[Federal Register Volume 84, Number 207 (Friday, October 25, 2019)]
[Notices]
[Pages 57497-57500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87372; File No. SR-ISE-2019-30]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Make Permanent 
Certain Options Market Rules That Are Linked to the Equity Market Plan 
To Address Extraordinary Market Volatility

October 21, 2019.
    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 October 18, 2019, 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 make permanent certain options market 
rules that are linked to the equity market Plan to Address 
Extraordinary Market Volatility.
    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 the proposed rule change is to make permanent 
certain options market rules in connection with the equity market Plan 
to Address Extraordinary Market Volatility (the ``Limit Up-Limit Down 
Plan'' or the ``Plan''). This change is being proposed in connection 
with the recently approved amendment to the Limit Up-Limit Down Plan 
that allows the Plan to continue to operate on a permanent basis 
(``Amendment 18'').\3\ This proposed rule change is substantially 
similar to a recently-approved rule change by Cboe Exchange, Inc. 
(``Cboe'').\4\
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    \3\ See Securities Exchange Act Release No. 85623 (April 11, 
2019), 84 FR 16086 (April 17, 2019) (Order Approving Amendment No. 
18).
    \4\ See Securities Exchange Act Release Nos. 86744 (August 23, 
2019), 84 FR 45565 (August 29, 2019) (SR-CBOE-2019-049) (Notice of 
Filing); and 87311 (October 15, 2019) (SR-CBOE-2019-049) (Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2). The 
Exchange understands that the other national securities exchanges 
will also file similar proposals to make permanent their respective 
pilot programs.
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    In an attempt to address extraordinary market volatility in NMS 
Stocks, and, in particular, events like the severe volatility on May 6, 
2010, U.S. national securities exchanges and the Financial Industry 
Regulatory Authority, Inc. (collectively, ``Participants'') drafted the 
Plan pursuant to Rule 608 of Regulation NMS and under the Act.\5\ On 
May 31, 2012, the Commission approved the Plan, as amended, on a one-
year pilot basis.\6\ Though the Plan was primarily designed for equity 
markets, the Exchange believed it would, indirectly, potentially impact 
the options markets as well. Thus, the Exchange has previously adopted 
and amended Options 3, Section 9(d) and Supplementary Material .01 to 
Options 3, Section 20 to ensure the option markets were not harmed as a 
result of the Plan's implementation and has implemented such rules on a 
pilot basis that has coincided with the pilot period for the Plan (the 
``Options Pilots'').\7\ Options 3, Section 9(d) addresses the interplay 
of the Exchange's rules in response to the Plan, and includes

[[Page 57498]]

provisions on how the Exchange will treat certain options orders during 
a limit or straddle state as well as options market maker quoting 
obligations during a limit or straddle state. In addition, 
Supplementary Material .01 to Options 3, Section 20 provides that an 
execution will not be subject to obvious or catastrophic error review 
if it occurred during a limit or straddle state. A limit or straddle 
state occurs when at least one side of the National Best Bid (``NBB'') 
or Offer (``NBO'') bid/ask is priced at a non-tradable level. 
Specifically, a straddle state exists when the NBB is below the lower 
price band while the NBO is inside the prices band or when the NBO is 
above the upper price band and the NBB is within the band, while a 
limit state occurs when the NBO equals the lower price band (without 
crossing the NBB), or the NBB equals the upper price band (without 
crossing the NBO). The Exchange adopted the Options Pilots to protect 
investors because when an underlying security is in a limit up-limit 
down state, there will not be a reliable price for the security to 
serve as a benchmark for the price of the option. Specifically, the 
Exchange adopted Supplementary Material .01 to Options 3, Section 20 
because the application of the obvious and catastrophic error rules 
would be impracticable given the potential for lack of a reliable NBBO 
in the options market during limit and straddle states. When adjusting 
or busting a trade pursuant to the obvious error rule, the 
determination of theoretical value of a trade generally references the 
NBB (for erroneous sell transactions) or NBO (for erroneous buy 
transactions) just prior to the trade in question, and is therefore not 
reliable when at least one side of the NBBO is priced at a non-
tradeable level, as is the case in limit and straddle states. In such a 
situation, determining theoretical value may often times be a very 
subjective rather than an objective determination and could give rise 
to additional uncertainty and confusion for investors. As a result, 
application of the obvious and catastrophic error rules would be 
impracticable given the lack of a reliable NBBO in the options market 
during limit and straddle states, and may produce undesirable effects 
or unanticipated consequences. As noted above, the Exchange adopted 
additional measures via other Options Pilot rules that are designed to 
protect investors during limit and straddle states.\8\ For example, the 
Exchange will reject Market Orders (as defined in Options 3, Section 
7(a)) and cancel Stop Orders \9\ during a Limit Up-Limit Down state to 
ensure that only those orders with a limit price will be executed 
during a limit or straddle state given the uncertainty of market prices 
during such a state. Furthermore, the Exchange believes that 
eliminating the application of obvious error rules during a limit or 
straddle state eliminates the re-evaluation of a transaction executed 
during such a state that could potentially create an unreasonable 
adverse selection opportunity due to the lack of a reliable reference 
price on one side of the market or another and discourage participants 
from providing liquidity during limit and straddle states, which is 
contrary to the goal in limiting participants' adverse selection with 
the application of the obvious error rule during normal trading states. 
For these reasons, the Exchange believes the Options Pilots and related 
rules are designed to add certainty on the options markets, which 
encourages more investors to participate in light of the changes 
associated with the Plan. The Plan was originally implemented on a 
pilot-basis in order to allow the public, the participating exchanges, 
and the Commission to assess the operation of the Plan and whether the 
Plan should be modified prior to approval on a permanent basis. As 
stated, the Exchange adopted the Option Pilots to coincide with this 
pilot; to continue the protections therein while the industry gains 
further experience operating the Plan.
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    \5\ See Securities Exchange Act Release No. 64547 (May 25, 
2011), 76 FR 31647 (June 1, 2011) (File No. 4-631).
    \6\ See Securities and Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012).
    \7\ See Securities Exchange Act Release Nos. 69329 (April 5, 
2013), 78 FR 21657 (April 11, 2014) (SR-ISE-2013-22); and 80432 
(April 11, 2017), 82 FR 18191 (April 17, 2017) (SR-ISE-2017-03).
    \8\ As set forth in Options 3, Section 9(d), this includes rules 
in connection with special handling for Market Orders and Stop 
Orders, and options market maker quoting obligations during a limit 
or straddle state.
    \9\ The Exchange will elect Stop Orders if the condition as 
provided in Options 3, Section 7(d) is met, and, because they become 
Market Orders, will then cancel them back. See Options 3, Section 
9(d)(3).
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    In connection with the order approving the establishment of the 
obvious error pilot, as well as the extensions of the obvious error 
pilot, the Exchange committed to submit monthly data regarding the 
program and to submit an overall analysis of the obvious error pilot in 
conjunction with the data submitted under the Plan and any other data 
as requested by the Commission. Pursuant to a rule filing, approved on 
April 7, 2014, each month, the Exchange committed to provide the 
Commission, and the public, a dataset containing the data for each 
straddle and limit state in optionable stocks that had at least one 
trade on the Exchange.\10\ The Exchange has continued to provide the 
Commission with this data on a monthly basis. For each trade on the 
Exchange, the Exchange provides (a) the stock symbol, option symbol, 
time at the start of the straddle or limit state, an indicator for 
whether it is a straddle or limit state, and (b) for the trades on the 
Exchange, the executed volume, time-weighted quoted bid-ask spread, 
time-weighted average quoted depth at the bid, time-weighted average 
quoted depth at the offer, high execution price, low execution price, 
number of trades for which a request for review for error was received 
during straddle and limit states, an indicator variable for whether 
those options outlined above have a price change exceeding 30% during 
the underlying stock's limit or straddle state compared to the last 
available option price as reported by OPRA before the start of the 
limit or straddle state. In addition, to help evaluate the impact of 
the pilot program, the Exchange has provided to the Commission, and the 
public, assessments relating to the impact of the operation of the 
obvious error rules during limit and straddle states including: (1) An 
evaluation of the statistical and economic impact of limit and straddle 
states on liquidity and market quality in the options markets, and (2) 
an assessment of whether the lack of obvious error rules in effect 
during the straddle and limit states are problematic. The Exchange has 
concluded that the Options Pilots do not negatively impact market 
quality during normal market conditions,\11\ and that there has been 
insufficient data to assess whether a lack of obvious error rules is 
problematic, however, the Exchange believes the continuation of the 
Options Pilots function to protect against any unanticipated 
consequences in the options markets during a limit or straddle state 
and add certainty on the options markets.
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    \10\ See Securities Exchange Act Release No. 71884 (April 7, 
2014), 79 FR 20269 (April 11, 2014) (SR-ISE-2014-22); see also ISE 
LULD Reports, available at: https://www.nasdaq.com/solutions/options/LULD.
    \11\ See also ISE LULD Reports, available at: https://www.nasdaq.com/solutions/options/LULD. During the most recent Review 
Period the Exchange did not receive any obvious error review 
requests for Limit-Up-Limit Down trades, and Limit Up-Limit Down 
trade volume accounted for nominal overall trade volume.
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    The Commission recently approved the Plan on a permanent basis 
(Amendment 18).\12\ In connection with this approval, the Exchange now 
proposes to amend Options 3, Section 9(d) and Supplementary Material 
.01 to Options 3, Section 20 that currently implement provisions of the 
Plan on a pilot basis to eliminate the pilot basis, which effectiveness 
expires on October

[[Page 57499]]

18, 2019, and to make such rules permanent. In its approval order to 
make the Plan permanent, the Commission recognized that, as a result of 
the Participants' and industry analysis of the Plan's operation, the 
Limit Up-Limit Down mechanism effectively addresses extraordinary 
market volatility. Indeed, the Plan benefits markets and market 
participants by helping to ensure orderly markets, but also, the 
Exchange believes, based on the data made available to the public and 
the Commission during the pilot period, that the obvious error pilot 
does not negatively impact market quality during normal market 
conditions.\13\ Rather, the Exchange believes the obvious error pilot 
functions to protect against any unanticipated consequences in the 
options markets during a limit or straddle state and add certainty on 
the options markets. The Exchange also believes the other Options 
Pilots rules provide additional measures designed to protect investors 
during limit and straddle states. For example, the Exchange will reject 
Market Orders and cancel Stop Orders during a Limit Up-Limit Down state 
to ensure that only those orders with a limit price will be executed 
during a limit or straddle state given the uncertainty of market prices 
during such a state.\14\ This removes impediments to and perfects the 
mechanism of a free and open market and national market system by 
encouraging more investors to participate in light of the changes 
associated with the Plan. The Exchange believes that if approved on a 
permanent basis, the Options Pilots would permanently provide investors 
with the above-described additional certainty of market prices and 
mitigation of unanticipated consequences and unreasonable adverse 
selection risk during limit and straddle states.
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    \12\ See supra note 3.
    \13\ See supra note 11.
    \14\ See supra notes 8 and 9.
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    Since the Commission's approval of Amendment 18 allowing the Plan 
to operate on a permanent basis, the Exchange and other national 
securities exchanges have determined that no further amendments should 
be made to the Options Pilots; \15\ the current Options Pilots 
effectively address extraordinary market volatility, are reasonably 
designed to comply with the requirements of the Plan, facilitate 
compliance with the Plan and should now operate on a permanent basis, 
consistent with the Plan. The Exchange does not propose any substantive 
or additional changes to Options 3, Section 9(d) or Supplementary 
Material .01 to Options 3, Section 20.
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    \15\ See Securities Exchange Act Release No. 85605 (April 11, 
2019), 84 FR 16098 (April 17, 2019) (SR-ISE-2019-10).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(b) of the Act,\16\ in general, and 
Section 6(b)(5) of the Act,\17\ in particular, in that it is designed 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest and not to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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    In particular, the Exchange believes that the proposed rule 
supports the objectives of perfecting the mechanism of a free and open 
market and the national market system because it promotes transparency 
and uniformity across markets concerning rules for options markets 
adopted to coincide with the Plan. The Exchange believes that 
eliminating the pilot basis for the Options Pilots and making such 
rules permanent facilitates compliance with the Plan by adding 
certainty to the markets during periods of market volatility, which has 
been approved and found by the Commission to be reasonably designed to 
prevent potentially harmful price volatility in NMS Stocks. It has been 
determined by the Commission that the Plan benefits markets and market 
participants by helping to ensure orderly markets, and, based on the 
data made available to the public and the Commission during the pilot 
period for Supplementary Material .01 to Options 3, Section 20, the 
Plan does not negatively impact options market quality during normal 
market conditions. Rather, the Plan, as it is implemented under the 
obvious error pilot, functions to protect against any unanticipated 
consequences in the options markets during a limit or straddle state 
and add certainty on the options markets. During a limit or straddle 
state, determining theoretical value of an option may be a subjective 
rather than an objective determination given the lack of a reliable 
NBBO, which may create an unreasonable adverse selection opportunity 
and discourage participants from providing liquidity during limit and 
straddle states. Therefore, the Exchange believes eliminating obvious 
error review in such states would, in turn, eliminate uncertainty and 
confusion for investors and benefit investors by encouraging more 
participation in light of the changes associated with the Plan. As 
stated, the Exchange believes the other Options Pilots rules provide 
additional measures designed to protect investors during limit and 
straddle states. For example, the Exchange will reject Market Orders 
and cancel Stop Orders during a Limit Up-Limit Down state to ensure 
that only those orders with a limit price will be executed during a 
limit or straddle state given the uncertainty of market prices during 
such a state.\18\ Accordingly, the Exchange believes that making the 
Options Pilots permanent will further the goals of investor protection 
and fair and orderly markets as the rules effectively address 
extraordinary market volatility pursuant to the Plan.
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    \18\ See supra notes 8 and 9.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
necessary to reflect that the Plan no longer operates as a pilot and 
has been approved to operate on a permanent basis by the Commission. As 
such, Options 3, Section 9(d) and Supplementary Material .01 to Options 
3, Section 20, which implement protections in connection with the Plan, 
should be amended to operate on a permanent basis. The Exchange 
understands that the other national securities exchanges will also file 
similar proposals to make permanent their respective pilot 
programs.\19\ Thus, the proposed rule change will help to ensure 
consistency across market centers without implicating any competitive 
issues.
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    \19\ In addition, the Exchange's proposal is substantially 
similar to Cboe's recently approved rule change. See supra note 4.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become

[[Page 57500]]

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 \20\ and Rule 19b-4(f)(6) 
thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \22\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, Rule 19b-4(f)(6)(iii) \23\ 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 proposed 
rule change may become effective and operative immediately upon filing. 
The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest, as 
it will allow the current Options Pilots to continue on a permanent 
basis without any changes, prior to the pilot expiration on October 18, 
2019. For this reason, the Commission hereby waives the 30-day 
operative delay and designates the proposed rule change as operative 
upon filing.\24\
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    \22\ 17 CFR 240.19b-4(f)(6).
    \23\ 17 CFR 240.19b-4(f)(6)(iii).
    \24\ For purposes only of waiving the 30-day operative delay, 
the Commission has 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 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 change 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-2019-30 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-2019-30. 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-2019-30 and should be submitted on 
or before November 15, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23258 Filed 10-24-19; 8:45 am]
 BILLING CODE 8011-01-P


