Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Regarding Complex Orders, 1565-1567 [2015-00221]
Download as PDF
<![CDATA[
Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices
Tradebook, Island, RediBook, Attain,
TrackECN, BATS Trading and Direct
Edge. As noted above, BATS launched
as an ATS in 2006 and became an
exchange in 2008, while Direct Edge
began operations in 2007 and obtained
exchange status in 2010. As noted
above, LavaFlow ECN provides market
data to its subscribers at no charge.26
In setting the proposed fees, the
Exchange considered the
competitiveness of the market for
proprietary data and all of the
implications of that competition. The
Exchange believes that it has considered
all relevant factors and has not
considered irrelevant factors in order to
establish fair, reasonable, and not
unreasonably discriminatory fees and an
equitable allocation of fees among all
users. The existence of numerous
alternatives to the Exchange’s products,
including proprietary data from other
sources, ensures that the Exchange
cannot set unreasonable fees, or fees
that are unreasonably discriminatory,
when vendors and subscribers can elect
these alternatives or choose not to
purchase a specific proprietary data
product if the attendant fees are not
justified by the returns that any
particular vendor or data recipient
would achieve through the purchase.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
No written comments were solicited
or received with respect to the proposed
rule change.
tkelley on DSK3SPTVN1PROD with NOTICES
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 Act27 and
paragraph (f)(2) of Rule 19b–4
thereunder.28 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:
SECURITIES AND EXCHANGE
COMMISSION
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–
NYSEMKT–2014–114 on the subject
line.
[Release No. 34–74004; File No. SR–ISE–
2014–56]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change Regarding Complex Orders
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–NYSEMKT–2014–114. 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 NYSE MKT. 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–
NYSEMKT–2014–114 and should be
submitted on or before February 2, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Brent J. Fields,
Secretary.
[FR Doc. 2015–00214 Filed 1–9–15; 8:45 am]
supra note 24.
U.S.C. 78s(b)(3)(A)(ii).
28 17 CFR 240.19b–4(f)(2).
27 15
VerDate Sep<11>2014
17:35 Jan 09, 2015
January 6, 2015.
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 December
23, 2014 the International Securities
Exchange, LLC (the ‘‘Exchange’’ or the
‘‘ISE’’) filed with the Securities and
Exchange Commission the proposed
rule change, as described in Items I and
II below, which items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The ISE proposes to amend its rules
to permit a greater number of complex
orders to leg into the regular market.
The text of the proposed rule change is
available on the Exchange’s Web site
(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
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposed rule
change is to permit a greater number of
complex orders to leg into the regular
market. The Exchange currently
BILLING CODE 8011–01–P
26 See
1 15
29 17
Jkt 235001
1565
PO 00000
CFR 200.30–3(a)(12).
Frm 00073
Fmt 4703
Sfmt 4703
2 17
E:\FR\FM\12JAN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
12JAN1
1566
Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices
provides functionality that
automatically removes a market maker’s
quotes in all series of an options class
when certain parameter settings are
triggered.3 The purpose of this
functionality is to allow market makers
to provide liquidity across hundreds of
options series without being at risk of
executing the full cumulative size of all
such quotes before being given the
opportunity to adjust their quotes. By
checking the risk parameters following
each execution in an options series, the
risk parameters allow market makers to
manage their risk. This is not the case,
however, when a complex order legs
into the regular market. Because the
execution of each leg is contingent on
the execution of the other legs, 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 therefore presents a higher risk to
market makers as compared to regular
orders being entered in multiple series
of an options class in the regular market
as it can result in market makers
exceeding their parameters by a greater
number of contracts. Because this risk is
directly proportional to the number of
legs associated with a complex order,
the Exchange amended Rule 722 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.4 The Legging
Filing effectively limited certain
legitimate complex order strategies,
such as a Box Spread 5 or a Condor,6
from legging into the regular market.
These strategies are limited to trading
3 See
ISE Rules 722 and 804.
Securities Exchange Act Release No. 70132
(August 7, 2013), 78 FR 49311 (August 13, 2013)
(SR–ISE–2013–38) (the ‘‘Legging Filing’’).
5 The box spread, or long box, is a common
strategy that involves buying a call spread together
with the corresponding put spread with both
spreads having the same strike prices and
expiration dates. A box spread can be constructed
by buying one in-the-money call, selling one outof-the-money call, buying one in-the-money put and
selling one out-of-the-money put. The long box is
used when the spreads are underpriced in relation
to their expiration values.
6 The condor option strategy is a limited risk,
non-directional option trading strategy that is
structured to earn a limited profit when the
underlying security is perceived to have little
volatility. To establish this position, a options
trader sells an in-the-money call, buys an in-themoney call (lower strike), sells an out-of-the-money
call and buys an out-of-the-money call (higher
strike). Using call options expiring on the same
month, the trader can implement a long condor
option spread by writing a lower strike in-themoney call, buying an even lower striking in-themoney call, writing a higher strike out-of-the-money
call and buying another even higher striking out-ofthe-money call. A total of 4 legs are involved in the
condor options strategy and a net debit is required
to establish the position.
tkelley on DSK3SPTVN1PROD with NOTICES
4 See
VerDate Sep<11>2014
17:35 Jan 09, 2015
Jkt 235001
with other complex orders in the
complex order book.
Despite the limitation adopted in the
Legging Filing, certain market
participants continued to use atypical
multi-leg strategies to trade with
multiple quotes from a single market
maker that caused single leg market
makers to trade far more than their risk
limits allowed. To minimize this risk,
the Exchange recently amended its rules
to prevent these atypical multi-leg
strategies from legging into the regular
market. These atypical multi-leg
strategies are complex orders with two
option legs where both legs are buying
or both legs are selling and both legs are
calls or both legs are puts, and complex
orders with three options legs, where all
legs are buying or all legs are selling
regardless of whether the option is a call
or a put (‘‘Non-Standard Strategies’’).7
Non-Standard Strategies are permitted
to trade only in the complex order book
and are prevented from legging into the
regular market.8
With rules limiting Non-Standard
Strategies from legging into the regular
market firmly in place, the risk of
market makers trading more than the
limitations they have set has greatly
diminished. The Exchange therefore
proposes to amend Rule 722 to allow
complex orders with two, three or four
legs (determined by the Exchange on a
class basis) to leg into the regular
market.9
The proposed rule change will allow
the Exchange to permit complex order
strategies with three or four legs to leg
into the regular market as long as all
legs are not buying or all legs are not
selling. To ensure that such orders do
not leg into the regular market, the
Exchange proposes to amend Rule
722(b)(3)(ii)(B) to extend the current
limitation found in that rule to complex
orders with 3 or 4 legs, where all legs
are buying or all legs are selling
regardless of whether the option is a call
or a put. Such orders will only be
permitted to trade against other complex
orders in the complex order book, as is
the case today. The Exchange expects
this proposal to loosen the current
restriction to result in a number of other
7 See Securities Exchange Act Release No. 73023
(September 9, 2014), 79 FR 55033 (September 15,
2014) (SR–ISE–2014–10).
8 See Rule 722(b)(3)(ii)(A)–(B).
9 The Exchange will issue a circular to members
identifying the options classes for which legging is
limited to complex orders and the associated
number of legs. The Exchange will provide
members with reasonable notice prior to changing
the limit to allow members to make any necessary
system changes.
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
legitimate complex order strategies to
also be executed on the Exchange.10
The Exchange previously permitted
complex orders that are the subject of
this proposal to leg into the regular
market and only recently limited that
activity to better address the risk posed
to market makers. The market maker
risk that the Exchange sought to address
in the Legging Filing was further
strengthened when ISE amended its
rules to prevent Non-Standard Strategies
from legging into the regular market.
With this proposed rule change,
complex order strategies, such as Box
Spreads and Condors, for example, will
once again be permitted to leg into the
regular market and thereby increase the
likelihood that these orders are executed
on the Exchange rather than on a
competing market without posing any
unintended risk to market makers. In
the Legging Filing, the Exchange noted
that over 85% of all complex orders
have only two legs. The Exchange notes
that current data continues to support
that assertion in that even today, over
85% of all complex orders have only
two legs and that very few complex
orders are entered with more than three
legs. The proposed rule change will
therefore impact only a small portion of
all complex orders traded on the
Exchange. These orders, however, are
comprised of legitimate trading
strategies that have an economic
purpose and are not submitted as means
to bypass a market maker’s risk setting.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 11 in general, and furthers the
objectives of Section 6(b)(5) of the Act 12
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.
The Exchange believes it is reasonable
to permit complex orders that are
subject of this rule change to leg into the
regular market. ISE has codified into its
rules the specific complex order
strategies that pose the greatest amount
of risk to market makers and therefore,
the Exchange believes the proposed rule
change to permit legitimate multi-legged
complex orders to interact with the
regular market will promote just and
equitable principles of trade. The
proposed rule change will facilitate the
10 See www.theoptionsguide.com for a more
comprehensive list of complex order strategies.
11 15 U.S.C. 78f(b).
12 15 U.S.C. 78f(b)(5).
E:\FR\FM\12JAN1.SGM
12JAN1
Federal Register / Vol. 80, No. 7 / Monday, January 12, 2015 / Notices
execution of complex order strategies,
such as Box Spreads and Condors,
which consist of four legs. The proposed
rule change is designed to protect
investors and the public interest in that
the proposal amends a current rule to
ensure that complex orders with three
or four option legs where all legs are
buying or all legs are selling only trade
against other complex orders in the
complex order book. The Exchange
notes that prior to the Legging Filing
and before the Non-Standard Strategies
were codified into the Exchange’s rules,
the complex order strategies affected by
this proposal were permitted to trade
and leg into the regular market.
Therefore, this proposed rule change
simply adjusts Exchange rules to once
again permit the execution such
complex order strategies. The proposed
rule change will also benefit investors
and the general public because multilegged strategies will have a greater
chance of execution when they are
allowed to leg into the regular market
and thereby increase the execution rate
for these orders thus, providing market
participants with an increased
opportunity to execute these orders on
ISE rather than on a competing
exchange.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The proposed rule change does not
impose any burden on competition. The
proposed change to amend the
restriction against complex order
strategies, such as Box Spreads and
Condors, from legging into the regular
market will allow a greater number of
complex orders to be executed on the
Exchange without adversely impacting
risk to market makers that are quoting
in the regular market.
tkelley on DSK3SPTVN1PROD with NOTICES
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
VerDate Sep<11>2014
17:35 Jan 09, 2015
Jkt 235001
become effective pursuant to Section
19(b)(3)(A) of the Act and Rule 19b–
4(f)(6) thereunder.
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.
1567
information that you wish to make
available publicly. All submissions
should refer to File Number SR–ISE–
2014–56 and should be submitted on or
before February 2, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Brent J. Fields,
Secretary.
[FR Doc. 2015–00221 Filed 1–9–15; 8:45 am]
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:
BILLING CODE 8011–01–P
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 No. SR–ISE–
2014–56 on the subject line.
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending Rule
123C To Specify That Exchange
Systems May Close One or More
Securities Electronically
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2014–56. 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
January 6, 2015.
PO 00000
Frm 00075
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 74006; File No. SR–NYSE–
2014–73]
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that December 23,
2014, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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
Rule 123C to specify that Exchange
systems may close one or more
securities electronically if a Designated
Market Maker (‘‘DMM’’) registered in a
security or securities cannot facilitate
the close of trading as required by
Exchange rules. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
on the Commission’s Web site at
www.sec.gov, and at the Commission’s
Public Reference Room.
13 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
E:\FR\FM\12JAN1.SGM
12JAN1
]]>Agencies
[Federal Register Volume 80, Number 7 (Monday, January 12, 2015)]
[Notices]
[Pages 1565-1567]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-00221]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74004; File No. SR-ISE-2014-56]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule
Change Regarding Complex Orders
January 6, 2015.
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 December 23, 2014 the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission the proposed rule change, as described in Items I
and II below, which items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\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 ISE proposes to amend its rules to permit a greater number of
complex orders to leg into the regular market. The text of the proposed
rule change is available on the Exchange's Web site (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 self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections A, B and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to permit a greater
number of complex orders to leg into the regular market. The Exchange
currently
[[Page 1566]]
provides functionality that automatically removes a market maker's
quotes in all series of an options class when certain parameter
settings are triggered.\3\ The purpose of this functionality is to
allow market makers to provide liquidity across hundreds of options
series without being at risk of executing the full cumulative size of
all such quotes before being given the opportunity to adjust their
quotes. By checking the risk parameters following each execution in an
options series, the risk parameters allow market makers to manage their
risk. This is not the case, however, when a complex order legs into the
regular market. Because the execution of each leg is contingent on the
execution of the other legs, 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 therefore
presents a higher risk to market makers as compared to regular orders
being entered in multiple series of an options class in the regular
market as it can result in market makers exceeding their parameters by
a greater number of contracts. Because this risk is directly
proportional to the number of legs associated with a complex order, the
Exchange amended Rule 722 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.\4\ The Legging Filing effectively limited
certain legitimate complex order strategies, such as a Box Spread \5\
or a Condor,\6\ from legging into the regular market. These strategies
are limited to trading with other complex orders in the complex order
book.
---------------------------------------------------------------------------
\3\ See ISE Rules 722 and 804.
\4\ See Securities Exchange Act Release No. 70132 (August 7,
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38) (the ``Legging
Filing'').
\5\ The box spread, or long box, is a common strategy that
involves buying a call spread together with the corresponding put
spread with both spreads having the same strike prices and
expiration dates. A box spread can be constructed by buying one in-
the-money call, selling one out-of-the-money call, buying one in-
the-money put and selling one out-of-the-money put. The long box is
used when the spreads are underpriced in relation to their
expiration values.
\6\ The condor option strategy is a limited risk, non-
directional option trading strategy that is structured to earn a
limited profit when the underlying security is perceived to have
little volatility. To establish this position, a options trader
sells an in-the-money call, buys an in-the-money call (lower
strike), sells an out-of-the-money call and buys an out-of-the-money
call (higher strike). Using call options expiring on the same month,
the trader can implement a long condor option spread by writing a
lower strike in-the-money call, buying an even lower striking in-
the-money call, writing a higher strike out-of-the-money call and
buying another even higher striking out-of-the-money call. A total
of 4 legs are involved in the condor options strategy and a net
debit is required to establish the position.
---------------------------------------------------------------------------
Despite the limitation adopted in the Legging Filing, certain
market participants continued to use atypical multi-leg strategies to
trade with multiple quotes from a single market maker that caused
single leg market makers to trade far more than their risk limits
allowed. To minimize this risk, the Exchange recently amended its rules
to prevent these atypical multi-leg strategies from legging into the
regular market. These atypical multi-leg strategies are complex orders
with two option legs where both legs are buying or both legs are
selling and both legs are calls or both legs are puts, and complex
orders with three options legs, where all legs are buying or all legs
are selling regardless of whether the option is a call or a put (``Non-
Standard Strategies'').\7\ Non-Standard Strategies are permitted to
trade only in the complex order book and are prevented from legging
into the regular market.\8\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 73023 (September 9,
2014), 79 FR 55033 (September 15, 2014) (SR-ISE-2014-10).
\8\ See Rule 722(b)(3)(ii)(A)-(B).
---------------------------------------------------------------------------
With rules limiting Non-Standard Strategies from legging into the
regular market firmly in place, the risk of market makers trading more
than the limitations they have set has greatly diminished. The Exchange
therefore proposes to amend Rule 722 to allow complex orders with two,
three or four legs (determined by the Exchange on a class basis) to leg
into the regular market.\9\
---------------------------------------------------------------------------
\9\ The Exchange will issue a circular to members identifying
the options classes for which legging is limited to complex orders
and the associated number of legs. The Exchange will provide members
with reasonable notice prior to changing the limit to allow members
to make any necessary system changes.
---------------------------------------------------------------------------
The proposed rule change will allow the Exchange to permit complex
order strategies with three or four legs to leg into the regular market
as long as all legs are not buying or all legs are not selling. To
ensure that such orders do not leg into the regular market, the
Exchange proposes to amend Rule 722(b)(3)(ii)(B) to extend the current
limitation found in that rule to complex orders with 3 or 4 legs, where
all legs are buying or all legs are selling regardless of whether the
option is a call or a put. Such orders will only be permitted to trade
against other complex orders in the complex order book, as is the case
today. The Exchange expects this proposal to loosen the current
restriction to result in a number of other legitimate complex order
strategies to also be executed on the Exchange.\10\
---------------------------------------------------------------------------
\10\ See www.theoptionsguide.com for a more comprehensive list
of complex order strategies.
---------------------------------------------------------------------------
The Exchange previously permitted complex orders that are the
subject of this proposal to leg into the regular market and only
recently limited that activity to better address the risk posed to
market makers. The market maker risk that the Exchange sought to
address in the Legging Filing was further strengthened when ISE amended
its rules to prevent Non-Standard Strategies from legging into the
regular market. With this proposed rule change, complex order
strategies, such as Box Spreads and Condors, for example, will once
again be permitted to leg into the regular market and thereby increase
the likelihood that these orders are executed on the Exchange rather
than on a competing market without posing any unintended risk to market
makers. In the Legging Filing, the Exchange noted that over 85% of all
complex orders have only two legs. The Exchange notes that current data
continues to support that assertion in that even today, over 85% of all
complex orders have only two legs and that very few complex orders are
entered with more than three legs. The proposed rule change will
therefore impact only a small portion of all complex orders traded on
the Exchange. These orders, however, are comprised of legitimate
trading strategies that have an economic purpose and are not submitted
as means to bypass a market maker's risk setting.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \11\ in general, and furthers the objectives of Section
6(b)(5) of the Act \12\ 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.
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes it is reasonable to permit complex orders
that are subject of this rule change to leg into the regular market.
ISE has codified into its rules the specific complex order strategies
that pose the greatest amount of risk to market makers and therefore,
the Exchange believes the proposed rule change to permit legitimate
multi-legged complex orders to interact with the regular market will
promote just and equitable principles of trade. The proposed rule
change will facilitate the
[[Page 1567]]
execution of complex order strategies, such as Box Spreads and Condors,
which consist of four legs. The proposed rule change is designed to
protect investors and the public interest in that the proposal amends a
current rule to ensure that complex orders with three or four option
legs where all legs are buying or all legs are selling only trade
against other complex orders in the complex order book. The Exchange
notes that prior to the Legging Filing and before the Non-Standard
Strategies were codified into the Exchange's rules, the complex order
strategies affected by this proposal were permitted to trade and leg
into the regular market. Therefore, this proposed rule change simply
adjusts Exchange rules to once again permit the execution such complex
order strategies. The proposed rule change will also benefit investors
and the general public because multi-legged strategies will have a
greater chance of execution when they are allowed to leg into the
regular market and thereby increase the execution rate for these orders
thus, providing market participants with an increased opportunity to
execute these orders on ISE rather than on a competing exchange.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition.
The proposed change to amend the restriction against complex order
strategies, such as Box Spreads and Condors, from legging into the
regular market will allow a greater number of complex orders to be
executed on the Exchange without adversely impacting risk to market
makers that are quoting in the regular market.
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) of the Act and Rule 19b-
4(f)(6) thereunder.
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:
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 No. SR-ISE-2014-56 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2014-56. 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-2014-56 and should be
submitted on or before February 2, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Brent J. Fields,
Secretary.
[FR Doc. 2015-00221 Filed 1-9-15; 8:45 am]
BILLING CODE 8011-01-P
