Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Memorialize Functionality Designed To Assist Members in the Event that They Lose Communication, 7252-7255 [2018-03308]
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Federal Register / Vol. 83, No. 34 / Tuesday, February 20, 2018 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82699; File No. SR–ISE–
2018–12]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Memorialize
Functionality Designed To Assist
Members in the Event that They Lose
Communication
February 13, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on February
2, 2018, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to
memorialize functionality which is
designed to assist Members in the event
that they lose communication with their
assigned Specialized Quote Feed
(‘‘SQF’’),3 Financial Information
eXchange (‘‘FIX’’),4 or Ouch to Trade
Options (‘‘OTTO’’) 5 Ports due to a loss
of connectivity.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
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1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 SQF is an interface that allows market makers
to connect and send quotes, sweeps and auction
responses into the Exchange.
4 FIX is an interface that allows market
participants to connect and send orders and auction
orders into the Exchange.
5 OTTO is an interface that allows market
participants to connect and send orders, auction
orders and auction responses into the Exchange.
2 17
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statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to
memorialize its detection of loss of
connection risk protection, which is
applicable to all Members, at ISE Rule
711(e). This automated process is in
effect if a Member’s SQF, FIX or OTTO
Port loses communication with a Client
Application due to a loss of
connectivity. This feature is designed to
protect ISE Market Makers 6 and other
market participants from inadvertent
exposure to excessive risk.
Members currently enter quotes and/
or orders utilizing either an SQF, FIX or
OTTO Port. SQF is utilized by ISE
Market Makers and FIX and OTTO are
utilized by all market participants.
These ports are trading system
components through which a Member
communicates its quotes and/or orders
to the Exchange’s match engine through
the Member’s Client Application. The
Exchange proposes to define ‘‘Client
Application’’ as the system component
of the Member through which the
Member communicates its quotes and
orders to the Exchange at proposed Rule
711(e)(i)(E). Under the proposed rule
change, an SQF Port would be defined
as the Exchange’s proprietary system
component through which ISE Market
Makers communicate their quotes from
the Client Application at proposed Rule
711(e)(i)(B). A FIX Port would be
defined as the Exchange’s universal
system component through which
Members communicate their orders
from the Member’s Client Application at
proposed Rule 711(e)(i)(D). An OTTO
Port would be defined as the Exchange’s
proprietary system component through
which Members communicate their
orders from the Member’s Client
Application at proposed Rule
711(e)(i)(C). ISE Market Makers may
submit quotes to the Exchange from one
or more SQF Ports. Similarly, market
participants may submit orders to the
Exchange from one or more FIX or
OTTO Ports. The proposed cancellation
feature will be mandatory for each ISE
Market Maker utilizing SQF for the
removal of quotes and optional for any
6 The term ‘‘market makers’’ refers to
‘‘Competitive ISE Market Makers’’ and ‘‘Primary ISE
Market Makers’’ collectively.
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market participant utilizing FIX or
OTTO for the removal of orders.
When the SQF Port detects the loss of
communication with a Member’s Client
Application because the Exchange’s
server does not receive a Heartbeat
message 7 for a certain period of time (a
period of ‘‘nn’’ seconds), the Exchange
will automatically logoff the Member’s
affected Client Application and
automatically cancel all of the Member’s
open quotes. Quotes will be cancelled
across all Client Applications that are
associated with the same ISE Market
Maker ID and underlying issues.
The Exchange proposes to define a
‘‘Heartbeat’’ message as a
communication which acts as a virtual
pulse between the SQF, FIX or OTTO
Port and the Client Application at
proposed Rule 711(e)(i)(A). The
Heartbeat message sent by the Member
and subsequently received by the
Exchange allows the SQF, FIX or OTTO
Port to continually monitor its
connection with the Member.
SQF Ports
The Exchange’s system has a default
time period, which will trigger a
disconnect from the Exchange and
remove quotes, set to fifteen (15)
seconds for SQF Ports. A Member may
change the default period of ‘‘nn’’
seconds of no technical connectivity to
trigger a disconnect from the Exchange
and remove quotes to a number between
one hundred (100) milliseconds and
99,999 milliseconds for SQF Ports prior
to each Session of Connectivity to the
Exchange. This feature is enabled for
each ISE Market Maker and may not be
disabled.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
Systematically or (2) by contacting the
Exchange’s operations staff. If the
Member changes the default number of
‘‘nn’’ seconds, that new setting shall be
in effect throughout the current Session
of Connectivity and will then default
back to fifteen seconds.8 The Member
may change the default setting prior to
each Session of Connectivity. A Session
of Connectivity would be defined to
mean each time the Member connects to
the Exchange’s system. If the Member
were to connect and then disconnect
within a trading day several times, each
7 It is important to note that the Exchange
separately sends a connectivity message to the
Member as evidence of connectivity.
8 The Exchange’s system would capture the new
setting information that was changed by the
Member and utilize the amended setting for that
particular session. The setting would not persist
beyond the current Session of Connectivity and the
setting would default back to 15 seconds for the
next session if the Member did not change the
setting again.
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time the Member disconnected the next
session would be a new Session of
Connectivity. This definition is
proposed at proposed Rule 711(e)(i)(F).
The Member may also communicate the
time to the Exchange by calling the
Exchange’s operations staff. If the time
period is communicated to the
Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the Member shall persist for
each subsequent Session of Connectivity
until the Member either contacts
Exchange operations by phone and
changes the setting or the Member
selects another time period in the Client
Application prior to the next Session of
Connectivity.
FIX and OTTO Ports
The Exchange’s system has a default
time period, which will trigger a
disconnect from the Exchange and
remove orders, set to thirty (30) seconds
for FIX Ports and fifteen (15) seconds for
OTTO Ports. The Member may disable
the removal of orders feature, but not
the disconnect feature. If the Member
elects to have its orders removed, in
addition to the disconnect for FIX, the
Member may determine a time period of
no technical connectivity to trigger the
disconnect and removal of orders
between one (1) second and thirty (30)
seconds. If the Member elects to have its
orders removed, in addition to the
disconnect for OTTO, the Member may
determine a time period of no technical
connectivity to trigger the disconnect
and removal of orders between one
hundred (100) milliseconds and 99,999
milliseconds. All orders will be
automatically cancelled.
There are two ways to change the
number of ‘‘nn’’ seconds: (1)
Systematically or (2) by contacting the
Exchange’s operations staff. If the
Member changes the default number of
‘‘nn’’ seconds, that new setting shall be
in effect throughout that Session of
Connectivity and will then default back
to thirty seconds for FIX Ports or fifteen
seconds for OTTO Ports at the end of
that session. The Member may change
the default setting prior to each Session
of Connectivity. The Member may also
communicate the time to the Exchange
by calling the Exchange’s operations
staff. If the time period is communicated
to the Exchange by calling Exchange
operations, the number of ‘‘nn’’ seconds
selected by the Member shall persist for
each subsequent Session of Connectivity
until the Member either contacts
Exchange operations by phone and
changes the setting or the Member
selects another time period through the
Client Application prior to the next
Session of Connectivity.
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Similar to SQF Ports, when a FIX or
OTTO Port detects the loss of
communication with a Member’s Client
Application for a certain time period (a
period of ‘‘nn’’ seconds), the Exchange
will automatically logoff the Member’s
affected Client Application and if
elected, automatically cancel all orders.
The Member may have an order which
has routed away prior to the
cancellation, in the event that the order
returns to the Order Book, because it
was either not filled or partially filled,
that order will be cancelled.
The disconnect feature is mandatory
for FIX and OTTO users however the
user has the ability to elect to also
enable a removal feature, which will
cancel all orders submitted through that
FIX or OTTO Port. If the removal of
orders feature is not enabled, the system
will simply disconnect the FIX and/or
OTTO user and not cancel any orders.
The FIX and/or OTTO user would have
to commence a new Session of
Connectivity to add, modify or cancel
its orders once disconnected.
The trigger for the SQF, FIX and
OTTO Ports is Client Application
specific. The automatic cancellation of
the ISE Market Maker’s quotes for SQF
Ports and open orders, if elected by the
Member for FIX or OTTO Ports, entered
into the respective SQF, FIX or OTTO
Ports via a particular Client Application
will neither impact nor determine the
treatment of the quotes of other ISE
Market Makers (not associated with the
same Market Maker ID) entered into
SQF Ports or orders of the same or other
Members entered into the FIX or OTTO
Ports via a separate and distinct Client
Application.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act 9 in general, and furthers the
objectives of Section 6(b)(5) of the Act 10
in particular, in that it is designed to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general to protect
investors and the public interest, by
imposing this mandatory removal
functionality on ISE Market Makers to
prevent disruption in the marketplace
and also offering this removal feature to
other market participants. Requiring ISE
Market Makers to utilize the disconnect
feature will avoid risks associated with
inadvertent executions in the event of a
loss of connectivity. Other market
participants will have the option to
9 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
10 15
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Frm 00118
Fmt 4703
either enable or disable the cancellation
feature, thereby offering the same risk
protections throughout the market.
ISE Market Makers will be required to
utilize this disconnect and removal
functionality with respect to SQF Ports.
This feature will remove impediments
to and improve the mechanism of a free
and open market and a national market
system aimed at protecting investors
and the public interest by requiring ISE
Market Makers quotes to be removed in
the event of a loss of connectivity with
the Exchange’s system. ISE Market
Makers provide liquidity to the market
place and have obligations unlike other
market participants.11 This risk feature
is important because it will enable ISE
Market Makers to avoid risks associated
with inadvertent executions in the event
of a loss of connectivity with the
Exchange. The proposed rule change is
designed to not permit unfair
discrimination among market
participants, as it would apply
uniformly to all ISE Market Makers
utilizing SQF Ports.
The disconnect feature of FIX and
OTTO is mandatory, however market
participants will have the option to
either enable or disable the cancellation
feature, which would result in the
cancellation of all orders submitted over
the applicable FIX or OTTO Port when
such port disconnect [sic]. It is
appropriate to offer this removal feature
as optional to all market participants
utilizing FIX or OTTO, because unlike
ISE Market Makers who are required to
provide quotes in all products in which
they are registered, market participants
utilizing FIX or OTTO do not bear the
same magnitude of risk of potential
erroneous or unintended executions. In
addition, market participants utilizing
FIX or OTTO may desire their orders to
remain on the order book despite a
technical disconnect, so as not to miss
any opportunities for execution of such
orders while the FIX and/or OTTO port
is disconnected.
Utilizing a time period for SQF and
OTTO Ports of fifteen (15) seconds and
permitting ISE Market Makers and
Members to modify the setting to
between 100 milliseconds and 99,999
milliseconds is consistent with the Act
because the Exchange does not desire to
trigger unwarranted logoffs of Members
and therefore allows Members the
ability to set their time in order to
enable the Exchange the authority to
disconnect the Member with this
feature. Both SQF and OTTO are
proprietary system components offered
by ISE. The Exchange believes that the
proposed settings for SQF and OTTO
11 See
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ISE Rule 804(e).
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are appropriate timeframes. Each ISE
Market Maker and Member has different
levels of sensitivity with respect to this
disconnect setting and each ISE Market
Maker and Member has their own
system safeguards as well. A default
setting of fifteen (15) seconds is
appropriate to capture the needs of all
ISE Market Makers and Members and
high enough not to trigger unwarranted
removal of quotes and orders.
Further, ISE Market Makers and
Members are able to customize their
settings. The Exchange’s proposal to
permit a timeframe for SQF and OTTO
Ports between 100 milliseconds and
99,999 milliseconds is consistent with
the Act and the protection of investors
because the purpose of this feature is to
mitigate the risk of potential erroneous
or unintended executions associated
with a loss in communication with a
Client Application. Members are able to
better anticipate the appropriate time
within which they may require prior to
a logoff as compared to the Exchange.
The Member is being offered a
timeframe by the Exchange within
which to select the appropriate time.
The Exchange does not desire to trigger
unwarranted logoffs of Members and
therefore permits Members to provide
an alternative time to the Exchange,
within the Exchange’s prescribed
timeframe, which authorizes the
Exchange to disconnect the Member.
The ‘‘nn’’ seconds serve as the
Member’s instruction to the Exchange to
act upon the loss of connection and
remove quotes from the system, and if
elected, orders from the System. This
range will accommodate Members in
selecting their appropriate times within
the prescribed timeframes.
With respect to SQF, the Exchange’s
proposal is further consistent with the
Act because it will mitigate the risk of
potential erroneous or unintended
executions associated with a loss in
communication with a Client
Application which protects investors
and the public interest. Also, any
interest that is executable against a ISE
Market Maker’s quotes that is received 12
by the Exchange prior to the trigger of
the disconnect to the Client
Application, which is processed by the
system, automatically executes at the
price up to the ISE Market Maker’s size.
In other words, the system will process
the request for cancellation in the order
it was received by the system.
With respect to FIX, a universal
system component, the Exchange’s
proposal would set a default timeframe
12 The time of receipt for an order or quote is the
time such message is processed by the Exchange
book.
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of thirty (30) seconds and permit a FIX
user to modify the timeframe for FIX
Ports to between 1 second and 30
seconds for the removal of orders. This
proposal is consistent with the Act and
the protection of investors because this
feature, which is optional, will mitigate
the risk of potential erroneous or
unintended executions associated with
a loss in communication with a Client
Application. With respect to the longer
timeframe for FIX, as compared to SQF
and OTTO, the Exchange notes that
unlike SQF and OTTO which are
proprietary system components, FIX is a
universal component. The settings on
FIX remain different given FIX is not a
proprietary system component. ISE
Market Makers require a quicker
timeframe (15 seconds as compared to
30 seconds). ISE Market Makers have
quoting obligations 13 and are more
sensitive to price movements as
compared to other market participants.
It is consistent with the Act to provide
a longer timeframe within which to
customize settings for FIX as compared
to SQF Ports because ISE Market Makers
need to remain vigilant of market
conditions and react more quickly to
market movements as compared to other
Members entering orders into the
system. The proposal acknowledges this
sensitivity borne by ISE Market Makers
and reflects the reaction time of ISE
Market Makers as compared to Members
entering orders. Of note, the proposed
customized timeframe for FIX might be
too long for ISE Market Makers given
their quoting requirements and
sensitivity to price movements. ISE
Market Makers would be severely
impacted by a loss of connectivity of
more than several seconds. The ISE
Market Maker would have exposure
during the time period in which they
are unable to manage their quote and
update that quote. The Member is best
positioned to determine their setting.
With respect to other market
participants that enter orders, they have
the option of selecting either OTTO or
FIX and therefore are able to obtain a
shortened timeframe with OTTO if they
desire.
The system operates consistently with
the firm quote obligations of a brokerdealer pursuant to Rule 602 of
Regulation NMS. Specifically, with
respect to ISE Market Makers, their
obligation to provide continuous twosided quotes on a daily basis is not
diminished by the automatic removal of
such quotes triggered by the disconnect.
ISE Market Makers are required to
provide continuous two-sided quotes on
a daily basis.14 ISE Market Makers will
not be relieved of the obligation to
provide continuous two-sided quotes on
a daily basis, nor will it prohibit the
Exchange from taking disciplinary
action against a ISE Market Maker for
failing to meet the continuous quoting
obligation each trading day as a result
of disconnects.
With respect to FIX and OTTO Ports,
the Exchange will offer this optional
removal functionality to all market
participants. Offering the removal
feature on a voluntary basis to all other
market participants is consistent with
the Act because it permits them an
opportunity to utilize this risk feature,
if desired, and avoid risks associated
with inadvertent executions in the event
of a loss of connectivity with the
Exchange. The removal feature is
designed to mitigate the risk of missed
and/or unintended executions
associated with a loss in communication
with a Client Application. The proposed
rule change is designed to not permit
unfair discrimination among market
participants, as this optional removal
feature will be offered uniformly to all
Members utilizing FIX and/or OTTO.
The Exchange will disconnect
Members from the Exchange and not
cancel a Member’s orders if the removal
feature is disabled. The disconnect
feature is mandatory and will cause the
Member to be disconnected within the
default timeframe or the timeframe
otherwise specified by the Member.
This feature is consistent with the Act
because it enables FIX and OTTO users
the ability to disconnect from the
Exchange, assess the situation and make
a determination concerning their risk
exposure. The Exchange notes that in
the event that orders need to be
removed, the Member may elect to
utilize the Kill Switch 15 feature. The
Exchange believes that it is consistent
with the Act to require other market
participants to be disconnected because
the participant is otherwise not
connected to the Exchange’s system and
the Member simply needs to reconnect
to commence submitting and cancelling
orders. The Exchange believes requiring
a disconnect when a loss of
communication is detected is a rational
course of action for the Exchange to
alert the Member of the technical
connectivity issue.
The proposed rule change will help
maintain a fair and orderly market
which promotes efficiency and protects
investors. This mandatory removal
feature for ISE Market Makers and
optional removal for all other market
14 See
13 See
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note 11 above.
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15 See
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note 11 above.
ISE Rule 711(d).
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participants will mitigate the risk of
potential erroneous or unintended
executions associated with a loss in
communication with a Client
Application.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange does not believe the
proposed rule change will cause an
undue burden on intra-market
competition because ISE Market Makers,
unlike other market participants, have
greater risks in the market place.
Quoting across many series in an option
creates large principal positions that
expose ISE Market Makers, who are
required to continuously quote in
assigned options, to potentially
significant market risk. Providing a
broader timeframe for the disconnect
and removal of orders for FIX as
compared to the removal of quotes for
SQF Ports and OTTO orders does not
create an undue burden on competition
because ISE Market Makers have
quoting obligations 16 and are more
sensitive to price movements as
compared to other market participants.
ISE Market Makers need to remain
vigilant of market conditions and react
more quickly to market movements as
compared to other Members entering
multiple orders into the system. The
proposal reflects this sensitivity borne
by ISE Market Makers and reflects the
reaction time of ISE Market Makers as
compared to other Members entering
orders. With respect to other market
participants that enter orders, they have
the option of selecting either OTTO or
FIX and therefore are able to obtain a
shortened timeframe with OTTO if they
desire.
Offering the removal feature to other
market participants on an optional basis
does not create an undue burden on
intra-market competition because unlike
ISE Market Makers, other market
participants do not bear the same risks
of potential erroneous or unintended
executions. FIX and OTTO users have
the opportunity to disable the
cancellation feature and simply
disconnect from the Exchange. FIX and
OTTO users may also set a timeframe
that is appropriate for their business. It
is appropriate to offer this optional
cancellation functionality to other
market participants for open orders,
because those orders are subject to risks
of missed and/or unintended executions
16 See
note 11 above.
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due to a lack of connectivity which the
participants needs to weigh. Finally, the
Exchange does not believe that such
change will impose any burden on intermarket competition that is not necessary
or appropriate in furtherance of the
purposes of the Act. Other options
exchanges offer similar functionality.17
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 18 and
subparagraph (f)(6) of Rule 19b–4
thereunder.19
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
17 See Phlx Rule 1019(c), NOM Rules at Chapter
VI, Section 6(e) and BX Rules at Chapter VI, Section
6(e).
18 15 U.S.C. 78s(b)(3)(A)(iii).
19 17 CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
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7255
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2018–12 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2018–12. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2018–12, and should
be submitted on or before March 13,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–03308 Filed 2–16–18; 8:45 am]
BILLING CODE 8011–01–P
20 17
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CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 83, Number 34 (Tuesday, February 20, 2018)]
[Notices]
[Pages 7252-7255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03308]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82699; File No. SR-ISE-2018-12]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Memorialize
Functionality Designed To Assist Members in the Event that They Lose
Communication
February 13, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 2, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to memorialize functionality which is
designed to assist Members in the event that they lose communication
with their assigned Specialized Quote Feed (``SQF''),\3\ Financial
Information eXchange (``FIX''),\4\ or Ouch to Trade Options (``OTTO'')
\5\ Ports due to a loss of connectivity.
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\3\ SQF is an interface that allows market makers to connect and
send quotes, sweeps and auction responses into the Exchange.
\4\ FIX is an interface that allows market participants to
connect and send orders and auction orders into the Exchange.
\5\ OTTO is an interface that allows market participants to
connect and send orders, auction orders and auction responses into
the Exchange.
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The text of the proposed rule change is available on the Exchange's
website at https://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to memorialize its detection of loss of
connection risk protection, which is applicable to all Members, at ISE
Rule 711(e). This automated process is in effect if a Member's SQF, FIX
or OTTO Port loses communication with a Client Application due to a
loss of connectivity. This feature is designed to protect ISE Market
Makers \6\ and other market participants from inadvertent exposure to
excessive risk.
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\6\ The term ``market makers'' refers to ``Competitive ISE
Market Makers'' and ``Primary ISE Market Makers'' collectively.
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Members currently enter quotes and/or orders utilizing either an
SQF, FIX or OTTO Port. SQF is utilized by ISE Market Makers and FIX and
OTTO are utilized by all market participants. These ports are trading
system components through which a Member communicates its quotes and/or
orders to the Exchange's match engine through the Member's Client
Application. The Exchange proposes to define ``Client Application'' as
the system component of the Member through which the Member
communicates its quotes and orders to the Exchange at proposed Rule
711(e)(i)(E). Under the proposed rule change, an SQF Port would be
defined as the Exchange's proprietary system component through which
ISE Market Makers communicate their quotes from the Client Application
at proposed Rule 711(e)(i)(B). A FIX Port would be defined as the
Exchange's universal system component through which Members communicate
their orders from the Member's Client Application at proposed Rule
711(e)(i)(D). An OTTO Port would be defined as the Exchange's
proprietary system component through which Members communicate their
orders from the Member's Client Application at proposed Rule
711(e)(i)(C). ISE Market Makers may submit quotes to the Exchange from
one or more SQF Ports. Similarly, market participants may submit orders
to the Exchange from one or more FIX or OTTO Ports. The proposed
cancellation feature will be mandatory for each ISE Market Maker
utilizing SQF for the removal of quotes and optional for any market
participant utilizing FIX or OTTO for the removal of orders.
When the SQF Port detects the loss of communication with a Member's
Client Application because the Exchange's server does not receive a
Heartbeat message \7\ for a certain period of time (a period of ``nn''
seconds), the Exchange will automatically logoff the Member's affected
Client Application and automatically cancel all of the Member's open
quotes. Quotes will be cancelled across all Client Applications that
are associated with the same ISE Market Maker ID and underlying issues.
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\7\ It is important to note that the Exchange separately sends a
connectivity message to the Member as evidence of connectivity.
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The Exchange proposes to define a ``Heartbeat'' message as a
communication which acts as a virtual pulse between the SQF, FIX or
OTTO Port and the Client Application at proposed Rule 711(e)(i)(A). The
Heartbeat message sent by the Member and subsequently received by the
Exchange allows the SQF, FIX or OTTO Port to continually monitor its
connection with the Member.
SQF Ports
The Exchange's system has a default time period, which will trigger
a disconnect from the Exchange and remove quotes, set to fifteen (15)
seconds for SQF Ports. A Member may change the default period of ``nn''
seconds of no technical connectivity to trigger a disconnect from the
Exchange and remove quotes to a number between one hundred (100)
milliseconds and 99,999 milliseconds for SQF Ports prior to each
Session of Connectivity to the Exchange. This feature is enabled for
each ISE Market Maker and may not be disabled.
There are two ways to change the number of ``nn'' seconds: (1)
Systematically or (2) by contacting the Exchange's operations staff. If
the Member changes the default number of ``nn'' seconds, that new
setting shall be in effect throughout the current Session of
Connectivity and will then default back to fifteen seconds.\8\ The
Member may change the default setting prior to each Session of
Connectivity. A Session of Connectivity would be defined to mean each
time the Member connects to the Exchange's system. If the Member were
to connect and then disconnect within a trading day several times, each
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time the Member disconnected the next session would be a new Session of
Connectivity. This definition is proposed at proposed Rule
711(e)(i)(F). The Member may also communicate the time to the Exchange
by calling the Exchange's operations staff. If the time period is
communicated to the Exchange by calling Exchange operations, the number
of ``nn'' seconds selected by the Member shall persist for each
subsequent Session of Connectivity until the Member either contacts
Exchange operations by phone and changes the setting or the Member
selects another time period in the Client Application prior to the next
Session of Connectivity.
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\8\ The Exchange's system would capture the new setting
information that was changed by the Member and utilize the amended
setting for that particular session. The setting would not persist
beyond the current Session of Connectivity and the setting would
default back to 15 seconds for the next session if the Member did
not change the setting again.
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FIX and OTTO Ports
The Exchange's system has a default time period, which will trigger
a disconnect from the Exchange and remove orders, set to thirty (30)
seconds for FIX Ports and fifteen (15) seconds for OTTO Ports. The
Member may disable the removal of orders feature, but not the
disconnect feature. If the Member elects to have its orders removed, in
addition to the disconnect for FIX, the Member may determine a time
period of no technical connectivity to trigger the disconnect and
removal of orders between one (1) second and thirty (30) seconds. If
the Member elects to have its orders removed, in addition to the
disconnect for OTTO, the Member may determine a time period of no
technical connectivity to trigger the disconnect and removal of orders
between one hundred (100) milliseconds and 99,999 milliseconds. All
orders will be automatically cancelled.
There are two ways to change the number of ``nn'' seconds: (1)
Systematically or (2) by contacting the Exchange's operations staff. If
the Member changes the default number of ``nn'' seconds, that new
setting shall be in effect throughout that Session of Connectivity and
will then default back to thirty seconds for FIX Ports or fifteen
seconds for OTTO Ports at the end of that session. The Member may
change the default setting prior to each Session of Connectivity. The
Member may also communicate the time to the Exchange by calling the
Exchange's operations staff. If the time period is communicated to the
Exchange by calling Exchange operations, the number of ``nn'' seconds
selected by the Member shall persist for each subsequent Session of
Connectivity until the Member either contacts Exchange operations by
phone and changes the setting or the Member selects another time period
through the Client Application prior to the next Session of
Connectivity.
Similar to SQF Ports, when a FIX or OTTO Port detects the loss of
communication with a Member's Client Application for a certain time
period (a period of ``nn'' seconds), the Exchange will automatically
logoff the Member's affected Client Application and if elected,
automatically cancel all orders. The Member may have an order which has
routed away prior to the cancellation, in the event that the order
returns to the Order Book, because it was either not filled or
partially filled, that order will be cancelled.
The disconnect feature is mandatory for FIX and OTTO users however
the user has the ability to elect to also enable a removal feature,
which will cancel all orders submitted through that FIX or OTTO Port.
If the removal of orders feature is not enabled, the system will simply
disconnect the FIX and/or OTTO user and not cancel any orders. The FIX
and/or OTTO user would have to commence a new Session of Connectivity
to add, modify or cancel its orders once disconnected.
The trigger for the SQF, FIX and OTTO Ports is Client Application
specific. The automatic cancellation of the ISE Market Maker's quotes
for SQF Ports and open orders, if elected by the Member for FIX or OTTO
Ports, entered into the respective SQF, FIX or OTTO Ports via a
particular Client Application will neither impact nor determine the
treatment of the quotes of other ISE Market Makers (not associated with
the same Market Maker ID) entered into SQF Ports or orders of the same
or other Members entered into the FIX or OTTO Ports via a separate and
distinct Client Application.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \9\ in general, and furthers the objectives of Section
6(b)(5) of the Act \10\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general to protect investors and the public
interest, by imposing this mandatory removal functionality on ISE
Market Makers to prevent disruption in the marketplace and also
offering this removal feature to other market participants. Requiring
ISE Market Makers to utilize the disconnect feature will avoid risks
associated with inadvertent executions in the event of a loss of
connectivity. Other market participants will have the option to either
enable or disable the cancellation feature, thereby offering the same
risk protections throughout the market.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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ISE Market Makers will be required to utilize this disconnect and
removal functionality with respect to SQF Ports. This feature will
remove impediments to and improve the mechanism of a free and open
market and a national market system aimed at protecting investors and
the public interest by requiring ISE Market Makers quotes to be removed
in the event of a loss of connectivity with the Exchange's system. ISE
Market Makers provide liquidity to the market place and have
obligations unlike other market participants.\11\ This risk feature is
important because it will enable ISE Market Makers to avoid risks
associated with inadvertent executions in the event of a loss of
connectivity with the Exchange. The proposed rule change is designed to
not permit unfair discrimination among market participants, as it would
apply uniformly to all ISE Market Makers utilizing SQF Ports.
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\11\ See ISE Rule 804(e).
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The disconnect feature of FIX and OTTO is mandatory, however market
participants will have the option to either enable or disable the
cancellation feature, which would result in the cancellation of all
orders submitted over the applicable FIX or OTTO Port when such port
disconnect [sic]. It is appropriate to offer this removal feature as
optional to all market participants utilizing FIX or OTTO, because
unlike ISE Market Makers who are required to provide quotes in all
products in which they are registered, market participants utilizing
FIX or OTTO do not bear the same magnitude of risk of potential
erroneous or unintended executions. In addition, market participants
utilizing FIX or OTTO may desire their orders to remain on the order
book despite a technical disconnect, so as not to miss any
opportunities for execution of such orders while the FIX and/or OTTO
port is disconnected.
Utilizing a time period for SQF and OTTO Ports of fifteen (15)
seconds and permitting ISE Market Makers and Members to modify the
setting to between 100 milliseconds and 99,999 milliseconds is
consistent with the Act because the Exchange does not desire to trigger
unwarranted logoffs of Members and therefore allows Members the ability
to set their time in order to enable the Exchange the authority to
disconnect the Member with this feature. Both SQF and OTTO are
proprietary system components offered by ISE. The Exchange believes
that the proposed settings for SQF and OTTO
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are appropriate timeframes. Each ISE Market Maker and Member has
different levels of sensitivity with respect to this disconnect setting
and each ISE Market Maker and Member has their own system safeguards as
well. A default setting of fifteen (15) seconds is appropriate to
capture the needs of all ISE Market Makers and Members and high enough
not to trigger unwarranted removal of quotes and orders.
Further, ISE Market Makers and Members are able to customize their
settings. The Exchange's proposal to permit a timeframe for SQF and
OTTO Ports between 100 milliseconds and 99,999 milliseconds is
consistent with the Act and the protection of investors because the
purpose of this feature is to mitigate the risk of potential erroneous
or unintended executions associated with a loss in communication with a
Client Application. Members are able to better anticipate the
appropriate time within which they may require prior to a logoff as
compared to the Exchange. The Member is being offered a timeframe by
the Exchange within which to select the appropriate time. The Exchange
does not desire to trigger unwarranted logoffs of Members and therefore
permits Members to provide an alternative time to the Exchange, within
the Exchange's prescribed timeframe, which authorizes the Exchange to
disconnect the Member. The ``nn'' seconds serve as the Member's
instruction to the Exchange to act upon the loss of connection and
remove quotes from the system, and if elected, orders from the System.
This range will accommodate Members in selecting their appropriate
times within the prescribed timeframes.
With respect to SQF, the Exchange's proposal is further consistent
with the Act because it will mitigate the risk of potential erroneous
or unintended executions associated with a loss in communication with a
Client Application which protects investors and the public interest.
Also, any interest that is executable against a ISE Market Maker's
quotes that is received \12\ by the Exchange prior to the trigger of
the disconnect to the Client Application, which is processed by the
system, automatically executes at the price up to the ISE Market
Maker's size. In other words, the system will process the request for
cancellation in the order it was received by the system.
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\12\ The time of receipt for an order or quote is the time such
message is processed by the Exchange book.
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With respect to FIX, a universal system component, the Exchange's
proposal would set a default timeframe of thirty (30) seconds and
permit a FIX user to modify the timeframe for FIX Ports to between 1
second and 30 seconds for the removal of orders. This proposal is
consistent with the Act and the protection of investors because this
feature, which is optional, will mitigate the risk of potential
erroneous or unintended executions associated with a loss in
communication with a Client Application. With respect to the longer
timeframe for FIX, as compared to SQF and OTTO, the Exchange notes that
unlike SQF and OTTO which are proprietary system components, FIX is a
universal component. The settings on FIX remain different given FIX is
not a proprietary system component. ISE Market Makers require a quicker
timeframe (15 seconds as compared to 30 seconds). ISE Market Makers
have quoting obligations \13\ and are more sensitive to price movements
as compared to other market participants. It is consistent with the Act
to provide a longer timeframe within which to customize settings for
FIX as compared to SQF Ports because ISE Market Makers need to remain
vigilant of market conditions and react more quickly to market
movements as compared to other Members entering orders into the system.
The proposal acknowledges this sensitivity borne by ISE Market Makers
and reflects the reaction time of ISE Market Makers as compared to
Members entering orders. Of note, the proposed customized timeframe for
FIX might be too long for ISE Market Makers given their quoting
requirements and sensitivity to price movements. ISE Market Makers
would be severely impacted by a loss of connectivity of more than
several seconds. The ISE Market Maker would have exposure during the
time period in which they are unable to manage their quote and update
that quote. The Member is best positioned to determine their setting.
With respect to other market participants that enter orders, they have
the option of selecting either OTTO or FIX and therefore are able to
obtain a shortened timeframe with OTTO if they desire.
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\13\ See note 11 above.
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The system operates consistently with the firm quote obligations of
a broker-dealer pursuant to Rule 602 of Regulation NMS. Specifically,
with respect to ISE Market Makers, their obligation to provide
continuous two-sided quotes on a daily basis is not diminished by the
automatic removal of such quotes triggered by the disconnect. ISE
Market Makers are required to provide continuous two-sided quotes on a
daily basis.\14\ ISE Market Makers will not be relieved of the
obligation to provide continuous two-sided quotes on a daily basis, nor
will it prohibit the Exchange from taking disciplinary action against a
ISE Market Maker for failing to meet the continuous quoting obligation
each trading day as a result of disconnects.
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\14\ See note 11 above.
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With respect to FIX and OTTO Ports, the Exchange will offer this
optional removal functionality to all market participants. Offering the
removal feature on a voluntary basis to all other market participants
is consistent with the Act because it permits them an opportunity to
utilize this risk feature, if desired, and avoid risks associated with
inadvertent executions in the event of a loss of connectivity with the
Exchange. The removal feature is designed to mitigate the risk of
missed and/or unintended executions associated with a loss in
communication with a Client Application. The proposed rule change is
designed to not permit unfair discrimination among market participants,
as this optional removal feature will be offered uniformly to all
Members utilizing FIX and/or OTTO.
The Exchange will disconnect Members from the Exchange and not
cancel a Member's orders if the removal feature is disabled. The
disconnect feature is mandatory and will cause the Member to be
disconnected within the default timeframe or the timeframe otherwise
specified by the Member. This feature is consistent with the Act
because it enables FIX and OTTO users the ability to disconnect from
the Exchange, assess the situation and make a determination concerning
their risk exposure. The Exchange notes that in the event that orders
need to be removed, the Member may elect to utilize the Kill Switch
\15\ feature. The Exchange believes that it is consistent with the Act
to require other market participants to be disconnected because the
participant is otherwise not connected to the Exchange's system and the
Member simply needs to reconnect to commence submitting and cancelling
orders. The Exchange believes requiring a disconnect when a loss of
communication is detected is a rational course of action for the
Exchange to alert the Member of the technical connectivity issue.
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\15\ See ISE Rule 711(d).
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The proposed rule change will help maintain a fair and orderly
market which promotes efficiency and protects investors. This mandatory
removal feature for ISE Market Makers and optional removal for all
other market
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participants will mitigate the risk of potential erroneous or
unintended executions associated with a loss in communication with a
Client Application.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. Specifically, the Exchange does
not believe the proposed rule change will cause an undue burden on
intra-market competition because ISE Market Makers, unlike other market
participants, have greater risks in the market place. Quoting across
many series in an option creates large principal positions that expose
ISE Market Makers, who are required to continuously quote in assigned
options, to potentially significant market risk. Providing a broader
timeframe for the disconnect and removal of orders for FIX as compared
to the removal of quotes for SQF Ports and OTTO orders does not create
an undue burden on competition because ISE Market Makers have quoting
obligations \16\ and are more sensitive to price movements as compared
to other market participants. ISE Market Makers need to remain vigilant
of market conditions and react more quickly to market movements as
compared to other Members entering multiple orders into the system. The
proposal reflects this sensitivity borne by ISE Market Makers and
reflects the reaction time of ISE Market Makers as compared to other
Members entering orders. With respect to other market participants that
enter orders, they have the option of selecting either OTTO or FIX and
therefore are able to obtain a shortened timeframe with OTTO if they
desire.
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\16\ See note 11 above.
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Offering the removal feature to other market participants on an
optional basis does not create an undue burden on intra-market
competition because unlike ISE Market Makers, other market participants
do not bear the same risks of potential erroneous or unintended
executions. FIX and OTTO users have the opportunity to disable the
cancellation feature and simply disconnect from the Exchange. FIX and
OTTO users may also set a timeframe that is appropriate for their
business. It is appropriate to offer this optional cancellation
functionality to other market participants for open orders, because
those orders are subject to risks of missed and/or unintended
executions due to a lack of connectivity which the participants needs
to weigh. Finally, the Exchange does not believe that such change will
impose any burden on inter-market competition that is not necessary or
appropriate in furtherance of the purposes of the Act. Other options
exchanges offer similar functionality.\17\
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\17\ See Phlx Rule 1019(c), NOM Rules at Chapter VI, Section
6(e) and BX Rules at Chapter VI, Section 6(e).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \18\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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\18\ 15 U.S.C. 78s(b)(3)(A)(iii).
\19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2018-12 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2018-12. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2018-12, and should be submitted on
or before March 13, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03308 Filed 2-16-18; 8:45 am]
BILLING CODE 8011-01-P
