[Federal Register Volume 80, Number 132 (Friday, July 10, 2015)]
[Notices]
[Pages 39824-39827]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16858]



[[Page 39824]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75361; File No. SR-MIAX-2015-44]


Self-Regulatory Organizations: Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by Miami International 
Securities Exchange LLC To Amend Exchange Rule 612 Regarding Enhanced 
Aggregate Risk Manager Protections for Exchange Market Makers

July 6, 2015.
    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 26, 2015, Miami International Securities 
Exchange LLC (``MIAX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') a proposed rule change as 
described in Items I, II, and III 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange is filing a proposal to amend Exchange Rule 612 to 
provide Enhanced Aggregate Risk Manager Protections for Exchange Market 
Makers.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at 
MIAX's principal office, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to amend Exchange Rule 612, Aggregate Risk 
Manager (``ARM'') to provide optional enhanced risk protections for 
Exchange Market Makers.\3\ Currently, ARM protects Market Makers by 
limiting the number of contracts they execute in an option class on the 
Exchange within a specified time period that has been established by 
the Market Maker (a ``specified time period''), which may have a 
duration of up to 15 seconds. MIAX Market Makers establish a percentage 
of their quotations (the ``Allowable Engagement Percentage'') and the 
specified time period for each option class in which they are 
appointed.\4\ When an execution against a Market Maker's Standard quote 
\5\ or Day eQuote (as defined below) occurs, the MIAX System \6\ looks 
back over the specified time period to determine whether the execution 
is of sufficient size to trigger the Aggregate Risk Manager. The System 
engages the Aggregate Risk Manager when it has determined that a Market 
Maker has traded a number of contracts equal to or above their 
Allowable Engagement Percentage during the specified time period. The 
Aggregate Risk Manager then automatically cancels and removes the 
Market Maker's Standard quotes and Day eQuotes from the Exchange's 
disseminated quotation in all series of that particular option class 
until the Market Maker sends a notification to the System of the intent 
to reengage quoting and submits a new revised quotation in the affected 
class.
---------------------------------------------------------------------------

    \3\ The term ``Market Makers'' refers to ``Lead Market Makers,'' 
``Primary Lead Market Makers'' and ``Registered Market Makers'' 
collectively. A Lead Market Maker is a Member registered with the 
Exchange for the purpose of making markets in securities traded on 
the Exchange and that is vested with the rights and responsibilities 
specified in chapter VI of these Rules with respect to Lead Market 
Makers. A Primary Lead Market Maker is a Lead Market Maker appointed 
by the Exchange to act as the Primary Lead Market Maker for the 
purpose of making markets in securities traded on the Exchange. A 
Registered Market Maker is a Member registered with the Exchange for 
the purpose of making markets in securities traded on the Exchange, 
who is not a Lead Market Maker. See Exchange Rule 100.
    \4\ The Exchange's Board or designated committee appoints one 
Primary Lead Market Maker and other Market Makers to each options 
class traded on the Exchange. For a complete description of the 
Exchange's appointment process, see Exchange Rule 602.
    \5\ 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).
    \6\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
---------------------------------------------------------------------------

    The Exchange proposes to add new, optional enhanced functionality 
to the ARM by adopting new Interpretations and Policies .02 to Rule 
612, entitled Enhanced Aggregate Risk Manager Protections. The proposed 
rule would address circumstances where a Market Maker experiences 
multiple, successive triggers of the Aggregate Risk Manager. The 
Enhanced ARM Protections would be triggered when the Allowable 
Engagement Percentage has been equaled or exceeded a specified number 
of times (not less than three times and not greater than 99 times) 
within a specified time period (not less than one second and not 
greater than 24,300 seconds) (each as determined by the Market Maker). 
For purposes of the Enhanced ARM Protections, the specified time period 
will be called the ``ARM trigger counting period'' in the rule.\7\ 
Market Makers may determine not to engage the Enhanced ARM Protections 
or may determine to engage either or both of two proposed Enhanced ARM 
Protections in the System: the Class Protection feature and the Market 
Maker Protection feature, each described more fully below.
---------------------------------------------------------------------------

    \7\ Respecting the proposed Enhanced ARM Protections, the 
Exchange proposes to adopt the term ``ARM trigger counting period'' 
in order to distinguish it from the ``specified time period'' 
defined in current Rule 612(a). The term ``specified time period'' 
describes the time period within which the System counts the number 
of executed contracts to determine whether the Allowable Engagement 
Percentage has been equaled or exceeded; the term ``ARM trigger 
counting period'' describes the time period within which the System 
counts the number of times the Allowable Engagement Percentage is 
equaled or exceeded.
---------------------------------------------------------------------------

    The Enhanced ARM Protections may be engaged simultaneously and will 
operate independently of one another. The ARM trigger counting period 
may be set differently for each Enhanced ARM Protection when they are 
engaged simultaneously. The determination not to engage the Enhanced 
ARM Protections does not require any action on the part of Market 
Makers.
eQuotes
    Current Interpretations and Policies .01 to Rule 612 states that 
eQuotes \8\ do not participate in the Aggregate Risk Manager. The 
Exchange proposes to amend Interpretations and Policies .01 to clarify 
that one type of eQuote, the

[[Page 39825]]

Day eQuote,\9\ participates in the ARM. The System does not include 
contracts traded through the use of an eQuote that is not a Day eQuote 
in the counting program for purposes of this Rule. eQuotes will remain 
in the System available for trading when the Aggregate Risk Manager is 
engaged. Day eQuotes participate in the Aggregate Risk Manager and will 
be included in the Enhanced ARM Protections. Day eQuotes are the only 
type of eQuote with a time in force (up to an entire trading session if 
not executed) that can last longer than an extremely brief time period, 
and thus are included in the current ARM counting period and will be 
included in the ARM trigger counting period.
---------------------------------------------------------------------------

    \8\ An eQuote is a quote with a specific time in force that does 
not automatically cancel and replace a previous Standard quote or 
eQuote. An eQuote can be cancelled by the Market Maker at any time, 
or can be replaced by another eQuote that contains specific 
instructions to cancel an existing eQuote. See Exchange Rule 
517(a)(2).
    \9\ A Day eQuote is a quote submitted by a Market Maker that 
does not automatically cancel or replace the Market Maker's previous 
Standard quote or eQuote. Day eQuotes will expire at the close of 
trading each trading day. The Exchange reserves the right to limit 
the number of Day eQuotes that a single Market Maker may place on 
the same side of an individual option. The same limit will apply to 
all types of Market Makers. If the Exchange determines to establish 
a limit, it will be no more than ten Day eQuotes on the same side of 
an individual option. The Exchange will publish the limit through 
the issuance of a Regulatory Circular. See Exchange Rule 
517(a)(2)(i).
---------------------------------------------------------------------------

    All other eQuotes (Auction or Cancel,\10\ Opening Only,\11\ 
Immediate or Cancel,\12\ Fill or Kill,\13\ and Intermarket Sweep \14\ 
eQuotes) are not included in ARM and will not be included in the 
Enhanced ARM Protections. These types of eQuotes have a very short time 
in force and thus are present in the Exchange's disseminated quotation 
for an extremely brief time period before they are cancelled 
automatically if not executed. A Market Maker that submits an eQuote 
other than a Day eQuote expects and intends that such eQuote will be 
executed or cancelled without the need for ARM protection. Therefore 
eQuotes that are not Day eQuotes are not included in the ARM counting 
system.
---------------------------------------------------------------------------

    \10\ See Exchange Rule 517(a)(2)(ii).
    \11\ See Exchange Rule 517(a)(2)(iii).
    \12\ See Exchange Rule 517(a)(2)(iv).
    \13\ See Exchange Rule 517(a)(2)(v).
    \14\ See Exchange Rule 517(a)(2)(vi).
---------------------------------------------------------------------------

Class Protection Feature
    Proposed Interpretations and Policies .02(a) would provide that a 
Market Maker may determine to engage the Class Protection feature for a 
particular option class in which the Market Maker is appointed (an 
``appointed option class''). When the Allowable Engagement Percentage 
in such appointed option class has been equaled or exceeded a specified 
number of times within the ARM trigger counting period, the Class 
Protection feature will remove the Market Maker's quotations from the 
Exchange's disseminated quotation in such appointed option class until 
the Market Maker instructs the Exchange (in a manner required by the 
Exchange and communicated to Members by Regulatory Circular) to reset 
the Class Protection feature. Additional quotations from the Market 
Maker in the affected class are not accepted until the Class Protection 
feature is reset.
    The Class Protection feature is distinguished from the regular 
function of ARM because the ARM trigger counting period, during which 
the System counts the number of times ARM is triggered for the affected 
option class, usually would be longer than the ``specified time 
period'' described in Rule 612(a), during which the ARM counts executed 
contracts. The Class Protection feature is intended to alert Market 
Makers that there may be ongoing volatile or otherwise unusual market 
conditions that necessitate specific evaluation of their ARM settings, 
and of the conditions that result in the number of ARM triggers that 
occurred during the ARM trigger counting period.
    The Class Protection feature removes quotes from the Exchange's 
disseminated quotation until the Market Maker instructs the Exchange 
(in a manner required by the Exchange and communicated to Members by 
Regulatory Circular) to reset the Class Protection feature.\15\ This 
non-automated instruction requires the Exchange to reset the Enhanced 
ARM Protection feature, as opposed to the method of resetting the 
standard ARM feature, where the Market Maker resets the ARM by sending 
a notification to the System of the intent to reengage quoting and 
submits a new revised quotation in the affected class. The purpose of 
the non-automated method of re-engaging the Class Protection feature is 
to give Market Makers the ability to reconsider, reset and confirm 
their Enhanced ARM Protection settings during times of peak or unusual 
market activity, rather than an automated re-engagement. The Exchange 
believes that this non-automated contact will strengthen the efficiency 
of the Enhanced ARM Protections by providing Market Makers with the 
ability to thoroughly assess current market conditions in setting risk 
management levels and controls.
---------------------------------------------------------------------------

    \15\ Any communication regarding the Enhanced ARM Protections 
must be in writing from the Market Maker or Market Maker 
organization via email or other electronic means to be described in 
the Regulatory Circular.
---------------------------------------------------------------------------

Market Maker Protection Feature
    The System will aggregate the specified number of times that the 
Allowable Engagement percentage has been equaled or exceeded in the 
Market Maker's specified number of unique appointed option classes 
within the ARM trigger counting period for an entire Market Maker 
organization. The Market Maker Protection feature will remove the 
Market Maker organization's quotations in all of the Market Maker 
organization's appointed option classes when the Allowable Engagement 
Percentage has been equaled or exceeded in the Market Maker 
organization's specified number of appointed option classes within the 
ARM trigger counting period, regardless of how many individual Market 
Makers in the same Market Maker organization are submitting quotations 
on MIAX. As with the Class Protection feature, and for the reasons 
described above, such quotes will be removed until the Market Maker 
instructs the Exchange (in a manner required by the Exchange and 
communicated to Members by Regulatory Circular) to reset the Market 
Maker Protection feature. Additional quotations from the Market Maker 
are not accepted until the Market Maker Protection feature is reset. 
One representative from a Market Maker organization may instruct the 
Exchange to reset the Market Maker Protection feature on behalf of his 
or her Market Maker organization.
Examples
    Market Maker organization ``Red, Inc.'' has three individual Market 
Makers (``MMs'') properly registered on MIAX. Red, Inc. MM 1 is 
appointed in option classes A, B and C. Red, Inc. MM2 is appointed in 
option classes D, E, F, and G. Red, Inc. MM3 is appointed in option 
classes H and I. Assume Red, Inc. determines that the Market Maker 
Protection feature will be engaged when the Allowable Engagement 
Percentage is equaled or exceeded three times (as described below) 
within their designated ARM trigger counting period.
    If within the ARM trigger counting period the Allowable Engagement 
Percentage is equaled or exceeded in option classes A, B, and C, the 
Market Maker Protection feature will remove Red Inc.'s quotations in 
all of its appointed option classes, (classes A through I), even though 
the only individual Market Maker affected is MM1, who is appointed in 
the three affected option classes.
    If within the ARM trigger counting period the Allowable Engagement

[[Page 39826]]

Percentage is equaled or exceeded in option classes A, D, and H, the 
Market Maker Protection feature will remove Red Inc.'s quotations in 
all of its appointed option classes, (classes A through I), because the 
Allowable Engagement Percentage in three of Red, Inc.'s appointed 
option classes has been equaled or exceeded, regardless of the fact 
that the three affected appointed option classes are not appointed to 
the same individual Red, Inc. Market Maker.
    In the event that the Allowable Engagement Percentage in one 
appointed option class is equaled or exceeded multiple times during the 
ARM trigger counting period, the System will consider such multiple 
events to be one single trigger for purposes of the activation of the 
Market Maker Protection feature. For example, if during the ARM trigger 
counting period there is one trigger in option class A, and there are 
five triggers in option class D, the System will calculate one trigger 
for option class A and just one trigger for option class D. 
Accordingly, the System will consider only two triggers to have 
occurred in Red, Inc.'s appointed option classes (one trigger in option 
class A, and one in option class D) during the ARM trigger counting 
period. In this example, the Market Maker Protection feature will not 
be engaged because Red, Inc. has determined that there must be three 
triggers during the ARM trigger counting period before the Market Maker 
Protection feature is to be activated. The purpose of this provision is 
to ensure that unusual activity or volatility in one particular 
appointed option class does not unnecessarily prompt the Market Maker 
Protection feature to remove a Market Maker or Market Maker 
organization's quotations from the Exchange's disseminated quotation in 
all of their other unaffected appointed option classes. In such a 
situation, the normal ARM functionality described in Exchange Rule 612 
(or the Class Protection feature \16\) is in place to remove such 
quotations in the single affected appointed option class.
---------------------------------------------------------------------------

    \16\ A Market Maker could elect to engage the Class Protection 
feature for a single option class. That feature is designed to 
provide an additional alert to Market Makers of an unusual number of 
ARM triggers in the affected assigned option class.
---------------------------------------------------------------------------

    The Exchange believes that the instant proposal should further 
assist Exchange Market Makers in managing their risk by establishing 
and making available additional risk management tools in the System. 
The Enhanced ARM Protection features will enable Exchange Market Makers 
to target a specific appointed option class, or all of its appointed 
option classes, for enhanced risk management and protection. This 
should assist Exchange Market Makers in targeting appointed option 
classes that could become extremely volatile under certain market 
conditions or when market events, news or other factors affect a Market 
Maker's ability to manage risk. The Enhanced ARM Protections are 
intended to address both foreseeable and unforeseeable market 
conditions in general, and can be tailored to meet the risk management 
needs of Exchange Market Makers and Market Maker organizations.
    The Exchange will announce the implementation date of the proposed 
rule change by Regulatory Circular to be published no later than 60 
days following the operative date of the proposed rule. The 
implementation date will be no later than 60 days following the 
issuance of the Regulatory Circular.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
section 6(b) of the Act \17\ in general, and furthers the objectives of 
section 6(b)(5) of the Act \18\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in, securities, to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system and, in general, to 
protect investors and the public interest.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that Members will benefit from the proposed 
Enhanced Aggregate Risk Manager Protections. Market Makers, who are 
obligated to submit continuous two-sided quotations in a certain number 
of series in their appointed option classes for a certain percentage of 
each trading session,\19\ are vulnerable to risk from unusual market 
conditions, volatility in specific option classes, and other market 
events that may cause them to receive multiple, extremely rapid 
automatic executions before they can adjust their quotations and 
overall risk exposure in the market.
---------------------------------------------------------------------------

    \19\ For a complete description of MIAX Market Maker quoting 
obligations, see Exchange Rule 604.
---------------------------------------------------------------------------

    Without adequate risk management tools in place on the Exchange, 
such as the existing ARM and the proposed Enhanced ARM Protections, the 
incentive for Exchange Market Makers to quote aggressively respecting 
both price and size could be diminished, and could result in a 
concomitant reduction in the depth and liquidity they provide to the 
market. Such a result may undermine the quality of the markets that 
would otherwise be available to customers and other market 
participants. Accordingly, the Exchange proposes the Enhanced ARM 
Protections to help Market Makers better manage their risk exposure and 
thus encourage Market Makers to provide additional depth and liquidity 
to the Exchange's markets, thereby removing impediments to and 
perfecting the mechanisms of a free and open market and a national 
market system and, in general, protecting investors and the public 
interest.
    In addition, the Enhanced ARM Protections promote just and 
equitable principles of trade by providing Exchange Market Makers with 
more risk management mechanisms available on the Exchange to give them 
confidence that protections are in place to reduce the risks associated 
with their Market Making obligations. The Exchange notes that the 
implementation and use of the Enhanced ARM Protections will not relieve 
Exchange Market Makers of their continuous quoting obligations under 
Exchange Rule 604 and under Reg NMS Rule 602.\20\ All of a Market 
Maker's quotes in each option class will be considered firm until such 
time as the Allowable Engagement Percentage threshold has been equaled 
or crossed and the Market Maker's quotes are removed by the Aggregate 
Risk Manager in all series of that option class.\21\
---------------------------------------------------------------------------

    \20\ 17 CFR 242.602.
    \21\ See Exchange Rule 612(c).
---------------------------------------------------------------------------

    Finally, the proposed Enhanced ARM Protections are designed to 
protect investors and the public interest by helping Market Makers 
prevent executions resulting from activity that exceeds their risk 
tolerance level under these rules as established by the Exchange.
    With regard to the impact of this proposal on system capacity, the 
Exchange notes that it has analyzed its capacity and represents that it 
and the Options Price Reporting Authority (``OPRA'') have the necessary 
systems capacity to handle any potential additional traffic associated 
with the proposed rule change. The Exchange believes that its members 
will not have a capacity issue as a result of this proposal.

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

    The Exchange does not believe that the proposed rule change will 
impose

[[Page 39827]]

any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    On the contrary, the Exchange believes that the proposed Enhanced 
ARM Protections will foster competition by providing Exchange Market 
Makers with an additional set of tools to use in submitting quotations 
with the best possible price and size in order to compete for 
executions and order flow. The Exchange believes the proposed Enhanced 
ARM Protections will not impose any burden on intra-market competition 
because its use is voluntary and is available to all Exchange Market 
Makers and Market Maker organizations.
    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily direct order flow to competing 
venues who offer similar functionality. As to inter-market competition, 
the Exchange believes that the proposed Enhanced ARM Protections should 
promote competition because they are designed to protect Exchange 
Market Makers from unusual market conditions or events that may cause 
them to receive multiple, automatic executions before they can adjust 
their quotation exposure in the market.
    For all the reasons stated, 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, and 
believes the proposed change will in fact enhance competition.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \22\ and Rule 19b-4(f)(6) \23\ 
thereunder.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MIAX-2015-44 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-2015-44. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of 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-2015-44 and should be 
submitted on or before July 31, 2015.
---------------------------------------------------------------------------

    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
Brent J. Fields,
Secretary.
[FR Doc. 2015-16858 Filed 7-9-15; 08:45 am]
 BILLING CODE 8011-01-P