[Federal Register Volume 79, Number 105 (Monday, June 2, 2014)]
[Notices]
[Pages 31372-31375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12646]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72254; File No. SR-ISE-2014-26]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Regarding Complex Orders
May 27, 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 May 20, 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, II, and III 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 to adopt additional price
protections for complex orders executed 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
The purpose of the proposal is to enhance the Exchange's complex
order functionality by adopting additional price protections for
complex orders executed on the Exchange. The Exchange provides in its
rules several complex order protections that currently exist in the
trading system.\3\ Today, under Supplementary Material .07(b) to Rule
722, the trading system rejects any complex order strategy where all
legs are to buy if it is entered at a price that is less than the
minimum price, which is calculated as the sum of the ratio times $0.01
per leg.\4\ Further, Supplementary Material .07(c) to Rule 722 provides
price protection for
[[Page 31373]]
vertical spreads where the trading system today rejects a vertical
spread order (i.e., an order to buy a call (put) option and to sell
another call (put) option in the same security with the same expiration
but a higher (lower) strike price) when entered with a net price of
less than zero, and prevents the execution of a vertical spread order
at a price that is less than zero when entered as a market order to
sell.\5\
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\3\ See Rule 722, Supplementary Material .07.
\4\ For example, an order to buy 2 calls and buy 1 put would
have a minimum price of $0.03. If such an order were entered at a
price of $0.02, it would not be executable, as a price of zero would
have to be assigned to one of the legs of the order.
\5\ The vertical spread price check does not apply to complex
orders executed in the Facilitation Mechanism, Solicited Order
Mechanism and Price Improvement Mechanism. Complex orders executed
in these mechanisms are two-sided orders where the contra-side order
is willing to trade with the agency order at an agreed upon price
thus removing the risk that the order was executed erroneously or at
an erroneous price.
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The Exchange now proposes to enhance existing price protections for
certain complex orders and quotes. The Exchange recognizes two complex
order strategies that could cause undue risk to market participants. In
order to address these strategies, the Exchange proposes to implement
functionality that prevents these complex order strategies from trading
at prices outside of pre-set limits. This proposal will apply only to
vertical spread orders and quotes and to calendar spread orders and
quotes. With this proposed rule change, the trading system will ensure
that neither of these strategies trade outside of quantifiable values
by more than a pre-set amount.
While the Exchange has developed functionality where the trading
system rejects vertical spreads when entered with a net price of less
than zero and prevents the execution of a vertical spread order at a
price that is less than zero when entered as a market order to sell,
the trading system does not currently reject orders and quotes that are
priced above the maximum value of this strategy. These orders and
quotes trade at prices that are more than the maximum value of the
strategy. With this proposal, the Exchange will allow this price
protection to be adjusted by a pre-set value. As a result, the trading
system will reject vertical spread orders when entered with a net price
of less than zero (minus a pre-set value) and will prevent the
execution of a vertical spread order at a price that is less than zero
(minus a pre-set value) when entered as a market order to sell. The
Exchange will establish a common pre-set value as an amount not to
exceed $1.00 which will apply across all options classes. For example,
assume the market for a January 30 call is 1.00 x 1.20 and for a
January 31 call it is 0.95 x 1.15. Suppose the pre-set value for a
minimum price check for vertical spreads is established by the Exchange
as $0.10. A vertical spread order consisting of a sale of one January
30 call and the purchase of one January 31 call priced at ($0.11) will
be rejected by the trading system because the limit price of this order
is below the pre-set value of ($0.10). A vertical spread market order
to sell, i.e., sale of one January 30 call and the purchase of one
January 31 call priced at the market, will be prevented from trading
with individual bids and offers because the resulting trade, i.e., sale
of January 30 call at $1.00 and purchase of January 31 call at $1.15,
will result in a net price of ($0.15), which is below the pre-set value
of ($0.10).
The Exchange also proposes to implement functionality where the
trading system will reject a vertical spread order when entered with a
net price greater than the value of the higher strike price minus the
lower strike price (plus a pre-set value) and will prevent the
execution of a vertical spread order at a price that is greater than
the value of the higher strike price minus the lower strike price (plus
a pre-set value) when entered as a market order to buy. The Exchange
will establish a common pre-set value as the lesser of (i) an amount
not to exceed $1.00, and (ii) a percentage of the difference between
strike prices not to exceed 10%, which will apply across all options
classes. For example, assume the market for a January 20 call is 10.55
x 10.70 and for a January 25 call it is 5.35 x 5.50. Suppose the pre-
set value for a maximum price check of vertical spreads is established
by the Exchange as the lesser of $0.10 and 5%. The maximum price for a
vertical spread order consisting of the purchase of one January 20 call
and the sale of one January 25 call is $5.10, which is calculated as
the lesser of the difference between the strike prices plus the pre-set
buffer, or $5.10, and the difference between the strike prices plus the
pre-set buffer percentage of the strike prices difference, or $5.25.
The trading system will therefore accept a vertical spread order
consisting of a purchase of one January 20 call and the sale of one
January 25 call priced at $5.00 but will reject a vertical spread order
priced at $5.15. A vertical spread market order to buy, i.e., purchase
of one January 20 call and sale of one January 25 call priced at the
market, will be prevented from trading with individual bids and offers
because the resulting trade, i.e., purchase of January 20 call at
$10.70 and sale of January 25 call at $5.35, will result in a net price
of $5.35, which is above the maximum price of $5.10.
A calendar spread is an order to buy a call (put) option with a
longer expiration and to sell another call (put) options with a shorter
expiration in the same security at the same strike price. A buyer of a
calendar spread would buy a longer expiration and sell a shorter
expiration in the same security at the same strike price while a seller
of a calendar spread would sell a longer expiration and buy a shorter
expiration in the same security at the same strike price. With this
proposal, the Exchange proposes to implement functionality where the
trading system will reject a calendar spread order when entered with a
net price of less than zero (minus a pre-set value), and will prevent
the execution of a calendar spread order at a price that is less than
zero (minus a pre-set value) when entered as a market order to sell.
The proposed price protection for calendar spreads will protect both
buyers and sellers of calendar spreads. The Exchange will establish a
common pre-set value as an amount not to exceed $1.00 which will apply
across all options classes. For example, assume the market for a
February 30 call is 1.00 x 1.20 and for a January 30 call it is 0.95 x
1.15. Suppose the pre-set value for a minimum price check of calendar
spreads is established by the Exchange as $0.10. An order to sell a
calendar spread consisting of a sale of one February 30 call and the
purchase of one January 30 call priced at ($0.11) will be rejected by
the trading system because the limit price of this order is below the
pre-set value of ($0.10). A market order to sell a calendar spread
consisting of a sale of one February 30 call and the purchase of one
January 30 call priced at market, will be prevented from trading with
individual bids and offers because the resulting trade, i.e., sale of
February 30 call at $1.00 and purchase of January 30 call at $1.15 will
result in a net price of ($0.15), which is below the pre-set value of
($0.10).
For purposes of the price protections set forth in Rule 722,
Supplementary Material .07(c)(1) and in proposed Rule 722,
Supplementary Material .07(c)(3), the Exchange will set a common pre-
set value not to exceed $1.00 to be applied uniformly across all
classes. For purposes of the price protections set forth in proposed
Rule 722, Supplementary Material .07(c)(2), the Exchange will set a
common pre-set value of (1) an amount not to exceed $1.00 and (2) a
percentage of the difference between strike prices not to exceed 10% to
be applied uniformly across all classes.
The Exchange notes, however, that there may be a need to adjust
these values. For example, the Exchange may determine at some future
point in time
[[Page 31374]]
to adjust the established pre-set value for all options classes. Any
change to the established pre-set value will be within the parameters
prescribed in the rules and will be communicated to Exchange Members
via circular.
The Exchange believes adopting a buffer is reasonable because while
market participants may in certain situations be willing to trade a
strategy beyond its minimum value, these trades could occur at
erroneous prices without a cap. The Exchange's ability to adjust the
pre-set value will provide market participants greater flexibility to
execute their trading strategies as it will allow market participants
to execute vertical and calendar spreads even if the strategy is priced
outside its intrinsic value.
The proposed price checks will not apply to complex orders executed
in the Facilitation Mechanism, Solicited Order Mechanism and Price
Improvement Mechanism. Complex orders executed in these mechanisms are
two-sided orders where the contra-side order is willing to trade with
the agency order at an agreed upon price thus removing the risk that
the order was executed erroneously or at an erroneous price.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \6\ in
general, and furthers the objectives of Section 6(b)(5) of the Act \7\
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. The Exchange
proposes to adopt the price protections described in the interest of
protecting investors and to assure fair and orderly markets on the
Exchange.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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As discussed above, the Exchange believes that rejecting vertical
spread orders that are entered at a price greater than their intrinsic
value and preventing the execution of such orders at a price greater
than their intrinsic value when they are entered as a buy market order
protects investors from executing these orders at erroneous prices. The
Exchange further believes that rejecting calendar spread orders that
are entered at a negative price also protects investors from executing
orders that were likely entered in error, and that preventing the
execution of such orders at negative prices when they are entered as a
sell market order, protects investors from paying to sell a strategy
when they expected to receive payment for selling the strategy.
The Exchange notes, however, that in certain situations, market
participants willingly want to execute certain trading strategies even
if such trades occur outside their intrinsic value or at seemingly
erroneous prices. The Exchange believes it is appropriate to provide
market participants flexibility to allow them to execute these trading
strategies and therefore to adopt a buffer to permit the execution of
such trading strategies. The Exchange believes it is reasonable to
adopt a buffer to give the Exchange the ability to adjust the pre-set
value uniformly across all options classes in the event the Exchange
believes a different pre-set value is more appropriate. Finally, the
Exchange notes that it provides these protections for the benefit of,
and in consultation with, its members. The Exchange believes the
proposed rule change will help the Exchange to maintain a fair and
orderly market, and provide a valuable service to investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The proposed rule change specifies circumstances in which the
trading system does not provide an automatic execution in the interest
of protecting investors against the execution of erroneous orders or
the execution of orders at erroneous prices. As such, the proposal does
not impose any burden on competition.
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 significantly
affect the protection of investors or the public interest, does not
impose any significant burden on competition, and, by its terms, does
not 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) \8\ of the Act and Rule 19b-
4(f)(6) \9\ thereunder. The Exchange provided the Commission with
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 the proposed rule
change.
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\8\ 15 U.S.C. 78s(b)(3)(A).
\9\ 17 CFR 240.19b 4(f)(6).
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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 (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ISE-2014-26 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-2014-26. 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 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
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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-2014-26, and should be
submitted on or before June 23, 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. 2014-12646 Filed 5-30-14; 8:45 am]
BILLING CODE 8011-01-P