[Federal Register Volume 78, Number 72 (Monday, April 15, 2013)]
[Notices]
[Pages 22357-22360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08726]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69354; File No. SR-MIAX-2013-15]
Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Order Approving, on an Accelerated Basis, Proposed Rule
Change Relating to Limit Up Limit Down Functionality
April 9, 2013.
I. Introduction
On March 25, 2013, Miami International Securities Exchange LLC (the
``Exchange'' or ``MIAX'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1)\1\ of the
Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4
thereunder,\3\ a proposed rule change to provide for how the Exchange
proposes to treat market-making quoting obligations in response to the
Regulation NMS Plan to Address Extraordinary Market Volatility. The
proposed rule change was published for comment in the Federal Register
on March 29, 2013.\4\ On April 8, 2013, the Exchange submitted
Amendment No. 1 to the proposed rule change.\5\ The Commission received
no comment letters on the proposal. This order approves the proposed
rule change on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 692347 (March 25,
2013), 78 FR 19344 (``Notice'').
\5\ In Amendment No. 1, the Exchange removed language from
proposed Rule 530(h) to clarify that its treatment of options
overlying securities that are subject to a trading pause in the
Limit Up-Limit Down context is intended to be the same as what is
currently set forth in Exchange Rule 504(c), which provides
generally for the treatment of options overlying securities that are
subject to a trading pause. Because the changes made in Amendment
No. 1 do not materially alter the substance of the proposed rule
change or raise any novel regulatory issues, Amendment No. 1 is not
subject to notice and comment.
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II. Background
On May 6, 2010, the U.S. equity markets experienced a severe
disruption that, among other things, resulted in the prices of a large
number of individual securities suddenly declining by significant
amounts in a very short time period before suddenly reversing to prices
consistent with their pre-decline levels.\6\ This severe price
volatility led to a large number of trades being executed at
temporarily depressed prices, including many that were more than 60%
away from pre-decline prices. One response to the events of May 6,
2010, was the development of the single-stock circuit breaker pilot
program, which was implemented through a series of rule filings by the
equity exchanges and by FINRA.\7\ The single-stock circuit breaker was
designed to reduce extraordinary market volatility in NMS stocks by
imposing a five-minute trading pause when a trade was executed at a
price outside of a specified percentage threshold.\8\
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\6\ The events of May 6 are described more fully in a joint
report by the staffs of the Commodity Futures Trading Commission
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on Emerging Regulatory
Issues, ``Findings Regarding the Market Events of May 6, 2010,''
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
\7\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012)
(``Limit Up-Limit Down Plan'' or ``Plan'').
\8\ See Securities Exchange Act Release Nos. 62884 (September
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of
the single-stock circuit breaker pilot) and Securities Exchange Act
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011)
(describing the ``third stage'' of the single-stock circuit breaker
pilot).
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To replace the single-stock circuit breaker pilot program, the
equity exchanges filed a National Market System Plan\9\ pursuant to
Section 11A of the Act,\10\ and Rule 608 thereunder,\11\ which featured
a ``limit up-limit down'' mechanism (as amended, the ``Limit Up-Limit
Down Plan'' or ``Plan'').
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\9\ NYSE Euronext filed on behalf of New York Stock Exchange LLC
(``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc.
(``NYSE Arca''), and the parties to the proposed National Market
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange,
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule
change on an immediately effective basis to change its name to NYSE
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No.
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
\10\ 15 U.S.C. 78k-1.
\11\ 17 CFR 242.608.
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The Plan sets forth requirements that are designed to prevent
trades in individual NMS stocks from occurring outside of the specified
price bands. The price bands consist of a lower price band and an upper
price band for each NMS stock. When one side of the market for an
individual security is outside the applicable price band, i.e., the
National Best Bid is below the Lower Price Band, or the National Best
Offer is above the Upper Price band, the Processors \12\ are required
to disseminate such National Best Bid or National Best Offer \13\ with
a flag identifying that quote as non-executable. When the other side of
the market reaches the applicable price band, i.e., the National Best
Offer reaches the lower price band, or the National Best Bid reaches
the upper price band, the market for an individual security enters a
15-second Limit State, and the Processors are required disseminate such
National Best Offer or National Best Bid with an appropriate flag
identifying it as a Limit State Quotation. Trading in that stock would
[[Page 22358]]
exit the 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 will declare a five-minute trading pause,
which is applicable to all markets trading the security.
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\12\ As used in the Plan, the Processor refers to 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. See id.
\13\ ``National Best Bid'' and ``National Best Offer'' has the
meaning provided in Rule 600(b)(42) of Regulation NMS under the
Exchange Act. See id.
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The Primary Listing Exchange may also declare a trading pause when
the stock is in a Straddle State, i.e., the National Best Bid (Offer)
is below (above) the Lower (Upper) Price Band and the NMS Stock is not
in a Limit State. In order to declare a trading pause in this scenario,
the Primary Listing Exchange must determine that trading in that stock
deviates from normal trading characteristics such that declaring a
trading pause would support the Plan's goal to address extraordinary
market volatility.\14\
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\14\ As set forth in more detail in the Plan, all trading
centers would be required to establish, maintain, and enforce
written policies and procedures reasonably designed to prevent the
display of offers below the Lower Price Band and bids above the
Upper Price Band for an NMS Stock. The Processors would be able to
disseminate an offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless may be inadvertently submitted
despite such reasonable policies and procedures, but with an
appropriate flag identifying it as non-executable; such bid or offer
would not be included in National Best Bid or National Best Offer
calculations. In addition, all trading centers would be required to
develop, maintain, and enforce policies and procedures reasonably
designed to prevent trades at prices outside the price bands, with
the exception of single-priced opening, reopening, and closing
transactions on the Primary Listing Exchange.
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On May 31, 2012, the Commission approved the Plan as a one-year
pilot, which shall be implemented in two phases.\15\ The first phase of
the Plan was implemented on April 8, 2013.\16\
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\15\ See ``Limit Up-Limit Down Plan,'' supra note 7. See also
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down
Plan by BATS Exchange, Inc., BATS Y- Exchange, Inc., Chicago Board
Options Exchange, Inc., et al.) and Securities Exchange Act Release
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS
Y- Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
\16\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra
note 15.
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III. Description of the Proposal
1. Market Maker Quoting Obligations
In light of the Plan, the Exchange has proposed to adopt Rule
530(f) to address market maker quoting obligations when an underlying
security enters a Limit or Straddle state. Specifically, MIAX proposed
in Rule 530(f)(1)(i)-(iv) to suspend, when the security underlying an
option is in a Limit or Straddle State, the following market maker
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).
Concerning the calculation of a market maker's continuous quoting
obligation, 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 represented that market makers should be relieved of
these quoting obligations during Limit and Straddle States because
during such periods, market makers could not be certain whether they
could buy or sell an underlying security, or if they could, at what
price or quantity. The Exchange's corresponding proposal to suspend the
maximum quotation spread requirement during Limit or Straddle States is
intended to encourage market makers to choose to provide liquidity
during such states. According to the Exchange, allowing options market
makers the flexibility to choose whether to enter quotes, and to do so
without restrictions on the bid-ask differential, the minimum size of
the quote, and the ability to enter one-sided quotes, is necessary to
encourage market makers to provide liquidity in options classes
overlying securities that may enter a Limit State or Straddle State.
The Exchange proposed Rule 530(f)(2) to make clear that a market
maker's relief from the quoting obligations described above shall
terminate when the Limit or Straddle state no longer exists in the
affected underlying stock.
2. Market Maker Participation Guarantees
MIAX additionally proposed in Rule 530(f)(3) to maintain,
unchanged, its scheme concerning the priority of quotes and orders
during Limit and Straddle states. Specifically, MIAX has proposed to
keep the provisions of Exchange Rule 514 unaffected during Limit or
Straddle states when a market maker receives relief from its quoting
obligations.
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 Exchange represented that,
although proposed rule 530(f)(1) would relieve market makers, including
PLMMs and DLMMs, from their quoting obligations during Limit or
Straddle states, maintaining participation guarantees could encourage
market makers to provide liquidity at the NBBO during such states.
3. Priority Quotes
Similarly, the Exchange proposed in Rule 530(g)(2)(i) to consider
all market maker quotes submitted during Limit or Straddle states that
result in an execution to be ``priority quotes,'' notwithstanding the
usual criteria governing priority quotes that would otherwise be
applicable under Rule 517(b).\17\ When a quote is deemed a priority
quote, it receives precedence for allocation purposes over all
``Professional Interest.'' \18\
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\17\ The otherwise applicable criteria governing priority quotes
are: (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).
\18\ See Exchange Rule 517(b). ``Professional Interest'' is
defined in Exchange Rule 100 to include orders for the account of a
person or entity that is a broker or dealer in securities or places
more than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s).
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MIAX represented that the purpose of this proposed rule is to
provide an 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. As with the participation guarantees, a market
maker quote is deemed a priority quote during such states only if it
participates in an execution at the NBBO.
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4. 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.
Specifically Proposed Rule 530(g)(1) describes the functionality of the
Exchange's Opening Process \19\ when a Straddle State or Limit State
occurs before and during the Opening Process.
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\19\ The Exchange's Opening Process is described in greater
detail in Exchange Rule 503.
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Proposed Rule 530(g)(1)(i) provides that Opening Process shall be
delayed for options overlying an NMS Stock that entered a Straddle
State or a Limit State prior to the opening of trading such overlying
options. As proposed, 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 if 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 the Exchange shall re-
commence the Opening Process from the beginning once the Limit or
Straddle State is no longer present.
5. 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.
The Exchange clarified in Amendment No. 1 that proposed Rule 530(h) is
intended merely to clarify that current Exchange Rule 504(c)--the
generally applicable rule concerning the treatment of options overlying
securities subject to a trading pause--shall equally apply when an
underlying security becomes subject to a trading pause as a result of
the Plan.
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 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.
IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and rules and
regulations thereunder applicable to a national securities
exchange.\20\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\21\ which,
among other things, requires a national securities exchange to be so
organized and have the capacity to be able to carry out the purposes of
the Act and to enforce compliance by its members and persons associated
with its members with the provisions of the Act, the rules and
regulations thereunder, and the rules of the exchange, and 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 regulation, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\20\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b).
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The Commission finds that the proposal to suspend a market maker's
obligations when the underlying security is in a Limit or Straddle
State is consistent with the Act. During a Limit or Straddle State,
there may not be a reliable price for the underlying security to serve
as a benchmark for market makers to price options. In addition, the
absence of an executable bid or offer for the underlying security will
make it more difficult for market makers to hedge the purchase or sale
of an option. Given these significant changes to the normal operating
conditions of market makers, the Commission finds that the Exchange's
decision to suspend a market maker's obligations in these limited
circumstances is consistent with the Act.
The Commission notes, however, that the Plan was approved on a
pilot basis and its Participants will monitor how it is functioning in
the equity markets during the pilot period. To this end, the Commission
expects that, upon implementation of the Plan, the Exchange will
continue monitoring the quoting requirements that are being amended in
this proposed rule change and that it will determine if any necessary
adjustments are required to ensure that they remain consistent with the
Act.
The Commission also finds that the proposal to maintain
participation guarantees and priority quote treatment for market makers
who participate in an execution at the NBBO during a Limit or Straddle
state is consistent with the Act. To the extent that market makers are
only eligible for such benefits if they are quoting at the best price
on the Exchange, this proposal is reasonably designed to incentivize
market makers to quote more aggressively when the underlying security
has entered into a limit up-limit down state than they might otherwise
quote, potentially providing additional liquidity and price discovery.
Lastly, the Commission finds that the Exchange's proposals
concerning its Opening Process and use of trading halts when an
underlying security is subject to a trading pause are consistent with
the Act. The Exchange's proposal to delay its Opening Process for an
option if the underlying has entered a Limit or Straddle is reasonably
designed to avoid opening an option during a time when the price of the
underlying security may be uncertain.\22\ Similarly, the Commission
finds that it is reasonable for the Exchange to halt trading in an
option when the underlying security is subject to a trading pause under
the Plan. This element of the Exchange's proposal is consistent with
how the Exchange currently treats options when an underlying security
is subject to a trading pause,\23\ and is also consistent with the
practice of other exchanges in this respect.\24\
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\22\ The Exchange's proposal concerning its Opening Process is
also consistent with what other exchanges have proposed. See, e.g.,
Phlx Rule 1047(f)(i).
\23\ See Exchange Rule 504(c).
\24\ See, e.g., CBOE Rule 6.3.06; NYSE Arca Rule 6.65(b); Phlx
Rule 1047(e).
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In addition, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act \25\ for approving the proposed rule change on an
accelerated basis. This proposal is related to the Plan, which became
operative on April 8, 2013. Accelerating approval will allow the
proposed rule change, and any attendant benefits, to take effect as
shortly after the Plan's implementation date as possible. Accordingly,
the
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Commission finds that good cause exists for approving the proposed rule
change on an accelerated basis.
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\25\ 15 U.S.C. 78s(b)(2)
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\26\ that the proposed rule change (SR-MIAX-2013-15), as modified by
Amendment No. 1, is approved on an accelerated basis.
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\26\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08726 Filed 4-12-13; 8:45 am]
BILLING CODE 8011-01-P