
[Federal Register Volume 78, Number 55 (Thursday, March 21, 2013)]
[Notices]
[Pages 17462-17464]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06481]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69148; File No. SR-ISE-2013-20]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Related to Limit Up/Limit Down

March 15, 2013.
    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 March 4, 2013, the International Securities Exchange, LLC (``ISE'' 
or ``Exchange'') 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 its rules proposing changes to its 
rules in light of the implementation of limit-up/limit-down procedures 
for securities that underlie options traded on the ISE. The text of the 
proposed rule change is available on the Exchange's Web site 
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 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
    On May 31, 2012, the Commission approved the Plan to Address 
Extraordinary Market Volatility (the ``Plan''),\3\ which establishes 
procedures to address extraordinary volatility in NMS Stocks. The 
procedures provide for market-wide limit up-limit down requirements 
that prevent trades in individual NMS Stocks from occurring outside of 
specified Price Bands. These limit up-limit down requirements are 
coupled with Trading Pauses to accommodate more fundamental price 
moves. The Plan procedures are designed, among other things, to protect 
investors and promote fair and orderly markets.\4\
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    \3\ Securities Exchange Act Release No. 67091 (May 31, 2012), 77 
FR 33498 (June 6, 2012) (File No. 4-631) (``Plan Approval Order'').
    \4\ Id. at 33511 (Preamble to the Plan).
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    ISE is not a participant in the Plan because it does not trade NMS 
Stocks. However, the ISE trades options contracts overlying NMS Stocks. 
Because options pricing models are highly dependent on the price of the 
underlying security and the ability of options traders to effect 
hedging transactions in the underlying security, the implementation of 
the Plan will impact the trading of options classes traded on the 
Exchange. Specifically, under the Plan, upper and lower price bands 
will be calculated based on a reference price for each NMS Stock.\5\

[[Page 17463]]

When one side of the market for an individual security is outside the 
applicable price band, the national best bid or national best offer 
will be disseminated with a flag identifying it as non-executable 
(i.e., a ``Straddle State''). When the other side of the market reaches 
the applicable price band, such national best bid or offer will be 
disseminated with a flag identifying it as a Limit State Quotation.\6\ 
If trading for a security does not exit a Limit State within 15 
seconds, a Trading Pause will be declared by the Primary Listing 
Exchange.\7\ The Trading Pause will last at least five minutes \8\ and 
will end when the Primary Listing Exchange disseminates a Reopening 
Price.\9\
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    \5\ The reference price equals the arithmetic mean price of 
eligible reported transactions for the NMS Stock over the 
immediately preceding five-minute period. See Section I(T) of the 
Plan.
    \6\ See Section I(D) of the Plan. The Limit State will end when 
the entire size of all Limit State Quotations are executed or 
cancelled.
    \7\ See Section VII(A) of the Plan. The Primary Listing Exchange 
is the market on which an NMS Stock is listed. If an NMS Stock is 
listed on more than one market, the Primary Listing Exchange is the 
market on which the security has been listed the longest. See 
Section I(O) of the Plan. A trading pause may also be declared when 
the national best bid (offer) is below (above) the lower (upper) 
price band and the security is not in a Limit State, and trading in 
that security deviates from normal trading characteristics. See 
Section VII(A)(2) of the Plan.
    \8\ A Trading Pause may last longer than 5 minutes if, for 
example, the Primary Market declares a Regulatory Halt, or if there 
is a significant order imbalance. See Section VII(B) of the Plan. If 
the Primary Listing Exchange does not report a Reopening Price 
within ten minutes after the declaration of a trading Pause and has 
not declared a Regulatory Halt, all trading centers may begin 
trading the security. Id.
    \9\ The Reopening Price is the price of a transaction that 
reopens trading on the Primary Listing Exchange following a Trading 
Pause or a Regulatory Halt, or, if the Primary Listing Exchange 
reopens with quotations, the midpoint of those quotations. The 
Exchange notes that under ISE Rule 702(c), trading on the Exchange 
is halted whenever trading in the underlying security has been 
paused by the primary listing market. Accordingly, the Exchange need 
not adopt any rule changes to address this aspect of the Plan.
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    When the national best bid (offer) for a security underlying an 
options class is non-executable, the ability for options market 
participants purchase (sell) shares of the underlying security and the 
price at which they may be able to purchase (sell) shares will become 
uncertain, as there will be a lack of transparency regarding the 
availability of liquidity for the security.\10\ This uncertainty will 
be factored into the options pricing models of market professionals, 
such as options market makers, which will likely result in wider 
spreads and less liquidity at the best bid and offer for the options 
class. In light of these unusual market conditions, when the national 
best bid or offer for a security underlying an options class traded on 
the Exchange is non-executable or when the underlying security is in a 
Limit State, the Exchange proposes to reject incoming and pending 
orders that do not have a limit price. This proposed change is 
consistent with the views of the Securities Industry and Financial 
Markets Association's (``SIFMA'') Listed Options Trading Committee.\11\ 
The Exchange believes that all of the options exchanges are considering 
similar rule changes so that there will be a uniform approach across 
the exchanges.\12\
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    \10\ See Letter to Boris Ilyevsky, Managing Director, ISE, from 
Thomas Price, Managing Director, Securities Industry and Financial 
Markets Association, dated October 4, 2012 (``SIFMA Letter''). A 
copy of the letter is provided in Exhibit 2 to this filing.
    \11\ Id.
    \12\ Id. (recommending that the options exchanges and the 
Commission work together to assemble a uniform set of rules).
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    Specifically, the Exchange proposes to automatically reject all 
incoming orders that do not contain a limit price to protect them from 
being executed at prices that may be vastly inferior to the prices 
available immediately prior to or following a Limit State or Straddle 
State. Such un-priced orders include market orders and stop orders, 
which become market orders when the stop price is elected.\13\ The 
Exchange will also cancel any unexecuted market orders and unexecuted 
stop orders.\14\
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    \13\ ISE Rule 715(e).
    \14\ Cancelling such orders is consistent with the views 
expressed by SIFMA. SIFMA Letter, supra note 10. Market orders may 
be unexecuted at the time that a Limit State or Straddle State is 
initiated for a number of reasons, such as they are being handled by 
the Primary Market Maker (see ISE Rule 803(c)), they are being 
exposed (see ISE Rule 716(c), ISE Rule 722(iii); and ISE Rule 803, 
Supplementary Material .02)), or they have been directed to a market 
maker (see ISE Rule 811). The Exchange will not reject pending 
transactions in the Exchange's Facilitation, Solicited Order, 
Crossing Order or Price Improvement Mechanisms, as all such 
transactions are initiated with a limit price. ISE Rule 716(d) 
(Facilitation Mechanism); ISE Rule 716(e) (Solicited Order 
Mechanism); Rule 721 (Crossing Orders); and Rule 723 (Price 
Improvement Mechanism). Allowing such transactions during a Limit 
State or Straddle State is consistent with the views expressed by 
SIFMA. SIFMA Letter, supra note 10.
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 2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism for a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    As discussed above, when an underlying security enters a Limit 
State or Straddle State, the best bid and offer in the options class is 
likely to widen considerably, and the liquidity available at those 
prices may be greatly reduced. In such circumstances, orders entered 
without a price could receive executions at prices that are vastly 
inferior to the market price just prior to the initiation of the Limit 
State or Straddle State and vastly inferior to the market price 
following the conclusion of the Limit State or Straddle State. Given 
that these states may be resolved very quickly, the Exchange believes 
that rejecting un-price orders will protect investors from receiving 
poor executions and provide a more fair and orderly market.

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

    The Exchange does not believe that the proposal will have any 
impact on competition, and that it is likely that all of the other 
options exchanges will adopt similar order protection rules.\17\
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    \17\ SIFMA Letter, supra note 10.
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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 written comments from members or other interested parties on this 
proposed rule change, however, the Exchange received a written request 
to adopt the rule changes contained in the proposal.\18\
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    \18\ Id.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of

[[Page 17464]]

investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \19\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \20\ 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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    At any time within 60 days of the filing of such 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 under 
Section 19(b)(2)(B) of the Act \21\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \21\ 15 U.S.C. 78s(b)(2)(B).
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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-2013-20 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-2013-20. 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-2013-20 and should be 
submitted on or before April 11, 2013.

    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. 2013-06481 Filed 3-20-13; 8:45 am]
BILLING CODE 8011-01-P


