83 FR 37849 - Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 518, Complex Orders

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 149 (August 2, 2018)

Page Range		37849-37853
FR Document		2018-16528
Federal Register, Volume 83 Issue 149 (Thursday, August 2, 2018)
[Federal Register Volume 83, Number 149 (Thursday, August 2, 2018)]
[Notices]
[Pages 37849-37853]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-16528]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83726; File No. SR-MIAX-2018-16]


Self-Regulatory Organizations; Miami International Securities 
Exchange LLC; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend Exchange Rule 518, Complex Orders

July 27, 2018.
    Pursuant to the provisions of Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on July 16, 2018, Miami International Securities 
Exchange, LLC (``MIAX Options'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the Exchange. The Commission is publishing this notice to 
solicit 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 amend Exchange Rule 518, 
Complex Orders, to update its rule text regarding stock-option orders, 
in connection with the upcoming launch of such orders on the Exchange.
    The text of the proposed rule change is available on the Exchange's 
website at http://www.miaxoptions.com/rule-filings/ at MIAX Options' 
principal office, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend Exchange Rule 518, Complex Orders, 
to update its rule text regarding stock-option orders, in connection 
with the upcoming launch of such orders on the Exchange. In particular, 
the Exchange is proposing to (i) adopt new rule text to introduce a new 
price protection feature for certain stock-option strategies, (ii) 
delete certain existing rule text to eliminate an unnecessary execution 
price restriction for the stock component of a stock-option strategy, 
and (iii) make certain minor clarifying edits to existing rule text.
    Complex orders began trading on the Exchange on October 24, 
2016.\3\ In its rule filing to establish the trading of complex orders, 
the Exchange adopted rules for handling stock-option orders.\4\ The 
Exchange also indicated that it would determine when stock-option 
orders would be made available for trading in the System \5\ and would 
communicate such determination to Members \6\ via Regulatory 
Circular.\7\ The Exchange is now proposing to make certain changes to 
its rule text, in connection with the upcoming launch of such orders on 
the Exchange, which is scheduled for the third quarter of 2018.
---------------------------------------------------------------------------

    \3\ See MIAX Regulatory Circular 2016-43, October 20, 2016.
    \4\ See Securities Exchange Act Release No. 79072 (October 7, 
2016), 81 FR 71131 (October 14, 2016) (SR-MIAX-2016-26).
    \5\ The term ``System'' means the automated trading system used 
by the Exchange for the trading of securities. See Exchange Rule 
100.
    \6\ The term ``Member'' means an individual or organization 
approved to exercise the trading rights associated with a Trading 
Permit. Members are deemed ``members'' under the Exchange Act. See 
Exchange Rule 100.
    \7\ See supra note 4.
---------------------------------------------------------------------------

    Currently, the Exchange provides price protection for certain 
complex option trading strategies such as Vertical Spreads \8\ and 
Calendar Spreads \9\ to prevent executions at potentially erroneous 
prices. Specifically, the Exchange provides a Vertical Spread Variance 
(``VSV'') price protection and a Calendar Spread Variance (``CSV'') 
price protection. The VSV establishes minimum and maximum trading price 
limits for Vertical Spreads.\10\ The CSV establishes a minimum trading 
price limit for Calendar Spreads.\11\ If the execution price of a 
complex order would be outside of the limits established for Vertical 
Spreads and Calendar Spreads, such complex order will be placed on the 
Strategy Book and will be managed to the appropriate trading price 
limit as described in Rule 518(c)(4), Managed Interest Process for 
Complex Orders. Orders to buy below the minimum trading price limit and 
orders to sell above the maximum trading price limit (in the case of 
Vertical Spreads) will be rejected by the System.\12\
---------------------------------------------------------------------------

    \8\ A ``Vertical Spread'' is a complex strategy consisting of 
the purchase of one call (put) option and the sale of another call 
(put) option overlying the same security that have the same 
expiration but different strike prices. See Exchange Rule 518.05(a).
    \9\ A ``Calendar Spread'' is a complex strategy consisting of 
the purchase of one call (put) option and the sale of another call 
(put) option overlying the same security that have different 
expirations but the same strike price. See Exchange Rule 518.05(b).
    \10\ See Exchange Rule 518.05(a).
    \11\ See Exchange Rule 518.05(b).
    \12\ See Exchange Rule 518.05(c).
---------------------------------------------------------------------------

    The Exchange now proposes to adopt new subsection (g) in Rule 518, 
Interpretations and Policies .01, to provide a price protection feature 
for certain stock-option strategies that have a single option component 
tied to a stock component with a standard deliverable.\13\ The proposed 
price protection feature, named ``Parity Price Protection,'' will 
provide price protection for strategies that consist of a

[[Page 37850]]

sale of one call \14\ and the purchase of one hundred shares of the 
underlying stock (``Buy-Write'') and the contra side of the strategy, 
or that consist of the purchase of one put \15\ and the purchase of one 
hundred shares of the underlying stock (``Married-Put'') and the contra 
side of the strategy. The Exchange will establish a Parity Spread 
Variance (``PSV'') value between $0.00 and $0.50. The PSV value will be 
uniform for all option classes traded on the Exchange as determined by 
the Exchange and communicated to Members via Regulatory Circular prior 
to accepting such orders on the Exchange. The PSV will be used to 
calculate a minimum option trading price limit that the System will 
prevent the option leg from trading below by applying the PSV value to 
the strike price of the option to establish a parity protected price 
for the strategy. For call option legs, the PSV value is added to the 
strike price of the option; for put option legs, the PSV value is 
subtracted from the strike price of the option. The System will then 
prevent the strategy from trading below its parity protected price 
limit to ensure that the strategy does not execute at a potentially 
erroneous price.
---------------------------------------------------------------------------

    \13\ The standard stock deliverable is 100 shares.
    \14\ The term ``call'' means an option contract under which the 
holder of the option has the right, in accordance with the terms of 
the option, to purchase from the Clearing Corporation the number of 
units of the underlying security covered by the option contract. See 
Exchange Rule 100.
    \15\ The term ``put'' means an option contract under which the 
holder of the option has the right, in accordance with the terms and 
provisions of the option, to sell to the Clearing Corporation the 
number of units of the underlying security covered by the option 
contract. See Exchange Rule 100.
---------------------------------------------------------------------------

    The examples below provide an illustration of how the protection is 
calculated for Buy-Write and Married-Put strategies. For the purposes 
of the following examples the PSV used in the calculations is $.10.
    Following is an example of the operation of the price protection 
feature for a Married-Put Strategy:
Example 1 (Married-Put)
    In its simplest terms the parity price of a put option can be 
expressed as (Strike Price - Stock Price = Put Option Parity Price). 
If, for example, the stock is trading at $45.00 and the Strike Price of 
the put option is $50.00, the parity price of the put option would then 
be $5.00 ($50.00 - $45.00 = $5.00). The Exchange is able to leverage 
the parity relationship between the components to establish a minimum 
option trading price limit for Married-Put Strategies by simply 
subtracting the PSV from the strike price of the option. The effect on 
the option price can be seen in the following calculation (($50.00 - 
$0.10) - $45.00 = $49.90 - $45.00 = $4.90). The Exchange will calculate 
the parity protected price for a Married-Put Strategy by leveraging the 
put option parity formula by simply subtracting the PSV from the strike 
price of the option. This would result in a parity protected price for 
the strategy of $49.90 using the figures above.
    This allows for the stock component and the option component prices 
to fluctuate to achieve the strategy's net price, but ensures that the 
strategy will not trade below its parity protected price. Married Put 
Strategy interest received to sell a price protected Married-Put 
Strategy below $49.90 will be placed on the Strategy Book \16\ at 
$49.90. Married Put Strategy interest received to buy a price protected 
Married-Put Strategy below $49.90 will be rejected.
---------------------------------------------------------------------------

    \16\ The ``Strategy Book'' is the Exchange's electronic book of 
complex orders and complex quotes. See Exchange Rule 518(a)(17).
---------------------------------------------------------------------------

Example 2 (Buy-Write)
    In its simplest terms the parity price of a call option can be 
expressed as (Stock Price - Strike Price = Call Option Parity Price). 
If, for example, the stock is trading at $45.00 and the Strike Price of 
the call option is $40.00, the parity price of the call option would 
then be $5.00 ($45.00 - $40.00 = $5.00). The Exchange is able to 
leverage the parity relationship between the components to establish a 
minimum option trading price limit for Buy-Write Strategies by adding 
the PSV to the strike price of the option. The effect on the option 
price can be seen in the following calculation ($45.00 - ($40.00 + 
$.10) = $45.00 - $40.10 = $4.90). The Exchange will calculate the 
parity protected price for a Buy-Write Strategy by leveraging the call 
option parity formula by simply adding the PSV to the strike price of 
the option. This would result in a parity protected price for the 
strategy of $40.10 net debit using the figures above.
    This allows for the stock component and the option component prices 
to fluctuate to achieve the strategy's net price, but ensures that the 
strategy will not trade below its parity protected price. Buy-Write 
strategy interest received to sell a price protected Buy-Write Strategy 
below $40.10 net debit will be placed on the Strategy Book at $40.10 
net debit.\17\ Buy-Write strategy interest received to buy a price 
protected Buy-Write Strategy below $40.10 net debit will be rejected.
---------------------------------------------------------------------------

    \17\ A seller of the strategy would receive a $40.10 net credit.
---------------------------------------------------------------------------

    Second, the Exchange proposes to delete certain existing rule text 
from Exchange Rule 518, Interpretations and Policies .01, subsection 
(b), to eliminate an unnecessary execution price restriction for the 
stock component of a stock-option strategy. Exchange Rule 518, 
Interpretations and Policies .01 subsection (b), contains a paragraph 
that provides that, ``[t]he execution price of the underlying security 
component must be also within the high-low range for the day in the 
underlying security at the time the stock-option order is processed and 
within a certain price from the current market, which the Exchange will 
establish and communicate to Members via Regulatory Circular. If the 
underlying security component price is not within these parameters, the 
stock-option order is not executable.'' \18\ The Exchange does not 
believe that this execution price restriction for the stock component 
is necessary given the existing price protections already in place on 
the Exchange.
---------------------------------------------------------------------------

    \18\ See Exchange Rule 518, Interpretations and Policies .01(b).
---------------------------------------------------------------------------

    The Exchange believes that the execution price restriction for the 
stock component of a stock-option strategy is unnecessary because all 
complex orders on the Exchange, including stock-option orders, receive 
Implied Complex MIAX Best Bid or Offer (``icMBBO'') protection.\19\ The 
icMBBO is a calculation that uses the best price from the Simple Order 
Book for each component of a complex strategy including displayed and 
non-displayed trading interest. For stock-option orders, the icMBBO for 
a complex strategy is calculated using the best price (whether 
displayed or non-displayed) on the Simple Order Book \20\ in the 
individual option component(s), and the NBBO \21\ in the stock 
component.\22\ Exchange Rule 518(c)(2)(ii) provides, in relevant part, 
that incoming complex orders and quotes will not be executed at prices 
inferior to the icMBBO or at a price that is equal to the icMBBO when 
there is a Priority Customer Order (as defined in Rule 100) at the best 
icMBBO price. Further, the rule provides that complex orders will never 
be executed at a price that is outside of the individual component 
prices on the Simple Order Book, and the net price of a complex order 
executed against another complex order on the Strategy Book will never 
be

[[Page 37851]]

inferior to the price that would be available if the complex order 
legged into the Simple Order Book. Accordingly, as a result of the 
icMBBO price protection feature, the execution price for the stock 
component of a stock-option order will always be inside the NBBO of the 
stock. Therefore, rule text stating that the execution price of the 
underlying security component must be within the high-low range for the 
day is unnecessary, as the icMBBO protection ensures that executions 
are always within the NBBO.
---------------------------------------------------------------------------

    \19\ See Exchange Rule 518(a)(11).
    \20\ The ``Simple Order Book'' is the Exchange's regular 
electronic book of orders and quotes. See Exchange Rule 518(a)(15).
    \21\ The term ``NBBO'' means the national best bid or offer as 
calculated by the Exchange based on market information received by 
the Exchange from the appropriate Securities Information Processor 
(``SIP''). See Exchange Rule 518(a)(14).
    \22\ See Exchange Rule 518(a)(11).
---------------------------------------------------------------------------

    Finally, the Exchange proposes to make a number of minor, non-
substantive edits to Rule 518, Interpretations and Policies .05(e), to 
add clarity and precision to the Exchange's rule text. Since the 
Exchange will be introducing the trading of complex strategies which 
include a ``stock'' component, the Exchange seeks to clarify certain 
aspects of the rule that are intended to apply only to the ``option'' 
component of a complex strategy. Specifically, the Exchange proposes to 
clarify the definition of a Wide Market Condition, as described in 
Interpretations and Policies .05, subsection (e)(1), so that it is 
clear that it is only applying to the ``option'' component of a complex 
strategy. The new proposed rule text will provide that, ``[a] `wide 
market condition' is defined as any individual option component of a 
complex strategy having, at the time of evaluation, an MBBO \23\ quote 
width that is wider than the permissible valid quote width as defined 
in Rule 603(b)(4).'' By definition, the MBBO is comprised of option 
interest only, therefore providing additional detail to the existing 
rule adds clarity to the Exchange's rules.
---------------------------------------------------------------------------

    \23\ The term ``MBBO'' means the best bid or offer on the Simple 
Order Book on the Exchange. See Exchange Rule 518(a)(13).
---------------------------------------------------------------------------

    Similarly, the Exchange proposes to clarify that Simple Market 
Auction or Timer Events (``SMAT Events'') pertain only to ``option'' 
components of a complex strategy, by amending Interpretations and 
Policies .05, subsection (e)(2)(i) and (e)(2)(ii), to include the term 
``option component'' in the first sentence of each section. By 
definition, the Exchange's Simple Market is comprised of option 
interest only, on the Simple Order Book, therefore providing additional 
detail to the existing rule adds clarity to the Exchange's rules.
2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with Section 6(b) of the Act \24\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \25\ 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.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78f(b).
    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes establishing a parity price protection for 
certain Buy-Write and Married-Put strategies promotes just and 
equitable principles of trade and removes impediments to and perfects 
the mechanisms of a free and open market and a national market system 
and, in general, protects investors and the public interest by ensuring 
that strategies are not executed at potentially erroneous prices.
    Given the relationship that the stock price, strike price, and 
option price have to each other, the Exchange is able to calculate a 
minimum option trading price limit for the option leg of certain stock-
option strategies with a call or a put component. Specifically, the 
parity price of a call option can be derived by subtracting the strike 
price from the stock price (Stock Price - Strike Price = Call Option 
Parity Price); and the parity price of a put option can be derived by 
subtracting the stock price from the strike price (Strike Price - Stock 
Price = Put Option Parity Price). Using these relationships the PSV may 
be applied to establish a minimum option trading price limit that the 
System will prevent the option leg from trading below to establish a 
parity protected price for the strategy to ensure the strategy does not 
trade below its parity protected price at a potentially erroneous 
price.
    The Exchange believes that Members will benefit from the proposed 
risk protection measure as the protection ensures that these stock-
option strategies are not executed below their parity protected price 
as calculated by the Exchange. Consequently, the proposed risk 
protection is designed to encourage Members to submit additional order 
flow and liquidity to the Exchange in these strategies, thereby 
removing impediments to and perfecting the mechanisms of a free and 
open market and a national market system and, in general, protecting 
investors and the public interest. This protection should provide 
Members with confidence that protections are in place on the Exchange 
to reduce the risk of these strategies being executed at potentially 
erroneous prices. As a result, the Exchange believes that the proposed 
price protection feature will promote just and equitable principles of 
trade.
    Additionally the Exchange's proposal to remove unnecessary rule 
text from its current rule which requires that the execution price of 
the underlying security component be within the high-low range for the 
day in the underlying security at the time the stock-option order is 
processed is consistent with Section 6(b) of the Act \26\ in general, 
and furthers the objectives of Section 6(b)(5) of the Act \27\ in 
particular. The Exchange believes that its existing icMBBO price 
protection feature will sufficiently guard against potentially 
erroneous transaction prices for complex strategies which include an 
underlying stock component. The icMBBO for a complex strategy involving 
a stock component is calculated using the best price on the Simple 
Order Book in the individual option component(s) and the NBBO in the 
stock component.\28\ Every complex order entered on the Exchange 
receives the icMBBO price protection \29\ and as a result, the 
execution price for the stock component of a stock-option order will 
always be inside the NBBO of the stock. Removal of the unnecessary rule 
text will protect investors and the public interest by providing 
clarity and precision in the Exchange's rules. Further, the Exchange 
notes that other exchanges that offer stock-option orders do not have 
this provision in their rules.\30\
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ See supra note 21.
    \29\ See supra note 19.
    \30\ See CBOE Rule 6.53C.06 and NASDAQ ISE Rule 722.
---------------------------------------------------------------------------

    Finally, the Exchange proposes to make minor non-substantive 
changes to its rule to clarify that Wide Market Conditions and Simple 
Market Auction or Timer Events on the Exchange are related to the 
``option'' components only for complex strategies. The Exchange 
believes the proposed changes promote just and equitable principles of 
trade, remove impediments to and perfect the mechanism of a free and 
open market and a national market system because they seek to add 
clarity and precision to the Exchange's rules. The Exchange believes 
that the proposed rule changes will provide greater clarity to Members 
and the public regarding the Exchange's Rules, and it is in the public 
interest for rules to be accurate and concise so as to eliminate the 
potential for confusion.

[[Page 37852]]

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 not necessary or appropriate in 
furtherance of the purposes of the Act. The Exchange believes the 
proposed rule change will foster competition as it provides a risk 
protection mechanism for certain complex strategies entered on the 
Exchange and may promote competition by enabling Members to trade more 
aggressively on the Exchange knowing that these strategies will not be 
executed below [sic] parity protected price at potentially erroneous 
prices. Accordingly, the price protection feature should instill 
additional confidence in Members that submit certain stock-option 
orders to the Exchange that their orders receive price protection, and 
thus should encourage Members to submit additional order flow and 
liquidity to the Exchange, thereby removing impediments to and 
perfecting the mechanisms of a free and open market and a national 
market system and, in general, protecting investors and the public 
interest.
    The removal of unnecessary rule text pertaining to the execution 
price of the stock component of a stock-option order does not impose 
any burden on competition as the proposed change will align the 
Exchange's rule with that of other exchanges.\31\ Further, the 
additional proposed changes remedy minor non-substantive issues in the 
text of various rules identified in this proposal.
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

    The Exchange does not believe the proposed rule change will impose 
any burden on intra-market competition as price protection is available 
to all market participants that submit orders in certain stock-option 
strategies. The Exchange further believes that the proposed price 
protection should promote inter-market competition, and result in more 
competitive order flow to the Exchange by protecting market 
participants from potentially erroneous executions occurring at prices 
below the parity protected price of the strategy, as calculated by the 
Exchange.
    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, and believes the proposed 
change will enhance competition.
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 \32\ and Rule 19b-4(f)(6) \33\ 
thereunder.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(3)(A).
    \33\ 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.
---------------------------------------------------------------------------

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \34\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \35\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay. The 
Exchange states that waiver of the operative delay is consistent with 
the protection of investors and the public interest because it will 
enable market participants to benefit from the proposed parity price 
protection feature, which is designed to safeguard against the 
possibility of executions occurring at potentially erroneous prices. 
MIAX also states that the proposal protects investors and the public 
interest by deleting a provision requiring the execution price of the 
underlying security component of a stock-option order to be within the 
underlying component's high-low range for the day. MIAX notes that this 
provision is unnecessary because all complex orders on MIAX are 
protected by the icMBBO price protection feature, which assures that 
the stock leg of a stock-option order will not be executed at a price 
that is inferior to the NBBO for the stock. The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest because the proposed 
parity price protection feature is designed to prevent Buy-Write and 
Married Put strategies from executing at potentially erroneous prices. 
As noted above, Buy-Write and Married Put interest to buy that is 
priced below the parity protected price for the strategy will be 
rejected, and Buy-Write and Married Put interest to sell that is priced 
below the parity protected price will be placed on the Strategy Book at 
the parity protected price for the strategy. Therefore, the Commission 
hereby waives the operative delay and designates the proposed rule 
change as operative upon filing.\36\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.19b-4(f)(6).
    \35\ 17 CFR 240.19b-4(f)(6)(iii).
    \36\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    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 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-2018-16 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-2018-16. 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 website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent

[[Page 37853]]

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 website 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. Persons submitting comments are cautioned that we do 
not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
MIAX-2018-16 and should be submitted on or before August 23, 2018.
---------------------------------------------------------------------------

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

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-16528 Filed 8-1-18; 8:45 am]
BILLING CODE 8011-01-P
37850 Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices

sale of one call 14 and the purchase of ¥ $45.00 = $49.90 ¥ $45.00 = $4.90). Exchange Rule 518, Interpretations and
one hundred shares of the underlying The Exchange will calculate the parity Policies .01, subsection (b), to eliminate
stock (‘‘Buy-Write’’) and the contra side protected price for a Married-Put an unnecessary execution price
of the strategy, or that consist of the Strategy by leveraging the put option restriction for the stock component of a
purchase of one put 15 and the purchase parity formula by simply subtracting the stock-option strategy. Exchange Rule
of one hundred shares of the underlying PSV from the strike price of the option. 518, Interpretations and Policies .01
stock (‘‘Married-Put’’) and the contra This would result in a parity protected subsection (b), contains a paragraph that
side of the strategy. The Exchange will price for the strategy of $49.90 using the provides that, ‘‘[t]he execution price of
establish a Parity Spread Variance figures above. the underlying security component
(‘‘PSV’’) value between $0.00 and $0.50. This allows for the stock component must be also within the high-low range
The PSV value will be uniform for all and the option component prices to for the day in the underlying security at
option classes traded on the Exchange fluctuate to achieve the strategy’s net the time the stock-option order is
as determined by the Exchange and price, but ensures that the strategy will processed and within a certain price
communicated to Members via not trade below its parity protected from the current market, which the
Regulatory Circular prior to accepting price. Married Put Strategy interest Exchange will establish and
such orders on the Exchange. The PSV received to sell a price protected communicate to Members via
will be used to calculate a minimum Married-Put Strategy below $49.90 will Regulatory Circular. If the underlying
option trading price limit that the be placed on the Strategy Book 16 at security component price is not within
System will prevent the option leg from $49.90. Married Put Strategy interest these parameters, the stock-option order
trading below by applying the PSV received to buy a price protected is not executable.’’ 18 The Exchange
value to the strike price of the option to Married-Put Strategy below $49.90 will does not believe that this execution
establish a parity protected price for the be rejected. price restriction for the stock
strategy. For call option legs, the PSV Example 2 (Buy-Write) component is necessary given the
value is added to the strike price of the existing price protections already in
option; for put option legs, the PSV In its simplest terms the parity price place on the Exchange.
value is subtracted from the strike price of a call option can be expressed as The Exchange believes that the
of the option. The System will then (Stock Price ¥ Strike Price = Call execution price restriction for the stock
prevent the strategy from trading below Option Parity Price). If, for example, the component of a stock-option strategy is
its parity protected price limit to ensure stock is trading at $45.00 and the Strike unnecessary because all complex orders
that the strategy does not execute at a Price of the call option is $40.00, the on the Exchange, including stock-option
potentially erroneous price. parity price of the call option would orders, receive Implied Complex MIAX
The examples below provide an then be $5.00 ($45.00 ¥ $40.00 = Best Bid or Offer (‘‘icMBBO’’)
illustration of how the protection is $5.00). The Exchange is able to leverage protection.19 The icMBBO is a
calculated for Buy-Write and Married- the parity relationship between the calculation that uses the best price from
Put strategies. For the purposes of the components to establish a minimum the Simple Order Book for each
following examples the PSV used in the option trading price limit for Buy-Write component of a complex strategy
calculations is $.10. Strategies by adding the PSV to the including displayed and non-displayed
Following is an example of the strike price of the option. The effect on trading interest. For stock-option orders,
operation of the price protection feature the option price can be seen in the the icMBBO for a complex strategy is
for a Married-Put Strategy: following calculation ($45.00 ¥ ($40.00 calculated using the best price (whether
+ $.10) = $45.00 ¥ $40.10 = $4.90). The displayed or non-displayed) on the
Example 1 (Married-Put) Exchange will calculate the parity Simple Order Book 20 in the individual
In its simplest terms the parity price protected price for a Buy-Write Strategy option component(s), and the NBBO 21
of a put option can be expressed as by leveraging the call option parity in the stock component.22 Exchange
(Strike Price ¥ Stock Price = Put Option formula by simply adding the PSV to Rule 518(c)(2)(ii) provides, in relevant
Parity Price). If, for example, the stock the strike price of the option. This part, that incoming complex orders and
is trading at $45.00 and the Strike Price would result in a parity protected price quotes will not be executed at prices
of the put option is $50.00, the parity for the strategy of $40.10 net debit using inferior to the icMBBO or at a price that
price of the put option would then be the figures above. is equal to the icMBBO when there is a
$5.00 ($50.00 ¥ $45.00 = $5.00). The This allows for the stock component Priority Customer Order (as defined in
Exchange is able to leverage the parity and the option component prices to Rule 100) at the best icMBBO price.
relationship between the components to fluctuate to achieve the strategy’s net Further, the rule provides that complex
establish a minimum option trading price, but ensures that the strategy will orders will never be executed at a price
price limit for Married-Put Strategies by not trade below its parity protected that is outside of the individual
simply subtracting the PSV from the price. Buy-Write strategy interest component prices on the Simple Order
strike price of the option. The effect on received to sell a price protected Buy- Book, and the net price of a complex
the option price can be seen in the Write Strategy below $40.10 net debit order executed against another complex
following calculation (($50.00 ¥ $0.10) will be placed on the Strategy Book at order on the Strategy Book will never be
$40.10 net debit.17 Buy-Write strategy
14 The term ‘‘call’’ means an option contract interest received to buy a price 18 See Exchange Rule 518, Interpretations and

under which the holder of the option has the right, protected Buy-Write Strategy below Policies .01(b).
in accordance with the terms of the option, to 19 See Exchange Rule 518(a)(11).
$40.10 net debit will be rejected.
daltland on DSKBBV9HB2PROD with NOTICES

purchase from the Clearing Corporation the number Second, the Exchange proposes to 20 The ‘‘Simple Order Book’’ is the Exchange’s

of units of the underlying security covered by the regular electronic book of orders and quotes. See
option contract. See Exchange Rule 100. delete certain existing rule text from Exchange Rule 518(a)(15).
15 The term ‘‘put’’ means an option contract under 21 The term ‘‘NBBO’’ means the national best bid
16 The ‘‘Strategy Book’’ is the Exchange’s or offer as calculated by the Exchange based on
which the holder of the option has the right, in
accordance with the terms and provisions of the electronic book of complex orders and complex market information received by the Exchange from
option, to sell to the Clearing Corporation the quotes. See Exchange Rule 518(a)(17). the appropriate Securities Information Processor
number of units of the underlying security covered 17 A seller of the strategy would receive a $40.10 (‘‘SIP’’). See Exchange Rule 518(a)(14).
by the option contract. See Exchange Rule 100. net credit. 22 See Exchange Rule 518(a)(11).

VerDate Sep<11>2014 17:06 Aug 01, 2018 Jkt 244001 PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 E:\FR\FM\02AUN1.SGM 02AUN1
Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices 37851

inferior to the price that would be Section 6(b) of the Act 24 in general, and with confidence that protections are in
available if the complex order legged furthers the objectives of Section 6(b)(5) place on the Exchange to reduce the risk
into the Simple Order Book. of the Act 25 in particular, in that it is of these strategies being executed at
Accordingly, as a result of the icMBBO designed to prevent fraudulent and potentially erroneous prices. As a result,
price protection feature, the execution manipulative acts and practices, to the Exchange believes that the proposed
price for the stock component of a stock- promote just and equitable principles of price protection feature will promote
option order will always be inside the trade, to foster cooperation and just and equitable principles of trade.
NBBO of the stock. Therefore, rule text coordination with persons engaged in Additionally the Exchange’s proposal
stating that the execution price of the facilitating transactions in securities, to to remove unnecessary rule text from its
underlying security component must be remove impediments to and perfect the current rule which requires that the
within the high-low range for the day is mechanisms of a free and open market execution price of the underlying
unnecessary, as the icMBBO protection and a national market system and, in security component be within the high-
ensures that executions are always general, to protect investors and the low range for the day in the underlying
within the NBBO. public interest. security at the time the stock-option
Finally, the Exchange proposes to The Exchange believes establishing a order is processed is consistent with
make a number of minor, non- parity price protection for certain Buy- Section 6(b) of the Act 26 in general, and
substantive edits to Rule 518, Write and Married-Put strategies furthers the objectives of Section 6(b)(5)
Interpretations and Policies .05(e), to promotes just and equitable principles of the Act 27 in particular. The Exchange
add clarity and precision to the of trade and removes impediments to believes that its existing icMBBO price
and perfects the mechanisms of a free protection feature will sufficiently guard
Exchange’s rule text. Since the
and open market and a national market against potentially erroneous
Exchange will be introducing the
system and, in general, protects transaction prices for complex strategies
trading of complex strategies which
investors and the public interest by which include an underlying stock
include a ‘‘stock’’ component, the
ensuring that strategies are not executed component. The icMBBO for a complex
Exchange seeks to clarify certain aspects
at potentially erroneous prices. strategy involving a stock component is
of the rule that are intended to apply Given the relationship that the stock
only to the ‘‘option’’ component of a calculated using the best price on the
price, strike price, and option price have Simple Order Book in the individual
complex strategy. Specifically, the to each other, the Exchange is able to
Exchange proposes to clarify the option component(s) and the NBBO in
calculate a minimum option trading the stock component.28 Every complex
definition of a Wide Market Condition, price limit for the option leg of certain
as described in Interpretations and order entered on the Exchange receives
stock-option strategies with a call or a the icMBBO price protection 29 and as a
Policies .05, subsection (e)(1), so that it put component. Specifically, the parity
is clear that it is only applying to the result, the execution price for the stock
price of a call option can be derived by component of a stock-option order will
‘‘option’’ component of a complex subtracting the strike price from the
strategy. The new proposed rule text always be inside the NBBO of the stock.
stock price (Stock Price ¥ Strike Price Removal of the unnecessary rule text
will provide that, ‘‘[a] ‘wide market = Call Option Parity Price); and the
condition’ is defined as any individual will protect investors and the public
parity price of a put option can be interest by providing clarity and
option component of a complex strategy derived by subtracting the stock price
having, at the time of evaluation, an precision in the Exchange’s rules.
from the strike price (Strike Price ¥ Further, the Exchange notes that other
MBBO 23 quote width that is wider than Stock Price = Put Option Parity Price).
the permissible valid quote width as exchanges that offer stock-option orders
Using these relationships the PSV may
defined in Rule 603(b)(4).’’ By do not have this provision in their
be applied to establish a minimum
definition, the MBBO is comprised of rules.30
option trading price limit that the Finally, the Exchange proposes to
option interest only, therefore providing System will prevent the option leg from
additional detail to the existing rule make minor non-substantive changes to
trading below to establish a parity its rule to clarify that Wide Market
adds clarity to the Exchange’s rules. protected price for the strategy to ensure Conditions and Simple Market Auction
Similarly, the Exchange proposes to the strategy does not trade below its or Timer Events on the Exchange are
clarify that Simple Market Auction or parity protected price at a potentially related to the ‘‘option’’ components only
Timer Events (‘‘SMAT Events’’) pertain erroneous price. for complex strategies. The Exchange
only to ‘‘option’’ components of a The Exchange believes that Members
believes the proposed changes promote
complex strategy, by amending will benefit from the proposed risk
just and equitable principles of trade,
Interpretations and Policies .05, protection measure as the protection
remove impediments to and perfect the
subsection (e)(2)(i) and (e)(2)(ii), to ensures that these stock-option
mechanism of a free and open market
include the term ‘‘option component’’ in strategies are not executed below their
and a national market system because
the first sentence of each section. By parity protected price as calculated by
they seek to add clarity and precision to
definition, the Exchange’s Simple the Exchange. Consequently, the
the Exchange’s rules. The Exchange
Market is comprised of option interest proposed risk protection is designed to
believes that the proposed rule changes
only, on the Simple Order Book, encourage Members to submit
will provide greater clarity to Members
therefore providing additional detail to additional order flow and liquidity to
and the public regarding the Exchange’s
the existing rule adds clarity to the the Exchange in these strategies, thereby
Rules, and it is in the public interest for
Exchange’s rules. removing impediments to and
rules to be accurate and concise so as to
perfecting the mechanisms of a free and
daltland on DSKBBV9HB2PROD with NOTICES

2. Statutory Basis eliminate the potential for confusion.
open market and a national market
The Exchange believes that its system and, in general, protecting 26 15 U.S.C. 78f(b).
proposed rule change is consistent with investors and the public interest. This 27 15 U.S.C. 78f(b)(5).
protection should provide Members 28 See supra note 21.

23 The term ‘‘MBBO’’ means the best bid or offer 29 See supra note 19.
24 15 U.S.C. 78f(b).
on the Simple Order Book on the Exchange. See 30 See CBOE Rule 6.53C.06 and NASDAQ ISE

Exchange Rule 518(a)(13). 25 15 U.S.C. 78f(b)(5). Rule 722.

VerDate Sep<11>2014 17:06 Aug 01, 2018 Jkt 244001 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 E:\FR\FM\02AUN1.SGM 02AUN1
37852 Federal Register / Vol. 83, No. 149 / Thursday, August 2, 2018 / Notices

B. Self-Regulatory Organization’s C. Self-Regulatory Organization’s public interest because the proposed
Statement on Burden on Competition Statement on Comments on the parity price protection feature is
Proposed Rule Change Received From designed to prevent Buy-Write and
The Exchange does not believe that Members, Participants, or Others Married Put strategies from executing at
the proposed rule change will impose potentially erroneous prices. As noted
Written comments were neither
any burden on competition not above, Buy-Write and Married Put
solicited nor received.
necessary or appropriate in furtherance interest to buy that is priced below the
of the purposes of the Act. The III. Date of Effectiveness of the parity protected price for the strategy
Exchange believes the proposed rule Proposed Rule Change and Timing for will be rejected, and Buy-Write and
change will foster competition as it Commission Action Married Put interest to sell that is priced
provides a risk protection mechanism Because the foregoing proposed rule below the parity protected price will be
for certain complex strategies entered on change does not: (i) Significantly affect placed on the Strategy Book at the parity
the Exchange and may promote the protection of investors or the public protected price for the strategy.
competition by enabling Members to interest; (ii) impose any significant Therefore, the Commission hereby
trade more aggressively on the Exchange burden on competition; and (iii) become waives the operative delay and
knowing that these strategies will not be operative for 30 days after the date of designates the proposed rule change as
executed below [sic] parity protected the filing, or such shorter time as the operative upon filing.36
price at potentially erroneous prices. Commission may designate, it has At any time within 60 days of the
Accordingly, the price protection become effective pursuant to 19(b)(3)(A) filing of the proposed rule change, the
of the Act 32 and Rule 19b–4(f)(6) 33 Commission summarily may
feature should instill additional
thereunder. temporarily suspend such rule change if
confidence in Members that submit
A proposed rule change filed it appears to the Commission that such
certain stock-option orders to the action is necessary or appropriate in the
Exchange that their orders receive price pursuant to Rule 19b–4(f)(6) under the
Act 34 normally does not become public interest, for the protection of
protection, and thus should encourage investors, or otherwise in furtherance of
Members to submit additional order operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 35 the purposes of the Act. If the
flow and liquidity to the Exchange, Commission takes such action, the
permits the Commission to designate a
thereby removing impediments to and Commission shall institute proceedings
shorter time if such action is consistent
perfecting the mechanisms of a free and to determine whether the proposed rule
with the protection of investors and the
open market and a national market should be approved or disapproved.
public interest. The Exchange has asked
system and, in general, protecting the Commission to waive the 30-day
investors and the public interest. IV. Solicitation of Comments
operative delay. The Exchange states
The removal of unnecessary rule text Interested persons are invited to
that waiver of the operative delay is
pertaining to the execution price of the submit written data, views, and
consistent with the protection of
arguments concerning the foregoing,
stock component of a stock-option order investors and the public interest
including whether the proposed rule
does not impose any burden on because it will enable market
change is consistent with the Act.
competition as the proposed change will participants to benefit from the
Comments may be submitted by any of
align the Exchange’s rule with that of proposed parity price protection feature,
the following methods:
other exchanges.31 Further, the which is designed to safeguard against
additional proposed changes remedy the possibility of executions occurring Electronic Comments
minor non-substantive issues in the text at potentially erroneous prices. MIAX • Use the Commission’s internet
of various rules identified in this also states that the proposal protects comment form (http://www.sec.gov/
proposal. investors and the public interest by rules/sro.shtml); or
The Exchange does not believe the deleting a provision requiring the • Send an email to rule-comments@
execution price of the underlying sec.gov. Please include File Number SR–
proposed rule change will impose any
security component of a stock-option MIAX–2018–16 on the subject line.
burden on intra-market competition as
order to be within the underlying
price protection is available to all Paper Comments
component’s high-low range for the day.
market participants that submit orders
MIAX notes that this provision is • Send paper comments in triplicate
in certain stock-option strategies. The
unnecessary because all complex orders to Brent J. Fields, Secretary, Securities
Exchange further believes that the and Exchange Commission, 100 F Street
on MIAX are protected by the icMBBO
proposed price protection should price protection feature, which assures NE, Washington, DC 20549–1090.
promote inter-market competition, and that the stock leg of a stock-option order All submissions should refer to File
result in more competitive order flow to will not be executed at a price that is Number SR–MIAX–2018–16. This file
the Exchange by protecting market inferior to the NBBO for the stock. The number should be included on the
participants from potentially erroneous Commission believes that waiving the subject line if email is used. To help the
executions occurring at prices below the 30-day operative delay is consistent Commission process and review your
parity protected price of the strategy, as with the protection of investors and the comments more efficiently, please use
calculated by the Exchange. only one method. The Commission will
The Exchange does not believe that 32 15 U.S.C. 78s(b)(3)(A). post all comments on the Commission’s
33 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
the proposed rule change will impose internet website (http://www.sec.gov/
daltland on DSKBBV9HB2PROD with NOTICES

4(f)(6) requires a self-regulatory organization to give
any burden on competition not the Commission written notice of its intent to file rules/sro.shtml). Copies of the
necessary or appropriate in furtherance the proposed rule change at least five business days submission, all subsequent
of the purposes of the Act, and believes prior to the date of filing of the proposed rule
the proposed change will enhance change, or such shorter time as designated by the 36 For purposes only of waiving the 30-day
Commission. The Exchange has satisfied this operative delay, the Commission has also
competition. requirement. considered the proposed rule’s impact on
34 17 CFR 240.19b–4(f)(6).
efficiency, competition, and capital formation. See
31 Id. 35 17 CFR 240.19b–4(f)(6)(iii). 15 U.S.C. 78c(f).

VerDate Sep<11>2014 17:06 Aug 01, 2018 Jkt 244001 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 E:\FR\FM\02AUN1.SGM 02AUN1
Document Created: 2018-08-02 01:28:47
Document Modified: 2018-08-02 01:28:47
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		83 FR 37849