Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Proposed Rule Change To Amend Its Rules Related to Complex Orders, 31783-31800 [2018-14544]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 131 (Monday, July 9, 2018)]
[Notices]
[Pages 31783-31800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14544]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83576; File No. SR-ISE-2018-56]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
of Proposed Rule Change To Amend Its Rules Related to Complex Orders

July 2, 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 June 22, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II, below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.

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[[Page 31784]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules related to Complex Orders.
    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 first adopted Rule 722 for complex orders in October 
2001 and has amended and expanded Rule 722 and other Exchange rules to 
provide for the handling of complex orders over the years. Although the 
Exchange has always handled complex orders on an automated basis, the 
Exchange's rules related to complex orders have largely remained 
principle based. As a result, the Exchange's rules do not fully 
describe how complex orders are processed in the level of detail that 
is now the standard for automated exchanges. Accordingly, the Exchange 
believes it is necessary and appropriate to revise its rules related to 
complex orders to provide greater clarity regarding how complex orders 
are processed on the Exchange. In this respect, the proposed rule 
change consolidates within Rule 722 provisions that have been added to 
various other Exchange rules over the years and adds cross references 
within Rule 722 to other applicable rules to provide a single point of 
reference for how complex orders are handled on the Exchange. The 
proposal also expands upon and clarifies various existing provisions, 
and provides greater detail regarding complex order types, the 
application of Exchange rules regarding internalization, and complex 
order crossing transactions. Furthermore, the proposal also adds 
provisions related to the exposure of complex orders for price 
improvement and the process for opening complex strategies. The 
Exchange notes that it is simply including additional detail in its 
rules on the existing process. No changes to the process are being 
contemplated by this rule change filing.
Definitions
    The Exchange proposes to amend Rule 722(a) to adopt the terms 
``Complex Options Strategy'' for complex strategies that have only 
options components, ``Stock-Option Strategy'' for complex strategies 
that have a stock component and a single options component, and 
``Stock-Complex Strategy'' for complex strategies that have a stock 
component and multiple options components. The proposed definitions 
would also include language that explains that only those Complex 
Options Strategies and Stock-Complex Strategies with no more than the 
applicable number of legs are eligible for processing.\3\ The 
applicable number of legs will be determined by the Exchange on a 
class-by-class basis independently for Complex Options Strategies and 
Stock-Complex Strategies.\4\ In addition, the Exchange proposes to 
adopt separate definitions for the terms ``Complex Options Order,'' 
``Stock-Option Order,'' and ``Stock-Complex Order,'' which refer to 
orders for a Complex Options Strategy, Stock-Option Strategy, and 
Stock-Complex Strategy, respectively. Finally, the Exchange proposes to 
state that the term ``Complex Order'' includes Complex Options Orders, 
Stock-Option Orders, and Stock-Complex Orders. Currently, Rule 722(a) 
does not contain a definition of complex strategies (as opposed to 
orders) and refers to options only complex orders as ``complex orders'' 
and separately defines ``stock-option orders.'' As a result, it may not 
be clear under the current definitions whether references in the rules 
to ``complex orders'' apply to stock-option orders, or whether 
references are to orders or to the complex instrument. Under the 
proposal, the term ``complex strategy'' is used to refer to Complex 
Options Strategies, Stock-Option Strategies and Stock-Complex 
Strategies. Accordingly, this proposed change will bring clarity to the 
Exchange's rules with respect to whether certain provisions apply only 
to Complex Options Strategies, only to Stock-Options Strategies, only 
to Stock-Complex Strategies or to all three. In this respect, the 
Exchange has reviewed all of its rules related to the handling of 
complex strategies to apply the newly defined terms appropriately.\5\
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    \3\ By definition, Stock-Option Strategies will have only one 
option leg and one stock leg.
    \4\ Currently, the Exchange accepts Complex Options Strategies 
with up to 10 options legs, and Stock-Option Strategies and Stock-
Complex Strategies with up to 9 options legs in addition to one 
stock leg. Chicago Board Options Exchange (``CBOE'') Rule 
6.53C(a)(1)-(2) provides similar flexibility in determining the 
maximum number of legs. The Exchange will inform members of any 
change to the number of legs accepted via Options Trader Alert.
    \5\ As discussed more fully later in the filing, the Exchange 
proposes to substitute the term ``complex order'' with ``Complex 
Options Order'' in Rule 715(k) and current Rule 722(b)(3)(ii) to 
clarify that legging orders are not created for Stock-Options Orders 
and Stock-Complex Orders, and in current Supplementary Material .04 
to Rule 722 to clarify that market maker spread quotation adjustment 
functionality applies only to Complex Option Order strategies. The 
Exchange also proposes to amend the use of the term ``complex 
order'' in current Rule 722(b)(1) to clarify the increments for 
Complex Options Orders, Stock-Option Orders and Stock-Complex 
Orders, and in current Rule 722(b)(2) to clarify the applicable 
priority rules for Complex Options Orders, Stock-Option Orders and 
Stock-Complex Orders.
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    The Exchange also proposes to delete from Rule 722 the definition 
of SSF-option order, which is a complex order that has a single stock 
future component, and to delete Supplementary Material .01 to Rule 722 
regarding entry and execution of SSF-option orders. Certain aspects of 
Supplementary Material .01 to Rule 722 also relate to Stock-Option 
Orders and Stock-Complex Orders. These parts of the rule contain 
outdated language that is not relevant to the trading of automated 
Stock-Option Orders and Stock-Complex Orders where all components are 
traded through the Exchange at a single net price. The Exchange 
therefore proposes to delete these parts of the rule as well. The 
Exchange provided for the potential to handle SSF-option orders in 
anticipation of the launch of exchange-traded single stock futures in 
2002. However, the single stock future product has not gained 
sufficient popularity among investors to support a SSF-option product, 
and the Exchange has never received a SSF-option order. Therefore, the 
Exchange proposes to remove the order type from its rules. The Exchange 
will file a proposal with the Commission should it determine to offer 
SSF-option orders in the future.
Order Types
    The Exchange proposes to delete current paragraph 722(b)(4) and add 
new paragraph 722(b), which specifies which of the order types 
contained in Rule 715 apply to complex orders and identifies any unique 
aspects with

[[Page 31785]]

respect to complex orders. All orders and designations the Exchange 
proposes to codify in Rule 722(b) for complex orders are currently 
available in the complex order book and are based on order types and 
designations currently provided in ISE Rule 715 for regular orders. The 
Exchange also proposes to specify that members may designate complex 
orders for participation in the complex order exposure process 
discussed below (i.e., ``Exposure Orders'' and ``Exposure Only 
Orders'').
    Specifically, the proposed rule provides that, unless otherwise 
specified, the definitions used in paragraph 722(b) have the same 
meaning contained in Rule 715 and that complex orders may be entered 
using the orders and designations provided in paragraph 722(b). The 
orders and designations identified in the proposed rule are: \6\
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    \6\ In connection with this change, Exchange [sic] proposes to 
use these definitions where applicable in Rule 722 (i.e., the 
complex order rule) and certain other rules that specify application 
to particular complex order types (e.g., Rule 702(d)(2)).
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    (1) Market Complex Order. A Market Complex Order is a Complex Order 
to buy or sell a complex strategy that is to be executed at the best 
price obtainable. If not executable upon entry, such orders will rest 
on the complex order book unless designated as fill-or-kill or 
immediate-or-cancel.
    (2) Limit Complex Order. A Limit Complex Order is a Complex Order 
to buy or sell a complex strategy that is entered with a limit price 
expressed as a net purchase or sale price for the components of the 
order.
    (3) All-Or-None Complex Order. A Complex Order may be designated as 
an All-or-None Order that is to be executed in its entirety or not at 
all. An All-Or-None Order may only be entered as an Immediate-or-Cancel 
Order.
    (4) Reserve Complex Order. A Limit Complex Order may be designated 
as a Reserve Order that contains both a displayed portion and a non-
displayed portion.
    (i) Both the displayed and non-displayed portions of a Reserve 
Complex Order are available for potential execution against incoming 
marketable orders or quotes. A non-marketable Reserve Complex Order 
will rest on the complex order book.
    (ii) The displayed portion of a Reserve Complex Order shall be 
ranked at the specified limit price and the time of order entry.
    (iii) The displayed portion of a Reserve Complex Order will trade 
in accordance with Rule 722(d).
    (iv) When the displayed portion of a Reserve Complex Order is 
decremented, either in full or in part, it shall be refreshed from the 
non-displayed portion of the resting Reserve Complex Order. If the 
displayed portion is refreshed in part, the new displayed portion shall 
include the previously displayed portion. Upon any refresh, the entire 
displayed portion shall be ranked at the specified limit price and 
obtain a new time stamp, i.e., the time that the new displayed portion 
of the order was refreshed. The new displayed portion will trade in 
accordance with Rule 722(d).
    (v) The initial non-displayed portion of a Reserve Complex Order 
rests on the complex order book and is ranked based on the specified 
limit price and time of order entry. Thereafter, non-displayed 
portions, if any, always obtain the same time stamp as that of the new 
displayed portion in subparagraph (iv) above. The non-displayed portion 
of any Reserve Complex Order is available for execution only after all 
displayed interest on the complex order book has been executed.\7\ 
Thereafter, the non-displayed portion of any Reserve Complex Order will 
trade in accordance with Rule 722(d).
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    \7\ The non-displayed portion of a Reserve Complex Order is 
available for execution after displayed interest on the complex 
order book but prior to interest on the regular order book. Under 
the Exchange's current priority rules, at each price, executable 
interest on the complex order book has priority over bids and offers 
for the individual options legs. See Rule 722(b)(2) (renumbered to 
Rule 722(c)(2)). These rules will remain in the proposed rules with 
only non-substantive changes that do impact the priority given to 
Complex Orders (including Reserve Complex Orders) entered on the 
Exchange. During the last three months, non-displayed Complex 
Reserve Order interest made up a very small fraction (0.28%) of the 
total volume executed on the Exchange. In addition, the vast 
majority (82%) of that non-displayed interest was for the account of 
a Priority Customer. Institutional customers in particular use 
Reserve Complex Orders to represent the full size of their interest 
on the complex order book while mitigating information leakage by 
displaying only a portion of such interest to the market. While the 
Exchange typically prioritizes displayed interest over non-displayed 
interest on the same order book, the Exchange believes that it is 
important to allow these participants to source ample liquidity on 
the complex order book by continuing to execute the non-displayed 
portion of their Reserve Complex Orders prior to any interest on the 
regular order book. Furthermore, because the current rules already 
prioritize Priority Customer orders notwithstanding the general 
principle that Complex Orders have priority ahead of the regular 
order book, the Exchange believes that this priority scheme 
appropriately incentivizes Complex Order interest while maintaining 
priority of customer orders in the regular market. See Securities 
and Exchange Act Release No. 44955 (October 18, 2001), 66 FR 53819 
(October 24, 2001) (Complex Order Priority Approval Order).
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    (vi) Only the displayed portion of a Reserve Complex Order is 
eligible to be exposed for price improvement pursuant to Rule 722(d)(1) 
and Supplementary Material .01 to this Rule 722.
    (5) Attributable Complex Order. A Market or Limit Complex Order may 
be designated as an Attributable Order as provided in Rule 715(h).
    (6) Customer Cross Complex Order. A Customer Cross Complex Order is 
comprised of a Priority Customer Complex Order to buy and a Priority 
Customer Complex Order to sell at the same price and for the same 
quantity. Such orders will trade in accordance with Supplementary 
Material .08(d) to this Rule 722.
    (7) Qualified Contingent Cross Complex Order. A Complex Options 
Order may be entered as a Qualified Contingent Cross Order, as defined 
in Rule 715(j). Qualified Contingent Cross Complex Orders will trade in 
accordance with Supplementary Material .08(e) to this Rule 722.
    (8) Day Complex Order. A Complex Order may be designated as a Day 
Order that if not executed, expires at the end of the day on which it 
was entered.
    (9) Fill-or-Kill Complex Orders. A Complex Order may be designated 
as a Fill-or-Kill Order that is to be executed in its entirety as soon 
as it is received and, if not so executed, cancelled.
    (10) Immediate-or-Cancel Complex Orders. A Complex Order may be 
designated as an Immediate-or-Cancel Order that is to be executed in 
whole or in part upon receipt. Any portion not so executed is 
cancelled.
    (11) Opening Only Complex Order. An Opening Only Complex Order is a 
Limit Complex Order that may be entered for execution during the 
Complex Opening Process described in Supplementary Material .10 to Rule 
722. Any portion of the order that is not executed during the Complex 
Opening Process is cancelled.
    (12) Good-Till-Date Complex Order. A Good-Till-Date Complex Order 
is an order to buy or sell which, if not executed, will be cancelled at 
the sooner of the end of the expiration date assigned to the Complex 
Order, or the expiration of any individual series comprising the order.
    (13) Good-Till-Cancel Complex Order. A Good-Till-Cancel Complex 
Order is an order to buy or sell that remains in force until the order 
is filled, canceled or any series of the order expires; provided, 
however, that a Good-Till-Cancel Complex Order will be cancelled in the 
event of a corporate action that results in an adjustment to the terms 
of any series underlying the Complex Order.
    (14) Exposure Complex Order. An Exposure Complex Order is an order

[[Page 31786]]

that will be exposed upon entry as provided in Supplementary Material 
.01 to this Rule 722 if eligible, or entered on the complex order book 
if not eligible. Any unexecuted balance of an Exposure Complex Order 
remaining upon the completion of the exposure process will be entered 
on the complex order book.
    (15) Exposure Only Complex Order. An Exposure Only Complex Order is 
an order that will be exposed upon entry as provided in Supplementary 
Material .01 to this Rule 722 if eligible, or cancelled if not 
eligible. Any unexecuted balance of an Exposure Only Complex Order 
remaining upon the completion of the exposure process will be 
cancelled.
    (16) Complex QCC with Stock Orders. A Complex QCC with Stock Order 
is a Qualified Contingent Cross Complex Order, as defined in Rule 
722(b)(7), entered with a stock component to be communicated to a 
designated broker-dealer for execution pursuant to Supplementary 
Material .08(f) to Rule 722.
Legging Orders
    Separately, Rule 715(k) contains a definition of legging orders, 
which are orders that represent a Complex Options Order on the regular 
order book. A ``legging order'' is defined as a limit order on the 
regular limit order book that represents one side of a complex order 
that is to buy or sell an equal quantity of two options series resting 
on the Exchange's complex order book.\8\ The Exchange proposes to 
clarify that legging orders are not created for Stock-Options Orders 
and Stock-Complex Orders by stating that a legging order represents one 
side of a ``Complex Options Order,'' and by referencing Complex Options 
Orders in other parts of the rule. The Exchange also proposes to 
indicate that a legging order is only generated from the displayed 
portion of a Complex Options order that is designated as a Reserve 
Complex Order. The non-displayed portion of such orders are not 
eligible to create legging orders as generation of a legging order 
would indicate to market participants that there is additional 
undisplayed size on the complex order book even though the member 
entering such Reserve Complex Order has determined not to display that 
interest.
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    \8\ Legging orders are firm orders that are included in the 
Exchange's displayed best bid or offer, and are disseminated over 
OPRA and the Nasdaq ISE Top Quote Feed. Legging orders are not 
disseminated over the Nasdaq ISE Order Feed since these orders 
represent a component leg of Complex Options Orders entered on the 
complex order book that have already been disseminated over the 
Nasdaq ISE Spread Feed.
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Trading Increments
    Currently, Rule 722 specifies that complex orders may be expressed 
in any decimal price, and that the legs of a complex order may be 
executed in one cent increments, regardless of the minimum increments 
otherwise applicable to the individual options legs of the order. The 
current language in the current Rule 722(b)(1) (renumbered Rule 
722(c)(1) under the proposal), which mirrors the rules of other options 
exchanges,\9\ reflects a combination of the increments applicable to 
Complex Options Strategies, Stock-Options Strategies and Stock-Complex 
Strategies. For clarity, the Exchange proposes to amend the Rule to 
specify that bids and offers for Complex Options Strategies may be 
expressed in one cent ($0.01) increments, and the options legs of 
Complex Options Strategies may be executed in one cent ($0.01) 
increments, regardless of the minimum increments otherwise applicable 
to the individual options legs of the order. The Exchange also proposes 
to amend the Rule to specify that bids and offers for Stock-Option 
Strategies and Stock-Complex Strategies may be expressed in any decimal 
price determined by the Exchange,\10\ and the stock leg of a Stock-
Option Strategy and Stock-Complex Strategy may be executed in any 
decimal price permitted in the equity market. Although the Exchange's 
current rule states that bids and offers entered on the complex order 
book can be entered in ``any decimal increment'' similar to language in 
the rules of other options markets,\11\ the Exchange determines 
appropriate minimum increments for Stock-Option Strategies and Stock-
Complex Strategies, and will not accept orders or quotes that do not 
abide by the selected minimum increment. Smaller minimum increments are 
appropriate for complex orders that contain a stock component as the 
stock component can trade at finer decimal increments permitted by the 
equity market. Furthermore, the Exchange notes that even with the 
flexibility provided in the rule, the individual options and stock legs 
must trade at increments allowed by the Commission in the options and 
equities markets. For clarity, the Exchange further proposes to add 
Supplementary Material .04 to Rule 710 (Minimum Trading Increments) to 
reference Rule 722 and specify the minimum trading increments 
applicable to the options leg(s) of a complex strategy.
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    \9\ See e.g., Commentary .01 to NYSE Amex Rule 980NY.
    \10\ The minimum increment for Stock-Option Strategies and 
Stock-Complex Strategies will be communicated to members via Options 
Trader Alert.
    \11\ See NYSE Arca Options Commentary .01 to Rule 6.91.
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    Finally, the Exchange proposes to amend Supplementary Material .07 
to Rule 722 to reflect the different increments applicable to the 
options and stock legs of complex strategies traded on the Exchange. In 
particular, the Exchange proposes to amend this rule to state that the 
system will reject complex strategies where are [sic] legs are to buy 
if entered at a price that is less than the minimum net price, which is 
calculated as the sum of the ratio on each leg of the complex strategy 
multiplied by the minimum increment applicable to that leg pursuant to 
Rule 722(c)(1). Currently, this rule states that the minimum price is 
calculated by multiplying the sum of the ratio on each leg by $0.01 per 
leg (i.e., the minimum increment for options legs). While this 
calculation is accurate for Complex Options Strategies, it does not 
reflect the treatment of Stock-Option Strategies or Stock-Complex 
Strategies where the stock leg(s) can be entered in any decimal price 
determined by the Exchange. For example, an order to buy a share of 
stock and two call options would have a minimum price of $0.0201--i.e., 
$0.02 for two options legs and $0.0001 for the stock leg.
Complex Order Priority
    The Exchange proposes to make minor non-substantive changes to the 
existing text of current Rule 722(b)(2) (renumbered Rule 722(c)(2) 
under the proposal) for clarity. Rule 722(b)(2) provides that the legs 
of a complex strategy with multiple options legs (i.e., Complex Options 
Strategies and the options legs of Stock-Complex Strategies where there 
are more than one options component) may not be executed at worse 
prices than are available on the Exchange for the individual series, 
but may be executed at the same price as bids and offers on the 
Exchange for the individual series so long as there are no Priority 
Customer Orders on the Exchange at those prices (provided however that 
for complex strategy with multiple options legs, if one of the options 
legs improves upon the best price available on the Exchange then the 
other leg is permitted to trade at the same price as a Priority 
Customer).\12\ Rule 722(b)(2) further provides that the option leg of a 
Stock-Option Strategy

[[Page 31787]]

may be executed at the same price as bids and offers on the Exchange 
for the individual series but not at the same price as Priority 
Customer Orders for the individual series. For clarity, the Exchange 
proposes to re-format Rule 722(b)(2) into three paragraphs and to 
replace certain cross references with the defined terms ``Complex 
Options Strategy,'' ``Stock-Options Strategy'' and ``Stock-Complex 
Strategy'' discussed above. The Exchange also proposes to replace 
references to bids and offers established ``in the marketplace'' with 
``on the Exchange'' as the reference to ``in the marketplace'' may 
create confusion as to whether ``marketplace'' refers to the Exchange 
or the broader market. The Exchange also proposes to delete references 
to SSF-option orders in the text of current Rule 722(b)(2), and to 
delete related Supplementary Material .01 to Rule 722. As discussed 
above, the Exchange is proposing to remove all references to SSF-option 
orders from the Rules. Furthermore, with the proposed elimination of 
this type of complex strategy from the rulebook, Supplementary Material 
.01 to Rule 722 is no longer necessary as it contains requirements 
related to the execution of SSF-option orders, as well as outdated 
language that no longer applies to the automated execution of complex 
strategies that contain a stock component. Finally, the Exchange 
proposes in Proposed Rule 722(c)(2)(iv) to add a new reference to the 
treatment of Reserve Orders that clarifies that a complex strategy may 
be executed at a net credit or debit price with one other Member 
without giving priority to the non-displayed portion of Reserve Orders 
on the bids or offers on the Exchange for the individual legs of the 
complex strategy. The non-displayed portion of a Reserve Order has no 
priority on the book because it is hidden from other market 
participants, and is therefore only available for execution after all 
displayed interest has been executed.\13\ Furthermore, to the extent 
that members entering orders in the regular market wish to have their 
orders protected they can use a number of order types that are 
displayed to the market and therefore retain their regular priority on 
the order book. Thus, complex strategies may be executed without giving 
priority to the non-displayed portion of such interest in the regular 
market. While this is consistent with the general treatment of non-
displayed interest in the regular market, the Exchange believes that it 
is important to add this reference here for additional clarity.
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    \12\ Pursuant to ISE Rule 100(a)(49) and (50), a Priority 
Customer Order is an order for the account of a person or entity 
that (i) is not a broker or dealer in securities, and (ii) does not 
place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).
    \13\ See Rule 715(g)(5).
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Execution of Orders
    For clarity, the Exchanges proposes to specify that complex 
strategies are not executable unless all of the terms of the strategy 
can be satisfied and the options legs can be executed at prices that 
comply with the provisions of current Rule 722(b)(2) (renumbered Rule 
722(c)(2) under the proposal).\14\ The Exchange also proposes to add 
new language under proposed Rule 722(d)(4) to clarify that, similar to 
treatment of orders in the regular market, complex strategies that are 
not executable may rest on the complex order book until they become 
executable. Furthermore, the Exchange proposes to amend the text of 
current Rule 722(b)(3) (renumbered Rule 722(d) under the proposal) to 
more clearly reflect the sequence in which complex strategies are 
processed: (i) First complex orders are exposed for price improvement 
(if eligible) for a period of up to one second (quotes in complex 
strategies are not eligible for exposure),\15\ (ii) then complex 
strategies are matched against other interest in the complex order book 
if possible,\16\ and (iii) then complex strategies are executed against 
bids and offers on the Exchange for the individual series if 
possible.\17\ Furthermore, as clarification, the amended Rule 722(d)(2) 
will explicitly reference that complex strategies will be executed at 
the best net price available from executable Complex Orders and quotes 
on the complex order book, and bids and offers for the individual 
options series. Certain complex strategies are not available to leg in 
to the regular market; \18\ complex orders for those strategies remain 
eligible for the complex order exposure process, and may also trade 
with other interest on the complex order book in accordance with the 
terms of the complex order. Finally, the Exchange proposes to add 
reference to ``executable'' complex strategies throughout this section 
to re-enforce that complex strategies cannot be executed unless the 
restrictions of current Rule 722(b)(2) (renumbered Rule 722(c)(2) under 
the proposal) are satisfied.\19\
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    \14\ For example, assume the ISE BBO for series A is $1.00 x 
$1.10 and the ISE BBO for series B is $0.95 x $1.05. A resting 
Complex Order to sell series A and sell series B at a net price of 
$2.16 is not executable because one of the legs of the complex order 
would need to be executed at a price that is above the best offer 
available for the individual series (i.e., $1.10 for series A and 
$1.06 for series B; or $1.11 for series A and $1.05 for series B). 
Nor would such a complex order be executable at a net price of $2.15 
if there were Priority Customer orders on the Exchange to sell 
series A and/or series B at the ISE best offer; however, assuming 
the individual legs trade in penny increments, the complex order 
would be executable at a price of $2.14 pursuant to Rule 722(c)(2).
    \15\ Although quotes in complex strategies are not eligible for 
exposure pursuant to Supplementary Material .01 to Rule 722, the 
Exchange notes that market makers that have interest that they wish 
to go through the exposure process have the option of submitting 
complex orders instead of quotes to be exposed.
    \16\ As described in proposed language being added to 
Supplementary Material .02 to Rule 722, the full size of Stock-
Option Orders and Stock-Complex Orders that are being processed by 
the stock execution venue pursuant to Supplementary Material .02 to 
Rule 722 will be unavailable for trading while the order is being 
processed. For example, if a Stock-Option Order to buy 100 contracts 
at a net price of $1.00 is matched with a sell order for 20 
contracts in the same complex strategy, the whole 100 contract 
Stock-Option Order will be unavailable for trading with other 
interest while the stock portion of the order is being processed for 
potential execution by the stock execution venue.
    \17\ The Exchange proposes to move the sub-paragraph regarding 
order exposure from current Rule 722(b)(3)(iii) to proposed Rule 
722(d)(1) (and Supplementary Material .01 to Rule 722) so that the 
rule more clearly indicates that eligible orders are exposed before 
they are matched against other interest in the complex order book. 
The Exchange also proposes to add text to current Rule 722(b)(3)(ii) 
(renumbered to be Rule 722(d)(3) under the proposal) to expressly 
state that if there are no executable contra-side complex orders on 
the complex order book, executable Complex Options Orders and the 
options legs of a Stock-Option Order or Stock-Complex Order (up to a 
maximum number of options legs) may be executed against bids and 
offers on the Exchange for the individual options legs if possible. 
The Exchange will continue to manage and curtail attempts to trade 
against the individual options legs so as to not negatively impact 
system capacity and performance. See Securities Exchange Act Release 
No. 66234 (January 24, 2012), 77 FR 4852 (January 31, 2012) (SR-ISE-
2011-82) (Approval Order). The Exchange will curtail the number of 
legging orders on an objective basis, such as limiting the number of 
orders generated in a particular class. The Exchange will not limit 
the generation of legging orders on the basis of the entering 
participant or the participant category of the order (e.g., Priority 
Customer, Professional Order, etc.). See id.
    \18\ See Rule 722(b)(3)(ii) (renumbered Rule 722(d)(3)); see 
also Securities Exchange Act Release No. 74004 (January 6, 2015), 80 
FR 1565 (January 12, 2015) (SR-ISE-2014-56).
    \19\ The Exchange proposes to add clarifying language to 
proposed Rule 722(d)(3) to separately identify that Complex Options 
Orders and the options legs of a Stock-Option Order or Stock-Complex 
Order (up to a maximum number of legs) may be executed against bids 
and offers on the Exchange for the individual options series. This 
change is consistent with the proposal to clarify the complex order 
definitions as discussed in supra note 5 and accompanying text.
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Incoming Complex Order Exposure Process
    The Exchange proposes to amend Rule 722 with respect to the 
exposure of complex orders upon entry. Rule 722 currently provides that 
members can choose to have complex orders that are marketable upon 
entry exposed for up to one second before being automatically executed. 
Similar to rules adopted by other options exchanges that trade

[[Page 31788]]

complex orders,\20\ the proposal will amend the rule to provide for an 
auction process. Specifically, the proposed rules would describe an 
auction process whereby complex orders that improve upon the best price 
for the same complex strategy on the complex order book upon entry may 
be exposed for up to one second, as described in more detail in the 
following paragraphs.\21\
---------------------------------------------------------------------------

    \20\ See Phlx Rule 1098(e); EDGX Rule 21.20(d); CBOE Rule 
6.53(d), each of which describe different processes for auctioning 
complex orders entered on those markets.
    \21\ A complex order improves upon the best price for the same 
complex strategy on the complex order book if it is a limit order to 
buy priced higher than the best bid, a limit order to sell priced 
lower than the best offer, or a market order to buy or sell.
---------------------------------------------------------------------------

    Proposed Supplementary Material .01 to Rule 722 \22\ specifies that 
upon entry of an eligible complex order designated for exposure, a 
broadcast message containing the details of the complex order (i.e., 
net price or at market, size, and side) is sent to all members,\23\ who 
are then given up to one second to enter responses with the prices and 
sizes at which they are willing to participate in the execution of the 
complex order. The proposed rule change also specifies that such 
responses are only executable against the Complex Order with respect to 
which they are entered,\24\ can be modified or withdrawn at any time 
prior to the end of the exposure period, and will be considered up to 
the size of the Complex Order being exposed. During the exposure 
period, the Exchange will broadcast the best Response price and the 
aggregate size of Responses available at that price.
---------------------------------------------------------------------------

    \22\ As proposed, the complex order exposure process will be 
described in Supplementary Material .01 to Rule 722. The Exchange 
therefore proposes to amend rules that cite to this process (e.g., 
Rule 722(d)(2)) to point to this rule instead of Rule 
722(b)(3)(iii).
    \23\ Prices for complex orders are not eligible to be reported 
to the Options Price Reporting Authority (``OPRA'') for inclusion in 
consolidated quotation data but trade prices on the individual legs 
are reported to OPRA as a part of last sale data with an identifier 
noting that the trade was part of a complex transaction. 
Accordingly, the Exchange does not provide information regarding the 
complex orders being exposed and responses entered during the 
process to OPRA. Instead, a broadcast message is sent to subscribers 
of the Exchange's order feed. The Exchange notes that it previously 
operated another auction mechanism, namely the Price Improvement 
Mechanism, without blind responses. See Securities Exchange Act 
Release No. 50819 (December 8, 2004), 69 FR 75093 (December 15, 
2004) (SR-ISE-2003-06).
    \24\ At the conclusion of the exposure period, any unexecuted 
balance of a Response is automatically cancelled. In addition, since 
any Responses are only available to trade against the order being 
exposed, only contra-side Responses are eligible to be executed in 
an exposure auction.
---------------------------------------------------------------------------

    In addition, the proposed rule change specifies that the exposure 
period is automatically terminated due to the receipt of certain 
unrelated complex orders for the same complex order strategy,\25\ or if 
a trading halt is initiated during the exposure period.\26\ At the end 
of the exposure period complex orders are automatically executed to the 
greatest extent possible pursuant to Rule 722(d)(2)-(3) taking into 
consideration (i) bids and offers on the complex order book, (ii) bids 
and offers on the Exchange for the individual options series, and (iii) 
Responses received during the exposure period, provided that when 
allocating pursuant to 722(d)(2)(ii), Responses are allocated pro-rata 
based on size.\27\ Thereafter, any unexecuted balance of the complex 
order at the end of the exposure period is placed on the complex order 
book.
---------------------------------------------------------------------------

    \25\ The exposure period will end immediately upon: (i) The 
receipt of a Complex Order or quote for the same complex strategy on 
either side of the market that is marketable against the complex 
order book or bids and offers for the individual legs; or (ii) the 
receipt of a non-marketable Complex Order or quote for the same 
complex strategy on the same side of the market that would cause the 
price of the exposed Complex Order to be outside of the best bid or 
offer for the same complex strategy on the complex order book.
    \26\ If a trading halt is initiated during the exposure period, 
the Complex Order exposure process will be automatically terminated 
without execution.
    \27\ Pursuant to Rule 722(d)(2), complex orders are executed 
against bids and offers on the complex order book in price priority. 
The Exchange designates on a class-by-class basis whether bids and 
offers at the same price on the complex order book are executed: (i) 
In time priority; or (ii) pursuant to an algorithm whereby priority 
customers are given priority and professional orders and market 
maker quotes are executed pro-rata based on size after certain 
allocation preferences are satisfied; or (iii) pro-rata based on 
size (i.e., without any special priority for Priority Customer 
Orders or allocation preferences). Pursuant to Rule 722(d)(3), 
complex order are also automatically executed against bids and 
offers on the Exchange for the individual legs of the complex order 
if possible.
---------------------------------------------------------------------------

    An Exposure Only Order, on the other hand, is a complex order that 
will be exposed upon entry as provided in Supplementary Material .01 to 
Rule 722 if eligible, but is cancelled if not eligible. Any unexecuted 
balance of an eligible Exposure Only Order upon the completion of the 
exposure process is also cancelled. Similar to Immediate-or-Cancel 
Orders, the Exposure Only order type is designed to assist members in 
achieving a speedy execution by exposing eligible Complex Orders to 
potential price improvement before cancelling any unexecuted balance.
Example:
Suppose the following market in complex strategy ABC:
ISE Complex BBO: 10 @1.00 x 10 @ 1.05
An Exposure Only Order is entered to buy 20 @ 1.03: [sic]

A broadcast message is sent announcing the start of an exposure 
auction. During the exposure period, the following responses are 
received:
Response 1: Sell 10 @ 1.03
Response 2: Sell 5 @ 1.02

At the end of the exposure period, the Exposure Only Order trades 
against:
Response 2: 5 @ 1.02
Response 1: 10 @ 1.03

The remaining quantity of 5 contracts is then cancelled.
Market Maker Quotes
    Supplementary Material .03 to Rule 722, which is currently subject 
to delayed implementation in conjunction with the Exchange's recent 
transition to the Nasdaq INET platform as described in the rule, 
provides that Market makers may enter quotes on the complex order book 
in their appointed options classes. Prior to the INET transition, 
quoting in the complex order book was available in a subset of the 
options classes. The Exchange therefore proposes to amend Supplementary 
Material .03 to Rule 722 to clarify that complex quoting will only be 
available in options classes selected by the Exchange and announced to 
members via Options Trader Alert.\28\ In addition, market makers that 
quote in the complex order book must enter certain risk parameters 
pursuant to Supplementary Material .04 to Rule 722 (``Market Maker 
Speed Bump''). In connection with changes described in the 
``Definitions'' section above, the Exchange proposes to amend 
Supplementary Material .04 to Rule 722 to clarify that the Market Maker 
Speed Bump applies to Complex Options Strategies and not to Stock-
Option Strategies or Stock-Complex Strategies.
---------------------------------------------------------------------------

    \28\ Market makers that wish to trade in complex strategies 
where quoting is not available may do so by entering Complex Orders. 
Market makers are not prohibited from entering Complex Orders in any 
options classes. See Rule 805.
---------------------------------------------------------------------------

Internalization and Crossing
    The Exchange proposes to add text to Rule 722 to provide clarity 
regarding the application of Rule 717(d) and (e) (regarding 
facilitation and solicitation), Rule 716 (regarding the Facilitation 
and Solicited Order Mechanisms), Rule 721 (regarding crossing orders), 
and Rule 723 (regarding the Price Improvement Mechanism) to complex 
orders.\29\ In this respect, the Exchange proposes to re-organize and 
clarify certain existing rule text, and to add additional provision 
[sic] into Rule 722 and proposed Supplementary Material .08 thereto.
---------------------------------------------------------------------------

    \29\ With the addition of language on complex auctions in Rule 
722, the Exchange also proposes to delete the current language 
addressing these auctions in Rules 716 and 723.
---------------------------------------------------------------------------

    Rule 717(d) requires members to expose orders they represent as 
agent to other market participants before they execute them as 
principal, and Rule

[[Page 31789]]

717(e) requires members to expose orders they represent as agent to 
other market participants before they execute them against orders that 
they solicit from other members of the Exchange or non-member broker-
dealers. Rule 717(d) and (e) provide a number of ways in which members 
may comply with this exposure requirement: (i) Members can expose 
orders on the Exchange for at least one second (i.e., entering them on 
the limit order book and waiting at least one second before entering a 
contra-side proprietary or solicited order), or (ii) members can enter 
the orders into one of the specified crossing mechanisms.\30\ The 
purpose of this Rule is to assure that all market participants have 
adequate opportunity to trade with orders executed on the Exchange and 
to provide an opportunity for price improvement through the various 
crossing mechanisms. The Exchange has consistently applied the exposure 
requirement contained in Rule 717(d) and (e) to the execution of 
complex orders on the complex order book,\31\ and has provided for the 
execution of complex orders using the specified mechanisms.\32\
---------------------------------------------------------------------------

    \30\ Rule 717(d) also specifies that the exposure requirement is 
satisfied if the member was already bidding or offering on the 
Exchange for at least one second prior to receiving an agency order 
that is executable against such bid or offer.
    \31\ See, e.g., Securities Exchange Act Release No. 57706 (April 
24, 2008), 73 FR 23517 (April 30, 2008) (SR-ISE-2007-77).
    \32\ ISE Rule 716, Supplementary Material .08 (regarding 
Facilitation and Solicited Order Mechanisms); and ISE Rule 723 
Supplementary Material .10 (regarding Price Improvement Mechanism).
---------------------------------------------------------------------------

    For clarity, the Exchange proposes to specify in Rule 722 that the 
requirements of Rule 717(d) and (e) apply to the execution of Complex 
Orders. In particular, the Exchange proposes to specify that Complex 
Orders represented as agent may be executed (i) as principal as 
provided in Rule 717(d), or against orders solicited from members and 
non-member broker-dealers as provided in Rule 717(e). The exposure 
requirements of Rule 717(d) or (e) must be met on the complex order 
book unless the order is executed in one of the mechanisms described in 
Supplementary Material .08 to this Rule 722. For example, an Electronic 
Access Member would meet its exposure requirement under Rule 717(d)(i) 
by exposing the agency order on the complex order book for at least one 
(1) second, or could enter the order into one of the Exchange's Complex 
Order crossing mechanisms described below.
    The Exchange also proposes to move into Supplementary Material .08 
to Rule 722 the rule text regarding the execution of complex orders 
using the Facilitation and Solicited Order Mechanisms from Rule 716, 
and the rule text regarding the execution of complex orders using the 
Price Improvement Mechanism from Rule 723. The Exchange also proposes 
to make non-substantive changes to the text to: (i) Re-enforce that 
complex orders cannot be executed unless they satisfy the requirements 
of current Rule 722(b)(2) (renumbered Rule 722(c)(2) under the 
proposal), (ii) clarify that Stock-Options Orders and Stock-Complex 
Orders cannot leg-into the market when they are executed using one of 
the mechanisms, (iii) specify that each options leg of a complex order 
must meet the minimum contract size requirement contained in paragraphs 
(d) and (e) of Rule 716, and (iv) add additional detail regarding how 
the Exchange processes complex orders entered into these 
mechanisms.\33\ These changes reflect the current operation of the 
Facilitation Mechanism, Solicited Order Mechanism, and Price 
Improvement Mechanism for Complex Orders, and are intended to provide 
greater clarity to Members with respect to treatment of their complex 
crossing orders. The proposed language also specifies that the 
application of current Rule 722(b)(2) (renumbered Rule 722(c)(2) under 
the proposal) may prevent the execution of orders entered into a 
mechanism, in which case, the transaction will be cancelled.
---------------------------------------------------------------------------

    \33\ With respect to the Complex Facilitation Mechanism, the 
entry check pursuant to proposed Supplementary Material .08(a)(1) to 
Rule 722 is different for Complex Options Orders and Complex Orders 
that have a stock component (i.e., Stock-Option Orders and Stock-
Complex Orders) since Stock-Option Orders and Stock-Complex Orders 
entered in the Complex Facilitation Mechanism are not eligible to 
trade with bids and offers for the individual legs.
---------------------------------------------------------------------------

    The Exchange also proposes to consolidate certain other provisions 
related to the auction mechanisms for Complex Orders and include 
relevant information in Rule 722 and the Supplementary Material 
thereto. For example, Proposed Supplementary Material .08(g) to Rule 
722 contains a reference to the minimum contract threshold for Mini 
Options, which merely restates requirements contained in Supplementary 
Material .13 to Rule 504. In addition, Proposed Rule 722(c)(3) 
reaffirms that the requirements of existing Rules 717(d) (Principal 
Transactions) and (e) (Solicitation Orders) apply to Complex Orders 
represented as agent, and that the exposure requirements of those rules 
must be met on the complex order book unless the order is executed in 
one of the mechanisms described in Supplementary Material .08 to this 
Rule 722. Although these requirements are located in other parts of the 
rulebook, the Exchange believes that including them in Complex Order 
rule will reinforce their applicability and aid members in navigating 
the Exchange's rulebook.
    The following examples illustrate how complex orders are transacted 
in the Exchange's crossing mechanisms and their interaction with 
individual bids and offers (while the examples below are for complex 
orders entered into the Facilitation Mechanism, these orders would 
interact similarly with individual bids and offers when entered into 
the Solicited Order Mechanism and the Price Improvement Mechanism):
Example 1
Suppose the following market in option class A:
ISE BBO: 10 @1.00 x 10 @1.05

Suppose further the following market in option class B:
ISE BBO: 10 @2.00 x 10 @2.05

A complex order is entered into the Complex Facilitation Mechanism in 
the complex order book for a strategy buying 1 option class A and 
buying 1 option class B:
Agency Complex Order: Buy 50 @3.05
Contra Side Complex Order: Sell 50 @3.05

A broadcast message is sent announcing the start of the auction. During 
the exposure period, the following orders and quotes are received:
Priority Customer 1 Complex Order: Sell 5 @3.05
Non-Customer 1 Complex Response: Sell 50 @3.05
Non-Customer 2 Complex Response: Sell 50 @3.05

At the end of the exposure period, the following orders/responses trade 
with the Complex Agency Order:
Priority Customer 1 Complex Order: 5 @ 3.05
Contra Side Complex Order: 20 @ 3.05 (40% of 50) \34\
---------------------------------------------------------------------------

    \34\ Pursuant to the proposed rules, Electronic Access Members 
that enter orders into the Facilitation or Price Improvement 
Mechanisms may also elect to receive a percentage allocation that is 
less than 40%. If the member includes such an instruction, the 
contra-side order would receive an allocation consistent with the 
percentage requested by the member. To ensure that all members have 
an opportunity to trade with the agency order, however, the 
allocation received would be limited to a maximum equal to the 40% 
allocation ordinarily given to the contra-side order. Furthermore, 
the contra-side order would still be responsible for executing up to 
the full size of the agency order if there is not enough interest to 
execute the agency order at a particular price. Other options 
exchanges such as Nasdaq BX, Inc. (``BX'') provide similar 
functionality that allows members using an auction mechanism to give 
up allocation priority. See e.g., BX Options Rules, Chapter VI, Sec. 
9, which provides a similar feature for the BX Options Price 
Improvement Auction (``PRISM'').

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

[[Page 31790]]

Non-Customer 1 Complex Response: 13 @ 3.05 (Pro-Rata)
Non-Customer 2 Complex Response: 12 @ 3.05 (Pro-Rata)
Example 2:
Suppose the following market in option class A:
ISE BBO: 10 @ 1.00 x 10 @ 1.05

Suppose further the following market in option class B:
ISE BBO: 10 @ 2.00 x 10 @ 2.05

A complex order is entered into the Complex Facilitation Mechanism in 
the complex order book for a strategy buying 1 option class A and 
buying 1 option class B:
Agency Complex Order: Buy 50 @ 3.05
Contra Side Complex Order: Sell 50 @ 3.05

A broadcast message is sent announcing the start of the auction. During 
the exposure period, the following orders and quotes are received:
Priority Customer 1 Complex Order: Sell 5 @ 3.05
Non-Customer 1 Complex Response: Sell 50 @ 3.05
Non-Customer 2 Complex Response: Sell 50 @ 3.05
Priority Customer 2 Regular Order: Sell 5 Option Class A @ 1.02
Priority Customer 3 Regular Order: Sell 5 Option Class B @ 2.03

At the end of the exposure period, the Complex Facilitation transaction 
is canceled since a trade at 3.05 with counter side orders/responses 
will violate the priority rules for Priority Customer 2 and Priority 
Customer 3 Regular Orders.
Example 3
Suppose the following market in option class A:
ISE BBO: 10 @ 1.00 x 10 @ 1.05

Suppose further the following market in option class B:
ISE BBO: 10 @ 2.00 x 10 @ 2.05

A complex order is entered into the Complex Facilitation Mechanism in 
the complex order book for a strategy buying 1 option class A and 
buying 1 option class B:
Agency Complex Order: Buy 50 @ 3.05
Contra Side Complex Order: Sell 50 @ 3.05

A broadcast message is sent announcing the start of the auction. During 
the exposure period, the following orders and quotes are received:
Priority Customer 1 Complex Order: Sell 5 @ 3.05
Non-Customer 1 Complex Response: Sell 50 @ 3.05
Non-Customer 2 Complex Response: Sell 50 @ 3.05
Non-Customer 3 Regular Order: Sell 40 Option Class A @ 1.02
Non-Customer 4 Regular Order: Sell 40 Option Class 5 @ 2.02
Non-Customer 5 Complex Response: Sell 10 @ 3.03

At the end of the exposure period, the following orders/responses trade 
with the Complex Agency Order:
Non-Customer 5 Complex Response: Sell 10 @ 3.03
Non-Customer 3 Regular Order: Sell 40 Option Class A @ 1.02
Non-Customer 4 Regular Order: Sell 40 Option Class 5 @ 2.02

In above [sic] example, the response and bids and offers on the 
individual legs can provide price improvement for the full size, hence 
the Complex Agency Order trades at improved price(s).

    The Exchange also proposes to adopt text in Supplementary Material 
.08 to Rule 722 addressing how Customer Cross Orders apply to Complex 
Orders. As discussed above, Rule 717(d) and (e) apply when a member 
seeks to execute an order it represents as agent against a proprietary 
order (i.e., a facilitation transaction) or an order the member has 
solicited from another broker-dealer (i.e., a solicited transaction). 
Accordingly, transactions where neither side is for the account of a 
broker-dealer are not within the scope of Rule 717(d) and (e), and 
members can enter the buy and sell orders on the limit order book 
nearly simultaneously.\35\ To make the execution of such customer 
orders more efficient, the Exchange developed a way to enter opposing 
customer orders using a single order type (``Customer Cross 
Orders'').\36\ Customer Cross Orders were limited to Priority Customer 
Orders in February 2010 after the Exchange adopted this sub-category of 
non-broker-dealer investors.\37\
---------------------------------------------------------------------------

    \35\ Supplementary Material .01 to Rule 717 prohibits members 
from entering into arrangements designed to circumvent the exposure 
require for facilitation transactions. Accordingly, it would be a 
violation of Rule 717(d) for a member to effectively facilitate an 
order by providing an opportunity for a customer or other person 
(including affiliates) to regularly execute against agency orders 
handled by the member immediately upon their entry on the Exchange.
    \36\ Securities Exchange Act Release No. 60253 (July 7, 2009), 
74 FR 34063 (July 14, 2009) (SR-ISE-2009-34).
    \37\ Securities Exchange Act Release No. 61433 (January 27, 
2010), 75 FR 5824 (February 4, 2010) (SR-ISE-2010-04). See also, 
supra note 12 (definition of Priority Customer Order).
---------------------------------------------------------------------------

    Pursuant to Rule 721, Customer Cross Orders are automatically 
executed upon entry provided that the execution: (i) Is at or between 
the best bid and offer on the Exchange, (ii) is not at the same price 
as a Priority Customer Order on the book, and (iii) will not trade 
through the NBBO.\38\ Customer Cross Orders are rejected if they cannot 
be executed. Rule 721 also provides that Customer Cross Orders may only 
be entered in the trading increments applicable to the options class 
under Rule 710, and that Supplemental Material .01 to Rule 717, which 
prohibits a member from being a party to any arrangement designed to 
circumvent the requirements applicable to executing agency orders as 
principal, applies to Complex Customer Cross Orders.
---------------------------------------------------------------------------

    \38\ ISE Rule 1901 (Order Protection) prohibits members from 
trading through Protected Bids and Protected Offers from other 
options exchanges.
---------------------------------------------------------------------------

    Just as the Exchange has applied the exposure requirements of Rule 
717(d) and (e) for facilitation and solicitation transactions involving 
Complex Orders, it has also provided for Complex Customer Cross Orders 
for the execution of off-setting complex Priority Customer Orders, 
which are not required to be exposed under Rule 717(d) and (e). The 
Exchange processes Complex Customer Cross Orders consistent with all of 
the applicable rules. Specifically, Rule 722(b) provides that 
``[e]xcept as otherwise provided in this Rule, Complex Orders shall be 
subject to all other Exchange Rules that pertain to orders generally.'' 
As discussed above, current Rule 722(b)(1) provides that Complex Orders 
may be traded in any decimal increment ``regardless of the minimum 
increments otherwise applicable to the individual legs of the orders,'' 
Rule 722(b)(2) (renumbered Rule 722(c)(2) under the proposal) provides 
that a Complex Order may not trade at prices that are worse than the 
best bids and offers on the Exchange in the individual series (nor in 
most circumstances at the same price as a Priority Customer Order), and 
current Rule 722(b)(3) provides that ``[c]omplex orders will be 
executed without consideration of any prices that might be available on 
other exchanges trading the same options contract.'' \39\ Accordingly, 
when executing Complex Customer Cross Orders, the Exchange permits the 
execution of a Complex Customer Cross Order so long as it is at or 
better than the best price available for the same complex strategy on 
the complex order book and there are no Priority Customer Orders at 
that price on the complex order book as required by Rule 721(a). The 
Exchange also applies the regular trading increments

[[Page 31791]]

for complex orders and Supplementary Material .01 to Rule 717 as 
specified in Rule 721(a). Pursuant to Rule 722(b)(3), the Exchange does 
not take into consideration prices available at other exchanges (i.e., 
there is no NBBO for Complex Orders or trade-through protection),\40\ 
and applies instead the priority rules for Complex Orders contained in 
Rule 722(b)(2), which prevents a Complex Order from trading at prices 
that are worse than the best bids and offers on the Exchange in the 
individual series (and in most circumstances at the same price as a 
Priority Customer Order).
---------------------------------------------------------------------------

    \39\ A transaction that is effected as a portion of a Complex 
Trade is exempted from the order protection rule. ISE Rule 
1901(b)(7).
    \40\ Id.
---------------------------------------------------------------------------

    The Exchange believes that its application of the Customer Cross 
Order for Complex Orders is consistent with all applicable existing 
Exchange rules and with the purpose underlying Customer Cross Orders. 
Specifically, the Complex Customer Cross Order protects Priority 
Customer Orders on the complex order book just as Priority Customer 
Orders are protected in the regular market pursuant to Rule 721(a). 
Furthermore, by applying the priority rules for Complex Orders 
contained in Rule 722(b)(2) (renumbered Rule 722(c)(2) under the 
proposal), Priority Customer Orders on the Exchange for the individual 
series are protected to the same extent as when any other Complex 
Orders are executed on the complex order book, and in particular when 
two off-setting Priority Customer Orders are entered on the complex 
order book nearly simultaneously rather than as a single Customer Cross 
Order.
    The Exchange also proposes to adopt text in Supplementary Material 
.08 to Rule 722 addressing how Qualified Contingent Cross Orders 
(``QCCs''), including QCC with Stock Orders, apply to Complex Options 
Orders. Pursuant to Rule 715(j), QCCs are orders to buy or sell at 
least 1,000 contracts that are identified as being part of a qualified 
contingent trade, as that term is defined in Supplementary Material .01 
to Rule 715.\41\ QCCs are not limited to Priority Customers. QCCs are 
executed upon entry without being exposed provided that the execution 
is at or between the NBBO and is not at the same price as a Priority 
Customer Order on the Exchange's limit order book. QCCs were adopted in 
2011 following the elimination of the trade-through exemption for block 
trades in the options market,\42\ as the Exchange recognized that the 
loss of the block trade exemption would adversely affect the ability of 
ISE members to effect large trades that are tied to stock (i.e., Stock 
Options Orders [sic] and Stock-Complex Orders). The QCC addresses the 
dislocation resulting from elimination of the block trade exemption by 
permitting members to provide their customers a net price for the 
entire trade, and then allowing the members to execute the options leg 
of the trade on the ISE at a price at least equal to the NBBO while 
using the Qualified Contingent Trade (``QCT'') exemption \43\ to effect 
the trade in the equities leg at a price necessary to achieve the net 
price. Pursuant to Rule 721(b), a QCC must be executed at a price that 
is at or between the NBBO. Furthermore, a QCC may not be executed at 
the same price as a Priority Customer Order in the series on the 
Exchange.
---------------------------------------------------------------------------

    \41\ The definition of QCC [sic] trade is substantively 
identical to the Commission's definition of a Qualified Contingent 
Transaction (``QCT'') for which the Commission, by order, has 
provided trade-through relief in the equities market. Securities 
Exchange Act Release No. 57620 (April 4, 2008), 73 FR 19271 (April 
9, 2008) (the ``QCT Release''). Pursuant to Supplementary Material 
.01 to ISE Rule 715, a QCC trade must meet the following conditions: 
(i) At least one component must be an NMS Stock; (ii) all the 
components must be effected with a product price contingency that 
either has been agreed to by all the respective counterparties or 
arranged for by a broker-dealer as principal or agent; (iii) the 
execution of one component must be contingent upon the execution of 
all other components at or near the same time; (iv) the specific 
relationship between the component orders (e.g., the spread between 
the prices of the component orders) must be determined by the time 
the contingent order is placed; (v) the component orders must bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or cancelled; and (iv) the transaction must be fully 
hedged (without regard to any prior existing position) as a result 
of other components of the contingent trade. Consistent with the QCT 
Release members must demonstrate that the transaction is fully 
hedged using reasonable risk-valuation methodologies.
    \42\ Securities Exchange Act Release No. 63955 (File No. SR-ISE-
2010-73), 76 FR 11533 (March 2, 2011) (``QCC Release''). The 
Distributive Linkage Plan replaced the Plan for the Purpose of 
Creating and Operating an Intermarket Option Linkage (``Old Linkage 
Plan''), and the Exchange's Linkage Rules replaced the existing ISE 
rules implementing the Old Plan (the ``Old Linkage Rules''). The Old 
Linkage Plan and the Old Linkage Rules provided a limited Trade-
Through exemption for ``Block Trades,'' defined to be trades of 500 
or more contracts with a premium value of at least $150,000. 
However, as with Regulation NMS, the Distributive Linkage Plan did 
not provide a Block Trade exemption.
    \43\ See QCT Release, supra note 41.
---------------------------------------------------------------------------

    Qualified Contingent Transactions may have multiple options 
components, in which case members may enter QCCs with multiple options 
legs (i.e., a Complex Options Order), and the Exchange applies the same 
principles contained in Rule 721(b) when executing such orders. For 
clarity, the Exchange proposes to specify in Supplementary Material .08 
to Rule 722 that Complex Options Orders entered as QCCs are 
automatically executed upon entry so long as: (i) The price of the 
transaction is at or within the best bid and offer for the same complex 
options strategy on the complex order book; (ii) there are no Priority 
Customer Complex Options Orders for the same strategy at the same price 
on the complex order book; and (iii) the individual options legs can be 
executed at prices that are at or between the NBBO for the individual 
series, and comply with the provisions of Rule 722(c)(2)(i), provided 
that no legs of the Complex Options Order can be executed at the same 
price as a Priority Customer Order on the Exchange in the individual 
options series. The proposed text also specifies that Complex Qualified 
Contingent Cross Orders are automatically canceled if they cannot be 
executed. In addition, Complex Qualified Contingent Cross Orders may 
only be entered in the regular trading increments applicable pursuant 
to Rule 722(c)(1), and each leg of a Complex Options Order must meet 
the 1,000 contract minimum size requirement for Qualified Contingent 
Cross Orders.
    The Exchange further believes that the proposed text is consistent 
with the requirements of Rule 721(b) and Rule 722, and that adding the 
proposed text to Rule 722 will provide clarity with respect to the 
execution of complex QCCs. In particular, the Exchange notes that in 
executing complex QCCs, Priority Customer Orders on the complex order 
book and Priority Customer Orders on the Exchange for the individual 
options series are protected. The purpose of allowing QCCs to be 
executed without exposure is to facilitate the execution of the options 
component of a QCT in the Exchange's electronic market. As such, the 
Exchange's initial QCC proposal did not provide for Priority Customer 
protection. However, the Exchange amended the proposal to provide for 
Priority Customer protection to alleviate concerns that adoption of the 
QCC, which is not limited to Priority Customers, would deprive Priority 
Customers of executions of their resting orders, which might also 
create a disincentive to placing Priority Customer limit orders on the 
Exchange.\44\ In its approval order, the Commission noted that the QCC 
proposal was consistent with the NMS QCT Exemption, which found that 
QCTs are of benefit to the market as a whole and a contribution to the 
efficient functioning of the securities markets and the price discovery 
process, but also

[[Page 31792]]

noted that the ISE's QCC proposal was narrowly drawn to provide a 
limited exception to the general principle of exposure, and that it 
retained the general principle of customer priority.\45\ Accordingly, 
when implementing complex QCCs, the Exchange believed it was necessary 
and appropriate to protect Priority Customer Orders for the individual 
series in addition to Priority Customer Orders on the complex order 
book when executing complex QCCs. Similarly, the Exchange believed it 
was necessary and appropriate to execute the individual legs of complex 
QCCs only at prices that are at or between the NBBO for the individual 
series.
---------------------------------------------------------------------------

    \44\ QCC Release, supra note 42 at 11541.
    \45\ Id.
---------------------------------------------------------------------------

    The proposed rules also explain how QCC with Stock Complex Orders 
are handled on the Exchange.\46\ The QCC with Stock Order is a piece of 
functionality that facilitates the execution of stock [sic] component 
of qualified contingent trades.\47\ In particular, a QCC with Stock 
Order is a QCC Order entered with a stock component to be communicated 
to a designated broker-dealer for execution. Since QCC Orders represent 
one component of a qualified contingent trade, each QCC Order must be 
paired with a stock transaction. Whereas members are required to 
separately execute the stock component of a regular Qualified 
Contingent Cross Complex Order, with a QCC with Stock Complex Order, 
the Exchange will attempt to facilitate the execution of the stock 
component in addition to the options component. When a member enters a 
QCC with Stock Complex Order, a Qualified Contingent Cross Complex 
Order is entered on the Exchange pursuant to Supplementary Material 
.08(e) to Rule 722. If the Qualified Contingent Cross Complex Order is 
executed, the Exchange will automatically communicate the stock 
component to the member's designated broker-dealer for execution. 
Alternatively, if the Qualified Contingent Cross Complex Order cannot 
be executed, the entire Complex QCC with Stock Order, including both 
the stock and options components, is cancelled.\48\ Supplementary 
Material .01-.03 to Rule 721 apply to the entry and execution of 
Complex QCC with Stock Orders. As explained in more detail in the QCC 
with Stock Notice,\49\ QCC with Stock Orders assist members in 
maintaining compliance with Exchange rules regarding the execution of 
the stock component of qualified contingent trades, and help maintain 
an audit trail for surveillance of members for compliance with such 
rules.
---------------------------------------------------------------------------

    \46\ See Proposed Rule 722(b)(16) and Supplementary Material 
.08(f) to Rule 722.
    \47\ See Securities Exchange Act Release No. 80090 (February 22, 
2017), 82 FR 12150 (February 28, 2017) (SR-ISE-2017-12) (``QCC with 
Stock Notice'').
    \48\ Members that execute the options component of a qualified 
contingent trade entered as a QCC with Stock Order remain 
responsible for the execution of the stock component if they do not 
receive an execution from their designated broker-dealer. The 
Exchange conducts surveillance to ensure that members execute the 
stock component of their qualified contingent trades. See id.
    \49\ Id.
---------------------------------------------------------------------------

Simultaneous Auctions
    In addition to other language describing the Exchange's processes 
for auctioning eligible Complex Orders as described above, the Exchange 
proposes to add language to Proposed Supplementary Material .01(b)(iii) 
and Proposed Supplementary Material .08(c)(4)(vi) regarding the 
processing of simultaneous auctions. The Complex Order Exposure and 
Price Improvement Mechanisms are eligible for termination before the 
end of the exposure period pursuant to Supplementary Material 
.01(b)(ii) and .08(c)(4)(v) to Rule 722. Specifically, these auctions 
are subject to early termination on the receipt of a Complex Order or 
quote for the same complex strategy on either side of the market that 
is marketable against the complex order book or bids and offers for the 
individual legs (including when the system receives a marketable 
Complex Order though the Complex Uncrossing Process described in 
Supplementary Material .12 to Rule 722); or the receipt of a non-
marketable Complex Order or quote for the same complex strategy on the 
same side of the market that would cause the price of the Complex Order 
being auctioned to be outside of the best bid or offer for the same 
complex strategy on the complex order book.
    In the event auctions are early terminated, the auctions will be 
processed in the sequence in which they were started. Furthermore, if 
an early termination condition occurs on a component leg of a complex 
strategy, the component leg auctions are early terminated first. If the 
event also affects a complex strategy, then auctions in the complex 
strategy will be evaluated for early termination and processing after 
auctions for the component legs have been processed. Eligible interest 
remaining on the Exchange's order books after an auction trades may 
trade with subsequent auctions as those are processed. The Exchange 
notes that except as provided in Supplementary Material .08(a)(2), 
(b)(2) to Rule 722 with respect to trading halts, the Complex 
Facilitation Mechanism and Complex Solicitation Mechanism do not 
terminate prior to the end of the period given for the entry of 
Responses.
Price Limits for Complex Orders and Quotes
    Current Rule 722(b)(3) (renumbered Rule 722(d) under the proposal) 
provides that complex strategies may be executed without consideration 
of any prices that might be available on other exchanges trading the 
same options contracts: (i) By trading on the complex order book, (ii) 
by legging to access liquidity on the regular order book, or (iii) 
through a process whereby Complex Orders are marked for price 
improvement (i.e., a Complex Order Exposure, as detailed in other parts 
of this rule change). Nevertheless, the Exchange believes that members 
may not want complex strategies to trade at prices that are 
significantly outside the market for the individual legs. Supplementary 
Material .07(a) to Rule 722 therefore establishes a risk protection 
that limits the amount that the legs of a complex strategy may be 
executed at prices inferior to the prices available on other exchanges 
trading the same options series.\50\ The Exchange proposes to include a 
reference in this rule to the stock leg of Stock-Option Strategies and 
Stock-Complex Strategies as well for clarity. In particular, the legs 
of a complex strategy cannot trade through the national best bid or 
offer for the series or any stock component by a configurable amount 
calculated as the lesser of (i) an absolute amount not to exceed $0.10, 
and (ii) a percentage of the NBBO not to exceed 500%, as determined by 
the Exchange on a class, series, or underlying basis.\51\
---------------------------------------------------------------------------

    \50\ Other options exchanges have similar rules for trading the 
legs of a complex order at prices at inferior prices. See e.g., BOX 
Rule 7240(b)(3)(iii)(A).
    \51\ Supplementary Material .07 to Rule 722 also allows members 
to include an instruction on their Complex Orders that each leg is 
to be executed at a price that is equal to or better than the 
national best bid or offer.
---------------------------------------------------------------------------

    In addition, the Exchange proposes to amend this rule to state 
that, unless the applicable rule states otherwise, when calculating the 
best net price achievable from the best ISE bids and offers for the 
individual legs, the price of the stock leg is the national best bid or 
offer price calculated pursuant to this Supplementary Material .07(a) 
to Rule 722. In connection with this change, the Exchange also proposes 
to amend its rules for the Limit Order Price Protection pursuant to 
Supplementary Material .07(d) to Rule 722 to clarify that the national 
best bid or offer price

[[Page 31793]]

is used for any stock leg. The Exchange believes that these two changes 
will increase transparency about the prices used by the Exchange for 
various purposes where the Exchange must derive a best bid or offer 
price from the prices available in the regular market.
    Furthermore, Supplementary Material .07(d) to Rule 722 provides 
that the Exchange will reject Limit Complex Orders to buy (sell) if the 
net price of the Limit Complex Order exceeds (is below) the net price 
available from the individual options series on the Exchange by a 
specified amount. Currently, the Exchange's rule states that this limit 
is established for Complex Orders to buy (sell) as the greater of the 
net price available from the individual options series on the Exchange 
plus (minus) an absolute or percentage amount determined by the 
Exchange. While this reflects the limit order price protection for 
Limit Complex Orders to buy, it suggests that the Exchange will reject 
Limit Complex Orders to sell based on whether the Limit Complex Order 
is priced below the greater (rather than lesser) of (1) the net price 
available from the individual options series minus the applicable 
absolute amount, or (2) the net price available from the individual 
options series minus the percentage amount. To adequately describe the 
rule for Limit Complex Orders to sell, the Exchange proposes to amend 
this rule text to state that the limit is established for Complex 
Orders to buy (sell) as the net price available from the individual 
options series on the Exchange plus (minus) the greater of the absolute 
or percentage values described in the rule.
Trade Value Allowance
    The Exchange proposes to adopt text in proposed Supplementary 
Material .09 to Rule 722 that clarifies how the Exchange handles Stock-
Option Strategies and Stock Complex Strategies when different minimum 
trading increments are allowed for the stock and options legs of such 
trades. Members enter Stock-Option Strategies and Stock Complex 
Strategies on the complex order book with a single net price that 
includes all stock and option legs of the order. As the stock leg is 
eligible for execution at finer increments permitted by the equity 
market responsible for executing the stock portion of such orders,\52\ 
Members can submit Stock Option [sic] Strategies and Stock Complex 
Strategies with up to a number of decimal places determined by the 
Exchange. The options leg(s), however, must be executed in one cent 
increments, in keeping with the minimum increment permitted for options 
executions.\53\ After calculating the appropriate options match price 
expressed in a valid one cent increment, the trading system will 
calculate the corresponding stock match price. This stock match price 
must be rounded to the increment supported by the equity market. In a 
small subset of cases, this rounding may result in a small difference 
between the expected notional value of the trade and the actual trade 
value (i.e., a ``Trade Value Allowance'').\54\ Members generally prefer 
not to forgo an execution for their Stock-Option Strategies and Stock-
Complex Strategies when there is a Trade Value Allowance, as the amount 
of the rounding is miniscule compared to the total value of the trade. 
Therefore, the Exchange offers to members functionality that allows 
Stock-Option Strategies and Stock-Complex Strategies to trade outside 
of their specified net prices so long as the amount of any Trade Value 
Allowance does not exceed a value determined by the member. Members 
have the option of opting out of this functionality if they do not want 
their orders to be executed when there is a Trade Value Allowance of 
any amount. In such cases, the Exchange will strictly enforce the net 
price marked on the order. For members that do not supply their own 
values, default values determined by the Exchange and announced to 
members will be applied instead. Any amount of Trade Value Allowance is 
permitted for auction orders pursuant to Supplementary Material .08 to 
Rule 722 that do not trade solely with their contra-side order.
---------------------------------------------------------------------------

    \52\ See Rule 722(c)(1).
    \53\ Id.
    \54\ Proposed Supplementary Material .09 to Rule 722 defines 
``Trade Value Allowance'' as the percentage difference between the 
expected notional value of a trade and the actual notional value of 
the trade.
---------------------------------------------------------------------------

Example
--Member has set a Trade Value Allowance of 0.05% of the expected trade 
value.
--Member enters order to Sell 57 shares of ABC stock and Buy a Jan 80 
ABC call with a net price of $43.746 and a quantity of 77.
--Order matched with corresponding contra order on the complex order 
book.
--The expected trade value based on the order's limit price/quantity 
and a contract multiplier of 100 is $336,844.20--i.e., $43.746 x 77 x 
100.
--Calculated options match price is $2.39 based on market prices and 
the stock match price is $80.940351 (rounded to six decimals).
--The rounding of the stock match price results in a total notional 
trade value of $336,844.200539--i.e., 77 x (($80.940351 x 57)--($2.39 x 
100)).
--The total notional Trade Value Allowance is approximately $0.000539--
i.e., less than one cent.
--Order is executed as the Trade Value Allowance is less than 0.05% of 
the expected trade value of $336,844.20.
    Trade Value Allowance is helpful as this feature allows members to 
receive an expeditious execution, and trade the stock and options 
components of a Stock-Option Strategy or Stock-Complex Strategy in a 
moving market without introducing legging risk. Without this 
functionality members would be forced to resubmit their orders and 
potentially receive a much worse price or miss an execution.
Complex Opening Process
    Options series traded on the Exchange are opened pursuant to Rule 
701 at the opening of the Exchange each business day, or during the 
reopening of the market after a trading halt.\55\ Proposed 
Supplementary Material .10 describes the Exchange's Complex Opening 
Process, and provides that after each of the individual component legs 
have opened, or reopened following a trading halt, Complex Options 
Strategies will be opened pursuant to the Complex Opening Price 
Determination described in Supplementary Material .11 to Rule 722, and 
Stock-Option Strategies and Stock-Complex Strategies will be opened 
pursuant to the Complex Uncrossing Process described in Supplementary 
Material .12(b) to Rule 722.\56\ Each of these processes is described 
in more detail below.
---------------------------------------------------------------------------

    \55\ Complex orders and quotes are disseminated to subscribers 
of the Exchange's market data feeds prior to the commencement of the 
Complex Opening Process. When the complex strategy has opened the 
Exchange disseminates a trading state indicating that regular 
trading has begun.
    \56\ The Complex Uncrossing Process is also used during regular 
trading when a resting Complex Order or quote that is locked or 
crossed with other interest becomes executable.
---------------------------------------------------------------------------

Complex Opening Price Determination
    Complex Options Strategies are opened pursuant to an opening 
process that attempts to execute Complex Orders and quotes on the 
complex order book at a single price that is within Boundary Prices 
that are constrained by the NBBO for the individual legs, thereby 
serving an important price discovery function.
    Proposed Supplementary Material .11(b) to Rule 722 provides that 
eligible interest during the Complex Opening Price Determination 
includes Complex Orders and quotes on the complex order

[[Page 31794]]

book except the non-displayed portion of Reserve Complex Orders. The 
non-displayed portion of a Reserve Complex Order is contingent, non-
displayed interest, and therefore not eligible for the Complex Opening 
Process. Allowing only the displayed portion of Reserve Complex Orders 
to participate in the Complex Opening Price Determination encourages 
members to enter displayed interest to participate in the opening 
auction, and ensures that the price discovery that occurs in the 
Complex Opening Price Determination is not skewed by interest that is 
not displayed to market participants. The non-displayed portion of a 
Reserve Complex Order may participate in the Complex Uncrossing Process 
pursuant to Proposed Supplementary Material .12(b) and thereby receive 
an execution during the Complex Opening Process. In addition, only 
interest on the complex order book is considered for the Complex 
Opening Price Determination as this part of the process is designed to 
promote price discovery for the complex strategy, and therefore bids 
and offers for the individual legs of the Complex Strategy are not 
eligible to participate in the Complex Opening Price Determination but 
will participate in the Complex Uncrossing Process.
    Proposed Supplementary Material .11(c) to Rule 722 describes the 
Exchange's process for opening when the best bid for a complex strategy 
does not lock or cross the best offer. In particular, if the best bid 
for a complex strategy does not lock or cross the best offer, there 
will be no trade in the Complex Opening Price Determination and the 
complex strategy will open pursuant to the Complex Uncrossing Process 
described in Supplementary Material .12(b) to Rule 722. The Exchange 
believes that it is appropriate to open with a Complex Order Uncrossing 
when the complex order book is not executable in the Complex Opening 
Price Determination as the uncrossing process supports the trading of 
additional interest and will thereby provide another opportunity for 
Complex Orders and quotes to be executed in the Complex Opening 
Process.
    Proposed Supplementary Material .11(d) to Rule 722 describes the 
Exchange's process for opening a Complex Strategy when a trade may be 
possible--i.e., if the best bid for the complex strategy locks or 
crosses the best offer.
    First, the system calculates Boundary Prices \57\ at or within 
which Complex Orders and quotes may be executed during the Complex 
Opening Price Determination. Boundary prices are calculated to ensure 
that the opening price is at or within the individual bids and offers 
established in the market. In particular, the Boundary Prices are 
calculated based on the NBBO for the individual legs; provided that, if 
the NBBO for any leg includes a Priority Customer order on the 
Exchange, the system adjusts the Boundary Prices according to Rule 
722(c)(2).
---------------------------------------------------------------------------

    \57\ See Proposed Supplementary Material .11(d)(i) to Rule 722.
---------------------------------------------------------------------------

Example 1
--Complex strategy to buy 1 contract of Series A and 1 contract of 
Series B
--ABBO for Series A is $1.00 x $1.03
--ISE BBO for Series A is $1.01 x 1.04
--ABBO for Series B is $0.98 x $1.01
--ISE BBO for Series B is $0.98 x $1.02
--Boundary price is $1.99 x $2.04
Example 2
--Market is the same as described in Example 1 above except that the 
ISE BBO for Series B includes a Priority Customer order on the bid
--Boundary price is $2.00 x $2.04 as the bid boundary is adjusted 
according to Rule 722(c)(2)

    Next, the Exchange will calculate the Potential Opening Price \58\ 
and Opening Price \59\ pursuant to Proposed Supplementary Material 
.11(d)(ii)-(iv) to Rule 722.
---------------------------------------------------------------------------

    \58\ See Supplementary Material .11(d)(ii)-(iii) to Rule 722.
    \59\ See Supplementary Material .11(d)(iv) to Rule 722.
---------------------------------------------------------------------------

    The Potential Opening Price is first calculated pursuant to 
Proposed Supplementary Material .11(d)(ii) to Rule 722 by identifying 
the price(s) at which the maximum number of contracts can trade 
(``maximum quantity criterion'') taking into consideration all eligible 
interest pursuant to Supplementary Material .11(b) to Rule 722. 
Proposed Supplementary Material .11(d)(iii) to Rule 722 also outlines 
additional considerations for calculating the Potential Opening Price 
when multiple prices would satisfy the maximum quantity criterion. 
Generally, when two or more Potential Opening Prices would satisfy the 
maximum quantity criterion: (A) Without leaving unexecuted contracts on 
the bid or offer side of the market at those prices, the system takes 
the highest and lowest of those prices and takes the mid-point; 
provided that (1) if the highest and/or lowest price described above is 
through the price of a bid or offer that is priced to not allocate in 
the Complex Opening Price Determination, the highest and/or lowest 
price will be rounded to the price of such bid or offer that is priced 
to not allocate before taking the mid-point, and (2) if the mid-point 
is not expressed as a permitted minimum trading increment, it will be 
rounded down to the nearest permissible minimum trading increment; or 
(B) leaving unexecuted contracts on the bid (offer) side of the market 
at those prices, the Potential Opening Price is the highest (lowest) 
executable bid (offer) price. Notwithstanding the foregoing: (C) if 
there are Market Complex Orders on the bid (offer) side of the market 
that would equal the full quantity of Complex Orders and quotes on 
offer (bid) side of the market, the limit price of the highest (lowest) 
priced Limit Complex Order or quote is the Potential Opening Price; and 
(D) if there are only Market Complex Orders on both sides of the 
market, or if there are Market Complex Orders on the bid (offer) side 
of the market for greater than the total size of Complex Orders and 
quotes on the offer (bid) side of the market, there will be no trade in 
the Complex Opening Price Determination and the complex strategy will 
open pursuant to the Complex Uncrossing Process described in 
Supplementary Material .12(b) to Rule 722. The examples below 
illustrate the scenarios discussed above, opening a complex strategy to 
buy 1 contract of Series A and 1 contract of Series B.
Example 3
--The following Complex Orders are on the complex order book:
    [cir] Buy Complex Order for 10 contracts at $0.42
    [cir] Buy Complex Order for 10 contracts at $0.41
    [cir] Sell Complex Order for 10 contracts at $0.32
    [cir] Sell Complex Order for 10 contracts at $0.35
--20 contracts can be allocated at prices between $0.35 and $0.41 
without leaving unexecuted contracts on the bid or offer side of the 
market of Complex Orders and quotes to be traded at those prices.
--The system therefore takes the mid-point of these prices (i.e., 
$0.38) as the Preliminary Opening Price pursuant to paragraph (A) 
above.
Example 4
--The following Complex Orders are on the complex order book:
    [cir] Buy Complex Order for 10 contracts at $0.42
    [cir] Buy Complex Order for 10 contracts at $0.41
    [cir] Buy Complex Order for 10 contracts at $0.33
    [cir] Sell Complex Order for 20 contracts

[[Page 31795]]

at $0.32
    [cir] Sell Complex Order for 10 contracts at $0.35
--20 contracts can be allocated at prices between $0.32 and $0.41 
without leaving unexecuted contracts on the bid or offer side of the 
market of Complex Orders and quotes to be traded at those prices; 
however, both of those prices are through the price of a bid or offer 
that is priced not to allocate--i.e., the Buy Complex Order at $0.33 
and the Sell Complex Order at $0.35.
--The system therefore rounds these prices to the price of interest 
priced not to allocate (i.e., $0.33 and $0.35) before taking the mid-
point of these prices (i.e., $0.34) as the Preliminary Opening Price 
pursuant to paragraph (A) above.
Example 5
--The following Complex Orders are on the complex order book:
    [cir] Buy Complex Order for 20 contracts at $0.41
    [cir] Sell Complex Order for 10 contracts at $0.35
--10 contracts can be allocated at prices between $0.35 and $0.41 
leaving unexecuted contracts on the bid side of the market of Complex 
Orders and quotes to be traded at those prices (i.e., 10 contracts to 
buy).
--The system therefore takes the highest executable bid (i.e., $0.41) 
as the Preliminary Opening Price pursuant to paragraph (B) above.
Example 6
--The following Complex Orders are on the complex order book:
    [cir] Buy Market Complex Order for 20 contracts
    [cir] Sell Complex Order for 10 contracts at $0.35
    [cir] Sell Complex Order for 10 contracts at $0.40
--The 20 contracts of Market Complex Order quantity on the bid side of 
the market equals the full 20 contracts available on the offer side of 
the market.
--The system therefore takes limit price of the highest priced Limit 
Complex Order (i.e., the Sell Complex Order priced at $0.40) as the 
Preliminary Opening Price pursuant to paragraph (C) above.
Example 7
--The following Complex Orders are on the complex order book:
    [cir] Buy Market Complex Order for 30 contracts
    [cir] Sell Complex Order for 10 contracts at $0.35
    [cir] Sell Complex Order for 10 contracts at $0.40
--The 30 contracts of Market Complex Order quantity on the bid side of 
the market exceeds the full 20 contracts available on the offer side of 
the market.
--There is no Potential Opening Price and no trade is possible in the 
Opening Price Determination pursuant to paragraph (D) above. The 
Complex Opening Process continues to the Complex Uncrossing Process.

    Pursuant to Proposed Supplementary Material .11(d)(iv) to Rule 722, 
if the Potential Opening Price is at or within the Boundary Prices, the 
Potential Opening Price becomes the Opening Price. If the Potential 
Opening Price is not at or within the Boundary Prices, the Opening 
Price will be the price closest to the Potential Opening Price that 
satisfies the maximum quantity criteria without leaving unexecuted 
contracts on the bid or offer side of the market at that price and is 
at or within the Boundary Prices. If the bid Boundary Price is higher 
than the offer Boundary Price, or if no valid Opening Price can be 
found at or within the Boundary Prices, there will be no trade in the 
Complex Opening Price Determination and the complex strategy will open 
pursuant to the Complex Uncrossing Process described in Supplementary 
Material .12(b) to Rule 722.
Example 8
--Individual leg prices are the same as Example 1 in this opening 
section. In addition, the following Complex Orders are on the book:
    [cir] Buy Complex Order 1 for 10 contracts at $2.02
    [cir] Buy Complex Order 2 for 15 contracts at $2.03
    [cir] Sell Complex Order 3 for 30 contracts at $2.02
--$2.02 is the Preliminary Opening Price as this is the price at which 
the maximum size of 25 contracts can be allocated. Since $2.02 is at or 
within the Boundary Prices (see Example 1) it is also the Opening 
Price.
--Buy Complex Order 1 and Buy Complex Order 2 are executed in full; 
Sell Complex Order 3 executes 25 contracts.
--The remaining 5 contracts of Sell Complex Order 3 will rest on the 
complex order book as there is no locked/crossed interest to 
participate in the Complex Uncrossing Process.
Example 9
--Individual leg prices are the same as Example 1 in this opening 
section. In addition, the following Complex Orders are on the book:
    [cir] Buy Complex Order 1 for 20 contracts at $2.06
    [cir] Sell Complex Order 1 for 20 contracts at $2.04
--20 contracts can be allocated at prices between $2.04 and $2.06 
without leaving unexecuted contracts on the bid or offer side of the 
market of Complex Orders and quotes to be traded at those prices.
--The system therefore takes the mid-point of these prices (i.e., 
$2.05) as the Preliminary Opening Price pursuant to paragraph (A) 
above.
--Since $2.05 is outside the Boundary Prices (see Example 1) the 
Opening Price will be $2.04--i.e., the price closest to the Potential 
Opening Price that satisfies the maximum quantity criteria without 
leaving unexecuted contracts on the bid or offer side of the market at 
that price and is at or within the Boundary Prices.
    Finally, the Exchange will allocate contracts to trade during the 
Complex Opening Process. In particular, where there is an execution 
possible, the system will give priority to Market Complex Orders first, 
then to resting Limit Complex Orders and quotes on the complex order 
book. The allocation provisions of Rule 722(d)(2) apply with respect to 
Complex Orders and quotes with the same price with priority given first 
to better priced interest.
    Proposed Supplementary Material .11(vi) to Rule 722 provides that 
the system will refresh Reserve Complex Orders pursuant to Rule 
722(b)(4)(iv) following the execution of the displayed portion of 
Reserve Complex Orders in the process described above.
    Proposed Supplementary Material .11(vii) to Rule 722 describes the 
Exchange's process for uncrossing the complex order book following the 
Complex Opening Price Determination described above. In particular, if 
the complex order book remains locked or crossed following the steps 
described above, the system will process any remaining Complex Orders 
and quotes, including Opening Only Complex Orders and the non-displayed 
portion of Reserve Complex Orders, in accordance with the Complex 
Uncrossing Process described in Supplementary Material .12(b) to Rule 
722. Bids and offers for the individual legs of the complex strategy 
will be eligible to participate in the Complex Uncrossing Process.

[[Page 31796]]

Complex Uncrossing Process
    Proposed Supplementary Material .12(b) to Rule 722 describes the 
Exchange's process for uncrossing the complex order book when a resting 
Complex Order or quote that is locked or crossed with other interest 
becomes executable during regular trading or as part of the Complex 
Opening Process. The Complex Uncrossing Process applies to Complex 
Options Strategies, Stock-Option Strategies, and Stock-Complex 
Strategies. Complex strategies are uncrossed using the following 
procedure: First, the system identifies the oldest Complex Order or 
quote among the best priced bids and offers on the complex order book--
i.e., based on the limit or market price of Complex orders and quotes 
on the complex order book. When determining which bids and offers are 
at the best price, all Complex Orders and quotes are considered at 
their limit or market price. A Complex Order entered with an 
instruction that it must be executed at a price that is equal to or 
better than the national best bid or offer pursuant to Supplementary 
Material .07(a) to Rule 722 is also considered based on its actual 
limit or market price and not the price of the national best bid or 
offer for the component legs at which the order would be executed, as 
would otherwise be the case. Then, the selected Complex Order or quote 
is matched pursuant to Rule 722(d)(2)-(3) with resting contra-side 
interest on the complex order book and, for Complex Orders, bids and 
offers for the individual legs of the complex strategy. This process is 
repeated until the complex order book is no longer executable.\60\
---------------------------------------------------------------------------

    \60\ The Exchange will manage and curtail repetition of the 
Complex Uncrossing Process so as to not negatively impact system 
capacity and performance.
---------------------------------------------------------------------------

Example 10
--Individual leg prices are the same as Example 1 above. In addition, 
the following Complex Orders and quotes are on the book:
    [cir] Sell Complex Order 1 at $2.02 submitted at time T1
    [cir] Sell Complex Order 2 at $2.02 submitted at time T2
--ISE Bid on Series B improves to $1.01 such that the leg markets are 
now executable with the resting Sell Complex Orders.
--Complex Uncrossing Process will occur. Complex Order 1 is the oldest 
Complex Order at the best price and is selected and trades with the leg 
markets first--i.e. Complex Order 1 will trade with the ISE Best Bid on 
Series A at 1.01 and the ISE Best Bid on Series B at 1.01. After 
Complex Order 1, Complex Order 2 will be selected and can trade with 
the remaining quantity on the leg markets.
    The Complex Uncrossing Process serves an important function when 
used in the Complex Opening Process and during regular trading. The 
Complex Opening Price Determination described in the section above is 
designed to permit interest residing on the complex order book to trade 
at a single price pursuant to a price discovery process within Boundary 
Prices that are constrained by the NBBO for the individual legs. There 
may be additional interest on the complex order book that could trade, 
for example, by legging to access liquidity on the regular order book. 
In addition, trades during the Complex Uncrossing Process are not 
constrained by the NBBO for the individual legs and can instead trade 
at prices permitted under Supplementary Material .07 to Rule 722, which 
allows the legs of a complex strategy to trade through the NBBO for the 
individual legs by a configurable amount. The Exchange therefore 
continues the Complex Opening Process by performing an uncrossing if 
the Complex Opening Price determination fails to discover an 
appropriate execution price (for example, if no valid Opening Price can 
be found at or within the Boundary Prices) or where there continues to 
be interest that is locked or crossed after Complex Orders and quotes 
are executed in the Complex Opening Price Determination. Furthermore, 
the Complex Uncrossing Process provides an efficient and fair way of 
determining how to execute Complex orders and quotes when interest that 
is locked or crossed becomes executable during regular trading. During 
the trading day there may be Complex Orders and quotes on the complex 
order book that are locked or crossed with other interest but that are 
not executable, for example, because the legs cannot be printed at 
permissible prices. When market conditions change and these Complex 
Orders or quotes become executable, the Exchange uses the Complex 
Uncrossing Process to execute Complex Orders or quotes against resting 
contra-side interest.
Updates to Rule 722
    The first two paragraphs of Rule 722 currently provide for the 
delay of re-introduction for certain complex functionality until 
specified dates, namely the legging functionality for Stock-Option 
Orders and functionality which permits concurrent complex order 
auctions, as further described in this Rule. The Exchange now proposes 
to update the rule references presently contained in these provisions 
to reflect the proposed renumbering and expansion of rules described 
above.\61\
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    \61\ Specifically: Current Rule 722(b)(3)(ii) (proposed Rule 
722(d)(3)), current Rule 722(b)(3)(iii) (proposed Rule 722(d)(1) and 
Supplementary Material .01 to Rule 722), current Supplementary 
Material .08 to Rule 716 (proposed Supplementary Material .08(a) and 
.08(b) to Rule 722), and current Supplementary Material .09 to Rule 
723 (proposed Supplementary Material .08(c) to Rule 722).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \62\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \63\ 
in particular, in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
for a free and open market and a national market system, and, in 
general, to protect investors and the public interest. The proposed 
rule change provides greater clarity regarding how Complex Orders are 
processed on the Exchange and expands upon various existing provisions 
within the Exchange's rules, including by adopting a rule that 
addresses the Exchange's process for opening complex strategies. The 
Exchange therefore believes that the proposed rule change will better 
enable members and investors to make informed decisions regarding the 
use of Complex Orders on the Exchange.
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    \62\ 15 U.S.C. 78f(b).
    \63\ 15 U.S.C. 78f(b)(5).
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    Specifically, with respect to the proposed changes to the 
definitions contained in Rule 722, the Exchange believes it is 
consistent with Section 6(b)(5) of the Act to more clearly identify 
Complex Options Strategies, Stock-Option Strategies and Stock-Complex 
Strategies (collectively complex strategies), including by indicating 
that the Exchange may limit the applicable number of legs accepted for 
each of these types of complex strategies, and to adopt separate 
definitions for orders in those strategies (as opposed to quotes) so 
that differences in processing are reflected more clearly in the 
Exchange's Rules. Similarly, the Exchange believes specifying which 
order types and designations contained in Rule 715 for regular orders 
on the Exchange apply to Complex Orders and specifying any differences 
with respect to the processing of Complex Orders within proposed Rule 
722(b) will bring clarity to the available Complex Order types. The 
added clarity will also assist

[[Page 31797]]

investors with determining which types of Complex Orders they can trade 
on the Exchange in order to fully realize their trading and hedging 
potential. With respect to Exposure Orders and Exposure Only Orders, 
the Exchange believes it is reasonable to provide an opportunity for 
investors to seek to have their orders exposed for an opportunity for 
price improvement. Furthermore, the Exchange believes that it is 
appropriate to give members the option to have such orders canceled if 
they are not eligible for exposure (i.e., for Exposure Only Orders) or 
have those orders entered on the complex order book (i.e., for Exposure 
Orders) based on their trading needs. With respect to legging 
orders,\64\ the Exchange believes that the proposed rule amendments 
will more clearly articulate that only Complex Options Order strategies 
can generate legging orders, and that a Reserve Complex Order will only 
generate a legging order from its displayed quantity to avoid exposing 
non-displayed size to market participants.
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    \64\ See Rule 715(k).
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    The Exchange also believes that specifying that bids and offers for 
Complex Options Strategies may be expressed in $0.01 increments,\65\ 
and that the options legs of complex strategies may be executed in 
$0.01 increments and not in ``any decimal price'' will remove any 
confusion regarding the applicable increment that may have existed with 
the current language that applied to all complex strategies. The rule 
will continue to state that Stock-Option Strategies and Stock-Complex 
Strategies are accepted in decimal increments, but the Exchange is 
clarifying the permitted increments will be determined by the Exchange 
with notice to its members.\66\ The Exchange believes that smaller 
increments are appropriate for complex strategies that have a stock 
component since the stock leg of such strategies are permitted to trade 
in finer increments than permitted in the options market. The proposed 
rule therefore gives the Exchange flexibility to adopt minimum 
increments that are appropriate for the trading of these strategies. 
Moreover, specifying the minimum trading increments for complex 
strategies in the Supplementary Material to Rule 710 will remove any 
potential confusion as to the application of Rule 710 to Complex 
Orders.
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    \65\ See Rule 722(c)(1).
    \66\ The stock leg may be executed in any decimal price 
permitted in the equity market.
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    The Exchange further believes that is it consistent with Section 
6(b)(5) of the Act to provide greater clarity to the priority of 
complex strategies with respect to bids and offers for the individual 
component series on the Exchange by re-formatting Rule 722(b)(2) 
(renumbered Rule 722(c)(2) under the proposal) and replacing certain 
references with defined terms. The Exchange also believes that it is 
consistent with the protection of investors and the public interest to 
add language in Proposed Rule 722(c)(2)(iv) that explains that complex 
strategies may be executed on the complex order book without giving 
priority to the non-displayed portion of Reserve Orders on the bids or 
offers for the individual legs of the complex strategy. As explained in 
the purpose section of this proposed rule change, complex strategies 
may be executed without giving priority to the non-displayed portion of 
a Reserve Order in the regular market as this non-displayed interest 
has no priority on the book, and is only available for execution after 
all displayed interest has been executed. The Exchange believes that 
the proposed changes to Rule 722(b)(3) (renumbered Rule 722(d) under 
the proposal) regarding the execution of complex strategies will also 
bring clarity to how complex strategies are executed. In particular, 
the proposal specifies that complex strategies are not executable 
unless the requirements of Rule 722(b)(2) (renumbered Rule 722(c)(2) 
under the proposal), regarding the protection of Priority Customer 
orders in the regular market, are satisfied, and more clearly 
identifies the sequence of complex strategy processing.
    The Exchange also believes that providing for an auction process 
whereby Complex Orders that improve upon the best price for the same 
options strategy on the complex order book benefits such Complex Orders 
by giving them an opportunity for price improvement, and that the 
exposure process specified in the proposed rule change is consistent 
with the requirements of Section 6(b)(5) of the Act.\67\ The proposed 
rule provides a fair opportunity for all members to participate in the 
execution of such Complex Orders according to the existing execution 
priority rules for Complex Orders. In particular, the Exchange notes 
that the proposed rule does not exclude any market participants from 
initiating or participating in the Complex Order auction and that all 
of the material terms of the order are included in the broadcast 
message. Additionally, the proposed rule assures that the exposure 
process will not interrupt the processing of Complex Orders by 
terminating the auction upon the receipt of certain Complex Orders for 
the same complex strategy. Specifically, the exposure period for a 
Complex Order will end immediately upon the receipt of a Complex Order 
or quote for the same options strategy on either side of the market 
that is marketable against the complex order book or bids and offers 
for the individual legs, which assures that incoming orders are not 
delayed by the exposure process. The exposure period for a Complex 
Order will also be terminated upon the receipt of a non-marketable 
Complex Order or quote for the same complex strategy on the same side 
of the market that would cause the price of the Complex Order to be 
outside of the best bid or offer for the same complex strategy on the 
complex order book, which protects the Complex Order being exposed from 
missing an execution opportunity. The Exchange further notes that 
investors are given the ability to designate whether or not their 
Complex Orders should be exposed for price improvement if eligible. 
Thus, the proposed rule specifies a process designed to balance the 
needs of investors that prefer an immediate execution and those that 
prefer an opportunity for price improvement.
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    \67\ See Supplementary Material .01 to Rule 722.
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    The Exchange believes that specifying in Supplementary Material .03 
to Rule 722 that market makers can enter quotes in classes selected by 
the Exchange will enhance clarity for members and investors as the 
Exchange has traditionally offered complex quoting functionality in 
only a limited number of symbols. Although complex quoting 
functionality has not yet been implemented on INET,\68\ the Exchange 
intends to continue this practice when complex quoting is re-enabled. 
Any classes selected by the Exchange for complex quoting are announced 
to the membership via Options Trader Alert, and market makers can enter 
Complex Orders in all classes regardless of whether quoting is 
permitted. In addition, the Exchange believes that it is appropriate to 
remove references to ``complex order strategies'' in the Market Maker 
Speed Bump rule (i.e., Supplementary Material .04 to Rule 722) as the 
proposed rules now contain a more specific definition of ``Complex 
Options Strategies.'' Due to the nature of the Market Maker Speed Bump, 
which is based exclusively on options contracts executed, this 
protection applies only to Complex Options Strategies and not to 
complex strategies that have a stock component--i.e.,

[[Page 31798]]

Stock-Option Strategies and Stock-Complex Strategies. The Exchange does 
not believe that the stock and options components of a Stock-Option 
Strategy or Stock-Complex Strategy can be combined in a way that 
provides a meaningful measure of risk exposure for members, and has 
therefore determined not to provide the Market Maker Speed Bump for 
these complex strategies.
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    \68\ See Securities Exchange Act Release No. 80613 (April 26, 
2017), 82 FR 22022 (May 11, 2017) (SR-ISE-2017-37).
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    The Exchange believes that specifying in Rule 722(c)(3) that the 
requirements of Rule 717(d) and (e) apply to the execution of Complex 
Orders will provide clarity to members. The Exchange further believes 
that moving the text related to the execution of Complex Orders in the 
various crossing mechanisms into Supplementary Material .08 to Rule 722 
will better enable members to understand how Complex Orders may be 
executed in compliance with the requirements of Rule 717(d) and (e), 
and that the proposed non-substantive changes to the existing text will 
provided greater detail and clarity regarding how Complex Orders are 
processed by the mechanisms. The Exchange also proposes to add 
additional detail to the Supplementary Material .08 to Rule 722 to more 
fully describe the operation of the Exchange's crossing mechanisms, 
including but not limited to the prices at which Complex Orders can be 
entered into the Complex Facilitation, Solicited Order, and Price 
Improvement Mechanisms. These proposed changes reflect the current 
operation of the Exchange's crossing mechanisms for Complex Orders, and 
are intended to provide additional details as are customary for rules 
today.
    As discussed in detail above, the Exchange also believes that the 
proposed rule changes related to complex Customer Cross Orders \69\ and 
complex QCCs--including Complex QCC Orders \70\ and Complex QCC with 
Stock Orders \71\ where the Exchange attempts to facilitate the 
execution of the stock component of the transaction to aid members in 
meeting their compliance obligations--is consistent with all applicable 
rules and with Section 6(b)(5) of the Act. Specifically, with respect 
to complex Customer Cross Orders which are not subject to the general 
principle of exposure, Priority Customer Orders on the Exchange for the 
individual series are protected to the same extent as when any other 
Complex Orders are executed on the complex order book. The Exchange 
believes that in this context, where two Priority Customer Complex 
Orders are being executed, it is reasonable and consistent with 
existing rules to apply the requirements of Rule 722(b)(2) and (b)(3) 
(renumbered Rule 722(c)(2) and 722(d) respectively). Indeed, it would 
be contrary to investor expectations if entering a complex Customer 
Cross Order reduced the opportunity for execution as compared to 
entering two separate Priority Customer Orders on the complex order 
book nearly simultaneously. In contrast, with respect to complex QCCs, 
which are not limited to Priority Customer Orders and were narrowly 
drawn to provide a limited exception to the general principle of 
exposure, the Exchange believes it is necessary and appropriate to 
restrict the execution if there are Priority Customer Orders on the 
Exchange in the individual options series at the same price or if the 
net price cannot be achieved at or within the NBBO for the individual 
series. The Exchange further believes that the proposed rule change to 
specify how complex Customer Cross Orders and complex QCCs are 
processed in Supplementary Material .08 to Rule 722 will provide 
clarity to members and investors.
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    \69\ See Supplementary Material .08(d) to Rule 722.
    \70\ See Supplementary Material .08(e) to Rule 722.
    \71\ See Supplementary Material .08(f) to Rule 722.
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    Furthermore, the Exchange believes that it is consistent with the 
protection of investors and the public interest to update its rules to 
clarify in Supplementary Material .07(a) to Rule 722 how the stock leg 
is considered when determining the best net price achievable from the 
ISE bids and offers for the individual legs. Although it is clear what 
this language means with respect to Complex Options Orders when the 
bids and offers for the individual legs refer to interest on the 
Exchange's regular order book, it is not currently clear with respect 
to the stock leg of Stock-Option Orders and Stock-Complex Orders. The 
stock leg of Stock-Option Orders and Stock-Complex Orders are permitted 
to trade through the national best bid or offer pursuant to the QCT 
exemption under Regulation NMS. To reinforce that these complex 
strategies benefit from the QCT Exemption, the Exchange proposes in 
Supplementary Material .13 to Rule 722 to provide that Members may only 
submit Complex Orders and quotes in Stock-Option Strategies and Stock-
Complex Strategies if such Complex Orders and quotes comply with the 
QCT exemption. Members submitting Complex Orders and quotes in Stock-
Option Strategies and Stock-Complex Strategies represent that they 
comply with the QCT exemption. The Exchange believes that explaining 
this in its rules will increase transparency around the operation of 
the Exchange to the benefit of members and other market participants 
that trade on the Exchange.
    With respect to Supplementary Material .07(d) to Rule 722, the 
Limit Order Price Protection is designed to ensure that orders are 
entered at prices that are reasonably related to the market. The 
Exchange therefore believes that it is appropriate to use the national 
best bid or offer price for this purpose, and is making it clear that 
the national best bid or offer price of the stock leg is used for this 
system protection.
    In addition, with respect to the other change to the Limit Order 
Price Protection rules, the Exchange believes that the proposed rule 
change will clarify how this system protection applies to Limit Complex 
Orders to sell. As explained above, the proposed rule text more 
accurately describes how the Exchange calculates the boundary prices 
used to determine when Limit Complex Orders to sell will be rejected.
    The Exchange also believes that codifying the Trade Value Allowance 
process in Supplementary Material .09 to Rule 722 will more accurately 
describe how complex strategies are executed. The Chicago Board Options 
Exchange (``CBOE'') also has similar rules for trading complex orders 
in open outcry.\72\ Due to the rounding process, an order or quote for 
a Stock-Option Strategy or Stock-Complex Strategy can trade through its 
net price by an insignificant amount relative to the value of the 
trade. Members generally prefer not to forgo an execution for their 
Stock Option Strategies and Stock-Complex Strategies when there is a 
Trade Value Allowance, as the amount of the rounding is miniscule 
compared to the value of the trade. As explained earlier, the Trade 
Value Allowance feature allows members to receive an expeditious 
execution, and trade the stock and options components of a Stock-Option 
Strategy or Stock-Complex Strategy in a moving market without 
introducing legging risk. Without this functionality members would be 
forced to resubmit their orders and potentially receive a much worse 
price or miss an execution. While the Exchange believes that the 
majority of members want their Stock-Option Strategies and Stock-
Complex Strategies to be handled this way, this functionality is 
optional, giving members the ability to require strict enforcement of 
the net price marked on the order; provided that any

[[Page 31799]]

Trade Value Allowance is permitted for auction orders pursuant to 
Supplementary Material .08 to Rule 722 that do not trade solely with 
their contra-side order in order to facilitate executions in these 
mechanisms. Permitting any amount of Trade Value Allowance in these 
limited circumstances ensures that an auction order that cannot trade 
with its contra-side order due to better priced Responses or interest 
on the Exchange's order books is not thereafter prohibited from 
executing due to an economically insignificant amount of trade value 
difference.
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    \72\ See Interpretations and Policies .01 to CBOE Rule 6.41, 
which requires members to resolve similar trade value differences in 
favor of the customer.
---------------------------------------------------------------------------

    The Exchange also believes that the codifying the Complex Opening 
Process, Complex Opening Price Determination, and Complex Uncrossing 
Process is designed to promote just and equitable principles of trade 
because it will increase transparency with respect to the Exchange's 
processes for opening and uncrossing complex strategies. The proposed 
rules describe the Exchange's current process for opening complex 
strategies, including provisions that describe eligible interest, the 
calculation of an appropriate Opening Price at which such interest will 
be executed, and allocation of contracts between market participants. 
The Complex Opening Price Determination is designed to provide an 
opportunity for members to trade complex strategies in a transparent 
opening rotation at a price that is within the NBBO prices of the 
individual legs prior to uncrossing the complex strategy in the Complex 
Uncrossing Process to allow additional interest to participate. The 
Exchange believes that codifying this process in the Exchange's 
rulebook will be helpful to members and other market participants that 
participate in the Complex Opening Price Determination. The proposed 
rules also detail the Exchange's process for uncrossing the complex 
order book when resting Complex Orders and quotes become executable 
during regular trading or as part of the Complex Opening Process. The 
Exchange believes that describing this process in its rules is helpful 
to members and other market participants as it adds additional 
information about how Complex Orders and quotes are executed when the 
complex order book becomes executable, for example, due to updated 
prices in market for the individual legs of the complex strategy. The 
Exchange believes that the Complex Opening Process, Complex Opening 
Price Determination, and Complex Uncrossing Process are each designed 
to perfect the mechanism of a free and open market and a national 
market system, and protect investors and the public interest.
    In addition, the Exchange further believes that the proposal 
removes impediments to and perfects the mechanism of a free and open 
market by ensuring that members, regulators and the public can more 
easily navigate the Exchange's rulebook and better understand the types 
of complex strategies available for trading on the Exchange and the 
manner in which such strategies are traded. The Exchange believes the 
proposed changes to the rules will benefit investors as they improve 
the readability of and further simplify the Exchange's rules regarding 
complex strategies. Similarly, the Exchange believes that the updates 
to the rule references in Rule 722 to reflect the proposed renumbering 
and expansion of rules will add further clarification to the Exchange's 
rulebook, and will also alleviate potential confusion as to the 
applicability of its rules, which will protect investors and the public 
interest.

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change 
provides greater clarity regarding how complex strategies are processed 
on the Exchange and expands upon various existing provisions within the 
Exchange's rules. The Exchange notes that it operates in a highly 
competitive market in which market participants can readily direct 
order flow to competing venues who offer similar functionality. The 
Exchange believes the proposed rule change will enhance competition 
among the various markets for Complex Order execution, potentially 
resulting in more active Complex Order trading on all exchanges. The 
Exchange notes that as to intramarket competition, the proposed rule 
change treats all Exchange participants equally, as fully described 
above.

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

    No written comments were either solicited or received.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2018-56 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-2018-56. 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

[[Page 31800]]

to make available publicly. All submissions should refer to File Number 
SR-ISE-2018-56, and should be submitted on or before July 30, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\73\
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    \73\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14544 Filed 7-6-18; 8:45 am]
 BILLING CODE P