[Federal Register Volume 81, Number 239 (Tuesday, December 13, 2016)]
[Notices]
[Pages 90030-90033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29805]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79500; File No. SR-MIAX-2016-46]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing of a Proposed Rule Change To Amend Rule 
515A, MIAX Price Improvement Mechanism (``PRIME'') and PRIME 
Solicitation Mechanism

December 7, 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 November 25, 2016, Miami International 
Securities Exchange LLC (``MIAX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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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 amend Exchange Rule 515A, MIAX Price

[[Page 90031]]

Improvement Mechanism (``PRIME'') and PRIME Solicitation Mechanism.
    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 Rule 515A(a)(1)(iii) to state 
that, with respect to Agency Orders (as defined below) that have a size 
of less than 50 contracts, if at the time of receipt of the Agency 
Order, the National Best Bid and Offer (``NBBO'') has a bid/ask 
differential of $0.01, the System \3\ will reject the Agency Order. The 
Exchange also proposes to make permanent a pilot program that allows 
orders of less than 50 contracts or 500 mini-option contracts to 
initiate a PRIME Auction (the ``Pilot''), as described below.
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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.
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Background
    PRIME is a process by which a Member may electronically submit for 
execution an order it represents as agent (``Agency Order'') against 
principal interest and/or an Agency Order against solicited interest. 
The Member that submits the Agency Order (the ``Initiating Member'') 
agrees to guarantee the execution of the Agency Order by submitting a 
contra-side order representing principal interest or solicited interest 
(``Contra-side Order''). When the Exchange receives a properly 
designated Agency Order for Auction processing, a Request for Responses 
(``RFR'') detailing the option, side, size, and initiating price will 
be sent to all subscribers of the Exchange's data feeds. Members may 
submit responses to the RFR (specifying prices and sizes). RFR 
responses can be either an Auction or Cancel (``AOC'') order or an AOC 
eQuote.\4\
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    \4\ See Exchange Rule 515A(a)(2)(i)(D).
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    Originally, for Agency Orders for less than 50 standard option 
contracts or 500 mini-option contracts, the Initiating Member was 
required to stop the entire Agency Order as principal or with a 
solicited order at the better of the NBBO price improved by a $0.01 
increment or the Agency Order's limit price (if the order is a limit 
order). In addition, to initiate the PRIME Auction for auto-match 
submissions, the Initiating Member was required to stop the Agency 
Order for less than 50 standard option contracts or 500 mini-option 
contracts at the better of the NBBO price improved by a $0.01 increment 
or the Agency Order's limit price.
    In November 2014, MIAX filed to establish a pilot program to allow 
orders of less than 50 contracts or 500 mini-option contracts to 
initiate a PRIME Auction (the ``Pilot'').\5\ The Pilot allows Agency 
Orders of any size to initiate a PRIME Auction on MIAX at a price that 
is at or better than the NBBO. The Exchange has extended the Pilot 
several times, and the Pilot is currently set to expire January 18, 
2017.\6\ The Exchange is proposing to make the Pilot permanent, with 
one modification, as described below.
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    \5\ See Securities Exchange Act Release No. 73590 (November 13, 
2014), 79 FR 68919 (November 19, 2014) (SR-MIAX-2014-56).
    \6\ See Securities Exchange Act Release No. 78265 (July 8, 
2016), 81 FR 45578 (July 14, 2016) (SR-MIAX-2016-19).
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Proposal
    The Exchange is proposing to adopt new Rule 515A(a)(1)(iii) upon 
the expiration of the current Pilot to establish on a permanent basis 
that, with respect to Agency Orders that have a size of less than 50 
contracts, if at the time of receipt of the Agency Order, the NBBO has 
a bid/ask differential of $0.01,\7\ the System will reject the Agency 
Order. Agency Orders with a size of under 50 contracts will be accepted 
and processed by the System when the NBBO bid/ask differential is 
greater than $0.01, and all Agency Orders with a size of 50 contracts 
or greater will be accepted and processed by the System, regardless of 
the NBBO bid/ask differential.
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    \7\ Currently, if the market is locked or crossed as defined in 
Exchange Rule 1402 for the option, the Agency Order will be rejected 
by the System prior to initiating an Auction or a Solicitation 
Auction. See Exchange Rule 515A, Interpretations and Policies .09. 
The Exchange will continue to reject Agency Orders, regardless of 
their size, in this situation.
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    Additionally, the Exchange is proposing to delete Interpretations 
and Policies .08 to Rule 515A. Interpretations and Policies .08 relates 
to the Pilot, and it states that the minimum size requirement for PRIME 
Auctions to start at the NBBO is subject to a Pilot Program ending 
January 18, 2017. Accordingly, the Exchange will continue after that 
date to accept and process Agency Orders of any size at the NBBO, 
except when the Agency Order is for a size of less than 50 contracts 
and the NBBO has a bid/ask differential of $0.01, in which case the 
System will reject the Agency Order. It also states that the Exchange 
will submit certain data to the Commission during the Pilot. Because 
the Pilot is being made permanent (and there is no ``Pilot''), the 
Exchange will no longer submit the referenced data.
    The purpose of providing the referenced data was to provide 
supporting evidence that, among other things, there is meaningful 
competition for all size orders within the PRIME, that there is 
significant price improvement for all orders executed through the 
PRIME, and that there is an active and liquid market functioning on the 
Exchange outside of the PRIME.
    The Exchange has analyzed this data and believes that there has 
been meaningful competition for all size orders within the PRIME 
Auction process, regardless of the size of the order or the bid/ask 
differential of the NBBO. Specifically from July, 2015 through January, 
2016, there were a total of 961,152 PRIME Auctions on MIAX, which 
included more than 2,691,000 participants, for an average of 2.8 
participants per PRIME Auction.\8\ Market Makers and other participants 
have submitted competitive bids and offers during the Response Time 
Interval and have shown interest in participating in trades stemming 
from PRIME Auctions, and the Exchange believes that the current 
allocation algorithm \9\ at multiple execution prices or at a single 
price supports competitive bidding and offering.
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    \8\ See Exhibit 3 attached hereto.
    \9\ After Priority Customer interest at a given price point has 
been satisfied, remaining contracts are allocated in accordance with 
the priority rules set forth in Rule 515A(a)(2)(iii).
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    The Exchange also believes that the data show that there is an 
active and liquid market functioning on the Exchange outside of the 
PRIME.\10\

[[Page 90032]]

Competitive bidding and offering occurs outside of the PRIME and 
participants can submit bids/offers at improved prices or join a bid or 
offer (thus improving liquidity at that price) regardless of the bid/
ask differential of the NBBO.
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    \10\ From July, 2015 through January, 2016, the Exchange 
executed 7,449,818 transactions for a total of 92,706,999 contracts 
outside of the PRIME. The Exchange believes that this represents an 
active and liquid market functioning on the Exchange outside of the 
PRIME.
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    While the Exchange continues to believe that opportunities remain 
for price improvement of Agency Orders with a size of less than 50 
contracts when the NBBO has a bid/ask differential of $0.01 (e.g., 
because market conditions may change during the PRIME Auction),\11\ the 
data have not demonstrated significant price improvement in this narrow 
circumstance, as indicated in the following table:
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    \11\ For example, assume the NBBO is $1.00 bid, $1.01 offer and 
an Agency Order is submitted into MIAX PRIME to buy 20 contracts at 
$1.01. The Exchange believes that there is still a chance, however 
slight, that during the Response Time Interval the offer price could 
change to $1.00, and the Agency Order, while guaranteed an execution 
at $1.01, could buy 20 contracts at $1.00.

                   PRIME Trades for Orders of Less Than 50 Contracts With NBBO Spread of $0.01
                                                [5/1-10/25/2016]
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Total Number of Trades........................       2,383,204  Total Number of Contracts.......      11,950,538
Trades Receiving Price Improvement............          17,179  Contracts Receiving Price                154,338
                                                                 Improvement.
Percent of Trades Receiving Improvement.......           0.72%  Percent of Contracts Receiving             1.29%
                                                                 Improvement.
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    The Exchange does believe, however, that based on the data there is 
significant price improvement, and significant opportunity for price 
improvement, for all Agency Orders submitted when the NBBO bid/ask 
differential is greater than $0.01. The data attached reflect an 
average price improvement of $0.045 per contract for all contracts 
executed in PRIME Auctions, regardless of the size of the Agency Order 
(i.e., less than 50 contracts or greater than 50 contracts).\12\ The 
maximum price improvement for any order can only be $0.01 per contract 
when the NBBO bid/ask differential is $0.01; the overall average price 
improvement, which is elevated to $0.045 per contract when considering 
all NBBO bid/ask differentials (i.e., including where the NBBO bid/ask 
differential is $0.02 or higher) reflects significant price improvement 
and opportunity for price improvement when the NBBO bid/ask 
differential is greater than $0.01 for orders of all sizes.
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    \12\ See Exhibit 3 attached hereto.
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    Moreover, the Exchange believes that, with respect to Agency Orders 
with a size of 50 contracts or greater, a PRIME Auction provides not 
only the opportunity for price improvement, but also a legitimate value 
proposition in certainty of execution. Continuing to allow PRIME 
Auctions to be initiated by Agency Orders with a size of 50 contracts 
or greater increases the opportunity for executions of larger size 
orders.\13\ For example, although the NBBO may have an associated size 
of 50 contracts, those 50 contracts at the best price may be fragmented 
across several exchanges (e.g., five exchanges disseminating the NBBO 
price for 10 contracts each). There is no guarantee that a participant 
wishing to buy or sell 50 contracts can access all of the posted 
liquidity in a fragmented marketplace in which (in this example) often 
only 10 contracts are executed on a particular exchange at the NBBO 
price, and thereafter the other 40 contracts are adjusted to inferior 
prices on the other exchanges before executing. The Exchange believes 
that maintaining the PRIME Auction for Agency Orders with a size of 50 
contracts or greater when the bid/ask differential at the NBBO is $0.01 
enables consolidated size discovery and provides certainty of larger 
sized executions. The Exchange believes that this represents an 
efficient way for market participants to access liquidity for larger 
sized orders. Therefore, the Exchange believes that it is appropriate 
to continue to support the acceptance of Agency Orders with a size of 
50 contracts or greater, regardless of the bid/ask differential of the 
NBBO, even at $0.01, both now and in the future.
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    \13\ According to the Options Clearing Corporation (``OCC''), 
for the year-to-date through September 2016 there were 130, 573,030 
transactions for a total of 1,473,152,154 contracts traded, for an 
average execution size of 11.3 contracts.
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    Based on its review of the data, the Exchange believes that there 
is meaningful competition for all size orders within the PRIME, that 
there is significant price improvement for all orders executed through 
the PRIME (except for Agency Orders with a size of less than 50 
contracts that are entered into the PRIME Auction when the NBBO has a 
bid/ask differential of $0.01), and that there is an active and liquid 
market functioning on the Exchange outside of the PRIME. Accordingly, 
the Exchange proposes to adopt Rule 515A(a)(1)(iii) upon the expiration 
of the Pilot to establish on a permanent basis that, with respect to 
Agency Orders that have a size of less than 50 contracts, if at the 
time of receipt of the Agency Order, the NBBO has a bid/ask 
differential of $0.01, the System will reject the Agency Order.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \14\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \15\ 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.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change fosters 
cooperation and coordination with persons engaged in facilitating 
transactions in securities because, based on its communication with the 
Commission, the Exchange believes that all U.S. options exchanges will 
file similar proposals to address the handling of Agency Orders 
received with a size of under 50 contracts when the NBBO has a bid/ask 
differential of $0.01.
    The proposed rule change removes 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 by way of 
meaningful competition for all size orders within the PRIME Auction 
process, regardless of the size of the order or the bid/ask 
differential of the NBBO. Further, with respect to Agency Orders with a 
size of 50 contracts or greater, the PRIME Auction process perfects the

[[Page 90033]]

mechanisms of a free and open market and a national market system by 
providing meaningful price improvement for orders executed through 
PRIME, regardless of the NBBO bid/ask differential. Additionally, the 
proposal protects investors and the public interest by showing that 
there is an active and liquid market functioning on the Exchange 
outside of the PRIME.
    Furthermore, the proposed rule change removes impediments to and 
perfects the mechanisms of a free and open market and a national market 
system by establishing the new manner in which the Exchange will handle 
Agency Orders received with a size of under 50 contracts when the NBBO 
has a bid/ask differential of $0.01.

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 PRIME Auction enables the Exchange to compete for order flow 
with other exchanges that have similar price improvement mechanisms in 
place. As stated above, the Exchange believes that there is meaningful 
competition in PRIME Auctions for all size orders, there are 
opportunities for significant price improvement for orders executed 
through PRIME, and that there is an active and liquid market 
functioning on the Exchange outside of PRIME.
    The Exchange believes that approving the Pilot on a permanent basis 
will not significantly impact competition, as it will continue to 
accept and process Agency Orders for potential price improvement except 
in the very limited circumstance where the Agency Order is for a size 
of less than 50 contracts and the NBBO bid/ask differential is $0.01.

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-2016-46 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-2016-46. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MIAX-2016-46 and should be 
submitted on or before January 3, 2017.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29805 Filed 12-12-16; 8:45 am]
 BILLING CODE 8011-01-P