Self-Regulatory Organizations; ISE Gemini, LLC; Order Granting Approval of Proposed Rule Change To Amend ISE Gemini Rule 723 and To Make Pilot Program Permanent, 8474-8477 [2017-01618]

Download as PDF mstockstill on DSK3G9T082PROD with NOTICES 8474 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect customers, issuers, brokers and dealers. As part of its proposal, the Exchange provided summary data on Exhibit 3 of its filing for the period January through June 2015, which the Exchange and Commission both publicly posted on their respective Web sites. Among other things, this data is useful in assessing the level of price improvement in the Auction, in particular for orders for fewer than 50 contracts; the degree of competition for order flow in such Auctions; and a comparison of liquidity in the Auctions with liquidity on the Exchange generally.23 Based on the data provided by the Exchange, the Commission believes that the Exchange’s price improvement auction generally delivers a meaningful opportunity for price improvement to orders, including orders for fewer than 50 contracts, when the spread in the option is $0.02 or more. At the same time, as the Exchange has recognized, the data do not demonstrate that such orders have realized significant price improvement when the NBBO has a bid/ ask differential of $0.01.24 Recognizing this, the Exchange has proposed to amend the Auction eligibility requirements to reject an Agency Order of less than 50 contracts where the NBBO has a bid/ask differential of $0.01. The Exchange’s proposal to modify the Auction eligibility requirements for orders of fewer than 50 contracts and seek permanent approval of the Pilot, as amended with the new provision, will, in the Commission’s view, promote opportunities for price improvement. The Commission believes that, particularly for Auctions for fewer than 50 contracts when the bid/ask differential is wider than $0.01, the data provided by the Exchange support its proposal to make the Pilot permanent. The data demonstrate that the Auction generally provides price improvement opportunities to orders, including orders of retail customers and particularly when the bid/ask differential is wider than $0.01, that there is meaningful competition for orders on the Exchange; and that there exists an active and liquid market functioning on the Exchange outside of the Auction.25 The Commission further believes that the proposed revisions to the eligibility requirements for Agency 23 See Exhibit 3 to SR–MIAX–2016–46. Notice, supra note 3, at 90032. 25 See Exhibit 3 to SR–MIAX–2016–46. 24 See VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 Orders of fewer than 50 contracts with respect to circumstances when the NBBO is $0.01 wide should help to enhance the operation of the Auction by limiting its use for smaller orders to circumstances when there are more meaningful opportunities for price improvement, and should benefit investors and others in a manner that is consistent with the Act. Thus, the Commission has determined to approve the Exchange’s proposed revisions to Rule 515A and to approve the Pilot, as proposed to be modified, on a permanent basis. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,26 that the proposed rule change (SR–MIAX–2016– 46), be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.27 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–01615 Filed 1–24–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79840; File No. SR– ISEGemini–2016–23] Self-Regulatory Organizations; ISE Gemini, LLC; Order Granting Approval of Proposed Rule Change To Amend ISE Gemini Rule 723 and To Make Pilot Program Permanent January 18, 2017. I. Introduction On December 12, 2016, ISE Gemini, LLC (the ‘‘Exchange’’ or ‘‘ISE Gemini’’) 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 the eligibility requirements for its Price Improvement Mechanism (‘‘PIM’’ or ‘‘Auction’’) and make permanent those aspects of the PIM that are currently operating on a pilot basis. The proposed rule change was published for comment in the Federal Register on December 19, 2016.3 The Commission received no comments regarding the proposal. This 26 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 See Securities Exchange Act Release No. 79541 (December 13, 2016), 81 FR 91974 (‘‘Notice’’). 27 17 PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 order approves the proposed rule change. II. Description of the Proposal The Exchange adopted PIM as part of its application to be registered as a national securities exchange under its previous name of Topaz Exchange, LLC (‘‘Topaz’’).4 Pursuant to ISE Gemini Rule 723, an Electronic Access Member (‘‘EAM’’) may electronically submit for execution an order it represents as agent (‘‘Agency Order’’) against principal interest or against a solicited order for the full size of the Agency Order, provided it submits the Agency Order for electronic execution into the PIM (a ‘‘Crossing Transaction’’). Parts of the PIM are currently operating on a pilot basis (‘‘Pilot’’),5 which is set to expire on January 18, 2017.6 The Exchange proposes to make the Pilot permanent, and also proposes to amend the Auction eligibility requirements for certain Agency Orders of less than 50 option contracts. A. PIM Eligibility Requirements for Agency Orders of Fewer than 50 Contracts Currently, the PIM may be initiated if certain conditions are met. The Crossing Transaction must be entered only at a price that is equal to or better than the National Best Bid/Offer (‘‘NBBO’’) on the opposite side of the market from the Agency Order, and better than the limit order or quote on the ISE Gemini order book on the same side of the Agency Order.7 ISE Gemini proposes to amend ISE Gemini Rule 723(b) to require EAMs to provide at least $0.01 price improvement for an Agency Order if that order is for less than 50 option contracts and if the difference between the NBBO is $0.01. For the period beginning January 19, 2017 until a date specified by the Exchange in a Regulatory Information Circular, which date shall be no later than April 15, 2017, ISE Gemini will adopt a member conduct standard to implement this 4 See Securities Exchange Act Release No. 70050 (July 26, 2013), 78 FR 46622 (August 1, 2013) (File No. 10–209) (‘‘Exchange Approval Order’’). The Exchange’s PIM was largely based on a similar functionality offered by the International Securities Exchange, LLC (‘‘ISE’’). See id. The Exchange subsequently changed its name to ISE Gemini. See Securities Exchange Act Release No. 71586 (February 20, 2014), 79 FR 10861 (February 26, 2014) (SR–Topaz–2014–06). 5 Two components of PIM were approved by the Commission on a pilot basis: (1) the early conclusion of the PIM; and (2) no minimum size requirement of orders. 6 See Securities Exchange Act Release No. 78343 (July 15, 2016), 81 FR 47483 (July 21, 2016) (SR– ISEGemini–2016–07) (‘‘PIM July 2016 Extension’’). 7 See ISE Gemini Rule 723(b)(1). E:\FR\FM\25JAN1.SGM 25JAN1 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices mstockstill on DSK3G9T082PROD with NOTICES requirement.8 Under this provision, ISE Gemini is proposing to amend the Auction Eligibility Requirements to require that, if the Agency Order is for less than 50 option contracts, and if the difference between the NBBO is $0.01, an EAM shall not enter a Crossing Transaction unless such Crossing Transaction is entered at a price that is one minimum price improvement increment better than the NBBO on the opposite side of the market from the Agency Order, and better than any limit order on the limit order book on the same side of the market as the Agency Order. This requirement will apply regardless of whether the Agency Order is for the account of a public customer, or where the Agency Order is for the account of a broker dealer or any other person or entity that is not a Public Customer. Failure to provide such price improvement will subject members to the fines set forth in ISE Rule 1614(d)(4).9 The Exchange stated that it will conduct electronic surveillance of the PIM to ensure that members comply with the proposed price improvement requirements for option orders of less than 50 contracts.10 The Exchange is also proposing a systems-based mechanism to implement this price improvement requirement, which shall be effective following the 8 The Exchange notes that its indirect parent company, U.S. Exchange Holdings, Inc. has been acquired by Nasdaq, Inc. See Securities Exchange Act Release No. 78119 (June 21, 2016), 81 FR 41611 (June 27, 2016) (SR–ISEGemini–2016–05). Pursuant to this acquisition, ISE Gemini platforms are migrating to Nasdaq platforms, including the platform that operates PIM. ISE Gemini intends to retain the proposed member conduct standard requiring price improvement for options orders of under 50 contracts where the difference between the NBBO is $0.01 until the ISE Gemini platforms and the corresponding symbols are migrated to the platforms operated by Nasdaq, Inc. See Notice, supra note 3, at 91975 n.7. 9 In a separate proposed rule change, ISE is proposing to adopt similar price improvement requirements for orders of fewer than 50 contracts for its PIM. As part of that rule change, ISE is proposing to amend ISE Rule 1614 (Imposition of Fines for Minor Rule Violations) to add Rule 1614(d)(4), which will provide that, beginning January 19, 2017, any member who enters an order into PIM for fewer than 50 contracts, while the National Best Bid or Offer spread is $0.01, must provide price improvement of at least one minimum price improvement increment better than the NBBO on the opposite side of the market from the Agency Order, which increment may not be smaller than $0.01. Failure to provide such price improvement will result in members being subject to the following fines: $500 for the second offense, $1,000 for the third offense, and $2,500 for the fourth offense. Subsequent offenses will subject the member to formal disciplinary action. ISE will review violations on a monthly cycle to assess these violations. The Commission notes that the ISE proposal was approved in conjunction with this proposal. See Securities Exchange Act Release No. 34–79829 (January 18, 2017) (SR–ISE–2016–29). 10 See Notice, supra note 3, at 91975–76. VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 migration of a symbol to INET, the platform operated by Nasdaq, Inc. that will also operate the PIM.11 Under this provision, if the Agency Order is for less than 50 option contracts, and if the difference between the NBBO is $0.01, the Crossing Transaction must be entered at one minimum price improvement increment better than the NBBO on the opposite side of the market from the Agency Order and better than the limit order or quote on the ISE Gemini order book on the same side of the Agency Order. The Exchange will retain the current requirements for PIM eligibility in all other instances. Accordingly, if the Agency Order is for 50 option contracts or more or if the difference between the NBBO is greater than $0.01, the Crossing Transaction must be entered only at a price that is equal to or better than the NBBO and better than the limit order or quote on the ISE Gemini order book on the same side as the Agency Order. The Exchange believes that these changes to PIM may provide additional opportunities for Agency Orders of fewer than 50 option contracts to receive price improvement over the NBBO where the difference in the NBBO is $0.01 and therefore encourage the increased submission of orders of under 50 option contracts.12 The Exchange notes that the statistics for the current pilot, which include, among other things, price improvement for orders of fewer than 50 option contracts under the current Auction eligibility requirements, show relatively small amounts of price improvement for such orders.13 ISE Gemini believes that the proposed requirements will therefore increase the price improvement that orders of fewer than 50 option contracts may receive in PIM.14 B. Pilot Program Two components of the PIM were approved by the Commission on a pilot basis: (1) The early conclusion of the PIM; 15 and (2) no minimum size requirement of orders. The provisions were approved for a pilot period that currently expires on January 18, 2017.16 The Exchange proposes to have the Pilot approved on a permanent basis. During the Pilot period, the Exchange submitted certain data periodically as required by the Commission, to provide supporting evidence that, among other things, there is meaningful competition 11 See id. at 91976. See also proposed ISE Gemini Rule 723(b). 12 See Notice, supra note 3, at 91976. 13 See id. 14 See id. 15 See ISE Gemini Rule 723(c)(5) and (d)(4). 16 See PIM July 2016 Extension, supra note 6. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 8475 for all size orders, there is significant price improvement available through the PIM, and that there is an active and liquid market functioning on the Exchange outside of the Auction mechanism.17 1. No Minimum Size Requirement Supplemental Material .03 to Rule 723 provides that, as part of the current Pilot, there will be no minimum size requirement for orders to be eligible for the Auction. The Exchange believes that the data gathered since the approval of the Pilot, which it discussed in the Notice, establishes that there is liquidity and competition both within the PIM and outside of the PIM, and that there are opportunities for significant price improvement within the PIM.18 The Exchange compiled price improvement data in orders from January through June 2016. For January 2016, where the order was on behalf of a Public Customer, the order was for 50 contracts or less, and ISE Gemini was at the NBBO, the most contracts traded (4,192) occurred when the spread was between $0.05 and $0.10.19 Of these, the greatest number of contracts (1,400) received $0.03 price improvement. In comparison, 6 contracts that traded at this spread received no price improvement. When the spread was $0.01 for this same category, a total of 499 contracts traded; 349 contracts received no price improvement, and 150 received $0.01 price improvement.20 In comparison, in January 2016, where the order was on behalf of a Public Customer, and the order was for greater than 50 contracts, and ISE Gemini was at the NBBO, the most contracts traded (1,495) occurred where the spread was $0.02. Of those contracts, the greatest number of contracts (979) received $0.01 price improvement, and 456 contracts received no price improvement.21 In January 2016, where the order was on behalf of a Public Customer, the order was for 50 contracts or less, and ISE Gemini was not at the NBBO, the most contracts traded (1,403) occurred when the spread was between $0.05 and $0.10. Of this category, the greatest number of contracts (570) received 17 See Supplementary Material .03 to ISE Gemini Rule 723. 18 See Notice, supra note 3, at 91976–77. See also Exhibit 3 to SR–ISEGemini–2016–23. 19 According to the Exchange, this discussion of January 2016 data is illustrative of data that was gathered between January 2016 and July 2016. See Notice, supra note 3, at 91976 n.13. The complete underlying data for January 2016 through June 2016 was attached as Exhibit 3 to the Notice. 20 See Notice, supra note 3, at 91977. 21 See id. E:\FR\FM\25JAN1.SGM 25JAN1 8476 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices $0.01 price improvement.22 In comparison, when the spread was $0.01 in this same category, a total of 80 contracts traded, and all received price improvement.23 In comparison, in January 2016, where the order was on behalf of a Public Customer, and order was for greater than 50 contracts, and ISE Gemini was not at the NBBO, the most contracts traded (4,846) occurred where the spread was $0.05—$0.10. Of those contracts, the greatest number of contracts (1,234) received $0.01 price improvement, and 1,008 contracts received no price improvement.24 ISE Gemini believes that the data gathered during the Pilot period indicates that there is meaningful competition in PIM auctions for all size orders, there is an active and liquid market functioning on the Exchange outside of the auction mechanism, and that there are opportunities for significant price improvement for orders executed through PIM.25 The Exchange therefore has requested that the Commission approve the no-minimum size requirement on a permanent basis. 2. Early Conclusion of the PIM Supplemental Material .05 to Rule 723 provides that Rule 723(c)(5) and Rule 723(d)(4), which relate to the termination of the exposure period by unrelated orders shall be part of the current Pilot. Rule 723(c)(5) provides that the exposure period will automatically terminate (i) at the end of the 500 millisecond period,26 (ii) upon the receipt of a market or marketable limit order on the Exchange in the same series, or (iii) upon the receipt of a nonmarketable limit order in the same series on the same side of the market as the Agency Order that would cause the price of the Crossing Transaction to be outside of the best bid or offer on the Exchange. Rule 723(d)(4) provides that, when a market order or marketable limit order on the opposite side of the market from the Agency Order ends the exposure period, it will participate in the execution of the Agency Order at the price that is mid-way between the best counter-side interest and the NBBO, so that both the market or marketable limit 22 See id. id. 24 See id. 25 See id. 26 The Commission notes that, at the time of the filing of this proposal, the duration of the exposure period was 500 milliseconds. The Exchange recently received approval to modify the exposure period to a time period designated by the Exchange of no less than 100 milliseconds and no more than one second. See Securities Exchange Act Release No. 79735 (January 4, 2017), 82 FR 3043 (January 10, 2017) (SR–ISEGemini–2016–14). mstockstill on DSK3G9T082PROD with NOTICES 23 See VerDate Sep<11>2014 20:29 Jan 24, 2017 Jkt 241001 order and the Agency Order receive price improvement. Transactions will be rounded, when necessary, to the $0.01 increment that favors the Agency Order. As with the no minimum size requirement, the Exchange has gathered data on these three conditions to assess the effect of early PIM conclusions on the Pilot. For the period from January 2016 through June 2016, there were a total of 65 early terminated Auctions. The number of orders in early terminated PIM auctions constituted 0.08% of total PIM orders.27 There were a total of 325 contracts that traded through early terminated Auctions. The number of contracts in early terminated PIM auctions represented 0.11% of total PIM contracts.28 Based on the data gathered during the Pilot, the Exchange does not anticipate that any of these conditions will occur with significant frequency, or will otherwise significantly affect the functioning of the PIM.29 The Exchange therefore has requested that the Commission approve this aspect of the Pilot on a permanent basis. III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, with Section 6(b) of the Act.30 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,31 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect customers, issuers, brokers and dealers. As part of its proposal, the Exchange provided summary data on Exhibit 3 of its filing for the period January through June 2016, which the Exchange and Commission both publicly posted on 27 See Notice, supra note 3, at 91977. id. 29 See id. 30 15 U.S.C. 78f(b). In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 31 15 U.S.C. 78f(b)(5). 28 See PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 their respective Web sites. Among other things, this data is useful in assessing the level of price improvement in the Auction, in particular for orders of fewer than 50 contracts; the degree of competition for order flow in such Auctions; and a comparison of liquidity in the Auctions with liquidity on the Exchange generally.32 Based on the data provided by the Exchange, the Commission believes that the Exchange’s price improvement auction generally delivers a meaningful opportunity for price improvement to orders, including orders for fewer than 50 contracts, when the spread in the option is $0.02 or more. At the same time, as the Exchange has recognized, the data do not demonstrate that such orders have realized significant price improvement when the NBBO has a bid/ ask differential of $0.01.33 Recognizing this, the Exchange has proposed to amend the Auction eligibility requirements to require the Initiating Participant to guarantee at least $0.01 of price improvement for Agency Orders of fewer than 50 contracts where the NBBO has a bid/ask differential of $0.01, whether or not the Exchange BBO is the same as the NBBO. The Exchange’s proposal to modify the Auction eligibility requirements for orders of fewer than 50 contracts and seek permanent approval of the Pilot, as amended with the new provision, will, in the Commission’s view, promote opportunities for price improvement for such orders when the NBBO is $0.01 wide, while continuing to provide opportunities for price improvement when spreads are wider than $0.01. In addition, the Commission has carefully evaluated the Pilot data and has determined that it would be beneficial to customers and to the options market as a whole to approve on a permanent basis the provisions concerning early conclusion of the PIM. The Commission notes that there have been few instances of early termination of the PIM. The Commission believes that, particularly for Auctions for fewer than 50 contracts when the bid/ask differential is wider than $0.01, the data provided by the Exchange support its proposal to make the Pilot permanent. The data demonstrate that the Auction generally provides price improvement opportunities to orders, including orders of retail customers and particularly when the bid/ask differential is wider than $0.01; that there is meaningful competition for orders on the Exchange; and that there 32 See 33 See E:\FR\FM\25JAN1.SGM Exhibit 3 to SR–ISEGemini–2016–23. Notice, supra note 3, at 91976. 25JAN1 Federal Register / Vol. 82, No. 15 / Wednesday, January 25, 2017 / Notices exists an active and liquid market functioning on the Exchange outside of the Auction.34 The Commission further believes that the proposed revisions to the eligibility requirements for orders of fewer than 50 contracts with respect to circumstances when the NBBO is no more than $0.01 wide should help to enhance the operation of the Auction by providing meaningful opportunities for price improvement in such circumstances, and should benefit investors and others in a manner that is consistent with the Act. The Commission further notes that, as discussed more fully above, ISE Gemini is initially proposing to implement is price improvement requirement for Agency Orders of fewer than 50 option contracts where the difference in the NBBO is $0.01 with a member conduct standard.35 As described in greater detail above, ISE Gemini proposes to enforce this requirement under ISE Rule 1614(d)(4). The Commission believes that ISE Gemini’s proposed member conduct standard and ISE Rule 1614(d)(4) are reasonable means to implement the price improvement requirement until implementation of its proposed systems-based mechanism for this requirement, which will become effective following the migration of a symbol to INET, the platform operated by Nasdaq, Inc. that will also operate the PIM. The Commission further notes that the Exchange has represented that its proposed member conduct standard will be effective until the migration of all symbols to the INET platform, which shall be no later than April 15, 2017.36 Thus, the Commission has determined to approve the Exchange’s proposed revisions to ISE Gemini Rule 723(b) and Supplementary Material .03 and .05 to ISE Gemini Rule 723, and to approve the Pilot, as proposed to be modified, on a permanent basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Eduardo A. Aleman, Assistant Secretary. IV. Conclusion II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change It is therefore ordered, pursuant to Section 19(b)(2) of the Act,37 that the proposed rule change (SR–ISEGemini– 2016–23), be and hereby is approved. mstockstill on DSK3G9T082PROD with NOTICES 34 See Exhibit 3 to SR–ISEGemini–2016–23. Exchange stated that it will conduct electronic surveillance of the PIM to ensure that members comply with the proposed price improvement requirements for option orders of fewer than 50 contracts. See Notice, supra note 3, at 91275–76. 36 See Notice, supra note 3, at 91275 & n.7. 37 15 U.S.C. 78s(b)(2). 38 17 CFR 200.30–3(a)(12). 35 The VerDate Sep<11>2014 21:59 Jan 24, 2017 Jkt 241001 [FR Doc. 2017–01618 Filed 1–24–17; 8:45 am] BILLING CODE 8011–01–P 8477 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 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79816; File No. SR–CBOE– 2017–003] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fees Schedule January 18, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 3, 2017, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Fees Schedule. The text of the proposed rule change is also available on the Exchange’s Web site (https:// www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 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 1 15 2 17 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00082 Fmt 4703 Sfmt 4703 The Exchange proposes to make a number of amendments to its Order Routing Subsidy (ORS) and Complex Order Routing Subsidy (CORS) Programs (collectively ‘‘Programs’’). By way of background, the ORS and CORS Programs allow CBOE to enter into subsidy arrangements with any CBOE Trading Permit Holder (‘‘TPH’’) (each, a ‘‘Participating TPH’’) or Non-CBOE TPH broker-dealer (each a ‘‘Participating Non-CBOE TPH’’) that meet certain criteria and provide certain order routing functionalities to other CBOE TPHs, Non-CBOE TPHs and/or use such functionalities themselves.3 (The term ‘‘Participant’’ as used in this filing refers to either a Participating TPH or a Participating Non-CBOE TPH). Participants in the ORS Program receive a payment from CBOE for every executed contract for simple orders routed to CBOE through their system. CBOE does not make payments under the ORS Program with respect to executed contracts in single-listed options classes traded on CBOE, or with respect to complex orders or spread orders. Similarly, participants in the CORS Program receive a payment from CBOE for every executed contract for complex orders routed to CBOE through their system. CBOE does not make payments under the CORS Program with respect to executed contracts in singlelisted options classes traded on CBOE or with respect to simple orders. Currently, under both programs the Exchange pays a subsidy of $0.02 per contract for all customer (origin code ‘‘C’’) orders and a subsidy of $0.06 per contract for all noncustomer orders. The Exchange first proposes to exclude customer orders from the Programs and eliminate the customer order subsidy. The Exchange also proposes to increase the subsidy for non-customer orders from $0.06 per contract to $0.07 per contract under both ORS and CORS. The Exchange notes that another Exchange with a similar subsidy program also does not provide subsidies for customer orders.4 3 See CBOE Fees Schedule, ‘‘Order Router Subsidy Program’’ and ‘‘Complex Order Router Subsidy Program’’ tables for more details on the ORS and CORS Programs. 4 See NASDAQ PHLX LLC Pricing Schedule, Section IV(e) [sic], Other Transaction Fees, Market Access and Routing Subsidy (‘‘MARS’’). E:\FR\FM\25JAN1.SGM 25JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8474-8477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01618]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79840; File No. SR-ISEGemini-2016-23]


Self-Regulatory Organizations; ISE Gemini, LLC; Order Granting 
Approval of Proposed Rule Change To Amend ISE Gemini Rule 723 and To 
Make Pilot Program Permanent

January 18, 2017.

I. Introduction

    On December 12, 2016, ISE Gemini, LLC (the ``Exchange'' or ``ISE 
Gemini'') 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 the eligibility requirements for its 
Price Improvement Mechanism (``PIM'' or ``Auction'') and make permanent 
those aspects of the PIM that are currently operating on a pilot basis. 
The proposed rule change was published for comment in the Federal 
Register on December 19, 2016.\3\ The Commission received no comments 
regarding the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79541 (December 13, 
2016), 81 FR 91974 (``Notice'').
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II. Description of the Proposal

    The Exchange adopted PIM as part of its application to be 
registered as a national securities exchange under its previous name of 
Topaz Exchange, LLC (``Topaz'').\4\ Pursuant to ISE Gemini Rule 723, an 
Electronic Access Member (``EAM'') may electronically submit for 
execution an order it represents as agent (``Agency Order'') against 
principal interest or against a solicited order for the full size of 
the Agency Order, provided it submits the Agency Order for electronic 
execution into the PIM (a ``Crossing Transaction''). Parts of the PIM 
are currently operating on a pilot basis (``Pilot''),\5\ which is set 
to expire on January 18, 2017.\6\ The Exchange proposes to make the 
Pilot permanent, and also proposes to amend the Auction eligibility 
requirements for certain Agency Orders of less than 50 option 
contracts.
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    \4\ See Securities Exchange Act Release No. 70050 (July 26, 
2013), 78 FR 46622 (August 1, 2013) (File No. 10-209) (``Exchange 
Approval Order''). The Exchange's PIM was largely based on a similar 
functionality offered by the International Securities Exchange, LLC 
(``ISE''). See id. The Exchange subsequently changed its name to ISE 
Gemini. See Securities Exchange Act Release No. 71586 (February 20, 
2014), 79 FR 10861 (February 26, 2014) (SR-Topaz-2014-06).
    \5\ Two components of PIM were approved by the Commission on a 
pilot basis: (1) the early conclusion of the PIM; and (2) no minimum 
size requirement of orders.
    \6\ See Securities Exchange Act Release No. 78343 (July 15, 
2016), 81 FR 47483 (July 21, 2016) (SR-ISEGemini-2016-07) (``PIM 
July 2016 Extension'').
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A. PIM Eligibility Requirements for Agency Orders of Fewer than 50 
Contracts

    Currently, the PIM may be initiated if certain conditions are met. 
The Crossing Transaction must be entered only at a price that is equal 
to or better than the National Best Bid/Offer (``NBBO'') on the 
opposite side of the market from the Agency Order, and better than the 
limit order or quote on the ISE Gemini order book on the same side of 
the Agency Order.\7\
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    \7\ See ISE Gemini Rule 723(b)(1).
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    ISE Gemini proposes to amend ISE Gemini Rule 723(b) to require EAMs 
to provide at least $0.01 price improvement for an Agency Order if that 
order is for less than 50 option contracts and if the difference 
between the NBBO is $0.01. For the period beginning January 19, 2017 
until a date specified by the Exchange in a Regulatory Information 
Circular, which date shall be no later than April 15, 2017, ISE Gemini 
will adopt a member conduct standard to implement this

[[Page 8475]]

requirement.\8\ Under this provision, ISE Gemini is proposing to amend 
the Auction Eligibility Requirements to require that, if the Agency 
Order is for less than 50 option contracts, and if the difference 
between the NBBO is $0.01, an EAM shall not enter a Crossing 
Transaction unless such Crossing Transaction is entered at a price that 
is one minimum price improvement increment better than the NBBO on the 
opposite side of the market from the Agency Order, and better than any 
limit order on the limit order book on the same side of the market as 
the Agency Order. This requirement will apply regardless of whether the 
Agency Order is for the account of a public customer, or where the 
Agency Order is for the account of a broker dealer or any other person 
or entity that is not a Public Customer.
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    \8\ The Exchange notes that its indirect parent company, U.S. 
Exchange Holdings, Inc. has been acquired by Nasdaq, Inc. See 
Securities Exchange Act Release No. 78119 (June 21, 2016), 81 FR 
41611 (June 27, 2016) (SR-ISEGemini-2016-05). Pursuant to this 
acquisition, ISE Gemini platforms are migrating to Nasdaq platforms, 
including the platform that operates PIM. ISE Gemini intends to 
retain the proposed member conduct standard requiring price 
improvement for options orders of under 50 contracts where the 
difference between the NBBO is $0.01 until the ISE Gemini platforms 
and the corresponding symbols are migrated to the platforms operated 
by Nasdaq, Inc. See Notice, supra note 3, at 91975 n.7.
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    Failure to provide such price improvement will subject members to 
the fines set forth in ISE Rule 1614(d)(4).\9\ The Exchange stated that 
it will conduct electronic surveillance of the PIM to ensure that 
members comply with the proposed price improvement requirements for 
option orders of less than 50 contracts.\10\
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    \9\ In a separate proposed rule change, ISE is proposing to 
adopt similar price improvement requirements for orders of fewer 
than 50 contracts for its PIM. As part of that rule change, ISE is 
proposing to amend ISE Rule 1614 (Imposition of Fines for Minor Rule 
Violations) to add Rule 1614(d)(4), which will provide that, 
beginning January 19, 2017, any member who enters an order into PIM 
for fewer than 50 contracts, while the National Best Bid or Offer 
spread is $0.01, must provide price improvement of at least one 
minimum price improvement increment better than the NBBO on the 
opposite side of the market from the Agency Order, which increment 
may not be smaller than $0.01. Failure to provide such price 
improvement will result in members being subject to the following 
fines: $500 for the second offense, $1,000 for the third offense, 
and $2,500 for the fourth offense. Subsequent offenses will subject 
the member to formal disciplinary action. ISE will review violations 
on a monthly cycle to assess these violations. The Commission notes 
that the ISE proposal was approved in conjunction with this 
proposal. See Securities Exchange Act Release No. 34-79829 (January 
18, 2017) (SR-ISE-2016-29).
    \10\ See Notice, supra note 3, at 91975-76.
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    The Exchange is also proposing a systems-based mechanism to 
implement this price improvement requirement, which shall be effective 
following the migration of a symbol to INET, the platform operated by 
Nasdaq, Inc. that will also operate the PIM.\11\ Under this provision, 
if the Agency Order is for less than 50 option contracts, and if the 
difference between the NBBO is $0.01, the Crossing Transaction must be 
entered at one minimum price improvement increment better than the NBBO 
on the opposite side of the market from the Agency Order and better 
than the limit order or quote on the ISE Gemini order book on the same 
side of the Agency Order.
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    \11\ See id. at 91976. See also proposed ISE Gemini Rule 723(b).
---------------------------------------------------------------------------

    The Exchange will retain the current requirements for PIM 
eligibility in all other instances. Accordingly, if the Agency Order is 
for 50 option contracts or more or if the difference between the NBBO 
is greater than $0.01, the Crossing Transaction must be entered only at 
a price that is equal to or better than the NBBO and better than the 
limit order or quote on the ISE Gemini order book on the same side as 
the Agency Order.
    The Exchange believes that these changes to PIM may provide 
additional opportunities for Agency Orders of fewer than 50 option 
contracts to receive price improvement over the NBBO where the 
difference in the NBBO is $0.01 and therefore encourage the increased 
submission of orders of under 50 option contracts.\12\ The Exchange 
notes that the statistics for the current pilot, which include, among 
other things, price improvement for orders of fewer than 50 option 
contracts under the current Auction eligibility requirements, show 
relatively small amounts of price improvement for such orders.\13\ ISE 
Gemini believes that the proposed requirements will therefore increase 
the price improvement that orders of fewer than 50 option contracts may 
receive in PIM.\14\
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    \12\ See Notice, supra note 3, at 91976.
    \13\ See id.
    \14\ See id.
---------------------------------------------------------------------------

B. Pilot Program

    Two components of the PIM were approved by the Commission on a 
pilot basis: (1) The early conclusion of the PIM; \15\ and (2) no 
minimum size requirement of orders. The provisions were approved for a 
pilot period that currently expires on January 18, 2017.\16\ The 
Exchange proposes to have the Pilot approved on a permanent basis.
---------------------------------------------------------------------------

    \15\ See ISE Gemini Rule 723(c)(5) and (d)(4).
    \16\ See PIM July 2016 Extension, supra note 6.
---------------------------------------------------------------------------

    During the Pilot period, the Exchange submitted certain data 
periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders, there is significant price improvement available 
through the PIM, and that there is an active and liquid market 
functioning on the Exchange outside of the Auction mechanism.\17\
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    \17\ See Supplementary Material .03 to ISE Gemini Rule 723.
---------------------------------------------------------------------------

1. No Minimum Size Requirement
    Supplemental Material .03 to Rule 723 provides that, as part of the 
current Pilot, there will be no minimum size requirement for orders to 
be eligible for the Auction. The Exchange believes that the data 
gathered since the approval of the Pilot, which it discussed in the 
Notice, establishes that there is liquidity and competition both within 
the PIM and outside of the PIM, and that there are opportunities for 
significant price improvement within the PIM.\18\
---------------------------------------------------------------------------

    \18\ See Notice, supra note 3, at 91976-77. See also Exhibit 3 
to SR-ISEGemini-2016-23.
---------------------------------------------------------------------------

    The Exchange compiled price improvement data in orders from January 
through June 2016. For January 2016, where the order was on behalf of a 
Public Customer, the order was for 50 contracts or less, and ISE Gemini 
was at the NBBO, the most contracts traded (4,192) occurred when the 
spread was between $0.05 and $0.10.\19\ Of these, the greatest number 
of contracts (1,400) received $0.03 price improvement. In comparison, 6 
contracts that traded at this spread received no price improvement. 
When the spread was $0.01 for this same category, a total of 499 
contracts traded; 349 contracts received no price improvement, and 150 
received $0.01 price improvement.\20\
---------------------------------------------------------------------------

    \19\ According to the Exchange, this discussion of January 2016 
data is illustrative of data that was gathered between January 2016 
and July 2016. See Notice, supra note 3, at 91976 n.13. The complete 
underlying data for January 2016 through June 2016 was attached as 
Exhibit 3 to the Notice.
    \20\ See Notice, supra note 3, at 91977.
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    In comparison, in January 2016, where the order was on behalf of a 
Public Customer, and the order was for greater than 50 contracts, and 
ISE Gemini was at the NBBO, the most contracts traded (1,495) occurred 
where the spread was $0.02. Of those contracts, the greatest number of 
contracts (979) received $0.01 price improvement, and 456 contracts 
received no price improvement.\21\
---------------------------------------------------------------------------

    \21\ See id.
---------------------------------------------------------------------------

    In January 2016, where the order was on behalf of a Public 
Customer, the order was for 50 contracts or less, and ISE Gemini was 
not at the NBBO, the most contracts traded (1,403) occurred when the 
spread was between $0.05 and $0.10. Of this category, the greatest 
number of contracts (570) received

[[Page 8476]]

$0.01 price improvement.\22\ In comparison, when the spread was $0.01 
in this same category, a total of 80 contracts traded, and all received 
price improvement.\23\
---------------------------------------------------------------------------

    \22\ See id.
    \23\ See id.
---------------------------------------------------------------------------

    In comparison, in January 2016, where the order was on behalf of a 
Public Customer, and order was for greater than 50 contracts, and ISE 
Gemini was not at the NBBO, the most contracts traded (4,846) occurred 
where the spread was $0.05--$0.10. Of those contracts, the greatest 
number of contracts (1,234) received $0.01 price improvement, and 1,008 
contracts received no price improvement.\24\
---------------------------------------------------------------------------

    \24\ See id.
---------------------------------------------------------------------------

    ISE Gemini believes that the data gathered during the Pilot period 
indicates that there is meaningful competition in PIM auctions for all 
size orders, there is an active and liquid market functioning on the 
Exchange outside of the auction mechanism, and that there are 
opportunities for significant price improvement for orders executed 
through PIM.\25\ The Exchange therefore has requested that the 
Commission approve the no-minimum size requirement on a permanent 
basis.
---------------------------------------------------------------------------

    \25\ See id.
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2. Early Conclusion of the PIM
    Supplemental Material .05 to Rule 723 provides that Rule 723(c)(5) 
and Rule 723(d)(4), which relate to the termination of the exposure 
period by unrelated orders shall be part of the current Pilot. Rule 
723(c)(5) provides that the exposure period will automatically 
terminate (i) at the end of the 500 millisecond period,\26\ (ii) upon 
the receipt of a market or marketable limit order on the Exchange in 
the same series, or (iii) upon the receipt of a nonmarketable limit 
order in the same series on the same side of the market as the Agency 
Order that would cause the price of the Crossing Transaction to be 
outside of the best bid or offer on the Exchange. Rule 723(d)(4) 
provides that, when a market order or marketable limit order on the 
opposite side of the market from the Agency Order ends the exposure 
period, it will participate in the execution of the Agency Order at the 
price that is mid-way between the best counter-side interest and the 
NBBO, so that both the market or marketable limit order and the Agency 
Order receive price improvement. Transactions will be rounded, when 
necessary, to the $0.01 increment that favors the Agency Order.
---------------------------------------------------------------------------

    \26\ The Commission notes that, at the time of the filing of 
this proposal, the duration of the exposure period was 500 
milliseconds. The Exchange recently received approval to modify the 
exposure period to a time period designated by the Exchange of no 
less than 100 milliseconds and no more than one second. See 
Securities Exchange Act Release No. 79735 (January 4, 2017), 82 FR 
3043 (January 10, 2017) (SR-ISEGemini-2016-14).
---------------------------------------------------------------------------

    As with the no minimum size requirement, the Exchange has gathered 
data on these three conditions to assess the effect of early PIM 
conclusions on the Pilot. For the period from January 2016 through June 
2016, there were a total of 65 early terminated Auctions. The number of 
orders in early terminated PIM auctions constituted 0.08% of total PIM 
orders.\27\ There were a total of 325 contracts that traded through 
early terminated Auctions. The number of contracts in early terminated 
PIM auctions represented 0.11% of total PIM contracts.\28\
---------------------------------------------------------------------------

    \27\ See Notice, supra note 3, at 91977.
    \28\ See id.
---------------------------------------------------------------------------

    Based on the data gathered during the Pilot, the Exchange does not 
anticipate that any of these conditions will occur with significant 
frequency, or will otherwise significantly affect the functioning of 
the PIM.\29\ The Exchange therefore has requested that the Commission 
approve this aspect of the Pilot on a permanent basis.
---------------------------------------------------------------------------

    \29\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\30\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\31\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect customers, issuers, brokers and dealers.
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    \30\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2016, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the Auction, in particular for orders of 
fewer than 50 contracts; the degree of competition for order flow in 
such Auctions; and a comparison of liquidity in the Auctions with 
liquidity on the Exchange generally.\32\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\33\ Recognizing this, the Exchange 
has proposed to amend the Auction eligibility requirements to require 
the Initiating Participant to guarantee at least $0.01 of price 
improvement for Agency Orders of fewer than 50 contracts where the NBBO 
has a bid/ask differential of $0.01, whether or not the Exchange BBO is 
the same as the NBBO.
---------------------------------------------------------------------------

    \32\ See Exhibit 3 to SR-ISEGemini-2016-23.
    \33\ See Notice, supra note 3, at 91976.
---------------------------------------------------------------------------

    The Exchange's proposal to modify the Auction eligibility 
requirements for orders of fewer than 50 contracts and seek permanent 
approval of the Pilot, as amended with the new provision, will, in the 
Commission's view, promote opportunities for price improvement for such 
orders when the NBBO is $0.01 wide, while continuing to provide 
opportunities for price improvement when spreads are wider than $0.01.
    In addition, the Commission has carefully evaluated the Pilot data 
and has determined that it would be beneficial to customers and to the 
options market as a whole to approve on a permanent basis the 
provisions concerning early conclusion of the PIM. The Commission notes 
that there have been few instances of early termination of the PIM.
    The Commission believes that, particularly for Auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the 
Pilot permanent. The data demonstrate that the Auction generally 
provides price improvement opportunities to orders, including orders of 
retail customers and particularly when the bid/ask differential is 
wider than $0.01; that there is meaningful competition for orders on 
the Exchange; and that there

[[Page 8477]]

exists an active and liquid market functioning on the Exchange outside 
of the Auction.\34\ The Commission further believes that the proposed 
revisions to the eligibility requirements for orders of fewer than 50 
contracts with respect to circumstances when the NBBO is no more than 
$0.01 wide should help to enhance the operation of the Auction by 
providing meaningful opportunities for price improvement in such 
circumstances, and should benefit investors and others in a manner that 
is consistent with the Act.
---------------------------------------------------------------------------

    \34\ See Exhibit 3 to SR-ISEGemini-2016-23.
---------------------------------------------------------------------------

    The Commission further notes that, as discussed more fully above, 
ISE Gemini is initially proposing to implement is price improvement 
requirement for Agency Orders of fewer than 50 option contracts where 
the difference in the NBBO is $0.01 with a member conduct standard.\35\ 
As described in greater detail above, ISE Gemini proposes to enforce 
this requirement under ISE Rule 1614(d)(4). The Commission believes 
that ISE Gemini's proposed member conduct standard and ISE Rule 
1614(d)(4) are reasonable means to implement the price improvement 
requirement until implementation of its proposed systems-based 
mechanism for this requirement, which will become effective following 
the migration of a symbol to INET, the platform operated by Nasdaq, 
Inc. that will also operate the PIM. The Commission further notes that 
the Exchange has represented that its proposed member conduct standard 
will be effective until the migration of all symbols to the INET 
platform, which shall be no later than April 15, 2017.\36\
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    \35\ The Exchange stated that it will conduct electronic 
surveillance of the PIM to ensure that members comply with the 
proposed price improvement requirements for option orders of fewer 
than 50 contracts. See Notice, supra note 3, at 91275-76.
    \36\ See Notice, supra note 3, at 91275 & n.7.
---------------------------------------------------------------------------

    Thus, the Commission has determined to approve the Exchange's 
proposed revisions to ISE Gemini Rule 723(b) and Supplementary Material 
.03 and .05 to ISE Gemini Rule 723, and to approve the Pilot, as 
proposed to be modified, on a permanent basis.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-ISEGemini-2016-23), be and 
hereby is approved.
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    \37\ 15 U.S.C. 78s(b)(2).
    \38\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01618 Filed 1-24-17; 8:45 am]
BILLING CODE 8011-01-P

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