
[Federal Register Volume 82, Number 51 (Friday, March 17, 2017)]
[Notices]
[Pages 14243-14248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80225; File No. SR-ISE-2017-02]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 
1, To Amend the Exchange Opening Process

March 13, 2017.

I. Introduction

    On January 13, 2017, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') 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 Exchange's opening 
process. The proposed rule change was published for comment in the 
Federal Register on January 27, 2017.\3\ On March 3, 2017, the Exchange 
filed Amendment No. 1 to the proposed rule change.\4\ The Commission 
received no comment letters on the proposed rule change. This order 
approves the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79887 (February 2, 
2017), 82 FR 9090 (``Notice'').
    \4\ In Amendment No. 1, the Exchange provided clarifying details 
to its proposal, including: (i) Expanding its proposed definition of 
``Quality Opening Market''; (ii) clarifying that only Public 
Customer interest is routable during the Opening Process; (iii) 
clarifying that when routing orders during the Opening Process the 
Exchange will do so based on price/time priority of routable 
interest; and (iv) clarifying that the proposed opening rule will 
not provide for after-hours trading rotations. The Exchange also 
made technical corrections and revisions to the proposed rule text 
for readability and consistency. Amendment No. 1 amends and replaces 
the original filing in its entirety. Because Amendment No. 1 does 
not materially alter the substance of the proposed rule change or 
raise unique or novel regulatory issues, it is not subject to notice 
and comment. The amendment is available at: https://www.sec.gov/comments/sr-ise-2017-02/ise201702.htm.
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II. Description of the Proposal, as Modified by Amendment No. 1

    The Exchange proposes to delete the entirety of current ISE Rule 
701 and replace the current Exchange opening process with an opening 
process reflected in proposed ISE Rules 701 and 715(t).\5\ The new 
opening process is

[[Page 14244]]

similar to the process used by Phlx,\6\ as well as the new opening 
process recently adopted by ISE Gemini, LLC (``ISE Gemini'').\7\ The 
Exchange's current and proposed opening processes are described 
below.\8\
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    \5\ The Exchange represents that this proposed rule change is 
being made in connection with a technology migration to a Nasdaq, 
Inc. (``Nasdaq'') supported architecture called INET which is 
utilized on The NASDAQ Options Market LLC, NASDAQ PHLX LLC 
(``Phlx'') and NASDAQ BX, Inc. See id.
    \6\ See Phlx Rule 1017. See also Securities Exchange Act Release 
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2016-79).
    \7\ See ISE Gemini Rules 701 and 715(t). See also Securities 
Exchange Act Release No. 10952 (February 10, 2017), 82 FR 10952 
(February 16, 2017) (SR-ISEGemini-2016-18).
    \8\ In connection with the new opening process, the Exchange 
proposes to adopt a new ``Definitions'' section in proposed Rule 
701(a), similar to Phlx Rule 1017(a), to define several terms that 
are used throughout the opening rule. Proposed Rule 701(a) will 
define: ABBO, ``market for the underlying security,'' Opening Price, 
Opening Process, Potential Opening Price, Pre-Market BBO, Quality 
Opening Market, Valid Width Quote, and Zero Bid Market. For 
definitions of these terms, see Notice supra note 3 at 9091.
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A. Current Exchange Opening Process

    Currently, a Primary Market Maker (``PMM'') on ISE initiates the 
``trading rotation'' in a specified options class.\9\ The Exchange may 
direct that one or more trading rotations be employed on any business 
day to aid in producing a fair and orderly market.\10\ For each 
rotation, except as the Exchange may direct, rotations are conducted in 
the order and manner the PMM determines to be appropriate under the 
circumstances.\11\ The PMM, with the approval of the Exchange, has the 
authority to determine the rotation order and manner or deviate from 
the rotation procedures.\12\ Such authority may be exercised before and 
during a trading rotation.\13\ Additionally, two or more trading 
rotations may be employed simultaneously, if the PMM, with the approval 
of the Exchange, so determines.\14\
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    \9\ See ISE Rule 701(a).
    \10\ See ISE Rule 701(a)(1).
    \11\ See ISE Rule 701(a)(2).
    \12\ See ISE Rule 701(a)(3).
    \13\ See ISE Rule 701(a)(3).
    \14\ See ISE Rule 701(a)(4).
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    Pursuant to ISE Rule 701(b), the opening rotation for each class of 
options is held promptly following the opening of the market for the 
underlying security.\15\ In the event the underlying security has not 
opened within a reasonable time after 9:30 a.m. Eastern Time, the PMM 
reports the delay to the Exchange and an inquiry is made to determine 
the cause of the delay.\16\ The opening rotation for the affected 
options series is then delayed until the market for the underlying 
security has opened, unless the Exchange determines that the interests 
of a fair and orderly market are best served by opening trading in the 
options contracts.\17\
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    \15\ See ISE Rule 701(b)(2). For purposes of ISE Rule 701(b)(2), 
the ``market for the underlying security'' is either the primary 
listing market, the primary volume market (defined as the market 
with the most liquidity in that underlying security for the previous 
two calendar months), or the first market to open the underlying 
security, as determined by the Exchange on an issue-by-issue basis 
and announced to the membership on the Exchange's Web site. See id.
    \16\ See ISE Rule 701(b)(3).
    \17\ See id. Additionally, the Exchange may delay the 
commencement of the opening rotation in any class of options in the 
interests of a fair and orderly market. See ISE Rule 701(b)(4).
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    Currently, in connection with a trading rotation, ISE Rule 701(c) 
specifies how transactions may be effected in a class of options after 
the end of normal trading hours. A trading rotation may be employed 
whenever the Exchange concludes that such action is appropriate in the 
interests of a fair and orderly market.\18\ The decisions to employ a 
trading rotation in non-expiring options are disseminated prior to the 
commencement of such rotation and, in general, the Exchange will 
commence no more than one trading rotation after the normal close of 
trading.\19\ If a trading rotation is in progress and the Exchange 
determines that a final trading rotation is needed to assure a fair and 
orderly market close, the rotation in progress will be halted and a 
final rotation will begin as promptly as possible.\20\ Finally, any 
trading rotation in non-expiring options conducted after the normal 
close of trading may not begin until five minutes after news of such 
rotation is disseminated by the Exchange.\21\
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    \18\ See ISE Rule 701(c)(1). The factors that may be considered 
include, but are not limited to, whether there has been a recent 
opening or reopening of trading in the underlying security, a 
declaration of a ``fast market'' pursuant to ISE Rule 704, or a need 
for a rotation in connection with expiring individual stock options 
or index options, an end of the year rotation, or the restart of a 
rotation which is already in progress. See id.
    \19\ See ISE Rule 701(c)(2).
    \20\ See ISE Rule 701(c)(3).
    \21\ See ISE Rule 701(c)(4).
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B. Proposed New Opening Process

1. Opening Sweep
    At the outset, the Exchange proposes to adopt a new order type, 
``Opening Sweep'', for the new opening process.\22\ Proposed Rule 
701(b)(1)(i) states that a Market Maker assigned to a particular option 
may only submit an Opening Sweep if, at the time of entry, that Market 
Maker has already submitted and maintains a Valid Width Quote.\23\ 
Opening Sweeps may be entered at any price with a minimum price 
variation applicable to the affected series, on either side of the 
market, at single or multiple price level(s), and may be cancelled and 
re-entered.\24\ A single Market Maker may enter multiple Opening 
Sweeps, with each Opening Sweep at a different price level.\25\ If a 
Market Maker submits multiple Opening Sweeps, the system will consider 
only the most recent Opening Sweep at each price level submitted by 
such Market Maker in determining the Opening Price (described 
below).\26\ Unexecuted Opening Sweeps will be cancelled once the 
affected series is open.\27\
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    \22\ The Exchange proposes to define an ``Opening Sweep'' as a 
Market Maker order submitted for execution against eligible interest 
in the system during the Opening Process pursuant to proposed Rule 
701(b)(1). See proposed Rule 715(t).
    \23\ All Opening Sweeps in the affected series entered by a 
Market Maker will be cancelled immediately if that Market Maker 
fails to maintain a continuous quote with a Valid Width Quote in the 
affected series. See proposed Rule 701(b)(1)(i).
    \24\ See proposed Rule 701(b)(1)(ii).
    \25\ See id.
    \26\ See id. The Exchange proposes to define ``Opening Price'' 
by cross-referencing proposed Rule 701(h) and (j). See proposed Rule 
701(a)(3).
    \27\ See id.
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2. Interest Included in the Opening Process
    The first part of the Opening Process determines what constitutes 
``eligible interest''. The Exchange proposes that eligible interest 
during the Opening Process \28\ will include Valid Width Quotes,\29\ 
Opening Sweeps, and orders.\30\ Quotes, other than Valid Width Quotes, 
will not be included in the Opening Process.\31\ All-or-None Orders 
that can be satisfied, and the displayed and non-displayed portions of 
Reserve Orders, are considered for execution and in determining the 
Opening Price throughout the Opening Process.\32\ The system will 
aggregate the size of all eligible interest for a particular 
participant category at a particular price level for trade allocation 
purposes pursuant to Rule 713.\33\ Only Public Customer interest is 
routable during the Opening Process.\34\
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    \28\ The Exchange proposes to define ``Opening Process'' by 
cross-referencing proposed Rule 701(c). See proposed Rule 701(a)(4).
    \29\ The Exchange proposes to define ``Valid Width Quote'' as a 
two-sided electronic quotation submitted by a Market Maker that 
consists of a bid/ask differential that is compliant with ISE Rule 
803(b)(4). See proposed Rule 701(a)(8).
    \30\ See proposed Rule 701(b).
    \31\ See id.
    \32\ See id.
    \33\ See proposed Rule 701(b)(2).
    \34\ See proposed Rule 701(b).
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    Market Maker Valid Width Quotes and Opening Sweeps received 
starting at 9:25 a.m. Eastern Time, or 7:25 a.m. Eastern Time for U.S. 
dollar-settled

[[Page 14245]]

foreign currency options, are included in the Opening Process.\35\ 
Orders entered at any time before an option series opens are included 
in the Opening Process.\36\
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    \35\ See proposed Rule 701(c).
    \36\ See id.
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3. Opening Process and Reopening After a Trading Halt
    The Exchange proposes that the Opening Process for an option series 
will be conducted pursuant to proposed Rules 701(f)-(j) on or after 
9:30 a.m. Eastern Time, or on or after 7:30 a.m. Eastern Time for U.S. 
dollar-settled foreign currency options, if: (1) The ABBO,\37\ if any, 
is not crossed; and (2) the system has received, within two minutes (or 
such shorter time as determined by the Exchange and disseminated to 
membership on the Exchange's Web site) of the opening trade or quote on 
the market for the underlying security \38\ in the case of equity 
options, or the receipt of the opening price in the underlying index in 
the case of index options, or market opening for the underlying 
security in the case of U.S. dollar-settled foreign currency options, 
any of the following: (i) A PMM's Valid Width Quote; (ii) the Valid 
Width Quotes of at least two Competitive Market Makers (``CMM''); or 
(iii) if no PMM's Valid Width Quote nor two CMMs' Valid Width Quotes 
within such timeframe, one CMM's Valid Width Quote.\39\
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    \37\ The Exchange proposes to define ``ABBO'' as the Away Best 
Bid or Offer. See proposed Rule 701(a)(1). The ABBO does not include 
ISE's market. See Notice, supra note 3, at 9091.
    \38\ The Exchange proposes to define ``market for the underlying 
security'' as either the primary listing market or the primary 
volume market (defined as the market with the most liquidity in that 
underlying security for the previous two calendar months), as 
determined by the Exchange by underlying and announced to the 
membership on the Exchange's Web site. See proposed Rule 701(a)(2).
    \39\ See proposed Rule 701(c)(1). The Exchange represents that 
it anticipates initially setting the timeframe during which a PMM's 
Valid Width quote or the presence of at least two CMMs' Valid Width 
Quotes will initiate the Opening Process at 30 seconds. See Notice, 
supra note 3, at 9092-93 n.18. The Exchange represents that it will 
provide notice of the initial setting to Members and provide notice 
if the Exchange determines to reduce the timeframe. See id.
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    For all options, the underlying security, including indexes, must 
be open on the primary market for a certain time period as determined 
by the Exchange for the Opening Process to commence.\40\ The Opening 
Process will stop and an option series will not open if the ABBO 
becomes crossed or a Valid Width Quote(s) pursuant to proposed Rule 
701(c)(1) is no longer present.\41\ Once each of these conditions no 
longer exists, the Opening Process in the affected option series will 
recommence.\42\ The Exchange would wait for the ABBO to become 
uncrossed before initiating the Opening Process to ensure that there is 
stability in the marketplace as the Exchange determines the Opening 
Price.\43\
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    \40\ See proposed Rule 701(c)(2). Proposed Rule 701(c)(2) 
stipulates that this time period will be no less than 100 
milliseconds and no more than 5 seconds. The Exchange represents 
that it will set the timer initially at 100 milliseconds and will 
issue a notice to provide the initial setting and will thereafter 
issue a notice if it were to change the timing. See Notice, supra 
note 3, at 9092. If the Exchange were to select a time not between 
100 milliseconds and 5 seconds, it will be required to file a rule 
proposal with the Commission. See id.
    \41\ See proposed Rule 701(c)(5).
    \42\ See id.
    \43\ See Notice, supra note 3, at 9093.
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    Proposed Rule 701(c)(3) states that the PMM assigned to a 
particular equity option must enter a Valid Width Quote not later than 
one minute following the dissemination of a quote or trade by the 
market for the underlying security or, in the case of index options, 
following the receipt of the opening price in the underlying index. The 
PMM assigned to a particular U.S. dollar-settled foreign currency 
option must enter a Valid Width Quote not later than one minute after 
the announced market opening.\44\ Furthermore, a CMM that submits a 
quote pursuant to proposed Rule 701 in any option series when the PMM's 
quote has not been submitted will be required to submit continuous, 
two-sided quotes in such option series until such time the PMM submits 
a quote, after which the Market Maker that submitted such quote will be 
obligated to submit quotations pursuant to ISE Rule 804(e).\45\
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    \44\ See proposed Rule 701(c)(3).
    \45\ See proposed Rule 701(c)(4).
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    Proposed Rule 701(d) states that the procedure described in 
proposed Rule 701 will be used to reopen an options series after a 
trading halt.\46\ If there is a trading halt or pause in the underlying 
security, the Opening Process will recommence irrespective of the 
specific times listed in proposed Rule 701(c)(1).\47\ Unlike the 
current ISE opening rule, the proposed new opening process does not 
provide for after-hours trading rotations.\48\
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    \46\ See proposed Rule 701(d).
    \47\ See id.
    \48\ See Amendment No. 1, supra note 4.
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4. Opening With a BBO (No Trade)
    Under proposed Rule 701(e), the Exchange will first see if the 
option series will open for trading with a BBO. If there are no opening 
quotes or orders that lock or cross each other and no routable orders 
locking or crossing the ABBO, the system will open with an opening 
quote by disseminating the Exchange's best bid and offer among quotes 
and orders (``BBO''), unless all three of the following conditions 
exist: (i) A Zero Bid Market; \49\ (ii) no ABBO; and (iii) no Quality 
Opening Market.\50\
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    \49\ The Exchange proposes to define the term ``Zero Bid 
Market'' as where the best bid for an options series is zero. See 
proposed Rule 701(a)(9).
    \50\ See proposed Rule 701(e).
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    A ``Quality Opening Market'' is a bid/ask differential applicable 
to the best bid and offer from all Valid Width Quotes defined in a 
table to be determined by the Exchange and published on the Exchange's 
Web site.\51\ The calculation of Quality Opening Market is based on the 
best bid and offer of Valid Width Quotes. The differential between the 
best bid and offer are compared to reach this determination. The 
allowable differential, as determined by the Exchange, takes into 
account the type of security (for example, Penny Pilot versus non-Penny 
Pilot issue), volatility, option premium, and liquidity. The Quality 
Opening Market differential is intended to ensure the price at which 
the Exchange opens reflects current market conditions.
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    \51\ See proposed Rule 701(a)(7).
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    If all three of the conditions described above exist, the Exchange 
will calculate an Opening Quote Range (``OQR'') pursuant to proposed 
Rule 701(i) (described below) and conduct the Price Discovery Mechanism 
(``PDM'') pursuant to proposed Rule 701(j) (described below).\52\ The 
Exchange believes that when these conditions exist, further price 
discovery is warranted.\53\
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    \52\ See id.
    \53\ See Notice, supra note 3, at 9093.
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5. Opening With a Trade
    If there are Valid Width Quotes or orders that lock or cross each 
other, the system will try to open with a trade. Proposed Rule 701(h) 
provides that the Exchange will open the option series with a trade of 
Exchange interest only at the Opening Price, if any of the following 
conditions occur: (1) The Potential Opening Price (described below) is 
at or within the best of the highest bid and the lowest offer among 
Valid Width Quotes (``Pre-Market BBO'') \54\ and the ABBO; (2) the 
Potential Opening Price is at or within the non-zero bid ABBO if the 
Pre-Market BBO is crossed; or (3) where there is no ABBO, the Potential 
Opening

[[Page 14246]]

Price is at or within the Pre-Market BBO which is also a Quality 
Opening Market.
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    \54\ See proposed Rule 701(a)(6). The Exchange states that the 
Pre-Market BBO would not include orders. See Amendment No. 1, supra 
note 4.
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    To undertake the above described process, the Exchange will 
calculate the Potential Opening Price by taking into consideration all 
Valid Width Quotes and orders (including Opening Sweeps and displayed 
and non-displayed portions of Reserve Orders), except All-or-None 
Orders that cannot be satisfied, and identify the price at which the 
maximum number of contracts can trade (``maximum quantity 
criterion'').\55\
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    \55\ See proposed Rule 701(g).
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    Under proposed Rule 701(g)(1), when two or more Potential Opening 
Prices would satisfy the maximum quantity criterion and leave no 
contracts unexecuted, the system would take the highest and lowest of 
those prices and takes the mid-point. If such mid-point cannot be 
expressed as a permitted minimum price variation, the mid-point will be 
rounded to the minimum price variation that is closest to the closing 
price for the affected series from the immediately prior trading 
session. If there is no closing price from the immediately prior 
trading session, the system will round up to the minimum price 
variation to determine the Opening Price.\56\ Further, if any value 
used for the mid-point calculation would cross either the Pre-Market 
BBO, or the ABBO, then, for the purposes of calculating the mid-point, 
the Exchange will use the better of the Pre-Market BBO or ABBO as a 
boundary price and will open the option series for trading with an 
execution at the resulting Potential Opening Price.\57\ The Exchange 
states that the purpose of these boundaries is to help ensure that the 
Potential Opening Price is reasonable and does not trade through other 
markets.\58\
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    \56\ See proposed Rule 701(g)(1).
    \57\ If the Exchange has not yet opened and the above conditions 
are not met, an Opening Quote Range (as described below) will be 
calculated pursuant to proposed Rule 701(i), and thereafter, the 
Price Discovery Mechanism described in proposed Rule 701(j) below 
will commence. See proposed Rule 701(h)(3)(i)(B)(II).
    \58\ See Notice, supra note 3, at 9094.
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    If two or more Potential Opening Prices for the affected series 
would satisfy the maximum quantity criterion and leave contracts 
unexecuted, the Opening Price will be either the lowest executable bid 
or highest executable offer of the largest sized side.\59\ This is 
designed to base the Potential Opening Price on the maximum quantity of 
contracts that are executable.\60\ Furthermore, the Potential Opening 
Price calculation will be bounded by the better away market price that 
cannot be satisfied with the Exchange routable interest.\61\ According 
to the Exchange, this would ensure that the Exchange would not open 
with a trade that would trade through another market.\62\
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    \59\ See proposed Rule 701(g)(2).
    \60\ See Notice, supra note 3, at 9094.
    \61\ See proposed Rule 701(g)(3).
    \62\ See Notice, supra note 3, at 9094.
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6. Price Discovery Mechanism
    If the Exchange has not opened with a BBO or trade pursuant to 
proposed Rule 701(e) or (h), the Exchange will conduct a PDM pursuant 
to proposed Rule 701(j) to determine the Opening Price. According to 
the Exchange, the purpose of the PDM is to satisfy the maximum number 
of contracts possible by applying wider price boundaries and seeking 
additional liquidity.\63\
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    \63\ See Notice, supra note 3, at 9095.
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    Before conducting a PDM, however, the Exchange will calculate the 
OQR under proposed Rule 701(i). The OQR, which is used during PDM, is 
an additional boundary designed to limit the Opening Price to a 
reasonable price and reduce the potential for erroneous trades during 
the Opening Process.\64\
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    \64\ See Notice, supra note 3, at 9094.
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    To determine the minimum value for the OQR, an amount, as defined 
in a table to be determined by the Exchange, will be subtracted from 
the highest quote bid among Valid Width Quotes on the Exchange and on 
the away market(s), if any, except as provided in proposed Rule 
701(i)(3) and (4).\65\ To determine the maximum value for the OQR, an 
amount, as defined in a table to be determined by the Exchange, will be 
added to the lowest quote offer among Valid Width Quotes on the 
Exchange and on the away market(s), if any, except as provided in 
proposed Rule 701(i)(3) and (4).\66\ If one or more away markets are 
collectively disseminating a BBO that is not crossed, however, and 
there are Valid Width Quotes on the Exchange that are executable 
against each other or that are executable against the ABBO, then the 
minimum value of the OQR will be the highest away bid and the maximum 
value will be the lowest away offer.\67\ Additionally, if there are 
Valid Width Quotes on the Exchange that are executable against each 
other, and there is no away market disseminating a BBO in the affected 
option series, the minimum value of the OQR will be the lowest quote 
bid among Valid Width Quotes on the Exchange and the maximum value will 
be the highest quote offer among Valid Width Quotes on the 
Exchange.\68\
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    \65\ See proposed Rule 701(i)(1).
    \66\ See proposed Rule 701(i)(2).
    \67\ See proposed Rule 701(i)(3). Proposed Rule 701(i)(3) 
further notes that the Opening Process will stop and an options 
series will not open if the ABBO becomes crossed pursuant to 
proposed Rule 701(c)(5).
    \68\ See proposed Rule 701(i)(4).
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    The Exchange will use the OQR to help calculate the Opening Price. 
For example, if there is more than one Potential Opening Price possible 
where no contracts would be left unexecuted, any price used for the 
mid-point calculation, pursuant to proposed Rule 701(g)(1), that is 
outside of the OQR will be restricted to the OQR on that side of the 
market.\69\ Other instances that implicate the OQR are described below.
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    \69\ See proposed Rule 701(i)(5).
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    During PDM, the Exchange will take into consideration the away 
market prices in calculating the Potential Opening Price. For example, 
if there is more than one Potential Opening Price possible where no 
contracts would be left unexecuted and the price used for the mid-point 
calculation is an away market price, pursuant to proposed Rule 
701(g)(3), the system will use the away market price as the Potential 
Opening Price.\70\ Moreover, proposed Rule 701(i)(7) provides that if 
the Exchange determines that non-routable interest can execute the 
maximum number of contracts against Exchange interest, after routable 
interest has been determined by the system to satisfy the away market, 
then the Potential Opening Price will be the price at which such 
maximum number of contracts can execute--excluding the interests to be 
routed to an away market.\71\
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    \70\ See proposed Rule 701(i)(6).
    \71\ The system will route Public Customer interest in price/
time priority to satisfy the away market. See proposed Rule 
701(i)(7).
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    After the OQR is calculated, the system will broadcast an Imbalance 
Message for the affected series \72\ to attract additional liquidity 
and begin an ``Imbalance Timer,'' not to exceed three seconds.\73\ The 
Imbalance Timer will be for the same number of seconds for all options 
traded on the Exchange, and each Imbalance Message will be subject to 
an Imbalance Timer.\74\ The Exchange may have up to four Imbalance 
Messages which each run its own Imbalance Timer pursuant to the PDM 
process.\75\
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    \72\ Imbalance Message includes the symbol, side of the 
imbalance (unmatched contracts), size of matched contracts, size of 
the imbalance, and Potential Opening Price bounded by the Pre-Market 
BBO.
    \73\ See proposed Rule 701(j)(1). The Exchange represents that 
it will issue a notice to provide the initial setting of the 
Imbalance Timer and would thereafter issue a notice if it were to 
change the timing. See Notice, supra note 3, at 9095 n.32.
    \74\ See proposed Rule 701(j)(1).
    \75\ See Notice, supra note 3, at 9100.

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[[Page 14247]]

    Proposed Rule 701(j)(2), states that any new interest received by 
the system will update the Potential Opening Price. If during or at the 
end of the Imbalance Timer, the Opening Price is at or within the OQR, 
the Imbalance Timer will end and the system will open with a trade at 
the Opening Price if the executions consist of Exchange interest only 
without trading through the ABBO and without trading through the limit 
price(s) of interest within the OQR, which is unable to be fully 
executed at the Opening Price. If no new interest comes in during the 
Imbalance Timer and the Potential Opening Price is at or within the OQR 
and does not trade through the ABBO, the Exchange will open with a 
trade at the end of the Imbalance Timer at the Potential Opening Price.
    If the option series has not opened pursuant to proposed Rule 
701(j)(2) described above, the system will concurrently: (i) Send a 
second Imbalance Message with a Potential Opening Price that is bounded 
by the OQR (and would not trade through the limit price(s) of interest 
within the OQR which is unable to be fully executed at the Opening 
Price) and includes away market volume in the size of the imbalance to 
participants; and (ii) initiate a Route Timer, not to exceed one 
second.\76\ As proposed, the Route Timer will operate as a pause before 
an order is routed to an away market. The Exchange states that the 
Route Timer is intended to give participants an opportunity to respond 
to an Imbalance Message before any opening interest is routed to away 
markets and thereby maximize trading on the Exchange.\77\ If during the 
Route Timer, interest is received by the system which would allow the 
Opening Price to be within the OQR without trading through away markets 
and without trading through the limit price(s) of interest within the 
OQR which is unable to be fully executed at the Opening Price, the 
system will open with trades at the Opening Price, and the Route Timer 
will simultaneously end. The system will monitor quotes received during 
the Route Timer and make ongoing changes to the OQR and Potential 
Opening Price to reflect them.
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    \76\ See proposed Rule 701(j)(3).
    \77\ See Notice, supra note 3, at 9096-97.
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    Proposed Rule 701(j)(3)(iii) provides that, if no trade occurs 
pursuant to proposed ISE Rule 701(j)(3)(ii), when the Route Timer 
expires, if the Potential Opening Price is within the OQR (and would 
not trade through the limit price(s) of interest within the OQR that is 
unable to be fully executed at the Opening Price), the system will 
determine if the total number of contracts displayed at better prices 
than the Exchange's Potential Opening Price on away markets (``better 
priced away contracts'') would satisfy the number of marketable 
contracts available on the Exchange. The Exchange will then open the 
option series by routing and/or trading on the Exchange, pursuant to 
proposed Rule 701(j)(3)(iii) paragraphs (A) through (C).
    Proposed Rule 701(j)(3)(iii)(A) provides that, if the total number 
of better priced away contracts would satisfy the number of marketable 
contracts available on the Exchange on either the buy or sell side, the 
system will route all marketable contracts on the Exchange to such 
better priced away markets as an Intermarket Sweep Order (``ISO'') 
designated as Immediate-or-Cancel (``IOC'') order(s) and determine an 
opening BBO that reflects the interest remaining on the Exchange. The 
system will price any contracts routed to away markets at the 
Exchange's Opening Price. The Exchange states that routing away at the 
Exchange's Opening Price is intended to achieve the best possible price 
available at the time the order is received by the away market.\78\
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    \78\ See Notice, supra note 3, at 9100-01.
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    Proposed Rule 701(j)(3)(iii)(B) provides that, if the total number 
of better priced away contracts would not satisfy the number of 
marketable contracts on the Exchange, the system will determine how 
many contracts it has available at the Opening Price. If the total 
number of better priced away contracts plus the number of contracts 
available at the Exchange's Opening Price would satisfy the number of 
marketable contracts on the Exchange on either the buy or sell side, 
the system will contemporaneously route, based on price/time priority 
of routable interest, a number of contracts that will satisfy such away 
market interest, and trade available contracts on the Exchange at the 
Opening Price. The system will price any contracts routed to away 
markets at the better of the Opening Price or the order's limit price 
pursuant to proposed Rule 701(j)(vi)(C)(3)(ii). The Exchange states 
that this proposed rule is designed to maximize execution of interest 
on the Exchange or away markets.\79\
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    \79\ See id.
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    Proposed Rule 701(j)(3)(iii)(C) provides that, if the total number 
of better priced away contracts plus the number of contracts available 
at the Opening Price plus the contracts available at away markets at 
the Exchange's Opening Price would satisfy the number of marketable 
contracts on the Exchange, either the buy or sell side, the system will 
contemporaneously route, based on price/time priority, a number of 
contracts that will satisfy such away market interest (pricing any 
contracts routed to away markets at the better of the Opening Price or 
the order's limit price), trade available contracts on the Exchange at 
the Opening Price, and route a number of contracts that will satisfy 
interest at other markets at prices equal to the Opening Price. The 
Exchange states that routing at the better of the Opening Price or the 
order's limit price is intended to achieve the best possible price 
available at the time the order is received by the away market and that 
routing at the order's limit price ensures that the order's limit price 
is not violated.\80\
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    \80\ See Notice, supra note 3, at 9100-01.
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    Proposed Rule 701(j)(4) provides that the system may send up to two 
additional Imbalance Messages \81\ (which may occur while the Route 
Timer is operating) bounded by the OQR and reflecting away market 
interest in the volume. After the Route Timer has expired, the 
processes in proposed Rule 701(j)(3) will repeat (except no new Route 
Timer will be initiated).
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    \81\ The Exchange notes that the first two Imbalance Messages 
always occur if there is interest which will route to an away 
market. See Notice, supra note 3, at 9096 n.37.
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7. Forced Opening
    Proposed Rule 701(j)(5) describes the process that occurs if the 
steps described above have not resulted in an opening of the options 
series. After all additional Imbalance Messages have been broadcasted 
pursuant to proposed Rule 701(j)(4), the system will open the series by 
executing as many contracts as possible by: (i) Routing to away markets 
at prices better than the Opening Price for their disseminated size; 
(ii) trading available contracts on the Exchange at the Opening Price 
bounded by the OQR (without trading through the limit price(s) of 
interest within the OQR which is unable to be fully executed at the 
Opening Price); and (iii) routing contracts to away markets at prices 
equal to the Opening Price at their disseminated size. In forced 
opening, the system will price any contracts routed to away markets at 
the better of the Opening Price or the order's limit price. Any 
unexecuted contracts from the imbalance not traded or routed will be 
cancelled back to the entering participant if they remain unexecuted 
and priced through the Opening Price. Otherwise such orders will remain 
in the order book.

[[Page 14248]]

    Proposed Rule 701(j)(6) provides that, to the extent possible, the 
system will execute orders at the Opening Price that have contingencies 
(such as without limitation, All-or-None, and Reserve Orders) and non-
routable orders such as ``Do-Not-Route'' or ``DNR'' Orders.\82\ The 
system will only route non-contingency Public Customer orders, except 
that the full volume of Public Customer Reserve Orders may route.
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    \82\ See ISE Rule 715(m).
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    Proposed Rule 701(j)(6)(i) provides that the system will cancel: 
(i) Any portion of a Do-Not-Route Order that would otherwise have to be 
routed to the exchange(s) disseminating the ABBO for an opening to 
occur, (ii) an All-or-None Order that is not executed during the 
opening and is priced through the Opening Price; and (iii) any order 
that is priced through the Opening Price. All other interest will 
remain in the system and be eligible for trading after opening. The 
Exchange states that it cancels these orders since it lacks enough 
liquidity to satisfy these orders on the opening.\83\ In addition, the 
Exchange believes that participants would prefer to have these orders 
returned to them for further assessment rather than have them entered 
into the order book at a price which is more aggressive than the price 
at which the Exchange opened.\84\
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    \83\ See Notice, supra note 3, at 9101.
    \84\ See id.
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8. Other Provisions
    Proposed Rule 701(k) provides that during the opening of the option 
series, where there is a possible execution, the system will give 
priority first to Market Orders \85\ then to resting Limit Orders \86\ 
and quotes. Additionally, the allocation provisions of ISE Rule 713 and 
the Supplementary Material to that rule apply with respect to other 
orders and quotes with the same price. Finally, proposed Rule 701(l) 
provides that upon the opening of the option series, regardless of an 
execution, the system will disseminate the price and size of the 
Exchange's best bid and offer.
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    \85\ See ISE Rule 715(a).
    \86\ See ISE Rule 715(b).
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9. Implementation
    The Exchange states that it intends to begin implementation of the 
proposed rule change in the second quarter of 2017.\87\ The Exchange 
represents that migration of the Exchange system to Nasdaq INET 
technology will be on a symbol by symbol basis and that the Exchange 
will issue an alert to Members to provide notification of the symbols 
that will migrate and the relevant dates.\88\
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    \87\ See Notice, supra note 3, at 9090.
    \88\ See id. For a more detailed description of the proposed 
rule change, see Notice, supra note 3.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange.\89\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\90\ 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 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.
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    \89\ 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).
    \90\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes to delete in its entirety the current opening 
process and replace it with an opening rotation similar to the process 
in place on its affiliated exchanges, Phlx and ISE Gemini. In making 
this change, the Exchange delineates, unlike in the current, more 
opaque rule, detailed steps of the opening process. By providing more 
clearly each sequence of the opening process, the Commission notes that 
the proposed rule helps market participants understand how the new 
opening rotation will operate. To that extent, the new opening process 
may promote transparency, reduce the potential for investor confusion, 
and assist market participants in deciding whether to participate in 
ISE's opening rotation. Further, if they do participate in the new 
opening process, the proposed rule may help provide market participants 
with the confidence and certainty as to how their orders or quotes will 
be processed.
    Further, the Commission believes that the proposed rule change is 
designed to promote just and equitable principles of trade by seeking 
to ensure that option series open in a fair and orderly manner. For 
example, the Commission notes that the proposed rule change is designed 
to mitigate the effects of the underlying security's volatility as the 
overlying option series undergoes the opening rotation. Specifically, 
the proposed rule provides for a range of no less than 100 milliseconds 
and no more than 5 seconds in order to ensure that the Exchange has the 
ability to adjust the period for which the underlying must be open on 
the primary market before the opening process commences. Moreover, the 
Commission notes that the proposed rule provides an orderly process for 
handling eligible interests during the opening rotation, while seeking 
to avoid opening executions at suboptimal prices. For instance, the new 
process ensures that the Exchange will not open with the Exchange's BBO 
if there is a Zero Bid Market, no ABBO, and no Quality Opening Market. 
Likewise, the Exchange will not open an option series with a trade 
unless one of the following conditions is met: (1) The Potential 
Opening Price is at or within the Pre-Market BBO and the ABBO; (2) the 
Potential Opening Price is at or within the non-zero bid ABBO if the 
Pre-Market BBO is crossed; or (3) where there is no ABBO, the Potential 
Opening Price is at or within the Pre-Market BBO which is also a 
Quality Opening Market. Finally, while the new opening process attempts 
to maximize the number of contracts executed on the Exchange during 
such rotation, including by seeking additional liquidity, if necessary, 
the Commission notes that the new opening process, unlike the current 
process, takes into consideration away market interests and ensures 
that better away prices are not traded through. For these reasons, the 
Commission believes that the proposed rule change, as modified by 
Amendment No. 1, is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\91\ that the proposed rule change (SR-ISE-2017-02), as 
modified by Amendment No. 1, be, and it hereby is, approved.
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    \91\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\92\
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    \92\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05340 Filed 3-16-17; 8:45 am]
BILLING CODE 8011-01-P


