[Federal Register Volume 82, Number 53 (Tuesday, March 21, 2017)]
[Notices]
[Pages 14589-14594]
[FR Doc No: 2017-05497]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80247; File No. SR-BOX-2017-08]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Amend BOX Rule 7170 (Nullification and Adjustment of Options
Transactions) To Add IM-7170-4

March 15, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 3, 2017, BOX Options Exchange LLC (the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the self-regulatory organization. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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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 7170 (Nullification and
Adjustment of Options Transactions) to add IM-7170-4. 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 Web site at http://boxexchange.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend BOX Rule 7170 (Nullification and
Adjustment of Options Transactions) to add IM-7170-4. This is filing is
based on a proposal recently submitted by Chicago Board Options
Exchange, Incorporated (``CBOE'') and approved by the Commission.\3\
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    \3\ See Securities Exchange Act Release No. 80040 (February 14,
2017), 82 FR 11248 (February 21, 2017) (Order Approving SR-CBOE-
2016-088).
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    Last year, the Exchange and other options exchanges adopted a new,
harmonized rule related to the adjustment and nullification of
erroneous options transactions, including a specific provision related
to coordination in connection with large-scale events involving
erroneous options transactions.\4\ The Exchange believes that the
changes the options exchanges implemented with the new, harmonized rule
have led to increased transparency and finality with respect to the
adjustment and nullification of erroneous options transactions.
However, as part of the initial initiative, the Exchange and other
options exchanges deferred a few specific matters for further
discussion.
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    \4\ See Securities Exchange Act Release No. 74911 (May 8, 2015),
80 FR 27717 (May 14, 2015) (SR-BOX-2015-18) (the ``Initial
Filing'').
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    Specifically, the options exchanges have been working together to
identify ways to improve the process related to the adjustment and
nullification of erroneous options transactions as it relates to
complex orders \5\ and stock-option orders. The goal of the process
that the options exchanges have undertaken is to further harmonize
rules related to the adjustment and nullification of erroneous options
transactions. As described below, the Exchange believes that the
changes the options exchanges and BOX have agreed to propose will
provide transparency and finality with respect to the adjustment and
nullification of erroneous complex order and stock-option order
transactions. Particularly, the proposed changes seek to achieve
consistent results for participants across U.S. options exchanges while
maintaining a fair and orderly market, protecting investors and
protecting the public interest.
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    \5\ See Rule 7240(a)(5) (defining complex orders).
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    The Proposed Rule is the culmination of this coordinated effort and
reflects discussions by the options exchanges whereby the exchanges
that offer complex orders and/or stock-option orders will universally
adopt new provisions that the options exchanges collectively believe
will improve the handling of erroneous options transactions that result
from the execution of complex orders and stock-option orders.\6\
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    \6\ The Exchange notes that it does not offer stock-option
orders and will not adopt the CBOE provisions around stock-option
orders.
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    The Exchange believes that the Proposed Rule supports an approach
consistent with long-standing principles in the options industry under
which the general policy is to adjust rather than nullify transactions.
The Exchange acknowledges that adjustment of transactions is contrary
to the operation of analogous rules applicable to the equities markets,
where erroneous transactions are typically nullified rather than
adjusted and where there is no distinction between the types of market
participants involved in a transaction. For the reasons set forth
below, the Exchange believes that the distinctions in market structure
between equities and options markets continue to support these
distinctions between the rules for handling obvious errors in the
equities and options markets.
    Various general structural differences between the options and
equities markets point toward the need for a different balancing of
risks for options market participants and are reflected in this
proposal. Option pricing is formulaic and is tied to the price of the
underlying stock, the volatility of the underlying security and other
factors. Because options market participants can generally create new
open interest in response to trading demand, as new open interest is
created, correlated trades in the underlying or related series are
generally also executed to hedge a market participant's risk. This
pairing of open interest with hedging interest differentiates the
options market specifically (and the derivatives markets broadly) from
the cash equities markets. In turn, the Exchange believes that the
hedging transactions engaged in by market participants necessitates
protection of transactions through adjustments rather than
nullifications when possible and otherwise appropriate.
    The options markets are also quote driven markets dependent on
liquidity providers to an even greater extent than equities markets. In
contrast to the approximately 7,000 different securities

traded in the U.S. equities markets each day, there are more than
500,000 unique, regularly quoted option series. Given this breadth in
options series the options markets are more dependent on liquidity
providers than equities markets; such liquidity is provided most
commonly by registered market makers but also by other professional
traders. With the number of instruments in which registered market
makers must quote and the risk attendant with quoting so many products
simultaneously, the Exchange believes that those liquidity providers
should be afforded a greater level of protection. In particular, the
Exchange believes that liquidity providers should be allowed protection
of their trades given the fact that they typically engage in hedging
activity to protect them from significant financial risk to encourage
continued liquidity provision and maintenance of the quote-driven
options markets.
    In addition to the factors described above, there are other
fundamental differences between options and equities markets which lend
themselves to different treatment of different classes of participants
that are reflected in this proposal. For example, there is no trade
reporting facility in the options markets. Thus, all transactions must
occur on an options exchange. This leads to significantly greater
retail customer participation directly on exchanges than in the
equities markets, where a significant amount of retail customer
participation never reaches the Exchange but is instead executed in
off-exchange venues such as alternative trading systems, broker-dealer
market making desks and internalizers. In turn, because of such direct
retail customer participation, the exchanges have taken steps to afford
those retail customers--generally Priority Customers--more favorable
treatment in some circumstances.
Complex Orders
    As more fully described below, the Proposed Rule applies much of
the Current Rule to Complex Orders.\7\ The Proposed Rule deviates from
the Current Rule only to account for the unique qualities of Complex
Orders. The Proposed Rule reflects the fact that Complex Orders can
execute against other Complex Orders or can execute against individual
simple orders in the leg markets. When a Complex Order executes against
the leg markets there may be different counterparties on each leg of
the Complex Order, and not every leg will necessarily be executed at an
erroneous price.
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    \7\ In order for a Complex Order to qualify as an obvious or
catastrophic error at least one of the legs must itself qualify as
an obvious or catastrophic error under the Current Rule. See
Proposed IM-7170-4 (a)-(b).
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    First, proposed IM-7170-4(a) governs the review of Complex Orders
that are executed against individual legs (as opposed to a Complex
Order that executes against another Complex Order).\8\ Proposed IM-
7170-4(a) provides:
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    \8\ The leg market consists of quotes and/or orders in single
options series. A Complex Order may be received by the Exchange
electronically, and the legs of the Complex Order may have different
counterparties. For example, Market-Maker 1 may be quoting in ABC
calls and Market-Maker 2 may be quoting in ABC puts. A Complex Order
to buy the ABC calls and puts may execute against the quotes of
Market-Maker 1 and Market-Maker 2.

    If a Complex Order executes against individual legs and at least
one of the legs qualifies as an Obvious or Catastrophic Error under
this Rule 7170, then the leg(s) that is an Obvious or Catastrophic
Error will be adjusted in accordance with paragraphs (c)(4)(A) or
(d)(3), respectively, regardless of whether one of the parties is a
Customer. However, any Customer order subject to this paragraph (a)
will be nullified if the adjustment would result in an execution
price higher (for buy transactions) or lower (for sell transactions)
than the Customer's limit price on the Complex Order or individual
leg(s). If any leg of a Complex Order is nullified, the entire
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transaction is nullified.

    As previously noted, at least one of the legs of the Complex Order
must qualify as an obvious or catastrophic error under the Current Rule
in order for the Complex Order to receive obvious or catastrophic error
relief. Thus, when the Exchange is notified (within the timeframes set
forth in paragraph (c)(2) or (d)(2)) of a Complex Order that is a
possible obvious error or catastrophic error, the Exchange will first
review the individual legs of the Complex Order to determine if one or
more legs qualify as an obvious or catastrophic error.\9\ If no leg
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification.
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    \9\ Because a Complex Order can execute against the leg market,
the Exchange may also be notified of a possible obvious or
catastrophic error by a counterparty that received an execution in
an individual options series. If upon review of a potential obvious
error the Exchange determines an individual options series was
executed against the leg of a Complex Order, proposed IM-7170-4 will
govern.
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    Reviewing the legs to determine whether one or more legs qualify as
an obvious or catastrophic error requires the Exchange to follow the
Current Rule. In accordance with paragraphs (c)(1) and (d)(1) of the
Current Rule, the Exchange compares the execution price of each
individual leg to the Theoretical Price of each leg (as determined by
paragraph (b) of the Current Rule). If the execution price of an
individual leg is higher or lower than the Theoretical Price for the
series by an amount equal to at least the amount shown in the obvious
error table in paragraph (c)(1) of the Current rule or the catastrophic
error table in paragraph (d)(1) of the Current Rule, the individual leg
qualifies as an obvious or catastrophic error, and the Exchange will
take steps to adjust or nullify the transaction.\10\
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    \10\ Only the execution price on the leg (or legs) that
qualifies as an obvious or catastrophic error pursuant to any
portion of Proposed IM-7170-4 will be adjusted. The execution price
of a leg (or legs) that does not qualify as an obvious or
catastrophic error will not be adjusted.
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    To illustrate, consider a Customer submits a Complex Order to the
Exchange consisting of leg 1 and leg 2--Leg 1 is to buy 100 ABC calls
and leg 2 is to sell 100 ABC puts. Also, consider that Market-Maker 1
is quoting the ABC calls $1.00-1.20 and Market-Maker 2 is quoting the
ABC puts $2.00-2.20. If the Complex Order executes against the quotes
of Market-Makers 1 and 2, the Customer buys the ABC calls for $1.20 and
sells the ABC puts for $2.00. As with the obvious/catastrophic error
reviews for simple orders, the execution price of leg 1 is compared to
the Theoretical Price \11\ of Leg 1 in order to determine if Leg 1 is
an obvious error under paragraph (c)(1) of the Current Rule or a
catastrophic error under paragraph (d)(1) of the Current Rule. The same
goes for Leg 2. The execution price of Leg 2 is compared to the
Theoretical Price of Leg 2. If it is determined that one or both of the
legs are an obvious or catastrophic error, then the leg (or legs) that
is an obvious or catastrophic error will be adjusted in accordance with
paragraphs (c)(4)(A) or (d)(3) of the Current Rule, regardless of
whether one of the parties is a Customer.\12\ Although a single-legged
execution that is deemed to be an obvious error under the Current Rule
is nullified whenever a Customer is involved in the transaction, the
Exchange believes adjusting execution prices is generally better for
the marketplace than nullifying executions because liquidity providers
often execute hedging transactions to offset options positions. When an
options transaction is nullified the hedging position can adversely
affect the liquidity provider. With regards to Complex Orders that
execute against individual legs, the additional rationale

for adjusting erroneous execution prices when possible is the fact that
the counterparty on a leg that is not executed at an obvious or
catastrophic error price cannot look at the execution price to
determine whether the execution may later be nullified (as opposed to
the counterparty on single-legged order that is executed at an obvious
error or catastrophic error price).
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    \11\ See Rule 7170(b) (defining the manner in which Theoretical
Price is determined).
    \12\ See Rule 7170(a)(1) (defining Customer for purposes of Rule
7170 as not including a broker-dealer, Professional Customer, or
Voluntary Professional Customer).
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    Paragraph (c)(4)(A) of the Current Rule mandates that if it is
determined that an obvious error has occurred, the execution price of
the transaction will be adjusted pursuant to the table set forth in
(c)(4)(A). Although for simple orders paragraph (c)(4)(A) is only
applicable when no party to the transaction is a Customer, for the
purposes of Complex Orders paragraph (a) of IM-7170-4 will supersede
that limitation; therefore, if it is determined that a leg (or legs) of
a Complex Order is an obvious error, the leg (or legs) will be adjusted
pursuant to (c)(4)(A), regardless of whether a party to the transaction
is a Customer. The Size Adjustment Modifier defined in subparagraph
(a)(4) will similarly apply (regardless of whether a Customer is on the
transaction) by virtue of the application of paragraph (c)(4)(A).\13\
The Exchange notes that adjusting all market participants is not unique
or novel. When the Exchange determines that a simple order execution is
a Catastrophic Error pursuant to the Current Rule, paragraph (d)(3)
already provides for adjusting the execution price for all market
participants, including Customers.
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    \13\ See Rule 7170(c)(4)(A) (stating that any non-Customer
Obvious Error exceeding 50 contracts will be subject to the Size
Adjustment Modifier defined in sub-paragraph (a)(4)).
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    Furthermore, as with the Current Rule, Proposed IM-7170-4(a)
provides protection for Customer orders, stating that where at least
one party to a Complex Order transaction is a Customer, the transaction
will be nullified if adjustment would result in an execution price
higher (for buy transactions) or lower (for sell transactions) than the
Customer's limit price on the Complex Order or individual leg(s). For
example, assume Customer enters a Complex Order to buy leg 1 and leg 2.
     Assume the NBBO for leg 1 is $0.20-1.00 and the NBBO for
leg 2 is $0.50-1.00 and that these have been the NBBOs since the market
opened.
     A split-second prior to the execution of the Complex Order
a Customer enters a simple order to sell the leg 1 options series at
$1.30, and the simple order enters the Exchange's book so that the BBO
is $.20-$1.30. The limit price on the simple order is $1.30.
     The Complex Order executes leg 1 against the Exchange's
best offer of $1.30 and leg 2 at $1.00 for a net execution price of
$2.30.
     However, leg 1 executed on a wide quote (the NBBO for leg
1 was $0.20-1.00 at the time of execution, which is wider than
$0.75).\14\ Leg 2 was not executed on a wide quote (the market for leg
2 was $0.50-1.00); thus, leg 2 execution price stands.
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    \14\ See Rule 7170(b)(3).
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     The Exchange determines that the Theoretical Price for leg
1 is $1.00, which was the best offer prior to the execution. Leg 1
qualifies as an obvious error because the difference between the
Theoretical Price ($1.00) and the execution price ($1.30) is larger
than $0.25.\15\
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    \15\ See Rule (c)(1).
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     According to Proposed IM-7170-4(a) Customers will also be
adjusted in accordance with Rule 7170(c)(4)(A), which for a buy
transaction under $3.00 calls for the Theoretical Price to by adjusted
by adding $0.15 \16\ to the Theoretical Price of $1.00. Thus, adjust
execution price for leg 1 would be $1.15.
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    \16\ See Rule 7170(c)(4)(A).
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     However, adjusting the execution price of leg 1 to $1.15
violates the limit price of the Customer's sell order on the simple
order book for leg 1, which was $1.30.
     Thus, the entire Complex Order transaction will be
nullified \17\ because the limit price of a Customer's sell order would
be violated by the adjustment.\18\
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    \17\ If any leg of a Complex Order is nullified, the entire
transaction is nullified. See Proposed IM-7170-4(a).
    \18\ The simple order in this example is not an erroneous sell
transaction because the execution price was not erroneously low. See
Rule 7170(a)(2).
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    As the above example demonstrates, incoming Complex Orders may
execute against resting simple orders in the leg market. If a Complex
Order leg is deemed to be an obvious error, adjusting the execution
price of the leg may violate the limit price of the resting order,
which will result in nullification if the resting order is for a
Customer. In contrast, IM-7170-2 provides that if an adjustment would
result in an execution price that is higher than an erroneous buy
transaction or lower than an erroneous sell transaction the execution
will not be adjusted or nullified.\19\ If the adjustment of a Complex
Order would violate the Complex Order Customer's limit price, the
transaction will be nullified.
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    \19\ See IM-7170-2.
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    As previously noted, paragraph (d)(3) of the Current Rule already
mandates that if it is determined that a catastrophic error has
occurred, the execution price of the transaction will be adjusted
pursuant to the table set forth in (d)(3). For purposes of Complex
Orders under Proposed IM-7170-4(a), if one of the legs of a Complex
Order is determined to be a Catastrophic Error under paragraph (d)(3),
all market participants will be adjusted in accordance with the table
set forth in (d)(3). Again, however, where at least one party to a
Complex Order transaction is a Customer, the transaction will be
nullified if adjustment would result in an execution price higher (for
buy transactions) or lower (for sell transactions) than the Customer's
limit price on the Complex Order or individual leg(s). Again, if any
leg of a Complex Order is nullified, the entire transaction is
nullified.
    Other than honoring the limit prices established for Customer
orders, the Exchange has proposed to treat Customers and non-Customers
the same in the context of the Complex Orders that trade against the
leg market. When Complex Orders trade against the leg market, it is
possible that at least some of the legs will execute at prices that
would not be deemed obvious or catastrophic errors, which gives the
counterparty in such situations no indication that the execution will
later by adjusted or nullified. The Exchange believes that treating
Customers and non-Customers the same in this context will provide
additional certainty to non-Customers (especially Market-Makers) with
respect to their potential exposure and hedging activities, including
comfort that even if a transaction is later adjusted, such transaction
will not be fully nullified. However, as noted above, under the
Proposed Rule where at least one party to the transaction is a
Customer, the trade will be nullified if the adjustment would result in
an execution price higher (for buy transactions) or lower (for sell
transactions) than the Customer's limit price on the Complex Order or
individual leg(s). The Exchange has retained the protection of a
Customer's limit price in order to avoid a situation where the
adjustment could be to a price that a Customer would not have expected,
and market professionals such as non-Customers would be better prepared
to recover in such situations. Therefore, adjustment for non-Customers
is more appropriate.
    Second, proposed IM-7170-4(b) governs the review of Complex Orders

that are executed against other Complex Orders. Proposed IM-7170-4(b)
provides:

    If a Complex Order executes against another Complex Order and at
least one of the legs qualifies as an Obvious Error under paragraph
(c)(1) or a Catastrophic Error under paragraph (d)(1), then the
leg(s) that is an Obvious or Catastrophic Error will be adjusted or
busted in accordance with paragraph (c)(4) or (d)(3), respectively,
so long as either: (i) The width of the National Spread Market for
the Complex Order strategy just prior to the erroneous transaction
was equal to or greater than the amount set forth in the wide quote
table of paragraph (b)(3) or (ii) the net execution price of the
Complex Order is higher (lower) than the offer (bid) of the National
Spread Market for the Complex Order strategy just prior to the
erroneous transaction by an amount equal to at least the amount
shown in the table in paragraph (c)(1). If any leg of a Complex
Order is nullified, the entire transaction is nullified. For
purposes of Rule 7170, the National Spread Market for a Complex
Order strategy is determined by the National Best Bid/Offer of the
individual legs of the strategy.

As described above in relation to Proposed IM-7170-4(a), the first step
is for the Exchange to review (upon receipt of a timely notification in
accordance with paragraphs (c)(2) or (d)(2) of the Current Rule) the
individual legs to determine whether a leg or legs qualifies as an
obvious or catastrophic error. If no leg qualifies as an obvious or
catastrophic error, the transaction stands--no adjustment and no
nullification.
    Unlike Proposed IM-7170-4(a), the Exchange is also proposing to
compare the net execution price of the entire Complex Order package to
the National Spread Market (``NSM'') for the Complex Order
strategy.\20\ Complex Orders are exempt from the order protection rules
of the options exchanges.\21\ Thus, depending on the manner in which
the systems of an options exchange are calibrated, a Complex Order can
execute without regard to the prices offered in the Complex Order books
or the leg markets of other options exchanges. In certain situations,
reviewing the execution prices of the legs in a vacuum would make the
leg appear to be an obvious or catastrophic error, even though the net
execution price on the Complex Order is not an erroneous price. For
example, assume the Exchange receives a Complex Order to buy ABC calls
and sell ABC puts.
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    \20\ NSM is the derived net market for a Complex Order package.
For example, if the NBBO of Leg 1 is $1.00-2.00 and the NBBO of Leg
2 is $5.00-7.00, then the NSM for a Complex Order to buy Leg 1 and
buy Leg 2 is $6.00-9.00.
    \21\ See Rule 15010(b)(7). All options exchanges have the same
order protection rule.
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     If the BBO for the ABC calls is $5.50-7.50 and the BBO for
ABC puts is $3.00-4.50, then the Exchange's spread market is $1.00-
4.50.\22\
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    \22\ The Complex Order is to buy ABC calls and sell ABC puts.
The Exchange's best offer for ABC puts is $7.50 and Exchange's best
bid for is $3.00. If the Customer were to buy the Complex Order
strategy, the Customer would receive a debit of $4.50 (buy ABC calls
for $7.50 minus selling ABC puts for $3.00). If the Customer were to
sell the Complex Order strategy the Customer would receive a credit
of $1.00 (selling the ABC calls for $5.50 minus buying the ABC puts
for $4.50). Thus, the Exchange's spread market is $1.00-4.50.
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     If the NBBO for the ABC calls is $6.00-6.50 and the NBBO
for the ABC puts is $3.50-4.00, then the NSM is $2.00-3.00.
     If the Customer buys the calls at $7.50 and sells the puts
at $4.00, the Complex Order Customer receives a net execution price of
$3.00 (debit), which is the expected net execution price as indicated
by the NSM offer of $3.00.
    If the exchange were to solely focus on the $7.50 execution price
of the ABC calls or the $4.00 execution price of the ABC puts, the
execution would qualify as an obvious or catastrophic error because the
execution price on the legs was outside the NBBO, even though the net
execution price is accurate. Thus, the additional review of the NSM to
determine if the Complex Order was executed at a truly erroneous price
is necessary. The same concern is not present when a Complex Order
executes against the leg market under IM-7170-4(a) because the Exchange
is modifying its system in order to ensure the leg will execute at or
within the NBBO of the leg markets.\23\
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    \23\ The proposed rule change to modify Exchange systems to
ensure the legs of a Complex Order will execute against legs in the
simple order market within the NBBO of the simple order market will
be in a separate filing.
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    In order to incorporate NSM, IM-7170-4(b) provides that if the
Exchange determines that a leg or legs does qualify as on obvious or
catastrophic error, the leg or legs will be adjusted or busted in
accordance with paragraph (c)(4) or (d)(3) of the Current Rule, so long
as either: (i) The width of the NSM for the Complex Order strategy just
prior to the erroneous transaction was equal to or greater than the
amount set forth in the wide quote table of paragraph (b)(3) of the
Current Rule or (ii) the net execution price of the Complex Order is
higher (lower) than the offer (bid) of the NSM for the Complex Order
strategy just prior to the erroneous transaction by an amount equal to
at least the amount shown in the table in paragraph (c)(1) of the
Current Rule.
    For example, assume an individual leg or legs qualifies as an
obvious or catastrophic error and the width of the NSM of the Complex
Order strategy just prior to the erroneous transaction is $6.00-9.00.
The Complex Order will qualify to be adjusted or busted in accordance
with paragraph (c)(4) of the Current Rule because the wide quote table
of paragraph (b)(3) of the Current Rule indicates that the minimum
amount is $1.50 for a bid price between $5.00 to $10.00. If the NSM
were instead $6.00-7.00 the Complex Order strategy would not qualify to
be adjusted or busted pursuant to .07(b)(i) because the width of the
NSM is $1.00, which is less than the required $1.50. However, the
execution may still qualify to be adjusted or busted in accordance with
paragraph (c)(4) or (d)(3) of the Current Rule pursuant to IM-7170-
4(b)(ii). Focusing on the NSM in this manner will ensure that the
obvious/catastrophic error review process focuses on the net execution
price instead of the execution prices of the individual legs, which may
have execution prices outside of the NBBO of the leg markets.
    Again, assume an individual leg or legs qualifies as an obvious or
catastrophic error as described above. If the NSM is $6.00-7.00 (not a
wide quote pursuant to the wide quote table in paragraph (b)(3) of the
Current Rule) but the execution price of the entire Complex Order
package (i.e., the net execution price) is higher (lower) than the
offer (bid) of the NSM for the Complex Order strategy just prior to the
erroneous transaction by an amount equal to at least the amount in the
table in paragraph (c)(1) of the Current Rule, then the Complex Order
qualifies to be adjusted or busted in accordance with paragraph (c)(4)
or (d)(3) of the Current Rule. For example, if the NSM for the Complex
Order strategy just prior to the erroneous transaction is $6.00-7.00
and the net execution price of the Complex Order transaction is $7.75,
the Complex Order qualifies to be adjusted or busted in accordance with
paragraph (c)(4) of the Current Rule because the execution price of
$7.75 is more than $0.50 (i.e., the minimum amount according to the
table in paragraph (c)(1) when the price is above $5.00 but less than
$10.01) from the NSM offer of $7.00. Focusing on the NSM in this manner
will ensure that the obvious/catastrophic error review process focuses
on the net execution price instead of the execution prices of the
individual legs, which may have execution prices outside of the NBBO of
the leg markets.
    Although the Exchange believes adjusting execution prices is
generally

better for the marketplace than nullifying executions because liquidity
providers often execute hedging transactions to offset options
positions, the Exchange recognizes that Complex Orders executing
against other Complex Orders is similar to simple orders executing
against other simple orders because both parties are able to review the
execution price to determine whether the transaction may have been
executed at an erroneous price. Thus, for purposes of Complex Orders
that meet the requirements of IM-7170-4(b), the Exchange proposes to
apply the Current Rule and adjust or bust obvious errors in accordance
with paragraph (c)(4) (as opposed to applying paragraph (c)(4)(A) as is
the case under IM-7170-4(a)) and catastrophic errors in accordance with
(d)(3).
    Therefore, for purposes of Complex Orders under Proposed IM-7170-
4(b), if one of the legs is determined to be an obvious error under
paragraph (c)(1), all Customer transactions will be nullified, unless a
Participant submits 200 or more Customer transactions for review in
accordance with (c)(4)(C).\24\ For purposes of Complex Orders under
Proposed IM-7170-4(b), if one of the legs is determined to be a
catastrophic error under paragraph (d)(3) and all of the other
requirements of IM-7170-4(b) are met, all market participants will be
adjusted in accordance with the table set forth in (d)(3). Again,
however, pursuant to paragraph (d)(3) where at least one party to a
Complex Order transaction is a Customer, the transaction will be
nullified if adjustment would result in an execution price higher (for
buy transactions) or lower (for sell transactions) than the Customer's
limit price on the Complex Order or individual leg(s). Also, if any leg
of a Complex Order is nullified, the entire transaction is nullified.
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    \24\ Rule 7170(c)(4)(C) also requires the orders resulting in
200 or more Customer transactions to have been submitted during the
course of 2 minutes or less.
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Implementation Date
    In order to ensure that the other options exchanges are able to
adopt rules consistent with this proposal and to coordinate
effectiveness of such harmonized rules, the Exchange proposed to delay
the effectiveness of this proposal to April 17, 2017.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the
requirements of Section 6(b) of the Securities Exchange Act of 1934
(the ``Act''),\25\ in general, and Section 6(b)(5) of the Act,\26\ 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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    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
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    As described above, the Exchange and other options exchanges are
seeking to adopt harmonized rules related to the adjustment and
nullification of erroneous options transactions. The Exchange believes
that the Proposed Rule will provide greater transparency and clarity
with respect to the adjustment and nullification of erroneous options
transactions. Particularly, the proposed changes seek to achieve
consistent results for participants across U.S. options exchanges while
maintaining a fair and orderly market, protecting investors and
protecting the public interest. Based on the foregoing, the Exchange
believes that the proposal is consistent with Section 6(b)(5) of the
Act \27\ in that the Proposed Rule will foster cooperation and
coordination with persons engaged in regulating and facilitating
transactions.
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    \27\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the various provisions allowing or dictating
adjustment rather than nullification of a trade are necessary given the
benefits of adjusting a trade price rather than nullifying the trade
completely. Because options trades are used to hedge, or are hedged by,
transactions in other markets, including securities and futures, many
Participants, and their customers, would rather adjust prices of
executions rather than nullify the transactions and, thus, lose a hedge
altogether. As such, the Exchange believes it is in the best interest
of investors to allow for price adjustments as well as nullifications.
    The Exchange does not believe that the proposal is unfairly
discriminatory, even though it differentiates in many places between
Customers and non-Customers. As with the Current Rule, Customers are
treated differently, often affording them preferential treatment. This
treatment is appropriate in light of the fact that Customers are not
necessarily immersed in the day-to-day trading of the markets, are less
likely to be watching trading activity in a particular option
throughout the day, and may have limited funds in their trading
accounts. At the same time, the Exchange reiterates that in the U.S.
options markets generally there is significant retail customer
participation that occurs directly on (and only on) options exchanges
such as the Exchange. Accordingly, differentiating among market
participants with respect to the adjustment and nullification of
erroneous options transactions is not unfairly discriminatory because
it is reasonable and fair to provide Customers with additional
protections as compared to non-Customers.
    The Exchange believes that its proposal to adopt the ability to
adjust a Customer's execution price when a Complex Order is deemed to
be an Obvious or Catastrophic Error is consistent with the Act. A
Complex Order that executes against individual leg markets may receive
an execution price on an individual leg that is not an Obvious or
Catastrophic error but another leg of the transaction is an Obvious or
Catastrophic Error. In such situations where the Complex Order is
executing against at least one individual or firm that is not aware of
the fact that they have executed against a Complex Order or that the
Complex Order has been executed at an erroneous price, the Exchange
believes it is more appropriate to adjust execution prices if possible
because the derivative transactions are often hedged with other
securities. Allowing adjustments instead of nullifying transactions in
these limited situations will help to ensure that market participants
are not left with a hedge that has no position to hedge against.

B. Self-Regulatory Organization's Statement on Burden on Competition

    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. In this regard and as indicated
above, the Exchange notes that the proposed rule change is
substantially similar to a filing submitted by CBOE that was recently
approved by the Commission.\28\
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    \28\ See supra, note 3.
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    The Exchange believes the proposal will not impose a burden on
intermarket competition but will rather alleviate any burden on
competition because it is the result of a collaborative effort by all
options exchanges to harmonize and improve the process related to the
adjustment and nullification of erroneous options transactions. The
Exchange does not believe that the rules applicable to such process is
an area where options exchanges should

compete, but rather, that all options exchanges should have consistent
rules to the extent possible. Particularly where a market participant
trades on several different exchanges and an erroneous trade may occur
on multiple markets nearly simultaneously, the Exchange believes that a
participant should have a consistent experience with respect to the
nullification or adjustment of transactions. The Exchange understands
that all other options exchanges that trade complex orders and/or
stock-option orders intend to file proposals that are substantially
similar to this proposal.
    The Exchange does not believe that the proposed rule change imposes
a burden on intramarket competition because the provisions apply to all
market participants equally within each participant category (i.e.,
Customers and non-Customers). With respect to competition between
Customer and non-Customer market participants, the Exchange believes
that the Proposed Rule acknowledges competing concerns and tries to
strike the appropriate balance between such concerns. For instance, the
Exchange believes that protection of Customers is important due to
their direct participation in the options markets as well as the fact
that they are not, by definition, market professionals. At the same
time, the Exchange believes due to the quote-driven nature of the
options markets, the importance of liquidity provision in such markets
and the risk that liquidity providers bear when quoting a large breadth
of products that are derivative of underlying securities, that the
protection of liquidity providers and the practice of adjusting
transactions rather than nullifying them is of critical importance. As
described above, the Exchange will apply specific and objective
criteria to determine whether an erroneous transaction has occurred
and, if so, how to adjust or nullify a transaction.

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 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 if consistent with the protection of investors
and the public interest, the proposed rule change has become effective
pursuant to Section 19(b)(3)(A) of the Act \29\ and Rule 19b-4(f)(6)
thereunder.\30\
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    \29\ 15 U.S.C. 78s(b)(3)(A).
    \30\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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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_ADDRESS>Please include
File Number SR-BOX-2017-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2017-08. 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 Web site (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 Web site 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; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BOX-2017-08, and should be
submitted on or before April 11, 2017.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05497 Filed 3-20-17; 8:45 am]
 BILLING CODE 8011-01-P