[Federal Register Volume 78, Number 70 (Thursday, April 11, 2013)]
[Notices]
[Pages 21642-21648]
[FR Doc No: 2013-08473]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69328; File No. SR-CBOE-2013-030]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Order Granting Accelerated Approval to Proposed Rule
Change, as Modified by Amendment Nos. 1 and 2, Relating to the
Regulation NMS Plan To Address Extraordinary Market Volatility

April 5, 2013.

I. Introduction

    On March 7, 2013, Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to modify its rules to address
certain option order types, order handling procedures, obvious error
and market-maker quoting obligations on the Exchange after the
implementation of the National Market System Plan to Address
Extraordinary Market Volatility (``Limit up-Limit Down Plan''). The
proposed rule change was published for comment in the Federal Register
on March 14, 2013.\3\ On March 26, 2013, CBOE filed Amendment No. 1 to
the proposed rule change.\4\ On April 4, CBOE filed Amendment No. 2 to
the proposed rule change.\5\ The Commission received one comment letter
on the proposed rule change.\6\ This order approves the proposed rule
change, as modified by Amendment Nos. 1 and 2, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69082 (March 8,
2013), 78 FR 16351 (``Notice'').
    \4\ See Amendment No. 1 dated March 26, 2013 (``Amendment No.
1''). Amendment No. 1 expanded upon the Exchange's rationale for its
proposed changes regarding the nullification and adjustment of
options transactions and agreed to provide the Commission with
relevant data to assess the impact of the proposal. Additionally,
the Exchange provided rationale for terminating the HAL auction
early and cancelling of the market orders, discussed infra. Because
Amendment No. 1 is technical in nature, it is not subject to notice
and comment.
    \5\ See Amendment No. 2 dated April 4, 2013 (``Amendment No.
2''). Amendment No. 2 expanded upon the Exchange's rationale for its
proposal to accept certain types of market orders during a limit up-
limit down state, its proposal to cancel and replace limit orders
with market orders during a limit up-limit down state, and its
proposed treatment of stock-option orders in a limit up-limit down
state. Because Amendment No. 2 is technical in nature, it is not
subject to notice and comment.
    \6\ See Letter to Elizabeth M. Murphy, Secretary, Commission,
from Angelo Evangelou, Associate General Counsel, CBOE, dated April
4, 2013 (``CBOE Letter'').
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II. Background

    On May 6, 2010, the U.S. equity markets experienced a severe
disruption that, among other things, resulted in the prices of a large
number of individual securities suddenly declining by significant
amounts in a very short time period before suddenly reversing to prices
consistent with their pre-decline levels.\7\ This severe price
volatility led to a large number of trades being executed at
temporarily depressed prices, including many that were more than 60%
away from pre-decline prices. One response to the events of May 6,
2010, was the development of the single-stock circuit breaker pilot
program, which was implemented through a series of rule filings by the
equity exchanges and by FINRA.\8\ The single-stock circuit breaker was
designed to reduce extraordinary market volatility in NMS stocks by
imposing a five-minute trading pause when a trade was executed at a
price outside of a specified percentage threshold.\9\
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    \7\ The events of May 6 are described more fully in a joint
report by the staffs of the Commodity Futures Trading Commission
(``CFTC'') and the Commission. See Report of the Staffs of the CFTC
and SEC to the Joint Advisory Committee on Emerging Regulatory
Issues, ``Findings Regarding the Market Events of May 6, 2010,''
dated September 30, 2010, available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
    \8\ For further discussion on the development of the single-
stock circuit breaker pilot program, see Securities Exchange Act
Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012)
(``Limit Up-Limit Down Plan'' or ``Plan'').
    \9\ See Securities Exchange Act Release Nos. 62884 (September
10, 2010), 75 FR 56618 (September 16, 2010) and Securities Exchange
Act Release No. 62883 (September 10, 2010), 75 FR 56608 (September
16, 2010) (SR-FINRA-2010-033) (describing the ``second stage'' of
the single-stock circuit breaker pilot) and Securities Exchange Act
Release No. 64735 (June 23, 2011), 76 FR 38243 (June 29, 2011)
(describing the ``third stage'' of the single-stock circuit breaker
pilot).
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    To replace the single-stock circuit breaker pilot program, the
equity exchanges filed a National Market System Plan \10\ pursuant to
Section 11A of the Act,\11\ and Rule 608 thereunder,\12\ which featured
a ``limit up-limit down'' mechanism.
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    \10\ NYSE Euronext filed on behalf of New York Stock Exchange
LLC (``NYSE''), NYSE Amex LLC (``NYSE Amex''), and NYSE Arca, Inc.
(``NYSE Arca''), and the parties to the proposed National Market
System Plan, BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago
Board Options Exchange, Incorporated (``CBOE''), Chicago Stock
Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial
Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX LLC, the Nasdaq Stock Market LLC, and National Stock Exchange,
Inc. (collectively with NYSE, NYSE MKT, and NYSE Arca, the
``Participants''). On May 14, 2012, NYSE Amex filed a proposed rule
change on an immediately effective basis to change its name to NYSE
MKT LLC (``NYSE MKT''). See Securities Exchange Act Release No.
67037 (May 21, 2012) (SR-NYSEAmex-2012-32).
    \11\ 15 U.S.C. 78k-1.
    \12\ 17 CFR 242.608.
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    The Plan sets forth requirements that are designed to prevent
trades in individual NMS stocks from occurring outside of the specified
price bands. The price bands consist of a lower price band and an upper
price band for each NMS stock. When one side of the market for an
individual security is outside the applicable price band, i.e., the
National Best Bid is below the Lower Price Band, or the National Best
Offer is above the Upper Price band, the Processors \13\ are required
to disseminate such National Best Bid or National Best Offer \14\ with
a flag identifying that quote as non-executable. When the other side of
the market reaches the applicable price band, i.e., the National Best
Offer reaches the lower price band, or the National Best Bid reaches
the upper price band, the market for an individual security enters a
15-second Limit State, and the Processors are required disseminate such
National Best Offer or National Best Bid with an appropriate flag
identifying it as a Limit State Quotation. Trading in that stock would
exit the Limit State if, within 15 seconds of entering the Limit State,
all Limit State Quotations were executed or canceled in their entirety.
If the market does not exit a Limit State within 15 seconds, then the
Primary Listing Exchange will declare a five-minute trading pause,
which is applicable to all markets trading the security.
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    \13\ As used in the Plan, the Processor refers to the single
plan processor responsible for the consolidation of information for
an NMS Stock pursuant to Rule 603(b) of Regulation NMS under the
Exchange Act. See id.
    \14\ ``National Best Bid'' and ``National Best Offer'' has the
meaning provided in Rule 600(b)(42) of Regulation NMS under the
Exchange Act. See id.
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    The Primary Listing Exchange may also declare a trading pause when
the stock is in a Straddle State, i.e., the National Best Bid (Offer)
is below (above) the Lower (Upper) Price Band and the NMS Stock is not
in a Limit State. In order to declare a trading pause in this scenario,
the Primary Listing Exchange must determine that trading in that stock
deviates from normal trading characteristics such that declaring a
trading pause would support the Plan's goal to address extraordinary
market volatility.\15\
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    \15\ As set forth in more detail in the Plan, all trading
centers would be required to establish, maintain, and enforce
written policies and procedures reasonably designed to prevent the
display of offers below the Lower Price Band and bids above the
Upper Price Band for an NMS Stock. The Processors would be able to
disseminate an offer below the Lower Price Band or bid above the
Upper Price Band that nevertheless may be inadvertently submitted
despite such reasonable policies and procedures, but with an
appropriate flag identifying it as non-executable; such bid or offer
would not be included in National Best Bid or National Best Offer
calculations. In addition, all trading centers would be required to
develop, maintain, and enforce policies and procedures reasonably
designed to prevent trades at prices outside the price bands, with
the exception of single-priced opening, reopening, and closing
transactions on the Primary Listing Exchange.

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    On May 31, 2012, the Commission approved the Plan as a one-year
pilot, which shall be implemented in two phases.\16\ The first phase of
the Plan shall be implemented beginning April 8, 2013.\17\
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    \16\ See ``Limit Up-Limit Down Plan,'' supra note 8. See also
Securities Exchange Act Release No. 68953 (February 20, 2013), 78 FR
13113 (February 26, 2013) (Second Amendment to Limit Up-Limit Down
Plan by BATS Exchange, Inc., BATS Y- Exchange, Inc., Chicago Board
Options Exchange, Inc., et al.) and Securities Exchange Act Release
No. 69062 (March 7, 2013), 78 FR 15757 (March 12, 2013) (Third
Amendment to Limit Up-Limit Down Plan by BATS Exchange, Inc., BATS
Y- Exchange, Inc., Chicago Board Options Exchange, Inc., et al.)
    \17\ See ``Second Amendment to Limit Up-Limit Down Plan,'' supra
note 16.
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III. Description of the Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2

    In light of and in connection with the Plan, the Exchange proposes
to amend its rules to address certain option order types, order
handling procedures, obvious error and market-maker quoting
obligations.\18\ The Exchange believes these modifications will protect
investors because when an underlying security is in a limit or straddle
state (collectively referred to as a ``limit up-limit down state''),
there will not be a reliable price for the security to serve as a
benchmark for the price of the option. In addition, the Exchange
believes these changes are warranted because the width of the options
markets might be compromised during the limit up-limit down states and,
thus, the quality of execution may be adversely impacted.
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    \18\ Specifically, the Exchange proposes to make changes to
Exchange Rules Rule 6.2B, ``Hybrid Opening System, Rule 6.14A,
``Hybrid Agency Liaison'', Rule 6.25, ``Nullification and Adjustment
of Options Transactions,'' Rule 6.53, ``Certain Types of Orders
Defined,'' Rule 6.53C, ``Complex Orders on the Hybrid System,'' Rule
8.7, ``Obligations of Market-Makers, Rule 8.13, ``Preferred Market-
Maker Program,'' Rule 8.15A, ``Lead Market-Maker in Hybrid
Classes,'' Rule 8.15B, ``Participation Entitlements of LLMs'', Rule
8.85, ``DPM Obligations,'' Rule 8.87, ``Participation Entitlement of
DPMs and e-DPMs,'' and Rule 8.93, ``e-DPM Obligations.'' See Notice
and Amendment No. 1.
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A. Exchange Rule 6.3A and the Plan

    The Exchange proposes to add to Exchange Rule 6.3A to codify the
changes occurring throughout its rulebook in connection with the Plan.
The Exchange proposes to re-name Rule 6.3A, which is currently titled
``Equity Market Trading Halt'', as ``Equity Market Plan to Address
Extraordinary Market Volatility''. The Exchange also plans to add new
rule text that will define the Plan as it applies to the Exchange, and
will describe the location of the other rule changes associated with
the Plan. The proposed changes to Rule 6.3A will essentially serve as a
roadmap for the Exchange's universal changes due to the implementation
of the Plan.

B. Order Handling During the Limit Up-Limit Down State

    The Exchange proposes to modify Exchange Rules 6.2B, 6.14A, 6.3A,
6.53 and 6.53C to address how certain Exchange order types will be
handled when the underlying security of such orders is in a limit up-
limit down state. The proposed rule change will address how market
orders,\19\ market-on-close,\20\ stop orders,\21\ and stock option
orders,\22\ will function on the Exchange upon the implementation of
the Plan. The Exchange is proposing to add language to clarify that:
(a) Any market order will be returned during limit up-limit down states
unless it qualifies for certain exceptions; \23\ (b) market-on-close
orders will not be elected if the underlying security is in a limit up-
limit down state; \24\ (c) stop orders will not be triggered if the
underlying security is in a limit up-limit down state, but will until
the end of that state, at which time they will become eligible to be
triggered; (d) stock-option orders will only execute if the calculated
stock price is within the permissible bands.\25\ In addition, if a
message is sent to replace a limit order with a market order while the
underlying is in a limit up-limit down state, the resting limit order
will be cancelled and the replaced market order will also be cancelled.
The Exchange represented that cancelling a market order in this
scenario is consistent with its treatment of market orders that are
received during a limit up-limit down state, and cancelling the
original limit order would be consistent with the Exchange's current
cancel and replace functionality.\26\
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    \19\ See Exchange Rule 6.53(a) which defines a market order as
``an order to buy or sell a stated number of options contracts at
the best price obtainable when the order reaches the post.''
    \20\ See Exchange Rule 6.53(c)(ii) which defines a market-on-
close order designation as an order ``to be executed as close as
possible to the closing bell, or during the closing rotation, and
should be near to or at the closing price for the particular series
of option contracts.''
    \21\ See Exchange Rule 6.53(c)(iii), which defines a stop order
as a market order ``to buy or sell when the market for a particular
option contract reaches a specified price on the CBOE floor.'' In
contrast, a stop-limit order, as defined in Exchange Rule
6.53(c)(iv), becomes a limit order when the market for the option
contract reaches a specified price. CBOE does not propose to make
any modifications to the treatment of stop-limit orders.
    \22\ See Exchange Rule 6.53C(a)(2) which defines a stock-option
order as ``an order to buy or sell a stated number of units of an
underlying stock or a security convertible into the underlying stock
* * * coupled with the purchase or sale of options contract(s) on
the opposite side of the market.''
    \23\ Specifically, a market order submitted to initiate an
Automated Improvement Mechanism will be accepted. Market orders will
also not be returned if the TPH elected to route that order for
manual handling. With respect to market orders submitted to initiate
an Automated Improvement Mechanism, the Exchange represented that
such orders are entered with a contra order. Because these market
orders are entered as a pair, they are effectively stopped because
they must execute at a price at or better than the contra order. See
Amendment No. 2. With respect to market orders routed for manual
handling, the Exchange represented that those orders are physically
handled by a broker on the Exchange floor who must affirmatively
agree to an execution price, and that such orders are thus not
subject to the same risks a market order may have if such order were
to execute against unfiltered electronic prices. Id.
    \24\ During closing rotation, the Exchange will continue to re-
evaluate the state of underlying securities for which the overlying
securities have not yet been closed. If upon re-evaluation the
underlying security should exit a limit up-limit down state, a
market-on-close order may be executed.
    \25\ If the calculated price of a stock-option order is not
within the permissible Price Bands, the stock-option order will be
routed for manual handling. This provision would help ensure that a
stock order would not be electronically routed to a stock venue for
an execution outside of the price bands. In addition, by routing
stock-option orders for manual handling, these orders will be
physically handled by a broker on the Exchange floor who must
affirmatively agree to an execution price. See Amendment No. 2.
    \26\ See Amendment No. 2.
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    The Exchange stated that, although it has determined to continue
options trading when a stock is in a limit up-limit down state, there
will not be a reliable price for the underlying security to serve as a
benchmark for the price of the option. Without a reliable underlying
stock price, the Exchange stated that there is an enhanced risk of
errors and improper executions. The Exchange also stated that adding a
level of certainty for TPHs by specifying the treatment of such orders
will encourage participation on the Exchange while the underlying
security is in limit up-limit down states. Accordingly, the Exchange
believes these order handling changes will best protect market
participants after the implementation of the Plan by not allowing
execution at unreasonable prices due to the shift in the stock prices.
    The Exchange also proposes to modify its opening procedures under
Exchange Rule 6.2B, ``Hybrid Opening System'' (``HOSS''). The Exchange
proposes to

add an Interpretation and Policy .07 to clarify that if the underlying
security for a class of options enters into a limit up-limit down state
when the class moves to opening rotation, any market orders entered
that trading day will be cancelled. The Exchange stated that, by
cancelling the market orders, it will comply with the Plan by not
allowing orders outside of the Price Bands to execute. As an exception,
market orders that are considered limit orders pursuant to Rule
6.13(b)(iv) and entered the previous trading day will remain in the
book. The Exchange is proposing to allow such market orders to remain
in the Book because these essentially act as limit orders at the
minimum increment.
    Next, the Exchange proposes to modify Exchange Rule 6.14A, ``Hybrid
Agency Liaison (``HAL''). This functionality provides automated order
handling in designated classes trading on the Hybrid System for
qualifying electronic orders that are not automatically executed by the
Hybrid System.\27\ When the Exchange receives a qualifying order that
is marketable against the National Best Bid or Offer (``NBBO'') and/or
the Exchange's best bid or offer (``BBO''),\28\ HAL electronically
exposes the order \29\ at the NBBO price to allow Market-Makers
appointed in that class, as well as all Trading Permit Holders
(``TPHs'') acting as agent for orders, at the top of the Exchange's
book in the relevant series (or all TPHs if allowed by the Exchange) to
step up to the NBBO price.
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    \27\ Currently, the Exchange determines the eligible order size,
eligible order types, eligible origin code (i.e., public customer
orders, non-Market-Maker broker-dealer orders and Market-Maker
broker-dealer orders), and classes in which HAL is activated. See
Exchange Rule 6.14A(a).
    \28\ HAL will not electronically expose the order if the
Exchange's quotation contains resting orders and does not contain
sufficient Market-Maker quotation interest to satisfy the entire
order.
    \29\ The duration of the exposure period may not exceed one
second. See Exchange Rule 6.14A(c) (describing the manner in which
an exposed order is allocated under HAL); see also Exchange Rule
6.14A(d) (listing the circumstances in which an exposure period
would terminate early).
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    The Exchange proposes to amend Rule 6.14A to modify the functioning
of HAL with respect to market orders when the underlying security of
the option is in a limit up-limit down state. Under the proposal, if an
underlying security enters a limit up-limit down state while a market
order is being exposed through HAL, the auction will end early, i.e.,
upon the entering of the limit up-limit down state. Additionally, any
unexecuted portion of the market order would be cancelled. The Exchange
stated that because there is an uncertainty of market prices during a
limit up-limit down state, terminating the HAL auction early and
cancelling the market order will ensure that market orders do not
receive an unanticipated price.\30\ As such, the proposed rule changes
would protect market participants by ensuring that they do not receive
an executed order with an unanticipated price due to the change in the
underlying security.
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    \30\ See Amendment No. 1.
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    The Exchange also proposes to modify the treatment of complex
orders on the Hybrid System and the Complex Order Auction (``COA'')
process. Generally, on a class-by-class basis, the Exchange may
activate COA, which is a process by which eligible complex orders \31\
are given an opportunity for price improvement before being booked in
the electronic complex order book (``COB'') or on a PAR workstation.
Upon receipt of a COA-eligible order and a request from a TPH
representing the order that such order be subjected to a COA, the
Exchange will send a request for responses (``RFR'') message to all
TPHs who have elected to receive RFR messages.\32\ Each Market-Maker
with an appointment in the relevant option class and each TPH acting as
agent for orders resting at the top of the COB in the relevant options
series may then submit responses to the RFR message during the Response
Time Interval.\33\
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    \31\ An eligible complex order, referred to in Rule 6.53C as a
``COA-eligible order,'' means a complex order that, as determined by
the Exchange on a class-by-class basis, is eligible for a COA
considering the order's marketability (defined as a number of ticks
away from the current market), size, complex order type and complex
order origin type (i.e., non-broker-dealer public customer, broker-
dealers that are not Market-Makers or specialists on an options
exchange, and/or Market-Makers or specialists on an options
exchange). All determinations by the Exchange on COA-eligible order
parameters are announced to Trading Permit Holders by Regulatory
Circular. See Rule 6.53C(d)(i)(2) and Interpretation and Policy .01
to Rule 6.53C.
    \32\ See Exchange Rule 6.53C(d)(ii). The RFR message will
identify the component series, the size of the COA-eligible order
and any contingencies, but will not identify the side of the market.
    \33\ See Exchange Rule 6.53C(d)(iii). A ``Response Time
Interval'' means the period of time during which responses to the
RFR may be entered, the length of which is determined by the
Exchange on a class-by-class basis but may not exceed three seconds.
See Rule 6.53C(d)(iii)(2).
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    The Exchange proposes to add to the COA rule that if, during COA of
a market order, the underlying security of an option enters a limit up-
limit down state, the COA will end upon the entering of that state and
the remaining portion of the order, if a market order, will cancel. The
Exchange believes this change will best protect investors because, once
the underlying enters a limit up-limit down state, pricing in the
options markets may change, resulting in executions at unexpected
prices.

C. Market Maker Obligations and Participation Entitlements

    The Exchange proposes to eliminate all market maker obligations for
options in which the underlying security is in a limit up-limit down
state. Currently, Exchange Rules 8.7, 8.13, 8.15A, 8.85, and 8.93
impose certain obligations on Market-Makers,\34\ PMMs,\35\ LMMs,\36\
DPMs,\37\ and e-DPMs,\38\ respectively, including obligations to
provide continuous electronic quotes.
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    \34\ See Exchange Rule 8.1, which defines a ``Market-Maker'' as
``an individual Trading Permit Holder or a TPH organization that is
registered with the Exchange for the purpose of making transactions
as a dealer specialist on the Exchange * * *.''
    \35\ See Exchange Rule 8.13, which defines a ``Preferred Market-
Maker'' as a specific Market-Maker designated by a Trading Permit
Holder to receive that Trading Permit Holder's orders in a specific
class.
    \36\ See Exchange Rule 8.15A, which defines a ``Lead Market-
Maker'' as a Market-Maker in good standing appointed by the Exchange
``in an option class for which a DPM has not been appointed * * *.''
    \37\ See Exchange Rule 8.80, which defines a ``Designated
Primary Market-Maker'' as a ``TPH organization that is approved by
the Exchange to function in allocated securities as a Market-Maker *
* * and is subject to the obligations under Rule 8.85 * * *.''
    \38\ See Exchange Rule 8.92, which defines an ``Electronic DPM''
as a ``TPH Organization that is approved by the Exchange to remotely
function in allocated option classes as a DPM and to fulfill certain
obligations required of DPMs * * *.''
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    The Exchange proposes to eliminate all market maker quoting
obligations \39\ in series of options when the underlying security is
currently in a limit up-limit down state. According to the Exchange,
eliminating all Market Maker obligations in connection with the
implementation of the Plan is the most effective way to ensure the
options markets will not be compromised when the underlying security
enters a limit up-limit down state. Specifically, there may not be
reliable prices for an underlying security during a limit up-limit down
state. Additionally, it may be difficult or not possible for a market
participant to hedge the purchase or sale of an option if the bid or
offer of an underlying security may not be executable due to a limit
up-limit down state. Given the possible effects of the limit up-limit
down state, the Exchange anticipates that Exchange Market-Makers may be
forced to change behaviors during these periods. In an effort to
protect the investors in the options market while the underlying
security is in a limit up-limit down state, the Exchange believes that
eliminating quoting obligations is the more effective way for this
protection.
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    \39\ See Notice, supra note 3.
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    Although the Exchange is proposing to relieve market makers of
their quoting

obligations when the underlying is in a limit up-limit down state, the
Exchange is proposing that PMMs, LMMs, DPMs and e-DPMs may still
receive participation entitlements pursuant to the proposed rules in
all series in their assigned classes in which they are quoting, even in
series in which they are not required to provide continuous electronic
quotes under the Exchange Rules. The Exchange stated that market makers
already receive participation entitlements in series in which they are
not required to quote; thus, under the proposed rule change, the market
would continue to function as it does now with respect to how
entitlements are allocated to Market-Makers. The Exchange believes this
benefit is appropriate, as it incentivizes Market-Makers to quote in as
many series as possible in their appointed classes, even those series
in which the underlying security has entered into a limit up-limit down
state. The Exchange stated that it is attempting to better encourage
Market-Makers to quote even though they will not have the obligation.
If market makers do choose to quote, the Exchange believes they should
be entitled to receive the entitlement for such quoting as appropriate.

D. Nullification and Adjustment of Options Transactions

    In connection with the implementation of the Plan, the Exchange
proposes to adopt Interpretation and Policies .06 to Rule 6.25 to
exclude transactions in options that overlay a security during a Limit
State or Straddle State from the obvious error pricing provision in
Rule 6.25(a)(1) for a one year pilot basis from the date of adoption of
the proposed rule change. Additionally, the Exchange proposes to
specify that electronic transactions in options that overlay an NMS
stock that occur during a Limit State or Straddle State may be reviewed
on an Exchange motion pursuant to Rule 6.25(b)(3). The Exchange also
proposes to provide the Commission with data and analysis during the
duration of the pilot as requested.
    Under Rule 6.25, an Obvious Price Error occurs when the execution
price of an electronic transaction is above or below the theoretical
price for the series by a specified amount. Pursuant to Rule
6.25(a)(1)(i), the theoretical price of an option series is currently
defined, for series traded on at least one other options exchange, as
the last national best bid price with respect to an erroneous sell
transaction, and the last national best offer price with respect to an
erroneous buy transaction, just prior to the trade. In certain
circumstances, Trading Officials have the discretion to determine the
theoretical price pursuant to Rule 6.25(a)(1)(iv).\40\
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    \40\ Rule 6.25(a)(1)(iv) provides there are no quotes for
comparison, or if the bid/ask differential of the national best bid
and offer for the affected series just prior to the erroneous
transaction was at least two times the permitted bid/ask
differential determined by the Exchange, designated Trading
Officials will determine the theoretical price.
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    The Exchange believes that neither method is appropriate during a
Limit State or Straddle State. In Amendment No. 1, the Exchange noted
that during a Limit State or Straddle State, options prices may deviate
substantially from those available prior to or following the state. The
Exchange believes this provision would give rise to much uncertainty
for market participants as there is no bright line definition of what
the theoretical value should be for an option when the underlying NMS
stock has an unexecutable bid or offer or both. The Exchange noted that
determining theoretical value in such a situation would be often times
be very subjective rather than an objective determination and would
give rise to additional uncertainty and confusion for investors.
Similarly, the Exchange believes the application of the current rule
would be impracticable given the lack of a reliable national best bid
or offer in the options market during Limit States and Straddle States,
and would produce undesirable effects.
    Ultimately, the Exchange believes that adding certainty to the
execution of limit orders in these situations should encourage market
participants to continue to provide liquidity to the Exchange, thus
promoting a fair and orderly market. On balance, the Exchange believes
that removing the potential inequity of nullifying or adjusting
executions occurring during Limit States or Straddle States outweighs
any potential benefits from applying these provisions during such
unusual market conditions.
    Therefore, the Exchange proposes to adopt Interpretation and Policy
.06 to Rule 6.25 to provide that transactions executed during a Limit
State or Straddle State are not subject to the obvious pricing error
provision in Rule 6.25(a)(1). In addition, amended Rule 6.25 will
include a qualification that nothing in the proposed rule change will
prevent transactions in options that overlay a security in a Limit
State or Straddle State from being reviewed on an Exchange motion
pursuant to Rule 6.25(b)(3). According to the Exchange, this safeguard
will provide the flexibility to act when necessary and appropriate,
while also providing market participants with certainty that trades
they effect with quotes and/or orders having limit prices will stand
irrespective of subsequent moves in the underlying security. The right
to review on Exchange motion electronic transactions that occur during
a Limit State or Straddle State under this provision, according to the
Exchange, would enable the Exchange to account for unforeseen
circumstances that result in obvious or catastrophic errors for which a
nullification or adjustment may be necessary in order to preserve the
interest of maintaining a fair and orderly market and for the
protection of investors. The Exchange also proposes to provide the
Commission with data and analysis during the duration of the pilot as
requested.

IV. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and rules and
regulations thereunder applicable to a national securities
exchange.\41\ In particular, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\42\ which,
among other things, requires a national securities exchange to be so
organized and have the capacity to be able to carry out the purposes of
the Act and to 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, and is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulation, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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    \41\ In approving the proposed rule changes, the Commission has
considered their impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
    \42\ 15 U.S.C. 78f(b).
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A. Exchange Rule 6.3A and the Plan

    Exchange Rule 6.3A lists changes to Exchange order types, order
handling, obvious error, and market-maker quoting obligations that the
Exchange is making in connection with the implementation of the Plan.
The Exchange believes that the proposed changes to Rule 6.3A will
describe to TPHs and other market participants where to find the
changes associated

with the Plan's implementation. Accordingly, the Commission finds that
this change promotes clarity in connection with CBOE's proposed changes
in response to the Limit up-Limit Down Plan and is therefore consistent
with the Act.

B. Order Handling During the Limit Up-Limit Down State

    As detailed above, the Exchange proposes to add language to clarify
that: (a) market orders, with certain exceptions, will be returned
during limit up-limit down states, (b) market-on-close orders will not
be elected if the underlying security is in a limit up-limit down
state, (c) stop orders will not be triggered while the underlying
security is in a limit up-limit down state, and (d) stock-option orders
will only execute if the calculated stock price is within the
permissible bands, unless such order is routed for manual handling. In
addition, during a limit up-limit down state, if a message is sent to
replace a limit order with a market order, the resting limit order will
be cancelled and the replaced market order will also be cancelled.
    The Commission finds that the Exchange's proposed method of
handling such orders is consistent with Section 6(b)(5) of the Act.
When the underlying stock enters a limit up-limit down state, the lack
of a reliable price in that market could affect the options markets in
various ways, including wider spreads and less liquidity. This could
potentially mean that market orders, which contain no restrictions on
the price at which they may execute, could receive executions at
unintended prices if executed during the limit up-limit down state. As
such, the proposed changes to reject market orders and market-on-close
orders if the underlying is in a limit up-limit down state, to not
trigger stop orders if the underlying is in a limit up-limit down
state, and to cancel market orders that replace limit orders when the
underlying is in a limit up-limit down state, are reasonably designed
to prevent such orders from being executed at potentially unexpected
prices.
    At the same time, the proposed exceptions to the treatment of these
orders--accepting market orders that are submitted to initiate an
Automated Price Improvement Mechanism, or which are routed for manual
handling--are designed to take into account that market orders
submitted in these ways may not be at the same risk as other market
orders for executions at unexpected prices. Specifically, market orders
submitted through the Automated Price Improvement Mechanism are
submitted as pairs, and are effectively stopped because they must
execute at a price at or better than the contra order. With respect to
market orders routed for manual handling, such orders are physically
handled by a broker on the Exchange floor who must affirmatively agree
to an execution price, as opposed to simply executing that order
against electronic prices. Similarly, the Exchange's proposal to route
a stock-option order for manual handling when the underlying is in a
limit up-limit down state allows such orders to be physically handled
by a broker on the Exchange floor who must affirmatively agree to an
execution price.
    The Exchange proposes to add an Interpretation and Policy .07 to
Rule 6.2B which states that if the underlying security for a class of
options enters into a limit up-limit down state when the class moves to
opening rotation, any market orders entered that trading day will be
cancelled. However, market orders that are considered limit orders
pursuant to Rule 6.13(b)(iv) and entered the previous trading day will
remain in the Book and can essentially act as limit orders at the
minimum increment.
    The Commission finds that these changes are consistent with the Act
in that they are reasonably designed to counter potential price
dislocations that may occur if the underlying enters a limit up-limit
down state during the opening by preventing market orders, which
contain no restrictions on the price at which they may execute, from
being executed at potentially unintended prices. At the same time, this
proposal allows market orders that are essentially limit orders to
continue to participate in the opening process without a similar risk
of an execution at an unintended price.
    The Exchange also proposes that, if an underlying security enters a
limit up-limit down state while a market order is being exposed through
HAL, the auction will end early, and any unexecuted portion of the
market order would be cancelled. The Commission believes that this
provision will provide certainty to options market participants on how
market orders submitted to HAL will be handled during limit up-limit
down states. In addition, the Commission finds that this provision is
consistent with the Act in that it is reasonably designed to counter
potential price dislocations that may occur if the underlying enters a
limit up-limit down state while the HAL functionality is underway by
preventing market orders, which contain no restrictions on the price at
which they may execute, from being executed at potentially unintended
prices.
    The Exchange proposes to amend the COA rule so that, if during a
COA of a market order, the underlying security of an option enters a
limit up-limit down state, the COA will end and the remaining portion
of the order, if a market order, will cancel. As with the proposed
change to HAL, the Commission believes that this provision is
consistent with the Act in that it will provide certainty to options
market participants on how market orders submitted to COA will be
handled during limit up-limit down states. In addition, the Commission
finds that this provision is reasonably designed to counter potential
price dislocations that may occur if the underlying enters a limit up-
limit down state while a COA is underway by preventing market orders,
which contain no restrictions on the price at which they may execute,
from being executed at potentially unintended prices.

C. Market Maker Obligations

    The Commission finds that the proposal to suspend a market maker's
obligations when the underlying security is in a limit up-limit down
state is consistent with the Act. During a limit up-limit down state,
there may not be a reliable price for the underlying security to serve
as a benchmark for market makers to price options. In addition, the
absence of an executable bid or offer for the underlying security will
make it more difficult for market makers to hedge the purchase or sale
of an option. Given these significant changes to the normal operating
conditions of market makers, the Commission finds that the Exchange's
decision to suspend a market maker's obligations in these limited
circumstances is consistent with the Act. The Commission notes,
however, that the Plan was approved on a pilot basis and its
Participants will monitor how it is functioning in the equity markets
during the pilot period. To this end, the Commission expects that, upon
implementation of the Plan, the Exchange will continue monitoring the
quoting requirements that are being amended in this proposed rule
change and determine if any necessary adjustments are required to
ensure that they remain consistent with the Act.
    The Commission also finds that the proposal to maintain
participation entitlements for market makers in all series in their
assigned classes in which they are quoting, including in series for
which the underlying security is in a limit up-limit down state and for
which they are not required to provide continuous electronic quotes
under the Exchange Rules, is consistent with the

Act. To the extent that market makers are only eligible for
participation entitlements if they are quoting at the best price on the
Exchange, this proposal is reasonably designed to incentivize Market-
Makers to quote more aggressively when the underlying security has
entered into a limit up-limit down state than they might otherwise
quote, potentially providing additional liquidity and price discovery.
To the extent that, under this proposal, market makers would receive
participation entitlements in series in which they are not required to
quote, the Commission notes that this aspect of the proposal is
consistent with the current application of participation entitlements.

D. Nullification and Adjustment of Options Transactions

    The Commission finds that the Exchange's proposal to suspend
certain aspects of Rule 6.25 during a Limit State or Straddle State is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.
Specifically, the Commission finds that the proposal is consistent with
Section 6(b)(5) of the Act,\43\ in that it is designed to 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, remove impediments to and perfect the mechanism of a free
and open market and a national market system, and, in general, protect
investors and the public interest.
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    \43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In Amendment No. 1, the Exchange notes its belief that suspending
certain aspects of Rule 6.25 during a Limit State or Straddle State
will ensure that limit orders that are filled during a Limit or
Straddle State will have certainty of execution in a manner that
promotes just and equitable principles of trade and removes impediments
to, and perfects the mechanism of, a free and open market and a
national market system. The Exchange believes the application of the
current rule would be impracticable given what it perceives will be the
lack of a reliable NBBO in the options market during Limit States and
Straddle States, and that the resulting actions (i.e., nullified trades
or adjusted prices) may not be appropriate given market conditions. In
addition, given the Exchange's view that options prices during Limit
States or Straddle States may deviate substantially from those
available shortly following the Limit State or Straddle State, the
Exchange believes that providing market participants time to re-
evaluate a transaction executed during a Limit State or Straddle State
will create an unreasonable adverse selection opportunity that will
discourage participants from providing liquidity during Limit States or
Straddle States. Ultimately, the Exchange believes that adding
certainty to the execution of orders in these situations should
encourage market participants to continue to provide liquidity to the
Exchange during Limit States and Straddle States, thus promoting fair
and orderly markets.
    The Exchange, however, has proposed this rule change based on its
expectations about the quality of the options market during Limit
States and Straddle States. The Exchange states, for example, that it
believes that application of the obvious and catastrophic error rules
would be impracticable given the potential for lack of a reliable NBBO
in the options market during Limit States and Straddle States. Given
the Exchange's recognition of the potential for unreliable NBBOs in the
options markets during Limit States and Straddle States, the Commission
is concerned about the extent to which investors may rely to their
detriment on the quality of quotations and price discovery in the
options markets during these periods. This concern is heightened by the
Exchange's proposal to exclude electronic trades that occur during a
Limit State or Straddle State from the obvious pricing error provisions
of Rule 6.25(a)(1) and the nullification or adjustment provisions of
Rule 6.25. The Commission urges investors and market professionals to
exercise caution when considering trading options under these
circumstances. Broker-dealers also should be mindful of their
obligations to customers that may or may not be aware of specific
options market conditions or the underlying stock market conditions
when placing their orders.
    While the Commission remains concerned about the quality of the
options market during the Limit States and Straddle States, and the
potential impact on investors of executing in this market without the
protections of the obvious or catastrophic error rules that are being
suspended during the Limit and Straddle States, it believes that
certain aspects of the proposal could help mitigate those concerns.
    First, despite the removal of obvious and catastrophic error
protection during Limit States and Straddle States, the Exchange states
that there are additional measures in place designed to protect
investors. For example, the Exchange states in Amendment No. 1 that by
rejecting market orders and not electing stop orders, only those orders
with a limit price will be executed during a Limit State or Straddle
State. Additionally, the Exchange notes the existence of SEC Rule 15c3-
5 requiring broker-dealers to have controls and procedures in place
that are reasonably designed to prevent the entry of erroneous orders.
Therefore, on balance, the Exchange believes that removing the
potential inequity of nullifying or adjusting executions occurring
during Limit States or Straddle States outweighs any potential benefits
from applying certain provisions during such unusual market conditions.
    The Exchange also believes that the aspect of the proposed rule
change that will continue to allow the Exchange to review on its own
motion electronic trades that occur during a Limit State or a Straddle
State is consistent with the Act because it would provide flexibility
for the Exchange to act when necessary and appropriate to nullify or
adjust a transaction and will enable the Exchange to account for
unforeseen circumstances that result in obvious errors for which a
nullification or adjustment may be necessary in order to preserve the
interest of maintaining a fair and orderly market and for the
protection of investors. The Exchange represents that it will
administer this provision in a manner that is consistent with the
principles of the Act. In addition, the Exchange has represented that
it will create and maintain records relating to the use of the
authority to act on its own motion during a Limit State or Straddle
State.
    Finally, the Exchange has proposed that the changes be implemented
on a one year pilot basis. The Commission believes that it is important
to implement the proposal as a pilot. The one year pilot period will
allow the Exchange time to assess the impact of the Plan on the options
marketplace and allow the Commission to further evaluate the effect of
the proposal prior to any proposal or determination to make the changes
permanent. To this end, the Exchange has committed to: (1) Evaluate the
options market quality during Limit States and Straddle States; (2)
assess the character of incoming order flow and transactions during
Limit States and Straddle States; and (3) review any complaints from
members and their customers concerning executions during Limit States
and Straddle States. Additionally, the Exchange has agreed to provide
the Commission with data requested to evaluate the impact of the
elimination of

the obvious error rule, including data relevant to assessing the
various analyses noted above. On April 4, 2013, the Exchange submitted
a letter stating that it would provide specific data to the Commission
and the public and certain analysis to the Commission to evaluate the
impact of Limit States and Straddle States on liquidity and market
quality in the options markets.\44\ This will allow the Commission, the
Exchange, and other interested parties to evaluate the quality of the
options markets during Limit States and Straddle States and to assess
whether the additional protections noted by the Exchange are sufficient
safeguards against the submission of erroneous trades, and whether the
Exchange's proposal appropriately balances the protection afforded to
an erroneous order sender against the potential hazards associated with
providing market participants additional time to review trades
submitted during a Limit State or Straddle State.
---------------------------------------------------------------------------

    \44\ In particular, the Exchange represented that, at least two
months prior to the end of the one year pilot period of proposed
Interpretation and Policy .06 to Rule 6.25, it would provide to the
Commission an evaluation of (i) the statistical and economic impact
of Straddle States on liquidity and market quality in the options
market and (ii) whether the lack of obvious error rules in effect
during the Limit States and Straddle States are problematic. In
addition, the Exchange represented that each month following the
adoption of the proposed rule change it would provide to the
Commission and the public a dataset containing certain data elements
for each Limit State and Straddle State in optionable stocks. The
Exchange stated that the options included in the dataset will be
those that meet the following conditions: (i) the options are more
than 20% in the money (strike price remains greater than 80% of the
last stock trade price for calls and strike price remains greater
than 120% of the last stock trade price for puts when the Limit
State or Straddle State is reached); (ii) the option has at least
two trades during the Limit State or Straddle State; and (iii) the
top ten options (as ranked by overall contract volume on that day)
meeting the conditions listed above. For each of those options
affected, each dataset will include, among other information: stock
symbol, option symbol, time at the start of the Limit State or
Straddle State and an indicator for whether it is a Limit State or
Straddle State. For activity on the exchange in the relevant
options, the Exchange has agreed to provide executed volume, time-
weighted quoted bid-ask spread, time-weighted average quoted depth
at the bid, time-weighted average quoted depth at the offer, high
execution price, low execution price, number of trades for which a
request for review for error was received during Straddle States and
Limit States, an indicator variable for whether those options
outlined above have a price change exceeding 30% during the
underlying stock's Limit State or Straddle State compared to the
last available option price as reported by OPRA before the start of
the Limit or Straddle state (1 if observe 30% and 0 otherwise), and
another indicator variable for whether the option price within five
minutes of the underlying stock leaving the Limit State or Straddle
State (or halt if applicable) is 30% away from the price before the
start of the Limit State or Straddle state. See CBOE Letter, supra
note 6.
---------------------------------------------------------------------------

    In addition, the Commission finds good cause, pursuant to Section
19(b)(2) of the Act \45\ for approving the proposed rule change on an
accelerated basis. This proposal is related to the Plan, which will
become operative on April 8, 2013, and aspects of the proposal, such as
rejecting market orders and not electing Stop Orders during a limit up-
limit down state, are designed to prevent such orders from receiving
poor executions during those times. In granting accelerated approval,
the proposed rule change, and its corresponding protections, will take
effect upon the Plan's implementation date. Accordingly, the Commission
finds that good cause exists for approving the proposed rule change on
an accelerated basis.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78s(b)(2)
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\46\ that the proposed rule change (SR-CBOE-2013-030), as modified
by Amendments Nos. 1 and 2, be, and it hereby is, approved on an
accelerated basis.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-08473 Filed 4-10-13; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 78, Number 123 (Wednesday, June 26, 2013)]
[Notices]
[Pages 38416-38420]
[FR Doc No: 2013-15225]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69809; File No. SR-MIAX-2013-30]

Self-Regulatory Organizations; Miami International Securities
Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to $0.50 and $1 Strike Price Intervals for Classes
in the Short Term Option Series Program

June 20, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that, on June 13, 2013, Miami International Securities Exchange LLC
(``MIAX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'') a proposed rule change as described in
Items I and II, below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange is filing a proposal to amend Exchange Rule 404,
Series of Option Contracts Open for Trading, by adopting
Interpretations and Policies .09 to the rule to describe the manner of
expiration and the strike price intervals of options series included in
the Exchange's $1 Strike Price Interval Program, and by modifying
Interpretations and Policies .02(e) to the rule to describe strike
price intervals for options series that are included in the Exchange's
Short Term Option Series Program.\3\
---------------------------------------------------------------------------

    \3\ The Exchange may open for trading on any Thursday or Friday
that is a business day ``Short Term Option Opening Date'') series of
options on that class that expire at the close of business on each
of the next consecutive Fridays that are business days (``Short Term
Option Series'' or ``STOS'').
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the Exchange's
Web site at http://www.miaxoptions.com/filter/wotitle/rule_filing, at
MIAX's principal office, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to adopt Interpretations and Policies .09 to
Exchange Rule 404 to state that, notwithstanding any other provision
regarding strike prices in the rule, Related non-STOS \4\ shall be
opened on the Thursday or Friday prior to the expiration week that such
Related non-STOS (such as, for example, series with standard monthly or
quarterly expirations) expire in the same manner as permitted in Rule
404, Interpretations and Policies .02, and in the same strike price
intervals for the STOS permitted in Rule 404, Interpretations and
Policies .02(e).
---------------------------------------------------------------------------

    \4\ Proposed Rule 404, Interpretations and Policies .02(e)
defines a ``Related non-Short Term Option'' as a non-Short Term
Option series that is included in a class that has been selected to
participate in the Short Term Option Series Program.
---------------------------------------------------------------------------

    The Exchange further proposes to amend Interpretations and Policies
.02(e) to Exchange Rule 404 to provide that the strike price interval
for STOS may be $0.50 or greater for option classes that trade in $1
strike price intervals and are in the STOS Program. If the class does
not trade in $1 strike price intervals, the strike price interval for
STOS may be $0.50 or greater where the strike price is less than $75
and $1.00 or greater where the strike price is between $75 and $150,
and the same as strike prices for series in that same option class that
expire in accordance with the normal monthly expiration cycle for
strike prices greater than $150. Notwithstanding any other provision
regarding strike prices in the rule, Related non-Short Term Option
series shall be opened on the Thursday or Friday prior to the
expiration week that such Related non-Short Term Option series expire
in the same manner as permitted in Rule 404, Commentary .02, and in the
same strike price intervals for the STOS permitted in this [sic] Rule
404, Commentary .02 (e).
    This is a competitive filing that is based on recent filings by the
International Securities Exchange, LLC (``ISE''), NASDAQ OMX PHLX, LLC
(``PHLX'') and NYSE MKT LLC (``NYSE MKT'').\5\ The ISE, PHLX and NYSE
MKT filings made changes to the strike price interval setting parameter
rules for their respective STOS Programs. STOS options are not listed
to expire during the same week as non-Short Term Option series. As a
result, ISE, PHLX and NYSE MKT amended their rules to permit non-Short
Term Option series to have the same strike price interval setting
parameters for STOS during the

week that non-Short Term Option series expire.
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    \5\ See Securities Exchange Act Release Nos. 67754 (August 29,
2012), 77 FR 54629 (September 5, 2012) (Order approving SR-ISE-2012-
33) (``ISE filing''); 69633 (May 23, 2012), 78 FR 32498 (May 30,
2013) (SR-Phlx-2013-55) (``PHLX filing''); 68074 (October 19, 2012),
77 FR 65241 (October 25, 2012) (SR-CBOE-2012-92); and 68193
(November 8, 2012), 77 FR 68177 (November 15, 2012) (Notice of
Filing and Immediate Effectiveness of SR-NYSEMKT-2012-53).
---------------------------------------------------------------------------

    ISE and PHLX also both amended the strike price interval setting
parameters for their STOS Programs, but the revisions to their
respective rules differ. Specifically, ISE permits $0.50 strike price
intervals for Weekly \6\ options for option classes that trade in one
dollar increments and are in the STOS Program.\7\ PHLX permits $0.50
strike price intervals when the strike price is below $75, and $1
strike price intervals when the strike price is between $75 and $150,
or $0.50 for classes that trade in one dollar increments in Related
non-Short Term Options and that participate in the STOS Program. PHLX
also provides that related non-Weekly option series may be opened
during the week prior to expiration week pursuant to the same strike
price interval parameters that exist for Weekly options. Thus a related
non-Weekly option may be opened in Weekly option strike price intervals
on a Thursday or a Friday that is a business day before the non-Weekly
option expiration week.\8\ If PHLX is not open for business on the
respective Thursday or Friday, however, the non-Weekly option may be
opened in Weekly option intervals on the first business day immediately
prior to that respective Thursday or Friday.\9\
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    \6\ Short Term Options Series (``STOS'') are also known as
``Weekly options'' or ``weeklies'' and trade as such under the
various exchanges' respective STOS Programs. For all practical
purposes, the terms STOS, Weekly options, and weeklies are
interchangeable.
    \7\ The permissible $0.50 strike price intervals may only be
opened on the Weekly option Opening Date that expire on the Weekly
option Expiration date and no additional series, including
additional series of the related non-Weekly option, may be opened
during expiration week in classes that are listed pursuant to ISE
rules.
    \8\ This opening timing is consistent with the principle that
the Exchange may add new series of options until two business days
prior to expiration. See Exchange Rule 404(e).
    \9\ On the Exchange, the STOS opening process is set forth in
MIAX Rule 404, Interpretations and Policies .02: After an option
class has been approved for listing and trading on the Exchange, the
Exchange may open for trading on any Thursday or Friday that is a
business day (``Short Term Option Opening Date'') series of options
on that class that expire at the close of business on each of the
next consecutive Fridays that are business days (``Short Term Option
Expiration Dates''). If the Exchange is not open for business on the
respective Thursday or Friday, the Short Term Option Opening Date
will be the first business day immediately prior to that respective
Thursday or Friday. Similarly, if the Exchange is not open for
business on the Friday of the following business week, the Short
Term Option Expiration Date will be the first business day
immediately prior to that Friday.
---------------------------------------------------------------------------

    The Exchange proposes herein to adopt rules that are in effect on
NYSE MKT in order to remain competitive regarding strike price interval
setting parameters. The Exchange notes that while it believes that
there is substantial overlap between the two strike price interval
setting parameters, the Exchange believes there are gaps that would
enable PHLX to initiate a series that ISE would not be able to initiate
and vice versa [sic].\10\ Since uniformity is not required for the STOS
Programs that have been adopted by the various options exchanges, the
Exchange proposes to revise its strike price intervals setting
parameters so that it has the ability to initiate strike prices in the
same manner (i.e., intervals) as both ISE and PHLX, and thus in the
same manner currently in place on NYSE MKT. Accordingly, just as with
NYSE MKT, the Exchange proposes to adopt aspects of both the ISE rule
text language and the PHLX rule text language approved by the
Commission.
---------------------------------------------------------------------------

    \10\ The Exchange and the majority, if not all, of the other
options exchanges that have adopted a STOS Program have a similar
rule that permits the listing of series that are opened by other
exchanges, consistent with the Options Listing Procedures Plan
(``OLPP''). See Exchange Rule 404A(b)(6). This filing is concerned
with the ability to initiate series. For example, if a class is
selected to participate in the STOS Program and non-STOS options on
that class do not trade in dollar increments, the Exchange believes
that PHLX would be permitted to initiate $0.50 strikes on that class
and ISE would not. Similarly, the strike price interval for
exchange-traded fund (``ETF'') options is generally $1 or greater
where the strike price is $200 or less.
---------------------------------------------------------------------------

    The STOS Program is codified in Interpretations and Policies .02 to
Exchange Rule 404. The rule states that after an option class has been
approved for listing and trading on the Exchange, the Exchange may open
for trading, on any Thursday or Friday that is a business day, series
of options on no more than twenty-five option classes that expire on
the Friday of the following business week that is a business day. In
addition to the twenty-five option class limitation, there is also a
limitation that no more than twenty series for each expiration date in
those classes may be initially opened for trading.\11\ Furthermore, the
strike price of each STOS has to be fixed with approximately the same
number of strike prices being opened above and below the value of the
underlying security at about the time that the short term options are
initially opened for trading on the Exchange, and with strike prices
being within thirty percent (30%) above or below the closing price of
the underlying security from the preceding day. The Exchange does not
propose any changes to the current program limitations. The Exchange
proposes only to specify that STOS can have interval prices of $0.50
and $1, as proposed under Interpretations and Policies .02(e) to Rule
404.
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    \11\ However, if the Exchange opens twenty (20) short term
options for a Short Term Option Expiration Date, up to 10 additional
series may be opened for trading on the Exchange when the Exchange
deems it necessary to maintain an orderly market, to meet customer
demand or when the market price of the underlying security moves
substantially from the exercise price or prices of the series
already opened. Any additional strike prices listed by the Exchange
shall be within thirty percent (30%) above or below the current
price of the underlying security. The Exchange may also open
additional strike prices of STOS that are more than 30% above or
below the current price of the underlying security provided that
demonstrated customer interest exists for such series, as expressed
by institutional, corporate or individual customers or their brokers
(market-makers trading for their own account shall not be considered
when determining customer interest under this provision).
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    The principal reason for the proposed interval pricing structure is
market demand for weekly options. There is continuing strong customer
demand for having the ability to execute hedging and trading strategies
effectively via STOS, particularly in the current fast, multi-faceted
trading and investing environment that extends across numerous markets
and platforms.\12\ The Exchange has observed increased demand for STOS
classes and/or series, particularly when market moving events such as
significant market volatility, corporate events, or when large market,
sector, or individual issue price swings have occurred. The STOS
Program is one of the most popular and quickly expanding options
expiration programs.
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    \12\ These include, without limitation, options, equities,
futures, derivatives, indexes, exchange traded funds, exchange
traded notes, currencies, and over-the-counter instruments.
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    The Exchange believes that the benefits of the ability to trade
STOS at $0.50 and $1 intervals at lower price levels cannot be
underestimated. The proposed intervals would clearly allow traders and
investors, and in particular public (retail) investors to more
effectively and with greater precision consummate trading and hedging
strategies on the Exchange. The Exchange believes that this precision
is increasingly necessary, and in fact crucial, as traders and
investors engage in trading and hedging strategies across various
investment platforms (e.g., equity and ETF, index, derivatives,
futures, foreign currency, and even commodities products); particularly
when many of these platforms enjoy substantially smaller strike price
differentiations (e.g., as low as $0.05).\13\
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    \13\ As an example, per the CME Web site, strike prices for
options on futures may be at an interval of $.05, $.10, and $.25 per
specified parameters. See http://www.cmegroup.com/trading/equityindex/files/EQUITY_FLEX_Options.pdf (options on S&P 500 and
NASDAQ-100 contracts) and http://www.cmegroup.com/rulebook/files/S_5734_x11-0518x Change in Listing Rules for Goldx Silverx Copper
Options.pdf (options on metals contracts).

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    Weekly options have characteristics that are attractive for certain
trading and hedging strategies. Thus, weeklies may be attractive for
retail trading strategies that could benefit from the inherent
accelerated time decay of weekly options, such as selling (buying)
vertical or calendar spreads. And weeklies may be particularly
attractive instruments for short-term institutional hedging needs
(e.g., sudden price movements against large option positions during
expiration week; maintenance or adjustment of complex option positions)
as well as for retail hedging needs (e.g., preceding large earnings
plays). In every case, trading and hedging is more effective when it
can be closely tailored. The current wider STOS price intervals have
negatively impacted investors and traders, particularly retail public
customers, who have on several occasions requested the Exchange to list
series with finer, narrower STOS intervals. The proposal would fix
this.
    The following is an example of how inadequately narrow STOS
intervals negatively impact trading and hedging opportunities. If an
investor needs to purchase an STOS call option in CSCO (03/26/12
closing price $20.84), the current $1 strike interval would offer less
opportunity and choice for an investor seeking to keep cash
expenditures low. For example, an investor wishing to buy an in-the-
money call option for less than a $2.50 investment per call purchase
has only two strike prices that meet his criteria from which to choose:
The 19 strike and the 20 strike. Such call options with five days until
expiration might offer ``ask prices'' (option premiums) of $1.75 and
$.75. However, if CSCO had $0.50 strike prices as proposed, the same
investor would have a selection of March 18.50, 19.00, 19.50, 20.00,
and the 20.50 strike call options that may have options premiums from
approximately $2.25 down to approximately $.25. This expanded range of
strikes, and commensurate option premiums, offers far more choice and a
considerably lower cost of entry to the investor, thereby garnering the
investor more than a 66% options premium savings. Lower intervals
increase effective liquidity by offering investors and traders more
price points at which they may execute trading and hedging
strategies.\14\ This allows investors and traders the ability to more
effectively execute their strategies at lower cost. Clearly, more
efficient pricing is advantageous to all market participants, from
retail to institutional investors. The changes proposed by the Exchange
should allow execution of more trading and hedging strategies on the
Exchange. The Exchange notes that in conformance with Exchange Rules,
the Exchange shall not list $0.50 or $1 strike price intervals on
Related non-STOS options within two (2) days of expiration. For
example, if a Related non-STOS in an options class is set to expire on
Friday, September 21, the Exchange could begin to trade $0.50 strike
price intervals surrounding that Related non-STOS on Thursday,
September 13, but no later than Friday September 14.
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    \14\ Moreover, lower strike intervals provide additional price
points for liquidity providers. This allows the liquidity providers
to improve theoretical pricing as well as hedging capabilities,
thereby enabling them to increase the size and quality of their
markets.
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    The Exchange proposes to list the expiring Related non-STOS on the
Thursday or Friday prior to expiration week, so that investors can
close a position in an expiring STOS and open a position at the same
strike price in a Related non-STOS. The listing of the $0.50 or $1
strike price intervals for expiring Related non-STOS on the Thursday or
Friday prior to expiration week is intended to be consistent with the
``overlap'' of STOS today, which facilitates investors desiring to
``roll'' a position from one STOS expiration to another. If the $0.50
or $1 interval strikes are not available until the opening on Monday of
expiration week, an investor who had a position in the prior week's
$0.50 or $1 interval STOS could not close a position in the expiring
STOS and open a position at the same strike in the Related non-STOS.
    Furthermore, the inadequate price intervals for STOS, particularly
at the lower price levels proposed by the Exchange, may discourage
retail and other customers from executing STOS orders when they could
be the most advantageous for effective execution of trading and hedging
strategies on regulated and transparent exchanges. The Exchange feels
that it is essential that such negative, potentially costly and time-
consuming impacts on retail investors are eliminated by offering
tighter intervals within the STOS Program. The changes proposed by the
Exchange should allow execution of more trading and hedging strategies
on the Exchange.\15\
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    \15\ In addition, there is a competitive impact. First, the
proposal would enable the Exchange to provide market participants
with an opportunity to execute their strategies (e.g., complex
option spreads) wholly on their preferred market, namely the
Exchange. Second, the proposal would diminish the potential for
foregone market opportunities on the Exchange caused by the need to
use a more advantageous (that is, interval-precise) platform than
STOs currently allow.
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    The Exchange also proposes that Related non-STOS shall be opened on
the Thursday or Friday prior to the expiration week that such Related
non-STOS expire in the same manner as permitted in Rule 404,
Interpretations and Policies .02, and in the same strike price
intervals for the STOS permitted in Rule 404, Interpretations and
Policies .02(e). The Exchange proposes to make this change to ensure
conformity between STOS options and Related non-STOS options that are
in the same options class (e.g., weekly and monthly SPY options). The
Exchange believes that not having such a conforming change would be
counter-productive and not beneficial for trading and hedging
purposes.\16\
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    \16\ Moreover, the Exchange notes that STOS options are not
listed and traded during the expiration week of the Related non-STOS
options. During this week, the non-STOS options are materially and
financially equivalent to the STOS options. The proposed change
would allow traders and hedgers to have the noted benefits of the
STOS Program during each week in a month.
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    The Exchange believes that the STOS Program has provided investors
with greater trading opportunities and flexibility and the ability to
more closely tailor their investment and risk management strategies and
decisions. Furthermore, the Exchange has had to reject trading requests
because of the limitations imposed by the Program. For these reasons,
the Exchange requests a modification of the strike price intervals in
the Program and the opportunity to provide investors with better weekly
option choices for investment, trading, and risk management purposes.
    With regard to the impact of this proposal on system capacity, the
Exchange has analyzed its capacity and represents that it and the
Options Price Reporting Authority (``OPRA'') have the necessary systems
capacity to handle any potential additional traffic associated with
this current amendment to the STOS Program. The Exchange believes that
its members will not have a capacity issue as a result of this
proposal. The Exchange represents that it will monitor the trading
volume associated with the additional options series listed as a result
of this proposal and the effect (if any) of these additional series on
market fragmentation and on the capacity of the Exchange's automated
systems.
2. Statutory Basis
    MIAX believes that its proposed rule change is consistent with
Section 6(b) of the Act \17\ in general, and furthers the

objectives of Section 6(b)(5) of the Act \18\ in particular, in that it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest. The Exchange
believes that providing strike prices of $.50 and $1 intervals in STOS
eligible classes will result in a continuing benefit to investors by
giving them more flexibility to closely tailor their investment
decisions and hedging decisions in a greater number of securities. The
Exchange also believes that providing the same strike price intervals
for options classes that are in the STOS Program and for the Related
non-STOS options just prior to and during expiration week will provide
the investing public and other market participants with additional
opportunities to hedge their investment, thus allowing these investors
to better manage their risk exposure. In addition, the Exchange
believes that the proposal will ensure conformity between STOS options
and Related non-STOS options that are in the same options class. The
Exchange believes that allowing the listing of expiring Related non-
STOS on the Thursday or Friday prior to expiration week will help
facilitate the ability of investors and other market participants to
close a position in an expiring STOS and open a position at the same
strike price in a Related non-STOS in a manner that is designed to
promote just and equitable principles of trade. While the expansion of
the STOS Program will generate additional quote traffic, the Exchange
does not believe that this increased traffic will become unmanageable
since the proposal remains limited to a fixed number of classes.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. In this regard and as indicated
above, the Exchange notes that the rule change is being proposed as a
competitive response to existing rules on other exchanges. The Exchange
believes this proposed rule change is necessary to permit fair
competition among the options exchanges with respect to their short
term options programs.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Because the foregoing proposed rule change does not significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not become operative for 30 days from the date on which it was filed,
or such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \19\ and Rule 19b-
4(f)(6) thereunder.\20\
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day
operative delay. The Commission believes that waiver of the 30-day
operative delay will allow MIAX to initiate strikes prices in more
granular intervals for STOs in the same manner as other options
exchanges, and permit, during the expiration week of a Related non-
Short Term option, a Related non-Short Term Option on a class that is
selected to participate in the Short Term Options Series Program to
have the strike price interval setting parameters as STOs. In sum, the
proposed rule change presents no novel issues, and waiver will allow
the Exchange to remain competitive with other exchanges. Therefore, the
Commission designates the proposal operative upon filing.\21\
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    \21\ For purposes only of waiving the 30-day operative delay,
the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-MIAX-2013-30 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MIAX-2013-30. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-MIAX-2013-30 and should be
submitted on or before July 17, 2013.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15225 Filed 6-25-13; 8:45 am]
BILLING CODE 8011-01-P