
[Federal Register Volume 81, Number 242 (Friday, December 16, 2016)]
[Notices]
[Pages 91221-91227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30257]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79530; File No. SR-ISE-2016-29]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change To Amend ISE Rule 723 and 
To Make Pilot Program Permanent

December 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 December 12, 2016, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchange. 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 Exchange proposes to amend ISE Rule 723, concerning its Price

[[Page 91222]]

Improvement Mechanism (``PIM''). Certain aspects of PIM are currently 
operating on a pilot basis (``Pilot''), which was initially approved by 
the Commission in 2004,\3\ and which is set to expire on January 18, 
2017.\4\ The Pilot concerns (i) the termination of the exposure period 
by unrelated orders; and (ii) no minimum size requirement of orders 
eligible for PIM. ISE seeks to make the Pilot permanent, and also 
proposes to change the requirements for providing price improvement for 
Agency Orders of less than 50 option contracts.
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    \3\ See Securities Exchange Act Release No. 50819 (December 8, 
2004), 69 FR 75093 (December 15, 2004) (SR-ISE-2003-06) (``PIM 
Approval Order'').
    \4\ See Securities Exchange Act Release No. 78344 (July 15, 
2016), 81 FR 47459 (July 21, 2016) (SR-ISE-2016-17).
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.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 Exchange 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 Exchange 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 make permanent 
certain pilots within Rule 723, relating to PIM. Paragraph .03 of the 
Supplementary Material to Rule 723 provides that there is no minimum 
size requirement for orders to be eligible for PIM. Paragraph .05 
concerns the termination of the exposure period by unrelated orders. In 
addition, ISE proposes to modify the requirements for PIM auctions 
involving less than 50 contracts (other than auctions involving Complex 
Orders) where the National Best Bid and Offer (``NBBO'') is only $0.01 
wide.
Background
    The Exchange adopted PIM in 2004 as a price-improvement mechanism 
on the Exchange.\5\ The PIM is a process that allows Electronic Access 
Members (``EAM'') to provide price improvement opportunities for a 
transaction wherein the Member seeks to execute an agency order as 
principal or execute an agency order against a solicited order (a 
``Crossing Transaction''). A Crossing Transaction is comprised of the 
order the EAM represents as agent (the ``Agency Order'') and a counter-
side order for the full size of the Agency Order (the ``Counter-Side 
Order''). The Counter-Side Order may represent interest for the 
Member's own account, or interest the Member has solicited from one or 
more other parties, or a combination of both.
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    \5\ In addition to the PIM Approval Order and the most recent 
extension cited above, the following proposed rule changes have been 
submitted in connection with PIM. See Securities Exchange Act 
Release Nos. 52027 (July 13, 2005), 70 FR 41804 (July 20, 2005) (SR-
ISE-2005-30); 54146 (July 14, 2006), 71 FR 41490 (July 21, 2006) 
(SR-ISE-2006-39); 56106 (July 19, 2007), 72 FR 40914 (July 25, 2007) 
(SR-ISE-2007-62); 56156 (July 27, 2007), 72 FR 43305 (August 3, 
2007) (SR-ISE-2007-66); 58197 (July 18, 2008), 73 FR 43810 (July 28, 
2008) (SR-ISE-2008-60); 60333 (July 17, 2009), 74 FR 36792 (July 24, 
2009) (SR-ISE-2009-52); 62513 (July 16, 2010), 75 FR 43221 (July 23, 
2010) (SR-ISE-2010-75); 64931 (July 20, 2011), 76 FR 44642 (July 26, 
2011) (SR-ISE-2011-41); 67202 (June 14, 2012), 77 FR 36589 (June 19, 
2012) (SR-ISE-2012-54); 69853 (June 25, 2013), 78 FR 39390 (July 1, 
2013) (SR-ISE-2013-41); 72467 (June 25, 2014), 79 FR 37377 (July 1, 
2014) (SRISE-2014-33); 75482 (July 17, 2015), 80 FR 43807 (July 23, 
2015) (SR-ISE-2015-23).
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    Rule 723 sets forth the criteria pursuant to which the PIM is 
initiated. Specifically, a Crossing Transaction must be entered only at 
a price that is equal to or better than the national best bid or offer 
(``NBBO'') and better than the limit order or quote on the ISE order 
book on the same side of the Agency Order. The Crossing Transaction may 
be priced in one-cent increments. The Crossing Transaction may not be 
canceled, but the price of the Counter-Side Order may be improved 
during the exposure period.
    Rule 723 also sets forth requirements relating to the exposure of 
orders in PIM and the termination of the exposure period. Upon entry of 
a Crossing Transaction into the Price Improvement Mechanism, a 
broadcast message that includes the series, price and size of the 
Agency Order, and whether it is to buy or sell, will be sent to all 
Members. This broadcast message will not be included in the ISE 
disseminated best bid or offer and will not be disseminated through 
OPRA. Members will be given 500 milliseconds to indicate the size and 
price at which they want to participate in the execution of the Agency 
Order (``Improvement Orders''). Improvement Orders may be entered by 
all Members for their own account or for the account of a Public 
Customer in one-cent increments at the same price as the Crossing 
Transaction or at an improved price for the Agency Order, and for any 
size up to the size of the Agency Order. During the exposure period, 
Improvement Orders may not be canceled, but may be modified to (1) 
increase the size at the same price, or (2) improve the price of the 
Improvement Order for any size up to the size of the Agency Order. 
During the exposure period, responses (including the Counter Side 
Order, Improvement Orders, and any changes to either) submitted by 
Members shall not be visible to other auction participants. The 
exposure period will automatically terminate (i) at the end of the 500 
millisecond period, (ii) upon the receipt of a market or marketable 
limit order on the Exchange in the same series, or (iii) upon the 
receipt of a nonmarketable limit order in the same series on the same 
side of the market as the Agency Order that would cause the price of 
the Crossing Transaction to be outside of the best bid or offer on the 
Exchange.
    Rule 723 also describes how orders will be executed at the end of 
the exposure period. Specifically, at the end of the exposure period, 
the Agency Order will be executed in full at the best prices available, 
taking into consideration orders and quotes in the Exchange market, 
Improvement Orders, and the Counter-Side Order. The Agency Order will 
receive executions at multiple price levels if there is insufficient 
size to execute the entire order at the best price. At a given price, 
Priority Customer interest is executed in full before Professional 
Orders and any other interest of Members (i.e., proprietary interest 
from Electronic Access Members and Exchange market makers).
    After Priority Customer interest at a given price, Professional 
Orders and Members' interest will participate in the execution of the 
Agency Order based upon the percentage of the total number of contracts 
available at the price that is represented by the size of the Members' 
interest.
    In the case where the Counter-Side Order is at the same price as 
Members' interest (after Priority Customer interest at a given price), 
the Counter-Side order will be allocated the greater of one (1) 
contract or forty percent (40%) of the initial size of the Agency Order 
before other Member interest is executed. Upon entry of Counter-Side 
orders, Members can elect to automatically match the price and size of 
orders, quotes and responses received during the exposure period up to 
a specified

[[Page 91223]]

limit price or without specifying a limit price. In this case, the 
Counter-Side order will be allocated its full size at each price point, 
or at each price point within its limit price if a limit is specified, 
until a price point is reached where the balance of the order can be 
fully executed. At such price point, the Counter-Side order shall be 
allocated the greater of one contract or forty percent (40%) of the 
original size of the Agency Order, but only after Priority Customer 
Orders at such price point are executed in full. Thereafter, all other 
orders, Responses, and quotes at the price point will participate in 
the execution of the Agency Order based upon the percentage of the 
total number of contracts available at the price that is represented by 
the size of the order, Response or quote. An election to automatically 
match better prices cannot be cancelled or altered during the exposure 
period.
    When a market order or marketable limit order on the opposite side 
of the market from the Agency Order ends the exposure period, it will 
participate in the execution of the Agency Order at the price that is 
mid-way between the best counter-side interest and the NBBO, so that 
both the market or marketable limit order and the Agency Order receive 
price improvement. Transactions will be rounded, when necessary, to the 
$0.01 increment that favors the Agency Order.
The Pilot
    As described above, two components of PIM are currently operating 
on a pilot basis: (i) The termination of the exposure period by 
unrelated orders; and (ii) no minimum size requirement of orders 
entered into PIM. The pilot has been extended until January 18, 
2017.\6\
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    \6\ See note 4 above.
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    As described in greater detail below, during the pilot period the 
Exchange has been required to submit, and has been submitting, certain 
data periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders within the PIM, that there is significant price 
improvement for all orders executed through the PIM, and that there is 
an active and liquid market functioning on the Exchange both within PIM 
and outside of the Auction mechanism. The Exchange has also analyzed 
the impact of certain aspects of the Pilot; for example, situation in 
which PIM is terminated prematurely by an unrelated order.
    The Exchange now seeks to have the Pilot approved on a permanent 
basis. In addition, the Exchange proposes to modify the scope of PIM so 
that, with respect to PIM orders for less than 50 option contracts, 
members will be required to receive price improvement of at least one 
minimum price improvement increment over the NBBO if the NBBO is only 
$0.01 wide. For orders of 50 contracts or more, or if the difference in 
the NBBO is greater than $0.01, and for Complex Orders, the 
requirements for price improvement remain the same.
Price Improvement for Orders Under 50 Contracts
    Currently, the PIM may be initiated if all of the following 
conditions are met. A Crossing Transaction must be entered only at a 
price that is equal to or better than the NBBO and better than the 
limit order or quote on the ISE order book on the same side of the 
Agency Order. The Crossing Transaction may be priced in one-cent 
increments. The Crossing Transaction may not be canceled, but the price 
of the Counter-Side Order may be improved during the exposure period.
    ISE proposes to amend Rule 723(b) to require Electronic Access 
Members to provide at least $0.01 price improvement for an Agency Order 
if that order is for less than 50 contracts and if the difference 
between the NBBO is $0.01. For the period beginning January 19, 2017 
until a date specified by the Exchange in a Regulatory Information 
Circular, which date shall be no later than July 15, 2017, ISE will 
adopt a member conduct standard to implement this requirement.\7\ Under 
this provision, ISE is proposing to amend the Auction Eligibility 
Requirements to require that, if the Agency Order is for less than 50 
option contracts, and if the difference between the NBBO is $0.01, an 
Electronic Access Member shall not enter a Crossing Transaction unless 
such Crossing Transaction is entered at a price that is one minimum 
price improvement increment better than the NBBO on the opposite side 
of the market from the Agency Order, and better than any limit order on 
the limit order book on the same side of the market as the Agency 
Order. This requirement will apply regardless of whether the Agency 
Order is for the account of a public customer, or where the Agency 
Order is for the account of a broker dealer or any other person or 
entity that is not a Public Customer.
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    \7\ The Exchange notes that its indirect parent company, U.S. 
Exchange Holdings, Inc. has been acquired by Nasdaq, Inc. See 
Securities Exchange Act Release No. 78119 (June 21, 2016), 81 FR 
41611 (June 27, 2016) (SR-ISE-2016-11). Pursuant to this 
acquisition, ISE platforms are migrating to Nasdaq platforms, 
including the platform that operates PIM. ISE intends to retain the 
proposed member conduct standard requiring price improvement for 
options orders of under 50 contracts where the difference between 
the NBBO is $0.01 until the ISE platforms and the corresponding 
symbols are migrated to the platforms operated by Nasdaq, Inc.
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    To enforce this requirement, ISE also proposes to amend Rule 1614 
(Imposition of Fines for Minor Rule Violations). Specifically, ISE will 
add Rule 1614(d)(4), which will provide that any Member who enters an 
order into PIM for less than 50 contracts, while the National Best Bid 
or Offer spread is $0.01, must provide price improvement of at least 
one minimum price improvement increment better than the NBBO on the 
opposite side of the market from the Agency Order, which increment may 
not be smaller than $0.01. Failure to provide such price improvement 
will result in members being subject to the following fines: $500 for 
the second offense, $1,000 for the third offense, and $2,500 for the 
fourth offense. Subsequent offenses will subject the member to formal 
disciplinary action. The Exchange will review violations on a monthly 
cycle to assess these violations. This provision shall also be in 
effect for the period beginning January 19, 2017 until a date specified 
by the Exchange in a Regulatory Information Circular, which date shall 
be no later than until September 15, 2017.\8\
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    \8\ As noted above, ISE will be eliminating the member conduct 
standard requiring price improvement for options orders of under 50 
contracts, where the difference between the NBBO is $0.01, by July 
15, 2017. However, ISE Mercury, LLC (``ISE Mercury'') is filing a 
rule change that adopts a similar member conduct standard, and that 
references proposed ISE Rule 1614(d)(4) as the means for enforcing 
its member conduct standard. ISE Mercury is proposing that its 
member conduct standard shall be in effect until a date specified by 
the Exchange in a Regulatory Information Circular, which date shall 
be no later than September 15, 2017. Accordingly, ISE is proposing 
that the date for eliminating Rule 1614(d)(4) shall be specified by 
the Exchange in a Regulatory Information Circular, which date shall 
be no later than until September 15, 2017.
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    The Exchange will conduct electronic surveillance of PIM to ensure 
that members comply with the proposed price improvement requirements 
for option orders of less than 50 contracts. Specifically, using an 
electronic surveillance system that produces alerts of potentially 
unlawful PIM orders, the Exchange will perform a frequent review of 
member firm activity to identify instances of apparent violations. Upon 
discovery of an apparent violation, the Exchange will attempt to 
contact the appropriate member firm to communicate the specifics of the 
apparent violation with the intent to assist the member firm in

[[Page 91224]]

preventing submission of subsequent problematic orders. The Exchange 
will review the alerts monthly and determine the applicability of the 
MRVP and appropriate penalty. The Exchange is not limited to the 
application of the MRVP, and may at its discretion, choose to escalate 
a matter for processing through the Exchange's disciplinary program.
    The Exchange is also proposing a systems-based mechanism to 
implement this price improvement requirement, which shall be effective 
following the migration of a symbol to INET, the platform operated by 
Nasdaq, Inc. that will also operate the PIM. Under this provision, if 
the Agency Order is for less than 50 option contracts, and if the 
difference between the National Best Bid and National Best Offer 
(``NBBO'') is $0.01, the Crossing Transaction must be entered at one 
minimum price improvement increment better than the NBBO on the 
opposite side of the market from the Agency Order and better than the 
limit order or quote on the ISE order book on the same side of the 
Agency Order.
    The Exchange believes that these changes to PIM may provide 
additional opportunities for Agency Orders of under 50 option contracts 
to receive price improvement over the NBBO where the difference in the 
NBBO is $0.01. ISE notes that the statistics for the current pilot, 
which include, among other things, price improvement for orders of less 
than 50 option contracts under the current auction eligibility 
requirements, show relatively small amounts of price improvement for 
such orders. ISE believes that the proposed requirements will therefore 
increase the price improvement that orders of under 50 option contracts 
may receive in PIM.
    The Exchange will retain the current requirements for auction 
eligibility where the Agency Order is for 50 option contracts or more, 
or if the difference between the NBBO is greater than $0.01. 
Accordingly, the Exchange is amending the Auction Eligibility 
Requirements to state that, if the PIM Order is for 50 option contracts 
or more or if the difference between the NBBO is greater than $0.01, 
the Crossing Transaction must be entered only at a price that is equal 
to or better than the NBBO and better than the limit order or quote on 
the ISE order book on the same side as the Agency Order.
No Minimum Size Requirement
    Supplemental Material .03 to Rule 723 provides that, as part of the 
current Pilot, there will be no minimum size requirement for orders to 
be eligible for the Auction.\9\ The Exchange proposed the no-minimum 
size requirement for the PIM because it believed that this would 
provide small customer orders with the opportunity to participate in 
the PIM and to receive corresponding price improvement. In initially 
approving the PIM, the Commission noted that the no minimum size 
requirement provided an opportunity for more market participants to 
participate in the auction. The Commission also stated that it would 
evaluate PIM during the Pilot Period to determine whether it would be 
beneficial to customers and to the options market as a whole to approve 
any proposal requesting permanent approval to permit orders of fewer 
than 50 contracts to be submitted to the PIM.\10\
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    \9\ The provision relating to the no minimum size requirement 
also requires the Exchange to submit certain data, periodically as 
required by the Commission, to provide supporting evidence that, 
among other things, there is meaningful competition for all size 
orders within the PIM, that there is significant price improvement 
for all orders executed through the PIM, and that there is an active 
and liquid market functioning on the Exchange outside of the PIM. 
Any raw data which is submitted to the Commission will be provided 
on a confidential basis.
    \10\ See PIM Approval Order, supra note 3.
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    As noted above, throughout the Pilot, the Exchange has been 
required to submit certain data periodically to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders within the PIM, that there is significant price 
improvement for all orders executed through the PIM, and that there is 
an active and liquid market functioning on the Exchange both within PIM 
and outside of the Auction mechanism.
    The Exchange believes that the data gathered since the approval of 
the Pilot establishes that there is liquidity and competition both 
within PIM and outside of PIM, and that there are opportunities for 
significant price improvement within PIM.\11\
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    \11\ Specifically, the Exchange gathered and reported nine 
separate data fields relating to simple PIM orders of fewer than 50 
contracts, including (1) the number of orders of fewer than 50 
contracts entered into the PIM; (2) the percentage of all orders of 
fewer than 50 contracts sent to ISE that are entered into the PIM; 
(3) the spread in the option, at the time an order of fewer than 50 
contracts is submitted to the PIM; and (4) of PIM trades, the 
percentage done at the NBBO plus $.01, plus $.02, plus $.03, etc. 
See PIM Approval Order, supra note 3.
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    In the period between January and June 2016, the PIM executed a 
total of 7.12 million contracts, which represented 2.86% of total ISE 
contract volume and 0.35% of industry volume. The percent of ISE volume 
traded in PIM ranged from 2.24% in June 2016 to 3.59% in February 2016. 
For complex orders, in January 2016, 25,854 complex orders of greater 
than 50 contracts were entered into PIM, which represents 0.18% of 
total ISE volume.
    The Exchange compiled price improvement data in simple PIM orders 
from January through June 2016 that divides the data into the following 
groups: (1) Orders of over 50 contracts where the Agency Order was on 
behalf of a Public Customer and ISE was at the NBBO; (2) orders of over 
50 contracts where the Agency Order was on behalf of a Public Customer 
and ISE was not at the NBBO; (3) orders of over 50 contracts where the 
Agency Order was on behalf of a non-customer and ISE was at the NBBO; 
(4) orders of over 50 contracts where the Agency Order was on behalf of 
a non-customer and ISE was not at the NBBO; (5) orders of 50 contracts 
or less where the Agency Order was on behalf of a Public Customer and 
ISE was at the NBBO; (6) orders of 50 contracts or less where the 
Agency Order was on behalf of a Public Customer and ISE was not at the 
NBBO; (7) orders of 50 contracts or less where the Agency Order was on 
behalf of a non-customer and ISE was at the NBBO; and (8) orders of 50 
contracts or less where the Agency Order was on behalf of a non-
customer and ISE was not at the NBBO.
    For January 2016, where the order was on behalf of a Public 
Customer, the order was for 50 contracts or less, and ISE was at the 
NBBO, the most contracts traded (194,249) occurred when the spread was 
between $0.05 and $0.10.\12\ Of these, the greatest number of contracts 
(43,888) received no price improvement. There was an average number of 
five participants when the spread was between $0.05 and $0.10. When the 
spread was $0.01 for this same category, a total of 17,202 contracts 
traded; 16,032 contracts received no price improvement, and 1,170 
received $0.01 price improvement. There was an average number of three 
participants when the spread was $0.01.
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    \12\ This discussion of January 2016 data is intended to be 
illustrative of data that was gathered between January 2016 and July 
2016. The complete underlying data for January 2016 through June 
2016 for these eight categories is attached as Exhibit 3a for simple 
orders entered in PIM, and Exhibit 3b for complex orders entered in 
PIM.
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    In comparison, in January 2016, where the order was on behalf of a 
Public Customer, and the order was for greater than 50 contracts, and 
ISE was at the NBBO, the most contracts traded (14,078) occurred where 
the spread was between $0.10 and $0.20. Of those contracts, the 
greatest number of

[[Page 91225]]

contracts (6,254) received price improvement of $0.05 to $0.10, and 44 
contracts received no price improvement. There was an average number of 
6 participants where the spread was between $0.10 and $0.20.
    In January 2016, where the order was on behalf of a Public 
Customer, the order was for 50 contracts or less, and ISE was not at 
the NBBO, the most contracts traded (76,326) occurred when the spread 
was between $0.05 and $0.10. Of these contracts, the greatest number of 
contracts (18,008) received no price improvement. There was an average 
number of four participants when the spread was between $0.05 and 
$0.10. In comparison, when the spread was $0.01 in this same category, 
a total of 17,687 contracts traded; 17,270 of those contracts received 
no price improvement, and 417 of those contracts received $0.01 price 
improvement. There was an average number of three participants when the 
spread was $0.01.
    In comparison, in January 2016, where the order was on behalf of a 
Public Customer, the order was for greater than 50 contracts, and ISE 
was not at the NBBO, the most contracts traded (10,541) occurred when 
the spread was between $0.10 and $0.20. Of these contracts, the 
greatest number (3,738) received price improvement of $0.05 to $0.10. 
There was an average number of 6 participants where the spread was 
between $0.10 and $0.20.
    In January 2016, the greatest number of complex orders traded 
(2,139) traded when the spread was at $0.05. Of those orders, 181 
represented orders of 50 or fewer contracts. During that period, the 
highest percentage (29.30%) of orders of greater than 50 contracts 
received $0.01 price improvement, and the highest percentage (20.4%) 
received no price improvement. For orders of greater than 50 contracts, 
the greatest number of orders (436) executed where there were no 
participants (besides the Electronic Access Member that entered the 
order). For orders of less than 50 contracts, the greatest number of 
orders (15) executed when there were no participants.
    ISE believes that the data gathered during the Pilot period 
indicates that there is meaningful competition in PIM auctions for all 
size orders, there is an active and liquid market functioning on the 
Exchange outside of the auction mechanism, and that, coupled with the 
proposed requirements for price improvement for options orders of under 
50 contracts, there are opportunities for significant price improvement 
for orders executed through PIM. The Exchange therefore believes that 
it is appropriate to approve the no-minimum size requirement on a 
permanent basis.
Early Conclusion of the PIM Auction
    Supplemental Material .05 to Rule 723 provides that Rule 723(c)(5) 
and Rule 723(d)(4), which relate to the termination of the exposure 
period by unrelated orders shall be part of the current Pilot. Rule 
723(c)(5) provides that the exposure period will automatically 
terminate (i) at the end of the 500 millisecond period,\13\ (ii) upon 
the receipt of a market or marketable limit order on the Exchange in 
the same series, or (iii) upon the receipt of a nonmarketable limit 
order in the same series on the same side of the market as the Agency 
Order that would cause the price of the Crossing Transaction to be 
outside of the best bid or offer on the Exchange. Rule 723(d)(4) 
provides that, when a market order or marketable limit order on the 
opposite side of the market from the Agency Order ends the exposure 
period, it will participate in the execution of the Agency Order at the 
price that is mid-way between the best counter-side interest and the 
NBBO, so that both the market or marketable limit order and the Agency 
Order receive price improvement. Transactions will be rounded, when 
necessary, to the $.01 increment that favors the Agency Order.\14\
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    \13\ As initially approved, this provision of Rule 723(c)(5) 
provided that the exposure period would automatically terminate at 
the end of the three second period. See Securities Exchange Act 
Release No. 49323 (February 26, 2004), 69 FR 10087 (March 3, 2004) 
(Notice of filing for SR-ISE-2003-06). This exposure period was 
subsequently reduced to one second, and then to the current 500 
milliseconds. See Securities Exchange Act Release Nos. 58224 (July 
25, 2008), 73 FR 44303 (July 30, 2008) (SR-ISE-2007-94); 68849 
(February 6, 2013), 78 FR 9973 (February 12, 2013) (SR-ISE-2012-
100). The Exchange notes that it is proposing to further modify the 
exposure period to a time period of no less than 100 milliseconds 
and no more than one second. See Securities Exchange Act Release No. 
79352 (November 18, 2016), 81 FR 85277 (November 25, 2016) (SR-ISE-
2016-26).
    \14\ When the Pilot was initially approved, there were two 
sections of Rule 723(d) that were approved on a pilot basis. Rule 
723(d)(5) was approved on a pilot basis, which was subsequently re-
numbered as current Rule 723(d)(4). See Securities Exchange Act 
Release No. 72554 (July 8, 2014), 79 FR 40830 (July 14, 2014) (SR-
ISE-2014-35). Rule 723(d)(6) was also approved on a pilot basis, but 
was subsequently deleted as that functionality was no longer offered 
on the Exchange. See Securities Exchange Act Release No. 68570 
(January 3, 2013) (SR-ISE-2012-82).
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    As with the no minimum size requirement, the Exchange has gathered 
data on these three conditions to assess the effect of early PIM 
Auction conclusions on the Pilot.\15\
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    \15\ The Exchange agreed to gather and submit the following data 
on this part of the Pilot: (1) The number of times that a market or 
marketable limit order in the same series on the same side of the 
market as the Agency Order prematurely ended the PIM auction, and 
the number of times such orders were entered by the same (or 
affiliated) firm that initiated the PIM that was terminated; (2) the 
percentage of PIM early terminations due to the receipt of a market 
or marketable limit order in the same series on the same side of the 
market that occurred within a \1/2\ second of the start of the PIM 
auction; the percentage that occurred within one second of the start 
of the PIM auction; the percentage that occurred within one and \1/
2\ second of the start of the PIM auction; the percentage that 
occurred within 2 seconds of the start of the PIM auction; the 
percentage that occurred within 2 and \1/2\ seconds of the PIM 
auction; and the average amount of price improvement provided to the 
Agency Order where the PIM is terminated early at each of these time 
periods; (3) the number of times that a market or marketable limit 
order in the same series on the opposite side of the market as the 
Agency Order prematurely ended the PIM auction and at what time the 
unrelated order ended the PIM auction, and the number of times such 
orders were entered by the same (or affiliated) firm that initiated 
the PIM that was terminated; (4) the percentage of PIM early 
terminations due to the receipt of a market or marketable limit 
order in the same series on the opposite side of the market that 
occurred within a \1/2\ second of the start of the PIM auction; the 
percentage that occurred within one second of the start of the PIM 
auction; the percentage that occurred within one and \1/2\ second of 
the start of the PIM auction; the percentage that occurred within 2 
seconds of the start of the PIM auction; the percentage that 
occurred within 2 and \1/2\ seconds of the PIM auction; and the 
average amount of price improvement provided to the Agency Order 
where the PIM is terminated early at each of these time periods; (5) 
the number of times that a nonmarketable limit order in the same 
series on the same side of the market as the Agency Order that would 
cause the price of the Crossing Transaction to be outside of the 
best bid or offer on the Exchange prematurely ended the PIM auction 
and at what time the unrelated order ended the PIM auction, and the 
number of times such orders were entered by the same (or affiliated) 
firm that initiated the PIM that was terminated; (6) the percentage 
of PIM early terminations due to the receipt of a market or 
marketable limit order in the same series on the same side of the 
market as the Agency Order that would cause the price of the 
Crossing Transaction to be outside of the best bid or offer on the 
Exchange that occurred within a \1/2\ second of the start of the PIM 
auction; the percentage that occurred within one second of the start 
of the PIM auction; the percentage that occurred within one and \1/
2\ second of the start of the PIM auction; the percentage that 
occurred within 2 seconds of the start of the PIM auction; the 
percentage that occurred within 2 and \1/2\ seconds of the PIM 
auction; and the average amount of price improvement provided to the 
Agency Order where the PIM is terminated early at each of these time 
periods; and (7) the average amount of price improvement provided to 
the Agency Order when the PIM auction is not terminated early (i.e., 
runs the full three seconds). See PIM Approval Order, supra note 3.
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    For the period from January 2016 through June 2016, there were a 
total of 673 early terminated auctions. The number of orders in early 
terminated PIM auctions constituted 0.15% of total PIM orders. There 
were a total of 9,595 contracts that traded through early terminated 
auctions. The number of contracts in early terminated PIM auctions 
represented 0.13% of total PIM contracts. Of the early terminated 
auctions, 49.93% of those auctions

[[Page 91226]]

received price improvement, and 37.31% of contracts that traded in an 
early-terminated auction received price improvement. Of the PIM 
auctions that terminated early and received price improvement from 
January 2016 through June 2016, the total amount of price improvement 
received was $185.11.
    For complex orders, in January 2016, one order terminated early, 
and the PIM period upon termination was greater than or equal to 0.5 
seconds. That order received $0.005 price improvement.
    Based on the data gathered during the pilot, the Exchange does not 
anticipate that any of these conditions will occur with significant 
frequency in either simple or complex orders, or will otherwise 
significantly affect the functioning of the PIM. The Exchange also 
notes 49.93% of auctions in simple orders that terminated early 
received price improvement, and that, for simple orders, 37.31% of the 
contracts in auctions that terminated early received price improvement, 
with a total price improvement of $185.11. The Exchange therefore 
believes it is appropriate to approve this aspect of the Pilot on a 
permanent basis.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\16\ in general and with 
Section 6(b)(5) of the Act,\17\ in that it is designed to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the Exchange.
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    \16\ 15 U.S.C. 78f.
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is also 
consistent with Section 6(b)(8) of the Act \18\ in that it does not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b)(8).
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    Specifically, the Exchange believes that PIM, including the rules 
to which the Pilot applies, results in increased liquidity available at 
improved prices, with competitive final pricing out of the complete 
control of the Electronic Access Member that initiated the auction. The 
Exchange believes that PIM promotes and fosters competition and affords 
the opportunity for price improvement to more options contracts. The 
Exchange believes that the changes to the PIM requiring price 
improvement of at least one minimum price improvement increment over 
the NBBO for Agency Orders of less than 50 option contracts where the 
difference in the NBBO is $0.01 will provide further price improvement 
for those orders, and thereby encourage additional submission of those 
orders into PIM. The Exchange believes that the proposal, which 
subjects members to the Minor Rule Violation Plan for failing to 
provide the required price improvement, coupled with the Exchange's 
surveillance efforts, are designed to facilitate members' compliance 
with the proposed requirement.
    The Exchange believes that approving the Pilot on a permanent basis 
is also consistent with the Act. With respect to the no minimum size 
requirement, the Exchange believes that the data gathered during the 
Pilot period indicates that there is meaningful competition in the PIM 
for all size orders, there is an active and liquid market functioning 
on the Exchange outside of the auction mechanism, and that there are 
opportunities for significant price improvement for orders executed 
through PIM, including for small customer orders.
    With respect to the early termination of the PIM, the Exchange 
believes that it is appropriate to terminate an auction (i) at the end 
of the 500 millisecond period, (ii) upon the receipt of a market or 
marketable limit order on the Exchange in the same series, or (iii) 
upon the receipt of a nonmarketable limit order in the same series on 
the same side of the market as the Agency Order that would cause the 
price of the Crossing Transaction to be outside of the best bid or 
offer on the Exchange. Based on the data gathered during the pilot, the 
Exchange does not anticipate that any of these conditions will occur 
with significant frequency for either simple or complex orders, or will 
otherwise disrupt the functioning of the PIM. The Exchange also notes 
that a significant percentage of contracts in auctions that terminated 
early received price improvement. The Exchange also believes that it is 
consistent with the Act to require that, when a market order or 
marketable limit order on the opposite side of the market from the 
Agency Order ends the exposure period, it will participate in the 
execution of the Agency Order at the price that is mid-way between the 
best counter-side interest and the NBBO, so that both the market or 
marketable limit order and the Agency Order receive price improvement.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposal will apply to all 
Exchange members, and participation in the PIM process is completely 
voluntary. Based on the data collected by the Exchange during the 
Pilot, the Exchange believes that there is meaningful competition in 
the PIM for all size orders, there are opportunities for significant 
price improvement for orders executed through PIM, and that there is an 
active and liquid market functioning on the Exchange outside of the 
PIM. The Exchange believes that requiring increased price improvement 
for Agency Orders may encourage competition by attracting additional 
orders to participate in the PIM. The Exchange believes that approving 
the Pilot on a permanent basis will not significantly impact 
competition, as the Exchange is proposing no other change to the Pilot 
beyond implementing it on a permanent basis.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be 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.

[[Page 91227]]

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-2016-29 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-2016-29. 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-2016-29 and should be 
submitted on or before January 6, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30257 Filed 12-15-16; 8:45 am]
 BILLING CODE 8011-01-P


