81 FR 20004 - Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing of Proposed Rule Change Related to Market Wide Risk Protection

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 66 (April 6, 2016)

[Federal Register Volume 81, Number 66 (Wednesday, April 6, 2016)]
[Notices]
[Pages 20004-20007]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-07834]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77489; File No. SR-ISE-2016-08]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing of Proposed Rule Change Related to Market Wide 
Risk Protection

March 31, 2016.
    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 March 17, 2016, the International Securities Exchange, LLC 
(the ``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change, as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to introduce new activity based order 
protections as described in more detail below. The text of the proposed 
rule change is available on the Exchange's Web site (http://www.ise.com), at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in sections A, B and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to introduce new risk 
protections for orders designed to aid members in their risk management 
by supplementing current price reasonability checks with activity based 
order protections.\3\ In particular, the Exchange proposes to introduce 
two activity based risk protections that will be mandatory for all 
members: (1) The ``Order Entry Rate Protection,'' which protects 
members against entering orders at a rate that exceeds predefined 
thresholds,\4\ and (2) the ``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 Proposed Rule 714(d), ``Market Wide Risk Protection.'' \5\ The 
Exchange will announce the implementation date of the Market Wide Risk 
Protection in a circular to be distributed to members prior to 
implementation.
---------------------------------------------------------------------------

    \3\ The Exchange provides members with limit order price 
protections designed to prevent erroneous executions by rejecting 
orders priced too far through the market. See Rule 714(b)(2).
    \4\ The Exchange will determine when to initiate the Order Entry 
Rate Protection pre-open to allow members time to load their orders 
without inadvertently triggering the protection. The precise time 
will be established by the Exchange and communicated to members via 
circular prior to implementation.
    \5\ The term ``Market Wide Risk Protection'' includes both the 
``Order Entry Rate Protection'' and the ``Order Execution Rate 
Protection.''
---------------------------------------------------------------------------

    Pursuant to the proposed Market Wide Risk Protection rule, the 
Exchange's trading system (the ``System'') will maintain one or more 
counting programs on behalf of each member that will count the number 
of orders entered, and the number of contracts traded on ISE or, if 
chosen by the member,\6\ across both ISE and ISE's affiliate, ISE 
Gemini, LLC (``ISE Gemini''), which shares a trading system with ISE. 
Members can use multiple counting programs to separate risk protections 
for different groups established within the member.\7\ The

[[Page 20005]]

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.\8\
---------------------------------------------------------------------------

    \6\ Members will have the option to set different risk 
parameters for their trading activity on each exchange, or set risk 
parameters that apply to their trading across both ISE and ISE 
Gemini, if desired.
    \7\ The Exchange will explain how members can go about setting 
up risk protections for different groups (e.g., business units) in a 
circular issued to members.
    \8\ 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). As explained below, the Exchange is not including 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. See note 9 supra [sic] 
and accompanying text.
---------------------------------------------------------------------------

    Members will have discretion to establish the applicable time 
period for each of the counts maintained under the Market Wide Risk 
Protection, provided that the selected period must be within minimum 
and maximum parameters established by the Exchange and announced via 
circular.\9\ While the Market Wide Risk Protection is mandatory for all 
members, the Exchange is not proposing to establish minimum or maximum 
values for the order entry and execution parameters described in (1) 
through (5) above. The Exchange believes that this approach will give 
members the flexibility needed to appropriately tailor the Market Wide 
Risk Protection to their respective risk management needs. In this 
regard, the Exchange notes that each member is in the best position to 
determine risk settings appropriate for their firm based on the 
member's trading activity and business needs. In the interest of 
maintaining a fair and orderly market, however, the Exchange will 
establish default values for the applicable time period and order entry 
and execution parameters in a circular to be distributed to members. 
Default values established by the Exchange will apply only to members 
that do not submit their own parameters for the Market Wide Risk 
Protection.
---------------------------------------------------------------------------

    \9\ The Exchange anticipates that the minimum and maximum values 
for the applicable time period will be initially set at one second 
and a full trading day, respectively.
---------------------------------------------------------------------------

    The Exchange proposes to use separate counts for regular orders, 
complex options orders, and complex orders with a stock component as 
members may want to have different risk settings for these instruments. 
In order to fully protect members, however, if the Market Wide Risk 
Protection is triggered based on any count, the triggered action will 
be taken across the entire market. In particular, if the Market Wide 
Risk Protection is triggered, action will be taken with respect to all 
products traded in both simple and complex instruments, and across ISE 
or, if applicable, ISE and ISE Gemini. Contracts executed on the agency 
and contra-side of a two-sided crossing order will be counted 
separately for the Order Execution Rate Protection. In addition, the 
contract execution count for complex orders will be the sum of the 
number of contracts executed with respect to each leg. Complex 
instruments that contain a stock component will not be included as part 
of the complex order execution count as the Order Execution Rate 
Protection is based exclusively on options contracts executed, and 
therefore does not apply to orders that have both stock and options 
components.\10\
---------------------------------------------------------------------------

    \10\ Stock-option orders contain both an option component(s) 
executed in contracts and a stock component executed in shares. The 
Exchange does not believe that these two components can be combined 
in a way that provides a meaningful measure of risk exposure for 
members, and has therefore determined not to provide the Order 
Execution Rate Protection for complex orders that contain a stock 
component.
---------------------------------------------------------------------------

    The System will trigger the Market Wide Risk Protection when the 
counting program has determined that the member has either (1) entered 
during the specified time period a number of orders exceeding its 
designated allowable order rate, or (2) executed during the specified 
time period a number of contracts exceeding its designated allowable 
contract execution rate. In particular, after a member enters an order, 
or a member's order is executed, the System will look back over the 
specified time period to determine whether the member has exceeded the 
threshold that it has set for the total number of orders entered or the 
total number of contracts traded, as applicable. If the member's 
threshold has been exceeded in either simple or complex instruments, 
the Market Wide Risk Protection will be triggered and the System will 
automatically reject all subsequent incoming orders entered by the 
member on ISE or, if applicable, across both ISE and ISE Gemini.\11\ In 
addition, if the member has opted in to this functionality, the System 
will automatically cancel all of the member's existing orders. The 
Market Wide Risk Protection will remain engaged until the member 
manually (e.g., via email) notifies the Exchange to enable the 
acceptance of new orders; however, the System will still allow members 
to interact with existing orders entered before the protection was 
triggered, including sending cancel order messages and receiving trade 
executions for those orders.
---------------------------------------------------------------------------

    \11\ Members that set different risk parameters for ISE and ISE 
Gemini will only have their orders rejected on the exchange whose 
threshold was exceeded.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Market Wide Risk Protection 
will assist members in better managing their risk when trading on the 
[sic] ISE. In particular, the proposed rule change provides 
functionality that allows members to set risk management thresholds for 
the number of orders entered or contracts executed on the Exchange 
during a specified period. This is similar to how other options 
exchanges have implemented activity-based risk management 
protections,\12\ and the Exchange believes this functionality will 
likewise be beneficial for ISE members.
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release Nos. 74118 (January 22, 
2015), 80 FR 4605 (January 28, 2015) (Notice); 74496 (March 13, 
2015), 80 FR 14421 (March 19, 2015) (Approval) (SR-MIAX-2015-03).
---------------------------------------------------------------------------

    The examples below illustrate how the Market Wide Risk Protection 
would work both for order entry and order execution protections:

    Example 1, Order Entry Rate Protection:
    Broker Dealer 1 (``BD1'') designates an allowable order rate of 499 
orders/1 second in simple instruments, 299 orders/1 second in complex 
options orders, and 199 orders/1 second in complex orders with a stock 
component.

@0 milliseconds, BD1 enters 200 regular orders. (Regular order total: 
200 orders)
@150 milliseconds, BD1 enters 50 complex options orders. (Complex 
options order total: 50 orders)
@250 milliseconds, BD1 enters 100 complex orders with a stock 
component. (Complex order with stock total: 100 orders)
@450 milliseconds, BD1 enters 250 regular orders. (Regular order total: 
450 orders)
@950 milliseconds, BD1 enters 50 regular orders. (Regular order total: 
500 orders)

    Market Wide Risk Protection is triggered on ISE, and, if 
applicable, ISE Gemini \13\ due to exceeding 499 regular orders in 1 
second. All subsequent orders in both simple and complex

[[Page 20006]]

instruments are rejected, and if BD1 has opted in to this 
functionality, all existing orders are cancelled. BD1 must contact 
Market Operations to resume trading.
---------------------------------------------------------------------------

    \13\ Members that share risk settings across both ISE and ISE 
Gemini will have the Market Wide Risk Protection triggered on both 
markets.

    Example 2, Order Execution Rate Protection:
    BD1 designates an allowable execution rate of 15,000 contracts/2 
seconds in simple instruments and 10,000 contracts/2 seconds in complex 
options orders.

@0 milliseconds, BD1 receives executions for 5,000 contracts from 
regular orders. (Regular execution total: 5,000 contracts)
@500 milliseconds, BD1 receives an execution for 2,500 contracts from a 
complex options order. (Complex execution total: 2,500 contracts)
@600 milliseconds, BD1 receives executions for 10,000 contracts from 
regular orders. (Regular execution total: 15,000 contracts)
@650 milliseconds, BD1 receives an execution for 1,500 contracts from a 
stock-option order. (Complex execution total: 2,500 contracts) \14\
---------------------------------------------------------------------------

    \14\ Complex orders with a stock component are not included in 
the order execution count.
---------------------------------------------------------------------------

@850 milliseconds, BD1 receives an execution for 3,000 contracts from a 
complex options order. (Complex execution total: 5,500 contracts)
@1150 milliseconds, BD1 receives an execution for 3,000 contracts from 
a
complex options order. (Complex execution total: 8,500 contracts)
@1700 milliseconds, BD1 receives an execution for 2,000 contracts from 
a complex options order. (Complex execution total: 10,500 contracts)

    Market Wide Risk Protection is triggered on ISE, and, if 
applicable, ISE Gemini \15\ due to exceeding 10,000 contracts in 2 
seconds for complex options orders. All subsequent orders in both 
simple and complex instruments are rejected, and if BD1 has opted in to 
this functionality, all existing orders are cancelled. BD1 must contact 
Market Operations to resume trading.
---------------------------------------------------------------------------

    \15\ Members that share risk settings across both ISE and ISE 
Gemini will have the Market Wide Risk Protection triggered on both 
markets.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\16\ 
Specifically, the proposed rule change is consistent with Section 
6(b)(5) of the Act,\17\ because it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a national market system and, 
in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change would assist 
with the maintenance of a fair and orderly market by establishing new 
activity based risk protections for orders. The Exchange currently 
offers a risk protection mechanism for market maker quotes that removes 
the member's quotes if a specified number of curtailment events occur 
during a set time period (``Market Wide Speed Bump'').\18\ The Exchange 
believes that this Market Wide Speed Bump functionality has been 
successful in reducing market maker risk and now proposes to adopt risk 
protections for orders that would allow other members to properly 
manage their exposure to excessive risk. In particular, the proposed 
rule change would implement two new risk protections based on the rate 
of order entry and order execution, respectively. The Exchange believes 
that both of these new protections, which together encompass the 
proposed Market Wide Risk Protection, would enable members to better 
manage their risk when trading options on the Exchange by limiting the 
member's risk exposure when systems or other issues result in orders 
being entered or executed at a rate that exceeds predefined thresholds. 
In today's market the Exchange believes that robust risk management is 
becoming increasingly more important for all members. The proposed rule 
change would provide an additional layer of risk protection for market 
participants that trade on the Exchange.
---------------------------------------------------------------------------

    \18\ See Rule 804(g)(2).
---------------------------------------------------------------------------

    The proposed Market Wide Risk Protection is similar to risk 
management functionality provided by other options exchanges, 
including, for example, the MIAX Options Exchange (``MIAX''), which 
recently received Commission approval for its ``Risk Protection 
Monitor'' for orders.\19\ In particular, the Market Wide Risk 
Protection is designed to 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. Such actions may undermine the 
quality of the markets available to customers and other market 
participants. Accordingly, the proposed rule change is designed to 
encourage members to submit additional order flow and liquidity to the 
Exchange, thereby removing impediments to and perfect [sic] the 
mechanisms of a free and open market and a national market system and, 
in general, protecting investors and the public interest. In addition, 
providing members with more tools for managing risk will facilitate 
transactions in securities because, as noted above, the members will 
have more confidence that protections are in place that reduce the 
risks from potential system errors and market events. As a result, the 
new functionality has the potential to promote just and equitable 
principles of trade.
---------------------------------------------------------------------------

    \19\ See supra note 10 [sic].
---------------------------------------------------------------------------

    The Exchange also believes that it is consistent with the 
protection of investors and the public interest to offer the Market 
Wide Risk Protection to members across both ISE and ISE Gemini as this 
will permit members to more effectively manage their risk 
simultaneously on both markets if desired. The Exchange already offers 
cross market risk protections for market makers [sic] quotes,\20\ and 
is now proposing to similarly offer a cross market risk protection for 
orders in order to reduce the risk that members face when entering 
orders on multiple exchanges. The Exchange notes that issues that would 
trigger the Market Wide Risk Protection are not normally confined to a 
member's activity on a single exchange. Accordingly, the Exchange 
believes that offering the Market Wide Risk Protection on a cross-
market basis would help members to more effectively manage their risk 
when trading on multiple markets, and reduce disruptive trading events 
to the benefit of all members and investors.
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release Nos. 71759 (March 20, 
2014), 79 FR 16850 (March 26, 2014) (``Notice''); 73147 (September 
19, 2014), 79 FR 57639 (September 25, 2014) (Approval) (SR-ISE-2014-
09).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\21\ the Exchange 
does not believe that the proposed rule change would impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
Market Wide Risk Protection is similar to risk protections already 
available on other options exchanges,\22\ and is designed to be a 
competitive

[[Page 20007]]

offering that would mitigate the risk associated with trading on the 
Exchange. Market makers already benefit from Market Wide Speed Bump 
functionality available for quotes. The proposed change would extend 
new risk protections to orders so that additional market participants 
can benefit from risk mitigating functionality. Like the Exchange's 
Market Wide Speed Bump, the proposed rule change would also be offered 
cross-market to members that want to be protected from inadvertent 
exposure to excessive risk when trading on both ISE and ISE Gemini. 
Permitting this functionality to be cross-market will not have any 
impact on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. In addition, the proposed 
functionality would be mandatory for all members, and would be made 
available on an equal and non-discriminatory basis. As such, the 
Exchange does not believe that the proposed rule change would impose 
any unnecessary burden on competition.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78f(b)(8).
    \22\ See supra notes 10 [sic] and 19.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    Within 45 days of the publication date of this notice or within 
such longer period (1) as the Commission may designate up to 45 days of 
such date if it finds such longer period to be appropriate and 
publishes its reasons for so finding or (2) as to which the self-
regulatory organization consents, the Commission will:
    (a) By order approve or disapprove such proposed rule change; or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2016-08 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-2016-08. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2016-08 and should be 
submitted on or before April 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07834 Filed 4-5-16; 8:45 am]
BILLING CODE 8011-01-P