[Federal Register Volume 88, Number 180 (Tuesday, September 19, 2023)]
[Notices]
[Pages 64482-64504]
[FR Doc No: 2023-20171]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98380; File No. SR-BOX-2023-20]

Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing
of Proposed Rule Change To Adopt Rules To Govern FLEX Equity Options
and a New Order Type to Trade FLEX Equity Options on the BOX Trading
Floor

September 13, 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 September 1, 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 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 (1) adopt Rules 5055 and 7605 which will
govern the trading of flexible exchange options (``FLEX Equity
Options'') on BOX; and (2) make related changes to Rules 100
(Definitions), 7620 (Accommodation Transactions), and 12140 (Imposition
of Fines for Minor Rule Violations). The text of the proposed rule
change is available from the principal office of the Exchange, at the
Commission's Public Reference Room and also on the Exchange's internet
website at https://rules.boxexchange.com/rulefilings.

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 adopt rules to govern FLEX Equity Options
and a new order type to trade FLEX Equity Options on the BOX Trading
Floor.\3\ The Exchange also proposes to amend Rules 100 (Definitions),
7620 (Accommodation Transactions), and 12140 (Imposition of Fines for
Minor Rule Violations) to reflect the introduction of FLEX Equity
Option trading on the Exchange. FLEX Equity Options are options with
flexible terms such that Participants \4\ can customize

expiration date, exercise price, and exercise style. FLEX Equity
Options are designed to meet the needs of investors for greater
flexibility in selecting the terms of options within the parameters of
the Exchange's proposed rules. FLEX Equity Options are not
preestablished for trading and are not listed individually for trading
on the Exchange. Rather, investors select FLEX Equity Option terms and
are limited by the parameters detailed below in their selection of
those terms. As a result, FLEX Equity Options allow investors to
satisfy more specific, individualized investment objectives than may be
available to them in the standardized options market. Specifically,
FLEX Equity Options will be subject to proposed Rule 5055 and will be
traded as FLEX Open Outcry Orders (``FOO Orders'') on the BOX Trading
Floor under proposed Rule 7605. FLEX Equity Options are a type put or
call, and allow investors to choose an exercise price of any dollar
amount in minimum increments of $0.01,\5\ an exercise style of American
or European,\6\ and an expiration date of any month, business day and
year no more than 15 years from the date on which a FLEX Equity Option
is executed.\7\ As discussed further below, FLEX Equity Options will
not be permitted with the same terms as an existing Non-FLEX Equity
Option listed on the Exchange.\8\ Because of their composition, the
Exchange believes that FLEX Equity Options may allow investors to more
closely meet their individual investment and hedging objectives by
customizing option contracts for the purpose of satisfying particular
investment objectives that could not be met by the standardized
markets.
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    \3\ The term ``Trading Floor'' or ``Options Floor'' means the
physical trading floor of the Exchange located in Chicago. The
Trading Floor shall consist of one ``Crowd Area'' or ``Pit'' where
all option classes will be located. The Crowd Area or Pit shall be
marked with specific visible boundaries on the Trading Floor, as
determined by the Exchange. A Floor Broker must open outcry an order
in the Crowd Area. See BOX Rule 100(a)(68).
    \4\ The term ``Participant'' means a firm, or organization that
is registered with the Exchange pursuant to the Rule 2000 Series for
purposes of participating in trading on a facility of the Exchange
and includes an ``Options Participant'' and ``BSTX Participant.''
See BOX Rule 100(a)(42).
    \5\ See proposed Rule 5055(e)(1)(iii).
    \6\ See proposed Rule 5055(e)(1)(iv).
    \7\ See proposed Rule 5055(e)(1)(v).
    \8\ At least one of the following terms must differ between FLEX
Equity Options and Non-FLEX Equity Options on the same underlying
security: Exercise price, Exercise style, and Expiration date.
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Background
    The Securities and Exchange Commission (``Commission'') approved
the trading of FLEX options in 1993.\9\ At the time, the Chicago Board
Options Exchange, Inc., now Cboe Exchange, Inc. (``CBOE'') proposed
FLEX options based on the Standard and Poor's Corporation 500 and 100
Stock Indexes (referred to as the ``CBOE Order'' herein).\10\ These
FLEX options were offered as an alternative to an over-the-counter
(``OTC'') market in customized equity options.\11\ Several years after
the initial approval, the Commission approved the trading of additional
FLEX options on specified equity securities.\12\ In its order, the
Commission provided: ``The benefits of the Exchanges' options markets
include, but are not limited to, a centralized market center, an
auction market with posted transparent market quotations and
transaction reporting, parameters and procedures for clearance and
settlement, and the guarantee of the OCC [Options Clearing Corporation]
for all contracts traded on the Exchange.'' \13\
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    \9\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993) (SR-CBOE-92-17) (Order Approving
and Notice of Filing and Order Granting Accelerated Approval to
Amendment Nos. 1, 2, 3, and 4 to Proposed Rule Changes by the
Chicago Board Options Exchange, Inc., Relating to Flexible Exchange
Options (``FLEX Options'')).
    \10\ Id.
    \11\ Id.
    \12\ See Securities Exchange Act Release No. 36841 (February 14,
1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-95-24)
(Order Approving Proposed Rule Changes and Notice of Filing and
Order Granting Accelerated Approval of Amendments by the Chicago
Board Options Exchange, Inc. and the Pacific Stock Exchange, Inc.,
Relating to the Listing of Flexible Exchange Options on Specified
Equity Securities).
    \13\ Id. The Exchange notes that the Commission found pursuant
to Rule 9b-1 under the Act, that FLEX Options, including FLEX Equity
Options, are standardized options for purposes of the options
disclosure framework established under Rule 9b-1 of the Act. Id.
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    The Exchange notes that FLEX options are currently traded on CBOE,
NYSE American LLC (``NYSE American''), NYSE Arca, Inc. (``NYSE Arca''),
and Nasdaq PHLX LLC (``PHLX'').\14\ The Exchange notes further that
CBOE offers electronic and open outcry FLEX option trading while NYSE
American, NYSE Arca, and PHLX offer only open outcry trading of FLEX
options.
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    \14\ See CBOE Rules 4.20-4.22 and 5.70-5.75 and NYSE American
Rules 900G-910G and NYSE Arca Rules 5.30-O-5.41-O and PHLX Rule
Options 8, Section 34.
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    In August 2017, the Commission approved the Exchange's proposal to
adopt rules for an open outcry trading floor.\15\ The Exchange based
the rules for the BOX Trading Floor on the rules of the options
exchanges that had established trading floors at that time. When the
BOX Trading Floor was adopted in 2017, it was the first options trading
floor to be established since the 1970s.\16\ As such, the BOX Trading
Floor rules have certain differences to the trading floor rules at the
other options exchanges, to account for the unique nature of BOX's
Trading Floor and to modernize the existing trading floor rules and
surveillance practices. The BOX Trading Floor has been operating since
2017 and is now well-established. The Exchange believes that its unique
features for open-outcry trading provide value to Floor Participants.
The Exchange now proposes to allow for the trading of FLEX Equity
Options as FOO Orders on the BOX Trading Floor.
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    \15\ See Securities Exchange Act Release No. 81292 (August 2,
2017), 82 FR 37144 (August 8, 2017) (Order Approving a Proposed Rule
Change, as Modified by Amendment Nos. 1 and 2, To Adopt Rules for an
Open-Outcry Trading Floor) (finding that the proposed rule change
was consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange).
    \16\ See https://www.optionsplaybook.com/options-introduction/stock-option-history/.
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Proposal
    The Exchange proposes to adopt Rule 5055 titled FLEX Equity Options
which describes and governs FLEX Equity Options. Rule 5055(a) details
the applicability of other Exchange rules with respect to the proposed
FLEX Equity Options.\17\ Specifically, the trading of FLEX Equity
Options is subject to all other Rules applicable to the trading of
options on the Exchange, unless otherwise provided in Rules 5055 and
7605.\18\ The rules proposed by the Exchange are uniquely applicable to
FLEX Equity Options in order to accommodate their special
characteristics. For example, the BOX Book \19\ and the Complex Order
Book \20\ shall not be available for transactions in FLEX Equity
Options because, consistent with other exchanges' FLEX rules, there
will be no pre-established series and no electronic trading of FLEX
Equity Options.\21\ While electronic trading in FLEX options is
available on CBOE,\22\ the Exchange at this time intends to introduce
FLEX Equity Options on the Trading Floor only, consistent with other
markets that trade these customized options solely on their trading
floors.\23\ The Exchange notes that rules that contemplate the
operation of or interaction with the BOX Book and the Complex Order
Book will not apply to FLEX Equity Options, given that FLEX Equity
Options may only be

traded as FOO Orders and FOO Orders may not be placed in the BOX Book
or the Complex Order Book.\24\ Additionally, the Exchange is proposing
to codify that Options Exchange Officials have the same duties and
ability to enforce rules applicable to the trading of FLEX Equity
Options as they do for all other activity on the Trading Floor.\25\
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    \17\ See proposed Rule 5055(a). For example, Rules 7010 (Fees
and Charges), 7020 (Days and Hours of Business), 7030 (Units of
Trading), and 7080 (Trading Halts) apply to FLEX Equity Options and
Non-FLEX Equity Options alike.
    \18\ See proposed Rule 5055(a). Proposed Rule 5055(a) is based
on NYSE Arca Rules 5.30-O(a) and (c).
    \19\ The term ``BOX Book'' means the electronic book of orders
on each single option series maintained by the BOX Trading Host. See
BOX Rule 100(a)(10).
    \20\ The term ``Complex Order Book'' means the electronic book
of Complex Orders maintained by the BOX Trading Host. See BOX Rule
7240(a)(8).
    \21\ See proposed Rule 5055(a)(1). Proposed Rule 5055(a)(1) is
based on CBOE Rule 5.72(a).
    \22\ See, e.g., CBOE Rules 5.73 and 5.74.
    \23\ See, e.g., NYSE Arca Rule 5.30-O(c).
    \24\ The Exchange notes that FLEX Equity Options may not trade
via the PIP, COPIP, Facilitation and Solicitation Auctions, or as
Qualified Contingent Cross (``QCC''), Complex QCC, Customer Cross,
and Complex Customer Cross Orders. If the Exchange intended to allow
FLEX Equity Options to trade via the PIP, COPIP, Facilitation and
Solicitation Auctions, or as (``QCC''), Complex QCC, Customer Cross,
and Complex Customer Cross Orders, the Exchange would be required to
file a proposed rule change with the Commission to amend its rules
to allow for the inclusion of FLEX Equity Options in the relevant
rule text.
    \25\ See proposed Rule 5055(f)(2).
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    FLEX Equity Options will only be permitted in puts and calls that
do not have the same exercise style (American or European), same
expiration date and same exercise price as Non-FLEX Equity Options that
are already available for trading on the same underlying security.\26\
In addition, once, and if, identical option series are listed for
trading as Non-FLEX Equity Options, (1) all existing open positions
established under the FLEX trading procedures shall be fully fungible
with transactions in the respective Non-FLEX Equity Option series, and
(2) any further trading in the series would be as Non-FLEX Equity
Options subject to the non-FLEX trading procedures and rules.\27\
Therefore, FOO Orders, whose terms must be different from options that
are already available for trading, would not be fungible with interest
resting on the BOX Book or Complex Order Book. Accordingly, the
Exchange believes FOO Orders would not be able to trade through
interest resting on the BOX Book or Complex Order Book nor would
interest resting on the BOX Book or Complex Order Book lose priority to
FOO Orders.
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    \26\ See proposed Rule 5055(f)(1). Proposed Rule 5055(f)(1) is
based on NYSE Arca Rule 5.32-O, Commentary .01.
    \27\ See proposed Rule 5055(f)(2). Proposed Rule 5055(f)(2) is
based on NYSE Arca Rule 5.32-O, Commentary .01.
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    The Exchange proposes Rule 5055(b) which defines the following
terms: FLEX Equity Option, Non-FLEX Equity Option, FLEX Market Maker,
and FLEX Open Outcry Order. Specifically, the term ``FLEX Equity
Option'' means an option on a specified underlying security that is
subject to Rule 5055.\28\ ``Non-FLEX Equity Option'' means an option
contract that is not a FLEX Equity Option.\29\ ``FLEX Open Outcry
Order'' (``FOO Order'') means a FLEX Equity Option order as defined in
proposed Rule 7605.\30\ ``FLEX Market Maker'' means a Market Maker that
is qualified by the Exchange to trade FLEX Equity Options and meets the
requirements of proposed Rule 5055(k).\31\ The proposed functionality
for FOO Orders is designed to be similar to the Exchange's existing
Qualified Open Outcry (``QOO'') Orders because both order types will be
transacted on the Trading Floor and BOX believes they should follow
similar procedures, excluding provisions related to the BOX Book, as
discussed below.\32\ FLEX Equity Options shall not be traded other than
as FOO Orders.\33\
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    \28\ See proposed Rule 5055(b)(1). The Exchange notes that
proposed Rule 5055(e)(1)(i) provides that FLEX Equity Options on
underlying securities may be authorized pursuant to Rule 5020.
    \29\ See proposed Rule 5055(b)(2). Proposed Rule 5055(b)(2) is
based on NYSE Arca Rule 5.30-O(b)(11).
    \30\ See proposed Rule 5055(b)(3).
    \31\ See proposed Rule 5055(b)(4).
    \32\ See BOX Rule 7600. See also Securities Exchange Act Release
No. 81292 (August 2, 2017), 82 FR 37144 (August 8, 2017) (Order
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1
and 2, To Adopt Rules for an Open-Outcry Trading Floor).
    \33\ See proposed Rule 5055(b)(3).
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    The Exchange proposes Rule 5055(c) which states that certain
Exchange rules do not apply to transactions in FLEX Equity Options.
Specifically, Rule 7600 ``Qualified Open Outcry Orders--Floor
Crossing'' and Rule 7620 ``Accommodation Transactions'' do not apply to
transactions in FLEX Equity Options.\34\ These rules represent order
types that currently apply to Non-FLEX Equity Options on the BOX
Trading Floor and are specifically excluded given that the Exchange is
proposing the FOO Order type to be used exclusively for trading FLEX
Equity Options. However, the Exchange proposes that certain Rule 7600
Interpretive Materials apply to FLEX Equity Options; in particular IM-
7600-2 \35\ and IM-7600-5.\36\ IM-7600-2 and IM-7600-5 relate to tied
hedge orders and to compliance with Section 11(a)(1) of the Act,
respectively, and will apply to the proposed FOO Orders in the same
manner as they currently apply to QOO Orders. Because these provisions
would apply equally to FLEX Equity Options as they do to Non-FLEX
Equity Options, they need not be duplicated for purposes of the
proposed rules.
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    \34\ See proposed Rule 5055(c). Proposed Rule 5055(c) is based
on NYSE Arca Rule 5.30-O(d).
    \35\ BOX IM-7600-2 provides that nothing prohibits a Floor
Broker from buying or selling a stock, security futures, or futures
position following receipt of an option order, including a Complex
Order, provided that prior to announcing such order to the trading
crowd: (a) the option order is in a class designated as eligible for
``tied hedge'' transactions (as described below) as determined by
the Exchange and is within the designated tied hedge eligibility
size parameters, which parameters shall be determined by the
Exchange and may not be smaller than 500 contracts per order.
Additionally, there shall be no aggregation of multiple orders to
satisfy the size parameter, and for Complex Orders involved in a
tied hedge transaction at least one leg must meet the minimum size
requirement; (b) such Floor Broker shall create an electronic record
that it is engaging in a tied hedge transaction in a form and manner
prescribed by the Exchange; (c) such hedging position is: (1)
comprised of a position designated as eligible for a tied hedge
transaction as determined by the Exchange and may include the same
underlying stock applicable to the option order, a security future
overlying the same stock applicable to the option order or, in
reference to an index or Exchange-Traded Fund Shares (``ETF''), a
related instrument. A ``related instrument'' means, in reference to
an index option, securities comprising ten percent or more of the
component securities in the index or a futures contract on any
economically equivalent index applicable to the option order. A
``related instrument'' means, in reference to an ETF option, a
futures contract on any economically equivalent index applicable to
the ETF underlying the option order; (2) brought without undue delay
to the trading crowd and announced concurrently with the option
order; (3) offered to the trading crowd in its entirety; and (4)
offered, at the execution price received by the Floor Broker
introducing the option, to any in-crowd Floor Participant who has
established parity or priority for the related options; (d) the
hedging position does not exceed the option order on a delta basis;
(e) all tied hedge transactions (regardless of whether the option
order is a simple or Complex Order) are treated the same as Complex
Orders for purposes of the Exchange's open outcry allocation and
reporting procedures. Tied hedge transactions are subject to the
existing NBBO trade-through requirements for options and stock, as
applicable, and may qualify for various exceptions; however, when
the option order is a simple order, the execution of the option leg
of a tied hedge transaction does not qualify for the NBBO trade-
through exception for a Complex Trade (defined in Rule 7610(e)); (f)
in-crowd Floor Participants that participate in the option
transaction must also participate in the hedging position and may
not prevent the option transaction from occurring by giving a
competing bid or offer for one component of such order; (g) in the
event the conditions in the non-options market prevents the
execution of the non-option leg(s) at the agreed prices, the trade
representing the options leg(s) may be cancelled; and (h) prior to
entering tied hedge orders on behalf of Customers, the Floor Broker
must deliver to the Customer a written notification informing the
Customer that his order may be executed using the Exchange's tied
hedge procedures. The written notification must disclose the terms
and conditions contained in this Interpretative Material and be in a
form approved by the Exchange. See BOX IM-7600-2.
    \36\ BOX IM-7600-5 provides that a Participant shall not utilize
the Trading Floor to effect any transaction for its own account, the
account of an associated person, or an account with respect to which
it or an associated person thereof exercises investment discretion
by relying on an exemption under Section 11(a)(1)(G) of the Exchange
Act. See BOX IM-7600-5.
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    The Exchange proposes Rule 5055(d) which states that FLEX Equity
Options will have no trading rotations.\37\ Trading rotations are used
to open or reopen a series of options on BOX at a single

price.\38\ There is a period of time before the market in the
underlying security opens during which orders placed on the BOX Book do
not generate trade executions but may participate in the Opening
Match.\39\ FLEX Equity Options will not be placed on the BOX Book, and
therefore will not have trading rotations because there will be no
requirement for specific FLEX Equity Option series to be quoted or
traded each day. FLEX Equity Options are created with terms unique to
individual investment objectives. As such, each investor may require
FLEX Equity Options with slightly different terms than those already
created. These individually defined FLEX Equity Options are customized
for each investor and therefore trading rotations may not be useful for
other investors who may create their own FLEX Equity Options because
trading rotations are designed, in part, to determine a single opening,
or reopening, price based on orders and quotes from multiple
Participants. With the bespoke nature of FLEX Options there is not the
opportunity, nor need, to bring together multiple orders and quotes as
part of a trading rotation.
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    \37\ See proposed Rule 5055(d). Proposed Rule 5055(d) is based
on NYSE Arca Rule 5.31-O(b).
    \38\ See BOX Rules 7070(e)(2) and (l).
    \39\ See BOX Rules 7070(a) and (e). The Exchange notes that
trading rotations are referred to in BOX Rule 7070(e) as the Opening
Match.
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    Further, the Exchange proposes Rule 5055(e) which provides that
FLEX Equity Options will not be preestablished for trading, and must
include one of each of the terms of a FLEX Equity Option that are
described in the proposed Rule.\40\ Specifically, (i) the Exchange may
authorize for trading a FLEX Equity Option class on any underlying
security if it may authorize trading a Non-FLEX Equity Option class on
that underlying security pursuant to Rule 5020,\41\ and that has Non-
FLEX Equity Options on such security listed and traded on at least one
national securities exchange, even if the Exchange does not list that
Non-FLEX Equity Option class for trading; \42\ (ii) the option type may
be put or call; \43\ (iii) the exercise price may be any dollar amount
in minimum increments of $0.01; \44\ (iv) the exercise style may be
American or European; \45\ and (v) the expiration date may be any
business day (specified to the day, month, and year) no more than 15
years from the date of the FLEX Equity Option transaction.\46\ A FLEX
Equity Option order may be submitted on any trading day, including the
expiration date.\47\
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    \40\ Proposed Rule 5055(e) is based on NYSE Arca Rule 5.32-O.
The Exchange notes that it is not proposing FLEX Index Options and
thus has not incorporated applicable provisions as Index Options do
not trade on BOX.
    \41\ Rule 5020 provides criteria for the listing of options on
several different underlying types of securities, including
securities registered with the SEC under Regulation NMS of the Act
(``NMS stock''), Exchange-Traded Fund Shares, and Index-Linked
Securities. See BOX Rule 5020.
    \42\ See proposed Rule 5055(e)(1)(i). Proposed Rule
5055(e)(1)(i) is based on NYSE Arca Rule 5.32-O(f)(1).
    \43\ See proposed Rule 5055(e)(1)(ii). Proposed Rule
5055(e)(1)(ii) is based on NYSE Arca Rule 5.32-O(b)(2).
    \44\ See proposed Rule 5055(e)(1)(iii). Proposed Rule
5055(e)(1)(iii) is based on NYSE Arca Rule 5.32-O(f)(2) (exercise
prices and premiums may be stated in terms of: (i) a dollar amount;
(ii) a method for fixing at the time a FLEX Request for Quote or
FLEX Order is traded; or (iii) a percentage of the price of the
underlying security at the time of the trade or as of the close of
trading on the NYSE Arca on the trade date). The Exchange notes that
the proposal only includes exercise, bid, and offer prices in terms
of a dollar amount.
    \45\ See proposed Rule 5055(e)(1)(iv). Proposed Rule
5055(e)(1)(iv) is based on NYSE Arca Rule 5.32-O(b)(3).
    \46\ See proposed Rule 5055(e)(1)(v). Proposed Rule
5055(e)(1)(v) is based on NYSE Arca Rules 5.32-O(b)(4) and (6). The
Exchange notes that it has omitted the exception for FLEX Index
Options because BOX does not list FLEX Index Options and FLEX Index
Options are not part of this proposal.
    \47\ See proposed Rule 5055(e)(1)(v)(a). It is the Exchange's
understanding from conversations with the Options Clearing
Corporation (``OCC'') that the OCC is able to process FLEX
transactions that occur on the expiration date. The Exchange notes
that NYSE Arca's rules do not contain a similar provision. However,
the Exchange believes, based on Participant feedback, that FLEX
Option orders on NYSE ARCA are allowed on the expiration date. The
Exchange notes that the exercise of options contracts is governed by
the Rule 9000 series including exercise cut-off times and contrary
exercise advices.
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    Next, the Exchange proposes Rule 5055(f) titled Additional
Conditions of FLEX Equity Options. Proposed Rule 5055(f)(1) limits FLEX
Equity Option terms such that options on an underlying security
otherwise eligible for FLEX trading will only be permitted in puts and
calls that do not have the same exercise style (American or European),
same expiration date and same exercise price as Non-FLEX Equity Options
that are already available for trading on the same underlying
security.\48\ Notwithstanding the foregoing, FLEX Equity Options that
may in the future have the same terms as Non-FLEX Equity Options will
be permitted before the options are listed for trading as Non-FLEX
Equity Options. Once and if the identical option series are listed for
trading as Non-FLEX Equity Options: (i) all existing open positions
established under the FLEX trading procedures shall be fully fungible
with transactions in the respective Non-FLEX Equity Option series,\49\
and (ii) any further trading in the series would be as Non-FLEX Equity
Options subject to the non-FLEX trading procedures and rules,\50\ in
addition to any other rules that apply to Non-FLEX Equity Options.\51\
In the event a Non-FLEX Equity Option series is added intra-day, the
holder or writer of a FLEX Equity Option position established under the
FLEX trading procedures would be permitted to close such position under
the FLEX trading procedures against another closing only FLEX Equity
Option position for the balance of the trading day on which the series
is added.\52\ In the event the Non-

FLEX Equity Option series is added on a trading day after the position
is established, the holder or writer of a FLEX Equity Option position
established under the FLEX trading procedures would be permitted to
close such position as a non-FLEX transaction consistent with the
requirements of Rule 5055(f)(2).
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    \48\ See proposed Rule 5055(f)(1). Proposed Rule 5055(f)(1) is
based on NYSE Arca Rule 5.32-O, Commentary .01. The Exchanges notes
that its system enforces the requirement that a FLEX Equity Option
does not have the same exercise style (American or European), same
expiration date and same exercise price as a Non-FLEX Equity Option
that is already available for trading on the same underlying
security. Specifically, the system will reject an order in a FLEX
Equity Option if the order is received with the same exercise style
(American or European), same expiration date and same exercise price
as a Non-FLEX Equity Option that is already available for trading on
the same underlying security on the Exchange.
    \49\ An open position resulting from a transaction on the
Exchange becomes fungible post-trade and is separate from the
execution occurring on the Exchange. For example, assume a
Participant buys one (1) American style AAPL call option expiring on
October 9, 2024, with a strike price of 150, which is a FLEX series
because there is no standard option listed with those same terms.
Now assume, while holding this position, a standard option with the
same terms is listed (American style AAPL call option expiring on
October 9, 2024, with a strike price of 150). After this standard
option is listed, the Participant purchases one (1) contract in this
non-FLEX option series. After this second transaction, the
Participant will have an open position of two (2) contracts in the
standard AAPL call expiring on October 9, 2024, with a 150 strike
price.
    \50\ This includes all priority and trade-through requirements
on the Exchange (see, e.g., Rule 7130).
    \51\ See proposed Rule 5055(f)(2). Proposed Rule 5055(f)(2) is
based on NYSE Arca Rule 5.32-O, Commentary .01. The Exchange notes
that FLEX Equity Options previously traded as part of a Complex FOO
Order or Multi-Leg FOO Order where the respective Non-FLEX Equity
Option series is later listed may not be traded as part of a Complex
FOO Order or Multi-leg FOO Order except as provided in proposed
Rules 5055(f)(3) and 7605(d)(3) once such Non-FLEX Equity Option
series has been listed on the Exchange. See proposed Rules
7605(d)(1) and 7605(d)(3). For example, assume a Participant
executes a Complex FOO Order to buy strategy A+B where A and B are
both FLEX Equity Option series. Now assume that prior to the opening
on the next trading day, a Non-FLEX Equity Option series with the
same terms (underlying security, type, exercise price, exercise
style, and expiration date) as A has been listed on the Exchange. If
the Participant decided to close out their open position in strategy
A + B, it would need to be done as two separate orders for the
component legs of the original order: (i) selling B, a FLEX Equity
Option, by submitting a FOO Order, and (ii) selling the
corresponding Non-FLEX Equity Option series that has the same terms
as A because A has become fungible with the Non-FLEX Equity Option
series with the identical terms. Trading in A would be subject to
the Non-FLEX trading procedures and rules. See proposed Rule
5055(f)(2).
    \52\ See proposed Rule 5055(f)(3). Proposed Rule 5055(f)(3) is
based on NYSE Arca Rule 5.32-O, Commentary .01. The Exchange notes
that Complex FOO Orders and Multi-Leg FOO Orders, discussed below,
may be traded with one or more closing only component legs. The
Exchange notes that proposed Rule 5055(f)(3) differs from NYSE Arca
Rule 5.32-O, Commentary .01 in that it includes a provision
detailing the interaction between proposed Rules 5055(f)(2) and (3).
---------------------------------------------------------------------------

    The Exchange proposes Rule 5055(g) which states that the minimum
quoting and trading increment for FLEX Equity Option contracts traded
on BOX will be one cent ($0.01) for all series.\53\
---------------------------------------------------------------------------

    \53\ See proposed Rule 5055(g). Proposed Rule 5055(g) is based
on CBOE Rule 5.4(c)(4). The Exchange notes that minimum increments
in percentage terms have been omitted because they are not part of
this proposal.
---------------------------------------------------------------------------

    The Exchange proposes Rule 5055(h) which states that FLEX Equity
Options will be subject to the exercise by exception provisions of Rule
805 of the OCC, titled Expiration Exercise Procedure.\54\ Rule 805
provides provisions for the automatic exercise of certain options upon
expiration.
---------------------------------------------------------------------------

    \54\ See proposed Rule 5055(h). Proposed Rule 5055(h) is based
on NYSE Arca Rule 5.32-O(f)(4).
---------------------------------------------------------------------------

    The Exchange proposes Rule 5055(i) which details position limits
for FLEX Equity Options. Specifically, 5055(i)(1) states that FLEX
Equity Options will not be subject to position limits, except as long
as the options positions remain open, positions in FLEX Equity Options
that expire on a third Friday-of-the-month shall be aggregated with
positions in Non-FLEX Equity Options on the same underlying security
and shall be subject to the position and exercise limits set forth in
this proposed rule, and in the current BOX rules.\55\ Positions in FLEX
Equity Options shall not be taken into account when calculating
position limits for Non-FLEX Equity Options, other than for positions
in FLEX Equity Options that expire on a third Friday-of-the-month, as
discussed below.\56\
---------------------------------------------------------------------------

    \55\ See BOX Rules 3120 (Position Limits) and 3140 (Exercise
Limits). The Exchange notes that Complex FOO Orders and Multi-Leg
FOO Orders when executed result in position changes for the
individual component legs of the transaction based on the
composition of the Complex or Multi-Leg FOO Order.
    \56\ See proposed Rule 5055(i). Proposed Rule 5055(i) is based
on NYSE Arca Rules 5.35-O(a)(iii) and (b). The Exchange notes that
Index Options and Binary Return Derivatives (``ByRDs'') are not
traded on BOX and therefore FLEX Index Options and FLEX ByRDs will
not be traded on BOX and are not included in proposed Rule 5055(i).
See also CBOE Rule 8.35 and NYSE American Rule 906G and PHLX Rule
Options 8, Section 34(e).
---------------------------------------------------------------------------

    The Exchange proposes to specify that, if the Exchange determines
that a higher margin requirement is advisable in light of the risks
associated with a FLEX Equity Option position, the Exchange may,
pursuant to its authority under Rule 10130(b), consider imposing higher
margin requirements upon the account maintaining the position.
Additionally, it should be noted that the clearing firm carrying the
account will be subject to capital charges under Rule 15c3-1 under the
Act \57\ to the extent of any margin deficiency resulting from a higher
margin requirement imposed by the Exchange.\58\
---------------------------------------------------------------------------

    \57\ See 17 CFR 240.15c3-1.
    \58\ See proposed Rule 5055(i)(1). Proposed Rule 5055(i)(1) is
based on NYSE Arca Rule 5.35-O(b).
---------------------------------------------------------------------------

    The Exchange notes that, unlike NYSE Arca Rule 5.35-O(b), the
Exchange is not proposing to include a requirement that each
Participant (other than a Market Maker) that maintains a position on
the same side of the market in excess of the standard position limit
for Non-FLEX Equity Options of the same class on behalf of its own
account or for the account of a customer shall report information on
the FLEX Equity Option position, positions in any related instrument,
the purpose or strategy for the position and the collateral used by the
account. Proposed Rule 5055(i)(1) would also differ from NYSE Arca Rule
5.35-O(b) in that the Exchange is proposing to better tailor the Rule's
description of the Exchange's ability to impose a higher margin
requirement with the Exchange's existing authority to impose higher
margin as described in Rule 10130(b). The Exchange believes this would
better maintain consistency with its existing rules and would more
accurately describe the process by which the Exchange would consider
imposing higher margin requirements in practice.
    The Exchange also believes that the separate reporting requirement
for FLEX Equity Option positions, along with a requirement for the
Exchange to monitor margin requirements for FLEX Equity Option
positions separately from the manner in which the Exchange considers
margin generally, add administrative burdens on Participants and the
Exchange that do not meaningfully contribute to the management of
margin in the options markets. The Exchange notes that the text of NYSE
Arca Rule 5.35-O(b), along with comparable rule text at other exchanges
that offer FLEX equity options, was originally adopted over 25 years
ago when FLEX equity options were first permitted to trade without
position limits.\59\ The options markets have changed significantly
since that time, including with respect to technology and surveillance
capabilities. Moreover, market participants are now much more familiar
with trading FLEX equity options and managing their associated risks.
The OCC and FINRA both manage their own robust margin requirements that
apply to Exchange Participants whether or not they trade in FLEX Equity
Options.\60\ The Exchange further understands that, since FLEX equity
options have traded on exchanges without position limits, no options
exchange has used its authority to increase margin requirements due to
large FLEX equity option positions. And, to the extent it ever became
necessary to do so, the Exchange believes it already has the authority
under Rule 10130(b) to increase margin requirements with respect to any
FLEX Equity Option position. Accordingly, the Exchange does not believe
it is necessary or appropriate to continue to mandate a duplicative
reporting requirement and separate margin calculation that imposes
additional administrative burdens on Participants and the Exchange with
limited attendant benefits.
---------------------------------------------------------------------------

    \59\ See Securities Exchange Act Release Nos. 39032 (September
9, 1997), 62 FR 48683 (September 16, 1997) (SR-Amex-96-19; SR-CBOE-
96-79; SR-PCX-97-09) (Order Granting Approval to Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval
to Amendment No. 1 to Proposed Rule Change by the American Stock
Exchange, Inc. and the Chicago Board Options Exchange, Inc., and
Order Granting Approval to Proposed Rule Change by the Pacific
Exchange, Inc., Relating to the Elimination of Position and Exercise
Limits for FLEX Equity Options) (approval of a pilot program for the
elimination of position and exercise limits on FLEX Equity Options)
and 42223 (December 10, 1999), 64 FR 71158 (December 20, 1999) (SR-
Amex-99-40; SR-PCX-99-41; SR-CBOE-99-59) (Order Granting Accelerated
Approval to Proposed Rule Change Relating to the Permanent Approval
of the Elimination of Position and Exercise Limits for FLEX Equity
Options).
    \60\ See, e.g., FINRA Rule 4210(f)(2); OCC Rule 601.
---------------------------------------------------------------------------

    The Exchange proposes Rule 5055(j) which governs exercise limits
for FLEX Equity Options. Specifically, proposed Rule 5055(j) states
that exercise limits for FLEX Equity Options shall be equivalent to the
position limits established in this proposal; accordingly, there shall
be no exercise limits for FLEX Equity Options.\61\ FLEX Equity Options
will not be taken into account when calculating exercise limits for
Non-FLEX Equity Options, except that as long as the option positions
remain open, positions in FLEX Equity Options which expire on a

third Friday-of-the-month shall be aggregated with positions in Non-
FLEX Equity Options on the same underlying security and will be subject
to Non-FLEX Equity Option exercise limits as applicable.\62\
---------------------------------------------------------------------------

    \61\ See proposed Rule 5055(j). Proposed Rule 5055(j) is based
on NYSE Arca Rule 5.36-O. See also proposed Rule 5055(i).
    \62\ See proposed Rule 5055(i).
---------------------------------------------------------------------------

    The Exchange proposes Rule 5055(k) which details the Letter of
Guarantee required for Market Makers to trade FLEX Equity Options.
Specifically, proposed Rule 5055(k) states that no Market Maker shall
effect any transaction in FLEX Equity Options unless a Letter of
Guarantee has been issued by a clearing member organization and filed
with the Exchange pursuant to Rule 8070 specifically accepting
financial responsibility for all FLEX Equity Option transactions made
by such Market Maker and such letter has not been revoked under Rule
8070(c).\63\ A Letter of Guarantee will be required for a Market Maker
to be qualified to trade FLEX Equity Options.
---------------------------------------------------------------------------

    \63\ See proposed Rule 5055(k). Proposed Rule 5055(k) is based
on NYSE Arca Rule 5.41-O(a). The Exchange notes that, while NYSE
Arca allows an existing Letter of Guarantee to be amended
specifically to include FLEX transactions upon approval by the OCC,
the Exchange's proposal does not include such a provision because
the Exchange will require a separate Letter of Guarantee. The
Exchange notes that a Market Maker's Letter of Guarantee will remain
effective until a revocation is received by the Exchange.
---------------------------------------------------------------------------

    Similarly, the Exchange proposes Rule 5055(l), which provides that
no Floor Broker \64\ shall effect any transaction in FLEX Equity
Options unless a Letter of Authorization has been issued by a clearing
member organization and filed with the Exchange specifically accepting
responsibility for the clearance of FLEX Equity Option transactions of
the Floor Broker, and that such letter will remain in effect until a
written revocation is received by the Exchange.\65\
---------------------------------------------------------------------------

    \64\ A Floor Broker is an individual who is registered with the
Exchange for the purpose, while on the Trading Floor, of accepting
and handling options orders. A Floor Broker must be registered as an
Options Participant prior to registering as a Floor Broker. See BOX
Rule 7540.
    \65\ See proposed Rule 5055(l). Proposed Rule 5055(l) is based
on NYSE Arca Rule 5.41-O(b). The Exchange notes that, while NYSE
Arca allows an existing Letter of Authorization to be amended
specifically to include FLEX transactions upon approval by the OCC,
the Exchange's proposal does not include such a provision because
the Exchange will require a separate Letter of Authorization. The
Exchange notes that a Floor Broker's Letter of Authorization will
remain effective until a written revocation is received by the
Exchange.
---------------------------------------------------------------------------

FLEX Open Outcry (``FOO'') Orders
    The Exchange proposes to introduce a new order type to facilitate
FLEX Equity Option transactions on the BOX Trading Floor. Specifically,
the Exchange proposes to adopt a FOO Order type and to model it after a
current order type on the Trading Floor--QOO Orders.\66\ Trading FLEX
options on an exchange floor in a similar manner as non-FLEX options is
consistent with how FLEX orders are traded on another exchange.\67\ FOO
Orders must consist of options with terms as defined in proposed Rule
5055. Further, FOO Orders are limited solely to FLEX Equity
Options.\68\ FOO Orders are limited solely to the BOX Trading Floor and
may be entered only by Floor Brokers.\69\ Floor Brokers must also be
registered under Rule 7550. Prior to the announcement of such FOO
Orders in the trading crowd, Floor Brokers must record all FOO Orders
pursuant to Rule 7580(e)(1).\70\ FOO Orders may be traded by FLEX
Market Makers, which must be registered under Rule 8000 and must be
Floor Market Makers in good standing under Rule 8500.\71\ FLEX Market
Makers will be subject to Rule 8510, including provisions for the
course and conduct of dealings, class assignments, and option priority
and parity, unless otherwise specified in proposed Rule 7605. The
Exchange shall qualify at least three FLEX Market Makers in accordance
with a FLEX-specific qualification process prescribed by the Exchange
to perform as Market Makers in FLEX Equity Options on the Trading
Floor.\72\ Additionally, a Floor Broker shall ascertain that at least
one FLEX Market Maker is present in the Crowd Area prior to announcing
an order for execution.\73\ The Exchange notes that the Commission
provided in its order approving the BOX Trading Floor that this
requirement, among others, is designed to increase the opportunities
for another Floor Participant to compete to interact with the orders on
the Trading Floor.\74\ For FLEX Equity Options, this means that at
least one of the FLEX Market Makers, out of the at least three required
to be qualified by the Exchange, is present in the Crowd Area when the
FOO Order is announced.\75\
---------------------------------------------------------------------------

    \66\ See proposed Rule 7605. See also Securities Exchange Act
Release No. 81292 (August 2, 2017), 82 FR 37144 (August 8, 2017)
(Order Approving a Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2, To Adopt Rules for an Open-Outcry Trading Floor)
(finding that the proposed rule change was consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange).
    \67\ CBOE allows a FLEX Order to be represented and executed in
the same manner as a non-FLEX Order. See CBOE Rule 5.72(d). The
Exchange notes that CBOE Rule 5.72(d) also contains provisions that
limit the priority rules applicable to FLEX Orders. Id. at
5.72(d)(2) and (3).
    \68\ See proposed Rule 7605(a).
    \69\ See proposed Rule 7605(b). Proposed Rule 7605(b) is based
on BOX Rules 7600(a)(2) and (3) and NYSE Arca Rule 5.41-O(b).
Additionally, the Exchange is proposing to add a statement
clarifying that Floor Brokers must record all FOO Orders pursuant to
Rule 7580(e)(1) prior to the announcement of such FOO Orders, which
is the requirement for all orders on the Trading Floor.
    \70\ BOX Rule 7580(e)(1) outlines the requirements for a Floor
Broker to record and systematize any orders prior to announcement of
such order in the trading crowd.
    \71\ See proposed Rule 7605(c). Proposed rule 7605(c) is based
on NYSE Arca Rules 5.37-O(a) and 5.41-O(a). The Exchange notes that,
while NYSE Arca requires at least three FLEX Qualified Market Makers
per class, the Exchange's proposal does not qualify FLEX Market
Makers per class.
    \72\ Id. FLEX Market Maker qualification will include an
examination requiring knowledge of FLEX Equity Options, including
FLEX Equity Option terms, FLEX Market Maker qualification
requirements, FLEX Market Maker quoting obligations, and FOO Order
trading procedures.
    \73\ See proposed Rule 7605(e)(3). Proposed Rule 7605(e)(3) is
similar to BOX Rule 7580(a), which applies to QOO Orders on the
Trading Floor and requires a Floor Broker to ascertain that at least
one Floor Market Maker is present in the Crowd Area prior to
announcing an order for execution.
    \74\ See Securities Exchange Act Release No. 81292 (August 2,
2017), 82 FR 37144 (August 8, 2017) (Order Approving a Proposed Rule
Change, as Modified by Amendment Nos. 1 and 2, To Adopt Rules for an
Open-Outcry Trading Floor).
    \75\ The Exchange notes that the requirement to have at least
three qualified FLEX Market Makers is a baseline that must be met in
order for any FLEX Equity Option to be traded on the Trading Floor.
The requirement that at least one FLEX Market Maker be present when
an FOO Order is announced is an additional order-by-order
requirement that promotes order competition and is the same
requirement for QOO Orders currently.
---------------------------------------------------------------------------

    On the BOX Trading Floor today, a Floor Broker may bring an
unmatched order to the Trading Floor in order to seek liquidity. The
Floor Broker may announce the unmatched order (i.e., the initiating
side of a QOO Order) to the trading crowd in an attempt to source the
contra-side. After finding sufficient quantity to match the initiating
side pursuant to Rules 7580(e)(2) and 7600(b), the Floor Broker is then
able to submit a two-sided QOO Order to the BOG \76\ as required.\77\
Floor Brokers may also enter single-sided orders into the BOX Book
using BOX's electronic interface. Specifically, a Floor Broker may
receive a matched or unmatched order via a telephone call on the
Trading Floor \78\ or may have the matched or unmatched order sent
electronically to the Floor Broker's order entry mechanism on the
Trading Floor prior to submitting the QOO Order to the BOG. Similar to
how QOO Orders are introduced on the Trading Floor

today, FOO Orders may be brought to the floor as matched or unmatched
orders with a Floor Broker receiving the matched or unmatched order via
the same methods that Floor Brokers receive them currently on the
Trading Floor.\79\ The Exchange again notes that trading FLEX options
on an exchange floor in a similar manner as non-FLEX options is
consistent with how FLEX orders are traded on another exchange.\80\
---------------------------------------------------------------------------

    \76\ The BOX Order Gateway (``BOG'') is a component of the
Trading Host which enables Floor Brokers and/or their employees to
enter transactions on the Trading Floor. See BOX Rule 100(b)(2).
    \77\ See IM-7600-4.
    \78\ When a Floor Broker receives an order, matched or
unmatched, via telephone, the Floor Broker must enter the order
electronically into the Floor Broker's order entry mechanism.
    \79\ See, e.g., Securities Exchange Act Release No. 80720 (May
18, 2017), 82 FR 23657, 23666 (May 23, 2017) (SR-BOX-2016-48)
(Notice of Filing of Amendment No. 2 to a Proposed Rule Change to
Adopt Rules for an Open-Outcry Trading Floor) (``[A] Floor Broker
may receive a matched or unmatched order via a telephone call on the
Trading Floor or may have the matched or unmatched order sent
electronically to the Floor Broker's order entry mechanism on the
Trading Floor . . . .'').
    \80\ CBOE allows a FLEX Order to be represented and executed in
a similar manner as a non-FLEX Order. See CBOE Rule 5.72(d). The
Exchange notes that CBOE Rule 5.72(d) also contains provisions that
limit the priority rules applicable to FLEX Orders. Id. at
5.72(d)(2) and (3).
---------------------------------------------------------------------------

    Next, pursuant to proposed Rule 7605(d), FOO Orders may be Complex
Orders (``Complex FOO Order'') or Multi-Leg Orders (``Multi-Leg FOO
Order'') as defined in Rules 7240(a)(7) and (10) with no more than the
applicable number of legs, as determined by the Exchange and
communicated to Participants,\81\ including tied hedge orders as
defined in IM-7600-2.\82\ However, the priority provisions of Rules
7240(b)(2) and (3) do not apply to Complex FOO Orders or Multi-Leg FOO
Orders because there will be no Complex Order Book for such orders, nor
will there be a BOX Book for the individual FLEX Equity Option
components of the Complex FOO Orders or Multi-Leg FOO Orders.\83\ Each
option leg of a Complex FOO Order or Multi-Leg FOO Order must be for a
FLEX Equity Option series with the same underlying security and must
have the same exercise style (American or European).\84\ If a Non-FLEX
Equity Option series is added intra-day for a component leg(s) of a
Complex FOO Order or Multi-Leg FOO Order, the holder or writer of a
position in the component leg(s) resulting from such Complex FOO Order
or Multi-Leg FOO Order would be permitted to close its position(s)
pursuant to proposed Rule 5055(f)(3). If a Non-FLEX Equity Option
series is added for a component leg(s) of a Complex FOO Order or Multi-
Leg FOO Order on a trading day after the position is established, the
holder or writer of a position in the component leg(s) resulting from
such Complex FOO Order or Multi-Leg FOO Order would be required to
execute separate FLEX and non-FLEX transactions consistent with the
requirements of proposed Rule 5055(f)(2) for each of the component
leg(s) of the Complex FOO Order or Multi-Leg FOO Order to close its
position(s).\85\
---------------------------------------------------------------------------

    \81\ The Exchange notes that this process is the same as current
Rule 7600(a)(4) for QOO Orders on the BOX Trading Floor. See BOX
Information Circular 2022-18 (June 7, 2022), https://boxoptions.com/assets/IC-2022-18-Upcoming-Enhancements-to-Complex-Orders.pdf
(providing that the maximum number of legs for Complex Orders is
currently 16). A separate notice will be issued for Complex FOO
Orders and Multi-Leg FOO Orders.
    \82\ The Exchange notes that tied hedge orders may not be
smaller than 500 contracts per order. See IM-7600-2(a).
    \83\ The Exchange notes that, as with a simple FOO Order, the
priority and allocation rules applicable to Complex FOO Orders and
Multi-Leg FOO Orders are in proposed Rules 7605(i) (allocation of
the initiating side of a FOO Order against the contra-side of the
FOO Order and interest from the Trading Crowd) and (k) (Floor Broker
guarantee when crossing orders) and current Rule 7610 (priority
among Floor Participants in the Trading Crowd).
    \84\ See proposed Rule 7605(d). Proposed Rule 7605(d) is based
on CBOE Rules 1.1 (definition of ``Complex Order'') and 5.70(b) and
BOX Rule 7600(a)(4). The Exchange does not reference FLEX Index
Options or related attributes because Index Options are not traded
on BOX and FLEX Index Options are not proposed herein.
    \85\ See Proposed Rule 7605(d)(3). The Exchange is proposing
Rule 7605(d)(3) to clarify the treatment of Complex FOO Orders and
Multi-Leg FOO Orders when a Non-FLEX Equity Option is subsequently
listed for a component leg.
---------------------------------------------------------------------------

Announcement, Representation, and Execution of a FOO Order
    The Exchange proposes Rule 7605(e) which details announcement and
representation of FOO Orders on the BOX Trading Floor that is
consistent with the current Trading Floor requirements.\86\
Specifically, the Exchange proposes that all FOO Orders must be
represented to the trading crowd as provided in Rule 7580(e)(2) \87\
prior to submitting the agency FOO Order as part of a two-sided order
to the Trading Host. The Exchange notes that Floor Brokers may bring
unmatched orders (i.e., the initiating side of a FOO Order) to the
Trading Floor in order to seek a contra-side. Once a contra-side is
sourced, the Floor Broker shall submit the two-sided FOO Order to the
BOG.\88\ When a Floor Broker submits a FOO Order for execution, the
order will be executed in accordance with the proposed rules. A FOO
Order on the Exchange is not deemed executed until it is processed by
the Trading Host. All transactions occurring from the Trading Floor
must be processed by the Trading Host. Floor Brokers are responsible
for handling all orders in accordance with Exchange priority rules.
---------------------------------------------------------------------------

    \86\ Proposed Rule 7605(e) is based on BOX Rules 7600(a),
(a)(1), (b) and (c). The Exchange notes that the QOO Order
provisions related to market conditions, the NBBO, the BOX Book,
book sweep, the Complex Order Book, auctions, and away routing have
been omitted because there will be no NBBO, no BOX Book, no Complex
Order Book, no electronic auctions, and no book sweep for FOO
Orders. See BOX Rules 7600(c)-(e) and (h). A book sweep is the
number of contracts, if any, of the initiating side of a QOO Order
that the Floor Broker is willing to relinquish to orders and quotes
on the BOX Book that have priority pursuant to Rules 7600(d)(1) and
(2). See BOX Rule 7600(h). Book sweeps will not apply to FOO Orders.
As provided in proposed Rules 5055(f)(1) and (2), FOO Orders must
have different terms from orders on the BOX Book and, therefore,
could not execute against interest on the BOX Book. For the same
reason, the Complex Order priority provisions in Rules 7240(b)(2)
and (3), which address the priority of Complex Orders and interest
on the BOX Book, do not apply to Complex FOO Orders or Multi-Leg FOO
Orders. See proposed Rule 7605(d). The priority and allocation of
FOO Orders will be determined by proposed Rules 7605(i) and (k) and
current Rule 7610. See supra note 83. The Exchange also notes that
proposed Rule 7605(e) requires that Floor Brokers announcing a FOO
Order give Floor Participants a reasonable amount of time to
respond, as provided in Rule 100(b)(5). Proposed Rule 7605(e)
further provides that the Exchange shall establish, and announce via
Regulatory Notice, a minimum period of time that qualifies as a
reasonable amount of time that a Floor Broker must allow Floor
Participants to respond, which must be between three seconds and
five minutes. This differs from current Rule 7600(c), which simply
states that Floor Brokers must allow adequate time for Floor
Participants to participate in the transaction as provided in Rule
100(b)(5).
    \87\ BOX Rule 7580(e)(2) provides that ``A Floor Broker must
announce an agency order that he is representing to the trading
crowd before submitting the order to the BOG for execution. This
announcement must take place whether the Floor Broker is
representing a single-sided order and soliciting contra-side
interest, or the Floor Broker has sufficient interest to match
against the agency order already. If a Floor Broker is holding two
agency orders, he will choose which order is the initiating side.''
    \88\ See proposed IM-7605-1. Proposed IM-7605-1 is based on IM-
7600-4.
---------------------------------------------------------------------------

    There will be an initiating side and a contra-side of a FOO Order.
The initiating side is the order which must be filled in its entirety.
The contra-side must guarantee the full size of the initiating side of
the FOO Order and can be composed of multiple firms. When the Floor
Broker is soliciting interest from the trading crowd when the
initiating side was announced or to the extent the trading crowd offers
a better price, the contra-side will be the solicited interest from the
trading crowd.\89\ If the Floor Broker had sufficient interest to match
against the initiating side when the initiating side was announced,
such Floor Broker interest will be the contra-side to the initiating
side. If Floor Participants \90\ responded with interest to the
initiating

side where the Floor Broker provided sufficient interest to match
against the initiating side, the Floor Broker will allocate the
initiating side of the FOO Order pursuant to proposed Rule 7605(i).\91\
The Exchange notes that this negotiation and agreement that occurs in
the trading crowd does not result in a final trade, but rather a
``meeting of the minds'' that is then submitted through the BOG for
execution. Consistent with current Trading Floor operations, all FOO
Orders must be announced to the trading crowd, as provided in Rule
7580(e)(2), prior to the FOO Order being submitted to the BOG.\92\ An
Options Exchange Official will certify that the Floor Broker adequately
announced the FOO Order to the trading crowd.
---------------------------------------------------------------------------

    \89\ The Exchange notes that priority of bids and offers from
Floor Participants in the trading crowd is determined by Rule 7610.
    \90\ The term ``Floor Participant'' means Floor Brokers as
defined in Rule 7540 and Floor Market Makers as defined in Rule
8510(b). See BOX Rule 100(a)(26).
    \91\ See proposed Rule 7605(e)(1). Proposed Rule 7605(e)(1) is
based on BOX Rule 7600(a)(1). The Exchange notes that provisions
related to market conditions, the NBBO, the BOX Book, book sweep,
and the Complex Order Book have been omitted because there will be
no NBBO, no BOX Book, no Complex Order Book, and no book sweep for
FOO Orders. See supra note 86. The priority and allocation of FOO
Orders will be determined by proposed Rules 7605(i) and (k) and
current Rule 7610. See supra note 83.
    \92\ See proposed Rule 7605(e)(2). Proposed Rule 7605(e)(2) is
based on BOX Rules 7600(b) and (c). The Exchange notes that
provisions related to market conditions, the NBBO, the BOX Book,
book sweep, and the Complex Order Book have been omitted because
there will be no NBBO, no BOX Book, no Complex Order Book, and no
book sweep for FOO Orders. See supra note 86. The priority and
allocation of FOO Orders will be determined by proposed Rules
7605(i) and (k) and current Rule 7610. See supra note 83.
---------------------------------------------------------------------------

    The FOO Order is not deemed executed until it is processed by the
Trading Host. Once the Floor Broker submits the FOO Order to the BOG
there will be no opportunity for the submitting Floor Broker,\93\ or
anyone else, to alter the terms of the FOO Order. After announcing the
FOO Order to the trading crowd, the Floor Broker must submit the FOO
Order to the BOG for processing by the Trading Host without undue
delay, provided that the executing Floor Broker must give Floor
Participants a reasonable amount of time to respond, as provided in
Rule 100(b)(5). Additionally, the Exchange shall establish, and
announce via Regulatory Notice, a minimum period of time (which amount
of time must be between three seconds and five minutes) that qualifies
as a reasonable amount of time for responses under proposed Rule
7605(e)(2). Such threshold will constitute the minimum possible time
that a Floor Broker must give to the trading crowd to respond to a FOO
Order; however, based on the characteristics and circumstances of each
specific FOO Order, a reasonable amount of time, as provided in Rule
100(b)(5), may require a response interval longer than the minimum
threshold. An Options Exchange Official may not waive the minimum
threshold established by the Exchange.
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    \93\ The Exchange notes that trades may be allocated as provided
in proposed Rule 7605(j). The Exchange notes further that the
Exchange may nullify a transaction or adjust the execution price of
a transaction in accordance with Rule 7170 (Nullification and
Adjustment of Options Transactions including Obvious Errors). See
also BOX Rule 7640(b) (relating to trading disputes and adjustment
or nullification of transactions on the Trading Floor).
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    The Exchange notes that the proposed floor interaction practice is
consistent with the process in BOX Rule 7600 for QOO Orders on the BOX
Trading Floor where the main differences are that FOO Orders will not
be eligible for the BOX Book or the Complex Order Book, there is no
NBBO, and that Floor Brokers must allow Floor Participants a minimum
period of time to respond to FOO Orders. Consistent with QOO Orders, a
FOO Order is not deemed executed until it is processed by the Trading
Host.\94\ The Exchange notes that a reasonable amount of time for Floor
Participants to respond to a FOO Order, the same as a QOO Order, will
be interpreted on a case-by-case basis by an Options Exchange Official
based on current market conditions and trading activity on the Trading
Floor, provided, for FOO Orders, the minimum threshold discussed above
must be satisfied.\95\
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    \94\ See proposed Rule 7605(e).
    \95\ See BOX Rule 100(b)(5). The Exchange notes that an Options
Exchange Official takes into account various factors including
complexity of the trade, general prevailing market conditions, and
activity on the Trading Floor at the time the order is announced.
---------------------------------------------------------------------------

    The Exchange proposes Rule 7605(f) which states that the minimum
size for FLEX Equity Options transactions and quotations shall be one
(1) contract.\96\ The Exchange also proposes Rule 7605(g) which states
that there are no maximum differences between the bid and the offer for
FLEX Equity Option quotes.\97\
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    \96\ See proposed Rule 7605(f). Proposed Rule 7605(f) is based
on NYSE Arca Rule 5.32-O(b)(7).
    \97\ See proposed Rule 7605(g). Proposed Rule 7605(g) is based
on NYSE Arca Rule 5.37-O(d). The Exchange notes that it has omitted
the first part of NYSE Arca Rule 5.37-O(d), which provides FLEX
Appointed Market Makers need not provide continuous FLEX Quotes and
the Exchange has included the second part of NYSE Arca Rule 5.37-
O(d), which provides FLEX Appointed Market Makers need not quote a
minimum bid-offer spread in FLEX Equity Options. The Exchange has
omitted the first part of NYSE Arca Rule 5.37-O(d) because, pursuant
to proposed Rule 7605(h), the Exchange is instead proposing that
FLEX Market Makers be obligated to quote FLEX Equity Options in
response to any request for quote by a Floor Broker or Options
Exchange Official and must provide a two-sided market, which the
Exchange believes will promote a robust and competitive market for
FOO Orders on the Trading Floor and facilitate a fair and orderly
market for the trading of FLEX Equity Options on the Exchange. The
Exchange further notes that on NYSE Arca, FLEX Appointed Market
Makers are appointed in classes of FLEX index options. FLEX
Qualified Market Makers are appointed in FLEX equity options on NYSE
Arca. Further, FLEX Appointed Market Makers have an obligation to
enter a quote in response to a request for quote in a FLEX index
option while FLEX Qualified Market Makers do not have a similar
obligation for FLEX equity options. The Exchange believes that this
distinction is the reason why NYSE Arca Rule 5.37-O(d) only
specifically exempts FLEX Appointed Market Makers from quoting with
a minimum bid-offer spread since they are the only FLEX market
makers with the requirement to respond to a request for quote.
Similarly, the Exchange is proposing that there be no maximum
differences between the bid and offer for FLEX Equity Option quotes
that, pursuant to Proposed Rule 7605(h), a FLEX Market Maker is
required to provide in response to a request for quote by a Floor
Broker or Options Exchange Official.
---------------------------------------------------------------------------

    Pursuant to proposed Rule 7605(h), FLEX Market Makers have an
obligation to quote a FLEX Equity Option in response to any request for
quote by a Floor Broker or Options Exchange Official and must provide a
two-sided market.\98\
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    \98\ See proposed Rule 7605(h). Proposed Rule 7605(h) is based
on BOX Rule 8510(c)(2). The Exchange notes that proposed Rule
7605(h) does not include the provisions of current Rule 8510(c)(2)
related to quote spread parameter requirements and quotation sizes,
which requirements are provided separately in proposed Rules 7605(f)
and (g).
---------------------------------------------------------------------------

Allocation of FOO Orders
    Next, the Exchange proposes Rule 7605(i) which details the
allocation process for FOO Orders. Specifically, the FOO Order will be
matched by the Trading Host against the contra-side of the FOO Order,
regardless of whether the contra-side order submitted by the Floor
Broker is ultimately entitled to receive an allocation pursuant to
proposed Rules 7605(i)(1)-(2). If no Floor Participant, other than the
executing Floor Broker, is entitled to an allocation, then no further
steps are necessary. If however, Floor Participants are entitled to an
allocation, the remaining balance of the initiating side of the FOO
Order will be allocated as described below.\99\
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    \99\ See proposed Rule 7605(i). Proposed Rule 7605(i) is based
on BOX Rule 7600(d)(3). The Exchange notes that provisions of BOX
Rules 7600(d)(1)-(2) were omitted from proposed Rule 7605(i) because
those provisions are related to the BOX Book, which is inapplicable
to FOO Orders.
---------------------------------------------------------------------------

    First, if the FOO Order satisfies the provisions of proposed Rule
7605(k), discussed below, the executing Floor Broker is entitled to 40%
of the remaining quantity of the initiating side of the FOO Order.\100\
Next, FLEX Market Makers that respond with interest when the Floor
Broker announces the FOO

Order to the trading crowd, as outlined in Rule 7580(e)(2) and proposed
Rule 7605(e), are allocated.\101\ When multiple Floor Participants
respond with interest, priority in the Trading Crowd is established
pursuant to Rule 7610.\102\ Last, if interest remains after Floor
Participants that responded with interest receive their allocation, the
remaining quantity of the initiating side of the FOO Order will be
allocated to the executing Floor Broker.\103\ The Exchange again notes
that similar allocation and priority provisions are already established
and apply to responses for QOO Orders on the BOX Trading Floor.\104\
---------------------------------------------------------------------------

    \100\ See proposed Rule 7605(i)(1). The Exchange notes that
proposed Rule 7605(i)(1) is based on BOX Rule 7600(d)(3)(i).
    \101\ See proposed Rule 7605(i)(2). The Exchange notes that
proposed Rule 7605(i)(2) is based on BOX Rule 7600(d)(3)(ii).
    \102\ Id. Priority under Rule 7610 is determined first by price
and then by sequence. Specifically, on the Trading Floor, the
highest (lowest) bid (offer) shall have priority; when two or more
bids (offers) represent the highest (lowest) price, priority shall
be afforded to such bids (offers) in the sequence in which they were
made. If, however, the bids (offers) of two or more Floor
Participants are made simultaneously, or if it is impossible to
determine clearly the order of time in which they are made, such
bids (offers) will be deemed to be on parity and priority will be
afforded to them, insofar as practicable, on an equal basis. The
Floor Broker announcing the order is responsible for determining the
sequence in which bids or offers are vocalized on the Trading Floor
from Floor Participants in response to the Floor Broker's bid,
offer, or call for a market. Rule 7610 also provides priority
provisions where a Floor Broker requests a market in order to fill a
large order and the Floor Participants provide a collective
response. See BOX Rule 7610.
    \103\ See proposed Rule 7605(i)(3). The Exchange notes that
proposed Rule 7605(i)(3) is based on BOX Rule 7600(d)(3)(iii).
    \104\ The Exchange notes that FOO Order allocation and priority
differs from QOO Order provisions related to the priority of orders
on the BOX Book. See BOX Rules 7600(c)-(e) and (h), and 7600(f)(1)
and (3). See also supra note 86.
---------------------------------------------------------------------------

    The Exchange proposes that after execution of the FOO Order, the
executing Floor Broker is responsible for providing the correct
allocations of the initiating side of the FOO Order to an Options
Exchange Official or his or her designee, if necessary, who will
properly record the order in the Exchange's system.\105\ The executing
Floor Broker must provide the correct allocations to an Options
Exchange Official or his or her designee, in writing, without
unreasonable delay.\106\ The Exchange notes that the same procedure for
recording trade allocations applies to QOO Orders on the BOX Trading
Floor today.
---------------------------------------------------------------------------

    \105\ See proposed Rule 7605(j). Proposed Rule 7605(j) is based
on BOX Rule 7600(d)(4).
    \106\ Id.
---------------------------------------------------------------------------

    Similar to the allocation process in place for QOO Orders, the
Exchange proposes to allow for a participation guarantee for certain
FOO Orders executed by Floor Brokers on the Trading Floor.
Specifically, when a Floor Broker holds an option order of the eligible
order size or greater, the Floor Broker is entitled to cross 40% of the
remaining contracts of the original order, after all bids or offers at
better prices are filled, with other orders that the Floor Broker is
holding.\107\ The Exchange may determine, on an option by option basis,
the eligible size for an order on the Trading Floor to be subject to
this guarantee; however, the eligible order size may not be less than
50 contracts. In determining whether an order satisfies the eligible
order size requirement, any Complex FOO Order or Multi-Leg FOO Order
must contain one leg alone which is for the eligible order size or
greater.\108\ Nothing in the proposed rule is intended to prohibit a
Floor Broker from trading more than their percentage entitlement if the
other Participants of the trading crowd do not choose to trade the
remaining portion of the order.\109\ The Exchange notes that the
proposed guarantee process is similar to the guarantee process
currently in place for QOO Orders on the BOX Trading Floor.\110\
---------------------------------------------------------------------------

    \107\ See proposed Rules 7605(i), 7605(k)(1) and (3). Proposed
Rules 7605(k)(1) and (3) are based on BOX Rules 7600(f)(1) and (3).
    \108\ See proposed Rule 7605(k)(2). Proposed Rule 7605(k)(2) is
based on BOX Rule 7600(f)(2).
    \109\ See proposed Rule 7605(k)(4). Proposed Rule 7605(k)(4) is
based on BOX Rule 7600(f)(4).
    \110\ The Exchange notes that the proposed FOO Order priority
differs from QOO Order priority because BOX Rules 7600(d)(1)-(2)
contain provisions that describe priority related to the BOX Book,
which is inapplicable to FOO Orders.
---------------------------------------------------------------------------

    The below examples are designed to illustrate the allocation of the
initiating side of a FOO Order.
    Example 1--Assume a Floor Broker wishes to execute a FOO Order for
500 contracts. When he announces the order, FLEX Market Maker 1 and
FLEX Market Maker 2 both respond to the FOO Order for 250 contracts
each at the same price as the Floor Broker's contra-side. FLEX Market
Maker 1 responded first so he will have time priority over FLEX Market
Maker 2. Since the FOO Order is for at least 50 contracts, the Floor
Broker is entitled to match at least 40% of the initiating side with
the Floor Broker's contra-side.
    Result: The initiating side of the FOO Order will match against the
Floor Broker's contra-side order for the full 500 contracts. After the
execution of the FOO Order, because other Floor Participants are
entitled to an allocation, the executing Floor Broker is then
responsible for providing an Options Exchange Official or his or her
designee the following allocation of the initiating side of the FOO
Order:

1. 200 contracts (40%, or 500 * .40) for the contra-side order
submitted by the Floor Broker
2. 250 contracts for FLEX Market Maker 1 with time priority
3. Remaining 50 contracts to FLEX Market Maker 2

    Example 2--Assume a Floor Broker wishes to execute a FOO Order for
40 contracts. When he announces the order, FLEX Market Maker 1 and FLEX
Market Maker 2 both respond to the FOO Order for 20 contracts each at
the same price as the Floor Broker's contra-side. FLEX Market Maker 1
responded first so he will have time priority over FLEX Market Maker 2.
Since the FOO Order is for less than 50 contracts, the Floor Broker is
not entitled to a 40% guarantee.
    Result: The initiating side FOO Order will match against the Floor
Broker's contra-side for the full 40 contracts. After execution of the
FOO Order, because other Floor Participants are entitled to an
allocation, the executing Floor Broker is then responsible for
providing an Options Exchange Official or his or her designee with the
following allocation of the initiating side of the FOO Order:

1. 20 contracts for FLEX Market Maker 1 with time priority
2. 20 contracts for FLEX Market Maker 2
3. The initiating side is filled and the executing Floor Broker will
receive no allocation.

    Example 3--Assume a Floor Broker wishes to execute a FOO Order for
40 contracts in ABC at 1.05 (initiating side is to sell). When he
announces the order, FLEX Market Maker 1 and FLEX Market Maker 2 both
respond to the FOO Order for 20 contracts each. FLEX Market Maker 1
responded first at an improved price to buy 20 at 1.06 so he will have
price priority over FLEX Market Maker 2.\111\ Since the FOO Order is
for less than 50 contracts, the Floor Broker is not entitled to a 40%
guarantee.
---------------------------------------------------------------------------

    \111\ Pursuant to Rule 7610, FLEX Marker Maker 1 would have
priority over FLEX Market Maker 2 even if FLEX Market Maker 2
responded first because FLEX Market Maker 1 responded at a better
price.
---------------------------------------------------------------------------

    Result: The Floor Broker will submit two FOO Orders for 20
contracts each: a FOO Order at 1.06 for 20 contracts and a FOO Order at
1.05 for 20 contracts. The initiating side of each FOO Order will match
against the Floor Broker's contra-side orders for the full 20
contracts. After execution of the FOO Orders, the executing Floor
Broker is then responsible for providing an Options Exchange Official
or his or her

designee with the following allocation of the initiating side of the
---------------------------------------------------------------------------
FOO Orders:

1. FOO Order at 1.06--20 contracts for FLEX Market Maker 1.
2. FOO Order at 1.05--20 contracts for FLEX Market Maker 2.
3. The executing Floor Broker will receive no allocation of either FOO
Order.
Additional Provisions
    The Exchange also proposes that all orders entrusted to a Floor
Broker will be considered Not Held Orders, unless otherwise specified
by a Floor Broker's client. A Not Held Order is an order marked ``not
held'', ``take time'', or which bears any qualifying notation giving
discretion as to the price or time at which such order is to be
executed.\112\
---------------------------------------------------------------------------

    \112\ See proposed Rule 7605(l). Proposed Rule 7605(l) is based
on BOX Rule 7600(g). See also NYSE Arca Rules 5.34-O and 6.62-O(f).
The Exchange notes that NYSE Arca Rule 5.34-O provides a Floor
Broker with additional discretion with respect to the number of FLEX
contracts to be purchased or sold. The Exchange is not proposing the
same discretion for FOO Orders so that the requirements for Floor
Brokers handling FOO Orders are the same as handling QOO Orders
currently on the Trading Floor.
---------------------------------------------------------------------------

    The Exchange further proposes IM-7605-1 which allows Floor Brokers
to bring unmatched orders (i.e., the initiating side of a FOO Order) to
the Trading Floor in order to seek contra-side interest. Once a contra-
side is sourced pursuant to current Rule 7580(e)(2) and proposed Rule
7605(e), the Floor Broker shall submit the two-sided FOO Order to the
BOG.\113\ The Exchange notes that this provision is identical to IM-
7600-4, with the exception of internal rule references, which applies
to QOO Orders on the BOX Trading Floor.
---------------------------------------------------------------------------

    \113\ See proposed IM-7605-1. Proposed IM-7605-1 is based on IM-
7600-4.
---------------------------------------------------------------------------

    The Exchange proposes IM-7605-2 to guide conduct on the floor.\114\
In particular, the Floor Broker must disclose all securities that are
components of the Public Customer order which is subject to crossing
before requesting bids and offers for the execution of all components
of the order. Once the trading crowd has provided a quote, it will
remain in effect until a reasonable amount of time has passed, there is
a significant change in the price of the underlying security, or the
market given in response to the request has been improved. In the case
of a dispute, the term ``significant change'' will be interpreted on a
case-by-case basis by an Options Exchange Official based upon the
extent of recent trading in the option and in the underlying security,
and any other relevant factors.\115\ The Participants of the trading
crowd who established the market will have priority over all other
orders that were not announced in the trading crowd at the time that
the market was established and will maintain priority over such orders
except for orders that improve upon the market. When a Floor Broker
announces an order to the trading crowd pursuant to Rule 7580(e)(2), it
shall be the responsibility of the Floor Participant who established
the market to alert the Floor Broker of the fact that the Floor
Participant has priority. Complex FOO Orders, Multi-Leg FOO Orders or
tied hedge orders on opposite sides of the market may be crossed,
provided that the Floor Broker holding such orders proceeds in the
manner described in proposed Rule 7605 and IM-7600-2 as appropriate.
Floor Participants may not prevent a Complex Order from being completed
by giving a competing bid or offer for one component of such
order.\116\ In determining whether an order satisfies the eligible tied
hedge order size requirement, any Complex FOO Order or Multi-Leg FOO
Order must contain one leg which, standing alone, is for the eligible
order size or greater.\117\ A Floor Broker crossing a Public Customer
FOO Order with an order that is not a Public Customer Order, when
providing for a reasonable opportunity \118\ for the trading crowd to
participate in the transaction, shall disclose the Public Customer
Order that is subject to crossing.
---------------------------------------------------------------------------

    \114\ See proposed IM-7605-2. Proposed IM-7605-2 is based on IM-
7600-1.
    \115\ The Exchange believes that, by providing the Options
Exchange Official with the ability to consider any other relevant
factors, Options Exchange Officials will retain the necessary
discretion to perform their duties if a new or unforeseen
circumstance arises.
    \116\ The Exchange notes that while a Complex Order could be
prevented from being completed by competing bids or offers on
multiple components of such orders, competing bids or offers in any
one of the multiple components may not prevent a Complex Order from
being completed and each one is prohibited.
    \117\ See proposed IM-7605-2(d). The eligible tied hedge order
size requirement is determined by the Exchange and may not be
smaller than 500 contracts per order. See BOX IM-7600-2.
    \118\ The Exchange is proposing that a minimum response period,
which must be between three seconds and five minutes, shall be
established by the Exchange and announced via Regulatory Notice. See
proposed Rule 7605(e)(2).
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 100(b)(3) to provide: ``All
Exchange options transactions shall be executed automatically by the
Trading Host as provided in applicable Exchange Rules.'' \119\ The
Exchange notes that Rule 100(b)(3) already applies to Non-FLEX Equity
Options. The proposed amendment is to replace specific rule references
with a more general reference to avoid any unintended ambiguity and
permit the Rule to apply in connection with FLEX Equity Options.
---------------------------------------------------------------------------

    \119\ See proposed Rule 100(b)(3).
---------------------------------------------------------------------------

    The Exchange proposes to amend Rule 7620, titled Accommodation
Transactions, and IM-7620-1 to exclude FLEX Equity Options as defined
in proposed Rule 5055.\120\ The Exchange notes that Rule 7620(b)
currently states that it applies to all options except for option
classes participating in the Penny Interval Program under Rule 7260,
and IM-7620-1(b) currently states that it applies to all options
including those in the Penny Interval Program. The proposed amendments
will ensure consistency with proposed Rule 5055(c), which provides that
Rule 7620 (Accommodation Transactions) shall not apply to transactions
in FLEX Equity Options.
---------------------------------------------------------------------------

    \120\ See proposed Rule 7620.
---------------------------------------------------------------------------

    The Exchange has not yet determined the fees for FOO transactions
executed on the Trading Floor. Prior to commencing trading of the
proposed FOO Orders on the Trading Floor, the Exchange intends to
submit a proposed rule change to the Commission setting forth the
proposed fees.
    The Exchange has also analyzed its capacity and represents that it
believes the Exchange and the Options Price Reporting Authority
(``OPRA'') have the necessary systems capacity to handle the additional
message traffic associated with the listing of new series that may
result from the introduction of FLEX Equity Options.\121\ Additionally,
the Exchange will have surveillance coverage in place to monitor issues
unique to FLEX trading.
---------------------------------------------------------------------------

    \121\ The Exchange will report FLEX Equity Option trades and, if
necessary, trade cancels to OPRA.
---------------------------------------------------------------------------

    The proposed FLEX Equity Option rules are based predominately on
the rules of NYSE Arca. However, the Exchange omitted certain NYSE Arca
rules from the proposed rules discussed herein due to differences in
the scope and operation of FLEX Option \122\ trading at NYSE Arca,
compared to the scope and operation of the proposed FLEX Equity Option
trading herein. The Exchange is not including NYSE Arca rule provisions
that relate to FLEX Index Options as Index Options are not traded on
BOX and FLEX Index Options are not proposed herein.\123\ In particular,
NYSE Arca Rule 5.39-O requires net liquidating equity of $100,000 in an
account in which

transactions in FLEX Index Options will be conducted. As the Exchange
does not trade Index Options, FLEX Index Options are not proposed
herein, and the Exchange already imposes minimum net capital
requirements,\124\ it does not propose additional requirements.
---------------------------------------------------------------------------

    \122\ The term ``Flexible Exchange Option'' or ``FLEX Option''
means a customized options contract. See NYSE Arca Rule 5.30-O(b)(4)
and CBOE Rule 1.1 (definition of, ``FLEX Option'').
    \123\ See NYSE Arca Rules 5.39-O and 5.40-O.
    \124\ See BOX Rules 8010, 8080, and 10200.
---------------------------------------------------------------------------

    Next, NYSE Arca Rule 5.40-O requires at least $1 million of net
liquidating equity in the account of a FLEX Appointed Market Maker.
However, FLEX Appointed Market Makers are appointed for FLEX Index
Options on NYSE Arca but are not required for FLEX Equity Options.\125\
Instead, NYSE Arca only requires FLEX Qualified Market Makers for FLEX
Equity Options.\126\ And, this subset of Market Makers is not required
to have at least $1 million of net liquidating equity. Therefore, the
Exchange's proposal does not propose to include additional net
liquidating equity requirements for FLEX Market Makers. The Exchange
notes that Market Makers, including Floor Market Makers and FLEX Market
Makers are still subject to several financial requirements, including
net liquidating equity in its Market Maker account of not less than
$200,000.\127\ Additionally, the Exchange believes that the large
infrastructure needed to trade as a Market Maker, including their
adequacy of capital and operational capacity is such that current
Market Makers are likely to have net liquidating equity well beyond $1
million. In fact, another exchange which trades FLEX Options has
removed a net liquidating equity requirement while still requiring
market makers to maintain net capital sufficient to comply with the
requirements of Rule 15c3-1, under the Act.\128\ The Exchange has a
similar provision, Rule 10200, that requires each Participant subject
to Rule 15c3-1 under the Act to comply with the capital requirements
prescribed therein among other requirements.\129\
---------------------------------------------------------------------------

    \125\ See NYSE Arca Rule 5.37-O(a).
    \126\ See id. The Exchange notes that NYSE Arca allows but does
not require appointment of two or more FLEX Appointed Market Makers
to FLEX Equity Options in lieu of appointing FLEX Qualified Market
Makers.
    \127\ See BOX Rule 8080(a)(1). Rule 8080 also requires Market
Makers to maintain net capital sufficient to comply with the
requirements of Rule 15c3-1 under the Act and each Market Maker that
is a Clearing Participant shall also maintain net capital sufficient
to comply with the requirements of the OCC. See BOX Rules 8080(a)(2)
and (b). See also BOX Rule 8010 (``To qualify for registration as a
Market Maker, an Options Participant must meet the requirements
established in SEC Rule 15c3-1(a)(6)(i) . . .'').
    \128\ See CBOE Rule 11.6 and Securities Exchange Act Release No.
87024 (September 19, 2019), 84 FR 50545 (September 25, 2019) (SR-
CBOE-2019-059) (Notice of Filing and Immediate Effectiveness of a
proposed rule change to amend certain rules relating to market
makers upon migration to the trading system used by CBOE affiliated
exchanges).
    \129\ See BOX Rule 10200 (Participants must comply with the
additional requirements of the Rule 10200 Series and Market Makers
must comply with the minimum financial requirements contained in
Rule 8010).
---------------------------------------------------------------------------

    An additional difference in the appointment of FLEX Market Makers
is that NYSE Arca appoints FLEX Qualified Market Makers to each FLEX
Equity Option of a given class, while the Exchange will qualify FLEX
Market Makers for all FLEX Equity Options. The Exchange believes that
the structure of its Trading Floor, with one crowd or trading area,
will operate more efficiently without qualifying FLEX Market Makers by
class.\130\ Accordingly, a Floor Broker or Options Exchange Official
may request a FLEX Equity Option quote in any class from a FLEX Market
Maker. The Exchange notes that FLEX Market Makers will be subject to
Rule 8510, including provisions for the course and conduct of dealings,
class assignments, and option priority and parity, unless otherwise
specified in proposed Rule 7605.\131\
---------------------------------------------------------------------------

    \130\ Pursuant to BOX Rule 8150(e), whenever a BOX Floor Market
Maker enters the trading crowd he must undertake the obligations
specified in Rule 8510(d) (In Classes of Option Contracts to Which
Assigned--Affirmative Obligations). Since there is only one trading
crowd on the BOX Floor, in practice this results in all BOX Floor
Market Makers being required to quote all classes on the Trading
Floor. The same will apply to FLEX Market Makers.
    \131\ See proposed Rules 7605(f)-(h) (providing FOO Order
quoting obligations). The Exchange notes that current Floor Market
Maker quoting obligations and restrictions are detailed in Rule
8510.
---------------------------------------------------------------------------

    Further, the Exchange notes differences between the proposed
quoting obligations and those applicable on NYSE Arca. Specifically, a
NYSE Arca FLEX Qualified Market Maker may, but shall not be obligated
to, enter a FLEX Quote in response to a Request for Quotes on a FLEX
Equity Option of the class in which he or she is qualified.\132\
However, a FLEX Official on NYSE Arca may call upon FLEX Qualified
Market Makers appointed in a class of FLEX Equity Options to make FLEX
Quotes in response to a specific Request for Quotes in that class of
FLEX Equity Options whenever in the opinion of the FLEX Official the
interests of a fair, orderly and competitive market are best served by
such action and shall make such a call upon FLEX Qualified Market
Makers whenever no FLEX Quotes are made in response to a specific
Request for Quotes.\133\ The Exchange's proposal differs from NYSE
Arca's rule in that FLEX Market Makers have an obligation to quote a
FLEX Equity Option in response to any request for quote by a Floor
Broker or Options Exchange Official and must provide a two-sided
market.\134\ The Exchange believes that the proposed quoting
requirements allow reasonable opportunities for Floor Brokers to get
quotes on FOO Orders and notes that the quoting requirements for QOO
Orders on the BOX Trading Floor are similar to those proposed for FOO
Orders.\135\
---------------------------------------------------------------------------

    \132\ See NYSE Arca Rule 5.37-O(b).
    \133\ See NYSE Arca Rule 5.37-O(c).
    \134\ See proposed Rule 7605(h).
    \135\ See BOX Rule 8510(c)(2). The Exchange notes that proposed
Rule 7605(h) and current Rule 8510(c)(2) are similar except that
proposed Rule 7605(h) does not include the provisions of current
Rule 8510(c)(2) related to quote spread parameter requirements and
quotation sizes, which requirements are provided separately in
proposed Rules 7605(f) and (g).
---------------------------------------------------------------------------

    Among other NYSE Arca provisions not incorporated by the Exchange,
are certain of NYSE Arca's ``Special Terms for FLEX Equity Options.''
\136\ Specifically, these special terms include that exercise prices
and premiums may be stated in terms of: (i) a dollar amount; (ii) a
method for fixing at the time a FLEX Request for Quote or FLEX order is
traded; or (iii) a percentage of the price of the underlying security
at the time of the trade or as of the close of trading on the NYSE Arca
on the trade date. The Exchange will only offer exercise prices and
premiums in a dollar amount because the additional methods for fixing
prices are a matter of individual preference, and the Exchange believes
that the requirements of Participants will be met by pricing exercise
prices and premiums in a dollar amount.\137\
---------------------------------------------------------------------------

    \136\ See NYSE Arca Rule 5.32-O(f)(2).
    \137\ The Exchange's belief that the requirements of
Participants will be met by stating exercise prices and premiums in
a dollar amount is based on conversations with Participants
regarding their preferences for stating the terms of exercise prices
and premiums.
---------------------------------------------------------------------------

    Another NYSE Arca provision not adopted by the Exchange in this
proposal allows discretionary orders where Floor Brokers have
discretion regarding the quantity of FLEX contracts traded.\138\ The
Exchange prohibits discretion regarding quantity, and other terms,
including the choice of the class of options to be bought or sold, and
whether any such transaction shall be one of purchase or sale except to
any discretionary transactions executed by a Floor Market Maker for an
account in which he has an interest.\139\ The Exchange believes that
proposed Rule 7605(l) combined with current Rule 7590, allowing Floor
Brokers to have discretion over some terms of a FOO

Order such as price and time while not allowing discretion over terms
such as quantity, strikes a balance between allowing Floor Brokers to
provide full services to clients and preventing erroneous trades based
on differing expectations or miscommunications between Floor Brokers
and their clients. The Exchange notes that Rule 7600(g) governing QOO
Orders is identical to proposed Rule 7605(l) and believes that
consistency of handling between QOO Orders and FOO Orders may reduce
confusion and increase efficiency on the Trading Floor.
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    \138\ See NYSE Arca Rule 5.34-O.
    \139\ See BOX Rule 7590 and proposed Rule 7605(l).
---------------------------------------------------------------------------

    Another NYSE Arca rule not proposed by the Exchange provides that
NYSE Arca may designate FLEX Officials.\140\ The Exchange is not
proposing a similar rule because Rule 100(b)(6) already provides that
any Exchange employee or officer designated as an Options Exchange
Official will from time to time as provided in these rules have the
ability to recommend and enforce rules and regulations relating to
trading access, order, decorum, health, safety and welfare on the
Exchange. Specifically, Options Exchange Officials have duties
enumerated in Rules 100(b)(5), 7610, 7640, and 8510, as well as in
proposed Rule 7605 regarding announcement, quoting, and recording of
FOO Orders, priority in the trading crowd, disputes on the trading
floor, and obligations and restrictions applicable to Floor Market
Makers and FLEX Market Makers. The Exchange believes that Options
Exchange Officials will have the authority necessary to enforce the
proposed FLEX Equity Option and FOO Order rules such that designation
of a unique FLEX Official would be redundant and unnecessary, as the
Exchange's existing Options Exchange Officials will have the ability to
perform the same functions as a separately designated FLEX Official.
Specifically, the duties of FLEX Officials on NYSE Arca are mainly
related to their Request for Quotes (``RFQ'') procedure unique to FLEX
Options trading on NYSE Arca.\141\ The Exchange has elected not to
adopt a similar procedure, as discussed below, instead basing the FOO
Order process on the QOO Order process already monitored by Options
Exchange Officials. Additionally, the Exchange's system is designed to
review the terms of a FLEX Equity Option for compliance with the
applicable Rules as opposed to being a requirement of an Options
Exchange Official to review.\142\ Options Exchange Officials will
continue to be responsible for monitoring all open outcry activity on
the Trading Floor. Therefore, the Exchange will not require a separate
official to govern any unique process for FLEX Equity Options.
Additionally, the Exchange represents that Options Exchange Officials
will receive appropriate training on the terms of FLEX Equity Options
and all rules applicable to FLEX Equity Options and FOO Orders,
including their responsibility to certify that a Floor Broker has
adequately announced a FOO Order to the trading crowd,\143\ consistent
with the manner in which they are currently trained with respect to QOO
Orders.\144\ The Exchange further notes that NYSE Arca's rules do not
require the exchange to designate FLEX Officials.\145\
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    \140\ See NYSE Arca Rule 5.38-O.
    \141\ NYSE Arca Rule 5.38-O provides that ``[a] FLEX Official is
responsible for: (1) reviewing the conformity of FLEX Requests for
Quotes and FLEX Quotes to the terms and specifications contained in
Rule 5.32-O [Terms of FLEX Options]; (2) posting FLEX Requests for
Quotes for dissemination; (3) determining the BBO; (4) ensuring that
FLEX contracts are executed in conformance with the priority
principles set forth in Rule 5.33-O; and (5) calling upon FLEX
Qualified Market Makers to make FLEX Quotes in specific classes of
FLEX Equity Options as provided in paragraph (c) of Rule 5.37-O.''
See NYSE Arca Rule 5.38-O.
    \142\ See supra note 48. The Exchange notes that NYSE Arca Rule
5.38-O(b)(1) provides that it is the responsibility of their FLEX
Officials to review the terms of a FLEX order.
    \143\ See proposed Rule 7605(e)(2).
    \144\ BOX Rules currently provide that the President of the
Exchange and his or her designated staff shall be responsible for
monitoring, among other things, the activities of Floor Participants
and their associated persons and shall establish standards and
procedures for the training and qualification of Floor Participants
and their associated persons active on the Trading Floor. See BOX
Rule 100(b)(1).
    \145\ See NYSE Arca Rule 5.38-O(a) (``The Exchange may at any
time designate an Exchange employee to act as a FLEX Official in one
or more classes of FLEX Options [emphasis added]. . . .'').
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    Another NYSE Arca rule provision not proposed by the Exchange is
NYSE Arca Rule 5.35-O(b), which would require that each Participant
(other than a Market Maker) that maintains a position on the same side
of the market in excess of the standard position limit for Non-FLEX
Equity Options of the same class on behalf of its own account or for
the account of a customer report information on the FLEX Equity Option
position, positions in any related instrument, the purpose or strategy
for the position and the collateral used by the account. As described
above, the options markets have changed significantly since this
provision was originally adopted and the Exchange does not believe it
is necessary or appropriate to continue to mandate a duplicative
reporting requirement that imposes additional administrative burdens on
Participants and the Exchange with limited attendant benefits. The
Exchange is also proposing to better tailor the language in proposed
Rule 5055(i) to its existing authority to impose higher margin
requirements on Participants.
    As mentioned above, rather than adopt the NYSE Arca RFQ procedure
for FLEX Equity Options,\146\ the Exchange instead proposes to utilize
the current process used on the BOX Trading Floor for QOO Orders with
the addition of a minimum time period that a Floor Broker must allow
Floor Participants when responding to FOO Orders.\147\ The Exchange
believes that using the order announcement and responsive quote process
for both QOO Orders and FOO Orders on the BOX Trading Floor will result
in less confusion and greater efficiency for all BOX Trading Floor
Participants.
---------------------------------------------------------------------------

    \146\ See NYSE Arca Rule 5.33-O.
    \147\ See proposed Rule 7605 and current Rule 7600. The minimum
time period, which must be between three seconds and five minutes,
will be established by the Exchange and communicated via Regulatory
Notice. See proposed Rule 7605(e)(2). See also Securities Exchange
Act Release No. 81292 (August 2, 2017), 82 FR 37144 (August 8, 2017)
(Order Approving a Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2, To Adopt Rules for an Open-Outcry Trading Floor).
---------------------------------------------------------------------------

    The Exchange notes that the manner in which the Exchange has
proposed rules with respect to announcement of orders and responsive
quotes is similar to how CBOE treats its FLEX Options; specifically,
CBOE allows a FLEX Order \148\ to be represented and executed in a
similar manner as a non-FLEX Option.\149\ The Exchange believes CBOE's
approach is consistent with the Act and proposes to also require Floor
Brokers to allow for a reasonable amount of time to participate in FLEX
Equity Option transactions. Further, unlike CBOE, the Exchange proposes
to establish and announce, via Regulatory Notice, a minimum period of
time that a Floor Broker must allow Floor Participants to respond
(which amount of time must be between three seconds and five minutes).
The Exchange believes that it is unnecessary to specify a specific
maximum time period for responses to FLEX orders as Options Exchange
Officials on BOX's Trading Floor will be responsible both to enforce
the minimum period of time and to ensure that Floor Participants have a
reasonable amount of time to respond to FOO Orders.\150\ The Exchange
notes that the proposed order announcement procedure for FOO Orders is
similar to

the rules and procedures currently in place for QOO Orders on the BOX
Trading Floor.
---------------------------------------------------------------------------

    \148\ ``FLEX Orders'' are orders submitted in FLEX Options. See
CBOE Rule 5.70.
    \149\ See CBOE Rule 5.72(d). The Exchange notes that CBOE Rule
5.72(d) also contains provisions that limit the priority rules
applicable to FLEX Orders. See CBOE Rules 5.72(d)(2) and (3).
    \150\ See supra note 147 and accompanying text.
---------------------------------------------------------------------------

Minor Rule Violation Plan
    The Exchange's disciplinary rules, including Exchange Rules
applicable to ``minor rule violations,'' are set forth in the Rule
12000 Series of the Exchange's current Rules. The MRVP provides that in
lieu of commencing a disciplinary proceeding, the Exchange may, subject
to the certain requirements set forth in the Rule, impose a fine, not
to exceed $5,000, on any Options Participant, or person associated with
or employed by an Options Participant, with respect to any Rule
violation listed in Rules 12140(d) or (e) as discussed below. Any fine
imposed pursuant to this Rule that (i) does not exceed $2,500 and (ii)
is not contested, shall be reported on a periodic basis, except as may
otherwise be required by Rule 19d-1 under the Act or by any other
regulatory authority. Further, the Rule provides that any person
against whom a fine is imposed under the Rule shall be served with a
written statement setting forth: (i) the Rule(s) allegedly violated;
(ii) the act or omission constituting each such violation; (iii) the
fine imposed for each violation; and (iv) the date by which such
determination becomes final and such fine must be paid or contested,
which date shall be not less than twenty-five (25) calendar days after
the date of service of such written statement. Rules 12140 (d) and (e)
set forth the list of specific Exchange Rules under which an Options
Participant or person associated with or employed by an Options
Participant may be subject to a fine for violations of such Rules and
the applicable fines that may be imposed by the Exchange. As with all
the violations incorporated into its MRVP, the Exchange will proceed
under this Rule only for violations that are minor in nature. Any other
violation will be addressed pursuant to Rules 12030 (Letters of
Consent) or 12040 (Charges).
    The Exchange proposes to amend its MRVP to add certain rules
relating to FLEX Equity Options to the list of rules eligible for minor
rule violation plan treatment by amending Rule 12140. Specifically, the
Exchange proposes to amend Rule 12140(e)(3), which covers the failure
to properly execute a QOO Order, to include Failure to Properly Execute
a FOO Order (proposed Rule 7605).\151\ Additionally, the Exchange
proposes to amend Rule 12140(e)(9), which covers compliance with
quotation requirements for Floor Market Makers and is designed to
sanction violations thereof, to include violations of proposed Rule
7605(h), which proposes quoting requirements similar to those contained
in Rule 8510(c)(2) regarding Floor Market Maker obligations.\152\
---------------------------------------------------------------------------

    \151\ See proposed Rule 12140(e)(3). The Exchange notes that
adding proposed Rule 7605 for FOO Orders to current Rule 12140(e)(3)
is consistent with the existing provision to enforce current Rule
7600 for QOO Orders because Floor Participants have the same general
requirements for executing FOO and QOO Orders on the Trading Floor.
The Exchange notes further that fines defined under Rule 12140(e)(3)
may apply to any failure to properly execute a FOO Order in
accordance with applicable provisions of proposed Rule 7605
governing such execution requirements. Proposed Rule 7605(h),
however, which relates to a FLEX Market Maker's quoting obligation,
is specifically proposed for inclusion in proposed Rule 12140(e)(9).
    \152\ See proposed Rule 12140(e)(9). The Exchange notes that
proposed Rule 7605(h) and current Rule 8510(c)(2) are similar except
that proposed Rule 7605(h) does not include the provisions of
current Rule 8510(c)(2) related to quote spread parameter
requirements and quotation sizes, which requirements are provided
separately in proposed Rules 7605(f) and (g). However, the Exchange
believes it is appropriate to include proposed Rule 7605(h) with
Rule 8510(c)(2) in the MRVP given the similar nature of the
underlying requirement to provide quotations.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act \153\ in general, and furthers the objectives of
Section 6(b)(5) of the Act \154\ in particular, in that it is designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
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.
Specifically, the Exchange believes the adoption of the proposed rules
allowing FLEX Equity Options to trade on the BOX Trading Floor as FOO
Orders is consistent with the goals of the Act to remove the
impediments to and perfect the mechanism of a free and open market
because it will benefit Participants by providing an additional venue
for Participants to provide and seek liquidity for customized, large,
or complex FLEX option orders. As the Commission noted in its order
granting FLEX Equity Option trading on CBOE and what was then the
Pacific Stock Exchange (now NYSE Arca), trading FLEX Equity Options on
an exchange is an alternative to trading customized options in OTC
markets and carries with it the advantages of exchange markets such as
transparency, parameters and procedures for clearance and settlement,
and a centralized counterparty clearing agency.\155\ Therefore, the
Exchange believes the proposed rule change will promote these same
benefits for the market as a whole by providing an additional venue for
market participants to seek liquidity for customized, large-sized, or
complex FLEX option orders. The Exchange believes that providing an
additional venue for these FLEX orders will benefit investors, the
national market system, Participants, and BOX by increasing competition
for order flow and executions, and thereby spur product enhancements
and potentially result in lower prices for exchange services related to
FLEX Equity Options.
---------------------------------------------------------------------------

    \153\ 15 U.S.C. 78f(b).
    \154\ 15 U.S.C. 78f(b)(5).
    \155\ See Securities Exchange Act Release No. 36841 (February
14, 1996), 61 FR 6666 (February 21, 1996) (SR-CBOE-95-43) (SR-PSE-
95-24) (Order Approving the Trading of Flexibly Structured Equity
Options by CBOE and PSE).
---------------------------------------------------------------------------

    The Exchange further believes that the proposal is designed to
prevent fraudulent and manipulative acts and practices as the Exchange
will review all current surveillance in light of any changes required,
including surveillance and technology to detect disruptive or
manipulative trading activity for FOO Orders on the Trading Floor, and
will modify or add any surveillance as appropriate.
General
    The Exchange believes that proposed Rule 5055(a) stating that the
trading of FLEX Equity Options is subject to all other Rules applicable
to the trading of options on the Exchange, unless otherwise provided in
Rules 5055 and 7605, is consistent with the Act because it will ensure
that, except where otherwise provided in Rules 5055 and 7605, the
Exchange's existing rules will continue to apply to FLEX Equity
Options, which will provide increased consistency for Participants
trading FLEX Equity Options and Non-FLEX Equity Options on BOX. The
Exchange reiterates that rules which contemplate the operation of or
interaction with the BOX Book and the Complex Order Book will not apply
to FLEX Equity Options, given that FLEX Equity Options may only be
traded as FOO Orders and FOO Orders may not be placed in the BOX Book
or the Complex Order Book.\156\ Specifically, proposed Rule 5055(a)
will specify that the BOX Book and the Complex Order Book shall not be
applicable for transactions in FLEX Equity Options and thereby provide
clarity for market participants that FLEX

Equity Options may only be traded on the Trading Floor. As described
above, while electronic trading in FLEX options is available on one
market today, the Exchange at this time intends to introduce FLEX
Equity Options on the Trading Floor only, consistent with other markets
that trade these customized options solely on their trading floors. The
Exchange also believes that providing further detail about rules that
shall not apply in proposed Rule 5055(c) is consistent with the Act
because it will provide clarity for market participants about existing
rules that will not be applicable to FLEX Equity Options on BOX. In
particular, specifying that Rules 7600 and 7620 will not apply to FLEX
Equity Options will avoid potential confusion about which order types
apply to FLEX Equity Options on BOX, as the Exchange is instead
proposing Rule 7605 to apply to transactions in FLEX Equity Options.
Specifically, Rule 7600 contains priority provisions related to the BOX
Book and the Complex Order Book neither of which are applicable to
transactions in FLEX Equity Options. The Exchange notes that another
exchange excludes similar rules from application to transactions in
FLEX Equity Options.\157\ However, proposed Rule 5055(c) also specifies
that IM-7600-2 and IM-7600-5 shall apply to FLEX Equity Options. The
Exchange believes that expressly applying these provisions is
consistent with the Act because, although the remainder of Rule 7600
will not apply to FOO Orders, IM-7600-2, and IM-7600-5 relate,
respectively, to tied hedge orders and to compliance with Section
11(a)(1) of the Act and should apply to the proposed FOO Orders in the
same manner as they currently apply to QOO Orders. Specifically, tied
hedge orders are a combination of an option and hedging position that
must follow the procedures set forth in IM-7600-2 which is designed to
protect investors and the public interest with provisions that limit
the types of combinations considered to be tied hedge orders as well as
prescribing Floor Broker duties for the handling of such orders. The
Exchange believes that expressly applying IM-7600-2 to FOO Orders is
consistent with the Act, as this will provide greater consistency
between the trading of FLEX Equity Options and Non-FLEX Equity Options
on the BOX Trading Floor and reduce the potential for market
participant confusion. Next, IM-7600-5 prevents Participants from
utilizing the Trading Floor to effect any transactions for their own
account, the account of an associated person, or an account with
respect to which the Participant or an associated person thereof
exercises investment discretion by relying on an exemption under
Section 11(a)(1)(G) of the Act (``G Exemption''). IM-7600-5 thereby
provides notice to Floor Participants that when utilizing the trading
floor to effect transactions in covered accounts, they cannot rely on
the G Exemption and must rely on other available exemptions to the
prohibition in Section 11(a)(1) of the Act.\158\ In this manner, IM-
7600-5 provides increased clarity to Floor Participants about their
ability to comply with Section 11(a)(1) of the Act and it is therefore
consistent with the Act and would protect investors and the public
interest to continue to apply this rule to FOO Orders.
---------------------------------------------------------------------------

    \156\ See supra notes 83 and 86 and accompanying text.
    \157\ See NYSE Arca Rules 5.30-O(c) and (d).
    \158\ See infra note 229 and accompanying text (describing the
Section 11(a)(1) prohibition and defining ``covered accounts'').
---------------------------------------------------------------------------

    The Exchange believes that the definitions proposed in Rule 5055(b)
will provide increased clarity to market participants which will
protect investors and the public interest by specifying definitions for
FLEX Equity Options and Non-FLEX Equity Options, and by specifying that
FLEX Equity Option transactions will be governed as proposed in Rule
7605 and shall not be traded other than as FOO Orders. The Exchange
believes further that the term ``FLEX Market Maker'' will clarify the
difference between Floor Market Makers and FLEX Market Makers, where
the latter are qualified for trading FLEX Equity Options and have an
obligation to provide quotes in response to FOO Orders. The Exchange
notes that, should it decide to propose additional order types or
electronic trading for FLEX Equity Options, it will revise the defined
term ``FLEX Open Outcry Order'' accordingly.
    The Exchange believes that proposed Rule 5055(d) which specifies
that there shall be no trading rotations in FLEX Equity Options is
designed to promote just and equitable principles of trade and to
remove impediments to and perfect the mechanism of a free and open
market and a national market system because it provides notice to
Participants regarding the mechanisms applicable to FLEX trading, which
will not include trading rotations due to the customized nature of FLEX
Equity Options and the fact that there will be no requirement for
specific FLEX Equity Option series to be quoted or traded each
day.\159\ The Exchange notes that QOO Orders on the Trading Floor can
only participate in a trading rotation if entered into the BOX Book and
as discussed herein FLEX Equity Options will not be eligible to be
placed on the BOX Book.\160\ The Exchange also notes that another
exchange does not hold trading rotations for FLEX Equity Options.\161\
---------------------------------------------------------------------------

    \159\ See Securities Exchange Act Release No. 31920 (February
24, 1993), 58 FR 12280, 12284 (March 3, 1993) (SR-CBOE-92-17) (Order
Approving Proposed Rule Change by the Chicago Board Options
Exchange, Inc. Relating to the Listing and Trading of Flexible
Exchange Options Based on the Nasdaq 100 Index).
    \160\ See BOX Rule 7070(d).
    \161\ See NYSE Arca Rule 5.31-O(b).
---------------------------------------------------------------------------

FLEX Equity Option Terms
    The Exchange believes that some of the terms of FLEX Equity Options
pursuant to proposed Rule 5055(e) serve to perfect the mechanism of a
free and open market and a national market system because they will
permit investors to customize some of the terms of their FLEX Equity
Options to implement more precise trading strategies and hedges which
may not be possible using Non-FLEX Equity Options.\162\ These investors
may have improved capability to execute strategies to meet their
specific investment objectives by using customized FLEX Equity Options.
However, only certain terms are subject to flexible structuring by the
parties to FLEX Equity Option transactions, and most of such terms have
a specified number of alternative configurations. The Exchange believes
that these restrictions are reasonable and designed to further the
objectives of the Act and to promote just and equitable principles of
trade because limiting FLEX Equity Option terms enables the efficient,
centralized clearance and settlement and active secondary trading of
opened FLEX Equity Options. Further, these terms are consistent with
those currently offered at another exchange.\163\
---------------------------------------------------------------------------

    \162\ See proposed Rule 5055(f)(1) (providing that FLEX Equity
Options shall be permitted in puts and calls that do not have the
same exercise style, same expiration date, and same exercise price
as Non-FLEX Equity Options that are already available for trading on
the same underlying security).
    \163\ See NYSE Arca Rule 5.32-O.
---------------------------------------------------------------------------

    Proposed rule 5055(e)(1)(v)(a) allowing a FLEX Equity Option order
to be submitted on any trading day, including the expiration date,
serves to perfect the mechanism of a free and open market and a
national market system because it will allow investors to execute FLEX
Equity Options at a time of their choosing. These investors may have
improved capability to execute strategies to meet their specific
investment objectives. Further, this rule is designed to provide
clarity about when FLEX Equity Options may be

executed. The Exchange believes that Floor Participants benefit from
increased flexibility and clarity.
    The Exchange also believes that proposed Rule 5055(f) to prevent
FLEX Equity Options and Non-FLEX Equity Options with the same terms
from trading concurrently is designed to promote just and equitable
principles of trade and prevent fraudulent and manipulative acts and
practices.\164\ In particular, a Non-FLEX Equity Option trading
pursuant to Rule 7600 as a QOO Order has different priority rules than
a FOO Order trading pursuant to proposed Rule 7605.\165\ Allowing an
option with the same terms to trade under both rules concurrently would
result in inconsistent order handling and could allow the order
priority of QOO Orders to be circumvented. Therefore, the Exchange
proposes to prevent this situation by permitting FLEX Equity Option
transactions only in options with a different term (exercise style,
expiration date, or exercise price) than Non-FLEX Equity Options that
otherwise meet the requirements of proposed Rule 5055(e). This is
designed to prevent FLEX Equity Options from being surrogates for Non-
FLEX Equity Options. Additionally, in the event that a Non-FLEX Equity
Option series is added intra-day, the holder or writer of a FLEX Equity
Option position established under the FLEX trading procedures would be
permitted to close such position under the FLEX trading procedures
against another closing only FLEX Equity Option position for the
balance of the trading day on which the series is added. In the event
that the Non-FLEX Equity Option series is added on a trading day after
the position is established, the holder or writer of a FLEX Equity
Option position established under the FLEX trading procedures would be
permitted to close such position as a non-FLEX transaction consistent
with the requirements of proposed Rule 5055(f)(2). This proposed rule
will prevent an option with the same terms from trading as both a FLEX
Equity Option and a Non-FLEX Equity Option concurrently, while
providing a narrow exception for closing positions.\166\ Further
opening trades in such options would be as Non-FLEX Equity Options
subject to the Non-FLEX Equity Option trading procedures and rules,
including Rule 7600 for Trading Floor transactions.\167\ The Exchange
believes that enforcing consistent handling and priority for identical
and fungible options prevents fraudulent and manipulative acts and
practices, and promotes just and equitable principles of trade to
protect investors and the public interest by ensuring consistent
treatment of these options. The Exchange further believes that
providing a narrow exception to permit the closing of a FLEX Equity
Option position for the balance of the trading day on which the
fungible Non-FLEX Equity Option is added perfects the mechanism of a
free and open market and a national market system because it provides
investors the ability to close their open FLEX Equity Option positions
the same day as the identical Non-FLEX Equity Option is added.\168\ As
noted herein, these requirements are consistent with those at another
exchange.\169\
---------------------------------------------------------------------------

    \164\ See proposed Rule 5055(f)(1).
    \165\ For example, the BOX Book will be inapplicable to FOO