
[Federal Register Volume 80, Number 7 (Monday, January 12, 2015)]
[Notices]
[Pages 1565-1567]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-00221]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74004; File No. SR-ISE-2014-56]


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

January 6, 2015.
    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 December 23, 2014 the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange 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 permit a greater number of 
complex orders to leg into the regular market. 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 this proposed rule change is to permit a greater 
number of complex orders to leg into the regular market. The Exchange 
currently

[[Page 1566]]

provides functionality that automatically removes a market maker's 
quotes in all series of an options class when certain parameter 
settings are triggered.\3\ The purpose of this functionality is to 
allow market makers to provide liquidity across hundreds of options 
series without being at risk of executing the full cumulative size of 
all such quotes before being given the opportunity to adjust their 
quotes. By checking the risk parameters following each execution in an 
options series, the risk parameters allow market makers to manage their 
risk. This is not the case, however, when a complex order legs into the 
regular market. Because the execution of each leg is contingent on the 
execution of the other legs, the execution of all the legs in the 
regular market is processed as a single transaction, not as a series of 
individual transactions. The legging-in of complex orders therefore 
presents a higher risk to market makers as compared to regular orders 
being entered in multiple series of an options class in the regular 
market as it can result in market makers exceeding their parameters by 
a greater number of contracts. Because this risk is directly 
proportional to the number of legs associated with a complex order, the 
Exchange amended Rule 722 to limit the legging functionality to complex 
orders with no more than either two or three legs, as determined by the 
Exchange on a class basis.\4\ The Legging Filing effectively limited 
certain legitimate complex order strategies, such as a Box Spread \5\ 
or a Condor,\6\ from legging into the regular market. These strategies 
are limited to trading with other complex orders in the complex order 
book.
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    \3\ See ISE Rules 722 and 804.
    \4\ See Securities Exchange Act Release No. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38) (the ``Legging 
Filing'').
    \5\ The box spread, or long box, is a common strategy that 
involves buying a call spread together with the corresponding put 
spread with both spreads having the same strike prices and 
expiration dates. A box spread can be constructed by buying one in-
the-money call, selling one out-of-the-money call, buying one in-
the-money put and selling one out-of-the-money put. The long box is 
used when the spreads are underpriced in relation to their 
expiration values.
    \6\ The condor option strategy is a limited risk, non-
directional option trading strategy that is structured to earn a 
limited profit when the underlying security is perceived to have 
little volatility. To establish this position, a options trader 
sells an in-the-money call, buys an in-the-money call (lower 
strike), sells an out-of-the-money call and buys an out-of-the-money 
call (higher strike). Using call options expiring on the same month, 
the trader can implement a long condor option spread by writing a 
lower strike in-the-money call, buying an even lower striking in-
the-money call, writing a higher strike out-of-the-money call and 
buying another even higher striking out-of-the-money call. A total 
of 4 legs are involved in the condor options strategy and a net 
debit is required to establish the position.
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    Despite the limitation adopted in the Legging Filing, certain 
market participants continued to use atypical multi-leg strategies to 
trade with multiple quotes from a single market maker that caused 
single leg market makers to trade far more than their risk limits 
allowed. To minimize this risk, the Exchange recently amended its rules 
to prevent these atypical multi-leg strategies from legging into the 
regular market. These atypical multi-leg strategies are complex orders 
with two option legs where both legs are buying or both legs are 
selling and both legs are calls or both legs are puts, and complex 
orders with three options legs, where all legs are buying or all legs 
are selling regardless of whether the option is a call or a put (``Non-
Standard Strategies'').\7\ Non-Standard Strategies are permitted to 
trade only in the complex order book and are prevented from legging 
into the regular market.\8\
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    \7\ See Securities Exchange Act Release No. 73023 (September 9, 
2014), 79 FR 55033 (September 15, 2014) (SR-ISE-2014-10).
    \8\ See Rule 722(b)(3)(ii)(A)-(B).
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    With rules limiting Non-Standard Strategies from legging into the 
regular market firmly in place, the risk of market makers trading more 
than the limitations they have set has greatly diminished. The Exchange 
therefore proposes to amend Rule 722 to allow complex orders with two, 
three or four legs (determined by the Exchange on a class basis) to leg 
into the regular market.\9\
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    \9\ The Exchange will issue a circular to members identifying 
the options classes for which legging is limited to complex orders 
and the associated number of legs. The Exchange will provide members 
with reasonable notice prior to changing the limit to allow members 
to make any necessary system changes.
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    The proposed rule change will allow the Exchange to permit complex 
order strategies with three or four legs to leg into the regular market 
as long as all legs are not buying or all legs are not selling. To 
ensure that such orders do not leg into the regular market, the 
Exchange proposes to amend Rule 722(b)(3)(ii)(B) to extend the current 
limitation found in that rule to complex orders with 3 or 4 legs, where 
all legs are buying or all legs are selling regardless of whether the 
option is a call or a put. Such orders will only be permitted to trade 
against other complex orders in the complex order book, as is the case 
today. The Exchange expects this proposal to loosen the current 
restriction to result in a number of other legitimate complex order 
strategies to also be executed on the Exchange.\10\
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    \10\ See www.theoptionsguide.com for a more comprehensive list 
of complex order strategies.
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    The Exchange previously permitted complex orders that are the 
subject of this proposal to leg into the regular market and only 
recently limited that activity to better address the risk posed to 
market makers. The market maker risk that the Exchange sought to 
address in the Legging Filing was further strengthened when ISE amended 
its rules to prevent Non-Standard Strategies from legging into the 
regular market. With this proposed rule change, complex order 
strategies, such as Box Spreads and Condors, for example, will once 
again be permitted to leg into the regular market and thereby increase 
the likelihood that these orders are executed on the Exchange rather 
than on a competing market without posing any unintended risk to market 
makers. In the Legging Filing, the Exchange noted that over 85% of all 
complex orders have only two legs. The Exchange notes that current data 
continues to support that assertion in that even today, over 85% of all 
complex orders have only two legs and that very few complex orders are 
entered with more than three legs. The proposed rule change will 
therefore impact only a small portion of all complex orders traded on 
the Exchange. These orders, however, are comprised of legitimate 
trading strategies that have an economic purpose and are not submitted 
as means to bypass a market maker's risk setting.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \11\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \12\ 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes it is reasonable to permit complex orders 
that are subject of this rule change to leg into the regular market. 
ISE has codified into its rules the specific complex order strategies 
that pose the greatest amount of risk to market makers and therefore, 
the Exchange believes the proposed rule change to permit legitimate 
multi-legged complex orders to interact with the regular market will 
promote just and equitable principles of trade. The proposed rule 
change will facilitate the

[[Page 1567]]

execution of complex order strategies, such as Box Spreads and Condors, 
which consist of four legs. The proposed rule change is designed to 
protect investors and the public interest in that the proposal amends a 
current rule to ensure that complex orders with three or four option 
legs where all legs are buying or all legs are selling only trade 
against other complex orders in the complex order book. The Exchange 
notes that prior to the Legging Filing and before the Non-Standard 
Strategies were codified into the Exchange's rules, the complex order 
strategies affected by this proposal were permitted to trade and leg 
into the regular market. Therefore, this proposed rule change simply 
adjusts Exchange rules to once again permit the execution such complex 
order strategies. The proposed rule change will also benefit investors 
and the general public because multi-legged strategies will have a 
greater chance of execution when they are allowed to leg into the 
regular market and thereby increase the execution rate for these orders 
thus, providing market participants with an increased opportunity to 
execute these orders on ISE rather than on a competing exchange.

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

    The proposed rule change does not impose any burden on competition. 
The proposed change to amend the restriction against complex order 
strategies, such as Box Spreads and Condors, from legging into the 
regular market will allow a greater number of complex orders to be 
executed on the Exchange without adversely impacting risk to market 
makers that are quoting in the regular market.

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 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) of the Act and Rule 19b-
4(f)(6) thereunder.
    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 No. SR-ISE-2014-56 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2014-56. 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 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-2014-56 and should be 
submitted on or before February 2, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-00221 Filed 1-9-15; 8:45 am]
BILLING CODE 8011-01-P


