Notice2023-28042
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend IM-7150-1 and Rule 7250 (Quote Mitigation)
Primary source
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Published
December 21, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 244 (Thursday, December 21, 2023)</title>
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[Federal Register Volume 88, Number 244 (Thursday, December 21, 2023)]
[Notices]
[Pages 88429-88432]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-28042]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99191; File No. SR-BOX-2023-30]
Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend IM-7150-
1 and Rule 7250 (Quote Mitigation)
December 15, 2023.
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 11, 2023, 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 Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change 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 IM-7150-1 and Rule 7250 (Quote
Mitigation). 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 <a href="https://rules.boxexchange.com/rulefilings">https://rules.boxexchange.com/rulefilings</a>.
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 modernize and improve
the operation of the rules. Specifically, the Exchange is proposing to
amend: (1) IM-7150-1 to remove certain language to provide better
consistency with the surveillance the Financial Industry Regulatory
Authority, Inc. (``FINRA'') currently provides for the Exchange; and
(2) Rule 7250 (Quote Mitigation) to update and clarify the quote
mitigation process used by the Exchange. The Exchange is proposing to
make such changes in response to requests from Exchange Regulation
Staff in an effort to improve the efficacy of the Exchange's existing
regulatory framework.
IM-7150-1
IM-7150-1 (a) currently provides that: ``it shall be considered
conduct inconsistent with just and equitable principles of trade for
any Initiating Participant to engage in a pattern of conduct where the
Initiating Participant submits Primary Improvement Orders into the PIP
process for two (2) contracts or less for the purpose of manipulating
the PIP process in order to gain a higher allocation percentage than
the Initiating Participant would have otherwise received in accordance
with the allocation procedures set forth in Rule 7150.'' \3\ The
Exchange now proposes to remove the language that states, ``2 contracts
or less.''
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\3\ See IM-7150-1.
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FINRA currently provides surveillance for this requirement for the
Exchange and other options exchanges. FINRA's surveillance program
monitors for manipulative activity by a market participant and includes
surveillance designed to detect activity where an Initiating
Participant submits Primary Improvement Orders into the PIP process for
four (4) contracts or less for the purpose of manipulating the PIP
process in order to gain a higher allocation percentage than the
Initiating Participant would have otherwise received. Even though IM-
7150-1 as written, notates that a pattern of orders for two (2)
contracts may indicate manipulation of the PIP Process, FINRA has
identified the potential for manipulation for orders greater than two
(2) contracts and expanded such surveillance accordingly. For example,
unbundling an order for 50 contracts into four (4) lots may have the
same effect as unbundling the order for two (2) contracts.\4\ Under the
current rule
[[Page 88430]]
text, if FINRA were to discover manipulative behavior on three (3) or
four (4) contracts it would be more difficult to prosecute and deter
this manipulative behavior on BOX. The Exchange believes that the
removal of the two (2) contracts or less language would help align the
rule text with current FINRA surveillance practices and improve the
efficacy of the Rule by allowing FINRA and the Exchange to more readily
prosecute and deter manipulative behavior in situations where the
Initiating Participant \5\ submits Primary Improvement Orders \6\ into
the PIP \7\ process for three (3) or four (4) contracts, as well as one
(1) or two (2) contracts, for the purpose of manipulating the PIP
process.
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\4\ For example, for one instance of 100 contracts, the BOX Firm
ID would be entitled to an allocation of at least 40% or 40
contracts. If the customer order is sent as multiple small PIPs for
2 contracts, the BOX Participant would receive at least 50% of each
PIP sent (2 * .40 = .8, rounded up to 1 contract). Therefore, the
total allocation of the original 100 contract order would be at
least 50% or 50 contracts, rather than 40% or 40 contracts, a
potential over allocation of at least 10 contracts. Similarly, if
the customer order is sent as multiple small PIPs for 4 contracts,
the BOX Participant would receive at least 50% of each PIP sent (4 *
.40 = 1.6, rounded up to 2 contracts). Therefore, the total
allocation of the original 100 contract order would be at least 50%
or 50 contracts, rather than 40% or 40 contracts, a potential over
allocation of at least 10 contracts.
\5\ See BOX Rule 7150(f).
\6\ Id.
\7\ See BOX Rule 7150.
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Rule 7250
BOX Rule 7250 currently states that: ``in order to control the
number of quotations the Exchange disseminates, the Exchange shall
utilize a mechanism so that newly-received quotations and other changes
to the Exchange's best bid and offer are not disseminated for a period
of up to, but not more than one second.'' \8\ The rule as it currently
reads, provides that the Exchange always utilizes a mechanism to
control the number of quotations disseminated by the Exchange. The
Exchange is now proposing to amend this language to allow the Exchange
to utilize the mechanism when appropriate.
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\8\ See BOX Rule 7250.
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BOX's Quote Mitigation mechanism was originally adopted over
fifteen years ago as a response to the implementation of the Penny
Pilot Program \9\ amid concerns that market quality and system capacity
would be overwhelmed by the increase in options market data traffic
created by the Penny Pilot Program. The Exchange sought to reduce both
peak and overall market data traffic by bundling order updates within a
certain timeframe. The rule was amended in 2012 to adopt the existing
quote mitigation mechanism that systemically limits the dissemination
of quotations and other changes to the BOX best bid and offer according
to prescribed time criteria (a ``holdback timer'').\10\ For example, if
there is a change in the price of a security underlying an option,
multiple market participants may adjust the price or size of their
quotes. Rather than disseminating each individual change, the holdback
timer permits BOX to wait until multiple Participants have adjusted
their quotes and then disseminates a new quotation.
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\9\ See Securities Exchange Act Release Nos. 55073 (January 19,
2007) 72 FR 2047 (January 17, 2007) (SR-BSE-2006-48) (Order
Approving BSE Quote Mitigation Plan) and 55155 (January 23, 2007) 72
FR 4714 (February 1, 2007) (SR-BSE-2006-49) (Order Approving Penny
Pilot Program on BSE).
\10\ See Securities Exchange Act Release No. 68141 (November 2,
2012) 77 FR 67040 (November 8, 2012) (Notice of Filing and Immediate
Effectiveness of a Proposal Regarding Quote Mitigation).
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Through internal review, the Exchange found that, while this
mechanism and functionality still exists on the Exchange, it is not
always necessary. The Exchange is proposing to amend the rule to
replace the ``shall'' with ``may'' and instead provide that ``the
Exchange may utilize a mechanism so that newly-received quotations and
other changes to the Exchange's best bid and offer are not disseminated
for a period of up to, but not more than one second.'' This proposed
amendment will modernize the Rule by still allowing the Exchange to
control the number of quotations that the Exchange disseminates using
the aforementioned mechanism if the need arises but will enable the
Exchange to rely on other methods within the overall BOX quote
mitigation strategy. For example, BOX actively monitors the quotation
activity of its Market Makers. When the Exchange detects that a Market
Maker is disseminating an unusual number of quotes, the Exchange
contacts that Market Maker and alerts it to such activity. Such
monitoring frequently reveals that the Market Maker may have internal
system issues or has incorrectly set system parameters that were not
immediately apparent. Alerting a Market Maker to possible excessive
quoting usually leads the market maker to take steps to reduce the
number of its quotes. BOX also has a policy of withdrawing approval of
underlying securities with low trading volume, thereby eliminating the
quotation traffic attendant to such listings.
The Exchange believes that the rule, as written, is outdated and
while the Exchange still has the ability to utilize the quote
mitigation mechanism, it is not always necessary to do so. The Exchange
believes this proposed change will better align Rule 7250 with current
Exchange practices and provide greater efficacy and flexibility to the
current quote mitigation strategies in place at the Exchange.
2. Statutory Basis
The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Act,\11\ in general, and Section
6(b)(5) of the Act,\12\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general to
protect investors and the public interest.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that the proposed amendment to
IM-7150-1 to remove the language that limits the prohibition for any
Initiating Participant to engage in a pattern of conduct where the
Initiating Participant submits Primary Improvement Orders into the PIP
process for the purpose of manipulating the PIP process to only cover
Primary Improvement Orders of two (2) contracts or less will help
protect investors and the public interest by allowing greater
protection against manipulative behaviors. Although the Rule currently
covers orders of two (2) contracts or less, FINRA currently surveils
and reviews the submission of four (4) contracts or less for the
Exchange. Even though IM-7150-1 as written, notates that a pattern of
orders for two (2) contracts may indicate manipulation of the PIP
Process, FINRA has identified the potential for manipulation for orders
greater than two (2) contracts and now the Exchange seeks to expand the
rule language accordingly. This proposed amendment to remove the two
(2) contracts or less limitation from IM-7150-1 is designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general protect investors and the public interest, by
aligning the Rule to current surveillance practices and allowing FINRA
to prosecute and deter manipulative behavior in violation of this Rule
relating to three (3) or four (4) contracts on behalf of the Exchange
more effectively. The Exchange believes that the removal of the two (2)
contracts or less language would improve the efficacy of FINRA's
surveillance by helping FINRA and the Exchange prosecute and deter
manipulative behavior in situations where the Initiating Participant
submits Primary
[[Page 88431]]
Improvement Orders into the PIP process for three (3) or four (4)
contracts, as well as one (1) or two (2) contracts, for the purpose of
manipulating the PIP process. As such, the Exchange believes the
proposed rule change is in the public interest, and therefore,
consistent with the Act.
The Exchange believes that amending BOX Rule 7250 to provide that
the Exchange may utilize a mechanism so that newly-received quotations
and other changes to the Exchange's best bid and offer are not
disseminated for a period of up to, but not more than one second, will
allow the Exchange to control the number of quotations that the
Exchange disseminates through the use of the aforementioned mechanism
but will enable the Exchange to rely on other methods within the
overall BOX quote mitigation strategy, such as monitoring and
delisting. The Exchange believes that the current rule, as written, is
outdated and while the Exchange still has the ability to utilize the
quote mitigation mechanism, it is not always necessary to do so. The
Exchange believes this proposed change will better align the Rule with
current Exchange practices, provide greater efficacy and flexibility to
the current quote mitigation strategies in place at the Exchange, and
make the Rule clearer for Participants. As such, the Exchange believes
the proposed rule change is in the public interest, and therefore,
consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act. The Exchange
believes that the proposed change will not impose a burden on
intermarket or intramarket competition. While the Exchange does not
believe that the proposed non-controversial change is a burden on
competition, or is competitive in nature, the Exchange believes that
proposed updates seek to modernize and improve the operation of the
rules.
The proposed amendment to IM-7150-1 is designed to help the
Exchange and FINRA more effectively prosecute and deter manipulative
behavior in violation of this Rule relating to three (3) or four (4)
contracts. This rule change is being proposed to help deter
manipulative behaviors on the Exchange and is not intended to address
competitive issues. The proposed change to Rule 7250 is intended to
modernize and help optimize the quotation mitigation practices on the
Exchange and is not intended to address competitive issues. The
proposed changes to IM-7150-1 and Rule 7250 will apply equally to all
market participants.
For the foregoing reasons, 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
Pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) \14\ thereunder, the Exchange has designated this proposal as
one that effects a change that: (i) does not significantly affect the
protection of investors or the public interest; (ii) does not impose
any significant burden on competition; and (iii) by its terms, does not
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate if consistent with the
protection of investors and the public interest.\15\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6).
\15\ 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 pursuant to Rule 19b-4(f)(6) under the
Act normally does not become operative for 30 days after the date of
its filing. However, Rule 19b-4(f)(6)(iii) \16\ permits the Commission
to designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange requested
that the Commission waive the 30-day operative delay so that the
proposal may become operative immediately upon filing. The proposed
change raises no novel legal or regulatory issues. Therefore, 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 hereby waives the 30-day operative delay
and designates the proposed rule change operative upon filing.\17\
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\16\ 17 CFR 240.19b-4(f)(6)(iii).
\17\ 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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5220273e377f313d3f3f373c2621122137317c353d24"><span class="__cf_email__" data-cfemail="1163647d743c727e7c7c747f6562516274723f767e67">[email protected]</span></a>. Please include
file number SR-BOX-2023-30 on the subject line.
Paper Comments
<bullet> 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-2023-30. 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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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
[[Page 88432]]
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-BOX-2023-30 and should be
submitted on or before January 11, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12), (59).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-28042 Filed 12-20-23; 8:45 am]
BILLING CODE 8011-01-P
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