
[Federal Register Volume 79, Number 58 (Wednesday, March 26, 2014)]
[Notices]
[Pages 16850-16852]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06599]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71759; File No. SR-ISE-2014-09]


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

March 20, 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 March 10, 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. 
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 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
    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 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.\3\ The Exchange also recently adopted another risk 
management parameter that allows 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 makes a market are automatically removed 
from the trading system.\4\ It is mandatory for market makers to enter 
values into all of these quotation risk management parameters for all 
options classes in which it enters quotes.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
    \4\ See Securities Exchange Act Release No. 71446 (January 30, 
2014), 79 FR 6951 (February 5, 2014) (SR-ISE-2014-04).
---------------------------------------------------------------------------

    The Exchange now proposes to further enhance its risk management 
offering for market maker quotes. Specifically, the Exchange proposes 
to implement functionality to allow market maker quotes to be removed 
from the trading system if a specified number of curtailment events 
occur across ISE and ISE Gemini, LLC (``ISE Gemini'').\5\ The Exchange 
notes that a single trading system governs the trading activity on ISE 
and ISE Gemini.\6\
---------------------------------------------------------------------------

    \5\ ISE Gemini recently changed its name from Topaz Exchange, 
LLC to ISE Gemini, LLC. See Exchange Act Release No. 71586 (February 
20, 2014), 79 FR 10861 (February 26, 2014) (SR-Topaz-2014-06).
    \6\ See Exchange Act Release No. 70050 (July 26, 2013), 78 FR 
46622 (August 1, 2013) (In the Matter of the Application of Topaz 
Exchange, LLC for Registration as a National Securities Exchange). 
Section D. Trading System, 4. Order Display, Execution, and Priority 
discusses variously the similarities between ISE and ISE Gemini.

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

[[Page 16851]]

    As proposed, market makers who choose to use this risk management 
tool must request each Exchange [sic] to set the proposed market wide 
parameter to govern its trading activity across both markets. Once this 
parameter is set, the trading system will count the number of times a 
market maker's pre-set curtailment occurs on each exchange, as 
specified in ISE Rule 804(g) (for regular orders) and ISE Rule 722, 
Supplementary Material .04 (for complex orders), and sum them together. 
Once the sum of the specified number of curtailment events across both 
markets has been reached, the trading system will remove all of the 
market maker's quotes in all classes on both ISE and ISE Gemini in 
which that market maker 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 market wide 
parameter across both markets has been triggered will be rejected until 
such time that the market maker notifies the market operations staff 
that supports each exchange that it is ready to come out of its 
curtailment.\7\ In the interest of maintaining fair and orderly 
markets, ISE believes it is important that market makers communicate 
their readiness to Exchange staff in a non-automated manner, such as by 
email or telephone. Once notified by the market maker, the market 
operations staff for each exchange will reactivate the market maker's 
quotes on both ISE and ISE Gemini and market makers on both ISE and ISE 
Gemini will once again be active in the options classes in which they 
make markets.
---------------------------------------------------------------------------

    \7\ Id. Pursuant to a facilities management agreement entered 
into by Topaz Exchange with ISE, ISE provides certain services, for 
example, business management services, facilities management 
services, IT services, fiscal services, as well as Commission and 
other regulatory compliance services and other legal services, such 
as surveillance programs, legal programs, systems and other 
operational services, which include services provided by the market 
operations staff.
---------------------------------------------------------------------------

    To illustrate how the proposed market wide parameter would apply 
when set for both ISE and ISE Gemini, suppose market maker WXYZ, who is 
a member of both ISE and ISE Gemini, makes a market in 50 options 
classes on ISE and in 50 options classes on ISE Gemini, sets the 
proposed market wide parameter so that it is triggered at 60 
curtailment events within a 30 second time period. On a given trading 
day, if market maker WXYZ is curtailed, within the prescribed time 
period, 35 times across all the options classes in which it makes a 
market on ISE and 25 times across all the options classes in which it 
makes a market on ISE Gemini then ISE will remove all of market maker 
WXYZ's quotes on ISE and ISE Gemini will remove all of market maker 
WXYZ's quotes on ISE Gemini. The 60 curtailment events can occur in 
just one class or in any number of classes in which market maker WXYZ 
makes a market.
    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 across both ISE and ISE Gemini 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. Nor is this 
risk limited to a single market. Market makers that quote in multiple 
series of multiple options on multiple markets 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 on ISE and 
ISE Gemini. 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 market makers in 
managing their market risk, and providing deep and liquid markets to 
the benefit of all investors.
    While the Exchange is adopting the proposed functionality following 
consultation with market makers, usage of the proposed market wide 
parameter will not be mandatory. Further, 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 
triggered.\8\ Accordingly, the proposal does not require members to 
manage their risk using the Exchange-provided tools. 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.
---------------------------------------------------------------------------

    \8\ For example, a market maker could set the value for the 
total number of curtailment events across both markets 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'') \9\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \10\ 
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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange currently provides market makers with a risk 
management tool that allows market maker quotes to be removed from the 
trading system if a specified number of curtailment events occur across 
ISE. The Exchange believes the proposed rule change is appropriate and 
reasonable because it enhances each Exchange's [sic] current risk 
management offering by allowing market makers to manage their risk 
across ISE and ISE Gemini and thereby strengthen their ability to 
manage risk across both markets. The proposed market wide parameter 
will protect market makers across both markets from inadvertent 
exposure to excessive risk and thereby allow market makers to quote 
aggressively and provide more liquidity with greater size to both 
markets which promotes just and equitable principles of trade and 
removes impediments to a free and open market to the benefit of 
investors.
    The Exchange believes it will not be unreasonably burdensome for 
market makers who choose to utilize the proposed functionality to set 
values into the proposed risk parameter, as all market makers currently 
utilize the Exchange's risk management functionality, all of which are 
mandatory, as noted above. 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

[[Page 16852]]

proposed market wide parameter will protect ISE and ISE Gemini market 
makers from inadvertent exposure to excessive risk across both markets. 
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.

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 market makers from 
inadvertent exposure to excessive risk when trading on both ISE and ISE 
Gemini. Accordingly, the proposed rule change will have no impact on 
competition. Market makers are not required to use the proposed 
functionality and may use their own risk-management systems and enter 
out-of-range values so that the Exchange-provided parameters will not 
be triggered. Accordingly, the proposal does not require members to use 
or 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

    Within 45 days of the publication date 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 such 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-2014-09 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-2014-09. 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 inspection and 
copying in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549-1090, 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 
ISE. 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-
2014-09, and should be submitted on or before April 16, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06599 Filed 3-25-14; 8:45 am]
BILLING CODE 8011-01-P


