
[Federal Register Volume 81, Number 96 (Wednesday, May 18, 2016)]
[Notices]
[Pages 31286-31289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11651]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77817; File No. SR-MIAX-2016-10]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Exchange Rule 612, Aggregate Risk Manager 
(``ARM'')

May 12, 2016.
    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on April 29, 2016, Miami International 
Securities Exchange LLC (``MIAX'' or the ``Exchange'') filed with the 
Securities and Exchange Commission (the ``Commission'') a proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 612, 
Aggregate Risk Manager (``ARM'').
    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 612, Aggregate Risk 
Manager (``ARM''), to modify the minimum Allowable Engagement 
Percentage (as described below) determined by Exchange Market Makers, 
and to codify the Exchange's existing practice of establishing default 
ARM settings, as described below. The Exchange is also proposing two 
minor technical amendments to Rule 612(a), as described below.
    ARM protects MIAX Market Makers \3\ and assists them in managing 
risk by limiting the number of contracts they execute in an option 
class on the Exchange within a specified time period that has been 
established by the Market Maker (a ``specified time period''). MIAX 
Market Makers establish a percentage of their quotations (the 
``Allowable Engagement Percentage'' or ``AEP'') and the specified time 
period for each option class in which they are appointed.\4\ The System 
activates the Aggregate Risk Manager when it has determined that a 
Market Maker has traded a number of contracts equal to or above their 
AEP during the specified time period. When an execution against a 
Market Maker's Standard quote \5\ or Day eQuote (as defined below) 
occurs, the System looks back over the specified time period to 
determine whether the execution is of sufficient size to trigger the 
Aggregate Risk Manager. The Aggregate Risk Manager then

[[Page 31287]]

automatically cancels and removes the Market Maker's Standard quotes 
and/or Day eQuotes from the Exchange's disseminated quotation in all 
series of that particular option class until the Market Maker sends a 
notification to the System of the intent to reengage quoting and 
submits a new revised quotation in the affected class.
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    \3\ The term ``Market Maker'' refers to a ``Lead Market Maker,'' 
``Primary Lead Market Maker'' and ``Registered Market Maker'' 
collectively. A Lead Market Maker is a Member registered with the 
Exchange for the purpose of making markets in securities traded on 
the Exchange and that is vested with the rights and responsibilities 
specified in Chapter VI of these Rules with respect to Lead Market 
Makers. A Primary Lead Market Maker is a Lead Market Maker appointed 
by the Exchange to act as the Primary Lead Market Maker for the 
purpose of making markets in securities traded on the Exchange. A 
Registered Market Maker is a Member registered with the Exchange for 
the purpose of making markets in securities traded on the Exchange, 
who is not a Lead Market Maker. See Exchange Rule 100.
    \4\ The Exchange's Board or designated committee appoints one 
Primary Lead Market Maker and other Market Makers to each options 
class traded on the Exchange. For a complete description of the 
Exchange's appointment process, see Exchange Rule 602.
    \5\ A Standard quote is a quote submitted by a Market Maker that 
cancels and replaces the Market Maker's previous Standard quote, if 
any. See Exchange Rule 517(a)(1).
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    Any eQuotes \6\ other than Day eQuotes \7\ present in the market 
are not cancelled by the Aggregate Risk Manager.
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    \6\ An eQuote is a quote with a specific time in force that does 
not automatically cancel and replace a previous Standard quote or 
eQuote. An eQuote can be cancelled by the Market Maker at any time, 
or can be replaced by another eQuote that contains specific 
instructions to cancel an existing eQuote. See Exchange Rule 
517(a)(2).
    \7\ A Day eQuote is a quote submitted by a Market Maker that 
does not automatically cancel or replace the Market Maker's previous 
Standard quote or eQuote. Day eQuotes will expire at the close of 
trading each trading day. See Exchange Rule 517(a)(2)(i).
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    Currently, Exchange Rule 612(a) states that the Market Maker will 
establish for each option class an AEP that cannot be less than 100%.
    First, the proposed amendments to Rule 612(a) would modify the 
existing rule to allow a Market Maker to establish an AEP at any 
percentage level for an option class in which such Market Maker is 
appointed. The Exchange believes that this change will give Market 
Makers the ability to better manage their risk and help them avoid 
trading a number of contracts that exceeds the Market Maker's risk 
tolerance level across multiple series when multiple series are 
executed in rapid succession.\8\
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    \8\ All of a Market Maker's quotes in each option class will be 
considered firm until such time as the AEP threshold has been 
equaled or crossed and the Market Maker's quotes are removed by the 
Aggregate Risk Manager in all series of that option class. Any 
marketable orders, or quotes that are executable against a Market 
Maker's disseminated quotation that are received prior to the time 
the Aggregate Risk Manager is engaged will be automatically executed 
at the disseminated price up to the Market Maker's disseminated 
size, regardless of whether such an execution results in executions 
in excess of the Market Maker's AEP. See Exchange Rule 612(c).
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    The purpose of the proposed rule change is to enable individual 
Market Makers to enhance their risk management for an individual option 
class or for multiple classes as market conditions warrant, based on 
their own risk tolerance level and quoting behavior. Market Makers will 
be able to more precisely customize their risk management within the 
MIAX System than previously permitted, taking into account such factors 
as the market conditions both present and anticipated, news that may 
affect an option class in which they are appointed, a sudden change in 
the volatility of an option, and other considerations affecting their 
risk management, without any limitation as to the level of the AEP that 
will trigger the Aggregate Risk Manager. The proposed rule change will 
provide greater ability for Market Makers to adapt more exact and 
precise risk controls based on the Market Maker's risk tolerance 
levels.
    Additionally, the Exchange proposes to amend Exchange Rule 612 to 
codify the Exchange's existing practice of establishing a default 
specified time period and a default AEP if such values are not 
established by a Market Maker. Currently, Exchange Rule 612(a) states 
that the specified time period cannot exceed 15 seconds. The proposed 
rule change would provide that the 15-second maximum will apply whether 
the specified time period is established by the Market Maker or as a 
default setting.
    The proposed rule change codifies that the Exchange will establish 
a default specified time period and a default AEP (``default 
settings'') on behalf of Market Makers that have not established a 
specified time period and/or an AEP. The purpose of the default 
settings is to assist Market Makers in managing their risk in the event 
that they have not established a specified time period and/or an AEP in 
a particular appointed option and trading in such appointed option 
becomes active. For example, a Market Maker might not establish a 
specified time period or an AEP in an appointed option that has a 
relatively low average daily volume. If such an appointed option 
becomes extremely active due to news, world events or overall market 
changes, the default settings are in place to ensure that the Market 
Maker's quotations are protected and removed from the Exchange's 
disseminated quotation when the default setting threshold has been 
reached. The default settings benefit not only the Market Maker but the 
marketplace as a whole by enhancing stability and maintaining fair and 
orderly markets on MIAX when the settings are not established by the 
Market Maker, and ensure that all Exchange Market Makers are protected 
by ARM regardless of whether they establish ARM settings on their own. 
The default settings will be determined by the Exchange on an Exchange-
wide basis and announced to Members via Regulatory Circular. The 
proposed rule change will serve to notify all market participants that 
the Exchange will establish the default settings for Market Makers and 
will apply them to all appointed option classes in which a Market Maker 
has not determined its specified time period or AEP. Any changes to the 
default settings will also be announced to Members via Regulatory 
Circular.
    The current rule states that the specified time period cannot 
exceed 15 seconds. This 15-second limitation will apply to the 
specified time period whether it is established by a Market Maker or 
set by the Exchange by default; thus the proposed rule change would 
clarify in the rule text that the specified time period cannot exceed 
15 seconds, whether established by the Market Maker or as a default 
setting. Additionally, although the proposed rule states that the 
default AEP shall not be less than 100%, this Exchange-established 
default AEP setting will not limit a Market Maker's ability to 
establish an AEP of less than or greater than 100%. A Market Maker may 
establish the AEP for an appointed option class at any level. The 
Exchange will apply the default settings when a specified time period 
and/or an AEP has not been established by a Market Maker appointed in 
an option class. The current default specified time period setting is 1 
second. The current default AEP setting is 105%. The Exchange does not 
propose to change the current default settings in the instant proposed 
rule change.
    The Exchange is proposing two minor technical changes to Exchange 
Rule 612(a). First, the Rule currently refers to a Market Maker's 
``assigned'' option classes. In order to maintain uniformity within 
Rule 612, the Exchange proposes to replace the word ``assigned'' with 
the word ``appointed,'' as it is used later in the Rule.\9\ 
Additionally, the current Rule states that ``[T]he Market Maker will 
also establish for each option class an Allowable Engagement Percentage 
. . .'' Because of the new codification of the default AEP setting 
established by the Exchange on behalf of a Market Maker that has not 
established an AEP in a given appointed class, the Exchange proposes to 
state that a Market Maker ``may'' establish an AEP, with the 
understanding that an AEP will be established by the Exchange on the 
Market Maker's behalf if not set by the Market Maker.
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    \9\ See Exchange Rule 612, Interpretations and Policies .02(a).
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    The Exchange will announce the implementation date of the proposed 
rule change by Regulatory Circular to be published no later than 60 
days following the operative date of the proposed rule. The 
implementation date will be no later than 60 days following the 
issuance of the Regulatory Circular.

[[Page 31288]]

2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \10\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \11\ 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    Market Makers are obligated to submit continuous two-sided 
quotations in a certain number of series in their appointed option 
classes for a certain percentage of each trading session,\12\ rendering 
them vulnerable to risk from unusual market conditions, volatility in 
specific option classes, and other market events that may cause them to 
receive multiple, extremely rapid automatic executions before they can 
adjust their quotations and overall risk exposure in the market. The 
ability of each Market Maker to adapt their specified time period and 
AEP to current market conditions is a valuable tool in assisting Market 
Makers in risk management. The proposed rule change removes impediments 
to and perfects the mechanism of a free and open market by giving 
Market Makers the means to establish an AEP that corresponds to their 
ability to assume the risks inherent in quoting in a marketplace in 
which executions are instant and quotations must be changed rapidly to 
account for volatility. This protects investors and the public interest 
by ensuring that liquidity providers such as Exchange Market Makers are 
able to quote aggressively within their risk tolerance levels with 
respect to both price and size, resulting in narrower bid/ask 
differentials and deeper liquidity on the Exchange, all to the benefit 
and protection of investors and the public interest.
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    \12\ For a complete description of MIAX Market Maker quoting 
obligations, see Exchange Rule 604.
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    The proposed default settings further protect investors and the 
public interest by enhancing the risk management features provided by 
the Exchange on behalf of Market Makers that have not established a 
specified time period and/or AEP. The default settings provide Market 
Makers with risk management tools implemented by the Exchange in the 
event that a Market Maker has not determined the duration of the 
specified time period or the AEP for an option class in which the 
Market Maker is appointed.
    Without adequate risk management tools in place on the Exchange, 
the incentive for Exchange Market Makers to quote aggressively 
respecting both price and size could be diminished, and could result in 
a concomitant reduction in the depth and liquidity they provide to the 
market. Such a result may undermine the quality of the markets that 
would otherwise be available to customers and other market 
participants. Accordingly, the Exchange proposes to help Market Makers 
better manage their risk exposure by giving them the ability to more 
precisely tailor their AEP to the market conditions present. This 
should encourage Market Makers to provide additional depth and 
liquidity to the Exchange's markets, thereby removing impediments to 
and perfecting the mechanisms of a free and open market and a national 
market system and, in general, protecting investors and the public 
interest.
    Significantly, the proposed rule change removes impediments to and 
perfects the mechanisms of a free and open market and a national market 
system and, in general, protects investors and the public interest 
because it codifies and enhances certain features of a risk management 
tool that is currently available to MIAX Market Makers. The elimination 
of the minimum AEP threshold requirement simply provides more 
alternatives to Market Makers in setting their AEP, on a class-by-class 
basis, without affecting their firm quote obligations. A Market Maker 
may set its AEP at any level (whether greater than, equal to, or less 
than 100%) in an appointed option, depending on that Market Maker's 
evaluation of its own risk tolerance level for that appointed option. 
The default settings serve to further enhance Market Makers' confidence 
in the Exchange's ability to assist them in their management of risk, 
and Market Makers are therefore likely to quote more aggressively in 
price and size, resulting in potentially narrower bid/ask differentials 
and deeper liquidity on the Exchange, serving to benefit and protect 
investors and the public interest.
    The proposed rule change also promotes just and equitable 
principles of trade by codifying the Exchange's current practice of 
establishing the default settings, thus providing Exchange Market 
Makers with additional protection in risk management mechanisms on the 
Exchange. The default settings are proposed to reduce the risks 
associated with their Market Making obligations. Finally, the proposed 
rule change is designed to protect investors and the public interest by 
helping Market Makers prevent executions resulting from activity that 
exceeds their risk tolerance level under these rules as established by 
the Exchange and by codifying the Exchange's existing practices 
concerning default ARM settings.
    The Exchange further notes that its proposal regarding minimum and 
default settings is consistent with rules that are currently in place 
on other exchanges.
    For example, the International Securities Exchange LLC (``ISE'') 
does not impose any minimum AEP or specified time period equivalent on 
its market makers, but the requirement for ISE market makers to provide 
these parameters is mandatory. ISE Rule 804(g) requires its market 
makers to provide parameters by which the Exchange will automatically 
remove a market maker's quotations. ISE Rule 804(g) differs from the 
instant proposed rule change in that it has no default percentage or 
time period settings if not established by the ISE market maker.
    BATS BZX Exchange, Inc. (``BATS BZX'') Rule 21.16, Risk Monitor 
Mechanism, states that a single BATS user may configure a single 
counting program or multiple counting programs to govern its trading 
activity (i.e., on a per port basis). Just as with ARM, the BATS Risk 
Monitor Mechanism is based in part on a percentage based trigger 
(similar to the AEP), measured against the number of contracts executed 
as a percentage of the number of contracts outstanding within a time 
period designated by the Exchange (``percentage trigger''). The 
percentage trigger is calculated similarly to the AEP: The BATS 
counting program first calculates, for each series of an option class, 
the percentage of a User's order size in the specified class or a BATS 
market maker's quote size in the appointed class that is executed on 
each side of the market, including both displayed and non-displayed 
size; the counting program then sums the overall series percentages for 
the entire option class to calculate the percentage trigger. Like the 
MIAX proposal, BATS BZX Rule 21.16 has no minimum AEP equivalent or 
minimum specified time period. Unlike the MIAX proposal, BATS BZX does 
not establish default settings on behalf of its market makers.\13\
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    \13\ Chicago Board Options Exchange, Inc. (``CBOE'') market 
makers may (but are not required to) establish parameters similar to 
the specified time period (the CBOE equivalent is a rolling time 
period in milliseconds) and the AEP. CBOE has no default settings. 
See CBOE Rule 8.18.

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    The Exchange notes that the proposed rule change will not relieve 
Exchange Market Makers of their continuous quoting obligations under 
Exchange Rule 604 and under Reg NMS Rule 602.\14\ All of a Market 
Maker's quotes in each option class will be considered firm until such 
time as the AEP threshold has been equaled or exceeded and the Market 
Maker's quotes are removed by the Aggregate Risk Manager in all series 
of that option class.\15\
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    \14\ 17 CFR 242.602.
    \15\ See Exchange Rule 612(c).
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.
    On the contrary, the Exchange believes that the proposed rule 
change will foster competition by providing Exchange Market Makers with 
the ability to enhance and specifically customize their use of the 
Exchange's risk management tools in order to compete for executions and 
order flow.
    As to inter-market competition, the Exchange believes that the 
proposed rule change should promote competition because it is designed 
to allow Exchange Market Makers with flexibility to modify their risk 
exposure in order to protect them from unusual market conditions or 
events that may increase their exposure in the market.
    For all the reasons stated, the Exchange does not believe that the 
proposed rule change will impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act, and 
believes the proposed change will in fact enhance competition.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) \17\ 
thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR- MIAX-2016-10 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MIAX-2016-10. 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 the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MIAX-2016-10 and should be 
submitted on or before June 8, 2016.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11651 Filed 5-17-16; 8:45 am]
 BILLING CODE 8011-01-P


