Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing of Proposed Rule Change To Amend BOX Rule 7620 (Accommodation Transactions), 86610-86614 [2020-28890]
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Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Notices
to Rule 19b–4(f)(6)(iii),17 the
Commission may 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 proposal may
take effect immediately. The
Commission believes that waiver of the
operative delay is consistent with the
protection of investors and the public
interest because it will allow the rules
discussed above to remain in effect
during the temporary period during
which the Trading Floor has not yet
been reopened in full to DMMs because
of health precautions related to the
Covid-19 pandemic. Accordingly, the
Commission hereby waives the 30-day
operative delay and designates the
proposal operative upon filing.18
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 19 of the Act to
determine whether the proposed rule
change 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–
NYSE–2020–106 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–NYSE–2020–106. This file
number should be included on the
17 17
CFR 240.19b–4(f)(6)(iii).
purposes only of accelerating the operative
date of this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
19 15 U.S.C. 78s(b)(2)(B).
18 For
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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 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–NYSE–2020–106 and
should be submitted on or before
January 21, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020–28893 Filed 12–29–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90792; File No. SR–BOX–
2020–38]
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Filing of
Proposed Rule Change To Amend BOX
Rule 7620 (Accommodation
Transactions)
December 23, 2020.
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 December
10, 2020, BOX Exchange LLC
(‘‘Exchange’’) filed with the Securities
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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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
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 7620 (Accommodation
Transactions) to allow Floor Brokers to
enter opening cabinet orders on behalf
of customers and Floor Market Makers,
and codify that cabinet trades will
follow open outcry rules pursuant to
Exchange Rule 7600. The text of the
proposed rule change is available from
the principal office of the Exchange, at
the Commission’s Public Reference
Room and also on the Exchange’s
internet 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
First, the proposed rule change is to
amend Rule 7620 (Accommodation
Transactions) to allow Floor Brokers to
enter opening cabinet orders on behalf
of customers 3 and Floor Market Makers.
This is a competitive filing that is based
on cabinet trading functionality at Cboe
Exchange, Inc. (‘‘Cboe’’).4
3 Customers of the Floor Broker can include
Public Customers, Broker Dealers and Market
Makers.
4 See Cboe Rule 5.85(h) (previously, Cboe Rule
6.54 Accommodation Liquidations (Cabinet
Trades); see also Securities Exchange Release No.
34–73974 (December 31, 2014) (Order Approving
SR–CBOE–2014–93)(explaining under the [cabinet
trade] procedures, bids and offers (whether opening
or closing a position) at a price of $1 per option
contract may be represented in the trading crowd
by a Floor Broker . . . but must yield priority to all
resting orders in the [ ] cabinet book (which resting
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As background, with respect to the
proposed change, the Exchange adopted
cabinet trading on the Exchange’s
Trading Floor.5 Under the current BOX
Rule 7620 (Accommodation
Transactions), only closing cabinet
transactions at a price of $1 per option
contract for the account of a customer or
Floor Market Maker are allowed. In
addition, the rule specifies that opening
orders are not cabinet orders, but
opening orders in certain cases may be
matched with a cabinet order.6 The
Exchange now wishes to allow opening
cabinet orders to further accommodate
additional cabinet transactions on the
Exchange Trading Floor.
The Exchange first proposes to amend
the definition of cabinet orders to
include bids and offers (whether
opening or closing) at a price of $1 per
option contract for the account of a
customer or Floor Market Maker.
The Exchange expects the majority of
opening cabinet orders to be submitted
by Market Makers (e.g., Floor Market
Makers or Away Market Makers), but
intends to offer the potential benefits of
these transactions to all participants.7
As liquidity providers, Market Makers
play a vital role in the financial markets
and help to facilitate market efficiency
and price discovery. Market Makers
engage in a course of dealings for their
own account to assist with the
maintenance of a fair and orderly
market. Market Makers must
consistently manage portfolio risk and
seek opportunities to hedge their
exposures in order to maintain a riskneutral position. Failure to rebalance
portfolios and continuously hedge
exposes Market Makers to undesirable
cabinet book orders may be closing only); Securities
Exchange Release No. 34–86994 (September 23,
2019) (SR–CBOE–2019–058) (noting inadvertent
removal of rule language and current proposal to
clarify and explicitly state market participants may
continue to place opening cabinet orders, so long
as they yield to all closing cabinet orders
represented by the trading crowd).
5 See Securities Exchange Release No. 34–85803
(May 8, 2019) (Notice of filing and immediate
effectiveness SR–BOX–2019–16).
6 See BOX Rule 7620(c), (d), and (e).
7 Although the Exchange anticipates that Market
Makers would be the primary market participant
involved in submitting opening cabinet trades, the
Exchange proposes to offer the order type to all
participants for competitive reasons. The Exchange
notes that its competitors offer all participants the
ability to submit opening cabinet orders, and
therefore, the Exchange wishes to offer the same
opportunities. See Securities Exchange Release No.
34–86994 (September 17, 2019) (Notice of Filing
and Immediate Effectiveness SR–CBOE–2019–058)
(stating that ‘‘market participants may continue . . .
to place opening cabinet orders, which must
continue to yield to all closing cabinet orders
represented by the trading crowd.’’); See also
NYSEArca Rule 6.80–O(b)(3) (stating ‘‘[Cabinet]
[o]rders may be placed for customer, firm and
Market Maker accounts . . .’’).
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risk. Therefore, permitting Market
Makers to submit opening cabinet
orders, while yielding priority to all
closing cabinet orders, will enable
Market Makers (or other market
participants) to hedge away unwanted
exposure and get back to a risk-neutral
position.
As an example of the proposed rule
change, consider the following:
Assume Market Maker (MM1) has the
following positions:
(Position 1): Long 300 put contracts on
XYZ with a May 2020 expiration
date, and a $105 strike price
(Position 2): Short 300 put contracts on
XYZ with a May 2020 expiration
date, and a $100 strike price
XYZ stock is currently at $50 per
share.
If MM1 then exercises Position 1
(Long 105 puts). MM1’s positions are
now:
(Position 2): Short 300 put contracts on
XYZ with a May 2020 expiration
date, and a $100 strike price
(Position 3): Short 30,000 8 Shares of
XYZ stock (because MM1 exercised
Position 1 and now has the right to
sell 30,000 Shares of the underlying
stock)
With this change MM1’s current risk
is XYZ’s stock price rising past $100 per
share, a risk exposure that is
theoretically unlimited. In the industry
having these types of positions is called
being ‘‘synthetically short’’.9 In order for
MM1 to hedge the risk of the stock price
going past $100 per share, MM1 would
seek to offset the risk of his current
Positions (2 and 3) by submitting an
opening cabinet bid for 300 XYZ call
contracts with a May 2020 expiration, at
a $100 strike price (Position 4).10
MM1 would have the following
positions:
(Position 2): Short 300 put contracts on
XYZ with a May 2020 expiration
date, and a $100 strike price
8 Example assumes each contract covers 100
shares of the underlying stock, therefore, 300
contracts multiplied by 100 shares of the
underlying stock is 30,000 shares.
9 Synthetic options are trading positions holding
a number of securities that when taken together,
emulate another position. See Synthetic Options,
www.corporatefinanceinstitute.com, https://
corporatefinanceinstitute.com/resources/
knowledge/trading-investing/synthetic-options/.
10 The Exchange notes, although submitted as an
‘‘opening’’ trade, this order is in effect ‘‘closing’’
synthetically for the Market Maker and transferring
risk from that Market Maker’s books to another
Market Maker more comfortable with that risk
exposure. The Exchange also notes that this
opening bid would be for a series that is not
actively traded and therefore would be in line with
the primary purposes of cabinet trading because the
Market Maker could now trade in a series that is
not actively traded in order to synthetically close
their position and hedge unwanted portfolio risk.
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(Position 3): Short 30,000 11 Shares of
XYZ stock
(Position 4): Long 300 call contracts of
XYZ with a May 2020 expiration at
a $100 strike price
After purchasing Position 4, MM1
will have effectively paired off Positions
2 and 3, and hedged against any
previous risk of the XYZ stock price
going over $100 per share.
Next, the Exchange proposes to make
numerous changes to Rule 7620 to
reduce confusion and clarify certain
terms and conditions.
First, the Exchange proposes to add
language to codify that Cabinet Orders
may only be executed on the Exchange’s
Trading Floor in open outcry pursuant
to Rule 7600 series. This language is
intended to clarify that cabinet orders
may execute in open outcry like all
other orders execute in open outcry, in
accordance with the order allocation,
priority, and execution rules applicable
to Qualified Open Outcry (‘‘QOO’’)
Orders. The Exchange notes, the
proposed changes do not substantively
alter the manner in which cabinet
orders may trade currently. The
Exchange believes clarifying that
cabinet orders follow the same trading
floor rules as all other open outcry
orders will simplify the rules of cabinet
orders for Participants, making the rules
for cabinet transactions easier to follow
and understand. The Exchange notes
this part of the proposal is similar to
Cboe’s cabinet order rule.12 In addition,
as described in further detail below,
Participants will no longer be required
to conduct cabinet trades through a
manual process which includes filling
out and submitting forms to the
Exchange.
In addition, the Exchange believes the
proposal, as discussed herein, would
make clear that the split-price priority
provisions within Rule 7600 series will
apply to cabinet trades in open outcry.13
The Exchange believes that expressly
including that split-price priority
provisions will apply to open outcry
cabinet trading would clarify to
Participants that this functionality is
available on the Exchange. The
Exchange believes not offering splitprice functionality for cabinet orders
unnecessarily limits the ability of
market participants to manually trade
cabinet orders on the floor. In addition,
restricting split-pricing for cabinet
trades would unreasonably restrict
11 See
supra note 8.
Cboe Rule 5.85(h). Cabinet orders on Cboe
follow the order allocation and priority rules that
are applicable to the execution of all orders in open
outcry.
13 See BOX Rule 7600(i) (Priority on Split-Price
Transactions Occurring in Open Outcry).
12 See
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business by not making available certain
prices which are available on other
competing exchanges. Split-price
priority for open outcry cabinet trades
provides an extra incentive for market
participants to both price improve and
facilitate the efficient trading of options
contracts that are worthless or not
actively traded. The Exchange notes that
at least one other competing options
exchange (NYSE American LLC ‘‘NYSE
American’’ f/k/a NYSE MKT LLC)
amended their rule text to explicitly
allow for split-price priority provisions
to apply to cabinet trading.14 In the
same manner, the Exchange now seeks
to extend split-price priority to open
outcry cabinet trades in order to have
substantially similar rules to those of
other exchanges with trading floors. The
Exchange believes this will not only
enable greater competition among
competing exchanges that already offer
this functionality, but also will align the
Exchanges rules with competitors and
thereby promotes efficiency and will
help reduce any potential for investor
confusion. The Exchange notes current
Rule 7620 provides that cabinet trading
shall be conducted in accordance with
other Exchange rules except as
14 See Securities and Exchange Act Release No.
34–68128 (November 1, 2012), 77 FR 66888
(November 7, 2012) (SR–NYSEMKT–2012–55)
(noticed by the Commission for immediate
effectiveness). NYSEMKT noted that ‘‘neither CBOE
nor PHLX have a similar restriction [for split-price
priority] on cabinet trades, and allow for split-price
priority for cabinet trades on the trading floor.’’
NYSEMKT cited to the prevailing Cboe and Phlx
rules at the time, (specifically CBOE Rules 6.54 and
6.47 and PHLX Rule 1059) and emphasized that
‘‘[s]plit-price priority [was] available for open outcry trading on both CBOE and PHLX, with no
restriction for cabinet trades.’’ Cboe Rule 6.54 was
modified to the current rule text and moved to Cboe
Rule 5.12. See Securities and Exchange Act Release
No. 86994 (September 17, 2019), 84 FR 49774
(September 23, 2019) (SR–CBOE–2019–058). In
Cboe’s SR–CBOE–2019–058 rule filing, Cboe noted
the rule change would not ‘‘substantively alter the
manner in which cabinet orders may trade,’’ and
stated that cabinet orders would execute ‘‘in
accordance with the order allocation, priority and
execution rules . . . which is substantially similar
to how cabinet trades currently function.’’ Cboe’s
Cabinet Orders rule was subsequently relocated
from Rule 5.12 to Rule 5.85(h), where it is currently
located. See Securities and Exchange Act Release
No. 87224 (October 4, 2019), 84 FR 54652 (October
10, 2019) (SR–CBOE–2019–081). The Exchange
believes split-price priority continues to be
available for cabinet trading on Cboe’s trading floor.
See also Phlx Options 8 Section 33.
Accommodation Transactions and Options 8
Section 25(a)(2) (split-price priority). Per Phlx
rulebook, split-price priority ‘‘applies to the
allocation of orders on the Trading Floor’’ and
cabinet trading (accommodation transactions) are
conducted only by Floor Brokers on Phlx’s trading
floor. While the above exchanges do not explicitly
state in their rule text that split-price functionality
is available for cabinet orders, as detailed above,
NYSE American/NYSEMKT amended its cabinet
trading rule text to specifically allow for split-price
priority for open outcry cabinet trades because
other exchanges provide for this capability.
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otherwise provided within Rule 7620,
which states, in part, that Exchange
Rule 7050 (Minimum Trading
Increments) shall not apply to orders
placed in the cabinet. Accordingly, the
Exchange believes there is no conflict
between the Exchange’s current rules
and the proposed rule change.
The Exchange then proposes to
specify that option classes participating
in the Penny Interval Program, pursuant
to Rule 7260, are not allowed as cabinet
orders. Penny Interval classes may
already trade in minimum increments of
$0.01, therefore, the proposed change
adds clarity to the rule text, and ensures
that the cabinet order rule accounts for
other Exchange Rules that provide for
trading in penny classes. The Exchange
notes the exclusion of penny classes is
consistent with cabinet order rules on at
least one other exchange.15
The Exchange then proposes to add
language that Floor Brokers representing
bids and offers for cabinet trades must
first yield priority to all existing closing
cabinet orders represented on the
Trading Floor. The Exchange believes
including this language makes clear that
cabinet orders (whether opening or
closing) must yield priority to any
existing closing cabinet orders. For
example, if a pre-existing closing
cabinet order is being represented in the
trading crowd, and another closing
cabinet order is submitted, the preexisting closing cabinet order will take
priority over the new closing cabinet
order. The Exchange notes this priority
process is followed on at least one other
options exchange.16
Next, as noted above, the Exchange
proposes to remove language in current
subsection (b) which requires Floor
Brokers to use designated transaction
forms to record cabinet transactions and
remove the language that states Rule
7580(e)(1) does not apply to cabinet
orders. The Exchange proposes to have
cabinet orders systematized by Floor
Brokers when they record the cabinet
orders in their order entry mechanisms
prior to representation on the
Exchange’s Trading Floor for execution
in open outcry. Specifically, cabinet
orders, like all other QOO Orders, will
be subject to the order recordation rule
under BOX rule 7580(e)(1).17 The
Exchange believes this will aid Floor
15 See
supra note 4.
Cboe Rule 5.85(h) (stating that ‘‘[c]abinet
orders may only execute after yielding priority to
all closing cabinet orders represented by the trading
crowd).
17 BOX Rule 7580(e)(1) requires Floor Brokers to
contemporaneously upon receipt of a single or
double-sided orders, and prior to the announcement
of such order in the trading crowd, record specific
information of the order onto the Floor Broker’s
order entry mechanism.
16 See
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Brokers in executing cabinet
transactions more efficiently and help
create an electronic audit trail for
cabinet orders represented and executed
by Floor Brokers on the Exchange’s
Trading Floor.
The Exchange then proposes to
remove the specific scenarios laid out in
current subsections (c) through (e). The
Exchange believes not removing these
examples, which describe the limited
circumstances in which opening orders
may be matched with a cabinet order 18
would create investor confusion as to
the types of cabinet orders allowed on
the BOX Trading Floor. As previously
discussed, the Exchange’s current
proposal would allow all cabinet trades
(opening or closing) to occur via open
outcry pursuant to Exchange Rule 7600
series, therefore current subsections (c)
through (e) would be unnecessary and
potentially confusing. The Exchange is
also proposing to remove the definition
of ‘‘opening order’’ in the current rule
because the Exchange no longer intends
to limit the meaning of the term to
contra-side opening orders as a response
to customers. The Exchange’s proposal
allows for initiating and contra-side
opening orders.
Finally, the Exchange proposes to
remove the requirement for Participants
to submit a cabinet transaction form
under Rule 7620(f). As previously
noted, the Exchange is proposing to
remove cabinet transaction forms in
order to have cabinet orders be recorded
and executed like all other QOO Orders
on the Exchange’s Trading Floor.
Therefore, Floor Brokers manually
submitting cabinet transaction forms to
the Exchange will no longer be
necessary. The Exchange believes that
harmonizing cabinet orders and QOO
Orders will avoid any potential investor
confusion by providing consistency in
order and trade recordation on the
Trading Floor.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with the
requirements of Section 6(b) of the
Act,19 in general, and Section 6(b)(5) of
the Act,20 in particular the Exchange
believes the proposed rule change
promotes just and equitable principles
of trade, and by supplying market
participants with an additional risk
management tool will remove
impediments to and perfect the
mechanism of a free and open market
and national market system, and in
general, protects investors and the
18 See
supra note 6.
U.S.C. 78f(b).
20 15 U.S.C. 78f(b)(5).
19 15
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public interest. Additionally, the
Exchange believes the proposed rule
change is consistent with Section 6(b)(5)
requirement that the rules of an
exchange not be designed to permit
unfair discrimination between market
participants because opening cabinet
trades are available to all market
participants and must respect the
priority of closing cabinet orders. The
Exchange believes opening cabinet
trades would essentially function as an
alternative means by which Participants
could avoid unwanted position
exposure. In addition, the Exchange
notes that opening cabinet trades are not
profitable for Participants, but can be
used to change a Participant’s risk
profile. The Exchange believes that the
proposed change is in line with the
primary purpose of cabinet trading
because closing cabinet orders allow
market participants to close worthless
positions—that carry some form of
diminutive risk—and opening cabinet
trades will similarly enable Participants
to submit orders in not actively traded
series to effectively close out
(synthetically) the risk of current
positions. As such, the Exchange
believes allowing market participants to
execute both opening and closing
cabinet positions is consistent with the
Act.
As stated above, the Exchange
believes offering opening cabinet orders
will allow Market Makers (and other
market participants) to more effectively
manage portfolio risk. The Exchange
believes enhancing the abilities of
market participants to reduce risk
exposure will remove impediments to,
and perfect the mechanisms of, a free
and open market and a national market
system by enabling market participants
to better manage risk and continue to
further participate in the market.
The Exchange believes the proposed
rule promotes just and equitable
principles of trade by accepting opening
cabinet orders, only if they yield
priority to existing closing cabinet
orders represented in the trading crowd.
This order of precedence will ensure
that cabinet orders remain available for
all market participants wishing to effect
closing transactions, but if no such
orders exist, the Exchange will then
allow for opening cabinet trades to
execute. Additionally, the Exchange
believes the proposed rule change is
consistent with the requirement that the
rules of an exchange not be designed to
permit unfair discrimination between
Participants. Specifically, the proposed
rule change is not unfairly
discriminatory because the priority
process respects the primacy of closing
cabinet orders which the Exchange
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anticipates would be executed by a
broader range of market participants.
The Exchange believes amending the
rule text to remove the trading
scenarios 21 in the current rule text that
will no longer apply and stating that all
cabinet orders will execute in open
outcry pursuant to Rule 7600 fosters
cooperation and coordination with
persons engaged in facilitating
transactions in securities. The Exchange
believes clarifying that cabinet trades
will follow the pre-existing rules of
QOO Orders adds greater transparency
and consistency to the Exchange’s
Trading Floor rules. The Exchange
believes that the proposed changes,
overall, will make the cabinet trading
rules easier to follow and understand.
The Exchange believes removing the
requirement for Participants to submit
manual cabinet transaction forms, and
instead have Floor Brokers follow the
electronic order recordation rule of the
Exchange will reduce the administrative
burden on Floor Brokers and therefore
removes impediments to and perfects
the mechanisms of a free and open
market. Also, because cabinet trades
will be reported and processed like all
other open outcry trades, market
participants will not be impacted nor
have to take on any additional reporting
or processing burden. In addition, the
Exchange believes that the proposal is
designed to prevent fraudulent and
manipulative acts and practices because
having an electronic audit trail of all
cabinet orders will provide a complete
and accurate record of cabinet
transactions and better facilitate
regulatory oversight. The Exchange
notes at least one other options
exchange systematizes cabinet orders
and allows cabinet orders to execute
pursuant to open outcry rules.22
The Exchange believes allowing for
split-pricing priority provisions
(pursuant to Rule 7600) to apply to
cabinet trades promotes just and
equitable principles of trade, and
removes impediments to and perfects
the mechanisms of a free and open
market and national market system
because it will align the Exchange’s
Rules with the rules and trading
practices of other options exchanges
that currently conduct cabinet trading
on their respective trading floors.23 The
Exchange believes providing market
participants the ability to have splitprice priority when trading cabinet
orders will help facilitate the trading of
options positions that are worthless or
not actively traded. The Exchange
21 See
supra note 6.
supra note 4.
23 See supra note 14.
22 See
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86613
believes the proposal is consistent with
the protection of investors and the
public interest because allowing for
split-price priority for cabinet trading
should lead to more aggressive quoting
by Floor Participants, which in turn
may lead to better executions for all
market participants. Specifically, a
Floor Participant might be willing to
trade at a better price for a portion of an
order if they were assured of trading
with the balance of the order at the next
best price increment. As a result, Floor
Brokers representing orders in the
trading crowd might receive betterpriced executions.
Lastly, the Exchange believes
permitting opening cabinet transactions
that yield priority to existing closing
cabinet orders aligns the Exchange’s
rule with at least two other exchanges
with trading floors.24 Therefore, the
Exchange believes this proposal offers
more consistency with floor trading
across market centers which helps avoid
potential investor confusion, thereby
removing impediments to and
perfecting the mechanisms of a free and
open national market system and
protecting investors and the public
interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule changes will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. As indicated
above, the Exchange notes that the rule
is being proposed as a competitive
response to the rules of another
exchange.25 The Exchange believes that
allowing for additional liquidations at
$1 per option contract would allow
market participants to better manage
risk and hedge unwanted exposure. The
Exchange believes this promotes
competition amongst exchanges because
market participants will have an
additional venue in which they can
execute opening cabinet order
transactions. In addition, the Exchange
believes allowing opening cabinet
executions from Market Makers will
provide Market Makers with an
additional risk management tool while
trading on BOX, and encourage them to
direct more general order flow to the
Exchange, which may ultimately benefit
all Participants. Furthermore, the
Exchange does not believe that the
proposed rule change will impose any
24 See supra note 4 and NYSEArca Rule 6.80–
O(b)(5) (noting bids or offers on orders to open or
close for the accounts of Market Makers, customers
or firms may be made at $1 per option contract, but
such orders must yield to all orders in the cabinet).
25 See supra note 4.
E:\FR\FM\30DEN1.SGM
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86614
Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Notices
burden on intramarket competition
because the proposal simply offers an
additional way for all market
participants to synthetically liquidate
unwanted risk exposure, and respects
the priority of closing cabinet orders. In
addition, the Exchange does not believe
the proposed rule change will impose
any burden on intramarket competition
because the proposed cabinet orders
will be available to all market
participants to execute in open outcry in
the same manner as they are able to
execute any other QOO Orders.
Furthermore, the Exchange believes that
allowing for split-pricing priority to
apply to cabinet trades is procompetitive as it will allow the
Exchange to offer its Participants pricing
abilities which are currently available
on competing exchanges 26 As such, the
Exchange does not believe that the
proposed rule change will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.
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:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BOX–2020–38 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BOX–2020–38. 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–2020–38 and should
be submitted on or before January 21,
2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020–28890 Filed 12–29–20; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90774; File No. SR–
NASDAQ–2020–092]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Extend
the Expiration Date of the Temporary
Amendments Set Forth in SR–
NASDAQ–2020–076 Concerning Video
Conference Hearings
December 22, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (‘‘Act’’
or ‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 notice is hereby given that
on December 17, 2020, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or
‘‘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 Exchange. The Exchange has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by 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 proposes to extend the
expiration date of the temporary
amendments in SR–NASDAQ–2020–076
from December 31, 2020 to April 30,
2021. The proposed rule change would
not make any changes to the text of the
Exchange rules.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, 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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.19b–4(f)(6).
2 17
26 See
supra note 14.
VerDate Sep<11>2014
17:47 Dec 29, 2020
27 17
Jkt 253001
PO 00000
CFR 200.30–3(a)(12).
Frm 00086
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]]>Agencies
[Federal Register Volume 85, Number 250 (Wednesday, December 30, 2020)]
[Notices]
[Pages 86610-86614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28890]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90792; File No. SR-BOX-2020-38]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change To Amend BOX Rule 7620 (Accommodation
Transactions)
December 23, 2020.
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 December 10, 2020, BOX Exchange LLC (``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 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 7620 (Accommodation
Transactions) to allow Floor Brokers to enter opening cabinet orders on
behalf of customers and Floor Market Makers, and codify that cabinet
trades will follow open outcry rules pursuant to Exchange Rule 7600.
The text of the proposed rule change is available from the principal
office of the Exchange, at the Commission's Public Reference Room and
also on the Exchange's internet 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
First, the proposed rule change is to amend Rule 7620
(Accommodation Transactions) to allow Floor Brokers to enter opening
cabinet orders on behalf of customers \3\ and Floor Market Makers. This
is a competitive filing that is based on cabinet trading functionality
at Cboe Exchange, Inc. (``Cboe'').\4\
---------------------------------------------------------------------------
\3\ Customers of the Floor Broker can include Public Customers,
Broker Dealers and Market Makers.
\4\ See Cboe Rule 5.85(h) (previously, Cboe Rule 6.54
Accommodation Liquidations (Cabinet Trades); see also Securities
Exchange Release No. 34-73974 (December 31, 2014) (Order Approving
SR-CBOE-2014-93)(explaining under the [cabinet trade] procedures,
bids and offers (whether opening or closing a position) at a price
of $1 per option contract may be represented in the trading crowd by
a Floor Broker . . . but must yield priority to all resting orders
in the [ ] cabinet book (which resting cabinet book orders may be
closing only); Securities Exchange Release No. 34-86994 (September
23, 2019) (SR-CBOE-2019-058) (noting inadvertent removal of rule
language and current proposal to clarify and explicitly state market
participants may continue to place opening cabinet orders, so long
as they yield to all closing cabinet orders represented by the
trading crowd).
---------------------------------------------------------------------------
[[Page 86611]]
As background, with respect to the proposed change, the Exchange
adopted cabinet trading on the Exchange's Trading Floor.\5\ Under the
current BOX Rule 7620 (Accommodation Transactions), only closing
cabinet transactions at a price of $1 per option contract for the
account of a customer or Floor Market Maker are allowed. In addition,
the rule specifies that opening orders are not cabinet orders, but
opening orders in certain cases may be matched with a cabinet order.\6\
The Exchange now wishes to allow opening cabinet orders to further
accommodate additional cabinet transactions on the Exchange Trading
Floor.
---------------------------------------------------------------------------
\5\ See Securities Exchange Release No. 34-85803 (May 8, 2019)
(Notice of filing and immediate effectiveness SR-BOX-2019-16).
\6\ See BOX Rule 7620(c), (d), and (e).
---------------------------------------------------------------------------
The Exchange first proposes to amend the definition of cabinet
orders to include bids and offers (whether opening or closing) at a
price of $1 per option contract for the account of a customer or Floor
Market Maker.
The Exchange expects the majority of opening cabinet orders to be
submitted by Market Makers (e.g., Floor Market Makers or Away Market
Makers), but intends to offer the potential benefits of these
transactions to all participants.\7\ As liquidity providers, Market
Makers play a vital role in the financial markets and help to
facilitate market efficiency and price discovery. Market Makers engage
in a course of dealings for their own account to assist with the
maintenance of a fair and orderly market. Market Makers must
consistently manage portfolio risk and seek opportunities to hedge
their exposures in order to maintain a risk-neutral position. Failure
to rebalance portfolios and continuously hedge exposes Market Makers to
undesirable risk. Therefore, permitting Market Makers to submit opening
cabinet orders, while yielding priority to all closing cabinet orders,
will enable Market Makers (or other market participants) to hedge away
unwanted exposure and get back to a risk-neutral position.
---------------------------------------------------------------------------
\7\ Although the Exchange anticipates that Market Makers would
be the primary market participant involved in submitting opening
cabinet trades, the Exchange proposes to offer the order type to all
participants for competitive reasons. The Exchange notes that its
competitors offer all participants the ability to submit opening
cabinet orders, and therefore, the Exchange wishes to offer the same
opportunities. See Securities Exchange Release No. 34-86994
(September 17, 2019) (Notice of Filing and Immediate Effectiveness
SR-CBOE-2019-058) (stating that ``market participants may continue .
. . to place opening cabinet orders, which must continue to yield to
all closing cabinet orders represented by the trading crowd.''); See
also NYSEArca Rule 6.80-O(b)(3) (stating ``[Cabinet] [o]rders may be
placed for customer, firm and Market Maker accounts . . .'').
---------------------------------------------------------------------------
As an example of the proposed rule change, consider the following:
Assume Market Maker (MM1) has the following positions:
(Position 1): Long 300 put contracts on XYZ with a May 2020 expiration
date, and a $105 strike price
(Position 2): Short 300 put contracts on XYZ with a May 2020 expiration
date, and a $100 strike price
XYZ stock is currently at $50 per share.
If MM1 then exercises Position 1 (Long 105 puts). MM1's positions
are now:
(Position 2): Short 300 put contracts on XYZ with a May 2020 expiration
date, and a $100 strike price
(Position 3): Short 30,000 \8\ Shares of XYZ stock (because MM1
exercised Position 1 and now has the right to sell 30,000 Shares of the
underlying stock)
---------------------------------------------------------------------------
\8\ Example assumes each contract covers 100 shares of the
underlying stock, therefore, 300 contracts multiplied by 100 shares
of the underlying stock is 30,000 shares.
With this change MM1's current risk is XYZ's stock price rising
past $100 per share, a risk exposure that is theoretically unlimited.
In the industry having these types of positions is called being
``synthetically short''.\9\ In order for MM1 to hedge the risk of the
stock price going past $100 per share, MM1 would seek to offset the
risk of his current Positions (2 and 3) by submitting an opening
cabinet bid for 300 XYZ call contracts with a May 2020 expiration, at a
$100 strike price (Position 4).\10\
---------------------------------------------------------------------------
\9\ Synthetic options are trading positions holding a number of
securities that when taken together, emulate another position. See
Synthetic Options, www.corporatefinanceinstitute.com, https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/synthetic-options/.
\10\ The Exchange notes, although submitted as an ``opening''
trade, this order is in effect ``closing'' synthetically for the
Market Maker and transferring risk from that Market Maker's books to
another Market Maker more comfortable with that risk exposure. The
Exchange also notes that this opening bid would be for a series that
is not actively traded and therefore would be in line with the
primary purposes of cabinet trading because the Market Maker could
now trade in a series that is not actively traded in order to
synthetically close their position and hedge unwanted portfolio
risk.
---------------------------------------------------------------------------
MM1 would have the following positions:
(Position 2): Short 300 put contracts on XYZ with a May 2020 expiration
date, and a $100 strike price
(Position 3): Short 30,000 \11\ Shares of XYZ stock
---------------------------------------------------------------------------
\11\ See supra note 8.
---------------------------------------------------------------------------
(Position 4): Long 300 call contracts of XYZ with a May 2020 expiration
at a $100 strike price
After purchasing Position 4, MM1 will have effectively paired off
Positions 2 and 3, and hedged against any previous risk of the XYZ
stock price going over $100 per share.
Next, the Exchange proposes to make numerous changes to Rule 7620
to reduce confusion and clarify certain terms and conditions.
First, the Exchange proposes to add language to codify that Cabinet
Orders may only be executed on the Exchange's Trading Floor in open
outcry pursuant to Rule 7600 series. This language is intended to
clarify that cabinet orders may execute in open outcry like all other
orders execute in open outcry, in accordance with the order allocation,
priority, and execution rules applicable to Qualified Open Outcry
(``QOO'') Orders. The Exchange notes, the proposed changes do not
substantively alter the manner in which cabinet orders may trade
currently. The Exchange believes clarifying that cabinet orders follow
the same trading floor rules as all other open outcry orders will
simplify the rules of cabinet orders for Participants, making the rules
for cabinet transactions easier to follow and understand. The Exchange
notes this part of the proposal is similar to Cboe's cabinet order
rule.\12\ In addition, as described in further detail below,
Participants will no longer be required to conduct cabinet trades
through a manual process which includes filling out and submitting
forms to the Exchange.
---------------------------------------------------------------------------
\12\ See Cboe Rule 5.85(h). Cabinet orders on Cboe follow the
order allocation and priority rules that are applicable to the
execution of all orders in open outcry.
---------------------------------------------------------------------------
In addition, the Exchange believes the proposal, as discussed
herein, would make clear that the split-price priority provisions
within Rule 7600 series will apply to cabinet trades in open
outcry.\13\ The Exchange believes that expressly including that split-
price priority provisions will apply to open outcry cabinet trading
would clarify to Participants that this functionality is available on
the Exchange. The Exchange believes not offering split-price
functionality for cabinet orders unnecessarily limits the ability of
market participants to manually trade cabinet orders on the floor. In
addition, restricting split-pricing for cabinet trades would
unreasonably restrict
[[Page 86612]]
business by not making available certain prices which are available on
other competing exchanges. Split-price priority for open outcry cabinet
trades provides an extra incentive for market participants to both
price improve and facilitate the efficient trading of options contracts
that are worthless or not actively traded. The Exchange notes that at
least one other competing options exchange (NYSE American LLC ``NYSE
American'' f/k/a NYSE MKT LLC) amended their rule text to explicitly
allow for split-price priority provisions to apply to cabinet
trading.\14\ In the same manner, the Exchange now seeks to extend
split-price priority to open outcry cabinet trades in order to have
substantially similar rules to those of other exchanges with trading
floors. The Exchange believes this will not only enable greater
competition among competing exchanges that already offer this
functionality, but also will align the Exchanges rules with competitors
and thereby promotes efficiency and will help reduce any potential for
investor confusion. The Exchange notes current Rule 7620 provides that
cabinet trading shall be conducted in accordance with other Exchange
rules except as otherwise provided within Rule 7620, which states, in
part, that Exchange Rule 7050 (Minimum Trading Increments) shall not
apply to orders placed in the cabinet. Accordingly, the Exchange
believes there is no conflict between the Exchange's current rules and
the proposed rule change.
---------------------------------------------------------------------------
\13\ See BOX Rule 7600(i) (Priority on Split-Price Transactions
Occurring in Open Outcry).
\14\ See Securities and Exchange Act Release No. 34-68128
(November 1, 2012), 77 FR 66888 (November 7, 2012) (SR-NYSEMKT-2012-
55) (noticed by the Commission for immediate effectiveness). NYSEMKT
noted that ``neither CBOE nor PHLX have a similar restriction [for
split-price priority] on cabinet trades, and allow for split-price
priority for cabinet trades on the trading floor.'' NYSEMKT cited to
the prevailing Cboe and Phlx rules at the time, (specifically CBOE
Rules 6.54 and 6.47 and PHLX Rule 1059) and emphasized that
``[s]plit-price priority [was] available for open out-cry trading on
both CBOE and PHLX, with no restriction for cabinet trades.'' Cboe
Rule 6.54 was modified to the current rule text and moved to Cboe
Rule 5.12. See Securities and Exchange Act Release No. 86994
(September 17, 2019), 84 FR 49774 (September 23, 2019) (SR-CBOE-
2019-058). In Cboe's SR-CBOE-2019-058 rule filing, Cboe noted the
rule change would not ``substantively alter the manner in which
cabinet orders may trade,'' and stated that cabinet orders would
execute ``in accordance with the order allocation, priority and
execution rules . . . which is substantially similar to how cabinet
trades currently function.'' Cboe's Cabinet Orders rule was
subsequently relocated from Rule 5.12 to Rule 5.85(h), where it is
currently located. See Securities and Exchange Act Release No. 87224
(October 4, 2019), 84 FR 54652 (October 10, 2019) (SR-CBOE-2019-
081). The Exchange believes split-price priority continues to be
available for cabinet trading on Cboe's trading floor. See also Phlx
Options 8 Section 33. Accommodation Transactions and Options 8
Section 25(a)(2) (split-price priority). Per Phlx rulebook, split-
price priority ``applies to the allocation of orders on the Trading
Floor'' and cabinet trading (accommodation transactions) are
conducted only by Floor Brokers on Phlx's trading floor. While the
above exchanges do not explicitly state in their rule text that
split-price functionality is available for cabinet orders, as
detailed above, NYSE American/NYSEMKT amended its cabinet trading
rule text to specifically allow for split-price priority for open
outcry cabinet trades because other exchanges provide for this
capability.
---------------------------------------------------------------------------
The Exchange then proposes to specify that option classes
participating in the Penny Interval Program, pursuant to Rule 7260, are
not allowed as cabinet orders. Penny Interval classes may already trade
in minimum increments of $0.01, therefore, the proposed change adds
clarity to the rule text, and ensures that the cabinet order rule
accounts for other Exchange Rules that provide for trading in penny
classes. The Exchange notes the exclusion of penny classes is
consistent with cabinet order rules on at least one other exchange.\15\
---------------------------------------------------------------------------
\15\ See supra note 4.
---------------------------------------------------------------------------
The Exchange then proposes to add language that Floor Brokers
representing bids and offers for cabinet trades must first yield
priority to all existing closing cabinet orders represented on the
Trading Floor. The Exchange believes including this language makes
clear that cabinet orders (whether opening or closing) must yield
priority to any existing closing cabinet orders. For example, if a pre-
existing closing cabinet order is being represented in the trading
crowd, and another closing cabinet order is submitted, the pre-existing
closing cabinet order will take priority over the new closing cabinet
order. The Exchange notes this priority process is followed on at least
one other options exchange.\16\
---------------------------------------------------------------------------
\16\ See Cboe Rule 5.85(h) (stating that ``[c]abinet orders may
only execute after yielding priority to all closing cabinet orders
represented by the trading crowd).
---------------------------------------------------------------------------
Next, as noted above, the Exchange proposes to remove language in
current subsection (b) which requires Floor Brokers to use designated
transaction forms to record cabinet transactions and remove the
language that states Rule 7580(e)(1) does not apply to cabinet orders.
The Exchange proposes to have cabinet orders systematized by Floor
Brokers when they record the cabinet orders in their order entry
mechanisms prior to representation on the Exchange's Trading Floor for
execution in open outcry. Specifically, cabinet orders, like all other
QOO Orders, will be subject to the order recordation rule under BOX
rule 7580(e)(1).\17\ The Exchange believes this will aid Floor Brokers
in executing cabinet transactions more efficiently and help create an
electronic audit trail for cabinet orders represented and executed by
Floor Brokers on the Exchange's Trading Floor.
---------------------------------------------------------------------------
\17\ BOX Rule 7580(e)(1) requires Floor Brokers to
contemporaneously upon receipt of a single or double-sided orders,
and prior to the announcement of such order in the trading crowd,
record specific information of the order onto the Floor Broker's
order entry mechanism.
---------------------------------------------------------------------------
The Exchange then proposes to remove the specific scenarios laid
out in current subsections (c) through (e). The Exchange believes not
removing these examples, which describe the limited circumstances in
which opening orders may be matched with a cabinet order \18\ would
create investor confusion as to the types of cabinet orders allowed on
the BOX Trading Floor. As previously discussed, the Exchange's current
proposal would allow all cabinet trades (opening or closing) to occur
via open outcry pursuant to Exchange Rule 7600 series, therefore
current subsections (c) through (e) would be unnecessary and
potentially confusing. The Exchange is also proposing to remove the
definition of ``opening order'' in the current rule because the
Exchange no longer intends to limit the meaning of the term to contra-
side opening orders as a response to customers. The Exchange's proposal
allows for initiating and contra-side opening orders.
---------------------------------------------------------------------------
\18\ See supra note 6.
---------------------------------------------------------------------------
Finally, the Exchange proposes to remove the requirement for
Participants to submit a cabinet transaction form under Rule 7620(f).
As previously noted, the Exchange is proposing to remove cabinet
transaction forms in order to have cabinet orders be recorded and
executed like all other QOO Orders on the Exchange's Trading Floor.
Therefore, Floor Brokers manually submitting cabinet transaction forms
to the Exchange will no longer be necessary. The Exchange believes that
harmonizing cabinet orders and QOO Orders will avoid any potential
investor confusion by providing consistency in order and trade
recordation on the Trading Floor.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\19\ in general, and Section
6(b)(5) of the Act,\20\ in particular the Exchange believes the
proposed rule change promotes just and equitable principles of trade,
and by supplying market participants with an additional risk management
tool will remove impediments to and perfect the mechanism of a free and
open market and national market system, and in general, protects
investors and the
[[Page 86613]]
public interest. Additionally, the Exchange believes the proposed rule
change is consistent with Section 6(b)(5) requirement that the rules of
an exchange not be designed to permit unfair discrimination between
market participants because opening cabinet trades are available to all
market participants and must respect the priority of closing cabinet
orders. The Exchange believes opening cabinet trades would essentially
function as an alternative means by which Participants could avoid
unwanted position exposure. In addition, the Exchange notes that
opening cabinet trades are not profitable for Participants, but can be
used to change a Participant's risk profile. The Exchange believes that
the proposed change is in line with the primary purpose of cabinet
trading because closing cabinet orders allow market participants to
close worthless positions--that carry some form of diminutive risk--and
opening cabinet trades will similarly enable Participants to submit
orders in not actively traded series to effectively close out
(synthetically) the risk of current positions. As such, the Exchange
believes allowing market participants to execute both opening and
closing cabinet positions is consistent with the Act.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(b).
\20\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
As stated above, the Exchange believes offering opening cabinet
orders will allow Market Makers (and other market participants) to more
effectively manage portfolio risk. The Exchange believes enhancing the
abilities of market participants to reduce risk exposure will remove
impediments to, and perfect the mechanisms of, a free and open market
and a national market system by enabling market participants to better
manage risk and continue to further participate in the market.
The Exchange believes the proposed rule promotes just and equitable
principles of trade by accepting opening cabinet orders, only if they
yield priority to existing closing cabinet orders represented in the
trading crowd. This order of precedence will ensure that cabinet orders
remain available for all market participants wishing to effect closing
transactions, but if no such orders exist, the Exchange will then allow
for opening cabinet trades to execute. Additionally, the Exchange
believes the proposed rule change is consistent with the requirement
that the rules of an exchange not be designed to permit unfair
discrimination between Participants. Specifically, the proposed rule
change is not unfairly discriminatory because the priority process
respects the primacy of closing cabinet orders which the Exchange
anticipates would be executed by a broader range of market
participants.
The Exchange believes amending the rule text to remove the trading
scenarios \21\ in the current rule text that will no longer apply and
stating that all cabinet orders will execute in open outcry pursuant to
Rule 7600 fosters cooperation and coordination with persons engaged in
facilitating transactions in securities. The Exchange believes
clarifying that cabinet trades will follow the pre-existing rules of
QOO Orders adds greater transparency and consistency to the Exchange's
Trading Floor rules. The Exchange believes that the proposed changes,
overall, will make the cabinet trading rules easier to follow and
understand. The Exchange believes removing the requirement for
Participants to submit manual cabinet transaction forms, and instead
have Floor Brokers follow the electronic order recordation rule of the
Exchange will reduce the administrative burden on Floor Brokers and
therefore removes impediments to and perfects the mechanisms of a free
and open market. Also, because cabinet trades will be reported and
processed like all other open outcry trades, market participants will
not be impacted nor have to take on any additional reporting or
processing burden. In addition, the Exchange believes that the proposal
is designed to prevent fraudulent and manipulative acts and practices
because having an electronic audit trail of all cabinet orders will
provide a complete and accurate record of cabinet transactions and
better facilitate regulatory oversight. The Exchange notes at least one
other options exchange systematizes cabinet orders and allows cabinet
orders to execute pursuant to open outcry rules.\22\
---------------------------------------------------------------------------
\21\ See supra note 6.
\22\ See supra note 4.
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The Exchange believes allowing for split-pricing priority
provisions (pursuant to Rule 7600) to apply to cabinet trades promotes
just and equitable principles of trade, and removes impediments to and
perfects the mechanisms of a free and open market and national market
system because it will align the Exchange's Rules with the rules and
trading practices of other options exchanges that currently conduct
cabinet trading on their respective trading floors.\23\ The Exchange
believes providing market participants the ability to have split-price
priority when trading cabinet orders will help facilitate the trading
of options positions that are worthless or not actively traded. The
Exchange believes the proposal is consistent with the protection of
investors and the public interest because allowing for split-price
priority for cabinet trading should lead to more aggressive quoting by
Floor Participants, which in turn may lead to better executions for all
market participants. Specifically, a Floor Participant might be willing
to trade at a better price for a portion of an order if they were
assured of trading with the balance of the order at the next best price
increment. As a result, Floor Brokers representing orders in the
trading crowd might receive better-priced executions.
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\23\ See supra note 14.
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Lastly, the Exchange believes permitting opening cabinet
transactions that yield priority to existing closing cabinet orders
aligns the Exchange's rule with at least two other exchanges with
trading floors.\24\ Therefore, the Exchange believes this proposal
offers more consistency with floor trading across market centers which
helps avoid potential investor confusion, thereby removing impediments
to and perfecting the mechanisms of a free and open national market
system and protecting investors and the public interest.
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\24\ See supra note 4 and NYSEArca Rule 6.80-O(b)(5) (noting
bids or offers on orders to open or close for the accounts of Market
Makers, customers or firms may be made at $1 per option contract,
but such orders must yield to all orders in the cabinet).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule changes will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. As indicated above, the
Exchange notes that the rule is being proposed as a competitive
response to the rules of another exchange.\25\ The Exchange believes
that allowing for additional liquidations at $1 per option contract
would allow market participants to better manage risk and hedge
unwanted exposure. The Exchange believes this promotes competition
amongst exchanges because market participants will have an additional
venue in which they can execute opening cabinet order transactions. In
addition, the Exchange believes allowing opening cabinet executions
from Market Makers will provide Market Makers with an additional risk
management tool while trading on BOX, and encourage them to direct more
general order flow to the Exchange, which may ultimately benefit all
Participants. Furthermore, the Exchange does not believe that the
proposed rule change will impose any
[[Page 86614]]
burden on intramarket competition because the proposal simply offers an
additional way for all market participants to synthetically liquidate
unwanted risk exposure, and respects the priority of closing cabinet
orders. In addition, the Exchange does not believe the proposed rule
change will impose any burden on intramarket competition because the
proposed cabinet orders will be available to all market participants to
execute in open outcry in the same manner as they are able to execute
any other QOO Orders. Furthermore, the Exchange believes that allowing
for split-pricing priority to apply to cabinet trades is pro-
competitive as it will allow the Exchange to offer its Participants
pricing abilities which are currently available on competing exchanges
\26\ As such, the Exchange does not believe that the proposed rule
change will impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\25\ See supra note 4.
\26\ See supra note 14.
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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-2020-38 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-BOX-2020-38. 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-2020-38 and should be submitted on
or before January 21, 2021.
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\27\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-28890 Filed 12-29-20; 8:45 am]
BILLING CODE 8011-01-P
