
[Federal Register Volume 79, Number 21 (Friday, January 31, 2014)]
[Notices]
[Pages 5495-5499]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01966]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71406; File No. SR-ISE-2014-05]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Regarding System Protections

January 27, 2014.
    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 January 17, 2014, 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, II, and III 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 to specify in its rules 
certain system protections contained in the trading system. 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
    The purpose of the proposal is to specify in the Exchange's rules 
certain existing trading system protections that prevent the entry and/
or execution of orders in certain circumstances. These protections are 
in addition to the system protection currently described in Rule 714 
that prevents orders from being automatically executed at prices that 
are inferior to a protected bid or offer on another exchange (``trade 
through protection'') pursuant to the requirements of the Intermarket 
Linkage Plan (the ``Plan'') and ISE Rules adopted to implement the Plan 
(the ``Linkage Rules'').\3\
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    \3\ ISE Rules 1900 through 1902 (Linkage Rules).
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    Specifically, ISE Rule 714 provides that incoming orders will not 
be automatically executed at prices that are inferior to the national 
best bid or offer (``NBBO''). Thus, the language currently contained in 
Rule 714 reflects how the trading system assures compliance with the 
prohibition on trading through the NBBO contained in ISE Rule 1901. 
Rule 714 also indicates that the prohibition on trade-throughs does not 
apply with respect to non-firm quotations as provided in ISE Rule 
1900(k). The Exchange proposes to make several non-substantive changes 
to the text and format of ISE Rule 714 with respect to these linkage-
related provisions for clarity,\4\ and to add a reference to 
intermarket sweep orders (``ISOs''). Pursuant to ISE Rule 1901, ISOs 
are eligible to be executed at a price that is inferior to the NBBO. 
For clarity, the Exchange believes it is appropriate to specify in Rule 
714 that the system does not prevent the automatic execution of an ISO 
at a price that is inferior to the NBBO.
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    \4\ The current text of ISE Rule 714 references non-firm 
quotations on the Exchange. This language preceded the adoption of 
the Linkage Rules and is no longer applicable. Accordingly, the 
Exchange proposes to delete this language.
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    The Exchange also is proposing to amend Rule 714 to add additional 
circumstances in which the trading system does not provide automatic 
executions as follows:
     Price Level Protection. There is a limit on the number of 
price levels at which an incoming order to sell (buy) will be executed 
automatically when there are no bids (offers) from other exchanges at 
any price for the options series. In such a circumstance, incoming 
orders are automatically executed at each successive price level until 
the maximum number of price levels is reached,\5\ and any balance is 
either handled by the primary market maker (``PMM'') (in the case of 
Priority Customer Orders)\6\ or canceled (in the case of Professional 
Orders).\7\ The number of price levels, which may be between 1 and 10, 
is determined by the Exchange from time-to-time on a class-by-class 
basis. Currently, this limit is set to three price levels.\8\
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    \5\ For example, assume the parameter is set to three tick 
levels, the best bid on the ISE in an options series that is traded 
in penny increments is $1.50, and there are no bids in the series 
from any other exchanges. If a Priority Customer market order to 
sell is received, the system will not automatically execute the 
incoming order at a price below $1.48. Therefore, such an order will 
execute the full size available at $1.50, $1.49 and $1.48, and any 
unexecuted balance will be handled by the PMM. In this respect, the 
PMM has the obligation under existing Exchange rules to engage in 
dealings for his own account when, among other things, there is a 
temporary disparity between the supply of and demand for a 
particular options contract, and to act with due diligence in 
handling orders. See infra, notes 13 and 14 and accompanying text.
    \6\ Pursuant to ISE Rule 100(a)(37A) and (37B), a Priority 
Customer Order is an order for the account of a person or entity 
that (i) is not a broker or dealer in securities, and (ii) does not 
place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).
    \7\ Pursuant to ISE Rule 100(a)(37C), a Professional Order is an 
order that is for the account of a person or entity that is not a 
Priority Customer.
    \8\ The Exchange will provide at least a two week notice to 
members via an exchange circular prior to changing the price level 
limit to allow members the opportunity to perform any system 
changes. Any change to the price level limit would be subject to 
consultations with members.
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     Limit Order Price Protection. There is a limit on the 
amount by which incoming limit orders to buy may be priced above the 
Exchange's best offer and by which incoming limit orders to sell may be 
priced below the Exchange's best bid. Limit orders that exceed the 
pricing limit are rejected upon entry. The limit is established by the 
Exchange from time-to-time, on a class-by-class basis, as the greater 
of: (i) An absolute amount not to exceed $2.00, or (ii) a percentage of 
the Exchange's best bid/offer not to exceed 10 percent.\9\ The Exchange 
currently has these limits set to $1.00 and 1 percent respectively.\10\
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    \9\ For example, if the ISE best bid is $3.00 and the limits are 
set to the greater of $1.00 or 1% (which equals $0.03 in this 
example), a limit order to sell that is entered with a limit price 
below $2.00 will be rejected.
    \10\ The Exchange will provide at least a two week notice to 
members via an exchange circular prior to changing the limit order 
price check to allow members the opportunity to perform any system 
changes. Any change to the limit order price check would be subject 
to consultations with members.
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     Size Limitation. There is a limit on the number of 
contracts an incoming order may specify. Orders or quotes that exceed 
the maximum number of

[[Page 5496]]

contracts are rejected upon entry.\11\ The maximum number of contracts, 
which shall not be less than 10,000, is established by the Exchange 
from time-to-time on a class-by-class basis. Currently, this limit is 
set to 999,999 contracts.\12\
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    \11\ For example, if the limit is set to 800,000 contracts, an 
order with a size of 800,001 or greater would be rejected by the 
system.
    \12\ The Exchange will provide at least a two week notice to 
members via an exchange circular prior to changing the size limit to 
allow members the opportunity to perform any system changes. Any 
change to the size limit would be subject to consultations with 
members.
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    The Exchange further proposes that, in the event of unusual market 
conditions and in the interest of a fair and orderly market, the 
Exchange may temporarily establish the levels at which the order 
protections are triggered as necessary and appropriate.
    When the PMM handles Priority Customer orders that are not 
automatically executed or canceled pursuant to the price level 
protection described above, they must do so pursuant to their 
obligations under ISE Rule 803 and consistent with Rule 400 (Just and 
Equitable Principles of Trade). Rule 803 states, among other things, 
that market makers have a continuous obligation to engage, to a 
reasonable degree under the existing circumstances, in dealings for his 
own account when there exists, or it is reasonably anticipated that 
there will exist, a lack of price continuity, a temporary disparity 
between the supply of and demand for a particular options contract, or 
a temporary distortion of the price relationships between options 
contracts of the same class.\13\ The Rule also specifies that a PMM 
must act with due diligence in handling orders and must accord priority 
to such orders over the PMM's principal orders.\14\ In addition to 
these existing provisions, the Exchange proposes to specify in Rule 
803(c) that PMMs are required to address orders they handle as soon as 
practical by either (i) executing all or a portion of the orders at a 
price that at least matches the NBBO and that improves upon the 
Exchange's best bid (in the case of a sell order) or the Exchange's 
best offer (in the case of a buy order); \15\ or (ii) releasing all or 
a portion of the order for execution against bids and offers on the 
Exchange.
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    \13\ Rule 803(b).
    \14\ Rule 803, Supplementary Material .01. The Exchange 
currently conducts surveillance of PMMs to assure that orders are 
handled timely, that such orders are executed at appropriate prices, 
and that such orders are afforded priority over the PMM's principal 
orders. This surveillance includes all orders handled by the PMM 
regardless of whether they are handling them via operation of the 
NBBO trade through protection or price level protection.
    \15\ A PMM cannot provide an execution at the same price as the 
Exchange's best bid or offer (as applicable) because that would 
allow the PMM to by-pass the execution priority rules contained in 
Rule 713. The Exchange conducts surveillance to detect instances 
when the PMM executes an order it is handling at the same price as 
the ISE best bid or offer (as applicable). It is not a violation for 
the PMM to execute an order at the same price as the ISE best bid or 
offer when the PMM is the only market participant at that price.
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    The Exchange also proposes to specify in Rule 722 (Complex Orders) 
the following pricing limits for complex orders and quotes:
     Trade-through limit: Rule 722 permits the legs of a 
complex order to be executed at prices that are inferior to the prices 
available on other exchanges trading the same options series.\16\ 
Notwithstanding, the system will not permit the legs of a complex order 
to trade through the best bids and offers from other exchanges by more 
than a configurable amount calculated as the lessor of: (i) An absolute 
amount not to exceed $0.10; and (ii) a percentage of the NBBO not to 
exceed 500 percent, as determined by the Exchange on a class or series 
basis. Effectively, the limit currently is an absolute amount of 
$0.05,\17\ as the parameters are set to $0.05 and 500 percent 
respectively.\18\ A member can also include an instruction on a complex 
order entered on the complex order book that the legs of the order are 
to be executed only at prices that are equal to or better than the 
national best bid or offer for the options series and any stock 
component.\19\
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    \16\ ISE Rule 722(b)(3). Under ISE Rule 722, the legs of a 
complex order may not be executed at worse prices than are available 
on the Exchange for the individual series, but may be executed at 
the same price as bids and offers on the Exchange for the individual 
series so long as there are no Priority Customer orders on the 
Exchange at those prices (provided however that for complex order 
with multiple options legs, if one of the options legs improves upon 
the best price available on the Exchange then the other leg is 
permitted to trade at the same price as a Priority Customer).
    \17\ Since the lowest possible price is $0.01, and 500% of $0.01 
equals $0.05, the lessor of the two limits will always equal $0.05 
under the current settings (e.g., if the price were $0.02, it would 
be the lessor of $0.05 or $0.10, which is $0.05).
    \18\ For example, assume that the national best offer for series 
A is $1.00 (ISE offer $1.15) and the national best offer for series 
B is $0.95 (ISE offer $1.10). Under ISE Rule 722, away market prices 
are not considered, and the highest net price at which a complex 
order to buy series A and to buy series B could be executed would be 
$2.25 ($1.15 + $1.10) (assuming there are no Priority Customer 
orders at the ISE best offer for series A or series B). However, 
when the trade through limit is applied, the highest price at which 
series A could be executed is $1.05 ($1.00 + $0.05) and the highest 
price at which series B could be executed would be $1.00 ($0.95 + 
$0.05). As a result, the maximum net price that a complex order to 
buy series A and to buy series B can be executed is $2.05 ($1.05 + 
$1.00). The Exchange will provide at least a two week notice to 
members via an exchange circular prior to changing the trade-through 
limit for complex orders to allow members the opportunity to perform 
any system changes. Any change to the trade-through limit for 
complex orders would be subject to consultations with members.
    \19\ For example, assume that the national best offer for series 
A is $1.00 (ISE offer $1.15) and the national best offer for series 
B is $0.95 (ISE offer $1.10). If a complex order to buy series A and 
to buy series B contains an instruction not to trade through the 
NBBO, the highest price at which series A could be executed is $1.00 
and the highest price at which series B could be executed would be 
$0.95. As a result, the maximum net price at which the complex order 
can be executed is $1.95 ($1.00 + $0.95). It is anticipated that 
this functionality will be available early next year. The Exchange 
will notify members via an exchange circular prior to implementing 
this optional functionality.
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     Minimum net price: The system will reject any complex 
order strategy where all legs are to buy if it is entered at a price 
that is less than the minimum price, which is calculated as the sum of 
the ratio times $0.01 per leg.\20\
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    \20\ For example, an order to buy 2 calls and buy 1 put would 
have a minimum price of $0.03. If such an option were entered at a 
price of $0.02, it would not be executable, as a price of zero would 
have to be assigned to one of the legs of the order.
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     Vertical spread price: The system will reject a vertical 
spread order (i.e., an order to buy a call (put) option and to sell 
another call (put) option in the same security with the same expiration 
but a higher (lower) strike price) when entered with a net price of 
less than zero, and will prevent the execution of a vertical spread 
order at a price that is less than zero when entered as a market order 
to sell.\21\
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    \21\ For example, a market order to sell a complex strategy buy 
a Dec 50 call and Sell a Dec 55 call will not leg into the market if 
the best bid for the December 50 call is less than the offer for the 
Dec 55 call, as the seller would be paying to execute the sell 
transaction: the investor who sells a Dec 50 call @ $1.00 and buys a 
Dec 55 call @ $1.20, would pay $0.20 to sell the strategy. The 
vertical spread price check does not apply to complex orders 
executed in the Facilitation Mechanism, Solicited Order Mechanism 
and Price Improvement Mechanism. Complex orders executed in these 
mechanisms are two-sided orders where the contra-side order is 
willing to trade with the agency order at an agreed upon price thus 
removing the risk that the order was executed erroneously or at an 
erroneous price.
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     Complex Limit Order Price Protection: There is a limit on 
the amount by which the net price of an incoming complex limit order to 
buy may exceed the net price available from the individual options 
series on the Exchange and by which the net price of an incoming 
complex limit order to sell may be below the net price available from 
the individual options series on the Exchange.\22\ Limit orders that 
exceed the pricing limit are rejected. The limit is established by the 
Exchange from

[[Page 5497]]

time-to-time, on a class-by-class basis, as the greater of: (i) An 
absolute amount not to exceed $2.00, or (ii) a percentage of the 
Exchange's best bid/offer not to exceed 10%. The Exchange currently has 
these limits set to $1.00 and 1 percent respectively.\23\ This limit 
order price protection applies only to orders and does not apply to 
quotes.
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    \22\ For example, assume the ISE best offer for series A is 
$2.00 and the ISE best offer for series B is $0.50, and that the 
limits are set to the greater of $1.00 or 1%. A complex limit order 
to buy series A and buy series B that is entered with a net limit 
price above $3.50 will be rejected (i.e., $2.00 for series A + $0.50 
for series B = net price of $2.50; $2.50 + $1.00 = $3.50).
    \23\ The Exchange will provide at least a two week notice to 
members via an exchange circular prior to changing the complex limit 
order price check to allow members the opportunity to perform any 
system changes. Any change to the complex limit order price check 
would be subject to consultations with members.
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     Complex Order Size Limitation: There is a limit on the 
number of contracts (and shares in the case of a stock-option order) 
any single leg of an incoming complex order may specify. Orders that 
exceed the maximum number of contracts (or shares as applicable) are 
rejected.\24\ The maximum number of contracts (or shares), which shall 
not be less than 10,000 contracts (or 100,000 shares), is established 
by the Exchange from time-to-time on a class-by-class basis. Currently, 
this limit is set to the maximum value of 999,999 contracts and 
9,999,999 shares.\25\
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    \24\ For example, if the limit is set to 800,000 contracts, a 
complex order with a size of 800,001 or greater for any single 
options leg would be rejected by the system.
    \25\ The Exchange will provide at least a two week notice to 
members via an exchange circular prior to changing the complex order 
size limit to allow members the opportunity to perform any system 
changes. Any change to the complex order size limit would be subject 
to consultations with members.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \26\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \27\ 
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. The system 
protections described above were implemented in the interest of 
protecting investors and to assure fair and orderly markets on the 
Exchange.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
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    Specifically, the Exchange operates an electronic marketplace in 
which orders are processed and executed in less than one second. 
Without any safeguards, orders that outsize the liquidity available at 
the displayed best bid or offer on the Exchange could potentially trade 
at prices far below the best bid and far above the best offer, creating 
extreme volatility in the marketplace and poor executions for 
investors. The primary safeguard in the national market system that 
protects against such occurrences is the prohibition against trading 
through protected bids and offers on other options exchanges, as this 
links the liquidity available across markets and in most circumstances, 
provides a stop-gap on each individual exchange. However, not all 
products are multiply traded, and even in multiply-traded options 
series, it is possible that ISE could be the only exchange 
disseminating a protected bid and/or offer in a particular options 
series at any given sub-second during the trading day.
    Accordingly, the Exchange designed its system to provide the price 
level protection described above when there are no other protected bids 
and offers in the national market system. The Exchange believes that 
limiting the number of price levels at which an incoming order will 
execute in these circumstances appropriately balances the interests of 
investors seeking execution of their orders and the Exchange's 
obligations to provide a fair and orderly market. While Professional 
Orders are canceled in these circumstances, the Exchange seeks to 
provide a higher level of service for Priority Customer orders by 
having them handled by the PMM, which has an affirmative obligation to 
provide liquidity and price continuity. This procedure also provides an 
opportunity for liquidity to refresh in the market, further providing 
better execution potential for Priority Customer orders. The Exchange 
believes that providing this service for Priority Customer orders is 
appropriate and consistent with feedback from members that enter 
Priority Customer orders on the Exchange, who prefer that Priority 
Customer orders not be canceled in this circumstance.
    Similarly, the Exchange's experience and member feedback indicates 
that the current limit of three price levels has worked well to balance 
the interests of investors receiving execution of their orders while 
protecting them from being executed at unreasonable prices. 
Nevertheless, the Exchange believes it is appropriate to maintain some 
flexibility to adjust the number of price level so that it can 
continually evaluate market conditions and investor needs. In this 
respect, under the proposal, the Exchange has the flexibility to adjust 
the number of price levels up to ten. The Exchange believes this limit 
is sufficient to give it the ability to make appropriate adjustments as 
necessary and appropriate to maintain fair and orderly markets.
    The Exchange also represents that the proposal merely clarifies the 
existing PMM obligations by specifying that the PMM must address orders 
it handles by either providing an execution or releasing orders for 
execution against bids and offers on the Exchange. The proposal further 
specifies that the price at which a PMM may execute an order must be at 
least equal to the NBBO and improve upon the best bid (offer) on the 
Exchange.\28\ While this was not previously stated explicitly in the 
Rules for this specific circumstance, the Exchange has always applied 
the obligations contained in ISE Rule 803(b) and Supplementary Material 
.01 thereto, as well as Rule 400 and Rule 713, consistent with the 
additional proposed language and has enforced compliance 
accordingly.\29\ Moreover, the Exchange believes the specified order 
handling provisions are appropriate to assure compliance with all 
applicable Exchange Rules with respect to the handling of orders by the 
PMM.\30\
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    \28\ See supra, note 15.
    \29\ See supra, notes 14 and 15.
    \30\ Id.
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    With respect to the trade through limit for complex orders, the 
Exchange believes it is consistent with the protection of investors to 
limit the amount by which the legs of a complex order are allowed to 
trade through the NBBO for the series. Pursuant to ISE Rule 722(b), the 
legs of a complex order are not permitted to trade at prices that are 
inferior to the ISE best bid or offer.\31\ It is possible, however, 
that the ISE best bid and/or offer are not at or near the NBBO for the 
options series.\32\ Investors understand that there is a benefit to 
executing certain trading strategies using complex orders, which 
assures that all parts of the strategy are executed and if applicable, 
at a specified net price. They also understand that the benefit of 
using a complex order may come at a ``cost'' because complex orders may 
be executed at prices that are inferior to the net price that might 
have been achieved if the individual legs of the complex order were 
executed at the NBBO.\33\ However, the Exchange believes it is 
necessary to protect investors from executing complex orders when such 
``cost'' becomes

[[Page 5498]]

economically irrational. Indeed, such pricing discrepancies indicate 
that there likely is an error, such as the wrong symbol, series or 
price was entered on the order.
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    \31\ See supra, note 16.
    \32\ See example supra, note 18 (demonstrating that a net price 
of $2.25 would be unreasonable given that the national best offers 
for series A and series B indicate a net price closer to $1.95 
($1.00 + $0.95)).
    \33\ Executing strategies through separate, non-contingent 
transactions, carries the risk that an investor will not be able to 
execute all of the components at the desired prices and/or sizes.
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    The Exchange believes that providing the trade-through limit 
protection to complex orders is appropriate and consistent with 
feedback from members that enter complex orders on the Exchange, who 
prefer that their complex orders not be executed in this circumstance. 
In this respect, the Exchange's experience and member feedback 
indicates that the current limit of $0.05 is appropriate to balance the 
interests of investors receiving execution of their complex orders 
while protecting them from being executed at unreasonable prices.\34\ 
Nevertheless, the Exchange believes it is appropriate to maintain some 
flexibility to adjust the amount by which a complex order may trade 
through the NBBO, so that it can continually evaluate market conditions 
and investor needs. In this respect, under the proposal, the Exchange 
has the flexibility to adjust the absolute value up to $0.10 and the 
percentage up to 500 percent.\35\ The Exchange believes this will be 
sufficient to give it the ability to make appropriate adjustments 
should market conditions so require.
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    \34\ See supra, note 18 and accompanying text.
    \35\ Id.
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    As discussed, the complex order trade-through limit is designed to 
prevent investors from erroneously executing complex orders at 
unreasonable prices while not unreasonably restricting the ability for 
investors to price complex orders. In some instances, however, 
investors may prefer that the Exchange further restrict the execution 
of complex orders by not allowing them to trade through the NBBO at 
all. Accordingly, the Exchange proposes to offer the optional ability 
for investors to instruct the Exchange not to execute the legs of a 
complex orders through the NBBO for the individual series. While the 
Exchange does not believe it would be appropriate to impose such a 
restriction on all investors, it believes that offering this optional 
limitation on complex orders is reasonable and appropriate for 
investors that prefer only to execute complex orders at net prices that 
equal or better the NBBO for the component series.
    The limit order price protection and size limitation for both 
regular and complex orders were designed to reject orders upon entry 
that were likely submitted in error. Limit orders that are entered with 
prices that cross the market by a large amount are likely to have been 
entered in the wrong options series, on the wrong side of the market, 
or with an erroneous price (e.g., a bid of $15 rather than $1.50). 
Similarly, orders entered with an unreasonably large size (e.g., 1 
million contracts or more) are likely to have been entered in error. 
The Exchange believes that it is in the interest of fair and orderly 
markets and the protection of investors to reject these orders upon 
entry, and thereby prevent erroneous transactions from occurring.
    The Exchange further believes that the Exchange's experience and 
member feedback indicates that the current limits of $1.00 and 1 
percent for the limit order price protection, and 999,999 contracts 
(and 9,999,999 shares in the case of a stock-option order) for the size 
limitation, has worked well to provide the protection of rejecting 
orders that have been entered in error while assuring that valid orders 
are not rejected. In this respect, the Exchange notes that orders below 
the established limits may well have been entered in error, but that it 
is highly unlikely that orders entered above the current limits were 
not entered in error. The Exchange believes it is appropriate to 
maintain some flexibility to adjust the limits so that it can 
continually evaluate the extent to which such limits could be reduced 
to prevent the entry of additional erroneous orders without rejecting 
legitimate orders. In this respect, under the proposal, the Exchange 
has specified that the limit order price protection limits shall not 
exceed $2.00 and 10 percent respectively. The Exchange believes that 
these limits provide sufficient flexibility for the Exchange to make 
appropriate adjustments in the interest of maintaining fair and orderly 
markets. The Exchange also notes that it has specified that the order 
size limitation shall not be less than 10,000 contracts (and 100,000 
shares in the case of a stock-option order). The Exchange notes in this 
respect that a block-size options order is defined as an order of at 
least 50 contracts,\36\ and that an order of 500 contracts is 
considered a very large institutional-size order (a block-size order in 
the equities market is an order of at least 10,000 shares).\37\ 
Accordingly, the Exchange believes that it would not be unreasonable to 
set a size limit as low as 10,000 contracts (and 100,000 shares in the 
case of a stock-option order) should the Exchange determine that it was 
necessary to maintain fair and orderly markets and to protect investors 
from executing orders entered with an erroneously large size.
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    \36\ ISE Rule 716(a).
    \37\ See, e.g., ISE Rule 716(e) (providing that the minimum size 
of an order entered into the Solicited Order Mechanism is 500 
contracts); and ISE Rule 715(j) (providing that a qualified 
Contingent Cross Order must be for at least 1,000 contracts).
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    As discussed above, a complex order strategy where all legs are to 
buy will be rejected if it is entered at a price that is less than the 
minimum price. The Exchange believes it is reasonable to reject such 
orders upon entry as they are not executable.\38\ Allowing such orders 
to be entered would create investor confusion; as such orders would not 
receive an execution and would remain pending until canceled. 
Similarly, the Exchange believes that rejecting vertical spread orders 
that are entered at a negative price protects investors from executing 
orders that were entered in error, and that preventing the execution of 
single-sided vertical spread orders at negative prices when they are 
entered as a sell market order, protects investors from paying to sell 
a strategy when they expected to receive payment for selling the 
strategy. These restrictions help the Exchange to maintain a fair and 
orderly market, and provide a valuable service to investors.
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    \38\ See supra, note 20.
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    Finally, the Exchange notes that it will give members at least a 
two week notice prior to changing the level at which the system 
protections are triggered to allow members to perform any system 
changes, and that the Exchange provides these protections for the 
benefit of, and in consultation with, its members. Notwithstanding, the 
Exchange also recognizes that the applicable protections may not be 
appropriate in unusual market conditions. In this respect, the Exchange 
has included in the proposal a provision providing that, in the event 
of unusual market conditions and in the interest of a fair and orderly 
market, the Exchange may temporarily establish the levels at which the 
system protections are triggered that are beyond those specified in the 
rule. The Exchange believes this is consistent with its obligation to 
assure a fair and orderly market, and that the need for such 
flexibility is recognized in other Exchange rules, such as those 
related to position limits, quote-width differentials and market maker 
risk parameters.\39\ In the event that the Exchange temporarily revises 
the levels at which the protections are triggered, it will immediately 
notify all members.
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    \39\ See ISE Rule 412 (regarding position limits), ISE Rule 803 
(regarding maximum quotation spreads), ISE Rule 804 (regarding 
market maker risk parameters) and ISE Rule 722 (regarding market 
maker risk parameters for complex orders).

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[[Page 5499]]

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

    The proposed rule change specifies circumstances in which the 
trading system does not provide an automatic execution in the interest 
of protecting investors against the execution of erroneous orders or 
the execution of orders at erroneous prices. As such, the proposal does 
not impose any burden on competition.

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 significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not 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) \40\ of the Act and Rule 19b-
4(f)(6) \41\ thereunder. The Exchange provided the Commission with 
written notice of its 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 the proposed rule 
change.
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    \40\ 15 U.S.C. 78s(b)(3)(A).
    \41\ 17 C.F.R. 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the 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.

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-2014-05 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-2014-05. 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-2014-05 and should be 
submitted on or before February 21, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01966 Filed 1-30-14; 8:45 am]
BILLING CODE 8011-01-P


