[Federal Register Volume 78, Number 58 (Tuesday, March 26, 2013)]
[Notices]
[Pages 18403-18407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06787]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69181; File No. SR-MIAX-2013-07]
Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change To Adopt MIAX Rule 530, Limit Up-Limit Down
March 19, 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 7, 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 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 adopt new Exchange Rule 530,
Limit Up-Limit Down (``LULD''), to provide for how the Exchange intends
to treat options orders 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 Plan
establishes procedures to address extraordinary volatility in NMS
Stocks (as defined below). The proposed rule outlines MIAX's LULD
processing for options overlying such NMS Stocks.
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 adopt MIAX Rule 530
to provide for how the Exchange proposes
[[Page 18404]]
to treat options orders 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'') \4\ have implemented market-wide measures designed to
restore investor confidence by reducing the potential for excessive
market volatility.
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\4\ FINRA is the largest independent regulator for all
securities firms doing business in the United States. FINRA oversees
approximately 4,275 brokerage firms, approximately 161,495 branch
offices and approximately 630,010 registered securities
representatives.
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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.\5\ 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.\6\ The Plan is designed to prevent trades in individual NMS
stocks from occurring outside of specified Price Bands.\7\ 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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\5\ See Securities Exchange Act Release No. 67091 (May 31,
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (Order Approving
the Plan on a Pilot Basis).
\6\ See Securities Exchange Act Release No. 67090 (May 31,
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
\7\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan.
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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.\8\
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\8\ MIAX is currently an options exchange only, and thus
currently does not trade NMS Stocks. Therefore, as of the date of
this proposal, MIAX is not a Participant in the Plan.
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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.\9\ 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 non-executable. 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.\10\ 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, 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.\11\ 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.\12\
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.\13\
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\9\ See Section V(A) of the Plan.
\10\ See Section VI(A) of the Plan.
\11\ See Section VI(A)(3) of the Plan.
\12\ See Section VI(B)(1) of the Plan.
\13\ The primary listing market would declare a Trading Pause in
an NMS stock; upon notification by the primary listing market, the
Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed. See Section VII(A) of the
Plan.
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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.
The Proposal
MIAX is not a Participant in the Plan because it does not list and
trade NMS Stocks. MIAX lists and trades options overlying NMS Stocks.
Trading in options overlying NMS Stocks is impacted by the
implementation of the Plan because options pricing models are highly
dependent on the price of the underlying security and the ability of
options traders to effect hedging transactions in the underlying
security. Thus, proposed MIAX Rule 530 would provide for how the
Exchange will treat orders and quotes in options overlying NMS stocks
when the Plan is in effect.
Pilot Period
Proposed Rule 530 includes an introductory paragraph stating that
the rule shall be in effect during a pilot period to coincide with the
pilot period for the Plan, and that the proposed rule establishes
procedures to address extraordinary volatility in NMS Stocks and
outlines MIAX's Limit Up-Limit Down processing.
Definitions
Proposed Rule 530(a) lists definitions that are identical to
definitions set forth in the Plan. The capitalized terms in proposed
Rule 530(a) and throughout the MIAX rules shall have the same meaning
as provided for in the Plan. The definitions set forth in proposed Rule
530 are as follows:
``Eligible Reported Transactions'' shall have the meaning
prescribed by the Operating Committee of the Plan (as defined below)
and shall generally mean transactions that are eligible to update the
last sale price of an NMS Stock.
``Limit State'' shall have the meaning provided in Section VI of
the Plan. When a National Best Bid is below the Lower Price Band
calculated by the Processor (as defined below) for an NMS Stock or a
National Best Offer is above the Upper Price Band calculated by the
Processor for an NMS Stock, the Processor will disseminate such
National Best Bid or National Best Offer with an appropriate flag
identifying it as non-executable. When a National Best Offer is equal
to the Lower Price Band or a National Best Bid is equal to the Upper
Price Band for an NMS Stock, the
[[Page 18405]]
Processor will distribute such National Best Bid or National Best Offer
with an appropriate flag identifying it as a ``Limit State Quotation''.
``LULD Functionality'' shall mean the specific processing logic
applied by the Exchange System to options traded on the Exchange when
the underlying NMS Stock has entered into a Limit State or Straddle
State. LULD Functionality remains in effect for the duration that the
underlying NMS Stock is in a Limit State or a Straddle State.
``Market Data Plan'' shall mean the effective national market
system plans through which the Participants act jointly to disseminate
consolidated information in compliance with Rule 603(b) of Regulation
NMS under the Exchange Act.
``Plan'' shall mean the Plan to Address Extraordinary Market
Volatility Submitted to the SEC pursuant to Rule 608 of Regulation NMS
under the Exchange Act, as amended from time to time in accordance with
its provisions.
``Primary Listing Exchange'' shall mean the Participant on which an
NMS Stock is listed. If an NMS Stock is listed on more than one
Participant, the Participant on which the NMS Stock has been listed the
longest shall be the Primary Listing Exchange.
``Processor'' shall mean the single plan processor responsible for
the consolidation of information for an NMS Stock pursuant to Rule
603(b) of Regulation NMS under the Exchange Act.
``Participant'' shall mean a party to the Plan.
``Regular Trading Hours'' shall have the meaning provided in Rule
600(b)(64) of Regulation NMS under the Exchange Act. For purposes of
the Plan, Regular Trading Hours can end earlier than 4:00 p.m. ET in
the case of an early scheduled close.
``Regulatory Halt'' shall have the meaning specified in the Market
Data Plans.
``Straddle State'' shall have the meaning provided in Section
VII(A)(2) of the Plan. An NMS Stock is in a Straddle State when the
National Best Bid (Offer) is below (above) the Lower (Upper) Price Band
and the NMS Stock is not in a Limit State, and trading in that NMS
Stock deviates from normal trading characteristics such that declaring
a Trading Pause would support the Plan's goal to address extraordinary
market volatility.
``Trading Pause'' shall have the meaning provided in Section VII of
the Plan. If trading for an NMS Stock does not exit a Limit State
within 15 seconds of entry during Regular Trading Hours, then the
Primary Listing Exchange will declare a Trading Pause for such NMS
Stock and shall notify the Processor. The Primary Listing Exchange may
also declare a Trading Pause for an NMS Stock when an NMS Stock is in a
Straddle State.
General Statement of LULD Functionality on MIAX
Proposed Rule 530(b) states that LULD Functionality becomes
effective for an option traded on the Exchange when the underlying NMS
Stock has entered into a Limit State or Straddle State. LULD
Functionality remains in effect for the duration that the underlying
NMS Stock is in a Limit State or a Straddle State. LULD Functionality
modifies the normal operation of the Exchange System in ways identified
by this Rule. LULD Functionality ends when the underlying NMS Stock is
no longer in a Limit State or a Straddle State, or when a Trading Pause
is declared by the Primary Listing Exchange.
The purpose of this provision is to establish in the Exchange's
rules, and thus notify investors, that the Exchange will respond by
modifying the normal operation of the Exchange's System when an
underlying NMS Stock is in a Limit State or a Straddle State.
Determining Straddle States and Limit States
Proposed Rule 530(c) states that the Exchange shall use the SIP
feed (CQS for Tape A and Tape B securities and UQDF for Tape C
securities) to determine when an NMS Stock is in a Limit State or a
Straddle State, and when such Limit State or Straddle State no longer
exists.
Handling of Orders During Straddle States and Limit States
Proposed Rule 530(d) describes how orders will be handled during a
Limit State and Straddle State in the underlying NMS Stock. Under new
Rule 530(d)(1), the opening in an option will not commence in the event
that the underlying NMS stock is open, but has entered into a Limit
State or Straddle State. If this occurs, the opening will only commence
and complete if the underlying NMS stock exits, and stays out of, a
Limit or Straddle State.
Accordingly, new Rule 530(d)(1) will provide that the Exchange will
not open an affected option. As a result, if an opening process is
occurring, it will cease and then start the opening process from the
beginning once the Limit State or Straddle State is no longer present.
This is consistent with the provisions of Exchange Rule 504(a)(1) that
states that the System may halt trading in the case of an option on a
security, when trading in the underlying security has been halted or
suspended in the primary market.
Rejection of Incoming Market Orders
The Exchange proposes to adopt provisions regarding the treatment
of certain orders if the underlying NMS stock is in a Limit State or
Straddle State. Whenever an NMS stock is in a Limit State 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. For
example, if the underlying NMS stock is in a Limit State, while trading
in that stock continues, by being in a Limit State, there will be
either cancellations or executions at that price, and if the Limit
State is not resolved in 15 seconds, the NMS Stock will enter a Trading
Pause. If an NMS stock is in a Straddle State, there is either a
National Best Bid or National Best Offer that is non-executable, which
could result in limited price discovery in the underlying NMS stock. In
addition to the lack of a reliable underlying reference price, the
Exchange believes that the width of the markets and quality of the
execution for market participants during a Limit State or Straddle
State could lead to inferior executions. The Exchange believes that
certain types of orders increase the risk of errors and poor executions
and therefore should not be allowed during these times when there may
not be a reliable underlying reference price, there may be a wide bid/
ask quotation differential, and there may be lower trading liquidity in
the options markets.
Therefore, the Exchange proposes that if an NMS stock is in a Limit
State or Straddle State, once the option has opened for trading, the
Exchange shall reject all incoming market orders submitted into the
Exchange's System.
In order to provide clarity in the Exchange's rules concerning
market order cancellations during a Limit or Straddle State, the
Exchange proposes to adopt proposed Rule 530(d)(2)(ii), which states
that the Exchange will cancel all unexecuted market orders existing
within the Exchange System during a Limit or Straddle State. Market
orders to sell an option received when the national best bid is zero
and the Exchange's disseminated offer is equal to or less than $0.10
that have been converted to limit orders to sell pursuant to Rule
519(a) \14\ will not be
[[Page 18406]]
cancelled by the Exchange's System. Although such orders were submitted
as market orders, due to the zero-bid at the time of receipt of such
orders, they are not maintained as market orders in the Exchange's
System but instead are converted into limit orders to sell at the
minimum price variation (``MPV'') applicable to the affected series,
provided that the MPV is equal to or less than $0.10. Proposed Rule
530(d)(2)(ii) would therefore state that once an NMS Stock has entered
either a Straddle State or Limit State, after the opening the Exchange
will cancel all unexecuted market orders existing within the Exchange
System, except that market orders to sell an option received when the
national best bid is zero and the Exchange's disseminated offer is
equal to or less than $0.10 that have been converted to limit orders to
sell pursuant to Rule 519(a) will not be cancelled by the Exchange's
System.
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\14\ If the Exchange receives a market order to sell an option
when the national best bid is zero and the Exchange's disseminated
offer is equal to or less than $0.10, the System will convert the
market order to sell to a limit order to sell with a limit price of
one Minimum Trading Increment. In this case, such sell orders will
automatically be placed on the Book in time priority and will be
displayed at the appropriate Minimum Price Variation. See Exchange
Rule 519(a)(1).
If the Exchange receives a market order to sell an option when
the national best bid is zero and the national best offer is greater
than $0.10, the System will reject the market order to sell. See
Exchange Rule 519(a)(2).
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The Exchange believes that adding certainty to the treatment of
market orders when the underlying NMS stock is in these situations
should encourage market participants to continue to provide liquidity
to the Exchange and thus promote a fair and orderly market.
The Exchange also proposes to adopt Rule 530(e), which provides
that the Exchange shall halt trading in all options whenever the
equities markets initiate a market-wide trading halt commonly known as
a circuit breaker in response to extraordinary market conditions.
Although the Exchange's rules currently address a variety of situations
involving halts, pauses and suspensions,\15\ the purpose of this
proposed rule is to adopt a very specific rule to deal with circuit
breaker-related halts.
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\15\ See, e.g., Exchange Rules 504, 506(d), 515 and 523.
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the provisions of Section 6 of the Act,\16\ in general, and with
Section 6(b)(5) of the Act,\17\ in particular, which requires that the
rules of an exchange be designed to prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade,
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, protect investors and the public interest,
because it should provide certainty about how options orders and trades
will be handled during periods of extraordinary volatility in the
underlying security.
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\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(5).
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The proposed rule change addresses specific order types that are
subject to added risks during such periods. The Exchange believes that
the rejection of options market orders should help to prevent
executions that might occur at prices that have not been reliably
formed, which should, in turn, protect investors from poor executions
during times of significant volatility.
Accordingly, the Exchange believes that the proposed rule change is
consistent with these requirements in that it should reduce the
negative impacts of sudden, unanticipated volatility in individual
options, and serve to preserve an orderly market in a transparent and
uniform manner, enhance the price-discovery process, increase overall
market confidence, and promote fair and orderly markets and the
protection of investors.
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 proposal does not impose a burden on competition
among the options exchanges, because, despite the intense competition
for order flow among the options exchanges, the proposal addresses a
regulatory situation common to all options exchanges. To the extent
that market participants disagree with the particular approach taken by
the Exchange in the instant proposal, market participants are certainly
able to direct order flow to competing venues.
The Exchange believes this proposal for how to treat options
openings and orders will not impose a burden on competition and will
help provide certainty during periods of extraordinary volatility in an
NMS stock.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \18\ and Rule 19b-4(f)(6) thereunder.\19\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) of the Act \20\ to determine whether the proposed
rule change should be approved or disapproved.
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\20\ 15 U.S.C. 78s(b)(2)(B).
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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 [email protected]. Please include
File
[[Page 18407]]
No. SR-MIAX-2013-07 on the subject line.
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-2013-07. 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-2013-07 and should be
submitted on or before April 16, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06787 Filed 3-25-13; 8:45 am]
BILLING CODE 8011-01-P