
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8452-8455]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01619]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79841; File No. SR-ISEMercury-2016-25]


Self-Regulatory Organizations; ISE Mercury LLC; Order Granting 
Approval of Proposed Rule Change To Amend ISE Mercury Rule 723 and To 
Make Pilot Program Permanent

January 18, 2017.

I. Introduction

    On December 12, 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 amend the eligibility requirements for its 
Price Improvement Mechanism (``PIM'' or ``Auction'') and make permanent 
those aspects of the PIM that are currently operating on a pilot basis. 
The proposed rule change was published for comment in the Federal 
Register on December 19, 2016.\3\ The Commission received no comments 
regarding the proposal. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79539 (December 13, 
2016), 81 FR 91982 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange adopted PIM as part of its application to be 
registered as a national securities exchange.\4\ Pursuant to ISE 
Mercury Rule 723, an Electronic Access Member (``EAM'') may 
electronically submit for execution an order it represents as agent 
(``Agency Order'') against principal interest or against a solicited 
order for the full size of the Agency Order, provided it submits the 
Agency Order for electronic execution into the PIM (a ``Crossing 
Transaction''). Parts of the PIM are currently operating on a pilot 
basis (``Pilot''),\5\ which is set to expire on January 18, 2017.\6\ 
The Exchange proposes to make the Pilot permanent, and also proposes to 
amend the Auction eligibility requirements for certain

[[Page 8453]]

Agency Orders of less than 50 option contracts.
---------------------------------------------------------------------------

    \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\ Two components of PIM were approved by the Commission on a 
pilot basis: (1) The early conclusion of the PIM; and (2) no minimum 
size requirement of orders.
    \6\ See Securities Exchange Act Release No. 78342 (July 15, 
2016), 81 FR 47481 (July 21, 2016) (SR-ISEMercury-2016-13) (``PIM 
July 2016 Extension'').
---------------------------------------------------------------------------

A. PIM Eligibility Requirements for Agency Orders of Fewer Than 50 
Contracts

    Currently, the PIM may be initiated if certain conditions are met. 
The Crossing Transaction must be entered only at a price that is equal 
to or better than the National Best Bid/Offer (``NBBO'') on the 
opposite side of the market from the Agency Order, and better than the 
limit order or quote on the ISE Mercury order book on the same side of 
the Agency Order.\7\
---------------------------------------------------------------------------

    \7\ See ISE Mercury Rule 723(b)(1).
---------------------------------------------------------------------------

    ISE Mercury proposes to amend ISE Mercury Rule 723(b) to require 
EAMs to provide at least $0.01 price improvement for an Agency Order if 
that order is for less than 50 option 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.\8\ Under this provision, ISE Mercury 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 EAM 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.
---------------------------------------------------------------------------

    \8\ 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. See Notice, supra note 3, at 91984 n.7.
---------------------------------------------------------------------------

    Failure to provide such price improvement will subject members to 
the fines set forth in ISE Rule 1614(d)(4).\9\ The Exchange stated that 
it will conduct electronic surveillance of the PIM to ensure that 
members comply with the proposed price improvement requirements for 
option orders of less than 50 contracts.\10\
---------------------------------------------------------------------------

    \9\ In a separate proposed rule change, ISE is proposing to 
adopt similar price improvement requirements for orders of fewer 
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 fewer 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. The Commission notes 
that the ISE proposal was approved in conjunction with this 
proposal. See Securities Exchange Act Release No. 34-79829 (January 
18, 2017) (SR-ISE-2016-29).
    \10\ See Notice, supra note 3, at 91984.
---------------------------------------------------------------------------

    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.\11\ Under this provision, 
if the Agency Order is for less than 50 option contracts, and if the 
difference between the 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 Mercury order book on the same 
side of the Agency Order.
---------------------------------------------------------------------------

    \11\ See id. See also proposed ISE Mercury Rule 723(b).
---------------------------------------------------------------------------

    The Exchange will retain the current requirements for PIM 
eligibility in all other instances. Accordingly, if the Agency 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.
    The Exchange believes that these changes to PIM may provide 
additional opportunities for Agency Orders of fewer than 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.\12\ The Exchange 
notes that the statistics for the current pilot, which include, among 
other things, price improvement for orders of fewer than 50 option 
contracts under the current Auction eligibility requirements, show 
relatively small amounts of price improvement for such orders.\13\ ISE 
Mercury believes that the proposed requirements will therefore increase 
the price improvement that orders of fewer than 50 option contracts may 
receive in PIM.\14\
---------------------------------------------------------------------------

    \12\ See Notice, supra note 3, at 91985.
    \13\ See id.
    \14\ See id.
---------------------------------------------------------------------------

B. Pilot Program

    Two components of the PIM were approved by the Commission on a 
pilot basis: (1) The early conclusion of the PIM; \15\ and (2) no 
minimum size requirement of orders. The provisions were approved for a 
pilot period that currently expires on January 18, 2017.\16\ The 
Exchange proposes to have the Pilot approved on a permanent basis.
---------------------------------------------------------------------------

    \15\ See ISE Mercury Rule 723(c)(5) and (d)(4).
    \16\ See PIM July 2016 Extension, supra note 6.
---------------------------------------------------------------------------

    During the Pilot period, the Exchange submitted certain data 
periodically as required by the Commission, to provide supporting 
evidence that, among other things, there is meaningful competition for 
all size orders, there is significant price improvement available 
through the PIM, and that there is an active and liquid market 
functioning on the Exchange outside of the Auction mechanism.\17\
---------------------------------------------------------------------------

    \17\ See Supplementary Material .03 to ISE Mercury Rule 723.
---------------------------------------------------------------------------

1. 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. The Exchange believes that the data 
gathered since the approval of the Pilot, which it discussed in the 
Notice, establishes that there is liquidity and competition both within 
the PIM and outside of the PIM, and that there are opportunities for 
significant price improvement within the PIM.\18\
---------------------------------------------------------------------------

    \18\ See Notice, supra note 3, at 91985-86. See also Exhibit 3 
to SR-ISEMercury-2016-25.
---------------------------------------------------------------------------

    The Exchange compiled price improvement data in orders from 
February through June 2016. 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.\19\ All of these contracts

[[Page 8454]]

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.\20\
---------------------------------------------------------------------------

    \19\ According to the Exchange, this discussion of March 2016 
data is illustrative of data that was gathered between February 2016 
and July 2016. See Notice, supra note 3, at 91985 n.13. The complete 
underlying data for February 2016 through June 2016 was attached as 
Exhibit 3 to the Notice.
    \20\ See Notice, supra note 3, at 91985.
---------------------------------------------------------------------------

    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. The greatest number of these contracts (429) received 
$0.05-$0.10 price improvement.\21\
---------------------------------------------------------------------------

    \21\ See id.
---------------------------------------------------------------------------

    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 was 
$0.01. Of this category, the greatest number of contracts (3,722) 
received no price improvement, and 50 contracts received $0.01 price 
improvement.\22\
---------------------------------------------------------------------------

    \22\ See id.
---------------------------------------------------------------------------

    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.\23\
---------------------------------------------------------------------------

    \23\ See id.
---------------------------------------------------------------------------

    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.\24\ The Exchange therefore has requested that the 
Commission approve the no-minimum size requirement on a permanent 
basis.
---------------------------------------------------------------------------

    \24\ See id. at 91986.
---------------------------------------------------------------------------

2. Early Conclusion of the PIM

    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,\25\ (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 $0.01 increment that favors the Agency Order.
---------------------------------------------------------------------------

    \25\ The Commission notes that, at the time of the filing of 
this proposal, the duration of the exposure period was 500 
milliseconds. The Exchange recently received approval to modify the 
exposure period to a time period designated by the Exchange of no 
less than 100 milliseconds and no more than one second. See 
Securities Exchange Act Release No. 79731 (January 4, 2017), 82 FR 
3058 (January 10, 2017) (SR-ISEMercury-2016-21).
---------------------------------------------------------------------------

    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. 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.\26\ 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.\27\
---------------------------------------------------------------------------

    \26\ See Notice, supra note 3, at 91986.
    \27\ See id.
---------------------------------------------------------------------------

    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.\28\ The Exchange therefore has requested that the Commission 
approve this aspect of the Pilot on a permanent basis.
---------------------------------------------------------------------------

    \28\ See id.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with Section 6(b) of the Act.\29\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\30\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to 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 customers, issuers, brokers and dealers.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b). In approving this proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As part of its proposal, the Exchange provided summary data on 
Exhibit 3 of its filing for the period January through June 2016, which 
the Exchange and Commission both publicly posted on their respective 
Web sites. Among other things, this data is useful in assessing the 
level of price improvement in the Auction, in particular for orders of 
fewer than 50 contracts; the degree of competition for order flow in 
such Auctions; and a comparison of liquidity in the Auctions with 
liquidity on the Exchange generally.\31\ Based on the data provided by 
the Exchange, the Commission believes that the Exchange's price 
improvement auction generally delivers a meaningful opportunity for 
price improvement to orders, including orders for fewer than 50 
contracts, when the spread in the option is $0.02 or more. At the same 
time, as the Exchange has recognized, the data do not demonstrate that 
such orders have realized significant price improvement when the NBBO 
has a bid/ask differential of $0.01.\32\ Recognizing this, the Exchange 
has proposed to amend the Auction eligibility requirements to require 
the Initiating Participant to guarantee at least $0.01 of price 
improvement for Agency Orders of fewer than 50 contracts where the NBBO 
has a bid/ask differential of $0.01, whether or not the Exchange BBO is 
the same as the NBBO.
---------------------------------------------------------------------------

    \31\ See Exhibit 3 to SR-ISEMercury-2016-25.
    \32\ See Notice, supra note 3, at 91985.
---------------------------------------------------------------------------

    The Exchange's proposal to modify the Auction eligibility 
requirements for orders of fewer than 50 contracts and seek permanent 
approval of the Pilot, as amended with the new provision, will, in the 
Commission's view, promote opportunities for price improvement for such 
orders when the NBBO is $0.01 wide, while continuing to provide 
opportunities for price improvement when spreads are wider than $0.01.
    In addition, the Commission has carefully evaluated the Pilot data 
and

[[Page 8455]]

has determined that it would be beneficial to customers and to the 
options market as a whole to approve on a permanent basis the 
provisions concerning early conclusion of the PIM. The Commission notes 
that there have been few instances of early termination of the PIM.
    The Commission believes that, particularly for Auctions for fewer 
than 50 contracts when the bid/ask differential is wider than $0.01, 
the data provided by the Exchange support its proposal to make the 
Pilot permanent. The data demonstrate that the Auction generally 
provides price improvement opportunities to orders, including orders of 
retail customers and particularly when the bid/ask differential is 
wider than $0.01; that there is meaningful competition for orders on 
the Exchange; and that there exists an active and liquid market 
functioning on the Exchange outside of the Auction.\33\ The Commission 
further believes that the proposed revisions to the eligibility 
requirements for orders of fewer than 50 contracts with respect to 
circumstances when the NBBO is no more than $0.01 wide should help to 
enhance the operation of the Auction by providing meaningful 
opportunities for price improvement in such circumstances, and should 
benefit investors and others in a manner that is consistent with the 
Act.
---------------------------------------------------------------------------

    \33\ See Exhibit 3 to SR-ISEMercury-2016-25.
---------------------------------------------------------------------------

    The Commission further notes that, as discussed more fully above, 
ISE Mercury is initially proposing to implement is price improvement 
requirement for Agency Orders of fewer than 50 option contracts where 
the difference in the NBBO is $0.01 with a member conduct standard.\34\ 
As described in greater detail above, ISE Mercury proposes to enforce 
this requirement under ISE Rule 1614(d)(4). The Commission believes 
that ISE Mercury's proposed member conduct standard and ISE Rule 
1614(d)(4) are reasonable means to implement the price improvement 
requirement until implementation of its proposed systems-based 
mechanism for this requirement, which will become effective following 
the migration of a symbol to INET, the platform operated by Nasdaq, 
Inc. that will also operate the PIM. The Commission further notes that 
the Exchange has represented that its proposed member conduct standard 
will be effective until the migration of all symbols to the INET 
platform, which shall be no later than September 15, 2017.\35\
---------------------------------------------------------------------------

    \34\ The Exchange stated that it will conduct electronic 
surveillance of the PIM to ensure that members comply with the 
proposed price improvement requirements for option orders of fewer 
than 50 contracts. See Notice, supra note 3, at 91284.
    \35\ See Notice, supra note 3, at 91284 & n.7.
---------------------------------------------------------------------------

    Thus, the Commission has determined to approve the Exchange's 
proposed revisions to ISE Mercury Rule 723(b) and Supplementary 
Material .03 and .05 to ISE Mercury Rule 723, and to approve the Pilot, 
as proposed to be modified, on a permanent basis.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\36\ that the proposed rule change (SR-ISEMercury-2016-25), be and 
hereby is approved.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
---------------------------------------------------------------------------

    \37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01619 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P


