
[Federal Register Volume 82, Number 126 (Monday, July 3, 2017)]
[Notices]
[Pages 30923-30925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13902]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81034; File No. SR-ISE-2017-58]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Specify an 
Exception to the Manner in Which Market Maker Immediate-or-Cancel 
Orders Will Be Handled

June 27, 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 June 19, 2017, Nasdaq, ISE LLC (``ISE'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``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 ISE Rule 715(b)(3) to specify an 
exception to the manner in which Immediate-or-Cancel Orders will be 
handled by the System when entered through the Specialized Quote Feed 
\3\ (``SQF'') protocol.
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    \3\ SQF is an interface that allows Market Makers to connect and 
send quotes, Immediate-or-Cancel Orders and auction responses into 
ISE.
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    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to amend ISE Rule 715(b)(3) to specify 
the manner in which an Immediate-or-Cancel Order will interact with 
certain order protections when entered through SQF. An Immediate-or-
Cancel Order is defined as a limit order that is to be executed in 
whole or in part upon receipt. Any portion not so executed is to be 
treated as cancelled.\4\ SQF is an interface that is being introduced 
with the technology migration to a Nasdaq, Inc. (``Nasdaq'') supported 
architecture.\5\ Today, Members may enter orders through FIX, DTI or 
Nasdaq Precise on ISE. After the migration to the INET architecture, 
Members will continue to be able to submit orders through FIX or Nasdaq 
Precise, as is the case today, and OTTO will also be available to enter 
orders. SQF will be available for Market Makers \6\ to enter quotes and 
also Immediate-or-Cancel Orders. DTI will no longer be available.
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    \4\ See ISE Rule 715(b)(3). Immediate-or-Cancel Orders do not 
route.
    \5\ See Securities Exchange Act Release No. 80432 (April 11, 
2017 (SR-ISE-2017-03) (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). INET is the 
proprietary core technology utilized across Nasdaq's global markets 
and utilized on The NASDAQ Options Market LLC (``NOM''), NASDAQ PHLX 
LLC (``Phlx'') and NASDAQ BX, Inc. (``BX'') (collectively, ``Nasdaq 
Exchanges''). The migration of ISE to the Nasdaq INET architecture 
would result in higher performance, scalability, and more robust 
architecture. With this system migration, the Exchange intends to 
adopt certain trading functionality currently utilized at Nasdaq 
Exchanges. The functionality being adopted is described in this 
filing.
    \6\ The term ``market makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
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    With the introduction of SQF, the Exchange proposes to amend ISE 
Rule 715(b)(3) to state that an Immediate-or-Cancel order entered by a 
Market Maker through SQF will not be subject to the (i) Limit Order 
Price Protection and Size Limitation Protection as defined in ISE Rule 
714(b)(2) and (3); or (ii) Limit Order Price Protection as defined in 
Supplementary Material .07(d) to ISE Rule 722. All other Immediate-or-
Cancel Orders entered through FIX, OTTO or Nasdaq Precise will continue 
to be subject to these protections.
    ISE Rule 714, entitled ``Automatic Execution of Orders,'' contains 
a section (b)(2) and (3) which applies to order protections that are 
automatically enforced by the System. The Limit Order Price Protection 
sets a limit on the amount by which incoming limit orders to buy may be 
priced above the Exchange's best offer and by which incoming limit 
orders to sell may be priced below the Exchange's best bid. Limit 
orders that exceed the pricing limit are rejected.\7\ Immediate-or-
Cancel Orders entered through SQF will not be subject to the Limit 
Order Price Protection provided in ISE Rule 714(b)(2).
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    \7\ The limit is established by the Exchange from time-to-time 
for orders to buy (sell) as the greater of the Exchange's best offer 
(bid) plus (minus): (i) An absolute amount not to exceed $2.00, or 
(ii) a percentage of the Exchange's best bid/offer not to exceed 
10%. See ISE Rule 714(b)(2).
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    ISE Rule 714(b)(3) provides a protection for size limitation. The 
System limits the number of contracts an incoming order may specify. 
Orders that exceed the maximum number of contracts are rejected.\8\ 
Immediate-or-Cancel Orders entered through SQF will not be subject to 
this size limitation protection provided in ISE Rule 714(b)(3).\9\
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    \8\ The maximum number of contracts, which shall not be less 
than 10,000, is established by the Exchange from time-to-time. See 
ISE Rule 714(b)(3).
    \9\ The Exchange notes that the protection for size limitation 
will be applied to Complex Immediate-or-Cancel Orders that are 
entered through SQF.
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    Supplementary Material .07(d) to ISE Rule 722 provides for a Limit 
Order Price Protection for Complex Orders. This protection limits the 
amount by which the net price of an incoming complex limit order to buy 
may exceed the net price available from the individual options series 
on the Exchange and by which the net price of

[[Page 30924]]

an incoming complex limit order to sell may be below the net price 
available from the individual options series on the Exchange. Limit 
orders that exceed the pricing limit are rejected.\10\ Immediate-or-
Cancel Orders entered through SQF will not be subject to the Limit 
Order Protection provided in Supplementary Material .07(d) to ISE Rule 
722.
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    \10\ The limit is established by the Exchange from time-to-time 
for complex orders to buy (sell) as the greater of the net price 
available from the individual options series on the Exchange plus 
(minus): (i) An absolute amount not to exceed $2.00, or (ii) a 
percentage of the net price available from the individual options 
series on the Exchange not to exceed 10%. This limit order price 
protection applies only to orders and does not apply to quotes.
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Implementation
    The Exchange intends to begin implementation of the proposed rule 
change in Q2 2017. The ISE migration will be on a symbol by symbol 
basis as specified in alert to Members that was issued by the Exchange 
in the form of an Options Trader Alert.\11\ The alert provides the 
dates that symbols will migrate to INET.
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    \11\ See Options Trader Alert #2017-40.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\12\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\13\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
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    With the adoption of the SQF protocol on INET, the Exchange will 
offer Market Makers the ability to expeditiously submit Immediate-or-
Cancel orders through SQF, without having to involve a different 
protocol and method of entry such as FIX, OTTO or Nasdaq Precise. With 
the ability for Market Makers to utilize the SQF protocol to enter 
Immediate-or-Cancel Orders, in addition to having the ability to enter 
Immediate-or-Cancel Orders on FIX, OTTO or Nasdaq Precise, similar to 
other market participants, Market Makers may submit Immediate-or-Cancel 
Orders into SQF allowing them to manage risk utilizing a single 
protocol, SQF.
    Unlike other market participants, Market Makers are required to 
provide liquidity to the market and are subject to certain obligations, 
including a requirement to provide continuous two-sided quotes on a 
daily basis.\14\ Market Makers use Immediate-or-Cancel Orders to trade 
out of accumulated positions and manage their risk when providing 
liquidity on the Exchange. Proper risk management, including using 
these Immediate-or-Cancel Orders to offload risk, is vital for Market 
Makers, and allows them to maintain tight markets and meet their 
quoting and other obligations to the market. The Exchange believes that 
allowing Market Makers to submit Immediate-or-Cancel Orders though 
their preferred protocol will increase their efficiency in submitting 
such orders and thereby allow them to maintain quality markets to the 
benefit of all market participants that trade on the Exchange.
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    \14\ See ISE Rule 804(e).
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    Miami International Securities Exchange LLC (``MIAX'') utilizes its 
MIAX Express Interface (MEI), a quoting interface, for market makers to 
enter immediate-or-cancel orders.\15\ Specifically, MIAX noted in its 
Application for Registration as a National Securities Exchange, ``. . . 
MIAX would allow market makers to use a variety of quote types, some of 
which would have a specific time in force and would be analogous to 
orders (MIAX refers to such order types as ``eQuotes,'' and market 
makers would be able to enter these orders through their quotation 
infrastructure).'' \16\ Furthermore, MIAX's Price Protection on Non-
Market Maker Orders is not available for orders submitted by a Market 
Maker.\17\ The Price Protection on Non-Market Maker Orders prevents an 
order from being executed at a price beyond the price designated in the 
order's price protection instructions, and is a similar protection to 
the Exchange's Limit Order Price Protection. The Exchange similarly 
believes that it is consistent with the Act to not apply certain 
protections to Market Maker Immediate-or-Cancel Orders submitted 
through SQF.
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    \15\ MIAX offers an eQuote, which is a quote with a specific 
time in force that does not automatically cancel and replace a 
previous Standard quote or eQuote. An eQuote can be cancelled by the 
Market Maker at any time, or can be replaced by another eQuote that 
contains specific instructions to cancel an existing eQuote. See 
MIAX Rule 517(a)(2).
    \16\ See Securities Exchange Release Act No. 68341 (December 3, 
2012), 77 FR 73065 (December 7, 2012) (File No. 10-207) (In the 
Matter of the Application of Miami International Securities 
Exchange, LLC for Registration as a National Securities Exchange: 
Findings, Opinion, and Order of the Commission).
    \17\ See MIAX Rule 515(c)(1).
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    Market Makers handle a large amount of risk when quoting on ISE and 
in addition to the risk protections required by the Exchange, Market-
Makers utilize their own risk management parameters when entering 
orders, minimizing the likelihood of a Market Maker order resulting 
from an error from being entered. The Exchange believes that Market 
Makers, unlike other market participants, have the ability to manage 
their risk when submitting Immediate-or-Cancel Orders through SQF and 
should be permitted to elect this method of order entry to obtain 
efficiency and speed of order entry, particularly in light of the 
continuous quoting obligations the Exchange imposes on these 
participants. If Market Makers desire the Limit Order Protections for 
single leg and complex orders and the Size Limitation Protections for 
single leg orders, they may utilize the FIX, OTTO or Nasdaq Precise 
protocols for entering their orders. The Exchange notes that market 
makers on NASDAQ Phlx LLC (``Phlx'') may enter Immediate-or-Cancel 
Orders through SQF and are similarly not subject to certain risk 
protections today.\18\ The Exchange represents that it will continue to 
assess the risk protections that are applied to orders, including 
Market Maker Immediate-or-Cancel Orders submitted through SQF, to 
ensure that adequate risk protections are available to members that 
trade on the Exchange. The Exchange will file to adopt additional risk 
protections in the event that the Exchange determines that such 
additional protections are appropriate in the interest of maintaining a 
fair and orderly market.
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    \18\ See Securities and Exchange Release No. 76295 (October 29, 
2015), 80 FR 68338 at 68339 (November 4, 2015) (SR-Phlx-2015-83) 
(Phlx noted in footnote 8 that while SQF permits the receipt of 
quotes, sweeps are not included for purposes of the Percentage Based 
risk protection in Rule 1095(i)). Phlx Rule 1080(c)(iii)(B) provides 
that, ``. . . Market Sweeps are processed on an immediate-or-cancel 
basis, may not be routed, may be entered only at a single price, and 
may not trade through away markets.''
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Market Makers handle a large 
amount of risk when quoting on ISE and in addition to the risk 
protections required by the Exchange, Market-Makers utilize their own 
risk management parameters when entering orders, minimizing the 
likelihood of a Market Maker order resulting from an error from being 
entered. Market Makers also transact a large amount of orders on the 
Exchange and bring liquidity to the market. Market Makers should be 
permitted to elect this method of order entry to obtain efficiency and 
speed of order entry, particularly in light of the

[[Page 30925]]

continuous quoting obligations the Exchange imposes on these members 
that are not applicable to other market participants. The Exchange 
therefore believes that this rule change will not impose an undue 
burden on competition.

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 Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\ 
Because the proposed rule change does not: (i) Significantly affect the 
protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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    \19\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    The Exchange has asked the Commission to waive the 30-day operative 
delay so that the proposal may become operative immediately upon 
filing. The Exchange has stated that it is requesting this waiver 
because ISE intends to offer to Market Makers the functionality to 
submit Immediate-or-Cancel Orders through SQF at the start of the INET 
migration, even though the Limit Order Price Protections in ISE Rule 
714(b)(2) and Supplementary Material .07(d) to ISE Rule 722 and the 
Size Limitation Protection in ISE Rule 714(b)(3) would not apply to 
those orders. The Exchange believes that Market Makers should be 
permitted to elect this method of order entry to obtain efficiency and 
speed of order entry, due to the continuous quoting obligations the 
Exchange places on Market Makers, unlike other market participants. 
Additionally the Exchange believes that Market Makers have the ability 
to manage their own risk when submitting Immediate-or-Cancel Orders 
through SQF. The Exchange represents that it will continue to assess 
the risk protections that are applied to orders and will file to adopt 
additional risk protections if it determines that such additional 
protections are appropriate in the interest of maintaining a fair and 
orderly market.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because this waiver will enable the Exchange to permit Market Makers to 
utilize the SQF protocol to submit Immediate-or-Cancel Orders in the 
symbols that have been migrated to INET, thereby allowing Market Makers 
to manage their risk through a single protocol for entering orders and 
quotations and comply with their continuous quoting requirements. The 
Commission notes that Market Makers are sophisticated market 
participants that have alternative methods to manage risk and that the 
Exchange will continue to assess the need for additional risk 
protections that may be appropriate, including for Immediate-or-Cancel 
Orders submitted through SQF. For this reason, the Commission hereby 
waives the 30-day operative delay requirement and designates the 
proposed rule change as operative upon filing.\21\
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    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \22\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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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. 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-2017-58 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2017-58. 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 such 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-2017-58, and should be 
submitted on or before July 24, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-13902 Filed 6-30-17; 8:45 am]
 BILLING CODE 8011-01-P


