Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of the Exchange To Perform Certain Routing and Other Functions, 96136-96140 [2016-31479]

Download as PDF 96136 Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / 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 Act,21 and Rule 19b–4(f)(2) 22 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. 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: asabaliauskas on DSK3SPTVN1PROD with NOTICES 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– MIAX–2016–47 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–MIAX–2016–47. 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 21 15 22 17 U.S.C. 78s(b)(3)(A)(ii). CFR 240.19b–4(f)(2). VerDate Sep<11>2014 18:41 Dec 28, 2016 Jkt 241001 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–MIAX– 2016–47, and should be submitted on or before January 19, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.23 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016–31481 Filed 12–28–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79664; File No. SR– ISEGemini–2016–16] Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of the Exchange To Perform Certain Routing and Other Functions December 22, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 9, 2016, ISE Gemini, LLC (‘‘ISE Gemini’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change. On December 20, 2016, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the Form 19b–4, and Exhibit 1 thereto, in their entirety. On December 20, 2016, the Exchange filed Amendment No. 2 to the proposed rule change.3 The proposed rule change, as modified by Amendment Nos. 1 and 2, 23 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Amendment No. 2 amended the description of one of the inbound routing conditions that would apply. Specifically, the Exchange modified the third condition to specify that the report that FINRA will provided to the Exchange’s chief regulatory officer on a quarterly basis will quantify all alerts, of which the Exchange or FINRA (rather than solely FINRA) are aware, that identify Nasdaq Execution Services, LLC as a participant that has potentially violated Commission or Exchange rules. 1 15 PO 00000 Frm 00181 Fmt 4703 Sfmt 4703 is described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment Nos. 1 and 2, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to (1) permit the Exchange to receive inbound orders in options routed through Nasdaq Execution Services, LLC (‘‘NES’’) from certain affiliated exchanges, as described in detail below, by establishing procedures designed to prevent potential informational advantages resulting from the affiliation with NES; and (2) grant the Exchange an exemption to permit NES, an affiliate of the Exchange, to become a Member of the Exchange in order to perform certain routing an [sic] other functions on behalf of the Exchange. 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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the filing is to permit ISE Gemini to receive inbound orders in options routed through Nasdaq Execution Services, LLC (‘‘NES’’) from certain affiliated exchanges, as described herein and establish procedures designed to prevent potential informational advantages resulting from the affiliation between ISE Gemini and NES. The Exchange requests approval to permit NES, an affiliate of the Exchange, to become a Member of the Exchange in order to perform inbound routing on behalf of the Exchange. The Exchange is also filing to permit ISE Gemini to route outbound orders through NES either directly or indirectly through a third E:\FR\FM\29DEN1.SGM 29DEN1 Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices party routing broker-dealer 4 to other market centers and perform other functions regarding the cancellation of orders and the maintenance of a NES error account.5 asabaliauskas on DSK3SPTVN1PROD with NOTICES Restriction on Affiliation NES is a broker-dealer owned and operated by Nasdaq, Inc. NES is affiliated with International Securities Exchange, LLC (‘‘ISE’’), ISE Gemini, ISE Mercury LLC,6 NASDAQ PHLX LLC (‘‘Phlx’’), The NASDAQ Options Market LLC (‘‘NOM’’) and NASDAQ BX, Inc. (‘‘BX’’). For purposes of this filing the term ‘‘Affiliated Entities’’ shall refer to ISE, ISE Mercury, Phlx, NOM and BX (collectively ‘‘Affiliated Entities’’). Currently, NES is a member of Phlx, NOM and BX (collectively ‘‘Nasdaq Exchanges’’) and provides all options routing functions for Phlx, NOM and BX.7 Today, Phlx Rule 985 (Affiliation and Ownership Restrictions), The NASDAQ Stock Market LLC (‘‘Nasdaq’’) Rule 2160 (Restrictions on Affiliation) 8 and BX Rule 2140 (Restrictions on Affiliation) currently prohibit the Nasdaq Exchanges or any entity with which it is affiliated from, directly or indirectly, acquiring or maintaining an ownership interest in, or engaging in a business venture with, a Nasdaq Exchange member or an affiliate of a Nasdaq Exchange member in the absence of an effective filing under 19(b) of the Act. Specifically, in connection with prior filings, the Commission has expressed concern that the affiliation of an exchange with one of its members raises the potential for unfair competitive advantage and potential conflicts of interest between an exchange’s selfregulatory obligations and its commercial interests.9 NES performs 4 The ability to route orders to other exchanges using either the Exchange’s affiliated broker-dealer (NES) or a third party unaffiliated broker-dealer, which the Exchange may choose to use, is for efficiency and potential cost savings. 5 The ability to route orders to other exchanges using either the Exchange’s affiliated broker-dealer (NES) or a third party unaffiliated broker-dealer, which the Exchange may choose to use, is for efficiency and potential cost savings. See ISE–2016– 27 (not published) which amends ISE Chapter 19, Rules 1901, 1903, 1904 and 1905. The ISE rule changes impact ISE Gemini because Chapter 19 is incorporated by reference into the ISE Gemini Rulebook. 6 ISE, ISE Gemini and ISE Mercury are collectively referred to as ‘‘ISE Exchanges.’’ 7 See Phlx Rule 1080(m) and Nasdaq and BX Rules at Chapter VI, Section 11. 8 NOM is a facility of Nasdaq. 9 Securities Exchange Act Release Nos. 71416 (January 28, 2014), 79 FR 6244 (February 3, 2014) (SR–Phlx–2014–05); 71419 (January 28, 2014), 79 FR 6247 (February 3, 2014) (SR–NASDAQ–2014– 007); and 714121 (January 28, 2014), 79 FR 6264 (February 3, 2014) (SR–BX–2014–003). VerDate Sep<11>2014 18:41 Dec 28, 2016 Jkt 241001 similar functions for the Nasdaq Exchanges and is a member of those three markets respectively.10 Similarly, NES would be prohibited from becoming an ISE Gemini member pursuant to ISE Gemini Rule 309, titled ‘‘Limitation on Affiliation between the Exchange and Members,’’ without Commission approval. Specifically, a Member may not become an affiliate of the Exchange, or any facility of the Exchange, or any entity with which the Exchange or any facility of the Exchange is affiliated such as the Affiliated Entities. This rule change requests permission from the Commission to allow NES, an affiliate of ISE Gemini to become a Member of ISE Gemini for the purpose of performing certain functions, including, but not limited to receiving inbound orders from one of the Affiliated Entities. In order for NES to be a Member of ISE Gemini, the Exchange proposes to permit the acceptance of inbound orders that NES routes in its capacity as a facility of the Affiliated Exchanges 11 subject to certain limitations and conditions as follows: • First, ISE Gemini shall maintain a Regulatory Services Agreement (‘‘RSA’’) with FINRA, as well as an agreement 10 See Securities Exchange Act Release Nos. 59721 (April 7, 2009), 74 FR 17245 (April 14, 2009) (SR–Phlx–2009–32); 59779 (April 16, 2009) 74 FR 18600 (April 23, 2009) (SR–Phlx–2009–32, Amendment No. 1) notice of filing of proposed rule change relating to enhanced electronic trading platform for options); 61667 (March 5, 2010), 75 FR 11964 (March 12, 2016)(SR–Phlx–2010–36)(notice of filing and immediate effectiveness of proposed rule changes to establish procedures to prevent information advantages resulting from the affiliation between Phlx and NES); and 71416 (January 28, 2014), 79 FR 6244 (February 3, 2014) (SR–Phlx–2014–05)(notice of filing and immediate effectiveness of proposed rule change to inbound routing of options orders). Nasdaq Options Services was the affiliated broker-dealer prior to a rule change to utilize NES, another affiliated brokerdealer of Nasdaq. See also Securities Exchange Act Release Nos. 63769 (January 25, 2011), 76 FR 5423 (January 31, 2011) (SR–BX–2011–003); 63859 (February 7, 2011), 76 FR 8391 (February 14, 2011) (SR–BX–2011–007) (notice of filing of proposed rule change relating to permanent approval of the BX and NES inbound routing relationship); 71420 (January 28, 2014), 79 FR 6256 (February 3, 2014)(SR–BX–2014–004)(notice of filing and immediate effectiveness of proposed rule change to inbound routing). See also Securities Exchange Act Release Nos. 65554 (October 13, 2011), 76 FR 65311 (October 20, 2011)(SR–NASDAQ–2011–142); 71418 (January 28, 2014), 79 FR 6262 (February 3, 2014)(SR–NASDAQ–2014–008)(notice of filing and immediate effectiveness of proposed rule change to inbound routing). 11 The Exchange notes that ISE and ISE Mercury are separately filing rule changes to permit NES to be a Member of ISE and ISE Mercury for the purpose of performing certain routing and other functions, including, but not limited to receiving inbound orders from other entities that are affiliated with NES such as the Affiliated Entities. See SR– ISE–2016–27 and SR–ISEMercury–2016–22 (both not published). PO 00000 Frm 00182 Fmt 4703 Sfmt 4703 96137 pursuant to Rule 17d–2 under the Act (‘‘17d–2 Agreement’’).12 Pursuant to the RSA and the 17d–2 Agreement, FINRA will be allocated regulatory responsibilities to review NES’s compliance with certain Exchange rules.13 Pursuant to the RSA, however, ISE Gemini retains ultimate responsibility for enforcing its rules with respect to NES. • Second, FINRA will monitor NES for compliance with the Exchange’s trading rules, and will collect and maintain certain related information.14 • Third, FINRA will provide a report to the Exchange’s chief regulatory officer (‘‘CRO’’), on a quarterly basis, that: (i) Quantifies all alerts (of which the Exchange or FINRA is aware) that identify NES as a participant that has potentially violated Commission or Exchange rules, and (ii) lists all investigations that identify NES as a participant that has potentially violated Commission or Exchange rules. • Fourth, ISE Gemini has in place Rule 309. The Exchange proposes to adopt a new paragraph (b) to Rule 309 to state that Nasdaq, Inc., as the holding company owning ISE Gemini and NES, to [sic] establish and maintain procedures and internal controls reasonably designed to ensure that NES does not develop or implement changes to its system, based on non-public information obtained regarding planned changes to ISE Gemini’s system, obtained as a result of its affiliation with the Exchange, until such information is available generally to similarly situated Exchange Members, in connection with the provision of inbound order routing to the Exchange.15 12 17 CFR 240.17d–2. FINRA will review NES’ compliance for certain common rules. The RSA with FINRA specifies the types of business activities that NES may undertake and it also indicates the obligations to which NES is subject under the RSA. Among other things, NES must maintain a certain amount of net capital pursuant to SEC Rule 15c3–1(a)(1)(ii) and operate pursuant to SEC Rule 15c3–3(k)(2)(ii). NES is permitted to route orders in options to the appropriate market center for execution in accordance with member order and requirements. 13 NES is also subject to independent oversight by FINRA, its designated examining authority, for compliance with financial responsibility requirements. 14 Pursuant to the RSA, both FINRA and ISE Gemini shall collect and maintain all alerts, complaints, investigations and enforcement actions in which NES (in its capacity as a facility of the Affiliated Entities) is identified as a participant that has potentially violated applicable Commission or Exchange rules. The Exchange and FINRA shall retain these records in an easily accessible manner in order to facilitate any potential review conducted by the Commission’s Office of Compliance Inspections and Examinations. 15 Similarly, Phlx Rule 985 also prohibits a Phlx member from being or becoming an affiliate of Phlx, E:\FR\FM\29DEN1.SGM Continued 29DEN1 96138 Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices The Exchange also proposes to add the letter ‘‘(a)’’ in front of the existing paragraph in Rule 309. Inbound Routing ISE Gemini Rule 309 is being amended to add rule language similar to Phlx Rule 985(c)(2). This new rule text provides that Nasdaq, Inc. which owns NES and ISE Gemini, shall establish and maintain procedures and internal controls reasonably designed to ensure that NES does not develop or implement changes to its system on the basis of non-public information regarding planned changes to the Exchange’s systems, obtained as a result of its affiliation with the Exchange, until such information is available generally to Exchange members in connection with the provision of inbound routing to the Exchange. By meeting the conditions described above under Restrictions on Affiliation, ISE Gemini will have set up mechanisms that protect the independence of ISE Gemini’s regulatory responsibilities, with respect to NES, as well as demonstrate that NES cannot use any information advantage it may have because of its affiliation with ISE Gemini. The Exchange has approval from Financial Regulatory Authority (‘‘FINRA’’) 16 and The Options Clearing Corporation (‘‘OCC’’) 17 for NES to perform these functions. The Exchange notes that the Nasdaq Exchanges are separately filing rule changes to permit NES to route orders inbound from ISE Gemini to the Nasdaq Exchanges.18 asabaliauskas on DSK3SPTVN1PROD with NOTICES Outbound Routing ISE has rules in place in Chapter 19 related to routing orders, which rules impact routing on ISE Gemini because those rules are incorporated by reference. Today, ISE Gemini utilizes Linkage Handlers 19 to route orders. or an affiliate of an entity affiliated with Phlx, in the absence of an effective filing under Section 19(b). See Phlx Rule 985(b)(1)(B). Phlx filed a rule proposal and received approval based on meeting the four conditions specified above to protect the independence of the Exchange’s regulatory responsibility with respect to NES, and has demonstrated that NES cannot use any information advantage it may have because of its affiliation with the Exchange. 16 The Membership Agreement as between NES and FINRA, dated January 15, 2014, provides that NES may ‘‘[e]ngage in the following types of business: Route orders in equities and options to the appropriate market center for execution in accordance with member order and requirements.’’ 17 On December 5, 2013 OCC provided NES membership approval. 18 See SR–NASDAQ–2016–169, SR–Phlx–2016– 120 and SR–BX–2016–068 (not published). 19 A Linkage Handler is a broker that is unaffiliated with the Exchange with which the VerDate Sep<11>2014 18:41 Dec 28, 2016 Jkt 241001 These Linkage Handlers are unaffiliated with ISE Gemini. The Exchange proposes to have NES route, either directly to other options exchanges or indirectly through third-party routing brokers on behalf of ISE Gemini.20 With the proposal, regardless of whether a third-party routing broker is utilized, all options routing will go through NES, however the Exchange could determine to direct NES to route orders to certain exchanges through a routing broker rather than routing an order directly. In those cases, orders are submitted to the third-party routing broker through NES, and the third-party routing broker routes the orders to the routing destination in its name.21 Specifically, within that proposal ISE proposes to amend Rule 1903 to adopt new language similar to Phlx Rule 1080(m).22 ISE also proposed to amend Rule 1904 to replace the rule text with rule text similar to Phlx Rule 1080(m)(v) to provide general authority for ISE or NES to cancel orders in order to maintain fair and orderly markets when technical system issues are occurring, and set forth the manner in which error positions may be handled by the ISE or NES.23 Rule 1901 is being amended to remove references to Linkage Handlers along with other references in Rules 1903.24 Finally Rule 1905 concerning error accounts is being deleted within that proposal.25 The Exchange is proposing that NES be permitted to perform the same functions pursuant to the same conditions with respect to the outbound routing of orders, cancellation or orders, and the handling of error positions as set forth in the ISE proposal. The Exchange also proposes to amend Rule 705 to remove the rule text in Rule 705(d)(4) which provided an exception to the limits on compensation for Linkage Handlers. NES is replacing the Linkage Handlers for purposes of routing options orders from the ISE Exchanges. Today, Phlx does not have a Exchange has contracted to provide Routing Services, as that term is defined in Rule 1903, by routing ISO(s) to other exchange(s) as agent on behalf of Public Customer and Non-Customer Orders according to the requirements of Rule 1901 (prohibition on trade-throughs) and Rule 1902 (prohibition on locked and crossed markets). See Supplementary Material .03 to ISE Rule 1901. 20 See SR–ISE–2016–27 (not published). This proposed rule change proposes to replace Linkage Handlers with NES for the purpose of outbound routing and to establish rules for the cancellation or [sic] orders and maintenance of an error account. 21 Id. 22 Id. 23 Id. 24 Id. 25 Id. PO 00000 Frm 00183 Fmt 4703 Sfmt 4703 similar provision and ISE is removing it from this rule. Implementation The Exchange notes that with respect to the Rules in Chapter 19, Rules 1901, 1903, 1904 and 1905, these rules impact not only the ISE market but also ISE Gemini because Chapter 19 is incorporated by reference into the ISE Gemini Rulebook. ISE Gemini will be implemented in Q1 2017 on a symbol by symbol basis. The Exchange will add notations in the ISE Gemini Rulebook to cross reference the amended rule text and make clear the implementation date. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,26 in general, and furthers the objectives of Section 6(b)(5) of the Act,27 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest, because the proposed rule change will allow the Exchange to receive inbound orders from each Affiliated Entity through NES, acting in its capacity as a facility of the respective Affiliated Entity, in a manner consistent with prior approvals and established protections. The Exchange believes that these conditions establish mechanisms that protect the independence of the Exchange’s regulatory responsibility with respect to NES, as well as ensure that NES cannot use any information it may have because of its affiliation with the Exchange to its advantage. Further, the Exchange notes that its proposal is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system because ISE Gemini will have set up mechanisms that protect the independence of ISE Gemini’s regulatory responsibilities, with respect to NES, as well as demonstrate that NES cannot use any information advantage it may have because of its affiliation with ISE Gemini. The Exchange will not be granting any preferential access to information from the Exchange’s Order Book to NES. As an affiliated routing broker, NES would not be treated differently than any other unaffiliated routing broker. 26 15 27 15 E:\FR\FM\29DEN1.SGM U.S.C. 78f(b). U.S.C. 78f(b)(5). 29DEN1 asabaliauskas on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices The proposal should remove impediments to and perfect the mechanism of a free and open market and a national market system by providing customer order protection and by facilitating trading at away exchanges so customer orders trade at the best market price. The proposal should also protect investors and the public interest by fostering compliance with the Options Order Protection and Locked/Crossed Market Plan. In addition, the Exchange believes that the proposal is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, because of the specific protections pertaining to the routing broker, in light of the potential conflict of interest where the member routing broker could have access to information regarding other members’ orders or the routing of those orders. These protections include the Exchange’s control over all routing logic as well as the confidentiality of routing information.28 The Exchange believes that its proposal related to the cancellation of orders and error account is consistent with the Act because NES’s or the Exchange’s ability to cancel orders during a technical or systems issue and to maintain an error account facilitates the smooth and efficient operations of the market.29 Specifically, the Exchange believes that allowing NES or the Exchange to cancel orders during a technical or systems issue would allow the Exchange to maintain fair and orderly markets.30 Moreover, the Exchange believes that allowing NES to assume error positions in an error account and to liquidate those positions, subject to the conditions set forth in the proposed amendments to Rule 1904 would be the least disruptive means to correct these errors, except in cases where NES can assign all such error positions to all affected members of the Exchange.31 Overall, the proposed amendments are designed to ensure full trade certainty for market participants and to avoid disrupting the clearance and settlement process.32 The proposed amendments are also designed to provide a consistent methodology for handling error positions in a manner that does not discriminate among members.33 The proposed amendments are also consistent with Section 6 of the Act insofar as they would require NES to establish controls to restrict the flow 28 See 29 See proposed Rule 1903(e). SR–ISE–2016–27 (not published). 30 Id. 31 Id. of any confidential information between the third-party broker and NES/the Exchange associated with the liquidation of error positions.34 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. Receiving orders through NES does not raise any issues of intra-market competition because it involves inbound routing from an affiliated exchange. This proposal provides that Nasdaq, which owns NES and the Exchange, shall establish and maintain procedures and internal controls reasonably designed to ensure that NES does not develop or implement changes to its system on the basis of non-public information regarding planned changes to the Exchange’s systems, obtained as a result of its affiliation with the Exchange, until such information is available generally to similarly situated Exchange members and member organizations in connection with the provision of inbound routing to the Exchange. Utilizing NES as the routing broker does not create any undue burden on intermarket competition because NES cannot use any information advantage it may have because of its affiliation with ISE Gemini. The Exchange will not be granting any preferential access to information from the Exchange’s Order Book to NES. As an affiliated routing broker, NES would not be treated differently than any other unaffiliated routing broker. The proposal does not result in a burden on competition among exchanges, because there are many competing options exchanges that provide routing services, including through an affiliate. Further, the proposal does not raise issues of intramarket competition, because the Exchange’s decision to route through a particular routing broker would impact all participants equally. With respect to the proposal to establish error accounts, the Exchange’s proposal does not result in a burden on competition among exchanges because NES’ or the Exchange’s ability to cancel orders during a technical or systems issue and to maintain an error account facilitates the smooth and efficient operations of the market for all impacted members. The proposals regarding assumption of error positions and [sic] to liquidation of those positions ensures certainty for all impacted market participants. The proposal does not discriminate among Members.35 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ISEGemini-2016–16 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–ISEGemini-2016–16. 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 32 Id. 33 Id. VerDate Sep<11>2014 34 Id. 18:41 Dec 28, 2016 Jkt 241001 PO 00000 Frm 00184 35 See Fmt 4703 Sfmt 4703 96139 E:\FR\FM\29DEN1.SGM SR–ISE–2016–27 (not published). 29DEN1 96140 Federal Register / Vol. 81, No. 250 / Thursday, December 29, 2016 / Notices 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-2016–16, and should be submitted on or before January 19, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2016–31479 Filed 12–28–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79654; File No. SR–Phlx– 2016–122] Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify Administrative Charges for Distributors of Proprietary Data Feed Products asabaliauskas on DSK3SPTVN1PROD with NOTICES December 22, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 14, 2016, NASDAQ PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III 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. 36 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 18:41 Dec 28, 2016 Jkt 241001 I. Self-Regulatory Organization’s Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend the Exchange’s Pricing Schedule under Section VIII, entitled ‘‘NASDAQ PSX FEES,’’ in the subsection currently entitled ‘‘Annual Administrative Fee,’’ to change the billing cycle for administrative fees paid by distributors of the Exchange’s market data from annual to monthly, and to: (1) Replace the current $500 annual administrative fee assessed to distributors of delayed market data with a $50 monthly administrative fee, and (2) replace the current $1,000 annual administrative fee assessed to distributors of real-time market data with a $100 monthly administrative fee. The proposal is described further below.3 While these amendments are effective upon filing, the Exchange has designated the proposed amendments to be operative on January 1, 2017. The text of the proposed rule change is available on the Exchange’s Web site at https://nasdaqphlx.cchwallstreet.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 Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to change the billing cycle for administrative fees paid by distributors 3 The NASDAQ Stock Market LLC and NASDAQ BX, Inc. are filing companion proposals similar to this one. All three proposals will change the billing cycle for administrative fees paid by distributors of market data from annual to monthly, and will: (1) Replace the current $500 annual administrative fee assessed to distributors of delayed market data with a $50 monthly administrative fee, and (2) replace the current $1,000 annual administrative fee assessed to distributors of real-time market data with a $100 monthly administrative fee. PO 00000 Frm 00185 Fmt 4703 Sfmt 4703 of the Exchange’s market data from annual to monthly, and to: (1) Replace the current $500 annual administrative fee assessed to distributors of delayed market data with a $50 monthly administrative fee, and (2) replace the current $1,000 annual administrative fee assessed to distributors of real-time market data with a $100 monthly administrative fee. Annual Administrative Fee The Exchange assesses an annual administrative fee to any market data distributor that receives any proprietary Exchange data feed product. The amount of that annual fee is $500 for delayed market data and $1,000 for realtime market data. Distributors of both delayed and real-time market data are not required to pay both fees; they are charged only the higher fee. The time difference between ‘‘delayed’’ and ‘‘realtime’’ data varies by product. PSX Basic, for example, is considered delayed after 15 minutes, while PSX TotalView-ITCH data is considered delayed after midnight ET. The specific delay interval applicable to each product is published on the Nasdaq Trader Web site. The fee is not prorated if the distributor receives the data feed for less than a year. Proposed Changes The Exchange proposes to change the billing cycle for administrative fees paid by distributors of the Exchange’s market data from annual to monthly, and to: (1) Replace the current $500 annual administrative fee assessed to distributors of delayed market data with a $50 monthly administrative fee, and (2) replace the current $1,000 annual administrative fee assessed to distributors of real-time market data with a $100 monthly administrative fee. The purposes of the proposal are to: (1) Facilitate billing by aligning the current annual administrative fee billing cycle with the standard monthly billing cycle used by the Exchange; (2) allocate the fee more equitably by charging distributors that receive less than a year of market data an administrative fee only for those months that they receive market data; and (3) bring the Exchange’s administrative fee into alignment with the Nasdaq and BX market data administrative fees, which, after current proposals take effect, will be charged the same administrative fees on the same billing cycle. The complexity of administering the Exchange’s market data program has increased significantly since the current fee was set in November of 2011. New, more complex products and services require the Exchange to expend more resources in administration and E:\FR\FM\29DEN1.SGM 29DEN1

Agencies

[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Notices]
[Pages 96136-96140]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31479]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79664; File No. SR-ISEGemini-2016-16]


Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To 
Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of 
the Exchange To Perform Certain Routing and Other Functions

December 22, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 9, 2016, ISE Gemini, LLC (``ISE Gemini'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change. On December 20, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change, which amended and replaced 
the Form 19b-4, and Exhibit 1 thereto, in their entirety. On December 
20, 2016, the Exchange filed Amendment No. 2 to the proposed rule 
change.\3\ The proposed rule change, as modified by Amendment Nos. 1 
and 2, is described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change, as modified by 
Amendment Nos. 1 and 2, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 amended the description of one of the 
inbound routing conditions that would apply. Specifically, the 
Exchange modified the third condition to specify that the report 
that FINRA will provided to the Exchange's chief regulatory officer 
on a quarterly basis will quantify all alerts, of which the Exchange 
or FINRA (rather than solely FINRA) are aware, that identify Nasdaq 
Execution Services, LLC as a participant that has potentially 
violated Commission or Exchange rules.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to (1) permit the Exchange to receive inbound 
orders in options routed through Nasdaq Execution Services, LLC 
(``NES'') from certain affiliated exchanges, as described in detail 
below, by establishing procedures designed to prevent potential 
informational advantages resulting from the affiliation with NES; and 
(2) grant the Exchange an exemption to permit NES, an affiliate of the 
Exchange, to become a Member of the Exchange in order to perform 
certain routing an [sic] other functions on behalf of the Exchange.

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 Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the filing is to permit ISE Gemini to receive 
inbound orders in options routed through Nasdaq Execution Services, LLC 
(``NES'') from certain affiliated exchanges, as described herein and 
establish procedures designed to prevent potential informational 
advantages resulting from the affiliation between ISE Gemini and NES. 
The Exchange requests approval to permit NES, an affiliate of the 
Exchange, to become a Member of the Exchange in order to perform 
inbound routing on behalf of the Exchange. The Exchange is also filing 
to permit ISE Gemini to route outbound orders through NES either 
directly or indirectly through a third

[[Page 96137]]

party routing broker-dealer \4\ to other market centers and perform 
other functions regarding the cancellation of orders and the 
maintenance of a NES error account.\5\
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    \4\ The ability to route orders to other exchanges using either 
the Exchange's affiliated broker-dealer (NES) or a third party 
unaffiliated broker-dealer, which the Exchange may choose to use, is 
for efficiency and potential cost savings.
    \5\ The ability to route orders to other exchanges using either 
the Exchange's affiliated broker-dealer (NES) or a third party 
unaffiliated broker-dealer, which the Exchange may choose to use, is 
for efficiency and potential cost savings. See ISE-2016-27 (not 
published) which amends ISE Chapter 19, Rules 1901, 1903, 1904 and 
1905. The ISE rule changes impact ISE Gemini because Chapter 19 is 
incorporated by reference into the ISE Gemini Rulebook.
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Restriction on Affiliation
    NES is a broker-dealer owned and operated by Nasdaq, Inc. NES is 
affiliated with International Securities Exchange, LLC (``ISE''), ISE 
Gemini, ISE Mercury LLC,\6\ NASDAQ PHLX LLC (``Phlx''), The NASDAQ 
Options Market LLC (``NOM'') and NASDAQ BX, Inc. (``BX''). For purposes 
of this filing the term ``Affiliated Entities'' shall refer to ISE, ISE 
Mercury, Phlx, NOM and BX (collectively ``Affiliated Entities''). 
Currently, NES is a member of Phlx, NOM and BX (collectively ``Nasdaq 
Exchanges'') and provides all options routing functions for Phlx, NOM 
and BX.\7\
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    \6\ ISE, ISE Gemini and ISE Mercury are collectively referred to 
as ``ISE Exchanges.''
    \7\ See Phlx Rule 1080(m) and Nasdaq and BX Rules at Chapter VI, 
Section 11.
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    Today, Phlx Rule 985 (Affiliation and Ownership Restrictions), The 
NASDAQ Stock Market LLC (``Nasdaq'') Rule 2160 (Restrictions on 
Affiliation) \8\ and BX Rule 2140 (Restrictions on Affiliation) 
currently prohibit the Nasdaq Exchanges or any entity with which it is 
affiliated from, directly or indirectly, acquiring or maintaining an 
ownership interest in, or engaging in a business venture with, a Nasdaq 
Exchange member or an affiliate of a Nasdaq Exchange member in the 
absence of an effective filing under 19(b) of the Act. Specifically, in 
connection with prior filings, the Commission has expressed concern 
that the affiliation of an exchange with one of its members raises the 
potential for unfair competitive advantage and potential conflicts of 
interest between an exchange's self-regulatory obligations and its 
commercial interests.\9\ NES performs similar functions for the Nasdaq 
Exchanges and is a member of those three markets respectively.\10\
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    \8\ NOM is a facility of Nasdaq.
    \9\ Securities Exchange Act Release Nos. 71416 (January 28, 
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05); 71419 
(January 28, 2014), 79 FR 6247 (February 3, 2014) (SR-NASDAQ-2014-
007); and 714121 (January 28, 2014), 79 FR 6264 (February 3, 2014) 
(SR-BX-2014-003).
    \10\ See Securities Exchange Act Release Nos. 59721 (April 7, 
2009), 74 FR 17245 (April 14, 2009) (SR-Phlx-2009-32); 59779 (April 
16, 2009) 74 FR 18600 (April 23, 2009) (SR-Phlx-2009-32, Amendment 
No. 1) notice of filing of proposed rule change relating to enhanced 
electronic trading platform for options); 61667 (March 5, 2010), 75 
FR 11964 (March 12, 2016)(SR-Phlx-2010-36)(notice of filing and 
immediate effectiveness of proposed rule changes to establish 
procedures to prevent information advantages resulting from the 
affiliation between Phlx and NES); and 71416 (January 28, 2014), 79 
FR 6244 (February 3, 2014) (SR-Phlx-2014-05)(notice of filing and 
immediate effectiveness of proposed rule change to inbound routing 
of options orders). Nasdaq Options Services was the affiliated 
broker-dealer prior to a rule change to utilize NES, another 
affiliated broker-dealer of Nasdaq. See also Securities Exchange Act 
Release Nos. 63769 (January 25, 2011), 76 FR 5423 (January 31, 2011) 
(SR-BX-2011-003); 63859 (February 7, 2011), 76 FR 8391 (February 14, 
2011) (SR-BX-2011-007) (notice of filing of proposed rule change 
relating to permanent approval of the BX and NES inbound routing 
relationship); 71420 (January 28, 2014), 79 FR 6256 (February 3, 
2014)(SR-BX-2014-004)(notice of filing and immediate effectiveness 
of proposed rule change to inbound routing). See also Securities 
Exchange Act Release Nos. 65554 (October 13, 2011), 76 FR 65311 
(October 20, 2011)(SR-NASDAQ-2011-142); 71418 (January 28, 2014), 79 
FR 6262 (February 3, 2014)(SR-NASDAQ-2014-008)(notice of filing and 
immediate effectiveness of proposed rule change to inbound routing).
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    Similarly, NES would be prohibited from becoming an ISE Gemini 
member pursuant to ISE Gemini Rule 309, titled ``Limitation on 
Affiliation between the Exchange and Members,'' without Commission 
approval. Specifically, a Member may not become an affiliate of the 
Exchange, or any facility of the Exchange, or any entity with which the 
Exchange or any facility of the Exchange is affiliated such as the 
Affiliated Entities. This rule change requests permission from the 
Commission to allow NES, an affiliate of ISE Gemini to become a Member 
of ISE Gemini for the purpose of performing certain functions, 
including, but not limited to receiving inbound orders from one of the 
Affiliated Entities.
    In order for NES to be a Member of ISE Gemini, the Exchange 
proposes to permit the acceptance of inbound orders that NES routes in 
its capacity as a facility of the Affiliated Exchanges \11\ subject to 
certain limitations and conditions as follows:
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    \11\ The Exchange notes that ISE and ISE Mercury are separately 
filing rule changes to permit NES to be a Member of ISE and ISE 
Mercury for the purpose of performing certain routing and other 
functions, including, but not limited to receiving inbound orders 
from other entities that are affiliated with NES such as the 
Affiliated Entities. See SR-ISE-2016-27 and SR-ISEMercury-2016-22 
(both not published).
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     First, ISE Gemini shall maintain a Regulatory Services 
Agreement (``RSA'') with FINRA, as well as an agreement pursuant to 
Rule 17d-2 under the Act (``17d-2 Agreement'').\12\ Pursuant to the RSA 
and the 17d-2 Agreement, FINRA will be allocated regulatory 
responsibilities to review NES's compliance with certain Exchange 
rules.\13\ Pursuant to the RSA, however, ISE Gemini retains ultimate 
responsibility for enforcing its rules with respect to NES.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.17d-2. FINRA will review NES' compliance for 
certain common rules. The RSA with FINRA specifies the types of 
business activities that NES may undertake and it also indicates the 
obligations to which NES is subject under the RSA. Among other 
things, NES must maintain a certain amount of net capital pursuant 
to SEC Rule 15c3-1(a)(1)(ii) and operate pursuant to SEC Rule 15c3-
3(k)(2)(ii). NES is permitted to route orders in options to the 
appropriate market center for execution in accordance with member 
order and requirements.
    \13\ NES is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
---------------------------------------------------------------------------

     Second, FINRA will monitor NES for compliance with the 
Exchange's trading rules, and will collect and maintain certain related 
information.\14\
---------------------------------------------------------------------------

    \14\ Pursuant to the RSA, both FINRA and ISE Gemini shall 
collect and maintain all alerts, complaints, investigations and 
enforcement actions in which NES (in its capacity as a facility of 
the Affiliated Entities) is identified as a participant that has 
potentially violated applicable Commission or Exchange rules. The 
Exchange and FINRA shall retain these records in an easily 
accessible manner in order to facilitate any potential review 
conducted by the Commission's Office of Compliance Inspections and 
Examinations.
---------------------------------------------------------------------------

     Third, FINRA will provide a report to the Exchange's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which the Exchange or FINRA is aware) that 
identify NES as a participant that has potentially violated Commission 
or Exchange rules, and (ii) lists all investigations that identify NES 
as a participant that has potentially violated Commission or Exchange 
rules.
     Fourth, ISE Gemini has in place Rule 309. The Exchange 
proposes to adopt a new paragraph (b) to Rule 309 to state that Nasdaq, 
Inc., as the holding company owning ISE Gemini and NES, to [sic] 
establish and maintain procedures and internal controls reasonably 
designed to ensure that NES does not develop or implement changes to 
its system, based on non-public information obtained regarding planned 
changes to ISE Gemini's system, obtained as a result of its affiliation 
with the Exchange, until such information is available generally to 
similarly situated Exchange Members, in connection with the provision 
of inbound order routing to the Exchange.\15\
---------------------------------------------------------------------------

    \15\ Similarly, Phlx Rule 985 also prohibits a Phlx member from 
being or becoming an affiliate of Phlx, or an affiliate of an entity 
affiliated with Phlx, in the absence of an effective filing under 
Section 19(b). See Phlx Rule 985(b)(1)(B). Phlx filed a rule 
proposal and received approval based on meeting the four conditions 
specified above to protect the independence of the Exchange's 
regulatory responsibility with respect to NES, and has demonstrated 
that NES cannot use any information advantage it may have because of 
its affiliation with the Exchange.

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[[Page 96138]]

    The Exchange also proposes to add the letter ``(a)'' in front of 
the existing paragraph in Rule 309.
Inbound Routing
    ISE Gemini Rule 309 is being amended to add rule language similar 
to Phlx Rule 985(c)(2). This new rule text provides that Nasdaq, Inc. 
which owns NES and ISE Gemini, shall establish and maintain procedures 
and internal controls reasonably designed to ensure that NES does not 
develop or implement changes to its system on the basis of non-public 
information regarding planned changes to the Exchange's systems, 
obtained as a result of its affiliation with the Exchange, until such 
information is available generally to Exchange members in connection 
with the provision of inbound routing to the Exchange.
    By meeting the conditions described above under Restrictions on 
Affiliation, ISE Gemini will have set up mechanisms that protect the 
independence of ISE Gemini's regulatory responsibilities, with respect 
to NES, as well as demonstrate that NES cannot use any information 
advantage it may have because of its affiliation with ISE Gemini.
    The Exchange has approval from Financial Regulatory Authority 
(``FINRA'') \16\ and The Options Clearing Corporation (``OCC'') \17\ 
for NES to perform these functions.
---------------------------------------------------------------------------

    \16\ The Membership Agreement as between NES and FINRA, dated 
January 15, 2014, provides that NES may ``[e]ngage in the following 
types of business: Route orders in equities and options to the 
appropriate market center for execution in accordance with member 
order and requirements.''
    \17\ On December 5, 2013 OCC provided NES membership approval.
---------------------------------------------------------------------------

    The Exchange notes that the Nasdaq Exchanges are separately filing 
rule changes to permit NES to route orders inbound from ISE Gemini to 
the Nasdaq Exchanges.\18\
---------------------------------------------------------------------------

    \18\ See SR-NASDAQ-2016-169, SR-Phlx-2016-120 and SR-BX-2016-068 
(not published).
---------------------------------------------------------------------------

Outbound Routing
    ISE has rules in place in Chapter 19 related to routing orders, 
which rules impact routing on ISE Gemini because those rules are 
incorporated by reference. Today, ISE Gemini utilizes Linkage Handlers 
\19\ to route orders. These Linkage Handlers are unaffiliated with ISE 
Gemini. The Exchange proposes to have NES route, either directly to 
other options exchanges or indirectly through third-party routing 
brokers on behalf of ISE Gemini.\20\ With the proposal, regardless of 
whether a third-party routing broker is utilized, all options routing 
will go through NES, however the Exchange could determine to direct NES 
to route orders to certain exchanges through a routing broker rather 
than routing an order directly. In those cases, orders are submitted to 
the third-party routing broker through NES, and the third-party routing 
broker routes the orders to the routing destination in its name.\21\ 
Specifically, within that proposal ISE proposes to amend Rule 1903 to 
adopt new language similar to Phlx Rule 1080(m).\22\
---------------------------------------------------------------------------

    \19\ A Linkage Handler is a broker that is unaffiliated with the 
Exchange with which the Exchange has contracted to provide Routing 
Services, as that term is defined in Rule 1903, by routing ISO(s) to 
other exchange(s) as agent on behalf of Public Customer and Non-
Customer Orders according to the requirements of Rule 1901 
(prohibition on trade-throughs) and Rule 1902 (prohibition on locked 
and crossed markets). See Supplementary Material .03 to ISE Rule 
1901.
    \20\ See SR-ISE-2016-27 (not published). This proposed rule 
change proposes to replace Linkage Handlers with NES for the purpose 
of outbound routing and to establish rules for the cancellation or 
[sic] orders and maintenance of an error account.
    \21\ Id.
    \22\ Id.
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    ISE also proposed to amend Rule 1904 to replace the rule text with 
rule text similar to Phlx Rule 1080(m)(v) to provide general authority 
for ISE or NES to cancel orders in order to maintain fair and orderly 
markets when technical system issues are occurring, and set forth the 
manner in which error positions may be handled by the ISE or NES.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    Rule 1901 is being amended to remove references to Linkage Handlers 
along with other references in Rules 1903.\24\ Finally Rule 1905 
concerning error accounts is being deleted within that proposal.\25\
---------------------------------------------------------------------------

    \24\ Id.
    \25\ Id.
---------------------------------------------------------------------------

    The Exchange is proposing that NES be permitted to perform the same 
functions pursuant to the same conditions with respect to the outbound 
routing of orders, cancellation or orders, and the handling of error 
positions as set forth in the ISE proposal.
    The Exchange also proposes to amend Rule 705 to remove the rule 
text in Rule 705(d)(4) which provided an exception to the limits on 
compensation for Linkage Handlers. NES is replacing the Linkage 
Handlers for purposes of routing options orders from the ISE Exchanges. 
Today, Phlx does not have a similar provision and ISE is removing it 
from this rule.
Implementation
    The Exchange notes that with respect to the Rules in Chapter 19, 
Rules 1901, 1903, 1904 and 1905, these rules impact not only the ISE 
market but also ISE Gemini because Chapter 19 is incorporated by 
reference into the ISE Gemini Rulebook. ISE Gemini will be implemented 
in Q1 2017 on a symbol by symbol basis. The Exchange will add notations 
in the ISE Gemini Rulebook to cross reference the amended rule text and 
make clear the implementation date.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\26\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\27\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest, because the proposed rule change will allow the Exchange to 
receive inbound orders from each Affiliated Entity through NES, acting 
in its capacity as a facility of the respective Affiliated Entity, in a 
manner consistent with prior approvals and established protections. The 
Exchange believes that these conditions establish mechanisms that 
protect the independence of the Exchange's regulatory responsibility 
with respect to NES, as well as ensure that NES cannot use any 
information it may have because of its affiliation with the Exchange to 
its advantage.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Further, the Exchange notes that its proposal is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system because ISE Gemini will have set up mechanisms that 
protect the independence of ISE Gemini's regulatory responsibilities, 
with respect to NES, as well as demonstrate that NES cannot use any 
information advantage it may have because of its affiliation with ISE 
Gemini. The Exchange will not be granting any preferential access to 
information from the Exchange's Order Book to NES. As an affiliated 
routing broker, NES would not be treated differently than any other 
unaffiliated routing broker.

[[Page 96139]]

    The proposal should remove impediments to and perfect the mechanism 
of a free and open market and a national market system by providing 
customer order protection and by facilitating trading at away exchanges 
so customer orders trade at the best market price. The proposal should 
also protect investors and the public interest by fostering compliance 
with the Options Order Protection and Locked/Crossed Market Plan. In 
addition, the Exchange believes that the proposal is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, because of the specific protections pertaining to the routing 
broker, in light of the potential conflict of interest where the member 
routing broker could have access to information regarding other 
members' orders or the routing of those orders. These protections 
include the Exchange's control over all routing logic as well as the 
confidentiality of routing information.\28\
---------------------------------------------------------------------------

    \28\ See proposed Rule 1903(e).
---------------------------------------------------------------------------

    The Exchange believes that its proposal related to the cancellation 
of orders and error account is consistent with the Act because NES's or 
the Exchange's ability to cancel orders during a technical or systems 
issue and to maintain an error account facilitates the smooth and 
efficient operations of the market.\29\ Specifically, the Exchange 
believes that allowing NES or the Exchange to cancel orders during a 
technical or systems issue would allow the Exchange to maintain fair 
and orderly markets.\30\ Moreover, the Exchange believes that allowing 
NES to assume error positions in an error account and to liquidate 
those positions, subject to the conditions set forth in the proposed 
amendments to Rule 1904 would be the least disruptive means to correct 
these errors, except in cases where NES can assign all such error 
positions to all affected members of the Exchange.\31\ Overall, the 
proposed amendments are designed to ensure full trade certainty for 
market participants and to avoid disrupting the clearance and 
settlement process.\32\ The proposed amendments are also designed to 
provide a consistent methodology for handling error positions in a 
manner that does not discriminate among members.\33\ The proposed 
amendments are also consistent with Section 6 of the Act insofar as 
they would require NES to establish controls to restrict the flow of 
any confidential information between the third-party broker and NES/the 
Exchange associated with the liquidation of error positions.\34\
---------------------------------------------------------------------------

    \29\ See SR-ISE-2016-27 (not published).
    \30\ Id.
    \31\ Id.
    \32\ Id.
    \33\ Id.
    \34\ Id.
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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. Receiving orders through NES 
does not raise any issues of intra-market competition because it 
involves inbound routing from an affiliated exchange. This proposal 
provides that Nasdaq, which owns NES and the Exchange, shall establish 
and maintain procedures and internal controls reasonably designed to 
ensure that NES does not develop or implement changes to its system on 
the basis of non-public information regarding planned changes to the 
Exchange's systems, obtained as a result of its affiliation with the 
Exchange, until such information is available generally to similarly 
situated Exchange members and member organizations in connection with 
the provision of inbound routing to the Exchange. Utilizing NES as the 
routing broker does not create any undue burden on inter-market 
competition because NES cannot use any information advantage it may 
have because of its affiliation with ISE Gemini. The Exchange will not 
be granting any preferential access to information from the Exchange's 
Order Book to NES. As an affiliated routing broker, NES would not be 
treated differently than any other unaffiliated routing broker.
    The proposal does not result in a burden on competition among 
exchanges, because there are many competing options exchanges that 
provide routing services, including through an affiliate. Further, the 
proposal does not raise issues of intra-market competition, because the 
Exchange's decision to route through a particular routing broker would 
impact all participants equally.
    With respect to the proposal to establish error accounts, the 
Exchange's proposal does not result in a burden on competition among 
exchanges because NES' or the Exchange's ability to cancel orders 
during a technical or systems issue and to maintain an error account 
facilitates the smooth and efficient operations of the market for all 
impacted members. The proposals regarding assumption of error positions 
and [sic] to liquidation of those positions ensures certainty for all 
impacted market participants. The proposal does not discriminate among 
Members.\35\
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    \35\ See SR-ISE-2016-27 (not published).
---------------------------------------------------------------------------

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

    No written comments were either solicited or received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment Nos. 1 and 2, is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISEGemini-2016-16 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-ISEGemini-2016-16. 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

[[Page 96140]]

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-2016-16, and 
should be submitted on or before January 19, 2017.
For the Commission, by the Division of Trading and Markets, pursuant to 
delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31479 Filed 12-28-16; 8:45 am]
BILLING CODE 8011-01-P
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