[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Notices]
[Pages 73065-73089]
[FR Doc No: 2012-29568]

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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'').\1\ Notice of MIAX's
Form 1 Application was published for comment in the Federal Register on
August 20, 2012.\2\ The Commission received two

comment letters concerning MIAX's Form 1 Application.\3\ MIAX submitted
a detailed response to comments on November 30, 2012.\4\ On November
30, 2012, MIAX submitted Amendment No. 1 to its Form 1 Application.\5\
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    \1\ 15 U.S.C. 78f.
    \2\ See Securities Exchange Act Release No. 67660 (August 15,
2012), 77 FR 50814 (``Notice'').
    \3\ 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.
    \4\ 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'').
    \5\ 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.
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II. Statutory Standards

    Under Sections 6(b) and 19(a) of the Act,\6\ 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.
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    \6\ 15 U.S.C. 78f(b) and 15 U.S.C. 78s(a), respectively.
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    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; \7\ (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; \8\ (3) not permit unfair discrimination between customers,
issuers, or dealers; \9\ and (4) protect investors and the public
interest.\10\ 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.\11\
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    \7\ See 15 U.S.C. 78f(b)(3).
    \8\ See 15 U.S.C. 78f(b)(5).
    \9\ See id.
    \10\ See id.
    \11\ See 15 U.S.C. 78f(b)(8).
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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'').\12\
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    \12\ See MIAX Exchange By-Laws Section 2.1. See also MIAX
Exchange LLC Agreement Sections 7 and 8.
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    Under the By-Laws of MIAX Exchange (``MIAX Exchange By-Laws''):
\13\
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    \13\ The MIAX Exchange By-Laws are included in the Second
Amended and Restated Limited Liability Company Agreement of MIAX
Exchange (``MIAX Exchange LLC Agreement'').
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     The Exchange Board will be composed of not less than ten
directors; \14\
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    \14\ See MIAX Exchange By-Laws Article II, Section 2.2(a).
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     One director will be the Chief Executive Officer of MIAX
Exchange; \15\
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    \15\ See MIAX Exchange By-Laws Article II, Section 2.2(b).
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     The number of Non-Industry Directors,\16\ including at
least one Independent Director,\17\ will equal or exceed the sum of the
number of Industry Directors \18\ and Member Representative Directors;
\19\ and
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    \16\ ``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).
    \17\ ``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).
    \18\ 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'').
    \19\ 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.
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     At least twenty percent of the directors on the Exchange
Board will be Member Representative Directors.\20\
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    \20\ See MIAX Exchange By-Laws Article II, Section 2.2(b)(ii).
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    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.\21\ In addition, Miami
Holdings will appoint the initial Nominating Committee \22\ and Member
Nominating Committee,\23\ consistent with each

committee's compositional requirements,\24\ 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.\25\
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    \21\ See MIAX Exchange By-Laws Article II, Section 2.4. See also
MIAX Exchange LLC Agreement Section 9(a).
    \22\ 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).
    \23\ 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.
    \24\ See MIAX Exchange By-Laws Article V, Section 5.1.
    \25\ See id.
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    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.\26\ Additional candidates, however,
may be nominated for the Member Representative Director positions by
MIAX Exchange members pursuant to a petition process.\27\ 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.\28\ 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.\29\ 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.\30\
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    \26\ 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).
    \27\ 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.
    \28\ 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).
    \29\ See MIAX Exchange By-Laws Article II, Section 2.4(f).
    \30\ See id.
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    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.\31\ 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.\32\
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    \31\ 15 U.S.C. 78f(b)(3).
    \32\ 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'').
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    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,\33\ 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.\34\ 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.\35\
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    \33\ 15 U.S.C. 78f(b)(3).
    \34\ 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'').
    \35\ See Nasdaq Order and NYSE/Archipelago Merger Approval
Order, supra note 32, and BATS Order, supra note 18.
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    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.\36\ 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.\37\ 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.\38\
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    \36\ 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).
    \37\ See Amendment No. 1.
    \38\ See Amendment No. 1.
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    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.\39\ 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.
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    \39\ See MIAX Exchange By-Laws Sections 2.5(b) and (d).
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    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.\40\ MIAX Exchange
will complete such process within 90 days after its application for
registration as a national securities exchange is granted by the
Commission.\41\
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    \40\ See Amendment No. 1; and MIAX Exchange By-Laws Sections
2.2(e) and 2.5(a).
    \41\ 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).
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    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.\42\ 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.\43\ 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.
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    \42\ See 15 U.S.C. 78f(b)(3).
    \43\ MIAX's proposed timeline for the interim board process
follows a process identical to what the Commission recently approved
for the BOX Exchange.
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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).\44\ The standing Committees of the Board will be the Audit,
Compensation, Appeals, and Regulatory Oversight Committees.\45\ 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.\46\
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    \44\ See MIAX Exchange By-Laws Section 4.1.
    \45\ See MIAX Exchange By-Laws Section 4.1(a).
    \46\ See MIAX Exchange By-Laws Section 4.5(e) and (f),
respectively.
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    The Audit Committee will consist of three or more directors, a
majority of which will be Non-Industry Directors.\47\ 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.\48\ The Appeals Committee will consist of one Independent
Director, one Industry Director, and one Member Representative
Director.\49\ 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.\50\ 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.\51\
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    \47\ 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).
    \48\ See MIAX Exchange By-Laws Section 4.5(a) and 4.5(c).
    \49\ See MIAX Exchange By-Laws Section 4.5(d).
    \50\ 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).
    \51\ See MIAX Exchange By-Laws Section 4.5(e).
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    With respect to Committees of MIAX Exchange, MIAX Exchange has
proposed to establish a Nominating Committee \52\ and a Member
Nominating Committee.\53\ 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.\54\ In addition, MIAX also has proposed to establish a Quality
of Markets Committee,\55\ 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.\56\
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    \52\ See MIAX Exchange By-Laws Article V, Section 5.2, and supra
note 22.
    \53\ See MIAX Exchange By-Laws Article V, Section 5.3, and supra
note 23.
    \54\ 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.
    \55\ See MIAX Exchange By-Laws Article IV, Section 4.6.
    \56\ See infra note 381 and accompanying text.
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    The Commission believes that MIAX Exchange's proposed committees,
which are similar to the committees maintained by other exchanges,\57\
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.\58\
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    \57\ See, e.g., BATS Order, supra note 18, and Nasdaq Order,
supra note 32.
    \58\ 15 U.S.C. 78f(b)(1).
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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.\59\ 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.
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    \59\ 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'').
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    In particular, for so long as Miami Holdings (directly or
indirectly) controls MIAX Exchange, no person, either alone or together
with its related persons,\60\ may beneficially own more than 40% of any
class of capital stock of Miami Holdings.\61\ 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.\62\ If any stockholder
violates these ownership limits, Miami Holdings would redeem the shares
in excess of the applicable ownership limit at their par value.\63\ 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.\64\ 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.\65\
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    \60\ See Miami Holdings Certificate NINTH (a)(ii) (defining
``related persons'').
    \61\ See Miami Holdings Certificate NINTH (b)(i)(A).
    \62\ See Miami Holdings Certificate NINTH (b)(i)(B).
    \63\ 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.
    \64\ See Miami Holdings Certificate NINTH (b)(i)(C).
    \65\ 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.
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    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.\66\ 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.\67\ 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,\68\ except that the Miami Holdings board cannot waive the
voting and ownership limits above 20% for MIAX Exchange members and
their related persons.\69\ Any such waiver would not be effective
unless and until approved by the Commission pursuant to Section 19 of
the Act.\70\
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    \66\ See Miami Holdings Certificate NINTH (b)(iv).
    \67\ See id.
    \68\ 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.
    \69\ 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).
    \70\ See Miami Holdings Certificate NINTH (b)(ii)(B).
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    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.\71\ 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.\72\
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    \71\ 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.
    \72\ 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.\73\ 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.\74\ 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.\75\
---------------------------------------------------------------------------

    \73\ 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).
    \74\ See 15 U.S.C. 78s. See also MIAX Exchange LLC Agreement,
Section 28(b).
    \75\ 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.\76\ 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.
---------------------------------------------------------------------------

    \76\ 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.\77\ 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.
---------------------------------------------------------------------------

    \77\ 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.\78\ Specifically:
---------------------------------------------------------------------------

    \78\ 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.\79\
---------------------------------------------------------------------------

    \79\ 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.\80\
---------------------------------------------------------------------------

    \80\ 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.\81\
---------------------------------------------------------------------------

    \81\ 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.\82\
---------------------------------------------------------------------------

    \82\ 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 \83\ 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.\84\
---------------------------------------------------------------------------

    \83\ See MIAX Exchange By-Laws Article X, Section 10.4; and
Miami Holdings By-Laws Article VII, Section 3.
    \84\ 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.\85\
---------------------------------------------------------------------------

    \85\ 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.\86\
---------------------------------------------------------------------------

    \86\ 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.\87\
---------------------------------------------------------------------------

    \87\ 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.\88\ 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.\89\
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78f(b)(1).
    \89\ 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 \90\ 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).\91\ 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.
---------------------------------------------------------------------------

    \90\ See 15 U.S.C. 78s(h)(1).
    \91\ 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.\92\ 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.\93\ 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.\94\ These provisions are applicable to all
entities' dealings with MIAX Exchange, including Miami Holdings.
---------------------------------------------------------------------------

    \92\ 15 U.S.C. 78t(a).
    \93\ 15 U.S.C. 78t(e).
    \94\ 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.\95\ 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.\96\ The discussion below summarizes how MIAX
Exchange proposes to conduct and structure its regulatory operations.
---------------------------------------------------------------------------

    \95\ See Section 6(b)(1) of the Act, 15 U.S.C. 78f(b)(1).
    \96\ 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.\97\
---------------------------------------------------------------------------

    \97\ 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.\98\ 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.\99\ The CRO will report to
the Regulatory Oversight Committee.\100\
---------------------------------------------------------------------------

    \98\ See MIAX Exchange By-Laws Article VI, Section 6.10.
    \99\ 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\
---------------------------------------------------------------------------

    \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.
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    \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).
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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.
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    \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).
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    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\
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    \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, e.g., 17 CFR
240.15c3-5.
    \143\ See, e.g., Nasdaq Rule 4611(d).
    \144\ 17 CFR 240.15c3-5.
---------------------------------------------------------------------------

2. Linkage
    MIAX intends to become a participant in the Plan Relating to
Options Order Protection and Locked/Crossed Markets or any successor
plan (``Linkage Plan'').\145\ If admitted as a participant to the Plan,
other plan participants would be able to send orders to MIAX in
accordance with the terms of the plan as applied to MIAX Exchange.
---------------------------------------------------------------------------

    \145\ See MIAX Form 1 Application, Exhibit E. 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, e.g., C2 Rule 8.11(a) (imposing a class quoting limit of 50)
and CBOE Rule 8.3A, Interpretations and Policies .01 (imposing a
class quoting limit of 50).
---------------------------------------------------------------------------

    The Commission finds that MIAX's rules for the registration and
appointment of Market Makers are consistent with the Act. In
particular, MIAX's rules provide an objective process by which a member
could become a Market Maker on MIAX and provide for oversight by MIAX
Exchange to monitor for continued compliance by Market Makers with the
terms of their application for such status. The Commission notes that
MIAX's proposed Market Maker registration and appointment requirements
are similar to those of other options exchanges.\156\
---------------------------------------------------------------------------

    \156\ See, e.g., ISE Rules 800 and 801, and C2 Rule 8.1
(registration); ISE Rule 802 and C2 Rule 8.11 (appointment).
---------------------------------------------------------------------------

b. Market Maker Obligations
    Pursuant to MIAX rules, all Market Makers will be subject to a
number of general obligations. In particular, the transactions of a
Market Maker must constitute a course of dealings reasonably calculated
to contribute to the maintenance of a fair and orderly market.\157\
Among other things, a Market Maker must: (1) Engage in dealings for its
own account when there is a lack of price continuity, a temporary
disparity between the supply of and demand for a particular option
contract, or a temporary distortion of the price relationships between
options contracts of the same class; (2) compete with other market
makers; (3) make markets that will be honored for the number of
contracts entered; (4) update quotations in response to changed market
conditions; and (5) price option contracts fairly by, among other
things, meeting the bid/ask differential requirements prescribed.\158\
In addition, Market Makers must maintain minimum net capital in
accordance with MIAX rules and the federal securities laws.\159\ Market
Makers also must maintain information barriers between market making
activities and any other business activities that are reasonably
designed to prevent the misuse of material, non-public
information.\160\
---------------------------------------------------------------------------

    \157\ See MIAX Rule 603(a).
    \158\ See MIAX Rule 603(b)(4). Specifically, as set forth in
note 285, infra, following the opening rotation, Market Makers must
create differences of no more than $5 between the bid and offer.
Prior to the opening rotation, bid/ask differentials shall be no
more than $.25 between the bid and offer for each option contract
for which the bid is less than $2, no more than $.40 where the bid
is at least $2 but does not exceed $5, no more than $.50 where the
bid is more than $5 but does not exceed $10, no more than $.80 where
the bid is more than $10 but does not exceed $20, and no more than
$1 where the bid is more than $20, provided that the Exchange may
establish differences other than the above for one or more option.
    \159\ See MIAX Rule 609.
    \160\ See MIAX Rule 610.
---------------------------------------------------------------------------

    MIAX's rules governing Market Maker quoting obligations are
tailored to the specific class of Market Maker.\161\ Specifically, a
Primary Lead Market Maker will be subject to the highest standard
applicable on MIAX, as they will be required to provide continuous two-
sided Standard quotes and/or Day eQuotes \162\ throughout the trading
day 99% of the time in the lesser of 99% of the series, or 100% of the
series minus one put-call pair, in each appointed class.\163\ Primary
Lead Market Makers also are required to participate in the opening
rotation.\164\ Lead Market Makers must provide continuous two-sided
quotes (consisting of Standard quotes and/or Day eQuotes) throughout
the trading day 90% of the time in 90% of the series in each of their
appointed classes.\165\ Lead Market Makers also must participate in the
opening rotation.\166\ Lastly, Registered Market Makers must provide
continuous two-sided quotes (consisting of Standard quotes and/or Day
eQuotes) 90% of the time in 60% of the series in each of its appointed
classes.\167\ Further, Registered Market Makers may be called upon by a
MIAX Exchange official to submit a single quote or maintain continuous
quotes in one or more series of its appointed classes whenever, in the
judgment of such official, it is necessary to do so in the interest of
fair and orderly markets.\168\ For purposes of meeting the continuous
quoting obligations discussed herein, a Market Maker's quote must meet
the bid/ask differential requirements of MIAX Rule 603(b)(4).\169\
---------------------------------------------------------------------------

    \161\ See MIAX Rule 604.
    \162\ See infra Section III(C)(5) (discussing the various types
of quotes that may be submitted by Market Makers on MIAX).
    \163\ See MIAX Rule 604(e)(1). 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\
---------------------------------------------------------------------------

    \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).