81_FR_33402 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

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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78(b)(5).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \33\ See supra notes 5 and 6.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12235 Filed 5-24-16; 8:45 am]
 BILLING CODE 8011-01-P



                                                                                Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices                                                    33301

                                                  C. Self-Regulatory Organization’s                         that would be consistent with the                      rules/sro.shtml). Copies of the
                                                  Statement on Comments on the                              strategy of other Managed Fund Shares                  submission, all subsequent
                                                  Proposed Rule Change Received From                        without undue delay.13 Thus, the                       amendments, all written statements
                                                  Members, Participants, or Others                          Commission believes that waiver of the                 with respect to the proposed rule
                                                    No written comments were solicited                      30-day operative delay with respect to                 change that are filed with the
                                                  or received with respect to the proposed                  the proposed change to the Fund is                     Commission, and all written
                                                  rule change.                                              consistent with the protection of                      communications relating to the
                                                                                                            investors and the public interest. The                 proposed rule change between the
                                                  III. Date of Effectiveness of the                         Commission hereby waives the 30-day                    Commission and any person, other than
                                                  Proposed Rule Change and Timing for                       operative delay and designates the                     those that may be withheld from the
                                                  Commission Action                                         proposed rule change to be operative                   public in accordance with the
                                                     Because the foregoing proposed rule                    upon filing.14                                         provisions of 5 U.S.C. 552, will be
                                                  change does not: (i) Significantly affect                    At any time within 60 days of the                   available for Web site viewing and
                                                  the protection of investors or the public                 filing of the proposed rule change, the                printing in the Commission’s Public
                                                  interest; (ii) impose any significant                     Commission may temporarily suspend                     Reference Room, 100 F Street NE.,
                                                  burden on competition; and (iii) become                   such rule change if it appears to the                  Washington, DC 20549, on official
                                                  operative for 30 days from the date on                    Commission that such action is                         business days between the hours of
                                                  which it was filed, or such shorter time                  necessary or appropriate in the public                 10:00 a.m. and 3:00 p.m. Copies of such
                                                  as the Commission may designate, if                       interest, for the protection of investors,             filing will also be available for
                                                  consistent with the protection of                         or otherwise in furtherance of the                     inspection and copying at the principal
                                                  investors and the public interest, the                    purposes of the Act. If the Commission                 office of the Exchange. All comments
                                                  proposed rule change has become                           takes such action, the Commission shall                received will be posted without change;
                                                  effective pursuant to Section 19(b)(3)(A)                 institute proceedings to determine                     the Commission does not edit personal
                                                  of the Act 11 and Rule 19b–4(f)(6)                        whether the proposed rule should be                    identifying information from
                                                  thereunder.12                                             approved or disapproved.                               submissions. You should submit only
                                                     The Exchange has asked the                                                                                    information that you wish to make
                                                  Commission to waive the 30-day                            IV. Solicitation of Comments                           available publicly. All submissions
                                                  operative delay so that the proposal may                    Interested persons are invited to                    should refer to File Number SR–
                                                  become operative immediately upon                         submit written data, views, and                        NYSEArca–2016–66 and should be
                                                  filing. The Exchange argues that waiver                   arguments concerning the foregoing,                    submitted on or before June 15, 2016.
                                                  of this requirement is consistent with                    including whether the proposed rule                      For the Commission, by the Division of
                                                  the protection of investors and the                       change is consistent with the Act.                     Trading and Markets, pursuant to delegated
                                                  public interest because the proposed                      Comments may be submitted by any of                    authority.15
                                                  change will permit the Fund to more                       the following methods:                                 Robert W. Errett,
                                                  efficiently implement its risk strategy,                                                                         Deputy Secretary.
                                                                                                            Electronic Comments
                                                  and, depending on market conditions, to                                                                          [FR Doc. 2016–12239 Filed 5–24–16; 8:45 am]
                                                  hedge market risk or to provide an                          • Use the Commission’s Internet
                                                                                                                                                                   BILLING CODE 8011–01–P
                                                  opportunity for enhanced returns,                         comment form (http://www.sec.gov/
                                                  which may be to the benefit of investors.                 rules/sro.shtml); or
                                                  The Commission notes that, other than                       • Send an email to rule-comments@                    SECURITIES AND EXCHANGE
                                                  the change proposed herein, no other                      sec.gov. Please include File Number SR–                COMMISSION
                                                  changes are being made with respect to                    NYSEArca–2016–66 on the subject line.
                                                                                                                                                                   [Release No. 34–77853; File No. SR–MIAX–
                                                  the Fund, and all other representations                   Paper Comments                                         2016–11]
                                                  made in the First Prior Release and
                                                  Second Prior Release remain                                  • Send paper comments in triplicate
                                                                                                            to Secretary, Securities and Exchange                  Self-Regulatory Organizations; Miami
                                                  unchanged. The proposal would: (1)                                                                               International Securities Exchange LLC;
                                                  Permit the Fund to invest in U.S.                         Commission, 100 F Street NE.,
                                                                                                            Washington, DC 20549–1090.                             Notice of Filing and Immediate
                                                  exchange-traded stock index futures on                                                                           Effectiveness of a Proposed Rule
                                                  broad based indexes, such as futures on                   All submissions should refer to File                   Change To Amend Exchange Rule 100
                                                  the S&P 500 Index; (2) confine all                        Number SR–NYSEArca–2016–66. This                       Concerning Professional Customers
                                                  futures contracts in which the Fund                       file number should be included on the
                                                  may invest to be traded only on U.S.                      subject line if email is used. To help the             May 19, 2016.
                                                  futures exchanges that are members of                     Commission process and review your                        Pursuant to the provisions of Section
                                                  the ISG; and (3) limit the Fund’s                         comments more efficiently, please use                  19(b)(1) of the Securities Exchange Act
                                                  investments in futures contracts to 10%                   only one method. The Commission will                   of 1934 (‘‘Act’’) 1 and Rule 19b–4
                                                  of the Fund’s net assets. The                             post all comments on the Commission’s                  thereunder,2 notice is hereby given that
                                                  Commission believes that the proposed                     Internet Web site (http://www.sec.gov/                 on May 6, 2016, Miami International
                                                  change raises no new or novel                                                                                    Securities Exchange LLC (‘‘MIAX’’ or
                                                  regulatory issues and would allow the                        13 See, e.g., Securities Exchange Act Release No.   ‘‘Exchange’’) filed with the Securities
                                                                                                            77620 (April 14, 2016), 81 FR 23339 (April 20,         and Exchange Commission
                                                  Fund to employ an additional strategy                     2016) (SR–BATS–2015–124) (order approving
                                                                                                            listing and trading of the REX VolMAXX Long VIX
                                                                                                                                                                   (‘‘Commission’’) a proposed rule change
mstockstill on DSK3G9T082PROD with NOTICES




                                                    11 15  U.S.C. 78s(b)(3)(A).                             Weekly Futures Strategy ETF and the REX                as described in Items I and II below,
                                                    12 17  CFR 240.19b–4(f)(6). In addition, Rule 19b–      VolMAXX Inverse VIX Weekly Futures Strategy            which Items have been prepared by the
                                                  4(f)(6) requires a self-regulatory organization to give   ETF of the Exchange Traded Concepts Trust) and         Exchange. The Commission is
                                                  the Commission written notice of its intent to file       supra, note 9.
                                                                                                                                                                   publishing this notice to solicit
                                                  the proposed rule change at least five business days         14 For purposes only of waiving the 30-day

                                                  prior to the date of filing of the proposed rule          operative delay, the Commission has also
                                                                                                                                                                     15 17 CFR 200.30–3(a)(12).
                                                  change, or such shorter time as designated by the         considered the proposed rule’s impact on
                                                                                                                                                                     1 15 U.S.C. 78s(b)(1).
                                                  Commission. The Exchange has satisfied this               efficiency, competition, and capital formation. See
                                                  requirement.                                              15 U.S.C. 78c(f).                                        2 17 CFR 240.19b–4.




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                                                  33302                       Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices

                                                  comments on the proposed rule change                    Interest rules. This filing is based upon              several of the exchanges noted in their
                                                  from interested persons.                                proposals recently submitted by Chicago                original professional order rule filings,
                                                                                                          Board Options Exchange, Incorporated                   their beliefs that disparate professional
                                                  I. Self-Regulatory Organization’s
                                                                                                          (‘‘CBOE’’) 5 and NASDAQ OMX PHLX                       order rules and a lack of uniformity in
                                                  Statement of the Terms of the Substance
                                                                                                          LLC (‘‘PHLX’’) 6 and approved by the                   the application of such rules across the
                                                  of the Proposed Rule Change
                                                                                                          Commission.                                            options markets would not promote the
                                                     The Exchange is filing a proposal to                                                                        best regulation and may, in fact,
                                                  amend the definition of Priority                        Background
                                                                                                                                                                 encourage regulatory arbitrage.10
                                                  Customer in Exchange Rule 100                              In general, certain customers that are                 Similar to other U.S. options
                                                  (Definitions), and to make a technical                  not ‘‘industry professionals’’, Market                 exchanges, the Exchange grants its
                                                  change to correct a typographical error                 Makers or brokers and dealers of                       Priority Customers certain marketplace
                                                  in the rule text.                                       securities are granted certain                         advantages over other market
                                                     The text of the proposed rule change                 marketplace advantages on most U.S.                    participants pursuant to the Exchange’s
                                                  is available on the Exchange’s Web site                 options exchanges over other market                    Fee Schedule 11 and Rules.12 In general,
                                                  at http://www.miaxoptions.com/filter/                   participants, including over those                     Priority Customers receive allocation
                                                  wotitle/rule_filing, at MIAX’s principal                customers that are industry                            and execution priority above equally
                                                  office, and at the Commission’s Public                  professionals, Market Makers or broker-                priced competing interests of Market
                                                  Reference Room.                                         dealers. The U.S. options exchanges                    Makers, broker-dealers, and other
                                                  II. Self-Regulatory Organization’s                      generally categorize persons or entities               market participants. In addition, Priority
                                                  Statement of the Purpose of, and                        that are not brokers or dealers in                     Customer Orders are generally exempt
                                                  Statutory Basis for, the Proposed Rule                  securities that place more than 390                    from transaction fees.
                                                  Change                                                  orders per day on average during a                        The Exchange currently defines a
                                                                                                          calendar month for their own beneficial                ‘‘Professional Interest’’ in relevant part
                                                     In its filing with the Commission, the               account(s) to be ‘‘industry                            as an order that is for the account of a
                                                  Exchange included statements                            professionals’’. Various exchanges refer               person or entity that is not a Priority
                                                  concerning the purpose of and basis for                 to persons or entities that meet or                    Customer.13 The Exchange’s Priority
                                                  the proposed rule change and discussed                  exceed the 390 orders per day threshold                Customer and Professional Interest rules
                                                  any comments it received on the                         as ‘‘professionals’’ or ‘‘professional                 were adopted to distinguish non-broker
                                                  proposed rule change. The text of these                 customers’’,7 while other exchanges
                                                  statements may be examined at the                       refer to orders placed for such                        of Amendment No. 2 and Order Granting
                                                  places specified in Item IV below. The                  customers’ beneficial account(s) to be                 Accelerated Approval of the Proposed Rule Change,
                                                  Exchange has prepared summaries, set                                                                           as Modified by Amendment No. 2 Thereto, Relating
                                                                                                          ‘‘professional orders’’ or ‘‘professional              to Professional Orders) (SR–PHLX–2010–005);
                                                  forth in sections A, B, and C below, of                 interests’’.8 Various exchanges adopted                Securities Exchange Act Release No. 61629 (March
                                                  the most significant aspects of such                    similar rules relating to orders placed by             2, 2010), 75 FR 10851, 10851 (March 9, 2010)
                                                  statements.                                             or for these industry professionals for                (Notice of Filing of Proposed Rule Change Relating
                                                                                                                                                                 to the Designation of a ‘‘Professional Customer’’)
                                                  A. Self-Regulatory Organization’s                       many of the same reasons, including,                   (SR–NYSEMKT–2010–018).
                                                  Statement of the Purpose of, and                        but not limited to the desire to create                   10 See, e.g., Securities and Exchange Act Release

                                                  Statutory Basis for, the Proposed Rule                  more competitive marketplaces and                      No. 62724 (August 16, 2010), 75 FR 51509 (August
                                                                                                                                                                 20, 2010) (Notice of Filing of a Proposed Rule
                                                  Change                                                  attract retail order flow.9 In addition,               Change by the NASDAQ Stock Market LLC To
                                                  1. Purpose                                                                                                     Adopt a Definition of Professional and Require That
                                                                                                             5 See Securities Exchange Act Release No. 77450
                                                                                                                                                                 All Professional Orders Be Appropriately Marked)
                                                     The Exchange proposes to amend the                   (March 25, 2016), 81 FR 18668 (March 31, 2016)         (SR–NASDAQ–2010–099); Securities and Exchange
                                                                                                          (Order Approving SR–CBOE–2016–005).                    Act Release No. 65500 (October 6, 2011), 76 FR
                                                  definition of ‘‘Priority Customer’’ in                     6 See Securities Exchange Act Release No. 77449     63686 (October 13, 2011) (Notice of Filing and
                                                  Rule 100 (Definitions) and to add                       (March 25, 2016), 81 FR 18665 (March 31, 2016)         Immediate Effectiveness of Proposed Rule Change
                                                  Interpretations and Policies .01 thereto                (Order Approving SR–PHLX–2016–10).                     To Adopt a Definition of Professional and Require
                                                  to specify the manner in which the                         7 See BATS Exchange, Inc. (‘‘BZX’’) Rule            That All Professional Orders Be Appropriately
                                                  Exchange will calculate the number of                   16.1(a)(45) (Professional); BOX Options Exchange       Marked) (SR–BATS–2011–041); Securities
                                                                                                          LLC (‘‘BOX’’) Rule 100(a)(50) (Professional); CBOE     Exchange Act Release No. 65036 (August 4, 2011),
                                                  orders submitted by a MIAX participant                  Rule 1.1(ggg) (Professional); C2 Rule 1.1; BX          76 FR 49517, 49518 (August 10, 2011) (Notice of
                                                  to determine if such orders should be                   Chapter I, Sec. 1(49) (Professional); PHLX Rule        Filing and Immediate Effectiveness of Proposed
                                                  designated as Priority Customer 3 or                    1000(b)(14) (Professional); and Nasdaq Options         Rule Change To Adopt a Definition of
                                                  Professional Interest 4 orders. The                     Market (‘‘NOM’’) Chapter I, Sec. 1(a)(48)              ‘‘Professional’’ and Require That Professional
                                                                                                          (Professional). See also NYSE MKT LLC (‘‘NYSE          Orders Be Appropriately Marked by BOX Options
                                                  Exchange believes that the proposed                     MKT’’) Rule 900.2NY(18A) (Professional Customer);      Participants) (SR–BX–2011–049); Securities
                                                  rule change would provide additional                    and NYSE Arca, Inc. (‘‘Arca’’) Rule 6.1A(4A)           Exchange Act Release No. 60931 (November 4,
                                                  clarity in the Exchange’s Rules and                     (Professional Customer).                               2009), 74 FR 58355, 58357 (November 12, 2009)
                                                  serve to promote the purposes for which                    8 See ISE Rule 100(a)(37C) (Professional Order);    (Notice of Filing of Proposed Rule Change, as
                                                                                                          ISE Gemini, LLC (‘‘Gemini’’) Rule 100(a)(37C)          Modified by Amendment No. 1, Related to
                                                  the Exchange originally adopted its                                                                            Professional Orders) (SR–CBOE 2009–078); see also
                                                                                                          (Professional Order); and MIAX Rule 100
                                                  Priority Customer and Professional                      (Professional Interest).                               Securities Exchange Act Release 73628 (November
                                                                                                             9 See, e.g., Securities Exchange Act Release No.    18, 2014), 79 FR 69958, 69960 (November 24, 2014)
                                                     3 The term ‘‘Priority Customer’’ means a person
                                                                                                          60931 (November 4, 2009), 74 FR 58355, 58356           (Notice of Filing and Immediate Effectiveness of a
                                                  or entity that (i) is not a broker or dealer in         (November 12, 2009) (Notice of Filing of Proposed      Proposed Rule Change Relating to Professional
                                                  securities, and (ii) does not place more than 390       Rule Change, as Modified by Amendment No. 1,           Orders) (SR–CBOE–2014–085).
                                                                                                                                                                    11 See, e.g., MIAX Options Fee Schedule.
                                                  listed options orders per day on average during a       Related to Professional Orders) (SR–CBOE 2009–
mstockstill on DSK3G9T082PROD with NOTICES




                                                  calendar month for its own beneficial account(s).       078); Securities Exchange Act Release No. 59287           12 Priority Customer Orders have priority over

                                                  The term ‘‘Priority Customer Order’’ means an order     (January 23, 2009), 74 FR 5694, 5694 (January 30,      Professional Interest and all Market Maker interest
                                                  for the account of a Priority Customer. See             2009) (Notice of Filing of Amendment No. 2 and         at the same price. See Exchange Rule 514(d)
                                                  Exchange Rule 100 (Definitions).                        Order Granting Accelerated Approval of the             (Priority of Quotes and Orders); see also 515A
                                                     4 The term ‘‘Professional Interest’’ means (i) an    Proposed Rule Change, as Modified by Amendment         (MIAX Price Improvement Mechanism (‘‘PRIME’’)
                                                  order that is for the account of a person or entity     Nos. 1 and 2 Thereto, Relating to Professional         and PRIME Solicitation Mechanism) (a)(2)(iii)
                                                  that is not a Priority Customer, or (ii) an order or    Account Holders) (SR–ISE–2006–026); Securities         (PRIME Auction Order Allocation) and (b)(2)(iii)
                                                  non-priority quote for the account of a Market          Exchange Act Release No. 61802 (March 30, 2010),       (PRIME Solicitation Mechanism Order Allocation).
                                                  Maker. See Exchange Rule 100 (Definitions).             75 FR 17193, 17194 (April 5, 2010) (Notice of Filing      13 See supra note 4.




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                                                                               Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices                                                    33303

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

                                                                                                          exchanges have issued interpretive                    NYSE Acra RBO–15–03, NYSE Amex RBO–15–06
                                                  these issues and there is no common                                                                           (Professional Customer Orders) with Interpretation
                                                  interpretation across the U.S. options                  guidance, those interpretations have not              and Policy .01 to Rule 1.1(ggg); Regulatory Circular
                                                  markets. The Exchange believes that                                                                           RG09–148 (Professional Orders); ISE Regulatory
                                                  additional clarity is needed regarding                    17 See CBOE Regulatory Circular RG09–148            Information Circular 2014–007/Gemini Regulatory
                                                                                                          (Professional Orders); ISE Regulatory Information     Information Circular 2014–011 (Priority Customer
                                                  professional order counting.
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                                                                                                          Circular 2014–007/Gemini Regulatory Information       Orders and Professional Orders (FAQ)); and ISE
                                                  Accordingly, the Exchange is proposing                  Circular 2014–011 (Priority Customer Orders and       Regulatory Information Circular 2009–179 (Priority
                                                                                                          Professional Orders (FAQ)); MIAX Regulatory           Customer Orders and Professional Orders (FAQ)).
                                                    14 See Exchange Rule 100 (Professional Interest).
                                                                                                          Circular 2014–69 (Priority Customer and                 19 The Exchange notes that it does not currently
                                                  See also supra notes 11 and 12.                         Professional Interest Order Summary); NYSE Joint      accept complex orders, however as noted above, the
                                                    15 See supra notes 7 and 8.                           Regulatory Bulletin, NYSE Acra RBO–15–03, NYSE        proposed Priority Customer and Professional
                                                    16 See MIAX Regulatory Circular 2014–69               Amex RBO–15–06) (Professional Customer Orders);       Interest order counting regime will count all orders
                                                  (Priority Customer and Professional Interest Order      BOX Regulatory Circular RC–2015–21 (Professional      regardless of the options exchange on which
                                                  Summary).                                               Orders).                                              entered.



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                                                  33304                       Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices

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


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                                                                                Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices                                              33305

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




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                                                  33306                       Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices

                                                  including former market makers and                      it is consistent with Section 6(b)(5) of              rule change would help to remove
                                                  hedge funds that trade with a frequency                 the Act 32 not to afford certain market               burdens on competition and promote a
                                                  resembling that of broker-dealers. The                  participants that have access to                      more competitive marketplace by
                                                  Exchange believes that it is reasonable                 information and technology similar to                 affording certain marketplace
                                                  under the Act to treat those customers                  that of brokers and dealers of securities             advantages only to those for whom they
                                                  who meet the high level of trading                      with marketplace advantages intended                  are intended. The Exchange notes that
                                                  activity established in the proposal                    for Priority Customers. Finally, the                  one of the purposes of the rules
                                                  differently than customers who do not                   Exchange believes that the proposed                   regarding professional traders is to help
                                                  meet that threshold and are more typical                rule change sets forth a more detailed                ensure fairness in the marketplace and
                                                  retail investors to ensure that                         and clear regulatory regime with respect              promote competition among all market
                                                  professional traders do not take                        to calculating average daily order entry              participants. The Exchange believes that
                                                  advantage of priority and fee benefits                  for Priority Customer and Professional                the proposed rule change should help
                                                  intended for Priority Customers.                        Interest order counting purposes. The                 establish more competition among
                                                     The Exchange notes that it is not                    Exchange believes that this additional                market participants and promote the
                                                  unfair to differentiate between different               clarity and detail will eliminate                     purposes underlying Exchange’s Priority
                                                  types of investors in order to achieve                  confusion among market participants,                  Customer and Professional Interest
                                                  certain marketplace balances. The Rules                 which is in the interests of all investors            rules. The Exchange does not believe
                                                  currently differentiate between Priority                and the general public.                               that the Act requires it to equally
                                                  Customers, broker-dealers, Market-                         The Exchange believes that a new set               provide the same incentives and
                                                  Makers, and the like, and these                         of standards and a more detailed                      discounts to all market participants
                                                  differentiations have been recognized to                counting regime than the Exchange’s                   given as discussed above, the
                                                  be consistent with the Act.30 The                       current Priority Customer and                         distinctions among such market
                                                  Exchange believes that the current rules                Professional Interest rules provide                   participants as professional traders or
                                                  of MIAX and other exchanges that                        would allow the Exchange to better                    retail investors.
                                                  accord priority to non-broker-dealer                    compete for order flow and help ensure                   Rather than burden competition, the
                                                  customers over broker-dealers are                       deeper levels of liquidity on the                     Exchange believes that the proposed
                                                  appropriate and consistent with the Act.                Exchange. The Exchange also believes                  rule change promotes competition by
                                                  The Exchange further believes that it is                that the proposed rule change would                   ensuring that retail investors continue to
                                                  appropriate and consistent with the Act                 help to remove impediments to and                     receive the appropriate marketplace
                                                  to accord priority to only those non-                   help perfect the mechanism of a free                  benefits in the MIAX marketplace as
                                                  professional customers who on average                   and open market and a national market                 intended in the MIAX Rules, while
                                                  do not place more than one order per                    system by increasing competition in the               furthering competition among
                                                  minute (390 per day) under the counting                 marketplace. Accordingly, the Exchange                marketplace professionals by treating
                                                  regime that the Exchange proposes. The                  proposes to amend the definition of                   them in the same manner under the
                                                  Exchange believes that such                             Priority Customer under Rule 100 and                  Rules as other similarly situated market
                                                  differentiations drive competition in the               adopt a new Interpretations and Policies              participants. The proposal will
                                                  marketplace and are within the business                 thereto.                                              accomplish this by ensuring that market
                                                  judgment of the Exchange. Accordingly,                                                                        participants with similar access to
                                                                                                          B. Self-Regulatory Organization’s                     information and technology (i.e.
                                                  the Exchange also believes that its
                                                                                                          Statement on Burden on Competition                    professional traders and broker-dealers)
                                                  proposal is consistent with the
                                                  requirement of Section 6(b)(8) of the                     The Exchange does not believe that                  receive similar treatment under the
                                                  Act 31 that the rules of an exchange not                the proposed rule change will impose                  Rules, while retail investors receive the
                                                  impose an unnecessary or inappropriate                  any burden on competition that is not                 benefits of order priority and fee
                                                  burden upon competition in that it                      necessary or appropriate in furtherance               waivers that are intended to apply to
                                                  treats persons who should be deemed                     of the purposes of the Act. In this regard            Priority Customers.
                                                  industry professionals, but who may not                 and as indicated above, the Exchange
                                                                                                                                                                C. Self-Regulatory Organization’s
                                                  be so deemed under current Exchange                     notes that this rule change is
                                                                                                                                                                Statement on Comments on the
                                                  Rules, in a manner so that they do not                  substantially similar to recent CBOE and
                                                                                                                                                                Proposed Rule Change Received From
                                                  receive special priority benefits.                      PHLX filings approved by the
                                                                                                                                                                Members, Participants, or Others
                                                     Furthermore, the Exchange believes                   Commission.33 As discussed above, the
                                                  that the proposed rule change will                      Exchange does not believe that the                      Written comments were neither
                                                  protect investors and the public interest               current rules of MIAX and other                       solicited nor received.
                                                  by helping to assure that true Priority                 exchanges that accord priority to non-                III. Date of Effectiveness of the
                                                  Customers continue to receive the                       broker-dealer customers over broker-                  Proposed Rule Change and Timing for
                                                  appropriate marketplace benefits in the                 dealers are unfairly discriminatory. Nor              Commission Action
                                                  MIAX marketplace as intended, while                     does the Exchange believe that it is
                                                                                                          unfairly discriminatory to accord                        The Exchange has filed the proposed
                                                  furthering competition among
                                                                                                          priority to only those non-professional               rule change pursuant to Section
                                                  marketplace professionals by treating
                                                                                                          customers who on average do not place                 19(b)(3)(A)(iii) of the Act 34 and Rule
                                                  them in the same manner as other
                                                                                                          more than one order per minute (390                   19b–4(f)(6) thereunder.35 Because the
                                                  similarly situated professional market                                                                        proposed rule change does not: (i)
                                                  participants. The Exchange believes that                per day) under the counting regime that
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                                                                                                          the Exchange proposes.                                  34 15  U.S.C. 78s(b)(3)(A)(iii).
                                                    30 See,e.g., Securities Exchange Act Release No.        The Exchange believes that its                        35 17  CFR 240.19b–4(f)(6). In addition, Rule 19b–
                                                  59287 (January 23, 2009), 74 FR 5694, 5694 (January     proposal does not impose an undue                     4(f)(6) requires a self-regulatory organization to give
                                                  30, 2009) (Notice of Filing of Amendment No. 2 and      burden on competition. Rather, the                    the Commission written notice of its intent to file
                                                  Order Granting Accelerated Approval of the                                                                    the proposed rule change at least five business days
                                                  Proposed Rule Change, as Modified by Amendment          Exchange believes that the proposed
                                                                                                                                                                prior to the date of filing of the proposed rule
                                                  Nos. 1 and 2 Thereto, Relating to Professional                                                                change, or such shorter time as designated by the
                                                  Account Holders) (SR–ISE–2006–026).                      32 15   U.S.C. 78(b)(5).                             Commission. The Exchange has satisfied this
                                                    31 15 U.S.C. 78(b)(8).                                 33 See   supra notes 5 and 6.                        requirement.



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                                                                                   Federal Register / Vol. 81, No. 101 / Wednesday, May 25, 2016 / Notices                                                   33307

                                                  Significantly affect the protection of                     proposed rule change between the                      I. Self-Regulatory Organization’s
                                                  investors or the public interest; (ii)                     Commission and any person, other than                 Statement of the Terms of Substance of
                                                  impose any significant burden on                           those that may be withheld from the                   the Proposed Rule Change
                                                  competition; and (iii) become operative                    public in accordance with the                            Nasdaq proposes to list and trade the
                                                  prior to 30 days from the date on which                    provisions of 5 U.S.C. 552, will be                   shares of the First Trust Equity Market
                                                  it was filed, or such shorter time as the                  available for Web site viewing and                    Neutral ETF (the ‘‘Fund’’) of First Trust
                                                  Commission may designate, if                               printing in the Commission’s Public                   Exchange-Traded Fund VIII (the
                                                  consistent with the protection of                          Reference Room, 100 F Street NE.,                     ‘‘Trust’’) under Nasdaq Rule 5735
                                                  investors and the public interest, the                     Washington, DC 20549 on official                      (‘‘Managed Fund Shares’’).3 The shares
                                                  proposed rule change has become                            business days between the hours of                    of the Fund are collectively referred to
                                                  effective pursuant to Section 19(b)(3)(A)                                                                        herein as the ‘‘Shares.’’
                                                                                                             10:00 a.m. and 3:00 p.m. Copies of such
                                                  of the Act and Rule 19b-4(f)(6)(iii)
                                                  thereunder.                                                filing also will be available for                     II. Self-Regulatory Organization’s
                                                     At any time within 60 days of the                       inspection and copying at the principal               Statement of the Purpose of, and
                                                  filing of such proposed rule change, the                   office of the Exchange. All comments                  Statutory Basis for, the Proposed Rule
                                                  Commission summarily may                                   received will be posted without change;               Change
                                                  temporarily suspend such rule change if                    the Commission does not edit personal                    In its filing with the Commission,
                                                  it appears to the Commission that such                     identifying information from                          Nasdaq included statements concerning
                                                  action is necessary or appropriate in the                  submissions. You should submit only                   the purpose of, and basis for, the
                                                  public interest, for the protection of                     information that you wish to make                     proposed rule change. The text of these
                                                  investors, or otherwise in furtherance of                  available publicly. All submissions                   statements may be examined at the
                                                  the purposes of the Act. If the                            should refer to File No. SR–MIAX–                     places specified in Item IV below.
                                                  Commission takes such action, the                          2016–11, and should be submitted on or                Nasdaq has prepared summaries, set
                                                  Commission shall institute proceedings                     before June 15, 2016.                                 forth in Sections A, B, and C below, of
                                                  under Section 19(b)(2)(B) of the Act 36 to                                                                       the most significant aspects of such
                                                                                                               For the Commission, by the Division of
                                                  determine whether the proposed rule                        Trading and Markets, pursuant to delegated            statements.
                                                  change should be approved or                               authority.37
                                                  disapproved.                                                                                                     A. Self-Regulatory Organization’s
                                                                                                             Robert W. Errett,                                     Statement of the Purpose of, and
                                                  IV. Solicitation of Comments                               Deputy Secretary.                                     Statutory Basis for, the Proposed Rule
                                                    Interested persons are invited to                        [FR Doc. 2016–12235 Filed 5–24–16; 8:45 am]           Change
                                                  submit written data, views, and                            BILLING CODE 8011–01–P                                1. Purpose
                                                  arguments concerning the foregoing,
                                                  including whether the proposed rule                                                                                 The Exchange proposes to list and
                                                                                                                                                                   trade the Shares of the Fund under
                                                  change is consistent with the Act.                         SECURITIES AND EXCHANGE                               Nasdaq Rule 5735, which governs the
                                                  Comments may be submitted by any of                        COMMISSION                                            listing and trading of Managed Fund
                                                  the following methods:
                                                                                                                                                                   Shares 4 on the Exchange. The Fund will
                                                  Electronic Comments                                        [Release No. 34–77854; File No. SR–                   be an actively-managed exchange-traded
                                                    • Use the Commission’s Internet                          NASDAQ–2016–061]                                      fund (‘‘ETF’’). The Shares will be
                                                  comment form (http://www.sec.gov/                                                                                offered by the Trust, which was
                                                                                                             Self-Regulatory Organizations; The
                                                  rules/sro.shtml); or
                                                    • Send an email to rule-comments@                        NASDAQ Stock Market LLC; Notice of                       3 The Commission approved Nasdaq Rule 5735 in

                                                                                                             Filing of Proposed Rule Change                        Securities Exchange Act Release No. 57962 (June
                                                  sec.gov. Please include File No. SR–                                                                             13, 2008), 73 FR 35175 (June 20, 2008) (SR–
                                                  MIAX–2016–11 on the subject line.                          Relating To Listing and Trading of                    NASDAQ–2008–039). There are already multiple
                                                                                                             Shares of the First Trust Equity Market               actively-managed funds listed on the Exchange; see,
                                                  Paper Comments                                             Neutral ETF of the First Trust                        e.g., Securities Exchange Act Release Nos. 72506
                                                     • Send paper comments in triplicate                     Exchange-Traded Fund VIII                             (July 1, 2014), 79 FR 38631 (July 8, 2014) (SR–
                                                                                                                                                                   NASDAQ–2014–050) (order approving listing and
                                                  to Secretary, Securities and Exchange                                                                            trading of First Trust Strategic Income ETF); 69464
                                                  Commission, 100 F Street NE.,                              May 19, 2016.                                         (April 26, 2013), 78 FR 25774 (May 2, 2013) (SR–
                                                  Washington, DC 20549–1090.                                    Pursuant to Section 19(b)(1) of the                NASDAQ–2013–036) (order approving listing and
                                                                                                                                                                   trading of First Trust Senior Loan Fund); and 66489
                                                  All submissions should refer to File No.                   Securities Exchange Act of 1934                       (February 29, 2012), 77 FR 13379 (March 6, 2012)
                                                  SR–MIAX–2016–11. This file number                          (‘‘Act’’),1 and Rule 19b–4 thereunder,2               (SR–NASDAQ–2012–004) (order approving listing
                                                  should be included on the subject line                     notice is hereby given that on May 4,                 and trading of WisdomTree Emerging Markets
                                                                                                                                                                   Corporate Bond Fund). The Exchange believes the
                                                  if email is used. To help the                              2016, The NASDAQ Stock Market LLC                     proposed rule change raises no significant issues
                                                  Commission process and review your                         (‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the           not previously addressed in those prior
                                                  comments more efficiently, please use                      Securities and Exchange Commission                    Commission orders.
                                                  only one method. The Commission will                       (‘‘SEC’’ or ‘‘Commission’’) the proposed
                                                                                                                                                                      4 A Managed Fund Share is a security that

                                                  post all comments on the Commission’s                                                                            represents an interest in an investment company
                                                                                                             rule change as described in in Items I                registered under the Investment Company Act of
                                                  Internet Web site (http://www.sec.gov/                     and II below, which Items have been                   1940 (15 U.S.C. 80a–1) (the ‘‘1940 Act’’) organized
                                                  rules/sro.shtml). Copies of the                            prepared by Nasdaq. The Commission is                 as an open-end investment company or similar
                                                  submission, all subsequent                                                                                       entity that invests in a portfolio of securities
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                                                                                                             publishing this notice to solicit                     selected by its investment adviser consistent with
                                                  amendments, all written statements
                                                                                                             comments on the proposed rule change                  its investment objectives and policies. In contrast,
                                                  with respect to the proposed rule                                                                                an open-end investment company that issues Index
                                                                                                             from interested persons.
                                                  change that are filed with the                                                                                   Fund Shares, listed and traded on the Exchange
                                                  Commission, and all written                                                                                      under Nasdaq Rule 5705, seeks to provide
                                                                                                                                                                   investment results that correspond generally to the
                                                  communications relating to the                               37 17 CFR 200.30–3(a)(12).
                                                                                                                                                                   price and yield performance of a specific foreign or
                                                                                                               1 15 U.S.C. 78s(b)(1).                              domestic stock index, fixed income securities
                                                    36 15   U.S.C. 78s(b)(2)(B).                               2 17 CFR 240.19b–4.                                 index, or combination thereof.



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Document Created: 2018-02-07 15:03:42
Document Modified: 2018-02-07 15:03:42
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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