[Federal Register Volume 83, Number 72 (Friday, April 13, 2018)]
[Notices]
[Pages 16163-16168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-07669]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83012; File No. SR-PEARL-2018-08]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Implement an
Equity Rights Program
April 9, 2018.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on April 6, 2018, MIAX PEARL, LLC (``MIAX PEARL''
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 is filing a proposal to implement an equity rights
program.
The text of the proposed rule change is available on the Exchange's
website at http://www.miaxoptions.com/rule-filings/pearl at MIAX
PEARL'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 implement an equity rights program
(``Program'') pursuant to which units representing the right to acquire
equity in the Exchange's parent holding company, Miami International
Holdings, Inc. (``MIH'') would be issued to a participating Member in
exchange for payment of an initial purchase price or the prepayment of
certain ERP Exchange Fees \3\ and the achievement of certain liquidity
volume thresholds on the Exchange over a 32-month period. The purpose
of the Program is to promote the long-term interests of MIAX PEARL by
providing incentives designed to encourage future MIH owners and MIAX
PEARL market participants to contribute to the growth and success of
MIAX PEARL, by being active liquidity providers and takers to provide
enhanced levels of trading volume to MIAX PEARL's market, through an
opportunity to increase their proprietary interests in MIAX PEARL's
enterprise value.
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\3\ The ERP Exchange fees consist of: (a) Transaction fees as
set forth in Section 1)a of the MIAX PEARL Exchange Fee Schedule;
(b) membership fees as set forth in Section 3 of the MIAX PEARL
Exchange Fee Schedule; (c) system connectivity fees as set forth in
Section 5 of the MIAX PEARL Exchange Fee Schedule; and (d) market
data fees as set forth in Section 6 of the MIAX PEARL Exchange Fee
Schedule (collectively, the ``ERP Exchange Fees'').
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Members that participate in the Program will have two options to
choose from: (i) An offering of I-Units; and/or (ii) an offering of J-
Units.\4\
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\4\ The Program which provides equity-like consideration in
exchange for market making or the provision of liquidity, order flow
or volume is open to market participants generally. All MIAX PEARL
Members may participate subject to their satisfaction of eligibility
requirements. To be designated as a participant Member, an applicant
must: (i) Be a Member in good standing of MIAX PEARL; (ii) qualify
as an ``accredited investor'' as such term is defined in Regulation
D of the Securities Act of 1933; and (iii) have executed all
required documentation for Program participation. Members may elect
to participate in either or both of the options. If either the I-
Unit or the J-Unit option is oversubscribed, the units in the
oversubscribed option will be allocated on a pro-rata basis that may
result in a fractional allocation.
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I-Units Option
Members that participate in the I-Unit option of the Program will
be issued for each unit (i) 31,870 shares of MIH common stock and (ii)
warrants to purchase 384,474 shares of common stock of MIH in exchange
for such participant Member's initial cash capital contribution of
$215,122.50, and with such warrants being exercisable upon the
achievement by the participating Member of certain volume thresholds on
the Exchange during a 32-month measurement period commencing May 1,
2018. A total of 2 I-Units will be offered. The total equity ownership
of MIH common stock held by any one
[[Page 16164]]
participant Member will be subject to a cap of 19.9%.\5\
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\5\ See Ninth Article (b)(i)(B), Amended and Restated
Certificate of Incorporation of Miami International Holdings, Inc.,
effective October 16, 2015 (providing that no Exchange Member,
either alone or together with its Related Persons, may own, directly
or indirectly, of record or beneficially, shares constituting more
than twenty percent (20%) of any class of capital stock of the
Corporation). See also Ninth Article (b)(i)(C), Amended and Restated
Certificate of Incorporation of Miami International Holdings, Inc.,
effective October 16, 2015 (providing that no Person, either alone
or together with its Related Persons, at any time may, directly,
indirectly or pursuant to any voting trust, agreement, plan or other
arrangement, vote or cause the voting of shares of the capital stock
of the Corporation or give any consent or proxy with respect to
shares representing more than twenty percent (20%) of the voting
power of the then issued and outstanding capital stock of the
Corporation, nor may any Person, either alone or together with its
Related Persons, enter into any agreement, plan or other arrangement
with any other Person, either alone or together with its Related
Persons, under circumstances that would result in the shares of
capital stock of the Corporation that are subject to such agreement,
plan or other arrangement not being voted on any matter or matters
or any proxy relating thereto being withheld, where the effect of
such agreement, plan or other arrangement would be to enable any
Person, either alone or together with its Related Persons, to vote,
possess the right to vote or cause the voting of shares of the
capital stock of the Corporation which would represent more than
twenty percent (20%) of said voting power.). Any purported transfer
of shares or ownership of shares in violation of the ownership cap
by a stockholder would be subject to the limitations of the
Certificate of Incorporation, including the non-recognition of
voting rights of shares in excess of the cap and a redemption right
by MIH for excess shares. See also Ninth Article (d) and (e),
Amended and Restated Certificate of Incorporation of Miami
International Holdings, Inc., effective October 16, 2015.
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The warrants will vest in seven (7) tranches: (i) One (1) tranche,
upon initial investment; and (ii) six (6) tranches during a measurement
period of months 1-32 of the Program. In addition, the participant
Members may earn or lose the right to exercise warrants on a pro-rata
basis based upon meeting volume commitments during the measurement
periods, as detailed below.
Upon the initial investment, the participant Member would receive
common shares equal to 31,870 shares of the common stock and 10% of the
warrants will vest. A participant Member will be eligible to earn the
remaining warrants during measurement periods provided that the
participant has achieved a specified percentage of the total national
average daily volume of options contracts reported to The Options
Clearing Corporation (``OCC'') (``OCC ADV'') on MIAX PEARL of all
option classes listed on MIAX PEARL.\6\
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\6\ If an options class is not listed on MIAX PEARL, then the
trading volume in that options class will be omitted from the
calculation of % OCC ADV. Priority Customer-to-Priority Customer
Crossing transactions where no fees are paid to the Exchange,
special strategies, and contracts as to which a Member acts solely
as clearing agent will not be counted in the number of option
contracts executed on the Exchange by any Member. (Incidental
Priority Customer-to-Priority Customer transactions, that are not
crossing transactions, will be counted in the number of options
contracts executed on the Exchange by a Member.) Special strategies
for the purpose of calculating trading volume include: (i) Dividend
strategy; (ii) merger strategy; (iii) short stock interest strategy;
(iv) reversal and conversion strategies; (v) jelly roll strategy;
and (vi) similar strategies offered by an options exchange that are
subject to a fee cap. Trading in special strategies currently is not
available on MIAX PEARL. Special strategies will be omitted from the
calculation of % OCC ADV to the extent it is possible to identify
such transactions.
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The remaining six (6) tranches, of 90% of the warrants, will vest
during the following measurement periods: (i) 5.63% of the warrants
resulting from months 1-2, with a volume commitment of 0.400% of OCC
ADV on MIAX PEARL per I-Unit; \7\ (ii) 16.87% of the warrants resulting
from months 3-8, with a volume commitment of 0.400% of OCC ADV on MIAX
PEARL per I-Unit; (iii) 16.87% of the warrants resulting from months 9-
14, with a volume commitment of 0.400% of OCC ADV on MIAX PEARL per I-
Unit; (iv) 16.87% of the warrants resulting from months 15-20, with a
volume commitment of 0.400% of OCC ADV on MIAX PEARL per I-Unit; (v)
16.88% of the warrants resulting from months 21-26, with a volume
commitment of 0.400% of OCC ADV on MIAX PEARL per I-Unit; and (vi)
16.88% of the warrants resulting from months 27-32, with a volume
commitment of 0.400% of OCC ADV on MIAX PEARL per I-Unit. If a
participant Member reaches 100% of the volume commitment during a
tranche's measurement period, the Member will earn 100% of the warrants
applicable to such measurement period. If a participant Member reaches
less than 100% but at least 70% of the volume commitment during a
tranche's measurement period, the Member will earn a reduced amount of
warrants on a pro-rata basis applicable to such measurement period. If
a participant Member fails to reach a minimum of 70% of the volume
commitment during a tranche's measurement period, the Member will lose
all right to that tranche of warrants. Notwithstanding, in the event a
participant Member has not satisfied the volume commitment for any one
measurement period (other than measurement period 6), the participant
Member will have an opportunity to vest those warrants if such
participant Member applies a portion of the Member's over-performance
from the measurement period immediately following the prior measurement
period to ensure a minimum of 70% of the volume commitment in the prior
period and in addition has satisfied the volume commitment for the
measurement period immediately following. If a participant Member
exceeds 100% of the volume commitment during a tranche's measurement
period, the Member is able to earn, on a pro-rata basis, warrants not
earned by other participant Members.
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\7\ The first measurement period will begin on May 1, 2018 and
end June 30, 2018. Therefore, May 1, 2018 through June 30, 2018 will
count as months 1-2 for purposes of the measurement period.
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J-Units Option
Members that participate in the J-Unit option of the Program will
be issued for each unit warrants to purchase 416,344 shares of common
stock of MIH in exchange for the prepayment of ERP Exchange Fees in the
amount of $250,000 for the 32-month period commencing May 1, 2018, and
with such warrants being exercisable upon the achievement by the
participating Member of certain volume thresholds on the Exchange
during a 32-month measurement period commencing May 1, 2018. A total of
25 J-Units will be offered. The total equity ownership of MIH common
stock held by any one participant Member will be subject to a cap of
19.9%.
The warrants will vest in six (6) tranches during the following
measurement periods: (i) 6.25% of the warrants resulting from months 1-
2, with a volume commitment of 0.400% of OCC ADV on MIAX PEARL per J-
Unit; \8\ (ii) 18.75% of the warrants resulting from months 3-8, with a
volume commitment of 0.400% of OCC ADV on MIAX PEARL per J-Unit; (iii)
18.75% of the warrants resulting from months 9-14, with a volume
commitment of 0.400% of OCC ADV on MIAX PEARL per J-Unit; (iv) 18.75%
of the warrants resulting from months 15-20, with a volume commitment
of 0.400% of OCC ADV on MIAX PEARL per J-Unit; (v) 18.75% of the
warrants resulting from months 21-26, with a volume commitment of
0.400% of OCC ADV on MIAX PEARL per J-Unit; and (vi) 18.75% of the
warrants resulting from months 27-32, with a volume commitment of
0.400% of OCC ADV on MIAX PEARL per J-Unit. If a participant Member
reaches 100% of the volume commitment during any one tranche's
measurement period, the Member will earn 100% of the warrants
applicable to
[[Page 16165]]
such measurement period. If a participant Member reaches less than 100%
but at least 70% of the volume commitment during a tranche's
measurement period, the Member will earn a reduced amount of warrants
on a pro-rata basis applicable to such measurement period. If a
participant Member fails to reach a minimum of 70% of the volume
commitment during the measurement period, the Member will lose all
right to that tranche of warrants. Notwithstanding, in the event a
participant Member has not satisfied the volume commitment for any one
measurement period (other than measurement period 6), the participant
Member will have an opportunity to vest those warrants if such
participant Member applies a portion of the Member's over-performance
from the measurement period immediately following the prior measurement
period to ensure a minimum of 70% of the volume commitment in the prior
period, and in addition has satisfied the volume commitment for the
measurement periods immediately following. If a participant Member
exceeds 100% of the volume commitment during any one tranche's
measurement period, the Member is able to earn, on a pro-rata basis,
warrants not earned by other participant Members.
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\8\ The first measurement period will begin on May 1, 2018 and
end June 30, 2018. Therefore, May 1, 2018 through June 30, 2018 will
count as months 1-2 for purposes of the measurement period.
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A participant Member will prepay the ERP Exchange Fees. Once a
participant Member has prepaid ERP Exchange Fees for the 32-month
period, each month the participant Member may execute contracts and
accumulate such ERP Exchange Fees based on the prevailing MIAX PEARL
Fee Schedule in effect at the time. Once a J-Unit participant Member
has incurred ERP Exchange Fees whereby the total accumulated ERP
Exchange Fees equal the prepaid amount of such ERP Exchange Fees, all
subsequently incurred ERP Exchange Fees will be billed and collected at
the appropriate rates as defined in the MIAX PEARL Fee Schedule.
Provisions Applicable to Both I-Units and J-Units
A Member of the Exchange and its Affiliate as defined in the Fee
Schedule of MIAX PEARL \9\ may together participate in the Program as
follows. In order to participate in the Program with a participant
Member an Appointed Market Maker or Appointed EEM must be designated as
such as of April 27, 2018 pursuant to the procedure for appointing an
Appointed Market Maker or Appointed EEM set forth in the MIAX PEARL Fee
Schedule. An Appointed Market Maker or Appointed EEM may not otherwise
be a participant Member of the Program. Notwithstanding the ability to
change the designation of an Appointed Market Maker or Appointed EEM as
set forth in the Fee Schedule of MIAX PEARL for MIAX PEARL Fee Schedule
purposes, no such change in designation may be made for purposes of the
Program and any designation of an Appointed Market Maker or Appointed
EEM as of April 27, 2018 shall remain in effect for purposes of the
Program for the duration of the Program.\10\ An Affiliate of a Member
with at least 75% common ownership between the firms as reflected on
each firm's Form BD, Schedule A (a ``Corporate Affiliate''), is not
required to follow the procedure set forth on the MIAX PEARL Fee
Schedule for designation of an Appointed Market Maker or Appointed EEM
and will together be deemed a participant Member in the Program for so
long as it maintains such corporate affiliation with the other Member.
Alternatively, a Corporate Affiliate of a Member may directly join the
Program and be a separate participant Member of the Program. Volume
thresholds and other aspects of the Program may be met by the Member
and its Affiliate who will together constitute a participant Member in
the Program. In the case where a Member and its Corporate Affiliate
separately joined the Program as participant Members volume thresholds
and other aspects of the Program must be met separately by the Member
and its Corporate Affiliate.
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\9\ For purposes of the MIAX PEARL Fee Schedule, the term
``Affiliate'' means (i) an affiliate of a Member of at least 75%
common ownership between the firms as reflected on each firm's Form
BD, Schedule A, (``Affiliate''), or (ii) the Appointed Market Maker
of an Appointed EEM (or, conversely, the Appointed EEM of an
Appointed Market Maker). An ``Appointed Market Maker'' is a MIAX
PEARL Market Maker (who does not otherwise have a corporate
affiliation based upon common ownership with an EEM) that has been
appointed by an EEM and an ``Appointed EEM'' is an EEM (who does not
otherwise have a corporate affiliation based upon common ownership
with a MIAX PEARL Market Maker) that has been appointed by a MIAX
PEARL Market Maker, pursuant to the following process. A MIAX PEARL
Market Maker appoints an EEM and an EEM appoints a MIAX PEARL Market
Maker, for the purposes of the Fee Schedule, by each completing and
sending an executed Volume Aggregation Request Form by email to
[email protected] no later than 2 business days prior to
the first business day of the month in which the designation is to
become effective. Transmittal of a validly completed and executed
form to the Exchange along with the Exchange's acknowledgement of
the effective designation to each of the Market Maker and EEM will
be viewed as acceptance of the appointment. The Exchange will only
recognize one designation per Member. A Member may make a
designation not more than once every 12 months (from the date of its
most recent designation), which designation shall remain in effect
unless or until the Exchange receives written notice submitted 2
business days prior to the first business day of the month from
either Member indicating that the appointment has been terminated.
Designations will become operative on the first business day of the
effective month and may not be terminated prior to the end of the
month. Execution data and reports will be provided to both parties.
See MIAX PEARL Fee Schedule Definitions.
\10\ A participant Member who changes a designation of an
Appointed Market Maker or Appointed EEM during the Program will be
effective with respect to transactions on the Exchange other than
the Program.
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Each participant Member will have a standard piggyback registration
right to include the common shares and the common shares issuable upon
exercise of the warrants should MIH file a Registration Statement under
the Securities Act of 1933. Each participant Member will also have the
right to participate pro rata in all future offerings of MIH securities
for so long as the participant Member holds at least 51% of the common
shares purchased by the participating Member directly or issuable upon
the exercise of warrants included in at least one J-Unit. MIH will have
the right of first refusal to purchase any common shares or warrant
shares that a participant Member decides to transfer or sell. Other
participant Members will have the secondary right of first refusal to
purchase any common shares or warrant shares that a participant Member
decides to transfer or sell.
All applicants will be subject to the same eligibility and
designation criteria, and all participant Members will participate in
the Program on the same terms, conditions and restrictions. To be
designated as a participant Member, an applicant must: (i) Be a Member
in good standing of MIAX PEARL; (ii) qualify as an ``accredited
investor'' as such term is defined in Regulation D of the Securities
Act of 1933; \11\ and (iii) have executed all required documentation
for Program participation. Participant Members must have executed the
definitive documentation, satisfied the eligibility criteria required
of Program participants enumerated above, and tendered the minimum cash
investment or prepayment of fees by April 27, 2018, with a closing to
occur on April 30, 2018.
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\11\ The purpose of this criterion relates to the ability of MIH
to sell shares of common stock pursuant to an exemption from
registration under the Securities Act of 1933. The definition of
``accredited investor'' under Rule 501(a)(1) of the Securities Act
of 1933 includes any broker or dealer registered pursuant to Section
15 of the Act. MIAX PEARL Rule 200(b) requires a Member to be
registered as a broker or dealer pursuant to Section 15 of the Act,
therefore all MIAX PEARL Members will satisfy this criterion.
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As discussed above, the purpose of the Program is to encourage
Members to direct greater trade volume to MIAX
[[Page 16166]]
PEARL to enhance trading volume in MIAX PEARL's market. Increased
volume will provide for greater liquidity and enhanced price discovery,
which benefits all market participants. Other exchanges have engaged in
the practice of incentivizing increased order flow in order to attract
liquidity providers through equity sharing arrangements.\12\ In
addition, Miami International Securities Exchange, LLC (``MIAX
Options''), an affiliate of the Exchange, previously adopted
substantially similar programs to incentivize increased order flow in
order to attract liquidity providers through an equity sharing
arrangement.\13\ The Program similarly intends to attract order flow,
which will increase liquidity, thereby providing greater trading
opportunities and tighter spreads for other market participants and
causing a corresponding increase in order flow from these other market
participants. The Program will similarly reward the liquidity providers
that provide this additional volume with a potential proprietary
interest in MIAX PEARL.
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\12\ See, e.g., Securities Exchange Act Release Nos. 62358 (June
22, 2010), 75 FR 37861 (June 30, 2010) (SR-NSX-2010-06); 64742 (June
24, 2011), 76 FR 38436 (June 30, 2011) (SR-NYSEAmex-2011-018); 69200
(March 21, 2013), 78 FR 18657 (March 27, 2013) (SR-CBOE-2013-31);
74114 (January 22, 2015), 80 FR 4611 (January 28, 2015) (SR-BOX-
2015-03); and 74576 (March 25, 2015), 80 FR 17122 (March 31, 2015)
(SR-BOX-2015-16).
\13\ See Securities Exchange Act Release Nos. 70498 (September
25, 2013), 78 FR 60348 (October 1, 2013) (SR-MIAX-2013-43); 74095
(January 20, 2015), 80 FR 4011 (January 26, 2015) (SR-MIAX-2015-02);
74225 (February 12 [sic], 2015), 80 FR 7897 (February 12, 2015) (SR-
MIAX-2015-05); and 80909 (June 12, 2017), 82 FR 27743 (June 16,
2017) (SR-MIAX-2017-28).
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The specific volume thresholds of the Program's measurement periods
were set based upon business determinations and analysis of current
volume levels. The volume thresholds are intended to incentivize firms
to increase the number of orders that are sent to MIAX PEARL to achieve
the next threshold. Increasing the number of orders that are sent to
MIAX PEARL will in turn provide tighter and more liquid markets, and
therefore attract more business as well.
The Exchange's proposal to include certain non-transaction fees
within the definition of ERP Exchange Fees and thus render them
eligible for prepayment under the Program is designed to offer broader
Member participation in the Program. Since the Exchange operates with a
maker-taker pricing structure, Members that are only ``makers'' on the
Exchange could receive significant transaction rebates on a monthly
basis, which could obviate the need to pre-pay transaction fees under
the Program. However, by including certain regular, monthly recurring
non-transaction fees as eligible for prepayment under the Program, the
Exchange believes that it is creating an incentive for Members that
conduct this type of business on the Exchange to participate in the
Program, thereby broadening the number of Members that could
potentially participate in the Program.
Finally, the Exchange notes that it is not proposing to offer
participant Members the right to appoint a director or an observer to
the MIH Board and/or the MIAX PEARL Board when a participating Member
acquires a certain number of units, which is different than the
programs that MIAX Options has offered its Members in the past.\14\ The
Exchange believes that, for business reasons, such a right is not a
relevant component for this Program, and thus has determined not to
include such a right.
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\14\ Id.
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MIAX PEARL will initiate the measurement period on May 1, 2018. The
Exchange will notify Members of the implementation of the Program and
the dates of the enrollment period by Regulatory Circular, and will
post a copy of this rule filing on its website. Any MIAX PEARL Member
that is interested in participating in the Program may contact MIAX
PEARL for more information and legal documentation and will be required
to enter into a nondisclosure agreement regarding this additional
Program information.
2. Statutory Basis
The Exchange believes that its proposed rule change is consistent
with Section 6(b) of the Act \15\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \16\ 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. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) of the Act \17\ requirement that the rules of an
exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. The Exchange also believes the
proposed rule change is consistent with Section 6(b)(4) of the Act,\18\
which requires that Exchange rules provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and other
persons using its facilities.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
\17\ 15 U.S.C. 78f(b)(5).
\18\ 15 U.S.C. 78f(b)(4).
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In particular, the proposed rule change is equitable and not
unfairly discriminatory, because all Members may elect to participate
(or elect to not participate) in the Program and earn units on the same
terms and conditions, assuming they satisfy the same eligibility
criteria as described above. The eligibility criteria are objective;
thus, all Members have the ability to satisfy them. The Board also has
authorized MIAX PEARL to offer common shares in MIH to any Member that
requests designation to participate in the Program and otherwise
satisfies the eligibility criteria to ensure that all Members will have
the opportunity to own common shares and thus participate in the
Program if they so choose. In addition, participant Members will earn
warrants on a pro-rata basis upon meeting fixed volume threshold
amounts during the measurement periods that will apply to all
participant Members.
The Exchange believes that the methodology used to calculate the
volume thresholds is fair, reasonable and not unfairly discriminatory
because it is based on objective criteria that are designed to omit
from the calculation functionality that is not available on the
Exchange and types of transactions that are subject to little or no
transaction fees. Specifically, the Exchange believes excluding
Priority Customer-to-Priority Customer Crossing transactions where no
fees are paid to the Exchange, special strategies, and contracts as to
which a Member acts solely as clearing agent from the number of option
contracts executed on the Exchange by any Member is reasonable and not
unfairly discriminatory because participating Members could otherwise
game the volume thresholds by executing excess volumes in these types
of transactions in which either no transaction fees are charged on the
Exchange, or the transaction is subject to a fee cap. The Program is
designed to reward participating Members for bringing their orders and
quotes to the Exchange to be executed on the Exchange. The Exchange
believes it is appropriate to exclude special strategies from the OCC
volume calculation since those transactions are not executed on the
Exchange. The Exchange believes that omitting clearing only
transactions from
[[Page 16167]]
the calculation to be fair and reasonable because the fact that a
Member is clearing a trade is coincidental to the choice of where to
execute that trade. And, because clearing only transactions are not
executed on MIAX PEARL, they do not fall within the intended
transactions that qualify for the Program. In addition, if the Exchange
were to reward the party clearing a trade, the Exchange would possibly
be double counting that trade--once for the executing party and once
for the clearing party. Furthermore, the Exchange believes that
counting incidental Priority Customer-to-Priority Customer
transactions, which are not crossing transactions, in the number of
options contracts executed on the Exchange by a Member is fair and
reasonable because in these situations the Priority Customer is not
necessarily choosing to execute against another Priority Customer in
order to avoid a transaction fee.
The Exchange believes that its proposal to allow Affiliates to
participate in the Program is fair, reasonable and not unfairly
discriminatory because it is being offered to all Members of the
Exchange on the same terms and conditions. The Exchange believes that
allowing both traditional Corporate Affiliates and also Appointed
Market Makers and Appointed EEMs to participate in the Program is
reasonable and appropriate because it will provide those participants
with a potentially greater opportunity to achieve the volume thresholds
in the Program. Also, the Exchange believes that allowing Appointed
Market Makers and Appointed EEMs to participate in the Program expands
access to the Program to Members that might not otherwise, individually
on their own, participate in the Program, which will benefit all market
participants by providing greater liquidity on the Exchange, all of
which perfects the mechanism for a free and open market and national
market system.
The Exchange believes the Program is equitable and reasonable
because an increase in volume and liquidity would benefit all market
participants by providing more trading opportunities and tighter
spreads, even to those market participants that do not participate in
the Program. Additionally, the Exchange believes the proposed rule
change is consistent with the Act because, as described above, the
Program is designed to bring greater volume and liquidity to the
Exchange, which will benefit all market participants by providing
tighter quoting and better prices, all of which perfects the mechanism
for a free and open market and national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
MIAX PEARL 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 believes that the
proposed rule change will improve competition by providing market
participants with another option when determining where to execute
orders and post liquidity.
The Exchange believes that the proposed change would increase both
intermarket and intramarket competition by incenting participant
Members to direct their orders to the Exchange, which will enhance the
quality of quoting and increase the volume of contracts traded here. To
the extent that there is an additional competitive burden on non-
participant Members, the Exchange believes that this is appropriate
because the Program should incent Members to direct additional order
flow to the Exchange and thus provide additional liquidity that
enhances the quality of its markets and increases the volume of
contracts traded here. To the extent that this purpose is achieved, all
of the Exchange's market participants should benefit from the improved
market liquidity. Enhanced market quality and increased transaction
volume that results from the anticipated increase in order flow
directed to the Exchange will benefit all market participants and
improve competition on the Exchange.
Given the robust competition for volume among options markets, many
of which offer the same products, implementing a program to attract
order flow like the one being proposed in this filing is consistent
with the above-mentioned goals of the Act. This is especially true for
the smaller options markets, such as MIAX PEARL, which is competing for
volume with much larger exchanges that dominate the options trading
industry. MIAX PEARL has a modest percentage of the average daily
trading volume in options, so it is unlikely that the Program could
cause any competitive harm to the options market or to market
participants. Rather, the Program is an attempt by a small options
market to attract order volume away from larger competitors by adopting
an innovative pricing strategy, as evidenced by the volume thresholds
of the Program that represent fractions of 1% of OCC ADV. The Exchange
notes that if the Program resulted in a modest percentage increase in
the average daily trading volume in options executing on MIAX PEARL,
while such percentage would represent a large volume increase for MIAX
PEARL, it would represent a minimal reduction in volume of its larger
competitors in the industry. The Exchange believes that the Program
will help further competition, because market participants will have
yet another option in determining where to execute orders and post
liquidity if they factor the benefits of MIAX PEARL equity
participation into the determination. The Exchange notes that other
exchanges have engaged in the practice of incentivizing increased order
flow in order to attract liquidity providers through equity sharing
arrangements.\19\ In addition, MIAX Options previously adopted
substantially similar programs to incentivize increased order flow in
order to attract liquidity providers through an equity sharing
arrangement.\20\
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\19\ See supra note 12.
\20\ See supra note 13.
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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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\21\ and Rule 19b-4(f)(2) \22\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule should be approved or disapproved.
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\21\ 15 U.S.C. 78s(b)(3)(A)(ii).
\22\ 17 CFR 240.19b-4(f)(2).
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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:
[[Page 16168]]
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-PEARL-2018-08 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-PEARL-2018-08. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of 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. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2018-08 and should be submitted on
or before May 4, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
Eduardo A. Aleman,
Assistant Secretary.
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\23\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-07669 Filed 4-12-18; 8:45 am]
BILLING CODE P