with reasonable depth, and to the minimizing of the effects of temporary disparity between supply and demand, immediate or reasonably to be anticipated. Transactions in such options not part of such a course of dealings are not to be effected by a Floor Market Maker for his own account.185 The Exchange is proposing Rule 8510 which will govern the obligations and restrictions applicable to Floor Market Makers.186 Generally, transactions of a Floor Market Maker should constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market, and those Participants should not enter into transactions or make bids or offers that are inconsistent with such a course of dealings.187 Additionally, the Exchange is proposing to define a Floor Market Maker as an Options Participant on the Exchange located on the Trading Floor who has received permission from the Exchange to trade in options for his own account.188 The Exchange is proposing a Continuous Open Outcry Quoting Obligation for Floor Market Makers.189 The Continuous Open Outcry Quoting Obligation requires Floor Market Makers to provide a two-sided market on the Trading Floor complying with the quote spread parameter requirements contained in proposed Rule 8510(d)(1).190 As part of the Continuous Open Outcry Quoting Obligation, such Floor Market Makers shall provide such quotations with a size of not less than 10 contracts. The Exchange also proposes affirmative obligations for Floor Market 185 See proposed Rule 8500(d). Rule 8510 is based on PHLX Rule 1014. PHLX Rule 1014 includes numerous sections that the Exchange is not including in proposed Rule 8510. The majority of the sections that the Exchange is omitting are not relevant to BOX. Specifically, they involve rules related to Participant categories that the Exchange does not and will not have on BOX. These include Streaming Quote Trader, which is a Registered Option Trader who has received permission from PHLX to submit electronic quotes only while they are present on the floor, and specialists. Additionally, the Exchange is not copying PHLX Rule 1014.06, which covers information barriers, because the Exchange already has rules covering misuse of material information. See Securities Exchange Act Release No. 75916 (September 14, 2015), 80 FR 56503 (September 18, 2015) (SR–BOX–2015–31). The Exchange is not copying PHLX Rules 1014.13 and 1014.14 because the PHLX Rules deal with types of activities and members that will not be present on BOX’s Trading Floor. As previously mentioned, PHLX Rule 1014.13 requires an in person minimum that the Exchange does not believe is necessary on the Trading Floor. 187 See proposed Rule 8510(a). 188 See proposed Rule 8510(b). 189 See proposed Rule 8510(c). 190 See proposed Rule 8510(c)(2). sradovich on DSK3GMQ082PROD with NOTICES 186 Proposed VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Makers in classes of option contracts to which they are assigned. Specifically, whenever a Floor Market Maker is called upon by an Options Exchange Official or a Floor Broker to make a market, the Floor Market Maker is expected to engage, to a reasonable degree under the existing circumstances, in dealing for his own account when there exists, or it is reasonably anticipated that there will exist, a lack of price continuity, a temporary disparity between the supply of and demand for a particular option contract, or a temporary distortion of the price relationships between option contracts of the same class.191 Additionally, the Exchange proposes the following obligations on Floor Market Makers while performing their market making activities on the Trading Floor: (1) Quote Spread Parameters (Bid/Ask Differentials) 192 and (2) Maximum Option Price Change.193 Specifically, Floor Market Makers shall provide a bid/ask differential on the Trading Floor for options on equities and index options by bidding and/or offering so as to create differences of no more than $0.25 between the bid and the offer for each option contract for which the prevailing bid is less than $2; no more than $0.40 where the prevailing bid is $2 or more but less than $5; no more than $0.50 where the prevailing bid is $5 or more but less than $10; no more than $0.80 where the prevailing bid is $10 or more but less than $20; and no more than $1 where the prevailing bid is $20 or more, provided that, in the case of equity options, the bid/ask differentials stated above shall not apply to in-the-money series where the market for the underlying security is wider than the differentials set forth above. For such series, the bid/ask differentials may be as wide as the quotation for the underlying security on the primary market, or its decimal equivalent rounded up to the nearest minimum increment. The Exchange may establish differences other than the above for one or more series or classes of options.194 191 See proposed Rule 8510(d). proposed Rule 8510(d)(1). 193 On the Trading Floor, a Floor Market Maker shall not be bidding more than $1 lower and/or offering no more than $1 higher than the last preceding transaction price for the particular option contract. However, this standard shall not ordinarily apply if the price per share of the underlying stock or Exchange-Traded Fund Share has changed by more than $1 since the last preceding transaction for the particular option contract. See proposed Rule 8510(d)(2). 194 The Exchange notes that the ability to provide different quoting requirements is not novel and the Exchange already has this ability when it comes to electronic quoting requirements. See Rule 8040(a)(7). Additionally, another Exchange allows 192 See PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 Quotations provided in open outcry may not be made with $5 bid/ask differentials provided in Rule 8040(a)(7) and instead must comply with the legal bid/ask differential requirements described in this subparagraph. These proposed obligations for Floor Market Maker are based on the rules of another exchange.195 The Exchange is also proposing restrictions for Floor Market Makers in classes of option contracts other than those to which they are appointed. Specifically, with respect to classes in which Floor Marker Makers are not appointed, Floor Market Makers should not (1) individually or as a group, intentionally or unintentionally, dominate the market in option contracts of a particular class; or (2) effect purchases or sales on the Trading Floor of the Exchange except in a reasonable and orderly manner; (3) be conspicuous in the general market or in the market in a particular option.196 Further, the Exchange proposes additional restrictions on Floor Market Makers.197 Specifically, except as otherwise provided, no Floor Market Maker shall (1) initiate a transaction while on the Trading Floor for any account in which he has an interest and execute as Floor Broker an off-floor order in options on the same underlying interest during the same trading session, or (2) retain priority over an off-floor order while establishing or increasing a position for an account in which he has an interest while on the Trading Floor of the Exchange.198 Proposed Rule 8510(h) discusses option priority and parity on the Trading Floor.199 Specifically, it references proposed Rule 7610, which for the same on their floor. See PHLX Rule 1014(c)(i)(A)(1)(a). 195 See PHLX Rule 1014(c)(i)(A). The Exchange is not including all of the PHLX rules related to Floor Market Maker quoting obligations. Specifically, the Exchange is not including PHLX rules applicable to foreign currency options because BOX does not list for trading foreign currency options. 196 See proposed Rule 8510(e). 197 See proposed Rule 8510(f). 198 This provision shall not apply to (1) any transaction by a registered Floor Market Maker in an option in which he is so registered; or (2) any transaction, other than a transaction for an account in which a Floor Market Maker has an interest, made with the prior approval of an Options Exchange Official to permit a member to contribute to the maintenance of a fair and orderly market in an option, or any purchase or sale to reverse any such transaction; or (3) any transaction to offset a transaction made in error. See proposed Rule 8510(g). 199 Proposed Rule 8510(h) is based on PHLX Rule 1014(g)(i)(A). The Exchange is not including the provision discussing orders of controlled accounts because the provision is not applicable to the Exchange’s Trading Floor. Specifically, the Exchange’s Trading Floor does not require a distinction for controlled accounts. E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices directs Floor Participants in the establishment of priority of orders on the Trading Floor. The Exchange is proposing to clarify that in situations where the allocation of contracts result in fractional amounts of contracts to be allocated to Floor Participants, the number of contracts to be allocated shall be rounded in a fair and equitable manner. The Exchange is also clarifying that Floor Participants must follow just and equitable principles of trade when dealing on the Trading Floor.200 Specifically, it shall be considered conduct inconsistent with just and equitable principles of trade for: (a) A Floor Broker to allocate orders other than in accordance with the Exchange’s priority rules applicable to floor trades; (b) a Floor Participant to enter into any agreement with another Floor Participant concerning allocation of trades; or (c) a Floor Participant to harass, intimidate or coerce another Floor Participant to make or refrain from making any complaint or appeal. The Exchange is proposing substantial Interpretive Material to supplement the Floor Market Maker Rules.201 Specifically, the Exchange is proposing IM–8510–1, which provides that the obligations of a Floor Market Maker with respect to those classes of options to which he is assigned shall take precedence over his other activities. The Exchange is proposing IM–8510–2, which details non-electronic orders and states that Floor Market Makers participating in a trading crowd may, in response to a verbal request for a market by a Floor Broker, state a bid or offer that is different than their electronically submitted bid or offer, provided that such stated bid or offer is not inferior to such electronically submitted bid or offer, except when such stated bid or offer is made in response to a Floor Broker’s solicitation of a single bid or offer as set forth in proposed Rule 7040(d)(2).202 A Floor Market Maker 200 See proposed Rule 8510(h)(4). proposed Interpretive Material to supplement the Floor Market Maker Rules is based mostly on commentary to PHLX Rule 1014. The Exchange notes that it is not copying all of the commentary to PHLX Rule 1014 as some of the commentary is not applicable because it involves specialists, who the Exchange does not have, or the commentary is covered by different proposed rules. 202 Proposed IM–8510–2 is based on PHLX Rule 1014.05(c). The Exchange is not including all of PHLX Rue 1014.05(c). Specifically, the Exchange is not including provisions of the PHLX Rule related to specialist because the Exchange does not have specialists and is not proposing to have specialists. The Exchange is also not including PHLX provisions related to priority of orders represented on the floor because the Exchange is copying the floor priority provisions from NYSE Arca and they are covered by proposed Rule 7600(c) sradovich on DSK3GMQ082PROD with NOTICES 201 The VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 shall be deemed to be participating in the crowd if such Floor Market Maker is, at the time an order is announced in the crowd, physically located in the specific Crowd Area. A Floor Market Maker who is physically present in such Crowd Area may engage in options transactions in assigned issues as a crowd participant, provided that such Floor Market Maker fulfills the requirements set forth in proposed Rule 8510. The Exchange is proposing to define the term ‘‘on the floor’’ as meaning the Trading Floor of the Exchange; the rooms, lobbies and other premises immediately adjacent thereto made available by the Exchange for use by Floor Participants generally; other rooms, lobbies and premises made available by the Exchange primarily for use by Floor Participants; and the telephone and other facilities in any such place.203 The Exchange is also proposing that the provisions of this Proposed Rule 8510 do not apply to transactions initiated by a Floor Market Maker for an account in which he has an interest unless such transactions are either initiated by a Floor Market Maker while on the Floor or unless such transactions, although originated off the Floor, are deemed on-Floor transactions under the provisions of these Rules.204 Additionally, the Exchange proposes that an off-Floor order for an account in which a Participant has an interest is to be treated as an on-Floor order if it is executed by the Participant who initiated it.205 Proposed IM–8510–4 also includes additional transactions that will be considered on-Floor transactions, including any transaction for an account in which a Floor Market Maker has an interest if such transaction is initiated off the Trading Floor by such Floor Market Maker after he has been on the Trading Floor during the same day. Additionally, the following will be treated as on-Floor orders, any transactions for a Participant for an account in which it has an interest: (1) Which results in an order entered off the Floor following a conversation relating thereto with a Floor Participant on the Floor who is a partner of or stockholder in such Participant; or (2) which results from an order entered off the Floor following the unsolicited submission from the Floor to the office of a quotation in a stock or Exchange-Traded Fund Share and the size of the market by a Participant on the Floor who is a 203 See proposed IM–8510–3(a). Proposed IM– 8510–3(a) is based on PHLX Rule 1014.07. 204 See proposed IM–8510–3(b). Proposed IM– 8510–3(b) is based on PHLX Rule 1014.07. 205 See proposed IM–8510–4. Proposed IM–8510– 4 is based on PHLX Rule 1014.08. PO 00000 Frm 00157 Fmt 4703 Sfmt 4703 23677 partner of or stockholder in such Participant; or (3) which results from an order entered off the Floor which is executed by a Participant on the Floor who is a partner of or stockholder in such Participant and who had handled the order on a ‘‘not-held’’ basis; 206 or (4) which results from an order entered off the Floor which is executed by a Participant on the Floor who is a partner of or stockholder in such Participant and who has changed the terms of the order. The Exchange is proposing that an onFloor order given by a Floor Market Maker to a commission broker, for an account in which the Floor Market Maker has an interest, is subject to all the rules restricting Floor Market Makers.207 The Exchange is proposing that the number of Floor Market Makers in the trading crowd who are establishing or increasing a position may temporarily be limited when, in the judgment of an Options Exchange Official, the interests of a fair and orderly market are served by such limitation.208 Additionally, the Exchange is proposing that the Exchange may adopt policies affecting the location of Floor Participants on the Trading Floor in the interest of a fair and orderly market.209 Lastly, the Exchange is proposing that a Floor Market Maker cannot acquire a ‘‘long’’ position by pairing off with a sell order before the opening, unless all off-Floor bids at that price are filled.210 The proposed rules applicable to Floor Market Makers are based predominately on the rules of PHLX. However, BOX omitted certain PHLX 206 However, the following are not on-Floor orders and such restrictions shall not apply to an order: (1) To sell an option for an account in which the Participant is directly or indirectly interested if, in facilitating the sale of a large block of stock or Exchange-Traded Fund Shares, the Participant acquired its position because the demand on the Floor was not sufficient to absorb the block at a particular price or prices; or (2) to purchase or sell an option for an account in which the Options Participant is directly or indirectly interested if the Options Participant was invited to participate on the opposite side of a block transaction by another Options Participant or a partner or stockholder therein because the market on the Floor could not readily absorb the block at a particular price or prices; or (3) to purchase or sell an option for an account in which the Participant is directly or indirectly interested if the transaction is on the opposite side of a block order being executed by the Participant for the account of its customer and the transaction is made to facilitate the execution of such order. 207 See proposed IM–8510–5. Proposed IM–8510– 5 is based on PHLX Rule 1014.09. 208 See proposed IM–8510–6. Proposed IM–8510– 6 is based on PHLX Rule 1014.12. 209 See proposed IM–8510–7. Proposed IM–8510– 7 is based on PHLX Rule 1014.17. 210 See proposed IM–8510–9. Proposed IM–8510– 9 is based on PHLX Rule 1014.11. E:\FR\FM\23MYN1.SGM 23MYN1 sradovich on DSK3GMQ082PROD with NOTICES 23678 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices rules from the proposed rules due to certain differences with how the Exchange is designing the Trading Floor. The Exchange is not including any of PHLX’s waiver provisions in the proposed rules.211 The Exchange does not believe that waiver provisions are necessary because the Exchange is not having specialists who have entitlement guarantees that they could waive on the Trading Floor. Additionally, BOX is not including rules related to foreign currency options because the Exchange does not list for trading options on foreign currencies. The Exchange is not including certain PHLX rules related to participation guarantees, allocation and priority. PHLX participant guarantee rules are designed to provide a guarantee entitlement to specialists on the trading floor. BOX is not proposing to have specialists on the Trading Floor and therefore there is no reason to include these PHLX rules. Additionally, BOX’s proposed allocation and priority rules for orders originating from the Trading Floor are based on the rules of NYSE Arca 212 and not those of PHLX. The Exchange proposes Rule 8530 which details the resolution of an uncompared trade.213 Specifically, when a disagreement between Floor Participants arising from an uncompared Exchange options transaction cannot be resolved by mutual agreement prior to 10:00 a.m. on the first business day following the trade date, the parties shall promptly, but not later than 3:30 p.m. on such day close out the transaction in the following manner. The Floor Participant representing the purchaser in the uncompared Exchange options transaction shall promptly enter into a new Exchange options transaction on the Floor of the Exchange to purchase the option contract that was the subject of the uncompared Exchange options transaction. The Floor Participant representing the writer in the uncompared Exchange options transaction shall promptly enter into a new Exchange options transaction on the Floor of the Exchange to sell (write) the option contract that was the subject of the uncompared Exchange options transaction. Any claims for damages resulting from such transactions must be made promptly for the accounts of the Floor Participants involved and not for the accounts of their respective customers. Notwithstanding the foregoing, if either Floor Participant is 211 See PHLX Rule 1014(g)(v)(D). NYSE Arca Rules 6.47(a) and 6.75. 213 Proposed Rule 8530 is based on PHLX Rule 1039. 212 See VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 acting for a firm account in an uncompared Exchange options transaction and not for the account of a Public Customer, such Floor Participant need not enter into a new transaction, in which event money differences will be based solely on the closing transaction of the other party to the uncompared transaction. In the event an uncompared transaction involves an option contract of a series in which trading has been terminated or suspended before a new Exchange options transaction can be effected to establish the amount of any loss, the Floor Participant not at fault may claim damages against the other Floor Participant involved in the transaction based on the terms of such transaction. All such claims for damages shall be made promptly. Fees The Exchange has not yet determined the fees for transactions originating from the Trading Floor. Prior to commencing trading on the Trading Floor, the Exchange will file proposed fees with the Commission. Additional Changes The Exchange is also proposing minor edits to other sections of the Exchange’s Rulebook in order to accommodate the various changes. Specifically, the Exchange is proposing several new definitions which results in the renumbering of numerous other definitions. Therefore, the Exchange is amending various references to definitions in the Rulebook.214 The Exchange notes that BOX Rule 3090 (Prevention of the Misuse of Material Nonpublic Information) will apply to Floor Participants. Specifically, Floor Brokers and Floor Market Makers will be required to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by such Participant or persons associated with such Participant.215 The Exchange does not believe more prescriptive information barriers are necessary for these Participants, as neither Floor Brokers nor Floor Market Makers will have different or greater access to nonpublic information when compared to any other Options Participant on the 214 See proposed changes to Rules 7130, 7150, and 7245. 215 As is the case today, information barriers of new entrants would be subject to review as part of a new firm application. Moreover, the policies and procedures of Market Makers, including those relating to information barriers, would be subject to review by the Exchange. PO 00000 Frm 00158 Fmt 4703 Sfmt 4703 Exchange.216 Accordingly, because these Floor Participants do not have any trading advantages at the Exchange due to their market role, the Exchange believes that they should be subject to the same rules as other Participants regarding the protection against the misuse of material non-public information, which in this case is BOX Rule 3090. The Exchange notes that this principles-based approach to protecting against the misuse of material nonpublic information for all its Participants is consistent with the rules of other exchanges with physical trading floors.217 Except for prescribed rules relating to floor-based designated market makers on the NYSE, who have access to specified non-public trading information, each of these exchange have a principles based approach protecting against the misuse of material non-public information. In connection with approving these rule changes, the Commission found that, with adequate oversight by exchanges of their members, eliminating prescriptive information barrier requirements should not reduce the effectiveness of exchange rules requiring members to establish and maintain systems to supervise the activities of members, including written procedures reasonably designed to ensure compliance with applicable federal securities laws and regulations, 216 A principles based approach to protect against the misuse of material non-public information for all of its registered Options Participants is consistent with the rules of other options and equities exchanges, except for prescribed rules relating to floor-based designated market makers on the NYSE, who have access to specified non-public trading information. Further, the Exchange believes that the principles-based approach is appropriate with regard to BOX’s market structure because it provides greater flexibility for how BOX Option Participants modify their internal policies and procedures in order to reflect their business model, business activities, or to their securities market itself. The Exchange also believes that the principles-based approach will provide for broader protections rather than a more prescriptive approach which would only protect certain defined non-public information. 217 See Securities Exchange Act Release No. 75432 (July 13, 2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a Principles-Based Approach to Prohibit the Misuse of Material Nonpublic Information by Specialists and eSpecialists by Deleting Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 8, 2009) (SR–NYSEArca–2009–78) (Order approving elimination of NYSE Arca rule that required market makers to establish and maintain specifically prescribed information barriers, including discussion of NYSE Arca and Nasdaq rules) (‘‘Arca Approval Order’’); and 72534 (July 3, 2014), 79 FR 39440 (July 10, 2014), [sic] SR–NYSE– 2014–12) (Order approving amendments to NYSE Rule 98 governing designated market makers to move to a principles-based approach to prohibit the misuse of material non-public information) (‘‘NYSE Approval Order’’). E:\FR\FM\23MYN1.SGM 23MYN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices and with the rules of the applicable exchange. The Exchange notes that the design of the proposed Trading Floor alleviates certain concerns related to misuse of information on trading floors. Specifically, the Exchange is not proposing to have a specialist on the Trading Floor, and, therefore, there are no concerns raised related to a specialist and an affiliated Market Maker coordinating their market making or otherwise sharing information. Further, the Exchange is not proposing to change what is considered to be material, nonpublic information that an affiliate of a Floor Participant could share with the Floor Participant. In that regard, Rule 3090 does not permit affiliates to have access to any non-public order or quote information of the Floor Participant, including hidden or undisplayed size or price information on such orders or quotes. Affiliates of Floor Participants would only have access to order and quotes that are publicly available to all market participants and the Exchange believes the current surveillance procedures are sufficient to monitor and protecting against the misuse of material non-public information with regard to any communications on and off the Trading Floor. The Exchange notes that all current Options Participants already have in place written policies and procedures to comply with Rule 3090 and such policies and procedures have been approved by BOX Regulation.218 As such, Floor Participants would be obligated to ensure that their policies and procedures reflect the current state of their business and continue to be reasonably designed to achieve compliance with applicable federal securities laws and regulations, including Section 15(g) of the Act,219 and with applicable Exchange rules, including being reasonably designed to protect against the misuse of material, non-public information. While information barriers are not required, Rule 3090(a) requires that a Participant consider its business model or business activities in structuring its policies and procedures, which may dictate that an information barrier or a functional separation be part of the appropriate set of policies and procedures that would be reasonably designed to achieve compliance with applicable securities law and regulations and with applicable Exchange rules. 218 FINRA currently approves Rule 3090 procedures on behalf of BOX Regulation pursuant to a Regulatory Services Agreement. 219 15 U.S.C. 780(g). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 The Exchange believes that the reliance on Rule 3090 ensures that all BOX Participants are required to protect against the misuse of any material nonpublic information. Rule 3090(b)(2) requires that a firm refrain from trading while in possession of material nonpublic information concerning imminent transactions in the security or a related product. The Exchange believes that this principles based approach provides all BOX Participants the flexibility when managing risk across the firm, including integrating options positions with other positions of the firm, or as applicable, by respective trading unit. Finally, FINRA has an exam program that reviews Participants for compliance with such procedures. As such, Floor Participants will be subject to FINRA’s review when implementing such policies and procedures for the Trading Floor. In addition, once implemented, FINRA would continue to monitor a Floor Participant’s compliance with those policies and procedures consistent with the current exam-based regulatory program associated with BOX Rule 3090. Lastly, the Exchange notes that it will submit a separate filing to the SEC which will cover minor rule violations on the Trading Floor. Specifically, the Exchange will file with the SEC to amend the Exchange’s Minor Rule Violation Plan in Rule 12140. The Exchange will not commence operation of the Trading Floor until the Minor Rule Violation Plan has been amended to include violations which occur on the Trading Floor. Trading Floor Data The Exchange will provide the Commission with data related to activity on the Trading Floor. Specifically, the Exchange will provide information regarding size, participation, price improvement by spread and trade type, effective spread, Floor Market Maker participation, and BOX Book participation. This information will be provided on a confidential basis with non-firm specific information being available quarterly on the Exchange’s Web site. 2. Statutory Basis Insert text from Item 3b. [sic] The Exchange believes that its proposal is consistent with Section 6(b) of the Act 220 in general, and furthers the objectives of Section 6(b)(5) of the Act 221 in particular, in that it is designed to prevent fraudulent and 220 15 221 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00159 Fmt 4703 Sfmt 4703 23679 manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. General BOX believes that the proposal is consistent with the Act and furthers the foregoing objectives by increasing the opportunities for Participants to execute orders and provide an additional venue for seeking liquidity. The Exchange believes the adoption of the proposed rules allowing for an open-outcry floor is consistent with the goals of the Act to remove the impediments to and perfect the mechanism of a free and open market because it will benefit Participants by providing an additional mechanism for Participants to provide and seek liquidity for large and complex orders. The Exchange believes that the nature of open outcry transactions lends itself better to larger-sized transactions than the liquidity that is generally available electronically and the proposed rules would encourage greater participation in such large trades. Therefore, the proposed rule changes will benefit the market as a whole by providing an additional venue for market participants to seek liquidity for large-sized and complex orders. Providing an additional venue for these orders will benefit investors, the national market system, Participants, and the Exchange’s market by increasing competition for order flow and executions, and thereby spur product enhancements and lower prices. The Exchange believes that the proposal is designed to prevent fraudulent and manipulative acts and practices because all surveillance coverage currently performed by the Exchange will cover trading from the Trading Floor. Additionally, the Exchange will have surveillance coverage in place to monitor issues unique to the Trading Floor. The Exchange believes the proposed changes to Rule 100(a) to include definitions of Floor Participant and Trading Floor are consistent with the goals of the Act. Specifically, the proposed changes are designed to protect investors and the public interest by providing background and clarity in the Rulebook. Additionally, proposed Rule 100(b) will provide additional clarity in the Rulebook. Specifically, the definition for Presiding Exchange Officials provides Floor Participants with notice of who is responsible for monitoring and regulating the Trading Floor. The other sections of proposed E:\FR\FM\23MYN1.SGM 23MYN1 23680 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES Rule 100(b) provide general background for Floor Participants in the beginning of the Rulebook that will aid in understanding the applicable rules throughout, which will protect investors and the public by making the Exchange’s Rulebook simpler to understand. Additionally, the Exchange notes that the various sections of proposed Rule 100(b) are based on the rules of another exchange with an openoutcry floor.222 The Exchange believes that the proposed Rule detailing the requirements for public outcry 223 is reasonable and consistent with the Act. Specifically, the Exchange believes this proposal is designed to protect investors and public interest by making clear the requirements for open outcry. The Exchange believes that the default of a Floor Market Maker being ‘‘out’’ promotes just and equitable principles of trade by ensuring a Floor Market Maker is only allocated if he desires. Additionally, the Exchange believes that requiring a Floor Broker to give Floor Participants a reasonable amount of time to respond to an order will protect investors and the public interest by ensuring that there is an opportunity for robust interaction on the Trading Floor. Participant Eligibility and Registration The Exchange believes that the proposed registration requirements, including floor trading examinations, if required, for Floor Brokers,224 Floor Market Makers and registered representatives on the Trading Floor, are reasonable and further the objectives of the Act.225 Specifically, these examinations address industry and Exchange specific topics that establish the foundation for the regulatory and procedural knowledge necessary for individuals required to register as Floor Brokers or Floor Market Makers and for such individuals to appropriately register under the Exchange’s Rules. Requiring these examinations will help promote consistency in examination requirements and uniformity across the markets. Additionally, the registration requirements for Floor Participants are reasonable because they will help the Exchange to determine if a registrant is qualified to be a Floor Broker or Floor Market Maker and therefore will protect investors and the public interest. Similarly, the Exchange believes that prescribing appropriate registration requirements including floor trading examinations for all other Trading Floor personnel, including clerks, interns, stock execution clerks and other associated persons, are reasonable as well. Specifically, these examinations address industry and Exchange specific topics that establish the foundation for the regulatory and procedural knowledge necessary to appropriately register under the Exchange rules. The proposed registration requirements for associated persons are reasonable because they will help the Exchange to determine if a registrant is qualified to be on the Trading Floor and therefore will protect investors and the public interest. Additionally, the proposed Rules covering eligibility and registration are based on the rules of another exchange that has an openoutcry floor.226 Trading on the Exchange Floor The Exchange believes that the proposed rules governing activity on the Trading Floor, including Trading Floor hours, opening the market, admittance, joint accounts, and dealings on the Trading Floor,227 are reasonable restrictions that are designed to further the objectives of the Act. Specifically, the proposed rules are designed to maintain order and structure on the Trading Floor and apply to all Floor Participants. Additionally, these rules are based on those of competing options exchanges that also have open-outcry floors.228 The Exchange believes the proposal to require each Options Participant that physically conducts business on the Trading Floor to procure and maintain liability insurance 229 should assist in preventing unnecessary waste of Exchange resources, which can be easily diverted to defending litigation claims and responding to non-Exchange related litigation matters on behalf of its Participants. The proposal is meant to prevent the Exchange from diverting valued resources away from its main regulatory responsibilities and being consumed in litigation designed to siphon Exchange monies and staff. The Exchange notes the proposal to require liability insurance is based on the rules of another exchange.230 The Exchange is proposing various rules related to Clerks on the Trading Floor 231 that the Exchange believes are 226 See 222 See PHLX Rules 1000(e), 1000(f), 1000(g),1080.06, and CBOE Rule 6.74(a). 223 See proposed Rule 100(b)(5). 224 Floor Brokers are required to complete a floor trading examination. See proposed Rules 2020(h) and 7550. 225 See proposed Rules 2020(h) and (i). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 PHLX Rule 620(a) and (b). proposed Rules 7070(d), 7500, 7510, 7520, and 7650. 228 See PHLX Rules 1017(c), 102, 104, 443, and 772. 229 See proposed Rule 7230(f). 230 See PHLX Rule 652(c)(2). 231 See proposed Rule 7630. reasonable and further the objectives of the Act. Specifically, the proposal relates to restrictions and conduct of Clerks on the Trading Floor that are designed to maintain order on the Trading Floor. Additionally, the proposal will make clear the rights and responsibilities of Clerks on the Trading Floor. The Exchange notes the proposed Rule related to Clerks on the Trading Floor is based on the rule of another exchange.232 The Exchange believes the proposed Rule relating to disputes on the Trading Floor will provide clarity and direction for the resolution of such disputes.233 The proposed Rule will contribute to the maintenance of a fair and orderly market by clearly laying out the dispute resolution process. Additionally, by first allowing the interested Floor Participants an opportunity to settle the disagreement, the Exchange is providing a reasonable opportunity for the interested parties to reach an equitable agreement. The Exchange believes that allowing an Options Exchange Official to settle disputes is reasonable and is designed to promote just and equitable principles of trade by having an independent third party settle the dispute. The Exchange believes that the dispute resolution process is further strengthened by allowing Floor Participants the ability to appeal an Options Exchange Official’s ruling. In addition, the Exchange believes that its proposal is consistent with Section 6(b) of the Act 234 in general, and furthers the objective of Section 6(b)(4) of the Act 235 in particular, in that it is an equitable allocation of reasonable fees and other charges among Exchange members. The Exchange believes that this proposal is equitable in that the appeal fee would apply to all Participants equally. The Exchange believes the appeal fee amount is reasonable as a similar fee exists on other option exchange with an open outcry trading floor.236 The addition of the appeal fee will help the Exchange offset costs associated with reviewing contested rulings by an Options Exchange Official. The Exchange believes it is reasonable to exclude Floor Market Makers and Floor Brokers who do not conduct business with the public from Rule 4180.237 Rule 4180 deals with requirements for Participants that are approved to transact business with the public; therefore the proposed Rule is 227 See PO 00000 Frm 00160 Fmt 4703 Sfmt 4703 232 See PHLX Rule 1090. proposed Rule 7640. 234 15 U.S.C. 78f(b). 235 15 U.S.C. 78f(b)(4). 236 See PHLX Rule 124(d)(iii). 237 See proposed Rule 4180(g). 233 See E:\FR\FM\23MYN1.SGM 23MYN1 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices simply clarifying that Rule 4180 will not apply to Floor Market Makers and Floor Brokers who do not conduct business with the Public. The Exchange notes the proposed Rule is based on the rule of another exchange.238 The proposal outlining bids and offers made on the Trading Floor and the solicitation of quotations on the Trading Floor 239 provides clarifying information to Floor Participants on how bidding and offering on the Trading Floor will work; therefore, the proposal is designed to protect investors and the public interest by making the proposed operation of the Trading Floor clear in the Exchange’s rules. The proposal is based on the rules of another exchange.240 sradovich on DSK3GMQ082PROD with NOTICES Floor Brokers The Exchange believes that the proposed rules applicable to Floor Brokers,241 including responsibilities and restrictions, are designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. Specifically, the proposed rules will provide guidance and restrictions for Floor Brokers operating on the Trading Floor. The proposed registration requirements for Floor Brokers will protect investors and the public interest by ensuring that all Floor Brokers are registered with the Exchange and that the Exchange approved each Floor Broker before they were admitted to the Trading Floor. The proposed responsibilities for Floor Brokers 242 are designed to further the goals of the Act. Specifically, the requirement that a Floor Broker use due diligence in handling an order and the requirement to ascertain that at least one Floor Market Maker is present when the order is announced on the Trading Floor, are designed to promote just and equitable principles of trade, and, in general to protect investors and the public interest by providing the opportunity for additional interaction and price improvement from any Floor Market Maker. The Exchange believes the various restrictions on Floor Brokers are reasonable and are in line with those on another exchange with an openoutcry floor.243 238 See PHLX Rule 705(f)(1)(B). proposed Rule 7040(d). 240 See PHLX Rule 1033(a). 241 See proposed Rules 7540, 7550, 7570, 7580, and 7590. 242 See proposed Rule 7580. 243 See PHLX Rules 155, 1063, and 1065. 239 See VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 Executions and Priority The proposed rule change is consistent with Section 11(a) of the Act and the rules thereunder. The Commission has stated that it believes all electronic executions executed against interest on the BOX Book are consistent with the requirements of Section 11(a) of the Act. Under the proposed rule change, Participants will be prohibited from utilizing the Trading Floor to effect any transaction for covered accounts. Participants are subject to review with respect to such compliance. Under the proposed rules, no covered account transactions utilizing the Trading Floor may use the G Exemption. Participants may only rely upon other exceptions to Section 11(a)(1) of the Act when interacting with the Trading Floor or the BOX Book utilizing the Trading Floor.244 The proposed rule changes would not limit in any way the obligation of a BOX Participant, while acting as a Floor Broker or otherwise, to comply with Section 11(a) or the rules thereunder.245 Notwithstanding proposed IM–7600– 5, under Rule 11a2–2(T), the so-called ‘‘effect vs. execute’’ rule, a Participant may effect transactions on the Trading Floor for its covered accounts by using another Participant, acting as a Floor Broker, provided that (i) the executing Floor Broker is not an associated person of the initiating Participant, (ii) the covered account order must be transmitted from off the Trading Floor, (iii) neither the initiating Participant nor any associated person of the initiating Participant participates in execution of the order after the covered account order has been transmitted for execution from off the Trading Floor (referred to below as the ‘‘non-participation requirement’’); and (iv) if the transaction is being effected for an account over which the initiating Participant or an associated person of that Participant exercises investment discretion, neither the initiating Participant nor any associated person may retain any compensation in connection with effecting the transaction unless express written consent to such retention has been obtained from the person or persons authorized to transact business for the managed account in the manner provided in the rule. Thus, a Participant (not acting in a market-making capacity) 244 For example, other § 11(a)(1) exemptions include, the ‘‘effect vs. execute’’ exemption, the market maker exemption, and the error account exemption. 245 A Floor Broker may utilize the Trading Floor to effect a transaction for a covered account only pursuant to proposed Rule 7540 and for purposes of liquidating error positions. PO 00000 Frm 00161 Fmt 4703 Sfmt 4703 23681 could submit an order for a covered account from off the Trading Floor to an unaffiliated Floor Broker for representation on the Trading Floor and use the effect versus execute exemption (assuming the other conditions of the rule are satisfied).246 A Participant, relying on the ‘‘effect versus execute’’ exemption, could not submit an order for a covered account to its ‘‘house’’ Floor Broker on the Trading Floor for execution. At no time following the submission of an order utilizing the Trading Floor will the submitting Participant or any associated person of such Participant acquire control or influence over the result or timing of the order’s execution. The Exchange believes that the proposed rules applicable to executions and priority 247 are designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. As explained above, executions from the Trading Floor will be consistent with options trade-through and priority rules and the Exchange’s systems are designed to help ensure that an execution from the Trading Floor cannot occur in violation of those rules. Specifically, when a QOO Order is submitted to the Trading Host for execution, the Exchange’s system will evaluate the current market conditions to ensure that the execution price is equal to or better than the NBBO. It is the Exchange’s understanding that traditionally on trading floors when a Floor Broker executed an order in the trading crowd verbally, that order was deemed executed; when the Floor Broker then entered the execution price electronically to complete the processing of the trade, including trade reporting to the tape, markets can change such that the execution price was outside the NBBO or violated the priority of orders now resting on the electronic book of the exchange. By having the QOO Order execute when it is received by the Trading Host, the Exchange is providing a system that will prevent executions that appear to be at prices that are worse than the NBBO due to the time they are reported. Specifically, the Exchange’s system will automatically enforce BOX Book 246 Orders for covered accounts that rely on the ‘‘effect versus execute’’ exemption will be transmitted from a remote location directly to the Trading Floor by electronic means. 247 See proposed Rules 7600 and 7610. E:\FR\FM\23MYN1.SGM 23MYN1 23682 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES priority 248 and trade-through provisions. The Exchange further believes that protecting non-Public Customer interest on the BOX Book that is ranked ahead of Public Customer interest is consistent with just and equitable principles of trade because it maintains the Exchange’s existing price/time priority rules by protecting interest that has time priority over Public Customer interest that has priority. The Exchange also notes that this proposed priority interaction with the BOX Book is the same as NYSE Arca.249 Additionally, the Exchange’s proposed interaction with orders on the BOX Book actually provides additional opportunities for orders on the BOX Book to interact with trades on the Trading Floor as compared to other exchanges with open-outcry floors. Specifically, other exchanges with open-outcry floors only require floor trades to yield priority to Public Customer Orders on the electronic book.250 The Exchange believes that the proposal to provide a Floor Broker with a guarantee for certain orders initiating from the Trading Floor 251 is reasonable and is consistent with the Act. Specifically, the proposal will reward Floor Brokers who bring large orders to the Exchange by guaranteeing them the ability to cross a certain percentage. The Exchange notes that another options exchange provides a guarantee on their trading floor.252 Additionally, the Exchange currently provides a guarantee with respect to auction transactions executed on the Exchange.253 The Exchange believes that the proposed priority provisions for Complex QOO Orders are reasonable because they align the Exchange’s Rules with the rules of other exchanges with open-outcry floors.254 Specifically, the Exchange will allow Complex QOO Orders from the Trading Floor to execute without giving priority to equivalent bids (offers) in the individual series legs on the initiating side, provided at least one options leg betters the corresponding bid or offer on the BOX Book by at least one minimum trading increment as set forth in Rule 7240(b)(1).255 BOX believes this is consistent with the Act because it is 248 Floor Brokers are responsible for complying with priority among Floor Participants on the Trading Floor. 249 See NYSE Arca Rules 6.47 and 6.75. 250 See PHLX Rule 1014.05(c), CBOE Rule 6.45(a), and NYSE MKT Rule 963NY(a). 251 See proposed Rule 7600(f). 252 See PHLX Rule 1064.02. 253 See Rule 7150 Price Improvement Period. 254 See NYSE Arca Rule 6.75(g). 255 See proposed Rule 7600(c). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 providing at least one leg with an improved price compared to bids or offers on the BOX Book. Additionally, the Exchange notes that these Complex Orders executed on trading floors can be large and complex and the proposed treatment of Complex Orders on the Trading Floor will increase the ability for Floor Brokers to execute these complex trades to the benefit of market participants. The Exchange believes that allowing Floor Brokers to disable the NBBO aspect of the Complex Order Filter when executing a Complex QOO Order is reasonable because other exchanges do not have NBBO protection for complex orders.256 The Exchange believes that the Trading Host, including the BOG as a component of the Trading Host,257 will further the objectives and goals of the Act. Specifically, the ability of the Trading Host to provide an electronic audit trail will help prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and remove impediments to and perfect the mechanisms of a free and open market and a national market system. All transactions on the Trading Floor must be submitted through the BOG for processing by the Trading Host, which will allow the Exchange to provide a complete and accurate audit trail and minimize the occurrences of disputes and regulatory violations. The Trading Host is designed to prohibit trade-through violations by preventing an execution at a price worse than the NBBO. The Exchange believes requiring that all transactions on the Trading Floor must be executed by the Trading Host will increase the speed and efficiency in which Floor Brokers handle orders, thereby making the Exchange’s market more efficient, to the benefit of the investing public and consistent with promoting just and equitable principles of trade. The Exchange believes that the proposal to adopt a new order type 258 for all executions originating on the Trading Floor is consistent with the Act. Specifically, as mentioned above, the new order type will help Floor Brokers initiating orders on the Trading Floor. The various elements of the QOO Order are designed to aid Floor Brokers in their duties on the Trading Floor. For example, by having the QOO Order execute when it is processed by the Trading Host, the Exchange is providing an accurate timestamp of when the order was executed. Additionally, the 256 See ISE Rule 722(b)(3). proposed Rule 100(b)(2). 258 See proposed Rule 7600. 257 See PO 00000 Frm 00162 Fmt 4703 Sfmt 4703 QOO Order is designed to ensure that all orders submitted by Floor Brokers are systematized before they are announced to the trading crowd.259 The Exchange believes that the features of the QOO Order are designed to promote just and equitable principles of trade, to remove impediments to and protect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. The Exchange believes that the proposed rules governing order allocation 260 are reasonable and consistent with the Act. Specifically, the proposed rules relating to the allocation of orders align the Exchange’s Rules with the rules of another options exchange with an open outcry trading floor.261 The Exchange believes the proposed rule change is designed to protect investors and the public interest by providing clarity and detail with regard to the allocation process on the Trading Floor. Additionally, the Exchange believes the proposed procedures a Floor Broker must follow when allocating an order are designed to promote just and equitable principles of trade by ensuring that priority on the Exchange is enforced. The Exchange believes that the book sweep size in proposed Rule 7600(h) is consistent with Section 6(b)(5) of the Act.262 In particular, the book sweep size promotes just and equitable principles of trade, removes impediments to and perfects the mechanism of a free and open market and a national market system and, in general protects investors and the public interest by increasing the interaction of the Trading Floor with the BOX Book, which will be beneficial to all market participants. Specifically, the Exchange believes that the book sweep functionality will enhance execution efficiency and regulatory oversight on the Trading Floor by making certain that a Floor Broker’s order will first trade with all available Public Customer interest on the BOX Book and any nonPublic Customer interest ranked ahead of such Public Customer interest at the execution price. The Exchange believes that without the book sweep size, the Exchange Act’s goal of creating an 259 In order to execute a QOO Order from the Trading Floor, it must be sent from a Floor Broker’s system to the BOG. This requires that the Floor Broker adequately systemized the QOO Order. The Exchange also notes that Floor Brokers will be subject to regulatory oversight by the Exchange to review whether Floor Brokers are properly systematizing orders. 260 See proposed Rule 7600(d). 261 See NYSE Arca Rules 6.47 and 6.75. 262 15 U.S.C. 78(f)(b)(5). E:\FR\FM\23MYN1.SGM 23MYN1 sradovich on DSK3GMQ082PROD with NOTICES Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices efficient market system will not be supported, as a Floor Broker may attempt to execute an order without first exhausting priority interest. Instead, the proposed book sweep size removes impediments to and perfects the mechanism of a free and open market and a national market system by providing an alternative that will increase the opportunity for orders on the Trading Floor to interact with interest on the BOX Book, which in turn has the potential to increase liquidity for all orders on the BOX Book. The Exchange notes that this approach is not entirely novel; as mentioned above, PHLX’s FBMS contains a functionality that will help a Floor Broker clear PHLX’s electronic book so a floor based order can execute.263 Specifically, if a Floor Broker on PHLX enters a twosided order through the FBMS, and there is interest on the PHLX electronic book at a price that would prevent the Floor Broker’s order from executing, the FBMS will provide the Floor Broker with the quantity of contracts on the electronic book that have priority and need to be satisfied before the Floor Broker’s order can execute at the agreed upon price.264 If the Floor Broker wishes to still execute his order, he can cause a portion of the floor based order to trade against this priority interest on the electronic book, thereby clearing the interest and permitting the remainder of the Floor Broker’s order to trade at the desired price. The PHLX FBMS functionality is optional, and a Floor Broker can decide not to trade against the electronic book and therefore not execute his two-sided order at the particular price. The Exchange believes that the Trading Floor book sweep size improves upon PHLX’s FBMS functionality by either immediately executing or rejecting the order depending on the book sweep size provided and the level of priority interest on the BOX Book. The Exchange believes the immediate execute or reject feature will allow for more execution certainty and incentivize Floor Brokers on BOX to provide an adequate book sweep size if they want the order to be eligible for execution. The Exchange does not believe that the immediate execution or rejection will disadvantage Floor Brokers on BOX compared to PHLX because it will provide certainty to Floor Brokers. The Exchange believes that the proposed book sweep size will protect investors and the public interest generally by establishing more execution oversight. Specifically, the Exchange believes that the book sweep size will allow BOX to electronically link in a single audit trail the Floor Broker execution and any execution with interest on the BOX Book. The Exchange believes that the proposal outlining the resolution of uncompared trades 265 will provide clarity and direction for Floor Participants when a disagreement arises from an uncompared Exchange options transaction that cannot be resolved by mutual agreement. The Exchange believes this proposal is designed to protect investors and public interest by making the proposed resolution of uncompared trades clear in the Exchange’s rules. Further, the proposal is based on the rules of another exchange.266 Communications and Equipment The Exchange believes the proposed Rule involving communications and equipment on the Trading Floor 267 includes reasonable restrictions that are consistent with the requirements of the Act. Specifically, the proposed Rule will provide the Exchange with the ability to monitor equipment on the Trading Floor and therefore provide adequate oversight of the Trading Floor. Additionally, the proposal will allow the Exchange to limit use of a communication device when such device interferes with normal operation of the Exchange’s own systems or facilities or with the Exchange’s regulatory duties, is inconsistent with the public interest, the protection of investors or just and equitable principles of trade, or interferes with the obligations of a Participant to fulfill its duties under, or is used to facilitate any violation of the Act or rules thereunder, or Exchange rules. Additionally, the Exchange notes that the proposal is consistent with rules of other exchanges.268 Market Makers The Exchange believes that the proposed Rules applicable to Floor Market Makers 269 are reasonable and will foster cooperation and coordination with persons engaged in facilitating transactions in securities and will remove impediments to and perfect the mechanism of a free and open market and a national market system. The Exchange also believes the proposed changes enhance the Exchange’s ability 265 See 263 See PHLX Rule 1063(e)(iv). 264 See Securities Exchange Act Release No. 68960 (February 20, 2013), 78 FR 13132 (February 26, 2013) (SR– Phlx–2013–09) at 13134. VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 proposed Rule 8530. PHLX Rule 1039. 267 See proposed Rule 7660. 268 See PHLX Rule 606 and CBOE Rule 6.23. 269 See proposed Rules 8500 and 8510. 266 See PO 00000 Frm 00163 Fmt 4703 Sfmt 4703 23683 to fairly and efficiently regulate its Floor Market Makers by utilizing a consistent rule set of obligations and restrictions. The Exchange believes the proposed changes reflect similar Market Maker obligations and restrictions already in place on BOX’s electronic exchange.270 The proposed changes simply align the existent obligations and restrictions of Market Makers with the use of a trading floor with certain exceptions. Specifically, instead of providing $5 bid/ask differentials as provided in Rule 8040(a)(7), the Exchange is proposing stricter bid/ask differentials. The Exchange believes that the proposed bid/ask differentials for Floor Market Makers are reasonable and will protect investors and the public interest by providing the opportunity for better execution prices on the Trading Floor when a Floor Market Maker is involved. Additionally, the Exchange believes that the proposed changes fall in line with similar trading floor rules at other exchanges.271 The Exchange believes that the proposed continuous open outcry quoting requirement for Floor Market Makers in proposed Rule 8510(c)(2) is consistent with Section 6(b)(5) of the Act. In particular, the continuous quoting requirement is designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect the investors and the public interest. Specifically, the Exchange believes that the continuous open outcry quoting requirement for Market Makers will benefit investors, the national market system, Participants, and the Exchange by ensuring that Floor Market Makers provide liquidity to the Trading Floor to the benefit of market participants. Lastly, the Exchange believes that the proposed rule is non-discriminatory as it will apply to all Floor Market Makers. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule changes will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. The Exchange notes that other exchanges currently offer open-outcry floors. The Exchange believes that the proposed rules will allow the Exchange to compete with these other exchanges. Additionally, while the proposed rule changes would permit BOX to operate a Trading Floor, the Exchange is not 270 See 271 See E:\FR\FM\23MYN1.SGM BOX Rules 8000, 8030, 8040, and 8050. PHLX Rules 1020 and 1014. 23MYN1 23684 Federal Register / Vol. 82, No. 98 / Tuesday, May 23, 2017 / Notices requiring that Participants register and have a presence on the Trading Floor. Therefore, the proposed rule changes do not impose a burden on intra-market competition. Overall, the proposal is procompetitive for several reasons. In particular, by helping Floor Brokers at the Exchange compete for executions against floor brokers at other exchanges, it also helps them to be more efficient and provide a better audit trail of their executions on the Trading Floor. This, in turn, helps the Exchange compete against other exchanges in a deeply competitive landscape. The Exchange believes its proposed unique features for open-outcry trading will provide value to Floor Participants, which in turn, will help the Exchange compete.272 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received comments on the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning Amendment No. 2, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: sradovich on DSK3GMQ082PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–BOX–2016–48 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BOX–2016–48. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BOX– 2016–48 and should be submitted on or before June 13, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.273 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–10588 Filed 5–22–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80709; File No. SR– BatsBZX–2017–35] Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 20.6, Nullification and Adjustment of Options Transactions Including Obvious Errors May 17, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 5, 2017, Bats BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 273 17 272 Unique features include proposed Rules 7600(h) and 100(b)(5). VerDate Sep<11>2014 21:15 May 22, 2017 Jkt 241001 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00164 Fmt 4703 Sfmt 4703 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to amend Rule 20.6, entitled ‘‘Nullification and Adjustment of Options Transactions including Obvious Errors.’’ Rule 20.6 relates to the adjustment and nullification of transactions that occur on the Exchange’s equity options platform (‘‘BZX Options’’). The text of the proposed rule change is available at the Exchange’s Web site at www.bats.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background The Exchange and other options exchanges recently adopted a new, harmonized rule related to the adjustment and nullification of erroneous options transactions, including a specific provision related to coordination in connection with largescale events involving erroneous options transactions.3 The Exchange believes that the changes the options exchanges implemented with the new, harmonized rule have led to increased transparency and finality with respect to the adjustment and nullification of erroneous options transactions. However, as part of the initial initiative, the Exchange and other options exchanges deferred a few specific matters for further discussion. Specifically, as described in the Initial Filing, the Exchange and all other options exchanges have been working to 3 See Securities Exchange Act Release No. 74556 (March 20, 2015), 80 FR 16031 (March 26, 2015) (SR–BATS–2014–067); see also Securities Exchange Act Release No. 73884 (December 18, 2014), 79 FR 77557 (December 24, 2014) (the ‘‘Initial Filing’’). E:\FR\FM\23MYN1.SGM 23MYN1

Agencies

[Federal Register Volume 82, Number 98 (Tuesday, May 23, 2017)]
[Notices]
[Pages 23657-23684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-10588]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80720; File No. SR-BOX-2016-48]


Self-Regulatory Organizations; BOX Options Exchange LLC; Notice 
of Filing of Amendment No. 2 to a Proposed Rule Change To Adopt Rules 
for an Open-Outcry Trading Floor

May 18, 2017.
    On November 16, 2016, BOX Options Exchange LLC (``BOX'' or the 
``Exchange'') 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 adopt rules for an open-outcry trading floor. 
The proposed rule change was published for comment in the Federal 
Register on December 05, 2016.\3\ The Commission received three comment 
letters in response to the publication of the Notice.\4\ On January 10, 
2017, the Commission extended the time period within which to approve 
the proposed rule change, disapprove the proposed rule change, or 
institute proceedings to determine whether to approve or disapprove the 
proposed rule change to March 05, 2017.\5\ On February 21, 2017, the 
Commission received a response letter from the Exchange, as well as 
Amendment No. 1 to the proposed rule change.\6\ On March 1, 2017, the

[[Page 23658]]

Commission instituted proceedings to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.\7\ 
In response to the OIP, the Commission received five additional comment 
letters.\8\ On May 17, 2017, the Exchange filed Amendment No. 2 to the 
proposed rule change, which replaced and superseded the original 
filing, as modified by Amendment No. 1, in its entirety.\9\ The 
Commission is publishing this notice to solicit comments from 
interested persons on Amendment No. 2. Items I and II below have been 
prepared by the Exchange. On May 18, 2017, the Commission extended the 
time period within which to approve or disapprove the proposed rule 
change to August 2, 2017.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79421 (November 29, 
2016), 81 FR 87607 (``Notice'').
    \4\ See letters to Brent J. Fields, Secretary, Commission, from 
Angelo Evangelou, Deputy General Counsel, The Chicago Board Options 
Exchange, Inc. (``CBOE''), dated January 10, 2017; Steve 
Crutchfield, Head of Market Structure, CTC Trading Group, LLC (``CTC 
Trading''), dated December 31, 2016; and Joan C. Conley, Senior Vice 
President and Corporate Secretary, The Nasdaq Stock Market LLC 
(``Nasdaq''), dated December 22, 2016.
    \5\ See Securities Exchange Act Release No. 79768 (January 10, 
2017), 82 FR 4956 (January 17, 2017).
    \6\ See letter to Brent J. Fields, Secretary, Commission, from 
Lisa J. Fall, President, Exchange, received February 21, 2017, and 
Amendment No. 1, dated February 21, 2017. Amendment No. 1 is 
available at: https://www.sec.gov/comments/sr-box-2016-48/box201648.shtml.
    \7\ See Securities Exchange Act Release No. 80134 (March 1, 
2017), 82 FR 12864 (March 7, 2017) (``OIP'').
    \8\ See letters to Brent J. Fields, Secretary, Commission, from 
Angelo Evangelou, Deputy General Counsel, CBOE, dated April 21, 
2017; Steve Crutchfield, Head of Market Structure, CTC Trading, 
dated April 13, 2017; John Kinahan, CEO, Group One Trading, LP, 
dated April 11, 2017; Elizabeth King, General Counsel and Corporate 
Secretary, New York Stock Exchange, dated March 28, 2017; and Joan 
C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, 
dated March 27, 2017.
    \9\ See Amendment No. 2, dated May 17, 2017. Amendment 2 is 
available on the Exchange's Web site at http://lynxstorageaccount.blob.core.windows.net/boxvr/SE_resources/SR-BOX-2016-48_Amendment_2.pdf.
    \10\ See Securities Exchange Act Release No. 80719 (May 18, 
2017).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change was filed on November 16, 2016, which was 
published in the Federal Register.\11\ The Exchange filed an Amendment 
1 to this rule change on February 21, 2017, which was published in the 
Federal Register notice along with the Order Instituting 
Proceedings.\12\ The Exchange is proposing an Amendment 2 to provide 
more specificity to the rule change. This Amendment 2 amends and 
replaces the Original Filing and Amendment 1 in their entirety.
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    \11\ See Securities Exchange Act Release No. 79421 (November 29, 
2016), 81 FR 87607 (December 5, 2016) (``Original Filing'').
    \12\ See Securities Exchange Act Release No. 80134 (March 1, 
2017), 82 FR 12864 (March 7, 2017) (SR-BOX-2016-48).
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    This Amendment 2 makes the following changes to the Original Filing 
as modified by Amendment 1, to: (i) Clarify that the Trading Floor will 
have a single Crowd Area; \13\ (ii) clarify that the BOX Order Gateway 
(``BOG'') is a component of the Trading Host; \14\ (iii) clarify the 
public outcry process; \15\ (iv) remove proposed Rule 7010(d); \16\ (v) 
provide clarity regarding Trading Floor admittance; \17\ (vi) provide 
more specificity on how trade-through and priority rules are enforced; 
\18\ (vii) provide clarity on the handling of orders by Floor Brokers; 
\19\ (viii) clarify the processing of orders by the Trading Host; \20\ 
(ix) include the requirement of the presence of a Floor Market Maker 
when a Floor Broker announces an order; \21\ (x) include the 
requirement of a Floor Broker to pass an examination as part of the 
registration process; \22\ (xi) provide clarity on the allocation 
process; \23\ (xii) provide additional detail on orders from the 
Trading Floor; \24\ (xiii) clarify the submission parameters and 
process of a QOO Order; \25\ (xiv) clarify that orders are announced on 
the Trading Floor; \26\ (xv) clarify the guarantee provision; \27\ 
(xvi) clarify that combination orders are Complex Orders; \28\ (xvii) 
clarify priority in the trading crowd; \29\ (xviii) clarify that 
single-sided orders may be represented on the Trading Floor; \30\ (xix) 
remove proposed Rule 7620; \31\ (xx) remove the continuous electronic 
quoting obligation; \32\ (xxi) clarify that orders for covered accounts 
\33\ relying on an exemption under Section 11(a)(1)(G) of the Exchange 
Act (the ``G Exemption'') are not allowed when the Trading Floor is 
utilized; \34\ (xxii) clarify the responsibilities of an Options 
Exchange Official; \35\ (xxiii) clarify certain rules related to 
behavior on the Trading Floor; \36\ (xxiv) provide certain data to the 
SEC with respect to activity on the Trading Floor; and (xxv) make 
grammatical changes to the rule text.
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    \13\ See changes in Exhibit 4 to proposed Rules 100(a)(67), 
7660(i), and IM-8510-2(b). The Commission notes that Exhibits 3, 4, 
and 5, which were submitted with Amendment No. 2, are available on 
the Commission's Web site at https://www.sec.gov/rules/sro/box.htm.
    \14\ See changes in Exhibit 4 to proposed Rule 100(b)(2), 
7580(e)(2), 7600(c), IM-7580-2, and 8510(i).
    \15\ See changes in Exhibit 4 to proposed Rule 100(b)(5).
    \16\ See changes in Exhibit 4 to proposed Rule 7010(d).
    \17\ See changes in Exhibit 4 to proposed Rule 7520.
    \18\ See changes in Exhibit 4 to proposed Rule7600(a).
    \19\ See changes in Exhibit 4 to proposed Rule 7580(e).
    \20\ See changes in Exhibit 4 to proposed Rules 100(b)(2), 
100(b)(3), 7240(b)(3)(iii), 7580(e), 7600(a), 7600(c), and 8510(i).
    \21\ See changes in Exhibit 4 to proposed Rule 7580(a).
    \22\ See changes in Exhibit 4 to proposed Rules 2020(h) and 
7550.
    \23\ See changes in Exhibit 4 to proposed Rules 7600(a), 
7600(d), and 7600(h).
    \24\ See changes in Exhibit 4 to proposed Rules 7600 and 
7580(e).
    \25\ As described in greater detail below, the Exchange is 
proposing to adopt a Qualified Open Outcry (``QOO'') Order type. All 
orders executed from the Trading Floor must be QOO Orders. See 
changes in Exhibit 4 to proposed Rule 7600(c).
    \26\ See changes in Exhibit 4 to proposed Rules 7580(e)(1), 
7580(e)(2), 7600(a), 7600(b), IM-7600-1, 7640(b), 8510(i), and IM-
8510-2(b).
    \27\ See changes in Exhibit 4 to proposed Rule 7600(f).
    \28\ See changes in Exhibit 4 to proposed Rules 7580(c), IM-
7590-1, 7600(f)(2), and IM-7600-1(d).
    \29\ See changes in Exhibit 4 to proposed Rules 7610(d)(1) and 
IM-7600-1(c).
    \30\ See changes in Exhibit 4 to proposed Rules 7580(e)(1), 
7580(e)(2), and IM-7600-4.
    \31\ See changes in Exhibit 4 to proposed Rules 7620 and IM-
7600-5.
    \32\ See changes in Exhibit 4 to proposed Rules 8500(a) and 
8510(c)(1).
    \33\ A ``covered account'' is the member's account, the account 
of an associated person, or an account with respect to which it or 
an associated person thereof exercises investment discretion.
    \34\ See changes in Exhibit 4 to proposed Rules 7620(d), IM-
7600-5, and 8510(h).
    \35\ See changes in Exhibit 4 to proposed Rule 100(b)(6).
    \36\ See changes in Exhibit 4 to proposed Rule 8510(h)(4).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify that the Trading 
Floor will have a single Crowd Area where all option classes will be 
located.\37\ The Exchange believes this change will provide greater 
clarity on how the Trading Floor will be organized by removing the 
Exchange's discretion to have multiple Crowd Areas. The Exchange 
believes this change is reasonable as it adds more clarity to the rule 
text by making clear in the rules the number of Crowd Areas on the 
Trading Floor.
---------------------------------------------------------------------------

    \37\ See changes in Exhibit 4 to proposed Rules 100(a)(67), 
7660(i), and IM-8510-2(b).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify that the BOG is a 
component of the Trading Host.\38\ The Exchange believes that this 
change will provide greater clarity on the relationship between the BOG 
and Trading Host. Specifically, the Exchange believes clarifying that 
the BOG is a component of the Trading Host will provide greater detail 
on how QOO Orders submitted by Floor Brokers are processed by the 
Trading Host. The Exchange believes this change is reasonable as it 
adds more clarity to the rule text.
---------------------------------------------------------------------------

    \38\ See changes in Exhibit 4 to proposed Rules 100(b)(2), 
7580(e)(2), 7600(c), IM-7580-2, and 8510(i).
---------------------------------------------------------------------------

    The Exchange is amending rule text to clarify the public outcry 
process on the Trading Floor.\39\ The proposed change

[[Page 23659]]

will provide how long a Floor Participant has to respond to a Floor 
Broker when an order is announced and additional details on the public 
outcry process. Specifically, a Floor Broker must a give a Floor 
Participant a reasonable amount of time to respond. The Exchange 
believes this change is reasonable as it adds clarity and removes any 
potential confusion from the rule text.
---------------------------------------------------------------------------

    \39\ See changes in Exhibit 4 to proposed Rule 100(b)(5).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to remove proposed Rule 
7010(d).\40\ The Exchange is removing the proposed Rule because it is 
not necessary. Specifically, the proposed Rule provides that the Board 
may impose a charge upon Options Participants measured by their 
respective net commissions on transactions effected on the Trading 
Floor of the Exchange. The Exchange does not believe the provision is 
necessary because the Exchange does not intend to charge fees based on 
net commissions.\41\ The Exchange believes this change is reasonable as 
it removes a proposed Rule that is not necessary for the Trading Floor.
---------------------------------------------------------------------------

    \40\ See changes in Exhibit 4 to proposed Rule 7010(d).
    \41\ The Exchange notes that this proposed change does not 
prevent the Exchange from charging fees on the Trading Floor.
---------------------------------------------------------------------------

    The Exchange is amending the rule text to provide clarity regarding 
Trading Floor admittance.\42\ The proposed change makes clear that the 
Exchange must follow applicable disciplinary rules and procedures when 
the Exchange withdraws existing approval to access the Trading Floor. 
The Exchange believes this change is reasonable as it adds clarity to 
the rule text by providing additional detail on the admittance process 
of the Exchange and the existing disciplinary rules that are 
applicable.
---------------------------------------------------------------------------

    \42\ See changes in Exhibit 4 to proposed Rule 7520.
---------------------------------------------------------------------------

    The Exchange is amending the rule text to provide more specificity 
on how trade-through and priority rules are enforced.\43\ The proposed 
changes will make clear that the Trading Host will enforce trade-
through and priority rules in the same manner for QOO Orders as the 
Trading Host does for all other orders on BOX. As is the case with all 
orders on BOX, the QOO Order is validated when the QOO Order is 
received by the Trading Host.
---------------------------------------------------------------------------

    \43\ See changes in Exhibit 4 to proposed Rule 7600(a).
---------------------------------------------------------------------------

    The Exchange is amending rule text to provide clarity on the 
handling of orders by Floor Brokers.\44\ The Exchange is amending the 
rule text to make clear that Floor Brokers must comply with certain 
requirements when representing an order on the Trading Floor. The 
Exchange notes that the proposed change does not impose any new 
requirements, but simply seeks to clarify the rules surrounding Floor 
Broker order handling requirements. As such, the Exchange believes that 
these changes are reasonable as they provide clarity to the rules.
---------------------------------------------------------------------------

    \44\ See changes in Exhibit 4 to proposed Rule 7580(e).
---------------------------------------------------------------------------

    The Exchange is amending the rule text describing the processing of 
an order by the Trading Host.\45\ As part of this clarifying change, 
the Exchange is amending the rule text on how orders are submitted from 
the Trading Floor. The Exchange is making this change because a QOO 
Order is not executed until the Trading Host processes the QOO Order as 
opposed to when it is announced on the Trading Floor. Additionally, the 
Exchange is amending the rule text to make clear that all options 
transactions on BOX are executed automatically by the Trading Host. The 
Exchange believes these changes are reasonable as they eliminate 
confusion and provide clarity to the rules.
---------------------------------------------------------------------------

    \45\ See changes in Exhibit 4 to proposed Rules 100(b)(2), 
100(b)(3), 7240(b)(3)(iii), 7580(e), 7600(a), 7600(c), and 8510(i).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to include the requirement 
of the presence of a Floor Market Maker when a Floor Broker announces 
an order.\46\ This proposed change is designed to better align the 
Exchange's rules with those of another options exchange.\47\ The 
Exchange believes this change is reasonable as it enhances consistency 
between the Exchange's proposed rules and existing rules at another 
exchange with a trading floor.
---------------------------------------------------------------------------

    \46\ See changes in Exhibit 4 to proposed Rule 7580(a).
    \47\ See NASDAQ PHLX LLC (``PHLX'') Rule 1063(a).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to include the requirement 
of a Floor Broker to pass an examination as part of the registration 
process.\48\ In the Original Filing, the Exchange was proposing to make 
Floor Broker examinations discretionary, which was a departure from 
another options exchange with a trading floor. Therefore, the Exchange 
believes this change is reasonable as it enhances consistency between 
the exchange's proposed rules and existing rules of another exchange 
with a trading floor.\49\
---------------------------------------------------------------------------

    \48\ See changes in Exhibit 4 to proposed Rules 2020(h) and 
7550.
    \49\ See PHLX Rule 1061.
---------------------------------------------------------------------------

    The Exchange is amending rule text to provide additional detail on 
orders from the Trading Floor.\50\ The proposed change provides details 
of how a Floor Broker may execute orders from the Trading Floor. The 
proposed change also provides additional details on a Floor Broker's 
responsibility to announce an order to the trading crowd. Additionally, 
as part of this proposed change, the Exchange is moving proposed Rule 
7580(e)(3) and combining it with proposed Rule 7600(a) in order to make 
the rule text clearer. The Exchange believes the proposed change is 
reasonable as it provides additional detail and clarity to the rule 
text.
---------------------------------------------------------------------------

    \50\ See changes in Exhibit 4 to proposed Rules 7600 and 
7580(e).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to provide clarity on the 
allocation process.\51\ The allocation process has not changed from the 
Original Filing; the proposed change is clarifying the timing and 
procedure that a Floor Broker must use on the Trading Floor. 
Specifically, the executing Floor Broker is responsible for providing 
the correct allocation of the initiating side of the QOO Order to an 
Options Exchange Official or his or her designee who will properly 
record the order in the Exchange's system. Additionally, the proposed 
change reformatted the rule text to make it clearer for Participants. 
As part of this change, the Exchange is clearly laying out how the 
initiating side of the QOO Order is allocated. The Exchange is also 
clarifying the rule text language with respect to the book sweep size. 
The Exchange believes that these changes are reasonable because they 
add clarity and provides additional detail to the rules.
---------------------------------------------------------------------------

    \51\ See changes in Exhibit 4 to proposed Rules 7600(a), 
7600(d), and 7600(h).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify the submission 
parameters and process of a QOO Order.\52\ This proposed change is 
designed to provide additional clarity on how the open-outcry process 
on the Trading Floor will occur. Specifically, the Exchange is adding 
rule text requiring a Floor Broker to submit the QOO Order to the BOG 
without undue delay. Although the Original Filing did not specifically 
state this, it was generally understood that a Floor Broker would 
submit the QOO Order to the BOG after announcement and would not 
unreasonably delay the submission, provided that the executing Floor 
Broker allows adequate time for Floor Participants to participate in 
the transaction as provided in proposed Rule 100(b)(5). The Exchange is 
also providing additional detail on the requirements for submitting a 
Complex

[[Page 23660]]

QOO Order. As part of this proposed change, the Exchange is also making 
certain clarifying changes to the rule text. As such, the Exchange 
believes the change is reasonable since it provides additional clarity 
to the rules by codifying this requirement of Floor Brokers.
---------------------------------------------------------------------------

    \52\ See changes in Exhibit 4 to proposed Rule 7600(c).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify that orders are 
announced on the Trading Floor.\53\ This proposed rule change is 
designed to clarify when an execution occurs. In the Original Filing, 
the Exchange used the terms ``executed'', ``announced'' and 
``represented'' on the Trading Floor interchangeably. In actuality, an 
order is announced on the Trading Floor but not executed; the execution 
occurs when the QOO Order is processed by the Trading Host. 
Additionally, a Floor Broker may represent an order on the Trading 
Floor, however, this only means he is holding the order and does not 
necessarily mean he is announcing the order for execution. The Exchange 
believes that these clarifications are reasonable since they are 
designed to clarify and remove confusion from the rule text.
---------------------------------------------------------------------------

    \53\ See changes in Exhibit 4 to proposed Rules 7580(e)(2), 
7600(a), 7600(b), IM-7600-1, 7640(b), 8510(i), and IM-8510-2(b).
---------------------------------------------------------------------------

    The Exchange is amending the rule text related to guarantees.\54\ 
Specifically, the Exchange is amending the rule text to remove language 
that may lead to confusion among Floor Participants. The Exchange 
believes this change is reasonable as it provides clarity to the rule 
text.
---------------------------------------------------------------------------

    \54\ See changes in Exhibit 4 to proposed Rule 7600(f).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify that combination 
orders, including spreads, straddles, and stock options, are Complex 
Orders.\55\ The Exchange is making this change in order to clarify the 
usage of certain terms throughout the Exchange's Rulebook. The Exchange 
believes that this minor change is designed to provide clarity in the 
rules and is reasonable.
---------------------------------------------------------------------------

    \55\ See changes in Exhibit 4 to proposed Rules 7580(c), IM-
7590-1, 7600(f)(2), and IM-7600-1(d).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify priority in the 
trading crowd.\56\ Specifically, the proposed change clarifies that it 
is the responsibility of the Floor Participant who established the 
market to alert the Floor Broker of the fact that the Floor Participant 
has priority when a Floor Broker announces an order to the trading 
crowd. The Exchange believes this change is reasonable because it will 
provide clarity and guidance to Floor Participants on the requirements 
of the rules.
---------------------------------------------------------------------------

    \56\ See changes in Exhibit 4 to proposed Rules 7610(d)(1) and 
IM-7600-1(c).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify that single-sided 
orders may be represented on the Trading Floor.\57\ Single-sided orders 
have always been allowed on the Trading Floor; however, the Original 
Filing was silent on whether they may be represented on the Trading 
Floor. This proposed change is simply codifying that single-sided 
orders are allowed on the Trading Floor and, therefore, the Exchange 
believes the change is reasonable.
---------------------------------------------------------------------------

    \57\ See changes in Exhibit 4 to proposed Rule IM-7600-4.
---------------------------------------------------------------------------

    The Exchange is removing proposed Rule 7620.\58\ Proposed Rule 7620 
is not necessary since orders executed by Floor Brokers from the 
Trading Floor must be QOO Orders processed by the Trading Host and 
proposed Rule 7600 provides adequate details on the process of 
executing orders from the Trading Floor. Specifically, paragraph (a) of 
proposed Rule 7620 is covered by proposed Rule 7600(d)(2) and paragraph 
(b) is covered by proposed Rule 7600(d)(3)(ii). Paragraph (c) was 
inadvertently included. Paragraph (c) provides that bids and offers of 
non-Public Customers on the BOX Book ranked behind any Public Customer 
Orders at the same price have last priority. This provision is not 
applicable to the Trading Floor because the executing Floor Broker has 
last priority on the Trading Floor, not bids and offers of non-Public 
Customers on the BOX Book ranked behind any Public Customer Orders at 
the same price.\59\ Lastly, paragraph (d) is being moved to proposed 
IM-7600-5. The Exchange believes this proposed change is reasonable as 
it removes unnecessary rule text.
---------------------------------------------------------------------------

    \58\ See changes in Exhibit 4 to proposed Rules 7620 and IM-
7600-5.
    \59\ At the same price, bids and offers of non-Public Customers 
on the BOX Book ranked behind any Public Customer Orders are not 
allocated to orders from the Trading Floor.
---------------------------------------------------------------------------

    The Exchange is amending rule text to remove the continuous 
electronic quoting obligation for Floor Market Makers.\60\ The proposed 
change will better align the rule text with that of other exchanges 
with trading floors that do not have electronic quoting requirements 
for Floor Market Makers. As such, the Exchange believes this change is 
reasonable as it enhances consistency between the Exchange's proposed 
Rule and existing rules at other exchanges with trading floors.
---------------------------------------------------------------------------

    \60\ See changes in Exhibit 4 to proposed Rules 8500(a) and 
8510(c)(1).
---------------------------------------------------------------------------

    The Exchange is amending the rule text to clarify that orders for 
covered accounts relying on an exemption under Section 11(a)(1)(G) of 
the Exchange Act (the ``G Exemption'') are not allowed on the Trading 
Floor.\61\ The Exchange is proposing this change to clarify that 
Participants may not utilize the Trading Floor to effect certain 
transactions. The Exchange is providing this information to Floor 
Brokers to provide clarity on applicable restrictions.
---------------------------------------------------------------------------

    \61\ See changes in Exhibit 4 to proposed Rules 7620(d), IM-
7600-5, and 8510(h).
---------------------------------------------------------------------------

    The Exchange is amending rule text to clarify the responsibilities 
of an Options Exchange Official.\62\ The Exchange is proposing this 
change to make clear the authority of Options Exchange Officials on the 
Trading Floor. The Exchange believes the proposed change is reasonable 
as it is clarifying the authority of the Options Exchange Officials and 
not proposing any change to their authority.
---------------------------------------------------------------------------

    \62\ See changes in Exhibit 4 to proposed Rule 100(b)(6).
---------------------------------------------------------------------------

    The Exchange is amending rule text to clarify certain rules related 
to behavior on the Trading Floor.\63\ This change is designed to 
clarify the rule text where the potential for confusion exists. The 
Exchange believes this change is reasonable as it clarifies the rule 
text and removes the possibility of confusion.
---------------------------------------------------------------------------

    \63\ See changes in Exhibit 4 to proposed Rule 8510(h)(4).
---------------------------------------------------------------------------

    The Exchange is proposing to provide data to the SEC with respect 
to activity on the Trading Floor. Specifically, the Exchange will 
provide information regarding size, participation, and price 
improvement by spread and trade type, effective spread, Floor Market 
Maker participation, and BOX Book participation. This information will 
be provided on a confidential basis with non-firm specific information 
being available quarterly on the Exchange's Web site.
    Lastly, the Exchange is proposing to make various grammatical 
changes to the rule text. The changes are simply designed to correct 
errors in the rule text.
    The text of the proposed rule change is available from the 
principal office of the Exchange, at the Commission's Public Reference 
Room and also on the Exchange's Internet Web site at http://boxexchange.com.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change

[[Page 23661]]

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

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

1. Purpose
    The Exchange is proposing to adopt rules to allow for open-outcry 
trading on a physical trading floor (``Trading Floor''). The Exchange 
notes that this is not a novel proposal and that other exchanges 
currently offer open-outcry trading in addition to electronic 
trading.\64\ The Exchange is proposing a hybrid model similar to these 
other exchanges.
---------------------------------------------------------------------------

    \64\ NYSE Arca, Inc. (``NYSE Arca''), PHLX, Chicago Board 
Options Exchange, Incorporated (``CBOE''), and NYSE MKT LLC (``NYSE 
MKT'').
---------------------------------------------------------------------------

General
    The Exchange is proposing various changes to the definition section 
of the Rulebook to accommodate the proposed Trading Floor. First, the 
Exchange is proposing to define ``Floor Participant'' as Floor Brokers 
as defined in Rule 7540 and Floor Market Makers as defined in Rule 
8510(b).\65\ The Exchange is proposing to define ``Trading Floor'' or 
``Options Floor'' as the physical trading floor of the Exchange located 
in Chicago.\66\ The Trading Floor shall consist of one ``Crowd Area'' 
or ``Pit'' where all option classes will be located. The Crowd Area or 
Pit shall be marked with specific visible boundaries on the Trading 
Floor, as determined by the Exchange. A Floor Broker must open outcry 
an order in the Crowd Area.
---------------------------------------------------------------------------

    \65\ See proposed Rule 100(a)(26).
    \66\ See proposed Rule 100(a)(67).
---------------------------------------------------------------------------

    The Exchange is proposing to add the definition of ``Presiding 
Exchange Officials.'' \67\ Specifically, the President of the Exchange 
and his or her designated staff shall be responsible for monitoring: 
(1) Dealings of Floor Participants and their associated persons on the 
Trading Floor, and of the premises of the Exchange immediately adjacent 
thereto; (2) the activities of Floor Participants and their associated 
persons, and shall establish standards and procedures for the training 
and qualification of Floor Participants and their associated persons 
active on the Trading Floor; (3) all Trading Floor employees of Floor 
Brokers and Floor Market Makers, and shall make and enforce such rules 
with respect to such employees as may be deemed necessary; (4) all 
connections or means of communications with the Trading Floor and may 
require the discontinuance of any such connection or means of 
communication when, in the opinion of the President or his or her 
designee, it is contrary to the welfare or interest of the Exchange; 
(5) the location of equipment and the assignment and use of space on 
the Trading Floor; and (6) relations with other options exchanges. The 
Exchange is also proposing that any Exchange employee or officer 
designated as an Options Exchange Official will from time to time as 
provided in these rules have the ability to recommend and enforce rules 
and regulations relating to trading access, order, decorum, health, 
safety and welfare on the Exchange.\68\
---------------------------------------------------------------------------

    \67\ See proposed Rule 100(b)(1). Proposed Rule 100(b)(1) is 
based on PHLX Rule 1000(e).
    \68\ See proposed Rule 100(b)(6). Proposed Rule 100(b)(6) is 
based on NYSE Arca Rule 6.1(b)(34).
---------------------------------------------------------------------------

BOX Order Gateway
    Next, the Exchange is proposing to add a definition for the ``BOX 
Order Gateway.'' The BOX Order Gateway (``BOG'') is a component of the 
Trading Host \69\ which enables Floor Brokers and/or their employees to 
enter transactions on the Trading Floor.\70\ Specifically, a Floor 
Broker will have a connection to the BOG giving the Floor Broker the 
ability to submit orders to the Trading Host. Once orders are submitted 
through the BOG they are immediately processed by the Trading Host. The 
Trading Host will establish an electronic audit trail for options 
orders represented and executed by Floor Brokers.\71\ The audit trail 
will provide an accurate, time-sequenced record of all orders from the 
Trading Floor, beginning with the receipt of an order by the Exchange, 
and further documenting the life of the order. Additional information 
on the requirements for Floor Broker's audit trail requirements are 
described in greater detail below. Additionally, the Exchange is 
proposing to clarify that all transactions executed on the Exchange 
shall be executed automatically by the Trading Host pursuant to Rule 
7130 or 7600.\72\ The Exchange is also proposing to clarify that bids 
and offers on the Trading Floor, to be effective, must be made by 
public outcry on the Trading Floor and that all bids and offers shall 
be general ones and shall not be specified for acceptance by particular 
Floor Participants.\73\
---------------------------------------------------------------------------

    \69\ The term ``Trading Host'' means the automated trading 
system used by BOX for the trading of options contracts. See Rule 
100(a)66.
    \70\ See proposed Rule 100(b)(2). Proposed Rule 100(b)(2) is 
based on PHLX Rule 1080.06. Proposed Rule 100(b)(2) is slightly 
different to PHLX Rule 1080.06 to account for the fact that all 
orders from the Trading Floor are not deemed executed until they are 
processed by the Trading Host. Specifically, with respect to 
providing a time-sequenced record, the Exchange is not including the 
distinction between electronic and other orders, and quotations on 
the trading floor. The Exchange is not including these references 
because, as mentioned above, all orders from the Trading Floor are 
electronic and not deemed executed until they are processed by the 
Trading Host.
    \71\ To be clear, the execution of an order represented on the 
Trading Floor does not occur until the order is processed by the 
Trading Host.
    \72\ See proposed Rule 100(b)(3). Proposed Rule 100(b)(3) is 
based on PHLX Rule 1000(f). The Exchange notes that PHLX includes 
additional methods for executions on PHLX's Trading Floor that BOX 
is not including in proposed Rule 100(b)(3). The Exchange does not 
believe that these methods are necessary as the Exchange believes 
that all transactions from the Trading Floor shall be processed by 
the Trading Host to ensure an accurate and complete audit trail.
    \73\ See proposed Rule 100(b)(4). Proposed Rule 100(b)(4) is 
based on PHLX Rule 1000(g). The Exchange notes that PHLX includes 
information about bidding and offering electronically as well as in 
public outcry; however, the Exchange is only proposing to include 
information about public outcry. BOX already has rules in place that 
govern electronic bidding and offering and therefore there is no 
need to mention it in proposed Rule 100(b)(4).
---------------------------------------------------------------------------

    The Exchange is also proposing to provide details on how the public 
outcry process will work on the Trading Floor. Specifically, the 
Exchange is proposing that bids and offers must be made in an audible 
tone of voice and a Floor Market Maker shall be considered ``out'' on a 
bid or offer if he does not affirmatively respond to the Floor Broker 
who is announcing the order, provided that a Floor Broker must give a 
Floor Participant a reasonable amount of time to respond.\74\ A 
``reasonable

[[Page 23662]]

amount of time'' will be interpreted on a case-by-case basis by an 
Options Exchange Official based on current market conditions and 
trading activity on the Trading Floor. A Floor Participant who is 
bidding and offering in immediate and rapid succession shall be deemed 
``in'' until he says ``out'' on either bid or offer. Once the trading 
crowd has provided a quote, it will remain in effect until: (i) A 
reasonable amount of time has passed, or (ii) there is a significant 
change in the price of the underlying security, or (iii) the market 
given in response to the request has been improved. In the case of a 
dispute, the term ``significant change'' will be interpreted on a case-
by-case basis by an Options Exchange Official based upon the extent of 
recent trading in the option and, in the case of equity and index 
options, in the underlying security, and any other relevant factors. A 
Floor Participant must verbalize that he is ``in'' after a Floor Broker 
announces an order, even if a valid quote has been provided by the 
Floor Participant prior to the announcement of the order by a Floor 
Broker.\75\ The Exchange believes that requiring the Floor Participant 
to confirm that they are still ``in'' after providing a valid quote 
will ensure that a Floor Participant is only participating in trades 
that he intends.
---------------------------------------------------------------------------

    \74\ See proposed Rule 100(b)(5). Proposed Rule 100(b)(5) is 
based on PHLX Rule 1000(g). The Exchange notes that proposed Rule 
100(b)(5) is slightly different to PHLX Rule 1000(g). Specifically, 
PHLX Rule 1000(g) considers a member to be ``in'' on a bid or offer 
while he remains at the post, unless he shall distinctly and audibly 
say ``out.'' The Exchange is requiring the Floor Market Maker to 
make an affirmative assertion that he is ``in''. The Exchange 
believes that this difference is reasonable and necessary. Requiring 
an affirmative response by a Floor Market Maker will allow for a 
more efficient process for executing orders on the Trading Floor. 
The Exchange is concerned that requiring every Floor Market Maker to 
affirmatively be ``out'' on every order before it is executed will 
lead to unnecessary delays on the Trading Floor and has the 
potential to cause disruptions. The Exchange notes that CBOE Rule 
6.74(a) does not consider members of the trading crowd in on the 
order; they must respond to the Floor Broker. Additionally, the 
Exchange is not including part of PHLX Rule 1000(g) that requires a 
member to audibly say ``out'' before the Floor Broker submits the 
order for execution and, if the order is not executed, the member 
must audibly say ``out'' before each time the Floor Broker resubmits 
the order for execution. The Exchange is not including this 
provision of PHLX's Rule 1000(g) because, as previously stated, a 
Floor Participant, including a Floor Market Maker, must provide an 
affirmative response if they want to be in on the trade.
    \75\ A Floor Broker may request a market prior to announcing an 
order on the Trading Floor (``market probe''). When a Floor Broker 
conducts a market probe, any responses from Floor Participants are 
public to all Floor Participants. When a Floor Broker conducts a 
market probe, he probes all Floor Participants.
---------------------------------------------------------------------------

    The Exchange is proposing that all bids or offers made on the 
Trading Floor for options contracts shall be deemed to be for one 
options contract unless a specific number of option contracts is 
expressed in the bid or offer and that bid or offer for more than one 
option contract shall be deemed to be for the amount thereof or a 
smaller number of options contracts.\76\ The Exchange is also proposing 
the following process for the solicitation of quotations on the Trading 
Floor.\77\ Specifically, in response to a Floor Broker's solicitation 
of a single bid or offer, Floor Participants may discuss, negotiate, 
and agree upon the price or prices at which an order of a size greater 
than the Exchange's disseminated size can be executed at that time, or 
the number of contracts that could be executed at a given price or 
prices, subject to the provisions of the Options Order Protection and 
Locked/Crossed Market Plan \78\ and the Exchange's Rules respecting 
Trade-Throughs. Notwithstanding the foregoing, a single Floor 
Participant may voice a bid or offer independently from, and 
differently from, the Participants of a trading crowd.
---------------------------------------------------------------------------

    \76\ See proposed Rule 7040(d). Proposed Rule 7040(d) is based 
on PHLX Rule 1033(a).
    \77\ See proposed Rule 7040(d)(2).
    \78\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009).
---------------------------------------------------------------------------

    The Exchange is proposing to adopt Rule 7230(f) Limitation of 
Liability, which codifies that each Options Participant that physically 
conducts business on the Exchange's Trading Floor is required, at its 
sole cost, to procure and maintain liability insurance that provides 
defense and indemnity coverage for itself, any person associated with 
it, and the Exchange for any action or proceeding brought relating to 
the conduct of the Options Participant or associated person.\79\ The 
insurance shall provide defense and indemnity coverage to the Exchange 
for the Exchange's sole, concurrent, or contributory negligence, or 
other wrongdoing, relating to or in connection with such claim and the 
Exchange shall be expressly named by endorsement as an Additional 
Insured under the Insurance. The Exchange's status and rights to 
coverage under the insurance shall be the same rights of the named 
insured of the insurance, including, without limitation, rights to the 
full policy limits; and the limits for the insurance shall be not less 
than $1,000,000 without erosion by defense costs, but under no 
circumstance shall the Exchange be entitled to less than the full 
policy limits of such insurance. The insurance shall state that it is 
primary to any insurance maintained by the Exchange. Each Options 
Participant annually shall cause a certificate of insurance to be 
issued directly to the Exchange demonstrating that insurance compliant 
with this proposed Rule has been procured and is maintained. Each 
Options Participant also shall furnish a copy of the insurance to the 
Exchange for review upon the Exchange's request at any time. This 
proposed section (f) is the only section of Rule 7230 specifically 
limited to Options Participants physically located on the Exchange's 
Trading Floor.
---------------------------------------------------------------------------

    \79\ Proposed Rule 7230(f) is based on PHLX Rule 652(c)(2).
---------------------------------------------------------------------------

Registration
    In order for a Participant to be admitted to the Trading Floor the 
Participant will be required to register with the Exchange. 
Additionally, all Floor Participants must be registered as a 
Participant \80\ on BOX prior to registering as either a Floor Broker 
or Floor Market Maker.
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    \80\ The term ``Participant'' means a firm or organization that 
is registered with the Exchange pursuant to the Rule 2000 Series for 
purposes of participating in options trading on BOX as an ``Order 
Flow Provider'' or ``Market Maker''. See Rule 100(a)(40).
---------------------------------------------------------------------------

    The Exchange is proposing to adopt Rule 2020(h) Trading Floor 
Registration, which codifies that each Floor Broker, Floor Market Maker 
and registered representative on the Exchange Trading Floor must be 
registered as ``Member Exchange'' (``ME'') under ``BOX'' on Form U4. 
Each Floor Market Maker and registered representative on the Exchange 
Trading Floor must successfully complete the appropriate floor trading 
examination(s), if prescribed by the Exchange, in addition to 
requirements imposed by other Exchange Rules.\81\ Each Floor Broker on 
the Exchange Trading Floor is required to successfully complete the 
appropriate floor trading examination, in addition to the requirements 
imposed by other Exchange Rules. The Exchange is also proposing to 
adopt procedures and a timeframe for submitting changes of registration 
status to the Exchange. Specifically, following the termination of or 
the initiation of a change in the trading status of any such Floor 
Participant who has been issued an Exchange access card and a Trading 
Floor badge, the appropriate Exchange form must be completed, approved 
and dated by a firm principal, officer, or member of the firm with 
authority to do so, and submitted to the appropriate Exchange 
department as soon as possible, but no later than 9:30 a.m. ET the next 
business day by the Options Participant employer. Additionally, the 
Exchange proposes to specify that every effort should be made to obtain 
the person's access card and Trading Floor badge and to submit these to 
the appropriate Exchange department.
---------------------------------------------------------------------------

    \81\ See proposed Rule 2020(h). Proposed Rule 2020(h) is based 
on PHLX Rule 620(a).
---------------------------------------------------------------------------

    The Exchange is also proposing to add Rule 2020(i), which details 
Non-Participant and Clerk Registration. Specifically, all Trading Floor 
personnel, including clerks, interns, stock execution clerks and any 
other associated persons, of a Floor Participant not required to 
register pursuant to proposed Rule 2020(h) must be registered as 
``Floor Employee'' (``FE'') under BOX on Form U4. Further, the Exchange 
may require successful completion of an examination in addition to 
requirements imposed by other Exchange Rules.\82\ The Exchange is also 
proposing to adopt procedures and a timeframe for submitting changes

[[Page 23663]]

of Trading Floor personnel registration status to the Exchange. 
Specifically, following the termination of or the initiation of a 
change in the status of any such personnel of a Floor Participant who 
has been issued an Exchange access card and a Trading Floor badge, the 
appropriate Exchange form must be completed, approved and dated by a 
Floor Participant principal, officer, or member of the Floor 
Participant with authority to do so, and submitted to the appropriate 
Exchange department as soon as possible, but no later than 9:30 a.m. ET 
the next business day by the Floor Participant employer. Additionally, 
the Exchange proposes to specify that every effort should be made to 
obtain the person's access card and Trading Floor badge and to submit 
these to the appropriate Exchange department.
---------------------------------------------------------------------------

    \82\ See proposed Rule 2020(i). Proposed Rule 2020(i) is based 
on PHLX Rule 620(b).
---------------------------------------------------------------------------

Broker's Blanket Bonds
    Currently, Rule 4180 Brokers' Blanket Bond provides that every OFP 
\83\ approved to transact business with the public and every Clearing 
Participant \84\ shall carry Brokers' Blanket Bonds covering officers 
and employees of the OFP in such form and in such amounts as the 
Exchange may require. The Exchange is now proposing that any Floor 
Participant that has registered solely to conduct business as a Floor 
Market Maker or a Floor Broker who does not conduct business with the 
public shall be exempt from the provisions of Rule 4180.\85\
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    \83\ The terms ``Order Flow Provider'' or ``OFP'' mean those 
Options Participants representing as agent Customer Orders on BOX 
and those non-Market Maker Participants conducting proprietary 
trading. See Rule 100(a)(45).
    \84\ The term ``Clearing Participant'' means an Options 
Participant that is self-clearing or an Options Participant that 
clears BOX Transactions for other Options Participants of BOX. See 
Rule 100(a)(13).
    \85\ See proposed Rule 4180(g). Proposed Rule 4180(g) is based 
on PHLX Rule 705(f)(1)(B).
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Doing Business on BOX
    The majority of the proposed rules governing the activity on the 
Trading Floor will be contained in the 7000 series, Doing Business on 
BOX, of the Exchange's Rules.
Trading on the Exchange Floor
    Dealings on the Trading Floor will be limited to the hours during 
which the Exchange is open for the transaction of business.\86\ 
Specifically, the Exchange's normal trading hours for equity options 
are 9:30 a.m. ET to 4:00 p.m. ET and for options on Exchange-Traded 
Fund Shares and broad-based indexes transactions may be effected until 
4:15 p.m. ET. Additionally, to be considered in the determination of 
the opening price and to participate in the opening trade, the Floor 
Broker must submit the order into the BOX Book \87\ electronically.\88\ 
The Floor Broker may do so from the Trading Floor using their terminal; 
however, the order will not receive any special or different treatment 
from any other pre-opening order submitted from off the Trading Floor. 
Additionally, a Floor Participant who wishes to place a Limit Order on 
the BOX Book must submit such a Limit Order electronically.\89\
---------------------------------------------------------------------------

    \86\ See proposed Rule 7500. Proposed Rule 7500 is based on PHLX 
Rule 102.
    \87\ The term ``Central Order Book'' or ``BOX Book'' means the 
electronic book of orders on each single option series maintained by 
the BOX Trading Host. See Rule 100(a)(10).
    \88\ See proposed Rule 7070(d). Proposed Rule 7070(d) is based 
on PHLX Rule 1017(c).
    \89\ See proposed IM-8510-8. Proposed IM-8510-8 is based on PHLX 
Rule 1014.18.
---------------------------------------------------------------------------

    The Exchange is proposing certain restrictions for dealings on the 
Trading Floor. Specifically, that no Options Participant shall, while 
on the Trading Floor, make any transactions with any non-Options 
Participants in any security admitted to dealing on the Exchange.\90\ 
Additionally, no employee of a Floor Participant shall be admitted to 
the Trading Floor unless that person is registered with and approved by 
the Exchange.\91\ The Exchange may in its discretion require the 
payment of a fee with respect to each employee so approved, and may at 
any time in its discretion withdraw any approval so given. In 
exercising Exchange discretion in withdrawing approval, the Exchange 
will follow applicable disciplinary rules and procedures, including the 
ability to appeal such Exchange determination.\92\
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    \90\ See proposed Rule 7510. Proposed Rule 7510 is based on PHLX 
Rule 104.
    \91\ See proposed rule 7520. Proposed Rule 7520 is based on PHLX 
Rule 443.
    \92\ The applicable disciplinary rules and procedures are 
located in 13000 Series of the Exchange's Rules.
---------------------------------------------------------------------------

Floor Brokers
    As previously mentioned, the Exchange is proposing two categories 
of Participants on the Trading Floor; Floor Brokers and Floor Market 
Makers. A Floor Broker is an individual who is registered with the 
Exchange for the purpose, while on the Trading Floor, of accepting and 
handling option orders.\93\ A Floor Broker who wishes to conduct 
business on the Trading Floor must be registered as a Participant on 
BOX prior to registering as a Floor Broker. A Floor Broker may take 
into his own account, and subsequently liquidate, any position that 
results from an error made while attempting to execute, as Floor 
Broker, an order.
---------------------------------------------------------------------------

    \93\ See proposed Rule 7540. Proposed Rule 7540 is based on PHLX 
Rule 1060. In addition to the definition in the PHLX Rule, the 
Exchange is proposing that Floor Brokers must register as Options 
Participants on BOX prior to registering as a Floor Broker on the 
Trading Floor. The Exchange believes that this additional 
requirement is reasonable as it will allow the Exchange to 
adequately monitor Participants and have uniform registration 
requirements for all Participants.
---------------------------------------------------------------------------

    Prior to being admitted to the Trading Floor, a Floor Broker shall 
file an application in writing with the Exchange staff on such form or 
forms as the Exchange may prescribe.\94\ The applications received from 
potential Floor Brokers will be reviewed by the Exchange,\95\ which 
shall consider an applicant's ability as demonstrated by his passing a 
Floor Broker's examination \96\ and such other factors as the Exchange 
deems appropriate.\97\ After reviewing the Floor Broker's application, 
the Exchange shall either approve or disapprove the applicant's 
registration as a Floor Broker.
---------------------------------------------------------------------------

    \94\ See proposed Rule 7550. Proposed Rule 7550 is based on PHLX 
Rule 1061.
    \95\ The Trading Floor application for Floor Participants is 
attached as Exhibit 3.
    \96\ The Floor Broker's examination will cover Exchange-specific 
rules dealing with the Trading Floor.
    \97\ A potential Floor Broker must follow the same application 
process as all Options Participants today. Rule 2040 provides 
restrictions and requirements on persons applying to become an 
Options Participant.
---------------------------------------------------------------------------

Responsibilities of Floor Brokers
    Floor Brokers will have certain responsibilities while conducting 
business on the Trading Floor. The proposed rules covering Floor 
Brokers' responsibilities are based on the rules of another exchange 
\98\ with certain differences due to the design and functionality of 
the Exchange's Trading Floor. Specifically, a Floor Broker handling an 
order must use due diligence to cause the order to be executed at the 
best price or prices available to him in accordance with the Rules of 
the Exchange.\99\ In addition to the Floor Broker requirements of 
proposed Rule 7570 concerning due diligence, a Floor Broker shall 
ascertain that at least one Floor Market Maker is present in the Crowd 
Area prior to announcing an order for execution.\100\
---------------------------------------------------------------------------

    \98\ See PHLX Rule 1063.
    \99\ See proposed Rule 7570. Proposed Rule 7570 is based on PHLX 
Rule 155.
    \100\ See proposed Rule 7580(a). Proposed Rule 7580(a) is based 
on PHLX Rule 1063(a). The Exchange notes that it is not copying the 
provisions of PHLX Rule 1063(a) that cover foreign currency options 
because the Exchange does not list for trading foreign currency 
options.
---------------------------------------------------------------------------

    Floor Brokers must make reasonable efforts to ascertain whether 
each order entrusted to them is for the account of

[[Page 23664]]

a Public Customer or broker-dealer.\101\ If it is determined the order 
is for the account of a broker-dealer, the responsible Floor Broker 
must advise the trading crowd of that fact while announcing the order 
via public outcry and make the appropriate notation in his order entry 
mechanism.
---------------------------------------------------------------------------

    \101\ See proposed IM-7580-2. Proposed IM-7580-2 is based on 
PHLX Rule 1063.02.
---------------------------------------------------------------------------

    The Exchange is also proposing rules for how a Floor Broker must 
handle contingency orders that are dependent upon the price of the 
underlying security and for how a Floor Broker must handle orders he is 
representing when they are for the account of a Market Maker.\102\ 
Specifically, for contingency orders, the Exchange is proposing that 
the Floor Broker shall be responsible for satisfying the dependency 
requirement on the basis of the last reported price of the underlying 
security in the primary market that is generally available on the 
Trading Floor at any given time. Unless mutually agreed by the 
Participants involved, an execution or non-execution that results shall 
not be altered by the fact that such reported price is subsequently 
found to have been erroneous. For orders from the account of a Market 
Maker, the Floor Broker must inform the crowd that he is handling an 
order for the account of a Market Maker and comply with proposed IM-
8510-6 and IM-8510-9.\103\ The purpose of requiring a Floor Broker, who 
is handling a Market Maker's order, to comply with Proposed IM-8510-6 
and IM-8510-9 is to prevent a Floor Market Maker from employing a Floor 
Broker in an effort to circumvent the restrictions in proposed IM-8510-
6 and IM-8510-9.\104\ Lastly, the Exchange is proposing that a Floor 
Broker shall not be held responsible for the execution of a Complex 
Order based upon transaction prices that are established at the opening 
or close of trading or during any trading rotation.\105\
---------------------------------------------------------------------------

    \102\ See proposed Rules 7580(b) and (d). Proposed Rule 7580(b) 
is based on CBOE Rule 6.73(b). The Exchange notes that CBOE's Rule 
provides for ``one-cancels-the-other orders,'' which BOX is not 
including because the Exchange does not offer these types of orders.
    \103\ See proposed Rule 7580(d). Proposed Rule 7580(d) is based 
on PHLX Rule 1063(d). PHLX's Rule provides for additional rules to 
which the Floor Broker must comply than what the Exchange is 
proposing. Specifically, PHLX Rule 1063(d) cites commentary .10, 
.11, .12, and .13 to PHLX Rule 1014; however, the Exchange is only 
proposing to copy commentary .11 and .12 to PHLX Rule 1014, see 
proposed IM-8510-6 and IM-8510-9. The Exchange is not copying PHLX 
1014.10 because it deals with specialists, which the Exchange is not 
proposing to have on the Trading Floor. Next, the Exchange is not 
copying PHLX Rule 1014.13, which deals with minimum quantity that a 
Floor Market Maker must execute in person per quarter, because the 
Exchange believes that having an in person requirement is an 
unnecessary restriction and does not fit the Exchange's Trading 
Floor.
    \104\ Proposed IM-8510-6 provides that an Options Exchange 
Official may temporarily limit the number of Floor Market Makers in 
the trading crowd who are establishing or increasing a position in 
the interest of a fair and orderly market. Proposed IM-8510-9 
prohibits a Floor Market Maker from acquiring a ``long'' position by 
pairing off with a sell order before the opening, unless all off-
Floor bids at the price are filled.
    \105\ See proposed Rule 7580(c).
---------------------------------------------------------------------------

    The Exchange is proposing requirements for Floor Brokers 
representing orders on the Trading Floor.\106\ These requirements are 
in addition to those in proposed Rule 7600. Specifically, in order to 
create an electronic audit trail for options orders represented by 
Floor Brokers on the Exchange's Trading Floor, a Floor Broker or such 
Floor Broker's employee shall, contemporaneously upon receipt of an 
order, including single-sided and double-sided orders, and prior to 
announcement of such an order in the trading crowd, record all options 
orders represented by such Floor Broker onto the Floor Broker's order 
entry mechanism.\107\ The following specific information with respect 
to orders represented by a Floor Broker shall be recorded by such Floor 
Broker or such Floor Broker's employees: (i) the order type (i.e., 
Public Customer, Professional, broker-dealer, Market Maker) and order 
receipt time; (ii) the option symbol; (iii) buy, sell, cross or cancel; 
(iv) call, put, complex (i.e., spread, straddle), or contingency order; 
(v) number of contracts; (vi) limit price or market order or, in the 
case of a multi-leg order, net debit or credit, if applicable; (vii) 
whether the transaction is to open or close a position; and (viii) The 
Options Clearing Corporation (``OCC'') clearing number of the broker-
dealer that submitted the order.\108\ Additionally, a Floor Broker must 
enter complete identification for all orders entered on behalf of 
Market Makers. Any additional information with respect to the order 
shall be input contemporaneously upon receipt, which may occur after 
the announcement and execution of the order.\109\ In the event of a 
malfunction in the Trading Host or any other related Trading Floor 
systems, including the BOG, orders will not be allowed to execute from 
the Trading Floor.
---------------------------------------------------------------------------

    \106\ See proposed Rule 7580(e).
    \107\ See proposed Rule 7580(e)(1). Proposed Rule 7580(e)(1) is 
based on PHLX Rule 1063(e)(i). PHLX's Rule provides for procedures 
for submitting orders on the Trading Floor in the event of a 
malfunction of PHLX's floor order system, which BOX is not 
including. The Exchange will not allow orders on the Trading Floor 
in the event that there is a malfunction with the Trading Host or 
any other related Trading Floor systems, including the BOG. The 
Exchange believes that providing a trade ticket backup would raise 
numerous issues with the audit trail.
    \108\ This information is also required when submitting a QOO 
Order.
    \109\ For example this may include information required to 
properly allocate the QOO Order to Floor Participants that responded 
when the QOO Order was announced to the trading crowd pursuant to 
proposed Rules 7580(e)(2) and 7600(b).
---------------------------------------------------------------------------

    All orders entrusted to a Floor Broker will be considered Not Held 
Orders, unless otherwise specified by a Floor Broker's client.\110\ A 
Not Held Order is an order marked ``not held'', ``take time'', or which 
bears any qualifying notation giving discretion as to the price or time 
at which such order is to be executed. An order entrusted to a Floor 
Broker will be considered a Not Held Order, unless otherwise specified 
by a Floor Broker's client.\111\Additionally, the Exchange is proposing 
that it shall be considered conduct inconsistent with just and 
equitable principles of trade for any Floor Broker or Floor Market 
Maker to intentionally disrupt the open outcry process.\112\
---------------------------------------------------------------------------

    \110\ See proposed IM-7580-3. Proposed IM-7580-3 is based on 
CBOE Rule 6.73.06.
    \111\ See proposed Rule 7600(g). Proposed Rule 7600(g) is based 
on CBOE Rule 6.53(g).
    \112\ See proposed IM-7580-4.
---------------------------------------------------------------------------

    A Floor Broker must announce an agency order that he is 
representing to the trading crowd before submitting the order to the 
BOG for execution.\113\ This announcement must take place whether the 
Floor Broker is representing a single-sided order and soliciting 
contra-side interest, or the Floor Broker has sufficient interest to 
match against the agency order already. If a Floor Broker is holding 
two agency orders, he will choose which order is the initiating 
side.\114\
---------------------------------------------------------------------------

    \113\ See proposed Rule 7580(e)(2).
    \114\ If only one of the agency orders is for the account of a 
Public Customer, that order must be the agency order. If both agency 
orders are for the accounts of Public Customers, it is the Floor 
Brokers sole decision to determine which order is the agency order. 
If neither agency order is for the account of a Public Customer, it 
is the Floor Brokers sole decision to determine which order is the 
agency order.
---------------------------------------------------------------------------

    The Exchange is proposing rules with respect to Floor Brokers and 
discretionary transactions.\115\ Specifically, no Floor Broker shall 
execute or cause to be executed any order on the Exchange with respect 
to which such Floor Broker is vested with discretion as to: (i) The 
choice of the class of options to be bought or sold, (ii) the number of 
contracts to be bought or sold, or (iii) whether any such transaction 
shall be one of purchase or sale. However, these proposed rules

[[Page 23665]]

shall not apply to any discretionary transactions executed by a Floor 
Market Maker for an account in which he has an interest. Additionally, 
no Floor Broker shall hold a Not Held Market Order to buy and a Not 
Held Market Order to sell the same series of options for the same 
account or for accounts of the same beneficial owner.\116\ Also, no 
Floor Broker shall leg a Complex Order for a Market Maker or accept 
opening or discretionary orders for a Market Maker who is associated 
with the same Options Participant as such Floor Broker or who is 
associated with another Options Participant which is affiliated with 
the same Options Participant as such Floor Broker. A Floor Broker may 
not exercise any discretion with respect to the order of a Market Maker 
or the order of an options market marker registered on another 
exchange.\117\
---------------------------------------------------------------------------

    \115\ See proposed Rule 7590. Proposed Rule 7590 is based on 
PHLX Rule 1065.
    \116\ See proposed IM-7590-1.
    \117\ See proposed IM-7590-2.
---------------------------------------------------------------------------

    Floor Brokers may use any communication device on the Trading Floor 
and in the Crowd Area to receive orders, provided that audit trail and 
record retention requirements of the Exchange are met.\118\ However, no 
person in the Crowd Area or on the Trading Floor may use any 
communication device for the purpose of recording activities on the 
Trading Floor or maintaining an open line of continuous communication 
whereby a non-associated person not located in the Crowd Area may 
continuously monitor the activities in the Crowd Area. The ability for 
Floor Brokers to receive orders while in the Crowd Area is based on the 
rules of another exchange.\119\
---------------------------------------------------------------------------

    \118\ See proposed Rule 7660(i).
    \119\ See CBOE Rule 6.23(c).
---------------------------------------------------------------------------

    The Exchange is not including certain PHLX rules related to Floor 
Broker duties to allocate, match and time stamp trades executed in open 
outcry and to submit the matched trade tickets to the exchange.\120\ 
BOX does not believe that these rules are necessary because all orders 
on the Trading Floor are only executed when they are received by the 
Trading Host, which will allow the Exchange to capture the required 
audit trail information.
---------------------------------------------------------------------------

    \120\ See PHLX Rule 1014(g)(vi).
---------------------------------------------------------------------------

Qualified Open Outcry Orders--Floor Crossing
    After an order has been announced to the trading crowd as provided 
in Rule 7580(e)(2), the Floor Broker must submit the agency order as 
part of a two-sided order (``Qualified Open Outcry Order'' or ``QOO 
Order'') to the Trading Host for execution.\121\ When a Floor Broker 
submits a QOO Order for execution, the order will be executed based on 
the market conditions of when the order is received by the Trading Host 
and in accordance with Exchange rules.\122\ A QOO Order on the Exchange 
is not deemed executed until it is processed by the Trading Host. All 
transactions occurring from the Trading Floor must be processed by the 
Trading Host. Floor Brokers are responsible for handling all orders in 
accordance with Exchange priority and trade-through rules.\123\ QOO 
Order functionality will assist the Floor Broker in respecting the BOX 
Book, consistent with Exchange priority rules, as described in proposed 
Rules 7600(c) and (d). The proposed QOO Order will only be allowed on 
the Trading Floor and only Floor Brokers may use the QOO Order. QOO 
Orders may be multi-leg orders up to four (4) legs, including Complex 
Orders, as defined in Rule 7240(a)(5) \124\ and tied to hedge orders as 
defined in proposed IM-7600-2. Such hedging position is comprised of a 
position designated as eligible for a tied hedge transaction as 
determined by the Exchange and may include the same underlying stock 
applicable to the option order, a security future overlying the same 
stock applicable to the option order or, in reference to an index or 
Exchange-Traded Fund Shares (``ETF''), a related instrument. A 
``related instrument'' means, in reference to an index option, 
securities comprising ten percent or more of the component securities 
in the index or a futures contract on any economically equivalent index 
applicable to the option order. A ``related instrument'' means, in 
reference to an ETF option, a futures contract on any economically 
equivalent index applicable to the ETF underlying the option order. 
Also, such hedging position is offered, at the execution price received 
by the Floor Broker introducing the option, to any in-crowd Floor 
Participant who has established parity or priority for the related 
options.
---------------------------------------------------------------------------

    \121\ See proposed Rule 7600(a). Proposed Rule 7600(a) is based 
on PHLX Rule 1063(e)(iv). The Exchange notes that the Trading Host 
does not include all the same functionality as PHLX's trading floor 
systems; the Trading Host will not attempt to execute an order 
multiple times if at first it cannot be executed. The Exchange also 
notes that Complex Orders are limited to four (4) legs on BOX. 
Additionally, the Exchange is not including specific functionality 
that will assist a Floor Broker in clearing the electronic book as 
PHLX does. The Exchange is not including this functionality because 
the QOO Order will assist Floor Brokers in respecting the BOX Book. 
Proposed Rule 7600(a) also includes additional information to cover 
the specific aspects of the QOO Order.
    \122\ For example, a Floor Broker wishes to execute 1000 ABC at 
1.03. At the time the QOO Order is announced to the trading crowd 
the NBBO for ABC is 1.00-1.08. When the Trading Host receives the 
QOO Order the NBBO is now 1.04-1.09. In this situation, the Trading 
Host would reject the QOO Order to avoid trading through the NBBO. 
Similarly, assume when the Floor Broker announced the QOO Order 
there were no orders on the BOX Book, the QOO Order had a book sweep 
size of 10, and the initiating side is to sell. When the Trading 
Host receives the QOO Order there is now a Public Customer Order on 
the BOX Book to buy 20 ABC at 1.03 and the NBBO is still 1.00-1.08. 
In this situation, the Trading Host would reject the QOO Order to 
avoid violating the priority provisions of the Exchange.
    \123\ In addition to the Trading Host preventing trade-through 
and priority violations of the BOX Book, the Exchange has robust 
surveillance procedures in place to monitor for these violations.
    \124\ The term ``Complex Order'' means any order involving the 
simultaneous purchase and/or sale of two or more different options 
series in the same underlying security, for the same account, in a 
ratio that is equal to or greater than one-to-three (.333) and less 
than or equal to three-to-one (3.00) and for the purpose of 
executing a particular investment strategy.
---------------------------------------------------------------------------

    There will be an initiating side and a contra-side to the QOO 
Order.\125\ The initiating side is the order which must be filled in 
its entirety. The contra-side must guarantee the full size of the 
initiating side of the QOO Order and the Floor Broker may provide a 
book sweep size as provided in proposed Rule 7600(h). If the Floor 
Broker was soliciting interest from the trading crowd when the 
initiating side was announced or to the extent the trading crowd offers 
a better price, the contra-side will be the solicited interest from the 
trading crowd. If the Floor Broker had sufficient interest to match 
against the initiating side when the agency order was announced, such 
Floor Broker interest will be the contra-side to the initiating side. 
If Floor Participants responded with interest to the initiating side 
where the Floor Broker provided sufficient interest to match against 
the initiating side, the Floor Broker will allocate the initiating side 
of the QOO Order(s) pursuant to Rule 7600(d).
---------------------------------------------------------------------------

    \125\ See proposed Rule 7600(a)(1). This does not prevent a 
Floor Broker from representing a single-sided order on the Trading 
Floor. Floor Brokers are permitted to bring single-sided orders to 
the Trading Floor in order to find contra-side liquidity. Once a 
contra-side is sourced pursuant to proposed Rule 7580(e)(2), the 
Floor Broker shall submit the two-sided QOO Order to the BOG.
---------------------------------------------------------------------------

    A QOO Order will be rejected if there is an ongoing auction in the 
option series when the QOO Order is received by the Trading Host.\126\ 
A Complex QOO Order \127\ will not be rejected if there is an ongoing 
auction in the options series of some, but not all, of the components 
of the Complex QOO Order.
---------------------------------------------------------------------------

    \126\ See proposed Rule 7600(a)(5).
    \127\ A Complex QOO Order is a Complex Order, as defined in Rule 
7240(a)(5), submitted as a QOO Order.

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

[[Page 23666]]

    A Floor Broker is welcome to bring an unmatched order to the 
Trading Floor in order to seek liquidity. The Floor Broker may announce 
the unmatched order (i.e., the initiating side of a QOO Order) to the 
trading crowd in an attempt to source the contra-side. After finding 
sufficient quantity to match the initiating side pursuant to proposed 
Rule 7580(e)(2) and proposed Rule 7600(b), the Floor Broker would now 
be able to submit a two-sided QOO Order to the BOG as required.\128\ 
Floor Brokers may also enter single sided orders into the BOX Book 
using BOX's electronic interface. Specifically, a Floor Broker may 
receive a matched or unmatched order via a telephone call on the 
Trading Floor \129\ or may have the matched or unmatched order sent 
electronically to the Floor Broker's order entry mechanism on the 
Trading Floor prior to submitting the QOO Order to the BOG.
---------------------------------------------------------------------------

    \128\ See proposed IM-7600-4.
    \129\ When a Floor Broker receives an order, matched or 
unmatched, via telephone, the Floor Broker must enter the order 
electronically into the Floor Broker's order entry mechanism.
---------------------------------------------------------------------------

    The Exchange is proposing that the execution price of the QOO Order 
must be equal to or better than the NBBO.\130\ Additionally, the QOO 
Order (1) may not trade through any equal or better priced Public 
Customer bids or offers on the BOX Book or any non-Public Customer bids 
or offers on the BOX Book that are ranked ahead of such equal or better 
priced Public Customer bids or offers, and (2) may not trade through 
any non-Public Customer bids or offers on the BOX Book that are priced 
better than the proposed execution price. The Exchange notes this 
proposed Rule is based on the rules of NYSE Arca.\131\
---------------------------------------------------------------------------

    \130\ See proposed Rule 7600(c).
    \131\ See NYSE Arca Rules 6.47 and 6.75. The Exchange notes that 
it is providing an additional provision that NYSE Arca does not have 
in its Rule. Specifically, the Exchange is providing for a book 
sweep size as provided in proposed Rule 7600(h).
---------------------------------------------------------------------------

    The Floor Broker must submit the QOO Order to the BOG for 
processing by the Trading Host, as provided in proposed Rule 7600. The 
Exchange is proposing that the QOO Order is not deemed executed until 
the QOO Order is processed by the Trading Host.\132\ Once the Floor 
Broker submits the QOO Order to the BOG there will be no opportunity 
for the submitting Floor Broker, or anyone else, to alter the terms of 
the QOO Order.\133\ After announcing the QOO Order to the trading 
crowd, the Floor Broker must submit the QOO Order to the BOG without 
undue delay, provided that the executing Floor Broker allows adequate 
time for Floor Participants to participate in the transaction as 
provided in proposed Rule 100(b)(5).
---------------------------------------------------------------------------

    \132\ The execution of the QOO Order will be reported after it 
is processed by the Trading Host in the same manner as all other 
orders on BOX.
    \133\ The Exchange notes that the processing of an incoming QOO 
Order by the Exchange is instantaneous.
---------------------------------------------------------------------------

    The Exchange is additionally proposing that when a Floor Broker 
executes a Complex QOO Order, the priority and rules for Complex Orders 
contained in Rule 7240(b)(2) and (3) will continue to apply, except 
that the Floor Broker may disable the NBBO aspect of the Complex Order 
Filter under Rule 7240(b)(3)(iii). For Complex QOO Orders, the Complex 
QOO Orders (1) may not trade through any equal or better priced Public 
Customer Complex bids or offers on the Complex Order Book \134\ or any 
non-Public Customer Complex bids or offers on the Complex Order Book 
that are ranked ahead of such equal or better priced Public Customer 
Complex bids or offers, and (2) may not trade through any non-Public 
Customer bids or offers on the Complex Order Book that are priced 
better than the proposed execution price. Additionally, the Complex QOO 
Order may be executed at a price without giving priority to equivalent 
bids or offers in the individual series legs on the initiating side, 
provided at least one options leg betters the corresponding bid or 
offer on the BOX Book by at least one minimum trading increment as set 
forth in Rule 7240(b)(1).
---------------------------------------------------------------------------

    \134\ The term ``Complex Order Book'' means the electronic book 
of Complex Orders maintained by the BOX Trading Host. See Rule 
7240(a)(6).
---------------------------------------------------------------------------

    As mentioned above, the Exchange is also proposing to amend the 
current rules related to Complex Orders on the Exchange in order to 
incorporate the trading of Complex Orders on the Trading Floor. 
Currently, incoming Complex Orders to the Exchange are filtered to 
ensure that each leg of a Complex Order will be executed at a price 
that is equal to or better than the NBBO and BOX BBO.\135\ The Exchange 
is now proposing that Floor Brokers may disable, on an order by order 
basis, the NBBO aspect of this protection for Complex QOO Orders. The 
Exchange notes that other options exchanges do not require the legs of 
a Complex Order to be executed at a price that is equal to or better 
than the NBBO and exchange BBO.\136\
---------------------------------------------------------------------------

    \135\ See Rule 7240(b)(3)(iii).
    \136\ See ISE Rule 722(b)(3).
---------------------------------------------------------------------------

    All QOO Orders must be announced to the trading crowd, as provided 
in proposed Rule 7580(e)(2), prior to the QOO Order being submitted to 
the BOG.\137\ This negotiation and agreement that occurs in the trading 
crowd does not result in a final trade, but rather a ``meeting of the 
minds'' that is then submitted through the BOG for processing by the 
Trading Host. The submitting Floor Broker must announce the order to 
the trading crowd and give Floor Participants a reasonable opportunity 
to respond to trade against the initiating side of the QOO Order. An 
Options Exchange Official will certify that the Floor Broker adequately 
announced the QOO Order to the trading crowd.\138\ When a Complex QOO 
Order is announced on the Trading Floor, Floor Participants wishing to 
participate must respond to all legs of the unique Complex QOO Order. 
For example, if a Floor Broker is executing a Complex QOO Order in A+B, 
a Floor Participant may respond with interest in A+B, but may not 
respond to only Leg A or Leg B. The executing Floor Broker's allocation 
process is identical to the process for non-Complex QOO Orders in 
proposed Rule 7600(d).
---------------------------------------------------------------------------

    \137\ See proposed Rule 7600(b). Proposed Rule 7600(b) is based 
on NYSE Arca Rule 6.47(a)(1).
    \138\ The Options Exchange Official will have a terminal that 
will allow him to certify that the Floor Broker adequately 
represented the QOO Order to the trading crowd.
---------------------------------------------------------------------------

    The Exchange believes that by having the QOO Order execute when it 
is processed by the Trading Host, the Exchange is providing a system 
that will prevent executions that appear to be at prices that are worse 
than the NBBO due to the fact that on traditional open-outcry floors 
the time that the execution is printed may be substantially after the 
time an execution actually occurred on the trading floor. The Exchange 
believes that having the QOO Order execute when it is processed by the 
Trading Host will minimize trade-through violations and provide an 
accurate and sequential audit trail. The Exchange notes that this is 
similar to the way executions on PHLX occur.\139\
---------------------------------------------------------------------------

    \139\ See PHLX Rule 1063(e)(iv). The Exchange is not including 
functionality that allows a Floor Broker to attempt to execute an 
order multiple times if it cannot be executed when the order is 
first submitted as PHLX does.
---------------------------------------------------------------------------

Priority in the Trading Crowd
    The Exchange is proposing rules for determining priority of bids 
and offers on the Trading Floor.\140\ Specifically,

[[Page 23667]]

the highest (lowest) bid (offer) shall have priority; when two or more 
bids (offers) represent the highest (lowest) price, priority shall be 
afforded to such bids (offers) in the sequence in which they were made. 
If, however, the bids (offers) of two or more Floor Participants are 
made simultaneously, or if it is impossible to determine clearly the 
order of time in which they are made, such bids (offers) will be deemed 
to be on parity and priority will be afforded to them, insofar as 
practicable, on an equal basis. BOX is proposing that the Floor Broker 
will be responsible for determining the sequence in which bids or 
offers are vocalized on the Trading Floor from Floor Participants in 
response to the Floor Broker's bid, offer, or call for a market. A 
Floor Participant that established priority pursuant to IM-7600-1(c) 
must inform the Floor Broker of such priority when the Floor Broker 
announces the order. Any disputes regarding a Floor Broker's 
determination of time priority sequence will be resolved by the Options 
Exchange Official. An Options Exchange Official may nullify a 
transaction or adjust its terms if they determine the transaction to 
have been in violation of Exchange Rules.
---------------------------------------------------------------------------

    \140\ See proposed Rule 7610. Proposed Rule 7610 is based on 
NYSE Arca Rule 6.75. The Exchange notes that it is not including 
certain sections of the NYSE Arca rule that apply to Lead Market 
Maker guarantee participation because the Exchange will not have 
Lead Market Makers on the Trading Floor. Specifically, a Lead Market 
Maker on NYSE Arca that establishes first priority during the 
vocalization process is entitled to buy or sell as many contracts as 
the Floor Broker may have available to trade. Additionally, on NYSE 
Arca, if the Lead Market Maker establishes some other priority other 
than first, the Lead Market Maker is entitled to buy or sell the 
number of contracts equal to the Lead Market Maker's guaranteed 
participation level. The Exchange is also omitting sections of the 
NYSE Arca rule that cover manual executions on the trading floor 
because the Exchange is requiring that all orders on the Trading 
Floor will not execute until they are processed by the Trading Host. 
The Exchange is not including provisions of NYSE Arca's rule that 
apply to stock-option orders because the Exchange does not offer 
this type of order. Additionally, the Exchange is not including the 
same level of detail as NYSE Arca does when referring to the actions 
that an Options Exchange Official can take when there is a dispute 
regarding a Floor Broker's determination of time priority on the 
Trading Floor. The Exchange believes that by allowing an Options 
Exchange Official the ability to nullify a transaction or adjust its 
terms when the transaction has violated the Exchange's Rules will 
provide the Exchange with the ability to better monitor and enforce 
the Exchange's Rules on the Trading Floor.
---------------------------------------------------------------------------

    The Exchange is proposing that the Floor Participant with first 
priority is entitled to buy or sell as many contracts as the Floor 
Broker may have available to trade. If there are any contracts 
remaining, the Floor Participant with second priority will be entitled 
to buy or sell as many contracts as there are remaining in the Floor 
Broker's order, and so on, until the Floor Broker's order has been 
filled entirely. An Options Exchange Official has the same 
responsibilities as a Floor Broker when the Options Exchange Official 
calls for a market.
    The Exchange's proposed rules will also cover the situation where a 
Floor Broker requests a market in order to fill a large order and the 
Floor Participants provide a collective response.\141\ In such 
situation, if the size of the response, in the aggregate, is less than 
or equal to the size of the order to be filled, the Floor Participants 
will each receive a share of the order that is equal to the size of 
their respective bids or offers. If, however, the size of the response 
exceeds the size of the order to be filled, that order will be 
allocated on a size pro rata basis. Specifically, in such 
circumstances, the size of the order to be allocated is multiplied by 
the size of an individual Floor Participant's quote divided by the 
aggregate size of all Floor Participants' quotes. For example, assume 
there are 200 contracts to be allocated, Floor Market Maker #1 is 
bidding for 100, Floor Market Maker #2 is bidding for 200 and Floor 
Market Maker #3 is bidding for 500. Under the ``size pro rata'' 
allocation formula, Floor Market Maker #1 will be allocated 25 
contracts (200 x 100 / 800); Floor Market Maker #2 will be allocated 50 
contracts (200 x 200 / 800); and Floor Market Maker #3 will be 
allocated 125 contracts (200 x 500 / 800).
---------------------------------------------------------------------------

    \141\ See proposed Rule 7610(d)(5).
---------------------------------------------------------------------------

Allocation
    The following describes how the initiating side of a QOO Order is 
allocated.\142\ First, the initiating side of the QOO Order will match 
against any bids or offers on the BOX Book priced better than the 
contra-side, provided that an adequate book sweep size was provided by 
the Floor Broker pursuant to paragraph (h).\143\ Multiple orders at the 
same price are matched based on time priority.
---------------------------------------------------------------------------

    \142\ See proposed Rule 7600(d).
    \143\ See proposed Rule 7600(d)(1).
---------------------------------------------------------------------------

    Next, at the same price as the contra-side of the QOO Order, if any 
contracts of the initiating side remain, the initiating side of the QOO 
Order will match against Public Customer Orders on the BOX Book, along 
with bids or offers of non-Public Customers ranked ahead of such Public 
Customer Orders on the BOX Book, provided that an adequate book sweep 
size was provided by the Floor Broker pursuant to paragraph (h).\144\ 
Multiple bids or offers at the same price are matched based on time 
priority.
---------------------------------------------------------------------------

    \144\ See proposed Rule 7600(d)(2).
---------------------------------------------------------------------------

    The remaining balance of the initiating side of the QOO Order, if 
any, will then be matched by the Trading Host against the contra-side 
of the QOO Order,\145\ regardless of whether the contra-side order 
submitted by the Floor Broker is ultimately entitled to receive an 
allocation,\146\ pursuant to proposed Rules 7600(d)(3)(i) or (iii). If 
no Floor Participant, other than the executing Floor Broker, is 
entitled to an allocation, then no further steps are necessary. If 
however, Floor Participants are entitled to an allocation, the 
remaining balance of the initiating side of the QOO Order will be 
allocated as described below.
---------------------------------------------------------------------------

    \145\ See proposed Rule 7600(d)(3).
    \146\ For the avoidance of doubt, the Exchange would like to 
make clear that the matching of the initiating side of the QOO Order 
against interest on the BOX Book and the matching of the remaining 
portion of initiating side of the QOO Order against the contra-side 
order provided by the Floor Broker will be completed automatically 
by the Trading Host.
---------------------------------------------------------------------------

    First, if the QOO Order satisfies the provisions of proposed Rule 
7600(f), the executing Floor Broker is entitled to 40% of the remaining 
quantity of the initiating side of the QOO Order.\147\ Next, Floor 
Participants that responded with interest when the executing Floor 
Broker announced the QOO Order to the trading crowd, as outlined in 
proposed Rules 7580(e)(2) and 7600(b), are allocated.\148\ When 
multiple Floor Participants respond with interest, priority is 
established pursuant to proposed Rule 7610.\149\ Finally, if interest 
remains after Floor Participants that responded with interest receive 
their allocation, the remaining quantity of the initiating side of the 
QOO Order will be allocated to the executing Floor Broker.\150\ After 
execution of the QOO Order, the executing Floor Broker is responsible 
for providing the correct allocations of the initiating side of the QOO 
Order to an Options Exchange Official or his or her designee, if 
necessary, who will properly record the order in the Exchange's 
system.\151\ The executing Floor Broker must provide the correct 
allocations to an Options

[[Page 23668]]

Exchange Official or his or her designee, in writing, without 
unreasonable delay.
---------------------------------------------------------------------------

    \147\ See proposed Rule 7600(d)(3)(i).
    \148\ See Proposed Rule 7600(d)(3)(ii).
    \149\ Proposed Rule 7610 provides that the highest bid or lowest 
offer shall have priority. Where two or more offers or bids are at 
the same price, priority shall be afforded in the sequence in which 
the offers or bids were made. If the bids or offers of more than one 
Floor Participant are made simultaneously, such bids or offers will 
be deemed to be on parity and priority will be afforded to them, 
insofar as practicable, on an equal basis. Accordingly, efforts will 
be made to assure that each Floor Participant on parity receives an 
equal number of contracts, to the extent mathematically possible. If 
the Floor Participants provide a collective response to a Floor 
Broker's request for a market in order to fill a large order, then 
the allocation will be size pro rata, if necessary.
    \150\ See Proposed Rule 7600(d)(3)(iii).
    \151\ See Proposed Rule 7600(d)(4). The Options Exchange 
Official or his or her designee is not responsible for confirming 
the accuracy of the allocations provided by the executing Floor 
Broker.
---------------------------------------------------------------------------

    The below examples are designed to illustrate the allocation of the 
initiating side of a QOO Order(s).
    Example 1 \152\--Assume there is no priority interest on the 
contra-side of the QOO Order, as provided in proposed Rule 7600(d)(2), 
on the BOX Book at the execution price of the QOO Order and a Floor 
Broker wishes to execute a QOO Order for 500 contracts. When he 
announces the order, Floor Market Maker 1 and Floor Market Maker 2 both 
respond to the QOO Order for 250 contracts each. Floor Market Maker 1 
responded first so he will have time priority over Floor Market Maker 
2. Since the QOO Order is for at least 500 contracts, the Floor Broker 
is entitled to match at least 40% of the initiating side with the Floor 
Broker's contra-side.\153\
---------------------------------------------------------------------------

    \152\ For the following three examples, assume the execution 
price of the QOO Order satisfies the submission requirements of 
proposed Rule 7000(c). Specifically, the execution price must be at 
a price (1) better than any Public Customer bids or offers on the 
BOX Book, and (2) no worse than any non-Public Customer bids or 
offers on the BOX Book, on the initiating side.
    \153\ The Floor Broker's 40% guarantee is outlined in proposed 
Rule 7600(f).
---------------------------------------------------------------------------

    Result: The initiating side of the QOO Order will match against the 
Floor Broker's contra-side order for the full 500 contracts. After the 
execution of the QOO Order, the executing Floor Broker is then 
responsible for providing an Options Exchange Official or his or her 
designee the following allocation of the initiating side of the QOO 
Order:

    1. 200 contracts (500 * .40) for the contra-side order submitted 
by the Floor Broker.
    2. 250 for Floor Market Maker 1 with time priority.
    3. Remaining 50 contracts to Floor Market Maker 2.

    Example 2--Assume there is no priority interest on the contra-side 
of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX 
Book at the execution price of the QOO Order and a Floor Broker wishes 
to execute a QOO Order for 400 contracts. When he announces the order, 
Floor Market Maker 1 and Floor Market Maker 2 both respond to the QOO 
Order for 200 contracts each. Floor Market Maker 1 responded first so 
he will have time priority over Floor Market Maker 2. Since the QOO 
Order is for less than 500 contracts, the Floor Broker is not entitled 
to a 40% guarantee.
    Result: The initiating side QOO Order will match against the Floor 
Broker's contra-side for the full 400 contracts. After execution of the 
QOO Order, the executing Floor Broker is then responsible for providing 
an Options Exchange Official or his or her designee with the following 
allocation of the initiating side of the QOO Order:

    1. 200 contracts for Floor Market Maker 1 with time priority.
    2. 200 contracts for Floor Market Maker 2.
    3. The executing Floor Broker will receive no allocation.

    Example 3--Assume there is no priority interest on the contra-side 
of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX 
Book at the execution price of the QOO Order and a Floor Broker wishes 
to execute a QOO Order for 400 contracts in ABC at 1.05 (initiating 
side is to sell). The NBBO for ABC is 1.00-1.10. When he announces the 
order, Floor Market Maker 1 and Floor Market Maker 2 both respond to 
the QOO Order for 200 contracts each. Floor Market Maker 1 responded 
first at an improved price to buy 200 at 1.06 so he will have price 
priority over Floor Market Maker 2. Since the QOO Order is for less 
than 500 contracts, the Floor Broker is not entitled to a 40% 
guarantee.
    Result: The Floor Broker will submit two QOO Orders for 200 
contracts each. A QOO Order at 1.06 for 200 contracts and a QOO Order 
at 1.05 for 200 contracts. The initiating side of the QOO Orders will 
match against the Floor Broker's contra-side orders for the full 200 
contracts. After execution of the QOO Orders, the executing Floor 
Broker is then responsible for providing an Options Exchange Official 
or his or her designee with the following allocation of the initiating 
side of the QOO Orders:

    1. QOO Order at 1.06--200 contracts for Floor Market Maker 1.
    2. QOO Order at 1.05--200 contracts for Floor Market Maker 2.
    3. The executing Floor Broker will receive no allocation of 
either QOO Order.

    Example 4--Assume there is no priority interest on the contra-side 
of the QOO Order, as provided in proposed Rule 7600(d)(2), on the BOX 
Book at the execution price of the QOO Order and a Floor Broker wishes 
to execute a QOO Order for 600 contracts in ABC at 1.05 (initiating 
side is to sell). The NBBO for ABC is 1.00-1.10. When he announces the 
order, Floor Market Maker 1 and Floor Market Maker 2 both respond to 
the QOO Order for 300 contracts each. Floor Market Maker 1 responded 
first at an improved price to buy 300 at 1.06 so he will have price 
priority over Floor Market Maker 2. Since the QOO Order is more than 
500 contracts, the Floor Broker is entitled to a 40% guarantee.
    Result: The Floor Broker will submit two QOO Orders for 300 
contracts each. A QOO Order at 1.06 for 300 contracts and a QOO Order 
at 1.05 for 300 contracts. The initiating side of the QOO Orders will 
match against the Floor Broker's contra-side orders for the full 300 
contracts. After execution of the QOO Orders, the executing Floor 
Broker is then responsible for providing an Options Exchange Official 
or his or her designee with the following allocation of the initiating 
side of the QOO Orders:

    1. QOO Order at 1.05--120 (300 *.40) contracts for the contra-
side order submitted by the Floor Broker.\154\
---------------------------------------------------------------------------

    \154\ The Floor Broker's guarantee only applies to 40% of the 
contracts at the given price level.
---------------------------------------------------------------------------

    2. QOO Order at 1.06--300 contracts for Floor Market Maker 1.
    3. QOO Order at 1.05--180 contracts for Floor Market Maker 2.

    Example 5--In the same scenario as above, but there is priority 
interest of 100 contracts on the BOX Book, as provided in proposed Rule 
7600(d)(2), at the execution price of the QOO Order and a Floor Broker 
elects to have a book sweep size of 100 contracts.
    Result:

    1. The initiating side of the QOO Order will first match against 
the priority interest on the BOX Book for 100 contracts.
    2. Then the remaining 300 contracts of the initiating side of 
the QOO Order will match against the executing Floor Broker's 
contra-side order. After execution of the QOO Order, the executing 
Floor Broker is then responsible for providing an Options Exchange 
Official or his or her designee with the following allocation of the 
initiating side of the QOO Order:
    a. 250 contracts for Floor Market Maker 1 with time priority.
    b. 50 contracts to Floor Market Maker 2.
    c. The executing Floor Broker will receive no allocation.

    The Exchange is also proposing that the QOO Order will not route to 
an away exchange and the QOO Order will not trade through any away 
exchange displaying a better price than the proposed execution price 
for the QOO Order.\155\
---------------------------------------------------------------------------

    \155\ See proposed Rule 7600(e).
---------------------------------------------------------------------------

Book Sweep Size
    The Exchange is proposing to provide a book sweep size to help 
Floor Brokers execute orders when there are bids or offers on the BOX 
Book that have priority over the contra-side of the QOO Order.\156\ 
Specifically, a Floor Broker may, but is not required to, provide a 
book sweep size. The book sweep size is the number of contracts, if 
any, of the initiating side of the QOO Order that the Floor Broker is 
willing to relinquish to interest on the BOX Book that has priority 
pursuant to proposed Rule 7600(d)(1) and (2). Specifically, any equal 
or better priced Public Customer

[[Page 23669]]

Orders on the BOX Book or any non-Public Customer bids or offers on the 
BOX Book that are ranked ahead of such equal or better priced Public 
Customer Orders, and any non-Public Customer bids or offers on the BOX 
Book that are priced better than the proposed execution price. If the 
number of contracts on the BOX Book that have priority over the contra-
side order is greater than the book sweep size, then the QOO Order will 
be rejected by the Trading Host. If the number of contracts on the BOX 
Book that have priority over the contra-side order is less than or 
equal to the book sweep size, then the QOO Order will be allowed to 
execute. In such case, the initiating side will execute against 
interest on the BOX Book with priority and then the remaining quantity, 
if any, will execute against the contra-side order. The Exchange 
believes that this proposed feature will aid Floor Brokers in having 
more of their executions accepted by the Trading Host and will benefit 
the market as a whole by providing a tool to assist Floor Brokers in 
executing orders when there is priority interest on the BOX Book. 
Additionally, the book sweep size will provide increased opportunity 
for orders on the BOX Book to be executed. The Exchange notes, however, 
that it shall be considered conduct inconsistent with just and 
equitable principles of trade for any Floor Broker to use the book 
sweep size for the purpose of violating the Floor Broker's duties and 
obligations.\157\
---------------------------------------------------------------------------

    \156\ See proposed Rule 7600(h).
    \157\ See proposed IM-7600-3.
---------------------------------------------------------------------------

    The Exchange notes that another exchange provides functionality to 
help Floor Brokers clear the electronic book.\158\ PHLX's system has 
functionality that will return the order to the Floor Broker if, after 
attempting to execute the order multiple times, the order cannot be 
executed. The Exchange believes this is similar to the proposed book 
sweep size that may result in a Floor Broker's order not executing once 
it is submitted.\159\
---------------------------------------------------------------------------

    \158\ PHLX's Floor Broker Management System (``FBMS'') provides 
execution functionality that will assist the Floor Broker in 
clearing the exchange book, consistent with exchange priority rules. 
See PHLX Rule 1063(e)(iv). Additionally, if a Floor Broker on PHLX 
enters a two-sided order through the FBMS, and there is interest on 
the PHLX electronic book at a price that would prevent the Floor 
Broker's order from executing, the FBMS will provide the Floor 
Broker with the quantity of contracts on the electronic book that 
have priority and need to be satisfied before the Floor Broker's 
order can execute at the agreed upon price. If the Floor Broker 
wishes to still execute his order, he can cause a portion of the 
floor based order to trade against this priority interest on the 
electronic book, thereby clearing the interest and permitting the 
remainder of the Floor Broker's order to trade at the desired price. 
The PHLX FBMS functionality is optional, and a Floor Broker can 
decide not to trade against the electronic book and therefore not 
execute his two-sided order at the particular price. See Securities 
Exchange Act Release No. 68960 (February 20, 2013), 78 FR 13132 
(February 26, 2013) (SR-Phlx-2013-09).
    \159\ The Exchange notes that the proposed functionality of the 
Trading Host on BOX will not attempt to execute an order multiple 
times. Instead, if, due to the book sweep size provided by the Floor 
Broker, the order cannot be executed by the Trading Host 
immediately, it will be rejected back to the Floor Broker. The 
similarity is in the fact that in both situations an order will not 
execute and will be rejected back to the Floor Broker. The Exchange 
believes that this difference between the Exchange and PHLX will 
incentivize Floor Brokers on BOX to provide an adequate book sweep 
size if they want the order to immediately execute.
---------------------------------------------------------------------------

Examples
    The following are examples of how the QOO Order will operate.
Example #1--Execution of a QOO Order
    The following example is designed to illustrate a QOO Order 
executing.

 NBBO 3.09-3.13
 QOO Order for 100 at 3.10 (initiating side is sell)
 Book sweep size = 0.

----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................             150            3.09            3.15              10  MM2
BD1.........................              15            3.08            3.16              10  MM3
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is accepted because the price of the QOO Order 
($3.10) is better than the NBBO on both the initiating side ($3.13) and 
the contra-side ($3.09).
Example #2--Capping of the Book Sweep Size
    The following example illustrates how the Exchange will handle a 
QOO Order that is submitted with a book sweep size that is greater than 
the size of the QOO Order.

 NBBO 3.09-3.13
 QOO Order for 100 at 3.10 (initiating side is sell)
 Book sweep size = 200 (will be capped at the size of the QOO 
Order (100)).

----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................             150            3.09            3.15              10  MM2
BD1.........................              15            3.08            3.16              10  MM3
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is accepted because the price of the QOO Order 
($3.10) is better than the NBBO on both the initiating side ($3.13) and 
the contra-side ($3.09).
Example #3--Rejecting a QOO Order based on the NBBO
    The following example illustrates how the Exchange will handle a 
QOO Order that is priced outside of the NBBO.

 NBBO 3.09-3.15
 QOO Order for 100 at 3.17 (initiating side is sell)
 Book sweep size = 100.

[[Page 23670]]



----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................              50            3.09            3.15              10  MM2
BD1.........................              20            3.08            3.16              10  MM3
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is rejected because the price of the QOO Order 
(3.17) is worse than the NBBO (3.15) on the initiating side of the QOO 
Order.
Example #4--Executing of a QOO Order Utilizing the Book Sweep Size
    The following example illustrates a QOO Order that utilizes the 
book sweep size and therefore executes against interest on the BOX 
Book.

 NBBO 3.09-3.15
 QOO Order for 100 at 3.09 (initiating side is sell)
 Book sweep size = 100.

----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC1.........................              50            3.09            3.15              10  MM2
PC2.........................              50            3.08            3.16              10  MM3
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is accepted, as the Floor Broker is willing to 
relinquish the full quantity of the initiating side to orders and 
quotes on the BOX Book. The initiating side will trade 50 contracts 
against PC1 at 3.09, and then the remaining 50 contracts will trade at 
3.09 against the contra-side.
Example #5--Insufficient Book Sweep Quantity
    The following example is designed to illustrate the situation where 
an executing Floor Broker did not provide an adequate book sweep size 
to have the QOO Order execute immediately when it was submitted to the 
Trading Host.

 NBBO 3.09-3.15
 QOO Order for 100 at 3.09 (initiating side is sell)
 Book sweep size = 40.

----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC1.........................              50            3.09            3.15              10  MM2
PC2.........................              50            3.08            3.16              10  MM3
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is rejected, as the Floor Broker is not willing 
to relinquish adequate quantity of the initiating side. Specifically, 
the book sweep size of 40 is not sufficient to satisfy PC1's 50 
contracts which have priority. Upon rejection, the Floor Broker may: 
(i) Increase the book sweep size and resubmit the order; or (ii) not 
trade the order on BOX.
Example #6--Trading Through an Away Exchange
    The following example is designed to illustrate how the Trading 
Host will handle a QOO Order that is submitted at a price that would 
trade-through an away exchange.

 NBBO 3.09-3.13
 QOO Order for 100 at 3.14 (initiating side is buy)
 Book sweep size = 100.

----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................              50            3.09            3.15              10  MM2
BD1.........................              20            3.08            3.16              10  MM3
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is rejected because the price of the QOO Order 
(3.14) is worse than the NBBO (3.13) on the contra-side of the QOO 
Order. The QOO Order is rejected even though the price of the QOO is 
better than the BOX Book on the initiating side (3.09) and the contra-
side (3.15). A QOO Order will not route to an away exchange and the QOO 
will not trade through any away exchange displaying a better price.
Example #7--Complex QOO Order on the Trading Floor
    The following is an example of an execution of a Complex QOO Order.

 Complex QOO Order for 100 of A+B at 2.01 (initiating side is 
buy)

[[Page 23671]]

 Floor Broker has disabled the away NBBO filter for the Complex 
QOO Order
 Book sweep size = 100
 NBBO for Complex Order \160\ A+B is 3.06-3.20
---------------------------------------------------------------------------

    \160\ The NBBO for Complex Orders is based on the NBBO for the 
individual options components of such Complex Order.
---------------------------------------------------------------------------

 BOX BBO for Complex Order \161\ A+B is 2.00-3.20
---------------------------------------------------------------------------

    \161\ The BOX BBO for Complex Orders is the best net bid and 
offer price based on the best bid and offer on the BOX Book for the 
individual option's components of the Complex Order.

----------------------------------------------------------------------------------------------------------------
                                         BOX Book For Complex Order A+B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
 
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument A
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC1.........................              10            1.00            1.10              10  PC2
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
BD1.........................              10            1.00            2.10              10  BD2
 
----------------------------------------------------------------------------------------------------------------

    Result: Complex QOO Order is accepted because the price of the 
Complex QOO Order (2.01) is better than the BOX BBO on the initiating 
side (2.00) and the contra-side (3.20). Additionally, since the NBBO 
filter has been disabled by the Floor Broker, the Complex QOO Order 
will ignore the NBBO for Complex Order A+B (3.06-3.20). Even when the 
Complex QOO Order ignores the away NBBO, it must still respect interest 
on BOX.
Example #8--Complex QOO Order Rejected Due to the Book Sweep Size
    The following is an example of a Complex QOO Order that is rejected 
by the Trading Host because the Floor Broker did not provide an 
adequate book sweep size to satisfy the resting interest on the Complex 
Order Book.

 Complex QOO Order for 100 of A+B at 3.07 (initiating side is 
sell)
 Book sweep size = 25
 NBBO for Complex Order A+B is 3.06-3.20

----------------------------------------------------------------------------------------------------------------
                                         BOX Book For Complex Order A+B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................              50            3.10
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument A
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC1.........................              10            1.06            1.10              10  PC2
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
BD1.........................             100            2.00            2.10             100  BD2
 
----------------------------------------------------------------------------------------------------------------

    Result: Complex QOO Order is rejected because the book sweep size 
is not adequate to satisfy the resting A+B Complex Orders on the 
Complex Order Book at 3.10 (50). If, however, the book sweep size was 
for at least 50 A+B, the Complex QOO Order would execute by having 50 
A+B execute against the resting Complex Orders on the Complex Order 
Book at 3.10. The remaining 50 A+B would execute against the contra-
side order at 3.07.
Example #9--Complex QOO Order Executing Against BOX Book Interest
    The following example is designed to illustrate the situation where 
the Complex QOO Order executes against Implied Orders \162\ and resting 
Complex Orders on the Complex Order Book.
---------------------------------------------------------------------------

    \162\ An ``Implied Order'' is a Complex Order at the cNBBO, 
derived from the orders at the BBO on the BOX Book for each 
component leg of a Strategy, provided each component leg is at a 
price equal to NBBO for that series. See Rule 7240(d)(1).


[[Page 23672]]


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

 Complex QOO Order for 100 of A+B at 3.04 (initiating side is 
sell)
 Book sweep size = 100
 NBBO for Complex Order A+B is 3.06-3.20

----------------------------------------------------------------------------------------------------------------
                                         BOX Book for Complex Order A+B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................              60            3.06
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument A
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC1.........................              10            1.06            1.10              10  PC2
MM2.........................              90            1.05
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
BD1.........................             100            2.00            2.10             100  BD2
 
----------------------------------------------------------------------------------------------------------------

    Result: Complex QOO Order is accepted because the Floor Broker is 
willing to relinquish the full quantity of the initiating side to bids 
and offers on the BOX Book. The initiating side will execute against 
resting orders of the individual legs and resting A+B Complex Orders. 
Specifically, 10 A+B of the initiating side will execute against an 
Implied Order at 3.06 (leg A at 1.06 and leg B at 2.00), 60 A+B will 
execute at 3.06 against resting A+B Complex Order and 30 A+B against an 
Implied Order at 3.05 (leg A at 1.05 and leg B at 2.00).
Example #10--Complex QOO Order Executing Against BOX Book Interest with 
Remaining Interest
    The following example illustrates how the Exchange will handle a 
Complex QOO Order that executes against BOX Book interest first but 
leaves interest on the BOX Book.

 Complex QOO Order for 100 of A+B at 3.04 (initiating side is 
sell)
 Book sweep size = 100
 NBBO for Complex Order A+B is 3.06-3.20

----------------------------------------------------------------------------------------------------------------
                                         BOX Book for Complex Order A+B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
 
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument A
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC1.........................              10            1.06            1.10              10  PC2
 
----------------------------------------------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                              BOX Book Instrument B
-----------------------------------------------------------------------------------------------------------------
           Account               Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
PC3.........................              20            2.00            2.10             100  BD2
 
----------------------------------------------------------------------------------------------------------------

    Result: Complex QOO Order is accepted. The initiating side will 
execute against resting orders of the individual legs and then against 
the contra-side. Specifically, 10 A+B of the initiating side will 
execute against an Implied Order at 3.06 (leg A at 1.06 and leg B at 
2.00), and 90 will execute against the contra-side at 3.04. The 
unexecuted interest on the BOX Book remains after the execution of the 
Complex QOO Order.
Example #11--Multiple Public Customer and non-Public Customer Orders on 
the BOX Book
    Under Proposed Rule 7600(d), multiple Public Customer and non-
Public Customer Orders on the BOX Book that have priority at the 
execution price of the QOO Order will be filled in the order they are 
ranked. The following example illustrates this situation.

 NBBO 3.10--3.13
 QOO Order for 100 at 3.10 (initiating side is sell)
 Surrender quantity = 100

[[Page 23673]]



----------------------------------------------------------------------------------------------------------------
                                                    BOX Book
-----------------------------------------------------------------------------------------------------------------
        Account \163\            Quantity           Buy            Sell          Quantity           Account
----------------------------------------------------------------------------------------------------------------
MM1.........................              50            3.10            3.15              10  MM2
PC1.........................              20            3.10  ..............  ..............  ..................
BD1.........................              50            3.10  ..............  ..............  ..................
PC2.........................              20            3.10  ..............  ..............  ..................
----------------------------------------------------------------------------------------------------------------

    Result: QOO Order is accepted because the price of the QOO Order 
($3.10) is better than or equal to the NBBO on both the initiating side 
($3.13) and the contra-side ($3.10). The initiating side will trade 50 
contracts against MM1 at $3.10, then 20 against PC1 at $3.10, and then 
30 against BD1 at $3.10. The remaining quantity of BD1 (20 contracts) 
and PC2's order for 20 contracts will remain on the BOX Book.
---------------------------------------------------------------------------

    \163\ This is the time sequence that the orders were received by 
BOX (i.e., MM1 was received first).
---------------------------------------------------------------------------

Guarantee
    The Exchange is proposing to allow for a participation guarantee 
for certain orders executed by Floor Brokers.\164\ Specifically, when a 
Floor Broker holds an order of the eligible order size or greater, the 
Floor Broker is entitled to cross a certain percentage of the order 
with other orders that the Floor Broker is holding. The Exchange may 
determine, on an option by option basis, the eligible size for an order 
on the Trading Floor to be subject to this guarantee; however, the 
eligible order size may not be less than 500 contracts.\165\ In 
determining whether an order satisfies the eligible order size 
requirement, any multi-part or Complex Order must contain one leg alone 
which is for the eligible order size or greater. The percentage of the 
order which a Floor Broker is entitled to cross, after all equal or 
better priced Public Customer bids or offers on the BOX Book and any 
non-Public Customer bids or offers that are ranked ahead of such Public 
Customer bids or offers are filled, is 40% of the remaining contracts 
in the order. However, nothing in this proposed Rule is intended to 
prohibit a Floor Broker from trading more than his percentage 
entitlement if the other Participants of the trading crowd do not 
choose to trade the remaining portion of the order.
---------------------------------------------------------------------------

    \164\ See proposed Rule 7600(f). Proposed Rule 7600(f) is based 
on PHLX Rule 1064.02. The Exchange notes that there are certain 
differences from the PHLX rule due to the fact that the Exchange 
will not have specialists on the Trading Floor and the Exchange has 
different rules than PHLX when it comes to orders on the Trading 
Floor executing against interest on the electronic book.
    \165\ Any changes to the eligible order size shall be 
communicated to Participants via circular.
---------------------------------------------------------------------------

Additional Requirements
    The Exchange is proposing additional requirements for Floor 
Participants while present on the Trading Floor.\166\ First, BOX is 
proposing that a Floor Broker must disclose all securities that are 
components of the Public Customer Order before requesting bids and 
offers for the execution of all components of the order. Next, the 
Exchange is proposing rules pertaining to treatment of quotes provided 
by Floor Participants. Specifically, a quote provided by a Floor 
Participant will remain in effect until: (1) A reasonable amount of 
time has passed; or (2) there is a significant change in the price of 
the underlying security; \167\ or (3) the market given in response to 
the request has been improved.\168\ BOX is proposing that the Floor 
Participant who established the market will, at the given price, have 
priority over all other orders that were not announced in the trading 
crowd at the time that the market was established (but not over Public 
Customer orders on the BOX Book or any non-Public Customer orders that 
have priority over such Public Customer orders on the BOX Book) and 
will maintain priority over such orders except for orders that improve 
upon the market. Additionally, when a Floor Broker announces an order 
to the trading crowd pursuant to Rule 7580(e)(2), it shall be the 
responsibility of the Floor Participant who established the market to 
alert the Floor Broker of the fact that the Floor Participant has 
priority.
---------------------------------------------------------------------------

    \166\ See proposed IM-7600-1. Proposed IM-7600-1 is based on 
PHLX Rule 1064.02. The Exchange notes that there are certain 
differences from the PHLX rule in order to account for the fact that 
BOX will not have specialists on the Trading Floor. Additionally, 
the Exchange is proposing additional language to clarify it is the 
responsibility of the Floor Participant who established the market 
to alert the executing Floor Broker of such information.
    \167\ In the case of a dispute, the term ``significant change'' 
will be interpreted on a case-by-case basis by an Options Exchange 
Official based upon the extent of recent trading in the option and 
in the underlying security, and any other relevant factors.
    \168\ See proposed IM-7600-1(b).
---------------------------------------------------------------------------

    The Exchange is proposing that Floor Participants may not prevent a 
Complex Order from being completed by giving a competing bid or offer 
for one component of such order. Lastly, the Exchange is proposing that 
if a Floor Broker is crossing a Public Customer Order with an order 
that is not a Public Customer Order, when providing an opportunity for 
the trading crowd to participate in the transaction, the Floor Broker 
shall disclose the Public Customer Order that is subject to crossing.
Tied Hedge
    BOX is proposing the adoption of rules that will allow for tied 
hedge transactions. Tied hedge transactions are transactions that 
involve an option transaction and a hedging transaction occurring on a 
non-option market, as described in greater detail below.\169\ 
Specifically, the Exchange is proposing that nothing prohibits a Floor 
Broker from buying or selling a stock, security futures, or futures 
position following receipt of an option order, including a Complex 
Order, provided that prior to announcing such order to the trading 
crowd certain conditions are met. The option order must be in a class 
designated as eligible for tied hedge transactions as determined by the 
Exchange and is within the designated tied hedge eligibility size 
parameters, which parameters shall be determined by the Exchange and 
may not be smaller than 500 contracts per order. Additionally, there 
shall be no aggregation of multiple orders to satisfy the size 
parameter, and for Complex Orders involved in a tied hedge transaction 
at least one leg must meet the minimum size requirement. The Floor 
Broker must create an electronic record that it is engaged in a tied 
hedge transaction in a form and manner prescribed by the Exchange. The 
hedging position is comprised of a position designated as eligible for 
a tied hedge transaction as determined by the Exchange and may include 
the same underlying stock applicable to the option order, a security 
future overlying the same stock applicable to the option order or, in 
reference to an index or Exchange-Traded Fund Shares (``ETF''), a 
related instrument.\170\ Additionally,

[[Page 23674]]

the hedging position must be brought without undue delay to the trading 
crowd and announced concurrently with the option order; offered to the 
trading crowd in its entirety; and offered, at the execution price 
received by the Floor Broker introducing the option, to any in-crowd 
Floor Participant who has established parity or priority for the 
related options. The hedging position must not exceed the option order 
on a delta basis to be eligible for treatment as a tied hedge order.
---------------------------------------------------------------------------

    \169\ See proposed IM-7600-2. Proposed IM-7600-2 is based on 
NYSE Arca Rule 6.47.01.
    \170\ A ``related instrument'' means, in reference to an index 
option, securities comprising ten percent or more of the component 
securities in the index or a futures contract on any economically 
equivalent index applicable to the option order. A ``related 
instrument'' means, in reference to an ETF option, a futures 
contract on any economically equivalent index applicable to the ETF 
underlying the option order.
---------------------------------------------------------------------------

    The Exchange is further proposing that all tied hedge transactions 
(regardless of whether the option order is a simple or Complex Order) 
are treated the same as Complex Orders for purposes of the Exchange's 
open outcry allocation and reporting procedures. Tied hedge 
transactions are subject to the existing NBBO trade-through 
requirements for options and stock, as applicable, and may qualify for 
various exceptions; however, when the option order is a simple order, 
the execution of the option leg of a tied hedge transaction does not 
qualify for the NBBO trade-through exception for a Complex Trade 
(defined in proposed Rule 7610(e)). Floor Participants that participate 
in the option transaction must also participate in the hedging position 
and may not prevent the option transaction from occurring by giving a 
competing bid or offer for one component of such order. In the event 
the conditions in the non-options market prevent the execution of the 
non-option leg(s) at the agreed prices, the trade representing the 
options leg(s) may be cancelled. BOX is proposing that prior to 
entering tied hedge orders on behalf of Public Customers, the Floor 
Broker must deliver to the Public Customer a written notification 
informing the Public Customer that his order may be executed using the 
Exchange's tied hedge procedures. The proposed Rule dealing with tied 
hedge orders is based on the rules of another options exchange.\171\
---------------------------------------------------------------------------

    \171\ See NYSE Arca Rule 6.47.01.
---------------------------------------------------------------------------

    The Exchange is also proposing language related to Section 
11(a)(1)(G) of the Exchange Act.\172\ Specifically, a BOX Participant 
shall not utilize the Trading Floor to effect any transaction for its 
own account, the account of an associated person, or an account with 
respect to which it or an associated person thereof exercises 
investment discretion by relying on an exemption under Section 
11(a)(1)(G) of the Exchange Act.
---------------------------------------------------------------------------

    \172\ See proposed IM-7600-5.
---------------------------------------------------------------------------

Clerks
    The Exchange is proposing to adopt Rule 7630 Clerks, which provides 
requirements for Clerks on the Trading Floor.\173\ The proposal defines 
``Clerk'' as any registered on-floor person employed by or associated 
with a Floor Broker or Floor Market Maker and who is not eligible to 
effect transactions on the Trading Floor as a Floor Market Maker or 
Floor Broker. The proposed Rule codifies that Clerks must display the 
badge(s) supplied by the Exchange while on the Trading Floor. Further, 
Proposed Rule 7630(c) codifies that a Clerk shall be primarily located 
at a workstation assigned to his employer or assigned to his employer's 
clearing firm unless such Clerk is (1) entering or leaving the Trading 
Floor, (2) transmitting, correcting or checking the status of an order 
or reporting or correcting an executed trade or (3) supervising other 
Clerks if he is identified as a supervisor on the registration form 
submitted to the Exchange's Membership Department.
---------------------------------------------------------------------------

    \173\ Proposed Rule 7630 is based on PHLX Rule 1090.
---------------------------------------------------------------------------

    The Exchange is also proposing Rule 7630(d), which details the 
registration requirements for a Floor Broker who employs a Clerk that 
performs any function other than a solely clerical or ministerial 
function. On the Trading Floor, a Clerk may enter an order under the 
direction of a Floor Broker by way of any order handling entry 
device.\174\ Proposed Rule 7630(f) defines a Floor Market Maker Clerk 
as any on-floor Clerk employed by or associated with a Floor Market 
Maker, and details the registration requirements and conduct on the 
Trading Floor for Floor Market Maker Clerks. A Floor Market Maker Clerk 
is permitted to communicate verbal market information (i.e., bid, 
offer, and size) in response to requests for such information, provided 
that such information is communicated under the direct supervision of 
his or her Floor Market Maker employer. A Floor Market Maker Clerk may 
consummate electronic transactions under the express direction of his 
or her Floor Market Maker employer by matching bids and offers. Such 
bids and offers and transactions effected under the supervision of a 
Floor Market Maker are binding as if made by the Floor Market Maker 
employer.
---------------------------------------------------------------------------

    \174\ See proposed Rule 7630(e).
---------------------------------------------------------------------------

Disputes on the Trading Floor
    The Exchange is proposing to adopt Rule 7640 to codify the process 
for the resolution of trading disputes on the Trading Floor.\175\ 
Specifically, disputes occurring on and relating to the Trading Floor, 
if not settled by agreement between the Floor Participants interested, 
shall be settled by an Options Exchange Official.
---------------------------------------------------------------------------

    \175\ Proposed Rule 7640 is based on PHLX Rule 124. The Exchange 
notes that there are certain differences from the PHLX rule because 
the Exchange desires to have consistency with its existing rules 
related to reviewing an Exchange ruling.
---------------------------------------------------------------------------

    The Exchange is proposing that an Options Exchange Official shall 
institute the course of action deemed to be most fair to all parties 
under the circumstances at the time when issuing decisions for the 
resolution of trading disputes. An Options Official may direct the 
execution of an order or adjust the transaction terms or Participants 
to an executed order, and may also nullify a transaction if the 
transaction is determined to have been in violation of Exchange Rules. 
Options transactions that are the result of an Obvious Error or 
Catastrophic Error shall be subject to the provisions and procedures 
set forth in Rule 7170. The proposed Rule also states that all rulings 
rendered by an Options Exchange Official are effective immediately and 
must be complied with promptly; failure to do so may result in an 
additional violation.
    Proposed Rule 7640(e) states that all Options Exchange Official 
rulings are reviewable by the CRO or his or her designee, and sets 
forth the process for such review. Regulatory staff must be advised 
within 15 minutes of an Options Exchange Official's ruling that a party 
to such ruling has determined to appeal from such ruling to the CRO or 
his or her designee. The Exchange may establish the procedures for the 
submission of a request for a review of an Options Exchange Official 
ruling. Options Exchange Official rulings (including those concerning 
the nullification or adjustment of transactions) may be sustained, 
overturned, or modified by the CRO or his or her designee. In making a 
determination, the CRO or his or her designee may consider facts and 
circumstances not available to the ruling Options Exchange Official, as 
well as action taken by the parties in reliance on the Options Exchange 
Official's ruling (e.g., cover, hedge, and related trading activity). 
Further, all decisions made by the CRO or his or her designee

[[Page 23675]]

in connection with initial rulings on requests for relief and with the 
review of an Options Exchange Official ruling pursuant to this proposed 
Rule 7640(e) shall be documented in writing and maintained by the 
Exchange in accordance with the record keeping requirements set forth 
in the Securities Exchange Act of 1934, as amended, and the rules 
thereunder. A Floor Participant seeking review of an Options Exchange 
Official ruling shall be assessed a fee of $250.00 for each Options 
Exchange Official ruling to be reviewed that is sustained and not 
overturned or modified by the CRO or his or her designee.\176\ All 
decisions of the CRO or his or her designee shall be final and may not 
be appealed to the Exchange's Board of Directors. Additionally, all 
decisions of the CRO or his or her designee are effective immediately 
and must be complied with promptly. Failure to promptly comply with a 
decision of the Exchange may result in an additional violation.
---------------------------------------------------------------------------

    \176\ In addition, in instances where the Exchange, on behalf of 
an Options Participant, requests a review by another options 
exchange, the Exchange will pass any resulting charges through to 
the relevant Options Participant.
---------------------------------------------------------------------------

    Lastly, as discussed in proposed IM-7640-1, the Exchange may 
determine that an Options Exchange Official is ineligible to 
participate in a particular ruling where it appears that such Options 
Exchange Official has a conflict of interest. The Exchange also sets 
forth when a conflict of interest exists, and allows that Exchange 
staff may consider other circumstances, on a case-by-case basis, in 
determining the eligibility or ineligibility of a particular Options 
Exchange Official to participate in a particular ruling due to a 
conflict of interest.\177\
---------------------------------------------------------------------------

    \177\ See proposed IM-7640-1.
---------------------------------------------------------------------------

Trading for Joint Account
    The Exchange is proposing Rule 7650, which will govern Trading for 
Joint Accounts.\178\ Specifically, it stipulates that while on the 
Trading Floor, no Options Participant shall initiate the purchase or 
sale on the Exchange of any security for any account in which he, his 
Options Participant organization or a participant therein, is directly 
or indirectly interested with any person other than such Options 
Participant or participant therein. The Exchange further clarifies that 
these provisions shall not apply to any purchase or sale by any Options 
Participant for any joint account maintained solely for effecting bona 
fide domestic or foreign arbitrage transactions.
---------------------------------------------------------------------------

    \178\ Proposed Rule 7650 is based on PHLX Rule 772.
---------------------------------------------------------------------------

Communications and Equipment
    The Exchange is proposing Rule 7660 Communications and Equipment, 
which deals with communication and equipment on the Trading Floor. 
Specifically, the proposed Rule details which communication devices are 
prohibited; provides the Exchange with the ability to remove any 
communication device that is in violation; sets forth the registration 
requirement and process; specifies the capacity and functionality of 
communication devices; outlines the communication devices allowed to 
Floor Market Makers, Floor Brokers, and Clerks; requires the 
maintenance of telephone records, and excludes the Exchange from 
liability due to conflicts between communication devices or due to 
electronic interference. Additionally, the Exchange will establish a 
communication device policy and violations of such policy may result in 
disciplinary action by the Exchange.\179\ Proposed IM-7660-2 clarifies 
that proposed Rule 7660 and any relevant Exchange policy are intended 
to apply to all communication and other electronic devices on the Floor 
of the Exchange, including, but not limited to, wireless, wired, 
tethered, voice, and data. The Exchange notes that the proposed rules 
applicable to communication and equipment on the Trading Floor are 
based on the rules of another exchange.\180\ Lastly, Proposed IM-7660-3 
provides the Exchange with the ability to limit or revoke the use of 
any communication device on the Trading Floor whenever the Exchange 
determines that use of such communication device: (1) Interferes with 
the normal operation of the Exchange's own systems or facilities or 
with the Exchange's regulatory duties, (2) is inconsistent with the 
public interest, the protection of investors or just and equitable 
principles of trade, or (3) interferes with the obligations of a Floor 
Participant to fulfill its duties under, or is used to facilitate any 
violation of, the Act or rules thereunder, or Exchange rules. The 
Exchange notes that proposed IM-7660-3 is based on the rules of another 
exchange.\181\
---------------------------------------------------------------------------

    \179\ See proposed IM-7660-1.
    \180\ See PHLX Rule 606. The Exchange notes that it is not 
copying PHLX Rule 606(b)(2)(i), which prohibits any member from 
establishing communication devices on the floor. The Exchange 
believes that this provision is not necessary and would be contrary 
to the Exchange's proposed Trading Floor design. Specifically, the 
Exchange will not be providing communication devices for Floor 
Participants; Floor Participants will be responsible for providing 
their own communication devices. Therefore, the inclusion of this 
provision would directly conflict with the Exchange's plan. 
Additionally, proposed Rule 7660(g) contains a provision not 
included in PHLX's rule that requires wireless telephone and other 
communication devices on the Options Floor to comply with applicable 
floor policies. The Exchange believes this provision is important as 
to make clear the restrictions and requirements applicable to 
communication devices on the Trading Floor.
    \181\ See CBOE Rule 6.23(b). The Exchange notes that although 
other provisions of proposed Rule 7660 are based on PHLX, PHLX does 
not allow Floor Brokers to receive orders while in the trading 
crowd; therefore, the Exchange is proposing to follow CBOE, which 
allows Floor Brokers to receive orders in the trading crowd.
---------------------------------------------------------------------------

Floor Market Makers
    The Exchange is proposing Rule 8500 Floor Market Maker, which 
details the rules surrounding Floor Market Makers, including 
registration as a Market Maker and suspension and termination of a 
Floor Market Maker.\182\ Specifically, with regard to suspension or 
termination, the registration of any Options Participant as a Floor 
Market Maker may be suspended or terminated by the Exchange upon a 
determination that such Options Participant has failed to properly 
perform as a Floor Market Maker.\183\
---------------------------------------------------------------------------

    \182\ See proposed Rules 8500 (a) and (b). Proposed Rules 8500 
(a) and (b) are based on PHLX Rule 1020. There are certain 
differences with PHLX's rule due to the fact that PHLX has 
additional categories of Participants that the Exchange does not.
    \183\ The 13000 Series of the Exchange's Rules provide 
procedures, including appealing, for Participants aggrieved by 
Exchange action, including suspension and termination.
---------------------------------------------------------------------------

    The Exchange proposes that a Floor Market Maker shall not effect on 
the Exchange purchases or sales of any option in which such Floor 
Market Maker is registered, for any account in which he or his Options 
Participant is directly or indirectly interested, unless such dealings 
are reasonably necessary to permit such Floor Market Maker to maintain 
a fair and orderly market.\184\
---------------------------------------------------------------------------

    \184\ See proposed Rule 8500(c).
---------------------------------------------------------------------------

    Also, the Exchange proposes certain expectations of Floor Market 
Makers. Specifically, proposed Rule 8500(d) details that it is 
ordinarily expected that a Floor Market Maker will engage, to a 
reasonable degree under the existing circumstances, in dealings for his 
own account in options when lack of price continuity or lack of depth 
in the options market or temporary disparity between supply and demand 
in the options market exists or is reasonably to be anticipated. The 
Exchange is proposing that transactions effected on the Exchange by a 
Floor Market Maker for his own account, and in the options in which he 
is registered, are to constitute a course of dealings reasonably 
calculated to contribute to

[[Page 23676]]

the maintenance of price continuity with reasonable depth, and to the 
minimizing of the effects of temporary disparity between supply and 
demand, immediate or reasonably to be anticipated. Transactions in such 
options not part of such a course of dealings are not to be effected by 
a Floor Market Maker for his own account.\185\
---------------------------------------------------------------------------

    \185\ See proposed Rule 8500(d).
---------------------------------------------------------------------------

    The Exchange is proposing Rule 8510 which will govern the 
obligations and restrictions applicable to Floor Market Makers.\186\ 
Generally, transactions of a Floor Market Maker should constitute a 
course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market, and those Participants should 
not enter into transactions or make bids or offers that are 
inconsistent with such a course of dealings.\187\ Additionally, the 
Exchange is proposing to define a Floor Market Maker as an Options 
Participant on the Exchange located on the Trading Floor who has 
received permission from the Exchange to trade in options for his own 
account.\188\
---------------------------------------------------------------------------

    \186\ Proposed Rule 8510 is based on PHLX Rule 1014. PHLX Rule 
1014 includes numerous sections that the Exchange is not including 
in proposed Rule 8510. The majority of the sections that the 
Exchange is omitting are not relevant to BOX. Specifically, they 
involve rules related to Participant categories that the Exchange 
does not and will not have on BOX. These include Streaming Quote 
Trader, which is a Registered Option Trader who has received 
permission from PHLX to submit electronic quotes only while they are 
present on the floor, and specialists. Additionally, the Exchange is 
not copying PHLX Rule 1014.06, which covers information barriers, 
because the Exchange already has rules covering misuse of material 
information. See Securities Exchange Act Release No. 75916 
(September 14, 2015), 80 FR 56503 (September 18, 2015) (SR-BOX-2015-
31). The Exchange is not copying PHLX Rules 1014.13 and 1014.14 
because the PHLX Rules deal with types of activities and members 
that will not be present on BOX's Trading Floor. As previously 
mentioned, PHLX Rule 1014.13 requires an in person minimum that the 
Exchange does not believe is necessary on the Trading Floor.
    \187\ See proposed Rule 8510(a).
    \188\ See proposed Rule 8510(b).
---------------------------------------------------------------------------

    The Exchange is proposing a Continuous Open Outcry Quoting 
Obligation for Floor Market Makers.\189\ The Continuous Open Outcry 
Quoting Obligation requires Floor Market Makers to provide a two-sided 
market on the Trading Floor complying with the quote spread parameter 
requirements contained in proposed Rule 8510(d)(1).\190\ As part of the 
Continuous Open Outcry Quoting Obligation, such Floor Market Makers 
shall provide such quotations with a size of not less than 10 
contracts.
---------------------------------------------------------------------------

    \189\ See proposed Rule 8510(c).
    \190\ See proposed Rule 8510(c)(2).
---------------------------------------------------------------------------

    The Exchange also proposes affirmative obligations for Floor Market 
Makers in classes of option contracts to which they are assigned. 
Specifically, whenever a Floor Market Maker is called upon by an 
Options Exchange Official or a Floor Broker to make a market, the Floor 
Market Maker is expected to engage, to a reasonable degree under the 
existing circumstances, in dealing for his own account when there 
exists, or it is reasonably anticipated that there will exist, a lack 
of price continuity, a temporary disparity between the supply of and 
demand for a particular option contract, or a temporary distortion of 
the price relationships between option contracts of the same 
class.\191\ Additionally, the Exchange proposes the following 
obligations on Floor Market Makers while performing their market making 
activities on the Trading Floor: (1) Quote Spread Parameters (Bid/Ask 
Differentials) \192\ and (2) Maximum Option Price Change.\193\ 
Specifically, Floor Market Makers shall provide a bid/ask differential 
on the Trading Floor for options on equities and index options by 
bidding and/or offering so as to create differences of no more than 
$0.25 between the bid and the offer for each option contract for which 
the prevailing bid is less than $2; no more than $0.40 where the 
prevailing bid is $2 or more but less than $5; no more than $0.50 where 
the prevailing bid is $5 or more but less than $10; no more than $0.80 
where the prevailing bid is $10 or more but less than $20; and no more 
than $1 where the prevailing bid is $20 or more, provided that, in the 
case of equity options, the bid/ask differentials stated above shall 
not apply to in-the-money series where the market for the underlying 
security is wider than the differentials set forth above. For such 
series, the bid/ask differentials may be as wide as the quotation for 
the underlying security on the primary market, or its decimal 
equivalent rounded up to the nearest minimum increment. The Exchange 
may establish differences other than the above for one or more series 
or classes of options.\194\ Quotations provided in open outcry may not 
be made with $5 bid/ask differentials provided in Rule 8040(a)(7) and 
instead must comply with the legal bid/ask differential requirements 
described in this subparagraph. These proposed obligations for Floor 
Market Maker are based on the rules of another exchange.\195\
---------------------------------------------------------------------------

    \191\ See proposed Rule 8510(d).
    \192\ See proposed Rule 8510(d)(1).
    \193\ On the Trading Floor, a Floor Market Maker shall not be 
bidding more than $1 lower and/or offering no more than $1 higher 
than the last preceding transaction price for the particular option 
contract. However, this standard shall not ordinarily apply if the 
price per share of the underlying stock or Exchange-Traded Fund 
Share has changed by more than $1 since the last preceding 
transaction for the particular option contract. See proposed Rule 
8510(d)(2).
    \194\ The Exchange notes that the ability to provide different 
quoting requirements is not novel and the Exchange already has this 
ability when it comes to electronic quoting requirements. See Rule 
8040(a)(7). Additionally, another Exchange allows for the same on 
their floor. See PHLX Rule 1014(c)(i)(A)(1)(a).
    \195\ See PHLX Rule 1014(c)(i)(A). The Exchange is not including 
all of the PHLX rules related to Floor Market Maker quoting 
obligations. Specifically, the Exchange is not including PHLX rules 
applicable to foreign currency options because BOX does not list for 
trading foreign currency options.
---------------------------------------------------------------------------

    The Exchange is also proposing restrictions for Floor Market Makers 
in classes of option contracts other than those to which they are 
appointed. Specifically, with respect to classes in which Floor Marker 
Makers are not appointed, Floor Market Makers should not (1) 
individually or as a group, intentionally or unintentionally, dominate 
the market in option contracts of a particular class; or (2) effect 
purchases or sales on the Trading Floor of the Exchange except in a 
reasonable and orderly manner; (3) be conspicuous in the general market 
or in the market in a particular option.\196\ Further, the Exchange 
proposes additional restrictions on Floor Market Makers.\197\ 
Specifically, except as otherwise provided, no Floor Market Maker shall 
(1) initiate a transaction while on the Trading Floor for any account 
in which he has an interest and execute as Floor Broker an off-floor 
order in options on the same underlying interest during the same 
trading session, or (2) retain priority over an off-floor order while 
establishing or increasing a position for an account in which he has an 
interest while on the Trading Floor of the Exchange.\198\
---------------------------------------------------------------------------

    \196\ See proposed Rule 8510(e).
    \197\ See proposed Rule 8510(f).
    \198\ This provision shall not apply to (1) any transaction by a 
registered Floor Market Maker in an option in which he is so 
registered; or (2) any transaction, other than a transaction for an 
account in which a Floor Market Maker has an interest, made with the 
prior approval of an Options Exchange Official to permit a member to 
contribute to the maintenance of a fair and orderly market in an 
option, or any purchase or sale to reverse any such transaction; or 
(3) any transaction to offset a transaction made in error. See 
proposed Rule 8510(g).
---------------------------------------------------------------------------

    Proposed Rule 8510(h) discusses option priority and parity on the 
Trading Floor.\199\ Specifically, it references proposed Rule 7610, 
which

[[Page 23677]]

directs Floor Participants in the establishment of priority of orders 
on the Trading Floor. The Exchange is proposing to clarify that in 
situations where the allocation of contracts result in fractional 
amounts of contracts to be allocated to Floor Participants, the number 
of contracts to be allocated shall be rounded in a fair and equitable 
manner.
---------------------------------------------------------------------------

    \199\ Proposed Rule 8510(h) is based on PHLX Rule 1014(g)(i)(A). 
The Exchange is not including the provision discussing orders of 
controlled accounts because the provision is not applicable to the 
Exchange's Trading Floor. Specifically, the Exchange's Trading Floor 
does not require a distinction for controlled accounts.
---------------------------------------------------------------------------

    The Exchange is also clarifying that Floor Participants must follow 
just and equitable principles of trade when dealing on the Trading 
Floor.\200\ Specifically, it shall be considered conduct inconsistent 
with just and equitable principles of trade for: (a) A Floor Broker to 
allocate orders other than in accordance with the Exchange's priority 
rules applicable to floor trades; (b) a Floor Participant to enter into 
any agreement with another Floor Participant concerning allocation of 
trades; or (c) a Floor Participant to harass, intimidate or coerce 
another Floor Participant to make or refrain from making any complaint 
or appeal.
---------------------------------------------------------------------------

    \200\ See proposed Rule 8510(h)(4).
---------------------------------------------------------------------------

    The Exchange is proposing substantial Interpretive Material to 
supplement the Floor Market Maker Rules.\201\ Specifically, the 
Exchange is proposing IM-8510-1, which provides that the obligations of 
a Floor Market Maker with respect to those classes of options to which 
he is assigned shall take precedence over his other activities. The 
Exchange is proposing IM-8510-2, which details non-electronic orders 
and states that Floor Market Makers participating in a trading crowd 
may, in response to a verbal request for a market by a Floor Broker, 
state a bid or offer that is different than their electronically 
submitted bid or offer, provided that such stated bid or offer is not 
inferior to such electronically submitted bid or offer, except when 
such stated bid or offer is made in response to a Floor Broker's 
solicitation of a single bid or offer as set forth in proposed Rule 
7040(d)(2).\202\ A Floor Market Maker shall be deemed to be 
participating in the crowd if such Floor Market Maker is, at the time 
an order is announced in the crowd, physically located in the specific 
Crowd Area. A Floor Market Maker who is physically present in such 
Crowd Area may engage in options transactions in assigned issues as a 
crowd participant, provided that such Floor Market Maker fulfills the 
requirements set forth in proposed Rule 8510. The Exchange is proposing 
to define the term ``on the floor'' as meaning the Trading Floor of the 
Exchange; the rooms, lobbies and other premises immediately adjacent 
thereto made available by the Exchange for use by Floor Participants 
generally; other rooms, lobbies and premises made available by the 
Exchange primarily for use by Floor Participants; and the telephone and 
other facilities in any such place.\203\ The Exchange is also proposing 
that the provisions of this Proposed Rule 8510 do not apply to 
transactions initiated by a Floor Market Maker for an account in which 
he has an interest unless such transactions are either initiated by a 
Floor Market Maker while on the Floor or unless such transactions, 
although originated off the Floor, are deemed on-Floor transactions 
under the provisions of these Rules.\204\
---------------------------------------------------------------------------

    \201\ The proposed Interpretive Material to supplement the Floor 
Market Maker Rules is based mostly on commentary to PHLX Rule 1014. 
The Exchange notes that it is not copying all of the commentary to 
PHLX Rule 1014 as some of the commentary is not applicable because 
it involves specialists, who the Exchange does not have, or the 
commentary is covered by different proposed rules.
    \202\ Proposed IM-8510-2 is based on PHLX Rule 1014.05(c). The 
Exchange is not including all of PHLX Rue 1014.05(c). Specifically, 
the Exchange is not including provisions of the PHLX Rule related to 
specialist because the Exchange does not have specialists and is not 
proposing to have specialists. The Exchange is also not including 
PHLX provisions related to priority of orders represented on the 
floor because the Exchange is copying the floor priority provisions 
from NYSE Arca and they are covered by proposed Rule 7600(c)
    \203\ See proposed IM-8510-3(a). Proposed IM-8510-3(a) is based 
on PHLX Rule 1014.07.
    \204\ See proposed IM-8510-3(b). Proposed IM-8510-3(b) is based 
on PHLX Rule 1014.07.
---------------------------------------------------------------------------

    Additionally, the Exchange proposes that an off-Floor order for an 
account in which a Participant has an interest is to be treated as an 
on-Floor order if it is executed by the Participant who initiated 
it.\205\ Proposed IM-8510-4 also includes additional transactions that 
will be considered on-Floor transactions, including any transaction for 
an account in which a Floor Market Maker has an interest if such 
transaction is initiated off the Trading Floor by such Floor Market 
Maker after he has been on the Trading Floor during the same day. 
Additionally, the following will be treated as on-Floor orders, any 
transactions for a Participant for an account in which it has an 
interest: (1) Which results in an order entered off the Floor following 
a conversation relating thereto with a Floor Participant on the Floor 
who is a partner of or stockholder in such Participant; or (2) which 
results from an order entered off the Floor following the unsolicited 
submission from the Floor to the office of a quotation in a stock or 
Exchange-Traded Fund Share and the size of the market by a Participant 
on the Floor who is a partner of or stockholder in such Participant; or 
(3) which results from an order entered off the Floor which is executed 
by a Participant on the Floor who is a partner of or stockholder in 
such Participant and who had handled the order on a ``not-held'' basis; 
\206\ or (4) which results from an order entered off the Floor which is 
executed by a Participant on the Floor who is a partner of or 
stockholder in such Participant and who has changed the terms of the 
order.
---------------------------------------------------------------------------

    \205\ See proposed IM-8510-4. Proposed IM-8510-4 is based on 
PHLX Rule 1014.08.
    \206\ However, the following are not on-Floor orders and such 
restrictions shall not apply to an order: (1) To sell an option for 
an account in which the Participant is directly or indirectly 
interested if, in facilitating the sale of a large block of stock or 
Exchange-Traded Fund Shares, the Participant acquired its position 
because the demand on the Floor was not sufficient to absorb the 
block at a particular price or prices; or (2) to purchase or sell an 
option for an account in which the Options Participant is directly 
or indirectly interested if the Options Participant was invited to 
participate on the opposite side of a block transaction by another 
Options Participant or a partner or stockholder therein because the 
market on the Floor could not readily absorb the block at a 
particular price or prices; or (3) to purchase or sell an option for 
an account in which the Participant is directly or indirectly 
interested if the transaction is on the opposite side of a block 
order being executed by the Participant for the account of its 
customer and the transaction is made to facilitate the execution of 
such order.
---------------------------------------------------------------------------

    The Exchange is proposing that an on-Floor order given by a Floor 
Market Maker to a commission broker, for an account in which the Floor 
Market Maker has an interest, is subject to all the rules restricting 
Floor Market Makers.\207\
---------------------------------------------------------------------------

    \207\ See proposed IM-8510-5. Proposed IM-8510-5 is based on 
PHLX Rule 1014.09.
---------------------------------------------------------------------------

    The Exchange is proposing that the number of Floor Market Makers in 
the trading crowd who are establishing or increasing a position may 
temporarily be limited when, in the judgment of an Options Exchange 
Official, the interests of a fair and orderly market are served by such 
limitation.\208\ Additionally, the Exchange is proposing that the 
Exchange may adopt policies affecting the location of Floor 
Participants on the Trading Floor in the interest of a fair and orderly 
market.\209\ Lastly, the Exchange is proposing that a Floor Market 
Maker cannot acquire a ``long'' position by pairing off with a sell 
order before the opening, unless all off-Floor bids at that price are 
filled.\210\
---------------------------------------------------------------------------

    \208\ See proposed IM-8510-6. Proposed IM-8510-6 is based on 
PHLX Rule 1014.12.
    \209\ See proposed IM-8510-7. Proposed IM-8510-7 is based on 
PHLX Rule 1014.17.
    \210\ See proposed IM-8510-9. Proposed IM-8510-9 is based on 
PHLX Rule 1014.11.
---------------------------------------------------------------------------

    The proposed rules applicable to Floor Market Makers are based 
predominately on the rules of PHLX. However, BOX omitted certain PHLX

[[Page 23678]]

rules from the proposed rules due to certain differences with how the 
Exchange is designing the Trading Floor. The Exchange is not including 
any of PHLX's waiver provisions in the proposed rules.\211\ The 
Exchange does not believe that waiver provisions are necessary because 
the Exchange is not having specialists who have entitlement guarantees 
that they could waive on the Trading Floor. Additionally, BOX is not 
including rules related to foreign currency options because the 
Exchange does not list for trading options on foreign currencies.
---------------------------------------------------------------------------

    \211\ See PHLX Rule 1014(g)(v)(D).
---------------------------------------------------------------------------

    The Exchange is not including certain PHLX rules related to 
participation guarantees, allocation and priority. PHLX participant 
guarantee rules are designed to provide a guarantee entitlement to 
specialists on the trading floor. BOX is not proposing to have 
specialists on the Trading Floor and therefore there is no reason to 
include these PHLX rules. Additionally, BOX's proposed allocation and 
priority rules for orders originating from the Trading Floor are based 
on the rules of NYSE Arca \212\ and not those of PHLX.
---------------------------------------------------------------------------

    \212\ See NYSE Arca Rules 6.47(a) and 6.75.
---------------------------------------------------------------------------

    The Exchange proposes Rule 8530 which details the resolution of an 
uncompared trade.\213\ Specifically, when a disagreement between Floor 
Participants arising from an uncompared Exchange options transaction 
cannot be resolved by mutual agreement prior to 10:00 a.m. on the first 
business day following the trade date, the parties shall promptly, but 
not later than 3:30 p.m. on such day close out the transaction in the 
following manner. The Floor Participant representing the purchaser in 
the uncompared Exchange options transaction shall promptly enter into a 
new Exchange options transaction on the Floor of the Exchange to 
purchase the option contract that was the subject of the uncompared 
Exchange options transaction. The Floor Participant representing the 
writer in the uncompared Exchange options transaction shall promptly 
enter into a new Exchange options transaction on the Floor of the 
Exchange to sell (write) the option contract that was the subject of 
the uncompared Exchange options transaction. Any claims for damages 
resulting from such transactions must be made promptly for the accounts 
of the Floor Participants involved and not for the accounts of their 
respective customers. Notwithstanding the foregoing, if either Floor 
Participant is acting for a firm account in an uncompared Exchange 
options transaction and not for the account of a Public Customer, such 
Floor Participant need not enter into a new transaction, in which event 
money differences will be based solely on the closing transaction of 
the other party to the uncompared transaction. In the event an 
uncompared transaction involves an option contract of a series in which 
trading has been terminated or suspended before a new Exchange options 
transaction can be effected to establish the amount of any loss, the 
Floor Participant not at fault may claim damages against the other 
Floor Participant involved in the transaction based on the terms of 
such transaction. All such claims for damages shall be made promptly.
---------------------------------------------------------------------------

    \213\ Proposed Rule 8530 is based on PHLX Rule 1039.
---------------------------------------------------------------------------

Fees
    The Exchange has not yet determined the fees for transactions 
originating from the Trading Floor. Prior to commencing trading on the 
Trading Floor, the Exchange will file proposed fees with the 
Commission.
Additional Changes
    The Exchange is also proposing minor edits to other sections of the 
Exchange's Rulebook in order to accommodate the various changes. 
Specifically, the Exchange is proposing several new definitions which 
results in the renumbering of numerous other definitions. Therefore, 
the Exchange is amending various references to definitions in the 
Rulebook.\214\
---------------------------------------------------------------------------

    \214\ See proposed changes to Rules 7130, 7150, and 7245.
---------------------------------------------------------------------------

    The Exchange notes that BOX Rule 3090 (Prevention of the Misuse of 
Material Nonpublic Information) will apply to Floor Participants. 
Specifically, Floor Brokers and Floor Market Makers will be required to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the misuse of material, non-public 
information by such Participant or persons associated with such 
Participant.\215\ The Exchange does not believe more prescriptive 
information barriers are necessary for these Participants, as neither 
Floor Brokers nor Floor Market Makers will have different or greater 
access to nonpublic information when compared to any other Options 
Participant on the Exchange.\216\ Accordingly, because these Floor 
Participants do not have any trading advantages at the Exchange due to 
their market role, the Exchange believes that they should be subject to 
the same rules as other Participants regarding the protection against 
the misuse of material non-public information, which in this case is 
BOX Rule 3090.
---------------------------------------------------------------------------

    \215\ As is the case today, information barriers of new entrants 
would be subject to review as part of a new firm application. 
Moreover, the policies and procedures of Market Makers, including 
those relating to information barriers, would be subject to review 
by the Exchange.
    \216\ A principles based approach to protect against the misuse 
of material non-public information for all of its registered Options 
Participants is consistent with the rules of other options and 
equities exchanges, except for prescribed rules relating to floor-
based designated market makers on the NYSE, who have access to 
specified non-public trading information. Further, the Exchange 
believes that the principles-based approach is appropriate with 
regard to BOX's market structure because it provides greater 
flexibility for how BOX Option Participants modify their internal 
policies and procedures in order to reflect their business model, 
business activities, or to their securities market itself. The 
Exchange also believes that the principles-based approach will 
provide for broader protections rather than a more prescriptive 
approach which would only protect certain defined non-public 
information.
---------------------------------------------------------------------------

    The Exchange notes that this principles-based approach to 
protecting against the misuse of material non-public information for 
all its Participants is consistent with the rules of other exchanges 
with physical trading floors.\217\ Except for prescribed rules relating 
to floor-based designated market makers on the NYSE, who have access to 
specified non-public trading information, each of these exchange have a 
principles based approach protecting against the misuse of material 
non-public information. In connection with approving these rule 
changes, the Commission found that, with adequate oversight by 
exchanges of their members, eliminating prescriptive information 
barrier requirements should not reduce the effectiveness of exchange 
rules requiring members to establish and maintain systems to supervise 
the activities of members, including written procedures reasonably 
designed to ensure compliance with applicable federal securities laws 
and regulations,

[[Page 23679]]

and with the rules of the applicable exchange.
---------------------------------------------------------------------------

    \217\ See Securities Exchange Act Release No. 75432 (July 13, 
2015), 80 FR 42597 (July 17, 2015) (Order Approving Adopting a 
Principles-Based Approach to Prohibit the Misuse of Material 
Nonpublic Information by Specialists and e-Specialists by Deleting 
Rule 927.3NY and Section (f) of Rule 927.5NY). See also Securities 
Exchange Act Release Nos. 60604 (Sept. 2, 2009), 76 FR 46272 (Sept. 
8, 2009) (SR-NYSEArca-2009-78) (Order approving elimination of NYSE 
Arca rule that required market makers to establish and maintain 
specifically prescribed information barriers, including discussion 
of NYSE Arca and Nasdaq rules) (``Arca Approval Order''); and 72534 
(July 3, 2014), 79 FR 39440 (July 10, 2014), [sic] SR-NYSE-2014-12) 
(Order approving amendments to NYSE Rule 98 governing designated 
market makers to move to a principles-based approach to prohibit the 
misuse of material non-public information) (``NYSE Approval 
Order'').
---------------------------------------------------------------------------

    The Exchange notes that the design of the proposed Trading Floor 
alleviates certain concerns related to misuse of information on trading 
floors. Specifically, the Exchange is not proposing to have a 
specialist on the Trading Floor, and, therefore, there are no concerns 
raised related to a specialist and an affiliated Market Maker 
coordinating their market making or otherwise sharing information. 
Further, the Exchange is not proposing to change what is considered to 
be material, non-public information that an affiliate of a Floor 
Participant could share with the Floor Participant. In that regard, 
Rule 3090 does not permit affiliates to have access to any non-public 
order or quote information of the Floor Participant, including hidden 
or undisplayed size or price information on such orders or quotes. 
Affiliates of Floor Participants would only have access to order and 
quotes that are publicly available to all market participants and the 
Exchange believes the current surveillance procedures are sufficient to 
monitor and protecting against the misuse of material non-public 
information with regard to any communications on and off the Trading 
Floor.
    The Exchange notes that all current Options Participants already 
have in place written policies and procedures to comply with Rule 3090 
and such policies and procedures have been approved by BOX 
Regulation.\218\ As such, Floor Participants would be obligated to 
ensure that their policies and procedures reflect the current state of 
their business and continue to be reasonably designed to achieve 
compliance with applicable federal securities laws and regulations, 
including Section 15(g) of the Act,\219\ and with applicable Exchange 
rules, including being reasonably designed to protect against the 
misuse of material, non-public information. While information barriers 
are not required, Rule 3090(a) requires that a Participant consider its 
business model or business activities in structuring its policies and 
procedures, which may dictate that an information barrier or a 
functional separation be part of the appropriate set of policies and 
procedures that would be reasonably designed to achieve compliance with 
applicable securities law and regulations and with applicable Exchange 
rules.
---------------------------------------------------------------------------

    \218\ FINRA currently approves Rule 3090 procedures on behalf of 
BOX Regulation pursuant to a Regulatory Services Agreement.
    \219\ 15 U.S.C. 780(g).
---------------------------------------------------------------------------

    The Exchange believes that the reliance on Rule 3090 ensures that 
all BOX Participants are required to protect against the misuse of any 
material non-public information. Rule 3090(b)(2) requires that a firm 
refrain from trading while in possession of material non-public 
information concerning imminent transactions in the security or a 
related product. The Exchange believes that this principles based 
approach provides all BOX Participants the flexibility when managing 
risk across the firm, including integrating options positions with 
other positions of the firm, or as applicable, by respective trading 
unit.
    Finally, FINRA has an exam program that reviews Participants for 
compliance with such procedures. As such, Floor Participants will be 
subject to FINRA's review when implementing such policies and 
procedures for the Trading Floor. In addition, once implemented, FINRA 
would continue to monitor a Floor Participant's compliance with those 
policies and procedures consistent with the current exam-based 
regulatory program associated with BOX Rule 3090.
    Lastly, the Exchange notes that it will submit a separate filing to 
the SEC which will cover minor rule violations on the Trading Floor. 
Specifically, the Exchange will file with the SEC to amend the 
Exchange's Minor Rule Violation Plan in Rule 12140. The Exchange will 
not commence operation of the Trading Floor until the Minor Rule 
Violation Plan has been amended to include violations which occur on 
the Trading Floor.
Trading Floor Data
    The Exchange will provide the Commission with data related to 
activity on the Trading Floor. Specifically, the Exchange will provide 
information regarding size, participation, price improvement by spread 
and trade type, effective spread, Floor Market Maker participation, and 
BOX Book participation. This information will be provided on a 
confidential basis with non-firm specific information being available 
quarterly on the Exchange's Web site.
2. Statutory Basis
    Insert text from Item 3b. [sic] The Exchange believes that its 
proposal is consistent with Section 6(b) of the Act \220\ in general, 
and furthers the objectives of Section 6(b)(5) of the Act \221\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in general 
to protect investors and the public interest.
---------------------------------------------------------------------------

    \220\ 15 U.S.C. 78f(b).
    \221\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

General
    BOX believes that the proposal is consistent with the Act and 
furthers the foregoing objectives by increasing the opportunities for 
Participants to execute orders and provide an additional venue for 
seeking liquidity. The Exchange believes the adoption of the proposed 
rules allowing for an open-outcry floor is consistent with the goals of 
the Act to remove the impediments to and perfect the mechanism of a 
free and open market because it will benefit Participants by providing 
an additional mechanism for Participants to provide and seek liquidity 
for large and complex orders. The Exchange believes that the nature of 
open outcry transactions lends itself better to larger-sized 
transactions than the liquidity that is generally available 
electronically and the proposed rules would encourage greater 
participation in such large trades. Therefore, the proposed rule 
changes will benefit the market as a whole by providing an additional 
venue for market participants to seek liquidity for large-sized and 
complex orders. Providing an additional venue for these orders will 
benefit investors, the national market system, Participants, and the 
Exchange's market by increasing competition for order flow and 
executions, and thereby spur product enhancements and lower prices. The 
Exchange believes that the proposal is designed to prevent fraudulent 
and manipulative acts and practices because all surveillance coverage 
currently performed by the Exchange will cover trading from the Trading 
Floor. Additionally, the Exchange will have surveillance coverage in 
place to monitor issues unique to the Trading Floor.
    The Exchange believes the proposed changes to Rule 100(a) to 
include definitions of Floor Participant and Trading Floor are 
consistent with the goals of the Act. Specifically, the proposed 
changes are designed to protect investors and the public interest by 
providing background and clarity in the Rulebook. Additionally, 
proposed Rule 100(b) will provide additional clarity in the Rulebook. 
Specifically, the definition for Presiding Exchange Officials provides 
Floor Participants with notice of who is responsible for monitoring and 
regulating the Trading Floor. The other sections of proposed

[[Page 23680]]

Rule 100(b) provide general background for Floor Participants in the 
beginning of the Rulebook that will aid in understanding the applicable 
rules throughout, which will protect investors and the public by making 
the Exchange's Rulebook simpler to understand. Additionally, the 
Exchange notes that the various sections of proposed Rule 100(b) are 
based on the rules of another exchange with an open-outcry floor.\222\
---------------------------------------------------------------------------

    \222\ See PHLX Rules 1000(e), 1000(f), 1000(g),1080.06, and CBOE 
Rule 6.74(a).
---------------------------------------------------------------------------

    The Exchange believes that the proposed Rule detailing the 
requirements for public outcry \223\ is reasonable and consistent with 
the Act. Specifically, the Exchange believes this proposal is designed 
to protect investors and public interest by making clear the 
requirements for open outcry. The Exchange believes that the default of 
a Floor Market Maker being ``out'' promotes just and equitable 
principles of trade by ensuring a Floor Market Maker is only allocated 
if he desires. Additionally, the Exchange believes that requiring a 
Floor Broker to give Floor Participants a reasonable amount of time to 
respond to an order will protect investors and the public interest by 
ensuring that there is an opportunity for robust interaction on the 
Trading Floor.
---------------------------------------------------------------------------

    \223\ See proposed Rule 100(b)(5).
---------------------------------------------------------------------------

Participant Eligibility and Registration
    The Exchange believes that the proposed registration requirements, 
including floor trading examinations, if required, for Floor 
Brokers,\224\ Floor Market Makers and registered representatives on the 
Trading Floor, are reasonable and further the objectives of the 
Act.\225\ Specifically, these examinations address industry and 
Exchange specific topics that establish the foundation for the 
regulatory and procedural knowledge necessary for individuals required 
to register as Floor Brokers or Floor Market Makers and for such 
individuals to appropriately register under the Exchange's Rules. 
Requiring these examinations will help promote consistency in 
examination requirements and uniformity across the markets. 
Additionally, the registration requirements for Floor Participants are 
reasonable because they will help the Exchange to determine if a 
registrant is qualified to be a Floor Broker or Floor Market Maker and 
therefore will protect investors and the public interest.
---------------------------------------------------------------------------

    \224\ Floor Brokers are required to complete a floor trading 
examination. See proposed Rules 2020(h) and 7550.
    \225\ See proposed Rules 2020(h) and (i).
---------------------------------------------------------------------------

    Similarly, the Exchange believes that prescribing appropriate 
registration requirements including floor trading examinations for all 
other Trading Floor personnel, including clerks, interns, stock 
execution clerks and other associated persons, are reasonable as well. 
Specifically, these examinations address industry and Exchange specific 
topics that establish the foundation for the regulatory and procedural 
knowledge necessary to appropriately register under the Exchange rules. 
The proposed registration requirements for associated persons are 
reasonable because they will help the Exchange to determine if a 
registrant is qualified to be on the Trading Floor and therefore will 
protect investors and the public interest. Additionally, the proposed 
Rules covering eligibility and registration are based on the rules of 
another exchange that has an open-outcry floor.\226\
---------------------------------------------------------------------------

    \226\ See PHLX Rule 620(a) and (b).
---------------------------------------------------------------------------

Trading on the Exchange Floor
    The Exchange believes that the proposed rules governing activity on 
the Trading Floor, including Trading Floor hours, opening the market, 
admittance, joint accounts, and dealings on the Trading Floor,\227\ are 
reasonable restrictions that are designed to further the objectives of 
the Act. Specifically, the proposed rules are designed to maintain 
order and structure on the Trading Floor and apply to all Floor 
Participants. Additionally, these rules are based on those of competing 
options exchanges that also have open-outcry floors.\228\
---------------------------------------------------------------------------

    \227\ See proposed Rules 7070(d), 7500, 7510, 7520, and 7650.
    \228\ See PHLX Rules 1017(c), 102, 104, 443, and 772.
---------------------------------------------------------------------------

    The Exchange believes the proposal to require each Options 
Participant that physically conducts business on the Trading Floor to 
procure and maintain liability insurance \229\ should assist in 
preventing unnecessary waste of Exchange resources, which can be easily 
diverted to defending litigation claims and responding to non-Exchange 
related litigation matters on behalf of its Participants. The proposal 
is meant to prevent the Exchange from diverting valued resources away 
from its main regulatory responsibilities and being consumed in 
litigation designed to siphon Exchange monies and staff. The Exchange 
notes the proposal to require liability insurance is based on the rules 
of another exchange.\230\
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    \229\ See proposed Rule 7230(f).
    \230\ See PHLX Rule 652(c)(2).
---------------------------------------------------------------------------

    The Exchange is proposing various rules related to Clerks on the 
Trading Floor \231\ that the Exchange believes are reasonable and 
further the objectives of the Act. Specifically, the proposal relates 
to restrictions and conduct of Clerks on the Trading Floor that are 
designed to maintain order on the Trading Floor. Additionally, the 
proposal will make clear the rights and responsibilities of Clerks on 
the Trading Floor. The Exchange notes the proposed Rule related to 
Clerks on the Trading Floor is based on the rule of another 
exchange.\232\
---------------------------------------------------------------------------

    \231\ See proposed Rule 7630.
    \232\ See PHLX Rule 1090.
---------------------------------------------------------------------------

    The Exchange believes the proposed Rule relating to disputes on the 
Trading Floor will provide clarity and direction for the resolution of 
such disputes.\233\ The proposed Rule will contribute to the 
maintenance of a fair and orderly market by clearly laying out the 
dispute resolution process. Additionally, by first allowing the 
interested Floor Participants an opportunity to settle the 
disagreement, the Exchange is providing a reasonable opportunity for 
the interested parties to reach an equitable agreement. The Exchange 
believes that allowing an Options Exchange Official to settle disputes 
is reasonable and is designed to promote just and equitable principles 
of trade by having an independent third party settle the dispute. The 
Exchange believes that the dispute resolution process is further 
strengthened by allowing Floor Participants the ability to appeal an 
Options Exchange Official's ruling. In addition, the Exchange believes 
that its proposal is consistent with Section 6(b) of the Act \234\ in 
general, and furthers the objective of Section 6(b)(4) of the Act \235\ 
in particular, in that it is an equitable allocation of reasonable fees 
and other charges among Exchange members. The Exchange believes that 
this proposal is equitable in that the appeal fee would apply to all 
Participants equally. The Exchange believes the appeal fee amount is 
reasonable as a similar fee exists on other option exchange with an 
open outcry trading floor.\236\ The addition of the appeal fee will 
help the Exchange offset costs associated with reviewing contested 
rulings by an Options Exchange Official.
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    \233\ See proposed Rule 7640.
    \234\ 15 U.S.C. 78f(b).
    \235\ 15 U.S.C. 78f(b)(4).
    \236\ See PHLX Rule 124(d)(iii).
---------------------------------------------------------------------------

    The Exchange believes it is reasonable to exclude Floor Market 
Makers and Floor Brokers who do not conduct business with the public 
from Rule 4180.\237\ Rule 4180 deals with requirements for Participants 
that are approved to transact business with the public; therefore the 
proposed Rule is

[[Page 23681]]

simply clarifying that Rule 4180 will not apply to Floor Market Makers 
and Floor Brokers who do not conduct business with the Public. The 
Exchange notes the proposed Rule is based on the rule of another 
exchange.\238\
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    \237\ See proposed Rule 4180(g).
    \238\ See PHLX Rule 705(f)(1)(B).
---------------------------------------------------------------------------

    The proposal outlining bids and offers made on the Trading Floor 
and the solicitation of quotations on the Trading Floor \239\ provides 
clarifying information to Floor Participants on how bidding and 
offering on the Trading Floor will work; therefore, the proposal is 
designed to protect investors and the public interest by making the 
proposed operation of the Trading Floor clear in the Exchange's rules. 
The proposal is based on the rules of another exchange.\240\
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    \239\ See proposed Rule 7040(d).
    \240\ See PHLX Rule 1033(a).
---------------------------------------------------------------------------

Floor Brokers
    The Exchange believes that the proposed rules applicable to Floor 
Brokers,\241\ including responsibilities and restrictions, are designed 
to promote just and equitable principles of trade, remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest. Specifically, the proposed rules will provide guidance and 
restrictions for Floor Brokers operating on the Trading Floor. The 
proposed registration requirements for Floor Brokers will protect 
investors and the public interest by ensuring that all Floor Brokers 
are registered with the Exchange and that the Exchange approved each 
Floor Broker before they were admitted to the Trading Floor.
---------------------------------------------------------------------------

    \241\ See proposed Rules 7540, 7550, 7570, 7580, and 7590.
---------------------------------------------------------------------------

    The proposed responsibilities for Floor Brokers \242\ are designed 
to further the goals of the Act. Specifically, the requirement that a 
Floor Broker use due diligence in handling an order and the requirement 
to ascertain that at least one Floor Market Maker is present when the 
order is announced on the Trading Floor, are designed to promote just 
and equitable principles of trade, and, in general to protect investors 
and the public interest by providing the opportunity for additional 
interaction and price improvement from any Floor Market Maker. The 
Exchange believes the various restrictions on Floor Brokers are 
reasonable and are in line with those on another exchange with an open-
outcry floor.\243\
---------------------------------------------------------------------------

    \242\ See proposed Rule 7580.
    \243\ See PHLX Rules 155, 1063, and 1065.
---------------------------------------------------------------------------

Executions and Priority
    The proposed rule change is consistent with Section 11(a) of the 
Act and the rules thereunder. The Commission has stated that it 
believes all electronic executions executed against interest on the BOX 
Book are consistent with the requirements of Section 11(a) of the Act.
    Under the proposed rule change, Participants will be prohibited 
from utilizing the Trading Floor to effect any transaction for covered 
accounts. Participants are subject to review with respect to such 
compliance.
    Under the proposed rules, no covered account transactions utilizing 
the Trading Floor may use the G Exemption. Participants may only rely 
upon other exceptions to Section 11(a)(1) of the Act when interacting 
with the Trading Floor or the BOX Book utilizing the Trading 
Floor.\244\ The proposed rule changes would not limit in any way the 
obligation of a BOX Participant, while acting as a Floor Broker or 
otherwise, to comply with Section 11(a) or the rules thereunder.\245\
---------------------------------------------------------------------------

    \244\ For example, other Sec.  11(a)(1) exemptions include, the 
``effect vs. execute'' exemption, the market maker exemption, and 
the error account exemption.
    \245\ A Floor Broker may utilize the Trading Floor to effect a 
transaction for a covered account only pursuant to proposed Rule 
7540 and for purposes of liquidating error positions.
---------------------------------------------------------------------------

    Notwithstanding proposed IM-7600-5, under Rule 11a2-2(T), the so-
called ``effect vs. execute'' rule, a Participant may effect 
transactions on the Trading Floor for its covered accounts by using 
another Participant, acting as a Floor Broker, provided that (i) the 
executing Floor Broker is not an associated person of the initiating 
Participant, (ii) the covered account order must be transmitted from 
off the Trading Floor, (iii) neither the initiating Participant nor any 
associated person of the initiating Participant participates in 
execution of the order after the covered account order has been 
transmitted for execution from off the Trading Floor (referred to below 
as the ``non-participation requirement''); and (iv) if the transaction 
is being effected for an account over which the initiating Participant 
or an associated person of that Participant exercises investment 
discretion, neither the initiating Participant nor any associated 
person may retain any compensation in connection with effecting the 
transaction unless express written consent to such retention has been 
obtained from the person or persons authorized to transact business for 
the managed account in the manner provided in the rule. Thus, a 
Participant (not acting in a market-making capacity) could submit an 
order for a covered account from off the Trading Floor to an 
unaffiliated Floor Broker for representation on the Trading Floor and 
use the effect versus execute exemption (assuming the other conditions 
of the rule are satisfied).\246\ A Participant, relying on the ``effect 
versus execute'' exemption, could not submit an order for a covered 
account to its ``house'' Floor Broker on the Trading Floor for 
execution. At no time following the submission of an order utilizing 
the Trading Floor will the submitting Participant or any associated 
person of such Participant acquire control or influence over the result 
or timing of the order's execution.
---------------------------------------------------------------------------

    \246\ Orders for covered accounts that rely on the ``effect 
versus execute'' exemption will be transmitted from a remote 
location directly to the Trading Floor by electronic means.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rules applicable to 
executions and priority \247\ are designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general to protect investors and the public interest. As explained 
above, executions from the Trading Floor will be consistent with 
options trade-through and priority rules and the Exchange's systems are 
designed to help ensure that an execution from the Trading Floor cannot 
occur in violation of those rules. Specifically, when a QOO Order is 
submitted to the Trading Host for execution, the Exchange's system will 
evaluate the current market conditions to ensure that the execution 
price is equal to or better than the NBBO. It is the Exchange's 
understanding that traditionally on trading floors when a Floor Broker 
executed an order in the trading crowd verbally, that order was deemed 
executed; when the Floor Broker then entered the execution price 
electronically to complete the processing of the trade, including trade 
reporting to the tape, markets can change such that the execution price 
was outside the NBBO or violated the priority of orders now resting on 
the electronic book of the exchange. By having the QOO Order execute 
when it is received by the Trading Host, the Exchange is providing a 
system that will prevent executions that appear to be at prices that 
are worse than the NBBO due to the time they are reported. 
Specifically, the Exchange's system will automatically enforce BOX Book

[[Page 23682]]

priority \248\ and trade-through provisions.
---------------------------------------------------------------------------

    \247\ See proposed Rules 7600 and 7610.
    \248\ Floor Brokers are responsible for complying with priority 
among Floor Participants on the Trading Floor.
---------------------------------------------------------------------------

    The Exchange further believes that protecting non-Public Customer 
interest on the BOX Book that is ranked ahead of Public Customer 
interest is consistent with just and equitable principles of trade 
because it maintains the Exchange's existing price/time priority rules 
by protecting interest that has time priority over Public Customer 
interest that has priority. The Exchange also notes that this proposed 
priority interaction with the BOX Book is the same as NYSE Arca.\249\ 
Additionally, the Exchange's proposed interaction with orders on the 
BOX Book actually provides additional opportunities for orders on the 
BOX Book to interact with trades on the Trading Floor as compared to 
other exchanges with open-outcry floors. Specifically, other exchanges 
with open-outcry floors only require floor trades to yield priority to 
Public Customer Orders on the electronic book.\250\
---------------------------------------------------------------------------

    \249\ See NYSE Arca Rules 6.47 and 6.75.
    \250\ See PHLX Rule 1014.05(c), CBOE Rule 6.45(a), and NYSE MKT 
Rule 963NY(a).
---------------------------------------------------------------------------

    The Exchange believes that the proposal to provide a Floor Broker 
with a guarantee for certain orders initiating from the Trading Floor 
\251\ is reasonable and is consistent with the Act. Specifically, the 
proposal will reward Floor Brokers who bring large orders to the 
Exchange by guaranteeing them the ability to cross a certain 
percentage. The Exchange notes that another options exchange provides a 
guarantee on their trading floor.\252\ Additionally, the Exchange 
currently provides a guarantee with respect to auction transactions 
executed on the Exchange.\253\
---------------------------------------------------------------------------

    \251\ See proposed Rule 7600(f).
    \252\ See PHLX Rule 1064.02.
    \253\ See Rule 7150 Price Improvement Period.
---------------------------------------------------------------------------

    The Exchange believes that the proposed priority provisions for 
Complex QOO Orders are reasonable because they align the Exchange's 
Rules with the rules of other exchanges with open-outcry floors.\254\ 
Specifically, the Exchange will allow Complex QOO Orders from the 
Trading Floor to execute without giving priority to equivalent bids 
(offers) in the individual series legs on the initiating side, provided 
at least one options leg betters the corresponding bid or offer on the 
BOX Book by at least one minimum trading increment as set forth in Rule 
7240(b)(1).\255\ BOX believes this is consistent with the Act because 
it is providing at least one leg with an improved price compared to 
bids or offers on the BOX Book. Additionally, the Exchange notes that 
these Complex Orders executed on trading floors can be large and 
complex and the proposed treatment of Complex Orders on the Trading 
Floor will increase the ability for Floor Brokers to execute these 
complex trades to the benefit of market participants. The Exchange 
believes that allowing Floor Brokers to disable the NBBO aspect of the 
Complex Order Filter when executing a Complex QOO Order is reasonable 
because other exchanges do not have NBBO protection for complex 
orders.\256\
---------------------------------------------------------------------------

    \254\ See NYSE Arca Rule 6.75(g).
    \255\ See proposed Rule 7600(c).
    \256\ See ISE Rule 722(b)(3).
---------------------------------------------------------------------------

    The Exchange believes that the Trading Host, including the BOG as a 
component of the Trading Host,\257\ will further the objectives and 
goals of the Act. Specifically, the ability of the Trading Host to 
provide an electronic audit trail will help prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, and remove impediments to and perfect the mechanisms of a 
free and open market and a national market system. All transactions on 
the Trading Floor must be submitted through the BOG for processing by 
the Trading Host, which will allow the Exchange to provide a complete 
and accurate audit trail and minimize the occurrences of disputes and 
regulatory violations. The Trading Host is designed to prohibit trade-
through violations by preventing an execution at a price worse than the 
NBBO.
---------------------------------------------------------------------------

    \257\ See proposed Rule 100(b)(2).
---------------------------------------------------------------------------

    The Exchange believes requiring that all transactions on the 
Trading Floor must be executed by the Trading Host will increase the 
speed and efficiency in which Floor Brokers handle orders, thereby 
making the Exchange's market more efficient, to the benefit of the 
investing public and consistent with promoting just and equitable 
principles of trade.
    The Exchange believes that the proposal to adopt a new order type 
\258\ for all executions originating on the Trading Floor is consistent 
with the Act. Specifically, as mentioned above, the new order type will 
help Floor Brokers initiating orders on the Trading Floor. The various 
elements of the QOO Order are designed to aid Floor Brokers in their 
duties on the Trading Floor. For example, by having the QOO Order 
execute when it is processed by the Trading Host, the Exchange is 
providing an accurate timestamp of when the order was executed. 
Additionally, the QOO Order is designed to ensure that all orders 
submitted by Floor Brokers are systematized before they are announced 
to the trading crowd.\259\ The Exchange believes that the features of 
the QOO Order are designed to promote just and equitable principles of 
trade, to remove impediments to and protect the mechanism of a free and 
open market and a national market system, and, in general to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \258\ See proposed Rule 7600.
    \259\ In order to execute a QOO Order from the Trading Floor, it 
must be sent from a Floor Broker's system to the BOG. This requires 
that the Floor Broker adequately systemized the QOO Order. The 
Exchange also notes that Floor Brokers will be subject to regulatory 
oversight by the Exchange to review whether Floor Brokers are 
properly systematizing orders.
---------------------------------------------------------------------------

    The Exchange believes that the proposed rules governing order 
allocation \260\ are reasonable and consistent with the Act. 
Specifically, the proposed rules relating to the allocation of orders 
align the Exchange's Rules with the rules of another options exchange 
with an open outcry trading floor.\261\ The Exchange believes the 
proposed rule change is designed to protect investors and the public 
interest by providing clarity and detail with regard to the allocation 
process on the Trading Floor. Additionally, the Exchange believes the 
proposed procedures a Floor Broker must follow when allocating an order 
are designed to promote just and equitable principles of trade by 
ensuring that priority on the Exchange is enforced.
---------------------------------------------------------------------------

    \260\ See proposed Rule 7600(d).
    \261\ See NYSE Arca Rules 6.47 and 6.75.
---------------------------------------------------------------------------

    The Exchange believes that the book sweep size in proposed Rule 
7600(h) is consistent with Section 6(b)(5) of the Act.\262\ In 
particular, the book sweep size promotes just and equitable principles 
of trade, removes impediments to and perfects the mechanism of a free 
and open market and a national market system and, in general protects 
investors and the public interest by increasing the interaction of the 
Trading Floor with the BOX Book, which will be beneficial to all market 
participants. Specifically, the Exchange believes that the book sweep 
functionality will enhance execution efficiency and regulatory 
oversight on the Trading Floor by making certain that a Floor Broker's 
order will first trade with all available Public Customer interest on 
the BOX Book and any non-Public Customer interest ranked ahead of such 
Public Customer interest at the execution price. The Exchange believes 
that without the book sweep size, the Exchange Act's goal of creating 
an

[[Page 23683]]

efficient market system will not be supported, as a Floor Broker may 
attempt to execute an order without first exhausting priority interest. 
Instead, the proposed book sweep size removes impediments to and 
perfects the mechanism of a free and open market and a national market 
system by providing an alternative that will increase the opportunity 
for orders on the Trading Floor to interact with interest on the BOX 
Book, which in turn has the potential to increase liquidity for all 
orders on the BOX Book. The Exchange notes that this approach is not 
entirely novel; as mentioned above, PHLX's FBMS contains a 
functionality that will help a Floor Broker clear PHLX's electronic 
book so a floor based order can execute.\263\ Specifically, if a Floor 
Broker on PHLX enters a two-sided order through the FBMS, and there is 
interest on the PHLX electronic book at a price that would prevent the 
Floor Broker's order from executing, the FBMS will provide the Floor 
Broker with the quantity of contracts on the electronic book that have 
priority and need to be satisfied before the Floor Broker's order can 
execute at the agreed upon price.\264\ If the Floor Broker wishes to 
still execute his order, he can cause a portion of the floor based 
order to trade against this priority interest on the electronic book, 
thereby clearing the interest and permitting the remainder of the Floor 
Broker's order to trade at the desired price. The PHLX FBMS 
functionality is optional, and a Floor Broker can decide not to trade 
against the electronic book and therefore not execute his two-sided 
order at the particular price. The Exchange believes that the Trading 
Floor book sweep size improves upon PHLX's FBMS functionality by either 
immediately executing or rejecting the order depending on the book 
sweep size provided and the level of priority interest on the BOX Book. 
The Exchange believes the immediate execute or reject feature will 
allow for more execution certainty and incentivize Floor Brokers on BOX 
to provide an adequate book sweep size if they want the order to be 
eligible for execution. The Exchange does not believe that the 
immediate execution or rejection will disadvantage Floor Brokers on BOX 
compared to PHLX because it will provide certainty to Floor Brokers. 
The Exchange believes that the proposed book sweep size will protect 
investors and the public interest generally by establishing more 
execution oversight. Specifically, the Exchange believes that the book 
sweep size will allow BOX to electronically link in a single audit 
trail the Floor Broker execution and any execution with interest on the 
BOX Book.
---------------------------------------------------------------------------

    \262\ 15 U.S.C. 78(f)(b)(5).
    \263\ See PHLX Rule 1063(e)(iv).
    \264\ See Securities Exchange Act Release No. 68960 (February 
20, 2013), 78 FR 13132 (February 26, 2013) (SR- Phlx-2013-09) at 
13134.
---------------------------------------------------------------------------

    The Exchange believes that the proposal outlining the resolution of 
uncompared trades \265\ will provide clarity and direction for Floor 
Participants when a disagreement arises from an uncompared Exchange 
options transaction that cannot be resolved by mutual agreement. The 
Exchange believes this proposal is designed to protect investors and 
public interest by making the proposed resolution of uncompared trades 
clear in the Exchange's rules. Further, the proposal is based on the 
rules of another exchange.\266\
---------------------------------------------------------------------------

    \265\ See proposed Rule 8530.
    \266\ See PHLX Rule 1039.
---------------------------------------------------------------------------

Communications and Equipment
    The Exchange believes the proposed Rule involving communications 
and equipment on the Trading Floor \267\ includes reasonable 
restrictions that are consistent with the requirements of the Act. 
Specifically, the proposed Rule will provide the Exchange with the 
ability to monitor equipment on the Trading Floor and therefore provide 
adequate oversight of the Trading Floor. Additionally, the proposal 
will allow the Exchange to limit use of a communication device when 
such device interferes with normal operation of the Exchange's own 
systems or facilities or with the Exchange's regulatory duties, is 
inconsistent with the public interest, the protection of investors or 
just and equitable principles of trade, or interferes with the 
obligations of a Participant to fulfill its duties under, or is used to 
facilitate any violation of the Act or rules thereunder, or Exchange 
rules. Additionally, the Exchange notes that the proposal is consistent 
with rules of other exchanges.\268\
---------------------------------------------------------------------------

    \267\ See proposed Rule 7660.
    \268\ See PHLX Rule 606 and CBOE Rule 6.23.
---------------------------------------------------------------------------

Market Makers
    The Exchange believes that the proposed Rules applicable to Floor 
Market Makers \269\ are reasonable and will foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities and will remove impediments to and perfect the mechanism of 
a free and open market and a national market system. The Exchange also 
believes the proposed changes enhance the Exchange's ability to fairly 
and efficiently regulate its Floor Market Makers by utilizing a 
consistent rule set of obligations and restrictions. The Exchange 
believes the proposed changes reflect similar Market Maker obligations 
and restrictions already in place on BOX's electronic exchange.\270\ 
The proposed changes simply align the existent obligations and 
restrictions of Market Makers with the use of a trading floor with 
certain exceptions. Specifically, instead of providing $5 bid/ask 
differentials as provided in Rule 8040(a)(7), the Exchange is proposing 
stricter bid/ask differentials. The Exchange believes that the proposed 
bid/ask differentials for Floor Market Makers are reasonable and will 
protect investors and the public interest by providing the opportunity 
for better execution prices on the Trading Floor when a Floor Market 
Maker is involved. Additionally, the Exchange believes that the 
proposed changes fall in line with similar trading floor rules at other 
exchanges.\271\
---------------------------------------------------------------------------

    \269\ See proposed Rules 8500 and 8510.
    \270\ See BOX Rules 8000, 8030, 8040, and 8050.
    \271\ See PHLX Rules 1020 and 1014.
---------------------------------------------------------------------------

    The Exchange believes that the proposed continuous open outcry 
quoting requirement for Floor Market Makers in proposed Rule 8510(c)(2) 
is consistent with Section 6(b)(5) of the Act. In particular, the 
continuous quoting requirement is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general to protect the investors and the public interest. 
Specifically, the Exchange believes that the continuous open outcry 
quoting requirement for Market Makers will benefit investors, the 
national market system, Participants, and the Exchange by ensuring that 
Floor Market Makers provide liquidity to the Trading Floor to the 
benefit of market participants. Lastly, the Exchange believes that the 
proposed rule is non-discriminatory as it will apply to all Floor 
Market Makers.

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

    The Exchange does not believe that the proposed rule changes will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange notes that other 
exchanges currently offer open-outcry floors. The Exchange believes 
that the proposed rules will allow the Exchange to compete with these 
other exchanges. Additionally, while the proposed rule changes would 
permit BOX to operate a Trading Floor, the Exchange is not

[[Page 23684]]

requiring that Participants register and have a presence on the Trading 
Floor. Therefore, the proposed rule changes do not impose a burden on 
intra-market competition.
    Overall, the proposal is pro-competitive for several reasons. In 
particular, by helping Floor Brokers at the Exchange compete for 
executions against floor brokers at other exchanges, it also helps them 
to be more efficient and provide a better audit trail of their 
executions on the Trading Floor. This, in turn, helps the Exchange 
compete against other exchanges in a deeply competitive landscape. The 
Exchange believes its proposed unique features for open-outcry trading 
will provide value to Floor Participants, which in turn, will help the 
Exchange compete.\272\
---------------------------------------------------------------------------

    \272\ Unique features include proposed Rules 7600(h) and 
100(b)(5).
---------------------------------------------------------------------------

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

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

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 2, including whether the proposed 
rule change is consistent with the Act. Comments may be submitted by 
any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BOX-2016-48 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BOX-2016-48. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BOX-2016-48 and should be 
submitted on or before June 13, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\273\
---------------------------------------------------------------------------

    \273\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-10588 Filed 5-22-17; 8:45 am]
 BILLING CODE 8011-01-P