
[Federal Register Volume 82, Number 192 (Thursday, October 5, 2017)]
[Notices]
[Pages 46576-46579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21407]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81772; File No. SR-ISE-2017-84]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Rule 
716(c) on the Block Order Mechanism

September 29, 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 September 18, 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 Rule 716(c) to more accurately 
describe the allocation methodology used in the Block Order Mechanism, 
add language regarding how the block execution price is determined, and 
describe the content of the broadcast message disseminated to members 
upon the entry of an order into the mechanism.
    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 Block Order Mechanism is a process by which a member can obtain 
liquidity for the execution of block-sized orders,\3\ defined as orders 
for fifty contracts or more.\4\ When an order is entered in the Block 
Order Mechanism, that order is exposed to members who are given an 
opportunity to respond with the prices and sizes at which they would be 
willing to trade with the block-sized order.\5\ The exposure period is 
designated by the Exchange via circular, but must be no less than 100 
milliseconds and no more than 1 second.\6\ At the conclusion of the 
exposure period, either an execution will occur at a single block 
execution price,\7\ or the order will be cancelled.\8\ The purpose of 
the proposed rule change is to amend Rule 716(c) to more accurately 
describe the allocation methodology used in the Block Order Mechanism, 
add language regarding how the block execution price is determined, and 
describe the content of the broadcast message disseminated to members 
upon the entry of an order into the mechanism. The Exchange believes 
that these changes will increase transparency around the operation of 
the Block Order Mechanism to the benefit of members and market 
participants.
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    \3\ See Rule 716(c).
    \4\ See Rule 716(a).
    \5\ A ``Response'' is an electronic message that is sent by 
members in response to a broadcast message. See Rule 716(b).
    \6\ See Supplementary Material .04 to Rule 716.
    \7\ Responses and orders and quotes on the order book at the 
time the block order is executed that are priced better than the 
block execution price are executed at the block execution price. See 
Rule 716(c)(2)(i).
    \8\ See Rule 716(c)(2).
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    Currently, Rule 716(c)(2)(ii) provides that Responses, quotes, and 
Professional

[[Page 46577]]

Orders \9\ at the block execution price will participate in the 
execution of the block-size order according to Rule 713(e)--i.e., the 
Exchange's regular allocation rule. As implemented today, however, 
interest that is executed in the Block Order Mechanism follows the 
customer priority pro-rata allocation methodology designed for the 
Exchange's auction mechanisms, including, for example, the Facilitation 
Mechanism,\10\ Solicited Order Mechanism,\11\ and Price Improvement 
Mechanism,\12\ with the exception that those two-sided auction 
mechanisms also allocate contracts against the contra order. This 
auction allocation methodology is similar to the Exchange's regular 
allocation methodology but does not provide enhanced allocations to the 
Primary Market Maker (``PMM'') pursuant to Rule 713(e) and 
Supplementary Material .01(b) to Rule 713.\13\ The Exchange therefore 
proposes to amend Rule 716(c)(2)(ii) to provide that, at the block 
execution price, Priority Customer Orders and Priority Customer 
Responses will be executed first in time priority, and then quotes, 
Professional Orders, and Professional Responses will participate in the 
execution of the block-size order based upon the percentage of the 
total number of contracts available at the block execution price that 
is represented by the size of the quote, Professional Order, or 
Professional Response. In addition, the Exchange proposes to specify in 
Rule 716(c)(2)(i) that interest that is priced better than the block 
execution price is executed in full. In particular, the Exchange 
proposes to amend this rule to state that bids (offers) on the Exchange 
at the time the block order is executed that are priced higher (lower) 
than the block execution price, as well as Responses that are priced 
higher (lower) than the block execution price, will be executed in full 
at the block execution price. Although Rule 716(c)(2)(ii) described 
above explains how allocations are handled at the block execution 
price, the Exchange believes that the additional clarity that interest 
that is priced better than the block execution price is executed in 
full would be helpful to members. With these two proposed changes, Rule 
716(c) will more accurately describe the allocation methodology used in 
the Block Order Mechanism.
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    \9\ The term ``Professional Order'' means an order that is for 
the account of a person or entity that is not a Priority Customer. 
See Rule 100(a)(37C).
    \10\ See Rule 716(d).
    \11\ See Rule 716(e).
    \12\ See Rule 723.
    \13\ Supplementary Material .01(b) to Rule 713 provides that, if 
the PMM is quoting at the best price, it has participation rights 
equal to the greater of the proportion of the total size at the best 
price represented by the size of its quote, or a percentage 
allocation entitlement based on the number of other Professional 
Orders and market maker quotations at the best price.
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    Furthermore, the Exchange proposes to add language to Rule 
716(c)(2)(i) that explains the price at which orders entered into the 
Block Order Mechanism are executed. In particular, the Exchange 
proposes to state that Responses, orders, and quotes will be executed 
at a single block execution price that is the price for the block-size 
order at which the maximum number of contracts can be executed 
consistent with the member's instruction. For example, if a member 
enters a block-sized order to buy 100 contracts at $1.00 into the Block 
Order Mechanism, and members enter Response A to sell 50 contracts at 
$0.90 and Response B to sell 40 contracts at $0.95, the block execution 
price would be $0.95 as this is the price at which the maximum number 
of contracts could be executed. The block-sized order and both 
Responses would then be executed at this single block execution price. 
Responses A and B would be executed in full since there is sufficient 
size to execute both Responses against the block-size order. In 
addition, if two other members also enter Responses C (Priority 
Customer) and D (non-Priority Customer) to sell at $0.98 for 10 
contracts each, the block execution price would be $0.98 as additional 
contracts could be executed at that price. In that instance, Responses 
A and B, which are priced better than the block execution price, would 
be executed in full, while Responses B and C, which are priced at the 
block execution price, would participate in accordance with the 
allocation methodology described in this proposed rule change--i.e., 
the remaining 10 contracts would go to Response C, which is a Priority 
Customer Response. The Block Order Mechanism is designed to provide an 
opportunity for members to receive liquidity for their block-sized 
orders and therefore trades at a price that allows the maximum number 
of contracts of such order to be executed against Responses entered to 
trade against the block-size order and interest on the Exchange's order 
book. The Exchange believes that describing how the block execution 
price is determined in Rule 716(c)(2)(i) will increase transparency 
around pricing of executions in the Block Order Mechanism.
    Finally, the Exchange proposes to add language to Rule 716(c)(1) to 
describe the content of the broadcast message sent to members upon the 
entry of an order into the Block Order Mechanism. In particular, the 
Exchange proposes to specify that this broadcast message includes the 
series, and may include price, size and/or side, as specified by the 
member entering the order. Similar language is included in the Block 
Order Mechanism Rule on the Exchange's affiliates, Nasdaq GEMX, LLC 
(``GEMX'') and Nasdaq MRX, LLC (``MRX''), which operate in the same way 
as ISE's Block Order Mechanism.\14\ The Exchange therefore believes 
that this change will increase transparency around the content of the 
broadcast message and promote consistency across the rulebooks of its 
affiliated exchanges that offer identical functionality.
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    \14\ See GEMX and MRX Rule 716(c)(1).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\15\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\16\ because it is designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanisms 
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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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed changes to the allocation 
language in Rule 716(c)(2)(i)-(ii) are consistent with the protection 
of investors and the public interest as the proposed allocation 
language more accurately reflects the Exchange's process for allocating 
contracts executed in the Block Order Mechanism. Although the 
Exchange's allocation rule for the Block Order Mechanism currently 
references the allocation process for regular trading, the allocation 
methodology does not include certain parts of the regular allocation 
procedure. In particular, the Exchange does not grant any special 
allocation to the PMM for interest executed in the Block Order 
Mechanism. The Exchange believes that it is appropriate to not provide 
an enhanced allocation entitlement to the PMM for interest executed in 
the Block Order Mechanism, as the Block Order Mechanism provides an 
auction process that does not rely on market maker quoting and other 
obligations to source liquidity. Furthermore, the Exchange

[[Page 46578]]

believes that it is helpful to explain in this rule that interest that 
is priced better than the block execution price would be executed in 
full. The allocation process used for the Block Order Mechanism is 
similar to how the Exchange allocates contracts in other auction 
mechanisms, including, for example, the Facilitation Mechanism, 
Solicited Order Mechanism, and Price Improvement Mechanism, with the 
exception that those two-sided auction mechanisms also allocate 
contracts against the contra order.\17\
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    \17\ See supra notes 10-12 and accompanying text.
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    The Exchange also believes that the proposed changes to describe 
how the block execution price is determined is consistent with the 
protection of investors and the public interest as this change will 
increase transparency around the price at which interest is executed in 
the Block Order Mechanism. As explained above, the Block Order 
Mechanism is designed to provide an opportunity for members to receive 
liquidity for their block-sized orders and therefore trades at a price 
that allows the maximum number of contracts of such order to be 
executed against Responses entered to trade against the block-size 
order and interest on the Exchange's order book. The Exchange believes 
that describing how the block execution price is determined in Rule 
716(c)(2)(i) will increase transparency around pricing of executions in 
the Block Order Mechanism.
    Finally, the Exchange believes that the proposed change to Rule 
716(c)(1) is consistent with the protection of investors and the public 
interest as it will provide transparency to members about the content 
of the broadcast message sent to members upon the entry of an order 
into the Block Order Mechanism. Currently, the broadcast message 
includes the series, and may include price, size and/or side, as 
specified by the member entering the order. The Exchange is not 
proposing any changes to the content of the broadcast message but wants 
to make this clear in its rules, which, with this change, will be 
consistent with the rules of its affiliates, GEMX and MRX.\18\
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    \18\ See supra note 14 and accompanying text.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\19\ 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 
rule change is designed to correct the Exchange's rules to more 
accurately reflect the handling of auctions in the Block Order 
Mechanism. No changes are proposed to the operation of the Exchange's 
trading system, and no members will be impacted by the proposed rule, 
which merely reflects current functionality offered to members that 
trade in the Block Order Mechanism. The proposed rule change is 
therefore not designed to impose any significant burden on competition.
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    \19\ 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

    Because the foregoing 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 for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \20\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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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    A proposed rule change filed under Rule 19b-4(f)(6) \22\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\23\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange requests 
that the Commission waive the 30-day operative delay. The Exchange 
notes that a waiver is consistent with the protection of investors and 
the public interest because it will allow the Exchange to correct its 
Block Order Mechanism rules to reflect the current functionality of the 
system without undue delay. The Commission believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest. Accordingly, the Commission hereby waives the 
30-day operative delay and designates the proposed rule change 
operative upon filing.\24\
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    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ 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 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.

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-2017-84 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-2017-84. 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.,

[[Page 46579]]

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-2017-84 and should be 
submitted on or before October 26, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21407 Filed 10-4-17; 8:45 am]
BILLING CODE 8011-01-P


