[Federal Register Volume 80, Number 53 (Thursday, March 19, 2015)]
[Notices]
[Pages 14421-14424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-06262]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74496; File No. SR-MIAX-2015-03]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Order Granting Approval to Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, To Adopt a ``Risk Protection 
Monitor'' Functionality Under Proposed MIAX Rule 519A and Amend the 
``Aggregate Risk Monitor'' Functionality Under MIAX Rule 612

March 13, 2015.

I. Introduction

    On January 8, 2015, Miami International Securities Exchange LLC 
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act

[[Page 14422]]

of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to establish a voluntary Risk Protection Monitor functionality 
for orders (the ``RPM'') and codify existing functionality regarding 
the Exchange's Aggregate Risk Manager for quotes (the ``ARM''). On 
January 20, 2105, the Exchange filed Amendment No.1 to the proposal.\3\ 
The proposed rule change, as modified by Amendment No. 1, was published 
for comment in the Federal Register on January 28, 2015.\4\ The 
Commission did not receive any comments on the proposed rule change. 
This order approves the proposed rule change, as modified by Amendment 
No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange proposed changes to the 
Form 19b-4, Exhibit 1, and Exhibit 5 to clarify that once triggered, 
the Risk Protection Monitor described therein will apply to orders 
in all series in all classes of options from the Exchange Member.
    \4\ See Securities Exchange Act Release No. 74118 (January 22, 
2015), 80 FR 4605 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes new MIAX Rule 519A to establish a voluntary 
RPM that will be available to all MIAX members. The Exchange also 
proposes clarifying amendments to current MIAX Rule 612, which 
describes the Exchange's ARM functionality that is applicable to 
quoting activity by MIAX Market Makers.

A. Risk Protection Monitor

    According to the Exchange, the RPM is intended to provide new risk 
protection functionality for orders entered by members. Under new MIAX 
Rule 519A, MIAX's automated trading system (the ``System'') will 
maintain a counting program (the ``counting program'') for each 
participating member. Member participation in the counting program will 
be voluntary. The counting program will count (i) the number of orders 
entered by the member on the Exchange within a specified time period 
that has been established by the member (the ``specified time 
period''), and (ii) the number of contracts traded via an order entered 
by the member on the Exchange within the specified time period.\5\ The 
Exchange will establish a maximum duration for any specified time 
period and announce that maximum duration via a Regulatory Circular. To 
use the RPM functionality, members must establish an Allowable Order 
Rate and/or an Allowable Contract Execution Rate. The Allowable Order 
Rate is the maximum number of permissible orders (as specified by the 
member) entered during the specified time period designated by the 
member. The Allowable Contract Execution Rate is the maximum number of 
permissible contracts (as specified by the member) executed during the 
specified time period designated by the member.
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    \5\ In its filing, the Exchange noted that members may establish 
different specified time periods for the purpose of counting orders 
and the purpose of counting contracts traded via an order entered by 
the member under the RPM, and thus, the length of the specified time 
period for each purpose need not be the same. See Notice, supra note 
4, at 4605 n.7.
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    If the RPM functionality is elected by a member, the System will 
trigger the RPM whenever the counting program determines that the 
member has entered a number of orders that exceeds the member's 
specified Allowable Order Rate during the specified time period, or 
executed a number of contracts that exceeds the member's specified 
Allowable Contract Execution Rate during the specified time period.\6\
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    \6\ In the Notice, the Exchange provided examples demonstrating 
how the System will determine when the Allowable Order Rate or 
Allowable Contract Execution Rate for an individual member is 
exceeded. See Notice, supra note 4, at 4606-07.
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    Under new MIAX Rule 519A, a member may establish whether the RPM, 
once triggered, will: (i) Prevent the System from receiving any new 
orders in all series in all classes from the member; (ii) prevent the 
System from receiving any new orders in all series in all classes from 
the member and cancel all existing Day orders in all series in all 
classes from the member; or (iii) send a notification that the RPM has 
been triggered without any further preventative actions or 
cancellations by the System. Once engaged, the RPM will automatically 
take whatever action has been specified in advance by the member. 
However, PRIME Orders, PRIME Solicitation Orders, Auction or Cancel 
Orders (``AOC Order''), Opening Orders (``OPG Order''), or Good `til 
Cancel Orders (``GTC Order'') will not participate in the RPM. \7\ When 
engaged, the RPM will allow the member to interact with existing orders 
that were entered prior to the member exceeding the Allowable Order 
Rate or the Allowable Contract Execution Rate, including sending cancel 
order messages and receiving trade executions from those orders. The 
RPM will remain engaged until the member communicates with the 
Exchange's help desk (the ``Help Desk'') to re-enable the System to 
accept new orders from the member. The Exchange noted that this 
communication from the member to the Help Desk may be sent either via 
email or phone.\8\
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    \7\ Interpretation and Policy .02 to new MIAX Rule 519A provides 
that PRIME Orders, PRIME Solicitation Orders, and GTC Orders will 
not participate in the RPM. The System will include PRIME Orders, 
PRIME Solicitation Orders, and GTC Orders in the counting program 
for purposes determining when the RPM is triggered. PRIME Orders, 
PRIME Solicitation Orders and Customer-to-Customer Orders will each 
be counted as two orders for the purpose of calculating the 
Allowable Order Rate. Once engaged, however, the RPM will not cancel 
any existing PRIME Orders, PRIME Solicitation Orders, AOC Orders, 
OPG Orders, or GTC Orders that are marked as Day orders.
    \8\ See Notice, supra note 4, at 4606 n.10.
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    In addition, the Exchange also proposes to allow members to group 
with other members so that the RPM would apply collectively to the 
group. The members in such a group must designate a group owner and may 
form a group together if: (i) There is at least 75% common ownership 
between the group's members, as reflected on each firm's Form BD, 
Schedule A; or (ii) there is written authorization signed by all 
members in the group, and the group owner maintains exclusive control 
of all orders sent to the Exchange from each MPID within the group. A 
clearing firm also may elect to group together with several members so 
that the RPM applies collectively to that group of members, provided 
that: (i) The clearing firm must be designated as the group owner; (ii) 
the clearing firm must serve as the clearing firm for all the MPIDs of 
the group; and (iii) there must be written authorization signed by the 
clearing firm and each member of the group.
    In general, the RPM for groups will operate in the same manner as 
it does for individual members, except that that the counting program 
and RPM protections will apply to the group as a whole. Thus, the 
counting program will count the number of orders entered and the number 
of contracts traded resulting from orders entered by all MPIDs in the 
group collectively, and the System will trigger the RPM when the group 
collectively exceeds either the Allowable Order Rate or Allowable 
Contract Execution Rate for the group.\9\ Once engaged, pursuant to the 
group owner's instructions, the RPM will automatically either: (i) 
Prevent the System from receiving any new orders in all series in all 
classes from each MPID in the group; (ii) prevent the System from 
receiving any new orders in all series in all classes from each MPID in 
the group and cancel all existing Day orders in all series in all 
classes from the group, or (iii) send a notification without any 
further

[[Page 14423]]

preventative action or cancellations by the System. Only the designated 
group owner may re-enable the acceptance of new orders for all the 
members of the group, via a request to the Help Desk. In instances when 
a clearing firm has grouped several members for the purpose of the RPM, 
the clearing firm may only elect to receive warning notifications 
indicating that a specific percentage of an Allowable Order Rate or an 
Allowable Contract Execution Rate has been met, unless one member of 
the group maintains exclusive control of all orders routed through all 
MPIDs within the group.
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    \9\ In the Notice, the Exchange provided examples demonstrating 
how the System will determine when the Allowable Order Rate or 
Allowable Contract Execution Rate is exceeded for a group. See 
Notice, supra note 4, at 4608.
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    In addition, members may elect to receive warning notifications 
from MIAX indicating that a specific percentage of an Allowable Order 
Rate or an Allowable Contract Execution Rate has been met. The Exchange 
also proposes that, at the request of a member, or if necessary to 
maintain a fair and orderly market, the Help Desk may pause and restart 
the specified time period used by the counting program or clear and 
reset any calculated Allowable Order Rate or Allowable Contract 
Execution Rate.

B. Aggregate Risk Manager

    The Exchange also proposes to codify what it represents is existing 
functionality regarding the ARM under MIAX Rule 612.\10\ Under MIAX 
Rule 612, the System maintains a counting program for each Market Maker 
who is required to submit continuous two-sided quotations pursuant to 
MIAX Rule 604 in each of its assigned option classes. The ARM counting 
program counts the number of contracts traded by a Market Maker's 
quotes in an assigned option class within a specified time period that 
has been established by the Market Maker; MIAX Rule 612 states that the 
specified time period for the ARM cannot exceed 15 seconds. Under the 
ARM, a Market Maker also establishes for each option class an Allowable 
Engagement Percentage. The System engages the ARM in a particular 
option class when the counting program has determined that a Market 
Maker has traded during the specified time period a number of contracts 
equal to or above its Allowable Engagement Percentage.\11\ Once 
engaged, the ARM automatically removes the Market Maker's quotations on 
MIAX in all series of that particular option class until the Market 
Maker submits a new revised quotation.
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    \10\ See Notice, supra note 4, at 4609.
    \11\ The Allowable Engagement Percentage cannot be less than 
100%. The System calculates the Allowable Engagement Percentage by 
first determining the percentage that the number of contracts 
executed in an individual option in a class represents relative to 
the Market Maker's disseminated Standard quote and/or Day eQuote in 
that individual option (``option percentage''). See MIAX Rule 
612(b)(2)(i). When the System calculates the option percentage, the 
number of contracts executed in that option class will be 
automatically offset by the number of contracts that are executed on 
the opposite side of the market in the same option class during the 
specified time period. See MIAX Rule 612(b)(3). The counting program 
will then combine the individual option percentages to determine the 
option class percentage (``class percentage''). See MIAX Rule 
612(b)(2)(ii). When the class percentage equals or exceeds the 
Market Maker's Allowable Engagement Percentage, the ARM will be 
triggered. See id.
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    The Exchange proposes to amend MIAX Rule 612 in two regards. First, 
the Exchange proposes to codify in its rules an existing requirement 
for a Market Maker to send a message to MIAX specifically to disengage 
the ARM and allow quoting before the Market Maker can begin to quote 
again in that class. As noted above, MIAX Rule 612 currently provides 
that once engaged, the ARM will automatically remove the Market Maker's 
quotations from MIAX in all series of that particular option class 
until the Market Maker submits a new revised quotation. The Exchange 
proposes to add rule text to MIAX Rule 612(b)(1) requiring a Market 
Maker also to send a notification to the System of its intent to 
reengage quoting in order to disengage the ARM. Second, the Exchange 
proposes to clarify, in new Interpretation and Policy .01 to Rule 612, 
that eQuotes \12\ do not participate in the ARM. The Exchange states 
that the System does not include contracts traded through the use of an 
eQuote in the counting program for purposes of Rule 612, and that 
eQuotes will remain in the System available for trading when the 
Aggregate Risk Manager is engaged.\13\
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    \12\ An eQuote ``is a quote with a specific time in force that 
does not automatically cancel and replace a previous Standard quote 
or eQuote,'' and ``can be cancelled by the Market Maker at any time, 
or can be replaced by another eQuote that contains specific 
instructions to cancel an existing eQuote.'' See MIAX Rule 
517(a)(2).
    \13\ See Notice, supra note 4, at 4609.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder that are applicable to a national securities 
exchange.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in 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. 
The Commission believes that the RPM may help members, and member 
groups, to mitigate the potential risks associated with the execution 
of an unacceptable level of orders that result from, e.g., technology 
issues with electronic trading systems. The Commission also notes that 
other exchanges have established risk protection mechanisms for members 
and/or market makers that are similar in many respects to MIAX's 
proposal.\16\ While the concept of member groups may be unique to 
MIAX's proposal, the Commission believes that MIAX has designed that 
portion of the proposed rule to be consistent with the Act, including 
section 6(b)(5), as it may foster cooperation and coordination with 
clearing transactions and protect investors and the public interest by 
providing a mechanism to reduce the risk of abnormal trading activity 
across multiple participants under common control or where the group 
otherwise provides written opt-in consent.
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    \14\ 15 U.S.C. 78f. In approving this proposed rule change, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ See, e.g., BATS Exchange (``BATS'') Rule 21.16 (Risk 
Monitor Mechanism available to all BATS Users); NASDAQ Options 
Market (``NOM'') Rule Chapter VI, Section 19 (Risk Monitor Mechanism 
available to all NOM Participants); BOX Options Exchange Rule 7280 
(Bulk Cancellation of Trading Interest available to Options 
Participants); and Chicago Board Options Exchange (``CBOE'') Rule 
8.18 (Quote Risk Monitor Mechanism available to certain CBOE Market-
Makers and CBOE Trading Permit Holders associated with certain CBOE 
Market-Makers).
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    The Commission notes that the RPM is a voluntary mechanism. The 
Commission reminds members electing to use the RPM to be mindful of 
their obligations to, among other things, seek best execution of orders 
they handle on an agency basis. A broker-dealer has a legal duty to 
seek to obtain best execution of customer orders, and the decision to 
utilize the RPM, including the parameters set by the member for the 
RPM, must be consistent with this duty.\17\ For instance, under the

[[Page 14424]]

proposal, members have unfettered discretion to set the Allowable Order 
Rate and Allowable Contract Execution Rate for the RPM. While MIAX 
neglected to affirmatively establish minimum and maximum permissible 
settings for the RPM in its rule, the Commission expects MIAX 
periodically to assess whether the RPM functionality is operating in a 
manner that is consistent with the promotion of fair and orderly 
markets. In addition, the Commission expects that members will consider 
their best execution obligations when establishing the minimum and 
maximum parameters for the RPM.\18\ For example, an abnormally low 
Allowable Order Rate set over an abnormally long specified time period 
should be carefully scrutinized, particularly if a member's order flow 
to MIAX contains agency orders. To the extent that the RPM is set to 
overly-sensitive parameters, a member should consider the effect of its 
chosen settings on its ability to receive a timely execution on 
marketable agency orders that it sends to MIAX in various market 
conditions.\19\ The Commission cautions that brokers considering their 
best execution obligations should be aware that the agency orders they 
represent may be rejected on account of the RPM.
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    \17\ See Securities Exchange Act Release Nos. 37619A (Sept. 6, 
1996), 61 FR 48290 (Sept. 12, 1996) (``Order Handling Rules 
Release''); 51808 (June 9, 2005), 70 FR 37496, 37537-8 (June 29, 
2005).
    \18\ The Commission reminds broker-dealers that they must 
examine their procedures for seeking to obtain best execution in 
light of market and technology changes and modify those practices if 
necessary to enable their customers to obtain the best reasonably 
available prices. See Order Handling Rules Release, supra note 17, 
at 48323.
    \19\ For example, a marketable agency order that would have 
otherwise executed on MIAX might be prevented from reaching MIAX on 
account of other interest from the member that causes it to exceed 
its Allowable Order Rate and, thus, triggers the RPM, resulting in 
the System blocking new orders from the member.
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    In addition, under the proposal, once the RPM is engaged, PRIME 
Orders, PRIME Solicitation Orders, GTC Orders, AOC Orders, and OPG 
Orders will not participate in the RPM.\20\ The Commission notes that 
these are unique order types.\21\ The Commission believes that these 
exceptions appear to be reasonably designed to not interfere with the 
operation of the PRIME and PRIME Solicitation auctions and also to 
restrict application of the RPM to specific types of orders, whose 
terms limit their application to specialized purposes for which members 
may not want or need order protection to apply.
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    \20\ See supra note 7.
    \21\ For example, the Exchange argues that PRIME Orders 
submitted pursuant to MIAX Rule 515A have been guaranteed an 
execution at the time of acceptance into the System and, therefore, 
should not be cancelled when the RPM is engaged, because the 
execution has effectively already occurred. See Notice, supra note 
4, at 4609.
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    The proposed rule change also codifies existing functionality in 
the ARM with respect to the procedures for resuming quoting and the 
non-participation of eQuotes. The Commission notes that the 
clarification of ARM procedures in Rule 612 could eliminate potential 
confusion for members regarding the need to affirmatively notify MIAX 
that the member wishes to re-start quoting following an ARM event as 
well as internal inconsistency in the rule about the inapplicability of 
ARM to eQuotes.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-MIAX-2015-03), as modified 
by Amendment No. 1, be, and hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-06262 Filed 3-18-15; 8:45 am]
 BILLING CODE 8011-01-P