
[Federal Register Volume 78, Number 56 (Friday, March 22, 2013)]
[Notices]
[Pages 17733-17736]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-06631]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69163; File No. SR-ISE-2013-27]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Complex Orders and Mini Options

March 18, 2013.
    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 March 18, 2013, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding certain complex 
orders traded on the Exchange. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ISE recently amended its rules to allow for the listing of Mini 
Options on SPDR S&P 500 (``SPY''), Apple, Inc.

[[Page 17734]]

(``AAPL''), SPDR Gold Trust (``GLD''), Google Inc. (``GOOG'') and 
Amazon.com Inc. (``AMZN'').\3\ Whereas standard options contracts 
represent a deliverable of 100 shares of an underlying security, Mini 
Options contracts represent a deliverable of 10 shares. Except for the 
difference in the number of deliverable shares, Mini Options have the 
same terms and contract characteristics as regular-sized equity and ETF 
options, including exercise style. Accordingly, the Exchange noted in 
its Mini Options filing that Exchange rules that apply to the trading 
of standard options contracts would apply to Mini Option contracts as 
well.\4\
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    \3\ Mini Options were approved for trading on September 28, 
2012. See Securities Exchange Act Release No. 67948 (September 28, 
2012), 77 FR 60735 (October 4, 2012) (Approving SR-ISE-2012-58).
    \4\ Id.
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    Prior to the commencement of trading Mini Options, the Exchange 
proposes to amend Rule 722 (Complex Orders) and Rule 1900 (Definitions) 
to provide that Exchange rules regarding complex orders shall apply to 
Mini Options and that consequently, Members may execute complex and 
stock-option orders involving Mini Options provided that all options 
legs of such orders are Mini Options. Moreover, the Exchange seeks to 
amend these rules to provide that all permissible ratios referenced in 
the definitions of stock-option orders represent the total number of 
shares of the underlying stock in the option leg to the total number of 
shares of the underlying stock in the stock leg.
    ISE Rule 722 governs Complex Orders on the Exchange and ISE Rule 
1900 lists definitions applicable to intermarket linkage. Currently, 
stock-option orders are defined in Rule 722(a)(2) and Rule 
1900(d)((ii)(A)-(B) as orders to buy or sell a stated number of units 
of an underlying stock or a security convertible into the underlying 
stock coupled with the purchase or sale of options contract(s) on the 
opposite side of the market representing either (A) the same number of 
units of the underlying stock or convertible security, or (B) the 
number of units of the underlying stock necessary to create a delta 
neutral position, but in no case in a ratio greater than 8 options 
contracts per unit of trading of the underlying stock or convertible 
security established for that series by the Clearing Corporation. 
Therefore, under this definition it would be permissible to execute, 
for example, a trade where the options leg consists of one (1) standard 
option contract (i.e., 100 shares) and the stock leg consists of 100 
shares of the underlying stock. Additionally, it would be permissible 
to execute a trade where the options leg consists of eight (8) standard 
option contracts (i.e., 800 shares) and the stock leg consists of 100 
shares of the underlying stock.
    The Exchange notes that the abovementioned permissible ratios were 
established to ensure that only stock-option orders that seek to 
achieve legitimate investment strategies are afforded certain benefits. 
Particularly, since compliance with trade-through rules may impede a 
market participant's ability to achieve the legitimate investment 
strategies that stock-option orders facilitate, an exception from the 
prohibition on trade-throughs is provided for any transaction that was 
effected as a portion of a legitimate stock-option order. Requiring a 
meaningful relationship between the different legs of a stock-option 
order prevents market participants from taking advantage of these 
orders to circumvent the otherwise applicable trade-through rules 
(e.g., preventing the execution of a stock-option order where the 
option leg consists of 100 options (i.e., 10,000 shares) and the stock 
leg consists of only 100 shares).
    Therefore, the Exchange proposes to amend the definition of stock-
option orders in Rule 722(a)(2) and Rule 1900(d)(ii)(A)-(B). As 
discussed above, the stock-option order definition in both Rule 722 and 
Rule 1900 clearly permits that an options leg may be coupled with a 
stock leg representing the same number of units of the underlying stock 
(i.e., one-to-one ratio). The Exchange seeks to provide that Mini 
Options may also be coupled with a stock leg if the stock leg 
represents the same number of units of the underlying stock. For 
example, pursuant to the definition, it would be permissible to execute 
a trade where leg one consists of one (1) Mini Option contract (i.e., 
10 shares) and leg two consists of 10 shares of the underlying stock.
    Next, the Exchange seeks to amend the stock-option order definition 
in Rule 722 and Rule 1900 to provide that in addition to standard 
options, Mini Options may be coupled with a stock leg consisting of 
however many units of the underlying stock is necessary to create a 
delta neutral position, provided that the total number of shares of the 
underlying stock in the option leg to the total number of shares of the 
underlying stock in the stock leg does not exceed an eight-to-one 
ratio. The Exchange notes the definition of a stock-option order in 
Rule 722 and Rule 1900 was drafted at a time in which only option 
contracts with a deliverable of 100 shares was contemplated. Therefore, 
the rules do not address how the eight-to-one ratio would be scaled in 
the event an option with a non-standard deliverable becomes available 
for trading. The language of these rules needs to be amended so that it 
is clear how Rule 722 and Rule 1900 would apply to Mini Options, as 
well as standard options. Accordingly, the proposed change specifies 
that the permissible ratios should be calculated and scaled based upon 
the total number of shares of the underlying stock in the options leg 
to the total number of shares of the underlying stock in the stock leg, 
instead of by the total number of option contracts in the options leg 
to the total number of shares of the underlying stock in the stock leg. 
An example of a permitted stock-option order involving Mini Options 
would be an order in which leg one consists of eighty (80) Mini Options 
(i.e., 800 shares) and leg two consists of 100 shares of the underlying 
stock (i.e., eight-to-one ratio). Similarly, an order where leg one 
consists of eight (8) Mini Options (i.e., 80 shares) and leg two 
consists of 10 shares of the underlying stock would be permitted.
    The proposed rule change provides that market participants may 
execute stock-option orders involving Mini Options. The proposed change 
also ensures that the principle behind the permissible ratios (i.e., to 
provide a meaningful relationship between the legs of complex and 
stock-option orders) is maintained for Mini Options. Finally, the 
Exchange notes that reference to the Clearing Corporation in Rule 
722(a)(2) and Rule 1900(d)(ii)(A)-(B) is superfluous and unnecessary 
and therefore deleted. The Exchange also proposes to add Supplementary 
Material .06 to clarify that if any leg of a complex order or stock-
option order is a Mini Option, all options legs of such order must also 
be Mini Options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder, including the 
requirements of Section 6(b) of the Act.\5\ In particular, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \6\ requirements that the rules of an exchange be designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, to foster cooperation and coordination with 
persons engaged in facilitating transactions insecurities, to remove 
impediments to and to perfect the mechanism for a free and open

[[Page 17735]]

market and a national market system, and, in general, to protect 
investors and the public interest.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange believes that investors and other market 
participants would benefit from the current rule proposal because it 
would allow market participants to take advantage of legitimate 
investment strategies and execute stock-option orders in Mini Options. 
Additionally, the Exchange believes the proposed rule change will avoid 
investor confusion if both standard options and Mini Options on the 
same underlying security are permitted to trade as stock-option orders. 
Also, the proposal to maintain the permissible ratios that are 
applicable to standard options in proportion for Mini Options ensures 
that the principle behind the permissible ratios (i.e., to provide a 
meaningful relationship between the legs of stock-option orders) is 
maintained for Mini Options, which promotes just and equitable 
principles of trade. The Exchange believes that describing prior to the 
commencement of trading how the permissible ratios in the stock-option 
order rules will be scaled for Mini Options would lessen investor and 
marketplace confusion.
    Finally, the Exchange believes that the proposed rule change is 
designed to not permit unfair discrimination among market participants 
as all market participants may participate in stock-option orders 
involving Mini Options.

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

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act. Specifically, since Mini Options are permitted on multiply-
listed classes, other exchanges that have received approval to trade 
Mini Options will have the opportunity to similarly amend their complex 
order rules to clarify and accommodate stock-option orders in Mini 
Option classes. Moreover, because all Members may participate in stock-
options orders involving Mini Options, the rule change does not permit 
unfair discrimination and does not impose a burden on Members.

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) \7\ of the Act and 
Rule 19b-4(f)(6) \8\ thereunder.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 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 the 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 under Rule 19b-4(f)(6) of the Act \9\ 
normally does not become operative prior to 30 days after the date of 
the filing. However, pursuant to Rule 19b-4(f)(6)(iii) of the Act,\10\ 
the Commission may designate a shorter time if such action is 
consistent with the protection of investors and the public interest. 
The Exchange has requested the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. In June 2012, the Exchange filed a proposed rule change to 
amend its rules to list and trade certain mini-options contracts on the 
Exchange, and represented in that filing that the Exchange's rules that 
apply to the trading of standard options contracts would apply to mini-
options contracts.\11\ The Exchange has represented that it intends to 
launch trading in mini-options contracts on March 18, 2013.\12\ The 
Exchange believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because such waiver would minimize confusion among market participants 
about how complex orders and stock-options orders involving mini-
options contracts will trade.\13\
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    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ 17 CFR 240.19b-4(f)(6)(iii).
    \11\ See Securities Exchange Act Release No. 67284 (June 27, 
2012), 77 FR 39545 (July 3, 2012). See also supra note 3.
    \12\ See SR-ISE-2013-27, Item 7.
    \13\ See id.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Such waiver would allow the Exchange to implement the proposed rule 
change contemporaneously with its launch of mini-options contracts 
trading on March 18, 2013, thereby mitigating potential investor 
confusion as to how complex orders and stock options orders involving 
mini-options contracts will trade. For this reason, the Commission 
hereby waives the 30-day operative delay and designates the proposed 
rule change to be operative upon filing with the Commission.\14\
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    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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 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 to 
determine whether the proposed rule change 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 rule-comments@sec.gov. Please include 
File Number SR-ISE-2013-27 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 Number SR-ISE-2013-27. 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

[[Page 17736]]

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 offices 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-2013-27, and should be submitted on or before April 
12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06631 Filed 3-21-13; 8:45 am]
BILLING CODE 8011-01-P


