
[Federal Register Volume 82, Number 72 (Monday, April 17, 2017)]
[Notices]
[Pages 18191-18196]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07638]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80432; File No. SR-ISE-2017-03]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Order Approving 
Proposed Rule Change, as Modified by Amendment No. 1, To Amend Various 
Rules in Connection With a System Migration to Nasdaq INET Technology

April 11, 2017.

I. Introduction

    On February 8, 2017, the International Securities Exchange, LLC 
(now known as Nasdaq ISE, LLC (``ISE'' or ``Exchange'')) \1\ filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\2\ 
and Rule 19b-4 thereunder,\3\ a proposed rule change to amend various 
Exchange rules in connection with a system migration to Nasdaq, Inc. 
(``Nasdaq'') supported technology. The proposed rule change was 
published for comment in the Federal Register on February 27, 2017.\4\ 
On March 30, 2017, the Exchange filed Amendment No. 1 to the proposed 
rule change.\5\ 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\ ISE was renamed Nasdaq ISE, LLC in a rule change that became 
operative on April 3, 2017. See Securities Exchange Act Release No. 
80325 (March 29, 2017), 82 FR 16445 (April 4, 2017) (SR-ISE-2017-
25).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 80075 (February 21, 
2017), 82 FR 11975 (``Notice'').
    \5\ In Amendment No. 1, the Exchange clarified the proposed 
handling of complex orders during Limit Up-Limit Down states, 
proposed that All-Or-None Orders may only be entered with a time-in-
force designation of Immediate-Or-Cancel, proposed to memorialize 
the handling of Cancel and Replace Orders, and removed a proposed 
rule change regarding delaying the implementation of Directed 
Orders. The Exchange also clarified the reason Price Level 
Protection would be applied to complex orders and made other 
clarifying changes. 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-2017-03/ise201703-1677882-149321.pdf.
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II. 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.\6\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\7\ 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. As noted above, the Commission 
received no comment letters regarding the proposed rule change.
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    \6\ 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).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Exchange proposes to amend various Exchange rules to reflect 
the ISE system migration to a Nasdaq INET technology.\8\ In connection 
this system migration, as discussed below, the Exchange intends to 
adopt certain trading functionality currently utilized on Nasdaq 
Exchanges.\9\
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    \8\ INET is utilized across Nasdaq's markets, including The 
NASDAQ Options Market LLC (``NOM''), NASDAQ PHLX LLC (``Phlx''), and 
NASDAQ BX, Inc. (collectively, the ``Nasdaq Exchanges''). See 
Notice, supra note 4, at 11975. The Commission also recently 
approved Nasdaq GEMX, LLC's (formerly ISE Gemini, LLC) migration to 
INET. See Securities Exchange Act Release Nos. 80011 (February 10, 
2017), 82 FR 10927 (February 16, 2017) (SR-ISEGemini-2016-17); 80014 
(February 10, 2017), 82 FR 10952 (February 16, 2017) (SR-ISEGemini-
2016-18).
    \9\ See Notice, supra note 4, at 11975. The Exchange anticipates 
that it will begin implementation of the proposed rule changes in 
the second quarter of 2017. See Notice, supra note 4, at 11975. 
According to the Exchange, the system migration will be on a symbol 
by symbol basis. The Exchange will issue an alert to members in the 
form of an Options Trader Alert to provide notification of the 
symbols that will migrate and the relevant dates. See id. Further, 
the Commission has approved a separately filed companion proposed 
rule change to amend the Exchange's opening process in connection 
with the system migration to INET technology. See Securities 
Exchange Act Release No. 80225 (March 13, 2017), 82 FR 14243 (March 
17, 2017) (SR-ISE-2017-02).

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[[Page 18192]]

A. Trading Halts

1. Cancellation of Quotes
    The Exchange proposes to amend ISE Rule 702 (Trading Halts) to 
conform the treatment of orders and quotes on the Exchange to Phlx Rule 
1047(f). Specifically, the Exchange proposes to amend Rule 702(a)(2) by 
providing that during a halt the Exchange will maintain existing orders 
on the book but not existing quotes. Pursuant to the revision, during 
the halt, the Exchange will accept orders and quotes and, for such 
orders and quotes, process cancels and modifications. Currently, the 
Exchange maintains existing orders and quotes during a trading halt. 
With respect to cancels and modifications during a trading halt, the 
Exchange represents that the current process on ISE will not change 
under the proposed rule change.\10\
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    \10\ See Notice, supra note 4, at 11976.
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    The Exchange represents that its proposal to maintain existing 
orders on the book but not existing quotes during a halt would provide 
market participants with clarity as to the manner in which interests 
will be handled by the System.\11\ The Exchange believes that, during a 
trading halt, the market may move and create risk to market 
participants with respect to resting interests.\12\
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    \11\ See Notice, supra note 4, at 11983.
    \12\ See id.
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    The Commission believes that that cancelling existing quotes during 
a trading halt would provide market participants the opportunity to 
update potentially stale quotes. Further, the Commission notes that the 
Exchange will process cancels and modifications to orders as well as 
quotes received during a halt. Finally, the Commission further notes 
that the proposed treatment of quotes during a halt is consistent with 
existing Phlx rule.\13\
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    \13\ See Phlx Rule 1047(f).
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2. Limit Up-Limit Down
    The Exchange proposes to replace existing ISE Rule 703A (Trading 
During Limit Up-Limit Down States in Underlying Securities) with 
proposed ISE Rule 702(d).\14\ Specifically, proposed ISE Rule 702(d) 
will provide that during a Limit State and Straddle State in the 
underlying NMS stock \15\ the Exchange will not open an affected 
option.\16\ However, provided the Exchange has opened an affected 
option for trading, the Exchange will: (i) Reject Market Orders \17\ 
(including complex Market Orders) and notify members of the reason for 
such rejection; \18\ (ii) cancel complex orders that are Market Orders 
residing in the System, if the complex Market Order becomes marketable 
while the affected underlying is in a Limit or Straddle State; \19\ 
(iii) continue to process Market Orders exposed at the NBBO pursuant to 
Supplementary Material. 02 to ISE Rule 1901 and complex Market Orders 
exposed for price improvement pursuant to ISE Rule 722(b)(3)(iii), 
pending in the System, and cancel such Market Order or complex Market 
Order if at the end of the exposure period the affected underlying is 
in a Limit or Straddle State; \20\ and (iv) elect Stop Orders if the 
condition is met, and, because such orders become Market Orders, cancel 
them back and notify members of the reason for such rejection.\21\ 
Moreover, when the security underlying an option class is in a Limit 
State or Straddle State, the Exchange will suspend the maximum 
quotation spread requirements for market maker quotes in ISE Rule 
803(b)(4) and the continuous quotation requirements in ISE Rule 
804(e).\22\ Additionally, the Exchange will not consider the time 
periods associated with Limit States and Straddle States when 
evaluating whether a market maker has complied with its continuous 
quotation requirements in ISE Rule 804(e).\23\
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    \14\ The Exchange represents that proposed ISE Rule 702(d) is 
similar to Phlx Rule 1047(d). See Notice, supra note 4, at 11976.
    \15\ Proposed ISE Rule 702(d) states that capitalized terms used 
in Rule 702(d) will have the same meaning as provided for in the 
Plan to Address Extraordinary Market Volatility Pursuant to Rule 608 
of Regulation NMS, as it may be amended from time to time (the 
``LULD Plan'').
    \16\ See proposed ISE Rule 702(d)(1). The Exchange states that 
its rules do not currently address the opening rotation in the event 
that the underlying NMS stock is open but has entered into a Limit 
or Straddle State. See Notice, supra note 4, at 11976.
    \17\ For the definition of the term ``Market Orders'', see ISE 
Rule 715(a).
    \18\ See proposed ISE Rule 702(d)(2).
    \19\ See id. See also Amendment No. 1, supra note 5.
    \20\ See proposed ISE Rule 702(d)(2). If the affected underlying 
is no longer in a Limit or Straddle State after the exposure period, 
the Market Order will be processed with normal handling. See id. The 
Exchange currently cancels Market Orders pending in the System upon 
initiation of a Limit or Straddle State. See Notice, supra note 4, 
at 11976.
    \21\ See proposed ISE Rule 702(d)(3). ISE currently does not 
elect Stop Orders that are pending in the System during a Limit or 
Straddle State. Under the proposal, the Exchange will elect Stop 
Orders that are pending in the System during a Limit or Straddle 
State, if conditions for such election are met; however, because 
such orders become Market Orders, they will be cancelled back to the 
member with a reason for such rejection. See Notice, supra note 4, 
at 11977.
    \22\ See proposed ISE Rule 702(d)(4).
    \23\ See id. Proposed ISE Rule 703(d)(4) is substantively 
identical to ISE Rule 703A(c). See Notice, supra note 4, at 11976.
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    The Commission believes that the proposed Rule 702(d) would provide 
certainty to market participants regarding the manner in which Limit 
up-Limit Down states would impact the opening process as well as Market 
Orders (including complex Market Orders) and Stop Orders. The 
Commission believes that the rejection of Market Orders (including 
complex Market Orders and elected Stop Orders) is reasonably designed 
to potentially prevent executions of un-priced orders during times of 
significant volatility.\24\ The Commission also notes that processing 
rather than cancelling existing Market Orders is reasonable because 
these Market Orders are only pending in the System if they are exposed 
at the NBBO pursuant to Supplementary Material .02 to ISE Rule 1901 or 
because they are complex Market Orders exposed for price improvement 
pursuant to ISE Rule 722(b)(3)(iii).\25\ Further, the Exchange believes 
that electing Stop Orders that are pending in the System during a Limit 
or Straddle State, if conditions for such election are met, would 
provide market participants with the intended result.\26\ Lastly, the 
Commission notes that proposed ISE Rule 702(d)(4) is substantively 
identical to existing ISE Rule 703A(c), which is being deleted.
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    \24\ See Notice, supra note 4, at 11982.
    \25\ See Notice, supra note 4, at 11982.
    \26\ See Notice, supra note 4, at 11982.
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3. Auction Handling During a Trading Halt
    The Exchange proposes to amend certain rules to account for the 
impact of a trading halt on the Exchange's auction mechanisms. First, 
the Exchange proposes to amend ISE Rule 723 (Price Improvement 
Mechanism for Crossing Transactions) regarding the manner in which a 
trading halt will impact an order entered into the Price Improvement 
Mechanism (``PIM''). Today, if a trading halt is initiated after an 
order is entered into the PIM, the Exchange terminates such auction and 
eligible interest is executed.\27\ The Exchange proposes to amend the 
current process by terminating the auction and not executing eligible 
interest when a

[[Page 18193]]

trading halt occurs.\28\ Similarly, the Exchange also proposes to amend 
to ISE Rule 716 (Block Trades) to state that, if a trading halt is 
initiated after an order is entered into the Block Order Mechanism, 
Facilitation Mechanism, or Solicited Order Mechanism, the Exchange will 
automatically terminate such auction without execution.\29\
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    \27\ See Notice, supra note 4, at 11977. In the case of a 
complex order entered into the PIM, if a trading halt is initiated, 
the auction would be terminated and eligible interest cancelled 
without execution. See id. The Exchange is not amending this 
behavior. See id.
    \28\ See proposed ISE Rule 723(d)(5). The Exchange is not 
amending the behavior of the PIM with respect to complex orders. See 
Amendment No. 1, supra note 5.
    \29\ See proposed subsections (c)(3), (d)(3)(iv), and (e)(2)(iv) 
of ISE Rule 716. The Exchange represents that this proposed 
amendment represents the current process on ISE and is generally 
consistent with Phlx Rule 1047(c). See Notice, supra note 4, at 
11977.
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    The Exchange believes that its proposal to terminate the PIM 
auction, Block Order Mechanism, Facilitation Mechanism, and Solicited 
Order Mechanism and not execute eligible interest when a trading halt 
occurs will provide certainty to participants regarding how their 
interest will be handled.\30\ The Exchange believes that during a 
trading halt, the market may move and create risk to market 
participants with respect to resting interest.\31\ The Commission 
believes that the proposed rule provides transparency and clarity 
regarding the handling of these orders during a trading halt.
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    \30\ See Notice, supra note 4, at 11983.
    \31\ See id.
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B. Market Order Spread Protection

    The Exchange proposes to amend ISE Rule 711 (Acceptance of Quotes 
and Orders) by adopting a new mandatory risk protection entitled Market 
Order Spread Protection which will apply to Market Orders.\32\ Pursuant 
to proposed ISE Rule 711(c), if the NBBO is wider than a preset 
threshold at the time a Market Order is received by the Exchange, the 
Exchange will reject the order. The Exchange will notify members of the 
threshold with a notice, and, thereafter, will notify members of any 
subsequent changes to the threshold.\33\ The Exchange represents that 
the Market Order Spread Protection will be the same for all options 
traded on the Exchange and is applicable to all members that submit 
Market Orders.\34\
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    \32\ The Exchange states that this mandatory feature is 
currently offered on NOM to protect Market Orders from being 
executed in very wide markets. See Notice, supra note 4, at 11977. 
See also NOM Rules at Chapter VI, Section 6(c).
    \33\ See Notice, supra note 4, at 11977. The Exchange proposes 
to initially set the threshold to $5, similar to the threshold set 
on NOM. See id. The Exchange states that NOM set the differential at 
$5 to match the maximum bid/ask differential permitted for quotes on 
that exchange. See id. ISE also uses a similar $5 differential. See 
id.
    \34\ See Notice, supra note 4, at 11978.
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    The Exchange believes, and the Commission concurs, that the 
proposed Market Order Spread Protection would help mitigate risks 
associated with trading errors and help reduce the number of executions 
at dislocated prices.\35\ The Commission also notes that the protection 
is similar to a mandatory feature currently offered on NOM.\36\
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    \35\ See Notice, supra note 4, at 11983.
    \36\ See NOM Rules at Chapter VI, Section 6(c).
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C. Acceptable Trade Range

    Today, ISE offers a Price Level Protection that places a limit on 
the number of price levels at which an incoming order or quote to sell 
(buy) would be executed automatically when there are no bids (offers) 
from other exchanges at any price for the options series.\37\ The 
Exchange proposes to replace the current Price Level Protection with 
Phlx's Acceptable Trade Range for orders that are not complex 
orders.\38\ The Exchange states that the proposed Acceptable Trade 
Range is a mechanism designed to prevent the System from experiencing 
dramatic price swings by preventing the market from moving beyond set 
thresholds.\39\ The System will calculate an Acceptable Trade Range to 
limit the range of prices at which an order or quote will be allowed to 
execute.\40\ Upon receipt of a new order or quote, the Acceptable Trade 
Range is calculated by taking the reference price, plus or minus a 
value to be determined by the Exchange, where the reference price is 
the National Best Bid (``NBB'') for sell orders/quotes and the National 
Best Offer (``NBO'') for buy orders/quotes. Accordingly, the Acceptable 
Trade Range is: The reference price - (x) for sell orders/quotes; and 
the reference price + (x) for buy orders.\41\ If an order or quote 
reaches the outer limit of the Acceptable Trade Range (the ``Threshold 
Price'') without being fully executed, then any unexecuted balance will 
be cancelled.\42\ The Acceptable Trade Range will not be available for 
All-or-None Orders.\43\
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    \37\ See Notice, supra note 4, at 11980; ISE Rule 714(b)(1).
    \38\ See Phlx Rule 1080(p). Unlike Phlx, ISE does not offer a 
general continuous re-pricing mechanism. See id. Accordingly, the 
Exchange states that the proposed Acceptable Trade Range will not 
include the posting period functionality available today on Phlx. 
See Notice, supra note 4, at 11978, n.16. The Exchange will not post 
interest that exceeds the outer limit of the Acceptable Trade Range; 
rather the interest will be cancelled. See Notice, supra note 4, at 
11978. Orders that do not exceed the outer limit of the Acceptable 
Trade Range will post to the order book and will reside on the order 
book at such price until they are either executed in full or 
cancelled by the member. See Notice, supra note 4, at 11979.
    \39\ See Notice, supra note 4, at 11983.
    \40\ See proposed ISE Rule 714(b)(1)(i).
    \41\ The Exchange states that the Acceptable Trade Range 
settings are tied to the option premium. See Notice, supra note 4, 
at 11979, n.17. A table consisting of several steps based on the 
premium of an option will be displayed on the NASDAQTrader.com Web 
site and used to determine how far the market for a given option 
will be allowed to move. See Notice, supra note 4, at 11979. Updates 
to the table would be announced via an Exchange alert, generally the 
prior day. See id.
    \42\ See proposed ISE Rule 714(b)(1)(ii).
    \43\ See proposed ISE Rule 714(b)(1)(ii). Today, ISE's Price 
Level Protection rule is also not available for All-or-None Orders. 
See Notice, supra note 4, at 11978, n.18.
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    The Exchange represents that it will set the Acceptable Trade Range 
at levels to ensure that it is triggered infrequently.\44\ While the 
Acceptable Trade Range settings will be tied to the option premium, 
other factors will be considered when determining the exact 
settings.\45\ For example, the Exchange states that acceptable ranges 
may change if market-wide volatility is high or if overall market 
liquidity is low based on historical trends.\46\ To ensure a well-
functioning market, the Exchange believes that different market 
conditions may require adjustments to the threshold amounts from time 
to time.\47\ Further, while the Acceptable Trade Range settings will 
generally be the same across all options traded on the Exchange, ISE 
proposes to set them separately based on characteristics of the 
underlying security.\48\ For example, the Exchange has generally 
observed that options subject to the Penny Pilot program quote with 
tighter spreads than options not subject to the Penny Pilot. 
Accordingly, the Exchange will set Acceptable Trade Ranges for three 
categories of options: (1) Penny Pilot Options trading in one cent 
increments for options trading at less than $3.00 and increments of 
five cents for options trading at $3.00 or more; (2) Penny Pilot 
Options trading in one-cent increments for all prices; and (3) Non-
Penny Pilot Options.\49\
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    \44\ See Notice, supra note 4, at 11978.
    \45\ See id.
    \46\ See id.
    \47\ See id.
    \48\ See Notice, supra note 4, at id.
    \49\ See proposed ISE Rule 714(b)(1)(iii).
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    The Exchange represents that the Acceptable Trade Range should 
prevent the System from experiencing dramatic price swings by 
preventing the market from moving beyond set thresholds.\50\ The 
Commission believes that the Acceptable Trade Range is reasonably 
designed to prevent executions of orders and quotes at prices that are 
significantly worse than the NBBO at time of an order's submission and 
may

[[Page 18194]]

reduce the potential negative impacts of unanticipated volatility in 
individual options.
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    \50\ See Notice, supra note 4, at 11983.
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    For complex orders, the Exchange proposes to continue to apply the 
existing Price Level Protection rule and relocate the rule from current 
ISE Rule 714(b)(1) to proposed ISE Rule 714(b)(4).\51\ The Exchange 
represents that the existing Price Level Protection Rule is a better 
protection for complex orders than the proposed Acceptable Trade Range 
protection because, unlike single leg orders, complex orders are not 
subject to trade-through protections and the Acceptable Trade Range 
protection utilizes the NBBO.\52\ The Commission also notes that the 
functionality of Price Level Protection will remain the same with 
respect to complex orders. Further, the Commission notes that the 
proposed Acceptable Trade Range is similar to an existing mechanism on 
Phlx.\53\
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    \51\ See proposed ISE Rule 714(b)(4). To adapt the rule so that 
it only applies to complex orders, the Exchange proposes to amend 
the Price Level Protection rule to: (i) Remove references that 
specifically relate to single leg order functionality; (ii) remove 
references to PMM handling that does not apply to complex orders; 
and (iii) add references to component legs to make clear that the 
rule applies to the component legs of complex orders. See Notice, 
supra note 4, at 11980. The Exchange represents that the number of 
price levels at which an incoming order or quote could execute when 
there are no corresponding bids or offers from other exchanges at 
any price is currently set to five per leg. See Amendment No. 1, 
supra note 5.
    \52\ See Notice, supra note 4, at id.
    \53\ See Notice, supra note 4, at 11983; Phlx Rule 1080(p).
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D. PMM Order Handling and Opening Obligations

    The Exchange proposes to eliminate the Primary Market Maker 
(``PMM'') order handling and opening obligations in ISE Rule 
803(c).\54\ As described above, with the migration of ISE to the Nasdaq 
INET architecture, the Exchange is adopting the Acceptable Trade Range 
and opening rotation functionality currently offered on NOM and Phlx, 
which do not contain similar requirements for the PMMs as in ISE Rule 
803(c).
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    \54\ ISE Rule 803(c) provides that, in addition to the 
obligations contained in Rule 803 for market makers generally, for 
options classes to which a market maker is the appointed PMM, PMM 
shall have the responsibility to: (1) As soon as practical, address 
Priority Customer Orders that are not automatically executed 
pursuant to Rule 714(b)(1) in a manner consistent with its 
obligations under Rule 803(b) by either (i) executing all or a 
portion of the order at a price that at least matches the NBBO and 
that improves upon the Exchange's best bid (in the case of a sell 
order) or the Exchange's best offer (in the case of a buy order); or 
(ii) releasing all or a portion of the order for execution against 
bids and offers on the Exchange; and (2) initiate trading in each 
series pursuant to Rule 701 (Trading Rotations).
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    The Exchange represents that PMMs' current obligations are no 
longer necessary due to the introduction of the Acceptable Trade Range 
and proposed changes to the Exchange's opening process.\55\ The 
Exchange states that its proposal to conform the Exchange's opening 
process to Phlx Rule 1017 will result in an opening initiated by the 
receipt of an appropriate number of valid width quotes by the PMM or 
Competitive Market Maker, instead of an opening process initiated by a 
PMM.\56\ Similarly, the Exchange believes the proposed Acceptable Trade 
Range functionality will continue to provide order protection to 
members without imposing any PMM obligations.\57\ The Exchange further 
represents that NOM and Phlx do not impose similar PMM order handling 
and opening obligations.\58\ Accordingly, the Commission believes that 
these changes are consistent with the Act.
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    \55\ See Notice, supra note 4, at 11983. See also supra note 9.
    \56\ See Notice, supra note 4, at 11983. See also supra note 9.
    \57\ See Notice, supra note 4, at 11980. The Exchange states 
that Phlx does not currently have similar roles for a Specialist on 
its market. See id.
    \58\ See Notice, supra note 4, at 11980.
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E. Back-Up PMM

    The Exchange proposes to amend Supplementary Material .03 to ISE 
Rule 803 to eliminate Back-Up PMMs. Today, any ISE member that is 
approved to act in the capacity of a PMM or an ``Alternative Primary 
Market Maker'' may voluntarily act as a Back-Up PMM in an options 
series in which it is quoting as a Competitive Market Maker 
(``CMM'').\59\ With the technology migration, the Exchange believes 
that a Back-Up PMM is no longer necessary because under INET the 
Exchange will not utilize the order handling obligations present on the 
Exchange today.\60\ The Exchange further represents that the proposed 
new opening process obviates the importance of such a role because it 
would no longer rely on a market maker to initiate the opening 
process.\61\ Accordingly, the Commission believes that these changes 
are consistent with the Act.
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    \59\ See ISE Rule 803, Supplementary Material .03.
    \60\ See Notice, supra note 4, at 11983.
    \61\ See Notice, supra note 4, at 11983. See also supra note 9.
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F. Market Maker Speed Bump

    The Exchange proposes to amend ISE Rule 804 (Market Maker 
Quotations) to establish default parameters for certain risk 
functionality. The Exchange currently offers a risk protection 
mechanism for market maker quotes that removes a member's quotes in an 
options class if a specified number of curtailment events occur during 
a set time period (``Market Maker Speed Bump'').\62\ In addition, the 
Exchange offers a market-wide risk protection that removes a market 
maker's quotes across all classes if a number of curtailment events 
occur (``Market-Wide Speed Bump'').\63\ ISE Rule 804(g) currently 
requires that market makers set curtailment parameters for both the 
Market Maker Speed Bump and the Market-Wide Speed Bump. Today, if a 
market maker does not set these parameters, for each Market Maker Speed 
Bump and the Market-Wide Speed Bump, the System rejects their 
quotes.\64\ With the technology migration, the Exchange proposes to 
provide default curtailment parameters, which will be determined by the 
Exchange and announced to members.\65\ The Commission believes that 
this change is consistent with the Act and notes that, although the 
Exchange will establish default curtailment settings, market makers 
will have discretion to set different curtailment settings appropriate 
for their trading and risk tolerance.
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    \62\ See ISE Rule 804(g)(1) and Supplementary Material .04 to 
ISE Rule 722.
    \63\ See ISE Rule 804(g)(2). Market makers may request the 
Exchange to set the market wide parameter to apply to just ISE or 
across ISE and ISE Gemini. See id.
    \64\ See Notice, supra note 4, at 11980-81.
    \65\ See Notice, supra note 4, at 11981.
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G. Anti-Internalization

    The Exchange proposes to amend the Supplementary Material at .03 to 
ISE Rule 804 (Market Maker Quotations) to adopt an anti-internalization 
rule. Today, ISE's functionality prevents Immediate-or-Cancel (``IOC'') 
orders entered by a market maker from trading with the market maker's 
own quote.\66\ The Exchange proposes to replace this self-trade 
protection with anti-internalization functionality currently offered on 
Phlx.\67\ The Exchange proposes to provide that quotes and orders 
entered by market makers using the same member identifier will not be 
executed against quotes and orders entered on the opposite side of the 
market by the same market maker using the same member identifier. In 
such a case, the System will cancel the resting quote or order back to 
the entering party prior to execution. The proposed anti-
internalization functionality will not apply in any auction or with 
respect to complex order transactions. The Exchange states that this 
proposed functionality does not modify the duty

[[Page 18195]]

of best execution owed to public customer orders.\68\
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    \66\ See id.
    \67\ See Phlx Rule 1080(p)(2).
    \68\ See Notice, supra note 4, at 11981.
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    The Exchange represents that the proposal is designed to assist 
market makers in reducing trading costs from unwanted executions 
potentially resulting from the interaction of executable interest from 
the same firm performing the same market making function.\69\ The 
Commission believes that the proposed rule is reasonably designed to 
prevent the unwanted execution of quotes and orders entered by market 
makers using the same member identifier.
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    \69\ See Notice, supra note 4, at 11981, n.34.
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H. Minimum Execution Quantity Orders

    The Exchange proposes to amend ISE Rule 715 (Types of Orders) to 
remove minimum quantity orders in subpart (q).\70\ The Exchange states 
that the utilization of minimum quantity orders by its members has been 
very limited, and therefore proposes to remove this order type.\71\ 
Furthermore, the Exchange proposes to remove two references to minimum 
quantity orders in Supplementary Material .02 to ISE Rule 713 and in 
Supplementary Material .04 to ISE Rule 717.
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    \70\ A Minimum Quantity Order is an order type that is available 
for partial execution only for a specified number of contracts or 
greater. A member may specify whether any subsequent executions of 
the order must also be for the specified number of contracts or 
greater, or if the balance may be executed as a regular order. If 
all executions are to be for a specified number of contracts or 
greater and the balance of the order after one or more partial 
execution(s) is less than the minimum, such balance is treated as 
all-or-none. See ISE Rule 715(q).
    \71\ See Notice, supra note 4, at 11981.
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    The Exchange states that the removing the minimum quantity order 
type would simplify functionality available on the Exchange and reduce 
the complexity of its order types.\72\ The Exchange further represents 
that the utilization of minimum quantity orders by its members has been 
very limited and is currently being utilized to transact less than 1% 
of the Exchange's volume.\73\ Accordingly, the Commission believes it 
is appropriate for the Exchange to remove references to the minimum 
quantity order type.
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    \72\ See Notice, supra note 4, at 11984.
    \73\ See Notice, supra note 4, at 11981, n.35.
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I. Cancel and Replace Orders

    The Exchange proposes to amend Supplementary Material .02 to ISE 
Rule 715 (Types of Orders) to memorialize how the Exchange System will 
handle cancel and replace orders in connection with the Exchange's 
technology migration to INET.\74\ Currently, Exchange members can send 
a Cancel and Replace Order in one message, which allows the replacement 
order to retain the time priority of the cancelled order, subject to 
certain exceptions.\75\ However, currently the Exchange does not apply 
price or other reasonability checks to the replacement order for all 
Cancel and Replace Orders.\76\ For example, the Exchange notes that 
currently, a Cancel and Replace Order which reduced the size of an 
original order from 600 to 300 contracts would not be subject to price 
or other reasonability checks.\77\
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    \74\ See Amendment No. 1, supra note 5.
    \75\ See id. The Exchange notes that, instead of sending a 
Cancel and Replace Order, a Member can separately send a 
cancellation message and a new order, for which the Exchange would 
apply price or other reasonability checks, but the new order would 
not retain the priority of the original order. See id. This behavior 
will not change. See id.
    \76\ See Amendment No. 1, supra note 5.
    \77\ See id.
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    The Exchange now proposes to define the Cancel and Replace Order to 
ensure that price and other reasonability checks are applied to Cancel 
and Replace Orders.\78\ The Exchange proposes to define a Cancel and 
Replace Order as a single message for the immediate cancellation of a 
previously received order and the replacement of that order with a new 
order. If the previously placed order is already partially filled or in 
its entirety, the replacement order is automatically canceled or 
reduced by the number of contracts that were executed. Additionally, 
the replacement order will retain the priority of the cancelled order, 
if the order posts to the order book, provided the price is not 
amended, size is not increased, or in the case of Reserve Orders, size 
is not changed. However, if the replacement portion of a Cancel and 
Replace Order does not satisfy the System's price or other 
reasonability checks the existing order will be cancelled and not 
replaced.\79\
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    \78\ See proposed ISE Rule 715, Supplementary Material .02.
    \79\ Price and reasonability checks that would be applied 
include ISE Rule 710 (Minimum Trading Increments), ISE Rule 711(c) 
(proposed Market Order Spread Protection), ISE Rule 714(b)(2) (Limit 
Order Price Protection), and ISE Rule 722(b)(1) (Minimum Increments 
for Complex Orders), and Supplementary Material .07 (b), (c) and (d) 
to Rule 722 (Price Limits for Complex Orders and Quotes). See 
Amendment No. 1, supra note 5, n.39. The Exchange also notes that, 
as for other orders, the Exchange may cancel an order because it 
does not satisfy a format or other requirement specified in the 
Exchange's rules and specifications. See id.
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    The Exchange represents that conducting price or other 
reasonability checks for all Cancel and Replace Orders will validate 
orders against current market conditions prior to proceeding with the 
request to modify the order.\80\ The Exchange further believes that 
memorializing Cancel and Replace Order handling will add transparency 
to the Exchange's rules and reduce the potential for investor 
confusion.\81\
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    \80\ See id.
    \81\ See id.
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    The Commission notes that other exchanges with a similar order type 
permit an order to retain priority if only the size of the order is 
decremented.\82\ Accordingly, the Commission believes it is appropriate 
for the Exchange to define Cancel and Replace Order in the manner 
proposed.
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    \82\ See id; see Phlx Rule 1080(b)(i)(A).
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J. All-Or-None Orders

    The Exchange proposes to amend ISE Rule 715(c) to provide that All-
Or-None Orders \83\ may only be entered into the Exchange's System with 
a time-in-force designation of Immediate-Or-Cancel.\84\ Currently, the 
Exchange allows users to submit All-Or-None Orders with any time-in-
force designation. As proposed, an All-Or-None Order would be required 
to be submitted as an Immediate-Or-Cancel Order and thus will either 
execute in its entirety or be cancelled. Because All-Or-None Orders 
will either be executed or cancelled, the Exchange also proposes to 
remove language stating that All-Or-None Orders can be maintained in 
the System in Supplementary Material .02 to ISE Rule 713 and to delete 
Supplementary Material .04 to Rule 717, which concerns the exposure of 
non-marketable All-Or-None Orders.\85\
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    \83\ An All-Or-None Order is a limit or market order that is to 
be executed in its entirety or not at all. See ISE Rule 715(c).
    \84\ An Immediate-Or-Cancel Order is a limit order that is to be 
executed in whole or in part upon receipt, and any portion not so 
executed is to be treated as cancelled. See ISE Rule 715(b)(3).
    \85\ See Amendment No. 1, supra note 5.
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    The Exchange states that this change would remove uncertainty with 
respect to the manner in which All-Or-None Orders would be handled in 
the order book, because the All-Or-None Order would be canceled if it 
cannot be immediately executed in its entirety.\86\ Accordingly, the 
Commission believes it is appropriate for the Exchange to require that 
All-Or-None Orders be entered with a time-in-force designation of 
Immediate-Or-Cancel.
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    \86\ See id.
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    For these reasons, the Commission believes that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the Act.

[[Page 18196]]

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\87\ that the proposed rule change (SR-ISE-2017-03), as modified by 
Amendment No. 1, be, and hereby is, approved.
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    \87\ 15 U.S.C. 78s(b)(2).
    \88\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\88\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07638 Filed 4-14-17; 8:45 am]
BILLING CODE 8011-01-P


