81 FR 67038 - Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity and Allow the Exchange To Take Prompt Action
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 189 (September 29, 2016)
Federal Register Volume 81, Issue 189 (September 29, 2016)
| Page Range | 67038-67044 | |
| FR Document | 2016-23498 |
[Federal Register Volume 81, Number 189 (Thursday, September 29, 2016)] [Notices] [Pages 67038-67044] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-23498] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78920; File No. SR-ISE-2016-21] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt a Rule To Prohibit Disruptive Quoting and Trading Activity and Allow the Exchange To Take Prompt Action September 23, 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 September 15, 2016, the International Securities Exchange, LLC (``ISE'' or ``Exchange'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to adopt a new rule to clearly prohibit disruptive quoting and trading activity on the Exchange, as further described below. Further the Exchange proposes to amend Exchange Rules to permit the Exchange to take prompt action to suspend Members or their clients that violate such rule. The text of the proposed rule change is available on the Exchange's Web site at 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 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. [[Page 67039]] A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange is filing this proposal to adopt a new rule to clearly prohibit disruptive quoting and trading activity on the Exchange and to amend Exchange Rules to permit the Exchange to take prompt action to suspend Members or their clients that violate such rule. Background As a national securities exchange registered pursuant to Section 6 of the Act, the Exchange is required to be organized and to have the capacity to enforce compliance by its members and persons associated with its members, with the Act, the rules and regulations thereunder, and the Exchange's Rules. Further, the Exchange's Rules are required to be ``designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest.'' \3\ In fulfilling these requirements, the Exchange has developed a comprehensive regulatory program that includes automated surveillance of trading activity that is both operated directly by Exchange staff and by staff of the Financial Industry Regulatory Authority (``FINRA'') pursuant to a Regulatory Services Agreement (``RSA''). When disruptive and potentially manipulative or improper quoting and trading activity is identified, the Exchange or FINRA (acting as an agent of the Exchange) conducts an investigation into the activity, requesting additional information from the Member or Members involved. To the extent violations of the Act, the rules and regulations thereunder, or Exchange Rules have been identified and confirmed, the Exchange or FINRA as its agent will commence the enforcement process, which might result in, among other things, a censure, a requirement to take certain remedial actions, one or more restrictions on future business activities, a monetary fine, or even a temporary or permanent ban from the securities industry. --------------------------------------------------------------------------- \3\ 15 U.S.C. 78f(b)(1). --------------------------------------------------------------------------- The process described above, from the identification of disruptive and potentially manipulative or improper quoting and trading activity to a final resolution of the matter, can often take several years. The Exchange believes that this time period is generally necessary and appropriate to afford the subject Member adequate due process, particularly in complex cases. However, as described below, the Exchange believes that there are certain obvious and uncomplicated cases of disruptive and manipulative behavior or cases where the potential harm to investors is so large that the Exchange should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange. In recent years, several cases have been brought and resolved by the Exchange and other SROs that involved allegations of wide-spread market manipulation, much of which was ultimately being conducted by foreign persons and entities using relatively rudimentary technology to access the markets and over which the Exchange and other SROs had no direct jurisdiction. In each case, the conduct involved a pattern of disruptive quoting and trading activity indicative of manipulative layering \4\ or spoofing.\5\ The Exchange and other SROs were able to identify the disruptive quoting and trading activity in real-time or near real-time; nonetheless, in accordance with Exchange Rules and the Act, the Members responsible for such conduct or responsible for their customers' conduct were allowed to continue the disruptive quoting and trading activity on the Exchange and other exchanges during the entirety of the subsequent lengthy investigation and enforcement process. The Exchange believes that it should have the authority to initiate an expedited suspension proceeding in order to stop the behavior from continuing on the Exchange if a Member is engaging in or facilitating disruptive quoting and trading activity and the Member has received sufficient notice with an opportunity to respond, but such activity has not ceased. --------------------------------------------------------------------------- \4\ ``Layering'' is a form of market manipulation in which multiple, non-bona fide limit orders are entered on one side of the market at various price levels in order to create the appearance of a change in the levels of supply and demand, thereby artificially moving the price of the security. An order is then executed on the opposite side of the market at the artificially created price, and the non-bona fide orders are cancelled. \5\ ``Spoofing'' is a form of market manipulation that involves the market manipulator placing non-bona fide orders that are intended to trigger some type of market movement and/or response from other market participants, from which the market manipulator might benefit by trading bona fide orders. --------------------------------------------------------------------------- The following two examples are instructive on the Exchange's rationale for the proposed rule change. In July 2012, Biremis Corp. (formerly Swift Trade Securities USA, Inc.) (the ``Firm'') and its CEO were barred from the industry for, among other things, supervisory violations related to a failure by the Firm to detect and prevent disruptive and allegedly manipulative trading activities, including layering, short sale violations, and anti-money laundering violations.\6\ The Firm's sole business was to provide trade execution services via a proprietary day trading platform and order management system to day traders located in foreign jurisdictions. Thus, the disruptive and allegedly manipulative trading activity introduced by the Firm to U.S. markets originated directly or indirectly from foreign clients of the Firm. The pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008. Although the Firm and its principals were on notice of the disruptive and allegedly manipulative quoting and trading activity that was occurring, the Firm took little to no action to attempt to supervise or prevent such quoting and trading activity until at least 2009. Even when it put some controls in place, they were deficient and the pattern of disruptive and allegedly manipulative trading activity continued to occur. As noted above, the final resolution of the enforcement action to bar the Firm and its CEO from the industry was not concluded until 2012, four years after the disruptive and allegedly manipulative trading activity was first identified. --------------------------------------------------------------------------- \6\ See Biremis Corp. and Peter Beck, FINRA Letter of Acceptance, Waiver and Consent No. 2010021162202, July 30, 2012. --------------------------------------------------------------------------- In September of 2012, Hold Brothers On-Line Investment Services, Inc. (the ``Firm'') settled a regulatory action in connection with the Firm's provision of a trading platform, trade software and trade execution, support and clearing services for day traders.\7\ Many traders using the Firm's services were located in foreign jurisdictions. The Firm ultimately settled the action with FINRA and several exchanges, including the Exchange, for a total monetary fine of $3.4 million. In a separate action, the Firm settled with the Commission for a monetary fine of $2.5 million.\8\ Among the alleged violations in the case were disruptive and allegedly manipulative quoting and trading activity, including spoofing, layering, wash trading, and pre-arranged trading. Through its [[Page 67040]] conduct and insufficient procedures and controls, the Firm also allegedly committed anti-money laundering violations by failing to detect and report manipulative and suspicious trading activity. The Firm was alleged to have not only provided foreign traders with access to the U.S. markets to engage in such activities, but that its principals also owned and funded foreign subsidiaries that engaged in the disruptive and allegedly manipulative quoting and trading activity. Although the pattern of disruptive and allegedly manipulative quoting and trading activity was identified in 2009, as noted above, the enforcement action was not concluded until 2012. Thus, although disruptive and allegedly manipulative quoting and trading was promptly detected, it continued for several years. --------------------------------------------------------------------------- \7\ See Hold Brothers On-Line Investment Services, LLC, FINRA Letter of Acceptance, Waiver and Consent No. 20100237710001, September 25, 2012. \8\ In the Matter of Hold Brothers On-Line Investment Services, LLC, Exchange Act Release No. 67924, September 25, 2012. --------------------------------------------------------------------------- The Exchange also notes the current criminal proceedings that have commenced against Navinder Singh Sarao. Mr. Sarao's allegedly manipulative trading activity, which included forms of layering and spoofing in the futures markets, has been linked as a contributing factor to the ``Flash Crash'' of 2010, and yet continued through 2015. The Exchange believes that the activities described in the cases above provide justification for the proposed rule change, which is described below. In addition, while the examples provided are related to the equities market, the Exchange believes that this type of conduct should be prohibited for options as well. The Exchange believes that these patterns of disruptive and allegedly manipulative quoting and trading activity need to be addressed and the product should not limit the action taken by the Exchange. Rule 1616--Expedited Client Suspension Proceeding The Exchange proposes to adopt new Rule 1616, titled ``Expedited Client Suspension Proceeding,'' to set forth procedures for issuing suspension orders, immediately prohibiting a Member from conducting continued disruptive quoting and trading activity on the Exchange. Importantly, these procedures would also provide the Exchange the authority to order a Member to cease and desist from providing access to the Exchange to a client of the Member that is conducting disruptive quoting and trading activity in violation of proposed Rule 403, which is currently reserved. New Rule 403 would be titled, ``Disruptive Quoting and Trading Activity Prohibited.'' Under proposed paragraph (a) of Rule 1616, with the prior written authorization of the Chief Regulatory Officer (``CRO'') or such other senior officers as the CRO may designate, the Office of General Counsel or Regulatory Department of the Exchange (such departments generally referred to as the ``Exchange'' for purposes of proposed Rule 1616) may initiate an expedited suspension proceeding with respect to alleged violations of Rule 403, which is proposed as part of this filing and described in detail below. Proposed paragraph (a) would also set forth the requirements for notice and service of such notice pursuant to the Rule, including the required method of service and the content of notice. Proposed paragraph (b) of Rule 1616 would govern the appointment of a Hearing Panel as well as potential disqualification or recusal of Hearing Officers. The proposed provision is consistent with existing Exchange Rule 1606(a). The proposed rule provides for a Hearing Officer to be recused in the event he or she has a conflict of interest or bias or other circumstances exist where his or her fairness might reasonably be questioned in accordance with Rules 1616(b)(2). In addition to recusal initiated by such a Hearing Officer, a party to the proceeding will be permitted to file a motion to disqualify a Hearing Officer. However, due to the compressed schedule pursuant to which the process would operate under Rule 1616, the proposed rule would require such motion to be filed no later than 5 days after the announcement of the Hearing Panel and the Exchange's brief in opposition to such motion would be required to be filed no later than 5 days after service thereof. Pursuant to existing Rule 1606(a)(3), any time a person serving on a Panel has a conflict of interest or bias or circumstances otherwise exist where his fairness might be reasonably questioned, the person must withdraw from the Panel. The applicable Hearing Officer shall remove himself or herself and the Panel Chairman may request the Chairman of the Business Conduct Committee select a replacement such that the Hearing Panel still meets the compositional requirements described in Rule 1616(a). Under paragraph (c) of the proposed Rule, the hearing would be held not later than 15 days after service of the notice initiating the suspension proceeding, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. In the event of a recusal or disqualification of a Hearing Officer, the hearing shall be held not later than five days after a replacement Hearing Officer is appointed. Proposed paragraph (c) would also govern how the hearing is conducted, including the authority of Hearing Officers, witnesses, additional information that may be required by the Hearing Panel, the requirement that a transcript of the proceeding be created and details related to such transcript, and details regarding the creation and maintenance of the record of the proceeding. Proposed paragraph (c) would also state that if a Respondent fails to appear at a hearing for which it has notice, the allegations in the notice and accompanying declaration may be deemed admitted, and the Hearing Panel may issue a suspension order without further proceedings. Finally, as proposed, if the Exchange fails to appear at a hearing for which it has notice, the Hearing Panel may order that the suspension proceeding be dismissed. Under paragraph (d) of the proposed Rule, the Hearing Panel would be required to issue a written decision stating whether a suspension order would be imposed. The Hearing Panel would be required to issue the decision not later than 10 days after receipt of the hearing transcript, unless otherwise extended by the Chairman of the Hearing Panel with the consent of the Parties for good cause shown. The Rule would state that a suspension order shall be imposed if the Hearing Panel finds by a preponderance of the evidence that the alleged violation specified in the notice has occurred and that the violative conduct or continuation thereof is likely to result in significant market disruption or other significant harm to investors. Proposed paragraph (d) would also describe the content, scope and form of a suspension order. As proposed, a suspension order shall be limited to ordering a Respondent to cease and desist from violating proposed Rule 403 and/or to ordering a Respondent to cease and desist from providing access to the Exchange to a client of Respondent that is causing violations of Rule 403. Under the proposed rule, a suspension order shall also set forth the alleged violation and the significant market disruption or other significant harm to investors that is likely to result without the issuance of an order. The order shall describe in reasonable detail the act or acts the Respondent is to take or refrain from taking, and suspend such Respondent unless and until such action is taken or refrained from. Finally, the order shall include the date and hour of its issuance. As proposed, a suspension order would remain effective and enforceable unless modified, set aside, limited, or revoked pursuant to proposed paragraph (e), as described below. Finally, paragraph (d) would require service of the Hearing [[Page 67041]] Panel's decision and any suspension order consistent with other portions of the proposed rule related to service. Proposed paragraph (e) of Rule 1616 would state that at any time after the Hearing Officers served the Respondent with a suspension order, a Party could apply to the Hearing Panel to have the order modified, set aside, limited, or revoked. If any part of a suspension order is modified, set aside, limited, or revoked, proposed paragraph (e) of Rule 1616 provides the Hearing Panel discretion to leave the cease and desist part of the order in place. For example, if a suspension order suspends Respondent unless and until Respondent ceases and desists providing access to the Exchange to a client of Respondent, and after the order is entered the Respondent complies, the Hearing Panel is permitted to modify the order to lift the suspension portion of the order while keeping in place the cease and desist portion of the order. With its broad modification powers, the Hearing Panel also maintains the discretion to impose conditions upon the removal of a suspension--for example, the Hearing Panel could modify an order to lift the suspension portion of the order in the event a Respondent complies with the cease and desist portion of the order but additionally order that the suspension will be re-imposed if Respondent violates the cease and desist provisions modified order in the future. The Hearing Panel generally would be required to respond to the request in writing within 10 days after receipt of the request. An application to modify, set aside, limit or revoke a suspension order would not stay the effectiveness of the suspension order. Finally, proposed paragraph (f) would provide that sanctions issued under the proposed Rule 1616 would constitute final and immediately effective disciplinary sanctions imposed by the Exchange, and that the right to have any action under the Rule reviewed by the Commission would be governed by Section 19 of the Act. The filing of an application for review would not stay the effectiveness of a suspension order unless the Commission otherwise ordered. Rule 403--Disruptive Quoting and Trading Activity Prohibited The Exchange currently has authority to prohibit and take action against manipulative trading activity, including disruptive quoting and trading activity, pursuant to its general market manipulation rules, including Rules 400 and 405. The Exchange proposes to adopt new Rule 403, which would more specifically define and prohibit disruptive quoting and trading activity on the Exchange. As noted above, the Exchange proposes to apply the proposed suspension rules to proposed Rule 403. Proposed Rule 403 would prohibit Members from engaging in or facilitating disruptive quoting and trading activity on the Exchange, as described in proposed Rule 403(a)(i) and (ii), including acting in concert with other persons to effect such activity. The Exchange believes that it is necessary to extend the prohibition to situations when persons are acting in concert to avoid a potential loophole where disruptive quoting and trading activity is simply split between several brokers or customers. The Exchange believes, that with respect to persons acting in concert perpetrating an abusive scheme, it is important that the Exchange have authority to act against the parties perpetrating the abusive scheme, whether it is one person or multiple persons. To provide proper context for the situations in which the Exchange proposes to utilize its proposed authority, the Exchange believes it is necessary to describe the types of disruptive quoting and trading activity that would cause the Exchange to use its authority. Accordingly, the Exchange proposes to adopt Rule 403(a)(i) and (ii) providing additional details regarding disruptive quoting and trading activity. Proposed Rule 403(a)(i)(a) describes disruptive quoting and trading activity containing many of the elements indicative of layering. It would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: (i) A party enters multiple limit orders on one side of the market at various price levels (the ``Displayed Orders''); and (ii) following the entry of the Displayed Orders, the level of supply and demand for the security changes; and (iii) the party enters one or more orders on the opposite side of the market of the Displayed Orders (the ``Contra-Side Orders'') that are subsequently executed; and (iv) following the execution of the Contra-Side Orders, the party cancels the Displayed Orders. Proposed Rule 403(a)(i)(b) describes disruptive quoting and trading activity containing many of the elements indicative of spoofing and would describe disruptive quoting and trading activity as a frequent pattern in which the following facts are present: (i) A party narrows the spread for a security by placing an order inside the national best bid or offer; and (ii) the party then submits an order on the opposite side of the market that executes against another market participant that joined the new inside market established by the order described in proposed 403(a)(i)(b)(i) that narrowed the spread. The Exchange believes that the proposed descriptions of disruptive quoting and trading activity articulated in the rule are consistent with the activities that have been identified and described in the client access cases described above. The Exchange further believes that the proposed descriptions will provide Members with clear descriptions of disruptive quoting and trading activity that will help them to avoid engaging in such activities or allowing their clients to engage in such activities. The Exchange proposes to make clear in proposed Rule 403(a)(ii), unless otherwise indicated, the descriptions of disruptive quoting and trading activity do not require the facts to occur in a specific order in order for the rule to apply. For instance, with respect to the pattern defined in proposed Rule 403(a)(i)(a) it is of no consequence whether a party first enters Displayed Orders and then Contra-side Orders or vice-versa. However, as proposed, it is required for supply and demand to change following the entry of the Displayed Orders. The Exchange also proposes to make clear that disruptive quoting and trading activity includes a pattern or practice in which some portion of the disruptive quoting and trading activity is conducted on the Exchange and the other portions of the disruptive quoting and trading activity are conducted on one or more other exchanges. The Exchange believes that this authority is necessary to address market participants who would otherwise seek to avoid the prohibitions of the proposed Rule by spreading their activity amongst various execution venues. In sum, proposed Rule 403 coupled with proposed Rule 1616 would provide the Exchange with authority to promptly act to prevent disruptive quoting and trading activity from continuing on the Exchange. Below is an example of how the proposed rule would operate. Assume that through its surveillance program, Exchange staff identifies a pattern of potentially disruptive quoting and trading activity. After an initial investigation the Exchange would then contact the Member responsible for the orders that caused the activity to request an explanation of the activity as well as any additional relevant information, including the source of the activity. If the Exchange were to continue to see the same pattern from the same Member and the source of the activity is the same or has been previously identified [[Page 67042]] as a frequent source of disruptive quoting and trading activity then the Exchange could initiate an expedited suspension proceeding by serving notice on the Member that would include details regarding the alleged violations as well as the proposed sanction. In such a case the proposed sanction would likely be to order the Member to cease and desist providing access to the Exchange to the client that is responsible for the disruptive quoting and trading activity and to suspend such Member unless and until such action is taken. The Member would have the opportunity to be heard in front of a Hearing Panel at a hearing to be conducted within 15 days of the notice. If the Hearing Panel determined that the violation alleged in the notice did not occur or that the conduct or its continuation would not have the potential to result in significant market disruption or other significant harm to investors, then the Hearing Panel would dismiss the suspension order proceeding. If the Hearing Panel determined that the violation alleged in the notice did occur and that the conduct or its continuation is likely to result in significant market disruption or other significant harm to investors, then the Hearing Panel would issue the order including the proposed sanction, ordering the Member to cease providing access to the client at issue and suspending such Member unless and until such action is taken. If such Member wished for the suspension to be lifted because the client ultimately responsible for the activity no longer would be provided access to the Exchange, then such Member could apply to the Hearing Panel to have the order modified, set aside, limited or revoked. The Exchange notes that the issuance of a suspension order would not alter the Exchange's ability to further investigate the matter and/or later sanction the Member pursuant to the Exchange's standard disciplinary process for supervisory violations or other violations of Exchange rules or the Act. The Exchange reiterates that it already has broad authority to take action against a Member in the event that such Member is engaging in or facilitating disruptive or manipulative trading activity on the Exchange. For the reasons described above, and in light of recent cases like the client access cases described above, as well as other cases currently under investigation, the Exchange believes that it is equally important for the Exchange to have the authority to promptly initiate expedited suspension proceedings against any Member who has demonstrated a clear pattern or practice of disruptive quoting and trading activity, as described above, and to take action including ordering such Member to terminate access to the Exchange to one or more of such Member's clients if such clients are responsible for the activity. The Exchange recognizes that its proposed authority to issue a suspension order is a powerful measure that should be used very cautiously. Consequently, the proposed rules have been designed to ensure that the proceedings are used to address only the most clear and serious types of disruptive quoting and trading activity and that the interests of Respondents are protected. For example, to ensure that proceedings are used appropriately and that the decision to initiate a proceeding is made only at the highest staff levels, the proposed rules require the CRO or another senior officer of the Exchange to issue written authorization before the Exchange can institute an expedited suspension proceeding. In addition, the rule by its terms is limited to violations of Rules 403, when necessary to protect investors, other Members and the Exchange. The Exchange will initiate disciplinary action for violations of Rule 403, pursuant to Rule 1616. Further, the Exchange believes that the proposed expedited suspension provisions described above that provide the opportunity to respond as well as a Hearing Panel determination prior to taking action will ensure that the Exchange would not utilize its authority in the absence of a clear pattern or practice of disruptive quoting and trading activity. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act \9\ in general, and furthers the objectives of Section 6(b)(5) of the Act \10\ in particular, in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest. Pursuant to the proposal, the Exchange will have a mechanism to promptly initiate expedited suspension proceedings in the event the Exchange believes that it has sufficient proof that a violation of Rule 403 has occurred and is ongoing. --------------------------------------------------------------------------- \9\ 15 U.S.C. 78f(b). \10\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- Further, the Exchange believes that the proposal is consistent with Sections 6(b)(1) and 6(b)(6) of the Act,\11\ which require that the rules of an exchange enforce compliance with, and provide appropriate discipline for, violations of the Commission and Exchange rules. The Exchange also believes that the proposal is consistent with the public interest, the protection of investors, or otherwise in furtherance of the purposes of the Act because the proposal helps to strengthen the Exchange's ability to carry out its oversight and enforcement responsibilities as a self-regulatory organization in cases where awaiting the conclusion of a full disciplinary proceeding is unsuitable in view of the potential harm to other Members and their customers. Also, the Exchange notes that if this type of conduct is allowed to continue on the Exchange, the Exchange's reputation could be harmed because it may appear to the public that the Exchange is not acting to address the behavior. The expedited process would enable the Exchange to address the behavior with greater speed. --------------------------------------------------------------------------- \11\ 15 U.S.C. 78f(b)(1) and 78f(b)(6). --------------------------------------------------------------------------- As explained above, the Exchange notes that it has defined the prohibited disruptive quoting and trading activity by modifying the traditional definitions of layering and spoofing \12\ to eliminate an express intent element that would not be proven on an expedited basis and would instead require a thorough investigation into the activity. As noted throughout this filing, the Exchange believes it is necessary for the protection of investors to make such modifications in order to adopt an expedited process rather than allowing disruptive quoting and trading activity to occur for several years. --------------------------------------------------------------------------- \12\ See supra, notes 4 and 5. --------------------------------------------------------------------------- Through this proposal, the Exchange does not intend to modify the definitions of spoofing and layering that have generally been used by the Exchange and other regulators in connection with actions like those cited above. The Exchange believes that the pattern of disruptive and allegedly manipulative quoting and trading activity was widespread across multiple exchanges, and the Exchange, FINRA, and other SROs identified clear patterns of the behavior in 2007 and 2008 in the equities markets.\13\ The Exchange believes that this proposal will provide the Exchange with the necessary means to enforce against such behavior in an expedited manner while providing [[Page 67043]] Members with the necessary due process. The Exchange believes that its proposal is consistent with the Act because it provides the Exchange with the ability to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general to protect investors and the public interest from such ongoing behavior. --------------------------------------------------------------------------- \13\ See Section 3 herein, the Purpose section, for examples of conduct referred to herein. --------------------------------------------------------------------------- Further, the Exchange believes that adopting a rule applicable to Options Participants is consistent with the Act because the Exchange believes that this type of behavior should be prohibited for all Members. The type of product should not be the determining factor, rather the behavior which challenges the market structure is the primary concern for the Exchange. While this behavior may not be as prevalent on the options market today, the Exchange does not believe that the possibility of such behavior in the future would not have the same market impact and thereby warrant an expedited process. The Exchange further believes that the proposal is consistent with Section 6(b)(7) of the Act,\14\ which requires that the rules of an exchange ``provide a fair procedure for the disciplining of members and persons associated with members . . . and the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange or a member thereof.'' Finally, the Exchange also believes the proposal is consistent with Sections 6(d)(1) and 6(d)(2) of the Act,\15\ which require that the rules of an exchange with respect to a disciplinary proceeding or proceeding that would limit or prohibit access to or membership in the exchange require the exchange to: Provide adequate and specific notice of the charges brought against a member or person associated with a member, provide an opportunity to defend against such charges, keep a record, and provide details regarding the findings and applicable sanctions in the event a determination to impose a disciplinary sanction is made. The Exchange believes that each of these requirements is addressed by the notice and due process provisions included within Rule 1616. Importantly, as noted above, the Exchange will use the authority only in clear and egregious cases when necessary to protect investors, other Members and the Exchange, and in such cases, the Respondent will be afforded due process in connection with the suspension proceedings. --------------------------------------------------------------------------- \14\ 15 U.S.C. 78f(b)(7). \15\ U.S.C. 78f(d)(1). --------------------------------------------------------------------------- Further, the Exchange believes that adopting a rule applicable to options is consistent with the Act because the Exchange believes that this type of behavior should be prohibited for all Members. The type of product should not be the determining factor, rather the behavior which challenges the market structure is the primary concern for the Exchange. While this behavior may not be as prevalent on the options market today, the Exchange does not believe that the possibility of such behavior in the future would not have the same market impact and thereby warrant an expedited process. 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. To the contrary, the Exchange believes that each self-regulatory organization should be empowered to regulate trading occurring on its market consistent with the Act and without regard to competitive issues. The Exchange is requesting authority to take appropriate action if necessary for the protection of investors, other Members and the Exchange. The Exchange also believes that it is important for all exchanges to be able to take similar action to enforce their rules against manipulative conduct thereby leaving no exchange prey to such conduct. The Exchange does not believe that the proposed rule change imposes an undue burden on competition, rather this process will provide the Exchange with the necessary means to enforce against violations of manipulative quoting and trading activity in an expedited manner, while providing Members with the necessary due process. The Exchange's proposal would treat all Members in a uniform manner with respect to the type of disciplinary action that would be taken for violations of manipulative quoting and trading activity. 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 \16\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\17\ --------------------------------------------------------------------------- \16\ 15 U.S.C. 78s(b)(3)(A)(iii). \17\ 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. --------------------------------------------------------------------------- A proposed rule change filed under Rule 19b-4(f)(6) normally does not become operative for 30 days after the date of its filing. However, Rule 19b-4(f)(6)(iii) \18\ permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has requested that the Commission waive the 30-day operative delay so that the proposed rule change will become operative on filing. The Exchange stated that the proposed rule change would allow the Exchange to regulate its market in a manner similar to other options exchanges. The Exchange also believes that it is important to prohibit Members from engaging in the manipulative conduct described above in a uniform manner on all exchanges. For these reasons, the Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission designates the proposed rule change to be operative upon filing.\19\ --------------------------------------------------------------------------- \18\ 17 CFR 240.19b-4(f)(6)(iii). \19\ For purposes only of waiving the 30-day operative delay, the Commission also has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). --------------------------------------------------------------------------- At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, [[Page 67044]] including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse 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-2016-21 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-2016-21. 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 such 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-2016-21, and should be submitted on or before October 20, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\20\ --------------------------------------------------------------------------- \20\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2016-23498 Filed 9-28-16; 8:45 am] BILLING CODE 8011-01-P
![67038 Federal Register / Vol. 81, No. 189 / Thursday, September 29, 2016 / Notices
circumstances under which the quotes and trades publicly reported SECURITIES AND EXCHANGE
Exchange’s Chief Executive Officer under the Exchange’s own reporting COMMISSION
(‘‘CEO’’) may determine to have the symbol. The proposed rule change
Exchange trade securities on its Disaster would also require member [Release No. 34–78920; File No. SR–ISE–
Recovery Facility.23 Finally, the organizations to participate in 2016–21]
Exchange proposes to amend Rule 431 scheduled functional and performance
to delete references to the terms Self-Regulatory Organizations;
testing of the Exchange’s business
‘‘member,’’ ‘‘member organization,’’ and International Securities Exchange,
continuity and disaster recovery plans LLC; Notice of Filing and Immediate
‘‘designated market maker’’ and use the in the manner and frequency specified
term ‘‘ATP Holder’’ because Rule 431 Effectiveness of Proposed Rule
by the Exchange, which shall not be less Change To Adopt a Rule To Prohibit
would pertain only to options trading.
than once every 12 months.26 Disruptive Quoting and Trading
Additionally the Exchange proposes to
amend Rule 0 to remove the reference Under the proposal, the Exchange Activity and Allow the Exchange To
to Rule 431 as being applicable to CEO would be authorized to make a Take Prompt Action
equities trading. determination for the Exchange to trade
September 23, 2016.
securities on the Disaster Recovery
III. Discussion and Commission Pursuant to Section 19(b)(1) of the
Facility only when the CEO deems such
Findings Securities Exchange Act of 1934
action to be necessary or appropriate for
After careful review of the proposal, (‘‘Act’’),1 and Rule 19b–4 thereunder,2
the maintenance of a fair and orderly notice is hereby given that on
as modified by Amendment Nos. 1 and market, or for the protection of investors
No. 2, the Commission finds that the September 15, 2016, the International
or otherwise in the public interest, due Securities Exchange, LLC (‘‘ISE’’ or
proposed rule change is consistent with
to extraordinary circumstances. The ‘‘Exchange’’) filed with the Securities
the requirements of the Act and the
Exchange CEO must notify the Exchange and Exchange Commission (‘‘SEC’’ or
rules and regulations thereunder
applicable to a national securities board of directors as soon as feasible if ‘‘Commission’’) the proposed rule
exchange.24 In particular, the the CEO makes a determination to use change as described in Items I and II
Commission finds that the proposed the Disaster Recovery Facility. below, which Items have been prepared
rule change is consistent with Section The Commission believes that the by the Exchange. The Commission is
6(b)(5) of the Act,25 which requires, proposal is reasonably designed to publishing this notice to solicit
among other things, that the rules of a permit the Exchange to continue to comments on the proposed rule change
national securities exchange be operate in the event of an emergency by from interested persons.
designed to prevent fraudulent and using a secondary data center located in I. Self-Regulatory Organization’s
manipulative acts and practices, to a geographically diverse location to Statement of the Terms of the Substance
promote just and equitable principles of open, trade, and close Exchange-listed of the Proposed Rule Change
trade, to foster cooperation and securities. Accordingly, the Commission
coordination with persons engaged in The Exchange proposes to adopt a
believes that the proposal is designed to new rule to clearly prohibit disruptive
facilitating transactions in securities, to remove impediments to and perfect the
remove impediments to and perfect the quoting and trading activity on the
mechanism of a free and open market Exchange, as further described below.
mechanism of a free and open market
and a national market system, and, in and a national market system, and to Further the Exchange proposes to
general, to protect investors and the protect investors and the public interest, amend Exchange Rules to permit the
public interest. and the Commission therefore finds that Exchange to take prompt action to
Under amended Exchange Rule 49, the proposed rule change is consistent suspend Members or their clients that
the Exchange would maintain its own with the requirements of the Act. violate such rule.
Disaster Recovery Facility to continue IV. Conclusion The text of the proposed rule change
Exchange operations when necessary is available on the Exchange’s Web site
without substantial disruption to It is therefore ordered, pursuant to at www.ise.com, at the principal office
member organizations. This Disaster Section 19(b)(2) of the Act,27 that the of the Exchange, and at the
Recovery Facility would allow the proposed rule change (SR–NYSEMKT– Commission’s Public Reference Room.
Exchange to no longer designate NYSE 2016–68), as modified by Amendments II. Self-Regulatory Organization’s
Arca as its backup facility but instead No. 1 and Partial Amendment No. 2, be, Statement of the Purpose of, and
operate as a fully electronic exchange on and hereby is, approved. Statutory Basis for, the Proposed Rule
its own facilities, under its own trading
For the Commission, by the Division of Change
rules, with its own order book and with
Trading and Markets, pursuant to delegated In its filing with the Commission, the
23 The Exchange proposes to amend Exchange authority.28 Exchange included statements
Rule 51(b) to provide the Exchange’s CEO with the Brent J. Fields, concerning the purpose of and basis for
authority to determine whether to use the
Exchange’s Disaster Recovery Facility. The Secretary. the proposed rule change and discussed
Exchange also proposes to make a conforming [FR Doc. 2016–23495 Filed 9–28–16; 8:45 am] any comments it received on the
amendment to Exchange Rule 51(c) to specify that
BILLING CODE 8011–01–P
proposed rule change. The text of these
the CEO shall take any of the actions described in statements may be examined at the
Exchange Rule 51(b) only when such action is
places specified in Item IV below. The
mstockstill on DSK3G9T082PROD with NOTICES
deemed necessary or appropriate for the
maintenance of a fair and orderly market, or the Exchange has prepared summaries, set
protection of investors of otherwise in the public forth in sections A, B, and C below, of
interest, due to extraordinary circumstances. the most significant aspects of such
24 In approving these proposed rule changes, the
statements.
Commission has considered the proposed rules’
26 See Proposed Exchange Rule 49(b)(N).
impact on efficiency, competition, and capital
27 15 U.S.C. 78s(b)(2).
formation. See 15 U.S.C. 78c(f). 1 15 U.S.C. 78s(b)(1).
25 15 U.S.C. 78f(b)(5). 28 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.
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![67044 Federal Register / Vol. 81, No. 189 / Thursday, September 29, 2016 / Notices
including whether the proposed rule SMALL BUSINESS ADMINISTRATION SUMMARY: This is a notice of an
change is consistent with the Act. Administrative declaration of a disaster
Comments may be submitted by any of [License No. 05/05–0315] for the Commonwealth of Kentucky
the following methods: dated 09/22/2016.
Northcreek Mezzanine Fund II, L.P.; Incident: Severe Storms, Torrential
Electronic Comments Notice Seeking Exemption Under Rains, Tornadoes, Severe Wind, Hail
Section 312 of the Small Business and Flooding.
• Use the Commission’s Internet Investment Act, Conflicts of Interest
comment form (http://www.sec.gov/ Incident Period: 07/03/2016 through
rules/sro.shtml); or 07/09/2016.
Notice is hereby given that Northcreek Effective Date: 09/22/2016.
• Send an email to rule-comments@ Mezzanine Fund II, L.P., 312 Walnut Physical Loan Application Deadline
sec.gov. Please include File Number SR– Street, Suite 2310 Cincinnati, OH 45202, Date: 11/21/2016.
ISE–2016–21 on the subject line. a Federal Licensee under the Small Economic Injury (EIDL) Loan
Paper Comments Business Investment Act of 1958, as Application Deadline Date: 06/22/2017.
amended (‘‘the Act’’), in connection ADDRESSES: Submit completed loan
• Send paper comments in triplicate with the financing of a small concern, applications to: U.S. Small Business
to Secretary, Securities and Exchange has sought an exemption under Section Administration Processing and
Commission, 100 F Street NE., 312 of the Act and Section 107.730, Disbursement Center, 14925 Kingsport
Washington, DC 20549–1090. Financings which Constitute Conflicts Road, Fort Worth, TX 76155.
of Interest of the Small Business FOR FURTHER INFORMATION CONTACT: A.
All submissions should refer to File
Administration (‘‘SBA’’) Rules and Escobar, Office of Disaster Assistance,
Number SR–ISE–2016–21. This file
Regulations (13 CFR 107.730). U.S. Small Business Administration,
number should be included on the
Northcreek Mezzanine Fund I, L.P. and 409 3rd Street SW., Suite 6050,
subject line if email is used. To help the
Northcreek Mezzanine Fund II, L.P. Washington, DC 20416.
Commission process and review your
propose to provide debt and equity
comments more efficiently, please use SUPPLEMENTARY INFORMATION: Notice is
financing to Alpha Sintered Metals,
only one method. The Commission will hereby given that as a result of the
LLC, 95 Mason Run Road, Ridgway, PA
post all comments on the Commission’s Administrator’s disaster declaration,
15853.
Internet Web site (http://www.sec.gov/ applications for disaster loans may be
The financing is brought within the
rules/sro.shtml). Copies of the filed at the address listed above or other
purview of § 107.730(a)(2) of the
submission, all subsequent locally announced locations.
Regulations because Northcreek
amendments, all written statements The following areas have been
Mezzanine Fund I, L.P. is currently
with respect to the proposed rule determined to be adversely affected by
invested in Alpha Sintered Metals, LLC
change that are filed with the the disaster:
and because of its level of ownership,
Commission, and all written Primary Counties: Marshall, Todd
Alpha Sintered Metals, LLC is an
communications relating to the Contiguous Counties:
Associate. Northcreek Mezzanine Fund
proposed rule change between the Kentucky: Calloway, Christian,
I, L.P. and Northcreek Mezzanine Fund
Commission and any person, other than Graves, Livingston, Logan, Lyon,
II, L.P. are also Associates and are
those that may be withheld from the McCracken, Muhlenberg, Trigg
seeking to co-invest in Alpha Sintered
public in accordance with the Tennessee: Montgomery, Robertson
Metals, LLC. Therefore this transaction
provisions of 5 U.S.C. 552, will be The Interest Rates are:
is considered financing an Associate,
available for Web site viewing and
requiring prior SBA exemption.
printing in the Commission’s Public Percent
Notice is hereby given that any
Reference Room, 100 F Street NE.,
interested person may submit written For Physical Damage:
Washington, DC 20549 on official
comments on the transaction, within Homeowners With Credit Avail-
business days between the hours of
fifteen days of the date of this able Elsewhere ...................... 3.250
10:00 a.m. and 3:00 p.m. Copies of such
publication, to the Associate Homeowners Without Credit
filing also will be available for
Administrator for Investment, U.S. Available Elsewhere .............. 1.625
inspection and copying at the principal Businesses With Credit Avail-
Small Business Administration, 409
office of the Exchange. All comments able Elsewhere ...................... 6.250
Third Street SW., Washington, DC
received will be posted without change; Businesses Without Credit
20416.
the Commission does not edit personal Available Elsewhere .............. 4.000
identifying information from Dated: September 14, 2016. Non-Profit Organizations With
submissions. You should submit only Mark L. Walsh, Credit Available Elsewhere ... 2.625
information that you wish to make Associate Administrator for Office of Non-Profit Organizations With-
available publicly. All submissions Investment and Innovation. out Credit Available Else-
where ..................................... 2.625
should refer to File Number SR–ISE– [FR Doc. 2016–23485 Filed 9–28–16; 8:45 am]
For Economic Injury:
2016–21, and should be submitted on or BILLING CODE P Businesses & Small Agricultural
before October 20, 2016. Cooperatives Without Credit
For the Commission, by the Division of Available Elsewhere .............. 4.000
Trading and Markets, pursuant to delegated SMALL BUSINESS ADMINISTRATION Non-Profit Organizations With-
mstockstill on DSK3G9T082PROD with NOTICES
authority.20 out Credit Available Else-
[Disaster Declaration #14871 and #14872] where ..................................... 2.625
Brent J. Fields,
Secretary. Kentucky Disaster #KY–00061 The number assigned to this disaster
[FR Doc. 2016–23498 Filed 9–28–16; 8:45 am] for physical damage is 14871 B and for
AGENCY: U.S. Small Business
BILLING CODE 8011–01–P
Administration. economic injury is 14872 0.
The States which received an EIDL
ACTION: Notice.
20 17 CFR 200.30–3(a)(12). Declaration # are Kentucky, Tennessee.
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Document Created: 2016-09-29 04:14:09
Document Modified: 2016-09-29 04:14:09
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 67038 |
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