
[Federal Register Volume 83, Number 238 (Wednesday, December 12, 2018)]
[Notices]
[Pages 63955-63958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26826]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84729; File No. SR-ISE-2018-96]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Bid/Ask 
Differentials

December 6, 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 November 28, 2018, 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 ISE Rule 701, entitled ``Opening,'' 
ISE Rule 803, entitled ``Obligations of Market Makers'' and ISE Rule 
100, entitled ``Definitions.''
    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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ISE proposes several amendments in this rule change. First, the 
Exchange proposes to amend ISE Rule 701, entitled ``Opening'' and ISE 
Rule 803, entitled ``Obligations of Market Makers'' to correct 
inconsistencies between the Exchange's rule text and the operation of 
the System. Second, the Exchange proposes to add definitions to ISE 
Rule 100 to define ``in-the-money'' and ``out-of-the-money'' option 
series. Third, the Exchange proposes to correct various cross 
references to Rule 100. Each amendment will be described in more detail 
below.
Rule 701
    Today, for the Opening Process, ISE Rule 701(a)(8) defines a 
``Valid Width Quote'' as a two-sided electronic quotation submitted by 
a Market Maker that consists of a bid/ask differential that is 
compliant with Rule 803(b)(4).\3\

[[Page 63956]]

Specifically, for the Opening Process, ISE Rule 803(b)(4) states that, 
for in-the money option series, the bid/ask differential may be as wide 
as the spread between the national best bid and offer in the underlying 
security. In practice, however, the Exchange's System permits a Valid 
Width Quote in the Opening Process to be as wide as the quotation for 
the underlying security on the primary (listing) market.\4\
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    \3\ ISE Rule 803(b)(4) provides:
     ``To price options contracts fairly by, among other things, 
bidding and offering so as to create differences of no more than $5 
between the bid and offer following the opening rotation in an 
equity or index options contract. Prior to the opening rotation, 
spread differentials shall be no more than $.25 between the bid and 
offer for each options contract for which the bid is less than $2, 
no more than $.40 where the bid is at least $2 but does not exceed 
$5, no more than $.50 where the bid is more than $5 but does not 
exceed $10, no more than $.80 where the bid is more than $10 but 
does not exceed $20, and no more than $1 where the bid is $20 or 
greater, provided that the Exchange may establish differences other 
than the above for one or more options series.
    (i) The bid/offer differentials stated in subparagraph (b)(4) of 
this Rule shall not apply to in-the-money options series where the 
underlying securities market is wider than the differentials set 
forth above. For these series, the bid/ask differential may be as 
wide as the spread between the national best bid and offer in the 
underlying security.''
    \4\ In connection with the ISE migration, the primary market was 
utilized beginning on June 12, 2017 as each symbol migrated to the 
INET platform.
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Proposal
    The Exchange proposes to codify its current practice and correctly 
reflect in its Rules that the Valid Width Quote in the Opening Process 
apply a primary market analysis, not a national best bid or offer 
(``NBBO'') analysis.\5\ Specifically, this proposal would conform the 
current rule text to the current System by amending the definition of a 
Valid Width Quote in Rule 701, ``Opening,'' so that, in the case of in-
the-money option series \6\ where the market for the underlying 
security is wider than the differentials set forth within ISE Rule 
803(b)(4), the bid/ask differential may be as wide as the quotation for 
the underlying security on the primary \7\ (listing) market, or its 
decimal equivalent rounded down to the nearest minimum increment.
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    \5\ The Exchange notes that today ISE utilizes the primary 
market in calculating the bid/ask differential during the Opening 
Process. This rule change would amend the rule to reflect ISE's 
current practice.
    \6\ An at-the-money option series would also qualify. An out-of-
the-money series would not qualify.
    \7\ The term ``primary market'' means the principal market in 
which an underlying security is traded. See ISE Rule 100(a)(48).
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    The Exchange believes that utilizing the primary market in the 
Opening Process is reasonable given the close connection between the 
primary market and the Opening Process. For example, ISE Rule 701(c)(2) 
provides, ``For all options, the underlying security, including 
indexes, must be open on the primary market for a certain time period 
as determined by the Exchange for the Opening Process to commence. The 
time period shall be no less than 100 milliseconds and no more than 5 
seconds.''
    Today, in order to open, the Exchange requires either: (i) The 
Primary Market Maker's (``PMM'') Valid Width Quote; (ii) the Valid 
Width Quotes of at least two Competitive Market Makers (``CMM''); or 
(iii) if neither the PMM's Valid Width Quote nor the Valid Width Quotes 
of two CMMs have been submitted within such timeframe, one CMM has 
submitted a Valid Width Quote. The Exchange notes that it requires 
Market Makers to submit Valid Width Quotes during the Opening Process 
to guarantee liquidity, unlike other markets which may not require 
market makers to quote during the opening.\8\ Further, amending the 
rule text to conform to its current practice will avoid confusion and 
continue to permit ISE to remain one of the strongest openings in the 
industry.
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    \8\ The Nasdaq Options Market (``NOM'') does not require NOM 
Market Makers to quote during the opening, however if a NOM Market 
Maker decided to quote during the opening, the Market Maker would be 
permitted to submit a bid/ask differential with a difference not to 
exceed $5 between the bid and offer regardless of the price of the 
bid. However, respecting in-the-money series where the market for 
the underlying security is wider than $5, the bid/ask differential 
may be as wide as the spread between the national best bid and offer 
in the underlying security. See NOM Rules at Chapter VII, Section 
6(d)(ii).
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Discretion
    The Exchange proposes to codify its current practice and amend ISE 
Rule 803(b)(4) to adopt rule text which permits the Exchange intra-day 
discretion for bid/ask differentials similar to the discretion 
currently permitted in the Opening Process. The Exchange proposes to 
add a sentence to the end of the paragraph in ISE Rule 803(b)(4) 
indicating the Exchange may establish differences other than the above 
for one or more series or classes of options. The Exchange notes that 
it utilizes this discretion today to grant relief for individual 
options classes as well as relief for all option classes based upon 
specific criteria. Today, Market Makers may request quote relief. When 
determining whether to grant quote relief the Exchange considers, among 
other factors, the following: (i) Pending corporate actions with 
undisclosed or uncertain terms; (ii) company or industry news with 
anticipated significant market impact; (iii) government news of a 
sensational nature. The Exchange believes that it is necessary to grant 
quote relief in certain circumstances where a Market Maker may not have 
enough information to maintain fair and orderly markets. The Exchange 
notes that other markets have similar discretion for intra-day quotes 
today.\9\
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    \9\ See Nasdaq Phlx LLC Rule 1014(c)(i)(A)(1)(a), Miami 
International Securities Exchange LLC Rule 604b)(4), Cboe Exchange, 
Inc. Rule 8.7(d), NYSE American LLC Rule 925NY(b)(4), NYSE Arca, 
Inc. 6.37-O(b)(4).
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Rule 100
    ISE rules currently do not define an ``in-the-money'' or ``out-of-
the-money'' option series. As part of this rule change, the Exchange 
proposes to define these above-referenced terms within ISE Rule 100 to 
bring greater transparency to its rules with respect to Market Maker 
quoting. The Exchange proposes to define the term ``in-the-money'' 
option at Rule 100(a)(28), which is currently reserved, as the 
following: For call options, all strike prices at or below the offer in 
the underlying security on the primary listing market; for put options, 
all strike prices at or above the bid in the underlying security on the 
primary listing market. The Exchange proposes to define an ``out-of-
the-money'' option at Rule 100(a)(40), which is currently reserved, to 
mean the following: For call options, all strike prices above the offer 
in the underlying security on the primary listing market; for put 
options, all strike prices below the bid in the underlying security on 
the primary listing market.\10\ Each of these definitions would apply 
for purposes of Market Maker quoting obligations in Rules 701 and 803. 
The Exchange notes that it specifically proposes to reference the rules 
related to Market Maker quoting obligations to avoid any confusion with 
the manner in which ``in-the-money'' and ``out-of-the-money'' options 
series are defined for purposes of other options rules.
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    \10\ The Exchange notes that it does not utilize a last sale 
calculation. The Exchange believes that the quotation for the 
underlying security on the primary market provides an accurate 
reflection of the market. A last sale calculation may not be an 
accurate reflection of the market because the last sale may not be 
representative of the primary market in all cases, particularly if a 
halt were to occur.
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    The Exchange has added these definitions into the existing rules in 
alphabetical order. The Exchange proposes to renumber the rules to 
account for the addition of these two new definitions and proposes to 
amend cross-references to Rule 100 within the Rulebook to reflect the 
proposed new numbering within Rule 100.
Cross References
    The Exchange proposes to amend cross-references to Rule 100 in 
Rules 713, 720 and Rule 1901 to refer to the current definitions.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the

[[Page 63957]]

objectives of Section 6(b)(5) of the Act,\12\ 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. The Exchange notes that today ISE 
utilizes the primary market in calculating the bid/ask differential 
during the Opening Process, although the current rule does not reflect 
this practice. This rule change would amend the rule to reflect ISE's 
current practice.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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Rules 701 and 803
    The Exchange's proposal to amend the Opening Process to conform to 
current practice is consistent with the Act because while the Exchange 
believes that relying on the primary market or the NBBO accurately 
reflect the current trading environment and take into consideration 
market conditions, the Exchange's current Opening Process is designed 
to utilize the primary standard during the Opening Process.\13\
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    \13\ ISE Rule 701(c)(2) provides, ``For all options, the 
underlying security, including indexes, must be open on the primary 
market for a certain time period as determined by the Exchange for 
the Opening Process to commence. The time period shall be no less 
than 100 milliseconds and no more than 5 seconds.''.''
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Discretion
    The Exchange's proposal to amend its rule to permit intra-day 
discretion to conform to current practice is consistent with the Act 
because such discretion is necessary to permit the Exchange the ability 
to attract liquidity from Market Makers while also maintaining a fair 
and orderly market. Market Makers accept a certain amount of risk when 
quoting on the Exchange. The Exchange imposes quoting and other 
obligations on Market Makers.\14\ The Exchange notes that these risks 
which Market Makers accept each trading day are calculated risks. The 
Exchange notes that it considers certain factors, which are likely 
unforeseen, in determining whether to grant relief either in individual 
options classes or for all option classes based upon specific criteria. 
Specifically, the Exchange considers, among other factors, the 
following: (i) Pending corporate actions with undisclosed or uncertain 
terms; (ii) company or industry news with anticipated significant 
market impact; (iii) government news of a sensational nature. The 
Exchange believes that it is necessary to grant quote relief in certain 
circumstances where a Market Maker may not have enough information to 
maintain fair and orderly markets. The Exchange notes that other 
markets have similar discretion for intra-day quotes today.\15\
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    \14\ See ISE Rules 803 and 804.
    \15\ See note 9 above.
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Rule 100
    The Exchange's proposal to define the terms ``in-the-money'' and 
``out-of-the-money'' for purposes of Market Maker quoting obligations 
in Rules 701 and 803 is consistent with the Act and protects investors 
and the public interest by bringing greater transparency to the 
Rulebook. Each of these defined terms would apply for purposes of 
Market Maker quoting obligations in Rules 701 and 803. The Exchange 
notes that it specifically proposes to reference the rules related to 
Market Maker quoting obligations to avoid any confusion with the manner 
in which ``in-the-money'' and ``out-of-the-money'' options series are 
defined for purposes of other options rules.
Cross-References
    The Exchange's proposal to amend cross-references to Rule 100 
within Rules 713, 720 and Rule 1901 to refer to the current definitions 
is consistent with the Act because it will correct references to 
definitions.

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.
Rules 701 and 803
    The Exchange's proposal to codify its current practice of utilizing 
the primary market in the Opening Process does not unduly burden 
competition because the current practice maintains a close connection 
between the primary market and the Opening Process. The primary market 
reflects the current trading environment. The Exchange notes that the 
proposal does not create an undue burden on intra-market competition 
because Market Makers are the only market participants subject to 
quoting requirements and these participants have valuable information 
with respect to the underlying instrument under the current process to 
make informed decisions and take calculated risks in the marketplace 
when providing liquidity. Market Makers remain responsible for 
maintaining fair and orderly markets.
Discretion
    The Exchange's proposal to codify the Exchange's ability to permit 
intra-day discretion similar to the discretion currently permitted in 
the Opening Process does not impose an undue burden on competition 
because Market Makers are the only market participants subject to 
quoting requirements and the proposal specifically considers the need 
for Market Makers to have information to make informed decisions to 
make calculated risks in the marketplace so that they may provide 
liquidity while maintaining fair and orderly markets. The proposed 
amendments do not create undue burdens on inter-market competition 
because other options markets have the same intra-day requirements.\16\
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    \16\ See note 9 above.
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Rule 100
    The Exchange's proposal to define the terms ``in-the-money'' or 
``out-of-the-money'' for purposes of Market Maker quoting obligations 
in Rules 701 and 803 does not unduly burden competition, rather it adds 
greater transparency to the Rulebook and makes clear the applicability 
of the definitions to avoid confusion with respect to the remainder of 
the options rules.
Cross-References
    The Exchange's proposal to amend cross-references to Rule 100 in 
Rules 713, 720 and Rule 1901 to refer to the current definitions does 
not unduly burden competition because it will correct references to 
definitions.

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 \17\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\18\
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    \17\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \18\ 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 the 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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[[Page 63958]]

    A proposed rule change filed under Rule 19b-4(f)(6) \19\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii)\20\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. 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 states that 
immediately codifying its current practice within its rules to 
accurately reflect the operation of the Exchange's System will avoid 
confusion. The Commission believes that waiver of the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Accordingly, the Commission hereby waives the operative delay 
and designates the proposed rule change as operative upon filing.\21\
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    \19\ 17 CFR 240.19b-4(f)(6).
    \20\ 17 CFR 240.19b-4(f)(6)(iii).
    \21\ For purposes only of waiving the 30-day operative delay, 
the Commission has also 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-2018-96 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-2018-96. 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 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 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. 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-2018-96 and should be submitted on 
or before January 2, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26826 Filed 12-11-18; 8:45 am]
 BILLING CODE 8011-01-P


