
[Federal Register Volume 80, Number 50 (Monday, March 16, 2015)]
[Notices]
[Pages 13660-13663]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-05861]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74465; File No. SR-ISE-2014-24]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Modify ISE's Opening Process

March 10, 2015.

I. Introduction

    On November 19, 2014, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (the ``Commission''), pursuant to Section 19(b)(1) 
of the Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify the opening process of 
the Exchange. The proposed rule change was published for comment in the 
Federal Register on December 10, 2014.\3\ On January 23, 2015, the 
Commission extended the time period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change, to March 10, 2015.\4\ The Commission received no comment 
letters on the proposed rule change. This order institutes proceedings 
under Section 19(b)(2)(B) of the Act \5\ to determine whether to 
approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 73736 (December 4, 
2014), 79 FR 73354 (``Notice'').
    \4\ See Securities Exchange Act Release No. 74126 (January 23, 
2015), 80 FR 4953 (January 29, 2015).
    \5\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    The Exchange proposes to (1) clarify and codify existing 
functionality within the trading system regarding the procedures for 
initiation of the opening process, and (2) modify the manner in which 
the Exchange's trading system opens trading at the beginning of the day 
and after trading halts.
    According to the Exchange, the proposed rule change would codify 
certain existing functionality within the trading system that was not 
previously described in the Exchange's rule and would provide new 
procedures for initiation of the opening rotation at the Exchange's 
opening and reopening after a trading halt. A more detailed

[[Page 13661]]

description of the initiation procedure is available in the Notice.\6\
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    \6\ See Notice, supra note 3 at 73355.
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    The Exchange also proposes to amend its opening rotation process. 
The Exchange believes that there are issues with its current opening 
process. Namely, because its opening process does not provide away 
market price protection, the Exchange believes that order flow 
providers are sending fewer pre-open orders to ISE. In addition, the 
Exchange states that ``the opening of options series can be delayed by 
imbalances that prevent ISE from determining an opening price in a 
timely manner'' and that ``such delays exacerbate the problem of not 
providing price protection at the opening.'' \7\
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    \7\ See Notice, supra note 3 at 73356.
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    To address its concerns, ISE proposes an iterative opening process. 
As described in the Notice, in the first iteration, the trading system 
will attempt to derive the first opening price to be at or better than 
the ISE Market Maker quotes and away best bid or offer (``ABBO'') 
prices. When there is executable interest, the trading system will 
first calculate a range of prices within which to open the options 
series (``Boundary Prices''). As is the case today, the trading system 
will use quotes provided by the Primary Market Maker (``PMM'') for the 
series in question to set the first Boundary Prices. If the PMM is not 
present on either side of the market, then the best quotes from the 
Competitive Market Makers (``CMMs'') will be used on the corresponding 
side. If there are no PMM or CMM quotes on the bid side, the lowest 
minimum trading increment for the option class will be used on the bid 
side. If there are no PMM or CMM quotes on the offer side, the options 
class will not open because in the absence of an offer there is no 
limit as to the price at which an opening trade can occur. If the 
options class is open on another exchange, the Boundary Prices will be 
determined to be the higher of the ISE Market Maker's bid in that 
options class and the national best bid, and the lower of the ISE 
Market Maker's offer in that options class and the national best offer.
    Once the trading system has determined the Boundary Prices, as 
appropriate, it then will determine the price at which the maximum 
number of contracts can trade at or within the appropriate Boundary 
Prices (the ``execution price'').\8\ Once the trading system determines 
the execution price, orders and quotes will be processed as follows--
market orders will be given priority before limit orders and quotes, 
and limit orders and quotes will be given priority by price. For limit 
orders and quotes with the same price, priority will be accorded first 
to Priority Customer Orders \9\ over Professional Orders \10\ and 
quotes. Priority Customer Orders with the same limit price will be 
executed in random \11\ while Professional Orders and quotes with the 
same limit price will be executed pro-rata based on size. If the 
Boundary Prices are calculated using the national best bid or offer 
(``NBBO''), any remaining Public Customer Orders \12\ after this 
iteration that would lock or cross a bid or offer from another exchange 
will be processed in accordance with Supplementary Material .02 to ISE 
Rule 1901.\13\ Any remaining Non-Customer Orders \14\ that would lock 
or cross a bid or offer from another exchange may trade outside the 
Boundary Prices by up to two trading increments as further described 
under the third iteration below.
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    \8\ See Notice, supra note 3, at 73356, for an example showing 
the calculation of the execution price following the first 
iteration.
    \9\ Pursuant to ISE Rules 100(a)(37A) and 100(a)(37B), a 
Priority Customer Order is an order for the account of a person or 
entity that (i) is not a broker or dealer in securities, and (ii) 
does not place more than 390 orders in listed options per day on 
average during a calendar month for its own beneficial account(s).
    \10\ Pursuant to ISE Rule 100(a)(37C), a Professional Order is 
an order that is for the account of a person or entity that is not a 
Priority Customer.
    \11\ Priority Customer orders with the same limit price in the 
regular order book are currently executed in time priority during 
the opening. The Exchange believes executing these orders on a 
random basis is a fairer approach because the current time priority 
is dependent on when such orders are communicated to the Exchange by 
a Priority Customer's broker before the market, not the time the 
Priority Customer expressed interest in doing the trade. Executing 
these orders in random will provide Priority Customer orders an 
equal opportunity to participate at the open.
    \12\ Pursuant to ISE Rules 100(a)(38) and 100(a)(39), a Public 
Customer means a person or entity that is not a broker or dealer in 
securities and a Public Customer Order means an order for the 
account of a Public Customer.
    \13\ Under the Options Order Protection and Locked/Crossed 
Market Plan (``Options Linkage Plan''), the Exchange cannot execute 
orders at a price that is inferior to the NBBO, nor can the Exchange 
place an order on its book that would cause the ISE best bid or 
offer to lock or cross another exchange's quote. In compliance with 
this requirement, Non-Customer Orders and Public Customer Orders are 
exposed to all ISE Members for up to one second to give them an 
opportunity to execute orders at the NBBO price or better before 
orders are rejected (in the case of Non-Customer Orders) or routed 
out to other exchanges (in the case of Public Customer Orders). See 
Supplementary Material .02 to Rule 1901.
    \14\ Pursuant to ISE Rules 100(a)(27) and (28), a Non-Customer 
means a person or entity that is a broker or dealer in securities 
and a Non-Customer Order means an order for the account of a Non-
Customer.
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    If after the first iteration there remain unexecuted orders and 
quotes that lock or cross each other, the trading system will initiate 
a second iteration.\15\ In the second iteration, the trading system 
will use either the ISE Market Maker quotes or the ABBO prices,\16\ 
whichever was not used in the first iteration, to establish the 
Boundary Prices. For example, if the ISE Market Maker quotes were used 
in the first iteration, the second iteration will use ABBO prices and 
vice versa. If there were no ABBO prices for consideration for the 
first iteration, then this second iteration will not occur and the 
trading system will initiate the third iteration as described below.
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    \15\ See Notice, supra note 3, at 73357, for an example showing 
the calculation of the execution price following the second 
iteration.
    \16\ The ABBO prices considered in the first iteration are also 
used during the second iteration.
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    In the second iteration, the trading system will again determine 
the execution price at which the maximum number of contracts can trade 
at or within the widened Boundary Prices. Once the trading system 
determines the second execution price, orders and quotes will be 
processed as follows--market orders will be given priority before limit 
orders and quotes, and limit orders and quotes will be given priority 
by price. For limit orders and quotes with the same price, priority 
will be accorded first to Priority Customer Orders over Professional 
Orders and quotes. Priority Customer Orders with the same limit price 
will be executed in random order while Professional Orders and quotes 
with the same limit price will be executed pro-rata based on size. If 
the Boundary Prices in the second iteration are calculated using the 
NBBO, any remaining Public Customer Orders after this iteration that 
would lock or cross a bid or offer from another exchange will be 
processed in accordance with Supplementary Material .02 to ISE Rule 
1901. Any remaining Non-Customer Orders that would lock or cross a bid 
or offer from another exchange may trade outside the Boundary Prices by 
up to two trading increments as further described under the third 
iteration below.
    If after the second iteration there remain unexecuted orders and 
quotes that lock or cross each other, the trading system will initiate 
a third iteration.\17\ In the third iteration, the prior Boundary 
Prices, i.e., the prices used in the second iteration, and in the case 
where the second iteration does not occur, the prices used in the first 
iteration, will be widened by two trading increments. The trading 
system will then determine the

[[Page 13662]]

price at which the maximum number of contracts could trade at or within 
the widened Boundary Prices. Once the trading system determines the 
third execution price, orders and quotes will be processed as follows--
market orders will be given priority before limit orders and quotes, 
and limit orders and quotes will be given priority by price. For limit 
orders and quotes with the same price, priority will be accorded first 
to Priority Customer Orders over Professional Orders and quotes. 
Priority Customer Orders with the same limit price will be executed in 
random order while Professional Orders and quotes with the same limit 
price will be executed pro-rata based on size. Thereafter, any 
unexecuted Priority Customer Orders that lock or cross the Boundary 
Prices will be handled by the PMM \18\ and any unexecuted Professional 
Orders and Non-Customer Orders that lock or cross the Boundary Prices 
will be canceled.
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    \17\ See Notice, supra note 3, at 73357, for an example showing 
the calculation of the execution price following the third 
iteration.
    \18\ The PMM has the obligation under existing Exchange rules to 
engage in dealings for its own account when, among other things, 
there is a temporary disparity between the supply of and demand for 
a particular options contract, and to act with due diligence in 
handling orders. See ISE Rule 803(c).
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    If after the third iteration there remain unexecuted orders and 
quotes that lock or cross each other, the trading system will initiate 
a fourth and final iteration.\19\ In the fourth iteration, the trading 
system will not calculate new Boundary Prices. The trading system will 
simply trade any remaining interest. Thereafter, the trading system 
will open the options series by disseminating the Exchange's best bid 
and offer derived from the remaining orders and quotes.
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    \19\ See Notice, supra note 3, at 73357-8, for an example 
showing the calculation of the execution price following the fourth 
and final iteration.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-ISE-
2014-24 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \20\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described in greater detail below, the Commission seeks and 
encourages interested persons to provide additional comment on the 
proposed rule change.
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    \20\ 15 U.S.C. 78s(b)(2)(B). Id. Section 19(b)(2) of the 
Exchange Act also provides that proceedings to determine whether to 
disapprove a proposed rule change must be concluded within 180 days 
of the date of publication of notice of the filing of the proposed 
rule change. See id. The time for conclusion of the proceedings may 
be extended for up to 60 days if the Commission finds good cause for 
such extension and publishes its reasons for so finding. See id.
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    The Exchange believes that ``each iteration of the proposed 
iterative process complies with Section 5(a) of the [Options] Linkage 
Plan, or qualifies as an exception under Section 5(b)(ii) of the 
[Options] Linkage Plan.'' \21\ Section 5(a)--Order Protection--of the 
Options Linkage Plan requires that each participant exchange establish 
written policies and procedures that are reasonably designed to prevent 
trade-throughs and to conduct surveillance to ascertain the 
effectiveness of such policies and procedures.\22\ Section 5(b) 
provides a number of exceptions to the order protection 
requirements.\23\ Section 5(b)(ii), in particular, provides an 
exception for a ``transaction traded through a Protected Quotation 
being disseminated by an Eligible Exchange during a trading rotation.'' 
\24\
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    \21\ See Notice, supra note 3, at 73358.
    \22\ Section 5(a) of the Options Linkage Plan.
    \23\ Section 5(b) of the Options Linkage Plan.
    \24\ Section 5(b)(ii) of the Options Linkage Plan.
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    In the Commission's Order approving the Options Linkage Plan,\25\ 
the Commission stated that the Section 5(b)(ii) exception from trade-
throughs was carried over from the previous linkage plan and is similar 
to an exception available for NMS stocks under Regulation NMS.\26\ The 
Commission further noted that the ``trading rotation'' in the Options 
Linkage Plan is ``effectively a single price auction to price the 
option.'' \27\
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    \25\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (``Options Linkage Plan Approval 
Order).
    \26\ See Options Linkage Plan Approval Order, id. at 39366.
    \27\ Id.
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    The Commission believes that ISE's proposal raises interpretive 
issues that warrant further public comment and Commission 
consideration. Namely, the Commission believes that proceedings are 
appropriate to consider whether the Exchange's proposed opening 
process, which would undertake potentially four separate iterations, 
each with its own execution price, is consistent with the Options 
Linkage Plan and with Section 6 of the Act, particularly Section 
6(b)(5),\28\ which requires, among other things, that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
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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    \28\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposal 
is inconsistent with Section 6(b)(5) \29\ or any other provision of the 
Act, or the rules and regulation thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\30\
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    \29\ 15 U.S.C. 78f(b)(5).
    \30\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    In addition to any other facets of the proposal on which persons 
may seek to comment, the Commission is soliciting the views of 
interested persons regarding provisions of the proposed rule change 
concerning compliance with Section 5(a) of the Options Linkage Plan or 
qualification as an exception under Section 5(b)(ii) of the Options 
Linkage Plan.
    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by April 6, 2015. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 20, 
2015. The Commission asks that commenters address the sufficiency and 
merit of the Exchange's statements in support of the proposed rule 
change, in addition to any other comments they may wish to submit about 
the proposed rule change. In particular, the Commission seeks comment 
on the statements of the Exchange contained in the Notice,\31\ 
including the statements made with

[[Page 13663]]

respect to compliance with the Options Linkage Plan, and any other 
issues raised by the proposed rule change.
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    \31\ See Notice, supra note 3.
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    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-2014-24 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-2014-24. 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 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-2014-24 and should be 
submitted by April 6, 2015. Rebuttal comments should be submitted by 
April 20, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-05861 Filed 3-13-15; 8:45 am]
 BILLING CODE 8011-01-P


