Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing of Proposed Rule Change To Amend the Opening Process, 96062-96074 [2016-31491]
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Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices
orders from the ISE Exchanges does not
create any issues of intra-market
competition because it involves
inbound routing from affiliated markets.
Nor does it result in a burden on
competition among exchanges, because
there are many competing options
exchanges that provide routing services,
including through an affiliate.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the provisions of Section 6 of the Act,14
in general, and with Sections 6(b)(5) of
the Act,15 in particular, in that the
proposal 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,
because the proposed rule change will
allow the Exchange to continue to
receive inbound orders from NES, acting
in its capacity as a facility of BX and
NOM, in a manner consistent with prior
approvals and established protections
and will further be permitted to receive
inbound orders from the ISE Exchanges,
for which NES will also act in its
capacity as a facility of those markets.
The Exchange believes that the
proposed conditions establish
mechanisms that protect the
independence of the Exchange’s
regulatory responsibility with respect to
NES, as well as ensure that NES cannot
use any information it may have
because of its affiliation with the
Exchange, or affiliation with other
Nasdaq Exchanges or ISE Exchanges, to
its advantage.
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NES routing in its capacity as a facility
of BX and NOM. By meeting the above
conditions, the Exchange has set up
mechanisms that protect the
independence of the Exchange’s
regulatory responsibility with respect to
NES, as well as demonstrate that NES
cannot use any information advantage it
may have because of its affiliation with
the Exchange. Because the Exchange has
met all the above-listed conditions, it
now seeks to permit an inbound routing
relationship with the ISE Exchanges
pursuant to the same conditions. The
Exchange will continue to comply with
the four conditions stated above.
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 (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (a) By order
approve or disapprove such proposed
rule change, or (b) institute proceedings
to determine whether the proposed rule
change should be disapproved.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Permitting Phlx to receive inbound
14 15
U.S.C. 78f.
15 15 U.S.C. 78f(b)(5).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, 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–
Phlx–2016–120 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–Phlx–2016–120. 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
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with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of 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;
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–Phlx–
2016–120, and should be submitted on
or before January 19, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016–31475 Filed 12–28–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79679; File No. SR–
ISEGemini–2016–18]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing of
Proposed Rule Change To Amend the
Opening Process
December 22, 2016.
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 December
16, 2016, ISE Gemini, LLC (‘‘ISE
Gemini’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
16 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend the
opening process.
The text of the proposed rule change
is available on the Exchange’s Web site
at www.ise.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
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 the
Statutory Basis for, the Proposed Rule
Change
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1. Purpose
The purpose of this rule change is to
amend the ISE Gemini opening process
in connection with a technology
migration to a Nasdaq, Inc. (‘‘Nasdaq’’)
supported architecture. INET is the
proprietary core technology utilized
across Nasdaq’s global markets and
utilized on The NASDAQ Options
Market LLC (‘‘NOM’’), NASDAQ PHLX
LLC (‘‘Phlx’’) and NASDAQ BX, Inc.
(‘‘BX’’) (collectively ‘‘Nasdaq
Exchanges’’). The migration of ISE
Gemini to the Nasdaq INET architecture
would result in higher performance,
scalability, and more robust
architecture. With this system
migration, the Exchange intends to
adopt the Phlx opening process.
The Exchange intends to begin
implementation of the proposed rule
change in Q1 2017. The migration will
be on a symbol by symbol basis, and the
Exchange will issue an alert to Members
to provide notification of the symbols
that will migrate and the relevant dates.
Generally
With the re-platform, the Exchange
will now be built on the Nasdaq INET
architecture, which allows certain
trading system functionality to be
performed in parallel. The Exchange
believes that this architecture change
will improve the Member experience by
reducing overall latency compared to
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the current ISE Gemini system because
of the manner in which the system is
segregated into component parts to
handle processing.
Opening Rotation
ISE Gemini will replace its current
opening process at Rule 701 with Phlx’s
Opening Process.3 The Exchange
believes that the proposed opening
process will provide a similar
experience for Members and investors
that trade on ISE Gemini to the
experience that they receive on Phlx
today.
Current Opening Process
Today, for each class of options that
has been approved for trading, the
opening rotation is conducted by the
Primary Market Maker (‘‘PMM’’)
appointed to such class of options
pursuant to ISE Gemini Rule 701(b)(1).
The Exchange may direct that one or
more trading rotations be employed on
any business day to aid in producing a
fair and orderly market pursuant to ISE
Gemini Rule 701(a)(1). For each rotation
so employed, except as the Exchange
may direct, rotations are conducted in
the order and manner the PMM
determines to be appropriate under the
circumstances pursuant to ISE Gemini
Rule 701(a)(2). The PMM, with the
approval of the Exchange, has the
authority to determine the rotation order
and manner and may also employ
multiple trading rotations
simultaneously pursuant to ISE Gemini
Rule 701(a)(3).
Trading rotations are employed at the
opening of the Exchange each business
day and during the reopening of the
market after a trading halt pursuant to
ISE Gemini Rule 701(b). The opening
rotation in each class of options is held
promptly following the opening of the
market for the underlying security.4 The
opening rotation for options contracts in
an underlying security is delayed until
the market for such underlying security
has opened unless the Exchange
determines that the interests of a fair
and orderly market are best served by
3 See Phlx Rule 1017. See also Securities
Exchange Act Release No. 79274 (November 9,
2016), 81 FR 80694 (November 16, 2016) (SR–Phlx–
2017–79) (notice of Filing of Partial Amendment
No. 2 and Order Granting Approval of a Proposed
Rule Change, as Modified by Partial Amendment
No. 2, to Amend PHLX Rule 1017, Openings in
Options).
4 The ‘‘market for the underlying security’’ is
either the primary listing market, the primary
volume market (defined as the market with the most
liquidity in that underlying security for the
previous two calendar months), or the first market
to open the underlying security, as determined by
the Exchange on an issue-by-issue basis. See ISE
Gemini Rule 701(b)(2).
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opening trading in the options contracts
pursuant to ISE Gemini Rule 701(b)(3).
Market Makers on ISE Gemini are
held to quoting obligations as outlined
in ISE Gemini Rule 803. Further, Market
Makers quotes prior to the opening
rotation, including PMM quotes, are
permitted with spread differential of no
more than $0.25 between the bid and
offer for each options contract for which
the bid is less than $2, no more than
$0.40 where the bid is at least $2 but
does not exceed $5, no more than $0.50
where the bid is more than $5 but does
not exceed $10, no more than $0.80
where the bid is more than $10 but does
not exceed $20, and no more than $1
where the bid is $20 or greater, provided
that the Exchange may establish
differences other than the above for one
or more options series, as specified in
ISE Gemini Rule 803(b)(4). These
differentials are defined as Valid Width
Quotes for purposes of this rule
proposal.
The PMM appointed to an option
class can initiate the rotation process by
sending a rotation request to the
Exchange or by authorizing the
Exchange to auto-rotate the class. In
addition, there are instances where the
PMM is unable to initiate the rotation
process. In such instances the Exchange
may initiate the rotation process by
using the Exchange’s ‘‘Delayed Opening
Process,’’ which provides an alternative
method for opening an option class
when the PMM is unable to initiate the
rotation process.5 Once the PMM or
Exchange initiates the opening rotation,
the Exchange will automatically process
displayed quotes and orders via a
process that determines the price at
which the maximum number of
contracts can trade within certain
established boundary prices. In order to
protect interest from trading at bad
prices, quotes and orders are not
executed outside of the established
boundary prices. If there are no quotes
or orders that lock or cross each other,
the Exchange will open a series by
disseminating the Exchange’s best bid
and offer among quotes and orders
under certain conditions.
The Exchange proposes to replace this
process with an opening process similar
to a recently approved Phlx opening
process as noted above.6
Opening Process
The Exchange will adopt a
‘‘Definitions’’ section at proposed ISE
Gemini Rule 701(a), similar to Phlx Rule
5 Certain conditions must be met for the Delayed
Opening Process to be used to initiate the opening
process.
6 See note 3 above.
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Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices
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1017(a), to define several terms that are
used throughout the opening rule.
Similar to today, the Exchange will
conduct an electronic opening for all
option series traded on the Exchange
using its trading system (hereinafter
‘‘system’’).
The Exchange proposes to define the
following terms, which are described
below: ‘‘ABBO,’’ ‘‘market for the
underlying security,’’ ‘‘Opening Price,’’
‘‘Opening Process,’’ ‘‘Pre-Market BBO,’’
‘‘Potential Opening Price,’’ ‘‘Quality
Opening Market,’’ ‘‘Valid Width Quote,’’
and ‘‘Zero Bid Market.’’
The Exchange proposes to define
‘‘Opening Process’’ at proposed Rule
701(a)(4) by cross-referencing proposed
Rule 701(c). The Exchange proposes to
define ‘‘Opening Price’’ at proposed
Rule 701(a)(3) by cross-referencing
proposed Rule 701(h) and (j). The
Exchange proposes to define ‘‘Potential
Opening Price’’ at proposed Rule
701(a)(5) by cross-referencing proposed
Rule 701(g). The Exchange proposes to
define ‘‘ABBO’’ at proposed Rule
701(a)(1) as the Away Best Bid or Offer.
The ABBO does not include ISE
Gemini’s market. The Exchange
proposes to define ‘‘market for the
underlying security’’ at proposed Rule
702(a)(2) as either the primary listing
market or the primary volume market
(defined as the market with the most
liquidity in that underlying security for
the previous two calendar months), as
determined by the Exchange by
underlying and announced to the
membership on the Exchange’s Web
site.7 The Exchange notes that the term
‘‘Market Makers’’ is currently defined in
ISE Gemini Rule 100(a)(25) as referring
to Primary Market Makers or ‘‘PMMs’’
and Competitive Market Makers or
‘‘CMMs,’’ collectively. The next
definition is ‘‘Pre-Market BBO’’ defined
at proposed Rule 701(a)(6) as the highest
bid and the lowest offer among Valid
Width Quotes.8 The term ‘‘Quality
Opening Market’’ is defined at proposed
Rule 701(a)(7) as a bid/ask differential
applicable to the best bid and offer from
all Valid Width Quotes defined in a
table to be determined by the Exchange
and published on the Exchange’s Web
site.9 This calculation of Quality
Opening Market is based on the best bid
7 Today, all are the primary listing market. The
Exchange would consider switching to primary
volume market if a different market begins to trade
more volume than the primary listing market and
the primary volume market becomes a more reliable
source of prices with more liquidity.
8 Valid Width Quotes is defined at proposed Rule
701(a)(8).
9 Phlx maintains a table on its Web site with this
information. See https://www.nasdaqtrader.com/
content/phlxxl/phlxiisys_overview.pdf. ISE Gemini
will publish similar details on its Web site.
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and offer of Valid Width Quotes. The
differential between the best bid and
offer are compared to reach this
determination. The allowable
differential, as determined by the
Exchange, takes into account the type of
security (for example, Penny Pilot
versus non-Penny Pilot issue), volatility,
option premium, and liquidity. The
Exchange utilizes its experience with
products to make this determination.
Next, a ‘‘Valid Width Quote’’ is defined
at proposed Rule 701(a)(8) as a twosided electronic quotation submitted by
a Market Maker that consists of a bid/
ask differential that is compliant with
Rule 803(b)(4). The term ‘‘Zero Bid
Market’’ is defined at proposed 701(a)(9)
where the best bid for an options series
is zero. The Exchange believes that
these definitions will bring additional
clarity to the proposed rule.
Eligible Interest
The first part of the Opening Process
determines what constitutes eligible
interest. The Exchange proposes to
adopt in proposed paragraph (b) of Rule
701 a provision that eligible opening
interest includes: (i) Valid Width
Quotes; (ii) Opening Sweeps; and (iii)
orders. Market Makers may submit
quotes,10 Opening Sweeps and orders,
but quotes other than Valid Width
Quotes will not be included in the
Opening Process. All-or-None Orders 11
that can be satisfied, and the displayed
and non-displayed portions of Reserve
Orders are considered for execution and
in determining the Opening Price
throughout the Opening Process.
The Exchange notes that Opening
Sweeps may be submitted through the
new Specialized Quote Feed or ‘‘SQF’’
protocol which permits one-sided
orders to be entered by a Market Maker.
Today, orders are entered by all
participants through FIX and/or DTI on
ISE Gemini. After the re-platform [sic]
the INET architecture, all participants
will continue to be able to submit orders
through FIX, however, DTI will no
longer be available. An Opening Sweep
is a Market Maker order submitted for
execution against eligible interest in the
system during the Opening Process.12 It
is similar to an Opening Only Order 13
that can be entered for the opening
rotation only and any portion of the
10 The term quotes shall refer to a two-sided
quote.
11 An All-or-None Order is a Limit or Market
Order that is to be executed in its entirety or not
at all. See ISE Gemini Rule 715(c). If the
contingency of the size could not be satisfied the
All-or-None Order will not be considered in the
Opening Process.
12 See proposed ISE Gemini Rule 715(t).
13 See ISE Gemini Rule 715(o).
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order that is not executed during the
opening rotation is cancelled. However,
it should also be noted that an Opening
Sweep may only be submitted by a
Market Maker when he/she has a Valid
Width Quote in the affected series
whereas, there is no such restriction on
Opening Only Orders. Since the
protocol over which an Opening Sweep
is submitted is used for Market Maker
quoting, the acceptance of an Opening
Sweep was structured to rely on the
Valid Width Quote. If a Market Maker
does not want to submit or is unable to
maintain a Valid Width Quote, the
Market Maker can submit Opening Only
Order instead.
Opening Sweep
Proposed Rule 701(b)(1)(i) provides
that a Market Maker assigned in a
particular option may only submit an
Opening Sweep if, at the time of entry
of the Opening Sweep, that Market
Maker has already submitted and
maintains a Valid Width Quote. All
Opening Sweeps in the affected series
entered by a Market Maker will be
cancelled immediately if that Market
Maker fails to maintain a continuous
quote with a Valid Width Quote in the
affected series. Opening Sweeps may be
entered at any price with a minimum
price variation applicable to the affected
series, on either side of the market, at
single or multiple price level(s), and
may be cancelled and re-entered. A
single Market Maker may enter multiple
Opening Sweeps, with each Opening
Sweep at a different price level. If a
Market Maker submits multiple
Opening Sweeps, the system will
consider only the most recent Opening
Sweep at each price level submitted by
such Market Maker in determining the
Opening Price. Unexecuted Opening
Sweeps will be cancelled once the
affected series is open.14
Proposed Rule 701(b)(2) states that the
system will aggregate the size of all
eligible interest for a particular
participant category 15 at a particular
price level for trade allocation purposes
pursuant to ISE Gemini Rule 713.
Eligible interest may be submitted into
ISE Gemini’s system and will be
received starting at the times noted
herein. Proposed Rule 701(c) provides
that Market Maker Valid Width Quotes
and Opening Sweeps received starting
at 9:25 a.m. Eastern Time, or 7:25 a.m.
14 See proposed ISE Gemini Rule 701(b)(1)(ii). See
also proposed ISE Gemini Rule 715(t).
15 ISE Gemini allocates first to Priority Customers
and then to all other Members by pro-rata. This is
different from Phlx which allocates to Customers
first, then to market makers pro-rata and then to all
others pro-rata. See ISE Gemini Rule 713 and Phlx
Rule 1014(g)(vii).
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Eastern Time for U.S. dollar-settled
foreign currency options, are included
in the Opening Process.16 Orders
entered at any time before an option
series opens are included in the
Opening Process. Orders may be entered
at any time before an options series
opens and are included in the Opening
Process. This proposed language adds
specificity to the rule regarding the
submission of orders. The 9:25 a.m.
Eastern Time and 7:25 a.m. Eastern
Time triggers are intended to tie the
option Opening Process to quoting in
the underlying security; 17 it presumes
that option quotes submitted before any
indicative quotes have been
disseminated for the underlying security
may not be reliable or intentional.
Therefore, the Exchange has chosen a
reasonable timeframe at which to begin
utilizing option quotes, based on the
Exchange’s experience when underlying
quotes start becoming available.
Proposed Rule 701(c)(1) describes
when the Opening Process can begin
with specific time-related triggers. The
proposed rule provides that the Opening
Process for an option series will be
conducted pursuant to proposed Rule
701(f) though (j) on or after 9:30 a.m.
Eastern Time, or on or after 7:30 a.m.
Eastern Time for U.S. dollar-settled
foreign currency options, if: The ABBO,
if any is not crossed and the system has
received, within two minutes (or such
shorter time as determined by the
Exchange and disseminated to
membership on the Exchange’s Web
site) of the opening trade or quote on the
market for the underlying security in the
case of equity options or, in the case of
index options, within two minutes of
the receipt of the opening price in the
underlying index (or such shorter time
as determined by the Exchange and
disseminated to membership on the
Exchange’s Web site), or within two
minutes of market opening for the
underlying security in the case of U.S.
dollar-settled foreign currency options
(or such shorter time as determined by
the Exchange and disseminated to
membership on the Exchange’s Web
site) 18 any of the following: (i) The
16 The timing is different to open U.S. dollarsettled foreign currency options because these
options normally open earlier in the day on ISE
Gemini as compared to other option series which
open in the day at 9:30 a.m. Eastern Time . These
times are not being amended. See ISE Rule 2008
(the rules contained in ISE Chapter 22 are
incorporated by reference into ISE Gemini Chapter
22), for transactions in options on a Foreign
Currency Index may be effected on the Exchange
between the hours of 7:30 a.m. Eastern Time and
4:15 p.m. Eastern Time.
17 For purposes of this rule, the underlying
security can also be an index.
18 The Exchange anticipates initially setting the
timeframe during which a PMM Valid Width quote
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PMM’s Valid Width Quote; (ii) the Valid
Width Quotes of at least two CMMs; or
(iii) if neither the PMM’s Valid Width
Quote nor the Valid Width Quotes of
two CMMs have been submitted within
such timeframe, one CMM has
submitted a Valid Width Quote.19 These
three requirements are intended to tie
the option Opening Process to receipt of
liquidity. If one of the above three
conditions are not met, the Exchange
will not initiate the Opening Process or
continue an ongoing Opening Process if
we do not have one of the three
conditions (i, ii or iii); thus, a Forced
Opening pursuant to proposed Rule
701(j)(5) could not occur.
The Exchange is proposing to state in
proposed Rule 701(c)(2) that the
underlying security, including indexes,
must be open on the primary market for
a certain time period for all options to
be determined by the Exchange for the
Opening Process to commence. The
Exchange is proposing that the time
period be no less than 100 milliseconds
and no more than 5 seconds.20 This
proposal is intended to permit the price
of the underlying security to settle down
and not flicker back and forth among
prices after its opening. It is common for
a stock to fluctuate in price immediately
upon opening; such volatility reflects a
natural uncertainty about the ultimate
Opening Price, while the buy and sell
interest is matched. The Exchange is
proposing a range of no less than 100
milliseconds and no more than 5
seconds in order to ensure that it has the
or the presence of at least two CMM Valid Width
Quotes will initiate the Opening Process at 30
seconds. The timeframe is consistent with the
current timeframe utilized on Phlx. The Exchange
believes 30 seconds is the appropriate amount of
time as it provides time for the PMM and CMMs
to assess the underlying security or index price and
submit Valid Width Quotes as well as ample time
for the underlying security or index price to
stabilize. After this 30 second period, the Exchange
will initiate the Opening Process provided one
CMM has submitted a Valid Width Quote since the
market for the underlying security or index has had
opportunity to stability. The Exchange may reduce
this timeframe if it is determined that the Opening
Process is taking longer to initiate than the
marketplace expects. The Exchange will provide
notice of the initial setting to Members. The
Exchange will provide notice of the shorter time
period to Members if the Exchange determines to
reduce the timeframe.
19 See proposed Rule 701(c)(1)(i)–(iii).
20 The Phlx Opening Process is set at 100
milliseconds. The Exchange believes that 100
milliseconds is the appropriate amount of time
given the experience with the Phlx market. The
Exchange would set the timer for ISE Gemini
initially at 100 milliseconds. The Exchange will
issue a notice to provide the initial setting and
would thereafter issue a notice if it were to change
the timing, which may be between 100 milliseconds
and 5 seconds. If the Exchange were to select a time
not between 100 milliseconds and 5 seconds it
would be required to file a rule proposal with the
Commission.
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ability to adjust the period for which the
underlying security must be open on the
primary market. The Exchange may
determine that in periods of high/low
volatility that allowing the underlying
to be open for a longer/shorter period of
time may help to ensure more stability
in the marketplace prior to initiating the
Opening Process.
Proposed Rule 701(c)(3) states that the
PMM assigned in a particular equity
option must enter a Valid Width Quote
not later than one minute following the
dissemination of a quote or trade by the
market for the underlying security or, in
the case of index options, following the
receipt of the opening price in the
underlying index. The PMM assigned in
a particular U.S. dollar-settled foreign
currency option must enter a Valid
Width Quote not later than one minute
after the announced market opening.
Furthermore, a CMM that submits a
quote pursuant to proposed Rule 701 in
any option series when the PMM’s
quote has not been submitted shall be
required to submit continuous, twosided quotes 21 in such option series
until such time as the PMM submits his/
her quote, after which the Market Maker
that submitted such quote shall be
obligated to submit quotations pursuant
to Rule 804(e). The Opening Process
will stop and an option series will not
open if the ABBO becomes crossed or a
Valid Width Quote(s) pursuant to
proposed Rule 701(c)(1) is no longer
present. Once each of these conditions
no longer exists, the Opening Process in
the affected option series will start again
pursuant to proposed Rule 701(e)–(j) as
proposed in Rule 701(c)(4). All eligible
opening interest will continue to be
considered during the Opening Process
when the process is re-started. The
proposed rule reflects that the ABBO
cannot be crossed because it is
indicative of uncertainty in the
marketplace of where the option series
should be valued. In this case, the
Exchange will wait for the ABBO to
become uncrossed before initiating the
Opening Process to ensure that there is
stability in the marketplace in order to
assist the Exchange in determining the
Opening Price.
Reopening After a Trading Halt
This section is intended to provide
information regarding the manner in
which a trading halt would impact the
Opening Process. Proposed Rule 701(d)
states that the procedure described in
this Rule may be used to reopen an
21 The Exchange has regulatory surveillances in
place with respect to Market Maker continuous
quoting obligations both at the opening and during
the other trading sessions. See ISE Gemini Rule 804
regarding quoting obligations.
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option after a trading halt. The
Exchange is adding that if there is a
trading halt or pause in the underlying
security, the Opening Process will start
again irrespective of the specific times
listed in proposed Rule 701(c)(1). This
is because these times relate to the
normal market opening in the morning.
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Opening With a BBO
This next section describes when the
Exchange may open with a quote on its
market. Proposed Rule 701(e), ‘‘Opening
with a BBO (No Trade),’’ provides that
if there are no opening quotes or orders
that lock or cross each other and no
routable orders locking or crossing the
ABBO, the system will open with an
opening quote by disseminating the
Exchange’s best bid and offer among
quotes and orders (‘‘BBO’’) that exist in
the system at that time, unless all three
of the following conditions exist: (i) A
Zero Bid Market; (ii) no ABBO; and (iii)
no Quality Opening Market. A Quality
Opening Market is determined by
reviewing all Valid Width Quotes and
determining if the difference of the best
bid of those Valid Width Quotes and the
best offer of those Valid Width Quotes
are of no more than a certain width.22
The Exchange utilizes the quotes to
assist in determining a fair and
reasonable Opening Price. Quotes are
utilized because Members are obligated
to provide both a bid and sell price,
providing a reasonable baseline of
where the marketplace views fair value.
If all three of these conditions exist,
the Exchange will calculate an Opening
Quote Range pursuant to paragraph (i)
and conduct the Price Discovery
Mechanism or ‘‘PDM’’ pursuant to
paragraph (j). The Exchange believes
that when all three of these conditions
exist, further price discovery is
warranted to validate or perhaps update
the Potential Opening Price and to
attract additional interest to perhaps
render an opening trade possible,
because: (i) A Zero Bid Market reflects
a lack of buying interest that could
benefit from price discovery; (ii) the
lack of an ABBO means there is no
external check on the Exchange’s market
for that options series; and (iii) the lack
of a Quality Opening Market indicates
that the Exchange’s market is wide. If no
quotes or orders lock/cross each other,
nothing matches and there can be no
trade. The Exchange believes that when
these conditions exist, it is difficult to
arrive at a reasonable and expected
price. If the provisions in proposed Rule
22 Phlx maintains a table on its Web site with this
information. See https://www.nasdaqtrader.com/
content/phlxxl/phlxiisys_overview.pdf. ISE Gemini
will publish similar details on its Web site.
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701(e)(i) through (iii) exist, an Opening
Quote Range is calculated pursuant to
proposed Rule 701(i) and thereafter, the
PDM in proposed Rule 701(j) will
initiate.23
Further Opening Processes
If an opening did not occur pursuant
to proposed Rule 701(e) and there are
opening Valid Width Quotes, or orders,
that lock or cross each other, the system
will calculate the Pre-Market BBO.24
Proposed Rule 701(g) describes the
general concept of how the system
calculates the Potential Opening Price
under all circumstances once the
Opening Process is triggered.
Specifically, the system will take into
consideration all Valid Width Quotes,
Opening Sweeps and orders (except Allor-None Orders that cannot be satisfied
and displayed and non-displayed
portions of Reserve Orders) for the
option series and identify the price at
which the maximum number of
contracts can trade (‘‘maximum quantity
criterion’’). Proposed Rule 701(h)(3)(i)
and proposed Rule 701(i) at paragraphs
(5) through (7) contain additional
provisions related to Potential Opening
Price which are discussed in further
detail herein. The proposal attempts to
maximize the number of contracts that
can trade, and is intended to find the
most reasonable and suitable price,
relying on the maximization to reflect
the best price.
Proposed Rule 701(g)(1) presents the
scenario for more than one Potential
Opening Price. When two or more
Potential Opening Prices would satisfy
the maximum quantity criterion and
leave no contracts unexecuted, the
system takes the highest and lowest of
those prices and takes the mid-point; if
such mid-point is not expressed as a
permitted minimum price variation, it
will be rounded to the minimum price
variation that is closest to the closing
price for the affected series from the
immediately prior trading session. If
there is no closing price from the
immediately prior trading session, the
system will round up to the minimum
price variation to determine the
Opening Price.
If two or more Potential Opening
Prices for the affected series would
satisfy the maximum quantity criterion
and leave contracts unexecuted, the
Opening Price will be either the lowest
executable bid or highest executable
offer of the largest sized side.25 This,
again, bases the Potential Opening Price
23 OQR and PDM processes may also initiate
pursuant to proposed Rule 701(h).
24 See proposed Rule 701(f).
25 See proposed Rule 701(g)(2).
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on the maximum quantity that is
executable. The Potential Opening Price
calculation is bounded by the away
market price that cannot be satisfied
with the Exchange routable interest.26
The Exchange does not open with a
trade that trades through another
market. This process, importantly,
breaks a tie by considering the largest
sized side and away markets, which are
relevant to determining a fair Opening
Price.
The system applies certain boundaries
to the Potential Opening Price to help
ensure that the price is a reasonable one
by identifying the quality of that price;
if a well-defined, fair price can be found
within these boundaries, the option
series can open at that price without
going through a further PDM. Proposed
Rule 701(h), ‘‘Opening with Trade,’’
provides the Exchange will open the
option series for trading with a trade of
Exchange interest only at the Opening
Price, if certain conditions described
below take place. The first condition is
provided in proposed Rule 701(h)(1),
the Potential Opening Price is at or
within the best of the Pre-Market BBO
and the ABBO. The second condition is
provided for in Rule 701(h)(2), the
Potential Opening Price is at or within
the non-zero bid ABBO if the PreMarket BBO is crossed. The third
provision is provided for in proposed
Rule 701(h)(3), where there is no ABBO,
the Potential Opening Price is at or
within the Pre-Market BBO which is
also a Quality Opening Market.
These boundaries serve to validate the
quality of the Opening Price. Proposed
Rule 701(h) provides that the Exchange
will open with a trade as long as it is
within the defined boundaries
regardless of any imbalance. The
Exchange believes that since the
Opening Price can be determined within
a well-defined boundary and not trading
through other markets, it is fair to open
the market immediately with a trade
and to have the remaining interest
available to be executed in the
displayed market. Using a boundarybased price counterbalances opening
faster at a less bounded and perhaps less
expected price and reduces the
possibility of leaving an imbalance.
Proposed Rule 701(h)(3)(i) provides
that if there is more than one Potential
Opening Price which meets the
conditions set forth in proposed Rule
701(h)(1), (2) or (3), where (A) no
contracts would be left unexecuted and
(B) any value used for the mid-point
calculation (which is described in
proposed Rule 701(g)) would cross
either: (I) The Pre-Market BBO or (II) the
26 See
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ABBO, then the Exchange will open the
option series for trading with an
execution and use the best price which
the Potential Opening Price crosses as a
boundary price for the purpose of the
mid-point calculation. If these
aforementioned conditions are not met,
an Opening Quote Range is calculated
as described in proposed Rule 701(i)
and the PDM, described in proposed
Rule 701(j), would commence. The
proposed rule explains the boundary as
well as the price basis for the mid-point
calculation for immediate opening with
a trade, which improves the detail
included in the rule. The Exchange
believes that this process is logical
because it seeks to select a fair and
balanced price.
Proposed Rule 701(i) provides that the
system will calculate an Opening Quote
Range (‘‘OQR’’) for a particular option
series that will be utilized in the PDM
if the Exchange has not opened subject
to any of the provisions described
above. Provided the Exchange has been
unable to open the option series under
Rule 701(e) or (h), the OQR would
broaden the range of prices at which the
Exchange may open. This would allow
additional interest to be eligible for
consideration in the Opening Process.
The OQR is an additional type of
boundary beyond the boundaries
mentioned in proposed Rule 701(g) and
(h). OQR is intended to limit the
Opening Price to a reasonable, middle
ground price and thus reduce the
potential for erroneous trades during the
Opening Process. Although the
Exchange applies other boundaries such
as the BBO, the OQR provides a range
of prices that may be able to satisfy
additional contracts while still ensuring
a reasonable Opening Price. The
Exchange seeks to execute as much
volume as is possible at the Opening
Price.
Specifically, to determine the
minimum value for the OQR, an
amount, as defined in a table to be
determined by the Exchange,27 will be
subtracted from the highest quote bid
among Valid Width Quotes on the
Exchange and on the away market(s), if
any, except as provided in proposed
Rule 701(i) paragraphs (3) and (4). To
determine the maximum value for the
OQR, an amount, as defined in a table
to be determined by the Exchange, will
be added to the lowest quote offer
among Valid Width Quotes on the
Exchange and on the away market(s), if
any, except as provided in proposed
Rule 701(i) paragraphs (3) and (4).28
However, if one or more away markets
are collectively disseminating a BBO
that is not crossed, and there are Valid
Width Quotes on the Exchange that
cross each other or that cross the away
market ABBO, then the minimum value
for the OQR will be the highest away
bid.29 In addition, the maximum value
for the OQR will be the lowest away
offer.30 And if, however, there are
opening quotes on the Exchange that
cross each other, and there is no away
market in the affected option series, the
minimum value for the OQR will be the
lowest quote bid among Valid Width
Quotes on the Exchange, and the
maximum value for the OQR will be the
highest quote offer among Valid Width
Quotes on the Exchange.31
If there is more than one Potential
Opening Price possible where no
contracts would be left unexecuted, any
price used for the mid-point calculation
(which is described in proposed Rule
701(g)(1)) that is outside of the OQR will
be restricted to the OQR price on that
side of the market for the purposes of
the mid-point calculation. Rule 701(i)(5)
continues the theme of relying on both
maximizing executions and looking at
the correct side of the market to
determine a fair price.
Proposed Rule 701(i)(6) deals with the
situation where there is an away market
price involved. If there is more than one
Potential Opening Price possible where
no contracts would be left unexecuted
and the price used for the mid-point
calculation (which is described in
proposed Rule 701(g)(1)) is an away
market price, pursuant to proposed Rule
701(g)(3), when contracts will be routed,
the system will use the away market
price as the Potential Opening Price.
The Exchange is seeking to execute the
maximum amount of volume possible at
the Opening Price. The Exchange will
enter into the Order Book any unfilled
interest at a price equal to or inferior to
the Opening Price. It should be noted,
the Exchange will not trade through an
away market.
Finally, proposed Rule 701(i)(7)
provides if the Exchange determined
that non-routable interest can receive
the maximum number of Exchange
interest, after routable interest has been
determined by the system to satisfy the
away market, then the Potential
Opening Price is the price at which the
maximum number of contracts can be
executed, excluding the interest which
will be routed to an away market, which
may be executed on the Exchange as
described in proposed Rule 701(g). The
system will route Public Customer
29 See
proposed Rule 701(i)(3)(i).
proposed Rule 701(i)(3)(ii).
31 See proposed Rule 701(i)(4)(i) and (ii).
27 See
note 22 above.
28 See proposed Rule 701(i)(2).
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30 See
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96067
interest in price/time priority to satisfy
the away market. This continues the
theme of trying to satisfy the maximum
amount of interest during the Opening
Process.
Price Discovery Mechanism
If the Exchange has not opened
pursuant to proposed Rule 701(e) or (h),
and after the OQR is calculated
pursuant to proposed Rule 701(i), the
Exchange will conduct a PDM pursuant
to proposed Rule 701(j). The PDM is the
process by which the Exchange seeks to
identify an Opening Price having not
been able to do so following the process
outlined thus far herein. The principles
behind the PDM are, as described above,
to satisfy the maximum number of
contracts possible by identifying a price
that may leave unexecuted contracts.
However, the PDM applies a proposed,
wider boundary to identify the Opening
Price and the PDM involves seeking
additional liquidity.
The Exchange believes that
conducting the price discovery process
in these situations protects opening
orders from receiving a random price
that does not reflect the totality of what
is happening in the markets on the
opening and also further protects
opening interest from receiving a
potentially erroneous execution price on
the opening. Opening immediately has
the benefit of speed and certainty, but
that benefit must be weighed against the
quality of the execution price and
whether orders were left unexecuted.
The Exchange believes that the
proposed rule strikes an appropriate
balance.
The proposed rule attempts to open
using Exchange interest only to
determine an Opening Price, provided
certain conditions contained in
proposed Rule 701(i) are present to
ensure market participants receive a
quality execution in the opening. The
proposed rule does not consider away
market liquidity for purposes of routing
interest to other markets until the PDM,
rather the away market prices are
considered for purposes of avoiding
trade-throughs. As a result, the
Exchange might open without routing if
all of the conditions described above are
met. The Exchange believes that the
benefit of this process is a more rapid
opening with quality execution prices.
Specifically, proposed Rule 701(j)(1)
provides that the system will broadcast
an Imbalance Message for the affected
series (which includes the symbol, side
of the imbalance (unmatched contracts),
size of matched contracts, size of the
imbalance, and Potential Opening Price
bounded by the Pre-Market BBO) to
participants, and begin an ‘‘Imbalance
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Timer,’’ not to exceed three seconds.
The Imbalance Timer would initially be
set 200 milliseconds.32 The Imbalance
Message is intended to attract additional
liquidity, much like an auction, using
an auction message and timer.33 The
Imbalance Timer would be for the same
number of seconds for all options traded
on the Exchange. Pursuant to this
proposed rule, as described in more
detail below, the Exchange may have up
to 4 Imbalance Messages which each
run its own Imbalance Timer.
Proposed Rule 701(j)(2), states that
any new interest received by the system
will update the Potential Opening Price.
If during or at the end of the Imbalance
Timer, the Opening Price is at or within
the OQR the Imbalance Timer will end
and the system will open with a trade
at the Opening Price if the executions
consist of Exchange interest only
without trading through the ABBO and
without trading through the limit
price(s) of interest within OQR which is
unable to be fully executed at the
Opening Price. If no new interest comes
in during the Imbalance Timer and the
Potential Opening Price is at or within
OQR and does not trade through the
ABBO, the Exchange will open at the
end of the Imbalance Timer at the
Potential Opening Price. This reflects
that the Exchange is seeking to identify
a price on the Exchange without routing
away, yet which price may not trade
through another market and the quality
of which is addressed by applying the
OQR boundary.
Provided the option series has not
opened pursuant to proposed Rule
701(j)(2),34 pursuant to proposed Rule
701(j)(3) the system will send a second
Imbalance Message with a Potential
Opening Price that is bounded by the
OQR (without trading through the limit
price(s) of interest within OQR which is
unable to be fully executed at the
Opening Price) and includes away
market volume in the size of the
imbalance to participants; and
concurrently initiate a Route Timer, not
to exceed one second.35 The Route
32 The Phlx timer is set at 200 milliseconds. The
Exchange will issue a notice to provide the initial
setting and would thereafter issue a notice if it were
to change the timing. If the Exchange were to select
a time which exceeds 3 seconds it would be
required file a rule proposal with the Commission.
33 For example, see COOP and COLA descriptions
in Phlx Rule 1098.
34 The Exchange notes that the system would not
open pursuant to proposed Rule 701(j)(2) if the
Potential Opening Price is outside of the OQR or if
the Potential Opening Price is at or within the OQR,
but would otherwise trade through the ABBO or
through the limit price(s) of interest within the OQR
which is unable to be fully executed at the Potential
Opening Price.
35 The Route Timer would be a brief timer that
operates as a pause before an order is routed to an
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Timer is intended to give Exchange
users an opportunity to respond to an
Imbalance Message before any opening
interest is routed to away markets and,
thereby, maximize trading on the
Exchange. If during the Route Timer,
interest is received by the system which
would allow the Opening Price to be
within OQR without trading through
away markets and without trading
through the limit price(s) of interest
within OQR which is unable to be fully
executed at the Opening Price, the
system will open with a trade at the
Opening Price and the Route Timer will
simultaneously end. The system will
monitor quotes received during the
Route Timer period and make ongoing
corresponding changes to the permitted
OQR and Potential Opening Price to
reflect them.36 This proposal serves to
widen the boundary of available
Opening Prices, which should similarly
increase the likelihood that an Opening
Price can be determined. The Route
Timer, like the Imbalance Timer, is
intended to permit responses to be
submitted and considered by the system
in calculating the Potential Opening
Price. The system does not route away
until the Route Timer ends.
Proposed Rule 701(j)(3)(iii) provides
when the Route Timer expires, if the
Potential Opening Price is within OQR
(without trading through the limit
price(s) of interest within OQR that is
unable to be fully executed at the
Opening Price), the system will
determine if the total number of
contracts displayed at better prices than
the Exchange’s Potential Opening Price
on away markets (‘‘better priced away
contracts’’) would satisfy the number of
marketable contracts available on the
Exchange. This provision protects the
unexecuted interest and should result in
a fairer price. The Exchange will open
the option series by routing and/or
trading on the Exchange, pursuant to
proposed Rule 701(j)(3)(iii) paragraphs
(A) through (C).
Proposed Rule 701(j)(3)(iii)(A)
provides if the total number of better
priced away contracts would satisfy the
number of marketable contracts
available on the Exchange on either the
buy or sell side, the system will route
all marketable contracts on the
Exchange to such better priced away
away market. Currently, the Phlx Route Timer is set
to one second. The ISE Gemini Route Timer will
also be initially set to one second. The Exchange
will issue a notice to Members to provide the initial
setting and would thereafter issue a notice to
Members if it were to change the timing within the
range of up to one second. If the Exchange were to
select a time beyond one second it would be
required file a rule proposal with the Commission.
36 See proposed Rule 701(j)(3)(ii).
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markets as Intermarket Sweep Order
(‘‘ISO’’) designated as Immediate-orCancel (‘‘IOC’’) order(s), and determine
an opening Best Bid or Offer (‘‘BBO’’)
that reflects the interest remaining on
the Exchange. The system will price any
contracts routed to away markets at the
Exchange’s Opening Price or pursuant
to proposed Rule 701(j)(3)(iii)(B) or (C)
described hereinafter. Routing away at
the Exchange’s Opening Price is
intended to achieve the best possible
price available at the time the order is
received by the away market.
Proposed Rule 701(j)(3)(iii)(B)
provides if the total number of better
priced away contracts would not satisfy
the number of marketable contracts the
Exchange has, the system will
determine how many contracts it has
available at the Exchange Opening
Price. If the total number of better
priced away contracts plus the number
of contracts available at the Exchange
Opening Price would satisfy the number
of marketable contracts on the Exchange
on either the buy or sell side, the system
will contemporaneously route a number
of contracts that will satisfy interest at
away markets at prices better than the
Exchange Opening Price, and trade
available contracts on the Exchange at
the Exchange Opening Price. The
system will price any contracts routed
to away markets at the better of the
Exchange Opening Price or the order’s
limit price pursuant to Rule
701(j)(vi)(C)(3)(ii). This continues with
the theme of maximum possible
execution of the interest on the
Exchange or away markets.
Proposed Rule 701(j)(3)(iii)(C)
provides if the total number of better
priced away contracts plus the number
of contracts available at the Exchange
Opening Price plus the contracts
available at away markets at the
Exchange Opening Price would satisfy
the number of marketable contracts the
Exchange has on either the buy or sell
side, the system will
contemporaneously route a number of
contracts that will satisfy interest at
away markets at prices better than the
Exchange Opening Price (pricing any
contracts routed to away markets at the
better of the Exchange Opening Price or
the order’s limit price), trade available
contracts on the Exchange at the
Exchange Opening Price, and route a
number of contracts that will satisfy
interest at other markets at prices equal
to the Exchange Opening Price. This
provision is intended to introduce
routing to away markets potentially both
at a better price than the Exchange
Opening Price as well as at the
Exchange Opening Price to access as
much liquidity as possible to maximize
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the number of contracts able to be
traded as part of the Opening Process.
The Exchange routes at the better of the
Exchange’s Opening Price or the order’s
limit price to first ensure the order’s
limit price is not violated. Routing away
at the Exchange’s Opening Price is
intended to achieve the best possible
price available at the time the order is
received by the away market.
Proposed Rule 701(j)(4) provides that
the system may send up to two
additional Imbalance Messages 37
(which may occur while the Route
Timer is operating) bounded by OQR
and reflecting away market interest in
the volume. These boundaries are
intended to assist in determining a
reasonable price at which an option
series might open.
This provision is proposed to further
state that after the Route Timer has
expired, the processes in proposed Rule
701(j)(3) will repeat (except no new
Route Timer will be initiated). No new
Route Timer is initiated because the
Exchange believes that after the Route
Timer has been initiated and
subsequently expired, no further delay
is needed before routing contracts if at
any point thereafter the Exchange is able
to satisfy the total number of marketable
contracts the Exchange has by executing
on the Exchange and routing to other
markets.
Proposed Rule 701(j)(5), entitled
‘‘Forced Opening,’’ will describe what
happens as a last resort in order to open
an options series when the processes
described above have not resulted in an
opening of the options series. Under this
process, called a Forced Opening, after
all additional Imbalance Messages have
occurred pursuant to proposed Rule
701(j)(4), the system will open the series
executing as many contracts as possible
by routing to away markets at prices
better than the Exchange Opening Price
for their disseminated size, trading
available contracts on the Exchange at
the Exchange Opening Price bounded by
OQR (without trading through the limit
price(s) of interest within OQR which is
unable to be fully executed at the
Opening Price). The system will also
route contracts to away markets at
prices equal to the Exchange Opening
Price at their disseminated size. In this
situation, the system will price any
contracts routed to away markets at the
37 The first two Imbalance Messages always occur
if there is interest which will route to an away
market. If the Exchange is thereafter unable to open
at a price without trading through the ABBO, up to
two more Imbalance Messages may occur based on
whether or not the Exchange has been able to open
before repeating the Imbalance Process. The
Exchange may open prior to the end of the first two
Imbalance Messages provided routing is not
necessary.
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better of the Exchange Opening Price or
the order’s limit price. Any unexecuted
contracts from the imbalance not traded
or routed will be cancelled back to the
entering participant if they remain
unexecuted and priced through the
Opening Price.
The boundaries of OQR and limit
prices within the OQR are intended to
ensure a quality Opening Price as well
as protect the unexecutable interest
entered with a limit price which may
not be able to be fully executed. There
is some language in the Phlx rule that
is not applicable to the ISE Gemini
opening because ISE Gemini does not
have automatic re-pricing of orders
resting in the Rulebook. Phlx’s rule
permits members to provide
instructions to re-enter the remaining
size of an unexecuted order for
automatic submission as a new order,
the ISE Gemini rule will not permit this
submission.
Proposed Rule 701(j)(6) provides the
system will execute orders at the
Opening Price that have contingencies
(such as without limitation, All-or-None
and Reserve Orders) and non-routable
orders such as ‘‘Do-Not-Route’’ or
‘‘DNR’’ Orders,38 to the extent possible.
The system will only route noncontingency Public Customer orders,
except that the full volume of Public
Customer Reserve Orders may route.
The Exchange is adding this detail to
memorialize the manner in which the
system will execute orders at the
opening. The Exchange desires to
provide certainty to market participants
as to which contingency orders will
execute and which orders will route
during the Opening Process.
Proposed Rule (j)(6)(i) provides the
system will cancel (1) any portion of a
Do-Not-Route order that would
otherwise have to be routed to the
exchange(s) disseminating the ABBO for
an opening to occur, (2) an All-or-None
Order that is not executed during the
opening and is priced through the
Opening Price or (3) any order that is
priced through the Opening Price. All
other interest will remain in the system
and be eligible for trading after opening.
The Exchange cancels these orders since
it lacks enough liquidity to satisfy these
orders on the opening yet their limit
price gives the appearance that they
should have been executed. The
Exchange believes that participants
would prefer to have these orders
returned to them for further assessment
rather than have these orders
immediately entered onto the order
book at a price which is more aggressive
than the price at which the Exchange
opened.
Proposed Rule 701(k) provides during
the opening of the option series, where
there is an execution possible, the
system will give priority to Market
Orders 39 first, then to resting Limit
Orders 40 and quotes. The allocation
provisions of ISE Gemini Rule 713 and
the Supplementary Material to that rule
apply with respect to other orders and
quotes with the same price. The
Exchange is providing certainty to
market participants as to the priority
scheme during the Opening Process.
Market Orders will be immediately
executed first because these orders have
no specified price and Limit Orders will
be executed thereafter in accordance
with the prices specified.
Finally, proposed Rule 701(l)
provides upon opening of the option
series, regardless of an execution, the
system disseminates the price and size
of the Exchange’s best bid and offer
(BBO).41 This provision simply makes
known the manner in which the
Exchange establishes the BBO for
purposes of reference upon opening.
There are some differences between
the Phlx and ISE Gemini rules. ISE
Gemini has a Reserve Order and Phlx
does not have this order type. With
Reserve Orders, the displayed and nondisplayed portions of Reserve Orders are
considered for execution and in
determining the Opening Price
throughout the Opening Process. Today,
ISE Gemini permits orders to route
during regular trading, however, the
Exchange does not perform away market
routing during the opening rotation.
With this proposal, routing is
considered during the Opening Process.
With respect to the Opening Sweep,
the Exchange proposes to adopt an order
type at new Rule 715(t) entitled
‘‘Opening Sweep.’’ This order type is
proposed to be a Market Maker order
submitted for execution against eligible
interest in the system during the
Opening Process pursuant to Rule
701(b)(i) [sic]. The Exchange believes
that describing this order type within
38 A Do-Not-Route order is a market or limit order
that is to be executed in whole or in part on the
Exchange only. Due to prices available on another
options exchange (as provided in Chapter 19 (Order
Protection; Locked and Crossed Markets)), any
balance of a do-not-route order that cannot be
executed upon entry, or placed on the Exchange’s
limit order book, will be automatically cancelled.
See Rule 715(m).
39 A Market Orders [sic] is defined as an order to
buy or sell a stated number of options contracts that
is to be executed at the best price obtainable when
the order reaches the Exchange. See ISE Gemini
Rule 715(a).
40 A Limit Order is an order to buy or sell a stated
number of options contracts at a specified price or
better. See ISE Gemini Rule 715(b).
41 See proposed Rule 701(j)(F) [sic].
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Rule 715 will provide clarity to the
introduction of Opening Sweeps.
Opening Process Examples:
The following examples are intended
to demonstrate the Opening Process.
Example 1. Proposed Rule 701(e)
Opening with an Exchange BBO (No
Trade). Suppose the PMM in an option
enters a quote, 2.00 (100) bid and 2.10
(100) offer and a buy order to pay 2.05
for 10 contracts is present in the system.
The System also observes an ABBO is
present with CBOE quoting a spread of
2.05 (100) and 2.15 (100). Given the
Exchange has no interest which locks or
crosses each other and does not cross
the ABBO, the option opens for trading
with an Exchange BBO of 2.05 (10) ×
2.10 (100) and no trade. Since there is
an ABBO and no Zero Bid Market, the
System does not conduct the PDM and
the option opens without delay.
Example 2a. Proposed Rule 701(h)
Opening with Trade. Suppose the PMM
enters the same quote in an option, 2.00
(100) bid and 2.10 (100) offer. This
quote defines the pre-market BBO.
CBOE disseminates a quote of 2.01 (100)
by 2.09 (100), making up the ABBO.
Firm A enters a buy order at 2.04 for 50
contracts. Firm B enters a sell order at
2.04 for 50 contracts. The Exchange
opens with the Firm A and Firm B
orders fully trading at an Opening Price
of 2.04 which satisfies the condition
defined in proposed Rule 701(h)(i), the
Potential Opening Price is at or within
the best of the Pre-Market BBO and the
ABBO.
Example 2b. Proposed Rule 701(h)
Opening with Trade. Similarly, suppose
the PMM enters the same quote in an
option, 2.00 (100) bid and 2.10 (100)
offer. A Market Maker enters a quote of
2.00 (100) × 2.12 (100). The pre-market
BBO is therefore 2.00 bid and 2.10 offer.
CBOE disseminates a quote of 2.05 (100)
by 2.15 (100), making up the ABBO.
Firm A enters a buy order at 2.11 for 300
contracts. Firm B enters a sell order at
2.11 for 100 contracts. The option does
not open for trading because the
Potential Opening Price of 2.11 does not
satisfy the condition defined in
proposed Rule 701(h)(i), as the Potential
Opening Price is outside the Pre-Market
BBO. The System thereafter calculates
the OQR and initiates the PDM, as
discussed in proposed Rule 701(j), to
facilitate the Opening Process for the
option.
Example 3. Proposed Rule 701(j)(2)
Price Discovery Mechanism and first
iteration. Assume the set up described
in Example 2b and an allowable OQR of
0.04. When the PDM is initiated, the
System broadcasts an Imbalance
Message. At the end of the Imbalance
Timer, the option opens with an
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Opening Price of 2.11 because it is
within OQR and the ABBO. The
maximum value for OQR is the lowest
quote offer of 2.10 plus 0.04.
Example 4. Proposed Rule 701(j)(3)
Price Discovery Mechanism and second
iteration with routing. Suppose the
PMM enters a quote, 2.00 (100) bid and
2.10 (100) offer and the defined
allowable OQR is 0.04. If CBOE
disseminates a quote of 2.00 (100) by
2.09 (100), the away offer is better than
the PMM quote. Customer A enters a
routable buy order at 2.10 for 150
contracts. The PDM initiates because the
Potential Opening Price (2.10) is equal
to the Pre-Market BBO but outside of the
ABBO. The Potential Opening Price is
2.10 because there is both buy and sell
interest at that price point. The System
is unable to open after the first iteration
of Imbalance since the Potential
Opening Price is within the OQR but
outside of the ABBO. The System
proceeds with the PDM and initiates a
Route Timer and broadcasts a second
Imbalance Message (assume no
additional interest is received during
the imbalance period). The System
opens the option for trading after the
Route Timer has expired and the
Imbalance Timer has completed since
the Potential Opening Price is within
OQR. The System routes 100 contracts
of the Customer order to the better
priced away offer at CBOE. The
Exchange would route to CBOE at an
Opening Price of 2.10 to execute against
the interest at 2.09 on CBOE. The 50
options contracts open and execute on
the Exchange with an Opening Price of
2.10. The Exchange routes to CBOE
using the Exchange’s Opening Price to
ensure, if there is market movement,
that the routed order is able to access
any price point equal to or better than
the Exchange’s Opening Price.
Example 5. Proposed Rule 701(j)(5)
Forced Opening. Suppose the PMM
enters a quote, 2.00 (100) bid and 2.10
(100) offer and the defined allowable
OQR is 0.04. A Market Maker enters a
quote for 2.05 (100) × 2.14 (100). Firm
A enters a buy order of 250 contracts for
2.15 which is more aggressive than the
expected OQR of 2.14. The PDM
initiates because the Potential Opening
Price of 2.15 is outside the Pre-Market
BBO (2.05 × 2.10). Assume no
additional interest is received during
the PDM. After the final Imbalance
Timer, the System opens the option for
trading with an execution of 200
contracts at an Opening Price of 2.14,
which is the boundary of OQR. The
residual 50 contracts from Firm A are
cancelled back to the participant
because the limit order price of 2.15 is
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priced through the Opening Price of
2.14.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,42 in general, and furthers the
objectives of Section 6(b)(5) of the Act,43
in particular, in that it is designed 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 the
reasons stated below.
The Exchange’s proposal to adopt the
Phlx Opening Process is consistent with
the Act because the new rule seeks to
find the best price. The proposal
permits the price of the underlying
security to settle down and not flicker
back and forth among prices after its
opening. It is common for a stock to
fluctuate in price immediately upon
opening; such volatility reflects a
natural uncertainty about the ultimate
Opening Price, while the buy and sell
interest is matched. The proposed rule
provides for a range of no less than 100
milliseconds and no more than 5
seconds in order to ensure that it has the
ability to adjust the period for which the
underlying security must be open on the
primary market. The Exchange may
determine that in periods of high/low
volatility that allowing the underlying
to be open for a longer/shorter period of
time may help to ensure more stability
in the marketplace prior to initiating the
Opening Process.
Definitions
The Exchange’s proposal to adopt a
‘‘Definitions’’ section is consistent with
the Act because the terms will assist
market participants in understanding
the meaning of terms used throughout
the proposed Rule. The Exchange added
the definitions to provide clarity and
consistency throughout the proposed
rule.
Eligible Interest
The first part of the Opening Process
determines what constitutes eligible
interest. The Exchange’s proposal seeks
to make clear what type of eligible
opening interest is included. The
Exchange notes that Valid Width
Quotes; Opening Sweeps; and orders are
included. The Exchange further notes
that Market Makers may submit quotes,
Opening Sweeps and orders, but quotes
other than Valid Width Quotes will not
be included in the Opening Process.
42 15
43 15
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Finally, All-or-None Orders 44 that can
be satisfied, and the displayed and nondisplayed portions of Reserve Orders are
considered for execution and in
determining the Opening Price
throughout the Opening Process. The
Exchange believes that defining what
qualifies as eligible interest is consistent
with the Act because market
participants will be provided with
certainty when submitting interest as to
which type of interest will be
considered in the Opening Process.
Opening Sweep
The Exchange believes that it is
consistent with the Act to introduce the
concept of an Opening Sweep and
memorialize this order type within Rule
715(t). While the Opening Sweep is
similar to an Opening Only Order,45 it
can be entered for the opening rotation
only and any portion of the order that
is not executed during the opening
rotation is cancelled. An Opening
Sweep may only be submitted by a
Market Maker when he/she has a Valid
Width Quote in the affected series 46
whereas, there is no such restriction on
Opening Only Orders. The Exchange
believes the addition of this order type
is consistent with the Act because it
provides for a specific type of order that
may be entered during the Opening
Process similar to Phlx for proposes [sic]
of qualifying as eligible interest. The
Exchange notes that this order type
would be not valid outside of the
opening in other trading sessions. The
Exchange is providing definitive rules
that concern the manner in which
Opening Sweeps may be entered into
the system. For example, an Opening
Sweep may be entered at any price with
a minimum price variation applicable to
the affected series, on either side of the
market, at single or multiple price
level(s), and may be cancelled and reentered. A single Market Maker may
enter multiple Opening Sweeps, with
each Opening Sweep at a different price
level. If a Market Maker submits
multiple Opening Sweeps, the system
will consider only the most recent
Opening Sweep at each price level
submitted by such Market Maker.
Unexecuted Opening Sweeps will be
cancelled once the affected series is
open.47 The Exchange believes that the
addition of Opening Sweep will also
44 See
note 11 above.
ISE Gemini Rule 715(o).
46 All Opening Sweeps in the affected series
entered by a Market Maker will be cancelled
immediately if that Market Maker fails to maintain
a continuous quote with a Valid Width Quote in the
affected series.
47 See proposed ISE Gemini Rule 701(b)(1)(ii). See
also proposed ISE Gemini Rule 715(t).
45 See
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provide certainty to market participants
as to the manner in which the system
will handle such interest.
With respect to trade allocation, the
proposal notes at Rule 701(b)(2) that the
system will aggregate the size of all
eligible interest for a particular
participant category 48 at a particular
price level for trade allocation purposes
pursuant to ISE Gemini Rule 713. The
Exchange believes that this allocation is
consistent with the Act because it
mirrors the current allocation process
on ISE Gemini in other trading sessions.
The proposed rule notes the specific
times that eligible interest may be
submitted into ISE Gemini’s system.
The Exchange’s proposed times for
entering Market Maker Valid Width
Quotes and Opening Sweeps (9:25 a.m.
Eastern Time) and U.S. dollar-settled
foreign currency options (7:25 a.m.
Eastern Time) eligible to participate in
the Opening Process, are consistent with
the Act because the times are intended
to tie the option Opening Process to
quoting in the underlying security;49 it
presumes that option quotes submitted
before any indicative quotes have been
disseminated for the underlying security
may not be reliable or intentional. The
Exchange believes these times represent
a reasonable timeframe at which to
begin utilizing option quotes, based on
the Exchange’s experience when
underlying quotes start becoming
available. This proposed language adds
specificity to the rule regarding the
submission of orders.
The Exchange’s proposal at Rule
701(c)(1) describes when the Opening
Process can begin with specific timerelated triggers. The proposed rule,
which provides that the Opening
Process for an option series will be
conducted on or after 9:30 a.m. Eastern
Time, or on or after 7:30 a.m. Eastern
Time for U.S. dollar-settled foreign
currency options, provided the ABBO, if
any, is not crossed and the system has
received within specified time periods
certain specified interest,50 is consistent
with the Act because this requirement is
intended to tie the option Opening
Process to receipt of liquidity. If one of
the above three conditions specified in
proposed Rule 701(c)(1)(i)–(iii) is not
met, the Exchange will not initiate the
Opening Process or continue an ongoing
Opening Process. The Exchange’s
48 ISE Gemini allocates first to Priority Customers
and then to all other Members by pro-rata. This is
different from Phlx which allocates to Customers
first, then to market makers pro-rata and then to all
others pro-rata. See ISE Gemini Rule 713 and Phlx
Rule 1014(g)(vii).
49 For purposes of this rule, the underlying
security can also be an index.
50 See proposed Rule 701(c)(1)(i)–(iii).
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96071
proposed rule considers the liquidity
present on its market before initiating
other processes to obtain additional
pricing information. The Exchange’s
proposal to adopt the Phlx Opening
Process is consistent with the Act
because the new rule seeks to find the
best price.
The Exchange’s proposed rule
considers the underlying security,
including indexes, which must be open
on the primary market for a certain time
period for all options to be determined
by the Exchange for the Opening
Process to commence. The Exchange
proposes a time period be no less than
100 milliseconds and no more than 5
seconds to permit the price of the
underlying security to settle down and
not flicker back and forth among prices
after its opening. Since it is common for
a stock to fluctuate in price immediately
upon opening, the Exchange accounts
for such volatility in its process. The
volatility reflects a natural uncertainty
about the ultimate Opening Price, while
the buy and sell interest is matched. The
Exchange’s proposed range is consistent
with the Act because it ensures that it
has the ability to adjust the period for
which the underlying security must be
open on the primary market. The
Exchange may determine that in periods
of high/low volatility that allowing the
underlying to be open for a longer/
shorter period of time may help to
ensure more stability in the marketplace
prior to initiating the Opening Process.
The Exchange’s proposal at Rule
701(c)(3) requires the PMM assigned in
a particular equity option to enter a
Valid Width Quote not later than one
minute following the dissemination of a
quote or trade by the market for the
underlying security or, in the case of
index options, following the receipt of
the opening price in the underlying
index. The PMM assigned in a
particular U.S. dollar-settled foreign
currency option must enter a Valid
Width Quote also not later than one
minute after the announced market
opening.
Furthermore, the Exchange proposes
that a CMM that submits a quote
pursuant to proposed Rule 701 in any
option series when the PMM’s quote has
not been submitted shall be required to
submit continuous, two-sided quotes in
such option series until such time as the
PMM submits his/her quote, after which
the Market Maker that submitted such
quote shall be obligated to submit
quotations pursuant to Rule 804(e). This
proposal is consistent with the Act
because the Exchange will not open if
the ABBO becomes crossed or a Valid
Width Quote(s) pursuant to proposed
Rule 701(c)(1) is no longer present.
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Instead the process would restart and all
eligible opening interest will continue
to be considered during the Opening
Process when the process is re-started.
The Exchange’s proposal is consistent
with the Act and promotes just and
equitable principles of trade because the
rule reflects that the ABBO cannot be
crossed because it is indicative of
uncertainty in the marketplace of where
the option series should be valued. The
Exchange will wait for the ABBO to
become uncrossed before initiating the
Opening Process to ensure that there is
stability in the marketplace in order to
assist the Exchange in determining the
Opening Price.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Reopening After a Trading Halt
In order to provide certainty to market
participants in the event of a trading
halt, the Exchange provides in its
proposal information regarding the
manner in which a trading halt would
impact the Opening Process. Proposed
Rule 701(d) provides if there is a trading
halt or pause in the underlying security,
the Opening Process will start again
irrespective of the specific times listed
in Rule 701(c)(1). The Exchange’s
proposal to restart in the event of a
trading halt is consistent with the Act
and promotes just and equitable
principles of trade because the proposed
rule ensures that there is stability in the
marketplace in order to assist the
Exchange in determining the Opening
Price.
Opening With a BBO
The Exchange’s proposed rule
accounts for a situation where there are
no opening quotes or orders that lock or
cross each other and no routable orders
locking or crossing the ABBO. In this
situation, the system will open with an
opening quote by disseminating the
Exchange’s best bid and offer among
quotes and orders (‘‘BBO’’) that exist in
the system at that time, unless all three
of the following conditions exist: (i) A
Zero Bid Market; (ii) no ABBO; and (iii)
no Quality Opening Market.51 The
Exchange utilizes the quotes to assist in
determining a fair and reasonable
Opening Price, which is consistent with
the Act because Members are obligated
to provide both a bid and sell price. The
Exchange believes that this measure
provides a reasonable baseline of where
the marketplace views fair value.
If all three of these conditions exist,
the Exchange will calculate an OQR
51 The Exchange nots [sic] herein that a Quality
Opening Market is determined by reviewing all
Valid Width Quotes and determining if the
difference of the best bid of those Valid Width
Quotes and the best offer of those Valid Width
Quotes are of no more than a certain width.
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pursuant to paragraph (i) and conduct
the PDM pursuant to paragraph (j). This
approach is consistent with the Act
because the [sic] when all three of these
conditions exist, further price discovery
is warranted to validate or perhaps
update the Exchange’s BBO and to
attract additional interest to perhaps
render an opening trade possible. The
Exchange notes that a Zero Bid Market
reflects a lack of buying interest to assist
in validating a reasonable opening BBO,
the lack of an ABBO means there is no
external check on the Exchange’s market
for that options series; and the lack of
a Quality Opening Market indicates that
the Exchange’s market is wide. For these
reasons, the Exchange believes that
when these conditions exist, it is
difficult to determine if the Exchange
BBO is reasonable and therefore an OQR
is calculated pursuant to proposed Rule
701(i) and thereafter, the PDM in
proposed Rule 701(j) will initiate.
The Exchange believes that [sic]
proposed rule promotes just and
equitable principles of trade, because
the proposed conditions involving Zero
Bid Markets, no ABBO and no Quality
Opening Market trigger the PDM rather
than an immediate opening in order to
validate the Opening Price against away
markets or by attracting additional
interest to address the specific
condition. This is consistent with the
Act because it should avoid opening
executions in very wide or unusual
markets where an opening execution
price cannot be validated.
Further Opening Processes and Price
Discovery Mechanism
The proposed rule promotes just and
equitable principles of trade because in
arriving at the Potential Opening Price
the rule considers the maximum
number of contracts that can be
executed, which results in a price that
is logical and reasonable in light of
away markets and other interest present
in the system. As noted herein, the
Exchange’s Opening Price is bounded
by the OQR without trading through the
limit price(s) of interest within OQR
which is unable to fully execute at the
Opening Price in order to provide
participants with assurance that their
orders will not be traded through.
Although the Exchange applies other
boundaries such as the BBO, the OQR
provides a range of prices that may be
able to satisfy additional contracts while
still ensuring a reasonable Opening
Price. The Exchange seeks to execute as
much volume as is possible at the
Opening Price. When choosing between
multiple Opening Prices when some
contracts would remain unexecuted,
using the lowest bid or highest offer of
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the largest sized side of the market
promotes just and equitable principles
of trade because it uses size as a tie
breaker. The Exchange’s method for
determining the Potential Opening Price
and Opening Price is consistent with the
Act because the proposed process seeks
to discover a reasonable price and
considers both interest present in ISE
Gemini’s system as well as away market
interest. The Exchange’s method seeks
to validate the Opening Price and avoid
opening at aberrant prices. The rule
provides for opening with a trade,
which is consistent with the Act
because it enables an immediate
opening to occur within a certain
boundary without need for the price
discovery process. The boundary
provides protections while still ensuring
a reasonable Opening Price.
The proposed rule considers more
than one Potential Opening Price, which
is consistent with the Act because it
forces the Potential Opening Price to fall
within the OQR boundary, thereby
providing price protection. Specifically,
the mid-point calculation balances the
price among interest participating in the
Opening when there is more than one
price at which the maximum number of
contracts could execute. Limiting the
mid-point calculation to the OQR when
a price would otherwise fall outside of
the OQR ensures the final mid-point
price will be within the protective OQR
boundary. If there is more than one
Potential Opening Price possible where
no contracts would be left unexecuted
and any price used for the mid-point
calculation is an away market price
when contracts will be routed, the
system will use the away market price
as the Potential Opening Price.
The PDM reflects what is generally
known as an imbalance process and is
intended to attract liquidity to improve
the price at which an option series will
open as well as to maximize the number
of contracts that can be executed on the
opening. This process will only occur of
the Exchange has not been able to
otherwise open an option series
utilizing the other processes available in
proposed Rule 701. The Exchange
believes the process presented in the
PDM is consistent with just and
equitable principles of trade because the
process applies a proposed, wider
boundary to identify the Opening Price
and seeks additional liquidity. The PDM
also promotes just and equitable
principles of trade by taking into
account whether all interest can be fully
executed, which helps investors by
including as much interest as possible
in the Opening Process. The Exchange
believes that conducting the price
discovery process in these situations
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protects opening orders from receiving a
random price that does not reflect the
totality of what is happening in the
markets on the opening and also further
protects opening interest from receiving
a potentially erroneous execution price
on the opening. Opening immediately
has the benefit of speed and certainty,
but that benefit must be weighed against
the quality of the execution price and
whether orders were left unexecuted.
The Exchange believes that the
proposed rule strikes an appropriate
balance.
It is consistent with the Act to not
consider away market liquidity, i.e.
away market volume, until the PDM
occurs because this proposed process
provides for a swift, yet conservative
opening. The Exchange is bounded by
the Pre-Market BBO when determining
an Opening Price. The away market
prices would be considered, albeit not
immediately. It is consistent with the
Act to consider interest on the Exchange
prior to routing to an away market
because the Exchange is utilizing the
interest currently present on its market
to determine a quality opening price.
The Exchange will attempt to match
interest in the system, which is within
the OQR, and not leave interest
unsatisfied that was otherwise at that
price. The Exchange will not tradethrough the away market interest in
satisfying this interest at the Exchange.
The proposal attempts to maximize the
number of contracts that can trade, and
is intended to find the most reasonable
and suitable price, relying on the
maximization to reflect the best price.
With respect to the manner in which
the Exchange sends an Imbalance
Message as proposed within Rule
701(j)(1), the Imbalance Message is
intended to attract additional liquidity,
much like an auction, using an auction
message and timer. The Imbalance
Timer is consistent with the Act because
it would provide a reasonable time for
participants to respond to the Imbalance
Message before any opening interest is
routed to away markets and, thereby,
maximize trading on the Exchange. The
Imbalance Timer would be for the same
number of seconds for all options traded
on the Exchange. This process will
repeat, up to four iterations, until the
options series opens. The Exchange
believes that this process is consistent
with the Act because the Exchange is
seeking to identify a price on the
Exchange without routing away, yet
which price may not trade through
another market and the quality of which
is addressed by applying the OQR
boundary.
Proposed Rule 701(j)(3)(iii)(C)
provides if the total number of better
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priced away contracts plus the number
of contracts available at the Exchange
Opening Price plus the contracts
available at away markets at the
Exchange Opening Price would satisfy
the number of marketable contracts the
Exchange has on either the buy or sell
side, the system will
contemporaneously route a number of
contracts that will satisfy interest at
away markets at prices better than the
Exchange Opening Price (pricing any
contracts routed to away markets at the
better of the Exchange Opening Price or
the order’s limit price), trade available
contracts on the Exchange at the
Exchange Opening Price, and route a
number of contracts that will satisfy
interest at other markets at prices equal
to the Exchange Opening Price. This
provision is consistent with the Act
because it considers routing to away
markets potentially both at a better price
than the Exchange Opening Price as
well as at the Exchange Opening Price
to access as much liquidity as possible
to maximize the number of contracts
able to be traded as part of the Opening
Process. The Exchange routes at the
better of the Exchange’s Opening Price
or the order’s limit price to first ensure
the order’s limit price is not violated.
Routing away at the Exchange’s
Opening Price is intended to achieve the
best possible price available at the time
the order is received by the away
market.
Proposed Rule 701(j)(5), entitled
‘‘Forced Opening,’’ provides for the
situation where, as a last resort, in order
to open an options series when the
processes described above have not
resulted in an opening of the options
series. Under a Forced Opening, the
system will open the series executing as
many contracts as possible by routing to
away markets at prices better than the
Exchange Opening Price for their
disseminated size, trading available
contracts on the Exchange at the
Exchange Opening Price bounded by
OQR (without trading through the limit
price(s) of interest within OQR which is
unable to be fully executed at the
Opening Price). The system will also
route contracts to away markets at
prices equal to the Exchange Opening
Price at their disseminated size. In this
situation, the system will price any
contracts routed to away markets at the
better of the Exchange Opening Price or
the order’s limit price. Any unexecuted
contracts from the imbalance not traded
or routed will be cancelled back to the
entering participant if they remain
unexecuted and priced through the
Opening Price. The Exchange believes
that this process is consistent with the
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
96073
Act because after attempting to open by
soliciting interest on ISE Gemini and
considering other away market interest
and considering interest responding to
Imbalance Messages, the Exchange
could not otherwise locate a fair and
reasonable price with which to open
options series.
The Exchange’s proposal to
memorialize the manner in which
proposed rule will cancel and prioritize
interest provides certainty to market
participants as to the priority scheme
during the Opening Process.52 The
Exchange’s proposal to execute Market
Orders first and then Limit Orders is
consistent with the Act because these
orders have no specified price and Limit
Orders will be executed thereafter in
accordance with the prices specified
due to the nature of these order types.
This is consistent with the manner in
which these orders execute after the
opening today.
Finally, proposed Rule 701(l)
provides upon opening of the option
series, regardless of an execution, the
system dissemination of the price and
size of the Exchange’s BBO is consistent
with the Act because it clarifies the
manner in which the Exchange
establishes the BBO for purposes of
reference upon opening.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The proposal
does not change the intense competition
that exists among the options markets
for options business including on the
opening. Nor does the Exchange believe
that the proposal will impose any
burden on intra-market competition; the
Opening Process involves many types of
participants and interest.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
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
52 See
E:\FR\FM\29DEN1.SGM
proposed Rule 701(j)(6)(i) and (k).
29DEN1
96074
Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
ISEGemini–2016–18, and should be
submitted on or before January 19, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.53
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016–31491 Filed 12–28–16; 8:45 am]
BILLING CODE 8011–01–P
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:
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79670; File No. SR–IEX–
2016–22]
• 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–
ISEGemini–2016–18 on the subject line.
Self-Regulatory Organizations:
Investors Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Related to
Retention of Jurisdiction Over
Members and Persons Associated with
Members Upon Termination,
Revocation, or Cancellation of
Membership or Association Thereof
Paper Comments
December 22, 2016.
• 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–ISEGemini–2016–18. 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
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 on official business
days between the hours of 10:00 a.m.
and 3:00 p.m. Copies of such filing also
will be available for inspection and
copying at the principal offices of the
Exchange. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b-4 thereunder,3
notice is hereby given that, on December
16, 2016, the Investors Exchange LLC
(‘‘IEX’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Electronic Comments
VerDate Sep<11>2014
18:41 Dec 28, 2016
Jkt 241001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Pursuant to the provisions of Section
19(b)(1) under the Securities Exchange
Act of 1934 (‘‘Act’’),4 and Rule 19b-4
thereunder,5 Investors Exchange LLC
(‘‘IEX’’ or ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend Rule 2.230, which is currently
reserved, to specify the circumstances
under which the Exchange retains
disciplinary jurisdiction over a Member
or persons associated with a Member
upon termination, revocation, or
cancellation of membership or
association thereof. The Exchange has
designated this proposal as ‘‘non53 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
4 15 U.S.C. 78s(b)(1).
5 17 CRF 240.19b–4.
controversial’’ and provided the
Commission with the notice required by
Rule 19b–4(f)(6)(iii) under the Act.6
The text of the proposed rule change
is available at the Exchange’s Web site
at www.iextrading.com, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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 self-regulatory organization 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 the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
IEX proposes to amend Rule 2.230,
which is currently reserved, to specify
the circumstances under which the
Exchange retains disciplinary
jurisdiction over a Member or persons
associated with a Member upon
termination, revocation or cancellation
of membership or association thereof.
As a national securities exchange and
self-regulatory organization (‘‘SRO’’),
IEX is subject to several provisions of
the Act with respect to rule enforcement
and discipline of Members and persons
associated with Members. First, Section
6(b)(1) 7 of the Act requires the
Exchange to enforce compliance by its
members and persons associated with
its members with applicable provisions
of the Act, the rules and regulations
thereunder and Exchange rules. In
addition, Section 6(b)(6) 8 of the Act
requires that IEX rules must provide
that its members and persons associated
with its members shall be appropriately
disciplined for such violations of
applicable provisions of the Act, the
rules and regulations thereunder and
Exchange rules (i.e., rule violations).
And finally, Section 6(b)(7) 9 of the Act
provides that IEX rules must provide a
fair procedure for the disciplining of
1 15
PO 00000
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Fmt 4703
Sfmt 4703
6 17
CFR 240.19b–4(f)(6)(iii).
U.S.C. 78f(b)(1).
8 15 U.S.C. 78f(b)(6).
9 15 U.S.C. 78f(b)(7).
7 15
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29DEN1
]]>Agencies
[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Notices]
[Pages 96062-96074]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31491]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79679; File No. SR-ISEGemini-2016-18]
Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing
of Proposed Rule Change To Amend the Opening Process
December 22, 2016.
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 December 16, 2016, ISE Gemini, LLC (``ISE Gemini'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
[[Page 96063]]
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend the opening process.
The text of the proposed rule change is available on the Exchange's
Web site at www.ise.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and the
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this rule change is to amend the ISE Gemini opening
process in connection with a technology migration to a Nasdaq, Inc.
(``Nasdaq'') supported architecture. INET is the proprietary core
technology utilized across Nasdaq's global markets and utilized on The
NASDAQ Options Market LLC (``NOM''), NASDAQ PHLX LLC (``Phlx'') and
NASDAQ BX, Inc. (``BX'') (collectively ``Nasdaq Exchanges''). The
migration of ISE Gemini to the Nasdaq INET architecture would result in
higher performance, scalability, and more robust architecture. With
this system migration, the Exchange intends to adopt the Phlx opening
process.
The Exchange intends to begin implementation of the proposed rule
change in Q1 2017. The migration will be on a symbol by symbol basis,
and the Exchange will issue an alert to Members to provide notification
of the symbols that will migrate and the relevant dates.
Generally
With the re-platform, the Exchange will now be built on the Nasdaq
INET architecture, which allows certain trading system functionality to
be performed in parallel. The Exchange believes that this architecture
change will improve the Member experience by reducing overall latency
compared to the current ISE Gemini system because of the manner in
which the system is segregated into component parts to handle
processing.
Opening Rotation
ISE Gemini will replace its current opening process at Rule 701
with Phlx's Opening Process.\3\ The Exchange believes that the proposed
opening process will provide a similar experience for Members and
investors that trade on ISE Gemini to the experience that they receive
on Phlx today.
---------------------------------------------------------------------------
\3\ See Phlx Rule 1017. See also Securities Exchange Act Release
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2017-79) (notice of Filing of Partial Amendment No. 2 and Order
Granting Approval of a Proposed Rule Change, as Modified by Partial
Amendment No. 2, to Amend PHLX Rule 1017, Openings in Options).
---------------------------------------------------------------------------
Current Opening Process
Today, for each class of options that has been approved for
trading, the opening rotation is conducted by the Primary Market Maker
(``PMM'') appointed to such class of options pursuant to ISE Gemini
Rule 701(b)(1). The Exchange may direct that one or more trading
rotations be employed on any business day to aid in producing a fair
and orderly market pursuant to ISE Gemini Rule 701(a)(1). For each
rotation so employed, except as the Exchange may direct, rotations are
conducted in the order and manner the PMM determines to be appropriate
under the circumstances pursuant to ISE Gemini Rule 701(a)(2). The PMM,
with the approval of the Exchange, has the authority to determine the
rotation order and manner and may also employ multiple trading
rotations simultaneously pursuant to ISE Gemini Rule 701(a)(3).
Trading rotations are employed at the opening of the Exchange each
business day and during the reopening of the market after a trading
halt pursuant to ISE Gemini Rule 701(b). The opening rotation in each
class of options is held promptly following the opening of the market
for the underlying security.\4\ The opening rotation for options
contracts in an underlying security is delayed until the market for
such underlying security has opened unless the Exchange determines that
the interests of a fair and orderly market are best served by opening
trading in the options contracts pursuant to ISE Gemini Rule 701(b)(3).
---------------------------------------------------------------------------
\4\ The ``market for the underlying security'' is either the
primary listing market, the primary volume market (defined as the
market with the most liquidity in that underlying security for the
previous two calendar months), or the first market to open the
underlying security, as determined by the Exchange on an issue-by-
issue basis. See ISE Gemini Rule 701(b)(2).
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Market Makers on ISE Gemini are held to quoting obligations as
outlined in ISE Gemini Rule 803. Further, Market Makers quotes prior to
the opening rotation, including PMM quotes, are permitted with spread
differential of no more than $0.25 between the bid and offer for each
options contract for which the bid is less than $2, no more than $0.40
where the bid is at least $2 but does not exceed $5, no more than $0.50
where the bid is more than $5 but does not exceed $10, no more than
$0.80 where the bid is more than $10 but does not exceed $20, and no
more than $1 where the bid is $20 or greater, provided that the
Exchange may establish differences other than the above for one or more
options series, as specified in ISE Gemini Rule 803(b)(4). These
differentials are defined as Valid Width Quotes for purposes of this
rule proposal.
The PMM appointed to an option class can initiate the rotation
process by sending a rotation request to the Exchange or by authorizing
the Exchange to auto-rotate the class. In addition, there are instances
where the PMM is unable to initiate the rotation process. In such
instances the Exchange may initiate the rotation process by using the
Exchange's ``Delayed Opening Process,'' which provides an alternative
method for opening an option class when the PMM is unable to initiate
the rotation process.\5\ Once the PMM or Exchange initiates the opening
rotation, the Exchange will automatically process displayed quotes and
orders via a process that determines the price at which the maximum
number of contracts can trade within certain established boundary
prices. In order to protect interest from trading at bad prices, quotes
and orders are not executed outside of the established boundary prices.
If there are no quotes or orders that lock or cross each other, the
Exchange will open a series by disseminating the Exchange's best bid
and offer among quotes and orders under certain conditions.
---------------------------------------------------------------------------
\5\ Certain conditions must be met for the Delayed Opening
Process to be used to initiate the opening process.
---------------------------------------------------------------------------
The Exchange proposes to replace this process with an opening
process similar to a recently approved Phlx opening process as noted
above.\6\
---------------------------------------------------------------------------
\6\ See note 3 above.
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Opening Process
The Exchange will adopt a ``Definitions'' section at proposed ISE
Gemini Rule 701(a), similar to Phlx Rule
[[Page 96064]]
1017(a), to define several terms that are used throughout the opening
rule. Similar to today, the Exchange will conduct an electronic opening
for all option series traded on the Exchange using its trading system
(hereinafter ``system'').
The Exchange proposes to define the following terms, which are
described below: ``ABBO,'' ``market for the underlying security,''
``Opening Price,'' ``Opening Process,'' ``Pre-Market BBO,'' ``Potential
Opening Price,'' ``Quality Opening Market,'' ``Valid Width Quote,'' and
``Zero Bid Market.''
The Exchange proposes to define ``Opening Process'' at proposed
Rule 701(a)(4) by cross-referencing proposed Rule 701(c). The Exchange
proposes to define ``Opening Price'' at proposed Rule 701(a)(3) by
cross-referencing proposed Rule 701(h) and (j). The Exchange proposes
to define ``Potential Opening Price'' at proposed Rule 701(a)(5) by
cross-referencing proposed Rule 701(g). The Exchange proposes to define
``ABBO'' at proposed Rule 701(a)(1) as the Away Best Bid or Offer. The
ABBO does not include ISE Gemini's market. The Exchange proposes to
define ``market for the underlying security'' at proposed Rule
702(a)(2) as either the primary listing market or the primary volume
market (defined as the market with the most liquidity in that
underlying security for the previous two calendar months), as
determined by the Exchange by underlying and announced to the
membership on the Exchange's Web site.\7\ The Exchange notes that the
term ``Market Makers'' is currently defined in ISE Gemini Rule
100(a)(25) as referring to Primary Market Makers or ``PMMs'' and
Competitive Market Makers or ``CMMs,'' collectively. The next
definition is ``Pre-Market BBO'' defined at proposed Rule 701(a)(6) as
the highest bid and the lowest offer among Valid Width Quotes.\8\ The
term ``Quality Opening Market'' is defined at proposed Rule 701(a)(7)
as a bid/ask differential applicable to the best bid and offer from all
Valid Width Quotes defined in a table to be determined by the Exchange
and published on the Exchange's Web site.\9\ This calculation of
Quality Opening Market is based on the best bid and offer of Valid
Width Quotes. The differential between the best bid and offer are
compared to reach this determination. The allowable differential, as
determined by the Exchange, takes into account the type of security
(for example, Penny Pilot versus non-Penny Pilot issue), volatility,
option premium, and liquidity. The Exchange utilizes its experience
with products to make this determination. Next, a ``Valid Width Quote''
is defined at proposed Rule 701(a)(8) as a two-sided electronic
quotation submitted by a Market Maker that consists of a bid/ask
differential that is compliant with Rule 803(b)(4). The term ``Zero Bid
Market'' is defined at proposed 701(a)(9) where the best bid for an
options series is zero. The Exchange believes that these definitions
will bring additional clarity to the proposed rule.
---------------------------------------------------------------------------
\7\ Today, all are the primary listing market. The Exchange
would consider switching to primary volume market if a different
market begins to trade more volume than the primary listing market
and the primary volume market becomes a more reliable source of
prices with more liquidity.
\8\ Valid Width Quotes is defined at proposed Rule 701(a)(8).
\9\ Phlx maintains a table on its Web site with this
information. See https://www.nasdaqtrader.com/content/phlxxl/phlxiisys_overview.pdf. ISE Gemini will publish similar details on
its Web site.
---------------------------------------------------------------------------
Eligible Interest
The first part of the Opening Process determines what constitutes
eligible interest. The Exchange proposes to adopt in proposed paragraph
(b) of Rule 701 a provision that eligible opening interest includes:
(i) Valid Width Quotes; (ii) Opening Sweeps; and (iii) orders. Market
Makers may submit quotes,\10\ Opening Sweeps and orders, but quotes
other than Valid Width Quotes will not be included in the Opening
Process. All-or-None Orders \11\ that can be satisfied, and the
displayed and non-displayed portions of Reserve Orders are considered
for execution and in determining the Opening Price throughout the
Opening Process.
---------------------------------------------------------------------------
\10\ The term quotes shall refer to a two-sided quote.
\11\ An All-or-None Order is a Limit or Market Order that is to
be executed in its entirety or not at all. See ISE Gemini Rule
715(c). If the contingency of the size could not be satisfied the
All-or-None Order will not be considered in the Opening Process.
---------------------------------------------------------------------------
The Exchange notes that Opening Sweeps may be submitted through the
new Specialized Quote Feed or ``SQF'' protocol which permits one-sided
orders to be entered by a Market Maker. Today, orders are entered by
all participants through FIX and/or DTI on ISE Gemini. After the re-
platform [sic] the INET architecture, all participants will continue to
be able to submit orders through FIX, however, DTI will no longer be
available. An Opening Sweep is a Market Maker order submitted for
execution against eligible interest in the system during the Opening
Process.\12\ It is similar to an Opening Only Order \13\ that can be
entered for the opening rotation only and any portion of the order that
is not executed during the opening rotation is cancelled. However, it
should also be noted that an Opening Sweep may only be submitted by a
Market Maker when he/she has a Valid Width Quote in the affected series
whereas, there is no such restriction on Opening Only Orders. Since the
protocol over which an Opening Sweep is submitted is used for Market
Maker quoting, the acceptance of an Opening Sweep was structured to
rely on the Valid Width Quote. If a Market Maker does not want to
submit or is unable to maintain a Valid Width Quote, the Market Maker
can submit Opening Only Order instead.
---------------------------------------------------------------------------
\12\ See proposed ISE Gemini Rule 715(t).
\13\ See ISE Gemini Rule 715(o).
---------------------------------------------------------------------------
Opening Sweep
Proposed Rule 701(b)(1)(i) provides that a Market Maker assigned in
a particular option may only submit an Opening Sweep if, at the time of
entry of the Opening Sweep, that Market Maker has already submitted and
maintains a Valid Width Quote. All Opening Sweeps in the affected
series entered by a Market Maker will be cancelled immediately if that
Market Maker fails to maintain a continuous quote with a Valid Width
Quote in the affected series. Opening Sweeps may be entered at any
price with a minimum price variation applicable to the affected series,
on either side of the market, at single or multiple price level(s), and
may be cancelled and re-entered. A single Market Maker may enter
multiple Opening Sweeps, with each Opening Sweep at a different price
level. If a Market Maker submits multiple Opening Sweeps, the system
will consider only the most recent Opening Sweep at each price level
submitted by such Market Maker in determining the Opening Price.
Unexecuted Opening Sweeps will be cancelled once the affected series is
open.\14\
---------------------------------------------------------------------------
\14\ See proposed ISE Gemini Rule 701(b)(1)(ii). See also
proposed ISE Gemini Rule 715(t).
---------------------------------------------------------------------------
Proposed Rule 701(b)(2) states that the system will aggregate the
size of all eligible interest for a particular participant category
\15\ at a particular price level for trade allocation purposes pursuant
to ISE Gemini Rule 713. Eligible interest may be submitted into ISE
Gemini's system and will be received starting at the times noted
herein. Proposed Rule 701(c) provides that Market Maker Valid Width
Quotes and Opening Sweeps received starting at 9:25 a.m. Eastern Time,
or 7:25 a.m.
[[Page 96065]]
Eastern Time for U.S. dollar-settled foreign currency options, are
included in the Opening Process.\16\ Orders entered at any time before
an option series opens are included in the Opening Process. Orders may
be entered at any time before an options series opens and are included
in the Opening Process. This proposed language adds specificity to the
rule regarding the submission of orders. The 9:25 a.m. Eastern Time and
7:25 a.m. Eastern Time triggers are intended to tie the option Opening
Process to quoting in the underlying security; \17\ it presumes that
option quotes submitted before any indicative quotes have been
disseminated for the underlying security may not be reliable or
intentional. Therefore, the Exchange has chosen a reasonable timeframe
at which to begin utilizing option quotes, based on the Exchange's
experience when underlying quotes start becoming available.
---------------------------------------------------------------------------
\15\ ISE Gemini allocates first to Priority Customers and then
to all other Members by pro-rata. This is different from Phlx which
allocates to Customers first, then to market makers pro-rata and
then to all others pro-rata. See ISE Gemini Rule 713 and Phlx Rule
1014(g)(vii).
\16\ The timing is different to open U.S. dollar-settled foreign
currency options because these options normally open earlier in the
day on ISE Gemini as compared to other option series which open in
the day at 9:30 a.m. Eastern Time . These times are not being
amended. See ISE Rule 2008 (the rules contained in ISE Chapter 22
are incorporated by reference into ISE Gemini Chapter 22), for
transactions in options on a Foreign Currency Index may be effected
on the Exchange between the hours of 7:30 a.m. Eastern Time and 4:15
p.m. Eastern Time.
\17\ For purposes of this rule, the underlying security can also
be an index.
---------------------------------------------------------------------------
Proposed Rule 701(c)(1) describes when the Opening Process can
begin with specific time-related triggers. The proposed rule provides
that the Opening Process for an option series will be conducted
pursuant to proposed Rule 701(f) though (j) on or after 9:30 a.m.
Eastern Time, or on or after 7:30 a.m. Eastern Time for U.S. dollar-
settled foreign currency options, if: The ABBO, if any is not crossed
and the system has received, within two minutes (or such shorter time
as determined by the Exchange and disseminated to membership on the
Exchange's Web site) of the opening trade or quote on the market for
the underlying security in the case of equity options or, in the case
of index options, within two minutes of the receipt of the opening
price in the underlying index (or such shorter time as determined by
the Exchange and disseminated to membership on the Exchange's Web
site), or within two minutes of market opening for the underlying
security in the case of U.S. dollar-settled foreign currency options
(or such shorter time as determined by the Exchange and disseminated to
membership on the Exchange's Web site) \18\ any of the following: (i)
The PMM's Valid Width Quote; (ii) the Valid Width Quotes of at least
two CMMs; or (iii) if neither the PMM's Valid Width Quote nor the Valid
Width Quotes of two CMMs have been submitted within such timeframe, one
CMM has submitted a Valid Width Quote.\19\ These three requirements are
intended to tie the option Opening Process to receipt of liquidity. If
one of the above three conditions are not met, the Exchange will not
initiate the Opening Process or continue an ongoing Opening Process if
we do not have one of the three conditions (i, ii or iii); thus, a
Forced Opening pursuant to proposed Rule 701(j)(5) could not occur.
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\18\ The Exchange anticipates initially setting the timeframe
during which a PMM Valid Width quote or the presence of at least two
CMM Valid Width Quotes will initiate the Opening Process at 30
seconds. The timeframe is consistent with the current timeframe
utilized on Phlx. The Exchange believes 30 seconds is the
appropriate amount of time as it provides time for the PMM and CMMs
to assess the underlying security or index price and submit Valid
Width Quotes as well as ample time for the underlying security or
index price to stabilize. After this 30 second period, the Exchange
will initiate the Opening Process provided one CMM has submitted a
Valid Width Quote since the market for the underlying security or
index has had opportunity to stability. The Exchange may reduce this
timeframe if it is determined that the Opening Process is taking
longer to initiate than the marketplace expects. The Exchange will
provide notice of the initial setting to Members. The Exchange will
provide notice of the shorter time period to Members if the Exchange
determines to reduce the timeframe.
\19\ See proposed Rule 701(c)(1)(i)-(iii).
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The Exchange is proposing to state in proposed Rule 701(c)(2) that
the underlying security, including indexes, must be open on the primary
market for a certain time period for all options to be determined by
the Exchange for the Opening Process to commence. The Exchange is
proposing that the time period be no less than 100 milliseconds and no
more than 5 seconds.\20\ This proposal is intended to permit the price
of the underlying security to settle down and not flicker back and
forth among prices after its opening. It is common for a stock to
fluctuate in price immediately upon opening; such volatility reflects a
natural uncertainty about the ultimate Opening Price, while the buy and
sell interest is matched. The Exchange is proposing a range of no less
than 100 milliseconds and no more than 5 seconds in order to ensure
that it has the ability to adjust the period for which the underlying
security must be open on the primary market. The Exchange may determine
that in periods of high/low volatility that allowing the underlying to
be open for a longer/shorter period of time may help to ensure more
stability in the marketplace prior to initiating the Opening Process.
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\20\ The Phlx Opening Process is set at 100 milliseconds. The
Exchange believes that 100 milliseconds is the appropriate amount of
time given the experience with the Phlx market. The Exchange would
set the timer for ISE Gemini initially at 100 milliseconds. The
Exchange will issue a notice to provide the initial setting and
would thereafter issue a notice if it were to change the timing,
which may be between 100 milliseconds and 5 seconds. If the Exchange
were to select a time not between 100 milliseconds and 5 seconds it
would be required to file a rule proposal with the Commission.
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Proposed Rule 701(c)(3) states that the PMM assigned in a
particular equity option must enter a Valid Width Quote not later than
one minute following the dissemination of a quote or trade by the
market for the underlying security or, in the case of index options,
following the receipt of the opening price in the underlying index. The
PMM assigned in a particular U.S. dollar-settled foreign currency
option must enter a Valid Width Quote not later than one minute after
the announced market opening. Furthermore, a CMM that submits a quote
pursuant to proposed Rule 701 in any option series when the PMM's quote
has not been submitted shall be required to submit continuous, two-
sided quotes \21\ in such option series until such time as the PMM
submits his/her quote, after which the Market Maker that submitted such
quote shall be obligated to submit quotations pursuant to Rule 804(e).
The Opening Process will stop and an option series will not open if the
ABBO becomes crossed or a Valid Width Quote(s) pursuant to proposed
Rule 701(c)(1) is no longer present. Once each of these conditions no
longer exists, the Opening Process in the affected option series will
start again pursuant to proposed Rule 701(e)-(j) as proposed in Rule
701(c)(4). All eligible opening interest will continue to be considered
during the Opening Process when the process is re-started. The proposed
rule reflects that the ABBO cannot be crossed because it is indicative
of uncertainty in the marketplace of where the option series should be
valued. In this case, the Exchange will wait for the ABBO to become
uncrossed before initiating the Opening Process to ensure that there is
stability in the marketplace in order to assist the Exchange in
determining the Opening Price.
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\21\ The Exchange has regulatory surveillances in place with
respect to Market Maker continuous quoting obligations both at the
opening and during the other trading sessions. See ISE Gemini Rule
804 regarding quoting obligations.
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Reopening After a Trading Halt
This section is intended to provide information regarding the
manner in which a trading halt would impact the Opening Process.
Proposed Rule 701(d) states that the procedure described in this Rule
may be used to reopen an
[[Page 96066]]
option after a trading halt. The Exchange is adding that if there is a
trading halt or pause in the underlying security, the Opening Process
will start again irrespective of the specific times listed in proposed
Rule 701(c)(1). This is because these times relate to the normal market
opening in the morning.
Opening With a BBO
This next section describes when the Exchange may open with a quote
on its market. Proposed Rule 701(e), ``Opening with a BBO (No Trade),''
provides that if there are no opening quotes or orders that lock or
cross each other and no routable orders locking or crossing the ABBO,
the system will open with an opening quote by disseminating the
Exchange's best bid and offer among quotes and orders (``BBO'') that
exist in the system at that time, unless all three of the following
conditions exist: (i) A Zero Bid Market; (ii) no ABBO; and (iii) no
Quality Opening Market. A Quality Opening Market is determined by
reviewing all Valid Width Quotes and determining if the difference of
the best bid of those Valid Width Quotes and the best offer of those
Valid Width Quotes are of no more than a certain width.\22\ The
Exchange utilizes the quotes to assist in determining a fair and
reasonable Opening Price. Quotes are utilized because Members are
obligated to provide both a bid and sell price, providing a reasonable
baseline of where the marketplace views fair value.
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\22\ Phlx maintains a table on its Web site with this
information. See https://www.nasdaqtrader.com/content/phlxxl/phlxiisys_overview.pdf. ISE Gemini will publish similar details on
its Web site.
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If all three of these conditions exist, the Exchange will calculate
an Opening Quote Range pursuant to paragraph (i) and conduct the Price
Discovery Mechanism or ``PDM'' pursuant to paragraph (j). The Exchange
believes that when all three of these conditions exist, further price
discovery is warranted to validate or perhaps update the Potential
Opening Price and to attract additional interest to perhaps render an
opening trade possible, because: (i) A Zero Bid Market reflects a lack
of buying interest that could benefit from price discovery; (ii) the
lack of an ABBO means there is no external check on the Exchange's
market for that options series; and (iii) the lack of a Quality Opening
Market indicates that the Exchange's market is wide. If no quotes or
orders lock/cross each other, nothing matches and there can be no
trade. The Exchange believes that when these conditions exist, it is
difficult to arrive at a reasonable and expected price. If the
provisions in proposed Rule 701(e)(i) through (iii) exist, an Opening
Quote Range is calculated pursuant to proposed Rule 701(i) and
thereafter, the PDM in proposed Rule 701(j) will initiate.\23\
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\23\ OQR and PDM processes may also initiate pursuant to
proposed Rule 701(h).
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Further Opening Processes
If an opening did not occur pursuant to proposed Rule 701(e) and
there are opening Valid Width Quotes, or orders, that lock or cross
each other, the system will calculate the Pre-Market BBO.\24\
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\24\ See proposed Rule 701(f).
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Proposed Rule 701(g) describes the general concept of how the
system calculates the Potential Opening Price under all circumstances
once the Opening Process is triggered. Specifically, the system will
take into consideration all Valid Width Quotes, Opening Sweeps and
orders (except All-or-None Orders that cannot be satisfied and
displayed and non-displayed portions of Reserve Orders) for the option
series and identify the price at which the maximum number of contracts
can trade (``maximum quantity criterion''). Proposed Rule 701(h)(3)(i)
and proposed Rule 701(i) at paragraphs (5) through (7) contain
additional provisions related to Potential Opening Price which are
discussed in further detail herein. The proposal attempts to maximize
the number of contracts that can trade, and is intended to find the
most reasonable and suitable price, relying on the maximization to
reflect the best price.
Proposed Rule 701(g)(1) presents the scenario for more than one
Potential Opening Price. When two or more Potential Opening Prices
would satisfy the maximum quantity criterion and leave no contracts
unexecuted, the system takes the highest and lowest of those prices and
takes the mid-point; if such mid-point is not expressed as a permitted
minimum price variation, it will be rounded to the minimum price
variation that is closest to the closing price for the affected series
from the immediately prior trading session. If there is no closing
price from the immediately prior trading session, the system will round
up to the minimum price variation to determine the Opening Price.
If two or more Potential Opening Prices for the affected series
would satisfy the maximum quantity criterion and leave contracts
unexecuted, the Opening Price will be either the lowest executable bid
or highest executable offer of the largest sized side.\25\ This, again,
bases the Potential Opening Price on the maximum quantity that is
executable. The Potential Opening Price calculation is bounded by the
away market price that cannot be satisfied with the Exchange routable
interest.\26\ The Exchange does not open with a trade that trades
through another market. This process, importantly, breaks a tie by
considering the largest sized side and away markets, which are relevant
to determining a fair Opening Price.
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\25\ See proposed Rule 701(g)(2).
\26\ See proposed Rule 701(g)(3).
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The system applies certain boundaries to the Potential Opening
Price to help ensure that the price is a reasonable one by identifying
the quality of that price; if a well-defined, fair price can be found
within these boundaries, the option series can open at that price
without going through a further PDM. Proposed Rule 701(h), ``Opening
with Trade,'' provides the Exchange will open the option series for
trading with a trade of Exchange interest only at the Opening Price, if
certain conditions described below take place. The first condition is
provided in proposed Rule 701(h)(1), the Potential Opening Price is at
or within the best of the Pre-Market BBO and the ABBO. The second
condition is provided for in Rule 701(h)(2), the Potential Opening
Price is at or within the non-zero bid ABBO if the Pre-Market BBO is
crossed. The third provision is provided for in proposed Rule
701(h)(3), where there is no ABBO, the Potential Opening Price is at or
within the Pre-Market BBO which is also a Quality Opening Market.
These boundaries serve to validate the quality of the Opening
Price. Proposed Rule 701(h) provides that the Exchange will open with a
trade as long as it is within the defined boundaries regardless of any
imbalance. The Exchange believes that since the Opening Price can be
determined within a well-defined boundary and not trading through other
markets, it is fair to open the market immediately with a trade and to
have the remaining interest available to be executed in the displayed
market. Using a boundary-based price counterbalances opening faster at
a less bounded and perhaps less expected price and reduces the
possibility of leaving an imbalance.
Proposed Rule 701(h)(3)(i) provides that if there is more than one
Potential Opening Price which meets the conditions set forth in
proposed Rule 701(h)(1), (2) or (3), where (A) no contracts would be
left unexecuted and (B) any value used for the mid-point calculation
(which is described in proposed Rule 701(g)) would cross either: (I)
The Pre-Market BBO or (II) the
[[Page 96067]]
ABBO, then the Exchange will open the option series for trading with an
execution and use the best price which the Potential Opening Price
crosses as a boundary price for the purpose of the mid-point
calculation. If these aforementioned conditions are not met, an Opening
Quote Range is calculated as described in proposed Rule 701(i) and the
PDM, described in proposed Rule 701(j), would commence. The proposed
rule explains the boundary as well as the price basis for the mid-point
calculation for immediate opening with a trade, which improves the
detail included in the rule. The Exchange believes that this process is
logical because it seeks to select a fair and balanced price.
Proposed Rule 701(i) provides that the system will calculate an
Opening Quote Range (``OQR'') for a particular option series that will
be utilized in the PDM if the Exchange has not opened subject to any of
the provisions described above. Provided the Exchange has been unable
to open the option series under Rule 701(e) or (h), the OQR would
broaden the range of prices at which the Exchange may open. This would
allow additional interest to be eligible for consideration in the
Opening Process. The OQR is an additional type of boundary beyond the
boundaries mentioned in proposed Rule 701(g) and (h). OQR is intended
to limit the Opening Price to a reasonable, middle ground price and
thus reduce the potential for erroneous trades during the Opening
Process. Although the Exchange applies other boundaries such as the
BBO, the OQR provides a range of prices that may be able to satisfy
additional contracts while still ensuring a reasonable Opening Price.
The Exchange seeks to execute as much volume as is possible at the
Opening Price.
Specifically, to determine the minimum value for the OQR, an
amount, as defined in a table to be determined by the Exchange,\27\
will be subtracted from the highest quote bid among Valid Width Quotes
on the Exchange and on the away market(s), if any, except as provided
in proposed Rule 701(i) paragraphs (3) and (4). To determine the
maximum value for the OQR, an amount, as defined in a table to be
determined by the Exchange, will be added to the lowest quote offer
among Valid Width Quotes on the Exchange and on the away market(s), if
any, except as provided in proposed Rule 701(i) paragraphs (3) and
(4).\28\ However, if one or more away markets are collectively
disseminating a BBO that is not crossed, and there are Valid Width
Quotes on the Exchange that cross each other or that cross the away
market ABBO, then the minimum value for the OQR will be the highest
away bid.\29\ In addition, the maximum value for the OQR will be the
lowest away offer.\30\ And if, however, there are opening quotes on the
Exchange that cross each other, and there is no away market in the
affected option series, the minimum value for the OQR will be the
lowest quote bid among Valid Width Quotes on the Exchange, and the
maximum value for the OQR will be the highest quote offer among Valid
Width Quotes on the Exchange.\31\
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\27\ See note 22 above.
\28\ See proposed Rule 701(i)(2).
\29\ See proposed Rule 701(i)(3)(i).
\30\ See proposed Rule 701(i)(3)(ii).
\31\ See proposed Rule 701(i)(4)(i) and (ii).
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If there is more than one Potential Opening Price possible where no
contracts would be left unexecuted, any price used for the mid-point
calculation (which is described in proposed Rule 701(g)(1)) that is
outside of the OQR will be restricted to the OQR price on that side of
the market for the purposes of the mid-point calculation. Rule
701(i)(5) continues the theme of relying on both maximizing executions
and looking at the correct side of the market to determine a fair
price.
Proposed Rule 701(i)(6) deals with the situation where there is an
away market price involved. If there is more than one Potential Opening
Price possible where no contracts would be left unexecuted and the
price used for the mid-point calculation (which is described in
proposed Rule 701(g)(1)) is an away market price, pursuant to proposed
Rule 701(g)(3), when contracts will be routed, the system will use the
away market price as the Potential Opening Price. The Exchange is
seeking to execute the maximum amount of volume possible at the Opening
Price. The Exchange will enter into the Order Book any unfilled
interest at a price equal to or inferior to the Opening Price. It
should be noted, the Exchange will not trade through an away market.
Finally, proposed Rule 701(i)(7) provides if the Exchange
determined that non-routable interest can receive the maximum number of
Exchange interest, after routable interest has been determined by the
system to satisfy the away market, then the Potential Opening Price is
the price at which the maximum number of contracts can be executed,
excluding the interest which will be routed to an away market, which
may be executed on the Exchange as described in proposed Rule 701(g).
The system will route Public Customer interest in price/time priority
to satisfy the away market. This continues the theme of trying to
satisfy the maximum amount of interest during the Opening Process.
Price Discovery Mechanism
If the Exchange has not opened pursuant to proposed Rule 701(e) or
(h), and after the OQR is calculated pursuant to proposed Rule 701(i),
the Exchange will conduct a PDM pursuant to proposed Rule 701(j). The
PDM is the process by which the Exchange seeks to identify an Opening
Price having not been able to do so following the process outlined thus
far herein. The principles behind the PDM are, as described above, to
satisfy the maximum number of contracts possible by identifying a price
that may leave unexecuted contracts. However, the PDM applies a
proposed, wider boundary to identify the Opening Price and the PDM
involves seeking additional liquidity.
The Exchange believes that conducting the price discovery process
in these situations protects opening orders from receiving a random
price that does not reflect the totality of what is happening in the
markets on the opening and also further protects opening interest from
receiving a potentially erroneous execution price on the opening.
Opening immediately has the benefit of speed and certainty, but that
benefit must be weighed against the quality of the execution price and
whether orders were left unexecuted. The Exchange believes that the
proposed rule strikes an appropriate balance.
The proposed rule attempts to open using Exchange interest only to
determine an Opening Price, provided certain conditions contained in
proposed Rule 701(i) are present to ensure market participants receive
a quality execution in the opening. The proposed rule does not consider
away market liquidity for purposes of routing interest to other markets
until the PDM, rather the away market prices are considered for
purposes of avoiding trade-throughs. As a result, the Exchange might
open without routing if all of the conditions described above are met.
The Exchange believes that the benefit of this process is a more rapid
opening with quality execution prices.
Specifically, proposed Rule 701(j)(1) provides that the system will
broadcast an Imbalance Message for the affected series (which includes
the symbol, side of the imbalance (unmatched contracts), size of
matched contracts, size of the imbalance, and Potential Opening Price
bounded by the Pre-Market BBO) to participants, and begin an
``Imbalance
[[Page 96068]]
Timer,'' not to exceed three seconds. The Imbalance Timer would
initially be set 200 milliseconds.\32\ The Imbalance Message is
intended to attract additional liquidity, much like an auction, using
an auction message and timer.\33\ The Imbalance Timer would be for the
same number of seconds for all options traded on the Exchange. Pursuant
to this proposed rule, as described in more detail below, the Exchange
may have up to 4 Imbalance Messages which each run its own Imbalance
Timer.
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\32\ The Phlx timer is set at 200 milliseconds. The Exchange
will issue a notice to provide the initial setting and would
thereafter issue a notice if it were to change the timing. If the
Exchange were to select a time which exceeds 3 seconds it would be
required file a rule proposal with the Commission.
\33\ For example, see COOP and COLA descriptions in Phlx Rule
1098.
---------------------------------------------------------------------------
Proposed Rule 701(j)(2), states that any new interest received by
the system will update the Potential Opening Price. If during or at the
end of the Imbalance Timer, the Opening Price is at or within the OQR
the Imbalance Timer will end and the system will open with a trade at
the Opening Price if the executions consist of Exchange interest only
without trading through the ABBO and without trading through the limit
price(s) of interest within OQR which is unable to be fully executed at
the Opening Price. If no new interest comes in during the Imbalance
Timer and the Potential Opening Price is at or within OQR and does not
trade through the ABBO, the Exchange will open at the end of the
Imbalance Timer at the Potential Opening Price. This reflects that the
Exchange is seeking to identify a price on the Exchange without routing
away, yet which price may not trade through another market and the
quality of which is addressed by applying the OQR boundary.
Provided the option series has not opened pursuant to proposed Rule
701(j)(2),\34\ pursuant to proposed Rule 701(j)(3) the system will send
a second Imbalance Message with a Potential Opening Price that is
bounded by the OQR (without trading through the limit price(s) of
interest within OQR which is unable to be fully executed at the Opening
Price) and includes away market volume in the size of the imbalance to
participants; and concurrently initiate a Route Timer, not to exceed
one second.\35\ The Route Timer is intended to give Exchange users an
opportunity to respond to an Imbalance Message before any opening
interest is routed to away markets and, thereby, maximize trading on
the Exchange. If during the Route Timer, interest is received by the
system which would allow the Opening Price to be within OQR without
trading through away markets and without trading through the limit
price(s) of interest within OQR which is unable to be fully executed at
the Opening Price, the system will open with a trade at the Opening
Price and the Route Timer will simultaneously end. The system will
monitor quotes received during the Route Timer period and make ongoing
corresponding changes to the permitted OQR and Potential Opening Price
to reflect them.\36\ This proposal serves to widen the boundary of
available Opening Prices, which should similarly increase the
likelihood that an Opening Price can be determined. The Route Timer,
like the Imbalance Timer, is intended to permit responses to be
submitted and considered by the system in calculating the Potential
Opening Price. The system does not route away until the Route Timer
ends.
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\34\ The Exchange notes that the system would not open pursuant
to proposed Rule 701(j)(2) if the Potential Opening Price is outside
of the OQR or if the Potential Opening Price is at or within the
OQR, but would otherwise trade through the ABBO or through the limit
price(s) of interest within the OQR which is unable to be fully
executed at the Potential Opening Price.
\35\ The Route Timer would be a brief timer that operates as a
pause before an order is routed to an away market. Currently, the
Phlx Route Timer is set to one second. The ISE Gemini Route Timer
will also be initially set to one second. The Exchange will issue a
notice to Members to provide the initial setting and would
thereafter issue a notice to Members if it were to change the timing
within the range of up to one second. If the Exchange were to select
a time beyond one second it would be required file a rule proposal
with the Commission.
\36\ See proposed Rule 701(j)(3)(ii).
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Proposed Rule 701(j)(3)(iii) provides when the Route Timer expires,
if the Potential Opening Price is within OQR (without trading through
the limit price(s) of interest within OQR that is unable to be fully
executed at the Opening Price), the system will determine if the total
number of contracts displayed at better prices than the Exchange's
Potential Opening Price on away markets (``better priced away
contracts'') would satisfy the number of marketable contracts available
on the Exchange. This provision protects the unexecuted interest and
should result in a fairer price. The Exchange will open the option
series by routing and/or trading on the Exchange, pursuant to proposed
Rule 701(j)(3)(iii) paragraphs (A) through (C).
Proposed Rule 701(j)(3)(iii)(A) provides if the total number of
better priced away contracts would satisfy the number of marketable
contracts available on the Exchange on either the buy or sell side, the
system will route all marketable contracts on the Exchange to such
better priced away markets as Intermarket Sweep Order (``ISO'')
designated as Immediate-or-Cancel (``IOC'') order(s), and determine an
opening Best Bid or Offer (``BBO'') that reflects the interest
remaining on the Exchange. The system will price any contracts routed
to away markets at the Exchange's Opening Price or pursuant to proposed
Rule 701(j)(3)(iii)(B) or (C) described hereinafter. Routing away at
the Exchange's Opening Price is intended to achieve the best possible
price available at the time the order is received by the away market.
Proposed Rule 701(j)(3)(iii)(B) provides if the total number of
better priced away contracts would not satisfy the number of marketable
contracts the Exchange has, the system will determine how many
contracts it has available at the Exchange Opening Price. If the total
number of better priced away contracts plus the number of contracts
available at the Exchange Opening Price would satisfy the number of
marketable contracts on the Exchange on either the buy or sell side,
the system will contemporaneously route a number of contracts that will
satisfy interest at away markets at prices better than the Exchange
Opening Price, and trade available contracts on the Exchange at the
Exchange Opening Price. The system will price any contracts routed to
away markets at the better of the Exchange Opening Price or the order's
limit price pursuant to Rule 701(j)(vi)(C)(3)(ii). This continues with
the theme of maximum possible execution of the interest on the Exchange
or away markets.
Proposed Rule 701(j)(3)(iii)(C) provides if the total number of
better priced away contracts plus the number of contracts available at
the Exchange Opening Price plus the contracts available at away markets
at the Exchange Opening Price would satisfy the number of marketable
contracts the Exchange has on either the buy or sell side, the system
will contemporaneously route a number of contracts that will satisfy
interest at away markets at prices better than the Exchange Opening
Price (pricing any contracts routed to away markets at the better of
the Exchange Opening Price or the order's limit price), trade available
contracts on the Exchange at the Exchange Opening Price, and route a
number of contracts that will satisfy interest at other markets at
prices equal to the Exchange Opening Price. This provision is intended
to introduce routing to away markets potentially both at a better price
than the Exchange Opening Price as well as at the Exchange Opening
Price to access as much liquidity as possible to maximize
[[Page 96069]]
the number of contracts able to be traded as part of the Opening
Process. The Exchange routes at the better of the Exchange's Opening
Price or the order's limit price to first ensure the order's limit
price is not violated. Routing away at the Exchange's Opening Price is
intended to achieve the best possible price available at the time the
order is received by the away market.
Proposed Rule 701(j)(4) provides that the system may send up to two
additional Imbalance Messages \37\ (which may occur while the Route
Timer is operating) bounded by OQR and reflecting away market interest
in the volume. These boundaries are intended to assist in determining a
reasonable price at which an option series might open.
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\37\ The first two Imbalance Messages always occur if there is
interest which will route to an away market. If the Exchange is
thereafter unable to open at a price without trading through the
ABBO, up to two more Imbalance Messages may occur based on whether
or not the Exchange has been able to open before repeating the
Imbalance Process. The Exchange may open prior to the end of the
first two Imbalance Messages provided routing is not necessary.
---------------------------------------------------------------------------
This provision is proposed to further state that after the Route
Timer has expired, the processes in proposed Rule 701(j)(3) will repeat
(except no new Route Timer will be initiated). No new Route Timer is
initiated because the Exchange believes that after the Route Timer has
been initiated and subsequently expired, no further delay is needed
before routing contracts if at any point thereafter the Exchange is
able to satisfy the total number of marketable contracts the Exchange
has by executing on the Exchange and routing to other markets.
Proposed Rule 701(j)(5), entitled ``Forced Opening,'' will describe
what happens as a last resort in order to open an options series when
the processes described above have not resulted in an opening of the
options series. Under this process, called a Forced Opening, after all
additional Imbalance Messages have occurred pursuant to proposed Rule
701(j)(4), the system will open the series executing as many contracts
as possible by routing to away markets at prices better than the
Exchange Opening Price for their disseminated size, trading available
contracts on the Exchange at the Exchange Opening Price bounded by OQR
(without trading through the limit price(s) of interest within OQR
which is unable to be fully executed at the Opening Price). The system
will also route contracts to away markets at prices equal to the
Exchange Opening Price at their disseminated size. In this situation,
the system will price any contracts routed to away markets at the
better of the Exchange Opening Price or the order's limit price. Any
unexecuted contracts from the imbalance not traded or routed will be
cancelled back to the entering participant if they remain unexecuted
and priced through the Opening Price.
The boundaries of OQR and limit prices within the OQR are intended
to ensure a quality Opening Price as well as protect the unexecutable
interest entered with a limit price which may not be able to be fully
executed. There is some language in the Phlx rule that is not
applicable to the ISE Gemini opening because ISE Gemini does not have
automatic re-pricing of orders resting in the Rulebook. Phlx's rule
permits members to provide instructions to re-enter the remaining size
of an unexecuted order for automatic submission as a new order, the ISE
Gemini rule will not permit this submission.
Proposed Rule 701(j)(6) provides the system will execute orders at
the Opening Price that have contingencies (such as without limitation,
All-or-None and Reserve Orders) and non-routable orders such as ``Do-
Not-Route'' or ``DNR'' Orders,\38\ to the extent possible. The system
will only route non-contingency Public Customer orders, except that the
full volume of Public Customer Reserve Orders may route. The Exchange
is adding this detail to memorialize the manner in which the system
will execute orders at the opening. The Exchange desires to provide
certainty to market participants as to which contingency orders will
execute and which orders will route during the Opening Process.
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\38\ A Do-Not-Route order is a market or limit order that is to
be executed in whole or in part on the Exchange only. Due to prices
available on another options exchange (as provided in Chapter 19
(Order Protection; Locked and Crossed Markets)), any balance of a
do-not-route order that cannot be executed upon entry, or placed on
the Exchange's limit order book, will be automatically cancelled.
See Rule 715(m).
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Proposed Rule (j)(6)(i) provides the system will cancel (1) any
portion of a Do-Not-Route order that would otherwise have to be routed
to the exchange(s) disseminating the ABBO for an opening to occur, (2)
an All-or-None Order that is not executed during the opening and is
priced through the Opening Price or (3) any order that is priced
through the Opening Price. All other interest will remain in the system
and be eligible for trading after opening. The Exchange cancels these
orders since it lacks enough liquidity to satisfy these orders on the
opening yet their limit price gives the appearance that they should
have been executed. The Exchange believes that participants would
prefer to have these orders returned to them for further assessment
rather than have these orders immediately entered onto the order book
at a price which is more aggressive than the price at which the
Exchange opened.
Proposed Rule 701(k) provides during the opening of the option
series, where there is an execution possible, the system will give
priority to Market Orders \39\ first, then to resting Limit Orders \40\
and quotes. The allocation provisions of ISE Gemini Rule 713 and the
Supplementary Material to that rule apply with respect to other orders
and quotes with the same price. The Exchange is providing certainty to
market participants as to the priority scheme during the Opening
Process. Market Orders will be immediately executed first because these
orders have no specified price and Limit Orders will be executed
thereafter in accordance with the prices specified.
---------------------------------------------------------------------------
\39\ A Market Orders [sic] is defined as an order to buy or sell
a stated number of options contracts that is to be executed at the
best price obtainable when the order reaches the Exchange. See ISE
Gemini Rule 715(a).
\40\ A Limit Order is an order to buy or sell a stated number of
options contracts at a specified price or better. See ISE Gemini
Rule 715(b).
---------------------------------------------------------------------------
Finally, proposed Rule 701(l) provides upon opening of the option
series, regardless of an execution, the system disseminates the price
and size of the Exchange's best bid and offer (BBO).\41\ This provision
simply makes known the manner in which the Exchange establishes the BBO
for purposes of reference upon opening.
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\41\ See proposed Rule 701(j)(F) [sic].
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There are some differences between the Phlx and ISE Gemini rules.
ISE Gemini has a Reserve Order and Phlx does not have this order type.
With Reserve Orders, the displayed and non-displayed portions of
Reserve Orders are considered for execution and in determining the
Opening Price throughout the Opening Process. Today, ISE Gemini permits
orders to route during regular trading, however, the Exchange does not
perform away market routing during the opening rotation. With this
proposal, routing is considered during the Opening Process.
With respect to the Opening Sweep, the Exchange proposes to adopt
an order type at new Rule 715(t) entitled ``Opening Sweep.'' This order
type is proposed to be a Market Maker order submitted for execution
against eligible interest in the system during the Opening Process
pursuant to Rule 701(b)(i) [sic]. The Exchange believes that describing
this order type within
[[Page 96070]]
Rule 715 will provide clarity to the introduction of Opening Sweeps.
Opening Process Examples:
The following examples are intended to demonstrate the Opening
Process.
Example 1. Proposed Rule 701(e) Opening with an Exchange BBO (No
Trade). Suppose the PMM in an option enters a quote, 2.00 (100) bid and
2.10 (100) offer and a buy order to pay 2.05 for 10 contracts is
present in the system. The System also observes an ABBO is present with
CBOE quoting a spread of 2.05 (100) and 2.15 (100). Given the Exchange
has no interest which locks or crosses each other and does not cross
the ABBO, the option opens for trading with an Exchange BBO of 2.05
(10) x 2.10 (100) and no trade. Since there is an ABBO and no Zero Bid
Market, the System does not conduct the PDM and the option opens
without delay.
Example 2a. Proposed Rule 701(h) Opening with Trade. Suppose the
PMM enters the same quote in an option, 2.00 (100) bid and 2.10 (100)
offer. This quote defines the pre-market BBO. CBOE disseminates a quote
of 2.01 (100) by 2.09 (100), making up the ABBO. Firm A enters a buy
order at 2.04 for 50 contracts. Firm B enters a sell order at 2.04 for
50 contracts. The Exchange opens with the Firm A and Firm B orders
fully trading at an Opening Price of 2.04 which satisfies the condition
defined in proposed Rule 701(h)(i), the Potential Opening Price is at
or within the best of the Pre-Market BBO and the ABBO.
Example 2b. Proposed Rule 701(h) Opening with Trade. Similarly,
suppose the PMM enters the same quote in an option, 2.00 (100) bid and
2.10 (100) offer. A Market Maker enters a quote of 2.00 (100) x 2.12
(100). The pre-market BBO is therefore 2.00 bid and 2.10 offer. CBOE
disseminates a quote of 2.05 (100) by 2.15 (100), making up the ABBO.
Firm A enters a buy order at 2.11 for 300 contracts. Firm B enters a
sell order at 2.11 for 100 contracts. The option does not open for
trading because the Potential Opening Price of 2.11 does not satisfy
the condition defined in proposed Rule 701(h)(i), as the Potential
Opening Price is outside the Pre-Market BBO. The System thereafter
calculates the OQR and initiates the PDM, as discussed in proposed Rule
701(j), to facilitate the Opening Process for the option.
Example 3. Proposed Rule 701(j)(2) Price Discovery Mechanism and
first iteration. Assume the set up described in Example 2b and an
allowable OQR of 0.04. When the PDM is initiated, the System broadcasts
an Imbalance Message. At the end of the Imbalance Timer, the option
opens with an Opening Price of 2.11 because it is within OQR and the
ABBO. The maximum value for OQR is the lowest quote offer of 2.10 plus
0.04.
Example 4. Proposed Rule 701(j)(3) Price Discovery Mechanism and
second iteration with routing. Suppose the PMM enters a quote, 2.00
(100) bid and 2.10 (100) offer and the defined allowable OQR is 0.04.
If CBOE disseminates a quote of 2.00 (100) by 2.09 (100), the away
offer is better than the PMM quote. Customer A enters a routable buy
order at 2.10 for 150 contracts. The PDM initiates because the
Potential Opening Price (2.10) is equal to the Pre-Market BBO but
outside of the ABBO. The Potential Opening Price is 2.10 because there
is both buy and sell interest at that price point. The System is unable
to open after the first iteration of Imbalance since the Potential
Opening Price is within the OQR but outside of the ABBO. The System
proceeds with the PDM and initiates a Route Timer and broadcasts a
second Imbalance Message (assume no additional interest is received
during the imbalance period). The System opens the option for trading
after the Route Timer has expired and the Imbalance Timer has completed
since the Potential Opening Price is within OQR. The System routes 100
contracts of the Customer order to the better priced away offer at
CBOE. The Exchange would route to CBOE at an Opening Price of 2.10 to
execute against the interest at 2.09 on CBOE. The 50 options contracts
open and execute on the Exchange with an Opening Price of 2.10. The
Exchange routes to CBOE using the Exchange's Opening Price to ensure,
if there is market movement, that the routed order is able to access
any price point equal to or better than the Exchange's Opening Price.
Example 5. Proposed Rule 701(j)(5) Forced Opening. Suppose the PMM
enters a quote, 2.00 (100) bid and 2.10 (100) offer and the defined
allowable OQR is 0.04. A Market Maker enters a quote for 2.05 (100) x
2.14 (100). Firm A enters a buy order of 250 contracts for 2.15 which
is more aggressive than the expected OQR of 2.14. The PDM initiates
because the Potential Opening Price of 2.15 is outside the Pre-Market
BBO (2.05 x 2.10). Assume no additional interest is received during the
PDM. After the final Imbalance Timer, the System opens the option for
trading with an execution of 200 contracts at an Opening Price of 2.14,
which is the boundary of OQR. The residual 50 contracts from Firm A are
cancelled back to the participant because the limit order price of 2.15
is priced through the Opening Price of 2.14.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\42\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\43\ in particular, in that it is designed 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 the reasons stated below.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78f(b).
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange's proposal to adopt the Phlx Opening Process is
consistent with the Act because the new rule seeks to find the best
price. The proposal permits the price of the underlying security to
settle down and not flicker back and forth among prices after its
opening. It is common for a stock to fluctuate in price immediately
upon opening; such volatility reflects a natural uncertainty about the
ultimate Opening Price, while the buy and sell interest is matched. The
proposed rule provides for a range of no less than 100 milliseconds and
no more than 5 seconds in order to ensure that it has the ability to
adjust the period for which the underlying security must be open on the
primary market. The Exchange may determine that in periods of high/low
volatility that allowing the underlying to be open for a longer/shorter
period of time may help to ensure more stability in the marketplace
prior to initiating the Opening Process.
Definitions
The Exchange's proposal to adopt a ``Definitions'' section is
consistent with the Act because the terms will assist market
participants in understanding the meaning of terms used throughout the
proposed Rule. The Exchange added the definitions to provide clarity
and consistency throughout the proposed rule.
Eligible Interest
The first part of the Opening Process determines what constitutes
eligible interest. The Exchange's proposal seeks to make clear what
type of eligible opening interest is included. The Exchange notes that
Valid Width Quotes; Opening Sweeps; and orders are included. The
Exchange further notes that Market Makers may submit quotes, Opening
Sweeps and orders, but quotes other than Valid Width Quotes will not be
included in the Opening Process.
[[Page 96071]]
Finally, All-or-None Orders \44\ that can be satisfied, and the
displayed and non-displayed portions of Reserve Orders are considered
for execution and in determining the Opening Price throughout the
Opening Process. The Exchange believes that defining what qualifies as
eligible interest is consistent with the Act because market
participants will be provided with certainty when submitting interest
as to which type of interest will be considered in the Opening Process.
---------------------------------------------------------------------------
\44\ See note 11 above.
---------------------------------------------------------------------------
Opening Sweep
The Exchange believes that it is consistent with the Act to
introduce the concept of an Opening Sweep and memorialize this order
type within Rule 715(t). While the Opening Sweep is similar to an
Opening Only Order,\45\ it can be entered for the opening rotation only
and any portion of the order that is not executed during the opening
rotation is cancelled. An Opening Sweep may only be submitted by a
Market Maker when he/she has a Valid Width Quote in the affected series
\46\ whereas, there is no such restriction on Opening Only Orders. The
Exchange believes the addition of this order type is consistent with
the Act because it provides for a specific type of order that may be
entered during the Opening Process similar to Phlx for proposes [sic]
of qualifying as eligible interest. The Exchange notes that this order
type would be not valid outside of the opening in other trading
sessions. The Exchange is providing definitive rules that concern the
manner in which Opening Sweeps may be entered into the system. For
example, an Opening Sweep may be entered at any price with a minimum
price variation applicable to the affected series, on either side of
the market, at single or multiple price level(s), and may be cancelled
and re-entered. A single Market Maker may enter multiple Opening
Sweeps, with each Opening Sweep at a different price level. If a Market
Maker submits multiple Opening Sweeps, the system will consider only
the most recent Opening Sweep at each price level submitted by such
Market Maker. Unexecuted Opening Sweeps will be cancelled once the
affected series is open.\47\ The Exchange believes that the addition of
Opening Sweep will also provide certainty to market participants as to
the manner in which the system will handle such interest.
---------------------------------------------------------------------------
\45\ See ISE Gemini Rule 715(o).
\46\ All Opening Sweeps in the affected series entered by a
Market Maker will be cancelled immediately if that Market Maker
fails to maintain a continuous quote with a Valid Width Quote in the
affected series.
\47\ See proposed ISE Gemini Rule 701(b)(1)(ii). See also
proposed ISE Gemini Rule 715(t).
---------------------------------------------------------------------------
With respect to trade allocation, the proposal notes at Rule
701(b)(2) that the system will aggregate the size of all eligible
interest for a particular participant category \48\ at a particular
price level for trade allocation purposes pursuant to ISE Gemini Rule
713. The Exchange believes that this allocation is consistent with the
Act because it mirrors the current allocation process on ISE Gemini in
other trading sessions.
---------------------------------------------------------------------------
\48\ ISE Gemini allocates first to Priority Customers and then
to all other Members by pro-rata. This is different from Phlx which
allocates to Customers first, then to market makers pro-rata and
then to all others pro-rata. See ISE Gemini Rule 713 and Phlx Rule
1014(g)(vii).
---------------------------------------------------------------------------
The proposed rule notes the specific times that eligible interest
may be submitted into ISE Gemini's system. The Exchange's proposed
times for entering Market Maker Valid Width Quotes and Opening Sweeps
(9:25 a.m. Eastern Time) and U.S. dollar-settled foreign currency
options (7:25 a.m. Eastern Time) eligible to participate in the Opening
Process, are consistent with the Act because the times are intended to
tie the option Opening Process to quoting in the underlying
security;\49\ it presumes that option quotes submitted before any
indicative quotes have been disseminated for the underlying security
may not be reliable or intentional. The Exchange believes these times
represent a reasonable timeframe at which to begin utilizing option
quotes, based on the Exchange's experience when underlying quotes start
becoming available. This proposed language adds specificity to the rule
regarding the submission of orders.
---------------------------------------------------------------------------
\49\ For purposes of this rule, the underlying security can also
be an index.
---------------------------------------------------------------------------
The Exchange's proposal at Rule 701(c)(1) describes when the
Opening Process can begin with specific time-related triggers. The
proposed rule, which provides that the Opening Process for an option
series will be conducted on or after 9:30 a.m. Eastern Time, or on or
after 7:30 a.m. Eastern Time for U.S. dollar-settled foreign currency
options, provided the ABBO, if any, is not crossed and the system has
received within specified time periods certain specified interest,\50\
is consistent with the Act because this requirement is intended to tie
the option Opening Process to receipt of liquidity. If one of the above
three conditions specified in proposed Rule 701(c)(1)(i)-(iii) is not
met, the Exchange will not initiate the Opening Process or continue an
ongoing Opening Process. The Exchange's proposed rule considers the
liquidity present on its market before initiating other processes to
obtain additional pricing information. The Exchange's proposal to adopt
the Phlx Opening Process is consistent with the Act because the new
rule seeks to find the best price.
---------------------------------------------------------------------------
\50\ See proposed Rule 701(c)(1)(i)-(iii).
---------------------------------------------------------------------------
The Exchange's proposed rule considers the underlying security,
including indexes, which must be open on the primary market for a
certain time period for all options to be determined by the Exchange
for the Opening Process to commence. The Exchange proposes a time
period be no less than 100 milliseconds and no more than 5 seconds to
permit the price of the underlying security to settle down and not
flicker back and forth among prices after its opening. Since it is
common for a stock to fluctuate in price immediately upon opening, the
Exchange accounts for such volatility in its process. The volatility
reflects a natural uncertainty about the ultimate Opening Price, while
the buy and sell interest is matched. The Exchange's proposed range is
consistent with the Act because it ensures that it has the ability to
adjust the period for which the underlying security must be open on the
primary market. The Exchange may determine that in periods of high/low
volatility that allowing the underlying to be open for a longer/shorter
period of time may help to ensure more stability in the marketplace
prior to initiating the Opening Process.
The Exchange's proposal at Rule 701(c)(3) requires the PMM assigned
in a particular equity option to enter a Valid Width Quote not later
than one minute following the dissemination of a quote or trade by the
market for the underlying security or, in the case of index options,
following the receipt of the opening price in the underlying index. The
PMM assigned in a particular U.S. dollar-settled foreign currency
option must enter a Valid Width Quote also not later than one minute
after the announced market opening.
Furthermore, the Exchange proposes that a CMM that submits a quote
pursuant to proposed Rule 701 in any option series when the PMM's quote
has not been submitted shall be required to submit continuous, two-
sided quotes in such option series until such time as the PMM submits
his/her quote, after which the Market Maker that submitted such quote
shall be obligated to submit quotations pursuant to Rule 804(e). This
proposal is consistent with the Act because the Exchange will not open
if the ABBO becomes crossed or a Valid Width Quote(s) pursuant to
proposed Rule 701(c)(1) is no longer present.
[[Page 96072]]
Instead the process would restart and all eligible opening interest
will continue to be considered during the Opening Process when the
process is re-started. The Exchange's proposal is consistent with the
Act and promotes just and equitable principles of trade because the
rule reflects that the ABBO cannot be crossed because it is indicative
of uncertainty in the marketplace of where the option series should be
valued. The Exchange will wait for the ABBO to become uncrossed before
initiating the Opening Process to ensure that there is stability in the
marketplace in order to assist the Exchange in determining the Opening
Price.
Reopening After a Trading Halt
In order to provide certainty to market participants in the event
of a trading halt, the Exchange provides in its proposal information
regarding the manner in which a trading halt would impact the Opening
Process. Proposed Rule 701(d) provides if there is a trading halt or
pause in the underlying security, the Opening Process will start again
irrespective of the specific times listed in Rule 701(c)(1). The
Exchange's proposal to restart in the event of a trading halt is
consistent with the Act and promotes just and equitable principles of
trade because the proposed rule ensures that there is stability in the
marketplace in order to assist the Exchange in determining the Opening
Price.
Opening With a BBO
The Exchange's proposed rule accounts for a situation where there
are no opening quotes or orders that lock or cross each other and no
routable orders locking or crossing the ABBO. In this situation, the
system will open with an opening quote by disseminating the Exchange's
best bid and offer among quotes and orders (``BBO'') that exist in the
system at that time, unless all three of the following conditions
exist: (i) A Zero Bid Market; (ii) no ABBO; and (iii) no Quality
Opening Market.\51\ The Exchange utilizes the quotes to assist in
determining a fair and reasonable Opening Price, which is consistent
with the Act because Members are obligated to provide both a bid and
sell price. The Exchange believes that this measure provides a
reasonable baseline of where the marketplace views fair value.
---------------------------------------------------------------------------
\51\ The Exchange nots [sic] herein that a Quality Opening
Market is determined by reviewing all Valid Width Quotes and
determining if the difference of the best bid of those Valid Width
Quotes and the best offer of those Valid Width Quotes are of no more
than a certain width.
---------------------------------------------------------------------------
If all three of these conditions exist, the Exchange will calculate
an OQR pursuant to paragraph (i) and conduct the PDM pursuant to
paragraph (j). This approach is consistent with the Act because the
[sic] when all three of these conditions exist, further price discovery
is warranted to validate or perhaps update the Exchange's BBO and to
attract additional interest to perhaps render an opening trade
possible. The Exchange notes that a Zero Bid Market reflects a lack of
buying interest to assist in validating a reasonable opening BBO, the
lack of an ABBO means there is no external check on the Exchange's
market for that options series; and the lack of a Quality Opening
Market indicates that the Exchange's market is wide. For these reasons,
the Exchange believes that when these conditions exist, it is difficult
to determine if the Exchange BBO is reasonable and therefore an OQR is
calculated pursuant to proposed Rule 701(i) and thereafter, the PDM in
proposed Rule 701(j) will initiate.
The Exchange believes that [sic] proposed rule promotes just and
equitable principles of trade, because the proposed conditions
involving Zero Bid Markets, no ABBO and no Quality Opening Market
trigger the PDM rather than an immediate opening in order to validate
the Opening Price against away markets or by attracting additional
interest to address the specific condition. This is consistent with the
Act because it should avoid opening executions in very wide or unusual
markets where an opening execution price cannot be validated.
Further Opening Processes and Price Discovery Mechanism
The proposed rule promotes just and equitable principles of trade
because in arriving at the Potential Opening Price the rule considers
the maximum number of contracts that can be executed, which results in
a price that is logical and reasonable in light of away markets and
other interest present in the system. As noted herein, the Exchange's
Opening Price is bounded by the OQR without trading through the limit
price(s) of interest within OQR which is unable to fully execute at the
Opening Price in order to provide participants with assurance that
their orders will not be traded through. Although the Exchange applies
other boundaries such as the BBO, the OQR provides a range of prices
that may be able to satisfy additional contracts while still ensuring a
reasonable Opening Price. The Exchange seeks to execute as much volume
as is possible at the Opening Price. When choosing between multiple
Opening Prices when some contracts would remain unexecuted, using the
lowest bid or highest offer of the largest sized side of the market
promotes just and equitable principles of trade because it uses size as
a tie breaker. The Exchange's method for determining the Potential
Opening Price and Opening Price is consistent with the Act because the
proposed process seeks to discover a reasonable price and considers
both interest present in ISE Gemini's system as well as away market
interest. The Exchange's method seeks to validate the Opening Price and
avoid opening at aberrant prices. The rule provides for opening with a
trade, which is consistent with the Act because it enables an immediate
opening to occur within a certain boundary without need for the price
discovery process. The boundary provides protections while still
ensuring a reasonable Opening Price.
The proposed rule considers more than one Potential Opening Price,
which is consistent with the Act because it forces the Potential
Opening Price to fall within the OQR boundary, thereby providing price
protection. Specifically, the mid-point calculation balances the price
among interest participating in the Opening when there is more than one
price at which the maximum number of contracts could execute. Limiting
the mid-point calculation to the OQR when a price would otherwise fall
outside of the OQR ensures the final mid-point price will be within the
protective OQR boundary. If there is more than one Potential Opening
Price possible where no contracts would be left unexecuted and any
price used for the mid-point calculation is an away market price when
contracts will be routed, the system will use the away market price as
the Potential Opening Price.
The PDM reflects what is generally known as an imbalance process
and is intended to attract liquidity to improve the price at which an
option series will open as well as to maximize the number of contracts
that can be executed on the opening. This process will only occur of
the Exchange has not been able to otherwise open an option series
utilizing the other processes available in proposed Rule 701. The
Exchange believes the process presented in the PDM is consistent with
just and equitable principles of trade because the process applies a
proposed, wider boundary to identify the Opening Price and seeks
additional liquidity. The PDM also promotes just and equitable
principles of trade by taking into account whether all interest can be
fully executed, which helps investors by including as much interest as
possible in the Opening Process. The Exchange believes that conducting
the price discovery process in these situations
[[Page 96073]]
protects opening orders from receiving a random price that does not
reflect the totality of what is happening in the markets on the opening
and also further protects opening interest from receiving a potentially
erroneous execution price on the opening. Opening immediately has the
benefit of speed and certainty, but that benefit must be weighed
against the quality of the execution price and whether orders were left
unexecuted. The Exchange believes that the proposed rule strikes an
appropriate balance.
It is consistent with the Act to not consider away market
liquidity, i.e. away market volume, until the PDM occurs because this
proposed process provides for a swift, yet conservative opening. The
Exchange is bounded by the Pre-Market BBO when determining an Opening
Price. The away market prices would be considered, albeit not
immediately. It is consistent with the Act to consider interest on the
Exchange prior to routing to an away market because the Exchange is
utilizing the interest currently present on its market to determine a
quality opening price. The Exchange will attempt to match interest in
the system, which is within the OQR, and not leave interest unsatisfied
that was otherwise at that price. The Exchange will not trade-through
the away market interest in satisfying this interest at the Exchange.
The proposal attempts to maximize the number of contracts that can
trade, and is intended to find the most reasonable and suitable price,
relying on the maximization to reflect the best price.
With respect to the manner in which the Exchange sends an Imbalance
Message as proposed within Rule 701(j)(1), the Imbalance Message is
intended to attract additional liquidity, much like an auction, using
an auction message and timer. The Imbalance Timer is consistent with
the Act because it would provide a reasonable time for participants to
respond to the Imbalance Message before any opening interest is routed
to away markets and, thereby, maximize trading on the Exchange. The
Imbalance Timer would be for the same number of seconds for all options
traded on the Exchange. This process will repeat, up to four
iterations, until the options series opens. The Exchange believes that
this process is consistent with the Act because the Exchange is seeking
to identify a price on the Exchange without routing away, yet which
price may not trade through another market and the quality of which is
addressed by applying the OQR boundary.
Proposed Rule 701(j)(3)(iii)(C) provides if the total number of
better priced away contracts plus the number of contracts available at
the Exchange Opening Price plus the contracts available at away markets
at the Exchange Opening Price would satisfy the number of marketable
contracts the Exchange has on either the buy or sell side, the system
will contemporaneously route a number of contracts that will satisfy
interest at away markets at prices better than the Exchange Opening
Price (pricing any contracts routed to away markets at the better of
the Exchange Opening Price or the order's limit price), trade available
contracts on the Exchange at the Exchange Opening Price, and route a
number of contracts that will satisfy interest at other markets at
prices equal to the Exchange Opening Price. This provision is
consistent with the Act because it considers routing to away markets
potentially both at a better price than the Exchange Opening Price as
well as at the Exchange Opening Price to access as much liquidity as
possible to maximize the number of contracts able to be traded as part
of the Opening Process. The Exchange routes at the better of the
Exchange's Opening Price or the order's limit price to first ensure the
order's limit price is not violated. Routing away at the Exchange's
Opening Price is intended to achieve the best possible price available
at the time the order is received by the away market.
Proposed Rule 701(j)(5), entitled ``Forced Opening,'' provides for
the situation where, as a last resort, in order to open an options
series when the processes described above have not resulted in an
opening of the options series. Under a Forced Opening, the system will
open the series executing as many contracts as possible by routing to
away markets at prices better than the Exchange Opening Price for their
disseminated size, trading available contracts on the Exchange at the
Exchange Opening Price bounded by OQR (without trading through the
limit price(s) of interest within OQR which is unable to be fully
executed at the Opening Price). The system will also route contracts to
away markets at prices equal to the Exchange Opening Price at their
disseminated size. In this situation, the system will price any
contracts routed to away markets at the better of the Exchange Opening
Price or the order's limit price. Any unexecuted contracts from the
imbalance not traded or routed will be cancelled back to the entering
participant if they remain unexecuted and priced through the Opening
Price. The Exchange believes that this process is consistent with the
Act because after attempting to open by soliciting interest on ISE
Gemini and considering other away market interest and considering
interest responding to Imbalance Messages, the Exchange could not
otherwise locate a fair and reasonable price with which to open options
series.
The Exchange's proposal to memorialize the manner in which proposed
rule will cancel and prioritize interest provides certainty to market
participants as to the priority scheme during the Opening Process.\52\
The Exchange's proposal to execute Market Orders first and then Limit
Orders is consistent with the Act because these orders have no
specified price and Limit Orders will be executed thereafter in
accordance with the prices specified due to the nature of these order
types. This is consistent with the manner in which these orders execute
after the opening today.
---------------------------------------------------------------------------
\52\ See proposed Rule 701(j)(6)(i) and (k).
---------------------------------------------------------------------------
Finally, proposed Rule 701(l) provides upon opening of the option
series, regardless of an execution, the system dissemination of the
price and size of the Exchange's BBO is consistent with the Act because
it clarifies the manner in which the Exchange establishes the BBO for
purposes of reference upon opening.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposal does not change
the intense competition that exists among the options markets for
options business including on the opening. Nor does the Exchange
believe that the proposal will impose any burden on intra-market
competition; the Opening Process involves many types of participants
and interest.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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
[[Page 96074]]
the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such 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-ISEGemini-2016-18 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-ISEGemini-2016-18. 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 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 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of such filing also will be available for inspection and copying
at the principal offices of the Exchange. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISEGemini-2016-18, and should be
submitted on or before January 19, 2017.
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\53\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\53\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31491 Filed 12-28-16; 8:45 am]
BILLING CODE 8011-01-P
