February 5, 2015.
On December 8, 2014, BOX Options Exchange LLC (“BOX” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),
and Rule 19b-4 thereunder,
to permit BOX Options Participants (“Participants”) to submit orders for which a Market Maker is designated to receive an Preferred allocation on the Exchange (“Preferenced Orders”). The proposed rule change was published in the Federal Register on December 24, 2014.
This order approves the proposed rule change.
II. Description of the Proposed Rule Change
As described in more detail below, the Exchange proposes to adopt new BOX Rule 7300 to establish a program that will permit Participants to submit Preferenced Orders to Market Makers and for Maker Makers to receive Preferred allocations on such orders.
As proposed, a Preferenced Order is any order, whether on a single options instrument or on a Complex Order Strategy, for which a Preferred Market Maker is designated with respect to such order, upon submission of such order to BOX.
A Preferred Market Maker is a Market Maker designated as such by a Participant with respect to an order submitted by such Participant to BOX.
All order types and designations available on BOX will be eligible to be entered as Preferenced Orders, except for Customer Cross Orders (which do not involve market makers) and Directed Orders (which relate to BOX's PIP and COPIP matching algorithms).
Start Printed Page 7664Preferenced Orders will be treated the same as other orders submitted to the Exchange, including being executed in price/time priority in accordance with the existing matching algorithm on the Exchange,
with some exceptions as described below and in proposed Rule 7300.
Although Complex Orders may be submitted as Preferenced Orders, such orders will be given the same treatment as Complex Orders submitted without designation.
Proposed BOX Rule 7300(c)(2) requires that a Preferred Market Maker maintain a continuous two-sided market, pursuant to BOX Rule 8050(c)(1), throughout the trading day, in options classes for which it accepts Preferenced Orders, for 99% of the time the Exchange is open for trading in each such option class.
However, a Preferred Market Maker will not be required to quote in intra-day add-on series or series that have an expiration of nine months or greater in the classes for which it receives Preferenced Orders.
Pursuant to proposed BOX Rule 7300(c), when the total quantity of all orders available for execution on the Exchange against a Preferenced Order on a single options series is less than or equal to the executable quantity of the Preferenced Order at a given price level, all such orders at that price will be filled and the balance of the Preferenced Order, if any, will be executed, if possible, against orders at the next best price level.
At the final price level, where the remaining quantity of the Preferenced Order is less than the total quantity of orders on the Exchange available for execution, and after all Public Customer orders have been filled, the Preferred Market Maker will receive a Preferred allocation set forth below, provided that: (1) The price level is at the NBBO, (2) the Preferred Market Maker has an existing quote on the opposite side of the Preferenced Order that is at the NBBO at the time the Preferenced Order is received, and (3) the Preferred Market Maker would not receive an allocation greater than 40% if allocated according to the Exchange's normal price/time priority.
The Preferred allocation will be limited by the total quantity of the Preferred Market Maker's quote and will be 40% of the remaining quantity of the Preferenced Order after all Public Customer orders are filled, or 50% of the remaining quantity if only one other executable, non-Public Customer order matches the Preferenced Order at the final price level.
Under the Exchange's proposal, Legging Orders will not be considered when determining whether the Preferred Market Maker receives its 40% or 50% allocation.
Once the Preferenced Order is allocated to the Preferred Market Maker, or if no Preferred Allocation is made, BOX will distribute any remaining unallocated quantity of the Preferenced Order to all remaining orders and quotes, not including any Legging Order, that have not already received an allocation.
This includes any quote by a Preferred Market Maker if no Preferred allocation was previously made. Allocations will be made in order of time priority. Following the allocation of all remaining order and quotes described above, any remaining unallocated quantity of the Preferenced Order will be allocated to any Legging Order at the same price.
III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange.
In particular, the Commission finds that the proposed rule change is consistent with Section 6(b) of the Act,
in general, and furthers the objectives of Section 6(b)(5) of the Act.
Section 6(b)(5) requires, among other things, that the rules of the national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system.
The Commission has previously approved rules of other national securities exchanges that provide for enhanced participation guarantees.
The Commission has closely scrutinized such exchange rule proposals where the percentage of enhanced participation would rise to a level that could have a material adverse impact on quote competition within a particular exchange.
BOX's proposal to permit Preferred Market Makers to receive a 40% allocation (or 50% where there is only one other non-public customer order at the same price as the Preferenced Order) will not increase the overall percentage of an order that is guaranteed to the Preferred Market Maker beyond the currently acceptable threshold.
Under the proposal, the remaining portion of each order will be available for allocation based on the competitive bidding of market participants. Therefore, the Commission does not believe that the proposal will negatively impact quote competition or order flow on BOX.
A Preferred Market Maker will have to be quoting at, or better than, the NBBO at the time a Preferenced Order is received in order to obtain the 40% or 50% guarantee. The Commission Start Printed Page 7665believes that it is critical that a Preferred Market Maker must not be permitted to step up and match the NBBO after it receives a directed order in order to receive the Preferred Allocation. In this regard, BOX's proposal prohibits notifying a DMM of an intention to submit a Directed Order so that such DMM could change its quotation to match the NBBO immediately prior to submission of the Directed Order, and then fade its quote. BOX submitted a letter to the Commission representing that it will provide the necessary protections against that type of conduct, and will proactively conduct surveillance for, and enforce against, such violations.
BOX's proposed rules will require Preferred Market Makers to quote at a higher level than other marker makers who are not Preferred Market Makers. Currently, market makers on BOX are required to quote 60% of the trading day.
In order to receive the participation entitlement, Preferred Market Makers will be required to quote 99% of the trading day. The Commission believes that requiring heightened quoting by a market maker in order to be eligible to receive a Preferred Allocation is consistent with what other exchanges have required as part of their directed order programs.
The Commission emphasizes that approval of this proposal does not affect a broker-dealer's duty of best execution. A broker-dealer has a legal duty to seek to obtain best execution of customer orders, and any decision to preference a particular Preferred Market Maker must be consistent with this duty.
A broker-dealer's duty of best execution derives from common law agency principles and fiduciary obligations, and is incorporated in SRO rules and, through judicial and Commission decisions, the antifraud provisions of the federal securities laws.
The duty of best execution requires broker-dealers to execute customers' trades at the most favorable terms reasonably available under the circumstances, i.e., at the best reasonably available price.
The duty of best execution requires broker-dealers to periodically assess the quality of competing markets to assure that order flow is directed to the markets providing the most beneficial terms for their customer orders.
Broker-dealers must examine their procedures for seeking to obtain best execution in light of market and technology changes and modify those practices if necessary to enable their customers to obtain the best reasonably available prices.
In doing so, broker-dealers must take into account price improvement opportunities, and whether different markets may be more suitable for different types of orders or particular securities.
For these reasons, the Commission believes that the proposal is consistent with the requirements of Section 6(b)(5) of the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-BOX-2014-28) be, and it hereby is, approved.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Brent J. Fields,
[FR Doc. 2015-02748 Filed 2-10-15; 8:45 am]
BILLING CODE 8011-01-P