
[Federal Register Volume 79, Number 105 (Monday, June 2, 2014)]
[Notices]
[Pages 31372-31375]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12646]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72254; File No. SR-ISE-2014-26]


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

May 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 May 20, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules to adopt additional price 
protections for complex orders executed 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
    The purpose of the proposal is to enhance the Exchange's complex 
order functionality by adopting additional price protections for 
complex orders executed on the Exchange. The Exchange provides in its 
rules several complex order protections that currently exist in the 
trading system.\3\ Today, under Supplementary Material .07(b) to Rule 
722, the trading system rejects 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.\4\ Further, Supplementary Material .07(c) to Rule 722 provides 
price protection for

[[Page 31373]]

vertical spreads where the trading system today rejects 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 prevents the execution of a vertical spread order 
at a price that is less than zero when entered as a market order to 
sell.\5\
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    \3\ See Rule 722, Supplementary Material .07.
    \4\ For example, an order to buy 2 calls and buy 1 put would 
have a minimum price of $0.03. If such an order 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.
    \5\ 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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    The Exchange now proposes to enhance existing price protections for 
certain complex orders and quotes. The Exchange recognizes two complex 
order strategies that could cause undue risk to market participants. In 
order to address these strategies, the Exchange proposes to implement 
functionality that prevents these complex order strategies from trading 
at prices outside of pre-set limits. This proposal will apply only to 
vertical spread orders and quotes and to calendar spread orders and 
quotes. With this proposed rule change, the trading system will ensure 
that neither of these strategies trade outside of quantifiable values 
by more than a pre-set amount.
    While the Exchange has developed functionality where the trading 
system rejects vertical spreads when entered with a net price of less 
than zero and prevents the execution of a vertical spread order at a 
price that is less than zero when entered as a market order to sell, 
the trading system does not currently reject orders and quotes that are 
priced above the maximum value of this strategy. These orders and 
quotes trade at prices that are more than the maximum value of the 
strategy. With this proposal, the Exchange will allow this price 
protection to be adjusted by a pre-set value. As a result, the trading 
system will reject vertical spread orders when entered with a net price 
of less than zero (minus a pre-set value) and will prevent the 
execution of a vertical spread order at a price that is less than zero 
(minus a pre-set value) when entered as a market order to sell. The 
Exchange will establish a common pre-set value as an amount not to 
exceed $1.00 which will apply across all options classes. For example, 
assume the market for a January 30 call is 1.00 x 1.20 and for a 
January 31 call it is 0.95 x 1.15. Suppose the pre-set value for a 
minimum price check for vertical spreads is established by the Exchange 
as $0.10. A vertical spread order consisting of a sale of one January 
30 call and the purchase of one January 31 call priced at ($0.11) will 
be rejected by the trading system because the limit price of this order 
is below the pre-set value of ($0.10). A vertical spread market order 
to sell, i.e., sale of one January 30 call and the purchase of one 
January 31 call priced at the market, will be prevented from trading 
with individual bids and offers because the resulting trade, i.e., sale 
of January 30 call at $1.00 and purchase of January 31 call at $1.15, 
will result in a net price of ($0.15), which is below the pre-set value 
of ($0.10).
    The Exchange also proposes to implement functionality where the 
trading system will reject a vertical spread order when entered with a 
net price greater than the value of the higher strike price minus the 
lower strike price (plus a pre-set value) and will prevent the 
execution of a vertical spread order at a price that is greater than 
the value of the higher strike price minus the lower strike price (plus 
a pre-set value) when entered as a market order to buy. The Exchange 
will establish a common pre-set value as the lesser of (i) an amount 
not to exceed $1.00, and (ii) a percentage of the difference between 
strike prices not to exceed 10%, which will apply across all options 
classes. For example, assume the market for a January 20 call is 10.55 
x 10.70 and for a January 25 call it is 5.35 x 5.50. Suppose the pre-
set value for a maximum price check of vertical spreads is established 
by the Exchange as the lesser of $0.10 and 5%. The maximum price for a 
vertical spread order consisting of the purchase of one January 20 call 
and the sale of one January 25 call is $5.10, which is calculated as 
the lesser of the difference between the strike prices plus the pre-set 
buffer, or $5.10, and the difference between the strike prices plus the 
pre-set buffer percentage of the strike prices difference, or $5.25. 
The trading system will therefore accept a vertical spread order 
consisting of a purchase of one January 20 call and the sale of one 
January 25 call priced at $5.00 but will reject a vertical spread order 
priced at $5.15. A vertical spread market order to buy, i.e., purchase 
of one January 20 call and sale of one January 25 call priced at the 
market, will be prevented from trading with individual bids and offers 
because the resulting trade, i.e., purchase of January 20 call at 
$10.70 and sale of January 25 call at $5.35, will result in a net price 
of $5.35, which is above the maximum price of $5.10.
    A calendar spread is an order to buy a call (put) option with a 
longer expiration and to sell another call (put) options with a shorter 
expiration in the same security at the same strike price. A buyer of a 
calendar spread would buy a longer expiration and sell a shorter 
expiration in the same security at the same strike price while a seller 
of a calendar spread would sell a longer expiration and buy a shorter 
expiration in the same security at the same strike price. With this 
proposal, the Exchange proposes to implement functionality where the 
trading system will reject a calendar spread order when entered with a 
net price of less than zero (minus a pre-set value), and will prevent 
the execution of a calendar spread order at a price that is less than 
zero (minus a pre-set value) when entered as a market order to sell. 
The proposed price protection for calendar spreads will protect both 
buyers and sellers of calendar spreads. The Exchange will establish a 
common pre-set value as an amount not to exceed $1.00 which will apply 
across all options classes. For example, assume the market for a 
February 30 call is 1.00 x 1.20 and for a January 30 call it is 0.95 x 
1.15. Suppose the pre-set value for a minimum price check of calendar 
spreads is established by the Exchange as $0.10. An order to sell a 
calendar spread consisting of a sale of one February 30 call and the 
purchase of one January 30 call priced at ($0.11) will be rejected by 
the trading system because the limit price of this order is below the 
pre-set value of ($0.10). A market order to sell a calendar spread 
consisting of a sale of one February 30 call and the purchase of one 
January 30 call priced at market, will be prevented from trading with 
individual bids and offers because the resulting trade, i.e., sale of 
February 30 call at $1.00 and purchase of January 30 call at $1.15 will 
result in a net price of ($0.15), which is below the pre-set value of 
($0.10).
    For purposes of the price protections set forth in Rule 722, 
Supplementary Material .07(c)(1) and in proposed Rule 722, 
Supplementary Material .07(c)(3), the Exchange will set a common pre-
set value not to exceed $1.00 to be applied uniformly across all 
classes. For purposes of the price protections set forth in proposed 
Rule 722, Supplementary Material .07(c)(2), the Exchange will set a 
common pre-set value of (1) an amount not to exceed $1.00 and (2) a 
percentage of the difference between strike prices not to exceed 10% to 
be applied uniformly across all classes.
    The Exchange notes, however, that there may be a need to adjust 
these values. For example, the Exchange may determine at some future 
point in time

[[Page 31374]]

to adjust the established pre-set value for all options classes. Any 
change to the established pre-set value will be within the parameters 
prescribed in the rules and will be communicated to Exchange Members 
via circular.
    The Exchange believes adopting a buffer is reasonable because while 
market participants may in certain situations be willing to trade a 
strategy beyond its minimum value, these trades could occur at 
erroneous prices without a cap. The Exchange's ability to adjust the 
pre-set value will provide market participants greater flexibility to 
execute their trading strategies as it will allow market participants 
to execute vertical and calendar spreads even if the strategy is priced 
outside its intrinsic value.
    The proposed price checks will 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.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \6\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \7\ 
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 Exchange 
proposes to adopt the price protections described in the interest of 
protecting investors and to assure fair and orderly markets on the 
Exchange.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the Exchange believes that rejecting vertical 
spread orders that are entered at a price greater than their intrinsic 
value and preventing the execution of such orders at a price greater 
than their intrinsic value when they are entered as a buy market order 
protects investors from executing these orders at erroneous prices. The 
Exchange further believes that rejecting calendar spread orders that 
are entered at a negative price also protects investors from executing 
orders that were likely entered in error, and that preventing the 
execution of such 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.
    The Exchange notes, however, that in certain situations, market 
participants willingly want to execute certain trading strategies even 
if such trades occur outside their intrinsic value or at seemingly 
erroneous prices. The Exchange believes it is appropriate to provide 
market participants flexibility to allow them to execute these trading 
strategies and therefore to adopt a buffer to permit the execution of 
such trading strategies. The Exchange believes it is reasonable to 
adopt a buffer to give the Exchange the ability to adjust the pre-set 
value uniformly across all options classes in the event the Exchange 
believes a different pre-set value is more appropriate. Finally, the 
Exchange notes that it provides these protections for the benefit of, 
and in consultation with, its members. The Exchange believes the 
proposed rule change will help the Exchange to maintain a fair and 
orderly market, and provide a valuable service to investors.

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) \8\ of the Act and Rule 19b-
4(f)(6) \9\ 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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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 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-2014-26 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-2014-26. 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 such filing also will be available 
for inspection and copying at the principal offices of the Exchange. 
All comments

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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-2014-26, and should be 
submitted on or before June 23, 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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12646 Filed 5-30-14; 8:45 am]
BILLING CODE 8011-01-P


