81 FR 76639 - Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt Exchange Rule 322, Disruptive Quoting and Trading Activity Prohibited and Exchange Rule 1018, Expedited Suspension Proceeding

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 213 (November 3, 2016)

[Federal Register Volume 81, Number 213 (Thursday, November 3, 2016)]
[Notices]
[Pages 76639-76645]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-26514]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79182; File No. SR-MIAX-2016-40]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Adopt Exchange Rule 322, Disruptive Quoting and 
Trading Activity Prohibited and Exchange Rule 1018, Expedited 
Suspension Proceeding

October 28, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 20, 2016, Miami International Securities Exchange LLC 
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the 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 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing a proposal to adopt Exchange Rule 322, 
Disruptive Quoting and Trading Activity Prohibited, to clearly prohibit 
disruptive quoting and trading activity on the Exchange as described 
below. The Exchange also proposes to adopt new Exchange Rule 1018, 
Expedited Suspension Proceeding, to permit the Exchange to take prompt 
action to

[[Page 76640]]

suspend Members or their clients that violate such rule.
    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 adopt new Exchange Rule 322, Disruptive 
Quoting and Trading Activity Prohibited, to clearly prohibit disruptive 
trading activity on the Exchange and to adopt a new Exchange Rule 1018, 
Expedited Suspension Proceeding, to permit the Exchange to take prompt 
action to suspend Members or their clients that violate such rule.
Background
    As a national securities exchange registered pursuant to Section 6 
of the Act, the Exchange is required to be organized and to have the 
capacity to enforce compliance by its members and persons associated 
with its members, with the Act, the rules and regulations, thereunder, 
and the Exchange's Rules. Further, the Exchange's Rules are required to 
be ``designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade . . . and, 
in general, to protect investors and the public interest.'' \3\ In 
fulfilling these requirements, the Exchange has developed a 
comprehensive regulatory program that includes automated surveillance 
of trading activity that is both operated directly by Exchange staff 
and by staff of the Financial Industry Regulatory Authority (``FINRA'') 
pursuant to a Regulatory Services Agreement (``RSA''). When disruptive 
and potentially manipulative or improper quoting and trading activity 
is identified, the Exchange or FINRA (acting as an agent of the 
Exchange) conducts an investigation into the activity, requesting 
additional information from the Member or Members involved. To the 
extent violations of the Act, the rules and regulations thereunder, or 
Exchange Rules have been identified and confirmed, the Exchange or 
FINRA, as its agent, will commence the enforcement process, which might 
result in, among other things, a censure, a requirement to take certain 
remedial actions, one or more restrictions on future business 
activities, a monetary fine, or even a temporary or permanent ban from 
the securities industry.
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    \3\ 15 U.S.C. 78(f)(b)(1).
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    The process described above, from the identification of disruptive 
and potentially manipulative or improper quoting and trading activity 
to a final resolution of the matter, can often take several years. The 
Exchange believes that this time period is generally necessary and 
appropriate to afford the subject Member adequate due process, 
particularly in complex cases. However, as described below, the 
Exchange believes that there are certain obvious and uncomplicated 
cases of disruptive and manipulative behavior or cases where the 
potential harm to investors is so large that the Exchange should have 
the authority to initiate an expedited suspension proceeding in order 
to stop the behavior from continuing on the Exchange.
    In recent years, several cases have been brought and resolved by 
exchanges and other SROs that involved allegations of wide-spread 
market manipulation, much of which was ultimately being conducted by 
foreign persons and entities using relatively rudimentary technology to 
access the markets and over which the exchanges and other SROs had no 
direct jurisdiction. In each case, the conduct involved a pattern of 
disruptive quoting and trading activity indicative of manipulative 
layering \4\ or spoofing.\5\
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    \4\ ``Layering'' is a form of market manipulation in which 
multiple, non-bona fide limit orders are entered on one side of the 
market at various price levels in order to create the appearance of 
a change in the levels of supply and demand, thereby artificially 
moving the price of the security. An order is then executed on the 
opposite side of the market at the artificially created price, and 
the non-bona fide orders are cancelled.
    \5\ ``Spoofing'' is a form of market manipulation that involves 
the market manipulator placing non-bona fide orders that are 
intended to trigger some type of market movement and/or response 
from other market participants, from which the market manipulator 
might benefit by trading bona fide orders.
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    The exchanges and other SROs were able to identify the disruptive 
quoting and trading activity in real-time or near real-time; 
nonetheless, in accordance with Exchange Rules and the Act, the Members 
responsible for such conduct or responsible for their customers' 
conduct were allowed to continue the disruptive quoting and trading 
activity on the Exchange and other exchanges during the entirety of the 
subsequent lengthy investigation and enforcement process. The Exchange 
believes that it should have the authority to initiate an expedited 
suspension proceeding in order to stop the behavior from continuing on 
the Exchange if a Member is engaging in or facilitating disruptive 
quoting and trading activity and the Member has received sufficient 
notice with an opportunity to respond, but such activity has not 
ceased.
    The following two examples are instructive on the Exchange's 
rationale for the proposed rule change.
    In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, 
Inc.) (the ``Firm'') and its CEO were barred from the industry for, 
among other things, supervisory violations related to a failure by the 
Firm to detect and prevent disruptive and allegedly manipulative 
trading activities, including layering, short sale violations, and 
anti-money laundering violations.\6\
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    \6\ See Biremis Corp. and Peter Beck, FINRA Letter of 
Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012.
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    The Firm's sole business was to provide trade execution services 
via a proprietary day trading platform and order management system to 
day traders located in foreign jurisdictions. Thus, the disruptive and 
allegedly manipulative trading activity introduced by the Firm to U.S. 
markets originated directly or indirectly from foreign clients of the 
Firm. The pattern of disruptive and allegedly manipulative quoting and 
trading activity was widespread across multiple exchanges, FINRA, and 
other SROs identified clear patterns of the behavior in 2007 and 2008. 
Although the Firm and its principals were on notice of the disruptive 
and allegedly manipulative quoting and trading activity that was 
occurring, the Firm took little to no action to attempt to supervise or 
prevent such quoting and trading activity until at least 2009. Even 
when it put some controls in place, they were deficient and the pattern 
of disruptive and allegedly manipulative trading activity continued to 
occur. As noted above, the final resolution of the enforcement action 
to bar the Firm and its CEO from the industry was not concluded until

[[Page 76641]]

2012, four years after the disruptive and allegedly manipulative 
trading activity was first identified.
    In September of 2012, Hold Brothers On-Line Investment Services, 
Inc. (the ``Firm'') settled a regulatory action in connection with the 
Firm's provision of a trading platform, trade software and trade 
execution, support and clearing services for day traders.\7\ Many 
traders using the Firm's services were located in foreign 
jurisdictions. The Firm ultimately settled the action with FINRA and 
several exchanges, for a total monetary fine of $3.4 million. In a 
separate action, the Firm settled with the Commission for a monetary 
fine of $2.5 million.\8\ Among the alleged violations in the case were 
disruptive and allegedly manipulative quoting and trading activity, 
including spoofing, layering, wash trading, and pre-arranged trading. 
Through its conduct and insufficient procedures and controls, the Firm 
also allegedly committed anti-money laundering violations by failing to 
detect and report manipulative and suspicious trading activity. The 
Firm was alleged to have not only provided foreign traders with access 
to the U.S. markets to engage in such activities, but that its 
principals also owned and funded foreign subsidiaries that engaged in 
the disruptive and allegedly manipulative quoting and trading activity. 
Although the pattern of disruptive and allegedly manipulative quoting 
and trading activity was identified in 2009, as noted above, the 
enforcement action was not concluded until 2012. Thus, although 
disruptive and allegedly manipulative quoting and trading was promptly 
detected, it continued for several years.
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    \7\ See Hold Brothers On-Line Investment Services, LLC, FINRA 
Letter of Acceptance, Waiver and Consent No. 20100237710001, 
September 25, 2012.
    \8\ In the Matter of Hold Brothers On-Line Investment Services, 
LLC, Exchange Act Release. No. 67924, September 25, 2012.
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    The Exchange also notes the current criminal proceedings that have 
commenced against Navinder Singh Sarao. Mr. Sarao's allegedly 
manipulative trading activity, which included forms of layering and 
spoofing in the futures markets, has been linked as a contributing 
factor to the ``Flash Crash'' of 2010, and yet continued through 2015.
    The Exchange believes that the activities described in the cases 
above provide justification for the proposed rule change, which is 
described below. In addition, while the examples provided are related 
to the equities market, the Exchange believes that this type of conduct 
should be prohibited for options as well. The Exchange believes that 
these patterns of disruptive and allegedly manipulative quoting and 
trading activity need to be addressed and the product should not limit 
the action taken by the Exchange.
Rule 1018--Expedited Suspension Proceeding
    The Exchange proposes to adopt new Rule 1018, titled ``Expedited 
Suspension Proceeding,'' to set forth procedures for issuing suspension 
orders, immediately prohibiting a Member from conducting continued 
disruptive quoting and trading activity on the Exchange. Importantly, 
these procedures would also provide the Exchange the authority to order 
a Member to cease and desist from providing access to the Exchange to a 
client of the Member that is conducting disruptive quoting and trading 
activity in violation of proposed Rule 322. The proposed new Rule 322 
would be titled, ``Disruptive Quoting and Trading Activity 
Prohibited.'' Under proposed paragraph (a) of Rule 1018, with the prior 
written authorization of the Chief Regulatory Officer (``CRO'') or such 
other senior officers as the CRO may designate, the Office of the 
General Counsel or Regulatory Department of the Exchange (such 
departments generally referred to as the ``Exchange'' for purposes of 
the proposed Rule 1018) may initiate an expedited suspension proceeding 
with respect to alleged violations of proposed Rule 322, which is 
proposed as part of this filing and described in detail below. Proposed 
paragraph (a) would also set forth the requirements for notice and 
service of such notice pursuant to the Rule, including the required 
method of service and the content of notice.
    Proposed paragraph (b) of Rule 1018 would govern the appointment of 
a Hearing Panel as well as potential disqualification or recusal of 
Panel Members. The proposed provision is consistent with existing 
Exchange Rule 1006(a). The proposed rule provides for a Panel Member to 
be recused in the event he or she has a conflict of interest or bias or 
other circumstances exist where his or her fairness might reasonably be 
questioned in accordance with Rule 1018(b)(2). In addition to recusal 
initiated by such a Panel Member, a party to the proceeding will be 
permitted to file a motion to disqualify a Panel Member. However, due 
to the compressed schedule pursuant to which the process would operate 
under Rule 1018, the proposed rule would require such motion to be 
filed no later than 5 days after the announcement of the Hearing Panel 
and the Exchange's brief in opposition to such motion would be required 
to be filed no later than 5 days after service thereof. Pursuant to 
existing Rule 1006(a)(3), any time a person serving on a Panel has a 
conflict of interest or bias or circumstances otherwise exist where his 
or her fairness might be reasonably questioned, the person must 
withdraw from the Panel. The applicable Panel Member shall remove 
himself or herself and the Panel Chairman may request the Chairman of 
the Business Conduct Committee to select a replacement such that the 
Hearing Panel still meets the compositional requirements described in 
Rule 1006(a).
    Under paragraph (c) of the proposed Rule, the hearing would be held 
not later than 15 days after the service of the notice initiating the 
suspension proceeding, unless otherwise extended by the Chairman of the 
Hearing Panel with the consent of the Parties for good cause shown. In 
the event of a recusal or disqualification of a Panel Member, the 
hearing shall be held not later than five days after a replacement 
Panel Member is appointed. Proposed paragraph (c) would also govern how 
the hearing is conducted, including the authority of Panel Members, 
witnesses, additional information that may be required by the Hearing 
Panel, the requirement that a transcript of the proceeding be created 
and details related to such transcript, and details regarding the 
creation and maintenance of the record of the proceeding. Proposed 
paragraph (c) would also state that if a Respondent fails to appear at 
a hearing for which it has notice, the allegations in the notice and 
accompanying declaration may be deemed admitted, and the Hearing Panel 
may issue a suspension order without further proceedings. Finally, as 
proposed, if the Exchange fails to appear at a hearing for which it has 
notice, the Hearing Panel may order that the suspension proceeding be 
dismissed.
    Under paragraph (d) of the proposed Rule, the Hearing Panel would 
be required to issue a written decision stating whether a suspension 
order would be imposed. The Hearing Panel would be required to issue 
the decision not later than 10 days after receipt of the hearing 
transcript, unless otherwise extended by the Chairman of the Hearing 
Panel with the consent of the Parties for good cause shown. The Rule 
would state that a suspension order shall be imposed if the Hearing 
Panel finds by a preponderance of the evidence that the alleged 
violation specified in the notice has occurred and that the violative 
conduct or continuation thereof is likely to result in

[[Page 76642]]

significant market disruption or other significant harm to investors.
    Proposed paragraph (d) would also describe the content, scope and 
form of a suspension order. As proposed, a suspension order shall be 
limited to ordering a Respondent to cease and desist from violating 
proposed Rule 322 and/or to ordering a Respondent to cease and desist 
from providing access to the Exchange to a client of Respondent that is 
causing violations of proposed Rule 322. Under the proposed rule, a 
suspension order shall also set forth the alleged violation and the 
significant market disruption or other significant harm to investors 
that is likely to result without the issuance of an order. The order 
shall describe in reasonable detail the act or acts the Respondent is 
to take or refrain from taking, and suspend such Respondent unless and 
until such action is taken or refrained from. Finally, the order shall 
include the date and hour of its issuance. As proposed, a suspension 
order would remain effective and enforceable unless modified, set 
aside, limited, or revoked pursuant to proposed paragraph (e), as 
described below. Finally, paragraph (d) would require service of the 
Hearing Panel's decision and any suspension order consistent with other 
portions of the proposed rule related to service.
    Proposed paragraph (e) of Rule 1018 would state that at any time 
after the Hearing Panel served the Respondent with a suspension order, 
a Party could apply to the Hearing Panel to have the order modified, 
set aside, limited, or revoked. If any part of a suspension order is 
modified, set aside, limited, or revoked, proposed paragraph (e) of 
Rule 1018 provides the Hearing Panel discretion to leave the cease and 
desist part of the order in place. For example, if a suspension order 
suspends Respondent unless and until Respondent ceases and desists 
providing access to the Exchange to a client of Respondent, and after 
the order is entered the Respondent complies, the Hearing Panel is 
permitted to modify the order to lift the suspension portion of the 
order while keeping in place the cease and desist portion of the order. 
With its broad modification powers, the Hearing Panel also maintains 
the discretion to impose conditions upon the removal of a suspension--
for example, the Hearing Panel could modify an order to lift the 
suspension portion of the order in the event a Respondent complies with 
the cease and desist portion of the order but additionally order that 
the suspension will be re-imposed if Respondent violates the cease and 
desist provisions modified order in the future. The Hearing Panel 
generally would be required to respond to the request in writing within 
10 days after receipt of the request. An application to modify, set 
aside, limit or revoke a suspension order would not stay the 
effectiveness of the suspension order.
    Finally, proposed paragraph (f) would provide that sanctions issued 
under the proposed Rule 1018 would constitute final and immediately 
effective disciplinary sanctions imposed by the Exchange, and that the 
right to have any action under the Rule reviewed by the Commission 
would be governed by Section 19 of the Act. The filing of an 
application for review would not stay the effectiveness of a suspension 
order unless the Commission otherwise ordered.
Rule 322--Disruptive Quoting and Trading Activity Prohibited
    The Exchange currently has authority to prohibit and take action 
against manipulative trading activity, including disruptive quoting and 
trading activity, pursuant to its general market manipulation rules, 
including Rules 301, Just and Equitable Principles of Trade, and 318, 
Manipulation. The Exchange proposes to adopt new Rule 322, which would 
more specifically define and prohibit disruptive quoting and trading 
activity on the Exchange. As noted above, the Exchange proposes to 
apply the proposed suspension rules to proposed Rule 322.
    Proposed Rule 322 would prohibit Members from engaging in or 
facilitating disruptive quoting and trading activity on the Exchange, 
as described in proposed Rule 322(a)(1) and (2), including acting in 
concert with other persons to effect such activity. The Exchange 
believes that it is necessary to extend the prohibition to situations 
when persons are acting in concert to avoid a potential loophole where 
disruptive quoting and trading activity is simply split between several 
brokers or customers. The Exchange believes, that with respect to 
persons acting in concert perpetrating an abusive scheme, it is 
important that the Exchange have authority to act against the parties 
perpetrating the abusive scheme, whether it is one person or multiple 
persons.
    To provide proper context for the situations in which the Exchange 
proposes to utilize its proposed authority, the Exchange believes it is 
necessary to describe the types of disruptive quoting and trading 
activity that would cause the Exchange to use its authority. 
Accordingly, the Exchange proposes to adopt Rule 322(a)(1) and (2) 
providing additional details regarding disruptive quoting and trading 
activity. Proposed Rule 322(a)(1)(i) describes disruptive quoting and 
trading activity containing many of the elements indicative of 
layering. It would describe disruptive quoting and trading activity as 
a frequent pattern in which the following facts are present: (i) A 
party enters multiple limit orders on one side of the market at various 
price levels (the ``Displayed Orders''); and (ii) following the entry 
of the Displayed Orders, the level of supply and demand for the 
security changes; and (iii) the party enters one or more orders on the 
opposite side of the market of the Displayed Orders (the ``Contra-Side 
Orders'') that are subsequently executed; and (iv) following the 
execution of the Contra-Side Orders, the party cancels the Displayed 
Orders.
    Proposed Rule 322(a)(1)(ii) describes disruptive quoting and 
trading activity containing many of the elements indicative of spoofing 
and would describe disruptive quoting and trading activity as a 
frequent pattern in which the following facts are present: (i) A party 
narrows the spread for a security by placing an order inside the 
national best bid or offer; and (ii) the party then submits an order on 
the opposite side of the market that executes against another market 
participant that joined the new inside market established by the order 
described in proposed Rule 322(a)(1)(ii)(A) that narrowed the spread. 
The Exchange believes that the proposed descriptions of disruptive 
quoting and trading activity articulated in the rule are consistent 
with the activities that have been identified and described in the 
client access cases described above. The Exchange further believes that 
the proposed descriptions will provide Members with clear descriptions 
of disruptive quoting and trading activity that will help them to avoid 
in engaging in such activities or allowing their clients to engage in 
such activities.
    The Exchange proposes to make clear in proposed Rule 322(a)(2), 
unless otherwise indicated, the descriptions of disruptive quoting and 
trading activity do not require the facts to occur in a specific order 
in order for the rule to apply. For instance, with respect to the 
pattern defined in proposed Rule 322(a)(1)(i) it is of no consequence 
whether a party first enters Displayed Orders and then Contra-side 
Orders or vice-versa. However, as proposed, it is required for supply 
and demand to change following the entry of the Displayed Orders. The 
Exchange also proposes to make clear that disruptive quoting and 
trading activity includes a

[[Page 76643]]

pattern or practice in which some portion of the disruptive quoting and 
trading activity is conducted on the Exchange and the other portions of 
the disruptive quoting and trading activity are conducted on one or 
more other exchanges. The Exchange believes that this authority is 
necessary to address market participants who would otherwise seek to 
avoid the prohibitions of the proposed Rule by spreading their activity 
amongst various execution venues. In sum, proposed Rule 322 coupled 
with proposed Rule 1018 would provide the Exchange with the authority 
to promptly act to prevent disruptive quoting and trading activity from 
continuing on the Exchange.
    Below is an example of how the proposed rule would operate.
    Assume that through its surveillance program, Exchange staff 
identifies a pattern of potentially disruptive quoting and trading 
activity. After an initial investigation the Exchange would then 
contact the Member responsible for the orders that caused the activity 
to request an explanation of the activity as well as any additional 
relevant information, including the source of the activity. If the 
Exchange were to continue to see the same pattern from the same Member 
and the source of the activity is the same or has been previously 
identified as a frequent source of disruptive quoting and trading 
activity then the Exchange could initiate an expedited suspension 
proceeding by serving notice on the Member that would include details 
regarding the alleged violations as well as the proposed sanction. In 
such a case the proposed sanction would likely be to order the Member 
to cease and desist providing access to the Exchange to the client that 
is responsible for the disruptive quoting and trading activity and to 
suspend such Member unless and until such action is taken.
    The Member would have the opportunity to be heard in front of a 
Hearing Panel at a hearing to be conducted within 15 days of the 
notice. If the Hearing Panel determined that the violation alleged in 
the notice did not occur or that the conduct or its continuation would 
not have the potential to result in significant market disruption or 
other significant harm to investors, then the Hearing Panel would 
dismiss the suspension order proceeding.
    If the Hearing Panel determined that the violation alleged in the 
notice did occur and that the conduct or its continuation is likely to 
result in significant market disruption or other significant harm to 
investors, then the Hearing Panel would issue the order including the 
proposed sanction, ordering the Member to cease providing access to the 
client at issue and suspending such Member unless and until such action 
is taken. If such Member wished for the suspension to be lifted because 
the client ultimately responsible for the activity no longer would be 
provided access to the Exchange, then such Member could apply to the 
Hearing Panel to have the order modified, set aside, limited or 
revoked. The Exchange notes that the issuance of a suspension order 
would not alter the Exchange's ability to further investigate the 
matter and/or later sanction the Member pursuant to the Exchange's 
standard disciplinary process for supervisory violations or other 
violations of Exchange rules or the Act.
    The Exchange reiterates that it already has broad authority to take 
action against a Member in the event that such Member is engaging in or 
facilitating disruptive or manipulative trading activity on the 
Exchange. For the reasons described above, and in light of recent cases 
like the client access cases described above, as well as other cases 
currently under investigation, the Exchange believes that it is equally 
important for the Exchange to have the authority to promptly initiate 
expedited suspension proceedings against any Member who has 
demonstrated a clear pattern or practice of disruptive quoting and 
trading activity, as described above, and to take action including 
ordering such Member to terminate access to the Exchange to one or more 
of such Member's clients if such clients are responsible for the 
activity.
    The Exchange recognizes that its proposed authority to issue a 
suspension order is a powerful measure that should be used very 
cautiously. Consequently, the proposed rules have been designed to 
ensure that the proceedings are used to address only the most clear and 
serious types of disruptive quoting and trading activity and that the 
interests of Respondents are protected. For example, to ensure that 
proceedings are used appropriately and that the decision to initiate a 
proceeding is made only at the highest staff levels, the proposed rules 
require the CRO or another senior officer of the Exchange to issue 
written authorization before the Exchange can institute an expedited 
suspension proceeding. In addition, the rule by its terms is limited to 
violations of Rule 322, when necessary to protect investors, other 
Members and the Exchange. The Exchange will initiate disciplinary 
action for violations of proposed Rule 322, pursuant to proposed Rule 
1018. Further, the Exchange believes that the proposed expedited 
suspension provisions described above that provide the opportunity to 
respond as well as a Hearing Panel determination prior to taking action 
will ensure that the Exchange would not utilize its authority in the 
absence of a clear pattern or practice of disruptive quoting and 
trading activity.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with 
Section 6(b) of the Act \9\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \10\ 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. Pursuant to the proposal, 
the Exchange will have a mechanism to promptly initiate expedited 
suspension proceedings in the event the Exchange believes that it has 
sufficient proof that a violation of proposed Rule 322 has occurred and 
is ongoing.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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    Further, the Exchange believes that the proposal is consistent with 
Sections 6(b)(1) and 6(b)(6) of the Act,\11\ which require that the 
rules of an exchange enforce compliance with, and provide appropriate 
discipline for, violations of the Commission and Exchange rules. The 
Exchange also believes that the proposal is consistent with the public 
interest, the protection of investors, or otherwise in furtherance of 
the purposes of the Act because the proposal helps to strengthen the 
Exchange's ability to carry out its oversight and enforcement 
responsibilities as a self-regulatory organization in cases where 
awaiting the conclusion of a full disciplinary proceeding is unsuitable 
in view of the potential harm to other Members and their customers. 
Also, the Exchange notes that if this type of conduct is allowed to 
continue on the Exchange, the Exchange's reputation could be harmed 
because it may appear to the public that the Exchange is not acting to 
address the behavior. The expedited process would enable the Exchange 
to address the behavior with greater speed.
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    \11\ 15 U.S.C. 78f(b)(1) and 78f(b)(6).
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    As explained above, the Exchange notes that it has defined the 
prohibited

[[Page 76644]]

disruptive quoting and trading activity by modifying the traditional 
definitions of layering and spoofing \12\ to eliminate an express 
intent element that would not be proven on an expedited basis and would 
instead require a thorough investigation into the activity. As noted 
throughout this filing, the Exchange believes it is necessary for the 
protection of investors to make such modifications in order to adopt an 
expedited process rather than allowing disruptive quoting and trading 
activity to occur for several years.
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    \12\ See supra note 4 and 5.
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    Through this proposal, the Exchange does not intend to modify the 
definitions of spoofing and layering that have generally been used by 
exchanges and other regulators in connection with actions like those 
cited above. The Exchange believes that the pattern of disruptive and 
allegedly manipulative quoting and trading activity was widespread 
across multiple exchanges, FINRA, and other SROs identified clear 
patterns of behavior in 2007 and 2008 in the equities markets.\13\ The 
Exchange believes that this proposal will provide the Exchange with the 
necessary means to enforce against such behavior in an expedited manner 
while providing Members with the necessary due process. The Exchange 
believes that its proposal is consistent with the Act because it 
provides the Exchange with the ability to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general to protect investors and the public interest 
from such ongoing behavior.
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    \13\ See Section 3 herein, the Purpose section, for examples of 
conduct referred to herein.
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    Further, the Exchange believes that adopting a rule applicable to 
market participants is consistent with the Act because it provides the 
Exchange with the ability to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general to protect investors and the public interest from such 
ongoing behavior.
    Further, the Exchange believes that adopting a rule applicable to 
market participants is consistent with the Act because the Exchange 
believes that this type of behavior should be prohibited for all 
Members. The type of product should not be the determining factor, 
rather the behavior which challenges the market structure is the 
primary concern for the Exchange. While this behavior may not be as 
prevalent on the options market today, the Exchange does not believe 
that the possibility of such behavior in the future would not have the 
same market impact and thereby warrant an expedited process.
    The Exchange further believes that the proposal is consistent with 
Section 6(b)(7) of the Act,\14\ which requires that the rules of an 
exchange ``provide a fair procedure for the disciplining of members and 
persons associated with members . . . and the prohibition or limitation 
by the exchange of any person with respect to access to services 
offered by the exchange or a member thereof.'' Finally, the Exchange 
also believes the proposal is consistent with Sections 6(d)(1) and 
6(d)(2) of the Act,\15\ which require that the rules of an exchange 
with respect to a disciplinary proceeding or proceeding that would 
limit or prohibit access to or membership in the exchange require the 
exchange to: Provide adequate and specific notice of the charges 
brought against a member or person associated with a member, provide an 
opportunity to defend against such charges, keep a record, and provide 
details regarding the findings and applicable sanctions in the event a 
determination to impose a disciplinary sanction is made. The Exchange 
believes that each of these requirements is addressed by the notice and 
due process provisions included within Rule 1018. Importantly, as noted 
above, the Exchange will use the authority only in clear and egregious 
cases when necessary to protect investors, other Members and the 
Exchange, and in such cases, the Respondent will be afforded due 
process in connection with the suspension proceedings.
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    \14\ 15 U.S.C. 78f(b)(7).
    \15\ 15 U.S.C. 78f(d)(1) and 78f(d)(2).
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    Further, the Exchange believes that adopting a rule applicable to 
options is consistent with the Act because the Exchange believes that 
this type of behavior should be prohibited for all Members. The type of 
product should not be the determining factor, rather the behavior which 
challenges the market structure is the primary concern for the 
Exchange. While this behavior may not be as prevalent on the options 
market today, the Exchange does not believe that the possibility of 
such behavior in the future would not have the same market impact and 
thereby warrant an expedited process.

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. To the contrary, the 
Exchange believes that each self-regulatory organization should be 
empowered to regulate trading occurring on its market consistent with 
the Act and without regard to competitive issues. The Exchange is 
requesting authority to take appropriate action if necessary for the 
protection of investors, other Members and the Exchange. The Exchange 
also believes that it is important for all exchanges to be able to take 
similar action to enforce their rules against manipulative conduct 
thereby leaving no exchange prey to such conduct.
    The Exchange does not believe that the proposed rule change imposes 
an undue burden on competition, rather this process will provide the 
Exchange with the necessary means to enforce against violations of 
manipulative quoting and trading activity in an expedited manner, while 
providing Members with the necessary due process. The Exchange's 
proposal would treat all Members in a uniform manner with respect to 
the type of disciplinary action that would be taken for violations of 
manipulative quoting and trading activity.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) \17\ 
thereunder.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the 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

[[Page 76645]]

Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-MIAX-2016-40 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MIAX-2016-40. 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 the 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 Number SR-MIAX-2016-40 and 
should be submitted on or before November 25, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-26514 Filed 11-2-16; 8:45 am]
BILLING CODE 8011-01-P