
[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66826-66828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28003]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84859; File No. SR-ISE-2018-98]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Relating to Market 
Makers Trading in Non-Appointed Options Classes

December 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 December 12, 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 Rule 805(b) relating to Market 
Makers \3\ trading in non-appointed options classes.
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    \3\ ``Market Makers'' refers to ``Competitive Market Makers'' 
and ``Primary Market Makers'' collectively. See Rule 100(a)(32).
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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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this rule change is to amend Rule 805(b) relating to 
Market Makers trading in non-appointed options classes.
    Rule 805(b) presently governs the submission of orders by Market 
Makers in non-appointed options classes. Subparagraphs (b)(2) and 
(b)(3) place limitations on the overall percentage of executions that 
can occur in the non-appointed options classes. Specifically, 
subparagraph (b)(2) limits a Competitive Market Maker's (``CMM'') total 
number of contracts executed in non-appointed options classes to 25% of 
the CMM's total number of contracts executed in its appointed options 
classes and with respect to which it was quoting pursuant to Rule 
804(e)(1), and subparagraph (b)(3) limits a Primary Market Maker's 
(``PMM'') total number of contracts executed in non-appointed options 
classes to 10% of the PMM's total number of contracts executed in its 
appointed classes.
    The Exchange now proposes in subparagraph (b)(3) to increase the 
overall percentage of executions that can occur in a PMM's non-
appointed options classes from 10% to 25% to align with the CMM 
allowance as well as other options exchanges, including its affiliated 
options market, BX Options.\4\ The Exchange adopted the 10% volume 
limitation for PMMs as part of its application to be registered as a 
national securities exchange, and initially restricted PMMs in this 
manner because as a nascent exchange, it sought to promote PMM activity 
in their appointed options classes in order to encourage liquidity on 
the Exchange. Since then, there has been a proliferation of options 
classes added to the Exchange for trading, and the Exchange therefore 
believes that the 10% limitation is restrictive in light of the current 
environment. The Exchange does not believe that its proposal will 
adversely impact the quality of the Exchange's market or lead to a 
material decrease in liquidity. As noted above, other options exchanges 
are operating today with similar or more generous allowances for its 
market makers without sacrificing market quality, and the Exchange 
believes that its proposed increase will likewise not result in a 
decrease of market quality.\5\ Furthermore, Market Makers and in 
particular, PMMs, will continue to be subject to the highest standard 
applicable on the Exchange to provide liquidity. For instance as set 
forth in Rule 804(e)(2), PMMs are held to the highest quoting standards 
on the Exchange. Specifically, PMMs are required to provide two-sided 
quotations in 90% of the cumulative number of seconds for which that 
PMM's appointed options class is open for trading.\6\ Furthermore, PMMs 
are required to quote in certain options series of their appointed 
classes that are excluded from the quoting requirements of CMMs (i.e., 
Quarterly Options Series, Adjusted Options Series, and long-term 
options). In addition, the Exchange can announce a higher percentage 
than the current 90% quoting requirement if doing so would be in the 
interest of a fair and orderly market.\7\ PMMs are also required to 
enter quotes in their appointed options classes and participate in the 
Opening Process.\8\ Accordingly, the Exchange believes that the 
foregoing obligations will continue to ensure that PMMs will provide 
liquidity in their appointed options classes notwithstanding the 
proposed increase in the trading allowance in non-appointed classes.
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    \4\ BX Options Market Makers (including Lead Market Makers) can 
execute no more than 25% of their total volume outside of their 
registered options classes. See BX Options Rules, Chapter VII, 
Section 6(e). In addition, CBOE Rule 8.7, Interpretations and 
Policies .03 provides that 75% of a Market-Maker's total contract 
volume must be in classes to which the Market-Maker is appointed. 
Accordingly, only 25% of a CBOE Market-Maker's contract volume can 
be in non-appointed classes. CBOE Rule 8.7 applies equally to Lead 
Market-Makers and Designated Primary Market-Makers in the same 
manner as Market-Makers. The Exchange also notes that NYSE Arca 
Options does not impose a strict percentage limitation on its market 
makers for transacting in non-appointed classes. See NYSE Arca 
Options Rules 6.37-O(d) and 6.37B-O.
    \5\ Id.
    \6\ See Rule 804(e)(2).
    \7\ See Rule 804(e)(2). See also Securities Exchange Act Release 
No. 84580 (November 14, 2018), 83 FR 58649 (November 20, 2018) (SR-
ISE-2018-90).
    \8\ See Rule 701(c)(3).
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    In addition, the Exchange believes that the proposed increase in 
the overall percentage from 10% to 25% will bring ISE in line with 
other options exchanges, and permit its Market Makers to effectively 
compete with market makers on other options exchanges. Moreover, 
applying requirements that are substantially similar to other options 
exchanges will remove a significant compliance burden on market makers 
who provide liquidity across multiple options exchanges.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the

[[Page 66827]]

objectives of Section 6(b)(5) of the Act,\10\ 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. In particular, the Exchange believes 
that the proposed rule change promotes just and equitable principles of 
trade because it reduces an outdated restriction on PMMs, and 
simplifies the application of the rule by imposing the same 25% volume 
limitation on all Market Makers. The purpose of limiting the number of 
contracts executed in non-appointed classes to a small percentage of 
contracts executed in appointed classes was to encourage Market Makers 
to provide liquidity in their appointed classes. As discussed above, 
the Exchange initially adopted the 10% volume limitation for PMMs 
because as a nascent exchange, it sought to promote PMM activity in 
their appointed options classes in order to encourage liquidity on the 
Exchange. Since then, there has been a proliferation of options classes 
added to the Exchange for trading, and the Exchange therefore believes 
that the 10% limitation is restrictive in light of the current 
environment. Other options exchanges are operating today with similar 
or more generous allowances for its market makers without sacrificing 
market quality, and the Exchange therefore believes that the proposed 
increase will not result in a decrease of quality on its own 
market.\11\ In addition, the Exchange believes that the heightened 
obligations for PMMs to participate in the Opening Process and provide 
intra-day quotes will continue to ensure that PMMs provide liquidity in 
their appointed options classes notwithstanding the proposed increase 
in the trading allowance in non-appointed classes.\12\ As discussed 
above, the proposed rule change will also conform ISE's Market Maker 
obligations to the requirements of other options markets, which will 
promote the application of consistent compliance standards for market 
makers who provide liquidity across multiple options exchanges.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ See note 4 above.
    \12\ See notes 6 - 8 above, with accompanying text.
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    Furthermore, such volume limitations were traditionally put in 
place and especially important at ``floor-based'' exchanges, since 
market makers were limited in the number of classes in which they could 
physically make markets, and it was in the floor-based exchange's 
interest that market makers focus their market making abilities on 
their appointed classes.\13\ Although limitations on trading in non-
appointed classes may be less important on a fully electronic exchange 
since electronic quoting and trading systems allow market makers to 
make markets and provide liquidity in many more options classes than on 
a floor-based exchange, ISE still believes focusing its Market Makers 
on trading in their appointed classes is important for providing 
liquidity in those classes. In this respect, the Exchange believes that 
its proposal would continue to meet that objective because the proposed 
limitation for PMMs would still require that a substantial percentage 
(i.e., 75%) of a PMM's transactions be effected in their appointed 
classes.
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    \13\ See e.g., Securities Exchange Act Release No. 35786 (May 
31, 1995), 60 FR 30122 (June 7, 1995) (SR-Amex-94-51) (order 
approving proposal by American Stock Exchange, Inc. relating to the 
in person trading volume requirement for registered options 
traders).
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    Finally, in determining to revise requirements for its Market 
Makers, the Exchange is mindful of the balance between the obligations 
and benefits provided to Market Makers. While the proposal will change 
obligations currently in place for Market Makers, the Exchange does not 
believe that these changes reduce the overall obligations applicable to 
Market Makers. In this respect, the Exchange still imposes many 
obligations on Market Makers to maintain a fair and orderly market in 
their appointed classes, which the Exchange believes eliminates the 
risk of a material decrease in liquidity.\14\ In addition, Market 
Makers are required to abide by quoting requirements in their appointed 
options classes in order to maintain the status of a Market Maker, and 
PMMs in particular are held to the highest quoting standards on the 
Exchange.\15\ As further discussed above, PMMs are also required to 
enter quotes and participate during the Opening Process, pursuant to 
Rule 701. Lastly, the Exchange also notes that for non-appointed 
options classes of Market Makers, Rule 803(d) would continue to 
prohibit a Market Maker from engaging in transactions for an account in 
which it has an interest that are disproportionate in relation to, or 
in derogation of, the performance of its obligations as specified in 
Rule 803(b) with respect to its appointed options classes. In 
particular, Market Makers would be prohibited from (1) individually or 
as a group, intentionally or unintentionally, dominating the market in 
options contracts of a particular class and (2) effecting purchases or 
sales on the Exchange except in a reasonable and orderly manner.\16\ 
Accordingly, the proposal supports the quality of the Exchange's 
markets by helping to ensure that Market Makers and in particular, 
PMMs, will continue to be obligated to and have incentives to provide 
liquidity in their appointed classes. Ultimately, the benefit that the 
proposed rule change confers upon PMMs by increasing the percentage of 
contracts executed in the PMM's non-appointed classes from 10% to 25% 
is offset by the PMM's continued responsibilities to provide 
significant liquidity to the market to the benefit of market 
participants.
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    \14\ See Rule 803(b)(1)--(4).
    \15\ See notes 6 and 7 above, with accompanying text.
    \16\ See Rule 803(d)(1) and (2).
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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. The Exchange does not believe 
that its proposal will impose an undue burden on intra-market 
competition because it will align the percentage limitations for both 
PMMs and CMMs to 25% of their non-appointed classes, and will treat all 
Market Makers uniformly in this respect. In terms of inter-market 
competition, the Exchange operates in a highly competitive market in 
which market participants can send order flow to competing exchanges if 
they deem trading practices at a particular exchange to be onerous or 
cumbersome. The proposal to increase the limitation on the percentage 
of contracts executed in a PMM's non-appointed classes from 10% to 25% 
will serve to better align the Exchange's requirements with those in 
place at other options exchanges, which enhances the ability of its 
Market Makers to effectively compete with market makers on other 
options exchanges.\17\
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    \17\ See note 4 above.
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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

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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 \18\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \19\ 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 pursuant to Rule 19b-4(f)(6) under the 
Act \20\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \21\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. ISE has 
requested that the Commission waive the 30-day operative delay 
contained in Rule 19b-4(f)(6)(iii). The Commission believes that waiver 
of the 30-day operative delay is consistent with the protection of 
investors and the public interest. The proposal raises no novel issues. 
As the Exchange notes, other options markets require their market 
makers to a 25% restriction for trading in non-appointed classes. 
Further, pursuant to the proposal, PMMs' obligation to their appointed 
classes would remain unchanged. Accordingly, the Commission waives the 
operative delay and designates the proposed rule change operative upon 
filing.\22\
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    \20\ 17 CFR 240.19b-4(f)(6).
    \21\ 17 CFR 240.19b-4(f)(6)(iii).
    \22\ For purposes only of waiving the 30-day operative delay, 
the Commission also 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 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 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-2018-98 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-2018-98. 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-2018-98 and 
should be submitted on or before January 17, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-28003 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P


