In the Matter of the Application of Miami International Securities Exchange, LLC for Registration as a National Securities Exchange: Findings, Opinion, and Order of the Commission

Federal RegisterDec 7, 2012

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68341; File No.10-207]

In the Matter of the Application of Miami International Securities Exchange, LLC for Registration as a National Securities Exchange: Findings, Opinion, and Order of the Commission

December 3, 2012.

I. Introduction

On April 26, 2012, Miami International Securities Exchange, LLC (“MIAX Exchange” or “MIAX”) submitted to the Securities and Exchange Commission (“Commission”) an Application for Registration as a National Securities Exchange (“Form 1 Application”) under Section 6 of the Securities Exchange Act of 1934 (“Act”).

Notice of MIAX's Form 1 Application was published for comment in the

Federal Register

on August 20, 2012.

The Commission received two

comment letters concerning MIAX's Form 1 Application.

MIAX submitted a detailed response to comments on November 30, 2012.

On November 30, 2012, MIAX submitted Amendment No. 1 to its Form 1 Application.

15 U.S.C. 78f.

See

Securities Exchange Act Release No. 67660 (August 15, 2012), 77 FR 50814 (“Notice”).

See

Letter from Michael J. Simon, Secretary, International Securities Exchange, LLC, to Elizabeth M. Murphy, Secretary, Commission, dated October 4, 2012 (“ISE Letter”); and Letter from Jeffrey S. Davis, Vice President and Deputy General Counsel, NASDAQ OMX Group, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated October 4, 2012 (“NASDAQ Letter”). In its letter, the International Securities Exchange (“ISE”), requested that MIAX clarify what it considered to be potential “unique aspects” of the proposed MIAX rules and asked the Commission to discuss how such provisions are consistent with the Act. Similarly, the letter from NASDAQ OMX (“NASDAQ”) requested that MIAX clarify certain of its proposed rules and provide greater explanation or detail as to how they would work. In Section IV, below, the Commission considers the issues raised by the comment letters, along with MIAX's response thereto, and considers whether MIAX sufficiently addressed those concerns. In summary, the Commission believes that MIAX has sufficiently addressed each of the commenters' concerns and has proposed reasonable changes to its rules to address those concerns. The changes also clarify the potential sources of ambiguity that commenters identified. The changes proposed in Amendment No. 1 are either not material, consistent with the existing rules of other registered national securities exchanges, or responsive to the concerns of the Commission and do not raise any new or novel regulatory issues.

See

Letter from Barbara Comly, Executive Vice President, General Counsel & Corporate Secretary, MIAX, to Elizabeth M. Murphy, Secretary, Commission, dated November 30, 2012 (“MIAX Response Letter”).

In Amendment No. 1, MIAX proposed changes to the Limited Liability Company Agreement and the By-Laws of Miami International Securities Exchange, LLC concerning the election of an interim board of directors, which is discussed below in Section IV.

See

Amendment No. 1. MIAX also proposed changes to its proposed rules in response to concerns raised by the two comment letters.

See

Amendment No. 1. The rule text changes are discussed below in Section III.

II. Statutory Standards

Under Sections 6(b) and 19(a) of the Act,

the Commission shall by order grant an application for registration as a national securities exchange if the Commission finds, among other things, that the proposed exchange is so organized and has the capacity to carry out the purposes of the Act and can comply, and can enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the exchange.

15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.

As discussed in greater detail below, the Commission finds that MIAX's application for exchange registration meets the requirements of the Act and the rules and regulations thereunder. Further, the Commission finds that the proposed rules of MIAX are consistent with Section 6 of the Act in that, among other things, they are designed to: (1) Assure fair representation of the exchange's members in the selection of its directors and administration of its affairs and provide that, among other things, one or more directors shall be representative of investors and not be associated with the exchange, or with a broker or dealer;

(2) prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and remove impediments to and perfect the mechanisms of a free and open market and a national market system;

(3) not permit unfair discrimination between customers, issuers, or dealers;

and (4) protect investors and the public interest.

Finally, the Commission finds that MIAX's proposed rules do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.

See

15 U.S.C. 78f(b)(3).

See

15 U.S.C. 78f(b)(5).

See id.

See

15 U.S.C. 78f(b)(8).

III. Discussion

A. Governance of MIAX Exchange

1. MIAX Exchange Board of Directors

The board of directors of MIAX Exchange (“Exchange Board”) will be its governing body and will possess all of the powers necessary for the management of its business and affairs, including governance of MIAX Exchange as a self-regulatory organization (“SRO”).

See

MIAX Exchange By-Laws Section 2.1.

See also

MIAX Exchange LLC Agreement Sections 7 and 8.

Under the By-Laws of MIAX Exchange (“MIAX Exchange By-Laws”):

The MIAX Exchange By-Laws are included in the Second Amended and Restated Limited Liability Company Agreement of MIAX Exchange (“MIAX Exchange LLC Agreement”).

• The Exchange Board will be composed of not less than ten directors;

See

MIAX Exchange By-Laws Article II, Section 2.2(a).

• One director will be the Chief Executive Officer of MIAX Exchange;

See

MIAX Exchange By-Laws Article II, Section 2.2(b).

• The number of Non-Industry Directors,

including at least one Independent Director,

will equal or exceed the sum of the number of Industry Directors

and Member Representative Directors;

and

“Non-Industry Director” means a Director who is an Independent Director or any other individual who would not be an Industry Director.

See

MIAX Exchange By-Laws Article I(y).

“Independent Director” means a “Director who has no material relationship with the [MIAX Exchange] or any affiliate of the [MIAX Exchange], or any [MIAX member] or any affiliate of any such [MIAX member];

provided,

however, that an individual who otherwise qualifies as an Independent Director shall not be disqualified from serving in such capacity solely because such Director is a Director of the [MIAX Exchange] or [Miami International Holdings, Inc.].”

See

MIAX Exchange By-Laws Article I(n).

An “Industry Director” is, among other things, a Director that is or has served within the prior three years as an officer, director, employee, or owner of a broker or dealer, as well as any Director who has, or has had, a consulting or employment relationship with MIAX Exchange or any affiliate of MIAX Exchange within the prior three years.

See

MIAX Exchange By-Laws Article I(p). This definition is consistent with what the Commission has approved for other exchanges.

See

Securities Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (“BATS Order”).

See also

Securities Exchange Act Release Nos. 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (“BOX Order”); and 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (“DirectEdge Exchanges Order”).

See

MIAX Exchange By-Laws Article II, Section 2.2 (b)(i). “Member Representative Director” means a Director who has been appointed by Miami International Holdings, Inc. as an initial Director pursuant to Section 2.5 of the MIAX Exchange By-Laws to serve until the first annual meeting or who “has been elected by the LLC Member after having been nominated by the Member Nominating Committee or by an Exchange Member pursuant to [the] By-Laws and confirmed as the nominee of Exchange Members after majority vote of Exchange Members, if applicable. A Member Representative Director may, but is not required to be, an officer, director, employee, or agent of an Exchange Member.”

See

MIAX Exchange By-Laws Article I(v).

See also

MIAX Exchange By-Laws Article II, Section 2.5.

• At least twenty percent of the directors on the Exchange Board will be Member Representative Directors.

See

MIAX Exchange By-Laws Article II, Section 2.2(b)(ii).

For the interim board (discussed below), and subsequently at the first annual meeting and each annual meeting thereafter, Miami Holdings, as the sole LLC Member of MIAX Exchange, will elect the MIAX Exchange Board pursuant to the MIAX By-Laws.

In addition, Miami Holdings will appoint the initial Nominating Committee

and Member Nominating Committee,

consistent with each

committee's compositional requirements,

to nominate candidates for election to the Exchange Board. Each of the Nominating Committee and Member Nominating Committee, after completion of its respective duties for nominating directors for election to the Board for that year, shall nominate candidates to serve on the succeeding year's Nominating Committee or Member Nominating Committee, as applicable. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX Exchange members pursuant to a petition process.

See

MIAX Exchange By-Laws Article II, Section 2.4.

See also

MIAX Exchange LLC Agreement Section 9(a).

The Nominating Committee will be comprised of at least three directors, and the number of Non-Industry members on the Nominating Committee must equal or exceed the number of Industry members.

See

MIAX Exchange By-Laws Article V, Section 5.2.

See also

MIAX Exchange By-Laws Article IV, Section 4.2(a).

The Member Nominating Committee will be comprised of at least three directors, and each member of the Member Nominating Committee

shall be a Member Representative member.

See

MIAX Exchange By-Laws Article V, Section 5.3.

See also

MIAX Exchange By-Laws Article IV, Section 4.2(a). Pursuant to MIAX Exchange By-Laws Article I(w), a “Member Representative member” is a member of any committee or hearing panel appointed by the Exchange Board who has been elected or appointed after having been nominated by the Member Nominating Committee pursuant to the by-laws and who is an officer, director, employee, or agent of an Exchange Member.

See

MIAX Exchange By-Laws Article V, Section 5.1.

See id.

The Nominating Committee will nominate candidates for each director position, and Miami Holdings, as the sole LLC Member, will elect those directors. For Member Representative Director positions, the Nominating Committee will nominate those candidates submitted to it, and approved, by the Member Nominating Committee.

Additional candidates, however, may be nominated for the Member Representative Director positions by MIAX Exchange members pursuant to a petition process.

If no candidates are nominated pursuant to a petition process, then the initial nominees submitted by the Member Nominating Committee will be nominated as Member Representative Directors by the Nominating Committee. If a petition process produces additional candidates, then the candidates nominated pursuant to the petition process, together with those nominated by the Member Nominating Committee, will be presented to MIAX Exchange members for a run-off election to determine the final slate of candidates for the vacant Member Representative Director positions.

In the event of a contested run-off election, the candidates who receive the most votes will be nominated as the final slate of Member Representative Director candidates by the Nominating Committee.

Miami Holdings, as the sole LLC Member, is obligated to elect the final slate of the Member Representative Director candidates that are nominated by the Nominating Committee.

The Member Nominating Committee will solicit comments from MIAX Exchange members for the purpose of approving and submitting names of candidates for election to the position of Member Representative Director.

See

MIAX Exchange By-Laws Article II, Section 2.4(b).

See

MIAX Exchange By-Laws Article II, Section 2.4(c). The petition must be signed by executive representatives of 10% or more of the MIAX Exchange members. No MIAX Exchange member, together with its affiliates, may account for more than 50% of the signatures endorsing a particular candidate.

See id.

See

MIAX Exchange By-Laws Article II, Section 2.4(e) and (f). Each MIAX Exchange Member shall have the right to cast one vote for each available Member Representative Director nomination, provided that any such vote must be cast for a person on the List of Candidates and that no MIAX Exchange member, together with its affiliates, may account for more than 20% of the votes cast for a candidate.

See

MIAX Exchange By-Laws Article II, Section 2.4(f).

See

MIAX Exchange By-Laws Article II, Section 2.4(f).

See id.

The Commission believes that the requirement in the MIAX Exchange By-Laws that 20% of the directors be Member Representative Directors and the means by which they will be chosen by MIAX Exchange members provide for the fair representation of members in the selection of directors and the administration of MIAX Exchange and therefore is consistent with Section 6(b)(3) of the Act.

As the Commission has previously noted, this requirement helps to ensure that members have a voice in the use of self-regulatory authority, and that an exchange is administered in a way that is equitable to all those who trade on its market or through its facilities.

15 U.S.C. 78f(b)(3).

See, e.g.,

Securities Exchange Act Release No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (granting the exchange registration of Nasdaq Stock Market, Inc.) (“Nasdaq Order”); and BATS Order,

supra

note 18.

See also

Securities Exchange Act Release No. 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (“NYSE/Archipelago Merger Approval Order”).

In addition, with respect to the requirement that the number of Non-Industry Directors, including at least one Independent Director, will equal or exceed the sum of the number of Industry Directors and Member Representative Directors, the Commission believes that the proposed composition of the MIAX Exchange Board satisfies the requirements in Section 6(b)(3) of the Act,

which requires in part that one or more directors be representative of issuers and investors and not be associated with a member of the exchange, or with a broker or dealer. The Commission previously has stated that the inclusion of public, non-industry representatives on exchange oversight bodies is an important mechanism to support an exchange's ability to protect the public interest.

Further, the presence of public, non-industry representatives can help to ensure that no single group of market participants has the ability to systematically disadvantage other market participants through the exchange governance process. The Commission believes that public, non-industry directors can provide unique, unbiased perspectives, which are designed to enhance the ability of the MIAX Exchange Board to address issues in a non-discriminatory fashion and foster the integrity of MIAX Exchange.

15 U.S.C. 78f(b)(3).

See, e.g.,

Regulation of Exchanges and Alternative Trading Systems, Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998) (“Regulation ATS Release”).

See

Nasdaq Order and NYSE/Archipelago Merger Approval Order,

supra

note 32, and BATS Order,

supra

note 18.

Interim Exchange Board.

Prior to commencing operations, Miami Holdings will appoint an interim Exchange board of directors (“Interim Exchange Board”), which will include interim Member Representative Directors. With respect to the selection of the interim Member Representative Directors for the Interim Exchange Board, prior to the commencement of operations as an exchange, MIAX will submit the names of its nominees for the interim Member Representative Directors positions to persons that have begun the process of becoming members in the new MIAX Exchange.

MIAX represents that the persons and firms that have applied to become the initial members of MIAX Exchange have already begun the process of completing the necessary applications, obtaining electronic connectivity, and testing their systems with MIAX.

MIAX additionally represents that the initial members of MIAX will consist substantially of the current group of persons and firms that have begun the membership application process with MIAX.

See

Amendment No. 1;

see also

MIAX Exchange By-Laws Section 2.5(b). Specifically, MIAX will submit the names of its nominees for the interim Member Representative Director positions to persons who have submitted initial documents for membership in the Exchange who would meet the qualifications for membership.

See

MIAX Exchange By-Laws Section 2.5(b).

See

Amendment No. 1.

See

Amendment No. 1.

Such persons will be allowed 14 days to submit the name of an alternative candidate and 5 days to vote for the final slate of candidates.

All other interim directors, except for the interim Member Representative Directors, will

be appointed and elected by Miami Holdings, and must meet the MIAX Exchange board composition requirements as set forth in the MIAX Exchange By-Laws. Once these interim Member Representative Directors are seated on the Interim Exchange Board, then the Interim Exchange Board will meet the board composition requirements set forth in the governing documents of MIAX Exchange.

See

MIAX Exchange By-Laws Sections 2.5(b) and (d).

The Interim Exchange Board will serve until the first initial Exchange Board is elected pursuant to the full nomination, petition, and voting process set forth in the MIAX By-Laws.

MIAX Exchange will complete such process within 90 days after its application for registration as a national securities exchange is granted by the Commission.

See

Amendment No. 1; and MIAX Exchange By-Laws Sections 2.2(e) and 2.5(a).

See

Amendment No. 1. The 90-day period is consistent with what the Commission recently approved for the BOX Exchange.

See

Securities Exchange Act Release No. 66871 (April 27, 2012), 77 FR 26323 (May 3, 2012) (allowing BOX Exchange to appoint an initial interim board to enable it to commence operations as a registered exchange).

See also

Securities Exchange Act Release No. 61152 (December 10, 2009), 74 FR 66699 (December 16, 2009) (“C2 Order”) (allowing CBOE to appoint the initial board members and to issue a circular to trading permit holders identifying a slate of representative directors within 45 days from the date on which trading commenced on C2).

The Commission believes that the process for electing the Interim Exchange Board, as proposed, is consistent with the requirements of the Act, including that the rules of the exchange assure fair representation of the exchange's members in the selection of its directors and administration of its affairs.

As noted above, MIAX represents that the initial members of MIAX will consist substantially of the current group of persons and firms that have begun the membership application process with MIAX. MIAX will engage these persons and firms in the interim board election process by, prior to the commencement of operations as an exchange, providing each of them with the opportunity to participate in the selection of interim Member Representative Directors consistent with the MIAX Exchange By-Laws. Further, MIAX Exchange represents that it will complete the full nomination, petition, and voting process as set forth in the MIAX Exchange By-Laws, which will provide persons that are approved as members after the effective date of this Order with the opportunity to participate in the selection of the Member Representative Directors, within 90 days of when MIAX Exchange's application for registration as a national securities exchange is granted.

The Commission therefore believes that MIAX Exchange's initial interim board process is consistent with the Act, including Section 6(b)(3), in that it is designed to provide representation among the persons and firms likely to become members when MIAX commences operations and is sufficient to allow MIAX to commence operations for an interim period prior to going through the process to elect a new Exchange Board pursuant to the full nomination, petition, and voting process set forth in the MIAX Exchange By-Laws.

See

15 U.S.C. 78f(b)(3).

MIAX's proposed timeline for the interim board process follows a process identical to what the Commission recently approved for the BOX Exchange.

2. Exchange Committees

In the MIAX Exchange By-Laws, MIAX Exchange has proposed to establish several standing committees, which will be divided into two categories: Committees of the Board (composed of MIAX Exchange directors) and Committees of the MIAX Exchange (composed of a mixture of MIAX Exchange directors and persons that are not MIAX Exchange directors).

The standing Committees of the Board will be the Audit, Compensation, Appeals, and Regulatory Oversight Committees.

In addition, the MIAX Chairman, with approval of the Exchange Board, may appoint an Executive Committee and a Finance Committee, which also would be Committees of the Board.

See

MIAX Exchange By-Laws Section 4.1.

See

MIAX Exchange By-Laws Section 4.1(a).

See

MIAX Exchange By-Laws Section 4.5(e) and (f), respectively.

The Audit Committee will consist of three or more directors, a majority of which will be Non-Industry Directors.

Each of the Compensation and Regulatory Oversight Committees will consist of three or more directors, all of which will be required to be Non-Industry Directors.

The Appeals Committee will consist of one Independent Director, one Industry Director, and one Member Representative Director.

If established, the Finance Committee will consist of at least three persons (who may, but are not required to, be directors) a majority of whom will be Non-Industry Directors.

The Executive Committee, if established, will consist of at least three directors. Because the Executive Committee will have the powers and authority of the Exchange Board in the management of the business and affairs of the MIAX Exchange between meetings of the Exchange Board, its composition must reflect that of the Exchange Board. Accordingly, the number of Non-Industry Directors on the Executive Committee must equal or exceed the number of Industry Directors and the percentages of Independent Directors and Member Representative Directors must be at least as great as the corresponding percentages on the Exchange Board as a whole.

See

MIAX Exchange By-Laws Section 4.5(b). A Non-Industry Director shall serve as Chairman of the Committee.

See id.

See also

MIAX Exchange By-Laws Section 4.2(a) (requiring that each committee be comprised of at least three people).

See

MIAX Exchange By-Laws Section 4.5(a) and 4.5(c).

See

MIAX Exchange By-Laws Section 4.5(d).

See

MIAX Exchange By-Laws Section 4.5(f).

See also

MIAX Exchange By-Laws Section 4.2(a) (providing that except as otherwise provided in the MIAX Exchange By-Laws, committees may include persons who are not members of the Board).

See

MIAX Exchange By-Laws Section 4.5(e).

With respect to Committees of MIAX Exchange, MIAX Exchange has proposed to establish a Nominating Committee

and a Member Nominating Committee.

As discussed above, these committees will have responsibility for, among other things, nominating candidates for election to the Exchange Board. On an annual basis, the members of these committees will nominate candidates for the succeeding year's respective committees to be elected by Miami Holdings, as the sole LLC Member.

In addition, MIAX also has proposed to establish a Quality of Markets Committee,

which will provide advice and guidance to the Exchange Board on issues related to the fairness, integrity, efficiency and competiveness of the information, order handling and execution mechanisms of the exchange from the perspective of individual and institutional investors, retail and market making firms, exchange listed companies, and other market participants. The Quality of Markets Committee will include a broad representation of participants in MIAX Exchange. Additionally, at least 20% of the members of the committee will be Member Representative members, and the number of Non-Industry members must equal or exceed the total number of Industry and Member Representative members. MIAX also has proposed to

establish a Business Conduct Committee as discussed further below.

See

MIAX Exchange By-Laws Article V, Section 5.2, and

supra

note 22.

See

MIAX Exchange By-Laws Article V, Section 5.3, and

supra

note 23.

See

MIAX Exchange By-Laws Article V, Section 5.1, and

supra

note 25. Additional candidates for the Member Nominating Committee may be nominated and elected by MIAX Exchange members pursuant to a petition process.

See supra

note 27 and accompanying text.

See

MIAX Exchange By-Laws Article IV, Section 4.6.

See infra

note 381 and accompanying text.

The Commission believes that MIAX Exchange's proposed committees, which are similar to the committees maintained by other exchanges,

are designed to help enable MIAX Exchange to carry out its responsibilities under the Act and are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.

See, e.g.,

BATS Order,

supra

note 18, and Nasdaq Order,

supra

note 32.

15 U.S.C. 78f(b)(1).

B. Regulation of MIAX Exchange

When MIAX Exchange commences operations as a national securities exchange, MIAX Exchange will have all the attendant regulatory obligations under the Act. In particular, MIAX Exchange will be responsible for the operation and regulation of its trading system and the regulation of its members. Certain provisions in the MIAX Exchange and Miami Holdings governance documents are designed to facilitate the ability of MIAX Exchange and the Commission to fulfill their regulatory obligations. The discussion below summarizes some of these key provisions.

1. Ownership Structure; Ownership and Voting Limitations

MIAX Exchange will be structured as a Delaware limited liability company (“LLC”), which will be wholly-owned by the sole member of the LLC, Miami International Holdings, Inc. (“Miami Holdings”). The Miami Holdings' proposed Amended and Restated Certificate of Incorporation (“Miami Holdings Certificate”) includes restrictions on the ability to own and vote shares of capital stock of Miami Holdings.

These limitations are designed to prevent any Miami Holdings shareholder from exercising undue control over the operation of MIAX Exchange and to assure that the MIAX Exchange and the Commission are able to carry out their regulatory obligations under the Act.

These provisions are consistent with ownership and voting limits approved by the Commission for other SROs.

See e.g.,

Securities Exchange Act Release Nos. 62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) (CBOE-2008-88) (CBOE Demutualization Approval Order); 58375 (August 18, 2008) 73 FR 49498 (August 21, 2008) (File No. 10-182) (“BATS Exchange Registration Order”); 53963 (June 8, 2006), 71 FR 34660 (June 15, 2006) (SR-NSX-2006-03) (“NSX Demutualization Order”); 51149 (February 8, 2005), 70 FR 7531 (February 14, 2005) (SR-CHX-2004-26) (“CHX Demutualization Order”); and 49098 (January 16, 2004), 69 FR 3974 (January 27, 2004) (SR-Phlx-2003-73) (“Phlx Demutualization Order”).

In particular, for so long as Miami Holdings (directly or indirectly) controls MIAX Exchange, no person, either alone or together with its related persons,

may beneficially own more than 40% of any class of capital stock of Miami Holdings.

MIAX proposed a more conservative restriction for MIAX Exchange members, wherein MIAX Exchange

members,

either alone or together with their related persons, are prohibited from beneficially owning more than 20% of shares of any class of capital stock of Miami Holdings.

If any stockholder violates these ownership limits, Miami Holdings would redeem the shares in excess of the applicable ownership limit at their par value.

In addition, no person, alone or together with its related persons, may vote or cause the voting of more than 20% of the voting power of the then issued and outstanding capital stock of Miami Holdings.

If any stockholder purports to vote, or cause the voting of, shares that would violate this voting limit, Miami Holdings would not honor such vote in excess of the voting limit.

See

Miami Holdings Certificate NINTH (a)(ii) (defining “related persons”).

See

Miami Holdings Certificate NINTH (b)(i)(A).

See

Miami Holdings Certificate NINTH (b)(i)(B).

See

Miami Holdings Certificate NINTH (e). Any shares which have been called for redemption shall not be deemed outstanding shares for the purpose of voting or determining the total number of shares entitled to vote. Once redeemed by Miami Holdings, such shares shall become treasury shares and shall no longer be deemed to be outstanding.

See id.

Furthermore, if any redemption results in another stockholder owning shares in violation of the ownership limits described above, Miami Holdings shall redeem such shares.

See id.

See

Miami Holdings Certificate NINTH (b)(i)(C).

See

Miami Holdings Certificate NINTH (d). The Miami Holdings Certificate also prohibits the payment of any stock dividends and conversions that would violate the ownership and voting limitations.

See

Miami Holdings Certificates FOURTH A.(b) and (e), and D.7.

Any person that proposes to own shares of capital stock in excess of the 40% ownership limitation, or vote or grant proxies or consents with respect to shares of capital stock in excess of the 20% voting limitation, must deliver written notice to the Miami Holdings board to notify the Board of its intention.

The notice must be delivered to the Board not less than 45 days before the proposed ownership of such shares or proposed exercise of such voting rights or the granting of such proxies or consents.

The Miami Holdings board may waive the 40% ownership limitation and the 20% voting limitation, pursuant to a resolution duly adopted by the Board of Directors, if it makes certain findings,

except that the Miami Holdings board cannot waive the voting and ownership limits above 20% for MIAX Exchange members and their related persons.

Any such waiver would not be effective unless and until approved by the Commission pursuant to Section 19 of the Act.

See

Miami Holdings Certificate NINTH (b)(iv).

See id.

See

Miami Holdings Certificate NINTH (b)(ii)(B). The required determinations are that (A) such waiver will not impair the ability of MIAX Exchange to carry out its functions and responsibilities under the Act and the rules and regulations promulgated thereunder, (B) such waiver is otherwise in the best interests of MIAX Exchange and Miami Holdings, (C) such waiver will not impair the ability of the Commission to enforce the Act and (D) the transferee in such transfer and its related persons are not subject to any applicable “statutory disqualification” (within the meaning of Section 3(a)(39) of the Act).

See

Miami Holdings Certificate NINTH (b)(ii)(B) and (b)(iii). The Commission has previously approved the rules of other exchanges that provide for the ability of the exchange to waive the ownership and voting limitations discussed above for non-members of the exchange.

See, e.g.,

DirectEdge Exchanges Order,

supra

note 18.

See id.

These provisions are generally consistent with waiver of ownership and voting limits approved by the Commission for other SROs.

See e.g.,

BATS Exchange Registration Order; NSX Demutualization Order,

supra

note 59; CHX Demutualization Order,

supra

note 59; and Securities Exchange Act Release No. 49718 (May 17, 2004), 69 FR 29611 (May 24, 2004) (SR-PCX-2004-08).

See

Miami Holdings Certificate NINTH (b)(ii)(B).

The Miami Holdings Certificate also contains provisions that are designed to further safeguard the ownership and voting limitation described above, or are otherwise related to direct and indirect changes in control. Specifically, any person that, either alone or together with its related persons owns, directly or indirectly, of record or beneficially, 5% or more of the capital stock of Miami Holdings will be required to immediately notify Miami Holdings in writing upon acquiring knowledge of such ownership.

Thereafter, such persons will be required to update Miami Holdings of any increase or decrease of 1% or more in their previously reported ownership percentage.

See

Miami Holdings Certificate NINTH(c)(i). The notice will require the person's full legal name; the person's title or status; the person's approximate ownership interest in Miami Holdings; and whether the person has power, directly or indirectly, to direct the management or policies of Miami Holdings.

See id.

See

Miami Holdings Certificate NINTH(c)(ii). Changes of less than 1% must also be reported to Miami Holdings if they result in such person crossing a 20% or 40% ownership threshold.

See id.

In addition, MIAX rules also impose limits on affiliation between the MIAX Exchange and a

member of the MIAX Exchange.

See

MIAX Rule 201(g) (“Without prior Commission approval, the Exchange or any entity with which it is affiliated shall not directly or indirectly through one or more intermediaries acquire or maintain an ownership interest in an Exchange Member. In addition, without prior Commission approval, no Member shall be or become affiliated with (1) the Exchange; or (2) any affiliate of the Exchange. Nothing herein shall prohibit a Member from acquiring or holding an equity interest in (i) Miami International Holdings, Inc. that is permitted by the Certificate of Incorporation of Miami International Holdings, Inc. or (ii) Miami International Securities Exchange, LLC that is permitted by the Amended and Restated Limited Liability Company Agreement of Miami International Securities Exchange, LLC.”).

The MIAX LLC Agreement does not include change of control provisions that are similar to those in the Miami Holdings Certificate; however the MIAX Exchange LLC Agreement explicitly provides that Miami Holdings is the sole LLC Member of MIAX Exchange.

Thus, if Miami Holdings ever proposes to no longer be the sole LLC Member of MIAX Exchange (and therefore no longer its sole owner), MIAX Exchange would be required to amend the MIAX Exchange LLC Agreement. Any changes to the MIAX Exchange LLC Agreement (which includes the MIAX Exchange By-Laws), including any change in the provisions that identify Miami Holdings as the sole owner of MIAX Exchange, must be filed with, or filed with and approved by, the Commission pursuant to Section 19 of the Act, as the case may be.

Further, pursuant to the MIAX Exchange By-Laws, Miami Holdings may not transfer or assign, in whole or in part, its ownership interest in MIAX Exchange, unless such transfer is filed with and approved by the Commission pursuant to Section 19 of the Act.

See

MIAX Exchange LLC Agreement and MIAX Exchange By-Laws Article I(t) A (both of which define “LLC Member” to mean Miami Holdings, as the sole member of MIAX).

See

15 U.S.C. 78s.

See also

MIAX Exchange LLC Agreement, Section 28(b).

See

MIAX Exchange By-Laws Article III, Section 3.4.

Although Miami Holdings is not independently responsible for regulation, its activities with respect to the operation of MIAX Exchange must be consistent with, and must not interfere with, the self-regulatory obligations of MIAX Exchange. As described above, the provisions applicable to direct and indirect changes in control of Miami Holdings and MIAX Exchange, as well as the voting limitation imposed on owners of Miami Holdings who also are MIAX Exchange members, are designed to help prevent any owner of Miami Holdings from exercising undue influence or control over the operation of MIAX Exchange and to help assure that MIAX Exchange retains a sufficient degree of independence to effectively carry out its regulatory obligations under the Act. In addition, these limitations are designed to address the conflicts of interests that might result from a member of a national securities exchange owning interests in the exchange. Members that trade on an exchange traditionally have had ownership interests in such exchange. As the Commission has noted in the past, however, a member's interest in an exchange, including an entity that controls an exchange, could become so large as to cast doubts on whether the exchange may fairly and objectively exercise its self-regulatory responsibilities with respect to such member.

A member that is a controlling shareholder of an exchange could seek to exercise that controlling influence by directing the exchange to refrain from, or the exchange may hesitate to, diligently monitor and conduct surveillance of the member's conduct or diligently enforce the exchange's rules and the federal securities laws with respect to conduct by the member that violates such provisions. As such, the Commission believes that these requirements are designed to minimize the potential that a person or entity can improperly interfere with or restrict the ability of MIAX Exchange to effectively carry out its regulatory oversight responsibilities under the Act.

See, e.g.,

DirectEdge Exchanges Order and BATS Order,

supra

note 18.

The Commission believes that MIAX's and Miami Holding's proposed governance provisions are consistent with the Act, including Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.

In particular, these requirements are designed to minimize the potential that a person could improperly interfere with or restrict the ability of the Commission or MIAX Exchange to effectively carry out their regulatory oversight responsibilities under the Act.

15 U.S.C. 78f(b)(1).

2. Regulatory Independence and Oversight

Although Miami Holdings will not itself carry out regulatory functions, its activities with respect to the operation of MIAX Exchange must be consistent with, and must not interfere with, MIAX Exchange's self-regulatory obligations. In this regard, MIAX Exchange and Miami Holdings propose to adopt certain provisions in their respective governing documents that are designed to help maintain the independence of the regulatory functions of MIAX Exchange. These proposed provisions are substantially similar to those included in the governing documents of other exchanges that recently have been granted registration.

Specifically:

See e.g.,

DirectEdge Exchanges Order and BATS Order,

supra

note 18, and C2 Order,

supra

note 41.

• The directors, officers, employees, and agents of Miami Holdings must give due regard to the preservation of the independence of the self-regulatory function of MIAX Exchange and must not take actions that would interfere with the effectuation of decisions by the MIAX Exchange Board relating to its regulatory functions or that would interfere with MIAX Exchange's ability to carry out its responsibilities under the Act.

See

Amended and Restated By-Laws of Miami Holdings (“Miami Holdings By-Laws”), Article VII, Section 1.

Similarly, Article II, Section 2.1(d) of the MIAX Exchange By-Laws requires the MIAX Exchange Board to, when managing the business and affairs of MIAX Exchange and evaluating any proposal, consider the requirements of Section 6(b) of the Act. Section 2.1(e) also requires the MIAX Exchange Board, when evaluating any proposal to take into account (among other things and to the extent relevant), the potential impact on the integrity, continuity and stability of the national securities exchange operated by MIAX Exchange and the other operations of MIAX Exchange on the ability to prevent fraudulent and manipulative acts and practices and on investors and the public, and whether such would promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to and facilitating transactions in securities or assist in the removal of impediments to or perfection of the mechanisms for a free and open market and a national market system.

See, e.g.,

Amended and Restated By-Laws of BATS, Article III, Section 1.

• Miami Holdings must comply with federal securities laws and the rules and regulations promulgated thereunder, and agrees to cooperate with the Commission and MIAX Exchange pursuant to, and to the extent of, their respective regulatory authority. In addition, Miami Holdings' officers, directors, employees, and agents must comply with federal securities laws and the rules and regulations promulgated thereunder and agree to cooperate with the Commission and MIAX Exchange in respect of the Commission's oversight responsibilities regarding MIAX Exchange and the self-regulatory functions and responsibilities of MIAX Exchange.

See

Miami Holdings By-Laws, Article VII, Section 4.

• Miami Holdings, and its officers, directors, employees, and agents submit to the jurisdiction of the U.S. federal courts, the Commission, and MIAX Exchange, for purposes of any action, suit, or proceeding pursuant to U.S. federal securities laws, and the rules

and regulations thereunder, arising out of, or relating to, MIAX Exchange activities.

See

Miami Holdings By-Laws, Article VII, Section 5.

• All books and records of MIAX Exchange reflecting confidential information pertaining to the self-regulatory function of MIAX Exchange (including but not limited to disciplinary matters, trading data, trading practices, and audit information) shall be retained in confidence by MIAX Exchange and its personnel and will not be used by MIAX Exchange for any non-regulatory purpose and shall not be made available to persons (including, without limitation, any MIAX Exchange member) other than to personnel of the Commission, and those personnel of MIAX Exchange, members of committees of MIAX Exchange, members of the MIAX Exchange Board, or hearing officers and other agents of MIAX, to the extent necessary or appropriate to properly discharge the self-regulatory function of MIAX Exchange.

See

MIAX Exchange By-Laws Article X, Section 10.4. The Commission notes that the Miami Holdings LLC Agreement also provides that all books and records of MIAX Exchange reflecting confidential information pertaining to the self-regulatory function of MIAX Exchange will be subject to confidentiality restrictions.

See

Miami Holdings By-Laws Article VII, Section 2. The requirement to keep such information confidential shall not limit the Commission's ability to access and examine such information or limit the ability of officers, directors, employees, or agent of Miami Holdings to disclose such information to the Commission.

See id.

• The books and records of MIAX Exchange and Miami Holdings must be maintained in the United States

and, to the extent they are related to the operation or administration of MIAX Exchange, Miami Holdings books and records will be subject at all times to inspection and copying by the Commission.

See

MIAX Exchange By-Laws Article X, Section 10.4; and Miami Holdings By-Laws Article VII, Section 3.

See

Miami Holdings By-Laws Article VII, Section 3.

• Furthermore, to the extent they relate to the activities of MIAX Exchange, the books, records, premises, officers, directors, employees, and agents of Miami Holdings will be deemed to be the books, records, premises, officers, directors, employees, and agents of MIAX Exchange, for purposes of, and subject to oversight pursuant to, the Act.

See

Miami Holdings By-Laws Article VII, Section 3.

• Miami Holdings will take necessary steps to cause its officers, directors, employees, and agents, prior to accepting a position as an officer, director, employee or agent (as applicable) to consent in writing to the applicability of provisions regarding books and records, confidentiality, jurisdiction, and regulatory obligations, with respect to their activities related to MIAX Exchange.

See

Miami Holdings By-Laws Article VII, Section 6.

• Miami Holdings Certificate and By-Laws require that, so long as Miami Holdings controls MIAX Exchange, any changes to those documents be submitted to the MIAX Exchange Board, and, if such change is required to be filed with the Commission pursuant to Section 19(b) of the Act and the rules and regulations thereunder, such change shall not be effective until filed with, or filed with and approved by, the Commission.

See

Miami Holdings Certificate Article VII; and Miami Holdings By-Laws, Article XII, Section 1.

The Commission believes that the provisions discussed in this section, which are designed to help maintain the independence of MIAX Exchange's regulatory function and help facilitate the ability of MIAX Exchange to carry out its responsibility and operate in a manner consistent with the Act, are appropriate and consistent with the requirements of the Act, particularly with Section 6(b)(1), which requires, in part, an exchange to be so organized and have the capacity to carry out the purposes of the Act.

Whether MIAX Exchange operates in compliance with the Act, however, depends on how it and Miami Holdings in practice implement the governance and other provisions that are the subject of this Order.

15 U.S.C. 78f(b)(1).

The Commission notes that it is reviewing the various standards and processes it uses to facilitate the registration of national securities exchanges and other entities required to register with the Commission and plans to issue a concept release designed to collect information and evaluate different aspects of these registration standards and processes, including the policy objectives of registration, how best to achieve those policy objectives through registration and other means, and the relative benefits and costs of the various means available.

See

Securities Exchange Act Release No. 65543 (October 12, 2011), 76 FR 65784, 65786 fn. 13 (October 24, 2011).

Further, Section 19(h)(1) of the Act

provides the Commission with the authority “to suspend for a period not exceeding twelve months or revoke the registration of [an SRO], or to censure or impose limitations upon the activities, functions, and operations of [an SRO], if [the Commission] finds, on the record after notice and opportunity for hearing, that [the SRO] has violated or is unable to comply with any provision of the Act, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance” with any such provision by its members (including associated persons thereof).

If Commission staff were to find, or become aware of, through staff review and inspection or otherwise, facts indicating any violations of the Act, including without limitation Sections 6(b)(1) and 19(g)(1), these matters could provide the basis for a disciplinary proceeding under Section 19(h)(1) of the Act.

See

15 U.S.C. 78s(h)(1).

See id.

The Commission also notes that, even in the absence of the governance provisions described above, under Section 20(a) of the Act any person with a controlling interest in MIAX Exchange would be jointly and severally liable with and to the same extent that MIAX Exchange is liable under any provision of the Act, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

In addition, Section 20(e) of the Act creates aiding and abetting liability for any person who knowingly provides substantial assistance to another person in violation of any provision of the Act or rule thereunder.

Further, Section 21C of the Act authorizes the Commission to enter a cease-and-desist order against any person who has been “a cause of” a violation of any provision of the Act through an act or omission that the person knew or should have known would contribute to the violation.

These provisions are applicable to all entities' dealings with MIAX Exchange, including Miami Holdings.

15 U.S.C. 78t(a).

15 U.S.C. 78t(e).

15 U.S.C. 78u-3.

3. Regulation of MIAX

As a prerequisite for the Commission's granting of an exchange's application for registration, an exchange must be organized and have the capacity to carry out the purposes of the Act.

Specifically, an exchange must be able to enforce compliance by its members, and persons associated with its members, with the federal securities laws and the rules of the exchange.

The discussion below summarizes how MIAX Exchange proposes to conduct and structure its regulatory operations.

See

Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).

See id. See also

Section 19(g) of the Act, 15 U.S.C. 78s(g).

a. Regulatory Oversight Committee

The regulatory operations of MIAX Exchange will be monitored by the Regulatory Oversight Committee of the MIAX Exchange Board. The Regulatory Oversight Committee will consist of at least three directors, all of whom will be Non-Industry Directors. The Regulatory Oversight Committee will be responsible for overseeing the adequacy and effectiveness of MIAX Exchange's regulatory and SRO responsibilities, assessing MIAX Exchange's regulatory performance, and assisting the MIAX Exchange Board (and committees of the MIAX Exchange Board) in reviewing MIAX Exchange's regulatory plan and the overall effectiveness of MIAX Exchange's regulatory functions.

See

MIAX Exchange By-Laws Article IV Section 4.5(c). The Regulatory Oversight Committee is responsible for reviewing MIAX Exchange's regulatory budget, and also will meet regularly with the Chief Regulatory Officer.

See id.

Further, a Chief Regulatory Officer (“CRO”) of MIAX Exchange will have general day-to-day supervision over MIAX Exchange's regulatory operations.

The Regulatory Oversight Committee also will be responsible for recommending compensation and personnel actions involving the CRO and senior regulatory personnel to the Compensation Committee of the MIAX Exchange for action.

The CRO will report to the Regulatory Oversight Committee.

100

See

MIAX Exchange By-Laws Article VI, Section 6.10.

See

MIAX Exchange By-Laws Article IV, Section 4.5(c).

100

See

MIAX Exchange By-Law Article VI, Section 6.10.

b. Regulatory Funding

To help assure the Commission that it has and will continue to have adequate funding to be able to meet its responsibilities under the Act, MIAX Exchange represented that, prior to commencing operations as a national securities exchange, Miami Holdings will provide sufficient funding to MIAX Exchange for the exchange to carry out its responsibilities under the Act.

101

Specifically, MIAX Exchange represents that prior to launching operations, Miami Holdings will allocate sufficient operational assets and make a capital contribution of not less than $2,000,000 into MIAX Exchange's capital account, in addition to either directly making payments of, or contributing adequate funds from Miami Holdings to MIAX Exchange for payments by MIAX Exchange of: (i) Personnel costs (including regulatory department personnel), (ii) technology support for regulatory oversight, (iii) infrastructure costs, and (iv) industry and regulatory memberships.

102

101

See

MIAX Form 1 Application, Exhibit I.

102

See id.

MIAX Exchange also represents that such direct funding by Miami Holdings, as well as allocations and contributions by Miami Holdings to MIAX Exchange, will be adequate to operate MIAX Exchange, including the ongoing regulation of the exchange, and that Miami Holdings and MIAX Exchange have entered into a funding agreement that requires Miami Holdings to provide adequate funding for the exchange's initial and ongoing operations, including the regulation of MIAX Exchange.

103

See id.

Further, any revenues received by MIAX Exchange from fees derived from its regulatory function or regulatory penalties will not be used for non-regulatory purposes.

104

Any excess funds, as determined by MIAX Exchange, may be remitted to Miami Holdings, however “Regulatory Funds” will not be remitted to Miami Holdings.

105

104

See

MIAX Exchange By-Laws Article IX, Section 9.4.

105

See

MIAX Form 1 Application, Exhibit I.

See also

MIAX Exchange LLC Agreement Section 16; and MIAX Exchange By-Laws Article IX, Section 9.4. MIAX Exchange By-Laws Article 1(ee) defines “Regulatory Funds” as “fees, fines, or penalties derived from the regulatory operations of the [MIAX Exchange]”, but such term does not include “revenues derived from listing fees, market data revenues, transaction revenues, or any other aspect of the commercial operations of the [MIAX Exchange], even if such revenues are used to pay costs associated with the regulatory operations of the [MIAX Exchange].” This definition is consistent with the rules of other SROs.

See e.g.,

By-Laws of NASDAQ OMX PHLX LLC, Article I(ii); and By-Laws of NASDAQ OMX BX, Inc., Article I(ii).

c. Rule 17d-2 Agreements; Regulatory Contract With CBOE

Section 19(g)(1) of the Act,

106

among other things, requires every SRO registered as either a national securities exchange or national securities association to examine for, and enforce compliance by, its members and persons associated with its members with the Act, the rules and regulations thereunder, and the SRO's own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) or Section 19(g)(2) of the Act.

107

Rule 17d-2 of the Act

108

permits SROs to propose joint plans to allocate regulatory responsibilities amongst themselves for their common rules with respect to their common members.

109

These agreements, which must be filed with and declared effective by the Commission, generally cover areas where each SRO's rules substantively overlap, including such regulatory functions as personnel registration and sales practices. Without this relief, the statutory obligation of each individual SRO could result in a pattern of multiple examinations of broker-dealers that maintain memberships in more than one SRO. Such regulatory duplication would add unnecessary expenses for common members and their SROs.

106

15 U.S.C. 78s(g)(1).

107

15 U.S.C. 78q(d) and 15 U.S.C. 78s(g)(2), respectively.

108

See

Section 17(d)(1) of the Act and Rule 17d-2 thereunder, 15 U.S.C. 78q(d)(1) and 17 CFR 240.17d-2. Section 17(d)(1) of the Act allows the Commission to relieve an SRO of certain responsibilities with respect to members of the SRO who are also members of another SRO. Specifically, Section 17(d)(1) allows the Commission to relieve an SRO of its responsibilities to: (i) Receive regulatory reports from such members; (ii) examine such members for compliance with the Act and the rules and regulations thereunder, and the rules of the SRO; or (iii) carry out other specified regulatory responsibilities with respect to such members.

109

17 CFR 240.17d-2. Section 19(g)(1) of the Act requires every SRO to examine its members and persons associated with its members and to enforce compliance with the federal securities laws and the SRO's own rules, unless the SRO is relieved of this responsibility pursuant to Section 17(d) of the Act. Section 17(d) was intended, in part, to eliminate unnecessary multiple examinations and regulatory duplication with respect to Common Members.

See

Securities Exchange Act Release No. 12935 (October 28, 1976), 41 FR 49091 (November 8, 1976) (“Rule 17d-2 Adopting Release”).

A 17d-2 plan that is declared effective by the Commission relieves the specified SRO of those regulatory responsibilities allocated by the plan to another SRO.

110

Many SROs have entered into Rule 17d-2 agreements.

111

MIAX Exchange has represented to the Commission that it intends to become a party to the existing multiparty options Rule 17d-2 plans concerning sales practice regulation and market surveillance.

112

Under these agreements, the examining SROs will examine firms that are common

members of MIAX Exchange and the particular examining SRO for compliance with certain provisions of the Act, certain rules and regulations adopted thereunder, and certain MIAX Exchange Rules.

110

See id.

111

See, e.g.,

Securities Exchange Act Release Nos. 59218 (January 8, 2009), 74 FR 2143 (January 14, 2009) (File No. 4-575) (FINRA/Boston Stock Exchange, Inc.); 58818 (October 20, 2008), 73 FR 63752 (October 27, 2008) (File No. 4-569) (FINRA/BATS Exchange, Inc.); 55755 (May 14, 2007), 72 FR 28057 (May 18, 2007) (File No. 4-536) (National Association of Securities Dealers, Inc. (“NASD”) (n/k/a FINRA) and CBOE concerning the CBOE Stock Exchange); 55367 (February 27, 2007), 72 FR 9983 (March 6, 2007) (File No. 4-529) (NASD/ISE); and 54136 (July 12, 2006), 71 FR 40759 (July 18, 2006) (File No. 4-517) (NASD/Nasdaq).

112

See

MIAX Form 1 Application, Exhibit L.

See also

Securities Exchange Act Release Nos. 66974 (May 11, 2012), 77 FR 29705 (May 18, 2012) (File No. S7-966) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d-2 plan concerning options-related sales practice matters); and 66975 (May 11, 2012), 77 FR 29712 (May 18, 2012) (File No. 4-551) (notice of filing and order approving and declaring effective an amendment to the multiparty 17d-2 plan concerning options-related market surveillance).

In addition, MIAX Exchange has entered into a Regulatory Services Agreement (“RSA”) with the Chicago Board Options Exchange, Incorporated (“CBOE”), under which CBOE will perform certain regulatory functions on behalf of MIAX Exchange.

113

Pursuant to the RSA, CBOE, in its capacity as service provider to MIAX Exchange, will perform various services on MIAX's behalf, including conducting certain market surveillances; assisting MIAX Exchange in conducting investigations of potential violations of MIAX Exchange rules and/or federal securities laws related to activity on the Exchange; conducting examinations related to Exchange members' conduct on MIAX Exchange; assisting MIAX Exchange with disciplinary proceedings pursuant to MIAX Exchange rules, including issuing charges and conducting hearings; and providing dispute resolution services to Exchange members on behalf of MIAX Exchange, including operation of the MIAX Exchange's arbitration program.

114

Notwithstanding the RSA, MIAX Exchange will retain ultimate legal responsibility for the regulation of its members and its market.

113

See

MIAX Form 1 Application, Exhibit L.

114

See

MIAX Form 1 Application, Exhibit L.

The Commission believes that it is consistent with the Act for MIAX Exchange to contract with another SRO to perform certain examination, enforcement, and disciplinary functions.

115

These functions are fundamental elements of a regulatory program, and constitute core self-regulatory functions. The Commission believes that CBOE, as an SRO that operates two options exchanges, should have the capacity to perform these functions for MIAX Exchange.

116

However, MIAX Exchange, unless relieved by the Commission of its responsibility,

117

bears the ultimate responsibility for self-regulatory responsibilities and primary liability for self-regulatory failures, not the SRO retained to perform regulatory functions on MIAX Exchange's behalf. In performing these regulatory functions, however, the SRO retained to perform regulatory functions may nonetheless bear liability for causing or aiding and abetting the failure of MIAX Exchange to perform its regulatory functions.

118

Accordingly, although CBOE will not act on its own behalf under its SRO responsibilities in carrying out these regulatory services for MIAX Exchange, as the SRO retained to perform regulatory functions, CBOE may have secondary liability if, for example, the Commission finds that the contracted functions are being performed so inadequately as to cause a violation of the federal securities laws by MIAX Exchange.

115

See, e.g.,

Regulation ATS Release,

supra

note 34.

See also

Securities Exchange Act Release Nos. 50122 (July 29, 2004), 69 FR 47962 (August 6, 2004) (SR-Amex-2004-32) (order approving rule that allowed Amex to contract with another SRO for regulatory services) (“Amex Regulatory Services Approval Order”); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004) (“NOM Approval Order”); Nasdaq Order,

supra

note 32; and BATS Order,

supra

note 18.

116

See, e.g.,

Amex Regulatory Services Approval Order,

supra

note 115; NOM Approval Order,

supra

note 115; and Nasdaq Order,

supra

note 32. The Commission notes that the RSA is not before the Commission and, therefore, the Commission is not acting on it.

117

See supra

note 108.

118

For example, if failings by the SRO retained to perform regulatory functions have the effect of leaving an exchange in violation of any aspect of the exchange's self-regulatory obligations, the exchange will bear direct liability for the violation, while the SRO retained to perform regulatory functions may bear liability for causing or aiding and abetting the violation.

See, e.g.,

Nasdaq Order,

supra

note 32; BATS Order,

supra

note 18; and Release No. 42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10-127) (approval of registration of ISE as a national securities exchange).

C. Trading System

1. Access to MIAX

Access to MIAX will be granted to individuals or organizations who are approved to become members. Approved members will be issued Trading Permits that grant the member the ability to transact on MIAX Exchange through the exchange's electronic systems.

119

Trading Permits will not convey upon members any ownership interest in MIAX Exchange, and they will not be transferable except in cases where a member experiences a change in control or corporate reorganization.

120

Membership will be open to any broker-dealer that: (1) Is registered under Section 15 of the Act;

121

and (2) has and maintains membership in another registered options exchange or the Financial Industry Regulatory Authority (“FINRA”).

122

There will be no limit to the number of Trading Permits that MIAX Exchange can issue, although MIAX could determine in the future that a limit on or decrease to the number of Trading Permits issued is necessary.

123

Members of MIAX may be one of three classes of market maker,

124

or they may be non-market makers.

119

See

MIAX Exchange Rule 200(a). MIAX intends to allow each member to determine the best method for accessing MIAX, whether by using customized front-end software or through third-party vendors who route orders to MIAX through front-end or service bureau configurations.

See

MIAX Form 1 Application, Exhibit E.

120

See

MIAX Rule 200(d).

121

See

MIAX Rule 200(b).

122

See

MIAX Rule 200(c)(7).

123

See

MIAX Rule 200(a). MIAX would announce in advance any limitation or decrease it plans to impose pursuant to Rule 200(a).

See id.

In the event that MIAX imposes a limitation or decrease, MIAX, in doing so, may not eliminate the ability of an existing member to trade on MIAX Exchange unless MIAX Exchange is permitted to do so pursuant to a rule filing submitted to the Commission under Section 19(b) of the Act.

See id.

In addition, MIAX's exercise of authority under proposed Rule 200 would be subject to the provisions of Section 6(c)(4) of the Act.

See id. See also

15 U.S.C. 78f(c)(4) (providing that an exchange may limit: (1) The number of members of the exchange and (2) the number of members and designated representatives of members permitted to effect transactions on the floor of the exchange without the services of another person acting as broker, provided, however, that no exchange shall have the authority to decrease the number of memberships in such exchange, or the number of members and designated representatives of members permitted to effect transactions on the floor of such exchange without the services of another person acting as broker, below such number in effect on May 1, 1975, or the date such exchange was registered with the Commission, whichever is later. In addition, the Commission, in accordance with the provisions of section 19(c) of the Act, may amend the rules of any exchange to increase (but not to decrease) or to remove any limitation on the number of memberships in such exchange or the number of members or designated representatives of members permitted to effect transactions on the floor of the exchange without the services of another person acting as broker, if the Commission finds that such limitation imposes a burden on competition not necessary or appropriate in furtherance of the purposes of the Act.).

See also

CBOE Rule 3.1(a)(vi) (concerning limiting or reducing the number of types of trading permits). In addition, MIAX's exercise of authority under proposed Rule 200 would be subject to the provisions of Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or any natural person associated with a registered broker or dealer may become a member of such exchange and any person may become associated with a member thereof.

See

15 U.S.C. 78f(b)(2).

124

See

MIAX Rule 600. Market Maker registration is discussed in greater detail below,

infra

Section III(C)(3)(a).

Those seeking to become members of MIAX will need to submit an application in accordance with procedures that MIAX will announce by Regulatory Circular.

125

Entities that become members, and their associated persons, will be required to meet and maintain certain qualification and registration criteria similar to what is required by other options exchanges.

126

In addition, MIAX proposes further requirements on members that seek to do business with the public.

127

Applicants who are denied membership may appeal MIAX Exchange's decision pursuant to MIAX's rules governing Hearings, Review, and Arbitration.

128

Every member will be subject to MIAX's regulatory jurisdiction, including MIAX's disciplinary jurisdiction.

129

125

See

MIAX Rule 200(c). Any proposed application fees contemplated by Rule 200(c) would need to be filed with the Commission pursuant to Section 19(b) of the Act and Rule 19b-4 thereunder.

See

15 U.S.C. 78s(b) and 17 CFR 240.19b-4, respectively.

126

See

MIAX Rule 200 Series. Such criteria include, but are not limited to, capital maintenance

requirements.

See, e.g.,

C2 Rules 3.1 and 3.2 (containing similar criteria).

127

See

MIAX Rule 1300 Series. These Rules also are similar to the rules of other exchanges.

See, e.g.,

ISE Rules Chapter 6.

128

See

MAX Rule 1100 Series.

129

See

MIAX Rule 200(f). For MIAX's rules concerning discipline,

see

MIAX Rule 1000 Series.

Further, MIAX Rule 608 requires market makers to have a letter of guarantee. In its comment letter, NASDAQ argues that MIAX should broaden this rule to require all members to provide a letter of guarantee, not just market makers.

130

In response, MIAX explains that MIAX Rule 209 already requires a letter of guarantee for all MIAX members.

131

130

See

NASDAQ Letter,

supra

note 3, at 4.

131

See

MIAX Response Letter,

supra

note 4, at 15-16. MIAX noted that MIAX Rule 608, which NASDAQ referenced, is a rule that relates specifically to market makers, and as such, it simply reiterates that Rule 209's general requirement concerning letters of guarantee applies specifically to market makers.

See id.

In addition, in its comment letter, NASDAQ notes that MIAX Rule 507 requires a member who changes clearing information to contact the clearing member on the other side of a trade.

132

NASDAQ argues this approach is potentially burdensome for MIAX members since some MIAX members might not maintain contact information for all other MIAX members.

133

NASDAQ believes that a better approach, given that the Options Clearing Corporation serves as the central clearing party for listed options trades, would be for the member to notify MIAX.

134

In response, MIAX revised Rule 507 to accommodate this suggestion, which MIAX believes should be less burdensome for members.

135

132

See

NASDAQ Letter,

supra

note 3, at 4.

133

See id.

134

See id.

135

See

MIAX Response Letter,

supra

note 4, at 13. MIAX notes that its revised rule is similar to the operation of ISE Rule 707.

See id.

The Commission finds that MIAX's proposed membership rules are consistent with the Act, including Section 6(b)(2) of the Act, which requires the rules of an exchange to provide that any registered broker or dealer or natural person associated with a broker or dealer may become a member of such exchange or associated with a member thereof.

136

MIAX's proposed rules with respect to exchange membership are substantively similar to the rules of other exchanges.

136

15 U.S.C. 78f(b)(2).

The Commission notes that pursuant to Section 6(c) of the Act,

137

an exchange must deny membership to any person, other than a natural person, that is not a registered broker or dealer, any natural person that is not, or is not associated with, a registered broker or dealer, and registered broker-dealers that do not satisfy certain standards, such as financial responsibility or operational capacity. As a registered exchange, MIAX must independently determine if an applicant satisfies the standards set forth in the Act, regardless of whether an applicant is a member of another SRO.

138

137

15 U.S.C. 78f(c).

138

See, e.g.,

BOX Order,

supra

note 18 at 26337; BATS Order,

supra

note 18, at 73 FR 49502; and Nasdaq Order,

supra

note 32, at 71 FR 3555.

In addition, members may enter into arrangements with other parties, including non-members and other members, to provide “Sponsored Access” to trading on MIAX.

139

Members who provide such Sponsored Access will be responsible for all trading conducted pursuant to the access agreement, and to the same extent as if the member were trading directly.

140

Accordingly, members that provide Sponsored Access must maintain and implement policies and procedures to supervise and monitor sponsored trading activity.

141

Additionally, non-members who seek to trade on MIAX through Sponsored Access agreements will need to agree to comply with all applicable federal securities laws and rules and MIAX Exchange rules.

142

MIAX's rules governing Sponsored Access arrangements are similar to the rules of other exchanges

143

and are consistent with Rule 15c3-5 under the Act.

144

139

See

MIAX Rule 210.

140

See

MIAX Rule 210(a).

141

See id.

142

See

MIAX Rule 210(d)(1)(i).

See also

Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (File No. 4-546) (order approving the national market system Plan Relating to Options Order Protection and Locked/Crossed Markets Submitted by the Chicago Board Options Exchange, Incorporated, ISE, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.).

MIAX Exchange rules include relevant definitions, establish the conditions pursuant to which members may enter orders in accordance with the Linkage Plan, impose obligations on MIAX Exchange regarding how it must process incoming orders, establish a general standard that members and MIAX Exchange should avoid trade-throughs, establish potential regulatory liability for members that engage in a pattern or practice of trading through other exchanges, and establish obligations with respect to locked and crossed markets.

The Commission believes that MIAX has proposed rules that are designed to comply with the requirements of the Linkage Plan.

146

Further, as provided below, before MIAX can commence operations as an exchange, it must become a participant in the Linkage Plan.

146

See

MIAX Rule 1400 Series.

3. Market Makers

a. Registration and Appointment

Members of MIAX may apply to become one of three types of market maker: Primary Lead Market Maker, Lead Market Maker, or Registered Market Maker (collectively, “Market Makers”). Market Makers are entitled to receive certain benefits and privileges in exchange for fulfilling certain affirmative and negative market-making obligations.

147

Each class of Market Maker will receive a specific level of benefits and privileges in exchange for a specific level of obligation that such Market Maker assumes to the MIAX market.

147

Market Makers' benefits and obligations are discussed in greater detail in the following section.

To begin the process of registering as a Registered Market Maker or Lead Market Maker, a member will be required to file a written application with MIAX.

148

In reviewing a member's application for membership, MIAX will consider, among other things, the applicant's market making ability.

149

Only approved Lead Market Makers

may apply to be considered for appointment as a Primary Lead Market Maker in one or more option classes traded on MIAX.

150

All members who are approved to become Market Makers will be designated as specialists on MIAX for all purposes under the Act and rules thereunder.

151

148

See

MIAX Rule 600(b).

149

See id.

The provision permitting MIAX to consider “such other factors as [it] deems appropriate” must be applied in a manner that is consistent with the Act, including provisions that prohibit an exchange from acting in an unfairly discriminatory manner.

See

15 U.S.C. 78f(b)(5);

see also

C2 Order,

supra

note 41, at n. 80, 76 FR at 66704.

150

See id.

151

See

MIAX Rule 600(a).

Once approved, a Market Maker would seek appointment to make markets in options classes.

152

Either the Exchange Board or a committee thereof

153

would evaluate an application for Market Maker status based on: (1) The financial resources available to the Market Maker; (2) the Market Maker's experience and expertise in market making or options trading; (3) the preferences of the Market Maker to receive appointment(s) in specific option class(es); and (4) the maintenance and enhancement of competition among Market Makers in each option class.

154

MIAX will allow one Primary Lead Market Maker appointment per class, and will have a maximum class quoting limit of fifty Market Makers per class.

155

Once appointed, MIAX will surveil a Market Maker's activity for continued compliance with all applicable rules and requirements, which are discussed in more detail below.

152

See

MIAX Rule 602.

153

See

MIAX Rule 602(a). MIAX Rule 1100 Series provides the process for hearings, review, and arbitration of claims by persons economically aggrieved by MIAX Exchange action, which would include denial of registration as a Market Maker.

154

See id.

155

See

Amendment No. 1 (in which MIAX revised its Rule 602(c) to increase the proposed class quoting limit from 10 to 50).

See also

Amendment No. 1 (revising MIAX Rule 604(e)(1) to provide that these obligations will be applied on a class-by-class basis).

164

See

MIAX Rule 604(e)(1)(i).

165

See

MIAX Rule 604(e)(1).

See also

Amendment No. 1 (revising MIAX Rule 604(e)(2) to provide that these obligations will be applied on a class-by-class basis).

166

See

MIAX Rule 604(e)(2).

167

See

MIAX Rule 604(e)(3).

See also

Amendment No. 1 (revising MIAX Rule 604(e)(3) to provide that these obligations will be applied on a class-by-class basis).

168

See

MIAX Rule 604(e)(3)(iii).

169

See

MIAX Rule 604(e)(1)-(3) (for Primary Lead Market Makers, Lead Market Makers, and Registered Market Makers, respectively).

In options classes other than to which they are appointed, a Market Maker is prohibited from engaging in transactions in an account in which it has an interest that are disproportionate to, or in derogation of, the performance of its market making obligations as set forth in the MIAX rules.

170

Further, the total number of contracts executed during a quarter by a Registered Market Maker in options classes to which it is not appointed may not exceed 25% of the total number of contracts traded by such Registered Market Maker in classes to which it is appointed.

171

Similarly, the total number of contracts executed during a quarter by a Lead Market Maker (including a Primary Lead Market Maker) in options classes to which it is not appointed may not exceed 10% of

the total number of contracts traded by such Lead Market Maker in classes to which it is appointed.

172

Executions resulting from orders in a Registered Market Maker's and Lead Market Maker's appointed classes are included in these 25% and 10% limitations, respectively.

173

170

See

MIAX Rule 603(d). Among other things, a Market Maker should not effect purchases or sales except in an orderly manner.

See id.

See also

ISE Rule 803(d) (containing an identical provision).

171

See

MIAX Rule 605(b)(2).

See also

ISE Rule 805(b)(2) (limiting the total number of contracts a Competitive Market Maker registered on that Exchange may execute per quarter in classes to which it is not appointed to 25% or less of the total contracts traded by that Market Maker in classes to which it is appointed).

172

See

MIAX Rule 605(b)(3);

see also

ISE Rule 805(b)(3) (limiting the total number of contracts a Primary Market Maker registered on that Exchange may execute per quarter in classes to which it is not appointed to 10% or less of the total contracts traded by that Market Maker in classes to which it is appointed.

173

See

MIAX Rule 605(b)(2)-(3). MIAX's inclusion of executions resulting from orders is more restrictive than similar rules of other exchanges, which do not include orders executed in appointed classes towards Market Makers' 25% and 10% limitations, respectively.

See, e.g.,

ISE Rule 805(b)(2)-(3).

See also

Amendment No. 1 (where MIAX revised Rule 605 to remove consideration of non-priority quotes from the 25% and 10% limitations). MIAX's proposal not to count non-priority quotes in the 25% or 10% buckets does not raise any new or novel issue because even a non-priority quote still would be required to meet the maximum differential provision contained in MIAX Rule 603(b)(4). Accordingly, such a valid width quote, even if it may not comply with a potentially narrower “priority quote width standard” under MIAX Rule 517(b)(ii), would still represent a valid width quote that can be counted towards a Market Maker's quoting obligation, consistent with the practice on other exchanges.

If MIAX finds any failure by a Market Maker to meet minimum performance standards or properly perform as a Market Maker, such Market Maker may be subject to suspension, termination, or restriction of registration in one or more of the securities in which the Market Maker is registered.

174

See

MIAX Rules 600 and 602(f).

Market Makers will receive certain benefits in return for satisfying their responsibilities.

175

For example, a broker-dealer or other lender may extend “good faith” credit to a member of a national securities exchange or registered broker-dealer to finance its activities as a market maker or specialist.

176

In addition, market makers are excepted from the prohibition in Section 11(a) of the Act.

177

The Commission believes that a market maker must be subject to sufficient and commensurate affirmative obligations, including the obligation to hold itself out as willing to buy and sell options for its own account on a regular or continuous basis, to justify favorable treatment.

178

The Commission further believes that the rules of all U.S. options markets need not provide the same standards for market maker participation, so long as they impose affirmative obligations that are consistent with the Act.

179

175

See, e.g.,

NOM Approval Order,

supra

note 115, at 73 FR 14526 (discussing the benefits and obligations of market makers).

176

See

12 CFR 221.5 and 12 CFR 220.7;

see also

17 CFR 240.15c3-1(a)(6) (capital requirements for market makers).

177

15 U.S.C. 78k(a).

178

See

NOM Approval Order,

supra

note 115, at 73 FR 14526.

179

See id.

The Commission believes that MIAX's Market Maker participation requirements impose appropriate affirmative obligations on MIAX Exchange's Market Makers that are commensurate with the benefits afforded to such participants and, accordingly, are consistent with the Act.

Specifically, with regard to MIAX's proposed continuous quoting obligations, only those quotes that are liquidity providing—Standard quotes and Day eQuotes—will be counted towards a Market Maker's quoting obligations, rather than all types of eQuotes that a Market Maker will be permitted to utilize.

180

The Commission believes that this treatment is appropriate under the Act and consistent with a Market Maker's obligation to contribute to the maintenance of a fair and orderly market. Further, the Commission believes that the specific levels of benefits conferred on the different classes of Market Makers are appropriately balanced by the obligations imposed by MIAX's rules. For example, as discussed below, Primary Lead Market Makers and Lead Market Makers are entitled to certain participation entitlements,

181

and at the same time, are subject to heightened continuous quoting obligations to justify these special benefits.

182

180

See infra

Section III(C)(5) (discussing the various quote types that Market Makers can utilize).

181

See infra

notes 225-240 and accompanying text (describing the Primary Lead Market Maker and Directed Lead Market Maker participation entitlements).

See also

infra

Section III(C)(5) (discussing the benefit Market Makers receive from the MIAX priority quote rule).

182

See supra

Section III(C)(3)(b) (describing Primary Lead Market Maker and Lead Market Maker quoting obligations).

Finally, the Commission believes that the Act does not mandate a particular market model for exchanges, and while Market Makers may become an important source of liquidity on MIAX, they will likely not be the only source as MIAX is designed to match buying and selling interest of all MIAX participants.

4. Order Display, Execution, and Priority

MIAX will operate a fully automated electronic options marketplace. Liquidity will be derived from orders to buy and orders to sell, as well as market maker quotations, submitted to MIAX electronically by its members from remote locations. There will be no physical trading floor. Options traded on the Exchange will be subject to Minimum Price Variations that will begin at $0.05 for option contracts trading at less than $3.00 per option, and $.10 for option contracts trading at $3.00 per option or higher.

183

In addition, MIAX will participate in the penny pilot program pursuant to which it will permit certain options with premiums under $3 (as well as heavily traded options on certain indices) to be quoted and traded in increments as low as $.01.

184

183

See

MIAX Rule 510(a).

184

NASDAQ points out that MIAX's rule concerning the “penny pilot” did not contain a date for the end of the penny pilot.

See

NASDAQ Letter,

supra

note 3, at 3. In response, MIAX amended its Rule 510 to insert the industry-wide date for the schedule expiration the penny pilot (

i.e.,

December 31, 2012), and MIAX noted that at the time it filed its Form 1 application, the scheduled expiration of the penny pilot was June 30, 2012 (which the Commission notes preceded publication of the notice of MIAX's Form 1 application in the

Federal Register

See

MIAX Response Letter,

supra

note 4, at 13. MIAX notes that the December 31, 2012 expiration date conforms to other exchange rules, including CBOE Rule 6.42 and ISE Rule 710.

See id.

All orders and quotes submitted to MIAX will be displayed unless: (i) The order is a contingent order (such as immediate or cancel orders); or (ii) the quote is a certain type of eQuote

185

(such as an Auction or Cancel eQuote). Displayed orders and quotes will be displayed on an anonymous basis (except for attributable orders,

186

which will allow voluntary disclosure of firm identification information) at a specified price. Non-displayed orders will not be displayed to any participant.

185

See infra

Section III(C)(5) (discussing eQuotes). The Commission notes that MIAX has not proposed orders with reserve size at this time.

186

An Attributable Order is a market or limit order which displays the user firm's ID for purposes of trading on MIAX. Use of Attributable Orders will be voluntary. This order type is consistent with similar order types on other exchanges.

See, e.g.,

CBOE Rule 6.53(o) (attributable order type).

In certain cases, orders and quotes may be displayed at a price different from the price specified by the submitting member.

187

One such case is

non-displayed penny orders. Specifically, MIAX proposes to allow a member to enter an order or quote (as applicable) priced in a penny increment for series that are subject to a minimum price variation other than a penny (

e.g.,

5 cents or 10 cents). The order would be displayed at the applicable minimum increment (rounded as appropriate), not the narrower penny price, but would be available for execution at the non-displayed penny price (

i.e.,

a “non-displayed penny order”).

188

With respect to MIAX's proposed use of non-displayed penny orders, the ISE Letter appears to assert that MIAX has proposed to permit non-displayed prices to be entered in regular trading increments in all classes, which (if true) ISE would oppose to the extent it could decrease transparency and further internalization of order flow.

189

ISE believes that MIAX's proposal on this point could be much broader than what has been previously approved by the Commission.

190

In response, MIAX notes that, pursuant to MIAX Rule 516(b)(3), non-displayed penny orders will only be accepted in designated classes, which must have a minimum price variation larger than one penny.

191

MIAX notes that such orders, which are limit orders priced in a one-cent increment, are executable at their stated penny limit price, but are displayed at the closest minimum price variation that does not violate the limit price.

192

MIAX reiterated that it does not propose to handle orders and quotes in a manner that will permit non-displayed prices in the regular trading increments in all options classes, and that its proposed rule is not intended to be broader than what has previously been approved by the Commission.

193

To clarify this point, MIAX revised Rule 516(b)(3) to state that non-displayed penny orders would only be accepted in designated classes and must have a minimum pricing variation larger than one penny.

194

187

In its comment letter, ISE disagreed with the broad statement in Exhibit E of MIAX's Form 1 application that says that orders and quotes will be displayed at the price specified by the submitting member. ISE points out that there are two additional instances, beyond what MIAX described in its Exhibit E, where an order or quote will not be displayed at the submitted price: (1) Customer interest (either Professional or Priority customers) that is marked Do Not Route that would lock or cross the NBBO; and (2) market maker quotes and orders that would trade through the ABBO.

See

ISE Letter,

supra

note 3, at 1-2. In each case, the orders will be displayed one minimum price variation away from the opposite side NBBO, but will remain available for execution on MIAX at the price that locks the NBBO.

See

ISE Letter,

supra

note 3, at 1-2. In response, MIAX revised Exhibit E to note all

instances of when orders and quotes will not be displayed or will be displayed at one price and executable at a different price.

See

MIAX Response Letter,

supra

note 4, at 3-4.

188

See

MIAX Rule 516(b)(4) (Non-displayed Penny Order). This functionality is based on similar rules of other exchanges.

See, e.g.,

CBOE Rule 6.13B (Penny Price Improvement).

189

See

ISE Letter,

supra

note 3, at 2.

190

See id.

191

See

MIAX Response Letter,

supra

note 4, at 9.

192

See id.

193

See id.

194

See id.

In its comment letter, NASDAQ notes that proposed MIAX Rule 516(b)(4) is silent on what would happen if a member attempted to submit a non-displayed penny order in an option that is not eligible for such orders.

195

In response, MIAX amended proposed MIAX Rule 516(b)(3) to state that such order would be rejected.

196

195

See

NASDAQ Letter,

supra

note 3, at 3.

196

See

MIAX Response Letter,

supra

note 4, at 9.

Members may submit the following types of orders: Market; Limit (including Marketable Limit, Fill-or-Kill, Immediate-or-Cancel, Non-Displayed Penny,

197

and Auction or Cancel (“AOC”)); WAIT;

198

Attributable; Intermarket Sweep (“ISO”); Do Not Route;

199

Opening; Customer Cross; Qualified Contingent Cross; Day Limit; and Good `Til Cancelled.

200

With the exception of the AOC Order, which is unique to MIAX, all of these order types are based on similar order types available on other options exchanges.

201

MIAX's AOC Order is a limit order which is used to provide liquidity during a specific MIAX Exchange mechanism (

e.g.,

the opening imbalance mechanism in MIAX Rule 503) with a time in force that corresponds to the duration of that event.

202

In other words, such an order would automatically expire at the end of the auction or event. AOC Orders are not displayed to any market participant, are not included in the MIAX best bid or offer, are not eligible for trading outside of the event, and may not be routed. The Commission believes that this order type, while not specifically based on an order type on another exchange, is substantially similar to order types approved by the Commission on other exchanges for use in various auction mechanisms, which are similarly not displayed to any participant and have a limited time in force related to the auction, and thus raises no new regulatory issues.

203

197

See supra

note 188.

198

“WAIT” orders are orders that, upon entry into the MIAX system, are held for one second without processing for potential display and/or execution. After one second, the order is processed for potential display and/or execution in accordance with all order entry instructions as determined by the entering party.

See

MIAX Rule 516(c).

See also

NYSE Arca Rule 6.62(w) (containing an identical type of WAIT Order).

199

In its comment letter, ISE notes that MIAX Rule 520 does not address how hidden prices that may result from the display of Do Not Route orders are treated for the requirement to expose orders before attempting to trade against them.

See

ISE Letter,

supra

note 3, at n. 6. MIAX clarified this point by revising Rule 520 (Limitation on Orders) to add new Interpretation .04 stating that Market Maker orders and quotes displayed at a price other than their limit price or quote price as described in Rule 515(d), and orders subject to the managed interest process—which includes all Do Not Route orders that could not be executed in full and are not cancelled—are not deemed to be “exposed” for purposes of Rule 520.

See

MIAX Response Letter,

supra

note 4, at 8-9.

In addition, NASDAQ requests clarification on MIAX Rule 516(f) regarding Do Not Route orders and how they operate when the NBBO locks contemporaneously.

See

NASDAQ Letter,

supra

note 3, at 4. In response, MIAX revised MIAX Rule 516(g) (previously 516(f)) to clarify that a Do Not Route order may execute at a price equal to or better than, but not inferior to, the best away market price, and if, after exhausting interest on MIAX, the best away market remains and the Do Not Route order has not been fully executed, the order will be handled in accordance with MIAX's managed interest process.

See

MIAX Response Letter,

supra

note 4, at 7-8. MIAX further notes that in case of contemporaneous locks, Do Not Route orders will be handled as set forth in MIAX Rules 515 and 516.

See

MIAX Response Letter,

supra

note 4, at 8. Further, ISE requests a technical clarification about the use of the term “away best bid/offer” in MIAX Rule 516(f), and whether it is intended to be different from the term “ABBO.”

See

ISE Letter,

supra

note 3, at n. 3. In response, MIAX eliminated this term in Rule 516 and instead notes that the specifics for handling a Do Not Route Order are set forth in Rule 515(c)(2), which explains such orders' handling without using the term “away best bid/offer.”

See

MIAX Response Letter,

supra

note 4, at 7.

200

See

MIAX Rule 516 for a description of each of the order types. MIAX notes that not all of these order types will be available upon initiation of operations. Rather, MIAX Exchange will update members through Regulatory Circulars as to the order types that will be available initially.

See also

infra

Section III(C)(5) (discussing various quote types that market makers may submit). NASDAQ argues that MIAX should be compelled to define which order types will be available and file changes when new order types are introduced.

See

NASDAQ Letter,

supra

note 3, at 3. In response, MIAX represents that it plans to use each of the order types listed in Rule 516 in the foreseeable future and states that it believes that its rule provides adequate detail about each order type.

See

MIAX Response Letter,

supra

note 4, at 14. In addition, MIAX represents that it will file a proposed rule change whenever it seeks to introduce a new order type.

See

MIAX Response Letter, supra note 4, at 14-15. The Commission agrees that MIAX has appropriately set forth in its rules the order types that it plans to introduce, has represented that it intends to utilize all of the proposed order types contained in its current proposed rules, and has acknowledged that it will need to file a proposed rule change if it ever seeks to introduce additional new order types.

201

See, e.g.,

NOM Chapter VI, Section 1(g)(5) (WAIT Order); ISE rule 715(h) (Attributable Order); NOM Chapter VI, Section 1(e)(8) (Intermarket Sweep Order); Phlx Rule 1080(m)(iv)(A) (Do Not Route Order); ISE Rule 714(i) (Customer Cross Order); ISE Rule 715(j) (Qualified Contingent Cross Order); NYSE MKT Rule 131 (Day Order and Good `Til Cancelled Order).

202

See

MIAX Rule 517(a)(2)(ii).

203

See, e.g.,

CBOE Rule 6.13A, Simple Auction Liaison (“SAL”).

See also

Securities Exchange Act Release No. 54229 (July 27, 2006), 71 FR 44058 (August 3, 2006) (CBOE-2005-90) (order approving a proposal to adopt a Simple Auction Liaison system to auction qualifying inbound orders for potential price improvement).

Trades will execute on MIAX when orders or quotes on the MIAX order book match one another.

204

The MIAX system will continuously and automatically match orders pursuant to

either price/time priority or pro-rata priority, as determined by MIAX on a class-by-class basis.

205

204

NASDAQ points out that MIAX Rules 511 (Acceptance of Quotes and Orders) and 512 (Contract Made on Acceptance of Bid or Offer) appear to be duplicative.

See

NASDAQ Letter,

supra

note 3, at 4. In response, MIAX has deleted MIAX Rule 512 as duplicative.

See

MIAX Response Letter,

supra

note 4, at 13.

205

See

MIAX Rule 514.

MIAX also will offer additional priority overlays at its discretion on a class-by-class basis, which include “Priority Customer” and “Market Turner” overlays. Priority overlays would only be applicable for pro rata priority.

206

Under the “Priority Customer” overlay, the highest bid and lowest offer will have priority except that Priority Customer orders

207

will have priority over “professional interest”

208

and all Market Maker interest at the same price.

209

If there were two or more Priority Customer orders for the same options series at the same price, priority would be afforded based on the sequence in which such orders were received. This priority overlay is the same as public customer priority overlays that have been approved by the Commission on other exchanges.

210

206

See Amendment No. 1.

See also

infra

notes 218 to 224 and accompanying text (describing more completely the revisions MIAX made to the priority rules in response to comments).

207

MIAX rules define “priority customer” as a person or entity that (i) is not a broker or dealer in securities, and (ii) does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s).

See

MIAX Rule 100.

See also

ISE Rule 100(a)(37A) (containing an identical definition of “priority customer”).

208

Pursuant to MIAX Rule 100, “professional interest” includes: (i) An order that is for the account of a person or entity that is not a Priority Customer, and (ii) an order or non-priority quote for the account of a Market Maker.

See also

infra

notes 284-290 for a discussion of “priority” and “non-priority” quotes.

209

See

MIAX Rule 514(d)(1).

210

See, e.g.,

CBOE Rule 6.45A(a)(ii)(1).

Under the “Market Turner” priority overlay, the “Market Turner” refers to the participant that was the first to enter an order or quote at a better price than the previous best disseminated MIAX price, where such order or quote is continuously in the market until the order or quote trades. When this priority overlay is in effect, the Market Turner would have priority at the highest bid or lowest offer that he or she established.

211

The Commission notes that an identical Market Turner priority overlay has been approved for use on another exchange.

212

211

See

MIAX Rule 514(d)(2).

212

See

CBOE Rule 6.45A(a)(iii)(2).

In its comment letter, ISE asks for clarification on the proposed execution priority provisions, including priority overlays. Specifically, ISE believes that it is difficult to understand how the different combinations or allocation methodologies, priority overlays, and entitlements will work.

213

ISE noted that the Form 1, by design, does not require a level of detail and discussion, as well as statutory analysis, which is required in SRO proposed rule changes filed on Form 19b-4.

214

For example, ISE presents an example of an allocation methodology that consists of pro rata with a Priority Customer and Market Turner overlays and asks how the overlays would interact with each other on MIAX.

215

NASDAQ also asks whether the priority provisions contained in MIAX Rule 514, when read in conjunction with the execution processes in MIAX Rule 515, might result in the ability for directing or internalizing orders in a new way.

216

In particular, NASDAQ asks about the interplay between the market turner overlay, non-displayed penny orders, and the liquidity refresh pause.

217

213

See

ISE Letter,

supra

note 3, at 3.

214

See id.

215

See id.

216

See

NASDAQ Letter,

supra

note 3, at 2.

217

See id.

In response, MIAX amended proposed MIAX Rules 514 and 515 to clarify the operation of two different trade allocation methodologies (

i.e.,

price-time and pro rata) with the possible priority overlays, which includes clarification of the different priority overlays that are applicable to a pro rata allocation methodology.

218

Specifically, MIAX revised proposed Rule 514 to clarify that the Market Turner overlay will never be in effect in conjunction with any other priority overlays, and that the priority overlays are only applicable to the pro rata allocation methodology (

i.e.,

the priority overlays cannot be used in conjunction with the price time methodology).

219

MIAX also clarified in Rule 514(d) that market maker priority quotes have precedence over other professional interest under the pro rata methodology only (

i.e.,

priority quotes would not have precedence under the price time methodology).

220

218

See

MIAX Response Letter,

supra

note 4, at 10-11.

219

See id.

220

See id.

See also

infra

Section III(C)(5) for a more detailed discussion of priority quotes.

In addition, MIAX expanded the discussion in Exhibit E to its Form 1 application to provide a detailed description of how the different trade allocation and priority overlays would operate.

221

MIAX also provided a series of examples to illustrate the proposed operation of its execution rule.

222

MIAX states that the clarifications to the rule text make clear that it has no intention to allow for the ability for directing or internalizing orders in a way not previously approved by the Commission.

223

Further, in response to NASDAQ, MIAX stated that it does not believe that there is any unique aspect to the operation of the market turner priority overlay, the liquidity refresh pause, or the rules related to non-displayed penny orders on MIAX or the overall functionality of these features when used in combination on the Exchange.

224

221

See

MIAX Response Letter,

supra

note 4, at 10.

222

See

Amendment No. 1.

223

See

MIAX Response Letter,

supra

note 4, at 2.

224

See id.

In addition, proposed MIAX rules provide that it may grant Primary Lead Market Makers and Lead Market Makers certain participation entitlements. For example, Primary Lead Market Makers

225

may be entitled to a participation entitlement with respect to each incoming order if they have a priority quote

226

at the National Best Bid and Offer (“NBBO”).

227

The Primary Lead Market Maker participation entitlements will only be in effect if the Priority Customer overlay also is in effect and will apply only to any remaining balance after any Priority Customer orders have first been satisfied.

228

Further, neither a Primary Lead Market Maker nor a Lead Market Maker could be allocated a total quantity greater than the quantity they are quoting at the execution price, and they will not receive any further allocation of an order if they receive a participation entitlement.

229

225

See supra

Section III(C)(3) (discussing the various categories of Market Makers, including Primary Lead Market Makers).

226

See infra

Section III(C)(5) (discussing priority quotes).

227

See

MIAX Rule 514(g). Specifically, the Primary Lead Market Maker's participation entitlement will be equal to the greater of: (i) The proportion of the total size at the best price represented by the size of its quote, or (ii) 60% of the contracts to be allocated if there is only one other Market Maker quotation at the NBBO or 40% if there are two or more other Market Maker quotes at the NBBO.

See

MIAX Rule 514(g)(1).

228

See

MIAX Rule 514(g).

229

See

MIAX Rule 514(i)(4).

Another such entitlement provides that small size orders (

i.e.,

five or fewer contracts) will be allocated in full to the Primary Lead Market Maker if it has a priority quote at the NBBO.

230

In its comment letter, NASDAQ commented that MIAX Rule 514(g)(2), which provides this small order preference to Primary Lead Market Makers, states that small size is “initially” defined as 5 or fewer contracts.

231

NASDAQ argues that

MIAX should not be allowed to have the discretion to change that number without filing a proposed rule change, and worries that MIAX might seek to unilaterally define such orders as “10 or 50 contracts” without first submitting a rule filing.

232

In response, MIAX amended Rule 514(g)(2) to avoid any doubt by stating that “small size orders are defined as five (5) or fewer contracts.”

233

MIAX further represents that any changes to the small size order rule would be made pursuant a subsequent proposed rule change filing with the Commission.

234

230

See

MIAX Rule 514(g)(2). The rule provides that MIAX Exchange will review the functioning of this provision quarterly to make sure that small size orders do not account for more than 40% of the volume executed on MIAX.

231

See

NASDAQ Letter,

supra

note 3, at 3.

232

See id.

233

See

MIAX Response Letter,

supra

note 4, at 13.

234

See id.

MIAX also permits Electronic Exchange Members

235

to utilize Directed Orders.

236

A “Directed Order” refers to an order that an Electronic Exchange Member enters into the MIAX system and directs to a particular Lead Market Maker, including a Primary Lead Market Maker

237

(“Directed Lead Market Maker”). The Lead Market Maker must have an appointment in the relevant options class to receive a Directed Order in that class. A Directed Lead Market Maker may be granted a participation entitlement if he or she has a priority quote at the NBBO.

238

The Directed Lead Market Maker participation entitlement will only be in effect if the Priority Customer overlay also is in effect and will apply only to any remaining balance after Priority Customer orders have first been satisfied. The Commission believes that these participation entitlements for Primary Lead Market Makers and Directed Lead Market Makers are consistent with those that the Commission has approved for other exchanges.

239

Further, the Commission believes that these entitlements are appropriately balanced by the obligations imposed on these classes of market makers, as discussed in detail above.

240

In particular, the Commission notes that Primary Lead Market Makers and Lead Market Makers are subject to higher quoting obligations than other Registered Market Makers who are not eligible to receive the aforementioned participation entitlements.

241

Therefore, the Commission believes that the proposed rules regarding participation entitlements are consistent with the Act.

235

An Electronic Exchange Member is the holder of a trading permit who is not a Market Maker.

See

MIAX Rule 100.

236

See

MIAX Rule 514(h).

237

See supra

Section III(C)(3) (discussing the various categories of market makers, including Lead Market Makers).

238

See

MIAX Rule 514(h). Specifically, the Directed Lead Market Maker's participation entitlement will be equal to the greater of: (i) The proportion of the total size at the best price represented by the size of its quote; or (ii) 60% of the contracts to be allocated if there is only one other Market Maker quotation at the NBBO or 40% if there are two or more other Market Maker quotes at the NBBO.

239

See, e.g.,

ISE Rule 713, Supp. 01 and .03.

240

See supra

Section III(C)(3)(b) (discussing market maker obligations).

241

As discussed above,

supra

Section III(C)(3)(b), Primary Lead Market Makers must provide continuous two-sided quotes 99% of the time in: (i) The lesser of 99% of the series, or 100% of the series minus one put-call pair, in each appointed class that is traded on at least one other exchange; and (ii) 100% of the series in each appointed class that is singly listed on MIAX.

See

MIAX Rule 604(e)(1). Lead Market Makers must provide continuous two-sided quotes 90% of the time in 90% of the series in each of its appointed classes.

See

MIAX Rule 604(e)(2).

In its comment letter, ISE identifies several proposed MIAX rules that ISE believes would benefit from increased detail or description. For example, ISE opines that certain aspects of Rule 514 (regarding quote priority) and Rule 515 (regarding processing of orders and quotes) may be novel.

242

In response, MIAX states that it does not believe that any aspects of MIAX Rules 514 or 515 raise new issues not previously addressed by the Commission; nevertheless MIAX made revisions to those rules to clarify their operation.

243

242

See

ISE Letter,

supra

note 3, at 1.

243

See

MIAX Response Letter,

supra

note 4, at 2.

In its comment letter, NASDAQ expresses concern over a few MIAX rules that used terms such as “from time to time” or “may.”

244

For example, NASDAQ notes MIAX Rule 514(j) that says MIAX may, from time to time, make available to members the quantity of Priority Customer contracts included in its best bid and offer.

245

NASDAQ questions when MIAX might do this and asks whether this would be a market data feed.

246

NASDAQ asks for a more detailed description of this provision, and recommends that it not be adopted at this time if MIAX is not prepared to roll it out at its commencement of operations.

247

In response, MIAX revised several of its proposed rules to add further detail including changing the terms “from time to time” or “may” to a more definitive “will” or a more specific time frame.

248

For example, MIAX revised MIAX Rule 503(b) concerning openings to clarify that the procedure described in that rule “will” be used to reopen a class after a trading halt.

249

In addition, MIAX amended MIAX Rule 514(h) to provide that eligible order types for Directed Lead Market Makers will only be set forth in the MIAX Rules and not by regulatory circular.

250

Further, MIAX deleted MIAX Rule 514(j) and instead has included text in MIAX Rule 506 to clarify that it “will” make available to subscribers of its data feeds and to all market participants through the public data feed an indication when there is Public Customer interest included in the MBBO.

251

244

See

NASDAQ Letter,

supra

note 3, at 2.

245

See id.

246

See id.

247

See id.

248

See

MIAX Response Letter,

supra

note 4, at 12-13.

249

See id.

250

See id.

at 13.

251

See id.

at 12.

In addition, NASDAQ recommends that MIAX Rule 503(h) and (i), which use the term “may,” should be clarified to specify how a closing procedure would be employed after the close of the market.

252

In response, as noted above, MIAX revised MIAX Rule 503 to replace the word “may” with the word “will” to clarify that the procedure described in that rule “will” be used to reopen a class after a trading halt.

253

Further, MIAX deleted MIAX Rule 503(i) concerning rotations in the event of a trading halt in a proprietary product because MIAX does not have any proprietary products at the time and that provision would be inapplicable currently.

254

252

See

NASDAQ Letter,

supra

note 3, at 2.

253

See

MIAX Response Letter,

supra

note 4, at 13.

254

See id.

at 12.

NASDAQ also requests clarification on MIAX Rule 503(e)(1) concerning the opening process, and in particular, whether MIAX would consider off-exchange trades or trades on markets other than the primary market when it decides whether to open an option class for trading.

255

In response, MIAX revised MIAX Rule 503(e)(1) to clarify that the opening process will begin following the dissemination of a quote or trade in the “market for the underlying security,” which MIAX previously defined in MIAX Rule 503(d) as either the primary listing market, the primary volume market, or the first market to open the underlying security, as determined on a class-by-class basis and announced to members in advance.

256

255

See

NASDAQ Letter,

supra

note 3, at 2.

256

See

MIAX Response Letter,

supra

note 4, at 13.

Further, NASDAQ recommends that MIAX Rule 503(g) be clarified to be more specific about when the Help Desk may deviate from the standard manner of the opening procedure.

257

In response, MIAX revised Rule 503 to note that the Help Desk may delay (rather than “deviate”) the opening procedure when necessary in the interests of maintaining a fair and

orderly market.

258

MIAX notes that Phlx Rule 1047(c) similarly allows an exchange official to delay the opening procedure, and that the Phlx rule provides the same level of detail as the revised MIAX rule.

259

257

See

NASDAQ Letter,

supra

note 3, at 2.

258

See

MIAX Response Letter,

supra

note 4, at 12.

259

See id.

at 14.

NASDAQ believes that MIAX's proposed rule text provides MIAX with too much discretion concerning the order types that initially will be available for use on MIAX, and argues that MIAX should be compelled to define which order types will be available when and file new rule changes when new order types are introduced or when order types are processed differently.

260

See

NASDAQ Letter,

supra

note 3, at 2-3. NASDAQ notes that existing exchanges are required to file detailed rule changes that describe how a proposed rule would work.

See id.

NASDAQ notes that the details and specific functionality are important to users, who need to understand how their orders will be handled in various situations.

See id.

at 3.

For example, NASDAQ notes MIAX Rule 516 states that “not all order types listed and described in this rule will be initially available for use on the Exchange.”

261

NASDAQ argues that, if the functionality related to certain order and quote types is not available on MIAX, then MIAX should specify in its rules what is available and file proposed rule changes when it introduces additional order or quote types and related functionality.

262

In response, MIAX believes it is permissible and appropriate to list in its rules all order and quote types that it intends to use soon after it commences operations, provided that the applicable rules contain a sufficient level of detail about each order and quote type.

263

MIAX believes that MIAX Rules 516 and 517 provide adequate detail on each of the order and quote types listed therein.

264

MIAX further believes that it is appropriate to use a regulatory circular to specify which order and quote types have been activated from among those specified in its rules.

265

MIAX represents that it intends to activate in the foreseeable future each of the proposed order and quote types contained in its proposed rules.

266

261

See

NASDAQ Letter,

supra

note 3, at 2.

262

See id.

at 3. For example, NASDAQ notes that MIAX Rule 516(d) says that Attributable Orders may not be available for all MIAX systems and MIAX would issue a Regulatory Circular specifying which systems and class of securities will have Attributable Orders.

See id.

In response, MIAX has revised Rule 516(e) (previously Rule 516(d)) to clarify that Attributable Orders will be available in the MIAX system on initial launch.

See

MIAX Response Letter,

supra

note 4, at 8.

263

See

MIAX Response Letter,

supra

note 4, at 14-15.

264

See id.

MIAX notes that other exchanges have similar rules, for example C2 Options Exchange.

265

See id.

266

See id.

at 14.

In addition, NASDAQ notes that MIAX Rule 514(g)(2) states that MIAX will advise membership through a Regulatory Circular when additional order types are eligible to be directed.

267

NASDAQ believes this flexibility may be problematic, and notes that directed orders can warrant additional regulatory scrutiny in light of the issues surrounding participation guarantees that usually accompany directed orders.

268

In response, MIAX amended MIAX Rule 514(h)(2) to remove its ability to specify this information in a regulatory circular and instead represents that it will submit a rule filing with the Commission when it proposes to extend directed order functionality to additional order types.

269

MIAX further represents that any order types eligible to be directed will be set forth in the MIAX rules.

270

267

See

NASDAQ Letter,

supra

note 3, at 3.

268

See id.

269

See

MIAX Response Letter,

supra

note 4, at 13.

270

See id.

The Commission believes that MIAX Exchange's proposed display, execution, and priority rules discussed above in this section are consistent with the Act. In particular, the Commission finds that the proposed rules are consistent with Section 6(b)(5) of the Act,

271

which, among other things, requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, 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, and to not permit unfair discrimination between customers, issuers, or dealers. The Commission also finds that the proposed rules are consistent with Section 6(b)(8) of the Act,

272

which requires that the rules of an exchange not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The trading rules of MIAX are substantially similar to the current trading rules of other exchanges, as noted above, which were filed with and approved by the Commission (or otherwise became effective) pursuant to Section 19(b) of the Act. Therefore, the Commission believes that these rules raise no new regulatory issues and are consistent with the Act. However, certain MIAX trading rules are, in fact, novel in some respect or unique to MIAX and may not be similarly based on the existing rules of other exchanges. The trading rules that are novel or unique to MIAX, including the use of eQuotes, priority quotes, and exposure mechanisms, are discussed separately in detail below.

271

15 U.S.C. 78f(b)(5).

272

15 U.S.C. 78f(b)(8).

5. eQuotes and Priority Quotes

The MIAX rules provide that Market Makers will be permitted to submit bids and offers to MIAX as orders, Standard quotes, or “eQuotes.”

273

Standard quotes refer to the traditional type of quotes that exist on other markets, and submission of a Standard quote by a Market Maker will cancel and replace any previously submitted Standard quote by the Market Maker.

274

In contrast, eQuotes will be quotes with a specific time in force, and Market Makers will be permitted to submit multiple eQuotes to MIAX Exchange (in addition to their single Standard quote).

275

In other words, the submission of an eQuote will not replace an existing Standard quote or eQuote. Thus, while Market Makers could only have one Standard quote active at any one time, they will be permitted to have multiple types of eQuotes active in a single series. The types of eQuotes available on MIAX will include Day eQuotes, Auction or Cancel (“AOC”) eQuotes, Opening Only (“OPG”) eQuotes, Immediate or Cancel (“IOC”) eQuotes, Fill or Kill eQuotes (“FOK”), and Intermarket Sweep eQuotes.

276

MIAX's proposed eQuote types are analogous to order types, often of the same name, that could be used by members and Market Makers on MIAX, as discussed above, except that the eQuotes would be submitted by Market Makers through their quote handling

terminal and may receive priority over other orders and quotes, as discussed below.

277

273

See

MIAX Rule 517.

274

See

MIAX 517(a)(1).

275

While Market Makers would be permitted to layer the book with multiple types of quotes, MIAX Rule 517(a)(2)(i) provides that one type of eQuote, the Day eQuote, will have limitations as to the number of such quotes that a single Market Maker could place on the same side of an individual option. This limitation is no more than 10 Day eQuotes on the same side of an individual option (as that term is defined in MIAX Rule 100), and the specific limit within this range would be sent to members through a Regulatory Circular. The same limit will apply to all types of Market Makers. MIAX has stated in its Form 1 that it does not intend to allow to the use of Day eQuotes upon initiation of its operations.

See

Exhibit E of MIAX's Form 1 Application.

276

See

MIAX Rule 517(a)(2) for a description of each of the e-Quote types. MIAX notes that not all of these order types will be available upon initiation of operations. Rather, MIAX will update members through Regulatory Circulars as to the order types that initially will be available and as additional order types become available.

277

NASDAQ pointed out an inconsistency between MIAX's proposed Rule 612(a) and MIAX's technical system specifications, as the technical specifications say that eQuotes are not considered for purposes of the MIAX Aggregate Risk Manager.

See

NASDAQ Letter,

supra

note 3, at 3. NASDAQ recommended that MIAX clarify this point in its rule text.

See id.

In response, MIAX states that it believes the rule and the technical specifications are both correct as written.

See

MIAX Response Letter,

supra

note 4, at 15. Specifically, MIAX notes that it does not plan to support Day eQuotes at its initial launch.

See id.

Accordingly, the technical specifications are accurate in that Day eQuotes would not be considered at this time for purposes of the Aggregate Risk Manager.

See id.

The subsequent introduction by MIAX of Day eQuotes would require corresponding amendments to the technical specifications.

See id.

The Commission believes that the proposed eQuotes provisions are consistent with the Act. The Commission acknowledges that, while Market Maker “quotes” traditionally

provide

liquidity to the market, MIAX's proposed eQuotes will allow Market Makers to utilize various types of “quotes” that may instead

remove

liquidity from the market. However, under MIAX's proposed rules, only certain types of quotes that

provide

liquidity (

i.e.,

only Standard quotes and Day eQuotes) will be permitted to count toward a Market Maker's continuous quoting obligations.

278

In other words, Market Makers on MIAX will still be required to post traditional, continuous two-sided quotes that provide liquidity to the market.

278

See

MIAX Rule 604(e);

See also

Securities Exchange Act Release No. 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (regarding the American Stock Exchange (“Amex”) Post Execution Reporting System, the Amex Switching System, the Intermarket Trading System, the Multiple Dealer Trading Facility of the Cincinnati Stock Exchange, the PCX Communications and Execution System, and the Philadelphia Stock Exchange (“Phlx”) Automated Communications and Execution System) (“1979 Release”).

Second, Rule 11a2-2(T) requires that the member not participate in the execution of its order once it has been transmitted to the member performing the execution. MIAX has represented that the MIAX trading system will at no time following the submission of an order allow a member or an associated person of such member to acquire control or influence over the result or timing of an order's execution.

310

According to MIAX, the execution of a member's order is determined solely by what orders, bids, or offers are present in the MIAX trading system at the time the member submits the order and the order priority based on MIAX rules.

311

Accordingly, the Commission believes that a MIAX member will not participate in the execution of its order submitted into the trading system.

310

See

MIAX 11(a) Request Letter,

supra

note 308. Members may change or cancel an order or quote at any time before the order is executed on the Exchange.

See

MIAX Form 1 Application, Exhibit E. The Commission has stated that the non-participation requirement is satisfied under such circumstances, so long as such modifications or cancellations are also transmitted from off the floor.

See

1978 Release,

supra

note 307 (stating that the “non-participation requirement does not prevent initiating members from canceling of modifying orders (or the instructions pursuant to which the initiating member wishes orders to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor”).

311

See

MIAX11(a) Request Letter,

supra

note 308.

Rule 11a2-2(T)'s third condition is that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the MIAX trading system, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages over non-members in handling their orders after transmitting them to MIAX Exchange.

312

MIAX has represented that the design of its trading system ensures that no member has any special or unique trading advantage over non-members in the handling of its orders after transmitting its orders to MIAX.

313

Based on MIAX's representation, the Commission believes that the MIAX trading system satisfies this requirement.

312

In considering the operation of automated execution systems operated by an exchange, the Commission noted that while there is no independent executing exchange member, the execution of an order is automatic once it has been transmitted into each system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2-2(T).

See

1979 Release.

313

See

MIAX 11(a) Request Letter,

supra

note 308.

Fourth, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2-2(T).

314

MIAX members trading for covered accounts over which they exercise investment discretion must comply with this condition in order to rely on the rule's exemption.

315

314

17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated person thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement.

See

17 CFR 240.11a2-2(T)(d).

See also

1978 Release,

supra

note 307 (stating “[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests”).

315

See

MIAX 11(a) Request Letter,

supra

note 308.

7. Exposure Mechanisms and Routing

MIAX's system is designed to automatically execute incoming orders or quotes against orders and quotes in its system, provided that such incoming orders and quotes will not be executed at prices inferior to the NBBO.

316

In the event that an incoming order could not be fully executed on MIAX because it would trade through the NBBO (see “Route Timer,” below) or, in certain cases, because there is insufficient size on MIAX to execute an incoming order in full when that order exhausts a Market Maker quote (see “Liquidity Refresh Pause,” below), its proposed execution rules provide for the use of exposure mechanisms in certain instances.

316

See

MIAX Rule 515.

Liquidity Refresh Pause.

First, MIAX proposes to implement a “Liquidity Refresh Pause” to allow additional orders or quotes to be received where an incoming order (“initiating order”) exhausts a Market Maker's quote that was all or part of the MIAX BBO (“MBBO”) and there are unexecuted contracts remaining from the initiating order.

317

Specifically, the Liquidity Refresh Pause would be utilized in instances where MIAX is the only market at the NBBO, and an incoming initiating order is a limit order that crosses the NBBO upon receipt or is a market order and, in either case, could only be partially executed on MIAX where it exhausted a Market Maker quote at the MBBO. In such cases, rather than immediately executing at the next available price, the MIAX system would

pause the market for a period of time not to exceed one second to allow additional Marker Maker orders and quotes and other market participant orders to be submitted.

317

See

MIAX Rule 515(c)(1)(iii).

At the start of the Liquidity Refresh Pause, the MIAX system will broadcast a message to subscribers of MIAX's data feeds, providing a description of the option and the size and side of the order or quote.

318

During the pause, the system will display the remainder of the initiating order at the original NBBO price and, on the opposite side of the market, it will display MIAX's next bid or offer as non-firm.

319

318

See

MIAX Rule 515(c)(1)(iii)(A).

319

See id.

See also

Phlx Rule 1082a(ii)(B)(3) (dissemination of non-firm quotes on opposite side of initiating order during Quote Exhaust timer); Securities Exchange Act Release No. 66315 (February 3, 2012), 77 FR 6828 (February 9, 2012) (Phlx-2012-12) (immediately effective filing to display non-firm quotes in conjunction with Quote Exhaust process).

All market participants may respond to the broadcast message during the Liquidity Refresh Pause.

320

During the Liquidity Refresh Pause, if MIAX receives a new order or quote on the opposite of the market from the initiating order's remaining contracts that locks or crosses the original NBBO, MIAX will immediately execute the remaining contracts at the original NBBO price, provided it would not trade through the current NBBO.

321

If MIAX receives a new order or quote on the same side of the market as the initiating order's remaining contracts that locks or crosses the original NBBO, MIAX will add the new order or quote to the MBBO size and disseminate the updated MBBO.

322

The initiating order and any new orders or quotes on the same side of the market received during the Liquidity Refresh Pause will be processed in the order in which they were received.

323

320

See

MIAX Rule 515(c)(1)(iii)(A)(1)(a).

321

See

MIAX Rule 515(c)(1)(iii)(A)(1)(b).

322

See

MIAX Rule 515(c)(1)(iii)(A)(1)(c). If MIAX receives an IOC or a FOK order on the same side of the market as the initiating order's remaining contracts, the MIAX system will immediately cancel the IOC and FOK orders. If MIAX receives an AOC order on the same side of the market as the initiating order's remaining contracts, the MIAX system will immediately reject the AOC order. If MIAX receives an ISO on the same side of the market as the initiating order's remaining contracts, the Liquidity Refresh Pause will be terminated early and the initiating order and any new orders received during the pause will be processed in the order in which they were received.

See

MIAX Rule 515(c)(1)(iii)(A)(1)(e)-(g).

323

See

MIAX Rule 515(c)(1)(iii)(A)(1)(c). If all of the remaining contracts in the initiating order and any new orders or quotes on the same side of the market received during the Liquidity Refres

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