[Federal Register Volume 79, Number 241 (Tuesday, December 16, 2014)]
[Notices]
[Pages 74797-74800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29363]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73808; File No. SR-ISE-2014-54]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Make Technical Corrections to ISE Rules
December 10, 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 December 3, 2014, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change, as described in Items I and II below, which Items have been
prepared by the self-regulatory organization. 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 ISE proposes to make certain technical corrections to ISE rules
as described in more detail below. The text of the proposed rule change
is available on the Exchange's Web site (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 self-regulatory organization
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 proposed rule change is to eliminate investor
confusion by making certain technical corrections to ISE rules that are
either obsolete or outdated, as described in more detail below.
1. Order Type Cleanup
The Exchange adopted Customer Participation Orders in August 2005
in order to facilitate members providing access to the Price
Improvement Mechanism (``PIM'') \3\ to Public Customers.\4\ Upon the
entry of a Crossing Transaction into the PIM,\5\ a broadcast message is
sent to all members, who then have 500 milliseconds to enter orders
that indicate the size and price at which they want to participate in
the execution (``Improvement Orders'').\6\ The Customer Participation
Order is an instruction to the member to enter an
[[Page 74798]]
Improvement Order on behalf of a Public Customer. Specifically, a
Customer Participation Order is a limit order on behalf of a Public
Customer that, in addition to the limit order price in standard
increments, includes a price stated in one cent increments at which the
Public Customer wishes to participate in trades executed in the same
options series in penny increments through the PIM.\7\ The Exchange no
longer offers Customer Participation Orders and therefore proposes to
remove this order type from its rules. Furthermore, the Exchange
proposes to remove two obsolete references to Customer Participation
Orders in other rules. Specifically, the Exchange proposes to remove
references to Customer Participation Orders in Supplementary Material
.06 to Rule 723, which explains when Improvement Orders can be entered
with respect to a Customer Participation Order,\8\ and in Rule 723(d),
which notes that the agency side of an order entered into the PIM may
execute against Customer Participation Orders at the end of the
exposure period.
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\3\ The PIM is a process by which an Electronic Access Member
can provide price improvement opportunities for a transaction
wherein the Electronic Access Member seeks to facilitate an order it
represents as agent, and/or a transaction wherein the Electronic
Access Member solicited interest to execute against an order it
represents as agent (a ``Crossing Transaction''). See Rule 723(a).
\4\ See Securities Exchange Act Release No. 52364 (August 31,
2005), 70 FR 53403 (September 8, 2005) (SR-ISE-2005-41). The term
``Public Customer'' means a person or entity that is not a broker or
dealer in securities. See ISE Rule 100(a)(38).
\5\ A Crossing Transaction is comprised of the order the
Electronic Access Member represents as agent (the ``Agency Order'')
and a counter-side order for the full size of the Agency Order (the
``Counter-Side Order''). The Counter-Side Order may represent
interest for the Member's own account, or interest the Member has
solicited from one or more other parties, or a combination of both.
See Rule 723(b).
\6\ See ISE Rule 723(c)(1).
\7\ See Rule 715(f).
\8\ Although Customer Participation Orders are no longer
available, members will continue to be able to enter Improvement
Orders for the account of Public Customers.
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In September 2008, the ISE adopted rules to allow members to enter
non-displayed orders and quotes in penny increments in designated
options with a minimum trading increment greater than one cent (``non-
displayed penny orders and quotes'').\9\ As proposed in that filing, a
non-displayed penny order or quote is available for execution at its
penny price but is displayed at the closest minimum trading increment
that does not violate the limit price. The Exchange does not offer non-
displayed penny orders or quotes and therefore proposes to delete
references to this order type from its rules as described below. First,
the Exchange proposes to delete Rule 715(b)(4), which defines non-
displayed penny order. Second, the Exchange proposes to delete language
in Rule 804(b)(1) and Rule 805(a) that permits market makers to enter
non-displayed penny quotes and orders, respectively. Third, the
Exchange proposes to delete language in Supplementary Material .06 to
Rule 716 concerning split prices for non-displayed penny orders and
quotes entered into the Facilitation and Solicitation Mechanisms.
Finally, the Exchange proposes to delete language in Supplementary
Material .03 to Rule 717 concerning the execution of non-displayed
penny orders that an Electronic Access Member represents as agent
against principal orders and orders solicited from other broker
dealers.
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\9\ See Exchange Act Release No. 58486 (September 8, 2008), 73
FR 53298 (September 15, 2008) (SR-ISE-2008-36).
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2. No Bid Options/Limit Price
Rule 713(b), which deals with priority of orders, provides that if
the lowest offer for any options contract is $0.05 then no member shall
enter a market order to sell that series, and any such market order
shall be considered a limit order to sell at a price of $0.05. This
provision is intended to prevent members from submitting market orders
to sell in no bid series, which would execute at a price of $0.00, and
to instead convert those orders to limit orders with a limit price
equal to the minimum trading increment, i.e., $0.05 for most option
classes.\10\ A ``no bid'' or ``zero bid'' series refers to an option
where the bid price is $0.00. Series of options quoted no bid are
usually deep out-of-the-money series that are perceived as having
little if any chance of expiring in-the-money. For options that trade
in regular nickel increments, a best offer of $0.05 corresponds to a
best bid of $0.00, i.e. one minimum trading increment below the offer.
However, option series may be no bid with other offer prices as well.
For example, an option class would be considered no bid if it is quoted
at $0.00 (bid)-$0.15 (offer). In order to avoid having these orders
execute at a price of $0.00, the Exchange proposes to clarify that Rule
713(b) applies to all option classes that are quoted no bid, rather
than just those option classes that have an offer of $0.05.
Furthermore, on January 26th, 2007, the options exchanges commenced a
pilot (the ``Penny Pilot'') to quote and trade options in one cent
increments, lowering the minimum trading increment from $0.05 in
certain symbols.\11\ The Exchange therefore proposes to clarify in Rule
713(b) that it will put a limit price equal to the minimum trading
increment on market orders to sell a no bid option series. For example,
if the deep out-of-the-money SPY December $230.00 call, which is traded
in penny increments, is quoted at $0.00 (bid)-$0.03 (offer), a market
order to sell would instead be treated as a limit order to sell at a
price of $0.01.
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\10\ Symbols not included in the Penny Pilot (discussed below)
generally trade in $0.05 increments if the options contract is
trading at less than $3.00 per option, and $0.10 increments if the
options contract is trading at $3.00 per option or higher. See Rule
710.
\11\ See Exchange Act Release No. 55161 (January 24, 2007), 72
FR 4754 (February 1, 2007) (SR-ISE-2006-62) (Approval Order); 54603
(October 16, 2006), 71 FR 62024 (October 20, 2006) (SR-ISE-2006-62)
(Notice).
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3. Linkage Rules
On April 18, 2013 the Commission approved a proposed rule change
that modified the ISE's linkage handling procedures under the Options
Order Protection and Locked/Crossed Market Plan (the ``Plan'').\12\
Prior to this rule change Primary Market Makers (``PMMs'') were
responsible for routing orders to away markets when necessary to comply
with the Plan. Under the current rules, however, the ISE has contracted
with unaffiliated broker dealers to route orders to other exchanges
when necessary to comply with the linkage rules (``Linkage Handlers'').
Since PMMs no longer perform linkage handling, the Exchange proposes to
move related language in Rule 803, which concerns the obligation of
market makers, to Chapter 19. In particular, the Exchange proposes to
move Supplementary Material .04 and .05 to Rule 803 to the
Supplementary Material to Rule 1901, which contains provisions relevant
to linkage handling. In connection with this change, the Exchange also
proposes to correct incorrect internal cross references to ``paragraph
(c)(2)'' in this Supplementary Material. Prior to the proposed rule
change described above, paragraph (c)(2) of Rule 803 contained language
concerning a PMM's linkage handling function. As away market routing is
now handled by Linkage Handlers pursuant to the Supplementary Material
to Rule 1901, the Exchange proposes to reference these rules instead.
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\12\ See Securities Exchange Act Release No. 69396 (April 18,
2013), 78 FR 24273 (April 24, 2013) (SR-ISE-2013-18).
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4. Supplementary Material
Finally, the Exchange notes that certain supplementary material is
mistakenly labelled as ``supplemental'' material in the Exchange's
rulebook.\13\ In order to achieve consistency with how other rules are
labelled, the Exchange proposes to change these to instead refer to
``supplementary'' material.
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\13\ See ``Supplemental'' Material to Rules 717, 809, 810, and
1615. See also references in Rule 721(a)(3) to ``Supplemental''
Material .01 to Rule 717, in Rule 1903 to ``Supplemental'' Material
.02 and .03 to Rule 1901, and in Rule 2011 to the ``Supplemental''
Material to Rule 2001.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder that are applicable to a national securities
[[Page 74799]]
exchange, and, in particular, with the requirements of Section 6(b) of
the Act.\14\ In particular, the proposal is consistent with Section
6(b)(5) of the Act,\15\ because is designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanisms of a free and open market and a national market system and,
in general, to protect investors and the public interest. As explained
in more detail below, the Exchange believes it is appropriate to make
the proposed technical corrections to its rules so that members and
investors have a clear and accurate understanding of the meaning of the
ISE's rules.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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1. Order Type Cleanup
As explained above, the Exchange does not offer Customer
Participation Orders or non-displayed penny orders or quotes, and thus
proposes to remove obsolete definitions and other outdated references
to these order types. The Exchange believes that these changes will
eliminate investor confusion regarding order types available for
trading on the ISE to the benefit of members of investors.
2. No Bid Options/Limit Price
The ISE, along with other options exchanges, currently operates a
pilot program to permit designated options classes to be quoted and
traded in increments as low as one cent. The Exchange is proposing to
amend Rule 713(b) to account for the fact that option classes selected
for inclusion in the Penny Pilot are permitted to trade in penny
increments. For penny classes that are quoted no bid, the Exchange will
convert a market order to sell to a limit order with a price of one
cent. In addition, the proposed rule change clarifies that Rule 713(b)
applies to all series with a bid of $0.00, and not just those series
that also have an offer of $0.05. The proposed rule change is necessary
to account for options trading in multiple trading increments,
including under the Penny Pilot, and will ensure that market orders to
sell are not inadvertently executed at a price of zero. The Exchange
believes that these changes more accurately reflect the intent of Rule
713(b), as described above, and will eliminate investor confusion with
respect to the operation of this rule by more accurately describing the
functionality provided by the Exchange. Moreover, the Exchange notes
that other exchanges have similar rules whereby a market order to sell
a no bid series is treated as a limit order with a limit price equal to
the minimum trading increment for the series.\16\
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\16\ See e.g. Securities Exchange Act Release No. 59475
(February 27, 2009), 74 FR 9840 (March 6, 2009) (SR-BX-2009-014)
(Notice); 59742 (April 9, 2009), 74 FR 17701 (April 16, 2009).
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3. Linkage Rules
The proposed changes to the linkage rules are non-substantive and
intended to reduce investor confusion by moving rules concerning
linkage handling to the appropriate chapter of the Exchange's rulebook.
As explained above, since PMMs previously conducted the linkage
handling function, these rules were located in Chapter 8 of the
rulebook. With the introduction of away market routing by Linkage
Handlers, the Exchange believes that these rules are more appropriately
located in Chapter 19. In addition, the Exchange notes that it is
correcting related internal cross references.
4. Supplementary Material
The proposed change to label supplementary material correctly is
non-substantive and is intended to achieve consistency in how these
rules are labelled to the benefit of members and investors.
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 that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change
makes technical, non-substantive, amendments to the Exchange's rules in
order to eliminate investor confusion, and is not designed to have any
competitive impact.
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) of the Act \17\ and Rule 19b-
4(f)(6) thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's 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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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \19\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \20\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposal may become operative immediately upon filing. The Exchange
believes that waiving the 30-day operative delay is consistent with the
protection of investors and the public interest because the proposed
rule change makes non-substantive, technical changes to the ISE's
rules. The Exchange believes that these changes should take effect on
filing as they increase the clarity of the ISE's rules to the benefit
of members and investors that trade on the Exchange. With respect to
the provisions regarding no bid options, the Exchange believes the
proposed rule change will update and clarify those rules consistent
with treatment on other options exchanges. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest, as it will enhance the clarity of
the ISE's rules and will reduce investor confusion with respect to the
operation of the ISE's rules. Therefore, the Commission hereby waives
the operative delay and designates the proposed rule change operative
upon filing.\21\
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\19\ 17 CFR 240.19b-4(f)(6).
\20\ 17 CFR 240.19b-4(f)(6)(iii).
\21\ For purposes only of waiving the 30-day operative delay,
the Commission has 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 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
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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 Number SR-ISE-2014-54 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2014-54. 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 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-2014-54, and should be
submitted on or before January 6, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29363 Filed 12-15-14; 8:45 am]
BILLING CODE 8011-01-P