Self-Regulatory Organizations; BOX Options Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Rules for an Open-Outcry Trading Floor, 37144-37154 [2017-16638]

Download as PDF 37144 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81292; File No. SR–BOX– 2016–48] Electronic Comments Self-Regulatory Organizations; BOX Options Exchange LLC; Order Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Adopt Rules for an Open-Outcry Trading Floor Paper Comments I. Introduction • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. asabaliauskas on DSKBBXCHB2PROD with NOTICES • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NSCC–2017–804 on the subject line. On November 16, 2016, BOX Options Exchange LLC (the ‘‘Exchange’’ or ‘‘BOX’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to 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 on the proposed rule change.4 On January 10, 2017, the Commission extended the time period within which to approve, 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 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 Order Instituting Proceedings, the Commission received All submissions should refer to File Number SR–NSCC–2017–804. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Advance Notice that are filed with the Commission, and all written communications relating to the Advance Notice 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 NSCC and on DTCC’s Web site (https://dtcc.com/legal/sec-rulefilings.aspx). 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–NSCC– 2017–804 and should be submitted on or before August 23, 2017. By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–16631 Filed 8–7–17; 8:45 am] BILLING CODE 8011–01–P VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 August 2, 2017. 1 15 U.S.C. 78s(b)(1). 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 (‘‘CBOE Letter I’’); Steve Crutchfield, Head of Market Structure, CTC Trading Group, LLC (‘‘CTC Trading’’), dated December 31, 2016 (‘‘CTC Letter I’’); and Joan C. Conley, Senior Vice President and Corporate Secretary, The Nasdaq Stock Market LLC (‘‘Nasdaq’’), dated December 22, 2016 (‘‘Nasdaq Letter I’’). 5 See Securities Exchange Act Release No. 79768, 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 (‘‘BOX Response Letter I’’), and Amendment No. 1, dated February 21, 2017. 7 See Securities Exchange Act Release No. 80134, 82 FR 12864 (March 7, 2017) (‘‘Order Instituting Proceedings’’). 2 17 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 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 On May 18, 2016, the Commission extended the time period for Commission action on the proceedings to determine whether to disapprove the proposed rule change to August 2, 2017.10 Amendment No. 2 was published for comment in the Federal Register on May 23, 2017.11 On May 25, 2017, the Commission received a second response letter from the Exchange.12 The Commission received two comment letters in response to the publication of Amendment No. 2.13 On July 14, 2017, the Commission received a third response letter from the Exchange.14 This order approves the proposed rule change, as modified by Amendment Nos. 1 and 2. II. Description of the Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 The Exchange proposes to adopt rules that would allow for open-outcry trading on BOX’s physical trading floor, located in Chicago (‘‘Trading Floor’’) as described below.15 A. BOX Floor Procedure The Exchange proposes to allow two categories of market participants (‘‘Floor Participants’’) 16 to transact business on the Trading Floor.17 One of these categories of market participants 8 See letters to Brent J. Fields, Secretary, Commission, from Angelo Evangelou, Deputy General Counsel, CBOE, dated April 21, 2017 (‘‘CBOE Letter II’’); Steve Crutchfield, Head of Market Structure, CTC Trading, dated April 13, 2017 (‘‘CTC Letter II’’); John Kinahan, CEO, Group One Trading, LP, dated April 11, 2017 (‘‘Group One Letter’’); Elizabeth King, General Counsel and Corporate Secretary, New York Stock Exchange, dated March 28, 2017 (‘‘NYSE Letter’’); and Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, dated March 27, 2017 (‘‘Nasdaq Letter II’’). 9 See Amendment No. 2, dated May 17, 2017. 10 See Securities Exchange Act Release No. 80719, 82 FR 23935 (May 24, 2017). 11 See Securities Exchange Act Release No. 80720 (May 18, 2017), 82 FR 23657 (‘‘Notice of Amendment No. 2’’). 12 See letter to Brent J. Fields, Secretary, Commission, from Lisa J. Fall, President, Exchange, received May 25, 2017 (‘‘BOX Response Letter II’’). 13 See letters to Brent J. Fields, Secretary, Commission, from Steve Crutchfield, Head of Market Structure, CTC Trading, dated July 10, 2017 (‘‘CTC Letter III’’); and Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, dated July 6, 2017 (‘‘Nasdaq Letter III’’). 14 See letter to Brent J. Fields, Secretary, Commission, from Lisa J. Fall, President, Exchange, received July 14, 2017 (‘‘BOX Response Letter III’’). 15 See proposed BOX Rule 100(a)(67). 16 See proposed BOX Rule 100(a)(26). 17 See proposed BOX Rule 100(a)(67). E:\FR\FM\08AUN1.SGM 08AUN1 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices consists of individuals (‘‘Floor Broker’’) 18 who will be registered as such with the Exchange and who will be permitted to accept and handle options orders, including representing such orders on the Trading Floor and entering those orders using the BOX Order Gateway (‘‘BOG’’) 19 for execution in the Exchange’s automated trading system (the ‘‘Trading Host’’).20 The second category of market participants consists of Options Participants of the Exchange located on the Trading Floor who receive permission from the Exchange to trade in options for their own account (‘‘Floor Market Makers’’).21 Contemporaneously upon receipt of an order and prior to the announcement of an order in the trading crowd, a Floor Broker wishing to execute an order will be required to record certain information about the order in the Floor Broker’s order entry mechanism.22 Specifically, the Floor Broker will be required to record: (i) The order type 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 multileg order, net debit or credit, if applicable; (vii) whether the transaction is to open or close a position; and (viii) the Options Clearing Corporation clearing number of the broker-dealer that submitted the order.23 The Floor Broker will then be required to ascertain that at least one Floor Market Maker is present in the Crowd Area 24 and announce the order to the trading crowd, in a process called open outcry.25 During open outcry, Floor Market Makers physically located in the Crowd Area will be permitted to express interest in trading against the initiating order.26 To do so, a Floor Market Maker will be required to verbalize that he is ‘‘in’’ after a Floor Broker announces an order, even if a Floor Market Maker had previously 18 See proposed BOX Rule 7540. proposed BOX Rules 100(b)(2) and 7580(e). BOX Rule 100(a)(66). 21 See proposed BOX Rule 8510(b). 22 See proposed BOX Rule 7580(e). 23 See proposed BOX Rule 7580(e)(1). 24 See proposed BOX Rules 100(a)(67) and 7580(a). 25 See proposed BOX Rules 7600(b) and 7580(e)(2). This will be required whether the Floor Broker is representing a single-sided order and is soliciting contra-side interest, or the Floor Broker has sufficient interest to match against the order already. See proposed BOX Rule 7580(e)(2). 26 See proposed BOX Rule IM–8510–2(b). It will 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. See proposed BOX Rule IM– 7580–4. 19 See asabaliauskas on DSKBBXCHB2PROD with NOTICES 20 See VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 provided a valid quote prior to the Floor Broker’s announcement of the order.27 A Floor Market Maker will be considered ‘‘out’’ on a bid or offer if he does not affirmatively respond to the Floor Broker who announces the order, provided that the Floor Broker will be required to give a Floor Participant a reasonable amount of time within which to respond.28 Under the proposal, after an order is announced to the trading crowd, the Floor Broker will be permitted to submit a Qualified Open Outcry Order (‘‘QOO Order’’) through the BOG to the Trading Host for execution. QOO Orders are two-sided orders 29 comprised of an ‘‘initiating side’’ (the ‘‘agency order’’), which must be filled in its entirety, and a ‘‘contra-side,’’ which must guarantee the full size of the agency order.30 The order announced by the Floor Broker on the Trading Floor will be considered the agency order. At the time of the announcement, the Floor Broker may be representing only that agency order (i.e., a single-sided or unmatched order) on the Trading Floor in order to seek a contra-side, or the Floor Broker may already have a contra-side that guarantees the full size of that agency order.31 If the Floor Broker does not have a contra-side and is therefore soliciting interest from the trading crowd when the initiating side is announced or to the extent the trading crowd provides a better price, the contra-side of the QOO Order will be the solicited interest from the trading crowd; 32 otherwise, the Floor Broker interest will be the contra-side of the QOO Order, subject to the allocation procedure as described below.33 For a non-complex QOO Order, the execution price must be equal to or 27 A Floor Broker will be permitted to request a market prior to announcing an order on the Trading Floor (‘‘Market Probe’’). When a Floor Broker announces a Market Probe, any responses from Floor Participants will be public to all Floor Participants. When a Floor Broker conducts a Market Probe, he must probe all Floor Participants. See Notice of Amendment No. 2, supra note 11, at 23662 n.75. 28 See proposed BOX Rule 100(b)(5). A ‘‘reasonable amount of time’’ will be interpreted on a case-by-case basis by an Options Exchange Official, based on the current market conditions and trading activity on the Trading Floor. See id. 29 A Floor Participant who wishes to place a limit order on the BOX Book will be required to submit such order electronically. See proposed BOX Rules IM–7580–1 and IM–8510–8. The BOX Book is defined as the electronic book of orders on each single option series maintained by the Trading Host. See BOX Rule 100(a)(10). 30 See proposed BOX Rule 7600(a)(1). 31 See proposed BOX Rule IM–7600–4. If a Floor Broker is holding two agency orders, he will choose which order will be the initiating side. See proposed BOX Rule 7580(e)(2). 32 See proposed BOX Rule 7600(a)(1). 33 See id. PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 37145 better than the National Best Bid or Offer (‘‘NBBO’’).34 A 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.35 Under the proposed rules, an Options Exchange Official 36 will be required to certify that the Floor Broker adequately announced the QOO Order to the trading crowd.37 Once a QOO Order is submitted through the BOG, it would be immediately processed by the Trading Host.38 The order would be executed based on market conditions at the time that the order is received by the Trading Host and in accordance with the Exchange’s rules.39 If there is an ongoing auction in the option series when the QOO Order is received by the Trading Host the QOO Order will be rejected.40 Under the proposal, the highest bid (lowest offer) in the trading crowd will have priority.41 If there are two or more bids (offers) for the same options contract that represent the highest bid (lowest offer), priority will be afforded to such bids (offers) in the sequence in which they are made.42 If a Floor Broker’s bid or offer is accepted by more than one Floor Participant, the Floor Broker will be required to designate the priority order of the Floor Participants based on when each Floor Participant responds.43 Starting with the Floor Participant with first priority, each Floor Participant will be entitled to buy or sell as many contracts as the Floor Broker may have available to trade until the Floor Broker’s order has been filled 34 See proposed BOX Rule 7600(c). proposed BOX Rule 7600(c). 36 See proposed BOX Rule 100(b)(6). The QOO Order will not be deemed executed until it is processed by the Trading Host. See proposed BOX Rule 7600(c). 37 See proposed BOX Rule 7600(b). 38 See proposed BOX Rule 100(b)(2). Under the proposal, orders on the Trading Floor will not route to an away exchange and may not be considered in the determination of the opening price or participate in the opening trade. See proposed BOX Rules 7070(d) and 7600(e). 39 See proposed BOX Rule 7600(a). Once a Floor Broker submits a QOO Order to the BOG, neither the submitting Floor Broker, nor anyone else, will be allowed to alter the terms of the QOO Order. See proposed BOX Rule 7600(c). 40 See proposed BOX Rule 7600(a)(5). A Complex QOO Order 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. See id. 41 See proposed BOX Rule 7610(a) and (b). 42 See id. 43 See proposed BOX Rule 7610(d)(2). 35 See E:\FR\FM\08AUN1.SGM 08AUN1 37146 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES entirely.44 However, if bids or offers are made by more than one Floor Participant 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.45 If Floor Participants provide a collective response to a Floor Broker’s request for a market in order to fill a large order, the order will be allocated pro rata pursuant to proposed BOX Rule 7610(d)(5).46 The Floor Broker will be responsible for determining the sequence in which bids or offers are vocalized on the Trading Floor in response to the Floor Broker’s bid, offer, or call for a market.47 The following BOX Book interest will have priority over the contra-side of the QOO Order: (i) Any equal or better priced bids or offers on the BOX Book that were submitted on behalf of persons who are not brokers or dealers in securities (‘‘Public Customers’’); 48 (ii) 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 (iii) any non-Public Customer bids or offers on the BOX Book that are priced better than the proposed execution price.49 When submitting the QOO Order to the BOG, a Floor Broker may, but will not be 44 See id. For Complex QOO Orders, Floor Participants will not be permitted to give a competing bid or offer for one component of the order to prevent the Complex QOO Order from being executed. See proposed BOX Rule IM–7600– 1(d). 45 See proposed BOX Rule 7610(d)(4). Each Floor Participant on parity will receive an equal number of contracts, to the extent mathematically possible. 46 Specifically, proposed BOX Rule 7610(d)(5) states that if the size of the trading crowd’s market, 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. However, if the size of the trading crowd’s market exceeds the size of the order to be filled, that order will be allocated on a size pro rata basis, with the Floor Participants in the trading crowd each receiving, to the extent practicable, the percentage of the order that is the ratio of the size of their respective bids or offers to the total size of all bids or offers. 47 See proposed BOX Rule 7610(d)(1). Any disputes regarding a Floor Broker’s determination of time priority sequence will be resolved by an Options Exchange Official. See id. An Options Exchange Official may nullify a transaction or adjust its terms if the Official determines the transaction to have been in violation of Exchange’s Rules. See id. 48 See BOX Rule 100(a)(51). 49 See proposed BOX Rule 7600(c). For Complex QOO Orders, the following Complex Order Book interest will have priority: (i) Any equal or better priced Public Customer Complex bids or offers on the Complex Order Book 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 (ii) any non-Public Customer bids or offers on the Complex Order Book that are priced better than the proposed execution price. See id. VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 required to, provide a ‘‘book sweep size.’’ 50 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 orders and quotes on the BOX Book that have priority pursuant to proposed BOX Rule 7600(c).51 If the number of contracts on the BOX Book that have priority over the contra-side of the QOO Order is greater than the book sweep size set by the Floor Broker, then the QOO Order will be rejected.52 The proposed rule change also describes the allocation process for QOO Orders.53 First, under the proposal, the initiating side of the QOO Order will match against any bids or offers on the BOX Book that have priority as outlined above, provided that an adequate book sweep size is provided by the Floor Broker.54 The remaining balance, if any, will be matched against the contra-side of the QOO Order, regardless of whether the Floor Broker is ultimately entitled to receive an allocation.55 If the QOO Order is of a certain size, which size will be determined by the Exchange on an option by option basis (at a size that may not be less than 500 contracts), the Floor Broker will be 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, 40% of the remaining contracts in the order.56 Next, Floor Participants that respond with interest when the executing Floor Broker announces the QOO Order to the trading crowd will be allocated.57 If interest remains, the remaining quantity of the initiating side of the QOO Order will be allocated to the executing Floor Broker.58 If the QOO Order executes, the executing Floor Broker will be responsible for providing 50 See proposed BOX Rule 7600(h). proposed BOX Rule 7600(h). Proposed BOX Rule IM–7600–3 states that it will 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. 52 See proposed BOX Rule 7600(h). 53 See also Notice of Amendment No. 2, supra note 11, at 23668–74 (providing a detailed description and examples of how orders will be allocated). 54 See proposed BOX Rule 7600(d)(1) and (2). 55 See proposed BOX Rule 7600(d)(3). 56 See proposed BOX Rule 7600(f). See also proposed BOX Rule 7600(d)(3)(i). In determining whether a Complex QOO Order satisfies the eligible order size requirement, the Complex QOO Order must contain one leg which, standing alone, is for the eligible size or greater. See proposed BOX Rule IM–7600–1(d). 57 See proposed BOX Rule 7600(d)(3)(ii). 58 See proposed BOX Rule 7600(d)(3)(iii). 51 See PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 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.59 Floor Brokers also will be responsible for handling all orders in accordance with the Exchange’s priority and tradethrough rules.60 The Floor Participants who established the market will 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.61 B. Additional Floor Broker Obligations A Floor Broker handling an order will be required to 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.62 All orders provided to Floor Brokers will be considered Not Held Orders 63 unless otherwise specified by the Floor Broker’s client.64 However, the proposed rule change would prohibit Floor Brokers from engaging in certain discretionary transactions.65 An Options Floor Broker 59 See proposed BOX Rule 7600(d)(4). The executing Floor Broker must provide the correct allocations to an Options Exchange Official or his or her designee, in writing, without unreasonable delay. See id. 60 See proposed BOX Rule 7600. Proposed BOX Rule 8510(h)(4) provides that it will be considered conduct inconsistent with just and equitable principles of trade for: (i) A Floor Broker to allocate orders other than in accordance with the Exchange’s priority rules applicable to floor trades; (ii) a Floor Participant to enter into any agreement with another Floor Participant concerning allocation of trades; or (iii) a Floor Participant to harass, intimidate or coerce another Floor Participant to make or refrain from making any complaint or appeal. 61 See proposed BOX Rule IM–7600–1(c). It will be the responsibility of the Floor Participant that established the market to alert the Floor Broker of the fact that the Floor Participant has priority when an order is announced. See id. 62 See proposed BOX Rule 7570. 63 See proposed BOX Rule 7600(g). A Not Held Order gives a Floor Broker discretion as to the price or time at which such order will be executed. See id. 64 See proposed BOX Rule IM–7580–3. 65 See proposed BOX Rules 7590, IM–7590–1 and IM–7590–2. Proposed BOX Rule 7590 will prohibit Floor Brokers from executing or causing to be executed any order or orders for which the 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. Proposed BOX Rule IM–7590–1 will prohibit the holding or acceptance of certain orders that could be interpreted as allowing the E:\FR\FM\08AUN1.SGM 08AUN1 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices handling a contingency order that is dependent upon the price of the underlying security will 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.66 Floor Brokers will be required to make reasonable efforts to ascertain whether each order entrusted to them is for the account of a Public Customer or a broker-dealer.67 For broker-dealer orders, a Floor Broker must advise the trading crowd of the fact that it is an order for the account of a broker-dealer prior to open outcry and prior to submitting the order for execution, as well as note such fact in the Floor Broker’s system.68 Additionally, a Floor Broker will be required to inform the trading crowd when he is representing an order for a Market Maker and will be required to comply with proposed BOX Rules IM–8510–6 and IM–8510–9.69 For Public Customer orders, a Floor Broker must disclose all securities that are components of the Public Customer order which is subject to crossing before requesting bids and offers for the execution of all components of the order.70 asabaliauskas on DSKBBXCHB2PROD with NOTICES C. Floor Market Makers Proposed BOX Rule 8500(a) will require a Floor Market Maker to register as a Market Maker with the Exchange, and such registration could be revoked or suspended at any time. The proposed rules will require Floor Market Maker transactions to constitute a course of dealings reasonably calculated to contribute to the maintenance of a fair and orderly market.71 Additionally, a Floor Market Maker will be prohibited Floor Broker discretion with respect to whether to purchase or sell options. Proposed BOX Rule IM– 7590–2 will prohibit Floor Brokers from exercising any discretion with respect to the order of an options market maker registered on any exchange. 66 See proposed BOX Rule 7580(b). 67 See proposed BOX Rule IM–7580–2. 68 See proposed BOX Rule IM–7580–2. 69 See proposed BOX Rule 7580(d). Proposed BOX Rule 8510–6 will allow the Exchange to temporarily limit the number of Floor Market Makers in the trading crowd who are establishing or increasing a position when the interests of a fair and orderly market require such limitation. Proposed BOX Rule 8510–9 will prohibit 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 that price are filled. 70 See proposed BOX Rule IM–7600–1(a). A Floor Broker crossing a Public Customer order with an order that is not a Public Customer order, when providing for a reasonable opportunity for the trading crowd to participate in the transaction, will be required to disclose the Public Customer order that is subject to crossing. See proposed BOX Rule IM–7600–1(e). 71 See proposed BOX Rule 8510(a). VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 from effecting 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.72 A Floor Market Maker will have certain affirmative obligations in classes of options contracts to which the Floor Market Maker is assigned.73 Floor Market Makers will be subject to a Continuous Open Outcry Quoting Obligation, which will require Floor Market Makers to provide a two-sided market complying with the quote spread parameter requirements contained in proposed Rule 8510(d)(1), in response to any request for a quote by a Floor Broker or Options Exchange Official.74 Floor Market Maker quotations must be in a size of at least 10 contracts.75 Additionally, Floor Market Makers will be subject to a maximum option price change, and will not be permitted to bid more than $1 lower and/or offer more than $1 higher than the last preceding transaction price for a particular option contract.76 The proposed rule change imposes other limitations on Floor Market Makers. Specifically, subject to certain exceptions, no Floor Market Maker will be allowed to initiate an Exchange options 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 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.77 The proposed rule change also describes what Floor Market Maker orders will be considered ‘‘on the Floor’’ and which Floor Market Maker orders 72 See proposed BOX Rule 8500(c). proposed BOX Rule 8510(d). Proposed BOX Rule 8610(e) describes the obligations of a Floor Market Maker with respect to classes of options to which the Floor Market Maker is not appointed. The obligations of a Floor Market Maker with respect to those classes of options to which he is assigned will take precedence over his other activities. See proposed BOX Rule IM–8510–1. 74 See proposed BOX Rule 8510(c)(2). Quotations in open outcry may not be made with $5 bid/ask differentials provided in BOX Rule 8040(a)(7). See proposed BOX Rule 8510(d)(1). 75 See proposed BOX Rule 8510(c)(2). 76 See proposed BOX Rule 8510(d)(2). This standard will 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 id. 77 See proposed BOX Rule 8510(f) and (g). 73 See PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 37147 will be subject to certain restrictions of the proposed rule change.78 D. Options Exchange Officials and Supervision of the Trading Floor Under the proposed rule change, the President of the Exchange and his or her designated staff will 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, in addition to establishing 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 will 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.79 The proposed rule change provides for the designation of Options Exchange Officials. Specifically, any Exchange employee or officer may be designated as an Options Exchange Official and will have the ability to recommend and enforce rules and regulations relating to trading access, order, decorum, health, safety and welfare on the Exchange.80 An Options Exchange Official will be required to, among other things, certify that Floor Brokers adequately announce QOO Orders to the trading crowd,81 resolve disputes regarding a Floor Broker’s determination of time priority sequence,82 and properly record the allocation of the initiating side of a QOO Order as provided by a Floor Broker.83 Options Exchange Officials will also be 78 See proposed BOX Rules IM–8510–3(b), IM– 8510–4 and IM–8510–5. 79 See proposed BOX Rule 100(b)(1). The Exchange states that it will submit a separate filing to the Commission to amend the Exchange’s Minor Rule Violation Plan in BOX Rule 12140 to cover minor rule violations on the Trading Floor. The Exchange represents that it will not commence operation of the Trading Floor until the Exchange’s Minor Rule Violation Plan has been amended to include violations which may occur on the Trading Floor. 80 See proposed BOX Rule 100(b)(6). 81 See proposed BOX Rule 7600(b). 82 See proposed BOX Rule 7610(d)(1). 83 See proposed BOX Rule 7600(d)(4). E:\FR\FM\08AUN1.SGM 08AUN1 37148 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices allowed to temporarily limit the number of Floor Market Makers in the trading crowd who are establishing or increasing a position when the interests of a fair and orderly market are served by such limitation,84 as well as call upon a Floor Market Maker to make a market.85 In addition, disputes occurring on and relating to the Trading Floor, if not settled by agreement between the interested Floor Participants, will be settled by an Options Exchange Official.86 Options Exchange Officials will have the authority to direct the execution of an order, adjust the transaction terms or Participants to an executed order, or nullify a transaction if the Options Exchange Official determines the transaction to have been in violation of Exchange Rules.87 All Options Exchange Official rulings are effective immediately and failure to comply with such a ruling may result in an additional violation.88 All Options Exchange Official rulings are reviewable by the Chief Regulatory Officer or his or her designee, and the proposed rule change provides procedures regarding review of rulings by Options Exchange Officials.89 E. Clerks The Exchange will permit Clerks— defined as any registered on-floor persons employed by or associated with a Floor Broker or Floor Market Maker and who are not eligible to effect transactions on the Trading Floor as a Floor Market Maker or Floor Broker—on the Trading Floor.90 Proposed Rule 7630 sets forth identification requirements, registration requirements, and provisions relating to conduct on the Trading Floor with respect to Clerks.91 A Floor Broker Clerk will be permitted to enter an order under the direction of a Floor Broker by way of any order asabaliauskas on DSKBBXCHB2PROD with NOTICES 84 See proposed BOX Rule IM–8510–6. 85 See proposed BOX Rule 8510(d). See also proposed BOX Rule 7610(d)(3). 86 See proposed BOX Rule 7640(a). The Exchange will be permitted to determine that an Options Exchange Official is ineligible to participate in a particular ruling where it appears such Options Exchange Official has a conflict of interest. See proposed BOX Rule IM–7640–1. 87 See proposed BOX Rule 7640(b). 88 See proposed BOX Rule 7640(c). 89 See proposed BOX Rule 7640(e). 90 See proposed BOX Rule 7630(a). 91 See proposed BOX Rule 7630. Among other things, proposed BOX Rule 7630 will require Clerks to display prominently at all time badge(s) supplied to them by the Exchange while on the Trading Floor and specifies that Clerks will be primarily located at a workstation assigned to his employer unless the Clerk is (i) entering or leaving the Trading Floor; (ii) transmitting, correcting, or checking the status of an order or reporting or correcting an executed trade; or (iii) supervising other Clerks. See id. VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 handling device.92 A Floor Market Maker Clerk will be 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, and such bids and offers are binding as if made by the Floor Market Maker employer.93 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 a ‘‘Floor Employee’’ under ‘‘BOX’’ on Form U4.94 F. Communications and Equipment The Exchange proposes BOX Rule 7660 to govern communications and equipment on the Trading Floor, including registration requirements, restrictions on use, capacity and functionality, recordkeeping requirements and exchange liability. Among other things, the proposed rule will allow Floor Market Makers to use their own cellular and cordless phones to place calls to any person at any location (whether on or off the Trading Floor) and allow Floor Brokers to use any communication device on the Trading Floor and in the Crowd Area to receive orders, provided that the Exchange’s audit trail and record retention requirements are satisfied.95 In addition, the Exchange represents that it has established a Communications Devices policy and violations of this policy may result in disciplinary action by the Exchange.96 Proposed BOX Rule 7660 and any relevant Exchange policy are intended to apply to all communication and other electronic devices on the Trading Floor, including, but not limited to, wireless, wired, tethered, voice, and data.97 G. Other Changes The Exchange’s proposal includes several other provisions relating to the proposed Trading Floor, including Trading Floor hours; 98 Trading Floor admittance; 99 the term ‘‘on the Floor,’’ which means the Trading Floor, the rooms, lobbies and other premises immediately adjacent thereto made available by the Exchange for use by Floor Participants generally; other 92 See proposed BOX Rule 7630(e). proposed BOX Rule 7630(f)(2). 94 See proposed BOX Rule 2020(i). 95 See proposed BOX Rule 7660(h) and (i). 96 See proposed BOX Rule IM–7660–1. 97 See proposed BOX Rule IM–7660–2. 98 See proposed BOX Rule 7500. 99 See proposed BOX Rules 7510 and 7520. 93 See PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 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;’’ 100 and the location of Floor Participants on the Trading Floor.101 The proposal also includes provisions relating generally to Floor Participants, including the registration of Floor Participants; 102 excepting Floor Participants who do not conduct business with the public from brokers’ blanket bond requirements; 103 requiring Floor Participants to procure and maintain liability insurance; 104 generally prohibiting trading for joint accounts without the prior approval of the exchange; 105 prohibiting Floor Participants from relying on an exemption under Section 11(a)(1)(G) of the Act; 106 and procedures governing the resolution of uncompared trades between Floor Participants.107 To accommodate new definitions relevant to the proposed Trading Floor, the Exchange is also renumbering certain subparts of Rule 100, Definitions, and making corresponding changes to update cross-references to such definitions where appropriate.108 H. Trading Floor Data The Exchange represents that it will provide the Commission with data related to activity on the Trading Floor.109 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.110 Firmspecific information will be provided to the Commission on a confidential basis each quarter and non-firm specific information will be made available to the public quarterly on the Exchange’s Web site.111 III. Discussion and Commission Findings After careful review and consideration of the comments received, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with the 100 See proposed BOX Rule IM–8510–3(a). proposed BOX Rule IM–8510–7. 102 See BOX Rule 2020(h). 103 See proposed BOX Rule 4180(g). 104 See proposed BOX Rule 7230(f). 105 See proposed BOX Rule 7650. 106 See proposed BOX Rule IM–7600–5. 107 See proposed BOX Rule 8530(a). 108 See, e.g., proposed BOX Rules 100, 7130, 7150, 7245. 109 See Notice of Amendment No. 2, supra note 11, at 23679. 110 See id. 111 See id. 101 See E:\FR\FM\08AUN1.SGM 08AUN1 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.112 In particular, the Commission finds that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with Sections 6(b)(1) and 6(b)(5) of the Act.113 Section 6(b)(1) of the Act 114 requires an exchange to be so organized and have the capacity to be able to carry out the purposes of the Act and to comply, and to enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange. Section 6(b)(5) of the Act 115 requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and not be designed to permit unfair discrimination between customers, issuers, brokers or dealers. As previously noted, the Commission received three comment letters on the initial proposed rule change, and one response letter from BOX.116 Subsequently, the Commission received five comment letters on the Order Instituting Proceedings and the proposed rule change as modified by Amendment No. 1, as well as a second response letter from BOX. Of these five comment letters, two urged disapproval of the proposed rule change,117 while the remaining three requested clarity or more specificity on various aspects of the proposal.118 Finally, in response to the publication of Amendment No. 2, two prior commenters submitted additional letters and BOX submitted an 112 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 113 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5). 114 15 U.S.C. 78f(b)(1). 115 15 U.S.C. 78f(b)(5). 116 These comments, as well as BOX’s initial response, are described in detail in the Order Instituting Proceedings. See Order Instituting Proceedings, supra note 7. 117 See CBOE Letter II and CTC Letter II, supra note 8. 118 See Group One Letter, Nasdaq Letter II, and NYSE Letter, supra note 8. VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 additional response letter.119 One of these commenters raised concerns with several aspects of the proposal for which it requested further consideration,120 while the other commenter urged disapproval of the proposed rule change, as amended.121 A. BOX Floor Participation 1. Floor Market Maker Presence Requirement Four commenters expressed concern that BOX’s initial proposal would allow a Floor Broker to execute trades on the Trading Floor when no Floor Market Makers are present.122 One commenter argued that options exchange trading floors grew from crowded equities or futures floors and therefore were certain to have robust and active market maker populations.123 The commenter further stated that the lack of rules to ensure robust market maker participation on the proposed Trading Floor would provide a way for internalizers to avoid exposure to market makers who might otherwise provide price improvement, which is contrary to investor protection and the public interest.124 One commenter stated that allowing orders to be crossed without meaningful exposure to other market participants deprives floor orders of the opportunity for exposure to a bona fide open-outcry auction process.125 Another commenter suggested that orders should be exposed to any Floor Participant that is eligible to interact as part of the crossing transaction.126 Another commenter argued that any proposed new options trading floor should be required to electronically expose all orders originating on the trading floor to qualified market participants off the trading floor before such orders would be permitted to execute.127 One commenter suggested that prior to the commencement of trading, BOX should be required to demonstrate that the Trading Floor is sufficiently populated with market participants, particularly Floor Market Makers, to ensure that a reasonable amount of liquidity exists.128 This commenter further noted that a well-populated 119 See Nasdaq Letter III and CTC Letter III, supra note 13 and BOX Response Letter III, supra note 14. 120 See Nasdaq Letter III, supra note 13. 121 See CTC Letter III, supra note 13. 122 See CTC Letters I & II, CBOE Letter II, Group One Letter, and Nasdaq Letter II, supra notes 4 and 8. 123 See CTC Letter I, supra note 4, at 4. 124 See id. at 4–5. See also Group One Letter and NYSE Letter, supra note 8. 125 See Group One Letter, supra note 8, at 2. 126 See NYSE Letter, supra note 8, at 2. 127 See CTC Letter I, supra note 4, at 3–4. 128 See Nasdaq Letter III, supra note 13, at 3. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 37149 trading floor is important for fostering price competition.129 In response to concerns about the potential for trades to be executed in the absence of a Floor Market Maker on the Trading Floor, BOX submitted Amendment No. 2 to require a Floor Broker to ascertain that at least one Floor Market Maker is present in the trading crowd prior to announcing an order to the trading crowd.130 In addition, in response to concerns regarding a potential lack of order exposure to other Floor Participants, BOX stated that proposed Rules 7580(e)(2) and 7600(b) require all orders from the Trading Floor to be exposed to the trading crowd prior to execution in the Trading Host and to require a Floor Broker to give Floor Participants a reasonable amount of time to respond once an order is announced to the trading crowd.131 BOX further stated that the proposal has always required orders to be exposed to the trading crowd prior to execution.132 In addition, BOX stated that it plans to launch its trading operations on the Trading Floor as soon as the requisite number of Floor Market Makers and Floor Brokers are registered and able to participate on the Trading Floor.133 The Commission notes that the Exchange amended its proposal to require a Floor Broker to ascertain that at least one Floor Market Maker be present in the Crowd Area prior to announcing an order to the trading crowd. The Commission believes that this requirement—along with the BOX’s other amendments to the proposal, such as the changes to the crowd area presence requirement and the Floor Market Maker quoting requirement, described below—are designed to increase the opportunities for another Floor Participant to compete to interact with the orders on the Trading Floor.134 2. Crowd Area Presence Requirement Four commenters raised concerns with the proposed requirement in BOX’s initial proposed rule change that a Floor Market Maker must be physically located in a specific Crowd Area to be deemed participating in the Crowd.135 129 See id. at 2. BOX Response Letter II, supra note 12, at 3. See also Notice of Amendment No. 2, supra note 11, at 23663. 131 See BOX Response Letter II, supra note 12, at 2–3. 132 See id. 133 See BOX Response Letter III, supra note 14, at 2. 134 See proposed BOX Rule 7580(a). 135 See CBOE Letters I & II, CTC Letters I & II, Group One Letter, and NYSE Letter, supra notes 4 and 8. 130 See E:\FR\FM\08AUN1.SGM 08AUN1 37150 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices Two commenters expressed concern regarding the proposed rule change’s description and application of physical boundary requirements.136 One commenter suggested that this aspect of the proposed rule change would limit potential opportunities for market maker price improvement.137 Another commenter suggested that the proposal to allow a Floor Market Maker to participate in a crowd only if he or she is physically located in a specific Crowd Area ‘‘at the time the order is represented in the crowd’’ is designed to discourage Floor Market Makers from providing liquidity.138 The commenter suggested that the Exchange could instead open a Trading Floor comprised of a single Crowd Area with rules permitting all Floor Market Makers to trade all issues as a means to help ensure opportunities for price improvement.139 Another commenter stated that, without knowledge of the order, it will be impossible for market makers to position themselves in advance in the appropriate pit, and therefore, multiple crowd areas will limit the ability of Floor Market Makers to participate, potentially threatening the best execution of customer orders.140 In response to these concerns, BOX submitted Amendment No. 2 to provide that the Trading Floor will be comprised of a single Crowd Area.141 BOX further noted that all options classes will be located in that Crowd Area, and Floor Brokers must expose orders via open outcry in the Crowd Area.142 The Commission believes that providing all Floor Market Makers the opportunity to respond to all orders on the Trading Floor is designed to increase the potential for competition for an order, which may increase the quality of order executions on BOX.143 3. Market Makers Must Opt-In To Participate Four commenters expressed concern about the aspect of the proposal that requires market makers to affirmatively opt-in to participate in a floor trade.144 One commenter opposed the concept of assuming a market maker to be ‘‘out’’ by default and expressed their preference asabaliauskas on DSKBBXCHB2PROD with NOTICES 136 See CBOE Letter I and CTC Letter I, supra note 4. 137 See CBOE Letter I, supra note 4, at 2, n.2. CTC Letter I, supra note 4, at 6. 139 See id. 140 See Group One Letter, supra note 8, at 2. 141 See BOX Response Letter II, supra note 12, at 138 See 2. 142 See id. proposed BOX Rule 100(b)(5). 144 See CTC Letter II, Group One Letter, Nasdaq Letter II, and NYSE Letter, supra note 8. 143 See VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 that BOX be required to allow Floor Market Makers to respond to a Floor Broker’s request for a quote before a cross is executed.145 Another commenter stated its belief that the proposed default ‘‘out’’ is unnecessary so long as the proposed rules support ample opportunities for Floor Market Maker participation.146 Another commenter requested clarification as to what would constitute participation for Floor Market Makers,147 while a different commenter suggested that a Floor Market Maker’s failure to bid or offer in ‘‘immediate and rapid succession’’ could be treated the same way as the Floor Market Maker not responding at all—with the result that the Floor Market Maker will be considered ‘‘out’’ on the trade.148 In response, BOX submitted Amendment No. 2 to provide that a Floor Broker will be required to give Floor Participants a reasonable amount of time to respond once the Floor Broker announces an order to the trading crowd.149 BOX also clarified that after a Floor Broker announces an order, a Floor Participant must verbalize that he is ‘‘in’’ even if the Floor Participant has already provided a valid quote prior to the announcement of the order by the Floor Broker.150 The Commission believes the proposal should ensure that Floor Participants may respond to orders announced in the trading crowd. In addition, the Commission notes that Amendment No. 2 will require an Options Exchange Official to certify that a Floor Broker adequately announced a QOO Order to the trading crowd.151 4. Floor Market Maker Quoting Requirement Five commenters expressed concern with the proposed requirement in BOX’s initial proposed rule change that Floor Market Makers would have to quote electronically in all classes offered on the proposed Trading Floor.152 One commenter stated that the imposition of an electronic quoting requirement could 145 See CTC Letter II, supra note 8, at 6. Group One Letter, supra note 8, at 3. 147 See Nasdaq Letter II, supra note 8, at 3. 148 See NYSE Letter, supra note 8, at 2. 149 See Notice of Amendment No. 2, supra note 11, at 23659. See also proposed BOX Rule 100(b)(5). 150 See Notice of Amendment No. 2, supra note 11, at 23660. In addition, the Exchange noted that at least one other options exchange with an options floor also requires members of its trading crowd to respond to participate in a floor crossing transaction. See CBOE Rule 6.74(a). See also NYSE Arca Rule 6.47(a); and NYSE American LLC Rule 934NY. 151 See proposed BOX Rule 7600(b). 152 See CBOE Letters I & II, CTC Letters I & II, Group One Letter, Nasdaq Letters I & II, and NYSE Letter, supra notes 4 and 8. 146 See PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 limit potential market maker price improvement.153 This commenter further argued that the quoting requirement creates a barrier to entry that they believe will limit marketmaker participation on the Trading Floor.154 Another commenter suggested that the proposed requirement appears to impose a costly and unprofitable burden on would-be market makers, which will discourage them from participating on the Trading Floor and which in turn will create a trading floor which is devoid of opportunities for meaningful order exposure and price improvement.155 This commenter further argued that the proposed rule change will discourage competitive market maker participation on the proposed Trading Floor.156 In response to commenters’ concerns, in Amendment No. 2, BOX eliminated the requirement to quote electronically in the classes that the Floor Market Maker quotes on the Trading Floor.157 The Commission believes that BOX’s proposal to require a Floor Market Maker to provide a two-sided market that complies with certain delineated quote spread parameters in response to any request for quote by a Floor Broker or Options Exchange Official, is consistent with the Act. B. Single-Sided Floor Orders Two commenters raised concerns about the inability of Floor Participants to represent single-sided orders on the proposed BOX Floor.158 One commenter noted that some language in Amendment No. 1 ‘‘welcomes’’ Floor Brokers to bring unmatched orders to the Trading Floor, while other language stated that ‘‘orders on the floor must be two-sided orders,’’ which the commenter found to be contradictory and confusing.159 In response, the Exchange submitted Amendment No. 2 to specifically state that Floor Brokers will be permitted to bring an unmatched order to the Trading Floor in order to seek a contra-side, and then enter the order into the BOX system using the QOO order type.160 Specifically, the Exchange noted that, as was true in its initial proposed rule 153 See CBOE Letter I, supra note 4, at 2 n.2. CBOE Letter II, supra note 8, at 2. 155 See CTC Letter I, supra note 4, at 5. See also CTC Letter III, supra note 13, at 2. 156 See CTC Letter I, supra note 4, at 5. 157 See Notice of Amendment No. 2, supra note 11, at 23658. See also BOX Response Letter II, supra note 12, at 2. 158 See CBOE Letter I and CTC Letters I & II, supra notes 4 and 8. 159 See CTC Letter II, supra note 8, at 8. 160 See proposed BOX Rules 7580(e)(2), 7600(b), IM–7600–4. See also BOX Response Letter I, supra note 6, at 4. 154 See E:\FR\FM\08AUN1.SGM 08AUN1 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices change, Floor Brokers will be permitted to bring single-sided orders to the Trading Floor in order to find contraside liquidity.161 The Commission notes that the Exchange’s proposed rules state that Floor Brokers will have the ability to represent single-sided orders on the Trading Floor, will be permitted to solicit bids and offers from Floor Market Makers to provide a contra-side order, and set forth rules governing the handling and execution of single-sided orders originating on the Trading Floor. asabaliauskas on DSKBBXCHB2PROD with NOTICES C. Trade-Through and Priority Rules One commenter stated that the proposed rule change is unclear regarding how the proposed BOG would systematically prevent violations of priority and trade-through requirements.162 This commenter further stated that it is unclear whether exposure in the trading crowd is required and whether the market against which trades are validated differs depending on the method of execution.163 Specifically, the commenter claimed that the proposed rule change does not sufficiently describe the timing and process for validating trades.164 In addition, this commenter stated that the proposed rule change does not discuss the specific manner in which surveillance reviews transactions for violations of Exchange rules or the manner in which the BOG or the Exchange enforces compliance for on-floor transactions.165 In response to the commenter’s concern that the proposed rule change is unclear about whether the BOG would systematically prevent violations of priority and trade-through requirements, BOX stated that the method by which trades are received and processed by the Trading Host serves as a safeguard to prevent violations of the priority and tradethrough requirements.166 BOX also noted that the execution does not occur when there is verbal agreement in the trading crowd, but rather when the executing Floor Broker sends the order from the Trading Floor to the Trading Host for execution.167 BOX further 161 See Notice of Amendment No. 2, supra note 11, at 23660. 162 See Nasdaq Letter I, supra note 4, at 2. See also Nasdaq Letter II, supra note 8, at 3–4. 163 See Nasdaq Letter I, supra note 4, at 2. 164 See id. 165 See id. at 3. 166 See BOX Response Letter I, supra note 6, at 1–2. See also BOX Response Letter II, supra note 12, at 3 (stating that since the execution does not occur until the order is processed by the Trading Host, the system will enforce compliance with trade-through, priority, and other rules). 167 See BOX Response Letter II, supra note 12, at 3. VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 stated that it structured the proposal to prevent trade-through violations and protect priority interest on the BOX Book.168 In response to the commenter’s suggestion that the proposed rule change does not adequately discuss surveillance, BOX stated that it currently has surveillance procedures in place to monitor compliance with the Exchange’s rules and that these procedures will be used to monitor transactions originating from the Trading Floor.169 In response to BOX’s assurances regarding its proposed surveillance procedures, the commenter stated that it is unclear whether BOX would have real-time surveillance coverage on the trading floor in addition to other types of surveillance coverage.170 The commenter suggested that real-time surveillance is necessary to monitor the unique aspects of member floor trading, such as negotiating open-outcry trades, handling floor disputes, and maintaining the ability to manually intervene in the floor environment.171 In response, BOX stated that it will have both a real-time surveillance presence on the trading floor and other surveillance coverage.172 BOX further noted that proposed Rule 7600(b) will require an Options Exchange Official to certify that a Floor Broker adequately announced a QOO Order to the trading crowd and stated that such certification is only possible if the Official is physically present on the Trading Floor.173 Finally, BOX reiterated that because all orders from the Trading Floor will be processed by the Trading Host, the Exchange also will electronically monitor all orders from the Trading Floor in the same manner as it does with electronic orders.174 The Commission notes that the Exchange represents that the Trading Host will establish an electronic audit trail for options orders represented and executed by Floor Brokers, that according to the Exchange, 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 documenting all stages of the order.175 The Commission believes that the proposed 168 See BOX Response Letter I, supra note 6, at 2. 169 See id. Nasdaq Letter III, supra note 13, at 1–2. 171 See id. 172 See BOX Response Letter III, supra note 14, at 170 See 2. 173 See id. id. 175 See Notice of Amendment No. 2, supra note 11, at 23661. 174 See PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 37151 systematization of all orders submitted to the Trading Floor is designed to provide a more complete audit trail and allow the Exchange to better monitor compliance with applicable Commission regulations and Exchange Rules.176 In addition, the Commission notes that the proposal requires all QOO Orders to be submitted through the BOG to be immediately processed by the Trading Host.177 The Commission further notes that orders are not deemed executed until they are processed by the Trading Host. The Commission believes that the automation provided by the BOG and the Trading Host may benefit the Exchange, its members and users, and other market participants by, for example, producing more accurate and timely trade reports and should ensure compliance with trade-through and priority rules. For example, the Trading Host will automatically prohibit a QOO Order from executing if such execution would trade-through a better priced order on the BOX Book (and the Floor Broker does not provide an adequate book sweep size) or on another market.178 In addition, processing and executing all QOO Orders by the Trading Host could provide a more accurate timestamp for audit trail and recordkeeping purposes than a manual alternative.179 The Commission believes that the functionality provided by the BOG and the Trading Host is reasonably designed to assist Floor Participants in complying with applicable Commission rules and regulations, and with the Exchange’s Rules. D. Book Sweep Three commenters expressed concern about the proposed ‘‘book sweep size’’ mechanism.180 One commenter suggested that the book sweep size would be a feature that prevents executions of orders on the BOX Book.181 The commenter further stated that the book sweep mechanism could prevent orders from executing in circumstances where there are orders on the BOX Book that could fill the order, possibly at a better price, and thus the mechanism potentially compromises its participants’ compliance with bestexecution obligations and unfairly discriminates against investors with 176 See proposed BOX Rule 7580(e)(1). proposed BOX Rule 100(b)(2). proposed BOX Rule 7600. 179 The Commission notes that the proposed rule change does not permit trades to occur on the Trading Floor if there is a malfunction with the Trading Host or related Trading Floor systems such as the BOG. See proposed BOX Rule 7580(e)(1). 180 See CBOE Letter II, CTC Letters I, II, & III, and NYSE Letter, supra notes 4, 8 and 13. 181 See CTC Letter I, supra note 4, at 7. See also CTC Letter III, note 13, at 3. 177 See 178 See E:\FR\FM\08AUN1.SGM 08AUN1 37152 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices executable orders resting in the BOX Book.182 Another commenter suggested that the book sweep size functionality could allow Floor Brokers to ensure the internalization of orders by not designating a book sweep size.183 In response to the commenters’ concerns regarding the book sweep size aspect of the proposal, BOX stated that the book sweep size is a voluntary tool that will aid Floor Brokers in satisfying duties owed to their customers, such as best execution.184 For example, according to BOX, when a Floor Broker needs an order to be executed immediately, the broker could opt either to provide a book sweep size equal to the entire size of the order, which provides liquidity to the BOX Book, or to provide an execution price that is better than the current best price on BOX, which presents an opportunity for potential price improvement.185 BOX also noted that it believes functionality similar to the book sweep size mechanism is available on at least one other trading floor, so the book sweep size aspect of its proposal is not unique.186 BOX further stated that any Floor Broker that uses the book sweep size for the purpose of violating his or her duties and obligations will be considered to have engaged in conduct inconsistent with just and equitable principles of trade.187 The Commission believes that the book sweep size functionality should provide Floor Brokers with an efficient mechanism to automatically execute orders (provided they designate a sufficient book sweep size) without having to send a separate order to clear orders on the BOX Book that have priority. The Commission reminds brokerdealers that they have a legal duty to seek to obtain best execution of customer orders.188 A broker-dealer’s asabaliauskas on DSKBBXCHB2PROD with NOTICES 182 See CTC Letter I, supra note 4, at 7–8. See also CTC Letter III, note 13, at 3. 183 See CBOE Letter II, supra note 8, at 2. 184 See BOX Response Letter I, supra note 6, at 3–4. See also BOX Response Letter II, supra note 12, at 3–4; BOX Response Letter III, supra note 14, at 3. 185 See BOX Response Letter I, supra note 6, at 4. 186 See id. See also BOX Response Letter II, supra note 12, at 4; BOX Response Letter III, supra note 14, at 3. BOX states that it believes the proposed book sweep size mechanism is comparable to the PHLX Floor Broker Management System. 187 See BOX Response Letter II, supra note 8, at 4. 188 See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269–70, 274 (3d Cir.), cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) (settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); In re Arleen Hughes, 27 SEC 629, 636 (1948), aff’d sub nom. Hughes v. SEC, 174 F.2d VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 duty of best execution derives from common law agency principles and fiduciary obligations, and is incorporated in SRO rules and, through judicial and Commission decisions, the antifraud provisions of the federal securities laws.189 The duty of best execution requires broker-dealers to periodically assess the quality of competing markets to assure that order flow is directed to the markets providing the most beneficial terms for their customer orders.190 Broker-dealers must examine their procedures for seeking to obtain best execution in light of market and technology changes and modify those practices if necessary to enable their customers to obtain the best reasonably available prices.191 In doing so, broker-dealers must take into account price improvement opportunities, and whether different markets may be more suitable for different types of orders or particular securities.192 969 (D.C. Cir. 1949)). See also Order Execution Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996) (‘‘Order Handling Rules Release’’). 189 Order Handling Rules Release, supra note 188, at 48322. See also Newton, 135 F.3d at 270. Failure to satisfy the duty of best execution can constitute fraud because a broker-dealer, in agreeing to execute a customer’s order, makes an implied representation that it will execute it in a manner that maximizes the customer’s economic gain in the transaction. See Newton, 135 F.3d at 273 (‘‘[T]he basis for the duty of best execution is the mutual understanding that the client is engaging in the trade—and retaining the services of the broker as his agent—solely for the purpose of maximizing his own economic benefit, and that the broker receives her compensation because she assists the client in reaching that goal.’’); In re Marc N. Geman, Securities Exchange Act Release No. 43963 (Feb. 14, 2001) (citing Newton, but concluding that respondent fulfilled his duty of best execution). See also Payment for Order Flow, Securities Exchange Act Release No. 34902 (Oct. 27, 1994), 59 FR 55006, 55009 (Nov. 2, 1994) (‘‘Payment for Order Flow Final Rules’’). If the broker-dealer intends not to act in a manner that maximizes the customer’s benefit when he accepts the order and does not disclose this to the customer, the broker-dealer’s implied representation is false. See Newton, 135 F.3d at 273–274. 190 Order Handling Rules Release, supra note 188, at 48322–33 (‘‘In conducting the requisite evaluation of its internal order handling procedures, a broker-dealer must regularly and rigorously examine execution quality likely to be obtained from different markets or market makers trading a security.’’). See also Newton, 135 F.3d at 271; Market 2000: An Examination of Current Equity Market Developments, at V–4 (SEC Division of Market Regulation January 1994) (‘‘Without specific instructions from a customer, however, a broker-dealer should periodically assess the quality of competing markets to ensure that its order flow is directed to markets providing the most advantageous terms for the customer’s order.’’); Payment for Order Flow Final Rules, supra note 189, at 55009. 191 Order Handling Rules, supra note 188 at 48323. 192 See id. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 E. Compliance With Section 11(a) of the Act One commenter expressed concern that BOX may not have adequately explained how options participants would comply with Section 11(a)(1) of the Act when effecting transactions through the BOG.193 More specifically, this commenter noted that BOX did not explain how a BOX member that is the counterparty to a QOO Order would comply with Section 11(a) of the Act.194 In response, BOX amended its proposal to help ensure compliance with Section 11(a)(1) of the Act.195 Section 11(a)(1) of the Act 196 prohibits a member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated person exercises investment discretion (collectively, ‘‘covered accounts’’), unless an exception applies. Sections 11(a)(1)(A)–(I) of the Act 197 and the rules thereunder provide certain exemptions from this general prohibition, including the exemption set forth in Rule 11a2–2(T) under the Act.198 The Exchange represents that its proposed rule change is consistent with Section 11(a) of the Act and the rules thereunder.199 The Exchange also states that the proposed rule change would not limit in any way the obligation of a Participant to comply with Section 11(a) of the Act or the rules thereunder.200 The Commission notes that the Exchange proposes to adopt IM–7600–5, which states that a Participant shall not utilize the Trading Floor to effect any transaction for a covered account by relying on an exemption under Section 11(a)(1)(G) of the Act (‘‘G Exemption’’).201 As the Exchange notes, 193 See NYSE Letter, supra note 8, at 5–6. id. 195 See BOX Response Letter II, supra note 12, at 194 See 4. 196 15 U.S.C. 78k(a)(1). U.S.C. 78k(a)(1)(A)–(I). 198 17 CFR 240.11a2–2(T). 199 See Notice of Amendment No. 2, supra note 11, at 23681. 200 See id. 201 15 U.S.C. 78k(a)(1)(G). Section 11(a)(1)(G) of the Act provides an exemption from the general prohibition in Section 11(a)(1) of the Act for any transaction for a member’s own account, provided that: (i) Such member is primarily engaged in the business of underwriting and distributing securities issued by other persons, selling securities to customers, and acting as broker, or any one or more of such activities, and whose gross income normally is derived principally from such business and related activities; and (ii) such transaction is effected in compliance with rules of the Commission which, as a minimum, assure that the transaction is not inconsistent with the maintenance of fair and orderly markets and yields 197 15 E:\FR\FM\08AUN1.SGM 08AUN1 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices asabaliauskas on DSKBBXCHB2PROD with NOTICES because no covered account transactions utilizing the Trading Floor may rely on the G Exemption, Participants utilizing the Trading Floor to effect transactions for covered accounts may only rely upon other exemptions to the Section 11(a)(1) prohibition.202 In addition to statutory exemptions, Rule 11a2–2(T) under the Act,203 known as the ‘‘effect versus execute’’ rule, provides exchange members with an exemption from the Section 11(a)(1) prohibition. Rule 11a2–2(T) permits an exchange member, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute transactions on the exchange. To comply with Rule 11a2–2(T)’s conditions, a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once the order has been transmitted to the member performing the execution; 204 (iii) may not be affiliated with the executing member; and (iv) with respect to an account over which the member or an associated person has investment discretion, neither the member nor an associated person may retain any compensation in connection with effecting the transaction except as provided in the Rule. For the reasons set forth below, the Commission believes that Participants utilizing the Trading Floor may comply with the conditions of Rule 11a2–2(T) under the Act.205 priority, parity, and precedence in execution to orders for the account of persons who are not members or associated with members of the exchange. See also 17 CFR 240.11a1–1(T) (setting forth requirements for relying on the G Exemption). 202 See Notice of Amendment No. 2, supra note 11, at 23681. Section 11(a) of the Act and the rules thereunder provide other exemptions to the Section 11(a)(1) prohibition, including, for example, the ‘‘effect versus execute’’ exemption (as discussed below), the exemption for transactions by a dealer acting in the capacity of a market maker, and the exemption for transactions to offset a transaction made in error. 203 17 CFR 240.11a2–2(T). 204 This prohibition also applies to associated persons of the initiating member. The member may, however, participate in clearing and settling the transaction. 205 The Commission has previously found that the all-electronic transactions effected through the Trading Host are consistent with the requirements of Section 11(a) of the Act and Rule 11a2–2(T) thereunder. See, e.g., Securities Exchange Act Release Nos. 72848 (August 14, 2014), 79 FR 49361 (August 20, 2014) (SR–BOX–2014–16) (order approving the Exchange’s proposal to adopt new trade allocation algorithms for matching trades at the conclusion of the PIP and the COPIP); and 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (order granting the Exchange’s application for registration as a national securities exchange). As part of the current proposal, the Exchange represents that the Trading Host will enforce tradethrough and priority rules in the same manner for QOO orders as the Trading Host does for all other VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 Rule 11a2–2(T)’s first requirement is that orders for covered accounts be transmitted from off the exchange floor. The Commission has found that the offfloor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.206 The Exchange states that Floor Brokers will receive matched or unmatched orders either via telephone, or electronically to the Floor Broker’s order entry mechanism.207 Moreover, the Exchange states that a Participant 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).208 The Commission notes that a Participant that submits an order for a covered account that utilizes the Trading Floor, and who wishes to rely on the ‘‘effect versus execute’’ exemption, must submit the order from off the Trading Floor. Second, Rule 11a2–2(T) requires that neither the initiating member nor an associated person of the initiating member participate in the execution of the transaction at any time after the order for the transaction has been transmitted. The Exchange represents that 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.209 In addition, the Exchange states that once a Floor Broker submits a QOO order to the BOG for execution, neither the Floor Broker nor anyone else may alter the terms of the order.210 orders on the Exchange. See Notice of Amendment No. 2, supra note 11, at 23659. 206 See, e.g., Securities Exchange Act Release Nos. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979); and 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (‘‘1978 Release’’). 207 See Notice of Amendment No. 2, supra note 11, at 23666. 208 See id. at 23681. 209 See id. The Commission notes that a Participant may cancel or modify the order, or modify the instructions for executing the order. The Commission has stated that the non-participation requirement is satisfied under such circumstances so long as the modifications or cancellations are also transmitted from off the floor. See 1978 Release, supra note 206, at 11547 (stating that the ‘‘non-participation requirement does not prevent initiating members from canceling of modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 210 See proposed Rule 7600(c) and Notice of Amendment No. 2, supra note 11, at 23666. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 37153 Moreover, when a Floor Broker submits a QOO Order for execution, the order will be executed in accordance with Exchange rules and based on market conditions of when the order is received by the Trading Host.211 Accordingly, based on the Exchange’s representations, the Commission believes that a Participant and its associated persons would not participate in the execution of an order submitted for execution utilizing the Trading Floor. Third, Rule 11a2–2(T) requires that the order be executed by an exchange member that is not associated with the member initiating the order. According to the Exchange, to rely on the exemption in Rule 11a2–2(T), a Participant could submit an order for a covered account from off the Trading Floor to an unaffiliated Floor Broker.212 The Exchange also states that a Participant relying on Rule 11a2–2(T) could not submit an order for a covered account to its ‘‘house’’ Floor Broker on the Trading Floor for execution.213 The Commission notes that if a Participant sends its order from off the floor to an affiliated Participant that is on the floor, who then directs the order into the Trading Host for execution, the off-floor Participant may not rely on the exemption in Rule 11a2–2(T). Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T) thereunder.214 The 211 See proposed Rule 7600(a) and Notice of Amendment No. 2, supra note 11, at 23665. 212 See Notice of Amendment No. 2, supra note 11, at 23681. 213 See id. 214 In addition, Rule 11a2–2(T)(d) requires that, if a member or associated person is authorized by written contract to retain compensation in connection with effecting transactions for covered accounts over which the member or associated person thereof exercises investment discretion, the member or associated person must furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member or any associated person thereof in connection with effecting transactions for the account during the period covered by the statement. See 17 CFR 240.11a2–2(T)(d). See also 1978 Release, supra note 206, at 11548 (stating that ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after E:\FR\FM\08AUN1.SGM Continued 08AUN1 37154 Federal Register / Vol. 82, No. 151 / Tuesday, August 8, 2017 / Notices Commission notes that Participants and their associated persons trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule’s exemption. asabaliauskas on DSKBBXCHB2PROD with NOTICES F. Options Market Structure: Price Improvement, Fragmentation and Trading Floor Data Three commenters expressed concern that the proposed rule change would negatively impact opportunities for orders to receive price improvement.215 Specifically, one commenter stated that the proposed rule change is designed to minimize opportunities for market maker and public customer trading interest to interact with, and provide price improvement to, orders being crossed on the BOX floor.216 This commenter asserts that the proposed rule change is designed to offer a frictionless crossing mechanism, which can be utilized to the detriment of customers.217 Two commenters expressed concern that the proposed rule change would increase fragmentation in the options trading market. One commenter stated that the proposed BOX floor would add an additional trading venue that firms, who have finite resources, would be required to staff and which would further fragment liquidity without offering anything unique or beneficial to customers.218 Another commenter stated that opening a new trading floor will exacerbate the practice of ‘‘venue shopping,’’ and noted that the number of market making firms is limited, and that market making firms lack the resources necessary to staff an escalating number of physical trading floors with dedicated personnel.219 In response, BOX argues that concerns about the general success of options trading floors are beyond the scope of its proposal.220 BOX further asserts that raising concerns about options trading floors either lacks merit or is an attempt to delay the approval of its proposal.221 In addition, BOX commits to provide the Commission with data related to activity on the Trading Floor, specifically information regarding size, participation, price improvement by deciding that such arrangements are suitable to their interests’’). 215 See CBOE Letters I & II, CTC Letters I & II, and Nasdaq Letter II, supra notes 4, 8 and 13. 216 See CBOE Letter I, supra note 4, at 1–2. 217 See id. at 2. 218 See CBOE Response Letter I, supra note 4, at 1. 219 See CTC Letter I, supra note 4, at 3. 220 See BOX Response Letter I, supra note 6, at 4. 221 See id. VerDate Sep<11>2014 21:16 Aug 07, 2017 Jkt 241001 spread and trade type, effective spread, Floor Market Maker participation, and BOX Book participation.222 This information could be used to evaluate, among other things, the levels of participation and amount of price improvement on the Trading Floor. Finally, BOX indicated that it believes a new trading floor will be good for the markets by providing increased competition which may lead to improvements in the market, which will inure to the benefit of all market participants.223 The Commission believes that the proposed rule change is consistent with the Act. Under the proposed rule change, the Exchange will establish an ‘‘open outcry’’ trading floor where orders will be sent to Floor Brokers who will represent those orders in an agency capacity, and who will be required to announce such orders to a trading crowd composed of Floor Market Makers prior to any execution. In this regard, the Commission notes that the Exchange made modifications to the initial proposal that are designed to remove or reduce the potential impediments to order interaction on the BOX Floor and which are designed to increase opportunities for price improvement. The Commission also notes that the data the Exchange has committed to provide may assist the Commission in assessing the level of participation in crossing transactions by market makers and other market participants, aside from the firm that initiated the cross, and to better review whether existing exchange rules appropriately allow for robust and beneficial competition on the options trading floors. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,224 that the proposed rule change (SR–BOX–2016– 48), as modified by Amendment Nos. 1 and 2, be, hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.225 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–16638 Filed 8–7–17; 8:45 am] SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81291; File No. SR– BatsEDGA–2017–19] Self-Regulatory Organizations; Bats EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Related to Fees for Use on Bats EDGA Exchange, Inc. August 2, 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 July 24, 2017, Bats EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the Exchange. The Exchange has designated the proposed rule change as one establishing or changing a member due, fee, or other charge imposed by the Exchange under Section 19(b)(3)(A)(ii) of the Act 3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange filed a proposal to amend the fee schedule applicable to Members 5 and non-Members of the Exchange pursuant to EDGA Rules 15.1(a) and (c). 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 BILLING CODE 8011–01–P 1 15 222 See Notice of Amendment No. 2, supra note 11, at 23679. 223 See BOX Response Letter III, supra note 14, at 3–4. 224 15 U.S.C. 78s(b)(2). 225 17 CFR 200.30–3(a)(12). PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 5 The term ‘‘Member’’ is defined as ‘‘any registered broker or dealer that has been admitted to membership in the Exchange.’’ See Exchange Rule 1.5(n). 2 17 E:\FR\FM\08AUN1.SGM 08AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 151 (Tuesday, August 8, 2017)]
[Notices]
[Pages 37144-37154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-16638]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81292; File No. SR-BOX-2016-48]


Self-Regulatory Organizations; BOX Options Exchange LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 and 
2, To Adopt Rules for an Open-Outcry Trading Floor

August 2, 2017.

I. Introduction

    On November 16, 2016, BOX Options Exchange LLC (the ``Exchange'' or 
``BOX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to 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 on the proposed rule change.\4\ On January 10, 2017, the 
Commission extended the time period within which to approve, 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 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 Order Instituting 
Proceedings, 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\ On May 18, 
2016, the Commission extended the time period for Commission action on 
the proceedings to determine whether to disapprove the proposed rule 
change to August 2, 2017.\10\ Amendment No. 2 was published for comment 
in the Federal Register on May 23, 2017.\11\ On May 25, 2017, the 
Commission received a second response letter from the Exchange.\12\ The 
Commission received two comment letters in response to the publication 
of Amendment No. 2.\13\ On July 14, 2017, the Commission received a 
third response letter from the Exchange.\14\ This order approves the 
proposed rule change, as modified by Amendment Nos. 1 and 2.
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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 (``CBOE Letter 
I''); Steve Crutchfield, Head of Market Structure, CTC Trading 
Group, LLC (``CTC Trading''), dated December 31, 2016 (``CTC Letter 
I''); and Joan C. Conley, Senior Vice President and Corporate 
Secretary, The Nasdaq Stock Market LLC (``Nasdaq''), dated December 
22, 2016 (``Nasdaq Letter I'').
    \5\ See Securities Exchange Act Release No. 79768, 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 (``BOX 
Response Letter I''), and Amendment No. 1, dated February 21, 2017.
    \7\ See Securities Exchange Act Release No. 80134, 82 FR 12864 
(March 7, 2017) (``Order Instituting Proceedings'').
    \8\ See letters to Brent J. Fields, Secretary, Commission, from 
Angelo Evangelou, Deputy General Counsel, CBOE, dated April 21, 2017 
(``CBOE Letter II''); Steve Crutchfield, Head of Market Structure, 
CTC Trading, dated April 13, 2017 (``CTC Letter II''); John Kinahan, 
CEO, Group One Trading, LP, dated April 11, 2017 (``Group One 
Letter''); Elizabeth King, General Counsel and Corporate Secretary, 
New York Stock Exchange, dated March 28, 2017 (``NYSE Letter''); and 
Joan C. Conley, Senior Vice President and Corporate Secretary, 
Nasdaq, dated March 27, 2017 (``Nasdaq Letter II'').
    \9\ See Amendment No. 2, dated May 17, 2017.
    \10\ See Securities Exchange Act Release No. 80719, 82 FR 23935 
(May 24, 2017).
    \11\ See Securities Exchange Act Release No. 80720 (May 18, 
2017), 82 FR 23657 (``Notice of Amendment No. 2'').
    \12\ See letter to Brent J. Fields, Secretary, Commission, from 
Lisa J. Fall, President, Exchange, received May 25, 2017 (``BOX 
Response Letter II'').
    \13\ See letters to Brent J. Fields, Secretary, Commission, from 
Steve Crutchfield, Head of Market Structure, CTC Trading, dated July 
10, 2017 (``CTC Letter III''); and Joan C. Conley, Senior Vice 
President and Corporate Secretary, Nasdaq, dated July 6, 2017 
(``Nasdaq Letter III'').
    \14\ See letter to Brent J. Fields, Secretary, Commission, from 
Lisa J. Fall, President, Exchange, received July 14, 2017 (``BOX 
Response Letter III'').
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 1 and 2

    The Exchange proposes to adopt rules that would allow for open-
outcry trading on BOX's physical trading floor, located in Chicago 
(``Trading Floor'') as described below.\15\
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    \15\ See proposed BOX Rule 100(a)(67).
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A. BOX Floor Procedure

    The Exchange proposes to allow two categories of market 
participants (``Floor Participants'') \16\ to transact business on the 
Trading Floor.\17\ One of these categories of market participants

[[Page 37145]]

consists of individuals (``Floor Broker'') \18\ who will be registered 
as such with the Exchange and who will be permitted to accept and 
handle options orders, including representing such orders on the 
Trading Floor and entering those orders using the BOX Order Gateway 
(``BOG'') \19\ for execution in the Exchange's automated trading system 
(the ``Trading Host'').\20\ The second category of market participants 
consists of Options Participants of the Exchange located on the Trading 
Floor who receive permission from the Exchange to trade in options for 
their own account (``Floor Market Makers'').\21\
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    \16\ See proposed BOX Rule 100(a)(26).
    \17\ See proposed BOX Rule 100(a)(67).
    \18\ See proposed BOX Rule 7540.
    \19\ See proposed BOX Rules 100(b)(2) and 7580(e).
    \20\ See BOX Rule 100(a)(66).
    \21\ See proposed BOX Rule 8510(b).
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    Contemporaneously upon receipt of an order and prior to the 
announcement of an order in the trading crowd, a Floor Broker wishing 
to execute an order will be required to record certain information 
about the order in the Floor Broker's order entry mechanism.\22\ 
Specifically, the Floor Broker will be required to record: (i) The 
order type 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 clearing 
number of the broker-dealer that submitted the order.\23\
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    \22\ See proposed BOX Rule 7580(e).
    \23\ See proposed BOX Rule 7580(e)(1).
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    The Floor Broker will then be required to ascertain that at least 
one Floor Market Maker is present in the Crowd Area \24\ and announce 
the order to the trading crowd, in a process called open outcry.\25\ 
During open outcry, Floor Market Makers physically located in the Crowd 
Area will be permitted to express interest in trading against the 
initiating order.\26\ To do so, a Floor Market Maker will be required 
to verbalize that he is ``in'' after a Floor Broker announces an order, 
even if a Floor Market Maker had previously provided a valid quote 
prior to the Floor Broker's announcement of the order.\27\ A Floor 
Market Maker will be considered ``out'' on a bid or offer if he does 
not affirmatively respond to the Floor Broker who announces the order, 
provided that the Floor Broker will be required to give a Floor 
Participant a reasonable amount of time within which to respond.\28\
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    \24\ See proposed BOX Rules 100(a)(67) and 7580(a).
    \25\ See proposed BOX Rules 7600(b) and 7580(e)(2). This will be 
required whether the Floor Broker is representing a single-sided 
order and is soliciting contra-side interest, or the Floor Broker 
has sufficient interest to match against the order already. See 
proposed BOX Rule 7580(e)(2).
    \26\ See proposed BOX Rule IM-8510-2(b). It will 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. See proposed BOX Rule IM-7580-4.
    \27\ A Floor Broker will be permitted to request a market prior 
to announcing an order on the Trading Floor (``Market Probe''). When 
a Floor Broker announces a Market Probe, any responses from Floor 
Participants will be public to all Floor Participants. When a Floor 
Broker conducts a Market Probe, he must probe all Floor 
Participants. See Notice of Amendment No. 2, supra note 11, at 23662 
n.75.
    \28\ See proposed BOX Rule 100(b)(5). A ``reasonable amount of 
time'' will be interpreted on a case-by-case basis by an Options 
Exchange Official, based on the current market conditions and 
trading activity on the Trading Floor. See id.
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    Under the proposal, after an order is announced to the trading 
crowd, the Floor Broker will be permitted to submit a Qualified Open 
Outcry Order (``QOO Order'') through the BOG to the Trading Host for 
execution. QOO Orders are two-sided orders \29\ comprised of an 
``initiating side'' (the ``agency order''), which must be filled in its 
entirety, and a ``contra-side,'' which must guarantee the full size of 
the agency order.\30\ The order announced by the Floor Broker on the 
Trading Floor will be considered the agency order. At the time of the 
announcement, the Floor Broker may be representing only that agency 
order (i.e., a single-sided or unmatched order) on the Trading Floor in 
order to seek a contra-side, or the Floor Broker may already have a 
contra-side that guarantees the full size of that agency order.\31\ If 
the Floor Broker does not have a contra-side and is therefore 
soliciting interest from the trading crowd when the initiating side is 
announced or to the extent the trading crowd provides a better price, 
the contra-side of the QOO Order will be the solicited interest from 
the trading crowd; \32\ otherwise, the Floor Broker interest will be 
the contra-side of the QOO Order, subject to the allocation procedure 
as described below.\33\
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    \29\ A Floor Participant who wishes to place a limit order on 
the BOX Book will be required to submit such order electronically. 
See proposed BOX Rules IM-7580-1 and IM-8510-8. The BOX Book is 
defined as the electronic book of orders on each single option 
series maintained by the Trading Host. See BOX Rule 100(a)(10).
    \30\ See proposed BOX Rule 7600(a)(1).
    \31\ See proposed BOX Rule IM-7600-4. If a Floor Broker is 
holding two agency orders, he will choose which order will be the 
initiating side. See proposed BOX Rule 7580(e)(2).
    \32\ See proposed BOX Rule 7600(a)(1).
    \33\ See id.
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    For a non-complex QOO Order, the execution price must be equal to 
or better than the National Best Bid or Offer (``NBBO'').\34\ A 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.\35\ Under the proposed rules, an Options Exchange 
Official \36\ will be required to certify that the Floor Broker 
adequately announced the QOO Order to the trading crowd.\37\
---------------------------------------------------------------------------

    \34\ See proposed BOX Rule 7600(c).
    \35\ See proposed BOX Rule 7600(c).
    \36\ See proposed BOX Rule 100(b)(6). The QOO Order will not be 
deemed executed until it is processed by the Trading Host. See 
proposed BOX Rule 7600(c).
    \37\ See proposed BOX Rule 7600(b).
---------------------------------------------------------------------------

    Once a QOO Order is submitted through the BOG, it would be 
immediately processed by the Trading Host.\38\ The order would be 
executed based on market conditions at the time that the order is 
received by the Trading Host and in accordance with the Exchange's 
rules.\39\ If there is an ongoing auction in the option series when the 
QOO Order is received by the Trading Host the QOO Order will be 
rejected.\40\
---------------------------------------------------------------------------

    \38\ See proposed BOX Rule 100(b)(2). Under the proposal, orders 
on the Trading Floor will not route to an away exchange and may not 
be considered in the determination of the opening price or 
participate in the opening trade. See proposed BOX Rules 7070(d) and 
7600(e).
    \39\ See proposed BOX Rule 7600(a). Once a Floor Broker submits 
a QOO Order to the BOG, neither the submitting Floor Broker, nor 
anyone else, will be allowed to alter the terms of the QOO Order. 
See proposed BOX Rule 7600(c).
    \40\ See proposed BOX Rule 7600(a)(5). A Complex QOO Order 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. 
See id.
---------------------------------------------------------------------------

    Under the proposal, the highest bid (lowest offer) in the trading 
crowd will have priority.\41\ If there are two or more bids (offers) 
for the same options contract that represent the highest bid (lowest 
offer), priority will be afforded to such bids (offers) in the sequence 
in which they are made.\42\ If a Floor Broker's bid or offer is 
accepted by more than one Floor Participant, the Floor Broker will be 
required to designate the priority order of the Floor Participants 
based on when each Floor Participant responds.\43\ Starting with the 
Floor Participant with first priority, each Floor Participant will be 
entitled to buy or sell as many contracts as the Floor Broker may have 
available to trade until the Floor Broker's order has been filled

[[Page 37146]]

entirely.\44\ However, if bids or offers are made by more than one 
Floor Participant 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.\45\ If Floor Participants provide a 
collective response to a Floor Broker's request for a market in order 
to fill a large order, the order will be allocated pro rata pursuant to 
proposed BOX Rule 7610(d)(5).\46\ The Floor Broker will be responsible 
for determining the sequence in which bids or offers are vocalized on 
the Trading Floor in response to the Floor Broker's bid, offer, or call 
for a market.\47\
---------------------------------------------------------------------------

    \41\ See proposed BOX Rule 7610(a) and (b).
    \42\ See id.
    \43\ See proposed BOX Rule 7610(d)(2).
    \44\ See id. For Complex QOO Orders, Floor Participants will not 
be permitted to give a competing bid or offer for one component of 
the order to prevent the Complex QOO Order from being executed. See 
proposed BOX Rule IM-7600-1(d).
    \45\ See proposed BOX Rule 7610(d)(4). Each Floor Participant on 
parity will receive an equal number of contracts, to the extent 
mathematically possible.
    \46\ Specifically, proposed BOX Rule 7610(d)(5) states that if 
the size of the trading crowd's market, 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. However, if the size of the 
trading crowd's market exceeds the size of the order to be filled, 
that order will be allocated on a size pro rata basis, with the 
Floor Participants in the trading crowd each receiving, to the 
extent practicable, the percentage of the order that is the ratio of 
the size of their respective bids or offers to the total size of all 
bids or offers.
    \47\ See proposed BOX Rule 7610(d)(1). Any disputes regarding a 
Floor Broker's determination of time priority sequence will be 
resolved by an Options Exchange Official. See id. An Options 
Exchange Official may nullify a transaction or adjust its terms if 
the Official determines the transaction to have been in violation of 
Exchange's Rules. See id.
---------------------------------------------------------------------------

    The following BOX Book interest will have priority over the contra-
side of the QOO Order: (i) Any equal or better priced bids or offers on 
the BOX Book that were submitted on behalf of persons who are not 
brokers or dealers in securities (``Public Customers''); \48\ (ii) 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 (iii) any non-Public Customer bids or offers on the BOX Book that 
are priced better than the proposed execution price.\49\ When 
submitting the QOO Order to the BOG, a Floor Broker may, but will not 
be required to, provide a ``book sweep size.'' \50\ 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 orders and 
quotes on the BOX Book that have priority pursuant to proposed BOX Rule 
7600(c).\51\ If the number of contracts on the BOX Book that have 
priority over the contra-side of the QOO Order is greater than the book 
sweep size set by the Floor Broker, then the QOO Order will be 
rejected.\52\
---------------------------------------------------------------------------

    \48\ See BOX Rule 100(a)(51).
    \49\ See proposed BOX Rule 7600(c). For Complex QOO Orders, the 
following Complex Order Book interest will have priority: (i) Any 
equal or better priced Public Customer Complex bids or offers on the 
Complex Order Book 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 (ii) any 
non-Public Customer bids or offers on the Complex Order Book that 
are priced better than the proposed execution price. See id.
    \50\ See proposed BOX Rule 7600(h).
    \51\ See proposed BOX Rule 7600(h). Proposed BOX Rule IM-7600-3 
states that it will 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.
    \52\ See proposed BOX Rule 7600(h).
---------------------------------------------------------------------------

    The proposed rule change also describes the allocation process for 
QOO Orders.\53\ First, under the proposal, the initiating side of the 
QOO Order will match against any bids or offers on the BOX Book that 
have priority as outlined above, provided that an adequate book sweep 
size is provided by the Floor Broker.\54\ The remaining balance, if 
any, will be matched against the contra-side of the QOO Order, 
regardless of whether the Floor Broker is ultimately entitled to 
receive an allocation.\55\ If the QOO Order is of a certain size, which 
size will be determined by the Exchange on an option by option basis 
(at a size that may not be less than 500 contracts), the Floor Broker 
will be 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, 40% of the remaining contracts in the order.\56\ 
Next, Floor Participants that respond with interest when the executing 
Floor Broker announces the QOO Order to the trading crowd will be 
allocated.\57\ If interest remains, the remaining quantity of the 
initiating side of the QOO Order will be allocated to the executing 
Floor Broker.\58\ If the QOO Order executes, the executing Floor Broker 
will be 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.\59\ Floor Brokers also will be responsible for 
handling all orders in accordance with the Exchange's priority and 
trade-through rules.\60\
---------------------------------------------------------------------------

    \53\ See also Notice of Amendment No. 2, supra note 11, at 
23668-74 (providing a detailed description and examples of how 
orders will be allocated).
    \54\ See proposed BOX Rule 7600(d)(1) and (2).
    \55\ See proposed BOX Rule 7600(d)(3).
    \56\ See proposed BOX Rule 7600(f). See also proposed BOX Rule 
7600(d)(3)(i). In determining whether a Complex QOO Order satisfies 
the eligible order size requirement, the Complex QOO Order must 
contain one leg which, standing alone, is for the eligible size or 
greater. See proposed BOX Rule IM-7600-1(d).
    \57\ See proposed BOX Rule 7600(d)(3)(ii).
    \58\ See proposed BOX Rule 7600(d)(3)(iii).
    \59\ See proposed BOX Rule 7600(d)(4). The executing Floor 
Broker must provide the correct allocations to an Options Exchange 
Official or his or her designee, in writing, without unreasonable 
delay. See id.
    \60\ See proposed BOX Rule 7600. Proposed BOX Rule 8510(h)(4) 
provides that it will be considered conduct inconsistent with just 
and equitable principles of trade for: (i) A Floor Broker to 
allocate orders other than in accordance with the Exchange's 
priority rules applicable to floor trades; (ii) a Floor Participant 
to enter into any agreement with another Floor Participant 
concerning allocation of trades; or (iii) a Floor Participant to 
harass, intimidate or coerce another Floor Participant to make or 
refrain from making any complaint or appeal.
---------------------------------------------------------------------------

    The Floor Participants who established the market will 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.\61\
---------------------------------------------------------------------------

    \61\ See proposed BOX Rule IM-7600-1(c). It will be the 
responsibility of the Floor Participant that established the market 
to alert the Floor Broker of the fact that the Floor Participant has 
priority when an order is announced. See id.
---------------------------------------------------------------------------

B. Additional Floor Broker Obligations

    A Floor Broker handling an order will be required to 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.\62\ All 
orders provided to Floor Brokers will be considered Not Held Orders 
\63\ unless otherwise specified by the Floor Broker's client.\64\ 
However, the proposed rule change would prohibit Floor Brokers from 
engaging in certain discretionary transactions.\65\ An Options Floor 
Broker

[[Page 37147]]

handling a contingency order that is dependent upon the price of the 
underlying security will 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.\66\
---------------------------------------------------------------------------

    \62\ See proposed BOX Rule 7570.
    \63\ See proposed BOX Rule 7600(g). A Not Held Order gives a 
Floor Broker discretion as to the price or time at which such order 
will be executed. See id.
    \64\ See proposed BOX Rule IM-7580-3.
    \65\ See proposed BOX Rules 7590, IM-7590-1 and IM-7590-2. 
Proposed BOX Rule 7590 will prohibit Floor Brokers from executing or 
causing to be executed any order or orders for which the 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. Proposed BOX Rule IM-7590-1 will prohibit the 
holding or acceptance of certain orders that could be interpreted as 
allowing the Floor Broker discretion with respect to whether to 
purchase or sell options. Proposed BOX Rule IM-7590-2 will prohibit 
Floor Brokers from exercising any discretion with respect to the 
order of an options market maker registered on any exchange.
    \66\ See proposed BOX Rule 7580(b).
---------------------------------------------------------------------------

    Floor Brokers will be required to make reasonable efforts to 
ascertain whether each order entrusted to them is for the account of a 
Public Customer or a broker-dealer.\67\ For broker-dealer orders, a 
Floor Broker must advise the trading crowd of the fact that it is an 
order for the account of a broker-dealer prior to open outcry and prior 
to submitting the order for execution, as well as note such fact in the 
Floor Broker's system.\68\ Additionally, a Floor Broker will be 
required to inform the trading crowd when he is representing an order 
for a Market Maker and will be required to comply with proposed BOX 
Rules IM-8510-6 and IM-8510-9.\69\ For Public Customer orders, a Floor 
Broker must disclose all securities that are components of the Public 
Customer order which is subject to crossing before requesting bids and 
offers for the execution of all components of the order.\70\
---------------------------------------------------------------------------

    \67\ See proposed BOX Rule IM-7580-2.
    \68\ See proposed BOX Rule IM-7580-2.
    \69\ See proposed BOX Rule 7580(d). Proposed BOX Rule 8510-6 
will allow the Exchange to temporarily limit the number of Floor 
Market Makers in the trading crowd who are establishing or 
increasing a position when the interests of a fair and orderly 
market require such limitation. Proposed BOX Rule 8510-9 will 
prohibit 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 that price are filled.
    \70\ See proposed BOX Rule IM-7600-1(a). A Floor Broker crossing 
a Public Customer order with an order that is not a Public Customer 
order, when providing for a reasonable opportunity for the trading 
crowd to participate in the transaction, will be required to 
disclose the Public Customer order that is subject to crossing. See 
proposed BOX Rule IM-7600-1(e).
---------------------------------------------------------------------------

C. Floor Market Makers

    Proposed BOX Rule 8500(a) will require a Floor Market Maker to 
register as a Market Maker with the Exchange, and such registration 
could be revoked or suspended at any time. The proposed rules will 
require Floor Market Maker transactions to constitute a course of 
dealings reasonably calculated to contribute to the maintenance of a 
fair and orderly market.\71\ Additionally, a Floor Market Maker will be 
prohibited from effecting 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.\72\
---------------------------------------------------------------------------

    \71\ See proposed BOX Rule 8510(a).
    \72\ See proposed BOX Rule 8500(c).
---------------------------------------------------------------------------

    A Floor Market Maker will have certain affirmative obligations in 
classes of options contracts to which the Floor Market Maker is 
assigned.\73\ Floor Market Makers will be subject to a Continuous Open 
Outcry Quoting Obligation, which will require Floor Market Makers to 
provide a two-sided market complying with the quote spread parameter 
requirements contained in proposed Rule 8510(d)(1), in response to any 
request for a quote by a Floor Broker or Options Exchange Official.\74\ 
Floor Market Maker quotations must be in a size of at least 10 
contracts.\75\ Additionally, Floor Market Makers will be subject to a 
maximum option price change, and will not be permitted to bid more than 
$1 lower and/or offer more than $1 higher than the last preceding 
transaction price for a particular option contract.\76\
---------------------------------------------------------------------------

    \73\ See proposed BOX Rule 8510(d). Proposed BOX Rule 8610(e) 
describes the obligations of a Floor Market Maker with respect to 
classes of options to which the Floor Market Maker is not appointed. 
The obligations of a Floor Market Maker with respect to those 
classes of options to which he is assigned will take precedence over 
his other activities. See proposed BOX Rule IM-8510-1.
    \74\ See proposed BOX Rule 8510(c)(2). Quotations in open outcry 
may not be made with $5 bid/ask differentials provided in BOX Rule 
8040(a)(7). See proposed BOX Rule 8510(d)(1).
    \75\ See proposed BOX Rule 8510(c)(2).
    \76\ See proposed BOX Rule 8510(d)(2). This standard will 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 
id.
---------------------------------------------------------------------------

    The proposed rule change imposes other limitations on Floor Market 
Makers. Specifically, subject to certain exceptions, no Floor Market 
Maker will be allowed to initiate an Exchange options 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 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.\77\ The proposed rule change also describes what Floor 
Market Maker orders will be considered ``on the Floor'' and which Floor 
Market Maker orders will be subject to certain restrictions of the 
proposed rule change.\78\
---------------------------------------------------------------------------

    \77\ See proposed BOX Rule 8510(f) and (g).
    \78\ See proposed BOX Rules IM-8510-3(b), IM-8510-4 and IM-8510-
5.
---------------------------------------------------------------------------

D. Options Exchange Officials and Supervision of the Trading Floor

    Under the proposed rule change, the President of the Exchange and 
his or her designated staff will 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, in addition to establishing 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 will 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.\79\
---------------------------------------------------------------------------

    \79\ See proposed BOX Rule 100(b)(1). The Exchange states that 
it will submit a separate filing to the Commission to amend the 
Exchange's Minor Rule Violation Plan in BOX Rule 12140 to cover 
minor rule violations on the Trading Floor. The Exchange represents 
that it will not commence operation of the Trading Floor until the 
Exchange's Minor Rule Violation Plan has been amended to include 
violations which may occur on the Trading Floor.
---------------------------------------------------------------------------

    The proposed rule change provides for the designation of Options 
Exchange Officials. Specifically, any Exchange employee or officer may 
be designated as an Options Exchange Official and will have the ability 
to recommend and enforce rules and regulations relating to trading 
access, order, decorum, health, safety and welfare on the Exchange.\80\ 
An Options Exchange Official will be required to, among other things, 
certify that Floor Brokers adequately announce QOO Orders to the 
trading crowd,\81\ resolve disputes regarding a Floor Broker's 
determination of time priority sequence,\82\ and properly record the 
allocation of the initiating side of a QOO Order as provided by a Floor 
Broker.\83\ Options Exchange Officials will also be

[[Page 37148]]

allowed to temporarily limit the number of Floor Market Makers in the 
trading crowd who are establishing or increasing a position when the 
interests of a fair and orderly market are served by such 
limitation,\84\ as well as call upon a Floor Market Maker to make a 
market.\85\
---------------------------------------------------------------------------

    \80\ See proposed BOX Rule 100(b)(6).
    \81\ See proposed BOX Rule 7600(b).
    \82\ See proposed BOX Rule 7610(d)(1).
    \83\ See proposed BOX Rule 7600(d)(4).
    \84\ See proposed BOX Rule IM-8510-6.
    \85\ See proposed BOX Rule 8510(d). See also proposed BOX Rule 
7610(d)(3).
---------------------------------------------------------------------------

    In addition, disputes occurring on and relating to the Trading 
Floor, if not settled by agreement between the interested Floor 
Participants, will be settled by an Options Exchange Official.\86\ 
Options Exchange Officials will have the authority to direct the 
execution of an order, adjust the transaction terms or Participants to 
an executed order, or nullify a transaction if the Options Exchange 
Official determines the transaction to have been in violation of 
Exchange Rules.\87\ All Options Exchange Official rulings are effective 
immediately and failure to comply with such a ruling may result in an 
additional violation.\88\ All Options Exchange Official rulings are 
reviewable by the Chief Regulatory Officer or his or her designee, and 
the proposed rule change provides procedures regarding review of 
rulings by Options Exchange Officials.\89\
---------------------------------------------------------------------------

    \86\ See proposed BOX Rule 7640(a). The Exchange will be 
permitted to determine that an Options Exchange Official is 
ineligible to participate in a particular ruling where it appears 
such Options Exchange Official has a conflict of interest. See 
proposed BOX Rule IM-7640-1.
    \87\ See proposed BOX Rule 7640(b).
    \88\ See proposed BOX Rule 7640(c).
    \89\ See proposed BOX Rule 7640(e).
---------------------------------------------------------------------------

E. Clerks

    The Exchange will permit Clerks--defined as any registered on-floor 
persons employed by or associated with a Floor Broker or Floor Market 
Maker and who are not eligible to effect transactions on the Trading 
Floor as a Floor Market Maker or Floor Broker--on the Trading 
Floor.\90\ Proposed Rule 7630 sets forth identification requirements, 
registration requirements, and provisions relating to conduct on the 
Trading Floor with respect to Clerks.\91\ A Floor Broker Clerk will be 
permitted to enter an order under the direction of a Floor Broker by 
way of any order handling device.\92\ A Floor Market Maker Clerk will 
be 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, and such bids and offers are 
binding as if made by the Floor Market Maker employer.\93\ 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 a 
``Floor Employee'' under ``BOX'' on Form U4.\94\
---------------------------------------------------------------------------

    \90\ See proposed BOX Rule 7630(a).
    \91\ See proposed BOX Rule 7630. Among other things, proposed 
BOX Rule 7630 will require Clerks to display prominently at all time 
badge(s) supplied to them by the Exchange while on the Trading Floor 
and specifies that Clerks will be primarily located at a workstation 
assigned to his employer unless the Clerk is (i) entering or leaving 
the Trading Floor; (ii) transmitting, correcting, or checking the 
status of an order or reporting or correcting an executed trade; or 
(iii) supervising other Clerks. See id.
    \92\ See proposed BOX Rule 7630(e).
    \93\ See proposed BOX Rule 7630(f)(2).
    \94\ See proposed BOX Rule 2020(i).
---------------------------------------------------------------------------

F. Communications and Equipment

    The Exchange proposes BOX Rule 7660 to govern communications and 
equipment on the Trading Floor, including registration requirements, 
restrictions on use, capacity and functionality, recordkeeping 
requirements and exchange liability. Among other things, the proposed 
rule will allow Floor Market Makers to use their own cellular and 
cordless phones to place calls to any person at any location (whether 
on or off the Trading Floor) and allow Floor Brokers to use any 
communication device on the Trading Floor and in the Crowd Area to 
receive orders, provided that the Exchange's audit trail and record 
retention requirements are satisfied.\95\ In addition, the Exchange 
represents that it has established a Communications Devices policy and 
violations of this policy may result in disciplinary action by the 
Exchange.\96\ Proposed BOX Rule 7660 and any relevant Exchange policy 
are intended to apply to all communication and other electronic devices 
on the Trading Floor, including, but not limited to, wireless, wired, 
tethered, voice, and data.\97\
---------------------------------------------------------------------------

    \95\ See proposed BOX Rule 7660(h) and (i).
    \96\ See proposed BOX Rule IM-7660-1.
    \97\ See proposed BOX Rule IM-7660-2.
---------------------------------------------------------------------------

G. Other Changes

    The Exchange's proposal includes several other provisions relating 
to the proposed Trading Floor, including Trading Floor hours; \98\ 
Trading Floor admittance; \99\ the term ``on the Floor,'' which means 
the Trading Floor, 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;'' \100\ and the 
location of Floor Participants on the Trading Floor.\101\ The proposal 
also includes provisions relating generally to Floor Participants, 
including the registration of Floor Participants; \102\ excepting Floor 
Participants who do not conduct business with the public from brokers' 
blanket bond requirements; \103\ requiring Floor Participants to 
procure and maintain liability insurance; \104\ generally prohibiting 
trading for joint accounts without the prior approval of the exchange; 
\105\ prohibiting Floor Participants from relying on an exemption under 
Section 11(a)(1)(G) of the Act; \106\ and procedures governing the 
resolution of uncompared trades between Floor Participants.\107\ To 
accommodate new definitions relevant to the proposed Trading Floor, the 
Exchange is also renumbering certain subparts of Rule 100, Definitions, 
and making corresponding changes to update cross-references to such 
definitions where appropriate.\108\
---------------------------------------------------------------------------

    \98\ See proposed BOX Rule 7500.
    \99\ See proposed BOX Rules 7510 and 7520.
    \100\ See proposed BOX Rule IM-8510-3(a).
    \101\ See proposed BOX Rule IM-8510-7.
    \102\ See BOX Rule 2020(h).
    \103\ See proposed BOX Rule 4180(g).
    \104\ See proposed BOX Rule 7230(f).
    \105\ See proposed BOX Rule 7650.
    \106\ See proposed BOX Rule IM-7600-5.
    \107\ See proposed BOX Rule 8530(a).
    \108\ See, e.g., proposed BOX Rules 100, 7130, 7150, 7245.
---------------------------------------------------------------------------

H. Trading Floor Data

    The Exchange represents that it will provide the Commission with 
data related to activity on the Trading Floor.\109\ 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.\110\ Firm-specific 
information will be provided to the Commission on a confidential basis 
each quarter and non-firm specific information will be made available 
to the public quarterly on the Exchange's Web site.\111\
---------------------------------------------------------------------------

    \109\ See Notice of Amendment No. 2, supra note 11, at 23679.
    \110\ See id.
    \111\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review and consideration of the comments received, 
the Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2, is consistent with the

[[Page 37149]]

requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\112\ In particular, the 
Commission finds that the proposed rule change, as modified by 
Amendment Nos. 1 and 2, is consistent with Sections 6(b)(1) and 6(b)(5) 
of the Act.\113\ Section 6(b)(1) of the Act \114\ requires an exchange 
to be so organized and have the capacity to be able to carry out the 
purposes of the Act and to comply, and to enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Act, the rules and regulations thereunder, and the rules of the 
exchange. Section 6(b)(5) of the Act \115\ requires, among other 
things, that the rules of a national securities exchange be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and not be designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers.
---------------------------------------------------------------------------

    \112\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \113\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5).
    \114\ 15 U.S.C. 78f(b)(1).
    \115\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As previously noted, the Commission received three comment letters 
on the initial proposed rule change, and one response letter from 
BOX.\116\ Subsequently, the Commission received five comment letters on 
the Order Instituting Proceedings and the proposed rule change as 
modified by Amendment No. 1, as well as a second response letter from 
BOX. Of these five comment letters, two urged disapproval of the 
proposed rule change,\117\ while the remaining three requested clarity 
or more specificity on various aspects of the proposal.\118\ Finally, 
in response to the publication of Amendment No. 2, two prior commenters 
submitted additional letters and BOX submitted an additional response 
letter.\119\ One of these commenters raised concerns with several 
aspects of the proposal for which it requested further 
consideration,\120\ while the other commenter urged disapproval of the 
proposed rule change, as amended.\121\
---------------------------------------------------------------------------

    \116\ These comments, as well as BOX's initial response, are 
described in detail in the Order Instituting Proceedings. See Order 
Instituting Proceedings, supra note 7.
    \117\ See CBOE Letter II and CTC Letter II, supra note 8.
    \118\ See Group One Letter, Nasdaq Letter II, and NYSE Letter, 
supra note 8.
    \119\ See Nasdaq Letter III and CTC Letter III, supra note 13 
and BOX Response Letter III, supra note 14.
    \120\ See Nasdaq Letter III, supra note 13.
    \121\ See CTC Letter III, supra note 13.
---------------------------------------------------------------------------

A. BOX Floor Participation

1. Floor Market Maker Presence Requirement
    Four commenters expressed concern that BOX's initial proposal would 
allow a Floor Broker to execute trades on the Trading Floor when no 
Floor Market Makers are present.\122\ One commenter argued that options 
exchange trading floors grew from crowded equities or futures floors 
and therefore were certain to have robust and active market maker 
populations.\123\ The commenter further stated that the lack of rules 
to ensure robust market maker participation on the proposed Trading 
Floor would provide a way for internalizers to avoid exposure to market 
makers who might otherwise provide price improvement, which is contrary 
to investor protection and the public interest.\124\ One commenter 
stated that allowing orders to be crossed without meaningful exposure 
to other market participants deprives floor orders of the opportunity 
for exposure to a bona fide open-outcry auction process.\125\ Another 
commenter suggested that orders should be exposed to any Floor 
Participant that is eligible to interact as part of the crossing 
transaction.\126\ Another commenter argued that any proposed new 
options trading floor should be required to electronically expose all 
orders originating on the trading floor to qualified market 
participants off the trading floor before such orders would be 
permitted to execute.\127\
---------------------------------------------------------------------------

    \122\ See CTC Letters I & II, CBOE Letter II, Group One Letter, 
and Nasdaq Letter II, supra notes 4 and 8.
    \123\ See CTC Letter I, supra note 4, at 4.
    \124\ See id. at 4-5. See also Group One Letter and NYSE Letter, 
supra note 8.
    \125\ See Group One Letter, supra note 8, at 2.
    \126\ See NYSE Letter, supra note 8, at 2.
    \127\ See CTC Letter I, supra note 4, at 3-4.
---------------------------------------------------------------------------

    One commenter suggested that prior to the commencement of trading, 
BOX should be required to demonstrate that the Trading Floor is 
sufficiently populated with market participants, particularly Floor 
Market Makers, to ensure that a reasonable amount of liquidity 
exists.\128\ This commenter further noted that a well-populated trading 
floor is important for fostering price competition.\129\
---------------------------------------------------------------------------

    \128\ See Nasdaq Letter III, supra note 13, at 3.
    \129\ See id. at 2.
---------------------------------------------------------------------------

    In response to concerns about the potential for trades to be 
executed in the absence of a Floor Market Maker on the Trading Floor, 
BOX submitted Amendment No. 2 to require a Floor Broker to ascertain 
that at least one Floor Market Maker is present in the trading crowd 
prior to announcing an order to the trading crowd.\130\ In addition, in 
response to concerns regarding a potential lack of order exposure to 
other Floor Participants, BOX stated that proposed Rules 7580(e)(2) and 
7600(b) require all orders from the Trading Floor to be exposed to the 
trading crowd prior to execution in the Trading Host and to require a 
Floor Broker to give Floor Participants a reasonable amount of time to 
respond once an order is announced to the trading crowd.\131\ BOX 
further stated that the proposal has always required orders to be 
exposed to the trading crowd prior to execution.\132\ In addition, BOX 
stated that it plans to launch its trading operations on the Trading 
Floor as soon as the requisite number of Floor Market Makers and Floor 
Brokers are registered and able to participate on the Trading 
Floor.\133\
---------------------------------------------------------------------------

    \130\ See BOX Response Letter II, supra note 12, at 3. See also 
Notice of Amendment No. 2, supra note 11, at 23663.
    \131\ See BOX Response Letter II, supra note 12, at 2-3.
    \132\ See id.
    \133\ See BOX Response Letter III, supra note 14, at 2.
---------------------------------------------------------------------------

    The Commission notes that the Exchange amended its proposal to 
require a Floor Broker to ascertain that at least one Floor Market 
Maker be present in the Crowd Area prior to announcing an order to the 
trading crowd. The Commission believes that this requirement--along 
with the BOX's other amendments to the proposal, such as the changes to 
the crowd area presence requirement and the Floor Market Maker quoting 
requirement, described below--are designed to increase the 
opportunities for another Floor Participant to compete to interact with 
the orders on the Trading Floor.\134\
---------------------------------------------------------------------------

    \134\ See proposed BOX Rule 7580(a).
---------------------------------------------------------------------------

2. Crowd Area Presence Requirement
    Four commenters raised concerns with the proposed requirement in 
BOX's initial proposed rule change that a Floor Market Maker must be 
physically located in a specific Crowd Area to be deemed participating 
in the Crowd.\135\

[[Page 37150]]

Two commenters expressed concern regarding the proposed rule change's 
description and application of physical boundary requirements.\136\ One 
commenter suggested that this aspect of the proposed rule change would 
limit potential opportunities for market maker price improvement.\137\ 
Another commenter suggested that the proposal to allow a Floor Market 
Maker to participate in a crowd only if he or she is physically located 
in a specific Crowd Area ``at the time the order is represented in the 
crowd'' is designed to discourage Floor Market Makers from providing 
liquidity.\138\ The commenter suggested that the Exchange could instead 
open a Trading Floor comprised of a single Crowd Area with rules 
permitting all Floor Market Makers to trade all issues as a means to 
help ensure opportunities for price improvement.\139\ Another commenter 
stated that, without knowledge of the order, it will be impossible for 
market makers to position themselves in advance in the appropriate pit, 
and therefore, multiple crowd areas will limit the ability of Floor 
Market Makers to participate, potentially threatening the best 
execution of customer orders.\140\
---------------------------------------------------------------------------

    \135\ See CBOE Letters I & II, CTC Letters I & II, Group One 
Letter, and NYSE Letter, supra notes 4 and 8.
    \136\ See CBOE Letter I and CTC Letter I, supra note 4.
    \137\ See CBOE Letter I, supra note 4, at 2, n.2.
    \138\ See CTC Letter I, supra note 4, at 6.
    \139\ See id.
    \140\ See Group One Letter, supra note 8, at 2.
---------------------------------------------------------------------------

    In response to these concerns, BOX submitted Amendment No. 2 to 
provide that the Trading Floor will be comprised of a single Crowd 
Area.\141\ BOX further noted that all options classes will be located 
in that Crowd Area, and Floor Brokers must expose orders via open 
outcry in the Crowd Area.\142\
---------------------------------------------------------------------------

    \141\ See BOX Response Letter II, supra note 12, at 2.
    \142\ See id.
---------------------------------------------------------------------------

    The Commission believes that providing all Floor Market Makers the 
opportunity to respond to all orders on the Trading Floor is designed 
to increase the potential for competition for an order, which may 
increase the quality of order executions on BOX.\143\
---------------------------------------------------------------------------

    \143\ See proposed BOX Rule 100(b)(5).
---------------------------------------------------------------------------

3. Market Makers Must Opt-In To Participate
    Four commenters expressed concern about the aspect of the proposal 
that requires market makers to affirmatively opt-in to participate in a 
floor trade.\144\ One commenter opposed the concept of assuming a 
market maker to be ``out'' by default and expressed their preference 
that BOX be required to allow Floor Market Makers to respond to a Floor 
Broker's request for a quote before a cross is executed.\145\ Another 
commenter stated its belief that the proposed default ``out'' is 
unnecessary so long as the proposed rules support ample opportunities 
for Floor Market Maker participation.\146\ Another commenter requested 
clarification as to what would constitute participation for Floor 
Market Makers,\147\ while a different commenter suggested that a Floor 
Market Maker's failure to bid or offer in ``immediate and rapid 
succession'' could be treated the same way as the Floor Market Maker 
not responding at all--with the result that the Floor Market Maker will 
be considered ``out'' on the trade.\148\
---------------------------------------------------------------------------

    \144\ See CTC Letter II, Group One Letter, Nasdaq Letter II, and 
NYSE Letter, supra note 8.
    \145\ See CTC Letter II, supra note 8, at 6.
    \146\ See Group One Letter, supra note 8, at 3.
    \147\ See Nasdaq Letter II, supra note 8, at 3.
    \148\ See NYSE Letter, supra note 8, at 2.
---------------------------------------------------------------------------

    In response, BOX submitted Amendment No. 2 to provide that a Floor 
Broker will be required to give Floor Participants a reasonable amount 
of time to respond once the Floor Broker announces an order to the 
trading crowd.\149\ BOX also clarified that after a Floor Broker 
announces an order, a Floor Participant must verbalize that he is 
``in'' even if the Floor Participant has already provided a valid quote 
prior to the announcement of the order by the Floor Broker.\150\
---------------------------------------------------------------------------

    \149\ See Notice of Amendment No. 2, supra note 11, at 23659. 
See also proposed BOX Rule 100(b)(5).
    \150\ See Notice of Amendment No. 2, supra note 11, at 23660. In 
addition, the Exchange noted that at least one other options 
exchange with an options floor also requires members of its trading 
crowd to respond to participate in a floor crossing transaction. See 
CBOE Rule 6.74(a). See also NYSE Arca Rule 6.47(a); and NYSE 
American LLC Rule 934NY.
---------------------------------------------------------------------------

    The Commission believes the proposal should ensure that Floor 
Participants may respond to orders announced in the trading crowd. In 
addition, the Commission notes that Amendment No. 2 will require an 
Options Exchange Official to certify that a Floor Broker adequately 
announced a QOO Order to the trading crowd.\151\
---------------------------------------------------------------------------

    \151\ See proposed BOX Rule 7600(b).
---------------------------------------------------------------------------

4. Floor Market Maker Quoting Requirement
    Five commenters expressed concern with the proposed requirement in 
BOX's initial proposed rule change that Floor Market Makers would have 
to quote electronically in all classes offered on the proposed Trading 
Floor.\152\ One commenter stated that the imposition of an electronic 
quoting requirement could limit potential market maker price 
improvement.\153\ This commenter further argued that the quoting 
requirement creates a barrier to entry that they believe will limit 
market-maker participation on the Trading Floor.\154\ Another commenter 
suggested that the proposed requirement appears to impose a costly and 
unprofitable burden on would-be market makers, which will discourage 
them from participating on the Trading Floor and which in turn will 
create a trading floor which is devoid of opportunities for meaningful 
order exposure and price improvement.\155\ This commenter further 
argued that the proposed rule change will discourage competitive market 
maker participation on the proposed Trading Floor.\156\ In response to 
commenters' concerns, in Amendment No. 2, BOX eliminated the 
requirement to quote electronically in the classes that the Floor 
Market Maker quotes on the Trading Floor.\157\
---------------------------------------------------------------------------

    \152\ See CBOE Letters I & II, CTC Letters I & II, Group One 
Letter, Nasdaq Letters I & II, and NYSE Letter, supra notes 4 and 8.
    \153\ See CBOE Letter I, supra note 4, at 2 n.2.
    \154\ See CBOE Letter II, supra note 8, at 2.
    \155\ See CTC Letter I, supra note 4, at 5. See also CTC Letter 
III, supra note 13, at 2.
    \156\ See CTC Letter I, supra note 4, at 5.
    \157\ See Notice of Amendment No. 2, supra note 11, at 23658. 
See also BOX Response Letter II, supra note 12, at 2.
---------------------------------------------------------------------------

    The Commission believes that BOX's proposal to require a Floor 
Market Maker to provide a two-sided market that complies with certain 
delineated quote spread parameters in response to any request for quote 
by a Floor Broker or Options Exchange Official, is consistent with the 
Act.

B. Single-Sided Floor Orders

    Two commenters raised concerns about the inability of Floor 
Participants to represent single-sided orders on the proposed BOX 
Floor.\158\ One commenter noted that some language in Amendment No. 1 
``welcomes'' Floor Brokers to bring unmatched orders to the Trading 
Floor, while other language stated that ``orders on the floor must be 
two-sided orders,'' which the commenter found to be contradictory and 
confusing.\159\ In response, the Exchange submitted Amendment No. 2 to 
specifically state that Floor Brokers will be permitted to bring an 
unmatched order to the Trading Floor in order to seek a contra-side, 
and then enter the order into the BOX system using the QOO order 
type.\160\
---------------------------------------------------------------------------

    \158\ See CBOE Letter I and CTC Letters I & II, supra notes 4 
and 8.
    \159\ See CTC Letter II, supra note 8, at 8.
    \160\ See proposed BOX Rules 7580(e)(2), 7600(b), IM-7600-4. See 
also BOX Response Letter I, supra note 6, at 4.
---------------------------------------------------------------------------

    Specifically, the Exchange noted that, as was true in its initial 
proposed rule

[[Page 37151]]

change, Floor Brokers will be permitted to bring single-sided orders to 
the Trading Floor in order to find contra-side liquidity.\161\ The 
Commission notes that the Exchange's proposed rules state that Floor 
Brokers will have the ability to represent single-sided orders on the 
Trading Floor, will be permitted to solicit bids and offers from Floor 
Market Makers to provide a contra-side order, and set forth rules 
governing the handling and execution of single-sided orders originating 
on the Trading Floor.
---------------------------------------------------------------------------

    \161\ See Notice of Amendment No. 2, supra note 11, at 23660.
---------------------------------------------------------------------------

C. Trade-Through and Priority Rules

    One commenter stated that the proposed rule change is unclear 
regarding how the proposed BOG would systematically prevent violations 
of priority and trade-through requirements.\162\ This commenter further 
stated that it is unclear whether exposure in the trading crowd is 
required and whether the market against which trades are validated 
differs depending on the method of execution.\163\ Specifically, the 
commenter claimed that the proposed rule change does not sufficiently 
describe the timing and process for validating trades.\164\ In 
addition, this commenter stated that the proposed rule change does not 
discuss the specific manner in which surveillance reviews transactions 
for violations of Exchange rules or the manner in which the BOG or the 
Exchange enforces compliance for on-floor transactions.\165\
---------------------------------------------------------------------------

    \162\ See Nasdaq Letter I, supra note 4, at 2. See also Nasdaq 
Letter II, supra note 8, at 3-4.
    \163\ See Nasdaq Letter I, supra note 4, at 2.
    \164\ See id.
    \165\ See id. at 3.
---------------------------------------------------------------------------

    In response to the commenter's concern that the proposed rule 
change is unclear about whether the BOG would systematically prevent 
violations of priority and trade-through requirements, BOX stated that 
the method by which trades are received and processed by the Trading 
Host serves as a safeguard to prevent violations of the priority and 
trade-through requirements.\166\ BOX also noted that the execution does 
not occur when there is verbal agreement in the trading crowd, but 
rather when the executing Floor Broker sends the order from the Trading 
Floor to the Trading Host for execution.\167\ BOX further stated that 
it structured the proposal to prevent trade-through violations and 
protect priority interest on the BOX Book.\168\
---------------------------------------------------------------------------

    \166\ See BOX Response Letter I, supra note 6, at 1-2. See also 
BOX Response Letter II, supra note 12, at 3 (stating that since the 
execution does not occur until the order is processed by the Trading 
Host, the system will enforce compliance with trade-through, 
priority, and other rules).
    \167\ See BOX Response Letter II, supra note 12, at 3.
    \168\ See BOX Response Letter I, supra note 6, at 2.
---------------------------------------------------------------------------

    In response to the commenter's suggestion that the proposed rule 
change does not adequately discuss surveillance, BOX stated that it 
currently has surveillance procedures in place to monitor compliance 
with the Exchange's rules and that these procedures will be used to 
monitor transactions originating from the Trading Floor.\169\
---------------------------------------------------------------------------

    \169\ See id.
---------------------------------------------------------------------------

    In response to BOX's assurances regarding its proposed surveillance 
procedures, the commenter stated that it is unclear whether BOX would 
have real-time surveillance coverage on the trading floor in addition 
to other types of surveillance coverage.\170\ The commenter suggested 
that real-time surveillance is necessary to monitor the unique aspects 
of member floor trading, such as negotiating open-outcry trades, 
handling floor disputes, and maintaining the ability to manually 
intervene in the floor environment.\171\
---------------------------------------------------------------------------

    \170\ See Nasdaq Letter III, supra note 13, at 1-2.
    \171\ See id.
---------------------------------------------------------------------------

    In response, BOX stated that it will have both a real-time 
surveillance presence on the trading floor and other surveillance 
coverage.\172\ BOX further noted that proposed Rule 7600(b) will 
require an Options Exchange Official to certify that a Floor Broker 
adequately announced a QOO Order to the trading crowd and stated that 
such certification is only possible if the Official is physically 
present on the Trading Floor.\173\ Finally, BOX reiterated that because 
all orders from the Trading Floor will be processed by the Trading 
Host, the Exchange also will electronically monitor all orders from the 
Trading Floor in the same manner as it does with electronic 
orders.\174\
---------------------------------------------------------------------------

    \172\ See BOX Response Letter III, supra note 14, at 2.
    \173\ See id.
    \174\ See id.
---------------------------------------------------------------------------

    The Commission notes that the Exchange represents that the Trading 
Host will establish an electronic audit trail for options orders 
represented and executed by Floor Brokers, that according to the 
Exchange, 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 documenting all stages of the order.\175\ The Commission 
believes that the proposed systematization of all orders submitted to 
the Trading Floor is designed to provide a more complete audit trail 
and allow the Exchange to better monitor compliance with applicable 
Commission regulations and Exchange Rules.\176\ In addition, the 
Commission notes that the proposal requires all QOO Orders to be 
submitted through the BOG to be immediately processed by the Trading 
Host.\177\ The Commission further notes that orders are not deemed 
executed until they are processed by the Trading Host. The Commission 
believes that the automation provided by the BOG and the Trading Host 
may benefit the Exchange, its members and users, and other market 
participants by, for example, producing more accurate and timely trade 
reports and should ensure compliance with trade-through and priority 
rules. For example, the Trading Host will automatically prohibit a QOO 
Order from executing if such execution would trade-through a better 
priced order on the BOX Book (and the Floor Broker does not provide an 
adequate book sweep size) or on another market.\178\ In addition, 
processing and executing all QOO Orders by the Trading Host could 
provide a more accurate timestamp for audit trail and recordkeeping 
purposes than a manual alternative.\179\ The Commission believes that 
the functionality provided by the BOG and the Trading Host is 
reasonably designed to assist Floor Participants in complying with 
applicable Commission rules and regulations, and with the Exchange's 
Rules.
---------------------------------------------------------------------------

    \175\ See Notice of Amendment No. 2, supra note 11, at 23661.
    \176\ See proposed BOX Rule 7580(e)(1).
    \177\ See proposed BOX Rule 100(b)(2).
    \178\ See proposed BOX Rule 7600.
    \179\ The Commission notes that the proposed rule change does 
not permit trades to occur on the Trading Floor if there is a 
malfunction with the Trading Host or related Trading Floor systems 
such as the BOG. See proposed BOX Rule 7580(e)(1).
---------------------------------------------------------------------------

D. Book Sweep

    Three commenters expressed concern about the proposed ``book sweep 
size'' mechanism.\180\ One commenter suggested that the book sweep size 
would be a feature that prevents executions of orders on the BOX 
Book.\181\ The commenter further stated that the book sweep mechanism 
could prevent orders from executing in circumstances where there are 
orders on the BOX Book that could fill the order, possibly at a better 
price, and thus the mechanism potentially compromises its participants' 
compliance with best-execution obligations and unfairly discriminates 
against investors with

[[Page 37152]]

executable orders resting in the BOX Book.\182\ Another commenter 
suggested that the book sweep size functionality could allow Floor 
Brokers to ensure the internalization of orders by not designating a 
book sweep size.\183\
---------------------------------------------------------------------------

    \180\ See CBOE Letter II, CTC Letters I, II, & III, and NYSE 
Letter, supra notes 4, 8 and 13.
    \181\ See CTC Letter I, supra note 4, at 7. See also CTC Letter 
III, note 13, at 3.
    \182\ See CTC Letter I, supra note 4, at 7-8. See also CTC 
Letter III, note 13, at 3.
    \183\ See CBOE Letter II, supra note 8, at 2.
---------------------------------------------------------------------------

    In response to the commenters' concerns regarding the book sweep 
size aspect of the proposal, BOX stated that the book sweep size is a 
voluntary tool that will aid Floor Brokers in satisfying duties owed to 
their customers, such as best execution.\184\ For example, according to 
BOX, when a Floor Broker needs an order to be executed immediately, the 
broker could opt either to provide a book sweep size equal to the 
entire size of the order, which provides liquidity to the BOX Book, or 
to provide an execution price that is better than the current best 
price on BOX, which presents an opportunity for potential price 
improvement.\185\ BOX also noted that it believes functionality similar 
to the book sweep size mechanism is available on at least one other 
trading floor, so the book sweep size aspect of its proposal is not 
unique.\186\ BOX further stated that any Floor Broker that uses the 
book sweep size for the purpose of violating his or her duties and 
obligations will be considered to have engaged in conduct inconsistent 
with just and equitable principles of trade.\187\
---------------------------------------------------------------------------

    \184\ See BOX Response Letter I, supra note 6, at 3-4. See also 
BOX Response Letter II, supra note 12, at 3-4; BOX Response Letter 
III, supra note 14, at 3.
    \185\ See BOX Response Letter I, supra note 6, at 4.
    \186\ See id. See also BOX Response Letter II, supra note 12, at 
4; BOX Response Letter III, supra note 14, at 3. BOX states that it 
believes the proposed book sweep size mechanism is comparable to the 
PHLX Floor Broker Management System.
    \187\ See BOX Response Letter II, supra note 8, at 4.
---------------------------------------------------------------------------

    The Commission believes that the book sweep size functionality 
should provide Floor Brokers with an efficient mechanism to 
automatically execute orders (provided they designate a sufficient book 
sweep size) without having to send a separate order to clear orders on 
the BOX Book that have priority.
    The Commission reminds broker-dealers that they have a legal duty 
to seek to obtain best execution of customer orders.\188\ A broker-
dealer's duty of best execution derives from common law agency 
principles and fiduciary obligations, and is incorporated in SRO rules 
and, through judicial and Commission decisions, the antifraud 
provisions of the federal securities laws.\189\ The duty of best 
execution requires broker-dealers to periodically assess the quality of 
competing markets to assure that order flow is directed to the markets 
providing the most beneficial terms for their customer orders.\190\ 
Broker-dealers must examine their procedures for seeking to obtain best 
execution in light of market and technology changes and modify those 
practices if necessary to enable their customers to obtain the best 
reasonably available prices.\191\ In doing so, broker-dealers must take 
into account price improvement opportunities, and whether different 
markets may be more suitable for different types of orders or 
particular securities.\192\
---------------------------------------------------------------------------

    \188\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner & 
Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525 
U.S. 811 (1998); Certain Market Making Activities on Nasdaq, 
Securities Exchange Act Release No. 40900 (Jan. 11, 1999) (settled 
case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); In re 
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 
174 F.2d 969 (D.C. Cir. 1949)). See also Order Execution 
Obligations, Securities Exchange Act Release No. 37619A (Sept. 6, 
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules 
Release'').
    \189\ Order Handling Rules Release, supra note 188, at 48322. 
See also Newton, 135 F.3d at 270. Failure to satisfy the duty of 
best execution can constitute fraud because a broker-dealer, in 
agreeing to execute a customer's order, makes an implied 
representation that it will execute it in a manner that maximizes 
the customer's economic gain in the transaction. See Newton, 135 
F.3d at 273 (``[T]he basis for the duty of best execution is the 
mutual understanding that the client is engaging in the trade--and 
retaining the services of the broker as his agent--solely for the 
purpose of maximizing his own economic benefit, and that the broker 
receives her compensation because she assists the client in reaching 
that goal.''); In re Marc N. Geman, Securities Exchange Act Release 
No. 43963 (Feb. 14, 2001) (citing Newton, but concluding that 
respondent fulfilled his duty of best execution). See also Payment 
for Order Flow, Securities Exchange Act Release No. 34902 (Oct. 27, 
1994), 59 FR 55006, 55009 (Nov. 2, 1994) (``Payment for Order Flow 
Final Rules''). If the broker-dealer intends not to act in a manner 
that maximizes the customer's benefit when he accepts the order and 
does not disclose this to the customer, the broker-dealer's implied 
representation is false. See Newton, 135 F.3d at 273-274.
    \190\ Order Handling Rules Release, supra note 188, at 48322-33 
(``In conducting the requisite evaluation of its internal order 
handling procedures, a broker-dealer must regularly and rigorously 
examine execution quality likely to be obtained from different 
markets or market makers trading a security.''). See also Newton, 
135 F.3d at 271; Market 2000: An Examination of Current Equity 
Market Developments, at V-4 (SEC Division of Market Regulation 
January 1994) (``Without specific instructions from a customer, 
however, a broker-dealer should periodically assess the quality of 
competing markets to ensure that its order flow is directed to 
markets providing the most advantageous terms for the customer's 
order.''); Payment for Order Flow Final Rules, supra note 189, at 
55009.
    \191\ Order Handling Rules, supra note 188 at 48323.
    \192\ See id.
---------------------------------------------------------------------------

E. Compliance With Section 11(a) of the Act

    One commenter expressed concern that BOX may not have adequately 
explained how options participants would comply with Section 11(a)(1) 
of the Act when effecting transactions through the BOG.\193\ More 
specifically, this commenter noted that BOX did not explain how a BOX 
member that is the counterparty to a QOO Order would comply with 
Section 11(a) of the Act.\194\ In response, BOX amended its proposal to 
help ensure compliance with Section 11(a)(1) of the Act.\195\
---------------------------------------------------------------------------

    \193\ See NYSE Letter, supra note 8, at 5-6.
    \194\ See id.
    \195\ See BOX Response Letter II, supra note 12, at 4.
---------------------------------------------------------------------------

    Section 11(a)(1) of the Act \196\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts''), unless an exception applies. 
Sections 11(a)(1)(A)-(I) of the Act \197\ and the rules thereunder 
provide certain exemptions from this general prohibition, including the 
exemption set forth in Rule 11a2-2(T) under the Act.\198\ The Exchange 
represents that its proposed rule change is consistent with Section 
11(a) of the Act and the rules thereunder.\199\ The Exchange also 
states that the proposed rule change would not limit in any way the 
obligation of a Participant to comply with Section 11(a) of the Act or 
the rules thereunder.\200\
---------------------------------------------------------------------------

    \196\ 15 U.S.C. 78k(a)(1).
    \197\ 15 U.S.C. 78k(a)(1)(A)-(I).
    \198\ 17 CFR 240.11a2-2(T).
    \199\ See Notice of Amendment No. 2, supra note 11, at 23681.
    \200\ See id.
---------------------------------------------------------------------------

    The Commission notes that the Exchange proposes to adopt IM-7600-5, 
which states that a Participant shall not utilize the Trading Floor to 
effect any transaction for a covered account by relying on an exemption 
under Section 11(a)(1)(G) of the Act (``G Exemption'').\201\ As the 
Exchange notes,

[[Page 37153]]

because no covered account transactions utilizing the Trading Floor may 
rely on the G Exemption, Participants utilizing the Trading Floor to 
effect transactions for covered accounts may only rely upon other 
exemptions to the Section 11(a)(1) prohibition.\202\
---------------------------------------------------------------------------

    \201\ 15 U.S.C. 78k(a)(1)(G). Section 11(a)(1)(G) of the Act 
provides an exemption from the general prohibition in Section 
11(a)(1) of the Act for any transaction for a member's own account, 
provided that: (i) Such member is primarily engaged in the business 
of underwriting and distributing securities issued by other persons, 
selling securities to customers, and acting as broker, or any one or 
more of such activities, and whose gross income normally is derived 
principally from such business and related activities; and (ii) such 
transaction is effected in compliance with rules of the Commission 
which, as a minimum, assure that the transaction is not inconsistent 
with the maintenance of fair and orderly markets and yields 
priority, parity, and precedence in execution to orders for the 
account of persons who are not members or associated with members of 
the exchange. See also 17 CFR 240.11a1-1(T) (setting forth 
requirements for relying on the G Exemption).
    \202\ See Notice of Amendment No. 2, supra note 11, at 23681. 
Section 11(a) of the Act and the rules thereunder provide other 
exemptions to the Section 11(a)(1) prohibition, including, for 
example, the ``effect versus execute'' exemption (as discussed 
below), the exemption for transactions by a dealer acting in the 
capacity of a market maker, and the exemption for transactions to 
offset a transaction made in error.
---------------------------------------------------------------------------

    In addition to statutory exemptions, Rule 11a2-2(T) under the 
Act,\203\ known as the ``effect versus execute'' rule, provides 
exchange members with an exemption from the Section 11(a)(1) 
prohibition. Rule 11a2-2(T) permits an exchange member, subject to 
certain conditions, to effect transactions for covered accounts by 
arranging for an unaffiliated member to execute transactions on the 
exchange. To comply with Rule 11a2-2(T)'s conditions, a member: (i) 
Must transmit the order from off the exchange floor; (ii) may not 
participate in the execution of the transaction once the order has been 
transmitted to the member performing the execution; \204\ (iii) may not 
be affiliated with the executing member; and (iv) with respect to an 
account over which the member or an associated person has investment 
discretion, neither the member nor an associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule. For the reasons set forth below, the Commission 
believes that Participants utilizing the Trading Floor may comply with 
the conditions of Rule 11a2-2(T) under the Act.\205\
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    \203\ 17 CFR 240.11a2-2(T).
    \204\ This prohibition also applies to associated persons of the 
initiating member. The member may, however, participate in clearing 
and settling the transaction.
    \205\ The Commission has previously found that the all-
electronic transactions effected through the Trading Host are 
consistent with the requirements of Section 11(a) of the Act and 
Rule 11a2-2(T) thereunder. See, e.g., Securities Exchange Act 
Release Nos. 72848 (August 14, 2014), 79 FR 49361 (August 20, 2014) 
(SR-BOX-2014-16) (order approving the Exchange's proposal to adopt 
new trade allocation algorithms for matching trades at the 
conclusion of the PIP and the COPIP); and 66871 (April 27, 2012), 77 
FR 26323 (May 3, 2012) (order granting the Exchange's application 
for registration as a national securities exchange). As part of the 
current proposal, the Exchange represents 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 the 
Exchange. See Notice of Amendment No. 2, supra note 11, at 23659.
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    Rule 11a2-2(T)'s first requirement is that orders for covered 
accounts be transmitted from off the exchange floor. The Commission has 
found that the off-floor transmission requirement is met if a covered 
account order is transmitted from a remote location directly to an 
exchange's floor by electronic means.\206\ The Exchange states that 
Floor Brokers will receive matched or unmatched orders either via 
telephone, or electronically to the Floor Broker's order entry 
mechanism.\207\ Moreover, the Exchange states that a Participant 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).\208\ The Commission notes that a 
Participant that submits an order for a covered account that utilizes 
the Trading Floor, and who wishes to rely on the ``effect versus 
execute'' exemption, must submit the order from off the Trading Floor.
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    \206\ See, e.g., Securities Exchange Act Release Nos. 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979); and 14563 (March 
14, 1978), 43 FR 11542 (March 17, 1978) (``1978 Release'').
    \207\ See Notice of Amendment No. 2, supra note 11, at 23666.
    \208\ See id. at 23681.
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    Second, Rule 11a2-2(T) requires that neither the initiating member 
nor an associated person of the initiating member participate in the 
execution of the transaction at any time after the order for the 
transaction has been transmitted. The Exchange represents that 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.\209\ In addition, the Exchange states that once 
a Floor Broker submits a QOO order to the BOG for execution, neither 
the Floor Broker nor anyone else may alter the terms of the order.\210\ 
Moreover, when a Floor Broker submits a QOO Order for execution, the 
order will be executed in accordance with Exchange rules and based on 
market conditions of when the order is received by the Trading 
Host.\211\ Accordingly, based on the Exchange's representations, the 
Commission believes that a Participant and its associated persons would 
not participate in the execution of an order submitted for execution 
utilizing the Trading Floor.
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    \209\ See id. The Commission notes that a Participant may cancel 
or modify the order, or modify the instructions for executing the 
order. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances so long as the 
modifications or cancellations are also transmitted from off the 
floor. See 1978 Release, supra note 206, at 11547 (stating that the 
``non-participation requirement does not prevent initiating members 
from canceling of modifying orders (or the instructions pursuant to 
which the initiating member wishes orders to be executed) after the 
orders have been transmitted to the executing member, provided that 
any such instructions are also transmitted from off the floor'').
    \210\ See proposed Rule 7600(c) and Notice of Amendment No. 2, 
supra note 11, at 23666.
    \211\ See proposed Rule 7600(a) and Notice of Amendment No. 2, 
supra note 11, at 23665.
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    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member that is not associated with the member initiating the 
order. According to the Exchange, to rely on the exemption in Rule 
11a2-2(T), a Participant could submit an order for a covered account 
from off the Trading Floor to an unaffiliated Floor Broker.\212\ The 
Exchange also states that a Participant relying on Rule 11a2-2(T) could 
not submit an order for a covered account to its ``house'' Floor Broker 
on the Trading Floor for execution.\213\ The Commission notes that if a 
Participant sends its order from off the floor to an affiliated 
Participant that is on the floor, who then directs the order into the 
Trading Host for execution, the off-floor Participant may not rely on 
the exemption in Rule 11a2-2(T).
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    \212\ See Notice of Amendment No. 2, supra note 11, at 23681.
    \213\ See id.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person may retain any compensation in connection with 
effecting the transaction, unless the person authorized to transact 
business for the account has expressly provided otherwise by written 
contract referring to Section 11(a) of the Act and Rule 11a2-2(T) 
thereunder.\214\ The

[[Page 37154]]

Commission notes that Participants and their associated persons trading 
for covered accounts over which they exercise investment discretion 
must comply with this condition in order to rely on the rule's 
exemption.
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    \214\ In addition, Rule 11a2-2(T)(d) requires that, if a member 
or associated person is authorized by written contract to retain 
compensation in connection with effecting transactions for covered 
accounts over which the member or associated person thereof 
exercises investment discretion, the member or associated person 
must furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member or any associated person 
thereof in connection with effecting transactions for the account 
during the period covered by the statement. See 17 CFR 240.11a2-
2(T)(d). See also 1978 Release, supra note 206, at 11548 (stating 
that ``[t]he contractual and disclosure requirements are designed to 
assure that accounts electing to permit transaction-related 
compensation do so only after deciding that such arrangements are 
suitable to their interests'').
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F. Options Market Structure: Price Improvement, Fragmentation and 
Trading Floor Data

    Three commenters expressed concern that the proposed rule change 
would negatively impact opportunities for orders to receive price 
improvement.\215\ Specifically, one commenter stated that the proposed 
rule change is designed to minimize opportunities for market maker and 
public customer trading interest to interact with, and provide price 
improvement to, orders being crossed on the BOX floor.\216\ This 
commenter asserts that the proposed rule change is designed to offer a 
frictionless crossing mechanism, which can be utilized to the detriment 
of customers.\217\
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    \215\ See CBOE Letters I & II, CTC Letters I & II, and Nasdaq 
Letter II, supra notes 4, 8 and 13.
    \216\ See CBOE Letter I, supra note 4, at 1-2.
    \217\ See id. at 2.
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    Two commenters expressed concern that the proposed rule change 
would increase fragmentation in the options trading market. One 
commenter stated that the proposed BOX floor would add an additional 
trading venue that firms, who have finite resources, would be required 
to staff and which would further fragment liquidity without offering 
anything unique or beneficial to customers.\218\ Another commenter 
stated that opening a new trading floor will exacerbate the practice of 
``venue shopping,'' and noted that the number of market making firms is 
limited, and that market making firms lack the resources necessary to 
staff an escalating number of physical trading floors with dedicated 
personnel.\219\
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    \218\ See CBOE Response Letter I, supra note 4, at 1.
    \219\ See CTC Letter I, supra note 4, at 3.
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    In response, BOX argues that concerns about the general success of 
options trading floors are beyond the scope of its proposal.\220\ BOX 
further asserts that raising concerns about options trading floors 
either lacks merit or is an attempt to delay the approval of its 
proposal.\221\ In addition, BOX commits to provide the Commission with 
data related to activity on the Trading Floor, specifically information 
regarding size, participation, price improvement by spread and trade 
type, effective spread, Floor Market Maker participation, and BOX Book 
participation.\222\ This information could be used to evaluate, among 
other things, the levels of participation and amount of price 
improvement on the Trading Floor. Finally, BOX indicated that it 
believes a new trading floor will be good for the markets by providing 
increased competition which may lead to improvements in the market, 
which will inure to the benefit of all market participants.\223\
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    \220\ See BOX Response Letter I, supra note 6, at 4.
    \221\ See id.
    \222\ See Notice of Amendment No. 2, supra note 11, at 23679.
    \223\ See BOX Response Letter III, supra note 14, at 3-4.
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    The Commission believes that the proposed rule change is consistent 
with the Act. Under the proposed rule change, the Exchange will 
establish an ``open outcry'' trading floor where orders will be sent to 
Floor Brokers who will represent those orders in an agency capacity, 
and who will be required to announce such orders to a trading crowd 
composed of Floor Market Makers prior to any execution. In this regard, 
the Commission notes that the Exchange made modifications to the 
initial proposal that are designed to remove or reduce the potential 
impediments to order interaction on the BOX Floor and which are 
designed to increase opportunities for price improvement. The 
Commission also notes that the data the Exchange has committed to 
provide may assist the Commission in assessing the level of 
participation in crossing transactions by market makers and other 
market participants, aside from the firm that initiated the cross, and 
to better review whether existing exchange rules appropriately allow 
for robust and beneficial competition on the options trading floors.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\224\ that the proposed rule change (SR-BOX-2016-48), as modified 
by Amendment Nos. 1 and 2, be, hereby is, approved.
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    \224\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\225\
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    \225\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-16638 Filed 8-7-17; 8:45 am]
 BILLING CODE 8011-01-P

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