
[Federal Register Volume 78, Number 110 (Friday, June 7, 2013)]
[Notices]
[Pages 34417-34419]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13508]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69682; File No. SR-MIAX-2013-21]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing of Proposed Rule Change To Modify the 
Allocation of Directed Orders in Specific Limited Situations

June 3, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 22, 2013, Miami International Securities Exchange LLC (``MIAX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 514 to 
modify the allocation of Directed Orders in specific limited 
situations.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at 
MIAX's principal office, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Exchange Rule 514 to modify the 
allocation of Directed Orders \3\ to provide a Directed Lead Market 
Maker (``DLMM'') a minimum participation allocation of one (1) contract 
in certain situations where the DLMM participation entitlement 
allocation results in an allocation of zero due to the fact that the 
Exchange System rounds down any fractional contract size allocations.
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    \3\ A `Directed Order' is an order entered into the System by an 
Electronic Exchange Member with a designation for a Lead Market 
Maker (referred to as a ``Directed Lead Market Maker''). See 
Securities Exchange Act Release No. 69507 (May 3, 2013), 78 FR 27269 
(May 9, 2013) (SR-MIAX-2013-20).
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    Exchange Rule 514(h)(1) provides the formula used to calculate the 
DLMM participation entitlement. Specifically, the DLMM participation 
entitlement is equal to the greater of: (i) The proportion of the total 
size at the best price represented by the size of its quote; (ii) sixty 
percent (60%) of the contracts to be allocated if there is only one (1) 
other Market Maker quotation at the NBBO; or (iii) forty percent (40%) 
if there are two (2) or more other Market Maker quotes at the NBBO.\4\ 
The DLMM participation entitlement algorithm works well when applied to 
Directed Orders of a contract size of three (3) or more. However, for 
Directed Orders of a contract size of two (2) or less, the DLMM 
participation entitlement allocation may result in an allocation of 
zero due to the fact that the Exchange

[[Page 34418]]

System rounds down any fractional contract size allocations.\5\
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    \4\ See Exchange Rule 514(h)(1).
    \5\ For example, the Exchange System will round down any 
fractional contract sizes in the following way: 3.7 contracts to 3 
contracts; 1.7 contracts to 1 contract; or 0.7 contract size to zero 
contracts.
    The Exchange notes that other competing exchanges may round up 
in certain situations where there is a fractional contract size 
allocation. Rounding up fractional contract sizes in this situation 
would result in a 0.7 contract size equaling 1 contract.
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    Example 1:
    Three (3) Lead Market Makers (LMMs) quoting at the NBBO; no orders 
resting on the Exchange System; and the DLMM participation entitlement 
overlay is in effect.

LMM1 Quote: 1.00 (35) x 1.10 (10)
LMM2 Quote: 1.00 (35) x 1.10 (10)
LMM3 Quote: 1.00 (10) x 1.10 (10)
MIAX Market: 1.00 (80) x 1.10 (30)

    Incoming Directed Order: Sell 3 contracts @ 1.00 directed to LMM3.
    The Exchange System operates as follows:
     LMM3 is entitled to the greater of: (i) pro-rata 
allocation, 0.375 contract (10/80 x 3 contracts); or (ii) 40%, 1.2 
contract (40% x 3 contracts). LMM3 would receive a DLMM participation 
entitlement of 1 contract.\6\
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    \6\ Since, the Exchange System is designed to round fractional 
allocations down, LMM3's DLMM participation entitlement of 1.2 
contracts is rounded down to 1 contract.
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     LMM1 and LMM2 would each receive 1 contract.\7\
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    \7\ With two contracts remaining to be allocated, the Exchange 
System applies the pro-rata allocation logic of Exchange Rule 
514(c)(2), which allocates one (1) contract at a time on a price-
size-time priority because the Directed Order (two contracts) cannot 
be evenly allocated between LMM1 and LMM2. See Exchange Rule 
514(c)(2). LMM3 would be excluded from receiving a pro-rata 
allocation, because LMM3 has already been allocated a participation 
entitlement. See Exchange Rule 514(e)(1). LMM1 and LMM2 are bidding 
at the same price, so priority is then determined by size. LMM1 and 
LMM2 are displaying the same bid size, so priority for the first 
contract is determined by time. LMM1 is allocated the first contract 
assuming LMM1 has the time priority. The next contract is allocated 
in the same fashion. LMM1 and LMM2 are bidding at the same price, so 
priority is determined by size. At that point, LMM2 is displaying 
the most size and is allocated the last contract.
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    Example 2:
    Three (3) Lead Market Makers (LMMs) quoting at the NBBO; no orders 
resting on the Exchange System; and the DLMM participation entitlement 
overlay is in effect.

LMM1 Quote: 1.00 (35) x 1.10 (10)
LMM2 Quote: 1.00 (35) x 1.10 (10)
LMM3 Quote: 1.00 (10) x 1.10 (10)
MIAX Market: 1.00 (80) x 1.10 (30)

    Incoming Directed Order: Sell 2 contracts @ 1.00 directed to LMM3.
    The Exchange System operates as follows:
     LMM3 is entitled to the greater of: (i) pro-rata 
allocation, 0.25 contract (10/80 x 2 contracts); or (ii) 40%, 0.8 
contract (40% x 2 contracts). LMM3 would receive a DLMM participation 
entitlement of zero.\8\
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    \8\ Since, the Exchange System is designed to round fractional 
allocations down, LMM3's DLMM participation entitlement of 0.8 
contracts is rounded down to zero.
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     LMM1 and LMM2 would each receive 1 contract.\9\

    \9\ With two contracts remaining to be allocated, the Exchange 
System applies the pro-rata allocation logic of Exchange Rule 
514(c)(2), which allocates one (1) contract at a time on a price-
size-time priority because the Directed Order (two contracts) cannot 
be evenly allocated among LMM1, LMM2, and LMM3. See Exchange Rule 
514(c)(2). LMM3 would be included in the pro-rata allocation 
calculation, because LMM3 was not allocated a participation 
entitlement. See Exchange Rule 514(e)(1). LMM1, LMM2, and LMM3 are 
bidding at the same price, so priority is then determined by size. 
LMM1 and LMM2 are displaying the same bid size (both greater than 
the bid size of LMM3), so priority for the first contract is 
determined by time. LMM1 is allocated the first contract assuming 
LMM1 has the time priority. The next contract is allocated in the 
same fashion. LMM1, LMM2, and LMM3 are bidding at the same price, so 
priority is determined by size. At that point, LMM2 is displaying 
the most size and is allocated the last contract.
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LMM3, who succeeded in drawing the Directed Order to the Exchange, does 
not receive a contract allocation.
    The Exchange proposes to modify the allocation of Directed Orders 
to provide a DLMM a minimum participation allocation of one (1) 
contract in situations where the DLMM participation allocation 
currently results in an allocation of zero due to the fact that the 
Exchange System rounds down any fractional contract size allocations. 
Specifically, the Exchange seeks to remedy these situations by adding 
``or (iii) one (1) contract'' to the DLMM participation entitlement 
formula of Exchange Rule 514(h)(1). Thus, the DLMM would be entitled to 
the greatest of: (i) the pro-rata share; (ii) 40% or 60% of the 
incoming Directed Order (depending on the number of other Market Makers 
quoting along with the DLMM); or (iii) one (1) contract. The following 
example, using the same facts as Example 2 above, illustrates the 
impact of the proposed change.
    Example 3:
    Three (3) LMMs quoting at the NBBO; no orders resting on the 
Exchange System; and the DLMM participation entitlement overlay is in 
effect.

LMM1 Quote: 1.00 (35) x 1.10 (10)
LMM2 Quote: 1.00 (35) x 1.10 (10)
LMM3 Quote: 1.00 (10) x 1.10 (10)
MIAX Market: 1.00 (80) x 1.10 (30)

    Incoming Directed Order: Sell 2 contracts @ 1.00 directed to LMM3.

The Exchange System would operate as follows:
     LMM3 would be entitled to the greater of: (i) Pro-rata 
allocation, 0.25 contract (10/80 x 2 contracts); (ii) 40%, 0.8 contract 
(40% x 2 contracts); or (iii) one (1) contract. LMM3 would receive a 
DLMM participation entitlement of one (1) contract.
     LMM1 would receive one (1) contract.\10\
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    \10\ The remaining contract would be allocated pursuant to the 
pro-rata allocation logic. The remaining contract would be allocated 
to LMM1 on time priority as both LMM1 and LMM2 had equally priced 
bids of the same size. LMM3 would be excluded from receiving a pro-
rata allocation, because LMM3 has already been allocated a 
participation entitlement. See Exchange Rule 514(e)(1). Thus, there 
is no risk in the LMM3 potentially receiving 100% of the Directed 
Order (e.g., one (1) contract during the participation entitlement 
and one (1) contract for being first in line for pro-rata allocation 
of the remainder because of price-size-time priority).
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    The Exchange believes that the proposed change preserves the 
integrity of its Directed Order program by enabling the DLMM to receive 
a minimum of one (1) contract in situations where the allocation would 
be zero due to the Exchange System's practice of rounding down 
fractional allocations. By choosing to enter a Directed Order over a 
non-directed order, an Electronic Exchange Member (``EEM'') actively 
intends to trade with the particular quote of the designated DLMM. In 
most situations when the DLMM participation entitlement applies, the 
EEM's Directed Order interacts and executes at least partially with the 
quote of the DLMM. However, when applying the DLMM participation 
entitlement to Directed Orders of a contract size of two (2) or less, 
such interaction with the quote of the DLMM may never occur because of 
the rounding down of fractional contract size by the Exchange System. 
The Exchange's proposal would fix these scenarios and ensure that the 
EEM's Directed Order would trade a minimum of one contract with the 
quote of the DLMM, when the DLMM participation entitlement applies. The 
Exchange believes this proposal to be fair because it preserves the 
original purpose of the Directed Order, to trade with the particular 
quote of the DLMM, and also correspondingly enables the DLMM to be 
rewarded with an allocation for having attracted the Directed Order to 
the Exchange.
    Because of the technology changes associated with this rule 
proposal, the Exchange will announce the implementation date of the 
proposal in a Regulatory Circular to be published no later than 30 days 
after the publication of the approval order in the Federal Register. 
The implementation date will be no later than 30 days following 
publication of the Regulatory Circular

[[Page 34419]]

announcing publication of the approval order in the Federal Register.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \11\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \12\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The proposal to establish a one (1) contract minimum for the DLMM 
participation entitlement promotes just and equitable principles of 
trade by enabling DLMM to be eligible for a participation entitlement 
regardless if the order is for three (3) contracts or more, or for two 
(2) contracts or less, in a manner that protects investors and the 
public interest. In addition, the proposal fosters cooperation and 
coordination with persons engaged in facilitating transactions in 
securities by fulfilling the intention of a Directed Order in a manner 
that provides additional certainty to both the EEM that initiates and 
the DLMM that receives a Directed Order in situations where the DLMM 
participation entitlement applies. The proposal is also designed to 
remove impediments to and perfect the mechanisms of a free and open 
market by providing additional certainty of execution of an EEM's 
Directed Order in a manner that encourages additional liquidity and 
order flow to the Exchange, improves overall market quality, and thus 
benefits all market participants. The Exchange notes that the proposal 
will have no effect on the existing participation entitlement program, 
except in the minority of situations where the DLMM participation 
entitlement is applied to Directed Orders of a contract size of two (2) 
or less. The Exchange also notes that Priority Customers will be 
unaffected by the proposal, as Priority Customer orders will continue 
to be allocated before the DLMM participation entitlement in a manner 
that promotes the protection of investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange notes that it 
operates in a highly competitive market in which market participants 
can readily direct order flow to competing venues who offer similar 
functionality. As to inter-market competition, the Exchange notes that 
other competing exchanges may already operate Directed Order programs 
which function in a similar manner, depending upon whether those 
exchanges choose to round up or round down fractional contract 
allocations. As to intra-market competition, the Exchange believes the 
proposal to be fair as it only applies to Directed Orders, which by 
their definition possess an intention by the EEM to trade with the 
quote of a particular DLMM. The Exchange notes that the proposal will 
have no effect on the existing participation entitlement program, 
except in the minority of situations where the DLMM participation 
entitlement is applied to Directed Orders of a contract size of two (2) 
or less. The Exchange believes it is appropriate and fair to preserve 
that intention by assuring that the Directed Order will trade at least 
one (1) contract with the DLMM.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-MIAX-2013-21 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number SR-MIAX-2013-21. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make publicly available. All 
submissions should refer to File Number SR-MIAX-2013-21 and should be 
submitted on or before June 28, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13508 Filed 6-6-13; 8:45 am]
BILLING CODE 8011-01-P


