
[Federal Register Volume 81, Number 243 (Monday, December 19, 2016)]
[Notices]
[Pages 91982-91987]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30392]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79539; File No. SR-ISEMercury-2016-25]


Self-Regulatory Organizations; ISE Mercury LLC; Notice of Filing 
of Proposed Rule Change to Amend ISE Mercury Rule 723 and To Make Pilot 
Program Permanent

December 13, 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, ISE Mercury, LLC (the ``Exchange'' or ``ISE 
Mercury'') filed with the Securities and Exchange

[[Page 91983]]

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 Mercury Rule 723, concerning its 
Price Improvement Mechanism (``PIM''). Certain aspects of PIM are 
currently operating on a pilot basis (``Pilot''), which is set to 
expire on January 18, 2017.\3\ 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 Mercury 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. 78342 (July 15, 
2016), 81 FR 47481 (July 21, 2016) (SR-ISEMercury-2016-13).
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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 Mercury proposes to modify the requirements for PIM 
auctions involving less than 50 contracts where the National Best Bid 
and Offer (``NBBO'') is only $0.01 wide.
Background
    The Exchange adopted PIM as part of its application to be 
registered as a national securities exchange.\4\ In approving PIM, the 
Commission noted that it was largely based on a similar functionality 
offered by the International Securities Exchange, LLC (``ISE'').\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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    \4\ See Securities Exchange Act Release No. 76998 (January 29, 
2016), 81 FR 6066 (February 4, 2016) (File No. 10-221) (``Exchange 
Approval Order'').
    \5\ See Exchange Approval Order, supra note 4.
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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 Exchange 
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 Mercury 
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 91984]]

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 
$.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 3 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, 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 Exchange 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 Mercury 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 September 15, 
2017, ISE Mercury will adopt a member conduct standard to implement 
this requirement.\7\ Under this provision, the Exchange 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. Failure to provide such price improvement will subject 
Members to the fines set forth in Rule 1614(d)(4) of the International 
Securities Exchange, LLC (``ISE'').\8\
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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-ISEMercury-2016-10). Pursuant to this 
acquisition, ISE Mercury platforms are migrating to Nasdaq 
platforms, including the platform that operates PIM. ISE Mercury 
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 Mercury platforms 
and the corresponding symbols are migrated to the platforms operated 
by Nasdaq, Inc.
    \8\ In a separate proposed rule change, ISE is proposing to 
adopt similar price improvement requirements for orders of less than 
50 contracts for its PIM. As part of that rule change, ISE is 
proposing to amend ISE Rule 1614 (Imposition of Fines for Minor Rule 
Violations) to add Rule 1614(d)(4), which will provide that, 
beginning January 19, 2017, 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. ISE will review violations 
on a monthly cycle to assess these violations.
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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 
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

[[Page 91985]]

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 and therefore encourage the increased submission of 
orders of under 50 option contracts. The Exchange 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 Mercury 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 Mercury 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\ As with the ISE PIM, 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 ISE PIM, the Commission 
noted that the no minimum size requirement provided an opportunity for 
more market participants to participate in the auction.\10\ 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.\11\
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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 Securities Exchange Act Release No. 50819 (December 8, 
2004), 69 FR 75093 (December 15, 2004) (SR-ISE-2003-06) (``ISE PIM 
Approval Order'').
    \11\ Id.
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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.\12\
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    \12\ Specifically, the Exchange gathered and reported nine 
separate data fields relating to 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 the Exchange 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 Exhibit B to ISE Mercury Exchange Application (File No. 10-
209).
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    In the period between February and June 2016, the PIM executed a 
total of 613,353 contracts, which represented 26.36% of total ISE 
Mercury contract volume and 0.04% of industry volume. The percent of 
ISE Mercury volume traded in PIM ranged from 0% in February 2016 to 
37.88% in June 2016.
    The Exchange compiled price improvement data in orders from 
February 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 Mercury was at the NBBO; (2) orders 
of over 50 contracts where the Agency Order was on behalf of a Public 
Customer and ISE Mercury was not at the NBBO; (3) orders of over 50 
contracts where the Agency Order was on behalf of a non-customer and 
ISE Mercury was at the NBBO; (4) orders of over 50 contracts where the 
Agency Order was on behalf of a non-customer and ISE Mercury 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 Mercury was at the NBBO; (6) 
orders of 50 contracts or less where the Agency Order was on behalf of 
a Public Customer and ISE Mercury 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 Mercury 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 Mercury was not at the NBBO.
    For March 2016, where the order was on behalf of a Public Customer, 
the order was for 50 contracts or less, and ISE Mercury was at the 
NBBO, the most contracts traded (2,525) occurred when the spread was 
$0.03, with an average number of two participants.\13\ All of these 
contracts received $0.01 price improvement. When the spread was $0.01 
for this same category, a total of 734 contracts traded, with none of 
those contracts receiving price improvement. There was an average 
number of 3 participants when the spread was $0.01.
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    \13\ This discussion of March 2016 data is intended to be 
illustrative of data that was gathered between February 2016 and 
July 2016. The complete underlying data for February 2016 through 
June 2016 for these eight categories is attached as Exhibit 3.
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    In comparison, where the order was on behalf of a Public Customer, 
the order was for greater than 50 contracts, and ISE Mercury was at the 
NBBO, the most contracts traded (934) occurred when the spread was 
$0.10 to $0.20, with an average number of 3 participants. The greatest 
number of these contracts (429) received $0.05-$0.10 price improvement.
    In March 2016, where the order was on behalf of a Public Customer, 
the order was for 50 contracts or less, and ISE Mercury was not at the 
NBBO, the most contracts traded (3,772) occurred when the spread $0.01. 
Of this category, the greatest number of contracts (3,722) received no 
price improvement, and 50 contracts received $0.01 price improvement. 
There was an average number of 2 participants when the spread was 
$0.01.
    In comparison, in March 2016, where the order was on behalf of a 
Public Customer, the order was for greater than 50 contracts, and ISE 
Mercury was not at the NBBO, the most contracts traded (1,431) occurred 
when the spread was $0.02. Of these contracts, the greatest number of 
contracts (758) received no price improvement. There was an

[[Page 91986]]

average number of 2 participants when the spread was $0.02.
    ISE Mercury 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 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,\14\ (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.
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    \14\ The Exchange notes that it is proposing to 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. 
79354 (November 18, 2016), 81 FR 85295 (November 25, 2016) (SR-
ISEMercury-2016-21).
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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 
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. See 
Exhibit B to ISE Mercury Exchange Application (File No. 10-209).
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    For the period from January 2016 through June 2016, there were a 
total of 77 early terminated auctions. The number of orders in early 
terminated PIM auctions constituted 0.35% of total PIM orders. There 
were a total of 1,581 contracts that traded through early terminated 
auctions. The number of contracts in early terminated PIM auctions 
represented 0.26% of total PIM contracts. Of the early terminated 
auctions, 46.75% of those auctions received price improvement, and 
31.37% of contracts that traded in an early-terminated auction received 
price improvement. Of the PIM auctions that terminated early and 
received price improvement from February 2016 through June 2016, the 
total amount of price improvement received was $16.53.
    Based on the data gathered during the pilot, the Exchange does not 
anticipate that any of these conditions will occur with significant 
frequency, or will otherwise significantly affect the functioning of 
the PIM. Of the early terminated auctions, 46.75% of those auctions 
received price improvement, and 31.37% of contracts that traded in an 
early-terminated auction received price improvement. The total amount 
of price improvement for PIM auctions that terminated early was $16.53. 
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).
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    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.
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    \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

[[Page 91987]]

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. 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. Based on the data 
gathered during the pilot, the Exchange does not anticipate that any of 
these conditions will occur with significant frequency, or will 
otherwise disrupt the functioning of the PIM. The Exchange also notes 
that a significant percentage of PIM auctions that terminated early 
executed at a price that was better than the NBBO at the time the 
auction began, and that a significant percentage of contracts in 
auctions that terminated early received 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. 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-ISEMercury 2016-25 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-ISEMercury-2016-25. 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-ISEMercury 2016-25 and 
should be submitted on or before January 9, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30392 Filed 12-16-16; 8:45 am]
 BILLING CODE 8011-01-P


