
[Federal Register Volume 82, Number 15 (Wednesday, January 25, 2017)]
[Notices]
[Pages 8469-8472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01608]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79829; File No. SR-ISE-2016-29]


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

January 18, 2017.

I. Introduction

    On December 12, 2016, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') 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 16, 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. 79530 (December 12, 
2016), 81 FR 91221 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange established PIM in December 2004 as a price 
improvement mechanism.\4\ Pursuant to ISE 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

[[Page 8470]]

January 18, 2017.\6\ The Exchange proposes to make the Pilot permanent, 
and also proposes to amend the Auction eligibility requirements for 
certain Agency Orders of less than 50 option contracts.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 50819 (December 8, 
2004), 69 FR 75093 (December 15, 2004) (SR-ISE-2003-06) (``PIM 
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. 78344 (July 15, 
2016), 81 FR 47459 (July 21, 2016) (SR-ISE-2016-17) (``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 order book on the same side of the 
Agency Order.\7\
---------------------------------------------------------------------------

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

    ISE proposes to amend ISE 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 July 15, 2017, ISE will adopt a member conduct 
standard to implement this requirement.\8\ 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 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-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. See 
Notice, supra note 3, at 91223 n.7.
---------------------------------------------------------------------------

    To enforce this requirement, ISE also proposes to add ISE Rule 
1614(d)(4), which will provide that any member who enters an order into 
PIM for less than 50 contracts, while the difference between the NBBO 
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 September 15, 2017.\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\ 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'') filed 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. See Securities Exchange Act Release No. 
79539 (December 13, 2016), 81 FR 91982 (December 19, 2016) (SR-
ISEMercury-2016-25). ISE Mercury proposed that its member conduct 
standard shall be in effect until a date specified by ISE Mercury 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.
    \10\ See Notice, supra note 3, at 91223.
---------------------------------------------------------------------------

    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 order book on the same side of 
the Agency Order.
---------------------------------------------------------------------------

    \11\ See id. at 91224. See also proposed ISE 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 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.\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 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 91224.
    \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 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 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

[[Page 8471]]

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 91224-25. See also Exhibit 3 
to SR-ISE-2016-29.
---------------------------------------------------------------------------

    The Exchange compiled price improvement data in simple PIM orders 
from January through June 2016. 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.\19\ Of these, the greatest 
number of contracts (43,888) received no price improvement. 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.\20\
---------------------------------------------------------------------------

    \19\ According to the Exchange, this discussion of January 2016 
data is illustrative of data that was gathered between January 2016 
and July 2016. See Notice, supra note 3, at 91224 n.12. The complete 
underlying data for January 2016 through June 2016 was attached as 
Exhibits 3A and 3B to the Notice.
    \20\ See Notice, supra note 3, at 91224.
---------------------------------------------------------------------------

    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 contracts (6,254) received price improvement of 
$0.05 to $0.10, and 44 contracts received no price improvement.\21\
---------------------------------------------------------------------------

    \21\ See id. at 91224-25.
---------------------------------------------------------------------------

    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.\22\ 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.\23\
---------------------------------------------------------------------------

    \22\ See id. at 91225.
    \23\ See id.
---------------------------------------------------------------------------

    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.\24\
---------------------------------------------------------------------------

    \24\ See id.
---------------------------------------------------------------------------

    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.\25\
---------------------------------------------------------------------------

    \25\ See id.
---------------------------------------------------------------------------

    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.\26\ The Exchange therefore has 
requested that the Commission approve the no-minimum size requirement 
on a permanent basis.
---------------------------------------------------------------------------

    \26\ See id.
---------------------------------------------------------------------------

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,\27\ (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.
---------------------------------------------------------------------------

    \27\ The Commission notes that, at the time of the filing of 
this proposal, the duration of the exposure period was 500 
milliseconds. See Securities Exchange Act Release No. 68849 
(February 6, 2013), 78 FR 9973 (February 12, 2013) (SR-ISE-2012-
100). 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. 79733 (January 4, 2017), 82 FR 3055 
(January 10, 2017) (SR-ISE-2016-26).
---------------------------------------------------------------------------

    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 673 early terminated Auctions. The number 
of orders in early terminated PIM auctions constituted 0.15% of total 
PIM orders.\28\ 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.\29\ 
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.\30\
---------------------------------------------------------------------------

    \28\ See Notice, supra note 3, at 91225.
    \29\ See id.
    \30\ See id. at 91226.
---------------------------------------------------------------------------

    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.\31\ The Exchange 
therefore has requested that the Commission approve this aspect of the 
Pilot on a permanent basis.
---------------------------------------------------------------------------

    \31\ 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.\32\ In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\33\ 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

[[Page 8472]]

general, to protect customers, issuers, brokers and dealers.
---------------------------------------------------------------------------

    \32\ 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).
    \33\ 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 for 
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.\34\ 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.\35\ 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.
---------------------------------------------------------------------------

    \34\ See Exhibit 3 to SR-ISE-2016-29.
    \35\ See Notice, supra note 3 at 91976.
---------------------------------------------------------------------------

    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 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.\36\ 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.
---------------------------------------------------------------------------

    \36\ See Exhibit 3 to SR-ISE-2016-29.
---------------------------------------------------------------------------

    The Commission further notes that, as discussed more fully above, 
ISE 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.\37\ 
As described in greater detail above, ISE proposes to enforce this 
requirement under proposed ISE Rule 1614(d)(4). The Commission believes 
that ISE's proposed member conduct standard and its 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 July 15, 2017.\38\
---------------------------------------------------------------------------

    \37\ 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 91223.
    \38\ See Notice, supra note 3, at 91223 & n.7.
---------------------------------------------------------------------------

    Thus, the Commission has determined to approve the Exchange's 
proposed revisions to ISE Rule 723(b), Supplementary Material .03 and 
.05 to ISE Rule 723, and ISE Rule 1614(d), 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,\39\ that the proposed rule change (SR-ISE-2016-29), be and hereby 
is approved.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01608 Filed 1-24-17; 8:45 am]
 BILLING CODE 8011-01-P


