[Federal Register Volume 86, Number 144 (Friday, July 30, 2021)]
[Notices]
[Pages 41105-41109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-16229]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92494; File No. SR-ISE-2021-17]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Opening Process

July 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 July 19, 2021 Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``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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[[Page 41106]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend ISE Options 3, Section 8, ``Options 
Opening Process.''
    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
    ISE proposes to amend Options 3, Section 8, ``Options Opening 
Process.'' Specifically, the Exchange proposes to amend the definition 
of Valid Width Quote at Options 3, Section 8(a)(8).
    ISE's Opening Process for an option series is conducted pursuant to 
Options 3, Section 8 paragraphs (f)-(j), on or after 9:30 a.m. Eastern 
Time if the ABBO, if any, is not crossed and the System has received, 
within two minutes \3\ of the opening trade or quote on the market for 
the underlying security,\4\ a Valid Width Quote. The System will accept 
a Primary Market Maker's Valid Width Quote or the Valid Width Quote of 
at least one Competitive Market Maker.\5\ Today, ISE requires a Primary 
Market Maker to enter a Valid Width Quote in 90% of their assigned 
series, not later than one minute following the dissemination of a 
quote or trade by the market for the underlying security.\6\ PMMs must 
promptly enter a Valid Width Quote in the remainder of their assigned 
series, which did not open within one minute following the 
dissemination of a quote or trade by the market for the underlying 
security.\7\ In either case, the Primary Market Maker or Competitive 
Market Maker must enter a Valid Width Quote to open an options series. 
ISE Options 3, Section 8(a)(8) defines a Valid Width Quote as follows:
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    \3\ The Exchange may designated a shorter time provided it is 
disseminated to membership on the Exchange's website.
    \4\ In the case of index options, the timing is within two 
minutes of the receipt of the opening price in the underlying index 
or within two minutes of market opening for the underlying security 
in the case of U.S. dollar-settled foreign currency options. In both 
cases the Exchange may designated a shorter time provided it is 
disseminated to membership on the Exchange's website.
    \5\ The Exchange proposes an amendment within Options 3, Section 
8(c)(1)(B) as described below.
    \6\ In the case of index options, a Primary Market Maker must 
enter a Valid Width Quote in 90% of their assigned series, not later 
than one minute following the receipt of the opening price in the 
underlying index. The PMM assigned in a particular U.S. dollar-
settled foreign currency option must enter a Valid Width Quote, in 
90% of their assigned series, not later than one minute after the 
announced market opening. See Options 3, Section 8(c)(3). The 
Exchange proposes to make a technical amendment to Options 3, 
Section 8(c)(3) which is described below.
    \7\ In the case of index options, Primary Market Makers must 
promptly enter a Valid Width Quote in the remainder of their 
assigned series, which did not open following the receipt of the 
opening price in the underlying index or, with respect to U.S. 
dollar-settled foreign currency options, following the announced 
market opening. See Options 3, Section 8(c)(3).
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    A ``Valid Width Quote'' is a two-sided electronic quotation 
submitted by a Market Maker that meets the following requirements: 
Differentials shall be no more than $.25 between the bid and offer for 
each options contract for which the bid is less than $2, no more than 
$.40 where the bid is at least $2 but does not exceed $5, no more than 
$.50 where the bid is more than $5 but does not exceed $10, no more 
than $.80 where the bid is more than $10 but does not exceed $20, and 
no more than $1 where the bid is $20 or greater, provided that, in the 
case of equity options, the bid/ask differentials stated above shall 
not apply to in-the-money series where the market for the underlying 
security is wider than the differentials set forth above. The bid/ask 
differentials for in-the-money options series may be as wide as the 
quotation for the underlying security on the primary market, or its 
decimal equivalent rounded down to the nearest minimum increment. The 
Exchange may establish differences other than the above for one or more 
series or classes of options.
    The Exchange proposes to amend a Valid Width Quote to instead 
provide:
    A ``Valid Width Quote'' is a two-sided electronic quotation 
submitted by a Market Maker that meets the following requirements: 
Differentials shall be no more than $5, provided that, in the case of 
equity options, the bid/ask differential stated above shall not apply 
to in-the-money series where the market for the underlying security is 
wider than the differential set forth above. The bid/ask differentials 
for in-the-money options series may be as wide as the quotation for the 
underlying security on the primary market, or its decimal equivalent 
rounded down to the nearest minimum increment. The Exchange may 
establish differences other than the above for one or more series or 
classes of options. Such differences will be posted by the Exchange on 
its website.
    This proposed language is similar to Nasdaq BX, Inc. (``BX'').\8\ 
The Exchange proposes to widen the current bid/ask differentials for 
several reasons.
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    \8\ BX Options 3, Section 8(a)(9) provides, ``A `Valid Width 
Quote' is a two-sided electronic quotation, submitted by a Market 
Maker, quoted with a difference not to exceed $5 between the bid and 
offer regardless of the price of the bid. However, respecting in-
the-money series where the market for the underlying security is 
wider than $5, the bid/ask differential may be as wide as the 
quotation for the underlying security on the primary market, or its 
decimal equivalent rounded down to the nearest minimum increment. 
The Exchange may establish differences other than the above for one 
or more series or classes of options.'' See also Securities Exchange 
Act Release No. 89731 (September 1, 2020), 85 FR 55524 (September 8, 
2020) (SR-BX-2020-016) (Order Approving Proposed Rule Change To 
Amend BX's Opening Process in Connection With a Technology 
Migration).
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    First, the proposal would conform the Valid Width Quote definition 
of ISE to that of BX. BX refers to a difference not to exceed $5 
between the bid and offer within the description of a Valid Width 
Quote, similar to BX Options 2, Section 4(f) and 5(d)(2) that describes 
intra-day quotes. By amending ISE's Valid Width Quote, the Exchange 
notes that the $5 difference is akin to ISE's intra-day requirement 
within ISE Options 2, Section 4(b)(4).\9\
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    \9\ ISE Options 2, Section 4(b)(4) provides, ``. . .To price 
options contracts fairly by, among other things, bidding and 
offering so as to create differences of no more than $5 between the 
bid and offer following the opening rotation in an equity or index 
options contract. The Exchange may establish differences other than 
the above for one or more series or classes of options.'' Intra-day, 
ISE also distinguishes in-the-money options series where the 
underlying securities market is wider than the differentials set 
forth above. For these series, the bid/ask differential may be as 
wide as the spread between the national best bid and offer in the 
underlying security.
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    Second, the proposed differential would simplify the differential 
for Primary Market Makers, who would continue to be required to submit 
a Valid Width Quote during the Opening Process in their assigned 
options series. Widening the differentials would allow Primary Market 
Makers, and Competitive Market Makers that elect to quote during the 
Opening Process, an ability to quote wider during the Opening Process 
when an underlying is

[[Page 41107]]

volatile. Today, pursuant to Options 3, Section 8(a)(8), the Exchange 
may establish differences other than the established bid/ask 
differentials for one or more series or classes of options. With this 
proposal, the Exchange is not amending its ability to continue to 
establish differences for one or more series or classes of options, 
rather the Exchange may continue to set other requirements pursuant to 
current ISE Options 3, Section 8(a)(8). Today, the Exchange has 
established Valid Width Quote differentials which differ from those 
described within Options 3, Section 8(a)(8),\10\ they are:
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    \10\ See https://www.nasdaq.com/docs/2021/03/22/ISESystemSettings.pdf.

------------------------------------------------------------------------
                                                     Maximum  bid/ask
  Bid price low end of    Bid price high end of        differential
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            $0.00                    $1.99                   $0.75
             2.00                     4.99                    1.20
             5.00                     9.99                    1.50
            10.00                    19.99                    2.40
            20.00                   20.00+                    3.00
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    Also, options with an expiration more than nine months away 
continue to be permitted a Valid Width Quote bid/ask differential of 
$5.00. The Exchange will continue to utilize the differentials 
currently posted on its website until such time as it provides notice 
to Members of a change.
    Third, the Exchange proposes to add rule text to state that such 
differences will be posted by the Exchange on its website.\11\ Posting 
the current differentials on its website would allow Members to easily 
refer to the quoting obligations for the Opening Process.
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    \11\ Id.
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Technical Amendment
    The Exchange proposes to amend ``Quotes'' to ``Quote'' within 
Options 3, Section 8(c)(1)(B). The Exchange also proposes to remove two 
incorrect citations to Options 3, Section 8(c)(1)(C). The ``C'' was 
removed in a prior rule change.\12\
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    \12\ See Securities Exchange Act Release No. 88729 (April 22, 
2020), 85 FR 23573 (April 28, 2020) (SR-ISE-2020-15) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
ISE Rules at Options 3, Section 8, Titled Options Opening Process).
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2. Statutory Basis
    The Exchange believes that its proposal to establish a $5 
difference is consistent with Section 6(b) of the Act.\13\ 
Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \14\ requirements that the rules of 
an exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, 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. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \15\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    The Exchange believes that the proposed $5 difference for the Valid 
Width Quote is more appropriate because it reflects the Exchange's 
experience in administering the rule and would continue to give Market 
Makers flexibility including during the Opening Process. The Exchange 
notes that the current standard is not being applied as the Exchange 
has established Valid Width Quote differentials which differ from those 
described within Options 3, Section 8(a)(8).\16\ Widening the Valid 
Width Quote requirement would provide Primary Market Makers, and 
Competitive Market Makers that elect to quote during the Opening 
Process, additional flexibility when submitting Valid Width Quotes 
during the Opening Process thereby allowing these Market Makers the 
ability to quote wider in instances where the Exchange has not 
established Valid Width Quote differentials which differ from those in 
the rule because volatile market conditions exist or there is news 
regarding an underlying security which may impact pricing. Primary 
Market Makers are integral to the Exchange's Opening Process as ISE is 
dependent on receiving a Valid Width Quote to open an options series. 
With this proposal, Primary Market Makers would continue to be required 
to submit a Valid Width Quote during the Opening Process in their 
assigned options series.\17\
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    \16\ See supra note 10.
    \17\ Today, ISE, Nasdaq GEMX, LLC (``GEMX''), Nasdaq MRX, LLC 
(``MRX''), Nasdaq Phlx LLC (``Phlx''), Miami International 
Securities Exchange, LLC (``MIAX'') and MIAX Emerald, LLC 
(``Emerald'') and are the only options markets that require a 
Primary Market Maker, or Lead Market Maker in the case of Phlx, to 
submit a quote to open an options series.
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    The proposal would conform the Valid Width Quote definition of ISE 
to that of BX.\18\ BX refers to a difference not to exceed $5 between 
the bid and offer within the description of a Valid Width Quote, 
similar to BX Options 2, Section 4(f) and 5(d)(2) that describes intra-
day quotes. By amending ISE's Valid Width Quote, the Exchange notes 
that the $5 difference is akin to ISE's intra-day requirement within 
ISE Options 2, Section 4(b)(4).\19\ Also, today, MIAX and Emerald 
require market makers to enter a valid width NBBO with a difference of 
no more than $5 between the bid and offer.\20\
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    \18\ See supra note 8.
    \19\ See supra note 9.
    \20\ MIAX and Emerald require Market Makers to submit a valid 
width NBBO in the opening where the bid and offer of the NBBO differ 
no more than differences outlined in MIAX and Emerald Rule 
603(b)(4)(i). MIAX and Emerald Rule 603(b)(4)(i) provides that 
bidding and offering so as to create differences of no more than $5 
between the bid and offer. Rule 603(b)(4)(ii) provides MIAX and 
Emerald may establish differences other than the bid/ask 
differentials described in (i) above for one or more option series 
or classes, respectively. See MIAX and Emerald Rules 503.
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    Not all options markets have bid/ask differentials. In 2019, Cboe 
removed its quote width requirements while citing corresponding rules 
of its affiliated exchanges.\21\ Cboe noted in the 2019 Rule Change 
that the current quote width requirement at the time for generally all 
classes was $10, however, its Market-Makers consistently maintained 
two-sided quotes that were much tighter than the required width. Cboe 
opined that, even if markets experienced periods of stress or 
volatility, they remained obligated to maintain two sided markets and 
engage in a course of dealings that must be reasonably calculated to 
contribute to the maintenance of a fair and orderly market, which 
includes refraining from making bids or offers that are inconsistent 
with such course of dealings and updating quotations in response to 
changed market conditions.\22\ Cboe noted that it did not believe that 
continuing to provide for a quote width requirement was necessary nor 
would it impact the maintenance of fair and orderly markets because 
Market-Makers already quoted at a bid/ask spread much narrower than the 
requirements and were required to continuously fulfill their 
obligations to engage in a course of dealings reasonably calculated to 
contribute to the maintenance of a fair and orderly market.\23\
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    \21\ See Securities Exchange Act Release No. 87024 (September 
19, 2019), 84 FR 50545 (September 25, 2019) (SR-Cboe-2019-059) 
(``2019 Rule Change'').
    \22\ Id.
    \23\ Id.
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    Unlike Cboe, ISE does require its Market Makers to quote both 
during the Opening Process and intra-day within certain established 
bid/ask differentials.

[[Page 41108]]

The Exchange notes that widening its Valid Width Quote differential 
during the Opening Process will not impact the maintenance of fair and 
orderly markets because Market Makers on ISE, unlike other markets that 
do not require quoting during the Opening Process, will continue to 
require that its Market Makers provide Valid Width Quotes during the 
Opening Process, thereby ensuring liquidity. Also, Market Makers may 
quote tighter than the defined Valid Width Quote differential. Finally, 
similar to Cboe's argument in the 2019 Rule Change, Market Makers are 
required to continuously fulfill their obligations to engage in a 
course of dealings reasonably calculated to contribute to the 
maintenance of a fair and orderly market.
    Today, the Exchange has discretion to set other differentials,\24\ 
similar to MIAX and Emerald.\25\ The Exchange currently is utilizing 
that discretion to set different bid/ask differentials based on its 
observation of market openings. Currently, the Exchange requires Market 
Makers to submit Valid Width Quotes which are tighter than the proposed 
$5 difference.
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    \24\ See Options 3, Section 8(a)(8), the Exchange may establish 
differences other than the established bid/ask differentials for one 
or more series or classes of options.
    \25\ See MIAX and Emerald Rules 503.
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    The Exchange's robust Opening Process seeks to encourage quality 
markets. As noted herein, unlike a majority of options markets,\26\ it 
requires Primary Market Makers to quote during the Opening Process to 
ensure liquidity as well as efficient Opening Process where options 
series are opened quickly and at fair prices.
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    \26\ See supra note 17.
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    The proposal to add rule text to state that such differences will 
be posted by the Exchange on its website \27\ would allow Members to 
easily refer to the quoting obligations for the Opening Process.
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    \27\ Id.
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Technical Amendment
    The Exchange's proposal to amend ``Quotes'' to ``Quote'' within 
Options 3, Section 8(c)(1)(B) and remove two incorrect citations to 
Options 3, Section 8(c)(1)(C) will bring greater clarity to the 
Exchange's Rules.

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's proposal to 
require Primary Market Makers and Competitive Market Makers to bid and/
or offer an option series with differences of no more than $5 for 
options on equities and index options does not impose an undue burden 
on competition. All Primary Market Makers, and Competitive Market 
Makers who elect to quote during the Opening Process, would be subject 
to the same requirement to submit a Valid Width Quote when submitting 
quotes during the Opening Process. Differentials would be available on 
the Exchange's website and therefore transparent, allowing Members to 
easily refer to the quoting obligations for the Opening Process. 
Finally, the proposal would also align quoting requirements more 
closely to intra-day requirements within ISE Options 2, Section 
4(b)(4).
    With respect to inter-market competition, the Exchange notes that 
most options markets do not require market makers to quote during the 
opening.\28\ The Exchange notes that MIAX and Emerald have quoting 
requirements in the opening similar to the differential proposed 
herein. Also, GEMX, MRX and Phlx are filing similar rule changes to 
this proposal.\29\
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    \28\ See supra note 17 citing the options markets that require 
bid/ask differentials.
    \29\ See SR-GEMX-2021-07, SR-MRX-2021-09 and SR-Phlx-2021-42. 
These rule changes are not yet noticed.
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Technical Amendment
    The Exchange's proposal to amend ``Quotes'' to ``Quote'' within 
Options 3, Section 8(c)(1)(B) and remove two incorrect citations to 
Options 3, Section 8(c)(1)(C) will bring greater clarity to the 
Exchange's Rules.

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 \30\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\31\
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    \30\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \31\ 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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    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-2021-17 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-2021-17. 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

[[Page 41109]]

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-
2021-17 and should be submitted on or before August 20, 2021.
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    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-16229 Filed 7-29-21; 8:45 am]
BILLING CODE 8011-01-P


