
[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Notices]
[Pages 48371-48375]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19762]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75632; File No. SR-ISE-2014-24]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Disapproving a Proposed Rule Change To Modify ISE's Opening 
Process

August 6, 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 ``SEC'' or 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,

[[Page 48372]]

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\ On March 10, 
2015, the Commission instituted proceedings under Section 19(b)(2)(B) 
of the Act \5\ to determine whether to approve or disapprove the 
proposed rule change.\6\ On May 13, 2015, the Commission received a 
letter from the Exchange responding to the Order Instituting 
Proceedings.\7\ The Commission received one other comment on the 
proposed rule change.\8\ This Order disapproves the proposed rule 
change.
---------------------------------------------------------------------------

    \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).
    \6\ See Securities Exchange Act Release No. 74465 (March 10, 
2015), 80 FR 13660 (March 16, 2015) (``Order Instituting 
Proceedings''). On June 4, 2015, the Commission designated a longer 
period for Commission action the proposed rule change to August 7, 
2015. See Securities Exchange Act Release No. 75104 (June 4, 2015), 
80 FR 33001 (June 10, 2015).
    \7\ See Letter to Brent J. Fields, Secretary, Commission, from 
Mike Simon, Secretary and General Counsel, dated May 13, 2015 (``ISE 
Letter'').
    \8\ See Letter to Brent J. Fields, Secretary, Commission, from 
Benjamin Londergan, Head of Options Trading and Technology, 
Convergex Execution Solutions LLC, dated June 1, 2015 (``Convergex 
Letter''). In its letter, Convergex stated that it supported the 
proposal because it believed the ``inherent protections and improved 
pricing will be of significant benefit to customers and outweigh any 
perceived advantages of the current single-priced opening process.'' 
See Convergex Letter at 1. The Convergex Letter noted that ISE's 
current opening process did not provide away market price 
protection, but the proposed rule change would introduce an 
iterative opening process where priority customer orders would be 
eligible for away market routing under certain circumstances. As a 
consequence of this change, Convergex believed its customers would 
``obtain better execution quality in an increasingly fair and 
orderly market than they enjoy currently under the ISE's present 
opening process.''
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange proposes to modify the process by which the Exchange's 
trading system opens trading at the beginning of the day and after 
trading halts.\9\ Specifically, ISE proposes to ``modify the opening 
process by moving from a single price opening'' to an iterative opening 
process, which could result in four separate opening prices for a 
single option series.\10\
---------------------------------------------------------------------------

    \9\ The Exchange also proposes to codify certain existing 
functionality within the trading system (regarding the procedures to 
initiate the opening rotation at the Exchange's opening and 
reopening after a trading halt) that was not previously described in 
the Exchange's rules. A more detailed description of the initiation 
procedure is available in the Notice. See Notice, supra note 3 at 
73355.
    \10\ See id. at 73356.
---------------------------------------------------------------------------

    As is the case today, under the proposal, if there is executable 
interest prior to the opening, ISE's trading system would first 
calculate a range of prices within which to open the options series 
(``Boundary Prices''). To determine the Boundary Prices, the trading 
system would use ISE market makers' quotes. Specifically, the trading 
system would use the quotes of ISE's Primary Market Maker (``PMM'') 
quotes, or in their absence, the best quotes of ISE's Competitive 
Market Makers (``CMMs'') on the corresponding side (PMMs, together with 
CMMs, ``ISE Market Makers'').\11\ If there are no PMM or CMM quotes on 
the bid side, the lowest minimum trading increment for the option class 
would be used. If there are no PMM or CMM quotes on the offer side, 
however, ``the options class would not open because in the absence of 
an offer there would be no limit as to the price at which an opening 
trade could occur.'' \12\ Under ISE's proposal, each iteration of the 
opening process would widen the Boundary Prices, except for the last 
iteration which would have no Boundary Prices. Each iteration as 
proposed is described below.
---------------------------------------------------------------------------

    \11\ ISE has two categories of market makers: PMMs and CMMs. A 
PMM is appointed to each options class traded on the Exchange but a 
CMM may or may not be appointed to each such options class. See ISE 
Rule 802.
    \12\ See Notice, supra note 3, at 73356.
---------------------------------------------------------------------------

    As explained in the Notice, in the first iteration, the trading 
system would attempt to derive the opening price to be at or better 
than either: The PMM's best bid and offer, or in the absence of a PMM 
quote, the best bid and offer of CMMs (``ISE Market Maker Quotes''); 
\13\ or the away best bid and offer (``ABBO''), whichever is better. 
Accordingly, if the options class is open on another exchange, the 
Boundary Prices would be determined to be the higher of the ISE Market 
Maker's bid or the away best bid and the lower of the ISE Market 
Maker's offer or the away best offer. If the options class is not yet 
open on another exchange, the Boundary Prices would be determined by 
the PMM or CMM quotes, as described above. Once the trading system has 
determined the Boundary Prices, it then would determine the price at 
which the maximum number of contracts could trade at or within the 
Boundary Prices (the ``execution price'') \14\ and process orders and 
quotes at the execution price as follows--market orders would be given 
priority before limit orders and quotes, then limit orders and quotes 
would be given priority by price. For limit orders and quotes with the 
same price, priority would be accorded first to Priority Customer 
Orders \15\ over Professional Orders \16\ and quotes. Priority Customer 
Orders with the same limit price would be executed on a random basis 
\17\ while Professional Orders and quotes with the same limit price 
would be executed pro-rata based on size. If the Boundary Prices were 
calculated using the ABBO, any remaining Public Customer Orders,\18\ 
but not Non-Customer \19\ Orders, that would lock or cross an ABBO 
would be processed in accordance with Supplementary Material .02 to ISE 
Rule 1901.\20\
---------------------------------------------------------------------------

    \13\ See id.
    \14\ See id. for an example showing the calculation of the 
execution price following the first iteration.
    \15\ 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).
    \16\ 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.
    \17\ Priority Customer Orders with the same limit price in the 
regular order book are currently executed in time priority during 
the opening. The Exchange states in the Notice that it 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, 
not the time the Priority Customer expressed interest in doing the 
trade. See Notice, supra note 3, at 73356.
    \18\ 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.
    \19\ Pursuant to ISE Rule 100(a)(27), a ``Non-Customer'' means a 
person or entity that is a broker or dealer in securities.
    \20\ As stated in the Notice, under the Options Order Protection 
and Locked/Crossed Market Plan (``Options Linkage Plan'' or 
``Linkage Plan''), the Exchange cannot execute orders at a price 
that is inferior to the national best bid or offer (``NBBO''), 
absent an applicable exception, 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. See Notice, supra note 3, at 73356. 
ISE's rule requires that, before orders are rejected or routed to an 
away market, an order that would otherwise lock or cross another 
exchange's bid or offer be exposed to all ISE members for up to one 
second to give the members an opportunity to execute against the 
order at the NBBO or better. See Supplementary Material .02 to Rule 
1901. If after an order is exposed, the order cannot be executed in 
full on the Exchange at the then-current NBBO or better, and it is 
marketable, the lesser of the full displayed size of the Protected 
Bid(s) or Protected Offer(s) that are priced better than the ISE's 
quote or the balance of the order will be sent to the linkage 
handler and any additional balance of the order will be executed on 
the ISE if it is marketable. Any additional balance of the order 
that is not marketable against the then-current NBBO will be placed 
on the ISE book. Id.
---------------------------------------------------------------------------

    According to the Exchange, if after the first iteration there 
remained unexecuted orders and quotes that would lock or cross each 
other, the trading system would initiate a second

[[Page 48373]]

iteration.\21\ In the second iteration, the trading system would use 
either the ISE Market Maker Quotes or the ABBO,\22\ 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 would use the ABBO and vice versa. If, 
during the first iteration, there were no ABBO, then the second 
iteration would not occur, and the trading system would initiate the 
third iteration as described below.
---------------------------------------------------------------------------

    \21\ See Notice, supra note 3, at 73357, for an example showing 
the calculation of the execution price following the second 
iteration.
    \22\ The ABBO prices considered in the first iteration are also 
used during the second iteration.
---------------------------------------------------------------------------

    In the second iteration, the trading system would again determine 
the execution price at which the maximum number of contracts could 
trade at or within the widened Boundary Prices. Once the trading system 
determines the second execution price, orders and quotes would be 
processed as follows--market orders would be given priority before 
limit orders and quotes, then limit orders and quotes would be given 
priority by price. For limit orders and quotes with the same price, 
priority would be accorded first to Priority Customer Orders over 
Professional Orders and quotes. Priority Customer Orders with the same 
limit price would be executed in random order while Professional Orders 
and quotes with the same limit price would be executed pro-rata based 
on size. If the Boundary Prices in the second iteration were calculated 
using the ABBO, any remaining Public Customer Orders, but not Non-
Customer Orders, that would lock or cross a bid or offer from another 
exchange would be processed in accordance with Supplementary Material 
.02 to ISE Rule 1901.
    If after the second iteration there remained unexecuted orders and 
quotes that lock or cross each other, the trading system would initiate 
a third iteration.\23\ 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 did not occur, the prices used in the first 
iteration) would be widened by two trading increments. The trading 
system would then again determine the 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 would be processed as follows--market orders would be given 
priority before limit orders and quotes, then limit orders and quotes 
would be given priority by price. For limit orders and quotes with the 
same price, priority would be accorded first to Priority Customer 
Orders over Professional Orders and quotes. Priority Customer Orders 
with the same limit price would be executed in random order while 
Professional Orders and quotes with the same limit price would be 
executed pro-rata based on size. Thereafter, any unexecuted Priority 
Customer Orders that lock or cross the Boundary Prices would be handled 
by the PMM \24\ and any unexecuted Professional Orders and Non-Customer 
Orders that lock or cross the Boundary Prices would be canceled.
---------------------------------------------------------------------------

    \23\ See Notice, supra note 3, at 73357, for an example showing 
the calculation of the execution price following the third 
iteration.
    \24\ 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).
---------------------------------------------------------------------------

    If after the third iteration there remained unexecuted orders and 
quotes that lock or cross each other, the trading system would initiate 
the fourth and final iteration.\25\ In the fourth iteration, the 
trading system would not calculate new Boundary Prices. The trading 
system would simply trade any remaining interest. Thereafter, the 
trading system would open the options series by disseminating the 
Exchange's best bid and offer derived from the remaining orders and 
quotes.\26\
---------------------------------------------------------------------------

    \25\ See Notice, supra note 3, at 73357-8, for an example 
showing the calculation of the execution price following the fourth 
and final iteration.
    \26\ See Notice, supra note 3, for a more complete description 
of the proposed rule change.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Act,\27\ the Commission shall 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to such organization.\28\ The Commission shall 
disapprove a proposed rule change if it does not make such a 
finding.\29\ Rule 700(b)(3) of the Commission's Rules of Practice state 
that the ``burden to demonstrate that a proposed rule change is 
consistent with the Exchange Act and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change'' and that a ``mere assertion that the proposed rule 
change is consistent with those requirements . . . is not sufficient.'' 
\30\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2)(C).
    \28\ See 15 U.S.C. 78s(b)(2)(C)(i).
    \29\ See 15 U.S.C. 78s(b)(2)(C)(ii); see also 17 CFR 
201.700(b)(3).
    \30\ See 17 CFR 201.700(b)(3). ``The description of a proposed 
rule change, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. Any failure of a self-regulatory organization to 
provide the information elicited by Form 19b-4 may result in the 
Commission not having a sufficient basis to make an affirmative 
finding that a proposed rule change is consistent with the Exchange 
Act and the rules and regulations issued thereunder that are 
applicable to the self-regulatory organization.'' Id.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not find that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange. In particular, the Commission does not find that 
the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\31\ which, among other things, requires 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. For reasons more fully 
discussed below, because the Commission cannot find that the Exchange's 
proposed iterative opening process would comply with Section 5 of the 
Options Linkage Plan,\32\ the Commission does not find that the 
proposed rule change is consistent with the Act and, in particular, 
with Section 6(b)(5) of the Act.\33\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b)(5).
    \32\ See Securities Exchange Act Release No. 60405 (July 30, 
2009), 74 FR 39362 (August 6, 2009) (``Options Linkage Plan Approval 
Order'').
    \33\ The Commission notes that ISE Rule 1901 implements Section 
5 of the Options Linkage Plan by incorporating as rules of ISE the 
provisions of Section 5. Accordingly, because the Commission cannot 
find the Exchange's proposal consistent with Section 5 of the 
Options Linkage Plan, the Commission also notes that the Exchange's 
proposal may not be consistent with its own rule.
---------------------------------------------------------------------------

    On July 30, 2009, pursuant to Section 11(A)(a)(3)(B) of the Act 
\34\ and Rule 608 thereunder,\35\ the Commission approved,\36\ as a 
national market system

[[Page 48374]]

plan, the Options Linkage Plan, which was submitted to the Commission 
by all seven options exchanges then operating (``Original Participant 
Exchanges'').\37\ As proposed and approved, Section 5(a) of the Options 
Linkage Plan requires each participant exchange to ``establish, 
maintain and enforce written policies and procedures [as approved by 
the SEC] that are reasonably designed to prevent Trade-Throughs in that 
Participant's market in Eligible Options Classes that do not fall 
within an exception set forth in [Section 5(b) of the Options Linkage 
Plan] . . .'' \38\ Among others exceptions, the Options Linkage Plan 
excepts from the trade-through prohibition transactions that ``traded 
through a Protected Quotation being disseminated by an Eligible 
Exchange during a trading rotation'' (the ``trading rotation 
exception'').\39\
---------------------------------------------------------------------------

    \34\ See 15 U.S.C. 78k-1(a)(3)(B).
    \35\ See 17 CFR 242.608.
    \36\ See Options Linkage Plan Approval Order, supra note 32. 
Section 11A(a)(3)(B) of the Act authorizes the Commission ``by rule 
or order, to authorize or require self-regulatory organizations to 
act jointly with respect to matters as to which they share authority 
under this title in planning, developing, operating, or regulating a 
national market system (or a subsystem thereof) or one or more 
facilities.'' The Commission's approval of a national market system 
plan is conditioned upon a finding that the proposed plan is 
``necessary or appropriate in the public interest, for the 
protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanism of, a 
national market system, or otherwise in furtherance of the purposes 
of the Act.'' See 17 CFR 242.608(b)(2).
    \37\ The seven options exchanges were Chicago Board Options 
Exchange, Inc.; ISE; The NASDAQ Stock Market LLC, NYSE Amex LLC (n/
k/a NYSE MKT LLC); NYSE Arca Inc.; NASDAQ OMX PHLX, Inc., and NASDAQ 
OMX BX, Inc.
    \38\ See Section 5(a)(i) of the Options Linkage Plan. The 
Options Linkage Plan defines ``Trade-Throughs'' to mean a 
``transaction in an options series, either as principal or agent, at 
a price that is lower than a Protected Bid or higher than a 
Protected Offer.'' Section 2(21) of the Options Linkage Plan. 
``Participant'' means ``an Eligible Exchange whose participation in 
the Plan has become effective pursuant to Section 3(c) of the 
Plan.'' Section 2(15) of the Options Linkage Plan. ``Eligible 
Options Classes'' mean ``all option series overlying a security (as 
that term is defined in Section 3(a)(10) of the Exchange Act) or 
group of securities, including both put options and call options, 
which class is available for trading on two or more Eligible 
Exchanges.'' Section 2(7) of the Options Linkage Plan. A ``Protected 
Bid'' or a ``Protected Offer'' means a ``Bid or Offer in an options 
series, respectively, that: a. Is displayed by an Eligible Exchange; 
b. Is disseminated pursuant to the OPRA Plan; and c. Is the Best Bid 
or Best Offer, respectively, of an Eligible Exchange.'' Section 
2(17) of the Options Linkage Plan. ``Eligible Exchange'' means ``a 
national securities exchange registered with the SEC in accordance 
with Section 6(a) of the Exchange Act that: (a) As a Participant 
Exchange in OCC (as that term is defined in Section VII of the OCC 
by-laws); (b) is a party to the OPRA Plan (as that term is described 
in Section I of the OPRA Plan); and (c) if the national securities 
exchange chooses not to become a party to this Plan, is a 
participant in another plan approved by the Commission providing for 
comparable Trade-Through and Locked and Crossed Market protection.'' 
Section 2(6) of the Options Linkage Plan.
    \39\ Section 5(b)(ii) of the Options Linkage Plan. The Options 
Linkage Plan defines ``Protected Quotation'' to mean a Protected Bid 
or Protected Offer. Section 2(18) of the Options Linkage Plan.
---------------------------------------------------------------------------

    According to the Exchange, with respect to the operation of the 
second, third, and fourth iterations of its proposed opening process, 
it is relying on the trading rotation exception. Specifically, if the 
second iteration utilizes the ISE Market Maker Quotes, to the extent 
the iteration results in any trade-throughs, the Exchange represents 
that ``such trade-throughs are permissible pursuant to Section 5(b)(ii) 
of the Linkage Plan, the Trading Rotation exception, which permits a 
participant exchange to trade through a Protected Quotation 
disseminated by an Eligible Exchange during a trading rotation.'' \40\ 
Likewise, the Exchange states that any trade-throughs during the third 
and fourth iterations are also permissible under the Linkage Plan 
because Section 5(b)(ii) ``permits a participant exchange to trade 
through a Protected Quotation disseminated by an Eligible Exchange 
during a trading rotation.'' \41\
---------------------------------------------------------------------------

    \40\ See Notice, supra note 3, at 73358. See supra note 39 for 
the definition of Protected Quotation and supra note 38 for the 
definition of Eligible Exchange.
    \41\ See Notice, supra note 3, at 73358-9.
---------------------------------------------------------------------------

    In the Order Instituting Proceedings, the Commission noted that it 
intended to further assess whether the Exchange's proposed iterative 
opening process complies with the Options Linkage Plan and the 
statutory requirements applicable to a national securities exchange 
under the Act.\42\ The Commission invited interested persons to submit 
written views with respect to these concerns. As mentioned above, ISE 
submitted a letter in response to the Order Instituting Proceedings 
providing additional justification for its proposal.
---------------------------------------------------------------------------

    \42\ See Order Instituting Proceedings, supra note 6, at 13662.
---------------------------------------------------------------------------

    In its letter, ISE argues that, unlike the trade-through exception 
for equities under Regulation NMS, the Options Linkage Plan does not 
state that the trade-through exception for opening transactions is 
limited to ``single price auctions.'' \43\ Further, ISE argues that its 
proposal is consistent with the plain language of Section 5(b)(ii) 
because, although the Linkage Plan does not define the term ``trading 
rotation,'' at the inception of the Plan, ``that term already had a 
meaningful and well understood securities law definition.'' \44\ ISE 
cites to Rule 600(a)(79) of Regulation NMS, which defines ``trading 
rotation'' to mean ``with respect to an options class, the time period 
on a national securities exchange during which . . . [o]pening, re-
opening, or closing transactions in options series in such options 
class are not yet completed; and . . . [c]ontinuous trading has not yet 
commenced or has not yet ended for the day in options series in such 
options class.'' \45\ ISE also suggests that if its proposal is 
inconsistent with the Linkage Plan, then other options exchanges would 
have negatively commented on it.\46\ ISE states that ``it is highly 
suggestive that none of our competitors submitted any contrary 
interpretation of the Linkage Plan.'' \47\
---------------------------------------------------------------------------

    \43\ See ISE Letter, supra note 7, at 3.
    \44\ See id.
    \45\ See id. See also 17 CFR 242.600(b)(79).
    \46\ See ISE Letter, supra note 7, at 3.
    \47\ See id.
---------------------------------------------------------------------------

    In the ISE Letter, the Exchange also disputes the Commission's 
interpretation in the Options Linkage Approval Order that the trade-
through exception in Section 5(b)(ii) of the Plan is for a trading 
rotation that is ``effectively a single price auction to price the 
option.'' \48\ The Exchange concedes that ``this language is itself 
copied from identical language submitted in comment letters by ISE and 
other options exchanges that was intended to be a non-comprehensive 
description of how our markets have traditionally operated'' but that 
``they did not purport to be a binding legal interpretation of how the 
Commission should interpret the term `trading rotation.' '' \49\
---------------------------------------------------------------------------

    \48\ See id. at 2.
    \49\ See id.
---------------------------------------------------------------------------

    ISE argues, moreover, that the rationale for the Linkage Plan's 
trading rotation exception applies equally to single price auctions and 
iterative openings.\50\ Namely, the rationale behind Section 5(b)(ii) 
was to allow options exchanges to ignore away markets during the 
opening when ``there are no practical means to include prices on other 
exchanges.'' \51\ Accordingly, ISE claims that the basis for the 
Section 5(b)(ii) exception applies to the iterative opening process 
that it proposes to adopt.
---------------------------------------------------------------------------

    \50\ See id. at 4.
    \51\ See id.
---------------------------------------------------------------------------

    Finally, ISE contends that it would be inappropriate for the 
Commission to disapprove its proposed rule change because the new 
process is designed to provide away market protection to Public 
Customer Orders.\52\ According to ISE, if the Commission disapproves 
the proposed rule change, the Commission's action would result in less, 
not more protection for investors.\53\
---------------------------------------------------------------------------

    \52\ See id.
    \53\ See id.
---------------------------------------------------------------------------

    After thoroughly reviewing the Exchange's assertions in the Notice 
and the ISE Letter, including the one comment received,\54\ the 
Commission cannot find that the iterative opening process proposed by 
the Exchange is consistent with the Options Linkage Plan and therefore 
with the Act.

[[Page 48375]]

Specifically, the Commission cannot find that each iteration of the 
amended process would qualify as an exception under Section 5(b)(ii) of 
the Linkage Plan. The Commission notes that when the Original 
Participant Exchanges proposed the Options Linkage Plan, all seven 
exchanges represented to the Commission that:
---------------------------------------------------------------------------

    \54\ See Convergex Letter, supra note 8.

    Section 5(b)(ii) of the Plan carries forward the current Trade-
Through exception in the old plan and is the options equivalent to 
the single price opening exception in Regulation NMS for equity 
securities. Options exchanges use a trading rotation to open an 
option for trading, or to reopen an option after a trading halt. The 
rotation is effectively a single price auction to price the option 
and there are no practical means to include prices on other 
---------------------------------------------------------------------------
exchanges in that auction.

    (emphasis added).\55\ Relying on this unanimous representation from 
all exchanges who jointly proposed the Options Linkage Plan, the 
Commission stated in the Options Linkage Plan Approval Order that the 
language used in the Section 5(b)(ii) is ``similar to an exception 
available for NMS stocks under Regulation NMS,'' \56\ and ``[a]s noted 
by the Participants, the trading rotation is effectively a single price 
auction to price the option.'' \57\
---------------------------------------------------------------------------

    \55\ See Letter from Michael Simon, Secretary, ISE, dated 
November 7, 2008, and available at http://www.sec.gov/rules/sro/nms/2008/4-546-ise-amend3.pdf. See also Letters from Peter G. Armstrong, 
Managing Director, Options, NYSE Arca, dated October 30, 2008, 
available at https://www.sec.gov/rules/sro/nms/2008/4-546-nysearca-amend3.pdf; Edward J. Joyce, President & Chief Operating Officer, 
Chicago Board Options Exchange, dated November 21, 2008, available 
at http://www.sec.gov/rules/sro/nms/2008/4-546-cboe-amend1.pdf; 
Jeffrey P. Burns, Managing Director, NYSE Alternext US LLC, dated 
November 25, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-nysealtr-amend1.pdf; John Katovich, Vice President, BSE, 
dated December 1, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-bse-amend1.pdf; Richard S. Rudolph, Counsel, Nasdaq 
OMX Phlx, dated December 3, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-phlx-amend1.pdf; and Jeffrey S. Davis, Vice 
President & Deputy General Counsel, Nasdaq Stock Market LLC, dated 
December 4, 2008, available at https://www.sec.gov/rules/sro/nms/2008/4-546-nasdaq-amend1.pdf.
    \56\ See Options Linkage Plan Approval Order, supra note 32, at 
39366. See also Rule 611(b)(3) of Regulation NMS under the Act (17 
CFR 242.611(b)(3)) which provides that ``the transaction that 
constituted the trade-through was a single-priced opening, 
reopening, or closing transaction by the trading center.''
    \57\ See Options Linkage Plan Approval Order, supra note 32, at 
39366.
---------------------------------------------------------------------------

    The Commission acknowledges that the text of Section 5(b)(ii) of 
the Options Linkage Plan refers to the trade-through exception during a 
``trading rotation,'' not a ``single price auction.'' But as even the 
Exchange notes in the ISE Letter, the Options Linkage Plan also does 
not define the term ``trading rotation'' nor provide additional 
clarification to what the trading rotation exception under Section 
5(b)(ii) means.\58\ In addition, as noted above, all seven exchanges 
that jointly proposed the Linkage Plan explicitly represented to the 
Commission that the trading rotation exception is ``similar to an 
exception available for NMS stocks under Regulation NMS'' and is 
``effectively a single price auction to price the option.'' \59\ 
Accordingly, in the absence of any basis in the Options Linkage Plan 
itself for the Commission to determine otherwise, and in light of 
prior, explicit representations by the Original Participant Exchanges 
that the trading rotation exception applies to a ``single price 
auction,'' the Commission cannot find that the Exchange's proposal is 
consistent with the Linkage Plan and thereby the Act.
---------------------------------------------------------------------------

    \58\ Further, the Commission notes that the Linkage Plan refers 
to a singular ``trading rotation'' not, as ISE implies, multiple 
``trading rotations.''
    \59\ See supra note 55.
---------------------------------------------------------------------------

    The Commission acknowledges that the ISE's proposed iterative 
opening process, unlike its current process, would provide away market 
protection for Public Customer Orders. For the reasons discussed above, 
however, the Commission cannot find that the proposed rule change is 
consistent with the Options Linkage Plan or the Act. Further, the 
Commission does not agree with the Exchange that the decision of other 
options exchanges not to comment on the proposed rule change equates to 
agreement with ISE's interpretation of the trading rotation exception. 
It would be inappropriate for the Commission to draw any such 
conclusion unless explicitly stated by a commenter. As ISE itself 
noted, ``exchanges may have several reasons for not commenting on a 
proposed rule change.'' \60\
---------------------------------------------------------------------------

    \60\ See ISE Letter, supra note 7, at 3. ISE also provides as an 
exhibit to its response letter data purporting to show trade-
throughs from all options exchanges during the first minute of 
trading on April 29, 2015, and April 30, 2015. According to ISE, the 
data shows trade-throughs from every exchange, with the total number 
of contracts trading through being 9,316 on April 29, and 48,269 
contracts on April 30. See Exhibit to ISE Letter, supra note 7. The 
Commission cannot surmise from the data whether the trade-throughs 
are occurring without an exception or whether the exchanges are not 
complying with the Linkage Plan or their own rules. The Commission 
notes that the Options Linkage Plan provides that if a participant 
exchange relies on a trade-through exception, it would be required 
to establish, maintain, and enforce written policies and procedures 
reasonably designed to assure compliance with the terms of the 
exception.
---------------------------------------------------------------------------

    Finally, in analyzing the proposed rule change, and in making its 
determination to disapprove the rule change, the Commission has 
considered whether the action will promote efficiency, competition, and 
capital formation,\61\ but, as discussed above, the Commission cannot 
find that the proposed rule change is consistent with the Options 
Linkage Plan or Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \61\ Whenever pursuant to the Act the Commission is engaged in 
rulemaking or the review of a rule of a self-regulatory 
organization, and is required to consider or determine whether an 
action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Conclusion

    For the foregoing reasons, the Commission does not find that the 
proposed rule change, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.
    IT IS THEREFORE ORDERED, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-ISE-2014-24), be, and hereby is, 
disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\62\
---------------------------------------------------------------------------

    \62\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19762 Filed 8-11-15; 8:45 am]
 BILLING CODE 8011-01-P


