Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Amend the Exchange Opening Process, 14243-14248 [2017-05340]

Download as PDF Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices the proposed primary peg order type, and that it is hardcoded conditionality based on pre-determined, objective factors.32 In addition, as the Commission observed in the IEX Form 1 Approval, other exchanges offer both discretion and pegging functionalities, including the combination of both of those functionalities in a single order type, and thus an order type that offers both discretion and pegging features is not novel.33 Importantly, the Commission notes that the Exchange’s amended primary peg order type would remain a nondisplayed order type, like all of the Exchange’s pegged order types, including the discretionary peg order type.34 Thus, the proposed amended primary peg order type, with its added discretionary and crumbling quote determination functionalities, should not impact the Exchange’s dissemination of a protected quotation, which must be displayed,35 or market participants’ ability to execute against the Exchange’s protection quotation, and does not appear otherwise designed to impede the mechanism of a free and open market. Accordingly, the Commission believes that the proposed amendments to the Exchange’s primary peg order type are consistent with the Act and, in particular, the Section 6(b)(5) requirement that a national securities exchange’s rules be designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.36 The Commission also believes that the proposed amendments to the Exchange’s price sliding process for primary peg orders and discretionary peg orders in locked or crossed markets are consistent with the Act. The Exchange has stated that its existing approach to price sliding for such orders asabaliauskas on DSK3SPTVN1PROD with NOTICES 32 See proposed Rule 11.190(b)(8) and Rule 11.190(g); see also IEX Form 1 Approval, supra note 28, at 41153. 33 See IEX Form 1 Approval, supra note 28, at 41153; see also, e.g., Nasdaq Rule 4703(g); NYSE Arca Equities Rule 7.31P(h)(3). In addition, as the Exchange has noted, primary pegged orders on other exchanges may be pegged to prices less aggressive than the near-side primary quote. See Notice, supra note 3, at 90036–37; see also, e.g., BZX Rule 11.9(c)(8)(A). 34 See Rules 11.190(a)(3) and (b)(8)(H). The Commission also notes that primary pegged orders on other exchanges may be non-displayed. See, e.g., BZX Rule 11.9(c)(8)(A). 35 See 17 CFR 242.600(b)(57) and (58). 36 The Commission notes that the Exchange would be required to submit a proposed rule change pursuant to Section 19(b) of the Act prior to implementing any changes to the proposed primary peg order type. VerDate Sep<11>2014 20:02 Mar 16, 2017 Jkt 241001 in locked or crossed markets is unnecessarily complicated, without any material benefit, and that the proposed amendments to the approach would remove the variability of a primary peg order’s booked price in locked or crossed market situations, and make the Exchange’s rules more clear and transparent.37 The Commission believes these changes should help lessen the complexity in the Exchange’s price sliding rules, which may reduce the potential for investor confusion as to how primary peg and discretionary peg orders would price slide in locked or crossed markets, and thereby help protect investors and the public interest consistent with Section 6(b)(5) of the Act. In addition, the proposed amendments appear to be consistent with the requirements of Rule 610(d) of Regulation NMS which, among other things, requires that the rules of a national securities exchange be reasonably designed to assure the reconciliation of locked or crossed quotations in an NMS stock.38 Lastly, the Commission believes that the Exchange’s proposed technical change to conform certain terminology in its proposed rules is intended to enhance the clarity of its rules, which should reduce the potential for investor confusion, and thereby help protect investors and the public interest consistent with Section 6(b)(5) of the Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,39 that the proposed rule change (SR–IEX–2016– 18) be and hereby is approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.40 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–05338 Filed 3–16–17; 8:45 am] BILLING CODE 8011–01–P 37 See Notice, 81 FR at 90037. 17 CFR 242.610(d). 39 15 U.S.C. 78s(b)(2). 40 17 CFR 200.30–3(a)(12). 38 See PO 00000 Frm 00046 Fmt 4703 Sfmt 4703 14243 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80225; File No. SR–ISE– 2017–02] Self-Regulatory Organizations; International Securities Exchange, LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Amend the Exchange Opening Process March 13, 2017. I. Introduction On January 13, 2017, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the Exchange’s opening process. The proposed rule change was published for comment in the Federal Register on January 27, 2017.3 On March 3, 2017, the Exchange filed Amendment No. 1 to the proposed rule change.4 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change, as modified by Amendment No. 1. II. Description of the Proposal, as Modified by Amendment No. 1 The Exchange proposes to delete the entirety of current ISE Rule 701 and replace the current Exchange opening process with an opening process reflected in proposed ISE Rules 701 and 715(t).5 The new opening process is 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 79887 (February 2, 2017), 82 FR 9090 (‘‘Notice’’). 4 In Amendment No. 1, the Exchange provided clarifying details to its proposal, including: (i) Expanding its proposed definition of ‘‘Quality Opening Market’’; (ii) clarifying that only Public Customer interest is routable during the Opening Process; (iii) clarifying that when routing orders during the Opening Process the Exchange will do so based on price/time priority of routable interest; and (iv) clarifying that the proposed opening rule will not provide for after-hours trading rotations. The Exchange also made technical corrections and revisions to the proposed rule text for readability and consistency. Amendment No. 1 amends and replaces the original filing in its entirety. Because Amendment No. 1 does not materially alter the substance of the proposed rule change or raise unique or novel regulatory issues, it is not subject to notice and comment. The amendment is available at: https://www.sec.gov/comments/sr-ise2017-02/ise201702.htm. 5 The Exchange represents that this proposed rule change is being made in connection with a technology migration to a Nasdaq, Inc. (‘‘Nasdaq’’) supported architecture called INET which is utilized on The NASDAQ Options Market LLC, 2 17 Continued E:\FR\FM\17MRN1.SGM 17MRN1 14244 Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices similar to the process used by Phlx,6 as well as the new opening process recently adopted by ISE Gemini, LLC (‘‘ISE Gemini’’).7 The Exchange’s current and proposed opening processes are described below.8 asabaliauskas on DSK3SPTVN1PROD with NOTICES A. Current Exchange Opening Process Currently, a Primary Market Maker (‘‘PMM’’) on ISE initiates the ‘‘trading rotation’’ in a specified options class.9 The Exchange may direct that one or more trading rotations be employed on any business day to aid in producing a fair and orderly market.10 For each rotation, except as the Exchange may direct, rotations are conducted in the order and manner the PMM determines to be appropriate under the circumstances.11 The PMM, with the approval of the Exchange, has the authority to determine the rotation order and manner or deviate from the rotation procedures.12 Such authority may be exercised before and during a trading rotation.13 Additionally, two or more trading rotations may be employed simultaneously, if the PMM, with the approval of the Exchange, so determines.14 Pursuant to ISE Rule 701(b), the opening rotation for each class of options is held promptly following the opening of the market for the underlying security.15 In the event the underlying security has not opened within a reasonable time after 9:30 a.m. Eastern NASDAQ PHLX LLC (‘‘Phlx’’) and NASDAQ BX, Inc. See id. 6 See Phlx Rule 1017. See also Securities Exchange Act Release No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR–Phlx– 2016–79). 7 See ISE Gemini Rules 701 and 715(t). See also Securities Exchange Act Release No. 10952 (February 10, 2017), 82 FR 10952 (February 16, 2017) (SR–ISEGemini–2016–18). 8 In connection with the new opening process, the Exchange proposes to adopt a new ‘‘Definitions’’ section in proposed Rule 701(a), similar to Phlx Rule 1017(a), to define several terms that are used throughout the opening rule. Proposed Rule 701(a) will define: ABBO, ‘‘market for the underlying security,’’ Opening Price, Opening Process, Potential Opening Price, Pre-Market BBO, Quality Opening Market, Valid Width Quote, and Zero Bid Market. For definitions of these terms, see Notice supra note 3 at 9091. 9 See ISE Rule 701(a). 10 See ISE Rule 701(a)(1). 11 See ISE Rule 701(a)(2). 12 See ISE Rule 701(a)(3). 13 See ISE Rule 701(a)(3). 14 See ISE Rule 701(a)(4). 15 See ISE Rule 701(b)(2). For purposes of ISE Rule 701(b)(2), the ‘‘market for the underlying security’’ is either the primary listing market, the primary volume market (defined as the market with the most liquidity in that underlying security for the previous two calendar months), or the first market to open the underlying security, as determined by the Exchange on an issue-by-issue basis and announced to the membership on the Exchange’s Web site. See id. VerDate Sep<11>2014 20:02 Mar 16, 2017 Jkt 241001 Time, the PMM reports the delay to the Exchange and an inquiry is made to determine the cause of the delay.16 The opening rotation for the affected options series is then delayed until the market for the underlying security has opened, unless the Exchange determines that the interests of a fair and orderly market are best served by opening trading in the options contracts.17 Currently, in connection with a trading rotation, ISE Rule 701(c) specifies how transactions may be effected in a class of options after the end of normal trading hours. A trading rotation may be employed whenever the Exchange concludes that such action is appropriate in the interests of a fair and orderly market.18 The decisions to employ a trading rotation in nonexpiring options are disseminated prior to the commencement of such rotation and, in general, the Exchange will commence no more than one trading rotation after the normal close of trading.19 If a trading rotation is in progress and the Exchange determines that a final trading rotation is needed to assure a fair and orderly market close, the rotation in progress will be halted and a final rotation will begin as promptly as possible.20 Finally, any trading rotation in non-expiring options conducted after the normal close of trading may not begin until five minutes after news of such rotation is disseminated by the Exchange.21 B. Proposed New Opening Process 1. Opening Sweep At the outset, the Exchange proposes to adopt a new order type, ‘‘Opening Sweep’’, for the new opening process.22 Proposed Rule 701(b)(1)(i) states that a Market Maker assigned to a particular option may only submit an Opening Sweep if, at the time of entry, that Market Maker has already submitted 16 See ISE Rule 701(b)(3). id. Additionally, the Exchange may delay the commencement of the opening rotation in any class of options in the interests of a fair and orderly market. See ISE Rule 701(b)(4). 18 See ISE Rule 701(c)(1). The factors that may be considered include, but are not limited to, whether there has been a recent opening or reopening of trading in the underlying security, a declaration of a ‘‘fast market’’ pursuant to ISE Rule 704, or a need for a rotation in connection with expiring individual stock options or index options, an end of the year rotation, or the restart of a rotation which is already in progress. See id. 19 See ISE Rule 701(c)(2). 20 See ISE Rule 701(c)(3). 21 See ISE Rule 701(c)(4). 22 The Exchange proposes to define an ‘‘Opening Sweep’’ as a Market Maker order submitted for execution against eligible interest in the system during the Opening Process pursuant to proposed Rule 701(b)(1). See proposed Rule 715(t). 17 See PO 00000 Frm 00047 Fmt 4703 Sfmt 4703 and maintains a Valid Width Quote.23 Opening Sweeps may be entered at any price with a minimum price variation applicable to the affected series, on either side of the market, at single or multiple price level(s), and may be cancelled and re-entered.24 A single Market Maker may enter multiple Opening Sweeps, with each Opening Sweep at a different price level.25 If a Market Maker submits multiple Opening Sweeps, the system will consider only the most recent Opening Sweep at each price level submitted by such Market Maker in determining the Opening Price (described below).26 Unexecuted Opening Sweeps will be cancelled once the affected series is open.27 2. Interest Included in the Opening Process The first part of the Opening Process determines what constitutes ‘‘eligible interest’’. The Exchange proposes that eligible interest during the Opening Process 28 will include Valid Width Quotes,29 Opening Sweeps, and orders.30 Quotes, other than Valid Width Quotes, will not be included in the Opening Process.31 All-or-None Orders that can be satisfied, and the displayed and non-displayed portions of Reserve Orders, are considered for execution and in determining the Opening Price throughout the Opening Process.32 The system will aggregate the size of all eligible interest for a particular participant category at a particular price level for trade allocation purposes pursuant to Rule 713.33 Only Public Customer interest is routable during the Opening Process.34 Market Maker Valid Width Quotes and Opening Sweeps received starting at 9:25 a.m. Eastern Time, or 7:25 a.m. Eastern Time for U.S. dollar-settled 23 All Opening Sweeps in the affected series entered by a Market Maker will be cancelled immediately if that Market Maker fails to maintain a continuous quote with a Valid Width Quote in the affected series. See proposed Rule 701(b)(1)(i). 24 See proposed Rule 701(b)(1)(ii). 25 See id. 26 See id. The Exchange proposes to define ‘‘Opening Price’’ by cross-referencing proposed Rule 701(h) and (j). See proposed Rule 701(a)(3). 27 See id. 28 The Exchange proposes to define ‘‘Opening Process’’ by cross-referencing proposed Rule 701(c). See proposed Rule 701(a)(4). 29 The Exchange proposes to define ‘‘Valid Width Quote’’ as a two-sided electronic quotation submitted by a Market Maker that consists of a bid/ ask differential that is compliant with ISE Rule 803(b)(4). See proposed Rule 701(a)(8). 30 See proposed Rule 701(b). 31 See id. 32 See id. 33 See proposed Rule 701(b)(2). 34 See proposed Rule 701(b). E:\FR\FM\17MRN1.SGM 17MRN1 Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices foreign currency options, are included in the Opening Process.35 Orders entered at any time before an option series opens are included in the Opening Process.36 3. Opening Process and Reopening After a Trading Halt The Exchange proposes that the Opening Process for an option series will be conducted pursuant to proposed Rules 701(f)–(j) on or after 9:30 a.m. Eastern Time, or on or after 7:30 a.m. Eastern Time for U.S. dollar-settled foreign currency options, if: (1) The ABBO,37 if any, is not crossed; and (2) the system has received, within two minutes (or such shorter time as determined by the Exchange and disseminated to membership on the Exchange’s Web site) of the opening trade or quote on the market for the underlying security 38 in the case of equity options, or the receipt of the opening price in the underlying index in the case of index options, or market opening for the underlying security in the case of U.S. dollar-settled foreign currency options, any of the following: (i) A PMM’s Valid Width Quote; (ii) the Valid Width Quotes of at least two Competitive Market Makers (‘‘CMM’’); or (iii) if no PMM’s Valid Width Quote nor two CMMs’ Valid Width Quotes within such timeframe, one CMM’s Valid Width Quote.39 For all options, the underlying security, including indexes, must be open on the primary market for a certain time period as determined by the Exchange for the Opening Process to commence.40 The Opening Process will asabaliauskas on DSK3SPTVN1PROD with NOTICES 35 See proposed Rule 701(c). 36 See id. 37 The Exchange proposes to define ‘‘ABBO’’ as the Away Best Bid or Offer. See proposed Rule 701(a)(1). The ABBO does not include ISE’s market. See Notice, supra note 3, at 9091. 38 The Exchange proposes to define ‘‘market for the underlying security’’ as either the primary listing market or the primary volume market (defined as the market with the most liquidity in that underlying security for the previous two calendar months), as determined by the Exchange by underlying and announced to the membership on the Exchange’s Web site. See proposed Rule 701(a)(2). 39 See proposed Rule 701(c)(1). The Exchange represents that it anticipates initially setting the timeframe during which a PMM’s Valid Width quote or the presence of at least two CMMs’ Valid Width Quotes will initiate the Opening Process at 30 seconds. See Notice, supra note 3, at 9092–93 n.18. The Exchange represents that it will provide notice of the initial setting to Members and provide notice if the Exchange determines to reduce the timeframe. See id. 40 See proposed Rule 701(c)(2). Proposed Rule 701(c)(2) stipulates that this time period will be no less than 100 milliseconds and no more than 5 seconds. The Exchange represents that it will set the timer initially at 100 milliseconds and will issue a notice to provide the initial setting and will VerDate Sep<11>2014 20:02 Mar 16, 2017 Jkt 241001 stop and an option series will not open if the ABBO becomes crossed or a Valid Width Quote(s) pursuant to proposed Rule 701(c)(1) is no longer present.41 Once each of these conditions no longer exists, the Opening Process in the affected option series will recommence.42 The Exchange would wait for the ABBO to become uncrossed before initiating the Opening Process to ensure that there is stability in the marketplace as the Exchange determines the Opening Price.43 Proposed Rule 701(c)(3) states that the PMM assigned to a particular equity option must enter a Valid Width Quote not later than one minute following the dissemination of a quote or trade by the market for the underlying security or, in the case of index options, following the receipt of the opening price in the underlying index. The PMM assigned to a particular U.S. dollar-settled foreign currency option must enter a Valid Width Quote not later than one minute after the announced market opening.44 Furthermore, a CMM that submits a quote pursuant to proposed Rule 701 in any option series when the PMM’s quote has not been submitted will be required to submit continuous, twosided quotes in such option series until such time the PMM submits a quote, after which the Market Maker that submitted such quote will be obligated to submit quotations pursuant to ISE Rule 804(e).45 Proposed Rule 701(d) states that the procedure described in proposed Rule 701 will be used to reopen an options series after a trading halt.46 If there is a trading halt or pause in the underlying security, the Opening Process will recommence irrespective of the specific times listed in proposed Rule 701(c)(1).47 Unlike the current ISE opening rule, the proposed new opening process does not provide for after-hours trading rotations.48 4. Opening With a BBO (No Trade) Under proposed Rule 701(e), the Exchange will first see if the option series will open for trading with a BBO. If there are no opening quotes or orders that lock or cross each other and no thereafter issue a notice if it were to change the timing. See Notice, supra note 3, at 9092. If the Exchange were to select a time not between 100 milliseconds and 5 seconds, it will be required to file a rule proposal with the Commission. See id. 41 See proposed Rule 701(c)(5). 42 See id. 43 See Notice, supra note 3, at 9093. 44 See proposed Rule 701(c)(3). 45 See proposed Rule 701(c)(4). 46 See proposed Rule 701(d). 47 See id. 48 See Amendment No. 1, supra note 4. PO 00000 Frm 00048 Fmt 4703 Sfmt 4703 14245 routable orders locking or crossing the ABBO, the system will open with an opening quote by disseminating the Exchange’s best bid and offer among quotes and orders (‘‘BBO’’), unless all three of the following conditions exist: (i) A Zero Bid Market; 49 (ii) no ABBO; and (iii) no Quality Opening Market.50 A ‘‘Quality Opening Market’’ is a bid/ ask differential applicable to the best bid and offer from all Valid Width Quotes defined in a table to be determined by the Exchange and published on the Exchange’s Web site.51 The calculation of Quality Opening Market is based on the best bid and offer of Valid Width Quotes. The differential between the best bid and offer are compared to reach this determination. The allowable differential, as determined by the Exchange, takes into account the type of security (for example, Penny Pilot versus non-Penny Pilot issue), volatility, option premium, and liquidity. The Quality Opening Market differential is intended to ensure the price at which the Exchange opens reflects current market conditions. If all three of the conditions described above exist, the Exchange will calculate an Opening Quote Range (‘‘OQR’’) pursuant to proposed Rule 701(i) (described below) and conduct the Price Discovery Mechanism (‘‘PDM’’) pursuant to proposed Rule 701(j) (described below).52 The Exchange believes that when these conditions exist, further price discovery is warranted.53 5. Opening With a Trade If there are Valid Width Quotes or orders that lock or cross each other, the system will try to open with a trade. Proposed Rule 701(h) provides that the Exchange will open the option series with a trade of Exchange interest only at the Opening Price, if any of the following conditions occur: (1) The Potential Opening Price (described below) is at or within the best of the highest bid and the lowest offer among Valid Width Quotes (‘‘Pre-Market BBO’’) 54 and the ABBO; (2) the Potential Opening Price is at or within the non-zero bid ABBO if the PreMarket BBO is crossed; or (3) where there is no ABBO, the Potential Opening 49 The Exchange proposes to define the term ‘‘Zero Bid Market’’ as where the best bid for an options series is zero. See proposed Rule 701(a)(9). 50 See proposed Rule 701(e). 51 See proposed Rule 701(a)(7). 52 See id. 53 See Notice, supra note 3, at 9093. 54 See proposed Rule 701(a)(6). The Exchange states that the Pre-Market BBO would not include orders. See Amendment No. 1, supra note 4. E:\FR\FM\17MRN1.SGM 17MRN1 14246 Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices Price is at or within the Pre-Market BBO which is also a Quality Opening Market. To undertake the above described process, the Exchange will calculate the Potential Opening Price by taking into consideration all Valid Width Quotes and orders (including Opening Sweeps and displayed and non-displayed portions of Reserve Orders), except Allor-None Orders that cannot be satisfied, and identify the price at which the maximum number of contracts can trade (‘‘maximum quantity criterion’’).55 Under proposed Rule 701(g)(1), when two or more Potential Opening Prices would satisfy the maximum quantity criterion and leave no contracts unexecuted, the system would take the highest and lowest of those prices and takes the mid-point. If such mid-point cannot be expressed as a permitted minimum price variation, the mid-point will be rounded to the minimum price variation that is closest to the closing price for the affected series from the immediately prior trading session. If there is no closing price from the immediately prior trading session, the system will round up to the minimum price variation to determine the Opening Price.56 Further, if any value used for the mid-point calculation would cross either the Pre-Market BBO, or the ABBO, then, for the purposes of calculating the mid-point, the Exchange will use the better of the Pre-Market BBO or ABBO as a boundary price and will open the option series for trading with an execution at the resulting Potential Opening Price.57 The Exchange states that the purpose of these boundaries is to help ensure that the Potential Opening Price is reasonable and does not trade through other markets.58 If two or more Potential Opening Prices for the affected series would satisfy the maximum quantity criterion and leave contracts unexecuted, the Opening Price will be either the lowest executable bid or highest executable offer of the largest sized side.59 This is designed to base the Potential Opening Price on the maximum quantity of contracts that are executable.60 Furthermore, the Potential Opening Price calculation will be bounded by the 6. Price Discovery Mechanism If the Exchange has not opened with a BBO or trade pursuant to proposed Rule 701(e) or (h), the Exchange will conduct a PDM pursuant to proposed Rule 701(j) to determine the Opening Price. According to the Exchange, the purpose of the PDM is to satisfy the maximum number of contracts possible by applying wider price boundaries and seeking additional liquidity.63 Before conducting a PDM, however, the Exchange will calculate the OQR under proposed Rule 701(i). The OQR, which is used during PDM, is an additional boundary designed to limit the Opening Price to a reasonable price and reduce the potential for erroneous trades during the Opening Process.64 To determine the minimum value for the OQR, an amount, as defined in a table to be determined by the Exchange, will be subtracted from the highest quote bid among Valid Width Quotes on the Exchange and on the away market(s), if any, except as provided in proposed Rule 701(i)(3) and (4).65 To determine the maximum value for the OQR, an amount, as defined in a table to be determined by the Exchange, will be added to the lowest quote offer among Valid Width Quotes on the Exchange and on the away market(s), if any, except as provided in proposed Rule 701(i)(3) and (4).66 If one or more away markets are collectively disseminating a BBO that is not crossed, however, and there are Valid Width Quotes on the Exchange that are executable against each other or that are executable against the ABBO, then the minimum value of the OQR will be the highest away bid and the maximum value will be the lowest away offer.67 Additionally, if there are Valid Width Quotes on the Exchange that are executable against each other, and there is no away market disseminating a BBO in the affected option series, the minimum value of the OQR will be the lowest quote bid among Valid Width 55 See asabaliauskas on DSK3SPTVN1PROD with NOTICES proposed Rule 701(g). proposed Rule 701(g)(1). 57 If the Exchange has not yet opened and the above conditions are not met, an Opening Quote Range (as described below) will be calculated pursuant to proposed Rule 701(i), and thereafter, the Price Discovery Mechanism described in proposed Rule 701(j) below will commence. See proposed Rule 701(h)(3)(i)(B)(II). 58 See Notice, supra note 3, at 9094. 59 See proposed Rule 701(g)(2). 60 See Notice, supra note 3, at 9094. better away market price that cannot be satisfied with the Exchange routable interest.61 According to the Exchange, this would ensure that the Exchange would not open with a trade that would trade through another market.62 56 See VerDate Sep<11>2014 20:02 Mar 16, 2017 Jkt 241001 61 See proposed Rule 701(g)(3). Notice, supra note 3, at 9094. 63 See Notice, supra note 3, at 9095. 64 See Notice, supra note 3, at 9094. 65 See proposed Rule 701(i)(1). 66 See proposed Rule 701(i)(2). 67 See proposed Rule 701(i)(3). Proposed Rule 701(i)(3) further notes that the Opening Process will stop and an options series will not open if the ABBO becomes crossed pursuant to proposed Rule 701(c)(5). 62 See PO 00000 Frm 00049 Fmt 4703 Sfmt 4703 Quotes on the Exchange and the maximum value will be the highest quote offer among Valid Width Quotes on the Exchange.68 The Exchange will use the OQR to help calculate the Opening Price. For example, if there is more than one Potential Opening Price possible where no contracts would be left unexecuted, any price used for the mid-point calculation, pursuant to proposed Rule 701(g)(1), that is outside of the OQR will be restricted to the OQR on that side of the market.69 Other instances that implicate the OQR are described below. During PDM, the Exchange will take into consideration the away market prices in calculating the Potential Opening Price. For example, if there is more than one Potential Opening Price possible where no contracts would be left unexecuted and the price used for the mid-point calculation is an away market price, pursuant to proposed Rule 701(g)(3), the system will use the away market price as the Potential Opening Price.70 Moreover, proposed Rule 701(i)(7) provides that if the Exchange determines that non-routable interest can execute the maximum number of contracts against Exchange interest, after routable interest has been determined by the system to satisfy the away market, then the Potential Opening Price will be the price at which such maximum number of contracts can execute—excluding the interests to be routed to an away market.71 After the OQR is calculated, the system will broadcast an Imbalance Message for the affected series 72 to attract additional liquidity and begin an ‘‘Imbalance Timer,’’ not to exceed three seconds.73 The Imbalance Timer will be for the same number of seconds for all options traded on the Exchange, and each Imbalance Message will be subject to an Imbalance Timer.74 The Exchange may have up to four Imbalance Messages which each run its own Imbalance Timer pursuant to the PDM process.75 68 See proposed Rule 701(i)(4). proposed Rule 701(i)(5). 70 See proposed Rule 701(i)(6). 71 The system will route Public Customer interest in price/time priority to satisfy the away market. See proposed Rule 701(i)(7). 72 Imbalance Message includes the symbol, side of the imbalance (unmatched contracts), size of matched contracts, size of the imbalance, and Potential Opening Price bounded by the Pre-Market BBO. 73 See proposed Rule 701(j)(1). The Exchange represents that it will issue a notice to provide the initial setting of the Imbalance Timer and would thereafter issue a notice if it were to change the timing. See Notice, supra note 3, at 9095 n.32. 74 See proposed Rule 701(j)(1). 75 See Notice, supra note 3, at 9100. 69 See E:\FR\FM\17MRN1.SGM 17MRN1 asabaliauskas on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices Proposed Rule 701(j)(2), states that any new interest received by the system will update the Potential Opening Price. If during or at the end of the Imbalance Timer, the Opening Price is at or within the OQR, the Imbalance Timer will end and the system will open with a trade at the Opening Price if the executions consist of Exchange interest only without trading through the ABBO and without trading through the limit price(s) of interest within the OQR, which is unable to be fully executed at the Opening Price. If no new interest comes in during the Imbalance Timer and the Potential Opening Price is at or within the OQR and does not trade through the ABBO, the Exchange will open with a trade at the end of the Imbalance Timer at the Potential Opening Price. If the option series has not opened pursuant to proposed Rule 701(j)(2) described above, the system will concurrently: (i) Send a second Imbalance Message with a Potential Opening Price that is bounded by the OQR (and would not trade through the limit price(s) of interest within the OQR which is unable to be fully executed at the Opening Price) and includes away market volume in the size of the imbalance to participants; and (ii) initiate a Route Timer, not to exceed one second.76 As proposed, the Route Timer will operate as a pause before an order is routed to an away market. The Exchange states that the Route Timer is intended to give participants an opportunity to respond to an Imbalance Message before any opening interest is routed to away markets and thereby maximize trading on the Exchange.77 If during the Route Timer, interest is received by the system which would allow the Opening Price to be within the OQR without trading through away markets and without trading through the limit price(s) of interest within the OQR which is unable to be fully executed at the Opening Price, the system will open with trades at the Opening Price, and the Route Timer will simultaneously end. The system will monitor quotes received during the Route Timer and make ongoing changes to the OQR and Potential Opening Price to reflect them. Proposed Rule 701(j)(3)(iii) provides that, if no trade occurs pursuant to proposed ISE Rule 701(j)(3)(ii), when the Route Timer expires, if the Potential Opening Price is within the OQR (and would not trade through the limit price(s) of interest within the OQR that is unable to be fully executed at the Opening Price), the system will 76 See 77 See proposed Rule 701(j)(3). Notice, supra note 3, at 9096–97. VerDate Sep<11>2014 20:02 Mar 16, 2017 Jkt 241001 determine if the total number of contracts displayed at better prices than the Exchange’s Potential Opening Price on away markets (‘‘better priced away contracts’’) would satisfy the number of marketable contracts available on the Exchange. The Exchange will then open the option series by routing and/or trading on the Exchange, pursuant to proposed Rule 701(j)(3)(iii) paragraphs (A) through (C). Proposed Rule 701(j)(3)(iii)(A) provides that, if the total number of better priced away contracts would satisfy the number of marketable contracts available on the Exchange on either the buy or sell side, the system will route all marketable contracts on the Exchange to such better priced away markets as an Intermarket Sweep Order (‘‘ISO’’) designated as Immediate-orCancel (‘‘IOC’’) order(s) and determine an opening BBO that reflects the interest remaining on the Exchange. The system will price any contracts routed to away markets at the Exchange’s Opening Price. The Exchange states that routing away at the Exchange’s Opening Price is intended to achieve the best possible price available at the time the order is received by the away market.78 Proposed Rule 701(j)(3)(iii)(B) provides that, if the total number of better priced away contracts would not satisfy the number of marketable contracts on the Exchange, the system will determine how many contracts it has available at the Opening Price. If the total number of better priced away contracts plus the number of contracts available at the Exchange’s Opening Price would satisfy the number of marketable contracts on the Exchange on either the buy or sell side, the system will contemporaneously route, based on price/time priority of routable interest, a number of contracts that will satisfy such away market interest, and trade available contracts on the Exchange at the Opening Price. The system will price any contracts routed to away markets at the better of the Opening Price or the order’s limit price pursuant to proposed Rule 701(j)(vi)(C)(3)(ii). The Exchange states that this proposed rule is designed to maximize execution of interest on the Exchange or away markets.79 Proposed Rule 701(j)(3)(iii)(C) provides that, if the total number of better priced away contracts plus the number of contracts available at the Opening Price plus the contracts available at away markets at the Exchange’s Opening Price would satisfy the number of marketable contracts on 78 See 79 See PO 00000 Notice, supra note 3, at 9100–01. id. Frm 00050 Fmt 4703 Sfmt 4703 14247 the Exchange, either the buy or sell side, the system will contemporaneously route, based on price/time priority, a number of contracts that will satisfy such away market interest (pricing any contracts routed to away markets at the better of the Opening Price or the order’s limit price), trade available contracts on the Exchange at the Opening Price, and route a number of contracts that will satisfy interest at other markets at prices equal to the Opening Price. The Exchange states that routing at the better of the Opening Price or the order’s limit price is intended to achieve the best possible price available at the time the order is received by the away market and that routing at the order’s limit price ensures that the order’s limit price is not violated.80 Proposed Rule 701(j)(4) provides that the system may send up to two additional Imbalance Messages 81 (which may occur while the Route Timer is operating) bounded by the OQR and reflecting away market interest in the volume. After the Route Timer has expired, the processes in proposed Rule 701(j)(3) will repeat (except no new Route Timer will be initiated). 7. Forced Opening Proposed Rule 701(j)(5) describes the process that occurs if the steps described above have not resulted in an opening of the options series. After all additional Imbalance Messages have been broadcasted pursuant to proposed Rule 701(j)(4), the system will open the series by executing as many contracts as possible by: (i) Routing to away markets at prices better than the Opening Price for their disseminated size; (ii) trading available contracts on the Exchange at the Opening Price bounded by the OQR (without trading through the limit price(s) of interest within the OQR which is unable to be fully executed at the Opening Price); and (iii) routing contracts to away markets at prices equal to the Opening Price at their disseminated size. In forced opening, the system will price any contracts routed to away markets at the better of the Opening Price or the order’s limit price. Any unexecuted contracts from the imbalance not traded or routed will be cancelled back to the entering participant if they remain unexecuted and priced through the Opening Price. Otherwise such orders will remain in the order book. 80 See Notice, supra note 3, at 9100–01. Exchange notes that the first two Imbalance Messages always occur if there is interest which will route to an away market. See Notice, supra note 3, at 9096 n.37. 81 The E:\FR\FM\17MRN1.SGM 17MRN1 14248 Federal Register / Vol. 82, No. 51 / Friday, March 17, 2017 / Notices Proposed Rule 701(j)(6) provides that, to the extent possible, the system will execute orders at the Opening Price that have contingencies (such as without limitation, All-or-None, and Reserve Orders) and non-routable orders such as ‘‘Do-Not-Route’’ or ‘‘DNR’’ Orders.82 The system will only route noncontingency Public Customer orders, except that the full volume of Public Customer Reserve Orders may route. Proposed Rule 701(j)(6)(i) provides that the system will cancel: (i) Any portion of a Do-Not-Route Order that would otherwise have to be routed to the exchange(s) disseminating the ABBO for an opening to occur, (ii) an All-or-None Order that is not executed during the opening and is priced through the Opening Price; and (iii) any order that is priced through the Opening Price. All other interest will remain in the system and be eligible for trading after opening. The Exchange states that it cancels these orders since it lacks enough liquidity to satisfy these orders on the opening.83 In addition, the Exchange believes that participants would prefer to have these orders returned to them for further assessment rather than have them entered into the order book at a price which is more aggressive than the price at which the Exchange opened.84 8. Other Provisions Proposed Rule 701(k) provides that during the opening of the option series, where there is a possible execution, the system will give priority first to Market Orders 85 then to resting Limit Orders 86 and quotes. Additionally, the allocation provisions of ISE Rule 713 and the Supplementary Material to that rule apply with respect to other orders and quotes with the same price. Finally, proposed Rule 701(l) provides that upon the opening of the option series, regardless of an execution, the system will disseminate the price and size of the Exchange’s best bid and offer. asabaliauskas on DSK3SPTVN1PROD with NOTICES 9. Implementation The Exchange states that it intends to begin implementation of the proposed rule change in the second quarter of 2017.87 The Exchange represents that migration of the Exchange system to Nasdaq INET technology will be on a symbol by symbol basis and that the Exchange will issue an alert to Members to provide notification of the symbols 82 See ISE Rule 715(m). 83 See Notice, supra note 3, at 9101. 84 See id. 85 See ISE Rule 715(a). 86 See ISE Rule 715(b). 87 See Notice, supra note 3, at 9090. VerDate Sep<11>2014 20:02 Mar 16, 2017 Jkt 241001 that will migrate and the relevant dates.88 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.89 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,90 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange proposes to delete in its entirety the current opening process and replace it with an opening rotation similar to the process in place on its affiliated exchanges, Phlx and ISE Gemini. In making this change, the Exchange delineates, unlike in the current, more opaque rule, detailed steps of the opening process. By providing more clearly each sequence of the opening process, the Commission notes that the proposed rule helps market participants understand how the new opening rotation will operate. To that extent, the new opening process may promote transparency, reduce the potential for investor confusion, and assist market participants in deciding whether to participate in ISE’s opening rotation. Further, if they do participate in the new opening process, the proposed rule may help provide market participants with the confidence and certainty as to how their orders or quotes will be processed. Further, the Commission believes that the proposed rule change is designed to promote just and equitable principles of trade by seeking to ensure that option series open in a fair and orderly manner. For example, the Commission notes that the proposed rule change is designed to mitigate the effects of the underlying security’s volatility as the overlying 88 See id. For a more detailed description of the proposed rule change, see Notice, supra note 3. 89 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 90 15 U.S.C. 78f(b)(5). PO 00000 Frm 00051 Fmt 4703 Sfmt 9990 option series undergoes the opening rotation. Specifically, the proposed rule provides for a range of no less than 100 milliseconds and no more than 5 seconds in order to ensure that the Exchange has the ability to adjust the period for which the underlying must be open on the primary market before the opening process commences. Moreover, the Commission notes that the proposed rule provides an orderly process for handling eligible interests during the opening rotation, while seeking to avoid opening executions at suboptimal prices. For instance, the new process ensures that the Exchange will not open with the Exchange’s BBO if there is a Zero Bid Market, no ABBO, and no Quality Opening Market. Likewise, the Exchange will not open an option series with a trade unless one of the following conditions is met: (1) The Potential Opening Price is at or within the PreMarket BBO and the ABBO; (2) the Potential Opening Price is at or within the non-zero bid ABBO if the PreMarket BBO is crossed; or (3) where there is no ABBO, the Potential Opening Price is at or within the Pre-Market BBO which is also a Quality Opening Market. Finally, while the new opening process attempts to maximize the number of contracts executed on the Exchange during such rotation, including by seeking additional liquidity, if necessary, the Commission notes that the new opening process, unlike the current process, takes into consideration away market interests and ensures that better away prices are not traded through. For these reasons, the Commission believes that the proposed rule change, as modified by Amendment No. 1, is consistent with the Act. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,91 that the proposed rule change (SR–ISE– 2017–02), as modified by Amendment No. 1, be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.92 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–05340 Filed 3–16–17; 8:45 am] BILLING CODE 8011–01–P 91 15 92 17 E:\FR\FM\17MRN1.SGM U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 17MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 51 (Friday, March 17, 2017)]
[Notices]
[Pages 14243-14248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05340]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80225; File No. SR-ISE-2017-02]

Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Approving Proposed Rule Change, as Modified by Amendment No.
1, To Amend the Exchange Opening Process

March 13, 2017.

I. Introduction

On January 13, 2017, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the Exchange's opening
process. The proposed rule change was published for comment in the
Federal Register on January 27, 2017.\3\ On March 3, 2017, the Exchange
filed Amendment No. 1 to the proposed rule change.\4\ The Commission
received no comment letters on the proposed rule change. This order
approves the proposed rule change, as modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 79887 (February 2,
2017), 82 FR 9090 (``Notice'').
\4\ In Amendment No. 1, the Exchange provided clarifying details
to its proposal, including: (i) Expanding its proposed definition of
``Quality Opening Market''; (ii) clarifying that only Public
Customer interest is routable during the Opening Process; (iii)
clarifying that when routing orders during the Opening Process the
Exchange will do so based on price/time priority of routable
interest; and (iv) clarifying that the proposed opening rule will
not provide for after-hours trading rotations. The Exchange also
made technical corrections and revisions to the proposed rule text
for readability and consistency. Amendment No. 1 amends and replaces
the original filing in its entirety. Because Amendment No. 1 does
not materially alter the substance of the proposed rule change or
raise unique or novel regulatory issues, it is not subject to notice
and comment. The amendment is available at: https://www.sec.gov/comments/sr-ise-2017-02/ise201702.htm.
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II. Description of the Proposal, as Modified by Amendment No. 1

The Exchange proposes to delete the entirety of current ISE Rule
701 and replace the current Exchange opening process with an opening
process reflected in proposed ISE Rules 701 and 715(t).\5\ The new
opening process is

[[Page 14244]]

similar to the process used by Phlx,\6\ as well as the new opening
process recently adopted by ISE Gemini, LLC (``ISE Gemini'').\7\ The
Exchange's current and proposed opening processes are described
below.\8\
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\5\ The Exchange represents that this proposed rule change is
being made in connection with a technology migration to a Nasdaq,
Inc. (``Nasdaq'') supported architecture called INET which is
utilized on The NASDAQ Options Market LLC, NASDAQ PHLX LLC
(``Phlx'') and NASDAQ BX, Inc. See id.
\6\ See Phlx Rule 1017. See also Securities Exchange Act Release
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2016-79).
\7\ See ISE Gemini Rules 701 and 715(t). See also Securities
Exchange Act Release No. 10952 (February 10, 2017), 82 FR 10952
(February 16, 2017) (SR-ISEGemini-2016-18).
\8\ In connection with the new opening process, the Exchange
proposes to adopt a new ``Definitions'' section in proposed Rule
701(a), similar to Phlx Rule 1017(a), to define several terms that
are used throughout the opening rule. Proposed Rule 701(a) will
define: ABBO, ``market for the underlying security,'' Opening Price,
Opening Process, Potential Opening Price, Pre-Market BBO, Quality
Opening Market, Valid Width Quote, and Zero Bid Market. For
definitions of these terms, see Notice supra note 3 at 9091.
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A. Current Exchange Opening Process

Currently, a Primary Market Maker (``PMM'') on ISE initiates the
``trading rotation'' in a specified options class.\9\ The Exchange may
direct that one or more trading rotations be employed on any business
day to aid in producing a fair and orderly market.\10\ For each
rotation, except as the Exchange may direct, rotations are conducted in
the order and manner the PMM determines to be appropriate under the
circumstances.\11\ The PMM, with the approval of the Exchange, has the
authority to determine the rotation order and manner or deviate from
the rotation procedures.\12\ Such authority may be exercised before and
during a trading rotation.\13\ Additionally, two or more trading
rotations may be employed simultaneously, if the PMM, with the approval
of the Exchange, so determines.\14\
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\9\ See ISE Rule 701(a).
\10\ See ISE Rule 701(a)(1).
\11\ See ISE Rule 701(a)(2).
\12\ See ISE Rule 701(a)(3).
\13\ See ISE Rule 701(a)(3).
\14\ See ISE Rule 701(a)(4).
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Pursuant to ISE Rule 701(b), the opening rotation for each class of
options is held promptly following the opening of the market for the
underlying security.\15\ In the event the underlying security has not
opened within a reasonable time after 9:30 a.m. Eastern Time, the PMM
reports the delay to the Exchange and an inquiry is made to determine
the cause of the delay.\16\ The opening rotation for the affected
options series is then delayed until the market for the underlying
security has opened, unless the Exchange determines that the interests
of a fair and orderly market are best served by opening trading in the
options contracts.\17\
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\15\ See ISE Rule 701(b)(2). For purposes of ISE Rule 701(b)(2),
the ``market for the underlying security'' is either the primary
listing market, the primary volume market (defined as the market
with the most liquidity in that underlying security for the previous
two calendar months), or the first market to open the underlying
security, as determined by the Exchange on an issue-by-issue basis
and announced to the membership on the Exchange's Web site. See id.
\16\ See ISE Rule 701(b)(3).
\17\ See id. Additionally, the Exchange may delay the
commencement of the opening rotation in any class of options in the
interests of a fair and orderly market. See ISE Rule 701(b)(4).
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Currently, in connection with a trading rotation, ISE Rule 701(c)
specifies how transactions may be effected in a class of options after
the end of normal trading hours. A trading rotation may be employed
whenever the Exchange concludes that such action is appropriate in the
interests of a fair and orderly market.\18\ The decisions to employ a
trading rotation in non-expiring options are disseminated prior to the
commencement of such rotation and, in general, the Exchange will
commence no more than one trading rotation after the normal close of
trading.\19\ If a trading rotation is in progress and the Exchange
determines that a final trading rotation is needed to assure a fair and
orderly market close, the rotation in progress will be halted and a
final rotation will begin as promptly as possible.\20\ Finally, any
trading rotation in non-expiring options conducted after the normal
close of trading may not begin until five minutes after news of such
rotation is disseminated by the Exchange.\21\
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\18\ See ISE Rule 701(c)(1). The factors that may be considered
include, but are not limited to, whether there has been a recent
opening or reopening of trading in the underlying security, a
declaration of a ``fast market'' pursuant to ISE Rule 704, or a need
for a rotation in connection with expiring individual stock options
or index options, an end of the year rotation, or the restart of a
rotation which is already in progress. See id.
\19\ See ISE Rule 701(c)(2).
\20\ See ISE Rule 701(c)(3).
\21\ See ISE Rule 701(c)(4).
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B. Proposed New Opening Process

1. Opening Sweep
At the outset, the Exchange proposes to adopt a new order type,
``Opening Sweep'', for the new opening process.\22\ Proposed Rule
701(b)(1)(i) states that a Market Maker assigned to a particular option
may only submit an Opening Sweep if, at the time of entry, that Market
Maker has already submitted and maintains a Valid Width Quote.\23\
Opening Sweeps may be entered at any price with a minimum price
variation applicable to the affected series, on either side of the
market, at single or multiple price level(s), and may be cancelled and
re-entered.\24\ A single Market Maker may enter multiple Opening
Sweeps, with each Opening Sweep at a different price level.\25\ If a
Market Maker submits multiple Opening Sweeps, the system will consider
only the most recent Opening Sweep at each price level submitted by
such Market Maker in determining the Opening Price (described
below).\26\ Unexecuted Opening Sweeps will be cancelled once the
affected series is open.\27\
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\22\ The Exchange proposes to define an ``Opening Sweep'' as a
Market Maker order submitted for execution against eligible interest
in the system during the Opening Process pursuant to proposed Rule
701(b)(1). See proposed Rule 715(t).
\23\ All Opening Sweeps in the affected series entered by a
Market Maker will be cancelled immediately if that Market Maker
fails to maintain a continuous quote with a Valid Width Quote in the
affected series. See proposed Rule 701(b)(1)(i).
\24\ See proposed Rule 701(b)(1)(ii).
\25\ See id.
\26\ See id. The Exchange proposes to define ``Opening Price''
by cross-referencing proposed Rule 701(h) and (j). See proposed Rule
701(a)(3).
\27\ See id.
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2. Interest Included in the Opening Process
The first part of the Opening Process determines what constitutes
``eligible interest''. The Exchange proposes that eligible interest
during the Opening Process \28\ will include Valid Width Quotes,\29\
Opening Sweeps, and orders.\30\ Quotes, other than Valid Width Quotes,
will not be included in the Opening Process.\31\ All-or-None Orders
that can be satisfied, and the displayed and non-displayed portions of
Reserve Orders, are considered for execution and in determining the
Opening Price throughout the Opening Process.\32\ The system will
aggregate the size of all eligible interest for a particular
participant category at a particular price level for trade allocation
purposes pursuant to Rule 713.\33\ Only Public Customer interest is
routable during the Opening Process.\34\
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\28\ The Exchange proposes to define ``Opening Process'' by
cross-referencing proposed Rule 701(c). See proposed Rule 701(a)(4).
\29\ The Exchange proposes to define ``Valid Width Quote'' as a
two-sided electronic quotation submitted by a Market Maker that
consists of a bid/ask differential that is compliant with ISE Rule
803(b)(4). See proposed Rule 701(a)(8).
\30\ See proposed Rule 701(b).
\31\ See id.
\32\ See id.
\33\ See proposed Rule 701(b)(2).
\34\ See proposed Rule 701(b).
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Market Maker Valid Width Quotes and Opening Sweeps received
starting at 9:25 a.m. Eastern Time, or 7:25 a.m. Eastern Time for U.S.
dollar-settled

[[Page 14245]]

foreign currency options, are included in the Opening Process.\35\
Orders entered at any time before an option series opens are included
in the Opening Process.\36\
---------------------------------------------------------------------------

\35\ See proposed Rule 701(c).
\36\ See id.
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3. Opening Process and Reopening After a Trading Halt
The Exchange proposes that the Opening Process for an option series
will be conducted pursuant to proposed Rules 701(f)-(j) on or after
9:30 a.m. Eastern Time, or on or after 7:30 a.m. Eastern Time for U.S.
dollar-settled foreign currency options, if: (1) The ABBO,\37\ if any,
is not crossed; and (2) the system has received, within two minutes (or
such shorter time as determined by the Exchange and disseminated to
membership on the Exchange's Web site) of the opening trade or quote on
the market for the underlying security \38\ in the case of equity
options, or the receipt of the opening price in the underlying index in
the case of index options, or market opening for the underlying
security in the case of U.S. dollar-settled foreign currency options,
any of the following: (i) A PMM's Valid Width Quote; (ii) the Valid
Width Quotes of at least two Competitive Market Makers (``CMM''); or
(iii) if no PMM's Valid Width Quote nor two CMMs' Valid Width Quotes
within such timeframe, one CMM's Valid Width Quote.\39\
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\37\ The Exchange proposes to define ``ABBO'' as the Away Best
Bid or Offer. See proposed Rule 701(a)(1). The ABBO does not include
ISE's market. See Notice, supra note 3, at 9091.
\38\ The Exchange proposes to define ``market for the underlying
security'' as either the primary listing market or the primary
volume market (defined as the market with the most liquidity in that
underlying security for the previous two calendar months), as
determined by the Exchange by underlying and announced to the
membership on the Exchange's Web site. See proposed Rule 701(a)(2).
\39\ See proposed Rule 701(c)(1). The Exchange represents that
it anticipates initially setting the timeframe during which a PMM's
Valid Width quote or the presence of at least two CMMs' Valid Width
Quotes will initiate the Opening Process at 30 seconds. See Notice,
supra note 3, at 9092-93 n.18. The Exchange represents that it will
provide notice of the initial setting to Members and provide notice
if the Exchange determines to reduce the timeframe. See id.
---------------------------------------------------------------------------

For all options, the underlying security, including indexes, must
be open on the primary market for a certain time period as determined
by the Exchange for the Opening Process to commence.\40\ The Opening
Process will stop and an option series will not open if the ABBO
becomes crossed or a Valid Width Quote(s) pursuant to proposed Rule
701(c)(1) is no longer present.\41\ Once each of these conditions no
longer exists, the Opening Process in the affected option series will
recommence.\42\ The Exchange would wait for the ABBO to become
uncrossed before initiating the Opening Process to ensure that there is
stability in the marketplace as the Exchange determines the Opening
Price.\43\
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\40\ See proposed Rule 701(c)(2). Proposed Rule 701(c)(2)
stipulates that this time period will be no less than 100
milliseconds and no more than 5 seconds. The Exchange represents
that it will set the timer initially at 100 milliseconds and will
issue a notice to provide the initial setting and will thereafter
issue a notice if it were to change the timing. See Notice, supra
note 3, at 9092. If the Exchange were to select a time not between
100 milliseconds and 5 seconds, it will be required to file a rule
proposal with the Commission. See id.
\41\ See proposed Rule 701(c)(5).
\42\ See id.
\43\ See Notice, supra note 3, at 9093.
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Proposed Rule 701(c)(3) states that the PMM assigned to a
particular equity option must enter a Valid Width Quote not later than
one minute following the dissemination of a quote or trade by the
market for the underlying security or, in the case of index options,
following the receipt of the opening price in the underlying index. The
PMM assigned to a particular U.S. dollar-settled foreign currency
option must enter a Valid Width Quote not later than one minute after
the announced market opening.\44\ Furthermore, a CMM that submits a
quote pursuant to proposed Rule 701 in any option series when the PMM's
quote has not been submitted will be required to submit continuous,
two-sided quotes in such option series until such time the PMM submits
a quote, after which the Market Maker that submitted such quote will be
obligated to submit quotations pursuant to ISE Rule 804(e).\45\
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\44\ See proposed Rule 701(c)(3).
\45\ See proposed Rule 701(c)(4).
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Proposed Rule 701(d) states that the procedure described in
proposed Rule 701 will be used to reopen an options series after a
trading halt.\46\ If there is a trading halt or pause in the underlying
security, the Opening Process will recommence irrespective of the
specific times listed in proposed Rule 701(c)(1).\47\ Unlike the
current ISE opening rule, the proposed new opening process does not
provide for after-hours trading rotations.\48\
---------------------------------------------------------------------------

\46\ See proposed Rule 701(d).
\47\ See id.
\48\ See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------

4. Opening With a BBO (No Trade)
Under proposed Rule 701(e), the Exchange will first see if the
option series will open for trading with a BBO. If there are no opening
quotes or orders that lock or cross each other and no routable orders
locking or crossing the ABBO, the system will open with an opening
quote by disseminating the Exchange's best bid and offer among quotes
and orders (``BBO''), unless all three of the following conditions
exist: (i) A Zero Bid Market; \49\ (ii) no ABBO; and (iii) no Quality
Opening Market.\50\
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\49\ The Exchange proposes to define the term ``Zero Bid
Market'' as where the best bid for an options series is zero. See
proposed Rule 701(a)(9).
\50\ See proposed Rule 701(e).
---------------------------------------------------------------------------

A ``Quality Opening Market'' is a bid/ask differential applicable
to the best bid and offer from all Valid Width Quotes defined in a
table to be determined by the Exchange and published on the Exchange's
Web site.\51\ The calculation of Quality Opening Market is based on the
best bid and offer of Valid Width Quotes. The differential between the
best bid and offer are compared to reach this determination. The
allowable differential, as determined by the Exchange, takes into
account the type of security (for example, Penny Pilot versus non-Penny
Pilot issue), volatility, option premium, and liquidity. The Quality
Opening Market differential is intended to ensure the price at which
the Exchange opens reflects current market conditions.
---------------------------------------------------------------------------

\51\ See proposed Rule 701(a)(7).
---------------------------------------------------------------------------

If all three of the conditions described above exist, the Exchange
will calculate an Opening Quote Range (``OQR'') pursuant to proposed
Rule 701(i) (described below) and conduct the Price Discovery Mechanism
(``PDM'') pursuant to proposed Rule 701(j) (described below).\52\ The
Exchange believes that when these conditions exist, further price
discovery is warranted.\53\
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\52\ See id.
\53\ See Notice, supra note 3, at 9093.
---------------------------------------------------------------------------

5. Opening With a Trade
If there are Valid Width Quotes or orders that lock or cross each
other, the system will try to open with a trade. Proposed Rule 701(h)
provides that the Exchange will open the option series with a trade of
Exchange interest only at the Opening Price, if any of the following
conditions occur: (1) The Potential Opening Price (described below) is
at or within the best of the highest bid and the lowest offer among
Valid Width Quotes (``Pre-Market BBO'') \54\ and the ABBO; (2) the
Potential Opening Price is at or within the non-zero bid ABBO if the
Pre-Market BBO is crossed; or (3) where there is no ABBO, the Potential
Opening

[[Page 14246]]

Price is at or within the Pre-Market BBO which is also a Quality
Opening Market.
---------------------------------------------------------------------------

\54\ See proposed Rule 701(a)(6). The Exchange states that the
Pre-Market BBO would not include orders. See Amendment No. 1, supra
note 4.
---------------------------------------------------------------------------

To undertake the above described process, the Exchange will
calculate the Potential Opening Price by taking into consideration all
Valid Width Quotes and orders (including Opening Sweeps and displayed
and non-displayed portions of Reserve Orders), except All-or-None
Orders that cannot be satisfied, and identify the price at which the
maximum number of contracts can trade (``maximum quantity
criterion'').\55\
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\55\ See proposed Rule 701(g).
---------------------------------------------------------------------------

Under proposed Rule 701(g)(1), when two or more Potential Opening
Prices would satisfy the maximum quantity criterion and leave no
contracts unexecuted, the system would take the highest and lowest of
those prices and takes the mid-point. If such mid-point cannot be
expressed as a permitted minimum price variation, the mid-point will be
rounded to the minimum price variation that is closest to the closing
price for the affected series from the immediately prior trading
session. If there is no closing price from the immediately prior
trading session, the system will round up to the minimum price
variation to determine the Opening Price.\56\ Further, if any value
used for the mid-point calculation would cross either the Pre-Market
BBO, or the ABBO, then, for the purposes of calculating the mid-point,
the Exchange will use the better of the Pre-Market BBO or ABBO as a
boundary price and will open the option series for trading with an
execution at the resulting Potential Opening Price.\57\ The Exchange
states that the purpose of these boundaries is to help ensure that the
Potential Opening Price is reasonable and does not trade through other
markets.\58\
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\56\ See proposed Rule 701(g)(1).
\57\ If the Exchange has not yet opened and the above conditions
are not met, an Opening Quote Range (as described below) will be
calculated pursuant to proposed Rule 701(i), and thereafter, the
Price Discovery Mechanism described in proposed Rule 701(j) below
will commence. See proposed Rule 701(h)(3)(i)(B)(II).
\58\ See Notice, supra note 3, at 9094.
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If two or more Potential Opening Prices for the affected series
would satisfy the maximum quantity criterion and leave contracts
unexecuted, the Opening Price will be either the lowest executable bid
or highest executable offer of the largest sized side.\59\ This is
designed to base the Potential Opening Price on the maximum quantity of
contracts that are executable.\60\ Furthermore, the Potential Opening
Price calculation will be bounded by the better away market price that
cannot be satisfied with the Exchange routable interest.\61\ According
to the Exchange, this would ensure that the Exchange would not open
with a trade that would trade through another market.\62\
---------------------------------------------------------------------------

\59\ See proposed Rule 701(g)(2).
\60\ See Notice, supra note 3, at 9094.
\61\ See proposed Rule 701(g)(3).
\62\ See Notice, supra note 3, at 9094.
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6. Price Discovery Mechanism
If the Exchange has not opened with a BBO or trade pursuant to
proposed Rule 701(e) or (h), the Exchange will conduct a PDM pursuant
to proposed Rule 701(j) to determine the Opening Price. According to
the Exchange, the purpose of the PDM is to satisfy the maximum number
of contracts possible by applying wider price boundaries and seeking
additional liquidity.\63\
---------------------------------------------------------------------------

\63\ See Notice, supra note 3, at 9095.
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Before conducting a PDM, however, the Exchange will calculate the
OQR under proposed Rule 701(i). The OQR, which is used during PDM, is
an additional boundary designed to limit the Opening Price to a
reasonable price and reduce the potential for erroneous trades during
the Opening Process.\64\
---------------------------------------------------------------------------

\64\ See Notice, supra note 3, at 9094.
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To determine the minimum value for the OQR, an amount, as defined
in a table to be determined by the Exchange, will be subtracted from
the highest quote bid among Valid Width Quotes on the Exchange and on
the away market(s), if any, except as provided in proposed Rule
701(i)(3) and (4).\65\ To determine the maximum value for the OQR, an
amount, as defined in a table to be determined by the Exchange, will be
added to the lowest quote offer among Valid Width Quotes on the
Exchange and on the away market(s), if any, except as provided in
proposed Rule 701(i)(3) and (4).\66\ If one or more away markets are
collectively disseminating a BBO that is not crossed, however, and
there are Valid Width Quotes on the Exchange that are executable
against each other or that are executable against the ABBO, then the
minimum value of the OQR will be the highest away bid and the maximum
value will be the lowest away offer.\67\ Additionally, if there are
Valid Width Quotes on the Exchange that are executable against each
other, and there is no away market disseminating a BBO in the affected
option series, the minimum value of the OQR will be the lowest quote
bid among Valid Width Quotes on the Exchange and the maximum value will
be the highest quote offer among Valid Width Quotes on the
Exchange.\68\
---------------------------------------------------------------------------

\65\ See proposed Rule 701(i)(1).
\66\ See proposed Rule 701(i)(2).
\67\ See proposed Rule 701(i)(3). Proposed Rule 701(i)(3)
further notes that the Opening Process will stop and an options
series will not open if the ABBO becomes crossed pursuant to
proposed Rule 701(c)(5).
\68\ See proposed Rule 701(i)(4).
---------------------------------------------------------------------------

The Exchange will use the OQR to help calculate the Opening Price.
For example, if there is more than one Potential Opening Price possible
where no contracts would be left unexecuted, any price used for the
mid-point calculation, pursuant to proposed Rule 701(g)(1), that is
outside of the OQR will be restricted to the OQR on that side of the
market.\69\ Other instances that implicate the OQR are described below.
---------------------------------------------------------------------------

\69\ See proposed Rule 701(i)(5).
---------------------------------------------------------------------------

During PDM, the Exchange will take into consideration the away
market prices in calculating the Potential Opening Price. For example,
if there is more than one Potential Opening Price possible where no
contracts would be left unexecuted and the price used for the mid-point
calculation is an away market price, pursuant to proposed Rule
701(g)(3), the system will use the away market price as the Potential
Opening Price.\70\ Moreover, proposed Rule 701(i)(7) provides that if
the Exchange determines that non-routable interest can execute the
maximum number of contracts against Exchange interest, after routable
interest has been determined by the system to satisfy the away market,
then the Potential Opening Price will be the price at which such
maximum number of contracts can execute--excluding the interests to be
routed to an away market.\71\
---------------------------------------------------------------------------

\70\ See proposed Rule 701(i)(6).
\71\ The system will route Public Customer interest in price/
time priority to satisfy the away market. See proposed Rule
701(i)(7).
---------------------------------------------------------------------------

After the OQR is calculated, the system will broadcast an Imbalance
Message for the affected series \72\ to attract additional liquidity
and begin an ``Imbalance Timer,'' not to exceed three seconds.\73\ The
Imbalance Timer will be for the same number of seconds for all options
traded on the Exchange, and each Imbalance Message will be subject to
an Imbalance Timer.\74\ The Exchange may have up to four Imbalance
Messages which each run its own Imbalance Timer pursuant to the PDM
process.\75\
---------------------------------------------------------------------------

\72\ Imbalance Message includes the symbol, side of the
imbalance (unmatched contracts), size of matched contracts, size of
the imbalance, and Potential Opening Price bounded by the Pre-Market
BBO.
\73\ See proposed Rule 701(j)(1). The Exchange represents that
it will issue a notice to provide the initial setting of the
Imbalance Timer and would thereafter issue a notice if it were to
change the timing. See Notice, supra note 3, at 9095 n.32.
\74\ See proposed Rule 701(j)(1).
\75\ See Notice, supra note 3, at 9100.

---------------------------------------------------------------------------

[[Page 14247]]

Proposed Rule 701(j)(2), states that any new interest received by
the system will update the Potential Opening Price. If during or at the
end of the Imbalance Timer, the Opening Price is at or within the OQR,
the Imbalance Timer will end and the system will open with a trade at
the Opening Price if the executions consist of Exchange interest only
without trading through the ABBO and without trading through the limit
price(s) of interest within the OQR, which is unable to be fully
executed at the Opening Price. If no new interest comes in during the
Imbalance Timer and the Potential Opening Price is at or within the OQR
and does not trade through the ABBO, the Exchange will open with a
trade at the end of the Imbalance Timer at the Potential Opening Price.
If the option series has not opened pursuant to proposed Rule
701(j)(2) described above, the system will concurrently: (i) Send a
second Imbalance Message with a Potential Opening Price that is bounded
by the OQR (and would not trade through the limit price(s) of interest
within the OQR which is unable to be fully executed at the Opening
Price) and includes away market volume in the size of the imbalance to
participants; and (ii) initiate a Route Timer, not to exceed one
second.\76\ As proposed, the Route Timer will operate as a pause before
an order is routed to an away market. The Exchange states that the
Route Timer is intended to give participants an opportunity to respond
to an Imbalance Message before any opening interest is routed to away
markets and thereby maximize trading on the Exchange.\77\ If during the
Route Timer, interest is received by the system which would allow the
Opening Price to be within the OQR without trading through away markets
and without trading through the limit price(s) of interest within the
OQR which is unable to be fully executed at the Opening Price, the
system will open with trades at the Opening Price, and the Route Timer
will simultaneously end. The system will monitor quotes received during
the Route Timer and make ongoing changes to the OQR and Potential
Opening Price to reflect them.
---------------------------------------------------------------------------

\76\ See proposed Rule 701(j)(3).
\77\ See Notice, supra note 3, at 9096-97.
---------------------------------------------------------------------------

Proposed Rule 701(j)(3)(iii) provides that, if no trade occurs
pursuant to proposed ISE Rule 701(j)(3)(ii), when the Route Timer
expires, if the Potential Opening Price is within the OQR (and would
not trade through the limit price(s) of interest within the OQR that is
unable to be fully executed at the Opening Price), the system will
determine if the total number of contracts displayed at better prices
than the Exchange's Potential Opening Price on away markets (``better
priced away contracts'') would satisfy the number of marketable
contracts available on the Exchange. The Exchange will then open the
option series by routing and/or trading on the Exchange, pursuant to
proposed Rule 701(j)(3)(iii) paragraphs (A) through (C).
Proposed Rule 701(j)(3)(iii)(A) provides that, if the total number
of better priced away contracts would satisfy the number of marketable
contracts available on the Exchange on either the buy or sell side, the
system will route all marketable contracts on the Exchange to such
better priced away markets as an Intermarket Sweep Order (``ISO'')
designated as Immediate-or-Cancel (``IOC'') order(s) and determine an
opening BBO that reflects the interest remaining on the Exchange. The
system will price any contracts routed to away markets at the
Exchange's Opening Price. The Exchange states that routing away at the
Exchange's Opening Price is intended to achieve the best possible price
available at the time the order is received by the away market.\78\
---------------------------------------------------------------------------

\78\ See Notice, supra note 3, at 9100-01.
---------------------------------------------------------------------------

Proposed Rule 701(j)(3)(iii)(B) provides that, if the total number
of better priced away contracts would not satisfy the number of
marketable contracts on the Exchange, the system will determine how
many contracts it has available at the Opening Price. If the total
number of better priced away contracts plus the number of contracts
available at the Exchange's Opening Price would satisfy the number of
marketable contracts on the Exchange on either the buy or sell side,
the system will contemporaneously route, based on price/time priority
of routable interest, a number of contracts that will satisfy such away
market interest, and trade available contracts on the Exchange at the
Opening Price. The system will price any contracts routed to away
markets at the better of the Opening Price or the order's limit price
pursuant to proposed Rule 701(j)(vi)(C)(3)(ii). The Exchange states
that this proposed rule is designed to maximize execution of interest
on the Exchange or away markets.\79\
---------------------------------------------------------------------------

\79\ See id.
---------------------------------------------------------------------------

Proposed Rule 701(j)(3)(iii)(C) provides that, if the total number
of better priced away contracts plus the number of contracts available
at the Opening Price plus the contracts available at away markets at
the Exchange's Opening Price would satisfy the number of marketable
contracts on the Exchange, either the buy or sell side, the system will
contemporaneously route, based on price/time priority, a number of
contracts that will satisfy such away market interest (pricing any
contracts routed to away markets at the better of the Opening Price or
the order's limit price), trade available contracts on the Exchange at
the Opening Price, and route a number of contracts that will satisfy
interest at other markets at prices equal to the Opening Price. The
Exchange states that routing at the better of the Opening Price or the
order's limit price is intended to achieve the best possible price
available at the time the order is received by the away market and that
routing at the order's limit price ensures that the order's limit price
is not violated.\80\
---------------------------------------------------------------------------

\80\ See Notice, supra note 3, at 9100-01.
---------------------------------------------------------------------------

Proposed Rule 701(j)(4) provides that the system may send up to two
additional Imbalance Messages \81\ (which may occur while the Route
Timer is operating) bounded by the OQR and reflecting away market
interest in the volume. After the Route Timer has expired, the
processes in proposed Rule 701(j)(3) will repeat (except no new Route
Timer will be initiated).
---------------------------------------------------------------------------

\81\ The Exchange notes that the first two Imbalance Messages
always occur if there is interest which will route to an away
market. See Notice, supra note 3, at 9096 n.37.
---------------------------------------------------------------------------

7. Forced Opening
Proposed Rule 701(j)(5) describes the process that occurs if the
steps described above have not resulted in an opening of the options
series. After all additional Imbalance Messages have been broadcasted
pursuant to proposed Rule 701(j)(4), the system will open the series by
executing as many contracts as possible by: (i) Routing to away markets
at prices better than the Opening Price for their disseminated size;
(ii) trading available contracts on the Exchange at the Opening Price
bounded by the OQR (without trading through the limit price(s) of
interest within the OQR which is unable to be fully executed at the
Opening Price); and (iii) routing contracts to away markets at prices
equal to the Opening Price at their disseminated size. In forced
opening, the system will price any contracts routed to away markets at
the better of the Opening Price or the order's limit price. Any
unexecuted contracts from the imbalance not traded or routed will be
cancelled back to the entering participant if they remain unexecuted
and priced through the Opening Price. Otherwise such orders will remain
in the order book.

[[Page 14248]]

Proposed Rule 701(j)(6) provides that, to the extent possible, the
system will execute orders at the Opening Price that have contingencies
(such as without limitation, All-or-None, and Reserve Orders) and non-
routable orders such as ``Do-Not-Route'' or ``DNR'' Orders.\82\ The
system will only route non-contingency Public Customer orders, except
that the full volume of Public Customer Reserve Orders may route.
---------------------------------------------------------------------------

\82\ See ISE Rule 715(m).
---------------------------------------------------------------------------

Proposed Rule 701(j)(6)(i) provides that the system will cancel:
(i) Any portion of a Do-Not-Route Order that would otherwise have to be
routed to the exchange(s) disseminating the ABBO for an opening to
occur, (ii) an All-or-None Order that is not executed during the
opening and is priced through the Opening Price; and (iii) any order
that is priced through the Opening Price. All other interest will
remain in the system and be eligible for trading after opening. The
Exchange states that it cancels these orders since it lacks enough
liquidity to satisfy these orders on the opening.\83\ In addition, the
Exchange believes that participants would prefer to have these orders
returned to them for further assessment rather than have them entered
into the order book at a price which is more aggressive than the price
at which the Exchange opened.\84\
---------------------------------------------------------------------------

\83\ See Notice, supra note 3, at 9101.
\84\ See id.
---------------------------------------------------------------------------

8. Other Provisions
Proposed Rule 701(k) provides that during the opening of the option
series, where there is a possible execution, the system will give
priority first to Market Orders \85\ then to resting Limit Orders \86\
and quotes. Additionally, the allocation provisions of ISE Rule 713 and
the Supplementary Material to that rule apply with respect to other
orders and quotes with the same price. Finally, proposed Rule 701(l)
provides that upon the opening of the option series, regardless of an
execution, the system will disseminate the price and size of the
Exchange's best bid and offer.
---------------------------------------------------------------------------

\85\ See ISE Rule 715(a).
\86\ See ISE Rule 715(b).
---------------------------------------------------------------------------

9. Implementation
The Exchange states that it intends to begin implementation of the
proposed rule change in the second quarter of 2017.\87\ The Exchange
represents that migration of the Exchange system to Nasdaq INET
technology will be on a symbol by symbol basis and that the Exchange
will issue an alert to Members to provide notification of the symbols
that will migrate and the relevant dates.\88\
---------------------------------------------------------------------------

\87\ See Notice, supra note 3, at 9090.
\88\ See id. For a more detailed description of the proposed
rule change, see Notice, supra note 3.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\89\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\90\ which requires, among other things,
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
---------------------------------------------------------------------------

\89\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\90\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange proposes to delete in its entirety the current opening
process and replace it with an opening rotation similar to the process
in place on its affiliated exchanges, Phlx and ISE Gemini. In making
this change, the Exchange delineates, unlike in the current, more
opaque rule, detailed steps of the opening process. By providing more
clearly each sequence of the opening process, the Commission notes that
the proposed rule helps market participants understand how the new
opening rotation will operate. To that extent, the new opening process
may promote transparency, reduce the potential for investor confusion,
and assist market participants in deciding whether to participate in
ISE's opening rotation. Further, if they do participate in the new
opening process, the proposed rule may help provide market participants
with the confidence and certainty as to how their orders or quotes will
be processed.
Further, the Commission believes that the proposed rule change is
designed to promote just and equitable principles of trade by seeking
to ensure that option series open in a fair and orderly manner. For
example, the Commission notes that the proposed rule change is designed
to mitigate the effects of the underlying security's volatility as the
overlying option series undergoes the opening rotation. Specifically,
the proposed rule provides for a range of no less than 100 milliseconds
and no more than 5 seconds in order to ensure that the Exchange has the
ability to adjust the period for which the underlying must be open on
the primary market before the opening process commences. Moreover, the
Commission notes that the proposed rule provides an orderly process for
handling eligible interests during the opening rotation, while seeking
to avoid opening executions at suboptimal prices. For instance, the new
process ensures that the Exchange will not open with the Exchange's BBO
if there is a Zero Bid Market, no ABBO, and no Quality Opening Market.
Likewise, the Exchange will not open an option series with a trade
unless one of the following conditions is met: (1) The Potential
Opening Price is at or within the Pre-Market BBO and the ABBO; (2) the
Potential Opening Price is at or within the non-zero bid ABBO if the
Pre-Market BBO is crossed; or (3) where there is no ABBO, the Potential
Opening Price is at or within the Pre-Market BBO which is also a
Quality Opening Market. Finally, while the new opening process attempts
to maximize the number of contracts executed on the Exchange during
such rotation, including by seeking additional liquidity, if necessary,
the Commission notes that the new opening process, unlike the current
process, takes into consideration away market interests and ensures
that better away prices are not traded through. For these reasons, the
Commission believes that the proposed rule change, as modified by
Amendment No. 1, is consistent with the Act.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\91\ that the proposed rule change (SR-ISE-2017-02), as
modified by Amendment No. 1, be, and it hereby is, approved.
---------------------------------------------------------------------------

\91\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\92\
---------------------------------------------------------------------------

\92\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05340 Filed 3-16-17; 8:45 am]
BILLING CODE 8011-01-P

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