[Federal Register Volume 86, Number 41 (Thursday, March 4, 2021)]
[Notices]
[Pages 12762-12769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-04428]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91223; File No. SR-ISE-2021-01]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Various 
Rules in Options 3 and Options 5

February 26, 2021.
    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 February 18, 2021, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, 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 various rules in Options 3 and 
Options 5.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, 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 amend various rules 
in Options 3 and Options 5. The proposed changes consist of conforming 
existing rules to current System technology, amending rule text to add 
greater detail on how certain Exchange functionality operate today, and 
conforming language within the Exchange's rules to the rules of other 
exchanges. As such, no System changes to existing functionality are 
being made pursuant to this proposal. Rather, this proposal is designed 
to reduce any potential investor confusion as to the features and 
applicability of certain functionality presently available on the 
Exchange. These changes are described in detail below, and include 
amending Exchange rules governing: (1) The Block Order Mechanism 
(``Block''),\3\ (2) the Facilitation Mechanism (``Facilitation''),\4\ 
(3) the Solicited Order Mechanism (``Solicitation''),\5\ (4) the Price 
Improvement Mechanism (``PIM''),\6\ (5) Trade Value Allowance 
(``TVA''),\7\ (6) Anti-Internalization,\8\ and (7) the exposure 
mechanism (``Exposure'').\9\
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    \3\ See Options 3, Section 11(a).
    \4\ See Options 3, Section 11(b).
    \5\ See Options 3, Section 11(d).
    \6\ See Options 3, Section 13.
    \7\ See Supplementary Material .03 to Options 3, Section 14.
    \8\ See Options 3, Section 15(a)(3)(A).
    \9\ See Supplementary Material .02 to Options 5, Section 2.
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Universal Changes
    In September 2019, the Exchange amended its regular allocation rule 
in Options 7, Section 10 (Priority of Quotes and Orders) to make non-
substantive changes, among other changes, to replace references to 
Professional interest with non-Priority Customer interest.\10\ The 
Exchange now proposes to make similar changes to replace all instances 
of ``Professional'' interest with ``non-Priority Customer'' interest 
throughout its auction allocation rules in Options 3, Section 11 and 
Section 13 to align with the changes made in SR-ISE-2019-21.\11\ While 
the term ``Professional Orders'' is defined within Options 1, Section 
1(a)(39) as an order that is for the account of a person or entity that 
is not a Priority Customer, the Exchange believes that using the term 
``non-Priority Customer'' is more clear in describing the types of 
market participant to which the allocation applies, and also reduces 
confusion regarding any reference to Professional Orders or 
Professional Customer orders.
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    \10\ See Securities Exchange Act Release No. 86947 (September 
12, 2019), 84 FR 49165 (September 18, 2019) (SR-ISE-2019-21).
    \11\ Specifically in Options 3, Section 11, the Exchange will 
amend current subsections (a)(2)(B), (b)(3)(A)-(C) (renumbered to 
(b)(4)(A)-(C) under this proposal), (c)(7)(A)-(C), (d)(2)(C) 
(renumbered to (d)(3)(C) under this proposal), and (e)(4)(D). In 
Options 3, Section 13, the Exchange will amend current subsections 
(d)(1)-(3) and (e)(5)(i)-(iii).
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    In addition, the Exchange proposes to make universal changes in its 
Facilitation and Solicitation rules \12\ to clearly delineate between 
orders and Responses \13\ of the same capacity. For example, where the 
existing rule text currently states ``Priority Customer bids 
(offers),'' the Exchange proposes instead to state ``Priority Customer 
Orders and Priority Customer Responses to buy (sell).'' The Exchange 
notes that this is merely a non-substantive change as auction orders 
and Responses of the same capacity do not get treated differently for 
allocation purposes today. The rules for complex Facilitation and 
Solicitation already distinguish between orders and Responses, so the 
Exchange is simply amending those complex rules to clearly state how, 
for example, Priority Customer Complex Orders and Priority Customer 
Responses get allocated today \14\ With the proposed changes, the 
Exchange seeks to include a similar level of detail within its simple 
and complex Facilitation and Solicitation rules in order to bring 
transparency

[[Page 12763]]

around how allocation takes place in those auction mechanisms today.
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    \12\ Specifically in Options 3, Section 11, subsections 
(b)(3)(A)-(C) (renumbered to (b)(4)(A)-(C)), and (d)(2)(A) and (C) 
(renumbered to (d)(3)(A) and (C)) will be updated.
    \13\ A ``Response'' is an electronic message that is sent by 
Members in response to a broadcast message. See Options 3, Section 
11.
    \14\ See Options 3, Section 11(c)(7) and (e)(4).
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Block Order Mechanism
    The Exchange proposes minor changes to the current descriptions of 
the Block execution and allocation process in Options 3, Section 11(a). 
As discussed below, the proposed Block changes are non-substantive in 
nature, and are intended to harmonize with the Block rule on its 
affiliated market, BX Options (``BX'') in order to ensure rule 
consistency between the Exchange and its affiliate offering identical 
functionality.
    First, the Exchange proposes to add ``up to the size of the block 
order'' at the end of subsection (a)(2)(A). As amended, the rule will 
provide that bids (offers) on the Exchange at the time the block order 
is time the block order is executed that are priced higher (lower) than 
the block execution price, as well as Responses that are priced higher 
(lower) than the block execution price, will be executed in full at the 
block execution price up to the size of the block order. The Exchange 
is making this non-substantive change to align with BX's Block 
rule,\15\ which will ensure rule consistency for identical 
functionality across affiliated markets. The language states that 
better priced interest gets executed in full only if there is 
sufficient size to execute against such interest, which is how block 
orders are executed and priced on the Exchange and BX today.
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    \15\ See BX Options 3, Section 11(a)(2)(A).
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    Second, the Exchange proposes a non-substantive change in the first 
sentence of subsection (a)(2)(B) to replace ``first and in time 
priority'' with ``first in price time priority.'' As amended, the rule 
will provide that at the block execution price, Priority Customer 
Orders and Priority Customer Responses will be executed first in price 
time priority. This is not a change to the current Block allocation 
methodology, but rather a non-substantive change for better 
readability, and to align with BX's Block rule \16\ in order to ensure 
rule consistency for identical functionality across affiliated markets. 
Block orders will continue to trade at a single execution price that 
allows the maximum number of contracts of the block order to be 
executed against both the Responses entered to trade against the order 
and unrelated interest on the Exchange's order book.
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    \16\ See BX Options 3, Section 11(a)(2)(B).
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Example 1

Block order is entered to buy 50 contracts @1.50

    The following Responses are received:
Priority Customer Response 1 to sell 40 contracts @1.40
Priority Customer Response 2 to sell 10 contracts @1.40
Priority Customer Response 3 to sell 10 contracts @1.39

    The block execution price would be $1.40 (i.e., the price at 
which the maximum number of contracts could be executed) and would 
be executed as follows:

Block order trades 10 with Priority Customer Response 3 @1.40
Block order trades 40 with Priority Customer Response 1 @1.40

    As shown above, Priority Customer Response 3 would be executed in 
full since it is priced better than the block execution price and there 
is sufficient size to execute Response 3 against the block order, while 
Priority Customer Responses 1 and 2, which are priced at the block 
execution price, would participate in price time priority--i.e., the 
remaining 40 contracts would go to Response 1, which was received 
before Response 2.
Facilitation Mechanism
    The Exchange proposes a number of changes to its Facilitation rule, 
none of which will change the current operation of this technology 
offering. Many of the proposed changes are intended to align the simple 
Facilitation rule in Options 3, Section 11(b) with the complex 
Facilitation rule in Options 3, Section 11(c) where relevant. In 
October 2018, the Exchange amended its complex order rules to provide 
greater clarity and additional detail regarding the operation and 
applicability of complex order functionality, including complex auction 
mechanisms like complex Facilitation.\17\ Accordingly, the Exchange 
seeks to make aligning changes and update its simple auction mechanism 
rules to similarly provide the level of detail that now exists in its 
complex auction mechanism rules. The proposed changes are also intended 
to align with the simple Facilitation rules of the Exchange's 
affiliated markets, Nasdaq GEMX (``GEMX'') and Nasdaq MRX (``MRX''). 
The Exchange also proposes to more accurately describe how orders will 
be allocated in Facilitation's ``auto-match'' functionality.
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    \17\ See Securities Exchange Act Release No. 84373 (October 5, 
2018), 83 FR 51730 (October 12, 2018) (SR-ISE-2018-56) (``Complex 
Order Filing''). As discussed later in this filing, the Complex 
Order Filing also clarified the Exchange's complex Solicitation and 
PIM rules, and the Exchange is proposing to align the simple 
Solicitation and PIM rules with the complex rules where possible.
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    In Options 3, Section 11(b), the Exchange proposes to add new 
subsection (b)(1),\18\ which will provide that Orders must be entered 
into the Facilitation Mechanism at a price that is (A) equal to or 
better than the NBBO on the same side of the market as the agency order 
unless there is a Priority Customer order on the same side Exchange 
best bid or offer, in which case the order must be entered at an 
improved price; and (B) equal to or better than the ABBO \19\ on the 
opposite side. Orders that do not meet these requirements are not 
eligible for the Facilitation Mechanism and will be rejected. The 
Exchange is not proposing any other changes to the current entry 
requirements for Facilitation. The new subsection (b)(1) would simply 
provide additional detail about simple Facilitation's existing entry 
checks, and align to the level of detail currently within the complex 
Facilitation rule regarding entry checks.\20\
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    \18\ As a result, current subsections (b)(1)--(3) will be 
renumbered as (b)(2)--(4). The Exchange will also renumber current 
subsection (b)(3)(D) as subsection (b)(5).
    \19\ The term ``Away Best Bid or Offer'' or ``ABBO'' means the 
displayed National Best Bid or Offer not including the Exchange's 
Best Bid or Offer. See Options 1, Section 1(a)(4).
    \20\ See Options 3, Section 11(c)(1) and (c)(2). Complex 
Facilitation refers to the Exchange's best bid or offer instead of 
the NBBO or ABBO. There is no NBBO for complex orders as complex 
orders may be executed without consideration of any prices that 
might be available on other exchanges trading the same options 
contracts. See Options 3, Section 14(d). Additionally, executions of 
legs of complex orders are exceptions to the prohibition on trade-
throughs. See Options 5, Section 2(b)(7).
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Example 2

    Assume the following market:

ISE BBO: 1 x 2 (also NBBO)
CBOE: 0.75. *times; 2.25 (next best exchange quote)
Facilitation order is entered to buy 50 contracts @2.05

    No Responses are received.

The Facilitation order executes with resting 50 lot quote @2. In this 
instance, the Facilitation order is able to begin crossed with the 
contra side ISE BBO because in execution, the resting 50 lot quote @2 
is able to provide price improvement to the facilitation order.
    In renumbered subsection (b)(2), the Exchange proposes to add 
language to describe the content of the broadcast message sent to 
Members upon entry of an order into simple Facilitation. In particular, 
the Exchange proposes to specify that the broadcast message includes 
the series, price and size of the Agency Order, and whether it is to 
buy or sell. Although this change reflects current functionality, the 
existing rule is silent in this regard and only indicates that a 
broadcast message is sent upon the order's entry into the mechanism.

[[Page 12764]]

Identical language currently exists in the rules governing simple 
Facilitation on GEMX and MRX, which operate in the same way as ISE's 
simple Facilitation.\21\
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    \21\ See GEMX and MRX Options 3, Section 11(b)(1).
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    In renumbered subsection (b)(3), the Exchange proposes to replace 
the words ``must not exceed'' with ``will only be considered up to'' in 
order to align with identical language in the complex Facilitation 
rule.\22\ This change more accurately describes that the System will 
cap Responses to the size of the auction for purposes of allocation 
methodology.
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    \22\ See Options 3, Section 11(c)(6).
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    In renumbered subsection (b)(4)(A), the Exchange proposes to 
provide that the facilitation order will be cancelled at the end of the 
exposure period if an execution would take place at a price that is 
inferior to the best bid (offer) on the Exchange. This is a non-
substantive change that makes clear that any executions in Facilitation 
will comply with the general prohibition on trade-throughs in Options 
5, Section 2(a). Identical language is included in the rules governing 
simple Facilitation on GEMX and MRX.\23\
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    \23\ See GEMX and MRX Options 3, Section 11(b)(3).
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    In renumbered subsections (b)(4)(B) and (b)(4)(C), the Exchange 
proposes to amend the rule to provide that the facilitating Member will 
be allocated up to forty percent (40%) (or such lower percentage 
requested by the Member) of the original size of the facilitation 
order. If the Member requests a lower allocation percentage, the 
contra-side order would receive an allocation consistent with the 
percentage requested by the Member. Regardless of the Member's request, 
the contra-side order would still be responsible for executing up to 
the full size of the agency order if there is not enough interest to 
execute the agency order at a particular price. Similar language 
indicating that the Member may request a lower allocation percentage 
than 40% is currently included in the complex Facilitation rule, which 
operate in the same way as the simple Facilitation in this manner.\24\ 
For greater consistency between its simple and complex Facilitation 
rules, the Exchange also proposes to make aligning, non-substantive 
changes in the complex Facilitation rule to provide that the Member 
will ``be allocated up to'' forty percent. The current complex 
Facilitation language provides that the Member will ``execute at least 
forty percent'' or that the Member will ``be allocated at least forty 
percent.'' \25\ The non-substantive language proposed for complex 
Facilitation will therefore serve to harmonize the complex rule with 
the amended simple rule.
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    \24\ See Options 3, Section 11(c)(7)(B) and (C). Other options 
exchanges such as BX provide similar functionality that allows 
members using an auction mechanism to configure allocation priority. 
See, e.g., BX Options 3, Section 13, which provides a similar 
feature for the BX Options Price Improvement Auction (``PRISM'') 
called ``Surrender.''
    \25\ Id.
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    The Exchange also proposes to more accurately describe 
Facilitation's auto-match functionality, which provides an enhanced 
price improvement opportunity for the agency order by permitting the 
contra-side order to further participate in the cross by auto-matching 
the price and size of competing interest providing price improvement 
from other market participants.\26\ The rule currently provides that 
upon entry of an order into the Facilitation Mechanism, the 
facilitating Electronic Access Member can elect to automatically match 
the price and size of orders, quotes and responses received during the 
exposure period up to a specified limit price or without specifying a 
limit price. In this case, the facilitating Electronic Access Member 
will be allocated its full size at each price point, or at each price 
point within its limit price is a limit is specified, until a price 
point is reached where the balance of the order can be fully 
executed.\27\ The Exchange proposes to state that if a Member elects to 
auto-match, the facilitating Electronic Access Member will be allocated 
the aggregate size of all competing quotes, orders, and Responses 
(instead of ``its full size'') at each price point, or at each price 
point up to the specified limit price (instead of ``within its limit 
price'') if a limit is specified, until a price point is reached where 
the balance of the order can be fully executed. The Exchange believes 
that the modified language more accurately explains how the 
functionality works today, and better aligns with how this feature is 
described in the Auto-Match Filing.\28\ For greater consistency within 
its Rulebook, the Exchange will also make the same changes in the 
complex Facilitation auto-match rule in Options 3, Section 11(c)(7)(C).
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    \26\ See Securities Exchange Act Release No. 62644 (August 4, 
2010), 75 FR 48395 (August 10, 2010) (SR-ISE-2010-61) (``Auto-Match 
Filing''). As discussed later in this filing, the Auto-Match Filing 
also introduced the auto-match feature on PIM. As such, the Exchange 
is proposing to make similar changes in PIM's auto-match rule as 
proposed for Facilitation's auto-match rule.
    \27\ See Options 3, Section 11(b)(3)(C) (renumbered to Section 
11(b)(4)(C) under this proposal).
    \28\ The Auto-Match Filing describes the auto-match feature as 
allowing the initiating member to submit a contra-side order that 
will automatically match the price and size set forth by the 
competing interest from other market participants (i.e., auction 
responses, quotes, and orders) at any price level during the auction 
or up to a specified limit price if a limit is specified.
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    Lastly, the Exchange proposes to add at the end of Supplementary 
Material .01 to Options 3, Section 11 that any solicited contra orders 
entered by Members into the Facilitation Mechanism to trade against 
Agency Orders may not be for the account of a Nasdaq ISE Market Maker 
that is assigned to the options class.\29\ This language was included 
in the approval order to SR-ISE-2006-78 to allow solicited transactions 
in ISE's Facilitation Mechanism, so the proposed change will import 
that prohibition into the rule text for greater transparency.
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    \29\ See Securities Exchange Act Release No. 55557 (March 29, 
2007), 72 FR 16838 (April 5, 2007) (SR-ISE-2006-78) (Order Granting 
Approval of Proposed Rule Change Relating to Facilitation 
Mechanism).
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Solicited Order Mechanism
    The Exchange proposes a number of changes to its Solicitation rule, 
none of which will change the current operation of this technology 
offering.
    In Options 3, Section 11(d), the Exchange proposes to add new 
subsection (d)(1),\30\ which will provide that orders must be must be 
entered into the Solicited Order Mechanism at a price that is equal to 
or better than the NBBO on both sides of the market; provided that, if 
there is a Priority Customer order on the Exchange best bid or offer, 
the order must be entered at an improved price. Orders that do not meet 
these requirements are not eligible for the Solicited Order Mechanism 
and will be rejected. The Exchange is not proposing any other changes 
to the current entry requirements for Solicitation. The new subsection 
(d)(1) would simply provide additional detail about simple 
Solicitation's existing entry checks, and align to the level of detail 
currently within the complex Solicitation rule regarding entry 
checks.\31\
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    \30\ As a result, current paragraphs (d)(1)-(3) will be 
renumbered accordingly. The Exchange will also renumber current 
paragraph (d)(2)(D) as paragraph (d)(4).
    \31\ See Options 3, Section 11(e)(1). Complex Solicitation 
refers to the Exchange's best bid or offer instead of the NBBO. As 
noted above, there is no NBBO for complex orders, and executions of 
legs of complex orders are exceptions to the prohibition of trade-
throughs. See supra note 20.
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Example 3

    Assume the following market:

ISE BBO: 1 x 2 (also NBBO)

[[Page 12765]]

CBOE: 0.75. x 2.25 (next best exchange quote)
Solicitation order is entered to buy 500 contracts @ 2.05

The Solicitation order is rejected upon entry for being crossed with 
the NBBO on the contra side. In contrast to Example 2 above for 
Facilitation, the Solicitation order in this instance is not able to 
begin crossed with the contra side ISE BBO because of the all-or-none 
contingency of the Solicitation order.\32\
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    \32\ See Options 3, Section 11(d) (requiring that each 
Solicitation order be designated as all-or-none).
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    In renumbered subsection (d)(2), the Exchange proposes to add 
language to describe the content of the broadcast message sent to 
Members upon entry of an order into simple Solicitation. In particular, 
the Exchange proposes to specify that the broadcast message includes 
the series, price and size of the Agency Order, and whether it is to 
buy or sell. While this change reflects current functionality, the 
existing rule is silent in this regard and only indicates that a 
broadcast message is sent upon the order's entry into the mechanism. 
Identical language already exists in the rules governing simple 
Solicitation on GEMX and MRX, which operate in the same way as the 
ISE's simple Solicitation.\33\
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    \33\ See GEMX and MRX Options 3, Section 11(d)(1).
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    Lastly, the Exchange also proposes technical changes in renumbered 
subsection (d)(3) to correct the internal lettering and cross-cites 
within paragraphs (A) through (C).
Price Improvement Mechanism
    The Exchange proposes a number of changes to the PIM rule, none of 
which will change the current operation of this technology offering. As 
noted above, many of these modifications are similar to the changes 
proposed for Facilitation.
    The Exchange proposes in Options 3, Section 13(b)(2) to delete 
``national best bid or offer'' as NBBO is already defined in subsection 
(b)(1) above. The Exchange proposes in subsection (c)(2) to provide 
that responses in the PIM (i.e., ``Improvement Orders'') will only be 
considered up to the size of the Agency Order. The proposed amendment 
will specifythat the System will cap the size of the Improvement Orders 
to the auction size for purposes of the allocation methodology. This is 
similar to the change proposed above for simple Facilitation, and also 
aligns to identical language in the complex PIM rule.\34\ The Exchange 
also proposes in subsection (c)(3) to amend the internal numbering from 
(1) and (2) to (i) and (ii) for greater numbering consistency within 
the PIM rule.
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    \34\ See Options 3, Section 13(e)(4)(i).
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    In subsection (d)(3), which describes how allocation and execution 
takes place in simple PIM, the Exchange proposes that the Counter-Side 
Order will be allocated the greater of one contract or 40% (or such 
lower percentage requested by the Member) of the initial size of the 
Agency Order. Similar to Facilitation as discussed above, the System 
currently permits Members entering orders into PIM to elect to receive 
a percentage allocation that is less than 40%, although the current 
rule is silent in this regard. If the Member requests a lower 
allocation percentage, the Counter-Side Order would receive an 
allocation consistent with the percentage requested by the Member. 
Regardless of the Member's request, the Counter-Side Order would still 
be responsible for executing up to the full size of the agency order if 
there is not enough interest to execute the agency order at a 
particular price. Complex PIM, which shares the same allocation feature 
as simple PIM, already has this concept within the rule, so the 
proposed changes will align the simple PIM rule with the complex PIM 
rule.\35\
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    \35\ See Options 3, Section 13(e)(5)(iii). As noted above, BX 
has a similar feature called Surrender for its PRISM auction. See 
supra note 24.
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    The Exchange also proposes to more accurately describe PIM's auto-
match functionality in a similar manner as Facilitation's auto-match 
functionality, as discussed above. In this instance, the Exchange 
proposes to amend the third sentence of subsection (d)(3) to provide: 
``If a Member elects to auto-match, the Counter-Side Order will be 
allocated the aggregate size of all competing quotes, orders, and 
Responses at each price point up to the specified limit price if a 
limit is specified, until a price point is reached where the balance of 
the order can be fully executed.'' Similar to the proposed amendments 
to simple Facilitation's auto-match, the Exchange believes that the 
proposed language for simple PIM's auto-match more clearly explains how 
the functionality works today, and better aligns with how this feature 
is described in the Auto-Match Filing. For greater consistency within 
its Rulebook, the Exchange will also make the same changes in the 
complex PIM auto-match rule in Options 3, Section 13(e)(5)(iii).
    The Exchange further proposes technical amendments in subsection 
(d)(3) to replace all instances of ``Counter-Side order'' as ``Counter-
Side Order'' to use the correct terminology. Lastly, the Exchange 
proposes to provide in Supplementary Material .04 to Options 3, Section 
13 that PIMs will not queue or overlap in any manner, except as 
described in Options 3, Section 11(f) and (g). Sections 11(f) and (g) 
set forth the governing provisions for concurrent complex auctions and 
concurrent complex and simple auctions. The proposed changes to add in 
the cross-cites to Sections 11(f) and (g) will make clear that two 
simple or two complex PIM auctions are not permitted to run 
concurrently, but that a simple PIM auction may run concurrently with a 
complex PIM auction.
Trade Value Allowance
    The Exchange proposes a non-substantive change to amend the TVA 
rule in Supplementary Material .03 to Options 3, Section 14 to add a 
cross-cite to the complex PIM rule in Options 3, Section 13, which was 
inadvertently omitted when the Exchange relocated the complex auctions 
rules in a prior filing.\36\ In SR-ISE-2019-05, the original cross-cite 
within the TVA rule was updated from Supplementary Material .08 to Rule 
722 to Rule 716 (now Options 3, Section 11). Supplementary Material .08 
to Rule 722 set forth the complex auction mechanism rules, namely 
complex Facilitation, Solicitation, and PIM. SR-ISE-2019-05 relocated 
complex Facilitation and Solicitation to Rule 716 (now Options 3, 
Section 11), but moved complex PIM to Rule 723 (now Options 3, Section 
13). As such, the original cross-cite in the TVA rule should have been 
updated to include complex PIM in Rule 723 but was inadvertently 
omitted.
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    \36\ See Securities Exchange Release No. 85308 (March 13, 2019), 
84 FR 10136 (March 19, 2019) (SR-ISE-2019-05).
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    TVA is a functionality that allows complex orders to trade outside 
of their expected notional trade amount by a specified amount. The 
amount of TVA permitted may be determined by the Member, or a default 
value determined by the Exchange and announced to Members.\37\ The TVA 
rule currently provides, however, that any amount of TVA is permitted 
in auction mechanisms pursuant to Options 3, Section 11 when auction 
orders do not trade solely with their contra-side order. The Exchange 
now proposes to add a cross-cite to Options 3, Section 13 to specify 
that TVA also applies to complex PIM auctions in this manner. The 
Exchange will also provide that TVA applies to ``complex'' mechanisms 
in the cited rules. These changes will

[[Page 12766]]

align the rule text to how TVA is presently implemented in the System. 
The Exchange notes that its complex auction mechanisms provide an 
opportunity for market participants to respond with better-priced 
interest that could execute against an Agency Order. As such, the 
Exchange believes that it is appropriate to ensure that paired orders 
entered into complex Facilitation, Solicitation and PIM that are broken 
up due to better-priced interest are actually executed against such 
better-priced interest, and are not restricted from trading due to TVA 
settings of one or more Members.
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    \37\ See Supplementary Material .03 to Options 3, Section 14.
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Anti-Internalization
    The Exchange proposes to amend its anti-internalization (``AIQ'') 
rule in Options 3, Section 15(a)(3)(A). Specifically, the Exchange 
proposes to add that AIQ does not apply during the opening process or 
reopening process following a trading halt pursuant to Options 3, 
Section 8 to provide more specificity on how this functionality 
currently operates. The Exchange notes that the same procedures used 
during the opening process are used to reopen an option series after a 
trading halt, and therefore proposes to specify that AIQ will not apply 
during an Opening Process (i.e., the opening and halt reopening 
process) in addition to an auction, as currently within the Rule. AIQ 
is unnecessary during an Opening Process due to the high level of 
control that Market Makers exercise over their quotes during this 
process. The proposed changes will align the Exchange's AIQ rule with 
BX's AIQ rule, which sets forth materially identical functionality.\38\
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    \38\ See BX Options 3, Section 15(c)(1).
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Exposure Mechanism
    Under the linkage rules, the Exchange cannot execute orders at a 
price that is inferior to the NBBO, nor can the Exchange place an order 
on its book that would cause the Exchange best bid or offer to lock or 
cross another exchange's quote.\39\ In these circumstances, 
Supplementary Material .02 to Options 5, Section 2 sets forth an 
Exposure mechanism for automated order handling where eligible incoming 
orders are exposed at the NBBO to all Members to give them an 
opportunity to execute the order at the NBBO price or better. The 
Exchange proposes to make clear within Supplementary Material .02 that 
an incoming order will be eligible for Exposure if the order is priced 
at or through the ABBO, when the ABBO is better than the Exchange BBO.
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    \39\ See Options 5, Sections 2 and 3. See also Options 3, 
Section 5(d).
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    Supplementary Material .02 to Options 5, Section 2 currently 
provides that when the automatic execution of an incoming order would 
result in an impermissible Trade-Through, such order would be exposed 
at the current NBBO to all Exchange Members for a time period 
established by the Exchange not to exceed one (1) second. Supplementary 
Material .01 to Options 5, Section 3, however, currently provides that 
when the price of an incoming limit order that is not executable upon 
entry would lock or cross a Protected Quotation, such order would be 
handled in accordance with the Exposure process in Supplementary 
Material .02 to Options 5, Section 2.\40\ The Exchange proposes to 
modify Supplementary Material .02 by removing the portion related to 
the automatic execution of an incoming order that would result in an 
impermissible Trade-Through, and instead providing within this Rule 
that Exposure will initiate when an incoming order is priced at or 
through the ABBO, when the ABBO is better than the Exchange BBO. The 
current language in Supplementary Material .02 only specifies that 
Exposure is initiated when the price of the incoming order is crossed 
with the ABBO (i.e., would result in an impermissible Trade-Through), 
but does not specify the scenario in Supplementary Material .01 to 
Options 5, Section 3 when the price is locked. As such, the proposed 
changes seek to enhance the accuracy of the rules by codifying both 
scenarios within the Exposure rule in Supplementary Material .02.
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    \40\ Such order would also be handled in accordance with 
Supplementary Material .04 (Non-Customer Orders that opt out of the 
Exposure mechanism) or .05 (Sweep Orders) to Options 5, Section 2, 
as applicable. See Supplementary Material .01 to Options 5, Section 
3.
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Technical Amendments
    The Exchange proposes technical changes in the Supplementary 
Material to Options 3, Section 11. First, the Exchange proposes in 
Supplementary Material .03 to update an incorrect cross-cite from 
Options 3, Section 22(d) to Section 22(b), which limits principal 
transactions. Second, the Exchange will make corrective changes to 
renumber Supplementary Material .07 to .05, and to update the cross-
cite to paragraph (a)(2)(i) therein to paragraph (a)(2)(A). Third, the 
Exchange proposes in renumbered Supplementary Material .07 to update 
the reference to ``Block Mechanism'' to ``Block Order Mechanism'' to 
use the correct terminology.
    Lastly, the Exchange proposes some harmonizing changes throughout 
its Rulebook to align with the rule numbering and titles with that of 
its affiliates. Specifically, the Exchange proposes to add a new 
Options 4B and reserve it in the Rulebook in order to harmonize its 
Options Rule numbering with that of its affiliates, GEMX and Nasdaq 
PHLX LLC (``Phlx''). The Exchange also proposes to retitle General 4 
(currently titled ``Regulation'') to ``Registration Requirements'' to 
harmonize its General Rule titles with that of its affiliates The 
Nasdaq Stock Market LLC and Nasdaq BX, Inc.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\41\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\42\ 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.
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    \41\ 15 U.S.C. 78f(b).
    \42\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal is consistent with the 
protection of investors and public interest as all of the proposed 
changes will increase transparency around how various existing Exchange 
mechanisms work today. As such, no System changes to existing 
functionality are being made pursuant to this proposal. Rather, this 
proposal is designed to reduce any potential investor confusion as to 
the features and applicability of certain functionality presently 
available on the Exchange.
    Furthermore, many of the proposed changes seek to provide greater 
harmonization between the rules of the Exchange and its affiliates 
(notably rules related to Block, Facilitation, Solicitation, and AIQ), 
or between the Exchange's own simple and complex auction rules (notably 
for simple and complex Facilitation, Solicitation, and PIM).\43\ The 
Exchange believes that these harmonizing changes would result in 
greater uniformity, and ultimately less burdensome and more efficient 
regulatory compliance by market participants. As such, the proposed 
rule change would foster cooperation and coordination with persons 
engaged in facilitating transactions in securities and

[[Page 12767]]

would remove impediments to and perfect the mechanism of a free and 
open market and a national market system. The Exchange also believes 
that more consistent rules will increase the understanding of the 
Exchange's operations for Members that are also members on the 
Exchange's affiliates, thereby contributing to the protection of 
investors and the public interest.
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    \43\ As noted above, the Exchange seeks to add granularity to 
its simple auction rules to align with the level of detail that 
currently exists within its complex auction rules. See supra note 
17.
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    Specifically, the Exchange believes that the proposed universal 
changes to replace all instances of Professional interest with non-
Priority Customer interest throughout the Exchange's auction allocation 
rules will add greater consistency within the Exchange's rules. As 
discussed above, the Exchange previously made the same modifications 
within its standard allocation rule in Options 7, Section 10, so the 
proposed changes will promote more consistent terminology in the rules 
and make them easier for market participants to navigate and 
comprehend. The Exchange also believes that using the term ``non-
Priority Customer'' reduces any potential confusion regarding any 
reference to Professional Orders or Professional Customer orders. In 
addition, the Exchange believes that clearly delineating between orders 
and Reponses of the same capacity in the Facilitation and Solicitation 
rules will bring clarity and transparency around how allocation takes 
place in those auction mechanisms. The complex Facilitation and 
Solicitation rules currently differentiate between orders and 
Responses,\44\ so the Exchange is aligning the simple rule to the level 
of granularity already found in the complex rule while also specifying 
the capacity of such order or Response within the simple and complex 
rules. As noted above, the Exchange is not changing the current 
allocation methodology, and auction orders and Responses of the same 
capacity do not get treated differently for allocation purposes today.
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    \44\ See supra note 14.
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    The Exchange believes that the proposed changes to the Block rule 
are consistent with the protection of investors and the public interest 
as the modifications will more accurately reflect the handling of 
auctions in Block, specifically as it relates to execution and 
allocation. The proposed changes will specify that better priced 
interest entered into Block gets executed in full only if there is 
sufficient size to execute against such interest, and that Priority 
Customer interest gets executed first in price time priority. This 
specificity will be helpful to market participants utilizing Block and 
provide greater certainty as to how their Block orders will be executed 
and allocated. The Exchange also believes that the proposed changes 
will continue to ensure a fair and orderly market by maintaining and 
protecting the priority of Priority Customer orders, while still 
affording the opportunity for all market participants to seek liquidity 
and potential price improvement during each Block auction commenced on 
the Exchange. As noted above, the Exchange is not proposing any changes 
to the current execution or allocation methodology but believes that 
the changes will promote consistency with the rulebook of its 
affiliated exchange BX, which offers identical functionality.\45\
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    \45\ See supra notes 15-16, and accompanying text.
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    Similarly, the Exchange believes that specifying the entry checks 
for simple Facilitation and Solicitation is consistent with the 
protection of investors and the public interest by providing greater 
consistency to the level of granularity currently within the complex 
Facilitation and Solicitation entry checks.\46\ The Exchange also 
believes it is appropriate to require that the Facilitation order be 
entered at an improved price if there is a Priority Customer order on 
the same side Exchange best bid or offer as the agency order. The 
Exchange believes this will ensure a fair and orderly market by 
maintaining priority of orders and quotes and protecting Priority 
Customer orders, while still affording the opportunity to seek 
liquidity and for potential price improvement during each Facilitation 
auction commenced on the Exchange. For the same reasons, the Exchange 
believes that it is appropriate to require that the Solicitation order 
be entered at an improved price if there is a Priority Customer order 
on the Exchange best bid or offer.
---------------------------------------------------------------------------

    \46\ See supra notes 20 and 31, and accompanying text.
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    The Exchange further believes that it is consistent with the Act to 
specify the contents of the broadcast message sent to Members upon 
entry of an order into simple Facilitation and Solicitation as the 
changes will remove any potential confusion about what type of auction 
information is disseminated. Currently, the broadcast message in simple 
Facilitation and Solicitation includes the series, price, and size of 
the Agency Order, and whether it is to buy or sell. As this information 
is helpful to auction participants, the Exchange believes that 
codifying this information into the simple Facilitation and 
Solicitation rules may encourage greater participation within these 
mechanisms, thereby increasing the opportunity for options orders to 
receive executions on the Exchange. The Exchange is not proposing any 
changes to the current content of the broadcast message but wants to 
make this clear in its rules, which, with this change, would be 
consistent with the rules of its affiliated exchanges that offer 
identical functionality.\47\ Likewise, the proposed change to add that 
a facilitation order would be cancelled at the end of the exposure 
period if an execution would take place at a price that is inferior to 
the best bid (offer) on the Exchange is intended to ensure compliance 
with the general prohibition on trade-throughs in Options 5, Section 
2(a), and to ensure consistency across the rules of the Exchange and 
its affiliates that offer identical functionality.\48\
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    \47\ See supra notes 21 and 33.
    \48\ See supra note 23.
---------------------------------------------------------------------------

    The proposed changes to replace ``must not exceed'' with ``will 
only be considered up to'' in the simple Facilitation and PIM rules are 
intended to more accurately describe that the System will cap the size 
of Responses to the size of the agency order for purposes of 
allocation. The Exchange is not amending current System behavior; 
rather, the modifications will more clearly articulate the handling of 
Responses by the System. In addition, the proposed changes will serve 
to harmonize the simple and complex auction rules, thereby resulting in 
greater uniformity and ultimately less burdensome and more efficient 
regulatory compliance by market participants.\49\
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    \49\ See supra notes 22 and 34.
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    The Exchange believes that its proposal to specify in the simple 
Facilitation and PIM rules that an initiating Member may elect to 
receive a percentage allocation lower than 40% is consistent with the 
Act. This feature provides an initiating Member that submits an order 
into Facilitation or PIM with the flexibility to configure its 
allocation percentage up to the full 40% entitlement. The Exchange 
notes that regardless of the Member's instruction, the contra-side 
order would still be responsible for executing up to the full size of 
the agency order if there is not enough interest to execute the agency 
order at a particular price. The Exchange continues to believe that the 
40% allocation entitlement is consistent with the statutory standards 
for competition and free and open markets by promoting price 
competition within Facilitation and PIM as Members would still have a 
reasonable opportunity to compete for a significant percentage of

[[Page 12768]]

the incoming order. The Exchange also notes that the configurable 40% 
allocation entitlement for simple Facilitation and PIM is consistent 
with the configurable allocation entitlements in place on complex 
Facilitation and PIM as well as on its affiliated exchange, BX.\50\ 
Accordingly, the Exchange believes that the proposed changes will 
promote consistency across the rulebooks of exchanges offering 
identical functionality and within its own Rulebook as well.
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    \50\ See supra notes 24 and 35.
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    With respect to the proposed changes to the Facilitation and PIM 
auto-match feature, the Exchange is amending the current rule text so 
that it more accurately explains how the Exchange will allocate an 
order designated for auto-match today. As discussed above, the Exchange 
is not making any substantive changes to the allocation procedure 
itself; rather the proposed changes are intended to better align how 
this feature is described in the Auto-Match Filing.\51\ Similarly, the 
Exchange believes that the proposed change in Supplementary Material 
.01 to Options 3, Section 11 to add the provision that any solicited 
contra orders entered by Members into the Facilitation Mechanism to 
trade against Agency Orders may not be for the account of a Nasdaq ISE 
Market Maker that is assigned to the options class will better align 
the rule text with related filing. As discussed above, this restriction 
was included in the approval order to the rule filing that allowed 
solicited transactions in the Facilitation Mechanism, so the Exchange 
will import that language into the rule text for greater 
transparency.\52\
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    \51\ See supra note 28.
    \52\ See supra note 29.
---------------------------------------------------------------------------

    The proposed change in Supplementary Material .04 to Options 3, 
Section 13 to provide that PIMs will not queue or overlap in any 
manner, except as described in Options 3, Section 11(f) and (g) will 
make clear that two simple or complex PIM auctions are not permitted to 
run concurrently, but that a simple PIM auction may run concurrently 
with a complex PIM auction. The Exchange believes that this change will 
reduce any potential confusion around how simultaneous PIM auctions are 
processed by the System.
    The Exchange believes that the proposed change to the TVA rule is a 
non-substantive change to say that any amount of TVA is permitted in 
complex PIM (in addition to all of the other complex auction mechanisms 
in Options 3, Section 11). This is a corrective change as the cross-
cite to complex PIM within the TVA rule was inadvertently dropped in a 
prior filing that relocated the complex auction rules.\53\ As noted 
above, the Exchange's complex auction mechanisms provide an opportunity 
for market participants to respond with better-priced interest that 
could execute against an Agency Order. Accordingly, the Exchange 
believes that it is appropriate to ensure that paired orders entered 
into complex Facilitation, Solicitation and PIM that are broken up due 
to better-priced interest are actually executed against such better-
priced interest, and are not restricted from trading due to TVA 
settings of one or more Members.
---------------------------------------------------------------------------

    \53\ See supra note 36.
---------------------------------------------------------------------------

    The Exchange believes its proposal to provide that AIQ will not 
apply during an Opening Process (i.e., the opening process or halt 
reopening process) will more accurately state how this functionality 
currently operates. AIQ prevents Market Makers from trading against 
their own quotes and orders. While the Exchange believes that this 
protection is useful for Market Makers to manage their trading during 
regular market hours, applying AIQ is unnecessary during an Opening 
Process due to the high level of control that Market Makers already 
exercise over their quotes during this process. Furthermore, the 
proposed AIQ changes will promote consistency with the rulebook of its 
affiliated exchange BX, which offers identical functionality.\54\
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    \54\ See supra note 38.
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    The Exchange believes that its proposal to provide that Exposure 
will initiate when an incoming order is priced at or through the ABBO, 
when the ABBO is better than the Exchange BBO, is consistent with the 
Act. As discussed above, the current language in Supplementary Material 
.02 only specifies that Exposure is initiated when the price of the 
incoming order is crossed with the ABBO (i.e., would result in an 
impermissible Trade-Through), but does not specify the scenario in 
Supplementary Material .01 to Options 5, Section 3 when the price is 
locked. Supplementary Material .01 to Options 5, Section 3, however, 
also currently provides that when the price of an incoming limit order 
that is not executable upon entry would lock or cross a Protected 
Quotation, such order would be handled in accordance with the Exposure 
process in Supplementary Material .02 to Options 5, Section 2. As such, 
the proposed changes will enhance the accuracy of the rules by 
codifying both scenarios within the Exposure rule in Supplementary 
Material .02, and will continue to ensure that such order complies with 
the general prohibition on trade-throughs in Options 5, Section 2(a).
    The Exchange further believes that the technical changes it is 
proposing throughout Options 3 are non-substantive changes intended to 
enhance the accuracy of the Exchange's Rulebook, which will alleviate 
potential confusion as to the applicability of its rules. As discussed 
above, these changes consist of updating internal rule lettering and 
cross-cites, and using correct terminology. Lastly, the Exchange 
believes that the harmonizing changes to add a new Options 4B in its 
Rulebook and to retitle General 4, each as discussed above, will serve 
to further harmonize its Rule numbering and titling with that of its 
affiliates, thereby promoting efficiency and conformity of its 
processes with those of its affiliated exchanges.

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. As indicated above, no System 
changes to existing functionality are being made pursuant to this 
proposal; rather, this proposal is designed to reduce any potential 
investor confusion as to the features and applicability of certain 
functionality presently available on the Exchange. Therefore, the 
proposed changes are designed to enhance clarity and consistency in the 
Exchange's Rulebook.
    Furthermore, many of the proposed changes seek to provide greater 
harmonization between the rules of the Exchange and its affiliates, and 
therefore promotes fair competition among the options exchanges. In 
particular, the proposed changes discussed above for Block and AIQ are 
based on BX rules governing identical functionality,\55\ and the 
Facilitation and Solicitation changes around broadcast message content 
and trade-through prohibition compliance (Facilitation only) are based 
on GEMX and MRX rules governing identical functionality.\56\ The 
Exchange notes that it operates in a highly competitive market in which 
market participants can readily direct order flow to competing venues 
who offer similar functionality. The Exchange believes that the

[[Page 12769]]

proposed rule change will enhance competition among the various markets 
for auction execution, potentially resulting in more active trading in 
auction mechanisms across all options exchanges.
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    \55\ See BX Options 3, Section 11(a) (Block) and Section 
15(c)(1) (AIQ).
    \56\ See GEMX and MRX Options 3, Section 11(b)(1) (Facilitation 
broadcast message), Options 3, Section 11(d)(1) (Solicitation 
broadcast message), and Options 3, Section 11(b)(3) (Facilitation 
executions trade-through compliance).
---------------------------------------------------------------------------

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 \57\ and 
paragraph (f)(6) of Rule 19b-4 thereunder.\58\
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    \57\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \58\ 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.
---------------------------------------------------------------------------

    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-2021-01 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-2021-01. 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 
20549-1090 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-2021-01, and should be 
submitted on or before March 25, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
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    \59\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-04428 Filed 3-3-21; 8:45 am]
BILLING CODE 8011-01-P


