
[Federal Register Volume 79, Number 119 (Friday, June 20, 2014)]
[Notices]
[Pages 35396-35397]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-14444]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72399; File No. SR-ISE-2014-31]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of a Proposed Rule Change on Bid/Offer 
Differentials for In-The-Money Option Series

June 16, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 4, 2014, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the self-regulatory organization. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to amend its rules to require that market makers 
quoting certain in-the-money options series maintain quotes that are no 
wider than the spread between the NBBO in the underlying security. The 
text of the proposed rule change is available on the Exchange's Web 
site (http://www.ise.com), at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections A, B and C below, of the 
most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend Rule 
803(b)(4)(i) to require that market makers quoting certain in-the-money 
options series maintain quotes that are no wider than the spread 
between the national best bid and offer (``NBBO'') in the underlying 
security. The Exchange believes that requiring that market makers post 
tighter quotes in these option series will improve market quality to 
the benefit of investors that trade on the ISE.
    In the course of maintaining fair and orderly markets in appointed 
options classes, market makers are generally required to price options 
contracts fairly by, among other things, bidding and offering so as to 
create differences of no more than $5 between the bid and offer 
following the opening rotation in an options contract.\3\ In addition, 
Rule 803(b)(4)(i) presently permits market makers to submit quotes with 
wider bid/offer differentials for in-the-money options series where the 
market for the underlying security is wider than the market maker's 
regular quotation requirements. In particular, a market maker quoting 
an in-the-money options series may submit quotes that are as wide as 
the quotation on the primary market of the underlying security. For 
example, if the primary market for ABC has a quote of $65 (bid)--$73 
(offer), ISE market makers may quote in-the-money option series on that 
security with a bid/offer differential of $8. The wider bid/offer 
differentials allowed in these circumstances are intended to give 
market makers more flexibility with respect to their quoting 
obligations as options are priced relative to the price of the 
underlying security.
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    \3\ See Rule 803(b). Unless the ISE establishes wider 
differentials for specific option classes, bid/offer differentials 
prior to the opening rotation must be no more than $0.25, $0.40, 
$0.50, $0.80, or $1, with the larger bid/offer differentials 
permitted for option contracts with higher priced bids. Id.
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    The Exchange proposes to change this obligation to instead require 
that market makers quoting these in-the-money options series maintain 
quotes that are no wider than the spread between the NBBO in the 
underlying security. A market maker quoting an in-the-money options 
series can hedge its position by trading in the underlying security at 
the NBBO, which may be narrower than the quotation on the primary 
market. For instance, in the example above, other exchanges that trade 
ABC may collectively have a higher bid of $66 and a lower offer of $72. 
Under the proposed rule, ISE market makers would be required to quote 
in-the-money option series on ABC with a bid/offer differential of no 
more than $6. The Exchange believes that measuring the permissible 
width of a market maker's quote against the NBBO more accurately 
reflects the current trading environment where multiple trading venues 
contribute to the prevailing market price of a security underlying an 
options series traded on the ISE.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\4\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\5\ because

[[Page 35397]]

is designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanisms of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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    This change is designed to benefit investors, who will be able to 
trade at better prices due to narrower spreads in in-the-money option 
series covered by the proposed rule change. The Exchange believes that 
market makers should maintain quotes that are no wider than the spread 
between the NBBO in the underlying security, as they can hedge their 
positions by trading in the underlying security at the NBBO, which may 
be narrower than the quotation on the primary market. As explained 
above, the Exchange believes that measuring the permissible width of a 
market maker's quote against the NBBO more accurately reflects the 
current trading environment where multiple trading venues contribute to 
the prevailing market price of a security underlying an options series 
traded on the ISE.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
intended to encourage tighter markets in in-the-money option series and 
is not designed to have any competitive impact. While market makers may 
be required to narrow their quotes in these series, the proposed rule 
change still affords sufficient flexibility to allow market makers to 
do so while managing their risk by hedging in the underlying security 
at the NBBO.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove 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-2014-31 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-2014-31. 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 office of 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-2014-31 and should be 
submitted on or before July 11, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-14444 Filed 6-19-14; 8:45 am]
BILLING CODE 8011-01-P


