[Federal Register Volume 78, Number 110 (Friday, June 7, 2013)]
[Notices]
[Pages 34417-34419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-13508]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69682; File No. SR-MIAX-2013-21]
Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Notice of Filing of Proposed Rule Change To Modify the
Allocation of Directed Orders in Specific Limited Situations
June 3, 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 May 22, 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 III below, which Items have been prepared by the self-regulatory
organization. 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 514 to
modify the allocation of Directed Orders in specific limited
situations.
The text of the proposed rule change is 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Exchange Rule 514 to modify the
allocation of Directed Orders \3\ to provide a Directed Lead Market
Maker (``DLMM'') a minimum participation allocation of one (1) contract
in certain situations where the DLMM participation entitlement
allocation results in an allocation of zero due to the fact that the
Exchange System rounds down any fractional contract size allocations.
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\3\ A `Directed Order' is an order entered into the System by an
Electronic Exchange Member with a designation for a Lead Market
Maker (referred to as a ``Directed Lead Market Maker''). See
Securities Exchange Act Release No. 69507 (May 3, 2013), 78 FR 27269
(May 9, 2013) (SR-MIAX-2013-20).
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Exchange Rule 514(h)(1) provides the formula used to calculate the
DLMM participation entitlement. Specifically, the DLMM participation
entitlement is equal to the greater of: (i) The proportion of the total
size at the best price represented by the size of its quote; (ii) sixty
percent (60%) of the contracts to be allocated if there is only one (1)
other Market Maker quotation at the NBBO; or (iii) forty percent (40%)
if there are two (2) or more other Market Maker quotes at the NBBO.\4\
The DLMM participation entitlement algorithm works well when applied to
Directed Orders of a contract size of three (3) or more. However, for
Directed Orders of a contract size of two (2) or less, the DLMM
participation entitlement allocation may result in an allocation of
zero due to the fact that the Exchange
[[Page 34418]]
System rounds down any fractional contract size allocations.\5\
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\4\ See Exchange Rule 514(h)(1).
\5\ For example, the Exchange System will round down any
fractional contract sizes in the following way: 3.7 contracts to 3
contracts; 1.7 contracts to 1 contract; or 0.7 contract size to zero
contracts.
The Exchange notes that other competing exchanges may round up
in certain situations where there is a fractional contract size
allocation. Rounding up fractional contract sizes in this situation
would result in a 0.7 contract size equaling 1 contract.
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Example 1:
Three (3) Lead Market Makers (LMMs) quoting at the NBBO; no orders
resting on the Exchange System; and the DLMM participation entitlement
overlay is in effect.
LMM1 Quote: 1.00 (35) x 1.10 (10)
LMM2 Quote: 1.00 (35) x 1.10 (10)
LMM3 Quote: 1.00 (10) x 1.10 (10)
MIAX Market: 1.00 (80) x 1.10 (30)
Incoming Directed Order: Sell 3 contracts @ 1.00 directed to LMM3.
The Exchange System operates as follows:
LMM3 is entitled to the greater of: (i) pro-rata
allocation, 0.375 contract (10/80 x 3 contracts); or (ii) 40%, 1.2
contract (40% x 3 contracts). LMM3 would receive a DLMM participation
entitlement of 1 contract.\6\
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\6\ Since, the Exchange System is designed to round fractional
allocations down, LMM3's DLMM participation entitlement of 1.2
contracts is rounded down to 1 contract.
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LMM1 and LMM2 would each receive 1 contract.\7\
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\7\ With two contracts remaining to be allocated, the Exchange
System applies the pro-rata allocation logic of Exchange Rule
514(c)(2), which allocates one (1) contract at a time on a price-
size-time priority because the Directed Order (two contracts) cannot
be evenly allocated between LMM1 and LMM2. See Exchange Rule
514(c)(2). LMM3 would be excluded from receiving a pro-rata
allocation, because LMM3 has already been allocated a participation
entitlement. See Exchange Rule 514(e)(1). LMM1 and LMM2 are bidding
at the same price, so priority is then determined by size. LMM1 and
LMM2 are displaying the same bid size, so priority for the first
contract is determined by time. LMM1 is allocated the first contract
assuming LMM1 has the time priority. The next contract is allocated
in the same fashion. LMM1 and LMM2 are bidding at the same price, so
priority is determined by size. At that point, LMM2 is displaying
the most size and is allocated the last contract.
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Example 2:
Three (3) Lead Market Makers (LMMs) quoting at the NBBO; no orders
resting on the Exchange System; and the DLMM participation entitlement
overlay is in effect.
LMM1 Quote: 1.00 (35) x 1.10 (10)
LMM2 Quote: 1.00 (35) x 1.10 (10)
LMM3 Quote: 1.00 (10) x 1.10 (10)
MIAX Market: 1.00 (80) x 1.10 (30)
Incoming Directed Order: Sell 2 contracts @ 1.00 directed to LMM3.
The Exchange System operates as follows:
LMM3 is entitled to the greater of: (i) pro-rata
allocation, 0.25 contract (10/80 x 2 contracts); or (ii) 40%, 0.8
contract (40% x 2 contracts). LMM3 would receive a DLMM participation
entitlement of zero.\8\
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\8\ Since, the Exchange System is designed to round fractional
allocations down, LMM3's DLMM participation entitlement of 0.8
contracts is rounded down to zero.
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LMM1 and LMM2 would each receive 1 contract.\9\
\9\ With two contracts remaining to be allocated, the Exchange
System applies the pro-rata allocation logic of Exchange Rule
514(c)(2), which allocates one (1) contract at a time on a price-
size-time priority because the Directed Order (two contracts) cannot
be evenly allocated among LMM1, LMM2, and LMM3. See Exchange Rule
514(c)(2). LMM3 would be included in the pro-rata allocation
calculation, because LMM3 was not allocated a participation
entitlement. See Exchange Rule 514(e)(1). LMM1, LMM2, and LMM3 are
bidding at the same price, so priority is then determined by size.
LMM1 and LMM2 are displaying the same bid size (both greater than
the bid size of LMM3), so priority for the first contract is
determined by time. LMM1 is allocated the first contract assuming
LMM1 has the time priority. The next contract is allocated in the
same fashion. LMM1, LMM2, and LMM3 are bidding at the same price, so
priority is determined by size. At that point, LMM2 is displaying
the most size and is allocated the last contract.
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LMM3, who succeeded in drawing the Directed Order to the Exchange, does
not receive a contract allocation.
The Exchange proposes to modify the allocation of Directed Orders
to provide a DLMM a minimum participation allocation of one (1)
contract in situations where the DLMM participation allocation
currently results in an allocation of zero due to the fact that the
Exchange System rounds down any fractional contract size allocations.
Specifically, the Exchange seeks to remedy these situations by adding
``or (iii) one (1) contract'' to the DLMM participation entitlement
formula of Exchange Rule 514(h)(1). Thus, the DLMM would be entitled to
the greatest of: (i) the pro-rata share; (ii) 40% or 60% of the
incoming Directed Order (depending on the number of other Market Makers
quoting along with the DLMM); or (iii) one (1) contract. The following
example, using the same facts as Example 2 above, illustrates the
impact of the proposed change.
Example 3:
Three (3) LMMs quoting at the NBBO; no orders resting on the
Exchange System; and the DLMM participation entitlement overlay is in
effect.
LMM1 Quote: 1.00 (35) x 1.10 (10)
LMM2 Quote: 1.00 (35) x 1.10 (10)
LMM3 Quote: 1.00 (10) x 1.10 (10)
MIAX Market: 1.00 (80) x 1.10 (30)
Incoming Directed Order: Sell 2 contracts @ 1.00 directed to LMM3.
The Exchange System would operate as follows:
LMM3 would be entitled to the greater of: (i) Pro-rata
allocation, 0.25 contract (10/80 x 2 contracts); (ii) 40%, 0.8 contract
(40% x 2 contracts); or (iii) one (1) contract. LMM3 would receive a
DLMM participation entitlement of one (1) contract.
LMM1 would receive one (1) contract.\10\
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\10\ The remaining contract would be allocated pursuant to the
pro-rata allocation logic. The remaining contract would be allocated
to LMM1 on time priority as both LMM1 and LMM2 had equally priced
bids of the same size. LMM3 would be excluded from receiving a pro-
rata allocation, because LMM3 has already been allocated a
participation entitlement. See Exchange Rule 514(e)(1). Thus, there
is no risk in the LMM3 potentially receiving 100% of the Directed
Order (e.g., one (1) contract during the participation entitlement
and one (1) contract for being first in line for pro-rata allocation
of the remainder because of price-size-time priority).
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The Exchange believes that the proposed change preserves the
integrity of its Directed Order program by enabling the DLMM to receive
a minimum of one (1) contract in situations where the allocation would
be zero due to the Exchange System's practice of rounding down
fractional allocations. By choosing to enter a Directed Order over a
non-directed order, an Electronic Exchange Member (``EEM'') actively
intends to trade with the particular quote of the designated DLMM. In
most situations when the DLMM participation entitlement applies, the
EEM's Directed Order interacts and executes at least partially with the
quote of the DLMM. However, when applying the DLMM participation
entitlement to Directed Orders of a contract size of two (2) or less,
such interaction with the quote of the DLMM may never occur because of
the rounding down of fractional contract size by the Exchange System.
The Exchange's proposal would fix these scenarios and ensure that the
EEM's Directed Order would trade a minimum of one contract with the
quote of the DLMM, when the DLMM participation entitlement applies. The
Exchange believes this proposal to be fair because it preserves the
original purpose of the Directed Order, to trade with the particular
quote of the DLMM, and also correspondingly enables the DLMM to be
rewarded with an allocation for having attracted the Directed Order to
the Exchange.
Because of the technology changes associated with this rule
proposal, the Exchange will announce the implementation date of the
proposal in a Regulatory Circular to be published no later than 30 days
after the publication of the approval order in the Federal Register.
The implementation date will be no later than 30 days following
publication of the Regulatory Circular
[[Page 34419]]
announcing publication of the approval order in the Federal Register.
2. Statutory Basis
MIAX believes that its proposed rule change is consistent with
Section 6(b) of the Act \11\ in general, and furthers the objectives of
Section 6(b)(5) of the Act \12\ 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 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.
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
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The proposal to establish a one (1) contract minimum for the DLMM
participation entitlement promotes just and equitable principles of
trade by enabling DLMM to be eligible for a participation entitlement
regardless if the order is for three (3) contracts or more, or for two
(2) contracts or less, in a manner that protects investors and the
public interest. In addition, the proposal fosters cooperation and
coordination with persons engaged in facilitating transactions in
securities by fulfilling the intention of a Directed Order in a manner
that provides additional certainty to both the EEM that initiates and
the DLMM that receives a Directed Order in situations where the DLMM
participation entitlement applies. The proposal is also designed to
remove impediments to and perfect the mechanisms of a free and open
market by providing additional certainty of execution of an EEM's
Directed Order in a manner that encourages additional liquidity and
order flow to the Exchange, improves overall market quality, and thus
benefits all market participants. The Exchange notes that the proposal
will have no effect on the existing participation entitlement program,
except in the minority of situations where the DLMM participation
entitlement is applied to Directed Orders of a contract size of two (2)
or less. The Exchange also notes that Priority Customers will be
unaffected by the proposal, as Priority Customer orders will continue
to be allocated before the DLMM participation entitlement in a manner
that promotes the protection of investors and the public interest.
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. The Exchange notes that it
operates in a highly competitive market in which market participants
can readily direct order flow to competing venues who offer similar
functionality. As to inter-market competition, the Exchange notes that
other competing exchanges may already operate Directed Order programs
which function in a similar manner, depending upon whether those
exchanges choose to round up or round down fractional contract
allocations. As to intra-market competition, the Exchange believes the
proposal to be fair as it only applies to Directed Orders, which by
their definition possess an intention by the EEM to trade with the
quote of a particular DLMM. The Exchange notes that the proposal will
have no effect on the existing participation entitlement program,
except in the minority of situations where the DLMM participation
entitlement is applied to Directed Orders of a contract size of two (2)
or less. The Exchange believes it is appropriate and fair to preserve
that intention by assuring that the Directed Order will trade at least
one (1) contract with the DLMM.
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 Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
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 Number SR-MIAX-2013-21 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 Number SR-MIAX-2013-21. 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 publicly available. All
submissions should refer to File Number SR-MIAX-2013-21 and should be
submitted on or before June 28, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13508 Filed 6-6-13; 8:45 am]
BILLING CODE 8011-01-P