Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Its Complex Order Rules, 71046-71051 [2023-22611]
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71046
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Notices
Exchange had less than 12% market
share of executed volume of multiplylisted equity and ETF options trades.13
The Exchange believes that the
proposed rule change reflects this
competitive environment because it
modifies the Exchange’s fees in a
manner designed to continue to incent
OTP Holders to direct Customer and
Market Maker posted interest to the
Exchange, to provide liquidity and to
attract order flow. To the extent that this
purpose is achieved, all the Exchange’s
market participants should benefit from
the improved market quality and
increased opportunities for price
improvement.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to section
19(b)(3)(A) 14 of the Act and
subparagraph (f)(2) of Rule 19b–4 15
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under section 19(b)(2)(B) 16 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
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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:
13 Based on a compilation of OCC data for
monthly volume of equity-based options and
monthly volume of equity-based ETF options, see
id., the Exchange’s market share in equity-based
options increased slightly from 11.36% for the
month of August 2022 to 11.37% for the month of
August 2023.
14 15 U.S.C. 78s(b)(3)(A).
15 17 CFR 240.19b–4(f)(2).
16 15 U.S.C. 78s(b)(2)(B).
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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–
NYSEARCA–2023–69 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–NYSEARCA–2023–69. 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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–NYSEARCA–2023–69 and should be
submitted on or before November 3,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–22507 Filed 10–12–23; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98702; File No. SR–ISE–
2023–22]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Its Complex
Order Rules
October 6, 2023
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 October
3, 2023, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Options 3, Section 11, Auction
Mechanisms, and Options 3, Section 13,
Price Improvement Mechanisms for
Crossing Transactions.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/ise/rules, 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
In connection with a technology
migration to an enhanced Nasdaq, Inc.
BILLING CODE 8011–01–P
1 15
17 17
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U.S.C. 78s(b)(1).
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Notices
(‘‘Nasdaq’’) functionality, the Exchange
proposes to amend certain auction
rules 3 which describe the short sale
price test in Rule 201 of Regulation
SHO. Specifically, the Exchange
proposes to adopt a new sentence
within Options 3, Section 11, Auction
Mechanisms, and Options 3, Section 13,
Price Improvement Mechanisms for
Crossing Transactions, to add further
detail to the recently adopted stock-tied
rule text. This rule change is identical
to a rule change filed by Nasdaq MRX,
LLC (‘‘MRX’’).4
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Background
Today, ISE Members may trade
certain Stock-Option Orders as
described in ISE Options 3, Section
14(a)(2) 5 and Stock-Complex Orders as
described in ISE Options 3, Section
14(a)(3),6 among other things. ISE
recently filed a rule change to amend its
stock-tied functionality in connection
with a technology migration.7 Among
other things, the proposal added
3 See Securities Exchange Act Release No. 98066
(August 7, 2023), 88 FR 54672 (SR–ISE–2023–13)
(Notice of Filing and Immediate Effectiveness of
Proposed Rule Change to Amend ISE Rules Related
to Complex Orders with Respect to a System
Migration) (‘‘SR–ISE–2023–13’’).
4 See Securities Exchange Act Release No. 98599
(September 28, 2023) (SR–MRX–2023–18) (Notice
of Filing and Immediate Effectiveness of Proposed
Rule Change to Amend its Complex Order Rules)
(not yet published).
5 The term ‘‘Stock-Option Order’’ refers to an
order for a Stock-Option Strategy as defined in
Options 3, Section 14(a)(2). 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 ISE Options 3, Section 14(a)(2).
6 The term ‘‘Stock-Complex Order’’ refers to an
order for a Stock-Complex Strategy as defined in
Options 3, Section 14(a)(3). 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 eightto-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 ISE Options 3, Section 14(a)(3).
7 See SR–ISE–2023–13.
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Supplementary Material .08(c) to
Options 3, Section 11 and
Supplementary Material .09(c) to
Options 3, Section 13 8 to address the
short sale price test in Rule 201 of
Regulation SHO with respect to
Complex PIM Orders,9 Complex
Facilitation Orders 10 and Complex
SOM Orders.11 The rule states that
when the short sale price test in Rule
201 of Regulation SHO is triggered for
a covered security, Nasdaq Execution
Services, LLC (‘‘NES’’),12 will not
execute a short sale order in the
underlying covered security component
of a Complex Facilitation Order,
Complex SOM Order and/or Response,
or in the underlying security component
of a Complex PIM Order and/or
Improvement Order, if the price is equal
to or below the current national best
bid.13 However, NES will execute a
short sale order in the underlying
covered security component of a
Complex Facilitation Order, Complex
SOM Order and/or Response, or in the
underlying security component of a
Complex PIM Order and/or
Improvement Order, if such order is
marked ‘‘short exempt,’’ regardless of
whether it is at a price that is equal to
or below the current national best bid.14
Further, if NES cannot execute the
underlying covered security component
of a Complex Facilitation Order,
Complex SOM Order and/or Response,
or Complex PIM Order and/or
Improvement Order, in accordance with
Rule 201 of Regulation SHO, the
Exchange will cancel back the Complex
Facilitation Order, Complex SOM Order
and/or Response or Complex PIM Order
and/or Improvement Order to the
entering Member.
8 Id.
9 A Complex PIM Order is an order entered into
the Complex Price Improvement Mechanism as
described in Options 3, Section 13(e). See ISE
Options 3, Section 14(b)(18).
10 A Complex Facilitation Order is an order
entered into the Complex Facilitation Mechanism
as described in Options 3, Section 11(c). See ISE
Options 3, Section 14(b)(16).
11 A Complex SOM Order is an order entered into
the Complex Solicited Order Mechanism as
described in Options 3, Section 11(e). See ISE
Options 3, Section 14(b)(17).
12 NES is a broker-dealer owned and operated by
Nasdaq, Inc. NES, an affiliate of the Exchange, has
been approved by the Commission to become a
Member of the Exchange and perform inbound
routing on behalf of the Exchange.
13 See ISE Supplementary Material .08(c) to
Options 3, Section 11 and ISE Supplementary
Material .09(c) to Options 3, Section 13. The term
‘‘covered security’’ has the same meaning as in Rule
201(a)(1) of Regulation SHO.
14 See ISE Supplementary Material .08(c) to
Options 3, Section 11 and ISE Supplementary
Material .09(c) to Options 3, Section 13.
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71047
Proposal
At this time, the Exchange proposes to
amend its Complex SOM, Complex
Facilitation, and Complex PIM rules to
add a new sentence within
Supplementary Material .08(c) to
Options 3, Section 11 and
Supplementary Material .09(c) to
Options 3, Section 13 that describes the
manner in which NES would execute a
short sale order in the underlying
covered security component of
Response, Improvement Complex Order,
or unrelated Limit Complex Order on
the Complex Order Book (1) when the
facilitating Electronic Access Member’s
contra-order, the solicited contra-side
Complex Order, or the Counter-Side
Order does not include a short sale
order in the underlying covered security
component; or (2) when the facilitating
Electronic Access Member’s contraorder, the solicited contra-side Complex
Order, or the Counter-Side Order
includes a short sale order in the
underlying security component. As
described more fully below, in the first
case NES would execute the underlying
covered security component of the
Response, Improvement Complex Order,
or unrelated Limit Complex Order on
the Complex Order Book at its stated
limit price. In the second case, NES
would execute the underlying security
component of the Response,
Improvement Complex Order, or
unrelated Limit Complex Order on the
Complex Order Book at its stated limit
price or better.
The proposed rules will make clear to
Members who submit auction responses
or Improvement Orders that include a
short sale order, or Members that place
orders on the Complex Order Book that
include a short sale order, the manner
in which NES will execute the short sale
component of their order when their
Response, Improvement Complex Order,
or unrelated Limit Complex Order on
the Complex Order Book executes in the
Complex SOM, Complex Facilitation,
and Complex PIM auction, (i.e., their
short sale order will execute at its stated
limit price, but not at a better price) if
the facilitating Electronic Access
Member’s contra-order, the solicited
contra-side Complex Order, or the
Counter-Side Order does not include a
short sale order. However their short
sale order will execute at its stated limit
price or better if the facilitating
Electronic Access Member’s contraorder, the solicited contra-side Complex
Order, or the Counter-Side Order
includes a short sale order. Thus,
whether a short sale order included in
an auction receives its stated limit price,
or potentially receives a better price
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Notices
than its limit price, depends on whether
the contra-side order submitted to the
auction with an agency order also
included a short sale order. Although
the availability of the potential for price
improvement for the responder’s short
sale order will vary, depending on
whether the contra-order also included
a short sale order, ISE notes that for the
reasons described below the alternative
would be to exclude auction orders that
include a short sale order from the
Complex SOM, Complex Facilitation,
and Complex PIM altogether, which
would decrease competition in the
auction and potentially reduce
opportunities for the agency order to
receive price improvement in the
auctions. Below are some examples of
Complex PIM Auction responses
(‘‘Improvement Orders’’) executing
within a Complex PIM Auction.15
Example No. 1—Complex PIM Auction
Utilizing Stated Limit Price
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ISE BBO for option leg is 0.05 × 0.10.
Underlying equity NBBO is 1.05 ×
1.10.
Reg SHO short sale price test is
triggered in the underlying.
Stock-Option Strategy is created to
buy 1 put, buy 100 shares (cBBO for this
strategy is 1.10 × 1.20).
Complex PIM to buy strategy, 100 @
1.13 (buy stock @1.08 and options @
0.05); 16 Counter-Side Order does not
include a short sale order.
Improvement Complex Order1 is a
Priority Customer Order to sell, sell
short stock leg, 100 @1.11 (sell stock @
1.06 and options @0.05).
Improvement Complex Order2 to sell,
sell short stock leg, 100 @1.12 (sell stock
@1.07 and options @0.05).
Complex PIM auction timer
concludes:
Improvement Complex Order1 trades
with Complex PIM Agency Order,
option @0.05 and stock @1.06 for net
price of 1.11. The Improvement
Complex Order may not trade the
underlying equity at 1.05 because it
cannot execute a short sale order at a
price that is equal to the NBB of the
underlying equity.
15 While the examples utilize the Complex PIM
auction, the same examples apply to a Complex
SOM or Complex Facilitation auction.
16 The Exchange notes that different combinations
of stock and options prices could determine the
strategy prices in this Example 1 as well as
Examples 2 and 3. The Exchange is assuming the
noted prices for the examples, however the
Exchange notes that multiple price points could
achieve the net prices in these examples. In this
particular case in Example 1, the agency order
could buy stock @1.07 and buy options @0.06 in
lieu of the prices noted.
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Example No. 2—Complex PIM Auction
Utilizing Stated Limit Price
ISE BBO for option leg is 0.05 × 0.10.
Underlying equity NBBO is 1.05 ×
1.10.
Reg SHO short sale price test is
triggered in the underlying.
Stock-Option Strategy is created to
buy 1 put, buy 100 shares (cBBO for this
strategy is 1.10 × 1.20).
Complex PIM to buy strategy, 100 @
1.13 (buy stock @1.08 and options @
0.05); Counter-Side Order does not
include a short sale order.
Improvement Complex Order1 is a
Priority Customer Order to sell, sell
short stock leg, 100 @1.10 (sell stock @
1.05 and options @0.05).
Improvement Complex Order2 to sell,
sell short stock leg, 100 @1.12 (sell stock
@1.06 and options @0.06).
Complex PIM auction timer
concludes:
Improvement Complex Order2 trades
with Complex PIM Agency Order,
option @0.06 and stock @1.06 for net
price of 1.12. Since the Counter-Side
Order does not include a short sale
order, Improvement Complex Order1 is
considered for execution at its stated
limit price of 1.10; since it cannot trade
at 1.10 due to Reg SHO, it does not trade
with the Complex PIM Agency Order.
Example No. 3—Complex PIM Auction
Where Counter-Side Is Also Short
Selling
ISE BBO for option leg is 0.05 × 0.10.
Underlying equity NBBO is 1.05 ×
1.20.
Counter-Side Order includes a short
sale order.
Reg SHO short sale price test is
triggered in the underlying.
Stock-Option Strategy is created to
buy 1 put, buy 100 shares (cBBO for this
strategy is 1.10 × 1.30).
Complex PIM to Buy strategy, 100 @
1.13, Counter-Side Order is a Market
Order that is willing to auto-match at
any price point within Reg SHO price
restriction bound and has ‘sell short’
stock leg instructions and therefore
cannot trade the stock component at any
price less than or equal to the
underlying best bid of $1.05. In this
example, if the Counter-Side Order did
not have a ‘‘sell short’’ instruction it
would not be required to trade at a price
that is better than the NBB for security
($1.05) and could execute at a price
equal to or less than the underlying best
bid of $1.05. The price of 1.10 is the cBB
(net of option and underlying NBB).
Improvement Complex Order1 is to
sell, sell short stock leg, 100 @1.10
(selling stock at 1.05 and options at
0.05; note it cannot trade at 1.10 due to
Reg SHO).
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Improvement Complex Order2 to sell,
sell short stock leg, 100 @1.12 (selling
stock at 1.06 and options at 0.06).
Complex PIM auction timer
concludes:
The Complex PIM Agency Order first
executes 40 contracts with the CounterSide Market Order, the option leg at
0.05 and stock leg at 1.06 for a net price
of 1.11. The remaining 60 contracts from
the Complex Agency Order then execute
with Improvement Complex Order1 at
the same price. In this example, both the
Complex Counter-Side Order and the
Improvement Complex Order are
marked short sale, which permits the
Improvement Complex Order to trade at
a price that is better than its stated limit
price.
In this example, the Improvement
Complex Order traded at its next
available price in lieu of its stated limit
price because both the Counter-Side
Order and the Improvement Complex
Order included a short sale order in the
underlying component security. In
contrast, if the Counter-Side Order did
not include a short sale order than [sic]
the Counter-Side Order and
Improvement Complex Order2 trade
with the Complex PIM Agency Order for
[sic] net price of 1.12 (option @0.06 and
stock @1.06).
The Exchange proposes to amend the
rule text in Supplementary Material .08
to Options 3, Section 11 with respect to
a SOM and Facilitation auction to
provide:
When a response or an unrelated limit
complex order on the complex order book
includes a short sale order in the underlying
covered security, NES will execute such
order at (1) its stated limit price if the
facilitating Electronic Access Member’s
contra order or contra-side solicited Complex
Order does not include a short sale order in
the underlying security; or (2) its stated limit
price or better if the facilitating Electronic
Access Member’ contra order or the solicited
contra-side Complex Order includes a short
sale order in the underlying covered security.
With respect to a Complex PIM
auction, the Exchange proposes to
amend the rule text within
Supplementary Material .09 to Options
3, Section 13 to provide:
When an improvement order or an
unrelated limit complex order on the
complex order book includes a short sale
order in the underlying covered security,
NES will execute such order at (1) its stated
limit price if the Counter-Side Order does not
include a short sale order in the underlying
security; or (2) its stated limit price or better
if the counter-side order includes a short sale
order in the underlying covered security.
In such case where a response or an
unrelated limit complex order on the
complex order book includes a short
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sale order in the underlying covered
security, NES will execute the order at
its stated limit price if the facilitating
Electronic Access Member’s contra
order, contra-side solicited Complex
Order, or Counter-Side Order does not
include a short sale order in the
underlying covered security because the
Exchange desires to foster competition
by including responses that have a short
sale order in the underlying covered
security. In this scenario, the Exchange
would consider all prices submitted by
responders at which the auction may
execute because the Electronic Access
Member’s contra order, contra-side
solicited Complex Order, or CounterSide Order does not need to comply
with the short sale price test in Rule 201
of Regulation SHO because the order is
not short. By using the order’s stated
limit price in this case, the Exchange
would allow the responder with a short
sale order to participate in the auction
and allocate the best price possible to
the agency order while complying with
the short sale price test.17 The Exchange
believes that including responses with a
short sale order in the underlying
covered security may create additional
competition in the Complex SOM,
Complex Facilitation and Complex PIM
auction while also providing additional
opportunity for potential price
improvement for the agency order.
When a response, Improvement
Order, or an unrelated limit complex
order on the complex order book
includes a short sale order in the
underlying covered security, NES will
execute the order at its stated limit price
or better if the facilitating Electronic
Access Member contra order, solicited
contra-side Complex Order, or CounterSide Order includes a short sale order
in the underlying security component.
In this case, each short sale compliant
price would be considered in
determining the price at which the
auction may execute, which would be at
its stated limit price or better. In this
scenario, because the Electronic Access
Member contra order, solicited contra17 For example, utilizing a Complex PIM auction
with a BBO of 0.05 × 0.10 and an NBBO for the
underlying security component of 1.05 × 1.10, if the
Initiating Order submitted an agency order to buy
@1.13 and a contra-order to sell @1.13, with automatch at any price point, and Responder1 was long
@1.10, and Responder2 was short @1.10 (in this
scenario 1.10 would not comply with the short sale
price test), pursuant to the proposed amendment,
the agency order would receive a price
improvement allocation @1.10. In this scenario the
improved price of 1.11 would not be allocated to
the responder with a short sale rather the price
improvement would be applied to the agency order.
The Exchange believes it is important to offer price
improvement to the agency order over the
responder to the auction. Of note, the responder
that was short @1.10 would be cancelled.
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side Complex Order, or Counter-Side
Order are short, the Exchange will only
consider prices that comply with the
short sale price test in Rule 201 of
Regulation SHO. In this case, all prices
that are compliant with the short sale
price test are considered when
allocating the auction, and both the
agency order and responders may
receive a better price. The auction
would allocate at the agency order’s
stated limited price or better depending
on the prices of the responses. The
auction responses may execute at their
stated limited price or better depending
on the final auction price.
This is in contrast to the prior
scenario where the Electronic Access
Member’s contra order, contra-side
solicited Complex Order, or CounterSide Order does not need to comply
with the short sale price test. Utilizing
the proposed stated limit price or better
where a Member’s contra order, contraside solicited Complex Order, or
Counter-Side Order includes a short sale
order allows the Exchange to potentially
provide price improvement opportunity
to the agency order.
Implementation
The Exchange intends to begin
implementation of the proposed rule
change prior to December 20, 2024. The
implementation would commence with
a limited symbol migration and
continue to migrate symbols over
several weeks. The Exchange will issue
an Options Trader Alert to Members to
provide notification of the symbols that
will migrate and the relevant dates.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,18 in general, and furthers the
objectives of Section 6(b)(5) of the Act,19
in particular, in that it is designed to
promote just and equitable principles of
trade and to protect investors and the
public interest for the reasons discussed
below.
With respect to short sale regulation,
the proposed handling of the stock/ETF
component of a Complex Order under
this proposal does not raise any issues
of compliance with the currently
operative provisions of Regulation
SHO 20 and, therefore, the proposal
promotes just and equitable principles
of trade. When a Complex Order has a
stock/ETF component, Members must
indicate, pursuant to Regulation SHO,
whether that order involves a long or
short sale. NES, as a trading center
18 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
17 CFR 242.200 et seq.
19 15
20
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71049
under Rule 201, will be compliant with
the requirements of Regulation SHO. Of
course, broker-dealers, including both
NES and the Members submitting orders
to ISE with a stock/ETF component,
must comply with Regulation SHO.
NES’ compliance team updates, reviews
and monitors NES’ policies and
procedures including those pertaining
to Regulation SHO on an annual basis.
In the case where a response,
Improvement Order, or an unrelated
limit complex order includes a short
sale order in the underlying covered
security, executing such order at its
stated limit price when the facilitating
Electronic Access Member’s contra
order, contra-side Complex Order, or
Counter-Side Order does not include a
short sale order in the underlying
security would protect investors and the
public interest by considering all prices
at which the auction could execute.
Under these circumstance, the
Response, Improvement Complex Order,
or unrelated Limit Complex Order
would be considered for execution at its
stated limit price (provided the limit
price is compliant with the short sale
price test in Rule 201 of Regulation
SHO) while the Electronic Access
Member’s contra order, contra-side
solicited Complex Order, or CounterSide Order does not need to comply
with the short sale price test in Rule 201
of Regulation SHO because the order is
not short. Utilizing the order’s stated
limit price in this case allows the
responder with a short sale order to
participate in the auction while the
agency order is allocated the best price
possible while complying with the short
sale price test. The Exchange believes
that this behavior is consistent with the
protection of investors and the public
interest because it attempts to afford
price improvement to the agency order
over the responder to the auction.
Finally, the Exchange believes that
including responses with a short sale
order in the underlying covered security
may create additional competition in
the Complex SOM, Complex Facilitation
and Complex PIM auction and provides
the agency order with additional
opportunities for potential price
improvement.
In contrast, when the facilitating
Electronic Access Member’s contra
order, contra-side Complex Order, or
Counter-Side Order includes a short
sale order in the underlying covered
security, the auction must be allocated
at a price that is short sell compliant. In
this case, each short sale compliant
price would be considered in
determining the price at which the
Complex SOM, Complex Facilitation
and Complex PIM auction may execute
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71050
Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Notices
lotter on DSK11XQN23PROD with NOTICES1
and, because the Electronic Access
Member contra order, solicited contraside Complex Order, or Counter-Side
Order are short, the Exchange will only
consider prices that comply with the
short sale price test in Rule 201 of
Regulation SHO. As a result, the auction
may allocate at the agency order’s stated
limited price or better depending on the
prices of the responses. Also, the
auction responses may execute at their
stated limited price or better depending
on the final auction price. The Exchange
believes its proposal is consistent with
the Act and the protection of investors
because both the agency order and
responders may receive a better price in
this case. This is in contrast to the prior
scenario where the Electronic Access
Member’s contra order, contra-side
solicited Complex Order, or CounterSide Order does not need to comply
with the short sale price test. Utilizing
the proposed stated limit price or better
where a Member’s contra order, contraside solicited Complex Order, or
Counter-Side Order includes a short sale
order allows the Exchange to potentially
provide a price improvement
opportunity to the agency order and to
the auction response. With the proposed
amendments, Complex SOM, Complex
Facilitation, and Complex PIM auction
responders who submit a response
would be aware of the auction price that
would comply with the short sale price
test in Rule 201 of Regulation SHO. The
proposed amendment allows Members
to participate in auctions with a short
sale response and such participation
facilitates competition in these auctions.
This proposed approach is in lieu of
prohibiting Members whose auction
Responses or resting Limit Complex
Orders include a short sale order from
responding to these auctions, which
would limit competition in the auction.
By allowing additional responses to
participate in the auction, the Exchange
believes that the proposal would benefit
investors and the public interest
because the additional interest may
increase competition in these auctions,
which may lead to better prices.
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.
Where a response, Improvement
Order, or an unrelated limit complex
order includes a short sale order in the
underlying covered security, executing
such order at its stated limit price when
the facilitating Electronic Access
Member’s contra order, contra-side
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16:55 Oct 12, 2023
Jkt 262001
Complex Order, or Counter-Side Order
does not include a short sale order in
the underlying covered security does
not impose an undue burden on intramarket competition because the
Exchange would uniformly consider all
prices submitted by responders in
determining the allocation price because
the Electronic Access Member’s contra
order, contra-side solicited Complex
Order, or Counter-Side Order does not
need to comply with the short sale price
test in Rule 201 of Regulation SHO
because the order is not short. Where a
response, Improvement Order, or an
unrelated limit complex order includes
a short sale order in the underlying
covered security, executing such order
at its stated limit price or better when
the facilitating Electronic Access
Member’s contra order, contra-side
Complex Order, or Counter-Side Order
is also a short sale order in the
underlying covered security component
does not impose an undue burden on
intra-market competition because the
Exchange would uniformly consider all
prices that are compliant with the short
sale price test when allocating the
auction.
Where a response, Improvement
Order, or an unrelated limit complex
order includes a short sale order in the
underlying covered security, executing
such order at its stated limit price when
the facilitating Electronic Access
Member’s contra order, contra-side
Complex Order, or Counter-Side Order
does not include a short sale order in
the underlying covered security and
executing such order its stated limit
price or better when the facilitating
Electronic Access Member contra-order,
solicited contra-side Complex Order, or
Counter-Side Order is also a short sale
order in the underlying covered security
component does not impose an undue
burden on inter-market competition
because other options exchanges today
may offer a similar process for handling
stock-tied transactions that have a short
sale order.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 21 and Rule
19b–4(f)(6) thereunder.22
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 necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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 rule-comments@
sec.gov. Please include file number SR–
ISE–2023–22 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–2023–22. 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
21 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires the Exchange to give the
Commission written notice of its intent to file the
proposed rule change, along with a brief description
and text of the proposed rule change, at least five
business days prior to the date of filing of the
proposed rule change, or such shorter time as
designated by the Commission. The Exchange has
satisfied this requirement.
22 17
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Federal Register / Vol. 88, No. 197 / Friday, October 13, 2023 / Notices
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–ISE–2023–22 and should be
submitted on or before November 3,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.8
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–22505 Filed 10–12–23; 8:45 am]
BILLING CODE 8011–01–P
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
J. Lynn Taylor,
Assistant Secretary.
SECURITIES AND EXCHANGE
COMMISSION
[FR Doc. 2023–22611 Filed 10–12–23; 8:45 am]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend the
FINRA Codes of Arbitration Procedure
and Code of Mediation Procedure To
Revise and Restate the Qualifications
for Representatives in Arbitrations and
Mediations
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98691; File No. SR–
EMERALD–2023–19]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Withdrawal of
Proposed Rule Change To Amend the
Fee Schedule To Modify Certain
Connectivity Fees and Ports Fees
October 5, 2023.
On August 8, 2023, MIAX Emerald,
LLC (‘‘MIAX Emerald’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change to amend certain connectivity
and port fees.
The proposed rule change was
immediately effective upon filing with
the Commission pursuant to section
19(b)(3)(A) of the Act.3 The proposed
rule change was published for comment
in the Federal Register on August 25,
2023.4 On September 29, 2023, pursuant
to section 19(b)(3)(C) of the Act,5 the
23 17
CFR 200.30–3(a)(12), (59).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A). A proposed rule change
may take effect upon filing with the Commission if
it is designated by the exchange as ‘‘establishing or
changing a due, fee, or other charge imposed by the
self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory
organization.’’ 15 U.S.C. 78s(b)(3)(A)(ii).
4 See Securities Exchange Act Release No. 98176
(August 21, 2023), 88 FR 58342.
5 15 U.S.C. 78s(b)(3)(C).
1 15
lotter on DSK11XQN23PROD with NOTICES1
Commission: (1) temporarily suspended
the proposed rule change; and (2)
instituted proceedings under Section
19(b)(2)(B) of the Act 6 to determine
whether to approve or disapprove the
proposed rule change.7 On October 2,
2023, the Exchange withdrew the
proposed rule change (SR–EMERALD–
2023–19).
VerDate Sep<11>2014
16:55 Oct 12, 2023
Jkt 262001
[Release No. 34–98703; File No. SR–FINRA–
2023–013]
October 6, 2023.
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 October
5, 2023, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by FINRA. 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
FINRA is proposing to amend FINRA
Rule 12208(b) through (d) of the Code of
Arbitration Procedure for Customer
Disputes (‘‘Customer Code’’), FINRA
Rule 13208(b) through (d) of the Code of
Arbitration Procedure for Industry
Disputes (‘‘Industry Code’’) and FINRA
Rule 14106(b) through (d) of the Code of
Mediation Procedure (‘‘Mediation
Code’’ and collectively, ‘‘Codes’’), to
6 15
U.S.C. 78s(b)(2)(B).
Securities Exchange Act Release No. 98656,
88 FR 68680 (October 4, 2023).
8 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
7 See
PO 00000
Frm 00132
Fmt 4703
Sfmt 4703
71051
revise and restate the qualifications for
representatives in arbitrations and
mediations in the forum administered
by FINRA Dispute Resolution Services
(‘‘DRS’’); to disallow compensated
representatives who are not attorneys
from representing parties in the DRS
forum; to codify that a student enrolled
in a law school participating in a law
school clinical program or its equivalent
and practicing under the supervision of
an attorney may represent investors in
the DRS forum; and to clarify the
circumstances in which any person,
including attorneys, would be
prohibited from representing parties in
the DRS forum.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA 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,
FINRA 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. FINRA 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
Background
The Codes currently permit parties to
arbitrations and mediations in the DRS
forum to represent themselves, to be
represented by an attorney at law in
good standing or to be represented by a
non-attorney representative (‘‘NAR’’).3
Some NARs receive compensation in
connection with their representation of
parties (‘‘compensated NARs’’).
Compensated NARs receive monetary or
non-monetary compensation in
connection with the representation of
parties—including, for example,
advance fees, consulting fees, payments
in kind, referral fees or fees pursuant to
a contingent fee arrangement. Other
NARs, often friends or relatives of a
party, may assist parties with their cases
without compensation
(‘‘uncompensated NARs’’). In addition,
although not specifically provided for in
3 See
E:\FR\FM\13OCN1.SGM
FINRA Rules 12208, 13208 and 14106.
13OCN1
]]>Agencies
[Federal Register Volume 88, Number 197 (Friday, October 13, 2023)]
[Notices]
[Pages 71046-71051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22611]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98702; File No. SR-ISE-2023-22]
Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend Its
Complex Order Rules
October 6, 2023
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 October 3, 2023, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\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 Options 3, Section 11, Auction
Mechanisms, and Options 3, Section 13, Price Improvement Mechanisms for
Crossing Transactions.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, 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
In connection with a technology migration to an enhanced Nasdaq,
Inc.
[[Page 71047]]
(``Nasdaq'') functionality, the Exchange proposes to amend certain
auction rules \3\ which describe the short sale price test in Rule 201
of Regulation SHO. Specifically, the Exchange proposes to adopt a new
sentence within Options 3, Section 11, Auction Mechanisms, and Options
3, Section 13, Price Improvement Mechanisms for Crossing Transactions,
to add further detail to the recently adopted stock-tied rule text.
This rule change is identical to a rule change filed by Nasdaq MRX, LLC
(``MRX'').\4\
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 98066 (August 7,
2023), 88 FR 54672 (SR-ISE-2023-13) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Amend ISE Rules Related to
Complex Orders with Respect to a System Migration) (``SR-ISE-2023-
13'').
\4\ See Securities Exchange Act Release No. 98599 (September 28,
2023) (SR-MRX-2023-18) (Notice of Filing and Immediate Effectiveness
of Proposed Rule Change to Amend its Complex Order Rules) (not yet
published).
---------------------------------------------------------------------------
Background
Today, ISE Members may trade certain Stock-Option Orders as
described in ISE Options 3, Section 14(a)(2) \5\ and Stock-Complex
Orders as described in ISE Options 3, Section 14(a)(3),\6\ among other
things. ISE recently filed a rule change to amend its stock-tied
functionality in connection with a technology migration.\7\ Among other
things, the proposal added Supplementary Material .08(c) to Options 3,
Section 11 and Supplementary Material .09(c) to Options 3, Section 13
\8\ to address the short sale price test in Rule 201 of Regulation SHO
with respect to Complex PIM Orders,\9\ Complex Facilitation Orders \10\
and Complex SOM Orders.\11\ The rule states that when the short sale
price test in Rule 201 of Regulation SHO is triggered for a covered
security, Nasdaq Execution Services, LLC (``NES''),\12\ will not
execute a short sale order in the underlying covered security component
of a Complex Facilitation Order, Complex SOM Order and/or Response, or
in the underlying security component of a Complex PIM Order and/or
Improvement Order, if the price is equal to or below the current
national best bid.\13\ However, NES will execute a short sale order in
the underlying covered security component of a Complex Facilitation
Order, Complex SOM Order and/or Response, or in the underlying security
component of a Complex PIM Order and/or Improvement Order, if such
order is marked ``short exempt,'' regardless of whether it is at a
price that is equal to or below the current national best bid.\14\
Further, if NES cannot execute the underlying covered security
component of a Complex Facilitation Order, Complex SOM Order and/or
Response, or Complex PIM Order and/or Improvement Order, in accordance
with Rule 201 of Regulation SHO, the Exchange will cancel back the
Complex Facilitation Order, Complex SOM Order and/or Response or
Complex PIM Order and/or Improvement Order to the entering Member.
---------------------------------------------------------------------------
\5\ The term ``Stock-Option Order'' refers to an order for a
Stock-Option Strategy as defined in Options 3, Section 14(a)(2). 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 ISE Options 3, Section 14(a)(2).
\6\ The term ``Stock-Complex Order'' refers to an order for a
Stock-Complex Strategy as defined in Options 3, Section 14(a)(3). 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
ISE Options 3, Section 14(a)(3).
\7\ See SR-ISE-2023-13.
\8\ Id.
\9\ A Complex PIM Order is an order entered into the Complex
Price Improvement Mechanism as described in Options 3, Section
13(e). See ISE Options 3, Section 14(b)(18).
\10\ A Complex Facilitation Order is an order entered into the
Complex Facilitation Mechanism as described in Options 3, Section
11(c). See ISE Options 3, Section 14(b)(16).
\11\ A Complex SOM Order is an order entered into the Complex
Solicited Order Mechanism as described in Options 3, Section 11(e).
See ISE Options 3, Section 14(b)(17).
\12\ NES is a broker-dealer owned and operated by Nasdaq, Inc.
NES, an affiliate of the Exchange, has been approved by the
Commission to become a Member of the Exchange and perform inbound
routing on behalf of the Exchange.
\13\ See ISE Supplementary Material .08(c) to Options 3, Section
11 and ISE Supplementary Material .09(c) to Options 3, Section 13.
The term ``covered security'' has the same meaning as in Rule
201(a)(1) of Regulation SHO.
\14\ See ISE Supplementary Material .08(c) to Options 3, Section
11 and ISE Supplementary Material .09(c) to Options 3, Section 13.
---------------------------------------------------------------------------
Proposal
At this time, the Exchange proposes to amend its Complex SOM,
Complex Facilitation, and Complex PIM rules to add a new sentence
within Supplementary Material .08(c) to Options 3, Section 11 and
Supplementary Material .09(c) to Options 3, Section 13 that describes
the manner in which NES would execute a short sale order in the
underlying covered security component of Response, Improvement Complex
Order, or unrelated Limit Complex Order on the Complex Order Book (1)
when the facilitating Electronic Access Member's contra-order, the
solicited contra-side Complex Order, or the Counter-Side Order does not
include a short sale order in the underlying covered security
component; or (2) when the facilitating Electronic Access Member's
contra-order, the solicited contra-side Complex Order, or the Counter-
Side Order includes a short sale order in the underlying security
component. As described more fully below, in the first case NES would
execute the underlying covered security component of the Response,
Improvement Complex Order, or unrelated Limit Complex Order on the
Complex Order Book at its stated limit price. In the second case, NES
would execute the underlying security component of the Response,
Improvement Complex Order, or unrelated Limit Complex Order on the
Complex Order Book at its stated limit price or better.
The proposed rules will make clear to Members who submit auction
responses or Improvement Orders that include a short sale order, or
Members that place orders on the Complex Order Book that include a
short sale order, the manner in which NES will execute the short sale
component of their order when their Response, Improvement Complex
Order, or unrelated Limit Complex Order on the Complex Order Book
executes in the Complex SOM, Complex Facilitation, and Complex PIM
auction, (i.e., their short sale order will execute at its stated limit
price, but not at a better price) if the facilitating Electronic Access
Member's contra-order, the solicited contra-side Complex Order, or the
Counter-Side Order does not include a short sale order. However their
short sale order will execute at its stated limit price or better if
the facilitating Electronic Access Member's contra-order, the solicited
contra-side Complex Order, or the Counter-Side Order includes a short
sale order. Thus, whether a short sale order included in an auction
receives its stated limit price, or potentially receives a better price
[[Page 71048]]
than its limit price, depends on whether the contra-side order
submitted to the auction with an agency order also included a short
sale order. Although the availability of the potential for price
improvement for the responder's short sale order will vary, depending
on whether the contra-order also included a short sale order, ISE notes
that for the reasons described below the alternative would be to
exclude auction orders that include a short sale order from the Complex
SOM, Complex Facilitation, and Complex PIM altogether, which would
decrease competition in the auction and potentially reduce
opportunities for the agency order to receive price improvement in the
auctions. Below are some examples of Complex PIM Auction responses
(``Improvement Orders'') executing within a Complex PIM Auction.\15\
---------------------------------------------------------------------------
\15\ While the examples utilize the Complex PIM auction, the
same examples apply to a Complex SOM or Complex Facilitation
auction.
---------------------------------------------------------------------------
Example No. 1--Complex PIM Auction Utilizing Stated Limit Price
ISE BBO for option leg is 0.05 x 0.10.
Underlying equity NBBO is 1.05 x 1.10.
Reg SHO short sale price test is triggered in the underlying.
Stock-Option Strategy is created to buy 1 put, buy 100 shares (cBBO
for this strategy is 1.10 x 1.20).
Complex PIM to buy strategy, 100 @1.13 (buy stock @1.08 and options
@0.05); \16\ Counter-Side Order does not include a short sale order.
---------------------------------------------------------------------------
\16\ The Exchange notes that different combinations of stock and
options prices could determine the strategy prices in this Example 1
as well as Examples 2 and 3. The Exchange is assuming the noted
prices for the examples, however the Exchange notes that multiple
price points could achieve the net prices in these examples. In this
particular case in Example 1, the agency order could buy stock @1.07
and buy options @0.06 in lieu of the prices noted.
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Improvement Complex Order1 is a Priority Customer Order to sell,
sell short stock leg, 100 @1.11 (sell stock @1.06 and options @0.05).
Improvement Complex Order2 to sell, sell short stock leg, 100 @1.12
(sell stock @1.07 and options @0.05).
Complex PIM auction timer concludes:
Improvement Complex Order1 trades with Complex PIM Agency Order,
option @0.05 and stock @1.06 for net price of 1.11. The Improvement
Complex Order may not trade the underlying equity at 1.05 because it
cannot execute a short sale order at a price that is equal to the NBB
of the underlying equity.
Example No. 2--Complex PIM Auction Utilizing Stated Limit Price
ISE BBO for option leg is 0.05 x 0.10.
Underlying equity NBBO is 1.05 x 1.10.
Reg SHO short sale price test is triggered in the underlying.
Stock-Option Strategy is created to buy 1 put, buy 100 shares (cBBO
for this strategy is 1.10 x 1.20).
Complex PIM to buy strategy, 100 @1.13 (buy stock @1.08 and options
@0.05); Counter-Side Order does not include a short sale order.
Improvement Complex Order1 is a Priority Customer Order to sell,
sell short stock leg, 100 @1.10 (sell stock @1.05 and options @0.05).
Improvement Complex Order2 to sell, sell short stock leg, 100 @1.12
(sell stock @1.06 and options @0.06).
Complex PIM auction timer concludes:
Improvement Complex Order2 trades with Complex PIM Agency Order,
option @0.06 and stock @1.06 for net price of 1.12. Since the Counter-
Side Order does not include a short sale order, Improvement Complex
Order1 is considered for execution at its stated limit price of 1.10;
since it cannot trade at 1.10 due to Reg SHO, it does not trade with
the Complex PIM Agency Order.
Example No. 3--Complex PIM Auction Where Counter-Side Is Also Short
Selling
ISE BBO for option leg is 0.05 x 0.10.
Underlying equity NBBO is 1.05 x 1.20.
Counter-Side Order includes a short sale order.
Reg SHO short sale price test is triggered in the underlying.
Stock-Option Strategy is created to buy 1 put, buy 100 shares (cBBO
for this strategy is 1.10 x 1.30).
Complex PIM to Buy strategy, 100 @1.13, Counter-Side Order is a
Market Order that is willing to auto-match at any price point within
Reg SHO price restriction bound and has `sell short' stock leg
instructions and therefore cannot trade the stock component at any
price less than or equal to the underlying best bid of $1.05. In this
example, if the Counter-Side Order did not have a ``sell short''
instruction it would not be required to trade at a price that is better
than the NBB for security ($1.05) and could execute at a price equal to
or less than the underlying best bid of $1.05. The price of 1.10 is the
cBB (net of option and underlying NBB).
Improvement Complex Order1 is to sell, sell short stock leg, 100
@1.10 (selling stock at 1.05 and options at 0.05; note it cannot trade
at 1.10 due to Reg SHO).
Improvement Complex Order2 to sell, sell short stock leg, 100 @1.12
(selling stock at 1.06 and options at 0.06).
Complex PIM auction timer concludes:
The Complex PIM Agency Order first executes 40 contracts with the
Counter-Side Market Order, the option leg at 0.05 and stock leg at 1.06
for a net price of 1.11. The remaining 60 contracts from the Complex
Agency Order then execute with Improvement Complex Order1 at the same
price. In this example, both the Complex Counter-Side Order and the
Improvement Complex Order are marked short sale, which permits the
Improvement Complex Order to trade at a price that is better than its
stated limit price.
In this example, the Improvement Complex Order traded at its next
available price in lieu of its stated limit price because both the
Counter-Side Order and the Improvement Complex Order included a short
sale order in the underlying component security. In contrast, if the
Counter-Side Order did not include a short sale order than [sic] the
Counter-Side Order and Improvement Complex Order2 trade with the
Complex PIM Agency Order for [sic] net price of 1.12 (option @0.06 and
stock @1.06).
The Exchange proposes to amend the rule text in Supplementary
Material .08 to Options 3, Section 11 with respect to a SOM and
Facilitation auction to provide:
When a response or an unrelated limit complex order on the
complex order book includes a short sale order in the underlying
covered security, NES will execute such order at (1) its stated
limit price if the facilitating Electronic Access Member's contra
order or contra-side solicited Complex Order does not include a
short sale order in the underlying security; or (2) its stated limit
price or better if the facilitating Electronic Access Member' contra
order or the solicited contra-side Complex Order includes a short
sale order in the underlying covered security.
With respect to a Complex PIM auction, the Exchange proposes to
amend the rule text within Supplementary Material .09 to Options 3,
Section 13 to provide:
When an improvement order or an unrelated limit complex order on
the complex order book includes a short sale order in the underlying
covered security, NES will execute such order at (1) its stated
limit price if the Counter-Side Order does not include a short sale
order in the underlying security; or (2) its stated limit price or
better if the counter-side order includes a short sale order in the
underlying covered security.
In such case where a response or an unrelated limit complex order
on the complex order book includes a short
[[Page 71049]]
sale order in the underlying covered security, NES will execute the
order at its stated limit price if the facilitating Electronic Access
Member's contra order, contra-side solicited Complex Order, or Counter-
Side Order does not include a short sale order in the underlying
covered security because the Exchange desires to foster competition by
including responses that have a short sale order in the underlying
covered security. In this scenario, the Exchange would consider all
prices submitted by responders at which the auction may execute because
the Electronic Access Member's contra order, contra-side solicited
Complex Order, or Counter-Side Order does not need to comply with the
short sale price test in Rule 201 of Regulation SHO because the order
is not short. By using the order's stated limit price in this case, the
Exchange would allow the responder with a short sale order to
participate in the auction and allocate the best price possible to the
agency order while complying with the short sale price test.\17\ The
Exchange believes that including responses with a short sale order in
the underlying covered security may create additional competition in
the Complex SOM, Complex Facilitation and Complex PIM auction while
also providing additional opportunity for potential price improvement
for the agency order.
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\17\ For example, utilizing a Complex PIM auction with a BBO of
0.05 x 0.10 and an NBBO for the underlying security component of
1.05 x 1.10, if the Initiating Order submitted an agency order to
buy @1.13 and a contra-order to sell @1.13, with auto-match at any
price point, and Responder1 was long @1.10, and Responder2 was short
@1.10 (in this scenario 1.10 would not comply with the short sale
price test), pursuant to the proposed amendment, the agency order
would receive a price improvement allocation @1.10. In this scenario
the improved price of 1.11 would not be allocated to the responder
with a short sale rather the price improvement would be applied to
the agency order. The Exchange believes it is important to offer
price improvement to the agency order over the responder to the
auction. Of note, the responder that was short @1.10 would be
cancelled.
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When a response, Improvement Order, or an unrelated limit complex
order on the complex order book includes a short sale order in the
underlying covered security, NES will execute the order at its stated
limit price or better if the facilitating Electronic Access Member
contra order, solicited contra-side Complex Order, or Counter-Side
Order includes a short sale order in the underlying security component.
In this case, each short sale compliant price would be considered in
determining the price at which the auction may execute, which would be
at its stated limit price or better. In this scenario, because the
Electronic Access Member contra order, solicited contra-side Complex
Order, or Counter-Side Order are short, the Exchange will only consider
prices that comply with the short sale price test in Rule 201 of
Regulation SHO. In this case, all prices that are compliant with the
short sale price test are considered when allocating the auction, and
both the agency order and responders may receive a better price. The
auction would allocate at the agency order's stated limited price or
better depending on the prices of the responses. The auction responses
may execute at their stated limited price or better depending on the
final auction price.
This is in contrast to the prior scenario where the Electronic
Access Member's contra order, contra-side solicited Complex Order, or
Counter-Side Order does not need to comply with the short sale price
test. Utilizing the proposed stated limit price or better where a
Member's contra order, contra-side solicited Complex Order, or Counter-
Side Order includes a short sale order allows the Exchange to
potentially provide price improvement opportunity to the agency order.
Implementation
The Exchange intends to begin implementation of the proposed rule
change prior to December 20, 2024. The implementation would commence
with a limited symbol migration and continue to migrate symbols over
several weeks. The Exchange will issue an Options Trader Alert to
Members to provide notification of the symbols that will migrate and
the relevant dates.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\18\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\19\ in particular, in that it is designed to
promote just and equitable principles of trade and to protect investors
and the public interest for the reasons discussed below.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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With respect to short sale regulation, the proposed handling of the
stock/ETF component of a Complex Order under this proposal does not
raise any issues of compliance with the currently operative provisions
of Regulation SHO \20\ and, therefore, the proposal promotes just and
equitable principles of trade. When a Complex Order has a stock/ETF
component, Members must indicate, pursuant to Regulation SHO, whether
that order involves a long or short sale. NES, as a trading center
under Rule 201, will be compliant with the requirements of Regulation
SHO. Of course, broker-dealers, including both NES and the Members
submitting orders to ISE with a stock/ETF component, must comply with
Regulation SHO. NES' compliance team updates, reviews and monitors NES'
policies and procedures including those pertaining to Regulation SHO on
an annual basis.
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\20\ 17 CFR 242.200 et seq.
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In the case where a response, Improvement Order, or an unrelated
limit complex order includes a short sale order in the underlying
covered security, executing such order at its stated limit price when
the facilitating Electronic Access Member's contra order, contra-side
Complex Order, or Counter-Side Order does not include a short sale
order in the underlying security would protect investors and the public
interest by considering all prices at which the auction could execute.
Under these circumstance, the Response, Improvement Complex Order, or
unrelated Limit Complex Order would be considered for execution at its
stated limit price (provided the limit price is compliant with the
short sale price test in Rule 201 of Regulation SHO) while the
Electronic Access Member's contra order, contra-side solicited Complex
Order, or Counter-Side Order does not need to comply with the short
sale price test in Rule 201 of Regulation SHO because the order is not
short. Utilizing the order's stated limit price in this case allows the
responder with a short sale order to participate in the auction while
the agency order is allocated the best price possible while complying
with the short sale price test. The Exchange believes that this
behavior is consistent with the protection of investors and the public
interest because it attempts to afford price improvement to the agency
order over the responder to the auction. Finally, the Exchange believes
that including responses with a short sale order in the underlying
covered security may create additional competition in the Complex SOM,
Complex Facilitation and Complex PIM auction and provides the agency
order with additional opportunities for potential price improvement.
In contrast, when the facilitating Electronic Access Member's
contra order, contra-side Complex Order, or Counter-Side Order includes
a short sale order in the underlying covered security, the auction must
be allocated at a price that is short sell compliant. In this case,
each short sale compliant price would be considered in determining the
price at which the Complex SOM, Complex Facilitation and Complex PIM
auction may execute
[[Page 71050]]
and, because the Electronic Access Member contra order, solicited
contra-side Complex Order, or Counter-Side Order are short, the
Exchange will only consider prices that comply with the short sale
price test in Rule 201 of Regulation SHO. As a result, the auction may
allocate at the agency order's stated limited price or better depending
on the prices of the responses. Also, the auction responses may execute
at their stated limited price or better depending on the final auction
price. The Exchange believes its proposal is consistent with the Act
and the protection of investors because both the agency order and
responders may receive a better price in this case. This is in contrast
to the prior scenario where the Electronic Access Member's contra
order, contra-side solicited Complex Order, or Counter-Side Order does
not need to comply with the short sale price test. Utilizing the
proposed stated limit price or better where a Member's contra order,
contra-side solicited Complex Order, or Counter-Side Order includes a
short sale order allows the Exchange to potentially provide a price
improvement opportunity to the agency order and to the auction
response. With the proposed amendments, Complex SOM, Complex
Facilitation, and Complex PIM auction responders who submit a response
would be aware of the auction price that would comply with the short
sale price test in Rule 201 of Regulation SHO. The proposed amendment
allows Members to participate in auctions with a short sale response
and such participation facilitates competition in these auctions. This
proposed approach is in lieu of prohibiting Members whose auction
Responses or resting Limit Complex Orders include a short sale order
from responding to these auctions, which would limit competition in the
auction. By allowing additional responses to participate in the
auction, the Exchange believes that the proposal would benefit
investors and the public interest because the additional interest may
increase competition in these auctions, which may lead to better
prices.
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.
Where a response, Improvement Order, or an unrelated limit complex
order includes a short sale order in the underlying covered security,
executing such order at its stated limit price when the facilitating
Electronic Access Member's contra order, contra-side Complex Order, or
Counter-Side Order does not include a short sale order in the
underlying covered security does not impose an undue burden on intra-
market competition because the Exchange would uniformly consider all
prices submitted by responders in determining the allocation price
because the Electronic Access Member's contra order, contra-side
solicited Complex Order, or Counter-Side Order does not need to comply
with the short sale price test in Rule 201 of Regulation SHO because
the order is not short. Where a response, Improvement Order, or an
unrelated limit complex order includes a short sale order in the
underlying covered security, executing such order at its stated limit
price or better when the facilitating Electronic Access Member's contra
order, contra-side Complex Order, or Counter-Side Order is also a short
sale order in the underlying covered security component does not impose
an undue burden on intra-market competition because the Exchange would
uniformly consider all prices that are compliant with the short sale
price test when allocating the auction.
Where a response, Improvement Order, or an unrelated limit complex
order includes a short sale order in the underlying covered security,
executing such order at its stated limit price when the facilitating
Electronic Access Member's contra order, contra-side Complex Order, or
Counter-Side Order does not include a short sale order in the
underlying covered security and executing such order its stated limit
price or better when the facilitating Electronic Access Member contra-
order, solicited contra-side Complex Order, or Counter-Side Order is
also a short sale order in the underlying covered security component
does not impose an undue burden on inter-market competition because
other options exchanges today may offer a similar process for handling
stock-tied transactions that have a short sale order.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \21\ and Rule
19b-4(f)(6) thereunder.\22\
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\21\ 15 U.S.C. 78s(b)(3)(A)(iii).
\22\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of its
intent to file the proposed rule change, along with a brief
description and text of the proposed rule change, at least five
business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-2023-22 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-2023-22. 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
[[Page 71051]]
Reference Room, 100 F Street NE, Washington, DC 20549 on official
business days between the hours of 10 a.m. and 3 p.m. Copies of the
filing also will be available for inspection and copying at the
principal office of the Exchange. Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly. We may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection. All submissions should refer to file number
SR-ISE-2023-22 and should be submitted on or before November 3, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12), (59).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-22611 Filed 10-12-23; 8:45 am]
BILLING CODE 8011-01-P
