82 FR 13910 - Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Schedule of Fees

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 49 (March 15, 2017)

[Federal Register Volume 82, Number 49 (Wednesday, March 15, 2017)]
[Notices]
[Pages 13910-13913]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-05089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80188; File No. SR-ISE-2017-16]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend the Schedule of Fees

March 9, 2017.
    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 February 24, 2017, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's Schedule of Fees, as 
described in further detail below.
    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.

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

1. Purpose
    The purpose of the proposed rule change is to amend the Exchange's 
Schedule of Fees to make changes to (1) the Market Maker Plus \3\ 
program, (2) Priority Customer \4\ regular order taker fees in Select 
Symbols,\5\ (3) Priority Customer complex order rebates in Select 
Symbols and Non-Select Symbols,\6\ and (4) the threshold of net zero 
complex contracts. Each of these changes is described below.
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    \3\ A ``Market Maker Plus'' is a Market Maker who is on the 
National Best Bid or National Best Offer a specified percentage of 
the time for series trading between $0.03 and $3.00 (for options 
whose underlying stock's previous trading day's last sale price was 
less than or equal to $100) and between $0.10 and $3.00 (for options 
whose underlying stock's previous trading day's last sale price was 
greater than $100) in premium in each of the front two expiration 
months. The specified percentage is at least 80% but lower than 85% 
of the time for Tier 1, at least 85% but lower than 95% of the time 
for Tier 2, and at least 95% of the time for Tier 3. A Market 
Maker's single best and single worst quoting days each month based 
on the front two expiration months, on a per symbol basis, will be 
excluded in calculating whether a Market Maker qualifies for this 
rebate, if doing so will qualify a Market Maker for the rebate.
    \4\ A ``Priority Customer'' is a person or entity that is not a 
broker/dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s), as defined in ISE Rule 100(a)(37A).
    \5\ ``Select Symbols'' are options overlying all symbols listed 
on the ISE that are in the Penny Pilot Program.
    \6\ ``Non-Select Symbols'' are options overlying all symbols, 
excluding Select Symbols.
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Market Maker Plus
    In order to promote and encourage liquidity in Select Symbols, the 
Exchange offers Market Makers \7\ that meet the quoting requirements 
for Market Maker Plus enhanced rebates for adding liquidity in those 
symbols. These Market Maker Plus rebates are provided on a per symbol 
basis in three tiers based on the time the Market Maker is quoting at 
the national best bid or offer (``NBBO'').\8\ Currently, the rebate is 
$0.10 per contract for Tier 1, $0.18 per contract for Tier 2, and $0.22 
per contract for Tier 3.\9\ The Exchange now proposes to increase the 
rebate for Tier 1 to $0.15 per contract. The rebates for Tier 2 and 
Tier 3, including the special rebates for Market Makers that achieve 
Market Maker Plus in SPY or QQQ, will remain at the same amounts as 
described herein.
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    \7\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
    \8\ For all Market Maker Plus tiers, a $0.30 per contract fee 
applies when trading against Priority Customer complex orders that 
leg into the regular order book. No fee is charged or rebate 
provided when trading against non[hyphen]Priority Customer complex 
orders that leg into the regular order book).
    \9\ In addition, the Exchange also offers lower rebates for 
Market Makers that achieve Market Maker Plus in SPY or QQQ. 
Specifically, Market Makers that achieve Tier 2 or Tier 3 of Market 
Maker Plus in either SPY or QQQ will receive the SPY or QQQ rebate 
based on the highest Market Maker tier achieved in either product. 
For example, a Market Maker that achieves Tier 1 Market Maker Plus 
in QQQ but Tier 3 Market Maker Plus in SPY will receive a Tier 3 
rebate in both SPY and QQQ. Instead of the Tier 2 and Tier 3 rebates 
described above, however, Market Maker Plus orders in SPY or QQQ are 
entitled to a rebate of $0.16 per contract for Tier 2, and $0.20 per 
contract for Tier 3.
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Priority Customer Taker Fees
    The Exchange charges a taker fee for regular orders in Select 
Symbols. This fee is $0.44 per contract for Market Maker orders, and 
$0.45 per contract for Non-ISE Market Maker,\10\ Firm Proprietary \11\/
Broker-Dealer,\12\ and Professional Customer \13\ orders. For Priority 
Customer orders this fee is $0.31 per contract, or $0.26 per contract 
for members with a total affiliated Priority Customer average daily 
volume (``ADV'') that equals or exceeds 200,000 contracts.\14\ The 
Exchange now

[[Page 13911]]

proposes to increase the taker fee for Priority Customer orders in 
Select Symbols to $0.40 per contract for all such orders regardless of 
volume. As such, the Exchange also proposes to delete the volume-based 
incentive for Priority Customer orders in Select Symbols, specifically 
the taker fee of $0.26 per contract for members that achieve the higher 
Priority Customer ADV tier.
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    \10\ A ``Non[hyphen]ISE Market Maker'' is a market maker as 
defined in Section 3(a)(38) of the Securities Exchange Act of 1934, 
as amended, registered in the same options class on another options 
exchange.
    \11\ A ``Firm Proprietary'' order is an order submitted by a 
member for its own proprietary account.
    \12\ A ``Broker[hyphen]Dealer'' order is an order submitted by a 
member for a broker[hyphen]dealer account that is not its own 
proprietary account.
    \13\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer.
    \14\ Priority Customer ADV includes all volume in all symbols 
and order types. All eligible volume from affiliated members will be 
aggregated in determining total affiliated Priority Customer ADV, 
provided there is at least 75% common ownership between the members 
as reflected on each member's Form BD, Schedule A. For purposes of 
determining Priority Customer ADV, any day that the regular order 
book is not open for the entire trading day or the Exchange 
instructs members in writing to route their orders to other markets 
may be excluded from such calculation; provided that the Exchange 
will only remove the day for members that would have a lower ADV 
with the day included.
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Priority Customer Complex Order Rebates
    Currently, the Exchange provides rebates to Priority Customer 
complex orders that trade with non-Priority Customer complex orders in 
the complex order book or trade with quotes and orders on the regular 
order book. Rebates are tiered based on a member's ADV executed during 
a given month as follows: 0 to 29,999 contracts (``Tier 1''), 30,000 to 
59,999 contracts (``Tier 2''), 60,000 to 99,999 contracts (``Tier 3''), 
100,000 to 149,999 (``Tier 4''), 150,000 to 199,999 contracts (``Tier 
5''), and 200,000 or more contracts (``Tier 6''). In Select Symbols the 
rebate is $0.30 per contract for Tier 1, $0.35 per contract for Tier 2, 
$0.41 per contract for Tier 3, $0.44 per contract for Tier 4, $0.46 per 
contract for Tier 5, and $0.47 per contract for Tier 6. In Non-Select 
Symbols the rebate is $0.63 per contract for Tier 1, $0.71 per contract 
for Tier 2, $0.79 per contract for Tier 3, $0.81 per contract for Tier 
4, $0.83 per contract for Tier 5, and $0.84 per contract for Tier 
6.\15\
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    \15\ For both Select Symbols and Non-Select Symbols, these 
rebates are provided per contract per leg if the order trades with 
non-Priority Customer orders in the complex order book, or trades 
with quotes and orders on the regular order book.
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    The Exchange now proposes to (i) introduce two additional volume-
based tiers of Priority Customer complex order rebates and (ii) in the 
existing tiers, amend the volume requirements necessary for achieving 
higher Priority Customer complex order rebates. As proposed, the ADV 
thresholds will be as follows: 0 to 14,999 contracts (``Tier 1''), 
15,000 to 44,999 contracts (``Tier 2''), 45,000 to 59,999 contracts 
(``Tier 3''), 60,000 to 74,999 contracts (``Tier 4''), 75,000 to 99,999 
contracts (``Tier 5''), 100,000 to 124,999 contracts (``Tier 6''), 
125,000 to 224,999 contracts (``Tier 7''), and 225,000 or more 
contracts (``Tier 8'').
    Under the proposal, the rebate amounts provided for Priority 
Customer complex orders in both Select Symbols and Non-Select Symbols 
will be amended to reflect the tier changes described above. In Select 
Symbols, the proposed rebate will be $0.26 per contract for Tier 1, 
$0.30 per contract for Tier 2, $0.36 per contract for Tier 3, $0.41 per 
contract for Tier 4, $0.42 per contract for Tier 5, $0.44 per contract 
for Tier 6, $0.46 per contract for Tier 7, and $0.49 per contract for 
Tier 8. In Non-Select Symbols, the proposed rebate will be $0.40 per 
contract for Tier 1, $0.60 per contract for Tier 2, $0.70 per contract 
for Tier 3, $0.75 per contract for Tier 4, $0.75 per contract for Tier 
5, $0.80 per contract for Tier 6, $0.81 per contract for Tier 7, and 
$0.85 per contract for Tier 8. Other rebate amounts--specifically, the 
Price Improvement Mechanism (``PIM'') Break-up Rebates for both Select 
and Non-Select Symbols and the Facilitation and Solicitation Break-up 
Rebate for Select Symbols--will remain unchanged from their current 
levels, including the rebate amounts for the two proposed additional 
tiers.
Net Zero Complex Orders
    Today, the Exchange does not provide rebates for Priority Customer 
complex orders that trade at a net price at or near $0.00 (i.e., net 
zero complex orders) that are entered on behalf of originating market 
participants that execute an ADV of at least 10,000 net zero complex 
orders in a given month. For purposes of determining which complex 
orders qualify as ``net zero,'' the Exchange counts all complex orders 
that leg in to the regular order book and are executed at a net price 
that is within a range of $0.01 credit and $0.01 debit.\16\ While these 
complex orders would generally not find a counterparty in the complex 
order book, they may leg in to the regular market where they are 
executed by Market Makers or other market participants on the 
individual legs who pay a fee to trade with this order flow. The fee 
Market Makers pay when a complex order legs into their quote is 
substantially higher than their fee or rebate for non-complex orders 
that trade against their quotes. The 10,000 contract threshold exists 
to differentiate market participants that are entering legitimate 
complex orders from those that are entering net zero complex orders 
solely to earn a rebate.
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    \16\ For example, a market participant could enter a net zero 
complex order that buys 500 contracts of the $193 March 6, 2016 SPY 
Put at a price of $0.03 and sells 500 contracts of the $193.50 March 
6, 2016 SPY Put at a price of $0.03 for a net price of $0.00.
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    The Exchange now proposes to lower the threshold of net zero 
complex contracts from 10,000 to 2,000 contracts. As such, net zero 
priced complex orders that leg into the regular order book and are 
entered by firms with an ADV in this type of activity of 2,000 
contracts or more in a given month will not earn the Priority Customer 
complex order rebate.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\17\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\18\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(4) and (5).
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Market Maker Plus Program
    The Exchange believes that it is reasonable and equitable to 
increase the Tier 1 Market Maker Plus rebate because it will encourage 
Market Makers to post tighter markets in Select Symbols and thereby 
maintain liquidity and attract additional order flow to the ISE, which 
will ultimately benefit all market participants that trade on the 
Exchange. The Tier 1 Market Maker Plus rebate has proven to be an 
effective incentive for Market Makers to provide liquidity in Select 
Symbols. The Exchange believes that the proposed Tier 1 Market Maker 
Plus rebate is reasonable and equitably allocated to those members that 
direct orders to the Exchange rather than to a competing exchange. The 
Exchange also believes that the proposed Tier 1 Market Maker Plus 
rebate is not unfairly discriminatory because all Market Makers can 
achieve the higher rebate by satisfying the applicable Market Maker 
Plus requirements.
Priority Customer Taker Fees
    The Exchange believes that the proposed changes to increase the 
Priority Customer taker fee and eliminate the Priority Customer taker 
fee discount program for members with a total affiliated Priority 
Customer ADV of more than 200,000 contracts are reasonable and 
equitable because the proposed fees remain lower than the fees charged 
to other market participants that remove liquidity on the Exchange. In 
addition, the Exchange believes that it is equitable and not unfairly 
discriminatory to continue to provide lower fees for Priority Customer 
orders. A Priority Customer is by definition not a broker or dealer in 
securities, and does not place more than

[[Page 13912]]

390 orders in listed options per day on average during a calendar month 
for its own beneficial account(s). This limitation does not apply to 
participants whose behavior is substantially similar to that of market 
professionals, including Professional Customers, who will generally 
submit a higher number of orders than Priority Customers.
Priority Customer Complex Order Rebates
    The Exchange believes that it is reasonable and equitable to make 
the proposed changes, both to the volume requirements necessary to 
achieve the Priority Customer complex order rebates and to the rebate 
amounts, as the proposals are designed to attract additional Priority 
Customer complex order volume to the Exchange. Although the Exchange is 
lowering the rebates for Priority Customer complex orders, it is also 
generally lowering the associated volume thresholds to make it easier 
for members to achieve the higher tiers. While the proposed rebate 
amounts are lower in some categories, the Exchange believes that the 
proposed changes are reasonable and equitable when looking at the 
overall program for both Non-Select Symbol and Select Symbol rebates. 
For example, a member who received a $0.71 Non-Select Symbol rebate for 
executing an ADV of 45,000 Non-Select Symbol contracts in a given month 
under the existing program would receive a $0.70 Non-Select Symbol 
rebate under the proposed program. However, a member who would have 
received a $0.35 Select Symbol rebate under the existing program for 
executing the same ADV for Select Symbol contracts in a given month 
would receive a $0.36 Select Symbol rebate under the proposed program. 
Therefore, the Exchange believes that the overall amendments to its 
rebate program for Priority Customer complex orders is reasonable and 
equitable as proposed. In addition, the Exchange believes that 
introducing an additional volume-based tier with higher rebate amounts 
will incentivize members to send additional order flow to the Exchange 
in order to achieve these rebates for their Priority Customer complex 
order volume, creating additional liquidity to the benefit of all 
members that trade complex orders on the Exchange.
    The Exchange further believes that it is equitable and not unfairly 
discriminatory to continue to provide a rebate only for Priority 
Customer complex orders. A Priority Customer is by definition not a 
broker or dealer in securities, and does not place more than 390 orders 
in listed options per day on average during a calendar month for its 
own beneficial account(s). This limitation does not apply to 
participants whose behavior is substantially similar to that of market 
professionals, including Professional Customers, who will generally 
submit a higher number of orders (many of which do not result in 
executions) than Priority Customers.
Net Zero Complex Orders
    The Exchange believes that the proposed change to lower the 
threshold of net zero complex contracts is reasonable, equitable, and 
not unfairly discriminatory as it is designed to remove financial 
incentives for market participants to engage in rebate arbitrage by 
entering valueless complex orders on the Exchange that do not have any 
economic purpose. The Exchange has determined that the current 
threshold is still too high to effectively discourage market 
participants from engaging in rebate arbitrage, and believes that the 
lower threshold proposed in this filing more accurately reflects the 
Exchange's original intent. No market participants meet the current ADV 
threshold, as firms have modified their activity to ensure that their 
complex ADV in the net zero range is lower than the 10,000 ADV 
threshold set in the original net zero filing. In January 2017, for 
example, the market participant with the largest ADV in net zero 
contracts executed an ADV of 1,250 net zero contracts. By comparison 
the average net zero ADV of market participants that traded complex 
orders in January 2017 was only 12 contracts, with the vast majority of 
these market participants executing no net zero contracts. The 
continued submission of a high volume of net zero complex orders that 
leg into the regular order book by these firms has generated complaints 
from the Market Makers that trade against these orders in the regular 
order book, as firms recognize these net zero complex orders as 
essentially non-economic.
    The Exchange believes that lowering the threshold will make it more 
difficult for firms to continue to enter net zero complex orders purely 
to earn a rebate. In particular, the Exchange notes that any firm that 
engages in this activity will be prevented from doing so with an ADV of 
more than 2,000 net zero complex orders. This will reduce the cost of 
these trades to the Exchange and its members as firms are limited in 
the amount of this net zero complex order activity that they can 
conduct on the Exchange. While the proposed threshold is still higher 
than current activity seen in January 2017, the Exchange believes that 
it is important to lower the ADV threshold to ensure that market 
participants do not further increase this activity. The Exchange 
believes that market participants will stop entering net zero complex 
orders when they reach the proposed ADV threshold as these firms are 
entering these orders solely for the purpose of earning a rebate. 
Indeed, this is consistent with the Exchange's experience with this 
rule to date, as firms that were previously entering a high volume of 
net zero complex orders have reduced their volume in activity covered 
by this rule.
    To the extent that market participants enter legitimate complex 
orders, however, they will continue to receive the same rebates that 
they do today. In addition, market participants that enter an 
insubstantial volume of net zero complex orders will also continue to 
receive rebates. The Exchange believes that it is reasonable, 
equitable, and not unfairly discriminatory to continue to provide 
rebates where appropriate based on the market participant executing 
only a low ADV of net zero complex orders. While the Exchange could 
prohibit rebates for any net zero complex orders without an ADV 
threshold, doing so would disadvantage innocent market participants 
that are not engaged in rebate arbitrage. The Exchange believes that 
the decision to allow rebates for firms with a limited ADV in net zero 
complex orders properly balances the need to encourage market 
participants to send order flow to the Exchange, and the need to 
prevent activity that is harmful to the market. Moreover, all market 
participants will be treated the same based on their net zero ADV.

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

    In accordance with Section 6(b)(8) of the Act,\19\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The Exchange 
believes that the proposed fees and rebates remain competitive with 
those on other options markets, and will continue to attract order flow 
to the Exchange. The Exchange operates in a highly competitive market 
in which market participants can readily direct their order flow to 
competing venues. In such an environment, the Exchange must continually 
review, and consider adjusting, its fees and rebates to remain 
competitive with other exchanges. For the reasons described above, the 
Exchange believes that the proposed fee

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changes reflect this competitive environment.
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    \19\ 15 U.S.C. 78f(b)(8).
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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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act,\20\ and Rule 19b-4(f)(2) \21\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is: (i) Necessary or 
appropriate in the public interest; (ii) for the protection of 
investors; or (iii) otherwise in furtherance of the purposes of the 
Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.
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    \20\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \21\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2017-16 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-2017-16. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2017-16 and should be 
submitted on or before April 5, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05089 Filed 3-14-17; 8:45 am]
 BILLING CODE 8011-01-P