82 FR 10811 - Self-Regulatory Organizations; ISE Gemini, LLC; ISE Mercury, LLC; Order Granting Approval of Proposed Rule Changes, as Modified by Amendment Nos. 1 and 2 Thereto, To Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of Each Exchange To Perform Certain Routing and Other Functions
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 30 (February 15, 2017)
Federal Register Volume 82, Issue 30 (February 15, 2017)
| Page Range | 10811-10814 | |
| FR Document | 2017-02992 |
[Federal Register Volume 82, Number 30 (Wednesday, February 15, 2017)] [Notices] [Pages 10811-10814] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-02992] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79995; File Nos. SR-ISEGemini-2016-16; SR-ISEMercury- 2016-22] Self-Regulatory Organizations; ISE Gemini, LLC; ISE Mercury, LLC; Order Granting Approval of Proposed Rule Changes, as Modified by Amendment Nos. 1 and 2 Thereto, To Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of Each Exchange To Perform Certain Routing and Other Functions February 9, 2017. I. Introduction On December 9, 2016, ISE Gemini, LLC (``ISE Gemini'') and ISE Mercury, LLC (``ISE Mercury,'' and each of ISE Gemini and ISE Mercury an ``Exchange'') filed with the Securities and Exchange Commission (``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule changes related to the routing of orders, cancellation of orders, and handling of error positions. The proposed rule changes would also permit Nasdaq Execution Services, LLC (``NES'') to become an affiliated Member \3\ of each Exchange to perform certain routing and other functions. On December 20, 2016, each Exchange filed Amendment No. 1 to its respective proposed rule change, which amended and replaced each original filing in its entirety. Also on December 20, 2016, each Exchange filed Amendment No. 2 to its respective proposed rule change.\4\ The proposed rule changes, each as modified by Amendment Nos. 1 and 2, were published for comment in the Federal Register on December 29, 2016.\5\ The Commission received no comments on the proposed rule changes. This order grants approval of the proposed rule changes, each as modified by the respective Amendment Nos. 1 and 2. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. \3\ A ``Member'' is an organization that has been approved to exercise certain trading rights on the Exchange. See ISE Gemini Rule 100(a)(23); ISE Mercury Rule 100(a)(23). \4\ Each Amendment No. 2 amended the description of one of the inbound routing conditions that would apply. Specifically, each Exchange modified the third condition to specify that the report that FINRA will provide to the Exchange's chief regulatory officer on a quarterly basis will quantify all alerts, of which the Exchange or FINRA (rather than solely FINRA) are aware, that identify NES as a participant that has potentially violated Commission or Exchange rules. \5\ See Securities Exchange Act Release Nos. 79664 (December 22, 2016), 81 FR 96136 (``ISE Gemini Notice''); 79663 (December 22, 2016), 81 FR 96089 (``ISE Mercury Notice''). --------------------------------------------------------------------------- II. Background On June 21, 2016, the Commission approved a proposed rule change relating to a corporate transaction in which Nasdaq, Inc. would become the ultimate parent of International Securities Exchange, LLC (``ISE''), ISE Gemini, and ISE Mercury (collectively, the ``ISE Exchanges'').\6\ The transaction closed on June 30, 2016.\7\ Nasdaq, Inc. is the ultimate parent of NASDAQ BX, Inc. (``BX''), The NASDAQ Stock Market LLC (``Nasdaq''), and NASDAQ PHLX LLC (``Phlx'' and, together with Nasdaq and BX, the ``Nasdaq Exchanges'').\8\ Nasdaq, Inc. is also the ultimate parent of NES,\9\ a broker-dealer that is a member, and affiliate, of each of the Nasdaq Exchanges.\10\ As a result of this transaction, the ISE Exchanges and the Nasdaq Exchanges became affiliates,\11\ and NES became an affiliate of the ISE Exchanges.\12\ --------------------------------------------------------------------------- \6\ See Securities Exchange Act Release No. 78119 (June 21, 2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11; SR-ISE Gemini- 2016-05; SR-ISE Mercury-2016-10) (order approving Nasdaq, Inc.'s acquisition of ISE, ISE Gemini, and ISE Mercury) (``Nasdaq Acquisition Order''). \7\ See http://ir.nasdaq.com/releasedetail.cfm?releaseid=977785 (Nasdaq press release announcing completion of its acquisition). \8\ See Nasdaq Acquisition Order, supra note 6, at 41611. \9\ See Securities Exchange Act Release No. 69233 (March 25, 2013), 78 FR 19352 (March 29, 2013) (SR-NASDAQ-2013-028) (order approving a proposed rule change to make permanent a pilot program to permit Nasdaq to accept inbound orders routed by NES from the BX Equities market and PSX) at 19352 n.6 and accompanying text (``BX Equity Routing Approval''). See also ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96089. \10\ See Securities Exchange Act Release Nos. 79661 (December 22, 2016), 81 FR 96100 (December 29, 2016) (SR-BX-2016-068) at 96100; 79662 (December 22, 2016), 81 FR 96087 (December 29, 2016) (SR-NASDAQ-2016-169) at 96087; and 79660 (December 22, 2016), 81 FR 96060 (December 29, 2016) (SR-Phlx-2016-120) at 96061. See also ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96089. \11\ See Nasdaq Acquisition Order, supra note 6, at 41611 n.8. The Nasdaq Exchanges, together with ISE, ISE Gemini (with respect to ISE Mercury), and ISE Mercury (with respect to ISE Gemini), are referred to herein as the ``Affiliated Exchanges.'' \12\ See generally ISE Gemini Notice, supra note 5, at 96137 (discussing that NES is a broker-dealer owned and operated by Nasdaq, Inc. and affiliated with ISE Gemini and the Affiliated Exchanges); ISE Mercury Notice, supra note 5, at 96089 (discussing that NES is a broker-dealer owned and operated by Nasdaq, Inc. and affiliated with ISE Mercury and the Affiliated Exchanges). --------------------------------------------------------------------------- As described in more detail below, ISE Gemini and ISE Mercury have now proposed rule changes (1) to permit each respective Exchange to receive inbound orders in options routed through NES from the Affiliated Exchanges, pursuant to certain limitations and conditions; and (2) to permit NES to become a Member of each Exchange to perform certain routing and other functions. ISE Gemini and ISE Mercury's respective rulebooks incorporate by reference Chapter 19 of ISE's rulebook, which contains rules relating to the routing of orders, cancellation of orders, and handling of certain error positions.\13\ ISE submitted a related proposed rule change to: (1) Route outbound orders in options listed and open for trading on ISE's system to away markets through NES, either directly or through a third-party routing broker-dealer; (2) adopt rules regarding the cancellation of orders and the handling of certain error positions, including maintenance by NES of an error account; and (3) make related conforming changes.\14\ These ISE rules, which the Commission is also approving today, concerning the outbound routing of orders, cancellation of orders, and handling of error accounts, will be incorporated by reference into ISE Gemini and ISE Mercury's rules,\15\ and are similar to [[Page 10812]] rules of Phlx,\16\ as well as the other Nasdaq Exchanges.\17\ Finally, ISE Gemini and ISE Mercury requested that the Commission approve their proposals to permit NES to become a Member of each respective Exchange, as required by ISE Gemini Rule 309 and ISE Mercury Rule 309 because of NES's affiliation with the Exchanges,\18\ to perform certain functions relating to routing orders inbound from the Affiliated Exchanges, the outbound routing of orders to away markets, cancellation of orders, and the maintenance of an error account. --------------------------------------------------------------------------- \13\ See ISE Gemini Rules, Chapter 19 (incorporating by reference rules in ISE Rules, Chapter 19); ISE Mercury Rules, Chapter 19 (incorporating by reference rules in ISE Rules, Chapter 19). \14\ See Securities Exchange Act Release No. 79665 (December 22, 2016), 81 FR 96092 (December 29, 2016) (``ISE Notice'') (notice of filing that proposes, among other things, to amend ISE Rules 1903, 1904, and 1905, and make conforming changes to ISE Rule 1901). The Commission is also today approving this proposed rule change. See Securities Exchange Act Release No. 79994 (February 9, 2017) (``ISE Exchange Routing Order''). \15\ Consistent with the proposals by ISE Gemini and ISE Mercury described herein, the ISE rules that the Commission is approving today also (1) permit ISE to receive inbound orders in options routed through NES from the Affiliated Exchanges, pursuant to certain limitations and conditions; and (2) permit NES to become a Member of ISE to perform certain routing and other functions. See ISE Notice, supra note 14, at 96093-94; ISE Exchange Routing Order, supra note 14. \16\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96090-91. See also Phlx Rules 985(c)(2), 1080(m)(ii), (iii), and (v). \17\ See Nasdaq Rule 2160(c) and Nasdaq Options Rules, Chapter VI, Section 11(d)-(g); and BX Rule 2140(c) and BX Options Rules, Chapter VI, Section 11(d)-(g). \18\ See ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96090. --------------------------------------------------------------------------- III. Discussion and Commission Findings After careful review, the Commission finds, as discussed in more detail below, that the proposed rule changes, as modified by Amendment Nos. 1 and 2, are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\19\ In particular, the Commission finds that the proposed rule changes, as modified by Amendment Nos. 1 and 2, are consistent with Section 6(b)(1) of the Act,\20\ which requires, among other things, that a national securities exchange be so organized and have the capacity to carry out the purpose of the Act, and to comply and enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulations thereunder, and the rules of the Exchange. Further, the Commission finds that the proposed rule changes, as modified by Amendment Nos. 1 and 2, are consistent with Section 6(b)(5) of the Act,\21\ which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to foster cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in securities; to remove impediments to and perfect the mechanism of a free and open market and a national market system; and, in general, to protect investors and the public interest. Section 6(b)(5) also requires that the rules of an exchange not be designed to permit unfair discrimination among customers, issuers, brokers, or dealers. --------------------------------------------------------------------------- \19\ In approving these proposed rule changes, the Commission has considered the proposed rules' impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). \20\ 15 U.S.C. 78f(b)(1). \21\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- A. Restriction on Affiliation As noted above, ISE Gemini and ISE Mercury proposed that NES be permitted to become a Member of each respective Exchange to perform certain routing and other functions, as described in more detail below.\22\ Absent Commission approval, ISE Gemini Rule 309 and ISE Mercury Rule 309 would prohibit NES from becoming a Member of either Exchange because of its affiliation with each Exchange and its affiliation with affiliates of each Exchange. Specifically, pursuant to ISE Gemini Rule 309, without prior Commission approval, a Member of the Exchange ``shall not be or become an affiliate of the Exchange, or any facility of the Exchange, or any entity with which the Exchange or any facility of the Exchange is affiliated.'' \23\ ISE Mercury Rule 309 contains the same restriction.\24\ --------------------------------------------------------------------------- \22\ See ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96090. See also infra Sections III.B-C. \23\ See ISE Gemini Rule 309. See also ISE Gemini Notice, supra note 5, at 96137. \24\ See ISE Mercury Rule 309. See also ISE Mercury Notice, supra note 5, at 96090. --------------------------------------------------------------------------- In the past, the Commission has expressed concern that the affiliation of an exchange with one of its members raises potential conflicts of interest and the potential for unfair competitive advantage.\25\ Although the Commission continues to be concerned about potential unfair competition and conflicts of interest between an exchange's self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, the Commission believes that it is consistent with the Act, as discussed in more detail below, to permit NES, an affiliate of each Exchange, to be a Member of each Exchange to perform each of the proposed functions, subject to the proposed limitations and conditions. The Commission also believes that the proposed limitations and conditions will mitigate its concerns about potential conflicts of interest and unfair competitive advantage,\26\ and that each Exchange's proposed rules are designed to ensure that NES cannot use any information advantage it may have because of its affiliation with each Exchange.\27\ --------------------------------------------------------------------------- \25\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (order approving the combination of NYSE Euronext and the American Stock Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2008-85) (order approving the purchase by ISE Holdings of an ownership interest in Direct Edge Holdings LLC); 59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a joint venture between NYSE and BIDS Holdings L.P.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10-182) (order granting the exchange registration of BATS Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10-194 and 10-196) (order granting the exchange registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10- 198) (order granting the exchange registration of BATS-Y Exchange, Inc.). \26\ See infra note 39 and accompanying text. \27\ See infra note 40 and accompanying text. The Commission also notes that the functions to be performed by NES for ISE Gemini and ISE Mercury, as well as the related limitations and conditions, are consistent with those previously approved by the Commission for other exchanges. See, e.g., Securities Exchange Act Release Nos. 67256 (June 26, 2012), 77 FR 39277 (July 2, 2012) (SR-BX-2012-030) (order approving rules relating to the establishment of the BX options market, including the use of an affiliated member for outbound and inbound routing of options orders) at 39280-82; and 67280 (June 27, 2012), 77 FR 39552 (July 3, 2012) (SR-BX-2012-034) (order approving a proposed rule change with respect to the authority of the BX or NES to cancel orders when a technical or systems issue occurs and the operation of an error account); BX Equity Routing Approval, supra note 9. In addition, the Commission is approving today ISE's proposal to allow NES to become a member of ISE to perform equivalent functions, subject to the same limitations and conditions. See ISE Exchange Routing Order, supra note 14. --------------------------------------------------------------------------- B. Inbound Routing As discussed above, NES is currently a member of each Nasdaq Exchange. NES also operates as a facility of each of Nasdaq, Phlx, and BX that provides outbound options routing from each to other market centers, subject to certain conditions.\28\ The Commission is approving today ISE's proposal that NES operate as a facility of ISE that provides outbound options routing to other market centers, subject to similar conditions.\29\ The operation of NES as a facility of each of the Affiliated Exchanges providing outbound routing [[Page 10813]] services will be subject to oversight by ISE, Nasdaq, BX, and Phlx, respectively, as well as Commission oversight. Each of the Affiliated Exchanges will be responsible for ensuring that NES's outbound options routing services are operated consistent with Section 6 of the Act and with the respective Affiliated Exchange's rules. In addition, the Affiliated Exchanges must each file with the Commission rule changes and fees relating to their outbound options routing services provided by NES. --------------------------------------------------------------------------- \28\ See Phlx Rule 1080(m)(ii) and (iii); Nasdaq Options Rules, Chapter VI, Section 11(d)-(f); BX Options Rules, Chapter VI, Section 11(d)-(f). The Commission notes that these conditions are consistent with the conditions the Commission is approving today for ISE Gemini and ISE Mercury's operation of NES as a facility of each Exchange for outbound options routing to other market centers. See infra Section III.C. \29\ See ISE Exchange Routing Order, supra note 14. --------------------------------------------------------------------------- Recognizing that the Commission previously expressed concern that the affiliation of an exchange with one of its members raises the potential for unfair competitive advantage and potential conflicts of interest between an exchange's self-regulatory obligations and its commercial interest, ISE Gemini and ISE Mercury proposed the following limitations and conditions to permit each Exchange to accept inbound options orders that NES routes in its capacity as a facility of the Affiliated Exchanges: \30\ --------------------------------------------------------------------------- \30\ See ISE Gemini Notice, supra note 5, at 96137-38; ISE Mercury Notice, supra note 5, at 96090. ---------------------------------------------------------------------------First, each Exchange and the Financial Industry Regulatory Authority (``FINRA'') will maintain a Regulatory Services Agreement (``RSA''), as well as an agreement pursuant to Rule 17d-2 under the Act (``17d-2 Agreement'').\31\ Pursuant to the RSA and the 17d-2 Agreement, FINRA will be allocated regulatory responsibilities to review NES's compliance with certain Exchange rules.\32\ Pursuant to the RSA, however, each Exchange retains ultimate responsibility for enforcing its rules with respect to NES. --------------------------------------------------------------------------- \31\ 17 CFR 240.17d-2. \32\ NES is also subject to independent oversight by FINRA, its designated examining authority, for compliance with financial responsibility requirements. --------------------------------------------------------------------------- Second, FINRA will monitor NES for compliance with each of the Exchange's trading rules, and will collect and maintain certain related information.\33\ --------------------------------------------------------------------------- \33\ Pursuant to the RSA, both FINRA and the respective Exchange will collect and maintain all alerts, complaints, investigations and enforcement actions in which NES (in its capacity as a facility of each of the Affiliated Exchanges routing orders to the Exchange) is identified as a participant that has potentially violated applicable Commission or Exchange rules. The respective Exchange and FINRA will retain these records in an easily accessible manner in order to facilitate any potential review conducted by the Commission's Office of Compliance Inspections and Examinations. See ISE Gemini Notice, supra note 5, at 96137 n.14 and accompanying text; ISE Mercury Notice, supra note 5, at 96090 n.14 and accompanying text. --------------------------------------------------------------------------- Third, FINRA will provide a report to each Exchange's chief regulatory officer (``CRO''), on a quarterly basis, that: (i) Quantifies all alerts (of which the Exchange or FINRA is aware) that identify NES as a participant that has potentially violated Commission, or the respective Exchange's, rules, and (ii) lists all investigations that identify NES as a participant that has potentially violated Commission, or the respective Exchange's, rules. Fourth, ISE Gemini and ISE Mercury proposed to amend ISE Gemini Rule 309 and ISE Mercury Rule 309, respectively, to add ISE Gemini Rule 309(b) and ISE Mercury Rule 309(b), which will provide that Nasdaq, Inc., as the holding company owning both the Exchange and NES, shall establish and maintain procedures and internal controls reasonably designed to ensure that NES does not develop or implement changes to its system, based on non-public information obtained regarding planned changes to the Exchange's systems 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.\34\ --------------------------------------------------------------------------- \34\ See proposed ISE Gemini Rule 309(b); proposed ISE Mercury Rule 309(b). ISE Gemini and ISE Mercury each proposed to designate existing ISE Gemini Rule 309 and ISE Mercury Rule 309, respectively, as subparagraph (a). See proposed ISE Gemini Rule 309(a); proposed ISE Mercury Rule 309(a). --------------------------------------------------------------------------- The Commission finds that ISE Gemini and ISE Mercury's proposed rule changes to permit each Exchange to accept inbound options orders routed by NES from its Affiliated Exchanges, including the related change to ISE Gemini Rule 309 and ISE Mercury Rule 309, are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. Specifically, the Commission finds that the proposed rule changes are consistent with Section 6(b)(1) of the Act,\35\ and Section 6(b)(5) of the Act.\36\ --------------------------------------------------------------------------- \35\ 15 U.S.C. 78f(b)(1). See also supra note 20 and accompanying text. \36\ 15 U.S.C. 78f(b)(5). See also supra note 21 and accompanying text. --------------------------------------------------------------------------- In the past, the Commission has expressed concern that the affiliation of an exchange with one of its members raises potential conflicts of interest and the potential for unfair competitive advantage.\37\ Although the Commission continues to be concerned about potential unfair competition and conflicts of interest between an exchange's self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, for the reasons discussed below, the Commission believes that it is consistent with the Act to permit NES, in its capacity as a facility of each of the Affiliated Exchanges, to route options orders inbound to ISE Gemini and ISE Mercury, subject to the limitations and conditions described above.\38\ --------------------------------------------------------------------------- \37\ See supra note 25 and accompanying text. \38\ The Commission notes that these limitations and conditions are consistent with those previously approved by the Commission for other exchanges. See, e.g., Securities Exchange Act Release Nos. 67256, supra note 27, at 39281-82; and 69299 (March 25, 2013), 78 FR 19337 (March 29, 2013) (SR-Phlx-2013-15) (order approving a proposed rule change to make permanent a pilot program to permit PSX to accept inbound orders routed by NES from BX); and BX Equity Routing Approval, supra note 9. --------------------------------------------------------------------------- The Commission believes that these limitations and conditions will mitigate its concerns about potential conflicts of interest and unfair competitive advantage. In particular, the Commission believes that a non-affiliated SRO's oversight of NES,\39\ combined with a non- affiliated SRO's monitoring of NES's compliance with each of the respective Exchange's rules and quarterly reporting to the respective Exchange, will help to protect the independence of ISE Gemini and ISE Mercury's regulatory responsibilities with respect to NES. The Commission also believes that proposed ISE Gemini Rule 309(b) and proposed ISE Mercury Rule 309(b) are designed to ensure that NES cannot use any information advantage it may have because of its affiliation with ISE Gemini or ISE Mercury.\40\ --------------------------------------------------------------------------- \39\ This oversight will be accomplished through the 17d-2 Agreement between FINRA and each Exchange and the RSA. \40\ See supra note 34 and accompanying text. --------------------------------------------------------------------------- C. Outbound Routing, Cancellation of Orders, and Error Accounts As discussed above, the Commission is today approving a proposed rule change by ISE that will amend certain provisions in Chapter 19 of ISE's rulebook, which is incorporated by reference to, and will therefore also become, the rules of ISE Gemini and ISE Mercury.\41\ Specifically, these new rules incorporated by reference will (1) permit ISE Gemini and ISE Mercury to route outbound orders in options listed and open for trading on their respective systems to away markets through NES, either directly or through a third-party routing broker- dealer; and (2) govern cancellation of orders by the Exchange or NES as either deems necessary to maintain a fair and orderly market if a technical or systems issue occurs at the Exchange, NES, or a routing destination, and the maintenance of an error account by NES for the purpose of addressing error positions that result from a [[Page 10814]] technical or systems issue at the Exchange, NES, a routing destination, or an unaffiliated third-party routing broker-dealer that affects one or more orders.\42\ The Commission found these rules, which will also become rules of ISE Gemini and ISE Mercury, to be consistent with the Act.\43\ --------------------------------------------------------------------------- \41\ See supra notes 13-15 and accompanying text. \42\ See supra note 14 and accompanying text. \43\ See ISE Exchange Routing Order, supra note 14. --------------------------------------------------------------------------- ISE Gemini and ISE Mercury each proposed that NES be permitted to perform the same functions pursuant to the same conditions with respect to the outbound routing of orders, cancellation of orders, and the handling of error positions as set forth in the ISE proposal.\44\ As discussed in the ISE Exchange Routing Order, the Commission believes that the proposed rules and procedures regarding the Exchanges' use of NES to route orders to away markets, cancellation of orders, and handling of error positions, which will also apply to ISE Gemini and ISE Mercury's use of NES, are consistent with the Act, for the reasons, and pursuant to the protections and considerations, discussed in such order.\45\ --------------------------------------------------------------------------- \44\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. \45\ See ISE Exchange Routing Order, supra note 14, at Section III.B and III.D. The proposal by ISE being approved today also makes other conforming changes to rules incorporated by reference. See ISE Exchange Routing Order, supra note 14. --------------------------------------------------------------------------- In addition, the Exchanges propose to make a related, conforming rule change to ISE Gemini Rule 705 and ISE Mercury Rule 705, respectively, which do not incorporate by reference ISE's rules. Currently, pursuant to ISE rules incorporated by reference, ISE Gemini and ISE Mercury utilize Linkage Handlers \46\ unaffiliated with the Exchange to route outbound orders.\47\ Pursuant to the proposed rule change by ISE, as applied to the Exchanges, ISE Gemini and ISE Mercury will no longer utilize unaffiliated Linkage Handlers to route outbound orders and instead, NES will route orders to other options exchanges, either directly, or indirectly through unaffiliated third-party routing broker-dealers, on behalf of ISE Gemini and ISE Mercury.\48\ Accordingly, ISE Gemini and ISE Mercury have proposed to remove ISE Gemini Rule 705(d)(4) and ISE Mercury Rule 705(d)(4), respectively, which provide an exception to the limits on compensation in ISE Gemini Rule 705(d) and ISE Mercury Rule 705(d) for Members to the extent such Members are acting as Linkage Handlers.\49\ ISE Gemini and ISE Mercury explained that Phlx does not have a similar provision and ISE is also removing this provision from its comparable rule.\50\ The Commission believes that this minor, conforming revision is consistent with the Act. --------------------------------------------------------------------------- \46\ A ``Linkage Handler'' is a broker that is unaffiliated with the Exchange with which the Exchange has contracted to provide Routing Services, as that term is defined in ISE Rule 1903, by routing ISO(s) to other exchange(s) as an agent on behalf of Public Customer and Non-Customer Orders according to the requirements of Rule 1901 (prohibition on trade-throughs) and Rule 1902 (prohibition on locked and crossed markets). See ISE Rule 1901, Supplementary Material .03. ISE Gemini Rules 100(a)(28) and (39), and ISE Mercury Rules 100(a)(28) and (39), define ``Non-Customer Order'' and ``Public Customer Order,'' respectively. \47\ See ISE Rule 1903(a). \48\ See ISE Exchange Routing Order, supra note 14. \49\ See proposed ISE Gemini Rule 705(d); proposed ISE Mercury Rule 705(d). \50\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. See also ISE Notice, supra note 14, at 96095 (noting that, unlike NES, Linkage Handlers are not affiliated with ISE and ISE does not believe that such an exception to compensation limits is necessary for NES). --------------------------------------------------------------------------- IV. Implementation of Proposed Rule Change ISE Gemini and ISE Mercury stated that they intend to begin implementation of the proposed rule changes in the first quarter of 2017 and third quarter of 2017, respectively, and that the migration will be on a symbol-by-symbol basis.\51\ The Commission expects that the Exchanges will issue alerts to Members to announce the relevant migration date for specific symbols. ISE Gemini and ISE Mercury represented that they will add notations in each rulebook to cross- reference the amended rule text and clarify the respective implementation dates.\52\ --------------------------------------------------------------------------- \51\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. \52\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. --------------------------------------------------------------------------- III. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\53\ that the proposed rule changes (SR-ISEGemini-2016-16; SR- ISEMercury-2016-22), each as modified by their respective Amendment Nos. 1 and 2, be, and hereby are, approved. --------------------------------------------------------------------------- \53\ 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\54\ --------------------------------------------------------------------------- \54\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-02992 Filed 2-14-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices 10811
Services 3 Negotiated Service rule changes, each as modified by and NES became an affiliate of the ISE
Agreement and Application for Non- Amendment Nos. 1 and 2, were Exchanges.12
Public Treatment of Materials Filed published for comment in the Federal As described in more detail below,
Under Seal; Filing Acceptance Date: Register on December 29, 2016.5 The ISE Gemini and ISE Mercury have now
February 8, 2017; Filing Authority: 39 Commission received no comments on proposed rule changes (1) to permit
CFR 3015.5; Public Representative: the proposed rule changes. This order each respective Exchange to receive
Kenneth R. Moeller; Comments Due: grants approval of the proposed rule
inbound orders in options routed
February 16, 2017. changes, each as modified by the
through NES from the Affiliated
This notice will be published in the respective Amendment Nos. 1 and 2.
Exchanges, pursuant to certain
Federal Register. II. Background limitations and conditions; and (2) to
Ruth Ann Abrams, On June 21, 2016, the Commission permit NES to become a Member of each
Secretary. approved a proposed rule change Exchange to perform certain routing and
[FR Doc. 2017–02978 Filed 2–14–17; 8:45 am] relating to a corporate transaction in other functions.
BILLING CODE 7710–FW–P which Nasdaq, Inc. would become the ISE Gemini and ISE Mercury’s
ultimate parent of International respective rulebooks incorporate by
Securities Exchange, LLC (‘‘ISE’’), ISE reference Chapter 19 of ISE’s rulebook,
SECURITIES AND EXCHANGE Gemini, and ISE Mercury (collectively, which contains rules relating to the
COMMISSION the ‘‘ISE Exchanges’’).6 The transaction routing of orders, cancellation of orders,
closed on June 30, 2016.7 Nasdaq, Inc. and handling of certain error
[Release No. 34–79995; File Nos. SR– is the ultimate parent of NASDAQ BX,
ISEGemini–2016–16; SR–ISEMercury–2016– positions.13 ISE submitted a related
Inc. (‘‘BX’’), The NASDAQ Stock Market proposed rule change to: (1) Route
22]
LLC (‘‘Nasdaq’’), and NASDAQ PHLX outbound orders in options listed and
Self-Regulatory Organizations; ISE LLC (‘‘Phlx’’ and, together with Nasdaq open for trading on ISE’s system to away
Gemini, LLC; ISE Mercury, LLC; Order and BX, the ‘‘Nasdaq Exchanges’’).8
markets through NES, either directly or
Granting Approval of Proposed Rule Nasdaq, Inc. is also the ultimate parent
through a third-party routing broker-
Changes, as Modified by Amendment of NES,9 a broker-dealer that is a
dealer; (2) adopt rules regarding the
Nos. 1 and 2 Thereto, To Permit member, and affiliate, of each of the
Nasdaq Exchanges.10 As a result of this cancellation of orders and the handling
Nasdaq Execution Services, LLC To of certain error positions, including
Become an Affiliated Member of Each transaction, the ISE Exchanges and the
Nasdaq Exchanges became affiliates,11 maintenance by NES of an error
Exchange To Perform Certain Routing account; and (3) make related
and Other Functions conforming changes.14 These ISE rules,
conditions that would apply. Specifically, each
February 9, 2017. Exchange modified the third condition to specify which the Commission is also
that the report that FINRA will provide to the approving today, concerning the
I. Introduction Exchange’s chief regulatory officer on a quarterly
basis will quantify all alerts, of which the Exchange
outbound routing of orders, cancellation
On December 9, 2016, ISE Gemini, or FINRA (rather than solely FINRA) are aware, that of orders, and handling of error
LLC (‘‘ISE Gemini’’) and ISE Mercury, identify NES as a participant that has potentially accounts, will be incorporated by
violated Commission or Exchange rules. reference into ISE Gemini and ISE
LLC (‘‘ISE Mercury,’’ and each of ISE 5 See Securities Exchange Act Release Nos. 79664
Gemini and ISE Mercury an (December 22, 2016), 81 FR 96136 (‘‘ISE Gemini
Mercury’s rules,15 and are similar to
‘‘Exchange’’) filed with the Securities Notice’’); 79663 (December 22, 2016), 81 FR 96089
and Exchange Commission (‘‘ISE Mercury Notice’’). ISE Mercury (with respect to ISE Gemini), are
6 See Securities Exchange Act Release No. 78119 referred to herein as the ‘‘Affiliated Exchanges.’’
(‘‘Commission’’), pursuant to Section
(June 21, 2016), 81 FR 41611 (June 27, 2016) (SR– 12 See generally ISE Gemini Notice, supra note 5,
19(b)(1) of the Securities Exchange Act ISE–2016–11; SR–ISE Gemini–2016–05; SR–ISE at 96137 (discussing that NES is a broker-dealer
of 1934 (‘‘Act’’) 1 and Rule 19b–4 Mercury–2016–10) (order approving Nasdaq, Inc.’s owned and operated by Nasdaq, Inc. and affiliated
thereunder,2 proposed rule changes acquisition of ISE, ISE Gemini, and ISE Mercury) with ISE Gemini and the Affiliated Exchanges); ISE
related to the routing of orders, (‘‘Nasdaq Acquisition Order’’). Mercury Notice, supra note 5, at 96089 (discussing
7 See http://ir.nasdaq.com/
cancellation of orders, and handling of that NES is a broker-dealer owned and operated by
releasedetail.cfm?releaseid=977785 (Nasdaq press Nasdaq, Inc. and affiliated with ISE Mercury and
error positions. The proposed rule release announcing completion of its acquisition). the Affiliated Exchanges).
changes would also permit Nasdaq 8 See Nasdaq Acquisition Order, supra note 6, at 13 See ISE Gemini Rules, Chapter 19
Execution Services, LLC (‘‘NES’’) to 41611. (incorporating by reference rules in ISE Rules,
9 See Securities Exchange Act Release No. 69233 Chapter 19); ISE Mercury Rules, Chapter 19
become an affiliated Member 3 of each
(March 25, 2013), 78 FR 19352 (March 29, 2013) (incorporating by reference rules in ISE Rules,
Exchange to perform certain routing and (SR–NASDAQ–2013–028) (order approving a Chapter 19).
other functions. On December 20, 2016, proposed rule change to make permanent a pilot 14 See Securities Exchange Act Release No. 79665
each Exchange filed Amendment No. 1 program to permit Nasdaq to accept inbound orders (December 22, 2016), 81 FR 96092 (December 29,
to its respective proposed rule change, routed by NES from the BX Equities market and 2016) (‘‘ISE Notice’’) (notice of filing that proposes,
PSX) at 19352 n.6 and accompanying text (‘‘BX among other things, to amend ISE Rules 1903, 1904,
which amended and replaced each Equity Routing Approval’’). See also ISE Gemini and 1905, and make conforming changes to ISE
original filing in its entirety. Also on Notice, supra note 5, at 96137; ISE Mercury Notice, Rule 1901). The Commission is also today
December 20, 2016, each Exchange filed supra note 5, at 96089. approving this proposed rule change. See Securities
Amendment No. 2 to its respective 10 See Securities Exchange Act Release Nos. Exchange Act Release No. 79994 (February 9, 2017)
proposed rule change.4 The proposed 79661 (December 22, 2016), 81 FR 96100 (December (‘‘ISE Exchange Routing Order’’).
29, 2016) (SR–BX–2016–068) at 96100; 79662 15 Consistent with the proposals by ISE Gemini
mstockstill on DSK3G9T082PROD with NOTICES
(December 22, 2016), 81 FR 96087 (December 29, and ISE Mercury described herein, the ISE rules
1 15 U.S.C. 78s(b)(1). 2016) (SR–NASDAQ–2016–169) at 96087; and that the Commission is approving today also (1)
2 17 CFR 240.19b–4. 79660 (December 22, 2016), 81 FR 96060 (December permit ISE to receive inbound orders in options
3 A ‘‘Member’’ is an organization that has been 29, 2016) (SR–Phlx–2016–120) at 96061. See also routed through NES from the Affiliated Exchanges,
approved to exercise certain trading rights on the ISE Gemini Notice, supra note 5, at 96137; ISE pursuant to certain limitations and conditions; and
Exchange. See ISE Gemini Rule 100(a)(23); ISE Mercury Notice, supra note 5, at 96089. (2) permit NES to become a Member of ISE to
Mercury Rule 100(a)(23). 11 See Nasdaq Acquisition Order, supra note 6, at perform certain routing and other functions. See ISE
4 Each Amendment No. 2 amended the 41611 n.8. The Nasdaq Exchanges, together with Notice, supra note 14, at 96093–94; ISE Exchange
description of one of the inbound routing ISE, ISE Gemini (with respect to ISE Mercury), and Routing Order, supra note 14.
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![10814 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices
technical or systems issue at the and ISE Mercury.48 Accordingly, ISE SECURITIES AND EXCHANGE
Exchange, NES, a routing destination, or Gemini and ISE Mercury have proposed COMMISSION
an unaffiliated third-party routing to remove ISE Gemini Rule 705(d)(4)
broker-dealer that affects one or more and ISE Mercury Rule 705(d)(4), [Release No. 34–79993; File No. SR–
orders.42 The Commission found these respectively, which provide an NYSEMKT–2017–01]
rules, which will also become rules of exception to the limits on compensation
ISE Gemini and ISE Mercury, to be in ISE Gemini Rule 705(d) and ISE Self-Regulatory Organizations; NYSE
consistent with the Act.43 Mercury Rule 705(d) for Members to the MKT LLC; Notice of Filing of Proposed
ISE Gemini and ISE Mercury each extent such Members are acting as Rule Change To Adopt New Equities
proposed that NES be permitted to Linkage Handlers.49 ISE Gemini and ISE Trading Rules To Transition Trading
perform the same functions pursuant to Mercury explained that Phlx does not on the Exchange From a Floor Based
the same conditions with respect to the have a similar provision and ISE is also Market With a Parity Allocation Model
outbound routing of orders, cancellation removing this provision from its to Fully Automated Price-Time Priority
of orders, and the handling of error comparable rule.50 The Commission Model on the Exchange’s New Trading
positions as set forth in the ISE believes that this minor, conforming Technology Platform, Pillar
proposal.44 As discussed in the ISE revision is consistent with the Act.
Exchange Routing Order, the February 9, 2017.
Commission believes that the proposed IV. Implementation of Proposed Rule Pursuant to Section 19(b)(1) 1 of the
rules and procedures regarding the Change Securities Exchange Act of 1934 (the
Exchanges’ use of NES to route orders ‘‘Act’’) 2 and Rule 19b–4 thereunder,3
to away markets, cancellation of orders, ISE Gemini and ISE Mercury stated
that they intend to begin notice is hereby given that, on January
and handling of error positions, which 25, 2017, NYSE MKT LLC (the
will also apply to ISE Gemini and ISE implementation of the proposed rule
‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with
Mercury’s use of NES, are consistent changes in the first quarter of 2017 and
the Securities and Exchange
with the Act, for the reasons, and third quarter of 2017, respectively, and
Commission (the ‘‘Commission’’) the
pursuant to the protections and that the migration will be on a symbol-
proposed rule change as described in
considerations, discussed in such by-symbol basis.51 The Commission
Items I, II, and III below, which Items
order.45 expects that the Exchanges will issue
have been prepared by the self-
In addition, the Exchanges propose to alerts to Members to announce the regulatory organization. The
make a related, conforming rule change relevant migration date for specific Commission is publishing this notice to
to ISE Gemini Rule 705 and ISE symbols. ISE Gemini and ISE Mercury solicit comments on the proposed rule
Mercury Rule 705, respectively, which represented that they will add notations change from interested persons.
do not incorporate by reference ISE’s in each rulebook to cross-reference the
rules. Currently, pursuant to ISE rules amended rule text and clarify the I. Self-Regulatory Organization’s
incorporated by reference, ISE Gemini respective implementation dates.52 Statement of the Terms of Substance of
and ISE Mercury utilize Linkage the Proposed Rule Change
Handlers 46 unaffiliated with the III. Conclusion
Exchange to route outbound orders.47 The Exchange proposes new rules to
It is therefore ordered, pursuant to transition trading on the Exchange to
Pursuant to the proposed rule change by Section 19(b)(2) of the Act,53 that the
ISE, as applied to the Exchanges, ISE Pillar, the Exchange’s new trading
proposed rule changes (SR–ISEGemini– technology platform, and to operate as
Gemini and ISE Mercury will no longer 2016–16; SR–ISEMercury–2016–22),
utilize unaffiliated Linkage Handlers to a fully-automated cash equities market.
each as modified by their respective The proposed rule change is available
route outbound orders and instead, NES
Amendment Nos. 1 and 2, be, and on the Exchange’s Web site at
will route orders to other options
hereby are, approved. www.nyse.com, at the principal office of
exchanges, either directly, or indirectly
through unaffiliated third-party routing For the Commission, by the Division of the Exchange, and at the Commission’s
broker-dealers, on behalf of ISE Gemini Trading and Markets, pursuant to delegated Public Reference Room.
authority.54
II. Self-Regulatory Organization’s
42 See supra note 14 and accompanying text. Eduardo A. Aleman, Statement of the Purpose of, and
43 See ISE Exchange Routing Order, supra note
Assistant Secretary. Statutory Basis for, the Proposed Rule
14.
44 See ISE Gemini Notice, supra note 5, at 96138; [FR Doc. 2017–02992 Filed 2–14–17; 8:45 am] Change
ISE Mercury Notice, supra note 5, at 96091. BILLING CODE 8011–01–P
45 See ISE Exchange Routing Order, supra note In its filing with the Commission, the
14, at Section III.B and III.D. The proposal by ISE 48 See
self-regulatory organization included
ISE Exchange Routing Order, supra note
being approved today also makes other conforming
14. statements concerning the purpose of,
changes to rules incorporated by reference. See ISE 49 See proposed ISE Gemini Rule 705(d); and basis for, the proposed rule change
Exchange Routing Order, supra note 14.
46 A ‘‘Linkage Handler’’ is a broker that is proposed ISE Mercury Rule 705(d). and discussed any comments it received
unaffiliated with the Exchange with which the
50 See ISE Gemini Notice, supra note 5, at 96138;
on the proposed rule change. The text
Exchange has contracted to provide Routing ISE Mercury Notice, supra note 5, at 96091. See also of those statements may be examined at
Services, as that term is defined in ISE Rule 1903, ISE Notice, supra note 14, at 96095 (noting that,
unlike NES, Linkage Handlers are not affiliated the places specified in Item IV below.
by routing ISO(s) to other exchange(s) as an agent
mstockstill on DSK3G9T082PROD with NOTICES
on behalf of Public Customer and Non-Customer with ISE and ISE does not believe that such an The Exchange has prepared summaries,
Orders according to the requirements of Rule 1901 exception to compensation limits is necessary for set forth in sections A, B, and C below,
(prohibition on trade-throughs) and Rule 1902 NES). of the most significant parts of such
51 See ISE Gemini Notice, supra note 5, at 96138;
(prohibition on locked and crossed markets). See statements.
ISE Rule 1901, Supplementary Material .03. ISE ISE Mercury Notice, supra note 5, at 96091.
52 See ISE Gemini Notice, supra note 5, at 96138;
Gemini Rules 100(a)(28) and (39), and ISE Mercury
Rules 100(a)(28) and (39), define ‘‘Non-Customer ISE Mercury Notice, supra note 5, at 96091. 1 15 U.S.C. 78s(b)(1).
Order’’ and ‘‘Public Customer Order,’’ respectively. 53 15 U.S.C. 78s(b)(2). 2 15 U.S.C. 78a.
47 See ISE Rule 1903(a). 54 17 CFR 200.30–3(a)(12). 3 17 CFR 240.19b–4.
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Document Created: 2017-02-15 00:55:02
Document Modified: 2017-02-15 00:55:02
| 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 | 82 FR 10811 |
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