Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change Related to Market Maker Risk Parameters and Complex Orders, 49311-49313 [2013-19510]
Download as PDF
<![CDATA[
Federal Register / Vol. 78, No. 156 / Tuesday, August 13, 2013 / Notices
immediately offer the 10GB Ultra
connectivity to those clients that believe
it can enhance the efficiency of their
trading.17 Accordingly, the Commission
hereby grants the Exchange’s request
and designates the proposal operative
upon filing.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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:
ehiers on DSK2VPTVN1PROD with NOTICES
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2013–099 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NASDAQ–2013–099. 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, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NASDAQ–2013–099 and should be
submitted on or before September 3,
2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–19508 Filed 8–12–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70132; File No. SR–ISE–
2013–38]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Order Approving Proposed Rule
Change Related to Market Maker Risk
Parameters and Complex Orders
August 7, 2013.
I. Introduction
On June 5, 2013, the International
Securities Exchange, LLC (the
‘‘Exchange’’ or the ‘‘ISE’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’), pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change related to market maker risk
parameters and complex orders. The
proposed rule change was published for
comment in the Federal Register on
June 24, 2013.3 The Commission
received no comments on the proposal.
This order approves the proposed rule
change.
II. Description of the Proposal
The Exchange proposes to amend ISE
Rule 722 and ISE Rule 804 to make it
mandatory for market makers to enter
values into all four of the quotation risk
18 17
17 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
VerDate Mar<15>2010
15:31 Aug 12, 2013
Jkt 229001
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 69782
(June 18, 2013), 78 FR 37870 (June 24, 2013) (SR–
ISE–2013–38) (the ‘‘Notice’’).
PO 00000
Frm 00062
Fmt 4703
Sfmt 4703
49311
management parameters for all options
classes in which they enter quotes.
These risk management parameters are
available for market maker quotes in
single options series and for market
maker quotes in complex instruments
on the complex order book. Market
makers may establish a time frame
during which the system calculates: (1)
The number of contracts executed by
the market maker in an options class; (2)
the percentage of the total size of the
market maker’s quotes in the class that
has been executed; (3) the absolute
value of the net between contracts
bought and contracts sold in an options
class, and (4) the absolute value of the
net between (a) calls purchased plus
puts sold, and (b) calls sold plus puts
purchased. The market maker
establishes limits for each of these four
parameters, and when the limits are
exceeded within the prescribed time
frame, the market makers quotes are
removed.
The Exchange notes that all ISE
market makers currently use the risk
management parameters when entering
quotes but may inadvertently enter
quotes without populating one or more
of the parameters, and thereby be
exposed to more financial risk than
intended. The Exchange indicates that,
in order to forestall such an occurrence,
ISE market makers requested that the
trading system be modified to reject a
quote if a value for any of the four risk
management parameters for the options
class is missing. While entering values
into the quotation risk parameters
would be mandatory to prevent an
inadvertent exposure to financial risk,
the Exchange notes that market makers
that prefer to use their own riskmanagement systems could simply enter
values that assure the Exchangeprovided parameters will not be
triggered.4 Accordingly, the proposal
requires that the fields for the quotation
risk management parameters be
populated, but does not require that
members substantively or qualitatively
manage their risk using the Exchangeprovided tools.
The Exchange also proposes to amend
ISE Rule 722 to limit a market maker’s
financial risk exposure as it relates to
the calculation of the aforementioned
ISE Rule 804 risk parameters and
complex orders legging-into the regular
market.5 Specifically, the Exchange
4 For example, a market maker could set the value
for the total number of contracts executed in a class
at a level that exceeds the total number of contracts
the market maker actually quotes in an options
class.
5 Pursuant to ISE Rule 722(b)(3)(ii), complex
orders may be executed against bids and offers on
E:\FR\FM\13AUN1.SGM
Continued
13AUN1
49312
Federal Register / Vol. 78, No. 156 / Tuesday, August 13, 2013 / Notices
ehiers on DSK2VPTVN1PROD with NOTICES
proposes to limit the legging
functionality to complex orders with no
more than either two or three legs, as
determined by the Exchange on a class
basis.6 In the Notice, the Exchange
explains that because the execution of
each leg of a complex order is
contingent on the execution of the other
legs and the execution of all the legs in
the regular market is processed as a
single transaction, not as a series of
individual transactions, the legging-in of
complex orders presents higher risk to
market makers compared to regular
orders being entered in multiple series
of an options class in the regular market
and may cause market makers to exceed
the established risk parameters by a
greater number of contracts. The
Exchange also notes that because the
potential to exceed the intended risk
parameters is directly proportional to
the number of legs associated with a
complex order, ISE market makers have
requested that the Exchange prevent
complex orders from legging into the
market if they have a large number of
legs. The Exchange believes that
because 85% of all complex orders have
only two legs, and very few complex
orders are entered with more than three
legs, the potential risk to market makers
in the regular market far out-weighs the
potential benefit of offering such
functionality to a very limited number
of orders.
The Exchange also notes that complex
orders with more than three legs (in
some cases more than two legs) that
could leg into the market except for the
proposed limitation will be available for
execution on the complex order book.
The Exchange states that the execution
priority rules contained in ISE Rule
722(b)(2) often prevent the execution of
complex orders that might otherwise be
executable because legs of a complex
order cannot be executed at the same
price as a Priority Customer Order in the
regular market unless another leg of the
order is executed at a price that is better
than the best price in the regular
market.7 In other words, if there is a
the Exchange for the individual legs of the complex
order, provided the complex order can be executed
while maintaining a permissible ratio by such bids
and offers.
6 The Exchange states that it will issue a circular
to members identifying the options classes for
which legging is limited to complex orders with
two legs and those for which legging is limited to
complex order with three legs. The Exchange also
states that it will provide members with reasonable
notice prior to changing the limit applicable to an
options class.
7 Pursuant to ISE Rule 100(a)(37A) and (37B), a
Priority Customer Order is an order for the account
of a person or entity that (i) is not a broker or dealer
in securities, and (ii) does not place more than 390
orders in listed options per day on average during
a calendar month for its own beneficial account(s).
VerDate Mar<15>2010
15:31 Aug 12, 2013
Jkt 229001
Priority Customer Order on the book in
one or more of the series of a complex
order, the net price of the complex order
has to improve upon the price that
would be available if the complex order
legged-into the market. Thus, currently
there can be complex orders resting on
the book that cannot leg-into the market
because the permissible ratio cannot be
satisfied by the bids and offers in the
regular market or because there are
Priority Customer Orders in the regular
market in one or more of the series of
the complex order that prevent its
execution. The Exchange believes that
preventing orders with more than three
legs (in some cases more than two legs)
from legging-into the market would not
create any unusual circumstances on the
complex order book. The Exchange also
notes that the priority of complex orders
on the complex order book will not be
impacted by the proposed rule change.8
In the Notice, the Exchange states that
checking the risk management
parameters following each execution in
an options series allows market makers
to provide liquidity across multiple
series of an options class while
mitigating the risk of executing the full
cumulative size of all such quotes;
however this is not the case when a
complex order legs-into the market.
III. Discussion
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.9 In particular, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,10 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest; and
are not designed to permit unfair
discrimination between customers,
issuers, brokers or dealers.
The Commission believes the
proposal is designed to provide market
8 For example, if there are multiple complex
orders for the same strategy at the same price with
four or more legs, they will be executed pursuant
to Rule 722(b)(3) (i.e., in time priority or pro-rata
bases on size (with or without Priority Customer
priority)).
9 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
10 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00063
Fmt 4703
Sfmt 4703
makers with a risk management tool to
assist managing the financial exposure
of market makers which in turn could
enhance the integrity of trading on the
securities markets and help to assure the
stability of the financial system. The
Commission believes that greater
assurances related to the management of
financial risk exposure could enable
market makers to enter quotations with
larger size, which in turn could benefit
investors through increased liquidity for
the execution of their orders, and that
such increased liquidity could benefits
investors by improving prices and
lowering volatility in the options
market.
As discussed above, the proposed rule
change is designed to protect market
makers from exposure to inadvertent,
excessive risk by modifying the trading
system to automatically reject
quotations unless values are entered for
all four risk management parameters for
all options classes in which quotes are
entered. ISE asserts that all market
makers currently utilize the Exchange
provided risk management tool; and the
catalyst for the instant proposal was a
request from market makers that the
entry of values into all four risk
management parameters be made
mandatory to avoid inadvertent error
that could result in unintended
financial exposure during quote entry.
In addition, while market makers must
populate the all risk management
parameters in order to have their
quotations accepted by the trading
system, they may enter values in the
parameters which effectively permit
them to bypass the Exchange provided
risk management tool in favor of a
different, preferred risk management
solution.
In addition, the proposed rule change
is designed to mitigate the financial risk
associated with complex orders that leginto the regular market. Specifically, the
proposed rule change would limit the
legging functionality to complex order
with no more than two or three legs, as
determined by the Exchange on a class
basis. The Exchange represents that it
will provide reasonable prior notice via
a circular to members that identifies the
applicable options classes for which
legging is limited to complex orders
with two legs and those for which
legging is limited to complex order with
three legs. The Exchange notes that 85%
of all complex orders only have two
orders and very few complex orders
have more than three legs, thus the vast
majority of complex orders would be
unaffected by this limitation. The
Exchange also opined that market maker
liquidity in the regular market may be
limited as a result of the potential risk
E:\FR\FM\13AUN1.SGM
13AUN1
Federal Register / Vol. 78, No. 156 / Tuesday, August 13, 2013 / Notices
of offering legging functionality for
complex orders with more than three
legs (in some cases with more than two
legs). In particular, the Exchange notes
that market makers may reduce the size
of their quotations in the regular market
because of the risk of executing the
cumulative size of their quotations
across multiple options series without
an opportunity to adjust their quotes.
Thus, the Exchange posits that limiting
the legging functionality to orders with
no more than three legs (in some cases
with no more than two legs) could
encourage market makers to add
liquidity to the regular market which
would in turn benefit investors.
Accordingly, the Commission believes
that the proposed rule change is
consistent with Section 6(b)(5) of the
Act.11
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,12 that the
proposed rule change (SR–ISE–2013–38)
is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–19510 Filed 8–12–13; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–70131; File No. SR–FINRA–
2013–033]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 9217 (Violations
Appropriate for Disposition Under Plan
Pursuant to SEC Rule 19d–1(c)(2))
ehiers on DSK2VPTVN1PROD with NOTICES
August 7, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 24,
2013, Financial Industry Regulatory
Authority (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by FINRA. The Commission is
publishing this notice to solicit
U.S.C. 78f(b)(5)
U.S.C. 78s(b)(2).
13 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
12 15
VerDate Mar<15>2010
15:31 Aug 12, 2013
Jkt 229001
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 9217 (Violations Appropriate for
Disposition Under Plan Pursuant to SEA
Rule 19d–1(c)(2)) to include additional
rule violations eligible for disposition
under FINRA’s Minor Rule Violation
Plan (‘‘MRVP’’).
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA 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. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
11 15
comments on the proposed rule change
from interested persons.
1. Purpose
FINRA Rule 9216(b) provides
procedures for disposition of certain
rule violations designated as minor rule
violations pursuant to a plan declared
effective by the Commission in
accordance with Section 19(d)(1) of the
Act and Rule 19d–1(c)(2) thereunder.
FINRA’s MRVP allows FINRA to impose
a fine of up to $2,500 on any member
or person associated with a member for
a minor violation of an eligible rule.
FINRA Rule 9217 sets forth the rules
eligible for disposition pursuant to
FINRA’s MRVP. FINRA is proposing to
expand the universe of eligible rules as
part of an effort to concentrate
regulatory resources on higher risk
matters: expanded use of the MRVP
could free up resources better allocated
to high-risk matters because MRVP
settlements typically are handled more
efficiently and expeditiously.
The purpose of the MRVP is to
provide reasonable but meaningful
sanctions for minor or technical
violations of rules when the conduct at
issue does not warrant stronger,
reportable disciplinary sanctions. The
PO 00000
Frm 00064
Fmt 4703
Sfmt 4703
49313
inclusion of a rule in FINRA’s MRVP
does not minimize the importance of
compliance with such rule, nor does it
preclude FINRA from choosing to
pursue violations of eligible rules
through an Acceptance, Waiver and
Consent (‘‘AWC’’) or Complaint if the
nature of the violations or prior
disciplinary history warrants more
significant sanctions. Rather, the option
to impose an MRVP sanction gives
FINRA additional flexibility to
administer its enforcement program in
the most effective and efficient manner,
while still fully meeting FINRA’s
remedial objectives in addressing
violative conduct. For example, MRVP
dispositions provide a useful tool for
implementing the concept of
progressive discipline to remediate
misconduct. FINRA will continue to
examine and surveil for compliance
with eligible rules in a manner
consistent with its examination
programs and will determine on a caseby-case basis whether disposition
pursuant to the MRVP is appropriate.
FINRA conducted a comprehensive
review of its rules and examination
dispositions to determine the rules it
proposes to add to the MRVP. Among
other things, FINRA considered (1) rules
routinely cited in formal disciplinary
actions that are not currently part of the
MRVP; (2) rules cited frequently in
informal actions; (3) rules comparable to
existing rules in the MRVP; and (4) rules
included in other self-regulatory
organization MRVPs.
The rules proposed for inclusion in
the MRVP broadly can be grouped into
several categories.
Filings and Notifications
In general, FINRA believes that
isolated failures to comply with rules
that require periodic reporting, filings or
notifications are appropriate for
inclusion in the MRVP. At the same
time FINRA recognizes that willful,
widespread or repeated failures under
such eligible rules may be more
appropriate for disposition through an
AWC or the filing of a Complaint.
FINRA notes that the current MRVP
includes several such rules.
Accordingly, the proposed rule change
would add the following rules to the
MRVP for violations involving late or
incomplete notices or filings: FINRA
Rule 2251(a) (Forwarding of Proxy and
other Issuer-Related Materials) (failure
to timely forward proxy and other
issuer-related materials); FINRA Rule
4524 (Supplemental FOCUS
Information) (failure to timely file or
filing of incomplete reports or
information); FINRA Rule 5110(b)
(Corporate Financing Rule—
E:\FR\FM\13AUN1.SGM
13AUN1
]]>Agencies
[Federal Register Volume 78, Number 156 (Tuesday, August 13, 2013)]
[Notices]
[Pages 49311-49313]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19510]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70132; File No. SR-ISE-2013-38]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving Proposed Rule Change Related to Market Maker Risk
Parameters and Complex Orders
August 7, 2013.
I. Introduction
On June 5, 2013, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change related to market maker risk
parameters and complex orders. The proposed rule change was published
for comment in the Federal Register on June 24, 2013.\3\ The Commission
received no comments on the proposal. This order approves the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 69782 (June 18,
2013), 78 FR 37870 (June 24, 2013) (SR-ISE-2013-38) (the
``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposal
The Exchange proposes to amend ISE Rule 722 and ISE Rule 804 to
make it mandatory for market makers to enter values into all four of
the quotation risk management parameters for all options classes in
which they enter quotes. These risk management parameters are available
for market maker quotes in single options series and for market maker
quotes in complex instruments on the complex order book. Market makers
may establish a time frame during which the system calculates: (1) The
number of contracts executed by the market maker in an options class;
(2) the percentage of the total size of the market maker's quotes in
the class that has been executed; (3) the absolute value of the net
between contracts bought and contracts sold in an options class, and
(4) the absolute value of the net between (a) calls purchased plus puts
sold, and (b) calls sold plus puts purchased. The market maker
establishes limits for each of these four parameters, and when the
limits are exceeded within the prescribed time frame, the market makers
quotes are removed.
The Exchange notes that all ISE market makers currently use the
risk management parameters when entering quotes but may inadvertently
enter quotes without populating one or more of the parameters, and
thereby be exposed to more financial risk than intended. The Exchange
indicates that, in order to forestall such an occurrence, ISE market
makers requested that the trading system be modified to reject a quote
if a value for any of the four risk management parameters for the
options class is missing. While entering values into the quotation risk
parameters would be mandatory to prevent an inadvertent exposure to
financial risk, the Exchange notes that market makers that prefer to
use their own risk-management systems could simply enter values that
assure the Exchange-provided parameters will not be triggered.\4\
Accordingly, the proposal requires that the fields for the quotation
risk management parameters be populated, but does not require that
members substantively or qualitatively manage their risk using the
Exchange-provided tools.
---------------------------------------------------------------------------
\4\ For example, a market maker could set the value for the
total number of contracts executed in a class at a level that
exceeds the total number of contracts the market maker actually
quotes in an options class.
---------------------------------------------------------------------------
The Exchange also proposes to amend ISE Rule 722 to limit a market
maker's financial risk exposure as it relates to the calculation of the
aforementioned ISE Rule 804 risk parameters and complex orders legging-
into the regular market.\5\ Specifically, the Exchange
[[Page 49312]]
proposes to limit the legging functionality to complex orders with no
more than either two or three legs, as determined by the Exchange on a
class basis.\6\ In the Notice, the Exchange explains that because the
execution of each leg of a complex order is contingent on the execution
of the other legs and the execution of all the legs in the regular
market is processed as a single transaction, not as a series of
individual transactions, the legging-in of complex orders presents
higher risk to market makers compared to regular orders being entered
in multiple series of an options class in the regular market and may
cause market makers to exceed the established risk parameters by a
greater number of contracts. The Exchange also notes that because the
potential to exceed the intended risk parameters is directly
proportional to the number of legs associated with a complex order, ISE
market makers have requested that the Exchange prevent complex orders
from legging into the market if they have a large number of legs. The
Exchange believes that because 85% of all complex orders have only two
legs, and very few complex orders are entered with more than three
legs, the potential risk to market makers in the regular market far
out-weighs the potential benefit of offering such functionality to a
very limited number of orders.
---------------------------------------------------------------------------
\5\ Pursuant to ISE Rule 722(b)(3)(ii), complex orders may be
executed against bids and offers on the Exchange for the individual
legs of the complex order, provided the complex order can be
executed while maintaining a permissible ratio by such bids and
offers.
\6\ The Exchange states that it will issue a circular to members
identifying the options classes for which legging is limited to
complex orders with two legs and those for which legging is limited
to complex order with three legs. The Exchange also states that it
will provide members with reasonable notice prior to changing the
limit applicable to an options class.
---------------------------------------------------------------------------
The Exchange also notes that complex orders with more than three
legs (in some cases more than two legs) that could leg into the market
except for the proposed limitation will be available for execution on
the complex order book. The Exchange states that the execution priority
rules contained in ISE Rule 722(b)(2) often prevent the execution of
complex orders that might otherwise be executable because legs of a
complex order cannot be executed at the same price as a Priority
Customer Order in the regular market unless another leg of the order is
executed at a price that is better than the best price in the regular
market.\7\ In other words, if there is a Priority Customer Order on the
book in one or more of the series of a complex order, the net price of
the complex order has to improve upon the price that would be available
if the complex order legged-into the market. Thus, currently there can
be complex orders resting on the book that cannot leg-into the market
because the permissible ratio cannot be satisfied by the bids and
offers in the regular market or because there are Priority Customer
Orders in the regular market in one or more of the series of the
complex order that prevent its execution. The Exchange believes that
preventing orders with more than three legs (in some cases more than
two legs) from legging-into the market would not create any unusual
circumstances on the complex order book. The Exchange also notes that
the priority of complex orders on the complex order book will not be
impacted by the proposed rule change.\8\
---------------------------------------------------------------------------
\7\ Pursuant to ISE Rule 100(a)(37A) and (37B), a Priority
Customer Order is an order for the account of a person or entity
that (i) is not a broker or dealer in securities, and (ii) does not
place more than 390 orders in listed options per day on average
during a calendar month for its own beneficial account(s).
\8\ For example, if there are multiple complex orders for the
same strategy at the same price with four or more legs, they will be
executed pursuant to Rule 722(b)(3) (i.e., in time priority or pro-
rata bases on size (with or without Priority Customer priority)).
---------------------------------------------------------------------------
In the Notice, the Exchange states that checking the risk
management parameters following each execution in an options series
allows market makers to provide liquidity across multiple series of an
options class while mitigating the risk of executing the full
cumulative size of all such quotes; however this is not the case when a
complex order legs-into the market.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange.\9\
In particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\10\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest; and are not designed to permit unfair discrimination between
customers, issuers, brokers or dealers.
---------------------------------------------------------------------------
\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission believes the proposal is designed to provide market
makers with a risk management tool to assist managing the financial
exposure of market makers which in turn could enhance the integrity of
trading on the securities markets and help to assure the stability of
the financial system. The Commission believes that greater assurances
related to the management of financial risk exposure could enable
market makers to enter quotations with larger size, which in turn could
benefit investors through increased liquidity for the execution of
their orders, and that such increased liquidity could benefits
investors by improving prices and lowering volatility in the options
market.
As discussed above, the proposed rule change is designed to protect
market makers from exposure to inadvertent, excessive risk by modifying
the trading system to automatically reject quotations unless values are
entered for all four risk management parameters for all options classes
in which quotes are entered. ISE asserts that all market makers
currently utilize the Exchange provided risk management tool; and the
catalyst for the instant proposal was a request from market makers that
the entry of values into all four risk management parameters be made
mandatory to avoid inadvertent error that could result in unintended
financial exposure during quote entry. In addition, while market makers
must populate the all risk management parameters in order to have their
quotations accepted by the trading system, they may enter values in the
parameters which effectively permit them to bypass the Exchange
provided risk management tool in favor of a different, preferred risk
management solution.
In addition, the proposed rule change is designed to mitigate the
financial risk associated with complex orders that leg-into the regular
market. Specifically, the proposed rule change would limit the legging
functionality to complex order with no more than two or three legs, as
determined by the Exchange on a class basis. The Exchange represents
that it will provide reasonable prior notice via a circular to members
that identifies the applicable options classes for which legging is
limited to complex orders with two legs and those for which legging is
limited to complex order with three legs. The Exchange notes that 85%
of all complex orders only have two orders and very few complex orders
have more than three legs, thus the vast majority of complex orders
would be unaffected by this limitation. The Exchange also opined that
market maker liquidity in the regular market may be limited as a result
of the potential risk
[[Page 49313]]
of offering legging functionality for complex orders with more than
three legs (in some cases with more than two legs). In particular, the
Exchange notes that market makers may reduce the size of their
quotations in the regular market because of the risk of executing the
cumulative size of their quotations across multiple options series
without an opportunity to adjust their quotes. Thus, the Exchange
posits that limiting the legging functionality to orders with no more
than three legs (in some cases with no more than two legs) could
encourage market makers to add liquidity to the regular market which
would in turn benefit investors.
Accordingly, the Commission believes that the proposed rule change
is consistent with Section 6(b)(5) of the Act.\11\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b)(5)
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-ISE-2013-38) is approved.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19510 Filed 8-12-13; 8:45 am]
BILLING CODE 8011-01-P
