
[Federal Register Volume 82, Number 117 (Tuesday, June 20, 2017)]
[Notices]
[Pages 28178-28180]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12763]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80922; File No. SR-ISE-2017-49]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Its 
Schedule of Fees To (1) Reduce the Priority Customer Taker Fee for 
Regular Orders in SPY to $0.35 Per Contract, and (2) Lower the 
Threshold of Net Zero Complex Contracts

June 14, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 31, 2017, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II, below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Schedule of Fees to (1) reduce 
the Priority Customer taker fee for regular orders in SPY to $0.35 per 
contract, and (2) lower the threshold of net zero complex contracts 
from 2,000 contracts to 1,000 contracts.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the Schedule of 
Fees to (1) reduce the Priority Customer \3\ taker fee for regular 
orders in SPY to $0.35 per contract, and (2) lower the threshold of net 
zero complex contracts from 2,000 contracts to 1,000 contracts. Each of 
these changes is described in more detail below.
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    \3\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in Nasdaq ISE Rule 
100(a)(37A).
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Priority Customer Taker Fee
    Currently, the Exchange charges a taker fee for regular orders in 
Select Symbols \4\ that is $0.44 per contract for Market Maker \5\ 
orders, $0.45 per contract for Non-Nasdaq ISE Market Maker,\6\ Firm 
Proprietary,\7\ Broker-Dealer,\8\ and Professional Customer orders,\9\ 
and $0.40 per contract for Priority Customer orders. The Exchange now 
proposes to adopt a reduced Priority Customer taker fee of $0.35 per 
contract for regular orders in SPY, which is the most actively traded 
name on the Exchange. This taker fee will remain unchanged for Select 
Symbols other than SPY. The Exchange believes that this reduction in 
fees will attract additional Priority Customer orders in SPY to the 
Exchange.
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    \4\ ``Select Symbols'' are options overlying all symbols listed 
on the Nasdaq ISE that are in the Penny Pilot Program.
    \5\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
    \6\ A ``Non-Nasdaq ISE Market Maker'' is a market maker as 
defined in Section 3(a)(38) of the Securities Exchange Act of 1934, 
as amended, registered in the same options class on another options 
exchange.
    \7\ A ``Firm Proprietary'' order is an order submitted by a 
member for its own proprietary account.
    \8\ A ``Broker-Dealer'' order is an order submitted by a member 
for a broker-dealer account that is not its own proprietary account.
    \9\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer.
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Net Zero Complex Orders
    Currently, the Exchange does not provide Priority Customer rebates 
for complex orders that that leg in to the regular order book and trade 
at a net price per contract at or near $0.00 (i.e., net zero complex 
orders), provided those orders are entered on behalf of originating 
market participants that execute an ADV of at least 2,000 contracts in 
net zero complex orders in a given month.\10\ While these complex 
orders would generally not find a counterparty in the complex order 
book, they may leg in to the regular order book where they are 
typically executed by Market Makers or other market participants on the 
individual legs who pay a fee to trade with this order flow. The 
Exchange does not provide rebates for net zero complex orders to 
prevent members from engaging in rebate arbitrage by entering valueless 
complex orders solely to recover rebates. For purposes of determining 
which complex orders qualify as net zero, the Exchange counts all 
complex orders that leg in to the regular order book and are executed 
at a net price per contract that is within a range of $0.01 credit and 
$0.01 debit. The 2,000 contract threshold exists to differentiate 
market participants that are entering legitimate complex orders from 
those that are entering net zero complex orders solely to earn a 
rebate. The Exchange now proposes to lower the threshold of net zero 
complex contracts from 2,000 contracts to 1,000 contracts per day. As 
such, net zero priced complex orders that leg into the regular order 
book and are entered by firms with an ADV in this type of activity of 
1,000 contracts or more in a given month will not earn the Priority 
Customer complex order rebate.
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    \10\ See Securities Exchange Act Release No. 80219 (March 13, 
2017), 82 FR 14249 (March 17, 2017) (SR-ISE-2017-22). Priority 
Customer complex orders that do not meet the definition of a net 
zero complex order, or that are entered on behalf of originating 
market participants that do not reach the 2,000 contract ADV 
threshold, remain eligible for rebates based on the tier achieved.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general, and 
Section 6(b)(4) of the Act,\12\ in particular, in that it is designed

[[Page 28179]]

to provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and other persons using its facilities.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(4).
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Priority Customer Taker Fee
    The Exchange believes that it is reasonable and equitable to reduce 
the Priority Customer taker fee for regular orders in SPY as the 
proposed fees are more favorable than those currently offered on the 
Exchange. The Exchange is targeting SPY for this change as SPY is the 
most actively traded symbol on the Exchange. With this change, the 
Exchange will charge lower taker fees for Priority Customer orders in 
SPY, thereby attracting additional order flow in this symbol to the 
benefit of all members that trade on the Exchange. The Exchange also 
believes that it is equitable and not unfairly discriminatory to only 
offer this reduced taker fee to Priority Customer orders. A Priority 
Customer is by definition not a broker or dealer in securities, and 
does not place more than 390 orders in listed options per day on 
average during a calendar month for its own beneficial account(s). This 
limitation does not apply to participants on the Exchange whose 
behavior is substantially similar to that of market professionals, 
including Professional Customers, who will generally submit a higher 
number of orders than Priority Customers.
Net Zero Complex Orders
    The Exchange believes that the proposed change to lower the 
threshold of net zero complex contracts is reasonable, equitable, and 
not unfairly discriminatory as it is designed to remove financial 
incentives for market participants to engage in rebate arbitrage by 
entering valueless complex orders on the Exchange that do not have any 
economic purpose. The Exchange has determined that the current 
threshold is still too high to effectively discourage market 
participants from engaging in rebate arbitrage, and believes that the 
lower threshold proposed in this filing more accurately reflects the 
Exchange's original intent. No market participants meet the current ADV 
threshold, as firms have modified their activity to ensure that their 
complex ADV in the net zero range is lower than the current 2,000 ADV 
threshold. Between May 1, 2017 and May 26, 2017, for example, the 
market participant with the largest ADV in net zero contracts executed 
an ADV of 1,204 net zero contracts. By comparison the average net zero 
ADV of market participants that traded complex orders during this time 
period was only 24 contracts, with the vast majority of these market 
participants executing no net zero contracts.\13\ The continued 
submission of a high volume of net zero complex orders that leg into 
the regular order book by these firms has generated complaints from the 
Market Makers that trade against these orders in the regular order 
book, as firms recognize these net zero complex orders as essentially 
non-economic.
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    \13\ Excluding market participants that did not execute any net 
zero complex orders, the average net zero ADV was only 109 
contracts.
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    The Exchange believes that lowering the threshold will make it more 
difficult for firms to continue to enter net zero complex orders purely 
to earn a rebate. In particular, the Exchange notes that any firm that 
engages in this activity will be prevented from doing so with an ADV of 
more than 1,000 contracts in net zero complex orders. This will reduce 
the cost of these trades to the Exchange and its members as firms are 
limited in the amount of this net zero complex order activity that they 
can conduct on the Exchange. The Exchange believes that market 
participants will stop entering net zero complex orders when they reach 
the proposed ADV threshold as these firms are entering these orders 
solely for the purpose of earning a rebate. Indeed, this is consistent 
with the Exchange's experience with this rule to date, as firms that 
were previously entering a high volume of net zero complex orders have 
reduced their volume in activity covered by this rule in response to 
other changes.
    To the extent that market participants enter legitimate complex 
orders, however, they will continue to receive the same rebates that 
they do today. In addition, market participants that enter an 
insubstantial volume of net zero complex orders will also continue to 
receive rebates. The Exchange believes that it is reasonable, 
equitable, and not unfairly discriminatory to continue to provide 
rebates where appropriate based on the market participant executing 
only a low ADV of net zero complex orders. While the Exchange could 
prohibit rebates for any net zero complex orders without an ADV 
threshold, doing so would disadvantage innocent market participants 
that are not engaged in rebate arbitrage. The Exchange believes that 
the decision to allow rebates for firms with a limited ADV in net zero 
complex orders properly balances the need to encourage market 
participants to send order flow to the Exchange, and the need to 
prevent activity that is harmful to the market. Moreover, all market 
participants will be treated the same based on their net zero ADV.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\14\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
reduction in Priority Customer taker fees for regular orders in SPY is 
better for these market participants, and illustrates competition in 
the options industry. In addition, the proposed net zero complex order 
change is designed to reduce the ability for certain market 
participants to engage in rebate arbitrage to the detriment of the 
Exchange and its members. The Exchange operates in a highly competitive 
market in which market participants can readily direct their order flow 
to competing venues. In such an environment, the Exchange must 
continually review, and consider adjusting, its fees and rebates to 
remain competitive with other exchanges. For the reasons described 
above, the Exchange believes that the proposed fee changes reflect this 
competitive environment.
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    \14\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\15\ and Rule 19b-4(f)(2) \16\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is: (i) Necessary or 
appropriate in the public interest; (ii) for the protection of 
investors; or (iii) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \16\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.

[[Page 28180]]

Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2017-49 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2017-49. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2017-49 and should be 
submitted on or before July 11, 2017.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-12763 Filed 6-19-17; 8:45 am]
 BILLING CODE 8011-01-P


