[Federal Register Volume 78, Number 143 (Thursday, July 25, 2013)]
[Notices]
[Pages 45001-45003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-17839]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70007; File No. SR-MIAX-2013-21]
Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Order Approving Proposed Rule Change To Modify the
Allocation of Directed Orders in Specific Limited Situations
July 19, 2013.
I. Introduction
On May 22, 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 modify its practice of
allocating Directed Orders. The proposed rule change was published for
comment in
[[Page 45002]]
the Federal Register on June 7, 2013.\4\ The Commission did not receive
any comments on the proposal. This order approves the proposed rule
change.
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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. 69682 (June 3,
2013), 78 FR 34417 (``Notice'').
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II. Description of the Proposal
The Exchange's proposal amends MIAX Rule 514 to modify the
allocation of Directed Orders \5\ to provide that a Directed Lead
Market Maker (``DLMM'') will always receive a minimum participation
allocation of at least one (1) contract. Specifically, the proposal
ensures that the DLMM will be allocated a minimum of one contract in
situations where, due to the Exchange's allocation calculation
methodology and the fact that the Exchange system rounds down any
fractional contract size allocations, the DLMM participation
entitlement allocation would otherwise have resulted in the DLMM being
allocated zero contracts.
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\5\ 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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Currently, MIAX Rule 514(h)(1) provides the formula used to
calculate the DLMM participation entitlement. The Rule provides that
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. According to MIAX, the DLMM participation
entitlement algorithm works well when applied to Directed Orders of a
contract size of three (3) or more. However, as MIAX explained in the
Notice,\6\ for Directed Orders of a contract size of two (2) or fewer,
the DLMM participation entitlement allocation may result in an
allocation of zero due to the fact that the Exchange system rounds down
any fractional contract size allocations.\7\ MIAX provided several
examples in the Notice to illustrate how, in such instances, a Lead
Market Maker to whom the order was specifically directed does not
receive a contract allocation.
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\6\ See Notice, supra note 4.
\7\ MIAX expressed its belief in the Notice that other competing
exchanges may instead round up in certain situations where there is
a fractional contract size allocation. See Notice, supra note 4.
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The MIAX proposal amends Rule 514(h)(1) to add a provision to
ensure that DLMMs receive at least one contract of an incoming Directed
Order. Thus, under the proposed rule change, a DLMM will 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, as described above); or (iii) one (1)
contract. Accordingly, MIAX's proposal will allow the Exchange to
ensure that the Electronic Exchange Member's (``EEM'') Directed Order
would trade a minimum of one contract with the quote of the DLMM, when
the DLMM participation entitlement applies.
III. Discussion and Commission Findings
The Commission has carefully reviewed the proposed rule change and
finds that it consistent with the requirements of the Act.\8\
Specifically, the Commission believes it is consistent with Section
6(b)(5) of the Act,\9\ which requires, among other things, that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, 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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\8\ 15 U.S.C. 78f. In approving this proposed rule change, the
Commission has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\9\ 15 U.S.C. 78f(b)(5).
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The Commission notes that a Directed Order is an order that an EEM
enters into the MIAX system and directs to a particular Lead Market
Maker. As such, EEMs have a reasonable expectation that, in most
situations when the DLMM participation entitlement applies, the EEM's
Directed Order will interact and execute at least partially with the
quote of the DLMM.\10\ However, under MIAX's current rules, solely
because of MIAX's practice of rounding down factional contract sizes
\11\ and its current allocation formula, Directed Orders with a
contract size of two or less may result in the DLMM being allocated
zero contracts. The Commission believes that it is appropriate to allow
MIAX to revise its rules to account for this limited situation and
ensure that DLMMs will receive at least one contract of any order that
is directed to them when the DLMM's participation entitlement
applies.\12\ The Commission believes that this change will allow the
rule to operate as anticipated by EEMs, providing greater certainty of
execution with regard to Directed Orders. Further, the proposed rule
change allows MIAX to effectuate one of the purposes of the Directed
Order participation entitlement; namely, to reward DLMMs for attracting
order flow to the Exchange.
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\10\ The Commission notes, however, that there may be other
situations where the DLMM may not have the opportunity to interact
with the Directed Order. For example, the DLMM participation
entitlement applies only to any remaining balance after Priority
Customer orders have been satisfied. See MIAX Rule 514(g). MIAX Rule
100 defines ``Priority Customer'' as ``a person or entity that (i)
is not a broker or dealer in securities, and (ii) does not place
more than 390 orders in listed options per day on average during a
calendar month for its own beneficial account(s).''
\11\ MIAX noted that other exchanges may not have the same issue
with Directed Orders because their systems round up instead of down
where there are fractional contract size allocations. See supra note
7.
\12\ See supra note 10 (concerning the possibility that a
Priority Customer may have priority).
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The Commission notes that this rule change will not impact the
application of other participation entitlements. For instance, MIAX
Rule 514(i)(1) provides that a PLMM may receive either the PLMM
entitlement or, if applicable, the DLMM entitlement, but not both. As
such, although this proposal will change the allocation for Directed
Orders of two or fewer contacts, it will not, in any way, affect the
small order participation guarantee for PLMMs in MIAX Rule 514(g)(2) or
allow DLMMs to receive both the small order participation entitlement
in that rule and the Directed Order participation entitlement in Rule
514(h). Additionally, under MIAX Rule 514(h)(4), the PLMM and DLMM
participation entitlements never allow for an allocation that is
greater than the quantity of contracts quoted by the PLMM or DLMM.
Furthermore, the Commission notes that the proposed change will not
affect Priority Customers because DLMM participation entitlements may
take effect only after all Priority Customer orders are satisfied.\13\
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\13\ See MIAX Rule 514(h).
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For the foregoing reasons, the Commission believes that the
proposed rule change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\14\ that the proposed rule change (SR-MIAX-2013-21), is approved.
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\14\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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[[Page 45003]]
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-17839 Filed 7-24-13; 8:45 am]
BILLING CODE 8011-01-P