
[Federal Register Volume 79, Number 4 (Tuesday, January 7, 2014)]
[Notices]
[Pages 881-882]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31599]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71208; File No. SR-ISE-2013-72]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To More Specifically 
Address the Number and Size of Counterparties to a Qualified Contingent 
Cross Order

December 31, 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 December 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 self-regulatory organization. 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 is proposing to amend Rules 504 (Series of Options 
Contracts Open for Trading) and 715 (Types of Orders) to more 
specifically address the number and size of counterparties to a 
Qualified Contingent Cross Order (``QCC Order''). The text of the 
proposed rule change is available on the Exchange's Internet Web site 
at http://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 self-regulatory organization 
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
    The purpose of this proposal is to remove the size restriction on 
contra-party participation on a QCC Order. This proposal would expand 
the availability of QCC Orders by permitting multiple contra-parties on 
a QCC Order, each of which may consist of an order for less than 1,000 
contracts; provided however, that the originating QCC Order meets the 
1,000 contract minimum (as well as the other requirements of a QCC 
Order). This change is intended to increase liquidity and, potentially, 
improve the prices at which QCC Orders get executed, as explained 
further below.
    A QCC Order must be comprised of an originating order to buy or 
sell at least 1,000 contracts \3\ that is identified as being part of a 
qualified contingent trade,\4\ coupled with a contra-side order or 
orders totaling an equal number of contracts, each of which is at least 
1,000 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 NBBO. QCC Orders will be automatically canceled if they 
cannot be executed. QCC Orders may only be entered in the regular 
trading increments applicable to the options class under Rule 710 
(Minimum Trading Increments).
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    \3\ In the case of Mini Options, the minimum size is 10,000 
contracts.
    \4\ 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 contra-parties [sic] 
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.
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    The QCC Order type was originally approved on February 24, 2011.\5\ 
The Exchange then amended this rule on December 17, 2013 [sic] to 
specify that a QCC Order could have multiple contra-parties, so long as 
each contra-party's order is for at least 1,000 contracts.\6\
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    \5\ See Securities Exchange Act Release No. 63955 (February 24, 
2011), 76 FR 11533 (March 2, 2011) (SR-ISE-2010-73).
    \6\ See SR-ISE-2013-71.
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    The Exchange is now proposing to remove the size limit placed on 
contra-parties to QCC Orders in an effort to increase liquidity and, 
potentially, improve the prices at which QCC Orders get executed. The 
ability for market participants to provide liquidity in response to 
large sized orders is directly proportional to the size and associated 
risk of the resulting position. As a result, smaller sized trades are 
often done at a better price than larger sized trades, which convey 
more risk. The ability to pool together multiple market participants to 
participate on a trade for any size, as opposed to only allowing market 
participants to participate for a minimum of 1,000 contracts has a 
direct and positive impact on the ability of those market participants 
to provide the best price as they compete to participate against the 
order without being compelled to provide liquidity with a large minimum 
quantity. This concept isn't unique to large crosses. It is well 
understood and observed that any product with multiple market 
participants providing liquidity offers the tightest and most liquid 
market and the same applies to the larger orders negotiated away from 
the exchanges.
    Allowing several participants to offer liquidity to a QCC Order 
serves to ensure that that order receives the best possible price 
available in the market. Restricting interaction to only participants 
who are willing to trade a minimum of 1,000 contracts simply guarantees 
an inferior price because a trade will be limited to few liquidity 
providers who are taking on more risk as opposed to multiple liquidity 
providers being able to share the overall risk and trade at a better 
price. For example, a 1,000 contract order in GOOG will receive a 
better price if two liquidity providers are able to each provide 500 
contracts, rather than one of them having to trade the entire 1,000 
contracts.
    An area of concern has been the protection of smaller orders, which 
is why the QCC Order is limited to the 1,000 contract minimum. It is 
important to note that the concern has always been and should continue 
to be for the originating or unsolicited part of the order, the order 
that is seeking liquidity and not the professional responders and 
providers of liquidity. Allowing smaller orders to participate on the 
other side of QCC Orders not only provides the best price and 
opportunity for a trade to

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occur in a tight and liquid market, but ensures that the highest 
possible number of liquidity providers are able to participate. 
Limiting participation only to liquidity providers who are willing to 
participate on the trade for 1,000 contracts conversely could result in 
an inferior price by shutting out some participants due to the large 
size and thereby minimizing the opportunity for competition and price 
improvement. Removing this limitation benefits both sides of a QCC 
trade by ensuring a trade at the best possible price without favoring 
larger participants on the solicited side of the trade.
2. Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \7\ that an exchange have rules that 
are 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 for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest by amending the rule text to more clearly defining the 
QCC Order. Specifically, because the proposal removes the size 
restriction placed on the contra-sides to a QCC Order, it should 
increase liquidity and improve the prices at which QCC Orders get 
executed and, therefore, provide more opportunity to participate in QCC 
trades, consistent with the key principles behind the QCC Order.
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    \7\ 15 U.S.C. 78f(b)(5).
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    In approving QCC Orders, the Commission has stated that ``. . . 
qualified contingent trades are of benefit to the market as a whole and 
a contribution to the efficient functioning of the securities markets 
and the price discovery process.'' \8\ The Commission ``also has 
recognized that contingent trades can be useful trading tools for 
investors and other market participants, particularly those who trade 
the securities of issuers involved in mergers, different classes of 
shares of the same issuer, convertible securities, and equity 
derivatives such as options [emphasis added].'' \9\ In light of these 
benefits, the Exchange believes that the proposal should improve the 
usefulness of the QCC Order without raising novel regulatory issues, 
because the proposal does not impact the fundamental aspects of this 
order type--it merely permits multiple contra-parties, regardless of 
size, on one side, while preserving the 1,000 contract minimum on the 
originating QCC Order.
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    \8\ QCC Approval Order at text accompanying footnote 115.
    \9\ QCC Approval Order at Section III.A. citing Securities 
Exchange Act Release No. 54389 (August 31, 2006), 71 FR 52829 
(September 7, 2006) (Original QCT Exemption).
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    Consistent with Section 6(b)(8) of the Act, the Exchange believes 
that this will be beneficial to participants because allowing multiple 
parties of any size on one contra-side of a QCC Order should foster 
competition for filling QCC Orders and thereby result in potentially 
better prices.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In fact, the proposal is 
intended to relieve a burden on competition, which results from 
different exchanges interpreting their rules differently. Among the 
options exchanges, the Exchange believes that the proposal to allow 
multiple counterparties of at least 1,000 contracts should foster 
competition for filling the contra-side of a QCC order and thereby 
result in potentially better prices for such orders.

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 in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change 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 Number SR-ISE-2013-72 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-2013-72. 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-2013-72 and should be 
submitted on or before January 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31599 Filed 1-6-14; 8:45 am]
BILLING CODE 8011-01-P[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
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