[Federal Register Volume 83, Number 122 (Monday, June 25, 2018)]
[Notices]
[Pages 29583-29589]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13505]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83464; File No. SR-ISE-2018-55]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Box and 
Butterfly Spread Protections

June 19, 2018.
    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 7, 2018, Nasdaq ISE, LLC (``ISE'' or the ``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 adopt new order type protections, 
Butterfly and Box Spread protections, for Complex Order \3\ strategy 
trades.
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    \3\ A complex order is any order involving the simultaneous 
purchase and/or sale of two or more different options series in the 
same underlying security, for the same account, in a ratio that is 
equal to or greater than one-to-three (.333) and less than or equal 
to three-to-one (3.00) and for the purpose of executing a particular 
investment strategy. See ISE Rule 722(a)(1).
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    The text of the proposed rule change is available on the Exchange's 
website at http://ise.cchwallstreet.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 proposes to: (i) Adopt Complex Order protections for 
Butterfly and Box Spread protections for Complex Order strategies; and 
(ii) reorganize and amend the existing Complex Order protections 
currently contained within .07 of Supplementary Material to Rule 722 
and Rule 714. These amendments will be described in greater detail 
below. This rule change is similar to protections, which exist today on 
Nasdaq Phlx LLC (``Phlx'').\4\
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    \4\ This rule change is similar to Phlx Rule 1098(i) and (j).
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Adopt Butterfly and Box Spread Protections
    Today, ISE members may submit Butterfly and Box spreads into the 
System. ISE proposes to define a Butterfly spread as a three legged 
Complex Order with certain characteristics.\5\ The Exchange is 
proposing to reject Butterfly spreads which are outside of certain 
parameters to avoid potential executions at prices that exceed the 
minimum and maximum possible intrinsic value of the spread by a 
specified amount. Additionally, ISE proposes to define a Box spread as 
a four legged Complex Order with certain characteristics.\6\ The 
Exchange is proposing to reject Box spreads which are outside of 
certain parameters to avoid potential executions at prices that exceed 
the minimum and maximum possible intrinsic value of the spread by a 
specified amount. Today, the Exchange offers similar order protection 
features for Complex Orders such as Vertical and Calendar Spread 
Protections \7\ to avoid erroneous trades.
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    \5\ This strategy utilizes a combination of either all calls or 
all puts of the same expiration date in the same underlying to limit 
risk.
    \6\ This strategy utilizes a combination of put/call pairs of 
options with the same expiration date in the same underlying to 
limit risk.
    \7\ See Supplementary Material .07(c) to ISE Rule 722.
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Butterfly Spread Protection
    As noted above, the Exchange proposes to adopt a Butterfly Spread 
Protection. A Butterfly Spread is a three legged Complex Order with the 
following: (1) Two legs to buy (sell) the same number of calls (puts); 
(2) one leg to sell (buy) twice the number of calls (puts) with a 
strike price at mid-point of the two legs to buy (sell); (3) all legs 
have the same expiration; and (4) each leg strike price is equidistant 
from the next sequential strike price. With this protection, a 
Butterfly Spread Limit Order that is priced higher than the Maximum 
Value (defined below) or lower than the Minimum Value (defined below) 
will be rejected. A Butterfly Spread Market Order (or Butterfly Spread 
Limit Order entered with a net price inside the Butterfly Spread 
Protection Range) to Buy (Sell) will be restricted from executing by 
legging into the single leg market with a net price higher (lower) than 
the Maximum (Minimum) Value. The Butterfly Spread Protection Range is 
the absolute difference between the Minimum Value and the Maximum 
Value.
    ISE's proposal continues to protect Butterfly Spreads from legging 
into the single leg market(s), similar to Phlx Rule 1098(i), at a price 
higher than the Maximum Value for buy orders and lower than the Minimum 
Value for sell orders. ISE's proposal differs from Phlx in that ISE 
allows legging below the Minimum Value for buys and above the Maximum 
Value for sells at a price made available by the synthetic (cIBBO) 
market outside of the Butterfly Spread Protection Range.\8\
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    \8\ Allowing sell orders to trade by legging into the simple 
market at prices above the Maximum Value (buy orders below the 
Minimum Value) offers an opportunity for sellers/buyers to receive a 
premium beyond the potential intrinsic value of the spread without 
creating risk for the Complex Order Book.
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    The Exchange believes that these limitations, which exist today for 
ISE Vertical and Calendar Spreads,\9\ are consistent with the Act 
because the limits permit buying below the minimum and selling above 
the maximum thereby allowing buyers and sellers to achieve better 
prices without taking on additional risk. The intrinsic value for the 
Butterfly Spread that could be achieved when closing the position would 
not be negatively impacted in

[[Page 29584]]

this case because the limitation permits price improvement. The 
Exchange notes, however, that in certain situations, market 
participants willingly want to execute certain trading strategies even 
if such trades occur outside their intrinsic value or at seemingly 
erroneous prices (e.g., negative price).\10\ The Exchange believes it 
is appropriate to provide market participants flexibility to allow them 
to execute these trading strategies and therefore to adopt a buffer to 
permit the execution of such trading strategies. The Exchange believes 
it is reasonable to adopt a buffer to give the Exchange the ability to 
adjust the pre-set value uniformly across all options classes in the 
event the Exchange believes a different pre-set value is more 
appropriate. Finally, the Exchange notes that it provides these 
protections for the benefit of, and in consultation with, its Members. 
The Exchange believes the proposed rule change will help the Exchange 
to maintain a fair and orderly market, and provide a valuable service 
to investors.
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    \9\ Id.
    \10\ A small incremental allowance outside of the Minimum/
Maximum Value allows for a small premium to offset commissions 
associated with trading and may incentivize participants to take the 
other side of spreads trading at or slightly outside of the 
intrinsic value. For the participant looking to close out their 
position, it may be financially beneficial to pay a small premium 
and close out the position rather than carry such position to 
expiration and take delivery. The purpose of this rule change is not 
to impede current order handling but to ensure execution prices are 
within a reasonable range of minimum and maximum values.
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    The Initial Maximum Value shall be the distance between the strike 
price of the leg with the mid-point strike price and either of the 
outer leg strike prices. The Maximum Value Buffer is the lesser of a 
configurable absolute dollar value or percentage of the Initial Maximum 
Value set by the Exchange and announced via a notice to members. The 
Exchange intends to set the Maximum Value Buffer at zero initially. The 
Maximum Value is calculated by adding the Initial Maximum Value and 
Maximum Value Buffer.
    The Initial Minimum Value shall be zero. The Minimum Value Buffer 
is a configurable absolute dollar value set by the Exchange and 
announced via a notice to members. The Exchange intends to set the 
Minimum Value Buffer at zero initially. The Exchange would monitor the 
zero value, including feedback from market participants, in determining 
whether the value is set at the appropriate level. The decision to 
change the buffer could stem from participant concern for their ability 
to close out positions. The Minimum Value is calculated by subtracting 
the Minimum Value Buffer from the Initial Minimum Value of zero. There 
are circumstances where the Minimum Value may be less than zero.\11\
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    \11\ For example, market participants who desire to trade out of 
positions at intrinsic value may not find a contra-side willing to 
trade without a premium. A small incremental allowance outside of 
the minimum/maximum value allows for a small premium to offset 
commissions associated with trading and may incentivize participants 
to take the other side of spreads trading at intrinsic value. For 
the participant looking to close out their position, it may be 
financially beneficial to pay a small premium and close out the 
position rather than carry such position to expiration and take 
delivery.
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    The Butterfly Spread Protection would apply throughout the trading 
day, including pre-market, during the Opening Process and during a 
trading halt. Unlike Phlx, but similar to ISE Vertical and Calendar 
spreads,\12\ these protections will not apply to Complex Orders being 
auctioned in the Facilitation, Solicitation, Price Improvement 
mechanism and associated auction responses. Also, today, the Vertical 
and Calendar spreads do not apply to Customer Cross Orders.\13\ The 
Exchange is adding Customer Cross Orders to the list of excluded order 
types that are not protected by the Vertical, Calendar, Box or 
Butterfly spread protections. Complex orders executed in these 
mechanisms are two-sided orders where the contra-side order is willing 
to trade with the agency order at an agreed upon price thus removing 
the risk that the order was executed erroneously outside its intrinsic 
value. Similarly, a Customer Cross Order is a two-sided order where the 
contra-side order is willing to trade with the agency order at an 
agreed upon price. The Exchange believes that because paired orders are 
negotiated in advance by both parties it is unlikely that the parties 
would agree to transact at prices that would necessitate the 
protections proposed within the Butterfly Spread Protection.
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    \12\ See ISE Rule 722 at Supplementary Material .07(c).
    \13\ A Customer Cross Order is comprised of a Priority Customer 
Order to buy and a Priority Customer Order to sell at the same price 
and for the same quantity. See ISE Rule 715(i).
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    Below is an example of the application of this protection.
Example 1
    Assume the following Complex Order legs for a Butterfly Spread:

1. Buy 1 NDX 6960 Jan 26 Call (33.70 x 34.60)
2. Sell 2 NDX 6970 Jan 26 Calls (27.00 x 27.90)
3. Buy 1 NDX 6980 Jan 26 Call (28.40 x 29.50)
The derived net ISE Complex Order market (``cIBBO'') is 6.30 x 10.10 
\14\
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    \14\ The cIBBO is calculated by deriving the synthetic bid and 
offer available in the simple market with the ratio of each option 
leg of the spread considered. The 6.30 number is arrived at by 
multiplying (1 * 33.70) then subtracting (2 * 27.90) and adding (1 * 
28.40). The 10.10 number is derived by multiplying (1 * 34.60) then 
subtracting (2 * 27.00) and adding (1 * 29.50).
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Assume both the Maximum Value Buffer and Minimum Value Buffer are 0.00
Minimum Value = 0.00
     Initial Minimum Value: 0.00
     Minimum Value Buffer: 0.00
     Minimum Value: 0.00-0.00 = 0.00
Maximum Value = 10
     Initial Maximum Value: 6970 (middle leg strike price)-6960 
(outer leg strike price) = 10.00

     Maximum Value Buffer: 0.00
     Maximum Value: 10.00 (Initial Maximum Value) + 0.00 
(Maximum Value Buffer) = 10.00

    An incoming order to buy the spread defined above for 10.10 will be 
rejected because the purchase price of 10.10 is greater than the 
Maximum Value of 10.00.
Example 2
    Assume the following Complex Order legs for a Butterfly Spread:

1. Buy 1 NDX 6960 Jan 26 Call (33.70 x 34.60)
2. Sell 2 NDX 6970 Jan 26 Calls (27.00 x 27.90)
3. Buy 1 NDX 6980 Jan 26 Call (28.40 x 29.45)
The derived net ISE Complex Order market (``cIBBO'') is 6.30 x 10.05 
\15\
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    \15\ The cIBBO is calculated by deriving the synthetic bid and 
offer available in the simple market with the ratio of each option 
leg of the spread considered.
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Assume both the Maximum Value Buffer and Minimum Value Buffer are 0.05
Minimum Value = -0.05
     Initial Minimum Value: 0.00
     Minimum Value Buffer: 0.05
     Minimum Value: 0.00-0.05 = -0.05
Maximum Value = 10.05
     Initial Maximum Value: 6970 (middle leg strike price)-6960 
(outer leg strike price) = 10.00
     Maximum Value Buffer: 0.05
     Maximum Value: 10.00 (Initial Maximum Value) + 0.05 
(Maximum Value Buffer) = 10.05

    An incoming order to buy the spread defined above for 10.05 will be 
accepted and executed against the simple market because the purchase 
price of 10.05 is equal to the Maximum Value 10.05.

[[Page 29585]]

Phlx has a similar protection in place today.\16\
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    \16\ See Securities and Exchange Act Release No. 83033 (April 
11, 2018), 83 FR 16907 (April 17, 2018) (SR-Phlx-2018-14).
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Box Spread Protection
    As noted above, the Exchange proposes to adopt a Box Spread 
Protection. A Box Spread is a four legged Complex Order with the 
following: (1) One pair of legs with the same strike price with one leg 
to buy a call (put) and one leg to sell a put (call); (2) a second pair 
of legs with a different strike price from the pair described in (1) 
with one leg to sell a call (put) and one leg to buy a put (call); (3) 
all legs have the same expiration; and (4) all legs have equal volume. 
With this protection, a Box Spread Limit Order that is priced higher 
than the Maximum Value or lower than the Minimum Value will be 
rejected. A Box Spread Market Order (or Box Spread Limit Order entered 
with a net price inside the Box Spread Protection Range) to Buy (Sell) 
will be restricted from executing by legging into the single leg market 
with a net price higher (lower) than the Maximum (Minimum) Value. The 
Box Spread Protection Range is the absolute difference between the 
Minimum Value and the Maximum Value.
    ISE's proposal continues to protect Box Spreads from legging into 
the single leg market(s), similar to Phlx Rule 1098(j), at a price 
higher than the Maximum Value for buy orders and lower than the Minimum 
Value for sell orders. ISE's proposal differs from Phlx in that ISE 
allows legging below the Minimum Value for buys and above the Maximum 
Value for sells at a price made available by the synthetic (cIBBO) 
market outside of the Box Spread Protection Range.\17\
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    \17\ Allowing sell orders to trade by legging into the simple 
market at prices above the Maximum Value (buy orders below the 
Minimum Value) offers an opportunity for sellers/buyers to receive a 
premium beyond the potential intrinsic value of the spread without 
creating risk for the Complex Order Book.
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    The Exchange believes that these limitations, which exist today for 
ISE Vertical and Calendar Spreads,\18\ are consistent with the Act 
because the limits permit buying below the minimum and selling above 
the maximum thereby allowing buyers and sellers to achieve better 
prices without taking on additional risk. The intrinsic value for the 
Box Spread that could be achieved when closing the position would not 
be negatively impacted in this case because the limitation permits 
price improvement as noted above for Butterfly Spreads.
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    \18\ See Supplementary Material .07(c) to ISE Rule 722.
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    The Initial Maximum Value shall be the distance between the strike 
prices of each pair of leg strike prices. The Maximum Value Buffer is 
the lesser of a configurable absolute dollar value or percentage of the 
Initial Maximum Value set by the Exchange and announced via a notice to 
members. The Exchange intends to set the Maximum Value Buffer at zero 
initially. The Maximum Value is calculated by adding the Initial 
Maximum Value and Maximum Value Buffer.
    The Initial Minimum Value shall be zero. The Minimum Value Buffer 
is a configurable absolute dollar value set by the Exchange and 
announced via a notice to members. The Exchange intends to set the 
Minimum Value Buffer at zero initially. The Minimum Value is calculated 
by subtracting the Minimum Value Buffer from the Initial Minimum Value 
of zero.
    The Box Spread Protection would apply throughout the trading day, 
including pre-market, during the Opening Process and during a trading 
halt. The protections will not apply to Complex Orders in the 
Facilitation, Solicitation, Price Improvement mechanism and associated 
auction responses. The Box Spread Protection will also not apply to 
Customer Cross Orders. Unlike Phlx, but similar to ISE Vertical and 
Calendar spreads,\19\ these protections will not apply to Complex 
Orders being auctioned in the Facilitation, Solicitation, Price 
Improvement mechanism and associated auction responses. Also, today, 
the Vertical and Calendar spreads do not apply to Customer Cross 
Orders. The Exchange is adding Customer Cross Orders to the list of 
excluded order types that are not protected by the Vertical, Calendar, 
Box or Butterfly spread protections. Complex orders executed in these 
mechanisms are two-sided orders where the contra-side order is willing 
to trade with the agency order at an agreed upon price thus removing 
the risk that the order was executed erroneously outside its intrinsic 
value. Similarly, a Customer Cross Order is a two-sided order where the 
contra-side order is willing to trade with the agency order at an 
agreed upon price. The Exchange believes that because paired orders are 
negotiated in advance by both parties it is unlikely that the parties 
would agree to transact at prices that would necessitate the 
protections proposed within the Box Spread Protections.
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    \19\ Id.
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Example 1
    Assume the following Complex Order pairs for a Box Spread:

1. Pair A
    a. Buy 1 NDX 6960 Jan 26 Call (30.80 x 34.05)
    b. Sell 1 NDX 6960 Jan 26 Put (33.50 x 36.00)
2. Pair B
    a. Sell 1 NDX 6970 Jan 26 Call (27.50 x 29.00)
    b. Buy 1 NDX 6970 Jan 26 Put (36.40 x 37.05)
The derived net ISE Complex Order market (``cIBBO'') is 2.20 x 10.10 
\20\
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    \20\ The cIBBO is calculated by deriving the synthetic bid and 
offer available in the simple market with the ratio of each option 
leg of the spread considered.
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Assume both Maximum Value Buffer and Minimum Value Buffer are 0.00
Minimum Value = 0.00
     Initial Minimum Value: 0.00
     Minimum Value Buffer: 0.00
     Minimum Value: 0.00-0.00 = 0.00
Maximum Value = 10.00
     Initial Maximum Value: 6970 (Pair A strike price)-6960 
(Pair B strike price) = 10.00
     Maximum Value Buffer: 0.00
     Maximum Value: 10.00 (Initial Maximum Value) + 0.00 
(Maximum Value Buffer) = 10.00

    An incoming order to buy the spread defined above for 10.10 will be 
rejected because the purchase price of 10.10 is greater than the 
Maximum Value of 10.00.
Example 2
    Assume the following Complex Order pairs for a Box Spread:

1. Pair A
    a. Buy 1 NDX 6960 Jan 26 Call (30.80 x 34.05)
    b. Sell 1 NDX 6960 Jan 26 Put (33.50 x 36.50)
2. Pair B
    a. Sell 1 NDX 6970 Jan 26 Call (27.50 x 30.75)
    b. Buy 1 NDX 6970 Jan 26 Put (36.40 x 37.05)
The derived net ISE Complex Order market (``cIBBO'') is -0.05 x 10.10 
\21\
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    \21\ The cIBBO is calculated by deriving the synthetic bid and 
offer available in the simple market with the ratio of each option 
leg of the spread considered.
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Assume both Maximum Value Buffer and Minimum Value Buffer are 0.05
Minimum Value = -0.05
     Initial Minimum Value: 0.00
     Minimum Value Buffer: 0.05
     Minimum Value: 0.00-0.05 = -0.05
Maximum Value = 10.05
     Initial Maximum Value: 6970 (Pair

[[Page 29586]]

A strike price)-6960 (Pair B strike price) = 10.00
     Maximum Value Buffer: 0.05
     Maximum Value: 10.00 (Initial Maximum Value) + 0.05 
(Maximum Value Buffer) = 10.05

    An incoming order to sell the spread defined above for -0.05 will 
be accepted and executed against the simple market because the purchase 
price of -0.05 is equal than the Minimum Value of -0.05. Phlx has a 
similar protection in place today.\22\
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    \22\ See note 4 above.
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Reorganize and Amend Supplementary Material .07 to Rule 722
    The Exchange proposes to reorganize and amend Supplementary 
Material .07 to Rule 722 which is entitled ``Price limits for complex 
order and quotes.'' The Exchange proposes to rename .07 as ``Complex 
Order Protections.'' The Exchange proposes to list all available 
Complex Order protections on ISE within Supplementary Material .07 to 
Rule 722.
Universal Changes
    The Exchange proposes to reorder the rule and title subsection 
``a'' as ``Price limits for Complex Orders and quotes.'' The Exchange 
is proposing to capitalize defined terms throughout this section for 
consistency. The Exchange removed cross-references that are no longer 
necessary with the reorganization. The Exchange proposes to re-letter 
and renumber this section to accommodate all the price protections. The 
Exchange also proposes adding titles throughout .07 to add more context 
to the rules. Proposed Supplementary Material to Rule 722 at .07(b) 
shall be titled, ``Strategy Protections.'' Proposed Supplementary 
Material to Rule 722 at .07(c) shall be titled, ``Other Price 
Protections which apply to Complex Orders.''
Price Limits
    With respect to the price limits specified in proposed Rule 722 at 
Supplementary Material .07(a)(1) the Exchange proposes a substantive 
amendment to revise the second sentence which currently provides, 
``Notwithstanding, the System will not permit any leg of a complex 
order to trade through the NBBO for the series by a configurable amount 
calculated as the lesser of (i) an absolute amount not to exceed $0.10, 
and (ii) a percentage of the NBBO not to exceed 500%, as determined by 
the Exchange on a class or series basis.'' The Exchange originally 
filed this rule to permit ISE to configure settings for this protection 
on a class or series basis. The Exchange proposes to amend the ability 
to configure settings. Similar to the proposed Butterfly and Box Spread 
protections, the Exchange proposes to apply the settings uniformly 
across all classes.
Strategy Protections
    The Exchange proposes introducing ISE Rule 722 at Supplementary 
Material .07(b) with the following text, ``The following protections 
will apply throughout the trading day, including pre-market, during the 
Opening Process and during a trading halt.'' Today, the Vertical and 
Calendar Spread Protections apply throughout the trading day, including 
pre-market, during the Opening Process and during a trading halt. The 
Exchange provides for no limitations in the Vertical and Calendar 
Spread Protections with respect to any limitations during specific 
trading sessions. The Exchange also does not intend for such 
limitations to apply for Box and Butterfly Spread Protections. The 
Exchange believes that adding this affirmative language will simply 
serve to remove any confusion on whether the protections do not apply 
during a specific trading session.
    The Exchange also proposes to add another sentence to the 
introduction of new section (b) which provides ``The protections will 
not apply to Complex Orders being auctioned and auction responses in 
the Facilitation Mechanism, Solicited Order Mechanism, and Price 
Improvement Mechanism and will not apply to Customer Cross Orders.'' 
Today, the protections for Vertical Spread Protection and Calendar 
Spread Protections do not apply to Complex Orders being auctioned and 
auction responses in the Facilitation Mechanism, Solicited Order 
Mechanism, and Price Improvement Mechanism and Customer Cross 
Orders.\23\ The Exchange is proposing these same limitations for Box 
and Butterfly Spreads. Complex orders executed in these mechanisms are 
two-sided orders where the contra-side order is willing to trade with 
the agency order at an agreed upon price thus removing the risk that 
the order was executed erroneously outside its intrinsic value.
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    \23\ The current rule text does not include Customer Cross 
Orders, however, today, the Vertical and Calendar spread protections 
do not apply to Customer Cross Orders.
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Vertical Spread Protections
    The Exchange proposes amending ISE Rule 722 at Supplementary 
Material .07(b)(1), similar to the Box and Butterfly Spread 
protections, to begin the section with the same conforming language 
indicating which strategy the Vertical Spread Protection applies to and 
also relocating the definition of a Vertical Spread to the initial 
paragraph. The Exchange is amending proposed ISE Rule 722 at 
Supplementary Material .07(b)(1)(A) to relocate the language in current 
Rule 722 at Supplementary Material .07(c)(4)(i) \24\ and .07(c)(5) \25\ 
into the actual paragraph rather than referring back to the 
paragraph.\26\ The Exchange proposes the following rule text, ``The 
Exchange will set a common pre-set value not to exceed $1.00 to be 
applied uniformly across all classes. The Exchange may amend the pre-
set value uniformly across all classes'' at proposed ISE Rule 722 at 
Supplementary Material .07(b)(1)(A).
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    \24\ Rule 722 at Supplementary Material .07(c)(4)(i) provides, 
``For purposes of the price protections set forth in paragraphs 
(c)(1) and (c)(3), the Exchange will set a common pre-set value not 
to exceed $1.00 to be applied uniformly across all classes.''
    \25\ Rule 722 at Supplementary Material .07(c)(5) provides ``The 
Exchange may change the pre-set values established in paragraph 
(c)(4) in accordance with the parameters set forth therein from time 
to time uniformly across all classes.''
    \26\ The words, ``For purposes of the price protections set 
forth in paragraphs (c)(1) and (c)(3)'' and ``established in 
paragraph (c)(4) in accordance with the parameters set forth therein 
from time to time'' are not being carried into the rule text as they 
are no longer necessary.
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    The Exchange notes that proposed ISE Rule 722 at Supplementary 
Material .07(b)(1)(B) already has a sentence which states, ``The pre-
set value is the lesser of an absolute amount and a percentage of the 
difference between the strike prices.'' Instead of also relocating ISE 
Rule 722 at Supplementary Material .07(c)(4)(ii) and (c)(5) into the 
actual paragraph, the Exchange proposes to remove the current sentence, 
``The pre-set value is the lesser of an absolute amount and a 
percentage of the difference between the strike prices'' and instead 
combine ISE Rule 722 at Supplementary Material .07(c)(4)(ii) \27\ and 
(c)(5).\28\ The Exchange proposes to state ``The pre-set value used by 
the vertical spread check will be the lesser of (1) an absolute amount 
not to exceed $1.00 and (2) a percentage of the difference between the 
strike prices not to exceed 10% to be applied uniformly across all 
classes. The Exchange may amend the pre-set value uniformly across all 
classes.'' The Exchange

[[Page 29587]]

believes that this proposed rule text more efficiently explains the 
relevant provisions and removes unnecessary text.
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    \27\ ISE Rule 722 at Supplementary Material .07(c)(4)(ii) 
provides ``For purposes of the price protections set forth in 
paragraph (c)(2), the Exchange will set common pre-set values of (1) 
an amount not to exceed $1.00 and (2) a percentage of the difference 
between strike prices not to exceed 10% to be applied uniformly 
across all classes.''
    \28\ ISE Rule 722 at Supplementary Material .07(c)(5) provides, 
``The Exchange may change the pre-set values established in 
paragraph (c)(4) in accordance with the parameters set forth therein 
from time to time uniformly across all classes.''
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Calendar Spread Protections
    The Exchange proposes amending ISE Rule 722 at Supplementary 
Material .07(b)(2), similar to the Box and Butterfly Spread 
protections, to begin the section with the same conforming language 
indicating which strategy the Calendar Spread Protection applies to and 
also relocating the definition of a Calendar Spread to the initial 
paragraph. The Exchange is also relocating language in current Rule 722 
at Supplementary Material .07(c)(4)(i) into the actual paragraph rather 
than referring back to the paragraph.\29\ The Exchange also proposes to 
relocate current Rule 722 at Supplementary Material .07(c)(5) into 
proposed ISE Rule 722 at Supplementary Material .07(b)(2) and amending 
the language to conform to the text in the remainder of the rule.\30\ 
The Exchange proposes to eliminate the remainder of the rule text 
currently in Supplementary Material to Rule 722 at .07(c)(4)(i) and 
(ii) and .07(c)(5) because the language has been relocated within the 
proposed text as described herein.
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    \29\ The words, ``For purposes of the price protections set 
forth in paragraphs (c)(1) and (c)(3)'' are not being carried into 
the rule text as they are no longer necessary.
    \30\ Currently, the rule text provides ``The Exchange may change 
the pre-set values established in paragraph (c)(4) in accordance 
with the parameters set forth therein from time to time uniformly 
across all classes.'' The Exchange proposes to state ``The Exchange 
may amend the pre-set value uniformly across all classes.''
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Other Price Protections
    The Exchange proposes to add to ISE Rule 722 new Supplementary 
Material .07(c) entitled ``Other Price Protections which apply to 
Complex Orders'' and relocate Limit Order Price Protection to 
.07(c)(1).\31\ The Exchange proposes to relocate Size Limitation to ISE 
Rule 722 at Supplementary Material .07(c)(2).\32\ Finally, the Exchange 
proposes to relocate Price Level Protection from Rule 714(b)(4) to Rule 
722 at Supplementary Material .07(c)(3). The Exchange proposes to 
remove the first sentence which provides, ``This protection shall apply 
to Complex Orders'' because this rule is not within a Complex Order 
rule currently and will not need that indication once the rule text is 
relocated to Rule 722. The Exchange also proposes to amend the last 
sentence of that rule which currently provides, ``The number of price 
levels for the component leg, which may be between one (1) and ten 
(10), is determined by the Exchange from time-to-time on a class-by-
class basis.'' The Exchange believes indicating between one and ten 
could be misleading because the setting could be numbers 1 and 10 so 
``from one (1) to ten (10)'' is being proposed to make that more clear.
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    \31\ Limit Order Price Protection is currently at ISE Rule 722 
at Supplementary Material .07(d).
    \32\ Size Limitation is currently at ISE Rule 722 at 
Supplementary Material .07(e).
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Rule 714
    Finally, the Exchange proposes to amend Rule 714(b) to make clear 
that the protections in that rule apply to single leg orders. The 
Exchange is placing protections for Complex Orders into Rule 722 and 
relocating the Price Level Protection rule \33\ related to Complex 
Orders. The additional clarifying language to single leg and cross-
reference to Supplementary Material .07 to ISE Rule 722 should make 
clear to Members where the various price protections are located.
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    \33\ As noted above the Price Level Protection rule is being 
relocated to ISE Rule 722 at Supplementary Material .07(c)(3).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\34\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\35\ 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, by offering protections for certain Complex Orders which 
restrict executions that exceed the intrinsic value of the spread by a 
specified (or configurable) amount. Further, the Exchange believes that 
its proposal will mitigate risks to market participants. Specifically, 
ISE believes that the change, which is responsive to member input, will 
facilitate transactions in securities and perfect the mechanism of a 
free and open market by providing its Members with additional 
functionality that will assist them with managing their risk by 
checking each Complex Order that is either a Butterfly or Box spread 
against certain parameters described within the filing before accepting 
the Complex Orders into the order book.
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    \34\ 15 U.S.C. 78f(b).
    \35\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the parameters described herein, 
including parameters which will be configured by the Exchange, will 
protect members from executing orders too far outside the Minimum Value 
and Maximum Value which considers the intrinsic value of the strategy, 
thereby promoting fair and orderly markets and the protection of 
investors. The Exchange intends to offer a buffer allowance from the 
minimum/maximum values permitted for the execution of these strategy 
orders to allow market participants flexibility to manage their 
business and accommodate executions outside of this range. The Exchange 
would monitor the zero value, including feedback from market 
participants, in determining whether the value is set at the 
appropriate level. The decision to change the buffer could stem from 
participants' concern for their ability to close out positions. There 
are circumstances where the Minimum Value may be less than zero. For 
example, market participants who desire to trade out of positions at 
intrinsic value may not find a contra-side willing to trade without a 
premium. A small incremental allowance outside of the minimum/maximum 
value allows for a small premium to offset commissions associated with 
trading and may incentivize participants to take the other side of 
spreads trading at intrinsic value. For the participant looking to 
close out their position, it may be financially beneficial to pay a 
small premium and close out the position rather than carry such 
position to expiration and take delivery. The purpose of this rule 
change is not to impede current order handling but to ensure execution 
prices are within a reasonable range of minimum and maximum values.
    These protections are very similar to protections on Phlx.\36\ 
ISE's proposal continues to protect Butterfly and Box Spreads from 
legging into the single leg market(s), similar to Phlx Rule 1098(i) and 
(j), at a price higher than the Maximum Value for buy orders and lower 
than the Minimum Value for sell orders. Further, ISE's proposal differs 
from Phlx in that ISE allows legging below the Minimum Value for buys 
and above the Maximum Value for sells at a price made available by the 
synthetic (cIBBO) market outside of the Butterfly and Box Spread 
Ranges, The Exchange believes that these limitations, which exist today 
for ISE Vertical and Calendar Spreads,\37\ are consistent with the Act 
because the limits permit buying below the minimum and selling above 
the maximum thereby allowing buyers and sellers to achieve better 
prices without

[[Page 29588]]

taking on additional risk.\38\ The intrinsic value for the Box Spread 
and the Butterfly Spread that could be achieved when closing the 
position would not be negatively impacted in this case because the 
limitation permits price improvement as noted above for Box Spreads and 
Butterfly Spreads.
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    \36\ See Phlx Rule 1098(i) and (j).
    \37\ See Supplementary Material .07(c) to ISE Rule 722.
    \38\ Allowing sell orders to trade by legging into the simple 
market at prices above the Maximum Value (buy orders below the 
Minimum Value) offers an opportunity for sellers/buyers to receive a 
premium beyond the potential intrinsic value of the spread without 
creating risk for the Complex Order Book.
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    The Exchange's proposal to exclude the Butterfly and Box Spread 
Protections from Complex Orders being auctioned and auction responses 
in the Facilitation Mechanism, Solicited Order Mechanism, and Price 
Improvement Mechanism is consistent with the Act because it conforms to 
the behavior of other protections on ISE protection including the 
protections for Vertical Spread and Calendar Spreads. Complex Orders 
executed in these mechanisms are two-sided orders where the contra-side 
order is willing to trade with the agency order at an agreed upon price 
thus removing the risk that the order was executed erroneously outside 
its intrinsic value. The Box and Butterfly Spread Protection will also 
not apply to Customer Cross Orders. Unlike Phlx, but similar to ISE 
Vertical and Calendar spreads,\39\ these protections will not apply to 
Complex Orders being auctioned in the Facilitation, Solicitation, Price 
Improvement mechanism and associated auction responses. Also, today, 
the Vertical and Calendar spreads do not apply to Customer Cross 
Orders. The Exchange is adding Customer Cross Orders to the list of 
excluded order types that are not protected by the Vertical, Calendar, 
Box or Butterfly Spread Protections. Complex orders executed in these 
mechanisms are two-sided orders where the contra-side order is willing 
to trade with the agency order at an agreed upon price thus removing 
the risk that the order was executed erroneously outside its intrinsic 
value. Similarly, a Customer Cross Order is a two-sided order where the 
contra-side order is willing to trade with the agency order at an 
agreed upon price. The Exchange believes that because paired orders are 
negotiated in advance by both parties it is unlikely that the parties 
would agree to transact at prices that would necessitate the 
protections proposed within the Box and Butterfly Spread Protections.
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    \39\ Id.
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    The Exchange believes that the proposed amendments to Supplementary 
Material .07 to ISE Rule 722 further clarify the existing rules and 
conform the structure of the rules to the proposed Butterfly and Box 
Spread protections. The Exchange believes that reorganizing 
Supplementary Material .07 to ISE Rule 722 by adding titles, 
capitalizing defined terms, reorganizing the letters and numbers and 
consolidating text will protect investors and the public interest by 
adding greater transparency to the rules. The Exchange also notes that 
it is adding clarifying language to the rule text and relocating the 
Price Level Protection from Rule 714, which concerns single leg 
protections to Rule 722 at Supplementary Material .07, which concerns 
Complex Order protections. The Exchange believes that amending proposed 
Supplementary Material .07(a)(1) to ISE Rule 722 to apply the setting 
\40\ uniformly across all markets rather than on a class or series 
basis will align this protection to the manner in which all other 
protections are applied for Complex Orders. The Exchange believes that 
uniformly applying the setting is consistent with the Act because it 
will apply the protection in the same manner regardless of class.
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    \40\ Proposed Supplementary Material .07(a)(1) to ISE Rule 722 
provides that the System will not permit any leg of a complex order 
to trade through the NBBO for the series by a configurable amount 
calculated as the lesser of (i) an absolute amount not to exceed 
$0.10, and (ii) a percentage of the NBBO not to exceed 500%, as 
determined by the Exchange.
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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. Specifically, the proposal does 
not impose an intra-market burden on competition, because it will apply 
to all Complex Orders, which are either Butterfly or Box spreads 
entered by any ISE Member. Further, the proposal will not impose an 
undue burden on inter-market competition, rather the proposal will 
assist the Exchange in remaining competitive in light of protections 
offered by other options exchanges.\41\ The Exchange competes with many 
other options exchanges, which offer Complex Orders. In this highly 
competitive market, market participants can easily and readily direct 
order flow to competing venues. The Exchange believes that not applying 
the Box and Butterfly Spread Protections to Customer Cross Orders, in 
addition to Complex Orders being auctioned in the Facilitation, 
Solicitation, Price Improvement mechanism and associated auction 
responses, does not impose any significant burden on competition 
because it will not be applied to any of these orders for any market 
participant.
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    \41\ See Phlx Rule 1098(i) and (j).
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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 Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \42\ and Rule 19b-4(f)(6) thereunder.\43\ 
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 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) of the Act and Rule 19b-4(f)(6) thereunder.\44\
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    \42\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \43\ 17 CFR 240.19b-4(f)(6).
    \44\ 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 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) \45\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\46\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. In its filing with the 
Commission, the Exchange has asked the Commission to waive the 30-day 
operative delay so that the proposal may become operative immediately 
upon filing so that the Exchange may immediately offer the Box and 
Butterfly Spread protections, which are offered on Phlx, and remain 
competitive with other markets. The Commission believes that waiver of 
the 30-day operative delay is consistent with the protection of 
investors and the public interest because the Box and Butterfly Spread 
protections will help market participant mitigate risk by preventing 
the execution of Butterfly and Box Spreads at prices that are outside 
of specified minimum and maximum values. The Commission notes that the 
Box and Butterfly Spread

[[Page 29589]]

protections are substantially similar to protections offered on Phlx. 
Therefore, the Commission designates the proposed rule change operative 
upon filing.\47\
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    \45\ 17 CFR 240.19b-4(f)(6).
    \46\ 17 CFR 240.19b-4(f)(6)(iii).
    \47\ For purpose only of waiving the operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    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) of the Act \48\ to determine whether the proposed 
rule change should be approved or disapproved.
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    \48\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 e-mail to [email protected]. Please include 
File Number SR-ISE-2018-55 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-2018-55. This file 
number should be included on the subject line if e-mail 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ISE-2018-55, and should be submitted on 
or before July 16, 2018.
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    \49\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\49\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-13505 Filed 6-22-18; 8:45 am]
BILLING CODE 8011-01-P


