Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange's Pricing Schedule at Options 7, 4045-4049 [2020-01040]
Download as PDF
<![CDATA[
4045
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
All submissions should refer to File
Number SR–BOX–2019–19. 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–BOX–2019–19 and should
be submitted by February 13, 2020.
Rebuttal comments should be submitted
by February 27, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.74
J. Matthew DeLesDernier,
Assistant Secretary.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2020–01041 Filed 1–22–20; 8:45 am]
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87998; File No. SR–ISE–
2020–01]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the
Exchange’s Pricing Schedule at
Options 7
January 16, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January 2,
2020, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II,
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend the
Exchange’s Pricing Schedule at Options
7, as described further below.
The text of the proposed rule change
is available on the Exchange’s website at
https://ise.cchwallstreet.com/, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
Priority customer complex tier
Tier
Tier
Tier
Tier
Tier
1
2
3
4
5
................................................
................................................
................................................
................................................
................................................
jbell on DSKJLSW7X2PROD with NOTICES
The purpose of the proposed rule
change is to amend the Exchange’s
Pricing Schedule at Options 7. Each
change is described below.
Priority Customer Complex Legging
Rebate
Currently, the Exchange provides
rebates to Priority Customer 3 complex
orders that trade with non-Priority
Customer complex orders in the
complex order book or trade with quotes
and orders on the regular order book.
This program is designed to encourage
Members to bring complex volume to
the Exchange, including incentivizing
Members to bring Priority Customer
complex orders specifically to earn the
associated rebates. Rebates are tiered
based on a percentage of total industry
volume.4 There are currently nine
Priority Customer Complex Tiers as
follows: 5
Rebate for
select
symbols 6
0.000–0.200 ...............................................................................................
Above 0.200–0.400 ...................................................................................
Above 0.400–0.600 ...................................................................................
Above 0.600–0.750 ...................................................................................
Above 0.750–1.000 ...................................................................................
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 A ‘‘Priority Customer’’ is a person or entity that
is not a broker/dealer in securities, and does not
place more than 390 orders in listed options per day
on average during a calendar month for its own
beneficial account(s), as defined in Nasdaq ISE
Options 1, Section 1(a)(36).
4 The Priority Customer Complex Tiers are based
on total Affiliated Member or Affiliated Entity
complex order volume (excluding Crossing Orders
1 15
17:13 Jan 22, 2020
1. Purpose
Complex order volume percentage
74 17
VerDate Sep<11>2014
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Jkt 250001
and Responses to Crossing Orders) calculated as a
percentage of total national volume cleared at The
Options Clearing Corporation in the Customer range
in equity and ETF options for that month
(hereinafter, ‘‘Complex Order Volume Percentage’’).
All complex order volume executed on the
Exchange, including volume executed by Affiliated
Members, is included in the volume calculation,
except for volume executed as Crossing Orders and
Responses to Crossing Orders. Affiliated Entities
may also aggregate their complex order volume for
purposes of calculating Priority Customer rebates.
The Appointed OFP would receive the rebate
PO 00000
Frm 00155
Fmt 4703
Sfmt 4703
($0.25)
(0.30)
(0.35)
(0.40)
(0.45)
Rebate for
non-select
symbols 7
($0.40)
(0.55)
(0.70)
(0.75)
(0.80)
associated with the qualifying volume tier based on
aggregated volume.
5 The rebate for the highest tier volume achieved
is applied retroactively to all eligible Priority
Customer complex volume once the threshold has
been reached. Members will not receive rebates for
net zero complex orders. For purposes of
determining which complex orders qualify as ‘‘net
zero’’ the Exchange will count all complex orders
that leg into the regular order book and are executed
at a net price per contract that is within a range of
$0.01 credit and $0.01 debit.
E:\FR\FM\23JAN1.SGM
23JAN1
4046
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
Priority customer complex tier
Tier
Tier
Tier
Tier
6
7
8
9
................................................
................................................
................................................
................................................
Above
Above
Above
Above
1.000–1.500 ...................................................................................
1.500–2.000 ...................................................................................
2.000–3.250 ...................................................................................
3.250 ..............................................................................................
jbell on DSKJLSW7X2PROD with NOTICES
Going forward, the Exchange proposes
to eliminate these rebates for Priority
Customer complex orders that trade
with quotes and orders on the regular
order book if any leg of the order is fifty
contracts or more. The Exchange will
continue to provide the rebate if the
largest leg of such order is under fifty
contracts. Rebates for Priority Customer
complex orders that trade with nonPriority Customer orders in the complex
order book will also remain unchanged
with this proposal, and the Exchange
will continue to provide such rebates to
qualifying Members, regardless of size.
The proposed changes are designed to
limit Members from entering larger
sized complex orders (i.e., 50 or more
contracts for the largest leg) to recover
Priority Customer complex order
rebates, and to reduce disincentives for
Market Makers 8 to provide liquidity on
the Exchange. Recently, the Exchange
has observed that several market
participants have been entering larger
sized Priority Customer complex orders
with a leg of fifty or more contracts to
earn a rebate. When these complex
orders do not find a counterparty in the
complex order book, they may leg into
the regular order book where they are
typically executed by Market Makers on
the individual legs who pay a fee to
trade with this order flow.9 As a result,
the Market Maker’s ability to provide
liquidity on the Exchange is adversely
affected as they are charged to trade
against these larger complex orders
6 ‘‘Select Symbols’’ are options overlying all
symbols listed on the Nasdaq ISE that are in the
Penny Pilot Program.
7 ‘‘Non-Select Symbols’’ are options overlying all
symbols excluding Select Symbols. For Non-Select
Symbols, no Priority Customer complex order
rebates are paid for orders in NDX, NQX, and MNX.
8 The term ‘‘Market Makers’’ refers to
‘‘Competitive Market Makers’’ and ‘‘Primary Market
Makers’’ collectively. See Options 1, Section
1(a)(21).
9 For example, a Market Maker providing
liquidity on the individual leg would typically pay
a maker fee of only $0.10 per contract for trading
with orders originating from the regular order book,
or in the case of Market Makers that achieve Market
Maker Plus status, would earn certain maker rebates
instead of paying the $0.10 per contract maker fee.
See Options 7, Section 3, note 5. When trading
against a Priority Customer complex order that legs
in from the complex order book, however, that same
Market Maker is instead charged a maker fee of
$0.15 per contract. See Options 7, Section 3, note
11.
VerDate Sep<11>2014
17:13 Jan 22, 2020
Rebate for
select
symbols 6
Complex order volume percentage
Jkt 250001
when they leg into the regular market
and execute against their quotes.
The Exchange believes that it is in the
interest of a fair and orderly market to
provide appropriate incentives for
Market Makers to maintain quality
markets. As a result, the Exchange has
instituted pricing programs that are
aimed at incentivizing Market Makers to
provide liquidity, including, for
example, the Market Maker Plus
program, which rewards Market Makers
for routinely quoting at the national best
bid or offer.10 By eliminating the rebate
for larger sized Priority Customer
complex orders that leg into the regular
order book, the Exchange seeks to
bolster liquidity by incentivizing Market
Makers to post tighter and more liquid
markets on ISE, to the benefit of all
market participants. At the same time,
smaller, more typically ‘‘retail’’ sized
Priority Customer complex orders with
less than fifty contracts for the largest
leg that trade with interest on the
regular order book, and Priority
Customer complex orders of any size
trading with non-Priority Customer
orders in the complex order book, will
continue to receive rebates based on the
Priority Customer Complex Tier
achieved, thereby continuing to
incentivize Members to bring complex
order flow to the Exchange to earn the
rebate on their Priority Customer
complex volume.
In addition, the Exchange proposes to
eliminate the $0.05 per contract
surcharge it currently imposes on
Priority Customer complex orders in
SPY that leg into the regular order book,
which is applied in addition to the
applicable Priority Customer complex
order rebate.11 This SPY surcharge was
originally adopted to offset the costs of
providing the Priority Customer
complex order rebates. With the changes
described above to eliminate the rebates
for larger-sized Priority Customer
complex orders that leg into the regular
order book, the Exchange believes that
10 See
Options 7, Section 3, note 5.
11 For example, if a Member qualifies for Priority
Customer Complex Tier 1, the Member’s Priority
Customer complex orders in SPY that leg into the
regular order book for non-net zero activity will
earn $0.20 per contract (i.e., $0.25 per contract
rebate for Select Symbols minus the $0.05 per
contract SPY surcharge).
PO 00000
Frm 00156
Fmt 4703
Sfmt 4703
(0.46)
(0.48)
(0.50)
(0.50)
Rebate for
non-select
symbols 7
(0.80)
(0.80)
(0.85)
(0.85)
it is appropriate to revisit this surcharge,
and now proposes to eliminate this fee.
By no longer assessing this surcharge,
the Exchange seeks to fortify Member
participation in the Priority Customer
complex order rebate program and
incentivize increased complex order
volume on the Exchange.
Priority Customer Complex Rebate Tiers
As discussed above, the Exchange
currently provides rebates to Priority
Customer complex orders based on nine
volume tiers. In particular, a Member
must execute a Complex Order Volume
Percentage of above 1% to 1.5% to
qualify for the $0.46 per contract
Priority Customer Complex Tier 6
rebate. In addition, a Member must
execute a Complex Order Volume
Percentage of above 3.25% to qualify for
the $0.50 per contract Priority Customer
Complex Tier 9 rebate. Going forward,
the Exchange proposes to increase the
Tier 6 rebate from $0.46 to $0.47 per
contract, with no changes to the
corresponding Complex Order Volume
Percentage. The Exchange also proposes
to reduce the Tier 9 Complex Order
Volume Percentage requirement from
above 3.25% to above 2.75% and
increase the corresponding rebate from
$0.50 to $0.52 per contract. There will
also be a corresponding change to Tier
8 to reduce the upper limit of the
Complex Order Volume Percentage from
3.25% to 2.75%.
The Exchange notes that all Members
may elect to qualify for the Priority
Customer complex rebates by
submitting complex order flow to the
Exchange and earn a rebate on their
Priority Customer complex volume.
Accordingly, the proposed changes are
designed to increase the amount of
complex order flow Members bring to
the Exchange, particularly Priority
Customer complex volume, and further
encourage them to contribute to a
deeper, more liquid market to the
benefit of all market participants.
PIM Response Fees
Today, for regular orders in Select
Symbols and Non-Select Symbols, the
Exchange charges all market participant
orders a fee for Responses to Price
Improvement Mechanism (‘‘PIM’’)
orders that is $0.25 per contract. For
E:\FR\FM\23JAN1.SGM
23JAN1
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
complex orders in both Select and NonSelect Symbols, the PIM Response fee is
likewise $0.25 per contract for all
market participant orders. The Exchange
now proposes to increase the
aforementioned fees to $0.35 per
contract for all market participant
orders.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,12 in general, and furthers the
objectives of Sections 6(b)(4) and 6(b)(5)
of the Act,13 in particular, in that it
provides for the equitable allocation of
reasonable dues, fees, and other charges
among members and issuers and other
persons using any facility, and is not
designed to permit unfair
discrimination between customers,
issuers, brokers, or dealers.
jbell on DSKJLSW7X2PROD with NOTICES
The Proposal Is Reasonable
The Exchange’s proposed changes to
its Pricing Schedule are reasonable in
several respects. As a threshold matter,
the Exchange is subject to significant
competitive forces in the market for
options transaction services that
constrain its pricing determinations in
that market. The fact that this market is
competitive has long been recognized by
the courts. In NetCoalition v. Securities
and Exchange Commission 14
(‘‘NetCoalition’’), the D.C. Circuit stated,
‘‘[n]o one disputes that competition for
order flow is ‘fierce.’ . . . As the SEC
explained, ‘[i]n the U.S. national market
system, buyers and sellers of securities,
and the broker-dealers that act as their
order-routing agents, have a wide range
of choices of where to route orders for
execution’; [and] ‘no exchange can
afford to take its market share
percentages for granted’ because ‘no
exchange possesses a monopoly,
regulatory or otherwise, in the execution
of order flow from broker dealers’. . .
.’’ 15
Numerous indicia demonstrate the
competitive nature of this market. For
example, clear substitutes to the
Exchange exist in the market for options
transaction services. The Exchange is
only one of sixteen options exchanges to
which market participants may direct
their order flow. Within this
environment, market participants can
freely and often do shift their order flow
among the Exchange and competing
12 15
U.S.C. 78f(b).
13 15 U.S.C. 78f(b)(4) and (5).
14 NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir.
2010).
15 Id. at 539 (quoting Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR
74770, 74782–83 (December 9, 2008) (SR–
NYSEArca–2006–21)).
VerDate Sep<11>2014
17:13 Jan 22, 2020
Jkt 250001
venues in response to changes in their
respective pricing schedules. Within the
foregoing context, the proposal
represents a reasonable attempt by the
Exchange to attract additional order
flow to the Exchange and increase its
market share relative to its competitors.
Overall, the Exchange believes that
the Priority Customer complex rebate
program, as modified, is reasonable
because the program is optional and all
Members can choose to participate or
not. In addition, the Exchange believes
that it is reasonable to eliminate the
rebate for Priority Customer complex
orders with any leg of 50 or more
contracts where such order legs into the
regular order book. As explained above,
Priority Customer complex orders,
including these larger orders that access
liquidity on the regular order book, are
currently paid significant rebates by the
Exchange, which are funded in part by
charging higher fees to the market
participants who trade against these
orders. As discussed above, when these
larger complex orders do not find a
counterparty in the complex order book,
they may leg into the regular order book
where they are typically executed by
Market Makers on the individual legs
who pay a fee to trade with this order
flow.
Market Makers may be impeded in
providing liquidity when doing so may
result in trading against these large
Priority Customer complex orders that
leg into the regular market. The
Exchange believes that it is important
that Market Makers be properly
incentivized to maintain quality
markets, and is therefore proposing to
take steps to reduce the incentives for
market participants to enter larger sized
Priority Customer complex orders that
leg into the regular market to access
liquidity, and to limit this rebate to
smaller sized orders that leg in. By
continuing to provide this rebate to
smaller Priority Customer complex
orders that trade with interest on the
regular order book, and Priority
Customer complex orders of any size
that trade with non-Priority Customer
orders on the complex order book, the
Exchange believes that the rebate
program will remain attractive and
continue to attract complex order flow,
which liquidity will benefit all market
participants, including Market Makers,
who may trade with this volume. The
Exchange believes that the proposed
threshold of under fifty contracts per leg
is set at an appropriate level that would
allow Market Makers to more easily
manage and react to these smaller, more
typically retail sized orders that leg in
to trade against their quotes in the
PO 00000
Frm 00157
Fmt 4703
Sfmt 4703
4047
regular order book.16 The Exchange
notes that fifty contracts is the threshold
for ‘‘block-sized orders’’ entered through
the Exchange’s Block Order Mechanism
and Facilitation Mechanism, and
normally denotes the cutoff between
orders of retail and institutional size on
ISE.17 With the proposed changes, the
Exchange believes that Market Makers
will be aided in their role of providing
liquidity and maintaining quality
markets to the benefit of all market
participants that trade on the Exchange.
The Exchange also believes that it is
reasonable to eliminate the SPY
surcharge for Priority Customer complex
orders that leg into the regular order
book. With the changes described above
to eliminate rebates for larger Priority
Customer complex orders that leg into
the regular order book, the Exchange
believes that it is appropriate to also
discontinue the SPY surcharge applied
to legged in complex orders. In addition,
the Exchange believes that eliminating
this surcharge will increase incentives
for Members to bring additional
complex order flow to the Exchange,
which increased liquidity will benefit
all market participants that trade on the
Exchange.
Furthermore, the Exchange believes
that the proposed changes to the Priority
Customer complex order rebate program
to lower the various Complex Order
Volume Percentage thresholds and
increase rebates in the manner
described above represent a reasonable
attempt by the Exchange to fortify
participation in the Priority Customer
complex order rebate program. In
particular, the Exchange’s proposal to
increase the rebate for Priority Customer
Complex Tier 6 from $0.46 per contract
to $0.47 per contract is intended to
encourage Members to submit
additional amounts of complex order
volume to obtain the higher rebate on
their Priority Customer complex orders.
The Exchange believes that the higher
rebate will further incentivize Members
to bring additional complex order flow,
including Priority Customer complex
order flow, to the Exchange. Similarly,
the Exchange’s proposal to lower the
volume requirements for Priority
Customer Complex Tiers 8 and 9, and
increase the Tier 9 rebate is reasonable
because this change is designed to make
16 The Exchange notes that Cboe Options
(‘‘Cboe’’) has a similar concept of limiting certain
fee incentives in its Fees Schedule for smaller sized
customer orders. See, e.g., Cboe Fees Schedule, fn.
9 (waiving transaction fees for customer orders
removing liquidity that are of 99 contracts or less
in ETF and ETN options).
17 See Options 3, Section 11(a) and (b) for a
description of the Block Order Mechanism and the
Facilitation Mechanism.
E:\FR\FM\23JAN1.SGM
23JAN1
4048
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
it easier for Members to achieve these
tiers to earn the higher rebate. The
proposed changes are designed to make
the rebates more achievable and
attractive to existing and potential
program participants. As noted above,
the Priority Customer complex rebate
program is optional and available to all
Members that choose to send complex
order flow to the Exchange to earn a
rebate on their Priority Customer
complex volume. To the extent the
program, as modified, continue to
attract complex volume to the Exchange,
the Exchange believes that the proposed
changes would improve the Exchange’s
overall competitiveness and strengthen
its market quality for all market
participants.
The Exchange believes that it is
reasonable to increase the regular and
complex PIM Response fees from $0.25
to $0.35 per contract for all market
participant orders. With the proposed
changes, the PIM Response fees will
remain significantly lower than those
charged for other Responses to Crossing
Order 18 on ISE.19 Accordingly, the
Exchange believes that the proposed
fees will remain attractive to market
participants and continue to encourage
them to respond to PIM auctions,
thereby increasing price improvement
opportunities for PIM orders.
jbell on DSKJLSW7X2PROD with NOTICES
The Proposal Is an Equitable Allocation
of Fees and Rebates
The Exchange believes that its
proposal is an equitable allocation of its
fees and rebates among its market
participants.
The Exchange believes that its
proposal to eliminate the rebate for
Priority Customer complex orders with
any leg of 50 or more contracts where
such order legs into the regular order
book is an equitable allocation of the
Priority Customer complex rebates. As
discussed above, this change is designed
to limit market participants from
entering larger Priority Customer
complex orders for the purpose of
earning the rebate, thereby reducing the
cost of these trades to the Exchange and
its Members, and incentivizing Market
Makers to maintain quality markets on
the Exchange. All Members may
18 ‘‘Responses to Crossing Order’’ is any contraside interest submitted after the commencement of
an auction in the Exchange’s Facilitation
Mechanism, Solicited Order Mechanism, Block
Order Mechanism or PIM.
19 For regular orders, the Exchange charges all
market participants a $0.50 per contract Response
fee for all other Crossing Orders. For complex
orders, this Response fee is $0.50 per contract in
Select Symbols for all market participants and in
Non-Select Symbols, $0.91 per contract (Market
Makers) and $0.96 per contract (all other market
participants). See Options 7, Sections 3 and 4.
VerDate Sep<11>2014
17:13 Jan 22, 2020
Jkt 250001
continue to qualify for these rebates,
provided that their Priority Customer
complex orders that trade with interest
on the regular market remain under a
certain size.
The Exchange believes that its
proposal to discontinue the SPY
surcharge for Priority Customer complex
orders that leg into the regular order
book is an equitable allocation of fees.
With the proposed change, no market
participant will be assessed the SPY
surcharge on their Priority Customer
complex orders that execute with
interest on the regular market.
Furthermore, the proposed changes to
the Priority Customer complex order
rebate program to lower the volume
threshold requirements and increase the
rebates in the manner described above
are equitable because any Member who
brings complex order flow to the
Exchange may qualify for the rebates.
The Exchange believes that the
proposed changes to Tier 6 and higher
are an equitable allocation of rebates
because the Exchange seeks to further
incentivize all Members to bring a
significant amount of complex volume
to the Exchange in order to earn the
highest range of Priority Customer
complex rebates offered under this
program. The Exchange anticipates all
Members that currently qualify for these
rebates will continue to do so under this
proposal. To the extent the proposed
changes encourage additional Members
to strive for the modified tiers and thus
attract more complex volume to the
Exchange, this increased order flow
would improve the overall quality and
attractiveness of the Exchange. The
Exchange notes that all market
participants stand to benefit from
increased liquidity as such increase
promotes market depth, facilitates
tighter spreads and enhances price
discovery. Accordingly, the Exchange
believes that the changes to Tier 6 and
higher, as discussed above, are
reasonably designed to provide further
incentives for all Members interested in
meeting the tier criteria to submit
additional Priority Customer complex
volume to achieve the higher rebates.
The Exchange believes that its
proposal to increase the regular and
complex PIM Response fees is equitable
because the proposed increase will
apply to all market participant orders.
As discussed above, all market
participant orders are currently charged
a $0.25 per contract PIM Response fee,
and will uniformly be charged $0.35 per
contract under this proposal.
PO 00000
Frm 00158
Fmt 4703
Sfmt 4703
The Proposal Is Not Unfairly
Discriminatory
The Exchange believes that the
proposed changes are not unfairly
discriminatory. As it relates to the
proposal to discontinue the Priority
Customer complex rebate for larger
sized orders (i.e., with a leg of 50 or
more contracts) that leg into the regular
order book, this change is intended to
improve market quality by discouraging
market participants from entering large
sized Priority Customer complex orders
for the purpose of earning the rebate,
thereby reducing the cost of these trades
to the Exchange and its Members, and
incentivizing Market Makers to
maintain quality markets on the
Exchange. The Exchange does not
believe that it is unfairly discriminatory
to continue to offer rebates to firms that
do not hit the proposed fifty contract
threshold as all market participants may
modify their behavior by entering
smaller sized complex orders to earn the
rebate, and such smaller, more retail
sized orders would allow Market
Makers to more easily manage and react
to these orders that trade against their
quotes on the regular order book. In
addition, all Priority Customer complex
orders that trade with non-Priority
Customer orders in the complex market
will continue to receive the rebates. The
Exchange does not believe that it is
unfairly discriminatory to provide
rebates only to Priority Customer
complex orders as this type of order
flow enhances liquidity on the
Exchange for the benefit of all market
participants by providing more trading
opportunities, which in turn attracts
Market Makers and other market
participants that may trade with this
order flow. As noted above, any Member
may choose to qualify for the Priority
Customer complex rebates by sending
the requisite volume of complex orders
to earn the rebate on their Priority
Customer complex orders. Thus the
proposed changes will apply uniformly
to all Members that bring complex order
flow to the Exchange.
In addition, the Exchange believes
that it is not unfairly discriminatory to
eliminate the SPY surcharge for Priority
Customer complex orders that leg into
the regular order book. As discussed
above, no market participant will be
assessed the SPY surcharge on their
Priority Customer complex orders that
execute with interest on the regular
market under the Exchange’s proposal.
Accordingly, the proposed change will
apply uniformly to all market
participants.
The Exchange also believes that the
proposed changes to Priority Customer
E:\FR\FM\23JAN1.SGM
23JAN1
Federal Register / Vol. 85, No. 15 / Thursday, January 23, 2020 / Notices
Complex Tier 6 and higher are not
unfairly discriminatory. Any Member
may choose to qualify for the rebate
program by sending complex order flow
to the Exchange. By encouraging all
Members to bring significant amounts of
complex order flow (i.e., to qualify for
the higher tiers) in order to earn a rebate
on their Priority Customer complex
orders, the Exchange seeks to provide
more trading opportunities for all
market participants, promote price
discovery, and improve the overall
market quality of the Exchange.
Lastly, the Exchange does not believe
that the proposed increase in PIM
Response fees is unfairly discriminatory
because they will apply uniformly to all
market participant orders that respond
to PIM auctions. As discussed above,
the Exchange believes that the proposed
fees will remain attractive to market
participants as they are lower than the
Response fees for other Crossing Orders,
and will continue to encourage market
participants to respond to PIM auctions,
thereby increasing price improvement
opportunities for PIM orders.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
jbell on DSKJLSW7X2PROD with NOTICES
Intramarket Competition
The Exchange does not believe that its
proposal will place any category of
Exchange participant at a competitive
disadvantage. All of the proposed
changes are designed to attract
additional liquidity to the Exchange.
The Exchange believes that the
proposed enhancements to the Priority
Customer complex rebate program and
proposed PIM Response fees will
continue to incentivize market
participants to direct liquidity to the
Exchange. As noted above, all market
participants will benefit from any
increase in market activity that the
proposal effectuates. The proposed fees
and rebates will apply uniformly to all
similarly situated participants as
discussed above, and as such, the
proposed changes will not impose an
undue burden on competition among
Exchange participants.
Intermarket Competition
The Exchange operates in a highly
competitive market in which market
participants can readily favor competing
venues if they deem fee levels at a
particular venue to be excessive, or
rebate opportunities available at other
venues to be more favorable. In such an
VerDate Sep<11>2014
17:13 Jan 22, 2020
Jkt 250001
environment, the Exchange must
continually adjust its fees to remain
competitive with other exchanges.
Because competitors are free to modify
their own fees in response, and because
market participants may readily adjust
their order routing practices, the
Exchange believes that the degree to
which fee changes in this market may
impose any burden on competition is
extremely limited.
Moreover, as noted above, price
competition between exchanges is
fierce, with liquidity and market share
moving freely between exchanges in
reaction to fee and rebate changes. In
sum, if the changes proposed herein are
unattractive to market participants, it is
likely that the Exchange will lose
market share as a result. Accordingly,
the Exchange does not believe that the
proposed changes will impair the ability
of members or competing order
execution venues to maintain their
competitive standing in the financial
markets.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act,20 and Rule
19b–4(f)(2) 21 thereunder. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is: (i)
Necessary or appropriate in the public
interest; (ii) for the protection of
investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
20 15
21 17
PO 00000
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
Frm 00159
Fmt 4703
Sfmt 9990
4049
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–2020–01 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–ISE–2020–01. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–ISE–2020–01 and should be
submitted on or before February 13,
2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.22
Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–01040 Filed 1–22–20; 8:45 am]
BILLING CODE 8011–01–P
22 17
E:\FR\FM\23JAN1.SGM
CFR 200.30–3(a)(12).
23JAN1
]]>Agencies
[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Notices]
[Pages 4045-4049]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-01040]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87998; File No. SR-ISE-2020-01]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend the
Exchange's Pricing Schedule at Options 7
January 16, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 2, 2020, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II, below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the Exchange's Pricing Schedule at
Options 7, as described further below.
The text of the proposed rule change is available on the Exchange's
website at https://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend the Exchange's
Pricing Schedule at Options 7. Each change is described below.
Priority Customer Complex Legging Rebate
Currently, the Exchange provides rebates to Priority Customer \3\
complex orders that trade with non-Priority Customer complex orders in
the complex order book or trade with quotes and orders on the regular
order book. This program is designed to encourage Members to bring
complex volume to the Exchange, including incentivizing Members to
bring Priority Customer complex orders specifically to earn the
associated rebates. Rebates are tiered based on a percentage of total
industry volume.\4\ There are currently nine Priority Customer Complex
Tiers as follows: \5\
---------------------------------------------------------------------------
\3\ A ``Priority Customer'' is a person or entity that is not a
broker/dealer in securities, and does not place more than 390 orders
in listed options per day on average during a calendar month for its
own beneficial account(s), as defined in Nasdaq ISE Options 1,
Section 1(a)(36).
\4\ The Priority Customer Complex Tiers are based on total
Affiliated Member or Affiliated Entity complex order volume
(excluding Crossing Orders and Responses to Crossing Orders)
calculated as a percentage of total national volume cleared at The
Options Clearing Corporation in the Customer range in equity and ETF
options for that month (hereinafter, ``Complex Order Volume
Percentage''). All complex order volume executed on the Exchange,
including volume executed by Affiliated Members, is included in the
volume calculation, except for volume executed as Crossing Orders
and Responses to Crossing Orders. Affiliated Entities may also
aggregate their complex order volume for purposes of calculating
Priority Customer rebates. The Appointed OFP would receive the
rebate associated with the qualifying volume tier based on
aggregated volume.
\5\ The rebate for the highest tier volume achieved is applied
retroactively to all eligible Priority Customer complex volume once
the threshold has been reached. Members will not receive rebates for
net zero complex orders. For purposes of determining which complex
orders qualify as ``net zero'' the Exchange will count all complex
orders that leg into the regular order book and are executed at a
net price per contract that is within a range of $0.01 credit and
$0.01 debit.
----------------------------------------------------------------------------------------------------------------
Rebate for Rebate for non-
Priority customer complex tier Complex order volume percentage select symbols select symbols
\6\ \7\
----------------------------------------------------------------------------------------------------------------
Tier 1..................................... 0.000-0.200........................ ($0.25) ($0.40)
Tier 2..................................... Above 0.200-0.400.................. (0.30) (0.55)
Tier 3..................................... Above 0.400-0.600.................. (0.35) (0.70)
Tier 4..................................... Above 0.600-0.750.................. (0.40) (0.75)
Tier 5..................................... Above 0.750-1.000.................. (0.45) (0.80)
[[Page 4046]]
Tier 6..................................... Above 1.000-1.500.................. (0.46) (0.80)
Tier 7..................................... Above 1.500-2.000.................. (0.48) (0.80)
Tier 8..................................... Above 2.000-3.250.................. (0.50) (0.85)
Tier 9..................................... Above 3.250........................ (0.50) (0.85)
----------------------------------------------------------------------------------------------------------------
Going forward, the Exchange proposes to eliminate these rebates for
Priority Customer complex orders that trade with quotes and orders on
the regular order book if any leg of the order is fifty contracts or
more. The Exchange will continue to provide the rebate if the largest
leg of such order is under fifty contracts. Rebates for Priority
Customer complex orders that trade with non-Priority Customer orders in
the complex order book will also remain unchanged with this proposal,
and the Exchange will continue to provide such rebates to qualifying
Members, regardless of size.
---------------------------------------------------------------------------
\6\ ``Select Symbols'' are options overlying all symbols listed
on the Nasdaq ISE that are in the Penny Pilot Program.
\7\ ``Non-Select Symbols'' are options overlying all symbols
excluding Select Symbols. For Non-Select Symbols, no Priority
Customer complex order rebates are paid for orders in NDX, NQX, and
MNX.
---------------------------------------------------------------------------
The proposed changes are designed to limit Members from entering
larger sized complex orders (i.e., 50 or more contracts for the largest
leg) to recover Priority Customer complex order rebates, and to reduce
disincentives for Market Makers \8\ to provide liquidity on the
Exchange. Recently, the Exchange has observed that several market
participants have been entering larger sized Priority Customer complex
orders with a leg of fifty or more contracts to earn a rebate. When
these complex orders do not find a counterparty in the complex order
book, they may leg into the regular order book where they are typically
executed by Market Makers on the individual legs who pay a fee to trade
with this order flow.\9\ As a result, the Market Maker's ability to
provide liquidity on the Exchange is adversely affected as they are
charged to trade against these larger complex orders when they leg into
the regular market and execute against their quotes.
---------------------------------------------------------------------------
\8\ The term ``Market Makers'' refers to ``Competitive Market
Makers'' and ``Primary Market Makers'' collectively. See Options 1,
Section 1(a)(21).
\9\ For example, a Market Maker providing liquidity on the
individual leg would typically pay a maker fee of only $0.10 per
contract for trading with orders originating from the regular order
book, or in the case of Market Makers that achieve Market Maker Plus
status, would earn certain maker rebates instead of paying the $0.10
per contract maker fee. See Options 7, Section 3, note 5. When
trading against a Priority Customer complex order that legs in from
the complex order book, however, that same Market Maker is instead
charged a maker fee of $0.15 per contract. See Options 7, Section 3,
note 11.
---------------------------------------------------------------------------
The Exchange believes that it is in the interest of a fair and
orderly market to provide appropriate incentives for Market Makers to
maintain quality markets. As a result, the Exchange has instituted
pricing programs that are aimed at incentivizing Market Makers to
provide liquidity, including, for example, the Market Maker Plus
program, which rewards Market Makers for routinely quoting at the
national best bid or offer.\10\ By eliminating the rebate for larger
sized Priority Customer complex orders that leg into the regular order
book, the Exchange seeks to bolster liquidity by incentivizing Market
Makers to post tighter and more liquid markets on ISE, to the benefit
of all market participants. At the same time, smaller, more typically
``retail'' sized Priority Customer complex orders with less than fifty
contracts for the largest leg that trade with interest on the regular
order book, and Priority Customer complex orders of any size trading
with non-Priority Customer orders in the complex order book, will
continue to receive rebates based on the Priority Customer Complex Tier
achieved, thereby continuing to incentivize Members to bring complex
order flow to the Exchange to earn the rebate on their Priority
Customer complex volume.
---------------------------------------------------------------------------
\10\ See Options 7, Section 3, note 5.
---------------------------------------------------------------------------
In addition, the Exchange proposes to eliminate the $0.05 per
contract surcharge it currently imposes on Priority Customer complex
orders in SPY that leg into the regular order book, which is applied in
addition to the applicable Priority Customer complex order rebate.\11\
This SPY surcharge was originally adopted to offset the costs of
providing the Priority Customer complex order rebates. With the changes
described above to eliminate the rebates for larger-sized Priority
Customer complex orders that leg into the regular order book, the
Exchange believes that it is appropriate to revisit this surcharge, and
now proposes to eliminate this fee. By no longer assessing this
surcharge, the Exchange seeks to fortify Member participation in the
Priority Customer complex order rebate program and incentivize
increased complex order volume on the Exchange.
---------------------------------------------------------------------------
\11\ For example, if a Member qualifies for Priority Customer
Complex Tier 1, the Member's Priority Customer complex orders in SPY
that leg into the regular order book for non-net zero activity will
earn $0.20 per contract (i.e., $0.25 per contract rebate for Select
Symbols minus the $0.05 per contract SPY surcharge).
---------------------------------------------------------------------------
Priority Customer Complex Rebate Tiers
As discussed above, the Exchange currently provides rebates to
Priority Customer complex orders based on nine volume tiers. In
particular, a Member must execute a Complex Order Volume Percentage of
above 1% to 1.5% to qualify for the $0.46 per contract Priority
Customer Complex Tier 6 rebate. In addition, a Member must execute a
Complex Order Volume Percentage of above 3.25% to qualify for the $0.50
per contract Priority Customer Complex Tier 9 rebate. Going forward,
the Exchange proposes to increase the Tier 6 rebate from $0.46 to $0.47
per contract, with no changes to the corresponding Complex Order Volume
Percentage. The Exchange also proposes to reduce the Tier 9 Complex
Order Volume Percentage requirement from above 3.25% to above 2.75% and
increase the corresponding rebate from $0.50 to $0.52 per contract.
There will also be a corresponding change to Tier 8 to reduce the upper
limit of the Complex Order Volume Percentage from 3.25% to 2.75%.
The Exchange notes that all Members may elect to qualify for the
Priority Customer complex rebates by submitting complex order flow to
the Exchange and earn a rebate on their Priority Customer complex
volume. Accordingly, the proposed changes are designed to increase the
amount of complex order flow Members bring to the Exchange,
particularly Priority Customer complex volume, and further encourage
them to contribute to a deeper, more liquid market to the benefit of
all market participants.
PIM Response Fees
Today, for regular orders in Select Symbols and Non-Select Symbols,
the Exchange charges all market participant orders a fee for Responses
to Price Improvement Mechanism (``PIM'') orders that is $0.25 per
contract. For
[[Page 4047]]
complex orders in both Select and Non-Select Symbols, the PIM Response
fee is likewise $0.25 per contract for all market participant orders.
The Exchange now proposes to increase the aforementioned fees to $0.35
per contract for all market participant orders.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\12\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\13\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees, and
other charges among members and issuers and other persons using any
facility, and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
The Proposal Is Reasonable
The Exchange's proposed changes to its Pricing Schedule are
reasonable in several respects. As a threshold matter, the Exchange is
subject to significant competitive forces in the market for options
transaction services that constrain its pricing determinations in that
market. The fact that this market is competitive has long been
recognized by the courts. In NetCoalition v. Securities and Exchange
Commission \14\ (``NetCoalition''), the D.C. Circuit stated, ``[n]o one
disputes that competition for order flow is `fierce.' . . . As the SEC
explained, `[i]n the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution'; [and] `no exchange can afford to take its market share
percentages for granted' because `no exchange possesses a monopoly,
regulatory or otherwise, in the execution of order flow from broker
dealers'. . . .'' \15\
---------------------------------------------------------------------------
\14\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
\15\ Id. at 539 (quoting Securities Exchange Act Release No.
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008)
(SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------
Numerous indicia demonstrate the competitive nature of this market.
For example, clear substitutes to the Exchange exist in the market for
options transaction services. The Exchange is only one of sixteen
options exchanges to which market participants may direct their order
flow. Within this environment, market participants can freely and often
do shift their order flow among the Exchange and competing venues in
response to changes in their respective pricing schedules. Within the
foregoing context, the proposal represents a reasonable attempt by the
Exchange to attract additional order flow to the Exchange and increase
its market share relative to its competitors.
Overall, the Exchange believes that the Priority Customer complex
rebate program, as modified, is reasonable because the program is
optional and all Members can choose to participate or not. In addition,
the Exchange believes that it is reasonable to eliminate the rebate for
Priority Customer complex orders with any leg of 50 or more contracts
where such order legs into the regular order book. As explained above,
Priority Customer complex orders, including these larger orders that
access liquidity on the regular order book, are currently paid
significant rebates by the Exchange, which are funded in part by
charging higher fees to the market participants who trade against these
orders. As discussed above, when these larger complex orders do not
find a counterparty in the complex order book, they may leg into the
regular order book where they are typically executed by Market Makers
on the individual legs who pay a fee to trade with this order flow.
Market Makers may be impeded in providing liquidity when doing so
may result in trading against these large Priority Customer complex
orders that leg into the regular market. The Exchange believes that it
is important that Market Makers be properly incentivized to maintain
quality markets, and is therefore proposing to take steps to reduce the
incentives for market participants to enter larger sized Priority
Customer complex orders that leg into the regular market to access
liquidity, and to limit this rebate to smaller sized orders that leg
in. By continuing to provide this rebate to smaller Priority Customer
complex orders that trade with interest on the regular order book, and
Priority Customer complex orders of any size that trade with non-
Priority Customer orders on the complex order book, the Exchange
believes that the rebate program will remain attractive and continue to
attract complex order flow, which liquidity will benefit all market
participants, including Market Makers, who may trade with this volume.
The Exchange believes that the proposed threshold of under fifty
contracts per leg is set at an appropriate level that would allow
Market Makers to more easily manage and react to these smaller, more
typically retail sized orders that leg in to trade against their quotes
in the regular order book.\16\ The Exchange notes that fifty contracts
is the threshold for ``block-sized orders'' entered through the
Exchange's Block Order Mechanism and Facilitation Mechanism, and
normally denotes the cutoff between orders of retail and institutional
size on ISE.\17\ With the proposed changes, the Exchange believes that
Market Makers will be aided in their role of providing liquidity and
maintaining quality markets to the benefit of all market participants
that trade on the Exchange.
---------------------------------------------------------------------------
\16\ The Exchange notes that Cboe Options (``Cboe'') has a
similar concept of limiting certain fee incentives in its Fees
Schedule for smaller sized customer orders. See, e.g., Cboe Fees
Schedule, fn. 9 (waiving transaction fees for customer orders
removing liquidity that are of 99 contracts or less in ETF and ETN
options).
\17\ See Options 3, Section 11(a) and (b) for a description of
the Block Order Mechanism and the Facilitation Mechanism.
---------------------------------------------------------------------------
The Exchange also believes that it is reasonable to eliminate the
SPY surcharge for Priority Customer complex orders that leg into the
regular order book. With the changes described above to eliminate
rebates for larger Priority Customer complex orders that leg into the
regular order book, the Exchange believes that it is appropriate to
also discontinue the SPY surcharge applied to legged in complex orders.
In addition, the Exchange believes that eliminating this surcharge will
increase incentives for Members to bring additional complex order flow
to the Exchange, which increased liquidity will benefit all market
participants that trade on the Exchange.
Furthermore, the Exchange believes that the proposed changes to the
Priority Customer complex order rebate program to lower the various
Complex Order Volume Percentage thresholds and increase rebates in the
manner described above represent a reasonable attempt by the Exchange
to fortify participation in the Priority Customer complex order rebate
program. In particular, the Exchange's proposal to increase the rebate
for Priority Customer Complex Tier 6 from $0.46 per contract to $0.47
per contract is intended to encourage Members to submit additional
amounts of complex order volume to obtain the higher rebate on their
Priority Customer complex orders. The Exchange believes that the higher
rebate will further incentivize Members to bring additional complex
order flow, including Priority Customer complex order flow, to the
Exchange. Similarly, the Exchange's proposal to lower the volume
requirements for Priority Customer Complex Tiers 8 and 9, and increase
the Tier 9 rebate is reasonable because this change is designed to make
[[Page 4048]]
it easier for Members to achieve these tiers to earn the higher rebate.
The proposed changes are designed to make the rebates more achievable
and attractive to existing and potential program participants. As noted
above, the Priority Customer complex rebate program is optional and
available to all Members that choose to send complex order flow to the
Exchange to earn a rebate on their Priority Customer complex volume. To
the extent the program, as modified, continue to attract complex volume
to the Exchange, the Exchange believes that the proposed changes would
improve the Exchange's overall competitiveness and strengthen its
market quality for all market participants.
The Exchange believes that it is reasonable to increase the regular
and complex PIM Response fees from $0.25 to $0.35 per contract for all
market participant orders. With the proposed changes, the PIM Response
fees will remain significantly lower than those charged for other
Responses to Crossing Order \18\ on ISE.\19\ Accordingly, the Exchange
believes that the proposed fees will remain attractive to market
participants and continue to encourage them to respond to PIM auctions,
thereby increasing price improvement opportunities for PIM orders.
---------------------------------------------------------------------------
\18\ ``Responses to Crossing Order'' is any contra-side interest
submitted after the commencement of an auction in the Exchange's
Facilitation Mechanism, Solicited Order Mechanism, Block Order
Mechanism or PIM.
\19\ For regular orders, the Exchange charges all market
participants a $0.50 per contract Response fee for all other
Crossing Orders. For complex orders, this Response fee is $0.50 per
contract in Select Symbols for all market participants and in Non-
Select Symbols, $0.91 per contract (Market Makers) and $0.96 per
contract (all other market participants). See Options 7, Sections 3
and 4.
---------------------------------------------------------------------------
The Proposal Is an Equitable Allocation of Fees and Rebates
The Exchange believes that its proposal is an equitable allocation
of its fees and rebates among its market participants.
The Exchange believes that its proposal to eliminate the rebate for
Priority Customer complex orders with any leg of 50 or more contracts
where such order legs into the regular order book is an equitable
allocation of the Priority Customer complex rebates. As discussed
above, this change is designed to limit market participants from
entering larger Priority Customer complex orders for the purpose of
earning the rebate, thereby reducing the cost of these trades to the
Exchange and its Members, and incentivizing Market Makers to maintain
quality markets on the Exchange. All Members may continue to qualify
for these rebates, provided that their Priority Customer complex orders
that trade with interest on the regular market remain under a certain
size.
The Exchange believes that its proposal to discontinue the SPY
surcharge for Priority Customer complex orders that leg into the
regular order book is an equitable allocation of fees. With the
proposed change, no market participant will be assessed the SPY
surcharge on their Priority Customer complex orders that execute with
interest on the regular market.
Furthermore, the proposed changes to the Priority Customer complex
order rebate program to lower the volume threshold requirements and
increase the rebates in the manner described above are equitable
because any Member who brings complex order flow to the Exchange may
qualify for the rebates. The Exchange believes that the proposed
changes to Tier 6 and higher are an equitable allocation of rebates
because the Exchange seeks to further incentivize all Members to bring
a significant amount of complex volume to the Exchange in order to earn
the highest range of Priority Customer complex rebates offered under
this program. The Exchange anticipates all Members that currently
qualify for these rebates will continue to do so under this proposal.
To the extent the proposed changes encourage additional Members to
strive for the modified tiers and thus attract more complex volume to
the Exchange, this increased order flow would improve the overall
quality and attractiveness of the Exchange. The Exchange notes that all
market participants stand to benefit from increased liquidity as such
increase promotes market depth, facilitates tighter spreads and
enhances price discovery. Accordingly, the Exchange believes that the
changes to Tier 6 and higher, as discussed above, are reasonably
designed to provide further incentives for all Members interested in
meeting the tier criteria to submit additional Priority Customer
complex volume to achieve the higher rebates.
The Exchange believes that its proposal to increase the regular and
complex PIM Response fees is equitable because the proposed increase
will apply to all market participant orders. As discussed above, all
market participant orders are currently charged a $0.25 per contract
PIM Response fee, and will uniformly be charged $0.35 per contract
under this proposal.
The Proposal Is Not Unfairly Discriminatory
The Exchange believes that the proposed changes are not unfairly
discriminatory. As it relates to the proposal to discontinue the
Priority Customer complex rebate for larger sized orders (i.e., with a
leg of 50 or more contracts) that leg into the regular order book, this
change is intended to improve market quality by discouraging market
participants from entering large sized Priority Customer complex orders
for the purpose of earning the rebate, thereby reducing the cost of
these trades to the Exchange and its Members, and incentivizing Market
Makers to maintain quality markets on the Exchange. The Exchange does
not believe that it is unfairly discriminatory to continue to offer
rebates to firms that do not hit the proposed fifty contract threshold
as all market participants may modify their behavior by entering
smaller sized complex orders to earn the rebate, and such smaller, more
retail sized orders would allow Market Makers to more easily manage and
react to these orders that trade against their quotes on the regular
order book. In addition, all Priority Customer complex orders that
trade with non-Priority Customer orders in the complex market will
continue to receive the rebates. The Exchange does not believe that it
is unfairly discriminatory to provide rebates only to Priority Customer
complex orders as this type of order flow enhances liquidity on the
Exchange for the benefit of all market participants by providing more
trading opportunities, which in turn attracts Market Makers and other
market participants that may trade with this order flow. As noted
above, any Member may choose to qualify for the Priority Customer
complex rebates by sending the requisite volume of complex orders to
earn the rebate on their Priority Customer complex orders. Thus the
proposed changes will apply uniformly to all Members that bring complex
order flow to the Exchange.
In addition, the Exchange believes that it is not unfairly
discriminatory to eliminate the SPY surcharge for Priority Customer
complex orders that leg into the regular order book. As discussed
above, no market participant will be assessed the SPY surcharge on
their Priority Customer complex orders that execute with interest on
the regular market under the Exchange's proposal. Accordingly, the
proposed change will apply uniformly to all market participants.
The Exchange also believes that the proposed changes to Priority
Customer
[[Page 4049]]
Complex Tier 6 and higher are not unfairly discriminatory. Any Member
may choose to qualify for the rebate program by sending complex order
flow to the Exchange. By encouraging all Members to bring significant
amounts of complex order flow (i.e., to qualify for the higher tiers)
in order to earn a rebate on their Priority Customer complex orders,
the Exchange seeks to provide more trading opportunities for all market
participants, promote price discovery, and improve the overall market
quality of the Exchange.
Lastly, the Exchange does not believe that the proposed increase in
PIM Response fees is unfairly discriminatory because they will apply
uniformly to all market participant orders that respond to PIM
auctions. As discussed above, the Exchange believes that the proposed
fees will remain attractive to market participants as they are lower
than the Response fees for other Crossing Orders, and will continue to
encourage market participants to respond to PIM auctions, thereby
increasing price improvement opportunities for PIM orders.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.
Intramarket Competition
The Exchange does not believe that its proposal will place any
category of Exchange participant at a competitive disadvantage. All of
the proposed changes are designed to attract additional liquidity to
the Exchange. The Exchange believes that the proposed enhancements to
the Priority Customer complex rebate program and proposed PIM Response
fees will continue to incentivize market participants to direct
liquidity to the Exchange. As noted above, all market participants will
benefit from any increase in market activity that the proposal
effectuates. The proposed fees and rebates will apply uniformly to all
similarly situated participants as discussed above, and as such, the
proposed changes will not impose an undue burden on competition among
Exchange participants.
Intermarket Competition
The Exchange operates in a highly competitive market in which
market participants can readily favor competing venues if they deem fee
levels at a particular venue to be excessive, or rebate opportunities
available at other venues to be more favorable. In such an environment,
the Exchange must continually adjust its fees to remain competitive
with other exchanges. Because competitors are free to modify their own
fees in response, and because market participants may readily adjust
their order routing practices, the Exchange believes that the degree to
which fee changes in this market may impose any burden on competition
is extremely limited.
Moreover, as noted above, price competition between exchanges is
fierce, with liquidity and market share moving freely between exchanges
in reaction to fee and rebate changes. In sum, if the changes proposed
herein are unattractive to market participants, it is likely that the
Exchange will lose market share as a result. Accordingly, the Exchange
does not believe that the proposed changes will impair the ability of
members or competing order execution venues to maintain their
competitive standing in the financial markets.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act,\20\ and Rule 19b-4(f)(2) \21\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is: (i) Necessary or
appropriate in the public interest; (ii) for the protection of
investors; or (iii) otherwise in furtherance of the purposes of the
Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or disapproved.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78s(b)(3)(A)(ii).
\21\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2020-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2020-01. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-ISE-2020-01 and should be submitted on
or before February 13, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-01040 Filed 1-22-20; 8:45 am]
BILLING CODE 8011-01-P
