
[Federal Register Volume 78, Number 72 (Monday, April 15, 2013)]
[Notices]
[Pages 22357-22360]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08726]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69354; File No. SR-MIAX-2013-15]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Order Approving, on an Accelerated Basis, Proposed Rule 
Change Relating to Limit Up Limit Down Functionality

April 9, 2013.

I. Introduction

    On March 25, 2013, Miami International Securities Exchange LLC (the 
``Exchange'' or ``MIAX'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1)\1\ of the 
Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to provide for how the Exchange 
proposes to treat market-making quoting obligations in response to the 
Regulation NMS Plan to Address Extraordinary Market Volatility. The 
proposed rule change was published for comment in the Federal Register 
on March 29, 2013.\4\ On April 8, 2013, the Exchange submitted 
Amendment No. 1 to the proposed rule change.\5\ The Commission received 
no comment letters on the proposal. This order approves the proposed 
rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 692347 (March 25, 
2013), 78 FR 19344 (``Notice'').
    \5\ In Amendment No. 1, the Exchange removed language from 
proposed Rule 530(h) to clarify that its treatment of options 
overlying securities that are subject to a trading pause in the 
Limit Up-Limit Down context is intended to be the same as what is 
currently set forth in Exchange Rule 504(c), which provides 
generally for the treatment of options overlying securities that are 
subject to a trading pause. Because the changes made in Amendment 
No. 1 do not materially alter the substance of the proposed rule 
change or raise any novel regulatory issues, Amendment No. 1 is not 
subject to notice and comment.
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II. Background

    On May 6, 2010, the U.S. equity markets experienced a severe 
disruption that, among other things, resulted in the prices of a large 
number of individual securities suddenly declining by significant 
amounts in a very short time period before suddenly reversing to prices 
consistent with their pre-decline levels.\6\ This severe price 
volatility led to a large number of trades being executed at 
temporarily depressed prices, including many that were more than 60% 
away from pre-decline prices. One response to the events of May 6, 
2010, was the development of the single-stock circuit breaker pilot 
program, which was implemented through a series of rule filings by the 
equity exchanges and by FINRA.\7\ The single-stock circuit breaker was 
designed to reduce extraordinary market volatility in NMS stocks by 
imposing a five-minute trading pause when a trade was executed at a 
price outside of a specified percentage threshold.\8\
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    \6\ The events of May 6 are described more fully in a joint 
report by the staffs of the Commodity Futures Trading Commission 
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC 
and SEC to the Joint Advisory Committee on Emerging Regulatory 
Issues, ``Findings Regarding the Market Events of May 6, 2010,'' 
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \7\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act 
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) 
(``Limit Up-Limit Down Plan'' or ``Plan'').
    \8\ See Securities Exchange Act Release Nos. 62884 (September 
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange 
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September 
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of 
the single-stock circuit breaker pilot) and Securities Exchange Act 
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011) 
(describing the ``third stage'' of the single-stock circuit breaker 
pilot).
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    To replace the single-stock circuit breaker pilot program, the 
equity exchanges filed a National Market System Plan\9\ pursuant to 
Section 11A of the Act,\10\ and Rule 608 thereunder,\11\ which featured 
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit 
Down Plan'' or ``Plan'').
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    \9\ NYSE Euronext filed on behalf of New York Stock Exchange LLC 
(``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc. 
(``NYSE Arca''), and the parties to the proposed National Market 
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago 
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock 
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial 
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX 
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange, 
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the 
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule 
change on an immediately effective basis to change its name to NYSE 
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No. 
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
    \10\ 15 U.S.C. 78k-1.
    \11\ 17 CFR 242.608.
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    The Plan sets forth requirements that are designed to prevent 
trades in individual NMS stocks from occurring outside of the specified 
price bands. The price bands consist of a lower price band and an upper 
price band for each NMS stock. When one side of the market for an 
individual security is outside the applicable price band, i.e., the 
National Best Bid is below the Lower Price Band, or the National Best 
Offer is above the Upper Price band, the Processors \12\ are required 
to disseminate such National Best Bid or National Best Offer \13\ with 
a flag identifying that quote as non-executable. When the other side of 
the market reaches the applicable price band, i.e., the National Best 
Offer reaches the lower price band, or the National Best Bid reaches 
the upper price band, the market for an individual security enters a 
15-second Limit State, and the Processors are required disseminate such 
National Best Offer or National Best Bid with an appropriate flag 
identifying it as a Limit State Quotation. Trading in that stock would

[[Page 22358]]

exit the Limit State if, within 15 seconds of entering the Limit State, 
all Limit State Quotations were executed or canceled in their entirety. 
If the market does not exit a Limit State within 15 seconds, then the 
Primary Listing Exchange will declare a five-minute trading pause, 
which is applicable to all markets trading the security.
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    \12\ As used in the Plan, the Processor refers to the single 
plan processor responsible for the consolidation of information for 
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the 
Exchange Act. See id.
    \13\ ``National Best Bid'' and ``National Best Offer'' has the 
meaning provided in Rule 600(b)(42) of Regulation NMS under the 
Exchange Act. See id.
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    The Primary Listing Exchange may also declare a trading pause when 
the stock is in a Straddle State, i.e., the National Best Bid (Offer) 
is below (above) the Lower (Upper) Price Band and the NMS Stock is not 
in a Limit State. In order to declare a trading pause in this scenario, 
the Primary Listing Exchange must determine that trading in that stock 
deviates from normal trading characteristics such that declaring a 
trading pause would support the Plan's goal to address extraordinary 
market volatility.\14\
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    \14\ As set forth in more detail in the Plan, all trading 
centers would be required to establish, maintain, and enforce 
written policies and procedures reasonably designed to prevent the 
display of offers below the Lower Price Band and bids above the 
Upper Price Band for an NMS Stock. The Processors would be able to 
disseminate an offer below the Lower Price Band or bid above the 
Upper Price Band that nevertheless may be inadvertently submitted 
despite such reasonable policies and procedures, but with an 
appropriate flag identifying it as non-executable; such bid or offer 
would not be included in National Best Bid or National Best Offer 
calculations. In addition, all trading centers would be required to 
develop, maintain, and enforce policies and procedures reasonably 
designed to prevent trades at prices outside the price bands, with 
the exception of single-priced opening, reopening, and closing 
transactions on the Primary Listing Exchange.
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    On May 31, 2012, the Commission approved the Plan as a one-year 
pilot, which shall be implemented in two phases.\15\ The first phase of 
the Plan was implemented on April 8, 2013.\16\
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    \15\ See ``Limit Up-Limit Down Plan,'' supra note 7. See also 
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR 
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down 
Plan by BATS Exchange, Inc., BATS Y- Exchange, Inc., Chicago Board 
Options Exchange, Inc., et al.) and Securities Exchange Act Release 
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third 
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS 
Y- Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
    \16\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra 
note 15.
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III. Description of the Proposal

1. Market Maker Quoting Obligations

    In light of the Plan, the Exchange has proposed to adopt Rule 
530(f) to address market maker quoting obligations when an underlying 
security enters a Limit or Straddle state. Specifically, MIAX proposed 
in Rule 530(f)(1)(i)-(iv) to suspend, when the security underlying an 
option is in a Limit or Straddle State, the following market maker 
quoting obligations: (i) The bid/ask differential requirements set 
forth in Exchange Rule 603(b)(4); (ii) the minimum quote size 
requirement set forth in Exchange Rule 604(b)(2); (iii) the two-sided 
quote requirement set forth in Exchange Rule 604(c); and (iv) the 
continuous quote requirement set forth in Exchange Rule 604(e). 
Concerning the calculation of a market maker's continuous quoting 
obligation, the Exchange will exclude the amount of time an NMS stock 
underlying a MIAX option is in a Limit State or Straddle State from the 
total amount of time in the trading day when calculating the percentage 
of the trading day MIAX Market Makers are required to quote.
    The Exchange represented that market makers should be relieved of 
these quoting obligations during Limit and Straddle States because 
during such periods, market makers could not be certain whether they 
could buy or sell an underlying security, or if they could, at what 
price or quantity. The Exchange's corresponding proposal to suspend the 
maximum quotation spread requirement during Limit or Straddle States is 
intended to encourage market makers to choose to provide liquidity 
during such states. According to the Exchange, allowing options market 
makers the flexibility to choose whether to enter quotes, and to do so 
without restrictions on the bid-ask differential, the minimum size of 
the quote, and the ability to enter one-sided quotes, is necessary to 
encourage market makers to provide liquidity in options classes 
overlying securities that may enter a Limit State or Straddle State. 
The Exchange proposed Rule 530(f)(2) to make clear that a market 
maker's relief from the quoting obligations described above shall 
terminate when the Limit or Straddle state no longer exists in the 
affected underlying stock.

2. Market Maker Participation Guarantees

    MIAX additionally proposed in Rule 530(f)(3) to maintain, 
unchanged, its scheme concerning the priority of quotes and orders 
during Limit and Straddle states. Specifically, MIAX has proposed to 
keep the provisions of Exchange Rule 514 unaffected during Limit or 
Straddle states when a market maker receives relief from its quoting 
obligations.
    Exchange Rule 514 describes, among other things, priority of quotes 
and orders on the Exchange, allocation methods used on the Exchange, 
and participation guarantees granted to certain Market Makers. Rule 
514(g) details the Primary Lead Market Maker (``PLMM'') participation 
guarantee and Rule 514(h) describes the Directed Lead Market Maker 
(``DLMM'') participation guarantee. The participation guarantees set 
forth in Exchange Rule 514 only apply if the affected PLMM or DLMM has 
submitted a priority quote at the NBBO. The Exchange represented that, 
although proposed rule 530(f)(1) would relieve market makers, including 
PLMMs and DLMMs, from their quoting obligations during Limit or 
Straddle states, maintaining participation guarantees could encourage 
market makers to provide liquidity at the NBBO during such states.

3. Priority Quotes

    Similarly, the Exchange proposed in Rule 530(g)(2)(i) to consider 
all market maker quotes submitted during Limit or Straddle states that 
result in an execution to be ``priority quotes,'' notwithstanding the 
usual criteria governing priority quotes that would otherwise be 
applicable under Rule 517(b).\17\ When a quote is deemed a priority 
quote, it receives precedence for allocation purposes over all 
``Professional Interest.'' \18\
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    \17\ The otherwise applicable criteria governing priority quotes 
are: (A) The bid/ask differential of a Market Maker's two-sided 
quote pair must be valid width (no wider than the bid/ask 
differentials outlined in Rule 603(b)(4)); (B) the initial size of 
both of the Market Maker's bid and the offer must be in compliance 
with the requirements of Rule 604(b)(2); (C) the bid/ask 
differential of a Market Maker's two-sided quote pair must meet the 
priority quote width requirements defined below in subparagraph (ii) 
for each option; and (D) either of the following are true: (1) At 
the time a locking or crossing quote or order enters the System, the 
Market Maker's two-sided quote pair must be valid width for that 
option and must have been resting on the Book; or (2) 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 for that 
option. See Exchange Rule 517(b)(i).
    \18\ See Exchange Rule 517(b). ``Professional Interest'' is 
defined in Exchange Rule 100 to include orders for the account of a 
person or entity that is a broker or dealer in securities or places 
more than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s).
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    MIAX represented that the purpose of this proposed rule is to 
provide an incentive for Market Makers to submit quotations during 
Limit and Straddle states by affording their quotes priority quote 
status, ensuring them of priority executions over professional interest 
when they assume the risk of quoting at or near the NBBO during times 
of extreme volatility. As with the participation guarantees, a market 
maker quote is deemed a priority quote during such states only if it 
participates in an execution at the NBBO.

[[Page 22359]]

4. Opening Process

    Proposed Rule 530(g) sets forth changes in the manner in which the 
Exchange's System will function during Limit and Straddle States. 
Specifically Proposed Rule 530(g)(1) describes the functionality of the 
Exchange's Opening Process \19\ when a Straddle State or Limit State 
occurs before and during the Opening Process.
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    \19\ The Exchange's Opening Process is described in greater 
detail in Exchange Rule 503.
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    Proposed Rule 530(g)(1)(i) provides that Opening Process shall be 
delayed for options overlying an NMS Stock that entered a Straddle 
State or a Limit State prior to the opening of trading such overlying 
options. As proposed, the Opening Process shall begin when such 
Straddle or Limit State has ended and there is not a halt or Trading 
Pause in effect. The Exchange therefore will not open an option 
overlying an NMS Stock that is in a Limit State or Straddle State.
    Proposed Rule 530(g)(1)(ii) addresses scenarios where the 
Exchange's Opening Process has started but not yet completed when the 
underlying NMS Stock enters a Straddle or Limit State. When the 
affected option is in the Opening Process but trading has not begun, 
the Opening Process will be terminated if the underlying NMS Stock is 
in a Limit or Straddle State. The Opening Process will begin anew in 
the affected overlying options when such Limit or Straddle State has 
ended and there is not a halt or Trading Pause in effect. Thus, if an 
Opening Process is occurring, it will cease and the Exchange shall re-
commence the Opening Process from the beginning once the Limit or 
Straddle State is no longer present.

5. Trading Pauses and Opening After a Trading Pause

    Proposed Rule 530(h) provides that the Exchange will halt trading 
in options overlying an NMS Stock that is subject to a trading pause. 
The Exchange clarified in Amendment No. 1 that proposed Rule 530(h) is 
intended merely to clarify that current Exchange Rule 504(c)--the 
generally applicable rule concerning the treatment of options overlying 
securities subject to a trading pause--shall equally apply when an 
underlying security becomes subject to a trading pause as a result of 
the Plan.
    Proposed Rule 530(i) provides that the Exchange will open trading 
following a trading pause pursuant to the Exchange's opening procedures 
contained in Rule 503. Proposed Rule 530(i) further adds that the 
Exchange may resume trading in options contracts overlying an affected 
NMS Stock if trading on the Primary Listing Exchange has not resumed 
within ten minutes of receipt of a trading pause and at least one 
exchange has resumed trading in such NMS Stock.

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and rules and 
regulations thereunder applicable to a national securities 
exchange.\20\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\21\ which, 
among other things, requires a national securities exchange to be so 
organized and have the capacity to be able to carry out the purposes of 
the Act and 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 the exchange, and is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulation, clearing, settling, 
processing information with respect to, and facilitating 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.
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    \20\ In approving the proposed rule changes, the Commission has 
considered their impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b).
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    The Commission finds that the proposal to suspend a market maker's 
obligations when the underlying security is in a Limit or Straddle 
State is consistent with the Act. During a Limit or Straddle State, 
there may not be a reliable price for the underlying security to serve 
as a benchmark for market makers to price options. In addition, the 
absence of an executable bid or offer for the underlying security will 
make it more difficult for market makers to hedge the purchase or sale 
of an option. Given these significant changes to the normal operating 
conditions of market makers, the Commission finds that the Exchange's 
decision to suspend a market maker's obligations in these limited 
circumstances is consistent with the Act.
    The Commission notes, however, that the Plan was approved on a 
pilot basis and its Participants will monitor how it is functioning in 
the equity markets during the pilot period. To this end, the Commission 
expects that, upon implementation of the Plan, the Exchange will 
continue monitoring the quoting requirements that are being amended in 
this proposed rule change and that it will determine if any necessary 
adjustments are required to ensure that they remain consistent with the 
Act.
    The Commission also finds that the proposal to maintain 
participation guarantees and priority quote treatment for market makers 
who participate in an execution at the NBBO during a Limit or Straddle 
state is consistent with the Act. To the extent that market makers are 
only eligible for such benefits if they are quoting at the best price 
on the Exchange, this proposal is reasonably designed to incentivize 
market makers to quote more aggressively when the underlying security 
has entered into a limit up-limit down state than they might otherwise 
quote, potentially providing additional liquidity and price discovery.
    Lastly, the Commission finds that the Exchange's proposals 
concerning its Opening Process and use of trading halts when an 
underlying security is subject to a trading pause are consistent with 
the Act. The Exchange's proposal to delay its Opening Process for an 
option if the underlying has entered a Limit or Straddle is reasonably 
designed to avoid opening an option during a time when the price of the 
underlying security may be uncertain.\22\ Similarly, the Commission 
finds that it is reasonable for the Exchange to halt trading in an 
option when the underlying security is subject to a trading pause under 
the Plan. This element of the Exchange's proposal is consistent with 
how the Exchange currently treats options when an underlying security 
is subject to a trading pause,\23\ and is also consistent with the 
practice of other exchanges in this respect.\24\
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    \22\ The Exchange's proposal concerning its Opening Process is 
also consistent with what other exchanges have proposed. See, e.g., 
Phlx Rule 1047(f)(i).
    \23\ See Exchange Rule 504(c).
    \24\ See, e.g., CBOE Rule 6.3.06; NYSE Arca Rule 6.65(b); Phlx 
Rule 1047(e).
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    In addition, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act \25\ for approving the proposed rule change on an 
accelerated basis. This proposal is related to the Plan, which became 
operative on April 8, 2013. Accelerating approval will allow the 
proposed rule change, and any attendant benefits, to take effect as 
shortly after the Plan's implementation date as possible. Accordingly, 
the

[[Page 22360]]

Commission finds that good cause exists for approving the proposed rule 
change on an accelerated basis.
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    \25\ 15 U.S.C. 78s(b)(2)
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\26\ that the proposed rule change (SR-MIAX-2013-15), as modified by 
Amendment No. 1, is approved on an accelerated basis.
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    \26\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08726 Filed 4-12-13; 8:45 am]
BILLING CODE 8011-01-P


