
[Federal Register Volume 79, Number 78 (Wednesday, April 23, 2014)]
[Notices]
[Pages 22749-22752]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-09211]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71968; File No. SR-MIAX-2014-08]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Order Approving Proposed Rule Change To Modify Price 
Protection Provisions for the Execution of Orders

April 17, 2014.

I. Introduction

    On February 14, 2014, 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 modify the price protection 
provisions in certain of its rules that govern the execution of orders. 
The proposed rule change was published for comment in the Federal 
Register on

[[Page 22750]]

March 6, 2014.\4\ The Commission did not receive any comments on the 
proposal. This order approves the proposed rule change.
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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. 71634 (February 28, 
2014), 79 FR 12713 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes a number of revisions to MIAX Rules 515 and 
529, which govern the execution and routing of orders. The primary 
purpose of the proposal is to amend the existing ``price protection'' 
provisions in those rules that apply to non-Market Maker orders to 
permit market participants to specify the level of price protection on 
an order by order basis and allow for executions of non-Market Maker 
orders at additional price points. The Exchange also proposes several 
conforming changes to other provisions in order to accommodate the 
amended price protection process. Finally, the Exchange's proposal 
amends Rule 529 to provide an additional situation in which MIAX will 
immediately route a Public Customer to an away market for execution.
    MIAX Rule 515(c) governs the execution of non-Market Maker orders 
that cannot be executed on MIAX, in whole or in part, at the National 
Best Bid or Offer (``NBBO'') upon receipt. Currently, Rule 515(c)(1) 
provides that certain non-Market Maker orders are subject to price 
protection, which prevents an order from executing at a price that is 
more than one minimum price variation (``MPV'') inferior to the NBBO 
prevailing at the time the order is received (the ``original NBBO''). 
Under the current price protection rules, MIAX imposes across-the-board 
price protection and will cancel the remaining portion of any order 
that can potentially trade at a price that is more than one MPV away 
from the original NBBO.\5\
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    \5\ See current MIAX Rules 515(c)(1)(ii)(A), 
(c)(1)(ii)(B)(1)(b), (c)(1)(ii)(B)(2)(b), (c)(1)(iii)(A)(1)(a)2), 
(c)(1)(iii)(A)(1)(b)2), (c)(1)(iii)(B)(1)(b), and 
(c)(1)(iii)(B)(2)(b) (instances where the System cancels orders that 
are priced more than one MPV away from the NBBO).
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    MIAX has proposed to modify the one-size-fits-all price protection 
process so that market participants may instead choose to allow their 
orders to execute at more than one MPV away from the original NBBO. 
Specifically, MIAX will allow market participants to designate, on an 
order-by-order basis, price protection instructions that are expressed 
in units of MPV away from the NBBO at the time of the order's receipt, 
or the MIAX Best Bid or Offer (``MBBO'') if the Away Best Bid or Offer 
(``ABBO'') is crossing the MBBO at the time order is received.\6\ Such 
price protection will prevent an order from being executed beyond the 
price designated in the order's price protection instructions (``price 
protection limit''). If an order does not contain custom price 
protection instructions from the market participant, MIAX will apply as 
a default the one-MPV price protection limit that exists under current 
MIAX rules. Further, market participants will have the ability to elect 
to disable price protection on an order by order basis.
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    \6\ See MIAX Rule 100 (defining MBBO and ABBO).
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    Similar to how the price protection process operates under MIAX's 
current rules, when an order reaches its price protection limit (either 
the number of MPVs designated by the market participant for the order 
or the default of one MPV if a limit was not specified), MIAX will 
cancel the remaining portion of the order. Market participants can then 
determine whether to resubmit the order. In the Notice, MIAX 
represented that under both the existing and proposed price protection 
process, MIAX will not execute orders at prices inferior to the 
NBBO.\7\
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    \7\ See Notice, supra note 4, at 12714.
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    In the Notice, MIAX explained how the new price protection process 
will apply to both routable and non-routable non-Market Maker 
orders.\8\ For routable orders, MIAX will seek to execute the order to 
the extent possible at MIAX before routing to the ABBO. Unlike the 
current process, which limits an order to trading at two price points 
(i.e., the original NBBO and one MPV away from the original NBBO at the 
time the order is received), the proposed process will allow orders to 
trade on MIAX or route to away markets at multiple price points, up to 
any custom price protection limit designated with the order. Thus, MIAX 
will trade and/or route a routable order until the order is: Fully 
executed; traded or routed up to, and including, its price protection 
limit; or traded or routed up to, and including, its limit price. As is 
currently the case, a routable order that would otherwise trade and/or 
route through its price protection limit will be cancelled. A routable 
order that has traded or routed up to, and including, its limit price 
will be displayed and booked at its limit price to await further 
execution in accordance with Rule 515. MIAX noted in the Notice that 
the proposed new process could trigger successive Route Timers at each 
price point at which the order could be routed to an away market.\9\
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    \8\ MIAX provided several detailed examples in the Notice to 
illustrate how the revised price protection functionality and other 
proposed changes will operate. See Notice, supra note 4.
    \9\ See Notice, supra note 4, at n. 17. After each route, MIAX 
will reevaluate the order to consider any updates to the away market 
quotes and may trigger additional Route Timers. The MIAX Route Timer 
process is described in Rule 529.
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    For non-routable non-Market Maker orders,\10\ MIAX will similarly 
allow orders to execute at multiple price points, rather than limiting 
orders to being executed at either the original NBBO or only one MPV 
away from the NBBO as provided under existing MIAX rules. As proposed, 
MIAX will execute non-routable non-Market Maker orders until the order 
is: fully executed; traded up to, and including, its custom designated 
price protection limit; or traded up to, and including, its limit 
price. A non-routable order that reaches its price protection limit 
before it reaches its limit price will be cancelled. If a non-routable 
order reaches its limit price, MIAX will attempt to display the order 
at its limit price unless doing so would lock or cross the current 
opposite-side of the NBBO, in which case MIAX will handle the order in 
accordance with its ``managed interest process.'' \11\
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    \10\ Non-routable non-Market Maker orders include, for example, 
Public Customer orders that are marked ``Do Not Route.'' Consistent 
with the existing price protection process, a non-routable order is 
never routed outside of the Exchange regardless of prices displayed 
by away markets and can trade only the Exchange only at a price 
equal to or better than, but not inferior to, the ABBO.
    \11\ The ``managed interest process'' provides that when MIAX 
cannot display an order at its limit price because doing so would 
lock or cross the NBBO, MIAX will display the ``managed'' order one 
MPV away from the prevailing opposite side NBBO and book the order 
internally at a price that would lock the prevailing opposite side 
NBBO. See current MIAX Rule 515(c)(2). While the proposed rule 
change proposes some modifications to the ``managed interest 
process'' to allow for executions at multiple price points as a 
result of custom designated price protection instructions, MIAX will 
continue to ``manage'' non-routable orders in essentially the same 
way it does now by displaying the order one MPV away from the 
prevailing opposite side NBBO and booking the order at a price that 
would lock the opposite side NBBO. See proposed MIAX Rule 
515(c)(1)(ii). However, because ``managed'' orders could trade at 
multiple price points as a result of the filing, MIAX also proposes 
to add supplementary material to Rule 515 to provide that if managed 
interest becomes tradable at multiple price points on MIAX due to 
the ABBO transitioning from a crossed state to an uncrossed state, 
then the midpoint of the MBBO, rounded up to the nearest MPV if 
necessary, will be used for the initial trade price. See proposed 
MIAX Rule 515, Interpretations and Policies .02. In the Notice, MIAX 
stated that this provision regarding midpoint pricing ``codifies'' 
existing functionality used during the managed interest process, 
while updating the functionality to correspond with the new proposed 
price protection rules.
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    To accommodate the proposed changes to MIAX's price protection 
process as described above, MIAX's proposal also revises its 
``Liquidity

[[Page 22751]]

Refresh Pause'' mechanism to account for potential executions at 
multiple price points. Consistent with current MIAX rules, the 
Liquidity Refresh Pause will continue to be triggered when: (A) Either 
an incoming order is a limit order whose limit price crosses the NBBO 
or the initiating order is a market order, and the limit order or 
market order could only be partially executed (``initiating order''); 
(B) a Market Maker quote was all or part of the MBBO when the MBBO is 
alone at the NBBO; and (C) the Market Maker quote was exhausted. In 
such cases, rather than immediately executing at the next available 
price, the MIAX system pauses the market for a period of time not to 
exceed one second to allow Marker Makers to refresh their quotes and 
orders as well as to allow other market participants to submit orders 
to execute against the remaining portion of the initiating order.
    Much of the Liquidity Refresh Pause process remains the same under 
the proposal. However, because orders with custom price protection 
instructions may now trade at multiple price points, MIAX proposes to 
trigger a Liquidity Refresh Pause either at the time it receives the 
order, or when MIAX ``reevaluates'' an order at the various price 
points at which it may execute. In addition, as a result of the 
proposed ``reevaluation'' of orders at different price points, MIAX's 
proposal revises the message that it will disseminate during the 
Liquidity Refresh Pause. Currently, MIAX disseminates a message to 
announce the Liquidity Refresh Pause that includes, in addition to a 
description of the option and the size and side of the order, ``the 
original NBBO price, which has been exhausted.'' \12\ Under the 
proposed rules, the liquidity refresh message will disseminate a 
description of the option, size and side of the order, and ``the 
exhausted MBBO price.'' \13\ The Exchange states that this change is 
necessary because orders may now trade at multiple price points and the 
pause may therefore occur at multiple successive price points.
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    \12\ See current MIAX Rule 515(c)(iii)(A).
    \13\ See proposed MIAX Rule 515(c)(2). As noted in the filing, 
the liquidity refresh message is disseminated only to subscribers of 
MIAX's proprietary data feeds. The message is not disseminated 
publicly through the Options Price Reporting Authority (OPRA) feed.
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    MIAX's proposal also will change the way MIAX handles new quotes or 
orders that it receives during the Liquidity Refresh Pause on the same 
side of the market as the initiating order's remaining contracts. 
Currently, when new quotes or orders are received during a Liquidity 
Refresh Pause on the same side as the order that initiated the pause, 
with a price that would lock or cross the original NBBO, MIAX adds the 
orders and quotes to its MBBO and the pause continues to run.\14\ Under 
the proposal, MIAX will instead terminate the pause when new orders or 
quotes are received on the same side of the initiating order with a 
price that would lock or cross the NBBO, and MIAX will then process all 
orders and quotes.\15\ Under both the existing and proposed rules, 
orders and quotes are executed in the order in which they were 
received, meaning the initiating order will execute first, followed by 
any new same-side orders or quotes based on their time of receipt. 
Similar to how the proposal will ``reevaluate'' an order for execution 
until exhausted, and thus will allow for multiple Route Timers and 
different price points, MIAX will allow an order to potentially trigger 
multiple Liquidity Refresh Pauses at different price points if the 
initiating order is not completely filled after the first pause.
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    \14\ See current MIAX Rule 515(c)(1)(iii)(A)(1)(c).
    \15\ See proposed MIAX Rule 515(c)(2)(i)(C). The proposal also 
amends how Immediate or Cancel (``IOC'') or Fill or Kill (``FOK'') 
orders interact with the Liquidity Refresh Pause. Specifically, 
rather than an IOC or FOK order getting cancelled if received on the 
same side of the market as the initiating order's remaining 
contracts, as it does under the current MIAX rules, if an IOC or FOK 
order is received on the same side of the market as the initiating 
order that locks or crosses the opposite side NBBO, it will cause 
the Liquidity Refresh Pause to terminate early and will be eligible 
to be executed in order of receipt, after the initiating order. The 
proposal will not change how same-side Auction or Cancel or 
Intermarket Sweep Orders are handled during a Liquidity Refresh 
Pause (they are cancelled), nor will it change how the pause 
terminates if the NBBO becomes crossed.
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    The Exchange also proposes to amend MIAX Rules 515(e) and 515(f) to 
permit market participants to also be able to designate custom price 
protection instructions on an order by order basis for Immediate or 
Cancel (``IOC'') and Fill or Kill (``FOK'') order types, 
respectively.\16\ With regard to IOC orders, the Exchange proposes to 
allow trading at multiple prices not to exceed the IOC order's limit 
price or the order's price protection limit, provided the execution 
does not trade at a price inferior to the current ABBO. With regard to 
FOK orders, receipt of a FOK order during a liquidity refresh pause 
currently causes the pause to terminate early, in which case the FOK 
order might not get a fill because the initiating order has priority. 
As proposed, MIAX will provide an additional opportunity for a FOK that 
is received during a liquidity refresh pause to access more liquidity 
after the pause ends. If MIAX is at the NBBO, then MIAX will execute 
the FOK order at the NBBO price or better and if the FOK order could 
not be executed in full at a single price, the FOK order is cancelled. 
If the MBBO is not at the NBBO or the FOK order is not fully executable 
against any orders or quotes on MIAX, the FOK order will be cancelled 
immediately.
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    \16\ Specifically, this includes: (i) Price protection 
instructions being expressed in units of MPV away from the NBBO at 
the time of the order's receipt, or the MBBO if the ABBO is crossing 
the MBBO; (ii) the default price protection being one MPV away from 
the NBBO at the time of receipt, or the MBBO if the ABBO is crossing 
the MBBO; and (iii) market participants being able to elect to 
disable price protection on an order by order basis.
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    Finally, the proposal would revise MIAX Rule 529, which governs the 
routing of orders to other markets. Currently, MIAX does not route 
Public Customer orders once they are resting on the MIAX book. As 
proposed, however, Rule 529 will provide that a resting Public Customer 
order will not initiate a route timer, but instead may be routed 
together with an incoming Public Customer order that separately has 
initiated a Route Timer. Specifically, when applicable, MIAX will 
immediately route the initiating Public Customer order, together with 
any routable resting interest on the same side of the market, to the 
opposite side ABBO, and the orders will be processed in the order in 
which they were received.

III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it consistent with the requirements of the Act.\17\ 
Specifically, the Commission believes MIAX's proposal is consistent 
with Section 6(b)(5) of the Act,\18\ which requires, among other 
things, that the rules of a national securities exchange be 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 regulating, 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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    \17\ 15 U.S.C. 78f. In approving this proposed rule change, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposed revised price 
protection process, which is more flexible and customizable than the 
current fixed one-MPV price protection

[[Page 22752]]

scheme, could allow market participants greater control over the 
execution of their orders. Specifically, the proposal may help market 
participants avoid having orders cancelled as a result of a narrow one-
MPV price protection limit, particularly in instances when the order's 
limit price expresses a willingness to trade more than one MPV away 
from the NBBO that prevailed at the time the order was received. The 
Commission notes, however, that such a result may still occur under the 
proposal, when either the default one-MPV price protection limit 
applies as a result of the member not providing customized 
instructions, or when a custom price protection limit sits between an 
order's limit price and the NBBO at the time the order is received. The 
Commission notes further that, in order to accommodate the amended 
price protection functionality, the proposal will allow orders to 
trigger pauses at multiple successive price points, either through the 
Route Timer or Liquidity Refresh mechanisms.
    In addition to providing market participants greater control over 
the execution of their orders, the Commission believes that the 
proposal also could facilitate more order interaction. By allowing 
orders to execute at multiple price points, up or down to their price 
protection limit or limit price, and to route to away markets at 
multiple price points, the proposal will allow market participants to 
interact with greater liquidity both on MIAX and on away markets and 
increase the opportunity for their orders to receive an execution. 
Importantly, as is the case under the current price protection 
functionality, the Commission notes that under the revised process, 
MIAX will not execute incoming orders at prices inferior to the then-
current NBBO.
    The Commission believes that the change regarding terminating a 
Liquidity Refresh Pause when a new quote or order is received during a 
Liquidity Refresh Pause on the same side of the market as the 
initiating orders' remaining contracts that locks or crosses the 
original NBBO is consistent with the Act. The Commission notes that 
terminating the pause in such a situation allows the displayed opposite 
side of the MBBO to receive an immediate execution. Further, the 
Commission notes that, as under the current MIAX rules, orders will 
then be processed in the order in which they were received.
    Finally, the Commission believes that the proposed change to permit 
immediate routing in an additional situation (i.e., for Public Customer 
orders resting on the book when an incoming Public Customer order has 
initiated a Route Mechanism) will benefit Public Customers by providing 
such orders with greater access to marketable away liquidity and will 
allow such orders more promptly to receive an execution instead of 
being restricted from immediately routing away. As the Commission noted 
in its approval of MIAX's application for registration as a national 
securities exchange, pursuant to MIAX's immediate routing process in 
Rule 529, orders have to meet a number of criteria to be eligible for 
immediate routing, and as such, many, if not most, orders are likely 
subject to the one second Route Timer, rather than immediately routing 
to an away exchange displaying the NBBO.\19\ While MIAX is not 
specifically required to route to away markets, the Commission believes 
that providing an additional opportunity for immediate routing should 
be beneficial to Public Customer orders.
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    \19\ See Securities Exchange Act Release No. 68341 (December 3, 
2012), 77 FR 73065, 73086-87 (December 7, 2012) (noting that broker-
dealers have a duty of best execution and thus broker-dealers 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).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\20\ that the proposed rule change (SR-MIAX-2014-08), is approved.
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    \20\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-09211 Filed 4-22-14; 8:45 am]
BILLING CODE 8011-01-P


