[Federal Register Volume 84, Number 56 (Friday, March 22, 2019)]
[Notices]
[Pages 10848-10854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05461]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85345; File No. SR-EMERALD-2019-13]


Self-Regulatory Organizations; MIAX Emerald, LLC; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
Exchange Rule 518, Complex Orders

March 18, 2019.
    Pursuant to 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 March 6, 2019, MIAX Emerald, LLC (``MIAX Emerald'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I and II 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 amend Exchange Rule 518, 
Complex Orders, to implement identical functionality currently 
operative on one of the Exchange's affiliates, Miami International 
Securities Exchange, LLC (``MIAX Options'').
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/emerald at MIAX 
Emerald's

[[Page 10849]]

principal office, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Exchange Rule 518, Complex Orders, 
to implement stock-option trading on the Exchange in an identical 
fashion, and with an identical rule, as MIAX Options.\3\ MIAX Emerald 
commenced operations as a national securities exchange registered under 
Section 6 of the Act \4\ on March 1, 2019. As described more fully in 
MIAX Emerald's Form 1 application,\5\ the Exchange is an affiliate of 
Miami International Securities Exchange, LLC (``MIAX Options'') and 
MIAX PEARL, LLC (``MIAX PEARL''). MIAX Emerald Rules, in their current 
form, were filed as Exhibit B to its Form 1 on August 16, 2018. At that 
time stock-option orders as described in MIAX Options Rule 518 were 
being implemented on the MIAX Options Exchange and MIAX Options Rule 
518 was undergoing revisions to support the implementation and trading 
of stock-option orders, therefore the revised MIAX Options rule \6\ was 
not included in the Exchange's Form 1 filing. In order to ensure 
consistent operation of both MIAX Emerald and MIAX Options through 
having consistent rules, the Exchange now proposes to amend the MIAX 
Emerald Rule as described below.
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    \3\ See MIAX Options Exchange Rule 518.
    \4\ 15 U.S.C. 78f.
    \5\ See Securities Exchange Act Release No. 84891 (December 20, 
2018), 83 FR 67421 (December 28, 2018) (File No. 10-233) (order 
approving application of MIAX Emerald, LLC for registration as a 
national securities exchange.)
    \6\ See Securities Exchange Act Release No. 83726 (July 27, 
2018), 83 FR 37849 (August 2, 2018) (SR-MIAX-2018-16).
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Proposal
    Complex orders began trading on MIAX Options on October 24, 
2016.\7\ In its rule filing to establish the trading of complex orders, 
MIAX Options adopted rules for handling stock-option orders.\8\ MIAX 
Options filed SR-MIAX-2018-16 \9\ to update its rule text regarding 
stock-option orders in connection with the launch of such orders on the 
MIAX Options Exchange. MIAX Emerald now proposes to amend Exchange Rule 
518, to adopt the identical provisions from the MIAX Options rulebook 
for handling stock-option orders that are currently in place on MIAX 
Options, in order to align stock-option trading on MIAX Emerald to MIAX 
Options.
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    \7\ See MIAX Options Regulatory Circular 2016-43, October 20, 
2016.
    \8\ See Securities Exchange Act Release No. 79072 (October 7, 
2016), 81 FR 71131 (October 14, 2016) (SR-MIAX-2016-26).
    \9\ See supra note 6.
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    In particular, the Exchange is proposing to (i) amend the 
definition of complex orders to add a stock-option order definition; 
(ii) amend the definition of Displayed Complex MIAX Emerald Best Bid or 
Offer (``dcEBBO'') and Implied Complex MIAX Emerald Best Bid or Offer 
(``icEBBO'') to add the stock-option order provision; (iii) amend 
subsection (b)(3) Complex Order Priority, to describe order priority 
handling for a stock-option order that has only one leg; (iv) adopt 
Interpretation and Policy .01 to Rule 518 titled, Special Provisions 
Applicable to Stock-Option Orders, to provide additional detail 
regarding the trading and regulation of stock-option orders on the 
Exchange; and (v) make certain minor clarifying edits to existing rule 
text.
    A ``complex order'' is currently defined in Exchange Rule 518 as 
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),\10\ 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.\11\ Only those complex 
orders in the classes designated by the Exchange and communicated to 
Members \12\ 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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    \10\ 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.
    \11\ 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).
    \12\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
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    The Exchange now proposes to update the definition of a complex 
order to include stock-option orders. The proposed text will state 
that, a complex order can also be a ``stock-option order'' as described 
further, and subject to the limitations set forth in proposed 
Interpretation and Policy .01 of 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 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.
    The Displayed Complex MIAX Emerald Best Bid or Offer (``dcEBBO'') 
is calculated using the best displayed price for each component of a 
complex strategy from the Simple Order Book. The Exchange proposes to 
update the definition of the dcEBBO to include stock-option orders and 
proposes to append the following sentence to the existing definition, 
``For stock-option orders, the dcEBBO 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.''
    The Implied Complex MIAX Emerald Best Bid or Offer (``icEBBO'') is 
a calculation that uses the best price from the Simple Order Book for 
each

[[Page 10850]]

component of a complex strategy including displayed and non-displayed 
trading interest. The Exchange now proposes to update the definition of 
the icEBBO to include stock-option orders by appending the following 
sentence to the end of the current definition, ``For stock-option 
orders, the icEBBO for a complex strategy will be calculated using the 
best price (whether displayed or non-displayed) on the Simple Order 
Book \13\ in the individual option component(s), and the national best 
bid or offer (``NBBO'') in the stock component.''
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    \13\ The ``Simple Order Book'' is the Exchange's regular 
electronic book of orders and quotes. See Exchange Rule 518(a)(15).
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    Current 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.\14\ The rule also states 
that complex orders will be subject to all other Exchange Rules that 
pertain to orders generally, unless otherwise provided in Rule 518(b).
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    \14\ See 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.
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    Current Rule 518(c)(2)(iii), Legging, provides that 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 that the execution price of each 
component is not executed at a price that is outside of the NBBO. The 
current rule also provides that legging is not available for cAOC 
orders, complex Standard quotes, or complex eQuotes. The Exchange now 
proposes to amend this sentence to provide that legging is not 
available for cAOC orders, complex Standard quotes, complex eQuotes, or 
stock-option orders.
    Current Rule 518(c)(3), Complex Order Priority, describes how the 
System \15\ will establish priority for complex orders. The complex 
order priority structure is based generally on the same approach and 
structure currently effective on MIAX Emerald respecting priority of 
orders and quotes in the simple market as established in Exchange Rule 
514.\16\ 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.\17\ The Exchange now 
proposes to amend Rule 518(c)(3)(i) to now include stock-option orders 
to 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) \18\ and Market Makers with priority quotes \19\ 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 Rule 518(c)(3)(i).
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    \15\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
    \16\ 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.
    \17\ See 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.
    \18\ 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.
    \19\ See Exchange Rule 517(b)(1).
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Stock-Option Orders
    The Exchange proposes to adopt Interpretation and Policy .01, 
Special Provisions Applicable to Stock-Option Orders, to provide detail 
regarding the trading and regulation of stock-option orders on the 
Exchange.
    The Exchange proposes to adopt new subsection (a) to Interpretation 
and Policy .01, to provide that stock-option orders may be executed 
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 \20\ under the Act. Members submitting such complex 
orders represent that such orders comply with the Qualified Contingent 
Trade Exemption.
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    \20\ 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 
Exchange 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.
    The Exchange proposes to adopt new subsection (b), Process, to, 
Interpretation and Policy .01 to provide that 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'').\21\ 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.
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    \21\ 17 CFR 242.200.
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    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-

[[Page 10851]]

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'') 
\22\ as discussed further below.
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    \22\ 17 CFR 242.201.
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    When the short sale price test in Rule 201 is triggered for a 
covered security,\23\ a ``trading center,'' \24\ 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 \25\ 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 \26\ for the covered 
security as of the end of regular trading hours on the prior day; \27\ 
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.\28\ 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),\29\ 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'' \30\ without regard 
to whether the order is at a price that is less than or equal to the 
current national best bid.\31\
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    \23\ 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).
    \24\ 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.
    \25\ The term ``national best bid'' is defined in Rule 
201(a)(4). 17 CFR 242.201(a)(4).
    \26\ The term ``listing market'' is defined in Rule 201(a)(3). 
17 CFR 242.201(a)(3).
    \27\ 17 CFR 242.201(b)(1)(i).
    \28\ 17 CFR 242.201(b)(1)(ii).
    \29\ 17 CFR 242.201(b)(1)(iii)(B).
    \30\ 17 CFR 242.200(g)(2).
    \31\ 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).
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    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, Interpretation and Policy .01(b) as described 
herein.
    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.
    The Exchange proposes to adopt subsection (c), Option Component, to 
Interpretation and Policy .01, to provide that 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.\32\
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    \32\ 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.
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    The Exchange proposes to adopt subsection (d), Strategy Book, to 
Interpretation and Policy .01, to provide 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.\33\
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    \33\ 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.''
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    The Exchange proposes to adopt subsection (e), Stock-Option Orders 
in MIAX Emerald Complex Order Auctions, to Interpretation and Policy 
.01, to provide 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

[[Page 10852]]

the price of the option leg(s), together with all applicable securities 
laws.
    The Exchange proposes to adopt subsection (f), Limit Up-Limit Down 
State, to Interpretation and Policy .01, to provide that when 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 \34\ 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'').
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    \34\ 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 Exchange proposes to adopt subsection (g), Parity Price 
Protection, to Interpretation and Policy .01, to provide that the 
System will provide parity price protection for strategies that consist 
of a sale (purchase) of one call and the purchase (sale) of 100 shares 
of the underlying stock (``Buy-Write'') or that consist of the purchase 
(sale) of one put and the purchase (sale) of 100 shares of the 
underlying stock (``Married-Put''). A Parity Spread Variance (``PSV'') 
value between $0.00 and $0.50 which will be uniform for all option 
classes traded on the Exchange, will be determined by the Exchange and 
communicated via Regulatory Circular. The PSV will be used to calculate 
a minimum option trading price limit that the System will prevent the 
option leg from trading below. For call option legs, the PSV value is 
added to the strike price of the option to establish a parity protected 
price for the strategy. For put option legs, the PSV value is 
subtracted from the strike price of the option to establish a parity 
protected price for the strategy. Married-Put and Buy-Write interest to 
buy (buy put and buy stock; or buy call and sell stock) that is priced 
below the parity protected price for the strategy will be rejected. 
Married-Put and Buy-Write interest to sell (sell put and sell stock; or 
sell call and buy stock) that is priced below the parity protected 
price for the strategy will be placed on the Strategy Book at the 
parity protected price for the strategy.
    The examples below provide an illustration of how the protection is 
calculated for Buy-Write and Married-Put strategies. For the purposes 
of the following examples the PSV used in the calculations is $.10.
    Following is an example of the operation of the price protection 
feature for a Married-Put Strategy:
Example 1 (Married-Put)
    In its simplest terms the parity price of a put option can be 
expressed as (Strike Price-Stock Price = Put Option Parity Price). If, 
for example, the stock is trading at $45.00 and the Strike Price of the 
put option is $50.00, the parity price of the put option would then be 
$5.00 ($50.00-$45.00 = $5.00). The Exchange is able to leverage the 
parity relationship between the components to establish a minimum 
option trading price limit for Married-Put Strategies by simply 
subtracting the PSV from the strike price of the option. The effect on 
the option price can be seen in the following calculation (($50.00-
$0.10)-$45.00 = $49.90-$45.00 = $4.90). The Exchange will calculate the 
parity protected price for a Married-Put Strategy by leveraging the put 
option parity formula by simply subtracting the PSV from the strike 
price of the option. This would result in a parity protected price for 
the strategy of $49.90 using the figures above.
    This allows for the stock component and the option component prices 
to fluctuate to achieve the strategy's net price, but ensures that the 
strategy will not trade below its parity protected price. Married Put 
Strategy interest received to sell a price protected Married-Put 
Strategy below $49.90 will be placed on the Strategy Book \35\ at 
$49.90. Married Put Strategy interest received to buy a price protected 
Married-Put Strategy below $49.90 will be rejected.
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    \35\ The ``Strategy Book'' is the Exchange's electronic book of 
complex orders and complex quotes. See Exchange Rule 518(a)(17).
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Example 2 (Buy-Write)
    In its simplest terms the parity price of a call option can be 
expressed as (Stock Price-Strike Price = Call Option Parity Price). If, 
for example, the stock is trading at $45.00 and the Strike Price of the 
call option is $40.00, the parity price of the call option would then 
be $5.00 ($45.00-$40.00 = $5.00). The Exchange is able to leverage the 
parity relationship between the components to establish a minimum 
option trading price limit for Buy-Write Strategies by adding the PSV 
to the strike price of the option. The effect on the option price can 
be seen in the following calculation ($45.00-($40.00 + $.10) = $45.00-
$40.10 = $4.90). The Exchange will calculate the parity protected price 
for a Buy-Write Strategy by leveraging the call option parity formula 
by simply adding the PSV to the strike price of the option. This would 
result in a parity protected price for the strategy of $40.10 net debit 
using the figures above.
    This allows for the stock component and the option component prices 
to fluctuate to achieve the strategy's net price, but ensures that the 
strategy will not trade below its parity protected price. Buy-Write 
strategy interest received to sell a price protected Buy-Write Strategy 
below $40.10 net debit will be placed on the Strategy Book at $40.10 
net debit.\36\ Buy-Write strategy interest received to buy a price 
protected Buy-Write Strategy below $40.10 net debit will be rejected.
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    \36\ A seller of the strategy would receive a $40.10 net credit.
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    The Exchange proposes to amend subsection (d), Implied Away Best 
Bid or Offer (``ixABBO'') Price Protection,\37\ of Interpretation and 
Policy .05 to add that 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.
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    \37\ The Implied Away Best Bid or Offer (``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. See Exchange Rule 518.05(d)
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    Finally, the Exchange proposes to make a number of minor, non-
substantive edits to Rule 518, Interpretation and Policy .05(e), to add 
clarity and precision to the Exchange's rule text. Since the Exchange 
will be introducing the trading of complex strategies which include a 
``stock'' component, the Exchange seeks to clarify certain aspects of 
the rule that are intended to apply only to the ``option'' component of 
a complex strategy. Specifically, the Exchange proposes to clarify the 
definition of a Wide Market Condition, as described in Interpretation 
and Policy .05, subsection (e)(1), so that it is clear that it is only 
applying to the ``option'' component of a complex strategy. The new 
proposed rule text will provide that, ``[a] `wide market condition' is 
defined as any individual option component of a complex strategy 
having, at the time of evaluation, an EBBO \38\ quote width that is 
wider than the permissible valid quote width as defined in Rule 
603(b)(4).'' By definition, the EBBO is comprised of option interest 
only, therefore providing additional detail to the existing rule adds 
clarity to the Exchange's rules.
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    \38\ The term ``EBBO'' means the best bid or offer on the Simple 
Order Book on the Exchange. See Exchange Rule 518(a)(10).
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    Similarly, the Exchange proposes to clarify that Simple Market 
Auction or

[[Page 10853]]

Timer Events (``SMAT Events'') pertain only to ``option'' components of 
a complex strategy, by amending Interpretation and Policy .05, 
subsection (e)(2)(i) and (e)(2)(ii), to include the term ``option 
component'' in the first sentence of each section. By definition, the 
Exchange's Simple Market is comprised of option interest only, on the 
Simple Order Book, therefore providing additional detail to the 
existing rule adds clarity to the Exchange's rules.
    Additionally, the Exchange believes that although MIAX Emerald 
rules may, in certain instances, intentionally differ from MIAX Options 
rules, the proposed changes will promote uniformity with MIAX Options 
with respect to rules that are intended to be identical. MIAX Emerald 
and MIAX Options may have a number of Members in common, and where 
feasible the Exchange intends to implement similar behavior to provide 
consistency between MIAX Options and MIAX Emerald so as to avoid 
confusion among Members.
2. Statutory Basis
    The Exchange believes that its proposed rule changes are consistent 
with Section 6(b) of the Act \39\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \40\ 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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    \39\ 15 U.S.C. 78f(b).
    \40\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes introducing stock-option orders promotes just 
and equitable principles of trade, 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 
providing investors additional complex orders to use to meet their 
investment objectives. The Exchange believes that the proposed rule 
change will assist in the electronic processing of stock-option orders 
by providing an efficient mechanism for transacting these strategies. 
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 establishing a parity price protection for 
certain Buy-Write and Married-Put strategies promotes just and 
equitable principles of trade and 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 strategies are not executed at potentially erroneous prices.
    Given the relationship that the stock price, strike price, and 
option price have to each other, the Exchange is able to calculate a 
minimum option trading price limit for the option leg of certain stock-
option strategies with a call or a put component. Specifically, the 
parity price of a call option can be derived by subtracting the strike 
price from the stock price (Stock Price - Strike Price = Call Option 
Parity Price); and the parity price of a put option can be derived by 
subtracting the stock price from the strike price (Strike Price - Stock 
Price = Put Option Parity Price). Using these relationships the PSV may 
be applied to establish a minimum option trading price limit that the 
System will prevent the option leg from trading below to establish a 
parity protected price for the strategy to ensure the strategy does not 
trade below its parity protected price at a potentially erroneous 
price.
    The Exchange believes that Members will benefit from the proposed 
risk protection measure as the protection ensures that these stock-
option strategies are not executed below their parity protected price 
as calculated by the Exchange. Consequently, the proposed risk 
protection is designed to encourage Members to submit additional order 
flow and liquidity to the Exchange in these strategies, 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. This protection should provide 
Members with confidence that protections are in place on the Exchange 
to reduce the risk of these strategies being executed at potentially 
erroneous prices. As a result, the Exchange believes that the proposed 
price protection feature will promote just and equitable principles of 
trade.
    Finally, the Exchange proposes to make minor non-substantive 
changes to its rule to clarify that Wide Market Conditions and Simple 
Market Auction or Timer Events on the Exchange are related to the 
``option'' components only for complex strategies. The Exchange 
believes the proposed changes promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system because they seek to add 
clarity and precision to the Exchange's rules. The Exchange believes 
that the proposed rule changes will provide greater clarity to Members 
and the public regarding the Exchange's Rules, and it is in the public 
interest for rules to be accurate and concise so as to eliminate the 
potential for confusion.

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 believes the 
proposed rule change will foster competition as the Exchange will offer 
stock-option orders which are offered on other exchanges.\41\ 
Additionally, the proposed rule change will foster competition as it 
provides a risk protection mechanism for certain complex strategies 
entered on the Exchange and may promote competition by enabling Members 
to trade more aggressively on the Exchange knowing that these 
strategies will not be executed below parity protected price at 
potentially erroneous prices. Accordingly, the price protection feature 
should instill additional confidence in Members that submit certain 
stock-option orders to the Exchange that their orders receive price 
protection, and thus should encourage Members to submit additional 
order flow and liquidity to the Exchange, 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. Further, the additional proposed changes remedy minor 
non-substantive issues in the text of various rules identified in this 
proposal.
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    \41\ See MIAX Options Exchange Rule 518, CBOE Rule 6.53C(a)(2), 
and NASDAQ PHLX Rule 1098.
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    The Exchange does not believe the proposed rule change will impose 
any burden on intra-market competition as the rules of the Exchange 
apply equally to all Members. The Exchange further believes that the 
proposed price protection should promote inter-market competition, and 
could result in more competitive order flow to the Exchange.
    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, and believes

[[Page 10854]]

the proposed change will enhance competition.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \42\ and Rule 19b-4(f)(6) \43\ 
thereunder.
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    \42\ 15 U.S.C. 78s(b)(3)(A).
    \43\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \44\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \45\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. In its filing 
with the Commission, the Exchange has asked the Commission to waive the 
30-day operative delay to allow MIAX Emerald to implement the handling 
and trading of stock-option orders in a manner identical to that of 
MIAX Options. As noted above, MIAX Emerald states that the proposed 
rules are identical to rules adopted by MIAX Options.\46\ In addition, 
MIAX Emerald notes that MIAX Emerald and MIAX Options may have a number 
of Members in common, and that, where feasible, MIAX Emerald intends to 
implement similar behavior to provide consistency between MIAX Options 
and MIAX Emerald to avoid confusion among Members. The Commission 
believes that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because it will allow 
MIAX Emerald to implement rules regarding the trading of stock-option 
orders that are identical to rules adopted by MIAX Options, thereby 
reducing the potential for confusion among market participants that are 
Members of both MIAX Emerald and MIAX Options. In addition, the 
Commission notes that because the proposed rule change is based on 
substantively identical rules of MIAX Options, the proposal raises no 
new regulatory issues. Accordingly, the Commission hereby waives the 
operative delay and designates the proposal operative upon filing.\47\
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    \44\ 17 CFR 240.19b-4(f)(6).
    \45\ 17 CFR 240.19b-4(f)(6)(iii).
    \46\ See supra note 3, and accompanying text.
    \47\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-EMERALD-2019-13 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-EMERALD-2019-13. 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-EMERALD-2019-13 and should be submitted 
on or before April 12, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
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    \48\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05461 Filed 3-21-19; 8:45 am]
 BILLING CODE 8011-01-P