[Federal Register Volume 79, Number 125 (Monday, June 30, 2014)]
[Notices]
[Pages 36849-36851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-15202]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72455; File No. SR-ISE-2014-09]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Order Instituting Proceedings to Determine Whether to Approve or
Disapprove Proposed Rule Change Relating to Market Maker Risk
Parameters
June 24, 2014.
I. Introduction
On March 10, 2014, the International Securities Exchange, LLC
(``Exchange'' or ``ISE'') 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 ISE Rules 722 and 804 to
mitigate market maker risk by adopting an Exchange-provided risk
management functionality. The proposed rule change was published for
comment in the Federal Register on March 26, 2014.\3\ The Commission
received no comments on the proposal. On May 7, 2014, pursuant to
Section 19(b)(2) of the Act,\4\ the Commission designated a longer
period within which to either approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to
[[Page 36850]]
disapprove the proposed rule change.\5\ This order institutes
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine
whether to approve or disapprove the proposed rule change.\7\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 71759 (Mar. 20,
2014), 79 FR 16850 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 72117 (May 7, 2014),
79 FR 27360 (May 13, 2014). The Commission determined that it was
appropriate to designate a longer period within which to take action
on the proposed rule change so that it has sufficient time to
consider the proposed rule change. Accordingly, the Commission
designated June 24, 2014 as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ Relatedly, the Commission is also instituting proceedings
under Section 19(b)(2)(B) of the Act to determine whether to approve
or disapprove a proposed rule change filed by ISE's affiliated
exchange, ISE Gemini, LLC (``ISE Gemini''), that mirrors the rule
change proposed by ISE. See Securities Exchange Act Release No. 34-
72454 (June 24, 2014).
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II. Description of the Proposal
As described in the Notice, the Exchange proposes to amend ISE
Rules 722 and 804 to mitigate market maker risk by adopting an
Exchange-provided risk management functionality. Currently, 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 four parameters that
can be set by market makers on a class-by-class basis and are available
for market maker quotes in single options series and in complex
instruments on the complex order book. Pursuant to the rules, 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.\8\
Separately, the Exchange recently adopted another risk management
parameter that permits market maker quotes in all classes to be
automatically removed from the trading system if a specified number of
curtailment events are exceeded within the prescribed time period
across the ISE market.\9\ It is mandatory for market makers to enter
values into all of the quotation risk management parameters for all
options classes in which it enters quotes.
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\8\ See Securities Exchange Act Release No. 70132 (August 7,
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
\9\ See Securities Exchange Act Release No. 71446 (January 30,
2014), 79 FR 6951 (February 5, 2014) (SR-ISE-2014-04).
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In the Notice, the Exchange proposes to further enhance its risk
management offering by implementing an additional functionality that
would permit market maker quotes to be automatically removed from the
trading system if a specified number of curtailment events occur across
ISE and its affiliated exchange, ISE Gemini. According to the Exchange,
a single trading system governs the trading activity on both ISE and
ISE Gemini.\10\
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\10\ See Notice, supra note 3.
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As proposed, market makers who choose to use this functionality
would be able to set market wide parameters to govern its trading
activity across both ISE and ISE Gemini. Once the parameter is set, the
trading system would count the number of times a market maker's pre-set
curtailment event occurs on each exchange, as specified in ISE Rule
804(g) (for regular orders) and ISE Rule 722, Supplementary Material
.04 (for complex orders) and aggregate them. Once the specified number
of curtailment events across both markets has been reached, the trading
system would automatically remove all of the market maker's quotes in
all classes on both ISE and ISE Gemini. The Exchange believes this
functionality would reduce market maker risk in the event the market
maker suffers from a systems issue or the occurrence of an unusual or
unexpected market activity. As proposed, any quotes sent by the market
maker after the market-wide parameter across both markets has been
triggered would be rejected until the market maker notifies each
exchange--in a non-automated manner, such as email or telephone--that
it is ready to come out of its curtailment. Once notified by the market
maker, the market operations staff for each exchange would reactivate
the market maker's quotes and the market maker would again be active in
on both ISE and ISE Gemini.\11\
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\11\ See Notice, supra note 3 for examples illustrating how the
Exchange's market wide risk management parameter would be applied
under the proposal.
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According to the Exchange, the proposed risk management
functionality would operate consistently with the firm quote
obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS.
The Exchange anticipates that any marketable orders or executable
quotes received before the proposed functionality is triggered would
automatically execute at the price up to the market maker's size,
regardless of whether such execution would result in executions in
excess of the market maker's pre-set parameters. Further, the Exchange
states that the proposed cross-exchange market wide parameter will not
be mandatory and that market makers who prefer to use their own risk
management systems can set the Exchange parameters to not be triggered.
III. Proceedings to Determine Whether to Approve or Disapprove SR-ISE-
2014-09 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \12\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change, as discussed below.
Institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described below, the Commission seeks and encourages
interested persons to provide additional comment on the proposed rule
change.
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\12\ 15 U.S.C. 78s(b)(2)(B).
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As discussed above, the Exchange proposes to amend ISE Rules 722
and 804, which would expand the current risk management offerings by
ISE and provide for cross-exchange risk management functionality. The
Commission believes that the proposal, which seeks to allow removal of
a market maker's quotes in all classes on both ISE and ISE Gemini once
an aggregated pre-set number of curtailment events on both exchanges is
reached, raises important issues that warrant further public comment
and Commission consideration. Namely, the Commission believes that
proceedings are appropriate to consider, among other matters, whether
the proposal is unfairly discriminatory to any member of the Exchange
and the impact of the proposal on competition among exchanges.
Pursuant to Section 19(b)(2)(B) of the Act,\13\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be
[[Page 36851]]
``designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to perfect the
mechanism of a free and open market and a national market systems; and
not be designed to permit unfair discrimination between customers,
issuers, brokers, or dealers.'' \14\ The Commission is also instituting
proceedings to allow for additional analysis of the proposed rule
change's consistency with Section 6(b)(8) of the Act, which requires
that rules of a national securities exchange ``do not impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of'' the Act.
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\13\ Id.
\14\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Sections 6(b)(5) and 6(b)(8) or any other provision of
the Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval which would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\15\
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\15\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by July 21, 2014. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by August 4,
2014.
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-2014-09 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-2014-09. 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 filings 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-2014-09 and should be
submitted on or before July 21, 2014. Rebuttal comments should be
submitted by August 4, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(57).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15202 Filed 6-27-14; 8:45 am]
BILLING CODE 8011-01-P