Document ID: SEC-2018-1096-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Miami International Securities Exchange, LLC
Posted Date: 2018-07-16T04:00Z

[Federal Register Volume 83, Number 136 (Monday, July 16, 2018)]
[Notices]
[Pages 32932-32944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15178]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83619; File No. SR-MIAX-2018-14]

Self-Regulatory Organizations: Notice of Filing of a Proposed 
Rule Change by Miami International Securities Exchange, LLC to List and 
Trade on the Exchange Options on the SPIKESTM Index

July 11, 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 June 28, 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 proposes to list and trade on the Exchange options on 
the SPIKESTM Index (``SPIKES'' or the ``Index''), a new 
index that measures expected 30-day volatility of the SPDR S&P 500 ETF 
Trust. The Exchange also proposes to list and trade short-term, 
quarterly, and long-term options on SPIKES. Options on SPIKES will be 
cash-settled and will have European-style exercise provisions.
    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.

[[Page 32933]]

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

1. Purpose
    The Exchange recently adopted generic rules relating to the listing 
and trading of cash-settled index options on the Exchange.\3\ The 
Exchange now proposes to amend its rules to provide for the listing and 
trading on the Exchange of options on the Index. The Index measures 
expected 30-day volatility of the SPDR S&P 500 ETF Trust (commonly 
known and referred to by its ticker symbol, ``SPY''). Options on the 
Index will be cash-settled and will have European-style exercise 
provisions. In addition to regular options, the Exchange proposes to 
also list short-term, quarterly, and long-term options on the Index. 
The Index is calculated using published real-time prices and bid/ask 
quotes of SPY options. The Index represents annualized expected 
volatility and is quoted in percentage points.
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    \3\ See Securities Exchange Act Release No. 81739 (September 27, 
2017), 82 FR 46111 (October 3, 2017) (SR-MIAX-2017-39) (Order 
approving the adoption of rules relating to trading in index 
options).
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Index Design and Composition
    The calculation of the Index is based on the methodology developed 
by T3i Pty Ltd, a firm that develops proprietary indexes, including 
derivatives-based indexes and options-enhanced indexes. The Index will 
be calculated and maintained by the Exchange. The Index measures 
expected 30-day volatility of SPY, historically the largest and most 
actively traded ETF in the United States as measured by its assets 
under management and the value of shares traded.
    Like most indices, the Index has a defined rules-based approach to 
selecting components--a series of options on the SPY--and weighting 
them to derive a single price for the Index.
    Therefore, the formula for expected T-term variance is as follows:
    [GRAPHIC] [TIFF OMITTED] TN16JY18.014
    
    The Index is calculated using only standard options on SPY that 
expire on the third Friday of each calendar month. Although weekly 
options on SPY are available, these are not used in the calculation of 
the Index.
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    \4\ Since the SPIKES Index is calculated on a real-time basis, 
the Exchange uses 1-second precision to measure time in years (which 
is expressed to at least eight decimal places, by dividing the 
number of seconds to option expiration by the total number of 
seconds in a year).
    \5\ This price is also known as the Reference Price, as defined 
and discussed in more detail below, in the following subsection 1, 
Determine Option Prices.
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    The calculation linearly interpolates between the variances of two 
monthly expirations--near-term (the closest expiration more than two 
full days into the future) and next-term (the monthly expiration 
following the near-term). This expiration selection method is used to 
avoid using highly irregular option prices close to the options 
settlement date. The 30-day point is typically in between these two 
expirations and the Index is interpolated between the volatilities of 
these two terms. When the closest

[[Page 32934]]

expiration is too close to expiry (less than two full days), rolling to 
the third-closest expiration occurs. This rolling rule serves to reduce 
spurious variability in the Index by means of minimizing the period of 
``extrapolation'' between the two expirations. The switch from closest 
to third-closest expiry rarely has any noticeable impact on the actual 
Index value, as the weight of the switched term is close to zero. The 
following describes the methodology used to price the Index in greater 
detail.
1. Determine Option Prices
    SPIKES uses a proprietary ``price dragging'' technique to determine 
the ongoing price for each individual option used in the calculation of 
the Index (``Reference Price''), to calculate the Index, as follows:
     Initially set all prices to 0;
     If there is a trade, the price of the option is always set 
to the trade price;
     If there is not yet a trade, on the opening quote, the 
opening bid is used as the current price;
     For newly-placed ask (bid) quotes, if the ask (bid) is 
lower (higher) than current Reference Price, the option price is set to 
ask (bid).
    The Exchange believes that this method should materially reduce 
erratic movements of the Index value as quotations on out-of-the-money 
(``OTM'') options are rapidly altered during times of low liquidity. 
The Exchange believes that this method is a material enhancement over 
existing calculation methodologies, and should result in improved Index 
stability by smoothing out options price inputs into the Index 
calculation, especially as options quotes are rapidly changing.
    An example of the price dragging technique is given below:

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                                                                                                                                          Difference  b/
                                                                                                                             Change in       t SPIKES
                   Time                                Market              SPIKES input      Change in       Midpoint        midpoint        input and
                                                                                \6\        SPIKES  input       input           input         midpoint
                                                                                                                                               input
--------------------------------------------------------------------------------------------------------------------------------------------------------
9:30:00...................................  0 x 0.......................            0.00  ..............            0.00  ..............            0.00
9:31:10...................................  2.35 x 2.65.................            2.35  ..............            2.50  ..............            0.15
9:31:10...................................  Trade @ 2.38................            2.38  ..............            2.50  ..............            0.12
                                                                                                     .03
9:33:01...................................  2.31 x 2.65.................            2.38  ..............            2.48  ..............            0.10
                                                                                                                                     .02
9:33:48...................................  2.31 x 2.39.................            2.38  ..............            2.35  ..............            0.03
                                                                                                                                     .13
9:36:41...................................  Trade @ 2.37................            2.37  ..............            2.35  ..............            0.02
                                                                                                     .01
9:38:34...................................  2.32 x 2.40.................            2.37  ..............            2.36  ..............            0.01
                                                                                                                                     .01
9:38:52...................................  2.00 x 6.00.................            2.37  ..............            4.00  ..............            1.63
                                                                                                                                    1.64
9:39:02...................................  Trade @ 3.10................            3.10  ..............            4.00  ..............            0.90
                                                                                                     .73
9:39:20...................................  3.05 x 3.50.................            3.10  ..............           3.275  ..............           0.175
                                                                                                                                   0.725
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    The example shows a hypothetical market for a specific option used 
as an input to SPIKES. The results of price dragging are shown in the 
column ``SPIKES Input,'' and a hypothetical result using an alternative 
method of calculating the option input price using the midpoint method 
is shown in the column ``Midpoint Input.'' The difference between the 
result using the SPIKES Input and the Midpoint Input is shown in the 
``Difference b/t SPIKES Input and Midpoint Input Column.'' The shaded 
cells illustrate changes in the input prices of the two methods after 
each update to the market. The Exchange believes that the example 
illustrates that, given the hypothetical market prices, the price 
dragging technique results in a smoother Index price because it relies 
primarily on trade prices (which are more indicative of actual value), 
only using quote prices when a quote bid is higher than the last trade 
or a quote offer is lower than the last trade. Additionally, the Index 
performance has been evaluated using alternative calculation 
methodologies. This evaluation included a comparison of the performance 
of the Index when calculated using the price dragging technique, versus 
the performance of the Index when calculated using an alternative 
midpoint method, and covered periods of both low and high volatility in 
SPY. The Exchange believes that the price dragging technique 
consistently outperformed the midpoint method, as measured by the 
Index's overall stability and smoothness of price changes, resulting 
from primarily relying on trade prices (which are more indicative of 
actual value).
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    \6\ This value is also referred to as the Reference Price, as 
defined above.
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    The price dragging technique is used to determine the Reference 
Price for each individual option used in the Index calculation. The 
Exchange believes that this technique is a material enhancement that 
may improve Index stability by smoothing out options price inputs into 
the Index calculation, especially as options quotes are rapidly 
changing. The price dragging technique is used for intraday calculation 
of the Index. The Exchange believes that the price dragging technique 
may be a more accurate and effective way to determine the Index value 
because the primary factor considered when updating the Reference Price 
is whether or not a trade has occurred. If a trade occurred, the 
Reference Price is set to the trade price. This methodology represents 
a Reference Price which is based on a ``meeting of the minds,'' or the 
creation of a contract. The Exchange believes that this more accurately 
represents the fair value at that given time, and thus will benefit 
investors and market participants trading options on the Index.
    A competing volatility index uses an alternative method for 
calculating its reference price. Specifically, that competing 
volatility index utilizes the mid-point of the bid and ask and only 
updates the reference price when there is a change in the bid or ask. 
The

[[Page 32935]]

Exchange believes that this methodology could be less reliable because 
it creates the potential for skewed reference prices in the event of a 
wide market. Options are often quoted in bulk by market makers, which 
in some cases, causes a divergence from the orthodox supply-demand 
dynamics as quotes are constantly updated across a series of strikes 
throughout the day. As a result, there can be more notable movements 
within the bid/ask spread that impact the calculation of an index based 
on mid-point prices.
    Therefore, the Exchange believes that the price dragging technique 
may create a more accurate and stable Index value and may better 
represent volatility in the market by emphasizing the actual trade 
price versus simply the midpoint spread. Furthermore, the Exchange 
believes that the enhanced feature may provide greater consistency in 
the marketplace because the price dragging technique results in a 
Reference Price that is supported by the fair market value at the time 
versus using the mid-point, which is not necessarily an accurate 
representation of the fair market value at the time.
2. Select the Options
    Another key feature of SPIKES is its exclusion rule (truncation 
method). The exclusion rule determines how far away from the money to 
exclude strikes from the volatility calculation. For each of the 
expirations, the securities to be used in the calculation are selected 
by removing in-the-money and OTM options, as follows:
     To determine the ATM strike, find the intersection of the 
put and call linearly interpolated price curves. Select the strike 
closest to the value of the intersection of the curves--this becomes 
the ATM strike. If the intersection falls exactly in the middle of two 
strikes, or if the whole segments overlap (i.e., when four neighboring 
calls and puts have the same price), use the lower strike. In case of 
more than one intersection point (in rare cases of highly irregular 
market prices), use the one closest to the current value of SPY.
     Use all listed puts below the ATM strike and all listed 
calls above the ATM strike, and both the ATM call and put. When two 
consecutive option prices of $0.05 or less are encountered when moving 
away from the ATM, exclude all the strikes beyond that level, from each 
of the put and call side.
    A competing volatility index that uses the midpoint for its option 
input prices uses a different exclusion rule, which similarly moves 
away from the ATM, but excludes individual strikes if they have no bid, 
and excludes all the strikes beyond two consecutive no bid strikes. A 
comparison of a hypothetical list of put option inputs and the 
resulting inclusion decision is given below.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           SPIKES input
                 Strike                         \7\           SPIKES input included?          Market         VIX input          VIX input included?
--------------------------------------------------------------------------------------------------------------------------------------------------------
201.....................................            0.06  Include.......................     0.05 x 0.07            0.06  Include.
200.5...................................            0.06  Include.......................     0.05 x 0.07            0.06  Include.
200.....................................            0.05  Include.......................     0.05 x 0.07            0.06  Include.
199.5...................................            0.04  Include.......................     0.04 x 0.06            0.05  Include.
199.....................................            0.05  Exclude.......................        0 x 0.11           0.055  Exclude.
198.5...................................            0.03  Exclude.......................      0.01 x 0.1           0.055  Include.
198.....................................            0.04  Exclude.......................     0.02 x 0.08            0.05  Include.
197.5...................................            0.03  Exclude.......................     0.01 x 0.07            0.04  Include.
197.....................................            0.04  Exclude.......................     0.01 x 0.06           0.035  Include.
196.5...................................            0.02  Exclude.......................        0 x 0.05           0.025  Exclude.
196.....................................            0.01  Exclude.......................     0.01 x 0.06           0.035  Include.
195.5...................................            0.01  Exclude.......................        0 x 0.05           0.025  Exclude.
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    The purpose of the exclusion rule is to remove option inputs from 
the calculation that could be deemed less reliable and thus potentially 
negatively impact the calculation outcome. The Exchange believes that 
its exclusion methodology is a material enhancement over existing 
methodologies, and should result in a calculation outcome that better 
reflects the expected measure of volatility.
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    \7\ See supra note 6.
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    As discussed previously, the price dragging method reduces the 
variability of the option inputs. Since the option inputs have reduced 
variability, and those values are used to determine which strikes make 
it into the index calculation, the combination of price dragging and 
exclusion rules work together to, in the Exchange's opinion, create a 
more reliable Index value.
3. Weight the Options and Estimate Volatility
    For each term, the volatility is estimated using the variance swap 
approximation, with the selected options' prices weighted according to 
the SPIKES formula:
[GRAPHIC] [TIFF OMITTED] TN16JY18.015

    Each eligible option's contribution is proportional to the change 
in the strike (half the difference between the strike on either side of 
the option) and the price, and inversely proportional to the square of 
the option's strike. After calculating for each option, these are 
summed and multiplied by two times the exponential of the risk free 
rate times time-to-expiration. The next step is to subtract from this 
value, the square of, the difference between the ATM call and put 
prices, times the exponential of the risk free rate times time-to-
expiration, divided by the ATM strike. Lastly, divide the result by the 
time to expiration to arrive at the final value.
4. Calculate the Index
    Compute the 30-day weighted average of the near- and next-term 
variances,

[[Page 32936]]

take the square root, and multiply by 100, as follows:
[GRAPHIC] [TIFF OMITTED] TN16JY18.016

t1 Time (in seconds) to near-term expiration
s1 Estimated volatility computed by variance swap 
approximation, near-term
t2 Time (in seconds) to next-term expiration
s2 Estimated volatility computed by variance swap 
approximation, next-term
tM Number of seconds in 30 days (30 x 86,400 = 2,592,000)
Background Information
    SPY is the largest and most actively traded ETF in the U.S.\8\ 
According to State Street Global Advisor, the Trustee of SPY, as of May 
14, 2018, the net assets under management in SPY was approximately $263 
billion; the weighted average market capitalization of the portfolio 
components was approximately $217 billion; the smallest market 
capitalization was approximately $3.6 billion (Range Resources 
Corporation, ticker: RRC), and the largest was approximately $930 
billion (Apple, Inc., ticker: AAPL).\9\ For the three months ending 
April 30, 2018, the average daily volume in SPY shares was 119 million, 
and the average value of shares traded was approximately $31.8 
billion.\10\ For the same period, the average daily volume in SPY 
options was approximately 4.2 million contracts.\11\ The most recent 
open interest in SPY options was approximately 23.9 million contracts 
as of May 14, 2018.\12\
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    \8\ SPY holds the shares of up to 500 companies listed on U.S. 
securities exchanges (SPY currently has 506 securities due to multi-
share classes for some companies).
    \9\ See https://www.spdrs.com/product/fund.seam?ticker=SPY.
    \10\ Calculated using data from Thompson Reuters as of May 14, 
2018.
    \11\ Calculated using data from The Options Clearing Corp. as of 
May 14, 2018.
    \12\ Id.
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    The Exchange believes that, in addition to the other unique and 
proprietary attributes associated with the Index's calculation and 
settlement methodology, as well as the Exchange's fully-electronic, 
transparent, highly-deterministic trading system, using SPY options as 
the components for a volatility index, in the manner proposed by the 
Exchange, will offer a number of significant, distinct advantages over 
other types of volatility indexes. The Exchange believes that the 
advantages of using SPY options have the potential to result in an 
extremely liquid volatility product with exceptionally tight spreads, 
and consequently would not be readily susceptible to fraudulent and 
manipulative acts. First, SPY options are extremely liquid (they 
regularly trade 4-5 million contracts a day, and have 20-30 million 
contracts in open interest). Second, SPY options have consistently 
tighter bid-ask spreads than SPX options, which are the components for 
the Cboe Exchange, Inc. (``Cboe'') VIX index. Since SPY options are 
traded on all 15 option exchanges, it allows market participants to 
take advantage of arbitrage opportunities across multiple venues. This 
is in contrast to SPX options which only trade on Cboe, and thus those 
arbitrage opportunities across venues are not possible. Since SPY 
options are traded on all 15 option exchanges, at the time of the final 
settlement of the SPIKES Index on the Exchange,\13\ there will be up to 
14 other options exchanges open for trading SPY options, thus serving 
as real-time cross-reference prices for those SPY options included in 
the Exchange's SPIKES Special Settlement Auction. This is in contrast 
to SPX options during Cboe's VIX settlement auction, where there are no 
real-time cross-reference prices for those SPX options included in 
Cboe's VIX settlement, as SPX options are only traded on one exchange--
Cboe. In terms of spreads, SPY spreads are significantly tighter and 
exhibit much higher consistency with a much narrower range of typical 
values and far fewer numbers of outliers than SPX. For example, when 
examining daily closing bid and ask prices of regular monthly options 
(with time to expiry closest to 30 calendar days) from October 2007 
(when SPY options started trading in penny increments) to May 2018, and 
comparing the following three strike ranges: (A) 1% ATM--at-the-money 
options within 1% (plus or minus) of the underlying forward price; (B) 
1-5% OTM--out-of-the-money options (higher strikes for calls, lower 
strikes for puts); and (C) 85-95% Puts--far out-of-the-money put 
options typically included in volatility index calculations, SPY 
spreads are consistently tighter than SPX spreads, both across strike 
prices and through time, by a factor of 2 to 4 times (this is after 
normalizing SPY spreads to SPX spreads, by multiplying SPY spreads by 
10). Accordingly, the Exchange believes that these advantages of using 
SPY options in the manner proposed by the Exchange, when combined with 
the other features and attributes of the SPIKES Index, have the 
potential to result in an extremely liquid volatility product with 
exceptionally tight spreads, and consequently would not be readily 
susceptible to fraudulent and manipulative acts.
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    \13\ The final settlement of the SPIKES Index occurs during the 
SPIKES Special Settlement Auction (defined and discussed below), 
which commences immediately following the opening of trading on the 
Exchange.
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    As set forth in Exhibit 3-1, the following are the characteristics 
of the Index: (i) The initial index value was 13.05 on January 10, 
2005; (ii) the index value on May 14, 2018 was 13.44; (iii) the lowest 
index value since inception was 9.80 and occurred on July 20, 2007; and 
(iv) the highest index value since inception was 81.85 and occurred on 
November 20, 2008.
Index Calculation and Maintenance
    As noted above, the Index will be maintained and calculated by the 
Exchange. The level of the Index will reflect the current expected 
volatility of SPY. The Index will be updated on a real-time basis on 
each trading day beginning at 9:30 a.m. and ending at 4:15 p.m. (New 
York time). If the current published value of a component is not 
available, the last published value will be used in the calculation. 
Values of the Index will be disseminated to the Options Price Reporting 
Authority (``OPRA'') at least every 15 seconds during the Exchange's 
regular trading hours, pursuant to Exchange Rules 1802 and 1803. The 
Exchange is currently disseminating the cash values of the Index to 
OPRA under the ticker symbol `SPIKE' in at least 15 second intervals. 
In the event the Index ceases to be maintained or calculated, or its 
values are not disseminated at least every 15 seconds by a widely 
available source, the Exchange will not list any additional series for 
trading, and may, for the purpose of maintaining a fair and orderly 
market and protecting investors, limit transactions in certain options 
on the Index to closing transactions only.

[[Page 32937]]

Exercise and Settlement Value
    On the expiration date for expiring SPIKES options, the Exchange 
will calculate the final settlement value of the Index for expiring 
SPIKES options. The expiration date for expiring SPIKES options is the 
same day that the final settlement value of the Index is calculated for 
those options. This date is the Wednesday that is thirty days prior to 
the third Friday of the calendar month immediately following the month 
in which the applicable SPIKES options expire. If that Wednesday or the 
Friday that is thirty days following that Wednesday is an Exchange 
holiday, the final settlement value shall be calculated on the business 
day immediately preceding that Wednesday. The exercise-settlement 
amount is equal to the difference between the final settlement value of 
the Index and the exercise price of the option, multiplied by $100. 
Exercise will result in the delivery of cash on the business day 
following expiration.
    To determine the final settlement value of the Index, the Exchange 
will perform an Index settlement price calculation which includes all 
SPY options that expire 30 days after the SPIKES settlement that are 
included in the settlement (these options are referred to in this rule 
filing as the ``constituent options''). In order to perform the Index 
settlement price calculation, each constituent option will be assigned 
a Settlement Reference Price or ``SRP,'' defined and discussed in more 
detail below. Each SRP will be determined through a new ``SPIKES 
Special Settlement Auction,'' which will be conducted once per month, 
in the constituent options traded on the Exchange, on final settlement 
day. The SPIKES Special Settlement Auction will utilize the Exchange's 
standard, existing Opening Process, as defined and fully-described in 
Exchange Rule 503(f), with a new proposed modification to account for 
situations where there remains an order imbalance \14\ that must be 
filled at the opening price after the requisite number of iterations of 
the imbalance process takes place under the Exchange's existing Opening 
Process (the Exchange's existing Opening Process provides that the 
Exchange can open with an imbalance after the requisite number of 
iterations of the imbalance process takes place).\15\ This new proposed 
modification to the Exchange's existing Opening Process to facilitate 
the execution of this remaining must-fill interest is referred to as 
the special settlement imbalance process (``SSIP''), which will be 
governed by new proposed Interpretations and Policies .06 to Exchange 
Rule 1809, as described more fully below. The Exchange believes that 
using its fully-electronic and fully-transparent Opening Process 
functionality, which is accessible to all Members of the Exchange for 
participation, in highly liquid SPY options (which are simultaneously 
opening and available for trading on up to 14 other exchanges, thus 
providing real-time cross-reference prices for the SPY options included 
in the settlement) to conduct the SPIKES Special Settlement Auction to 
settle expiring SPIKES options, will offer significant advantages over 
other types of volatility index auction processes, resulting in a 
robust Opening Process that presents arbitrage opportunities across 
multiple venues to drive prices into line and reach equilibrium, and 
thus consequently would not be readily susceptible to fraudulent and 
manipulative acts.
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    \14\ An ``imbalance'' occurs when there is insufficient 
liquidity to satisfy all trading interest due an execution at a 
certain price. See Exchange Rule 503(f)(2)(v).
    \15\ See Exchange Rule 503(f)(2)(vii)(B)(5).
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    The Exchange believes that the SPIKES Special Settlement Auction 
would not be readily susceptible to fraudulent and manipulative acts 
for a number of reasons. As discussed more fully below, the Exchange's 
existing Opening Process runs to completion and precedes the engagement 
of the new SSIP. The existing Opening Process cannot occur prior to 
9:30 a.m. Eastern Time and only begins following the dissemination of a 
quote or trade in the market for the underlying security.\16\ Following 
the dissemination of a quote or trade in the market for the underlying 
security, the System will pause for a period of time no longer than one 
half second to allow the marketplace to absorb this information.\17\ 
When there is an imbalance,\18\ the System will broadcast a System 
Imbalance Message (which includes the symbol, side of the market, 
quantity of matched contracts, the imbalance quantity, must fill 
quantity (i.e., the number of contracts that must be filled in order 
for that option to open on the Exchange at the indicated price), 
quantity of routable contracts, and price of the affected series) to 
subscribers of the Exchange's data feeds and begin an Imbalance Timer 
\19\ not to exceed three seconds.\20\ Under the existing Opening 
Process the Exchange may repeat this process up to three times.\21\ 
While the Exchange is conducting its Opening Process, all 14 other 
option exchanges will also be conducting their opening process for SPY 
options. As the Exchange works through its process to resolve 
imbalances under the existing Opening Process, other Exchanges will be 
open and will serve as real-time cross-reference prices for those SPY 
options, enabling market participants to send orders to the Exchange if 
there are pricing anomalies for these SPY options across venues. The 
longer it takes the Exchange to work through the imbalance, the greater 
the likelihood that other exchanges will have opened their SPY options 
market and the natural pressures of a competitive market will help to 
eliminate any pricing anomalies and aid in eliminating the imbalance on 
the Exchange. Further, the Exchange's imbalance process is transparent, 
as every subscriber to the Exchange's data feed receives the imbalance 
messages, and every Member of the Exchange can participate in the 
imbalance process.
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    \16\ See Exchange Rule 503(e)(1).
    \17\ The Exchange notes that the current setting is one half 
second.
    \18\ See supra note 14.
    \19\ The Exchange notes that the current Imbalance Timer setting 
is one second.
    \20\ See Exchange Rule 503(f)(2)(vii).
    \21\ See Exchange Rule 503(f)(2)(vii)(B)(4).
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    As previously discussed, on the day the settlement value for the 
Index is calculated, the Exchange will conduct the SPIKES Special 
Settlement Auction, using its standard, existing Opening Process for 
all options on the Exchange, including the constituent options.\22\ The 
following paragraphs provide a high level overview of the Exchange's 
standard, existing Opening Process, in order to illustrate the complete 
operation of the SPIKES Special Settlement Auction.
---------------------------------------------------------------------------

    \22\ For a complete description of the Exchange's standard, 
existing Opening Process, refer to Exchange Rule 503, Openings on 
the Exchange.
---------------------------------------------------------------------------

    Pursuant to the standard, existing Opening Process, if there are no 
quotes or orders that lock or cross each other, the System \23\ will 
open by disseminating the Exchange's best bid and offer among quotes 
and orders that exist in the System at that time. If there are quotes 
or orders that lock each other, the System will calculate an Expanded 
Quote Range (``EQR''), as described in Rule 503(f)(2). The EQR 
represents the limits of the range in which transactions may occur 
during the Opening Process.\24\ The EQR is recalculated any

[[Page 32938]]

time a route timer or Imbalance Timer expires if material conditions of 
the market (imbalance size, ABBO \25\ price and size, liquidity price 
or size, etc.) have changed during the timer. Once calculated, the EQR 
represents the limits of the range in which transactions may occur 
during the Opening Process.\26\ The System uses the EQR to determine 
the highest and lowest price of the opening price range.
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    \23\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
    \24\ See Exchange Rule 503(f)(2)(i). See also Exchange 
Regulatory Circular 2012-02, which sets forth the tables that 
describe the calculation of the EQR for option classes traded on the 
Exchange, at http://www.miaxoptions.com/sites/default/files/circular-files/MIAX_Opening_Process_and_Pause_Timer.pdf.
    \25\ The term ``ABBO'' or ``Away Best Bid or Offer'' means the 
best bid(s) or offer(s) disseminated by other Eligible Exchanges 
(defined in Rule 1400(f)) and calculated by the Exchange based on 
market information received by the Exchange from OPRA. See Exchange 
Rule 100.
    \26\ See Exchange Rule 503(f)(2)(i).
---------------------------------------------------------------------------

    To calculate the opening price, the System takes into consideration 
all valid Exchange quotes and all valid orders, together with other 
exchanges' markets for the series, and identifies the price at which 
the maximum number of contracts can trade. If that price is within the 
EQR and leaves no imbalance, the Exchange will open at that price, 
executing marketable trading interest as long as the opening price 
includes only Exchange interest.\27\ If the calculated opening price 
included interest other than solely Exchange interest, the System will 
broadcast a system imbalance message (which includes the symbol, side 
of the market, quantity of matched contracts, the imbalance quantity, 
must fill quantity, quantity of routable contracts, and price of the 
affected series) to Exchange Members \28\ and initiate a ``route 
timer,'' not to exceed one second.\29\
---------------------------------------------------------------------------

    \27\ See Exchange Rule 503(f)(2)(iv).
    \28\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \29\ See Exchange Rule 503(f)(2)(iv)(A).
---------------------------------------------------------------------------

    If all opening and marketable interest cannot be completely 
executed at or within the EQR without trading at a price inferior to 
the ABBO, or cannot trade at or within the quality opening market range 
in the absence of a valid width NBBO,\30\ the System will automatically 
institute an imbalance process.\31\ The System will broadcast a system 
imbalance message (which includes the symbol, side of the market, 
quantity of matched contracts, the imbalance quantity, must fill 
quantity, quantity of routable contracts, and price of the affected 
series) to subscribers of the Exchange's data feeds, and begin an 
Imbalance Timer, not to exceed three seconds.\32\ Market Makers \33\ 
may enter Opening Only (``OPG'') eQuotes,\34\ Auction or Cancel 
(``AOC'') eQuotes,\35\ Standard quotes,\36\ Opening Orders (``OPG 
Orders''),\37\ AOC Orders \38\ and limit orders during the Imbalance 
Timer. Other Exchange Members may enter OPG Orders, AOC Orders and 
other order types (except those order types not valid during the 
Opening Process, as described in Rule 516) during the Imbalance 
Timer.\39\ If, at the conclusion of the timer, quotes and orders 
submitted during the Imbalance Timer, or other changes to the ABBO, 
would not allow the entire imbalance amount to trade at the Exchange at 
or within the EQR without trading at a price inferior to the ABBO, the 
System will send a new system imbalance message to Exchange Members and 
initiate a route timer for routable Public Customer orders not to 
exceed one second. If, during the route timer, interest is received by 
the System which would allow all interest to trade on the System (i.e., 
there is no longer an imbalance) at the opening price without trading 
at a price inferior to other markets, the System will trade and the 
route timer will end.\40\ The System may repeat the imbalance process 
up to three times (as established by the Exchange).\41\ Following 
completion of the third imbalance process, if there is an opening 
transaction, any unexecuted contracts from the imbalance not traded or 
routed will be cancelled back to the entering Member if the price for 
those contracts crosses the opening price, in effect cancelling that 
must fill interest.\42\ That is the completion of the Exchange's 
standard, existing Opening Process.
---------------------------------------------------------------------------

    \30\ The term ``NBBO'' means the national best bid or offer as 
calculated by the Exchange based on market information received by 
the Exchange from OPRA. See Exchange Rule 100.
    \31\ See Exchange Rule 503(f)(2)(vii).
    \32\ See Exchange Rule 503(f)(2)(vii)(A).
    \33\ The term ``Market Makers'' refers to ``Lead Market 
Makers'', ``Primary Lead Market Makers'' and ``Registered Market 
Makers'' collectively. See Exchange Rule 100.
    \34\ An opening only or ``OPG'' eQuote is a quote that can be 
submitted by a Market Maker only during the Opening as set forth in 
Rule 503. OPG eQuotes will automatically expire at the end of the 
Opening Process. See Exchange Rule 517(a)(2)(iii).
    \35\ An Auction or Cancel or ``AOC'' eQuote is a quote submitted 
by a Market Maker to provide liquidity in a specific Exchange 
process with a time in force that corresponds with the duration of 
that event and will automatically expire at the end of that event. 
See Exchange Rule 517(a)(2)(ii).
    \36\ A Standard quote is a quote submitted by a Market Maker 
that cancels and replaces the Market Maker's previous Standard 
quote, if any. See Exchange Rule 517(a)(1).
    \37\ An Opening or ``OPG'' Order is an order that is valid only 
for the opening process. See Exchange Rule 516(h).
    \38\ An Auction-or-Cancel or ``AOC'' order is a limit order used 
to provide liquidity during a specific Exchange process with a time 
in force that corresponds with that event. See Exchange Rule 
516(b)(4).
    \39\ See supra note 22.
    \40\ See Exchange Rule 503(f)(2)(vii)(B)(2).
    \41\ See Exchange Rule 503(f)(2)(vii)(B)(4).
    \42\ See Exchange Rule 503(f)(2)(vii)(B)(5).
---------------------------------------------------------------------------

    Now, where an imbalance exists in constituent options and the final 
imbalance process has been conducted as part of the Exchange's 
standard, existing Opening Process, instead of cancelling that must 
fill interest back to the entering Member, the Exchange is proposing to 
conduct the SSIP,\43\ where the Exchange will satisfy that must fill 
interest. The Exchange does not want to cancel any must fill interest, 
as this liquidity could represent previously hedged interest that must 
be unwound.
---------------------------------------------------------------------------

    \43\ See proposed Exchange Rule 503(f)(2)(vii)(B)(5)(a).
---------------------------------------------------------------------------

    The SSIP is employed to satisfy all liquidity identified as must 
fill which is creating the imbalance, referred to as the must fill 
imbalance. The SSIP is an iterative process that is designed to 
determine a price at which all must fill imbalance interest can be 
satisfied.\44\ In the SPIKES Special Settlement Auction, in addition to 
any order types that may be regularly 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'') at any 
time after the opening of the Live Order Window (``LOW'') \45\ and the 
Live Quote Window (``LQW''),\46\ respectively. SAOs are specific order 
types that allow a Member to voluntarily tag such order as a SPIKES 
strategy order, defined below. All orders for participation in the 
SPIKES Special Settlement Auction that are related to positions in, or 
a trading strategy involving, SPIKES Index options (``SPIKES strategy 
orders''), and any change to or cancellation of any such order: (i) 
Must be received prior to the applicable SPIKES strategy order cut-off 
time for the constituent option series, as determined by the Exchange, 
which may be no earlier than the opening of the LOQ or the LQW, and no 
later than the opening of trading in the series. The Exchange will 
announce all determinations regarding changes to the applicable SPIKES 
strategy order cut-off time via Regulatory Circular at least one day 
prior to implementation (however the Exchange anticipates initially 
establishing the cut-off time at 9:20 a.m.

[[Page 32939]]

Eastern); and (ii) may not be cancelled or modified after the 
applicable SPIKES strategy order cut-off time, unless the SPIKES 
strategy order is not executed in the SPIKES Special Settlement Auction 
and the cancellation or modification is submitted after the SPIKES 
Special Settlement Auction is concluded (provided that any such SPIKES 
strategy order may be modified or cancelled after the applicable SPIKES 
strategy order cut-off time and prior to the applicable non-SPIKES 
strategy order cut-off time in order to correct a legitimate error, in 
which case the Member submitting the change or cancellation will 
prepare and maintain a memorandum setting forth the circumstances that 
resulted in the change or cancellation and will file a copy of the 
memorandum with the Exchange no later than the next business day in a 
form and manner prescribed by the Exchange). In general, the Exchange 
will consider orders to be SPIKES strategy orders for purposes of Rule 
1809 Interpretation and Policy .06, if the orders possess the following 
three characteristics: (A) Are for options with the expiration that 
will be used to calculate the exercise or final settlement value of the 
applicable volatility index option contract; (B) are for options 
spanning the full range of strike prices for the appropriate expiration 
for options that will be used to calculate the exercise or final 
settlement value of the applicable volatility index option contract, 
but not necessarily every available strike price; and (C) are for put 
options with strike prices less than the ``at-the-money'' strike price 
and for call options with strike prices greater than the ``at-the-
money'' strike price. They may also be for put and call options with 
``at-the-money'' strike prices.
---------------------------------------------------------------------------

    \44\ See proposed Exchange Rule 1809, Interpretations and 
Policies .06.
    \45\ The Exchange notes that the current Live Order Window opens 
at 7:30 a.m.
    \46\ The Exchange notes that the current Live Quote Window 
setting opens at 9:25 a.m., however the Exchange plans to open the 
Live Quote Window for the SPIKES Special Settlement Auction at 8:30 
a.m.
---------------------------------------------------------------------------

    Whether certain orders are SPIKES strategy orders for purposes of 
Interpretation and Policy .06 depends upon specific facts and 
circumstances. The Exchange may also deem order types other than those 
provided above as SPIKES strategy orders if the Exchange determines 
that to be the case based upon the applicable facts and circumstances.
    These requirements are substantially similar to Cboe's requirements 
for ``strategy orders'' participating in the VIX settlement 
auction.\47\
---------------------------------------------------------------------------

    \47\ See Cboe Rule 6.2, Hybrid Opening (and Sometimes Closing) 
System (``HOSS''), Interpretations and Policies .01, Modified 
Opening Procedure for Series Used to Calculate the Exercise/Final 
Settlement Values of Volatility Indexes.
---------------------------------------------------------------------------

    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.
    The SPIKES strategy order cut-off time exists because trades to 
liquidate hedges can contribute to an order imbalance during the SPIKES 
Special Settlement Auction in SPY option series on expiration/final 
settlement dates. For example, traders liquidating hedges could 
predominantly be on one side of the market and those market 
participants' orders may create buy or sell order imbalances during the 
SPIKES Special Settlement Auction in SPY option series on expiration/
final settlement dates. As a result of having a SPIKES strategy order 
cut-off time in place, the Exchange has created a defined window to 
encourage participation in the SPIKES Special Settlement Auction among 
market participants who may wish to place off-setting orders against 
imbalances to which SPIKES strategy orders may have contributed. 
Additionally, by precluding the modification or cancellation of SPIKES 
strategy orders from occurring after the cut-off time, the Exchange is 
ensuring that the order book reflects bona-fide interest for execution, 
and is a feature designed to prevent manipulation of the final 
settlement price.
    Following is a description of the proposed operation of the SSIP 
portion of the SPIKES Special Settlement Auction, as set forth in 
Exchange Rule 1809, proposed Interpretations and Policies .06. To begin 
the SSIP, the System will broadcast a system imbalance message to all 
subscribers of the Exchange's relevant data feed and begin an SSIP 
Imbalance Timer, the duration of which is to be determined by the 
Exchange, not to exceed ten seconds, and communicated via Regulatory 
Circular. During the SSIP Imbalance Timer, the System accepts all quote 
and order types supported during the standard Opening Process. Next, 
the System will evaluate the must fill imbalance and adjust the EQR by 
a defined amount by appending to the EQR (adding to offers or 
subtracting from bids) the EQR value (as previously determined by the 
Exchange and communicated via Regulatory Circular). During the SSIP, 
the allowable EQR will be increased .5 times the EQR value upon each 
iteration of the SSIP. The SSIP will be repeated until a price is 
reached at which there is no remaining must fill imbalance.
    An example of a SPIKES Special Settlement Auction (which utilizes 
the Exchange's standard, existing Opening Process, as modified by the 
SSIP), for a constituent option is provided to illustrate the process.
Example
SPY Mar 280 Call--constituent option

    The Exchange market for the constituent option is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                Bid size       Bid         Offer      Offer size
----------------------------------------------------------------------------------------------------------------
PLMM........................................................          100         1.01         1.10          100
MM1.........................................................           50         1.02         1.10           50
----------------------------------------------------------------------------------------------------------------

    The Exchange receives an SAO Order to purchase 500 SPY March 280 
contracts with a ``market'' price. Accordingly, there are 150 contracts 
offered at $1.10 and a market order \48\ to buy 500 contracts. This 
results in the following:
---------------------------------------------------------------------------

    \48\ A market order is an order to buy or sell a stated number 
of option contracts at the best price available at the time of 
execution. See Exchange Rule 516(a).

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Imbalance Quantity.........................................          350
Must Fill Imbalance Quantity...............................          350
Matched Quantity...........................................          150
------------------------------------------------------------------------

[[Page 32940]]

    The Exchange's standard Opening Process is used, and because an 
imbalance exists, the Exchange's Standard Opening Imbalance Process (as 
defined in Rule 503(f)(2)(vii)) commences. The EQR is expanded by the 
EQR value of $0.10,\49\ becoming $1.02 x $1.20.
---------------------------------------------------------------------------

    \49\ The EQR value for options bid $0.00 to $1.00 is $0.05; 
$1.01 to $2.00 is $0.10; $3.01 to $5.00 is $0.20; $5.01 to $10.00 is 
$0.30; $10.01 to $20.00 is $0.50; $20.01 to $40.00 is $0.70; and 
$40.01 and above is $0.90. See also supra note 14.
---------------------------------------------------------------------------

    After three iterations of the Exchange's Standard Opening Imbalance 
Process,\50\ if the must fill imbalance quantity has not been 
satisfied, the new SSIP will be employed. (For purposes of this 
example, assume that all such three iterations have completed and the 
must fill imbalance quantity still has not been satisfied.)
---------------------------------------------------------------------------

    \50\ The System may repeat the Standard Opening Imbalance 
Process up to three times (as established by the Exchange). See 
Exchange Rule 503(f)(2)(vii)(B)(4).
---------------------------------------------------------------------------

    The SSIP will begin by using an EQR expanded by 1.0 times the EQR 
value ($0.10). Therefore, the EQR for the first iteration of SSIP is 
$1.02 x $1.20.
    Since no responses have yet been received, a system imbalance 
message is broadcast to all subscribers of the Exchange's data feeds 
and the SSIP auction period is started: The following responses are 
received:

 @20 Milliseconds BD1 response, AOC Order to sell 200 @$1.20 
arrives

    At the end of the SSIP auction period, the System evaluates the 
orders and responses to determine if the must fill imbalance quantity 
can be satisfied at, or within, the EQR.
    The Exchange market for the constituent option is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                Bid size       Bid         Offer      Offer size
----------------------------------------------------------------------------------------------------------------
PLMM........................................................          100         1.01         1.10          100
MM1.........................................................           50         1.02         1.10           50
BD1.........................................................  ...........  ...........         1.20          200
----------------------------------------------------------------------------------------------------------------

    The offer of 150 contracts at $1.10 remains and there are now an 
additional 200 contracts offered at $1.20. This results in the 
following:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Imbalance Quantity.........................................          150
Must Fill Imbalance Quantity...............................          150
Matched Quantity...........................................          350
------------------------------------------------------------------------

    A must fill imbalance quantity of 150 contracts priced through the 
EQR remains, as there are a total of 350 contracts offered and a buy 
order for 500 at the market.
    Because an imbalance still exists, a second iteration of the SSIP 
will begin by expanding the side of the EQR opposite the must fill 
imbalance quantity quote range, from the original EQR value to the 
quote range plus 1.5 times the original EQR value ($0.10), becoming 
$1.25 ($1.10 + $0.15).
    A new system imbalance message is broadcast to all subscribers of 
the Exchange's data feeds and a second SSIP auction period is started:
    The following responses are received:

 @500 milliseconds MM2 response, AOC eQuote to sell 1000 @ 
$1.23 arrives

    At the end of the SSIP auction period, the System evaluates the 
orders and responses to see if the must fill imbalance quantity can be 
satisfied at, or within, the EQR.
    The Exchange market for the constituent option is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                Bid size       Bid         Offer      Offer size
----------------------------------------------------------------------------------------------------------------
PLMM........................................................          100         1.01         1.10          100
MM1.........................................................           50         1.02         1.10           50
BD1.........................................................  ...........  ...........         1.20          200
MM2.........................................................  ...........  ...........         1.23         1000
----------------------------------------------------------------------------------------------------------------

    The offer of 150 contracts at $1.10 remains, as well as the 200 
contracts offered at $1.20. In addition, there is now an offer to sell 
1,000 contracts at $1.23.
    In this case, the entire must fill imbalance quantity can be 
satisfied at $1.23. The SAO Order to purchase 500 contracts at the 
market price is filled in the following fashion:

 The SAO Order buys 100 from the PLMM @$1.23
 The SAO Order buys 50 from MM1 @$1.23
 The SAO Order buys 200 from BD1 @$1.23
 The SAO Order buys 150 from MM2 @$1.23

    Once there is no remaining must fill imbalance, SAOs, AOC Orders, 
AOC eQuotes, OPG Orders, and OPG eQuotes submitted into the SPIKES 
Special Settlement Auction are cancelled. Any unfilled day limit orders 
and GTC orders that are priced at the Opening Price are placed on the 
Book and managed by the System.
    As previously discussed, the System will assign an SRP to each 
constituent option to facilitate the calculation of the final 
settlement price of the Index. If the System opens the constituent 
option with a trade, the System assigns the constituent option an SRP 
equal to the trade price in that option. If there is no locking or 
crossing interest and the System opens the constituent option without a 
trade, and the bid-ask spread is at or within a range as defined by the 
Exchange in an SRP opening width table and communicated via Regulatory 
Circular, the System assigns the constituent option an SRP equal to the 
midpoint of the bid and ask prices. If the bid-ask spread is not within 
a range as defined in the SRP opening width table, the System will 
conduct an additional process to determine the SRP of the constituent 
option, as follows.
    First, the System will start a settlement reference price timer 
(``SRPT'') (the duration of which will be defined by the Exchange not 
to exceed sixty seconds and communicated via Regulatory Circular). If, 
during the SRPT, there is a trade on the Exchange, the System will set 
the SRP equal to the trade price. If, during the SRPT, the bid-ask 
spread changes so that it is within a range defined in the settlement 
price opening width table, the System will set the SRP equal to the 
midpoint of the bid and ask price.

[[Page 32941]]

    If the SRPT expires, the System will set the SRP equal to the 
Reference Price (the current price of that option utilizing the cash 
index calculation formula, described above) of the constituent option 
if it is equal to or inside the MBBO.\51\ If the Reference Price is 
non-zero and less than the Exchange's bid, then the System will set the 
SRP equal to the Exchange's bid. If the Reference Price is non-zero and 
greater than the Exchange's ask, then the System will set the SRP equal 
to the Exchange's ask. If the Reference Price is zero and if one or 
both adjacent constituent options have a non-zero SRP, the constituent 
option will be excluded from the calculation. If the Reference Price is 
zero and there are multiple adjacent constituent options with a current 
Reference Price of zero, the System will use the midpoint of the NBBO 
for the SRP if the NBBO bid-ask spread is at or within a range defined 
in the settlement price opening width table. If the NBBO bid-ask spread 
is not within a range defined in the settlement price opening width 
table, the System will wait for either a trade, or a bid-ask spread 
that is within a range defined in the settlement price opening width 
table. Once all constituent options have been assigned an SRP, the 
System will perform the final settlement price calculation of the 
Index.
---------------------------------------------------------------------------

    \51\ The term ``MBBO'' means the best bid or offer on the 
Exchange. See Exchange Rule 100.
---------------------------------------------------------------------------

    The Exchange believes that this fully-electronic and fully-
transparent SPIKES Special Settlement Auction process, which is 
accessible to all Members of the Exchange for participation, in highly 
liquid SPY options (which are simultaneously opening and available for 
trading on 14 other exchanges, thus providing real-time cross-reference 
prices for the SPY options included in the settlement) to settle 
expiring SPIKES options, offers significant advantages over other types 
of volatility auction processes, and will result in a robust opening 
process that presents arbitrage opportunities across multiple venues to 
drive prices into line and reach equilibrium, and thus would not be 
readily susceptible to fraudulent and manipulative acts.

Contract Specifications

    The contract specifications for options on the Index are set forth 
in Exhibit 3-2. The Index is a broad-based index, as defined in MIAX 
Options Rule 1801(k), for the purpose of determining which of the 
Exchange's rules apply to options on the Index.\52\ Options on the 
Index are European-style and cash-settled. Standard trading hours for 
index options (9:30 a.m. to 4:15 p.m., New York time) will apply to the 
Index.\53\ The Exchange proposes to apply margin requirements for the 
purchase and sale of options on the Index that are identical to those 
applied for other broad-based index options traded on other options 
exchanges.
---------------------------------------------------------------------------

    \52\ The proposed rule change relates solely to the Exchange's 
request to list and trade options on the Index and does not 
represent a request for the Commission to determine whether the 
Index is a ``narrow-based index'' as that term is defined under the 
Act. See 15 U.S.C. 78c(a)(55)(B).
    \53\ See Exchange Rule 1808.
---------------------------------------------------------------------------

    The trading of options on the Index will be subject to the trading 
halt procedures applicable to index options traded on the Exchange.\54\ 
Options on the Index will be quoted and traded in U.S. dollars.\55\ 
Accordingly, all Exchange and Options Clearing Corporation (``OCC'') 
members shall be able to accommodate trading, clearance and settlement 
of the Index without alteration. Furthermore, the Exchange believes 
that OCC will be able to accommodate trading, clearance and settlement 
of options on the Index without having to obtain any additional 
approval.
---------------------------------------------------------------------------

    \54\ See Exchange Rule 1808(c).
    \55\ See Exchange Rule 1809(a)(1).
---------------------------------------------------------------------------

    The Exchange proposes that the minimum trading increments for 
options on the Index shall be $0.05 for series trading below $3, and 
$0.10 for series trading at or above $3. This is the same pricing 
convention utilized by Cboe for VIX options. Accordingly, the Exchange 
is proposing to amend Exchange Rule 404, Series of Option Contracts 
Open for Trading, by adopting new Interpretations and Policies .11 to 
specify the minimum trading increments for options on the Index.
    The Exchange proposes that there shall be no position or exercise 
limits for options on the Index. As noted above, the Index will settle 
using published prices and quotes from its corresponding SPY options. 
Because the size of SPY options market (as well as the underlying SPY 
market) is so large, the Exchange believes that there is minimal risk 
of manipulation by virtue of position size in SPIKES options. The 
Exchange notes that options on Cboe's VIX are also not subject to any 
position or exercise limits.\56\ Accordingly, the Exchange is proposing 
to amend Exchange Rule 1804(a) to specify that there will be no 
position limits and no exercise limits for options on the SPIKES Index.
---------------------------------------------------------------------------

    \56\ See Securities Exchange Act Release No.54019 (June 20, 
2006), 71 FR 36569 (June 27, 2006) (SR-CBOE-2006-55). Additionally, 
the Exchange notes there are currently a number of actively-traded 
broad-based index options, i.e., DJX, NDX, SPX, that are also not 
subject to any position or exercise limits.
---------------------------------------------------------------------------

    The Exchange initially proposes to list options on the Index in up 
to twelve (12) standard monthly expirations. This is the same number of 
monthly expirations that are permitted for VIX options, pursuant to 
Cboe Rule 24.9(a).\57\ Accordingly, the Exchange is proposing to amend 
Exchange Rule 1809(a)(3) to permit the listing of up to twelve (12) 
standard monthly expirations for SPIKES options. The Exchange is also 
proposing to make changes to Exchange Rule 1809(a)(3), in order to 
conform the structure of such rule to Cboe's Rule 24.9(a), to allow for 
the listing of short-term options and quarterly options.
---------------------------------------------------------------------------

    \57\ Cboe Rule 24.9 also permits for the listing of up to six 
weekly VIX expirations.
---------------------------------------------------------------------------

    The Exchange proposes to set the minimum strike price interval for 
options on the Index at $0.50 where the strike price is less than $15, 
$1 or greater where the strike price is between $15 and $200, and $5 or 
greater where the strike price is greater than $200. The Exchange 
believes that $0.50 and $1 strike price intervals will provide 
investors with greater flexibility by allowing them to establish 
positions that are better tailored to meet their investment objectives. 
Further, as proposed, when new series of options on the Index with a 
new expiration date are opened for trading, or when additional series 
of options on the Index in an existing expiration date are opened for 
trading as the current value of the Index moves substantially from the 
exercise prices of series already opened, the exercise prices of such 
new or additional series shall be reasonably related to the current 
value of the Index at the time such series are first opened for 
trading.\58\ The Exchange, however, proposes to eliminate this range 
limitation that will limit the number of $1 strikes that may be listed 
in options on the Index. The Exchange's proposal to set minimum strike 
price intervals without a range limitation is identical to strike price 
intervals adopted by Cboe for the VIX.\59\ Accordingly, the Exchange is 
proposing to amend Exchange Rule 1809(c), Procedures for Adding and 
Deleting Strike Prices, to adopt new sub-section (5) to specify the

[[Page 32942]]

minimum strike price intervals for options on the Index.
---------------------------------------------------------------------------

    \58\ See Exchange Rule 1809(c)(3). The term ``reasonably related 
to the current index value of the underlying index'' means that the 
exercise price is within thirty percent (30%) of the current index 
value, as defined in MIAX Options 1809(c)(4).
    \59\ See Securities Exchange Act Release No. 63155 (October 21, 
2010), 75 FR 66402 (October 28, 2010) (SR-CBOE-2010-096).
---------------------------------------------------------------------------

    The trading of options on the Index shall be subject to the same 
rules that presently govern the trading of Exchange index options, 
including sales practice rules, margin requirements, and trading rules. 
In addition, long-term option series having up to sixty months to 
expiration may be traded.\60\ The trading of long-term options on the 
Index shall also be subject to the same rules that govern the trading 
of all the Exchange's index options, including sales practice rules, 
margin requirements, and trading rules. Further, pursuant to 
Interpretations and Policies .01 of MIAX Options Rule 1809, the 
Exchange may also list Short Term Option Series and pursuant to 
Interpretations and Policies .02 of MIAX Options Rule 1809, the 
Exchange may also list Quarterly Options Series, respectively, on the 
Index.
---------------------------------------------------------------------------

    \60\ See Exchange Rule 1809(b)(1).
---------------------------------------------------------------------------

    Chapter XIII of the Exchange's rules is designed to protect public 
customer trading and shall apply to trading in options on the Index. 
Specifically, paragraphs (a) and (b) of MIAX Options Rule 1307 prohibit 
Members from accepting a customer order to purchase or write an option, 
including options on the Index, unless such customer's account has been 
approved in writing by a designated Options Principal of the Member. 
Additionally, MIAX Options Rule 1309 regarding suitability is designed 
to ensure that options, including options on the Index, are only sold 
to customers capable of evaluating and bearing the risks associated 
with trading in this instrument. Further, MIAX Options Rule 1310 
permits Members to exercise discretionary power with respect to trading 
options, including options on the Index, in a customer's account only 
if the Member has received prior written authorization from the 
customer and the account had been accepted in writing by a designated 
Options Principal. MIAX Options Rule 1310 also requires designated 
Options Principals or Representatives of a Member to approve and 
initial each discretionary order, including discretionary orders for 
options on the Index, on the day the discretionary order is entered. 
Finally, MIAX Options Rule 1308, Supervision of Accounts, MIAX Options 
Rule 1311, Confirmation to Customers, and MIAX Options Rule 1315, 
Delivery of Current Options Disclosure Documents and Prospectus, will 
also apply to trading in options on the Index.
Surveillance and Capacity
    The Exchange has an adequate surveillance program in place for 
options traded on the Index and intends to apply those same program 
procedures that it applies to the Exchange's other options products. In 
addition, several new surveillances related to the Index will be added 
to the MIAX surveillance program. The Exchange has a Regulatory 
Services Agreement (``RSA'') in place with the Financial Regulatory 
Authority (``FINRA'') to conduct cross-market surveillances on its 
behalf and has expanded the RSA to include a new options pattern: Index 
Expiration for Cash Settled, A.M.-Settled, Index Options. The purpose 
of this pattern is to determine whether any market participants 
influenced the settlement price of an a.m. cash-settled index product 
to benefit their expiring index option position.
    In addition to the Index Expiration for Cash Settled report 
mentioned above, both MIAX Option Regulation and FINRA Options 
Regulation will manually review options activity during each monthly 
settlement process. After manually reviewing settlement process 
activity over the course of months, MIAX Options and FINRA will 
determine whether additional reports or enhancements to the cash 
settled report(s) are required.
    Further, the Exchange's regulatory department conducts routine 
surveillance in dozens of discrete areas. Index products and their 
respective symbols are integrated into the Exchange's existing 
surveillance system architecture and are thus subject to the relevant 
surveillance processes. This is true for both surveillance system 
processing and manual processes that support the Exchange's 
surveillance program. Additionally, the Exchange is also a member of 
the Intermarket Surveillance Group (ISG) under the Intermarket 
Surveillance Group Agreement, dated June 20, 1994. The members of the 
ISG include all of the U.S. registered stock and options markets.\61\ 
The members of ISG work together to coordinate surveillance and 
investigative information sharing in the stock and options markets.
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    \61\ For the current list of members of the ISG, see https://www.isgportal.org/isgPortal/public/members.htm.
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    The Exchange represents that it has the necessary System capacity 
to support additional quotations and messages that will result from the 
listing and trading of options on the Index.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of the Act,\62\ in general and with Section 6(b)(5) 
of the Act,\63\ 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 mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \62\ 15 U.S.C. 78a et seq.
    \63\ 15 U.S.C. 78f(b)(5).
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    The proposed change will permit options trading in the Index 
pursuant to rules designed to prevent fraudulent and manipulative acts 
and practices and promote just and equitable principles of trade. In 
particular, the Exchange believes the proposed rule change will further 
the Exchange's goal of introducing new and innovative products to the 
marketplace. The Exchange believes that listing options on the Index 
will provide an opportunity for investors to hedge, or speculate on, 
the market risk associated with changes in volatility.
    The Exchange believes that the enhanced features to the Index may 
serve to prevent fraudulent and manipulative acts and practices. 
Specifically, the Exchange believes that its price dragging technique 
and truncation rule, in combination with the immense liquidity of the 
underlying options, make the Index less susceptible to market 
manipulation. The price dragging technique, which is used to determine 
the ongoing Reference Price for each individual option used in the 
calculation of the Index, helps prevent market manipulation by 
utilizing the most recent trade price as the Reference Price. The 
Exchange believes that this feature may be a more accurate methodology 
than only using the mid-point of the bid and ask, which is the 
methodology utilized by a competing volatility index. The Exchange 
believes the price dragging technique may create a more accurate and 
stable index value which better represents volatility in the market by 
emphasizing the actual trade price versus simply the mid-point spread.
    Furthermore, the Exchange believes that the enhanced feature may 
provide

[[Page 32943]]

greater consistency in the marketplace because the price dragging 
technique results in a Reference Price that is supported by the fair 
market value at the time versus using the mid-point, which is not 
necessarily an accurate representation of the fair market value at the 
time.
    Furthermore, the truncation method, another key enhancement in the 
Index, determines how far away from the money to exclude strikes from 
the volatility calculation. This helps to ensure that values are not 
being included that would skew the resulting Index value by taking into 
account OTM options which are too far away to be accurately priced into 
the Index value calculation. By excluding these options from the 
calculation, the Exchange believes it is able to provide a more 
reliable Index value. The Exchange believes that its exclusion 
methodology is a material enhancement over existing methodologies, and 
should result in a calculation outcome that better reflects the 
expected measure of volatility.
    As discussed previously, the price dragging method reduces the 
variability of the option inputs (which also referred to herein as the 
Reference Prices). Since the option inputs have reduced variability, 
and those values are used to determine which strikes make it into the 
Index's calculation, the combination of price dragging and exclusion 
rules work together to, in the Exchange's opinion, create a more 
reliable Index value. The Exchange believes that a more reliable Index 
value will benefit investors and market participants trading options on 
the Index, will promote just and equitable principles of trade, and 
should serve to prevent fraudulent and manipulative acts and practices.
    The Exchange believes that, in addition to the other unique and 
proprietary attributes associated with the Index's calculation and 
settlement methodology, as well as the Exchange's fully-electronic, 
transparent, highly-deterministic trading system, using SPY options as 
the components for a volatility index, in the manner proposed by the 
Exchange, will offer a number of significant, distinct advantages over 
other types of volatility indexes. The Exchange believes that the 
advantages of using SPY options have the potential to result in an 
extremely liquid volatility product with exceptionally tight spreads, 
and consequently would not be readily susceptible to fraudulent and 
manipulative acts. First, SPY options are extremely liquid (they 
regularly trade 4-5 million contracts a day, and have 20-30 million 
contracts in open interest). Second, SPY options have consistently 
tighter bid-ask spreads than SPX options, which are the components for 
Cboe's VIX index. Since SPY options are traded on all 15 option 
exchanges, it allows market participants to take advantage of arbitrage 
opportunities across multiple venues. This is in contrast to SPX 
options which only trade on Cboe, and thus those arbitrage 
opportunities across venues are not possible. Also, at the time of 
final settlement, there are 14 other options exchanges on which SPY 
options are traded, and may serve as real-time cross-reference prices 
for SPY options during the Exchange's SPIKES Special Settlement 
Auction. This is in contrast to SPX options during Cboe's VIX 
settlement auction, where there is no such reference market for SPX 
options open during the time of the VIX settlement, as SPX options are 
only traded on one exchange--Cboe. In terms of spreads, SPY spreads are 
significantly tighter and exhibit much higher consistency with a much 
narrower range of typical values and far fewer numbers of outliers than 
SPX. SPY spreads are consistently tighter than SPX spreads, both across 
strike prices and through time, by a factor of 2 to 4 times (this is 
after normalizing SPY spreads to SPX spreads, by multiplying SPY 
spreads by 10). Accordingly, the Exchange believes that these 
advantages of using SPY options in the manner proposed by the Exchange, 
when combined with the other features and attributes of the SPIKES 
Index, have the potential to result in an extremely liquid volatility 
product with exceptionally tight spreads, and consequently would not be 
readily susceptible to fraudulent and manipulative acts.
    The Exchange is currently disseminating the cash values of the 
Index to OPRA under the ticker symbol `SPIKE' in at least 15 second 
intervals. The Exchange believes that disseminating updates in at least 
15 second intervals will benefit investors and other market 
participants, as they will be better able to track the current value of 
the Index at any given period of time, will promote just and equitable 
principles of trade, and should prevent fraudulent and manipulative 
acts and practices.
    The Exchange believes that using its fully-electronic and fully-
transparent Opening Process functionality, which is accessible to all 
Members of the Exchange for participation, in highly liquid SPY options 
(which are simultaneously opening and available for trading on 14 other 
exchanges, thus providing real-time cross-reference prices for the SPY 
options included in the settlement) to conduct the SPIKES Special 
Settlement Auction to settle expiring SPIKES options, will offer 
significant advantages over other types of volatility auction 
processes, resulting in a robust opening process that presents 
arbitrage opportunities across multiple venues to drive prices into 
line and reach equilibrium, and thus benefiting investors and other 
market participants, promoting just and equitable principles of trade, 
and should prevent fraudulent and manipulative acts and practices.
    The Exchange believes that having a SPIKES strategy order 
modification and cancellation cut-off time during the SPIKES Special 
Settlement Auction in SPY option series on expiration/final settlement 
date will help to ensure that the order book reflects bona-fide 
interest for execution, and is a feature designed to prevent 
manipulation of the final settlement price.
    Volatility-focused products have become more prominent over the 
past several years, and in a number of different formats and types, 
including ETFs, exchange-traded notes, exchange-traded options, and 
exchange-traded futures. Such products offer investors the opportunity 
to manage their volatility risks associated with an underlying asset 
class. Currently, most of the products focus on underlying equity 
indexes or equity-based portfolios.
    The Exchange proposes to introduce a cash-settled options contract 
on a new volatility index, which focuses on equity exposure using 
options on SPY. SPY is the largest and most liquid ETF in the United 
Sates, and the most actively traded equity option product. The Exchange 
believes that because the Index is derived from published SPY options 
prices, and given the immense liquidity found in the individual 
portfolio components of SPY, the concern that the Index will be subject 
to market manipulation is greatly reduced. Therefore, the Exchange 
believes that the proposed rule change to list options on the Index is 
appropriate.
    The Exchange further notes that Exchange Rules that apply to the 
trading of other index options currently traded on the Exchange would 
also apply to the trading of options on the Index. Additionally, the 
trading of options on the Index would be subject to, among others, 
Exchange Rules governing margin requirements and trading halt 
procedures.
    Finally, the Exchange represents that it has an adequate 
surveillance program in place to detect manipulative trading in options 
on the Index. The Exchange also represents that it has the necessary 
systems capacity to support the new options series. Additionally, as 
stated in

[[Page 32944]]

the filing, the Exchange has rules in place designed to protect public 
customer trading.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. . The Exchange notes that the 
proposed rule change will facilitate the listing and trading of a novel 
index option product that will enhance competition among market 
participants, to the benefit of investors and the marketplace.

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. Among other things, the Exchange 
believes that the use of SPY options in the manner proposed by the 
Exchange, when combined with the other features and attributes of the 
SPIKES Index, has the potential to result in an extremely liquid 
volatility product with exceptionally tight spreads, and consequently 
would not be readily susceptible to fraudulent and manipulative acts. 
In particular, the Commission seeks comment on the following:
     Do commenters agree with this overall assertion by the 
Exchange?
     Do commenters believe any proposed features (e.g., 
inclusion of relatively illiquid OTM (Out-of-the-Money) put SPY options 
in SPIKES settlement, SPIKES settlement via a short pre-open auction of 
SPY options, cash-settlement) of the SPIKES settlement could make 
options on SPIKES susceptible to manipulation? Why or why not?
     Do commenters believe the definition of ``SPIKES strategy 
orders'' is sufficiently clear? Why or why not?
     Do commenters believe the proposed SPIKES strategy order 
cut-off time is adequate to provide sufficient time to work off order 
imbalances during the SPIKES Special Settlement Auction in SPY option 
series on final settlement dates? Why or why not?
     Do commenters believe precluding the submission, 
modification, or cancellation of SPIKES strategy orders after the 
proposed cut-off time will be effective in reducing the likelihood of 
manipulation in the calculation of the final settlement value for the 
SPIKES Index? Why or why not?
     Do commenters believe the proposed exclusion rule/
truncation method, which is designed to remove SPY option price inputs 
deemed less reliable in order to avoid a potential negative impact on 
the SPIKES calculation outcome, will be effective in reducing the 
likelihood of manipulation in the calculation of the final settlement 
value for the SPIKES Index? Why or why not?
     The Exchange discusses the price dragging technique used 
for intraday calculation of the SPIKES Index value to determine the 
Reference Price for each of the individual SPY options used in the 
calculation of the Index value. Do commenters believe that the price 
dragging technique would improve Index stability by smoothing out 
options price inputs into the Index calculation, especially as SPY 
options quotes are rapidly changing? Do commenters agree that the price 
dragging technique will result in a smoother Index price? What are 
commenters' views on any potential effect of the price dragging 
technique, in which the primary factor considered when updating the 
Reference Price for each of the individual SPY options is whether or 
not a trade has occurred, on the price efficiency of the SPIKES Index, 
including whether the price dragging technique may result in stale 
prices?
     Do commenters believe that the lack of proposed position 
limits on cash-settled SPIKES Index options could make the options more 
susceptible to manipulation? \64\ Why or why not?
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    \64\ See, e.g., Hans R. Dutt & Lawrence E. Harris, Position 
Limits for Cash-Settled Derivative Contracts, 25 J. Futures Mkts. 
945 (2005) (arguing that limits on the positions that traders can 
carry into final settlement can be used to mitigate the 
susceptibility to manipulation of cash-settled derivative 
contracts).
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    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-2018-14 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-2018-14. 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 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. 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 Number SR-MIAX-2018-14, and should be submitted on 
or before August 6, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\65\
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    \65\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15178 Filed 7-13-18; 8:45 am]
 BILLING CODE 8011-01-P