Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend Its Rules Relating to Complex Orders, 51730-51744 [2018-22202]
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–84373; File No. SR–ISE–
2018–56]
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2018–73 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.
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All submissions should refer to File
Number SR–NYSEArca–2018–73. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2018–73, and
should be submitted on or before
November 2, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22208 Filed 10–11–18; 8:45 am]
BILLING CODE 8011–01–P
35 17
CFR 200.30–3(a)(12).
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Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend Its Rules
Relating to Complex Orders
October 5, 2018.
I. Introduction
On June 22, 2018, Nasdaq ISE, LLC
(‘‘ISE’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
provide additional detail to its rules
governing the trading of Complex
Orders. The proposed rule change was
published for comment in the Federal
Register on July 9, 2018.3 The
Commission received no comments
regarding the proposal. On August 10,
2018, pursuant to Section 19(b)(2) of the
Act,4 the Commission extended the time
for Commission action on the proposal
until October 5, 2018.5 ISE filed
Amendment No. 1 to the proposal on
October 1, 2018.6 The Commission is
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 83576
(July 2, 2018), 83 FR 31783 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 83818
(August 10, 2018), 83 FR 40800 (August 16, 2018).
6 Amendment No. 1 revises the proposal to: (1)
Discontinue Reserve Complex Orders; (2) indicate
in proposed ISE Rule 722(c)(2) that complex
strategies will not be executed at prices inferior to
the best net price achievable from the best net price
on ISE for the individual legs of the strategy; (3)
indicate in proposed ISE Rule 722(d)(2) that
complex strategies will execute against Priority
Customer interest on the single leg book at the same
price before executing against interest on the
Complex Order Book; (4) indicate in proposed ISE
Rule 722, Supplementary Material .01(b)(ii) that an
exposure period will end immediately when a
Complex Order for the same complex strategy on
either side of the market becomes marketable
against interest on the Complex Order Book or bids
and offers in the leg market; (5) revise proposed ISE
Rules 722, Supplementary Material .01(b)(iii) and
.08(c)(4)(vi) to describe the sequence of executions
when an incoming Complex Order causes the early
termination of a complex exposure auction and an
auction for one of the component legs of the
complex strategy; (6) revise proposed ISE Rule 722,
Supplementary Material .01(c) to indicate that at
the end of the exposure period, the interest against
which the exposed order executes includes bids
and offers on the Complex Order Book and for the
individual legs that arrived during the exposure
period; (7) revise proposed ISE Rule 722,
Supplementary Material .01(d) to indicate that an
exposure process will terminate immediately
without an execution if a trading halt is initiated
2 17
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publishing this notice to solicit
comment on Amendment No. 1 to the
proposed rule change from interested
persons and is approving the proposed
rule change, as modified by Amendment
No. 1, on an accelerated basis.
II. Description of the Proposed Rule
Change, as Modified by Amendment
No. 1
As described more fully in the Notice,
the proposal modifies ISE’s rules to
provide additional detail regarding the
trading of Complex Orders on ISE.
A. Definitions
The proposal revises ISE Rule 722(a)
to add new defined terms and modify
existing defined terms relating to
Complex Orders. The proposal defines
‘‘Complex Order’’ to include Complex
Options Orders, Stock-Option Orders,
and Stock-Complex Orders.7 Complex
Options Orders, Stock-Option Orders,
and Stock-Complex Orders refer to
orders for a Complex Options Strategy,8
in any series underlying the Complex Order being
exposed; (8) clarify the description of the execution
of Stock-Option and Stock Complex Orders in
proposed ISE Rule 722, Supplementary Material
.02; (9) revise proposed ISE Rule 722,
Supplementary Material .08(e) to indicate that
Complex QCC Orders may be entered in $0.01
increments; (10) delete provisions in ISE Rule 722
indicating that ISE will recommence the
functionality that permits concurrent auctions for
the same complex strategy by April 17, 2019, and
add proposed ISE Rule 722, Supplementary
Material .08(g) to indicate the auctions for the same
complex strategy will not operate concurrently; (11)
add proposed ISE Rule 722, Supplementary
Material .08(h) to indicate that an auction for a
complex strategy and an auction for a component
leg of the complex strategy may operate
concurrently; (12) indicate in proposed ISE Rule
722, Supplementary Material .13 to indicate that the
stock leg of a stock-option order must be marked
‘‘buy,’’ ‘‘sell,’’ ‘‘sell short,’’ or ‘‘sell short exempt,’’
in compliance with Regulation SHO under the Act;
(13) provide a new example illustrating customer
priority and the execution of a Complex Order; (14)
indicate that ISE does not manage and curtail its
functionality for executing a complex strategy
against leg market interest; (15) add references to
the NBBO and the underlying stock in proposed ISE
Rule 722, Supplementary Material .07(a); (16)
provide additional discussion of the rationale for
permitting a Trade Value Allowance of any amount
when a Complex Order executes in an auction and
does not trade solely with its contra-side order; and
(17) make several technical corrections to the
proposal. Amendment No. 1 is available at https://
www.sec.gov/comments/sr-ise-2018-56/srise2018564467038-175833.pdf.
7 See proposed ISE Rule 722(a)(5).
8 A Complex Options Strategy is the simultaneous
purchase and/or sale of two or more different
options series in the same underlying security, for
the same account, in a ratio that is equal to or
greater than one-to-three (.333) and less than or
equal to three-to-one (3.00) and for the purpose of
executing a particular investment strategy. Only
those Complex Options Strategies with no more
than the applicable number of legs, as determined
by the Exchange on a class-by-class basis, are
eligible for processing. See proposed ISE Rule
722(a)(1). ISE will determine the applicable number
of legs for Complex Options Strategies and Stock-
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Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
a Stock-Option Strategy,9 and a StockComplex Strategy,10 respectively.11 The
term ‘‘complex strategy’’ includes
Complex Options Strategies, StockOption Strategies, and Stock-Complex
Strategies.12 ISE believes that the
definitions will help to clarify whether
provisions in its rules apply only to
Complex Options Strategies, only to
Stock-Option Strategies, only to StockComplex Strategies, or to all three.13
The proposal deletes from ISE Rule 722
the definition of SSF-option order. ISE
states that single stock futures have not
gained sufficient popularity among
investors to support a SSF-option
product, and that ISE has never received
a SSF-option order.14
B. Order Types
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New ISE Rule 722(b) 15 identifies the
following order types and designations
that are available for Complex Orders:
Complex Strategies on a class-by-class basis. See
Notice, 83 FR at 31784. ISE notes that, by
definition, Stock-Option Strategies will have only
one option leg and one stock leg. See id. at 31784,
n.3.
9 A Stock-Option Strategy is the purchase or sale
of a stated number of units of an underlying stock
or a security convertible into the underlying stock
(‘‘convertible security’’) coupled with the purchase
or sale of options contract(s) on the opposite side
of the market representing either (A) the same
number of units of the underlying stock or
convertible security, or (B) the number of units of
the underlying stock necessary to create a delta
neutral position, but in no case in a ratio greater
than eight-to-one (8.00), where the ratio represents
the total number of units of the underlying stock
or convertible security in the option leg to the total
number of units of the underlying stock or
convertible security in the stock leg. See proposed
Rule 722(a)(2).
10 A Stock-Complex Strategy is the purchase or
sale of a stated number of units of an underlying
stock or a security convertible into the underlying
stock (‘‘convertible security’’) coupled with the
purchase or sale of a Complex Options Strategy on
the opposite side of the market representing either
(A) the same number of units of the underlying
stock or convertible security, or (B) the number of
units of the underlying stock necessary to create a
delta neutral position, but in no case in a ratio
greater than eight-to-one (8.00), where the ratio
represents the total number of units of the
underlying stock or convertible security in the
option legs to the total number of units of the
underlying stock or convertible security in the stock
leg. Only those Stock-Complex Strategies with no
more than the applicable number of legs, as
determined by the Exchange on a class-by-class
basis, are eligible for processing. See proposed ISE
Rule 722(a)(3).
11 See proposed ISE Rule 722(a)(5).
12 See proposed ISE Rule 722(a)(4).
13 See Notice, 83 FR at 31784.
14 See id. ISE also proposes to delete current ISE
Rule 722, Supplementary Material .01, which
references SSF-option orders and includes outdated
language relating to Stock-Option and StockComplex Orders. ISE will file a proposed rule
change with the Commission if it decides to offer
SSF-option orders in the future. See id.
15 The proposal renumbers current ISE Rule
722(b) as ISE Rule 722(c).
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Market Complex Order; 16 Limit
Complex Order; 17 All-or-None Complex
Order; 18 Attributable Complex Order; 19
Customer Cross Complex Order; 20
Qualified Contingent Cross Complex
Order; 21 Day Complex Order; 22 Fill-orKill Complex Order; 23 Immediate-orCancel Complex Order; 24 Opening Only
Complex Order; 25 Good-Till-Date
Complex Order; 26 Good-Till-Cancel
Complex Order; 27 Exposure Complex
Order; 28 Exposure Only Complex
16 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-orkill or immediate-or-cancel. See proposed ISE Rule
722(b)(1).
17 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. See proposed
ISE Rule 722(b)(2).
18 A Complex Order may be designated as an Allor-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. See
proposed ISE Rule 722(b)(3).
19 A Market or Limit Complex Order may be
designated as an Attributable Order as provided in
Rule 715(h). See proposed ISE Rule 722(b)(5).
20 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. See proposed ISE
Rule 722(b)(6).
21 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. See
proposed ISE Rule 722(b)(7).
22 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. See proposed ISE Rule
722(b)(8).
23 A Complex Order may be designated as a Fillor-Kill Order that is to be executed in its entirety
as soon as it is received and, if not so executed,
cancelled. See proposed ISE Rule 722(b)(9).
24 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. See proposed ISE Rule
722(b)(10).
25 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. See
proposed ISE Rule 722(b)(11).
26 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. See
proposed ISE Rule 722(b)(12).
27 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.
See proposed ISE Rule 722(b)(13).
28 An Exposure Complex Order is an order that
will be exposed upon entry as provided in
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51731
Order; 29 and Complex QCC with Stock
Order.30 The order types and
designations for Complex Orders in
proposed ISE Rule 722(b) are based on
order types and designations currently
provided in ISE Rule 715 for regular
orders.31 The proposal also amends ISE
Rule 715(k) to indicate that legging
orders are generated only for Complex
Options Orders.
ISE originally proposed to include
Reserve Complex Orders in the order
types available for Complex Orders.32 In
Amendment No. 1, ISE proposes to
discontinue offering Reserve Complex
Orders in the fourth quarter of 2018.33
Supplementary Material .01 to 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. See proposed ISE Rule 722(b)(14).
29 An Exposure Only Complex Order is an order
that will be exposed upon entry as provided in
Supplementary Material .01 to 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. See proposed ISE Rule 722(b)(15).
30 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. See
proposed ISE Rule 722(b)(16).
31 See Notice, 83 FR at 31785.
32 Proposed ISE Rule 722(b)(4) provided that: 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. Thereafter, the non-displayed
portion of any Reserve Complex Order will trade in
accordance with Rule 722(d). (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 Rule 722.
33 See Amendment No. 1. In connection with this
change, the proposal deletes references to Reserve
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ISE will continue to offer Reserve
Orders in the single leg order book.34
ISE states that it does not receive a high
volume of Reserve Complex Orders and
believes that it is not necessary to offer
Reserve Complex Orders because there
is no great demand for this order type.35
ISE notes that it offers a variety of order
types to its market participants and does
not believe that discontinuing Reserve
Complex Orders will disadvantage
market participants when they submit
Complex Orders.36 In addition, ISE
states that other options exchanges do
not offer Reserve Complex Orders.37 ISE
will issue an Options Trader Alert to
members indicating the date when
Reserve Complex Orders will no longer
be offered.38
C. Trading of Complex Orders and
Quotes
Proposed ISE Rule 722(c) (formerly
ISE Rule 722(b)) states that complex
strategies will be subject to all other ISE
rules that pertain to orders and quotes
generally, except as otherwise provided
in ISE Rule 722.
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1. Minimum Increments
Bids and offers for Complex Options
Strategies may be expressed in $0.01
increments, and the option(s) legs of
Complex Options Strategies, StockOption Strategies, and Stock-Complex
Strategies may be executed in $0.01
increments, regardless of the minimum
increments otherwise applicable to the
individual options legs of the order.39
Bids and offers for Stock-Option
Strategies or Stock-Complex Strategies
may be expressed in any decimal price
determined by ISE, and the stock leg of
a Stock-Option Strategy or StockComplex Strategy may be executed in
any decimal price permitted in the
equity market.40 ISE states that smaller
minimum increments are appropriate
for Complex Orders that contain a stock
component because the stock
component may trade at finer decimal
increments permitted by the equity
market.41 ISE notes that even with the
Complex Orders in the following proposed rules:
Proposed ISE Rule 722(b)(4); proposed ISE Rule
722(c)(2)(iv); proposed ISE Rule 722,
Supplementary Material .11(vi); and proposed ISE
Rule 722, Supplementary Material .12(b).
34 See id.
35 See id.
36 See id.
37 See id.
38 ISE states that it will notify members in
October of the anticipated discontinuation of
Reserve Complex Orders in 2018. See id.
39 See proposed ISE Rule 722(c)(1).
40 See id. ISE will communicate the minimum
increment for Stock-Option Strategies and StockComplex Strategies to members via Options Trader
Alert. See Notice, 83 FR at 31786, n. 10.
41 See Notice, 83 FR at 31786.
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flexibility provided in proposed ISE
Rule 722(c)(1), the individual options
and stock legs of a Complex Order must
trade in increments allowed by the
Commission in the options and equities
markets.42
2. Complex Order Priority
The proposal revises the Complex
Order priority provisions in current ISE
Rule 722(b)(2) (renumbered ISE Rule
722(c)(2)) to make several nonsubstantive clarifying changes,
including re-formatting the rule into
three paragraphs and incorporating new
defined terms into the rule text.43 As
described more fully in the Notice,
under proposed ISE Rule 722(c)(2), the
legs of a complex strategy with multiple
options legs (i.e., Complex Options
Strategies and Stock-Complex Strategies
with more than one options component)
may be executed at the same price as
bids and offers on ISE for the individual
series so long as there are no Priority
Customer Orders on ISE at those
prices.44 If one options leg of such a
strategy improves upon the best price
available on the Exchange, then the
other leg(s) of the complex strategy may
trade at the same price as Priority
Customer interest.45 The option leg of a
Stock-Option Strategy may be executed
at the same price as bids and offers on
ISE for the individual series established
by Professional Orders and market
maker quotes, but not at the same price
as Priority Customer Orders for the
individual series.46 Proposed ISE Rule
722(c)(2) also states that complex
42 See id. The proposal makes corresponding
changes to ISE Rule 722, Supplementary Material
.07(b). ISE Rule 722, Supplementary Material .07(b),
as proposed to be amended, states that the System
will reject orders and quotes for a complex strategy
where all 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). ISE notes that the revised rule reflects
that the stock leg(s) of a Stock-Option or StockComplex Strategy may be entered in any decimal
price determined by ISE. 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. See
Notice, 83 FR at 31786. The proposal also amends
ISE Rule 710 to reference the quoting and trading
increments for Complex Strategies specified in
proposed ISE Rule 722(c)(1).
43 See Notice, 83 FR at 31786–7.
44 See Notice, 83 FR at 31786. Pursuant to ISE
Rules 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). See id. at 3178 6,
n. 12.
45 See Notice, 83 FR at 31786 and proposed ISE
Rule 722(c)(2).
46 See id. at 31786–7 and proposed ISE Rule
722(c)(2).
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strategies will not be executed at prices
inferior to the best net price achievable
from the best ISE bids and offers for the
individual legs.47
3. Complex Order Executions
The proposal renumbers ISE Rule
722(b)(3) as ISE Rule 722(d) and, for
clarity, states 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
proposed ISE Rule 722(c)(2).48 In
addition, proposed ISE Rule 722(d)
more clearly reflects the sequence in
which complex strategies are processed.
First, eligible Complex Orders are
exposed for price improvement for a
period of up to one second as provided
in ISE Rule 722, Supplementary
Material .01.49 Second, Complex Orders
are matched against other interest in the
Complex Order Book, if possible.50
However, executable Complex Orders
will execute against Priority Customer
interest on the single leg book at the
same price before executing against the
Complex Order Book.51 Thus, Priority
Customer Orders on the single leg order
book will retain priority and will
execute prior to any other Complex
Order or non-Priority Customer single
leg interest at the same price.52 Third,
Complex Orders are executed against
bids and offers on ISE for the individual
series, if possible.53
The proposal also adds new ISE Rule
722(d)(4), which indicates that, similar
to the treatment of orders in the regular
market, complex strategies that are not
executable may rest on the Complex
Order Book until they become
executable.54 The proposal retains,
without substantive changes, provisions
in current ISE Rule 722(b)(3) that
specify the manner in which bids and
offers at the same price on the Complex
Order Book may be allocated and
certain restrictions on Complex Order
executions against leg market interest.55
4. Complex Order Exposure Process
Current ISE Rule 722(b)(3)(iii)
provides that Complex Orders marked
for price improvement Complex orders
will be exposed on the Complex Order
Book for a period of up to one second
before being automatically executed
against pre-existing interest to provide
47 See
Amendment No. 1.
Amendment No. 1.
49 See proposed ISE Rule 722(d)(1).
50 See proposed ISE Rule 722(d)(2).
51 See id. and Amendment No. 1.
52 See id.
53 See proposed ISE Rule 722(d)(2).
54 See Notice, 83 FR at 31787.
55 See proposed ISE Rules 722(d)(2) and (3).
48 See
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an opportunity for market participants
to enter contra-side Complex Orders
that provide price improvement. At the
end of the display period, contra-side
orders are executed in price priority and
in time priority at the same price. The
proposal replaces this provision with
proposed ISE Rule 722, Supplementary
Material .01, which describes an auction
process for Complex Orders. Under
proposed ISE Rule 722, Supplementary
Material .01, a member may designate
for exposure a Complex Order that
improves upon the best price for the
same complex strategy on the Complex
Order Book.56 Market participants may
enter Exposure Complex Orders or
Exposure Only Complex Orders.57 Upon
entry of an eligible Complex Order, ISE
will send a broadcast message that
includes net price or at market, size, and
side, and Members will be able to enter
Responses with the prices and sizes at
which they are willing to participate in
the execution of the Complex Order.58
During the exposure period, ISE will
broadcast the best Response price and
the aggregate size of Responses available
at that price.59 The exposure period will
end immediately upon receipt of certain
unrelated Complex Orders for the same
complex strategy,60 or if a trading halt
is initiated in any series underlying the
Complex Order during the exposure
period.61 At the end of the exposure
period, if the Complex Order still
improves upon the best price for the
complex strategy on the same side of the
56 See proposed ISE Rule 722, Supplementary
Material .01(a). Incoming orders will not be eligible
to be exposed if there are market orders on the
Complex Order Book on the same side of the market
for the same complex strategy. See id.
57 See notes 28 and 29, supra.
58 See proposed ISE Rule 722, Supplementary
Material .01(b). Responses are only executable
against the Complex Order with respect to which
they are entered, 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. At the conclusion of
the exposure period, any unexecuted balance of a
Response will be cancelled automatically. See
proposed ISE Rule 722, Supplementary Material
.01(b)(i).
59 See id.
60 The exposure period for a Complex Order will
end immediately: (A) Upon 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; (B) 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
exposed Complex Order to be outside of the best
bid or offer for the same complex strategy on the
Complex Order Book; or (C) when a resting
Complex Order for the same complex strategy
becomes marketable against interest on the
Complex Order Book or bids and offers for
individual legs of the same complex strategy.
61 See proposed ISE Rule 722, Supplementary
Material. 01(d).
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market, the Complex Order will be
automatically executed to the greatest
extent possible pursuant to proposed
ISE Rule 722(d)(2)–(3), taking into
consideration: (i) Bids and offers on the
Complex Order Book, including interest
received during the exposure period, (ii)
bids and offers on ISE for the individual
options series, including interest
received during the exposure period,
and (iii) Responses received during the
exposure period, provided that when
allocating pursuant to proposed ISE
Rule 722(d)(2)(iii), Responses are
allocated pro-rata based on size.62 Any
unexecuted balance will be placed on
the Complex Order Book (or cancelled
in the case of an Exposure Only
Complex Order).63
5. Trade Value Allowance
The Trade Value Allowance provided
in proposed ISE Rule 722,
Supplementary Material .09 is a
functionality that allows Stock-Option
Strategies and Stock-Complex Strategies
to trade outside of their expected
notional trade value by a specified
amount (the ‘‘Trade Value
Allowance’’).64 ISE states that after
calculating the appropriate options
match price for a Stock-Option or StockComplex Order expressed in a valid one
cent increment, its trading system
calculates the corresponding stock
match price rounded to the increment
supported by the equity market.65 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.66 ISE states that
its members generally prefer not to forgo
an execution for their Stock-Option
Strategies and Stock Complex Strategies
when there is a Trade Value Allowance
because the amount of the rounding is
miniscule compared to the total value of
the trade.67 Members may opt out of the
Trade Value Allowance if they do not
want their orders to be executed when
there is a Trade Value Allowance of any
amount.68 In those cases, ISE will
strictly enforce the net price marked on
the order.69
The amount of Trade Value
Allowance permitted may be
determined by the member, or a default
62 See proposed ISE Rule 722, Supplementary
Material. 01(c) and Amendment No. 1.
63 See id.
64 The Trade Value Allowance is the percentage
difference between the expected notional value of
a trade and the actual notional value of the trade.
See proposed ISE Rule 722, Supplementary
Material .09.
65 See Notice, 83 FR at 31793.
66 See id.
67 See id.
68 See id.
69 See id.
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51733
value determined by ISE and announced
to members.70 However, any amount of
Trade Value Allowance is permitted for
an order executed in an auction
pursuant to ISE Rule 722,
Supplementary Material .08 that does
not trade solely with its contra-side
order.71 ISE notes that its auction
mechanisms provide an opportunity for
market participants to respond with
better priced interest that could execute
against an Agency Order.72 In the
interest of maintaining a fair and
competitive market, ISE believes that it
is appropriate to ensure that crosses
entered into an auction mechanism that
are broken up due to better priced
interest are actually executed against
such better priced interest, and are not
restricted from trading to due to the
Trade Value Allowance settings of one
or more members.73 Otherwise, an
Agency Order in an auction mechanism
could be forced to forgo a guaranteed
execution with the negotiated contraside party without the benefit of trading
at a better price with other market
participants.74 Because the Trade Value
Allowance is the result of a rounding
error, ISE believes that any amount of
error allowed in these circumstances
would be miniscule compared to the
value of the trade.75
D. Complex Opening and Re-Opening
Process and Complex Uncrossing
Process
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 proposed ISE Rule 722,
Supplementary Material .11, and StockOption Strategies and Stock-Complex
Strategies will be opened pursuant to
the Complex Uncrossing Process
described in proposed ISE Rule 722,
Supplementary Material .12(b).76
1. Complex Opening and Re-Opening
Process
ISE opens Complex Options Strategies
in 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
70 See proposed ISE Rule 722, Supplementary
Material .09.
71 See id.
72 See Amendment No. 1.
73 See id.
74 See id.
75 See id.
76 See proposed ISE Rule 722, Supplementary
Material .10. The Complex Opening Process is
described in greater detail in the Notice, 83 FR at
31793–5.
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are constrained by the NBBO for the
individual legs.77 Bids and offers for the
individual legs of a complex strategy are
not eligible to participate in the
Complex Opening Price Determination,
although they may participate in the
Complex Uncrossing Process.78 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 ISE
Rule 722, Supplementary Material
.12(b).79
If the best bid for a complex strategy
locks or crosses the best offer, the
system will calculate the Potential
Opening Price by identifying the
price(s) at which the maximum number
of contracts can trade (‘‘maximum
quantity criterion’’) taking into
consideration all eligible interest.80 The
proposal also provides a method for
determining the Potential Opening Price
when two or more Potential Opening
Prices would satisfy the maximum
quantity criterion.81 If the Potential
77 See Notice, 83 FR at 31793. The system
calculates Boundary Prices at or within which
Complex Orders and quotes may be executed
during the Complex Opening Price Determination
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
proposed ISE Rule 722(c)(2). See proposed ISE Rule
722, Supplementary Material .11(d)(i).
78 See proposed ISE Rule 722, Supplementary
Material .11(b) and (d)(vi). ISE states that the
Complex Opening Price Determination considers
only interest on the Complex Order Book because
the process is designed to promote price discovery
for the complex strategy. See Notice, 83 FR at
31794.
79 See proposed ISE Rule 722, Supplementary
Material .11(c).
80 See proposed ISE Rule 722, Supplementary
Material .11(d)(ii). Eligible interest during the
Complex Opening Price Determination includes
Complex Orders and quotes on the Complex Order
Book. See proposed ISE Rule 722, Supplementary
Material .11(b).
81 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 of Complex Orders and
quotes to be traded 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 of Complex Orders and quotes to be
traded 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
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Opening Price is at or within the
Boundary Prices, the Potential Opening
Price becomes the Opening Price.82 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.83 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 proposed
Supplementary Material .12(b) to Rule
722.84
When an execution is possible during
the Complex Opening Price
Determination, the system gives priority
first to Market Complex Orders, then to
resting Limit Complex Orders and
quotes on the Complex Order Book,
with priority given to better priced
interest.85 The allocation provisions of
proposed ISE Rule 722(d)(2) apply with
respect to Complex Orders and quotes at
the same price.86
If the Complex Order Book remains
locked or crossed following the process
described in proposed ISE Rule 722,
Supplementary Material .12(d)(i)–(v),
the system will process any remaining
Complex Orders and quotes, including
Opening Only Complex Orders, in
accordance with the Complex
Uncrossing Process described in
proposed ISE Rule 722, Supplementary
Material .12(b).87 ISE believes that it is
appropriate to open with a Complex
Uncrossing Process when the Complex
Order Book is not executable in the
Complex Opening Price Determination
because the Complex Uncrossing
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. See
proposed ISE Rule 722, Supplementary Material
.11(d)(iii).
82 See proposed ISE Rule 722, Supplementary
Material .12(d)(iv).
83 See id.
84 See id.
85 See proposed ISE Rule 722, Supplementary
Material .12(d)(v).
86 See id.
87 See proposed ISE Rule 722, Supplementary
Material .12(d)(vi).
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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.88 ISE notes that 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.89 In addition,
ISE notes that trades during the
Complex Uncrossing Process are not
constrained by the NBBO for the
individual legs and can instead trade at
prices permitted under ISE Rule 722,
Supplementary Material .07, which
allows the legs of a complex strategy to
trade through the NBBO for the
individual legs by a configurable
amount.90 ISE therefore continues the
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.91
2. Complex Uncrossing Process
The Complex Uncrossing Process is
used during the Complex Opening
Process, as described above, and during
regular trading when a resting Complex
Order or quote that is locked or crossed
with other interest becomes
executable.92 During the Complex
Uncrossing Process, ISE’s system
identifies the oldest Complex Order or
quote among the best priced bids and
offers on the Complex Order Book and
matches that order or quote pursuant to
proposed ISE 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.93 This process is repeated until
the Complex Order Book is no longer
executable.94
ISE states that the Complex
Uncrossing Process provides an efficient
88 See
Notice, 83 FR at 31794.
id.
90 See id.
91 See id.
92 See id.
93 See proposed ISE Rule 722, Supplementary
Material .12(b)(i) and (ii). A Complex Order entered
with an instruction that it must be executed at a
price that is equal to or better than the NBBO is
considered based on its actual limit or market price
and not the price of the NBBO for the component
legs. See proposed ISE Rule 722, Supplementary
Material .12(b)(i).
94 See proposed ISE Rule 722, Supplementary
Material .12(b)(iii).
89 See
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and fair way of determining how to
execute Complex Orders and quotes
when interest that is locked or crossed
becomes executable during regular
trading.95 ISE notes that 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.96 When market conditions
change (e.g., the leg markets update) 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.97 ISE
believes that describing this process in
its rules is helpful to members and other
market participants because it provides
additional information about how
Complex Orders and quotes are
executed when the Complex Order Book
becomes executable.98
E. Internalization and Crossing
For clarity, ISE proposes to amend ISE
Rule 722 to specify that the
requirements of ISE Rules 722(d) and (e)
apply to Complex Orders.99 Proposed
ISE Rule 722(c)(3) states that Complex
Orders represented as agent may be
executed (i) as principal as provided in
ISE Rule 717(d), or (ii) against orders
solicited from Members and nonmember broker-dealers as provided in
ISE Rule 717(e). The rule further
provides that exposure requirements of
ISE Rules 717(d) or (e) must be met on
the Complex Order Book unless the
order is executed in one of the
mechanisms described in proposed
Supplementary Material .08 to ISE Rule
722.100 ISE notes that it has consistently
95 See
Notice, 83 FR at 31796.
id.
97 See id. at 31796 and 31799.
98 See id. at 31799.
99 ISE Rule 717(d) states that Electronic Access
Members (‘‘EAMs’’) may not execute as principal
orders they represent as agent unless (i) agency
orders are first exposed on the Exchange for at least
one (1) second, (ii) the EAM has been bidding or
offering on the Exchange for at least one (1) second
prior to receiving an agency order that is executable
against such bid or offer, or (iii) the Member utilizes
the Facilitation Mechanism pursuant to Rule
716(d), or (iv) the Member utilizes the Price
Improvement Mechanism for Crossing Transactions
pursuant to Rule 723. ISE 717(e) states that EAMs
may not execute orders they represent as agent on
the Exchange against orders solicited from Members
and non-member broker-dealers to transact with
such orders unless (i) the unsolicited order is first
exposed on the Exchange for at least one (1) second,
(ii) the Member utilizes the Solicited Order
Mechanism pursuant to Rule 716(e), (iii) the
Member utilizes the Facilitation Mechanism
pursuant to Rule 716(d) or (iv) the Member utilizes
the Price Improvement Mechanism for Crossing
Transactions pursuant to Rule 723.
100 See proposed ISE Rule 722(c)(3).
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96 See
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applied the exposure requirement in ISE
Rules 717(d) and (e) to the execution of
Complex Orders on the Complex Order
Book, and that it has provided for the
execution of Complex Orders using the
Facilitation Mechanism, the Solicited
Order Mechanism, and the Price
Improvement Mechanism (‘‘PIM’’).101
The proposal replaces current ISE Rules
716, Supplementary Material .08
(describing the execution of Complex
Orders in the Facilitation and Solicited
Order Mechanisms) and 723,
Supplementary Material .09 (describing
the execution of Complex Orders in the
PIM), with proposed ISE Rules 722,
Supplementary Material .08(a), (b), and
(c), which describe the execution of
Complex Orders in these mechanisms in
greater detail.
1. Complex Facilitation Mechanism and
Complex Solicited Order Mechanism
Proposed ISE Rule 722,
Supplementary Material .08(a) provides
that an Electronic Access Member
(‘‘EAM’’) may use the Complex
Facilitation Mechanism to facilitate a
block-size Complex Order it represents
as agent, and/or a transaction in which
the EAM has solicited interest to
execute against a block-size Complex
Order it represents as agent. Each
options leg of a Complex Order entered
into the Complex Facilitation
Mechanism must meet the minimum
contract size requirement in ISE Rule
716(d) (i.e., at least 50 contracts).102 An
EAM must be willing to execute the
entire size of Complex Orders entered
into the Complex Facilitation
Mechanism.103
The Complex Solicited Order
Mechanism allows an EAM to attempt
to execute a Complex Order it
represents as agent (the ‘‘Agency
Complex Order’’) against contra orders
that it solicited according to ISE Rule
716(e). Each Complex Order entered
into the Solicited Order Mechanism
must be designated as all-or-none, and
each options leg must meet the
minimum contract size requirement
contained in ISE Rule 716(e) (i.e., 500 or
more contracts).104 The Complex
101 See
Notice, 83 FR at 31789.
proposed ISE Rule 722, Supplementary
Material .08(a).
103 See id.
104 See proposed ISE Rule 722, Supplementary
Material .08(b). Prior to entering Agency Orders into
the Complex Solicited Order Mechanism on behalf
of a customer, EAMs must deliver to the customer
a written notification informing the customer that
its order may be executed using Nasdaq ISE’s
Solicited Order Mechanism. Such written
notification must disclose the terms and conditions
contained in ISE Rule 722, Supplementary Material
.08(b) and must be in a form approved by the
Exchange. See proposed ISE Rule 722,
Supplementary Material .08(5).
102 See
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51735
Facilitation Mechanism and the
Complex Solicited Order Mechanism
operate in a similar manner, as
described below.
Complex Orders must be entered into
the Complex Facilitation Mechanism or
into the Complex Solicited Order
Mechanism at a price that is (A) equal
to or better than the best bid or offer on
the Complex Order Book on the same
side of the market as the Agency Order;
and (B) equal to or better than the best
net price achievable from the best ISE
bids and offers for the individual legs on
the same side of the market as the
Agency Order; provided that, if there is
a Priority Customer order on the best
bid or offer for any leg, the order must
be entered at an improved price
consistent with ISE Rule 722(c)(2).105 A
Complex Order that does not meet these
requirements is not eligible for the
Complex Facilitation Mechanism or the
Complex Solicited Order Mechanism
and will be rejected.106
Upon the entry of a Complex Order
into the Complex Facilitation
Mechanism or the Complex Solicited
Order Mechanism, ISE will send a
broadcast message that includes the net
price, side, and size of the Agency
Complex Order, and Members will have
an opportunity to enter Responses with
the net prices and sizes at which they
want to participate in the facilitation of
the Agency Complex Order.107 The time
given to enter Responses, which ISE
will designate via Options Trader Alert,
will be no less than 100 milliseconds
and no more than one second.108
Responses are only executable against
the Complex Order with respect to
which they are entered, and will only be
105 See proposed ISE Rule 722, Supplementary
Material .08(a)(1)(i) and (ii) and .08(b).
106 See proposed ISE Rules 722, Supplementary
Material .08(a)(1) and .08(b)(1). In addition, a
Complex Order entered into the Complex
Facilitation Mechanism or Complex Solicited Order
Mechanism will be rejected if any component of the
Complex Order has not opened for trading, or if
there is a trading halt in any series underlying the
Complex Order. If a trading halt is initiated after the
order is entered into the Complex Facilitation
Mechanism, the auction will be automatically
terminated without execution. See proposed ISE
Rules 722, Supplementary Material .08(a)(1) and
.08(b)(1). The priority rules in proposed ISE Rule
722(c)(2) also may prevent the execution of a
Complex Order entered into the Facilitation
Mechanism, in which case the transaction will be
cancelled. See proposed ISE Rule 722,
Supplementary Material .08(a)(5)(iv). Similarly, an
Agency Complex Order entered into the Solicited
Order Mechanism may execute against the solicited
Complex Order only if, among other things, there
are no Priority Customer Complex Orders or
Responses that are priced equal to the proposed
execution price. See proposed ISE Rule 722,
Supplementary Material .08(b)(4)(i)(D).
107 See proposed ISE Rules 722, Supplementary
Material .08(a)(3) and .08(b)(3).
108 See id.
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considered up to the size of the
Complex Order to be facilitated.109
Responses must be entered in the
increments provided in proposed ISE
Rule 722(c)(1) at the facilitation price or
the proposed net execution price, as
applicable, or at a price that is at least
one cent better for the Agency Order.110
Responses will not be visible to other
auction participants and can be
modified or deleted before the exposure
period has ended.111
At the end of the period given for the
entry of Responses in the Complex
Facilitation Mechanism, a facilitation
order will be automatically executed as
provided in the proposed rule.112 The
proposal also provides a guaranteed
allocation for the facilitating EAM,113
and allows the facilitating EAM to elect
to automatically match the net price and
size of Complex Orders, Responses, and
quotes received during the exposure
period up to a specified limit price or
without specifying a limit price.114
109 See proposed ISE Rules 722, Supplementary
Material .08(a)(4) and .08(b)(3).
110 See id.
111 See proposed ISE Rules 722, Supplementary
Material .08(a)(5) and .08(b)(4).
112 See proposed ISE Rule 722, Supplementary
Material .08(a)(5). If an improved net price for the
Complex Order being executed can be achieved
from Complex Orders, Responses, and quotes on the
Complex Order Book and, for Complex Options
Orders, the ISE best bids and offers on the
individual legs, the facilitation order will be
executed against such interest. See proposed ISE
Rule 722, Supplementary Material .08(a)(5)(iv). If
there is insufficient size to execute the entire
facilitation order at a better net price, Priority
Customer Complex Orders and Responses to buy
(sell) at the time the facilitation order is executed
that are priced higher (lower) than the facilitation
price will be executed at the facilitation price.
Professional Complex Orders and Responses, and
quotes to buy (sell) at the time the facilitation order
is executed that are priced higher (lower) than the
facilitation price will be executed at their stated
price, thereby providing the Complex Order being
facilitated a better price for the number of contracts
associated with such higher bids (lower offers). See
proposed ISE Rule 722, Supplementary Material
.08(a)(5)(i).
113 Proposed ISE Rule 722, Supplementary
Material .08(a)(5)(ii) provides that the facilitating
EAM will execute at least forty percent (40%) (or
such lower percentage requested by the member) of
the original size of the facilitation order, but only
after better-priced Responses, Complex Orders and
quotes, as well as Priority Customer Complex
Orders and Responses at the facilitation price, are
executed in full. Thereafter, Professional Complex
Orders and Responses, and quotes at the facilitation
price will participate in the execution of the
facilitation order based upon the percentage of the
total number of contracts available at the facilitation
price that is represented by the size of the
Professional Complex Order or Response, or quote.
114 Proposed ISE Rule 722, Supplementary
Material .08(a)(5)(iii) provides that a facilitating
EAM may elect to automatically match the net price
and size of Complex Orders, Responses and quotes
received during the exposure period up to a
specified limit price or without specifying a limit
price. This election will also automatically match
the net price available from the ISE best bids and
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At the end of the period given for the
entry of Responses in the Solicited
Order Mechanism, an Agency Complex
Order will be automatically executed in
full pursuant to proposed ISE Rule 722,
Supplementary Material .08(b)(4)(i)–(iv),
or cancelled.115 The Agency Complex
Order will execute against the Solicited
Complex Order or against other interest
depending on whether there is
insufficient size to execute the Agency
Order at an improved net price(s),116
sufficient Priority Customer interest to
execute the entire Agency Complex
order at the proposed net execution
price,117 or sufficient size to execute the
offers on the individual legs for the full size of the
order; provided that with notice to members the
Exchange may determine whether to offer this
option only for Complex Options Orders, StockOption Orders, and/or Stock Complex Orders. If a
member elects to auto-match, the facilitating EAM
will be allocated its full size at each price point, or
at each price point within its limit price if a limit
is specified, until a price point is reached where the
balance of the order can be fully executed. At such
price point, the facilitating EAM will be allocated
at least 40% (or such lower percentage requested by
the member) of the original size of the facilitation
order, but only after Priority Customer Orders and
Responses at such price point. Thereafter,
Professional Complex Orders and Responses, and
quotes at the price point will participate in the
execution of the facilitation order based upon the
percentage of the total number of contracts available
at the facilitation price that is represented by the
size of the Professional Complex Order or Response,
or quote. An election to automatically match better
prices cannot be cancelled or altered during the
exposure period.
115 See proposed ISE Rule 722, Supplementary
Material .08(b)(4).
116 If at the time of execution there is insufficient
size to execute the entire Agency Complex Order at
an improved net price(s) pursuant to ISE Rule 722,
Supplementary Material .08(b)(4)(iii), the Agency
Complex Order will be executed against the
solicited Complex Order at the proposed execution
net price so long as, at the time of execution: (A)
The execution net price is equal to or better than
the best net price achievable from the best ISE bids
and offers for the individual legs, (B) the Complex
Order can be executed in accordance with ISE Rule
722(c)(2) with respect to the individual legs, (C) the
execution net price is equal to or better than the
best bid or offer on the Complex Order Book, and
(D) there are no Priority Customer Complex Orders
or Responses that are priced equal to the proposed
execution price. See proposed ISE Rule 722,
Supplementary Material .08(b)(4)(i).
117 If there are Priority Customer Complex Orders
or Responses on the opposite side of the Agency
Complex Order at the proposed execution net price
and there is sufficient size to execute the entire size
of the Agency Complex Order, the Agency Complex
Order will be executed against such interest, and
the solicited Complex Order will be cancelled,
provided that: (A) The execution net price is equal
to or better than the best net price achievable from
the best ISE bids and offers for the individual legs,
and (B) the Complex Order can be executed in
accordance with ISE Rule 722(c)(2) with respect to
the individual legs. The aggregate size of all
Complex Orders, Responses and quotes and, for
Complex Options Orders, the aggregate size
available from the best bids and offers for the
individual legs, will be used to determine whether
the entire Agency Complex Order can be executed
pursuant to this paragraph. See proposed ISE Rule
722, Supplementary Material .08(b)(4)(ii).
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entire Agency Complex Order at an
improved net price(s).118 The proposed
rule also specifies the allocation of
interest when the Agency Complex
Order executes against interest other
than the solicited Complex Order.119
2. Complex PIM
The Complex PIM allows an EAM to
seek price improvement for a
transaction in which an EAM is
facilitating a Complex Order it
represents as agent, and/or a transaction
in which the EAM has solicited interest
to execute against a Complex Order it
represents as agent (a ‘‘Crossing
Transaction’’).120 A Crossing
Transaction is comprised of the order
the EAM represents as agent (the
‘‘Agency Order’’) and a counter-side
order for the full size of the Agency
Order (the ‘‘Counter-Side Order’’).121 A
Complex Order must be entered into the
Complex PIM at a price that is better
than the best net price (i) available on
the Complex Order Book on both sides
of the market; and (ii) achievable from
the best ISE bids and offers for the
individual legs on both sides of the
market (an ‘‘improved net price’’).122 A
Complex Order that does not satisfy this
requirement will be rejected.123
118 If at the time of execution there is sufficient
size to execute the entire Agency Complex Order at
an improved net price(s), the Agency Complex
Order will be executed at the improved net price(s),
and the solicited Complex Order will be cancelled,
provided that: (A) The execution net price is equal
to or better than the best net price achievable from
the best ISE bids and offers for the individual legs,
and (B) the Complex Order can be executed in
accordance with ISE Rule 722(c)(2) with respect to
the individual legs. The aggregate size of all
Complex Orders, Responses, and quotes, and the
aggregate size available from the best bids and offers
for the individual legs for a Complex Options
Order, will be used to determine whether the entire
Agency Complex Order can be executed at an
improved net price(s). See proposed ISE Rule 722,
Supplementary Material .08(b)(4)(iii).
119 Proposed ISE Rule 722, Supplementary
Material .08(b)(4)(iv) provides that when executing
the Agency Complex Order against other interest in
accordance with proposed ISE Rule 722,
Supplementary Material .08(b)(ii) and (iii), Priority
Customer Complex Orders and Responses will be
executed first. Professional Complex Orders and
Responses, and market maker quotes participate
next in the execution of the Agency Complex Order
based upon the percentage of the total number of
contracts available at the best price that is
represented by the size of the Professional Complex
Order or Response, or market maker quote. Finally,
for Complex Options Orders, bids and offers for the
individual legs will be executed pursuant to Rule
713 and the Supplementary Material thereto.
120 See proposed ISE Rule 722, Supplementary
Material .08(c).
121 The Counter-Side Order may represent interest
for the Member’s own account or interest the
Member has solicited from one or more other
parties, or a combination of both. See proposed ISE
Rule 722, Supplementary Material .08(c)(1).
122 See proposed ISE Rule 722, Supplementary
Material .08(c)(2).
123 See id. In addition, a Complex Order entered
into the Complex PIM will be rejected if any
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Upon entry of a Complex Order into
the Complex PIM, ISE will broadcast to
members a message that includes the
net price, side and size of the Agency
Complex Order.124 ISE will designate
via Options Trader Alert a time of no
less than 100 milliseconds and no more
than one second for members to indicate
the size and net price at which they
want to participate in the execution of
the Agency Complex Order
(‘‘Improvement Complex Orders’’).125
All members may enter Improvement
Complex Orders for their own account
or for the account of a Public
Customer.126
The exposure period for a Complex
PIM will automatically terminate (A) at
the end of the time period designated by
ISE pursuant to ISE Rule 722,
Supplementary Material .08(c)(4)(i), (B)
upon the receipt of a Complex Order or
quote in 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 (C) upon the receipt
of a non-marketable Complex Order or
quote in the same complex strategy on
the same side of the market as the
Agency Complex Order that would
cause the execution of the Agency
Complex Order to be outside of the best
bid or offer on the Complex Order
Book.127 Although only one Complex
component of the Complex Order has not opened
for trading, or if there is a trading halt in any series
underlying the Complex Order. If a trading halt is
initiated after the order is entered into the Complex
PIM, the auction will be automatically terminated
without an execution. See ISE Rule 722,
Supplementary Material .08(c)(3).
124 See proposed ISE Rule 722, Supplementary
Material .08(c)(4).
125 See proposed ISE Rule 722, Supplementary
Material .08(c)(4).
126 See proposed ISE Rule 722, Supplementary
Material .08(c)(4)(i). An Improvement Complex
Order, which is only executable against the
Complex Order with respect to which it is entered
and will only be considered up to the size of the
Agency Complex Order, must be entered in the
increments provided in proposed ISE Rule 722(c)(1)
at the same price as the Crossing Transaction or at
a price that is at least one cent better for the Agency
Complex Order. An Improvement Complex Order
may not be canceled, but it may be modified to (1)
increase the size at the same price, or (2) improve
the price of the Improvement Complex Order for
any size. Improvement Complex Orders will not be
visible to other auction participants. See proposed
ISE Rules 722, Supplementary Material .08(c)(4)(i)–
(iii).
127 See proposed ISE Rule 722, Supplementary
Material .08(c)(4)(iv). When a marketable Complex
Order on the opposite side of the Agency Complex
Order ends the exposure period, it will participate
in the execution of the Agency Complex Order at
the price that is mid-way between the best counterside interest and the same side best bid or offer on
the Complex Order Book or net price from ISE best
bid or offer on individual legs, whichever is better,
so that both the marketable Complex Order and the
Agency Complex Order receive price improvement.
See proposed ISE Rule 722, Supplementary
Material .04(c)(5)(iv).
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PIM may be ongoing at any time for a
particular complex strategy, a PIM in a
component leg of a complex strategy
may run concurrently with a Complex
PIM for that strategy.128
At the end of the exposure period, the
Agency Complex Order will be executed
in full at the best prices available, taking
into consideration Complex Orders and
quotes in the Complex Order Book,
Improvement Complex Orders, the
Counter-Side Order, and, for Complex
Options Orders, the ISE best bids and
offers on the individual legs.129 The
Agency Complex Order will receive
executions at multiple price levels if
there is insufficient size to execute the
entire order at the best price.130 At any
net price, Priority Customer interest on
the Complex Order Book (i.e., Priority
Customer Complex Orders and
Improvement Complex Orders) is
executed in full before Professional
interest (i.e., Professional Complex
Orders and Improvement Complex
Orders) and market maker quotes on the
Complex Order Book.131 After Priority
Customer interest on the Complex Order
Book at a given net price, Professional
interest and market maker quotes on the
Complex Order Book will participate in
the execution of the Agency Complex
Order based on the percentage of the
total number of contracts available at
128 See proposed ISE Rule 722, Supplementary
Material .08(c)(4)(v). A Complex PIM for a complex
strategy may be ongoing at the same time as a PIM
pursuant to ISE Rule 723 or during an exposure
period pursuant to Supplementary Material .02 to
ISE Rule 1901 in a component leg(s) of such
complex strategy. If a Complex PIM is early
terminated pursuant to ISE Rule 722,
Supplementary Material .08(c)(4)(iv), and the
incoming Complex Order that causes the early
termination in the complex strategy is also
marketable against a component leg(s) of the
complex strategy that is the subject of a concurrent
ongoing PIM pursuant to ISE Rule 723 or an
exposure period pursuant to Supplementary
Material .02 to ISE Rule 1901, then the concurrent
Complex PIM and component leg auction(s) are
processed in the following sequence: (1) The
Complex PIM is early terminated; (2) the
component leg auction(s) are early terminated and
processed; and (3) legging of residual incoming
Complex Order interest occurs. See proposed ISE
Rule 722, Supplementary Material .08(c)(4)(vi) and
Amendment No. 1.
129 See proposed ISE Rule 722, Supplementary
Material .08(c)(5). If an improved net price for the
Complex Order being executed can be achieved
from Complex Orders, Improvement Complex
Orders, and quotes on the Complex Order Book
and, for Complex Options Orders, the ISE best bids
and offers on the individual legs, the Agency
Complex Order will be executed against such
interest. In addition, the priority provisions in ISE
Rule 722(c)(2) will continue to apply and may
prevent the execution of a Complex Order entered
into the Complex PIM, in which case the
transaction will be cancelled. See ISE Rule 722,
Supplementary Material .08(c)(5)(v).
130 See proposed ISE Rule 722, Supplementary
Material .08(c)(5).
131 See proposed ISE Rule 722, Supplementary
Material .08(c)(5)(i).
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51737
the price represented by the size of that
interest.132 When the Counter-Side
Complex Order is at the same net price
as Professional interest and market
maker quotes on the Complex Order
Book, the Counter-Side Complex Order
will be allocated the greater of one
contract or 40% (or such lower
percentage requested by the member) of
the initial size of the Agency Complex
Order before other Professional interest
and market maker quotes on the
Complex Order Book are executed.133
3. Complex Customer Cross Orders
ISE notes that ISE Rules 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).134
Transactions where neither side is for
the account of a broker-dealer are not
within the scope of ISE Rule 717(d) and
(e), and members can enter the buy and
sell orders on the limit order book
nearly simultaneously.135 To make the
132 See proposed ISE Rule 722, Supplementary
Material .08(c)(5)(ii).
133 See proposed ISE Rule 722, Supplementary
Material .08(c)(5)(iii). Upon entry of Counter-Side
Complex Orders, Members can elect to
automatically match the price and size of Complex
Orders, Improvement Complex Orders and quotes
received on the Complex Order Book during the
exposure period up to a specified limit net price or
without specifying a limit net price. This election
will also automatically match the net price
available from the ISE best bids and offers on the
individual legs for the full size of the order;
provided that with notice to members the Exchange
may determine whether to offer this option only for
Complex Options Orders, Stock-Option Orders,
and/or Stock Complex Orders. If a member elects
to auto-match, the Counter-Side Complex Order
will be allocated its full size at each price point, or
at each price point within its limit net price if a
limit is specified, until a price point is reached
where the balance of the order can be fully
executed. At such price point, the Counter-Side
Complex Order shall be allocated the greater of one
contract or 40% (or such lower percentage
requested by the member) of the original size of the
Agency Complex Order, but only after Priority
Customer Complex Orders and Improvement
Complex Orders at such price point are executed in
full. Thereafter, all Professional Complex Orders
and Improvement Complex Orders, and quotes at
the price point will participate in the execution of
the Agency Complex Order based upon the
percentage of the total number of contracts available
at the price that is represented by the size of the
Professional Complex Order or Improvement
Complex Order, or quote on the complex order
book. See id.
134 See Notice, 83 FR at 31790.
135 See id. ISE notes that ISE Rule 717,
Supplementary Material .01 prohibits members
from entering into arrangements designed to
circumvent the exposure requirements for
facilitation transactions. Accordingly, it would be a
violation of ISE 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
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execution of such customer orders more
efficient, the ISE developed Customer
Cross Orders as a way to enter opposing
customer orders using a single order
type.136
Proposed ISE Rule 722,
Supplementary Material .08(d)
addresses the application of Customer
Cross Orders to Complex Orders.137
Proposed ISE Rule 722, Supplementary
Material .08(d) states that Complex
Customer Cross Orders will be
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 strategy on the
Complex Order Book; (ii) there are no
Priority Customer Complex Orders for
the same strategy at the same price on
the Complex Order Book; and (iii) the
options legs can be executed at prices
that comply with the provisions of ISE
Rule 722(c)(2). The proposed rule
further states that Complex Customer
Cross Orders will be rejected if they
cannot be executed, and that ISE Rule
717, Supplementary Material .01 applies
to Complex Customer Cross Orders.138
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4. Complex Qualified Contingent Cross
Orders
Proposed ISE Rule 722,
Supplementary Material .08(e) states
that Complex Options Orders may be
entered as Qualified Contingent Cross
Orders, as defined in ISE Rule 715(j).139
agency orders handled by the member immediately
upon their entry on the Exchange. See id. at n. 35.
136 See Notice, 83 FR at 31790. See also Securities
Exchange Act Release No. 60253 (July 7, 2009), 74
FR 34063 (July 14, 2009) (notice of filing and
immediate effectiveness of File No. SR–ISE–2009–
34).
137 See Notice, 83 FR at 31790.
138 See footnote 135, supra.
139 ISE Rule 715(j) defines a Qualified Contingent
Cross Order as an order comprised of an originating
order to buy or sell at least 1,000 contracts that is
identified as being part of a qualified contingent
trade, as that term is defined in ISE Rule 715,
Supplementary Material .01, coupled with a contraside order or orders totaling an equal number of
contracts. ISE Rule 715, Supplementary Material .01
states that a qualified contingent trade is a
transaction consisting of two or more component
orders, executed as agent or principal, where: (a) At
least one component is an NMS Stock, as defined
in Rule 600 of Regulation NMS under the Exchange
Act; (b) all components are effected with a product
or price contingency that either has been agreed to
by all the respective counterparties or arranged for
by a broker-dealer as principal or agent; (c) the
execution of one component is contingent upon the
execution of all other components at or near the
same time; (d) the specific relationship between the
component orders (e.g., the spread between the
prices of the component orders) is determined by
the time the contingent order is placed; (e) the
component orders 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 (f) the
transaction is fully hedged (without regard to any
prior existing position) as a result of other
components of the contingent trade.
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Proposed ISE Rule 722, Supplementary
Material .08(e) states that Complex
Qualified Contingent Cross Orders
(‘‘Complex QCC Orders’’) will be
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 options legs can be executed at
prices that (A) are at or between the
NBBO for the individual series, and (B)
comply with the provisions of ISE 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. Proposed ISE Rule 722,
Supplementary Material .08(e) further
provides that Complex QCC Orders will
be rejected if they cannot be executed,
that they may be entered in one cent
increments, and that each leg of a
Complex Options Order must meet the
1,000 contract minimum size
requirement for Qualified Contingent
Cross Orders. ISE notes that in
executing Complex QCC Orders, Priority
Customer Orders on the Complex Order
Book and Priority Customer Orders on
ISE for the individual options series are
protected.140
5. Complex QCC With Stock Orders
Proposed ISE Rule 722,
Supplementary Material .08(f) describes
the processing of Complex QCC with
Stock Orders.141 ISE notes that because
a Complex QCC Order represents one
component of a qualified contingent
trade, each Complex QCC Order must be
paired with a stock transaction.142 ISE
further notes that members must
separately execute the stock component
of a regular Complex QCC Order.143 By
contrast, when a member enters a
Complex QCC with Stock Order, ISE
will attempt to facilitate the execution
of the stock component in addition to
the options component.144 When a
member enters a Complex QCC with
Stock Order, a Complex QCC Order is
entered ISE.145 If the Complex QCC
Order is executed, ISE will
140 See
Notice, 83 FR at 31791.
noted above, a Complex QCC with Stock
Order is a Complex QCC 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 proposed ISE Rule 722,
Supplementary Material .08. See proposed ISE Rule
722(b)(16).
142 See Notice, 83 FR at 31792.
143 See id.
144 See id.
145 See proposed ISE Rule 722, Supplementary
Material .08(f)(1).
141 As
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automatically communicate the stock
component to the member’s designated
broker-dealer for execution.146 If the
Complex QCC Order cannot be
executed, the entire Complex QCC with
Stock Order, including both the stock
and options components, is
cancelled.147 ISE Rules 721,
Supplementary Material .01–.03 apply
to the entry and execution of Complex
QCC with Stock Orders.148 ISE states
that Complex 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.149
F. Concurrent Auctions
1. Concurrent Complex Order and
Single Leg Auctions
Proposed ISE Rule 722,
Supplementary Material .08(h) provides
that an auction in the Block Order
Mechanism, Facilitation Mechanism,
Solicited Order Mechanism, or PIM, or
an exposure period as provided in ISE
Rule 1901, Supplementary Material .02,
for an option series may occur
concurrently with a Complex Order
Exposure Auction, Complex Facilitation
auction, Complex Solicited Order
auction, or Complex PIM for a Complex
Order that includes that series.150 To the
extent that there are concurrent
Complex Order and single leg auctions
involving a specific option series, each
auction will be processed sequentially
based on the time the auction
commenced.151
2. Limitation on Concurrent Complex
Strategy Auctions
In conjunction with ISE’s migration to
the INET platform, ISE filed a proposal
in 2017 to delay the re-introduction of
146 See proposed ISE Rule 722, Supplementary
Material .08(f)(2).
147 See proposed ISE Rule 722, Supplementary
Material .08(f)(3).
148 See proposed ISE Rule 722, Supplementary
Material .08(f)(4).
149 See Notice, 83 FR at 31792. 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. See ISE Rule 721,
Supplementary Material .03.
150 See Amendment No. 1.
151 See Amendment No. 1. At the time an auction
concludes, including when it concludes early, the
auction will be processed pursuant to ISE Rules
716(b), (c), (d), or (e), or 723 or Supplementary
Material .02 to Rule 1901, as applicable, for the
single option, or pursuant to proposed ISE Rules
722, Supplementary Material .01, or .08(a), (b), or
(c), as applicable, for the Complex Order, except as
provided for in proposed Supplementary Material
.08(c)(4)(vi) to ISE Rule 722. See id.
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functionality on ISE that permitted
concurrent Complex Order auctions in
the same complex strategy.152 ISE
subsequently extended its delay of the
re-introduction of this functionality for
an additional year, until April 17,
2019.153 ISE states that it has no
immediate plans to re-introduce the
functionality.154 Accordingly, ISE
proposes to delete from ISE Rule 722
language indicating that ISE will
recommence concurrent Complex Order
auctions or before April 17, 2019.155 In
addition, ISE proposes to adopt ISE Rule
722, Supplementary Material .08(g),
which provides that only one Exposure
Auction, Complex PIM, Complex
Facilitation Mechanism auction, or
Complex Solicited Order Mechanism
auction will be ongoing at any given
time in a complex strategy, and states
that such auctions will not queue or
overlap in any manner.156
ISE states that it has not offered
concurrent auctions in the same
complex order strategy since 2017, and
notes that no member has complained
or expressed concern about the absence
of the functionality.157 In the April 2018
Notice, ISE stated that it was rare for
multiple auctions in a complex strategy
to be ongoing at a particular time,
particularly due to the decrease in ISE’s
auction timers to 100 milliseconds.158
152 INET is the proprietary core technology
utilized across Nasdaq’s global markets and utilized
on The Nasdaq Options Market LLC, Nasdaq PHLX
LLC, and Nasdaq BX, Inc. See Amendment No. 1.
See also Securities and Exchange Act Release No.
80525 (April 25, 2017), 82 FR 20405 (May 1, 2017)
(notice of filing and immediate effectiveness of SR–
ISE–2017–33).
153 See Amendment No. 1. See also Securities and
Exchange Act Release No. 83101 (April 25, 2018),
83 FR 19130 (May 1, 2018) (notice of filing and
immediate effectiveness of SR–ISE–2018–40)
(‘‘April 2018 Notice’’).
154 See Amendment No. 1.
155 See id. In the event that ISE wishes to
implement concurrent Complex Order auctions in
the future, it will file a proposed rule change with
the Commission to do so. See id.
156 See Amendment No. 1. Proposed ISE Rule
722, Supplementary Material .08(g) states that ISE
will not initiate an Exposure Auction, Complex
PIM, Complex Facilitation Mechanism auction, or
Complex Solicited Order Mechanism auction in a
complex strategy while another Exposure Auction,
Complex PIM, or Complex Solicited Order
Mechanism auction in that Complex Strategy is
ongoing. If a Complex PIM auction, Complex
Facilitation Mechanism auction, or Complex
Solicited Order Mechanism auction for a Complex
Strategy has been initiated, an Exposure Auction for
that Complex Strategy will not be initiated, and an
Exposure Only Complex Order for the Complex
Strategy will be cancelled back to the member. An
Exposure Order for the Complex Strategy will be
processed as an order that is not marked for price
improvement.
157 See Amendment No. 1.
158 See April Notice, 82 FR at n. 10 (citing
Securities Exchange Act Release No. 79733 (January
4, 2017), 82 FR 3055 (January 10, 2017) (SR–ISE–
2016–26) (permitting the Exchange to determine
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ISE stated that prior to the migration to
the INET platform concurrent auctions
in a complex options strategy only
occurred approximately 0.5% of the
time that an auction ran on the
Exchange.159 ISE believes that the
absence of the concurrent Complex
Order functionality will have an
insignificant impact on members.160 ISE
states that a member that has auctioneligible interest to execute when another
Complex Order auction is ongoing can
either re-submit that order to the
Exchange after the auction has
concluded, or submit the order to
another options market that provides
similar auction functionality.161 In this
regard, ISE notes that its market data
feeds provide information to members
about when a Complex Order auction is
ongoing, and members can therefore use
this information to make appropriate
routing decisions based on applicable
market conditions.162 ISE notes that
other options markets do not offer
concurrent Complex Order auctions in a
strategy.163
G. Stock-Option and Stock-Complex
Orders
Proposed ISE Rule 722,
Supplementary Material .13 provides
requirements for Stock-Option and
Stock-Complex Orders. The proposed
rule allows members to submit only
Stock-Option and Stock-Complex
Orders and quotes that comply with the
QCT Exemption from Rule 611(a) of
Regulation NMS, and members
submitting these orders and quotes
represent that they comply with the
QCT Exemption. In addition, proposed
ISE Rule 722, Supplementary Material
.13 requires that the stock leg of a StockOption Order be marked ‘‘buy,’’ ‘‘sell,’’
‘‘sell short,’’ or ‘‘sell short exempt’’ in
compliance with Regulation SHO under
the Exchange Act.
auction timers for PIM, Facilitation, and
Solicitation within a range of 100 milliseconds and
one second)). ISE noted that each of these auction
timers, as well as the auction timer for exposure
auctions, was currently set to 100 milliseconds. See
also Amendment No. 1.
159 See April Notice, 82 FR at 19131. See also
Amendment No. 1.
160 See Amendment No. 1.
161 See id.
162 See id.
163 ISE states that Nasdaq Phlx, LLC does not
allow the initiation of a Complex Order Live
Auction when there is a Price Improvement XL
auction already ongoing in the strategy pursuant to
Phlx Rule 1098(e)(2). Similarly, Miami International
Securities Exchange LLC has the ability to limit the
frequency of Complex Auctions by establishing a
minimum time period between such auctions
pursuant to MIAX Rule 518(d)(2). See id.
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51739
H. Additional Changes
1. Market Maker Quotes
As part of the transition to the INET
platform, ISE has delayed until April 26,
2019, the re-introduction of the
functionality that allows market makers
to enter quotes in certain symbols for
complex strategies on the Complex
Order Book.164 ISE states that prior to
the INET transition, quoting in the
Complex Order Book was available in a
subset of the options classes.165
Accordingly, ISE proposes to amend ISE
Rule 722, Supplementary Material .03 to
indicate that complex quoting will be
available only in options classes
selected by the Exchange and
announced to members via Options
Trader Alert.166 ISE notes that market
makers that quote in the Complex Order
Book must enter certain risk parameters
pursuant to ISE Rule 722,
Supplementary Material .04 (‘‘Market
Maker Speed Bump’’).167 In connection
with proposed changes to the defined
terms relating to Complex Orders, as
described above, ISE proposes to amend
ISE Rule 722, Supplementary Material
.04 to clarify that the Market Maker
Speed Bump applies to Complex
Options Strategies and not to StockOption Strategies or Stock-Complex
Strategies.168
2. Price Limits for Complex Orders and
Quotes
ISE Rule 722, Supplementary Material
.07(a) establishes a risk protection that
limits the amount by which the legs of
a complex strategy may be executed at
prices inferior to the prices available on
other exchanges trading the same
options series. ISE proposes to amend
ISE Rule 722, Supplementary Material
.07(a) to include a reference to the stock
leg of Stock-Option Strategies and
Stock-Complex Strategies.169 Proposed
ISE Rule 722, Supplementary Material
.07(a) will state, in part, that the System
will not permit the legs of a complex
strategy to trade through the NBBO for
the series or any stock component by a
configurable amount calculated as the
lesser of (i) an absolute amount not to
164 See ISE Rule 722, Supplementary Material .03.
See also Securities Exchange Act Release Number
83001 (April 5, 2018), 83 FR 15653 (April 11, 2018)
(notice of filing and immediate effectiveness of File
No. SR–ISE–2018–29).
165 See Notice, 83 FR at 31788.
166 See id.
167 See id.
168 See id. ISE notes that because the Market
Maker Speed Bump is based exclusively on options
contracts traded, it applies only to Complex
Options Strategies and not to complex strategies
that have a stock component. See id. at 31797.
169 See Notice, 83 FR at 31792. See id. at
31792–3.
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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. Similarly,
ISE proposes to add a reference to the
national best bid or offer for the stock
leg to the Limit Order Price Protection
in ISE Rule 722, Supplementary
Material .07(d).170 ISE believes that
these changes will increase
transparency with respect to the prices
ISE uses when ISE must derive a best
bid or offer from the prices available in
the regular market.171 In addition, ISE
Rule 722, Supplementary Material
.07(d) currently describes the
application of the Limit Order Price
Protection to Limit Complex Orders to
buy. The proposal revises ISE Rule 722,
Supplementary Material .07(d) to
describe the application of the price
protection to Limit Complex Orders to
sell.172
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III. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.173 In particular, for
the reasons discussed below, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act,174 which requires,
among other things, that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
170 See id. at 31792–3. Proposed ISE Rule 722,
Supplementary Material .07(d) states: There is a
limit on the amount by which the net price of an
incoming Limit Complex Order to buy may exceed
the net price available from the individual options
series on the Exchange and the national best bid or
offer for any stock leg, and by which the net price
of an incoming Limit Complex Order to sell may be
below the net price available from the individual
options series on the Exchange and the national
best bid or offer for any stock leg. Limit Complex
Orders that exceed the pricing limit are rejected.
The limit is established by the Exchange from timeto-time for Limit Complex Orders to buy (sell) as
the net price available from the individual options
series on the Exchange and the national best bid or
offer for any stock leg plus (minus) the greater of:
(i) An absolute amount not to exceed $2.00, or (ii)
a percentage of the net price available from the
individual options series on the Exchange and the
national best bid or offer for any stock leg not to
exceed 10%. This limit order price protection
applies only to orders and does not apply to quotes.
171 See id.
172 See id. at 31793.
173 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
174 15 U.S.C. 78f(b)(5).
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perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest. This
order approves the proposed rule
change in its entirety, although only
certain more significant aspects of the
proposed rules are discussed below.
A. Definitions and Order Types
The proposal revises ISE’s current
definitions relating to Complex Orders
by creating the new defined terms
Complex Options Strategy, StockOption Strategy, and Stock-Complex
Strategy, as well as the corresponding
orders for each of these strategies. The
new defined terms should help to
clarify ISE’s rules by indicating more
precisely which ISE rules apply to these
orders and strategies.175 The
Commission believes that the Complex
Order types in proposed ISE Rule
722(b), including Market Complex
Orders, Limit Complex Orders, All-orNone Complex Orders, Attributable
Complex Orders, Day Complex Orders,
Fill-or-Kill Complex Orders, Immediateor-Cancel Complex Orders, Opening
Only Complex Orders, Good-Till-Date
Complex Orders, Good-Till-Cancel
Complex Orders, Exposure Complex
Orders, and Exposure Only Complex
Orders provide market participants with
flexibility and control over the trading
of Complex Orders.176 The Commission
notes that ISE currently permits each of
these order types (other than Exposure
Complex Orders and Exposure Only
Complex Orders) for orders for a single
option series.177
The proposal deletes from ISE Rule
722 the definition of SSF-option order.
As noted above, ISE states that single
stock futures have not gained sufficient
popularity among investors to support a
SSF-option product, and ISE has never
received a SSF-option order.178 In light
of the lack of interest in trading SSFoption orders, the Commission believes
that ISE’s elimination of SSF-option
orders will not negatively impact
investors or other market
participants.179
ISE also proposes to discontinue
Reserve Complex Orders in the fourth
quarter of 2018.180 As noted above, ISE
states that it does not receive a high
175 For example, the proposal revises ISE Rule
715(k) to indicate that legging orders are generated
only for Complex Options Orders.
176 Complex Customer Cross Orders and Complex
QCC Orders are discussed in Section III.F(3), infra.
177 See ISE Rule 715.
178 See note 14, supra, and accompanying text.
179 ISE will file a proposed rule change with the
Commission if ISE determines to offer SSF-option
orders in the future. See Notice, 83 FR at 31784.
180 See Amendment No. 1.
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volume of Reserve Complex Orders, that
there is no great demand for this order
type, and that other options exchanges
do not offer this order type.181 ISE will
issue an Options Trader Alert to
members indicating the date when
Reserve Complex Orders will no longer
be offered.182 The Commission notes
that under ISE’s procedures for
executing Reserve Complex Orders, the
non-displayed portion of a Reserve
Complex Order is available for
execution before displayed interest on
the regular order book at the same
price.183 The Commission believes that
the discontinuation of Reserve Complex
Orders will protect investors and the
public interest by assuring that all
displayed interest on the Complex
Order book and the regular book
executes before non-displayed interest
at the same price.184
B. Trading of Complex Orders and
Quotes
The Commission notes that proposed
ISE Rule 722(c)(2) is designed to protect
established leg market interest by
providing that if any of the bids or offers
established in the marketplace consist of
a Priority Customer Order, at least one
leg of a Complex Options Order or the
options legs of a Stock-Complex Order
must trade at a price that is better than
the corresponding bid or offer in the
marketplace by at least a $0.01
increment.185 Similarly, the option leg
of a Stock-Option Order has priority
over leg market interest in the series
established by Professional Orders and
market maker quotes at the same price,
but not over Priority Customer interest
in the series.186 The Commission notes
that other options exchanges have
similar provisions requiring one leg of a
complex order to trade at a better price
than the derived leg market price when
the established interest in the leg market
price includes customer interest.187
ISE’s rules further protect Priority
Customer interest by providing that
executable Complex Orders will execute
against Priority Customer interest on the
single leg book at the same price before
executing against the Complex Order
book.188 Thus, Priority Customer Orders
181 See
id.
id.
183 See Notice, 83 FR at 31785, n.7.
184 ISE will continue to offer Reserve Orders on
the single leg book. See Amendment No. 1.
185 See proposed ISE Rules 722(c)(2)(i) and (iii).
A Complex Order that does not satisfy the
requirements of proposed ISE Rule 722(c)(2) is not
executable. See proposed ISE Rule 722(d).
186 See proposed ISE Rule 722(c)(2)(ii).
187 See, e.g., Phlx Rule 1098(c)(iii); EDGX Rule
21.20(c)(1)(B) and (C); and MIAX Rule 518(c)(3).
188 See proposed ISE Rule 722(d)(2) and
Amendment No. 1.
182 See
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on the single leg order book will retain
priority and will execute prior to any
other Complex Order or non-Priority
Customer single leg interest at the same
price.189 In addition, ISE, like other
exchanges, does not allow Complex
Orders to be executed at prices inferior
to the best net price achievable from the
best bids and offers on the Exchange for
the individual legs.190
ISE allows Complex Orders to execute
against bids and offers on ISE for the
individual legs of the Complex Order if
there is no executable contra-side
complex interest on the Complex Order
Book at a particular price.191 The
Commission believes that allowing
Complex Orders to execute against leg
market interest could benefit investors
by providing additional execution
opportunities for both Complex Orders
and interest in the regular market. In
addition, the Commission believes that
executing Complex Orders against
interest in the regular market could
facilitate interaction between the
Complex Order book and the regular
market, potentially resulting in a more
competitive and efficient market, and
better executions for investors. The
Commission notes that other exchanges
also allow Complex Orders to execute
against leg market interest.192
As described more fully above, the
Trade Value Allowance is a
functionality that allows Stock-Option
Strategies and Stock-Complex Strategies
to trade outside of their expected
notional value by a specified amount.
The amount of Trade Value Allowance
may be determined by a member or set
at a default value determined by ISE and
announced to members, although any
amount of Trade Value Allowance is
permitted for orders entered into the
auction mechanisms in proposed ISE
Rule 722, Supplementary Material .08
that do not trade solely with their
contra-side order.193 Members may opt
out of the Trade Value Allowance if
they do not want their orders to be
executed when there is a Trade Value
Allowance of any amount and, in those
cases, ISE will strictly enforce the net
price marked on the order.194 The
Commission believes that the Trade
Value Allowance will provide members
with the flexibility to obtain a desired
execution of a Stock-Option or Stock189 See
id.
proposed ISE ISE Rule 722(c)(2) and
Amendment No. 1. See also EDGX Rule
21.20(c)(2)(E); and MIAX Rule 518(c)(2)(ii).
191 See proposed ISE Rule 722(d)(3).
192 See, e.g., EDGX Rule 21.20(c)(2)(F); and MIAX
Rule 518(c)(2)(iii).
193 See proposed ISE Rule 722, Supplementary
Material .09.
194 See Notice, 83 FR at 31793.
190 See
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Complex Order when their order trades
at a value outside of the expected
notional value of the trade due to
rounding. The Commission notes that
members are not obligated to use the
Trade Value Allowance and may choose
to have their orders executed at the net
price marked on the order.
D. Complex Opening Process and
Complex Uncrossing Process
The Commission believes that the
Complex Opening Process is designed to
provide for the orderly opening of
Complex Orders on ISE by matching as
much interest in a complex strategy as
possible at a price determined through
an objective process set forth in ISE’s
rules. As described more fully above,
the Complex Opening Process allows
interest residing on the Complex Order
Book to trade at a single price within
Boundary Prices that are constrained by
the NBBO for the individual legs.195 If
the Complex Opening Process fails to
discover an appropriate execution price
(e.g., there is no valid Opening Price at
or within the Boundary Prices), ISE
continues the Complex Opening Process
by performing an uncrossing, which
provides additional execution
opportunities by allowing Complex
Orders to execute against leg market
interest.196
ISE states that the Complex
Uncrossing Process, when used during
regular trading, provides a fair and
efficient means for executing Complex
Orders or quotes when interest that is
locked or crossed becomes
executable.197 As described more fully
above, when Complex Orders or quotes
become executable, the Complex
Uncrossing Process identifies the oldest
interest on the Complex Order Book and
matches it pursuant to proposed ISE
Rule 722(d)(2)–(3) with resting contraside interest.198 This process is repeated
until the Complex Order Book is no
longer executable.199 The Commission
believes that the Complex Uncrossing
Process is designed to provide for the
execution in accordance with ISE’s rules
of Complex Orders and other interest on
ISE that becomes executable during
regular trading or as part of the Complex
Opening Process.
195 See
id. at 31796.
also performs an uncrossing if there is
interest that is locked or crossed after Complex
Orders and quotes are executed in the Complex
Opening Price Determination. See id.
197 See id.
198 See proposed ISE Rule 722, Supplementary
Material .12(b).
199 See proposed ISE Rule 722, Supplementary
Material .12(b)(iii).
196 ISE
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51741
E. Complex Order Exposure Process
The Complex Order exposure auction
process will allow members to expose
eligible Complex Orders for price
improvement. ISE notes that the
exposure process will not interrupt the
processing of Complex Orders because
the exposure period for a Complex
Order will end immediately upon 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, thereby
assuring that incoming orders are not
delayed by the exposure process.200 In
addition, the exposure period will be
terminated upon the receipt of a
nonmarketable 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.201 ISE notes that
no market participants are excluded
from initiating or participating in a
Complex Order exposure auction.202
The Commission believes that the
exposure auction process may provide
additional opportunities for Complex
Orders to receive price improvement.
The Commission notes that other
options exchanges provide similar
auctions for complex orders.203
F. Internalization and Crossing
1. Complex Facilitation Mechanism and
Complex Solicited Order Mechanism
The Commission believes that the
Complex Facilitation Mechanism and
the Complex Solicited Order
Mechanism may provide opportunities
for Complex Orders to receive price
improvement. ISE members may submit
a customer Complex Order and
matching contra-side interest into the
Complex Facilitation Mechanism or the
Complex Solicited Order Mechanism for
price improvement. Upon entry of a
Complex Order into one of the
mechanisms, ISE sends member a
broadcast message that includes the net
price, side, and size of the Agency
Complex Order, and members may enter
Responses with the net prices and sizes
at which they wish to participate in the
execution of the Agency Complex
200 See Notice, 83 FR at 31797. See also proposed
ISE Rule 722, Supplementary Material .01(b)(ii).
201 See Notice, 83 FR at 31797.
202 See id.
203 See, e.g., Cboe Rule 6.53C(d); and EDGX Rule
21.20(d).
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Order.204 At the conclusion of the
auction, a Complex Order entered into
the Complex Facilitation Mechanism or
the Complex Solicited Order
Mechanism receives an execution at the
best price available and, at a minimum,
is executed in full against the matching
contra-side interest. Thus, a Complex
Order entered into the Complex
Facilitation Mechanism or the Complex
Solicited Order Mechanism is
guaranteed an execution at the
conclusion of the auction and may be
executed at an improved price.205 The
Commission notes that ISE also operates
Facilitation Mechanism and Solicited
Order Mechanism auctions for orders
for a single option series.206
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2. Complex PIM
The Commission believes that the
Complex PIM may provide
opportunities for Complex Orders to
receive price improvement. A Complex
Order entered into Complex PIM
auction must be stopped at a price that
is better than the best net price (i)
available on the Complex Order book on
both sides of the market; and (ii)
achievable from the best ISE bids and
offers for the individual legs on both
sides of the market (an ‘‘improved net
price’’).207 A member enters an Agency
Complex Order into the Complex PIM
against principal or solicited interest for
execution.208 At the conclusion of the
exposure period, the Agency Complex
Order will be executed in full at the best
prices available, taking into
consideration Complex Orders and
quotes in the Complex Order book,
Improvement Complex Orders, the
Counter-Side Order, and, for Complex
Options Orders, the ISE best bids and
offers on the individual legs.209 Thus, a
Complex Order entered into a Complex
PIM auction would receive an execution
at the best price available at the
conclusion of the auction and, at a
minimum, would be executed in full at
the improved net price. The
Commission notes that other options
exchanges have adopted similar rules to
permit the entry of complex orders into
an electronic price improvement
auction process.210 In addition, the
204 See proposed ISE Rules 722, Supplementary
Material .08(a)(3) and (b)(3).
205 See proposed ISE Rules 722, Supplementary
Material .08(a)(1)(iv) and (b)(4)(iii).
206 See ISE Rule 716(d) and (e).
207 See proposed ISE Rule 722, Supplementary
Material .08(c)(2).
208 See proposed ISE Rule 722, Supplementary
Material .08(c)(1).
209 See proposed ISE Rule 722, Supplementary
Material .08(c)(5).
210 See, e.g., BOX Rule 7245; Cboe Rule 6.74A;
MIAX Rule 515A, Interpretation and Policy .12; and
NYSE American Rule 971.2NY.
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Commission notes that ISE operates a
PIM auction for orders for a single
option series.211
3. Complex Customer Cross Orders,
Complex QCC Orders, and Complex
QCC With Stock Orders
ISE’s proposed Customer Cross
Complex Orders allow for the crossing
of Priority Customer Complex Orders in
a manner similar to other customer
crossing rules that the Commission has
previously approved for another options
exchange.212 The Commission believes
that ISE’s proposed Customer Cross
Complex Orders are consistent with the
Act and do not raise any novel or
significant issues.
ISE’s proposed Complex QCC rules
permit Complex Orders to participate in
a clean cross of the options leg of a
subset of qualified contingent trades in
a similar manner as Qualified
Contingent Cross Orders already
permitted on ISE.213 The Commission
notes that, under the proposal (1) a
Complex QCC Order must be part of a
qualified contingent trade under
Regulation NMS; 214 (2) each options leg
of a Complex QCC Order must be for
1,000 contracts; and (3) the options legs
of the Complex QCC Order must be
executed at prices that (A) are at or
between the NBBO for the individual
series, and (B) comply with the
provisions of proposed ISE Rule
722(c)(2)(i), provided that no options leg
of a Complex QCC Order can be
executed at the same price as a Priority
Customer Order on ISE in the individual
options series. The Commission believes
that these requirements establish a
limited exception to the general
principle of exposure and retain the
general principle of customer priority in
the options markets. In addition, the
requirement that a Complex QCC Order
be part of a qualified contingent trade by
satisfying each of the six underlying
requirements of the NMS QCT
Exemption, and the requirement that
211 See
ISE Rule 723.
MIAX Rule 518(h)(3). See also Cboe Rule
6.74A, Interpretation and Policy .08(b).
213 See ISE Rule 721(b). See also Securities
Exchange Act Release Nos. 64653 (June 13, 2011),
76 FR 35491 (June 17, 2011) (order approving File
No. SR–CBOE–2011–41); and 63955 (February 24,
2011), 76 FR 11533 (March 2, 2011) (order
approving File No. SR–ISE–2010–73). The
Commission has granted an exemption for qualified
contingent trades that meet certain requirements
from Rule 611(a) of Regulation NMS, 17 CFR
242.611(a) (the ‘‘NMS QCT Exemption’’). See
Securities Exchange Act Release No. 57620 (April
4, 2008), 73 FR 19271 (April 9, 2008) (which
supersedes a release initially granting the NMS QCT
Exemption, Securities Exchange Act Release No.
54389 (August 31, 2006), 71 FR 52829 (September
7, 2006)).
214 See note 139, supra.
212 See
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each options leg of a Complex QCC
Order be for a minimum size of 1,000
contracts, provide another limit to the
use of Complex QCC Orders by ensuring
that only transactions of significant size
may avail themselves of this order type.
The Commission notes that ISE’s
proposed rules for Complex QCC Orders
are similar to the rules of another
options exchange.215
The Commission believes that ISE’s
proposed Complex QCC with Stock
Orders could help ISE members comply
with the requirement to execute the
stock component of a qualified
contingent trade. The Commission notes
that the requirements of ISE Rule 721,
Supplementary Material .01–.03 apply
to the entry and execution of Complex
QCC with Stock Orders.216 The
Commission further notes that a
member that executes the options
component of a qualified contingent
trade entered as a Complex QCC with
Stock Order remains responsible for the
execution of the stock component if it
does not receive an execution from its
designated broker-dealer.217
G. Concurrent Auctions
ISE proposes to permit certain
auctions for complex strategies to
operate concurrently with auctions for a
single option series that is a component
of the complex strategy.218 The
Commission believes that ISE’s
proposed rule provides for the orderly
processing of concurrent complex and
single leg auctions. The Commission
notes that another options exchange has
adopted similar rules.219
In addition, ISE proposes to delete
from ISE Rule 722 language indicating
that ISE will recommence concurrent
Complex Order auctions in or before
April 17, 2019, and to adopt a rule
indicating that only one auction in a
complex strategy will be ongoing at any
given time.220 As noted above, ISE states
that no member has complained or
expressed concern about the absence of
the concurrent auction functionality,
which has not operated on ISE since
2017.221 ISE further states that, prior to
the migration to the INET platform,
concurrent auctions in a complex
strategy occurred rarely, approximately
0.5% of the time that an auction ran on
215 See
MIAX Rule 515(h)(4).
proposed ISE Rule 722, Supplementary
Material .08(f)(4).
217 See ISE Rule 721, Supplementary Material .03.
218 See proposed ISE Rule 722, Supplementary
Material .08(h).
219 See NYSE American Rules 971.1NY,
Commentary .01, and 971.2NY, Commentary .03.
220 See proposed ISE Rule 722, Supplementary
Material .08(g) and Amendment No. 1.
221 See Amendment No. 1.
216 See
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the Exchange.222 Because concurrent
auctions for a complex strategy occurred
infrequently, the Commission does not
believe that the elimination of the
concurrent auction functionality for
complex strategies will significantly
affect investors or other market
participants. In addition, in the absence
of the concurrent auction functionality,
a market participant with auctioneligible interest that wished to initiate
an auction on ISE could wait for an
ongoing auction to conclude or submit
its interest to another exchange. The
Commission notes that another options
market does not permit concurrent
auctions for the same complex
strategy.223
H. Stock-Option and Stock-Complex
Orders
Proposed ISE Rule 722,
Supplementary Material .13 allows
members to submit only Stock-Option
and Stock-Complex Orders and quotes
that comply with the QCT Exemption
from Rule 611(a) of Regulation NMS.
The proposed rule further requires that
the stock leg of a Stock-Option Order be
marked ‘‘buy,’’ ‘‘sell,’’ ‘‘sell short,’’ or
‘‘sell short exempt’’ in compliance with
Regulation SHO under the Exchange
Act. The Commission notes that other
options exchanges have adopted similar
rules.224 Accordingly, the Commission
does not believe that proposed ISE Rule
722, Supplementary Material .13 raises
novel regulatory issues.
I. Additional Changes
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The Commission believes that the
proposed change to ISE Rules 722,
Supplementary Material .03 makes clear
that the market maker quoting
functionality for Complex Orders will
be available only in classes selected by
ISE, consistent with ISE’s practice prior
to the transition to the INET platform.225
In addition, the proposed changes to ISE
Rule 722, Supplementary Material .04
make clear that the Market Maker Speed
Bump applies only to Complex Options
Strategies. The Commission believes
that the changes to ISE Rule 722,
Supplementary Material .03 and .04 will
222 See April Notice, 82 FR at 19131. See also
Amendment No. 1.
223 See Phlx Rule 1098(e)(2). In addition, MIAX
has the ability to limit the frequency of Complex
Auctions by establishing a minimum time period
between auctions. See MIAX Rule 518(d).
224 See, e.g., Cboe Rule 6.53C, Interpretation and
Policy .06(a) and (e); MIAX Rule 518, Interpretation
and Policy .01.
225 See Notice, 83 FR at 31788. ISE intends to
continue this practice after the complex quoting
functionality has been re-enabled on the INET
platform. See id. at 31797. ISE notes that market
makers can enter Complex Orders in all classes
regardless of whether quoting is permitted. See id.
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help to assure that the rules accurately
describe the availability and operation
of their respective functionalities.
The Commission believes that the
proposed change to ISE Rule 722,
Supplementary Material .07(a) to
incorporate references to the stock leg of
a Stock-Option or Stock-Complex Order
revises the rule to reflect the manner in
which Supplementary Material .07(a)
applies to Complex Orders with a stock
component. The Commission notes that
the proposed changes to ISE Rule 722,
Supplementary Material .07(d) include a
similar clarification and also describe
the application of the limit order price
protection in Supplementary Material
.07(d) to Limit Complex Orders to sell.
The Commission believes that this
change will assure that ISE Rule 722,
Supplementary Material .07(d)
accurately reflects the manner in which
the limit order price protection applies
to Limit Complex Orders to sell.
IV. Solicitation of Comments on
Amendment No. 1
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 1 is consistent with the
Act. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
ISE–2018–56 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, 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
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51743
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2018–56, and should
be submitted on or before November 2,
2018.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 1, prior to
the thirtieth day after the date of
publication of the notice of Amendment
No. 1 in the Federal Register. In
Amendment No. 1, ISE revises its
original proposal to make the changes
discussed in detail above. Notably, in
Amendment No. 1, ISE revises the
proposal to discontinue offering Reserve
Complex Orders. The Commission
believes that eliminating Reserve
Complex Orders will assure that all
displayed interest on the Complex
Order Book and on the regular book
executes before non-displayed interest.
Amendment No. 1 also provides that
ISE will not re-introduce the auction
functionality that permits concurrent
auctions for the same complex strategy.
For the reasons discussed above, the
Commission does not believe that the
elimination of this functionality will
significantly affect investors or other
market participants on ISE. Amendment
No. 1 clarifies and provides additional
detail to the text of the proposed rules,
makes technical corrections, and
provides additional analysis of the
certain proposed changes, thus
facilitating the Commission’s ability to
make the findings set forth above to
approve the proposal. Accordingly, the
Commission finds good cause for
approving the proposed rule change, as
modified by Amendment No. 1, on an
accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,226 that the
proposed rule change (SR–ISE–2018–
226 15
E:\FR\FM\12OCN1.SGM
U.S.C. 78s(b)(2).
12OCN1
51744
Federal Register / Vol. 83, No. 198 / Friday, October 12, 2018 / Notices
56), as modified by Amendment No. 1,
is approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.227
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–22202 Filed 10–11–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Investment Company Act Release No.
33265; 812–14883]
Natixis Funds Trust I, et al.; Notice of
Application
October 5, 2018.
Securities and Exchange
Commission (‘‘Commission’’).
ACTION: Notice.
khammond on DSK30JT082PROD with NOTICES
AGENCY:
Notice of an application under section
6(c) of the Investment Company Act of
1940 (‘‘Act’’) for an exemption from
section 15(a) of the Act and rule 18f–2
under the Act, as well as from certain
disclosure requirements in rule 20a–1
under the Act, Item 19(a)(3) of Form
N–1A, Items 22(c)(1)(ii), 22(c)(1)(iii),
22(c)(8) and 22(c)(9) of Schedule 14A
under the Securities Exchange Act of
1934, and sections 6–07(2)(a), (b), and
(c) of Regulation S–X (‘‘Disclosure
Requirements’’). The requested
exemption would permit an investment
adviser to hire and replace certain subadvisers without shareholder approval
and grant relief from the Disclosure
Requirements as they relate to fees paid
to the sub-advisers.
APPLICANTS: Natixis Funds Trust I,
Natixis Funds Trust II, Natixis Funds
Trust IV, Natixis ETF Trust, Natixis ETF
Trust II, Loomis Sayles Fund I, Loomis
Sayles Funds II, and Gateway Trust
(each a ‘‘Trust’’ and collectively the
‘‘Trusts’’), each an open-end
management investment company, and
Natixis Advisors, L.P. (the ‘‘Adviser’’), a
registered investment adviser under the
Investment Advisers Act of 1940
(collectively with the Trusts, the
‘‘Applicants’’).
FILING DATES: The application was filed
on March 9, 2018 and amended on
August 17, 2018, and September 7,
2018.
HEARING OR NOTIFICATION OF HEARING:
An order granting the application will
be issued unless the Commission orders
a hearing. Interested persons may
request a hearing by writing to the
Commission’s Secretary and serving
227 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
19:19 Oct 11, 2018
Jkt 247001
applicants with a copy of the request,
personally or by mail. Hearing requests
should be received by the Commission
by 5:30 p.m. on October 30, 2018, and
should be accompanied by proof of
service on the applicants, in the form of
an affidavit or, for lawyers, a certificate
of service. Pursuant to rule 0–5 under
the Act, hearing requests should state
the nature of the writer’s interest, any
facts bearing upon the desirability of a
hearing on the matter, the reason for the
request, and the issues contested.
Persons who wish to be notified of a
hearing may request notification by
writing to the Commission’s Secretary.
ADDRESSES: Secretary, U.S. Securities
and Exchange Commission, 100 F Street
NE, Washington, DC 20549–1090.
Applicants: Russell Kane, Esq., Natixis
Advisors, L.P., 888 Boylston Street,
Boston, MA 02199; John M. Loder, Esq.,
Ropes & Gray LLP, 800 Boylston Street,
Boston, MA 02199.
FOR FURTHER INFORMATION CONTACT:
Matthew B. Archer-Beck, Senior
Counsel, at (202) 551–5044, or Katlin C.
Bottock, Branch Chief, at (202) 551–
6821 (Division of Investment
Management, Chief Counsel’s Office).
SUPPLEMENTARY INFORMATION: The
following is a summary of the
application. The complete application
may be obtained via the Commission’s
website by searching for the file
number, or an applicant using the
Company name box, at https://
www.sec.gov/search/search.htm or by
calling (202) 551–8090.
Summary of the Application
1. The Adviser will serve as the
investment adviser to the Subadvised
Series pursuant to an investment
advisory agreement with the Trusts
(each, an ‘‘Investment Management
Agreement’’).1 The Adviser will provide
the Subadvised Series with continuous
and comprehensive investment
management services, subject to the
supervision of, and policies established
by the board of trustees of the Trust (the
‘‘Board’’). The Investment Management
Agreement permits the Adviser, subject
to the approval of the Board, to delegate
1 Applicants request relief with respect to the
named Applicants, as well as to any future series
of the Trusts and any other registered open-end
management investment company or series thereof
that (a) is advised by the Adviser, its successors, or
any entity controlling, controlled by or under
common control with the Adviser or its successors
(included in the term ‘‘Adviser’’); (b) uses the multimanager structure described in the application; and
(c) complies with the terms and conditions set forth
in the application (each, a ‘‘Subadvised Series’’).
For purposes of the requested order, ‘‘successor’’ is
limited to an entity that results from a
reorganization into another jurisdiction or a change
in the type of business organization.
PO 00000
Frm 00085
Fmt 4703
Sfmt 4703
to one or more sub-advisers (each, a
‘‘Sub-Adviser’’ and collectively, the
‘‘Sub-Advisers’’) the responsibility to
provide the day-to-day portfolio
investment management of each
Subadvised Series, subject to the
supervision and direction of the
Adviser.2 The primary responsibility for
managing each Subadvised Series will
remain vested in the Adviser. The
Adviser will hire, evaluate, allocate
assets to and oversee the Sub-Advisers,
including determining whether a SubAdviser should be terminated, at all
times subject to the authority of the
Board.
2. Applicants request an exemption to
permit the Adviser, subject to Board
approval, to hire certain Sub-Advisers
pursuant to Sub-Advisory Agreements
and materially amend existing SubAdvisory Agreements without obtaining
the shareholder approval required under
section 15(a) of the Act and rule 18f–2
under the Act.3 Applicants also seek an
exemption from the Disclosure
Requirements to permit a Subadvised
Series to disclose (as both a dollar
amount and a percentage of the
Subadvised Series’ net assets): (a) The
aggregate fees paid to the Adviser and
any Wholly-Owned Sub-Adviser; (b) the
aggregate fees paid to Non-Affiliated
Sub-Advisers; and (c) the fee paid to
each Affiliated Sub-Adviser
(collectively, ‘‘Aggregate Fee
Disclosure’’).
3. Applicants agree that any order
granting the requested relief will be
subject to the terms and conditions
stated in the application. Such terms
and conditions provide for, among other
safeguards, appropriate disclosure to
Subadvised Series shareholders and
notification about sub-advisory changes
and enhanced Board oversight to protect
the interests of the Subadvised Series’
shareholders.
2 A ‘‘Sub-Adviser’’ for a Subadvised Series is (1)
an indirect or direct ‘‘wholly-owned subsidiary’’ (as
such term is defined in the Act) of the Adviser for
that Subadvised Series, or (2) a sister company of
the Adviser for that Subadvised Series that is an
indirect or direct ‘‘wholly-owned subsidiary’’ of the
same company that, indirectly or directly, wholly
owns the Adviser (each of (1) and (2) a ‘‘WhollyOwned Sub-Adviser’’ and collectively, the
‘‘Wholly-Owned Sub-Advisers’’), or (3) not an
‘‘affiliated person’’ (as such term is defined in
section 2(a)(3) of the Act) of the Subadvised Series,
except to the extent that an affiliation arises solely
because the Sub-Adviser serves as a sub-adviser to
a Subadvised Series (‘‘Non-Affiliated SubAdvisers’’).
3 The requested relief will not extend to any subadviser, other than a Wholly-Owned Sub-Adviser,
who is an affiliated person, as defined in Section
2(a)(3) of the Act, of the Subadvised Series, the
Trusts or of the Adviser, other than by reason of
serving as a sub-adviser to one or more of the
Subadvised Series (‘‘Affiliated Sub-Adviser’’).
E:\FR\FM\12OCN1.SGM
12OCN1
]]>Agencies
[Federal Register Volume 83, Number 198 (Friday, October 12, 2018)]
[Notices]
[Pages 51730-51744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22202]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84373; File No. SR-ISE-2018-56]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
of Amendment No. 1 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Its
Rules Relating to Complex Orders
October 5, 2018.
I. Introduction
On June 22, 2018, Nasdaq ISE, LLC (``ISE'' or the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
provide additional detail to its rules governing the trading of Complex
Orders. The proposed rule change was published for comment in the
Federal Register on July 9, 2018.\3\ The Commission received no
comments regarding the proposal. On August 10, 2018, pursuant to
Section 19(b)(2) of the Act,\4\ the Commission extended the time for
Commission action on the proposal until October 5, 2018.\5\ ISE filed
Amendment No. 1 to the proposal on October 1, 2018.\6\ The Commission
is publishing this notice to solicit comment on Amendment No. 1 to the
proposed rule change from interested persons and is approving the
proposed rule change, as modified by Amendment No. 1, on an accelerated
basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 83576 (July 2,
2018), 83 FR 31783 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 83818 (August 10,
2018), 83 FR 40800 (August 16, 2018).
\6\ Amendment No. 1 revises the proposal to: (1) Discontinue
Reserve Complex Orders; (2) indicate in proposed ISE Rule 722(c)(2)
that complex strategies will not be executed at prices inferior to
the best net price achievable from the best net price on ISE for the
individual legs of the strategy; (3) indicate in proposed ISE Rule
722(d)(2) that complex strategies will execute against Priority
Customer interest on the single leg book at the same price before
executing against interest on the Complex Order Book; (4) indicate
in proposed ISE Rule 722, Supplementary Material .01(b)(ii) that an
exposure period will end immediately when a Complex Order for the
same complex strategy on either side of the market becomes
marketable against interest on the Complex Order Book or bids and
offers in the leg market; (5) revise proposed ISE Rules 722,
Supplementary Material .01(b)(iii) and .08(c)(4)(vi) to describe the
sequence of executions when an incoming Complex Order causes the
early termination of a complex exposure auction and an auction for
one of the component legs of the complex strategy; (6) revise
proposed ISE Rule 722, Supplementary Material .01(c) to indicate
that at the end of the exposure period, the interest against which
the exposed order executes includes bids and offers on the Complex
Order Book and for the individual legs that arrived during the
exposure period; (7) revise proposed ISE Rule 722, Supplementary
Material .01(d) to indicate that an exposure process will terminate
immediately without an execution if a trading halt is initiated in
any series underlying the Complex Order being exposed; (8) clarify
the description of the execution of Stock-Option and Stock Complex
Orders in proposed ISE Rule 722, Supplementary Material .02; (9)
revise proposed ISE Rule 722, Supplementary Material .08(e) to
indicate that Complex QCC Orders may be entered in $0.01 increments;
(10) delete provisions in ISE Rule 722 indicating that ISE will
recommence the functionality that permits concurrent auctions for
the same complex strategy by April 17, 2019, and add proposed ISE
Rule 722, Supplementary Material .08(g) to indicate the auctions for
the same complex strategy will not operate concurrently; (11) add
proposed ISE Rule 722, Supplementary Material .08(h) to indicate
that an auction for a complex strategy and an auction for a
component leg of the complex strategy may operate concurrently; (12)
indicate in proposed ISE Rule 722, Supplementary Material .13 to
indicate that the stock leg of a stock-option order must be marked
``buy,'' ``sell,'' ``sell short,'' or ``sell short exempt,'' in
compliance with Regulation SHO under the Act; (13) provide a new
example illustrating customer priority and the execution of a
Complex Order; (14) indicate that ISE does not manage and curtail
its functionality for executing a complex strategy against leg
market interest; (15) add references to the NBBO and the underlying
stock in proposed ISE Rule 722, Supplementary Material .07(a); (16)
provide additional discussion of the rationale for permitting a
Trade Value Allowance of any amount when a Complex Order executes in
an auction and does not trade solely with its contra-side order; and
(17) make several technical corrections to the proposal. Amendment
No. 1 is available at https://www.sec.gov/comments/sr-ise-2018-56/srise201856-4467038-175833.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
As described more fully in the Notice, the proposal modifies ISE's
rules to provide additional detail regarding the trading of Complex
Orders on ISE.
A. Definitions
The proposal revises ISE Rule 722(a) to add new defined terms and
modify existing defined terms relating to Complex Orders. The proposal
defines ``Complex Order'' to include Complex Options Orders, Stock-
Option Orders, and Stock-Complex Orders.\7\ Complex Options Orders,
Stock-Option Orders, and Stock-Complex Orders refer to orders for a
Complex Options Strategy,\8\
[[Page 51731]]
a Stock-Option Strategy,\9\ and a Stock-Complex Strategy,\10\
respectively.\11\ The term ``complex strategy'' includes Complex
Options Strategies, Stock-Option Strategies, and Stock-Complex
Strategies.\12\ ISE believes that the definitions will help to clarify
whether provisions in its rules apply only to Complex Options
Strategies, only to Stock-Option Strategies, only to Stock-Complex
Strategies, or to all three.\13\ The proposal deletes from ISE Rule 722
the definition of SSF-option order. ISE states that single stock
futures have not gained sufficient popularity among investors to
support a SSF-option product, and that ISE has never received a SSF-
option order.\14\
---------------------------------------------------------------------------
\7\ See proposed ISE Rule 722(a)(5).
\8\ A Complex Options Strategy is the simultaneous purchase and/
or sale of two or more different options series in the same
underlying security, for the same account, in a ratio that is equal
to or greater than one-to-three (.333) and less than or equal to
three-to-one (3.00) and for the purpose of executing a particular
investment strategy. Only those Complex Options Strategies with no
more than the applicable number of legs, as determined by the
Exchange on a class-by-class basis, are eligible for processing. See
proposed ISE Rule 722(a)(1). ISE will determine the applicable
number of legs for Complex Options Strategies and Stock-Complex
Strategies on a class-by-class basis. See Notice, 83 FR at 31784.
ISE notes that, by definition, Stock-Option Strategies will have
only one option leg and one stock leg. See id. at 31784, n.3.
\9\ A Stock-Option Strategy is the purchase or sale of a stated
number of units of an underlying stock or a security convertible
into the underlying stock (``convertible security'') coupled with
the purchase or sale of options contract(s) on the opposite side of
the market representing either (A) the same number of units of the
underlying stock or convertible security, or (B) the number of units
of the underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-to-one
(8.00), where the ratio represents the total number of units of the
underlying stock or convertible security in the option leg to the
total number of units of the underlying stock or convertible
security in the stock leg. See proposed Rule 722(a)(2).
\10\ A Stock-Complex Strategy is the purchase or sale of a
stated number of units of an underlying stock or a security
convertible into the underlying stock (``convertible security'')
coupled with the purchase or sale of a Complex Options Strategy on
the opposite side of the market representing either (A) the same
number of units of the underlying stock or convertible security, or
(B) the number of units of the underlying stock necessary to create
a delta neutral position, but in no case in a ratio greater than
eight-to-one (8.00), where the ratio represents the total number of
units of the underlying stock or convertible security in the option
legs to the total number of units of the underlying stock or
convertible security in the stock leg. Only those Stock-Complex
Strategies with no more than the applicable number of legs, as
determined by the Exchange on a class-by-class basis, are eligible
for processing. See proposed ISE Rule 722(a)(3).
\11\ See proposed ISE Rule 722(a)(5).
\12\ See proposed ISE Rule 722(a)(4).
\13\ See Notice, 83 FR at 31784.
\14\ See id. ISE also proposes to delete current ISE Rule 722,
Supplementary Material .01, which references SSF-option orders and
includes outdated language relating to Stock-Option and Stock-
Complex Orders. ISE will file a proposed rule change with the
Commission if it decides to offer SSF-option orders in the future.
See id.
---------------------------------------------------------------------------
B. Order Types
New ISE Rule 722(b) \15\ identifies the following order types and
designations that are available for Complex Orders: Market Complex
Order; \16\ Limit Complex Order; \17\ All-or-None Complex Order; \18\
Attributable Complex Order; \19\ Customer Cross Complex Order; \20\
Qualified Contingent Cross Complex Order; \21\ Day Complex Order; \22\
Fill-or-Kill Complex Order; \23\ Immediate-or-Cancel Complex Order;
\24\ Opening Only Complex Order; \25\ Good-Till-Date Complex Order;
\26\ Good-Till-Cancel Complex Order; \27\ Exposure Complex Order; \28\
Exposure Only Complex Order; \29\ and Complex QCC with Stock Order.\30\
The order types and designations for Complex Orders in proposed ISE
Rule 722(b) are based on order types and designations currently
provided in ISE Rule 715 for regular orders.\31\ The proposal also
amends ISE Rule 715(k) to indicate that legging orders are generated
only for Complex Options Orders.
---------------------------------------------------------------------------
\15\ The proposal renumbers current ISE Rule 722(b) as ISE Rule
722(c).
\16\ 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. See proposed ISE Rule 722(b)(1).
\17\ 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. See
proposed ISE Rule 722(b)(2).
\18\ 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. See
proposed ISE Rule 722(b)(3).
\19\ A Market or Limit Complex Order may be designated as an
Attributable Order as provided in Rule 715(h). See proposed ISE Rule
722(b)(5).
\20\ 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. See proposed ISE Rule 722(b)(6).
\21\ 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. See proposed ISE
Rule 722(b)(7).
\22\ 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.
See proposed ISE Rule 722(b)(8).
\23\ 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. See proposed ISE Rule 722(b)(9).
\24\ 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. See proposed ISE Rule
722(b)(10).
\25\ 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. See proposed ISE Rule 722(b)(11).
\26\ 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. See
proposed ISE Rule 722(b)(12).
\27\ 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. See proposed ISE Rule 722(b)(13).
\28\ An Exposure Complex Order is an order that will be exposed
upon entry as provided in Supplementary Material .01 to 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. See proposed ISE Rule 722(b)(14).
\29\ An Exposure Only Complex Order is an order that will be
exposed upon entry as provided in Supplementary Material .01 to 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. See proposed
ISE Rule 722(b)(15).
\30\ 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. See
proposed ISE Rule 722(b)(16).
\31\ See Notice, 83 FR at 31785.
---------------------------------------------------------------------------
ISE originally proposed to include Reserve Complex Orders in the
order types available for Complex Orders.\32\ In Amendment No. 1, ISE
proposes to discontinue offering Reserve Complex Orders in the fourth
quarter of 2018.\33\
[[Page 51732]]
ISE will continue to offer Reserve Orders in the single leg order
book.\34\ ISE states that it does not receive a high volume of Reserve
Complex Orders and believes that it is not necessary to offer Reserve
Complex Orders because there is no great demand for this order
type.\35\ ISE notes that it offers a variety of order types to its
market participants and does not believe that discontinuing Reserve
Complex Orders will disadvantage market participants when they submit
Complex Orders.\36\ In addition, ISE states that other options
exchanges do not offer Reserve Complex Orders.\37\ ISE will issue an
Options Trader Alert to members indicating the date when Reserve
Complex Orders will no longer be offered.\38\
---------------------------------------------------------------------------
\32\ Proposed ISE Rule 722(b)(4) provided that: 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. Thereafter, the non-displayed portion of any
Reserve Complex Order will trade in accordance with Rule 722(d).
(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 Rule 722.
\33\ See Amendment No. 1. In connection with this change, the
proposal deletes references to Reserve Complex Orders in the
following proposed rules: Proposed ISE Rule 722(b)(4); proposed ISE
Rule 722(c)(2)(iv); proposed ISE Rule 722, Supplementary Material
.11(vi); and proposed ISE Rule 722, Supplementary Material .12(b).
\34\ See id.
\35\ See id.
\36\ See id.
\37\ See id.
\38\ ISE states that it will notify members in October of the
anticipated discontinuation of Reserve Complex Orders in 2018. See
id.
---------------------------------------------------------------------------
C. Trading of Complex Orders and Quotes
Proposed ISE Rule 722(c) (formerly ISE Rule 722(b)) states that
complex strategies will be subject to all other ISE rules that pertain
to orders and quotes generally, except as otherwise provided in ISE
Rule 722.
1. Minimum Increments
Bids and offers for Complex Options Strategies may be expressed in
$0.01 increments, and the option(s) legs of Complex Options Strategies,
Stock-Option Strategies, and Stock-Complex Strategies may be executed
in $0.01 increments, regardless of the minimum increments otherwise
applicable to the individual options legs of the order.\39\ Bids and
offers for Stock-Option Strategies or Stock-Complex Strategies may be
expressed in any decimal price determined by ISE, and the stock leg of
a Stock-Option Strategy or Stock-Complex Strategy may be executed in
any decimal price permitted in the equity market.\40\ ISE states that
smaller minimum increments are appropriate for Complex Orders that
contain a stock component because the stock component may trade at
finer decimal increments permitted by the equity market.\41\ ISE notes
that even with the flexibility provided in proposed ISE Rule 722(c)(1),
the individual options and stock legs of a Complex Order must trade in
increments allowed by the Commission in the options and equities
markets.\42\
---------------------------------------------------------------------------
\39\ See proposed ISE Rule 722(c)(1).
\40\ See id. ISE will communicate the minimum increment for
Stock-Option Strategies and Stock-Complex Strategies to members via
Options Trader Alert. See Notice, 83 FR at 31786, n. 10.
\41\ See Notice, 83 FR at 31786.
\42\ See id. The proposal makes corresponding changes to ISE
Rule 722, Supplementary Material .07(b). ISE Rule 722, Supplementary
Material .07(b), as proposed to be amended, states that the System
will reject orders and quotes for a complex strategy where all 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). ISE notes that the revised
rule reflects that the stock leg(s) of a Stock-Option or Stock-
Complex Strategy may be entered in any decimal price determined by
ISE. 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. See Notice, 83 FR at
31786. The proposal also amends ISE Rule 710 to reference the
quoting and trading increments for Complex Strategies specified in
proposed ISE Rule 722(c)(1).
---------------------------------------------------------------------------
2. Complex Order Priority
The proposal revises the Complex Order priority provisions in
current ISE Rule 722(b)(2) (renumbered ISE Rule 722(c)(2)) to make
several non-substantive clarifying changes, including re-formatting the
rule into three paragraphs and incorporating new defined terms into the
rule text.\43\ As described more fully in the Notice, under proposed
ISE Rule 722(c)(2), the legs of a complex strategy with multiple
options legs (i.e., Complex Options Strategies and Stock-Complex
Strategies with more than one options component) may be executed at the
same price as bids and offers on ISE for the individual series so long
as there are no Priority Customer Orders on ISE at those prices.\44\ If
one options leg of such a strategy improves upon the best price
available on the Exchange, then the other leg(s) of the complex
strategy may trade at the same price as Priority Customer interest.\45\
The option leg of a Stock-Option Strategy may be executed at the same
price as bids and offers on ISE for the individual series established
by Professional Orders and market maker quotes, but not at the same
price as Priority Customer Orders for the individual series.\46\
Proposed ISE Rule 722(c)(2) also states that complex strategies will
not be executed at prices inferior to the best net price achievable
from the best ISE bids and offers for the individual legs.\47\
---------------------------------------------------------------------------
\43\ See Notice, 83 FR at 31786-7.
\44\ See Notice, 83 FR at 31786. Pursuant to ISE Rules
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). See id. at 3178 6, n. 12.
\45\ See Notice, 83 FR at 31786 and proposed ISE Rule 722(c)(2).
\46\ See id. at 31786-7 and proposed ISE Rule 722(c)(2).
\47\ See Amendment No. 1.
---------------------------------------------------------------------------
3. Complex Order Executions
The proposal renumbers ISE Rule 722(b)(3) as ISE Rule 722(d) and,
for clarity, states 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 proposed
ISE Rule 722(c)(2).\48\ In addition, proposed ISE Rule 722(d) more
clearly reflects the sequence in which complex strategies are
processed. First, eligible Complex Orders are exposed for price
improvement for a period of up to one second as provided in ISE Rule
722, Supplementary Material .01.\49\ Second, Complex Orders are matched
against other interest in the Complex Order Book, if possible.\50\
However, executable Complex Orders will execute against Priority
Customer interest on the single leg book at the same price before
executing against the Complex Order Book.\51\ Thus, Priority Customer
Orders on the single leg order book will retain priority and will
execute prior to any other Complex Order or non-Priority Customer
single leg interest at the same price.\52\ Third, Complex Orders are
executed against bids and offers on ISE for the individual series, if
possible.\53\
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\48\ See Amendment No. 1.
\49\ See proposed ISE Rule 722(d)(1).
\50\ See proposed ISE Rule 722(d)(2).
\51\ See id. and Amendment No. 1.
\52\ See id.
\53\ See proposed ISE Rule 722(d)(2).
---------------------------------------------------------------------------
The proposal also adds new ISE Rule 722(d)(4), which indicates
that, similar to the treatment of orders in the regular market, complex
strategies that are not executable may rest on the Complex Order Book
until they become executable.\54\ The proposal retains, without
substantive changes, provisions in current ISE Rule 722(b)(3) that
specify the manner in which bids and offers at the same price on the
Complex Order Book may be allocated and certain restrictions on Complex
Order executions against leg market interest.\55\
---------------------------------------------------------------------------
\54\ See Notice, 83 FR at 31787.
\55\ See proposed ISE Rules 722(d)(2) and (3).
---------------------------------------------------------------------------
4. Complex Order Exposure Process
Current ISE Rule 722(b)(3)(iii) provides that Complex Orders marked
for price improvement Complex orders will be exposed on the Complex
Order Book for a period of up to one second before being automatically
executed against pre-existing interest to provide
[[Page 51733]]
an opportunity for market participants to enter contra-side Complex
Orders that provide price improvement. At the end of the display
period, contra-side orders are executed in price priority and in time
priority at the same price. The proposal replaces this provision with
proposed ISE Rule 722, Supplementary Material .01, which describes an
auction process for Complex Orders. Under proposed ISE Rule 722,
Supplementary Material .01, a member may designate for exposure a
Complex Order that improves upon the best price for the same complex
strategy on the Complex Order Book.\56\ Market participants may enter
Exposure Complex Orders or Exposure Only Complex Orders.\57\ Upon entry
of an eligible Complex Order, ISE will send a broadcast message that
includes net price or at market, size, and side, and Members will be
able to enter Responses with the prices and sizes at which they are
willing to participate in the execution of the Complex Order.\58\
During the exposure period, ISE will broadcast the best Response price
and the aggregate size of Responses available at that price.\59\ The
exposure period will end immediately upon receipt of certain unrelated
Complex Orders for the same complex strategy,\60\ or if a trading halt
is initiated in any series underlying the Complex Order during the
exposure period.\61\ At the end of the exposure period, if the Complex
Order still improves upon the best price for the complex strategy on
the same side of the market, the Complex Order will be automatically
executed to the greatest extent possible pursuant to proposed ISE Rule
722(d)(2)-(3), taking into consideration: (i) Bids and offers on the
Complex Order Book, including interest received during the exposure
period, (ii) bids and offers on ISE for the individual options series,
including interest received during the exposure period, and (iii)
Responses received during the exposure period, provided that when
allocating pursuant to proposed ISE Rule 722(d)(2)(iii), Responses are
allocated pro-rata based on size.\62\ Any unexecuted balance will be
placed on the Complex Order Book (or cancelled in the case of an
Exposure Only Complex Order).\63\
---------------------------------------------------------------------------
\56\ See proposed ISE Rule 722, Supplementary Material .01(a).
Incoming orders will not be eligible to be exposed if there are
market orders on the Complex Order Book on the same side of the
market for the same complex strategy. See id.
\57\ See notes 28 and 29, supra.
\58\ See proposed ISE Rule 722, Supplementary Material .01(b).
Responses are only executable against the Complex Order with respect
to which they are entered, 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. At the conclusion of
the exposure period, any unexecuted balance of a Response will be
cancelled automatically. See proposed ISE Rule 722, Supplementary
Material .01(b)(i).
\59\ See id.
\60\ The exposure period for a Complex Order will end
immediately: (A) Upon 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; (B) 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 exposed Complex Order to be
outside of the best bid or offer for the same complex strategy on
the Complex Order Book; or (C) when a resting Complex Order for the
same complex strategy becomes marketable against interest on the
Complex Order Book or bids and offers for individual legs of the
same complex strategy.
\61\ See proposed ISE Rule 722, Supplementary Material. 01(d).
\62\ See proposed ISE Rule 722, Supplementary Material. 01(c)
and Amendment No. 1.
\63\ See id.
---------------------------------------------------------------------------
5. Trade Value Allowance
The Trade Value Allowance provided in proposed ISE Rule 722,
Supplementary Material .09 is a functionality that allows Stock-Option
Strategies and Stock-Complex Strategies to trade outside of their
expected notional trade value by a specified amount (the ``Trade Value
Allowance'').\64\ ISE states that after calculating the appropriate
options match price for a Stock-Option or Stock-Complex Order expressed
in a valid one cent increment, its trading system calculates the
corresponding stock match price rounded to the increment supported by
the equity market.\65\ 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.\66\ ISE states that its members
generally prefer not to forgo an execution for their Stock-Option
Strategies and Stock Complex Strategies when there is a Trade Value
Allowance because the amount of the rounding is miniscule compared to
the total value of the trade.\67\ Members may opt out of the Trade
Value Allowance if they do not want their orders to be executed when
there is a Trade Value Allowance of any amount.\68\ In those cases, ISE
will strictly enforce the net price marked on the order.\69\
---------------------------------------------------------------------------
\64\ The Trade Value Allowance is the percentage difference
between the expected notional value of a trade and the actual
notional value of the trade. See proposed ISE Rule 722,
Supplementary Material .09.
\65\ See Notice, 83 FR at 31793.
\66\ See id.
\67\ See id.
\68\ See id.
\69\ See id.
---------------------------------------------------------------------------
The amount of Trade Value Allowance permitted may be determined by
the member, or a default value determined by ISE and announced to
members.\70\ However, any amount of Trade Value Allowance is permitted
for an order executed in an auction pursuant to ISE Rule 722,
Supplementary Material .08 that does not trade solely with its contra-
side order.\71\ ISE notes that its auction mechanisms provide an
opportunity for market participants to respond with better priced
interest that could execute against an Agency Order.\72\ In the
interest of maintaining a fair and competitive market, ISE believes
that it is appropriate to ensure that crosses entered into an auction
mechanism that are broken up due to better priced interest are actually
executed against such better priced interest, and are not restricted
from trading to due to the Trade Value Allowance settings of one or
more members.\73\ Otherwise, an Agency Order in an auction mechanism
could be forced to forgo a guaranteed execution with the negotiated
contra-side party without the benefit of trading at a better price with
other market participants.\74\ Because the Trade Value Allowance is the
result of a rounding error, ISE believes that any amount of error
allowed in these circumstances would be miniscule compared to the value
of the trade.\75\
---------------------------------------------------------------------------
\70\ See proposed ISE Rule 722, Supplementary Material .09.
\71\ See id.
\72\ See Amendment No. 1.
\73\ See id.
\74\ See id.
\75\ See id.
---------------------------------------------------------------------------
D. Complex Opening and Re-Opening Process and Complex Uncrossing
Process
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
proposed ISE Rule 722, Supplementary Material .11, and Stock-Option
Strategies and Stock-Complex Strategies will be opened pursuant to the
Complex Uncrossing Process described in proposed ISE Rule 722,
Supplementary Material .12(b).\76\
---------------------------------------------------------------------------
\76\ See proposed ISE Rule 722, Supplementary Material .10. The
Complex Opening Process is described in greater detail in the
Notice, 83 FR at 31793-5.
---------------------------------------------------------------------------
1. Complex Opening and Re-Opening Process
ISE opens Complex Options Strategies in 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
[[Page 51734]]
are constrained by the NBBO for the individual legs.\77\ Bids and
offers for the individual legs of a complex strategy are not eligible
to participate in the Complex Opening Price Determination, although
they may participate in the Complex Uncrossing Process.\78\ 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 ISE Rule 722, Supplementary Material .12(b).\79\
---------------------------------------------------------------------------
\77\ See Notice, 83 FR at 31793. The system calculates Boundary
Prices at or within which Complex Orders and quotes may be executed
during the Complex Opening Price Determination 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 proposed ISE Rule 722(c)(2). See
proposed ISE Rule 722, Supplementary Material .11(d)(i).
\78\ See proposed ISE Rule 722, Supplementary Material .11(b)
and (d)(vi). ISE states that the Complex Opening Price Determination
considers only interest on the Complex Order Book because the
process is designed to promote price discovery for the complex
strategy. See Notice, 83 FR at 31794.
\79\ See proposed ISE Rule 722, Supplementary Material .11(c).
---------------------------------------------------------------------------
If the best bid for a complex strategy locks or crosses the best
offer, the system will calculate the Potential Opening Price by
identifying the price(s) at which the maximum number of contracts can
trade (``maximum quantity criterion'') taking into consideration all
eligible interest.\80\ The proposal also provides a method for
determining the Potential Opening Price when two or more Potential
Opening Prices would satisfy the maximum quantity criterion.\81\ If the
Potential Opening Price is at or within the Boundary Prices, the
Potential Opening Price becomes the Opening Price.\82\ 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.\83\ 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 proposed
Supplementary Material .12(b) to Rule 722.\84\
---------------------------------------------------------------------------
\80\ See proposed ISE Rule 722, Supplementary Material
.11(d)(ii). Eligible interest during the Complex Opening Price
Determination includes Complex Orders and quotes on the Complex
Order Book. See proposed ISE Rule 722, Supplementary Material
.11(b).
\81\ 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 of Complex Orders and quotes
to be traded 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 of Complex Orders and quotes to be traded 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. See proposed
ISE Rule 722, Supplementary Material .11(d)(iii).
\82\ See proposed ISE Rule 722, Supplementary Material
.12(d)(iv).
\83\ See id.
\84\ See id.
---------------------------------------------------------------------------
When an execution is possible during the Complex Opening Price
Determination, the system gives priority first to Market Complex
Orders, then to resting Limit Complex Orders and quotes on the Complex
Order Book, with priority given to better priced interest.\85\ The
allocation provisions of proposed ISE Rule 722(d)(2) apply with respect
to Complex Orders and quotes at the same price.\86\
---------------------------------------------------------------------------
\85\ See proposed ISE Rule 722, Supplementary Material
.12(d)(v).
\86\ See id.
---------------------------------------------------------------------------
If the Complex Order Book remains locked or crossed following the
process described in proposed ISE Rule 722, Supplementary Material
.12(d)(i)-(v), the system will process any remaining Complex Orders and
quotes, including Opening Only Complex Orders, in accordance with the
Complex Uncrossing Process described in proposed ISE Rule 722,
Supplementary Material .12(b).\87\ ISE believes that it is appropriate
to open with a Complex Uncrossing Process when the Complex Order Book
is not executable in the Complex Opening Price Determination because
the Complex 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.\88\
ISE notes that 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.\89\ In addition, ISE notes that trades during
the Complex Uncrossing Process are not constrained by the NBBO for the
individual legs and can instead trade at prices permitted under ISE
Rule 722, Supplementary Material .07, which allows the legs of a
complex strategy to trade through the NBBO for the individual legs by a
configurable amount.\90\ ISE therefore continues the 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.\91\
---------------------------------------------------------------------------
\87\ See proposed ISE Rule 722, Supplementary Material
.12(d)(vi).
\88\ See Notice, 83 FR at 31794.
\89\ See id.
\90\ See id.
\91\ See id.
---------------------------------------------------------------------------
2. Complex Uncrossing Process
The Complex Uncrossing Process is used during the Complex Opening
Process, as described above, and during regular trading when a resting
Complex Order or quote that is locked or crossed with other interest
becomes executable.\92\ During the Complex Uncrossing Process, ISE's
system identifies the oldest Complex Order or quote among the best
priced bids and offers on the Complex Order Book and matches that order
or quote pursuant to proposed ISE 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.\93\
This process is repeated until the Complex Order Book is no longer
executable.\94\
---------------------------------------------------------------------------
\92\ See id.
\93\ See proposed ISE Rule 722, Supplementary Material .12(b)(i)
and (ii). A Complex Order entered with an instruction that it must
be executed at a price that is equal to or better than the NBBO is
considered based on its actual limit or market price and not the
price of the NBBO for the component legs. See proposed ISE Rule 722,
Supplementary Material .12(b)(i).
\94\ See proposed ISE Rule 722, Supplementary Material
.12(b)(iii).
---------------------------------------------------------------------------
ISE states that the Complex Uncrossing Process provides an
efficient
[[Page 51735]]
and fair way of determining how to execute Complex Orders and quotes
when interest that is locked or crossed becomes executable during
regular trading.\95\ ISE notes that 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.\96\ When
market conditions change (e.g., the leg markets update) 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.\97\ ISE believes that describing this
process in its rules is helpful to members and other market
participants because it provides additional information about how
Complex Orders and quotes are executed when the Complex Order Book
becomes executable.\98\
---------------------------------------------------------------------------
\95\ See Notice, 83 FR at 31796.
\96\ See id.
\97\ See id. at 31796 and 31799.
\98\ See id. at 31799.
---------------------------------------------------------------------------
E. Internalization and Crossing
For clarity, ISE proposes to amend ISE Rule 722 to specify that the
requirements of ISE Rules 722(d) and (e) apply to Complex Orders.\99\
Proposed ISE Rule 722(c)(3) states that Complex Orders represented as
agent may be executed (i) as principal as provided in ISE Rule 717(d),
or (ii) against orders solicited from Members and non-member broker-
dealers as provided in ISE Rule 717(e). The rule further provides that
exposure requirements of ISE Rules 717(d) or (e) must be met on the
Complex Order Book unless the order is executed in one of the
mechanisms described in proposed Supplementary Material .08 to ISE Rule
722.\100\ ISE notes that it has consistently applied the exposure
requirement in ISE Rules 717(d) and (e) to the execution of Complex
Orders on the Complex Order Book, and that it has provided for the
execution of Complex Orders using the Facilitation Mechanism, the
Solicited Order Mechanism, and the Price Improvement Mechanism
(``PIM'').\101\ The proposal replaces current ISE Rules 716,
Supplementary Material .08 (describing the execution of Complex Orders
in the Facilitation and Solicited Order Mechanisms) and 723,
Supplementary Material .09 (describing the execution of Complex Orders
in the PIM), with proposed ISE Rules 722, Supplementary Material
.08(a), (b), and (c), which describe the execution of Complex Orders in
these mechanisms in greater detail.
---------------------------------------------------------------------------
\99\ ISE Rule 717(d) states that Electronic Access Members
(``EAMs'') may not execute as principal orders they represent as
agent unless (i) agency orders are first exposed on the Exchange for
at least one (1) second, (ii) the EAM has been bidding or offering
on the Exchange for at least one (1) second prior to receiving an
agency order that is executable against such bid or offer, or (iii)
the Member utilizes the Facilitation Mechanism pursuant to Rule
716(d), or (iv) the Member utilizes the Price Improvement Mechanism
for Crossing Transactions pursuant to Rule 723. ISE 717(e) states
that EAMs may not execute orders they represent as agent on the
Exchange against orders solicited from Members and non-member
broker-dealers to transact with such orders unless (i) the
unsolicited order is first exposed on the Exchange for at least one
(1) second, (ii) the Member utilizes the Solicited Order Mechanism
pursuant to Rule 716(e), (iii) the Member utilizes the Facilitation
Mechanism pursuant to Rule 716(d) or (iv) the Member utilizes the
Price Improvement Mechanism for Crossing Transactions pursuant to
Rule 723.
\100\ See proposed ISE Rule 722(c)(3).
\101\ See Notice, 83 FR at 31789.
---------------------------------------------------------------------------
1. Complex Facilitation Mechanism and Complex Solicited Order Mechanism
Proposed ISE Rule 722, Supplementary Material .08(a) provides that
an Electronic Access Member (``EAM'') may use the Complex Facilitation
Mechanism to facilitate a block-size Complex Order it represents as
agent, and/or a transaction in which the EAM has solicited interest to
execute against a block-size Complex Order it represents as agent. Each
options leg of a Complex Order entered into the Complex Facilitation
Mechanism must meet the minimum contract size requirement in ISE Rule
716(d) (i.e., at least 50 contracts).\102\ An EAM must be willing to
execute the entire size of Complex Orders entered into the Complex
Facilitation Mechanism.\103\
---------------------------------------------------------------------------
\102\ See proposed ISE Rule 722, Supplementary Material .08(a).
\103\ See id.
---------------------------------------------------------------------------
The Complex Solicited Order Mechanism allows an EAM to attempt to
execute a Complex Order it represents as agent (the ``Agency Complex
Order'') against contra orders that it solicited according to ISE Rule
716(e). Each Complex Order entered into the Solicited Order Mechanism
must be designated as all-or-none, and each options leg must meet the
minimum contract size requirement contained in ISE Rule 716(e) (i.e.,
500 or more contracts).\104\ The Complex Facilitation Mechanism and the
Complex Solicited Order Mechanism operate in a similar manner, as
described below.
---------------------------------------------------------------------------
\104\ See proposed ISE Rule 722, Supplementary Material .08(b).
Prior to entering Agency Orders into the Complex Solicited Order
Mechanism on behalf of a customer, EAMs must deliver to the customer
a written notification informing the customer that its order may be
executed using Nasdaq ISE's Solicited Order Mechanism. Such written
notification must disclose the terms and conditions contained in ISE
Rule 722, Supplementary Material .08(b) and must be in a form
approved by the Exchange. See proposed ISE Rule 722, Supplementary
Material .08(5).
---------------------------------------------------------------------------
Complex Orders must be entered into the Complex Facilitation
Mechanism or into the Complex Solicited Order Mechanism at a price that
is (A) equal to or better than the best bid or offer on the Complex
Order Book on the same side of the market as the Agency Order; and (B)
equal to or better than the best net price achievable from the best ISE
bids and offers for the individual legs on the same side of the market
as the Agency Order; provided that, if there is a Priority Customer
order on the best bid or offer for any leg, the order must be entered
at an improved price consistent with ISE Rule 722(c)(2).\105\ A Complex
Order that does not meet these requirements is not eligible for the
Complex Facilitation Mechanism or the Complex Solicited Order Mechanism
and will be rejected.\106\
---------------------------------------------------------------------------
\105\ See proposed ISE Rule 722, Supplementary Material
.08(a)(1)(i) and (ii) and .08(b).
\106\ See proposed ISE Rules 722, Supplementary Material
.08(a)(1) and .08(b)(1). In addition, a Complex Order entered into
the Complex Facilitation Mechanism or Complex Solicited Order
Mechanism will be rejected if any component of the Complex Order has
not opened for trading, or if there is a trading halt in any series
underlying the Complex Order. If a trading halt is initiated after
the order is entered into the Complex Facilitation Mechanism, the
auction will be automatically terminated without execution. See
proposed ISE Rules 722, Supplementary Material .08(a)(1) and
.08(b)(1). The priority rules in proposed ISE Rule 722(c)(2) also
may prevent the execution of a Complex Order entered into the
Facilitation Mechanism, in which case the transaction will be
cancelled. See proposed ISE Rule 722, Supplementary Material
.08(a)(5)(iv). Similarly, an Agency Complex Order entered into the
Solicited Order Mechanism may execute against the solicited Complex
Order only if, among other things, there are no Priority Customer
Complex Orders or Responses that are priced equal to the proposed
execution price. See proposed ISE Rule 722, Supplementary Material
.08(b)(4)(i)(D).
---------------------------------------------------------------------------
Upon the entry of a Complex Order into the Complex Facilitation
Mechanism or the Complex Solicited Order Mechanism, ISE will send a
broadcast message that includes the net price, side, and size of the
Agency Complex Order, and Members will have an opportunity to enter
Responses with the net prices and sizes at which they want to
participate in the facilitation of the Agency Complex Order.\107\ The
time given to enter Responses, which ISE will designate via Options
Trader Alert, will be no less than 100 milliseconds and no more than
one second.\108\ Responses are only executable against the Complex
Order with respect to which they are entered, and will only be
[[Page 51736]]
considered up to the size of the Complex Order to be facilitated.\109\
Responses must be entered in the increments provided in proposed ISE
Rule 722(c)(1) at the facilitation price or the proposed net execution
price, as applicable, or at a price that is at least one cent better
for the Agency Order.\110\ Responses will not be visible to other
auction participants and can be modified or deleted before the exposure
period has ended.\111\
---------------------------------------------------------------------------
\107\ See proposed ISE Rules 722, Supplementary Material
.08(a)(3) and .08(b)(3).
\108\ See id.
\109\ See proposed ISE Rules 722, Supplementary Material
.08(a)(4) and .08(b)(3).
\110\ See id.
\111\ See proposed ISE Rules 722, Supplementary Material
.08(a)(5) and .08(b)(4).
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At the end of the period given for the entry of Responses in the
Complex Facilitation Mechanism, a facilitation order will be
automatically executed as provided in the proposed rule.\112\ The
proposal also provides a guaranteed allocation for the facilitating
EAM,\113\ and allows the facilitating EAM to elect to automatically
match the net price and size of Complex Orders, Responses, and quotes
received during the exposure period up to a specified limit price or
without specifying a limit price.\114\
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\112\ See proposed ISE Rule 722, Supplementary Material
.08(a)(5). If an improved net price for the Complex Order being
executed can be achieved from Complex Orders, Responses, and quotes
on the Complex Order Book and, for Complex Options Orders, the ISE
best bids and offers on the individual legs, the facilitation order
will be executed against such interest. See proposed ISE Rule 722,
Supplementary Material .08(a)(5)(iv). If there is insufficient size
to execute the entire facilitation order at a better net price,
Priority Customer Complex Orders and Responses to buy (sell) at the
time the facilitation order is executed that are priced higher
(lower) than the facilitation price will be executed at the
facilitation price. Professional Complex Orders and Responses, and
quotes to buy (sell) at the time the facilitation order is executed
that are priced higher (lower) than the facilitation price will be
executed at their stated price, thereby providing the Complex Order
being facilitated a better price for the number of contracts
associated with such higher bids (lower offers). See proposed ISE
Rule 722, Supplementary Material .08(a)(5)(i).
\113\ Proposed ISE Rule 722, Supplementary Material
.08(a)(5)(ii) provides that the facilitating EAM will execute at
least forty percent (40%) (or such lower percentage requested by the
member) of the original size of the facilitation order, but only
after better-priced Responses, Complex Orders and quotes, as well as
Priority Customer Complex Orders and Responses at the facilitation
price, are executed in full. Thereafter, Professional Complex Orders
and Responses, and quotes at the facilitation price will participate
in the execution of the facilitation order based upon the percentage
of the total number of contracts available at the facilitation price
that is represented by the size of the Professional Complex Order or
Response, or quote.
\114\ Proposed ISE Rule 722, Supplementary Material
.08(a)(5)(iii) provides that a facilitating EAM may elect to
automatically match the net price and size of Complex Orders,
Responses and quotes received during the exposure period up to a
specified limit price or without specifying a limit price. This
election will also automatically match the net price available from
the ISE best bids and offers on the individual legs for the full
size of the order; provided that with notice to members the Exchange
may determine whether to offer this option only for Complex Options
Orders, Stock-Option Orders, and/or Stock Complex Orders. If a
member elects to auto-match, the facilitating EAM will be allocated
its full size at each price point, or at each price point within its
limit price if a limit is specified, until a price point is reached
where the balance of the order can be fully executed. At such price
point, the facilitating EAM will be allocated at least 40% (or such
lower percentage requested by the member) of the original size of
the facilitation order, but only after Priority Customer Orders and
Responses at such price point. Thereafter, Professional Complex
Orders and Responses, and quotes at the price point will participate
in the execution of the facilitation order based upon the percentage
of the total number of contracts available at the facilitation price
that is represented by the size of the Professional Complex Order or
Response, or quote. An election to automatically match better prices
cannot be cancelled or altered during the exposure period.
---------------------------------------------------------------------------
At the end of the period given for the entry of Responses in the
Solicited Order Mechanism, an Agency Complex Order will be
automatically executed in full pursuant to proposed ISE Rule 722,
Supplementary Material .08(b)(4)(i)-(iv), or cancelled.\115\ The Agency
Complex Order will execute against the Solicited Complex Order or
against other interest depending on whether there is insufficient size
to execute the Agency Order at an improved net price(s),\116\
sufficient Priority Customer interest to execute the entire Agency
Complex order at the proposed net execution price,\117\ or sufficient
size to execute the entire Agency Complex Order at an improved net
price(s).\118\ The proposed rule also specifies the allocation of
interest when the Agency Complex Order executes against interest other
than the solicited Complex Order.\119\
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\115\ See proposed ISE Rule 722, Supplementary Material
.08(b)(4).
\116\ If at the time of execution there is insufficient size to
execute the entire Agency Complex Order at an improved net price(s)
pursuant to ISE Rule 722, Supplementary Material .08(b)(4)(iii), the
Agency Complex Order will be executed against the solicited Complex
Order at the proposed execution net price so long as, at the time of
execution: (A) The execution net price is equal to or better than
the best net price achievable from the best ISE bids and offers for
the individual legs, (B) the Complex Order can be executed in
accordance with ISE Rule 722(c)(2) with respect to the individual
legs, (C) the execution net price is equal to or better than the
best bid or offer on the Complex Order Book, and (D) there are no
Priority Customer Complex Orders or Responses that are priced equal
to the proposed execution price. See proposed ISE Rule 722,
Supplementary Material .08(b)(4)(i).
\117\ If there are Priority Customer Complex Orders or Responses
on the opposite side of the Agency Complex Order at the proposed
execution net price and there is sufficient size to execute the
entire size of the Agency Complex Order, the Agency Complex Order
will be executed against such interest, and the solicited Complex
Order will be cancelled, provided that: (A) The execution net price
is equal to or better than the best net price achievable from the
best ISE bids and offers for the individual legs, and (B) the
Complex Order can be executed in accordance with ISE Rule 722(c)(2)
with respect to the individual legs. The aggregate size of all
Complex Orders, Responses and quotes and, for Complex Options
Orders, the aggregate size available from the best bids and offers
for the individual legs, will be used to determine whether the
entire Agency Complex Order can be executed pursuant to this
paragraph. See proposed ISE Rule 722, Supplementary Material
.08(b)(4)(ii).
\118\ If at the time of execution there is sufficient size to
execute the entire Agency Complex Order at an improved net price(s),
the Agency Complex Order will be executed at the improved net
price(s), and the solicited Complex Order will be cancelled,
provided that: (A) The execution net price is equal to or better
than the best net price achievable from the best ISE bids and offers
for the individual legs, and (B) the Complex Order can be executed
in accordance with ISE Rule 722(c)(2) with respect to the individual
legs. The aggregate size of all Complex Orders, Responses, and
quotes, and the aggregate size available from the best bids and
offers for the individual legs for a Complex Options Order, will be
used to determine whether the entire Agency Complex Order can be
executed at an improved net price(s). See proposed ISE Rule 722,
Supplementary Material .08(b)(4)(iii).
\119\ Proposed ISE Rule 722, Supplementary Material
.08(b)(4)(iv) provides that when executing the Agency Complex Order
against other interest in accordance with proposed ISE Rule 722,
Supplementary Material .08(b)(ii) and (iii), Priority Customer
Complex Orders and Responses will be executed first. Professional
Complex Orders and Responses, and market maker quotes participate
next in the execution of the Agency Complex Order based upon the
percentage of the total number of contracts available at the best
price that is represented by the size of the Professional Complex
Order or Response, or market maker quote. Finally, for Complex
Options Orders, bids and offers for the individual legs will be
executed pursuant to Rule 713 and the Supplementary Material
thereto.
---------------------------------------------------------------------------
2. Complex PIM
The Complex PIM allows an EAM to seek price improvement for a
transaction in which an EAM is facilitating a Complex Order it
represents as agent, and/or a transaction in which the EAM has
solicited interest to execute against a Complex Order it represents as
agent (a ``Crossing Transaction'').\120\ A Crossing Transaction is
comprised of the order the EAM represents as agent (the ``Agency
Order'') and a counter-side order for the full size of the Agency Order
(the ``Counter-Side Order'').\121\ A Complex Order must be entered into
the Complex PIM at a price that is better than the best net price (i)
available on the Complex Order Book on both sides of the market; and
(ii) achievable from the best ISE bids and offers for the individual
legs on both sides of the market (an ``improved net price'').\122\ A
Complex Order that does not satisfy this requirement will be
rejected.\123\
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\120\ See proposed ISE Rule 722, Supplementary Material .08(c).
\121\ The Counter-Side Order may represent interest for the
Member's own account or interest the Member has solicited from one
or more other parties, or a combination of both. See proposed ISE
Rule 722, Supplementary Material .08(c)(1).
\122\ See proposed ISE Rule 722, Supplementary Material
.08(c)(2).
\123\ See id. In addition, a Complex Order entered into the
Complex PIM will be rejected if any component of the Complex Order
has not opened for trading, or if there is a trading halt in any
series underlying the Complex Order. If a trading halt is initiated
after the order is entered into the Complex PIM, the auction will be
automatically terminated without an execution. See ISE Rule 722,
Supplementary Material .08(c)(3).
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[[Page 51737]]
Upon entry of a Complex Order into the Complex PIM, ISE will
broadcast to members a message that includes the net price, side and
size of the Agency Complex Order.\124\ ISE will designate via Options
Trader Alert a time of no less than 100 milliseconds and no more than
one second for members to indicate the size and net price at which they
want to participate in the execution of the Agency Complex Order
(``Improvement Complex Orders'').\125\ All members may enter
Improvement Complex Orders for their own account or for the account of
a Public Customer.\126\
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\124\ See proposed ISE Rule 722, Supplementary Material
.08(c)(4).
\125\ See proposed ISE Rule 722, Supplementary Material
.08(c)(4).
\126\ See proposed ISE Rule 722, Supplementary Material
.08(c)(4)(i). An Improvement Complex Order, which is only executable
against the Complex Order with respect to which it is entered and
will only be considered up to the size of the Agency Complex Order,
must be entered in the increments provided in proposed ISE Rule
722(c)(1) at the same price as the Crossing Transaction or at a
price that is at least one cent better for the Agency Complex Order.
An Improvement Complex Order may not be canceled, but it may be
modified to (1) increase the size at the same price, or (2) improve
the price of the Improvement Complex Order for any size. Improvement
Complex Orders will not be visible to other auction participants.
See proposed ISE Rules 722, Supplementary Material .08(c)(4)(i)-
(iii).
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The exposure period for a Complex PIM will automatically terminate
(A) at the end of the time period designated by ISE pursuant to ISE
Rule 722, Supplementary Material .08(c)(4)(i), (B) upon the receipt of
a Complex Order or quote in 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 (C) upon the receipt of a non-
marketable Complex Order or quote in the same complex strategy on the
same side of the market as the Agency Complex Order that would cause
the execution of the Agency Complex Order to be outside of the best bid
or offer on the Complex Order Book.\127\ Although only one Complex PIM
may be ongoing at any time for a particular complex strategy, a PIM in
a component leg of a complex strategy may run concurrently with a
Complex PIM for that strategy.\128\
---------------------------------------------------------------------------
\127\ See proposed ISE Rule 722, Supplementary Material
.08(c)(4)(iv). When a marketable Complex Order on the opposite side
of the Agency Complex Order ends the exposure period, it will
participate in the execution of the Agency Complex Order at the
price that is mid-way between the best counter-side interest and the
same side best bid or offer on the Complex Order Book or net price
from ISE best bid or offer on individual legs, whichever is better,
so that both the marketable Complex Order and the Agency Complex
Order receive price improvement. See proposed ISE Rule 722,
Supplementary Material .04(c)(5)(iv).
\128\ See proposed ISE Rule 722, Supplementary Material
.08(c)(4)(v). A Complex PIM for a complex strategy may be ongoing at
the same time as a PIM pursuant to ISE Rule 723 or during an
exposure period pursuant to Supplementary Material .02 to ISE Rule
1901 in a component leg(s) of such complex strategy. If a Complex
PIM is early terminated pursuant to ISE Rule 722, Supplementary
Material .08(c)(4)(iv), and the incoming Complex Order that causes
the early termination in the complex strategy is also marketable
against a component leg(s) of the complex strategy that is the
subject of a concurrent ongoing PIM pursuant to ISE Rule 723 or an
exposure period pursuant to Supplementary Material .02 to ISE Rule
1901, then the concurrent Complex PIM and component leg auction(s)
are processed in the following sequence: (1) The Complex PIM is
early terminated; (2) the component leg auction(s) are early
terminated and processed; and (3) legging of residual incoming
Complex Order interest occurs. See proposed ISE Rule 722,
Supplementary Material .08(c)(4)(vi) and Amendment No. 1.
---------------------------------------------------------------------------
At the end of the exposure period, the Agency Complex Order will be
executed in full at the best prices available, taking into
consideration Complex Orders and quotes in the Complex Order Book,
Improvement Complex Orders, the Counter-Side Order, and, for Complex
Options Orders, the ISE best bids and offers on the individual
legs.\129\ The Agency Complex Order will receive executions at multiple
price levels if there is insufficient size to execute the entire order
at the best price.\130\ At any net price, Priority Customer interest on
the Complex Order Book (i.e., Priority Customer Complex Orders and
Improvement Complex Orders) is executed in full before Professional
interest (i.e., Professional Complex Orders and Improvement Complex
Orders) and market maker quotes on the Complex Order Book.\131\ After
Priority Customer interest on the Complex Order Book at a given net
price, Professional interest and market maker quotes on the Complex
Order Book will participate in the execution of the Agency Complex
Order based on the percentage of the total number of contracts
available at the price represented by the size of that interest.\132\
When the Counter-Side Complex Order is at the same net price as
Professional interest and market maker quotes on the Complex Order
Book, the Counter-Side Complex Order will be allocated the greater of
one contract or 40% (or such lower percentage requested by the member)
of the initial size of the Agency Complex Order before other
Professional interest and market maker quotes on the Complex Order Book
are executed.\133\
---------------------------------------------------------------------------
\129\ See proposed ISE Rule 722, Supplementary Material
.08(c)(5). If an improved net price for the Complex Order being
executed can be achieved from Complex Orders, Improvement Complex
Orders, and quotes on the Complex Order Book and, for Complex
Options Orders, the ISE best bids and offers on the individual legs,
the Agency Complex Order will be executed against such interest. In
addition, the priority provisions in ISE Rule 722(c)(2) will
continue to apply and may prevent the execution of a Complex Order
entered into the Complex PIM, in which case the transaction will be
cancelled. See ISE Rule 722, Supplementary Material .08(c)(5)(v).
\130\ See proposed ISE Rule 722, Supplementary Material
.08(c)(5).
\131\ See proposed ISE Rule 722, Supplementary Material
.08(c)(5)(i).
\132\ See proposed ISE Rule 722, Supplementary Material
.08(c)(5)(ii).
\133\ See proposed ISE Rule 722, Supplementary Material
.08(c)(5)(iii). Upon entry of Counter-Side Complex Orders, Members
can elect to automatically match the price and size of Complex
Orders, Improvement Complex Orders and quotes received on the
Complex Order Book during the exposure period up to a specified
limit net price or without specifying a limit net price. This
election will also automatically match the net price available from
the ISE best bids and offers on the individual legs for the full
size of the order; provided that with notice to members the Exchange
may determine whether to offer this option only for Complex Options
Orders, Stock-Option Orders, and/or Stock Complex Orders. If a
member elects to auto-match, the Counter-Side Complex Order will be
allocated its full size at each price point, or at each price point
within its limit net price if a limit is specified, until a price
point is reached where the balance of the order can be fully
executed. At such price point, the Counter-Side Complex Order shall
be allocated the greater of one contract or 40% (or such lower
percentage requested by the member) of the original size of the
Agency Complex Order, but only after Priority Customer Complex
Orders and Improvement Complex Orders at such price point are
executed in full. Thereafter, all Professional Complex Orders and
Improvement Complex Orders, and quotes at the price point will
participate in the execution of the Agency Complex Order based upon
the percentage of the total number of contracts available at the
price that is represented by the size of the Professional Complex
Order or Improvement Complex Order, or quote on the complex order
book. See id.
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3. Complex Customer Cross Orders
ISE notes that ISE Rules 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).\134\
Transactions where neither side is for the account of a broker-dealer
are not within the scope of ISE Rule 717(d) and (e), and members can
enter the buy and sell orders on the limit order book nearly
simultaneously.\135\ To make the
[[Page 51738]]
execution of such customer orders more efficient, the ISE developed
Customer Cross Orders as a way to enter opposing customer orders using
a single order type.\136\
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\134\ See Notice, 83 FR at 31790.
\135\ See id. ISE notes that ISE Rule 717, Supplementary
Material .01 prohibits members from entering into arrangements
designed to circumvent the exposure requirements for facilitation
transactions. Accordingly, it would be a violation of ISE 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. See id. at n. 35.
\136\ See Notice, 83 FR at 31790. See also Securities Exchange
Act Release No. 60253 (July 7, 2009), 74 FR 34063 (July 14, 2009)
(notice of filing and immediate effectiveness of File No. SR-ISE-
2009-34).
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Proposed ISE Rule 722, Supplementary Material .08(d) addresses the
application of Customer Cross Orders to Complex Orders.\137\ Proposed
ISE Rule 722, Supplementary Material .08(d) states that Complex
Customer Cross Orders will be 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 strategy on the Complex Order Book; (ii)
there are no Priority Customer Complex Orders for the same strategy at
the same price on the Complex Order Book; and (iii) the options legs
can be executed at prices that comply with the provisions of ISE Rule
722(c)(2). The proposed rule further states that Complex Customer Cross
Orders will be rejected if they cannot be executed, and that ISE Rule
717, Supplementary Material .01 applies to Complex Customer Cross
Orders.\138\
---------------------------------------------------------------------------
\137\ See Notice, 83 FR at 31790.
\138\ See footnote 135, supra.
---------------------------------------------------------------------------
4. Complex Qualified Contingent Cross Orders
Proposed ISE Rule 722, Supplementary Material .08(e) states that
Complex Options Orders may be entered as Qualified Contingent Cross
Orders, as defined in ISE Rule 715(j).\139\ Proposed ISE Rule 722,
Supplementary Material .08(e) states that Complex Qualified Contingent
Cross Orders (``Complex QCC Orders'') will be 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 options legs can be executed at prices that (A) are
at or between the NBBO for the individual series, and (B) comply with
the provisions of ISE 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.
Proposed ISE Rule 722, Supplementary Material .08(e) further provides
that Complex QCC Orders will be rejected if they cannot be executed,
that they may be entered in one cent increments, and that each leg of a
Complex Options Order must meet the 1,000 contract minimum size
requirement for Qualified Contingent Cross Orders. ISE notes that in
executing Complex QCC Orders, Priority Customer Orders on the Complex
Order Book and Priority Customer Orders on ISE for the individual
options series are protected.\140\
---------------------------------------------------------------------------
\139\ ISE Rule 715(j) defines a Qualified Contingent Cross Order
as an order comprised of an originating order to buy or sell at
least 1,000 contracts that is identified as being part of a
qualified contingent trade, as that term is defined in ISE Rule 715,
Supplementary Material .01, coupled with a contra-side order or
orders totaling an equal number of contracts. ISE Rule 715,
Supplementary Material .01 states that a qualified contingent trade
is a transaction consisting of two or more component orders,
executed as agent or principal, where: (a) At least one component is
an NMS Stock, as defined in Rule 600 of Regulation NMS under the
Exchange Act; (b) all components are effected with a product or
price contingency that either has been agreed to by all the
respective counterparties or arranged for by a broker-dealer as
principal or agent; (c) the execution of one component is contingent
upon the execution of all other components at or near the same time;
(d) the specific relationship between the component orders (e.g.,
the spread between the prices of the component orders) is determined
by the time the contingent order is placed; (e) the component orders
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 (f) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade.
\140\ See Notice, 83 FR at 31791.
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5. Complex QCC With Stock Orders
Proposed ISE Rule 722, Supplementary Material .08(f) describes the
processing of Complex QCC with Stock Orders.\141\ ISE notes that
because a Complex QCC Order represents one component of a qualified
contingent trade, each Complex QCC Order must be paired with a stock
transaction.\142\ ISE further notes that members must separately
execute the stock component of a regular Complex QCC Order.\143\ By
contrast, when a member enters a Complex QCC with Stock Order, ISE will
attempt to facilitate the execution of the stock component in addition
to the options component.\144\ When a member enters a Complex QCC with
Stock Order, a Complex QCC Order is entered ISE.\145\ If the Complex
QCC Order is executed, ISE will automatically communicate the stock
component to the member's designated broker-dealer for execution.\146\
If the Complex QCC Order cannot be executed, the entire Complex QCC
with Stock Order, including both the stock and options components, is
cancelled.\147\ ISE Rules 721, Supplementary Material .01-.03 apply to
the entry and execution of Complex QCC with Stock Orders.\148\ ISE
states that Complex 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.\149\
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\141\ As noted above, a Complex QCC with Stock Order is a
Complex QCC 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 proposed ISE Rule 722, Supplementary Material
.08. See proposed ISE Rule 722(b)(16).
\142\ See Notice, 83 FR at 31792.
\143\ See id.
\144\ See id.
\145\ See proposed ISE Rule 722, Supplementary Material
.08(f)(1).
\146\ See proposed ISE Rule 722, Supplementary Material
.08(f)(2).
\147\ See proposed ISE Rule 722, Supplementary Material
.08(f)(3).
\148\ See proposed ISE Rule 722, Supplementary Material
.08(f)(4).
\149\ See Notice, 83 FR at 31792. 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. See ISE Rule 721, Supplementary Material .03.
---------------------------------------------------------------------------
F. Concurrent Auctions
1. Concurrent Complex Order and Single Leg Auctions
Proposed ISE Rule 722, Supplementary Material .08(h) provides that
an auction in the Block Order Mechanism, Facilitation Mechanism,
Solicited Order Mechanism, or PIM, or an exposure period as provided in
ISE Rule 1901, Supplementary Material .02, for an option series may
occur concurrently with a Complex Order Exposure Auction, Complex
Facilitation auction, Complex Solicited Order auction, or Complex PIM
for a Complex Order that includes that series.\150\ To the extent that
there are concurrent Complex Order and single leg auctions involving a
specific option series, each auction will be processed sequentially
based on the time the auction commenced.\151\
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\150\ See Amendment No. 1.
\151\ See Amendment No. 1. At the time an auction concludes,
including when it concludes early, the auction will be processed
pursuant to ISE Rules 716(b), (c), (d), or (e), or 723 or
Supplementary Material .02 to Rule 1901, as applicable, for the
single option, or pursuant to proposed ISE Rules 722, Supplementary
Material .01, or .08(a), (b), or (c), as applicable, for the Complex
Order, except as provided for in proposed Supplementary Material
.08(c)(4)(vi) to ISE Rule 722. See id.
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2. Limitation on Concurrent Complex Strategy Auctions
In conjunction with ISE's migration to the INET platform, ISE filed
a proposal in 2017 to delay the re-introduction of
[[Page 51739]]
functionality on ISE that permitted concurrent Complex Order auctions
in the same complex strategy.\152\ ISE subsequently extended its delay
of the re-introduction of this functionality for an additional year,
until April 17, 2019.\153\ ISE states that it has no immediate plans to
re-introduce the functionality.\154\ Accordingly, ISE proposes to
delete from ISE Rule 722 language indicating that ISE will recommence
concurrent Complex Order auctions or before April 17, 2019.\155\ In
addition, ISE proposes to adopt ISE Rule 722, Supplementary Material
.08(g), which provides that only one Exposure Auction, Complex PIM,
Complex Facilitation Mechanism auction, or Complex Solicited Order
Mechanism auction will be ongoing at any given time in a complex
strategy, and states that such auctions will not queue or overlap in
any manner.\156\
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\152\ INET is the proprietary core technology utilized across
Nasdaq's global markets and utilized on The Nasdaq Options Market
LLC, Nasdaq PHLX LLC, and Nasdaq BX, Inc. See Amendment No. 1. See
also Securities and Exchange Act Release No. 80525 (April 25, 2017),
82 FR 20405 (May 1, 2017) (notice of filing and immediate
effectiveness of SR-ISE-2017-33).
\153\ See Amendment No. 1. See also Securities and Exchange Act
Release No. 83101 (April 25, 2018), 83 FR 19130 (May 1, 2018)
(notice of filing and immediate effectiveness of SR-ISE-2018-40)
(``April 2018 Notice'').
\154\ See Amendment No. 1.
\155\ See id. In the event that ISE wishes to implement
concurrent Complex Order auctions in the future, it will file a
proposed rule change with the Commission to do so. See id.
\156\ See Amendment No. 1. Proposed ISE Rule 722, Supplementary
Material .08(g) states that ISE will not initiate an Exposure
Auction, Complex PIM, Complex Facilitation Mechanism auction, or
Complex Solicited Order Mechanism auction in a complex strategy
while another Exposure Auction, Complex PIM, or Complex Solicited
Order Mechanism auction in that Complex Strategy is ongoing. If a
Complex PIM auction, Complex Facilitation Mechanism auction, or
Complex Solicited Order Mechanism auction for a Complex Strategy has
been initiated, an Exposure Auction for that Complex Strategy will
not be initiated, and an Exposure Only Complex Order for the Complex
Strategy will be cancelled back to the member. An Exposure Order for
the Complex Strategy will be processed as an order that is not
marked for price improvement.
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ISE states that it has not offered concurrent auctions in the same
complex order strategy since 2017, and notes that no member has
complained or expressed concern about the absence of the
functionality.\157\ In the April 2018 Notice, ISE stated that it was
rare for multiple auctions in a complex strategy to be ongoing at a
particular time, particularly due to the decrease in ISE's auction
timers to 100 milliseconds.\158\ ISE stated that prior to the migration
to the INET platform concurrent auctions in a complex options strategy
only occurred approximately 0.5% of the time that an auction ran on the
Exchange.\159\ ISE believes that the absence of the concurrent Complex
Order functionality will have an insignificant impact on members.\160\
ISE states that a member that has auction-eligible interest to execute
when another Complex Order auction is ongoing can either re-submit that
order to the Exchange after the auction has concluded, or submit the
order to another options market that provides similar auction
functionality.\161\ In this regard, ISE notes that its market data
feeds provide information to members about when a Complex Order auction
is ongoing, and members can therefore use this information to make
appropriate routing decisions based on applicable market
conditions.\162\ ISE notes that other options markets do not offer
concurrent Complex Order auctions in a strategy.\163\
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\157\ See Amendment No. 1.
\158\ See April Notice, 82 FR at n. 10 (citing Securities
Exchange Act Release No. 79733 (January 4, 2017), 82 FR 3055
(January 10, 2017) (SR-ISE-2016-26) (permitting the Exchange to
determine auction timers for PIM, Facilitation, and Solicitation
within a range of 100 milliseconds and one second)). ISE noted that
each of these auction timers, as well as the auction timer for
exposure auctions, was currently set to 100 milliseconds. See also
Amendment No. 1.
\159\ See April Notice, 82 FR at 19131. See also Amendment No.
1.
\160\ See Amendment No. 1.
\161\ See id.
\162\ See id.
\163\ ISE states that Nasdaq Phlx, LLC does not allow the
initiation of a Complex Order Live Auction when there is a Price
Improvement XL auction already ongoing in the strategy pursuant to
Phlx Rule 1098(e)(2). Similarly, Miami International Securities
Exchange LLC has the ability to limit the frequency of Complex
Auctions by establishing a minimum time period between such auctions
pursuant to MIAX Rule 518(d)(2). See id.
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G. Stock-Option and Stock-Complex Orders
Proposed ISE Rule 722, Supplementary Material .13 provides
requirements for Stock-Option and Stock-Complex Orders. The proposed
rule allows members to submit only Stock-Option and Stock-Complex
Orders and quotes that comply with the QCT Exemption from Rule 611(a)
of Regulation NMS, and members submitting these orders and quotes
represent that they comply with the QCT Exemption. In addition,
proposed ISE Rule 722, Supplementary Material .13 requires that the
stock leg of a Stock-Option Order be marked ``buy,'' ``sell,'' ``sell
short,'' or ``sell short exempt'' in compliance with Regulation SHO
under the Exchange Act.
H. Additional Changes
1. Market Maker Quotes
As part of the transition to the INET platform, ISE has delayed
until April 26, 2019, the re-introduction of the functionality that
allows market makers to enter quotes in certain symbols for complex
strategies on the Complex Order Book.\164\ ISE states that prior to the
INET transition, quoting in the Complex Order Book was available in a
subset of the options classes.\165\ Accordingly, ISE proposes to amend
ISE Rule 722, Supplementary Material .03 to indicate that complex
quoting will be available only in options classes selected by the
Exchange and announced to members via Options Trader Alert.\166\ ISE
notes that market makers that quote in the Complex Order Book must
enter certain risk parameters pursuant to ISE Rule 722, Supplementary
Material .04 (``Market Maker Speed Bump'').\167\ In connection with
proposed changes to the defined terms relating to Complex Orders, as
described above, ISE proposes to amend ISE Rule 722, Supplementary
Material .04 to clarify that the Market Maker Speed Bump applies to
Complex Options Strategies and not to Stock-Option Strategies or Stock-
Complex Strategies.\168\
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\164\ See ISE Rule 722, Supplementary Material .03. See also
Securities Exchange Act Release Number 83001 (April 5, 2018), 83 FR
15653 (April 11, 2018) (notice of filing and immediate effectiveness
of File No. SR-ISE-2018-29).
\165\ See Notice, 83 FR at 31788.
\166\ See id.
\167\ See id.
\168\ See id. ISE notes that because the Market Maker Speed Bump
is based exclusively on options contracts traded, it applies only to
Complex Options Strategies and not to complex strategies that have a
stock component. See id. at 31797.
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2. Price Limits for Complex Orders and Quotes
ISE Rule 722, Supplementary Material .07(a) establishes a risk
protection that limits the amount by which the legs of a complex
strategy may be executed at prices inferior to the prices available on
other exchanges trading the same options series. ISE proposes to amend
ISE Rule 722, Supplementary Material .07(a) to include a reference to
the stock leg of Stock-Option Strategies and Stock-Complex
Strategies.\169\ Proposed ISE Rule 722, Supplementary Material .07(a)
will state, in part, that the System will not permit the legs of a
complex strategy to trade through the NBBO for the series or any stock
component by a configurable amount calculated as the lesser of (i) an
absolute amount not to
[[Page 51740]]
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.
Similarly, ISE proposes to add a reference to the national best bid or
offer for the stock leg to the Limit Order Price Protection in ISE Rule
722, Supplementary Material .07(d).\170\ ISE believes that these
changes will increase transparency with respect to the prices ISE uses
when ISE must derive a best bid or offer from the prices available in
the regular market.\171\ In addition, ISE Rule 722, Supplementary
Material .07(d) currently describes the application of the Limit Order
Price Protection to Limit Complex Orders to buy. The proposal revises
ISE Rule 722, Supplementary Material .07(d) to describe the application
of the price protection to Limit Complex Orders to sell.\172\
---------------------------------------------------------------------------
\169\ See Notice, 83 FR at 31792. See id. at 31792-3.
\170\ See id. at 31792-3. Proposed ISE Rule 722, Supplementary
Material .07(d) states: There is a limit on the amount by which the
net price of an incoming Limit Complex Order to buy may exceed the
net price available from the individual options series on the
Exchange and the national best bid or offer for any stock leg, and
by which the net price of an incoming Limit Complex Order to sell
may be below the net price available from the individual options
series on the Exchange and the national best bid or offer for any
stock leg. Limit Complex Orders that exceed the pricing limit are
rejected. The limit is established by the Exchange from time-to-time
for Limit Complex Orders to buy (sell) as the net price available
from the individual options series on the Exchange and the national
best bid or offer for any stock leg plus (minus) the greater of: (i)
An absolute amount not to exceed $2.00, or (ii) a percentage of the
net price available from the individual options series on the
Exchange and the national best bid or offer for any stock leg not to
exceed 10%. This limit order price protection applies only to orders
and does not apply to quotes.
\171\ See id.
\172\ See id. at 31793.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\173\ In particular, for
the reasons discussed below, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act,\174\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest. This order approves the proposed rule change in its
entirety, although only certain more significant aspects of the
proposed rules are discussed below.
---------------------------------------------------------------------------
\173\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\174\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Definitions and Order Types
The proposal revises ISE's current definitions relating to Complex
Orders by creating the new defined terms Complex Options Strategy,
Stock-Option Strategy, and Stock-Complex Strategy, as well as the
corresponding orders for each of these strategies. The new defined
terms should help to clarify ISE's rules by indicating more precisely
which ISE rules apply to these orders and strategies.\175\ The
Commission believes that the Complex Order types in proposed ISE Rule
722(b), including Market Complex Orders, Limit Complex Orders, All-or-
None Complex Orders, Attributable Complex Orders, Day Complex Orders,
Fill-or-Kill Complex Orders, Immediate-or-Cancel Complex Orders,
Opening Only Complex Orders, Good-Till-Date Complex Orders, Good-Till-
Cancel Complex Orders, Exposure Complex Orders, and Exposure Only
Complex Orders provide market participants with flexibility and control
over the trading of Complex Orders.\176\ The Commission notes that ISE
currently permits each of these order types (other than Exposure
Complex Orders and Exposure Only Complex Orders) for orders for a
single option series.\177\
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\175\ For example, the proposal revises ISE Rule 715(k) to
indicate that legging orders are generated only for Complex Options
Orders.
\176\ Complex Customer Cross Orders and Complex QCC Orders are
discussed in Section III.F(3), infra.
\177\ See ISE Rule 715.
---------------------------------------------------------------------------
The proposal deletes from ISE Rule 722 the definition of SSF-option
order. As noted above, ISE states that single stock futures have not
gained sufficient popularity among investors to support a SSF-option
product, and ISE has never received a SSF-option order.\178\ In light
of the lack of interest in trading SSF-option orders, the Commission
believes that ISE's elimination of SSF-option orders will not
negatively impact investors or other market participants.\179\
---------------------------------------------------------------------------
\178\ See note 14, supra, and accompanying text.
\179\ ISE will file a proposed rule change with the Commission
if ISE determines to offer SSF-option orders in the future. See
Notice, 83 FR at 31784.
---------------------------------------------------------------------------
ISE also proposes to discontinue Reserve Complex Orders in the
fourth quarter of 2018.\180\ As noted above, ISE states that it does
not receive a high volume of Reserve Complex Orders, that there is no
great demand for this order type, and that other options exchanges do
not offer this order type.\181\ ISE will issue an Options Trader Alert
to members indicating the date when Reserve Complex Orders will no
longer be offered.\182\ The Commission notes that under ISE's
procedures for executing Reserve Complex Orders, the non-displayed
portion of a Reserve Complex Order is available for execution before
displayed interest on the regular order book at the same price.\183\
The Commission believes that the discontinuation of Reserve Complex
Orders will protect investors and the public interest by assuring that
all displayed interest on the Complex Order book and the regular book
executes before non-displayed interest at the same price.\184\
---------------------------------------------------------------------------
\180\ See Amendment No. 1.
\181\ See id.
\182\ See id.
\183\ See Notice, 83 FR at 31785, n.7.
\184\ ISE will continue to offer Reserve Orders on the single
leg book. See Amendment No. 1.
---------------------------------------------------------------------------
B. Trading of Complex Orders and Quotes
The Commission notes that proposed ISE Rule 722(c)(2) is designed
to protect established leg market interest by providing that if any of
the bids or offers established in the marketplace consist of a Priority
Customer Order, at least one leg of a Complex Options Order or the
options legs of a Stock-Complex Order must trade at a price that is
better than the corresponding bid or offer in the marketplace by at
least a $0.01 increment.\185\ Similarly, the option leg of a Stock-
Option Order has priority over leg market interest in the series
established by Professional Orders and market maker quotes at the same
price, but not over Priority Customer interest in the series.\186\ The
Commission notes that other options exchanges have similar provisions
requiring one leg of a complex order to trade at a better price than
the derived leg market price when the established interest in the leg
market price includes customer interest.\187\ ISE's rules further
protect Priority Customer interest by providing that executable Complex
Orders will execute against Priority Customer interest on the single
leg book at the same price before executing against the Complex Order
book.\188\ Thus, Priority Customer Orders
[[Page 51741]]
on the single leg order book will retain priority and will execute
prior to any other Complex Order or non-Priority Customer single leg
interest at the same price.\189\ In addition, ISE, like other
exchanges, does not allow Complex Orders to be executed at prices
inferior to the best net price achievable from the best bids and offers
on the Exchange for the individual legs.\190\
---------------------------------------------------------------------------
\185\ See proposed ISE Rules 722(c)(2)(i) and (iii). A Complex
Order that does not satisfy the requirements of proposed ISE Rule
722(c)(2) is not executable. See proposed ISE Rule 722(d).
\186\ See proposed ISE Rule 722(c)(2)(ii).
\187\ See, e.g., Phlx Rule 1098(c)(iii); EDGX Rule
21.20(c)(1)(B) and (C); and MIAX Rule 518(c)(3).
\188\ See proposed ISE Rule 722(d)(2) and Amendment No. 1.
\189\ See id.
\190\ See proposed ISE ISE Rule 722(c)(2) and Amendment No. 1.
See also EDGX Rule 21.20(c)(2)(E); and MIAX Rule 518(c)(2)(ii).
---------------------------------------------------------------------------
ISE allows Complex Orders to execute against bids and offers on ISE
for the individual legs of the Complex Order if there is no executable
contra-side complex interest on the Complex Order Book at a particular
price.\191\ The Commission believes that allowing Complex Orders to
execute against leg market interest could benefit investors by
providing additional execution opportunities for both Complex Orders
and interest in the regular market. In addition, the Commission
believes that executing Complex Orders against interest in the regular
market could facilitate interaction between the Complex Order book and
the regular market, potentially resulting in a more competitive and
efficient market, and better executions for investors. The Commission
notes that other exchanges also allow Complex Orders to execute against
leg market interest.\192\
---------------------------------------------------------------------------
\191\ See proposed ISE Rule 722(d)(3).
\192\ See, e.g., EDGX Rule 21.20(c)(2)(F); and MIAX Rule
518(c)(2)(iii).
---------------------------------------------------------------------------
As described more fully above, the Trade Value Allowance is a
functionality that allows Stock-Option Strategies and Stock-Complex
Strategies to trade outside of their expected notional value by a
specified amount. The amount of Trade Value Allowance may be determined
by a member or set at a default value determined by ISE and announced
to members, although any amount of Trade Value Allowance is permitted
for orders entered into the auction mechanisms in proposed ISE Rule
722, Supplementary Material .08 that do not trade solely with their
contra-side order.\193\ Members may opt out of the Trade Value
Allowance if they do not want their orders to be executed when there is
a Trade Value Allowance of any amount and, in those cases, ISE will
strictly enforce the net price marked on the order.\194\ The Commission
believes that the Trade Value Allowance will provide members with the
flexibility to obtain a desired execution of a Stock-Option or Stock-
Complex Order when their order trades at a value outside of the
expected notional value of the trade due to rounding. The Commission
notes that members are not obligated to use the Trade Value Allowance
and may choose to have their orders executed at the net price marked on
the order.
---------------------------------------------------------------------------
\193\ See proposed ISE Rule 722, Supplementary Material .09.
\194\ See Notice, 83 FR at 31793.
---------------------------------------------------------------------------
D. Complex Opening Process and Complex Uncrossing Process
The Commission believes that the Complex Opening Process is
designed to provide for the orderly opening of Complex Orders on ISE by
matching as much interest in a complex strategy as possible at a price
determined through an objective process set forth in ISE's rules. As
described more fully above, the Complex Opening Process allows interest
residing on the Complex Order Book to trade at a single price within
Boundary Prices that are constrained by the NBBO for the individual
legs.\195\ If the Complex Opening Process fails to discover an
appropriate execution price (e.g., there is no valid Opening Price at
or within the Boundary Prices), ISE continues the Complex Opening
Process by performing an uncrossing, which provides additional
execution opportunities by allowing Complex Orders to execute against
leg market interest.\196\
---------------------------------------------------------------------------
\195\ See id. at 31796.
\196\ ISE also performs an uncrossing if there is interest that
is locked or crossed after Complex Orders and quotes are executed in
the Complex Opening Price Determination. See id.
---------------------------------------------------------------------------
ISE states that the Complex Uncrossing Process, when used during
regular trading, provides a fair and efficient means for executing
Complex Orders or quotes when interest that is locked or crossed
becomes executable.\197\ As described more fully above, when Complex
Orders or quotes become executable, the Complex Uncrossing Process
identifies the oldest interest on the Complex Order Book and matches it
pursuant to proposed ISE Rule 722(d)(2)-(3) with resting contra-side
interest.\198\ This process is repeated until the Complex Order Book is
no longer executable.\199\ The Commission believes that the Complex
Uncrossing Process is designed to provide for the execution in
accordance with ISE's rules of Complex Orders and other interest on ISE
that becomes executable during regular trading or as part of the
Complex Opening Process.
---------------------------------------------------------------------------
\197\ See id.
\198\ See proposed ISE Rule 722, Supplementary Material .12(b).
\199\ See proposed ISE Rule 722, Supplementary Material
.12(b)(iii).
---------------------------------------------------------------------------
E. Complex Order Exposure Process
The Complex Order exposure auction process will allow members to
expose eligible Complex Orders for price improvement. ISE notes that
the exposure process will not interrupt the processing of Complex
Orders because the exposure period for a Complex Order will end
immediately upon 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, thereby assuring that incoming orders are not delayed by the
exposure process.\200\ In addition, the exposure period will be
terminated upon the receipt of a nonmarketable 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.\201\ ISE notes that no market participants are excluded
from initiating or participating in a Complex Order exposure
auction.\202\ The Commission believes that the exposure auction process
may provide additional opportunities for Complex Orders to receive
price improvement. The Commission notes that other options exchanges
provide similar auctions for complex orders.\203\
---------------------------------------------------------------------------
\200\ See Notice, 83 FR at 31797. See also proposed ISE Rule
722, Supplementary Material .01(b)(ii).
\201\ See Notice, 83 FR at 31797.
\202\ See id.
\203\ See, e.g., Cboe Rule 6.53C(d); and EDGX Rule 21.20(d).
---------------------------------------------------------------------------
F. Internalization and Crossing
1. Complex Facilitation Mechanism and Complex Solicited Order Mechanism
The Commission believes that the Complex Facilitation Mechanism and
the Complex Solicited Order Mechanism may provide opportunities for
Complex Orders to receive price improvement. ISE members may submit a
customer Complex Order and matching contra-side interest into the
Complex Facilitation Mechanism or the Complex Solicited Order Mechanism
for price improvement. Upon entry of a Complex Order into one of the
mechanisms, ISE sends member a broadcast message that includes the net
price, side, and size of the Agency Complex Order, and members may
enter Responses with the net prices and sizes at which they wish to
participate in the execution of the Agency Complex
[[Page 51742]]
Order.\204\ At the conclusion of the auction, a Complex Order entered
into the Complex Facilitation Mechanism or the Complex Solicited Order
Mechanism receives an execution at the best price available and, at a
minimum, is executed in full against the matching contra-side interest.
Thus, a Complex Order entered into the Complex Facilitation Mechanism
or the Complex Solicited Order Mechanism is guaranteed an execution at
the conclusion of the auction and may be executed at an improved
price.\205\ The Commission notes that ISE also operates Facilitation
Mechanism and Solicited Order Mechanism auctions for orders for a
single option series.\206\
---------------------------------------------------------------------------
\204\ See proposed ISE Rules 722, Supplementary Material
.08(a)(3) and (b)(3).
\205\ See proposed ISE Rules 722, Supplementary Material
.08(a)(1)(iv) and (b)(4)(iii).
\206\ See ISE Rule 716(d) and (e).
---------------------------------------------------------------------------
2. Complex PIM
The Commission believes that the Complex PIM may provide
opportunities for Complex Orders to receive price improvement. A
Complex Order entered into Complex PIM auction must be stopped at a
price that is better than the best net price (i) available on the
Complex Order book on both sides of the market; and (ii) achievable
from the best ISE bids and offers for the individual legs on both sides
of the market (an ``improved net price'').\207\ A member enters an
Agency Complex Order into the Complex PIM against principal or
solicited interest for execution.\208\ At the conclusion of the
exposure period, the Agency Complex Order will be executed in full at
the best prices available, taking into consideration Complex Orders and
quotes in the Complex Order book, Improvement Complex Orders, the
Counter-Side Order, and, for Complex Options Orders, the ISE best bids
and offers on the individual legs.\209\ Thus, a Complex Order entered
into a Complex PIM auction would receive an execution at the best price
available at the conclusion of the auction and, at a minimum, would be
executed in full at the improved net price. The Commission notes that
other options exchanges have adopted similar rules to permit the entry
of complex orders into an electronic price improvement auction
process.\210\ In addition, the Commission notes that ISE operates a PIM
auction for orders for a single option series.\211\
---------------------------------------------------------------------------
\207\ See proposed ISE Rule 722, Supplementary Material
.08(c)(2).
\208\ See proposed ISE Rule 722, Supplementary Material
.08(c)(1).
\209\ See proposed ISE Rule 722, Supplementary Material
.08(c)(5).
\210\ See, e.g., BOX Rule 7245; Cboe Rule 6.74A; MIAX Rule 515A,
Interpretation and Policy .12; and NYSE American Rule 971.2NY.
\211\ See ISE Rule 723.
---------------------------------------------------------------------------
3. Complex Customer Cross Orders, Complex QCC Orders, and Complex QCC
With Stock Orders
ISE's proposed Customer Cross Complex Orders allow for the crossing
of Priority Customer Complex Orders in a manner similar to other
customer crossing rules that the Commission has previously approved for
another options exchange.\212\ The Commission believes that ISE's
proposed Customer Cross Complex Orders are consistent with the Act and
do not raise any novel or significant issues.
---------------------------------------------------------------------------
\212\ See MIAX Rule 518(h)(3). See also Cboe Rule 6.74A,
Interpretation and Policy .08(b).
---------------------------------------------------------------------------
ISE's proposed Complex QCC rules permit Complex Orders to
participate in a clean cross of the options leg of a subset of
qualified contingent trades in a similar manner as Qualified Contingent
Cross Orders already permitted on ISE.\213\ The Commission notes that,
under the proposal (1) a Complex QCC Order must be part of a qualified
contingent trade under Regulation NMS; \214\ (2) each options leg of a
Complex QCC Order must be for 1,000 contracts; and (3) the options legs
of the Complex QCC Order must be executed at prices that (A) are at or
between the NBBO for the individual series, and (B) comply with the
provisions of proposed ISE Rule 722(c)(2)(i), provided that no options
leg of a Complex QCC Order can be executed at the same price as a
Priority Customer Order on ISE in the individual options series. The
Commission believes that these requirements establish a limited
exception to the general principle of exposure and retain the general
principle of customer priority in the options markets. In addition, the
requirement that a Complex QCC Order be part of a qualified contingent
trade by satisfying each of the six underlying requirements of the NMS
QCT Exemption, and the requirement that each options leg of a Complex
QCC Order be for a minimum size of 1,000 contracts, provide another
limit to the use of Complex QCC Orders by ensuring that only
transactions of significant size may avail themselves of this order
type. The Commission notes that ISE's proposed rules for Complex QCC
Orders are similar to the rules of another options exchange.\215\
---------------------------------------------------------------------------
\213\ See ISE Rule 721(b). See also Securities Exchange Act
Release Nos. 64653 (June 13, 2011), 76 FR 35491 (June 17, 2011)
(order approving File No. SR-CBOE-2011-41); and 63955 (February 24,
2011), 76 FR 11533 (March 2, 2011) (order approving File No. SR-ISE-
2010-73). The Commission has granted an exemption for qualified
contingent trades that meet certain requirements from Rule 611(a) of
Regulation NMS, 17 CFR 242.611(a) (the ``NMS QCT Exemption''). See
Securities Exchange Act Release No. 57620 (April 4, 2008), 73 FR
19271 (April 9, 2008) (which supersedes a release initially granting
the NMS QCT Exemption, Securities Exchange Act Release No. 54389
(August 31, 2006), 71 FR 52829 (September 7, 2006)).
\214\ See note 139, supra.
\215\ See MIAX Rule 515(h)(4).
---------------------------------------------------------------------------
The Commission believes that ISE's proposed Complex QCC with Stock
Orders could help ISE members comply with the requirement to execute
the stock component of a qualified contingent trade. The Commission
notes that the requirements of ISE Rule 721, Supplementary Material
.01-.03 apply to the entry and execution of Complex QCC with Stock
Orders.\216\ The Commission further notes that a member that executes
the options component of a qualified contingent trade entered as a
Complex QCC with Stock Order remains responsible for the execution of
the stock component if it does not receive an execution from its
designated broker-dealer.\217\
---------------------------------------------------------------------------
\216\ See proposed ISE Rule 722, Supplementary Material
.08(f)(4).
\217\ See ISE Rule 721, Supplementary Material .03.
---------------------------------------------------------------------------
G. Concurrent Auctions
ISE proposes to permit certain auctions for complex strategies to
operate concurrently with auctions for a single option series that is a
component of the complex strategy.\218\ The Commission believes that
ISE's proposed rule provides for the orderly processing of concurrent
complex and single leg auctions. The Commission notes that another
options exchange has adopted similar rules.\219\
---------------------------------------------------------------------------
\218\ See proposed ISE Rule 722, Supplementary Material .08(h).
\219\ See NYSE American Rules 971.1NY, Commentary .01, and
971.2NY, Commentary .03.
---------------------------------------------------------------------------
In addition, ISE proposes to delete from ISE Rule 722 language
indicating that ISE will recommence concurrent Complex Order auctions
in or before April 17, 2019, and to adopt a rule indicating that only
one auction in a complex strategy will be ongoing at any given
time.\220\ As noted above, ISE states that no member has complained or
expressed concern about the absence of the concurrent auction
functionality, which has not operated on ISE since 2017.\221\ ISE
further states that, prior to the migration to the INET platform,
concurrent auctions in a complex strategy occurred rarely,
approximately 0.5% of the time that an auction ran on
[[Page 51743]]
the Exchange.\222\ Because concurrent auctions for a complex strategy
occurred infrequently, the Commission does not believe that the
elimination of the concurrent auction functionality for complex
strategies will significantly affect investors or other market
participants. In addition, in the absence of the concurrent auction
functionality, a market participant with auction-eligible interest that
wished to initiate an auction on ISE could wait for an ongoing auction
to conclude or submit its interest to another exchange. The Commission
notes that another options market does not permit concurrent auctions
for the same complex strategy.\223\
---------------------------------------------------------------------------
\220\ See proposed ISE Rule 722, Supplementary Material .08(g)
and Amendment No. 1.
\221\ See Amendment No. 1.
\222\ See April Notice, 82 FR at 19131. See also Amendment No.
1.
\223\ See Phlx Rule 1098(e)(2). In addition, MIAX has the
ability to limit the frequency of Complex Auctions by establishing a
minimum time period between auctions. See MIAX Rule 518(d).
---------------------------------------------------------------------------
H. Stock-Option and Stock-Complex Orders
Proposed ISE Rule 722, Supplementary Material .13 allows members to
submit only Stock-Option and Stock-Complex Orders and quotes that
comply with the QCT Exemption from Rule 611(a) of Regulation NMS. The
proposed rule further requires that the stock leg of a Stock-Option
Order be marked ``buy,'' ``sell,'' ``sell short,'' or ``sell short
exempt'' in compliance with Regulation SHO under the Exchange Act. The
Commission notes that other options exchanges have adopted similar
rules.\224\ Accordingly, the Commission does not believe that proposed
ISE Rule 722, Supplementary Material .13 raises novel regulatory
issues.
---------------------------------------------------------------------------
\224\ See, e.g., Cboe Rule 6.53C, Interpretation and Policy
.06(a) and (e); MIAX Rule 518, Interpretation and Policy .01.
---------------------------------------------------------------------------
I. Additional Changes
The Commission believes that the proposed change to ISE Rules 722,
Supplementary Material .03 makes clear that the market maker quoting
functionality for Complex Orders will be available only in classes
selected by ISE, consistent with ISE's practice prior to the transition
to the INET platform.\225\ In addition, the proposed changes to ISE
Rule 722, Supplementary Material .04 make clear that the Market Maker
Speed Bump applies only to Complex Options Strategies. The Commission
believes that the changes to ISE Rule 722, Supplementary Material .03
and .04 will help to assure that the rules accurately describe the
availability and operation of their respective functionalities.
---------------------------------------------------------------------------
\225\ See Notice, 83 FR at 31788. ISE intends to continue this
practice after the complex quoting functionality has been re-enabled
on the INET platform. See id. at 31797. ISE notes that market makers
can enter Complex Orders in all classes regardless of whether
quoting is permitted. See id.
---------------------------------------------------------------------------
The Commission believes that the proposed change to ISE Rule 722,
Supplementary Material .07(a) to incorporate references to the stock
leg of a Stock-Option or Stock-Complex Order revises the rule to
reflect the manner in which Supplementary Material .07(a) applies to
Complex Orders with a stock component. The Commission notes that the
proposed changes to ISE Rule 722, Supplementary Material .07(d) include
a similar clarification and also describe the application of the limit
order price protection in Supplementary Material .07(d) to Limit
Complex Orders to sell. The Commission believes that this change will
assure that ISE Rule 722, Supplementary Material .07(d) accurately
reflects the manner in which the limit order price protection applies
to Limit Complex Orders to sell.
IV. Solicitation of Comments on Amendment No. 1
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 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 Brent J. Fields,
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 such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2018-56, and should be submitted on
or before November 2, 2018.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 1, prior to the thirtieth day
after the date of publication of the notice of Amendment No. 1 in the
Federal Register. In Amendment No. 1, ISE revises its original proposal
to make the changes discussed in detail above. Notably, in Amendment
No. 1, ISE revises the proposal to discontinue offering Reserve Complex
Orders. The Commission believes that eliminating Reserve Complex Orders
will assure that all displayed interest on the Complex Order Book and
on the regular book executes before non-displayed interest. Amendment
No. 1 also provides that ISE will not re-introduce the auction
functionality that permits concurrent auctions for the same complex
strategy. For the reasons discussed above, the Commission does not
believe that the elimination of this functionality will significantly
affect investors or other market participants on ISE. Amendment No. 1
clarifies and provides additional detail to the text of the proposed
rules, makes technical corrections, and provides additional analysis of
the certain proposed changes, thus facilitating the Commission's
ability to make the findings set forth above to approve the proposal.
Accordingly, the Commission finds good cause for approving the proposed
rule change, as modified by Amendment No. 1, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\226\ that the proposed rule change (SR-ISE-2018-
[[Page 51744]]
56), as modified by Amendment No. 1, is approved on an accelerated
basis.
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\226\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\227\
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\227\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22202 Filed 10-11-18; 8:45 am]
BILLING CODE 8011-01-P
