[Federal Register Volume 78, Number 56 (Friday, March 22, 2013)]
[Notices]
[Pages 17733-17736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06631]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69163; File No. SR-ISE-2013-27]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Relating to Complex Orders and Mini Options
March 18, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 18, 2013, the International Securities Exchange, LLC (the
``Exchange'' or the ``ISE'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I and II below, which items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules regarding certain complex
orders traded on the Exchange. The text of the proposed rule change is
available on the Exchange's Web site www.ise.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 self-regulatory organization 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
ISE recently amended its rules to allow for the listing of Mini
Options on SPDR S&P 500 (``SPY''), Apple, Inc.
[[Page 17734]]
(``AAPL''), SPDR Gold Trust (``GLD''), Google Inc. (``GOOG'') and
Amazon.com Inc. (``AMZN'').\3\ Whereas standard options contracts
represent a deliverable of 100 shares of an underlying security, Mini
Options contracts represent a deliverable of 10 shares. Except for the
difference in the number of deliverable shares, Mini Options have the
same terms and contract characteristics as regular-sized equity and ETF
options, including exercise style. Accordingly, the Exchange noted in
its Mini Options filing that Exchange rules that apply to the trading
of standard options contracts would apply to Mini Option contracts as
well.\4\
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\3\ Mini Options were approved for trading on September 28,
2012. See Securities Exchange Act Release No. 67948 (September 28,
2012), 77 FR 60735 (October 4, 2012) (Approving SR-ISE-2012-58).
\4\ Id.
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Prior to the commencement of trading Mini Options, the Exchange
proposes to amend Rule 722 (Complex Orders) and Rule 1900 (Definitions)
to provide that Exchange rules regarding complex orders shall apply to
Mini Options and that consequently, Members may execute complex and
stock-option orders involving Mini Options provided that all options
legs of such orders are Mini Options. Moreover, the Exchange seeks to
amend these rules to provide that all permissible ratios referenced in
the definitions of stock-option orders represent the total number of
shares of the underlying stock in the option leg to the total number of
shares of the underlying stock in the stock leg.
ISE Rule 722 governs Complex Orders on the Exchange and ISE Rule
1900 lists definitions applicable to intermarket linkage. Currently,
stock-option orders are defined in Rule 722(a)(2) and Rule
1900(d)((ii)(A)-(B) as orders to buy or sell a stated number of units
of an underlying stock or a security convertible into the underlying
stock 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 8 options
contracts per unit of trading of the underlying stock or convertible
security established for that series by the Clearing Corporation.
Therefore, under this definition it would be permissible to execute,
for example, a trade where the options leg consists of one (1) standard
option contract (i.e., 100 shares) and the stock leg consists of 100
shares of the underlying stock. Additionally, it would be permissible
to execute a trade where the options leg consists of eight (8) standard
option contracts (i.e., 800 shares) and the stock leg consists of 100
shares of the underlying stock.
The Exchange notes that the abovementioned permissible ratios were
established to ensure that only stock-option orders that seek to
achieve legitimate investment strategies are afforded certain benefits.
Particularly, since compliance with trade-through rules may impede a
market participant's ability to achieve the legitimate investment
strategies that stock-option orders facilitate, an exception from the
prohibition on trade-throughs is provided for any transaction that was
effected as a portion of a legitimate stock-option order. Requiring a
meaningful relationship between the different legs of a stock-option
order prevents market participants from taking advantage of these
orders to circumvent the otherwise applicable trade-through rules
(e.g., preventing the execution of a stock-option order where the
option leg consists of 100 options (i.e., 10,000 shares) and the stock
leg consists of only 100 shares).
Therefore, the Exchange proposes to amend the definition of stock-
option orders in Rule 722(a)(2) and Rule 1900(d)(ii)(A)-(B). As
discussed above, the stock-option order definition in both Rule 722 and
Rule 1900 clearly permits that an options leg may be coupled with a
stock leg representing the same number of units of the underlying stock
(i.e., one-to-one ratio). The Exchange seeks to provide that Mini
Options may also be coupled with a stock leg if the stock leg
represents the same number of units of the underlying stock. For
example, pursuant to the definition, it would be permissible to execute
a trade where leg one consists of one (1) Mini Option contract (i.e.,
10 shares) and leg two consists of 10 shares of the underlying stock.
Next, the Exchange seeks to amend the stock-option order definition
in Rule 722 and Rule 1900 to provide that in addition to standard
options, Mini Options may be coupled with a stock leg consisting of
however many units of the underlying stock is necessary to create a
delta neutral position, provided that the total number of shares of the
underlying stock in the option leg to the total number of shares of the
underlying stock in the stock leg does not exceed an eight-to-one
ratio. The Exchange notes the definition of a stock-option order in
Rule 722 and Rule 1900 was drafted at a time in which only option
contracts with a deliverable of 100 shares was contemplated. Therefore,
the rules do not address how the eight-to-one ratio would be scaled in
the event an option with a non-standard deliverable becomes available
for trading. The language of these rules needs to be amended so that it
is clear how Rule 722 and Rule 1900 would apply to Mini Options, as
well as standard options. Accordingly, the proposed change specifies
that the permissible ratios should be calculated and scaled based upon
the total number of shares of the underlying stock in the options leg
to the total number of shares of the underlying stock in the stock leg,
instead of by the total number of option contracts in the options leg
to the total number of shares of the underlying stock in the stock leg.
An example of a permitted stock-option order involving Mini Options
would be an order in which leg one consists of eighty (80) Mini Options
(i.e., 800 shares) and leg two consists of 100 shares of the underlying
stock (i.e., eight-to-one ratio). Similarly, an order where leg one
consists of eight (8) Mini Options (i.e., 80 shares) and leg two
consists of 10 shares of the underlying stock would be permitted.
The proposed rule change provides that market participants may
execute stock-option orders involving Mini Options. The proposed change
also ensures that the principle behind the permissible ratios (i.e., to
provide a meaningful relationship between the legs of complex and
stock-option orders) is maintained for Mini Options. Finally, the
Exchange notes that reference to the Clearing Corporation in Rule
722(a)(2) and Rule 1900(d)(ii)(A)-(B) is superfluous and unnecessary
and therefore deleted. The Exchange also proposes to add Supplementary
Material .06 to clarify that if any leg of a complex order or stock-
option order is a Mini Option, all options legs of such order must also
be Mini Options.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder, including the
requirements of Section 6(b) of the Act.\5\ In particular, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \6\ requirements that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, to foster cooperation and coordination with
persons engaged in facilitating transactions insecurities, to remove
impediments to and to perfect the mechanism for a free and open
[[Page 17735]]
market and a national market system, and, in general, to protect
investors and the public interest.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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Specifically, the Exchange believes that investors and other market
participants would benefit from the current rule proposal because it
would allow market participants to take advantage of legitimate
investment strategies and execute stock-option orders in Mini Options.
Additionally, the Exchange believes the proposed rule change will avoid
investor confusion if both standard options and Mini Options on the
same underlying security are permitted to trade as stock-option orders.
Also, the proposal to maintain the permissible ratios that are
applicable to standard options in proportion for Mini Options ensures
that the principle behind the permissible ratios (i.e., to provide a
meaningful relationship between the legs of stock-option orders) is
maintained for Mini Options, which promotes just and equitable
principles of trade. The Exchange believes that describing prior to the
commencement of trading how the permissible ratios in the stock-option
order rules will be scaled for Mini Options would lessen investor and
marketplace confusion.
Finally, the Exchange believes that the proposed rule change is
designed to not permit unfair discrimination among market participants
as all market participants may participate in stock-option orders
involving Mini Options.
B. Self-Regulatory Organization's Statement on Burden on Competition
This proposed rule change does not impose any burden on competition
that is not necessary or appropriate in furtherance of the purposes of
the Act. Specifically, since Mini Options are permitted on multiply-
listed classes, other exchanges that have received approval to trade
Mini Options will have the opportunity to similarly amend their complex
order rules to clarify and accommodate stock-option orders in Mini
Option classes. Moreover, because all Members may participate in stock-
options orders involving Mini Options, the rule change does not permit
unfair discrimination and does not impose a burden on Members.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
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) \7\ of the Act and
Rule 19b-4(f)(6) \8\ thereunder.
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\7\ 15 U.S.C. 78s(b)(3)(A).
\8\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of the 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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A proposed rule change filed under Rule 19b-4(f)(6) of the Act \9\
normally does not become operative prior to 30 days after the date of
the filing. However, pursuant to Rule 19b-4(f)(6)(iii) of the Act,\10\
the Commission may designate a shorter time if such action is
consistent with the protection of investors and the public interest.
The Exchange has requested the Commission to waive the 30-day operative
delay so that the proposal may become operative immediately upon
filing. In June 2012, the Exchange filed a proposed rule change to
amend its rules to list and trade certain mini-options contracts on the
Exchange, and represented in that filing that the Exchange's rules that
apply to the trading of standard options contracts would apply to mini-
options contracts.\11\ The Exchange has represented that it intends to
launch trading in mini-options contracts on March 18, 2013.\12\ The
Exchange believes that waiver of the 30-day operative delay is
consistent with the protection of investors and the public interest
because such waiver would minimize confusion among market participants
about how complex orders and stock-options orders involving mini-
options contracts will trade.\13\
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\9\ 17 CFR 240.19b-4(f)(6).
\10\ 17 CFR 240.19b-4(f)(6)(iii).
\11\ See Securities Exchange Act Release No. 67284 (June 27,
2012), 77 FR 39545 (July 3, 2012). See also supra note 3.
\12\ See SR-ISE-2013-27, Item 7.
\13\ See id.
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The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Such waiver would allow the Exchange to implement the proposed rule
change contemporaneously with its launch of mini-options contracts
trading on March 18, 2013, thereby mitigating potential investor
confusion as to how complex orders and stock options orders involving
mini-options contracts will trade. For this reason, the Commission
hereby waives the 30-day operative delay and designates the proposed
rule change to be operative upon filing with the Commission.\14\
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\14\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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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 to
determine whether the proposed rule change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2013-27 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2013-27. 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 Web site (http://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
[[Page 17736]]
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 Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
such filing also will be available for inspection and copying at the
principal offices of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-ISE-2013-27, and should be submitted on or before April
12, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06631 Filed 3-21-13; 8:45 am]
BILLING CODE 8011-01-P