[Federal Register Volume 79, Number 82 (Tuesday, April 29, 2014)]
[Notices]
[Pages 24032-24040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-09680]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72009; File No. SR-MIAX-2014-09]


Self-Regulatory Organizations; Miami International Securities 
Exchange, LLC; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Adopt the MIAX PRIME Price Improvement Mechanism 
and the MIAX PRIME Solicitation Mechanism

April 23, 2014.

I. Introduction

    On February 18, 2014, Miami International Securities Exchange LLC

[[Page 24033]]

(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt MIAX Rule 515A to 
implement the MIAX Price Improvement Mechanism (``PRIME'') and the 
PRIME Solicitation Mechanism. The proposed rule change was published 
for comment in the Federal Register on March 10, 2014.\3\ On April 17, 
2014, MIAX filed Amendment No. 1 to the proposal.\4\ The Commission 
received no comments regarding the proposal.\5\ The Commission is 
publishing this notice to solicit comment on Amendment No. 1 from 
interested persons and is approving the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71640 (March 10, 
2014), 79 FR 13334 (``Notice'').
    \4\ See Letter from Brian O'Neill, Vice President and Senior 
Counsel, MIAX, to Elizabeth M. Murphy, Secretary, Commission, dated 
April 17, 2014. In Amendment No. 1, MIAX amended its filing to 
clarify that its analysis of its proposed mechanisms' compliance 
with Section 11(a) of the Act, which referred to both proposed 
mechanisms collectively as ``PRIME,'' was applicable to both the 
PRIME price improvement mechanism as well as the PRIME Solicitation 
Mechanism.
    \5\ To promote the public availability and transparency of its 
post-notice amendment, MIAX submitted a copy of Amendment No. 1 
through the Commission's electronic public comment letter mechanism. 
Accordingly, since the Commission received Amendment No. 1 from 
MIAX, it has been publicly available on the Commission's Web site at 
http://www.sec.gov/rules/sro/miax.shtml.
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II. Description of the Proposal

    The Exchange proposes to adopt MIAX Rule 515A to establish the 
PRIME and PRIME Solicitation Mechanism.\6\ The PRIME is a process by 
which a Member (``Initiating Member'') may electronically submit for 
execution an order it represents as agent (``Agency Order'') against 
principal interest and/or solicited interest. The PRIME Solicitation 
Mechanism is a separate process by which a Member that represents 
agency orders of not less than 500 standard option contracts (or 5,000 
mini-option contracts) may electronically execute such orders against 
solicited orders.
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    \6\ As MIAX explained in its Notice, because of the technology 
changes associated with this rule proposal, if approved by the 
Commission, MIAX noted that it would announce the implementation 
date of the proposal in a Regulatory Circular to be published no 
later than 90 days after the Commission's publication of an approval 
order in the Federal Register. In addition, MIAX represented that 
the implementation date will be no later than 90 days following 
publication of the Regulatory Circular announcing publication of the 
approval order in the Federal Register. See Notice, supra note 3, 79 
FR at 13347.
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A. PRIME Price Improvement Auction

    The Exchange proposes to implement an electronic auction system 
called ``PRIME'' that would expose certain orders electronically in an 
auction to provide such orders with the opportunity to receive an 
execution at an improved price.\7\ The Commission notes that MIAX's 
proposed price improvement mechanism is similar to the Automated 
Improvement Mechanism (``AIM'') offered by the Chicago Board Options 
Exchange, Incorporated (``CBOE'').\8\
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    \7\ Proposed MIAX Rule 515A, Interpretations and Policy .02 
provides that the PRIME and PRIME Solicitation Mechanism may only be 
used to execute bona fide crossing transactions. Using the PRIME and 
PRIME Solicitation Mechanism for any other means, including but not 
limited to, market or price manipulation, shall be considered 
conduct inconsistent with just and equitable principles of trade in 
accordance with MIAX Rule 301.
    \8\ See CBOE Rule 6.74A.
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Eligibility and Auction Process
    To be eligible, the Agency Order must be in a class designated as 
eligible for PRIME as determined by the Exchange and within the 
designated auction order eligibility size parameters as such size 
parameters are determined by the Exchange.\9\ In addition, if the 
Agency Order is for 50 standard option contracts (or 500 mini-option 
contracts) or more, the Initiating Member must stop the entire Agency 
Order as principal or with a solicited order at the better of the 
National Best Bid or Offer (``NBBO'') or the Agency Order's limit price 
(if the order is a limit order).\10\ However, if the Agency Order is 
for less than 50 standard option contracts (or less than 500 mini-
option contracts), the Initiating Member must stop the entire Agency 
Order as principal or with a solicited order at the better of (i) the 
NBBO price improved by a $0.01 increment; or (ii) the Agency Order's 
limit price (if the order is a limit order).\11\
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    \9\ See proposed MIAX Rule 515A(a)(1)(i). Proposed MIAX Rule 
515A, Interpretation and Policy .05 provides that any determinations 
made by the Exchange pursuant to this MIAX Rule 515A, such as 
eligible classes and order size parameters, will be communicated in 
a Regulatory Circular.
    \10\ See proposed MIAX Rule 515A(a)(1)(ii).
    \11\ See proposed MIAX Rule 515A(a)(1)(iii). The Exchange states 
that since the Initiating Member is stopping the entire Agency Order 
at the NBBO price or better at the beginning of the PRIME auction, 
the execution at the conclusion of the PRIME auction would qualify 
as an exception to the general prohibition against trade-throughs, 
pursuant to MIAX Rule 1401(b)(9). See MIAX Rule 1401(b)(9) 
(providing an exception from trade-through liability in the 
circumstance when a transaction that constituted the trade-through 
was the execution of an order that was stopped at a price that did 
not trade through an Eligible Exchange at the time of the stop).
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    To initiate the PRIME auction, the Initiating Member must mark the 
Agency Order for PRIME processing, and specify either: (i) A single 
price at which it seeks to cross the Agency Order (with principal 
interest and/or a solicited order) (``single-price submission''), 
including whether the Initiating Member elects to have last priority in 
allocation, or (ii) that it is willing to automatically match (``auto-
match'') as principal the price and size of all PRIME responses up to 
an optional designated limit price. If the Initiating Member chooses to 
auto-match PRIME responses, the Agency Order will be stopped at the 
better of the NBBO (if 50 standard option contracts (or 500 mini-option 
contracts) or greater), $0.01 increment better than the NBBO (if less 
than 50 standard option contracts or 500 mini-option contracts), or the 
Agency Order's limit price.\12\ For both single price submissions and 
auto-match, in order to protect resting interest on MIAX's system 
(``Book''), whenever the disseminated best bid or offer on the Exchange 
(``MBBO'') \13\ on the same side of the market as the Agency Order 
represents a limit order on the Book, the stop price must be at least 
$0.01 increment better than the booked order's limit price.\14\
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    \12\ See proposed MIAX Rule 515A(a)(2)(i)(A).
    \13\ See MIAX Rule 100.
    \14\ See proposed MIAX Rule 515A(a)(2)(i)(A).
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    For both a single price submission and auto-match, the stop price 
specified by the Initiating Member on the Agency Order will be the 
``initiating price'' for the PRIME auction.\15\ The Initiating Member 
may not modify or cancel the submission after it has submitted an 
Agency Order to the PRIME auction for processing.\16\ Only one PRIME 
auction may be running at any given time in an option, and PRIME 
auctions in the same option may not queue or overlap in any manner.\17\
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    \15\ See id. See also Notice, supra note 3, 79 FR at 13336 (for 
examples illustrating the initiating price for various potential 
Agency Orders).
    \16\ See proposed MIAX Rule 515A(a)(2)(i)(A).
    \17\ See proposed MIAX Rule 515A(a)(2). In addition, if managed 
interest exists on the Exchange's Book pursuant to MIAX Rule 515(c) 
for the option on the same side of the market as the Agency Order, 
the Agency Order will be rejected by the System prior to initiating 
a PRIME or PRIME Solicitation Mechanism auction. See proposed MIAX 
Rule 515A, Interpretation and Policy .07. If managed interest exists 
on the MIAX Book pursuant to MIAX Rule 515(c) for the option on the 
opposite side of the market as the Agency Order and when the MBBO is 
equal to the NBBO, the Agency Order will be automatically executed 
against the managed interest, if the execution would be at a price 
equal to the initiating price of the Agency Order. If the Agency 
Order is not fully executed after the managed interest is fully 
exhausted and is no longer at a price equal to or better than the 
initiating price of the Agency Order, a PRIME auction will be 
initiated for the balance of the order. See proposed MIAX Rule 515A, 
Interpretations and Policies .06.

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[[Page 24034]]

    When the Exchange receives a properly designated Agency Order for 
PRIME auction processing, a request for responses (``RFR'') detailing 
the option, side, size, and initiating price will be sent to all 
subscribers of the Exchange's data feeds.\18\ The RFR response period 
for each PRIME auction will last for 500 milliseconds.\19\ During the 
RFR response period, Members may submit responses to the RFR 
(specifying prices and sizes).\20\ RFR responses must be submitted as 
either an auction or cancel (``AOC'') order or an AOC eQuote.\21\ 
Responses cannot cross the MBBO on the opposite side of the market from 
the response.\22\ RFR responses shall not be visible to other auction 
participants, and MIAX will not disseminate them to the Options Price 
Reporting Authority (``OPRA'').\23\ The minimum price increment for RFR 
responses and for the Initiating Member's submission is a $0.01 
increment, regardless of whether the class otherwise trades in a larger 
price increment.\24\ MIAX will cap an RFR response with a size greater 
than the size of the Agency Order at the size of the Agency Order for 
allocation purposes.\25\ RFR responses may be cancelled by the Member 
submitting them.\26\
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    \18\ See proposed MIAX Rule 515A(a)(2)(i)(B). The Exchange will 
include the RFR from the auction mechanisms in the Exchange's data 
feeds at no incremental cost to subscribers. Thus, any subscriber 
that chooses to receive options data, including any Member 
subscriber, has the ability to respond to those RFRs.
    \19\ See proposed MIAX Rule 515A(a)(2)(i)(C). In February 2014, 
to determine whether the proposed duration of the RFR would provide 
sufficient time to enter an RFR response, the Exchange asked 
Members, including Market Makers, whether their firms ``could 
respond to an Auction with a duration of 500 milliseconds.'' Of the 
8 Members that responded to the question, 100% indicated that their 
firm could respond in this time frame. See Notice, supra note 3, 79 
FR at 13337, n.19.
    \20\ See proposed MIAX Rule 515A(a)(2)(i)(D). The Exchange 
states that any MIAX Member, and any MIAX Member acting as agent for 
orders, may respond to an RFR in a PRIME auction.
    \21\ See id. An AOC order is a limit order used to provide 
liquidity during a specific Exchange process (such as the Opening 
Imbalance process described in MIAX Rule 503) with a time in force 
that corresponds with that event. AOC orders are not displayed to 
any market participant, are not included in the MBBO and therefore 
are not eligible for trading outside of the event, may not be 
routed, and may not trade at a price inferior to the away markets. 
See MIAX Rule 516(b)(4). An AOC eQuote is a quote submitted by a 
Market Maker to provide liquidity in a specific Exchange process 
(such as the Opening Imbalance Process described in MIAX Rule 503) 
with a time in force that corresponds with the duration of that 
event and will automatically expire at the end of that event. AOC 
eQuotes are not displayed to any market participant, are not 
included in the MBBO and therefore are not eligible for trading 
outside of the event. An AOC eQuote does not automatically cancel or 
replace the Market Maker's previous Standard quote or eQuote. See 
MIAX Rule 517(a)(2)(ii). The Exchange notes that any orders or 
quotes received by the System during the Auction that are not AOC 
orders or AOC eQuotes will be treated as unrelated trading interest. 
In addition, the Exchange notes that an AOC order or an AOC eQuote 
could trade at a price inferior to the away market if it is a part 
of an exempt transaction. See MIAX Rule 1402.
    \22\ See proposed MIAX Rule 515A(a)(2)(i)(D).
    \23\ See proposed MIAX Rule 515A(a)(2)(i)(E).
    \24\ See proposed MIAX Rule 515A(a)(2)(i)(F).
    \25\ See proposed MIAX Rule 515A(a)(2)(i)(G). The Exchange 
states that RFR response sizes are capped at the same size of the 
Agency Order in order to prevent manipulation and gaming of the pro 
rata allocation within each origin type and price point. The 
Commission understands that unrelated trading interest including 
unrelated orders, quotes, or orders on the Exchange's Book will not 
be subject to such a cap, since they are not considered responses to 
the Auction.
    \26\ See proposed MIAX Rule 515A(a)(2)(i)(H).
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1. Conclusion of the PRIME Auction
    The PRIME auction will end early, before the end of the RFR 
response period, under certain enumerated circumstances.\27\ 
Specifically, the PRIME will conclude at the sooner of the following: 
(i) The end of the RFR response period; (ii) upon receipt by MIAX of an 
unrelated order (in the same option as the Agency Order) on the same 
side or opposite side of the market from the RFR responses, that is 
marketable against either the MBBO (when such quote is the NBBO) or the 
RFR responses; (iii) upon receipt by MIAX of an unrelated limit order 
(in the same option as the Agency Order and on the opposite side of the 
market from the Agency Order) that improves any RFR response; (iv) any 
time an RFR response matches the MBBO on the opposite side of the 
market from the RFR responses; (v) any time there is a quote lock in 
the subject option on the Exchange pursuant to MIAX Rule 1402; or (vi) 
any time there is a trading halt in the option on the Exchange.\28\
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    \27\ The Exchange states that the PRIME is designed to maintain 
priority of all resting quotes and orders and any RFR responses 
received before the end of the PRIME auction. Thus the PRIME will 
end early, before the end of the RFR period, as a result of certain 
events that would otherwise disrupt the priority of the PRIME 
auction with the Exchange's Book. See Notice, supra note 3, 79 FR at 
13338.
    \28\ See proposed MIAX Rule 515A(a)(2)(ii).
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    MIAX will consider it to be conduct inconsistent with just and 
equitable principles of trade, in accordance with MIAX Rule 301, for 
any Member to enter orders, quotes, Agency Orders, or other responses 
for the purpose of disrupting or manipulating a PRIME auction. Such 
conduct includes, but is not limited to, engaging in a pattern or 
practice of submitting unrelated orders that cause a PRIME auction to 
conclude before the end of the RFR period and engaging in a pattern of 
conduct where the Member submitting the Agency Order into the PRIME 
breaks up the Agency Order into separate orders for two (2) or fewer 
contracts for the purpose of gaining a higher allocation percentage 
than the Member would have otherwise received in accordance with the 
allocation procedures contained in MIAX Rule 515A.\29\
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    \29\ See proposed MIAX Rule 515A, Interpretations and Policies 
.01.
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3. Priority and Allocation of Orders and Quotes
    In its Notice, MIAX represented that the priority of allocation at 
the conclusion of a PRIME auction, described below, will be similar to 
the standard allocation of orders and quotes on MIAX.\30\ MIAX Rule 514 
describes the priority of allocation of orders and quotes on the 
Exchange. According to the Exchange, under the pro-rata allocation 
method, resting quotes and orders on the Book are prioritized according 
to price. If there are two or more quotes or orders at the best price, 
then the contracts are allocated proportionally according to size (in a 
pro-rata fashion) within each origin type. If the executed quantity 
cannot be evenly allocated, the remaining contracts will be distributed 
one at a time based upon size-time priority.\31\ When the Priority 
Customer Overlay is in effect, the highest bid and lowest offer has 
priority, except that Priority Customer Orders have priority over 
Professional Interest and all Market Maker interest at the same price. 
If there are two or more Priority Customer Orders for the same options 
at the same price, priority is afforded to such Priority Customer 
Orders in the sequence in which they are received by the System.\32\ If 
there is other interest at the NBBO, after all Priority Customer Orders 
(if any) at that price have been filled, executions at that price will 
be first allocated to other remaining Market

[[Page 24035]]

Maker priority quotes,\33\ which have not received a participation 
entitlement, and have precedence over Professional Interest.\34\ If, 
after all Market Maker priority quotes have been filled in accordance 
with MIAX Rule 514(d)(1), there remains interest at the NBBO, 
executions will be allocated to all Professional Interest at that 
price.\35\
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    \30\ See Notice, supra note 3, 79 FR at 13338. According to the 
Exchange, the allocation of orders and quotes at the conclusion of a 
PRIME auction will be in priority ranked by price/origin type/pro-
rata/time, which is the standard allocation of orders and quotes on 
MIAX when the pro-rata allocation method and the Priority Customer 
Overlay is in effect. The key differences between the standard 
allocation and PRIME allocation are that in PRIME: RFR responses are 
capped at the total size of the Agency Order which changes the pro-
rata calculation when allocating within the same origin type; no 
participation entitlement will apply to orders executed in the 
PRIME; and the Initiating Member's facilitating or solicitation 
order may receive a participation guarantee at the stop price.
    \31\ See MIAX Rule 514(c)(2).
    \32\ See MIAX Rule 514(d)(1).
    \33\ To be considered a priority quote, at the time of 
execution, each of the following standards must be met: (i) The bid/
ask differential of a Market Maker's two-sided quote pair must be 
valid width (no wider than the bid/ask differentials outlined in 
MIAX Rule 603(b)(4)); (ii) the initial size of both of the Market 
Maker's bid and the offer must be in compliance with the 
requirements of MIAX Rule 604(b)(2); (iii) the bid/ask differential 
of a Market Maker's two-sided quote pair must meet the priority 
quote width requirements defined in MIAX Rule 517(b)(1)(ii) for each 
option; and (iv) either of the following are true: (1) At the time a 
locking or crossing quote or order enters the System, the Market 
Maker's two-sided quote pair must be valid width for that option and 
must have been resting on the Book; or (2) immediately prior to the 
time the Market Maker enters a new quote that locks or crosses the 
MBBO, the Market Maker must have had a valid width quote already 
existing (i.e., exclusive of the Market Maker's new marketable quote 
or update) among his two-sided quotes for that option. See MIAX Rule 
517(b)(1)(i).
    \34\ See MIAX Rule 514(e)(1). The term ``Professional Interest'' 
means (i) an order that is for the account of a person or entity 
that is not a Priority Customer, or (ii) an order or non-priority 
quote for the account of a Market Maker. See MIAX Rule 100.
    \35\ See MIAX Rule 514(e)(2).
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    At each price point, orders and quotes will be given priority by 
type--first to Priority Customers, then Market Makers with priority 
quotes, and then to Professional Interest. If unrelated orders are 
received by the Exchange during the period when a PRIME auction is 
occurring, such orders will be eligible to participate in the auction, 
subject to the process above. If orders received are not executed in 
the PRIME auction, the time stamps they received will be used to 
determine time priority for their execution outside of the auction.
    Thus, at the conclusion of the PRIME auction, the Agency Order will 
be allocated at the best price(s) pursuant to the matching algorithm in 
effect for the class. Such best prices include non-auction quotes and 
orders.\36\ With respect to order execution priority, Priority Customer 
orders resting on the Book before the auction or that are received 
during the RFR response period, as well as Priority Customer RFR 
responses, will collectively have first priority to trade against the 
Agency Order. The allocation of an Agency Order against any Priority 
Customer orders resting in the Book, Priority Customer orders received 
during the RFR response period, and Priority Customer RFR responses 
shall be in the sequence in which they are received by the System.\37\
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    \36\ See proposed MIAX Rule 515A(a)(2)(iii)(A).
    \37\ See proposed MIAX Rule 515A(a)(2)(iii)(B). The Exchange 
represents that the priority allocation in PRIME is consistent with 
the standard priority rules for Priority Customers in MIAX Rule 
514(d)(1). The Exchange gives priority to Priority Customer orders 
whether they were on the Book or received during the RFR response 
period.
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    After the execution of Priority Customer orders and responses, if 
the best price equals the Initiating Member's single-price submission, 
then the Initiating Member's single-price submission will be eligible 
for a ``participation guarantee'' under which the Initiating Member 
will receive an allocation of the greater of one contract or a certain 
percentage of the order, which percentage will be determined by the 
Exchange and may not be larger than 40% of the Agency Order in 
total.\38\ If only one Member's response matches the Initiating 
Member's single price submission, then the Initiating Member may be 
allocated up to 50% of the Agency Order.\39\ If the Initiating Member 
selected the auto-match option, the Initiating Member will receive an 
allocation at each auto-matched RFR response price point up to any 
designated limit price, or until a price point is reached where the 
balance of the order can be fully executed.\40\ At such final price 
point, the Initiating Member will be entitled to a ``participation 
guarantee'' that will result in the Initiating Member being allocated 
the greater of one contract or a certain percentage of the remainder of 
the order, which percentage will be determined by the Exchange and may 
not be larger than 40% of the contracts remaining at the final price 
point.\41\ However, if the Initiating Member elected to have last 
priority in allocation when submitting an Agency Order to initiate a 
PRIME auction against a single-price submission, the Initiating Member 
will be allocated only the amount of contracts remaining, if any, after 
the Agency Order is allocated to all other responses at the single 
price specified by the Initiating Member.\42\
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    \38\ See proposed MIAX Rule 515A(a)(2)(iii)(H).
    \39\ See proposed MIAX Rule 515A(a)(2)(iii)(H). It is the 
Commission's understanding that the Initiating Member would retain a 
50% allocation only where the Initiating Member is matched by only 
one response at the best price. See also Notice, supra note 3, 79 FR 
at 13340 (for examples illustrating the allocation at the end of the 
PRIME).
    \40\ The Exchange notes that the auto-match functionality will 
only allocate the full size of RFR responses (AOC orders and AOC 
eQuotes). See proposed MIAX Rule 515A(a)(2)(iii)(I). As noted above, 
any orders or quotes received by the System during the PRIME that 
are not AOC orders or AOC eQuotes will be treated as unrelated 
trading interest; the auto-match functionality will not allocate 
against such unrelated trading interest. See proposed MIAX Rule 
515A(a)(2)(i)(D).
    \41\ See proposed MIAX Rule 515A(a)(2)(iii)(I).
    \42\ See proposed MIAX Rule 515A(a)(2)(iii)(L).
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    Following allocation to any Priority Customer interest and any 
allocation to the Initiating Member pursuant to its participation 
guarantee and auto-match (if applicable), Market Maker priority quotes 
and RFR responses from Market Makers with priority quotes will 
collectively have the next level of priority. The allocation of Agency 
Orders against these contra sided quotes and RFR responses will be on a 
size pro rata basis as defined in MIAX Rule 514(c)(2).\43\
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    \43\ See proposed MIAX Rule 515A(a)(2)(iii)(C).
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    Next, Professional Interest orders resting in the Book, 
Professional Interest orders placed in the Book during the RFR response 
period, Professional Interest quotes, and Professional Interest RFR 
responses will collectively have last priority.\44\ The allocation of 
Agency Orders against these contra sided orders and RFR responses will 
be on a size pro rata basis as defined in MIAX Rule 514(c)(2).\45\
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    \44\ See MIAX Rule 514(e)(2).
    \45\ See proposed MIAX Rule 515A(a)(2)(iii)(D).
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    When allocating the Agency Order, the market maker ``participation 
entitlements'' shall not apply to orders executed pursuant to the PRIME 
rule.\46\ If an unrelated market or marketable limit order on the 
opposite side of the market as the Agency Order is received during the 
PRIME auction and ended the auction, such unrelated order will trade 
against the Agency Order at the midpoint of the best RFR response (or 
in the absence of an RFR response, the initiating price) and the NBBO 
on the other side of the market from the RFR responses (rounded towards 
the disseminated quote when necessary).\47\ If an unrelated non-
marketable limit order on the opposite side of the market as the Agency 
Order is received during the PRIME auction and ended the auction, such 
unrelated order will trade against the Agency Order at the midpoint of 
the best RFR response and the unrelated order's limit price (rounded 
towards the unrelated order's limit price when necessary).\48\
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    \46\ See proposed MIAX Rule 515A(a)(2)(iii)(E). See, e.g., MIAX 
Rule 514(g) (Primary Lead Market Maker Participation Entitlements), 
for an example of a market maker ``participation entitlement.'' 
These market maker ``entitlements'' are separate and apart from, and 
do not relate to, the ``participation guarantee'' that is part of 
the proposed PRIME mechanism.
    \47\ See proposed MIAX Rule 515A(a)(2)(iii)(F). See also Notice, 
supra note 3, 79 FR at 13341 (for examples illustrating the 
allocation when the PRIME concludes early).
    \48\ See proposed MIAX Rule 515A(a)(2)(iii)(G). An unrelated 
non-marketable limit order on the opposite side of the market as the 
Agency Order would end the PRIME in the situation when that 
unrelated non-marketable limit order improves any RFR response.

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[[Page 24036]]

    If the final auction price locks a Priority Customer order on the 
Book on the same side of the market as the Agency Order, then the 
Agency Order will execute against the RFR responses at $0.01 increment 
worse than the final PRIME auction price (towards the opposite side of 
the Agency Order) against the PRIME auction participants that submitted 
the final price, unless there is sufficient size in the PRIME responses 
to execute both the Agency Order and the booked Priority Customer order 
(in which case they will both execute at the final PRIME auction 
price). Any balance shall trade against the Priority Customer order in 
the Book at such order's limit price.\49\
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    \49\ See proposed MIAX Rule 515A(a)(2)(iii)(K). Thus, the 
execution price will be $0.01 increment higher than the final PRIME 
auction price if the Agency Order is to buy or $0.01 increment lower 
than the final PRIME auction price if the Agency Order is to sell.
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    Notwithstanding the priority for Market Makers and Professional 
Interest pursuant to proposed MIAX Rule 515A(a)(2)(iii)(C) and (D), if 
the PRIME auction does not result in price improvement over the 
Exchange's disseminated price at the time the PRIME auction began, 
resting unchanged quotes or orders that were disseminated at the best 
price before the PRIME auction began will have priority after any 
Priority Customer order priority and the Initiating Member's 
participation guarantee have been satisfied.\50\ Any unexecuted balance 
on the Agency Order will be allocated to RFR responses, provided that 
those RFR responses will be capped to the size of the original order 
and that the Initiating Member may not participate on any such balance, 
unless the Agency Order would otherwise go unfilled.\51\
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    \50\ See proposed MIAX Rule 515A(a)(2)(iii)(J). The Exchange 
notes that the priority of such resting unchanged quotes or orders 
that were disseminated at the best price before the PRIME began will 
still be subject to the standard priority allocation in effect 
pursuant to MIAX Rule 514. See Notice, supra note 3, 79 FR at 13343.
    \51\ See proposed MIAX Rule 515A(a)(2)(iii)(J).
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    If an unexecuted balance remains on the PRIME auction responses 
after the Agency Order has been executed in full and such balance in 
the RFR responses could trade against any unrelated order(s) that 
caused the PRIME auction to conclude, then the RFR balance will trade 
against the unrelated order(s) on a size pro rata basis as defined in 
MIAX Rule 514(c)(2).\52\
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    \52\ See proposed MIAX Rule 515A(a)(2)(iii)(M).
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    It shall be considered conduct inconsistent with just and equitable 
principles of trade, in accordance with MIAX Rule 301, for any Member 
to enter orders, quotes, Agency Orders, or other responses for the 
purpose of disrupting or manipulating the auction. Such conduct 
includes, but is not limited to, engaging in a pattern of conduct where 
the Member submitting the Agency Order into the PRIME breaks up the 
Agency Order into separate orders for two (2) or fewer contracts for 
the purpose of gaining a higher allocation percentage than the Member 
would have otherwise received in accordance with the allocation 
procedures contained in MIAX Rule 515A(a)(2)(iii).\53\
---------------------------------------------------------------------------

    \53\ See proposed MIAX Rule 515A, Interpretations and Policies 
.01.
---------------------------------------------------------------------------

    Finally, in proposed MIAX Rule 515A, Interpretation and Policy .08, 
the Exchange obligates itself to submit certain data, as requested by 
the Commission staff, on the operation of the PRIME auction. This data 
will be used to assist the Exchange as well as the Commission in 
assessing activity in PRIME auctions including, among other things, the 
degree of meaningful competition for all size orders within the PRIME 
auction, whether there is material price improvement for orders 
executed through the PRIME mechanism, and whether there is an active 
and liquid market functioning on the Exchange outside of the PRIME 
mechanism.\54\
---------------------------------------------------------------------------

    \54\ See proposed MIAX Rule 515A, Interpretation and Policy .08. 
For the list of the data that the Exchange agreed to provide to the 
Commission relating to the PRIME, see Exhibit 3 to SR-MIAX-2014-09, 
which is publicly available on the Exchange's Web site at http://www.miaxoptions.com.
---------------------------------------------------------------------------

B. PRIME Solicitation Mechanism

    MIAX also is proposing to adopt a solicitation mechanism that is 
similar to CBOE's Solicitation Auction Mechanism.\55\ Through this 
proposed mechanism, a Member that represents Agency Orders may 
electronically execute them against solicited orders provided that it 
submits both the Agency Order and solicited orders for electronic 
execution into the PRIME Solicitation Mechanism pursuant to proposed 
MIAX Rule 515A(b).\56\
---------------------------------------------------------------------------

    \55\ See CBOE Rule 6.74B.
    \56\ For executions pursuant to the PRIME Solicitation 
Mechanism, prior to entering Agency Orders into the PRIME on behalf 
of customers, Initiating Members must deliver to the customer a 
written notification informing the customer that his order may be 
executed using the PRIME. The written notification must disclose the 
terms and conditions contained in MIAX Rule 515A and be in a form 
that is approved by the Exchange. See proposed MIAX Rule 515A, 
Interpretations and Policy .03. In addition, Members may not use the 
PRIME Solicitation Mechanism to circumvent MIAX Rule 520 limiting 
principal transactions. This may include, but is not limited to, 
Members entering contra orders that are solicited from (i) 
affiliated broker-dealers or (ii) broker-dealers with which the 
Member has an arrangement that allows the Member to realize similar 
economic benefits from the solicited transaction as it would achieve 
by executing the customer order in whole or in part as principal. 
Additionally, solicited contra orders entered by Members to trade 
against Agency Orders may not be for the account of a MIAX Market 
Maker assigned to the options class. See proposed MIAX Rule 515A, 
Interpretations and Policies .04.
---------------------------------------------------------------------------

1. Eligibility and PRIME Solicitation Mechanism Process
    The Initiating Member may initiate a PRIME Solicitation Mechanism 
provided that the Agency Order is in a class designated as eligible for 
PRIME Solicitation Mechanisms as determined by the Exchange and within 
the designated PRIME Solicitation Mechanism order eligibility size 
parameters as such size parameters are determined by the Exchange. The 
eligible order size may not be less than 500 standard option contracts 
or 5,000 mini-option contracts.\57\ Also, each order entered into the 
PRIME Solicitation Mechanism must be designated as all-or-none, and the 
minimum price increment for an Initiating Member's single price 
submission will be a $0.01 increment.\58\
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    \57\ Proposed MIAX Rule 515A, Interpretation and Policy .05 
provides that any determinations made by the Exchange pursuant to 
MIAX Rule 515A, such as eligible classes and order size parameters, 
will be communicated in a Regulatory Circular.
    \58\ See proposed MIAX Rule 515A(b)(1).
---------------------------------------------------------------------------

    To initiate the PRIME Solicitation Mechanism, the Initiating Member 
must mark the Agency Order for PRIME Solicitation Mechanism processing 
and specify a single price at which it seeks to cross the Agency Order 
with a solicited order, which shall be the initiating price for the 
PRIME Solicitation Mechanism.\59\ When the Exchange receives a properly 
designated Agency Order for PRIME Solicitation Mechanism processing, an 
RFR message indicating the option, side, size, and initiating price 
\60\ will be sent to all subscribers of the Exchange's data feeds.\61\ 
Any Member may submit responses to the RFR (specifying prices and 
sizes) during the RFR response period (which, like the PRIME auction,

[[Page 24037]]

will be 500 milliseconds).\62\ RFR responses must be either an AOC 
order or an AOC eQuote.\63\ The minimum price increment for responses 
will be $0.01 increment.\64\ A response with a size greater than the 
size of the Agency Order will be capped at the size of the Agency 
Order.\65\ Responses will not be visible to other Solicitation Auction 
participants, and MIAX will not disseminate them to OPRA.\66\ Members 
may cancel RFR responses.\67\
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    \59\ See proposed MIAX Rule 515A(b)(2)(i)(A).
    \60\ The initiating price for the PRIME Solicitation Mechanism 
is the single price specified by the Initiating Member at which it 
seeks to cross the Agency Order with a solicited order. See proposed 
MIAX Rule 515A(b)(2)(i)(A).
    \61\ See proposed MIAX Rule 515A(b)(2)(i)(B). As noted above 
with respect to the PRIME, the Exchange will include the RFR from 
the auction mechanisms in the Exchange's data feeds at no 
incremental costs to subscribers. Thus, any subscriber that chooses 
to receive options data, including any Member subscriber, has the 
ability to respond to those RFRs.
    \62\ See proposed MIAX Rule 515A(b)(2)(i)(C). In February 2014, 
to determine whether the proposed duration of the RFR would provide 
sufficient time to enter an RFR response, the Exchange asked 
Members, including Market Makers, whether their firms ``could 
respond to an Auction with a duration of 500 milliseconds.'' Of the 
8 Members that responded to the question, 100% indicated that their 
firm could respond in this time frame. Thus, the Exchange notes its 
belief that the proposed duration for the RFR of 500 milliseconds, 
would provide a meaningful opportunity for participants on MIAX to 
respond to an RFR while at the same time facilitating the prompt 
execution of orders. See Notice, supra note 3, 79 FR at 13343, n. 
62.
    \63\ See proposed MIAX Rule 515A(b)(2)(i)(C). Any MIAX Member 
may respond to the RFR in the PRIME Solicitation Mechanism. See 
Notice, supra note 3, 79 FR at 13344, n.63.
    \64\ See proposed MIAX Rule 515A(b)(2)(i)(E).
    \65\ See proposed MIAX Rule 515A(b)(2)(i)(F).
    \66\ See proposed MIAX Rule 515A(b)(2)(i)(D).
    \67\ See proposed MIAX Rule 515A(b)(2)(i)(G).
---------------------------------------------------------------------------

2. Conclusion of the PRIME Solicitation Mechanism
    The PRIME Solicitation Mechanism will end early, before the end of 
the RFR response period, under certain circumstances. Specifically, the 
PRIME Solicitation Mechanism will conclude at the sooner of the 
following: (i) The end of the RFR response period; (ii) upon receipt by 
MIAX of an unrelated order (in the same option as the Agency Order) on 
the same side or opposite side of the market from the RFR responses, 
that is marketable against either the MBBO (when such quote is the 
NBBO) or the RFR responses; (iii) upon receipt by MIAX of an unrelated 
limit order (in the same option as the Agency Order and on the opposite 
side of the market as the Agency Order) that improves any RFR response; 
(iv) any time an RFR response matches the MBBO on the opposite side of 
the market from the RFR responses; (v) any time there is a quote lock 
on the Exchange pursuant to MIAX Rule 1402; or (vi) any time there is a 
trading halt in the option on the Exchange.\68\
---------------------------------------------------------------------------

    \68\ See proposed MIAX Rule 515A(b)(2)(ii).
---------------------------------------------------------------------------

3. Priority and Allocation
    At the conclusion of the Solicitation Auction, the Agency Order 
will either be automatically executed in full and allocated subject to 
the following provisions, or will be cancelled. The Agency Order will 
be executed against the solicited order at the proposed execution 
price, provided that:
     The execution price must be equal to or better than the 
NBBO; \69\
---------------------------------------------------------------------------

    \69\ See proposed MIAX Rule 515A(b)(2)(iii)(A).
---------------------------------------------------------------------------

     There are no Priority Customer orders resting in the Book 
on the opposite side of the Agency Order at the proposed execution 
price; \70\ and
---------------------------------------------------------------------------

    \70\ See proposed MIAX Rule 515A(b)(2)(iii)(B)(1).
---------------------------------------------------------------------------

     There is insufficient size to execute the Agency Order at 
an improved price.\71\
---------------------------------------------------------------------------

    \71\ See proposed MIAX Rule 515A(b)(2)(iii)(C). See also Notice, 
supra note 3, 79 FR at 13344 (for examples illustrating the 
allocation at the end of the PRIME Solicitation Mechanism).
---------------------------------------------------------------------------

    If the execution would otherwise take place outside the NBBO, the 
Agency Order and solicited order will be cancelled.\72\
---------------------------------------------------------------------------

    \72\ See proposed MIAX Rule 515A(b)(2)(iii)(A).
---------------------------------------------------------------------------

    If there are Priority Customer orders resting in the Book on the 
opposite side as the Agency Order and there is sufficient size 
(considering all resting orders, quotes, and RFR responses) to execute 
the Agency Order, then the Agency Order will be executed against this 
interest, and the solicited order will be cancelled. In such case, the 
Agency Order will be allocated at the best price(s) pursuant to the 
matching algorithm in effect for the class.\73\ However, if there are 
Priority Customer orders resting in the Book on the opposite side as 
the Agency Order and there is not sufficient size (considering all 
resting orders, quotes, and RFR responses) to fill the entire Agency 
Order, then both the Agency Order and the solicited order will be 
cancelled.\74\
---------------------------------------------------------------------------

    \73\ See proposed MIAX Rule 515A(b)(2)(iii)(B)(1). The Agency 
Order will be allocated at the best price(s) pursuant to the 
matching algorithm in effect for the class. The Exchange states that 
this will ensure that the Agency Order is allocated in a manner 
consistent with the standard priority of allocation of the Exchange 
rules that distinguish between Priority Customers, Market Makers 
with priority quotes, and Professional Interest.
    \74\ See proposed MIAX Rule 515A(b)(2)(iii)(B)(2).
---------------------------------------------------------------------------

    If there is sufficient size (considering all resting orders, 
quotes, and RFR responses) to execute the Agency Order in full at an 
improved price or prices that is equal or better than the NBBO, then 
the Agency Order will execute at such improved price(s) and the 
solicited order will be cancelled. In such case, the Agency Order will 
be allocated at the best price(s) pursuant to the matching algorithm in 
effect for the class.\75\
---------------------------------------------------------------------------

    \75\ See proposed MIAX Rule 515A(b)(2)(iii)(C)(1). The Exchange 
proposes to specify that the Agency Order will be allocated pursuant 
to the matching algorithm in effect for the class. This will ensure 
that the Agency Order is allocated in a manner consistent with the 
standard priority of allocation of the Exchange rules that 
distinguish between Priority Customers, Market Makers with priority 
quotes, and Professional Interest.
---------------------------------------------------------------------------

C. Order Exposure Rule

    MIAX Rule 520 prohibits Members from acting as principal on any 
orders they represent as agent unless (i) agency orders are first 
exposed on the Exchange for at least one (1) second, and (ii) the 
Member has been bidding or offering on the Exchange for at least one 
(1) second prior to receiving an agency order that is executable 
against such bid or offer. In addition, Members may not execute orders 
they represent as agent on the Exchange against orders solicited from 
Members and non-member broker-dealers to transact with such orders 
unless the unsolicited order is first exposed on the Exchange for at 
least one (1) second.
    The Exchange proposes to amend MIAX Rule 520 to permit a Member to 
execute against as principal orders it represents as agent if the 
Member utilizes the PRIME price improvement mechanism. Similarly, the 
Exchange proposes to amend MIAX Rule 520 to permit a Member to execute 
orders it represents as agent against orders it has solicited if the 
Member utilizes the PRIME price improvement mechanism or PRIME 
Solicitation Mechanism. Accordingly if those mechanisms were used, such 
Agency Orders submitted into them would not be subject to the one 
second order exposure requirement of MIAX Rule 520.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\76\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\77\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in

[[Page 24038]]

general, to protect customers, issuers, brokers and dealers. The 
Commission believes that approving the Exchange's proposal to establish 
the PRIME price improvement mechanism and the PRIME Solicitation 
Mechanism may increase competition among those options exchanges that 
offer similar mechanisms. The Commission further believes that allowing 
MIAX Members to enter orders into the PRIME price improvement mechanism 
and the PRIME Solicitation Mechanism could provide additional 
opportunities for such orders, notably orders from Priority Customers, 
to receive price improvement over the NBBO.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    MIAX's proposed PRIME price improvement mechanism is similar to 
existing functionality at other options exchanges and does not raise 
any novel issues.\78\ In particular, for orders of fewer than 50 
standard options contracts or 500 mini-option contracts, the PRIME 
price improvement mechanism requires the Initiating Member to stop the 
Agency Order at the better of the NBBO price improved by a $0.01 
increment or the Agency Order's limit price.\79\ Once an Agency Order 
has been submitted, the submission may not be modified or cancelled. 
The Commission notes that such smaller orders are thus effectively 
guaranteed some level of price improvement if they are submitted into 
the PRIME price improvement mechanism. Orders of 50 or greater 
contracts are guaranteed an execution price of at least the NBBO and, 
moreover, are given the opportunity for price improvement beyond the 
NBBO by being exposed to Members during the PRIME auction. In addition, 
MIAX's proposal protects resting interest on its Book as the stop price 
must be at least $0.01 increment better than any booked order's limit 
price on the same side of the market as the Agency Order.
---------------------------------------------------------------------------

    \78\ See CBOE Rule 6.74A (CBOE's AIM).
    \79\ The Commission notes that this aspect of MIAX's proposal 
(i.e., to stop an Agency Order of fewer than 50 contracts at a 
price-improved price) is similar to requirements set forth in CBOE's 
AIM. See CBOE Rule 6.74A(a)(3).
---------------------------------------------------------------------------

    The PRIME price improvement mechanism also permits members to 
submit responses to the RFR on behalf of all types of interest.\80\ The 
Commission believes that this requirement provides the potential for an 
Agency Order to be exposed to a competitive auction. Further, when the 
Exchange receives a properly designated Agency Order for PRIME auction 
processing, it will send to all subscribers of its data feeds an RFR 
detailing the option, side, size, and initiating price. This message, 
available to any subscriber, is designed to help attract responses to a 
PRIME auction and may result in competitive PRIME auctions and 
ultimately better prices for the Agency Order to the extent it is 
successful in attracting competitive responses to a PRIME auction.
---------------------------------------------------------------------------

    \80\ Cf. CBOE Rule 6.74A(b)(1)(D)-(E) (only CBOE Market Makers 
with an appointment in the relevant option class, and CBOE Members 
acting as agent for orders resting at the top of the CBOE book 
opposite the Agency Order, may submit responses to the AIM RFR).
---------------------------------------------------------------------------

    The RFR (for both the PRIME auction and PRIME Solicitation 
Mechanism) will last for 500 milliseconds. In February 2014, to 
determine whether the proposed duration of the RFR would provide 
sufficient time to enter an RFR response, the Exchange asked its 
Members, including Market Makers, whether their firms ``could respond 
to an Auction with a duration of 500 milliseconds.'' Of the 8 Members 
that responded to the question, 100% indicated that their firm could 
respond in this time frame.\81\ Based on MIAX's statements, the 
Commission believes that 500 milliseconds could facilitate the prompt 
execution of Agency Orders in the PRIME auction (and PRIME Solicitation 
Mechanism), while providing market participants with an opportunity to 
compete for exposed bids and offers. The Commission notes that another 
exchange's price improvement mechanism also provides a 500 millisecond 
auction response period.\82\
---------------------------------------------------------------------------

    \81\ See Notice, supra note 3, 79 FR at 13337, n. 19 and 13343, 
n. 62.
    \82\ See International Securities Exchange Rule 723(c)(5).
---------------------------------------------------------------------------

    At the conclusion of a PRIME auction, Priority Customer orders and 
RFR responses representing Priority Customer interest have first 
priority to trade against the Agency Order. After execution of Priority 
Customer responses and orders, the Initiating Member may be allocated a 
limited percentage of the Agency Order, not to exceed 40% of the 
contracts at the applicable price point (however, if only one response 
matches the Initiating Member's single price submission at the best 
price, then the Initiating Member may be allocated up to 50% of the 
order). Market Maker priority quotes and RFR responses from Market 
Makers with priority quotes have next priority. Quotes, orders, and RFR 
responses representing Professional Interest have final priority. The 
Commission believes that the proposed matching algorithm set forth in 
MIAX's PRIME rule is sufficiently clear regarding how orders are to be 
allocated in the PRIME auction and does not raise any novel issues.
    The Exchange has represented its commitment to submit certain data 
on PRIME auctions at the request of Commission staff. The Commission 
expects such data to be used, by both the Exchange and the Commission 
staff, to assess the performance of PRIME auctions, including, among 
other things, to study whether there is meaningful competition for all 
size orders with the PRIME, the degree of price improvement for all 
orders executed through the PRIME mechanism, whether there is an active 
and liquid market functioning on the Exchange outside of the PRIME, and 
the situations in which a PRIME auction is terminated before the end of 
the RFR response period. The data provided will enable the Commission, 
as well as the Exchange itself, to evaluate the PRIME auction to 
determine its performance and impact on options market structure and 
the degree to which it is beneficial to customers and to the options 
market as a whole.
    The Commission further believes that the proposal to establish the 
PRIME Solicitation Mechanism may allow for greater flexibility in 
executing large-sized orders, and is not novel or otherwise raise any 
issues of first impression.\83\ The Commission believes that the 
proposal includes appropriate conditions to assure that the Agency 
Order is exposed to Members for the possibility of price improvement 
over the NBBO and that Priority Customer orders on the Exchange are 
protected. At the conclusion of a PRIME Solicitation Mechanism auction, 
the Agency Order would either be executed in full or cancelled. The 
Agency Order will be executed against the solicited order at the 
proposed executed price if (i) the execution price is equal to or 
better than the NBBO; (ii) there are no Priority Customer Orders 
resting in the book on the opposite side of the Agency Order at the 
proposed execution price; and (iii) there is insufficient size to 
execute the Agency Order at an improved price. If there are Priority 
Customer orders and there is sufficient size to execute the Agency 
Order (considering all eligible interest), the Agency Order will be 
executed against these interests and the solicited order will be 
cancelled. If, however, there are Priority Customer Orders but there is 
not sufficient size to execute the Agency Order in full, then both the 
Agency Order and the solicited order will be cancelled. Finally, if 
there is sufficient size to execute the Agency Order in full at an 
improved price equal

[[Page 24039]]

to or better than the NBBO, the Agency Order will execute at the 
improved price and the solicited order will be cancelled. The 
Commission believes that the priority and allocation rules for the 
PRIME Solicitation Mechanism, which are based on a similar mechanism on 
another exchange, are reasonable and consistent with the Act.
---------------------------------------------------------------------------

    \83\ The Commission also notes that the proposal is similar to 
requirements set forth in the CBOE Solicitation Auction Mechanism. 
See CBOE Rule 6.74B.
---------------------------------------------------------------------------

IV. Section 11(a) of the Act

    Section 11(a)(1) of the Act \84\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\85\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the 
execution;\86\ (iii) may not be affiliated with the executing member; 
and (iv) with respect to an account over which the member has 
investment discretion, neither the member nor its associated person may 
retain any compensation in connection with effecting the transaction 
except as provided in the Rule. For the reasons set forth below, the 
Commission believes that Exchange members entering orders into the 
PRIME and PRIME Solicitation Mechanism would satisfy the requirements 
of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78k(a)(1).
    \85\ 17 CFR 240.11a2-2(T).
    \86\ The member may, however, participate in clearing and 
settling the transaction.
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\87\ MIAX has represented that the MIAX trading system 
and the proposed PRIME and PRIME Solicitation Mechanism receive all 
orders electronically through remote terminals or computer-to-computer 
interfaces. The Exchange also represents that orders for covered 
accounts from Members will be transmitted from a remote location 
directly to the proposed PRIME and PRIME Solicitation Mechanism by 
electronic means. Because no Exchange members may submit orders into 
the PRIME and PRIME Solicitation Mechanism from on the floor of the 
Exchange, the Commission believes that the PRIME and PRIME Solicitation 
Mechanism satisfy the off-floor transmission requirement.
---------------------------------------------------------------------------

    \87\ See, e.g., Securities Exchange Act Release Nos. 61419 
(January 26, 2010), 75 FR 5157 (February 1, 2010) (SR-BATS-2009-031) 
(approving BATS options trading); 59154 (December 23, 2008), 73 FR 
80468 (December 31, 2008) (SR-BSE-2008-48) (approving equity 
securities listing and trading on BSE); 57478 (March 12, 2008), 73 
FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (approving NOM options trading); 53128 (January 13, 2006), 71 
FR 3550 (January 23, 2006) (File No. 10-131) (approving The Nasdaq 
Stock Market LLC); 44983 (October 25, 2001), 66 FR 55225 (November 
1, 2001) (SR-PCX-00-25) (approving Archipelago Exchange); 29237 (May 
24, 1991), 56 FR 24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-
53) (approving NYSE's Off-Hours Trading Facility); and 15533 
(January 29, 1979), 44 FR 6084 (January 31, 1979) (``1979 
Release'').
---------------------------------------------------------------------------

    Second, the Rule requires that the member not participate in the 
execution of its order. The Exchange represents that at no time 
following the submission of an order is a member organization able to 
acquire control or influence over the result or timing of an order's 
execution.\88\ According to the Exchange, the execution of an order is 
determined by what other orders are present and the priority of those 
orders.\89\ Accordingly, the Commission believes that a member does not 
participate in the execution of an order submitted to the PRIME and 
PRIME Solicitation Mechanism.
---------------------------------------------------------------------------

    \88\ See Notice, supra note 3, 79 FR at 13347. See also 
Amendment No. 1, supra note 4 and accompanying text.
    \89\ See id. The Exchange notes that a Member may cancel or 
modify the order, or modify the instructions for executing the 
order, but that such instructions would be transmitted from off the 
floor of the Exchange. The Commission has stated that the non-
participation requirement is satisfied under such circumstances so 
long as such modifications or cancellations are also transmitted 
from off the floor. See Securities Exchange Act Release No. 14563 
(March 14, 1978), 43 FR 11542 (March 17, 1978) (``1978 Release'') 
(stating that the ``non-participation requirement does not prevent 
initiating members from canceling or modifying orders (or the 
instructions pursuant to which the initiating member wishes to be 
executed) after the orders have been transmitted to the executing 
member, provided that any such instructions are also transmitted 
from off the floor'').
---------------------------------------------------------------------------

    Third, Rule 11a2-2(T) requires that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this requirement is satisfied 
when automated systems, such as the PRIME and PRIME Solicitation 
Mechanism, are used, as long as the design of these systems ensures 
that members do not possess any special or unique trading advantages in 
handling their orders after transmitting them to the exchange.\90\ MIAX 
has represented that the PRIME and PRIME Solicitation Mechanism are 
designed so that no Member has any special or unique trading advantage 
in the handling of its orders after transmitting its orders to the 
mechanisms.\91\ Based on the Exchange's representation, the Commission 
believes that PRIME and PRIME Solicitation Mechanism satisfy this 
requirement.
---------------------------------------------------------------------------

    \90\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that, while there is 
not an independent executing exchange member, the execution of an 
order is automatic once it has been transmitted into the system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 87.
    \91\ See Notice, supra note 3, 79 FR at 13347. See also 
Amendment No. 1, supra note 4 and accompanying text.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\92\ MIAX represents that Members relying on Rule 11a2-
2(T) for transactions effected through the PRIME and PRIME Solicitation 
Mechanism must comply with this condition of the Rule.\93\
---------------------------------------------------------------------------

    \92\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 89 (stating ``[t]he contractual and disclosure requirements are 
designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \93\ See Notice, supra note 3, 79 FR at 13347. See also 
Amendment No. 1, supra note 4 and accompanying text.

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[[Page 24040]]

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MIAX-2014-09 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MIAX-2014-09. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml).
    Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549-1090, on official business days between the hours of 10:00 
a.m. and 3:00 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MIAX-2014-09 and should be 
submitted on or before May 20, 2014.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    As discussed above, the Exchange submitted Amendment No. 1 to 
clarify representations it made in its original filing concerning the 
applicability of and compliance of its proposed PRIME mechanisms with 
Section 11(a) of the Act.\94\ Specifically, MIAX clarified that it 
intended its references to ``PRIME'' in its Section 11(a) analysis to 
apply to both the PRIME price improvement mechanism as well as the 
PRIME Solicitation Mechanism. Thus, the content of Amendment No. 1, 
which merely clarifies a potential ambiguity in the filing, does not 
raise any novel issues and instead provides additional clarifying 
information to support MIAX's analysis of how its proposal is 
consistent with the Act and thus facilitates the Commission's ability 
to make the requisite findings set forth above and ultimately approve 
the proposal. In addition, the Commission notes that it published the 
original proposal in the Federal Register and did not receive any 
comments on MIAX's Section 11(a) analysis or any other parts of the 
proposal.\95\ Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\96\ to approve the filing, as modified by 
Amendment No. 1, on an accelerated basis prior to the 30th day after 
the date of the publication in the Federal Register of notice of 
Amendment No. 1 to the filing.
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    \94\ See Amendment No. 1, supra note 4.
    \95\ The Commission also notes that, in order to promote the 
public availability and transparency of MIAX's post-notice 
amendment, MIAX submitted a copy of Amendment No. 1 through the 
Commission's electronic public comment letter mechanism on the same 
day that it filed Amendment No. 1 with the Commission. See supra 
note 5.
    \96\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\97\ that the proposed rule change (SR-MIAX-2014-09), as modified 
by Amendment No. 1, be and hereby is approved on an accelerated basis.
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    \97\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\98\
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    \98\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09680 Filed 4-28-14; 8:45 am]
BILLING CODE 8011-01-P