
[Federal Register Volume 81, Number 106 (Thursday, June 2, 2016)]
[Notices]
[Pages 35405-35406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77931; File No. SR-ISEMercury-2016-07]


Self-Regulatory Organizations; ISE Mercury, LLC; Order Approving 
Proposed Rule Change Related to Market Wide Risk Protection

May 26, 2016.

I. Introduction

    On March 29, 2016, ISE Mercury, LLC (the ``Exchange'' or ``ISE 
Mercury'') filed with the Securities and Exchange Commission 
(``Commission'') pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to introduce new activity-based risk protection 
functionality. The proposed rule change was published for comment in 
the Federal Register on April 14, 2016.\3\ No substantive comment 
letters were received in response to this proposal.\4\ This order 
approves 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. 77569 (April 8, 
2016), 81 FR 22140 (``Notice'').
    \4\ The Commission received one anonymous comment letter that 
read ``[g]ood.'' See Letter from Anonymous, dated May 3, 2016.
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II. Description of the Proposed Rule Change

    The Exchange proposed to introduce two activity-based risk 
protection measures that will be mandatory for all members: (1) The 
``Order Entry Rate Protection,'' which prevents members from entering 
orders at a rate that exceeds predefined thresholds,\5\ and (2) the 
``Order Execution Rate Protection,'' which prevents members from 
executing orders at a rate that exceeds their predefined risk settings 
(together, ``Market Wide Risk Protection''). The Exchange will announce 
the implementation date of the proposed rule in a circular to be 
distributed to members prior to implementation.\6\
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    \5\ The Exchange stated that it will initiate the Order Entry 
Rate Protection pre-open, but in a manner that allows members time 
to load their orders without inadvertently triggering the 
protection. The Exchange further noted that it will establish and 
communicate the precise initiation time via circular and prior to 
implementation. See Notice, supra note 3, at 22141 n.4.
    \6\ See Notice, supra note 3, at 22141.
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    Pursuant to proposed Rule 714(d), ``Market Wide Risk Protection,'' 
the Exchange's trading system (the ``System'') will maintain one or 
more counting programs on behalf of each member that will track the 
number of orders entered and the number of contracts traded on ISE 
Mercury.\7\ Members may also use multiple counting programs to separate 
risk protections for different groups established within the member.\8\ 
The counting programs will maintain separate counts, over rolling time 
periods specified by the member, for each count of: (1) The total 
number of orders entered; and (2) the total number of contracts 
traded.\9\
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    \7\ Unlike similar risk protection measures available on ISE 
Mercury's affiliated exchanges, the Market Wide Risk Protection 
functionality for ISE Mercury will not apply cross-market to its 
affiliated exchanges. Cf., e.g., Securities Exchange Act Release 
Nos. 77489 (Mar. 31, 2016), 81 FR 20004 (Apr. 6, 2016) (SR-ISE-2016-
08) (notice describing International Securities Exchange, LLC's 
Market Wide Risk Protection functionality); and 77488 (Mar. 31, 
2016), 81 FR 20021 (Apr. 6, 2016) (SR-ISEGemini-2016-03) (notice 
describing ISE Gemini, LLC's Market Wide Risk Protection 
functionality). See also Notice, supra note 3, at 22141 n.6.
    \8\ The Exchange stated that it will explain how members can go 
about setting up risk protections for different groups (e.g., 
business units) in a circular issued to members. See Notice, supra 
note 3, at 22141 n.7.
    \9\ See proposed Rule 714(d). The Exchange clarified that a 
member's allowable order rate for the Order Entry Rate Protection 
will be comprised of parameter (1), while the allowable contract 
execution rate for the Order Execution Rate Protection will be 
comprised of parameter (2). The Exchange further explained that 
contracts executed on the agency and contra-side of a two-sided 
crossing order will be counted separately for the Order Execution 
Rate Protection. See Notice, supra note 3, at 22141.
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    According to the Exchange, members will have the discretion to 
establish the applicable time period for each of the counts maintained 
under the Market Wide Risk Protection, provided that the selected 
period is within minimum and maximum time parameters that will be 
established by the Exchange and announced via circular.\10\ By 
contrast, the Exchange's proposal does not establish minimum or maximum 
values for the order entry or execution parameters described in (1) and 
(2) above. Nevertheless, the Exchange will establish default values 
\11\ for the time period, order entry, and contracts traded parameters 
in a circular to be distributed to members. The Exchange represented 
that such default values will apply only to members that do not submit 
their own parameters for the Market Wide Risk Protection measures.\12\
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    \10\ See Notice, supra note 3, at 22141. The Exchange stated 
that it anticipated setting these minimum and maximum time 
parameters at one second and a full trading day, respectively. See 
id. at n.9.
    \11\ See proposed Rule 714(d); see also Notice, supra note 3, at 
22141.
    \12\ See Notice, supra note 3, at 22141.
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    Under proposed Rule 714(d), the System will trigger the Market Wide 
Risk Protection when it determines that the member has either (1) 
entered a number of orders exceeding its designated allowable order 
rate for the specified time period, or (2) executed a number of 
contracts exceeding its designated allowable contract execution rate 
for the specified time period.\13\ If the member's thresholds have been 
exceeded, the Market Wide Risk Protection will be triggered and the 
System will automatically reject all subsequent incoming orders entered 
by the member on ISE Mercury. In addition, if the member has opted in 
to this functionality, the System will automatically cancel all of the 
member's existing orders.\14\ The Market Wide Risk Protection will 
remain engaged until the member manually (e.g., via email)

[[Page 35406]]

notifies the Exchange to enable the acceptance of new orders.\15\
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    \13\ Id.; see also proposed Rule 714(d)(1). Specifically, after 
a member enters or executes an order, the System will look back over 
the specified time period to determine whether the member has 
exceeded the relevant thresholds. See Notice, supra note 3, at 
22141. In the Notice, the Exchange provided examples illustrating 
how the Market Wide Risk Protection functionality would work both 
for order entry and order execution protections. See Notice, supra 
note 3, at 22141-42.
    \14\ Proposed Rule 714(d)(2).
    \15\ Proposed Rule 714(d)(3). Members who have not opted to 
cancel all existing orders under proposed Rule 714(d)(2), however, 
will still be able to interact with their existing orders entered 
before the Market Wide Risk Protection was triggered. For instance, 
such members may send cancel order messages and/or receive trade 
executions for those orders. Id.; see also Notice, supra note 3, at 
22141.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \16\ 
and rules and regulations thereunder applicable to a national 
securities exchange.\17\ In particular, the Commission finds that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act, which requires, among other things, that the rules 
of a national securities exchange be designed to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanisms of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.\18\
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    \16\ 15 U.S.C. 78f(b).
    \17\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposed activity-based 
order protections will provide an additional tool to members to assist 
them in managing their risk exposure.\19\ Specifically, the Commission 
believes that the Market Wide Risk Protection functionality may help 
members to mitigate the potential risks associated with entering and/or 
executing a level of orders that exceeds their risk management 
thresholds that may result from, for example, technology issues with 
electronic trading systems. Further, the Commission notes that other 
exchanges have established risk protection mechanisms for members and 
market makers that are similar in many respects to ISE Mercury's 
proposal.\20\
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    \19\ The Exchange currently provides members with limit order 
price protections that reject orders priced too far outside of the 
Exchange's best bid or offer. See ISE Mercury Rule 714(b)(2).
    \20\ See, e.g., Miami International Securities Exchange, LLC 
Rule 519A (``Risk Protection Monitor''); BATS BZX Exchange, Inc. 
Rule 21.16 (``Risk Monitor Mechanism'').
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    Proposed Rule 714(d) imposes a mandatory obligation on ISE Mercury 
members to utilize the Market Wide Risk Protection functionality. The 
Commission notes that, although the Exchange will establish minimum and 
maximum permissible parameters for the time period values, members will 
have discretion to set the threshold values for the order entry and 
order execution parameters.\21\ If members do not independently set 
such parameters, they will be subject to the default parameters 
established by ISE Mercury.\22\ While the Commission believes that the 
Exchange's proposed rule provides members flexibility to tailor the 
Market Wide Risk Protection to their respective risk management needs, 
the Commission reminds members to be mindful of their obligations to, 
among other things, seek best execution of orders they handle on an 
agency basis and consider their best execution obligations when 
establishing parameters for the Market Wide Risk Protection or 
utilizing the default parameters set by ISE Mercury.\23\ For example, 
an abnormally low order entry parameter, set over an abnormally long 
specified time period should be carefully scrutinized, particularly if 
a member's order flow to ISE Mercury contains agency orders. To the 
extent that a member chooses sensitive parameters, a member should 
consider the effect of its chosen settings on its ability to receive a 
timely execution on marketable agency orders that it sends to ISE 
Mercury in various market conditions. The Commission cautions brokers 
considering their best execution obligations to be aware that the 
agency orders they represent may be rejected as a result of the Market 
Wide Risk Protection functionality.
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    \21\ The Exchange has represented that it anticipates that the 
minimum and maximum values for the applicable time period will be 
initially set at one second and a full trading day, respectively, 
which the Commission believes gives members wide latitude in 
establishing the applicable time periods. See Notice, supra note 3, 
at 22141 n.9.
    \22\ Proposed Rule 714(d).
    \23\ See Securities Exchange Act Release No. 37619A (Sept. 6, 
1996), 61 FR 48290, at 48323 (Sept. 12, 1996) (Order Execution 
Obligations adopting release); see also Securities Exchange Act 
Release No. 51808 (June 9, 2005), 70 FR 37496, 37537-8 (June 29, 
2005) (Regulation NMS adopting release).
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    As discussed above, ISE Mercury determined not to establish minimum 
and maximum permissible settings for the order entry and order 
execution parameters in its rule and indicated its intent to set a 
minimum and maximum for the time period parameters that provide broad 
discretion to members (i.e., one second and a full trading day, 
respectively).\24\ In light of these broad limits, the Commission 
expects ISE Mercury to periodically assess whether the Market Wide Risk 
Protection measures are operating in a manner that is consistent with 
the promotion of fair and orderly markets, including whether the 
default values and minimum and maximum permissible parameters for the 
applicable time period established by ISE Mercury continue to be 
appropriate and operate in a manner consistent with the Act and the 
rules thereunder.
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    \24\ See Notice, supra note 3, at 22141 n.9; see also supra note 
21.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-ISEMercury-2016-07) be, and 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
Brent J. Fields,
Secretary.
[FR Doc. 2016-12890 Filed 6-1-16; 8:45 am]
 BILLING CODE 8011-01-P


