Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing of Proposed Rule Change Relating to Limit Up Limit Down Functionality, 19344-19348 [2013-07318]

Download as PDF 19344 Federal Register / Vol. 78, No. 61 / Friday, March 29, 2013 / Notices demonstrated that NES cannot use any information advantage it may have because of its affiliation with the Exchange.20 In the past, the Commission has expressed concern that the affiliation of an exchange with one of its members raises potential conflicts of interest, and the potential for unfair competitive advantage.21 Although the Commission continues to be concerned about potential unfair competition and conflicts of interest between an exchange’s self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, for the reasons discussed below, the Commission believes that it is consistent with the Act to permit NES, in its capacity as a facility of PSX, to route orders inbound to the Exchange on a permanent basis instead of a pilot basis, subject to the limitations and conditions described above.22 The Exchange has proposed four ongoing conditions applicable to NES’s routing activities, which are enumerated above. The Commission believes that these conditions will mitigate its concerns about potential conflicts of interest and unfair competitive advantage. In particular, the Commission believes that FINRA’s oversight of NES,23 combined with FINRA’s monitoring of NES’s 20 See Notice, supra note 3, at 10675. e.g., Securities Exchange Act Release Nos. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR–NASDAQ–2006–006) (order approving NASDAQ’s proposal to adopt NASDAQ Rule 2140, restricting affiliations between NASDAQ and its members); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (order approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (SR–Amex–2008–62 and SR–NYSE–2008– 60) (order approving the combination of NYSE Euronext and the American Stock Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 2008) (SR–ISE–2009–85) (order approving the purchase by ISE Holdings of an ownership interest in Direct Edge Holdings LLC); 59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (SR–NYSE– 2008–120) (order approving a joint venture between NYSE and BIDS Holdings L.P.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10– 182) (order granting the exchange registration of BATS Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10–194 and 10–196) (order granting the exchange registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10–198) (order granting the exchange registration of BATS–Y Exchange, Inc.). 22 The Commission notes that these limitations and conditions are consistent with those previously approved by the Commission for the Exchange. See, e.g., Securities Exchange Act Release Nos. 67256 (June 26, 2012) 77 FR 39277 (July 2, 2012) (SR–BX– 2012–030); and 64090 (March 17, 2011), 76 FR 16462 (March 23, 2011) (SR–BX–2011–007). 23 This oversight will be accomplished through the 17d–2 Agreement between FINRA and the Exchange and the Regulatory Contract. See Notice, supra note 3, at 10675 n.10 and accompanying text. mstockstill on DSK4VPTVN1PROD with NOTICES 21 See, VerDate Mar<15>2010 17:34 Mar 28, 2013 Jkt 229001 compliance with the Exchange’s rules and quarterly reporting to the Exchange, will help to protect the independence of the Exchange’s regulatory responsibilities with respect to NES. The Commission also believes that the Exchange’s Rule 2140(a) is designed to ensure that NES cannot use any information advantage it may have because of its affiliation with the Exchange. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,24 that the proposed rule change (SR–BX–2013– 013) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Elizabeth M. Murphy, Secretary. [FR Doc. 2013–07317 Filed 3–28–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69234; File No. SR–MIAX– 2013–15] Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing of Proposed Rule Change Relating to Limit Up Limit Down Functionality March 25, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’)1, and Rule 19b–4 thereunder,2 notice is hereby given that on March 25, 2013, Miami International Securities Exchange LLC (‘‘MIAX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend Exchange Rule 530, Limit UpLimit Down (‘‘LULD’’), to provide for how the Exchange proposes to treat option orders, market-making quoting obligations, openings, priority quotes (as defined below), systemic changes, 24 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. Trading Pauses and openings following a Trading Pause in response to the Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 of Regulation NMS, as it may be amended from time to time (the ‘‘Plan’’). The proposed rules establish procedures to address extraordinary volatility in NMS Stocks and outlines MIAX’s LULD processing for options overlying such NMS Stocks. Rule 530, as proposed to be amended, will be effective on a one year pilot basis beginning on the date of implementation of the Plan. The text of the proposed rule change is provided in Exhibit 5. 3 The text of the proposed rule change is also available on the Exchange’s Web site at http:// www.miaxoptions.com/filter/wotitle/ rule_filing, at MIAX’s principal office, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to amend MIAX Rule 530 to provide for how the Exchange proposes to treat options orders, market-making quoting obligations, openings, priority quotes (as defined below), systemic changes, Trading Pauses, and openings following a Trading Pause in response to the Plan. Background Since May 6, 2010, when the markets experienced excessive volatility in an abbreviated time period, i.e., the ‘‘flash crash,’’ the equities exchanges and The Financial Industry Regulatory Authority (‘‘FINRA’’) have implemented marketwide measures designed to restore investor confidence by reducing the potential for excessive market volatility. 25 17 PO 00000 Frm 00166 Fmt 4703 Sfmt 4703 3 The Commission notes that Exhibit 5 is attached to the filing, not to this notice. E:\FR\FM\29MRN1.SGM 29MRN1 Federal Register / Vol. 78, No. 61 / Friday, March 29, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Among the measures adopted include pilot plans for stock-by-stock trading pauses, related changes to the equities market clearly erroneous execution rules, and more stringent equities market maker quoting requirements. On May 31, 2012, the Commission approved the Plan, as amended, on a one-year pilot basis. In addition, the Commission approved changes to the equities market-wide circuit breaker rules on a pilot basis to coincide with the pilot period for the Plan. The Plan is designed to prevent trades in individual NMS stocks from occurring outside of specified Price Bands.4 The instant proposed rule change is intended to adopt MIAX rules that address the trading of options overlying NMS Stocks that are the subject of the Plan and its provisions during times of unusual volatility in the markets. The requirements of the Plan are coupled with Trading Pauses to accommodate more fundamental price moves (as opposed to erroneous trades or momentary gaps in liquidity). All trading centers in NMS stocks, including both those operated by Participants and those operated by members of Participants, are required to establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the requirements specified in the Plan. Limit State and Straddle State As set forth in more detail in the Plan, Price Bands consisting of a Lower Price Band and an Upper Price Band for each NMS Stock are calculated by the Processors. When the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band, the Processors shall disseminate such National Best Bid (Offer) with an appropriate flag identifying it as unexecutable. When the National Best Bid (Offer) is equal to the Upper (Lower) Price Band, the Processors shall distribute such National Best Bid (Offer) with an appropriate flag identifying it as a Limit State Quotation. All trading centers in NMS stocks must maintain written policies and procedures that are reasonably designed to prevent the display of offers below the Lower Price Band and bids above the Upper Price Band for NMS stocks. Notwithstanding this requirement, the Processor shall display an offer below the Lower Price Band or a bid above the Upper Price Band, but with a flag indicating that it is non-executable. Such bids or offers shall not be included in the National 4 Unless otherwise specified, capitalized terms used in this filing are based on the defined terms of the Plan. VerDate Mar<15>2010 17:34 Mar 28, 2013 Jkt 229001 Best Bid or National Best Offer calculations. Trading in an NMS stock immediately enters a Limit State if the National Best Offer (Bid) equals but does not cross the Lower (Upper) Price Band. Trading for an NMS stock exits a Limit State if, within 15 seconds of entering the Limit State, all Limit State Quotations were executed or canceled in their entirety. If the market does not exit a Limit State within 15 seconds, then the Primary Listing Exchange would declare a five-minute trading pause pursuant to Section VII of the Plan, which would be applicable to all markets trading the security. In addition, the Plan defines a Straddle State as when the National Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the NMS stock is not in a Limit State. For example, assume the Lower Price Band for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such NMS stock would be in a Straddle State if the National Best Bid were below $9.50, and therefore non-executable, and the National Best Offer were above $9.50 (including a National Best Offer that could be above $10.50). If an NMS stock is in a Straddle State and trading in that stock deviates from normal trading characteristics, the Primary Listing Exchange may declare a trading pause for that NMS stock if such Trading Pause would support the Plan’s goal to address extraordinary market volatility. Relief From Market Maker Quoting Obligations The Exchange proposes to adopt Rule 530(f) to address Market Maker quoting obligations during Straddle States and Limit States. Specifically, the Exchange proposes to adopt proposed Rules 530(f)(1)(i)–(iv) to state that during such periods Market Makers will be relieved of the following obligations (collectively, ‘‘the quoting obligations’’): (i) The bid/ask differential requirements set forth in Exchange Rule 603(b)(4); (ii) the minimum quote size requirement set forth in Exchange Rule 604(b)(2); (iii) the two-sided quote requirement set forth in Exchange Rule 604(c); and (iv) the continuous quote requirement set forth in Exchange Rule 604(e). The Exchange acknowledges the effect of limited price discovery in the underlying stock on the direct relationship between an options price and the price of the underlying security. During a Limit State or Straddle State, the bid price or offer price of the underlying security will be unexecutable and the ability to hedge the purchase or sale of an option will be jeopardized. Recognizing that it may be impossible to hedge to offset the risk PO 00000 Frm 00167 Fmt 4703 Sfmt 4703 19345 created by trading options, the Exchange expects that Market Makers will, as a result, modify their quoting behavior. The Exchange therefore believes it is reasonable and appropriate to relieve Market Makers from their quoting obligations as proposed during a Limit or Straddle State. Given the uncertain effect on liquidity for affected option contracts during a Limit or Straddle State, the Exchange believes it is reasonable to relieve Market Makers from the complete suite of quoting obligations as proposed and not just the continuous quote requirements of Exchange Rule 604(e). Offering relief from Exchange Rule 604(e) provides needed flexibility to Market Makers during the affected periods of uncertain price discovery. The Exchange believes that if it does not afford relief from the remaining Market Maker quoting obligations, such as the bid-ask differential of Rule 603(b)(4), the minimum size requirement set forth in Exchange Rule 604(b)(2), the requirement to submit two-sided quotes set forth in Exchange Rule 604(c), and the continuous quoting obligations set forth in Exchange Rule 604(e), such flexibility would be compromised. If for example, the National Best Bid or Offer (‘‘NBBO’’) has a bid/ask differential that is greater than $5.00, a Market Maker would be compelled to improve one or both sides of the NBBO to stay within the $5.00 bid-ask differential requirement of Rule 603(b)(4). Given the option, the Exchange believes that Market Makers would likely choose not to quote at all over assuming unwanted risk by being compelled to quote at one or both sides of the NBBO. In the interest of promoting liquidity during these periods, the Exchange believes it best to relieve Market Makers of all quoting obligations. The Exchange will exclude the amount of time an NMS stock underlying a MIAX option is in a Limit State or Straddle State from the total amount of time in the trading day when calculating the percentage of the trading day MIAX Market Makers are required to quote. The Exchange believes that this is appropriate for the same reasons discussed above, in light of the limited price discovery in the underlying stock and the direct relationship between an options price and the price of the underlying security. During a Limit State or Straddle State, the bid price or offer price of the underlying security will be unexecutable and the ability to hedge the purchase or sale of an option will be jeopardized. Proposed Rule 530(f)(2) states that the relief described in sub-paragraphs (f)(1)(i)-(iv) shall terminate when the E:\FR\FM\29MRN1.SGM 29MRN1 19346 Federal Register / Vol. 78, No. 61 / Friday, March 29, 2013 / Notices Limit or Straddle State no longer exists in the affected NMS Stock. mstockstill on DSK4VPTVN1PROD with NOTICES Market Maker Participation Guarantees Proposed Rule 530(f)(3) states that the provisions of Exchange Rule 514 concerning priority of quotes and orders shall remain unchanged during periods of relief from quoting obligations pursuant to proposed Rule 530(f). Exchange Rule 514 describes, among other things, priority of quotes and orders on the Exchange, allocation methods used on the Exchange, and participation guarantees granted to certain Market Makers. Rule 514(g) details the Primary Lead Market Maker (‘‘PLMM’’) participation guarantee and Rule 514(h) describes the Directed Lead Market Maker (‘‘DLMM’’) participation guarantee. The participation guarantees set forth in Exchange Rule 514 only apply if the affected PLMM or DLMM has submitted a priority quote at the NBBO. The PLMM and DLMM each have a more stringent quoting obligation during normal trading conditions than other Market Makers, and the participation guarantee rewards them for these elevated quoting obligations. Although proposed Rule 530 would relieve PLMMs and DLMMs of their quoting obligations, the Exchange believes that they should continue to be entitled to receive the participation guarantee for executions in which they participate during a Limit or Straddle State. As previously noted, the Exchange expects a Limit State and a Straddle State to have a negative impact on liquidity in the options markets, and that some Market Makers may elect not to quote at all during such times of extreme volatility. Market Makers who quote at the NBBO during these times may face greater risk in doing so given the pricing uncertainty in the underlying NMS Stock, and the Exchange believes that affording them the participation guarantees set forth in Exchange Rule 514 should serve as a reward to Market Makers who assume a higher than normal risk in quoting at the NBBO. Moreover, the Exchange believes that the use of participation guarantees, which can be found on other options exchanges,5 provides incentives for Market Makers to provide liquidity at 5 See Phlx Rule 1014(b)(vii), CBOE Rule 6.45A(a)(ii)(2), C2 Rule 8.19, NYSE Amex Rule 964.2NY, and ISE Rule 713(e) for entitlements comparable to MIAX’s Primary Lead Market Maker participation entitlement. See Phlx Rules 1014(b)(viii) and 1080(1), CBOE Rules 8.13 and 6.45A(a)(ii)(2), C2 Rules 6.12(a)(3)(B) and 8.13, NYSE Amex Rule 964.1NY, and ISE Rules 713 and 811 for entitlements comparable to MIAX’s Directed Lead Market Maker participation entitlement. VerDate Mar<15>2010 17:34 Mar 28, 2013 Jkt 229001 the NBBO during Limit States and Straddle States. Accordingly, proposed Rule 530(f)(3) preserves the operation of Rule 514 by continuing to grant participation entitlements for options when the underlying NMS Stock has entered either a Straddle or Limit State. The Exchange believes that rewarding Market Makers for their assumption of higher than normal risk during times of extreme market volatility and promoting and fostering liquidity through the participation guarantee will help in the maintenance of a fair and orderly market. The Exchange further believes that removing the participation guarantees from the operation of Rule 514 would have the adverse effect of motivating Market Makers to remove liquidity and further destabilize the marketplace at a time when stability and liquidity is most needed. Lastly, the Exchange notes that the participation guarantee only applies if the qualifying Market Maker participates in the execution at the NBBO. Opening Process Proposed Rule 530(g) sets forth changes in the manner in which the Exchange’s System will function during Limit and Straddle States. Proposed Rule 530(g)(1) describes the functionality of the Exchange’s Opening Process 6 when a Straddle State or Limit State occurs before and during the Opening Process. Proposed Rule 530(g)(1)(i) provides that Opening Process shall be delayed for options overlying an NMS Stock that is in a Straddle State or a Limit State prior to the opening of trading such overlying options and that the Opening Process shall begin when such Straddle or Limit State has ended and there is not a halt or Trading Pause in effect. The Exchange therefore will not open an option overlying an NMS Stock that is in a Limit State or Straddle State. Proposed Rule 530(g)(1)(ii) addresses scenarios where the Exchange’s Opening Process has started but not yet completed when the underlying NMS Stock enters a Straddle or Limit State. When the affected option is in the Opening Process but trading has not begun, the Opening Process will be terminated when the underlying NMS Stock is in a Limit or Straddle State. The Opening Process will begin anew in the affected overlying options when such Limit or Straddle State has ended and there is not a halt or Trading Pause in effect. Thus, if an Opening Process is occurring, it will cease and then start the Opening Process from the beginning 6 For a complete description of the Exchange’s Opening Process, see Exchange Rule 503. PO 00000 Frm 00168 Fmt 4703 Sfmt 4703 once the Limit or Straddle State is no longer present. Priority Quotes The Exchange is proposing to adopt rules that would qualify all quotes as priority quotes 7 when LULD Functionality is in effect. Proposed Rule 530(g)(2)(i) states that, notwithstanding the provisions of Exchange Rule 517(b),8 all quotes that result in an execution during a period in which LULD Functionality is engaged shall be deemed to be priority quotes for allocation purposes. The purpose of the proposed rule is to provide incentive for Market Makers to submit quotations during Limit and Straddle states by affording their quotes priority quote status, ensuring them of priority executions over professional interest when they assume the risk of quoting at or near the NBBO during times of extreme volatility. The Exchange believes that deeming all quotes to be priority quotes should be strictly limited to the time period in which the affected underlying NMS Stock is in either a Limit or Straddle State (and LULD Functionality is thus engaged). Accordingly, proposed rule 530(g)(2)(ii) would state clearly in the Exchange’s rules that, for executions occurring when LULD Functionality is not engaged, the priority status of a quote for allocation purposes shall be determined by the provisions of Rule 517(b). 7 For trade allocation purposes, quotes will be considered either priority quotes (i.e., trade allocation will be in accordance with Rule 514(e), which provides priority quotes with precedence over all Professional Interest) or non-priority quotes (i.e., trade allocation will be in accordance with Rule 514(e), which also provides non-priority quotes are considered together with all other Professional Interest) based upon a Market Maker’s quote width at certain times as described in the rule. See Exchange Rule 517(b). 8 The Exchange is proposing to deem all quotes as priority quotes that result in an execution during a period in which LULD Functionality is engaged, notwithstanding the requirement under normal circumstances that, to be considered a priority quote at the time of execution, each of the following standards must be met: (A) the bid/ask differential of a Market Maker’s two-sided quote pair must be valid width (no wider than the bid/ask differentials outlined in Rule 603(b)(4)); (B) the initial size of both of the Market Maker’s bid and the offer must be in compliance with the requirements of Rule 604(b)(2); (C) the bid/ask differential of a Market Maker’s two-sided quote pair must meet the priority quote width requirements defined below in subparagraph (ii) for each option; and (D) either of the following are true: (1) At the time a locking or crossing quote or order enters the System, the Market Maker’s two-sided quote pair must be valid width for that option and must have been resting on the Book; or (2) Immediately prior to the time the Market Maker enters a new quote that locks or crosses the MBBO, the Market Maker must have had a valid width quote already existing (i.e., exclusive of the Market Maker’s new marketable quote or update) among his two-sided quotes for that option. See Exchange Rule 517(b)(i). E:\FR\FM\29MRN1.SGM 29MRN1 Federal Register / Vol. 78, No. 61 / Friday, March 29, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES As with participation guarantees as discussed above, the Exchange believes that rewarding Market Makers for their assumption of higher than normal risk during times of extreme market volatility by deeming all quotes submitted during a Limit or Straddle State to be priority quotes will help in the maintenance of a fair and orderly market. Such rewards are intended to promote and foster liquidity in the options marketplace. The Exchange further believes that, absent this and the other incentives proposed herein, Market Makers could be motivated to remove liquidity and further destabilize the marketplace at a time when stability and liquidity is most needed. The Exchange notes that the priority quote status only applies if the qualifying Market Maker participates in the execution at the NBBO. The Exchange believes that the incentive for Market Makers to quote at the NBBO during periods of extreme volatility and the concomitant extraordinary risk assumed by Market Makers in submitting quotes at the NBBO under such conditions is consistent with the fundamental principle of customer protection incorporated in the Act. The Exchange expects that liquidity and stability in the options markets will be compromised during a Limit or Straddle State. The participation guarantees and priority quote status described in the instant proposed rule change, taken as a whole, are intended to mitigate the anticipated diminished liquidity and stability in the options markets brought about by a Limit or Straddle State. These incentives for Market Makers to quote and to assume extraordinary risk are intended to enhance liquidity and stability during times of unusual volatility in the options marketplace, which should promote customer protection and foster stability in the marketplace as a whole. Trading Pauses and Opening After a Trading Pause Proposed Rule 530(h) provides that the Exchange will halt trading in options overlying an NMS Stock that is subject to a Trading Pause. During a Trading Pause, the Exchange System will purge all quotes in the affected option, yet maintain orders existing in the Exchange System prior to the Trading Pause. Additionally, the Exchange System will accept incoming orders and quotes, including market orders. Proposed Rule 530(i) provides that the Exchange will open trading following a Trading Pause pursuant to the Exchange’s opening procedures VerDate Mar<15>2010 17:34 Mar 28, 2013 Jkt 229001 contained in Rule 503. Proposed Rule 530(i) further adds that, consistent with provisions of the Plan,9 the Exchange may resume trading in options contracts overlying an affected NMS Stock if trading on the Primary Listing Exchange has not resumed within ten minutes of receipt of a Trading Pause and at least one exchange has resumed trading in such NMS Stock. 2. Statutory Basis MIAX believes that its proposed rule change is consistent with Section 6(b) of the Act 10 in general, and furthers the objectives of Section 6(b)(5) of the Act 11 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanisms of a free and open market and a national market system and, in general, to protect investors and the public interest, and it is not designed to permit unfair discrimination among customers, brokers, or dealers. The Exchange believes that excluding the Limit and Straddle State from a Market Maker’s quoting obligation calculation should promote just and equitable principles of trade by recognizing the particular risk that arises for liquidity providers who cannot hedge. Whenever an NMS stock is in a Limit or Straddle State, trading continues; however, there will not be a reliable price for a security to serve as a benchmark for the price of the option. Accordingly, the Exchange seeks to expressly remove these periods from consideration in order to enable MIAX Market Makers to provide the necessary liquidity and facilitate transactions on the Exchange. The Exchange also believes that the proposed rules concerning MIAX LULD Functionality described herein during a Limit or Straddle State will minimize undue risk to MIAX Market Makers, and thus will lead them to continue to act as Market Makers, rather than potentially causing Market Makers to de-register. The Exchange also believes that these changes will help to protect all investors from executions in options at prices that are not based on a reliable benchmark for the price of an option during times of significant volatility. Section VII(B)(3) of the Plan. U.S.C. 78f(b). 11 15 U.S.C. 78f(b)(5). 19347 B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange believes the proposed changes will not impose any burden on intra-market competition because it applies to all MIAX participants equally. The Exchange does not believe the proposed rules will impose any burden on inter-market competition as the proposed rules are intended to protect investors with the implementation of the Plan. In addition, the proposed changes will provide certainty of treatment and execution of options orders during periods of extraordinary market volatility. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved.12 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File No. SR–MIAX–2013–15 on the subject line. 9 See 10 15 PO 00000 Frm 00169 Fmt 4703 Sfmt 4703 12 The Commission notes that the Exchange requested accelerated approval of the filing. E:\FR\FM\29MRN1.SGM 29MRN1 19348 Federal Register / Vol. 78, No. 61 / Friday, March 29, 2013 / Notices Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–MIAX–2013–15. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–MIAX– 2013–15 and should be submitted on or before April 8, 2013.13 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Elizabeth M. Murphy, Secretary. [FR Doc. 2013–07318 Filed 3–28–13; 8:45 am] mstockstill on DSK4VPTVN1PROD with NOTICES BILLING CODE 8011–01–P 13 The Commission believes that a 10-day comment period is reasonable, given the urgency of the matter. It will provide adequate time for comment. 14 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:34 Mar 28, 2013 Jkt 229001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69227; File No. SR–CBOE– 2013–035] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of a Proposed Rule Change Relating to Exchange Trading Days and Hours of Business and Trading Halts March 25, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 11, 2013, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Exchange rules to clarify Rules 6.1, ‘‘Days and Hours of Business,’’ and 6.3, ‘‘Trading Halts.’’ The text of the proposed rule change is available on the Exchange’s Web site (http:// www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 1 15 2 17 PO 00000 Fmt 4703 1. Purpose The Exchange is proposing to change its rules to clarify when it will be open for trading along with when trading halts on underlying securities will inhibit trading on the Exchange. The Exchange is proposing to amend its rules to clarify that it will not be solely dependent upon the ‘‘primary market’’ when determining when to open and/or halt securities. Instead, the Exchange is proposing to clarify in its rules that it will be open if there is ample liquidity in the underlying market for the security. Generally, the national equity exchanges have the same core business hours.3 With this proposal, the Exchange is attempting to clarify in its rules that it can remain open to trade options during such business hours even if the ‘‘primary market’’ of the underlying securities is not open for business. The Exchange believes that the proposed changes will allow the markets to continue to function in an instance where all exchanges may not be open. In addition, the Exchange believes the proposed changes will bring greater clarity to its Trading Permit Holders (‘‘TPHs’’) regarding when the Exchange will be open for trading. Currently, Exchange Rule 6.1 provides that no TPH ‘‘shall make any bid, offer, or transaction on the Exchange before or after’’ business hours.4 As an administrative clean-up change, the Exchange is proposing to eliminate this language as it is no longer relevant. Executions may only happen during business hours, however, TPHs now have the ability to submit information in the electronic system outside of business hours. The Exchange believes deleting this language would bring greater clarity to Exchange rules while updating the rule text to the current trading environment. Next, the Exchange is proposing to add language to Rule 6.1.01 to specify that the Exchange will not solely rely on the ‘‘primary market’’ of an underlying security to determine whether the Exchange may trade the option for such security. The Exchange believes that the proposed rule change will specify that if there is an ample market in the underlying security, the Exchange has the authority to trade the option even if 3 See, e.g., New York Stock Exchange Rule 51(a) and Bats Exchange Rule 1.5(w) which describes regular trading hours as 9:30 a.m. through 4:00 p.m. Eastern. 4 See Exchange Rule 6.1. U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00170 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change Sfmt 4703 E:\FR\FM\29MRN1.SGM 29MRN1

Agencies

[Federal Register Volume 78, Number 61 (Friday, March 29, 2013)]
[Notices]
[Pages 19344-19348]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07318]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69234; File No. SR-MIAX-2013-15]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing of Proposed Rule Change Relating to 
Limit Up Limit Down Functionality

March 25, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\, and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 25, 2013, Miami International Securities Exchange LLC 
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and II below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 530, Limit 
Up-Limit Down (``LULD''), to provide for how the Exchange proposes to 
treat option orders, market-making quoting obligations, openings, 
priority quotes (as defined below), systemic changes, Trading Pauses 
and openings following a Trading Pause in response to the Plan to 
Address Extraordinary Market Volatility Pursuant to Rule 608 of 
Regulation NMS, as it may be amended from time to time (the ``Plan''). 
The proposed rules establish procedures to address extraordinary 
volatility in NMS Stocks and outlines MIAX's LULD processing for 
options overlying such NMS Stocks. Rule 530, as proposed to be amended, 
will be effective on a one year pilot basis beginning on the date of 
implementation of the Plan.
    The text of the proposed rule change is provided in Exhibit 5. \3\ 
The text of the proposed rule change is also available on the 
Exchange's Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at MIAX's principal office, and at the Commission's Public 
Reference Room.
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    \3\ The Commission notes that Exhibit 5 is attached to the 
filing, not to this notice.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend MIAX Rule 530 
to provide for how the Exchange proposes to treat options orders, 
market-making quoting obligations, openings, priority quotes (as 
defined below), systemic changes, Trading Pauses, and openings 
following a Trading Pause in response to the Plan.
Background
    Since May 6, 2010, when the markets experienced excessive 
volatility in an abbreviated time period, i.e., the ``flash crash,'' 
the equities exchanges and The Financial Industry Regulatory Authority 
(``FINRA'') have implemented market-wide measures designed to restore 
investor confidence by reducing the potential for excessive market 
volatility.

[[Page 19345]]

    Among the measures adopted include pilot plans for stock-by-stock 
trading pauses, related changes to the equities market clearly 
erroneous execution rules, and more stringent equities market maker 
quoting requirements. On May 31, 2012, the Commission approved the 
Plan, as amended, on a one-year pilot basis. In addition, the 
Commission approved changes to the equities market-wide circuit breaker 
rules on a pilot basis to coincide with the pilot period for the Plan. 
The Plan is designed to prevent trades in individual NMS stocks from 
occurring outside of specified Price Bands.\4\ The instant proposed 
rule change is intended to adopt MIAX rules that address the trading of 
options overlying NMS Stocks that are the subject of the Plan and its 
provisions during times of unusual volatility in the markets.
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    \4\ Unless otherwise specified, capitalized terms used in this 
filing are based on the defined terms of the Plan.
---------------------------------------------------------------------------

    The requirements of the Plan are coupled with Trading Pauses to 
accommodate more fundamental price moves (as opposed to erroneous 
trades or momentary gaps in liquidity). All trading centers in NMS 
stocks, including both those operated by Participants and those 
operated by members of Participants, are required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to comply with the requirements specified in the 
Plan.
Limit State and Straddle State
    As set forth in more detail in the Plan, Price Bands consisting of 
a Lower Price Band and an Upper Price Band for each NMS Stock are 
calculated by the Processors. When the National Best Bid (Offer) is 
below (above) the Lower (Upper) Price Band, the Processors shall 
disseminate such National Best Bid (Offer) with an appropriate flag 
identifying it as unexecutable. When the National Best Bid (Offer) is 
equal to the Upper (Lower) Price Band, the Processors shall distribute 
such National Best Bid (Offer) with an appropriate flag identifying it 
as a Limit State Quotation. All trading centers in NMS stocks must 
maintain written policies and procedures that are reasonably designed 
to prevent the display of offers below the Lower Price Band and bids 
above the Upper Price Band for NMS stocks. Notwithstanding this 
requirement, the Processor shall display an offer below the Lower Price 
Band or a bid above the Upper Price Band, but with a flag indicating 
that it is non-executable. Such bids or offers shall not be included in 
the National Best Bid or National Best Offer calculations. Trading in 
an NMS stock immediately enters a Limit State if the National Best 
Offer (Bid) equals but does not cross the Lower (Upper) Price Band. 
Trading for an NMS stock exits a Limit State if, within 15 seconds of 
entering the Limit State, all Limit State Quotations were executed or 
canceled in their entirety. If the market does not exit a Limit State 
within 15 seconds, then the Primary Listing Exchange would declare a 
five-minute trading pause pursuant to Section VII of the Plan, which 
would be applicable to all markets trading the security.
    In addition, the Plan defines a Straddle State as when the National 
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and the 
NMS stock is not in a Limit State. For example, assume the Lower Price 
Band for an NMS Stock is $9.50 and the Upper Price Band is $10.50, such 
NMS stock would be in a Straddle State if the National Best Bid were 
below $9.50, and therefore non-executable, and the National Best Offer 
were above $9.50 (including a National Best Offer that could be above 
$10.50). If an NMS stock is in a Straddle State and trading in that 
stock deviates from normal trading characteristics, the Primary Listing 
Exchange may declare a trading pause for that NMS stock if such Trading 
Pause would support the Plan's goal to address extraordinary market 
volatility.
Relief From Market Maker Quoting Obligations
    The Exchange proposes to adopt Rule 530(f) to address Market Maker 
quoting obligations during Straddle States and Limit States. 
Specifically, the Exchange proposes to adopt proposed Rules 
530(f)(1)(i)-(iv) to state that during such periods Market Makers will 
be relieved of the following obligations (collectively, ``the quoting 
obligations''): (i) The bid/ask differential requirements set forth in 
Exchange Rule 603(b)(4); (ii) the minimum quote size requirement set 
forth in Exchange Rule 604(b)(2); (iii) the two-sided quote requirement 
set forth in Exchange Rule 604(c); and (iv) the continuous quote 
requirement set forth in Exchange Rule 604(e).
    The Exchange acknowledges the effect of limited price discovery in 
the underlying stock on the direct relationship between an options 
price and the price of the underlying security. During a Limit State or 
Straddle State, the bid price or offer price of the underlying security 
will be unexecutable and the ability to hedge the purchase or sale of 
an option will be jeopardized. Recognizing that it may be impossible to 
hedge to offset the risk created by trading options, the Exchange 
expects that Market Makers will, as a result, modify their quoting 
behavior. The Exchange therefore believes it is reasonable and 
appropriate to relieve Market Makers from their quoting obligations as 
proposed during a Limit or Straddle State.
    Given the uncertain effect on liquidity for affected option 
contracts during a Limit or Straddle State, the Exchange believes it is 
reasonable to relieve Market Makers from the complete suite of quoting 
obligations as proposed and not just the continuous quote requirements 
of Exchange Rule 604(e). Offering relief from Exchange Rule 604(e) 
provides needed flexibility to Market Makers during the affected 
periods of uncertain price discovery. The Exchange believes that if it 
does not afford relief from the remaining Market Maker quoting 
obligations, such as the bid-ask differential of Rule 603(b)(4), the 
minimum size requirement set forth in Exchange Rule 604(b)(2), the 
requirement to submit two-sided quotes set forth in Exchange Rule 
604(c), and the continuous quoting obligations set forth in Exchange 
Rule 604(e), such flexibility would be compromised. If for example, the 
National Best Bid or Offer (``NBBO'') has a bid/ask differential that 
is greater than $5.00, a Market Maker would be compelled to improve one 
or both sides of the NBBO to stay within the $5.00 bid-ask differential 
requirement of Rule 603(b)(4). Given the option, the Exchange believes 
that Market Makers would likely choose not to quote at all over 
assuming unwanted risk by being compelled to quote at one or both sides 
of the NBBO. In the interest of promoting liquidity during these 
periods, the Exchange believes it best to relieve Market Makers of all 
quoting obligations.
    The Exchange will exclude the amount of time an NMS stock 
underlying a MIAX option is in a Limit State or Straddle State from the 
total amount of time in the trading day when calculating the percentage 
of the trading day MIAX Market Makers are required to quote. The 
Exchange believes that this is appropriate for the same reasons 
discussed above, in light of the limited price discovery in the 
underlying stock and the direct relationship between an options price 
and the price of the underlying security. During a Limit State or 
Straddle State, the bid price or offer price of the underlying security 
will be unexecutable and the ability to hedge the purchase or sale of 
an option will be jeopardized.
    Proposed Rule 530(f)(2) states that the relief described in sub-
paragraphs (f)(1)(i)-(iv) shall terminate when the

[[Page 19346]]

Limit or Straddle State no longer exists in the affected NMS Stock.
Market Maker Participation Guarantees
    Proposed Rule 530(f)(3) states that the provisions of Exchange Rule 
514 concerning priority of quotes and orders shall remain unchanged 
during periods of relief from quoting obligations pursuant to proposed 
Rule 530(f).
    Exchange Rule 514 describes, among other things, priority of quotes 
and orders on the Exchange, allocation methods used on the Exchange, 
and participation guarantees granted to certain Market Makers. Rule 
514(g) details the Primary Lead Market Maker (``PLMM'') participation 
guarantee and Rule 514(h) describes the Directed Lead Market Maker 
(``DLMM'') participation guarantee. The participation guarantees set 
forth in Exchange Rule 514 only apply if the affected PLMM or DLMM has 
submitted a priority quote at the NBBO.
    The PLMM and DLMM each have a more stringent quoting obligation 
during normal trading conditions than other Market Makers, and the 
participation guarantee rewards them for these elevated quoting 
obligations. Although proposed Rule 530 would relieve PLMMs and DLMMs 
of their quoting obligations, the Exchange believes that they should 
continue to be entitled to receive the participation guarantee for 
executions in which they participate during a Limit or Straddle State.
    As previously noted, the Exchange expects a Limit State and a 
Straddle State to have a negative impact on liquidity in the options 
markets, and that some Market Makers may elect not to quote at all 
during such times of extreme volatility. Market Makers who quote at the 
NBBO during these times may face greater risk in doing so given the 
pricing uncertainty in the underlying NMS Stock, and the Exchange 
believes that affording them the participation guarantees set forth in 
Exchange Rule 514 should serve as a reward to Market Makers who assume 
a higher than normal risk in quoting at the NBBO.
    Moreover, the Exchange believes that the use of participation 
guarantees, which can be found on other options exchanges,\5\ provides 
incentives for Market Makers to provide liquidity at the NBBO during 
Limit States and Straddle States. Accordingly, proposed Rule 530(f)(3) 
preserves the operation of Rule 514 by continuing to grant 
participation entitlements for options when the underlying NMS Stock 
has entered either a Straddle or Limit State. The Exchange believes 
that rewarding Market Makers for their assumption of higher than normal 
risk during times of extreme market volatility and promoting and 
fostering liquidity through the participation guarantee will help in 
the maintenance of a fair and orderly market. The Exchange further 
believes that removing the participation guarantees from the operation 
of Rule 514 would have the adverse effect of motivating Market Makers 
to remove liquidity and further destabilize the marketplace at a time 
when stability and liquidity is most needed. Lastly, the Exchange notes 
that the participation guarantee only applies if the qualifying Market 
Maker participates in the execution at the NBBO.
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    \5\ See Phlx Rule 1014(b)(vii), CBOE Rule 6.45A(a)(ii)(2), C2 
Rule 8.19, NYSE Amex Rule 964.2NY, and ISE Rule 713(e) for 
entitlements comparable to MIAX's Primary Lead Market Maker 
participation entitlement. See Phlx Rules 1014(b)(viii) and 1080(1), 
CBOE Rules 8.13 and 6.45A(a)(ii)(2), C2 Rules 6.12(a)(3)(B) and 
8.13, NYSE Amex Rule 964.1NY, and ISE Rules 713 and 811 for 
entitlements comparable to MIAX's Directed Lead Market Maker 
participation entitlement.
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Opening Process
    Proposed Rule 530(g) sets forth changes in the manner in which the 
Exchange's System will function during Limit and Straddle States.
    Proposed Rule 530(g)(1) describes the functionality of the 
Exchange's Opening Process \6\ when a Straddle State or Limit State 
occurs before and during the Opening Process.
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    \6\ For a complete description of the Exchange's Opening 
Process, see Exchange Rule 503.
---------------------------------------------------------------------------

    Proposed Rule 530(g)(1)(i) provides that Opening Process shall be 
delayed for options overlying an NMS Stock that is in a Straddle State 
or a Limit State prior to the opening of trading such overlying options 
and that the Opening Process shall begin when such Straddle or Limit 
State has ended and there is not a halt or Trading Pause in effect. The 
Exchange therefore will not open an option overlying an NMS Stock that 
is in a Limit State or Straddle State.
    Proposed Rule 530(g)(1)(ii) addresses scenarios where the 
Exchange's Opening Process has started but not yet completed when the 
underlying NMS Stock enters a Straddle or Limit State. When the 
affected option is in the Opening Process but trading has not begun, 
the Opening Process will be terminated when the underlying NMS Stock is 
in a Limit or Straddle State. The Opening Process will begin anew in 
the affected overlying options when such Limit or Straddle State has 
ended and there is not a halt or Trading Pause in effect. Thus, if an 
Opening Process is occurring, it will cease and then start the Opening 
Process from the beginning once the Limit or Straddle State is no 
longer present.
Priority Quotes
    The Exchange is proposing to adopt rules that would qualify all 
quotes as priority quotes \7\ when LULD Functionality is in effect. 
Proposed Rule 530(g)(2)(i) states that, notwithstanding the provisions 
of Exchange Rule 517(b),\8\ all quotes that result in an execution 
during a period in which LULD Functionality is engaged shall be deemed 
to be priority quotes for allocation purposes.
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    \7\ For trade allocation purposes, quotes will be considered 
either priority quotes (i.e., trade allocation will be in accordance 
with Rule 514(e), which provides priority quotes with precedence 
over all Professional Interest) or non-priority quotes (i.e., trade 
allocation will be in accordance with Rule 514(e), which also 
provides non-priority quotes are considered together with all other 
Professional Interest) based upon a Market Maker's quote width at 
certain times as described in the rule. See Exchange Rule 517(b).
    \8\ The Exchange is proposing to deem all quotes as priority 
quotes that result in an execution during a period in which LULD 
Functionality is engaged, notwithstanding the requirement under 
normal circumstances that, to be considered a priority quote at the 
time of execution, each of the following standards must be met: (A) 
the bid/ask differential of a Market Maker's two-sided quote pair 
must be valid width (no wider than the bid/ask differentials 
outlined in Rule 603(b)(4)); (B) the initial size of both of the 
Market Maker's bid and the offer must be in compliance with the 
requirements of Rule 604(b)(2); (C) the bid/ask differential of a 
Market Maker's two-sided quote pair must meet the priority quote 
width requirements defined below in subparagraph (ii) for each 
option; and (D) either of the following are true: (1) At the time a 
locking or crossing quote or order enters the System, the Market 
Maker's two-sided quote pair must be valid width for that option and 
must have been resting on the Book; or (2) Immediately prior to the 
time the Market Maker enters a new quote that locks or crosses the 
MBBO, the Market Maker must have had a valid width quote already 
existing (i.e., exclusive of the Market Maker's new marketable quote 
or update) among his two-sided quotes for that option. See Exchange 
Rule 517(b)(i).
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    The purpose of the proposed rule is to provide incentive for Market 
Makers to submit quotations during Limit and Straddle states by 
affording their quotes priority quote status, ensuring them of priority 
executions over professional interest when they assume the risk of 
quoting at or near the NBBO during times of extreme volatility.
    The Exchange believes that deeming all quotes to be priority quotes 
should be strictly limited to the time period in which the affected 
underlying NMS Stock is in either a Limit or Straddle State (and LULD 
Functionality is thus engaged). Accordingly, proposed rule 
530(g)(2)(ii) would state clearly in the Exchange's rules that, for 
executions occurring when LULD Functionality is not engaged, the 
priority status of a quote for allocation purposes shall be determined 
by the provisions of Rule 517(b).

[[Page 19347]]

    As with participation guarantees as discussed above, the Exchange 
believes that rewarding Market Makers for their assumption of higher 
than normal risk during times of extreme market volatility by deeming 
all quotes submitted during a Limit or Straddle State to be priority 
quotes will help in the maintenance of a fair and orderly market. Such 
rewards are intended to promote and foster liquidity in the options 
marketplace. The Exchange further believes that, absent this and the 
other incentives proposed herein, Market Makers could be motivated to 
remove liquidity and further destabilize the marketplace at a time when 
stability and liquidity is most needed. The Exchange notes that the 
priority quote status only applies if the qualifying Market Maker 
participates in the execution at the NBBO.
    The Exchange believes that the incentive for Market Makers to quote 
at the NBBO during periods of extreme volatility and the concomitant 
extraordinary risk assumed by Market Makers in submitting quotes at the 
NBBO under such conditions is consistent with the fundamental principle 
of customer protection incorporated in the Act. The Exchange expects 
that liquidity and stability in the options markets will be compromised 
during a Limit or Straddle State. The participation guarantees and 
priority quote status described in the instant proposed rule change, 
taken as a whole, are intended to mitigate the anticipated diminished 
liquidity and stability in the options markets brought about by a Limit 
or Straddle State. These incentives for Market Makers to quote and to 
assume extraordinary risk are intended to enhance liquidity and 
stability during times of unusual volatility in the options 
marketplace, which should promote customer protection and foster 
stability in the marketplace as a whole.
Trading Pauses and Opening After a Trading Pause
    Proposed Rule 530(h) provides that the Exchange will halt trading 
in options overlying an NMS Stock that is subject to a Trading Pause. 
During a Trading Pause, the Exchange System will purge all quotes in 
the affected option, yet maintain orders existing in the Exchange 
System prior to the Trading Pause. Additionally, the Exchange System 
will accept incoming orders and quotes, including market orders.
    Proposed Rule 530(i) provides that the Exchange will open trading 
following a Trading Pause pursuant to the Exchange's opening procedures 
contained in Rule 503. Proposed Rule 530(i) further adds that, 
consistent with provisions of the Plan,\9\ the Exchange may resume 
trading in options contracts overlying an affected NMS Stock if trading 
on the Primary Listing Exchange has not resumed within ten minutes of 
receipt of a Trading Pause and at least one exchange has resumed 
trading in such NMS Stock.
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    \9\ See Section VII(B)(3) of the Plan.
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2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \10\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \11\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest, and it is not designed to 
permit unfair discrimination among customers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that excluding the Limit and Straddle State 
from a Market Maker's quoting obligation calculation should promote 
just and equitable principles of trade by recognizing the particular 
risk that arises for liquidity providers who cannot hedge. Whenever an 
NMS stock is in a Limit or Straddle State, trading continues; however, 
there will not be a reliable price for a security to serve as a 
benchmark for the price of the option. Accordingly, the Exchange seeks 
to expressly remove these periods from consideration in order to enable 
MIAX Market Makers to provide the necessary liquidity and facilitate 
transactions on the Exchange.
    The Exchange also believes that the proposed rules concerning MIAX 
LULD Functionality described herein during a Limit or Straddle State 
will minimize undue risk to MIAX Market Makers, and thus will lead them 
to continue to act as Market Makers, rather than potentially causing 
Market Makers to de-register. The Exchange also believes that these 
changes will help to protect all investors from executions in options 
at prices that are not based on a reliable benchmark for the price of 
an option during times of significant volatility.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
    Specifically, the Exchange believes the proposed changes will not 
impose any burden on intra-market competition because it applies to all 
MIAX participants equally. The Exchange does not believe the proposed 
rules will impose any burden on inter-market competition as the 
proposed rules are intended to protect investors with the 
implementation of the Plan. In addition, the proposed changes will 
provide certainty of treatment and execution of options orders during 
periods of extraordinary market volatility.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.\12\
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    \12\ The Commission notes that the Exchange requested 
accelerated approval of the filing.
---------------------------------------------------------------------------

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. SR-MIAX-2013-15 on the subject line.

[[Page 19348]]

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File No. SR-MIAX-2013-15. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File No. SR-MIAX-2013-15 and should be 
submitted on or before April 8, 2013.\13\
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    \13\ The Commission believes that a 10-day comment period is 
reasonable, given the urgency of the matter. It will provide 
adequate time for comment.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-07318 Filed 3-28-13; 8:45 am]
BILLING CODE 8011-01-P