[Federal Register Volume 81, Number 165 (Thursday, August 25, 2016)]
[Notices]
[Pages 58770-58801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-20213]
[[Page 58769]]
Vol. 81
Thursday,
No. 165
August 25, 2016
Part IV
Securities and Exchange Commission
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Self-Regulatory Organizations: Notice of Filing of a Proposed Rule
Change by Miami International Securities Exchange, LLC To Adopt New
Rules To Govern the Trading of Complex Orders on the Exchange; Notices
Federal Register / Vol. 81 , No. 165 / Thursday, August 25, 2016 /
Notices
[[Page 58770]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78620; File No. SR-MIAX-2016-26]
Self-Regulatory Organizations: Notice of Filing of a Proposed
Rule Change by Miami International Securities Exchange, LLC To Adopt
New Rules To Govern the Trading of Complex Orders on the Exchange
August 18, 2016.
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 August 8, 2016, Miami International Securities
Exchange LLC (``MIAX'' or the ``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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt new rules to govern the trading of
complex orders on the Exchange.
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 adopt new rules that describe the trading
of complex orders on the Exchange. Proposed new Rule 518, Complex
Orders, details the functionality of the MIAX System \3\ in the
handling of complex orders on the Exchange. The proposed rules are
based substantially on similar rules of other exchanges.\4\ The
Exchange believes that the similarity of its proposed complex order
rules to those of other exchanges will allow the Exchange's proposed
complex order functionality to fit seamlessly into the greater options
marketplace and benefit market participants who are already familiar
with similar functionality offered on other exchanges.
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\3\ The term ``System'' means the automated trading system used
by the Exchange for the trading of securities. See Exchange Rule
100.
\4\ See, e.g., Chicago Board Options Exchange, Inc. (``CBOE'')
Rule 6.53(C)[sic]; International Securities Exchange LLC (``ISE'')
Rule 722; NYSE MKT Rule 980NY; BOX Options Exchange LLC (``BOX'')
Rule 7240; NASDAQ OMX PHLX LLC (``PHLX'') Rule 1098; NYSEArca Rule
6.91.
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Additionally, the Exchange is proposing to amend Exchange Rule 516,
Order Types Defined, to add a cross-reference to Rule 518 stating that
complex order types are defined in Rule 518 and that, specifically,
derived orders (as discussed below) are defined in Rule 518(a)(9). The
Exchange is also proposing to amend Exchange Rules 519A, Risk
Protection Monitor, to include complex orders in the rule; 521,
Nullification and Adjustment of Options Transactions Including Obvious
Errors, to establish the process for handling complex order obvious
errors, and 605, Market Maker Orders, to add certain complex orders to
the enumerated orders in which Exchange Market Makers may place orders
on the Exchange, as described below.
Definitions
Proposed Rule 518(a) provides definitions of terms that apply to
the trading of complex orders, and such terms are used throughout this
proposed rule change.
The term ``ABBO'' means the best bid(s) or offer(s) disseminated by
other Eligible Exchanges (defined in Rule 1400(f)) \5\ and calculated
by the Exchange based on market information received by the Exchange
from OPRA.
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\5\ ``Eligible Exchange'' means a national securities exchange
registered with the SEC in accordance with Section 6(a) of the Act
that: (1) Is a Participant Exchange in OCC (as that term is defined
in Section VII of the OCC by-laws); (2) is a party to the OPRA Plan
(as that term is described in Section I of the OPRA Plan); and (3)
if the national securities exchange is not a party to the Options
Order Protection and Locked/Crossed Markets Plan, is a participant
in another plan approved by the Commission providing for comparable
Trade-Through and Locked and Crossed Market protection. See Exchange
Rule 1400(f).
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The Complex National Best Bid or Offer (``cNBBO'') is calculated
using the NBBO for each component of a complex strategy to establish
the best net bid and offer for a complex strategy. For stock-option
orders (described below), the cNBBO for a complex strategy will be
calculated using the NBBO in the individual option component(s) and the
NBBO in the stock component.
A ``Complex Auction'' is an auction of a complex order as set forth
in proposed Rule 518(d), described below.
A ``Complex Auction-eligible order'' is an order that meets the
requirements of proposed Rule 518(d)(1), as described below.
A ``complex order'' is any order involving the concurrent purchase
and/or sale of two or more different options in the same underlying
security (the ``legs'' or ``components'' of the complex order),\6\ for
the same account, in a ratio that is equal to or greater than one-to-
three (.333) and less than or equal to three-to-one (3.00) and for the
purposes of executing a particular investment strategy. Mini-options
may only be part of a complex order that includes other mini-
options.\7\ Only those complex orders in the classes designated by the
Exchange and communicated to Members via Regulatory Circular with no
more than the applicable number of legs, as determined by the Exchange
on a class-by-class basis and communicated to Members via Regulatory
Circular, are eligible for processing.
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\6\ The different options in the same underlying security that
comprise a particular complex order are referred to as the ``legs''
or ``components'' of the complex order throughout this proposal.
\7\ This definition is consistent with other options exchanges.
See e.g., CBOE Rule 6.53C(a)(1). See also PHLX Rule 1098(a)(i); NYSE
MKT Rule 900.3NY(e); and BOX Rule 7240(a)(5).
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A complex order can also be a ``stock-option order'' as described
further, and subject to the limitations set forth, in proposed
Interpretations and Policies .01 of proposed Rule 518. A stock-option
order is an order to buy or sell a stated number of units of an
underlying security (stock or Exchange Traded Fund Share (``ETF'')) or
a security convertible into the underlying stock (``convertible
security'') coupled with the purchase or sale of options contract(s) on
the opposite side of the market representing either (i) the same number
of units of the underlying security or convertible security, or (ii)
the number of units of the underlying stock necessary to create a delta
neutral position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of
[[Page 58771]]
the underlying security or convertible security in the option leg to
the total number of units of the underlying security or convertible
security in the stock leg. Only those stock-option orders in the
classes designated by the Exchange and communicated to Members via
Regulatory Circular with no more than the applicable number of legs as
determined by the Exchange on a class-by-class basis and communicated
to Members via Regulatory Circular, are eligible for processing.\8\
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\8\ This is substantially similar to the definition of a stock-
option order on other exchanges. See, e.g., CBOE Rule 6.53C(a)(2)
and PHLX Rule 1098.
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The term ``complex strategy'' means a particular combination of
components and their ratios to one another. New complex strategies can
be created as the result of the receipt of a complex order, or by the
Exchange for a complex strategy that is not currently in the System.
The Exchange may limit the number of new complex strategies that may be
in the System at a particular time and will communicate this limitation
to Members via Regulatory Circular.
A ``complex quote'' is a Market Maker complex Standard quote or
complex eQuote for a complex strategy as set forth in Interpretations
and Policies .02 of proposed Rule 518, described below.
The Displayed Complex MIAX Best Bid or Offer (``dcMBBO'') is
calculated using the best displayed price for each component of a
complex strategy from the Simple Order Book. For stock-option orders,
the dcMBBO for a complex strategy will be calculated using the
Exchange's best displayed bid or offer in the individual option
component(s) and the NBBO in the stock component.
A ``derived order'' is an Exchange-generated limit order on the
Simple Order Book that represents either the bid or offer of one
component of a complex order resting on the Strategy Book that is
comprised of orders to buy or sell an equal quantity (with a one-to-one
ratio) of two option components.\9\ This order type is also used on
other exchanges in the trading of complex orders. Derived orders will
not be routed outside of the Exchange regardless of the price(s)
disseminated by away markets. The Exchange will determine on a class-
by-class basis to make available derived orders and communicate such
determination to Members via a Regulatory Circular. The purpose of this
provision is to carefully manage the number of derived orders being
generated so that they do not negatively impact system capacity and
performance. Derived orders are firm orders (i.e., if executed, firm
for the disseminated price and size) that are included in the MBBO (as
defined below).\10\
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\9\ The Exchange notes that a derived order is the equivalent of
a similar order type on other exchanges. See, e.g., PHLX Rule
1098(f)(iii)(C) (Legging Orders). Like a MIAX derived order, a
Legging Order on PHLX may be generated for one leg of a Complex
Order at a price: (i) That matches or improves upon the best PHLX
displayed bid or offer; and (ii) at which the net price can be
achieved when the other leg is executed against the best displayed
bid or offer on PHLX. The PHLX rule governs situations in which a
Legging Order will not be created; the proposed MIAX rule states
that a derived order will not be displayed at a price that locks or
crosses the best bid or offer of another exchange, and that a
derived order will not be created at a price increment less than the
minimum established by MIAX Rule 510, whereas the PHLX rule states
that Legging Orders may be generated and executed in an increment
other than the minimum increment for that series and will be ranked
on the order book at its generated price and displayed at a price
that is rounded to the nearest minimum increment for that series.
The rules also differ slightly in the manner and circumstances in
which derived or Legging Orders may be removed from the Simple Order
Book. See infra note 19.
\10\ The derived order type is also firm on other exchanges.
See, e.g., ISE Rule 715(k), which states that ``Legging'' orders are
firm orders that are included in the ISE's displayed best bid or
offer. See also, e.g., BOX Rule 7240(c), which states that a
``Legging Order'' is a firm order that is included in the BBO if it
is equal to, or better than, the existing BBO.
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A derived order may be automatically generated for one or more legs
of a complex order at a price that matches or improves upon the best
displayed bid or offer in the affected series on the Simple Order Book
and at a price at which the net price of the complex order on the
Strategy Book can be achieved when the other component(s) of the
complex order is (are) executed against the best displayed bid or offer
on the Simple Order Book. A derived order will not be displayed at a
price that locks or crosses the best bid or offer of another exchange
(the ``ABBO'').\11\ In such a circumstance, the System will display the
derived order on the Simple Order Book at a price that is one Minimum
Price Variation (``MPV'') \12\ away from the current opposite side best
bid or offer of such other exchange, and rank the derived order on the
Simple Order Book according to its actual price. A derived order will
not be created at a price increment less than the minimum established
by Rule 510.
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\11\ This is similar to the rules of another exchange. BOX rules
state that a ``Legging Order'' that would lock or cross opposite
side NBBO will be ranked on the BOX Book at the locking price and
displayed at one minimum trading increment below the current NBO
(for bids) or one minimum trading increment above the current NBB
(for offers) for the applicable series (``display-price sliding'').
See BOX Rule 7240(c)(2)(i).
\12\ For a complete description of MPVs, see Exchange Rule 510.
Example--Derived order adjusted so as not to lock (cross) the ABBO
MIAX--Mar 50 Put 1.00 (10)--1.20 (20)
MIAX--Mar 55 Call 1.00 (10)--1.20 (20)
ABBO--Mar 50 Put 1.00 (10)--1.05 (10)
ABBO--Mar 55 Call 1.00 (10)--1.20 (10)
The Exchange receives a Priority Customer buy order to purchase 1 Mar
50 put and purchase 1 Mar 55 call for a 2.25 debit, 10 times. The order
is not designated as Complex Auction-on-Arrival (cAOA) and will not
initiate an auction upon arrival even if it equals or improves the Upon
Receipt Improvement Percentage (``URIP,'' as defined in proposed Rule
518, Interpretations and Policies .04[sic](b)).
The icMBBO \13\ is 2.00 debit bid, 10 times at 2.40 credit offer, 20
times
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\13\ The Implied Complex MIAX Best Bid or Offer (``icMBBO'') is
a calculation that uses thebest [sic] price from the Simple Order
Book for each component of a complex strategy including displayed
and non-displayed trading interest. For stock-option orders, the
icMBBO for a complex strategy will be calculated using the best
price (whether displayed or non-displayed) on the Simple Order Book
in the individual option component(s), and the NBBO in the stock
component. See proposed Rule 518(a)(11), described below.
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The dcMBBO is 2.00 debit bid, 10 times at 2.40 credit offer, 20 times
The URIP Percentage is 60% of the bid ask spread or 0.24
There is no offsetting complex order to sell and the complex order
cannot leg into the Simple Order Market because the icMBBO offer for
the complex order on the MIAX Simple Order Book is offered at 2.40.
A derived order to buy the Mar 50 put for 1.05 (calculated by
determining the component price that achieves the net price (2.25
debit) that can execute against the best displayed price on the Simple
Order Book), 10 times would lock the ABO if displayed at $1.05 and
therefore be in violation, so the derived order will instead be created
at 1.05 and displayed at 1.00, one MPV inside of the ABO, in this case
joining the MIAX's best bid for the Mar 50 put of 1.00; while managed
at a non-displayed price on the Simple Order Book to buy at 1.05:
Mar 50 Put 1.00 (20) (10 derived order displayed at 1.00 and booked at
1.05)--1.20 (20)
Mar 55 Call 1.00 (10)--1.20 (20)
The new icMBBO is 2.05 debit bid, 10 times at 2.40 credit offer, 20
times
If a marketable order to sell Mar 50 put 1 or more times is
received, it will execute against the derived order to buy the Mar 50
put at the non-displayed price for 1.05 1 or more times and the
[[Page 58772]]
System will automatically execute the other leg of the complex order
against the Simple Order Book offer for the Mar 55 call at 1.20 for the
same quantity. As a result, the net price of 2.25 is achieved for the
complex order (buy the Mar 50 put for 1.05 and buy Mar 55 call for 1.20
= 2.25 net price).
A derived order will be handled in the same manner as other orders
on the Simple Order Book except as otherwise provided in proposed Rule
518, and will be executed only after all other executable orders
(including orders subject to the managed interest process as described
below) and quotes at the same price are executed in full. When a
derived order is executed, the other component of the complex order on
the Strategy Book will be automatically executed against the best bid
or offer on the Exchange.\14\ The Exchange believes that a derived
order, created for the execution of a complex order, should not be
afforded priority over resting orders and quotes on the Simple Order
Book, and therefore has determined to protect the priority on the
Simple Order Book of such resting orders and quotes.
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\14\ See Note 11.
Example--Derived order is last in priority on the Simple Order Book
MIAX--Mar 50 Call 2.00 (10)--2.10 (60)
MIAX--Mar 55 Call 1.00 (20)--1.10 (80)
The Exchange receives a Priority Customer complex order to buy 1 Mar 50
call and sell 1 Mar 55 call for a 1.00 debit, 5 times. The order is not
designated as cAOA and will not initiate a Complex Auction upon arrival
even if it equals or improves the URIP. There is no Customer interest
resting on the Strategy Book.
The icMBBO is 0.90 debit bid, 10 times at 1.10 credit offer, 20 times
The dcMBBO is 0.90 debit bid, 10 times at 1.10 credit offer, 20 times
The URIP Percentage is 60% of the bid ask spread or 0.12
There is no offsetting complex order to sell and the complex order
cannot leg into the Simple Order Market because the icMBBO offer for
the complex order on the MIAX Simple Order Book is offered at 1.10. A
derived order to buy the Mar 50 call for 2.00, 5 times may be
automatically generated by the System without violating protected
quotations at away markets for either leg. The derived buy order will
join the MBB for the March 50 call and will not change the MIAX's
icMBBO price.
Mar 50 Call 2.00 (15 total, 5 from derived order)--2.10 (60)
The new icMBBO is 0.90 debit bid, 15 times at 1.10 credit offer, 20
times
If a marketable order to sell Mar 50 call 15 times or more is received,
it will execute first against the order on the Simple Order Book and
then against the derived order to buy the Mar 50 call for 2.00 5 times
and the System will automatically execute the other leg of the complex
order against the Simple Order Book bid for the Mar 55 call at 1.00 5
times. As a result, the net price of 1.00 is achieved for the complex
order (buy the Mar 50 call for 2.00 and sell the Mar 55 call at 1.00 =
1.00 net price).
A derived order is automatically removed from the Simple Order Book
if (i) the displayed price of the derived order is no longer at the
displayed best bid or offer on the Simple Order Book, (ii) execution of
the derived order would no longer achieve the net price of the complex
order on the Strategy Book when the other component of the complex
order is executed against the best bid or offer on the Simple Order
Book, (iii) the complex order is executed in full, (iv) the complex
order is cancelled, or (v) any component of the complex order resting
on the Strategy Book that is used to generate the derived order is
subject to a Simple Market Auction or Timer (``SMAT'') Event,\15\ a
wide market condition,\16\ or a halt \17\ (each as described
below).\18\ This is similar to the functionality regarding derived
order equivalents on other exchanges.\19\
\15\ A SMAT Event is defined as any of the following: A PRIME
Auction (pursuant to Exchange Rule 515A); a Route Timer (pursuant to
Exchange Rule 529); or a liquidity refresh pause (pursuant to
Exchange Rule 515(c)(2)). See proposed Rule 518(a)(16).
\16\ A ``wide-market condition'' is defined as any individual
component of a complex strategy having, at the time of evaluation,
an MBBO quote width that is wider than the permissible valid quote
width as defined in Rule 603(b)(4). See proposed Rule 518,
Interpretations and Policies .05(e).
\17\ See Exchange Rule 504.
\18\ See proposed Rule 518(a)(9).
\19\ Respecting the removal of derived orders from the Simple
Order Book, PHLX Rule 1098(f)(iii)(C) lists additional scenarios
under which a PHLX ``legging'' Order on PHLX is automatically
removed from the regular order book: (i) If the price of the legging
Order is no longer at the Exchange's displayed best bid or offer on
the regular limit order book, (ii) if execution of the legging Order
would no longer achieve the net price of the Complex Order when the
other leg is executed against the Exchange's best displayed bid or
offer on the regular limit order book (other than another legging
Order), (iii) if the Complex Order is executed in full or in part
(this differs from proposed Rule 518(a)(9)(vi)(C), which states that
a derived order will be removed if executed in full), (iv) if the
Complex Order is cancelled or modified (proposed Rule
518(a)(9)(vi)(D) states that the derived order will be removed if
cancelled but not if modified). Similarly, a legging order on ISE is
automatically removed from the regular limit order book if: (i) The
price of the legging order is no longer at the displayed best bid or
offer on the regular limit order book, (ii) execution of the legging
order would no longer achieve the net price of the complex order
when the other leg is executed against the best displayed bid or
offer on the regular limit order book, (iii) the complex order is
executed in full or in part (again unlike proposed Rule
518(a)(9)(vi)(C) which only include a derived order executed in
full) against another complex order on the complex order book, or
(iv) the complex order is cancelled or modified (unlike Rule
518((a)(9)(vi)(C)[sic] which does not include a provision for
modification). See also, ISE Rule 715(k), which states that a
legging order is automatically removed from the regular limit order
book if: (i) The price of the legging order is no longer at the
displayed best bid or offer on the regular limit order book, (ii)
execution of the legging order would no longer achieve the net price
of the complex order when the other leg is executed against the best
displayed bid or offer on the regular limit order book, (iii) the
complex order is executed in full or in part against another complex
order on the complex order book, or (iv) the complex order is
cancelled or modified. See also, BOX Rule 7240(c) respecting BOX
``legging'' Orders.
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Example--Derived order is cancelled when a component of a complex order
is subject to a SMAT Event \20\
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\20\ This example describes a PRIME Auction in any one of the
components used to generate the derived order. The example could
apply to such a component that is subject to any SMAT Event.
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MIAX--Mar 50 Put 1.00 (10)--1.20 (20)
MIAX--Mar 55 Call 1.00 (10)--1.20 (20)
ABBO--Mar 50 Put 1.05 (10)--1.20 (10)
ABBO--Mar 55 Call 1.00 (10)--1.20 (10)
The Exchange receives a Priority Customer complex order to buy 1 Mar 50
put and purchase 1 Mar 55 call for a 2.25 debit, 10 times. The order is
not designated as cAOA and will not initiate an auction upon arrival
even if it equals or improves the URIP.
The icMBBO is 2.00 debit bid, 10 times at 2.40 credit offer, 20 times
The dcMBBO is 2.00 debit bid, 10 times at 2.40 credit offer, 20 times
The URIP Percentage is 60% of the bid ask spread or 0.24
There is no offsetting complex order to sell and the complex order
cannot leg into the Simple Order Market because the icMBBO offer for
the complex order on the MIAX Simple Order Book is offered at 2.40.
Derived orders to buy the Mar 50 put for 1.05, 10 times and the Mar 55
call for 1.05, 10 times may be automatically generated by the System
without violating protected quotations at away markets for either leg,
improving the MIAX's best bid for each of the Mar 50 put and the Mar 55
call to 1.05:
Mar 50 Put 1.05 (10) (Derived order)--1.20 (20)
Mar 55 Call 1.05 (10) (Derived order)--1.20 (20)
[[Page 58773]]
If in the Simple Order Book, a PRIME Auction (or other SMAT Event) were
to start in either the Mar 50 put or the Mar 55 call, the System will
automatically cancel the derived order to buy the Mar 50 put while
simultaneously cancelling the derived order to buy the Mar 55 call.
Example--Derived order is created resulting in the execution of a
complex order and simultaneous cancellation of the other unneeded
derived order.
MIAX--Mar 50 Put 1.00 (10)--1.20 (20)
MIAX--Mar 55 Call 1.00 (10)--1.20 (20)
ABBO--Mar 50 Put 1.05 (10)--1.20 (10)
ABBO--Mar 55 Call 1.00 (10)--1.20 (10)
The Exchange receives a Priority Customer complex order to buy 1 Mar 50
put and buy 1 Mar 55 call for a 2.25 debit, 10 times. The order is not
designated as cAOA and will not initiate an auction upon arrival even
if it equals or improves the URIP.
The icMBBO is 2.00 debit bid, 10 times at 2.40 credit offer, 20 times
The dcMBBO is 2.00 debit bid, 10 times at 2.40 credit offer, 20 times
The URIP Percentage is 60% of the bid ask spread or 0.24
There is no offsetting complex order to sell and the complex order
cannot leg into the Simple Order Market because the icMBBO offer for
the complex order on the MIAX Simple Order Book is offered at 2.40.
Derived orders to buy the Mar 50 put for 1.05, 10 times and the Mar 55
call for 1.05, 10 times may be automatically generated by the System
without violating protected quotations at away markets for either leg,
improving the MIAX's best bid for each of the Mar 50 put and the Mar 55
call to 1.05:
Mar 50 Put 1.05 (10) (derived order)--1.20 (20)
Mar 55 Call 1.05 (10) (derived order)--1.20 (20)
The new icMBBO is 2.10 debit bid, 10 times at 2.40 credit offer, 20
times. If a marketable order to sell Mar 50 put 10 times or more is
received, it will execute against the derived order to buy the Mar 50
put for 1.05 10 times and the System will automatically execute the
other leg of the complex order against the Simple Order Book offer for
the Mar 55 call at 1.20 while simultaneously cancelling the now
unneeded derived order to buy the Mar 55 call for 1.05. As a result,
the net price of 2.25 is achieved for the complex order (buy the Mar 50
put for 1.05 and buy Mar 55 call for 1.20 = 2.25 net price).
Finally, proposed Rule 518(a)(9)(vii) provides that a derived order
that is locked (i.e., if the opposite side MBBO locks the derived
order) will be executed if the execution price is at the NBBO.
The Exchange believes that derived orders will significantly
enhance the Strategy Book by enabling greater interaction of multi-
legged orders with the Simple Order Book. This functionality should
tighten spreads on the MIAX Simple Order Book, resulting in better
executions for complex orders and for regular orders.
The term ``free trading'' means trading that occurs during a
trading session other than: (i) At the opening or re-opening for
trading following a halt, or (ii) during the Complex Auction Process
(as described below and in proposed Rule 518(d)).
The Implied Complex Best Bid or Offer (``icMBBO'') is a calculation
that uses the best price from the Simple Order Book for each component
of a complex strategy including displayed and non-displayed trading
interest. For stock-option orders, the icMBBO for a complex strategy
will be calculated using the best price (whether displayed or non-
displayed) on the Simple Order Book in the individual option
component(s), and the national best bid or offer (``NBBO'') in the
stock component.
Certain Market Maker complex Standard quotes and complex eQuotes
(as defined below) will qualify as ``Market Maker Priority Interest for
Complex'' on the Strategy Book (as defined below) if the criteria
described herein have been met.\21\ For purposes of the proposed Rule,
Market Maker Priority Interest for Complex is established at the
beginning of a Complex Auction (as described in proposed Rule 518(d)
below), or at the time of execution in free trading.
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\21\ Market Maker complex quotes may be entered as either
complex Standard quotes or complex eQuotes. A complex eQuote is
either a Complex Auction or Cancel eQuote (``cAOC eQuote'') or an
``Immediate or Cancel eQuote'' (``cIOC eQuote'') A cAOC eQuote is an
eQuote submitted by a Market Maker that is used to provide liquidity
during a specific Complex Auction with a time in force that
corresponds with the duration of the Complex Auction. A cIOC eQuote
is a complex eQuote with a time-in-force of IOC that may be matched
with another complex quote or complex order for an execution to
occur in whole or in part upon receipt into the System. cIOC eQuotes
will not: (i) Be executed against individual orders and quotes
resting on the Simple Order Book; (ii) be eligible to initiate a
Complex Auction or join a Complex Auction in progress; or (iii) rest
on the Strategy Book. Any portion of a cIOC eQuote that is not
executed will be immediately cancelled. See proposed Rule 518,
Interpretations and Policies .02.
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If complex Standard quoting is engaged for a complex strategy,\22\
a Market Maker complex Standard quote or complex eQuote will qualify as
Market Maker Priority Interest for Complex if the Market Maker has a
complex Standard quote in the complex strategy that equals or improves
the dcMBBO on the opposite side from the incoming complex order or
quote at the time of evaluation (a ``Complex priority quote'').\23\ The
Exchange's proposal to adopt Market Maker Priority Interest for Complex
in the Strategy Book is substantially based upon principles and rules
currently operative on the Exchange respecting the Simple Order
Book.\24\ While the priority and trade allocation method for the
Strategy Book, described below, distinguishes among Market Maker
Priority Interest and Market Maker non-Priority Interest,\25\ the
proposed rules concerning complex priority are not novel, and have
simply emerged from the priority rules already in existence on the
Exchange.
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\22\ Complex Standard quoting will be engaged by the Exchange
for complex strategies on a strategy-by-strategy basis. The
strategies for which complex Standard quoting is engaged will be
communicated to Members via Regulatory Circular. See proposed Rule
518, Interpretations and Policies .02. Among the criteria used in
determining the classes for which complex Standard quoting will be
engaged are average daily volume in the class, number of expiration
months and strike prices in the class, number of strike prices at or
near the money in the class, and input from Members. This differs
slightly from ISE, which states merely that market makers may enter
quotes for complex order strategies on the complex order book in
their appointed options classes. See ISE Rule 722, Supplementary
Material .03.
\23\ The Exchange notes that, unlike the continuous quoting
requirements in the simple order market, there are no continuous
quoting requirements respecting complex orders. This is similar to
ISE, where market makers are not required to enter quotes on the
complex order book. Quotes for complex orders are not subject to any
quotation requirements that are applicable to market maker quotes in
the regular market for individual options series or classes. See ISE
Rule 722, Supplementary Material .03.
\24\ The Exchange currently follows the established hierarchy
that generally affords priority to Priority Customer Orders, then to
Market Makers with priority quotes, followed by Professional
Interest at the same price. See Exchange Rule 514.
\25\ See proposed Rule 518(c)(3)(ii).
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The term ``MBBO'' means the best bid or offer on the Simple Order
Book (as defined below) on the Exchange, and the term ``NBBO'' means
the national best bid or offer as calculated by the Exchange based on
market information received by the Exchange from the appropriate
Securities Information Processor (``SIP'').\26\
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\26\ All U.S. exchanges and associations that quote and trade
exchange-listed securities must provide their data to a centralized
SIP for data consolidation and dissemination. See 15 U.S.C. 78c
(22)(A).
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The ``Simple Order Book'' is the Exchange's regular electronic book
of orders and quotes.
A Simple Market Auction or Timer (``SMAT'') Event is defined as a
PRIME
[[Page 58774]]
Auction (pursuant to Rule 515A); \27\ a Route Timer (pursuant to Rule
529); \28\ or a liquidity refresh pause (pursuant to Rule
515(c)(2)).\29\ Complex orders and quotes will be handled during a SMAT
Event as described in proposed Interpretations and Policies .05(e)(2)
of proposed Rule 518, as discussed below.
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\27\ The MIAX Price Improvement Mechanism (``PRIME'') is a
process by which a Member may electronically submit for execution
(``Auction'') an order it represents as agent (``Agency Order'')
against principal interest, and/or an Agency Order against solicited
interest. See Exchange Rule 515A.
\28\ The Exchange may automatically route orders to other
exchanges under certain circumstances (``Routing Services''). In
connection with such services, one of two Route Mechanisms,
Immediate Routing or the Route Timer, will be used when a Public
Customer order is received and/or reevaluated that is both routable
and marketable against the opposite side ABBO upon receipt and the
Exchange's disseminated market is not equal to the opposite side
ABBO, or is equal to the opposite side ABBO and of insufficient size
to satisfy the order. For those initiating Public Customer orders
that are routable, but do not meet the additional criteria for
Immediate Routing, the System will implement a Route Timer not to
exceed one second (the duration of the Timer will be announced to
Members through a Regulatory Circular), in order to allow Market
Makers and other participants an opportunity to interact with the
initiating order. See Exchange Rule 529.
\29\ The System will pause the market for a time period not to
exceed one second to allow additional orders or quotes refreshing
the liquidity at the MBBO to be received (``liquidity refresh
pause'') when at the time of receipt or reevaluation of the
initiating order by the System: (A) Either the initiating order is a
limit order whose limit price crosses the NBBO or the initiating
order is a market order, and the limit order or market order could
only be partially executed; (B) a Market Maker quote was all or part
of the MBBO when the MBBO is alone at the NBBO; and (C) and the
Market Maker quote was exhausted. See Exchange Rule 515(c)(2).
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The ``Strategy Book'' is the Exchange's electronic book of complex
orders and complex quotes.\30\
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\30\ This definition is consistent with that of another options
exchange. See BOX Rule 7240(a)(6). The BOX rule differs from
proposed Rule 518(a)(16), which defines the Strategy Book, in that
BOX refers to the book as the ``Complex Order Book'' and also refers
to the BOX Trading Host.
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Types of Complex Orders
Proposed Rule 518(b), Types of Complex Orders, describes the
various types and specific times-in-force for complex orders handled by
the System.
As an initial matter, proposed Rule 518(b)(1) states that the
Exchange will issue a Regulatory Circular listing which complex order
types, among the complex order types set forth in the proposed Rule,
are available for use on the Exchange. Additional Regulatory Circulars
will be issued as additional complex order types, among those complex
order types set forth in the proposed Rule, become available for use on
the Exchange. Regulatory Circulars will also be issued when a complex
order type that had been in usage on the Exchange will no longer be
available for use. This is substantially similar to, and based upon,
the manner in which the Exchange determines the available order types
in the Simple Order Book.\31\ The purpose of this provision is to
enable the Exchange to modify the complex order types that are
available on the Exchange as market conditions change. The Exchange
believes that this enhances its ability to remain competitive as
markets and market conditions change and evolve.
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\31\ See Exchange Rule 516.
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Among the complex order types that may be submitted are limit
orders, market orders, Good `til Cancelled (``GTC'') orders, or day
limit orders as each such term is defined in Rule 516,\32\ or Complex
Auction-on-Arrival (``cAOA'') orders, Complex Auction-or-Cancel
(``cAOC'') orders, or Complex Immediate-or-Cancel (``cIOC'') orders, as
such terms are defined below.
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\32\ For a complete description of these order types, see
Exchange Rule 516. The Exchange is not proposing to offer fill-or-
kill complex orders, as currently offered on other exchanges. The
Exchange does not believe that a fill-or-kill order is a critical
order type for effective complex order trading. See e.g., CBOE Rule
6.53C(b), which differs slightly from proposed Rule 518(b) in that
the CBOE rule states that orders may also be entered as fill-or-kill
or as all-or-none (the Exchange does not accept all-or-none orders);
and BOX Rule 7240(b)(4)(i), which differs slightly from proposed
Rule 518(b) in that the BOX rule states that orders may also be
entered as fill-or-kill or as ``Session'' orders.
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Complex orders will be considered ineligible to initiate a Complex
Auction upon receipt unless designated as Complex Auction-on-Arrival
(``cAOA'') orders.\33\ Proposed Rule 518(b)(2)(i) defines a cAOA order
as a complex order designated to be placed into a Complex Auction upon
receipt or upon evaluation. Complex orders that are not designated as
cAOA will, by default, not initiate a Complex Auction upon arrival, but
except as described herein will be eligible to participate in a Complex
Auction that is in progress when such complex order arrives or if
placed on the Strategy Book may participate in or may initiate a
Complex Auction, following evaluation conducted by the System (as
described below). Complex orders that are designated as cIOC or cAOC
are not eligible for cAOA designation, and their evaluation will not
result in the initiation of a Complex Auction either upon arrival or if
eligible when resting on the Strategy Book.
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\33\ The Exchange believes that this gives market participants
extra flexibility to control the handling and execution of their
complex orders by the System by giving them the additional ability
to determine not to have their complex order initiate a Complex
Auction by electing not to designate it as a cAOA order. This
differs slightly from CBOE Rule 6.53[sic](d)(ii)(B), which requires
CBOE Trading Permit Holders to affirmatively request, on an order-
by-order basis, that a COA-eligible order with two legs not be
placed into a CBOE Complex Order Auction (a ``do-not-COA'' request).
The MIAX System considers an order not designated as cAOA to be
ineligible to initiate an auction by default.
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A complex order may also be submitted as a cAOC order. A cAOC order
is a complex limit order used to provide liquidity during a specific
Complex Auction with a time in force that corresponds with that event.
cAOC orders are not displayed to any market participant, and are not
eligible for trading outside of the event.
Additionally, a complex order may be submitted as a Complex
Immediate-or-Cancel or ``cIOC'' order, which is a complex order that is
to be executed in whole or in part upon receipt. Any portion not so
executed is cancelled.
Trading of Complex Orders and Quotes
Proposed Rule 518(c), Trading of Complex Orders and Quotes,
describes the manner in which complex orders will be handled and traded
on the Exchange. The Exchange will determine and communicate to Members
via Regulatory Circular which complex order origin types (i.e., non-
broker-dealer customers, broker-dealers that are not Market Makers on
an options exchange, and/or Market Makers on an options exchange) are
eligible for entry onto the Strategy Book.\34\ The rule also states
that complex orders will be subject to all other Exchange Rules that
pertain to orders generally, unless otherwise provided in proposed Rule
518.
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\34\ See Proposed Rule 518(c). See also CBOE Rule 6.53C(c)(i),
which states that CBOE will determine which classes and which
complex order origin types (i.e., non-broker-dealer public customer,
broker-dealers that are not Market-Makers or specialists on an
options exchange, and/or Market-Makers or specialists on an options
exchange) are eligible for entry into the Complex Order Book.
---------------------------------------------------------------------------
Proposed Rule 518(c)(1) provides that bids and offers on complex
orders and quotes may be expressed in $0.01 increments, and the
component(s) of a complex order may be executed in $0.01 increments,
regardless of the minimum increments otherwise applicable to individual
components of the complex order,\35\ and that if any component of a
complex strategy would be executed at a price that is equal to a
Priority Customer bid or offer on the Simple Order Book, at least one
other component of the complex strategy must
[[Page 58775]]
trade at a price that is better than the corresponding MBBO.\36\
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\35\ See Proposed Rule 518(c)(1). See also ISE Rule 722(b)(1),
which is slightly distinguished from proposed Rule 518(c)(1) because
it states that bids and offers on complex orders may be expressed in
any decimal price, and the leg(s) of a complex order may be executed
in one cent increments, regardless of the minimum increments
otherwise applicable to the individual legs of the order.
\36\ See Proposed Rule 518(c)(1)(ii). See also, ISE Rule
722(b)(2), which states that in this situation at least one leg must
trade at a price that is better by at least one minimum trading
increment, and PHLX Rule 1098(c)(iii), requiring in this situation
that at least one option leg is executed at a better price than the
established bid or offer for that option contract and no option leg
is executed at a price outside of the established bid or offer for
that option contract.
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Additionally, respecting execution pricing, proposed Rule
518(c)(1)(iii) states generally that a complex order will not be
executed at a net price that would cause any component of the complex
strategy to be executed: (A) At a price of zero; or (B) ahead of a
Priority Customer order on the Simple Order Book without improving the
MBBO of at least one component of the complex strategy. The Exchange
will never trade through Priority Customer orders, thus protecting the
priority that is established in the Simple Order Book.
Execution of Complex Orders and Quotes
Proposed Rule 518(c)(2) describes the process of the opening of the
Strategy Book (and reopening after a halt) for trading, prices at which
executions may occur on the Exchange for complex strategies, execution
of complex orders against the individual components or ``legs'' on the
Simple Order Book, the automatic generation of derived orders, and the
process of evaluation that is conducted by the System on an ongoing
basis respecting complex orders.
Proposed Rule 518(c)(2)(i) states that complex orders and quotes do
not participate in the opening process for the individual option legs
conducted pursuant to Rule 503.\37\ At the beginning of each trading
session, and upon reopening after a halt, once all components of a
complex strategy are open, an initial evaluation will be conducted in
order to determine whether a complex order is a Complex Auction-
eligible order, using the process and criteria described in
Interpretations and Policies .03(a) of proposed Rule 518 regarding the
Initial Improvement Percentage (``IIP''). The IIP is used to calculate
a percentage of the dcMBBO bid/ask differential at or within which the
System will determine to initiate a Complex Auction when the Strategy
Book opens for trading.\38\ If a Complex Auction-eligible order is
priced equal to, or improves, the IIP value and is also priced equal
to, or improves, other complex orders and/or quotes resting at the top
of the Strategy Book, the complex order will be eligible to initiate a
Complex Auction.
---------------------------------------------------------------------------
\37\ This is similar to the opening of complex orders on other
exchanges. Complex Orders on PHLX will not open for trading until
each option component of a Complex Order Strategy has opened or
reopened following a trading halt. See PHLX Rules 1098(d)(i) and
(ii). Similarly, complex orders on NYSE MKT do not participate in
the opening Auction Process for individual component option series
legs conducted pursuant to Rule 952NY. The NYSE MKT Complex Matching
Engine will not process an Electronic Complex Order until all of the
individual component option series that make up a complex order
strategy have opened. See NYSE MKT Rule 980NY(c)(i)(A).
\38\ Similarly, as discussed more fully below, the System will
also calculate an Upon Receipt Improvement Percentage (``URIP'')
value to determine whether a complex order is priced equal to, or
improves, the URIP value upon receipt when the complex strategy is
open for trading, and a Re-evaluation Improvement Percentage
(``RIP'') value, to determine whether a complex order resting at the
top of the Strategy Book is priced equal to, or improves, the RIP
value. If so, in either case, the complex order will be Complex
Auction-eligible. See Proposed Rule 518, Interpretations and
Policies .03(b) and (c).
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The purpose of this provision is to ensure that a complex order
will not initiate a Complex Auction if it does not improve the current
complex bid or offer by at least a defined percentage (i.e., the IIP)
where it is not reasonable to anticipate that it would generate a
meaningful number of RFR Responses such that there would be improvement
of the complex order's limit price. Promoting the orderly initiation of
a Complex Auction is essential to maintaining a fair and orderly market
for complex orders; otherwise, the initiation of Complex Auctions that
are unlikely to result in price improvement might result in a
disproportionate amount of quote and message activity that could affect
the orderliness of the market. The Exchange believes that the use of
the IIP in this manner ensures that a Complex Auction will be conducted
when there is a meaningful opportunity for price improvement, and
accordingly will benefit participants and investors that submit complex
orders to the Exchange by limiting unnecessary activity on the
Exchange.
The System will also evaluate the eligibility of complex orders and
quotes (as applicable) to participate in the managed interest process
for complex orders as set forth in proposed Rule 518(c)(4) and
described below; if they are eligible for full or partial execution
against a complex order or quote resting on the Strategy Book or
through Legging with the Simple Order Book as set forth in proposed
Rule 518(c)(2)(iii) and described below; whether the complex order or
quote should be cancelled; and whether all or any remaining portion of
the complex order or quote should be placed on the Strategy Book. This
evaluation process is ongoing and is designed to handle complex orders
in the most efficient manner possible as market conditions change. The
various outcomes are determined at the time of evaluation based on
then-existing market conditions, which are continually evolving and
require such evaluation for determination of the System's handling of
complex orders.
The Strategy Book will open for trading, or reopen for trading
after a halt, with a Complex Auction if it is determined that one of
the following conditions is present: (A) A complex order with no
matching interest on the Strategy Book equals or improves the IIP, (B)
matching interest exists at a price that is equal to or through the
IIP, or (C) a size imbalance exists where the price at which the
maximum quantity that can trade is equal to or through the IIP. If the
Strategy Book contains matched interest or a size imbalance exists
where the price at which the maximum quantity can trade is not equal to
or through the IIP, the Strategy Book will open for trading with a
trade and a Complex Auction will not be initiated. The remaining
portion of any complex order for which there is a size imbalance will
be placed on the Strategy Book. If the Strategy Book contains no
matching interest or interest equal to or through the IIP, the complex
strategy will open without a trade and a Complex Auction will not be
initiated.
Proposed Rule 518(c)(2)(ii) describes the manner in which the
System determines the price of execution of complex orders and quotes.
Incoming complex orders and quotes will be executed by the System in
accordance with the provisions below, and will not be executed at
prices inferior to the icMBBO or at a price that is equal to the icMBBO
when there is a Priority Customer Order (as defined in Rule 100) \39\
at the best icMBBO price. Complex orders will never be executed at a
price that is outside of the individual component prices on the Simple
Order Book. Furthermore, the net price of a complex order executed
against another complex order on the Strategy Book will never be
inferior to the price that would be available if the complex order
legged into the Simple Order Book. The purpose of this provision is to
prevent a component of a complex order from being executed at a price
that is inferior to the best-priced contra-side orders or quotes on the
[[Page 58776]]
Simple Order Book (on which the icMBBO is based) and to prevent a
component of a complex order from being executed at a price that
compromises the priority already established by a Priority Customer on
the Simple Order Book. The Exchange believes that such priority should
be protected and that such protection should be extended to the
execution of complex orders on the Strategy Book.\40\
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\39\ The term ``Priority Customer'' means a person or entity
that (i) is not a broker or dealer in securities and (ii) does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial accounts(s). The term
``Priority Customer Order'' means an order for the account of a
Priority Customer. See Exchange Rule 100.
\40\ Other exchanges protect Priority and Public Customer
priority. ISE Priority Customer Orders on the Exchange shall have
priority over Professional Orders and market maker quotes at the
same price in the same options series. See ISE Rule 713(c). See
also, CBOE Rule 6.45A(a)(i)(1), which states that CBOE Public
customer orders in the electronic book have priority, and NYSE MKT
Rule 964NY(b)(2)(A), which provides that bids and offers in the
Consolidated Book for Customer accounts have first priority over
other bids or offers at the same price.
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Incoming complex orders that could not be executed because the
executions would be priced (A) outside of the icMBBO, or (B) equal to
or through the icMBBO due to a Priority Customer Order at the best
icMBBO price, will be cancelled if such complex orders are not eligible
to be placed on the Strategy Book. Complex orders and quotes will be
executed without consideration of any prices for the complex strategy
that might be available on other exchanges trading the same options
contracts provided, however, that such complex order price may be
subject to the Implied Exchange Away Best Bid or Offer (``ixABBO'')
Protection set forth in Interpretations and Policies .05(d) proposed
Rule 518.\41\
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\41\ The ixABBO price protection feature is a price protection
mechanism under which, when in operation as requested by the
submitting Member, a buy order will not be executed at a price that
is higher than each other single exchange's best offer, and under
which a sell order will not be executed at a price that is lower
than each other single exchange's best bid for the complex strategy.
The ixABBO is calculated using the best net bid and offer for a
complex strategy using each other exchange's displayed best bid or
offer on their version of the Simple Order Book. For stock-option
orders, the ixABBO for a complex strategy will be calculated using
the BBO for each component on each individual away options market
and the NBBO for the stock component. The ixABBO price protection
feature must be engaged on an order-by-order basis by the submitting
Member and is not available for complex Standard quotes, complex
eQuotes, or cAOC orders. The Exchange believes that these
limitations on the execution price provide a price protection option
for Members that choose to place the ixABBO protection in operation.
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Proposed Rule 518(c)(2)(iii) describes the Legging process through
which complex orders, under certain circumstances, are executed against
the individual components of a complex strategy on the Simple Order
Book. Complex orders up to a maximum number of legs (determined by the
Exchange on a class-by-class basis as either two or three legs and
communicated to Members via Regulatory Circular) may be automatically
executed against bids and offers on the Simple Order Book for the
individual legs of the complex order (``Legging''), provided the
complex order can be executed in full or in a permissible ratio by such
bids and offers, and provided that the execution price of each
component is not executed at a price that is outside of the NBBO.\42\
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\42\ See proposed Rule 518(c)(2)(iii). This is similar to CBOE
Rule 6.53C(c)(ii)(1), which states that complex order in the COB
will automatically execute against individual orders or quotes
residing in the EBook provided the complex order can be executed in
full (or in a permissible ratio) by the orders and quotes in EBook;
see also BOX Rule 7240(b)(3)(ii) providing that Complex Orders will
be automatically executed against bids and offers on the BOX Book
for the individual legs of the Complex Order to the extent that the
Complex Order can be executed in full or in a permissible ratio by
such bids and offers. Legging is not available on the Exchange for
cAOC orders, complex Standard quotes, complex eQuotes, or stock-
option orders.
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Legging is not available for cAOC orders, complex Standard quotes,
complex eQuotes, or stock-option orders. The benefit of Legging against
the individual components of a complex order or quote on the Simple
Order Book is that complex orders can access the full liquidity of the
Exchange's Simple Order Book, thus enhancing the possibility of
executions at the best available prices on the Exchange.
Notwithstanding the foregoing, the Exchange is proposing to
establish, in proposed Rule 518(c)(2)(iii), that complex orders that
could otherwise be eligible for Legging will only be permitted to trade
against other complex orders in the Strategy Book in certain
situations.
Specifically, proposed Rule 518(c)(2)(iii) would provide that
complex orders with two option legs where both legs are buying or both
legs are selling and both legs are calls or both legs are puts may only
trade against other complex orders on the Strategy Book and will not be
permitted to leg into the Simple Order Book. Similarly, proposed Rule
518(c)(2)(iii) would impose a similar restriction by stating that
complex orders with three option legs where all legs are buying or all
legs are selling may only trade against other complex orders on the
Strategy Book (regardless of whether the option leg is a call or a
put).\43\ The System will not generate derived orders for these complex
orders.
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\43\ This is substantially similar to ISE Rules 722(b)(3)(ii)(A)
and (B), which state that Complex orders with 2 option legs where
both legs are buying or both legs are selling and both legs are
calls or both legs are puts may only trade against other complex
orders in the complex order book. The trading system will not
generate legging orders for these complex orders, and complex orders
with 3 or 4 option legs where all legs are buying or all legs are
selling may only trade against other complex orders in the complex
order book. See also, Securities Exchange Act Release No. 73023
(September 9, 2014), 79 FR 55033 (September 15, 2014)(SR-ISE-2014-
10). This differs slightly from the Exchange's proposal because the
Exchange's proposal applies to complex orders with two option legs
in the same manner as the ISE rule, but applies to complex orders
with three option legs (instead of three or four legs) where all
legs are buying or all legs are selling, regardless of whether the
option leg is a call or a put.
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Currently, Market Makers in the Simple Order Book are protected
from undue risk of executions by way of the Aggregate Risk Manager
(``ARM'') \44\ by limiting the number of contracts they execute in an
option class on the Exchange within a specified time period (a
``specified time period''). ARM automatically cancels and removes the
Market Maker's Standard quotes from the Exchange's disseminated
quotation in all series of a particular option class when it has
determined that a Market Maker has traded a number of contracts equal
to or above a percentage of their quotations (the ``Allowable
Engagement Percentage'' or ``AEP'') during the specified time period.
The purpose of ARM is to allow Market Makers to provide liquidity
across potentially hundreds of options series without executing the
full cumulative size of all such quotes before being given adequate
opportunity to adjust the price and/or size of their quotes.
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\44\ See Exchange Rule 612.
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All of a Market Maker's quotes in each option class are considered
firm until such time as the AEP threshold has been equaled or exceeded
and the Market Maker's quotes are removed by ARM in all series of that
option class.\45\ Thus the Legging of complex orders presents higher
risk to Market Makers as compared to simple orders being entered in
multiple series of an options class in the simple market, as it can
result in Market Makers exceeding their established AEP by a greater
number of contracts. Although Market Makers can limit their risk
through the use of ARM, the Market Maker's quotes are not removed until
after a trade is executed. As a result, because of the way complex
orders leg into the regular market as a single transaction, Market
Makers may end up trading more than the cumulative AEP they have
established, and are therefore exposed to greater risk. The Exchange
believes that Market Makers may be compelled to change their quoting
and trading behavior to account for this additional risk by widening
their quotes and reducing the size associated with their quotes, which
[[Page 58777]]
would diminish the Exchange's quality of markets and the quality of the
markets in general.
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\45\ See Exchange Rule 612(c).
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The purpose of the limitations in proposed Rule 518(c)(2)(iii) is
to minimize the impact of Legging on single leg Market Makers by
limiting a potential source of unintended Market Maker risk when
certain types of complex orders leg into the Simple Order Book. The
Exchange believes that the proposed limitation on the availability of
Legging to (i) complex orders with two option legs where both legs are
buying or both legs are selling and both legs are calls or both legs
are puts, and (ii) complex orders with three option legs where all legs
are buying or all legs are selling regardless of whether the option leg
is a call or a put, should serve to reduce the risk of Market Makers
trading above their risk tolerance levels.
Proposed Rule 518(c)(2)(iv) states that derived orders, as
described above, may be automatically generated on behalf of complex
orders so that they are represented at the best bid or offer on the
Exchange for the individual legs, and shall be executed as provided in
proposed Rule 518(a)(9), described above.
Proposed Rule 518(c)(2)(v) sets forth the process for evaluation of
complex orders and quotes, and the Strategy Book, on a regular basis
and for various conditions and events that result in the System's
particular handling and execution of complex orders and quotes in
response to such regular evaluation, conditions and events. The System
will evaluate complex orders and quotes initially once all components
of the complex strategy are open as set forth in proposed Rule
518(c)(2)(i) as described above, upon receipt as set forth in proposed
Rule 518(c)(5)(i) as described below, and continually as set forth in
proposed Rule 518(c)(5)(ii) as described below.\46\
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\46\ Other exchanges' systems conduct evaluations as well. For
example, PHLX conducts an opening ``COOP Evaluation'' to determine,
for a Complex Order Strategy, the price at which the maximum number
of contracts can trade, taking into account Complex Orders marked
all-or-none (which will be executed if possible) unless the maximum
number of contracts can only trade without including all-or-none
orders. See, e.g., PHLX Rule 1098(d)(ii)(C).
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The purpose of the evaluation process for complex orders and quotes
is to determine (A) their eligibility to initiate, or to participate
in, a Complex Auction as described in proposed Rule 518(d)(1) below;
(B) their eligibility to participate in the managed interest process as
described in proposed Rule 518(c)(4) below; (C) whether a derived order
should be generated or cancelled; (D) if they are eligible for full or
partial execution against a complex order or quote resting on the
Strategy Book or through Legging with the Simple Order Book (as
described in proposed Rule 518(c)(2)(iii) above); (E) whether the
complex order or quote should be cancelled; and (F) whether the complex
order or quote or any remaining portion thereof should be placed or
remain on the Strategy Book.
The Exchange notes that, while the rules of other exchanges do not
include descriptions of the evaluation process with the same level of
detail and specificity as the rules concerning the evaluation process
in proposed Rule 518, such a process occurs on trading systems on other
exchanges. For example, the CBOE system evaluates its book in a similar
manner to the proposed evaluation of the Strategy Book when determining
how to execute complex orders.\47\ PHLX evaluates the opening price and
whether or not a trade can take place.\48\ ISE evaluates price limits
for complex orders and quotes both on ISE and on away exchanges,
outside of which they will either not be executed or will be rejected
outright before entering the ISE system.\49\ The evaluation process is
thus not a novel or unique concept; the Exchange is simply codifying it
so that Members will know precisely how their complex orders are
evaluated and handled by the System. The Exchange believes that this
transparency provides Members with the necessary details concerning the
manner in which the Strategy Book and their complex orders are
evaluated.
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\47\ A similar evaluation takes place in that a complex order in
the CBOE Complex Order Book will automatically execute against
individual orders or quotes residing in the EBook (simple orders)
provided the complex order can be executed in full (or in a
permissible ratio) by the orders and quotes in EBook; complex orders
in the COB that are marketable against each other will automatically
execute. See CBOE Rules 6.53[sic](c)(ii)(1) and (2).
\48\ Upon expiration of the Complex Order Opening Process Timer,
the PHLX system will conduct a COOP Evaluation to determine, for a
Complex Order Strategy, the price at which the maximum number of
contracts can trade, taking into account Complex Orders marked all-
or-none (which will be executed if possible) unless the maximum
number of contracts can only trade without including all-or-none
orders. The PHLX will open the Complex Order Strategy at that price,
executing marketable trading interest, in the following order:
first, to non-broker-dealer customers in time priority; next to Phlx
electronic market makers on a pro rata basis; and then to all other
participants on a pro rata basis. The imbalance of Complex Orders
that are unexecutable at that price are placed on the CBOOK. If at
the end of the COOP Timer the System determines that no market or
marketable limit Complex Orders or COOP Sweeps, Complex Orders or
COOP Sweeps that are equal to or improve the cPBBO, and/or Complex
Orders or COOP Sweeps that cross within the cPBBO exist in the
System, all Complex Orders received during the COOP Timer will be
placed on the CBOOK. If at the end of the COOP Timer the System
determines that there are market or marketable limit Complex Orders
or COOP Sweeps, Complex Orders or COOP Sweeps that are equal to or
improve the cPBBO, and/or Complex Orders or COOP Sweeps that cross
within the cPBBO in the System, the System will do the following: if
such interest crosses and does not match in size, the execution
price is based on the highest (lowest) executable offer (bid) price
when the larger sized interest is offering (bidding), provided,
however, that if there is more than one price at which the interest
may execute, the execution price when the larger sized interest is
offering (bidding) is the midpoint of the highest (lowest)
executable offer (bid) price and the next available executable offer
(bid) price rounded, if necessary, down (up) to the closest minimum
trading increment. If the crossing interest is equal in size, the
execution price is the midpoint of lowest executable bid price and
the highest executable offer price, rounded, if necessary, up to the
closest minimum trading increment. Executable bids/offers include
any interest which could be executed at the net price without
trading through residual interest or the cPBBO or without trading at
the cPBBO where there is non-broker-dealer customer interest at the
best bid or offer for any leg, consistent with Rule 1098(c)(iii).
See PHLX Rule 1098(d)(ii)(C).
\49\ ISE evaluates, among other things, prices at which complex
orders are eligible or ineligible for execution. The legs of a
complex order may be executed at prices that are inferior to the
prices available on other exchanges trading the same options series.
Notwithstanding, the ISE System will not permit any leg of a complex
order to trade through the NBBO for the series by a configurable
amount calculated as the lesser of (i) an absolute amount not to
exceed $0.10, and (ii) a percentage of the NBBO not to exceed 500%,
as determined by the Exchange on a class or series basis. A Member
can also include an instruction on a complex order entered on the
complex order book that each leg of the complex order is to be
executed only at a price that is equal to or better than the
national best bid or offer for the options series or any stock
component, as applicable. The ISE System evaluates complex orders
for rejection. ISE will reject any complex order strategy where all
legs are to buy if it is entered at a price that is less than the
minimum price, which is calculated as the sum of the ratio on each
leg of the complex order multiplied by $0.01 per leg (e.g., an order
to buy 2 calls and buy 1 put would have a minimum price of $0.03).
See ISE Rule 722, Supplementary Material .07.
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The continual and event-triggered evaluation process ensures that
the System is monitoring and assessing the Strategy Book for incoming
complex orders and quotes, and changes in market conditions or events
that cause complex orders to become due for execution or Complex
Auction-eligible, and conditions or events that result in the
cancellation of complex orders on the Strategy Book. This ensures the
integrity of the Exchange's System in handling complex orders and
results in a fair and orderly market for complex orders on MIAX.
Complex Order Priority
Proposed Rule 518(c)(3) describes how the system will establish
priority for complex orders. The proposed complex order priority
structure is based generally on the same approach
[[Page 58778]]
and structure currently effective on MIAX respecting priority of orders
and quotes in the simple market as established in Exchange Rule
514.\50\ A complex order may be executed at a net credit or debit price
with one other Member without giving priority to bids or offers
established in the marketplace that are no better than the bids or
offers comprising such net credit or debit; provided, however, that if
any of the bids or offers established in the marketplace consist of a
Priority Customer Order, at least one leg of the complex order must
trade at a price that is better than the corresponding bid or offer in
the marketplace by at least a $0.01 increment.\51\ Under the
circumstances described above, if a stock-option order has one option
leg, such option leg has priority over bids and offers established in
the marketplace by Professional Interest (as defined in Rule 100) \52\
and Market Makers with priority quotes \53\ that are no better than the
price of the options leg, but not over such bids and offers established
by Priority Customer Orders. If a stock-option order has more than one
option leg, such option legs may be executed in accordance with
proposed Rule 518(c)(3)(i).
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\50\ Exchange Rule 514, Priority of Quotes and Orders, describes
among other things the various execution priority, trade allocation
and participation guarantees generally applicable to the Simple
Order Book. Some sections of Exchange Rule 514 are cross-referenced
herein and will apply as noted to complex orders, as the context
requires.
\51\ See Proposed Rule 518(c)(3). See also, ISE Rule 722(b)(2),
which states that in this situation at least one leg must trade at a
price that is better by at least one minimum trading increment, and
PHLX Rule 1098(c)(iii), requiring in this situation that at least
one option leg is executed at a better price than the established
bid or offer for that option contract and no option leg is executed
at a price outside of the established bid or offer for that option
contract.
\52\ 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 Exchange Rule 100.
\53\ See Exchange Rule 517(b)(1).
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Regarding execution and allocation of complex orders, proposed Rule
518(c)(3)(ii) establishes that complex orders will be automatically
executed against bids and offers on the Strategy Book in price
priority. Bids and offers at the same price on the Strategy Book will
be executed pursuant to the following priority rules: (A) Priority
Customer complex orders resting on the Strategy Book will have first
priority to trade against a complex order. Priority Customer complex
orders resting on the Strategy Book will be allocated in price time
priority; (B) Market Maker Priority Interest for Complex will
collectively have second priority. Market Maker Priority Interest for
Complex will be allocated on a pro-rata basis as defined in Rule
514(c)(2); (C) Market Maker non-Priority Interest for Complex will
collectively have third priority. Market Maker non-Priority Interest
for Complex will be allocated on a pro-rata basis as defined in Rule
514(c)(2); (D) Non-Market Maker Professional Interest orders resting on
the Strategy Book will collectively have fourth priority. Non-Market
Maker Professional Interest orders will be allocated on a pro-rata
basis as defined in Rule 514(c)(2).\54\
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\54\ In contrast, PHLX rules state that an incoming marketable
Complex Order that does not trigger a COLA Timer will execute first
against quotes or orders on the limit order book for the individual
components of the order (whereas, under the instant proposal,
outside of a Complex Auction the Exchange will first execute bids
and offers at the same price on the Strategy Book), second, against
non-broker-dealer customer Complex Orders and non-market maker
broker-dealer Complex Orders resting in the CBOOK in price priority
and, at the same price, against (i) non-broker-dealer customer
Complex Orders in the order in which they were received; (ii) SQTs,
RSQTs, non-SQT ROTs, specialists and non-PHLX market makers on
another exchange on a size pro rata basis (whereas, under the
instant proposal, the Exchange does not bundle all Market Makers in
the same priority tier, and instead distinguishes between Market
Maker Priority Interest, which is executed and allocated on a pro
rata basis before Market Maker non-Priority Interest, which is
thereafter executed and allocated on a pro rata basis); and (iii)
non-market-maker broker-dealer Complex Orders on a size pro rata
basis. See PHLX Rule 1098(f)(iii).
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Managed Interest Process for Complex Orders
In order to ensure that complex orders (which are non-routable)
receive the best executions on the Exchange, proposed Rule 518(c)(4),
sets forth the price(s) at which complex orders will be placed on the
Strategy Book. The managed interest process is initiated when a complex
order that is eligible to be placed on the Strategy Book cannot be
executed against either the Strategy Book or the Simple Order Book
(with the individual legs) at the complex order's net price, and is
intended to ensure that a complex order to be managed does not result
in a locked or crossed market on the Exchange. Once initiated, the
managed interest process for complex orders will be based upon the
icMBBO.\55\
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\55\ A complex order for which the ixABBO protection is engaged
will be managed to the ixABBO as described below and in proposed
Rule 518, Interpretations and Policies .05(d).
---------------------------------------------------------------------------
Under the managed interest process, a complex order that is resting
on the Strategy Book and is either a complex market order as described
in proposed Rule 518(c)(6) and discussed below, or has a limit price
that locks or crosses the current opposite side icMBBO when the icMBBO
is the best price, may be subject to the managed interest process for
complex orders as discussed herein. Complex Standard quotes are not
eligible for inclusion in the managed interest process. An unexecuted
complex Standard quote with a limit price that would otherwise be
managed to the icMBBO will be cancelled. If the order is not a Complex
Auction-eligible order as defined in proposed Rule 518(d)(1) and
described below, the System will first determine if the inbound complex
order can be matched against other complex orders and/or quotes resting
on the Strategy Book at a price that is at or inside the icMBBO
(provided there are no Priority Customer orders on the Simple Order
Book at that price). Second, the System will determine if the inbound
complex order can be executed by Legging against individual orders and
quotes resting on the Simple Order Book at the icMBBO. A complex order
subject to the managed interest process will never be executed at a
price that is through the individual component prices on the Simple
Order Book. Furthermore, the net price of a complex order subject to
the managed interest process that is executed against another complex
order on the Strategy Book will never be inferior to the price that
would be available if the complex order legged into the Simple Order
Book. When the opposite side icMBBO includes a Priority Customer Order,
the System will book and display such booked complex order on the
Strategy Book at a price (the ``book and display price'') that is $0.01
away from the current opposite side icMBBO.
Example--Complex order managed interest when Priority Customer Interest
at the icMBBO is Present
MIAX--LMM quote Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM quote Mar 55 Call 2.00-2.30 (10x10)
MIAX Priority Customer order Mar 55 Call 2.10 bid (1)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and sell 2 Mar 55 Calls for a 2.30 debit, 100
times. The cAOA instruction is not present on this order, so the order
will not initiate an auction upon arrival regardless of its
relationship to the Improvement Percentage.
icMBBO is 1.40 debit bid at 2.30 credit offer
Since the Mar 55 call is 2.10 bid for only one contract (the MIAX
Priority Customer order), the complex order cannot be legged against
the Simple Order Book at a 2.30 debit as a 2.30 debit would require
selling two March 55 Calls at 2.10 while buying one March 50 Call at
6.50. Since there is Priority
[[Page 58779]]
Customer interest on one leg of the complex order on the Simple Order
Book, the inbound complex order cannot trade at this price by matching
with other complex liquidity. Thus, the order is managed for display
purposes at a price one penny inside of the opposite side icMBBO, 2.29
and is available to trade with other complex liquidity at 2.29. Since
there is no managed interest on the Simple Order Book, the icMBBO is
equal to the dcMBBO in this case and remains 1.40 debit bid at 2.30
credit offer. The combination of the Simple Order Book and the Strategy
Book will be a one penny wide market of 2.29 debit bid at 2.30 credit
offer. If additional interest were to arrive on the Mar 55 Call 2.10
bid, the inbound complex order would be re-evaluated and would in this
example become eligible to leg with the Priority Customer interest on
the Simple Order Book at the 2.30 credit offer.
When the opposite side icMBBO does not include a Priority Customer
Order and is not available for execution in the ratio of such complex
order, or cannot be executed through Legging with the Simple Order
Book, the System will place such complex order on the Strategy Book and
display such booked complex order at a book and display price that will
lock the current opposite side icMBBO because it is a price at which
another complex order or quote can trade.
Example--Complex Market order managed interest when Priority Customer
Interest at the icMBBO is Present
MIAX--LMM quote Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM quote Mar 55 Call 2.00-2.30 (10x10)
MIAX Priority Customer order Mar 55 Call 2.10 bid (1)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and sell 2 Mar 55 Calls for a market debit, 100
times. The cAOA instruction is not present on this order, so the order
will not initiate an auction upon arrival regardless of its
relationship to the IIP.
The icMBBO is 1.40 debit bid at 2.30 credit offer
The dcMBBO is 1.40 debit bid at 2.30 credit offer
Since the Mar 55 call is 2.10 bid for only one contract (the MIAX
Priority Customer order), the complex order cannot be legged against
the Simple Order Book at a 2.30 debit (the complex market order's
assigned dcMBBO price), because a 2.30 debit would require selling two
March 55 Calls at 2.10 while buying one March 50 Call at 6.50. Since
there is Priority Customer interest on one leg of the complex order on
the Simple Order Book, the inbound complex order cannot trade at this
price by matching with other complex liquidity. Thus, the complex order
is managed for display purposes at a price one penny inside of the
opposite side icMBBO, 2.29 and is available to trade with other complex
liquidity at 2.29. Since there is no managed interest on the Simple
Order Book, the icMBBO is equal to the dcMBBO in this case and remains
1.40 debit bid at 2.30 credit offer. The combination of the Simple
Order Book and the Strategy Book will be a one penny wide market of
2.29 debit bid at 2.30 credit offer.
If additional interest were to arrive on the Mar 55 Call 2.10 bid,
the resting complex order would be re-evaluated and would in this
example become eligible to leg with the icMBBO or dcMBBO since they are
equal, which includes Priority Customer interest on the Simple Order
Book at the 2.30 credit offer.
Example--Complex order managed interest when the ratio to allow Legging
does not exist, and there is no Priority Customer Interest
MIAX--LMM quote Mar 50 call 6.00-6.50 (10x10)
MIAX--LMM quote Mar 55 call 2.00-2.30 (10x10)
MIAX Professional order Mar 55 Call 2.10 bid (1)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 call and sell 2 Mar 55 calls for a 2.30 debit, 100
times.
The icMBBO is 1.40 debit bid at 2.30 credit offer
The cAOA instruction is not present on this complex order, so the
complex order will not initiate an auction upon arrival regardless of
its relationship to the URIP.
Since the Mar 55 call is 2.10 bid for only one contract (the MIAX
Professional order), the complex order cannot be legged against the
Simple Order Book at a 2.30 debit, as a 2.30 debit would require
selling two March 55 Calls at 2.10 while buying one March 50 Call at
6.50. Although the inbound complex order cannot trade at this time
because there is insufficient interest to buy the March 55 Call, there
is no Priority Customer interest on either side of the 2.30 credit
offer and therefor the order will be able to trade at that price when
sufficient interest exists. Thus, the order is managed for display
purposes at a price locking the opposite side icMBBO 2.30 and is
available to trade against other complex interest at 2.30. Since there
is no managed interest on the Simple Order Book, the icMBBO is equal to
the dcMBBO and remains 1.40 debit bid at 2.30 credit offer. The
combination of the Simple Order Book and the Strategy Book will be a
locked market of 2.30 debit bid at 2.30 credit offer.
Example--Complex Market order managed interest when the ratio to allow
Legging does not exist, and there is no Priority Customer Interest
MIAX--LMM quote Mar 50 call 6.00-6.50 (10x10)
MIAX--LMM quote Mar 55 call 2.00-2.30 (10x10)
MIAX Professional order Mar 55 Call 2.10 bid (1)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 call and sell 2 Mar 55 calls for a market debit, 100
times.
The icMBBO is 1.40 debit bid at 2.30 credit offer
The dcMBBO is 1.40 debit bid at 2.30 credit offer
The cAOA instruction is not present on this order, so the order will
not initiate an auction upon arrival regardless of its relationship to
the URIP.
Since the Mar 55 call is 2.10 bid for only one contract (the MIAX
Professional order), the complex order cannot be legged against the
Simple Order Book at a 2.30 debit (the complex market order's assigned
dcMBBO price), as a 2.30 debit would require selling two March 55 Calls
at 2.10 while buying one March 50 Call at 6.50. Although the inbound
complex order cannot trade at this time because there is insufficient
interest to buy the March 55 Call, there is no Priority Customer
interest on either side of the 2.30 credit offer and therefor the order
will be able to trade at that price when sufficient interest exists.
Thus, the complex order is managed for display purposes at a price
locking the opposite side icMBBO which is equal to the dcMBBO at 2.30
and is available to trade against other complex interest at 2.30. Since
there is no managed interest on the Simple Order Book, the icMBBO is
equal to the dcMBBO and remains 1.40 debit bid at 2.30 credit offer.
The combination of the Simple Order Book and the Strategy Book will be
a locked market of 2.30 debit bid at 2.30 credit offer.
Should the icMBBO change, the complex order's book and display
price will continuously re-price to the new icMBBO until (A) the
complex order has been executed in its entirety; (B) if not executed,
the complex order has been placed on the Strategy Book at prices up to
and including its limit price or, in the case of a complex market
order, at the
[[Page 58780]]
new icMBBO; (C) the complex order has been partially executed and
remaining unexecuted contracts have been placed on the Strategy Book at
prices up to and including their limit price or, in the case of a
complex market order, at the new icMBBO; or (D) the complex order or
any remaining portion of the complex order is cancelled. If the
Exchange receives a new complex order or quote for the complex strategy
on the opposite side of the market from the managed complex order that
can be executed, the System will immediately execute the remaining
contracts from the managed complex order to the extent possible at the
complex order's current book and display price, provided that the
execution price is not outside of the current icMBBO. If unexecuted
contracts remain from the complex order on the Strategy Book, the
complex order's size will be revised and disseminated to reflect the
complex order's remaining contracts at its current managed book and
display price.
The purpose of using the calculated icMBBO is to enable the System
to determine a valid trading price range for complex strategies and to
protect orders resting on the Simple Order Book by ensuring that they
are executed when entitled. Additionally, the managed interest process
is designed to ensure that the System will not execute any component of
a complex order at a price that would trade through an order on the
Simple Order Book or that would disrupt the established priority of
Priority Customer interest resting on the Simple Order Book.\56\ The
Exchange believes that this is reasonable because it prevents the
components of a complex order from trading at a price that is inferior
to a price at which the individual components may be traded on MIAX and
it maintains the priority for Priority Customers resting on the Simple
Order Book.
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\56\ For a complete description of priority in the Simple Order
Book, see Exchange Rule 514.
---------------------------------------------------------------------------
Evaluation Process
Proposed Rule 518(c)(5) describes how and when the System
determines to execute or otherwise handle complex orders in the System.
As stated above, the System will evaluate complex orders and quotes and
the Strategy Book on a regular basis and to respond to the existence of
various conditions and/or events that trigger an evaluation. Evaluation
results in the various manners of handling and executing complex orders
and quotes as described herein. The System will evaluate complex orders
and quotes initially once all components of the complex strategy are
open as set forth in proposed Rule 518(c)(2)(i) as described above,
upon receipt as set forth in proposed Rule 518(c)(5)(i) as described
below, and continually as set forth in proposed Rule(c)(5)(ii) as
described below.
Proposed Rule 518(c)(5)(i) describes the evaluation process that
occurs upon receipt of complex orders and quotes once a complex
strategy is open for trading. After a complex strategy is open for
trading, all new complex orders and quotes that are received for the
complex strategy are evaluated upon arrival. The System will determine
if such complex orders are Complex Auction-eligible orders, using the
process and criteria regarding the Upon Receipt Improvement Percentage
(``URIP'') as described below.\57\ The System will also evaluate (A)
whether such complex orders or quotes are eligible for full or partial
execution against a complex order or quote resting on the Strategy
Book; (B) whether such complex orders or quotes are eligible for full
or partial execution through Legging with the Simple Order Book (as
described in proposed Rule 518(c)(2)(iii) and discussed above); (C)
whether all or any remaining portion of a complex order or quote should
be placed on the Strategy Book; (D) whether a derived order should be
generated or cancelled; (E) the eligibility of such complex orders and
quotes (as applicable) to participate in the managed interest process
as described above; \58\ and (F) whether such complex orders should be
cancelled.
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\57\ See proposed Rule 518, Interpretations and Policies .03(b).
\58\ See proposed Rule 518(c)(4).
---------------------------------------------------------------------------
Proposed Rule 518(c)(5)(ii) describes the System's ongoing regular
evaluation of the Strategy Book. The System will continue to evaluate
complex orders and quotes on the Strategy Book to determine if such
complex orders are Complex Auction-eligible orders, using the process
and criteria described in Proposed Rule 518, Interpretations and
Policies .03(c) regarding the Re-evaluation Improvement Percentage
(``RIP'') described below. The System will also continue, on a regular
basis, to evaluate the factors listed in (A)-(F) above.
The System will also continue to evaluate whether there is a SMAT
Event as defined above, a wide market condition (as described in
Proposed Rule 518, Interpretations and Policies .05(e)(1) and discussed
below), a halt (as described in proposed Rule 518, Interpretations and
Policies .05(e)(3) and discussed below) affecting any component of a
complex strategy. Complex orders and quotes will be handled during such
events in the manner set forth in proposed Rule 518, Interpretations
and Policies .05(e), as discussed below.
Proposed Rule 518(c)(5)(iii) states that if the System determines
that a complex order is a Complex Auction-eligible order (described
below), such complex order will be submitted into the Complex Auction
process as described in proposed Rule 518(d) and discussed below.
Proposed Rule 518(c)(5)(iv) describes the handling of orders that
are determined not to be Complex Auction-eligible. If the System
determines that a complex order is not a Complex Auction-eligible
order, such complex order may be, as applicable, immediately matched
and executed against a complex order or quote resting on the Strategy
Book; executed against the individual components of the complex order
on the Simple Order Book through Legging (as described in proposed Rule
518(c)(2)(iii) above; placed on the Strategy Book and managed pursuant
to the managed interest process as described in proposed Rule 518(c)(4)
and discussed above; or cancelled by the System if the time-in-force
(i.e., IOC) of the complex order does not allow it to rest on the
Strategy Book.
The Exchange is proposing to establish complex orders that may be
submitted as market orders. Proposed Rule 518(c)(6) states that complex
orders may be submitted as market orders and may be designated as cAOA.
The proposed rule distinguishes between complex market orders
designated as cAOA and those that are not so designated.
Proposed Rule 518(c)(6)(i) states that complex market orders
designated as cAOA may initiate a Complex Auction upon arrival or join
a Complex Auction in progress. The Complex Auction process is set forth
in proposed Rule 518(d) and discussed below. Proposed Rule
518(c)(6)(ii), Complex Market Orders not Designated as cAOA, states
that complex market orders not designated as cAOA will trade
immediately with any contra-side complex orders or quotes, or against
the individual legs, up to and including the dcMBBO, and may be subject
to the managed interest process, and the Evaluation Process, each as
described above.
Complex Auction Process
Proposed Rule 518(d), Complex Auction Process, describes the
process for determining if a complex order is
[[Page 58781]]
eligible to begin a Complex Auction, and to participate in a Complex
Auction that is in progress. Certain option classes, as determined by
the Exchange and communicated to Members via Regulatory Circular, will
be eligible to participate in a Complex Auction (an ``eligible
class''). Upon evaluation as described above, the Exchange may
determine to automatically submit a Complex Auction-eligible order
(defined below) into a Complex Auction (as described below). Upon entry
into the System or upon evaluation of a complex order resting at the
top of the Strategy Book, Complex Auction-eligible orders may be
subject to an automated request for responses (``RFR''), as described
below.
Proposed Rule 518(d)(1) defines and describes the handling of a
Complex Auction-eligible order. A ``Complex Auction-eligible order''
means a complex order that, as determined by the Exchange, is eligible
to initiate or join a Complex Auction based upon the order's
marketability (i.e., if the price of such order is equal to or within a
specific range of the current dcMBBO) as established by the Exchange,
number of components, and complex order origin types (i.e., non-broker-
dealer customers, broker-dealers that are not market makers on an
options exchange, and/or market makers on an options exchange as
established by the Exchange and communicated to Members via Regulatory
Circular).\59\ Exchange Market Makers have an obligation to provide
liquidity on the Exchange, and the Exchange believes that it is not
appropriate for Exchange Market Makers to submit orders intended to
initiate Complex Auctions, and instead that they should provide
liquidity via RFR Responses (described below) during the Response Time
Interval (described below). Other exchanges also have limited auction
eligibility for complex orders based on order origin type.\60\
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\59\ See also NYSE MKT Rule 980NY(e)(1), which lists Customers,
broker-dealers that are not Market-Makers or specialists on an
options exchange, and/or Market-Makers or specialists on an options
exchange.
\60\ See id. See also, e.g., CBOE Regulatory Circular RG14-143
(October 14, 2014), limiting Complex Order Auction (``COA'')
eligibility to non-broker-dealer public customer orders and
professional customer orders.
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In order to initiate a Complex Auction upon receipt, a Complex
Auction-eligible order must be designated as cAOA and must meet the
criteria described in proposed Rule 518, Interpretations and Policies
.03(b) regarding the URIP as described below. A complex order not
designated as cAOA (i.e., a complex order considered by default to be
``do not auction on arrival'' by the System) may (i) join a Complex
Auction in progress at the time of receipt; (ii) become a Complex
Auction-eligible order after resting on the Strategy Book and may then
automatically join a Complex Auction then in effect for the complex
strategy; or (iii) initiate a Complex Auction if it meets the criteria
described in proposed Rule 518, Interpretations and Policies .03(a)
regarding the IIP or .03(c) regarding the RIP.
A complex order not designated as cAOA will still have execution
opportunities. A complex order not designated as cAOA is deemed to be
``do not auction on arrival'' by the System by default. Such a complex
order will still have the opportunity to execute upon entry into the
System without initiating a Complex Auction. For example, such an order
may execute automatically upon entry into the System by matching with
complex orders and/or quotes resting on the Strategy Book at a price
that is at or inside the icMBBO, or via Legging against the Simple
Order Book to the extent they are marketable. Additionally, such an
order on the opposite side of, and marketable against, a Complex
Auction-eligible order may trade against the Complex Auction-eligible
order if the System receives the order while a Complex Auction
ongoing.\61\
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\61\ A MIAX complex order not designated as cAOA will not be
considered a Complex Auction-eligible order by default. The Exchange
believes that this gives market participants extra flexibility to
control the handling and execution of their complex orders by the
System by giving them the ability to determine affirmatively to have
their complex order initiate a Complex Auction by way of the cAOA
designation. In contrast, CBOE Rule 6.53C (d)(ii)(B) expressly
states that Trading Permit Holders may request on an order by order
basis that an incoming COA eligible order with two legs not COA (a
``do not COA'' request).
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Complex orders processed through a Complex Auction may be executed
without consideration to prices of the same complex interest that might
be available on other exchanges.
Proposed Rule 518(d)(2) describes the circumstances under which a
Complex Auction is begun. Upon receipt of a Complex Auction-eligible
order or upon an evaluation by the System indicating that there is a
Complex Auction-eligible order resting on the Strategy Book, the
Exchange may begin the Complex Auction process by sending an RFR
message. The RFR message will be sent to all subscribers to the
Exchange's data feeds that deliver RFR messages. The RFR message will
identify the complex strategy, the price, quantity of matched complex
quotes and/or orders at that price, imbalance quantity, and side of the
market of the Complex Auction-eligible order. The inclusion of the
quantity of matched complex quotes and/or orders at the price included
in the RFR message is intended to inform participants considering
submitting an RFR Response of the number of contracts for which there
is matched interest, and the purpose of including the imbalance
quantity in the RFR message is to inform such participants of the
number of contracts that do not have matched interest. The Exchange
believes that this level of detail should provide such participants
with specific information about a Complex Auction in which they may
decide to participate. The sum of the matched interest quantity and the
imbalance quantity is equal to the size of the initiating Complex
Auction-eligible order that is being auctioned.\62\ The price included
in the RFR message will be the limit order price, unless that price is
through the opposite side dcMBBO or the Complex Auction is initiated by
a complex market order, in which case such price will be the dcMBBO.
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\62\ See also NYSE MKT Rule 980NY(e)(2), which differs slightly
because it includes size, but does not include an imbalance quantity
or matched quantity, but states similarly that RFR messages will
identify the component series and side of the market of the order
and any contingencies.
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The Exchange may determine to limit the frequency of Complex
Auctions for a complex strategy (i.e., establish a minimum time period
between Complex Auctions initiated for complex orders in that strategy
resting on the Strategy Book). The duration of such limitation will be
established on an Exchange-wide basis and communicated to Members via
Regulatory Circular.\63\ The Exchange will not change the duration of
the minimum time period on an intra-day basis during any trading
session. The purpose of this limitation is to safeguard the integrity
of the System and to ensure an orderly market on the Exchange. The
Exchange believes that it is possible that there could be multiple
Complex Auctions commencing and in progress at any particular time, and
that without such a limitation the Exchange could be inundated with
Complex Auctions and that an unusually large number of simultaneous
Complex Auctions could be disruptive to the orderly function of the
System. Despite this limitation respecting orders resting on the
Strategy Book, however, a new
[[Page 58782]]
complex order received by the System during such limitation that
ordinarily triggers a Complex Auction will still trigger a Complex
Auction upon receipt.
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\63\ The frequency of auctions for complex orders is also
limited on another exchange. See, e.g., CBOE Rule 6.53C,
Interpretations and Policies .04, which states that CBOE may also
determine on a class-by-class and strategy basis to limit the
frequency of COAs initiated for complex orders resting in COB.
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Proposed Rule 518(d)(3) defines the amount of time within which
participants may respond to an RFR message. The term ``Response Time
Interval'' means the period of time during which responses to the RFR
may be entered. The Exchange will determine the duration of the
Response Time Interval, which shall not exceed 500 milliseconds, and
will communicate it to Members via Regulatory Circular.\64\
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\64\ Unlike other exchanges, the Exchange is not proposing a
minimum Response Time Interval (see NYSEArca Rule 6.91, which
establishes a minimum Response Time Interval of 500 milliseconds and
a maximum of 1 second), and is limiting the Response Time Interval
to a maximum of 500 milliseconds, whereas other exchanges have a
maximum Response Time Interval of 100 milliseconds (see BOX Rule
7245(f)(1)) and others have a Response Time Interval of up to 3
seconds (see CBOE Rule 6.53C(d)(iii)(2)). The Exchange believes that
500 milliseconds is a reasonable amount of time within which
participants can respond to an RFR message.
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Proposed Rule 518(d)(4) states that Members may submit a response
to the RFR message (an ``RFR Response'') during the Response Time
Interval. RFR Responses may be submitted in $0.01 increments. RFR
Responses must be a cAOC order or a cAOC eQuote \65\ (discussed below),
and may be submitted on either side of the market. RFR Responses
represent non-firm interest that can be modified or withdrawn at any
time prior to the end of the Response Time Interval. At the end of the
Response Time Interval, RFR Responses are firm (i.e., guaranteed at the
RFR price and size). All RFR Responses and other complex orders and
quotes on the opposite side of the Complex Auction-eligible order are
also firm with respect to other incoming Complex Auction-eligible
orders that are received during the Response Time Interval. Any RFR
Responses not executed in full will expire at the end of the Complex
Auction.\66\
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\65\ A ``Complex Auction or Cancel eQuote'' or ``cAOC eQuote''
is an eQuote submitted by a Market Maker that is used to provide
liquidity during a specific Complex Auction with a time in force
that corresponds with the duration of the Complex Auction. See
proposed Rule 518, Interpretations and Policies .02(c)(2)[sic]. cAOC
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 (in this case the Complex Auction). A cAOC
eQuote does not automatically cancel or replace the Market Maker's
previous Standard quote or eQuote. See Exchange Rule 517(a)(2)(ii).
The Exchange notes that any orders or quotes received by the System
during the Complex Auction that are not cAOC orders or cAOC eQuotes
will be treated as unrelated trading interest. In addition, the
Exchange notes that a cAOC order or a cAOC eQuote could trade at a
price inferior to the away market if it is a part of an exempt
transaction. See Exchange Rule 1402.
\66\ This differs slightly from, but has the same effect as, the
language in CBOE Rule 6.53C(d)(vii), which states that any RFR
Responses not accepted in whole or in a permissible ratio will
expire at the end of the Response Time Interval.
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Proposed Rule 518(d)(5) describes how Complex Auction-eligible
orders are handled following the Response Time Interval.
At the end of the Response Time Interval, Complex Auction-eligible
orders (and other complex orders and quotes) may be executed in whole
or in part. Complex Auction-eligible orders will be executed against
the best priced contra side interest, and any unexecuted portion of a
Complex Auction-eligible order remaining at the end of the Response
Time Interval will either be evaluated to determine if it may initiate
another Complex Auction, or placed on the Strategy Book and ranked
pursuant to proposed Rule 518(c)(3) as discussed above.
The Complex Auction will terminate at the end of the Response Time
Interval without trading when any individual component of a complex
strategy in the Complex Auction process is subject to a wide market
condition as described in proposed Rule 518, Interpretations and
Policies .05(e)(1), or to a SMAT Event as described in proposed Rule
518(a)(16) and proposed Interpretations and Policies .05(e)(2), or
immediately without trading if any individual component or underlying
security of a complex strategy in the Complex Auction process is
subject to a halt as described in proposed Rule 518, Interpretations
and Policies .05(e)(3). Upon the conclusion of these condition(s) or
process(es), an affected complex order will be evaluated and may
initiate a new Complex Auction if such complex order is determined to
be a Complex Auction-eligible order.
Example--Complex Auction termination without trading due to a SMAT
Event (a PRIME Auction) followed by a new Evaluation upon resolution of
the PRIME Auction.
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 call and sell 1 Mar 55 call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the order price exceeds the URIP requirement (2.70 + 0.48 = 3.18)
to initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side, and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer
price bidding 3.20 to buy 1000 contracts. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.10 credit sell
of 1000 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.00 credit
sell of 500 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.20 credit
sell of 500 arrives
@ 250 milliseconds MM4 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
@ 350 milliseconds BD2 submits an unrelated complex order @
2.70 credit sell of 200 arrives and joins the Complex Auction
@ 400 milliseconds a PRIME Auction begins in either the Mar 50
Call or the Mar 55 Call
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval
ends,\67\ the Complex Auction ends without a trade, because one
component is in a PRIME Auction. All RFR Responses, cAOC orders and
eQuotes are cancelled. The unrelated complex order to sell @ 2.70
credit is placed on the Strategy Book. If at the conclusion of the SMAT
Event (PRIME Auction), the initiating Customer buy complex order to
purchase 1 Mar 50 call and sell 1 Mar 55 call for a 3.20 debit is
resting on the Complex book and available upon the next evaluation
following the PRIME Auction an evaluation and a new Complex Auction can
be initiated. Upon evaluation the initiating Customer complex order to
buy 1000 @ 3.20 is now crossing the BD2 complex order to sell 200 @
2.70. Because there is an imbalance the best price of the imbalance is
used to determine if the
[[Page 58783]]
imbalance price equals or improves the Re-evaluation Improvement
Percentage (RIP).
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\67\ The Exchange will determine the duration of the Response
Time Interval, which shall not exceed 500 milliseconds, and will
communicate it to Members via Regulatory Circular. See proposed Rule
518(d)(3). All examples in this proposal assume a 500 millisecond
Response Time Interval unless otherwise indicated.
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the best order price on the imbalance side exceeds the RIP
requirement (2.70 + 0.48 = 3.18) to initiate a new Complex Auction, an
RFR message is broadcast to all subscribers showing the price, quantity
of matched complex quotes and/or orders at that price, the imbalance
quantity, and side and a 500 millisecond Response Time Interval is
started.
The System starts the auction at the best imbalance price, in this
case the Initiating Priority Customer price bidding 3.20 to buy 1000
strategies. In addition to the existing crossed interest of BD2 complex
order to sell 200 @ 2.70 credit, the following responses are received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.20 credit sell
of 400 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 200 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.15 credit
sell of 200 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case a single price of 3.20 satisfies the
maximum quantity of 1000 and becomes the final auction price.
Trade 1,000 at $3.20
Customer buys 400 from BD1
Customer buys 200 from BD2
Customer buys 200 from MM1
Customer buys 200 from MM3
Complex Auction Pricing
Proposed Rule 518(d)(6) describes the manner in which the System
prices and executes complex orders and quotes at the conclusion of the
Response Time Interval.
The proposed Rule initially states the broader pricing policy and
functionality of all trading of complex orders in the System (whether a
trade is executed in the Complex Auction process or in free trading).
Specifically, a complex strategy will not be executed at a net price
that would cause any component of the complex strategy to be executed:
(A) At a price of zero; or (B) ahead of a Priority Customer order on
the Simple Order Book without improving the MBBO on at least one
component of the complex strategy by at least $.01.
At the conclusion of the Response Time Interval, using $0.01 inside
the current icMBBO as the boundary (the ``boundary''), the System will
calculate the price where the maximum quantity of contracts can trade
and also determine whether there is an imbalance. The purpose of using
a boundary of $.01 inside the icMBBO as the Complex Auction price in
this situation is to protect the Simple Order Book and to ensure that
executions following the Response Time Interval are not blocked by a
bid or offer on the Simple Order Book on the opposite side of the
market for a component of a Complex strategy that will not satisfy the
requisite ratio for the complex order.
Example--Complex Auction takes place $.01 inside of the icMBBO to avoid
a situation where nothing can trade and the incoming order cannot be
satisfied at the Complex Auction price.
MIAX--LMM Mar 50 Call 0.99-1.05 (10x10)
MIAX--LMM Mar 55 Call 0.80-0.95 (10x10)
MIAX Priority Customer order to buy a Mar 50 Call for 1.00 (2)
The Exchange receives an initiating Priority Customer complex order to
sell 3 Mar 50 calls and buy 2 Mar 55 calls at a 1.10 credit, 100 times.
The cAOA instruction is present on this complex order, so the complex
order will initiate a Complex Auction upon arrival if it equals or
improves the URIP.
The icMBBO is 1.10 debit at 1.55 credit
The dcMBBO is 1.10 debit at 1.55 credit
The URIP Percentage is 60% of the bid/ask spread or 0.27
Since the initiating Priority Customer order price exceeds the URIP
requirement (1.55-0.27=1.28) to initiate a Complex Auction upon
arrival, an RFR is broadcast showing price, the quantity of matched
complex quotes and/or orders at that price, imbalance quantity, and
side and a 500 millisecond Response Time Interval is started.
The System starts the Complex Auction at the initiating Priority
Customer price offering to sell 100 strategies at 1.11. The following
responses are received:
@ 50 milliseconds MM1 response, cAOC eQuote to buy 100 @ 1.10
debit arrives
@ 150 milliseconds MM4 response, cAOC eQuote to buy 50 @ 1.11
debit arrives
@ 500 milliseconds the Response Time Interval expires, the
Complex Auction ends and the trade is allocated against initiating
Priority Customer using the single best price at which the greatest
quantity can trade in the following manner:
1. 50 trade vs. MM4 @ 1.11
2. Nothing can trade at 1.10 due to the presence of Priority Customer
interest in the March 50 Call on the Simple Order Book at 1.00 in
insufficient quantity to meet the ratio required by the Priority
Customer order. Therefore, the 1.10 cAOC response by MM1 expires
untraded at the end of the Complex Auction and the balance of the
initiating Priority Customer complex order to sell is placed on the
Strategy Book at a managed and displayed price of 1.11
The Exchange begins Complex Auctions at a price that is $.01 inside
of the icMBBO to protect the integrity of the Simple Order Book and to
eliminate the possibility of beginning a Complex Auction at a price at
which the order cannot execute.
No Imbalance at End of Response Time Interval
If there is no imbalance, and a single price satisfies the maximum
quantity criteria, that single price is used as the Complex Auction
price. If two or more prices satisfy the maximum quantity criteria, the
System will calculate the midpoint of the lowest and highest price
points that satisfy the maximum quantity criteria, such midpoint price
is used as the Complex Auction price. For orders with ixABBO Price
Protection, as described above, (``price protection''), the midpoint
pricing will use the price protection range selected by the Member at
the end of the Complex Auction. If the midpoint price is not in a $0.01
increment, the System will round toward the midpoint of the dcMBBO to
the nearest $0.01. If the midpoint of the highest and lowest prices is
also the midpoint of the dcMBBO and is not in a $0.01 increment, the
System will round the price up to the next $0.01 increment.
Example--Complex Auction Pricing when there is no imbalance and the
maximum quantity at a single price is used as the Complex Auction price
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
[[Page 58784]]
purchase 1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48 (60% x 0.80 =
0.48)
Since the order price exceeds the URIP requirement (2.70 + 0.48 = 3.18)
to initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 to buy 1000 strategies. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.20 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.15 credit
sell of 250 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case a single price of 3.20 satisfies the
maximum quantity of 1000 and becomes the final auction price.
Trade 1,000 at $3.20
Customer buys 500 from BD1
Customer buys 250 from MM1
Customer buys 250 from MM3
Example--Complex Auction Pricing when there is no imbalance and the
maximum quantity at two or more prices is used as the Complex Auction
price.
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and Sell 1 Mar 55 Call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48 (60% x
0.80 = 0.48). Since the order price exceeds the URIP requirement
(2.70+0.48=3.18) to initiate an auction upon arrival, an RFR is
broadcast to all subscribers showing price, the quantity of matched
complex quotes and/or orders at that price, imbalance quantity, and
side is sent and a 500 millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 to buy 1000 strategies. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.10 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 1000 can trade at
or within the prices of 3.10 and 3.20. To find the final trade price
the process will continue by taking the midpoint between the highest
and lowest price points that satisfy the maximum quantity, in this case
is 3.15.
Trade 1,000 at $3.15
Customer buys 500 from BD1
Customer buys 250 from MM1
Customer buys 250 from MM3
Example--Complex Auction Pricing when there is no imbalance and the
maximum quantity at two or more prices is used as the Complex Auction
price. If the midpoint price is not in a $0.01 increment, the System
will round toward the midpoint of the dcMBBO to the nearest $0.01.
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and Sell 1 Mar 55 Call for a 3.19 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
Midpoint of dcMBBO is the difference between the bid and offer divided
by 2 added to the dcMBB or subtracted from the dcMBO:
2.70 + ((350-2.70) *.5) = 3.10 or
3.50-((3.50-2.70 *.5) = 3.10
The URIP Percentage is 60% of the bid/ask spread or 0.48 (60% x 0.80 =
0.48)
Since the order price exceeds the URIP requirement (2.70 + 0.48 = 3.18)
to initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.19 to buy 1000 strategies. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.10 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 1000 can trade at
or within the prices of 3.10 and 3.19. To find the final trade price
the process will continue by taking the midpoint between the highest
and lowest price points that satisfy the maximum quantity, in this case
is 2.70 + ((3.19-3.10) *.5) = 3.145. Because the midpoint price is not
0.01 increment the trade price is rounded toward 3.10 the midpoint
price of the dcMBBO to the nearest 0.01.
Trade 1,000 at $3.14
Customer buys 500 from BD1
Customer buys 250 from MM1
Customer buys 250 from MM3
Example--Complex Auction Pricing when there is no imbalance and the
maximum quantity at two or more prices is used as the Complex Auction
price. If the midpoint of the highest and lowest prices is also the
midpoint of the dcMBBO and is not in a $0.01 increment, the System will
round the price up to the next $0.01 increment.
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
[[Page 58785]]
MIAX--LMM Mar 55 Call 3.01-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and Sell 1 Mar 55 Call for a 3.18 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.49 credit offer
The dcMBBO is 2.70 debit bid at 3.49 credit offer
Midpoint of dcMBBO is the difference between the bid and offer times
0.5 added to the dcMBB or subtracted from the dcMBO:
2.70 + ((3.49-2.70) * 0.5) = 3.095 or
3.49-((3.49-2.70 * 0.5) = 3.095
The URIP Percentage is 60% of the bid/ask spread or 0.47 (60% x 0.79 =
0.47)
Since the order price exceeds the URIP requirement (2.70 + 0.47 = 3.17)
to initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.18 to buy 1000 strategies. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.01 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.00 credit
sell of 250 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.00 credit
sell of 250 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 1000 can trade at
or within the prices of 3.01 and 3.18. To find the final trade price
the process will continue by taking the midpoint between the highest
and lowest price points that satisfy the maximum quantity, in this case
is 3.01 + ((3.18-3.01) * .5) = 3.095. Because the midpoint of the
highest and lowest price is also the midpoint of the dcMBBO and is not
0.01 increment the trade price is rounded up to the next 0.01
increment.
Trade 1,000 at $3.10
Customer buys 500 from BD1
Customer buys 250 from MM1
Customer buys 250 from MM3
Size Imbalance at End of Response Time Interval
If there is a size imbalance, and if a single price satisfies the
maximum quantity criteria, that single price is used as the Complex
Auction price. If two or more prices satisfy the maximum quantity
criteria, the System will price the execution at the price on the
opposite side of the size imbalance that meets the maximum quantity
criteria, while also respecting limit prices and the pricing boundaries
which include the price protection boundary of $0.01 inside of the
icMBBO and the price protection range (if any) selected by the Members
whose interest makes up the order imbalance.
Example--Complex Auction Pricing when there is an imbalance and the
maximum quantity at two or more prices are used as the Complex Auction
price
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and Sell 1 Mar 55 Call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48 (60% x 0.80 =
0.48)
Since the order price exceeds the URIP requirement (2.70 + 0.48 = 3.18)
to initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 to buy 1000 strategies. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.15 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 200 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.15 credit
sell of 200 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 900 can trade at
or within the prices of 3.15 and 3.20. Because there is more quantity
to buy than to sell, this creates an imbalance therefore the final
trade price does not use the midpoint and instead will be at the price
on the opposite side of the size imbalance, in this case 3.20. After
the Auction process has terminated, the remaining bid for a size of 100
will be placed on the Strategy Book at its limit price of 3.20.
Trade 900 at $3.20
Customer buys 500 from BD1
Customer buys 200 from MM1
Customer buys 200 from MM3
Post $3.20 bid for 100
If, after trading the maximum quantity at the execution price,
Complex Auction interest remains with a managed price that locks or
crosses the opposite side icMBBO, the System will execute the
individual legs of eligible remaining Complex Auction eligible orders
and quotes against orders and quotes resting on the Simple Order Book
that were present prior to the beginning of the Complex Auction at the
icMBBO if available in the proper ratio and at or within the NBBO of
each component of the complex order.
After executing the imbalance side interest to the extent possible
at the icMBBO, and if Priority Customer interest at the icMBBO that is
not in the proper ratio remains, the System will place such remaining
imbalance side interest on the Strategy Book and manage such interest
pursuant to proposed Rule 518(c)(4). If no Priority Customer interest
at the icMBBO remains, the System will execute Complex Auction interest
with any available complex orders, complex Standard quotes or complex
eQuotes priced at the icMBBO, and then with any orders or quotes on the
Simple Order Book at the icMBBO that were received or modified after
the beginning of the Response Time Interval.
If after trading the maximum quantity at the initial icMBBO all
interest at the initial icMBBO has been executed, including through
Legging with the Simple Order Book (as described in proposed Rule
518(c)(2)(iii) above), and Complex Auction interest remains with a
managed price that crosses the exhausted icMBBO or dcMBBO (if the next
opposite side icMBBO is also the dcMBBO), or locks or crosses the next
opposite side icMBBO or dcMBBO (if the next opposite side icMBBO is
also the dcMBBO), the System will repeat the process for a size
imbalance
[[Page 58786]]
described in proposed Rule 518(d)(6)(i)(B)(1)-(3) above. At each icMBBO
price level the System will repeat this process at the end of the
Response Time Interval until reaching the dcMBBO price. If the Complex
Auction price is equal to or crosses the dcMBBO and the dcMBBO is
exhausted, the System will place any remaining Complex Auction interest
on the Strategy Book and manage the interest that is eligible to rest
on the Strategy Book pursuant to subparagraph (c)(4) to the exhausted
dcMBBO price, cancel Complex Auction interest, including remaining
complex order cAOC interest, that is not eligible to rest on the
Strategy Book, and cancel any complex Standard quotes that are locking
or crossing the exhausted dcMBBO price. The System will then
immediately initiate a re-evaluation of the remaining interest from the
Complex Auction and may initiate a new Complex Auction without regard
to the RIP.
Example--Remaining Complex Auction interest after trading the maximum
quantity, that locks or crosses the opposite side icMBBO will leg
against interest resting on the Simple Order Book
ABBO--Mar 50 Call 6.20-6.30
MIAX--LMM Mar 50 Call 6.00-6.20 (10x100) managed offer
MIAX--LMM Mar 50 Call 6.00-6.30 (10x100) displayed offer
MIAX--LMM Mar 55 Call 3.00-3.30 (100x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and Sell 1 Mar 55 Call for a 3.40 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.20 credit offer
The dcMBBO is 2.70 debit bid at 3.30 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.36 (60% x 0.60 =
0.36)
Since the order price exceeds the URIP requirement (2.70 + 0.36 = 3.06)
to initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at the Complex Auction price, imbalance quantity, and side is
sent and a 500 millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.30 to buy 1000 strategies. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.15 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 200 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.15 credit
sell of 200 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 900 can trade at
or within the prices of 3.15 and 0.01 inside the icMBBO, which results
in a boundary price of 3.19. Because there is more quantity to buy than
to sell, this creates an imbalance therefore the final trade price does
not use the midpoint and instead will be at the price on the opposite
side of the size imbalance, in this case 3.19.
The remaining balance of 100 to buy at 3.40 will execute by Legging
against interest resting on the Simple Order Book at the icMBBO price
of $3.20 buy 100 of the LMM Mar 50 Call at 6.20 and sell 100 of the LMM
Mar 55 Call at 3.00 for a net debit of 3.20.
Trade 900 at $3.19
Customer buys 500 from BD1
Customer buys 200 from MM1
Customer buys 200 from MM3
Leg the balance against the $3.20 icMBBO
Customer buys 100 of the Mar 50 Call at 6.20 from the LMM
Customer sells 100 of the Mar 55 Call at 3.00 to the LMM
If the trading described above was not at the dcMBBO, the System
will follow the same procedure at the dcMBBO. If after trading the
maximum quantity at the dcMBBO, interest at the dcMBBO remains, the
System will place any remaining Complex Auction interest on the
Strategy Book and manage the interest that is eligible to rest on the
Strategy Book pursuant to proposed Rule 518(c)(4), and cancel Complex
Auction interest, including remaining complex order cAOC interest, that
is not eligible to rest on the Strategy Book.
Example--Complex Auction interest trades the maximum quantity at the
initial icMBBO, and additional remaining interest locks or crosses the
next opposite side icMBBO or dcMBBO (if the next opposite side icMBBO
is also the dcMBBO) the system will repeat the process for a size
imbalance
MIAX--LMM Mar 50 Call 6.00-6.20 (10x10) managed offer
MIAX--LMM Mar 50 Call 6.00-6.30 (10x100) displayed offer
MIAX--LMM Mar 55 Call 3.00-3.30 (1000x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 Call and Sell 1 Mar 55 Call for a 3.40 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.20 credit offer
The dcMBBO is 2.70 debit bid at 3.30 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.36 (60% x 0.60 =
0.36)
Since the order price exceeds the URIP requirement (2.70+0.36=3.06) to
initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.30 (the opposite side dcMBBO) to buy 1000 strategies. The
following responses are received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.15 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 200 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.15 credit
sell of 200 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 900 can trade at
or within the prices of 3.15 and 0.01 inside the icMBBO, which results
in a boundary price of 3.19. Because there is more quantity to buy than
to sell, this creates an imbalance therefore the final trade price does
not use the midpoint and instead will be at the price on the opposite
side of the size imbalance, in this case 3.19.
The remaining balance of 100 to buy at 3.40 will execute by Legging
against interest resting on the Simple Order Book at the icMBBO that
was present prior to the beginning of the Complex Auction. The complex
order will in this case buy 10 of the LMM Mar 50 Call at 6.20 and sell
10 of the LMM Mar 55 Call at 3.00 for a net debit of 3.20 fully
executing the initial icMBBO. With all interest at the initial icMBBO
of 3.20 credit executed, Complex Auction
[[Page 58787]]
interest remains to buy 90 at 3.40, and will follow the process for a
size imbalance as described above and trade at the next icMBBO or in
this case the dcMBBO since the next opposite side icMBBO is also the
dcMBBO. The complex order will execute against by Legging interest
resting on the Simple Order Book at the dcMBBO, in this case buy 90 of
the LMM Mar 50 calls at 6.30 and sell 90 of the LMM Mar 55 calls at
3.00 for a net debit of 3.30.
Trade 900 at $3.19
Customer buys 500 from BD1
Customer buys 200 from MM1
Customer buys 200 from MM3
Leg 10 against the $3.20 icMBBO
Customer buys 10 of the Mar 50 calls at 6.20 from the LMM
Customer sells 10 of the Mar 55 calls at 3.00 to the LMM
Leg 90 against the $3.30 dcMBBO
Customer buys 90 of the Mar 50 calls at 6.30 from the LMM
Customer sells 90 of the Mar 55 calls at 3.00 to the LMM
Example--When the icMBBO is also the dcMBBO, remaining Complex Auction
interest that locks or crosses the opposite side dcMBBO will leg
against interest resting on the Simple Order Book exhausting interest
at the dcMBBO and then will be evaluated
MIAX--LMM Mar 50 call 6.00-6.20 (10x10)
MIAX--LMM Mar 55 call 3.00-3.30 (1000x10)
The Exchange receives an Initiating Customer complex order to buy 1
Mar 50 call and Sell 1 Mar 55 call for a 3.30 debit, 1000 times. The
cAOA instruction is present on this order, so the order will initiate
an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.20 credit offer
The dcMBBO is 2.70 debit bid at 3.20 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.30 (60% x 0.50 =
0.30)
Since the order price exceeds the URIP requirement (2.70+0.30=3.00) to
initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 (the opposite side dcMBBO) to buy 1000 contracts. The
following responses are received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.15 credit sell
of 500 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.10 credit
sell of 200 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.15 credit
sell of 200 arrives
@ 225 milliseconds MM2 complex Standard quote bidding @ 3.20
debit buy of 200 arrives
@ 400 milliseconds MM2 response, cAOC eQuote @ 3.40 credit
sell of 200 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the Complex Auction price determination will find the maximum quantity
that can trade. In this case the maximum quantity of 900 can trade at
or within the prices of 3.15 and 0.01 inside of the icMBBO, which
results in a buy imbalance. Because there is more quantity to buy than
to sell, this creates an imbalance therefore the final trade price does
not use the midpoint and instead will be at the price on the opposite
side of the size imbalance, in this case 3.19.
A portion of the remaining balance of 100 to buy at 3.30 will execute
by Legging against interest resting on the Simple Order Book at the
combined icMBBO/dcMBBO that was present prior to the beginning of the
Complex Auction. The complex order will in this case buy 10 of the LMM
Mar 50 Call at 6.20 and sell 10 of the LMM Mar 55 Call at 3.00 for a
net debit of 3.20, exhausting the dcMBBO.
Once the dcMBBO has been exhausted and Auction interest remains, all
unexecuted cAOC eQuotes or orders and any unexecuted complex Standard
quotes that are locking or crossing the exhausted dcMBBO price are
cancelled. This results in the cancellation of MM2's 3.40 credit cAOC
response and MM2's 3.20 debit complex Standard quote bid.
Since the dcMBBO has been exhausted, the remaining balance of 90
contracts from the Initiating Priority Customer order will then be
placed on the Strategy Book at the exhausted dcMBBO price.
The new Simple Market quotes after exhausting the original icMBBO/
dcMBBO are:
MIAX--LMM Mar 50 Call 6.10-6.40 (10x10)
MIAX--LMM Mar 55 Call 2.90-3.00 (10x10)
The icMBBO is 3.10 debit bid at 3.50 credit offer
The dcMBBO is 3.10 debit bid at 3.50 credit offer
The RIP Percentage is 60% of the bid/ask spread or 0.24
Regardless of the fact that the order's limit price does not meet or
exceed the RIP requirement (3.10+0.24=3.34) to initiate an Auction upon
reevaluation, an RFR is broadcast to all subscribers showing price, the
quantity of matched complex quotes and/or orders at that price,
imbalance quantity, and side is sent and a 500 millisecond Response
Time Interval is started.
The System starts the Auction at the Initiating Priority Customer's
limit price bidding 3.30 to buy 90 contracts. The following responses
are received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.25 credit sell
of 100 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.30 credit
sell of 100 arrives
The Complex Auction process will continue until the Response Time
Interval ends. When the 500 millisecond Response Time Interval ends,
the maximum quantity of 90 contracts will trade at 3.25[sic]
If all interest at the dcMBBO has been exhausted and Auction orders
with a managed or limit price that locks or crosses the exhausted
dcMBBO price remain, the System will place any remaining Complex
Auction interest on the Strategy Book and manage the interest that is
eligible to rest on the Strategy Book pursuant to proposed Rule
518(c)(4) to the exhausted dcMBBO price, cancel Complex Auction
interest (including remaining complex order cAOC interest) that is not
eligible to rest on the Strategy Book, and cancel any complex Standard
quotes that are locking or crossing the exhausted dcMBBO price. The
System will then immediately initiate a reevaluation of the remaining
interest from the Complex Auction and may initiate a new Complex
Auction without regard to the RIP.
The System will place any eligible remaining non-marketable Complex
Auction orders and quotes on the Strategy Book, cancel any remaining
Complex Auction interest that is not eligible to rest on the Strategy
Book, and cancel complex Standard quotes that would otherwise require
management because of their price as described in proposed Rule
518(c)(4) above if placed on the Strategy Book.
Trade Allocation Following the Complex Auction
Proposed Rule 518(d)(7) describes the allocation of complex orders
and quotes that are executed in a Complex Auction. Once the Complex
Auction is complete
[[Page 58788]]
(at the end of the Response Time Interval), such orders and quotes will
be allocated first in price priority based on their original limit
price, and thereafter as stated herein.
Individual orders and quotes in the leg markets resting on the
Simple Order Book prior to the initiation of a Complex Auction and that
have remained unchanged during the Auction have first priority,
provided the complex order can be executed in full (or in a permissible
ratio) against orders and quotes on the Simple Order Book, provided
that the prices of the components on the Simple Order Book are at or
within the NBBO for each component. Orders and/or quotes resting on the
Simple Order Book that execute against a complex order will be
allocated pursuant to Rule 514(c). The Exchange believes that unchanged
orders and quotes resting on the Simple Order Book should retain their
established priority when Legging against a complex order.
Priority Customer complex orders resting on the Strategy Book
before, or that are received during, the Response Time Interval, and
Priority Customer RFR Responses, collectively have second priority and
will be allocated in price-time priority. This is consistent with the
handling of Priority Customers on other exchanges \68\ and on the MIAX
Simple Order Book \69\
---------------------------------------------------------------------------
\68\ Similarly, on PHLX, after attempting to trade with the PHLX
simple limit order book for the individual components, customer
marketable Complex Orders on the PHLX CBOOK (their equivalent of the
Strategy Book) have priority over non-public customer Complex
Orders. See PHLX Rule 1098(e)(vi). CBOE also affords priority to
public customer complex orders after attempting to trade the complex
order against the individual components, followed by non-public
customer orders resting in the CBOE Complex Order Book. See CBOE
Rule 6.53C(d)(v). This is slightly distinguished from the MIAX
System which seeks first to match complex orders resting on the
Strategy Book.
\69\ When the Priority Customer Overlay is in effect, the
highest bid and lowest offer shall have priority except that
Priority Customer Orders shall 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 series
at the same price, priority shall be afforded to such Priority
Customer Orders in the sequence in which they are received by the
System. See Exchange Rule 514(d)(1). Other exchanges have similar
allocation models for the simple market. For example, ISE Priority
Customer Orders have priority over Professional Orders and market
maker quotes at the same price in the same options series. See ISE
Rule 713(c). Similarly, on CBOE, Public customer orders in the
electronic book have priority. See CBOE Rule 6.45A(a)(i)(A)(1). PHLX
allocates contracts to non-public customers only after public
customer market and marketable limit orders have been executed. See
PHLX Rule 1014(g)(vii).
---------------------------------------------------------------------------
Market Maker Priority Interest for Complex and RFR Responses from
Market Makers with Priority Interest for Complex collectively have
third priority and will be allocated on a pro-rata basis as defined in
Rule 514(c)(2).
Market Maker non-Priority Interest for Complex and RFR Responses
from Market Makers with non-Priority Interest for Complex collectively
have fourth priority and will be allocated on a pro-rata basis as
defined in Rule 514(c)(2).
Non-Market Maker Professional Interest complex orders resting on
the Strategy Book, non-Market Maker Professional Interest complex
orders placed on the Strategy Book during the Response Time Interval,
and non-Market Maker Professional Interest RFR Responses will
collectively have fifth priority and will be allocated on a pro-rata
basis as defined in Rule 514(c)(2).
Finally, individual orders and quotes in the leg markets that are
received or changed during the Complex Auction will collectively have
sixth priority and will be allocated pursuant to Rule 514(c)(2).\70\
---------------------------------------------------------------------------
\70\ This differs slightly from the execution of orders on other
exchanges. ISE may designate on a class basis whether bids and
offers at the same price on the complex order book will be executed
either in time priority; pursuant to ISE Rule 713(e) regarding
priority in the ISE simple order book, or pro-rata based on size.
See ISE Rule 722(b)(3)(i). Additionally, CBOE establishes priority
for the Complex Order Book based upon the rules of trading priority
otherwise applicable to incoming electronic orders in the individual
component legs or another electronic matching algorithm in the CBOE
rules. See CBOE Rule 6.53C(c)(ii)(2).
---------------------------------------------------------------------------
The following examples illustrate the manner in which complex
orders and quotes are allocated at the conclusion of the Complex
Auction.\71\
\71\ The Exchange notes that in all examples in the filing, a
Market Maker response should be considered from a Market Maker that
does not have a priority quote, unless the example specifically
states that the response is from a Market Maker with a priority
quote.
---------------------------------------------------------------------------
Example--Priority Customer has priority over other responding
participants
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate a Complex Auction upon arrival if it equals or improves the
URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the initiating order price exceeds the URIP requirement
(2.70+0.48=3.18) to initiate an auction upon arrival, an RFR is
broadcast to all subscribers showing price, the quantity of matched
complex quotes and/or orders at that price, imbalance quantity, and
side is sent and a 500 millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 to buy 1000 contracts. The following responses are
received:
@ 50 milliseconds MM1 response, cAOC eQuote @ 3.10 credit sell
of 2000 arrives
@ 150 milliseconds MM4 response, cAOC eQuote @ 3.00 credit
sell of 500 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.20 credit
sell of 500 arrives
@ 250 milliseconds Priority Customer response, cAOC Order @
3.10 credit sell of 250 arrives
@ 500 milliseconds the Response Time Interval ends, the
Complex Auction ends and the trade is allocated against the initiating
Priority Customer using the single best price at which the greatest
quantity can trade in the following manner:
1. 500 trade vs. MM4 @ 3.10 (MM4 achieved price priority by offering at
3.00)
2. 250 trade vs. the Priority Customer response @ 3.10 (The Priority
Customer has priority over the MM1 offering at the same price)
3. 250 trade vs. MM1 @ 3.10
Example--Market Maker with priority quotes has priority over Market
Makers without priority quotes
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the order price exceeds the URIP requirement (2.70+0.48=3.18) to
initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing price, the quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and
[[Page 58789]]
a 500 millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 to buy 1000 contracts. The following responses are
received:
@ 50 milliseconds MM1 non-priority response, cAOC eQuote @
3.10 credit sell of 2000 arrives
@ 150 milliseconds MM4 non-priority response, cAOC eQuote @
3.00 credit sell of 500 arrives
@ 200 milliseconds MM3 non-priority response, cAOC eQuote @
3.20 credit sell of 500 arrives
@ 250 milliseconds MM5 with priority quotes response, cAOC
eQuote @ 3.10 credit sell of 500 arrives
@ 500 milliseconds the Response Time Interval ends, the
Complex Auction ends and the trade is allocated against the initiating
Priority Customer using the single best price at which the greatest
quantity can trade in the following manner:
1. 500 trade vs. MM4 @ 3.10 (MM4 has price priority over the other MMs)
2. 500 trade vs. MM5 @ 3.10 (MM5 has price priority over MM3 and has
priority by virtue of priority quoting over MM1)
Example--Professional Interest starts Auction, joined by Priority
Customer Interest to show Priority Customer allocation priority
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an initiating broker-dealer complex order to buy
1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 debit, 1000 times. The
cAOA instruction is present on this order, so the order will initiate
an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the order price exceeds the URIP requirement (2.70+0.48=3.18) to
initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing the price, quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval begins.
The System starts the auction at the initiating broker dealer price
bidding 3.20 to buy 1000 contracts. The following responses are
received:
@ 50 milliseconds Priority Customer #1 unrelated order buy 750
@ 3.20 debit arrives
@ 150 milliseconds Priority Customer #2 unrelated order buy
500 @ 3.20 debit arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.20 credit
sell of 500 arrives
@ 250 milliseconds Priority Customer #3 response, cAOC Order @
3.20 credit sell of 500 arrives
@ 500 milliseconds the Response Time Interval ends, the
auction ends and the trade (including unrelated interest from Priority
Customer #s 1 and 2) is allocated against Initiating Customer using the
single best price at which the greatest quantity can trade in the
following manner:
1. 500 trade Priority Customer #1 buys (Priority Customer #1 has origin
type priority over the Broker-Dealer and time priority over Priority
Customer #2). Priority Customer #3 sells @ 3.20 (Priority Customer #3
has priority over MM3 offering at the same price).
2. 250 trade Priority Customer #1 buys (Priority Customer #1 has origin
type priority over the Broker-Dealer and time priority over Priority
Customer #2). MM3 sells @ 3.20 (MM3 is now alone at 3.20 since Priority
Customer #3 is filled.
3. 250 trade Priority Customer #2 (which is an unrelated order) buys
(Priority Customer #2 has origin type priority over the Broker-Dealer).
MM3 sells @ 3.20, and the balance of 250 is placed on the Strategy
Book.
Processing of Unrelated Complex Orders
The Complex Auction is designed to work effectively with the
Strategy Book and is designed to maintain priority of all resting
quotes and orders and any RFR Responses received before the end of the
Response Time Interval. Proposed Rule 518(d)(8) describes the manner in
which the System handles incoming unrelated complex orders and quotes
that are eligible to join a Complex Auction and are received during the
Response Time Interval for a Complex Auction-eligible order. Such
incoming unrelated complex orders and quotes will simply join the
Complex Auction, will be ranked by price, and will be allocated as
described above.\72\
---------------------------------------------------------------------------
\72\ The Exchange proposes to include eligible unrelated
incoming complex orders and quotes in the Complex Auction Process.
This is similar to another exchange. Specifically, PHLX incoming
Complex Orders that were received during the COLA Timer (equivalent
to the MIAX Response Time Interval) for the same Complex Order
Strategy as the COLA-eligible order that are on the same side of the
market will join the COLA. See PHLX Rule 1098(e)(viii)(B). Incoming
PHLX Complex Orders on the opposite side of the market from the
COLA-eligible order will join the COLA or be executed after the COLA
under various circumstances described in the rule. Other exchanges
permit certain orders to join a complex auction under limited
circumstances, and other unrelated complex orders will terminate the
auction process. For example, on CBOE incoming complex orders that
are received prior to the expiration of the Response Time Interval
for the original COA that are on the opposite side of the market and
are marketable against the starting price of the original COA-
eligible order will cause the original COA to end. Incoming COA-
eligible orders are on the same side of the market, at the same
price or worse than the original COA-eligible order and better than
or equal to the starting price will join the original COA. See CBOE
Rule 6.53C(d)(viii). NYSE MKT distinguishes the processing of
unrelated complex orders by side of market. See NYSE MKT Rule
980NY(c)[sic](8).
---------------------------------------------------------------------------
The ability for unrelated marketable orders to join and be executed
in a Complex Auction enhances the liquidity in the Complex Auction and
thus increases opportunities for execution of complex orders and quotes
on both sides of the market, all to the benefit of investors and to the
marketplace as a whole.
Example--Arrival of an unrelated marketable complex order on the
opposite side.
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Customer buy complex order to
purchase 1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the order price exceeds the URIP requirement (2.70+0.48=3.18) to
initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing the price, quantity of matched complex quotes and/
or orders at that price, imbalance quantity, and side is sent and a 500
millisecond Response Time Interval is started.
The System starts the auction at the initiating Priority Customer price
bidding 3.20 to buy 1000 contracts. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.10 credit sell
of 1000 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.00 credit
sell of 500 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.20 credit
sell of 500 arrives
[[Page 58790]]
@ 250 milliseconds MM4 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
@ 350 milliseconds BD2 submits an unrelated complex order @
2.70 credit sell of 200 arrives
@ 500 milliseconds the Response Time Interval ends, the
Complex Auction ends and the trade is allocated against the initiating
Priority Customer using the single best price at which the greatest
quantity can trade in the following manner:
1. 200 trade vs. unrelated complex order @ 3.10 (BD2 achieved price
priority by offering at 2.70)
2. 500 trade vs. MM1 @ 3.10 (MM1 achieved price priority by over the
other responses by offering at 3.00)
3. 250 trade vs. MM4 @ 3.10 (MM4 achieved price priority over MM3 by
offering at 3.10 and origin type priority over BD1)
4. 50 trade vs. BD1 @ 3.10 (BD1 achieved price priority over MM3 by
offering at 3.10)
Example--Arrival of unrelated marketable complex order on the same side
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 3.00-3.30 (10x10)
The Exchange receives an Initiating Priority Customer buy complex order
to purchase 1 Mar 50 call and Sell 1 Mar 55 call for a 3.20 debit, 1000
times. The cAOA instruction is present on this order, so the order will
initiate an auction upon arrival if it equals or improves the URIP.
The icMBBO is 2.70 debit bid at 3.50 credit offer
The dcMBBO is 2.70 debit bid at 3.50 credit offer
The URIP Percentage is 60% of the bid/ask spread or 0.48
Since the order price exceeds the URIP requirement (2.70+0.48=3.18) to
initiate an auction upon arrival, an RFR is broadcast to all
subscribers showing the price, quantity of matched complex quotes and/
or orders at the Exchange's disseminated price, imbalance quantity, and
side is sent and a 500 millisecond Response Time Interval is started.
The System starts the auction at the Initiating Priority Customer price
bidding 3.20 to buy 1000 contracts. The following responses are
received:
@ 50 milliseconds BD1 response, cAOC Order @ 3.10 credit sell
of 1000 arrives
@ 150 milliseconds MM1 response, cAOC eQuote @ 3.00 credit
sell of 500 arrives
@ 200 milliseconds MM3 response, cAOC eQuote @ 3.20 credit
sell of 500 arrives
@ 250 milliseconds MM4 response, cAOC eQuote @ 3.10 credit
sell of 250 arrives
@ 350 milliseconds BD2 submits an unrelated complex order @
3.20 debit buy of 200 arrives
@ 500 milliseconds the Response Time Interval ends, the
Complex Auction ends and the trade is allocated against the initiating
Broker-Dealer using the single best price at which the greatest
quantity can trade in the following manner:
1. Initiating Priority Customer buys 500 vs. MM1 @ 3.10 (The Priority
Customer initiating order has origin type priority over BD2. MM1
achieved price priority over other responses by offering at 3.00)
2. Initiating Priority Customer buys 250 vs. MM4 @ 3.10 (The Priority
Customer initiating order has origin type priority over BD2. MM4
achieved price priority over MM3 by offering at 3.10 and origin type
priority over BD1)
3. Initiating Priority Customer buys 250 vs. BD1 @ 3.10 (The Priority
Customer initiating order has origin type priority over BD2. BD1
achieved price priority over MM3)
4. BD2 buys 200 vs BD1 @ 3.10 (The Priority Customer initiating order
is filled. BD1 achieved price priority over MM3)
Proposed Rule 518(d)(9) states that a complex order not designated
as cAOA will either be (i) executed in full at a single price or at
multiple prices up to its limit price, with remaining contracts placed
on the Strategy Book; (ii) executed until the order exhausts the
opposite side dcMBBO, at which time the order will be placed on the
Strategy Book and evaluated for Complex Auction eligibility; or (iii)
cancelled.
Proposed Rules 518(d)(10), (11) and (12) each describe the
effect(s) of certain market conditions on the Complex Auction. Proposed
Rule 518[sic](10) provides that a change in the best bid or offer of
the leg markets will not affect the processing of the Complex Auction.
Any such changed bid or offer will be included in the evaluation at the
end of the Response Time Interval.
Proposed Rule 518(d)(11) states that if the underlying security of
a Complex Auction-eligible order that is a market order enters a Limit
State or Straddle State, as defined in Rule 530 the Complex Auction
will end upon such underlying security's entering of the Limit or
Straddle State if such market order is the only trading interest
remaining on that side of the Complex Auction, in which case the
remaining portion of such market order will be cancelled. If there are
orders and/or quotes other than such market order on that side of the
Complex Auction, such market order will be cancelled and the Complex
Auction will continue. Any remaining complex orders and/or quotes that
joined the Complex Auction will continue to be processed according to
proposed Rule 518(d) as discussed above.
Proposed Rule 518(d)(12), states that if, during a Complex Auction,
the underlying security and/or any component of a Complex Auction-
eligible order is subject to a wide market condition, a SMAT Event or a
trading halt, the Complex Auction will be handled as set forth in
proposed Rule 518, Interpretations and Policies .05(e) as described in
detail below.
The Exchange believes that the provisions regarding the Complex
Auction provide a framework that will enable the efficient trading of
complex orders in a manner that is similar to other options exchanges
as stated above, and in some ways enhances the processing of unrelated
complex orders that join the Complex Auction process seamlessly.
Further, this clarity in the operation of the Complex Auction and its
consistency with other exchanges will help promote a fair and orderly
options market. As described above, the Complex Auction is designed to
work in concert with the Strategy Book and with a priority of
allocation that will be similar to the allocation of simple orders and
quotes on MIAX. If orders are received by the Exchange during the
Response Time Interval, such orders will be eligible to participate in
the Complex Auction, subject to the process above. If orders received
are not executed in the Complex Auction, the time stamps they received
will be used to determine time priority for their execution outside of
the auction.
Interpretations and Policies
The Exchange also proposes several Interpretations and Policies to
proposed Rule 518.
Stock-Option Orders
Proposed Interpretations and Policies .01 Special Provisions
Applicable to Stock-Option Orders provides additional detail regarding
the trading and regulation of stock-option orders on the Exchange. The
Exchange will determine when stock-option orders will be made available
for trading in the System and communicate such determination to Members
via Regulatory Circular.
As set forth in proposed Rule 518, Interpretations and Policies
.01(a), stock-option orders may be executed
[[Page 58791]]
against other stock-option orders through the Strategy Book and Complex
Auction. Stock-option orders will not be legged against the individual
component legs, and the System will not generate a derived order based
upon a stock-option order. A stock-option order shall not be executed
on the System unless the underlying security component is executable at
the price(s) necessary to achieve the desired net price.
Members may only submit stock-option orders if such orders comply
with the Qualified Contingent Trade Exemption from Rule 611(a) of
Regulation NMS \73\ under the Act. Members submitting such complex
orders represent that such orders comply with the Qualified Contingent
Trade Exemption.
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\73\ 17 CFR 242.611(a).
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To participate in stock-option order processing, a Member must give
up a Clearing Member previously identified to, and processed by the
Exchange as a Designated Give Up for that Member in accordance with
Rule 507 and which has entered into a brokerage agreement with one or
more Exchange-designated broker-dealers that are not affiliated with
the Exchange to electronically execute the underlying security
component of the stock-option order at a stock trading venue selected
by the Exchange-designated broker-dealer on behalf of the Member.
Proposed Rule 518, Interpretations and Policies .01(b) sets forth
the process by which stock-option orders, including inbound and those
resting on the Strategy Book, will be handled. When a stock-option
order is received by the Exchange, the System will validate that the
stock-option order has been properly marked as required by Rule 200 of
Regulation SHO under the Act (``Rule 200'').\74\ Rule 200 requires all
broker-dealers to mark sell orders of equity securities as ``long,''
``short,'' or ``short exempt.'' Accordingly, Members submitting stock-
option orders must mark the underlying security component (including
ETF) ``long,'' ``short,'' or ``short exempt'' in compliance with Rule
200. If the stock-option order is not so marked, the order will be
rejected by the System. Likewise, any underlying security component of
a stock-option order sent by the Exchange to the Exchange-designated
broker-dealer shall be marked ``long,'' ``short,'' or ``short exempt''
in the same manner in which it was received by the Exchange from the
submitting Member.
---------------------------------------------------------------------------
\74\ 17 CFR 242.200.
---------------------------------------------------------------------------
If the stock-option order is properly marked, the System will
determine whether the stock-option order is Complex Auction-eligible.
If the stock-option order is Complex Auction-eligible, the System will
initiate the Complex Auction Process described in paragraph (d) of this
Rule. Any stock-option order executed utilizing the Complex Auction
Process will comply with the requirements of Rule 201 of Regulation SHO
under the Act (``Rule 201'') \75\ as discussed further below.
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\75\ 17 CFR 242.201.
---------------------------------------------------------------------------
When the short sale price test in Rule 201 is triggered for a
covered security,\76\ a ``trading center,'' \77\ such as the Exchange,
an Exchange-designated broker-dealer, or a stock trading venue, as
applicable, must comply with Rule 201. Rule 201 requires a trading
center to establish, maintain, and enforce written policies and
procedures reasonably designed to prevent the execution or display of a
short sale order of a covered security at a price that is less than or
equal to the current national best bid \78\ if the price of that
covered security decreases by 10% or more from the covered security's
closing price as determined by the listing market \79\ for the covered
security as of the end of regular trading hours on the prior day; \80\
and impose these requirements for the remainder of the day and the
following day when a national best bid for the covered security is
calculated and disseminated on a current and continuing basis by a plan
processor pursuant to an effective national market system plan.\81\ A
trading center such as the Exchange, an Exchange-designated broker-
dealer and a stock trading venue, as applicable, on which the
underlying security component is executed, must also comply with Rule
201(b)(1)(iii)(B),\82\ which provides that a trading center must
establish, maintain, and enforce written policies and procedures
reasonably designed to permit the execution or display of a short sale
order of a covered security marked ``short exempt'' \83\ without regard
to whether the order is at a price that is less than or equal to the
current national best bid.\84\
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\76\ For purposes of this proposal, the term ``covered
security'' shall have the same meaning as in Rule 201(a)(1) of
Regulation SHO. The term ``covered security'' is defined in Rule
201(a)(1) as any NMS stock as defined in Rule 600(b)(47) of
Regulation NMS. See also 17 CFR 242.600(b)(47).
\77\ Rule 201(a)(9) states that the term ``trading center''
shall have the same meaning as in Rule 600(b)(78). Rule 600(b)(78)
of Regulation NMS defines a ``trading center'' as ``a national
securities exchange or national securities association that operates
an SRO trading facility, an alternative trading system, an exchange
market maker, an OTC market maker, or any other broker or dealer
that executes orders internally by trading as principal or crossing
orders as agent.'' See 17 CFR 242.600(b)(78). The definition
encompasses all entities that may execute short sale orders. Thus,
Rule 201 will apply to any entity that executes short sale orders.
\78\ The term ``national best bid'' is defined in Rule
201(a)(4). 17 CFR 242.201(a)(4).
\79\ The term ``listing market'' is defined in Rule 201(a)(3).
17 CFR 242.201(a)(3).
\80\ 17 CFR 242.201(b)(1)(i).
\81\ 17 CFR 242.201(b)(1)(ii).
\82\ 17 CFR 242.201(b)(1)(iii)(B).
\83\ 17 CFR 242.200(g)(2).
\84\ Since the underlying security component of a stock-option
order is not displayed by the Exchange, the exception in Rule
201(b)(1)(iii)(A) is not available. 17 CFR 242.201(b)(1)(iii)(A).
---------------------------------------------------------------------------
If the stock-option order is not Complex Auction-eligible, the
System will determine if it is eligible to be executed against another
inbound stock-option order or another stock-option order resting on the
Strategy Book. If eligible, the System will route both sides of the
matched underlying security component of the stock-option order as a
Qualified Contingent Trade (``QCT'') to an Exchange-designated broker-
dealer for execution on a stock trading venue. The stock trading venue
will then either successfully execute the QCT or cancel it back to the
Exchange-designated broker-dealer, which in turn will either report the
execution of the QCT or cancel it back to the Exchange. While the
Exchange is a trading center pursuant to Rule 201, the Exchange will
neither execute nor display the underlying security component of a
stock-option order. Instead, the execution or display of the underlying
security component of a stock-option order will occur on a trading
center other than the Exchange, such as an Exchange-designated broker-
dealer or other stock trading venue.
If the Exchange-designated broker-dealer or other stock trading
venue, as applicable, cannot execute the underlying security component
of a stock-option order in accordance with Rule 201, the Exchange will
not execute the option component(s) of the stock-option order and will
either place the unexecuted stock-option order on the Strategy Book or
cancel it back to the submitting Member in accordance with the
submitting Member's instructions (except that cAOC and cIOC stock-
option orders and eQuotes will be cancelled). Once placed back onto the
Strategy Book, the stock-option order will be handled in accordance
with Proposed Rule 518, Interpretations and Policies .01(b) as
described herein.
The execution price of the underlying security component must be
also within the high-low range for the day in the underlying security
at the time the
[[Page 58792]]
stock-option order is processed and within a certain price from the
current market, which the Exchange will establish and communicate to
Members via Regulatory Circular. If the underlying security component
price is not within these parameters, the stock-option order is not
executable.
If the stock-option order is not Complex Auction-eligible and
cannot be executed or placed on the Strategy Book, it will be cancelled
by the System. Otherwise, the stock-option order will be placed on the
Strategy Book.
As set forth in proposed Rule 518, Interpretations and Policies
.01(c) regarding the option component of a stock-option order, the
option leg(s) of a stock-option order shall not be executed (i) at a
price that is inferior to the Exchange's best bid (offer) in the option
or (ii) at the Exchange's best bid (offer) in that option if one or
more Priority Customer Orders are resting at the best bid (offer) price
on the Simple Order Book in each of the option components and the
stock-option order could otherwise be executed in full (or in a
permissible ratio). If one or more Priority Customer Orders are resting
at the best bid (offer) price on the Simple Order Book, at least one
option component must trade at a price that is better than the
corresponding bid or offer in the marketplace by at least $0.01. The
option leg(s) of a stock-option order may be executed in a $0.01
increment, regardless of the minimum quoting increment applicable to
that series.\85\
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\85\ See also CBOE Rule 6.53C.06(b), which states that the
option leg(s) shall not be executed at a price that is (i) at a
price that is inferior to the Exchange's best bid (offer) in the
series or (ii) at the Exchange's best bid (offer) in that series if
one or more public customer orders are resting at the best bid
(offer) price on the Ebook in each of the component option series
and the stock-option order could otherwise be executed in full (or
in a permissible ratio). The option leg(s) of a stock-option order
may be executed in a one-cent increment, regardless of the minimum
quoting increment applicable to that series.
---------------------------------------------------------------------------
Proposed Rule 518, Interpretations and Policies .01(d) provides
that stock-option orders and quotes on the Strategy Book that are
marketable against each other will automatically execute, subject to
price and priority provisions described in the above paragraph relating
to the option component of the stock-option order. Orders and quotes
may be submitted by Members to trade against orders on the Strategy
Book.\86\
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\86\ See also CBOE Rule 6.53C.06(c), which differs slightly,
stating that orders and quotes may be submitted by market
participants to trade against orders in the COB except that the N
second group timer shall not be in effect for stock-option orders.
MIAX does not have an ``N-second group timer.''
---------------------------------------------------------------------------
Proposed Rule 518, Interpretations and Policies .01(e) provides
that stock-option orders executed via Complex Auction shall trade in
the sequence set forth in proposed Rule 518(d)(5) described above
except that the provision regarding individual orders and quotes in the
leg markets resting on the Simple Order Book prior to the initiation of
a Complex Auction will not be applicable and such execution will be
subject to the conditions noted above concerning the price of the
option leg(s), together with all applicable securities laws.
Proposed Rule 518, Interpretations and Policies .01(f) provides
that the underlying security of a stock-option order is in a limit up-
limit down state as defined in Rule 530, such order will only execute
if the calculated stock price is within the permissible Price Bands as
determined by SIPs \87\ under the Plan to Address Extraordinary Market
Volatility Pursuant to Rule 608 of Regulation NMS, as it may be amended
from time to time (the ``LULD Plan'').
---------------------------------------------------------------------------
\87\ See supra note 26.
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Market Maker Complex Quotes
Proposed Rule 518, Interpretations and Policies .02 describes the
manner in which the Exchange will determine to allow Market Maker
quotes in complex strategies.\88\ Market Maker complex quotes may be
entered as either complex Standard quotes or complex eQuotes, as
defined in proposed Rule 518, Interpretations and Policies .02(a).\89\
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\88\ ISE permits market maker complex quotes. See supra note 23.
\89\ A complex Standard quote is defined as a complex quote
submitted by a Market Maker that cancels and replaces the Market
Maker's previous complex Standard quote for that side of the
strategy, if any. A complex eQuote is defined as a complex quote
submitted by a Market Maker with a specific time in force that does
not automatically cancel and replace the Market Maker's previous
complex Standard quote or complex eQuote.
---------------------------------------------------------------------------
The Exchange will determine, on a class-by-class basis, the complex
strategies in which Market Makers may submit complex Standard quotes,
and will notify Members of such determination via Regulatory Circular.
Market Makers may submit complex eQuotes in their appointed options
classes.
A ``Complex Auction or Cancel eQuote'' or ``cAOC eQuote'' is an
eQuote submitted by a Market Maker that is used to provide liquidity
during a specific Complex Auction with a time in force that corresponds
with the duration of the Complex Auction. cAOC eQuotes will not: (i) Be
executed against individual orders and quotes resting on the Simple
Order Book; (ii) be eligible to initiate a Complex Auction, but may
join a Complex Auction in progress; (iii) rest on the Strategy Book; or
(iv) be displayed.
A ``Complex Immediate or Cancel eQuote'' or ``cIOC eQuote'' is a
complex eQuote with a time-in-force of IOC that may be matched with
another complex quote or complex order for an execution to occur in
whole or in part upon receipt into the System.\90\ cIOC eQuotes will
not: (i) Be executed against individual orders and quotes resting on
the Simple Order Book; (ii) be eligible to initiate a Complex Auction
or join a Complex Auction in progress; (iii) rest on the Strategy Book;
or (iv) be displayed. Any portion of a cIOC eQuote that is not executed
will be immediately cancelled.
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\90\ This is based on the Exchange's current IOC eQuotes in the
simple market. See Exchange Rule 517(a)(ii)[sic](iv).
---------------------------------------------------------------------------
Market Maker complex quotes are executed in the same manner as
complex orders but will not be executed against bids and offers on the
Simple Order Book via Legging as described in proposed Rule
518(c)(2)(iii). Market Maker complex Standard quotes may rest on the
Strategy Book and are not subject to the managed interest process
described in proposed Rule 518(c)(4). An unexecuted complex Standard
quote with a limit price that would otherwise be managed to the icMBBO
will be cancelled.
Market Makers are not required to enter complex quotes on the
Strategy Book. Quotes for complex strategies are not subject to any
quoting requirements that are applicable to Market Maker quotes in the
simple market for individual options series or classes. Volume executed
in complex strategies is not taken into consideration when determining
whether Market Makers are meeting quotation obligations applicable to
Market Maker quotes in the simple market for individual options.\91\
---------------------------------------------------------------------------
\91\ See Proposed Rule 518, Interpretations and Policies .02.
This is substantially similar to complex quoting functionality
currently operative on another exchange. Specifically, ISE market
makers may enter quotes for complex order strategies on the complex
order book in their appointed options classes. Market Maker quotes
for complex order strategies are executed in the same manner as
orders as provided in other ISE rules but will not be automatically
executed against bids and offers on the Exchange for the individual
legs. Just as with the proposed MIAX rules, ISE market makers are
not required to enter quotes on the complex order book. Quotes for
complex orders are not subject to any quotation requirements that
are applicable to ISE market maker quotes in the regular market for
individual options series or classes, nor is any volume executed in
complex orders taken into consideration when determining whether ISE
market makers are meeting quotation obligations applicable to market
maker quotes in the regular market for individual options series.
See ISE Rule 722, Commentary [sic] .03.
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[[Page 58793]]
Improvement Percentages
Proposed Rule 518, Interpretations and Policies .03 establishes the
method by which the Exchange will determine whether complex order
interest is qualified to initiate a Complex Auction. Such qualification
is contingent on three categories of ``improvement percentages'' that
are used to determine the complex order's marketability at the time of
the System's evaluation.\92\
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\92\ This is similar to the manner in which other exchanges
determine a complex order's eligibility to initiate an auction for
complex orders. CBOE rules state that a ``COA-eligible order'' means
a complex order that, as determined by the Exchange on a class-by-
class basis, is eligible for a COA considering the order's
marketability (defined as a number of ticks away from the current
market). See CBOE Rule 6.53C(d)[sic](2). Respecting complex orders
resting on the CBOE Complex Order Book (``COB''), for each class
where COA is activated, CBOE may also determine to activate COA for
complex orders resting in COB. For such classes, any non-marketable
order resting at the top of the COB may be automatically subject to
COA if the order is within a number of ticks away from the current
derived net market. See CBOE Rule 6.53C, Interpretations and
Policies .04. This differs from proposed Rule 518, Interpretations
and Policies .03, which would make such a determination based upon
the percentage by which a complex order (a potential Complex
Auction-eligible order) improves the market at the time of
evaluation.
---------------------------------------------------------------------------
For complex orders received prior to the opening of all individual
components of a complex strategy, the System will calculate an IIP
value, which is a defined percentage of the current dcMBBO bid/ask
differential once all of the components of the complex strategy have
opened. Such percentage will be defined by the Exchange and
communicated to Members via Regulatory Circular. If a Complex Auction-
eligible order is priced equal to or improves the IIP value and is also
priced equal to, or improves, other complex orders and/or quotes
resting at the top of the Strategy Book, the complex order will be
eligible to initiate a Complex Auction.
Example--Initial Improvement Percentage (IIP)
Option quotes immediately after entering free trading are as
follows
MIAX--LMM quote Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM quote Mar 55 Call 2.00-2.30 (10x10)
The strategy is buy 1 Mar 50 calls and sell 2 Mar 55 calls
The dcMBBO is 1.40 debit bid at 2.50 credit offer
The IIP has been set by the Exchange at 60%
The bid/ask spread is 1.10 wide (2.50 - 1.40 = 1.10)
The IIP value is 1.10 * 60% = 0.66
Buy orders received before the strategy components are all open must be
bid at a level that equals or crosses a 2.06 (1.40+0.66) debit in order
to initiate a Complex Auction when the components enter free trading.
Sell orders received before the strategy components are all open
must be offered at a level that equals or crosses a 1.84 (2.50-0.66)
credit in order to initiate a Complex Auction when the components enter
free trading.
Upon receipt of a complex order when the complex strategy is open,
the System will calculate an Upon Receipt Improvement Percentage
(``URIP'') value, which is a defined percentage of the current dcMBBO
bid/ask differential. Such percentage will be defined by the Exchange
and communicated to Members via Regulatory Circular. If a Complex
Auction-eligible order is priced equal to or improves the URIP value
and is also priced to improve other complex orders and/or quotes
resting at the top of the Strategy Book, the complex order will be
eligible to initiate a Complex Auction.
Example--Upon Receipt Improvement Percentage (URIP)
Option quotes upon arrival of a cAOA designated complex order
MIAX--LMM quote Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM quote Mar 55 Call 2.00-2.30 (10x10)
The strategy is buy 1 Mar 50 call and sell 2 Mar 55 calls
The dcMBBO is 1.40 debit bid at 2.50 credit offer
The URIP has been set by the Exchange at 60%
The bid/ask spread is 1.10 wide (2.50 - 1.40 = 1.10)
The URIP value is 1.10 * 60% = 0.66
Buy orders designated as cAOA must be bid at a level that equals or
crosses a 2.06 (1.40+0.66) debit in order to initiate a Complex Auction
upon receipt.
Sell orders designated as cAOA must be offered at a level that
equals or crosses a 1.84 (2.50-0.66) credit in order to initiate an
Auction upon receipt.
Upon evaluation of a complex order resting at the top of the
Strategy Book, the System will calculate a Re-Evaluation Improvement
Percentage (``RIP'') value, which is a defined percentage of the
current dcMBBO bid/ask differential. Such percentage will be defined by
the Exchange and communicated to Members via Regulatory Circular. If a
complex order resting at the top of the Strategy Book is priced equal
to, or improves, the RIP value, the complex order will be eligible to
initiate a Complex Auction.
Example--Re-Evaluation Improvement Percentage (RIP)
Option quotes upon re-evaluation
MIAX--LMM Mar 50 Call 6.00-6.50 (10x10)
MIAX--LMM Mar 55 Call 2.00-2.30 (10x10)
The strategy is Buy 1 Mar 50 call and Sell 2 Mar 55 calls
The dcMBBO is 1.40 debit bid at 2.50 credit offer
The RIP has been set by the Exchange at 70%
The bid/ask spread is 1.10 wide (2.50-1.40 = 1.10)
The RIP value is 1.10 * 70% = 0.77
Buy orders must be bid at a level that equals or crosses a 2.17
(1.40+0.77) debit in order to initiate a Complex Auction upon re-
evaluation.
Sell orders must be offered at a level that equals or crosses a
1.73 (2.50-0.77) credit in order to initiate a Complex Auction upon re-
evaluation.
Proposed Rule 518, Interpretations and Policies .04 is a regulatory
provision that prohibits the dissemination of information related to
Complex Auction-eligible orders by the submitting Member to third
parties. Such conduct will be deemed conduct inconsistent with just and
equitable principles of trade as described in Exchange Rule 301.
Price and Other Protections
Proposed Interpretations and Policies .05 establishes Price
Protection standards that are intended to ensure that certain types of
complex strategies will not be executed outside of a preset standard
minimum and/or maximum price limit.
First, the proposal establishes a price protection program for
Vertical Spreads and Calendar Spreads by establishing a Vertical Spread
Variance (``VSV'') and Calendar Spread Variance (``CSV''). VSV will
apply only to Vertical Spreads, and CSV will apply only to Calendar
Spreads.\93\
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\93\ A ``Vertical Spread'' is a complex strategy consisting of
the purchase of one call (put) option and the sale of another call
(put) option overlying the same security that have the same
expiration but different strike prices. See proposed Rule 518,
Interpretations and Policies .05(a). The proposed MIAX VSV and CSV
price protections are substantially similar to the price protections
that are currently operative on other exchanges. For example, the
PHLX Strategy Price Protection (``SPP'') is a feature of the System
that prevents certain Complex Order Strategies from trading at
prices outside of pre-set standard limits. The PHLX SPP for Vertical
and Time (Calendar) spreads is virtually the same as the proposed
MIAX VSV and CSV price protections, except that the PHLX rule refers
to a ``Time Spread'' instead of a ``Calendar Spread.'' ISE's
Vertical and Calendar Spread price protections differ slightly in
that the ISE system will (i) prevent the execution of a vertical
spread order at a price that is less than zero; (ii) reject a
vertical spread order when entered with a net price greater than the
value of the higher strike price minus the lower strike price (plus
a pre-set value) (iii) prevent the execution of a vertical spread
order at a price that is greater than the value of the higher strike
price minus the lower strike price (plus a pre-set value) when
entered as a market order to buy; (iv) reject a calendar spread
order (i.e., an order to buy a call (put) option with a longer
expiration and to sell another call (put) option with a shorter
expiration in the same security at the same strike price) when
entered with a net price of less than zero (minus a pre-set value),
and will prevent the execution of a calendar spread order at a price
that is less than zero (minus a pre-set value) when entered as a
market order to sell. See ISE Rule 722, Supplementary Material
.07(c).
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[[Page 58794]]
The VSV establishes minimum and maximum trading price limits for
Vertical Spreads. The maximum possible trading price limit of the VSV
is the difference between the two component strike prices plus a pre-
set value. For example, a Vertical Spread consisting of the purchase of
one January 30 call and the sale of one January 35 call would have a
maximum trading price limit of $5.00 plus a pre-set value. The minimum
possible trading price limit of a Vertical Spread is always zero minus
a pre-set value. The pre-set value will be uniform for all option
classes traded on the Exchange as determined by the Exchange and
communicated to Members via Regulatory Circular.
A ``Calendar Spread'' is a complex strategy consisting of the
purchase of one call (put) option and the sale of another call (put)
option overlying the same security that have different expirations but
the same strike price. The CSV establishes a minimum trading price
limit for Calendar Spreads. The CSV establishes a minimum trading price
limit for Calendar Spreads. The maximum possible value of a Calendar
Spread is unlimited, thus there is no maximum price protection for
Calendar Spreads. The minimum possible trading price limit of a
Calendar Spread is zero minus a pre-set value. The pre-set value will
be uniform for all option classes traded on the Exchange as determined
by the Exchange and communicated to Members via Regulatory Circular.
If the execution price of a complex order would be outside of the
limits established in the VSV or the CSV, such complex order will be
placed on the Strategy Book and will be managed to the appropriate
trading price limit as described in proposed Rule 518(c)(4) above.
Orders to buy below the minimum trading price limit and orders to sell
above the maximum trading price limit (in the case of Vertical Spreads)
will be rejected by the System.
Another feature in the System that is designed to protect investors
from executions that are outside of the price on any individual market
is the Implied Away Best Bid or Offer (``ixABBO'') price protection
feature. The ixABBO price protection feature is a price protection
mechanism under which, when in operation as requested by the submitting
Member, a buy order will not be executed at a price that is higher than
each other single exchange's best displayed offer for the complex
strategy, and under which a sell order will not be executed at a price
that is lower than each other single exchange's best displayed bid for
the complex strategy. The ixABBO is calculated using the best net bid
and offer for a complex strategy using each other exchange's displayed
best bid or offer on their simple order book. For stock-option orders,
the ixABBO for a complex strategy will be calculated using the BBO for
each component on each individual away options market and the NBBO for
the stock component. The ixABBO price protection feature must be
engaged on an order-by-order basis by the submitting Member and is not
available for complex Standard quotes, complex eQuotes, or cAOC orders.
Example--Complex order with ixABBO Protection Requested
MIAX--quote Mar 50 Call 6.00-6.50 (10x10)
MIAX--quote Mar 55 Call 2.00-2.30 (10x10)
GEM Mar 50 Call 6.00-6.50 (10x10)
GEM Mar 55 Call 2.00-2.10 (10x10)
BOX Mar 50 Call 6.00-6.50 (10x10)
BOX Mar 55 Call 2.10-2.30 (10x10)
The Exchange receives an Initiating Customer order to buy 1 Mar 50 call
and sell 2 Mar 55 calls for a 2.50 debit x 100, with ixABBO protection
requested.
The icMBBO is 1.40 debit bid at 2.50 credit offer
The ixABBO is 1.80 debit bid (GEM) at 2.30 credit offer (BOX)
The cAOA instruction is not present on this order, so the order will
not initiate an auction upon arrival regardless of its relationship to
the Improvement Percentage. The ABBO Price Protection instruction which
instructs the Exchange to apply ixABBO protection is present, so the
Exchange will protect the order to the best bid for the strategy or
best offer for the strategy available from any single exchange's
protected quotation in the Simple Order Market, including the MIAX.
Since the ixABBO protection has been selected, the inbound order cannot
be legged against the Strategy Book for a 2.50 debit (the strategy is
offered at 2.30 on BOX). In order to display the order at its maximum
tradable price, the inbound order is managed on the Strategy Book and
displayed at its protected limit of 2.30 debit bid. While the MIAX
icMBBO remains 1.40 debit bid at 2.50 credit offer, the combination of
the Simple Order Book and the Strategy Book becomes 2.30 debit bid at
2.50 credit offer.
The BOX then updates their protected Simple Order Market quotation
while all other Simple Market quotations remain the same:
BOX Mar 50 Call 6.00-6.50 (10x10)
BOX Mar 55 Call 2.20-2.40 (10x10)
The ixABBO is now 1.80 debit (GEM) at 2.10 credit (BOX)
The MIAX System will now re-evaluate the order and will apply the new
ixABBO protection. The order will now be managed on the Strategy Book
and displayed at its protected limit of 2.10 debit bid. While the MIAX
icMBBO remains 1.40 debit bid at 2.50 credit offer, the combination of
the Simple Order Book and the Strategy Book becomes 2.10 debit bid at
2.50 credit offer. The BOX again updates their protected Simple Order
Market quotation while all other Simple Market quotations remain the
same:
BOX Mar 50 Call 6.00-6.50 (10x10)
BOX Mar 55 Call 2.10-2.30 (10x10)
The ixABBO is now 1.80 debit bid (GEM) at 2.30 credit offer (BOX)
The MIAX System will now re-evaluate the order and will apply the new
ixABBO protection. The order will now be managed on the Strategy Book
and displayed at its protected limit of 2.30 debit bid. While the MIAX
icMBBO remains 1.40 debit bid at 2.50 credit offer, the combination of
the Simple Order Book and the Strategy Book once again becomes 2.30
debit bid at 2.50 credit offer.
Wide Market Conditions, SMAT Events and Halts
The Exchange is proposing to establish rules for additional
investor protections when external market events occur that affect
complex orders and quotes on the Exchange. These external events and
additional investor protections, and the manner in which the System
responds to them, are defined and specified in proposed Rule 518,
Interpretations and Policies .05(e). First, a ``wide market condition''
is defined as any individual component of a complex strategy having, at
the time of evaluation, an MBBO quote width that is wider than the
permissible valid quote width as defined in Rule 603(b)(4).\94\
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\94\ A Market Maker on the Exchange is expected to price option
contracts fairly by, among other things, bidding and offering so as
to create differences of no more than $5 between the bid and offer
(``bid/ask differentials'') following the opening rotation in an
equity option contract. The Exchange may establish differences other
than the bid/ask differentials described above for one or more
option series or classes. See Exchange Rules 603(b)(4)(i) and (ii).
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[[Page 58795]]
Proposed Rule 518, Interpretations and Policies .05(e)(1)(i),
describes how the System functions when there is a wide market
condition during free trading (i.e., when there is not a Complex
Auction in progress). Specifically, if a wide market condition exists
for a component of a complex strategy, trading in the complex strategy
will be suspended. The Strategy Book will remain available for Members
to enter and manage complex orders and quotes. New Complex Auctions
will not be initiated and incoming Complex Auction-eligible orders that
could have otherwise caused an auction to begin will be placed on the
Strategy Book. Incoming complex orders with a time in force of IOC will
be cancelled.
The System will continue to evaluate the Strategy Book. If a wide
market condition exists for a component of a complex strategy at the
time of evaluation, complex orders or quotes that could have otherwise
been executed will not be executed until the wide market condition no
longer exists. When the wide market condition no longer exists, the
System will again evaluate the Strategy Book and will use the process
and criteria respecting the RIP as described in proposed
Interpretations and Policies .03(c) to determine whether complex order
interest exists to initiate a Complex Auction, or whether to commence
trading in the complex strategy without a Complex Auction.
Proposed Rule 518, Interpretations and Policies .05(e)(1)(ii),
describes how the System functions when there is a wide market
condition during a Complex Auction. If, at the expiration of the
Response Time Interval, a wide market condition exists for a component
of a complex strategy in the Complex Auction, trading in the complex
strategy will be suspended, and any RFR Responses will be cancelled.
Remaining Complex Auction-eligible orders will then be placed on the
Strategy Book. When the wide market condition no longer exists, the
System will evaluate the Strategy Book pursuant to proposed Rule
518(c)(5)(ii), and will use the process and criteria respecting the RIP
as described in proposed Interpretations and Policies .03(c) to
determine whether complex order interest exists to initiate a Complex
Auction, or whether to commence trading in the complex strategy without
a Complex Auction.
The purpose of the rule and functionality concerning a wide market
condition is to limit the trading of complex orders when one or more of
the components of a complex strategy are wider than the defined valid
width in the simple market \95\ as this has the potential to create
unnaturally wide spreads in the complex strategy, which in turn could
result in a less than optimal execution price. The Exchange believes
that the rule and functionality are essential in protecting customers
submitting complex orders from extreme market conditions in the simple
market respecting the components of such complex orders.
---------------------------------------------------------------------------
\95\ Id.
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Proposed Rule 518, Interpretations and Policies .05(e)(2) sets
forth the functionality of the System if a Simple Market Auction or
Timer (``SMAT'') Event (defined above as a PRIME Auction, a Route
Timer, or a liquidity refresh pause) \96\ exists for a component of a
complex strategy.
---------------------------------------------------------------------------
\96\ See proposed Rule 518(a)(16).
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If a SMAT Event exists during free trading for a component of a
complex strategy, trading in the complex strategy will be suspended.
The Strategy Book will remain available for Members to enter and manage
complex orders and quotes. New Complex Auctions may be initiated for
incoming Complex Auction-eligible orders that meet the requirements of
the URIP (as described in proposed Rule 518, Interpretations and
Policies .03(b) above). Incoming complex orders and quotes that could
otherwise be executed during the SMAT Event(s) without entering the
Complex Auction process will be placed on the Strategy Book. Incoming
complex orders received during a SMAT Event with a time in force of IOC
will be cancelled by the System.
The System will continue to evaluate the Strategy Book. When the
SMAT Event(s) no longer exist(s), the System will evaluate the Strategy
Book, and will use the process and criteria respecting the RIP to
determine whether complex order interest exists to initiate a Complex
Auction, or whether to commence trading in the complex strategy without
a Complex Auction.
Proposed Rule 518, Interpretations and Policies .05(e)(2)(ii)
describes what happens when a SMAT Event occurs during a Complex
Auction. If, at the end of the Response Time Interval, a component of a
complex strategy is in a SMAT Event, trading in the complex strategy
will be suspended and all RFR Responses will be cancelled. Remaining
Complex Auction-eligible orders will then be placed on the Strategy
Book. When the SMAT Event(s) no longer exist(s), the System will
evaluate the Strategy Book pursuant to proposed Rule 518(c)(5)(ii), and
will use the process and criteria respecting the RIP as described in
Interpretations and Policies .03(c) of this Rule to determine whether
complex order interest exists to initiate a Complex Auction, or whether
to commence trading in the complex strategy without a Complex Auction.
SMAT Events represent temporary interruptions of free trading in
one or more components of a complex strategy. The temporary suspension
of trading in complex orders during a SMAT event is intended to enhance
continuity, trade-through protection, and orderliness in the simple
markets and to protect complex order components from being executed at
prices that could be better following a SMAT Event or a wide market
condition. Once a SMAT Event is concluded or resolved, the System will
evaluate the Strategy Book as described above to provide the previously
suspended complex orders with more opportunities to be executed.
Halts
Proposed Rule 518, Interpretations and Policies .05(e)(3) describes
the System's functionality when there is a halt in trading for the
underlying security or a component of a complex order. If a trading
halt exists for the underlying security or a component of a complex
strategy, trading in the complex strategy will be suspended.
The Strategy Book will remain available for members to enter and
manage complex orders and quotes. Incoming complex orders and quotes
that could otherwise be executed or initiate a Complex Auction in the
absence of a halt will be placed on the Strategy Book. This is similar
to functionality that is currently operative on another exchange.\97\
Incoming complex orders and quotes with a time in force of IOC will be
cancelled.
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\97\ See, e.g., PHLX Rule 1098(c)(ii)(C), which states that
complex orders will not trade on the PHLX system during a trading
halt for any options component of the Complex Order.
---------------------------------------------------------------------------
When trading in the halted component(s) and/or underlying security
of the complex order resumes, the System will evaluate the Strategy
Book as described in proposed Rule 518(c)(2)(i), and will use the
process and criteria respecting the IIP as described in proposed Rule
518, Interpretations and Policies .03(a) to determine whether complex
order interest exists to initiate a Complex Auction, or whether to
commence trading in the complex strategy without a Complex Auction.
Proposed Interpretations and Policies .05(e)(3)(ii) describes what
happens
[[Page 58796]]
when there is a halt during a Complex Auction. Unlike during a wide
market condition or a SMAT Event, where a Complex Auction will end
without trading at the end of the Response Time Interval, if during a
Complex Auction any component or the underlying security of a Complex
Auction-eligible order is halted, the Complex Auction will end early
without trading \98\ and all RFR Responses will be cancelled. Remaining
complex orders will be placed on the Strategy Book if eligible, or
cancelled. When trading in the halted component(s) and/or underlying
security of the complex order resumes, the System will evaluate the
Strategy Book pursuant to proposed Rule 518(c)(2)(i) above, and will
use the process and criteria respecting the IIP as described in
Interpretations and Policies .03(a) of this Rule to determine whether
marketable complex order interest exists to initiate a Complex Auction,
or whether to commence trading in the complex strategy without a
Complex Auction.
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\98\ This is the only circumstance under which a Complex Auction
on MIAX would end early. In all other circumstances described in
proposed Rule 518 that would disrupt trading during a Complex
Auction, the Complex Auction will end after the Response Time
Interval without trading.
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Another investor protection proposed by the Exchange is described
in Interpretations and Policies .06 of proposed Rule 518, the MIAX
Order Monitor for Complex Orders (``cMOM'').\99\
---------------------------------------------------------------------------
\99\ cMOM is substantially similar to the Exchange's MIAX Order
Monitor (``MOM'') protection for the Simple Order Book. See Exchange
Rule 519.
---------------------------------------------------------------------------
cMOM defines a price range outside of which a complex limit order
will not be accepted by the System. cMOM is a number defined by the
Exchange and communicated to Members via Regulatory Circular. The
default price range for cMOM will be greater than or equal to a price
through the cNBBO for the complex strategy to be determined by the
Exchange and communicated to Members via Regulatory Circular. Such
price will not be greater than $2.50. A complex limit order to sell
will not be accepted at a price that is lower than the cNBBO bid, and a
complex limit order to buy will not be accepted at a price that is
higher than the cNBBO offer, by more than cMOM. A complex limit order
that is priced through this range will be rejected.
cMOM includes complex order size protections, open complex order
protection, and open complex contract protection. Respecting complex
order size protections, the System will prevent certain complex orders
from executing or being placed on the Strategy Book if the size of the
complex order exceeds the complex order size protection designated by
the Member. If the maximum size of complex orders is not designated by
the Member, the Exchange will set a maximum size of complex orders on
behalf of the Member by default. Members may designate the complex
order size protection on a firm wide basis. The default maximum size
for complex orders will be determined by the Exchange and announced to
Members via Regulatory Circular.
Under the open complex order protection, the System will reject any
complex orders that exceed the maximum number of open complex orders
held in the System on behalf of a particular Member, as designated by
the Member. Members may designate the open complex order protection on
a firm wide basis. If the maximum number of open complex orders is not
designated by the Member, the Exchange will set a maximum number of
open complex orders on behalf of the Member by default. The default
maximum number of open complex orders will be determined by the
Exchange and announced to Members via Regulatory Circular.
Open complex contract protection provides that the System will
reject any complex orders that exceed the maximum number of open
complex contracts represented by complex orders held in the System on
behalf of a particular Member, as designated by the Member. Members may
designate the open complex contract protection on a firm wide basis. If
the maximum number of open complex contracts is not designated by the
Member, the Exchange will set a maximum number of open complex
contracts on behalf of the Member by default. The default maximum
number of open complex contracts will be determined by the Exchange and
announced to Members via Regulatory Circular.
The cMOM protections will be available for complex orders as
determined by the Exchange and communicated to Members via Regulatory
Circular.
The Exchange is also proposing to amend Exchange Rule 519A to state
that complex orders will participate in the Risk Protection Monitor.
The Risk Protection Monitor maintains a counting program (``counting
program'') for each participating Member that will count the number of
orders entered and the number of contracts traded via an order entered
by a Member on the Exchange within a specified time period that has
been established by the Member, and will reject orders that exceed a
Member-designated ``Allowable Order Rate'' and an ``Allowable Contract
Execution Rate.'' \100\
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\100\ For a complete description of the Risk Protection Monitor,
see Securities Exchange Act Release No. 74496 (March 13, 2015), 80
FR 14421 (March 19, 2015) (SR-MIAX-2015-03).
---------------------------------------------------------------------------
Obvious and Catastrophic Errors
The Exchange proposes to adopt Rule 521(c)(5) to address the manner
in which obvious errors in complex order transactions will be handled
in situations where one or more components of a complex order is
eligible to be adjusted or nullified pursuant to Exchange Rule
521(c)(4).\101\
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\101\ Exchange Rule 521(c)(4) describes the actions to be taken
by the Exchange when a transaction resulting from an obvious error
(as defined elsewhere in Rule 521) has occurred, depending upon who
the parties to the transaction are.
---------------------------------------------------------------------------
Specifically, if a complex order executes against another complex
order on the Strategy Book and one or more components of the
transaction is deemed eligible to be adjusted or nullified, the entire
trade (all components) will be nullified, unless both parties agree to
adjust the transaction to a different price within thirty (30) minutes
of being notified by the Exchange of the decision to nullify the
transaction. Additionally, if a complex order executes against orders
or quotes on the Simple Order Book, each component of the complex order
will be reviewed and handled independently in accordance with Exchange
Rule 521.\102\
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\102\ This differs slightly from rules on other exchanges. For
example, ISE rules provide that if both parties to a trade that is
one component of a complex order execution are parties to all of the
trades that together comprise the execution of a complex order at a
single net debit or credit, then if one of those component trades
can be nullified under ISE rules, all component trades that were
part of the same complex order shall be nullified as well. See ISE
Rule 720, Commentary [sic] .04. PHLX rules also include this
provision. See PHLX Rule 1092, Commentary .01. This differs slightly
from the rules of other exchanges.
---------------------------------------------------------------------------
The Exchange also proposes a minor change to Exchange Rule 605,
Market Maker Orders, to codify in Rule 605(a) that, in addition to the
other order types specified in the rule, Market Makers may place
complex orders in option classes to which they are appointed respecting
cAOC complex orders.
Because of the technology changes associated with this rule
proposal, the Exchange will announce the implementation date of the
proposal in a Regulatory Circular to be published no later than 90 days
after the publication of the approval order in the Federal Register.
The implementation date will be no later than 90 days following
publication of the Regulatory Circular
[[Page 58797]]
announcing publication of the approval order in the Federal Register.
2. Statutory Basis
MIAX believes that its proposed rule change is consistent with
Section 6(b) of the Act \103\ in general, and furthers the objectives
of Section 6(b)(5) of the Act \104\ in particular, in that it is
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanisms of a
free and open market and a national market system and, in general, to
protect investors and the public interest. The Exchange believes in
particular that its proposal regarding executions of complex orders
against the Simple Order Book is consistent with the Act and furthers
the objectives of Section 6(b)(5) of the Act \105\ because it provides
greater liquidity to the marketplace as a whole by fostering the
interaction between the components of complex orders on the Strategy
Book and the Simple Order Book. This should enhance the opportunity for
executions of both complex orders and simple orders.
---------------------------------------------------------------------------
\103\ 15 U.S.C. 78f(b).
\104\ 15 U.S.C. 78f(b)(5).
\105\ Id.
---------------------------------------------------------------------------
The Exchange believes the proposed rule change will result in more
efficient trading and reduce the risk that complex orders fail to
execute for investors by providing additional opportunities to fill
complex orders, and that the changes are consistent with the Act. The
Exchange believes that increased interaction, where possible, on a
continuous and real-time basis of the bids and offers on each component
of a complex strategy with the bids and offers on the corresponding
complex strategy and vice versa, through derived orders and Legging,
will benefit market participants and investors. The proposed rule
change will allow complex orders to interact with interest on the MIAX
Simple Order Book and, conversely, allow interest on the MIAX Simple
Order Book to interact with complex orders in an efficient and orderly
manner.
The Exchange also believes the interaction of orders will benefit
investors by increasing the opportunity for complex orders to receive
execution, while also enhancing execution quality for orders on the
MIAX Simple Order Book. Generally, the options industry rules for the
execution of complex orders provide that two complex orders may execute
against one another if the execution prices of the component legs
result in a net price that is better than the best customer limit order
available for the individual component legs. This permits an exchange,
when executing two complex orders against one another, to execute each
component leg on the market's best bid or offer so long as the
execution does not trade ahead of customer interest.
The Exchange believes it is reasonable to permit complex orders
that are subject of this rule change to leg into the Simple Order Book.
The proposed rule concerning Legging will facilitate the execution of
more complex orders, and will thus benefit investors and the general
public because complex orders will have a greater chance of execution
when they are allowed to leg into the simple market and thereby
increase the execution rate for these orders, thus providing market
participants with an increased opportunity to execute these orders on
MIAX. The prohibition against the Legging of complex orders with two
option legs where both legs are buying or both legs are selling and
both legs are calls or both legs are puts, and on complex orders with
three option legs where all legs are buying or all legs are selling
regardless of whether the option leg is a call or a put, protects
investors and the public interest by ensuring that Market Makers
providing liquidity do not trade above their established risk tolerance
levels.
The Exchange believes it is reasonable to limit the types of
complex orders that are eligible to leg into the Simple Order Book. The
Exchange believes that the vast majority of complex orders sent to the
Exchange will be unaffected by this proposed rule. Moreover, the
Exchange believes that the potential risk of offering legging
functionality for complex orders such as those impacted by the proposed
rule could limit the amount of liquidity that Market Makers are willing
to provide in the Simple Order Book. In particular, Market Makers,
without the proposed limitation, are at risk of executing the
cumulative size of their quotations across multiple options series
without an opportunity to adjust their quotes. Market Makers may be
compelled to change their quoting and trading behavior to account for
this additional risk by widening their quotes and reducing the size
associated with their quotes, which would diminish the Exchange's
quality of markets and the quality of the markets in general. The
limitations in proposed Rule 518(c)(2)(iii) substantially diminish a
potential source of unintended Market Maker risk when certain types of
complex orders leg into the Simple Order Book, 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 by adding confidence and stability in the
Exchange's marketplace. This benefit to investors far exceeds the small
amount of potential liquidity provided by the few complex orders to
which this aspect of the proposal applies.
Additionally, investors will have greater opportunities to manage
risk with the new availability of trading in complex orders. The
proposed adoption of rules governing complex order auctions will
facilitate the execution of complex orders while providing
opportunities to access additional liquidity and fostering price
improvement. The Exchange believes the proposed rules are appropriate
in that complex orders are widely recognized by market participants as
invaluable, both as an investment, and a risk management strategy. The
proposed rules will provide an efficient mechanism for carrying out
these strategies. In addition, the proposed complex order rules promote
equal access by providing Members that subscribe to the Exchange's data
feeds that include auction notifications with the opportunity to
interact with orders in the Complex Auction. In this regard, any Member
can subscribe to the options data provided through the Exchange's data
feeds that include auction notifications.
The Exchange believes that the general provisions regarding the
trading of complex orders provide a clear framework for trading of
complex orders in a manner consistent with other options exchanges.
This consistency should promote a fair and orderly national options
market system. The Exchange believes that the proposed rules will
result in efficient trading and reduce the risk for investors that
complex orders could fail to execute by providing additional
opportunities to fill complex orders.
The proposed execution and priority rules will allow complex orders
to interact with interest in the MIAX Simple Order Book and,
conversely, interest on the MIAX Simple Order Book to interact with
complex orders in an efficient and orderly manner. Consistent with
other exchanges and with well-established principles of customer
protection, the proposed rules state that a complex order may be
executed at a net credit or debit price with one other Member without
giving priority to bids or offers established in
[[Page 58798]]
the marketplace that are no better than the bids or offers comprising
such net credit or debit; provided, however, that if any of the bids or
offers established in the marketplace consist of a Priority Customer
Order, at least one leg of the complex order must trade at a price that
is better than the corresponding bid or offer in the marketplace by at
least a $0.01 increment.\106\ Additionally, before executing against
another complex order, a complex order on MIAX will execute first
against orders on the MIAX Simple Order Book (except in the limited
circumstance described in proposed Rule 518(c)(2)(iii)) if the net
price of such orders is equal to the best price on the Strategy Book if
any of the bids or offers established in the simple marketplace consist
of a Priority Customer Order.
---------------------------------------------------------------------------
\106\ See proposed Rule 518(c)(3)(i).
---------------------------------------------------------------------------
For the reasons set forth above, the Exchange believes the proposed
rule change regarding complex order execution is consistent with the
goals of the Act to remove impediments to and to perfect the mechanism
of a free and open market and a national market system, and to protect
investors and the public interest.
Market Maker Priority Interest for Complex
The Exchange believes that affording priority in the Strategy Book
to Market Makers with complex Standard quotes that are priced at or
inside the dcMBBO further perfects the mechanisms of a free and open
market and a national market system and, in general, protects investors
and the public interest, by providing Market Makers with additional
incentive to submit complex Standard quotes at the best price in the
Strategy Book.
Certain Market Maker complex Standard quotes and complex eQuotes
will qualify as ``Market Maker Priority Interest for Complex'' on the
Strategy Book at the beginning of a Complex Auction, or at the time of
execution in free trading. Affording priority in the Strategy Book to
Market Makers with a Complex priority quote should provide incentive to
MIAX participants to submit complex quotes at the best prices.
Moreover, the Exchange believes that this treatment of Market
Makers is a suitable reward for Market Makers quoting in the Strategy
Book at the best price in the complex strategy. The Exchange believes
this furthers the objectives of Section 6(b)(5) of the Act \107\
because it provides greater depth and liquidity in the Strategy Book,
all to the benefit of investors. The Exchange believes its proposal to
afford priority in the Strategy Book to certain Market Maker quotes on
the Strategy Book will result in enhanced liquidity on the Exchange,
and thus further perfects the mechanisms of a free and open market and
a national market system, consistent with the Act.
---------------------------------------------------------------------------
\107\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Derived Orders
The Exchange believes the generation of derived orders as set forth
in proposed Rule 518(a)(9) is consistent with the goals of the Act to
remove the impediments to and perfect the mechanism of a free and open
market because their addition to the marketplace should facilitate
additional transactions and interaction between orders on the Strategy
Book and orders on the Simple Order Book. The Exchange believes the
addition of derived orders to the MIAX market will benefit Market
Makers, traders, and retail investors trading on MIAX by enhancing
execution quality and the likelihood and efficiency of trade execution.
In the absence of the proposed rule, complex orders that could
otherwise execute against interest on the Simple Order Book would not
trade.
A derived order is automatically removed from the Simple Order Book
if the displayed price of the derived order is no longer at the
displayed best bid or offer on the Simple Order Book; if execution of
the derived order would no longer achieve the net price of the complex
order on the Strategy Book when the other component of the complex
order is executed against the best bid or offer on the Simple Order
Book; if the complex order is executed in full; if the complex order is
cancelled, or if any component of the complex order resting on the
Strategy Book that is used to generate the derived order is subject to
a SMAT Event, a wide market condition, or a halt. Until such removal,
derived orders provide additional likelihood and efficiency of trade
execution in furtherance of the goals of the Act. Applying these
limitations, the Exchange will closely monitor the generation of
derived orders to ensure they do not negatively impact system capacity
and performance, thus removing these potential impediments to, and
perfecting the mechanism of, a free and open market.
The Exchange further believes that the automatic generation of
derived orders will provide additional execution opportunities for
complex orders and interest on the MIAX Simple Order Book, and thus
enhance execution quality for investors on MIAX. The Exchange believes
the additional opportunities for potential execution through the
interaction of orders on the Strategy Book and orders on the Simple
Order Book as achieved through derived orders, and the potential for
enhanced execution quality, as outlined above, promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market, are in the public interest and,
therefore, consistent with the Act.
The Exchange believes that the availability of derived orders will
provide additional execution opportunities for complex orders without
negatively impacting any investors in the simple market. The
availability of derived orders may enhance the quality of execution for
investors on the MIAX Simple Order Book by improving the price and/or
size of the MBBO and by providing additional execution opportunity for
resting interest on the MIAX Simple Order Book. The Exchange also
believes that derived orders are compliant with Rule 602 of Regulation
NMS \108\ because each derived order is included in the MBBO if it is
equal to or better than the otherwise existing MBBO.
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\108\ 17 CFR 242.602.
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Types of Complex Orders
The Exchange proposes that complex orders may be submitted as limit
orders, market orders, IOC orders, GTC orders, or day limit orders as
each such term is defined in Exchange Rule 516, or as a cAOA order, or
cAOC order.\109\ In particular, the Exchange believes that limit
orders, IOC orders, GTC orders and day limit orders all provide
valuable limitations on execution price and time that help to protect
MIAX participants and investors in both the Simple Order Book and in
the proposed Strategy Book. The Exchange believes that permitting
complex orders to be entered with these varying order contingency types
will give MIAX participants greater control and flexibility over the
manner and circumstances in which their orders may be executed,
modified, or cancelled, and thus will provide for the protection of
investors and contribute to market efficiency.
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\109\ See proposed Rule 518(b).
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Evaluation
The Exchange believes that the regular and event-driven evaluation
of the Strategy Book for the eligibility of complex orders or, as
appropriate, complex quotes, to initiate or participate in a Complex
Auction, and to determine their eligibility to participate in the
managed interest process, whether a
[[Page 58799]]
derived order should be generated or cancelled, if they are eligible
for full or partial execution against a complex order or quote resting
on the Strategy Book or through Legging with the Simple Order Book,
whether the complex order or quote should be cancelled; and whether the
complex order or quote or any remaining portion thereof should be
placed on the Strategy Book are consistent with the principles of the
Act to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest.
Evaluation of the executability of complex orders and quotes and
for the determination as to whether a complex order is Complex Auction-
eligible is central to the removal of impediments to, and the
perfection of, the mechanisms of a free and open market and a national
market system and, in general, the protection of investors and the
public interest. The evaluation process ensures that the System will
capture and act upon complex orders and quotes that are due for
execution or placed in a Complex Auction. The regular and event-driven
evaluation process removes potential impediments to the mechanisms of
the free and open market and the national market system by ensuring
that complex orders and quotes are given the best possible chance at
execution at the best price, evaluating the availability of complex
orders and quotes to be handled in a number of ways as described in
this proposal. Any potential impediments to the order handling and
execution process respecting complex orders and quotes are
substantially removed due to their continual and event-driven
evaluation for subsequent action to be taken by the System. This
protects investors and the public interest by ensuring that complex
orders and quotes in the System are continually monitored and evaluated
for potential action(s) to be taken on behalf of investors that submit
their complex orders and quotes to MIAX.
Complex Auction Process
The Complex Auction process is also designed to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system and, in general, to protect
investors and the public interest.
Following evaluation, a Complex Auction-eligible order may begin a
Complex Auction or may join a Complex Auction in progress.\110\ The
Complex Auction process promotes just and equitable principles of
trade, fosters cooperation and coordination with persons engaged in
facilitating transactions in securities, removes impediments to and
perfects the mechanisms of a free and open market and a national market
system and, in general, protects investors and the public interest by
ensuring that eligible complex orders and quotes are given every
opportunity to be executed at the best prices against an increased
level of contra-side liquidity responding to the RFR message. This
mechanism of a free and open market is designed to enhance liquidity
and the potential for better execution prices during the Response Time
Interval, all to the benefit of investors on MIAX, and thereby
consistent with the Act.
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\110\ A cAOC eQuote will not initiate a Complex Auction but may
join a Complex Auction in progress; an IOC eQuote will not initiate
or join a Complex Auction in progress. See proposed Rule 518,
Interpretations and Policies .02(c)(1) and (2).
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The Exchange believes that the determination to initiate a Complex
Auction using the IIP, URIP or RIP value, as applicable, removes
impediments to, and perfects the mechanisms of, a free and open market
and a national market system and, in general, protects investors and
the public interest, by ensuring that a Complex Auction is conducted
for a complex order only when there is a reasonable and realistic
chance for price improvement through a Complex Auction. The IIP, URIP
and RIP are used to calculate a percentage of the dcMBBO bid/ask
differential at or within which the System will determine to initiate a
Complex Auction. If a complex order is priced equal to, or improves,
the IIP, URIP or RIP value, the complex order will be eligible to
initiate a Complex Auction.
The purpose of this provision is to ensure that a complex order
will not initiate a Complex Auction if it is priced through the bid or
offer at a point (i.e., outside of the IIP, URIP or RIP) where it is
not reasonable to anticipate that it would generate a meaningful number
of RFR Responses such that there would be price improvement of the
complex order's limit price. Promoting the orderly initiation of a
Complex Auction is essential to maintaining a fair and orderly market
for complex orders; otherwise, the initiation of Complex Auctions that
are unlikely to result in price improvement might result in unnecessary
activity in the marketplace when there is no meaningful opportunity for
price improvement. The Exchange believes that the IIP, URIP and RIP
remove this potential impediment to the MIAX market and to the
marketplace as a whole.
If a complex order is not priced equal to, or better than, the IIP,
URIP or RIP value, the Exchange believes that it is not reasonable to
anticipate that it would generate a meaningful number of RFR Responses
such that there would be price improvement of the complex order's limit
price. Promoting the orderly initiation of Complex Auctions is
essential to maintaining a fair and orderly market for complex orders;
otherwise, the initiation of Complex Auctions that are unlikely to
result in price improvement could affect the orderliness of the
marketplace in general.
The Exchange believes that this removes impediments to and perfects
the mechanisms of a free and open market and a national market system
by promoting the orderly initiation of Complex Auctions, and by
limiting the likelihood of unnecessary Complex Auctions that are not
expected to result in price improvement.
The Exchange believes the proposed maximum 500 millisecond Response
Time Interval promotes just and equitable principles of trade and
removes impediments to a free and open market because it allows
sufficient time for Members participating in a Complex Auction to
submit RFR Responses and would encourage competition among
participants, thereby enhancing the potential for price improvement for
complex orders in the Complex Auction to the benefit of investors and
public interest. The Exchange believes the proposed rule change is not
unfairly discriminatory because it establishes a Response Time Interval
applicable to all MIAX participants participating in a Complex Auction.
The proposed Complex Auction process is designed to protect the
integrity of the System and of the MIAX marketplace for the protection
of investors and the public interest by, among other things, limiting
the number of Complex Auctions that may be initiated within a given
time period. Multiple Complex Auctions may be in progress at any
particular time across multiple strategies, but only one Complex
Auction per strategy may be in progress at any particular time. Without
such a limitation, investors could be faced with an unusually large
number of simultaneous Complex Auctions in the same strategy, which in
turn could
[[Page 58800]]
impact the orderly function of the markets. The Exchange believes that
this limitation is consistent with the Act because it is designed to
remove impediments to and perfect the mechanisms of a free and open
market and a national market system by ensuring orderliness in the
Complex Auction process.
The Complex Auction Process also protects investors and the public
interest by creating more opportunities for price improvement of
complex orders, all to the benefit of MIAX participants and the
marketplace as a whole.
Complex Order Price Protections
The Exchange believes that the proposed complex order price
protections will provide market participants with valuable price and
order size protections in order to enable them to better manage their
risk exposure when trading complex orders. The VSV will ensure that a
Vertical Spread will not trade at a net price of less than the minimum
possible value minus a pre-set price setting an acceptable range or
greater than the maximum possible value plus a pre-set price setting an
acceptable range. The CSV will ensure that a Calendar Spread will not
trade at a price of less than zero (minus a pre-set price setting an
acceptable range). Orders to buy below the minimum price and orders to
sell above the maximum price will be rejected by the System.
cMOM defines a price range outside of which a complex limit order
will not be accepted by the System. A complex order that is priced
through this range will be rejected. This is intended to provide a fair
and orderly market in complex orders on the Exchange by filtering and
rejecting inbound complex orders at prices that could be erroneous and/
or disruptive.
Other Protections
The Exchange is proposing to suspend and in some cases restart
trading in complex orders and quotes, to remove certain complex orders
from the Strategy Book, and to end a complex Auction either early or at
the end of the Response Time Interval when there is a wide market
condition, SMAT Event and/or a halt in the underlying security of, or
in an individual component of, a complex order. This protection is
intended to protect investors and the public interest by causing the
System not to execute during potentially disruptive conditions or
events that could affect customer protection, and to resume trading in
complex orders and quotes to the extent possible upon the conclusion or
resolution of the potentially disruptive condition or event.
The System's proposed functionality during a wide market condition
protects investors and the public interest by ensuring that the
execution of complex orders and quotes on behalf of investors and the
public will only occur at times when there is a fair and orderly
market.
Risk Protection Monitor
The proposed amendment to Exchange Rule 519A, Risk Protection
Monitor, to reject complex orders that exceed a Member-designated
``Allowable Order Rate'' and an ``Allowable Contract Execution Rate''
is designed to protect investors and the public interest by assisting
Members submitting complex orders in their risk management. Members are
vulnerable to the risk from system or other error or a market event
that may cause them to send a large number of orders or receive
multiple, automatic executions before they can adjust their order
exposure in the market. Without adequate risk management tools, such as
the Risk Protection Monitor, Members could reduce the amount of order
flow and liquidity that they provide to the market. Such actions may
undermine the quality of the markets available to customers and other
market participants. Accordingly, the proposed amendments to the Risk
Protection Monitor should instill additional confidence in Members that
submit orders to the Exchange that their risk tolerance levels are
protected, and thus should encourage such Members to submit additional
order flow and liquidity to the Exchange with the understanding that
they have this protection respecting all orders they submit to the
Exchange, including complex orders, 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.
Obvious and Catastrophic Errors
The proposed amendment to Exchange Rule 521, Nullification and
Adjustment of Options Transactions Including Obvious Errors protects
investors and the public interest by extending the obvious error
process for complex orders.
Under the proposal, if a complex order executes against another
complex order on the Strategy Book and one or more components of the
transaction is deemed eligible to be adjusted or nullified, the entire
trade (all components) will be nullified, unless both parties agree to
adjust the transaction to a different price within thirty (30) minutes
of being notified by the Exchange of the decision to nullify the
transaction. If a complex order executes against orders or quotes on
the Simple Order Book, each component of the complex order will be
reviewed and handled independently in accordance with Rule 521.
This addition to Exchange Rule 521 should help add more certainty
to the obvious/catastrophic error process and reduce the price risk to
parties trading on the Exchange, and mitigate risk for the parties to a
complex order where all or one or more components of the complex order
traded at an erroneous price. Parties to complex trades on MIAX will
have less trading risk because all of the components will be nullified
under the proposal.
This additional risk protection for parties to a complex trade
promotes just and equitable principles of trade and is designed to
protect investors and the public interest, by providing additional
mechanisms through which investors may nullify or adjust erroneous
trades, and is therefore consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Exchange notes that it
operates in a highly competitive market in which market participants
can readily direct order flow to competing venues who offer similar
functionality. The Exchange believes that the proposal to offer the
ability to execute complex orders on the Exchange is pro-competitive by
providing market participants with the opportunity to execute complex
orders in a manner that is similar to that allowed on other options
exchanges.
The Exchange believes that the proposal will enhance competition
among the various markets for complex order execution, potentially
resulting in more active complex order trading on all exchanges.
The Exchange notes that as to intramarket competition, its proposal
is designed to treat all Exchange participants in the same category of
participant equally. The Exchange believes that it is equitable and
reasonable to afford trade allocation priority to certain categories of
participants. The proposal to establish first priority to Priority
Customer complex orders resting on the Strategy Book is consistent with
the long-
[[Page 58801]]
standing policies of customer protection found throughout the Act.
Allocating thereafter to Market Maker Priority Interest for Complex is
justified because Market Maker Priority Interest for Complex only
applies if the Market Maker has a complex Standard quote in the complex
strategy that equals or improves the dcMBBO. The Exchange's proposal to
afford such a Market Maker priority in the Strategy Book is not new
conceptually; Market Makers are afforded priority on the Exchange in
the Simple Order Book in certain situations.\111\ Thus, the Exchange
believes that a Market Maker whose quoting activity qualifies for
Market Maker Priority Interest for Complex is justifiably afforded
priority with respect to such quoting activity.
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\111\ For example, after executions resulting from Priority
Overlays when the pro-rata allocation method applies, 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 Maker priority quotes,
which have not received a participation entitlement, and have
precedence over Professional Interest. See Exchange Rule
514(e)(i)[sic].
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The Exchange also believes that affording priority to them (after
Priority Customer complex orders) is reasonable in light of the
liquidity they provide, which other MIAX participants such as non-
Market Maker Professional Interest participants are not required to
provide.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-MIAX-2016-26 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-2016-26. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-MIAX-2016-26, and should be
submitted on or before September 15, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\112\
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\112\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-20213 Filed 8-24-16; 8:45 am]
BILLING CODE 8011-01-P