[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Notices]
[Pages 31265-31267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11039]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88892; File No. SR-BOX-2020-12]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend BOX Rule
7270 (Block Trades) To Add an Automatic Matching Feature to the
Facilitation Auction Mechanism
May 18, 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 May 7, 2020, BOX 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 from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend BOX Rule 7270 (Block Trades) to add
an automatic matching feature to the Facilitation Auction mechanism.
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 http://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 purpose of the proposed rule change is to amend Rule 7270 to
add an automatic matching feature to the Facilitation Auction
mechanism.
Currently, BOX's Facilitation Auction mechanism allows members to
enter two-sided orders for execution with the possibility of the Agency
Order receiving price improvement.\3\ In this mechanism, an Agency
Order is submitted to BOX by the Facilitating Participant with a
matching guaranteed contra-side order (``Facilitation Order'') equal to
the full size of the Agency Order. The agency side of this two-sided
order is then exposed to market participants during a one-second
auction to give them an opportunity to compete so that they may
participate in the execution of the Agency Order.
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\3\ See BOX Rule 7270(a) (Facilitation Auction mechanism).
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The Exchange now proposes to adopt auto-match functionality to the
Facilitation Auction mechanism. Upon entry of an order into the
Facilitation Mechanism, the Facilitating Participant can elect to
automatically match the price and size of orders, quotes and responses
received during the exposure period up to a specified limit price or
without specifying a limit price (``auto-match''). In this case, the
Facilitating Participant will be allocated its full size at each price
point, or at each price point within its limit price if a limit is
specified, until a price point is reached where the balance of the
order can be fully executed. At such price point, the Facilitating
Participant shall be allocated at least forty percent (40%) of the
original size of the facilitation order, but only after Public Customer
interest
[[Page 31266]]
at such price point. Thereafter, all other orders, Responses, and
quotes at the facilitation price will participate in the execution of
the Agency Order based upon price/time priority. Further, the Exchange
proposes that an election to automatically match better prices cannot
be cancelled or altered during the exposure period.
Under the proposal, if a Facilitating Participant elects to use the
auto-match feature, the Facilitation Order will be allocated its full
size at each price level where there are competing quotes or orders, up
to the auto-match limit if one is specified, until a price level is
reached where the balance of the Agency Order can be fully executed. At
such price level, the Facilitation order will be allocated the greater
of one contract or 40% of the size of the Agency Order after Public
Customers. The following examples illustrate how the proposed auto-
match feature will operate in the Facilitation Auction mechanism.
Assume the NBBO is $10.60 bid and $10.70 offered. An Agency Order
to sell 50 contracts at $10.65 is entered into the Facilitation
Mechanism by the Facilitating Participant with a Facilitation Order
that has an auto-match limit of $10.70:
If one Response is received for 20 contracts to buy at
$10.70, the Agency Order will execute against 40 contracts at $10.70
(20 against the Response and 20 against the Facilitation Order) and 10
contracts at $10.65 (against the Facilitation Order).
In the same scenario above, with multiple Responses, the
Facilitating Participant will be allocated its full size at each price
point, or at each price point within its limit price if a limit is
specified, until a price point is reached where the balance of the
order can be fully executed. At such price point, the facilitating
Participant shall be allocated at least forty percent (40%) of the
original size of the facilitation order, but only after Public Customer
interest at such price point.\4\
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\4\ See Proposed Rule 7270(a)(4).
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If Response 1 is for 20 contracts to buy at $10.70 and
Response 2 and Response 3 are for 5 contracts (each respectively) to
buy at $10.65 (Response 2 is a Broker Dealer and Response 3 is a Market
Maker), the Agency Order will execute against 40 contracts at $10.70
(20 against Response 1 and 20 contracts against the Facilitation Order)
and 10 contracts at $10.65 against the Facilitation Order.
If Response 1 is for 20 contracts to buy at $10.70 and
Response 2 and Response 3 are for 5 contracts (each respectively) to
buy at $10.65 (Response 2 is a Public Customer and Response 3 is a
Broker Dealer), the Agency Order will execute against: 40 Contracts at
$10.70 (20 contracts against Response 1 and 20 contracts against the
Facilitation Order), 5 contracts at $10.65 against Response 2 (Public
Customer Response), and then the remaining 5 contracts at $10.65
against the Facilitation Order.
Under the current rules, the Agency Order in the examples would
sell 20 contracts at $10.70 and the remaining contracts at $10.65.
Thus, the proposed auto-match feature will benefit the Agency Order
because it sells an additional 20 contracts at the better price.
The Exchange notes that the Facilitation Auction mechanism allows
for broad participation in its competitive auctions by all types of
market participants (e.g., Public Customers, Broker-Dealers, and Market
Makers). All market participants are able to receive the auction
broadcast and may respond by submitting competing interest (i.e.,
responses, orders and quotes). All Agency Orders entered into the
mechanisms will continue to be broadly exposed in the auction before
the Facilitating Participant can execute against the Agency Order via
the auto-match feature.
The Exchange notes that when the Facilitating Participant selects
the auto-match feature prior to the start of an auction, the available
liquidity at improved prices is increased and competitive final pricing
is out of the Facilitating Participant's control. The Exchange believes
that the proposal will increase competition in the auctions, will
provide more options contracts with price improvement and incent market
participants to initiate more auctions with the auto-match feature.
Increases in the number of auctions initiated on the Exchange using the
Facilitation Auction mechanism will directly correlate with an increase
in the number of Agency Orders that are provided with the opportunity
to receive price improvement over the NBBO.
The Exchange also notes that this auto-match feature has been
implemented by another options exchange with respect to their
facilitation auction mechanism.\5\
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\5\ See Nasdaq ISE (``ISE'') Rule Options 3, Section 11(b)(C).
The Exchange notes a minor difference between the proposed rule
discussed herein and ISE's rule. ISE's rule states that ``. . .
thereafter, all other orders, Responses, and quotes at the price
point will participate in the execution of the facilitation order
based upon the percentage of the total number of contracts available
at the facilitation price that is represented by the size of the
order, Response or quote.'' The Exchange notes that ISE is a pro-
rata allocation exchange which is reflected by the rule text
discussed above. Further, BOX is a price/time priority exchange. As
such, the Exchange believes it is appropriate to reflect the use of
price/time priority, not pro-rata, in the proposed change.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\6\ in general, and Section
6(b)(5) of the Act,\7\ in particular, that an exchange have rules that
are designed to promote just and equitable principles of trade, and to
remove impediments to and perfect the mechanism for a free and open
market and a national market system, and in general, to protect
investors and the public interest. In particular, the Exchange believes
that the proposal will result in additional liquidity available at
improved prices with competitive final pricing out of the Facilitating
Participant's control, thus increasing competition in the Facilitation
auctions and providing more options contracts with price improvement.
As a result of the increased opportunity for price improvement, the
Exchange believes that market participants will be incented to initiate
more Facilitation auctions. Increases in the number of auctions will
directly correlate with an increase in the number of customer orders
that are provided with the opportunity to receive price improvement
over the NBBO. Further, the Exchange notes that similar functionality
currently exists at another options exchange in the industry.\8\
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
\8\ See supra note 5.
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B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. The proposed functionality, which is similar to functionality
offered on another exchange, is voluntary and the Exchange therefore
does not believe that providing this functionality will have any
significant impact on competition. Further, the Exchange believes that
the proposed change is evidence of the competitive environment in the
options industry where exchanges must continually improve their
offerings to maintain competitive standing. As such, the Exchange does
not believe that the proposed rule change will impose any burden on
competition not necessary or
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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
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 \9\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
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\9\ 15 U.S.C. 78s(b)(3)(A)(iii).
\10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file 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.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days from the date of filing. However, Rule
19b-4(f)(6)(iii) \11\ 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. The Commission notes that waiver of the
operative delay would allow the Exchange to provide the auto-match
functionality immediately available to Participants. The Commission
also notes that the proposed rule change is substantially similar to
functionality on another options exchange.\12\ For these reasons, the
Commission believes that waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest.
Accordingly, the Commission waives the 30-day operative delay and
designates the proposed rule change operative upon filing.\13\
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\11\ 17 CFR 240.19b-4(f)(6)(iii).
\12\ See supra note 5.
\13\ 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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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 necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-BOX-2020-12 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-2020-12. 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 (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for 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-BOX-2020-12, and should be submitted on
or before June 12, 2020.
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\14\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11039 Filed 5-21-20; 8:45 am]
BILLING CODE 8011-01-P