
[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Notices]
[Pages 73065-73089]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-29568]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68341; File No.10-207]


In the Matter of the Application of Miami International 
Securities Exchange, LLC for Registration as a National Securities 
Exchange: Findings, Opinion, and Order of the Commission

December 3, 2012.

I. Introduction

    On April 26, 2012, Miami International Securities Exchange, LLC 
(``MIAX Exchange'' or ``MIAX'') submitted to the Securities and 
Exchange Commission (``Commission'') an Application for Registration as 
a National Securities Exchange (``Form 1 Application'') under Section 6 
of the Securities Exchange Act of 1934 (``Act'').\1\ Notice of MIAX's 
Form 1 Application was published for comment in the Federal Register on 
August 20, 2012.\2\ The Commission received two

[[Page 73066]]

comment letters concerning MIAX's Form 1 Application.\3\ MIAX submitted 
a detailed response to comments on November 30, 2012.\4\ On November 
30, 2012, MIAX submitted Amendment No. 1 to its Form 1 Application.\5\
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    \1\ 15 U.S.C. 78f.
    \2\ See Securities Exchange Act Release No. 67660 (August 15, 
2012), 77 FR 50814 (``Notice'').
    \3\ See Letter from Michael J. Simon, Secretary, International 
Securities Exchange, LLC, to Elizabeth M. Murphy, Secretary, 
Commission, dated October 4, 2012 (``ISE Letter''); and Letter from 
Jeffrey S. Davis, Vice President and Deputy General Counsel, NASDAQ 
OMX Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, 
dated October 4, 2012 (``NASDAQ Letter''). In its letter, the 
International Securities Exchange (``ISE''), requested that MIAX 
clarify what it considered to be potential ``unique aspects'' of the 
proposed MIAX rules and asked the Commission to discuss how such 
provisions are consistent with the Act. Similarly, the letter from 
NASDAQ OMX (``NASDAQ'') requested that MIAX clarify certain of its 
proposed rules and provide greater explanation or detail as to how 
they would work. In Section IV, below, the Commission considers the 
issues raised by the comment letters, along with MIAX's response 
thereto, and considers whether MIAX sufficiently addressed those 
concerns. In summary, the Commission believes that MIAX has 
sufficiently addressed each of the commenters' concerns and has 
proposed reasonable changes to its rules to address those concerns. 
The changes also clarify the potential sources of ambiguity that 
commenters identified. The changes proposed in Amendment No. 1 are 
either not material, consistent with the existing rules of other 
registered national securities exchanges, or responsive to the 
concerns of the Commission and do not raise any new or novel 
regulatory issues.
    \4\ See Letter from Barbara Comly, Executive Vice President, 
General Counsel & Corporate Secretary, MIAX, to Elizabeth M. Murphy, 
Secretary, Commission, dated November 30, 2012 (``MIAX Response 
Letter'').
    \5\ In Amendment No. 1, MIAX proposed changes to the Limited 
Liability Company Agreement and the By-Laws of Miami International 
Securities Exchange, LLC concerning the election of an interim board 
of directors, which is discussed below in Section IV. See Amendment 
No. 1. MIAX also proposed changes to its proposed rules in response 
to concerns raised by the two comment letters. See Amendment No. 1. 
The rule text changes are discussed below in Section III.
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II. Statutory Standards

    Under Sections 6(b) and 19(a) of the Act,\6\ the Commission shall 
by order grant an application for registration as a national securities 
exchange if the Commission finds, among other things, that the proposed 
exchange is so organized and has the capacity to carry out the purposes 
of the Act and can comply, and can enforce compliance by its members 
and persons associated with its members, with the provisions of the 
Act, the rules and regulations thereunder, and the rules of the 
exchange.
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    \6\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    As discussed in greater detail below, the Commission finds that 
MIAX's application for exchange registration meets the requirements of 
the Act and the rules and regulations thereunder. Further, the 
Commission finds that the proposed rules of MIAX are consistent with 
Section 6 of the Act in that, among other things, they are designed to: 
(1) Assure fair representation of the exchange's members in the 
selection of its directors and administration of its affairs and 
provide that, among other things, one or more directors shall be 
representative of investors and not be associated with the exchange, or 
with a broker or dealer; \7\ (2) prevent fraudulent and manipulative 
acts and practices, promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, and remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system; \8\ (3) not permit unfair discrimination between customers, 
issuers, or dealers; \9\ and (4) protect investors and the public 
interest.\10\ Finally, the Commission finds that MIAX's proposed rules 
do not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\11\
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    \7\ See 15 U.S.C. 78f(b)(3).
    \8\ See 15 U.S.C. 78f(b)(5).
    \9\ See id.
    \10\ See id.
    \11\ See 15 U.S.C. 78f(b)(8).
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III. Discussion

A. Governance of MIAX Exchange

1. MIAX Exchange Board of Directors
    The board of directors of MIAX Exchange (``Exchange Board'') will 
be its governing body and will possess all of the powers necessary for 
the management of its business and affairs, including governance of 
MIAX Exchange as a self-regulatory organization (``SRO'').\12\
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    \12\ See MIAX Exchange By-Laws Section 2.1. See also MIAX 
Exchange LLC Agreement Sections 7 and 8.
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    Under the By-Laws of MIAX Exchange (``MIAX Exchange By-Laws''): 
\13\
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    \13\ The MIAX Exchange By-Laws are included in the Second 
Amended and Restated Limited Liability Company Agreement of MIAX 
Exchange (``MIAX Exchange LLC Agreement'').
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     The Exchange Board will be composed of not less than ten 
directors; \14\
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    \14\ See MIAX Exchange By-Laws Article II, Section 2.2(a).
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     One director will be the Chief Executive Officer of MIAX 
Exchange; \15\
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    \15\ See MIAX Exchange By-Laws Article II, Section 2.2(b).
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     The number of Non-Industry Directors,\16\ including at 
least one Independent Director,\17\ will equal or exceed the sum of the 
number of Industry Directors \18\ and Member Representative Directors; 
\19\ and
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    \16\ ``Non-Industry Director'' means a Director who is an 
Independent Director or any other individual who would not be an 
Industry Director. See MIAX Exchange By-Laws Article I(y).
    \17\ ``Independent Director'' means a ``Director who has no 
material relationship with the [MIAX Exchange] or any affiliate of 
the [MIAX Exchange], or any [MIAX member] or any affiliate of any 
such [MIAX member]; provided, however, that an individual who 
otherwise qualifies as an Independent Director shall not be 
disqualified from serving in such capacity solely because such 
Director is a Director of the [MIAX Exchange] or [Miami 
International Holdings, Inc.].'' See MIAX Exchange By-Laws Article 
I(n).
    \18\ An ``Industry Director'' is, among other things, a Director 
that is or has served within the prior three years as an officer, 
director, employee, or owner of a broker or dealer, as well as any 
Director who has, or has had, a consulting or employment 
relationship with MIAX Exchange or any affiliate of MIAX Exchange 
within the prior three years. See MIAX Exchange By-Laws Article 
I(p). This definition is consistent with what the Commission has 
approved for other exchanges. See Securities Exchange Act Release 
No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (``BATS 
Order''). See also Securities Exchange Act Release Nos. 66871 (April 
27, 2012), 77 FR 26323 (May 3, 2012) (``BOX Order''); and 61698 
(March 12, 2010), 75 FR 13151 (March 18, 2010) (``DirectEdge 
Exchanges Order'').
    \19\ See MIAX Exchange By-Laws Article II, Section 2.2 (b)(i). 
``Member Representative Director'' means a Director who has been 
appointed by Miami International Holdings, Inc. as an initial 
Director pursuant to Section 2.5 of the MIAX Exchange By-Laws to 
serve until the first annual meeting or who ``has been elected by 
the LLC Member after having been nominated by the Member Nominating 
Committee or by an Exchange Member pursuant to [the] By-Laws and 
confirmed as the nominee of Exchange Members after majority vote of 
Exchange Members, if applicable. A Member Representative Director 
may, but is not required to be, an officer, director, employee, or 
agent of an Exchange Member.'' See MIAX Exchange By-Laws Article 
I(v). See also MIAX Exchange By-Laws Article II, Section 2.5.
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     At least twenty percent of the directors on the Exchange 
Board will be Member Representative Directors.\20\
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    \20\ See MIAX Exchange By-Laws Article II, Section 2.2(b)(ii).
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    For the interim board (discussed below), and subsequently at the 
first annual meeting and each annual meeting thereafter, Miami 
Holdings, as the sole LLC Member of MIAX Exchange, will elect the MIAX 
Exchange Board pursuant to the MIAX By-Laws.\21\ In addition, Miami 
Holdings will appoint the initial Nominating Committee \22\ and Member 
Nominating Committee,\23\ consistent with each

[[Page 73067]]

committee's compositional requirements,\24\ to nominate candidates for 
election to the Exchange Board. Each of the Nominating Committee and 
Member Nominating Committee, after completion of its respective duties 
for nominating directors for election to the Board for that year, shall 
nominate candidates to serve on the succeeding year's Nominating 
Committee or Member Nominating Committee, as applicable. Additional 
candidates for the Member Nominating Committee may be nominated and 
elected by MIAX Exchange members pursuant to a petition process.\25\
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    \21\ See MIAX Exchange By-Laws Article II, Section 2.4. See also 
MIAX Exchange LLC Agreement Section 9(a).
    \22\ The Nominating Committee will be comprised of at least 
three directors, and the number of Non-Industry members on the 
Nominating Committee must equal or exceed the number of Industry 
members. See MIAX Exchange By-Laws Article V, Section 5.2. See also 
MIAX Exchange By-Laws Article IV, Section 4.2(a).
    \23\ The Member Nominating Committee will be comprised of at 
least three directors, and each member of the Member Nominating 
Committee shall be a Member Representative member. See MIAX Exchange 
By-Laws Article V, Section 5.3. See also MIAX Exchange By-Laws 
Article IV, Section 4.2(a). Pursuant to MIAX Exchange By-Laws 
Article I(w), a ``Member Representative member'' is a member of any 
committee or hearing panel appointed by the Exchange Board who has 
been elected or appointed after having been nominated by the Member 
Nominating Committee pursuant to the by-laws and who is an officer, 
director, employee, or agent of an Exchange Member.
    \24\ See MIAX Exchange By-Laws Article V, Section 5.1.
    \25\ See id.
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    The Nominating Committee will nominate candidates for each director 
position, and Miami Holdings, as the sole LLC Member, will elect those 
directors. For Member Representative Director positions, the Nominating 
Committee will nominate those candidates submitted to it, and approved, 
by the Member Nominating Committee.\26\ Additional candidates, however, 
may be nominated for the Member Representative Director positions by 
MIAX Exchange members pursuant to a petition process.\27\ If no 
candidates are nominated pursuant to a petition process, then the 
initial nominees submitted by the Member Nominating Committee will be 
nominated as Member Representative Directors by the Nominating 
Committee. If a petition process produces additional candidates, then 
the candidates nominated pursuant to the petition process, together 
with those nominated by the Member Nominating Committee, will be 
presented to MIAX Exchange members for a run-off election to determine 
the final slate of candidates for the vacant Member Representative 
Director positions.\28\ In the event of a contested run-off election, 
the candidates who receive the most votes will be nominated as the 
final slate of Member Representative Director candidates by the 
Nominating Committee.\29\ Miami Holdings, as the sole LLC Member, is 
obligated to elect the final slate of the Member Representative 
Director candidates that are nominated by the Nominating Committee.\30\
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    \26\ The Member Nominating Committee will solicit comments from 
MIAX Exchange members for the purpose of approving and submitting 
names of candidates for election to the position of Member 
Representative Director. See MIAX Exchange By-Laws Article II, 
Section 2.4(b).
    \27\ See MIAX Exchange By-Laws Article II, Section 2.4(c). The 
petition must be signed by executive representatives of 10% or more 
of the MIAX Exchange members. No MIAX Exchange member, together with 
its affiliates, may account for more than 50% of the signatures 
endorsing a particular candidate. See id.
    \28\ See MIAX Exchange By-Laws Article II, Section 2.4(e) and 
(f). Each MIAX Exchange Member shall have the right to cast one vote 
for each available Member Representative Director nomination, 
provided that any such vote must be cast for a person on the List of 
Candidates and that no MIAX Exchange member, together with its 
affiliates, may account for more than 20% of the votes cast for a 
candidate. See MIAX Exchange By-Laws Article II, Section 2.4(f).
    \29\ See MIAX Exchange By-Laws Article II, Section 2.4(f).
    \30\ See id.
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    The Commission believes that the requirement in the MIAX Exchange 
By-Laws that 20% of the directors be Member Representative Directors 
and the means by which they will be chosen by MIAX Exchange members 
provide for the fair representation of members in the selection of 
directors and the administration of MIAX Exchange and therefore is 
consistent with Section 6(b)(3) of the Act.\31\ As the Commission has 
previously noted, this requirement helps to ensure that members have a 
voice in the use of self-regulatory authority, and that an exchange is 
administered in a way that is equitable to all those who trade on its 
market or through its facilities.\32\
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    \31\ 15 U.S.C. 78f(b)(3).
    \32\ See, e.g., Securities Exchange Act Release No. 53128 
(January 13, 2006), 71 FR 3550 (January 23, 2006) (granting the 
exchange registration of Nasdaq Stock Market, Inc.) (``Nasdaq 
Order''); and BATS Order, supra note 18. See also Securities 
Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 
(March 6, 2006) (``NYSE/Archipelago Merger Approval Order'').
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    In addition, with respect to the requirement that the number of 
Non-Industry Directors, including at least one Independent Director, 
will equal or exceed the sum of the number of Industry Directors and 
Member Representative Directors, the Commission believes that the 
proposed composition of the MIAX Exchange Board satisfies the 
requirements in Section 6(b)(3) of the Act,\33\ which requires in part 
that one or more directors be representative of issuers and investors 
and not be associated with a member of the exchange, or with a broker 
or dealer. The Commission previously has stated that the inclusion of 
public, non-industry representatives on exchange oversight bodies is an 
important mechanism to support an exchange's ability to protect the 
public interest.\34\ Further, the presence of public, non-industry 
representatives can help to ensure that no single group of market 
participants has the ability to systematically disadvantage other 
market participants through the exchange governance process. The 
Commission believes that public, non-industry directors can provide 
unique, unbiased perspectives, which are designed to enhance the 
ability of the MIAX Exchange Board to address issues in a non-
discriminatory fashion and foster the integrity of MIAX Exchange.\35\
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    \33\ 15 U.S.C. 78f(b)(3).
    \34\ See, e.g., Regulation of Exchanges and Alternative Trading 
Systems, Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998) (``Regulation ATS Release'').
    \35\ See Nasdaq Order and NYSE/Archipelago Merger Approval 
Order, supra note 32, and BATS Order, supra note 18.
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    Interim Exchange Board. Prior to commencing operations, Miami 
Holdings will appoint an interim Exchange board of directors (``Interim 
Exchange Board''), which will include interim Member Representative 
Directors. With respect to the selection of the interim Member 
Representative Directors for the Interim Exchange Board, prior to the 
commencement of operations as an exchange, MIAX will submit the names 
of its nominees for the interim Member Representative Directors 
positions to persons that have begun the process of becoming members in 
the new MIAX Exchange.\36\ MIAX represents that the persons and firms 
that have applied to become the initial members of MIAX Exchange have 
already begun the process of completing the necessary applications, 
obtaining electronic connectivity, and testing their systems with 
MIAX.\37\ MIAX additionally represents that the initial members of MIAX 
will consist substantially of the current group of persons and firms 
that have begun the membership application process with MIAX.\38\
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    \36\ See Amendment No. 1; see also MIAX Exchange By-Laws Section 
2.5(b). Specifically, MIAX will submit the names of its nominees for 
the interim Member Representative Director positions to persons who 
have submitted initial documents for membership in the Exchange who 
would meet the qualifications for membership. See MIAX Exchange By-
Laws Section 2.5(b).
    \37\ See Amendment No. 1.
    \38\ See Amendment No. 1.
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    Such persons will be allowed 14 days to submit the name of an 
alternative candidate and 5 days to vote for the final slate of 
candidates.\39\ All other interim directors, except for the interim 
Member Representative Directors, will

[[Page 73068]]

be appointed and elected by Miami Holdings, and must meet the MIAX 
Exchange board composition requirements as set forth in the MIAX 
Exchange By-Laws. Once these interim Member Representative Directors 
are seated on the Interim Exchange Board, then the Interim Exchange 
Board will meet the board composition requirements set forth in the 
governing documents of MIAX Exchange.
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    \39\ See MIAX Exchange By-Laws Sections 2.5(b) and (d).
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    The Interim Exchange Board will serve until the first initial 
Exchange Board is elected pursuant to the full nomination, petition, 
and voting process set forth in the MIAX By-Laws.\40\ MIAX Exchange 
will complete such process within 90 days after its application for 
registration as a national securities exchange is granted by the 
Commission.\41\
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    \40\ See Amendment No. 1; and MIAX Exchange By-Laws Sections 
2.2(e) and 2.5(a).
    \41\ See Amendment No. 1. The 90-day period is consistent with 
what the Commission recently approved for the BOX Exchange. See 
Securities Exchange Act Release No. 66871 (April 27, 2012), 77 FR 
26323 (May 3, 2012) (allowing BOX Exchange to appoint an initial 
interim board to enable it to commence operations as a registered 
exchange). See also Securities Exchange Act Release No. 61152 
(December 10, 2009), 74 FR 66699 (December 16, 2009) (``C2 Order'') 
(allowing CBOE to appoint the initial board members and to issue a 
circular to trading permit holders identifying a slate of 
representative directors within 45 days from the date on which 
trading commenced on C2).
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    The Commission believes that the process for electing the Interim 
Exchange Board, as proposed, is consistent with the requirements of the 
Act, including that the rules of the exchange assure fair 
representation of the exchange's members in the selection of its 
directors and administration of its affairs.\42\ As noted above, MIAX 
represents that the initial members of MIAX will consist substantially 
of the current group of persons and firms that have begun the 
membership application process with MIAX. MIAX will engage these 
persons and firms in the interim board election process by, prior to 
the commencement of operations as an exchange, providing each of them 
with the opportunity to participate in the selection of interim Member 
Representative Directors consistent with the MIAX Exchange By-Laws. 
Further, MIAX Exchange represents that it will complete the full 
nomination, petition, and voting process as set forth in the MIAX 
Exchange By-Laws, which will provide persons that are approved as 
members after the effective date of this Order with the opportunity to 
participate in the selection of the Member Representative Directors, 
within 90 days of when MIAX Exchange's application for registration as 
a national securities exchange is granted.\43\ The Commission therefore 
believes that MIAX Exchange's initial interim board process is 
consistent with the Act, including Section 6(b)(3), in that it is 
designed to provide representation among the persons and firms likely 
to become members when MIAX commences operations and is sufficient to 
allow MIAX to commence operations for an interim period prior to going 
through the process to elect a new Exchange Board pursuant to the full 
nomination, petition, and voting process set forth in the MIAX Exchange 
By-Laws.
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    \42\ See 15 U.S.C. 78f(b)(3).
    \43\ MIAX's proposed timeline for the interim board process 
follows a process identical to what the Commission recently approved 
for the BOX Exchange.
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2. Exchange Committees
    In the MIAX Exchange By-Laws, MIAX Exchange has proposed to 
establish several standing committees, which will be divided into two 
categories: Committees of the Board (composed of MIAX Exchange 
directors) and Committees of the MIAX Exchange (composed of a mixture 
of MIAX Exchange directors and persons that are not MIAX Exchange 
directors).\44\ The standing Committees of the Board will be the Audit, 
Compensation, Appeals, and Regulatory Oversight Committees.\45\ In 
addition, the MIAX Chairman, with approval of the Exchange Board, may 
appoint an Executive Committee and a Finance Committee, which also 
would be Committees of the Board.\46\
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    \44\ See MIAX Exchange By-Laws Section 4.1.
    \45\ See MIAX Exchange By-Laws Section 4.1(a).
    \46\ See MIAX Exchange By-Laws Section 4.5(e) and (f), 
respectively.
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    The Audit Committee will consist of three or more directors, a 
majority of which will be Non-Industry Directors.\47\ Each of the 
Compensation and Regulatory Oversight Committees will consist of three 
or more directors, all of which will be required to be Non-Industry 
Directors.\48\ The Appeals Committee will consist of one Independent 
Director, one Industry Director, and one Member Representative 
Director.\49\ If established, the Finance Committee will consist of at 
least three persons (who may, but are not required to, be directors) a 
majority of whom will be Non-Industry Directors.\50\ The Executive 
Committee, if established, will consist of at least three directors. 
Because the Executive Committee will have the powers and authority of 
the Exchange Board in the management of the business and affairs of the 
MIAX Exchange between meetings of the Exchange Board, its composition 
must reflect that of the Exchange Board. Accordingly, the number of 
Non-Industry Directors on the Executive Committee must equal or exceed 
the number of Industry Directors and the percentages of Independent 
Directors and Member Representative Directors must be at least as great 
as the corresponding percentages on the Exchange Board as a whole.\51\
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    \47\ See MIAX Exchange By-Laws Section 4.5(b). A Non-Industry 
Director shall serve as Chairman of the Committee. See id. See also 
MIAX Exchange By-Laws Section 4.2(a) (requiring that each committee 
be comprised of at least three people).
    \48\ See MIAX Exchange By-Laws Section 4.5(a) and 4.5(c).
    \49\ See MIAX Exchange By-Laws Section 4.5(d).
    \50\ See MIAX Exchange By-Laws Section 4.5(f). See also MIAX 
Exchange By-Laws Section 4.2(a) (providing that except as otherwise 
provided in the MIAX Exchange By-Laws, committees may include 
persons who are not members of the Board).
    \51\ See MIAX Exchange By-Laws Section 4.5(e).
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    With respect to Committees of MIAX Exchange, MIAX Exchange has 
proposed to establish a Nominating Committee \52\ and a Member 
Nominating Committee.\53\ As discussed above, these committees will 
have responsibility for, among other things, nominating candidates for 
election to the Exchange Board. On an annual basis, the members of 
these committees will nominate candidates for the succeeding year's 
respective committees to be elected by Miami Holdings, as the sole LLC 
Member.\54\ In addition, MIAX also has proposed to establish a Quality 
of Markets Committee,\55\ which will provide advice and guidance to the 
Exchange Board on issues related to the fairness, integrity, efficiency 
and competiveness of the information, order handling and execution 
mechanisms of the exchange from the perspective of individual and 
institutional investors, retail and market making firms, exchange 
listed companies, and other market participants. The Quality of Markets 
Committee will include a broad representation of participants in MIAX 
Exchange. Additionally, at least 20% of the members of the committee 
will be Member Representative members, and the number of Non-Industry 
members must equal or exceed the total number of Industry and Member 
Representative members. MIAX also has proposed to

[[Page 73069]]

establish a Business Conduct Committee as discussed further below.\56\
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    \52\ See MIAX Exchange By-Laws Article V, Section 5.2, and supra 
note 22.
    \53\ See MIAX Exchange By-Laws Article V, Section 5.3, and supra 
note 23.
    \54\ See MIAX Exchange By-Laws Article V, Section 5.1, and supra 
note 25. Additional candidates for the Member Nominating Committee 
may be nominated and elected by MIAX Exchange members pursuant to a 
petition process. See supra note 27 and accompanying text.
    \55\ See MIAX Exchange By-Laws Article IV, Section 4.6.
    \56\ See infra note 381 and accompanying text.
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    The Commission believes that MIAX Exchange's proposed committees, 
which are similar to the committees maintained by other exchanges,\57\ 
are designed to help enable MIAX Exchange to carry out its 
responsibilities under the Act and are consistent with the Act, 
including Section 6(b)(1), which requires, in part, an exchange to be 
so organized and have the capacity to carry out the purposes of the 
Act.\58\
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    \57\ See, e.g., BATS Order, supra note 18, and Nasdaq Order, 
supra note 32.
    \58\ 15 U.S.C. 78f(b)(1).
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B. Regulation of MIAX Exchange

    When MIAX Exchange commences operations as a national securities 
exchange, MIAX Exchange will have all the attendant regulatory 
obligations under the Act. In particular, MIAX Exchange will be 
responsible for the operation and regulation of its trading system and 
the regulation of its members. Certain provisions in the MIAX Exchange 
and Miami Holdings governance documents are designed to facilitate the 
ability of MIAX Exchange and the Commission to fulfill their regulatory 
obligations. The discussion below summarizes some of these key 
provisions.
1. Ownership Structure; Ownership and Voting Limitations
    MIAX Exchange will be structured as a Delaware limited liability 
company (``LLC''), which will be wholly-owned by the sole member of the 
LLC, Miami International Holdings, Inc. (``Miami Holdings''). The Miami 
Holdings' proposed Amended and Restated Certificate of Incorporation 
(``Miami Holdings Certificate'') includes restrictions on the ability 
to own and vote shares of capital stock of Miami Holdings.\59\ These 
limitations are designed to prevent any Miami Holdings shareholder from 
exercising undue control over the operation of MIAX Exchange and to 
assure that the MIAX Exchange and the Commission are able to carry out 
their regulatory obligations under the Act.
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    \59\ These provisions are consistent with ownership and voting 
limits approved by the Commission for other SROs. See e.g., 
Securities Exchange Act Release Nos. 62158 (May 24, 2010), 75 FR 
30082 (May 28, 2010) (CBOE-2008-88) (CBOE Demutualization Approval 
Order); 58375 (August 18, 2008) 73 FR 49498 (August 21, 2008) (File 
No. 10-182) (``BATS Exchange Registration Order''); 53963 (June 8, 
2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (``NSX 
Demutualization Order''); 51149 (February 8, 2005), 70 FR 7531 
(February 14, 2005) (SR-CHX-2004-26) (``CHX Demutualization 
Order''); and 49098 (January 16, 2004), 69 FR 3974 (January 27, 
2004) (SR-Phlx-2003-73) (``Phlx Demutualization Order'').
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    In particular, for so long as Miami Holdings (directly or 
indirectly) controls MIAX Exchange, no person, either alone or together 
with its related persons,\60\ may beneficially own more than 40% of any 
class of capital stock of Miami Holdings.\61\ MIAX proposed a more 
conservative restriction for MIAX Exchange members, wherein MIAX 
Exchange members, either alone or together with their related persons, 
are prohibited from beneficially owning more than 20% of shares of any 
class of capital stock of Miami Holdings.\62\ If any stockholder 
violates these ownership limits, Miami Holdings would redeem the shares 
in excess of the applicable ownership limit at their par value.\63\ In 
addition, no person, alone or together with its related persons, may 
vote or cause the voting of more than 20% of the voting power of the 
then issued and outstanding capital stock of Miami Holdings.\64\ If any 
stockholder purports to vote, or cause the voting of, shares that would 
violate this voting limit, Miami Holdings would not honor such vote in 
excess of the voting limit.\65\
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    \60\ See Miami Holdings Certificate NINTH (a)(ii) (defining 
``related persons'').
    \61\ See Miami Holdings Certificate NINTH (b)(i)(A).
    \62\ See Miami Holdings Certificate NINTH (b)(i)(B).
    \63\ See Miami Holdings Certificate NINTH (e). Any shares which 
have been called for redemption shall not be deemed outstanding 
shares for the purpose of voting or determining the total number of 
shares entitled to vote. Once redeemed by Miami Holdings, such 
shares shall become treasury shares and shall no longer be deemed to 
be outstanding. See id. Furthermore, if any redemption results in 
another stockholder owning shares in violation of the ownership 
limits described above, Miami Holdings shall redeem such shares. See 
id.
    \64\ See Miami Holdings Certificate NINTH (b)(i)(C).
    \65\ See Miami Holdings Certificate NINTH (d). The Miami 
Holdings Certificate also prohibits the payment of any stock 
dividends and conversions that would violate the ownership and 
voting limitations. See Miami Holdings Certificates FOURTH A.(b) and 
(e), and D.7.
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    Any person that proposes to own shares of capital stock in excess 
of the 40% ownership limitation, or vote or grant proxies or consents 
with respect to shares of capital stock in excess of the 20% voting 
limitation, must deliver written notice to the Miami Holdings board to 
notify the Board of its intention.\66\ The notice must be delivered to 
the Board not less than 45 days before the proposed ownership of such 
shares or proposed exercise of such voting rights or the granting of 
such proxies or consents.\67\ The Miami Holdings board may waive the 
40% ownership limitation and the 20% voting limitation, pursuant to a 
resolution duly adopted by the Board of Directors, if it makes certain 
findings,\68\ except that the Miami Holdings board cannot waive the 
voting and ownership limits above 20% for MIAX Exchange members and 
their related persons.\69\ Any such waiver would not be effective 
unless and until approved by the Commission pursuant to Section 19 of 
the Act.\70\
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    \66\ See Miami Holdings Certificate NINTH (b)(iv).
    \67\ See id.
    \68\ See Miami Holdings Certificate NINTH (b)(ii)(B). The 
required determinations are that (A) such waiver will not impair the 
ability of MIAX Exchange to carry out its functions and 
responsibilities under the Act and the rules and regulations 
promulgated thereunder, (B) such waiver is otherwise in the best 
interests of MIAX Exchange and Miami Holdings, (C) such waiver will 
not impair the ability of the Commission to enforce the Act and (D) 
the transferee in such transfer and its related persons are not 
subject to any applicable ``statutory disqualification'' (within the 
meaning of Section 3(a)(39) of the Act). See Miami Holdings 
Certificate NINTH (b)(ii)(B) and (b)(iii). The Commission has 
previously approved the rules of other exchanges that provide for 
the ability of the exchange to waive the ownership and voting 
limitations discussed above for non-members of the exchange. See, 
e.g., DirectEdge Exchanges Order, supra note 18.
    \69\ See id. These provisions are generally consistent with 
waiver of ownership and voting limits approved by the Commission for 
other SROs. See e.g., BATS Exchange Registration Order; NSX 
Demutualization Order, supra note 59; CHX Demutualization Order, 
supra note 59; and Securities Exchange Act Release No. 49718 (May 
17, 2004), 69 FR 29611 (May 24, 2004) (SR-PCX-2004-08).
    \70\ See Miami Holdings Certificate NINTH (b)(ii)(B).
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    The Miami Holdings Certificate also contains provisions that are 
designed to further safeguard the ownership and voting limitation 
described above, or are otherwise related to direct and indirect 
changes in control. Specifically, any person that, either alone or 
together with its related persons owns, directly or indirectly, of 
record or beneficially, 5% or more of the capital stock of Miami 
Holdings will be required to immediately notify Miami Holdings in 
writing upon acquiring knowledge of such ownership.\71\ Thereafter, 
such persons will be required to update Miami Holdings of any increase 
or decrease of 1% or more in their previously reported ownership 
percentage.\72\
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    \71\ See Miami Holdings Certificate NINTH(c)(i). The notice will 
require the person's full legal name; the person's title or status; 
the person's approximate ownership interest in Miami Holdings; and 
whether the person has power, directly or indirectly, to direct the 
management or policies of Miami Holdings. See id.
    \72\ See Miami Holdings Certificate NINTH(c)(ii). Changes of 
less than 1% must also be reported to Miami Holdings if they result 
in such person crossing a 20% or 40% ownership threshold. See id. In 
addition, MIAX rules also impose limits on affiliation between the 
MIAX Exchange and a member of the MIAX Exchange. See MIAX Rule 
201(g) (``Without prior Commission approval, the Exchange or any 
entity with which it is affiliated shall not directly or indirectly 
through one or more intermediaries acquire or maintain an ownership 
interest in an Exchange Member. In addition, without prior 
Commission approval, no Member shall be or become affiliated with 
(1) the Exchange; or (2) any affiliate of the Exchange. Nothing 
herein shall prohibit a Member from acquiring or holding an equity 
interest in (i) Miami International Holdings, Inc. that is permitted 
by the Certificate of Incorporation of Miami International Holdings, 
Inc. or (ii) Miami International Securities Exchange, LLC that is 
permitted by the Amended and Restated Limited Liability Company 
Agreement of Miami International Securities Exchange, LLC.'').

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[[Page 73070]]

    The MIAX LLC Agreement does not include change of control 
provisions that are similar to those in the Miami Holdings Certificate; 
however the MIAX Exchange LLC Agreement explicitly provides that Miami 
Holdings is the sole LLC Member of MIAX Exchange.\73\ Thus, if Miami 
Holdings ever proposes to no longer be the sole LLC Member of MIAX 
Exchange (and therefore no longer its sole owner), MIAX Exchange would 
be required to amend the MIAX Exchange LLC Agreement. Any changes to 
the MIAX Exchange LLC Agreement (which includes the MIAX Exchange By-
Laws), including any change in the provisions that identify Miami 
Holdings as the sole owner of MIAX Exchange, must be filed with, or 
filed with and approved by, the Commission pursuant to Section 19 of 
the Act, as the case may be.\74\ Further, pursuant to the MIAX Exchange 
By-Laws, Miami Holdings may not transfer or assign, in whole or in 
part, its ownership interest in MIAX Exchange, unless such transfer is 
filed with and approved by the Commission pursuant to Section 19 of the 
Act.\75\
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    \73\ See MIAX Exchange LLC Agreement and MIAX Exchange By-Laws 
Article I(t) A (both of which define ``LLC Member'' to mean Miami 
Holdings, as the sole member of MIAX).
    \74\ See 15 U.S.C. 78s. See also MIAX Exchange LLC Agreement, 
Section 28(b).
    \75\ See MIAX Exchange By-Laws Article III, Section 3.4.
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    Although Miami Holdings is not independently responsible for 
regulation, its activities with respect to the operation of MIAX 
Exchange must be consistent with, and must not interfere with, the 
self-regulatory obligations of MIAX Exchange. As described above, the 
provisions applicable to direct and indirect changes in control of 
Miami Holdings and MIAX Exchange, as well as the voting limitation 
imposed on owners of Miami Holdings who also are MIAX Exchange members, 
are designed to help prevent any owner of Miami Holdings from 
exercising undue influence or control over the operation of MIAX 
Exchange and to help assure that MIAX Exchange retains a sufficient 
degree of independence to effectively carry out its regulatory 
obligations under the Act. In addition, these limitations are designed 
to address the conflicts of interests that might result from a member 
of a national securities exchange owning interests in the exchange. 
Members that trade on an exchange traditionally have had ownership 
interests in such exchange. As the Commission has noted in the past, 
however, a member's interest in an exchange, including an entity that 
controls an exchange, could become so large as to cast doubts on 
whether the exchange may fairly and objectively exercise its self-
regulatory responsibilities with respect to such member.\76\ A member 
that is a controlling shareholder of an exchange could seek to exercise 
that controlling influence by directing the exchange to refrain from, 
or the exchange may hesitate to, diligently monitor and conduct 
surveillance of the member's conduct or diligently enforce the 
exchange's rules and the federal securities laws with respect to 
conduct by the member that violates such provisions. As such, the 
Commission believes that these requirements are designed to minimize 
the potential that a person or entity can improperly interfere with or 
restrict the ability of MIAX Exchange to effectively carry out its 
regulatory oversight responsibilities under the Act.
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    \76\ See, e.g., DirectEdge Exchanges Order and BATS Order, supra 
note 18.
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    The Commission believes that MIAX's and Miami Holding's proposed 
governance provisions are consistent with the Act, including Section 
6(b)(1), which requires, in part, an exchange to be so organized and 
have the capacity to carry out the purposes of the Act.\77\ In 
particular, these requirements are designed to minimize the potential 
that a person could improperly interfere with or restrict the ability 
of the Commission or MIAX Exchange to effectively carry out their 
regulatory oversight responsibilities under the Act.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78f(b)(1).
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2. Regulatory Independence and Oversight
    Although Miami Holdings will not itself carry out regulatory 
functions, its activities with respect to the operation of MIAX 
Exchange must be consistent with, and must not interfere with, MIAX 
Exchange's self-regulatory obligations. In this regard, MIAX Exchange 
and Miami Holdings propose to adopt certain provisions in their 
respective governing documents that are designed to help maintain the 
independence of the regulatory functions of MIAX Exchange. These 
proposed provisions are substantially similar to those included in the 
governing documents of other exchanges that recently have been granted 
registration.\78\ Specifically:
---------------------------------------------------------------------------

    \78\ See e.g., DirectEdge Exchanges Order and BATS Order, supra 
note 18, and C2 Order, supra note 41.
---------------------------------------------------------------------------

     The directors, officers, employees, and agents of Miami 
Holdings must give due regard to the preservation of the independence 
of the self-regulatory function of MIAX Exchange and must not take 
actions that would interfere with the effectuation of decisions by the 
MIAX Exchange Board relating to its regulatory functions or that would 
interfere with MIAX Exchange's ability to carry out its 
responsibilities under the Act.\79\
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    \79\ See Amended and Restated By-Laws of Miami Holdings (``Miami 
Holdings By-Laws''), Article VII, Section 1.
     Similarly, Article II, Section 2.1(d) of the MIAX Exchange By-
Laws requires the MIAX Exchange Board to, when managing the business 
and affairs of MIAX Exchange and evaluating any proposal, consider 
the requirements of Section 6(b) of the Act. Section 2.1(e) also 
requires the MIAX Exchange Board, when evaluating any proposal to 
take into account (among other things and to the extent relevant), 
the potential impact on the integrity, continuity and stability of 
the national securities exchange operated by MIAX Exchange and the 
other operations of MIAX Exchange on the ability to prevent 
fraudulent and manipulative acts and practices and on investors and 
the public, and whether such would promote just and equitable 
principles of trade, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to and facilitating transactions in 
securities or assist in the removal of impediments to or perfection 
of the mechanisms for a free and open market and a national market 
system. See, e.g., Amended and Restated By-Laws of BATS, Article 
III, Section 1.
---------------------------------------------------------------------------

     Miami Holdings must comply with federal securities laws 
and the rules and regulations promulgated thereunder, and agrees to 
cooperate with the Commission and MIAX Exchange pursuant to, and to the 
extent of, their respective regulatory authority. In addition, Miami 
Holdings' officers, directors, employees, and agents must comply with 
federal securities laws and the rules and regulations promulgated 
thereunder and agree to cooperate with the Commission and MIAX Exchange 
in respect of the Commission's oversight responsibilities regarding 
MIAX Exchange and the self-regulatory functions and responsibilities of 
MIAX Exchange.\80\
---------------------------------------------------------------------------

    \80\ See Miami Holdings By-Laws, Article VII, Section 4.
---------------------------------------------------------------------------

     Miami Holdings, and its officers, directors, employees, 
and agents submit to the jurisdiction of the U.S. federal courts, the 
Commission, and MIAX Exchange, for purposes of any action, suit, or 
proceeding pursuant to U.S. federal securities laws, and the rules

[[Page 73071]]

and regulations thereunder, arising out of, or relating to, MIAX 
Exchange activities.\81\
---------------------------------------------------------------------------

    \81\ See Miami Holdings By-Laws, Article VII, Section 5.
---------------------------------------------------------------------------

     All books and records of MIAX Exchange reflecting 
confidential information pertaining to the self-regulatory function of 
MIAX Exchange (including but not limited to disciplinary matters, 
trading data, trading practices, and audit information) shall be 
retained in confidence by MIAX Exchange and its personnel and will not 
be used by MIAX Exchange for any non-regulatory purpose and shall not 
be made available to persons (including, without limitation, any MIAX 
Exchange member) other than to personnel of the Commission, and those 
personnel of MIAX Exchange, members of committees of MIAX Exchange, 
members of the MIAX Exchange Board, or hearing officers and other 
agents of MIAX, to the extent necessary or appropriate to properly 
discharge the self-regulatory function of MIAX Exchange.\82\
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    \82\ See MIAX Exchange By-Laws Article X, Section 10.4. The 
Commission notes that the Miami Holdings LLC Agreement also provides 
that all books and records of MIAX Exchange reflecting confidential 
information pertaining to the self-regulatory function of MIAX 
Exchange will be subject to confidentiality restrictions. See Miami 
Holdings By-Laws Article VII, Section 2. The requirement to keep 
such information confidential shall not limit the Commission's 
ability to access and examine such information or limit the ability 
of officers, directors, employees, or agent of Miami Holdings to 
disclose such information to the Commission. See id.
---------------------------------------------------------------------------

     The books and records of MIAX Exchange and Miami Holdings 
must be maintained in the United States \83\ and, to the extent they 
are related to the operation or administration of MIAX Exchange, Miami 
Holdings books and records will be subject at all times to inspection 
and copying by the Commission.\84\
---------------------------------------------------------------------------

    \83\ See MIAX Exchange By-Laws Article X, Section 10.4; and 
Miami Holdings By-Laws Article VII, Section 3.
    \84\ See Miami Holdings By-Laws Article VII, Section 3.
---------------------------------------------------------------------------

     Furthermore, to the extent they relate to the activities 
of MIAX Exchange, the books, records, premises, officers, directors, 
employees, and agents of Miami Holdings will be deemed to be the books, 
records, premises, officers, directors, employees, and agents of MIAX 
Exchange, for purposes of, and subject to oversight pursuant to, the 
Act.\85\
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    \85\ See Miami Holdings By-Laws Article VII, Section 3.
---------------------------------------------------------------------------

     Miami Holdings will take necessary steps to cause its 
officers, directors, employees, and agents, prior to accepting a 
position as an officer, director, employee or agent (as applicable) to 
consent in writing to the applicability of provisions regarding books 
and records, confidentiality, jurisdiction, and regulatory obligations, 
with respect to their activities related to MIAX Exchange.\86\
---------------------------------------------------------------------------

    \86\ See Miami Holdings By-Laws Article VII, Section 6.
---------------------------------------------------------------------------

     Miami Holdings Certificate and By-Laws require that, so 
long as Miami Holdings controls MIAX Exchange, any changes to those 
documents be submitted to the MIAX Exchange Board, and, if such change 
is required to be filed with the Commission pursuant to Section 19(b) 
of the Act and the rules and regulations thereunder, such change shall 
not be effective until filed with, or filed with and approved by, the 
Commission.\87\
---------------------------------------------------------------------------

    \87\ See Miami Holdings Certificate Article VII; and Miami 
Holdings By-Laws, Article XII, Section 1.
---------------------------------------------------------------------------

    The Commission believes that the provisions discussed in this 
section, which are designed to help maintain the independence of MIAX 
Exchange's regulatory function and help facilitate the ability of MIAX 
Exchange to carry out its responsibility and operate in a manner 
consistent with the Act, are appropriate and consistent with the 
requirements of the Act, particularly with Section 6(b)(1), which 
requires, in part, an exchange to be so organized and have the capacity 
to carry out the purposes of the Act.\88\ Whether MIAX Exchange 
operates in compliance with the Act, however, depends on how it and 
Miami Holdings in practice implement the governance and other 
provisions that are the subject of this Order.\89\
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78f(b)(1).
    \89\ The Commission notes that it is reviewing the various 
standards and processes it uses to facilitate the registration of 
national securities exchanges and other entities required to 
register with the Commission and plans to issue a concept release 
designed to collect information and evaluate different aspects of 
these registration standards and processes, including the policy 
objectives of registration, how best to achieve those policy 
objectives through registration and other means, and the relative 
benefits and costs of the various means available. See Securities 
Exchange Act Release No. 65543 (October 12, 2011), 76 FR 65784, 
65786 fn. 13 (October 24, 2011).
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    Further, Section 19(h)(1) of the Act \90\ provides the Commission 
with the authority ``to suspend for a period not exceeding twelve 
months or revoke the registration of [an SRO], or to censure or impose 
limitations upon the activities, functions, and operations of [an SRO], 
if [the Commission] finds, on the record after notice and opportunity 
for hearing, that [the SRO] has violated or is unable to comply with 
any provision of the Act, the rules or regulations thereunder, or its 
own rules or without reasonable justification or excuse has failed to 
enforce compliance'' with any such provision by its members (including 
associated persons thereof).\91\ If Commission staff were to find, or 
become aware of, through staff review and inspection or otherwise, 
facts indicating any violations of the Act, including without 
limitation Sections 6(b)(1) and 19(g)(1), these matters could provide 
the basis for a disciplinary proceeding under Section 19(h)(1) of the 
Act.
---------------------------------------------------------------------------

    \90\ See 15 U.S.C. 78s(h)(1).
    \91\ See id.
---------------------------------------------------------------------------

    The Commission also notes that, even in the absence of the 
governance provisions described above, under Section 20(a) of the Act 
any person with a controlling interest in MIAX Exchange would be 
jointly and severally liable with and to the same extent that MIAX 
Exchange is liable under any provision of the Act, unless the 
controlling person acted in good faith and did not directly or 
indirectly induce the act or acts constituting the violation or cause 
of action.\92\ In addition, Section 20(e) of the Act creates aiding and 
abetting liability for any person who knowingly provides substantial 
assistance to another person in violation of any provision of the Act 
or rule thereunder.\93\ Further, Section 21C of the Act authorizes the 
Commission to enter a cease-and-desist order against any person who has 
been ``a cause of'' a violation of any provision of the Act through an 
act or omission that the person knew or should have known would 
contribute to the violation.\94\ These provisions are applicable to all 
entities' dealings with MIAX Exchange, including Miami Holdings.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78t(a).
    \93\ 15 U.S.C. 78t(e).
    \94\ 15 U.S.C. 78u-3.
---------------------------------------------------------------------------

3. Regulation of MIAX
    As a prerequisite for the Commission's granting of an exchange's 
application for registration, an exchange must be organized and have 
the capacity to carry out the purposes of the Act.\95\ Specifically, an 
exchange must be able to enforce compliance by its members, and persons 
associated with its members, with the federal securities laws and the 
rules of the exchange.\96\ The discussion below summarizes how MIAX 
Exchange proposes to conduct and structure its regulatory operations.
---------------------------------------------------------------------------

    \95\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \96\ See id. See also Section 19(g) of the Act, 15 U.S.C. 
78s(g).

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[[Page 73072]]

a. Regulatory Oversight Committee
    The regulatory operations of MIAX Exchange will be monitored by the 
Regulatory Oversight Committee of the MIAX Exchange Board. The 
Regulatory Oversight Committee will consist of at least three 
directors, all of whom will be Non-Industry Directors. The Regulatory 
Oversight Committee will be responsible for overseeing the adequacy and 
effectiveness of MIAX Exchange's regulatory and SRO responsibilities, 
assessing MIAX Exchange's regulatory performance, and assisting the 
MIAX Exchange Board (and committees of the MIAX Exchange Board) in 
reviewing MIAX Exchange's regulatory plan and the overall effectiveness 
of MIAX Exchange's regulatory functions.\97\
---------------------------------------------------------------------------

    \97\ See MIAX Exchange By-Laws Article IV Section 4.5(c). The 
Regulatory Oversight Committee is responsible for reviewing MIAX 
Exchange's regulatory budget, and also will meet regularly with the 
Chief Regulatory Officer. See id.
---------------------------------------------------------------------------

    Further, a Chief Regulatory Officer (``CRO'') of MIAX Exchange will 
have general day-to-day supervision over MIAX Exchange's regulatory 
operations.\98\ The Regulatory Oversight Committee also will be 
responsible for recommending compensation and personnel actions 
involving the CRO and senior regulatory personnel to the Compensation 
Committee of the MIAX Exchange for action.\99\ The CRO will report to 
the Regulatory Oversight Committee.\100\
---------------------------------------------------------------------------

    \98\ See MIAX Exchange By-Laws Article VI, Section 6.10.
    \99\ See MIAX Exchange By-Laws Article IV, Section 4.5(c).
    \100\ See MIAX Exchange By-Law Article VI, Section 6.10.
---------------------------------------------------------------------------

b. Regulatory Funding
    To help assure the Commission that it has and will continue to have 
adequate funding to be able to meet its responsibilities under the Act, 
MIAX Exchange represented that, prior to commencing operations as a 
national securities exchange, Miami Holdings will provide sufficient 
funding to MIAX Exchange for the exchange to carry out its 
responsibilities under the Act.\101\ Specifically, MIAX Exchange 
represents that prior to launching operations, Miami Holdings will 
allocate sufficient operational assets and make a capital contribution 
of not less than $2,000,000 into MIAX Exchange's capital account, in 
addition to either directly making payments of, or contributing 
adequate funds from Miami Holdings to MIAX Exchange for payments by 
MIAX Exchange of: (i) Personnel costs (including regulatory department 
personnel), (ii) technology support for regulatory oversight, (iii) 
infrastructure costs, and (iv) industry and regulatory 
memberships.\102\
---------------------------------------------------------------------------

    \101\ See MIAX Form 1 Application, Exhibit I.
    \102\ See id.
---------------------------------------------------------------------------

    MIAX Exchange also represents that such direct funding by Miami 
Holdings, as well as allocations and contributions by Miami Holdings to 
MIAX Exchange, will be adequate to operate MIAX Exchange, including the 
ongoing regulation of the exchange, and that Miami Holdings and MIAX 
Exchange have entered into a funding agreement that requires Miami 
Holdings to provide adequate funding for the exchange's initial and 
ongoing operations, including the regulation of MIAX Exchange.\103\
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    \103\ See id.
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    Further, any revenues received by MIAX Exchange from fees derived 
from its regulatory function or regulatory penalties will not be used 
for non-regulatory purposes.\104\ Any excess funds, as determined by 
MIAX Exchange, may be remitted to Miami Holdings, however ``Regulatory 
Funds'' will not be remitted to Miami Holdings.\105\
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    \104\ See MIAX Exchange By-Laws Article IX, Section 9.4.
    \105\ See MIAX Form 1 Application, Exhibit I. See also MIAX 
Exchange LLC Agreement Section 16; and MIAX Exchange By-Laws Article 
IX, Section 9.4. MIAX Exchange By-Laws Article 1(ee) defines 
``Regulatory Funds'' as ``fees, fines, or penalties derived from the 
regulatory operations of the [MIAX Exchange]'', but such term does 
not include ``revenues derived from listing fees, market data 
revenues, transaction revenues, or any other aspect of the 
commercial operations of the [MIAX Exchange], even if such revenues 
are used to pay costs associated with the regulatory operations of 
the [MIAX Exchange].'' This definition is consistent with the rules 
of other SROs. See e.g., By-Laws of NASDAQ OMX PHLX LLC, Article 
I(ii); and By-Laws of NASDAQ OMX BX, Inc., Article I(ii).
---------------------------------------------------------------------------

c. Rule 17d-2 Agreements; Regulatory Contract With CBOE
    Section 19(g)(1) of the Act,\106\ among other things, requires 
every SRO registered as either a national securities exchange or 
national securities association to examine for, and enforce compliance 
by, its members and persons associated with its members with the Act, 
the rules and regulations thereunder, and the SRO's own rules, unless 
the SRO is relieved of this responsibility pursuant to Section 17(d) or 
Section 19(g)(2) of the Act.\107\ Rule 17d-2 of the Act \108\ permits 
SROs to propose joint plans to allocate regulatory responsibilities 
amongst themselves for their common rules with respect to their common 
members.\109\ These agreements, which must be filed with and declared 
effective by the Commission, generally cover areas where each SRO's 
rules substantively overlap, including such regulatory functions as 
personnel registration and sales practices. Without this relief, the 
statutory obligation of each individual SRO could result in a pattern 
of multiple examinations of broker-dealers that maintain memberships in 
more than one SRO. Such regulatory duplication would add unnecessary 
expenses for common members and their SROs.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78s(g)(1).
    \107\ 15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.
    \108\ See Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 
15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the 
Act allows the Commission to relieve an SRO of certain 
responsibilities with respect to members of the SRO who are also 
members of another SRO. Specifically, Section 17(d)(1) allows the 
Commission to relieve an SRO of its responsibilities to: (i) Receive 
regulatory reports from such members; (ii) examine such members for 
compliance with the Act and the rules and regulations thereunder, 
and the rules of the SRO; or (iii) carry out other specified 
regulatory responsibilities with respect to such members.
    \109\ 17 CFR 240.17d-2. Section 19(g)(1) of the Act requires 
every SRO to examine its members and persons associated with its 
members and to enforce compliance with the federal securities laws 
and the SRO's own rules, unless the SRO is relieved of this 
responsibility pursuant to Section 17(d) of the Act. Section 17(d) 
was intended, in part, to eliminate unnecessary multiple 
examinations and regulatory duplication with respect to Common 
Members. See Securities Exchange Act Release No. 12935 (October 28, 
1976), 41 FR 49091 (November 8, 1976) (``Rule 17d-2 Adopting 
Release'').
---------------------------------------------------------------------------

    A 17d-2 plan that is declared effective by the Commission relieves 
the specified SRO of those regulatory responsibilities allocated by the 
plan to another SRO.\110\ Many SROs have entered into Rule 17d-2 
agreements.\111\ MIAX Exchange has represented to the Commission that 
it intends to become a party to the existing multiparty options Rule 
17d-2 plans concerning sales practice regulation and market 
surveillance.\112\ Under these agreements, the examining SROs will 
examine firms that are common

[[Page 73073]]

members of MIAX Exchange and the particular examining SRO for 
compliance with certain provisions of the Act, certain rules and 
regulations adopted thereunder, and certain MIAX Exchange Rules.
---------------------------------------------------------------------------

    \110\ See id.
    \111\ See, e.g., Securities Exchange Act Release Nos. 59218 
(January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575) 
(FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 
63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, 
Inc.); 55755 (May 14, 2007), 72 FR 28057 (May 18, 2007) (File No. 4-
536) (National Association of Securities Dealers, Inc. (``NASD'') 
(n/k/a FINRA) and CBOE concerning the CBOE Stock Exchange); 55367 
(February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529) 
(NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) 
(File No. 4-517) (NASD/Nasdaq).
    \112\ See MIAX Form 1 Application, Exhibit L. See also 
Securities Exchange Act Release Nos. 66974 (May 11, 2012), 77 FR 
29705 (May 18, 2012) (File No. S7-966) (notice of filing and order 
approving and declaring effective an amendment to the multiparty 
17d-2 plan concerning options-related sales practice matters); and 
66975 (May 11, 2012), 77 FR 29712 (May 18, 2012) (File No. 4-551) 
(notice of filing and order approving and declaring effective an 
amendment to the multiparty 17d-2 plan concerning options-related 
market surveillance).
---------------------------------------------------------------------------

    In addition, MIAX Exchange has entered into a Regulatory Services 
Agreement (``RSA'') with the Chicago Board Options Exchange, 
Incorporated (``CBOE''), under which CBOE will perform certain 
regulatory functions on behalf of MIAX Exchange.\113\ Pursuant to the 
RSA, CBOE, in its capacity as service provider to MIAX Exchange, will 
perform various services on MIAX's behalf, including conducting certain 
market surveillances; assisting MIAX Exchange in conducting 
investigations of potential violations of MIAX Exchange rules and/or 
federal securities laws related to activity on the Exchange; conducting 
examinations related to Exchange members' conduct on MIAX Exchange; 
assisting MIAX Exchange with disciplinary proceedings pursuant to MIAX 
Exchange rules, including issuing charges and conducting hearings; and 
providing dispute resolution services to Exchange members on behalf of 
MIAX Exchange, including operation of the MIAX Exchange's arbitration 
program.\114\ Notwithstanding the RSA, MIAX Exchange will retain 
ultimate legal responsibility for the regulation of its members and its 
market.
---------------------------------------------------------------------------

    \113\ See MIAX Form 1 Application, Exhibit L.
    \114\ See MIAX Form 1 Application, Exhibit L.
---------------------------------------------------------------------------

    The Commission believes that it is consistent with the Act for MIAX 
Exchange to contract with another SRO to perform certain examination, 
enforcement, and disciplinary functions.\115\ These functions are 
fundamental elements of a regulatory program, and constitute core self-
regulatory functions. The Commission believes that CBOE, as an SRO that 
operates two options exchanges, should have the capacity to perform 
these functions for MIAX Exchange.\116\ However, MIAX Exchange, unless 
relieved by the Commission of its responsibility,\117\ bears the 
ultimate responsibility for self-regulatory responsibilities and 
primary liability for self-regulatory failures, not the SRO retained to 
perform regulatory functions on MIAX Exchange's behalf. In performing 
these regulatory functions, however, the SRO retained to perform 
regulatory functions may nonetheless bear liability for causing or 
aiding and abetting the failure of MIAX Exchange to perform its 
regulatory functions.\118\ Accordingly, although CBOE will not act on 
its own behalf under its SRO responsibilities in carrying out these 
regulatory services for MIAX Exchange, as the SRO retained to perform 
regulatory functions, CBOE may have secondary liability if, for 
example, the Commission finds that the contracted functions are being 
performed so inadequately as to cause a violation of the federal 
securities laws by MIAX Exchange.
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    \115\ See, e.g., Regulation ATS Release, supra note 34. See also 
Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 
47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that 
allowed Amex to contract with another SRO for regulatory services) 
(``Amex Regulatory Services Approval Order''); 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (``NOM 
Approval Order''); Nasdaq Order, supra note 32; and BATS Order, 
supra note 18.
    \116\ See, e.g., Amex Regulatory Services Approval Order, supra 
note 115; NOM Approval Order, supra note 115; and Nasdaq Order, 
supra note 32. The Commission notes that the RSA is not before the 
Commission and, therefore, the Commission is not acting on it.
    \117\ See supra note 108.
    \118\ For example, if failings by the SRO retained to perform 
regulatory functions have the effect of leaving an exchange in 
violation of any aspect of the exchange's self-regulatory 
obligations, the exchange will bear direct liability for the 
violation, while the SRO retained to perform regulatory functions 
may bear liability for causing or aiding and abetting the violation. 
See, e.g., Nasdaq Order, supra note 32; BATS Order, supra note 18; 
and Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 
2000) (File No. 10-127) (approval of registration of ISE as a 
national securities exchange).
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C. Trading System

1. Access to MIAX
    Access to MIAX will be granted to individuals or organizations who 
are approved to become members. Approved members will be issued Trading 
Permits that grant the member the ability to transact on MIAX Exchange 
through the exchange's electronic systems.\119\ Trading Permits will 
not convey upon members any ownership interest in MIAX Exchange, and 
they will not be transferable except in cases where a member 
experiences a change in control or corporate reorganization.\120\ 
Membership will be open to any broker-dealer that: (1) Is registered 
under Section 15 of the Act; \121\ and (2) has and maintains membership 
in another registered options exchange or the Financial Industry 
Regulatory Authority (``FINRA'').\122\ There will be no limit to the 
number of Trading Permits that MIAX Exchange can issue, although MIAX 
could determine in the future that a limit on or decrease to the number 
of Trading Permits issued is necessary.\123\ Members of MIAX may be one 
of three classes of market maker,\124\ or they may be non-market 
makers.
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    \119\ See MIAX Exchange Rule 200(a). MIAX intends to allow each 
member to determine the best method for accessing MIAX, whether by 
using customized front-end software or through third-party vendors 
who route orders to MIAX through front-end or service bureau 
configurations. See MIAX Form 1 Application, Exhibit E.
    \120\ See MIAX Rule 200(d).
    \121\ See MIAX Rule 200(b).
    \122\ See MIAX Rule 200(c)(7).
    \123\ See MIAX Rule 200(a). MIAX would announce in advance any 
limitation or decrease it plans to impose pursuant to Rule 200(a). 
See id. In the event that MIAX imposes a limitation or decrease, 
MIAX, in doing so, may not eliminate the ability of an existing 
member to trade on MIAX Exchange unless MIAX Exchange is permitted 
to do so pursuant to a rule filing submitted to the Commission under 
Section 19(b) of the Act. See id. In addition, MIAX's exercise of 
authority under proposed Rule 200 would be subject to the provisions 
of Section 6(c)(4) of the Act. See id. See also 15 U.S.C. 78f(c)(4) 
(providing that an exchange may limit: (1) The number of members of 
the exchange and (2) the number of members and designated 
representatives of members permitted to effect transactions on the 
floor of the exchange without the services of another person acting 
as broker, provided, however, that no exchange shall have the 
authority to decrease the number of memberships in such exchange, or 
the number of members and designated representatives of members 
permitted to effect transactions on the floor of such exchange 
without the services of another person acting as broker, below such 
number in effect on May 1, 1975, or the date such exchange was 
registered with the Commission, whichever is later. In addition, the 
Commission, in accordance with the provisions of section 19(c) of 
the Act, may amend the rules of any exchange to increase (but not to 
decrease) or to remove any limitation on the number of memberships 
in such exchange or the number of members or designated 
representatives of members permitted to effect transactions on the 
floor of the exchange without the services of another person acting 
as broker, if the Commission finds that such limitation imposes a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.). See also CBOE Rule 3.1(a)(vi) (concerning 
limiting or reducing the number of types of trading permits). In 
addition, MIAX's exercise of authority under proposed Rule 200 would 
be subject to the provisions of Section 6(b)(2) of the Act, which 
requires the rules of an exchange to provide that any registered 
broker or dealer or any natural person associated with a registered 
broker or dealer may become a member of such exchange and any person 
may become associated with a member thereof. See 15 U.S.C. 
78f(b)(2).
    \124\ See MIAX Rule 600. Market Maker registration is discussed 
in greater detail below, infra Section III(C)(3)(a).
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    Those seeking to become members of MIAX will need to submit an 
application in accordance with procedures that MIAX will announce by 
Regulatory Circular.\125\ Entities that become members, and their 
associated persons, will be required to meet and maintain certain 
qualification and registration criteria similar to what is required by 
other options exchanges.\126\

[[Page 73074]]

In addition, MIAX proposes further requirements on members that seek to 
do business with the public.\127\ Applicants who are denied membership 
may appeal MIAX Exchange's decision pursuant to MIAX's rules governing 
Hearings, Review, and Arbitration.\128\ Every member will be subject to 
MIAX's regulatory jurisdiction, including MIAX's disciplinary 
jurisdiction.\129\
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    \125\ See MIAX Rule 200(c). Any proposed application fees 
contemplated by Rule 200(c) would need to be filed with the 
Commission pursuant to Section 19(b) of the Act and Rule 19b-4 
thereunder. See 15 U.S.C. 78s(b) and 17 CFR 240.19b-4, respectively.
    \126\ See MIAX Rule 200 Series. Such criteria include, but are 
not limited to, capital maintenance requirements. See, e.g., C2 
Rules 3.1 and 3.2 (containing similar criteria).
    \127\ See MIAX Rule 1300 Series. These Rules also are similar to 
the rules of other exchanges. See, e.g., ISE Rules Chapter 6.
    \128\ See MAX Rule 1100 Series.
    \129\ See MIAX Rule 200(f). For MIAX's rules concerning 
discipline, see MIAX Rule 1000 Series.
---------------------------------------------------------------------------

    Further, MIAX Rule 608 requires market makers to have a letter of 
guarantee. In its comment letter, NASDAQ argues that MIAX should 
broaden this rule to require all members to provide a letter of 
guarantee, not just market makers.\130\ In response, MIAX explains that 
MIAX Rule 209 already requires a letter of guarantee for all MIAX 
members.\131\
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    \130\ See NASDAQ Letter, supra note 3, at 4.
    \131\ See MIAX Response Letter, supra note 4, at 15-16. MIAX 
noted that MIAX Rule 608, which NASDAQ referenced, is a rule that 
relates specifically to market makers, and as such, it simply 
reiterates that Rule 209's general requirement concerning letters of 
guarantee applies specifically to market makers. See id.
---------------------------------------------------------------------------

    In addition, in its comment letter, NASDAQ notes that MIAX Rule 507 
requires a member who changes clearing information to contact the 
clearing member on the other side of a trade.\132\ NASDAQ argues this 
approach is potentially burdensome for MIAX members since some MIAX 
members might not maintain contact information for all other MIAX 
members.\133\ NASDAQ believes that a better approach, given that the 
Options Clearing Corporation serves as the central clearing party for 
listed options trades, would be for the member to notify MIAX.\134\ In 
response, MIAX revised Rule 507 to accommodate this suggestion, which 
MIAX believes should be less burdensome for members.\135\
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    \132\ See NASDAQ Letter, supra note 3, at 4.
    \133\ See id.
    \134\ See id.
    \135\ See MIAX Response Letter, supra note 4, at 13. MIAX notes 
that its revised rule is similar to the operation of ISE Rule 707. 
See id.
---------------------------------------------------------------------------

    The Commission finds that MIAX's proposed membership rules are 
consistent with the Act, including Section 6(b)(2) of the Act, which 
requires the rules of an exchange to provide that any registered broker 
or dealer or natural person associated with a broker or dealer may 
become a member of such exchange or associated with a member 
thereof.\136\ MIAX's proposed rules with respect to exchange membership 
are substantively similar to the rules of other exchanges.
---------------------------------------------------------------------------

    \136\ 15 U.S.C. 78f(b)(2).
---------------------------------------------------------------------------

    The Commission notes that pursuant to Section 6(c) of the Act,\137\ 
an exchange must deny membership to any person, other than a natural 
person, that is not a registered broker or dealer, any natural person 
that is not, or is not associated with, a registered broker or dealer, 
and registered broker-dealers that do not satisfy certain standards, 
such as financial responsibility or operational capacity. As a 
registered exchange, MIAX must independently determine if an applicant 
satisfies the standards set forth in the Act, regardless of whether an 
applicant is a member of another SRO.\138\
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    \137\ 15 U.S.C. 78f(c).
    \138\ See, e.g., BOX Order, supra note 18 at 26337; BATS Order, 
supra note 18, at 73 FR 49502; and Nasdaq Order, supra note 32, at 
71 FR 3555.
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    In addition, members may enter into arrangements with other 
parties, including non-members and other members, to provide 
``Sponsored Access'' to trading on MIAX.\139\ Members who provide such 
Sponsored Access will be responsible for all trading conducted pursuant 
to the access agreement, and to the same extent as if the member were 
trading directly.\140\ Accordingly, members that provide Sponsored 
Access must maintain and implement policies and procedures to supervise 
and monitor sponsored trading activity.\141\ Additionally, non-members 
who seek to trade on MIAX through Sponsored Access agreements will need 
to agree to comply with all applicable federal securities laws and 
rules and MIAX Exchange rules.\142\ MIAX's rules governing Sponsored 
Access arrangements are similar to the rules of other exchanges \143\ 
and are consistent with Rule 15c3-5 under the Act.\144\
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    \139\ See MIAX Rule 210.
    \140\ See MIAX Rule 210(a).
    \141\ See id.
    \142\ See MIAX Rule 210(d)(1)(i). See also, e.g., 17 CFR 
240.15c3-5.
    \143\ See, e.g., Nasdaq Rule 4611(d).
    \144\ 17 CFR 240.15c3-5.
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2. Linkage
    MIAX intends to become a participant in the Plan Relating to 
Options Order Protection and Locked/Crossed Markets or any successor 
plan (``Linkage Plan'').\145\ If admitted as a participant to the Plan, 
other plan participants would be able to send orders to MIAX in 
accordance with the terms of the plan as applied to MIAX Exchange.
---------------------------------------------------------------------------

    \145\ See MIAX Form 1 Application, Exhibit E. See also 
Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 
39362 (August 6, 2009) (File No. 4-546) (order approving the 
national market system Plan Relating to Options Order Protection and 
Locked/Crossed Markets Submitted by the Chicago Board Options 
Exchange, Incorporated, ISE, The NASDAQ Stock Market LLC, NASDAQ OMX 
BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, 
Inc.).
---------------------------------------------------------------------------

    MIAX Exchange rules include relevant definitions, establish the 
conditions pursuant to which members may enter orders in accordance 
with the Linkage Plan, impose obligations on MIAX Exchange regarding 
how it must process incoming orders, establish a general standard that 
members and MIAX Exchange should avoid trade-throughs, establish 
potential regulatory liability for members that engage in a pattern or 
practice of trading through other exchanges, and establish obligations 
with respect to locked and crossed markets.
    The Commission believes that MIAX has proposed rules that are 
designed to comply with the requirements of the Linkage Plan.\146\ 
Further, as provided below, before MIAX can commence operations as an 
exchange, it must become a participant in the Linkage Plan.
---------------------------------------------------------------------------

    \146\ See MIAX Rule 1400 Series.
---------------------------------------------------------------------------

3. Market Makers
a. Registration and Appointment
    Members of MIAX may apply to become one of three types of market 
maker: Primary Lead Market Maker, Lead Market Maker, or Registered 
Market Maker (collectively, ``Market Makers''). Market Makers are 
entitled to receive certain benefits and privileges in exchange for 
fulfilling certain affirmative and negative market-making 
obligations.\147\ Each class of Market Maker will receive a specific 
level of benefits and privileges in exchange for a specific level of 
obligation that such Market Maker assumes to the MIAX market.
---------------------------------------------------------------------------

    \147\ Market Makers' benefits and obligations are discussed in 
greater detail in the following section.
---------------------------------------------------------------------------

    To begin the process of registering as a Registered Market Maker or 
Lead Market Maker, a member will be required to file a written 
application with MIAX.\148\ In reviewing a member's application for 
membership, MIAX will consider, among other things, the applicant's 
market making ability.\149\ Only approved Lead Market Makers

[[Page 73075]]

may apply to be considered for appointment as a Primary Lead Market 
Maker in one or more option classes traded on MIAX.\150\ All members 
who are approved to become Market Makers will be designated as 
specialists on MIAX for all purposes under the Act and rules 
thereunder.\151\
---------------------------------------------------------------------------

    \148\ See MIAX Rule 600(b).
    \149\ See id. The provision permitting MIAX to consider ``such 
other factors as [it] deems appropriate'' must be applied in a 
manner that is consistent with the Act, including provisions that 
prohibit an exchange from acting in an unfairly discriminatory 
manner. See 15 U.S.C. 78f(b)(5); see also C2 Order, supra note 41, 
at n. 80, 76 FR at 66704.
    \150\ See id.
    \151\ See MIAX Rule 600(a).
---------------------------------------------------------------------------

    Once approved, a Market Maker would seek appointment to make 
markets in options classes.\152\ Either the Exchange Board or a 
committee thereof \153\ would evaluate an application for Market Maker 
status based on: (1) The financial resources available to the Market 
Maker; (2) the Market Maker's experience and expertise in market making 
or options trading; (3) the preferences of the Market Maker to receive 
appointment(s) in specific option class(es); and (4) the maintenance 
and enhancement of competition among Market Makers in each option 
class.\154\ MIAX will allow one Primary Lead Market Maker appointment 
per class, and will have a maximum class quoting limit of fifty Market 
Makers per class.\155\ Once appointed, MIAX will surveil a Market 
Maker's activity for continued compliance with all applicable rules and 
requirements, which are discussed in more detail below.
---------------------------------------------------------------------------

    \152\ See MIAX Rule 602.
    \153\ See MIAX Rule 602(a). MIAX Rule 1100 Series provides the 
process for hearings, review, and arbitration of claims by persons 
economically aggrieved by MIAX Exchange action, which would include 
denial of registration as a Market Maker.
    \154\ See id.
    \155\ See Amendment No. 1 (in which MIAX revised its Rule 602(c) 
to increase the proposed class quoting limit from 10 to 50). See 
also, e.g., C2 Rule 8.11(a) (imposing a class quoting limit of 50) 
and CBOE Rule 8.3A, Interpretations and Policies .01 (imposing a 
class quoting limit of 50).
---------------------------------------------------------------------------

    The Commission finds that MIAX's rules for the registration and 
appointment of Market Makers are consistent with the Act. In 
particular, MIAX's rules provide an objective process by which a member 
could become a Market Maker on MIAX and provide for oversight by MIAX 
Exchange to monitor for continued compliance by Market Makers with the 
terms of their application for such status. The Commission notes that 
MIAX's proposed Market Maker registration and appointment requirements 
are similar to those of other options exchanges.\156\
---------------------------------------------------------------------------

    \156\ See, e.g., ISE Rules 800 and 801, and C2 Rule 8.1 
(registration); ISE Rule 802 and C2 Rule 8.11 (appointment).
---------------------------------------------------------------------------

b. Market Maker Obligations
    Pursuant to MIAX rules, all Market Makers will be subject to a 
number of general obligations. In particular, the transactions of a 
Market Maker must constitute a course of dealings reasonably calculated 
to contribute to the maintenance of a fair and orderly market.\157\ 
Among other things, a Market Maker must: (1) Engage in dealings for its 
own account when there is a lack of price continuity, a temporary 
disparity between the supply of and demand for a particular option 
contract, or a temporary distortion of the price relationships between 
options contracts of the same class; (2) compete with other market 
makers; (3) make markets that will be honored for the number of 
contracts entered; (4) update quotations in response to changed market 
conditions; and (5) price option contracts fairly by, among other 
things, meeting the bid/ask differential requirements prescribed.\158\ 
In addition, Market Makers must maintain minimum net capital in 
accordance with MIAX rules and the federal securities laws.\159\ Market 
Makers also must maintain information barriers between market making 
activities and any other business activities that are reasonably 
designed to prevent the misuse of material, non-public 
information.\160\
---------------------------------------------------------------------------

    \157\ See MIAX Rule 603(a).
    \158\ See MIAX Rule 603(b)(4). Specifically, as set forth in 
note 285, infra, following the opening rotation, Market Makers must 
create differences of no more than $5 between the bid and offer. 
Prior to the opening rotation, bid/ask differentials shall be no 
more than $.25 between the bid and offer for each option contract 
for which the bid is less than $2, no more than $.40 where the bid 
is at least $2 but does not exceed $5, no more than $.50 where the 
bid is more than $5 but does not exceed $10, no more than $.80 where 
the bid is more than $10 but does not exceed $20, and no more than 
$1 where the bid is more than $20, provided that the Exchange may 
establish differences other than the above for one or more option.
    \159\ See MIAX Rule 609.
    \160\ See MIAX Rule 610.
---------------------------------------------------------------------------

    MIAX's rules governing Market Maker quoting obligations are 
tailored to the specific class of Market Maker.\161\ Specifically, a 
Primary Lead Market Maker will be subject to the highest standard 
applicable on MIAX, as they will be required to provide continuous two-
sided Standard quotes and/or Day eQuotes \162\ throughout the trading 
day 99% of the time in the lesser of 99% of the series, or 100% of the 
series minus one put-call pair, in each appointed class.\163\ Primary 
Lead Market Makers also are required to participate in the opening 
rotation.\164\ Lead Market Makers must provide continuous two-sided 
quotes (consisting of Standard quotes and/or Day eQuotes) throughout 
the trading day 90% of the time in 90% of the series in each of their 
appointed classes.\165\ Lead Market Makers also must participate in the 
opening rotation.\166\ Lastly, Registered Market Makers must provide 
continuous two-sided quotes (consisting of Standard quotes and/or Day 
eQuotes) 90% of the time in 60% of the series in each of its appointed 
classes.\167\ Further, Registered Market Makers may be called upon by a 
MIAX Exchange official to submit a single quote or maintain continuous 
quotes in one or more series of its appointed classes whenever, in the 
judgment of such official, it is necessary to do so in the interest of 
fair and orderly markets.\168\ For purposes of meeting the continuous 
quoting obligations discussed herein, a Market Maker's quote must meet 
the bid/ask differential requirements of MIAX Rule 603(b)(4).\169\
---------------------------------------------------------------------------

    \161\ See MIAX Rule 604.
    \162\ See infra Section III(C)(5) (discussing the various types 
of quotes that may be submitted by Market Makers on MIAX).
    \163\ See MIAX Rule 604(e)(1). See also Amendment No. 1 
(revising MIAX Rule 604(e)(1) to provide that these obligations will 
be applied on a class-by-class basis).
    \164\ See MIAX Rule 604(e)(1)(i).
    \165\ See MIAX Rule 604(e)(1). See also Amendment No. 1 
(revising MIAX Rule 604(e)(2) to provide that these obligations will 
be applied on a class-by-class basis).
    \166\ See MIAX Rule 604(e)(2).
    \167\ See MIAX Rule 604(e)(3). See also Amendment No. 1 
(revising MIAX Rule 604(e)(3) to provide that these obligations will 
be applied on a class-by-class basis).
    \168\ See MIAX Rule 604(e)(3)(iii).
    \169\ See MIAX Rule 604(e)(1)-(3) (for Primary Lead Market 
Makers, Lead Market Makers, and Registered Market Makers, 
respectively).
---------------------------------------------------------------------------

    In options classes other than to which they are appointed, a Market 
Maker is prohibited from engaging in transactions in an account in 
which it has an interest that are disproportionate to, or in derogation 
of, the performance of its market making obligations as set forth in 
the MIAX rules.\170\ Further, the total number of contracts executed 
during a quarter by a Registered Market Maker in options classes to 
which it is not appointed may not exceed 25% of the total number of 
contracts traded by such Registered Market Maker in classes to which it 
is appointed.\171\ Similarly, the total number of contracts executed 
during a quarter by a Lead Market Maker (including a Primary Lead 
Market Maker) in options classes to which it is not appointed may not 
exceed 10% of

[[Page 73076]]

the total number of contracts traded by such Lead Market Maker in 
classes to which it is appointed.\172\ Executions resulting from orders 
in a Registered Market Maker's and Lead Market Maker's appointed 
classes are included in these 25% and 10% limitations, 
respectively.\173\
---------------------------------------------------------------------------

    \170\ See MIAX Rule 603(d). Among other things, a Market Maker 
should not effect purchases or sales except in an orderly manner. 
See id. See also ISE Rule 803(d) (containing an identical 
provision).
    \171\ See MIAX Rule 605(b)(2). See also ISE Rule 805(b)(2) 
(limiting the total number of contracts a Competitive Market Maker 
registered on that Exchange may execute per quarter in classes to 
which it is not appointed to 25% or less of the total contracts 
traded by that Market Maker in classes to which it is appointed).
    \172\ See MIAX Rule 605(b)(3); see also ISE Rule 805(b)(3) 
(limiting the total number of contracts a Primary Market Maker 
registered on that Exchange may execute per quarter in classes to 
which it is not appointed to 10% or less of the total contracts 
traded by that Market Maker in classes to which it is appointed.
    \173\ See MIAX Rule 605(b)(2)-(3). MIAX's inclusion of 
executions resulting from orders is more restrictive than similar 
rules of other exchanges, which do not include orders executed in 
appointed classes towards Market Makers' 25% and 10% limitations, 
respectively. See, e.g., ISE Rule 805(b)(2)-(3).
    See also Amendment No. 1 (where MIAX revised Rule 605 to remove 
consideration of non-priority quotes from the 25% and 10% 
limitations). MIAX's proposal not to count non-priority quotes in 
the 25% or 10% buckets does not raise any new or novel issue because 
even a non-priority quote still would be required to meet the 
maximum differential provision contained in MIAX Rule 603(b)(4). 
Accordingly, such a valid width quote, even if it may not comply 
with a potentially narrower ``priority quote width standard'' under 
MIAX Rule 517(b)(ii), would still represent a valid width quote that 
can be counted towards a Market Maker's quoting obligation, 
consistent with the practice on other exchanges.
---------------------------------------------------------------------------

    If MIAX finds any failure by a Market Maker to meet minimum 
performance standards or properly perform as a Market Maker, such 
Market Maker may be subject to suspension, termination, or restriction 
of registration in one or more of the securities in which the Market 
Maker is registered.\174\
---------------------------------------------------------------------------

    \174\ See MIAX Rules 600 and 602(f).
---------------------------------------------------------------------------

    Market Makers will receive certain benefits in return for 
satisfying their responsibilities.\175\ For example, a broker-dealer or 
other lender may extend ``good faith'' credit to a member of a national 
securities exchange or registered broker-dealer to finance its 
activities as a market maker or specialist.\176\ In addition, market 
makers are excepted from the prohibition in Section 11(a) of the 
Act.\177\ The Commission believes that a market maker must be subject 
to sufficient and commensurate affirmative obligations, including the 
obligation to hold itself out as willing to buy and sell options for 
its own account on a regular or continuous basis, to justify favorable 
treatment.\178\ The Commission further believes that the rules of all 
U.S. options markets need not provide the same standards for market 
maker participation, so long as they impose affirmative obligations 
that are consistent with the Act.\179\
---------------------------------------------------------------------------

    \175\ See, e.g., NOM Approval Order, supra note 115, at 73 FR 
14526 (discussing the benefits and obligations of market makers).
    \176\ See 12 CFR 221.5 and 12 CFR 220.7; see also 17 CFR 
240.15c3-1(a)(6) (capital requirements for market makers).
    \177\ 15 U.S.C. 78k(a).
    \178\ See NOM Approval Order, supra note 115, at 73 FR 14526.
    \179\ See id.
---------------------------------------------------------------------------

    The Commission believes that MIAX's Market Maker participation 
requirements impose appropriate affirmative obligations on MIAX 
Exchange's Market Makers that are commensurate with the benefits 
afforded to such participants and, accordingly, are consistent with the 
Act.
    Specifically, with regard to MIAX's proposed continuous quoting 
obligations, only those quotes that are liquidity providing--Standard 
quotes and Day eQuotes--will be counted towards a Market Maker's 
quoting obligations, rather than all types of eQuotes that a Market 
Maker will be permitted to utilize.\180\ The Commission believes that 
this treatment is appropriate under the Act and consistent with a 
Market Maker's obligation to contribute to the maintenance of a fair 
and orderly market. Further, the Commission believes that the specific 
levels of benefits conferred on the different classes of Market Makers 
are appropriately balanced by the obligations imposed by MIAX's rules. 
For example, as discussed below, Primary Lead Market Makers and Lead 
Market Makers are entitled to certain participation entitlements,\181\ 
and at the same time, are subject to heightened continuous quoting 
obligations to justify these special benefits.\182\
---------------------------------------------------------------------------

    \180\ See infra Section III(C)(5) (discussing the various quote 
types that Market Makers can utilize).
    \181\ See infra notes 225-240 and accompanying text (describing 
the Primary Lead Market Maker and Directed Lead Market Maker 
participation entitlements). See also infra Section III(C)(5) 
(discussing the benefit Market Makers receive from the MIAX priority 
quote rule).
    \182\ See supra Section III(C)(3)(b) (describing Primary Lead 
Market Maker and Lead Market Maker quoting obligations).
---------------------------------------------------------------------------

    Finally, the Commission believes that the Act does not mandate a 
particular market model for exchanges, and while Market Makers may 
become an important source of liquidity on MIAX, they will likely not 
be the only source as MIAX is designed to match buying and selling 
interest of all MIAX participants.
4. Order Display, Execution, and Priority
    MIAX will operate a fully automated electronic options marketplace. 
Liquidity will be derived from orders to buy and orders to sell, as 
well as market maker quotations, submitted to MIAX electronically by 
its members from remote locations. There will be no physical trading 
floor. Options traded on the Exchange will be subject to Minimum Price 
Variations that will begin at $0.05 for option contracts trading at 
less than $3.00 per option, and $.10 for option contracts trading at 
$3.00 per option or higher.\183\ In addition, MIAX will participate in 
the penny pilot program pursuant to which it will permit certain 
options with premiums under $3 (as well as heavily traded options on 
certain indices) to be quoted and traded in increments as low as 
$.01.\184\
---------------------------------------------------------------------------

    \183\ See MIAX Rule 510(a).
    \184\ NASDAQ points out that MIAX's rule concerning the ``penny 
pilot'' did not contain a date for the end of the penny pilot. See 
NASDAQ Letter, supra note 3, at 3. In response, MIAX amended its 
Rule 510 to insert the industry-wide date for the schedule 
expiration the penny pilot (i.e., December 31, 2012), and MIAX noted 
that at the time it filed its Form 1 application, the scheduled 
expiration of the penny pilot was June 30, 2012 (which the 
Commission notes preceded publication of the notice of MIAX's Form 1 
application in the Federal Register). See MIAX Response Letter, 
supra note 4, at 13. MIAX notes that the December 31, 2012 
expiration date conforms to other exchange rules, including CBOE 
Rule 6.42 and ISE Rule 710. See id.
---------------------------------------------------------------------------

    All orders and quotes submitted to MIAX will be displayed unless: 
(i) The order is a contingent order (such as immediate or cancel 
orders); or (ii) the quote is a certain type of eQuote \185\ (such as 
an Auction or Cancel eQuote). Displayed orders and quotes will be 
displayed on an anonymous basis (except for attributable orders,\186\ 
which will allow voluntary disclosure of firm identification 
information) at a specified price. Non-displayed orders will not be 
displayed to any participant.
---------------------------------------------------------------------------

    \185\ See infra Section III(C)(5) (discussing eQuotes). The 
Commission notes that MIAX has not proposed orders with reserve size 
at this time.
    \186\ An Attributable Order is a market or limit order which 
displays the user firm's ID for purposes of trading on MIAX. Use of 
Attributable Orders will be voluntary. This order type is consistent 
with similar order types on other exchanges. See, e.g., CBOE Rule 
6.53(o) (attributable order type).
---------------------------------------------------------------------------

    In certain cases, orders and quotes may be displayed at a price 
different from the price specified by the submitting member.\187\ One 
such case is

[[Page 73077]]

non-displayed penny orders. Specifically, MIAX proposes to allow a 
member to enter an order or quote (as applicable) priced in a penny 
increment for series that are subject to a minimum price variation 
other than a penny (e.g., 5 cents or 10 cents). The order would be 
displayed at the applicable minimum increment (rounded as appropriate), 
not the narrower penny price, but would be available for execution at 
the non-displayed penny price (i.e., a ``non-displayed penny 
order'').\188\ With respect to MIAX's proposed use of non-displayed 
penny orders, the ISE Letter appears to assert that MIAX has proposed 
to permit non-displayed prices to be entered in regular trading 
increments in all classes, which (if true) ISE would oppose to the 
extent it could decrease transparency and further internalization of 
order flow.\189\ ISE believes that MIAX's proposal on this point could 
be much broader than what has been previously approved by the 
Commission.\190\ In response, MIAX notes that, pursuant to MIAX Rule 
516(b)(3), non-displayed penny orders will only be accepted in 
designated classes, which must have a minimum price variation larger 
than one penny.\191\ MIAX notes that such orders, which are limit 
orders priced in a one-cent increment, are executable at their stated 
penny limit price, but are displayed at the closest minimum price 
variation that does not violate the limit price.\192\ MIAX reiterated 
that it does not propose to handle orders and quotes in a manner that 
will permit non-displayed prices in the regular trading increments in 
all options classes, and that its proposed rule is not intended to be 
broader than what has previously been approved by the Commission.\193\ 
To clarify this point, MIAX revised Rule 516(b)(3) to state that non-
displayed penny orders would only be accepted in designated classes and 
must have a minimum pricing variation larger than one penny.\194\
---------------------------------------------------------------------------

    \187\ In its comment letter, ISE disagreed with the broad 
statement in Exhibit E of MIAX's Form 1 application that says that 
orders and quotes will be displayed at the price specified by the 
submitting member. ISE points out that there are two additional 
instances, beyond what MIAX described in its Exhibit E, where an 
order or quote will not be displayed at the submitted price: (1) 
Customer interest (either Professional or Priority customers) that 
is marked Do Not Route that would lock or cross the NBBO; and (2) 
market maker quotes and orders that would trade through the ABBO. 
See ISE Letter, supra note 3, at 1-2. In each case, the orders will 
be displayed one minimum price variation away from the opposite side 
NBBO, but will remain available for execution on MIAX at the price 
that locks the NBBO. See ISE Letter, supra note 3, at 1-2. In 
response, MIAX revised Exhibit E to note all instances of when 
orders and quotes will not be displayed or will be displayed at one 
price and executable at a different price. See MIAX Response Letter, 
supra note 4, at 3-4.
    \188\ See MIAX Rule 516(b)(4) (Non-displayed Penny Order). This 
functionality is based on similar rules of other exchanges. See, 
e.g., CBOE Rule 6.13B (Penny Price Improvement).
    \189\ See ISE Letter, supra note 3, at 2.
    \190\ See id.
    \191\ See MIAX Response Letter, supra note 4, at 9.
    \192\ See id.
    \193\ See id.
    \194\ See id.
---------------------------------------------------------------------------

    In its comment letter, NASDAQ notes that proposed MIAX Rule 
516(b)(4) is silent on what would happen if a member attempted to 
submit a non-displayed penny order in an option that is not eligible 
for such orders.\195\ In response, MIAX amended proposed MIAX Rule 
516(b)(3) to state that such order would be rejected.\196\
---------------------------------------------------------------------------

    \195\ See NASDAQ Letter, supra note 3, at 3.
    \196\ See MIAX Response Letter, supra note 4, at 9.
---------------------------------------------------------------------------

    Members may submit the following types of orders: Market; Limit 
(including Marketable Limit, Fill-or-Kill, Immediate-or-Cancel, Non-
Displayed Penny,\197\ and Auction or Cancel (``AOC'')); WAIT; \198\ 
Attributable; Intermarket Sweep (``ISO''); Do Not Route; \199\ Opening; 
Customer Cross; Qualified Contingent Cross; Day Limit; and Good `Til 
Cancelled.\200\ With the exception of the AOC Order, which is unique to 
MIAX, all of these order types are based on similar order types 
available on other options exchanges.\201\ MIAX's AOC Order is a limit 
order which is used to provide liquidity during a specific MIAX 
Exchange mechanism (e.g., the opening imbalance mechanism in MIAX Rule 
503) with a time in force that corresponds to the duration of that 
event.\202\ In other words, such an order would automatically expire at 
the end of the auction or event. AOC Orders are not displayed to any 
market participant, are not included in the MIAX best bid or offer, are 
not eligible for trading outside of the event, and may not be routed. 
The Commission believes that this order type, while not specifically 
based on an order type on another exchange, is substantially similar to 
order types approved by the Commission on other exchanges for use in 
various auction mechanisms, which are similarly not displayed to any 
participant and have a limited time in force related to the auction, 
and thus raises no new regulatory issues.\203\
---------------------------------------------------------------------------

    \197\ See supra note 188.
    \198\ ``WAIT'' orders are orders that, upon entry into the MIAX 
system, are held for one second without processing for potential 
display and/or execution. After one second, the order is processed 
for potential display and/or execution in accordance with all order 
entry instructions as determined by the entering party. See MIAX 
Rule 516(c). See also NYSE Arca Rule 6.62(w) (containing an 
identical type of WAIT Order).
    \199\ In its comment letter, ISE notes that MIAX Rule 520 does 
not address how hidden prices that may result from the display of Do 
Not Route orders are treated for the requirement to expose orders 
before attempting to trade against them. See ISE Letter, supra note 
3, at n. 6. MIAX clarified this point by revising Rule 520 
(Limitation on Orders) to add new Interpretation .04 stating that 
Market Maker orders and quotes displayed at a price other than their 
limit price or quote price as described in Rule 515(d), and orders 
subject to the managed interest process--which includes all Do Not 
Route orders that could not be executed in full and are not 
cancelled--are not deemed to be ``exposed'' for purposes of Rule 
520. See MIAX Response Letter, supra note 4, at 8-9.
    In addition, NASDAQ requests clarification on MIAX Rule 516(f) 
regarding Do Not Route orders and how they operate when the NBBO 
locks contemporaneously. See NASDAQ Letter, supra note 3, at 4. In 
response, MIAX revised MIAX Rule 516(g) (previously 516(f)) to 
clarify that a Do Not Route order may execute at a price equal to or 
better than, but not inferior to, the best away market price, and 
if, after exhausting interest on MIAX, the best away market remains 
and the Do Not Route order has not been fully executed, the order 
will be handled in accordance with MIAX's managed interest process. 
See MIAX Response Letter, supra note 4, at 7-8. MIAX further notes 
that in case of contemporaneous locks, Do Not Route orders will be 
handled as set forth in MIAX Rules 515 and 516. See MIAX Response 
Letter, supra note 4, at 8. Further, ISE requests a technical 
clarification about the use of the term ``away best bid/offer'' in 
MIAX Rule 516(f), and whether it is intended to be different from 
the term ``ABBO.'' See ISE Letter, supra note 3, at n. 3. In 
response, MIAX eliminated this term in Rule 516 and instead notes 
that the specifics for handling a Do Not Route Order are set forth 
in Rule 515(c)(2), which explains such orders' handling without 
using the term ``away best bid/offer.'' See MIAX Response Letter, 
supra note 4, at 7.
    \200\ See MIAX Rule 516 for a description of each of the order 
types. MIAX notes that not all of these order types will be 
available upon initiation of operations. Rather, MIAX Exchange will 
update members through Regulatory Circulars as to the order types 
that will be available initially. See also infra Section III(C)(5) 
(discussing various quote types that market makers may submit). 
NASDAQ argues that MIAX should be compelled to define which order 
types will be available and file changes when new order types are 
introduced. See NASDAQ Letter, supra note 3, at 3. In response, MIAX 
represents that it plans to use each of the order types listed in 
Rule 516 in the foreseeable future and states that it believes that 
its rule provides adequate detail about each order type. See MIAX 
Response Letter, supra note 4, at 14. In addition, MIAX represents 
that it will file a proposed rule change whenever it seeks to 
introduce a new order type. See MIAX Response Letter, supra note 4, 
at 14-15. The Commission agrees that MIAX has appropriately set 
forth in its rules the order types that it plans to introduce, has 
represented that it intends to utilize all of the proposed order 
types contained in its current proposed rules, and has acknowledged 
that it will need to file a proposed rule change if it ever seeks to 
introduce additional new order types.
    \201\ See, e.g., NOM Chapter VI, Section 1(g)(5) (WAIT Order); 
ISE rule 715(h) (Attributable Order); NOM Chapter VI, Section 
1(e)(8) (Intermarket Sweep Order); Phlx Rule 1080(m)(iv)(A) (Do Not 
Route Order); ISE Rule 714(i) (Customer Cross Order); ISE Rule 
715(j) (Qualified Contingent Cross Order); NYSE MKT Rule 131 (Day 
Order and Good `Til Cancelled Order).
    \202\ See MIAX Rule 517(a)(2)(ii).
    \203\ See, e.g., CBOE Rule 6.13A, Simple Auction Liaison 
(``SAL''). See also Securities Exchange Act Release No. 54229 (July 
27, 2006), 71 FR 44058 (August 3, 2006) (CBOE-2005-90) (order 
approving a proposal to adopt a Simple Auction Liaison system to 
auction qualifying inbound orders for potential price improvement).
---------------------------------------------------------------------------

    Trades will execute on MIAX when orders or quotes on the MIAX order 
book match one another.\204\ The MIAX system will continuously and 
automatically match orders pursuant to

[[Page 73078]]

either price/time priority or pro-rata priority, as determined by MIAX 
on a class-by-class basis.\205\
---------------------------------------------------------------------------

    \204\ NASDAQ points out that MIAX Rules 511 (Acceptance of 
Quotes and Orders) and 512 (Contract Made on Acceptance of Bid or 
Offer) appear to be duplicative. See NASDAQ Letter, supra note 3, at 
4. In response, MIAX has deleted MIAX Rule 512 as duplicative. See 
MIAX Response Letter, supra note 4, at 13.
    \205\ See MIAX Rule 514.
---------------------------------------------------------------------------

    MIAX also will offer additional priority overlays at its discretion 
on a class-by-class basis, which include ``Priority Customer'' and 
``Market Turner'' overlays. Priority overlays would only be applicable 
for pro rata priority.\206\ Under the ``Priority Customer'' overlay, 
the highest bid and lowest offer will have priority except that 
Priority Customer orders \207\ will have priority over ``professional 
interest'' \208\ and all Market Maker interest at the same price.\209\ 
If there were two or more Priority Customer orders for the same options 
series at the same price, priority would be afforded based on the 
sequence in which such orders were received. This priority overlay is 
the same as public customer priority overlays that have been approved 
by the Commission on other exchanges.\210\
---------------------------------------------------------------------------

    \206\ See Amendment No. 1. See also infra notes 218 to 224 and 
accompanying text (describing more completely the revisions MIAX 
made to the priority rules in response to comments).
    \207\ MIAX rules define ``priority customer'' as a person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
does not place more than 390 orders in listed options per day on 
average during a calendar month for its own beneficial account(s). 
See MIAX Rule 100. See also ISE Rule 100(a)(37A) (containing an 
identical definition of ``priority customer'').
    \208\ Pursuant to MIAX Rule 100, ``professional interest'' 
includes: (i) An order that is for the account of a person or entity 
that is not a Priority Customer, and (ii) an order or non-priority 
quote for the account of a Market Maker. See also infra notes 284-
290 for a discussion of ``priority'' and ``non-priority'' quotes.
    \209\ See MIAX Rule 514(d)(1).
    \210\ See, e.g., CBOE Rule 6.45A(a)(ii)(1).
---------------------------------------------------------------------------

    Under the ``Market Turner'' priority overlay, the ``Market Turner'' 
refers to the participant that was the first to enter an order or quote 
at a better price than the previous best disseminated MIAX price, where 
such order or quote is continuously in the market until the order or 
quote trades. When this priority overlay is in effect, the Market 
Turner would have priority at the highest bid or lowest offer that he 
or she established.\211\ The Commission notes that an identical Market 
Turner priority overlay has been approved for use on another 
exchange.\212\
---------------------------------------------------------------------------

    \211\ See MIAX Rule 514(d)(2).
    \212\ See CBOE Rule 6.45A(a)(iii)(2).
---------------------------------------------------------------------------

    In its comment letter, ISE asks for clarification on the proposed 
execution priority provisions, including priority overlays. 
Specifically, ISE believes that it is difficult to understand how the 
different combinations or allocation methodologies, priority overlays, 
and entitlements will work.\213\ ISE noted that the Form 1, by design, 
does not require a level of detail and discussion, as well as statutory 
analysis, which is required in SRO proposed rule changes filed on Form 
19b-4.\214\ For example, ISE presents an example of an allocation 
methodology that consists of pro rata with a Priority Customer and 
Market Turner overlays and asks how the overlays would interact with 
each other on MIAX.\215\ NASDAQ also asks whether the priority 
provisions contained in MIAX Rule 514, when read in conjunction with 
the execution processes in MIAX Rule 515, might result in the ability 
for directing or internalizing orders in a new way.\216\ In particular, 
NASDAQ asks about the interplay between the market turner overlay, non-
displayed penny orders, and the liquidity refresh pause.\217\
---------------------------------------------------------------------------

    \213\ See ISE Letter, supra note 3, at 3.
    \214\ See id.
    \215\ See id.
    \216\ See NASDAQ Letter, supra note 3, at 2.
    \217\ See id.
---------------------------------------------------------------------------

    In response, MIAX amended proposed MIAX Rules 514 and 515 to 
clarify the operation of two different trade allocation methodologies 
(i.e., price-time and pro rata) with the possible priority overlays, 
which includes clarification of the different priority overlays that 
are applicable to a pro rata allocation methodology.\218\ Specifically, 
MIAX revised proposed Rule 514 to clarify that the Market Turner 
overlay will never be in effect in conjunction with any other priority 
overlays, and that the priority overlays are only applicable to the pro 
rata allocation methodology (i.e., the priority overlays cannot be used 
in conjunction with the price time methodology).\219\ MIAX also 
clarified in Rule 514(d) that market maker priority quotes have 
precedence over other professional interest under the pro rata 
methodology only (i.e., priority quotes would not have precedence under 
the price time methodology).\220\
---------------------------------------------------------------------------

    \218\ See MIAX Response Letter, supra note 4, at 10-11.
    \219\ See id.
    \220\ See id. See also infra Section III(C)(5) for a more 
detailed discussion of priority quotes.
---------------------------------------------------------------------------

    In addition, MIAX expanded the discussion in Exhibit E to its Form 
1 application to provide a detailed description of how the different 
trade allocation and priority overlays would operate.\221\ MIAX also 
provided a series of examples to illustrate the proposed operation of 
its execution rule.\222\ MIAX states that the clarifications to the 
rule text make clear that it has no intention to allow for the ability 
for directing or internalizing orders in a way not previously approved 
by the Commission.\223\ Further, in response to NASDAQ, MIAX stated 
that it does not believe that there is any unique aspect to the 
operation of the market turner priority overlay, the liquidity refresh 
pause, or the rules related to non-displayed penny orders on MIAX or 
the overall functionality of these features when used in combination on 
the Exchange.\224\
---------------------------------------------------------------------------

    \221\ See MIAX Response Letter, supra note 4, at 10.
    \222\ See Amendment No. 1.
    \223\ See MIAX Response Letter, supra note 4, at 2.
    \224\ See id.
---------------------------------------------------------------------------

    In addition, proposed MIAX rules provide that it may grant Primary 
Lead Market Makers and Lead Market Makers certain participation 
entitlements. For example, Primary Lead Market Makers \225\ may be 
entitled to a participation entitlement with respect to each incoming 
order if they have a priority quote \226\ at the National Best Bid and 
Offer (``NBBO'').\227\ The Primary Lead Market Maker participation 
entitlements will only be in effect if the Priority Customer overlay 
also is in effect and will apply only to any remaining balance after 
any Priority Customer orders have first been satisfied.\228\ Further, 
neither a Primary Lead Market Maker nor a Lead Market Maker could be 
allocated a total quantity greater than the quantity they are quoting 
at the execution price, and they will not receive any further 
allocation of an order if they receive a participation 
entitlement.\229\
---------------------------------------------------------------------------

    \225\ See supra Section III(C)(3) (discussing the various 
categories of Market Makers, including Primary Lead Market Makers).
    \226\ See infra Section III(C)(5) (discussing priority quotes).
    \227\ See MIAX Rule 514(g). Specifically, the Primary Lead 
Market Maker's participation entitlement will be equal to the 
greater of: (i) The proportion of the total size at the best price 
represented by the size of its quote, or (ii) 60% of the contracts 
to be allocated if there is only one other Market Maker quotation at 
the NBBO or 40% if there are two or more other Market Maker quotes 
at the NBBO. See MIAX Rule 514(g)(1).
    \228\ See MIAX Rule 514(g).
    \229\ See MIAX Rule 514(i)(4).
---------------------------------------------------------------------------

    Another such entitlement provides that small size orders (i.e., 
five or fewer contracts) will be allocated in full to the Primary Lead 
Market Maker if it has a priority quote at the NBBO.\230\ In its 
comment letter, NASDAQ commented that MIAX Rule 514(g)(2), which 
provides this small order preference to Primary Lead Market Makers, 
states that small size is ``initially'' defined as 5 or fewer 
contracts.\231\ NASDAQ argues that

[[Page 73079]]

MIAX should not be allowed to have the discretion to change that number 
without filing a proposed rule change, and worries that MIAX might seek 
to unilaterally define such orders as ``10 or 50 contracts'' without 
first submitting a rule filing.\232\ In response, MIAX amended Rule 
514(g)(2) to avoid any doubt by stating that ``small size orders are 
defined as five (5) or fewer contracts.'' \233\ MIAX further represents 
that any changes to the small size order rule would be made pursuant a 
subsequent proposed rule change filing with the Commission.\234\
---------------------------------------------------------------------------

    \230\ See MIAX Rule 514(g)(2). The rule provides that MIAX 
Exchange will review the functioning of this provision quarterly to 
make sure that small size orders do not account for more than 40% of 
the volume executed on MIAX.
    \231\ See NASDAQ Letter, supra note 3, at 3.
    \232\ See id.
    \233\ See MIAX Response Letter, supra note 4, at 13.
    \234\ See id.
---------------------------------------------------------------------------

    MIAX also permits Electronic Exchange Members \235\ to utilize 
Directed Orders.\236\ A ``Directed Order'' refers to an order that an 
Electronic Exchange Member enters into the MIAX system and directs to a 
particular Lead Market Maker, including a Primary Lead Market Maker 
\237\ (``Directed Lead Market Maker''). The Lead Market Maker must have 
an appointment in the relevant options class to receive a Directed 
Order in that class. A Directed Lead Market Maker may be granted a 
participation entitlement if he or she has a priority quote at the 
NBBO.\238\ The Directed Lead Market Maker participation entitlement 
will only be in effect if the Priority Customer overlay also is in 
effect and will apply only to any remaining balance after Priority 
Customer orders have first been satisfied. The Commission believes that 
these participation entitlements for Primary Lead Market Makers and 
Directed Lead Market Makers are consistent with those that the 
Commission has approved for other exchanges.\239\ Further, the 
Commission believes that these entitlements are appropriately balanced 
by the obligations imposed on these classes of market makers, as 
discussed in detail above.\240\ In particular, the Commission notes 
that Primary Lead Market Makers and Lead Market Makers are subject to 
higher quoting obligations than other Registered Market Makers who are 
not eligible to receive the aforementioned participation 
entitlements.\241\ Therefore, the Commission believes that the proposed 
rules regarding participation entitlements are consistent with the Act.
---------------------------------------------------------------------------

    \235\ An Electronic Exchange Member is the holder of a trading 
permit who is not a Market Maker. See MIAX Rule 100.
    \236\ See MIAX Rule 514(h).
    \237\ See supra Section III(C)(3) (discussing the various 
categories of market makers, including Lead Market Makers).
    \238\ See MIAX Rule 514(h). Specifically, the Directed Lead 
Market Maker's participation entitlement will be equal to the 
greater of: (i) The proportion of the total size at the best price 
represented by the size of its quote; or (ii) 60% of the contracts 
to be allocated if there is only one other Market Maker quotation at 
the NBBO or 40% if there are two or more other Market Maker quotes 
at the NBBO.
    \239\ See, e.g., ISE Rule 713, Supp. 01 and .03.
    \240\ See supra Section III(C)(3)(b) (discussing market maker 
obligations).
    \241\ As discussed above, supra Section III(C)(3)(b), Primary 
Lead Market Makers must provide continuous two-sided quotes 99% of 
the time in: (i) The lesser of 99% of the series, or 100% of the 
series minus one put-call pair, in each appointed class that is 
traded on at least one other exchange; and (ii) 100% of the series 
in each appointed class that is singly listed on MIAX. See MIAX Rule 
604(e)(1). Lead Market Makers must provide continuous two-sided 
quotes 90% of the time in 90% of the series in each of its appointed 
classes. See MIAX Rule 604(e)(2).
---------------------------------------------------------------------------

    In its comment letter, ISE identifies several proposed MIAX rules 
that ISE believes would benefit from increased detail or description. 
For example, ISE opines that certain aspects of Rule 514 (regarding 
quote priority) and Rule 515 (regarding processing of orders and 
quotes) may be novel.\242\ In response, MIAX states that it does not 
believe that any aspects of MIAX Rules 514 or 515 raise new issues not 
previously addressed by the Commission; nevertheless MIAX made 
revisions to those rules to clarify their operation.\243\
---------------------------------------------------------------------------

    \242\ See ISE Letter, supra note 3, at 1.
    \243\ See MIAX Response Letter, supra note 4, at 2.
---------------------------------------------------------------------------

    In its comment letter, NASDAQ expresses concern over a few MIAX 
rules that used terms such as ``from time to time'' or ``may.'' \244\ 
For example, NASDAQ notes MIAX Rule 514(j) that says MIAX may, from 
time to time, make available to members the quantity of Priority 
Customer contracts included in its best bid and offer.\245\ NASDAQ 
questions when MIAX might do this and asks whether this would be a 
market data feed.\246\ NASDAQ asks for a more detailed description of 
this provision, and recommends that it not be adopted at this time if 
MIAX is not prepared to roll it out at its commencement of 
operations.\247\ In response, MIAX revised several of its proposed 
rules to add further detail including changing the terms ``from time to 
time'' or ``may'' to a more definitive ``will'' or a more specific time 
frame.\248\ For example, MIAX revised MIAX Rule 503(b) concerning 
openings to clarify that the procedure described in that rule ``will'' 
be used to reopen a class after a trading halt.\249\ In addition, MIAX 
amended MIAX Rule 514(h) to provide that eligible order types for 
Directed Lead Market Makers will only be set forth in the MIAX Rules 
and not by regulatory circular.\250\ Further, MIAX deleted MIAX Rule 
514(j) and instead has included text in MIAX Rule 506 to clarify that 
it ``will'' make available to subscribers of its data feeds and to all 
market participants through the public data feed an indication when 
there is Public Customer interest included in the MBBO.\251\
---------------------------------------------------------------------------

    \244\ See NASDAQ Letter, supra note 3, at 2.
    \245\ See id.
    \246\ See id.
    \247\ See id.
    \248\ See MIAX Response Letter, supra note 4, at 12-13.
    \249\ See id.
    \250\ See id. at 13.
    \251\ See id. at 12.
---------------------------------------------------------------------------

    In addition, NASDAQ recommends that MIAX Rule 503(h) and (i), which 
use the term ``may,'' should be clarified to specify how a closing 
procedure would be employed after the close of the market.\252\ In 
response, as noted above, MIAX revised MIAX Rule 503 to replace the 
word ``may'' with the word ``will'' to clarify that the procedure 
described in that rule ``will'' be used to reopen a class after a 
trading halt.\253\ Further, MIAX deleted MIAX Rule 503(i) concerning 
rotations in the event of a trading halt in a proprietary product 
because MIAX does not have any proprietary products at the time and 
that provision would be inapplicable currently.\254\
---------------------------------------------------------------------------

    \252\ See NASDAQ Letter, supra note 3, at 2.
    \253\ See MIAX Response Letter, supra note 4, at 13.
    \254\ See id. at 12.
---------------------------------------------------------------------------

    NASDAQ also requests clarification on MIAX Rule 503(e)(1) 
concerning the opening process, and in particular, whether MIAX would 
consider off-exchange trades or trades on markets other than the 
primary market when it decides whether to open an option class for 
trading.\255\ In response, MIAX revised MIAX Rule 503(e)(1) to clarify 
that the opening process will begin following the dissemination of a 
quote or trade in the ``market for the underlying security,'' which 
MIAX previously defined in MIAX Rule 503(d) as either the primary 
listing market, the primary volume market, or the first market to open 
the underlying security, as determined on a class-by-class basis and 
announced to members in advance.\256\
---------------------------------------------------------------------------

    \255\ See NASDAQ Letter, supra note 3, at 2.
    \256\ See MIAX Response Letter, supra note 4, at 13.
---------------------------------------------------------------------------

    Further, NASDAQ recommends that MIAX Rule 503(g) be clarified to be 
more specific about when the Help Desk may deviate from the standard 
manner of the opening procedure.\257\ In response, MIAX revised Rule 
503 to note that the Help Desk may delay (rather than ``deviate'') the 
opening procedure when necessary in the interests of maintaining a fair 
and

[[Page 73080]]

orderly market.\258\ MIAX notes that Phlx Rule 1047(c) similarly allows 
an exchange official to delay the opening procedure, and that the Phlx 
rule provides the same level of detail as the revised MIAX rule.\259\
---------------------------------------------------------------------------

    \257\ See NASDAQ Letter, supra note 3, at 2.
    \258\ See MIAX Response Letter, supra note 4, at 12.
    \259\ See id. at 14.
---------------------------------------------------------------------------

    NASDAQ believes that MIAX's proposed rule text provides MIAX with 
too much discretion concerning the order types that initially will be 
available for use on MIAX, and argues that MIAX should be compelled to 
define which order types will be available when and file new rule 
changes when new order types are introduced or when order types are 
processed differently.\260\
---------------------------------------------------------------------------

    \260\ See NASDAQ Letter, supra note 3, at 2-3. NASDAQ notes that 
existing exchanges are required to file detailed rule changes that 
describe how a proposed rule would work. See id. NASDAQ notes that 
the details and specific functionality are important to users, who 
need to understand how their orders will be handled in various 
situations. See id. at 3.
---------------------------------------------------------------------------

    For example, NASDAQ notes MIAX Rule 516 states that ``not all order 
types listed and described in this rule will be initially available for 
use on the Exchange.'' \261\ NASDAQ argues that, if the functionality 
related to certain order and quote types is not available on MIAX, then 
MIAX should specify in its rules what is available and file proposed 
rule changes when it introduces additional order or quote types and 
related functionality.\262\ In response, MIAX believes it is 
permissible and appropriate to list in its rules all order and quote 
types that it intends to use soon after it commences operations, 
provided that the applicable rules contain a sufficient level of detail 
about each order and quote type.\263\ MIAX believes that MIAX Rules 516 
and 517 provide adequate detail on each of the order and quote types 
listed therein.\264\ MIAX further believes that it is appropriate to 
use a regulatory circular to specify which order and quote types have 
been activated from among those specified in its rules.\265\ MIAX 
represents that it intends to activate in the foreseeable future each 
of the proposed order and quote types contained in its proposed 
rules.\266\
---------------------------------------------------------------------------

    \261\ See NASDAQ Letter, supra note 3, at 2.
    \262\ See id. at 3. For example, NASDAQ notes that MIAX Rule 
516(d) says that Attributable Orders may not be available for all 
MIAX systems and MIAX would issue a Regulatory Circular specifying 
which systems and class of securities will have Attributable Orders. 
See id. In response, MIAX has revised Rule 516(e) (previously Rule 
516(d)) to clarify that Attributable Orders will be available in the 
MIAX system on initial launch. See MIAX Response Letter, supra note 
4, at 8.
    \263\ See MIAX Response Letter, supra note 4, at 14-15.
    \264\ See id. MIAX notes that other exchanges have similar 
rules, for example C2 Options Exchange.
    \265\ See id.
    \266\ See id. at 14.
---------------------------------------------------------------------------

    In addition, NASDAQ notes that MIAX Rule 514(g)(2) states that MIAX 
will advise membership through a Regulatory Circular when additional 
order types are eligible to be directed.\267\ NASDAQ believes this 
flexibility may be problematic, and notes that directed orders can 
warrant additional regulatory scrutiny in light of the issues 
surrounding participation guarantees that usually accompany directed 
orders.\268\ In response, MIAX amended MIAX Rule 514(h)(2) to remove 
its ability to specify this information in a regulatory circular and 
instead represents that it will submit a rule filing with the 
Commission when it proposes to extend directed order functionality to 
additional order types.\269\ MIAX further represents that any order 
types eligible to be directed will be set forth in the MIAX rules.\270\
---------------------------------------------------------------------------

    \267\ See NASDAQ Letter, supra note 3, at 3.
    \268\ See id.
    \269\ See MIAX Response Letter, supra note 4, at 13.
    \270\ See id.
---------------------------------------------------------------------------

    The Commission believes that MIAX Exchange's proposed display, 
execution, and priority rules discussed above in this section are 
consistent with the Act. In particular, the Commission finds that the 
proposed rules are consistent with Section 6(b)(5) of the Act,\271\ 
which, among other things, requires that the rules of a national 
securities exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest, and to not permit unfair discrimination between 
customers, issuers, or dealers. The Commission also finds that the 
proposed rules are consistent with Section 6(b)(8) of the Act,\272\ 
which requires that the rules of an exchange not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The trading rules of MIAX are substantially 
similar to the current trading rules of other exchanges, as noted 
above, which were filed with and approved by the Commission (or 
otherwise became effective) pursuant to Section 19(b) of the Act. 
Therefore, the Commission believes that these rules raise no new 
regulatory issues and are consistent with the Act. However, certain 
MIAX trading rules are, in fact, novel in some respect or unique to 
MIAX and may not be similarly based on the existing rules of other 
exchanges. The trading rules that are novel or unique to MIAX, 
including the use of eQuotes, priority quotes, and exposure mechanisms, 
are discussed separately in detail below.
---------------------------------------------------------------------------

    \271\ 15 U.S.C. 78f(b)(5).
    \272\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

5. eQuotes and Priority Quotes
    The MIAX rules provide that Market Makers will be permitted to 
submit bids and offers to MIAX as orders, Standard quotes, or 
``eQuotes.'' \273\ Standard quotes refer to the traditional type of 
quotes that exist on other markets, and submission of a Standard quote 
by a Market Maker will cancel and replace any previously submitted 
Standard quote by the Market Maker.\274\ In contrast, eQuotes will be 
quotes with a specific time in force, and Market Makers will be 
permitted to submit multiple eQuotes to MIAX Exchange (in addition to 
their single Standard quote).\275\ In other words, the submission of an 
eQuote will not replace an existing Standard quote or eQuote. Thus, 
while Market Makers could only have one Standard quote active at any 
one time, they will be permitted to have multiple types of eQuotes 
active in a single series. The types of eQuotes available on MIAX will 
include Day eQuotes, Auction or Cancel (``AOC'') eQuotes, Opening Only 
(``OPG'') eQuotes, Immediate or Cancel (``IOC'') eQuotes, Fill or Kill 
eQuotes (``FOK''), and Intermarket Sweep eQuotes.\276\ MIAX's proposed 
eQuote types are analogous to order types, often of the same name, that 
could be used by members and Market Makers on MIAX, as discussed above, 
except that the eQuotes would be submitted by Market Makers through 
their quote handling

[[Page 73081]]

terminal and may receive priority over other orders and quotes, as 
discussed below.\277\
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    \273\ See MIAX Rule 517.
    \274\ See MIAX 517(a)(1).
    \275\ While Market Makers would be permitted to layer the book 
with multiple types of quotes, MIAX Rule 517(a)(2)(i) provides that 
one type of eQuote, the Day eQuote, will have limitations as to the 
number of such quotes that a single Market Maker could place on the 
same side of an individual option. This limitation is no more than 
10 Day eQuotes on the same side of an individual option (as that 
term is defined in MIAX Rule 100), and the specific limit within 
this range would be sent to members through a Regulatory Circular. 
The same limit will apply to all types of Market Makers. MIAX has 
stated in its Form 1 that it does not intend to allow to the use of 
Day eQuotes upon initiation of its operations. See Exhibit E of 
MIAX's Form 1 Application.
    \276\ See MIAX Rule 517(a)(2) for a description of each of the 
e-Quote types. MIAX notes that not all of these order types will be 
available upon initiation of operations. Rather, MIAX will update 
members through Regulatory Circulars as to the order types that 
initially will be available and as additional order types become 
available.
    \277\ NASDAQ pointed out an inconsistency between MIAX's 
proposed Rule 612(a) and MIAX's technical system specifications, as 
the technical specifications say that eQuotes are not considered for 
purposes of the MIAX Aggregate Risk Manager. See NASDAQ Letter, 
supra note 3, at 3. NASDAQ recommended that MIAX clarify this point 
in its rule text. See id. In response, MIAX states that it believes 
the rule and the technical specifications are both correct as 
written. See MIAX Response Letter, supra note 4, at 15. 
Specifically, MIAX notes that it does not plan to support Day 
eQuotes at its initial launch. See id. Accordingly, the technical 
specifications are accurate in that Day eQuotes would not be 
considered at this time for purposes of the Aggregate Risk Manager. 
See id. The subsequent introduction by MIAX of Day eQuotes would 
require corresponding amendments to the technical specifications. 
See id.
---------------------------------------------------------------------------

    The Commission believes that the proposed eQuotes provisions are 
consistent with the Act. The Commission acknowledges that, while Market 
Maker ``quotes'' traditionally provide liquidity to the market, MIAX's 
proposed eQuotes will allow Market Makers to utilize various types of 
``quotes'' that may instead remove liquidity from the market. However, 
under MIAX's proposed rules, only certain types of quotes that provide 
liquidity (i.e., only Standard quotes and Day eQuotes) will be 
permitted to count toward a Market Maker's continuous quoting 
obligations.\278\ In other words, Market Makers on MIAX will still be 
required to post traditional, continuous two-sided quotes that provide 
liquidity to the market.
---------------------------------------------------------------------------

    \278\ See MIAX Rule 604(e); see also supra Section III(C)(3)(b) 
(discussing Market Maker obligations).
---------------------------------------------------------------------------

    Further, as noted above, the proposed eQuote types are largely 
analogous to orders, and other markets allow Market Makers to submit 
similar types of orders that also are not permitted to count towards a 
Market Maker's quoting obligations.\279\
---------------------------------------------------------------------------

    \279\ See, e.g., ISE Rule 805.
---------------------------------------------------------------------------

    The Commission notes that all quote types that may be submitted by 
Market Makers, whether Standard quotes or eQuotes, must be firm in 
accordance with the Market Maker's obligations under the MIAX rules 
\280\ and Rule 602 of Regulation NMS.\281\ However, the MIAX rules 
provide that bids and offers in certain of the eQuote types will not be 
disseminated to quotation vendors, including AOC eQuotes, OPG eQuotes, 
IOC eQuotes, FOK eQuotes, and Immediate or Cancel Intermarket Sweep 
Quotes. The Commission believes that this is consistent with the Act 
and Rule 602 of Regulation NMS due to the limited time in force or 
other contingencies associated with these particular eQuote types. Rule 
602 of Regulation NMS generally requires exchanges to make their best 
bids and offers in U.S.-listed securities available in the consolidated 
quotation data that is widely disseminated to the public.\282\ 
Paragraph (a)(1)(i)(A) of Rule 602, however, excludes bids and offers 
communicated on an exchange that either are executed immediately after 
communication or cancelled or withdrawn if not executed immediately 
after communication. The Commission believes that IOC eQuotes, FOK 
eQuotes, and Immediate or Cancel Intermarket Sweep Quotes fall within 
this exclusion under paragraph (a)(1)(i)(A) of Rule 602 and thus are 
consistent with the Act. Further, paragraph (a)(1)(i)(B) of Rule 602 
excludes any bid or offer communicated prior to the commencement of 
trading in a security. Accordingly, the Commission notes that OPG 
eQuotes, which are quotes that can be submitted by a Market Maker only 
during the opening and will expire at the end of the opening process, 
are excluded from the dissemination requirements of Rule 602. Finally, 
as noted above with respect to AOC orders, the Commission has 
previously approved similar order types as consistent with the Act that 
are used in various auction mechanisms on other exchanges that are not 
displayed to any market participants.\283\ The Commission believes that 
AOC eQuotes are analogous to these types of orders, and as such, the 
Commission believes that MIAX's proposal to not disseminate AOC eQuotes 
is consistent with the Act.
---------------------------------------------------------------------------

    \280\ See MIAX Rules 604(d) and 517.
    \281\ 17 CFR 242.602.
    \282\ See id.
    \283\ See supra note 203 and accompanying text.
---------------------------------------------------------------------------

    On MIAX, all Market Maker quotes will be designated as either 
``priority quotes'' or ``non-priority quotes.'' \284\ As clarified by 
MIAX in Amendment No. 1, to be considered a priority quote, the 
following standards must be met at the time of execution:
---------------------------------------------------------------------------

    \284\ See MIAX Rule 517(b).
---------------------------------------------------------------------------

    1. The Market Maker must have a two-sided quote pair that is valid 
width (i.e., it must meet the bid/ask differential requirements in MIAX 
Rule 603(b)(4) \285\ (i.e., a ``valid width quote''));
---------------------------------------------------------------------------

    \285\ MIAX Rule 603(b)(4) provides that, following the opening 
rotation, Market Makers must create differences of no more than $5 
between the bid and offer. Prior to the opening rotation, bid/ask 
differentials shall be no more than $.25 between the bid and offer 
for each option contract for which the bid is less than $2, no more 
than $.40 where the bid is at least $2 but does not exceed $5, no 
more than $.50 where the bid is more than $5 but does not exceed 
$10, no more than $.80 where the bid is more than $10 but does not 
exceed $20, and no more than $1 where the bid is more than $20, 
provided that MIAX may establish differences other than the above 
for one or more option.
---------------------------------------------------------------------------

    2. The initial size of both of the Market Maker's bid and offer 
must meet the minimum quote size requirements of MIAX Rule 604(b)(2);
    3. The bid/ask differential of the Market Maker's two-sided quote 
pair must meet the priority width requirements specified by MIAX for 
each option; \286\ and
---------------------------------------------------------------------------

    \286\ MIAX added text to MIAX Rule 517(b)(1)(ii) to clarify that 
MIAX will establish priority quote widths through a proposed rule 
change filed with the Commission, and the width could be as narrow 
as one MVP or as wide as, but not wider than, the bid/ask 
differentials in MIAX Rule 603(b)(4). See Amendment No. 1.
---------------------------------------------------------------------------

    4. Either of the following are true: (i) At the time a locking or 
crossing quote or order enters the MIAX system, the Market Maker's two-
sided quote pair is a valid width quote resting on the Book; or (ii) 
immediately prior to the time the Market Maker enters a new quote that 
locks or crosses the MBBO, the Market Maker must have had a valid width 
quote already existing (i.e., exclusive of the Market Maker's new 
marketable quote or update) among his two-sided quotes.\287\
---------------------------------------------------------------------------

    \287\ See MIAX Rule 517(b)(1)(i).
---------------------------------------------------------------------------

    When determining whether a Market Maker has a valid width quote, 
MIAX will consider only Standard quotes and Day eQuotes.\288\ In the 
event that a Market Maker has a priority quote on MIAX Exchange, all of 
that Market Maker's quotes (including all Standard quotes and eQuotes) 
would be entitled to have precedence over all other ``Professional 
Interest'' \289\ (i.e., non-Priority Customer orders, Market Maker 
orders, and non-priority quotes) at the same price in accordance with 
MIAX Rule 514(e).\290\
---------------------------------------------------------------------------

    \288\ See MIAX Rule 517(b)(2).
    \289\ See MIAX Rule 100 and supra note 208
    \290\ See MIAX Rules 517(b)(1) and 514(e).
---------------------------------------------------------------------------

    In its comment letter, ISE asks about MIAX Rule 514(e) and whether 
a Market Maker priority quote has precedence over other professional 
interest under both pro rata priority and price time priority, as well 
as when executing against an Intermarket Sweep Order.\291\ In response, 
MIAX revised MIAX Rule 514(e) to clarify that Market Maker priority 
quotes will have precedence over other professional interest under the 
pro rata allocation methodology but not under the price time 
methodology.\292\
---------------------------------------------------------------------------

    \291\ See ISE Letter, supra note 3, at 4.
    \292\ See Amendment No. 1 and MIAX Response Letter, supra note 
4, at 10. MIAX also clarified that a Market Maker will have 
precedence over other professional interest when MIAX receives an 
Intermarket Sweep Order at a price inferior to the NBBO. See id.
---------------------------------------------------------------------------

    Further, ISE commented on MIAX Rule 603 and the priority quote 
provision. ISE believes that quote width

[[Page 73082]]

violations would not be ``against the rules'' on MIAX, and also 
questions whether the priority quote provision is an appropriate 
``heightened'' quotation requirement for a Market Maker to obtain a 
``priority quote''.\293\ While stating that it would not object to this 
approach, ISE requests that the Commission, if it approves MIAX's 
registration, to set forth the statutory basis for allowing a Market 
Maker to obtain a priority over other professional interests via a 
priority quote.\294\ In response, MIAX added text to MIAX Rule 517(b) 
to clarify that MIAX would establish the priority quote width 
requirement through a proposed rule change filed with the Commission, 
and the requirement can have bid/ask differentials as narrow as one 
minimum price variation or as wide as, but never wider than, the 
minimum bid/ask differentials contained in MIAX Rule 603.\295\ MIAX 
represented that the priority quote width standards ``will be in 
addition to and generally more stringent than the regulatory 
requirements applied to Market Makers,'' and that ``the categorization 
of Market Maker quotes as priority and non-priority allows the Exchange 
to provide incentives to its Market Makers to provide tighter 
markets.'' \296\ Until MIAX establishes narrower priority quote width 
requirements, however, the priority quote width will be the standard 
bid/ask differentials contained in MIAX Rule 603.\297\ In addition, 
MIAX clarified that the initial size of the bid and the offer for a 
priority quote must meet the minimum size requirement of MIAX Rule 
604(b)(2).\298\ Further, MIAX affirms that there is, despite ISE's 
assumption to the contrary, a maximum market quotation spread 
requirement during regular market hours.\299\ Thus, a violation of the 
quote width requirements contained in MIAX Rule 603, which is a free-
standing rule, would constitute a rule violation separate and apart 
from the priority quote provisions and would subject a market maker to 
disciplinary action.\300\
---------------------------------------------------------------------------

    \293\ See ISE Letter, supra note 3, at 4. MIAX responded that 
ISE's assumption was incorrect, and MIAX affirmed that market makers 
may be subject to disciplinary action if their quotation spread 
exceeds $5. See MIAX Response Letter, supra note 4, at 11.
    \294\ See ISE Letter, supra note 3, at 5.
    \295\ See Amendment No. 1 and MIAX Response Letter, supra note 
4, at 11-12.
    \296\ See MIAX Response Letter, supra note 4, at 11.
    \297\ See Amendment 1 (revising MIAX Rule 517(b)(ii)).
    \298\ See MIAX Response Letter, supra note 4, at 11.
    \299\ See id.
    \300\ See id.
---------------------------------------------------------------------------

    The Commission believes that it is appropriate and consistent with 
the Act for MIAX to provide its Market Makers that are meeting their 
priority quote width obligations with precedence over other 
Professional interest in the manner that MIAX has proposed. MIAX's 
proposed priority quote rule and the precedence afforded to Market 
Makers that maintain a priority quote provides Market Makers with a 
benefit in return for the obligations to the market that they have 
assumed (e.g., the obligation to supply a continuous quote), while 
Market Makers will have precedence at the same price over other 
Professional participants that either do not have any obligations 
(i.e., non-Market Maker Professional interest) or participants that are 
not quoting valid width markets (i.e., other Market Makers).\301\ As 
discussed in further detail above, the Commission previously has 
recognized that, due to the obligations imposed on market makers, it is 
appropriate and consistent with the Act to confer certain corresponding 
benefits on them.\302\ In the event a professional participant wanted 
to receive the benefits of becoming a market maker, it could apply to 
register as a market maker, subject to the Exchange's registration 
requirements and the participant's willingness to undertake the 
applicable obligations.\303\ Further, at least one other exchange 
affords market makers precedence over other professional interest in a 
manner similar to the MIAX rules.\304\
---------------------------------------------------------------------------

    \301\ See Phlx Rule 1000(b)(14) (defining a ``professional'' to 
mean any person or entity that (i) is not a broker or dealer in 
securities, and (ii) places more than 390 orders in listed options 
per day on average during a calendar month for its own beneficial 
account(s), and providing that, subject to limited exceptions, ``[a] 
professional will be treated in the same manner as an off-floor 
broker-dealer for purposes of Rules 1014(g) * * *'').
    \302\ See infra Section III(C)(3)(b) (discussing Market Maker 
obligations and benefits).
    \303\ In Amendment No. 1, MIAX revised the maximum number of 
Market Makers allowed to quote per class up to 50 from 10. See 
Amendment 1 (revising rule 602(c)(2) to increase the Class Quoting 
Limit to 50 from 10). MIAX notes that a class quoting limit of 50 
Market Makers is consistent with the practice at other exchanges 
(see, e.g., CBOE Rule 8.3A and C2 Rule 8.11). See MIAX Response 
Letter, supra note 4, at 12. In addition, the higher limit will 
provide additional opportunity for interested participants to become 
Market Makers on MIAX and avail themselves of the benefits afforded 
to Market Makers on MIAX in return for undertaking the applicable 
obligations to the MIAX market. See id.
    \304\ See Phlx Rule 1014(g)(vii). Unlike MIAX's proposed rule, 
the Phlx rule provides that, for automatically executed trades, all 
market makers have precedence over other market participants, 
irrespective of whether such market makers are meeting their bid-ask 
differential requirements. In addition, NASDAQ BX has filed a 
proposed rule change to provide similar precedence for its market 
makers. See Securities Exchange Act Release No. 68041 (October 11, 
2012), 77 FR 63903 (October 17, 2012) (BX-2012-065).
     In addition, MIAX's priority quote proposal establishes a 
framework that could readily take into account future efforts by 
MIAX, which would be submitted pursuant to a proposed rule change 
submitted in accordance with Section 19 of the Act, to reduce and 
further narrow the maximum permitted width from the standard maximum 
$5 width, which is the current standard among U.S. options 
exchanges. If it does so, MIAX's system would provide an additional 
incentive for Market Makers to provide these narrower valid width 
quotes at all times through affording them precedence in return for 
their increased obligations.
    At the same time, the Commission acknowledges that MIAX's 
current proposed bid/ask differential requirement (i.e., $5 
following the opening) is in line with the current industry standard 
among the options exchanges. Thus, MIAX will provide precedence to 
Market Makers based on a proposed quote width standard that is, at 
present, no more strict than other markets. However, as noted above, 
even if MIAX does not ultimately impose a narrower valid priority 
quote width, MIAX's proposal is consistent with the rules of two 
other exchanges, which provide such precedence to market makers 
without regard to whether they are meeting their bid-ask 
differential requirements.
---------------------------------------------------------------------------

6. Section 11(a) of the Act
    Section 11(a)(1) of the Act \305\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts''), unless an exception applies.
---------------------------------------------------------------------------

    \305\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

    Rule 11a2-2(T) under the Act,\306\ known as the ``effect versus 
execute'' rule, provides exchange members with an exemption from the 
Section 11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange 
member, subject to certain conditions, to effect transactions for 
covered accounts by arranging for an unaffiliated member to execute the 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (1) Must transmit the order from off the exchange 
floor; (2) may not participate in the execution of the transaction once 
it has been transmitted to the member performing the execution; \307\ 
(3) may not be affiliated with the executing member; and (4) with 
respect to an account over which the member has investment discretion, 
neither the member nor its associated person may retain any 
compensation in connection with effecting the transaction except as 
provided in the Rule.
---------------------------------------------------------------------------

    \306\ 17 CFR 240.11a2-2(T).
    \307\ The member may, however, participate in clearing and 
settling the transaction. See Securities Exchange Act Release No. 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (regarding the 
NYSE's Designated Order Turnaround System (``1978 Release'')).

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

[[Page 73083]]

    In a letter to the Commission,\308\ MIAX requested that the 
Commission concur with its conclusion that MIAX members that enter 
orders into the MIAX trading system satisfy the requirements of Rule 
11a2-2(T). For the reasons set forth below, the Commission believes 
that MIAX members entering orders into the MIAX trading system will 
satisfy the conditions of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \308\ See Letter from Barbara J. Comly, General Counsel and 
Corporate Secretary, Miami Holdings, to Richard R. Holley, III, 
Assistant Director, Division of Trading and Markets, Commission, 
dated November 30, 2012 (``MIAX 11(a) Request Letter'').
---------------------------------------------------------------------------

    First, Rule 11a2-2(T) requires that orders for covered accounts be 
transmitted from off the exchange floor. MIAX will not have a physical 
trading floor, and the MIAX trading system will receive orders from 
members electronically through remote terminals or computer-to-computer 
interfaces. In the context of other automated trading systems, the 
Commission has found that the off-floor transmission requirement is met 
if a covered account order is transmitted from a remote location 
directly to an exchange's floor by electronic means.\309\ Since the 
MIAX trading system receives all orders electronically through remote 
terminals or computer-to-computer interfaces, the Commission believes 
that the trading system satisfies the off-floor transmission 
requirement.
---------------------------------------------------------------------------

    \309\ See, e.g., Securities Exchange Act Release Nos. 59154 
(December 23, 2008) 73 FR 80468 (December 31, 2008) (SR-BSE-2008-48) 
(order approving proposed rules of BX); 49068, (January 13, 2004), 
69 FR 2775 (January 20, 2004) (establishing, among other things, BOX 
as an options trading facility of BSE); 44983, (October 25, 2001), 
66 FR 55225 (November 1, 2001) (approving the PCX's use of the 
Archipelago Exchange as its equity trading facility); 29237 (May 24, 
1991), 56 FR 24853 (May 31, 1991) (regarding NYSE's Off-Hours 
Trading Facility). See 1978 Release, supra note 307. See also 
Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 
6084 (January 31, 1979) (regarding the American Stock Exchange 
(``Amex'') Post Execution Reporting System, the Amex Switching 
System, the Intermarket Trading System, the Multiple Dealer Trading 
Facility of the Cincinnati Stock Exchange, the PCX Communications 
and Execution System, and the Philadelphia Stock Exchange (``Phlx'') 
Automated Communications and Execution System) (``1979 Release'').
---------------------------------------------------------------------------

    Second, Rule 11a2-2(T) requires that the member not participate in 
the execution of its order once it has been transmitted to the member 
performing the execution. MIAX has represented that the MIAX trading 
system will at no time following the submission of an order allow a 
member or an associated person of such member to acquire control or 
influence over the result or timing of an order's execution.\310\ 
According to MIAX, the execution of a member's order is determined 
solely by what orders, bids, or offers are present in the MIAX trading 
system at the time the member submits the order and the order priority 
based on MIAX rules.\311\ Accordingly, the Commission believes that a 
MIAX member will not participate in the execution of its order 
submitted into the trading system.
---------------------------------------------------------------------------

    \310\ See MIAX 11(a) Request Letter, supra note 308. Members may 
change or cancel an order or quote at any time before the order is 
executed on the Exchange. See MIAX Form 1 Application, Exhibit E. 
The Commission has stated that the non-participation requirement is 
satisfied under such circumstances, so long as such modifications or 
cancellations are also transmitted from off the floor. See 1978 
Release, supra note 307 (stating that the ``non-participation 
requirement does not prevent initiating members from canceling of 
modifying orders (or the instructions pursuant to which the 
initiating member wishes orders to be executed) after the orders 
have been transmitted to the executing member, provided that any 
such instructions are also transmitted from off the floor'').
    \311\ See MIAX11(a) Request Letter, supra note 308.
---------------------------------------------------------------------------

    Rule 11a2-2(T)'s third condition is that the order be executed by 
an exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that the requirement is satisfied when 
automated exchange facilities, such as the MIAX trading system, are 
used, as long as the design of these systems ensures that members do 
not possess any special or unique trading advantages over non-members 
in handling their orders after transmitting them to MIAX Exchange.\312\ 
MIAX has represented that the design of its trading system ensures that 
no member has any special or unique trading advantage over non-members 
in the handling of its orders after transmitting its orders to 
MIAX.\313\ Based on MIAX's representation, the Commission believes that 
the MIAX trading system satisfies this requirement.
---------------------------------------------------------------------------

    \312\ In considering the operation of automated execution 
systems operated by an exchange, the Commission noted that while 
there is no independent executing exchange member, the execution of 
an order is automatic once it has been transmitted into each system. 
Because the design of these systems ensures that members do not 
possess any special or unique trading advantages in handling their 
orders after transmitting them to the exchange, the Commission has 
stated that executions obtained through these systems satisfy the 
independent execution requirement of Rule 11a2-2(T). See 1979 
Release.
    \313\ See MIAX 11(a) Request Letter, supra note 308.
---------------------------------------------------------------------------

    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T).\314\ MIAX members trading for covered accounts over which they 
exercise investment discretion must comply with this condition in order 
to rely on the rule's exemption.\315\
---------------------------------------------------------------------------

    \314\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated person thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 307 (stating ``[t]he contractual and disclosure requirements 
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \315\ See MIAX 11(a) Request Letter, supra note 308.
---------------------------------------------------------------------------

7. Exposure Mechanisms and Routing
    MIAX's system is designed to automatically execute incoming orders 
or quotes against orders and quotes in its system, provided that such 
incoming orders and quotes will not be executed at prices inferior to 
the NBBO.\316\ In the event that an incoming order could not be fully 
executed on MIAX because it would trade through the NBBO (see ``Route 
Timer,'' below) or, in certain cases, because there is insufficient 
size on MIAX to execute an incoming order in full when that order 
exhausts a Market Maker quote (see ``Liquidity Refresh Pause,'' below), 
its proposed execution rules provide for the use of exposure mechanisms 
in certain instances.
---------------------------------------------------------------------------

    \316\ See MIAX Rule 515.
---------------------------------------------------------------------------

    Liquidity Refresh Pause. First, MIAX proposes to implement a 
``Liquidity Refresh Pause'' to allow additional orders or quotes to be 
received where an incoming order (``initiating order'') exhausts a 
Market Maker's quote that was all or part of the MIAX BBO (``MBBO'') 
and there are unexecuted contracts remaining from the initiating 
order.\317\ Specifically, the Liquidity Refresh Pause would be utilized 
in instances where MIAX is the only market at the NBBO, and an incoming 
initiating order is a limit order that crosses the NBBO upon receipt or 
is a market order and, in either case, could only be partially executed 
on MIAX where it exhausted a Market Maker quote at the MBBO. In such 
cases, rather than immediately executing at the next available price, 
the MIAX system would

[[Page 73084]]

pause the market for a period of time not to exceed one second to allow 
additional Marker Maker orders and quotes and other market participant 
orders to be submitted.
---------------------------------------------------------------------------

    \317\ See MIAX Rule 515(c)(1)(iii).
---------------------------------------------------------------------------

    At the start of the Liquidity Refresh Pause, the MIAX system will 
broadcast a message to subscribers of MIAX's data feeds, providing a 
description of the option and the size and side of the order or 
quote.\318\ During the pause, the system will display the remainder of 
the initiating order at the original NBBO price and, on the opposite 
side of the market, it will display MIAX's next bid or offer as non-
firm.\319\
---------------------------------------------------------------------------

    \318\ See MIAX Rule 515(c)(1)(iii)(A).
    \319\ See id. See also Phlx Rule 1082a(ii)(B)(3) (dissemination 
of non-firm quotes on opposite side of initiating order during Quote 
Exhaust timer); Securities Exchange Act Release No. 66315 (February 
3, 2012), 77 FR 6828 (February 9, 2012) (Phlx-2012-12) (immediately 
effective filing to display non-firm quotes in conjunction with 
Quote Exhaust process).
---------------------------------------------------------------------------

    All market participants may respond to the broadcast message during 
the Liquidity Refresh Pause.\320\ During the Liquidity Refresh Pause, 
if MIAX receives a new order or quote on the opposite of the market 
from the initiating order's remaining contracts that locks or crosses 
the original NBBO, MIAX will immediately execute the remaining 
contracts at the original NBBO price, provided it would not trade 
through the current NBBO.\321\ If MIAX receives a new order or quote on 
the same side of the market as the initiating order's remaining 
contracts that locks or crosses the original NBBO, MIAX will add the 
new order or quote to the MBBO size and disseminate the updated 
MBBO.\322\ The initiating order and any new orders or quotes on the 
same side of the market received during the Liquidity Refresh Pause 
will be processed in the order in which they were received.\323\
---------------------------------------------------------------------------

    \320\ See MIAX Rule 515(c)(1)(iii)(A)(1)(a).
    \321\ See MIAX Rule 515(c)(1)(iii)(A)(1)(b).
    \322\ See MIAX Rule 515(c)(1)(iii)(A)(1)(c). If MIAX receives an 
IOC or a FOK order on the same side of the market as the initiating 
order's remaining contracts, the MIAX system will immediately cancel 
the IOC and FOK orders. If MIAX receives an AOC order on the same 
side of the market as the initiating order's remaining contracts, 
the MIAX system will immediately reject the AOC order. If MIAX 
receives an ISO on the same side of the market as the initiating 
order's remaining contracts, the Liquidity Refresh Pause will be 
terminated early and the initiating order and any new orders 
received during the pause will be processed in the order in which 
they were received. See MIAX Rule 515(c)(1)(iii)(A)(1)(e)-(g).
    \323\ See MIAX Rule 515(c)(1)(iii)(A)(1)(c). If all of the 
remaining contracts in the initiating order and any new orders or 
quotes on the same side of the market received during the Liquidity 
Refresh Pause are traded or cancelled during the Liquidity Refresh 
Pause, the Liquidity Refresh Pause will be terminated early and 
normal trading will resume. See MIAX Rule 515(c)(1)(iii)(A)(1)(d).
---------------------------------------------------------------------------

    At the end of the Liquidity Refresh Pause, if there are still 
unexecuted contracts remaining in the initiating order or any new 
interest on the same side of the market, the MIAX system will execute 
the remaining contracts in accordance with MIAX's ``price protection'' 
process, which ensures that the execution of remaining contracts is 
limited to only one minimum price variation (``MPV'') inferior to the 
original NBBO price, provided it does not trade through the current 
NBBO.\324\ Specifically, if the next MIAX bid or offer is only one MPV 
inferior to the original NBBO, the initiating order's remaining 
contracts will be immediately executed at the next MIAX bid or offer up 
to the remaining contracts or the size of the MIAX bid or offer, 
whichever is less, provided the execution does not trade at a price 
inferior to the current NBBO.\325\ If the next MIAX bid or offer is 
more than one MPV inferior to the original NBBO, then the initiating 
order will be handled depending on whether the limit price of the 
initiating order crosses the original NBBO by one or more MPVs. In 
particular, if the initiating order is a limit order whose limit price 
crosses the original NBBO by more than one MPV or if it is a market 
order, the remaining unexecuted portion of the initiating order will be 
cancelled.\326\ If the initiating order is a limit order whose limit 
price crosses the original NBBO by one MPV, the MIAX system will 
display and book the initiating order at its limit price. If the limit 
price would lock or cross the NBBO, then the MIAX system will handle 
the order in accordance with MIAX's ``managed interest process.'' \327\
---------------------------------------------------------------------------

    \324\ See MIAX Rule 515(c)(1)(iii)(A)(2) and MIAX Form 1 
Application, Exhibit E.
    \325\ If there are still contracts remaining from the initiating 
order, then the order will be handled pursuant to subparagraphs (1) 
or (2) of MIAX Rule 515(c)(1)(iii)(A)(2)(a), depending on whether 
the limit price of the initiating order crosses the original NBBO by 
one MPV or more.
    \326\ See MIAX Rule 515(c)(1)(iii)(A)(2)(b)(2).
    \327\ See MIAX Rule 515(c)(1)(iii)(A)(2)(b)(1). The ``managed 
interest process'' is set forth in MIAX Rule 515(c)(2). In addition 
to its potential use at the end of the Liquidity Refresh Pause, the 
``managed interest process'' would be used more broadly for orders, 
such as Do Not Route orders, that could not be executed or could not 
be executed in full and could not be displayed at their limit price 
because that limit price would lock or cross the NBBO. See MIAX Rule 
515(c)(2) (noting specifically that the ``managed interest process'' 
could apply pursuant to Rule 515 subparagraphs (c)(1)(i)A), 
(c)(1)(ii)(A), (c)(1)(ii)(B)1.a, (c)(1)(ii)(B)2.a, 
c(1)(iii)(A)2.a.1), (c)(1)(iii)(A)2.b.1), (c)(1)(iii)(B)1.a., and 
(c)(1)(iii)(B)2.a.).
---------------------------------------------------------------------------

    Under the ``managed interest process,'' the initiating order will 
be displayed one MPV away from the current opposite-side NBBO if 
displaying the order at its limit price would lock or cross the 
NBBO.\328\ Should the NBBO price change to an inferior price level, the 
initiating order's displayed price will continue to re-price so that it 
is displayed one MPV away from the new NBBO until the order reaches its 
original limit price, is fully executed, or is cancelled.\329\ However, 
while displaying the initiating order one MPV away from the opposite-
side NBBO, the initiating order will be placed on the MIAX book at a 
price that locks the current opposite-side NBBO.\330\ If MIAX receives 
a new order or quote on the opposite side of the market from the 
initiating order that could be executed, the MIAX system will 
immediately execute the remaining contracts to the extent possible at 
the initiating order's current booked bid or offer price, provided that 
it does not trade through the current NBBO.\331\
---------------------------------------------------------------------------

    \328\ See MIAX Rule 515(c)(2).
    \329\ See id. See also Phlx Rule 1080(m)(iv)(A) (providing a 
functionally similar process of handling Do Not Route orders, 
displaying the order one MPV away from the current NBBO, booking the 
order internally on the Phlx book at a price that would lock the 
current NBBO, and re-pricing the order until it reaches its limit 
price in the event the NBBO moves to an inferior level).
    \330\ See id.
    \331\ See Phlx Rule 1080(m)(iv)(A) (providing that Do Not Route 
orders that are re-priced to one MPV away from the current NBBO will 
interact with incoming contra-side orders at the best away market 
price); see also, e.g. Phlx Rule 1082(a)(ii)(B)(3)(d) (providing 
that if Phlx receives an order or quote on the opposite side of the 
market from the initiating quote or order during the Quote Exhaust 
Timer that locks or crosses the reference price at any time during 
the Quote Exhaust Timer, it will execute immediately against the 
initiating quote or order at the reference price, which is price at 
which the initiating order was initially partially executed).
---------------------------------------------------------------------------

    In its comment letter, ISE requests that MIAX clarify the operation 
of MIAX Rule 515, with reference to the execution price of a resting 
order that has a non-displayed execution price, including confirmation 
that the order would not be executed at a price that would trade 
through the NBBO.\332\ ISE further requests clarification as to how 
certain orders are re-priced, including pursuant to MIAX Rule 515(c)(2) 
and (d) and whether those rules contemplate that an order will be 
continuously re-priced, or only re-priced once.\333\ NASDAQ asked a 
question similar to ISE concerning whether the managed interest process 
would result in a resting order being re-priced only once or

[[Page 73085]]

dynamically as the away markets move.\334\
---------------------------------------------------------------------------

    \332\ See ISE Letter, supra note 3, at n. 3. MIAX added the 
phrase ``provided that the execution price does not violate the 
current NBBO'' to the place in MIAX Rule 516(f) (which was 
renumbered to 516(g)) where ISE noted it was missing. See MIAX 
Response Letter, supra note 4, at 6.
    \333\ See ISE Letter, supra note 3, at n. 3. ISE also asks for 
clarification as to whether Do Not Route orders will be continuously 
re-priced, or only re-priced once. See id. at n. 2.
    \334\ See NASDAQ Letter, supra note 3, at 2.
---------------------------------------------------------------------------

    In response, MIAX revised several provisions in MIAX Rule 515 to 
clarify the execution price for a resting non-displayed order and to 
clarify the circumstances under which such orders are re-priced and the 
circumstances in which the booked price would differ from the 
NBBO.\335\ For example, MIAX amended MIAX Rule 515(c)(2) to clarify 
that orders in the managed interest process are continuously re-
priced.\336\ MIAX also clarified in additional spots in MIAX Rules 515, 
516, and 529 that such orders will not be executed at a price that 
would trade through the NBBO.\337\
---------------------------------------------------------------------------

    \335\ See MIAX Response Letter, supra note 4, at 5-6.
    \336\ See id.
    \337\ See id.
---------------------------------------------------------------------------

    In addition, NASDAQ notes that MIAX Rule 515 contains a number of 
situations where the rule provides that a posted order will immediately 
execute any remaining contracts when an inbound order comes into the 
MIAX system; however, MIAX's rule does not address what happens if the 
inbound order does not contain sufficient size to fully execute against 
the resting order.\338\ In response, MIAX revised Rules 515(c) and 
515(d) as well as 529(b)(2) to clarify what happens in such situations 
if an inbound order comes into the MIAX system where such inbound order 
contains less than the size of the posted order.\339\ Specifically, 
MIAX will disseminate a revised MBBO that reflects the incoming order's 
remaining size and price.\340\ For example, when MIAX is alone at the 
NBBO and utilizes the Liquidity Refresh Pause, if unexecuted contracts 
remain from an initiating order, MIAX would revise its MBBO to reflect 
the balance of the unexecuted order.\341\
---------------------------------------------------------------------------

    \338\ See NASDAQ Letter, supra note 3, at 4.
    \339\ See MIAX Response Letter, supra note 4, at 6-7.
    \340\ See MIAX Rules 515(d), 515(c)(1)(iii)(A)(1)(b), and 
529(b)(2)(i).
    \341\ See MIAX Rule 515(c)(1)(iii)(A)(1)(b).
---------------------------------------------------------------------------

    Route Timer. MIAX also has proposed to subject Public Customer 
\342\ orders to a ``Route Timer'' when it receives a route-eligible 
Public Customer order that cannot be filled on MIAX.\343\ Specifically, 
if MIAX receives a Public Customer order (``initiating order'') that is 
marketable against the NBBO on an away market (``ABBO'') and MIAX is 
not at the NBBO, or MIAX's disseminated market is equal to the ABBO but 
MIAX has insufficient size to satisfy the initiating order,\344\ the 
order may be subject to a Route Timer not to exceed one second.\345\ 
During the Route Timer, Market Makers and other market participants may 
interact with the initiating order before MIAX routes the order to an 
away market or otherwise handles the order in accordance with MIAX Rule 
515 or 529, as discussed below.
---------------------------------------------------------------------------

    \342\ See supra note 207.
    \343\ Orders with certain contingencies, such as IOC orders, and 
orders marked with a ``do not route'' qualifier are not eligible for 
routing. See also infra notes 359--363 and accompanying text 
(concerning ISE's comment regarding the proposed rule's limited 
applicability to Priority Customers) and Amendment No. 1 (in which 
MIAX revised the rule to apply to the broader category of Public 
Customers).
    \344\ The Route Timer will be utilized when MIAX is not at the 
NBBO, or is at the NBBO along with other markets but does not have 
sufficient size to execute a routable Public Customer initiating 
order in full. In contrast, the Liquidity Refresh Pause, discussed 
above, will be used when MIAX is the only market at the NBBO. See 
MIAX Rule 515(c)(1)(iii). The Route Timer is applicable only for 
Public Customer orders that are routable but do not meet the 
criteria for immediate routing discussed below. See MIAX Rule 
529(b)(2)(i).
    \345\ See MIAX Rule 529(b)(2). Orders that meet certain criteria 
may be eligible for immediate routing rather than the one second 
Route Timer, as discussed further below. See infra notes 356--357 
and accompanying text.
---------------------------------------------------------------------------

    Like the Liquidity Refresh Pause discussed above, when the Route 
Timer is activated, MIAX will broadcast a notification (``Route 
Notification'') to subscribers of MIAX's data feeds, providing the size 
and side of the option.\346\ During the timer, the MIAX system will 
display and book the initiating order at its limit price. However, if 
the limit price locks or crosses the current opposite side NBBO, the 
system will display the initiating order one MPV away from the current 
opposite side NBBO and book the initiating order at price that will 
internally lock the current opposite side NBBO.\347\ The initiating 
order will remain available for execution up to its original bid or 
down to its original offer.\348\ MIAX will display its next bid or 
offer on the opposite side of the market from the initiating order as 
non-firm.\349\
---------------------------------------------------------------------------

    \346\ See MIAX Rule 529(b)(2)(i). See also Amendment No. 1 (in 
which MIAX removed rule text from Rule 529(b)(2)(i) that also would 
have provided the NBBO price on the opposite side of the market from 
the order in the Route Notification).
    \347\ The internally locked price will not be visible to any 
participant.
    \348\ See MIAX Rule 529(b)(2)(i).
    \349\ See id. See also supra note 319.
---------------------------------------------------------------------------

    During the Route Timer, if MIAX receives a new order or quote on 
the opposite side of the market from the initiating order that can be 
executed, the MIAX system will immediately execute the remaining 
contracts at the initiating order's current booked bid or offer 
price,\350\ provided that the execution price does not trade through 
the current NBBO.\351\ If MIAX receives orders or quotes on the same 
side of the market as the initiating order, such new orders or quotes 
will join the initiating order in the Route Timer, and the MIAX system 
will disseminate an updated MBBO that includes the new order or quote's 
size.\352\ If there is a change in the ABBO during the Route Timer that 
would allow the initiating order to trade on MIAX at the revised NBBO, 
the Route Timer will be cancelled and regular trading will resume.\353\
---------------------------------------------------------------------------

    \350\ See supra note 331.
    \351\ See id.
    \352\ See MIAX Rule 529(b)(2)(ii).
    \353\ See MIAX Rule 529(b)(2)(ii). In addition, if, during the 
Route Timer, the initiating order and all interest on the same side 
of the market is traded in full or cancelled, the Route Timer will 
be terminated.
---------------------------------------------------------------------------

    At the end of the Route Timer, if necessary, the MIAX system will 
route ISO orders to away markets disseminating the NBBO.\354\ If, after 
routing to away markets, additional contracts remain to be executed 
from the initiating order, the MIAX system will handle the remaining 
interest in accordance with MIAX Rule 515.\355\
---------------------------------------------------------------------------

    \354\ See MIAX Rule 529(b)(2)(iii). At the end of the Route 
Timer, same side orders or quotes will be handled in the order in 
which they were received by MIAX. See MIAX Rule 529(b)(2)(ii).
    \355\ See MIAX Rule 529(b)(2)(iii). MIAX Rule 515 is the general 
rule governing execution of orders and quotes. It provides a number 
of different provisions describing how the MIAX system will handle 
orders that cannot be executed in part or in full. In accordance 
with Rule 515, depending on a variety of factors, orders may be 
cancelled, handled in accordance with the ``managed interest 
process,'' or subject to the Liquidity Refresh Pause, among others. 
See generally MIAX Rule 515.
---------------------------------------------------------------------------

    Immediate Routing. In addition, in limited circumstances where a 
number of criteria are met, certain Public Customer orders that are 
eligible for routing could be routed immediately without being subject 
to the Route Timer (``Immediate Routing'').\356\ These criteria 
generally require that a Public Customer order be significantly greater 
in size than the size of the NBBO posted at away markets and must be 
received by MIAX at a time when MIAX has significant interest posted at 
one MPV inferior to the NBBO at away markets. Specifically, an incoming 
Public Customer order (``initiating order'') will be eligible for 
Immediate Routing if: (i) The initiating order's limit price crosses 
the opposite side NBBO; (ii) the MBBO is inferior to the NBBO on the 
opposite

[[Page 73086]]

side of the market by one MPV; (iii) the displayed NBBO is not crossed; 
(iv) the initiating order size is equal to or greater than three times 
the total size of the away markets represented in the opposite side 
ABBO; (v) the size of the quotes and orders at the MBBO combined with 
the total size of the ABBO on the opposite side of the market are equal 
to or greater than one half the size of the initiating order; (vi) 
MIAX's disseminated market includes a bid of greater than zero with a 
size of greater than zero if the order is a sell order; and (vii) the 
size of MIAX's disseminated market is equal to or greater than three 
times the total size of the away markets represented in the opposite 
side ABBO.\357\ If a Public Customer order meets the aforementioned 
criteria, the MIAX system will immediately route ISO orders priced at 
the ABBO to the away markets disseminating prices better than the 
MBBO.\358\
---------------------------------------------------------------------------

    \356\ See MIAX Rule 529(b)(1). See also infra notes 359--363 and 
accompanying text (concerning ISE's comment regarding the proposed 
rule's limited applicability to Priority Customers) and Amendment 
No. 1 (in which MIAX revised the rule to apply to the broader 
category of Public Customers).
    \357\ See MIAX Rule 529(b)(1).
    \358\ See id. If there are still contracts remaining to be 
executed from the initiating order after routing, the remaining 
interest will be handled in accordance with MIAX Rule 515.
---------------------------------------------------------------------------

    In its comment letter, ISE discusses MIAX Rules 515(c) and 529 and 
notes that MIAX would only route Priority Customer Orders but not other 
types of public customer orders, like Professional orders.\359\ ISE 
questions whether this distinction is consistent with the Intermarket 
Linkage Plan and the Act.\360\ In addition, ISE requests clarification 
on the use of the terms ``NBBO'' and ``ABBO'' in MIAX Rules 515 and 
529, respectively.\361\ In response, MIAX revised its Route Timer 
provisions in MIAX Rules 529 (Order Routing to Other Exchanges) and 503 
(Openings on the Exchange) to change all references from ``Priority 
Customer Order'' to ``Public Customer Order.'' \362\ The term ``Public 
Customer'' is defined in MIAX Rule 100 to mean a person that is not a 
broker or dealer in securities.\363\ Accordingly, MIAX has addressed 
ISE's comment by broadening the types of interest that it will route, 
as ISE suggested, to include all Public Customer interest, which term 
includes Professional Customers, in a manner that is consistent with 
the Intermarket Linkage Plan and the Act.
---------------------------------------------------------------------------

    \359\ See ISE Letter, supra note 3, at 3.
    \360\ See id.
    \361\ See id. at n. 7. MIAX notes that the NBBO is the combined 
best bid and best offer from both the ABBO (all markets excluding 
MIAX) and the MBBO (MIAX's best bid and best offer). See MIAX 
Response Letter, supra note 4, at 8-9. MIAX believes that the terms 
are used correctly in MIAX Rules 515 and 529. See MIAX Response 
Letter, supra note 4, at 7.
    \362\ See MIAX Response Letter, supra note 4, at n. 35.
    \363\ See MIAX Rule 100.
---------------------------------------------------------------------------

    The Commission believes that MIAX's proposed exposure and routing 
mechanisms, including the Liquidity Refresh Pause, Route Timer, and 
Immediate Routing criteria, are consistent with the Act. Several 
exchanges have adopted rules that provide for substantially similar 
exposure functionalities \364\ that afford an opportunity for members 
to electronically ``step up'' and match a better-priced bid or offer 
available on another exchange, rather than immediately sending orders 
to other exchanges for execution.\365\
---------------------------------------------------------------------------

    \364\ See, e.g., ISE Rule 803, Supplementary Material .02 and 
Securities Exchange Act Release Nos. 57812 (May 12, 2008), 73 FR 
28846 (May 19, 2008) (SR-ISE-2008-28) and 58038 (June 26, 2008), 73 
FR 38261 (July 3, 2008) (SR-ISE-2008-50); and CBOE Rule 6.14A(b), 
HAL.
    \365\ The Commission notes that it has proposed changes to Rule 
602 of Regulation NMS that may affect these electronic ``flash'' 
mechanisms, if adopted. See Securities Exchange Act Release No. 
60684 (September 18, 2009), 74 FR 48632, 48633 (September 23, 2009) 
(File No. S7-21-09).
---------------------------------------------------------------------------

    The Commission believes that MIAX's proposed Liquidity Refresh 
Pause is consistent with the Act. The rules governing MIAX's Liquidity 
Refresh Pause are substantially similar to those that the Commission 
approved for Phlx's ``Quote Exhaust'' process.\366\ However, unlike 
MIAX, Phlx does not broadcast a message during its Quote Exhaust Timer. 
The Commission has, however, approved other similar broadcast messages 
for dissemination during order exposure or flash-type processes on 
other exchanges.\367\ Further, MIAX's Liquidity Refresh Pause will 
limit the incoming order's execution price to one MPV inferior to the 
original NBBO price.\368\ The Commission believes that this ``price 
protection'' functionality of MIAX's Liquidity Refresh Pause can 
benefit investors by ensuring that, should the NBBO price move to an 
inferior price during the one second (or less) pause, a limit will be 
imposed on how far away from the original NBBO price the initiating 
order may be executed; specifically, it may only be executed one MPV 
from the original NBBO price. In addition, an incoming order will not 
receive an execution pursuant to the Liquidity Refresh Pause process if 
such order would trade through the then-current NBBO. Further, market 
participants may utilize an IOC or FOK order to avoid having MIAX 
potentially subject their order to the Liquidity Refresh Pause 
process.\369\
---------------------------------------------------------------------------

    \366\ See Phlx Rule 1082(a)(ii)(B)(3). See also Securities 
Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 
2009) (SR-Phlx-2009-32) (approving Quote Exhaust process) and supra 
note 319.
    \367\ See, e.g., CBOE Rule 6.14A, Hybrid Agency Liaison 
(``HAL''). CBOE sends out an ``exposure message'' for orders 
received by its HAL system to electronically expose the order at the 
NBBO price.
    \368\ Phlx's rule does not include a similar provision. Phlx 
Rule 1082(a)(ii)(B)(3)(f) provides that the system will conduct an 
``Acceptable Price Range'' test to determine whether there is a 
valid next available price at which the system may execute the 
remaining unexecuted contracts. See Phlx Rule 1082(a)(ii)(B)(3)(f).
    \369\ See MIAX Rules 515(c)(1), 515(e), and 515(f).
---------------------------------------------------------------------------

    Pursuant to MIAX's Immediate Routing process, orders will have to 
meet a number of criteria to be eligible for immediate routing, as 
described above. As such, many, if not most, orders likely will be 
subject to the one second Route Timer, rather than immediately routing 
to an away exchange displaying the NBBO. MIAX, however, is not required 
to route orders to away exchanges. Further, market participants may 
avoid the Route Timer by utilizing an IOC or FOK Order.
    In addition, broker-dealers have a duty of best execution.\370\ A 
broker-dealer must carry out a regular and rigorous review of the 
quality of the options markets to evaluate its best execution policies, 
including the determination as to which options market it routes 
customer order flow.\371\

[[Page 73087]]

The protection against trade-throughs supports the broker-dealer's duty 
of best execution by helping ensure that customer orders are not 
executed at prices inferior to the best quotations, but it does not 
supplant or diminish the broker-dealer's responsibility for achieving 
best execution, including its duty to evaluate the execution quality of 
markets to which it routes customer orders.\372\ Thus, to meet their 
best execution obligations, broker-dealers will need to consider and 
evaluate the functioning of the MIAX routing mechanisms and the quality 
of any resulting executions in making their determination of whether to 
route customer orders to MIAX.
---------------------------------------------------------------------------

    \370\ A broker-dealer has a legal duty to seek to obtain best 
execution of customer orders. See, e.g., Newton v. Merrill, Lynch, 
Pierce, Fenner & Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), 
cert. denied, 525 U.S. 811 (1998); Certain Market Making Activities 
on Nasdaq, Securities Exchange Act Release No. 40900 (Jan. 11, 1999) 
(settled case) (citing Sinclair v. SEC, 444 F.2d 399 (2d Cir. 1971); 
Arleen Hughes, 27 SEC 629, 636 (1948), aff'd sub nom. Hughes v. SEC, 
174 F.2d 969 (DC Cir. 1949)). See also Order Execution Obligations, 
Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 
48290 (Sept. 12, 1996) (``Order Handling Rules Release''). A broker-
dealer's duty of best execution derives from common law agency 
principles and fiduciary obligations, and is incorporated in SRO 
rules and, through judicial and Commission decisions, the antifraud 
provisions of the federal securities laws. See Order Handling Rules 
Release, 61 FR at 48322. See also Newton, 135 F.3d at 270. The duty 
of best execution requires broker-dealers to execute customers' 
trades at the most favorable terms reasonably available under the 
circumstances, i.e., at the best reasonably available price. Newton, 
135 F.3d at 270. Newton also noted certain factors relevant to best 
execution--order size, trading characteristics of the security, 
speed of execution, clearing costs, and the cost and difficulty of 
executing an order in a particular market. See id. at 270 n.2 
(citing Payment for Order Flow, Exchange Act Release No. 33026 (Oct. 
6, 1993), 58 FR 52934, 52937-38 (Oct. 13, 1993) (Proposed Rules)). 
See In re E.F. Hutton & Co., Securities Exchange Act Release No. 
25887 (July 6, 1988). See also Securities Exchange Act Release No. 
34902 (October 27, 1994), 59 FR 55006, 55008-55009 (November 2, 
1994) (``Approval of Payment for Order Flow Final Rules'). See also 
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005) (``NMS Adopting Release''), at 37537 
(discussing the duty of best execution).
    \371\ See NMS Adopting Release, supra note 370, at 37538. See 
also Securities Exchange Act Release No. 49175 (February 3, 2004), 
69 FR 6124, 6128 (February 9, 2004) (``Options Concept Release'').
    \372\ See NMS Adopting Release, supra note 370, at 37538.
---------------------------------------------------------------------------

D. Discipline and Oversight of Members

    As noted above, one prerequisite for the Commission's grant of an 
exchange's application for registration is that a proposed exchange 
must be so organized and have the capacity to be able to carry out the 
purposes of the Act.\373\ Specifically, an exchange must be able to 
enforce compliance by its members and persons associated with its 
members with federal securities laws and the rules of the 
exchange.\374\
---------------------------------------------------------------------------

    \373\ See 15 U.S.C. 78f(b)(1).
    \374\ See id.
---------------------------------------------------------------------------

    MIAX rules codify MIAX's disciplinary jurisdiction over its 
members, thereby facilitating its ability to enforce its members' 
compliance with its rules and the federal securities laws.\375\ MIAX's 
rules permit it to sanction members for violations of its rules and 
violations of the federal securities laws by, among other things, 
expelling or suspending members; limiting members' activities, 
functions, or operations; fining or censuring members; suspending or 
barring a person from being associated with a member; or any other 
fitting sanction in accordance with MIAX rules.\376\
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    \375\ See MIAX Rule 1000.
    \376\ See id. See also CBOE Rule 17.1(a) and ISE Rule 1600(a) 
(containing identical provisions).
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    MIAX's disciplinary and oversight functions will be administered in 
accordance with Chapter X of the MIAX rules, which governs disciplinary 
actions. Unless delegated to another SRO pursuant to the terms of an 
effective 17d-2 plan,\377\ MIAX regulatory staff (including regulatory 
staff of another SRO that may be acting on MIAX Exchange's behalf 
pursuant to a regulatory services agreement) will, among other things, 
investigate potential securities laws violations and initiate charges 
pursuant to MIAX rules.\378\
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    \377\ See supra note 112 (concerning the 17d-2 plans to which 
MIAX has committed to join).
    \378\ See MIAX Rules 1002 and 1004. As noted above, MIAX has 
entered into a RSA with CBOE under which CBOE will perform certain 
regulatory functions on behalf of MIAX. MIAX may perform some or all 
of the functions specified in the Chapter X of the MIAX Rules. See 
also MIAX Rule 1015. CBOE will: assist MIAX in conducting market 
surveillance and investigations of potential violations of MIAX 
rules and/or federal securities laws related to activity on MIAX ; 
conduct examinations related to MIAX members' conduct on MIAX; 
assist MIAX with disciplinary proceedings pursuant to MIAX rules, 
including issuing charges and conducting hearings; and provide 
dispute resolution services to MIAX members on behalf of MIAX, 
including operation of MIAX's arbitration program. See supra notes 
113--114 and accompanying text.
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    Upon a finding of probable cause of a violation within the 
disciplinary jurisdiction of MIAX Exchange and where further 
proceedings are warranted,\379\ MIAX will conduct a hearing on 
disciplinary matters before a professional hearing officer \380\ and 
two members of the Business Conduct Committee \381\ (the 
``Panel'').\382\ The MIAX member (or their associated person) or the 
MIAX Exchange regulatory staff may petition for review of the decision 
of the Panel by the MIAX Exchange Board.\383\ Any review would be 
conducted by the MIAX Exchange Board or a committee thereof composed of 
at least three Directors of the MIAX Exchange Board \384\ (whose 
decision must be ratified by a majority of the MIAX Exchange Board) and 
such decision will be final.\385\ In addition, the MIAX Exchange Board 
on its own motion may order review of a disciplinary decision.\386\
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    \379\ See MIAX Rule 1004. If there is probable cause for finding 
a violation, MIAX Exchange regulatory staff will prepare a statement 
of charges including the allegations and specifying the provisions 
of the Act and/or MIAX Exchange rules, regulations or policies 
thereunder alleged to have been violated by the MIAX member or 
associated person. The CRO must approve the statement of charges.
    \380\ See MIAX Rule 1015, Interpretation and Policy .01. As 
noted above, MIAX has entered into a RSA with CBOE to provide 
certain regulatory functions, including providing professional 
hearing officers. Under MIAX Rule 1006(a), the professional hearing 
officer is designated as the Chairman of the Panel. Under MIAX Rule 
1006(e), the Panel Chairman has the sole responsibility to determine 
the time and place of all meetings of the Panel, and make all 
determinations with regard to procedural or evidentiary matters, as 
well as prescribe the time within which all documents, exhibits, 
briefs, stipulations, notices or other written materials must be 
filed where such is not specified in MIAX rules.
    \381\ In Amendment No. 1, MIAX proposed new By-Law 4.7 to 
include additional specifics of the Business Conduct Committee, 
which shall be appointed by the Chairman of the Exchange Board. 
Specifically, the Committee, which will not be a Board Committee, 
will have a minimum of three members and will be composed of a 
number of individuals as determined by the MIAX Chairman, none of 
whom shall be Directors of MIAX. In addition, at least one member of 
the Business Conduct Committee and any panel thereof must be an 
officer, director or employee of a MIAX member. See Amendment No. 1; 
see also MIAX Exchange By-Laws Sections 4.1 and 4.7. See also BOX 
Bylaw 6.08(a) (containing an identical composition for the BOX 
Hearing Committee).
    \382\ See MIAX Rule 1006. A Panel may make a determination 
without a hearing and may impose a penalty as to violations that the 
Member or associated person has admitted or has failed to answer or 
that otherwise do not appear to be in dispute. See MIAX Rule 1008. A 
Member or associated person alleged to have committed a disciplinary 
violation may submit a written offer of settlement to the Panel, or 
CRO if a Panel is not yet been appointed, which the Panel or CRO may 
accept or reject. If the second offer of settlement is rejected 
(such decision is not subject to review), a hearing will proceed in 
accordance with MIAX Rule 1006. See MIAX Rule 1009.
    \383\ See MIAX Rule 1010.
    \384\ Specifically, the Chairman of the MIAX Board, with the 
approval of the Board, shall appoint an Appeals Committee to preside 
over all appeals related to disciplinary and adverse action 
determinations. See note 49 and accompanying text (detailing the 
composition of the Appeals Committee). If the Independent Director 
serving on the Appeals Committee recuses himself or herself from an 
appeal, due to conflict of interest or otherwise, the Independent 
Director may be replaced by a Non-Industry Director for purposes of 
the applicable appeal if there is no other Independent Director able 
to serve as the replacement. See MIAX Exchange By-Laws Section 
4.5(d). See also Amended and Restated By-Laws of BATS Exchange, 
Inc., Section V, Article 6 (specifying a similar Appeals Committee).
    \385\ See MIAX Rule 1010.
    \386\ See id.
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    Appeals from any determination that impacts access to MIAX, such as 
termination or suspension of membership, will be instituted under, and 
governed by, the provisions in the Chapter XI of the MIAX Rules. MIAX's 
Chapter XI applies to persons economically aggrieved by any of the 
following actions of MIAX including, but not limited to: (a) Denial of 
an application to become a Member; (b) barring a person from becoming 
associated with a Member; (c) limiting or prohibiting services provided 
by the MIAX or services of any exchange member.\387\
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    \387\ See MIAX Rule 1100. As noted above, MIAX has entered into 
a RSA with CBOE under which CBOE will perform certain regulatory 
functions on behalf of MIAX. CBOE may perform some or all of the 
functions specified in the Chapter XI of the MIAX Rules. See supra 
note 114. See also MIAX Rule 1106.
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    Any person aggrieved by an action of MIAX within the scope of the 
Chapter XI may file a written application to be heard within thirty 
days \388\ after such

[[Page 73088]]

action has been taken.\389\ Applications for hearing and review will be 
referred to the Business Conduct Committee, which will appoint a 
hearing panel of no less than three members of such Committee.\390\ The 
decision of the hearing panel made pursuant to Chapter XI of the MIAX 
rules is subject to review by the MIAX Exchange Board, either on its 
own motion within 30 days after issuance of the decision, or upon 
written request submitted by the applicant or the President of MIAX 
Exchange within 15 days after issuance of the decision.\391\ The review 
would be conducted by the MIAX Exchange Board or a committee of the 
MIAX Exchange Board composed of at least three directors.\392\
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    \388\ An applicant may file for an extension of time as allowed 
by the Chairman of the Business Conduct Committee within thirty days 
of the MIAX Exchange's action. An application for an extension will 
be ruled upon by the Chairman of the Business Conduct Committee, and 
his ruling will be given in writing. Rulings on applications for 
extensions of time are not subject to appeal. See MIAX Rule 1101.
    \389\ The application must include: (1) The action for which 
review is sought; (2) the specific reasons for the applicant's 
exception to such action; (3) the relief sought; and (4) whether the 
applicant intends to submit any documents, statements, arguments or 
other material in support of the application, with a description of 
any such materials. See MIAX Rule 1101(a).
    \390\ See MIAX Rule 1102. The decision of the hearing panel will 
be made in writing and sent to the parties to the proceedings. See 
MIAX Rule 1103.
    \391\ See MIAX Rule 1104. The MIAX Exchange Board, or a 
committee of the MIAX Exchange Board, will have sole discretion to 
grant or deny either request. See id.
    \392\ See MIAX Rule 1104(b). The MIAX Exchange Board or its 
designated committee may affirm, reverse, or modify in whole or in 
part, the decision of the hearing panel. The decision of the MIAX 
Exchange Board or its designated committee would be final, and must 
be in writing and would be sent to the parties to the proceeding. 
See MIAX Rule 1104(c).
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    The Commission finds that MIAX's proposed disciplinary and 
oversight rules and structure, as well as its proposed process for 
persons economically aggrieved by certain MIAX actions, are consistent 
with the requirements of Sections 6(b)(6) and 6(b)(7) of the Act \393\ 
in that they provide fair procedures for the disciplining of members 
and persons associated with members. The Commission further finds that 
the proposed MIAX rules are designed to provide MIAX Exchange with the 
ability to comply, and with the authority to enforce compliance by its 
members and persons associated with its members, with the provisions of 
the Act, the rules and regulations thereunder, and the rules of 
MIAX.\394\
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    \393\ 15 U.S.C. 78f(b)(6) and (b)(7), respectively.
    \394\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
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E. Listing

    MIAX does not intend to offer original listings when it commences 
operations. Instead, MIAX will list and trade only equity options that 
are listed on other national securities exchanges and cleared by the 
Options Clearing Corporation. MIAX's listing rules, including the 
criteria for the underlying securities of the options to be traded, are 
substantially similar to the rules of other exchanges.\395\ The 
Commission finds that MIAX's proposed initial and continued listing 
rules are consistent with the Act, including Section 6(b)(5), in that 
they are designed to protect investors and the public interest and to 
promote just and equitable principles of trade. Before beginning 
operation, MIAX will need to become a participant in the Plan for the 
Purpose of Developing and Implementing Procedures Designed to 
Facilitate the Listing and Trading of Standardized Options Submitted 
Pursuant to Section 11A(a)(3)(B) of the Act (``OLPP''). In addition, 
before beginning operation, MIAX will need to become a participant in 
the Options Clearing Corporation.
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    \395\ See, e.g., ISE Rule 502 (Criteria for Underlying 
Securities).
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IV. Exemption From Section 19(b) of the Act With Regard to CBOE and 
NYSE Rules Incorporated by Reference

    MIAX proposes to incorporate by reference certain CBOE rules 
concerning arbitration. Thus, MIAX arbitration proceedings will be 
governed by the applicable CBOE arbitration rules. Specifically, as 
referenced in MIAX Rule 1107 (Arbitration), MIAX proposes to 
incorporate by reference Chapter XVIII of CBOE's rulebook (CBOE 
Arbitration Rules).\396\ MIAX also proposes in Rule 1502 to incorporate 
by reference the CBOE or NYSE rules concerning initial and maintenance 
margin requirements.
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    \396\ In addition, with respect to pre-dispute arbitration 
agreements, MIAX Rule 1107(c) provides that CBOE Rule 18.35 would 
apply to disputes between MIAX members and their customers.
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    In connection with the proposal to incorporate the CBOE and NYSE 
rules by reference, MIAX requested, pursuant to Rule 240.0-12 under the 
Act,\397\ an exemption under Section 36 of the Act from the rule filing 
requirements of Section 19(b) of the Act for changes to the MIAX rules 
that are effected solely by virtue of a change to a cross-referenced 
CBOE or NYSE rules.\398\ MIAX proposes to incorporate by reference 
categories of rules, rather than individual rules within a category, 
that are not trading rules. In addition, MIAX agrees to provide written 
notice to its members whenever CBOE or NYSE proposes a change to a rule 
within a cross-referenced category of rules \399\ and whenever any such 
proposed changes are approved by the Commission or otherwise become 
effective.\400\
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    \397\ 17 CFR 240.0-12.
    \398\ See Letter from Barbara Comly, General Counsel, MIAX, to 
Elizabeth M. Murphy, Secretary, Commission, dated November 30, 2012 
(``Section 19(b) Exemption Request'').
    \399\ See id.
    \400\ MIAX will provide such notice through a posting on the 
same Web site location where MIAX posts its own rule filings 
pursuant to Rule 19b-4 under the Act, within the required time 
frame. The Web site posting will include a link to the location on 
the FINRA or CBOE Web site where FINRA's or CBOE's proposed rule 
change is posted. See id.
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    Using the authority under Section 36 of the Act,\401\ the 
Commission previously exempted certain SROs from the requirement to 
file proposed rule changes under Section 19(b) of the Act.\402\ The 
Commission is hereby granting MIAX's request for exemption, pursuant to 
Section 36 of the Act, from the rule filing requirements of Section 
19(b) of the Act with respect to the rules that MIAX proposes to 
incorporate by reference. The exemption is conditioned upon MIAX 
providing written notice to MIAX members whenever CBOE or NYSE proposes 
to change an incorporated by reference rule. The Commission believes 
that the exemption is appropriate in the public interest and consistent 
with the protection of investors because it will promote more efficient 
use of Commission and SROs resources by avoiding duplicative rule 
filings based on simultaneous changes to identical rule text sought by 
more than one SRO.
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    \401\ 15 U.S.C. 78mm.
    \402\ See, e.g., DirectEdge Exchanges Order, BATS Order, and BOX 
Order, supra note 18, and C2 Order, supra note 41. In particular, 
the BOX Order granted relief for BOX's arbitration rule (which is 
substantively similar to MIAX's proposed rule), which also 
incorporates the same FINRA rules that MIAX proposes to incorporate.
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V. Conclusion

    It is ordered that the application of MIAX Exchange for 
registration as a national securities exchange be, and it hereby is, 
granted.
    It is furthered ordered that operation of MIAX Exchange is 
conditioned on the satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to 
Options Trading. MIAX Exchange must join: (1) The Plan for the 
Reporting of Consolidated Options Last Sale Reports and Quotation 
Information (Options Price Reporting Authority); (2) the OLPP; (3) the 
Linkage Plan; and (4) the Plan of the Options Regulatory Surveillance 
Authority.
    B. Participation in Multiparty Rule 17d-2 Plans. MIAX Exchange must 
become a party to the multiparty Rule 17d-2 agreements concerning 
options sales practice regulation and market surveillance.
    C. Participation in the Options Clearing Corporation. MIAX Exchange

[[Page 73089]]

must become an Options Clearing Corporation participant exchange.
    D. Participation in the Intermarket Surveillance Group. MIAX 
Exchange must join the Intermarket Surveillance Group.
    E. Effective Regulation. MIAX Exchange must have, and represent in 
a letter to the staff in the Commission's Office of Compliance 
Inspections and Examinations that it has, adequate procedures and 
programs in place to effectively regulate MIAX.
    F. Trade Processing and Exchange Systems. MIAX Exchange must have, 
and represent in a letter to the staff in the Commission's Division of 
Trading and Markets that it has, adequate procedures and programs in 
place, as detailed in Commission Automation Policy Review guidelines, 
to effectively process trades and maintain the confidentiality, 
integrity, and availability of MIAX's systems.\403\
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    \403\ On November 16, 1989, the Commission published its first 
Automation Review Policy (``ARP I''), in which the Commission 
created a voluntary framework for SROs to establish comprehensive 
planning and assessment programs to determine systems capacity and 
vulnerability. On May 9, 1991, the Commission published its second 
Automation Review Policy (``ARP II'') to clarify the types of review 
and reports expected from SROs. See Securities Exchange Act Release 
Nos. 27445 (November 16, 1989), 54 FR 48703 (November 24, 1989) and 
29185 (May 9, 1991), 56 FR 22490 (May 15, 1991).
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    It is further ordered, pursuant to Section 36 of the Act,\404\ that 
MIAX shall be exempted from the rule filing requirements of Section 
19(b) of the Act with respect to the FINRA and CBOE rules that MIAX 
proposes to incorporate by reference, subject to the conditions 
specified in this Order.
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    \404\ 15 U.S.C. 78mm.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-29568 Filed 12-6-12; 8:45 am]
BILLING CODE 8011-01-P


