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, Issue 213 (November 3, 2016)
| Page Range | 76639-76645 | |
| FR Document | 2016-26514 |
[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] ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \3\ 15 U.S.C. 78(f)(b)(1). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \6\ See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\ 15 U.S.C. 78f(b). \10\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \11\ 15 U.S.C. 78f(b)(1) and 78f(b)(6). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \12\ See supra note 4 and 5. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \13\ See Section 3 herein, the Purpose section, for examples of conduct referred to herein. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \14\ 15 U.S.C. 78f(b)(7). \15\ 15 U.S.C. 78f(d)(1) and 78f(d)(2). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 CommentsUse 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\ --------------------------------------------------------------------------- \18\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2016-26514 Filed 11-2-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices 76639
be incentivized to minimize any III. Date of Effectiveness of the office of the Exchange. All comments
compliance issues identified in the Proposed Rule Change and Timing for received will be posted without change;
inspection. The proposed amendments Commission Action the Commission does not edit personal
to Rule 748(g) concerning the Within 45 days of the date of identifying information from
examination schedule and specifically publication of this notice in the Federal submissions. You should submit only
requiring that the inspection be Register or within such longer period (i) information that you wish to make
reasonably designed to assist in as the Commission may designate up to available publicly.
preventing and detecting violations of, All submissions should refer to File
90 days of such date if it finds such
Number SR–Phlx–2016–104 and should
and achieving compliance with, longer period to be appropriate and
be submitted on or before November 25,
applicable securities laws and publishes its reasons for so finding or 2016.
regulations and with applicable (ii) as to which the Exchange consents,
Exchange rules should assure that the Commission shall: (a) By order For the Commission, by the Division of
Trading and Markets, pursuant to delegated
inspections take place with a approve or disapprove such proposed
authority.6
predictable and adequate frequency and rule change, or (b) institute proceedings
Brent J. Fields,
are reasonably designed to identify to determine whether the proposed rule
change should be disapproved. Secretary.
violations of applicable law and rules.
[FR Doc. 2016–26511 Filed 11–2–16; 8:45 am]
The proposed amendments to Rule IV. Solicitation of Comments BILLING CODE 8011–01–P
748(h) are also designed to protect Interested persons are invited to
investors and the public interest, by submit written data, views, and
requiring the written supervisory arguments concerning the foregoing, SECURITIES AND EXCHANGE
procedures to be preserved for a period including whether the proposed rule COMMISSION
of not less than three years, the first two change is consistent with the Act. [Release No. 34–79182; File No. SR–MIAX–
in an easily accessible place, in order to Comments may be submitted by any of 2016–40]
facilitate identification of instances the following methods:
where the procedures were not Self-Regulatory Organizations; Miami
Electronic Comments International Securities Exchange LLC;
followed. Stating that the written
supervisory procedures and the system • Use the Commission’s Internet Notice of Filing and Immediate
for applying such procedures shall comment form (http://www.sec.gov/ Effectiveness of a Proposed Rule
reasonably be ‘‘designed’’ rather than rules/sro.shtml); or Change To Adopt Exchange Rule 322,
‘‘expected’’ to prevent and detect • Send an email to rule-comments@ Disruptive Quoting and Trading
violations clarifies the affirmative sec.gov. Please include File Number SR– Activity Prohibited and Exchange Rule
Phlx–2016–104 on the subject line. 1018, Expedited Suspension
nature of the member or member
Proceeding
organization’s obligations under the rule Paper Comments
when creating such procedures. • Send paper comments in triplicate October 28, 2016.
Finally, the Rule 748(h) amendment to Brent J. Fields, Secretary, Securities Pursuant to Section 19(b)(1) of the
requiring members or member and Exchange Commission, 100 F Street Securities Exchange Act of 1934
organizations to update their written NE., Washington, DC 20549–1090. (‘‘Act’’),1 and Rule 19b–4 thereunder,2
supervisory procedures following notice is hereby given that on October
All submissions should refer to File 20, 2016, Miami International Securities
changes in applicable securities laws Number SR–Phlx–2016–104. This file Exchange LLC (‘‘MIAX’’ or ‘‘Exchange’’)
and regulations, and Exchange rules number should be included on the filed with the Securities and Exchange
should promote the continued subject line if email is used. To help the Commission (‘‘SEC’’ or ‘‘Commission’’)
usefulness of the procedures in the Commission process and review your the proposed rule change as described
context of ongoing changes in the comments more efficiently, please use in Items I and II below, which Items
regulatory environment in which only one method. The Commission will have been prepared by the Exchange.
members and member organizations post all comments on the Commission’s The Commission is publishing this
conduct their business. Internet Web site (http://www.sec.gov/ notice to solicit comments on the
rules/sro.shtml). proposed rule change from interested
B. Self-Regulatory Organization’s Copies of the submission, all
Statement on Burden on Competition persons.
subsequent amendments, all written
statements with respect to the proposed I. Self-Regulatory Organization’s
The Exchange does not believe that Statement of the Terms of Substance of
rule change that are filed with the
the proposed rule change will impose the Proposed Rule Change
Commission, and all written
any burden on competition not communications relating to the
necessary or appropriate in furtherance The Exchange is filing a proposal to
proposed rule change between the adopt Exchange Rule 322, Disruptive
of the purposes of the Act. The Commission and any person, other than Quoting and Trading Activity
amendments will apply to all members those that may be withheld from the Prohibited, to clearly prohibit disruptive
and member organizations subject to public in accordance with the quoting and trading activity on the
Rule 748. provisions of 5 U.S.C. 552, will be Exchange as described below. The
available for Web site viewing and
mstockstill on DSK3G9T082PROD with NOTICES
C. Self-Regulatory Organization’s Exchange also proposes to adopt new
Statement on Comments on the printing in the Commission’s Public Exchange Rule 1018, Expedited
Proposed Rule Change Received From Reference Room, 100 F Street NE., Suspension Proceeding, to permit the
Washington, DC 20549, on official Exchange to take prompt action to
Members, Participants, or Others
business days between the hours of
No written comments were either 10:00 a.m. and 3:00 p.m. Copies of the 6 17 CFR 200.30–3(a)(12).
solicited or received. filing also will be available for 1 15 U.S.C. 78s(b)(1).
inspection and copying at the principal 2 17 CFR 240.19b–4.
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![Federal Register / Vol. 81, No. 213 / Thursday, November 3, 2016 / Notices 76645
Commission takes such action, the For the Commission, by the Division of II. Self-Regulatory Organization’s
Commission shall institute proceedings Trading and Markets, pursuant to delegated Statement of the Purpose of, and
to determine whether the proposed rule authority.18 Statutory Basis for, the Proposed Rule
should be approved or disapproved. Brent J. Fields, Change
Secretary.
IV. Solicitation of Comments In its filing with the Commission, the
[FR Doc. 2016–26514 Filed 11–2–16; 8:45 am]
Exchange included statements
Interested persons are invited to BILLING CODE 8011–01–P
concerning the purpose of and basis for
submit written data, views, and the proposed rule change and discussed
arguments concerning the foregoing, any comments it received on the
including whether the proposed rule SECURITIES AND EXCHANGE
COMMISSION proposed rule change. The text of these
change is consistent with the Act. statements may be examined at the
Comments may be submitted by any of [Release No. 34–79184; File No. SR– places specified in Item IV below. The
the following methods: BatsEDGX–2016–58] Exchange has prepared summaries, set
Electronic Comments forth in Sections A, B, and C below, of
Self-Regulatory Organizations; Bats
the most significant parts of such
• Use the Commission’s Internet EDGX Exchange, Inc.; Notice of Filing
statements.
comment form (http://www.sec.gov/ and Immediate Effectiveness of a
rules/sro.shtml); or Proposed Rule Change To Amend A. Self-Regulatory Organization’s
EDGX Rule 21.12, Clearing Member Statement of the Purpose of, and
• Send an email to rule-comments@
Give Up Statutory Basis for, the Proposed Rule
sec.gov. Please include File Number SR–
Change
MIAX–2016–40 on the subject line. October 28, 2016.
Pursuant to Section 19(b)(1) of the 1. Purpose
Paper Comments
Securities Exchange Act of 1934 (the The Exchange is proposing to amend
• Send paper comments in triplicate ‘‘Act’’),1 and Rule 19b–4 thereunder,2 Rule 21.12 (Clearing Member Give Up)
to Brent J. Fields, Secretary, Securities notice is hereby given that on October to expand upon the procedure related to
and Exchange Commission, 100 F Street 19, 2016, Bats EDGX Exchange, Inc. (the the ‘‘give up’’ of a Clearing Member by
NE., Washington, DC 20549–1090. ‘‘Exchange’’ or ‘‘EDGX’’) filed with the Exchange Users. The Exchange believes
All submissions should refer to File Securities and Exchange Commission that this proposal would result in the
Number SR–MIAX–2016–40. This file (the ‘‘Commission’’) the proposed rule fair and reasonable use of resources by
number should be included on the change as described in Items I and II both the Exchange and the User. In
subject line if email is used. To help the below, which Items have been prepared addition, the proposed change would
Commission process and review your by the Exchange. The Commission is align the Exchange with competing
comments more efficiently, please use publishing this notice to solicit options exchanges that have adopted
only one method. The Commission will comments on the proposed rule change rules consistent with this proposal.5
post all comments on the Commission’s from interested persons.
Background
Internet Web site (http://www.sec.gov/ I. Self-Regulatory Organization’s
rules/sro.shtml). Copies of the Statement of the Terms of the Substance Under current Exchange rules, Users
submission, all subsequent of the Proposed Rule Change entering transactions on the Exchange
amendments, all written statements must either be a Clearing Member or
The Exchange filed a proposal to must establish a clearing arrangement
with respect to the proposed rule
amend Rule 21.12 in order to codify the with a Clearing Member, and must have
change that are filed with the
requirement that for each transaction in a Letter of Guarantee issued by a
Commission, and all written
which the User 3 participates, the User Clearing Member. In addition, under
communications relating to the
must give up the name of the Clearing current Rule 21.12, a User must give up
proposed rule change between the
Member 4 through which the transaction the name of the Clearing Member
Commission and any person, other than
will be cleared (‘‘give up’’). through which each transaction will be
those that may be withheld from the The text of the proposed rule change
public in accordance with the cleared. Every Clearing Member accepts
is available at the Exchange’s Web site
provisions of 5 U.S.C. 552, will be financial responsibility for all EGDX
at www.batstrading.com, at the
available for Web site viewing and Options transactions made by the
principal office of the Exchange, and at
printing in the Commission’s Public guaranteed User pursuant to Rule
the Commission’s Public Reference
Reference Room, 100 F Street NE., 22.8(b) (Terms of Letter of Guarantee).
Room.
Washington, DC 20549, on official The Exchange believes the proposed
business days between the hours of 18 17
amendment will result in a more
CFR 200.30–3(a)(12).
10:00 a.m. and 3:00 p.m. Copies of the 1 15 U.S.C. 78s(b)(1).
structured and coherent streamlined
filing also will be available for 2 17 CFR 240.19b–4. give up process.
inspection and copying at the principal 3 A User is defined as ‘‘any Options member or
office of the Exchange. All comments Sponsored Participant who is authorized to obtain 5 See Securities Exchange Act Release Nos. 75642
received will be posted without change; access to the System pursuant to Rule 11.3 (August 7, 2015), 80 FR 48594 (August 13, 2015)
(Access).’’ See Exchange Rule 16.1(a)(63). (SR–NYSEMKT–2015–55) (Notice of Filing and
the Commission does not edit personal 4 A Clearing Member is defined as ‘‘an Options Immediate Effectiveness of Proposed Rule Change
identifying information from Member that is self-clearing or an Options Member Amending Rule 961 To Establish Exchange Rules
mstockstill on DSK3G9T082PROD with NOTICES
submissions. You should submit only that clears EDGX Options Transactions for other Governing the Give Up of a Clearing Member by
information that you wish to make Members of EDGX Options.’’ See Exchange Rule Users and Conforming Changes to Rules 960 and
16.1(a)(15). An Option Member is defined as ‘‘a 954NY); 72668 (July 24, 2014), 79 FR 44229 (July
available publicly. firm, or organization that is registered with the 30, 2014) (SR–CBOE–2014–048) (Order Approving
All submissions should refer to File Exchange pursuant to Chapter XVII of these Rules Proposed Rule Change Relating to the ‘‘Give Up’’
Number SR–MIAX–2016–40 and should for purposes of participating in options trading on Process, the Process by which a Trading Permit
EDGX Options as an ‘Options Order Entry Firm’ or Holder ‘‘Gives Up’’ or Selects and Indicates the
be submitted on or before November 25, ‘Options Market Maker.’ ’’ See Exchange Rule Clearing Trading Permit Holder Responsible for the
2016. 16.1(a)(38). clearance of an Exchange transaction).
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Document Created: 2016-11-03 03:24:23
Document Modified: 2016-11-03 03:24:23
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 76639 |
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