
[Federal Register Volume 77, Number 20 (Tuesday, January 31, 2012)]
[Notices]
[Pages 4852-4853]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1986]



[[Page 4852]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66234; File No. SR-ISE-2011-82]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving a Proposed Rule Change Relating to Legging Orders

January 25, 2012.

I. Introduction

    On November 29, 2011, the International Securities Exchange, LLC 
(the ``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (the ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend ISE Rule 715, ``Types of 
Orders,'' to add a new order type, the legging order. The proposed rule 
change was published for comment in the Federal Register on December 
12, 2011.\3\ The Commission received no comment letters regarding the 
proposed rule change. This order approves the proposed rule change.
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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. 65900 (December 6, 
2011), 76 FR 77275 (``Notice'').
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II. Description

    A complex order resting on ISE's complex order book may be executed 
either by: (i) Trading against an incoming complex order that is 
marketable against the resting complex order, or (ii) legging into the 
market when the net price of the complex order can be satisfied by 
executing all of the legs of the complex order against the best bids or 
offers on ISE for the individual options series. ISE's new order type, 
the legging order, is designed to increase the opportunities for a 
complex order resting on ISE's complex order book to leg into the 
market.\4\
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    \4\ Legging orders will not be generated for market maker quotes 
on the complex order book because market maker quotes cannot leg 
into the market. See ISE Rule 722, Supplementary Material .03.
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    Under the proposal, a legging order may be generated automatically 
on behalf of one leg of a complex order resting on ISE's complex order 
book at a price: (i) That matches or improves the best displayed bid or 
offer on ISE's regular limit order book; and (ii) at which the net 
price of the complex order can be achieved when the other leg of the 
complex order executes against the best displayed bid or offer on ISE's 
regular limit order book.\5\ When a legging order representing one leg 
of the complex order is executed, the other leg of the complex order 
will execute automatically against ISE's displayed best bid or 
offer.\6\
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    \5\ See ISE Rule 715(k)(1).
    \6\ See ISE Rule 715(k)(2).
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    A legging order will be removed automatically from ISE's regular 
limit order book if: (i) The price of the legging order is no longer at 
the displayed best bid or offer on the Exchange's regular limit order 
book; (ii) execution of the legging order would no longer achieve the 
net price of the complex order when the other leg is executed against 
the best displayed bid or offer on the regular limit order book; (iii) 
the complex order is executed in full or in part against another 
complex order on the complex order book; or (iv) the complex order is 
cancelled or modified.\7\
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    \7\ See ISE Rule 715(k)(3).
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    Legging orders are firm orders that will be included in ISE's 
displayed best bid or offer.\8\ A legging order will be executed only 
after all other executable orders (including any non-displayed size) 
and quotes at the same price are executed in full.\9\ Accordingly, ISE 
notes that the generation of a legging order will not affect the 
existing priority, or execution opportunities, currently provided to 
participants in the regular market.\10\
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    \8\ See ISE Rule 715(k).
    \9\ See ISE Rule 715(k)(2).
    \10\ See Notice, 76 FR at 77276.
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    The proposal limits the circumstances under which a legging order 
may be generated. A legging order may be generated only on behalf of a 
two-legged complex that has an equal number of contracts on both legs, 
and a legging order will not be created at a price that would lock or 
cross the best bid or offer of another exchange.\11\ There can be only 
one legging order to buy in a series.\12\
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    \11\ See ISE Rule 715(k) and (k)(1).
    \12\ See Notice, 76 FR at 77276.
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    In addition to these limitations, ISE states that it will carefully 
manage and curtail the number of legging orders being generated so that 
they do not negatively impact system capacity and performance.\13\ 
Accordingly, legging orders may not be generated for all eligible 
complex orders resting on the complex order book.\14\ ISE represents 
that it will curtail the number of legging orders on an objective 
basis, such as by limiting the number of orders generated in a 
particular class.\15\ ISE represents, further, that it will not limit 
the generation of legging orders on the basis of the entering 
participant or the participant category of the order (i.e., 
professional, professional customer, or public customer).\16\
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    \13\ See id.
    \14\ See id.
    \15\ See Notice, 76 FR at 77276, footnote 6.
    \16\ See id.
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    The following example illustrates the operation of legging orders:

    A complex order to buy 10 series 1 (S1) and 10 series 2 (S2) at 
a net price of $2.25 (buy S1/S2 10 @ $2.25) is entered into the 
complex order book and there is no off-setting complex order to 
sell.
    The complex order cannot leg into the regular market because the 
BBO net price available for the complex order on ISE's regular order 
book is $2.40, as follows:

------------------------------------------------------------------------
              ISE Bid                             ISE Offer
------------------------------------------------------------------------
S1 10 @ $1.00                        20 @ $1.20
S2 10 @ $1.00                        20 @ $1.20
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    (buy S1 @ $1.20 + buy S2 @ $1.20 = $2.40 net)
    Legging orders to buy 10 S1 @ $1.05 and 10 S2 @ $1.05 may be 
generated automatically, improving ISE's best bid for both S1 and S2 
to $1.05:

------------------------------------------------------------------------
              ISE Bid                             ISE Offer
------------------------------------------------------------------------
S1 10 @ $1.05                        20 @ $1.20
 (legging order)
S2 10 @ $1.05                        20 @ $1.20
 (legging order)
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    If ISE receives a marketable order to sell 10 S1, it would 
execute against the legging order to buy S1 at $1.05, the other leg 
of the complex order would execute automatically against the 
displayed offer of $1.20 for S2, and the legging order to buy S2 at 
$1.05 would be cancelled automatically. This would achieve the net 
price of $2.25 for the complex order (buy S1 @ $1.05 + buy S2 @ 
$1.20 = $2.25 net).\17\
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    \17\ If ISE received a marketable order to sell 10 S2, it would 
execute against the legging order to buy S2 at $1.05, the other leg 
of the complex order would execute automatically against the 
displayed offer of $1.20 for S1, and the legging order to buy S1 at 
$1.05 would be cancelled automatically. This would achieve the net 
price of $2.25 for the complex order (buy S1 @ $1.20 + buy S2 @ 
$1.05 = $2.25 net). For additional examples regarding the operation 
of legging orders, see Notice, 76 FR at 77275-77276.

    ISE notes that, in this example, the legging order enabled the 
execution of the complex order at a net price of $2.25 and enhanced the 
execution of the interest in the leg market because (i) the incoming 
marketable order to sell S1 received a better price ($1.05 instead of 
$1.00), and (ii) the complex order provided liquidity to execute the 
resting leg market interest to sell S2 at $1.20.\18\
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    \18\ See Notice, 76 FR at 77276.

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[[Page 4853]]

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\20\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism 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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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change could 
facilitate the execution of complex orders resting on ISE's complex 
order book by increasing the opportunities for these orders to execute 
against interest in the leg market, thereby benefitting investors 
seeking to execute complex orders. In addition, the Commission believes 
that the proposal could benefit participants in the leg market by 
providing additional liquidity, and potentially more favorable 
executions, for orders and quotes in the leg market.
    A legging order is a firm order that will be included in ISE's 
displayed best bid or offer.\21\ In addition, a legging order will not 
be created at a price that would lock or cross the best bid or offer of 
another exchange.\22\ The Commission notes that a legging order will be 
executed only after all other executable orders (including any non-
displayed size) and quotes at the same price are executed in full.\23\ 
Accordingly, ISE states that legging orders will not affect the 
existing priority, or execution opportunities, of participants in the 
leg market.\24\
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    \21\ See ISE Rule 715(k).
    \22\ See ISE Rule 715(k)(1).
    \23\ See ISE Rule 715(k)(2).
    \24\ See Notice, 76 FR at 77276.
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    As noted above, ISE represents that it will carefully manage and 
curtail the number of legging orders being generated so that they do 
not negatively impact system capacity and performance.\25\ ISE 
represents, further, that it will curtail the number of legging orders 
on an objective basis, such as by limiting the number of orders 
generated in a particular class, and that it will not limit the 
generation of legging orders on the basis of the entering participant 
or the participant category of the order (i.e., professional, 
professional customer, or public customer).\26\
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    \25\ See id.
    \26\ See id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-ISE-2011-82) is approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1986 Filed 1-30-12; 8:45 am]
BILLING CODE 8011-01-P


