
[Federal Register Volume 81, Number 96 (Wednesday, May 18, 2016)]
[Notices]
[Pages 31270-31272]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77821; File No. SR-ISE-2016-13]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend the Schedule of Fees

May 12, 2016.
    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 2, 2016, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change, as described 
in Items I, II, and III 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 eliminate Priority Customer complex order 
rebates for certain ``net zero'' complex orders. 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
    Currently, the Exchange provides rebates to Priority Customer \3\ 
complex orders that trade with non-Priority Customer complex orders in 
the complex order book or trade with quotes and orders on the regular 
order book. Rebates are tiered based on a member's average daily volume 
(``ADV'') executed during a given month as follows: 0 to 29,999 
contracts (``Tier 1''), 30,000 to 59,999 contracts (``Tier 2''), 60,000 
to 99,999 contracts (``Tier 3''), 100,000 to 149,999 (``Tier 4''), 
150,000 to 199,999 contracts (``Tier 5''), and 200,000 or more 
contracts (``Tier 6''). In Select Symbols the rebate is $0.30 per 
contract for Tier 1, $0.35 per contract for Tier 2, $0.41 per contract 
for Tier 3, $0.44 per contract for Tier 4, $0.46 per contract for Tier 
5, and $0.47 per contract for Tier 6. In Non-Select Symbols the rebate 
is $0.63 per contract for Tier 1, $0.71 per contract for Tier 2, $0.79 
per contract for Tier 3, $0.81 per contract for Tier 4, $0.83 per 
contract for Tier 5, and $0.84 per contract for Tier 6.
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    \3\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in ISE Rule 100(a)(37A).
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    Recently, a market participant has been entering a large volume of 
valueless complex orders that trade at a net price at or near $0.00 
(i.e., ``net zero'' complex orders) with the sole intention of earning 
a rebate.\4\ While these complex orders would generally not find a 
counterparty in the complex order book, they may leg in to the regular 
order book where they are typically executed by Market Makers \5\ on 
the individual legs. The fee that Market Makers quoting in Select 
Symbols pay when a complex order legs into their quote is substantially 
higher than their fee or rebate for regular orders that trade against 
their quotes. In particular, a Market Maker providing liquidity on the 
individual leg would typically pay a maker fee of only $0.10 per 
contract,\6\ or in the case of Market Makers that achieve Market Maker 
Plus status,\7\ would earn a maker rebate

[[Page 31271]]

ranging from $0.10 per contract to $0.22 per contract. When trading 
against a Priority Customer complex order that legs in from the complex 
order book, however, that same Market Maker is charged a maker fee of 
$0.30 per contract.\8\ In Non-Select Symbols, Market Makers pay a fee 
of $0.25 per contract subject to certain tier discounts,\9\ or $0.20 
per contract for orders sent by an Electronic Access Member.\10\
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    \4\ For example, a market participant could enter a ``net zero'' 
complex order that buys 500 contracts of the $193 March 6, 2016 SPY 
Put at a price of $0.03 and sells 500 contracts of the $193.50 March 
6, 2016 SPY Put at a price of $0.03 for a net price of $0.00.
    \5\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
    \6\ This maker fee also applies to Non-ISE Market Maker, Firm 
Proprietary/Broker Dealer and Professional Customer orders in Select 
Symbols. Priority Customer orders are not charged a maker fee in 
Select Symbols for orders entered on the regular order book.
    A ``Non-ISE Market Maker'' is a market maker as defined in 
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended, 
registered in the same options class on another options exchange.
    A ``Firm Proprietary'' order is an order submitted by a member 
for its own proprietary account.
    A ``Broker-Dealer'' order is an order submitted by a member for 
a broker-dealer account that is not its own proprietary account.
    A ``Professional Customer'' is a person or entity that is not a 
broker/dealer and is not a Priority Customer.
    \7\ A Market Maker Plus is a Market Maker who is on the National 
Best Bid or National Best Offer a specified percentage of the time 
for series trading between $0.03 and $3.00 (for options whose 
underlying stock's previous trading day's last sale price was less 
than or equal to $100) and between $0.10 and $3.00 (for options 
whose underlying stock's previous trading day's last sale price was 
greater than $100) in premium in each of the front two expiration 
months. The specified percentage is at least 80% but lower than 85% 
of the time for Tier 1, at least 85% but lower than 95% of the time 
for Tier 2, and at least 95% of the time for Tier 3. A Market 
Maker's single best and single worst quoting days each month based 
on the front two expiration months, on a per symbol basis, will be 
excluded in calculating whether a Market Maker qualifies for this 
rebate, if doing so will qualify a Market Maker for the rebate.
    \8\ This higher maker fee for trading against a Priority 
Customer complex order that legs in to the regular order book also 
applies to Non-ISE Market Maker orders.
    \9\ See Schedule of Fees, Section IV.C.
    \10\ There is no fee difference in Non-Select Symbols for 
trading against Priority Customer complex orders that leg in to the 
regular order book. Non-ISE Market Maker, Firm Proprietary/Broker-
Dealer and Professional Customer orders in Non-Select Symbols are 
charged a fee of $0.72 per contract. Priority Customer orders are 
not charged a fee in Non-Select symbols for orders entered on the 
regular order book.
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    By entering essentially valueless complex orders, this market 
participant or others employing the same strategy are able to recover 
rebates for essentially non-economic trades at the expense of the 
Exchange and the market participants on the other side of the trade. 
This behavior is a form of rebate arbitrage, and the Exchange believes 
that it is in the best interest of the Exchange and its members to 
remove the incentives that promote this activity. The Exchange 
therefore proposes to eliminate Priority Customer rebates for ``net 
zero'' complex orders that are entered on behalf of originating market 
participants that execute an ADV of at least 10,000 ``net zero'' 
complex orders in a given month. For purposes of determining which 
complex orders qualify as ``net zero'' the Exchange will count all 
complex orders that leg in to the regular order book and are executed 
at a net price that is within a range of $0.01 credit and $0.01 debit.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general, and 
Section 6(b)(4) of the Act,\12\ in particular, in that it is designed 
to provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and other persons using its facilities.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed fee change is reasonable 
and equitable as it is designed to remove financial incentives for 
market participants to engage in rebate arbitrage by entering ``net 
zero'' complex orders on the Exchange that do not have any economic 
substance. As explained above, Priority Customer complex orders, 
including ``net zero'' complex orders that leg in to the regular order 
book, are currently paid significant rebates by the Exchange, which are 
funded in part by charging higher fees to the market participants that 
trade against these orders. The Exchange believes that eliminating the 
rebate provided to ``net zero'' complex orders will discourage market 
participants from entering these valueless orders, which are entered 
for the sole purpose of earning a rebate. The Exchange also believes 
that the proposed rule change is not unfairly discriminatory as it is 
designed to stop market participants from taking advantage of Exchange 
rebates by entering orders that lack economic substance. The Exchange 
is proposing to eliminate Priority Customer complex order rebates for 
all market participants that enter a large number of ``net zero'' 
complex orders. To the extent that those market participants enter 
legitimate complex orders, however, they will continue to receive the 
same rebates that they do today. In addition, market participants that 
enter an insubstantial volume of ``net zero'' complex orders will also 
continue to receive rebates. The Exchange does not believe that it is 
unfairly discriminatory to continue to offer rebates to firms that do 
not hit the proposed ``net zero'' ADV threshold as this more limited 
trading activity is not indicative of rebate arbitrage.

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

    In accordance with Section 6(b)(8) of the Act,\13\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change is designed to eliminate the ability for certain market 
participants to engage in rebate arbitrage to the detriment of the 
Exchange and its members. The Exchange operates in a highly competitive 
market in which market participants can readily direct their order flow 
to competing venues. In such an environment, the Exchange must 
continually review, and consider adjusting, its fees and rebates to 
remain competitive with other exchanges. For the reasons described 
above, the Exchange believes that the proposed fee changes reflect this 
competitive environment.
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    \13\ 15 U.S.C. 78f(b)(8).
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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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \14\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\15\ because it establishes a due, fee, or other charge 
imposed by ISE.
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    \14\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \15\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 No. SR-ISE-2016-13 on the subject line.

[[Page 31272]]

Paper Comments

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

All submissions should refer to File Number SR-ISE-2016-13. 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 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-2016-13 and should be 
submitted by June 8, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Robert W. Errett,
Deputy Secretary.
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    \16\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-11644 Filed 5-17-16; 8:45 am]
 BILLING CODE 8011-01-P


