[Federal Register Volume 79, Number 24 (Wednesday, February 5, 2014)]
[Notices]
[Pages 6951-6954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-02380]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71446; File No. SR-ISE-2014-04]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Related to Market Maker Risk Parameters
January 30, 2014.
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 January 17, 2014, 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.
[[Page 6952]]
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 Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules to mitigate market maker
risk by adopting an Exchange-provided risk management functionality.
The text of the proposed rule change is available on the Exchange's
Internet Web site at http://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
Pursuant to ISE Rules 722 and 804, the Exchange automatically
removes a market maker's quotes in all series of an options class when
certain parameter settings are triggered. Specifically, there are
currently four parameters that can be set by market makers on a class-
by-class basis. These parameters are available for market maker quotes
in single options series and for market maker quotes in complex
instruments on the complex order book. Market makers establish a time
frame during which the system calculates: (1) The number of contracts
executed by the market maker in an options class; (2) the percentage of
the total size of the market maker's quotes in the class that has been
executed; (3) the absolute value of the net between contracts bought
and contracts sold in an options class, and (4) the absolute value of
the net between (a) calls purchased plus puts sold, and (b) calls sold
plus puts purchased. The market maker establishes limits for each of
these four parameters, and when the limits are exceeded within the
prescribed time frame, the market maker's quotes in that class are
removed or curtailed. It is mandatory for market makers to enter values
into all four of the quotation risk management parameters for all
options classes in which it enters quotes.\3\
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\3\ See Securities Exchange Act Release No. 70132 (August 7,
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
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The Exchange now proposes to enhance its risk management offering
to further strengthen risk management for market maker quotes. While
the parameters described in the preceding paragraph are set on a class-
by-class basis, the Exchange now proposes to adopt functionality that
will allow market makers to manage their risk across the entire market.
Specifically, the Exchange proposes to adopt functionality to allow
market maker quotes to be removed from the trading system if a
specified number of curtailment events occur across the ISE market. If
the specified number of curtailment events is exceeded within the
prescribed time period, the market maker's quotes in all classes in
which it quotes will automatically be removed from the trading system.
As proposed, market makers must request the Exchange to set the
proposed market wide parameter to govern its trading activity. Once
this parameter is set, the trading system will count the number of
times a market maker's pre-set curtailment, as specified in Rule 804(g)
(for regular orders) and Rule 722, Supplementary Material .04 (for
complex orders), has been triggered. Once the specified number of
curtailment events has been reached, the trading system will remove all
of the market maker's quotes in all classes in which it makes a market
thereby reducing the risk to the market maker in the event the market
maker is suffering from a systems issue or due to the occurrence of
unusual or unexpected market activity. Any quotes sent by the market
maker after the proposed market wide parameter has been triggered will
be rejected until such time that the market maker notifies the Exchange
that it is ready to come out of its curtailment. In the interests of
maintaining fair and orderly markets, the Exchange believes it is
important that market makers communicate their readiness to the
Exchange in a non-automated manner, such as by email or telephone. Once
notified by the market maker, the Exchange will reactivate the market
maker's quotes and the market maker will once again be active in the
options classes in which it makes markets.
As an example, suppose market maker ABCD, who makes a market in 50
options classes on the Exchange, sets the proposed market wide
parameter so that it is triggered at 25 curtailment events within a 20
second time period. On a given trading day, if market maker ABCD is
curtailed, within the prescribed time period, 25 times across all 50
options classes in which it makes a market then all of market maker
ABCD's quotes on ISE in all 50 options classes will be removed from the
trading system. The 25 curtailment events can occur in just one class
or any number of classes in which market maker ABCD makes a market on
the Exchange.
While the proposed risk management functionality is a useful
feature that serves an important risk management purpose, it operates
consistent with the firm quote obligations of a broker-dealer pursuant
to Rule 602 of Regulation NMS. Specifically, any marketable orders or
quotes that are executable against a market maker's quotes that are
received prior to the time this functionality is engaged will be
automatically executed at the price up to the market maker's size,
regardless of whether such execution results in executions in excess of
the market maker's pre-set parameters.
The proposed market wide parameter is meant to provide market
makers with protection from the risk of multiple executions across
multiple series of an option or across multiple options. The risk to
market makers is not limited to a single series in an option or even to
all series in an option; market makers that quote in multiple series of
multiple options have significant exposure, requiring them to offset or
hedge their overall positions. The proposed functionality will be
useful for market makers, who are required to continuously quote in
assigned options classes. Quoting across many series in an option or
multiple options creates the possibility of executions that can create
large, unintended principal positions that could expose market makers
to unnecessary risk. The proposed functionality is intended to assist
Exchange market makers in managing their market risk, and providing
deep and liquid markets for the benefit to all investors.
While entering values into the proposed market wide parameter will
be mandatory, the Exchange notes that market makers who prefer to use
their own risk-management systems can set values that assure the
Exchange-provided parameter will not be
[[Page 6953]]
triggered.\4\ Accordingly, the proposal does not require members to
manage their risk using the Exchange-provided tools. The Exchange
expects to implement the proposed functionality in January 2014. The
Exchange will provide at least two weeks' notice to members via an
Exchange circular prior to implementing the proposed functionality to
allow members the opportunity to perform any system changes.
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\4\ For example, a market maker could set the value for the
total number of curtailment events across the market at a high
number so as not to trigger the Exchange-provided parameter.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \5\ in
general, and furthers the objectives of Section 6(b)(5) of the Act \6\
in particular, in that it is designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
for a free and open market and a national market system, and, in
general, to protect investors and the public interest.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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The Exchange believes the proposed rule change enhances its risk
management offering to further strengthen risk management for market
maker quotes. The proposed market wide parameter is appropriate and
reasonable because it offers functionality for market makers to manage
their risk. The proposed market wide parameter will protect market
makers from inadvertent exposure to excessive risk and thereby allow
market makers to quote aggressively which removes impediments to a free
and open market and benefits all Exchange members.
The Exchange believes that requiring market makers to set values
into the proposed risk parameter provided by the Exchange will not be
unreasonably burdensome, as all ISE market makers currently utilize the
Exchange's risk management functionality. Moreover, the Exchange is
proposing this rule change at the request of its market makers to
further reduce their risk in the event the market maker is suffering
from a systems issue or due to the occurrence of unusual or unexpected
market activity. As discussed above, the proposed market wide parameter
will protect market makers from inadvertent exposure to excessive risk.
Reducing such risk will enable market makers to enter quotations
without any fear of inadvertent exposure to excessive risk, which in
turn will benefit investors through increased liquidity for the
execution of their orders. Such increased liquidity benefits investors
because they receive better prices and because it lowers volatility in
the options market. The Exchange notes a similar functionality is
offered by the BATS Exchange, Inc. (``BATS'').\7\ The Risk Monitor
Mechanism provides BATS participants, and particularly market makers,
protection from the risk of multiple executions across multiple series
of an option or across multiple options. The Risk Monitor Mechanism
uses a counting program that users may configure to govern trading. The
counting program counts executions, contract volume and notional value,
within a specified time period established by a user and on an absolute
basis for each trading day. The BATS trading system engages the Risk
Monitor Mechanism when the counting program has determined that a
user's trading has triggered a setting whereby the Risk Monitor
Mechanism then automatically removes the user's orders in all series of
a particular option or in all series of all options until the counting
program has been reset.
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\7\ See BATS Rules, Chapter XXI, Rule 21.16, Risk Monitor
Mechanism.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change does not impose any burden on competition.
The proposed rule change is meant to protect ISE market makers from
inadvertent exposure to excessive risk. Accordingly, the proposed rule
change will have no impact on competition. Market makers who prefer to
use their own risk-management systems can enter out-of-range values so
that the Exchange-provided parameters will not be triggered.
Accordingly, the proposal does not require members to manage their risk
using an Exchange-provided tool.
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 after the date of the filing, or such
shorter time as the Commission may designate, it has become effective
pursuant to 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) \9\
thereunder.
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 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 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. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
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 No. SR-ISE-2014-04 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-2014-04. 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 communications relating to
the
[[Page 6954]]
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 office 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-2014-04 and should be
submitted by February 26, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02380 Filed 2-4-14; 8:45 am]
BILLING CODE 8011-01-P