[Federal Register Volume 83, Number 202 (Thursday, October 18, 2018)]
[Notices]
[Pages 52865-52868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22683]



-----------------------------------------------------------------------



SECURITIES AND EXCHANGE COMMISSION



[Release No. 34-84417; File No. SR-MIAX-2018-14]




Self-Regulatory Organizations; Miami International Securities 

Exchange, LLC; Order Granting Approval of a Proposed Rule Change To 

List and Trade Options on the SPIKESTM Index



October 12, 2018.



I. Introduction



    On June 28, 2018, Miami International Securities Exchange, LLC 

(``MIAX Options'' or ``Exchange'') filed with the Securities and 

Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of 

the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 

thereunder,\2\ a proposed rule change to list and trade options on the 

SPIKESTM Index (``SPIKES'' or the ``Index''), which measures 

expected 30-day volatility of the SPDR S&P 500 ETF Trust (``SPY''). The 

proposed rule change was published for comment in the Federal Register 

on July 16, 2018.\3\ On August 28, 2018, pursuant to Section 19(b)(2) 

of the Act,\4\ the Commission designated a longer period within which 

to approve the proposed rule change, disapprove the proposed rule 

change, or institute proceedings to determine whether to approve or 

disapprove the proposed rule change.\5\ The Commission received no 

comments on the proposal. This order approves the proposed rule change.

---------------------------------------------------------------------------



    \1\ 15 U.S.C. 78s(b)(1).

    \2\ 17 CFR 240.19b-4.

    \3\ See Securities Exchange Act Release No. 83619 (July 11, 

2018), 83 FR 32932 (``Notice'').

    \4\ 15 U.S.C. 78s(b)(2).

    \5\ See Securities Exchange Act Release No. 83975, 83 FR 44929 

(September 4, 2018). The Commission designated October 14, 2018 as 

the date by which the Commission shall approve or disapprove, or 

institute proceedings to determine whether to approve or disapprove, 

the proposed rule change.

---------------------------------------------------------------------------



II. Description of the Proposed Rule Change



    The Exchange proposes to list and trade cash-settled, European-

style options on the Index, which measures expected thirty-day 

volatility of SPY.\6\

---------------------------------------------------------------------------



    \6\ According to the Exchange, SPY is historically the largest 

and most actively-traded exchange-traded fund in the United States 

as measured by its assets under management and the value of shares 

traded. See Notice, supra note 3, at 32936.

---------------------------------------------------------------------------



    As more fully set forth in the Notice, the Index is calculated 

using a methodology developed by T3i Pty Ltd, which uses published 

real-time prices and bid/ask quotes of SPY options.\7\ The Index will 

be calculated and maintained by the Exchange. The Index uses a 

proprietary ``price dragging'' technique to determine the ongoing price 

for each individual option used in the calculation of the Index 

(``Reference Price''), which the Exchange believes should materially 

reduce erratic movements of the Index value as quotations on out-of-

the-money options are rapidly altered during times of low liquidity.\8\ 

The Exchange also notes the Index's exclusion rule (``truncation 

method''), which determines how far away from the money to exclude 

strikes from the volatility calculation. When two consecutive option 

prices of $0.05 or less are encountered when moving away from the at-

the-money strike, the truncation method excludes all the strikes beyond 

that level, from each of the put and call side.\9\ The Exchange 

believes that this exclusion methodology should result in a calculation 

outcome that better reflects the expected measure of volatility.\10\

---------------------------------------------------------------------------



    \7\ See id. at 32933-36 (describing in more detail the 

calculation methodology for the Index).

    \8\ See id. at 32934-35 (describing in more detail the ``price 

dragging'' methodology).

    \9\ See id. at 32935 (describing in more detail the truncation 

method).

    \10\ See id.

---------------------------------------------------------------------------



    The Index will be updated on a real-time basis on each trading day 

beginning at 9:30 a.m. and ending at



[[Page 52866]]



4:15 p.m. (New York time).\11\ Values of the Index will be disseminated 

to the Options Price Reporting Authority (``OPRA'') at least every 

fifteen seconds during the Exchange's regular trading hours, pursuant 

to Exchange Rules 1802 and 1803.\12\ In the event the Index ceases to 

be maintained or calculated, or its values are not disseminated at 

least every fifteen seconds by a widely available source, the Exchange 

will not list any additional series for trading and may, for the 

purpose of maintaining a fair and orderly market and protecting 

investors, limit transactions in certain options on the Index to 

closing transactions only.

---------------------------------------------------------------------------



    \11\ If the current published value of a component is not 

available, the last published value will be used in the calculation.

    \12\ The Exchange notes that it is currently disseminating the 

cash values of the Index to OPRA under the ticker symbol ``SPIKE'' 

in at least fifteen second intervals. See Notice, supra note 3, at 

32936.

---------------------------------------------------------------------------



    The Exchange proposes that the standard trading hours for index 

options (9:30 a.m. to 4:15 p.m., New York time) will apply to options 

on the Index. Options on the Index will expire on the Wednesday that is 

thirty days prior to the third Friday of the calendar month immediately 

following the expiration month.\13\ The exercise-settlement amount will 

be equal to the difference between the final settlement value of the 

Index and the exercise price of the option, multiplied by $100. 

Exercise will result in the delivery of cash on the business day 

following expiration.

---------------------------------------------------------------------------



    \13\ If that Wednesday or the Friday that is thirty days 

following that Wednesday is an Exchange holiday, the final 

settlement value will be calculated on the business day immediately 

preceding that Wednesday.

---------------------------------------------------------------------------



    To determine the final settlement value of the Index, the Exchange 

will perform an Index settlement price calculation, which includes all 

SPY options that expire thirty days after the SPIKES settlement that 

are included in the settlement (``constituent options''). To perform 

the Index settlement price calculation, each constituent option will be 

assigned a Settlement Reference Price (``SRP''). Each SRP will be 

determined through the proposed ``SPIKES Special Settlement Auction,'' 

which will be conducted once per month, in the constituent options 

traded on the Exchange, on final settlement day. The SPIKES Special 

Settlement Auction will utilize the Exchange's existing standard 

opening process, as described in Exchange Rule 503(f), with a proposed 

modification to account for situations where there remains an order 

imbalance \14\ that must be filled at the opening price after the 

requisite number of iterations of the imbalance process takes place 

under the Exchange's existing opening process.\15\

---------------------------------------------------------------------------



    \14\ An ``imbalance'' occurs when there is insufficient 

liquidity to satisfy all trading interest due an execution at a 

certain price. See Exchange Rule 503(f)(2)(v).

    \15\ The proposed modification to the Exchange's existing 

opening process to facilitate the execution of this remaining must-

fill interest is referred to as the special settlement imbalance 

process (``SSIP''). See proposed Rule 1809, Interpretation and 

Policy .06. For more detail about the operation of the SPIKES 

Special Settlement Auction, including an example, see Notice, supra 

note 3, at 32939-41.

---------------------------------------------------------------------------



    All orders for participation in the SPIKES Special Settlement 

Auction that are related to positions in, or a trading strategy 

involving, Index options (``SPIKES Strategy Orders'') and any change to 

or cancellation of any such order: (i) Must be received prior to the 

applicable SPIKES Strategy Order cut-off time for the constituent 

option series, as determined by the Exchange, which may be no earlier 

than the opening of the live order window (currently, 7:30 a.m.) or the 

live quote window (for the SPIKES Special Settlement Auction, 

anticipated to be 8:30 a.m.), and no later than the opening of trading 

in the series; and (ii) may not be cancelled or modified after the 

applicable SPIKES Strategy Order cut-off time, unless the SPIKES 

Strategy Order is not executed in the SPIKES Special Settlement Auction 

and the cancellation or modification is submitted after the SPIKES 

Special Settlement Auction is concluded. The Exchange states that it 

will generally consider orders to be SPIKES Strategy Orders if the 

orders possess the following characteristics: (i) They are for options 

with the expiration that will be used to calculate the exercise or 

final settlement value of the applicable volatility index option 

contract; (ii) they are for options spanning the full range of strike 

prices for the appropriate expiration for options that will be used to 

calculate the exercise or final settlement value of the applicable 

volatility index option contract, but not necessarily every available 

strike price; and (iii) they are for put options with strike prices 

less than the at-the-money strike price, for call options with strike 

prices greater than the at-the-money strike price, or for put and call 

options with at-the-money strike prices. The Exchange notes that it may 

also deem order types other than those provided above as SPIKES 

Strategy Orders if the Exchange determines that to be the case based on 

the applicable facts and circumstances.\16\

---------------------------------------------------------------------------



    \16\ See Notice, supra note 3, at 32939.

---------------------------------------------------------------------------



    The Exchange believes that the Index, including the settlement 

value, will not be readily susceptible to manipulation.\17\ According 

to the Exchange, the ``price dragging'' technique, which is used to 

determine the ongoing Reference Price for each individual option used 

in the calculation of the Index, helps prevent market manipulation by 

utilizing the most recent trade price as the Reference Price, which the 

Exchange believes to be a more accurate methodology than 

alternatives.\18\ Further, the Exchange believes that using SPY options 

as the components for a volatility index has the potential to result in 

an extremely liquid volatility product with exceptionally tight 

spreads, which consequently would not be readily susceptible to 

fraudulent and manipulative acts.\19\ For example, the Exchange notes 

that SPY options regularly trade four to five million contracts a day 

and have twenty to thirty million contracts in open interest, and are 

traded on all fifteen option exchanges.\20\ Since SPY options are 

traded on all fifteen option exchanges, the Exchange believes that 

market participants may take advantage of arbitrage opportunities 

across multiple venues.\21\

---------------------------------------------------------------------------



    \17\ See id. at 32942-43.

    \18\ See id. at 32942.

    \19\ See id. at 32943.

    \20\ See id.

    \21\ See id.

---------------------------------------------------------------------------



    The Exchange proposes to adopt minimum trading increments for 

options on the Index to be $0.05 for series trading below $3, and $0.10 

for series trading at or above $3. The Exchange also proposes to set 

the minimum strike price interval for options on the Index at $0.50 

where the strike price is less than $15, $1 or greater where the strike 

price is between $15 and $200, and $5 or greater where the strike price 

is greater than $200. Currently, when new series of options on the 

Index with a new expiration date are opened for trading, or when 

additional series of options on the Index in an existing expiration 

date are opened for trading as the current value of the Index moves 

substantially from the exercise prices of series already opened, the 

exercise prices of such new or additional series must be reasonably 

related to the current value of the Index at the time such series are 

first opened for trading.\22\ The Exchange, however, proposes to 

eliminate this range limitation that would otherwise limit the number 

of $1 strikes that may be listed in options on the Index. The



[[Page 52867]]



Exchange's proposal to eliminate this range limitation is identical to 

strike price intervals adopted by the Cboe Exchange, Inc. (``Cboe'') 

for the Cboe Volatility Index (``VIX'').\23\

---------------------------------------------------------------------------



    \22\ See Exchange Rule 1809(c)(3). The term ``reasonably related 

to the current index value of the underlying index'' means that the 

exercise price is within thirty percent of the current index value, 

as defined in Exchange Rule 1809(c)(4).

    \23\ See Securities Exchange Act Release No. 63155 (October 21, 

2010), 75 FR 66402 (October 28, 2010) (SR-CBOE-2010-096).

---------------------------------------------------------------------------



    The Exchange initially proposes to list options on the Index in up 

to twelve standard monthly expirations. In addition, long-term option 

series having up to sixty months to expiration,\24\ Short Term Option 

Series,\25\ and Quarterly Options Series \26\ may also be traded. 

Options on the Index will be quoted and traded in U.S. dollars.\27\

---------------------------------------------------------------------------



    \24\ See Exchange Rule 1809(b)(1).

    \25\ See Exchange Rule 1809, Interpretations and Policies .01.

    \26\ See Exchange Rule 1809, Interpretations and Policies .02.

    \27\ See Exchange Rule 1809(a)(1).

---------------------------------------------------------------------------



    The Exchange believes that the Index is a broad-based index, as 

that term is defined in Exchange Rule 1801(k).\28\ The Exchange 

proposes that the Index should be treated as a broad-based index for 

purposes of position limits, exercise limits, and margin requirements. 

Accordingly, the Exchange proposes no position or exercise limits for 

options on the Index \29\ and the Exchange proposes to apply margin 

requirements that are identical to those applied for other broad-based 

index options.

---------------------------------------------------------------------------



    \28\ Exchange Rule 1801(k) defines the terms ``market index'' 

and ``broad-based index'' to mean an index designed to be 

representative of a stock market as a whole or of a range of 

companies in unrelated industries.

    \29\ As noted above, the Index will settle using published 

prices and quotes from its corresponding SPY options. The Exchange 

asserts that because the size of SPY options market (as well as the 

underlying SPY market) is so large, the Exchange believes that there 

is minimal risk of manipulation by virtue of position size in SPIKES 

options. The Exchange notes that options on Cboe's VIX are also not 

subject to any position or exercise limits. See Notice, supra note 

3, at 32941. See also Securities Exchange Act Release No. 54019 

(June 20, 2006), 71 FR 36569 (June 27, 2006) (SR-CBOE-2006-55). 

Additionally, the Exchange notes there are currently a number of 

actively-traded broad-based index options, e.g., DJX, NDX, SPX, that 

are also not subject to any position or exercise limits. See Notice, 

supra note 3, at 32941 n.56.

---------------------------------------------------------------------------



    In addition, the Exchange proposes that the trading of options on 

the Index will be subject to the same rules governing the trading of 

Exchange index options, including sales practice rules, margin 

requirements, and trading rules. Trading of options on the Index will 

also be subject to the trading halt procedures applicable to other 

index options traded on the Exchange.\30\ Further, Chapter XIII of the 

Exchange's rules, which is designed to protect public customer trading, 

will apply to trading in options on the Index.

---------------------------------------------------------------------------



    \30\ See Exchange Rule 1808(c).

---------------------------------------------------------------------------



    The Exchange represents that it has an adequate surveillance 

program in place for options on the Index and intends to apply those 

same program procedures that it applies to the Exchange's other options 

products. In addition, the Exchange notes that several new 

surveillances related to the Index will be added to its surveillance 

program.\31\ Specifically, the Exchange notes that it has a Regulatory 

Services Agreement (``RSA'') in place with the Financial Industry 

Regulatory Authority (``FINRA'') to conduct cross-market surveillances 

on its behalf and has expanded the RSA to include a new options pattern 

designed to determine whether any market participants influenced the 

settlement price of an a.m. cash-settled index product to benefit their 

expiring index option position. Further, the Exchange represents that 

both MIAX Options Regulation and FINRA Options Regulation will manually 

review options activity during each monthly settlement process. After 

manually reviewing settlement process activity over the course of 

months, the Exchange and FINRA will determine whether additional 

reports or enhancements to the cash-settled report(s) are required.\32\ 

Additionally, the Exchange notes that it is a member of the Intermarket 

Surveillance Group, through which it can coordinate surveillance and 

investigative information sharing in the stock and options markets with 

all U.S. registered stock and options markets. The Exchange also 

represents that it has the necessary system capacity to support 

additional quotations and messages that will result from the listing 

and trading of options on the Index.

---------------------------------------------------------------------------



    \31\ See Notice, supra note 3, at 32942.

    \32\ See id.

---------------------------------------------------------------------------



III. Discussion and Commission Findings



    After careful consideration of the proposal, 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,\33\ and, in particular, the requirements 

of Section 6 of the Act.\34\ Specifically, the Commission finds that 

the proposed rule change is consistent with Section 6(b)(5) of the 

Act,\35\ 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 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. Specifically, the 

Commission believes that the proposed Index options provide investors 

with an additional trading and hedging mechanism.

---------------------------------------------------------------------------



    \33\ 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).

    \34\ 15 U.S.C. 78f.

    \35\ 15 U.S.C. 78f(b)(5).

---------------------------------------------------------------------------



    The Commission believes that the Exchange's proposal is consistent 

with the Act.\36\ As noted above, the Index is calculated using 

published real-time price and bid/ask quotes of SPY options and 

measures changes in the expected thirty-day volatility of SPY. The 

Commission notes that SPY options are the most actively-traded options 

in terms of average daily volume. After careful consideration, the 

Commission has determined that the Exchange's proposal to list and 

trade options on the Index, including the proposed settlement process, 

is comparable to the listing and trading of options on similar 

volatility indexes.\37\

---------------------------------------------------------------------------



    \36\ In approving this proposed rule change to list and trade 

options on the Index, the Commission is not determining whether the 

Index is a ``narrow-based'' security index as that term is defined 

in the Act. See 15 U.S.C. 78c(a)(55)(B).

    \37\ See Securities Exchange Act Release No. 49563 (April 14, 

2004), 69 FR 21589 (April 21, 2004) (SR-CBOE-2003-40) (order 

approving the listing and trading of options on the VIX). See also 

Securities Exchange Act Release No. 71365 (January 22, 2014), 79 FR 

4512 (January 28, 2014) (SR-ISE-2013-42) (order approving the 

listing and trading of options on the Nations VolDex Index).

---------------------------------------------------------------------------



    The Commission also believes that permitting $0.50 strike price 

intervals if the strike price is less than $15 and $1.00 strike price 

intervals if the strike price is between $15 and $200 will provide 

investors with added flexibility in the trading of these options and 

will further the public interest by allowing investors to establish 

positions that are better tailored to meet their investment objectives. 

As noted above, the Exchange proposes to provide an exception for the 

proposed Index options from the existing requirement that exercise 

prices of new or additional series must be reasonably related to the 

current value of the Index at the time such series are first opened for 

trading.\38\ The Commission believes that this change is consistent 

with the Act because it should provide investors added flexibility to 

meet their investment objectives.\39\ The



[[Page 52868]]



Commission also notes that the Exchange has represented that it has the 

necessary systems capacity to handle the additional traffic associated 

with the listing and trading of this new product and it expects that 

the Exchange considered this expansion of the permissible range of 

strike prices in making such a representation.\40\

---------------------------------------------------------------------------



    \38\ See supra notes 22-23 and accompanying text.

    \39\ The Commission notes that Cboe previously eliminated the 

band that limited the number of $1 strikes that could be listed on 

VIX options. See Securities Exchange Act Release No. 63155 (October 

21, 2010), 75 FR 66402 (October 28, 2010) (SR-CBOE-2010-096).

    \40\ See Notice, supra note 3, at 32942.

---------------------------------------------------------------------------



    The Commission also believes that it is consistent with the Act to 

apply margin requirements to the proposed Index options that are 

otherwise applicable to options on broad-based indexes. The Commission 

further believes that the Exchange's proposed minimum trading 

increment, series openings, and other aspects of the proposed rule 

change are appropriate and consistent with the Act.

    As a national securities exchange, the Exchange is required, under 

Section 6(b)(1) of the Act,\41\ to enforce compliance by its members 

and persons associated with its members with the provisions of the Act, 

Commission rules and regulations thereunder, and its own rules. The 

Exchange has asserted its belief that there is a low potential for 

manipulation of the Index settlement value.\42\ The Exchange has 

represented that it has an adequate surveillance program in place for 

options traded on the Index, and will monitor for any potential 

manipulation of the Index settlement value according to its current 

surveillance procedures and additional surveillance measures.\43\ The 

Commission also notes the Exchange's representation that it has the 

necessary systems capacity to support the new options series that will 

result from this proposal.\44\

---------------------------------------------------------------------------



    \41\ 15 U.S.C. 78f(b)(1).

    \42\ See Notice, supra note 3, at 32942-43.

    \43\ See supra notes 31-32 and accompanying text.

    \44\ See id.

---------------------------------------------------------------------------



IV. Conclusion



    It is therefore ordered, pursuant to Section 19(b)(2) of the 

Act,\45\ that the proposed rule change (SR-MIAX-2018-14) be, and hereby 

is, approved.

---------------------------------------------------------------------------



    \45\ 15 U.S.C. 78s(b)(2).

---------------------------------------------------------------------------



    For the Commission, by the Division of Trading and Markets, 

pursuant to delegated authority.\46\

---------------------------------------------------------------------------



    \46\ 17 CFR 200.30-3(a)(12).



Eduardo A. Aleman,

Assistant Secretary.

[FR Doc. 2018-22683 Filed 10-17-18; 8:45 am]

 BILLING CODE 8011-01-P




