
[Federal Register Volume 77, Number 248 (Thursday, December 27, 2012)]
[Notices]
[Pages 76336-76338]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31124]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68492; File No. SR-ISE-2012-100]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Reduce the Response 
Times in the Block Mechanism, Facilitation Mechanism, Solicited Order 
Mechanism and Price Improvement Mechanism

December 20, 2012.
    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 19, 2012, 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 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 Rules 716 (Block Trades) and 723 
(Price Improvement Mechanism for Crossing Transactions) to reduce the 
response times in the Block Mechanism, Facilitation Mechanism, 
Solicited Order Mechanism and Price Improvement Mechanism (``PIM''). 
The text of the proposed rule change is available on the Exchange's 
Internet Web site at http://www.ise.com, on the Commission's Internet 
Web site at http://www.sec.gov, 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend ISE Rules 716 
(Block Trades) and 723 (Price Improvement Mechanism for Crossing 
Transactions) to reduce the response times in the Block Mechanism, 
Facilitation Mechanism, Solicited Order Mechanism and PIM from one 
second to 500 milliseconds (\1/2\ of one second).
    Rule 716 contains the requirements applicable to the execution of 
orders using the Block Order Mechanism, Facilitation Mechanism and 
Solicited Order Mechanism. The Block Order Mechanism allows members to 
obtain liquidity for the execution of a block-size order,\3\ whereas 
the Facilitation and Solicited Order Mechanisms allow members to enter 
cross transactions seeking price improvement.\4\ Rule 723 contains the 
requirements applicable to the execution of orders using the PIM. The 
PIM allows members to enter cross transactions of any size. The 
Facilitation, Solicited Order Mechanisms and PIM allow for ISE Members 
to designate certain customer orders for price improvement and submit 
such orders into one of the mechanisms with a matching contra order. 
Once such an order is submitted, ISE commences an auction by 
broadcasting a message to all Members that includes the series, price, 
size and side of the market.\5\ Further, responses within the PIM 
(i.e., Improvement Orders), are also broadcast to market participants 
during the auction. Orders entered into any of these mechanisms 
currently are exposed to all market participants for one second, giving 
them an opportunity to enter additional trading interest before the 
orders are automatically executed. Under the proposal, the exposure 
period for each of the four mechanisms would be reduced to 500 
milliseconds. When approving previous reductions in ISE exposure 
periods in these mechanisms the Commission concluded that reducing 
these time periods from three seconds to one second was consistent with 
the Act.\6\
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    \3\ Block-size orders are orders for 50 contracts or more. See 
Rule 716(a).
    \4\ Only block-size orders can be entered into the Facilitation 
Mechanism, whereas only orders for 500 contracts or more can be 
entered into the Solicited Order Mechanism. See Rule 716(d) and (e).
    \5\ ISE Members may choose to hide the size, side and price when 
entering orders into the Block Order Mechanism.
    \6\ See Securities Exchange Act Release No. 58224 (July 25, 
2008), 73 FR 44303 (July 30, 2008) (Order granting accelerated 
approval of a proposed rule change as modified by amendments No. 1 
and 3 thereto relating to reduction of certain order handling and 
exposure periods from three seconds to one second) (SR-ISE-2007-94).
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    ISE is not proposing any change to the requirement in ISE Rule 
717(d) and (e) that requires an Electronic Access Member (``EAM'') to 
expose its customer's order on the ISE book for at least one second 
before either executing such agency order as principal or against 
orders solicited from Members and non-members, unless the EAM submits 
the agency order to the Facilitation Mechanism, Solicited Order 
Mechanism or PIM.\7\ ISE believes this exception for the Facilitation 
Mechanism, Solicited Order Mechanism and PIM is appropriate because the 
customer order is guaranteed an execution at the National Best Bid/
Offer (``NBBO'') or a better price through the Facilitation Mechanism, 
Solicited Order Mechanism and PIM. Additionally, ISE Members are 
informed about the agency order starting the auction through receipt of 
the broadcast. ISE Members have the opportunity to compete for 
participation in the execution of the customer order by responding to 
the broadcast with their best priced responses.
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    \7\ Since EAMs submitting orders into the Block Mechanism do not 
have the contra order, Rule 717(d) and (e) does not apply.
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    With respect to the Facilitation Mechanism, Solicited Order 
Mechanism and PIM, ISE believes the proposed rule change could provide 
more customer orders an opportunity for price improvement because it 
will reduce the market risk for all ISE Members executing trades in 
these mechanisms. ISE Members that submit orders into such mechanisms 
to initiate an auction (``Initiating Members'') are required to 
guarantee an execution at the NBBO or a better price, and are subject 
to market risk while the order is exposed in one of the mechanisms to 
other ISE Members. While other ISE Members are also subject to market 
risk, the Initiating Member is most exposed because the market can move 
against them during the auction period and they have guaranteed the 
customer an execution at the NBBO or better based on the market prices 
prior to the commencement of the auction. In today's fast-paced 
markets, big price changes can occur in one second, leaving the 
Initiating Members vulnerable to trading losses due to their choice to 
seek price improvement for their customer. The Initiating Member

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acts in a critical role in the price improvement process and their 
willingness to guarantee the customer an execution at the NBBO or a 
better price is keystone to the customer order gaining the opportunity 
for price improvement. Therefore, limiting Initiating Members' market 
risk by reducing the exposure time in the mechanisms should increase 
the likelihood that an Initiating Member would seek price improvement 
for its customer by entering such orders into one of the mechanisms.
    Additionally, the Exchange does not believe that requiring the 
auction to run for one second is necessary in today's market where, 
generally, Members' systems have the capability to respond within 
milliseconds. As such, reducing the response time in the Block Order 
Mechanism is appropriate as Members no longer need one second to 
respond to the auction. Reducing the auction time for the Block Order 
Mechanism from one second to 500 milliseconds will allow members the 
opportunity to seek out liquidity in an expedient manner that is 
consistent with system capabilities.
    ISE's Members operate electronic systems that enable them to react 
and respond to orders in a meaningful way in fractions of a second. ISE 
anticipates that its Members will continue to compete within the 
proposed auction duration of 500 milliseconds. In particular, ISE 
believes that 500 milliseconds will continue to provide ISE Members 
with sufficient time to respond to, compete for, and provide price 
improvement for orders, and will provide investors and other market 
participants with more timely executions, and reduce their market risk.
    Reducing the duration of the auctions from one second to 500 
milliseconds will benefit Members trading in the mechanisms. It is in 
these Members' best interest to minimize the auction time while 
continuing to allow Members adequate time to electronically respond. 
Both the order being exposed and the Members' responses are subject to 
market risk during the auction. While a limited number of Members wait 
to respond until later in the auction, presumably to minimize their 
market risk, in more than 90% of executions occurring in the mechanisms 
Members respond within the first 500 milliseconds. ISE believes that 
500 milliseconds will continue to provide market participants with 
sufficient time to respond, compete, and provide price improvement for 
orders and will provide investors and other market participants with 
more timely executions, thereby reducing their market risk.\8\
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    \8\ With Block Orders, the Member enters one side of the order 
in an effort to find contra-side liquidity. While this order is 
exposed, the Member is exposed to market risk. Therefore, reducing 
the exposure time will reduce the market risk for Block Orders just 
as it will reduce the market risk with respect to orders entered 
into the Facilitation Mechanism, Solicited Order Mechanism and PIM.
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    In consideration of this proposed rule change, ISE surveyed all ISE 
Members that have participated in the mechanisms in 2011 and 2012 to 
substantiate that such ISE Members could receive, process and 
communicate a response to an ISE broadcast within 500 milliseconds. 
Twenty of the twenty-one firms surveyed indicated that they can, either 
currently or with some system development, receive, process and 
communicate a response back to ISE within 500 milliseconds.\9\
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    \9\ Seventeen of the twenty-one firms surveyed indicated that 
they can currently receive, process and communicate a response back 
to ISE within 500 milliseconds. Of the four firms that cannot 
currently respond within 500 milliseconds, one firm stated that 500 
milliseconds is sufficient for non-complex orders in the mechanisms, 
but had not yet tested for complex orders. Each of the four firms 
that need to perform systems work indicated that with six weeks 
notice of the implementation date, they can perform the systems work 
necessary to respond to an ISE broadcast within 500 milliseconds.
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    Also in consideration of this proposed rule change, ISE reviewed 
all executions occurring in the mechanisms by its Members for the month 
of October 2012. This review of executions in the mechanisms (excluding 
PIM) indicates that approximately ninety-three percent (93%) of 
responses that resulted in price improving executions at the conclusion 
of an auction were submitted within 500 milliseconds. Approximately 
eighty-nine percent (89%) of responses that resulted in price improving 
executions at the conclusion of an auction were submitted within 100 
milliseconds of the initial order, and eighty-five percent (85%) were 
submitted within 10 milliseconds of the initial order. The review of 
executions in the PIM indicates that approximately eighty-nine percent 
(89%) of responses that resulted in price improving executions at the 
conclusion of an auction were submitted within 500 milliseconds. 
Approximately sixty-six percent (66%) of responses that resulted in 
price improving executions at the conclusion of an auction were 
submitted within 100 milliseconds of the initial order, and sixty-four 
percent (64%) were submitted within 10 milliseconds of the initial 
order. As mentioned above, ISE surveyed Members that use the mechanisms 
to confirm that they have sufficiently automated electronic systems to 
enable them to react and respond to an auction within 500 milliseconds.
    Accordingly, ISE believes that 500 milliseconds will continue to 
provide ISE Members with sufficient time to respond to, compete for, 
and provide price improvement for orders, and will provide investors 
and other market participants with more timely executions, and reduce 
their market risk. Moreover, Supplementary Material .04 to Rule 723 
provides that the PIM will not run simultaneously with or overlap 
another PIM in the same series. As a result, Members may be unable to 
initiate PIMs on behalf of their customers. Reducing the auction time 
to 500 milliseconds will decrease the likelihood that an auction is 
underway when a customer order is received. Accordingly, ISE believes 
it is likely that the number of PIM transactions will increase, thereby 
providing customers a greater opportunity to benefit from price 
improvement.
    Based on current market data related to the mechanisms and feedback 
from the surveyed ISE Members, ISE believes that reducing the exposure 
time in the mechanisms from one second to 500 milliseconds would not 
impair Members' ability to compete in the mechanisms. For example, in 
the mechanisms (excluding PIM) eighty-four percent (84%) of auctions 
include competition for execution (i.e., at least one other Member 
competes for execution of the customer order), sixty percent (60%) of 
all auctions include two or more Members competing for an execution, 
while forty-five percent (45%) of all auctions include three or more 
Members competing for an execution. In the PIM, ninety-six percent 
(96%) of auctions include competition for execution (i.e., at least one 
other Member competes for execution of the customer order), seventy-
seven percent (77%) of all auctions include two or more Members 
competing for an execution, while forty-six percent (46%) of all 
auctions include three or more Members competing for an execution.
    ISE believes that the information outlined above regarding price 
improving transactions in the mechanisms and the feedback provided by 
ISE Members provides substantial support for its assertion that 
reducing the auction from one second to 500 milliseconds will continue 
to provide Members with sufficient time to ensure competition for 
orders entered into the mechanisms, and could provide customer orders 
with additional opportunities for price improvement.
    With regard to the impact of this proposal on system capacity, ISE 
has

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analyzed its capacity and represents that it has the necessary systems 
capacity to handle the potential additional traffic associated with the 
additional transactions that may occur with the implementation of the 
proposed reduction in the auction duration to 500 milliseconds. 
Additionally, the Exchange represents that its systems will be able to 
sufficiently maintain an audit trail for order and trade information 
with the reduction in the auction duration.
    Upon effectiveness of the proposal, and at least six weeks prior to 
implementation of the proposed rule change, ISE will issue an 
Informational Circular to Members, informing them of the implementation 
date of the reduction of the auction from one second to 500 
milliseconds in the mechanisms to allow members the opportunity to 
perform systems changes. This will give Members an opportunity to make 
any necessary modifications to coincide with the implementation date.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\10\ in general, and with 
Section 6(b)(5) of the Act,\11\ in particular, in that the proposal is 
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. In particular, the proposed rule change will provide 
investors with more timely execution of their options orders, while 
ensuring that there is an adequate exposure of orders in the 
mechanisms. Additionally, the proposed change will allow additional 
investors the opportunity to receive price improvement through the 
mechanisms, and will reduce market risk for ISE Members using the 
mechanisms. As such, ISE believes the proposed rule change would help 
perfect the mechanism for a free and open national market system, and 
generally help protect investors' and the public interest.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change is not unfairly 
discriminatory because the auction duration would be the same for all 
Members. All Members in the mechanisms have today, and will continue to 
have, an equal opportunity to receive the broadcast and respond with 
their best prices during the auction. Additionally, ISE believes the 
reduction in the auction duration reduces the market risk for all ISE 
Members. The reduction in time period reduces the market risk for the 
Initiating Member as well as any Members providing orders in response 
to a broadcast. Moreover, based on the feedback ISE received from its 
Members, ISE believes that a reduction in the auction period to 500 
milliseconds would not impair Members' ability to compete in the 
mechanisms. ISE believes these results support the assertion that a 
reduction in the auction duration would not be unfairly discriminatory 
and would benefit investors.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

    Within 45 days of the date of publication of this notice or within 
such longer period (i) as the Commission may designate up to 90 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (ii) as to which the self-
regulatory organization consents, the Commission will:
    (a) By order approve or disapprove such proposed rule changes; or
    (b) Institute proceedings to determine whether the proposed rule 
changes should be 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 rule-comments@sec.gov. Please include 
File No. SR-ISE-2012-100 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-ISE-2012-100. 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 No. SR-ISE-2012-100 and should be 
submitted on or before January 17, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-31124 Filed 12-26-12; 8:45 am]
BILLING CODE 8011-01-P


