Document ID: SEC-2018-1775-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Miami International Securities Exchange, LLC
Posted Date: 2018-11-20T05:00Z

[Federal Register Volume 83, Number 224 (Tuesday, November 20, 2018)]
[Notices]
[Pages 58642-58645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-25249]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84594; File No. SR-MIAX-2018-34]

Self-Regulatory Organizations: Notice of Filing of a Proposed 
Rule Change by Miami International Securities Exchange, LLC To Amend 
Exchange Rule 519, MIAX Order Monitor; Exchange Rule 519A, Risk 
Protection Monitor; and Rule 517, Quote Types Defined

November 14, 2018.
    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 November 9, 2018, Miami International 
Securities Exchange, LLC (``MIAX Options'' 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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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 519, MIAX 
Order Monitor; Exchange Rule 519A, Risk Protection Monitor; and Rule 
517, Quote Types Defined.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/ at MIAX Options' 
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
    On June 28, 2018, the Exchange filed with the Securities and 
Exchange Commission (``SEC'') a proposal to list and trade on the 
Exchange, options on the SPIKESTM Index, a new index that 
measures expected 30-day volatility of the SPDR S&P 500 ETF Trust.\3\ 
To establish the settlement value for the Index, a settlement auction 
named the SPIKES Special Settlement Auction will be conducted once per 
month, on the day the settlement value for the Index is to be 
calculated. During the SPIKES Special Settlement Auction, in addition 
to any order types that may regularly be accepted by the Exchange, the 
Exchange will also accept settlement auction only orders (``SAO 
Orders'') and settlement auction only eQuotes (``SAO eQuotes''). (SAO 
Orders and SAO eQuotes are collectively referred to as ``SAOs'').\4\ 
SAOs are specific order types that allow a Member \5\ to voluntarily 
tag such an order as a SPIKES strategy order.
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    \3\ See Securities Exchange Act Release No. 84417 (October 12, 
2018), 83 FR 52865 (October 18, 2018) (SR-MIAX-2018-14) (Order 
Granting Approval of a Proposed Rule Change by Miami International 
Securities Exchange, LLC to List and Trade Options on the SPIKES\TM\ 
Index).
    \4\ Id.
    \5\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associate with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
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    The Exchange anticipates that market participants that actively 
trade SPIKES options may hedge their positions with SPY option series 
that will also be used to calculate the SPIKES exercise settlement/
final settlement value. Market participants holding hedged SPIKES 
options positions may trade out of their SPY option series on the 
relevant SPIKES expiration/final settlement date. Specifically, market 
participants holding short, hedged SPIKES options could liquidate that 
hedge by selling their SPY options series, while traders holding long, 
hedged SPIKES options could liquidate their hedge by buying SPY option 
series. In order to seek convergence with the SPIKE exercise/final 
settlement value, these market participants may liquidate their hedges 
by submitting SPIKES strategy orders in the appropriate SPY option 
series during the SPIKES Special Settlement Auction on the SPIKES 
expiration/final settlement date. Given that SAOs are designed for the 
special purpose of closing a hedged position and are available for use 
only during the SPIKES Special Settlement Auction, the Exchange 
proposes to amend its rules to remove SAO Orders from certain risk 
protection features offered by the Exchange.
    Specifically, the Exchange proposes to amend Exchange Rule 519, 
MIAX Order Monitor. The MIAX Order Monitor is a risk management feature 
of the Exchange's System.\6\ Pursuant to paragraph (a) of the Rule, the 
MIAX Order Monitor provides an order price protection for Market Orders 
to Sell,\7\ Market Orders to Buy or Sell,\8\ and Limit Orders to Buy or 
Sell,\9\ in order to avoid the occurrence of potential obvious or 
catastrophic errors on the Exchange. The MIAX Order Monitor will 
prevent certain orders from executing or being placed on the Book \10\ 
at prices outside pre-set standard limits.\11\ The MIAX Order Monitor 
will also cause the System to prevent certain orders from executing or 
being placed on the Book if the size of the order exceeds the order 
size protection designated by the Member.\12\ The MIAX Order Monitor 
will also cause the System to reject any orders that exceed the maximum 
number of open orders held in the System on behalf of a particular 
Member, as designated by the Member.\13\ The MIAX Order Monitor will 
also cause the System to reject any orders that exceed the maximum 
number of open contracts represented by orders held in the System on 
behalf of a particular Member, as designated by the Member.\14\
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    \6\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
    \7\ See Exchange Rule 519(a)(1).
    \8\ See Exchange Rule 519(a)(2).
    \9\ See Exchange Rule 519(a)(3).
    \10\ The term ``Book'' means the electronic book of buy and sell 
orders and quotes maintained by the System. See Exchange Rule 100.
    \11\ See Exchange Rule 519(a).
    \12\ See Exchange Rule 519(b).
    \13\ See Exchange Rule 519(c).
    \14\ See Exchange Rule 519(d).
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    The Exchange now proposes to amend Exchange Rule 519, 
Interpretations and Policies, to adopt new subsection .03, to provide 
that the order protections of the MIAX Order Monitor pursuant to 
sections (b) (c) and (d) will not apply to Settlement Auction Only 
Orders (SAO Orders), as defined in Interpretations and Policies .03 of 
Exchange Rule 503. The Exchange does not believe that an

[[Page 58643]]

SAO Order should be subject to the order size protection described in 
Rule 519(b) as preventing the order from being placed on the Book may 
prevent the Member from effectively hedging or closing a hedged 
position in SPIKES options. Similarly, the Exchange does not believe 
that an SAO Order should be subject to the open order protection 
described in Rule 519(c) as this protection aggregates open orders held 
in the System and may inadvertently prevent the Member from hedging or 
closing a hedged position in SPIKES options by preventing the 
submission of an SAO Order. Lastly, the Exchange does not believe that 
an SAO Order should be subject to the open contract protection 
described in Rule 519(d) as this protection aggregates the number of 
open contracts represented by orders held in the System. Including SAO 
Orders in this protection may inadvertently prevent the Member from 
hedging or closing a hedged position in SPIKES options by preventing 
the submission of an SAO Order.
    The Exchange also proposes to amend Exchange Rule 519A, Risk 
Protection Monitor. The Risk Protection Monitor (``RPM'') is a feature 
of the MIAX System which maintains a counting program (``counting 
program'') for each participating Member that will count the number of 
orders entered and the number of contracts traded via an order entered 
by a Member on the Exchange within a specified time period that has 
been established by the Member (the ``specified time period''). The 
maximum duration of the specified time period will be established by 
the Exchange and announced via a Regulatory Circular. The Risk 
Protection Monitor maintains one or more Member-configurable Allowable 
Order Rate settings and Allowable Contract Execution Rate settings. 
When a Member's order is entered or when an execution of a Member's 
order occurs, the System will look back over the specified time period 
to determine if the Member has: (i) Entered during the specified time 
period a number of orders exceeding their Allowable Order Rate 
setting(s), or (ii) executed during the specified time period a number 
of contracts exceeding their Allowable Contract Execution Rate 
setting(s). Once engaged, the Risk Protection Monitor will then, as 
determined by the Member: Automatically either (A) prevent the System 
from receiving any new orders in all series in all classes from the 
Member; (B) prevent the System from receiving any new orders in all 
series in all classes from the Member and cancel all existing orders 
with a time-in-force of Day in all series in all classes from the 
Member; or (C) send a notification to the Member without any further 
preventative or cancellation action by the System. When engaged, the 
Risk Protection Monitor will still allow the Member to interact with 
existing orders entered prior to exceeding the Allowable Order Rate 
setting or the Allowable Contract Execution Rate setting, including 
sending cancel order messages and receiving trade executions from those 
orders. The Risk Protection Monitor shall remain engaged until the 
Member communicates with the Help Desk\15\ to enable the acceptance of 
new orders.\16\
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    \15\ The term ``Help Desk'' means the Exchange's control room 
consisting of Exchange staff authorized to make certain trading 
determinations on behalf of the Exchange. The Help Desk shall report 
to and be supervised by a senior executive officer of the Exchange. 
See Exchange Rule 100.
    \16\ See Exchange Rule 519A(a).
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    The Exchange now proposes to amend Interpretations and Policies, to 
adopt new subsection .02, to state that SAO Orders, as defined in 
Interpretations and Policies .03 of Rule 503, are not eligible to 
participate in the Risk Protection Monitor. Prohibiting SAO Orders from 
participating in the Risk Protection Monitor ensures that these orders 
may be freely submitted to the Exchange and will remain active in the 
System once accepted. As discussed above, SAO Orders are strategy 
orders used for hedging or closing a hedged position in SPIKES options 
during the SPIKES Special Settlement Auction which is conducted only 
once per month. When engaged the Risk Protection Monitor may prevent 
the Member from submitting SAO Orders to the Exchange until the Member 
communicates with the Help Desk to enable the acceptance of new orders. 
The Exchange does not believe it is in the best interest of the Member 
to introduce this type of delay for SAO Orders, as they are time 
sensitive and are designed to participate in the SPIKES Special 
Settlement Auction.
    Additionally, the Exchange proposes to amend Rule 517, Quote Types 
Defined. Specifically, subsection (d) of Rule 517 provides that bids 
and offers in certain limited time in force eQuote types (Auction or 
Cancel, Opening Only, Immediate or Cancel, Fill or Kill, and Immediate 
or Cancel Intermarket Sweep) will not be disseminated by the Exchange 
in accordance with Rule 602 of Regulation NMS. In addition, executions 
resulting from these eQuote types will not be used by the Exchange's 
Aggregate Risk Manager to determine whether the Market Maker has 
exceeded the Allowable Exchange Percentage as more fully described in 
Rule 612.
    Exchange Rule 612, Aggregate Risk Manager (``ARM'') describes a 
risk protection feature similar to the Risk Protection Manager for 
orders, however ARM is only available for Market Makers and provides a 
counting program (``counting program'') for each Market Maker who is 
required to submit continuous two-sided quotations pursuant to Rule 604 
in each of their appointed option classes. The counting program will 
count the number of contracts traded by the Market Maker (the 
``specified time period''). The Market Maker may also establish for 
each option class an Allowable Engagement Percentage. The Exchange will 
establish a default specified time period and a default Allowable 
Engagement Percentage (``default settings'') on behalf of a Market 
Maker that has not established a specified time period and/or an 
Allowable Engagement Percentage.\17\
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    \17\ See Exchange Rule 612(a).
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    The System will engage the Aggregate Risk Manager 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 their Allowable Engagement Percentage. The Aggregate 
Risk Manager will then automatically remove the Market Maker's Standard 
Quotations and Day eQuotes from the Exchange's disseminated quotation 
in all series of that particular option class until the Market Maker 
sends a notification to the System of the intent to reengage quoting 
and submits a new revised quotation.\18\
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    \18\ See Exchange Rule 612(b)(1).
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    The Exchange now proposes to add the Settlement Auction Only eQuote 
(SAO eQuote), as defined in Interpretations and Policies .03 of 
Exchange Rule 503, to the list of eQuotes that are not subject to the 
Aggregate Risk Manager. An SAO eQuote is a special purpose eQuote 
available only during the SPIKES Special Settlement Auction and as such 
should be treated similarly to other limited time in force eQuote 
types.
    The Exchange also proposes to amend Interpretations and Policies of 
Rule 517 to adopt new subsection .02 which will state that an SAO 
eQuote will be considered a priority quote for trade allocation in 
accordance with Exchange Rule 514(e). To be considered a priority quote 
a Market Maker's quote must meet certain conditions as stipulated in 
the Exchange rules, one of which is that the

[[Page 58644]]

quote is valid width and two-sided.\19\ SAO eQuotes are a special 
purpose eQuote used to hedge or close a hedged position. A Market Maker 
using an SAO eQuote will not be in a position to place a quote on the 
opposite side of the market, as an execution of the opposite side 
eQuote would impair the ability of the Market Maker to hedge or close a 
hedged position. The Exchange does not wish to disadvantage a Market 
Maker for properly using an eQuote when it is not feasible for a Market 
Maker to otherwise meet the priority quote requirements (submission of 
a two-sided quote) with this type of eQuote.
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    \19\ See Exchange Rule 517(b)(1)(i)(A).
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2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with Section 6(b) of the Act \20\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \21\ 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 regulating, 
clearing, settling, processing information with respect to, and 
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.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes promote just and 
equitable principles of trade and remove impediments to and perfect the 
mechanism of a free and open market and a national market system 
because they seek to ensure that SAOs may be freely submitted to the 
Exchange and that SAOs are not encumbered by risk protections designed 
for order types used during the course of regular trading. 
Additionally, the Exchange believes that removing SAO Orders from RPM 
and from certain MIAX Order Monitor features ensures that SAO Orders 
are available for their intended use to hedge or close a hedged 
position in SPIKES options. Similarly, the Exchange believes that 
removing SAO eQuotes from ARM ensures that SAO eQuotes are available 
for their intended use. Treating an SAO eQuote as a priority quote for 
allocation purposes ensures that a Market Maker with an SAO eQuote at 
the Opening Price could receive an execution without having to submit a 
two-sided quote. A Market Maker using an SAO eQuote to hedge or close a 
hedged position can not provide an SAO eQuote on the opposite side of 
the market without negatively impacting their original eQuote. 
Therefore, the Exchange believes it is just and equitable to permit SAO 
eQuotes to be treated as priority quotes for allocation purposes as it 
is not feasible for a Market Maker to meet the requirements necessary 
to establish a priority quote using SAO eQuotes.
    The Exchange believes that the proposed change promotes just and 
equitable principles of trade, and removes impediments to and perfects 
the mechanisms of a free and open market and a national market system 
and, in general, protects investors and the public interest, as the 
changes allow for SAO Orders and SAO eQuotes to be freely used for 
their intended purpose and will contribute to increased liquidity on 
the Exchange.

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.
    The Exchange does not believe the proposed rule change will impose 
any burden on inter-market competition as the proposed rule changes are 
designed to ensure that SAOs may be submitted to the Exchange to 
participate in the SPIKES Special Settlement Auction, and that once 
accepted these orders remain active in the System. The Exchange does 
not believe that the proposed rule change will cause an unnecessary 
burden on inter-market competition as SAOs are only used for the SPIKES 
Special Settlement Auction which is a special process unique to the 
Exchange.
    Additionally, the Exchange does not believe the proposed rule 
change will impose any burden on intra-market competition as the Rules 
apply equally to all Exchange Members, and all Members have the ability 
to submit SAOs.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MIAX-2018-34 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-2018-34. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File

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Number SR-MIAX-2018-34, and should be submitted on or before December 
11, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-25249 Filed 11-19-18; 8:45 am]
BILLING CODE 8011-01-P