
[Federal Register Volume 88, Number 154 (Friday, August 11, 2023)]
[Notices]
[Pages 54672-54685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17208]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98066; File No. SR-ISE-2023-13]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules 
Related to Complex Orders With Respect to a System Migration

August 7, 2023.
    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 25, 2023, 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 Options 3, Section 7, Types of 
Orders and Order and Quote Protocols; Options 3, Section 11, Auction 
Mechanisms; Options 3, Section 12, Crossing Orders, Section 13, Price 
Improvement Mechanisms for Crossing Transactions; Options 3, Section 
14, Complex Orders; Options 3, Section 15, Simple Order Risk 
Protections; and Options 3, Section 16, Complex Order Risk Protections.
    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
    In connection with a technology migration to an enhanced Nasdaq, 
Inc. (``Nasdaq'') functionality in 2024, the Exchange intends to adopt 
certain trading functionality currently utilized at Nasdaq affiliate 
exchanges. Also, the Exchange intends to remove certain functionality. 
Specifically, the following sections would be amended: Options 3, 
Section 7, Types of Orders and Order and Quote Protocols; Options 3, 
Section 11, Auction Mechanisms; Options 3, Section 12, Crossing Orders, 
Section 13, Price Improvement Mechanisms for Crossing Transactions; 
Options 3, Section 14, Complex Orders; Options 3, Section 15, Simple 
Order Risk Protections; and Options 3, Section 16, Complex Order Risk 
Protections. Each change will be described below. The proposed stock-
tied functionality is identical to Phlx Options 3, Sections 
13(b)(10)(ii) and 14(a)(i) with respect to utilizing NES to process and 
report stock-tied functionality with two differences which are 
explained in the proposal. Additionally, MRX recently adopted identical 
rules to those proposed herein.\3\
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    \3\ See Securities Exchange Release Act No. 97726 (June 14, 
2023), 88 FR 40344 (June 21, 2023) (SR-MRX-2023-10) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Complex Order Rules) (``SR-MRX-2023-10''). MRX's rules are not yet 
operative.
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Stock-Related Strategies and Elimination of Trade Value Allowance
    Today, ISE Members are able to trade certain Stock-Option Orders as 
described in ISE Options 3, Section 14(a)(2),\4\ Stock-Complex Orders 
as described in ISE Options 3, Section 14(a)(3),\5\ Complex QCC with 
Stock Orders as described in ISE Options 3, Section 14(b)(15),\6\ QCC 
with Stock Orders \7\ as described in Options 3, Section 7(t) and 
12(e), as described in Supplementary Material .03 of ISE Options 3, 
Section 14 (``Delayed Functionalities'').\8\ Additionally, today, ISE 
offers a Trade Value Allowance.\9\
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    \4\ The term ``Stock-Option Order'' refers to an order for a 
Stock-Option Strategy as defined in Options 3, Section 14(a)(2). A 
Stock-Option Strategy is the purchase or sale of a stated number of 
units of an underlying stock or a security convertible into the 
underlying stock (``convertible security'') coupled with the 
purchase or sale of options contract(s) on the opposite side of the 
market representing either (A) the same number of units of the 
underlying stock or convertible security, or (B) the number of units 
of the underlying stock necessary to create a delta neutral 
position, but in no case in a ratio greater than eight-to-one 
(8.00), where the ratio represents the total number of units of the 
underlying stock or convertible security in the option leg to the 
total number of units of the underlying stock or convertible 
security in the stock leg. See ISE Options 3, Section 14(a)(2).
    \5\ The term ``Stock-Complex Order'' refers to an order for a 
Stock-Complex Strategy as defined in Options 3, Section 14(a)(3). A 
Stock-Complex Strategy is the purchase or sale of a stated number of 
units of an underlying stock or a security convertible into the 
underlying stock (``convertible security'') coupled with the 
purchase or sale of a Complex Options Strategy on the opposite side 
of the market representing either (A) the same number of units of 
the underlying stock or convertible security, or (B) the number of 
units of the underlying stock necessary to create a delta neutral 
position, but in no case in a ratio greater than eight-to-one 
(8.00), where the ratio represents the total number of units of the 
underlying stock or convertible security in the option legs to the 
total number of units of the underlying stock or convertible 
security in the stock leg. Only those Stock-Complex Strategies with 
no more than the applicable number of legs, as determined by the 
Exchange on a class-by-class basis, are eligible for processing. See 
ISE Options 3, Section 14(a)(3).
    \6\ A Complex QCC with Stock Order is a Qualified Contingent 
Cross Complex Order, as defined in subparagraph (b)(6) of Options 3, 
Section 14, entered with a stock component to be communicated to a 
designated broker-dealer for execution pursuant to ISE Options 3, 
Section 12(f).
    \7\ A QCC with Stock Order is a Qualified Contingent Cross 
Order, as defined in Options 3, Section 7(j), entered with a stock 
component to be communicated to a designated broker-dealer for 
execution pursuant to Options 3, Section 12(e). See Options 3, 
Section 7(t).
    \8\ See note 3 above.
    \9\ The Trade Value Allowance permits Stock-Option Strategies 
and Stock-Complex Strategies at valid increments Options 3, Section 
14(c)(1), Stock-Option Strategies and Stock-Complex Strategies to 
trade outside of their expected notional trade value by a specified 
amount, in order to facilitate the execution of the stock leg and 
options leg(s). The Trade Value Allowance is the percentage 
difference between the expected notional value of a trade and the 
actual notional value of the trade. The amount of Trade Value 
Allowance permitted may be determined by the Member, or a default 
value determined by the Exchange and announced to Members; provided 
that any amount of Trade Value Allowance is permitted in mechanisms 
pursuant to Options 3, Sections 11 and 13 when auction orders do not 
trade solely with their contra-side order. See Supplementary 
Material .03 of ISE Options 3, Section 14.
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    At this time, in connection with a technology migration in 2024, 
ISE proposes to amend its stock-tied

[[Page 54673]]

functionality. Today, ISE Members desiring to execute an order with 
stock or an ETF component are required to enter into a brokerage 
agreement with a broker-dealer designated by the Exchange and are 
permitted to enter into such an agreement with one or more other 
broker-dealers to which the Exchange is able to route stock orders.\10\
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    \10\ See Supplementary Material .02 to Options 3, Section 14.
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    The Exchange proposes to amend its rules to instead require that a 
Member desiring to execute a Stock-Option Order or a Stock-Complex 
Order enter into a brokerage agreement with Nasdaq Execution Services, 
LLC (``NES'') which will execute the stock or ETF component of the 
order.\11\ The stock component of a Qualified Contingent Cross 
(``QCC'') with Stock Order or a Complex QCC with Stock Order will 
continue to be handled by a third-party broker as provided in Options 
3, Sections 12(e) and (f).\12\ NES is a broker-dealer owned and 
operated by Nasdaq, Inc. NES, an affiliate of the Exchange, has been 
approved by the Commission to become a Member of the Exchange and 
perform inbound routing on behalf of the Exchange.\13\ Additionally, 
NES is permitted to route outbound orders either directly or indirectly 
through a third party routing broker-dealer to other market centers and 
perform other functions regarding the cancellation of orders and the 
maintenance of a NES error account.\14\
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    \11\ Id.
    \12\ ISE members may also trade QCC Orders and complex QCC 
Orders. See Options 3, Section 12(c) and (d). For those orders, the 
parties to the trade will arrange for the execution of the stock 
component of the order.
    \13\ See Securities Exchange Act Release No. 79994 (February 9, 
2017), 82 FR 10837 (February 15, 2017) (SR-ISE-2016-27) (Order 
Granting Approval of Proposed Rule Changes, as Modified by Amendment 
No. 1 Thereto, To Amend the Exchange's Rules Regarding Routing of 
Orders, Cancellation of Orders, and Handling of Error Positions, and 
Permit Nasdaq Execution Services, LLC To Become an Affiliated Member 
of the Exchange To Perform Certain Routing and Other Functions).
    \14\ Id. ISE is subject to certain limitations and conditions 
such as maintaining a Regulatory Services Agreement with FINRA, as 
well as an agreement pursuant to Rule 17d-2 under the Act, among 
other limitations and conditions.
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    NES currently acts as agent for orders to buy and sell the 
underlying stock or ETF component of a Complex Order on Nasdaq Phlx LLC 
(``Phlx'').\15\ The functions performed by NES on Phlx today are 
identical to the functions that ISE proposes for NES to perform for ISE 
Members as well as rules recently adopted by MRX.\16\ Identical to 
Phlx, after ISE's System determines that a Complex Order execution is 
possible and identifies the prices for each component of such Complex 
Order, ISE will electronically communicate the stock or ETF component 
of the Complex Order to NES for execution.\17\ NES, acting as agent for 
the orders to buy and sell the underlying stock or ETF, will execute 
the orders in the over-the-counter (``OTC'') market and will handle the 
orders pursuant to applicable rules regarding equity trading, including 
the rules governing trade reporting, trade-throughs, and short sales. 
This function is currently performed by a third-party broker-dealer. 
The proposed stock-tied functionality is identical to Phlx Options 3, 
Sections 13(b)(10)(ii) and 14(a)(i) with respect to utilizing NES to 
process and report the stock or ETF component of a Complex Order. 
However, there are two differences in the way Phlx and ISE handle 
stock-tied option orders.
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    \15\ See Phlx Options 3, Sections 13(b), 14(a) and 16(b).
    \16\ See Securities Exchange Act Release No. 63777 (January 26, 
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157) (Order 
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 
and 2, Relating to Complex Orders) (``Phlx Complex Order 
Approval''). NES assumed the stock execution functionalities that 
were previously performed by NOS. Phlx subsequently filed to permit 
both inbound and outbound orders to be routed through NES instead of 
Nasdaq Options Services LLC (``NOS''). See Securities Exchange Act 
Release No. 71417 (January 28, 2014), 79 FR 6253 (February 3, 2014) 
(SR-Phlx-2014-04) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change to Outbound Routing) and 71416 (January 28, 
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to 
Inbound Routing of Options Orders). See also SR-MRX-2023-10 which 
rules are not yet operative.
    \17\ See proposed Supplementary Material .08(b) to Options 3, 
Section 11, proposed Options 3, Section 12(b)(2), proposed 
Supplementary Material .09(b) to Options 3, Section 13, proposed 
Supplementary Material .02 to Options 3, Section 14 and proposed 
Options 3, Section 16(d). See also Phlx Options 3, Section 
13(b)(10)(ii), Options 3, Section 16(b).
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    First, while both Phlx and ISE have certain risk protections for 
complex orders, they differ. With respect to ISE, the execution price 
of the Complex Order must be within a certain price from the current 
market, as determined by the Exchange pursuant to Options 3, Section 
16(a). Specifically, today, ISE Options 3, Section 16(a) provides that 
the System will not permit any leg of a complex strategy to trade-
through the NBBO for the series or any stock component by a 
configurable amount calculated as the lesser of (i) an absolute amount 
not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed 
500%, as determined by the Exchange on a class, series or underlying 
basis. In contrast, Phlx Options 3, Section 16(b)(i) describes Phlx's 
Acceptable Complex Execution (``ACE'') Parameter which defines a price 
range outside of which a complex order will not be executed. On Phlx, a 
complex order to sell is not executed at a price that is lower than the 
cNBBO \18\ bid by more than the ACE Parameter. Conversely, on Phlx, a 
complex order to buy will not be executed at a price that is higher 
than the cNBBO offer by more than the ACE Parameter. While ISE's and 
Phlx's price checks differ, both markets seek to prevent executions 
from occurring at certain prices and at certain percentages from the 
NBBO. ISE's proposal would require NES to apply the same price check 
for stock-tied functionality that are being applied today by a third-
party broker-dealer that executed the stock or ETF component of a 
complex strategy on behalf of ISE Members. ISE Members would continue 
to be subject to the same price check which is applied to all Complex 
Orders executed on ISE.
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    \18\ The term ``cNBBO'' means the best net debit or credit price 
for a Complex Order Strategy based on the NBBO for the individual 
options components of a Complex Order Strategy, and, where the 
underlying security is a component of the Complex Order, the 
National Best Bid and/or Offer for the underlying security. See Phlx 
Options 3, Section 14(a)(vi).
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    Second, ISE and Phlx differ with respect to the manner in which 
their systems handle Stock-Option Strategies and Stock-Complex 
Strategies that would execute against interest on the Complex Order 
Book at a price that does not meet the price checks in their respective 
rules or do not meet Regulation SHO provisions as provided for in 
proposed Options 3, Section 16(e) \19\ are handled by their respective 
systems. As proposed, ISE will hold orders on the Complex Order book 
that cannot be executed because of Regulation SHO or price check 
restrictions, unless the Member requests the order to be cancelled. If 
an ISE Member elects to have the order held on the Complex Order Book, 
the order would await other matching opportunities, otherwise at the 
Member's election the order would be returned to the Member. In 
contrast, Phlx only provides for a cancellation of the order. ISE's 
proposed approach would provide the Member with optionality as to the 
handing of the order. The Exchange believes providing the choice to 
have the order held on the Complex Order Book provides Members with an 
opportunity for an execution.
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    \19\ As proposed, NES will only execute Stock-Option Strategies 
and Stock-Complex Strategies if the underlying covered security 
component is in accordance with Rule 201 of Regulation SHO.
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NES
    NES is a registered broker-dealer and member of various exchanges 
and the Financial Industry Regulatory Authority

[[Page 54674]]

(``FINRA''). NES will be responsible for the proper execution, trade 
reporting, and submission to clearing of the underlying stock or ETF 
component of a Complex Order.\20\ Because these trades will occur off-
exchange, the principal regulator is FINRA. Furthermore, today, NES is 
responsible for compliance with FINRA rules generally and is subject to 
examination by FINRA. Specifically, NES is subject to FINRA Rule 3110, 
which generally requires that the policies and procedures and 
supervisory systems of a broker-dealer be reasonably designed to 
achieve compliance with applicable securities laws and regulations and 
with applicable FINRA rules, including those relating to the misuse of 
material non-public information. To this end, today, NES has in place 
policies related to confidentiality and the potential for informational 
advantages relating to its affiliates, intended to protect against the 
misuse of material nonpublic information.\21\ In particular, NES will 
have in place policies and procedures designed to prevent the misuse of 
material non-public information related to stock-tied executions. Of 
note, NES only receives information about the stock or ETF portion of 
the order from the Exchange. As mentioned herein, today, NES is 
responsible for the proper execution, trade reporting, and submission 
to clearing of the underlying stock or ETF component of a Complex Order 
on Phlx. ISE will adopt identical policies and procedures for its 
stock-tied functionality as are in place on Phlx today.
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    \20\ The Commission's approval order for Phlx stated that NOS 
(now NES) ``. . . as a facility of the Phlx, NOS is subject to 
oversight by the Commission and by the Phlx. In addition, NOS, a 
member of FINRA, is responsible for compliance with applicable rules 
regarding equity trading, including rules governing trade reporting, 
trade-throughs and short sales, and is subject to examination by 
FINRA. Because NOS will execute the stock or ETF component of a 
Complex Order in the OTC market, the principal regulator of these 
trades will be FINRA, rather than the Phlx or Nasdaq.'' See SR-Phlx-
2010-157 76 FR 5630 at 5625, footnote 20. Phlx originally set up its 
affiliated broker-dealers as two separate entities, NES and NOS. 
When Phlx replaced NOS with NES, it noted in the rule change that 
NES will operate the same way as NOS operated, in terms of routing 
options orders to destination options exchanges. See SR-Phlx-2014-
04, 79 FR 6253 at 6254.
    \21\ Similarly, the Exchange does establish and maintain 
procedures and internal controls reasonably designed to adequately 
restrict the flow of confidential and proprietary information 
between the Exchange and NES. Additionally NES undertook all NOS' 
responsibilities with respect to the execution and reporting of the 
underlying security component of a Complex Order. See SR-Phlx-2014-
04 at note 20. Therefore, members of FINRA or the NASDAQ Stock 
Market (``NASDAQ'') who were required to have a Uniform Service 
Bureau/Executing Broker Agreement (``AGU'') with NOS in order to 
trade Complex Orders containing a stock/ETF component and firms that 
are not members of FINRA or NASDAQ who were required to have a 
Qualified Special Representative (``QSR'') arrangement with NOS in 
order to trade Complex Orders containing a stock/ETF component were 
required to have such arrangements with NES. See Securities Exchange 
Act Release No. 71417 (January 28, 2014), 79 FR 6253 (February 3, 
2014) (SR-Phlx-2014-04) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change to Outbound Routing) and 71416 
(January 28, 2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) 
(Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change to Inbound Routing of Options Orders).
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    In addition, because the execution and reporting of the stock/ETF 
piece will occur otherwise than on ISE or any other exchange, it will 
be handled by NES pursuant to applicable rules regarding equity 
trading,\22\ including the rules governing trade reporting, trade-
throughs and short sales. Specifically, NES will report the trades to 
the Trade Reporting Facility.\23\ Firms that are members of FINRA are 
required to have a Uniform Service Bureau/Executing Broker Agreement 
(``AGU'') with NES in order to trade Complex Orders containing a stock/
ETF component. Firms that are not members of FINRA are required to have 
a Qualified Special Representative (``QSR'') arrangement with NES in 
order to trade Complex Orders containing a stock/ETF component. This 
requirement is codified in proposed Supplementary Material .08 to 
Options 3, Section 11, proposed Options 3, Section 12(b)(1), proposed 
Supplementary Material .09 to Options 3, Section 13 and proposed 
Supplementary Material .07 to Options 3, Section 14. Accordingly, this 
process is available to all ISE Members and the stock/ETF component of 
a Complex Order, once executed, will be properly processed for trade 
reporting purposes. Phlx has identical requirements within its Options 
3, Sections 13(b)(10) and 14(a)(i).
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    \22\ Once the orders are communicated to the broker-dealer for 
execution, the broker-dealer has complete responsibility for 
determining whether the orders may be executed in accordance with 
all of the rules applicable to execution of equity orders.
    \23\ Specifically, the trades will be reported to the FINRA/
Nasdaq TRF which is a facility of FINRA that is operated by Nasdaq, 
Inc. and utilizes Automated Confirmation Transaction (``ACT'') 
Service technology.
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    With respect to trade-throughs, the Exchange believes that the 
stock/ETF component of a Complex Order is eligible for the Qualified 
Contingent Trade Exemption from Rule 611(a) of Regulation NMS. A 
Qualified Contingent Trade is a transaction consisting of two or more 
component orders, executed as agent or principal, that satisfy the six 
elements in the Commission's order exempting Qualified Contingent 
Trades (``QCTs'') from the requirements of Rule 611(a),\24\ which 
requires trading centers to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent trade-
throughs.\25\ The Exchange believes that the stock/ETF portion of a 
Complex Order under this proposal complies with all six requirements. 
Moreover, as explained below, ISE's System will validate compliance 
with each requirement such that any matched order received by NES under 
this proposal has been checked for compliance with the exemption, as 
follows:
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    \24\ 17 CFR 242.611(a).
    \25\ See Securities Exchange Act Release Nos. 57620 (April 4, 
2008), 73 FR 19271 (April 9, 2008) (``QCT Exemptive Order''). See 
also Securities Exchange Act Release No. 54389 (August 31, 2006), 71 
FR 52829 (September 7, 2006). The QCT Exemption applies to trade-
throughs caused by the execution of an order involving one or more 
NMS stocks that are components of a ``qualified contingent trade.'' 
As described more fully in the QCT Exemptive Order, a qualified 
contingent trade is a transaction consisting of two or more 
component orders, executed as principal or agent, where: (1) At 
least one component order is an NMS stock; (2) all components are 
effected with a product or price contingency that either has been 
agreed to by the respective counterparties or arranged for by a 
broker-dealer as principal or agent; (3) the execution of one 
component is contingent upon the execution of all other components 
at or near the same time; (4) the specific relationship between the 
component orders (e.g., the spread between the prices of the 
component orders) is determined at the time the contingent order is 
placed; (5) the component orders bear a derivative relationship to 
one another, represent different classes of shares of the same 
issuer, or involve the securities of participants in mergers or with 
intentions to merge that have been announced or since cancelled; and 
(6) the Exempted NMS Stock Transaction is fully hedged (without 
regard to any prior existing position) as a result of the other 
components of the contingent trade.

    (1) At least one component order is in an NMS stock: The stock/
ETF component must be an NMS stock, which is validated by the 
System;
    (2) all components are effected with a product or price 
contingency that either has been agreed to by the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent: A Complex Order, by definition consists of a single net/debit 
price and this price contingency applies to all the components of 
the order, such that the stock price computed and sent to NES allows 
the stock/ETF order to be executed at the proper net debit/credit 
price based on the execution price of each of the option legs, which 
is determined by the ISE System;
    (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time: Once a 
Complex Order is accepted and validated by the System, the entire 
package is processed as a single transaction and each of the option 
leg and stock/ETF components are simultaneously processed;

[[Page 54675]]

    (4) the specific relationship between the component orders 
(e.g., the spread between the prices of the component orders) is 
determined at the time the contingent order is placed: Complex 
Orders, upon entry, must have a size for each component and a net 
debit/credit, which the System validates and processes to determine 
the ratio between the components; an order is rejected if the net 
debit/credit price and size are not provided on the order;
    (5) the component orders bear a derivative relationship to one 
another, represent different classes of shares of the same issuer, 
or involve the securities of participants in mergers or with 
intentions to merge that have been announced or since cancelled: 
under this proposal, the stock/ETF component must be the underlying 
security respecting the option legs, which is validated by the 
System; and
    (6) the transaction is fully hedged (without regard to any prior 
existing position) as a result of the other components of the 
contingent trade: Under this proposal, the ratio between the options 
and stock/ETF must be a conforming ratio (8 contracts per 100 
shares), which the System validates, and which under reasonable risk 
valuation methodologies, means that the stock/ETF position is fully 
hedged.\26\
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    \26\ A trading center may demonstrate that an Exempted NMS Stock 
Transaction is fully hedged under the circumstances based on the use 
of reasonable risk-valuation methodologies. The release approving 
the original exemption stated: To effectively execute a contingent 
trade, its component orders must be executed in full or in ratio at 
its predetermined spread or ratio. ``In ratio'' clarifies that 
component orders of a contingent trade do not necessarily have to be 
executed in full, but any partial executions must be in a 
predetermined ratio.

    Furthermore, proposed Supplementary Material .08 to Options 3, 
Section 11, proposed Options 3, Section 12(b)(1), proposed 
Supplementary Material .09 to Options 3, Section 13 and proposed 
Supplementary Material .07 to Options 3, Section 14 provide that 
Members may only submit Complex Orders with a stock/ETF component if 
such orders comply with the Qualified Contingent Trade Exemption. 
Members submitting such Complex Orders with a stock/ETF component 
represent that such orders comply with the Qualified C vontingent Trade 
Exemption. Thus, the Exchange believes that Complex Orders consisting 
of a stock/ETF component will comply with the exemption and that ISE's 
System will validate such compliance to assist NES in carrying out its 
responsibilities as agent for these orders.
    With respect to short sale regulation, the proposed handling of the 
stock/ETF component of a Complex Order under this proposal should not 
raise any issues of compliance with the currently operative provisions 
of Regulation SHO.\27\ When a Complex Order has a stock/ETF component, 
Members must indicate, pursuant to Regulation SHO, whether that order 
involves a long or short sale. The System will accept Complex Orders 
with a stock/ETF component marked to reflect either a long or short 
position; specifically, orders not marked as buy, sell or sell short 
will be rejected by ISE's System.\28\ The System will electronically 
deliver the stock/ETF component to NES for execution. Simultaneous to 
the options execution on ISE's System, NES will execute and report the 
stock/ETF component, which will contain the long or short indication as 
it was delivered by the Member to ISE's System. Accordingly, NES, as a 
trading center under Rule 201, will be compliant with the requirements 
of Regulation SHO. Of course, broker-dealers, including both NES and 
the Members submitting orders to ISE with a stock/ETF component, must 
comply with Regulation SHO. NES' compliance team updates, reviews and 
monitors NES' policies and procedures including those pertaining to 
Regulation SHO on an annual basis.
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    \27\ 17 CFR 242.200 et seq.
    \28\ The Exchange also accepts short sell exempt orders as 
described herein.
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    Further, proposed Supplementary Material .08(c) to Options 3, 
Section 11, and proposed Options 3, Section 12(b)(3), proposed 
Supplementary Material .09(c) to Options 3, Section 13, and proposed 
Options 3, Section 16(e) provide that when the short sale price test in 
Rule 201 of Regulation SHO \29\ is triggered for a covered security, 
NES will not execute a short sale order in the underlying covered 
security component \30\ of a Complex Order if the price is equal to or 
below the current national best bid. However, NES will execute a short 
sale order in the underlying covered security component of a Complex 
Order if such order is marked ``short exempt,'' regardless of whether 
it is at a price that is equal to or below the current national best 
bid. If NES cannot execute the underlying covered security component of 
a Complex Order in accordance with Rule 201 of Regulation SHO, the 
Exchange will hold the Complex Order on the Complex Order Book, if 
consistent with Member instructions (Members may always elect to cancel 
the order).\31\ The order may execute at a price that is not equal to 
or below the current national best bid.\32\ This proposed rule is 
similar to Phlx Options 3, Section 16(b) except that unlike Phlx, ISE 
will not cancel back the Complex Order to the entering Member unless 
the Member requests that the order be cancelled. As noted above, ISE 
and Phlx differ with respect to the manner in which their systems 
handle Stock-Option Strategies and Stock-Complex Strategies that do not 
meet requisite price checks in their respective rules or do not meet 
the requirements of Regulation SHO. As proposed, ISE will hold orders 
on the Complex Order book that cannot be executed pursuant to 
Regulation SHO restrictions, unless the Member requests the order to be 
cancelled.\33\ If an ISE Member elects to have the order held, the 
order would await other matching opportunities, otherwise at the 
Member's election the order would be returned to the Member. In 
contrast, Phlx only provides for a cancellation of the order. ISE's 
proposed approach would provide the Member with optionality as to the 
handing of the order. The Exchange believes providing the choice to 
have the order held provides Members with an opportunity for an 
execution.
---------------------------------------------------------------------------

    \29\ See Securities Exchange Act Release No. 61595 (February 26, 
2010), 75 FR 11232 (March 10, 2010) (``Rule 201 Adopting Release'').
    \30\ For purposes of this paragraph, the term ``covered 
security'' shall have the same meaning as in Rule 201(a)(1) of 
Regulation SHO.
    \31\ See proposed Options 3, Section 16(e). In contrast, Complex 
Orders in an auction mechanism that cannot be executed in accordance 
with Regulation SHO will be cancelled back and will not rest on the 
Complex Order Book as provided in Supplementary Material .08 to 
Options 3, Section 11 and Supplementary Material .09 to Options 3, 
Section 13.
    \32\ See proposed Options 3, Section 16(e).
    \33\ See proposed Options 3, Section 16(e).
---------------------------------------------------------------------------

    For these reasons, the processing of the stock/ETF component of a 
Complex Order under this proposal will comply with applicable rules 
regarding equity trading, including the rules governing trade 
reporting, trade-throughs and short sales. NES's responsibilities 
respecting these equity trading rules will be documented in NES's 
written policies and procedures. NES' compliance team updates, reviews 
and monitors NES' policies and procedures regarding equity trading 
rules on an annual basis. NES is regulated by FINRA and as such, NES 
policies and procedures are subject to review and examinations by 
FINRA.
    As part of the execution of the stock/ETF component, NES will 
ensure that the execution price is within the intra-day high-low range 
for the day in that stock at the time the Complex Order is processed 
and within a certain price range from the current market pursuant to 
Options 3, Section 16(a),\34\ which the Exchange will establish in an 
Options Trader Alert. If the stock price is not

[[Page 54676]]

within these parameters, the Complex Order is not executable and would 
be held on the order book or cancelled, consistent with Member 
instructions.\35\ Today, the third-party broker-dealer would ensure the 
execution price is within the intra-day high-low range. With the 
transition to NES, the Exchange would commence performing this check. 
Members who transact stock-tied functionality on ISE would therefore 
continue to be subject to the same execution price check with NES as 
today.
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    \34\ This intra-day high-low range check does not occur for 
Complex PIM Orders, Complex Facilitation Orders and Complex SOM 
Orders, and also does not occur for Complex Customer Cross Orders.
    \35\ See proposed Options 3, Section 16(d). In contrast, Complex 
Orders in an auction mechanism that cannot be executed in accordance 
with Regulation SHO will be cancelled back and will not rest on the 
Complex Order Book as provided in Supplementary Material .08 to 
Options 3, Section 11 and Supplementary Material .09 to Options 3, 
Section 13.
---------------------------------------------------------------------------

    The Exchange believes that the continued electronic submission of 
the stock/ETF piece of the Complex Order to NES for execution should 
help ensure that the Complex Order, as a whole, is executed timely and 
at the desired price. In addition, the Exchange's electronic 
communication of the stock or ETF component to NES for execution 
eliminates the need for each party to separately submit the stock 
component to a broker-dealer for execution. The execution of the stock/
ETF portion of a Complex Order will be immediate; the Exchange's System 
will calculate the stock price based on the net debit/credit price of 
the Complex Order,\36\ while also calculating and determining the 
appropriate options price(s), all electronically. The Exchange 
continues to believe that this practice would not require the Exchange 
to later nullify options trades if the stock price cannot be achieved. 
Accordingly, like Phlx, the Exchange is not proposing to adopt a rule 
permitting such option trade nullifications because the trade would not 
occur at a price that later required nullification due to the 
unavailability of the stock/ETF price. The Exchange further believes 
that the certainty associated with such electronic calculations and 
processing will continue to be an attractive feature for Members 
transacting Complex Orders with a stock or ETF component. Likewise, 
Phlx does not have a rule for options trade nullification for similar 
transactions. Phlx reasoned in its proposal to similarly use an 
affiliate to execute the stock or ETF component of a Complex Order that 
because such execution would be immediate, with Phlx's system 
calculating the stock or ETF price based on the net debit/credit price 
of the Complex Order while also calculating and determining the 
appropriate options price(s), that it believed that its approach would 
not require Phlx to later nullify options trades if the stock price 
cannot be achieved.\37\
---------------------------------------------------------------------------

    \36\ The stock/ETF price is, of course, included within the net 
debit/credit price of the Complex Order.
    \37\ See Phlx Complex Order Approval supra at 5633.
---------------------------------------------------------------------------

    The Exchange also believes that it is appropriate to construct a 
program wherein its affiliate, NES, is the exclusive conduit for the 
execution of the stock/ETF component of a Complex Order under this 
proposal, similar to Phlx.\38\ As a practical matter, complex order 
programs on other exchanges involve specific arrangements with a 
broker-dealer to facilitate prompt execution. NES does not intend to 
charge a fee for the execution of the stock/ETF component of a Complex 
Order.\39\ The Exchange believes that is consistent with the Act for 
such an arrangement to involve one broker-dealer, even one that is an 
affiliate, particularly to offer the aforementioned benefits of a 
prompt, electronic execution for Complex Orders involving stock/ETFs. 
Specifically, offering a seamless, automatic execution for both the 
options and stock/ETF components of a Complex Order is an important 
feature that should promote just and equitable principles of trade and 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system by deeply enhancing the sort of 
complex order processing available on options exchanges today. 
Nevertheless, Members could, in lieu of this proposed arrangement with 
NES, choose, instead, the following alternatives: (i) avoid using 
Complex Orders that involve stock/ETFs, (ii) use a trading floor to 
execute Complex Order with stock, or (iii) go to another options venue, 
several of which offer a similar feature.\40\
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    \38\ See ISE General 2, Section 4(b) which provides that Nasdaq, 
Inc., which owns NASDAQ Execution Services, LLC and the Exchange, 
shall establish and maintain procedures and internal controls 
reasonably designed to ensure that NASDAQ Execution Services, LLC 
does not develop or implement changes to its system on the basis of 
non-public information regarding planned changes to the Exchange's 
systems, obtained as a result of its affiliation with the Exchange, 
until such information is available generally to similarly situated 
Exchange Members in connection with the provision of inbound routing 
to the Exchange.
    \39\ However, Trade Reporting Facility and clearing fees, not 
charged by ISE or NES, may result. National Securities Clearing 
Corporation (``NSCC'') and ACT will bill firms directly for their 
use of the NSCC and ACT systems, respectively. To the extent that 
NES is billed by NSCC or ACT, it will not pass through such fees to 
firms for the stock/ETF portion of a Complex Order under this 
proposal. ISE's fees applicable to Complex Orders appear in its Fee 
Schedule and may change from time to time.
    \40\ Existing Complex Order mechanisms at Cboe, Inc. (``Cboe'') 
offers a similar end result. See Cboe 5.33(l).
---------------------------------------------------------------------------

    In line with the proposed amendments, the Exchange proposes to 
remove language within Supplementary Material .02 of Options 3, Section 
14 which states,

    Members may also indicate preferred execution brokers, and such 
preferences will determine order routing priority whenever possible. 
A trade of a Stock-Option Order or a Stock-Complex Order will be 
automatically cancelled if market conditions prevent the execution 
of the stock or option leg(s) at the prices necessary to achieve the 
agreed upon net price. When a Stock-Option Order or Stock-Complex 
Order has been matched with another Stock-Option Order or Stock-
Complex Order that is for less than the full size of the Stock-
Option Order or Stock-Complex Order, the full size of the Stock-
Option Order or Stock Complex Order being processed by the stock 
execution venue will be unavailable for trading while the order is 
being processed.

    As noted herein, Members will no longer be able to indicate 
preferred execution brokers which makes the first sentence within 
Supplementary Material .02 of Options 3, Section 14 unnecessary. The 
second sentence within Supplementary Material .02 of Options 3, Section 
14 is being removed because the Exchange is replacing this rule text 
with proposed Options 3, Section 16(d) and (e) which describes price 
checks that will be performed for Stock-Option Orders or Stock-Complex 
Orders by NES. The third sentence within Supplementary Material .02 of 
Options 3, Section 14 is being removed because the Exchange's proposal 
to replace the third-party broker with NES will remove a delay that 
currently exists in the workflow to process a Stock-Option Order or 
Stock-Complex Order. NES will perform the stock leg validations 
proposed in Options 3, Sections 16(d) and (e) for Stock-Option Orders 
or Stock-Complex Orders. Thereafter, NES would print the stock 
components onto the Trade Reporting Facility and ISE would print the 
option component executions. This new workflow in which the stock or 
ETF component of the order will be routed to NES for execution instead 
of a third-party broker-dealer will obviate the possibility that the 
stock execution venue will be unavailable for trading while the order 
is being processed because ISE would no longer be reliant on a third-
party broker-dealer to conduct the appropriate checks and, thereafter, 
relay information to ISE. With the proposed change, NES, the

[[Page 54677]]

Exchange's affiliate, would conduct the necessary price checks and 
would make Stock-Option Orders or Stock-Complex Orders available to ISE 
in the same way that it does for Phlx. The Exchange believes that this 
new workflow would increase the efficiency of the entire transaction, 
including stock component validation and reporting.
Complex Opening Process
    Similarly, the Exchange proposes to amend Supplementary Material 
.04 to Options 3, Section 14 to provide that Stock-Option Strategies 
and Stock-Complex Strategies will open pursuant to the Complex Opening 
Price Determination described in Supplementary Material .05 to Options 
3, Section 14 instead of the Complex Uncrossing Process described in 
Supplementary Material .06(b) to Options 3, Section 14. Similar to the 
discussion above, the applicable price checks for the stock/ETF 
component of a Stock-Option Strategy and Stock-Complex Strategy are 
being performed by a third-party broker-dealer, which causes a delay 
that prevents these strategies from participating in the Complex 
Opening Process. With the proposed change to utilize NES in lieu of a 
third-party broker-dealer, Stock-Option Strategies and Stock-Complex 
Strategies would be able to participate in the Complex Opening Process 
because there would be no delay as NES, the Exchange's affiliate, would 
conduct the necessary checks (i.e. the price checks Options 3, Section 
16(d) and (e)). Thereafter, NES would make Stock-Option Order or Stock-
Complex Order available to participate in the Complex Opening Process.
    For example, assume that an underlying equity is in a Regulation 
SHO State, the underlying equity component is open on the primary 
underlying market, and the following strategy is created prior to the 
option leg being opened on ISE:

[ssquf] Assume Stock Option Strategy: Buy 8 puts and buy 100 shares
[ssquf] Stock Leg NBBO: 50.00 x 50.20
[ssquf] Option leg opens on ISE and the NBBO is 2.00 x 2.10
[ssquf] Stock-Option Strategy derived NBBO: 16.50 x 16.75 \41\
---------------------------------------------------------------------------

    \41\ The derived NBBO for the Stock Option Strategy was 
calculated as follows: Stock Option Strategy Derived Bid = \1/
4\(2.00 x 8) + \1/4\(50) = 16.50 and Stock Option Strategy Derived 
Offer = \1/4\(2.10 x 8) + \1/4\(50.20) = 16.75. The Stock Option 
Strategy is normalized by ISE's System by dividing the legs by the 
greatest common denominator of four (4). The normalized ratio was 
applied to the option leg price and stock leg price to determine the 
net price strategy.
---------------------------------------------------------------------------

[ssquf] Firm A Customer Stock-Option Order to buy 5 strategies for 
16.50 arrives
[ssquf] Firm B Stock-Option Order to buy 5 strategies for 16.50 arrives
[ssquf] Firm C Stock-Option Order to sell 7 strategies for 16.50 
arrives with instructions to short the stock component
[ssquf] Firm D Stock-Option Order to sell 3 strategies for 16.50 
arrives with instructions to Sell the Stock component

    In the above scenario, only Firm A (buying 5 strategies) and Firm D 
(not shorting 3 strategies) can actually trade at the Opening Price 
despite it appearing there is a fully matched cross. Firm C (selling 7 
strategies) cannot trade because the underlying is in a Regulation SHO 
state and the only price the stock leg can be matched at, is on the 
National Best Bid, which is not a permissible price to short sell for 
an underlying in a Regulation SHO state.
    ISE does not attempt to match Stock-Option Orders and Stock-Complex 
Orders during the Complex Opening Price Determination because the 
Exchange cannot ensure that all parties in the cross are able to match 
at the proposed stock leg price because the checks are performed by a 
third party. If the third party is unable to match part of the cross, 
executions on the options components are busted, therefore the Exchange 
does not consider Stock-Option Orders and Stock-Complex Orders in the 
Complex Opening.
    With this proposal, the price checks would be conducted by NES, an 
affiliate of the Exchange. Once ISE determines the stock and option leg 
prices, ISE will communicate the stock price and quantity to NES, who 
will conduct the necessary price checks. The proposed workflow provides 
efficiencies for the stock component execution as compared to the 
current process which involves a third-party broker-dealer. With this 
process, ISE would be able to process the option component and match 
the strategies during the Complex Opening Price Determination without 
the need for ISE to await a response from a third-party broker-dealer.
    The ability to attempt this match opportunity earlier in the 
Complex Opening Price Determination is critical because the market can 
move between the Complex Opening Price Determination and the Complex 
Uncrossing Process \42\ in such a way that the trade could no longer be 
possible. By way of example, if the Stock Component adjusts to 53.00 x 
54.00 before this strategy can attempt a Complex Uncrossing Process, 
the Stock Option Strategy derived NBBO would be 17.25 x 17.70 and there 
would no longer be a match possible for the interest willing to buy and 
sell at 16.50. If the System instead had utilized the Opening Price 
Determination, the execution would have occurred in this instance.
---------------------------------------------------------------------------

    \42\ See Supplementary Material .06 to ISE Options 3, Section 
14.
---------------------------------------------------------------------------

Trade Value Allowance
    Trade Value Allowance is a functionality that allows Stock-Option 
Strategies and Stock-Complex Strategies to trade outside of their 
expected notional trade value by a specified amount (the ``Trade Value 
Allowance'').\43\ After calculating the appropriate options match price 
for a Stock-Option or Stock-Complex Order expressed in a valid one cent 
increment, the System calculates the corresponding stock match price 
rounded to the increment supported by the equity market.
---------------------------------------------------------------------------

    \43\ The Trade Value Allowance is the percentage difference 
between the expected notional value of a trade and the actual 
notional value of the trade. See Supplementary Material .03 of ISE 
Options 3, Section 14.
---------------------------------------------------------------------------

    The Exchange no longer desires to offer the Trade Value Allowance. 
The Exchange will issue an Options Trader Alert indicating its intent 
to decommission this functionality to provide notice to Members.\44\ 
Very few Members have opted to utilize the Trade Value Allowance and 
even a smaller percentage of trades were subject to the allowance. Phlx 
does not have a similar allowance today. In an effort to harmonize its 
complex order functionality across its Nasdaq affiliated markets, the 
Exchange proposes to no longer offer the Trade Value Allowance 
functionality. With the proposed change to utilize NES, the Exchange 
would determine the stock leg prices, and NES would be able to execute 
the stock leg at two different prices to ensure that the net price of 
the execution is within the notional value of the original order, thus 
eliminating the need for the allowance.
---------------------------------------------------------------------------

    \44\ MRX issued such an alert indicating it would when it 
decommissioned its Trade Value Allowance. See Options Trader Alert 
#2023-3. See also SR-MRX-2023-10. No MRX Member expressed concern 
with this functionality being eliminated.
---------------------------------------------------------------------------

Options 3, Section 7
    The Exchange proposes to make a clarifying change to ISE Options 3, 
Section 7, Types of Orders and Order and Quote Protocols. The Exchange 
proposes to amend ISE Options 3, Section 7(t) related to QCC with Stock 
Orders to make clear that QCC with Stock Orders may only be entered

[[Page 54678]]

through FIX \45\ and Precise.\46\ ISE has 3 order entry protocols, FIX, 
OTTO \47\ and Precise. Members only require one order entry protocol to 
enter orders onto ISE. While Members only require one order entry port 
to submit orders into ISE, the Exchange offers Members a choice between 
2 different types of ports to utilize to submit QCC with Stock 
Orders.\48\ All Members would have the ability to enter QCC with Stock 
Orders through FIX or Precise. Members are not required to subscribe to 
both FIX and Precise. QCC with Stock Orders may not be entered through 
OTTO.
---------------------------------------------------------------------------

    \45\ ``Financial Information eXchange'' or ``FIX'' is an 
interface that allows Members and their Sponsored Customers to 
connect, send, and receive messages related to orders and auction 
orders to the Exchange. Features include the following: (1) 
execution messages; (2) order messages; (3) risk protection triggers 
and cancel notifications; and (4) post trade allocation messages. 
See Supplementary Material .03(a) to Options 3, Section 7.
    \46\ ``Nasdaq Precise'' or ``Precise'' is a front-end interface 
that allows Electronic Access Members and their Sponsored Customers 
to send orders to the Exchange and perform other related functions. 
Features include the following: (1) order and execution management: 
enter, modify, and cancel orders on the Exchange, and manage 
executions (e.g., parent/child orders, inactive orders, and post-
trade allocations); (2) market data: access to real-time market data 
(e.g., NBBO and Exchange BBO); (3) risk management: set customizable 
risk parameters (e.g., kill switch); and (4) book keeping and 
reporting: comprehensive audit trail of orders and trades (e.g., 
order history and done away trade reports). See Supplementary 
Material .03(d) to Options 3, Section 7.
    \47\ ``Ouch to Trade Options'' or ``OTTO'' is an interface that 
allows Members and their Sponsored Customers to connect, send, and 
receive messages related to orders, auction orders, and auction 
responses to the Exchange. Features include the following: (1) 
options symbol directory messages (e.g., underlying and complex 
instruments); (2) system event messages (e.g., start of trading 
hours messages and start of opening); (3) trading action messages 
(e.g., halts and resumes); (4) execution messages; (5) order 
messages; (6) risk protection triggers and cancel notifications; (7) 
auction notifications; (8) auction responses; and (9) post trade 
allocation messages. See Supplementary Material .03(b) to Options 3, 
Section 7.
    \48\ See Options 7, Section 6, Ports and Other Services.
---------------------------------------------------------------------------

    Additionally, the Exchange proposes to amend Supplementary Material 
.02(d) to Options 3, Section 7 related to Immediate-or-Cancel Orders. 
The Exchange proposes to specifically amend Supplementary Material 
.02(d)(3) to Options 3, Section 7 to add QCC with Stock Orders and 
Complex QCC with Stock Orders to the list of order types that have a 
Time in Force or ``TIF'' of Immediate-or-Cancel or ``IOC''. Because QCC 
with Stock Orders and Complex QCC with Stock Orders have a TIF of IOC, 
these order types will either execute on entry or cancel. Adding these 
order types to Supplementary Material .02(d)(3) to Options 3, Section 7 
will make this clear.
Options 3, Section 12
    The Exchange proposes to amend Options 3, Section 12(e)(4) to 
clarify the manner in which a Member may submit a QCC with Stock 
Order.\49\ Today, Options 3, Section 12(e)(4) provides that, ``QCC with 
Stock Orders can be entered with separate prices for the stock and 
options components, or with a net price for both.'' The Exchange 
proposes to amend this rule text to instead reflect the current manner 
in which QCC with Stock Orders may be entered into ISE's System. The 
proposed rule text would provide, ``QCC with Stock Orders must be 
entered with a net price for the stock and options components through 
FIX. Separate prices for the stock and options components, or a net 
price for both may be entered through Precise. The System will 
calculate the individual component prices.'' The current language of 
Options 3, Section 12(e)(4) is not correct because it does not specify 
the protocols. The Exchange proposes to amend this language to make 
clear the current System functionality. The proposed language does not 
result in a change to the Exchange's System. As noted above, QCC with 
Stock Orders may not be entered through OTTO. The Exchange notes that 
requiring QCC with Stock Orders to be submitted through FIX or Precise 
is consistent with proposed Options 3, Section 7(t) which requires 
Members to enter QCC Orders through FIX or Precise. Additionally, the 
Exchange is specifying how the System calculates the individual 
component prices. Members may elect to enter orders through either FIX 
or Precise. Members do not need to subscribe to both protocols.
---------------------------------------------------------------------------

    \49\ QCC with Stock Orders are processed in accordance with 
Options 3, Section 12(e).
---------------------------------------------------------------------------

Options 3, Section 15
    The Exchange proposes to amend its Market Wide Risk Protection 
within Options 3, Section 15(a)(1)(C) to add certain additional 
information concerning the current Market Wide Risk Protection along 
with new language that would apply as a result of the proposed changes 
to stock-tied functionality.
    Today, the Exchange offers a Market Wide Risk Protection which is 
comprised of an ``Order Entry Rate Protection'' which protects Members 
against entering orders at a rate that exceeds predefined thresholds, 
and an ``Order Execution Rate Protection,'' which protects Members 
against executing orders at a rate that exceeds their predefined risk 
settings. Both of these risk protections are detailed in the ``Market 
Wide Risk Protection.'' Today, pursuant to the proposed Market Wide 
Risk Protection rule, the Exchange's System maintains one or more 
counting programs for each Member that count orders entered and 
contracts traded on ISE. Members can use multiple counting programs to 
separate risk protections for different groups established within the 
Member.
    ISE Options 3, Section 15(a)(1)(C) currently states, that the 
counting programs will maintain separate counts, over rolling time 
periods specified by the Member for each count of:

    (1) the total number of orders entered in the regular order 
book; (2) the total number of orders entered in the complex order 
book with only options legs; (3) the total number of orders entered 
in the complex order book with both stock and options legs; (4) the 
total number of contracts traded in regular orders; and (5) the 
total number of contracts traded in complex orders with only options 
legs.

    Today, the counting programs maintain separate counts over rolling 
time period for the total number of orders entered in the regular order 
book, complex order book with only options legs; and the complex order 
book with both stock and options legs. Additionally, the risk 
protection counts the total number of contracts traded in regular 
orders and Complex Orders with only options legs.\50\ The Exchange 
proposes to amend ISE Options 3, Section 15(a)(1)(C) within (2) through 
(5) to use the defined terms Stock-Option Order, Stock-Complex Order, 
and Complex Option Order. The Exchange notes that the stock portion of 
QCC Orders, Complex Qualified QCC Orders, QCC with Stock Orders, and 
Complex QCC with Stock Orders are not counted in (3) because ISE's 
System does not handle the stock portion of these orders. ISE would not 
represent the stock leg through NES as it would for other Stock-Option 
Orders and Stock-Complex Orders as described herein. The Exchange notes 
that QCC Orders, Complex Qualified QCC Orders, QCC with Stock Orders, 
and Complex QCC with Stock Orders are considered, where applicable, in 
Options 3, Section 15(a)(1)(C)(1), (2), (4) and (5).
---------------------------------------------------------------------------

    \50\ The Member's allowable order rate for the Order Entry Rate 
Protection is comprised of the parameters defined in (1) to (3), 
while the allowable contract execution rate for the Order Execution 
Rate Protection is comprised of the parameters defined in (4) and 
(5).
---------------------------------------------------------------------------

    Today, the Exchange does not include a complex execution count for 
Complex Orders with a stock component as the execution counts 
maintained by the Order Execution Rate Protection are based solely on 
options contracts traded. At this time, as a result of

[[Page 54679]]

amending the stock-tied functionality, the Exchange proposes to add a 
new number (6) to ISE Options 3, Section 15(a)(1)(C) to note that the 
counting programs will maintain separate counts, over rolling time 
periods specified by the Member for each count, of the total number of 
Stock-Option Order and Stock-Complex Order contracts traded. The 
Exchange is adding new number (6) because it is introducing NES in 
place of a third-party broker-dealer. As a result, the Exchange will 
guarantee a stock-tied execution. Today, the stock-tied execution is 
not guaranteed by the third-party broker-dealer. Because of the ability 
to guarantee the execution, the Exchange is amending Options 3, Section 
15(a)(1)(C) to add (6) to the list of contracts counted by the Market 
Wide Risk Protection because the Exchange is able to perform the risk 
check since NES will be handling the stock for Stock-Option Orders and 
Stock-Complex Orders. This risk protection will reduce risk associated 
with system errors or market events that may cause Members to send a 
large number of orders, or receive multiple, automatic executions, 
before they can adjust their exposure in the market. Without adequate 
risk management tools, such as those proposed in this filing, Members 
could reduce the amount of order flow and liquidity that they provide 
on ISE. As a result, the functionality promotes just and equitable 
principles of trade.
    Finally, the Exchange proposes to add the defined term ``DNTT'' to 
the end of Options 3, Section 16(a) to define the instruction on a 
Complex Order to price each leg of the Complex Order to be executed 
equal to or better than the NBBO for the options series or any stock 
component, as applicable as a ``Do-Not-Trade-Through'' or ``DNTT''. 
This is not a substantive amendment, rather this change is meant to 
assist Members in locating this functionality within ISE's rules.
Implementation
    The Exchange intends to begin implementation of the proposed rule 
change prior to December 20, 2024. The implementation would commence 
with a limited symbol migration and continue to migrate symbols over 
several weeks. The Exchange will issue an Options Trader Alert to 
Members to provide notification of the symbols that will migrate and 
the relevant dates.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\51\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\52\ in particular, in that it is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest for the reasons discussed below.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b).
    \52\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Stock-Related Strategies and Elimination of Trade Value Allowance
Stock-Tied Functionality
    The Exchange's proposal to amend its stock-tied functionality as 
described above promotes just and equitable principles of trade and 
removes impediments to and perfect the mechanism of a free and open 
market and a national market system because it will permit the Exchange 
to streamline its stock-tied processes as discussed more fully below. 
Further, the amendments to require that a Member desiring to execute an 
order with stock or an ETF component enter into a brokerage agreement 
with NES, a broker-dealer owned and operated by Nasdaq, Inc., protects 
investors and the general public because Members will be required to 
comply with NES' requirements and those requirements will be uniform 
for all ISE Members. The proposed stock-tied functionality is identical 
to Phlx Options 3, Sections 13(b)(10)(ii) and 14(a)(i) with respect to 
utilizing NES to process and report stock-tied functionality with two 
differences.
    First, while both Phlx and ISE have certain risk protections for 
complex orders, they differ. With respect to ISE, the execution price 
of the Complex Order must be within a certain price from the current 
market, as determined by the Exchange pursuant to Options 3, Section 
16(a). Specifically, today, ISE Options 3, Section 16(a) provides that 
the System will not permit any leg of a complex strategy to trade-
through the NBBO for the series or any stock component by a 
configurable amount calculated as the lesser of (i) an absolute amount 
not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed 
500%, as determined by the Exchange on a class, series or underlying 
basis. Phlx Options 3, Section 16(b)(i) describes Phlx's ACE Parameter 
which defines a price range outside of which a complex order will not 
be executed. On Phlx, a complex order to sell is not executed at a 
price that is lower than the cNBBO bid by more than the ACE Parameter. 
Conversely, on Phlx, a complex order to buy will not be executed at a 
price that is higher than the cNBBO offer by more than the ACE 
Parameter. While ISE's and Phlx's price checks differ, both markets 
seek to prevent executions from occurring at certain prices and at 
certain percentages from the NBBO. The Exchange believes that this 
proposal promotes just and equitable principles of trade because NES 
would apply the same price check for stock-tied functionality that was 
being applied previously by a third party that executed the stock or 
ETF component of a complex strategy on behalf of ISE Members. 
Additionally, ISE Members would continue to be subject to the same 
price check which is applied to all Complex Orders executed on ISE.
    Second, ISE and Phlx differ with respect to the manner in which 
their systems handle Stock-Option Strategies and Stock-Complex 
Strategies that would execute against interest on the Complex Order 
Book at a price that do not meet price checks as provided for in 
proposed Options 3, Section 16(d) \53\ or do not meet Regulation SHO 
provisions as provided for in proposed Options 3, Section 16(e) \54\ 
are handled by their respective systems. As proposed, ISE will hold 
orders on the Complex Order book that cannot be executed because of 
Regulation SHO or price check restrictions, unless the Member requests 
the order to be cancelled. If an ISE Member elects to have the order 
held on the Complex Order Book, the order would await other matching 
opportunities, otherwise at the Member's election the order would be 
returned to the Member. In contrast, Phlx only provides for a 
cancellation of the order. The Exchange believes that this proposal 
promotes just and equitable principles of trade because ISE's proposed 
approach would provide the Member with optionality as to the handing of 
the order. The Exchange believes providing the choice to have the order 
held on the Complex Order Book provides Members with an opportunity for 
an execution.
---------------------------------------------------------------------------

    \53\ As proposed, the execution price of Stock-Option Strategies 
and Stock-Complex Strategies must be within the high-low range for 
the day in that stock at the time the Complex Order is processed and 
within a certain price from the current market pursuant to Options 
3, Section 16(a), as determined by the Exchange.
    \54\ See supra note 19.
---------------------------------------------------------------------------

    NES, an affiliate of the Exchange and a registered broker-dealer, 
has been approved by the Commission to become a Member of the Exchange 
and perform inbound routing on behalf of the Exchange.\55\ 
Additionally, NES is permitted to route outbound orders either directly 
or indirectly through a third party routing broker-dealer to other 
market centers and perform other

[[Page 54680]]

functions regarding the cancellation of orders and the maintenance of a 
NES error account.\56\ The functions performed by NES on Phlx today are 
identical to the functions that ISE proposes for NES to perform for ISE 
Members.\57\ Identical to Phlx, after ISE's System determines that a 
Complex Order is possible and identifies the prices for each component 
of such Complex Order, ISE will electronically communicate the stock or 
ETF component of the Complex Order to NES for execution.\58\
---------------------------------------------------------------------------

    \55\ See supra note 13.
    \56\ See supra note 14.
    \57\ See Securities Exchange Act Release No. 63777 (January 26, 
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157) (Order 
Approving a Proposed Rule Change, as Modified by Amendment Nos. 1 
and 2, Relating to Complex Orders) (``Phlx Complex Order 
Approval''). NES assumed the stock execution functionalities that 
were previously performed by NOS. Phlx subsequently filed to permit 
both inbound and outbound orders to be routed through NES instead of 
Nasdaq Options Services LLC (``NOS''). See Securities Exchange Act 
Release No. 71417 (January 28, 2014), 79 FR 6253 (February 3, 2014) 
(SR-Phlx-2014-04) (Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change to Outbound Routing) and 71416 (January 28, 
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to 
Inbound Routing of Options Orders).
    \58\ See proposed Supplementary Material .08(b) to Options 3, 
Section 11, proposed Options 3, Section 12(b)(2), proposed 
Supplementary Material .09(b) to Options 3, Section 13, proposed 
Supplementary Material .02 to Options 3, Section 14 and proposed 
Options 3, Section 16(d). See also Phlx Options 3, Section 
13(b)(10)(ii), Options 3, Section 16(b).
---------------------------------------------------------------------------

    NES, acting as agent for the orders to buy and sell the underlying 
stock or ETF, will execute the orders in the OTC market and will handle 
the orders pursuant to applicable rules regarding equity trading, 
including the rules governing trade reporting, trade-throughs, and 
short sales. Today, this function is performed by a third-party broker-
dealer that executes the stock or ETF component of a complex strategy 
on behalf of ISE Members. As proposed, this structure will promote just 
and equitable principles of trade because NES will be responsible for 
the proper execution, trade reporting, and submission to clearing of 
the underlying stock or ETF component of a Complex Order.\59\ 
Furthermore, today, NES is responsible for compliance with FINRA rules 
generally and is subject to examination by FINRA.\60\ Finally, today, 
NES has in place policies related to confidentiality and the potential 
for informational advantages relating to its affiliates, intended to 
protect against the misuse of material nonpublic information.\61\ In 
particular, NES will have in place policies and procedures designed to 
prevent the misuse of material non-public information related to stock-
tied executions which will protect investors and the public interest. 
NES only receives information about the stock or ETF portion of the 
order from the Exchange. As mentioned herein, today, NES is responsible 
for the proper execution, trade reporting, and submission to clearing 
of the underlying stock or ETF component of a Complex Order on Phlx. 
ISE will adopt identical policies and procedures for its stock-tied 
functionality as are in place on Phlx today.
---------------------------------------------------------------------------

    \59\ See supra note 20.
    \60\ NES is subject to FINRA Rule 3110, which generally requires 
that the policies and procedures and supervisory systems be 
reasonably designed to achieve compliance with applicable securities 
laws and regulations and with applicable FINRA rules, including 
those relating to the misuse of material non-public information.
    \61\ See supra note 21.
---------------------------------------------------------------------------

    In addition, the execution and reporting of the stock/ETF piece 
will occur otherwise than on ISE or any other exchange, and will be 
handled by NES pursuant to applicable rules regarding equity 
trading,\62\ including the rules governing trade reporting, trade-
throughs and short sales. The Exchange's proposal also promotes just 
and equitable principles of trade as NES will report the trades to the 
Trade Reporting Facility.\63\ Further, all ISE Members may execute 
stock-tied transactions. All stock-tied transactions will have the 
stock/ETF component of a Complex Order, once executed, properly 
processed for trade reporting purposes. Phlx has identical rules for 
processing and reporting.\64\
---------------------------------------------------------------------------

    \62\ See supra note 23.
    \63\ See supra note 24.
    \64\ See Phlx Options 3, Sections 13(b)(10) and 14(a)(i).
---------------------------------------------------------------------------

    With respect to trade-throughs, the Exchange believes that the 
stock/ETF component of a Complex Order is eligible for the Qualified 
Contingent Trade Exemption from Rule 611(a) of Regulation NMS. The 
Exchange believes that the stock/ETF portion of a Complex Order under 
this proposal complies with all six requirements of the Qualified 
Contingent Trade Exemption.\65\ In order to promote just and equitable 
principles of trade, ISE's System will validate compliance with each 
requirement such that any matched order received by NES under this 
proposal has been checked for compliance with the exemption. Members 
may only submit Complex Orders with a stock/ETF component if such 
orders comply with the Qualified Contingent Trade Exemption.\66\ 
Members submitting such Complex Orders with a stock/ETF component 
represent that such orders comply with the Qualified Contingent Trade 
Exemption. Thus, the Exchange believes that Complex Orders consisting 
of a stock/ETF component will comply with the exemption and that ISE's 
System will validate such compliance to assist NES in carrying out its 
responsibilities as agent for these orders.
---------------------------------------------------------------------------

    \65\ The six requirements include: (1) At least one component 
order is in an NMS stock: The stock/ETF component must be an NMS 
stock, which is validated by the System; (2) all components are 
effected with a product or price contingency that either has been 
agreed to by the respective counterparties or arranged for by a 
broker-dealer as principal or agent: A Complex Order, by definition 
consists of a single net/debit price and this price contingency 
applies to all the components of the order, such that the stock 
price computed and sent to NES allows the stock/ETF order to be 
executed at the proper net debit/credit price based on the execution 
price of each of the option legs, which is determined by the ISE 
System; (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time: Once a 
Complex Order is accepted and validated by the System, the entire 
package is processed as a single transaction and each of the option 
leg and stock/ETF components are simultaneously processed; (4) the 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined at the 
time the contingent order is placed: Complex Orders, upon entry, 
must have a size for each component and a net debit/credit, which 
the System validates and processes to determine the ratio between 
the components; an order is rejected if the net debit/credit price 
and size are not provided on the order; (5) the component orders 
bear a derivative relationship to one another, represent different 
classes of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or since cancelled: under this proposal, the stock/ETF 
component must be the underlying security respecting the option 
legs, which is validated by the System; and (6) the transaction is 
fully hedged (without regard to any prior existing position) as a 
result of the other components of the contingent trade: Under this 
proposal, the ratio between the options and stock/ETF must be a 
conforming ratio (8 contracts per 100 shares), which the System 
validates, and which under reasonable risk valuation methodologies, 
means that the stock/ETF position is fully hedged.
    \66\ See Supplementary Material .07 to Options 3, Section 14.
---------------------------------------------------------------------------

    With respect to short sale regulation, the proposed handling of the 
stock/ETF component of a Complex Order under this proposal should not 
raise any issues of compliance with the currently operative provisions 
of Regulation SHO \67\ and therefore promote just and equitable 
principles of trade. When a Complex Order has a stock/ETF component, 
Members must indicate, pursuant to Regulation SHO, whether that order 
involves a long or short sale. The System will accept Complex Orders 
with a stock/ETF component marked to reflect either a long or short 
position; specifically, orders not marked as buy, sell or sell short 
will be rejected by ISE's System.\68\ The System will electronically 
deliver the stock/ETF

[[Page 54681]]

component to NES for execution. Simultaneous to the options execution 
on ISE's System, NES will execute and report the stock/ETF component, 
which will contain the long or short indication as it was delivered by 
the Member to ISE's System. Accordingly, NES, as a trading center under 
Rule 201, will be compliant with the requirements of Regulation SHO. Of 
course, broker-dealers, including both NES and the Members submitting 
orders to ISE with a stock/ETF component, must comply with Regulation 
SHO. NES' compliance team updates, reviews and monitors NES' policies 
and procedures including those pertaining to Regulation SHO on an 
annual basis.
---------------------------------------------------------------------------

    \67\ 17 CFR 242.200 et seq.
    \68\ The Exchange also accept short sell exempt orders as 
described herein.
---------------------------------------------------------------------------

    Further, proposed Options 3, Section 16(e) provides that when the 
short sale price test in Rule 201 of Regulation SHO \69\ is triggered 
for a covered security, NES will not execute a short sale order in the 
underlying covered security component of a Complex Order if the price 
is equal to or below the current national best bid. However, NES will 
execute a short sale order in the underlying covered security component 
of a Complex Order if such order is marked ``short exempt,'' regardless 
of whether it is at a price that is equal to or below the current 
national best bid. If NES cannot execute the underlying covered 
security component of a Complex Order in accordance with Rule 201 of 
Regulation SHO, the Exchange will hold the Complex Order on the Complex 
Order Book, if consistent with Member instructions (Members may always 
elect to cancel the order).\70\ The order may execute at a price that 
is not equal to or below the current national best bid. This proposed 
rule is similar to Phlx Options 3, Section 16(b) except that unlike 
Phlx, ISE will not cancel back the Complex Order to the entering Member 
unless the Member requests that the order be cancelled back. The 
proposal is identical to MRX Options 3, Section 16(b).
---------------------------------------------------------------------------

    \69\ See supra note 30.
    \70\ See proposed Options 3, Section 16(e). In contrast, Complex 
Orders in an auction mechanism that cannot be executed in accordance 
with Regulation SHO will be cancelled back and will not rest on the 
Complex Order Book as provided in Supplementary Material .08 to 
Options 3, Section 11 and Supplementary Material .09 to Options 3, 
Section 13.
---------------------------------------------------------------------------

    For these reasons, the processing of the stock/ETF component of a 
Complex Order under this proposal will comply with applicable rules 
regarding equity trading, including the rules governing trade 
reporting, trade-throughs and short sales and is consistent with the 
Act. NES's responsibilities respecting these equity trading rules will 
be documented in NES's written policies and procedures. NES' compliance 
team updates, reviews and monitors NES' policies and procedures. NES is 
regulated by FINRA and as such, NES policies and procedures are subject 
to review and examinations by FINRA.
    Further, as part of the execution of the stock/ETF component, the 
Exchange will ensure that the execution price is within the intra-day 
high-low range for the day in that stock at the time the Complex Order 
is processed and within a certain price range from the current market 
pursuant to Options 3, Section 16(a) which will protect investors and 
the general public.\71\ If the stock price is not within these 
parameters, the Complex Order is not executable and would be held on 
the order book or cancelled, consistent with Member instructions.\72\ 
Today, the third-party broker-dealer ensures the execution price is 
within the intra-day high-low range. With the transition to NES, the 
Exchange would commence performing this check. Members who transact 
stock-tied functionality on ISE would therefore continue to be subject 
to the same execution price check with NES as today. This intra-day 
high-low range check does not occur for certain Complex Orders auctions 
(e.g. Complex PIM Orders,\73\ Complex Facilitation Orders \74\ and 
Complex SOM Orders \75\) and also does not occur for Complex Customer 
Cross Orders \76\ or Complex QCC Orders.\77\ The Exchange believes that 
this exception for auctions is consistent with the Act because these 
auctions have their own rules for auction eligibility, entry checks, 
and offer price improvement all of which are distinguishable from 
execution of orders on the Complex Order Book. Complex Customer Cross 
Orders are automatically executed upon entry so long as: (i) the price 
of the transaction is at or within the best bid and offer for the same 
complex strategy on the Complex Order Book; (ii) there are no Priority 
Customer Complex Orders for the same strategy at the same price on the 
Complex Order Book; and (iii) the options legs can be executed at 
prices that comply with the provisions of Options 3, Section 14(c)(2). 
Complex Customer Cross Orders will be rejected if they cannot be 
executed.\78\
---------------------------------------------------------------------------

    \71\ See supra note 35.
    \72\ Similar to other order types, the Member may elect to enter 
the order as an Immediate-or-Cancel to avoid resting on the order 
book or as Day order which could rest on the order book.
    \73\ A Complex PIM Order is an order entered into the Complex 
Price Improvement Mechanism as described in Options 3, Section 
13(e). See ISE Options 3, Section 14(b)(18).
    \74\ A Complex Facilitation Order is an order entered into the 
Complex Facilitation Mechanism as described in Options 3, Section 
11(c). See ISE Options 3, Section 14(b)(16).
    \75\ A Complex SOM Order is an order entered into the Complex 
Solicited Order Mechanism as described in Options 3, Section 11(e). 
See ISE Options 3, Section 14(b)(17).
    \76\ See Options 3, Section 12(b).
    \77\ See Options 3, Section 12(d).
    \78\ Supplementary Material .01 to Options 3, Section 22 applies 
to Complex Customer Cross Orders.
---------------------------------------------------------------------------

    Finally, the Exchange also believes that it is appropriate to 
construct a program wherein its affiliate, NES, is the exclusive 
conduit for the execution of the stock/ETF component of a Complex Order 
under this proposal, identical to Phlx and MRX.\79\ As a practical 
matter, complex order programs on other exchanges involve specific 
arrangements with a broker-dealer to facilitate prompt execution. NES 
does not intend to charge a fee for the execution of the stock/ETF 
component of a Complex Order.\80\ The Exchange believes that is 
consistent with the Act for such an arrangement to involve one broker-
dealer, even one that is an affiliate, particularly to offer the 
aforementioned benefits of a prompt, electronic execution for Complex 
Orders involving stock/ETFs. Specifically, offering a seamless, 
automatic execution for both the options and stock/ETF components of a 
Complex Order is an important feature that should promote just and 
equitable principles of trade and remove impediments to and perfect the 
mechanism of a free and open market and a national market system by 
deeply enhancing the sort of complex order processing available on 
options exchanges today. Nevertheless, Members could, in lieu of this 
proposed arrangement with NES, choose, instead, the following 
alternatives: (i) avoid using Complex Orders that involve stock/ETFs, 
(ii) use a trading floor to execute Complex Order with stock, or (iii) 
go to another options venue, several of which offer a similar 
feature.\81\
---------------------------------------------------------------------------

    \79\ See supra note 39. See proposed Supplementary Material .02 
to ISE Options 3, Section 14. In addition to amending Supplementary 
Material .02 to ISE Options 3, Section 14 to require Members to 
enter into a brokerage agreement, the Exchange proposes to make 
conforming changes to Supplementary Material .02 to ISE Options 3, 
Section 14 to delete provisions that allow Members to enter into a 
brokerage agreement with one or more brokers to route stock orders. 
See MRX Supplementary Material .02 to ISE Options 3, Section 14.
    \80\ See supra note 40.
    \81\ See supra note 41.
---------------------------------------------------------------------------

    The Exchange's proposal to remove the second and third sentences 
within Supplementary Material .02 of Options 3, Section 14 \82\ is 
consistent with the

[[Page 54682]]

Act in that it protects investors and the general public because this 
new workflow in which the stock or ETF component of the order will be 
routed to NES for execution instead of a third-party broker-dealer will 
obviate the possibility that the stock execution venue will be 
unavailable for trading while the order is being processed because of 
the efficiency created in executing the entire transaction, including 
stock component validation and reporting, without the need for ISE to 
utilize a third-party broker-dealer and await a response from the 
third-party broker-dealer. ISE would no longer be reliant on a third-
party broker-dealer to conduct the appropriate checks and, thereafter, 
relay information to ISE. With the proposed change, NES, the Exchange's 
affiliate, would conduct the necessary checks and thereafter the Stock-
Option Order or Stock-Complex Order would be available for execution. 
Proposed Options 3, Sections 16(d) and (e) describe the System price 
checks that will be performed for Stock-Option Orders or Stock-Complex 
Orders by NES.
---------------------------------------------------------------------------

    \82\ The second and third sentences of Supplementary Material 
.02 of ISE Options 3, Section 14 states, ``A trade of a Stock-Option 
Order or a Stock-Complex Order will be automatically cancelled if 
market conditions prevent the execution of the stock or option 
leg(s) at the prices necessary to achieve the agreed upon net price. 
When a Stock-Option Order or Stock-Complex Order has been matched 
with another Stock-Option Order or Stock-Complex Order that is for 
less than the full size of the Stock-Option Order or Stock-Complex 
Order, the full size of the Stock-Option Order or Stock Complex 
Order being processed by the stock execution venue will be 
unavailable for trading while the order is being processed.''
---------------------------------------------------------------------------

    Similarly, the Exchange's proposal to amend Supplementary Material 
.04 to Options 3, Section 14 to provide that Stock-Option Strategies 
and Stock-Complex Strategies will open pursuant to the Complex Opening 
Price Determination described in Supplementary Material .05 to Options 
3, Section 14, instead of the Complex Uncrossing Process described in 
Supplementary Material .06(b) to Options 3, Section 14, is consistent 
with the Act. Similar to the discussion above, today the applicable 
checks for the stock/ETF component of a Stock-Option Strategy and 
Stock-Complex Strategy are being performed by a third-party broker-
dealer, which causes a delay that prevents these strategies from 
participating in the Complex Opening Process. With the proposed change 
to utilize NES, in lieu of a third-party broker-dealer, Stock-Option 
Strategies and Stock-Complex Strategies would be able to participate in 
the Complex Opening Process as NES, the Exchange's affiliate, would 
conduct the necessary price checks and would be able to make Stock-
Option Order or Stock-Complex Order available to participate in the 
Complex Opening Process without the need for ISE to await a response 
from a third-party broker-dealer. This amendment is consistent with the 
Act as it serves to protect investors and the general public by 
improving the Exchange's processes to make Stock-Option Strategies and 
Stock-Complex Strategies subject to the Complex Opening Price 
Determination similar to other order types. The Complex Opening Process 
seeks to maximize the interest which is traded during the Complex 
Opening Price Determination process and deliver a rational price for 
the available interest at the opening. The Complex Opening Price 
Determination process maximizes the number of contracts executed during 
the Complex Opening Process and ensures that residual contracts of 
partially executed orders or quotes are at a price equal to or inferior 
to the Opening Price.
Trade Value Allowance
    The Exchange's proposal to no longer offer Trade Value Allowance is 
consistent with the Act because very few Members have opted to utilize 
the Trade Value Allowance and even a smaller percentage of trades were 
subject to the allowance. MRX recently removed its Trade Value 
Allowance as described in SR-MRX-2023-10. Phlx does not have a similar 
allowance today. In an effort to harmonize its complex order 
functionality across its Nasdaq affiliated markets, the Exchange 
proposes to no longer offer the Trade Value Allowance functionality. In 
addition, the Exchange believes that this proposal removes impediments 
to and perfect the mechanism of a free and open market and a national 
market system because the proposal removes an allowance that is no 
longer necessary; other options exchanges, like Phlx, do not offer such 
an allowance. With the proposed change to utilize NES, the Exchange 
would be able to determine stock leg prices, and NES would be able to 
execute the stock leg at two different prices to ensure that the net 
price of the execution is within the notional value of the original 
order, thus eliminating the need for the allowance.
Options 3, Section 7
    The Exchange's proposal to make a clarifying change to ISE Options 
3, Section 7, Types of Orders and Order and Quote Protocols is 
consistent with the Act. The Exchange proposes to amend ISE Options 3, 
Section 7(t) related to QCC with Stock Orders to make clear that QCC 
with Stock Orders may only be entered through FIX or Precise. ISE has 3 
order entry protocols, FIX, OTTO and Precise. QCC with Stock Orders may 
not be entered through OTTO. Members only require one order entry 
protocol to enter orders onto ISE. While Members only require one order 
entry port to submit orders into ISE, the Exchange offers Member a 
choice between 2 different types of ports to utilize to submit QCC with 
Stock Orders.\83\ All Members would have the ability to enter QCC with 
Stock Orders through FIX or Precise. Members are not required to 
subscribe to both FIX and Precise. The Exchange's proposal to add rule 
text to Options 3, Section 7(t) will clarify the functionality, thereby 
protecting investors and the general public.
---------------------------------------------------------------------------

    \83\ See Options 7, Section 6, Ports and Other Services.
---------------------------------------------------------------------------

    Additionally, the Exchange's proposal to amend Supplementary 
Material .02(d) to Options 3, Section 7 related to Immediate-or-Cancel 
Orders is consistent with the Act. The Exchange proposes to 
specifically amend Supplementary Material .02(d)(3) to Options 3, 
Section 7 to add QCC with Stock Orders and Complex QCC with Stock to 
the list of order types that have a Time in Force or ``TIF'' of 
Immediate-or-Cancel or ``IOC''. Because QCC with Stock Orders and 
Complex QCC with Stock have a TIF of IOC, these order types will 
execute either execute on entry or cancel. This amendment will make 
clear the manner in which the aforementioned order types trade, thereby 
protecting investors and the general public.
Options 3, Section 12
    The Exchange's proposal to amend Options 3, Section 12(e)(4) to 
clarify that a Member may submit a QCC with Stock Order with a net 
price for the stock and options components through FIX or Members may 
submit separate prices for the stock and options components, or a net 
price for both may be entered through Precise. This amendment is 
consistent with the Act because the amended rule text makes clear the 
format in which these orders may be submitted to the System depending 
on the protocol. Today, the Exchange does not allow FIX to accept QCC 
with Stock Orders with separate prices for the stock and options 
components but does permit Members to do so through Precise. Each 
exchange may specify the manner in which certain order types may be 
submitted to an exchange and the format for submitting those orders. 
The proposal protects investors and the general public by clarifying 
the manner in which

[[Page 54683]]

Members may submit QCC with Stock Orders. The proposed language does 
not result in a change to the Exchange's System. As noted above, QCC 
with Stock Orders may not be entered through OTTO. The Exchange notes 
that requiring QCC with Stock Orders to be submitted through FIX or 
Precise is consistent with proposed Options 3, Section 7(t) which 
requires Members to enter QCC Orders through FIX or Precise.
Options 3, Section 15
    The Exchange's proposal to amend its Market Wide Risk Protection 
within Options 3, Section 15(a)(1)(C) to add certain additional 
information concerning the current Market Wide Risk Protection along 
with new language that would apply as a result of the proposed changes 
to stock-tied functionality is consistent with the Act. The proposed 
changes to ISE Options 3, Section 15(a)(1)(C) protect investors and the 
public interest by clearly describing the operation of the Market Wide 
Risk Protection by using defined terms. Proposed ISE Options 3, Section 
15(a)(1)(C)(6) adds the total number of contracts traded in Stock-
Option Orders and Stock-Complex Orders to the Market Wide Risk 
Protection. This change protects investors and the general public 
because this risk protection by expanding the scope of the Market Wide 
Risk Protection to include additional contracts which will reduce risk 
associated with system errors or market events that may cause Members 
to send a large number of orders, or receive multiple, automatic 
executions, before they can adjust their exposure in the market. The 
Exchange notes that QCC Orders, Complex Qualified QCC Orders, QCC with 
Stock Orders, and Complex QCC with Stock Orders are considered, where 
applicable, in Options 3, Section 15(a)(1)(C)(1), (2), (4) and (5). 
Members will continue to be provided with the flexibility needed to 
appropriately tailor the Market Wide Risk Protection to their 
respective risk management needs.

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.
Re-Introduction of Stock-Related Strategies and Elimination of Trade 
Value Allowance
Stock-Tied Functionality
    The Exchange's proposal to amend its stock-tied functionality does 
not impose an intra-market undue burden on competition as all Members 
may utilize the stock-tied functionality and would be uniformly subject 
to the requirements associated with executing a stock-tied transaction. 
Also, in lieu of this proposed arrangement with NES, Members could 
choose, instead, the following alternatives: (i) avoid using Complex 
Orders that involve stock/ETFs, (ii) use a trading floor to execute 
Complex Order with stock, or (iii) go to another options venue, several 
of which offer a similar feature.\84\ The Exchange's proposal to amend 
its stock-tied functionality does not impose an inter-market undue 
burden on competition as other options exchanges today may offer a 
similar process for handling stock-tied transactions. Today, Phlx and 
MRX offer an identical process for handling stock-tied 
transactions.\85\
---------------------------------------------------------------------------

    \84\ See supra note 41.
    \85\ See Phlx Options 3, Sections 13(b)(10) and 14(a)(i). See 
also MRX Supplementary Material .08(b) to Options 3, Section 11 
Options 3, Section 12(b)(2), Supplementary Material .09(b) to 
Options 3, Section 13, Supplementary Material .02 to Options 3, 
Section 14 and Options 3, Section 16(d).
---------------------------------------------------------------------------

    The Exchange's proposal to remove rule text from Options 3, Section 
14 that states, ``When a Stock-Option Order or Stock-Complex Order has 
been matched with another Stock-Option Order or Stock-Complex Order 
that is for less than the full size of the Stock-Option Order or Stock-
Complex Order, the full size of the Stock-Option Order or Stock Complex 
Order being processed by the stock execution venue will be unavailable 
for trading while the order is being processed,'' does not impose an 
undue burden on intra-market competition because the proposed new 
functionality will apply equally to all Members transacting Complex 
Orders on ISE. All Stock-Option Orders and Stock-Complex Orders will be 
handled in the same manner by the System. The Exchange's proposal to 
remove rule text from Options 3, Section 14 does not impose an undue 
burden on inter-market competition as the scope of this change is 
limited to ISE and its relationship with a broker-dealer handling the 
stock component of the order.
    The Exchange's proposal to remove the rule text within 
Supplementary Material .02 of Options 3, Section 14 \86\ does not 
impose an undue burden on intra-market competition because all Members 
will have the ability to use the new workflow in which the stock or ETF 
component of the order will be routed to NES for execution instead of a 
third-party broker-dealer. The proposed new functionality will apply 
equally to all Members transacting Complex Orders on ISE. All Stock-
Option Orders and Stock-Complex Orders will be handled in the same 
manner by the System. Additionally, this proposed amendment will not 
impose an undue burden on inter-market competition because all market 
participants that direct orders to ISE will have their orders handled 
in a similar manner. The proposed stock-tied functionality is identical 
to Phlx Options 3, Sections 13(b)(10)(ii) and 14(a)(i) with respect to 
utilizing NES to process and report the stock or ETF component of a 
Complex Order. MRX Supplementary Material .08(b) to Options 3, Section 
11 Options 3, Section 12(b)(2), Supplementary Material .09(b) to 
Options 3, Section 13, Supplementary Material .02 to Options 3, Section 
14 and Options 3, Section 16(d) also permit MRX to utilize NES to 
process and report the stock or ETF component of a Complex Order.
---------------------------------------------------------------------------

    \86\ Supplementary Material .02 of Options 3, Section 14 states 
that, ``Members may also indicate preferred execution brokers, and 
such preferences will determine order routing priority whenever 
possible. A trade of a Stock-Option Order or a Stock-Complex Order 
will be automatically cancelled if market conditions prevent the 
execution of the stock or option leg(s) at the prices necessary to 
achieve the agreed upon net price. When a Stock-Option Order or 
Stock-Complex Order has been matched with another Stock-Option Order 
or Stock-Complex Order that is for less than the full size of the 
Stock-Option Order or Stock-Complex Order, the full size of the 
Stock-Option Order or Stock Complex Order being processed by the 
stock execution venue will be unavailable for trading while the 
order is being processed.''
---------------------------------------------------------------------------

    Similarly, the Exchange's proposal to amend Supplementary Material 
.04 to Options 3, Section 14 to provide that Stock-Option Strategies 
and Stock-Complex Strategies will open pursuant to the Complex Opening 
Price Determination described in Supplementary Material .05 to Options 
3, Section 14, instead of the Complex Uncrossing Process described in 
Supplementary Material .06(b) to Options 3, Section 14, does not impose 
an undue burden on intra-market competition because all Stock-Option 
Strategies and Stock-Complex Strategies will be subject to the same 
process. All Stock-Option Orders and Stock-Complex Orders will be 
transacted in the Complex Opening by the System. The Exchange's 
proposal to amend Supplementary Material .04 to Options 3, Section 14 
to provide that Stock-Option Strategies and Stock-Complex Strategies 
will open pursuant to the Complex Opening Price Determination described 
in Supplementary Material .05 to Options 3, Section 14, instead of the 
Complex Uncrossing Process described in Supplementary Material .06(b) 
to Options 3, Section 14 does not

[[Page 54684]]

impose an undue burden on inter-market competition because other 
options markets may also elect to permit similar order types to trade 
in their complex opening process.
Trade Value Allowance
    The Exchange's proposal to no longer offer Trade Value Allowance 
does not impose an undue burden on intra-market competition because no 
Member would be able to utilize the Trade Value Allowance. The proposed 
stock-tied functionality is identical to Phlx Options 3, Sections 
13(b)(10)(ii) and 14(a)(i) and MRX Supplementary Material .08(b) to 
Options 3, Section 11 Options 3, Section 12(b)(2), Supplementary 
Material .09(b) to Options 3, Section 13, Supplementary Material .02 to 
Options 3, Section 14 and Options 3, Section 16(d). with respect to 
utilizing NES to process and report the stock or ETF component of a 
Complex Order.
    The Exchange's proposal to no longer offer Trade Value Allowance 
does not impose an undue burden on inter-market competition because 
other options exchanges could choose to offer a similar functionality.
Options 3, Section 7
    The Exchange's proposal to make a clarifying change to ISE Options 
3, Section 7, Types of Orders and Order and Quote Protocols does not 
impose an undue burden on intra-market competition because all Members 
may enter QCC with Stock Orders through FIX or Precise. While Members 
only require one order entry port to submit orders into ISE, the 
Exchange offers Members a choice between 2 different types of ports to 
utilize to submit QCC with Stock Orders.\87\
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    \87\ See Options 7, Section 6, Ports and Other Services.
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    The Exchange's proposal to make a clarifying change to ISE Options 
3, Section 7, Types of Orders and Order and Quote Protocols does not 
impose an undue burden on inter-market competition because other 
options exchanges may also create order entry protocols for their 
markets.
    Additionally, the Exchange's proposal to amend Supplementary 
Material .02(d) to Options 3, Section 7 to add QCC with Stock Orders 
and Complex QCC with Stock to the list of order types that have a Time 
in Force or ``TIF'' of Immediate-or-Cancel or ``IOC'' does not impose 
an undue burden on intra-market competition because this amendment 
reflects the description of these particular order types which will 
either execute on entry or cancel. All QCC with Stock Orders and 
Complex QCC with Stock that are entered on ISE will be handled in the 
same manner. Further, all Members may trade QCC with Stock Orders and 
Complex QCC with Stock Orders. Additionally, the Exchange's proposal to 
amend Supplementary Material .02(d) to Options 3, Section 7 related to 
Immediate-or-Cancel Orders does not impose an undue burden on inter-
market competition because other options markets may adopt a similar 
requirement for such orders.
Options 3, Section 12
    The Exchange's proposal to amend Options 3, Section 12(e)(4) to 
clarify that a Member may submit a QCC with Stock Order with a net 
price for the stock and options components through FIX or they may 
submit separate prices for the stock and options components, or a net 
price for both may be entered through Precise does not impose an intra-
market burden on competition because all Members are required to 
uniformly submit QCC with Stock Orders in this fashion.
    The Exchange's proposal to amend Options 3, Section 12(e)(4) to 
clarify that a Member may submit a QCC with Stock Order with a net 
price for the stock and options components through FIX or they may 
submit separate prices for the stock and options components, or a net 
price for both may be entered through Precise does not impose an inter-
market burden on competition because each exchange may specify the 
manner in which certain order types may be submitted to an exchange and 
the format for submitting those orders. Also, requiring QCC with Stock 
Orders to be submitted through FIX or Precise is consistent with 
proposed Options 3, Section 7(t) which requires Members to enter QCC 
Orders through FIX or Precise.
Options 3, Section 15
    The Exchange's proposal to amend its Market Wide Risk Protection 
within Options 3, Section 15(a)(1)(C) to utilize defined terms along 
with new language does not impose an undue burden on intra-market 
competition because the counting programs within the Market Wide Risk 
Protections will apply equally to all Members. The proposal to amend 
the Market Wide Risk Protection does not impose an undue burden on 
inter-market competition because other options exchanges may adopt 
similar risk protections for their members.

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 \88\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\89\
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    \88\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \89\ 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 (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-ISE-2023-13 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-2023-13. This file

[[Page 54685]]

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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-ISE-2023-13 and should be 
submitted on or before September 1, 2023.
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    \90\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\90\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17208 Filed 8-10-23; 8:45 am]
BILLING CODE 8011-01-P


