
[Federal Register Volume 79, Number 24 (Wednesday, February 5, 2014)]
[Notices]
[Pages 6951-6954]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02380]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71446; File No. SR-ISE-2014-04]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Related to Market Maker Risk Parameters

January 30, 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 and II below, which items have been prepared by 
the Exchange.

[[Page 6952]]

The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules to mitigate market maker 
risk by adopting an Exchange-provided risk management functionality.
    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 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
    Pursuant to ISE Rules 722 and 804, the Exchange automatically 
removes a market maker's quotes in all series of an options class when 
certain parameter settings are triggered. Specifically, there are 
currently four parameters that can be set by market makers on a class-
by-class basis. These parameters are available for market maker quotes 
in single options series and for market maker quotes in complex 
instruments on the complex order book. Market makers establish a time 
frame during which the system calculates: (1) The number of contracts 
executed by the market maker in an options class; (2) the percentage of 
the total size of the market maker's quotes in the class that has been 
executed; (3) the absolute value of the net between contracts bought 
and contracts sold in an options class, and (4) the absolute value of 
the net between (a) calls purchased plus puts sold, and (b) calls sold 
plus puts purchased. The market maker establishes limits for each of 
these four parameters, and when the limits are exceeded within the 
prescribed time frame, the market maker's quotes in that class are 
removed or curtailed. It is mandatory for market makers to enter values 
into all four of the quotation risk management parameters for all 
options classes in which it enters quotes.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
---------------------------------------------------------------------------

    The Exchange now proposes to enhance its risk management offering 
to further strengthen risk management for market maker quotes. While 
the parameters described in the preceding paragraph are set on a class-
by-class basis, the Exchange now proposes to adopt functionality that 
will allow market makers to manage their risk across the entire market. 
Specifically, the Exchange proposes to adopt functionality to allow 
market maker quotes to be removed from the trading system if a 
specified number of curtailment events occur across the ISE market. If 
the specified number of curtailment events is exceeded within the 
prescribed time period, the market maker's quotes in all classes in 
which it quotes will automatically be removed from the trading system.
    As proposed, market makers must request the Exchange to set the 
proposed market wide parameter to govern its trading activity. Once 
this parameter is set, the trading system will count the number of 
times a market maker's pre-set curtailment, as specified in Rule 804(g) 
(for regular orders) and Rule 722, Supplementary Material .04 (for 
complex orders), has been triggered. Once the specified number of 
curtailment events has been reached, the trading system will remove all 
of the market maker's quotes in all classes in which it makes a market 
thereby reducing the risk to the market maker in the event the market 
maker is suffering from a systems issue or due to the occurrence of 
unusual or unexpected market activity. Any quotes sent by the market 
maker after the proposed market wide parameter has been triggered will 
be rejected until such time that the market maker notifies the Exchange 
that it is ready to come out of its curtailment. In the interests of 
maintaining fair and orderly markets, the Exchange believes it is 
important that market makers communicate their readiness to the 
Exchange in a non-automated manner, such as by email or telephone. Once 
notified by the market maker, the Exchange will reactivate the market 
maker's quotes and the market maker will once again be active in the 
options classes in which it makes markets.
    As an example, suppose market maker ABCD, who makes a market in 50 
options classes on the Exchange, sets the proposed market wide 
parameter so that it is triggered at 25 curtailment events within a 20 
second time period. On a given trading day, if market maker ABCD is 
curtailed, within the prescribed time period, 25 times across all 50 
options classes in which it makes a market then all of market maker 
ABCD's quotes on ISE in all 50 options classes will be removed from the 
trading system. The 25 curtailment events can occur in just one class 
or any number of classes in which market maker ABCD makes a market on 
the Exchange.
    While the proposed risk management functionality is a useful 
feature that serves an important risk management purpose, it operates 
consistent with the firm quote obligations of a broker-dealer pursuant 
to Rule 602 of Regulation NMS. Specifically, any marketable orders or 
quotes that are executable against a market maker's quotes that are 
received prior to the time this functionality is engaged will be 
automatically executed at the price up to the market maker's size, 
regardless of whether such execution results in executions in excess of 
the market maker's pre-set parameters.
    The proposed market wide parameter is meant to provide market 
makers with protection from the risk of multiple executions across 
multiple series of an option or across multiple options. The risk to 
market makers is not limited to a single series in an option or even to 
all series in an option; market makers that quote in multiple series of 
multiple options have significant exposure, requiring them to offset or 
hedge their overall positions. The proposed functionality will be 
useful for market makers, who are required to continuously quote in 
assigned options classes. Quoting across many series in an option or 
multiple options creates the possibility of executions that can create 
large, unintended principal positions that could expose market makers 
to unnecessary risk. The proposed functionality is intended to assist 
Exchange market makers in managing their market risk, and providing 
deep and liquid markets for the benefit to all investors.
    While entering values into the proposed market wide parameter will 
be mandatory, the Exchange notes that market makers who prefer to use 
their own risk-management systems can set values that assure the 
Exchange-provided parameter will not be

[[Page 6953]]

triggered.\4\ Accordingly, the proposal does not require members to 
manage their risk using the Exchange-provided tools. The Exchange 
expects to implement the proposed functionality in January 2014. The 
Exchange will provide at least two weeks' notice to members via an 
Exchange circular prior to implementing the proposed functionality to 
allow members the opportunity to perform any system changes.
---------------------------------------------------------------------------

    \4\ For example, a market maker could set the value for the 
total number of curtailment events across the market at a high 
number so as not to trigger the Exchange-provided parameter.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \5\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \6\ 
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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change enhances its risk 
management offering to further strengthen risk management for market 
maker quotes. The proposed market wide parameter is appropriate and 
reasonable because it offers functionality for market makers to manage 
their risk. The proposed market wide parameter will protect market 
makers from inadvertent exposure to excessive risk and thereby allow 
market makers to quote aggressively which removes impediments to a free 
and open market and benefits all Exchange members.
    The Exchange believes that requiring market makers to set values 
into the proposed risk parameter provided by the Exchange will not be 
unreasonably burdensome, as all ISE market makers currently utilize the 
Exchange's risk management functionality. Moreover, the Exchange is 
proposing this rule change at the request of its market makers to 
further reduce their risk in the event the market maker is suffering 
from a systems issue or due to the occurrence of unusual or unexpected 
market activity. As discussed above, the proposed market wide parameter 
will protect market makers from inadvertent exposure to excessive risk. 
Reducing such risk will enable market makers to enter quotations 
without any fear of inadvertent exposure to excessive risk, which in 
turn will benefit investors through increased liquidity for the 
execution of their orders. Such increased liquidity benefits investors 
because they receive better prices and because it lowers volatility in 
the options market. The Exchange notes a similar functionality is 
offered by the BATS Exchange, Inc. (``BATS'').\7\ The Risk Monitor 
Mechanism provides BATS participants, and particularly market makers, 
protection from the risk of multiple executions across multiple series 
of an option or across multiple options. The Risk Monitor Mechanism 
uses a counting program that users may configure to govern trading. The 
counting program counts executions, contract volume and notional value, 
within a specified time period established by a user and on an absolute 
basis for each trading day. The BATS trading system engages the Risk 
Monitor Mechanism when the counting program has determined that a 
user's trading has triggered a setting whereby the Risk Monitor 
Mechanism then automatically removes the user's orders in all series of 
a particular option or in all series of all options until the counting 
program has been reset.
---------------------------------------------------------------------------

    \7\ See BATS Rules, Chapter XXI, Rule 21.16, Risk Monitor 
Mechanism.
---------------------------------------------------------------------------

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

    The proposed rule change does not impose any burden on competition. 
The proposed rule change is meant to protect ISE market makers from 
inadvertent exposure to excessive risk. Accordingly, the proposed rule 
change will have no impact on competition. Market makers who prefer to 
use their own risk-management systems can enter out-of-range values so 
that the Exchange-provided parameters will not be triggered. 
Accordingly, the proposal does not require members to manage their risk 
using an Exchange-provided tool.

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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) \9\ 
thereunder.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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 filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule 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 No. SR-ISE-2014-04 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2014-04. 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

[[Page 6954]]

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 Number SR-ISE-2014-04 and should be 
submitted by February 26, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02380 Filed 2-4-14; 8:45 am]
BILLING CODE 8011-01-P


