
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8472-8474]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01615]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79837; File No. SR-MIAX-2016-46]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Order Granting Approval of a Proposed Rule Change To 
Amend Rule 515A, MIAX Price Improvement Mechanism (``PRIME'') and PRIME 
Solicitation Mechanism

January 18, 2017.

I. Introduction

    On November 25, 2016, Miami International Securities Exchange LLC 
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to the provisions of Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change to amend the eligibility 
requirements for the MIAX Price Improvement Mechanism (``PRIME'' or 
``Auction'') and make permanent a pilot program for PRIME. The proposed 
rule change was published for comment in the Federal Register on 
December 13, 2016.\3\ The Commission received no comments regarding the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79500 (December 7, 
2016), 81 FR 90030 (``Notice'').
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II. Description of the Proposal

    PRIME is a process by which a MIAX Member may electronically submit 
for execution an order it represents as agent (``Agency Order'') 
against principal interest and/or an Agency Order against solicited 
interest.\4\ The Member that submits the Agency Order (the ``Initiating 
Member'') must guarantee the execution of the Agency Order by 
submitting a contra-side order representing principal interest or 
solicited interest (``Contra-side Order'').

[[Page 8473]]

When the Exchange receives a properly designated Agency Order for 
Auction processing, a Request for Responses (``RFR'') detailing the 
option, side, size, and initiating price will be sent to all 
subscribers of the Exchange's data feeds. Members may submit responses 
to the RFR (specifying prices and sizes). RFR responses can be either 
an Auction or Cancel (``AOC'') order or an AOC eQuote.\5\
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    \4\ See MIAX Rule 515A(a). PRIME was introduced in 2014. See 
Securities Exchange Act Release No. 72009 (April 23, 2014), 79 FR 
24032 (April 29, 2014) (``PRIME Approval Order'').
    \5\ See MIAX Rule 515A(a)(2)(i)(D).
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    In November 2014, MIAX established a pilot program (the ``Pilot'') 
to permit orders of any size to initiate a PRIME Auction at a price 
that is at or better than the national best bid or offer (``NBBO'').\6\ 
Pursuant to Interpretations and Policies .08 to MIAX Rule 515A, the 
Exchange committed to provide data to the Commission to demonstrate 
that, among other things, there is meaningful competition for all size 
orders within PRIME, that there is significant price improvement for 
all orders executed through PRIME, and that there is an active and 
liquid market functioning on the Exchange outside of PRIME. The Pilot 
is currently set to expire on January 18, 2017.\7\
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    \6\ See Securities Exchange Act Release No. 73590 (November 13, 
2014), 79 FR 68919 (November 19, 2014) (SR-MIAX-2014-56).
    \7\ See Securities Exchange Act Release No. 78265 (July 8, 
2016), 81 FR 45578 (July 14, 2016) (SR-MIAX-2016-19).
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    The Exchange proposes to make the Pilot permanent. The Exchange 
further proposes to adopt new Rule 515A(a)(1)(iii) to state that if, at 
the time of receipt of an Agency Order of fewer than 50 contracts, the 
NBBO has a bid/ask differential of $0.01, the System \8\ will reject 
the Agency Order.
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    \8\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See MIAX Rule 100.
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    In support of its proposal, the Exchange has provided the 
Commission with data for PRIME executions from January 2015 through 
January 2016.\9\ The Exchange believes that there has been meaningful 
competition for all size orders within the PRIME Auction process, 
regardless of the size of the order or the bid/ask differential of the 
NBBO.\10\ Specifically from July 2015 through January 2016, there were 
a total of 961,152 PRIME Auctions on MIAX, which included more than 
2,691,000 participants, for an average of 2.8 participants per PRIME 
Auction. \11\
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    \9\ See Exhibit 3 to SR-MIAX-2016-46.
    \10\ See Notice, supra note 3, at 90031.
    \11\ See id.
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    The Exchange also believes that the data show that there is an 
active and liquid market functioning on the Exchange outside of the 
PRIME.\12\ From July 2015 through January 2016, the Exchange executed 
7,449,818 transactions for a total of 92,706,999 contracts outside of 
the PRIME. \13\ According to the Exchange, competitive bidding and 
offering occurs outside of the PRIME and participants can submit bids/
offers at improved prices or join a bid or offer (thus improving 
liquidity at that price) regardless of the bid/ask differential of the 
NBBO.\14\
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    \12\ See id. at 90031-32.
    \13\ See id.
    \14\ See id. at 90032.
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    While the Exchange continues to believe that opportunities remain 
for price improvement of Agency Orders with a size of less than 50 
contracts when the NBBO has a bid/ask differential of $0.01 (e.g., 
because market conditions may change during the PRIME Auction), the 
data have not demonstrated significant price improvement in this narrow 
circumstance, as indicated in the following table:\15\
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    \15\ See id.

                   PRIME Trades for Orders of Less Than 50 Contracts With NBBO Spread of $0.01
                                                [5/1-10/25/2016]
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Total Number of Trades........................       2,383,204  Total Number of Contracts.......      11,950,538
Trades Receiving Price Improvement............          17,179  Contracts Receiving Price                154,338
                                                                 Improvement.
Percent of Trades Receiving Improvement.......           0.72%  Percent of Contracts Receiving             1.29%
                                                                 Improvement.
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    In addition to seeking permanent approval of the Pilot, the 
Exchange proposes to adopt new Rule 515A(a)(1)(iii) to require that if, 
at the time of receipt of an Agency Order of fewer than 50 contracts, 
the NBBO has a bid/ask differential of $0.01,\16\ the System will 
reject the Agency Order. Agency Orders with a size of under 50 
contracts will be accepted and processed by the System when the NBBO 
bid/ask differential is greater than $0.01, and all Agency Orders with 
a size of 50 contracts or greater will be accepted and processed by the 
System, regardless of the NBBO bid/ask differential.
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    \16\ Currently, if the market is locked or crossed as defined in 
Exchange Rule 1402 for the option, the Agency Order will be rejected 
by the System prior to initiating an Auction or a Solicitation 
Auction. See Exchange Rule 515A, Interpretations and Policies .09. 
The Exchange will continue to reject Agency Orders, regardless of 
their size, in this situation.
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    The Exchange does believe, however, that based on the data there is 
significant price improvement, and significant opportunity for price 
improvement, for all Agency Orders submitted when the NBBO bid/ask 
differential is greater than $0.01.\17\ In particular, the Exchange 
believes that continuing to allow PRIME Auctions to be initiated by 
Agency Orders with a size of 50 contracts or greater increases the 
opportunity for executions of larger size orders.\18\ The Exchange 
believes that maintaining the PRIME Auction for Agency Orders with a 
size of 50 contracts or greater when the bid/ask differential at the 
NBBO is $0.01 enables consolidated size discovery and provides 
certainty of larger sized executions.\19\ The Exchange believes that 
this represents an efficient way for market participants to access 
liquidity for larger sized orders.\20\
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    \17\ See Notice, supra note 3, at 90032.
    \18\ See id.
    \19\ See id.
    \20\ See id.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\21\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\22\ 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

[[Page 8474]]

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 customers, issuers, brokers and 
dealers.
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    \21\ 15 U.S.C. 78f(b). 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).
    \22\ 15 U.S.C. 78f(b)(5).
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    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2015, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the Auction, in particular for orders for 
fewer than 50 contracts; the degree of competition for order flow in 
such Auctions; and a comparison of liquidity in the Auctions with 
liquidity on the Exchange generally.\23\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\24\ Recognizing this, the Exchange 
has proposed to amend the Auction eligibility requirements to reject an 
Agency Order of less than 50 contracts where the NBBO has a bid/ask 
differential of $0.01. The Exchange's proposal to modify the Auction 
eligibility requirements for orders of fewer than 50 contracts and seek 
permanent approval of the Pilot, as amended with the new provision, 
will, in the Commission's view, promote opportunities for price 
improvement.
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    \23\ See Exhibit 3 to SR-MIAX-2016-46.
    \24\ See Notice, supra note 3, at 90032.
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    The Commission believes that, particularly for Auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the 
Pilot permanent. The data demonstrate that the Auction generally 
provides price improvement opportunities to orders, including orders of 
retail customers and particularly when the bid/ask differential is 
wider than $0.01, that there is meaningful competition for orders on 
the Exchange; and that there exists an active and liquid market 
functioning on the Exchange outside of the Auction.\25\ The Commission 
further believes that the proposed revisions to the eligibility 
requirements for Agency Orders of fewer than 50 contracts with respect 
to circumstances when the NBBO is $0.01 wide should help to enhance the 
operation of the Auction by limiting its use for smaller orders to 
circumstances when there are more meaningful opportunities for price 
improvement, and should benefit investors and others in a manner that 
is consistent with the Act. Thus, the Commission has determined to 
approve the Exchange's proposed revisions to Rule 515A and to approve 
the Pilot, as proposed to be modified, on a permanent basis.
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    \25\ See Exhibit 3 to SR-MIAX-2016-46.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-MIAX-2016-46), be and hereby 
is approved.
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    \26\ 15 U.S.C. 78s(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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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01615 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P


