Self-Regulatory Organizations; International Securities Exchange, LLC; Order Disapproving a Proposed Rule Change To Modify ISE's Opening Process, 48371-48375 [2015-19762]

Download as PDF Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices contracts and transactions, within the meaning of Section 17(A)(b)(3)(F).6 In addition, in ICE Clear Europe’s view, the new Disciplinary Framework provides an appropriately tailored set of cash assessments for Missed Submissions by Clearing Members, in light of the importance of end-of-day price submissions to the Clearing House risk management and settlement procedures. The framework is thus consistent with the requirements of Section 17A(b)(3)(G) of the Act.7 The framework also provides a procedure for notifying Clearing Members of the details of any such assessments for Missed Submissions, and for Clearing Members to dispute and/or seek a waiver of such assessments. In ICE Clear Europe’s view, this aspect of the framework is consistent with the requirements of Section 17A(b)(3)(H) of the Act.8 mstockstill on DSK4VPTVN1PROD with NOTICES B. Self-Regulatory Organization’s Statement on Burden on Competition ICE Clear Europe does not believe the proposed rule change would have any impact, or impose any burden, on competition not necessary or appropriate in furtherance of the purposes of the Act. The enhancements to ICE Clear Europe’s price discovery process apply uniformly to all Clearing Members. As a result, ICE Clear Europe does not believe that the adoption of the policy amendments will adversely affect competition among Clearing Members, or the ability of market participants to clear contracts generally. The Clearing House also does not believe that the amendments will reduce access to clearing CDS contracts generally or limit market participants’ choices for clearing CDS. The amendments may result in certain additional costs for Clearing Members that are required to enter into Firm Trades as a result of obvious errors in their submissions, or are subject to cash assessments as a result of Missed Submissions. ICE Clear Europe believes that these additional costs are warranted to enhance the integrity of the price submission process, and are in any event generally within the control of the Clearing Member. As a result, ICE Clear Europe does not believe the proposed amendments impose any burden on competition that is inappropriate in furtherance of the purposes of the Act. 6 15 U.S.C. 78q–1(b)(3)(F). U.S.C. 78q–1(b)(3)(G). 8 15 U.S.C. 78q–1(b)(3)(H). 7 15 VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the proposed rule change have not been solicited or received. ICE Clear Europe will notify the Commission of any written comments received by ICE Clear Europe. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change or (B) institute proceedings to determine whether the proposed rule change should be 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 (https://www.sec.gov/ rules/sro.shtml) or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ICEEU–2015–013 on the subject line. Paper Comments • 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–ICEEU–2015–013. 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 (https://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 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 48371 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 such filings will also be available for inspection and copying at the principal office of ICE Clear Europe and on ICE Clear Europe’s Web site at https:// www.theice.com/clear-europe/ regulation#rule-filings. 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–ICEEU–2015–013 and should be submitted on or before September 2, 2015. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–19757 Filed 8–11–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75632; File No. SR–ISE– 2014–24] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Disapproving a Proposed Rule Change To Modify ISE’s Opening Process August 6, 2015. I. Introduction On November 19, 2014, the International Securities Exchange, LLC (the ‘‘Exchange’’ or the ‘‘ISE’’) filed with the Securities and Exchange Commission (the ‘‘SEC’’ or the ‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to modify the opening process of the Exchange. The proposed rule change was published for comment in the Federal Register on December 10, 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\12AUN1.SGM 12AUN1 48372 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices 2014.3 On January 23, 2015, the Commission extended the time period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change to March 10, 2015.4 On March 10, 2015, the Commission instituted proceedings under Section 19(b)(2)(B) of the Act 5 to determine whether to approve or disapprove the proposed rule change.6 On May 13, 2015, the Commission received a letter from the Exchange responding to the Order Instituting Proceedings.7 The Commission received one other comment on the proposed rule change.8 This Order disapproves the proposed rule change. mstockstill on DSK4VPTVN1PROD with NOTICES II. Description of the Proposal The Exchange proposes to modify the process by which the Exchange’s trading system opens trading at the beginning of the day and after trading halts.9 Specifically, ISE proposes to ‘‘modify the opening process by moving from a single price opening’’ to an iterative opening process, which could result in four separate opening prices for a single option series.10 3 See Securities Exchange Act Release No. 73736 (December 4, 2014), 79 FR 73354 (‘‘Notice’’). 4 See Securities Exchange Act Release No. 74126 (January 23, 2015), 80 FR 4953 (January 29, 2015). 5 15 U.S.C. 78s(b)(2)(B). 6 See Securities Exchange Act Release No. 74465 (March 10, 2015), 80 FR 13660 (March 16, 2015) (‘‘Order Instituting Proceedings’’). On June 4, 2015, the Commission designated a longer period for Commission action the proposed rule change to August 7, 2015. See Securities Exchange Act Release No. 75104 (June 4, 2015), 80 FR 33001 (June 10, 2015). 7 See Letter to Brent J. Fields, Secretary, Commission, from Mike Simon, Secretary and General Counsel, dated May 13, 2015 (‘‘ISE Letter’’). 8 See Letter to Brent J. Fields, Secretary, Commission, from Benjamin Londergan, Head of Options Trading and Technology, Convergex Execution Solutions LLC, dated June 1, 2015 (‘‘Convergex Letter’’). In its letter, Convergex stated that it supported the proposal because it believed the ‘‘inherent protections and improved pricing will be of significant benefit to customers and outweigh any perceived advantages of the current singlepriced opening process.’’ See Convergex Letter at 1. The Convergex Letter noted that ISE’s current opening process did not provide away market price protection, but the proposed rule change would introduce an iterative opening process where priority customer orders would be eligible for away market routing under certain circumstances. As a consequence of this change, Convergex believed its customers would ‘‘obtain better execution quality in an increasingly fair and orderly market than they enjoy currently under the ISE’s present opening process.’’ 9 The Exchange also proposes to codify certain existing functionality within the trading system (regarding the procedures to initiate the opening rotation at the Exchange’s opening and reopening after a trading halt) that was not previously described in the Exchange’s rules. A more detailed description of the initiation procedure is available in the Notice. See Notice, supra note 3 at 73355. 10 See id. at 73356. VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 As is the case today, under the proposal, if there is executable interest prior to the opening, ISE’s trading system would first calculate a range of prices within which to open the options series (‘‘Boundary Prices’’). To determine the Boundary Prices, the trading system would use ISE market makers’ quotes. Specifically, the trading system would use the quotes of ISE’s Primary Market Maker (‘‘PMM’’) quotes, or in their absence, the best quotes of ISE’s Competitive Market Makers (‘‘CMMs’’) on the corresponding side (PMMs, together with CMMs, ‘‘ISE Market Makers’’).11 If there are no PMM or CMM quotes on the bid side, the lowest minimum trading increment for the option class would be used. If there are no PMM or CMM quotes on the offer side, however, ‘‘the options class would not open because in the absence of an offer there would be no limit as to the price at which an opening trade could occur.’’ 12 Under ISE’s proposal, each iteration of the opening process would widen the Boundary Prices, except for the last iteration which would have no Boundary Prices. Each iteration as proposed is described below. As explained in the Notice, in the first iteration, the trading system would attempt to derive the opening price to be at or better than either: The PMM’s best bid and offer, or in the absence of a PMM quote, the best bid and offer of CMMs (‘‘ISE Market Maker Quotes’’); 13 or the away best bid and offer (‘‘ABBO’’), whichever is better. Accordingly, if the options class is open on another exchange, the Boundary Prices would be determined to be the higher of the ISE Market Maker’s bid or the away best bid and the lower of the ISE Market Maker’s offer or the away best offer. If the options class is not yet open on another exchange, the Boundary Prices would be determined by the PMM or CMM quotes, as described above. Once the trading system has determined the Boundary Prices, it then would determine the price at which the maximum number of contracts could trade at or within the Boundary Prices (the ‘‘execution price’’) 14 and process orders and quotes at the execution price as follows— market orders would be given priority before limit orders and quotes, then limit orders and quotes would be given 11 ISE has two categories of market makers: PMMs and CMMs. A PMM is appointed to each options class traded on the Exchange but a CMM may or may not be appointed to each such options class. See ISE Rule 802. 12 See Notice, supra note 3, at 73356. 13 See id. 14 See id. for an example showing the calculation of the execution price following the first iteration. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 priority by price. For limit orders and quotes with the same price, priority would be accorded first to Priority Customer Orders 15 over Professional Orders 16 and quotes. Priority Customer Orders with the same limit price would be executed on a random basis 17 while Professional Orders and quotes with the same limit price would be executed prorata based on size. If the Boundary Prices were calculated using the ABBO, any remaining Public Customer Orders,18 but not Non-Customer 19 Orders, that would lock or cross an ABBO would be processed in accordance with Supplementary Material .02 to ISE Rule 1901.20 According to the Exchange, if after the first iteration there remained unexecuted orders and quotes that would lock or cross each other, the trading system would initiate a second 15 Pursuant to ISE Rules 100(a)(37A) and 100(a)(37B), a ‘‘Priority Customer Order’’ is an order for the account of a person or entity that (i) is not a broker or dealer in securities, and (ii) does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). 16 Pursuant to ISE Rule 100(a)(37C), a ‘‘Professional Order’’ is an order that is for the account of a person or entity that is not a Priority Customer. 17 Priority Customer Orders with the same limit price in the regular order book are currently executed in time priority during the opening. The Exchange states in the Notice that it believes executing these orders on a random basis is a fairer approach because the current time priority is dependent on when such orders are communicated to the Exchange by a Priority Customer’s broker, not the time the Priority Customer expressed interest in doing the trade. See Notice, supra note 3, at 73356. 18 Pursuant to ISE Rules 100(a)(38) and 100(a)(39), a ‘‘Public Customer’’ means a person or entity that is not a broker or dealer in securities and a ‘‘Public Customer Order’’ means an order for the account of a Public Customer. 19 Pursuant to ISE Rule 100(a)(27), a ‘‘NonCustomer’’ means a person or entity that is a broker or dealer in securities. 20 As stated in the Notice, under the Options Order Protection and Locked/Crossed Market Plan (‘‘Options Linkage Plan’’ or ‘‘Linkage Plan’’), the Exchange cannot execute orders at a price that is inferior to the national best bid or offer (‘‘NBBO’’), absent an applicable exception, nor can the Exchange place an order on its book that would cause the ISE best bid or offer to lock or cross another exchange’s quote. See Notice, supra note 3, at 73356. ISE’s rule requires that, before orders are rejected or routed to an away market, an order that would otherwise lock or cross another exchange’s bid or offer be exposed to all ISE members for up to one second to give the members an opportunity to execute against the order at the NBBO or better. See Supplementary Material .02 to Rule 1901. If after an order is exposed, the order cannot be executed in full on the Exchange at the then-current NBBO or better, and it is marketable, the lesser of the full displayed size of the Protected Bid(s) or Protected Offer(s) that are priced better than the ISE’s quote or the balance of the order will be sent to the linkage handler and any additional balance of the order will be executed on the ISE if it is marketable. Any additional balance of the order that is not marketable against the then-current NBBO will be placed on the ISE book. Id. E:\FR\FM\12AUN1.SGM 12AUN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices iteration.21 In the second iteration, the trading system would use either the ISE Market Maker Quotes or the ABBO,22 whichever was not used in the first iteration, to establish the Boundary Prices. For example, if the ISE Market Maker Quotes were used in the first iteration, the second iteration would use the ABBO and vice versa. If, during the first iteration, there were no ABBO, then the second iteration would not occur, and the trading system would initiate the third iteration as described below. In the second iteration, the trading system would again determine the execution price at which the maximum number of contracts could trade at or within the widened Boundary Prices. Once the trading system determines the second execution price, orders and quotes would be processed as follows— market orders would be given priority before limit orders and quotes, then limit orders and quotes would be given priority by price. For limit orders and quotes with the same price, priority would be accorded first to Priority Customer Orders over Professional Orders and quotes. Priority Customer Orders with the same limit price would be executed in random order while Professional Orders and quotes with the same limit price would be executed prorata based on size. If the Boundary Prices in the second iteration were calculated using the ABBO, any remaining Public Customer Orders, but not Non-Customer Orders, that would lock or cross a bid or offer from another exchange would be processed in accordance with Supplementary Material .02 to ISE Rule 1901. If after the second iteration there remained unexecuted orders and quotes that lock or cross each other, the trading system would initiate a third iteration.23 In the third iteration, the prior Boundary Prices (i.e., the prices used in the second iteration and, in the case where the second iteration did not occur, the prices used in the first iteration) would be widened by two trading increments. The trading system would then again determine the price at which the maximum number of contracts could trade at or within the widened Boundary Prices. Once the trading system determines the third execution price, orders and quotes would be processed as follows—market orders would be given priority before 21 See Notice, supra note 3, at 73357, for an example showing the calculation of the execution price following the second iteration. 22 The ABBO prices considered in the first iteration are also used during the second iteration. 23 See Notice, supra note 3, at 73357, for an example showing the calculation of the execution price following the third iteration. VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 limit orders and quotes, then limit orders and quotes would be given priority by price. For limit orders and quotes with the same price, priority would be accorded first to Priority Customer Orders over Professional Orders and quotes. Priority Customer Orders with the same limit price would be executed in random order while Professional Orders and quotes with the same limit price would be executed prorata based on size. Thereafter, any unexecuted Priority Customer Orders that lock or cross the Boundary Prices would be handled by the PMM 24 and any unexecuted Professional Orders and Non-Customer Orders that lock or cross the Boundary Prices would be canceled. If after the third iteration there remained unexecuted orders and quotes that lock or cross each other, the trading system would initiate the fourth and final iteration.25 In the fourth iteration, the trading system would not calculate new Boundary Prices. The trading system would simply trade any remaining interest. Thereafter, the trading system would open the options series by disseminating the Exchange’s best bid and offer derived from the remaining orders and quotes.26 III. Discussion and Commission Findings Under Section 19(b)(2)(C) of the Act,27 the Commission shall approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder that are applicable to such organization.28 The Commission shall disapprove a proposed rule change if it does not make such a finding.29 Rule 700(b)(3) of the Commission’s Rules of Practice state that the ‘‘burden to demonstrate that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the self-regulatory organization that proposed the rule change’’ and that a ‘‘mere assertion that the proposed rule 24 The PMM has the obligation under existing Exchange rules to engage in dealings for its own account when, among other things, there is a temporary disparity between the supply of and demand for a particular options contract, and to act with due diligence in handling orders. See ISE Rule 803(c). 25 See Notice, supra note 3, at 73357–8, for an example showing the calculation of the execution price following the fourth and final iteration. 26 See Notice, supra note 3, for a more complete description of the proposed rule change. 27 15 U.S.C. 78s(b)(2)(C). 28 See 15 U.S.C. 78s(b)(2)(C)(i). 29 See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 201.700(b)(3). PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 48373 change is consistent with those requirements . . . is not sufficient.’’ 30 After careful consideration, the Commission does not find that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission does not find that the proposed rule change is consistent with Section 6(b)(5) of the Act,31 which, among other things, requires that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, 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. For reasons more fully discussed below, because the Commission cannot find that the Exchange’s proposed iterative opening process would comply with Section 5 of the Options Linkage Plan,32 the Commission does not find that the proposed rule change is consistent with the Act and, in particular, with Section 6(b)(5) of the Act.33 On July 30, 2009, pursuant to Section 11(A)(a)(3)(B) of the Act 34 and Rule 608 thereunder,35 the Commission approved,36 as a national market system 30 See 17 CFR 201.700(b)(3). ‘‘The description of a proposed rule change, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding. Any failure of a self-regulatory organization to provide the information elicited by Form 19b–4 may result in the Commission not having a sufficient basis to make an affirmative finding that a proposed rule change is consistent with the Exchange Act and the rules and regulations issued thereunder that are applicable to the self-regulatory organization.’’ Id. 31 15 U.S.C. 78f(b)(5). 32 See Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR 39362 (August 6, 2009) (‘‘Options Linkage Plan Approval Order’’). 33 The Commission notes that ISE Rule 1901 implements Section 5 of the Options Linkage Plan by incorporating as rules of ISE the provisions of Section 5. Accordingly, because the Commission cannot find the Exchange’s proposal consistent with Section 5 of the Options Linkage Plan, the Commission also notes that the Exchange’s proposal may not be consistent with its own rule. 34 See 15 U.S.C. 78k–1(a)(3)(B). 35 See 17 CFR 242.608. 36 See Options Linkage Plan Approval Order, supra note 32. Section 11A(a)(3)(B) of the Act authorizes the Commission ‘‘by rule or order, to authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under this title in planning, developing, operating, or regulating a national market system (or a subsystem thereof) or one or more facilities.’’ The Commission’s approval of a national market system plan is conditioned upon a finding that the proposed plan is ‘‘necessary or appropriate in the public interest, for the protection E:\FR\FM\12AUN1.SGM Continued 12AUN1 48374 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES plan, the Options Linkage Plan, which was submitted to the Commission by all seven options exchanges then operating (‘‘Original Participant Exchanges’’).37 As proposed and approved, Section 5(a) of the Options Linkage Plan requires each participant exchange to ‘‘establish, maintain and enforce written policies and procedures [as approved by the SEC] that are reasonably designed to prevent Trade-Throughs in that Participant’s market in Eligible Options Classes that do not fall within an exception set forth in [Section 5(b) of the Options Linkage Plan] . . .’’ 38 Among others exceptions, the Options Linkage Plan excepts from the tradethrough prohibition transactions that ‘‘traded through a Protected Quotation being disseminated by an Eligible Exchange during a trading rotation’’ (the ‘‘trading rotation exception’’).39 According to the Exchange, with respect to the operation of the second, third, and fourth iterations of its proposed opening process, it is relying on the trading rotation exception. of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act.’’ See 17 CFR 242.608(b)(2). 37 The seven options exchanges were Chicago Board Options Exchange, Inc.; ISE; The NASDAQ Stock Market LLC, NYSE Amex LLC (n/k/a NYSE MKT LLC); NYSE Arca Inc.; NASDAQ OMX PHLX, Inc., and NASDAQ OMX BX, Inc. 38 See Section 5(a)(i) of the Options Linkage Plan. The Options Linkage Plan defines ‘‘TradeThroughs’’ to mean a ‘‘transaction in an options series, either as principal or agent, at a price that is lower than a Protected Bid or higher than a Protected Offer.’’ Section 2(21) of the Options Linkage Plan. ‘‘Participant’’ means ‘‘an Eligible Exchange whose participation in the Plan has become effective pursuant to Section 3(c) of the Plan.’’ Section 2(15) of the Options Linkage Plan. ‘‘Eligible Options Classes’’ mean ‘‘all option series overlying a security (as that term is defined in Section 3(a)(10) of the Exchange Act) or group of securities, including both put options and call options, which class is available for trading on two or more Eligible Exchanges.’’ Section 2(7) of the Options Linkage Plan. A ‘‘Protected Bid’’ or a ‘‘Protected Offer’’ means a ‘‘Bid or Offer in an options series, respectively, that: a. Is displayed by an Eligible Exchange; b. Is disseminated pursuant to the OPRA Plan; and c. Is the Best Bid or Best Offer, respectively, of an Eligible Exchange.’’ Section 2(17) of the Options Linkage Plan. ‘‘Eligible Exchange’’ means ‘‘a national securities exchange registered with the SEC in accordance with Section 6(a) of the Exchange Act that: (a) As a Participant Exchange in OCC (as that term is defined in Section VII of the OCC by-laws); (b) is a party to the OPRA Plan (as that term is described in Section I of the OPRA Plan); and (c) if the national securities exchange chooses not to become a party to this Plan, is a participant in another plan approved by the Commission providing for comparable TradeThrough and Locked and Crossed Market protection.’’ Section 2(6) of the Options Linkage Plan. 39 Section 5(b)(ii) of the Options Linkage Plan. The Options Linkage Plan defines ‘‘Protected Quotation’’ to mean a Protected Bid or Protected Offer. Section 2(18) of the Options Linkage Plan. VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 Specifically, if the second iteration utilizes the ISE Market Maker Quotes, to the extent the iteration results in any trade-throughs, the Exchange represents that ‘‘such trade-throughs are permissible pursuant to Section 5(b)(ii) of the Linkage Plan, the Trading Rotation exception, which permits a participant exchange to trade through a Protected Quotation disseminated by an Eligible Exchange during a trading rotation.’’ 40 Likewise, the Exchange states that any trade-throughs during the third and fourth iterations are also permissible under the Linkage Plan because Section 5(b)(ii) ‘‘permits a participant exchange to trade through a Protected Quotation disseminated by an Eligible Exchange during a trading rotation.’’ 41 In the Order Instituting Proceedings, the Commission noted that it intended to further assess whether the Exchange’s proposed iterative opening process complies with the Options Linkage Plan and the statutory requirements applicable to a national securities exchange under the Act.42 The Commission invited interested persons to submit written views with respect to these concerns. As mentioned above, ISE submitted a letter in response to the Order Instituting Proceedings providing additional justification for its proposal. In its letter, ISE argues that, unlike the trade-through exception for equities under Regulation NMS, the Options Linkage Plan does not state that the trade-through exception for opening transactions is limited to ‘‘single price auctions.’’ 43 Further, ISE argues that its proposal is consistent with the plain language of Section 5(b)(ii) because, although the Linkage Plan does not define the term ‘‘trading rotation,’’ at the inception of the Plan, ‘‘that term already had a meaningful and well understood securities law definition.’’ 44 ISE cites to Rule 600(a)(79) of Regulation NMS, which defines ‘‘trading rotation’’ to mean ‘‘with respect to an options class, the time period on a national securities exchange during which . . . [o]pening, re-opening, or closing transactions in options series in such options class are not yet completed; and . . . [c]ontinuous trading has not yet commenced or has not yet ended for the day in options series in such options class.’’ 45 ISE also suggests that if its proposal is inconsistent with the Linkage Plan, then other options exchanges would have negatively commented on it.46 ISE states that ‘‘it is highly suggestive that none of our competitors submitted any contrary interpretation of the Linkage Plan.’’ 47 In the ISE Letter, the Exchange also disputes the Commission’s interpretation in the Options Linkage Approval Order that the trade-through exception in Section 5(b)(ii) of the Plan is for a trading rotation that is ‘‘effectively a single price auction to price the option.’’ 48 The Exchange concedes that ‘‘this language is itself copied from identical language submitted in comment letters by ISE and other options exchanges that was intended to be a non-comprehensive description of how our markets have traditionally operated’’ but that ‘‘they did not purport to be a binding legal interpretation of how the Commission should interpret the term ‘trading rotation.’ ’’ 49 ISE argues, moreover, that the rationale for the Linkage Plan’s trading rotation exception applies equally to single price auctions and iterative openings.50 Namely, the rationale behind Section 5(b)(ii) was to allow options exchanges to ignore away markets during the opening when ‘‘there are no practical means to include prices on other exchanges.’’ 51 Accordingly, ISE claims that the basis for the Section 5(b)(ii) exception applies to the iterative opening process that it proposes to adopt. Finally, ISE contends that it would be inappropriate for the Commission to disapprove its proposed rule change because the new process is designed to provide away market protection to Public Customer Orders.52 According to ISE, if the Commission disapproves the proposed rule change, the Commission’s action would result in less, not more protection for investors.53 After thoroughly reviewing the Exchange’s assertions in the Notice and the ISE Letter, including the one comment received,54 the Commission cannot find that the iterative opening process proposed by the Exchange is consistent with the Options Linkage Plan and therefore with the Act. 45 See 40 See Notice, supra note 3, at 73358. See supra note 39 for the definition of Protected Quotation and supra note 38 for the definition of Eligible Exchange. 41 See Notice, supra note 3, at 73358–9. 42 See Order Instituting Proceedings, supra note 6, at 13662. 43 See ISE Letter, supra note 7, at 3. 44 See id. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 id. See also 17 CFR 242.600(b)(79). ISE Letter, supra note 7, at 3. 47 See id. 48 See id. at 2. 49 See id. 50 See id. at 4. 51 See id. 52 See id. 53 See id. 54 See Convergex Letter, supra note 8. 46 See E:\FR\FM\12AUN1.SGM 12AUN1 Federal Register / Vol. 80, No. 155 / Wednesday, August 12, 2015 / Notices Specifically, the Commission cannot find that each iteration of the amended process would qualify as an exception under Section 5(b)(ii) of the Linkage Plan. The Commission notes that when the Original Participant Exchanges proposed the Options Linkage Plan, all seven exchanges represented to the Commission that: Section 5(b)(ii) of the Plan carries forward the current Trade-Through exception in the old plan and is the options equivalent to the single price opening exception in Regulation NMS for equity securities. Options exchanges use a trading rotation to open an option for trading, or to reopen an option after a trading halt. The rotation is effectively a single price auction to price the option and there are no practical means to include prices on other exchanges in that auction. mstockstill on DSK4VPTVN1PROD with NOTICES (emphasis added).55 Relying on this unanimous representation from all exchanges who jointly proposed the Options Linkage Plan, the Commission stated in the Options Linkage Plan Approval Order that the language used in the Section 5(b)(ii) is ‘‘similar to an exception available for NMS stocks under Regulation NMS,’’ 56 and ‘‘[a]s noted by the Participants, the trading rotation is effectively a single price auction to price the option.’’ 57 The Commission acknowledges that the text of Section 5(b)(ii) of the Options Linkage Plan refers to the trade-through exception during a ‘‘trading rotation,’’ not a ‘‘single price auction.’’ But as even the Exchange notes in the ISE Letter, the Options Linkage Plan also does not define the term ‘‘trading rotation’’ nor 55 See Letter from Michael Simon, Secretary, ISE, dated November 7, 2008, and available at https:// www.sec.gov/rules/sro/nms/2008/4-546-iseamend3.pdf. See also Letters from Peter G. Armstrong, Managing Director, Options, NYSE Arca, dated October 30, 2008, available at https:// www.sec.gov/rules/sro/nms/2008/4-546-nysearcaamend3.pdf; Edward J. Joyce, President & Chief Operating Officer, Chicago Board Options Exchange, dated November 21, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-cboeamend1.pdf; Jeffrey P. Burns, Managing Director, NYSE Alternext US LLC, dated November 25, 2008, available at https://www.sec.gov/rules/sro/nms/ 2008/4-546-nysealtr-amend1.pdf; John Katovich, Vice President, BSE, dated December 1, 2008, available at https://www.sec.gov/rules/sro/nms/ 2008/4-546-bse-amend1.pdf; Richard S. Rudolph, Counsel, Nasdaq OMX Phlx, dated December 3, 2008, available at https://www.sec.gov/rules/sro/ nms/2008/4-546-phlx-amend1.pdf; and Jeffrey S. Davis, Vice President & Deputy General Counsel, Nasdaq Stock Market LLC, dated December 4, 2008, available at https://www.sec.gov/rules/sro/nms/ 2008/4-546-nasdaq-amend1.pdf. 56 See Options Linkage Plan Approval Order, supra note 32, at 39366. See also Rule 611(b)(3) of Regulation NMS under the Act (17 CFR 242.611(b)(3)) which provides that ‘‘the transaction that constituted the trade-through was a singlepriced opening, reopening, or closing transaction by the trading center.’’ 57 See Options Linkage Plan Approval Order, supra note 32, at 39366. VerDate Sep<11>2014 18:16 Aug 11, 2015 Jkt 235001 provide additional clarification to what the trading rotation exception under Section 5(b)(ii) means.58 In addition, as noted above, all seven exchanges that jointly proposed the Linkage Plan explicitly represented to the Commission that the trading rotation exception is ‘‘similar to an exception available for NMS stocks under Regulation NMS’’ and is ‘‘effectively a single price auction to price the option.’’ 59 Accordingly, in the absence of any basis in the Options Linkage Plan itself for the Commission to determine otherwise, and in light of prior, explicit representations by the Original Participant Exchanges that the trading rotation exception applies to a ‘‘single price auction,’’ the Commission cannot find that the Exchange’s proposal is consistent with the Linkage Plan and thereby the Act. The Commission acknowledges that the ISE’s proposed iterative opening process, unlike its current process, would provide away market protection for Public Customer Orders. For the reasons discussed above, however, the Commission cannot find that the proposed rule change is consistent with the Options Linkage Plan or the Act. Further, the Commission does not agree with the Exchange that the decision of other options exchanges not to comment on the proposed rule change equates to agreement with ISE’s interpretation of the trading rotation exception. It would be inappropriate for the Commission to draw any such conclusion unless explicitly stated by a commenter. As ISE itself noted, ‘‘exchanges may have several reasons for not commenting on a proposed rule change.’’ 60 Finally, in analyzing the proposed rule change, and in making its determination to disapprove the rule change, the Commission has considered whether the action will promote efficiency, competition, and capital 58 Further, the Commission notes that the Linkage Plan refers to a singular ‘‘trading rotation’’ not, as ISE implies, multiple ‘‘trading rotations.’’ 59 See supra note 55. 60 See ISE Letter, supra note 7, at 3. ISE also provides as an exhibit to its response letter data purporting to show trade-throughs from all options exchanges during the first minute of trading on April 29, 2015, and April 30, 2015. According to ISE, the data shows trade-throughs from every exchange, with the total number of contracts trading through being 9,316 on April 29, and 48,269 contracts on April 30. See Exhibit to ISE Letter, supra note 7. The Commission cannot surmise from the data whether the trade-throughs are occurring without an exception or whether the exchanges are not complying with the Linkage Plan or their own rules. The Commission notes that the Options Linkage Plan provides that if a participant exchange relies on a trade-through exception, it would be required to establish, maintain, and enforce written policies and procedures reasonably designed to assure compliance with the terms of the exception. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 48375 formation,61 but, as discussed above, the Commission cannot find that the proposed rule change is consistent with the Options Linkage Plan or Section 6(b)(5) of the Act. IV. Conclusion For the foregoing reasons, the Commission does not find that the proposed rule change, is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular, with Section 6(b)(5) of the Act. IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR–ISE– 2014–24), be, and hereby is, disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.62 Robert W. Errett, Deputy Secretary. [FR Doc. 2015–19762 Filed 8–11–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–75630; File No. SR–CHX– 2015–03] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change To Implement CHX SNAPSM, an Intra-Day and On-Demand Auction Service August 6, 2015. On June 23, 2015, the Chicago Stock Exchange, Inc. (‘‘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 implement CHX SNAPSM, which would be an intra-day and ondemand auction service that would be initiated at the request of market participants seeking to trade securities in bulk. The proposed rule change was published for comment in the Federal 61 Whenever pursuant to the Act the Commission is engaged in rulemaking or the review of a rule of a self-regulatory organization, and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 62 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. E:\FR\FM\12AUN1.SGM 12AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Notices]
[Pages 48371-48375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19762]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75632; File No. SR-ISE-2014-24]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Disapproving a Proposed Rule Change To Modify ISE's Opening
Process

August 6, 2015.

I. Introduction

On November 19, 2014, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (the ``SEC'' or the ``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (the ``Act'')
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to modify the
opening process of the Exchange. The proposed rule change was published
for comment in the Federal Register on December 10,

[[Page 48372]]

2014.\3\ On January 23, 2015, the Commission extended the time period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change to March 10, 2015.\4\ On March 10,
2015, the Commission instituted proceedings under Section 19(b)(2)(B)
of the Act \5\ to determine whether to approve or disapprove the
proposed rule change.\6\ On May 13, 2015, the Commission received a
letter from the Exchange responding to the Order Instituting
Proceedings.\7\ The Commission received one other comment on the
proposed rule change.\8\ This Order disapproves the proposed rule
change.
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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. 73736 (December 4,
2014), 79 FR 73354 (``Notice'').
\4\ See Securities Exchange Act Release No. 74126 (January 23,
2015), 80 FR 4953 (January 29, 2015).
\5\ 15 U.S.C. 78s(b)(2)(B).
\6\ See Securities Exchange Act Release No. 74465 (March 10,
2015), 80 FR 13660 (March 16, 2015) (``Order Instituting
Proceedings''). On June 4, 2015, the Commission designated a longer
period for Commission action the proposed rule change to August 7,
2015. See Securities Exchange Act Release No. 75104 (June 4, 2015),
80 FR 33001 (June 10, 2015).
\7\ See Letter to Brent J. Fields, Secretary, Commission, from
Mike Simon, Secretary and General Counsel, dated May 13, 2015 (``ISE
Letter'').
\8\ See Letter to Brent J. Fields, Secretary, Commission, from
Benjamin Londergan, Head of Options Trading and Technology,
Convergex Execution Solutions LLC, dated June 1, 2015 (``Convergex
Letter''). In its letter, Convergex stated that it supported the
proposal because it believed the ``inherent protections and improved
pricing will be of significant benefit to customers and outweigh any
perceived advantages of the current single-priced opening process.''
See Convergex Letter at 1. The Convergex Letter noted that ISE's
current opening process did not provide away market price
protection, but the proposed rule change would introduce an
iterative opening process where priority customer orders would be
eligible for away market routing under certain circumstances. As a
consequence of this change, Convergex believed its customers would
``obtain better execution quality in an increasingly fair and
orderly market than they enjoy currently under the ISE's present
opening process.''
---------------------------------------------------------------------------

II. Description of the Proposal

The Exchange proposes to modify the process by which the Exchange's
trading system opens trading at the beginning of the day and after
trading halts.\9\ Specifically, ISE proposes to ``modify the opening
process by moving from a single price opening'' to an iterative opening
process, which could result in four separate opening prices for a
single option series.\10\
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\9\ The Exchange also proposes to codify certain existing
functionality within the trading system (regarding the procedures to
initiate the opening rotation at the Exchange's opening and
reopening after a trading halt) that was not previously described in
the Exchange's rules. A more detailed description of the initiation
procedure is available in the Notice. See Notice, supra note 3 at
73355.
\10\ See id. at 73356.
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As is the case today, under the proposal, if there is executable
interest prior to the opening, ISE's trading system would first
calculate a range of prices within which to open the options series
(``Boundary Prices''). To determine the Boundary Prices, the trading
system would use ISE market makers' quotes. Specifically, the trading
system would use the quotes of ISE's Primary Market Maker (``PMM'')
quotes, or in their absence, the best quotes of ISE's Competitive
Market Makers (``CMMs'') on the corresponding side (PMMs, together with
CMMs, ``ISE Market Makers'').\11\ If there are no PMM or CMM quotes on
the bid side, the lowest minimum trading increment for the option class
would be used. If there are no PMM or CMM quotes on the offer side,
however, ``the options class would not open because in the absence of
an offer there would be no limit as to the price at which an opening
trade could occur.'' \12\ Under ISE's proposal, each iteration of the
opening process would widen the Boundary Prices, except for the last
iteration which would have no Boundary Prices. Each iteration as
proposed is described below.
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\11\ ISE has two categories of market makers: PMMs and CMMs. A
PMM is appointed to each options class traded on the Exchange but a
CMM may or may not be appointed to each such options class. See ISE
Rule 802.
\12\ See Notice, supra note 3, at 73356.
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As explained in the Notice, in the first iteration, the trading
system would attempt to derive the opening price to be at or better
than either: The PMM's best bid and offer, or in the absence of a PMM
quote, the best bid and offer of CMMs (``ISE Market Maker Quotes'');
\13\ or the away best bid and offer (``ABBO''), whichever is better.
Accordingly, if the options class is open on another exchange, the
Boundary Prices would be determined to be the higher of the ISE Market
Maker's bid or the away best bid and the lower of the ISE Market
Maker's offer or the away best offer. If the options class is not yet
open on another exchange, the Boundary Prices would be determined by
the PMM or CMM quotes, as described above. Once the trading system has
determined the Boundary Prices, it then would determine the price at
which the maximum number of contracts could trade at or within the
Boundary Prices (the ``execution price'') \14\ and process orders and
quotes at the execution price as follows--market orders would be given
priority before limit orders and quotes, then limit orders and quotes
would be given priority by price. For limit orders and quotes with the
same price, priority would be accorded first to Priority Customer
Orders \15\ over Professional Orders \16\ and quotes. Priority Customer
Orders with the same limit price would be executed on a random basis
\17\ while Professional Orders and quotes with the same limit price
would be executed pro-rata based on size. If the Boundary Prices were
calculated using the ABBO, any remaining Public Customer Orders,\18\
but not Non-Customer \19\ Orders, that would lock or cross an ABBO
would be processed in accordance with Supplementary Material .02 to ISE
Rule 1901.\20\
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\13\ See id.
\14\ See id. for an example showing the calculation of the
execution price following the first iteration.
\15\ Pursuant to ISE Rules 100(a)(37A) and 100(a)(37B), a
``Priority Customer Order'' is an order for the account of a person
or entity that (i) is not a broker or dealer in securities, and (ii)
does not place more than 390 orders in listed options per day on
average during a calendar month for its own beneficial account(s).
\16\ Pursuant to ISE Rule 100(a)(37C), a ``Professional Order''
is an order that is for the account of a person or entity that is
not a Priority Customer.
\17\ Priority Customer Orders with the same limit price in the
regular order book are currently executed in time priority during
the opening. The Exchange states in the Notice that it believes
executing these orders on a random basis is a fairer approach
because the current time priority is dependent on when such orders
are communicated to the Exchange by a Priority Customer's broker,
not the time the Priority Customer expressed interest in doing the
trade. See Notice, supra note 3, at 73356.
\18\ Pursuant to ISE Rules 100(a)(38) and 100(a)(39), a ``Public
Customer'' means a person or entity that is not a broker or dealer
in securities and a ``Public Customer Order'' means an order for the
account of a Public Customer.
\19\ Pursuant to ISE Rule 100(a)(27), a ``Non-Customer'' means a
person or entity that is a broker or dealer in securities.
\20\ As stated in the Notice, under the Options Order Protection
and Locked/Crossed Market Plan (``Options Linkage Plan'' or
``Linkage Plan''), the Exchange cannot execute orders at a price
that is inferior to the national best bid or offer (``NBBO''),
absent an applicable exception, nor can the Exchange place an order
on its book that would cause the ISE best bid or offer to lock or
cross another exchange's quote. See Notice, supra note 3, at 73356.
ISE's rule requires that, before orders are rejected or routed to an
away market, an order that would otherwise lock or cross another
exchange's bid or offer be exposed to all ISE members for up to one
second to give the members an opportunity to execute against the
order at the NBBO or better. See Supplementary Material .02 to Rule
1901. If after an order is exposed, the order cannot be executed in
full on the Exchange at the then-current NBBO or better, and it is
marketable, the lesser of the full displayed size of the Protected
Bid(s) or Protected Offer(s) that are priced better than the ISE's
quote or the balance of the order will be sent to the linkage
handler and any additional balance of the order will be executed on
the ISE if it is marketable. Any additional balance of the order
that is not marketable against the then-current NBBO will be placed
on the ISE book. Id.
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According to the Exchange, if after the first iteration there
remained unexecuted orders and quotes that would lock or cross each
other, the trading system would initiate a second

[[Page 48373]]

iteration.\21\ In the second iteration, the trading system would use
either the ISE Market Maker Quotes or the ABBO,\22\ whichever was not
used in the first iteration, to establish the Boundary Prices. For
example, if the ISE Market Maker Quotes were used in the first
iteration, the second iteration would use the ABBO and vice versa. If,
during the first iteration, there were no ABBO, then the second
iteration would not occur, and the trading system would initiate the
third iteration as described below.
---------------------------------------------------------------------------

\21\ See Notice, supra note 3, at 73357, for an example showing
the calculation of the execution price following the second
iteration.
\22\ The ABBO prices considered in the first iteration are also
used during the second iteration.
---------------------------------------------------------------------------

In the second iteration, the trading system would again determine
the execution price at which the maximum number of contracts could
trade at or within the widened Boundary Prices. Once the trading system
determines the second execution price, orders and quotes would be
processed as follows--market orders would be given priority before
limit orders and quotes, then limit orders and quotes would be given
priority by price. For limit orders and quotes with the same price,
priority would be accorded first to Priority Customer Orders over
Professional Orders and quotes. Priority Customer Orders with the same
limit price would be executed in random order while Professional Orders
and quotes with the same limit price would be executed pro-rata based
on size. If the Boundary Prices in the second iteration were calculated
using the ABBO, any remaining Public Customer Orders, but not Non-
Customer Orders, that would lock or cross a bid or offer from another
exchange would be processed in accordance with Supplementary Material
.02 to ISE Rule 1901.
If after the second iteration there remained unexecuted orders and
quotes that lock or cross each other, the trading system would initiate
a third iteration.\23\ In the third iteration, the prior Boundary
Prices (i.e., the prices used in the second iteration and, in the case
where the second iteration did not occur, the prices used in the first
iteration) would be widened by two trading increments. The trading
system would then again determine the price at which the maximum number
of contracts could trade at or within the widened Boundary Prices. Once
the trading system determines the third execution price, orders and
quotes would be processed as follows--market orders would be given
priority before limit orders and quotes, then limit orders and quotes
would be given priority by price. For limit orders and quotes with the
same price, priority would be accorded first to Priority Customer
Orders over Professional Orders and quotes. Priority Customer Orders
with the same limit price would be executed in random order while
Professional Orders and quotes with the same limit price would be
executed pro-rata based on size. Thereafter, any unexecuted Priority
Customer Orders that lock or cross the Boundary Prices would be handled
by the PMM \24\ and any unexecuted Professional Orders and Non-Customer
Orders that lock or cross the Boundary Prices would be canceled.
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\23\ See Notice, supra note 3, at 73357, for an example showing
the calculation of the execution price following the third
iteration.
\24\ The PMM has the obligation under existing Exchange rules to
engage in dealings for its own account when, among other things,
there is a temporary disparity between the supply of and demand for
a particular options contract, and to act with due diligence in
handling orders. See ISE Rule 803(c).
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If after the third iteration there remained unexecuted orders and
quotes that lock or cross each other, the trading system would initiate
the fourth and final iteration.\25\ In the fourth iteration, the
trading system would not calculate new Boundary Prices. The trading
system would simply trade any remaining interest. Thereafter, the
trading system would open the options series by disseminating the
Exchange's best bid and offer derived from the remaining orders and
quotes.\26\
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\25\ See Notice, supra note 3, at 73357-8, for an example
showing the calculation of the execution price following the fourth
and final iteration.
\26\ See Notice, supra note 3, for a more complete description
of the proposed rule change.
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III. Discussion and Commission Findings

Under Section 19(b)(2)(C) of the Act,\27\ the Commission shall
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to such organization.\28\ The Commission shall
disapprove a proposed rule change if it does not make such a
finding.\29\ Rule 700(b)(3) of the Commission's Rules of Practice state
that the ``burden to demonstrate that a proposed rule change is
consistent with the Exchange Act and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change'' and that a ``mere assertion that the proposed rule
change is consistent with those requirements . . . is not sufficient.''
\30\
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\27\ 15 U.S.C. 78s(b)(2)(C).
\28\ See 15 U.S.C. 78s(b)(2)(C)(i).
\29\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR
201.700(b)(3).
\30\ See 17 CFR 201.700(b)(3). ``The description of a proposed
rule change, its purpose and operation, its effect, and a legal
analysis of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. Any failure of a self-regulatory organization to
provide the information elicited by Form 19b-4 may result in the
Commission not having a sufficient basis to make an affirmative
finding that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder that are
applicable to the self-regulatory organization.'' Id.
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After careful consideration, the Commission does not find that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange. In particular, the Commission does not find that
the proposed rule change is consistent with Section 6(b)(5) of the
Act,\31\ which, among other things, requires that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, 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. For reasons more fully
discussed below, because the Commission cannot find that the Exchange's
proposed iterative opening process would comply with Section 5 of the
Options Linkage Plan,\32\ the Commission does not find that the
proposed rule change is consistent with the Act and, in particular,
with Section 6(b)(5) of the Act.\33\
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\31\ 15 U.S.C. 78f(b)(5).
\32\ See Securities Exchange Act Release No. 60405 (July 30,
2009), 74 FR 39362 (August 6, 2009) (``Options Linkage Plan Approval
Order'').
\33\ The Commission notes that ISE Rule 1901 implements Section
5 of the Options Linkage Plan by incorporating as rules of ISE the
provisions of Section 5. Accordingly, because the Commission cannot
find the Exchange's proposal consistent with Section 5 of the
Options Linkage Plan, the Commission also notes that the Exchange's
proposal may not be consistent with its own rule.
---------------------------------------------------------------------------

On July 30, 2009, pursuant to Section 11(A)(a)(3)(B) of the Act
\34\ and Rule 608 thereunder,\35\ the Commission approved,\36\ as a
national market system

[[Page 48374]]

plan, the Options Linkage Plan, which was submitted to the Commission
by all seven options exchanges then operating (``Original Participant
Exchanges'').\37\ As proposed and approved, Section 5(a) of the Options
Linkage Plan requires each participant exchange to ``establish,
maintain and enforce written policies and procedures [as approved by
the SEC] that are reasonably designed to prevent Trade-Throughs in that
Participant's market in Eligible Options Classes that do not fall
within an exception set forth in [Section 5(b) of the Options Linkage
Plan] . . .'' \38\ Among others exceptions, the Options Linkage Plan
excepts from the trade-through prohibition transactions that ``traded
through a Protected Quotation being disseminated by an Eligible
Exchange during a trading rotation'' (the ``trading rotation
exception'').\39\
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\34\ See 15 U.S.C. 78k-1(a)(3)(B).
\35\ See 17 CFR 242.608.
\36\ See Options Linkage Plan Approval Order, supra note 32.
Section 11A(a)(3)(B) of the Act authorizes the Commission ``by rule
or order, to authorize or require self-regulatory organizations to
act jointly with respect to matters as to which they share authority
under this title in planning, developing, operating, or regulating a
national market system (or a subsystem thereof) or one or more
facilities.'' The Commission's approval of a national market system
plan is conditioned upon a finding that the proposed plan is
``necessary or appropriate in the public interest, for the
protection of investors and the maintenance of fair and orderly
markets, to remove impediments to, and perfect the mechanism of, a
national market system, or otherwise in furtherance of the purposes
of the Act.'' See 17 CFR 242.608(b)(2).
\37\ The seven options exchanges were Chicago Board Options
Exchange, Inc.; ISE; The NASDAQ Stock Market LLC, NYSE Amex LLC (n/
k/a NYSE MKT LLC); NYSE Arca Inc.; NASDAQ OMX PHLX, Inc., and NASDAQ
OMX BX, Inc.
\38\ See Section 5(a)(i) of the Options Linkage Plan. The
Options Linkage Plan defines ``Trade-Throughs'' to mean a
``transaction in an options series, either as principal or agent, at
a price that is lower than a Protected Bid or higher than a
Protected Offer.'' Section 2(21) of the Options Linkage Plan.
``Participant'' means ``an Eligible Exchange whose participation in
the Plan has become effective pursuant to Section 3(c) of the
Plan.'' Section 2(15) of the Options Linkage Plan. ``Eligible
Options Classes'' mean ``all option series overlying a security (as
that term is defined in Section 3(a)(10) of the Exchange Act) or
group of securities, including both put options and call options,
which class is available for trading on two or more Eligible
Exchanges.'' Section 2(7) of the Options Linkage Plan. A ``Protected
Bid'' or a ``Protected Offer'' means a ``Bid or Offer in an options
series, respectively, that: a. Is displayed by an Eligible Exchange;
b. Is disseminated pursuant to the OPRA Plan; and c. Is the Best Bid
or Best Offer, respectively, of an Eligible Exchange.'' Section
2(17) of the Options Linkage Plan. ``Eligible Exchange'' means ``a
national securities exchange registered with the SEC in accordance
with Section 6(a) of the Exchange Act that: (a) As a Participant
Exchange in OCC (as that term is defined in Section VII of the OCC
by-laws); (b) is a party to the OPRA Plan (as that term is described
in Section I of the OPRA Plan); and (c) if the national securities
exchange chooses not to become a party to this Plan, is a
participant in another plan approved by the Commission providing for
comparable Trade-Through and Locked and Crossed Market protection.''
Section 2(6) of the Options Linkage Plan.
\39\ Section 5(b)(ii) of the Options Linkage Plan. The Options
Linkage Plan defines ``Protected Quotation'' to mean a Protected Bid
or Protected Offer. Section 2(18) of the Options Linkage Plan.
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According to the Exchange, with respect to the operation of the
second, third, and fourth iterations of its proposed opening process,
it is relying on the trading rotation exception. Specifically, if the
second iteration utilizes the ISE Market Maker Quotes, to the extent
the iteration results in any trade-throughs, the Exchange represents
that ``such trade-throughs are permissible pursuant to Section 5(b)(ii)
of the Linkage Plan, the Trading Rotation exception, which permits a
participant exchange to trade through a Protected Quotation
disseminated by an Eligible Exchange during a trading rotation.'' \40\
Likewise, the Exchange states that any trade-throughs during the third
and fourth iterations are also permissible under the Linkage Plan
because Section 5(b)(ii) ``permits a participant exchange to trade
through a Protected Quotation disseminated by an Eligible Exchange
during a trading rotation.'' \41\
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\40\ See Notice, supra note 3, at 73358. See supra note 39 for
the definition of Protected Quotation and supra note 38 for the
definition of Eligible Exchange.
\41\ See Notice, supra note 3, at 73358-9.
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In the Order Instituting Proceedings, the Commission noted that it
intended to further assess whether the Exchange's proposed iterative
opening process complies with the Options Linkage Plan and the
statutory requirements applicable to a national securities exchange
under the Act.\42\ The Commission invited interested persons to submit
written views with respect to these concerns. As mentioned above, ISE
submitted a letter in response to the Order Instituting Proceedings
providing additional justification for its proposal.
---------------------------------------------------------------------------

\42\ See Order Instituting Proceedings, supra note 6, at 13662.
---------------------------------------------------------------------------

In its letter, ISE argues that, unlike the trade-through exception
for equities under Regulation NMS, the Options Linkage Plan does not
state that the trade-through exception for opening transactions is
limited to ``single price auctions.'' \43\ Further, ISE argues that its
proposal is consistent with the plain language of Section 5(b)(ii)
because, although the Linkage Plan does not define the term ``trading
rotation,'' at the inception of the Plan, ``that term already had a
meaningful and well understood securities law definition.'' \44\ ISE
cites to Rule 600(a)(79) of Regulation NMS, which defines ``trading
rotation'' to mean ``with respect to an options class, the time period
on a national securities exchange during which . . . [o]pening, re-
opening, or closing transactions in options series in such options
class are not yet completed; and . . . [c]ontinuous trading has not yet
commenced or has not yet ended for the day in options series in such
options class.'' \45\ ISE also suggests that if its proposal is
inconsistent with the Linkage Plan, then other options exchanges would
have negatively commented on it.\46\ ISE states that ``it is highly
suggestive that none of our competitors submitted any contrary
interpretation of the Linkage Plan.'' \47\
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\43\ See ISE Letter, supra note 7, at 3.
\44\ See id.
\45\ See id. See also 17 CFR 242.600(b)(79).
\46\ See ISE Letter, supra note 7, at 3.
\47\ See id.
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In the ISE Letter, the Exchange also disputes the Commission's
interpretation in the Options Linkage Approval Order that the trade-
through exception in Section 5(b)(ii) of the Plan is for a trading
rotation that is ``effectively a single price auction to price the
option.'' \48\ The Exchange concedes that ``this language is itself
copied from identical language submitted in comment letters by ISE and
other options exchanges that was intended to be a non-comprehensive
description of how our markets have traditionally operated'' but that
``they did not purport to be a binding legal interpretation of how the
Commission should interpret the term `trading rotation.' '' \49\
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\48\ See id. at 2.
\49\ See id.
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ISE argues, moreover, that the rationale for the Linkage Plan's
trading rotation exception applies equally to single price auctions and
iterative openings.\50\ Namely, the rationale behind Section 5(b)(ii)
was to allow options exchanges to ignore away markets during the
opening when ``there are no practical means to include prices on other
exchanges.'' \51\ Accordingly, ISE claims that the basis for the
Section 5(b)(ii) exception applies to the iterative opening process
that it proposes to adopt.
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\50\ See id. at 4.
\51\ See id.
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Finally, ISE contends that it would be inappropriate for the
Commission to disapprove its proposed rule change because the new
process is designed to provide away market protection to Public
Customer Orders.\52\ According to ISE, if the Commission disapproves
the proposed rule change, the Commission's action would result in less,
not more protection for investors.\53\
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\52\ See id.
\53\ See id.
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After thoroughly reviewing the Exchange's assertions in the Notice
and the ISE Letter, including the one comment received,\54\ the
Commission cannot find that the iterative opening process proposed by
the Exchange is consistent with the Options Linkage Plan and therefore
with the Act.

[[Page 48375]]

Specifically, the Commission cannot find that each iteration of the
amended process would qualify as an exception under Section 5(b)(ii) of
the Linkage Plan. The Commission notes that when the Original
Participant Exchanges proposed the Options Linkage Plan, all seven
exchanges represented to the Commission that:
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\54\ See Convergex Letter, supra note 8.

Section 5(b)(ii) of the Plan carries forward the current Trade-
Through exception in the old plan and is the options equivalent to
the single price opening exception in Regulation NMS for equity
securities. Options exchanges use a trading rotation to open an
option for trading, or to reopen an option after a trading halt. The
rotation is effectively a single price auction to price the option
and there are no practical means to include prices on other
---------------------------------------------------------------------------
exchanges in that auction.

(emphasis added).\55\ Relying on this unanimous representation from
all exchanges who jointly proposed the Options Linkage Plan, the
Commission stated in the Options Linkage Plan Approval Order that the
language used in the Section 5(b)(ii) is ``similar to an exception
available for NMS stocks under Regulation NMS,'' \56\ and ``[a]s noted
by the Participants, the trading rotation is effectively a single price
auction to price the option.'' \57\
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\55\ See Letter from Michael Simon, Secretary, ISE, dated
November 7, 2008, and available at https://www.sec.gov/rules/sro/nms/2008/4-546-ise-amend3.pdf. See also Letters from Peter G. Armstrong,
Managing Director, Options, NYSE Arca, dated October 30, 2008,
available at https://www.sec.gov/rules/sro/nms/2008/4-546-nysearca-amend3.pdf; Edward J. Joyce, President & Chief Operating Officer,
Chicago Board Options Exchange, dated November 21, 2008, available
at https://www.sec.gov/rules/sro/nms/2008/4-546-cboe-amend1.pdf;
Jeffrey P. Burns, Managing Director, NYSE Alternext US LLC, dated
November 25, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-nysealtr-amend1.pdf; John Katovich, Vice President, BSE,
dated December 1, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-bse-amend1.pdf; Richard S. Rudolph, Counsel, Nasdaq
OMX Phlx, dated December 3, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-phlx-amend1.pdf; and Jeffrey S. Davis, Vice
President & Deputy General Counsel, Nasdaq Stock Market LLC, dated
December 4, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-nasdaq-amend1.pdf.
\56\ See Options Linkage Plan Approval Order, supra note 32, at
39366. See also Rule 611(b)(3) of Regulation NMS under the Act (17
CFR 242.611(b)(3)) which provides that ``the transaction that
constituted the trade-through was a single-priced opening,
reopening, or closing transaction by the trading center.''
\57\ See Options Linkage Plan Approval Order, supra note 32, at
39366.
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The Commission acknowledges that the text of Section 5(b)(ii) of
the Options Linkage Plan refers to the trade-through exception during a
``trading rotation,'' not a ``single price auction.'' But as even the
Exchange notes in the ISE Letter, the Options Linkage Plan also does
not define the term ``trading rotation'' nor provide additional
clarification to what the trading rotation exception under Section
5(b)(ii) means.\58\ In addition, as noted above, all seven exchanges
that jointly proposed the Linkage Plan explicitly represented to the
Commission that the trading rotation exception is ``similar to an
exception available for NMS stocks under Regulation NMS'' and is
``effectively a single price auction to price the option.'' \59\
Accordingly, in the absence of any basis in the Options Linkage Plan
itself for the Commission to determine otherwise, and in light of
prior, explicit representations by the Original Participant Exchanges
that the trading rotation exception applies to a ``single price
auction,'' the Commission cannot find that the Exchange's proposal is
consistent with the Linkage Plan and thereby the Act.
---------------------------------------------------------------------------

\58\ Further, the Commission notes that the Linkage Plan refers
to a singular ``trading rotation'' not, as ISE implies, multiple
``trading rotations.''
\59\ See supra note 55.
---------------------------------------------------------------------------

The Commission acknowledges that the ISE's proposed iterative
opening process, unlike its current process, would provide away market
protection for Public Customer Orders. For the reasons discussed above,
however, the Commission cannot find that the proposed rule change is
consistent with the Options Linkage Plan or the Act. Further, the
Commission does not agree with the Exchange that the decision of other
options exchanges not to comment on the proposed rule change equates to
agreement with ISE's interpretation of the trading rotation exception.
It would be inappropriate for the Commission to draw any such
conclusion unless explicitly stated by a commenter. As ISE itself
noted, ``exchanges may have several reasons for not commenting on a
proposed rule change.'' \60\
---------------------------------------------------------------------------

\60\ See ISE Letter, supra note 7, at 3. ISE also provides as an
exhibit to its response letter data purporting to show trade-
throughs from all options exchanges during the first minute of
trading on April 29, 2015, and April 30, 2015. According to ISE, the
data shows trade-throughs from every exchange, with the total number
of contracts trading through being 9,316 on April 29, and 48,269
contracts on April 30. See Exhibit to ISE Letter, supra note 7. The
Commission cannot surmise from the data whether the trade-throughs
are occurring without an exception or whether the exchanges are not
complying with the Linkage Plan or their own rules. The Commission
notes that the Options Linkage Plan provides that if a participant
exchange relies on a trade-through exception, it would be required
to establish, maintain, and enforce written policies and procedures
reasonably designed to assure compliance with the terms of the
exception.
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Finally, in analyzing the proposed rule change, and in making its
determination to disapprove the rule change, the Commission has
considered whether the action will promote efficiency, competition, and
capital formation,\61\ but, as discussed above, the Commission cannot
find that the proposed rule change is consistent with the Options
Linkage Plan or Section 6(b)(5) of the Act.
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\61\ Whenever pursuant to the Act the Commission is engaged in
rulemaking or the review of a rule of a self-regulatory
organization, and is required to consider or determine whether an
action is necessary or appropriate in the public interest, the
Commission shall also consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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IV. Conclusion

For the foregoing reasons, the Commission does not find that the
proposed rule change, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5) of the Act.
IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Act,
that the proposed rule change (SR-ISE-2014-24), be, and hereby is,
disapproved.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\62\
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\62\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19762 Filed 8-11-15; 8:45 am]
BILLING CODE 8011-01-P

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