Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to the Price Improvement Mechanism, 40830-40835 [2014-16363]

Download as PDF 40830 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices of the purposes of the Act. To the contrary, the Exchange believes that the proposed fee change will promote competition as it is designed to allow ISE Gemini to better compete for order flow by offering higher rebates to Priority Customer orders executed by certain members that do not currently qualify for any of the higher rebate tiers. The Exchange operates in a highly competitive market in which market participants can readily direct their order flow to competing venues. In such an environment, the Exchange must continually review, and consider adjusting, its fees to remain competitive with other exchanges. For the reasons described above, the Exchange believes that the proposed fee changes reflect this competitive environment. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 8 and subparagraph (f)(2) of Rule 19b–4 thereunder.9 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: 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–2014–21. 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 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– ISEGemini–2014–21 and should be submitted on or before August 4, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–16366 Filed 7–11–14; 8:45 am] BILLING CODE 8011–01–P mstockstill on DSK4VPTVN1PROD with NOTICES • 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 No. SR– ISEGemini–2014–21 on the subject line. 9 17 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). VerDate Mar<15>2010 19:25 Jul 11, 2014 [Release No. 34–72554; File No. SR–ISE– 2014–35 Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Related to the Price Improvement Mechanism July 8, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b-4 thereunder,2 notice is hereby given that on June 25, 2014, International Securities Exchange, LLC (‘‘Exchange’’ or ‘‘ISE’’) filed with the Securities and Exchange Commission (‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules regarding the Price Improvement Mechanism (‘‘PIM’’). The text of the proposed rule change is available on the Exchange’s Internet Web site at https://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 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 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 Statutory Basis for, the Proposed Rule Change Electronic Comments 8 15 SECURITIES AND EXCHANGE COMMISSION 1. Purpose The purpose of this proposed rule change is to amend the Exchange’s rules regarding the PIM functionality. The 1 15 10 17 Jkt 232001 PO 00000 CFR 200.30–3(a)(12). Frm 00126 Fmt 4703 Sfmt 4703 2 17 E:\FR\FM\14JYN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 14JYN1 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Exchange proposes to make two changes to its PIM rules. The first change is based on a proposal recently submitted by NASDAQ OMX PHLX LLC (‘‘PHLX’’), and approved by the Commission,3 pursuant to which orders of any size may initiate the price improvement auction (‘‘PIXL’’) on PHLX at a price which is at or better than the national best bid or offer (‘‘NBBO’’), even in instances where PHLX has resting interest on the opposite side and thus not at least one cent better than PHLX’s own best bid or offer as required in the past. The second change proposed in this filing relates to how responses are addressed in the PIM. With this proposed change, the manner in which response messages are treated will be similar to how they are treated in the price improvement auctions operated at other exchanges.4 The PIM is a process that allows Electronic Access Members (‘‘EAM’’) to provide price improvement opportunities for a transaction wherein the Member seeks to execute an agency order as principal or execute an agency order against a solicited order (a ‘‘Crossing Transaction’’).5 A Crossing Transaction is comprised of the order the EAM represents as agent (the ‘‘Agency Order’’) and a counter-side order for the full size of the Agency Order (the ‘‘Counter-Side Order’’). The Counter-Side Order may represent interest for the Member’s own account, or interest the Member has solicited from one or more other parties, or a combination of both. Currently under Rule 723, a Crossing Transaction must be entered only at a price that is better than the ISE best bid or offer (‘‘ISE BBO’’) and equal to or better than the national best bid or offer (‘‘NBBO’’). Under Supplementary Material .08 to Rule 723, when the ISE BBO is equal to the NBBO, a Crossing Transaction may be entered where the price of the Crossing Transaction is equal to the ISE BBO if the Agency Order is on the opposite side of the market from the ISE BBO. In this case, the Agency Order is automatically executed against the ISE BBO. If the 3 See Securities Exchange Act Release No. 70654 (October 10, 2013), 78 FR 62891 (October 22, 2013) (SR–PHLX–2013–76). 4 See Securities Exchange Act Release No. 72009 (April 23, 2014), 79 FR 24032 (April 29, 2014) (Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Adopt the MIAX PRIME Price Improvement Mechanism and the MIAX PRIME Solicitation Mechanism) (‘‘MIAX Filing’’). See also PHLX Rule 1080(n)(ii)(A)(6). 5 See Securities Exchange Act No. 50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) (SR–ISE–2003–06). VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 Agency Order is not fully executed after the ISE BBO is fully exhausted and is no longer at a price equal to the Crossing Transaction, the PIM is initiated for the balance of the order as provided in Rule 723. The Exchange now proposes to modify PIM so that Members may enter a Crossing Transaction at a price that is at or better than the NBBO on either side of the Agency Order and better than the limit order or quote on the ISE order book on the same side of the Agency Order. Members are not required to improve the ISE BBO on the opposite side of the Agency Order to initiate a PIM. Any resting interest on the ISE order book on the opposite side of the Agency Order will participate at the end of the auction in accordance with Rule 723(d). With this proposed rule change, PIM will now operate similar to the PIXL functionality at PHLX in terms of the price at which a PIM can be initiated.6 The proposed change to the start price of a PIM will not impact the current execution priority. However, as discussed in detail below, the Exchange is also proposing to make PIM auctions blind. In addition, the Exchange is proposing that Member orders will no longer yield priority to non-Member orders.7 The Exchange believes the proposed rule change will allow a greater number of orders to receive price improvement that might not currently be afforded any price improvement. By auctioning the entire quantity in the PIM, the opportunity for price improvement over the prevailing NBBO is extended to the whole order, rather than only the portion that does not interact with the resting liquidity at the auction price level. As before, Priority Customers will continue to have priority at each price level in accordance with Rule 723(d). At each given price point, ISE will execute Priority Customer interest in a price/ time fashion such that all Priority Customer interest which was resting on the order book is satisfied before any other interest that arrived after the PIM was initiated. After Priority Customer interest at a given price point has been satisfied, remaining contracts will be allocated among all Exchange quotes and orders in accordance with the execution rules set forth in Rule 723(d). Interest, whether resting prior to the commencement of the auction or arriving during the auction process, will continue to be executed in accordance with Rule 723(d). PHLX Rule 1080(n). Customer interest will continue to be executed first followed by Professional Orders and Member interest. See proposed Rule 723(d)(2). PO 00000 6 See 7 Priority Frm 00127 Fmt 4703 Sfmt 4703 40831 The Exchange believes using the allocation method that it currently does is a fair distribution because the Counter-Side Order provides significant value to the market. The EAM guarantees the Crossing Transaction price improvement, and is subject to market risk while the order is exposed to other market participants. The EAM may only improve the price where it stopped the agency side, and may not cancel its order once the PIM commences. Other market participants are free to modify or cancel their quotes and orders at any time during the auction. The Exchange believes that the EAM provides an important role in facilitating the price improvement opportunity for market participants. The following examples illustrate how the proposed rule change would operate: Example 1 ISE BBO is 2.48–2.51 (60x30) (10 of the 30 on the offer is a Priority Customer; 20 of the 30 on the offer is a market maker (MM1); all 60 on the bid is a MM). NBBO is 2.48–2.51 (100x100). Under the proposed rule change, an Agency Order to buy may be entered into the PIM at any price between and including 2.49 and 2.51. Assume a Priority Customer or nonPriority Customer order to buy 100 contracts is submitted into the PIM with a stop price of 2.51. The PIM auction will commence with a notification being sent to market participants. Assume, during the auction, two market makers (MM2 and MM3) respond. MM2 responds to sell 10 contracts at 2.50 and MM3 responds to sell 20 contracts at 2.51. At the end of the auction, the agency side of the order will buy 10 contracts from MM2 at 2.50, leaving 90 to be allocated at the original order limit of 2.51. The allocation process would continue and 10 contracts will be allocated to the Priority Customer on the book at 2.51, leaving 80 contracts to be allocated among the Counter-Side Order at 2.51 and the two market makers offering at 2.51. The remaining 80 contracts will be allocated at a price of 2.51 with 40 contracts (40% of the original order quantity) being allocated to the Counter-Side Order, 20 contracts allocated to MM1 and 20 contracts allocated to MM3. The Exchange believes the proposed rule change will attract new order flow that might not currently be afforded any price improvement opportunity. Moreover, the Exchange notes that the Boston Options Exchange (‘‘BOX’’) currently has rules that allow it to commence its price improvement auction, called the Price Improvement Period (‘‘PIP’’), at a price equal to the E:\FR\FM\14JYN1.SGM 14JYN1 mstockstill on DSK4VPTVN1PROD with NOTICES 40832 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices NBBO.8 When a PIP is initiated at a price equal to the NBBO, regardless of size, the resting quotes and orders on BOX are considered for allocation at the end of the auction. BOX executes interest that existed on the BOX order book prior to the commencement of a PIP before executing any interest which joined during the auction. This behavior aligns with the BOX standard trade allocation rules as they employ a price/ time allocation algorithm. Similar to BOX, the ISE proposed rule change will allow orders of any size to initiate an auction at a price which is equal to or better than the NBBO where ISE may have resting interest. ISE will execute a Crossing Transaction against any interest, resting prior to the commencement of an auction or interest which arrived during the auction, in accordance with the rules as stated and illustrated with the example above. While this is different than the allocation algorithm that BOX employs, this behavior is consistent with the ISE PIM rules in place today. This proposal will continue to afford the same price improvement opportunities for Priority Customer and non-Priority Customer Crossing Transactions as is in operation today, but with the ability to initiate such price improving auctions at a price that is equal to the NBBO, and therefore permitting more of such orders to receive price improvement. Further, as noted above, under Supplementary Material .08 to Rule 723, when the ISE BBO is equal to the NBBO, a Crossing Transaction may currently be entered where the price of the Crossing Transaction is equal to the ISE BBO if the Agency Order is on the opposite side of the market from the ISE BBO. However, with this proposed rule change, if a Crossing Transaction is entered at a price equal to the ISE BBO on the opposite side of the market, the Agency Order will no longer automatically execute and the Agency Order will trade against any interest, resting prior to the commencement of an auction or interest which arrived during the auction, in accordance with rule 723(d). The Exchange, therefore, proposes to delete Supplementary Material .08 to Rule 723. The second change proposed in this filing is to modify the PIM functionality so responses sent by Members during a PIM auction are not visible to other auction participants. With this proposed change, responses will be treated in the same way they are treated in price improvement auctions operated by other exchanges.9 8 See 9 See BOX Rules Chapter V, Section 18(e). supra note 4. VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 Currently, upon entry of a Crossing Transaction into the PIM, a broadcast message that includes the series, price and size of the Agency Order, and whether it is to buy or sell, is sent to all Members. Members are then given 500 milliseconds to indicate the size and price at which they want to participate in the execution of the Agency Order (‘‘Improvement Orders’’). Improvement Orders may be entered by all Members for their own account or for the account of a Public Customer in one-cent increments at the same price as the Crossing Transaction or at an improved price for the Agency Order, and for any size up to the size of the Agency Order. During the exposure period, Improvement Orders cannot be canceled, but can be modified to (1) increase the size at the same price, or (2) improve the price of the Improvement Order for any size up to the size of the Agency Order. During the exposure period, the aggregate size of the best prices (including the Counter-Side Order, Improvement Orders, and any changes to either) are continually updated and broadcast to all Members. Because the PIM permits Members to continually receive broadcast messages, the Exchange adopted rules pursuant to which EAMs and Exchange Market Makers are required to yield priority to all non-Member orders 10 which the Commission found to be consistent with the requirements in Section 11(a) of the Act. At the time PIM was approved, although the ‘‘effect versus execute’’ exemption under Section 11(a) existed and was available to ISE Members, because of the manner in which the PIM was designed, ISE Members were not able to comply with that exemption. Instead, the PIM was designed to rely on yielding by Members to non-Member orders to be consistent with Section 11(a) of the Act. The Exchange notes it is now more than a decade since PIM was approved. The options markets have since greatly evolved and some options exchanges that have adopted a price improvement auction rely now on the ‘‘effect versus execute’’ exemption under Section 11(a) and yield execution priority to Priority Customers only. As a competitive response, the Exchange now proposes to delete relevant parts of Rule 723 to modify the PIM functionality so that responses submitted during a PIM auction will no 10 See Securities Exchange Act No. 50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) (SR–ISE–2003–06). See also Securities Exchange Act Release No. 59287 (January 23, 2009), 74 FR 5694 (January 30, 2009). In connection with the current proposal to make PIM auctions blind, the Exchange proposes to delete reference to nonMember Professional Orders from its rules. PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 longer be continually updated and broadcast to all Members.11 Doing so will allow ISE Members to rely on the ‘‘effect versus execute’’ exemption under Section 11(a) of the Act when utilizing the PIM. Section 11(a) of the Exchange Act prohibits any member of a national securities exchange from effecting transactions on that exchange for its own account, the account of an associated person, or an account over which it or its associated persons exercises discretion (‘‘covered accounts’’), unless an exception applies.12 Section 11(a)(1) contains a number of exceptions for principal transactions by members and their associated persons. As set forth below, the Exchange believes that with the proposed change, the PIM rules are now consistent with the requirements in Section 11(a) and the rules thereunder. In this regard, Section 11(a)(1)(A) provides an exception from the prohibitions in Section 11(a) for dealers acting in the capacity of market makers. With respect to Market Makers on the Exchange, the Exchange believes that orders sent by them for covered accounts to the proposed PIM would qualify for this exception from Section 11(a). In addition to this Market Maker exception, Rule 11a2–2(T) under the Exchange Act, known as the ‘‘effect versus execute’’ rule, provides exchange members with an exception from Section 11(a) by permitting them, subject to certain conditions, to effect transactions for covered accounts by arranging for an unaffiliated member to execute the transactions on the exchange.13 To comply with the ‘‘effect versus execute’’ rule’s conditions, a member: (i) Must transmit the order from off the exchange floor; (ii) may not participate in the execution of the transaction once it has been transmitted to the member performing the execution; 14 (iii) may not be affiliated with the member executing the transaction on the floor through the 11 A number of exchanges currently operate price improvement auctions where responses submitted by a member are blind, i.e., not visible to other auction participants. For example, MIAX Rule 515A(a)(2)(i)(E) notes that ‘‘responses shall not be visible to other Auction participants.’’ See Securities Exchange Act Release No. 72009 (April 23, 2014), 79 FR 24032 (April 29, 2014). Additionally, PHLX Rule 1080(n)(ii)(A)(6) similarly provides that ‘‘responses will not be visible to Auction participants.’’ See PHLX Rule 1080(n)(ii)(A)(6). 12 15 U.S.C. 78k(a)(1). 13 17 CFR 240.11a2–2(T). 14 The member, however, may participate in clearing and settling the transaction. See Securities Exchange Act Release No. 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978). E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices facilities of the Exchange; and (iv) with respect to an account over which the member has investment discretion, neither the member nor its associated person may retain any compensation in connection with effecting the transaction except as provided in the rule.15 The Exchange believes that orders sent by Members for covered accounts to the proposed PIM would qualify for this ‘‘effect versus execute’’ exception from Section 11(a), as described below. In this regard, the first condition of Rule 11a2–2(T) is that orders for covered accounts be transmitted from off the exchange floor. The ISE trading system and the PIM receives all orders electronically through remote terminals or computerto-computer interfaces. The Exchange represents that orders for covered accounts from Members will be transmitted from a remote location directly to the PIM auction by electronic means. In the context of other automated trading systems, the Commission has found that the off-floor transmission requirement is met if a covered account order is transmitted from a remote location directly to an exchange’s floor by electronic means.16 The second condition of Rule 11a2–2(T) requires that the member not participate in the execution of its order once the order is transmitted to the floor for execution.17 The Exchange represents that, upon submission to the PIM, an order will be executed automatically pursuant to the rules set forth for the mechanism. In particular, execution of an order sent to the mechanism depends not on the Member entering the order, but rather on what other orders are present and the priority of those orders. Thus, at no time following the submission of an order is a Member able to acquire control or influence over the result or timing of order execution.18 15 17 CFR 240.11a2–2(T). e.g., Securities Exchange Act Release Nos. 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008) (SR–BSE–2008–48); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR– NASDAQ–2007–004 and SR–NASDAQ–2007–080); 49068 (January 13, 2004), 69 FR 2775 (January 20, 2004) (SR–BSE–2002–15); 15533 (January 29, 1979), 44 FR 6084 (January 31, 1979) (‘‘1979 Release’’); 14563 (March 14, 1978), 43 FR 11542 (March 17, 1978) (‘‘1978 Release’’). 17 The description above covers the universe of the types of Members (i.e., Market Makers, EAMs). 18 The Exchange notes that a Member may cancel or modify the order, or modify the instructions for executing the order, but that such instructions would be transmitted from off the floor of the Exchange. The Commission has stated that the nonparticipation requirement is satisfied under such circumstances so long as such modifications or cancellations are also transmitted from off the floor. See 1978 Release (stating that the ‘‘nonparticipation requirement does not prevent initiating members from canceling or modifying mstockstill on DSK4VPTVN1PROD with NOTICES 16 See, VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 Rule 11a2–2(T)’s third condition requires that the order be executed by an exchange member who is unaffiliated with the member initiating the order. The Commission has stated that the requirement is satisfied when automated exchange facilities, such as the PIM, are used, as long as the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange.19 The Exchange represents that the PIM is designed so that no Member has any special or unique trading advantage in the handling of its orders after transmitting its orders to the mechanism. Rule 11a2–2(T)’s fourth condition requires that, in the case of a transaction effected for an account with respect to which the initiating member or an associated person thereof exercises investment discretion, neither the initiating member nor any associated person thereof may retain any compensation in connection with effecting the transaction, unless the person authorized to transact business for the account has expressly provided otherwise by written contract referring to Section 11(a) of the Act and Rule 11a2–2(T) thereunder.20 The Exchange recognizes that Members relying on Rule 11a2–2(T) for transactions effected through the PIM must comply with this condition of the Rule. orders (or the instructions pursuant to which the initiating member wishes to be executed) after the orders have been transmitted to the executing member, provided that any such instructions are also transmitted from off the floor’’). 19 In considering the operation of automated execution systems operated by an exchange, the Commission noted that, while there is not an independent executing exchange member, the execution of an order is automatic once it has been transmitted into the system. Because the design of these systems ensures that members do not possess any special or unique trading advantages in handling their orders after transmitting them to the exchange, the Commission has stated that executions obtained through these systems satisfy the independent execution requirement of Rule 11a2–2(T). See 1979 Release. 20 See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, Rule 11a2–2(T)(d) requires a member or associated person authorized by written contract to retain compensation, in connection with effecting transactions for covered accounts over which such member or associated persons thereof exercises investment discretion, to furnish at least annually to the person authorized to transact business for the account a statement setting forth the total amount of compensation retained by the member in connection with effecting transactions for the account during the period covered by the statement which amount must be exclusive of all amounts paid to others during that period for services rendered to effect such transactions. See also 1978 Release (stating ‘‘[t]he contractual and disclosure requirements are designed to assure that accounts electing to permit transaction-related compensation do so only after deciding that such arrangements are suitable to their interests’’). PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 40833 2. Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Securities Exchange Act of 1934 (the ‘‘Act’’) 21 in general, and furthers the objectives of Section 6(b)(5) of the Act 22 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism for a free and open market and a national market system, and, in general, to protect investors and the public interest by creating positive, beneficial incentives for EAMs to provide price improvement opportunities to market participants. With the proposed change to the start price of a PIM auction, Members will not be required to improve the ISE BBO on the opposite side of the Agency Order to initiate a PIM. Further, any resting interest on the ISE order book on the opposite side of the Agency Order will now participate at the end of the auction. As a result, the proposed rule change will remove impediments to and perfect the mechanism for a free and open market and will result in more orders being executed in the PIM, thus providing an increased probability of price improvement for all orders, regardless of their size. With this proposed rule change, market participants would be incentivized to introduce more orders to the PIM for the opportunity to receive price improvement. Furthermore, Priority Customers will continue to have priority at each price level in accordance with ISE Rule 723(d). While currently nonMember Professional Orders are executed after Priority Customer interest and before Member interest, with this proposal, which in part amends ISE rules to make PIM a blind auction, all Professional Orders will now be at par with Member interest and will be executed after Priority Customer orders are executed. The Exchange believes it is appropriate to give Professionals Orders the same priority that is given to broker-dealer orders because professional customers and brokerdealers essentially behave the same, i.e., the type of trading professional customers engage in largely resembles that of a broker-dealer. The Exchange believes it is appropriate to treat these market participants at par with one another. In particular, the Exchange believes that using the same allocation process as is used today for Crossing Transactions is fair and equitable because of the value the EAM brings to the marketplace. 21 15 22 15 E:\FR\FM\14JYN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 14JYN1 40834 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES Specifically, by stopping the Crossing Transaction at or better than the NBBO, the EAM facilitates a process that protects investors and is in the public interest by providing an opportunity for price improvement. The Exchange believes the proposed rule change generally will benefit investors by offering more opportunities for orders to receive price improvement. For these reasons, the Exchange believes that the proposal is fair, reasonable and equitable for all market participants. The Exchange believes its proposal to amend the manner in which responses in the PIM auction are addressed is consistent with Section 6(b) of the Act. The proposal to make responses in the PIM blind to other auction participants and the corresponding change to the priority rules for the PIM are similar to existing priority rules that distinguish between Priority Customers, Market Makers, and Professional interest in a manner that will help ensure a fair and orderly market by maintaining priority of orders and quotes while still affording the opportunity for price improvement is both reasonable and appropriate. The Exchange believes the proposed rule change is appropriate in the [sic] price improvement auctions are widely recognized by market participants as invaluable, both as a tool to access liquidity, and a mechanism to help meet their best execution obligations. The proposed rule change will further the ability of market participants to carry out these strategies. Finally, as noted above, the proposed changes are a competitive response to how price improvement auctions on other exchanges currently operate and with this proposal, the Exchange will be on a more equal footing to compete with other exchanges for orders to be executed in the PIM. 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 Exchange’s proposal to amend its rules regarding the start price of a PIM auction will not impose a burden on competition because it will increase the number of orders that may be executed in the PIM and thereby receive price improvement opportunities that were not previously available to them. Further, the Exchange’s proposal to make PIM a blind auction will allow ISE to compete with other options exchanges that already have blind auctions which most options exchanges VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 that operate a price improvement auction do. Finally, the Exchange’s proposal to amend the execution priority rules will not be a burden on competition because the proposed change will allow the Exchange to compete with other options exchanges that operate a price improvement auction and whose rules already permit its members to rely on the ‘‘effect versus execute’’ exemption when utilizing the price improvement auction of those markets. The changes proposed to Rule 723 will offer opportunities found on other options exchanges and create systems that embolden market participants to seek out price improvement opportunities for customers. Accordingly, the proposed rule change will have no impact on competition other than to strengthen competition among the options exchanges that provide price improvement opportunities. Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act 23 and subparagraph (f)(6) of Rule 19b–4 thereunder.24 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the U.S.C. 78s(b)(3)(a)(ii). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6) requires the Exchange to give the Commission written notice of the Exchange’s intent to file the proposed rule change along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. PO 00000 23 15 24 17 Frm 00130 Fmt 4703 Sfmt 4703 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– ISE–2014–35 on the subject line. Paper Comments All submissions should refer to File Number SR–ISE–2014–35. 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 ISE. 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–ISE– 2014–35 and should be submitted on or before August 4, 2014. E:\FR\FM\14JYN1.SGM 14JYN1 Federal Register / Vol. 79, No. 134 / Monday, July 14, 2014 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.25 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–16363 Filed 7–11–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [File No. 500–1] the Matter of ErgoBilt, Inc., FPB Bancorp, Inc., Geos Communications, Inc., Integra Bank Corporation, Latitude Solutions Inc., Noram Capital Holdings, Inc., Raptor Technology Group, Inc., and Subjex Corp.; Order Of Suspension Of Trading mstockstill on DSK4VPTVN1PROD with NOTICES July 10, 2014 It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of ErgoBilt, Inc. because it has not filed any periodic reports since the period ended September 30, 1997. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of FPB Bancorp, Inc. because it has not filed any periodic reports since the period ended March 31, 2011. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Geos Communications, Inc. because it has not filed any periodic reports since the period ended March 31, 2011. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Integra Bank Corporation because it has not filed any periodic reports since the period ended March 31, 2011. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Latitude Solutions, Inc. because it has not filed any periodic reports since the period ended March 31, 2012. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Noram Capital Holdings, Inc. because it has not filed any periodic reports since the period ended March 31, 2010. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information 25 17 concerning the securities of Raptor Technology Group, Inc. because it has not filed any periodic reports since the period ended September 30, 2011. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Subjex Corp. because it has not filed any periodic reports since the period ended March 31, 2011. The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed companies. Therefore, it is ordered, pursuant to Section 12(k) of the Securities Exchange Act of 1934, that trading in the securities of the abovelisted companies is suspended for the period from 9:30 a.m. EDT on July 10, 2014, through 11:59 p.m. EDT on July 23, 2014. By the Commission. Jill M. Peterson, Assistant Secretary. [FR Doc. 2014–16518 Filed 7–10–14; 4:15 pm] BILLING CODE 8011–01–P [Public Notice: 8793] Determination under Section 107(a) of the William Wilberforce Trafficking Victims Protection Reauthorization Act of 2008 Pursuant to the authority vested in me by the President’s September 20, 2010 delegation of the waiver function conferred in Section 107(a) of the William Wilberforce Trafficking Victims Protection Act of 2008 (Pub. L. 110– 457), I hereby determine that a waiver of the application of clause (i) of Section 110(b)(2)(D) of the Trafficking Victims Protection Act of 2000, as amended (Pub. L. 106–386), is justified with respect to Angola, Bahrain, Belarus, Burma, Burundi, Comoros, Djibouti, Haiti, Kenya, Lebanon, Namibia, South Sudan, Suriname, and Turkmenistan. This Determination shall be reported to Congress and published in the Federal Register. John Kerry, Secretary of State. [FR Doc. 2014–16416 Filed 7–11–14; 8:45 am] BILLING CODE 4710–17–P CFR 200.30–3(a)(12). VerDate Mar<15>2010 19:25 Jul 11, 2014 Jkt 232001 PO 00000 Frm 00131 Fmt 4703 DEPARTMENT OF TRANSPORTATION Federal Railroad Administration [Docket No. FRA–2014–0011–N–14] Proposed Agency Information Collection Activities; Comment Request Federal Railroad Administration (FRA), Department of Transportation (DOT). ACTION: Notice and request for comments. AGENCY: In compliance with the Paperwork Reduction Act of 1995, this notice announces that the renewal Information Collection Requests (ICRs) abstracted below are being forwarded to the Office of Management and Budget (OMB) for review and comment. The ICRs describe the nature of the information collections and their expected burdens. The Federal Register notice with a 60-day comment period soliciting comments on the following collections of information was published on April 21, 2014 (79 FR 22178). SUMMARY: Comments must be submitted on or before August 13, 2014. FOR FURTHER INFORMATION CONTACT: Mr. Robert Brogan, Office of Planning and Evaluation Division, RRS–21, Federal Railroad Administration, 1200 New Jersey Ave. SE., Mail Stop 25, Washington, DC 20590 (Telephone: (202) 493–6292), or Ms. Kimberly Toone, Office of Information Technology, RAD–20, Federal Railroad Administration, 1200 New Jersey Ave. SE., Mail Stop 35, Washington, DC 20590 (Telephone: (202) 493–6132). (These telephone numbers are not tollfree.) SUPPLEMENTARY INFORMATION: The Paperwork Reduction Act of 1995 (PRA), Public Law 104–13, sec. 2, 109 Stat. 163 (1995) (codified as revised at 44 U.S.C. 3501–3520), and its implementing regulations, 5 CFR part 1320, require Federal agencies to issue two notices seeking public comment on information collection activities before OMB may approve paperwork packages. 44 U.S.C. 3506, 3507; 5 CFR 1320.5, 1320.8(d)(1), 1320.12. On April 21, 2014, FRA published a 60-day notice in the Federal Register soliciting comment on ICRs that the agency was seeking OMB approval. See 79 FR 22178. FRA received no comments in response to this notice. Before OMB decides whether to approve these proposed collections of information, it must provide 30 days for public comment. 44 U.S.C. 3507(b); 5 DATES: DEPARTMENT OF STATE Sfmt 4703 40835 E:\FR\FM\14JYN1.SGM 14JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 134 (Monday, July 14, 2014)]
[Notices]
[Pages 40830-40835]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-16363]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72554; File No. SR-ISE-2014-35

Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Related to the Price Improvement Mechanism

July 8, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 25, 2014, International Securities Exchange, LLC (``Exchange''
or ``ISE'') filed with the Securities and Exchange Commission
(``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.
---------------------------------------------------------------------------

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

The Exchange proposes to amend its rules regarding the Price
Improvement Mechanism (``PIM'').
The text of the proposed rule change is available on the Exchange's
Internet Web site at https://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
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 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
Statutory Basis for, the Proposed Rule Change

1. Purpose
The purpose of this proposed rule change is to amend the Exchange's
rules regarding the PIM functionality. The

[[Page 40831]]

Exchange proposes to make two changes to its PIM rules. The first
change is based on a proposal recently submitted by NASDAQ OMX PHLX LLC
(``PHLX''), and approved by the Commission,\3\ pursuant to which orders
of any size may initiate the price improvement auction (``PIXL'') on
PHLX at a price which is at or better than the national best bid or
offer (``NBBO''), even in instances where PHLX has resting interest on
the opposite side and thus not at least one cent better than PHLX's own
best bid or offer as required in the past. The second change proposed
in this filing relates to how responses are addressed in the PIM. With
this proposed change, the manner in which response messages are treated
will be similar to how they are treated in the price improvement
auctions operated at other exchanges.\4\
---------------------------------------------------------------------------

\3\ See Securities Exchange Act Release No. 70654 (October 10,
2013), 78 FR 62891 (October 22, 2013) (SR-PHLX-2013-76).
\4\ See Securities Exchange Act Release No. 72009 (April 23,
2014), 79 FR 24032 (April 29, 2014) (Notice of Filing of Amendment
No. 1 and Order Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment No. 1, To Adopt the MIAX PRIME
Price Improvement Mechanism and the MIAX PRIME Solicitation
Mechanism) (``MIAX Filing''). See also PHLX Rule 1080(n)(ii)(A)(6).
---------------------------------------------------------------------------

The PIM is a process that allows Electronic Access Members
(``EAM'') to provide price improvement opportunities for a transaction
wherein the Member seeks to execute an agency order as principal or
execute an agency order against a solicited order (a ``Crossing
Transaction'').\5\ A Crossing Transaction is comprised of the order the
EAM represents as agent (the ``Agency Order'') and a counter-side order
for the full size of the Agency Order (the ``Counter-Side Order''). The
Counter-Side Order may represent interest for the Member's own account,
or interest the Member has solicited from one or more other parties, or
a combination of both.
---------------------------------------------------------------------------

\5\ See Securities Exchange Act No. 50819 (December 8, 2004), 69
FR 75093 (December 15, 2004) (SR-ISE-2003-06).
---------------------------------------------------------------------------

Currently under Rule 723, a Crossing Transaction must be entered
only at a price that is better than the ISE best bid or offer (``ISE
BBO'') and equal to or better than the national best bid or offer
(``NBBO''). Under Supplementary Material .08 to Rule 723, when the ISE
BBO is equal to the NBBO, a Crossing Transaction may be entered where
the price of the Crossing Transaction is equal to the ISE BBO if the
Agency Order is on the opposite side of the market from the ISE BBO. In
this case, the Agency Order is automatically executed against the ISE
BBO. If the Agency Order is not fully executed after the ISE BBO is
fully exhausted and is no longer at a price equal to the Crossing
Transaction, the PIM is initiated for the balance of the order as
provided in Rule 723.
The Exchange now proposes to modify PIM so that Members may enter a
Crossing Transaction at a price that is at or better than the NBBO on
either side of the Agency Order and better than the limit order or
quote on the ISE order book on the same side of the Agency Order.
Members are not required to improve the ISE BBO on the opposite side of
the Agency Order to initiate a PIM. Any resting interest on the ISE
order book on the opposite side of the Agency Order will participate at
the end of the auction in accordance with Rule 723(d). With this
proposed rule change, PIM will now operate similar to the PIXL
functionality at PHLX in terms of the price at which a PIM can be
initiated.\6\ The proposed change to the start price of a PIM will not
impact the current execution priority. However, as discussed in detail
below, the Exchange is also proposing to make PIM auctions blind. In
addition, the Exchange is proposing that Member orders will no longer
yield priority to non-Member orders.\7\
---------------------------------------------------------------------------

\6\ See PHLX Rule 1080(n).
\7\ Priority Customer interest will continue to be executed
first followed by Professional Orders and Member interest. See
proposed Rule 723(d)(2).
---------------------------------------------------------------------------

The Exchange believes the proposed rule change will allow a greater
number of orders to receive price improvement that might not currently
be afforded any price improvement. By auctioning the entire quantity in
the PIM, the opportunity for price improvement over the prevailing NBBO
is extended to the whole order, rather than only the portion that does
not interact with the resting liquidity at the auction price level. As
before, Priority Customers will continue to have priority at each price
level in accordance with Rule 723(d). At each given price point, ISE
will execute Priority Customer interest in a price/time fashion such
that all Priority Customer interest which was resting on the order book
is satisfied before any other interest that arrived after the PIM was
initiated. After Priority Customer interest at a given price point has
been satisfied, remaining contracts will be allocated among all
Exchange quotes and orders in accordance with the execution rules set
forth in Rule 723(d). Interest, whether resting prior to the
commencement of the auction or arriving during the auction process,
will continue to be executed in accordance with Rule 723(d).
The Exchange believes using the allocation method that it currently
does is a fair distribution because the Counter-Side Order provides
significant value to the market. The EAM guarantees the Crossing
Transaction price improvement, and is subject to market risk while the
order is exposed to other market participants. The EAM may only improve
the price where it stopped the agency side, and may not cancel its
order once the PIM commences. Other market participants are free to
modify or cancel their quotes and orders at any time during the
auction. The Exchange believes that the EAM provides an important role
in facilitating the price improvement opportunity for market
participants.
The following examples illustrate how the proposed rule change
would operate: Example 1
ISE BBO is 2.48-2.51 (60x30) (10 of the 30 on the offer is a
Priority Customer; 20 of the 30 on the offer is a market maker (MM1);
all 60 on the bid is a MM). NBBO is 2.48-2.51 (100x100). Under the
proposed rule change, an Agency Order to buy may be entered into the
PIM at any price between and including 2.49 and 2.51.
Assume a Priority Customer or non-Priority Customer order to buy
100 contracts is submitted into the PIM with a stop price of 2.51. The
PIM auction will commence with a notification being sent to market
participants. Assume, during the auction, two market makers (MM2 and
MM3) respond. MM2 responds to sell 10 contracts at 2.50 and MM3
responds to sell 20 contracts at 2.51. At the end of the auction, the
agency side of the order will buy 10 contracts from MM2 at 2.50,
leaving 90 to be allocated at the original order limit of 2.51. The
allocation process would continue and 10 contracts will be allocated to
the Priority Customer on the book at 2.51, leaving 80 contracts to be
allocated among the Counter-Side Order at 2.51 and the two market
makers offering at 2.51. The remaining 80 contracts will be allocated
at a price of 2.51 with 40 contracts (40% of the original order
quantity) being allocated to the Counter-Side Order, 20 contracts
allocated to MM1 and 20 contracts allocated to MM3.
The Exchange believes the proposed rule change will attract new
order flow that might not currently be afforded any price improvement
opportunity. Moreover, the Exchange notes that the Boston Options
Exchange (``BOX'') currently has rules that allow it to commence its
price improvement auction, called the Price Improvement Period
(``PIP''), at a price equal to the

[[Page 40832]]

NBBO.\8\ When a PIP is initiated at a price equal to the NBBO,
regardless of size, the resting quotes and orders on BOX are considered
for allocation at the end of the auction. BOX executes interest that
existed on the BOX order book prior to the commencement of a PIP before
executing any interest which joined during the auction. This behavior
aligns with the BOX standard trade allocation rules as they employ a
price/time allocation algorithm.
---------------------------------------------------------------------------

\8\ See BOX Rules Chapter V, Section 18(e).
---------------------------------------------------------------------------

Similar to BOX, the ISE proposed rule change will allow orders of
any size to initiate an auction at a price which is equal to or better
than the NBBO where ISE may have resting interest. ISE will execute a
Crossing Transaction against any interest, resting prior to the
commencement of an auction or interest which arrived during the
auction, in accordance with the rules as stated and illustrated with
the example above. While this is different than the allocation
algorithm that BOX employs, this behavior is consistent with the ISE
PIM rules in place today. This proposal will continue to afford the
same price improvement opportunities for Priority Customer and non-
Priority Customer Crossing Transactions as is in operation today, but
with the ability to initiate such price improving auctions at a price
that is equal to the NBBO, and therefore permitting more of such orders
to receive price improvement.
Further, as noted above, under Supplementary Material .08 to Rule
723, when the ISE BBO is equal to the NBBO, a Crossing Transaction may
currently be entered where the price of the Crossing Transaction is
equal to the ISE BBO if the Agency Order is on the opposite side of the
market from the ISE BBO. However, with this proposed rule change, if a
Crossing Transaction is entered at a price equal to the ISE BBO on the
opposite side of the market, the Agency Order will no longer
automatically execute and the Agency Order will trade against any
interest, resting prior to the commencement of an auction or interest
which arrived during the auction, in accordance with rule 723(d). The
Exchange, therefore, proposes to delete Supplementary Material .08 to
Rule 723.
The second change proposed in this filing is to modify the PIM
functionality so responses sent by Members during a PIM auction are not
visible to other auction participants. With this proposed change,
responses will be treated in the same way they are treated in price
improvement auctions operated by other exchanges.\9\
---------------------------------------------------------------------------

\9\ See supra note 4.
---------------------------------------------------------------------------

Currently, upon entry of a Crossing Transaction into the PIM, a
broadcast message that includes the series, price and size of the
Agency Order, and whether it is to buy or sell, is sent to all Members.
Members are then given 500 milliseconds to indicate the size and price
at which they want to participate in the execution of the Agency Order
(``Improvement Orders''). Improvement Orders may be entered by all
Members for their own account or for the account of a Public Customer
in one-cent increments at the same price as the Crossing Transaction or
at an improved price for the Agency Order, and for any size up to the
size of the Agency Order. During the exposure period, Improvement
Orders cannot be canceled, but can be modified to (1) increase the size
at the same price, or (2) improve the price of the Improvement Order
for any size up to the size of the Agency Order. During the exposure
period, the aggregate size of the best prices (including the Counter-
Side Order, Improvement Orders, and any changes to either) are
continually updated and broadcast to all Members.
Because the PIM permits Members to continually receive broadcast
messages, the Exchange adopted rules pursuant to which EAMs and
Exchange Market Makers are required to yield priority to all non-Member
orders \10\ which the Commission found to be consistent with the
requirements in Section 11(a) of the Act. At the time PIM was approved,
although the ``effect versus execute'' exemption under Section 11(a)
existed and was available to ISE Members, because of the manner in
which the PIM was designed, ISE Members were not able to comply with
that exemption. Instead, the PIM was designed to rely on yielding by
Members to non-Member orders to be consistent with Section 11(a) of the
Act. The Exchange notes it is now more than a decade since PIM was
approved. The options markets have since greatly evolved and some
options exchanges that have adopted a price improvement auction rely
now on the ``effect versus execute'' exemption under Section 11(a) and
yield execution priority to Priority Customers only. As a competitive
response, the Exchange now proposes to delete relevant parts of Rule
723 to modify the PIM functionality so that responses submitted during
a PIM auction will no longer be continually updated and broadcast to
all Members.\11\ Doing so will allow ISE Members to rely on the
``effect versus execute'' exemption under Section 11(a) of the Act when
utilizing the PIM.
---------------------------------------------------------------------------

\10\ See Securities Exchange Act No. 50819 (December 8, 2004),
69 FR 75093 (December 15, 2004) (SR-ISE-2003-06). See also
Securities Exchange Act Release No. 59287 (January 23, 2009), 74 FR
5694 (January 30, 2009). In connection with the current proposal to
make PIM auctions blind, the Exchange proposes to delete reference
to non-Member Professional Orders from its rules.
\11\ A number of exchanges currently operate price improvement
auctions where responses submitted by a member are blind, i.e., not
visible to other auction participants. For example, MIAX Rule
515A(a)(2)(i)(E) notes that ``responses shall not be visible to
other Auction participants.'' See Securities Exchange Act Release
No. 72009 (April 23, 2014), 79 FR 24032 (April 29, 2014).
Additionally, PHLX Rule 1080(n)(ii)(A)(6) similarly provides that
``responses will not be visible to Auction participants.'' See PHLX
Rule 1080(n)(ii)(A)(6).
---------------------------------------------------------------------------

Section 11(a) of the Exchange Act prohibits any member of a
national securities exchange from effecting transactions on that
exchange for its own account, the account of an associated person, or
an account over which it or its associated persons exercises discretion
(``covered accounts''), unless an exception applies.\12\ Section
11(a)(1) contains a number of exceptions for principal transactions by
members and their associated persons. As set forth below, the Exchange
believes that with the proposed change, the PIM rules are now
consistent with the requirements in Section 11(a) and the rules
thereunder.
---------------------------------------------------------------------------

\12\ 15 U.S.C. 78k(a)(1).
---------------------------------------------------------------------------

In this regard, Section 11(a)(1)(A) provides an exception from the
prohibitions in Section 11(a) for dealers acting in the capacity of
market makers. With respect to Market Makers on the Exchange, the
Exchange believes that orders sent by them for covered accounts to the
proposed PIM would qualify for this exception from Section 11(a).
In addition to this Market Maker exception, Rule 11a2-2(T) under
the Exchange Act, known as the ``effect versus execute'' rule, provides
exchange members with an exception from Section 11(a) by permitting
them, subject to certain conditions, to effect transactions for covered
accounts by arranging for an unaffiliated member to execute the
transactions on the exchange.\13\ To comply with the ``effect versus
execute'' rule's conditions, a member: (i) Must transmit the order from
off the exchange floor; (ii) may not participate in the execution of
the transaction once it has been transmitted to the member performing
the execution; \14\ (iii) may not be affiliated with the member
executing the transaction on the floor through the

[[Page 40833]]

facilities of the Exchange; and (iv) with respect to an account over
which the member has investment discretion, neither the member nor its
associated person may retain any compensation in connection with
effecting the transaction except as provided in the rule.\15\ The
Exchange believes that orders sent by Members for covered accounts to
the proposed PIM would qualify for this ``effect versus execute''
exception from Section 11(a), as described below. In this regard, the
first condition of Rule 11a2-2(T) is that orders for covered accounts
be transmitted from off the exchange floor. The ISE trading system and
the PIM receives all orders electronically through remote terminals or
computer-to-computer interfaces. The Exchange represents that orders
for covered accounts from Members will be transmitted from a remote
location directly to the PIM auction by electronic means. In the
context of other automated trading systems, the Commission has found
that the off-floor transmission requirement is met if a covered account
order is transmitted from a remote location directly to an exchange's
floor by electronic means.\16\ The second condition of Rule 11a2-2(T)
requires that the member not participate in the execution of its order
once the order is transmitted to the floor for execution.\17\ The
Exchange represents that, upon submission to the PIM, an order will be
executed automatically pursuant to the rules set forth for the
mechanism. In particular, execution of an order sent to the mechanism
depends not on the Member entering the order, but rather on what other
orders are present and the priority of those orders. Thus, at no time
following the submission of an order is a Member able to acquire
control or influence over the result or timing of order execution.\18\
Rule 11a2-2(T)'s third condition requires that the order be executed by
an exchange member who is unaffiliated with the member initiating the
order. The Commission has stated that the requirement is satisfied when
automated exchange facilities, such as the PIM, are used, as long as
the design of these systems ensures that members do not possess any
special or unique trading advantages in handling their orders after
transmitting them to the exchange.\19\ The Exchange represents that the
PIM is designed so that no Member has any special or unique trading
advantage in the handling of its orders after transmitting its orders
to the mechanism. Rule 11a2-2(T)'s fourth condition requires that, in
the case of a transaction effected for an account with respect to which
the initiating member or an associated person thereof exercises
investment discretion, neither the initiating member nor any associated
person thereof may retain any compensation in connection with effecting
the transaction, unless the person authorized to transact business for
the account has expressly provided otherwise by written contract
referring to Section 11(a) of the Act and Rule 11a2-2(T)
thereunder.\20\ The Exchange recognizes that Members relying on Rule
11a2-2(T) for transactions effected through the PIM must comply with
this condition of the Rule.
---------------------------------------------------------------------------

\13\ 17 CFR 240.11a2-2(T).
\14\ The member, however, may participate in clearing and
settling the transaction. See Securities Exchange Act Release No.
14563 (March 14, 1978), 43 FR 11542 (March 17, 1978).
\15\ 17 CFR 240.11a2-2(T).
\16\ See, e.g., Securities Exchange Act Release Nos. 59154
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48); 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-
NASDAQ-2007-004 and SR-NASDAQ-2007-080); 49068 (January 13, 2004),
69 FR 2775 (January 20, 2004) (SR-BSE-2002-15); 15533 (January 29,
1979), 44 FR 6084 (January 31, 1979) (``1979 Release''); 14563
(March 14, 1978), 43 FR 11542 (March 17, 1978) (``1978 Release'').
\17\ The description above covers the universe of the types of
Members (i.e., Market Makers, EAMs).
\18\ The Exchange notes that a Member may cancel or modify the
order, or modify the instructions for executing the order, but that
such instructions would be transmitted from off the floor of the
Exchange. The Commission has stated that the non-participation
requirement is satisfied under such circumstances so long as such
modifications or cancellations are also transmitted from off the
floor. See 1978 Release (stating that the ``non-participation
requirement does not prevent initiating members from canceling or
modifying orders (or the instructions pursuant to which the
initiating member wishes to be executed) after the orders have been
transmitted to the executing member, provided that any such
instructions are also transmitted from off the floor'').
\19\ In considering the operation of automated execution systems
operated by an exchange, the Commission noted that, while there is
not an independent executing exchange member, the execution of an
order is automatic once it has been transmitted into the system.
Because the design of these systems ensures that members do not
possess any special or unique trading advantages in handling their
orders after transmitting them to the exchange, the Commission has
stated that executions obtained through these systems satisfy the
independent execution requirement of Rule 11a2-2(T). See 1979
Release.
\20\ See 17 CFR 240.11a2-2(T)(a)(2)(iv). In addition, Rule 11a2-
2(T)(d) requires a member or associated person authorized by written
contract to retain compensation, in connection with effecting
transactions for covered accounts over which such member or
associated persons thereof exercises investment discretion, to
furnish at least annually to the person authorized to transact
business for the account a statement setting forth the total amount
of compensation retained by the member in connection with effecting
transactions for the account during the period covered by the
statement which amount must be exclusive of all amounts paid to
others during that period for services rendered to effect such
transactions. See also 1978 Release (stating ``[t]he contractual and
disclosure requirements are designed to assure that accounts
electing to permit transaction-related compensation do so only after
deciding that such arrangements are suitable to their interests'').
---------------------------------------------------------------------------

2. Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \21\ in
general, and furthers the objectives of Section 6(b)(5) of the Act \22\
in particular, in that it is designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
for a free and open market and a national market system, and, in
general, to protect investors and the public interest by creating
positive, beneficial incentives for EAMs to provide price improvement
opportunities to market participants. With the proposed change to the
start price of a PIM auction, Members will not be required to improve
the ISE BBO on the opposite side of the Agency Order to initiate a PIM.
Further, any resting interest on the ISE order book on the opposite
side of the Agency Order will now participate at the end of the
auction. As a result, the proposed rule change will remove impediments
to and perfect the mechanism for a free and open market and will result
in more orders being executed in the PIM, thus providing an increased
probability of price improvement for all orders, regardless of their
size. With this proposed rule change, market participants would be
incentivized to introduce more orders to the PIM for the opportunity to
receive price improvement. Furthermore, Priority Customers will
continue to have priority at each price level in accordance with ISE
Rule 723(d). While currently non-Member Professional Orders are
executed after Priority Customer interest and before Member interest,
with this proposal, which in part amends ISE rules to make PIM a blind
auction, all Professional Orders will now be at par with Member
interest and will be executed after Priority Customer orders are
executed. The Exchange believes it is appropriate to give Professionals
Orders the same priority that is given to broker-dealer orders because
professional customers and broker-dealers essentially behave the same,
i.e., the type of trading professional customers engage in largely
resembles that of a broker-dealer. The Exchange believes it is
appropriate to treat these market participants at par with one another.
---------------------------------------------------------------------------

\21\ 15 U.S.C. 78f(b).
\22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

In particular, the Exchange believes that using the same allocation
process as is used today for Crossing Transactions is fair and
equitable because of the value the EAM brings to the marketplace.

[[Page 40834]]

Specifically, by stopping the Crossing Transaction at or better than
the NBBO, the EAM facilitates a process that protects investors and is
in the public interest by providing an opportunity for price
improvement. The Exchange believes the proposed rule change generally
will benefit investors by offering more opportunities for orders to
receive price improvement. For these reasons, the Exchange believes
that the proposal is fair, reasonable and equitable for all market
participants.
The Exchange believes its proposal to amend the manner in which
responses in the PIM auction are addressed is consistent with Section
6(b) of the Act. The proposal to make responses in the PIM blind to
other auction participants and the corresponding change to the priority
rules for the PIM are similar to existing priority rules that
distinguish between Priority Customers, Market Makers, and Professional
interest in a manner that will help ensure a fair and orderly market by
maintaining priority of orders and quotes while still affording the
opportunity for price improvement is both reasonable and appropriate.
The Exchange believes the proposed rule change is appropriate in
the [sic] price improvement auctions are widely recognized by market
participants as invaluable, both as a tool to access liquidity, and a
mechanism to help meet their best execution obligations. The proposed
rule change will further the ability of market participants to carry
out these strategies. Finally, as noted above, the proposed changes are
a competitive response to how price improvement auctions on other
exchanges currently operate and with this proposal, the Exchange will
be on a more equal footing to compete with other exchanges for orders
to be executed in the PIM.

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 Exchange's proposal to
amend its rules regarding the start price of a PIM auction will not
impose a burden on competition because it will increase the number of
orders that may be executed in the PIM and thereby receive price
improvement opportunities that were not previously available to them.
Further, the Exchange's proposal to make PIM a blind auction will allow
ISE to compete with other options exchanges that already have blind
auctions which most options exchanges that operate a price improvement
auction do. Finally, the Exchange's proposal to amend the execution
priority rules will not be a burden on competition because the proposed
change will allow the Exchange to compete with other options exchanges
that operate a price improvement auction and whose rules already permit
its members to rely on the ``effect versus execute'' exemption when
utilizing the price improvement auction of those markets. The changes
proposed to Rule 723 will offer opportunities found on other options
exchanges and create systems that embolden market participants to seek
out price improvement opportunities for customers. Accordingly, the
proposed rule change will have no impact on competition other than to
strengthen competition among the options exchanges that provide price
improvement opportunities.

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

The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.

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

Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \23\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\24\
---------------------------------------------------------------------------

\23\ 15 U.S.C. 78s(b)(3)(a)(ii).
\24\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
---------------------------------------------------------------------------

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

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-ISE-2014-35 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-ISE-2014-35. 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 ISE. 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-ISE-2014-35 and should be
submitted on or before August 4, 2014.

[[Page 40835]]

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------

\25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-16363 Filed 7-11-14; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.