Document ID: SEC-2017-0504-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Miami International Securities Exchange, LLC
Posted Date: 2017-03-27T04:00Z

[Federal Register Volume 82, Number 57 (Monday, March 27, 2017)]
[Notices]
[Pages 15251-15258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05921]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80284; File No. SR-MIAX-2017-13]

Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Rule 521, Nullification and Adjustment of 
Options Transactions Including Obvious Errors

March 21, 2017.
    Pursuant to the provisions of 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 March 17, 2017, Miami International Securities 
Exchange, LLC (``MIAX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') a proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 15252]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 521 (the 
``Current Rule''), Nullification and Adjustment of Options Transactions 
Including Obvious Errors, by adding new Interpretation and Policy .03 
to Rule 521 (the ``Proposed Rule'').
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.miaxoptions.com/rule-filings, at MIAX's 
principal office, and at the Commission's Public Reference Room.

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 Exchange 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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend Exchange Rule 521, Nullification and 
Adjustment of Options Transactions Including Obvious Errors, to add 
Interpretation and Policy .03. This filing is based on a proposal 
recently submitted by Chicago Board Options Exchange, Incorporated 
(``CBOE'') and approved by the Commission.\3\
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    \3\ See Securities Exchange Act Release No. 80040 (February 14, 
2017), 82 FR 11248 (February 21, 2017) (Order Approving SR-CBOE-
2016-088).
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    Last year, the Exchange and other options exchanges adopted a new, 
harmonized rule related to the adjustment and nullification of 
erroneous options transactions, including a specific provision related 
to coordination in connection with large-scale events involving 
erroneous options transactions.\4\ The Exchange believes that the 
changes the options exchanges implemented with the new, harmonized rule 
have led to increased transparency and finality with respect to the 
adjustment and nullification of erroneous options transactions. 
However, as part of the initial initiative, the Exchange and other 
options exchanges deferred a few specific matters for further 
discussion.
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    \4\ See Securities Exchange Act Release No. 74918 (May 8, 2015), 
80 FR 27781 (May 14, 2015) (SR-MIAX-2015-35) (the ``Initial 
Filing'').
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    Specifically, the options exchanges have been working together to 
identify ways to improve the process related to the adjustment and 
nullification of erroneous options transactions as it relates to 
complex orders and stock-option orders.\5\ The goal of the process that 
the options exchanges have undertaken is to further harmonize rules 
related to the adjustment and nullification of erroneous options 
transactions. As described below, the Exchange believes that the 
changes the options exchanges and the Exchange have agreed to propose 
will provide transparency and finality with respect to the adjustment 
and nullification of erroneous complex order and stock-option order 
transactions. Particularly, the proposed changes seek to achieve 
consistent results for participants across U.S. options exchanges while 
maintaining a fair and orderly market, protecting investors and 
protecting the public interest.
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    \5\ See Exchange Rule 518(a)(5) (defining complex orders and 
stock-option orders).
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    The Proposed Rule is the culmination of this coordinated effort and 
reflects discussions by the options exchanges whereby the exchanges 
that offer complex orders and/or stock-option orders will universally 
adopt new provisions that the options exchanges collectively believe 
will improve the handling of erroneous options transactions that result 
from the execution of complex orders and stock-option orders.\6\
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    \6\ An exchange that does not offer complex orders and/or stock-
option orders will not adopt these new provisions until such time as 
the exchange offers complex orders and/or stock-option orders. 
Exchange Rule 518 currently permits the trading of complex orders 
and stock-option orders.
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    The Exchange believes that the Proposed Rule supports an approach 
consistent with long-standing principles in the options industry under 
which the general policy is to adjust rather than nullify transactions. 
The Exchange acknowledges that adjustment of transactions is contrary 
to the operation of analogous rules applicable to the equities markets, 
where erroneous transactions are typically nullified rather than 
adjusted and where there is no distinction between the types of market 
participants involved in a transaction. For the reasons set forth 
below, the Exchange believes that the distinctions in market structure 
between equities and options markets continue to support these 
distinctions between the rules for handling obvious errors in the 
equities and options markets.
    Various general structural differences between the options and 
equities markets point toward the need for a different balancing of 
risks for options market participants and are reflected in this 
proposal. Option pricing is formulaic and is tied to the price of the 
underlying stock, the volatility of the underlying security and other 
factors. Because options market participants can generally create new 
open interest in response to trading demand, as new open interest is 
created, correlated trades in the underlying or related series are 
generally also executed to hedge a market participant's risk. This 
pairing of open interest with hedging interest differentiates the 
options market specifically (and the derivatives markets broadly) from 
the cash equities markets. In turn, the Exchange believes that the 
hedging transactions engaged in by market participants necessitate 
protection of transactions through adjustments rather than 
nullifications when possible and otherwise appropriate.
    The options markets are also quote driven markets dependent on 
liquidity providers to an even greater extent than equities markets. In 
contrast to the approximately 7,000 different securities traded in the 
U.S. equities markets each day, there are more than 500,000 unique, 
regularly quoted option series. Given this breadth in options series 
the options markets are more dependent on liquidity providers than 
equities markets; such liquidity is provided most commonly by 
registered market makers but also by other professional traders. With 
the number of instruments in which registered market makers must quote 
and the risk attendant with quoting so many products simultaneously, 
the Exchange believes that those liquidity providers should be afforded 
a greater level of protection. In particular, the Exchange believes 
that liquidity providers should be allowed protection of their trades 
given the fact that they typically engage in hedging activity to 
protect them from significant financial risk to encourage continued 
liquidity provision and maintenance of the quote-driven options 
markets.
    In addition to the factors described above, there are other 
fundamental differences between options and equities markets which lend 
themselves to different treatment of different classes of participants 
that are reflected in this proposal. For example, there is no trade 
reporting facility in the options markets. Thus, all transactions must 
occur on an options exchange. This leads to significantly greater 
retail customer

[[Page 15253]]

participation directly on exchanges than in the equities markets, where 
a significant amount of retail customer participation never reaches the 
Exchange but is instead executed in off-exchange venues such as 
alternative trading systems, broker-dealer market making desks and 
internalizers. In turn, because of such direct retail customer 
participation, the exchanges have taken steps to afford those retail 
customers--generally Priority Customers--more favorable treatment in 
some circumstances.

Complex Orders and Stock-Option Orders

    As more fully described below, the Proposed Rule applies much of 
the Current Rule to complex orders and stock-option orders.\7\ The 
Proposed Rule deviates from the Current Rule only to account for the 
unique qualities of complex orders and stock-option orders. The 
Proposed Rule reflects the fact that complex orders can execute against 
other complex orders or can execute against individual simple orders in 
the leg markets. When a complex order executes against the leg markets 
there may be different counterparties on each leg of the complex order, 
and not every leg will necessarily be executed at an erroneous price. 
With regards to stock-option orders, the Proposed Rule reflects the 
fact that stock-option orders contain a stock component that is 
executed on a stock trading venue, and the Exchange may not be able to 
ensure that the stock trading venue will adjust or nullify the stock 
execution in the event of an obvious or catastrophic error. In order to 
apply the Current Rule and account for the unique characteristics of 
complex orders and stock-option orders, proposed Interpretation and 
Policy .03 is split into three parts--paragraphs (a), (b), and (c).
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    \7\ In order for a complex order or stock-option order to 
qualify as an obvious or catastrophic error at least one of the legs 
must itself qualify as an obvious or catastrophic error under the 
Current Rule. See Proposed Rule 521 Interpretation and Policy 
.03(a)-(c).
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    First, proposed Interpretation and Policy .03(a) governs the review 
of complex orders that are executed against individual legs (as opposed 
to a complex order that executes against another complex order).\8\ 
Proposed Rule 521 Interpretation and Policy .03(a) provides:
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    \8\ The leg market consists of quotes and/or orders in single 
options series. A complex order may be received by the Exchange 
electronically, and the legs of the complex order may have different 
counterparties. For example, Market-Maker 1 may be quoting in ABC 
calls and Market-Maker 2 may be quoting in ABC puts. A complex order 
to buy the ABC calls and puts may execute against the quotes of 
Market-Maker 1 and Market-Maker 2.

    If a complex order executes against individual legs and at least 
one of the legs qualifies as an Obvious Error under paragraph (c)(1) 
or a Catastrophic Error under paragraph (d)(1), then the leg(s) that 
is an Obvious or Catastrophic Error will be adjusted in accordance 
with paragraphs (c)(4)(A) or (d)(3), respectively, regardless of 
whether one of the parties is a Customer. However, any Customer 
order subject to this paragraph (a) will be nullified if the 
adjustment would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the Customer's 
limit price on the complex order or individual leg(s). If any leg of 
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a complex order is nullified, the entire transaction is nullified.

    As previously noted, at least one of the legs of the complex order 
must qualify as an obvious or catastrophic error under the Current Rule 
in order for the complex order to receive obvious or catastrophic error 
relief. Thus, when the Exchange is notified (within the timeframes set 
forth in paragraph (c)(2) or (d)(2)) of a complex order that is a 
possible obvious error or catastrophic error, the Exchange will first 
review the individual legs of the complex order to determine if one or 
more legs qualify as an obvious or catastrophic error.\9\ If no leg 
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification. Reviewing the legs to determine 
whether one or more legs qualify as an obvious or catastrophic error 
requires the Exchange to follow the Current Rule. In accordance with 
paragraphs (c)(1) and (d)(1) of the Current Rule, the Exchange compares 
the execution price of each individual leg to the Theoretical Price of 
each leg (as determined by paragraph (b) of the Current Rule). If the 
execution price of an individual leg is higher or lower than the 
Theoretical Price for the series by an amount equal to at least the 
amount shown in the obvious error table in paragraph (c)(1) of the 
Current Rule or the catastrophic error table in paragraph (d)(1) of the 
Current Rule, the individual leg qualifies as an obvious or 
catastrophic error, and the Exchange will take steps to adjust or 
nullify the transaction.\10\
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    \9\ Because a complex order can execute against the leg market, 
the Exchange may also be notified of a possible obvious or 
catastrophic error by a counterparty that received an execution in 
an individual options series. If upon review of a potential obvious 
error the Exchange determines an individual options series was 
executed against the leg of a complex order or stock-option order, 
Proposed Rule 521 Interpretation and Policy .03 will govern.
    \10\ Only the execution price on the leg (or legs) that 
qualifies as an obvious or catastrophic error pursuant to any 
portion of Proposed Rule 521 Interpretation and Policy .03 will be 
adjusted. The execution price of a leg (or legs) that does not 
qualify as an obvious or catastrophic error will not be adjusted.
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    To illustrate, assume a Customer submits a complex order to the 
Exchange consisting of Leg 1 and Leg 2--Leg 1 is to buy 100 ABC calls 
and Leg 2 is to sell 100 ABC puts. Also, assume that Market-Maker 1 is 
quoting the ABC calls $1.00-1.20 and Market-Maker 2 is quoting the ABC 
puts $2.00-2.20. If the complex order executes against the quotes of 
Market-Makers 1 and 2, the Customer buys the ABC calls for $1.20 and 
sells the ABC puts for $2.00. As with the obvious/catastrophic error 
reviews for simple orders, the execution price of Leg 1 is compared to 
the Theoretical Price \11\ of Leg 1 in order to determine if Leg 1 is 
an obvious error under paragraph (c)(1) of the Current Rule or a 
catastrophic error under paragraph (d)(1) of the Current Rule. The same 
goes for Leg 2. The execution price of Leg 2 is compared to the 
Theoretical Price of Leg 2. If it is determined that one or both of the 
legs are an obvious or catastrophic error, then the leg (or legs) that 
is an obvious or catastrophic error will be adjusted in accordance with 
paragraphs (c)(4)(A) or (d)(3) of the Current Rule, regardless of 
whether one of the parties is a Customer.\12\ Although a single-legged 
execution that is deemed to be an obvious error under the Current Rule 
is nullified whenever a Customer is involved in the transaction, the 
Exchange believes adjusting execution prices is generally better for 
the marketplace than nullifying executions because liquidity providers 
often execute hedging transactions to offset options positions. When an 
options transaction is nullified the hedging position can adversely 
affect the liquidity provider. With regards to complex orders that 
execute against individual legs, the additional rationale for adjusting 
erroneous execution prices when possible is the fact that the 
counterparty on a leg that is not executed at an obvious or 
catastrophic error price cannot look at the execution price to 
determine whether the execution may later be nullified (as opposed to 
the counterparty on single-legged order that is executed at an

[[Page 15254]]

obvious error or catastrophic error price).
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    \11\ See Exchange Rule 521(b) (defining the manner in which 
Theoretical Price is determined).
    \12\ See Exchange Rule 521(a)(1) (defining Customer for purposes 
of Rule 521 to mean a Priority Customer, which is a person or entity 
that (i) is not a broker or dealer in securities, and (ii) does not 
place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s). See 
Exchange Rule 100.)
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    Paragraph (c)(4)(A) of the Current Rule mandates that if it is 
determined that an obvious error has occurred, the execution price of 
the transaction will be adjusted pursuant to the table set forth in 
(c)(4)(A). Although for simple orders paragraph (c)(4)(A) is only 
applicable when no party to the transaction is a Customer, for the 
purposes of complex orders paragraph (a) of Interpretation and Policy 
.03 will supersede that limitation; therefore, if it is determined that 
a leg (or legs) of a complex order is an obvious error, the leg (or 
legs) will be adjusted pursuant to (c)(4)(A), regardless of whether a 
party to the transaction is a Customer. The Size Adjustment Modifier 
defined in subparagraph (a)(4) of the Current Rule will similarly apply 
(regardless of whether a Customer is on the transaction) by virtue of 
the application of paragraph (c)(4)(A).\13\ The Exchange notes that 
adjusting all market participants is not unique or novel. When the 
Exchange determines that a simple order execution is a Catastrophic 
Error pursuant to the Current Rule, paragraph (d)(3) already provides 
for adjusting the execution price for all market participants, 
including Customers.
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    \13\ See Exchange Rule 521(c)(4)(A) (stating that any non-
Customer Obvious Error exceeding 50 contracts will be subject to the 
Size Adjustment Modifier defined in sub-paragraph (a)(4)). The Size 
Adjustment Modifier may also apply to the option leg of a stock-
option order that is adjusted pursuant to Proposed Rule 521 
Interpretation and Policy .03(c).
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    Furthermore, as with the Current Rule, Proposed Rule 521 
Interpretation and Policy .03(a) provides protection for Customer 
orders, stating that where at least one party to a complex order 
transaction is a Customer, the transaction will be nullified if 
adjustment would result in an execution price higher (for buy 
transactions) or lower (for sell transactions) than the Customer's 
limit price on the complex order or individual leg(s). For example, 
assume Customer enters a complex order to buy Leg 1 and Leg 2.
     Assume the NBBO for Leg 1 is $0.20-1.00 and the NBBO for 
Leg 2 is $0.50-1.00 and that these have been the NBBOs since the market 
opened.
     A split-second prior to the execution of the complex order 
a Customer enters a simple order to sell the Leg 1 options series at 
$1.30, and the simple order enters the Exchange's book so that the BBO 
is $.20-$1.30. The limit price on the simple order is $1.30.
     The complex order executes Leg 1 against the Exchange's 
best offer of $1.30 and Leg 2 at $1.00 for a net execution price of 
$2.30.
     However, Leg 1 executed on a wide quote (the NBBO for Leg 
1 was $0.20-1.00 at the time of execution, which is wider than 
$0.75).\14\ Leg 2 was not executed on a wide quote (the market for Leg 
2 was $0.50-1.00); thus, Leg 2 execution price stands.
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    \14\ See Exchange Rule 521(b)(3).
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     The Exchange determines that the Theoretical Price for Leg 
1 is $1.00, which was the best offer prior to the execution. Leg 1 
qualifies as an obvious error because the difference between the 
Theoretical Price ($1.00) and the execution price ($1.30) is larger 
than $0.25.\15\
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    \15\ See Exchange Rule 521(c)(1).
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     According to Proposed Rule 521 Interpretation and Policy 
.03(a), Customers will also be adjusted in accordance with Rule 
521(c)(4)(A), which for a buy transaction under $3.00 calls for the 
Theoretical Price to by adjusted by adding $0.15 \16\ to the 
Theoretical Price of $1.00. Thus, adjust execution price for Leg 1 
would be $1.15.
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    \16\ See Exchange Rule 521(c)(4)(A).
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     However, adjusting the execution price of Leg 1 to $1.15 
violates the limit price of the Customer's sell order on the simple 
order book for Leg 1, which was $1.30.
     Thus, the entire complex order transaction will be 
nullified \17\ because the limit price of a Customer's sell order would 
be violated by the adjustment.\18\
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    \17\ If any leg of a complex order is nullified, the entire 
transaction is nullified. See Proposed Rule 521 Interpretation and 
Policy .03(a).
    \18\ The simple order in this example is not an erroneous sell 
transaction because the execution price was not erroneously low. See 
Exchange Rule 521(a)(2).
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    As the above example demonstrates, incoming complex orders may 
execute against resting simple orders in the leg market. If a complex 
order leg is deemed to be an obvious error, adjusting the execution 
price of the leg may violate the limit price of the resting order, 
which will result in nullification if the resting order is for a 
Customer. In contrast, Interpretation and Policy .02 to Rule 521 
provides that if an adjustment would result in an execution price that 
is higher than an erroneous buy transaction or lower than an erroneous 
sell transaction the execution will not be adjusted or nullified.\19\ 
If the adjustment of a complex order would violate the complex order 
Customer's limit price, the transaction will be nullified.
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    \19\ See Exchange Rule 521 Interpretation and Policy .02.
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    As previously noted, paragraph (d)(3) of the Current Rule already 
mandates that if it is determined that a catastrophic error has 
occurred, the execution price of the transaction will be adjusted 
pursuant to the table set forth in paragraph (d)(3). For purposes of 
complex orders under Proposed Rule 521 Interpretation and Policy 
.03(a), if one of the legs of a complex order is determined to be a 
Catastrophic Error under paragraph (d)(3), all market participants will 
be adjusted in accordance with the table set forth in (d)(3). Again, 
however, where at least one party to a complex order transaction is a 
Customer, the transaction will be nullified if adjustment would result 
in an execution price higher (for buy transactions) or lower (for sell 
transactions) than the Customer's limit price on the complex order or 
individual leg(s). Again, if any leg of a complex order is nullified, 
the entire transaction is nullified. Additionally, as is the case 
today, a Member that submits an appeal seeking the review of an 
Official ruling will be assessed a fee of $500.00 for each Official 
ruling to be reviewed that is sustained and not overturned or modified 
by the Chief Regulatory Officer or his/her designee. In addition, in 
instances where the Exchange, on behalf of a Member, requests a 
determination by another market center that a transaction is clearly 
erroneous, the Exchange will pass any resulting charges through to the 
relevant Member.\20\
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    \20\ See Exchange Rule 521(l)(2).
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    Other than honoring the limit prices established for Customer 
orders, the Exchange has proposed to treat Customers and non-Customers 
the same in the context of the complex orders that trade against the 
leg market. When complex orders trade against the leg market, it is 
possible that at least some of the legs will execute at prices that 
would not be deemed obvious or catastrophic errors, which gives the 
counterparty in such situations no indication that the execution will 
later by adjusted or nullified. The Exchange believes that treating 
Customers and non-Customers the same in this context will provide 
additional certainty to non-Customers (especially Market-Makers) with 
respect to their potential exposure and hedging activities, including 
comfort that even if a transaction is later adjusted, such transaction 
will not be fully nullified. However, as noted above, under the 
Proposed Rule where at least one party to the transaction is a 
Customer, the trade will be nullified if the adjustment would result in 
an execution price higher (for buy transactions) or lower (for sell 
transactions) than the Customer's limit

[[Page 15255]]

price on the complex order or individual leg(s). The Exchange has 
retained the protection of a Customer's limit price in order to avoid a 
situation where the adjustment could be to a price that a Customer 
would not have expected, and market professionals such as non-Customers 
would be better prepared to recover in such situations. Therefore, 
adjustment for non-Customers is more appropriate.
    Second, proposed Interpretation and Policy .03(b) governs the 
review of complex orders that are executed against other complex 
orders. Proposed Rule 521 Interpretation and Policy .03(b) provides:

    If a complex order executes against another complex order and at 
least one of the legs qualifies as an Obvious Error under paragraph 
(c)(1) or a Catastrophic Error under paragraph (d)(1), then the 
leg(s) that is an Obvious or Catastrophic Error will be adjusted or 
busted in accordance with paragraph (c)(4) or (d)(3), respectively, 
so long as either: (i) The width of the National Spread Market for 
the complex order strategy just prior to the erroneous transaction 
was equal to or greater than the amount set forth in the wide quote 
table of paragraph (b)(3), or (ii) the net execution price of the 
complex order is higher (lower) than the offer (bid) of the National 
Spread Market for the complex order strategy just prior to the 
erroneous transaction by an amount equal to at least the amount 
shown in the table in paragraph (c)(1). If any leg of a complex 
order is nullified, the entire transaction is nullified. For 
purposes of this Rule 521, the National Spread Market for a complex 
order strategy is determined by the National Best Bid/Offer of the 
individual legs of the strategy.

    As described above in relation to Proposed Rule 521 Interpretation 
and Policy .03(a), the first step is for the Exchange to review (upon 
receipt of a timely notification in accordance with paragraphs (c)(2) 
or (d)(2) of the Current Rule) the individual legs to determine whether 
a leg or legs qualifies as an obvious or catastrophic error. If no leg 
qualifies as an obvious or catastrophic error, the transaction stands--
no adjustment and no nullification.
    Unlike Proposed Rule 521 Interpretation and Policy .03(a), the 
Exchange is also proposing to compare the net execution price of the 
entire complex order package to the National Spread Market (``NSM'') 
for the complex order strategy.\21\ Complex orders are exempt from the 
order protection rules of the options exchanges.\22\ Thus, depending on 
the manner in which the systems of an options exchange are calibrated, 
a complex order can execute without regard to the prices offered in the 
complex order books or the leg markets of other options exchanges. In 
certain situations, reviewing the execution prices of the legs in a 
vacuum would make the leg appear to be an obvious or catastrophic 
error, even though the net execution price on the complex order is not 
an erroneous price. For example, assume the Exchange receives a complex 
order to buy ABC calls and sell ABC puts.
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    \21\ NSM is the derived net market for a complex order package. 
For example, if the NBBO of Leg 1 is $1.00-2.00 and the NBBO of Leg 
2 is $5.00-7.00, then the NSM for a complex order to buy Leg 1 and 
buy Leg 2 is $6.00-9.00.
    \22\ See Exchange Rule 1401(b)(7). All options exchanges have 
the same order protection rule.
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     If the BBO for the ABC calls is $5.50-7.50 and the BBO for 
ABC puts is $3.00-4.50, then the Exchange's spread market is $1.00-
4.50.\23\
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    \23\ The complex order is to buy ABC calls and sell ABC puts. 
The Exchange's best offer for ABC puts is $7.50 and Exchange's best 
bid for is $3.00. If the Customer were to buy the complex order 
strategy, the Customer would receive a debit of $4.50 (buy ABC calls 
for $7.50 minus selling ABC puts for $3.00). If the Customer were to 
sell the complex order strategy the Customer would receive a credit 
of $1.00 (selling the ABC calls for $5.50 minus buying the ABC puts 
for $4.50). Thus, the Exchange's spread market is $1.00-4.50.
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     If the NBBO for the ABC calls is $6.00-6.50 and the NBBO 
for the ABC puts is $3.50-4.00, then the NSM is $2.00-3.00.
     If the Customer buys the calls at $7.50 and sells the puts 
at $4.00, the complex order Customer receives a net execution price of 
$3.00 (debit), which is the expected net execution price as indicated 
by the NSM offer of $3.00.
    If the exchange were to solely focus on the $7.50 execution price 
of the ABC calls or the $4.00 execution price of the ABC puts, the 
execution would qualify as an obvious or catastrophic error because the 
execution price on the legs was outside the NBBO, even though the net 
execution price is accurate. Thus, the additional review of the NSM to 
determine if the complex order was executed at a truly erroneous price 
is necessary. The same concern is not present when a complex order 
executes against the leg market under Proposed Rule 521 Interpretation 
and Policy .03(a) because the execution price of each component is not 
executed at a price that is outside of the NBBO.\24\
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    \24\ See Exchange Rule 518(c)(2)(iii).
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    In order to incorporate NSM, Proposed Rule 521 Interpretation and 
Policy .03(b) provides that if a complex order executes against another 
complex order and at least one of the legs qualifies as an obvious or 
catastrophic error, the leg or legs that is an obvious or catastrophic 
error will be adjusted or busted in accordance with paragraph (c)(4) or 
(d)(3) of the Current Rule, so long as either: (i) The width of the NSM 
for the complex order strategy just prior to the erroneous transaction 
was equal to or greater than the amount set forth in the wide quote 
table of paragraph (b)(3) of the Current Rule or (ii) the net execution 
price of the complex order is higher (lower) than the offer (bid) of 
the NSM for the complex order strategy just prior to the erroneous 
transaction by an amount equal to at least the amount shown in the 
table in paragraph (c)(1) of the Current Rule.
    For example, assume an individual leg or legs qualifies as an 
obvious or catastrophic error and the width of the NSM of the complex 
order strategy just prior to the erroneous transaction is $6.00-9.00. 
The complex order will qualify to be adjusted or busted in accordance 
with paragraph (c)(4) of the Current Rule because the wide quote table 
of paragraph (b)(3) of the Current Rule indicates that the minimum 
amount is $1.50 for a bid price between $5.00 to $10.00. If the NSM 
were instead $6.00-7.00 the complex order strategy would not qualify to 
be adjusted or busted pursuant to Proposed Rule 521 Interpretation and 
Policy .03(b)(i) because the width of the NSM is $1.00, which is less 
than the required $1.50. However, the execution may still qualify to be 
adjusted or busted in accordance with paragraph (c)(4) or (d)(3) of the 
Current Rule pursuant to Proposed Rule 521 Interpretation and Policy 
.03(b)(ii). Focusing on the NSM in this manner will ensure that the 
obvious/catastrophic error review process focuses on the net execution 
price instead of the execution prices of the individual legs, which may 
have execution prices outside of the NBBO of the leg markets.
    Again, assume an individual leg or legs qualifies as an obvious or 
catastrophic error as described above. If the NSM is $6.00-7.00 (not a 
wide quote pursuant to the wide quote table in paragraph (b)(3) of the 
Current Rule) but the execution price of the entire complex order 
package (i.e., the net execution price) is higher (lower) than the 
offer (bid) of the NSM for the complex order strategy just prior to the 
erroneous transaction by an amount equal to at least the amount in the 
table in paragraph (c)(1) of the Current Rule, then the complex order 
qualifies to be adjusted or busted in accordance with paragraph (c)(4) 
or (d)(3) of the Current Rule. For example, if the NSM for the complex 
order strategy just prior to the erroneous transaction is $6.00-7.00 
and the net execution price of the complex order transaction is $7.75, 
the complex order qualifies to be adjusted or busted in accordance with 
paragraph (c)(4) of the Current Rule because the execution price of 
$7.75 is more than $0.50 (i.e.,

[[Page 15256]]

the minimum amount according to the table in paragraph (c)(1) when the 
price is above $5.00 but less than $10.01) from the NSM offer of $7.00. 
Focusing on the NSM in this manner will ensure that the obvious/
catastrophic error review process focuses on the net execution price 
instead of the execution prices of the individual legs, which may have 
execution prices outside of the NBBO of the leg markets.
    Although the Exchange believes adjusting execution prices is 
generally better for the marketplace than nullifying executions because 
liquidity providers often execute hedging transactions to offset 
options positions, the Exchange recognizes that complex orders 
executing against other complex orders is similar to simple orders 
executing against other simple orders because both parties are able to 
review the execution price to determine whether the transaction may 
have been executed at an erroneous price. Thus, for purposes of complex 
orders that meet the requirements of Proposed Rule 521 Interpretation 
and Policy .03(b), the Exchange proposes to apply the Current Rule and 
adjust or bust obvious errors in accordance with paragraph (c)(4) (as 
opposed to applying paragraph (c)(4)(A) as is the case under Proposed 
Rule 521 Interpretation and Policy .03(a)) and catastrophic errors in 
accordance with (d)(3).
    Therefore, for purposes of complex orders under Proposed Rule 521 
Interpretation and Policy .03(b), if one of the legs is determined to 
be an obvious error under paragraph (c)(1), all Customer transactions 
will be nullified, unless a Member submits 200 or more Customer 
transactions for review in accordance with (c)(4)(C).\25\ For purposes 
of complex orders under Proposed Rule 521 Interpretation and Policy 
.03(b), if one of the legs is determined to be a catastrophic error 
under paragraph (d)(3) and all of the other requirements of Rule 521 
Interpretation and Policy .03(b) are met, all market participants will 
be adjusted in accordance with the table set forth in (d)(3). Again, 
however, pursuant to paragraph (d)(3) where at least one party to a 
complex order transaction is a Customer, the transaction will be 
nullified if adjustment would result in an execution price higher (for 
buy transactions) or lower (for sell transactions) than the Customer's 
limit price on the complex order or individual leg(s). Also, if any leg 
of a complex order is nullified, the entire transaction is nullified.
---------------------------------------------------------------------------

    \25\ Rule 521(c)(4)(C) also requires the orders resulting in 200 
or more Customer transactions to have been submitted during the 
course of 2 minutes or less.
---------------------------------------------------------------------------

    Third, proposed Interpretation and Policy .03(c) governs stock-
option orders. Proposed Rule 521 Interpretation and Policy .03(c) 
provides:

    If the option leg of a stock-option order qualifies as an 
Obvious Error under paragraph (c)(1) or a Catastrophic Error under 
paragraph (d)(1), then the option leg that is an Obvious or 
Catastrophic Error will be adjusted in accordance with paragraph 
(c)(4)(A) or (d)(3), respectively, regardless of whether one of the 
parties is a Customer. However, the option leg of any Customer order 
subject to this paragraph (c) will be nullified if the adjustment 
would result in an execution price higher (for buy transactions) or 
lower (for sell transactions) than the Customer's limit price on the 
stock-option order, and the Exchange will attempt to nullify the 
stock leg. Whenever a stock trading venue nullifies the stock leg of 
a stock-option order or whenever the stock leg cannot be executed, 
the Exchange will nullify the option leg upon request of one of the 
parties to the transaction or in accordance with paragraph (c)(3).

    Similar to proposed Interpretation and Policy .03(a), an options 
leg (or legs) of a stock-option order must qualify as an obvious or 
catastrophic error under the Current Rule in order for the stock-option 
order to qualify as an obvious or catastrophic error. Also similar to 
Proposed Rule 521 Interpretation and Policy .03(a), if an options leg 
(or legs) does qualify as an obvious or catastrophic error, the option 
leg (or legs) will be adjusted in accordance with paragraph (c)(4)(A) 
or (d)(3), respectively, regardless of whether one of the parties is a 
Customer. Again, as with Proposed Rule 521 Interpretation and Policy 
.03(a), where at least one party to a complex order transaction is a 
Customer, the Exchange will nullify the option leg and attempt to 
nullify the stock leg if adjustment would result in an execution price 
higher (for buy transactions) or lower (for sell transactions) than the 
Customer's limit price on the complex order or individual leg(s).
    The stock leg of a stock-option order is not executed on the 
Exchange; rather, the stock leg is sent to a stock trading venue for 
execution. The Exchange is unaware of a mechanism by which the Exchange 
can guarantee that the stock leg will be nullified by the stock trading 
venue in the event of an obvious or catastrophic error on the Exchange. 
Thus, in the event of the nullification of the option leg pursuant to 
Proposed Rule 521 Interpretation and Policy .03(c), the Exchange will 
attempt to have the stock leg nullified by the stock trading venue by 
either contacting the stock trading venue or notifying the parties to 
the transaction that the option leg is being nullified. The party or 
parties to the transaction may ultimately need to contact the stock 
trading venue to have the stock portion nullified.
    Finally, the Exchange proposes to provide guidance that whenever 
the stock trading venue nullifies the stock leg of a stock-option 
order, the option will be nullified upon request of one of the parties 
to the transaction or by an Official acting on their own motion in 
accordance with paragraph (c)(3). There are situations in which buyer 
and seller agree to trade a stock-option order, but the stock leg 
cannot be executed. The Exchange proposes to provide guidance that 
whenever the stock portion of a stock-option order cannot be executed, 
the Exchange will nullify the option leg upon request of one of the 
parties to the transaction or on an Official's own motion.

Implementation Date

    In order to ensure that the other options exchanges are able to 
adopt rules consistent with this proposal and to coordinate 
effectiveness of such harmonized rules, the Exchange proposes to delay 
the operative date of this proposal to April 17, 2017.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \26\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \27\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest. .[sic] As described above, 
the Exchange and other options exchanges are seeking to adopt 
harmonized rules related to the adjustment and nullification of 
erroneous options transactions. The Exchange believes that the Proposed 
Rule will provide greater transparency and clarity with respect to the 
adjustment and nullification of erroneous options transactions. 
Particularly, the proposed changes seek to achieve consistent results 
for participants across U.S. options exchanges while maintaining a fair 
and orderly market, protecting investors and protecting the public 
interest. Based on

[[Page 15257]]

the foregoing, the Exchange believes that the proposal is consistent 
with Section 6(b)(5) of the Act \28\ in that the Proposed Rule will 
foster cooperation and coordination with persons engaged in regulating 
and facilitating transactions. The Exchange believes the various 
provisions allowing or dictating adjustment rather than nullification 
of a trade are necessary given the benefits of adjusting a trade price 
rather than nullifying the trade completely. Because options trades are 
used to hedge, or are hedged by, transactions in other markets, 
including securities and futures, many Members, and their customers, 
would rather adjust prices of executions rather than nullify the 
transactions and, thus, lose a hedge altogether. As such, the Exchange 
believes it is in the best interest of investors to allow for price 
adjustments as well as nullifications.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ Id.
---------------------------------------------------------------------------

    The Exchange does not believe that the proposal is unfairly 
discriminatory, even though it differentiates in many places between 
Customers and non-Customers. As with the Current Rule, Customers are 
treated differently, often affording them preferential treatment. This 
treatment is appropriate in light of the fact that Customers are not 
necessarily immersed in the day-to-day trading of the markets, are less 
likely to be watching trading activity in a particular option 
throughout the day, and may have limited funds in their trading 
accounts. At the same time, the Exchange reiterates that in the U.S. 
options markets generally there is significant retail customer 
participation that occurs directly on (and only on) options exchanges 
such as the Exchange. Accordingly, differentiating among market 
participants with respect to the adjustment and nullification of 
erroneous options transactions is not unfairly discriminatory because 
it is reasonable and fair to provide Customers with additional 
protections as compared to non-Customers.
    The Exchange believes that its proposal to adopt the ability to 
adjust a Customer's execution price when a complex order is deemed to 
be an Obvious or Catastrophic Error is consistent with the Act. A 
complex order that executes against individual leg markets may receive 
an execution price on an individual leg that is not an Obvious or 
Catastrophic error but another leg of the transaction is an Obvious or 
Catastrophic Error. In such situations where the complex order is 
executing against at least one individual or firm that is not aware of 
the fact that they have executed against a complex order or that the 
complex order has been executed at an erroneous price, the Exchange 
believes it is more appropriate to adjust execution prices if possible 
because the derivative transactions are often hedged with other 
securities. Allowing adjustments instead of nullifying transactions in 
these limited situations will help to ensure that market participants 
are not left with a hedge that has no position to hedge against.
    The Exchange also believes its proposal related to stock-option 
orders is consistent with the Act. Stock-option orders consist of an 
option component and a stock component. Due to the fact that the 
Exchange has no control over the venues on which the stock is executed 
the proposal focuses on the option component of the stock-option order 
by adjusting or nullifying the option in accordance with paragraph 
(c)(4)(A) or (d)(3). Also, nullifying the option component if the stock 
component cannot be executed ensures that market participants receive 
the execution for which they bargained. Stock-option orders are 
negotiated and agreed to as a package; thus, if for any reason the 
stock portion of a stock-option order cannot ultimately be executed, 
the parties should not be saddled with an options position sans stock.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. In this regard and as 
indicated above, the Exchange notes that the proposed rule change is 
substantially similar to a filing submitted by CBOE that was recently 
approved by the Commission.\29\
---------------------------------------------------------------------------

    \29\ See supra, note 3.
---------------------------------------------------------------------------

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

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \30\ and

[[Page 15258]]

subparagraph (f)(6) of Rule 19b-4 thereunder.\31\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \32\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \33\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing. The 
Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest as 
it will allow the Exchange to implement the proposed rule change by 
April 17, 2017 in coordination with the other options exchanges. 
Accordingly, the Commission hereby waives the operative delay and 
designates the proposal operative upon filing.\34\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.19b-4(f)(6).
    \33\ 17 CFR 240.19b-4(f)(6)(iii).
    \34\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MIAX-2017-13 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MIAX-2017-13. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MIAX-2017-13, and should be 
submitted on or before April 17, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05921 Filed 3-24-17; 8:45 am]
 BILLING CODE 8011-01-P