[Federal Register Volume 82, Number 38 (Tuesday, February 28, 2017)]
[Notices]
[Pages 12150-12153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03847]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80090; File No. SR-ISE-2017-12]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change To Amend Rule 715 and Rule 721
February 22, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 13, 2017, the International Securities Exchange, LLC
(``ISE'' or ``Exchange'') 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 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 Substance
of the Proposed Rule Change
The Exchange proposes to amend Rule 715 (Types of Orders) and Rule
721 (Crossing Orders) to codify its Qualified Contingent Cross
(``QCC'') with Stock Order functionality.
The text of the proposed rule change is available on the Exchange's
Web site at 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 Exchange 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 codify functionality
currently offered to members--i.e., QCC with Stock Orders. The QCC with
Stock Order is a piece of functionality that facilitates the execution
of stock component of qualified contingent trades. In particular, a QCC
with Stock Order is a QCC Order entered with a stock component to be
communicated to a designated broker-dealer for execution.\3\ QCC with
Stock Orders assist members in maintaining compliance with Exchange
rules regarding the execution of the stock component of qualified
contingent trades, and help maintain an audit trail for surveillance of
members for compliance with such rules.
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\3\ See Proposed Rule 715(t).
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Currently, although the Exchange has rules on QCC Orders, those
rules do not specify how the stock component of such transactions is to
be executed. In particular, those rules do not describe how this
process may be facilitated by the Exchange electronically communicating
the stock component to a designated broker-dealer for execution on the
behalf of the member. The proposed rule change will increase the
transparency of this process to the benefit of members and other market
participants that execute QCC Orders on the Exchange, including those
that use the QCC with Stock Order functionality described in this
filing.
A QCC Order is comprised of an originating order to buy or sell at
least 1000 contracts that is identified as being part of a qualified
contingent trade,\4\
[[Page 12151]]
coupled with a contra-side order or orders totaling an equal number of
contracts. QCC Orders are automatically executed upon entry provided
that the execution (i) is not at the same price as a Priority Customer
Order on the Exchange's limit order book and (ii) is at or between the
national best bid or offer (``NBBO'').\5\ QCC Orders are automatically
canceled if they cannot be executed, and may only be entered in the
regular trading increments applicable to the options class.\6\
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\4\ See Rule 715(j). A ``qualified contingent trade'' is a
transaction consisting of two or more component orders, executed as
agent or principal, where: (a) At least one component is an NMS
Stock, as defined in Rule 600 of Regulation NMS under the Exchange
Act; (b) all components are effected with a product or price
contingency that either has been agreed to by all the respective
counterparties or arranged for by a broker-dealer as principal or
agent; (c) the execution of one component is contingent upon the
execution of all other components at or near the same time; (d) the
specific relationship between the component orders (e.g., the spread
between the prices of the component orders) is determined by the
time the contingent order is placed; (e) the component orders bear a
derivative relationship to one another, represent different classes
of shares of the same issuer, or involve the securities of
participants in mergers or with intentions to merge that have been
announced or cancelled; and (f) the transaction is fully hedged
(without regard to any prior existing position) as a result of other
components of the contingent trade. See Supplementary Material .01
to Rule 715.
\5\ See Rule 721(b).
\6\ See Rule 721(b)(1), (2).
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Since QCC Orders represent one component of a qualified contingent
trade, each QCC Order must be paired with a stock transaction. When a
member enters a QCC Order, the member is responsible for executing the
associated stock component of the qualified contingent trade within a
reasonable period of time after the QCC Order is executed. The Exchange
conducts surveillance of members to ensure that members execute the
stock component of a qualified contingent trade at or near the same
time as the options component. While the Exchange does not specify how
the member should go about executing the stock component of the trade,
this process is often manual and is therefore a compliance risk for
members if they do not execute the stock component within a reasonable
time period.
Thus, the Exchange also offers QCC with Stock Orders that
communicate the stock component of a qualified contingent trade to a
broker-dealer for execution in connection with the execution of a QCC
Order on the Exchange. This functionality reduces the compliance burden
on members by providing an automated means of executing the stock
component of a qualified contingent trade, and also provides benefits
for the Exchange's surveillance by providing an audit trail for the
execution of the stock component. QCC with Stock Orders can be entered
by members through the Exchange's front-end order and execution
management system (``PrecISE''), or through the member's Financial
Information eXchange (``FIX'') connection to the Exchange.
QCC with Stock Orders are available to members on a voluntary
basis. Members that enter QCC with Stock Orders must enter into a
brokerage agreement with one or more broker-dealers designated by the
Exchange.\7\ Currently, three broker-dealers have established
connectivity for executing the stock component of QCC with Stock
Orders. The member must designate a specific broker-dealer on each
order if the member has entered into an agreement with more than
one.\8\ The Exchange does not have any financial arrangement with the
designated broker-dealers with respect to communicating stock orders to
them.\9\ While the Exchange does not charge members a fee for the
execution of the stock component of a QCC with Stock Order,\10\ each
member would be responsible for whatever fees or other charges are
imposed by their designated broker-dealer.\11\
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\7\ See Proposed Supplementary Material .02 to Rule 721.
\8\ Id. The Exchange does not have any role with respect to
determining where to route the stock component of a QCC with Stock
Order if the member has entered into an agreement with more than one
broker-dealer.
\9\ Id. The Exchange also represents that the designated broker-
dealers that execute the stock component of QCC with Stock Orders do
not receive other special benefits related to trading on the
Exchange.
\10\ Members that enter their QCC with Stock Orders through
PrecISE are charged a fee for the use of the front end terminal but
are not charged transaction fees for the execution of the stock
component of the trade.
\11\ These fees are billed directly by the member's designated
broker-dealer.
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Members can enter QCC with Stock Orders with separate prices for
the stock and options components, or with a net price for both.\12\ QCC
Orders may not be executable on entry if priced at the same price as a
Priority Customer Order, or at a price that is outside of the NBBO. The
stock component of a qualified contingent trade, however, is permitted
to trade through the stock NBBO pursuant to an exemption granted by the
Commission from the order protection requirements of Rule 611(a) of
Regulation NMS.\13\ Net priced QCC with Stock Orders reduce the chance
that members miss the market since the Exchange will calculate a price
for the stock and options components that honors the net price of the
package and current market prices, if possible. At the same time, the
Exchange permits members to submit QCC with Stock Orders with separate
stock and options prices for members that want specific prices for each
individual component.
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\12\ See Proposed Supplementary Material .01 Rule 721.
\13\ See Securities Exchange Act Release Nos. 54389 (August 31,
2006), 71 FR 52829 (September 7, 2006) (Order Granting an Exemption
for Qualified Contingent Trades From Rule 611(a) of Regulation NMS
Under the Securities Exchange Act of 1934); 57620 (April 4, 2008),
73 FR 19271 (April 9, 2008) (Order Modifying the Exemption for
Qualified Contingent Trades from Rule 611(a) of Regulation NMS Under
the Securities Exchange Act of 1934).
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When a member enters a QCC with Stock Order, a QCC Order is entered
on the Exchange.\14\ That QCC Order is automatically executed upon
entry provided that the conditions of Rule 721(b) are met. If the QCC
Order is executed, the Exchange will automatically communicate the
stock component to the member's designated broker-dealer for
execution.\15\ Although QCC Orders are eligible for automatic
execution, it is possible that the QCC Order may not be executable
based on market prices at the time the order is entered. If the QCC
Order is not capable of being executed, the entire QCC with Stock
Order, including both the stock and options components, is
cancelled.\16\ This prevents members from executing the stock component
of a qualified contingent trade where the options component has not
been successfully executed.
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\14\ See Proposed Rule 721(c)(1).
\15\ See Proposed Rule 721(c)(2).
\16\ See Proposed Rule 721(c)(3).
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Furthermore, it is possible that the member will receive an
execution for the QCC Order but not the stock component communicated to
the broker-dealer. Once the stock component is communicated to the
member's designated broker-dealer for execution, the broker-dealer is
responsible for determining whether the stock component may be executed
in accordance with all of the rules applicable to execution of such
orders. Members that execute the options component of a qualified
contingent trade entered as a QCC with Stock Order remain responsible
for the execution of the stock component if they do not receive an
execution from their designated broker-dealer.\17\ In such cases, the
Exchange will inform the member that the stock component of the trade
has not been executed, and that they must find an alternative means of
executing the stock component. The Exchange conducts surveillance to
ensure that members execute the stock component of their qualified
contingent trades; this surveillance also extends to
[[Page 12152]]
QCC with Stock Orders where the options component is successfully
executed but the stock component is not.
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\17\ See Proposed Supplementary Material .03 to Rule 721.
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Example 1:
Stock NBBO: $100 x $101
Option NBBO: $1 x $2
Member submits a QCC with Stock Order buying 1,000 puts and 100,000
shares of stock with a net price of $101.50.
QCC Order is entered on the Exchange and executed at a price of
$1.50.
Stock component is routed to member's designed broker-dealer at a
price of $100.
The stock component is executed successfully, or the member remains
responsible for executing the stock component elsewhere.
Example 2:
Stock NBBO: $100 x $101
Option NBBO: $1 x $2
Member submits a QCC with Stock Order buying 1,000 puts at $1.99
and 100,000 shares of stock at $100.
QCC Order is entered on the Exchange and executed at a price of
$1.99.
Stock component is routed to the member's designed broker-dealer at
a price of $100.
The stock component is executed successfully, or the member remains
responsible for executing the stock component elsewhere.
Example 3:
Stock NBBO: $100 x $101
ABBO: $1.00 x $1.05
Exchange BBO: $1.00 (Priority Customer) x 1.01 (Priority Customer)
Member submits a QCC with Stock Order buying 1,000 puts at $1.01
and 100,000 shares of stock at $100.
QCC Order is entered on the Exchange at a price of $1.01 and is
cancelled due to being at the same price as a Priority Customer order
on the Exchange.
Because the QCC Order is not successfully executed the entire QCC
with Stock Order is cancelled.
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 exchange, and,
in particular, with the requirements of Section 6(b) of the Act.\18\ In
particular, the proposal is consistent with Section 6(b)(5) of the
Act,\19\ 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.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
promote just and equitable principles of trade because it will increase
transparency for members and other market participants with respect to
how the Exchange facilitates the execution of the stock component of
qualified contingent trades. The QCC with Stock Order is an optional
piece of functionality offered to members to communicate the stock
component of a qualified contingent trade to a designated broker-dealer
for execution. Members that do not wish to use QCC with Stock
functionality can enter QCC Orders on the Exchange and separately
execute the stock component of their trades on another venue. Members
can also build their own technology to electronically communicate the
stock component of a qualified contingent trade to a broker-dealer for
execution. QCC with Stock Orders reduce members' compliance burden
because it allows for the automatic submission of the stock component
of a qualified contingent trade in connection with the execution of the
options component(s) as a QCC Order on the Exchange. It also provides
benefits to the Exchange by establishing an audit trail for the
execution of the stock component of such trades within a reasonable
period of time after the execution of the QCC Order. Members remain
responsible for ensuring the execution of the stock component of a
qualified contingent trade. Nevertheless, the Exchange believes that
members have found the QCC with Stock Order functionality useful for
ensuring compliance with the requirement that they execute the stock
component of a qualified contingent trade within a reasonable period of
time after executing the option component(s) on the Exchange as a QCC
Order. The Exchange therefore believes that QCC with Stock Orders are
designed to 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.
B. Self-Regulatory Organization's Statement on Burden on Competition
In accordance with Section 6(b)(8) of the Act,\20\ the Exchange
does not believe that the proposed rule change will impose any burden
on intermarket or intramarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. QCC with Stock
Orders facilitate member compliance with the requirements associated
with executing QCC Orders on the Exchange, and are not designed to
impose any unnecessary burden on competition. Members are not required
to use QCC with Stock Orders, and can either create similar
functionality, or manually communicate the stock component of their
qualified contingent trades to a broker-dealer for execution. In
addition, QCC with Stock Orders are available to all members either
through the Exchange's PrecISE front end or the member's FIX
connection.
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\20\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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)(iii) of the Act \21\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\22\
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\21\ 15 U.S.C. 78s(b)(3)(A)(iii).
\22\ 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 met this requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) \23\ permits the Commission to designate a
shorter time if such action is consistent with the protection of
investors and the public interest. In its filing with the Commission,
the Exchange requests that the Commission waive the 30-day operative
delay. The Exchange states that it currently offers QCC with Stock
Order functionality to aid members in their compliance with qualified
contingent trade obligations, and for the surveillance benefits that
this functionality provides. According to the Exchange, waiving the
operative delay will allow the Exchange to update its rules immediately
to reflect this
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functionality, to the benefit of members and other market participants.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
The QCC with Stock Order functionality is designed to help ISE members
that choose to use the functionality comply with their qualified
contingent trade obligations in connection with a QCC Order,\24\ as
well as help the Exchange surveil its members for compliance with the
Exchange's rules for QCC Orders. Therefore, the Commission designates
the proposed rule change operative upon filing.\25\
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\23\ 17 CFR 240.19b-4(f)(6)(iii).
\24\ See supra note 4 and accompanying text.
\25\ 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 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-2017-12 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-2017-12. 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 the 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-2017-12 and should be
submitted on or March 21, 2017.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-03847 Filed 2-27-17; 8:45 am]
BILLING CODE 8011-01-P