Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change Related to Market Wide Risk Protection, 33561-33563 [2016-12384]
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Federal Register / Vol. 81, No. 102 / Thursday, May 26, 2016 / Notices
in connection with the revised date is
reprinted below.
Stanley F. Mires,
Attorney, Federal Compliance.
Decision of the Governors of the United
States Postal Service Concerning
Revised Implementation Date of Mail
Classification Schedule Changes for
Priority Mail International Flat Rate
Envelopes and Priority Mail
International Small Flat Rate Boxes
(Governors’ Decision No. 16–2)
May 12, 2016.
Statement of Explanation and
Justification
Pursuant to section 404(b) and
Chapter 36 of title 39, United States
Code, Governors’ Decision No. 16–1
established classification changes to
Priority Mail International Flat Rate
Envelopes (PMI FREs) and PMI Small
Flat Rate Boxes (PMI SFRBs) to be
effective June 3, 2016.
Due to operational considerations, I
hereby revise the implementation date
of the classification changes set forth in
Governors’ Decision No. 16–1 as
indicated in our order below.
Order
The changes in classification to PMI
FREs and PMI SFRBs established in
Governors’ Decision No. 16–1 shall be
effective on August 28, 2016.
By The Governors:
James H. Bilbray
Chairman, Temporary Emergency Committee
of the Board of Governors
[FR Doc. 2016–12400 Filed 5–25–16; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77875; File No. SR–ISE–
2016–08]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Order Approving Proposed Rule
Change Related to Market Wide Risk
Protection
sradovich on DSK3TPTVN1PROD with NOTICES
May 20, 2016.
I. Introduction
On March 17, 2016, the International
Securities Exchange, LLC (the
‘‘Exchange’’ or ‘‘ISE’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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introduce new activity-based risk
protection functionality. The proposed
rule change was published for comment
in the Federal Register on April 6,
2016.3 No comment letters were
received in response to this proposal.
This order approves the proposed rule
change.
II. Description of the Proposed Rule
Change
The Exchange proposed to introduce
two activity-based risk protection
measures that will be mandatory for all
members: (1) The ‘‘Order Entry Rate
Protection,’’ which prevents members
from entering orders at a rate that
exceeds predefined thresholds,4 and (2)
the ‘‘Order Execution Rate Protection,’’
which prevents members from
executing orders at a rate that exceeds
their predefined risk settings (together,
‘‘Market Wide Risk Protection’’). The
Exchange will announce the
implementation date of the proposed
rule in a circular to be distributed to
members prior to implementation.5
Pursuant to proposed Rule 714(d),
‘‘Market Wide Risk Protection,’’ the
Exchange’s trading system (the
‘‘System’’) will maintain one or more
counting programs on behalf of each
member that will track the number of
orders entered and the number of
contracts traded on ISE or, if chosen by
the member, across both ISE and its
affiliate, ISE Gemini, LLC (‘‘ISE
Gemini’’).6 Members may also use
multiple counting programs to separate
risk protections for different groups
established within the member.7 The
counting programs will maintain
separate counts, over rolling time
periods specified by the member, for
each count of: (1) The total number of
orders entered in the regular order book;
(2) the total number of orders entered in
the complex order book with only
options legs; (3) the total number of
orders entered in the complex order
book with both stock and options legs;
3 See Securities Exchange Act Release No. 77489
(Mar. 31, 2016), 81 FR 20004 (‘‘Notice’’).
4 The Exchange stated that it will initiate the
Order Entry Rate Protection pre-open, but in a
manner that allows members time to load their
orders without inadvertently triggering the
protection. The Exchange further noted that it will
establish and communicate the precise initiation
time via circular and prior to implementation. See
Notice, supra note 3, at 20004 n.4.
5 See Notice, supra note 3, at 20004.
6 Members may set different risk parameters for
their trading activity on each exchange, or they may
set risk parameters that apply to their trading across
both ISE and ISE Gemini. See proposed Rule 714(d).
7 The Exchange stated that it will explain how
members can go about setting up risk protections
for different groups (e.g., business units) in a
circular issued to members. See Notice, supra note
3, at 20004–05 n.7.
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(4) the total number of contracts traded
in regular orders; and (5) the total
number of contracts traded in complex
orders with only options legs.8
According to the Exchange, members
will have the discretion to establish the
applicable time period for each of the
counts maintained under the Market
Wide Risk Protection, provided that the
selected period is within minimum and
maximum time parameters that will be
established by the Exchange and
announced via circular.9 By contrast,
the Exchange’s proposal does not
establish minimum or maximum values
for any of the order entry or execution
parameters described in (1) through (5)
above. Nevertheless, the Exchange will
establish default values 10 for the time
period, order entry, and contracts traded
parameters in a circular to be
distributed to members. The Exchange
represented that such default values
will apply only to members that do not
submit their own parameters for the
Market Wide Risk Protection
measures.11
The Exchange further proposed to use
separate counts for regular orders,
complex options orders,12 and complex
orders with a stock component,13 as it
believed that members may want to
have different risk settings for these
instruments. If the Market Wide Risk
Protection is triggered based on any
count, however, proposed Rule 714(d)
states that the triggered action
(discussed below) will be taken across
the entire market—with respect to all
products traded in both simple and
complex instruments and across ISE (or,
8 See proposed Rule 714(d). The Exchange
clarified that a member’s allowable order rate for
the Order Entry Rate Protection will be comprised
of parameters (1) to (3), while the allowable contract
execution rate for the Order Execution Rate
Protection will be comprised of parameters (4) and
(5). The Exchange further explained that contracts
executed on the agency and contra-side of a twosided crossing order will be counted separately for
the Order Execution Rate Protection. See Notice,
supra note 3, at 20005.
9 Id. The Exchange stated that it anticipated
setting these minimum and maximum time
parameters at one second and a full trading day,
respectively. See Notice, supra note 3, at 20005 n.9.
10 See proposed Rule 714(d); see also Notice,
supra note 3, at 20005.
11 Id.
12 The Exchange explained that the contract
execution count for complex orders with only
options legs will be the sum of the number of
contracts executed with respect to each leg. Id.
13 Complex orders that contain a stock component
will not be included as part of the complex order
execution count. The Exchange stated its belief that
the separate components of stock-option orders (i.e.,
options components executed in contracts and
stock components executed in shares) could not be
combined in a way that would provide a
meaningful measure of risk exposure. See Notice,
supra note 3, at 20005 n.10.
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Federal Register / Vol. 81, No. 102 / Thursday, May 26, 2016 / Notices
if set by the member, across ISE and ISE
Gemini).14
Under proposed Rule 714(d), the
System will trigger the Market Wide
Risk Protection when it determines that
the member has either (1) entered a
number of orders exceeding its
designated allowable order rate for the
specified time period, or (2) executed a
number of contracts exceeding its
designated allowable contract execution
rate for the specified time period.15 If
the member’s thresholds have been
exceeded in either simple or complex
instruments, the Market Wide Risk
Protection will be triggered and the
System will automatically reject all
subsequent incoming orders entered by
the member on ISE or, if set by the
member, across both ISE and ISE
Gemini.16 In addition, if the member has
opted in to this functionality, the
System will automatically cancel all of
the member’s existing orders.17 The
Market Wide Risk Protection will
remain engaged until the member
manually (e.g., via email) notifies the
Exchange to enable the acceptance of
new orders.18
sradovich on DSK3TPTVN1PROD with NOTICES
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of
Section 6 of the Act 19 and rules and
regulations thereunder applicable to a
national securities exchange.20 In
particular, the Commission finds that
the proposed rule change is consistent
with the requirements of Section 6(b)(5)
of the Act, which requires, among other
14 Proposed Rule 714(d)(1); see also Notice, supra
note 3, at 20005.
15 Id.; see also proposed Rule 714(d)(1).
Specifically, after a member enters or executes an
order, the System will look back over the specified
time period to determine whether the member has
exceeded the relevant thresholds. See Notice, supra
note 3, at 20005. In the Notice, the Exchange
provided examples illustrating how the Market
Wide Risk Protection functionality would work
both for order entry and order execution
protections. See Notice, supra note 3, at 20005–06.
16 According to the Exchange, members that set
different risk parameters for ISE and ISE Gemini
will only have their orders rejected on the exchange
whose threshold was exceeded. See Notice, supra
note 3, at 20005 n.11.
17 Proposed Rule 714(d)(2).
18 Proposed Rule 714(d)(3). Members who have
not opted to cancel all existing orders under
proposed Rule 714(d)(2), however, will still be able
to interact with their existing orders entered before
the Market Wide Risk Protection was triggered. For
instance, such members may send cancel order
messages and/or receive trade executions for those
orders. Id.; see also Notice, supra note 3, at 20005.
19 15 U.S.C. 78f(b).
20 In approving these proposed rule changes, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
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things, that the rules of a national
securities exchange be designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanisms of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.21
The Commission believes that the
Exchange’s proposed activity-based
order protections will provide an
additional tool to members to assist
them in managing their risk exposure.22
Specifically, the Commission believes
that the Market Wide Risk Protection
functionality may help members to
mitigate the potential risks associated
with entering and/or executing a level of
orders that exceeds their risk
management thresholds that may result
from, for example, technology issues
with electronic trading systems. Further,
the Commission notes that other
exchanges have established risk
protection mechanisms for members
and market makers that are similar in
many respects to ISE’s proposal.23
Proposed Rule 714(d) imposes a
mandatory obligation on ISE members
to utilize the Market Wide Risk
Protection functionality. The
Commission notes that, although the
Exchange will establish minimum and
maximum permissible parameters for
the time period values, members will
have discretion to set the threshold
values for the order entry and order
execution parameters.24 If members do
not independently set such parameters,
they will be subject to the default
parameters established by ISE.25 While
the Commission believes that the
Exchange’s proposed rule provides
members flexibility to tailor the Market
Wide Risk Protection to their respective
risk management needs, the
Commission reminds members to be
mindful of their obligations to, among
other things, seek best execution of
orders they handle on an agency basis
and consider their best execution
obligations when establishing
parameters for the Market Wide Risk
Protection or utilizing the default
21 15
U.S.C. 78f(b)(5).
Exchange currently provides members
with limit order price protections that reject orders
priced too far outside of the Exchange’s best bid or
offer. See ISE Rule 714(b)(2).
23 See, e.g., Miami International Securities
Exchange, LLC Rule 519A (‘‘Risk Protection
Monitor’’); BATS BZX Exchange, Inc. Rule 21.16
(‘‘Risk Monitor Mechanism’’).
24 The Exchange has represented that it
anticipates that the minimum and maximum values
for the applicable time period will be initially set
at one second and a full trading day, respectively,
which the Commission believes gives members
wide latitude in establishing the applicable time
periods. See Notice, supra note 3, at 20005 n.9.
25 Proposed Rule 714(d).
22 The
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parameters set by ISE.26 For example, an
abnormally low order entry parameter,
set over an abnormally long specified
time period should be carefully
scrutinized, particularly if a member’s
order flow to ISE contains agency
orders. To the extent that a member
chooses sensitive parameters, a member
should consider the effect of its chosen
settings on its ability to receive a timely
execution on marketable agency orders
that it sends to ISE in various market
conditions. The Commission cautions
brokers considering their best execution
obligations to be aware that the agency
orders they represent may be rejected as
a result of the Market Wide Risk
Protection functionality.
As discussed above, ISE determined
not to establish minimum and
maximum permissible settings for the
order entry and order execution
parameters in its rule and indicated its
intent to set a minimum and maximum
for the time period parameters that
provide broad discretion to members
(i.e., one second and a full trading day,
respectively).27 In light of these broad
limits, the Commission expects ISE to
periodically assess whether the Market
Wide Risk Protection measures are
operating in a manner that is consistent
with the promotion of fair and orderly
markets, including whether the default
values and minimum and maximum
permissible parameters for the
applicable time period established by
ISE continue to be appropriate and
operate in a manner consistent with the
Act and the rules thereunder.
Finally, the Commission believes that
it is consistent with the Act for ISE to
offer its Market Wide Risk Protection
across both ISE and its affiliate, ISE
Gemini, as such functionality could
assist members in managing and
reducing inadvertent exposure to
excessive risk across both of these
markets if the member desires to avail
itself of that feature. Further, the
Commission notes that it previously
approved ISE’s proposal to offer crossmarket risk protections for market
maker quotes, and approval of the crossmarket application of the Market Wide
Risk Protection functionality is
consistent with that prior approval.28
26 See Securities Exchange Act Release No.
37619A (Sept. 6, 1996), 61 FR 48290, at 48323
(Sept. 12, 1996) (Order Execution Obligations
adopting release); see also Securities Exchange Act
Release No. 51808 (June 9, 2005), 70 FR 37496,
37537–8 (June 29, 2005) (Regulation NMS adopting
release).
27 See Notice, supra note 3, at 20005 n.9; see also
supra note 24.
28 See ISE Rule 804(g); see also Securities
Exchange Act Release No. 73147 (Sept. 19, 2014),
79 FR 57639 (Sept. 25, 2014) (SR–ISE–2014–09)
(approval order).
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Federal Register / Vol. 81, No. 102 / Thursday, May 26, 2016 / Notices
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,29 that the
proposed rule change (SR–ISE–2016–08)
be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.30
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–12384 Filed 5–25–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77880; File No. SR–NYSE–
2016–17]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Approving Proposed Rule Change, as
Modified by Amendment No. 1 Thereto,
To Add Additional Order Types to the
NYSE BondsSM Platform, Codify
Functionality of Order Types Currently
Available on NYSE Bonds, and Provide
Greater Detail as to How an Indicative
Match Price Is Established With
Respect to Bond Auctions
May 20, 2016.
I. Introduction
On March 16, 2016, New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend Rule 86 to add additional order
types to the NYSE BondsSM platform, to
codify functionality of order types
currently available on NYSE Bonds, and
to amend the definition of Indicative
Match Price (‘‘IMP’’) in current Rule
86(b)(2)(G) to provide greater detail as to
how an IMP is established with respect
to Bond Auctions. On March 29, 2016,
the Exchange filed Amendment No. 1 to
the proposal.3 The proposed rule change
was published for comment in the
Federal Register on April 5, 2016.4 No
29 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 In Amendment No. 1, the Exchange proposed
changes to amend the proposed rule text of Rule
86(j)(A)(ii) in Exhibit 5 and the purpose section of
each of the Form 19b–4 and Exhibit 1 to clarify the
effective time used to determine the priority of
Timed Orders. The Exchange also amended the
purpose section of each of the Form 19b–4 and
Exhibit 1 to add that all-or-none and minimum
quantity contingencies are displayed.
4 See Securities Exchange Act Release No. 77477
(March 30, 2016), 81 FR 19671 (‘‘Notice’’).
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30 17
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comment letters were received in
response to the Notice. This order
approves the proposed rule change, as
modified by Amendment No. 1.
II. Description of the Proposed Rule
Change
The Exchange proposes to amend
Rule 86 to add NYSE Bonds Fill-or-Kill
Order, NYSE Bonds All-or-None Order
and NYSE Bonds Minimum Quantity
Order as new order types to the NYSE
Bonds platform,5 and to codify the
operation of NYSE Bonds Good ‘Til Date
Order and NYSE Bonds Timed Order
that, according to the Exchange, are
currently available on the NYSE Bonds
platform.6 The Exchange also proposes
to amend the definition of IMP to
provide greater detail as to how an IMP
is established with respect to Bond
Auctions.
The Exchange proposes to adopt the
NYSE Bonds Fill-or-Kill Order (‘‘NYSE
Bonds FOK Order’’), a NYSE Bonds
Limit Order that would be executed
immediately in its entirety at the best
price available against a single contra
party and, if not executed immediately
in its entirety, would be cancelled.7 A
NYSE Bonds FOK Order would be
eligible to participate in all trading
sessions,8 but could be executed only
during the trading session in which the
order is sent; otherwise the order would
be rejected. A NYSE Bonds FOK Order
cannot participate in either the Opening
Bond Auction or the Core Bond
Auction.9
The Exchange proposes to adopt the
NYSE Bonds All-or-None Order (‘‘NYSE
Bonds AON Order’’), a NYSE Bonds
Limit Order (whose AON contingency
5 NYSE Bonds is the Exchange’s electronic system
for receiving, processing, executing and reporting
bids, offers, and executions in bonds. See Notice,
supra note 4, at 19672. NYSE Bonds currently
allows Users to submit limit orders and reserve
orders. Current Rule 86(b)(2)(M) defines a User as
any Member or Member Organization, Sponsored
Participant, or Authorized Trader that is authorized
to access NYSE Bonds. A NYSE Bonds Limit Order
and a NYSE Bonds Reserve Order are defined in
current Rules 86(b)(2)(B) and (C), respectively. The
Exchange is also proposing non-substantive
organizational changes to renumber sections of Rule
86.
6 See Notice, supra note 4, at 19672.
7 A NYSE Bonds FOK Order cannot be a NYSE
Bonds Reserve Order. See proposed Rule
86(b)(2)(B)(ii).
8 The Opening Bond Trading Session commences
with the Opening Bond Auction at 4:00 a.m. ET and
concludes at 8:00 a.m. ET. See Rule 86(i)(1)(A). The
Core Bond Trading Session commences with the
Core Bond Auction at 8:00 a.m. ET and concludes
at 5:00 p.m. ET. See Rule 86(i)(2)(A). The Late Bond
Trading Session commences at 5:00 p.m. ET and
concludes at 8:00 p.m. ET. See Rule 86(i)(3)(A).
9 The Notice provides additional details and
examples related to the NYSE Bonds FOK Order.
See Notice, supra note 4, at 19672. See also
proposed Rule 86(b)(2)(B)(vii).
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33563
would be displayed on the order book)
that would be executed in its entirety
against one or more contra party, or not
at all.10 If a NYSE Bonds AON Order is
not executed in full, NYSE Bonds would
post the order to the order book at its
limit price until it is executed in full, or
is cancelled. Incoming contra-side
orders that cannot meet the AON
quantity may trade at or bypass the
price of the NYSE Bonds AON Order. A
NYSE Bonds AON Order would not
participate in either the Opening Bond
Auction or the Core Bond Auction and
the order is eligible for execution only
during the trading session for which it
is designated. A NYSE Bonds AON
Order must be designated as ‘‘day,’’
‘‘good ‘til cancelled,’’ or ‘‘good ‘til
date.’’ 11
The Exchange also proposes to adopt
the NYSE Bonds Minimum Quantity
Order, a NYSE Bonds Limit Order
(whose minimum quantity contingency
would be displayed on the order book)
that would trade against one or more
contra side orders, provided the order’s
quantity requirement is met.12 In the
event there is not enough contra-side
liquidity available at the time a NYSE
Bonds Minimum Quantity Order is
submitted, NYSE Bonds would post the
order on the order book at its limit price
until it is executed in full, or is
cancelled. Incoming contra-side orders
that cannot meet the minimum quantity
may trade at or bypass the price of a
NYSE Bonds Minimum Quantity Order.
A NYSE Bonds Minimum Quantity
Order would be rejected if the minimum
quantity entered on the order is greater
than the total number of bonds of the
order. A NYSE Bonds Minimum
Quantity Order may be partially
executed as long as each partial
execution is for the minimum number of
bonds or greater. If a balance remains
after one or more partial executions and
such balance is for less than the
minimum quantity specified on the
order, such balance would be treated as
a regular limit order and placed on the
order book in price-time priority. A
NYSE Bonds Minimum Quantity Order
would not participate in either the
Opening Bond Auction or the Core
Bond Auction and the order would be
eligible for execution only in the trading
session during which it was sent. A
10 A NYSE Bonds AON Order cannot be a NYSE
Bonds Reserve Order. See proposed Rule
86(b)(2)(B)(ii).
11 The Notice provides additional details and
examples related to the NYSE Bonds AON Order.
See Notice, supra note 4, at 19672–73. See also
proposed Rule 86(b)(2)(B)(viii).
12 A NYSE Bonds Minimum Quantity Order
cannot be a NYSE Bonds Reserve Order. See
proposed Rule 86(b)(2)(B)(ii).
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]]>Agencies
[Federal Register Volume 81, Number 102 (Thursday, May 26, 2016)]
[Notices]
[Pages 33561-33563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12384]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77875; File No. SR-ISE-2016-08]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving Proposed Rule Change Related to Market Wide Risk
Protection
May 20, 2016.
I. Introduction
On March 17, 2016, the International Securities Exchange, LLC (the
``Exchange'' or ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to introduce new activity-based
risk protection functionality. The proposed rule change was published
for comment in the Federal Register on April 6, 2016.\3\ No comment
letters were received in response to this proposal. This order approves
the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 77489 (Mar. 31,
2016), 81 FR 20004 (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The Exchange proposed to introduce two activity-based risk
protection measures that will be mandatory for all members: (1) The
``Order Entry Rate Protection,'' which prevents members from entering
orders at a rate that exceeds predefined thresholds,\4\ and (2) the
``Order Execution Rate Protection,'' which prevents members from
executing orders at a rate that exceeds their predefined risk settings
(together, ``Market Wide Risk Protection''). The Exchange will announce
the implementation date of the proposed rule in a circular to be
distributed to members prior to implementation.\5\
---------------------------------------------------------------------------
\4\ The Exchange stated that it will initiate the Order Entry
Rate Protection pre-open, but in a manner that allows members time
to load their orders without inadvertently triggering the
protection. The Exchange further noted that it will establish and
communicate the precise initiation time via circular and prior to
implementation. See Notice, supra note 3, at 20004 n.4.
\5\ See Notice, supra note 3, at 20004.
---------------------------------------------------------------------------
Pursuant to proposed Rule 714(d), ``Market Wide Risk Protection,''
the Exchange's trading system (the ``System'') will maintain one or
more counting programs on behalf of each member that will track the
number of orders entered and the number of contracts traded on ISE or,
if chosen by the member, across both ISE and its affiliate, ISE Gemini,
LLC (``ISE Gemini'').\6\ Members may also use multiple counting
programs to separate risk protections for different groups established
within the member.\7\ The counting programs will maintain separate
counts, over rolling time periods specified by the member, for each
count of: (1) The total number of orders entered in the regular order
book; (2) the total number of orders entered in the complex order book
with only options legs; (3) the total number of orders entered in the
complex order book with both stock and options legs; (4) the total
number of contracts traded in regular orders; and (5) the total number
of contracts traded in complex orders with only options legs.\8\
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\6\ Members may set different risk parameters for their trading
activity on each exchange, or they may set risk parameters that
apply to their trading across both ISE and ISE Gemini. See proposed
Rule 714(d).
\7\ The Exchange stated that it will explain how members can go
about setting up risk protections for different groups (e.g.,
business units) in a circular issued to members. See Notice, supra
note 3, at 20004-05 n.7.
\8\ See proposed Rule 714(d). The Exchange clarified that a
member's allowable order rate for the Order Entry Rate Protection
will be comprised of parameters (1) to (3), while the allowable
contract execution rate for the Order Execution Rate Protection will
be comprised of parameters (4) and (5). The Exchange further
explained that contracts executed on the agency and contra-side of a
two-sided crossing order will be counted separately for the Order
Execution Rate Protection. See Notice, supra note 3, at 20005.
---------------------------------------------------------------------------
According to the Exchange, members will have the discretion to
establish the applicable time period for each of the counts maintained
under the Market Wide Risk Protection, provided that the selected
period is within minimum and maximum time parameters that will be
established by the Exchange and announced via circular.\9\ By contrast,
the Exchange's proposal does not establish minimum or maximum values
for any of the order entry or execution parameters described in (1)
through (5) above. Nevertheless, the Exchange will establish default
values \10\ for the time period, order entry, and contracts traded
parameters in a circular to be distributed to members. The Exchange
represented that such default values will apply only to members that do
not submit their own parameters for the Market Wide Risk Protection
measures.\11\
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\9\ Id. The Exchange stated that it anticipated setting these
minimum and maximum time parameters at one second and a full trading
day, respectively. See Notice, supra note 3, at 20005 n.9.
\10\ See proposed Rule 714(d); see also Notice, supra note 3, at
20005.
\11\ Id.
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The Exchange further proposed to use separate counts for regular
orders, complex options orders,\12\ and complex orders with a stock
component,\13\ as it believed that members may want to have different
risk settings for these instruments. If the Market Wide Risk Protection
is triggered based on any count, however, proposed Rule 714(d) states
that the triggered action (discussed below) will be taken across the
entire market--with respect to all products traded in both simple and
complex instruments and across ISE (or,
[[Page 33562]]
if set by the member, across ISE and ISE Gemini).\14\
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\12\ The Exchange explained that the contract execution count
for complex orders with only options legs will be the sum of the
number of contracts executed with respect to each leg. Id.
\13\ Complex orders that contain a stock component will not be
included as part of the complex order execution count. The Exchange
stated its belief that the separate components of stock-option
orders (i.e., options components executed in contracts and stock
components executed in shares) could not be combined in a way that
would provide a meaningful measure of risk exposure. See Notice,
supra note 3, at 20005 n.10.
\14\ Proposed Rule 714(d)(1); see also Notice, supra note 3, at
20005.
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Under proposed Rule 714(d), the System will trigger the Market Wide
Risk Protection when it determines that the member has either (1)
entered a number of orders exceeding its designated allowable order
rate for the specified time period, or (2) executed a number of
contracts exceeding its designated allowable contract execution rate
for the specified time period.\15\ If the member's thresholds have been
exceeded in either simple or complex instruments, the Market Wide Risk
Protection will be triggered and the System will automatically reject
all subsequent incoming orders entered by the member on ISE or, if set
by the member, across both ISE and ISE Gemini.\16\ In addition, if the
member has opted in to this functionality, the System will
automatically cancel all of the member's existing orders.\17\ The
Market Wide Risk Protection will remain engaged until the member
manually (e.g., via email) notifies the Exchange to enable the
acceptance of new orders.\18\
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\15\ Id.; see also proposed Rule 714(d)(1). Specifically, after
a member enters or executes an order, the System will look back over
the specified time period to determine whether the member has
exceeded the relevant thresholds. See Notice, supra note 3, at
20005. In the Notice, the Exchange provided examples illustrating
how the Market Wide Risk Protection functionality would work both
for order entry and order execution protections. See Notice, supra
note 3, at 20005-06.
\16\ According to the Exchange, members that set different risk
parameters for ISE and ISE Gemini will only have their orders
rejected on the exchange whose threshold was exceeded. See Notice,
supra note 3, at 20005 n.11.
\17\ Proposed Rule 714(d)(2).
\18\ Proposed Rule 714(d)(3). Members who have not opted to
cancel all existing orders under proposed Rule 714(d)(2), however,
will still be able to interact with their existing orders entered
before the Market Wide Risk Protection was triggered. For instance,
such members may send cancel order messages and/or receive trade
executions for those orders. Id.; see also Notice, supra note 3, at
20005.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \19\
and rules and regulations thereunder applicable to a national
securities exchange.\20\ In particular, the Commission finds that the
proposed rule change is consistent with the requirements of Section
6(b)(5) of the Act, which requires, among other things, that the rules
of a national securities exchange be designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanisms of a free and open market and a national market system, and,
in general, to protect investors and the public interest.\21\
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\19\ 15 U.S.C. 78f(b).
\20\ In approving these proposed rule changes, the Commission
has considered the proposed rules' impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\21\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the Exchange's proposed activity-based
order protections will provide an additional tool to members to assist
them in managing their risk exposure.\22\ Specifically, the Commission
believes that the Market Wide Risk Protection functionality may help
members to mitigate the potential risks associated with entering and/or
executing a level of orders that exceeds their risk management
thresholds that may result from, for example, technology issues with
electronic trading systems. Further, the Commission notes that other
exchanges have established risk protection mechanisms for members and
market makers that are similar in many respects to ISE's proposal.\23\
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\22\ The Exchange currently provides members with limit order
price protections that reject orders priced too far outside of the
Exchange's best bid or offer. See ISE Rule 714(b)(2).
\23\ See, e.g., Miami International Securities Exchange, LLC
Rule 519A (``Risk Protection Monitor''); BATS BZX Exchange, Inc.
Rule 21.16 (``Risk Monitor Mechanism'').
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Proposed Rule 714(d) imposes a mandatory obligation on ISE members
to utilize the Market Wide Risk Protection functionality. The
Commission notes that, although the Exchange will establish minimum and
maximum permissible parameters for the time period values, members will
have discretion to set the threshold values for the order entry and
order execution parameters.\24\ If members do not independently set
such parameters, they will be subject to the default parameters
established by ISE.\25\ While the Commission believes that the
Exchange's proposed rule provides members flexibility to tailor the
Market Wide Risk Protection to their respective risk management needs,
the Commission reminds members to be mindful of their obligations to,
among other things, seek best execution of orders they handle on an
agency basis and consider their best execution obligations when
establishing parameters for the Market Wide Risk Protection or
utilizing the default parameters set by ISE.\26\ For example, an
abnormally low order entry parameter, set over an abnormally long
specified time period should be carefully scrutinized, particularly if
a member's order flow to ISE contains agency orders. To the extent that
a member chooses sensitive parameters, a member should consider the
effect of its chosen settings on its ability to receive a timely
execution on marketable agency orders that it sends to ISE in various
market conditions. The Commission cautions brokers considering their
best execution obligations to be aware that the agency orders they
represent may be rejected as a result of the Market Wide Risk
Protection functionality.
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\24\ The Exchange has represented that it anticipates that the
minimum and maximum values for the applicable time period will be
initially set at one second and a full trading day, respectively,
which the Commission believes gives members wide latitude in
establishing the applicable time periods. See Notice, supra note 3,
at 20005 n.9.
\25\ Proposed Rule 714(d).
\26\ See Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290, at 48323 (Sept. 12, 1996) (Order Execution
Obligations adopting release); see also Securities Exchange Act
Release No. 51808 (June 9, 2005), 70 FR 37496, 37537-8 (June 29,
2005) (Regulation NMS adopting release).
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As discussed above, ISE determined not to establish minimum and
maximum permissible settings for the order entry and order execution
parameters in its rule and indicated its intent to set a minimum and
maximum for the time period parameters that provide broad discretion to
members (i.e., one second and a full trading day, respectively).\27\ In
light of these broad limits, the Commission expects ISE to periodically
assess whether the Market Wide Risk Protection measures are operating
in a manner that is consistent with the promotion of fair and orderly
markets, including whether the default values and minimum and maximum
permissible parameters for the applicable time period established by
ISE continue to be appropriate and operate in a manner consistent with
the Act and the rules thereunder.
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\27\ See Notice, supra note 3, at 20005 n.9; see also supra note
24.
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Finally, the Commission believes that it is consistent with the Act
for ISE to offer its Market Wide Risk Protection across both ISE and
its affiliate, ISE Gemini, as such functionality could assist members
in managing and reducing inadvertent exposure to excessive risk across
both of these markets if the member desires to avail itself of that
feature. Further, the Commission notes that it previously approved
ISE's proposal to offer cross-market risk protections for market maker
quotes, and approval of the cross-market application of the Market Wide
Risk Protection functionality is consistent with that prior
approval.\28\
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\28\ See ISE Rule 804(g); see also Securities Exchange Act
Release No. 73147 (Sept. 19, 2014), 79 FR 57639 (Sept. 25, 2014)
(SR-ISE-2014-09) (approval order).
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[[Page 33563]]
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-ISE-2016-08) be, and hereby
is, approved.
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\29\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12384 Filed 5-25-16; 8:45 am]
BILLING CODE 8011-01-P
