Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change To Amend Various Rules in Connection With a System Migration to Nasdaq INET Technology, 11975-11985 [2017-03730]
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Federal Register / Vol. 82, No. 37 / Monday, February 27, 2017 / Notices
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: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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:
mstockstill on DSK3G9T082PROD 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–
NYSEArca–2017–14 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2017–14. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
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submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2017–14, and should be
submitted on or before March 20, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–03802 Filed 2–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80075; File No. SR–ISE–
2017–03]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing of Proposed Rule
Change To Amend Various Rules in
Connection With a System Migration to
Nasdaq INET Technology
February 21, 2017.
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 February
8, 2017, the International Securities
Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I and II below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
various rules in connection with a
system migration to Nasdaq INET
technology.
The text of the proposed rule change
is available on the Exchange’s Web site
at www.ise.com, at the principal office
of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
14 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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11975
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 this rule change is to
amend certain rules to reflect the ISE
technology migration to a Nasdaq, Inc.
(‘‘Nasdaq’’) supported architecture.
INET is the proprietary core technology
utilized across Nasdaq’s global markets
and utilized on The NASDAQ Options
Market LLC (‘‘NOM’’), NASDAQ PHLX
LLC (‘‘Phlx’’) and NASDAQ BX, Inc.
(‘‘BX’’) (collectively, ‘‘Nasdaq
Exchanges’’). The migration of ISE to the
Nasdaq INET architecture would result
in higher performance, scalability, and
more robust architecture. With this
system migration, the Exchange intends
to adopt certain trading functionality
currently utilized at Nasdaq Exchanges.
The functionality being adopted is
described in this filing.
The Exchange is also separately
filing 3 a rule change to amend the
Exchange’s Opening Process. ISE will
replace its current opening process at
Rule 701 with Phlx’s Opening Process.4
The Exchange intends to begin
implementation of the proposed rule
changes in Q2 2017. The migration will
be on a symbol by symbol basis, and the
Exchange will issue an alert to members
in the form of an Options Trader Alert
to provide notification of the symbols
that will migrate and the relevant dates.
Generally
With the re-platform, the Exchange
will now be built on the Nasdaq INET
architecture, which allows certain
trading system functionality to be
performed in parallel. The Exchange
believes that this architecture change
will improve the member experience by
reducing overall latency compared to
the current ISE system because of the
manner in which the system is
segregated into component parts to
handle processing.
3 See
SR–ISE–2017–02 (not yet published).
Phlx Rule 1017. See also Securities
Exchange Act Release No. 79274 (November 9,
2016), 81 FR 80694 (November 16, 2016) (SR–Phlx–
2017–79) (notice of Filing of Partial Amendment
No. 2 and Order Granting Approval of a Proposed
Rule Change, as Modified by Partial Amendment
No. 2, to Amend PHLX Rule 1017, Openings in
Options).
4 See
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Federal Register / Vol. 82, No. 37 / Monday, February 27, 2017 / Notices
Trading Halts
Cancellation of Quotes
The Exchange proposes to amend ISE
Rule 702 entitled ‘‘Trading Halts.’’
Specifically, the Exchange proposes to
amend Rule 702(a)(2) to note that during
a halt, the Exchange will maintain
existing orders on the book, but not
existing quotes prior to the halt, accept
orders and quotes, and process cancels
and modifications for quotes and orders,
except that existing quotes are
cancelled. Today, ISE maintains existing
orders and quotes during a trading halt.
With respect to cancels and
modifications, this behavior will not
change. ISE does not have a quote purge
today, so this functionality will be
changed with the adoption of this
trading rule. The Exchange believes that
purging quotes upon a halt will remove
uncertainty for market participants.
The Exchange proposes to conform
the treatment of quotes and orders on
ISE to Phlx Rule 1047(f) in conjunction
with the replatform of ISE. The
Exchange desires to handle halts in a
similar manner as Phlx.
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Limit Up-Limit Down
The Exchange also proposes to add
new ISE Rule 702(d) to replace rule text
currently contained in ISE Rule 703A
entitled ‘‘Trading During Limit UpLimit Down States in Underlying
Securities.’’ Proposed ISE Rule 702(d) is
similar to language currently in Phlx
Rule 1047, entitled ‘‘Trading During
Limit Up-Limit Down States in
Underlying Securities.’’ Proposed ISE
Rule 702(d) is similar to language
currently in Phlx Rule 1047(d), which
provides for Exchange handling due to
extraordinary market volatility.
Currently ISE Rule 703A(a) and (b)
provides modified order handling
procedures when a security underlying
an options class traded on the Exchange
enters a Limit State or Straddle State
under the Plan to Address Extraordinary
Market Volatility (the ‘‘Plan’’).5
5 Unless otherwise specified, capitalized terms
used in this rule filing are based on the defined
terms of the Plan. As set forth in more detail in the
Plan, Price Bands consisting of a Lower Price Band
and an Upper Price Band for each NMS Stock are
calculated by the Processors (Section V(A) of the
Plan). When the National Best Bid (Offer) is below
(above) the Lower (Upper) Price Band, the
Processors shall disseminate such National Best Bid
(Offer) with an appropriate flag identifying it as
unexecutable. When the National Best Bid (Offer)
is equal to the Upper (Lower) Price Band, the
Processors shall distribute such National Best Bid
(Offer) with an appropriate flag identifying it as a
Limit State Quotation (Section VI(A) of the Plan).
All trading centers in NMS stocks must maintain
written policies and procedures that are reasonably
designed to prevent the display of offers below the
Lower Price Band and bids above the Upper Price
Band for NMS stocks. Notwithstanding this
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Specifically, during a Limit State or
Straddle State: (1) Incoming Market
Orders are automatically rejected, and
all unexecuted Market Orders pending
in the System are cancelled, and (2)
incoming Stop Orders (which become
Market Orders if elected) are
automatically rejected, and unexecuted
Stop Orders pending in the System
cannot be elected and will be held until
the end of the Limit State or Straddle
State. In addition, ISE Rule 703A(c)
provides that when the security
underlying an option class is in a Limit
State or Straddle State, the maximum
quotation spread requirements for
market maker quotes contained in ISE
Rule 803(b)(5) and the continuous
quotation requirements contained in ISE
Rule 804(e) shall be suspended.6
With the re-platform, the Exchange
will adopt opening limitation, Market
Order and Stop Order handling
consistent with handling today on
Phlx.7 Specifically, proposed ISE Rule
702(d) will provide that during a Limit
State and Straddle State in the
Underlying NMS stock: (i) The
Exchange will not open an affected
option, (ii) provided the Exchange has
requirement, the Processor shall display an offer
below the Lower Price Band or a bid above the
Upper Price Band, but with a flag that it is nonexecutable. Such bids or offers shall not be
included in the National Best Bid or National Best
Offer calculations (Section VI(A)(3) of the Plan).
Trading in an NMS stock immediately enters a
Limit State if the National Best Offer (Bid) equals
but does not cross the Lower (Upper) Price Band
(Section VI(B)(1) of the Plan. Trading for an NMS
stock exits a Limit State if, within 15 seconds of
entering the Limit State, all Limit State Quotations
were executed or canceled in their entirety. If the
market does not exit a Limit State within 15
seconds, then the Primary Listing Exchange would
declare a five-minute trading pause pursuant to
Section VII of the Plan, which would be applicable
to all markets trading the security. The primary
listing market would declare a Trading Pause in an
NMS stock; upon notification by the primary listing
market, the Processor would disseminate this
information to the public. No trades in that NMS
stock could occur during the trading pause, but all
bids and offers may be displayed (Section VII(A) of
the Plan). In addition, the Plan defines a Straddle
State as when the National Best Bid (Offer) is below
(above) the Lower (Upper) Price Band and the NMS
stock is not in a Limit State. For example, assume
the Lower Price Band for an NMS Stock is $9.50
and the Upper Price Band is $10.50, such NMS
stock would be in a Straddle State if the National
Best Bid were below $9.50, and therefore
unexecutable, and the National Best Offer were
above $9.50 (including a National Best Offer that
could be above $10.50). If an NMS stock is in a
Straddle State and trading in that stock deviates
from normal trading characteristics, the Primary
Listing Exchange may declare a trading pause for
that NMS stock if such Trading Pause would
support the Plan’s goal to address extraordinary
market volatility.
6 The time periods associated with Limit States
and Straddle States are not considered by the
Exchange when evaluating whether a market maker
complied with the continuous quotation
requirements contained in Rule 804(e).
7 See proposed ISE Rule 702(d)(ii) and (iii).
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opened an affected option for trading,
the Exchange shall reject Market
Orders,8 as defined in ISE Rule 715(a),
and shall notify Members of the reason
for such rejection, and (iii) provided the
Exchange has opened an affected option
for trading, the Exchange will elect Stop
Orders if the condition is met, and,
because they become Market Orders,
shall cancel them back and notify
Members of the reason for such
rejection. The language in proposed ISE
Rule 703(d)(iv) concerning the
maximum quotation spread
requirements for market maker quotes
and the continuous quotation
requirements suspensions are the same
language currently contained in ISE
Rule 703A(c).
These amendments differ in certain
respects from the manner in which ISE
operates today during a Limit State or
Straddle State. The current ISE rule
does not address the opening. The
Exchange proposes to adopt rule text to
provide for how the Exchange shall treat
the opening rotation.9 The opening in
an option will not commence in the
event that the underlying NMS stock is
open, but has entered into a Limit State
or Straddle State. If this occurs, the
opening will only commence and
complete if the underlying NMS stock
stays out of a Limit or Straddle State.
Accordingly, proposed ISE Rule
702(d)(i) will provide that the Exchange
will not open an affected option. As a
result, if an opening process is
occurring, it will cease and then start
the opening process from the beginning
once the Limit State or Straddle State is
no longer occurring.
In addition, ISE currently cancels
Market Orders pending in the System
upon initiation of a Limit or Straddle
State. Under the proposal to adopt the
Phlx rule and implementation of the
Limit Up-Limit Down procedures,
Market Orders pending in the System
will continue to be processed regardless
of the Limit or Straddle State. The
Exchange believes this is a reasonable
handling of Market Orders in the system
since these orders are only pending in
the System if they are exposed at the
NBBO pursuant to Supplementary
Material .02 to ISE Rule 1901 or a
complex order exposed for price
improvement pursuant to ISE Rule
722(b)(3)(iii). In both cases, if at the end
of the exposure period the affected
underlying is in a Limit or Straddle
State, the Market Order will be
8 This includes complex orders as well as single
leg orders. The Exchange shall cancel complex
orders that are Market Orders residing in the
System if they are about to be executed by the
System.
9 See note 3 above.
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cancelled with no execution occurring.
If at the end of the exposure period the
underlying is no longer in a Limit or
Straddle State, the Market Order will be
handled under the normal operation of
the rules.
Lastly, ISE does not currently elect
Stop Orders that are pending in the
System during a Limit or Straddle State.
Under the proposal, and in-line with the
Phlx implementation, Stop Orders that
are pending in the System during a
Limit or Straddle State will be elected,
if conditions for such election are met,
however because they become Market
Orders will be cancelled back to the
Member with a reason for such
rejection.
While the implementation of Market
and Stop Order handling varies from
ISE today, both the current and
proposed Rule provide for protections
from erroneous executions in a highly
volatile period.10 The Exchange believes
consistency across the six options
markets operated by Nasdaq, Inc.
provides clarity for Members as to how
their orders, as well as the opening
process, will be handled in a Limit or
Straddle State.
Auction Handling During a Trading Halt
The Exchange proposes to amend
various rules to add detail to ISE rules
to account for the impact of a trading
halt on the Exchange’s auction
mechanisms. The Exchange proposes to
memorialize within ISE Rule 723,
entitled ‘‘Price Improvement
Mechanism for Crossing Transactions’’
the manner in which a trading halt will
impact an order entered into PIM once
it is migrated to the INET architecture.
Today, if a trading halt is initiated
after a single leg order is entered into
the Price Improvement Mechanism
(‘‘PIM’’) on ISE, such auction is
terminated and eligible interest is
executed or in the case of a complex
order entered into PIM, the auction is
terminated and eligible interest is
cancelled without execution. The
Exchange is amending the behavior with
respect to single leg orders in PIM
auctions to terminate the auction and
not execute eligible interest when a
trading halt occurs. In the event of a
trading halt, terminating the auction and
not executing eligible interest will
provide certainty to participants in
regard to how their interest will be
handled. Introducing consistent order
handling, regardless of single leg or
complex, and memorializing the manner
in which the system will handle all
10 The Exchange is introducing a Phlx protection,
Acceptable Trade Range, into ISE Rules as
discussed within this rule change.
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orders entered into PIM during a trading
halt will provide transparency for the
benefit of members and investors. The
Exchange is not amending the behavior
with respect to complex orders in PIM
auctions.
The Exchange proposes an
amendment to ISE Rule 716, entitled
‘‘Block Trades’’ to memorialize that if a
trading halt is initiated after an order is
entered into the Block Order
Mechanism, Facilitation Mechanism, or
Solicited Order Mechanism, such
auction will also be automatically
terminated without execution. This is
the current behavior today on ISE and
will not be changing.
As discussed above, Phlx Rule 1047(c)
provides that in the event the Exchange
halts trading, all trading in the affected
option shall be halted. This is
interpreted to restrict executions after a
halt unless there is a specific rule
specifying that such trades should take
place. The Exchange is proposing to add
more specificity into the relevant rules.
With respect to Block Order
Mechanism, Facilitation Mechanism, or
Solicited Order Mechanism, the
Exchange notes that the current
behavior is consistent with Phlx Rule
1047(c) generally, where all trading in
the affected option shall be halted.11 In
the event of a trading halt, terminating
these auction mechanisms and not
executing eligible interest will provide
certainty to participants in regard to
how their interest will be handled.
Memorializing the manner in which the
system will handle orders during a
trading halt will provide transparency
for the benefit of members and
investors.
Market Order Spread Protection
The Exchange proposes to amend ISE
Rule 711, entitled ‘‘Acceptance of
Quotes and Orders’’ to adopt a new
mandatory risk protection entitled
Market Order Spread Protection which
will apply to single leg Market Orders.
ISE does not have a similar feature
today. This mandatory feature is
currently offered on NOM to protect
Market Orders from being executed in
very wide markets.12
11 See
Phlx Rule 1047(c).
12 See NOM Rules at Chapter VI, Section 6(c).
NOM’s current rule states, ‘‘System Orders that are
Market Orders will be rejected if the best of the
NBBO and the internal market BBO (the ‘‘Reference
BBO’’) is wider than a preset threshold at the time
the order is received by the System.’’ NOM has two
order types, Price-Improving and Post-Only Orders,
which result in non-displayed pricing that may
cause the internal market BBO to be better than the
NBBO. ISE does not have similar non-displayed
order types and therefore the reference to the
internal market BBO is not necessary.
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11977
Pursuant to proposed ISE Rule 711(c),
if the NBBO is wider than a preset
threshold at the time a Market Order is
received, the order will be rejected. For
example, if the Market Order Spread
Protection is set to $20.00, and a Market
Order to buy is received while the
NBBO is $1.00–$50.00, such Market
Order will be rejected. The proposed
feature would assist with the
maintenance of fair and orderly markets
by mitigating the risks associated with
errors resulting in executions at prices
that are away from the Best Bid or Offer
and potentially erroneous. Further the
proposal protects investors from
potentially receiving executions away
from the prevailing prices at any given
time. The Exchange proposes this
feature to avoid a series of improperly
priced aggressive orders transacting in
the Order Book.
Today, the NOM threshold is set at
$5. ISE will initially set the threshold to
$5. Similar to NOM, the Exchange will
notify Members of the threshold with a
notice, and, thereafter, Members will be
notified of any subsequent changes to
the threshold. NOM set the differential
at $5 to match the bid/ask differential
permitted for quotes on the Exchange.13
ISE has a similar $5 differential.14 Thus,
the presence of a quote on the Exchange
will ensure the NBBO is at least $5
wide. The Exchange believes the
presence of a quote on the Exchange, or
a bid/ask differential of the NBBO,
which is no more than $5 wide affords
Market Orders proper protection against
erroneous execution and in the event a
bid/ask differential is more than $5,
then a Market Order is rejected. The
threshold is appropriate because it seeks
to capture improperly priced Market
Orders and reject them to reduce the
risk of, and to potentially prevent, the
automatic execution of Market Orders at
prices that may be considered
erroneous. The Exchange’s proposed
threshold is a reasonable measure to
ensure prices remain within the
reasonable limits. This protection will
bolster the normal resilience and market
behavior that persistently produces
robust reference prices. This feature
should create a level of protection that
13 See Chapter VII, Section 6(d)(ii) of NOM Rules
which describes the bid/ask differentials. Options
on equities (including Exchange-Traded Fund
Shares), and on index options must be quoted with
a difference not to exceed $5 between the bid and
offer regardless of the price of the bid, including
before and during the opening. However, respecting
in-the-money series where the market for the
underlying security is wider than $5, the bid/ask
differential may be as wide as the quotation for the
underlying security on the primary market. The
Exchange may establish differences other than the
above for one or more series or classes of options.
14 See ISE Rule 803(b)(4).
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Federal Register / Vol. 82, No. 37 / Monday, February 27, 2017 / Notices
prevents Market Orders from entering
the Order Book outside of an acceptable
range for the Market Order to execute.
Finally, the Market Order Spread
Protection will be the same for all
options traded on the Exchange, and is
applicable to all Members that submit
Market Orders.
Acceptable Trade Range
The Exchange proposes to amend ISE
Rule 714, entitled ‘‘Automatic
Execution of Orders,’’ at ISE Rule
714(b)(1) to adopt Phlx’s Acceptable
Trade Range for single leg orders.15 The
Exchange is proposing to adopt similar
functionality which is currently utilized
on Phlx in connection with the
replatform of ISE for single leg orders.
Today, ISE places a limit on the number
of price levels at which an incoming
order or quote to sell (buy) will be
executed automatically when there are
no bids (offers) from other exchanges at
any price for the options series. Orders
and quotes are executed at each
successive price level until the
maximum number of price levels is
reached, and any balance is either
handled by the Primary Market Maker
pursuant to Rule 803(c)(1) (in the case
of Priority Customer Orders) or canceled
(in the case of Professional Orders). The
number of price levels, may be between
one (1) and ten (10). The Exchange
determines the number of price levels
from time-to-time on a class-by-class
basis.
ISE proposes to replace the current
Price Level Protection applied to single
leg orders with Phlx’s Acceptable Trade
Range.16 The proposed Acceptable
Trade Range is a mechanism to prevent
the system from experiencing dramatic
price swings by creating a level of
protection that prevents the market from
moving beyond set thresholds. The
thresholds consist of a reference price
plus (minus) set dollar amounts based
on the nature of the option and the
premium of the option.
The system will calculate an
Acceptable Trade Range to limit the
range of prices at which an order or
quote will be allowed to execute. To
bolster the normal resilience and market
behavior that persistently produces
robust reference prices, ISE is proposing
to create a level of protection that
prevents the market from moving
beyond set thresholds. The Acceptable
Trade Range is calculated (upon receipt
of a new order or quote) by taking the
reference price, plus or minus a value to
be determined by the Exchange (i.e., the
reference price¥(x) for sell orders/
Exchange
Bid size
NOM .................................................................................................................
NYSE Arca .......................................................................................................
NYSE MKT ......................................................................................................
BOX .................................................................................................................
quotes and the reference price + (x) for
buy orders).17 Upon receipt of a new
order, the reference price is the National
Best Bid (‘‘NBB’’) for sell orders/quotes
and the National Best Offer (‘‘NBO’’) for
buy orders/quotes. If an order or quote
reaches the outer limit of the Acceptable
Trade Range (the ‘‘Threshold Price’’)
without being fully executed, then any
unexecuted balance will be cancelled.
The proposed Acceptable Trade Range
would work as follows: Prior to
executing orders received by ISE, an
Acceptable Trade Range is calculated to
determine the range of prices at which
orders/quotes may be executed.18 When
an order is initially received, the
threshold is calculated by adding (for
buy orders/quotes) or subtracting (for
sell orders/quotes) a value,19 as
discussed below, to the National Best
Offer for buy orders/quotes or the
National Best Bid for sell orders/quotes
to determine the range of prices that are
valid for execution. A buy (sell) order or
quote will be allowed to execute up
(down) to and including the maximum
(minimum) price within the Acceptable
Trade Range.
For example, in a thinly traded
option:
Away Exchange Quotes:
Bid price
10
10
10
10
$1.00
1.00
1.00
1.00
Offer price
Offer size
$1.05
1.05
1.10
1.15
10
10
10
10
ISE Price Levels:
Exchange
ISE
ISE
ISE
ISE
orders
orders
orders
orders
Bid size
........................................................................................................
........................................................................................................
........................................................................................................
........................................................................................................
If ISE receives a routable market order
to buy 80 contracts, the System will
respond as described below:
mstockstill on DSK3G9T082PROD with NOTICES
—10 contracts will be executed at $1.05
against ISE
15 See Phlx Rule 1080(p). Today, ISE places a
limit on the number of price levels at which an
incoming order or quote to sell (buy) will be
executed automatically for single leg and complex
orders when there are no bids (offers) from other
exchanges at any price for the options series. Orders
and quotes are executed at each successive price
level until the maximum number of price levels is
reached, and any balance is either handled by the
Primary Market Maker pursuant to Rule 803(c)(1)
(in the case of Priority Customer Orders) or
canceled (in the case of Professional Orders). The
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Jkt 241001
Bid price
10
........................
........................
........................
$1.00
........................
........................
........................
Offer price
Offer size
$1.05
1.10
1.40
5.00
10
10
10
10
—10 contracts will be executed at $1.05
against NOM
—10 contracts will be executed at $1.05
against NYSE Arca
—10 contracts will be executed at $1.10
against ISE
—10 contracts will be executed at $1.10
against NYSE MKT
—10 contracts will be executed at $1.15
against BOX
number of price levels, may be between one (1) and
ten (10). The Exchange determines the number of
price levels from time-to-time on a class-by-class
basis. This proposal only impacts single leg orders.
16 The Exchange notes that the version of
Acceptable Trade Range to be implemented on ISE
will not include the posting period functionality
available today on Phlx. The proposed rules reflect
this change.
17 The Acceptable Trade Range settings are tied to
the option premium.
18 The Acceptable Trade Range will not be
available for all-or-none orders. Today, ISE’s Price
Level Protection rule is not available for all-or-none
orders. The Exchange has determined that it would
be difficult, from a technical standpoint, to apply
this feature to those orders because their particular
contingency makes it difficult to automate their
handling.
19 The value that is to be added to/subtracted
from the reference price will be set by ISE and
posted on its Web site.
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After these executions, there are no
other known valid away exchange
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quotes. The National Best Bid/Offer
(‘‘NBBO’’) is therefore comprised of the
remaining interest on the ISE book,
specifically 10 contracts at $1.40 and 10
contracts at $5.00. In the absence of an
Acceptable Trade Range mechanism, the
order would execute against the
remaining interest at $1.40 and $5.00,
resulting in potential harm to investors.
ISE will set the parameters of the
mechanism at levels that will ensure
that it is triggered quite infrequently.
Importantly, the Acceptable Trade
Range is neutral with respect to away
markets, an order may route to other
destinations to access liquidity priced
within the Acceptable Trade Range
provided the order is designated as
routable.
The options premium will be the
dominant factor in determining the
Acceptable Trade Range. Generally,
options with lower premiums tend to be
more liquid and have tighter bid/ask
spreads; options with higher premiums
have wider spreads and less liquidity.
Accordingly, a table consisting of
several steps based on the premium of
the option will be used to determine
how far the market for a given option
will be allowed to move. This table or
tables would be listed on the
NASDAQTrader.com Web site and any
periodic updates to the table would be
announced via an Options Trader Alert.
For example, looking at some SPY
May 2013 Call options on May 1st of
2013:
Bid/Offer of SPY May 160 Call (at or nearthe-money): $1.23 × $1.24 (several
hundred contracts on bid and offer)
Bid/Offer of SPY May 105 Call (deep in-themoney): $54.10 × $54.26 (11 contracts on
each side)
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The deep in-the-money calls (May 105
calls) have a wider spread ($54.10 ¥
$54.26 = $0.16) compared to a spread of
$0.01 for the at-the-money calls (May
160 calls). Therefore, it is appropriate to
have different thresholds for the two
options. For instance, it may make sense
to have a $0.05 threshold for the at-themoney strikes (Premium <$2) and a
$0.50 threshold for the deep in-themoney strikes (Premium >$10).
To consider another example, the May
2013 ORCL put options on May 1st of
2013:
Bid/Offer of ORCL 33 May Put (at or nearthe-money): $0.33 × $0.34 (100 × 500)
Bid/Offer of ORCL 44 May Put (deep in-themoney): $10.40 × $10.55 (50 × 200)
Even though ORCL has a much lower
share price than SPY, and is a different
type of security (it is a common stock
of a technology company whereas SPY
is an ETF based on the S&P 500 Index),
the pattern is the same. The option with
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the lower premium has a very narrow
spread of $0.01 with significant size
displayed whereas the higher premium
option has a wide spread ($0.15) and
less size displayed.
The Acceptable Trade Range settings
will be tied to the option premium.
However, other factors will be
considered when determining the exact
settings. For example, acceptable ranges
may change if market-wide volatility is
as high as it was during the financial
crisis in 2008 and 2009, or if overall
liquidity is low based on historical
trends. These different market
conditions may present the need to
adjust the threshold amounts from time
to time to ensure a well-functioning
market. Without adjustments, the
market may become too constrained or
conversely, prone to wide price swings.
As stated above, the Exchange would
publish the Acceptable Trade Range
table or tables on the Exchange Web
site. The Exchange does not foresee
updating the table(s) often or intraday,
although the exchange may determine to
do so in extreme circumstances. The
Exchange will provide sufficient
advanced notice of changes to the
Acceptable Trade Range table, generally
the prior day, to its membership via an
Exchange alert.
The Acceptable Trade Range settings
would generally be the same across all
options traded on ISE, although ISE
proposes to maintain flexibility to set
them separately based on characteristics
of the underlying security. For instance,
Google is a stock with a high share price
($824.57 closing price on April 30,
2013). Google options therefore may
require special settings due to the risk
involved in actively quoting options on
such a high-priced stock. Option
spreads on Google are wider and the
size available at the best bid and offer
is smaller. Google could potentially
need a wider threshold setting
compared to other lower-priced stocks.
There are other options that fit into this
category (e.g., AAPL) which makes it
necessary to have threshold settings that
have flexibility based on the underlying
security. Additionally, it is generally
observed that options subject to the
Penny Pilot program quote with tighter
spreads than options not subject to the
Penny Pilot. Currently, ISE expects to
set Acceptable Trade Ranges for three
categories of options: (1) Penny Pilot
Options trading in one cent increments
for options trading at less than $3.00
and increments of five cents for options
trading at $3.00 or more, (2) Penny Pilot
Options trading in one-cent increments
for all prices, and (3) Non-Penny Pilot
Options.
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The Phlx rule contains language that
references a posting period.20
Specifically, the Phlx Rule provides if
an order/quote reaches the outer limit of
the Acceptable Trade Range (the
‘‘Threshold Price’’) without being fully
executed, it will be posted at the
Threshold Price for a brief period, not
to exceed one second (‘‘Posting
Period’’), to allow more liquidity to be
collected, unless a Quote Exhaust has
occurred, in which case the Quote
Exhaust process in Phlx Rule
1082(a)(ii)(B)(3) will ensue, triggering a
new Reference Price.21 The Exchange
will not post interest that exceeds the
outer limit of the Acceptable Trade
Range, rather the interest will be
cancelled. Only if the order limit does
not exceed the Acceptable Trade Range
will it post on the Exchange, if not
otherwise executed. Further, the Phlx
rule provides for the re-pricing of that
order or quote and calculation of a new
Acceptable Trade Range. Consistent
with the current treatment of orders and
quotes under ISE rules, the Exchange is
not adopting the posting period. Unlike
Phlx, ISE does not offer a general
continuous re-pricing mechanism, and
does not consider iterations in its
current functionality.22 ISE would
cancel rather than reprice orders which
exceed the outer limit of the Acceptable
Trade Range. Orders which do not
exceed the outer limit of the Acceptable
Trade Range will post to the order book
and will reside on the order book at
such price until they are either executed
in full or cancelled by the Member.
Additionally, resting orders do not reprice on the order book as they do today
on Phlx. For these reasons, the
unexecuted balance which exceeds the
outer limit of the Acceptable Trade
20 See
Phlx Rule 1080(p)(1)(B).
Quote Exhaust process occurs when the
Exchange’s disseminated market at a particular
price level includes a quote, and such market is
exhausted by an inbound contra-side quote or
order, and following such exhaustion, contracts
remain to be executed from such quote or order
through the initial execution price.
22 With respect to trade-throughs and locked and
crossed markets, a Phlx order will not be executed
at a price that trades through another market or is
displayed at a price that would lock or cross
another market. If, at the time of entry, an order that
the entering party has elected not to make eligible
for routing would cause a locked or crossed market
violation or would cause a trade-through violation,
it will be re-priced to the current national best offer
(for bids) or the current national best bid (for offers)
and displayed at one minimum price variance
above (for offers) or below (for bids) the national
best price. See Phlx Rule 1080(m)(iv)(A). In the
instance that the System automatically reprices an
order or quote, the System would assign the orders
or quote a new timestamp and the order or quote
will be reprioritized within the Order Book in
accordance with the priority rules in Phlx Rule
1014 (g).
21 The
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Range will be cancelled, rather than
posted to the order book.
For complex orders, the Exchange
will continue to apply the Price Level
Protection Rule which is being relocated
to Rule 714(b)(4) and revised to
specifically state that the Price Level
Protection shall apply to complex
orders. The functionality will remain
the same. The Exchange is amending the
current rule to remove references that
specifically related to single leg order
functionality. Primary Market Maker
handling does not apply to complex
orders and therefore is being removed
from the rule text. The Exchange is also
adding references to component legs to
make clear the application to complex
orders. Unlike single leg orders which
are subject to trade-through protections,
complex orders do not have similar
restrictions and therefore the Exchange
believes that the current Price Level
Protection Rule provides a better
protection for complex orders because
the Acceptable Trade Range protection
described within this filing utilizes the
NBBO and the Price Level Protection
does not rely on the NBBO but rather
limits the number of price levels.
PMM Order Handling and Opening
Obligations
Today, PMMs are responsible for
handling Priority Customer orders that
are not automatically executed pursuant
to ISE Rule 714(b)(1), i.e., the Price
Level Protection, and to initiate the
opening rotation in each series pursuant
to ISE Rule 701. This responsibility is
described in each of those rules, as well
as in ISE Rule 803(c), which provides
that:
mstockstill on DSK3G9T082PROD with NOTICES
In addition to the obligations contained in
this Rule for market makers generally, for
options classes to which a market maker is
the appointed Primary Market Maker, it shall
have the responsibility to: (1) As soon as
practical, address Priority Customer Orders
that are not automatically executed pursuant
to Rule 714(b)(1) in a manner consistent with
its obligations under paragraph (b) of this
Rule by either (i) executing all or a portion
of the order at a price that at least matches
the NBBO and that improves upon the
Exchange’s best bid (in the case of a sell
order) or the Exchange’s best offer (in the
case of a buy order); or (ii) releasing all or
a portion of the order for execution against
bids and offers on the Exchange. (2) Initiate
trading in each series pursuant to Rule 701.
As described in more detail in the
sections above, with the re-platform to
Nasdaq technology, the Exchange is
adopting Acceptable Trade Range and
opening rotation functionality currently
offered on NOM and Phlx, which do not
contain similar requirements for the
PMM. The Exchange therefore proposes
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to eliminate the PMM order handling
and opening obligations in Rule 803(c).
The Exchange believes that the
elimination of the PMM obligation to
initiate the opening rotation in this rule
is appropriate because the proposed
opening process 23 is initiated by the
receipt of an appropriate number of
valid width Primary Market Maker or
Competitive Market Maker quotes as
outlined in proposed ISE Rule 701(c)(i).
Similarly, the Acceptable Trade Range
functionality will continue to provide
an important protection to members
without imposing any Primary Market
Maker obligations. Today, Phlx does not
have similar roles for a Specialist on its
market. In connection with the
replatform, the Exchange will conform
its rules with those of Phlx with respect
to the manner in which it operates the
Opening Process.
Back-Up PMM
The Exchange also proposes to amend
ISE Supplementary Material .03 to Rule
803 to eliminate its Back-Up Primary
Market Maker program. Today, any ISE
Member that is approved to act in the
capacity of a Primary Market Maker may
voluntarily act as a ‘‘Back-Up Primary
Market Maker’’ in options series in
which it is quoting as a Competitive
Market Maker. A Back-Up Primary
Market Maker assumes all of the
responsibilities and privileges of a
Primary Market Maker under the
Exchange’s rules with respect to any
series in which the appointed Primary
Market Maker fails to have a quote in
the System except that a Back-Up
Primary Market Maker’s quoting
obligations are the same as the quoting
obligations for Competitive Market
Makers as described in ISE Rule
804(e)(2)(iii) and .02 of Supplementary
Material to Rule 804.24 If more than one
Competitive Market Maker that has
volunteered to be a Back-Up Primary
Market Maker is quoting in an options
series at the time that a Primary Market
Maker ceases quoting, the Competitive
Market Maker with the largest offer at
the lowest price in the series at that time
will be chosen to be the Back-Up
Primary Market Maker. In the event of
a tie based on price and size, the
Competitive Market Maker with time
priority will be automatically chosen.
The Back-Up Primary Market Maker is
23 See
note 3 above.
Exchange notes that the current rule text
for Back-up Primary Market Maker on ISE does not
indicate that quoting obligations for Back-up
Primary Market Makers are the same as for
Competitive Market Makers. This, however, has
been the Exchange’s practice. See Securities
Exchange Act Release No. 76936 (January 20, 2016),
81 FR 4347 (January 26, 2016) (SR–ISE–2016–02).
24 The
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automatically restored to Competitive
Market Maker status when the
appointed Primary Market Maker
initiates quoting in the series. The
obligations of a Primary Market Maker
include the initiation of a trading
rotation pursuant to ISE Rule 701,
quoting and other obligations pursuant
to ISE Rules 803 and 804, and financial
requirements pursuant to ISE Rule 809.
The Exchange is proposing to amend the
obligations of a PMM only with regard
to the initiation of a trading rotation
pursuant to ISE Rule 701. The quoting
and financial requirements rules shall
remain the same.
With the re-platform, a Back-Up
Primary Market Maker is no longer
necessary since the order handling
obligations present on ISE today are not
going to be present in the new system.
Furthermore, the proposed Opening
Process obviates the importance of such
a role. The Opening Process describes
the entry of quotes by both a Primary
Market Maker and a Competitive Market
Maker, provided they are Valid Width
Quotes.25 The Opening Process further
describes alternative methods to open
the market if such quotes are not
entered at the opening by either of these
market makers.26 The reliance on a
market maker to initiate the opening
process is no longer present within the
proposed rule.27
Market Maker Speed Bump
The Exchange proposes to amend ISE
Rule 804, entitled ‘‘Market Maker
Quotations’’ to establish default
parameters for certain risk functionality.
The Exchange offers a risk protection
mechanism for market maker quotes
that removes a member’s quotes in an
options class if a specified number of
curtailment events occur during a set
time period (‘‘Market Maker Speed
Bump’’). In addition, the Exchange
offers a market-wide risk protection that
removes a market maker’s quotes across
all classes if a number of curtailment
events occur (‘‘Market-Wide Speed
Bump’’).28 ISE Rule 804(g) currently
requires that market makers set
curtailment parameters for both the
Market Maker Speed Bump and the
Market-Wide Speed Bump. Today, if a
market maker does not set these
parameters their quotes are rejected by
25 A Valid Width Quote is a two-sided electronic
quotation submitted by a Market Maker that
consists of a bid/ask differential that is compliant
with ISE proposed Rule 803(b)(4). See note 3 above.
26 See note 3 above.
27 Id.
28 Market makers may request the Exchange to set
the market wide parameter to apply to just ISE or
across ISE and ISE Gemini.
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the trading system for each of the speed
bumps mentioned herein.
With the re-platform, the Exchange
has determined to provide default
curtailment parameters to assist market
makers when they do not enter their
own parameters into the system. The
default parameters will be determined
by the Exchange and announced to
members. Rather than rejecting quotes,
the default parameters would be
instituted. The default parameters are
important because market makers at ISE
have quoting obligations as specified in
ISE Rule 804. When a market maker’s
quotes are removed from the system, the
time does not count toward the
continuous quoting obligations. The
Exchange believes that allowing for
default settings would cause quotes not
to be rejected and would assist market
makers in meeting their quoting
obligations because they would not have
their quotes removed from the market.
Today, Phlx indicates default
parameters for its detection of loss of
communication settings.29
mstockstill on DSK3G9T082PROD with NOTICES
Anti-Internalization
The Exchange proposes to amend the
ISE Supplementary Material at .03 to
Rule 804, entitled ‘‘Market Maker
Quotations’’ to adopt AntiInternalization rule. Today, ISE’s
functionality prevents Immediate-orCancel (‘‘IOC’’) 30 orders entered by a
market maker from trading with the
market maker’s own quote.31. [sic] As
implemented, if an IOC order entered by
a market maker would trade with a
quote entered by the same market
maker, that order will instead be
allocated to other interest at the same
price, and the balance cancelled. The
Exchange proposes to replace this selftrade protection functionality with AntiInternalization functionality currently
offered on Phlx.32
Today, Phlx provides antiinternalization (‘‘AIQ’’) functionality to
Specialists and Registered Options
Traders (‘‘collectively market makers’’).
Quotes and orders entered by Phlx
market makers using the same badge 33
are not executed against quotes and
orders entered on the opposite side of
the market using the same badge. This
automatically prevents these quotes and
orders from interacting with each other
29 Phlx
Rule 1019(c).
30 An IOC order is a limit order that is to be
executed in whole or in part upon receipt. Any
portion not so executed is to be treated as cancelled.
See Rule 715(b)(3).
31 This functionality is not memorialized in ISE’s
rules.
32 See Phlx Rule 1080(p)(2).
33 A badge is the same as a market participant
identifier (‘‘MPID’’).
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in the System. On Phlx, the system
cancels the resting quote or order back
to the entering party prior to execution.
This functionality does not apply in any
auction or with respect to complex
transactions.
The Exchange proposes to adopt a
similar rule that provides that quotes
and orders entered by Market Makers
using the same member identifier will
not be executed against quotes and
orders entered on the opposite side of
the market by the same market maker
using the same member identifier. In
such a case, the system will cancel the
resting quote or order back to the
entering party prior to execution. This
functionality shall not apply in any
auction or with respect to complex
transactions. AIQ is difficult to apply
during auctions, and there is limited
benefit in doing so. There is limited
benefit because, generally speaking,
auctions do not raise the same policy
concerns for wash sales and ERISA 34
due to the semi-random manner in
which trades are matched. AIQ is
unnecessary with respect to complex
orders due to the highly specialized
nature of such orders and the high level
of control that market participants
exercise over complex orders.
This functionality does not relieve or
otherwise modify the duty of best
execution owed to orders received from
public customers. Market Makers
generally do not display public
customer orders in market making
quotations, opting instead to enter
public customer orders using separate
identifiers. In the event that a Market
Maker opts to include a public customer
order within a market making quotation,
the Market Maker must take appropriate
steps to ensure that public customer
orders that do not execute due to antiinternalization functionality ultimately
receive the same execution price (or
better) they would have originally
obtained if execution of the order was
not inhibited by the functionality.
This Anti-Internalization
functionality can assist Market Makers
in reducing trading costs from
unwanted executions potentially
resulting from the interaction of
executable buy and sell trading interest
34 AIQ also is designed to assist market
participants in complying with certain rules and
regulations of the Employee Retirement Income
Security Act (‘‘ERISA’’) that preclude and/or limit
managing broker-dealers of such accounts from
trading as principal with orders generated for those
accounts. It can also assist Market Makers in
reducing trading costs from unwanted executions
potentially resulting from the interaction of
executable buy and sell trading interest from the
same firm when performing the same market
making function.
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11981
from the same firm when performing the
same market making function.
Minimum Execution Quantity Orders
The Exchange proposes to amend ISE
Rule 715, entitled ‘‘Types of Orders’’ at
715(q) to remove minimum quantity
orders. Today, the Exchange allows
members to enter minimum quantity
orders, which is an order type that is
available for partial execution, but each
partial execution must be for a specified
number of contracts or greater. If the
balance of the order after one or more
partial executions is less than the
minimum, such balance is treated as allor-none. Like all-or-none orders,
minimum quantity orders are
contingency orders that are not
displayed in the Exchange’s best bid or
offer. However, the Exchange
disseminates to market participants an
indication that a minimum quantity
order has been entered. The Exchange
has found that the utilization of
minimum quantity orders by its
members has been very limited, and
therefore proposes to remove this
functionality.35 Furthermore, the
Exchange proposes to remove two
references to minimum quantity orders
in other rules. Specifically, the
Exchange proposes to remove references
to minimum quantity orders in ISE
Supplementary Material .02 to Rule 713,
which notes that minimum quantity
orders are contingency orders that have
no priority on the book, and in ISE
Supplementary Material .04 to Rule 717,
which explains that non-marketable
minimum quantity orders are deemed
‘‘exposed’’ one second following a
broadcast notifying the market that such
an order to buy or sell a specified
number of contracts at a specified with
a specified minimum quantity has been
received in the options series.
Delay of Implementation
The Exchange proposes to delay the
implementation of Directed Order 36
functionality on ISE. The Exchange
proposes to continue to offer this
functionality on the current platform.
The Exchange however would propose
35 This functionality is currently being utilized to
transact less than 1% of ISE’s volume.
36 ISE currently operates a Directed Order system
in which Electronic Access Members (‘‘EAMs’’) can
send an order to a DMM for possible price
improvement. If a DMM accepts Directed Orders
generally, that DMM must accept all Directed
Orders from all EAMs. Once such a DMM receives
a Directed Order, it either (i) must enter the order
into the Exchange’s PIM auction and guarantee its
execution at a price better than the ISE best bid or
offer (‘‘ISE BBO’’) by at least a penny and equal to
or better than the NBBO or (ii) must release the
order into the Exchange’s limit order book, in
which case there are certain restrictions on the
DMM interacting with the order. See ISE Rule 811.
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not to launch the Directed Order
functionality on ISE at the same time as
proposed herein for the proposals to
amend other trading functions. The
Exchange would instead issue an alert
which specifies a different date for this
functionality to commence on ISE. This
functionality will remain the same on
the new platform.
The Exchange proposes to amend the
rule text in Rule 811 (Directed Orders)
to note that this functionality will not be
available as of a certain date in the
second quarter of 2017 to be announced
in a notice. The Exchange will
recommence this functionality on ISE
within one year from the date of filing
of this rule change to be announced in
a separate notice.
The Exchange intends to begin
implementation of the functionality for
Directed Orders after Q2 2017. The
migration will also be on a symbol by
symbol basis, and the Exchange will
issue an alert to members in the form of
an Options Trader Alert to provide
notification of the symbols that will
migrate and the relevant dates. The
Exchange will introduce Directed
Orders on ISE within one year from the
date of this filing, otherwise the
Exchange will file a rule proposal with
the Commission to remove these rules.
mstockstill on DSK3G9T082PROD with NOTICES
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,37 in general, and furthers the
objectives of Section 6(b)(5) of the Act,38
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 for the
reasons stated below.
Trading Halts
The Exchange’s proposal to amend
ISE Rule 702 concerning Trading Halts
to specifically note that during a halt the
Exchange will maintain existing orders
on the book but not existing quotes is
consistent with the Act because it
provides market participants with
clarity as to the manner in which
interest will be handled by the system.
During a trading halt, the market may
move and create risk to market
participants with respect to resting
interest. The Exchange believes that
cancelling existing quotes protects
investors and the public interest by
removing potentially stale quotes during
the halt process.
37 15
38 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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The Exchange’s proposal to amend its
rules on order handling during Limit
up-Limit Down states and trading halts
is consistent with the Act because it will
harmonize the way the Exchange treats
orders during a Limit State or Straddle
State in the equity market, or a trading
halt in the option, with how those
orders are handled on other Nasdaq
Exchanges. The proposed rule text
should provide certainty about how
options orders and trades will be
handled during periods of extraordinary
volatility in the underlying security.
Specifically, under the proposal, market
participants will be able to continue to
trade options overlying securities that
are in a Limit State or Straddle State,
while addressing specific order types
that are subject to added risks during
such periods. The Exchange believes
that the rejection of options Market
Orders (including elected Stop Orders)
should help to prevent executions that
might occur at prices that have not been
reliably formed, which should, in turn,
protect, in particular, retail investors
from executions of un-priced orders
during times of significant volatility.
Specifically, with respect to Market
Orders, Market Orders exposed at the
NBBO pursuant to Supplementary
Material .02 to ISE Rule 1901 or exposed
for price improvement pursuant to ISE
Rule 722(b)(3)(iii), which are pending in
the system, will continue to be
processed. The Exchange believes that it
is consistent with the Act to cancel a
Market Order, if at the end of either of
these exposure periods the affected
underlying is in a Limit or Straddle
State, because of the uncertainty present
which may result in executions that
might occur at prices that have not been
reliably formed. The Exchange would
process the Market Order, with normal
handling, provided the affected
underlying is no longer in a Limit or
Straddle State. The Exchange believes
that this approach should, in turn,
protect, in particular, retail investors
from executions of un-priced orders
during times of significant volatility.
The Exchange believes that harmonizing
these rules will provide a better
experience to members that trade on
multiple markets operated by Nasdaq,
Inc.
Cancellation of Quotes
The Exchange’s proposal to amend
ISE Rule 702 concerning Trading Halts
to specifically note that during a halt the
Exchange will maintain existing orders
on the book but not existing quotes is
consistent with the Act because it
provides market participants with
clarity as to the manner in which
interest will be handled by the system.
PO 00000
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Fmt 4703
Sfmt 4703
During a trading halt, the market may
move and create risk to market
participants with respect to resting
interest. The Exchange believes that
cancelling existing quotes protects
investors and the public interest by
removing potentially stale quotes during
the halt process.
Limit Up-Limit Down
The Exchange’s proposal to add new
ISE Rule 702(d) to replace rule text
currently contained in ISE Rule 703A
entitled ‘‘Trading During Limit UpLimit Down States in Underlying
Securities’’ is consistent with the Act
because the proposed rules provide for
protections from erroneous executions
in a highly volatile period. The
proposed rule text in ISE Rule 702(d) is
similar to language currently in Phlx
Rule 1047(d), which provides for
Exchange handling due to extraordinary
market volatility. As noted within this
proposal, the Exchange will adopt
opening limitation, Market Order and
Stop Order handling consistent with
handling today on Phlx. The Exchange
proposes to adopt rule text to provide
for how the Exchange shall treat the
opening rotation.39 If an opening
process is occurring, it will cease and
then start the opening process from the
beginning once the Limit State or
Straddle State is no longer occurring.
The Exchange believes that this
treatment at the opening will protect
investors and the public interest by
halting trading to prevent unintended
executions. Also, with this proposal,
Market Orders pending in the System
will continue to be processed regardless
of the Limit or Straddle State. The
Exchange believes that this treatment of
Market Orders is consistent with the Act
because these Market Orders are only
pending in the System if they are
exposed at the NBBO pursuant to
Supplementary Material .02 to ISE Rule
1901 or a complex order exposed for
price improvement pursuant to ISE Rule
722(b)(3)(iii). If at the end of the
exposure period the affected underlying
is in a Limit or Straddle State, the
Market Order will be cancelled with no
trade occurring. If at the end of the
exposure period, the affected underlying
is no longer in a Limit or Straddle State,
the Market Order will be handled
pursuant to the normal operation of the
rules.
Lastly, ISE does not currently elect
Stop Orders that are pending in the
System during a Limit or Straddle State.
Under the proposal, and in-line with the
Phlx implementation, Stop Orders that
are pending in the System during a
39 See
E:\FR\FM\27FEN1.SGM
note 3 above.
27FEN1
Federal Register / Vol. 82, No. 37 / Monday, February 27, 2017 / Notices
Limit or Straddle State will be elected,
if conditions for such election are met,
and, because they become Market
Orders, will be cancelled back to the
Member with a reason for such
rejection. The Exchange believes that
this is consistent with the Act because
it affords the appropriate protections to
an elected Stop Order once it becomes
a Market Order after election. The
Exchange believes that this approach
provides the market participant with the
intended result.
mstockstill on DSK3G9T082PROD with NOTICES
Auction Handling During a Trading Halt
The Exchange’s proposal to amend
various rules to add detail to ISE rules
to account for the impact of a trading
halt on the Exchange’s auction
mechanisms is consistent with the Act
for the reasons which follow. The
Exchange’s proposal to amend today’s
current behavior and instead terminate
the auction and not execute eligible
interest when a trading halt occurs is
consistent with the Act because during
a trading halt, the market may move and
create risk to market participants with
respect to resting interest. The Exchange
believes that terminating the PIM
auction protects investors and the
public interest by providing certainty to
participants in regard to how their
interest will be handled. Introducing
consistent order handling and
memorializing the manner in which the
system will handle orders entered into
PIM during a trading halt will provide
transparency for the benefit of members
and investors.
The Exchange’s proposal to amend
ISE Rule 716, entitled ‘‘Block Trades’’ to
memorialize that if a trading halt is
initiated after an order is entered into
the Block Order Mechanism,
Facilitation Mechanism, or Solicited
Order Mechanism, such auction will
also be automatically terminated
without execution is consistent with the
Act because in the event of a trading
halt, terminating these auction
mechanisms and not executing eligible
interest will provide certainty to
participants in regard to how their
interest will be handled. Memorializing
the manner in which the system will
handle orders during a trading halt will
provide transparency for the benefit of
members and investors.
Market Order Spread Protection
The Exchange’s proposal to amend
ISE Rule 711 to adopt a mandatory risk
protection entitled Market Order Spread
Protection for single leg orders is
consistent with the Act because it
provides a protection for Market Orders
that may encourage price continuity,
which should, in turn, protect investors
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20:23 Feb 24, 2017
Jkt 241001
and the public interest by reducing
executions occurring at dislocated
prices. Further, the Exchange believes
that this rule proposal will mitigate
risks to market participants.
Acceptable Trade Range
The Exchange’s proposal to amend
ISE Rule 714 to remove the current Price
Level Protection rule and adopt Phlx’s
Acceptable Trade Range for single leg
orders is consistent with the Act and
will 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 by making the
Exchange’s market more efficient, to the
benefit of the investing public. Further,
it should prevent the system from
experiencing dramatic price swings by
creating a level of protection that
prevents the market from moving
beyond set thresholds. The proposed
rule change will reduce the negative
impacts of sudden, unanticipated
volatility in individual options, and
serve to preserve an orderly market in
a transparent and uniform manner,
enhance the price-discovery process,
increase overall market confidence, and
promote fair and orderly markets and
the protection of investors. Specifically,
the Exchange believes that the NBBO is
a fair representation of then-available
prices and accordingly the proposal
helps to avoid executions at prices that
are significantly worse than the NBBO.
With respect to the posting
information, which is described in the
Phlx rule, but not contained in the
proposed ISE rule, the Exchange
believes that it is consistent with the
Act to cancel unexecuted interest which
is priced through an Acceptable Trade
Range. Today, the Exchange does not
have an iterative process wherein the
Exchange will attempt to execute
unexecuted balances for a period of time
while that interest is automatically repriced on the order book. Phlx has this
type of functionality for Acceptable
Trade Range, while the Exchange does
not re-price interest on the order book.
The Exchange transparently describes
the cancellation of the interest within its
rules.
The Exchange’s proposal to amend
the current Price Level Protection Rule
in Rule 714(b)(1) to relocate the
provision to Rule 714(b)(4) and remove
references to PMM Order Handling is
consistent with the Act because the
Exchange will continue to offer this
protection for complex orders. Unlike
single leg orders which are subject to
trade-through protections, complex
orders do not have similar restrictions
and therefore the Exchange believes that
PO 00000
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11983
the current Price Level Protection Rule
provides a better protection for complex
orders because the Acceptable Trade
Range protection described within this
filing utilizes the NBBO and the Price
Level Protection does not rely on the
NBBO but rather limits the number of
price levels.
PMM Order Handling and Opening
Obligations
The Exchange’s proposal to eliminate
the PMMs order handling and opening
obligations is consistent with the Act
because PMMs will no longer have these
obligations due to the introduction of
Acceptable Trade Range and opening
rotation functionality that is offered
today on NOM and Phlx. Because the
PMM will no longer have these
obligations, the Exchange believes that
it is appropriate to remove these rules.
Back-Up PMM
The Exchange’s proposal to remove
certain responsibilities of Primary
Market Makers with respect to Back-Up
Primary Market Maker assignments is
consistent with the Act because the
Exchange believes this function is not
necessary. Today, in addition to market
making obligations, the Primary Market
Maker has certain order handling and
other obligations as prescribed by
Exchange Rules. Specifically, the
obligations of a Primary Market Maker
include the initiation of a trading
rotation pursuant to ISE Rule 701,
quoting and other obligations pursuant
to ISE Rules 803 and 804, and financial
requirements pursuant to ISE Rule 809.
The Exchange is proposing to amend the
obligations of a PMM only with regard
to the initiation of a trading rotation
pursuant to ISE Rule 701. The quoting
and financial requirements rules shall
remain the same. With the re-platform,
a Back-Up Primary Market Maker is no
longer necessary since the order
handling obligations present on ISE
today are not going to be present in the
new system. Furthermore, the proposed
Opening Process,40 obviates the
importance of such a role. The Opening
Process further describes alternative
methods to open the market if such
quotes are not entered at the opening by
either of these market makers.41 The
reliance on a market maker to initiate
the opening process is no longer present
within the proposed rule.42
In addition, the Exchange does not
believe there is an interest among
market participants for the back-up
assignment.
40 See
note 3 above.
41 Id.
42 Id.
E:\FR\FM\27FEN1.SGM
27FEN1
11984
Federal Register / Vol. 82, No. 37 / Monday, February 27, 2017 / Notices
Default Settings for Market Maker Risk
Protections
The Exchange’s proposal to amend
ISE Rule 804(g) to introduce default
curtailment settings for the Market
Maker Speed Bump and Market-Wide
Speed Bump is consistent with the Act
as it will allow market makers to use
Exchange set default values for these
risk protections. Today, these market
makers would have their quotes rejected
if they fail to enter the required
curtailment parameters. The default
settings provide an alternative for
market makers that have not entered
their curtailment settings. Default
settings will be announced to members
who will have the opportunity to avoid
the defaults by entering their own
curtailment settings as required under
the rule.
Anti-Internalization
The Exchange’s proposal to amend
the ISE Supplementary Material at .03 to
Rule 804 to add Anti-Internalization is
consistent with the Act because it is
designed to assist market makers in
reducing trading costs from unwanted
executions potentially resulting from
the interaction of executable buy and
sell trading interest from the same firm
when performing the same market
making function. Further, it is
consistent with the Act to not apply this
functionality in any auction or with
respect to complex transactions because
AIQ is difficult to apply during
auctions, and there is limited benefit in
doing so. There is limited benefit
because, generally speaking, auctions do
not raise the same policy concerns for
wash sales and ERISA 43 due to the
semi-random manner in which trades
are matched. AIQ is unnecessary with
respect to complex orders due to the
highly specialized nature of such orders
and the high level of control that market
participants exercise over complex
orders.
mstockstill on DSK3G9T082PROD with NOTICES
Minimum Quantity Orders
The Exchange believes that removing
minimum quantity orders would
remove impediments to and perfect the
mechanism of a free and open market
and a national market system by
simplifying functionality available on
the Exchange and reducing complexity
of its order types.
Delay of Implementation
The Exchange believes that delaying
the implementation of the Directed
Order functionality on ISE is consistent
with the Act because the Exchange
desires to rollout this functionality at a
43 See
note 34 above.
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20:23 Feb 24, 2017
Jkt 241001
later date to allow additional time to
rebuild this technology on the new
platform. The Exchange is staging the
replatform to provide maximum benefit
to its Members while also ensuring a
successful rollout. This delay will
provide the Exchange additional time to
implement this functionality, which is
not being amended. Members will be
given adequate notice of the
implementation dates. The Exchange
will continue to provide notifications to
Members to ensure clarity about the
delay of implementation of this
functionality. The Exchange will note
the applicable dates within the rule text.
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. As explained
above, the Exchange is re-platforming
it’s trading system onto the Nasdaq
INET architecture, and is making certain
other changes to its trading functionality
in connection with this migration. A
majority of the functionality that is
being added with the proposed rule
change already exists on one or more
Nasdaq Exchanges. As a result, the
Exchange does not believe that the
proposed rule change will impact the
intense competition that exists in the
options market. In fact, the Exchange
believes that adopting this functionality
on ISE will allow the Exchange to more
effectively compete for order flow with
other options markets.
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
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
PO 00000
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Fmt 4703
Sfmt 4703
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2017–03 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2017–03. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the 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–ISE–
2017–03 and should be submitted on or
before March 20, 2017.
E:\FR\FM\27FEN1.SGM
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Federal Register / Vol. 82, No. 37 / Monday, February 27, 2017 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–03730 Filed 2–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No. IC–
32483; 812–14386]
The RBB Fund, Inc. and Altair Advisers
LLC; Notice of Application
February 21, 2017.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice of an application under
section 6(c) of the Investment Company
Act of 1940 (‘‘Act’’) for an exemption
from section 15(a) of the Act and rule
18f–2 under the Act, as well as from
certain disclosure requirements in rule
20a–1 under the Act, Item 19(a)(3) of
Form N–1A, Items 22(c)(1)(ii),
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of
Schedule 14A under the Securities
Exchange Act of 1934, and Sections 6–
07(2)(a), (b), and (c) of Regulation S–X
(‘‘Disclosure Requirements’’). The
requested exemption would permit an
investment adviser to hire and replace
certain sub-advisers without
shareholder approval and grant relief
from the Disclosure Requirements as
they relate to fees paid to the subadvisers.
AGENCY:
The RBB Fund, Inc. (the
‘‘Company’’), an open-end management
investment company registered under
the Act with multiple series, and Altair
Advisers LLC, a Delaware limited
liability company registered as an
investment adviser under the
Investment Advisers Act of 1940
(‘‘Altair’’ or the ‘‘Adviser,’’ and,
collectively with the Company, the
‘‘Applicants’’).
FILING DATES: The application was filed
November 14, 2014, and amended on
May 8, 2015, March 4, 2016, October 6,
2016 and February 3, 2017.
HEARING OR NOTIFICATION OF HEARING: An
order granting the application will be
issued unless the Commission orders a
hearing. Interested persons may request
a hearing by writing to the
Commission’s Secretary and serving
Applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on March 20, 2017, and
mstockstill on DSK3G9T082PROD with NOTICES
APPLICANTS:
44 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
20:23 Feb 24, 2017
Jkt 241001
should be accompanied by proof of
service on the Applicants, in the form
of an affidavit or, for lawyers, a
certificate of service. Pursuant to rule 0–
5 under the Act, hearing requests should
state the nature of the writer’s interest,
any facts bearing upon the desirability
of a hearing on the matter, the reason for
the request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
Applicants: Altair Advisers LLC, 303 W.
Madison Street, Suite 600, Chicago, IL
60606; and Michael P. Malloy, Esq.,
Drinker Biddle & Reath LLP, One Logan
Square, Ste. 2000, Philadelphia, PA
19103–6996.
FOR FURTHER INFORMATION CONTACT: Erin
C. Loomis, Senior Counsel, at (202) 551–
6721, or Parisa Haghshenas, Branch
Chief, at (202) 551–6723 (Division of
Investment Management, Chief
Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
Web site by searching for the file
number, or an Applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Summary of the Application
1. The Adviser will serve as the
investment adviser to each Subadvised
Series pursuant to an investment
advisory agreement with the Company
(the ‘‘Investment Advisory
Agreement’’).1 The Adviser will provide
the Subadvised Series with continuous
and comprehensive investment
management services subject to the
supervision of, and policies established
by, each Subadvised Series’ board of
directors (‘‘Board’’). The Investment
Advisory Agreement permits the
Adviser, subject to the approval of the
Board, to delegate to one or more Sub1 Applicants request relief with respect to the
named Applicants, any future series of the
Company and any other existing or future registered
open-end management investment company or
series thereof that intends to rely on the requested
order in the future and that: (a) Is advised by Altair
or its successor or by any entity controlling,
controlled by, or under common control with Altair
or its successor (included in the term ‘‘Adviser’’);
(b) uses the multi-manager structure described in
the application; and (c) complies with the terms
and conditions of the application (any such series,
a ‘‘Subadvised Series’’). For purposes of the
requested order, ‘‘successor’’ is limited to an entity
that results from a reorganization into another
jurisdiction or a change in the type of business
organization.
PO 00000
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11985
Advisers the responsibility to provide
the day-to-day portfolio investment
management of each Subadvised Series,
subject to the supervision and direction
of the Adviser.2 The primary
responsibility for managing the
Subadvised Series will remain vested in
the Adviser. The Adviser will hire,
evaluate, allocate assets to and oversee
the Sub-Advisers, including
determining whether a Sub-Adviser
should be terminated, at all times
subject to the authority of the Board.
2. Applicants request an exemption to
permit the Adviser, subject to Board
approval, to hire certain Sub-Advisers
pursuant to sub-advisory agreements
(each, a ‘‘Sub-Advisory Agreement’’ and
collectively, the ‘‘Sub-Advisory
Agreements’’) and materially amend
Sub-Advisory Agreements without
obtaining the shareholder approval
required under section 15(a) of the Act
and rule 18f–2 under the Act.3
Applicants also seek an exemption from
the Disclosure Requirements to permit a
Subadvised Series to disclose (as both a
dollar amount and a percentage of the
Subadvised Series’ net assets): (a) The
aggregate fees paid to the Adviser and
any Wholly-Owned Sub-Advisers; (b)
the aggregate fees paid to Non-Affiliated
Sub-Advisers, and (c) the fee paid to
each Affiliated Sub-Adviser.
3. Applicants agree that any order
granting the requested relief will be
subject to the terms and conditions
stated in the application. Such terms
and conditions provide for, among other
safeguards, appropriate disclosure to
Subadvised Series’ shareholders and
notification about sub-advisory changes
and enhanced Board oversight to protect
the interests of the Subadvised Series’
shareholders.
4. Section 6(c) of the Act provides that
the Commission may exempt any
2 A ‘‘Sub-Adviser’’ for a Series is (1) an indirect
or direct ‘‘wholly owned subsidiary’’ (as such term
is defined in the Act) of the Adviser for that Series,
or (2) a sister company of the Adviser for that Series
that is an indirect or direct ‘‘wholly-owned
subsidiary’’ (as such term is defined in Section
2(a)(43) of the Act) of the same company that,
indirectly or directly, wholly owns the Adviser
(each of (1) and (2) a ‘‘Wholly-Owned Sub Adviser’’
and collectively, the ‘‘Wholly-Owned SubAdvisers’’), or (3) an investment sub-adviser for that
Series that is not an ‘‘affiliated person’’ (as such
term is defined in Section 2(a)(3) of the Act) of the
Series or the Adviser, except to the extent that an
affiliation arises solely because the sub-adviser
serves as a sub-adviser to one or more Series (each
a ‘‘Non-Affiliated Sub-Adviser’’ and collectively,
the ‘‘Non-Affiliated Sub-Advisers’’).
3 The requested relief will not extend to any subadviser, other than a Wholly-Owned Sub-Adviser,
who is an affiliated person, as defined in section
2(a)(3) of the Act, of the Subadvised Series, the
Company or of the Adviser, other than by reason
of serving as a sub-adviser to one or more of the
Subadvised Series (‘‘Affiliated Sub-Adviser’’).
E:\FR\FM\27FEN1.SGM
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]]>Agencies
[Federal Register Volume 82, Number 37 (Monday, February 27, 2017)]
[Notices]
[Pages 11975-11985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03730]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80075; File No. SR-ISE-2017-03]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing of Proposed Rule Change To Amend Various Rules in
Connection With a System Migration to Nasdaq INET Technology
February 21, 2017.
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 February 8, 2017, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend various rules in connection with a
system migration to Nasdaq INET technology.
The text of the proposed rule change is available on the Exchange's
Web site at www.ise.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The 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 this rule change is to amend certain rules to
reflect the ISE technology migration to a Nasdaq, Inc. (``Nasdaq'')
supported architecture. INET is the proprietary core technology
utilized across Nasdaq's global markets and utilized on The NASDAQ
Options Market LLC (``NOM''), NASDAQ PHLX LLC (``Phlx'') and NASDAQ BX,
Inc. (``BX'') (collectively, ``Nasdaq Exchanges''). The migration of
ISE to the Nasdaq INET architecture would result in higher performance,
scalability, and more robust architecture. With this system migration,
the Exchange intends to adopt certain trading functionality currently
utilized at Nasdaq Exchanges. The functionality being adopted is
described in this filing.
The Exchange is also separately filing \3\ a rule change to amend
the Exchange's Opening Process. ISE will replace its current opening
process at Rule 701 with Phlx's Opening Process.\4\
---------------------------------------------------------------------------
\3\ See SR-ISE-2017-02 (not yet published).
\4\ See Phlx Rule 1017. See also Securities Exchange Act Release
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2017-79) (notice of Filing of Partial Amendment No. 2 and Order
Granting Approval of a Proposed Rule Change, as Modified by Partial
Amendment No. 2, to Amend PHLX Rule 1017, Openings in Options).
---------------------------------------------------------------------------
The Exchange intends to begin implementation of the proposed rule
changes in Q2 2017. The migration will be on a symbol by symbol basis,
and the Exchange will issue an alert to members in the form of an
Options Trader Alert to provide notification of the symbols that will
migrate and the relevant dates.
Generally
With the re-platform, the Exchange will now be built on the Nasdaq
INET architecture, which allows certain trading system functionality to
be performed in parallel. The Exchange believes that this architecture
change will improve the member experience by reducing overall latency
compared to the current ISE system because of the manner in which the
system is segregated into component parts to handle processing.
[[Page 11976]]
Trading Halts
Cancellation of Quotes
The Exchange proposes to amend ISE Rule 702 entitled ``Trading
Halts.'' Specifically, the Exchange proposes to amend Rule 702(a)(2) to
note that during a halt, the Exchange will maintain existing orders on
the book, but not existing quotes prior to the halt, accept orders and
quotes, and process cancels and modifications for quotes and orders,
except that existing quotes are cancelled. Today, ISE maintains
existing orders and quotes during a trading halt. With respect to
cancels and modifications, this behavior will not change. ISE does not
have a quote purge today, so this functionality will be changed with
the adoption of this trading rule. The Exchange believes that purging
quotes upon a halt will remove uncertainty for market participants.
The Exchange proposes to conform the treatment of quotes and orders
on ISE to Phlx Rule 1047(f) in conjunction with the replatform of ISE.
The Exchange desires to handle halts in a similar manner as Phlx.
Limit Up-Limit Down
The Exchange also proposes to add new ISE Rule 702(d) to replace
rule text currently contained in ISE Rule 703A entitled ``Trading
During Limit Up-Limit Down States in Underlying Securities.'' Proposed
ISE Rule 702(d) is similar to language currently in Phlx Rule 1047,
entitled ``Trading During Limit Up-Limit Down States in Underlying
Securities.'' Proposed ISE Rule 702(d) is similar to language currently
in Phlx Rule 1047(d), which provides for Exchange handling due to
extraordinary market volatility. Currently ISE Rule 703A(a) and (b)
provides modified order handling procedures when a security underlying
an options class traded on the Exchange enters a Limit State or
Straddle State under the Plan to Address Extraordinary Market
Volatility (the ``Plan'').\5\ Specifically, during a Limit State or
Straddle State: (1) Incoming Market Orders are automatically rejected,
and all unexecuted Market Orders pending in the System are cancelled,
and (2) incoming Stop Orders (which become Market Orders if elected)
are automatically rejected, and unexecuted Stop Orders pending in the
System cannot be elected and will be held until the end of the Limit
State or Straddle State. In addition, ISE Rule 703A(c) provides that
when the security underlying an option class is in a Limit State or
Straddle State, the maximum quotation spread requirements for market
maker quotes contained in ISE Rule 803(b)(5) and the continuous
quotation requirements contained in ISE Rule 804(e) shall be
suspended.\6\
---------------------------------------------------------------------------
\5\ Unless otherwise specified, capitalized terms used in this
rule filing are based on the defined terms of the Plan. As set forth
in more detail in the Plan, Price Bands consisting of a Lower Price
Band and an Upper Price Band for each NMS Stock are calculated by
the Processors (Section V(A) of the Plan). When the National Best
Bid (Offer) is below (above) the Lower (Upper) Price Band, the
Processors shall disseminate such National Best Bid (Offer) with an
appropriate flag identifying it as unexecutable. When the National
Best Bid (Offer) is equal to the Upper (Lower) Price Band, the
Processors shall distribute such National Best Bid (Offer) with an
appropriate flag identifying it as a Limit State Quotation (Section
VI(A) of the Plan). All trading centers in NMS stocks must maintain
written policies and procedures that are reasonably designed to
prevent the display of offers below the Lower Price Band and bids
above the Upper Price Band for NMS stocks. Notwithstanding this
requirement, the Processor shall display an offer below the Lower
Price Band or a bid above the Upper Price Band, but with a flag that
it is non-executable. Such bids or offers shall not be included in
the National Best Bid or National Best Offer calculations (Section
VI(A)(3) of the Plan). Trading in an NMS stock immediately enters a
Limit State if the National Best Offer (Bid) equals but does not
cross the Lower (Upper) Price Band (Section VI(B)(1) of the Plan.
Trading for an NMS stock exits a Limit State if, within 15 seconds
of entering the Limit State, all Limit State Quotations were
executed or canceled in their entirety. If the market does not exit
a Limit State within 15 seconds, then the Primary Listing Exchange
would declare a five-minute trading pause pursuant to Section VII of
the Plan, which would be applicable to all markets trading the
security. The primary listing market would declare a Trading Pause
in an NMS stock; upon notification by the primary listing market,
the Processor would disseminate this information to the public. No
trades in that NMS stock could occur during the trading pause, but
all bids and offers may be displayed (Section VII(A) of the Plan).
In addition, the Plan defines a Straddle State as when the National
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and
the NMS stock is not in a Limit State. For example, assume the Lower
Price Band for an NMS Stock is $9.50 and the Upper Price Band is
$10.50, such NMS stock would be in a Straddle State if the National
Best Bid were below $9.50, and therefore unexecutable, and the
National Best Offer were above $9.50 (including a National Best
Offer that could be above $10.50). If an NMS stock is in a Straddle
State and trading in that stock deviates from normal trading
characteristics, the Primary Listing Exchange may declare a trading
pause for that NMS stock if such Trading Pause would support the
Plan's goal to address extraordinary market volatility.
\6\ The time periods associated with Limit States and Straddle
States are not considered by the Exchange when evaluating whether a
market maker complied with the continuous quotation requirements
contained in Rule 804(e).
---------------------------------------------------------------------------
With the re-platform, the Exchange will adopt opening limitation,
Market Order and Stop Order handling consistent with handling today on
Phlx.\7\ Specifically, proposed ISE Rule 702(d) will provide that
during a Limit State and Straddle State in the Underlying NMS stock:
(i) The Exchange will not open an affected option, (ii) provided the
Exchange has opened an affected option for trading, the Exchange shall
reject Market Orders,\8\ as defined in ISE Rule 715(a), and shall
notify Members of the reason for such rejection, and (iii) provided the
Exchange has opened an affected option for trading, the Exchange will
elect Stop Orders if the condition is met, and, because they become
Market Orders, shall cancel them back and notify Members of the reason
for such rejection. The language in proposed ISE Rule 703(d)(iv)
concerning the maximum quotation spread requirements for market maker
quotes and the continuous quotation requirements suspensions are the
same language currently contained in ISE Rule 703A(c).
---------------------------------------------------------------------------
\7\ See proposed ISE Rule 702(d)(ii) and (iii).
\8\ This includes complex orders as well as single leg orders.
The Exchange shall cancel complex orders that are Market Orders
residing in the System if they are about to be executed by the
System.
---------------------------------------------------------------------------
These amendments differ in certain respects from the manner in
which ISE operates today during a Limit State or Straddle State. The
current ISE rule does not address the opening. The Exchange proposes to
adopt rule text to provide for how the Exchange shall treat the opening
rotation.\9\ The opening in an option will not commence in the event
that the underlying NMS stock is open, but has entered into a Limit
State or Straddle State. If this occurs, the opening will only commence
and complete if the underlying NMS stock stays out of a Limit or
Straddle State. Accordingly, proposed ISE Rule 702(d)(i) will provide
that the Exchange will not open an affected option. As a result, if an
opening process is occurring, it will cease and then start the opening
process from the beginning once the Limit State or Straddle State is no
longer occurring.
---------------------------------------------------------------------------
\9\ See note 3 above.
---------------------------------------------------------------------------
In addition, ISE currently cancels Market Orders pending in the
System upon initiation of a Limit or Straddle State. Under the proposal
to adopt the Phlx rule and implementation of the Limit Up-Limit Down
procedures, Market Orders pending in the System will continue to be
processed regardless of the Limit or Straddle State. The Exchange
believes this is a reasonable handling of Market Orders in the system
since these orders are only pending in the System if they are exposed
at the NBBO pursuant to Supplementary Material .02 to ISE Rule 1901 or
a complex order exposed for price improvement pursuant to ISE Rule
722(b)(3)(iii). In both cases, if at the end of the exposure period the
affected underlying is in a Limit or Straddle State, the Market Order
will be
[[Page 11977]]
cancelled with no execution occurring. If at the end of the exposure
period the underlying is no longer in a Limit or Straddle State, the
Market Order will be handled under the normal operation of the rules.
Lastly, ISE does not currently elect Stop Orders that are pending
in the System during a Limit or Straddle State. Under the proposal, and
in-line with the Phlx implementation, Stop Orders that are pending in
the System during a Limit or Straddle State will be elected, if
conditions for such election are met, however because they become
Market Orders will be cancelled back to the Member with a reason for
such rejection.
While the implementation of Market and Stop Order handling varies
from ISE today, both the current and proposed Rule provide for
protections from erroneous executions in a highly volatile period.\10\
The Exchange believes consistency across the six options markets
operated by Nasdaq, Inc. provides clarity for Members as to how their
orders, as well as the opening process, will be handled in a Limit or
Straddle State.
---------------------------------------------------------------------------
\10\ The Exchange is introducing a Phlx protection, Acceptable
Trade Range, into ISE Rules as discussed within this rule change.
---------------------------------------------------------------------------
Auction Handling During a Trading Halt
The Exchange proposes to amend various rules to add detail to ISE
rules to account for the impact of a trading halt on the Exchange's
auction mechanisms. The Exchange proposes to memorialize within ISE
Rule 723, entitled ``Price Improvement Mechanism for Crossing
Transactions'' the manner in which a trading halt will impact an order
entered into PIM once it is migrated to the INET architecture.
Today, if a trading halt is initiated after a single leg order is
entered into the Price Improvement Mechanism (``PIM'') on ISE, such
auction is terminated and eligible interest is executed or in the case
of a complex order entered into PIM, the auction is terminated and
eligible interest is cancelled without execution. The Exchange is
amending the behavior with respect to single leg orders in PIM auctions
to terminate the auction and not execute eligible interest when a
trading halt occurs. In the event of a trading halt, terminating the
auction and not executing eligible interest will provide certainty to
participants in regard to how their interest will be handled.
Introducing consistent order handling, regardless of single leg or
complex, and memorializing the manner in which the system will handle
all orders entered into PIM during a trading halt will provide
transparency for the benefit of members and investors. The Exchange is
not amending the behavior with respect to complex orders in PIM
auctions.
The Exchange proposes an amendment to ISE Rule 716, entitled
``Block Trades'' to memorialize that if a trading halt is initiated
after an order is entered into the Block Order Mechanism, Facilitation
Mechanism, or Solicited Order Mechanism, such auction will also be
automatically terminated without execution. This is the current
behavior today on ISE and will not be changing.
As discussed above, Phlx Rule 1047(c) provides that in the event
the Exchange halts trading, all trading in the affected option shall be
halted. This is interpreted to restrict executions after a halt unless
there is a specific rule specifying that such trades should take place.
The Exchange is proposing to add more specificity into the relevant
rules. With respect to Block Order Mechanism, Facilitation Mechanism,
or Solicited Order Mechanism, the Exchange notes that the current
behavior is consistent with Phlx Rule 1047(c) generally, where all
trading in the affected option shall be halted.\11\ In the event of a
trading halt, terminating these auction mechanisms and not executing
eligible interest will provide certainty to participants in regard to
how their interest will be handled. Memorializing the manner in which
the system will handle orders during a trading halt will provide
transparency for the benefit of members and investors.
---------------------------------------------------------------------------
\11\ See Phlx Rule 1047(c).
---------------------------------------------------------------------------
Market Order Spread Protection
The Exchange proposes to amend ISE Rule 711, entitled ``Acceptance
of Quotes and Orders'' to adopt a new mandatory risk protection
entitled Market Order Spread Protection which will apply to single leg
Market Orders. ISE does not have a similar feature today. This
mandatory feature is currently offered on NOM to protect Market Orders
from being executed in very wide markets.\12\
---------------------------------------------------------------------------
\12\ See NOM Rules at Chapter VI, Section 6(c). NOM's current
rule states, ``System Orders that are Market Orders will be rejected
if the best of the NBBO and the internal market BBO (the ``Reference
BBO'') is wider than a preset threshold at the time the order is
received by the System.'' NOM has two order types, Price-Improving
and Post-Only Orders, which result in non-displayed pricing that may
cause the internal market BBO to be better than the NBBO. ISE does
not have similar non-displayed order types and therefore the
reference to the internal market BBO is not necessary.
---------------------------------------------------------------------------
Pursuant to proposed ISE Rule 711(c), if the NBBO is wider than a
preset threshold at the time a Market Order is received, the order will
be rejected. For example, if the Market Order Spread Protection is set
to $20.00, and a Market Order to buy is received while the NBBO is
$1.00-$50.00, such Market Order will be rejected. The proposed feature
would assist with the maintenance of fair and orderly markets by
mitigating the risks associated with errors resulting in executions at
prices that are away from the Best Bid or Offer and potentially
erroneous. Further the proposal protects investors from potentially
receiving executions away from the prevailing prices at any given time.
The Exchange proposes this feature to avoid a series of improperly
priced aggressive orders transacting in the Order Book.
Today, the NOM threshold is set at $5. ISE will initially set the
threshold to $5. Similar to NOM, the Exchange will notify Members of
the threshold with a notice, and, thereafter, Members will be notified
of any subsequent changes to the threshold. NOM set the differential at
$5 to match the bid/ask differential permitted for quotes on the
Exchange.\13\ ISE has a similar $5 differential.\14\ Thus, the presence
of a quote on the Exchange will ensure the NBBO is at least $5 wide.
The Exchange believes the presence of a quote on the Exchange, or a
bid/ask differential of the NBBO, which is no more than $5 wide affords
Market Orders proper protection against erroneous execution and in the
event a bid/ask differential is more than $5, then a Market Order is
rejected. The threshold is appropriate because it seeks to capture
improperly priced Market Orders and reject them to reduce the risk of,
and to potentially prevent, the automatic execution of Market Orders at
prices that may be considered erroneous. The Exchange's proposed
threshold is a reasonable measure to ensure prices remain within the
reasonable limits. This protection will bolster the normal resilience
and market behavior that persistently produces robust reference prices.
This feature should create a level of protection that
[[Page 11978]]
prevents Market Orders from entering the Order Book outside of an
acceptable range for the Market Order to execute.
---------------------------------------------------------------------------
\13\ See Chapter VII, Section 6(d)(ii) of NOM Rules which
describes the bid/ask differentials. Options on equities (including
Exchange-Traded Fund Shares), and on index options must be quoted
with a difference not to exceed $5 between the bid and offer
regardless of the price of the bid, including before and during the
opening. However, respecting in-the-money series where the market
for the underlying security is wider than $5, the bid/ask
differential may be as wide as the quotation for the underlying
security on the primary market. The Exchange may establish
differences other than the above for one or more series or classes
of options.
\14\ See ISE Rule 803(b)(4).
---------------------------------------------------------------------------
Finally, the Market Order Spread Protection will be the same for
all options traded on the Exchange, and is applicable to all Members
that submit Market Orders.
Acceptable Trade Range
The Exchange proposes to amend ISE Rule 714, entitled ``Automatic
Execution of Orders,'' at ISE Rule 714(b)(1) to adopt Phlx's Acceptable
Trade Range for single leg orders.\15\ The Exchange is proposing to
adopt similar functionality which is currently utilized on Phlx in
connection with the replatform of ISE for single leg orders. Today, ISE
places a limit on the number of price levels at which an incoming order
or quote to sell (buy) will be executed automatically when there are no
bids (offers) from other exchanges at any price for the options series.
Orders and quotes are executed at each successive price level until the
maximum number of price levels is reached, and any balance is either
handled by the Primary Market Maker pursuant to Rule 803(c)(1) (in the
case of Priority Customer Orders) or canceled (in the case of
Professional Orders). The number of price levels, may be between one
(1) and ten (10). The Exchange determines the number of price levels
from time-to-time on a class-by-class basis.
---------------------------------------------------------------------------
\15\ See Phlx Rule 1080(p). Today, ISE places a limit on the
number of price levels at which an incoming order or quote to sell
(buy) will be executed automatically for single leg and complex
orders when there are no bids (offers) from other exchanges at any
price for the options series. Orders and quotes are executed at each
successive price level until the maximum number of price levels is
reached, and any balance is either handled by the Primary Market
Maker pursuant to Rule 803(c)(1) (in the case of Priority Customer
Orders) or canceled (in the case of Professional Orders). The number
of price levels, may be between one (1) and ten (10). The Exchange
determines the number of price levels from time-to-time on a class-
by-class basis. This proposal only impacts single leg orders.
---------------------------------------------------------------------------
ISE proposes to replace the current Price Level Protection applied
to single leg orders with Phlx's Acceptable Trade Range.\16\ The
proposed Acceptable Trade Range is a mechanism to prevent the system
from experiencing dramatic price swings by creating a level of
protection that prevents the market from moving beyond set thresholds.
The thresholds consist of a reference price plus (minus) set dollar
amounts based on the nature of the option and the premium of the
option.
---------------------------------------------------------------------------
\16\ The Exchange notes that the version of Acceptable Trade
Range to be implemented on ISE will not include the posting period
functionality available today on Phlx. The proposed rules reflect
this change.
---------------------------------------------------------------------------
The system will calculate an Acceptable Trade Range to limit the
range of prices at which an order or quote will be allowed to execute.
To bolster the normal resilience and market behavior that persistently
produces robust reference prices, ISE is proposing to create a level of
protection that prevents the market from moving beyond set thresholds.
The Acceptable Trade Range is calculated (upon receipt of a new order
or quote) by taking the reference price, plus or minus a value to be
determined by the Exchange (i.e., the reference price-(x) for sell
orders/quotes and the reference price + (x) for buy orders).\17\ Upon
receipt of a new order, the reference price is the National Best Bid
(``NBB'') for sell orders/quotes and the National Best Offer (``NBO'')
for buy orders/quotes. If an order or quote reaches the outer limit of
the Acceptable Trade Range (the ``Threshold Price'') without being
fully executed, then any unexecuted balance will be cancelled. The
proposed Acceptable Trade Range would work as follows: Prior to
executing orders received by ISE, an Acceptable Trade Range is
calculated to determine the range of prices at which orders/quotes may
be executed.\18\ When an order is initially received, the threshold is
calculated by adding (for buy orders/quotes) or subtracting (for sell
orders/quotes) a value,\19\ as discussed below, to the National Best
Offer for buy orders/quotes or the National Best Bid for sell orders/
quotes to determine the range of prices that are valid for execution. A
buy (sell) order or quote will be allowed to execute up (down) to and
including the maximum (minimum) price within the Acceptable Trade
Range.
---------------------------------------------------------------------------
\17\ The Acceptable Trade Range settings are tied to the option
premium.
\18\ The Acceptable Trade Range will not be available for all-
or-none orders. Today, ISE's Price Level Protection rule is not
available for all-or-none orders. The Exchange has determined that
it would be difficult, from a technical standpoint, to apply this
feature to those orders because their particular contingency makes
it difficult to automate their handling.
\19\ The value that is to be added to/subtracted from the
reference price will be set by ISE and posted on its Web site.
---------------------------------------------------------------------------
For example, in a thinly traded option:
Away Exchange Quotes:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
NOM............................................. 10 $1.00 $1.05 10
NYSE Arca....................................... 10 1.00 1.05 10
NYSE MKT........................................ 10 1.00 1.10 10
BOX............................................. 10 1.00 1.15 10
----------------------------------------------------------------------------------------------------------------
ISE Price Levels:
----------------------------------------------------------------------------------------------------------------
Exchange Bid size Bid price Offer price Offer size
----------------------------------------------------------------------------------------------------------------
ISE orders...................................... 10 $1.00 $1.05 10
ISE orders...................................... .............. .............. 1.10 10
ISE orders...................................... .............. .............. 1.40 10
ISE orders...................................... .............. .............. 5.00 10
----------------------------------------------------------------------------------------------------------------
If ISE receives a routable market order to buy 80 contracts, the
System will respond as described below:
--10 contracts will be executed at $1.05 against ISE
--10 contracts will be executed at $1.05 against NOM
--10 contracts will be executed at $1.05 against NYSE Arca
--10 contracts will be executed at $1.10 against ISE
--10 contracts will be executed at $1.10 against NYSE MKT
--10 contracts will be executed at $1.15 against BOX
After these executions, there are no other known valid away
exchange
[[Page 11979]]
quotes. The National Best Bid/Offer (``NBBO'') is therefore comprised
of the remaining interest on the ISE book, specifically 10 contracts at
$1.40 and 10 contracts at $5.00. In the absence of an Acceptable Trade
Range mechanism, the order would execute against the remaining interest
at $1.40 and $5.00, resulting in potential harm to investors.
ISE will set the parameters of the mechanism at levels that will
ensure that it is triggered quite infrequently. Importantly, the
Acceptable Trade Range is neutral with respect to away markets, an
order may route to other destinations to access liquidity priced within
the Acceptable Trade Range provided the order is designated as
routable.
The options premium will be the dominant factor in determining the
Acceptable Trade Range. Generally, options with lower premiums tend to
be more liquid and have tighter bid/ask spreads; options with higher
premiums have wider spreads and less liquidity. Accordingly, a table
consisting of several steps based on the premium of the option will be
used to determine how far the market for a given option will be allowed
to move. This table or tables would be listed on the NASDAQTrader.com
Web site and any periodic updates to the table would be announced via
an Options Trader Alert.
For example, looking at some SPY May 2013 Call options on May 1st
of 2013:
Bid/Offer of SPY May 160 Call (at or near-the-money): $1.23 x $1.24
(several hundred contracts on bid and offer)
Bid/Offer of SPY May 105 Call (deep in-the-money): $54.10 x $54.26
(11 contracts on each side)
The deep in-the-money calls (May 105 calls) have a wider spread ($54.10
- $54.26 = $0.16) compared to a spread of $0.01 for the at-the-money
calls (May 160 calls). Therefore, it is appropriate to have different
thresholds for the two options. For instance, it may make sense to have
a $0.05 threshold for the at-the-money strikes (Premium <$2) and a
$0.50 threshold for the deep in-the-money strikes (Premium >$10).
To consider another example, the May 2013 ORCL put options on May
1st of 2013:
Bid/Offer of ORCL 33 May Put (at or near-the-money): $0.33 x $0.34
(100 x 500)
Bid/Offer of ORCL 44 May Put (deep in-the-money): $10.40 x $10.55
(50 x 200)
Even though ORCL has a much lower share price than SPY, and is a
different type of security (it is a common stock of a technology
company whereas SPY is an ETF based on the S&P 500 Index), the pattern
is the same. The option with the lower premium has a very narrow spread
of $0.01 with significant size displayed whereas the higher premium
option has a wide spread ($0.15) and less size displayed.
The Acceptable Trade Range settings will be tied to the option
premium. However, other factors will be considered when determining the
exact settings. For example, acceptable ranges may change if market-
wide volatility is as high as it was during the financial crisis in
2008 and 2009, or if overall liquidity is low based on historical
trends. These different market conditions may present the need to
adjust the threshold amounts from time to time to ensure a well-
functioning market. Without adjustments, the market may become too
constrained or conversely, prone to wide price swings. As stated above,
the Exchange would publish the Acceptable Trade Range table or tables
on the Exchange Web site. The Exchange does not foresee updating the
table(s) often or intraday, although the exchange may determine to do
so in extreme circumstances. The Exchange will provide sufficient
advanced notice of changes to the Acceptable Trade Range table,
generally the prior day, to its membership via an Exchange alert.
The Acceptable Trade Range settings would generally be the same
across all options traded on ISE, although ISE proposes to maintain
flexibility to set them separately based on characteristics of the
underlying security. For instance, Google is a stock with a high share
price ($824.57 closing price on April 30, 2013). Google options
therefore may require special settings due to the risk involved in
actively quoting options on such a high-priced stock. Option spreads on
Google are wider and the size available at the best bid and offer is
smaller. Google could potentially need a wider threshold setting
compared to other lower-priced stocks. There are other options that fit
into this category (e.g., AAPL) which makes it necessary to have
threshold settings that have flexibility based on the underlying
security. Additionally, it is generally observed that options subject
to the Penny Pilot program quote with tighter spreads than options not
subject to the Penny Pilot. Currently, ISE expects to set Acceptable
Trade Ranges for three categories of options: (1) Penny Pilot Options
trading in one cent increments for options trading at less than $3.00
and increments of five cents for options trading at $3.00 or more, (2)
Penny Pilot Options trading in one-cent increments for all prices, and
(3) Non-Penny Pilot Options.
The Phlx rule contains language that references a posting
period.\20\ Specifically, the Phlx Rule provides if an order/quote
reaches the outer limit of the Acceptable Trade Range (the ``Threshold
Price'') without being fully executed, it will be posted at the
Threshold Price for a brief period, not to exceed one second (``Posting
Period''), to allow more liquidity to be collected, unless a Quote
Exhaust has occurred, in which case the Quote Exhaust process in Phlx
Rule 1082(a)(ii)(B)(3) will ensue, triggering a new Reference
Price.\21\ The Exchange will not post interest that exceeds the outer
limit of the Acceptable Trade Range, rather the interest will be
cancelled. Only if the order limit does not exceed the Acceptable Trade
Range will it post on the Exchange, if not otherwise executed. Further,
the Phlx rule provides for the re-pricing of that order or quote and
calculation of a new Acceptable Trade Range. Consistent with the
current treatment of orders and quotes under ISE rules, the Exchange is
not adopting the posting period. Unlike Phlx, ISE does not offer a
general continuous re-pricing mechanism, and does not consider
iterations in its current functionality.\22\ ISE would cancel rather
than reprice orders which exceed the outer limit of the Acceptable
Trade Range. Orders which do not exceed the outer limit of the
Acceptable Trade Range will post to the order book and will reside on
the order book at such price until they are either executed in full or
cancelled by the Member. Additionally, resting orders do not re-price
on the order book as they do today on Phlx. For these reasons, the
unexecuted balance which exceeds the outer limit of the Acceptable
Trade
[[Page 11980]]
Range will be cancelled, rather than posted to the order book.
---------------------------------------------------------------------------
\20\ See Phlx Rule 1080(p)(1)(B).
\21\ The Quote Exhaust process occurs when the Exchange's
disseminated market at a particular price level includes a quote,
and such market is exhausted by an inbound contra-side quote or
order, and following such exhaustion, contracts remain to be
executed from such quote or order through the initial execution
price.
\22\ With respect to trade-throughs and locked and crossed
markets, a Phlx order will not be executed at a price that trades
through another market or is displayed at a price that would lock or
cross another market. If, at the time of entry, an order that the
entering party has elected not to make eligible for routing would
cause a locked or crossed market violation or would cause a trade-
through violation, it will be re-priced to the current national best
offer (for bids) or the current national best bid (for offers) and
displayed at one minimum price variance above (for offers) or below
(for bids) the national best price. See Phlx Rule 1080(m)(iv)(A). In
the instance that the System automatically reprices an order or
quote, the System would assign the orders or quote a new timestamp
and the order or quote will be reprioritized within the Order Book
in accordance with the priority rules in Phlx Rule 1014 (g).
---------------------------------------------------------------------------
For complex orders, the Exchange will continue to apply the Price
Level Protection Rule which is being relocated to Rule 714(b)(4) and
revised to specifically state that the Price Level Protection shall
apply to complex orders. The functionality will remain the same. The
Exchange is amending the current rule to remove references that
specifically related to single leg order functionality. Primary Market
Maker handling does not apply to complex orders and therefore is being
removed from the rule text. The Exchange is also adding references to
component legs to make clear the application to complex orders. Unlike
single leg orders which are subject to trade-through protections,
complex orders do not have similar restrictions and therefore the
Exchange believes that the current Price Level Protection Rule provides
a better protection for complex orders because the Acceptable Trade
Range protection described within this filing utilizes the NBBO and the
Price Level Protection does not rely on the NBBO but rather limits the
number of price levels.
PMM Order Handling and Opening Obligations
Today, PMMs are responsible for handling Priority Customer orders
that are not automatically executed pursuant to ISE Rule 714(b)(1),
i.e., the Price Level Protection, and to initiate the opening rotation
in each series pursuant to ISE Rule 701. This responsibility is
described in each of those rules, as well as in ISE Rule 803(c), which
provides that:
In addition to the obligations contained in this Rule for market
makers generally, for options classes to which a market maker is the
appointed Primary Market Maker, it shall have the responsibility to:
(1) As soon as practical, address Priority Customer Orders that are
not automatically executed pursuant to Rule 714(b)(1) in a manner
consistent with its obligations under paragraph (b) of this Rule by
either (i) executing all or a portion of the order at a price that
at least matches the NBBO and that improves upon the Exchange's best
bid (in the case of a sell order) or the Exchange's best offer (in
the case of a buy order); or (ii) releasing all or a portion of the
order for execution against bids and offers on the Exchange. (2)
Initiate trading in each series pursuant to Rule 701.
As described in more detail in the sections above, with the re-
platform to Nasdaq technology, the Exchange is adopting Acceptable
Trade Range and opening rotation functionality currently offered on NOM
and Phlx, which do not contain similar requirements for the PMM. The
Exchange therefore proposes to eliminate the PMM order handling and
opening obligations in Rule 803(c).
The Exchange believes that the elimination of the PMM obligation to
initiate the opening rotation in this rule is appropriate because the
proposed opening process \23\ is initiated by the receipt of an
appropriate number of valid width Primary Market Maker or Competitive
Market Maker quotes as outlined in proposed ISE Rule 701(c)(i).
Similarly, the Acceptable Trade Range functionality will continue to
provide an important protection to members without imposing any Primary
Market Maker obligations. Today, Phlx does not have similar roles for a
Specialist on its market. In connection with the replatform, the
Exchange will conform its rules with those of Phlx with respect to the
manner in which it operates the Opening Process.
---------------------------------------------------------------------------
\23\ See note 3 above.
---------------------------------------------------------------------------
Back-Up PMM
The Exchange also proposes to amend ISE Supplementary Material .03
to Rule 803 to eliminate its Back-Up Primary Market Maker program.
Today, any ISE Member that is approved to act in the capacity of a
Primary Market Maker may voluntarily act as a ``Back-Up Primary Market
Maker'' in options series in which it is quoting as a Competitive
Market Maker. A Back-Up Primary Market Maker assumes all of the
responsibilities and privileges of a Primary Market Maker under the
Exchange's rules with respect to any series in which the appointed
Primary Market Maker fails to have a quote in the System except that a
Back-Up Primary Market Maker's quoting obligations are the same as the
quoting obligations for Competitive Market Makers as described in ISE
Rule 804(e)(2)(iii) and .02 of Supplementary Material to Rule 804.\24\
If more than one Competitive Market Maker that has volunteered to be a
Back-Up Primary Market Maker is quoting in an options series at the
time that a Primary Market Maker ceases quoting, the Competitive Market
Maker with the largest offer at the lowest price in the series at that
time will be chosen to be the Back-Up Primary Market Maker. In the
event of a tie based on price and size, the Competitive Market Maker
with time priority will be automatically chosen. The Back-Up Primary
Market Maker is automatically restored to Competitive Market Maker
status when the appointed Primary Market Maker initiates quoting in the
series. The obligations of a Primary Market Maker include the
initiation of a trading rotation pursuant to ISE Rule 701, quoting and
other obligations pursuant to ISE Rules 803 and 804, and financial
requirements pursuant to ISE Rule 809. The Exchange is proposing to
amend the obligations of a PMM only with regard to the initiation of a
trading rotation pursuant to ISE Rule 701. The quoting and financial
requirements rules shall remain the same.
---------------------------------------------------------------------------
\24\ The Exchange notes that the current rule text for Back-up
Primary Market Maker on ISE does not indicate that quoting
obligations for Back-up Primary Market Makers are the same as for
Competitive Market Makers. This, however, has been the Exchange's
practice. See Securities Exchange Act Release No. 76936 (January 20,
2016), 81 FR 4347 (January 26, 2016) (SR-ISE-2016-02).
---------------------------------------------------------------------------
With the re-platform, a Back-Up Primary Market Maker is no longer
necessary since the order handling obligations present on ISE today are
not going to be present in the new system. Furthermore, the proposed
Opening Process obviates the importance of such a role. The Opening
Process describes the entry of quotes by both a Primary Market Maker
and a Competitive Market Maker, provided they are Valid Width
Quotes.\25\ The Opening Process further describes alternative methods
to open the market if such quotes are not entered at the opening by
either of these market makers.\26\ The reliance on a market maker to
initiate the opening process is no longer present within the proposed
rule.\27\
---------------------------------------------------------------------------
\25\ A Valid Width Quote is a two-sided electronic quotation
submitted by a Market Maker that consists of a bid/ask differential
that is compliant with ISE proposed Rule 803(b)(4). See note 3
above.
\26\ See note 3 above.
\27\ Id.
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Market Maker Speed Bump
The Exchange proposes to amend ISE Rule 804, entitled ``Market
Maker Quotations'' to establish default parameters for certain risk
functionality. The Exchange offers a risk protection mechanism for
market maker quotes that removes a member's quotes in an options class
if a specified number of curtailment events occur during a set time
period (``Market Maker Speed Bump''). In addition, the Exchange offers
a market-wide risk protection that removes a market maker's quotes
across all classes if a number of curtailment events occur (``Market-
Wide Speed Bump'').\28\ ISE Rule 804(g) currently requires that market
makers set curtailment parameters for both the Market Maker Speed Bump
and the Market-Wide Speed Bump. Today, if a market maker does not set
these parameters their quotes are rejected by
[[Page 11981]]
the trading system for each of the speed bumps mentioned herein.
---------------------------------------------------------------------------
\28\ Market makers may request the Exchange to set the market
wide parameter to apply to just ISE or across ISE and ISE Gemini.
---------------------------------------------------------------------------
With the re-platform, the Exchange has determined to provide
default curtailment parameters to assist market makers when they do not
enter their own parameters into the system. The default parameters will
be determined by the Exchange and announced to members. Rather than
rejecting quotes, the default parameters would be instituted. The
default parameters are important because market makers at ISE have
quoting obligations as specified in ISE Rule 804. When a market maker's
quotes are removed from the system, the time does not count toward the
continuous quoting obligations. The Exchange believes that allowing for
default settings would cause quotes not to be rejected and would assist
market makers in meeting their quoting obligations because they would
not have their quotes removed from the market. Today, Phlx indicates
default parameters for its detection of loss of communication
settings.\29\
---------------------------------------------------------------------------
\29\ Phlx Rule 1019(c).
---------------------------------------------------------------------------
Anti-Internalization
The Exchange proposes to amend the ISE Supplementary Material at
.03 to Rule 804, entitled ``Market Maker Quotations'' to adopt Anti-
Internalization rule. Today, ISE's functionality prevents Immediate-or-
Cancel (``IOC'') \30\ orders entered by a market maker from trading
with the market maker's own quote.\31\. [sic] As implemented, if an IOC
order entered by a market maker would trade with a quote entered by the
same market maker, that order will instead be allocated to other
interest at the same price, and the balance cancelled. The Exchange
proposes to replace this self-trade protection functionality with Anti-
Internalization functionality currently offered on Phlx.\32\
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\30\ An IOC order is a limit order that is to be executed in
whole or in part upon receipt. Any portion not so executed is to be
treated as cancelled. See Rule 715(b)(3).
\31\ This functionality is not memorialized in ISE's rules.
\32\ See Phlx Rule 1080(p)(2).
---------------------------------------------------------------------------
Today, Phlx provides anti-internalization (``AIQ'') functionality
to Specialists and Registered Options Traders (``collectively market
makers''). Quotes and orders entered by Phlx market makers using the
same badge \33\ are not executed against quotes and orders entered on
the opposite side of the market using the same badge. This
automatically prevents these quotes and orders from interacting with
each other in the System. On Phlx, the system cancels the resting quote
or order back to the entering party prior to execution. This
functionality does not apply in any auction or with respect to complex
transactions.
---------------------------------------------------------------------------
\33\ A badge is the same as a market participant identifier
(``MPID'').
---------------------------------------------------------------------------
The Exchange proposes to adopt a similar rule that provides that
quotes and orders entered by Market Makers using the same member
identifier will not be executed against quotes and orders entered on
the opposite side of the market by the same market maker using the same
member identifier. In such a case, the system will cancel the resting
quote or order back to the entering party prior to execution. This
functionality shall not apply in any auction or with respect to complex
transactions. AIQ is difficult to apply during auctions, and there is
limited benefit in doing so. There is limited benefit because,
generally speaking, auctions do not raise the same policy concerns for
wash sales and ERISA \34\ due to the semi-random manner in which trades
are matched. AIQ is unnecessary with respect to complex orders due to
the highly specialized nature of such orders and the high level of
control that market participants exercise over complex orders.
---------------------------------------------------------------------------
\34\ AIQ also is designed to assist market participants in
complying with certain rules and regulations of the Employee
Retirement Income Security Act (``ERISA'') that preclude and/or
limit managing broker-dealers of such accounts from trading as
principal with orders generated for those accounts. It can also
assist Market Makers in reducing trading costs from unwanted
executions potentially resulting from the interaction of executable
buy and sell trading interest from the same firm when performing the
same market making function.
---------------------------------------------------------------------------
This functionality does not relieve or otherwise modify the duty of
best execution owed to orders received from public customers. Market
Makers generally do not display public customer orders in market making
quotations, opting instead to enter public customer orders using
separate identifiers. In the event that a Market Maker opts to include
a public customer order within a market making quotation, the Market
Maker must take appropriate steps to ensure that public customer orders
that do not execute due to anti-internalization functionality
ultimately receive the same execution price (or better) they would have
originally obtained if execution of the order was not inhibited by the
functionality.
This Anti-Internalization functionality can assist Market Makers in
reducing trading costs from unwanted executions potentially resulting
from the interaction of executable buy and sell trading interest from
the same firm when performing the same market making function.
Minimum Execution Quantity Orders
The Exchange proposes to amend ISE Rule 715, entitled ``Types of
Orders'' at 715(q) to remove minimum quantity orders. Today, the
Exchange allows members to enter minimum quantity orders, which is an
order type that is available for partial execution, but each partial
execution must be for a specified number of contracts or greater. If
the balance of the order after one or more partial executions is less
than the minimum, such balance is treated as all-or-none. Like all-or-
none orders, minimum quantity orders are contingency orders that are
not displayed in the Exchange's best bid or offer. However, the
Exchange disseminates to market participants an indication that a
minimum quantity order has been entered. The Exchange has found that
the utilization of minimum quantity orders by its members has been very
limited, and therefore proposes to remove this functionality.\35\
Furthermore, the Exchange proposes to remove two references to minimum
quantity orders in other rules. Specifically, the Exchange proposes to
remove references to minimum quantity orders in ISE Supplementary
Material .02 to Rule 713, which notes that minimum quantity orders are
contingency orders that have no priority on the book, and in ISE
Supplementary Material .04 to Rule 717, which explains that non-
marketable minimum quantity orders are deemed ``exposed'' one second
following a broadcast notifying the market that such an order to buy or
sell a specified number of contracts at a specified with a specified
minimum quantity has been received in the options series.
---------------------------------------------------------------------------
\35\ This functionality is currently being utilized to transact
less than 1% of ISE's volume.
---------------------------------------------------------------------------
Delay of Implementation
The Exchange proposes to delay the implementation of Directed Order
\36\ functionality on ISE. The Exchange proposes to continue to offer
this functionality on the current platform. The Exchange however would
propose
[[Page 11982]]
not to launch the Directed Order functionality on ISE at the same time
as proposed herein for the proposals to amend other trading functions.
The Exchange would instead issue an alert which specifies a different
date for this functionality to commence on ISE. This functionality will
remain the same on the new platform.
---------------------------------------------------------------------------
\36\ ISE currently operates a Directed Order system in which
Electronic Access Members (``EAMs'') can send an order to a DMM for
possible price improvement. If a DMM accepts Directed Orders
generally, that DMM must accept all Directed Orders from all EAMs.
Once such a DMM receives a Directed Order, it either (i) must enter
the order into the Exchange's PIM auction and guarantee its
execution at a price better than the ISE best bid or offer (``ISE
BBO'') by at least a penny and equal to or better than the NBBO or
(ii) must release the order into the Exchange's limit order book, in
which case there are certain restrictions on the DMM interacting
with the order. See ISE Rule 811.
---------------------------------------------------------------------------
The Exchange proposes to amend the rule text in Rule 811 (Directed
Orders) to note that this functionality will not be available as of a
certain date in the second quarter of 2017 to be announced in a notice.
The Exchange will recommence this functionality on ISE within one year
from the date of filing of this rule change to be announced in a
separate notice.
The Exchange intends to begin implementation of the functionality
for Directed Orders after Q2 2017. The migration will also be on a
symbol by symbol basis, and the Exchange will issue an alert to members
in the form of an Options Trader Alert to provide notification of the
symbols that will migrate and the relevant dates. The Exchange will
introduce Directed Orders on ISE within one year from the date of this
filing, otherwise the Exchange will file a rule proposal with the
Commission to remove these rules.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\37\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\38\ 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 for the reasons stated below.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(b).
\38\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Trading Halts
The Exchange's proposal to amend ISE Rule 702 concerning Trading
Halts to specifically note that during a halt the Exchange will
maintain existing orders on the book but not existing quotes is
consistent with the Act because it provides market participants with
clarity as to the manner in which interest will be handled by the
system. During a trading halt, the market may move and create risk to
market participants with respect to resting interest. The Exchange
believes that cancelling existing quotes protects investors and the
public interest by removing potentially stale quotes during the halt
process.
The Exchange's proposal to amend its rules on order handling during
Limit up-Limit Down states and trading halts is consistent with the Act
because it will harmonize the way the Exchange treats orders during a
Limit State or Straddle State in the equity market, or a trading halt
in the option, with how those orders are handled on other Nasdaq
Exchanges. The proposed rule text should provide certainty about how
options orders and trades will be handled during periods of
extraordinary volatility in the underlying security. Specifically,
under the proposal, market participants will be able to continue to
trade options overlying securities that are in a Limit State or
Straddle State, while addressing specific order types that are subject
to added risks during such periods. The Exchange believes that the
rejection of options Market Orders (including elected Stop Orders)
should help to prevent executions that might occur at prices that have
not been reliably formed, which should, in turn, protect, in
particular, retail investors from executions of un-priced orders during
times of significant volatility. Specifically, with respect to Market
Orders, Market Orders exposed at the NBBO pursuant to Supplementary
Material .02 to ISE Rule 1901 or exposed for price improvement pursuant
to ISE Rule 722(b)(3)(iii), which are pending in the system, will
continue to be processed. The Exchange believes that it is consistent
with the Act to cancel a Market Order, if at the end of either of these
exposure periods the affected underlying is in a Limit or Straddle
State, because of the uncertainty present which may result in
executions that might occur at prices that have not been reliably
formed. The Exchange would process the Market Order, with normal
handling, provided the affected underlying is no longer in a Limit or
Straddle State. The Exchange believes that this approach should, in
turn, protect, in particular, retail investors from executions of un-
priced orders during times of significant volatility. The Exchange
believes that harmonizing these rules will provide a better experience
to members that trade on multiple markets operated by Nasdaq, Inc.
Cancellation of Quotes
The Exchange's proposal to amend ISE Rule 702 concerning Trading
Halts to specifically note that during a halt the Exchange will
maintain existing orders on the book but not existing quotes is
consistent with the Act because it provides market participants with
clarity as to the manner in which interest will be handled by the
system. During a trading halt, the market may move and create risk to
market participants with respect to resting interest. The Exchange
believes that cancelling existing quotes protects investors and the
public interest by removing potentially stale quotes during the halt
process.
Limit Up-Limit Down
The Exchange's proposal to add new ISE Rule 702(d) to replace rule
text currently contained in ISE Rule 703A entitled ``Trading During
Limit Up-Limit Down States in Underlying Securities'' is consistent
with the Act because the proposed rules provide for protections from
erroneous executions in a highly volatile period. The proposed rule
text in ISE Rule 702(d) is similar to language currently in Phlx Rule
1047(d), which provides for Exchange handling due to extraordinary
market volatility. As noted within this proposal, the Exchange will
adopt opening limitation, Market Order and Stop Order handling
consistent with handling today on Phlx. The Exchange proposes to adopt
rule text to provide for how the Exchange shall treat the opening
rotation.\39\ If an opening process is occurring, it will cease and
then start the opening process from the beginning once the Limit State
or Straddle State is no longer occurring. The Exchange believes that
this treatment at the opening will protect investors and the public
interest by halting trading to prevent unintended executions. Also,
with this proposal, Market Orders pending in the System will continue
to be processed regardless of the Limit or Straddle State. The Exchange
believes that this treatment of Market Orders is consistent with the
Act because these Market Orders are only pending in the System if they
are exposed at the NBBO pursuant to Supplementary Material .02 to ISE
Rule 1901 or a complex order exposed for price improvement pursuant to
ISE Rule 722(b)(3)(iii). If at the end of the exposure period the
affected underlying is in a Limit or Straddle State, the Market Order
will be cancelled with no trade occurring. If at the end of the
exposure period, the affected underlying is no longer in a Limit or
Straddle State, the Market Order will be handled pursuant to the normal
operation of the rules.
---------------------------------------------------------------------------
\39\ See note 3 above.
---------------------------------------------------------------------------
Lastly, ISE does not currently elect Stop Orders that are pending
in the System during a Limit or Straddle State. Under the proposal, and
in-line with the Phlx implementation, Stop Orders that are pending in
the System during a
[[Page 11983]]
Limit or Straddle State will be elected, if conditions for such
election are met, and, because they become Market Orders, will be
cancelled back to the Member with a reason for such rejection. The
Exchange believes that this is consistent with the Act because it
affords the appropriate protections to an elected Stop Order once it
becomes a Market Order after election. The Exchange believes that this
approach provides the market participant with the intended result.
Auction Handling During a Trading Halt
The Exchange's proposal to amend various rules to add detail to ISE
rules to account for the impact of a trading halt on the Exchange's
auction mechanisms is consistent with the Act for the reasons which
follow. The Exchange's proposal to amend today's current behavior and
instead terminate the auction and not execute eligible interest when a
trading halt occurs is consistent with the Act because during a trading
halt, the market may move and create risk to market participants with
respect to resting interest. The Exchange believes that terminating the
PIM auction protects investors and the public interest by providing
certainty to participants in regard to how their interest will be
handled. Introducing consistent order handling and memorializing the
manner in which the system will handle orders entered into PIM during a
trading halt will provide transparency for the benefit of members and
investors.
The Exchange's proposal to amend ISE Rule 716, entitled ``Block
Trades'' to memorialize that if a trading halt is initiated after an
order is entered into the Block Order Mechanism, Facilitation
Mechanism, or Solicited Order Mechanism, such auction will also be
automatically terminated without execution is consistent with the Act
because in the event of a trading halt, terminating these auction
mechanisms and not executing eligible interest will provide certainty
to participants in regard to how their interest will be handled.
Memorializing the manner in which the system will handle orders during
a trading halt will provide transparency for the benefit of members and
investors.
Market Order Spread Protection
The Exchange's proposal to amend ISE Rule 711 to adopt a mandatory
risk protection entitled Market Order Spread Protection for single leg
orders is consistent with the Act because it provides a protection for
Market Orders that may encourage price continuity, which should, in
turn, protect investors and the public interest by reducing executions
occurring at dislocated prices. Further, the Exchange believes that
this rule proposal will mitigate risks to market participants.
Acceptable Trade Range
The Exchange's proposal to amend ISE Rule 714 to remove the current
Price Level Protection rule and adopt Phlx's Acceptable Trade Range for
single leg orders is consistent with the Act and will 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 by making the Exchange's market more efficient, to the
benefit of the investing public. Further, it should prevent the system
from experiencing dramatic price swings by creating a level of
protection that prevents the market from moving beyond set thresholds.
The proposed rule change will reduce the negative impacts of sudden,
unanticipated volatility in individual options, and serve to preserve
an orderly market in a transparent and uniform manner, enhance the
price-discovery process, increase overall market confidence, and
promote fair and orderly markets and the protection of investors.
Specifically, the Exchange believes that the NBBO is a fair
representation of then-available prices and accordingly the proposal
helps to avoid executions at prices that are significantly worse than
the NBBO.
With respect to the posting information, which is described in the
Phlx rule, but not contained in the proposed ISE rule, the Exchange
believes that it is consistent with the Act to cancel unexecuted
interest which is priced through an Acceptable Trade Range. Today, the
Exchange does not have an iterative process wherein the Exchange will
attempt to execute unexecuted balances for a period of time while that
interest is automatically re-priced on the order book. Phlx has this
type of functionality for Acceptable Trade Range, while the Exchange
does not re-price interest on the order book. The Exchange
transparently describes the cancellation of the interest within its
rules.
The Exchange's proposal to amend the current Price Level Protection
Rule in Rule 714(b)(1) to relocate the provision to Rule 714(b)(4) and
remove references to PMM Order Handling is consistent with the Act
because the Exchange will continue to offer this protection for complex
orders. Unlike single leg orders which are subject to trade-through
protections, complex orders do not have similar restrictions and
therefore the Exchange believes that the current Price Level Protection
Rule provides a better protection for complex orders because the
Acceptable Trade Range protection described within this filing utilizes
the NBBO and the Price Level Protection does not rely on the NBBO but
rather limits the number of price levels.
PMM Order Handling and Opening Obligations
The Exchange's proposal to eliminate the PMMs order handling and
opening obligations is consistent with the Act because PMMs will no
longer have these obligations due to the introduction of Acceptable
Trade Range and opening rotation functionality that is offered today on
NOM and Phlx. Because the PMM will no longer have these obligations,
the Exchange believes that it is appropriate to remove these rules.
Back-Up PMM
The Exchange's proposal to remove certain responsibilities of
Primary Market Makers with respect to Back-Up Primary Market Maker
assignments is consistent with the Act because the Exchange believes
this function is not necessary. Today, in addition to market making
obligations, the Primary Market Maker has certain order handling and
other obligations as prescribed by Exchange Rules. Specifically, the
obligations of a Primary Market Maker include the initiation of a
trading rotation pursuant to ISE Rule 701, quoting and other
obligations pursuant to ISE Rules 803 and 804, and financial
requirements pursuant to ISE Rule 809. The Exchange is proposing to
amend the obligations of a PMM only with regard to the initiation of a
trading rotation pursuant to ISE Rule 701. The quoting and financial
requirements rules shall remain the same. With the re-platform, a Back-
Up Primary Market Maker is no longer necessary since the order handling
obligations present on ISE today are not going to be present in the new
system. Furthermore, the proposed Opening Process,\40\ obviates the
importance of such a role. The Opening Process further describes
alternative methods to open the market if such quotes are not entered
at the opening by either of these market makers.\41\ The reliance on a
market maker to initiate the opening process is no longer present
within the proposed rule.\42\
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\40\ See note 3 above.
\41\ Id.
\42\ Id.
---------------------------------------------------------------------------
In addition, the Exchange does not believe there is an interest
among market participants for the back-up assignment.
[[Page 11984]]
Default Settings for Market Maker Risk Protections
The Exchange's proposal to amend ISE Rule 804(g) to introduce
default curtailment settings for the Market Maker Speed Bump and
Market-Wide Speed Bump is consistent with the Act as it will allow
market makers to use Exchange set default values for these risk
protections. Today, these market makers would have their quotes
rejected if they fail to enter the required curtailment parameters. The
default settings provide an alternative for market makers that have not
entered their curtailment settings. Default settings will be announced
to members who will have the opportunity to avoid the defaults by
entering their own curtailment settings as required under the rule.
Anti-Internalization
The Exchange's proposal to amend the ISE Supplementary Material at
.03 to Rule 804 to add Anti-Internalization is consistent with the Act
because it is designed to assist market makers in reducing trading
costs from unwanted executions potentially resulting from the
interaction of executable buy and sell trading interest from the same
firm when performing the same market making function. Further, it is
consistent with the Act to not apply this functionality in any auction
or with respect to complex transactions because AIQ is difficult to
apply during auctions, and there is limited benefit in doing so. There
is limited benefit because, generally speaking, auctions do not raise
the same policy concerns for wash sales and ERISA \43\ due to the semi-
random manner in which trades are matched. AIQ is unnecessary with
respect to complex orders due to the highly specialized nature of such
orders and the high level of control that market participants exercise
over complex orders.
---------------------------------------------------------------------------
\43\ See note 34 above.
---------------------------------------------------------------------------
Minimum Quantity Orders
The Exchange believes that removing minimum quantity orders would
remove impediments to and perfect the mechanism of a free and open
market and a national market system by simplifying functionality
available on the Exchange and reducing complexity of its order types.
Delay of Implementation
The Exchange believes that delaying the implementation of the
Directed Order functionality on ISE is consistent with the Act because
the Exchange desires to rollout this functionality at a later date to
allow additional time to rebuild this technology on the new platform.
The Exchange is staging the replatform to provide maximum benefit to
its Members while also ensuring a successful rollout. This delay will
provide the Exchange additional time to implement this functionality,
which is not being amended. Members will be given adequate notice of
the implementation dates. The Exchange will continue to provide
notifications to Members to ensure clarity about the delay of
implementation of this functionality. The Exchange will note the
applicable dates within the rule text.
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. As explained above, the
Exchange is re-platforming it's trading system onto the Nasdaq INET
architecture, and is making certain other changes to its trading
functionality in connection with this migration. A majority of the
functionality that is being added with the proposed rule change already
exists on one or more Nasdaq Exchanges. As a result, the Exchange does
not believe that the proposed rule change will impact the intense
competition that exists in the options market. In fact, the Exchange
believes that adopting this functionality on ISE will allow the
Exchange to more effectively compete for order flow with other options
markets.
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 up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(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 is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-ISE-2017-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2017-03. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the 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-ISE-2017-03 and should be
submitted on or before March 20, 2017.
[[Page 11985]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03730 Filed 2-24-17; 8:45 am]
BILLING CODE 8011-01-P
