Notice2022-24146
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rule 2614, Orders and Order Instructions and Rule 2618, Risk Settings and Trading Risk Metrics To Enhance Existing Risk Controls
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 7, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 214 (Monday, November 7, 2022)</title>
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[Federal Register Volume 87, Number 214 (Monday, November 7, 2022)]
[Notices]
[Pages 67080-67086]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-24146]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96205; File No. SR-PEARL-2022-43]
Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Filing
and Immediate Effectiveness of a Proposed Rule Change To Amend Rule
2614, Orders and Order Instructions and Rule 2618, Risk Settings and
Trading Risk Metrics To Enhance Existing Risk Controls
November 1, 2022.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 19, 2022, MIAX PEARL, LLC (``MIAX Pearl'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is filing a proposed rule change to enhance its
existing risk controls and provide Equity Members \3\ additional risk
controls when trading equity securities on the Exchange's equity
trading platform (referred to herein as ``MIAX Pearl Equities'').
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\3\ The term ``Equity Member'' is a Member authorized by the
Exchange to transact business on MIAX Pearl Equities. See Exchange
Rule 1901.
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The text of the proposed rule change is available on the Exchange's
website at <a href="http://www.miaxoptions.com/rule-filings/pearl">http://www.miaxoptions.com/rule-filings/pearl</a> at MIAX
PEARL'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
Purpose
The purpose of the proposed rule change is to enhance certain
existing risk controls and provide Equity Members additional risk
controls when trading equity securities on MIAX Pearl Equities. To help
Equity Members manage their risk, the Exchange currently offers Limit
Order Price Protection and other risk controls that authorize the
Exchange to take automated action if a designated limit for an Equity
Member is breached. Such risk controls provide Equity Members with
enhanced abilities to manage their risk when trading on the Exchange.
The Exchange now proposes to amend Limit Order Price Protection under
Exchange Rule 2614(a)(1)(I) and amend Exchange Rule 2618 to enhance
certain existing risk controls and provide additional optional risk
controls to Equity Members. Each of these changes are described below.
Limit Order Price Protection
Limit Order Price Protection is set forth under Exchange Rule
2614(a)(1)(I) and provides for the cancellation of Limit Orders priced
too far away from a specified reference price at the time the order
first becomes eligible to trade. A Limit Order entered before Regular
Trading Hours \4\ that becomes eligible to trade during Regular Trading
Hours will be subject to Limit Order Price Protection at the time
Regular Trading Hours begins.\5\
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\4\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See Exchange Rule 1901.
\5\ Further, a Limit Order in a security that is subject to a
trading halt becomes first eligible to trade when the halt is lifted
and continuous trading has resumed. See Exchange Rule
2614(a)(1)(I)(iii).
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Exchange Rule 2614(a)(1)(I)(i) provides that a Limit Order to buy
(sell) will be rejected if it is priced at or above (below) the greater
of a specified dollar value and percentage away from the following: (1)
the PBO for Limit Orders to buy, the PBB for Limit Orders to sell; (2)
if the PBO or PBB is unavailable, the consolidated last sale price
disseminated during the Regular Trading Hours on trade date; (3) if the
PBO, PBB, and a consolidated last sale price are unavailable, the prior
day's Official Closing Price identified as such by the primary listing
exchange, adjusted to account for events such as corporate actions and
news events. Exchange Rule 2614(a)(1)(I)(iii) provides that Limit Order
Price Protection will not be applied if the prices listed above are
unavailable. Equity Members have requested that Limit Order Price
Protection also not be applied when the prior day's Official Closing
Price is to be used when the PBO, PBB, and a consolidated last sale
price are unavailable and a trading halt has been declared by the
primary listing market during that trading day. The Exchange
understands that Equity Members believe the Official Closing Price does
not appropriately relate to the current trading behavior of the
security in such a scenario and Equity Members would prefer Limit Order
Price Protection not be applied since it may result in their Limit
Order being unnecessarily rejected. The Exchange, therefore, proposes
to amend Exchange Rule 2614(a)(1)(I)(iii) to provide that Limit Order
Price Protection would not be applied when a regulatory halt has been
declared by the primary listing market during that trading day and the
Exchange would have applied the prior day's Official Closing Price
because the PBO, PBB, and a consolidated last sale price are
unavailable.
[[Page 67081]]
Exchange Rule 2614(a)(1)(I)(ii) provides Equity Members the ability
to customize their specified dollar and percentages on a per session
\6\ basis. If an Equity Member does not provide the Exchange specified
dollar values or percentages for their order(s), default specified
dollar and percentages established by the Exchange will be applied.\7\
Equity Members have expressed the need for additional flexibility by
being able to customize their dollar and percentage thresholds on a per
Market Participant Identifier (``MPID'') basis, rather than only on a
per session basis. Equity Members requested this flexibility so that
they can customize their dollar and percentage thresholds individually
for each of their MPIDs based on their risk appetite. Therefore, the
Exchange proposes to amend Exchange Rule 2614(a)(1)(I)(ii) to also
allow Equity Members to customize the specified dollar and percentages
on a per MPID basis.
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\6\ ``Sessions'' is a defined group of connections to the
Exchange's System.
\7\ The default specified dollar and percentages are posted to
the Exchange's website here: <a href="https://www.miaxequities.com/system-configuration/pearl-equities">https://www.miaxequities.com/system-configuration/pearl-equities</a>.
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Per-Order Risk Controls
The Exchange offers Equity Members the ability to establish certain
risk control parameters that assist Equity Members in managing their
market risk on a per order basis. These optional risk controls are set
forth under Exchange Rule 2618(a)(1) and offer Equity Members
protection from entering orders outside of certain size and price
parameters, and selected order type and modifier combinations, as well
as protection from the risk of duplicative executions. The Exchange
also permits Equity Members to block new orders, to cancel all open
orders, block both new orders and cancel all open orders, and
automatically cancel all orders to the extent the Equity Member loses
its connection to MIAX Pearl Equities.\8\ The risk controls are
available to all Equity Members, but are particularly useful to Market
Makers, who are required to continuously quote in the Equity Securities
to which they are assigned.
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\8\ See Exchange Rule 2618(a)(7)(a) (proposed herein to be
renumbered as Exchange Rule 2618(a)(7)(A)). The Exchange also
proposes to renumber Exchange Rule 2618(a)(7)(b) as Exchange Rule
2618(a)(7)(B).
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As an initial matter, the Exchange proposes to amend Exchange Rule
2618(a)(5) and (6) to incorporate the risk controls set forth under
Exchange Rule 2618(a)(1). Exchange Rule 2618(a)(5) currently provides
that for the risk settings identified in Exchange Rule 2618(a)(2)
(discussed below), both the Equity Member and the Clearing Member (if
allocated such responsibility pursuant to Exchange Rule 2618(a)(4)) may
enable alerts to signal when the Equity Member is approaching
designated limits. Equity Members are also able to enable alerts for
risk settings set forth under Exchange Rule 2618(a)(1) and the Exchange
proposes to codify this option in Exchange Rule 2618(a)(5). Therefore,
Exchange Rule 2618(a)(5) would provide that for the risk settings
identified in Exchange Rule (a)(1), the Equity Member may enable alerts
to signal when the Equity Member is approaching designated limits
provided for in the applicable risk control.
Exchange Rule 2618(a)(6) currently provides that if a risk setting
identified in Exchange Rule 2618(a)(2) is breached, the Exchange will
automatically block new orders submitted and cancel open orders until
such time that the applicable risk control is adjusted to a higher
limit by the Equity Member or Clearing Member with the responsibility
of establishing and adjusting the risk settings identified in paragraph
(a)(2). The same is true for risk settings set forth under Exchange
Rule 2618(a)(1) and the Exchange proposes to codify this option in
Exchange Rule 2618(a)(6) by adding references to Exchange Rule
2618(a)(1) and providing that the Exchange will automatically block new
orders submitted and cancel open orders based on the applicable risk
control. Whether the Exchange automatically blocks new orders or
cancels open orders would depend on the nature of the applicable risk
control. For example, the Exchange would block an order if it was an
order type that the Equity Member instructed the Exchange to block
pursuant to Exchange Rule 2618(a)(1)(C) or was entered in a Principal
capacity and to be blocked pursuant to proposed Exchange Rule
2618(a)(1)(E). The Exchange would cancel an order in a security resting
on the MIAX Pearl Equities Book where, for purposes of the cumulative
risk controls under Exchange Rule 2618(a)(2), an order is entered in a
security that breaches the threshold selected by the Equity Member and
the Equity Member instructed the Exchange to cancel the resting
orders.\9\ The Exchange provides an internet-facing portal via its
website that Equity Members access using unique login credentials. The
online portal provides self-service functions to Equity Members.\10\
Equity Members may use the Exchange's online portal to establish or
adjust risk controls set forth under Exchange Rule 2618(a)(1) and (2)
and may establish or adjust those controls at the beginning of each
trading day or intra-day.
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\9\ In such case, the Exchange would also reject the order that
breaches the threshold selected by the Equity Member.
\10\ See Member Firm Portal User Manual, available at <a href="https://www.miaxoptions.com/sites/default/files/knowledge-center/2022-06/MIAX_Exchanges_Member_Firm_Portal_User_Manual_05262022.pdf">https://www.miaxoptions.com/sites/default/files/knowledge-center/2022-06/MIAX_Exchanges_Member_Firm_Portal_User_Manual_05262022.pdf</a> (last
visited October 13, 2022).
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The Exchange also proposes to amend Exchange Rule 2618(a)(1) to
provide additional optional per order risk controls to Equity
Members.\11\ The proposed controls would relate to the entry of orders
placed in a Principal or Riskless Principal capacity, the size of an
order as compared to the average daily volume (``ADV'') of the
security, orders in securities on the Equity Member's restricted
securities list, and controls related to the frequency at which orders
and/or Cancel/Replace messages are entered. Specifically, Exchange Rule
2618(a)(1)(E) would provide for the prevention of the entry of orders
placed in a Principal or Riskless Principal capacity. An Equity Member
would be able to instruct the Exchange to reject any orders marked with
the capacity of Principal or Riskless Principal or convert such orders
to an Agency capacity. In such case, only orders with a capacity of
Agency would be accepted. This control is similar to existing controls,
such as controls to block an order type or modifier under Exchange Rule
2618(a)(1)(C), because both instruct the Exchange to reject an order
that includes certain specific characteristics, such as an order
modifier, or in this case, a specific capacity. This proposed risk
setting may also assist Equity Members in complying with Exchange Rule
2603, which requires Equity Members to ``input accurate information
into the System, including, but not limited to, whether the Equity
Member acted in a Principal, Agent, or Riskless Principal capacity for
each order entered'' by preventing the entry of an order in a Principal
capacity where it seeks to only enter orders in an Agency capacity.
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\11\ The Exchange also proposes to amend Exchange Rule 2618 to
replace all references to the term ``User'' with ``Equity Member''
to ensure consistent terminology is used within the Rule. This is a
non-substantive change since the risk controls under Exchange Rule
2618 are only available to Equity Members and, therefore, this
proposed change does not alter the operation or application of
Exchange Rule 2618.
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Exchange Rule 2618(a)(1)(F) would provide for controls preventing
the entry of an order or order modification request with a size that
exceeds the
[[Page 67082]]
ADV \12\ of the security multiplied by a percentage selected by the
Equity Member when the ADV of the security is greater than a specified
minimum ADV selected by the Equity Member \13\ When opting into this
protection, the Equity Member would need to configure an ADV percentage
and ``minimum ADV'' for the security. A minimum ADV is required in the
security for the control to be applied. For example, an Equity Member
may indicate that for any securities with an ADV of 3,000 shares or
less, the ADV check should not be applied. The Equity Member sets the
minimum ADV, but the ADV percentage only applies if the ADV in the
security is higher than the minimum ADV selected by the Equity Member.
Pursuant to amended Exchange Rule 2618(a)(6), the Exchange would
automatically block new orders or order modification requests until
such time that this risk control is adjusted to a higher limit by the
Equity Member. Another example, assume the ADV in security ABCD is
2,000 shares and the Equity Member sets a custom percentage of 10% and
a minimum ADV of 1,500 shares. In such case, the risk control would be
applied as 1,500 < 2,000 with an ADV check threshold of 200 shares (10%
x 2,000 = 200 shares). The Equity Member then submits an order for 200
shares and that order is accepted by the Exchange. However, the
Exchange would reject an order where that Equity Member entered an
order for greater than 200 shares.
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\12\ The ADV would be calculated over the prior 20 trading days
and would account for trading days with an early close.
\13\ This control is based on Interpretations and Policies
.01(g) of EDGX Rule 11.10 and EDGA Rule 11.10.
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Exchange Rule 2618(a)(1)(G) would provide controls related to
orders in securities on the Equity Member's restricted securities list.
Generally speaking, a restricted list is a current list of securities
in which the Equity Member prohibits proprietary, employee and certain
solicited customer transactions in a security. This control would
instruct the Exchange to reject any order in a security that is
included on the Equity Member's restricted securities list pursuant to
amended Exchange Rule 2618(a)(6).\14\ Lastly, Exchange Rule
2618(a)(1)(H) would provide for controls related to the frequency at
which orders and/or Cancel/Replace messages are entered and that
instruct the Exchange to reject an order or Cancel/Replace message that
are entered at a pace that exceeds a certain frequency.\15\ In such
case, the Equity Member sets the time window in which the Exchange will
count the number of order or Cancel/Replace messages that are received.
The Exchange would prevent the entry of new orders or Cancel/Replace
messages until a certain amount of time selected by the Equity Member
has passed or the Equity Member has reset this control. Pursuant to
amended Exchange Rule 2618(a)(5), an Equity Member may enable alerts to
signal when the Equity Member is approaching designated frequency
limits. This control is similar to existing controls, such as controls
to block an order type or modifier under Exchange Rule 2618(a)(1)(C),
because both instruct the Exchange to reject an order that includes
certain specific characteristics, such as an order modifier, or in this
case, is entered within a certain time of an earlier order or Cancel/
Replace message.
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\14\ This control is based on Interpretations and Policies
.01(d) of EDGX Rule 11.10 and EDGA Rule 11.10.
\15\ This control is based on Interpretations and Policies
.01(f) of EDGX Rule 11.10 and EDGA Rule 11.10. Rejection of orders
under Exchange Rule 2618(a)(1)(H) is provided for in Exchange Rule
2618(a)(6).
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Currently, Equity Members are able to customize thresholds
applicable to the current risk controls under Exchange Rule 2618(a)(1)
on a per session or indirectly on a firm level basis \16\ and the
Exchange proposes to codify this optionality under Exchange Rule
2618(a)(3) by adding a reference to Exchange Rule 2618(a)(1). The
Exchange also proposes to now allow Equity Members further flexibility
by allowing them to customize thresholds applicable to the current risk
controls and the new risk controls described above and set forth under
Exchange Rule 2618(a)(1) on a MPID basis. Equity Members have requested
this added flexibility so that they may separately manage their order
flow at a more granular level.
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\16\ See Section 9 of the MIAX Pearl Equities Exchange User
Manual available at MIAX_Pearl_Equities_User_Manual_June_2022.pdf
(<a href="http://miaxoptions.com">miaxoptions.com</a>) (last visited September 19, 2022); and Section 1
of the MIAX Pearl Equities Exchange Port Attributes document
available at <a href="https://www.miaxoptions.com/sites/default/files/page-files/MIAX_PEARL_Equities_Port_Attributes_v2.0.pdf">https://www.miaxoptions.com/sites/default/files/page-files/MIAX_PEARL_Equities_Port_Attributes_v2.0.pdf</a> (last visited
September 19, 2022). The Exchange does not currently expressly
permit Equity Members to set the controls listed under Exchange Rule
2614(a)(1) on a firm level basis. However, Equity Members may
achieve firm level settings for controls listed under Exchange Rule
2614(a)(1) by setting all of their MPID and session level settings
to the same threshold.
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Exchange Rule 2618(a)(3) currently provides, in sum, that either an
Equity Member or its Clearing Member may establish and adjust limits
for the risk settings provided in Exchange Rule 2618(a)(2) (described
below). Exchange Rule 2618(a)(3)(A) further provides that these limits
or thresholds may be set at the MPID, session, or firm level.\17\
Exchange Rule 2618(a)(3) does not currently include the risk settings
under Exchange Rule 2618(a)(1). Therefore, the Exchange proposes to
amend Exchange Rule 2618(a)(3) to include the risk settings under
Exchange Rule 2618(a)(1) to codify that they may be set at the firm or
session level and to further provide that they may also be set at the
MPID level by including the following sentence: ``[a]n Equity Member
may set limits for the risk settings provided in paragraph (a)(1) of
this Rule 2618.'' Exchange Rule 2618(a)(3)(B) also provides that such
limits may be established or adjusted before the beginning of a trading
day or during the trading day. This is currently true for the controls
under Exchange Rule 2618(a)(1) and adding reference to this rule above
to Exchange Rule 2618(a)(3) would codify this functionality and add
this additional specificity to the Rule.
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\17\ Id.
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The level at which the limits for a certain control could be set
would depend on the nature of the control. Specifically, Equity Members
are or would be able to set risk settings on a session and/or MPID
level for the controls listed under Exchange Rule 2618(a)(1)(A), (B),
and (C), and proposed Exchange Rule 2618(a)(1)(E), (F), and (G).
Controls to prohibit the entry of duplicative orders under Exchange
Rule 2618(a)(1)(D) may only be able to be set at the session level, but
due to the nature of the check, the controls would also monitor for
duplicative orders sent from the same MPID. Controls related to the
frequency of orders and Cancel/Replace messages under proposed Exchange
Rule 2618(a)(1)(H) may be set at the session, firm, and MPID level.
Cumulative Risk Controls
Exchange Rule 2618(a)(2) sets forth the specific cumulative risk
settings the Exchange offers and include Gross Notional Trade Value and
Net Notional Trade Value. Gross Notional Trade Value is a pre-
established maximum daily dollar amount for purchases and sales across
all symbols, where both purchases and sales are counted as positive
values. Net Notional Trade Value is a pre-established maximum daily
dollar amount for purchases and sales across all symbols, where
purchases are counted as positive values and sales are counted as
negative values. For purposes of calculating the Gross Notional Trade
Value and Net Notional Trade Value, only executed orders are
included.\18\
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\18\ The Exchange also proposes to amend the descriptions of
Gross Notional Trade Value and Net Notional Trade Value under
Exchange Rules 2618(a)(2) to replace the unnecessary phrase ``which
refers to'' with the word ``is''. These changes do not alter the
operation of either risk control.
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[[Page 67083]]
Based on Equity Member demand, the Exchange proposes to adopt the
following two additional cumulative risk controls that take into
account open, unexecuted orders, Gross Notional Open Value and Net
Notional Open Value. Proposed Exchange Rule 2618(a)(2)(C) would provide
that the Gross Notional Open value is a pre-established maximum daily
dollar amount for open buy and sell orders across all symbols, where
both open orders to buy and sell are counted as positive values. For
purposes of calculating the Gross Notional Open Value, only unexecuted
orders are included. Proposed Exchange Rule 2618(a)(2)(D) would provide
that the Net Notional Open Value is a pre-established maximum daily
dollar amount for open buy and sell orders across all symbols, where
open orders to buy are counted as positive values and open orders to
sell are counted as negative values. For purposes of calculating the
Net Notional Open Value, only unexecuted orders are included, just like
the Gross Notional Open Value risk control.
For both the Gross Notional Open Value and Net Notional Open Value
risk settings, the open orders calculation would only include Limit
Orders resting on the MIAX Pearl Equities Book and Limit Orders that
have been routed to an away exchange for execution. Limit Orders and
Pegged Orders will be included at their limit price. Market Orders
would not be included. Both the Gross Notional Open Value and Net
Notional Open Value risk settings are completely optional and would not
be applied where the Equity Member does not set the applicable
threshold.
Exchange Rule 2618(a)(4) provides that an Equity Member that does
not self-clear may allocate and revoke \19\ the responsibility of
establishing and adjusting the Gross Notional Trade Value and Net
Notional Trade Value settings to a Clearing Member \20\ that clears
transactions on behalf of the Equity Member, if designated in a manner
prescribed by the Exchange. The Exchange proposes that the same would
be true for the new Gross Notional Open Value and Net Notional Open
Value settings.
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\19\ As discussed below, if an Equity Member revokes from its
Clearing Member the responsibility of establishing and adjusting the
risk settings identified in paragraph (a)(2), the settings applied
by the Equity Member would be applicable.
\20\ The term ``Clearing Member'' refers to a Member that is a
member of a Qualified Clearing Agency and clears transactions on
behalf of another Member. See Exchange Rule 2620(a). Exchange Rule
2620(a) also outlines the process by which a Clearing Member shall
affirm its responsibility for clearing any and all trades executed
by the Equity Member designating it as its Clearing Firm, and
provides that the rules of a Qualified Clearing Agency shall govern
with respect to the clearance and settlement of any transactions
executed by the Equity Member on the Exchange.
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By way of background, Exchange Rule 2620(a) allows Clearing Members
an opportunity to manage their risk of clearing on behalf of other
Equity Members, if authorized to do so by the Equity Member trading on
the Exchange. Such functionality is designed to help Clearing Members
better monitor and manage the potential risks that they assume when
clearing for Equity Members of the Exchange. An Equity Member may
allocate or revoke the responsibility of establishing and adjusting the
risk settings identified in paragraph (a)(2) of Exchange Rule 2618 to
its Clearing Member in a manner prescribed by the Exchange. By
allocating such responsibility, an Equity Member cedes all control and
ability to establish and adjust such risk settings to its Clearing
Member unless and until such responsibility is revoked by the Equity
Member. Because the Equity Member is responsible for its own trading
activity, the Exchange will not provide a Clearing Member authorization
to establish and adjust risk settings on behalf of an Equity Member
without first receiving consent from the Equity Member. The Exchange
considers an Equity Member to have provided such consent if it
allocates the responsibility to establish and adjust risk settings to
its Clearing Member in a manner prescribed by the Exchange.
Exchange Rule 2618(a)(3) provides that either an Equity Member or
its Clearing Member, if allocated such responsibility pursuant to
Exchange Rule 2618(a)(4), may establish and adjust limits for the risk
settings provided in Exchange Rule 2618(a)(2). An Equity Member or
Clearing Member may establish and adjust limits for the risk settings
in a manner prescribed by the Exchange. This includes use of the
Exchange's online portal. The online portal page also provides a view
of all applicable limits for each Equity Member, which will be made
available to the Equity Member and its Clearing Member, as currently
discussed in Exchange Rule 2618(a)(4).
Trading Collar
In addition to the optional risk control parameters described
above, the Exchange also prevents all incoming orders, including those
marked ISO, from executing at a price outside the Trading Collar price
range and is described in Exchange Rule 2618(b). The Trading Collar
prevents buy orders from trading or routing at prices above the collar
and prevents sell orders from trading or routing at prices below the
collar. The Trading Collar price range is calculated using the greater
of numerical guidelines for clearly erroneous executions under Exchange
Rule 2621 or a specified dollar value established by the Exchange.
Exchange Rule 2618(b)(1) provides that the Trading Collar price
range is calculated based on a Trading Collar Reference Price and sets
forth a sequence of prices to determine the Trading Collar Reference
Price to be used if a certain reference price is unavailable. The
Exchange first utilizes the consolidated last sale price disseminated
during the Regular Trading Hours on the trade date as the Trading
Collar Reference Price. If not available, the prior day's Official
Closing Price identified as such by the primary listing exchange,
adjusted to account for events such as corporate actions and news
events is used. If neither are available to use as the Trading Collar
Reference Price, the Exchange suspends the Trading Collar function in
the interest of maintaining a fair and orderly market in the impacted
security. The Exchange calculates the Trading Collar price range for a
security by applying the Numerical Guideline and reference price to the
Trading Collar Reference Price. The result is added to the Trading
Collar Reference Price to determine the Trading Collar Price for buy
orders, while the result is subtracted from the Trading Collar
Reference Price to determine the Trading Collar Price for sell orders.
Exchange Rule 2618(b)(1) further provides that upon entry, any portion
of an order to buy (sell) that would execute at a price above (below)
the Trading Collar Price is cancelled.
Like proposed above for Limit Order Price Protection, Equity
Members have requested that the Trading Collar not be applied when the
prior day's Official Closing Price is to be used when the a
consolidated last sale price is unavailable and a regulatory halt has
been declared by the primary listing market during that trading day.
The Exchange understands that Equity Members believe the Official
Closing Price does not appropriately relate to the current trading
behavior of the security in such a scenario and Equity Members would
prefer the Trading Collar not be applied since it may result in their
order being unnecessarily rejected. The Exchange, therefore,
[[Page 67084]]
proposes to amend Exchange Rule 2618(b)(1) to provide that upon entry,
an order priced outside the Trading Collar would not be rejected when a
trading halt has been declared by the primary listing market during
that trading day and the Exchange would have applied the prior day's
Official Closing Price because the consolidated last sale price is
unavailable. In such case, the Exchange would accept such Limit Order
and post it on the MIAX Pearl Equities Book at its limit price.\21\
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\21\ In such case, a Limit Order would continue to be subject to
the Exchange's applicable re-pricing processes. See Exchange Rule
2614(a)(1)(E)-(H).
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* * * * *
The Exchange does not guarantee that the risk settings in this
proposal are sufficiently comprehensive to meet all of an Equity
Member's risk management needs. Pursuant to Rule 15c3-5 under the
Act,\22\ a broker-dealer with market access must perform appropriate
due diligence to assure that controls are reasonably designed to be
effective, and otherwise consistent with the rule.\23\ Use of the
Exchange's risk settings included in Exchange Rule 2618 will not
automatically constitute compliance with Exchange or federal rules and
responsibility for compliance with all Exchange and SEC rules remains
with the Equity Member.
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\22\ 17 CFR 240.15c3-5.
\23\ See Division of Trading and Markets, Responses to
Frequently Asked Questions Concerning Risk Management Controls for
Brokers or Dealers with Market Access, available at <a href="https://www.sec.gov/divisions/marketreg/faq-15c-5-risk-management-controls-bd.htm">https://www.sec.gov/divisions/marketreg/faq-15c-5-risk-management-controls-bd.htm</a>.
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Implementation
Due to the technological changes associated with this proposed
change, the Exchange will issue a trading alert publicly announcing the
implementation date of the proposed enhancements to its risk controls
set forth herein. The Exchange anticipates that the implementation date
will be in the fourth quarter of 2022.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\24\ in general, and furthers the objectives of Section
6(b)(5),\25\ in particular, because 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 regulating, 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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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes the proposed amendments will
remove impediments to and perfect the mechanism of a free and open
market and a national market system because they provide additional
functionality for an Equity Member to manage its risk. The Exchange
notes that all of the proposed changes, risk settings, and related
functionality are entirely optional. The Exchange believes that the
proposed risk settings under Exchange Rule 2618(a)(1) and (2) are
designed to protect investors and the public interest because the
proposed additional functionality is a form of risk mitigation that
will aid Equity Members and Clearing Members in minimizing their
financial exposure and reduce the potential for disruptive, market-wide
events. In turn, the introduction of such risk management functionality
could enhance the integrity of trading on the securities markets and
help to assure the stability of the financial system. The proposed rule
change would provide an additional option for Equity Members seeking to
further tailor their risk management capability while transacting on
the Exchange.
Risk Controls Under Exchange Rule 2618(a)(1)
The proposed risk settings under Exchange Rule 2618(a)(1) promote
just and equitable principles of trade because they would provide
Equity Members with additional protections to manage trading risk and
market exposure. Certain of the proposed additional risk settings are
available on other equity exchanges \26\ or similar to existing risk
settings. Specifically, proposed Exchange Rule 2618(a)(1)(E) regarding
the entry of orders in a Principal or Riskless Principal capacity is
similar to existing controls, such as controls to block an order type
or modifier under Exchange Rule 2618(a)(1)(C), because it instructs the
Exchange to reject an order that includes certain specific
characteristics, such as an order modifier, or in this case, is entered
with a specific capacity. Further the proposed controls under Exchange
Rule 2618(a)(1)(F), (G), and (H) are based on the rules of other
national securities exchange. For example, proposed Exchange Rule
2618(a)(1)(F) provides for the prevention of the entry of an order or
order modification request with a size that exceeds the average daily
trading volume of the security is based on Interpretations and Policies
.01(g) of EDGX Rule 11.10 and EDGA Rule 11.10. Proposed Exchange Rule
2618(a)(1)(G) regarding the entry of orders in securities on an Equity
Member's restricted list is based on Interpretations and Policies
.01(d) of EDGX Rule 11.10 and EDGA Rule 11.10. Finally, proposed
Exchange Rule 2618(a)(1)(H) regarding the frequency of orders and
Cancel/Replace messages is based on Interpretations and Policies .01(f)
of EDGX Rule 11.10 and EDGA Rule 11.10.
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\26\ See supra notes 13-15.
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The Exchange believes amending Exchange Rule 2618(a)(3) to
incorporate the risk controls under Exchange Rule 2618(a)(1) promotes
just and equitable principles of trade because it simply codifies an
Equity Member's ability to customize thresholds applicable to the
current risk controls under Exchange Rule 2618(a)(1) on a per session
or indirectly on a firm level basis.\27\ This proposed change would
also allow Equity Members to customize thresholds applicable to the
current risk controls and the new risk controls described above and set
forth under Exchange Rule 2618(a)(1) on a MPID basis. Doing so would
provide Equity Members with finer granularity with which they may set
and customize such thresholds and manage order flow.
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\27\ See supra note 16.
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The Exchange's proposal to amend Exchange Rule 2618(a)(5) and (6)
to incorporate the risk controls set forth under Exchange Rule
2618(a)(1) also promotes just and equitable principles of trade because
it simply codifies existing behavior and provides additional
specificity within each Rule. Incorporating Exchange Rule 2618(a)(1)
within Exchange Rule 2618(a)(5) fosters cooperation and coordination
with persons facilitating transactions in securities because it will
codify and make clear that the Exchange will provide alerts when an
Equity Member's trading activity reaches certain thresholds under the
risk protections set forth under Exchange Rule 2618(a)(1). Likewise,
incorporating Exchange Rule 2618(a)(1) within Exchange Rule 2618(a)(6)
will also codify and make clear that the Exchange will automatically
block new orders submitted and cancel open orders until such time that
the applicable risk control is adjusted to a higher limit by the Equity
Member. Both these changes would provide greater clarity within the
Exchange's rules and avoid potential investor confusion.
[[Page 67085]]
Proposed Gross Notional Open Value and Net Notional Open Value Risk
Controls
The proposed Gross Notional Open Value and Net Notional Open Value
risk controls under Exchange Rule 2618(a)(2) would further permit
Equity Members and Clearing Members who have a financial interest in
the risk settings of Equity Members to better monitor and manage their
potential risks, including those assumed by Clearing Members, thereby
providing Equity Members and Clearing Members with greater control and
flexibility over setting their own risk tolerance and exposure. In
addition, the proposed additional risk settings under Exchange Rule
2618(a)(2) could provide Clearing Members, who have assumed certain
risks of Equity Members, greater control over risk tolerance and
exposure on behalf of their correspondent Equity Members, if allocated
responsibility pursuant to Exchange Rule 2618(a)(4), while also
providing an alert system under Exchange Rule 2618(a)(5) that ensures
that both Equity Members and Clearing Members are aware of developing
issues. As such, the Exchange believes that the proposed risk settings
would provide additional means to address potentially market-impacting
events, helping to ensure the proper functioning of the market. To the
extent a Clearing Member might reasonably require an Equity Member to
provide access to its risk settings as a prerequisite to continuing to
clear trades on the Equity Member's behalf, the Exchange's sharing of
those risk settings directly reduces the administrative burden on
participants on the Exchange, including both Clearing Members and
Equity Members. Moreover, providing Clearing Members with the ability
to see the risk settings established for Equity Members for which they
clear fosters efficiencies in the market and removes impediments to and
perfects the mechanism of a free and open market and a national market
system. The Exchange believes that the proposed new risk settings under
Exchange Rule 2618(a)(2) are consistent with the Act, particularly
Section 6(b)(5),\28\ because they would foster cooperation and
coordination with persons engaged in facilitating transactions in
securities and more generally, will protect investors and the public
interest, by allowing Equity Members and Clearing Members to better
monitor their risk exposure and by fostering efficiencies in the market
and removing impediments to and perfect the mechanism of a free and
open market and a national market system.
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\28\ 15 U.S.C. 78f(b)(5).
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In addition, the proposed Gross Notional Open Value and Net
Notional Open Value risk controls under proposed Exchange Rule
2618(a)(2)(C) and (D), respectively, are similar to credit controls
measuring gross and net exposure provided for in Exchange Rules
2618(a)(1)(A) and (a)(2)(A) and (B). Further, like the Exchange's
existing credit controls measuring gross and net exposure, the proposed
risk setting would also be based on a notional execution value.
Proposed Gross Notional Open Value and Net Notional Open Value risk
controls under proposed Exchange Rule 2618(a)(2)(C) and (D) are also
reasonably designed to provide Equity Members and Clearing Members (if
allocated responsibility pursuant to Exchange Rule 2618(a)(4))
additional opportunity to monitor and manage the potential risks of an
execution that exceeds their certain risk appetite, as well as to
provide Clearing Members with greater control over their risk tolerance
and exposure on behalf of their correspondent Equity Members.
Limit Order Price Protection and Trading Collar Changes
Allowing Equity Members to customize their Limit Order Price
Protection dollar and percentage thresholds on a per MPID basis, rather
than only on a per session basis under Exchange Rule 2614(a)(1)(I)(ii)
provides Equity Members additional flexibility to customize those
thresholds in a manner consistent with their risk appetite and
behavior. The proposal promotes just and equitable principles of trade
because it would allow Equity Members to set their risk thresholds
comprehensively and across various level settings, including the more
granular MPID level, if they chose to do so, as well as prevent the
unnecessary rejection of orders in certain market scenarios.
The proposal to not apply Limit Order Price Protection and Trading
Collar when the prior day's Official Closing Price is to be used when
the PBO, PBB, (for Limit Order Price Protection) and a consolidated
last sale price are unavailable and a trading halt has been declared by
the primary listing market during that trading day also promotes just
and equitable principles of trade because in such a scenario, the
Exchange believes the Official Closing Price does not appropriately
relate to the current trading behavior of the security and may result
in their order being unnecessarily rejected. Equity Members are free to
not enter orders during such times and enter such orders later when
Limit Order Price Protection and Trading Collars are in effect.
Replacing ``User'' With ``Equity Member''
The proposal to amend Exchange Rule 2618 to replace all references
to the term ``User'' with ``Equity Member'' removes impediments to and
perfects the mechanism of a free and open market and a national market
system because it would ensure consistent terminology is used within
the Rule, thereby avoiding potential investor confusion. This is a non-
substantive change since the risk controls under Exchange Rule 2618 are
only available to Equity Members and, therefore, this proposed change
does not alter the operation or application of Exchange Rule 2618.
* * * * *
Finally, the Exchange believes that the proposed rule change does
not unfairly discriminate among the Exchange's Members because use of
the risk settings is optional and are not a prerequisite for
participation on the Exchange. The proposed risk settings are
completely voluntary and, as they relate solely to optional risk
management functionality, no Member is required or under any regulatory
obligation to utilize them.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. In fact, the Exchange
believes that the proposal may have a positive effect on competition
because it would allow the Exchange to offer additional risk management
functionality that is comparable to functionality that has been adopted
by other national securities exchanges.\29\ Further, by providing
Equity Members and their Clearing Members additional means to monitor
and control risk, the proposed rule may increase confidence in the
proper functioning of the markets and contribute to additional
competition among trading venues and broker-dealers. Rather than impede
competition, the proposal is designed to facilitate more robust risk
management by Equity Members and Clearing Members, which, in turn,
could enhance the integrity of trading on the securities markets and
help to assure the stability of the financial system. The proposal
would impose no burden on intra-market competition because use of the
proposed risk settings is optional and
[[Page 67086]]
each risk setting is available to all Equity Members equally.
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\29\ See supra notes 13-15.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \30\ and Rule 19b-4(f)(6) \31\
thereunder.
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#eb999e878ec6888486868e859f98ab988e88c58c849d"><span class="__cf_email__" data-cfemail="cebcbba2abe3ada1a3a3aba0babd8ebdabade0a9a1b8">[email protected]</span></a>. Please include
File Number SR-PEARL-2022-43 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-PEARL-2022-43. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of the Exchange. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-PEARL-2022-43 and should be submitted on
or before November 28, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-24146 Filed 11-4-22; 8:45 am]
BILLING CODE 8011-01-P
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