Self-Regulatory Organizations; BOX Options Exchange LLC; Notice of Filing of Proposed Rule Change To Adopt Rules Governing the Trading of Complex Qualified Contingent Cross and Complex Customer Cross Orders, 26719-26724 [2018-12319]
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Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 15 and
subparagraph (f)(6) of Rule 19b–4
thereunder.16
A proposed rule change filed under
Rule 19b–4(f)(6) 17 normally does not
become operative prior to 30 days after
the date of the filing. However, Rule
19b–4(f)(6)(iii) 18 permits the
Commission to designate a shorter time
if such action is consistent with the
protection of investors and the public
interest. The Exchange has asked the
Commission to waive the 30-day
operative delay so that the proposed
rule change may become effective and
operative immediately upon filing. The
Exchange states that waiver of the
operative delay will allow the Exchange
to correct the Nasdaq MRX Top Quote
Feed and update its rules immediately
regarding order and execution
information offered on MRX. The
Exchange further states that it believes
the waiver will further the protection of
investors and the public interest
because it will provide greater
transparency as to the Nasdaq MRX Top
Quote Feed as well as trade detail
available to market participants.
Further, the Exchange states that
memorializing TradeInfo will provide
Members with greater information
concerning a Member’s executions on
MRX and make its availability
transparent. The Commission believes
that waiver of the 30-day operative
delay is consistent with the protection
of investors and the public interest.
15 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
17 17 CFR 240.19b–4(f)(6).
18 17 CFR 240.19b–4(f)(6)(iii).
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16 17
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Therefore, the Commission hereby
waives the 30-day operative delay and
designates the proposed rule change as
operative upon filing.19
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MRX–2018–16 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MRX–2018–16. 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
19 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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26719
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MRX–2018–16 and should
be submitted on or before June 29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–12318 Filed 6–7–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83367; File No. SR–BOX–
2018–14]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing of Proposed Rule Change To
Adopt Rules Governing the Trading of
Complex Qualified Contingent Cross
and Complex Customer Cross Orders
June 4, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 22,
2018, BOX Options Exchange LLC (the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to adopt rules
governing the trading of Complex
Qualified Contingent Cross and
Complex Customer Cross Orders. The
text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Exchange’s internet website at https://
boxoptions.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing rules that
will make existing functionality
available to additional order types on
BOX. Specifically, the Exchange is
proposing rules to codify Complex
Customer Cross Orders and Complex
Qualified Contingent Cross (‘‘QCC’’)
Orders on the Exchange.3 The Exchange
notes that the proposed changes are
similar to the rules of another
exchange.4 In addition, the Exchange is
proposing to expand certain Complex
Order protections to the newly codified
QCC Order and Complex Customer
Cross Orders.5
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Complex Customer Cross Orders
First, the Exchange is proposing to
add text related to Complex Customer
Cross Orders. Proposed Rule
7240(b)(4)(iii) defines a Complex
Customer Cross Order as a type of
Complex Order which is comprised of
one Public Customer Complex Order to
buy and one Public Customer Complex
Order to sell (the same strategy) at the
same price and for the same quantity.6
The Exchange uses the same crossing
mechanism for the processing and
execution of Complex Customer Cross
Orders that is used for Customer Cross
Orders in the regular market.
Accordingly, proposed Rule 7110(c)(7)
shall govern the trading of Complex
Customer Cross Orders, as defined in
Rule 7240(b)(4)(iii), on BOX. Proposed
3 See https://boxoptions.com/assets/RC-2017-11CC_QCC_cNBBO-July-10-Implementation-1.pdf.
4 See MIAX Rules 518(b)(5), 515(h)(3), 515(h)(4)
and 518(b)(6).
5 See SR–BOX–2018–13.
6 Proposed Rule 7240(b)(4)(iii) is based on MIAX
Rule 518(b)(5).
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Rule 7110(c)(7) describes the execution
price requirements that are specific to
Complex Customer Cross Orders.7
Specifically, Complex Customer Cross
Orders are automatically executed upon
entry provided that the execution (i) is
at least $0.01 better than (inside) the
cBBO 8 and any Public Customer
Complex Order on the Complex Order
Book; 9 (ii) is at or better than any nonPublic Customer Complex Order on the
Complex Order Book; and (iii) is at or
between the cNBBO.10 The purpose of
the requirement that the execution must
be at least $0.01 better than the cBBO is
to ensure that there is no interference
between the regular and complex
markets. The purpose of the
requirement that the execution must be
at least $0.01 better than any Public
Customer Complex Order on the
Complex Order Book is to ensure that
the Complex Customer Cross Order does
not trade in front of any resting Public
Customer Complex Orders. The purpose
of the requirement that the Complex
Customer Cross Order be executed at or
between the cNBBO is to ensure that net
execution price is within the best net
price available in the market and is in
line with the requirement that simple
Customer Cross Orders must execute at
or within the NBBO.
The system will reject a Complex
Customer Cross Order if, at the time of
receipt of the Complex Customer Cross
Order, the strategy is subject to an
ongoing auction (including COPIP,
Facilitation, and Solicitation auctions)
or there is an exposed order on the
strategy pursuant to Rule 7240(b)(3)(B).
The purpose of this provision is to
maintain an orderly market by avoiding
the execution of Complex Customer
Cross Orders with components that are
involved in other system functions that
could affect the execution price of the
Complex Customer Cross Order, and by
avoiding concurrent processing on the
Exchange involving the same strategy.
Proposed Rule 7110(c)(7)(i) states that
Complex Customer Cross Orders will be
automatically cancelled if they cannot
be executed. Proposed Rule
7110(c)(7)(ii) provides that Complex
Customer Cross Orders may only be
7 Proposed Rule 7110(c)(7) is based on MIAX Rule
515(h)(3).
8 The term ‘‘cBBO’’ means the best net bid and
offer price for a Complex Order Strategy based on
the BBO on the BOX Book for the individual
options components of such Strategy. See Rule
7240(a)(1).
9 The term ‘‘Complex Order Book’’ means the
electronic book of Complex Orders maintained by
the BOX Trading Host. See Rule 7240(a)(8).
10 The term ‘‘cNBBO’’ means the best net bid and
offer price for a Complex Order Strategy based on
the NBBO for the individual options components of
such Strategy. See Rule 7240(a)(3).
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entered in the minimum trading
increments applicable to Complex
Orders under Rule 7240(b)(1).
As a regulatory matter, proposed Rule
7110(c)(7)(iii) states that IM–7140–1
applies to the entry and execution of
Complex Customer Cross Orders.11
The following example illustrates the
execution of a Complex Customer Cross
Order:
Example 1—Execution of a Complex
Customer Cross Order
BOX Leg A Book: 6.00–6.50
BOX Leg B Book: 3.00–3.30
Strategy: Buy A Call, Sell B Call
The cNBBO is 2.70–3.20
The cBBO is 3.00–3.20
The Complex Order Book contains a Public
Customer order to sell the strategy at 3.20.
The Exchange receives a Complex
Customer Cross Order representing Public
Customers on both sides for the simultaneous
purchase and sale of the strategy at a price
of 3.19.
The order price is at least $0.01 better than
(inside) the cBBO and the Public Customer
Complex Order on the Complex Order Book.
Additionally, the order price is at or between
the cNBBO. Therefore, the Complex
Customer Cross Order is automatically
executed upon entry.
The Exchange notes that the proposed
rules for Complex Customer Cross
Orders are based on the rules of another
exchange with certain minor
differences.12 First, the MIAX Rule
requires the execution price to be better
than the best net price of a complex
order. The proposal requires the
execution price to be better than any
Public Customer Complex Orders on the
Complex Order Book and no worse than
the price of any non-Public Customer
Complex Orders. The Exchange believes
this difference is minor because the
execution price must respect the orders
on the Complex Order Book and not
trade ahead of Public Customer Orders
on the Complex Order Book, which is in
line with regular Customer Cross
11 Rule 7140(b) prevents an Options Participant
executing agency orders to increase its economic
gain from trading against the order without first
giving other trading interest on BOX an opportunity
to trade with the agency order pursuant to Rule
7150 (Price Improvement Period), Rule 7245
(Complex Order Price Improvement Period) or Rule
7270 (Block Trades). However, the Exchange
recognizes that it may be possible for an Options
Participant to establish a relationship with a
Customer or other person (including affiliates) to
deny agency orders the opportunity to interact on
BOX and to realize similar economic benefits as it
would achieve by executing agency orders as
principal. It will be a violation of this Rule for an
Options Participant to circumvent this Rule by
providing an opportunity for a Customer or other
person (including affiliates) to execute against
agency orders handled by the Options Participant
immediately upon their entry into the Trading Host.
See IM–7140–1.
12 See MIAX Rules 515(h)(3) and 518(b)(5).
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Orders. Pursuant to Rule 7110(c)(5) a
Customer Cross Order must execute at a
price that is at or between the best bid
and offer on BOX and is not at the same
price as a Public Customer Order on the
BOX Book. Additionally, the Exchange
is proposing to have the execution price
be within the cNBBO, which MIAX does
not provide. The Exchange believes this
difference is minor because the
Exchange is simply ensuring that the
execution price respect the best net
prices available in the market.
Additionally, similarly to the above,
regular Complex Cross Orders may not
trade through the NBBO.
Next, although both the proposed
Rule and MIAX’s Rule require the
execution to be at least $0.01 better than
best price based on orders on the regular
books, MIAX includes non-displayed
trading interest when determining the
best price based on the regular books,
which the Exchange is not proposing
because the Exchange does not have
non-displayed interest.
Lastly, MIAX rejects a Complex
Customer Cross Order if, at the time of
receipt, any component of the strategy is
subject to a PRIME Auction, a Route
Timer, or liquidity refresh pause. The
Exchange is not proposing the same
conditions.13 With respect to not
rejecting when a component is subject
to an auction, the Exchange notes that
this approach is in line with the
treatment of a COPIP when there is an
ongoing PIP on a component of the
Complex Order. Specifically, the
Exchange will accept Complex Orders
designated for the COPIP where there is
a PIP on an individual component.14
Further, in order to ensure orderly
markets involving multiple Complex
Orders with common components, the
Exchange is proposing additional
circumstances in which a Complex
Customer Cross Order will be rejected,
specifically, when there is an exposed
order on the strategy pursuant to rule
7240(b)(4)(iii), or there is an ongoing
Facilitation or Solicitation auction on
the strategy.
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Complex QCC Orders
Next, the Exchange is proposing to
add text related to Complex QCC
Orders. Pursuant to proposed Rule
7240(b)(4)(iv), a Complex QCC Order is
comprised of an originating Complex
Order to buy or sell where each
component is at least 1,000 contracts
that is identified as being part of a
13 BOX notes that it does not have either the
Route Timer or liquidity refresh pause features on
the Exchange. As such, BOX is not proposing to
include these features under the Proposal.
14 See IM–7245–2.
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qualified contingent trade 15 coupled
with a contra-side Complex Order or
orders totaling an equal number of
contracts.16
The Exchange uses the same crossing
mechanism for the processing and
execution of Complex QCC Orders that
is used for QCC Orders in the regular
market.17 Accordingly, proposed Rule
7110(c)(8) shall govern trading of
Complex QCC Orders, as defined in
Rule 7240(b)(4)(iv), on BOX. Proposed
Rule 7110(c)(8) describes the execution
price requirements that are specific for
Complex QCC Orders.18 Specifically,
Complex QCC Orders are automatically
executed upon entry provided that the
execution (i) is not at the same price as
a Public Customer Complex Order; (ii)
is at least $0.01 better than (inside) the
cBBO; (iii) is at or better than any nonPublic Customer Complex on the
Complex Order Book; and (iv) each
option leg executes at or between the
NBBO. The purpose of the requirement
that the execution must be at least $0.01
better than the cBBO is to ensure that
there is no interference between the
regular and complex markets. The
purpose of the requirement that the
execution must not be at the same price
as any Public Customer Complex Order
on the Complex Order Book is to ensure
that the Complex Customer Cross Order
does not trade in front of any resting
Public Customer Complex Orders. The
purpose of the requirement that the
individual options legs of the Complex
15 A ‘‘qualified contingent trade’’ is a transaction
consisting of two or more component orders,
executed as agent or principal, where: (1) At least
one component is an NMS Stock, as defined in Rule
600 of Regulation NMS under the Exchange Act; (2)
all components are effected with a product or price
contingency that either has been agreed to by all the
respective counterparties or arranged for by a
broker-dealer as principal or agent; (3) the
execution of one component is contingent upon the
execution of all other components at or near the
same time; (4) the specific relationship between the
component orders (e.g., the spread between the
prices of the component orders) is determined by
the time the contingent order is placed; (5) the
component orders bear a derivative relationship to
one another, represent different classes of shares of
the same issuer, or involve the securities of
participants in mergers or with intentions to merge
that have been announced or cancelled; and (6) the
transaction is fully hedged (without regard to any
prior existing position) as a result of other
components of the contingent trade. See IM–7110–
2.
16 Proposed Rule 7240(b)(4)(iv) is based on MIAX
Rule 518(b)(6).
17 See Securities Exchange Act Release No. 80661
(May 11, 2017), 82 FR 22682 (May 17, 2017) (SR–
BOX–2017–14). The Exchange notes that regular
QCC Orders on BOX are allowed to execute
automatically on entry without exposure provided
the execution: (i) Is not at the same price as a Public
Customer Order on the BOX Book; and (2) is at or
between the NBBO.
18 Proposed Rule 7110(c)(8) is based on MIAX
Rule 515(h)(4).
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26721
QCC Order be executed at or between
the NBBO is to ensure that the
execution price of each option leg is
within the best price available in the
market and is in line with the
requirement that simple QCC Orders
must execute at or within the NBBO.
The system does not consider the
NBBO price for the stock component
because the Exchange does not execute
the stock component; the Exchange
executes the option components at a net
price and ensures that, among other
things, the execution price of (i) the
strategy is at least $0.01 better than the
cBBO; and (ii) each option leg is at or
between the NBBO.
The Exchange believes the proposed
Complex QCC pricing methodology
aligns with the Qualified Contingent
Trade (‘‘QCT’’) Exemption, as defined
below. The parties to a contingent trade
are focused on the spread or ratio
between the transaction prices for each
of the component instruments (i.e., the
net price of the entire contingent trade),
rather than on the absolute price of any
single component. Pursuant to the
requirements of the NMS QCT
Exemption, the spread or ratio stands
regardless of the market prices of the
individual orders at their time of
execution. As the Commission noted in
the Original QCT Exemption, ‘‘the
difficulty of maintaining a hedge, and
the risk of falling out of hedge, could
dissuade participants from engaging in
contingent trades, or at least raise the
cost of such trades.’’ Thus, the
Commission found that, if each stock leg
of a qualified contingent trade were
required to meet the trade-through
provisions of Rule 611 of Regulation
NMS, such trades could become too
risky and costly to be employed
successfully and noted that the
elimination or reduction of this trading
strategy potentially could remove
liquidity from the market.19 This is also
true for QCC Orders in options, and thus
the Exchange believes that its proposal
is consistent with the Original QCT
Exemption.20
The system will reject a Complex QCC
Order if, at the time of receipt of the
Complex QCC Order, the strategy is
subject to an ongoing auction (including
COPIP, Facilitation, and Solicitation
19 See Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829 (September 7, 2006)
(‘‘Original QCT Exemption’’).
20 The Exchange represents that QCTs will be
subject to existing trading surveillance
administered by the Financial Industry Regulatory
Authority (‘‘FINRA’’) on behalf of the Exchange,
which are designated to detect violations of
Exchange rules and applicable federal securities
laws. The Exchange believes the existing
surveillance of QCTs is sufficient to ensure
compliance with the proposed rule.
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auctions) or there is an exposed order
on the strategy pursuant to Rule
7240(b)(3)(B). The purpose of this
provision is to maintain an orderly
market by avoiding the execution of
Complex QCC Order with components
that are involved in other system
functions that could affect the execution
price of the Complex QCC Order, and by
avoiding concurrent processing on the
Exchange involving the same strategy.
Proposed Rule 7110(c)(8)(i) states that
Complex QCC Orders will be
automatically cancelled if they cannot
be executed. Proposed Rule
7110(c)(8)(ii) provides that Complex
QCC Orders may only be entered in the
minimum trading increments applicable
to Complex Orders under Rule
7240(b)(1).
The following example illustrates the
execution of a Complex QCC Order:
Example 2—Execution of a Complex QCC
Order
BOX Leg A Book: 6.00–6.60
BOX Leg B Book: 3.00–3.30
Leg A NBBO: 6.00–6.60
Leg B NBBO: 3.00–3.30
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Strategy: Buy A Call, Sell B Call
The cBBO is 2.70–3.30
The cNBBO is 2.70–3.30
The Complex Order Book contains a
broker-dealer order to sell the strategy at
3.29.
The Exchange receives a Complex
QCC Order for the simultaneous
purchase and sale of the strategy at a net
price of 3.29, 1,000 times. Since the
order can be executed at or between the
NBBO for each leg of the strategy, is not
at a worse price than the non-Public
Customer Order on the Complex Order
Book, is at least $0.01 better than the
cBBO and the order size is met, the
Complex QCC Order is automatically
executed upon entry.
The proposed rules governing
Complex QCC Orders are based on the
rules of another exchange with certain
differences.21 First, MIAX requires the
individual legs be executed not at the
same price as a Priority Customer Order
on the book. The Exchange does not
propose to include this provision of
MIAX’s rule as the BOX system handles
Complex Orders differently.
Specifically, Complex Orders on BOX
are executed at a net debit or credit, and
therefore it is understandable that the
execution parameters would be
controlled by the net price of the
strategy rather than the individual legs.
A Complex Order may execute as a net
credit or debit with one other
Participant; provided, the price of at
least one leg of the Complex Order must
21 See
MIAX Rules 515(h)(4) and 518(b)(6).
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trade at a price that is better than the
corresponding bid or offer in the
marketplace by at least one minimum
trading increment (i.e., one cent) as set
forth in Rule 7240(b)(1).22 As such, and
to stay in line with how Complex
Orders are handled on BOX, the
Exchange is proposing that the net
execution price of the Complex QCC
Order be better than the cBBO. As
discussed above, this is in line with the
approach to Complex Orders in general
on the Exchange. Further, the Exchange
believes it is important to respect all
interest in the regular Book and not only
Public Customer interest, as is the case
with MIAX, which is why the Exchange
requires the Complex QCC Order to be
better than the cBBO.
To illustrate this, assume a Complex
QCC Order at $2.01 is received by the
system for strategy A+B. There is a
Public Customer Order to buy leg A on
the Book for $1.00 and a Public
Customer Order to buy leg B on the
Book for $1.00. Under the proposal, the
Complex QCC Order would be accepted
by the system because the execution
price is at least $0.01 better than the
cBBO.23 The Exchange does not believe
that this result harms the resting Public
Customer Orders.24 Specifically, given
the execution price of $2.01, the sell
side of the Complex QCC Order could
not interact with the resting Public
Customer Orders because there is no
interest on the individual legs that,
when combined, equal the execution
price of $2.01. If, however, in addition
to the Public Customer order to buy leg
B at $1.00 there is a non-Public
Customer order to buy leg B at $1.01,
the Complex QCC Order at $2.01 would
be rejected. This is because the
execution price is no longer better than
the cBBO.25 As such, the Public
Customer Order on leg A is protected
because there is interest on the
individual leg Books that, when
22 See Rule 7240(b)(2)(1)(i). In addition, Complex
Qualified Open Outcry Orders 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 (i.e., one
cent) as set forth in Rule 7240(b)(1). See 7600(c).
23 Assume for the example that the cBBO is 2.00–
5.00. The 2.00 bid is comprised of the Public
Customer Orders on the individual leg books and
5.00 is a resting Complex Order.
24 As outlined in the proposal, this is consistent
with how the system currently handles the
interaction between Complex Orders and the
individual leg Books. The Exchange notes that the
same behavior occurs regardless of the account of
the order on the individual leg Books. For example,
if the orders on the leg Books were for the account
of a broker-dealer, the execution price of the
Complex QCC would still need to be $0.01 better
than the cBBO.
25 The cBBO would now be 2.01–5.00.
PO 00000
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Sfmt 4703
combined, equal the proposed execution
price of the Complex QCC Order.
Further, since the agreed upon price
between market participants was $2.01,
it would be detrimental to require the
order to be executed at a worse price
than is necessary. While the BOX
proposal does not have the same price
protection for Public Customers as
MIAX Complex QCC rule, the Exchange
believes the proposal, which provides a
level of price protection to all
Participants, remains consistent with
the Act.
The Exchange is proposing the
additional requirements that the
execution price is not at the same price
as a Public Customer Complex Order
and at or better than any non-Public
Customer Complex Order on the
Complex Order Book as compared to
MIAX. The Exchange believes that these
additional requirements are reasonable
because the Exchange is respecting
resting Complex Orders.
Lastly, MIAX rejects a Complex QCC
Order if, at the time of receipt, any
component of the strategy is subject to
a PRIME Auction, a Route Timer, or
liquidity refresh pause. The Exchange is
not proposing the same conditions.26
With respect to not rejecting when a
component is subject to an auction, the
Exchange notes that this approach is in
line with the treatment of a COPIP when
there is an ongoing PIP on a component
of the Complex Order. Specifically, the
Exchange will accept Complex Orders
designated for the COPIP where there is
a PIP on an individual component.27
Further, the Exchange notes that orders
on the regular book are protected by the
fact that the execution price must be at
least $0.01 better than the cBBO.
Additionally, in order to ensure orderly
markets involving multiple Complex
Orders with common components, the
Exchange is proposing additional
circumstances in which a Complex QCC
Order will be rejected, specifically,
when there is an exposed order on the
strategy, or there is an ongoing
Facilitation or Solicitation auction on
the strategy.
Lastly, the Exchange proposes to
expand certain Complex Order
protections to Complex QCC Orders and
Complex Customer Cross Orders.
Specifically, the Exchange proposes to
amend Rule IM–7240–1(a)(5) and IM–
7240(b)(5) to apply these price
protection checks to Complex QCC
Orders and Complex Customer Cross
26 BOX notes that it does not have either the
Route Timer or liquidity refresh pause features on
the Exchange. As such, BOX is not proposing to
include these features under the Proposal.
27 See IM–7245–2.
E:\FR\FM\08JNN1.SGM
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Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Notices
Orders. The Exchange notes that another
options exchange has similar price
checks.28
amozie on DSK3GDR082PROD with NOTICES1
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),29 in general, and Section 6(b)(5)
of the Act,30 in particular, in that it is
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general to protect investors and the
public interest.
The proposal to amend Rules 7110
and 7240 to codify rules covering
Complex Customer Cross and Complex
QCC Orders is consistent with Section
6(b)(5) of the Act because this proposal
promotes just and equitable principles
of trade and protects investors and the
public interest by providing increased
opportunities for the execution of
Complex Orders. The Exchange believes
that the proposed Complex Customer
Cross and Complex QCC Rules will
benefit Participants and the marketplace
as a whole by adopting rules that allow
for the trading of these types of orders
on the Exchange. The Exchange believes
the proposed rules for Complex
Customer Cross and Complex QCC
Orders remove impediments to and
perfects the mechanism of a free and
open market and a national market
system and will result in more efficient
trading and enhance the likelihood of
the Complex Orders executing at the
best prices by providing additional
order types resulting in potentially
greater liquidity available for trading on
the Exchange.
The proposed rule change will
provide rules that make existing
functionality available to additional
order types. Providing rules that make
Customer Cross and QCC available for
Complex Orders removes impediments
to and perfects the mechanisms of a free
and open market and a national market
system because Participants will be
given additional ways in which they can
execute Complex Orders.
The proposed rule change will protect
investors and the public interest by
28 See Chicago Board Options Exchange,
Incorporated (‘‘Cboe’’) Interpretations and Polices
.08(c) and (g) to Rule 6.53C.
29 15 U.S.C. 78f(b).
30 15 U.S.C. 78f(b)(5).
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16:53 Jun 07, 2018
Jkt 241001
assuring the existing priority and
allocation rules applicable to the
processing and execution of Customer
Cross Orders, QCC Orders, and Complex
Orders remains consistent with the
processing and execution of these order
types, unless otherwise specifically set
forth in the rules.
The Exchange further believes that the
proposed methodology for the execution
of Complex QCC Orders without
consideration of the NBBO of the stock
component is consistent with the QCT
Exemption. As stated above, the QCT
Exemption provides an exception for
the stock leg of qualified contingent
trades from trade-through requirements.
Therefore, the system considers the
NBBO of the options legs of the
Complex QCC Order, and not the NBBO
for the stock component, in calculating
the pricing requirement for Complex
QCC Orders.
The system does not consider the
NBBO price for the stock component
because the Exchange does not execute
the stock component; the Exchange
executes the option components at a net
price and ensures that the net execution
price for the strategy (i) is at least $0.01
better than the cBBO; (ii) is not at the
same price as a Public Customer
Complex Order; (iii) is at or better than
any non-Public Customer Complex
Order on the Complex Order Book; and
(iv) each leg is at or between the NBBO.
The Exchange believes that the
proposal to reject a Complex Customer
Cross or Complex QCC Order at the time
of receipt of the order when the strategy
is subject to an ongoing auction
(including COPIP, Facilitation and
Solicitation auctions), or there is an
exposed order on the strategy, removes
impediments to and perfects the
mechanism of a free and open market by
ensuring orderly markets involving
multiple complex orders with common
components.
The proposed rule change to
implement a debit/credit check for
Complex QCC and Complex Customer
Cross Orders is consistent with the Act.
With the use of debit/credit checks, the
Exchange can further assist with the
maintenance of a fair and orderly
market by mitigating the potential risks
associated with Complex Orders trading
at prices that are inconsistent with their
strategies (which may result in
executions at prices that are extreme
and potentially erroneous), which
ultimately protects investors. This
proposed implementation of the debit/
credit check promotes just and equitable
principles of trade, as it is based on the
same general option and volatility
pricing principles which the Exchange
understands are used by market
PO 00000
Frm 00083
Fmt 4703
Sfmt 4703
26723
participants in their option pricing
models.
Additionally, the Exchange also
believes that calculating a maximum
price for true butterfly spreads, vertical
spreads, and box spreads will assist
with the maintenance of fair and orderly
markets by helping to mitigate the
potential risks associated with Complex
QCC and Complex Customer Cross
Orders trading at extreme and
potentially erroneous prices that are
inconsistent with particular Complex
Order strategies. Further, the Exchange
notes that the maximum price is
designed to mitigate the potential risks
of executions at prices that are not
within an acceptable price range, as a
means to help mitigate the potential
risks associated with Complex Orders
trading at prices that are inconsistent
with their strategies, in addition to the
debit/credit check. As such, the
proposed rule change is designed to
protect investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change to provide
rules governing the trading of Complex
Customer Cross and Complex QCC
Orders will impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. In this regard and
as indicated above, the Exchange notes
that the rule is being proposed as a
competitive response to the rules of
another exchange.31 Additionally, the
proposed rule change is intended to
promote competition by adding rules for
new order types that enable Participants
to execute Complex Orders on the
Exchange. The Exchange believes that
this enhances inter-market competition
by enabling the Exchange to compete for
this type of order flow with other
exchanges that have similar rules and
functionalities in place.
Further, the Exchange does not
believe that the proposed Complex
Order protections will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act. In this regard and
as indicated above, the Exchange notes
that the rule change is being proposed
as a competitive response to the rules of
another exchange.32 Additionally, the
Exchange believes the proposed rule
change is beneficial to Participants as it
will provide increased protections that
will prevent the execution of certain
Complex Orders that were entered in
31 See MIAX Rules 515(h)(3), 515(h)(4), 518(b)(5),
and 518(b)(6).
32 See supra, note 4.
E:\FR\FM\08JNN1.SGM
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26724
Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Notices
error. The Exchange believes the
proposal is pro-competitive and should
serve to attract additional Complex
Orders to the Exchange. Further, the
Exchange does not believe the proposed
change will not impose a burden on
intramarket competition because it is
available to all Participants.
For the reasons stated, the Exchange
does not believe that the proposed rule
changes will impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act, and the Exchange
believes the proposed change will, in
fact, enhance competition.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
amozie on DSK3GDR082PROD with NOTICES1
Electronic Comments
• 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–
BOX–2018–14 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BOX–2018–14. This file
number should be included on the
subject line if email is used. To help the
VerDate Sep<11>2014
16:53 Jun 07, 2018
Jkt 241001
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BOX–2018–14, and should
be submitted on or before June 29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–12319 Filed 6–7–18; 8:45 am]
BILLING CODE 8011–01–P
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend and
reorganize Chapter V of the ISE
Schedule of Fees.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83370; File No. SR–ISE–
2018–48]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend and
Reorganize Chapter V of the ISE
Schedule of Fees
June 4, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 22,
2018, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
33 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
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Sfmt 4703
The Exchange proposes to amend
Chapter V of the ISE Schedule of Fees
to: (i) Eliminate the Table of Contents;
(ii) retitle Section V, currently titled
‘‘Trading Application;’’ (iii) retitle Parts
A, B and C of Chapter V which are
currently titled ‘‘Installation,’’
‘‘Software License & Maintenance’’ and
‘‘Reserved’’ respectively; and (iv)
eliminate the Part D title, ‘‘INET Port
Fees’’ and amend and reorganize the
current port fees. Each change will be
described in more detail below. The
Exchange believes that the proposed
amendments to the Schedule of Fees
will provide more clarity as to the
current fees. The Exchange notes that no
fee changes are being introduced with
this rule change. The Exchange is
simply reorganizing its rules to conform
to other Nasdaq affiliate markets by
aligning the location and description of
its rules on each market.
E:\FR\FM\08JNN1.SGM
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Agencies
[Federal Register Volume 83, Number 111 (Friday, June 8, 2018)]
[Notices]
[Pages 26719-26724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-12319]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83367; File No. SR-BOX-2018-14]
Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing of Proposed Rule Change To Adopt Rules Governing the Trading
of Complex Qualified Contingent Cross and Complex Customer Cross Orders
June 4, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 22, 2018, BOX Options Exchange LLC (the ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to adopt rules governing the trading of
Complex Qualified Contingent Cross and Complex Customer Cross Orders.
The text of the proposed rule change is available from the principal
office of the Exchange, at the Commission's Public Reference Room and
also on the
[[Page 26720]]
Exchange's internet website at https://boxoptions.com.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange is proposing rules that will make existing
functionality available to additional order types on BOX. Specifically,
the Exchange is proposing rules to codify Complex Customer Cross Orders
and Complex Qualified Contingent Cross (``QCC'') Orders on the
Exchange.\3\ The Exchange notes that the proposed changes are similar
to the rules of another exchange.\4\ In addition, the Exchange is
proposing to expand certain Complex Order protections to the newly
codified QCC Order and Complex Customer Cross Orders.\5\
---------------------------------------------------------------------------
\3\ See https://boxoptions.com/assets/RC-2017-11-CC_QCC_cNBBO-July-10-Implementation-1.pdf.
\4\ See MIAX Rules 518(b)(5), 515(h)(3), 515(h)(4) and
518(b)(6).
\5\ See SR-BOX-2018-13.
---------------------------------------------------------------------------
Complex Customer Cross Orders
First, the Exchange is proposing to add text related to Complex
Customer Cross Orders. Proposed Rule 7240(b)(4)(iii) defines a Complex
Customer Cross Order as a type of Complex Order which is comprised of
one Public Customer Complex Order to buy and one Public Customer
Complex Order to sell (the same strategy) at the same price and for the
same quantity.\6\
---------------------------------------------------------------------------
\6\ Proposed Rule 7240(b)(4)(iii) is based on MIAX Rule
518(b)(5).
---------------------------------------------------------------------------
The Exchange uses the same crossing mechanism for the processing
and execution of Complex Customer Cross Orders that is used for
Customer Cross Orders in the regular market. Accordingly, proposed Rule
7110(c)(7) shall govern the trading of Complex Customer Cross Orders,
as defined in Rule 7240(b)(4)(iii), on BOX. Proposed Rule 7110(c)(7)
describes the execution price requirements that are specific to Complex
Customer Cross Orders.\7\ Specifically, Complex Customer Cross Orders
are automatically executed upon entry provided that the execution (i)
is at least $0.01 better than (inside) the cBBO \8\ and any Public
Customer Complex Order on the Complex Order Book; \9\ (ii) is at or
better than any non-Public Customer Complex Order on the Complex Order
Book; and (iii) is at or between the cNBBO.\10\ The purpose of the
requirement that the execution must be at least $0.01 better than the
cBBO is to ensure that there is no interference between the regular and
complex markets. The purpose of the requirement that the execution must
be at least $0.01 better than any Public Customer Complex Order on the
Complex Order Book is to ensure that the Complex Customer Cross Order
does not trade in front of any resting Public Customer Complex Orders.
The purpose of the requirement that the Complex Customer Cross Order be
executed at or between the cNBBO is to ensure that net execution price
is within the best net price available in the market and is in line
with the requirement that simple Customer Cross Orders must execute at
or within the NBBO.
---------------------------------------------------------------------------
\7\ Proposed Rule 7110(c)(7) is based on MIAX Rule 515(h)(3).
\8\ The term ``cBBO'' means the best net bid and offer price for
a Complex Order Strategy based on the BBO on the BOX Book for the
individual options components of such Strategy. See Rule 7240(a)(1).
\9\ The term ``Complex Order Book'' means the electronic book of
Complex Orders maintained by the BOX Trading Host. See Rule
7240(a)(8).
\10\ The term ``cNBBO'' means the best net bid and offer price
for a Complex Order Strategy based on the NBBO for the individual
options components of such Strategy. See Rule 7240(a)(3).
---------------------------------------------------------------------------
The system will reject a Complex Customer Cross Order if, at the
time of receipt of the Complex Customer Cross Order, the strategy is
subject to an ongoing auction (including COPIP, Facilitation, and
Solicitation auctions) or there is an exposed order on the strategy
pursuant to Rule 7240(b)(3)(B). The purpose of this provision is to
maintain an orderly market by avoiding the execution of Complex
Customer Cross Orders with components that are involved in other system
functions that could affect the execution price of the Complex Customer
Cross Order, and by avoiding concurrent processing on the Exchange
involving the same strategy.
Proposed Rule 7110(c)(7)(i) states that Complex Customer Cross
Orders will be automatically cancelled if they cannot be executed.
Proposed Rule 7110(c)(7)(ii) provides that Complex Customer Cross
Orders may only be entered in the minimum trading increments applicable
to Complex Orders under Rule 7240(b)(1).
As a regulatory matter, proposed Rule 7110(c)(7)(iii) states that
IM-7140-1 applies to the entry and execution of Complex Customer Cross
Orders.\11\
---------------------------------------------------------------------------
\11\ Rule 7140(b) prevents an Options Participant executing
agency orders to increase its economic gain from trading against the
order without first giving other trading interest on BOX an
opportunity to trade with the agency order pursuant to Rule 7150
(Price Improvement Period), Rule 7245 (Complex Order Price
Improvement Period) or Rule 7270 (Block Trades). However, the
Exchange recognizes that it may be possible for an Options
Participant to establish a relationship with a Customer or other
person (including affiliates) to deny agency orders the opportunity
to interact on BOX and to realize similar economic benefits as it
would achieve by executing agency orders as principal. It will be a
violation of this Rule for an Options Participant to circumvent this
Rule by providing an opportunity for a Customer or other person
(including affiliates) to execute against agency orders handled by
the Options Participant immediately upon their entry into the
Trading Host. See IM-7140-1.
---------------------------------------------------------------------------
The following example illustrates the execution of a Complex
Customer Cross Order:
Example 1--Execution of a Complex Customer Cross Order
BOX Leg A Book: 6.00-6.50
BOX Leg B Book: 3.00-3.30
Strategy: Buy A Call, Sell B Call
The cNBBO is 2.70-3.20
The cBBO is 3.00-3.20
The Complex Order Book contains a Public Customer order to sell
the strategy at 3.20.
The Exchange receives a Complex Customer Cross Order
representing Public Customers on both sides for the simultaneous
purchase and sale of the strategy at a price of 3.19.
The order price is at least $0.01 better than (inside) the cBBO
and the Public Customer Complex Order on the Complex Order Book.
Additionally, the order price is at or between the cNBBO. Therefore,
the Complex Customer Cross Order is automatically executed upon
entry.
The Exchange notes that the proposed rules for Complex Customer
Cross Orders are based on the rules of another exchange with certain
minor differences.\12\ First, the MIAX Rule requires the execution
price to be better than the best net price of a complex order. The
proposal requires the execution price to be better than any Public
Customer Complex Orders on the Complex Order Book and no worse than the
price of any non-Public Customer Complex Orders. The Exchange believes
this difference is minor because the execution price must respect the
orders on the Complex Order Book and not trade ahead of Public Customer
Orders on the Complex Order Book, which is in line with regular
Customer Cross
[[Page 26721]]
Orders. Pursuant to Rule 7110(c)(5) a Customer Cross Order must execute
at a price that is at or between the best bid and offer on BOX and is
not at the same price as a Public Customer Order on the BOX Book.
Additionally, the Exchange is proposing to have the execution price be
within the cNBBO, which MIAX does not provide. The Exchange believes
this difference is minor because the Exchange is simply ensuring that
the execution price respect the best net prices available in the
market. Additionally, similarly to the above, regular Complex Cross
Orders may not trade through the NBBO.
---------------------------------------------------------------------------
\12\ See MIAX Rules 515(h)(3) and 518(b)(5).
---------------------------------------------------------------------------
Next, although both the proposed Rule and MIAX's Rule require the
execution to be at least $0.01 better than best price based on orders
on the regular books, MIAX includes non-displayed trading interest when
determining the best price based on the regular books, which the
Exchange is not proposing because the Exchange does not have non-
displayed interest.
Lastly, MIAX rejects a Complex Customer Cross Order if, at the time
of receipt, any component of the strategy is subject to a PRIME
Auction, a Route Timer, or liquidity refresh pause. The Exchange is not
proposing the same conditions.\13\ With respect to not rejecting when a
component is subject to an auction, the Exchange notes that this
approach is in line with the treatment of a COPIP when there is an
ongoing PIP on a component of the Complex Order. Specifically, the
Exchange will accept Complex Orders designated for the COPIP where
there is a PIP on an individual component.\14\ Further, in order to
ensure orderly markets involving multiple Complex Orders with common
components, the Exchange is proposing additional circumstances in which
a Complex Customer Cross Order will be rejected, specifically, when
there is an exposed order on the strategy pursuant to rule
7240(b)(4)(iii), or there is an ongoing Facilitation or Solicitation
auction on the strategy.
---------------------------------------------------------------------------
\13\ BOX notes that it does not have either the Route Timer or
liquidity refresh pause features on the Exchange. As such, BOX is
not proposing to include these features under the Proposal.
\14\ See IM-7245-2.
---------------------------------------------------------------------------
Complex QCC Orders
Next, the Exchange is proposing to add text related to Complex QCC
Orders. Pursuant to proposed Rule 7240(b)(4)(iv), a Complex QCC Order
is comprised of an originating Complex Order to buy or sell where each
component is at least 1,000 contracts that is identified as being part
of a qualified contingent trade \15\ coupled with a contra-side Complex
Order or orders totaling an equal number of contracts.\16\
---------------------------------------------------------------------------
\15\ A ``qualified contingent trade'' is a transaction
consisting of two or more component orders, executed as agent or
principal, where: (1) At least one component is an NMS Stock, as
defined in Rule 600 of Regulation NMS under the Exchange Act; (2)
all components are effected with a product or price contingency that
either has been agreed to by all the respective counterparties or
arranged for by a broker-dealer as principal or agent; (3) the
execution of one component is contingent upon the execution of all
other components at or near the same time; (4) the specific
relationship between the component orders (e.g., the spread between
the prices of the component orders) is determined by the time the
contingent order is placed; (5) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (6) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade. See IM-7110-2.
\16\ Proposed Rule 7240(b)(4)(iv) is based on MIAX Rule
518(b)(6).
---------------------------------------------------------------------------
The Exchange uses the same crossing mechanism for the processing
and execution of Complex QCC Orders that is used for QCC Orders in the
regular market.\17\ Accordingly, proposed Rule 7110(c)(8) shall govern
trading of Complex QCC Orders, as defined in Rule 7240(b)(4)(iv), on
BOX. Proposed Rule 7110(c)(8) describes the execution price
requirements that are specific for Complex QCC Orders.\18\
Specifically, Complex QCC Orders are automatically executed upon entry
provided that the execution (i) is not at the same price as a Public
Customer Complex Order; (ii) is at least $0.01 better than (inside) the
cBBO; (iii) is at or better than any non-Public Customer Complex on the
Complex Order Book; and (iv) each option leg executes at or between the
NBBO. The purpose of the requirement that the execution must be at
least $0.01 better than the cBBO is to ensure that there is no
interference between the regular and complex markets. The purpose of
the requirement that the execution must not be at the same price as any
Public Customer Complex Order on the Complex Order Book is to ensure
that the Complex Customer Cross Order does not trade in front of any
resting Public Customer Complex Orders. The purpose of the requirement
that the individual options legs of the Complex QCC Order be executed
at or between the NBBO is to ensure that the execution price of each
option leg is within the best price available in the market and is in
line with the requirement that simple QCC Orders must execute at or
within the NBBO.
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\17\ See Securities Exchange Act Release No. 80661 (May 11,
2017), 82 FR 22682 (May 17, 2017) (SR-BOX-2017-14). The Exchange
notes that regular QCC Orders on BOX are allowed to execute
automatically on entry without exposure provided the execution: (i)
Is not at the same price as a Public Customer Order on the BOX Book;
and (2) is at or between the NBBO.
\18\ Proposed Rule 7110(c)(8) is based on MIAX Rule 515(h)(4).
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The system does not consider the NBBO price for the stock component
because the Exchange does not execute the stock component; the Exchange
executes the option components at a net price and ensures that, among
other things, the execution price of (i) the strategy is at least $0.01
better than the cBBO; and (ii) each option leg is at or between the
NBBO.
The Exchange believes the proposed Complex QCC pricing methodology
aligns with the Qualified Contingent Trade (``QCT'') Exemption, as
defined below. The parties to a contingent trade are focused on the
spread or ratio between the transaction prices for each of the
component instruments (i.e., the net price of the entire contingent
trade), rather than on the absolute price of any single component.
Pursuant to the requirements of the NMS QCT Exemption, the spread or
ratio stands regardless of the market prices of the individual orders
at their time of execution. As the Commission noted in the Original QCT
Exemption, ``the difficulty of maintaining a hedge, and the risk of
falling out of hedge, could dissuade participants from engaging in
contingent trades, or at least raise the cost of such trades.'' Thus,
the Commission found that, if each stock leg of a qualified contingent
trade were required to meet the trade-through provisions of Rule 611 of
Regulation NMS, such trades could become too risky and costly to be
employed successfully and noted that the elimination or reduction of
this trading strategy potentially could remove liquidity from the
market.\19\ This is also true for QCC Orders in options, and thus the
Exchange believes that its proposal is consistent with the Original QCT
Exemption.\20\
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\19\ See Securities Exchange Act Release No. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006) (``Original QCT Exemption'').
\20\ The Exchange represents that QCTs will be subject to
existing trading surveillance administered by the Financial Industry
Regulatory Authority (``FINRA'') on behalf of the Exchange, which
are designated to detect violations of Exchange rules and applicable
federal securities laws. The Exchange believes the existing
surveillance of QCTs is sufficient to ensure compliance with the
proposed rule.
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The system will reject a Complex QCC Order if, at the time of
receipt of the Complex QCC Order, the strategy is subject to an ongoing
auction (including COPIP, Facilitation, and Solicitation
[[Page 26722]]
auctions) or there is an exposed order on the strategy pursuant to Rule
7240(b)(3)(B). The purpose of this provision is to maintain an orderly
market by avoiding the execution of Complex QCC Order with components
that are involved in other system functions that could affect the
execution price of the Complex QCC Order, and by avoiding concurrent
processing on the Exchange involving the same strategy.
Proposed Rule 7110(c)(8)(i) states that Complex QCC Orders will be
automatically cancelled if they cannot be executed. Proposed Rule
7110(c)(8)(ii) provides that Complex QCC Orders may only be entered in
the minimum trading increments applicable to Complex Orders under Rule
7240(b)(1).
The following example illustrates the execution of a Complex QCC
Order:
Example 2--Execution of a Complex QCC Order
BOX Leg A Book: 6.00-6.60
BOX Leg B Book: 3.00-3.30
Leg A NBBO: 6.00-6.60
Leg B NBBO: 3.00-3.30
Strategy: Buy A Call, Sell B Call
The cBBO is 2.70-3.30
The cNBBO is 2.70-3.30
The Complex Order Book contains a broker-dealer order to sell
the strategy at 3.29.
The Exchange receives a Complex QCC Order for the simultaneous
purchase and sale of the strategy at a net price of 3.29, 1,000 times.
Since the order can be executed at or between the NBBO for each leg of
the strategy, is not at a worse price than the non-Public Customer
Order on the Complex Order Book, is at least $0.01 better than the cBBO
and the order size is met, the Complex QCC Order is automatically
executed upon entry.
The proposed rules governing Complex QCC Orders are based on the
rules of another exchange with certain differences.\21\ First, MIAX
requires the individual legs be executed not at the same price as a
Priority Customer Order on the book. The Exchange does not propose to
include this provision of MIAX's rule as the BOX system handles Complex
Orders differently. Specifically, Complex Orders on BOX are executed at
a net debit or credit, and therefore it is understandable that the
execution parameters would be controlled by the net price of the
strategy rather than the individual legs. A Complex Order may execute
as a net credit or debit with one other Participant; provided, the
price of at least one leg of the Complex Order must trade at a price
that is better than the corresponding bid or offer in the marketplace
by at least one minimum trading increment (i.e., one cent) as set forth
in Rule 7240(b)(1).\22\ As such, and to stay in line with how Complex
Orders are handled on BOX, the Exchange is proposing that the net
execution price of the Complex QCC Order be better than the cBBO. As
discussed above, this is in line with the approach to Complex Orders in
general on the Exchange. Further, the Exchange believes it is important
to respect all interest in the regular Book and not only Public
Customer interest, as is the case with MIAX, which is why the Exchange
requires the Complex QCC Order to be better than the cBBO.
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\21\ See MIAX Rules 515(h)(4) and 518(b)(6).
\22\ See Rule 7240(b)(2)(1)(i). In addition, Complex Qualified
Open Outcry Orders 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 (i.e., one cent) as set forth in Rule
7240(b)(1). See 7600(c).
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To illustrate this, assume a Complex QCC Order at $2.01 is received
by the system for strategy A+B. There is a Public Customer Order to buy
leg A on the Book for $1.00 and a Public Customer Order to buy leg B on
the Book for $1.00. Under the proposal, the Complex QCC Order would be
accepted by the system because the execution price is at least $0.01
better than the cBBO.\23\ The Exchange does not believe that this
result harms the resting Public Customer Orders.\24\ Specifically,
given the execution price of $2.01, the sell side of the Complex QCC
Order could not interact with the resting Public Customer Orders
because there is no interest on the individual legs that, when
combined, equal the execution price of $2.01. If, however, in addition
to the Public Customer order to buy leg B at $1.00 there is a non-
Public Customer order to buy leg B at $1.01, the Complex QCC Order at
$2.01 would be rejected. This is because the execution price is no
longer better than the cBBO.\25\ As such, the Public Customer Order on
leg A is protected because there is interest on the individual leg
Books that, when combined, equal the proposed execution price of the
Complex QCC Order. Further, since the agreed upon price between market
participants was $2.01, it would be detrimental to require the order to
be executed at a worse price than is necessary. While the BOX proposal
does not have the same price protection for Public Customers as MIAX
Complex QCC rule, the Exchange believes the proposal, which provides a
level of price protection to all Participants, remains consistent with
the Act.
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\23\ Assume for the example that the cBBO is 2.00-5.00. The 2.00
bid is comprised of the Public Customer Orders on the individual leg
books and 5.00 is a resting Complex Order.
\24\ As outlined in the proposal, this is consistent with how
the system currently handles the interaction between Complex Orders
and the individual leg Books. The Exchange notes that the same
behavior occurs regardless of the account of the order on the
individual leg Books. For example, if the orders on the leg Books
were for the account of a broker-dealer, the execution price of the
Complex QCC would still need to be $0.01 better than the cBBO.
\25\ The cBBO would now be 2.01-5.00.
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The Exchange is proposing the additional requirements that the
execution price is not at the same price as a Public Customer Complex
Order and at or better than any non-Public Customer Complex Order on
the Complex Order Book as compared to MIAX. The Exchange believes that
these additional requirements are reasonable because the Exchange is
respecting resting Complex Orders.
Lastly, MIAX rejects a Complex QCC Order if, at the time of
receipt, any component of the strategy is subject to a PRIME Auction, a
Route Timer, or liquidity refresh pause. The Exchange is not proposing
the same conditions.\26\ With respect to not rejecting when a component
is subject to an auction, the Exchange notes that this approach is in
line with the treatment of a COPIP when there is an ongoing PIP on a
component of the Complex Order. Specifically, the Exchange will accept
Complex Orders designated for the COPIP where there is a PIP on an
individual component.\27\ Further, the Exchange notes that orders on
the regular book are protected by the fact that the execution price
must be at least $0.01 better than the cBBO. Additionally, in order to
ensure orderly markets involving multiple Complex Orders with common
components, the Exchange is proposing additional circumstances in which
a Complex QCC Order will be rejected, specifically, when there is an
exposed order on the strategy, or there is an ongoing Facilitation or
Solicitation auction on the strategy.
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\26\ BOX notes that it does not have either the Route Timer or
liquidity refresh pause features on the Exchange. As such, BOX is
not proposing to include these features under the Proposal.
\27\ See IM-7245-2.
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Lastly, the Exchange proposes to expand certain Complex Order
protections to Complex QCC Orders and Complex Customer Cross Orders.
Specifically, the Exchange proposes to amend Rule IM-7240-1(a)(5) and
IM-7240(b)(5) to apply these price protection checks to Complex QCC
Orders and Complex Customer Cross
[[Page 26723]]
Orders. The Exchange notes that another options exchange has similar
price checks.\28\
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\28\ See Chicago Board Options Exchange, Incorporated (``Cboe'')
Interpretations and Polices .08(c) and (g) to Rule 6.53C.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\29\ in general, and Section 6(b)(5) of the Act,\30\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in 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.
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\29\ 15 U.S.C. 78f(b).
\30\ 15 U.S.C. 78f(b)(5).
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The proposal to amend Rules 7110 and 7240 to codify rules covering
Complex Customer Cross and Complex QCC Orders is consistent with
Section 6(b)(5) of the Act because this proposal promotes just and
equitable principles of trade and protects investors and the public
interest by providing increased opportunities for the execution of
Complex Orders. The Exchange believes that the proposed Complex
Customer Cross and Complex QCC Rules will benefit Participants and the
marketplace as a whole by adopting rules that allow for the trading of
these types of orders on the Exchange. The Exchange believes the
proposed rules for Complex Customer Cross and Complex QCC Orders remove
impediments to and perfects the mechanism of a free and open market and
a national market system and will result in more efficient trading and
enhance the likelihood of the Complex Orders executing at the best
prices by providing additional order types resulting in potentially
greater liquidity available for trading on the Exchange.
The proposed rule change will provide rules that make existing
functionality available to additional order types. Providing rules that
make Customer Cross and QCC available for Complex Orders removes
impediments to and perfects the mechanisms of a free and open market
and a national market system because Participants will be given
additional ways in which they can execute Complex Orders.
The proposed rule change will protect investors and the public
interest by assuring the existing priority and allocation rules
applicable to the processing and execution of Customer Cross Orders,
QCC Orders, and Complex Orders remains consistent with the processing
and execution of these order types, unless otherwise specifically set
forth in the rules.
The Exchange further believes that the proposed methodology for the
execution of Complex QCC Orders without consideration of the NBBO of
the stock component is consistent with the QCT Exemption. As stated
above, the QCT Exemption provides an exception for the stock leg of
qualified contingent trades from trade-through requirements. Therefore,
the system considers the NBBO of the options legs of the Complex QCC
Order, and not the NBBO for the stock component, in calculating the
pricing requirement for Complex QCC Orders.
The system does not consider the NBBO price for the stock component
because the Exchange does not execute the stock component; the Exchange
executes the option components at a net price and ensures that the net
execution price for the strategy (i) is at least $0.01 better than the
cBBO; (ii) is not at the same price as a Public Customer Complex Order;
(iii) is at or better than any non-Public Customer Complex Order on the
Complex Order Book; and (iv) each leg is at or between the NBBO.
The Exchange believes that the proposal to reject a Complex
Customer Cross or Complex QCC Order at the time of receipt of the order
when the strategy is subject to an ongoing auction (including COPIP,
Facilitation and Solicitation auctions), or there is an exposed order
on the strategy, removes impediments to and perfects the mechanism of a
free and open market by ensuring orderly markets involving multiple
complex orders with common components.
The proposed rule change to implement a debit/credit check for
Complex QCC and Complex Customer Cross Orders is consistent with the
Act. With the use of debit/credit checks, the Exchange can further
assist with the maintenance of a fair and orderly market by mitigating
the potential risks associated with Complex Orders trading at prices
that are inconsistent with their strategies (which may result in
executions at prices that are extreme and potentially erroneous), which
ultimately protects investors. This proposed implementation of the
debit/credit check promotes just and equitable principles of trade, as
it is based on the same general option and volatility pricing
principles which the Exchange understands are used by market
participants in their option pricing models.
Additionally, the Exchange also believes that calculating a maximum
price for true butterfly spreads, vertical spreads, and box spreads
will assist with the maintenance of fair and orderly markets by helping
to mitigate the potential risks associated with Complex QCC and Complex
Customer Cross Orders trading at extreme and potentially erroneous
prices that are inconsistent with particular Complex Order strategies.
Further, the Exchange notes that the maximum price is designed to
mitigate the potential risks of executions at prices that are not
within an acceptable price range, as a means to help mitigate the
potential risks associated with Complex Orders trading at prices that
are inconsistent with their strategies, in addition to the debit/credit
check. As such, the proposed rule change is designed to protect
investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change to
provide rules governing the trading of Complex Customer Cross and
Complex QCC Orders will impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act. In this
regard and as indicated above, the Exchange notes that the rule is
being proposed as a competitive response to the rules of another
exchange.\31\ Additionally, the proposed rule change is intended to
promote competition by adding rules for new order types that enable
Participants to execute Complex Orders on the Exchange. The Exchange
believes that this enhances inter-market competition by enabling the
Exchange to compete for this type of order flow with other exchanges
that have similar rules and functionalities in place.
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\31\ See MIAX Rules 515(h)(3), 515(h)(4), 518(b)(5), and
518(b)(6).
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Further, the Exchange does not believe that the proposed Complex
Order protections will impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Act. In this
regard and as indicated above, the Exchange notes that the rule change
is being proposed as a competitive response to the rules of another
exchange.\32\ Additionally, the Exchange believes the proposed rule
change is beneficial to Participants as it will provide increased
protections that will prevent the execution of certain Complex Orders
that were entered in
[[Page 26724]]
error. The Exchange believes the proposal is pro-competitive and should
serve to attract additional Complex Orders to the Exchange. Further,
the Exchange does not believe the proposed change will not impose a
burden on intramarket competition because it is available to all
Participants.
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\32\ See supra, note 4.
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For the reasons stated, the Exchange does not believe that the
proposed rule changes will impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Act, and
the Exchange believes the proposed change will, in fact, enhance
competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BOX-2018-14 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2018-14. 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 website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street, NE, Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-BOX-2018-14, and should be submitted on
or before June 29, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-12319 Filed 6-7-18; 8:45 am]
BILLING CODE 8011-01-P