[Federal Register Volume 85, Number 162 (Thursday, August 20, 2020)]
[Notices]
[Pages 51510-51518]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18204]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89563; File No. SR-PEARL-2020-03]


Self-Regulatory Organizations; MIAX PEARL, LLC; Order Approving a 
Proposed Rule Change, as Modified by Amendment No. 1, To Establish 
Rules Governing the Trading of Equity Securities

August 14, 2020.

I. Introduction

    On January 24, 2020, MIAX PEARL, LLC (``MIAX PEARL'' 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 adopt rules to govern the trading of cash 
equities and establish an equities trading facility of the Exchange. 
The proposed rule change was published for comment in the Federal 
Register on February 12, 2020.\3\ On March 25, 2020, the Commission 
extended the time 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, 
to May 12, 2020.\4\ On May 8, 2020, the Exchange filed Amendment No. 1 
to the proposed rule change.\5\ On May 12, 2020, the Commission 
published notice of Amendment No. 1 and instituted proceedings pursuant 
to Section 19(b)(2)(B) of the Act \6\ to determine whether to approve 
or disapprove the proposed rule change, as modified by Amendment No. 
1.\7\ On August 6, the Commission designated a longer period for 
Commission action on the proposed rule change, as modified by Amendment 
No. 1.\8\ The Commission has received no comments on the proposed rule 
change, as modified by Amendment No. 1. This order approves the 
proposed rule change, as modified by Amendment No. 1.
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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. 88132 (February 6, 
2020), 85 FR 8053 (February 12, 2020) (``Notice'').
    \4\ See Securities Exchange Act Release No. 88476 (March 25, 
2020), 85 FR 17929 (March 31, 2020).
    \5\ In Amendment No. 1 the Exchange: (i) Deleted the definition 
of ``Equity Securities'' from proposed Exchange Rule 1901and made 
corresponding changes throughout the proposed Exchange Rules to 
eliminate unnecessary confusion; (ii) substituted references to 
``PEARL Equities'' with ``MIAX PEARL Equities'' throughout the 
proposed Exchange Rules; (iii) updated proposed Exchange Rule 2622 
(Limit Up-Limit Down Plan and Trading Halts) regarding a Level 3 
Market Decline to conform it to recent changes made by each of the 
national securities exchanges that trade equities and the Financial 
Industry Regulatory Authority (``FINRA''), and made a corresponding 
change to proposed Exchange Rule 2615 (Opening Process); and (iv) 
modified proposed Exchange Rule 2617(a)(4)(C) and (D) to account for 
the potential for orders to post and rest at prices that cross 
contra-side liquidity and also to correct a typographical error in 
proposed Exchange Rule 2617(a)(4)(D). Amendment No. 1 is available 
on the Commission's website at: https://www.sec.gov/comments/sr-pearl-2020-03/srpearl202003-7168815-216600a.pdf.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 88859 (May 12, 
2020), 85 FR 29759 (May 18, 2020).
    \8\ See Securities Exchange Act Release No. 89502 (August 6, 
2020), 85 FR 48746 (August 12, 2020).
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II. Discussion and Commission Findings

    After careful review of the proposed rule change, as modified by 
Amendment

[[Page 51511]]

No. 1, the Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\9\ Specifically, the 
Commission finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act,\10\ 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, and 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. Section 
6(b)(5) also requires that the rules of an exchange not be designed to 
permit unfair discrimination among customers, issuers, brokers, or 
dealers. Further, the Commission finds that the proposed rule change, 
as amended, is consistent with Section 6(b)(1) of the Act,\11\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the exchange, and with 
Section 6(b)(6) and 6(b)(7) of the Act,\12\ which require an exchange 
to provide fair procedures for the disciplining of members and persons 
associated with members. The Commission also finds that the proposed 
rule change, as amended, is consistent with Section 11A of the Act,\13\ 
and does not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.\14\ In addition, 
the Commission finds that the proposed rule change, as amended, is 
consistent with Section 12(f) of the Act,\15\ which governs unlisted 
trading privileges for securities originally listed on another national 
securities exchange.
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    \9\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ 15 U.S.C. 78f(b)(1).
    \12\ 15 U.S.C. 78f(b)(6) and (b)(7).
    \13\ 15 U.S.C. 78k-1.
    \14\ 15 U.S.C. 78f(b)(8).
    \15\ 15 U.S.C. 78l(f).
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    As set forth in the Notice and the Notice of Amendment No. 1, the 
Exchange proposes to adopt rules governing the trading of cash equities 
on the Exchange and establish an equities trading facility of the 
Exchange (referred to as ``MIAX PEARL Equities'') that will function in 
a manner similar to equities trading platforms the Commission has 
approved for other national securities exchanges.\16\ The Exchange's 
proposed rules for MIAX PEARL Equities are substantively similar to the 
corresponding rules of other equities exchanges. The Commission 
believes that the proposed MIAX PEARL Equities rules raise no new or 
novel policy matters or issues. As discussed below, the Commission 
believes that the proposed MIAX PEARL Equities rules are consistent 
with the Act.
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    \16\ MIAX PEARL's equities rules, including its rules relating 
to market makers, order types and instructions, priority, execution, 
and opening processes, are similar to existing exchanges' trading 
rules. See, e.g., Rules of the Cboe BZX Exchange, Inc.
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A. MIAX PEARL Equity Members

    MIAX PEARL Equities, as a trading facility of the Exchange, will be 
a fully automated electronic system (``System'') for the trading of 
cash equity securities.\17\ The Exchange will have a new category of 
Exchange Member participation called ``Equity Member.'' \18\
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    \17\ See Notice, supra note 3 at 8053, 8056.
    \18\ See MIAX PEARL Equities Rules 2000-2003.
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    An Equity Member must be or become a member of the Exchange 
pursuant to Chapter II (Access) and continue to abide by the 
requirements of Chapter II of Exchange Rules and the additional 
requirements of Chapter XX governing participation in MIAX PEARL 
Equities.\19\ An Equity Member must also be a member of another 
registered exchange that is not registered solely under Section 6(g) of 
the Act, or be a member of FINRA.\20\ Further, an Equity Member that 
transacts business with public customers must at all times be a member 
of FINRA.\21\
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    \19\ See MIAX PEARL Equities Rule 2000(b).
    \20\ See MIAX PEARL Equities Rule 2001(f). If such other 
registered exchange has not been designated by the Commission, 
pursuant to Rule 17d-1 under the Act, to examine Members for 
compliance with financial responsibility rules, then such applicant 
must have and maintain a membership in FINRA. See id.
    \21\ See MIAX PEARL Equities Rule 2001(f).
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    There will be two types of Equity Members: (1) Equities Order Entry 
Firms (``OEFs'') and (2) Equities Market Makers. Each Equity Member 
must be registered as a broker-dealer and have as the principal purpose 
of being an Equity Member the conduct of a securities business, which 
shall be deemed to exist if and so long as: (1) The Equity Member has 
qualified and acts in respect of its business on MIAX PEARL Equities as 
an OEF, or an Equities Market Maker, or both; and (2) all transactions 
effected by the Equity Member are in compliance with Section 11(a) of 
the Act \22\ and the rules and regulations adopted thereunder.\23\ 
Equity Members may trade equity securities for their own proprietary 
accounts or, if authorized to do so under applicable law, may conduct 
business on behalf of customers.\24\ OEFs are Equity Members 
representing orders as agent on MIAX PEARL Equities or non-Equities 
Market Makers conducting proprietary trading as principal.\25\ An 
Equity Member may also register as an Equities Market Maker by filing a 
registration request with the Exchange.\26\
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    \22\ 15 U.S.C. 78k(a).
    \23\ See MIAX PEARL Equities Rule 2001(e).
    \24\ See id.
    \25\ See MIAX PEARL Equities Rule 1901.
    \26\ See MIAX PEARL Equities Rule 2605. The Exchange represents 
that it will not restrict access in any particular equity security 
until the Exchange has submitted objective standards for restricting 
access to the Commission for the Commission's review and approval. 
See id.
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    An Equity Member registered as an Equities Market Maker is required 
to engage in a course of dealing for its own account and to assist in 
the maintenance of a fair and orderly market.\27\ Among other things, 
each Equities Market Maker must, on a daily basis, maintain a two-sided 
market on a continuous basis during regular market hours for each 
equity security in which it is registered as an Equities Market 
Maker.\28\ Equities Market Makers may withdraw their quotations,\29\ 
and may voluntarily terminate their registration with the Exchange.\30\ 
Pursuant to the existing procedures set forth in Chapter IX of current 
Exchange Rules, the Exchange may suspend condition, limit, prohibit or 
terminate the authority of an Equities Market Maker to enter quotations 
in one or more authorized securities for violations of applicable 
requirements or prohibitions.\31\
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    \27\ See MIAX PEARL Equities Rule 2606.
    \28\ See MIAX PEARL Equities Rule 2606(a)(1).
    \29\ See MIAX PEARL Equities Rule 2607.
    \30\ See MIAX PEARL Equities Rule 2608.
    \31\ See MIAX PEARL Equities Rule 2609.
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    While using the System, Equity Members and persons employed by or 
associated with any Equity Member are prohibited from conduct that is: 
(1) Inconsistent with the maintenance of a fair and orderly market; (2) 
apt to impair public confidence in the operations of the Exchange; or 
(3) inconsistent with the ordinary and efficient conduct of

[[Page 51512]]

business.\32\ Should any such conduct occur, the Exchange may suspend 
an Equity Member's access to the System following a warning, or 
terminate an Equity Member's access to the System by written 
notice.\33\
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    \32\ See MIAX PEARL Equities Rule 2602(b).
    \33\ See MIAX PEARL Equities Rule 2602(d).
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    The Exchange's rules with respect to Equity Member participation, 
including the proposed affirmative and negative obligations for 
Equities Market Makers, raise no novel regulatory issues. The 
Commission believes that these proposed rules are consistent with 
Section 6(b)(5) of the Act because they are designed to promote just 
and equitable principles of trade, perfect the mechanism of a national 
market system and, in general, protect investors and the public 
interest. The Commission also believes that these proposed rules 
subject Equity Market Makers and Equity Members to appropriate 
discipline for improper conduct, consistent with Section 6(b)(6) and 
6(b)(7) of the Act.

B. MIAX PEARL Equities Trading System

    The Exchange's equities trading System, like its system for 
options, will be operated as a fully automated electronic order book, 
and the Exchange will not maintain or operate a physical trading 
floor.\34\ The Exchange will be a trading center whose quotations can 
be ``automated quotations'' under Rule 600(b)(4).\35\ In addition, the 
Exchange is designed to be an ``automated trading center'' under Rule 
600(b)(5) whose best-priced, displayed quotation will be a ``protected 
quotation'' under Rules 600(b)(61) and 600(b)(62), and for purposes of 
Rule 611.\36\ Only Equity Members and their Sponsored Participants 
(collectively, ``Users'') may transact business on MIAX PEARL via the 
System.\37\
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    \34\ The Exchange represents that the System will leverage the 
Exchange's current technology, including its customer connectivity, 
messaging protocols, quotations and execution engine, order router, 
data feeds, and network infrastructure. See Notice, supra note 3, at 
8056.
    \35\ 17 CFR 242.600(b)(4). See also MIAX PEARL Equities Rule 
2617(c).
    \36\ 17 CFR 242.600(b)(5), (b)(61) and (b)(62); 17 CFR 242.611. 
See also MIAX PEARL Equities Rule 2617(c).
    \37\ See MIAX PEARL Equities Rules 2000 and 2602(a)(1). See also 
Exchange Rule 210 (Sponsored Access to the Exchange).
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Order Types and Instructions
    Users may submit orders to the System as Limit Orders, Market 
Orders, or Midpoint Peg Orders.\38\ Orders may be entered as an odd 
lot, round lot, or mixed lot.\39\ The System will support two time-in-
force instructions: Immediate-or-Cancel (``IOC'') or Regular Hours Only 
(``RHO'').\40\ Users may submit orders with the display instructions of 
Displayed or Non-Displayed, but all orders eligible for display will be 
automatically defaulted to Displayed unless a User elects 
otherwise.\41\ Users also may submit orders with instructions of Do Not 
Route,\42\ Post Only,\43\ Attributable,\44\ and Non-Attributable.\45\ 
In addition, Users may mark Limit Orders as Intermarket Sweep Orders, 
which will allow orders so designated to be automatically matched and 
executed without reference to Protected Quotations at other trading 
centers.\46\ Users may also choose to designate orders with self-trade 
protection modifiers to prevent executions against a resting opposite 
side order originating from the same market participant, Exchange 
Member, or trading group identifier.\47\ The order types and 
instructions the Exchange has proposed for its equities trading System 
raise no new regulatory issues. The Commission believes these proposed 
rules are consistent with the Act, and Section 6(b)(5) in particular, 
because the proposed order type functionality offered by the Exchange 
will enable Exchange Users with varying trading needs to submit orders 
to the Exchange that are tailored to meet those needs, which should 
help promote just and equitable principles of trade, foster 
coordination with persons engaged in facilitating transactions in 
securities, and remove impediments to and perfect the mechanism of a 
national market system.
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    \38\ See MIAX PEARL Equities Rule 2614(a)(1)-(3).
    \39\ See MIAX PEARL Equities Rule 2614(a). Odd lot, round lot, 
and mixed lot orders are treated in the same manner on the Exchange, 
except as discussed below regarding the adjustment of an odd-lot 
price that locks or crosses the Protected NBBO. See MIAX PEARL 
Equities Rule 2611 and infra note 88 and accompanying text.
    \40\ See MIAX PEARL Equities Rule 2614(b). A Market Order may 
only include a time in force of IOC. See MIAX PEARL Equities Rule 
2614(a)(2).
    \41\ See MIAX PEARL Equities Rule 2614(c)(3) and (4). Market 
Orders and Mid-Point Peg Orders are not eligible for display. See 
MIAX PEARL Equities Rule 2614(a)(2) and (3).
    \42\ See MIAX PEARL Equities Rule 2614(c)(1).
    \43\ See MIAX PEARL Equities Rule 2614(c)(2).
    \44\ See MIAX PEARL Equities Rule 2614(c)(5).
    \45\ See MIAX PEARL Equities Rule 2614(c)(6).
    \46\ An ISO is not eligible for routing and may include a time-
in-force of IOC or RHO. See MIAX PEARL Equities Rule 2614(d).
    \47\ See MIAX PEARL Equities Rule 2614(f).
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    The MIAX PEARL Equities Rules will also provide for Limit Order 
Price Protection.\48\ The Exchange has proposed that a Limit Order to 
buy (sell) will be rejected if it is priced at or above (below) the 
greater of a specified dollar and percentage away from: (1) The 
Protected Best Offer for Limit Orders to buy, the Protected Best Bid 
for Limit Orders to sell; or (2) if the Protected Best Offer or 
Protected Best Bid is unavailable, the consolidated last sale price 
disseminated during the Regular Trading Hours on trade date; or (3) if 
the Protected Best Offer or Protected Best Bid and a consolidated last 
sale price are unavailable, the prior day's Official Closing Price 
identified as such by the primary listing exchange, adjusted to account 
for events such as corporate actions and news events.\49\
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    \48\ See MIAX PEARL Equities Rule 2614(a)(1)(I).
    \49\ See MIAX PEARL Equities Rule 1900 (defining the term 
``PBO'' or ``Protected NBO'' as the national best offer that is a 
Protected Quotation, and the term ``PBB'' or ``Protected NBB'' as 
the national best bid that is a Protected Quotation).
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    The Exchange's proposed Limit Order Price Protection functionality 
differs from that provided by other national securities exchanges in 
two respects: (i) It permits Equity Members to customize Limit Order 
Price Protection by specifying a dollar value and percentage limit away 
from a reference price on a per session basis, in lieu of using the 
Exchange's default parameters; and (ii) it provides for an alternative 
reference price when the NBBO and/or last sale price are 
unavailable.\50\ By permitting Equity Members to customize the Limit 
Order Price Protection while also maintaining Exchange default 
protection levels that are applicable in the absence of Equity Member 
customization, and by providing an alternative reference price when the 
NBBO and/or last sale price are unavailable, these proposed rules are 
designed to provide Equity Members with price protection for their 
limit orders that is reflective of the current trading environment for 
a given security and is also tailored to their risk profiles.\51\ The 
Commission believes that the Exchange's Limit Order Price Protection 
functionality is designed to help to protect investors, consistent with 
the requirements of Section 6(b)(5) of the Act, by ensuring that an 
Equity Member's limit order may only execute at prices that are within 
a specified bound of the prevailing market price for a particular 
security, as reflected by the NBBO or other available reference points 
if the NBBO is not available.
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    \50\ See Notice, supra note 3, at 8061.
    \51\ See id.
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Opening Procedures
    The Exchange will conduct an Opening Process at the start of 
Regular

[[Page 51513]]

Trading Hours.\52\ During the Opening Process, the Exchange attempts to 
match eligible buy and sell orders at the midpoint of the NBBO.\53\ The 
midpoint of the NBBO will be calculated differently depending on 
whether the primary listing exchange is NYSE or NYSE American,\54\ or 
is any other primary listing exchange.\55\
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    \52\ Orders designated as Post Only, ISOs, Market Orders, and 
orders that include a time-in-force other than RHO are not eligible 
to participate in the Opening Process. See MIAX PEARL Equities Rule 
2615. Self-trade prevention modifiers will be honored during the 
Opening Process. See MIAX PEARL Equities Rule 2615(a)(2).
    \53\ See MIAX PEARL Equities Rule 2615(b).
    \54\ See MIAX PEARL Equities Rule 2615(c)(1).
    \55\ For any other primary listing exchange, the Opening Process 
will be priced at the midpoint of the first NBBO subsequent to the 
first two-sided quotation published by the primary listing exchange 
after 9:30:00 a.m. Eastern Time. See MIAX PEARL Equities Rules 
2615(c)(2).
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    If the conditions to establish the Opening Process do not occur by 
9:45:00 a.m. Eastern Time, the Exchange will conduct a Contingent Open 
by matching all orders eligible to participate in the Opening Process 
at the midpoint of the then prevailing NBBO.\56\ The Exchange's 
proposal to match orders at the midpoint of the NBBO as part of the 
Contingent Open would provide consistent order handling to Users that 
wish to participate in the MIAX PEARL Equities Opening Process by 
executing their eligible orders at the midpoint of the NBBO, regardless 
of whether the opening process occurs at or near 9:30 a.m. Eastern 
Time, or later as part of a Contingent Open.\57\ If the midpoint of the 
NBBO is not available for the Contingent Open, all orders will be 
handled in time sequence, beginning with the order with the oldest 
timestamp, and be placed on the MIAX PEARL Equities Book, cancelled, 
executed, or routed to away trading centers in accordance with the 
terms of the order.\58\ Those Users that do not wish to participate in 
the Contingent Open may cancel their orders at any time and resubmit 
those orders after the Contingent Open occurs and continuous trading 
begins.\59\ While an equity security is subject to a halt, suspension, 
or pause in trading, the Exchange will accept orders for queuing prior 
to the resumption of trading in the security for participation in the 
Re-Opening Process.\60\ The Re-Opening Process will occur in the same 
general manner as the Opening Process.\61\
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    \56\ See MIAX PEARL Equities Rule 2615(d).
    \57\ See Notice, supra note 3, at 8063.
    \58\ Users not seeking an execution at the midpoint of the NBBO 
during the Contingent Open may cancel their orders before 9:45 a.m. 
and re-enter those orders after the Contingent Open occurs. See 
Notice, supra note 3, at 8063.
    \59\ See id.
    \60\ See MIAX PEARL Equities Rule 2615(e).
    \61\ See MIAX PEARL Equities Rule 2615(e)(1).
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    The Commission believes that the proposed opening and re-opening 
procedures are reasonably designed to provide for an orderly opening or 
re-opening of trading on MIAX PEARL Equities, and thus are consistent 
with the Act, and in particular the Section 6(b)(5) goals of removing 
impediments to the mechanism of a national market system and protecting 
investors and the public interest. In addition, the Exchange states 
that other equity exchanges do not perform a Contingent Opening process 
following their initial opening processes that attempts to match orders 
at the midpoint of the NBBO.\62\ The Commission believes that the 
Exchange's proposal to match orders at the midpoint of the NBBO as part 
of the Contingent Open provides an additional opportunity for 
marketable contra-side interest to execute at the NBBO midpoint prior 
to the beginning of continuous trading, and thereby promotes just and 
equitable principles of trade, the removal of impediments to the 
mechanism of the national market system, and the protection of 
investors and the public interest, consistent with Section 6(b)(5) of 
the Act.\63\
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    \62\ See Notice, supra note 3, at 8063 n.61.
    \63\ 15 U.S.C. 78f(b)(5).
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Order Priority and Execution
    Following the Opening Process, the System will continuously and 
automatically match orders pursuant to price/display/time priority.\64\ 
Orders are ranked based on their working price.\65\ For equally-priced 
trading interest, orders categorized as displayed will have priority 
over orders categorized as non-displayed.\66\ Within each priority 
category, orders will be ranked based on time, with each order being 
assigned a timestamp equal to the time the order is first placed on the 
MIAX PEARL Equities Book, subject to enumerated exceptions regarding 
self-trade prevention and certain cancel/replace messages.\67\ The 
System also will utilize certain collars and constraints in an effort 
to reduce the occurrence of erroneous trades.\68\ The best-ranked 
orders to buy and best-ranked orders to sell that are displayable in 
the MIAX PEARL Equities book and their aggregate displayed size will be 
available to quotation vendors for dissemination pursuant to the 
requirements of Rule 602 of Regulation NMS.\69\
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    \64\ See MIAX PEARL Equities Rules 2616(a). See MIAX PEARL 
Equities Rule 2616(a)(1).
    \65\ See MIAX PEARL Equities Rule 2616(a)(1).
    \66\ See MIAX PEARL Equities Rule 2616(a)(2).
    \67\ See MIAX PEARL Equities Rule 2616(a)(3)-(5).
    \68\ See MIAX PEARL Equities Rules 2618 and 2621.
    \69\ See MIAX PEARL Rule 2216(b).
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    MIAX PEARL Equities Rule 2617(a) addresses order execution. The 
rule provides that an order will be cancelled back to the User if, 
based on market conditions, User instructions, applicable Exchange 
Rules and/or the Act and the rules and regulations thereunder, such 
order is not executable, cannot be routed to another trading center and 
cannot be posted to the MIAX PEARL Equities Book.\70\
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    \70\ See MIAX PEARL Equities Rule 2617(a).
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    MIAX PEARL Equities Rule 2617(a)(1)-(3) provides that the System 
will comply with all applicable securities laws and regulations, 
including Regulation NMS Rule 611, Regulation SHO, and the Plan to 
Address Extraordinary Market Volatility (the ``LULD Plan'').\71\ MIAX 
PEARL Equities Rule 2617(a)(4) addresses how (subject to the 
requirements of Rule 611 and other applicable Commission and Exchange 
requirements), an incoming order or Aggressing Order would be matched 
against orders on the MIAX PEARL Equities Book.\72\ Specifically, MIAX 
PEARL Equities Rule 2617(a)(4)(A)-(B) provides that an Aggressing Order 
or an incoming order to buy (sell) will be automatically executed to 
the extent that it is priced at an amount that equals or exceeds (is 
less than) any order to sell (buy) in the MIAX PEARL Equities Book and 
is executable.\73\
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    \71\ See id. Rule 2617(a)(2) specifies that for any execution to 
occur during Regular Trading Hours, the price must be equal to, or 
better than, the Protected NBBO unless an exception to Rule 611 
applies. See MIAX PEARL Equities Rules 1901 (defining ``Protected 
NBBO'') and 2617(a)(2).
    \72\ See MIAX PEARL Equities Rule 1901 (defining ``Aggressing 
Order'' as an order to buy (sell) that is or becomes marketable 
against sell (buy) interest on the MIAX PEARL Equities Book).
    \73\ See MIAX PEARL Equities Rule 2617(a)(4)(A)-(B).
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    MIAX PEARL Equities Rule 2617(a)(4)(C) and (D) further address 
executions on the MIAX PEARL Equities Book. As initially proposed, MIAX 
PEARL Equities Rule 2617(a)(4)(C) and (D) set forth how the Exchange 
would process orders when the MIAX PEARL Equities Book is internally 
locked.\74\ In Amendment No. 1, the Exchange added language to these 
proposed rule provisions to account for the fact that certain orders 
also may post at prices resulting in a MIAX PEARL Equities Book that is 
internally crossed.\75\ The Exchange stated that

[[Page 51514]]

such an internally crossed book may occur when an incoming order of odd 
lot size designated as Post Only does not execute against a resting 
Midpoint Peg order pursuant to the Exchange's proposed economic best 
interest functionality under MIAX PEARL Equities Rule 2614(c)(2).\76\ 
The Exchange provided an example where this occurs when an incoming 
displayable odd lot Post Only order would cross a contra-side Midpoint 
Peg order resting at the midpoint of the PBBO by one half of one cent 
($.005) and post and display at its limit price, crossing the Midpoint 
Peg order.\77\ The example further reflects where these internally 
crossed orders would be subsequently executable--specifically, the 
Midpoint Peg order would no longer be executable at the midpoint of the 
PBBO and instead would be executable at one-half minimum price 
variation more aggressive than the displayed price of the odd lot Post 
Only order, and the odd lot Post Only order would be executable at its 
displayed price.\78\ The Exchange modified MIAX PEARL Equities Rule 
2617(a)(4)(C) and (D) to acknowledge this possibility.
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    \74\ See Amendment No. 1.
    \75\ Id.
    \76\ Id.
    \77\ Id. The example assumes that the PBBO is $10.00 by $10.05 
and there are no orders resting on the MIAX PEARL Equities book. The 
Exchange states that it has yet to determine the level of fees and 
rebates it intends to offer, so the example assumes a maker/taker 
fee structure with a $0.0030 fee for removing liquidity and a 
$0.0030 rebate for providing liquidity, requiring at least $0.0060 
of price improvement for a displayed order designated as Post Only 
to remove liquidity. The Exchange also states that, assuming it 
offers lower fees and rebates for non-displayed orders, if the 
incoming post only order in the example was non-displayed, it would 
execute against the resting contra-side Midpoint Peg order pursuant 
to the Exchange's proposed economic best interest functionality 
under Exchange Rule 2614(c)(2). Further, the Exchange states that if 
the incoming post only order in the example instead was a displayed 
round lot, it would have updated the PBBO resulting in the contra-
side Midpoint Peg Order being re-priced to the new midpoint of the 
PBBO and not resulting in a non-displayed internally crossed book. 
Id.
    \78\ Id.
---------------------------------------------------------------------------

    MIAX PEARL Equities Rule 2617(a)(4)(C), as modified by Amendment 
No. 1, acknowledges that certain orders, based on their operation and 
User instructions, are permitted to post and rest on the MIAX PEARL 
Equities Book at prices that lock or cross contra-side liquidity; 
provided, however, that the System would never display a locked or 
crossed market.\79\ The rule further provides that, if an Aggressing 
Order or an incoming order to buy (sell) would execute upon entry 
against an order to sell (buy) at the same price as or a price inferior 
to a resting displayed order to buy (sell), the Aggressing Order or 
incoming order to buy (sell) will be cancelled or posted to the MIAX 
PEARL Equities Book and ranked in accordance with MIAX PEARL Equities 
Rule 2616.\80\
---------------------------------------------------------------------------

    \79\ See Amendment No. 1; Rule 2617(a)(4)(C).
    \80\ See Amendment No. 1; Rule 2617(a)(4)(C).
---------------------------------------------------------------------------

    MIAX PEARL Equities Rule 2617(a)(4)(D), as modified by Amendment 
No. 1, governs the price at which an order is executable when it is 
posted non-displayed on the PEARL Equities Book and there is a contra-
side displayed order at a price which results in an internally locked 
or crossed book.\81\ For securities priced equal to or greater than 
$1.00 per share, in the case where a non-displayed order to sell (buy) 
is posted on the MIAX PEARL Equities Book at a price that locks or 
crosses a displayed order to buy (sell) pursuant to MIAX PEARL Equities 
Rule 2617(a)(4)(C) described above, an Aggressing Order or an incoming 
order to buy (sell) that is a market order or a limit order priced more 
aggressively than the order to buy (sell) displayed on the MIAX PEARL 
Equities Book will execute against the non-displayed order to sell 
(buy) resting on the MIAX PEARL Equities Book at one-half minimum price 
variation greater (less) than the price of the resting displayed order 
to buy (sell).\82\
---------------------------------------------------------------------------

    \81\ See Amendment No. 1; Rule 2617(a)(4)(D).
    \82\ See Amendment No. 1; Rule 2617(a)(4)(D).
---------------------------------------------------------------------------

    The MIAX PEARL Equities Rules also are designed to address 
intermarket locks and crosses, as required by Rule 610(d) of Regulation 
NMS,\83\ in that they are designed not to disseminate interest that 
would lock or cross a protected quote, require Users to reasonably 
avoid displaying interest that locks or crosses any protected 
quotation, and are reasonably designed to assure the reconciliation of 
locked or crossed interest.\84\ The MIAX PEARL Equities Rules also 
provide for the re-pricing of limit orders in order to comply with Rule 
201 of Regulation SHO \85\ and the LULD Plan,\86\ and the repricing of 
non-displayed limit orders to ensure compliance with Rule 611 of 
Regulation NMS.\87\
---------------------------------------------------------------------------

    \83\ 17 CFR 242.610(d).
    \84\ See MIAX PEARL Equities Rule 2624. See also MIAX PEARL 
Equities Rule 2614(a)(1) and (g)(1) (relating to price sliding 
functionality for non-routable limit orders to avoid violations of 
Rule 610(d) of Regulation NMS, 17 CFR 242.610(d)).
    \85\ 17 CFR 242.201. See MIAX PEARL Equities Rule 2614(a)(1) and 
(g)(3).
    \86\ See MIAX PEARL Equities Rules 2614(a)(1) and 2622. See also 
MIAX PEARL Equities Rule 2617(a)(3) (providing that any executions 
that occur during Regular Trading Hours must comply with the LULD 
plan).
    \87\ 17 CFR 242.611. See MIAX PEARL Equities Rule 2614(a)(1) and 
(g)(2).
---------------------------------------------------------------------------

    Further, with respect to odd lots, the Exchange has proposed that 
the working and display price of a displayable odd lot order will be 
adjusted both on arrival and when resting on the MIAX PEARL Equities 
Book depending on the odd lot order's limit price in relation the 
Protected NBBO and whether the Protected NBBO itself is locked or 
crossed, to reduce the potential for odd lot orders to be displayed on 
the Exchange's proprietary data feed at potentially unexecutable 
prices.\88\ This functionality differs from that of certain other 
equity exchanges by re-pricing the odd lot order to the PBB/PBO of the 
Exchange when the PBB/PBO was previously locked or crossed by an away 
trading center.\89\ According to the Exchange, this difference will 
reduce the potential for an odd lot order to appear on the Exchange's 
proprietary data feeds as though it is locking or crossing the PBBO. 
The Commission believes that, to the extent Rule 2617 will reduce the 
potential for odd lot orders to be displayed on the Exchange's data 
feed at potentially unexecutable prices, this proposed rule is 
reasonably designed to protect investors and remove impediments to the 
mechanism of a national market system, consistent with Section 6(b)(5) 
of the Act.
---------------------------------------------------------------------------

    \88\ See MIAX PEARL Equities Rule 2611(b). See also Notice, 
supra note 3 at 8057.
    \89\ See Notice, supra note 3, at 8073 n.111.
---------------------------------------------------------------------------

    To meet their regulatory responsibilities under Rule 611(a) of 
Regulation NMS, other trading centers will be required to have 
sufficient notice of new protected quotations, as well as all necessary 
information (such as final technical specifications).\90\ The 
Commission believes that it would be a reasonable policy and procedure 
under Rule 611(a) to require that industry participants begin treating 
MIAX PEARL Equities' best bid and best offer as a protected quotation 
as soon as possible but no later than 90 days after the date of this 
order, or such later date as MIAX PEARL Equities begins operation of 
its equities trading platform. The Commission has taken the same 
position with other new equities exchanges.\91\
---------------------------------------------------------------------------

    \90\ See Securities Exchange Act Release No. 53829 (May 18, 
2006), 71 FR 30038, 30041 (May 24, 2006) (File No. S7-10-04) 
(extending the compliance dates for Rule 610 and Rule 611 of 
Regulation NMS under the Act).
    \91\ See, e.g., Securities Exchange Act Release Nos. 85828 (May 
10, 2019), 84 FR 21841 (May 15, 2019) (File No. 10-234) (order 
granting registration of Long-Term Stock Exchange, Inc.); and 88806 
(May 4, 2020), 85 FR 27451 (File No. 10-237) (order granting 
registration of MEMX LLC).
---------------------------------------------------------------------------

    In light of the foregoing, the Commission finds that the MIAX PEARL 
Equities trading rules are consistent with the Act and, in

[[Page 51515]]

particular, the Section 6(b)(5) requirement that an exchange's rules be 
designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system, and protect investors and the public 
interest.\92\
---------------------------------------------------------------------------

    \92\ See 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

C. Routing

    MIAX PEARL Equities will support orders that are designated to be 
routed to the Protected NBBO as well as orders that will execute only 
within MIAX PEARL Equities.\93\ The System will provide a routing 
service (``Routing Services'') for orders when trading interest is not 
available on MIAX PEARL Equities.\94\ As the Exchange currently does 
for options,\95\ it will route orders in equity securities via one or 
more routing brokers that are not affiliated with the Exchange.\96\
---------------------------------------------------------------------------

    \93\ However, an order marked ``short'' when a short sale price 
test restriction pursuant to Rule 201 of Regulation SHO is in effect 
is not eligible for routing by the Exchange. See MIAX PEARL Equities 
Rule 2617(b)(2). An order that is ineligible for routing due to a 
short sale price test restriction and that includes a time-in-force 
of IOC will be cancelled upon entry. Id. The Exchange will handle 
routable orders in connection with the LULD Plan as described in 
MIAX PEARL Equities Rule 2622(b)(2) and (3).
    \94\ See Notice, supra note 3, at 8053.
    \95\ See Exchange Rule 529.
    \96\ See Notice, supra note 3, at 8066. The Exchange states that 
this routing process is described under MIAX PEARL Equities Rule 
2617(b)(1), which is identical to current Exchange Rule 529 that is 
applicable to options. See id.
---------------------------------------------------------------------------

    For all Routing Services, the Exchange will determine the logic 
that provides when, how, and where orders are routed away to other 
trading centers.\97\ The Exchange represents that the Exchange's 
routing logic will not provide any advantage to Users when routing 
orders to away trading centers as compared to other routing 
methods.\98\ The routing broker will receive routing instructions from 
the Exchange to route orders to other trading centers and report such 
executions back to the Exchange.\99\ The routing broker cannot change 
the terms of an order or the routing instructions, nor does the routing 
broker have any discretion about where to route an order.\100\
---------------------------------------------------------------------------

    \97\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(iv).
    \98\ See Notice, supra note 3, at 8066.
    \99\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(v).
    \100\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(v).
---------------------------------------------------------------------------

    The Exchange represents that for each routing broker used by the 
Exchange, an agreement will be in place between the Exchange and the 
routing broker that will, among other things, restrict the use of any 
confidential and proprietary information that the routing broker 
receives to legitimate business purposes necessary for routing orders 
at the direction of the Exchange.\101\ Further, the Exchange will 
establish and maintain procedures and internal controls reasonably 
designed to adequately restrict the flow of confidential and 
proprietary information between the Exchange and the routing broker, 
and any other entity, including any affiliate of the routing broker; 
and, if the routing broker or any of its affiliates engages in any 
other business activities other than providing routing services to the 
Exchange, between the segment of the routing broker or affiliate that 
provides the other business activities and the segment of the routing 
broker that provides the Routing Services.\102\
---------------------------------------------------------------------------

    \101\ See Notice, supra note 3, at 8066. See also MIAX PEARL 
Equities Rule 2617(b)(1)(A).
    \102\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(i).
---------------------------------------------------------------------------

    The Exchange may not use a routing broker for which the Exchange or 
any affiliate of the Exchange is the designated examining 
authority.\103\ In addition, the MIAX PEARL Equities rules state that 
the Exchange will provide its Routing Services in compliance with the 
provisions of the Act and the rules thereunder, including, but not 
limited to, the requirements in Section 6(b)(4) and (5) of the Act that 
the rules of a national securities exchange provide for the equitable 
allocation of reasonable dues, fees, and other charges among an 
exchange's members and other persons using its facilities, and not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\104\ The Exchange also represents that it will 
file a proposed rule change with the Commission pursuant to Section 
19(b) of the Act prior to offering additional routing options.\105\
---------------------------------------------------------------------------

    \103\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(ii).
    \104\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(iii).
    \105\ See Notice, supra note 3, at 8066 n.78.
---------------------------------------------------------------------------

    The Exchange states that use of its Routing Services to route 
orders to other market centers is optional.\106\ Parties that do not 
desire to use these services must designate their orders as not 
available for routing.\107\ In addition, any bid or offer entered on 
the Exchange routed to another trading center through a routing broker 
that results in an execution shall be binding on the Member that 
entered such bid or offer.\108\ The MIAX PEARL Equities rules with 
respect to Routing Services raise no new regulatory issues. The 
Commission believes that the proposed routing rules are consistent with 
the Act, and further the goals of Section 6(b)(5) in particular, 
because they are designed to foster coordination with persons engaged 
in facilitating transactions in securities and to remove impediments to 
and perfect the mechanism of a national market system, and are not 
designed to permit unfair discrimination between customers or broker-
dealers.
---------------------------------------------------------------------------

    \106\ See id. at 8066.
    \107\ See id.
    \108\ See MIAX PEARL Equities Rule 2617(b)(1)(A)(vi).
---------------------------------------------------------------------------

D. Securities Traded: Unlisted Trading Privileges

    The Exchange is not proposing to be a listing market for equity 
securities, but instead will trade equity securities pursuant to 
unlisted trading privileges (``UTP''). MIAX PEARL Equities Rule 2900 
establishes the Exchange's authority to trade securities on a UTP 
basis. MIAX PEARL Equities Rule 2900(a) provides that the Exchange may 
extend UTP to any NMS Stock that is listed on another national 
securities exchange or with respect to which UTP may otherwise be 
extended in accordance with Section 12(f) of the Act.\109\ MIAX PEARL 
Equities Rule 2900(a) further provides that any such security would be 
subject to all Exchange rules applicable to trading on the Exchange, 
unless otherwise noted. For any UTP security that is a UTP Exchange 
Traded Product, the Exchange will distribute an information circular 
prior to the commencement of trading in each such UTP Exchange Traded 
Product that generally includes the same information as is contained in 
the information circular provided by the listing exchange.\110\ Equity 
Members must provide each purchaser of UTP Exchange Traded Products a 
written description of the terms and characteristics of those 
securities, in a form approved by the Exchange or prepared by the open-
ended management company issuing such

[[Page 51516]]

securities, not later than the time a confirmation of the first 
transaction in such securities is delivered to such purchaser.\111\ 
Upon request of a customer, an Equity Member must also provide a 
prospectus for the particular UTP Exchange Traded Product.\112\
---------------------------------------------------------------------------

    \109\ Any such security will be subject to all Exchange rules 
applicable to trading on the Exchange, unless otherwise noted. See 
MIAX PEARL Equities Rule 2900. See also Amendment No. 1, supra note 
5 (deleting from the MIAX PEARL Equities Rules the originally 
proposed definition of ``Equity Securities'' as unnecessary).
    \110\ This includes: (a) The special risks of trading the new 
Exchange Traded Product; (b) the Exchange Rules that will apply to 
the new Exchange Traded Product; and (c) information about the 
dissemination of value of the underlying assets or indices. See MIAX 
PEARL Equities Rules 2900(b)(1).
    \111\ In addition, Equity Members will include a written 
description with any sales material relating to UTP Exchange Traded 
Products that is provided to customers or the public, as well as a 
disclaimer with any other written materials provided by an Equity 
Member to customers or the public making specific reference to the 
UTP Exchange Traded Products as an investment vehicle substantially. 
See MIAX PEARL Equities Rules 2900(b)(2)(B).
    \112\ See MIAX PEARL Equities Rule 2900(b)(2)(C).
---------------------------------------------------------------------------

    The Exchange will also impose certain restrictions on Equity 
Members acting as Equities Market Makers on the Exchange in a UTP 
Exchange Traded Product that derives its value from one or more 
currencies, commodities, or derivatives based on one or more currencies 
or commodities, or is based on a basket or index composed of currencies 
or commodities.\113\ Further, the Exchange will enter into 
comprehensive surveillance sharing agreements with markets that trade 
components of the index or portfolio on which the UTP Exchange Traded 
Product is based to the same extent as the listing exchange's rules 
require the listing exchange to enter into comprehensive surveillance 
sharing agreements with such markets.\114\
---------------------------------------------------------------------------

    \113\ See MIAX PEARL Equities Rule 2900(b)(4).
    \114\ See MIAX PEARL Equities Rule 2900(b)(5).
---------------------------------------------------------------------------

    Rule 12f-5 under the Act requires an exchange that extends unlisted 
trading privileges to securities to have in effect a rule or rules 
providing for transactions in the class or type of security to which 
the exchange extends unlisted trading privileges. MIAX PEARL Equities 
Rule 2900 includes a provision that any security traded UTP on the 
Exchange ``shall be subject to all Exchange rules applicable to trading 
on the Exchange, unless otherwise noted.'' Accordingly, pursuant to 
Section 12(f) of the Act and Rule 12f-5 thereunder, MIAX PEARL Equities 
Rules will be permitted to extend unlisted trading privileges to 
securities of the same class, subject to the trading rules of the 
Exchange.
    The provisions in MIAX PEARL Equities Rules 2900 raise no new 
regulatory issues, and the Commission therefore finds that the 
Exchange's approach to the trading of securities on a UTP basis, as set 
forth in MIAX PEARL Equities Rule 2900, is consistent with Section 
12(f) of the Act and Rule 12f-5 thereunder.

E. Regulation

    The Exchange represents that it will regulate MIAX PEARL Equities 
using the Exchange's existing regulatory structure.\115\ Pursuant to 
the Exchange's By-Laws, the Chief Regulatory Office of the Exchange 
will have general supervision of the regulatory operations of the 
Exchange, which will include responsibility for overseeing the 
Exchange's surveillance, examination, and enforcement functions and for 
administering any regulatory services agreements applicable to MIAX 
PEARL Equities.\116\ Further, the Exchange's existing Regulatory 
Oversight Committee will be responsible for overseeing the adequacy and 
effectiveness of Exchange's regulatory and self-regulatory organization 
responsibilities, including those applicable to MIAX PEARL 
Equities.\117\
---------------------------------------------------------------------------

    \115\ See Notice, supra note 3, at 8071-72.
    \116\ See MIAX PEARL By-Laws, Section 6.10.
    \117\ See MIAX PEARL By-Laws, Section 4.5(c).
---------------------------------------------------------------------------

    As more fully discussed in the Notice, the Exchange has proposed 
specific business conduct and operational rules for Equity Members 
which include rules covering similar subject matter as existing 
Exchange Rules applicable to options Members.\118\ In addition, the 
Exchange's existing rules applicable to the MIAX PEARL options market 
(current Chapters I though XVIII of the Exchange Rules) will apply to 
Equity Members and their associated persons, unless a specific MIAX 
PEARL Equities Rule (in proposed Chapters XIX through XXX of the 
Exchange Rules) governs or the context otherwise requires.\119\
---------------------------------------------------------------------------

    \118\ See Notice, supra note 3, at 8069-70 (discussing MIAX 
PEARL Equities Rules regarding Fair Practice (Chapter XXI), Books, 
Records, and Reports (Chapter XXII), Supervision (Chapter XXIII), 
Margin (Chapter XXIV), Chapter XXVII (Trading Practice Rules), and 
other miscellaneous provisions (Chapter XXVIII)).
    \119\ See MIAX PEARL Rule 1900 (Applicability).
---------------------------------------------------------------------------

    Further, the Exchange's By-Laws provide that it has disciplinary 
jurisdiction over its members, including Equity Members so that it can 
enforce its members' compliance with its rules and the federal 
securities laws.\120\ The Exchange's rules also permit it to sanction 
members for violations of its rules and of the federal securities laws 
by, among other things, expelling or suspending members, limiting 
members' activities, functions, or operations, fining or censuring 
members, or suspending or barring a person from being associated with a 
member.\121\
---------------------------------------------------------------------------

    \120\ See MIAX PEARL By-Laws Section 9.2. See also MIAX PEARL 
By-Laws Section 2.1(d).
    \121\ See Chapter X of Exchange Rules. The Exchange's rules also 
provide for the imposition of fines for minor rule violations in 
lieu of commencing disciplinary proceedings.
---------------------------------------------------------------------------

    In addition, the Exchange represents that: (1) The Exchange will 
join the existing equities industry agreements and establish new 
agreements, as necessary, pursuant to Section 17(d) of the Act; (2) the 
Exchange's Regulatory Services Agreement (``RSA'') with FINRA will 
govern many aspects of the regulation and discipline of Members that 
participate in equities trading, as it does for options market 
regulation; and (3) the Exchange will authorize Equity Members to trade 
on MIAX PEARL Equities and conduct surveillance of equities trading as 
it does for options.\122\
---------------------------------------------------------------------------

    \122\ See id. at 8071-72.
---------------------------------------------------------------------------

    The Exchange represents that it will establish Rule 17d-2 Plans for 
Allocation of Regulatory Responsibilities, including, subject to 
Commission approval: (i) A plan with FINRA pursuant to which the 
Exchange and FINRA will agree to allocate to FINRA, with respect to 
common members, regulatory responsibility for overseeing and enforcing 
certain applicable laws, rules, and regulations of MIAX PEARL Equities; 
(ii) joining the multi-party plan with FINRA and other national 
securities exchanges for the surveillance, investigation, and 
enforcement of common insider trading rules; and (iii) joining the 
multi-party plan with FINRA and other national securities exchanges for 
the allocation of regulatory responsibilities with respect to certain 
Regulation NMS Rules.\123\
---------------------------------------------------------------------------

    \123\ See Notice, supra note 3, at 8072. Rule 17d-2 provides 
that any two or more self-regulatory organizations (``SROs'') may 
file with the Commission a plan for allocating among such SROs the 
responsibility to receive regulatory reports from persons who are 
members or participants of more than one of such SROs to examine 
such persons for compliance, or to enforce compliance by such 
persons, with specified provisions of the Act, the rules and 
regulations thereunder, and the rules of such SROs, or to carry out 
other specified regulatory functions with respect to such persons. 
See 17 CFR 240.17d-2.
---------------------------------------------------------------------------

    In addition, the Exchange represents that it will: (i) Expand its 
existing RSA with FINRA, pursuant to which FINRA performs various 
regulatory services on behalf of the Exchange, subject to the 
Exchange's ultimate responsibility, including the review of membership 
applications and the conduct of investigations, disciplinary and 
hearing services; (ii) join the Intermarket Surveillance Group 
(``ISG''); and (iii) submit a Minor Rule Violation Plan to the 
Commission under Rule 19d-1(c)(2) of the Act applicable to Equity 
Members.\124\
---------------------------------------------------------------------------

    \124\ See id.
---------------------------------------------------------------------------

    According to the Exchange, FINRA currently surveils options trading 
on behalf of the Exchange pursuant to an existing RSA designed to 
detect violations of Exchange rules and applicable federal securities 
laws.\125\ The Exchange represents that this RSA

[[Page 51517]]

will be expanded to provide for FINRA to also surveil equities trading 
on MIAX PEARL Equities on behalf of the Exchange.\126\ The Exchange 
will remain responsible for FINRA's performance under the RSA.\127\
---------------------------------------------------------------------------

    \125\ See Notice, supra note 3, at 8072.
    \126\ See id.
    \127\ See id.
---------------------------------------------------------------------------

    In addition, with respect to exchange traded products traded on 
MIAX PEARL Equities pursuant to unlisted trading privileges, the 
Exchange represents that it will enter into a comprehensive 
surveillance sharing agreement with markets that trade components of 
the index or portfolio on which shares of an exchange-traded product is 
based to the same extent as the listing exchange's rules require the 
listing exchange to enter into a comprehensive surveillance sharing 
agreement with such markets.\128\
---------------------------------------------------------------------------

    \128\ See id. The Exchange states that FINRA, on behalf of the 
Exchange, may obtain information, and will communicate information 
as needed, regarding trading in the shares of exchange-traded 
products, as well as in the underlying exchange-traded securities 
and instruments with other markets and other entities that are 
members of ISG. The Exchange may also obtain information regarding 
trading in such shares and underlying securities and instruments 
from markets and other entities that are members of ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement. Moreover, the Exchange states that FINRA, on behalf of 
the Exchange, is able to access, as needed, trade information for 
certain fixed income securities held by a fund reported to FINRA's 
Trade Reporting and Compliance Engine. See id.
---------------------------------------------------------------------------

    The Exchange has also proposed Rule 2622(e) to comply with the LULD 
Plan.\129\ MIAX PEARL Equities Rule 2622(e) requires the Exchange to be 
a Participant in the LULD Plan \130\ and requires that Equity Members 
comply with the LULD Plan's provisions. MIAX PEARL Equities Rule 
2622(e) also describes the Exchange's order handling procedures to 
comply with the LULD Plan.\131\
---------------------------------------------------------------------------

    \129\ In Amendment No. 1, the Exchange updated MIAX PEARL 
Equities Rules 2615 and 2622 regarding trading halts to reflect 
recent proposed rule changes filed by all other equity exchanges and 
FINRA with respect to a Level 3 Market Decline. See supra note 5. 
When triggered, a Level 3 halt would halt trading market-wide until 
the next trading day. The changes in Amendment No. 1 would allow for 
next-day trading to resume in all NMS stocks no differently from any 
other trading day, and would not need to wait for the primary 
listing market to reopen trading in a security.
    \130\ The Exchange represents that it intends to become a 
Participant in the LULD Plan prior to launching MIAX PEARL Equities. 
See Notice, supra note 3, at 8068, n.87 and Section III.A. infra.
    \131\ See MIAX PEARL Equities Rule 2622(e), and Notice, supra 
note 3, at 8068.
---------------------------------------------------------------------------

    The Exchange's proposed regulatory structure raises no new 
regulatory issues. Accordingly, the Commission finds that the 
Exchange's proposed regulatory structure, including the Exchange's 
proposed application of existing rules and by-laws to MIAX PEARL 
Equities and Equity Members' conduct, the Exchange's commitment to 
establish new or expand existing agreements with third-parties 
including FINRA for purposes such as surveillance, member discipline, 
and overseeing and enforcing compliance with MIAX PEARL Equities rules, 
and proposed Rule 2622(e) requiring compliance with the LULD plan, are 
consistent with the Act and, in particular, the Section 6(b)(5) 
requirement that an exchange's rules be designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system, and 
protect investors and the public interest.\132\ The Commission also 
finds that the Exchange's proposed regulatory structure is consistent 
with the requirements of Section 6(b)(1) of the Act, which requires an 
exchange to be so organized and have the capacity to be able to carry 
out the purposes of the Act and to comply, and to enforce compliance by 
its members and persons associated with its members, with the Act and 
the rules and regulations thereunder, and the rules of the 
Exchange,\133\ and with Section 6(b)(6) and 6(b)(7) of the Act,\134\ 
which require an Exchange to provide fair procedures for the 
disciplining of members and persons associated with members.
---------------------------------------------------------------------------

    \132\ See 15 U.S.C. 78f(b)(5).
    \133\ 15 U.S.C. 78f(b)(1).
    \134\ 15 U.S.C. 78f(b)(6) and (b)(7).
---------------------------------------------------------------------------

F. Section 11(a) of the Act

    Section 11(a)(1) of the Act \135\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises investment discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) under the Act,\136\ known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a)(1) prohibition. Rule 11a2-2(T) permits an exchange member, 
subject to certain conditions, to effect transactions for covered 
accounts by arranging for an unaffiliated member to execute 
transactions on the exchange. To comply with Rule 11a2-2(T)'s 
conditions, a member: (i) Must transmit the order from off the exchange 
floor; (ii) may not participate in the execution of the transaction 
once it has been transmitted to the member performing the execution; 
\137\ (iii) may not be affiliated with the executing member; and (iv) 
with respect to an account over which the member or an associated 
person has investment discretion, neither the member nor its associated 
person may retain any compensation in connection with effecting the 
transaction except as provided in the Rule.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78k(a)(1).
    \136\ 17 CFR 240.11a2-2(T).
    \137\ This prohibition also applies to associated persons. The 
member may, however, participate in clearing and settling the 
transaction.
---------------------------------------------------------------------------

    In a letter to the Commission, the Exchange requests that the 
Commission concur with the Exchange's conclusion that Equity Members 
that enter orders into the System satisfy the conditions of Rule 11a2-
2(T).\138\ For the reasons set forth below, the Commission believes 
that Equity Members entering orders into the System could satisfy the 
requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------

    \138\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Christopher Solgan, VP, Senior Counsel, MIAX PEARL, dated July 
13, 2020 (``MIAX PEARL 11(a) Letter'').
---------------------------------------------------------------------------

    The Rule's first condition is that orders for covered accounts be 
transmitted from off the exchange floor. In the context of automated 
trading systems, the Commission has found that the off-floor 
transmission condition is met if a covered account order is transmitted 
from a remote location directly to an exchange's floor by electronic 
means. \139\ The Exchange has represented that it does not have a 
physical trading floor, and the System will receive orders from members 
electronically through remote terminals or computer-to-computer 
interfaces. The Commission believes that the System satisfies this off-
floor transmission condition.
---------------------------------------------------------------------------

    \139\ See, e.g., Securities Exchange Act Release Nos. 78101 
(June 17, 2016), 81 FR 41141 (June 23, 2016) (order approving IEX 
exchange registration); 75650 (August 7, 2015), 80 FR 48600 (August 
13, 2015) (order approving EDGX Options as an options trading 
facility of the EDGX Exchange, Inc.); 61419 (January 26, 2010), 75 
FR 5157 (February 1, 2010); (order approving the BATS Options as an 
options trading facility of the BATS Exchange, Inc.); 49068 (January 
13, 2004), 69 FR 2775 (January 20, 2004) (order approving the Boston 
Options Exchange as an options trading facility of the Boston Stock 
Exchange); 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001) 
(order approving Archipelago Exchange as electronic trading facility 
of the Pacific Exchange); 29237 (May 24, 1991), 56 FR 24853 (May 31, 
1991) (regarding NYSE's Off-Hours Trading Facility); 15533 (January 
29, 1979), 44 FR 6084 (January 31, 1979) (``1979 Release''); and 
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (``1978 
Release'') (regarding NYSE's Designated Order Turnaround System).
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    The second condition states that the member and any associated 
person not participate in the execution of its order after the order 
has been transmitted. The Exchange represented that at no time 
following the submission of an order is

[[Page 51518]]

an Equity Member or an associated person of the Equity Member able to 
acquire control or influence over the result or timing of the order's 
execution.\140\ According to the Exchange, the execution of a member's 
order is determined solely by what quotes and orders, bids, or offers 
are present in the System at the time the Equity Member submits the 
order, and the order priority based on the MIAX PEARL Equities 
Rules.\141\ Accordingly, the Commission believes that an Equity Member 
and its associated persons do not participate in the execution of an 
order submitted to the System.
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    \140\ See MIAX PEARL 11(a) Letter, supra note 138, at 3-4.
    \141\ See id. at 4. The member may cancel or modify the order, 
or modify the instruction for executing the order, but only from off 
the floor. The Commission has stated that the non-participation 
requirement is satisfied under such circumstances, so long as such 
modifications or cancellations are also transmitted from off the 
floor. See Securities Exchange Act Release No. 14713 (April 27, 
1978), 43 FR 18557 (May 1, 1978) (``1978 Release'') (stating that 
the ``non-participation requirement does not prevent initiating 
members from canceling or modifying orders (or the instructions 
pursuant to which the initiating member wishes orders to be 
executed) after the orders have been transmitted to the executing 
member, provided that any such instructions are also transmitted 
from off the floor'').
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    The third condition states that the order be executed by an 
exchange member who is unaffiliated with the member initiating the 
order. The Commission has stated that this condition is satisfied when 
automated exchange facilities are used, as long as the design of these 
systems ensures that members do not possess any special or unique 
trading advantages in handling their orders after transmitting them to 
the exchange.\142\ The Exchange has represented that the design of the 
System ensures that no Equity Member has any special or unique trading 
advantage in the handling of its orders after transmitting its orders 
to the Exchange.\143\ Based on the Exchange's representation that the 
design of the System ensures that no Equity Member has any special or 
unique trading advantage in the handling of its orders after 
transmitting its orders to the Exchange, the Commission believes that 
the System satisfies this condition of Rule 11a2-2(T).
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    \142\ In considering the operation of automated execution 
systems operated by an exchange, the Commission has noted that while 
there is not an independent executing exchange member, the execution 
of an order is automatic once it has been transmitted into the 
system. Because the design of these systems ensures that members do 
not possess any special or unique trading advantages in handling 
their orders after transmitting them to the exchange, the Commission 
has stated that executions obtained through these systems satisfy 
the independent execution requirement of Rule 11a2-2(T). See 1979 
Release, supra note 139.
    \143\ See MIAX PEARL 11(a) Letter, supra note 138, at 4.
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    Fourth, in the case of a transaction effected for an account with 
respect to which the initiating member or an associated person thereof 
exercises investment discretion, neither the initiating member nor any 
associated person thereof may retain any compensation in connection 
with effecting the transaction, unless the person authorized to 
transact business for the account has expressly provided otherwise by 
written contract referring to Section 11(a) of the Act and Rule 11a2-
2(T) thereunder.\144\ Equity Members trading for covered accounts over 
which they exercise investment discretion must comply with this 
condition in order to rely on the rule's exemption.\145\
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    \144\ 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written 
contract to retain compensation, in connection with effecting 
transactions for covered accounts over which such member or 
associated persons thereof exercises investment discretion, to 
furnish at least annually to the person authorized to transact 
business for the account a statement setting forth the total amount 
of compensation retained by the member in connection with effecting 
transactions for the account during the period covered by the 
statement. See 17 CFR 240.11a2-2(T)(d). See also 1978 Release, supra 
note 141 (stating ``[t]he contractual and disclosure requirements 
are designed to assure that accounts electing to permit transaction-
related compensation do so only after deciding that such 
arrangements are suitable to their interests'').
    \145\ See MIAX PEARL 11(a) Letter, supra note 138, at 4.
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\146\ that the proposed rule change (SR-PEARL-2020-03), as modified 
by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \146\ 15 U.S.C. 78s(b)(2).
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    Although the Commission's approval of the proposed rule change is 
final, and the proposed rules are therefore effective, it is further 
ordered that the operation of MIAX PEARL Equities is conditioned on the 
satisfaction of the requirements below:
    A. Participation in National Market System Plans Relating to 
Equities Trading. MIAX PEARL must join all relevant national market 
system plans related to equities trading, including: (1) The 
Consolidated Tape Association Plan, the Consolidated Quotation Plan, 
and the Nasdaq UTP Plan (or any successors thereto); (2) the National 
Market System Plan to Address Extraordinary Market Volatility; and (3) 
the National Market System Plan Establishing Procedures Under Rule 605 
of Regulation NMS.
    B. Regulatory Services Agreement and Rule 17d-2 Agreements. MIAX 
PEARL must ensure that all necessary changes are made to its RSA with 
FINRA and must be a party to the multi-party Rule 17d-2 agreements 
applicable to equities trading and equities market surveillance.
    C. Intermarket Surveillance Group. MIAX PEARL must join the 
Intermarket Surveillance Group.
    D. Minor Rule Violation Plan. MIAX PEARL must submit a Minor Rule 
Violation Plan to address Equity Members.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\147\
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    \147\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18204 Filed 8-19-20; 8:45 am]
BILLING CODE 8011-01-P


