81 FR 33301 - Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 100 Concerning Professional Customers

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 101 (May 25, 2016)

Page Range33301-33307
FR Document2016-12235

Federal Register, Volume 81 Issue 101 (Wednesday, May 25, 2016)
[Federal Register Volume 81, Number 101 (Wednesday, May 25, 2016)]
[Notices]
[Pages 33301-33307]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-12235]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77853; File No. SR-MIAX-2016-11]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Exchange Rule 100 Concerning Professional 
Customers

May 19, 2016.
    Pursuant to the provisions of 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 6, 2016, Miami International Securities 
Exchange LLC (``MIAX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'') a 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

[[Page 33302]]

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 the 
Substance of the Proposed Rule Change

    The Exchange is filing a proposal to amend the definition of 
Priority Customer in Exchange Rule 100 (Definitions), and to make a 
technical change to correct a typographical error in the rule text.
    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 the definition of ``Priority 
Customer'' in Rule 100 (Definitions) and to add Interpretations and 
Policies .01 thereto to specify the manner in which the Exchange will 
calculate the number of orders submitted by a MIAX participant to 
determine if such orders should be designated as Priority Customer \3\ 
or Professional Interest \4\ orders. The Exchange believes that the 
proposed rule change would provide additional clarity in the Exchange's 
Rules and serve to promote the purposes for which the Exchange 
originally adopted its Priority Customer and Professional Interest 
rules. This filing is based upon proposals recently submitted by 
Chicago Board Options Exchange, Incorporated (``CBOE'') \5\ and NASDAQ 
OMX PHLX LLC (``PHLX'') \6\ and approved by the Commission.
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    \3\ The term ``Priority Customer'' means a person or entity that 
(i) is not a broker or dealer in securities, and (ii) does not place 
more than 390 listed options orders per day on average during a 
calendar month for its own beneficial account(s). The term 
``Priority Customer Order'' means an order for the account of a 
Priority Customer. See Exchange Rule 100 (Definitions).
    \4\ The term ``Professional Interest'' means (i) an order that 
is for the account of a person or entity that is not a Priority 
Customer, or (ii) an order or non-priority quote for the account of 
a Market Maker. See Exchange Rule 100 (Definitions).
    \5\ See Securities Exchange Act Release No. 77450 (March 25, 
2016), 81 FR 18668 (March 31, 2016) (Order Approving SR-CBOE-2016-
005).
    \6\ See Securities Exchange Act Release No. 77449 (March 25, 
2016), 81 FR 18665 (March 31, 2016) (Order Approving SR-PHLX-2016-
10).
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Background
    In general, certain customers that are not ``industry 
professionals'', Market Makers or brokers and dealers of securities are 
granted certain marketplace advantages on most U.S. options exchanges 
over other market participants, including over those customers that are 
industry professionals, Market Makers or broker-dealers. The U.S. 
options exchanges generally categorize persons or entities that are not 
brokers or dealers in securities that place more than 390 orders per 
day on average during a calendar month for their own beneficial 
account(s) to be ``industry professionals''. Various exchanges refer to 
persons or entities that meet or exceed the 390 orders per day 
threshold as ``professionals'' or ``professional customers'',\7\ while 
other exchanges refer to orders placed for such customers' beneficial 
account(s) to be ``professional orders'' or ``professional 
interests''.\8\ Various exchanges adopted similar rules relating to 
orders placed by or for these industry professionals for many of the 
same reasons, including, but not limited to the desire to create more 
competitive marketplaces and attract retail order flow.\9\ In addition, 
several of the exchanges noted in their original professional order 
rule filings, their beliefs that disparate professional order rules and 
a lack of uniformity in the application of such rules across the 
options markets would not promote the best regulation and may, in fact, 
encourage regulatory arbitrage.\10\
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    \7\ See BATS Exchange, Inc. (``BZX'') Rule 16.1(a)(45) 
(Professional); BOX Options Exchange LLC (``BOX'') Rule 100(a)(50) 
(Professional); CBOE Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX 
Chapter I, Sec. 1(49) (Professional); PHLX Rule 1000(b)(14) 
(Professional); and Nasdaq Options Market (``NOM'') Chapter I, Sec. 
1(a)(48) (Professional). See also NYSE MKT LLC (``NYSE MKT'') Rule 
900.2NY(18A) (Professional Customer); and NYSE Arca, Inc. (``Arca'') 
Rule 6.1A(4A) (Professional Customer).
    \8\ See ISE Rule 100(a)(37C) (Professional Order); ISE Gemini, 
LLC (``Gemini'') Rule 100(a)(37C) (Professional Order); and MIAX 
Rule 100 (Professional Interest).
    \9\ See, e.g., Securities Exchange Act Release No. 60931 
(November 4, 2009), 74 FR 58355, 58356 (November 12, 2009) (Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Related to Professional Orders) (SR-CBOE 2009-078); Securities 
Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694, 5694 
(January 30, 2009) (Notice of Filing of Amendment No. 2 and Order 
Granting Accelerated Approval of the Proposed Rule Change, as 
Modified by Amendment Nos. 1 and 2 Thereto, Relating to Professional 
Account Holders) (SR-ISE-2006-026); Securities Exchange Act Release 
No. 61802 (March 30, 2010), 75 FR 17193, 17194 (April 5, 2010) 
(Notice of Filing of Amendment No. 2 and Order Granting Accelerated 
Approval of the Proposed Rule Change, as Modified by Amendment No. 2 
Thereto, Relating to Professional Orders) (SR-PHLX-2010-005); 
Securities Exchange Act Release No. 61629 (March 2, 2010), 75 FR 
10851, 10851 (March 9, 2010) (Notice of Filing of Proposed Rule 
Change Relating to the Designation of a ``Professional Customer'') 
(SR-NYSEMKT-2010-018).
    \10\ See, e.g., Securities and Exchange Act Release No. 62724 
(August 16, 2010), 75 FR 51509 (August 20, 2010) (Notice of Filing 
of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a 
Definition of Professional and Require That All Professional Orders 
Be Appropriately Marked) (SR-NASDAQ-2010-099); Securities and 
Exchange Act Release No. 65500 (October 6, 2011), 76 FR 63686 
(October 13, 2011) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Adopt a Definition of Professional and 
Require That All Professional Orders Be Appropriately Marked) (SR-
BATS-2011-041); Securities Exchange Act Release No. 65036 (August 4, 
2011), 76 FR 49517, 49518 (August 10, 2011) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Adopt a 
Definition of ``Professional'' and Require That Professional Orders 
Be Appropriately Marked by BOX Options Participants) (SR-BX-2011-
049); Securities Exchange Act Release No. 60931 (November 4, 2009), 
74 FR 58355, 58357 (November 12, 2009) (Notice of Filing of Proposed 
Rule Change, as Modified by Amendment No. 1, Related to Professional 
Orders) (SR-CBOE 2009-078); see also Securities Exchange Act Release 
73628 (November 18, 2014), 79 FR 69958, 69960 (November 24, 2014) 
(Notice of Filing and Immediate Effectiveness of a Proposed Rule 
Change Relating to Professional Orders) (SR-CBOE-2014-085).
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    Similar to other U.S. options exchanges, the Exchange grants its 
Priority Customers certain marketplace advantages over other market 
participants pursuant to the Exchange's Fee Schedule \11\ and 
Rules.\12\ In general, Priority Customers receive allocation and 
execution priority above equally priced competing interests of Market 
Makers, broker-dealers, and other market participants. In addition, 
Priority Customer Orders are generally exempt from transaction fees.
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    \11\ See, e.g., MIAX Options Fee Schedule.
    \12\ Priority Customer Orders have priority over Professional 
Interest and all Market Maker interest at the same price. See 
Exchange Rule 514(d) (Priority of Quotes and Orders); see also 515A 
(MIAX Price Improvement Mechanism (``PRIME'') and PRIME Solicitation 
Mechanism) (a)(2)(iii) (PRIME Auction Order Allocation) and 
(b)(2)(iii) (PRIME Solicitation Mechanism Order Allocation).
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    The Exchange currently defines a ``Professional Interest'' in 
relevant part as an order that is for the account of a person or entity 
that is not a Priority Customer.\13\ The Exchange's Priority Customer 
and Professional Interest rules were adopted to distinguish non-broker

[[Page 33303]]

dealer individuals and entities that have access to information and 
technology that enable them to professionally trade listed options in a 
manner similar to brokers or dealers in securities, from retail 
investors for order priority and/or transaction fees purposes. In 
general, Professional Interest orders are treated in the same manner as 
the orders of broker-dealers under the Exchange's Rules, including but 
not limited to, rules governing execution priority and fees.\14\ MIAX's 
average daily order threshold of 390 orders per day is substantially 
similar to the distinction made by professional order rules of other 
exchanges and was materially based upon the preexistent professional 
order rules of other exchanges.\15\
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    \13\ See supra note 4.
    \14\ See Exchange Rule 100 (Professional Interest). See also 
supra notes 11 and 12.
    \15\ See supra notes 7 and 8.
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    In September 2014, the Exchange clarified its Priority Customer 
Order and Professional Interest distinctions by issuing a Regulatory 
Circular to its Members \16\ summarizing the requirements for 
determining the designation of orders as Priority Customer or 
Professional Interest. For example, the Regulatory Circular codified 
the Exchange's interpretation that for order counting purposes, a 
``parent'' order that is broken up into multiple ``child'' orders by an 
individual at a broker or dealer, or by an algorithm housed at a broker 
or dealer, at a single price, should count as one single order. This 
interpretation was a clarification of Exchange Rules based on the 
Exchange's past interpretations of the definitions of Priority Customer 
and Professional Interest under Rule 100.
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    \16\ See MIAX Regulatory Circular 2014-69 (Priority Customer and 
Professional Interest Order Summary).
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    The Exchange's Regulatory Circular, however, has not clarified the 
Exchange's Priority Customer and Professional Interest rules 
completely. The advent of new multi-leg spread products and the 
proliferation of the use of complex orders and algorithmic execution 
strategies by both institutional and retail market participants 
continue to raise questions as to what constitutes an ``order'' for 
professional order counting purposes. For example, do multi-leg spread 
orders or strategy orders constitute a single order or multiple orders 
for professional order counting purposes? The Exchange's Rules do not 
fully address these issues and there is no common interpretation across 
the U.S. options markets. The Exchange believes that additional clarity 
is needed regarding professional order counting. Accordingly, the 
Exchange is proposing to amend its definition of a Priority Customer 
and to add Interpretations and Policies .01 to such definition to 
address how various new execution and order strategies should be 
treated under the Exchange's Rules.
    Moreover, the Exchange believes that the proposed rule change would 
better serve to accomplish the Exchange's goals for its Priority 
Customer and Professional Interest rules. Based upon current order 
counting methodology under these Rule 100 definitions, many market 
participants who are not broker-dealers but nevertheless use 
sophisticated execution strategies and trading algorithms such that 
they would typically be considered ``industry professionals'' or 
``professional traders'' are not captured by the Exchange's 
Professional Interest rule and are instead treated as Priority 
Customers. The Exchange believes that these types of market 
participants have access to technology and market information akin to 
broker-dealers, unlike typical retail market participants. The 
Exchange's Priority Customer and Professional Interest rules were 
designed to differentiate between the foregoing market participants. 
The Exchange therefore believes that a new Interpretations and Policies 
to the definition of Priority Customer under Rule 100 is warranted to 
ensure that Priority Customers are afforded the marketplace advantages 
that they are intended to be afforded over other types of market 
participants on the Exchange.
    The Exchange notes that despite the adoption of materially similar 
professional order rules across the markets, there is no consistent 
definition across the markets as to what constitutes an ``order'' for 
professional order counting purposes. While several options exchanges, 
including MIAX, have attempted to clarify their interpretations of 
their professional order counting rules through regulatory and 
information notices and circulars,\17\ many of the options exchanges 
have not adopted rules regarding the application of their professional 
order counting methodologies. Furthermore, where exchanges have issued 
interpretive guidance, those interpretations have not necessarily been 
consistent.\18\ As a result, the Exchange believes that the lack of 
uniformity amongst the exchanges' professional order counting 
methodologies may not promote the best regulation and in fact may 
encourage regulatory arbitrage.
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    \17\ See CBOE Regulatory Circular RG09-148 (Professional 
Orders); ISE Regulatory Information Circular 2014-007/Gemini 
Regulatory Information Circular 2014-011 (Priority Customer Orders 
and Professional Orders (FAQ)); MIAX Regulatory Circular 2014-69 
(Priority Customer and Professional Interest Order Summary); NYSE 
Joint Regulatory Bulletin, NYSE Acra RBO-15-03, NYSE Amex RBO-15-06) 
(Professional Customer Orders); BOX Regulatory Circular RC-2015-21 
(Professional Orders).
    \18\ Compare NYSE Joint Regulatory Bulletin, NYSE Acra RBO-15-
03, NYSE Amex RBO-15-06 (Professional Customer Orders) with 
Interpretation and Policy .01 to Rule 1.1(ggg); Regulatory Circular 
RG09-148 (Professional Orders); ISE Regulatory Information Circular 
2014-007/Gemini Regulatory Information Circular 2014-011 (Priority 
Customer Orders and Professional Orders (FAQ)); and ISE Regulatory 
Information Circular 2009-179 (Priority Customer Orders and 
Professional Orders (FAQ)).
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Proposal
    The Exchange proposes to add additional details to the definition 
of Priority Customer under Rule 100, including a new Interpretations 
and Policies setting forth a more detailed counting regime for 
calculating average daily orders for Priority Customer and Professional 
Interest order counting purposes. Specifically, the Exchange's proposed 
Interpretations and Policies would make clear how to count complex 
orders, ``parent/child'' orders that are broken into multiple orders, 
and ``cancel/replace'' orders for Priority Customer and Professional 
Interest order counting purposes.
    Proposed Interpretations and Policies .01, paragraph (a) would 
provide that except as noted below, each order of any order type, 
regardless of the options exchange on which the order is entered or to 
which the order is routed, shall be counted as one (1) order toward the 
390-order threshold, except that Flexible Exchange Option (FLEX) orders 
shall not be counted. This is because FLEX orders are non-electronic 
orders, and the proposed rule change relates only to orders that are 
submitted electronically.
    Proposed Interpretations and Policies .01, paragraph (b) would 
state that a complex order \19\ comprised of eight (8) options legs or 
fewer will count as a single order toward the 390-order threshold. A 
complex order comprised of nine (9) options legs or more will count as 
multiple orders, with each options leg counting as its own separate 
order. Stock components of stock-option orders are explicitly excluded 
from the count because they do not constitute orders in listed options. 
The Exchange believes that complex orders with nine or more legs are 
more likely to be used by professional traders than traditional two, 
three and four leg complex orders

[[Page 33304]]

strategies and combinations thereof with eight legs or fewer, which are 
generally not algorithmically generated and are frequently used by 
retail investors. Thus, the types of complex orders traditionally 
placed by retail investors would continue to count as a single order 
toward the 390-order threshold while the more complex strategy orders 
that are typically used by professional traders would count as multiple 
orders.
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    \19\ The Exchange notes that it does not currently accept 
complex orders, however as noted above, the proposed Priority 
Customer and Professional Interest order counting regime will count 
all orders regardless of the options exchange on which entered.
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    Proposed Interpretations and Policies .01, paragraph (c) would 
provide details relating to the counting of ``parent/child'' orders. 
Under the proposal, a ``parent'' order placed for the beneficial 
account(s) of a person or entity not a broker or dealer that is broken 
into multiple subordinate ``child'' orders on the same side (buy/sell) 
and series as the ``parent'' order, by a broker or dealer or an 
algorithm housed at a broker or dealer or licensed from a broker dealer 
but housed with the customer, shall count as one (1) order, even if the 
``child'' orders are routed away. Proposed paragraph (c) would permit 
larger ``parent'' orders (which may be simple orders or complex orders 
consisting of up to eight legs), to be broken into multiple smaller 
orders on the same side (buy/sell) and in the same series (or complex 
orders consisting of up to eight legs) in order to attempt to achieve 
best execution for the overall order. Proposed paragraph (c) would 
essentially separate orders that are part of an overall strategy from 
those orders that are being ``worked'' by a broker in order to achieve 
best execution or in an attempt to time the market.
    For example, if a customer were to enter an order to buy 1,000 XYZ 
$5 January calls at a limit price of $1, which the customer's broker 
then broke into four separate orders to buy 250 XYZ $5 January calls at 
a limit price of $1 in order to achieve a better execution, the four 
``child'' orders would still only count as one order for Priority 
Customer and Professional Interest order counting purposes (whether or 
not the four separate orders were sent to the same or different 
exchanges for execution).\20\ Similarly, in the case of a complex 
order, if a customer were to enter an order to buy 1,000 XYZ $5 
January(sell)/March(buy) calendar spreads (with a 1:1 ratio on the 
legs), at a net debit limit price of $0.20, which the customer's broker 
then broke into four separate orders to buy 250 XYZ $5 January/March 
calendar spreads (each with a 1:1 ratio on the legs), each at a net 
debit limit price of $0.20, the four ``child'' orders would still only 
count as one order for Priority Customer and Professional Interest 
order counting purposes (whether or not the four separate orders were 
sent to the same or different exchanges for execution).
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    \20\ Notably, however, if the customer herself were to enter the 
same four identical orders to buy 250 XYZ $5 January calls at a 
limit price of $1 prior to sending the orders, those orders would 
count as four separate orders for Priority Customer and Professional 
Interest order counting purposes because the orders would not have 
been broken into multiple ``child'' orders on the same side(buy/
sell) and series as the ``parent'' order by a broker or dealer, or 
by an algorithm housed at a broker or dealer or licensed from a 
broker or dealer but housed with the customer.
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    On the other hand, a ``parent'' order (including a strategy order) 
\21\ that is broken into multiple subordinate ``child'' orders on both 
sides (buy/sell) of a series and/or multiple series shall count as 
multiple orders, with each ``child'' order counted as a new and 
separate order per side and series. Accordingly under this provision, 
strategy orders, which are most often used by sophisticated traders 
best characterized as industry professionals, would count as multiple 
orders for each ``child'' order entered as part of the overall 
strategy. For example, if a customer were to enter an order with her 
broker by which multiple ``child'' orders were then sent to the 
Exchange on both sides (buy/sell) of a series in a particular option 
class, each order entered would count as a separate order for Priority 
Customer and Professional Interest order counting purposes. Further, if 
a customer were to enter an order with her broker by which multiple 
``child'' orders were then sent to the Exchange across multiple series 
in a particular option class, each order entered would count as a 
separate order for Priority Customer and Professional Interest order 
counting purposes. Likewise, if the customer instructed her broker to 
buy a variety of calls across various option classes as part of a 
basket trade, each order entered by the broker in order to obtain the 
positions making up the basket would count as a separate order for 
Priority Customer and Professional Interest order counting 
purposes.\22\
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    \21\ For purposes of the proposed Interpretation and Policy, the 
term ``strategy order'' is intended to mean an execution strategy, 
trading instruction, or algorithm whereby multiple ``child'' orders 
on both sides of a series and/or multiple series are generated prior 
to being sent to any or multiple U.S. options exchange(s).
    \22\ Notably, with respect to the types of ``parent'' orders 
(including strategy orders) described in paragraph (c) to the 
definition of Priority Customer under proposed Interpretation and 
Policy .01 to Rule 100, such orders would be received only as 
multiple ``child'' orders on the U.S. options exchange receiving 
such orders. The ``parent'' order would be broken apart before being 
sent by the participant to the exchange(s) as multiple ``child'' 
orders.
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    The Exchange believes that the distinctions between ``parent'' and 
``child'' orders in proposed paragraph (c) are appropriate. The purpose 
of proposed paragraph (c) is to distinguish ``child'' orders of 
``parent'' orders generated by algorithms that are typically used by 
sophisticated traders to continuously update their orders in concert 
with market updates in order to keep their overall trading strategies 
in balance. The Exchange believes that these types of ``parent/child'' 
orders typically used by sophisticated traders should count toward the 
390-order threshold as multiple orders.
    Proposed Interpretations and Policies .01, paragraph (d) would 
discuss the counting of orders that are cancelled and replaced toward 
the 390-order threshold. Specifically, proposed paragraph (d)(1) would 
provide that an order that cancels and replaces a prior order shall 
count as a second order, or multiple new orders in the case of a 
complex order comprised of nine (9) options legs or more, including 
``single-strike algorithms.'' A series of cancel and replace orders in 
an individual strike which track the Exchange's best bid or offer 
(``MBBO'') or the national best bid or offer (``NBBO'') shall count as 
separate new orders. Paragraph (d)(1) makes clear that a cancel message 
in and of itself, is not an order. For example, if a trader were to 
enter a non-marketable limit order to buy an option contract at a 
certain net debit price, cancel the order in response to market 
movements, and then reenter the same order once it became marketable, 
those orders would count as two separate orders for Priority Customer 
and Professional Interest order counting purposes even though the terms 
of both orders were the same.
    Proposed paragraph (d)(2) would provide that except as noted in 
proposed paragraph (d)(3), an order that cancels and replaces a 
subordinate ``child'' order on the same side and series as the 
``parent'' order shall not count as a new order. For example, if a 
customer were to enter an order with her broker to buy 10,000 XYZ $5 
January calls at a limit price of $1, which the customer's broker then 
entered, but could not fill and then cancelled to avoid having to rest 
the order in the book as part of a strategy to obtain a better 
execution for the customer and then resubmitted the remainder of the 
order, which would be considered a ``child'' of the ``parent'' order, 
once it became marketable, such orders would only count as one order 
for Priority Customer and Professional Interest order counting 
purposes.

[[Page 33305]]

    Proposed paragraph (d)(3) would state that an order that cancels 
and replaces a subordinate ``child'' order and results in multiple new 
sides and/or in multiple series will count as a new order per side and 
series. Proposed paragraph (d)(3) is aimed at identifying ``child'' 
orders of ``parent'' orders generated by algorithms that are typically 
used by sophisticated traders to continuously update their orders in 
concert with market updates in order to keep their overall trading 
strategies in balance. The Exchange believes that proposed paragraph 
(d)(3) is consistent with these goals. For example, if an investor were 
to seek to make a trade (or series of trades) to take a long position 
at a certain percentage limit on a basket of options, the investor may 
need to cancel and replace several of the ``child'' orders entered to 
achieve the overall execution strategy several times to account for 
updates in the prices of the underlying securities. In such a case, 
each ``child'' order placed to keep the overall execution strategy in 
place would count as a new and separate order even if the particular 
``child'' order were being used to replace a slightly different 
``child'' order that was previously being used to keep the same overall 
execution strategy in place. The Exchange believes that the 
distinctions between cancel/replace orders in proposed paragraphs 
(d)(2) and (d)(3) are appropriate as the orders described in proposed 
paragraph (d)(3) are typically generated by algorithms used by 
sophisticated traders to keep strategy orders continuously in line with 
updates in the markets. As such, the Exchange believes that in such 
cases, cancel/replace orders should count as multiple orders.
    Finally, proposed paragraph (d)(3) would also codify the Exchange's 
``pegged'' order interpretation in the text of the Rules. Proposed 
paragraph (d)(3) would provide that an order that cancels and replaces 
a subordinate ``child'' order ``pegged'' to the MBBO or NBBO will count 
as a new order each time a cancel/replace order is used to follow the 
MBBO or NBBO. This interpretation is similar to the Exchange's current 
interpretation of its Priority Customer and Professional Interest 
rules.\23\ The Exchange believes that paragraph (d)(3) is appropriate 
to make clear that pegged strategy orders that are typically used by 
sophisticated traders should be counted as multiple orders even though 
such orders may cancel/replace orders on the same side (buy/sell) of 
the market in a single series in order to achieve an overall order 
strategy.
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    \23\ See supra note 16.
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    Under current definitions of Priority Customer and Professional 
Interest under Rule 100, in order to properly represent orders entered 
on the Exchange, MIAX Members are required to mark orders as ``Priority 
Customer'' or ``Professional Interest''.\24\ This requirement will 
remain the same. To comply with this requirement, Members are required 
to review their customer activity on at least a quarterly basis to 
determine whether orders that are not for the account of a broker-
dealer should be represented as Priority Customer or Professional 
Interest.\25\ Orders for any account that had an average of more than 
390 orders per day during any month of a given quarter must be 
represented as Professional Interest for the entire next calendar 
quarter. Members are required to conduct a quarterly review and make 
any appropriate changes to the way in which they are representing 
orders within five days after the end of each calendar quarter. While 
Members only will be required to review their customer accounts on a 
quarterly basis, if during a quarter the Exchange identifies a customer 
for which orders are being represented as Priority Customer but that 
has averaged more than 390 orders per day during a month, the Exchange 
will notify the Member and the Member will be required to change the 
manner in which it is representing the customer's orders within five 
days.
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    \24\ See id.
    \25\ See id.
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    The Exchange's rules only require that Members conduct a look-back 
to determine whether their customers are averaging more than 390 orders 
per day at the end of each calendar quarter.\26\ The Exchange therefore 
proposes that the proposed rule amendment become operative on July 1, 
2016 in order to ensure that all orders during the quarterly review 
period commencing July 1, 2016 will be counted in the same manner and 
that the proposed order counting rules will not be applied 
retroactively. The Exchange will issue a Regulatory Circular 30 days 
prior to the operative date.
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    \26\ See supra note 16.
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    Additionally, the Exchange is making a technical change to correct 
a typographical error in the definition of Priority Customer under Rule 
100 such that ``accounts(s)'' shall be corrected to read as 
``account(s)''.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \27\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \28\ 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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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
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    Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \29\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \29\ See id.
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    In particular, the Exchange believes that the proposed amendment to 
the definition of Priority Customer under Rule 100 will promote 
consistent application of the rule by further defining the manner in 
which the Exchange will compute the average daily number of orders 
submitted by a MIAX participant during a calendar month for its 
beneficial account(s) for purposes of determining the appropriate 
Priority Customer or Professional Interest designation. Furthermore, 
the Exchange believes that specifying the manner in which the 390-order 
daily threshold will be calculated within its Rules will provide 
Members with certainty and provide them with insight as they conduct 
their quarterly reviews for purposes of designating orders.
    The Exchange additionally believes that the proposed rule change 
provides a more conservative order counting regime that would identify 
more traders as industry professionals, which the Exchange's definition 
of Priority Customer was designed to exclude, and thus create a better 
competitive balance for all participants on the Exchange, consistent 
with the Act. As the options markets have evolved to become more 
electronic and more competitive, the Exchange believes that the 
distinction between registered broker-dealers on the one hand and 
professional traders who are nevertheless currently treated as Priority 
Customers on the other hand has become increasingly blurred. More and 
more, the Exchange's category of Priority Customer today includes 
sophisticated algorithmic traders

[[Page 33306]]

including former market makers and hedge funds that trade with a 
frequency resembling that of broker-dealers. The Exchange believes that 
it is reasonable under the Act to treat those customers who meet the 
high level of trading activity established in the proposal differently 
than customers who do not meet that threshold and are more typical 
retail investors to ensure that professional traders do not take 
advantage of priority and fee benefits intended for Priority Customers.
    The Exchange notes that it is not unfair to differentiate between 
different types of investors in order to achieve certain marketplace 
balances. The Rules currently differentiate between Priority Customers, 
broker-dealers, Market-Makers, and the like, and these differentiations 
have been recognized to be consistent with the Act.\30\ The Exchange 
believes that the current rules of MIAX and other exchanges that accord 
priority to non-broker-dealer customers over broker-dealers are 
appropriate and consistent with the Act. The Exchange further believes 
that it is appropriate and consistent with the Act to accord priority 
to only those non-professional customers who on average do not place 
more than one order per minute (390 per day) under the counting regime 
that the Exchange proposes. The Exchange believes that such 
differentiations drive competition in the marketplace and are within 
the business judgment of the Exchange. Accordingly, the Exchange also 
believes that its proposal is consistent with the requirement of 
Section 6(b)(8) of the Act \31\ that the rules of an exchange not 
impose an unnecessary or inappropriate burden upon competition in that 
it treats persons who should be deemed industry professionals, but who 
may not be so deemed under current Exchange Rules, in a manner so that 
they do not receive special priority benefits.
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    \30\ See, e.g., Securities Exchange Act Release No. 59287 
(January 23, 2009), 74 FR 5694, 5694 (January 30, 2009) (Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
the Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 
Thereto, Relating to Professional Account Holders) (SR-ISE-2006-
026).
    \31\ 15 U.S.C. 78(b)(8).
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    Furthermore, the Exchange believes that the proposed rule change 
will protect investors and the public interest by helping to assure 
that true Priority Customers continue to receive the appropriate 
marketplace benefits in the MIAX marketplace as intended, while 
furthering competition among marketplace professionals by treating them 
in the same manner as other similarly situated professional market 
participants. The Exchange believes that it is consistent with Section 
6(b)(5) of the Act \32\ not to afford certain market participants that 
have access to information and technology similar to that of brokers 
and dealers of securities with marketplace advantages intended for 
Priority Customers. Finally, the Exchange believes that the proposed 
rule change sets forth a more detailed and clear regulatory regime with 
respect to calculating average daily order entry for Priority Customer 
and Professional Interest order counting purposes. The Exchange 
believes that this additional clarity and detail will eliminate 
confusion among market participants, which is in the interests of all 
investors and the general public.
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    \32\ 15 U.S.C. 78(b)(5).
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    The Exchange believes that a new set of standards and a more 
detailed counting regime than the Exchange's current Priority Customer 
and Professional Interest rules provide would allow the Exchange to 
better compete for order flow and help ensure deeper levels of 
liquidity on the Exchange. The Exchange also believes that the proposed 
rule change would help to remove impediments to and help perfect the 
mechanism of a free and open market and a national market system by 
increasing competition in the marketplace. Accordingly, the Exchange 
proposes to amend the definition of Priority Customer under Rule 100 
and adopt a new Interpretations and Policies thereto.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. In this regard and as 
indicated above, the Exchange notes that this rule change is 
substantially similar to recent CBOE and PHLX filings approved by the 
Commission.\33\ As discussed above, the Exchange does not believe that 
the current rules of MIAX and other exchanges that accord priority to 
non-broker-dealer customers over broker-dealers are unfairly 
discriminatory. Nor does the Exchange believe that it is unfairly 
discriminatory to accord priority to only those non-professional 
customers who on average do not place more than one order per minute 
(390 per day) under the counting regime that the Exchange proposes.
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    \33\ See supra notes 5 and 6.
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    The Exchange believes that its proposal does not impose an undue 
burden on competition. Rather, the Exchange believes that the proposed 
rule change would help to remove burdens on competition and promote a 
more competitive marketplace by affording certain marketplace 
advantages only to those for whom they are intended. The Exchange notes 
that one of the purposes of the rules regarding professional traders is 
to help ensure fairness in the marketplace and promote competition 
among all market participants. The Exchange believes that the proposed 
rule change should help establish more competition among market 
participants and promote the purposes underlying Exchange's Priority 
Customer and Professional Interest rules. The Exchange does not believe 
that the Act requires it to equally provide the same incentives and 
discounts to all market participants given as discussed above, the 
distinctions among such market participants as professional traders or 
retail investors.
    Rather than burden competition, the Exchange believes that the 
proposed rule change promotes competition by ensuring that retail 
investors continue to receive the appropriate marketplace benefits in 
the MIAX marketplace as intended in the MIAX Rules, while furthering 
competition among marketplace professionals by treating them in the 
same manner under the Rules as other similarly situated market 
participants. The proposal will accomplish this by ensuring that market 
participants with similar access to information and technology (i.e. 
professional traders and broker-dealers) receive similar treatment 
under the Rules, while retail investors receive the benefits of order 
priority and fee waivers that are intended to apply to Priority 
Customers.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \34\ and Rule 19b-4(f)(6) thereunder.\35\ 
Because the proposed rule change does not: (i)

[[Page 33307]]

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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    \34\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \35\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 \36\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \36\ 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 No. SR-MIAX-2016-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-MIAX-2016-11. 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-2016-11, and should be 
submitted on or before June 15, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12235 Filed 5-24-16; 8:45 am]
 BILLING CODE 8011-01-P


81_FR_33402
Current View
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 33301 

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