83 FR 20107 - Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Add Pricing for P.M. Settled Options on Broad-Based Indexes With Nonstandard Expiration Dates

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 88 (May 7, 2018)

[Federal Register Volume 83, Number 88 (Monday, May 7, 2018)]
[Notices]
[Pages 20107-20110]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-09574]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83144; File No. SR-ISE-2018-38]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Add Pricing for 
P.M. Settled Options on Broad-Based Indexes With Nonstandard Expiration 
Dates

May 1, 2018.
    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 April 17, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with 
the Securities and Exchange Commission (``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 to 
add pricing for P.M. settled options on broad-based indexes with 
nonstandard expiration dates, as described further below.
    The text of the proposed rule change is available on the Exchange's 
website at http://ise.cchwallstreet.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 Exchange recently received approval to list P.M. settled 
options on broad-based indexes with nonstandard expiration dates on a 
twelve month pilot basis, beginning on February 1, 2018.\3\ This pilot 
permits both Weekly Expirations and End of Month expirations similar to 
those of A.M. settled broad-based index options, except that the 
exercise settlement value will be based on the index value derived from 
the closing prices of component stocks.\4\ The Exchange proposes to 
list these aforementioned options, commencing on April 19, 2018, with 
the symbol ``NDXP.''
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    \3\ See Securities Exchange Act Release No. 82612 (February 1, 
2018), 83 FR 5470 (February 7, 2018) (SR-ISE-2017-111).
    \4\ Id.
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    The Exchange now proposes to adopt the index pricing applicable to 
NDX \5\ today to NDXP. Accordingly, the Exchange proposes to add the 
following definition in its Schedule of Fees: ```NDX' will mean A.M. or 
P.M settled options on the full value of the Nasdaq 100[supreg] 
Index.'' Therefore, each reference to NDX pricing currently in the 
Schedule of Fees will likewise apply to NDXP under this proposal, as 
further discussed below. The Exchange initially filed the proposed 
pricing changes on April 9, 2018 (SR-ISE-2018-33). On April 17, 2018, 
the Exchange withdrew that filing and submitted this filing.
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    \5\ NDX represents A.M. settled options on the full value of the 
Nasdaq 100[supreg] Index and is traded under the symbol NDX.

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[[Page 20108]]

Section I: Transaction Fees for Index Options
    Today, the Exchange charges a uniform transaction fee of $0.75 per 
contract for Non-Priority Customer \6\ orders in NDX. These fees are 
assessed to all executions in NDX, including Non-Priority Customer 
Crossing Orders \7\ in NDX. No transaction fee is assessed to Priority 
Customer \8\ orders in NDX. The Exchange now proposes to apply these 
transaction fees to NDXP.
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    \6\ Non-Priority Customer includes Market Maker, Non-Nasdaq ISE 
Market Maker, Firm Proprietary/Broker-Dealer, and Professional 
Customer.
    \7\ A ``Crossing Order'' is an order executed in the Exchange's 
Facilitation Mechanism, Solicited Order Mechanism, Price Improvement 
Mechanism (PIM) or submitted as a Qualified Contingent Cross order. 
For purposes of the Fee Schedule, orders executed in the Block Order 
Mechanism are also considered Crossing Orders.
    \8\ 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 Nasdaq ISE Rule 
100(a)(37A).
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Section II: Priority Customer Complex Rebates
    Today, the tiered Priority Customer Complex Rebates in Section II 
of the Schedule of Fees are not paid for NDX. As proposed, the Priority 
Customer Complex Rebates will likewise not be paid for NDXP.
Section IV.C: Non-Priority Customer License Surcharge
    Today, the Exchange charges a $0.25 per contract license surcharge 
for all Non-Priority Customer orders in NDX, which applies to all 
executions in NDX, including executions of NDX orders that are routed 
to away markets in connection with the Options Order Protection and 
Locked/Crossed Market Plan (the ``Plan'').\9\ The Exchange currently 
assesses a $0.25 per contract license surcharge as well as a route-out 
fee of $0.95 per contract for those Non-Priority Customer NDX orders 
that are executed on an away market in connection with the Plan. Under 
the Exchange's proposal, the $0.25 per contract Non-Priority Customer 
license surcharge for NDX will likewise apply to all executions in 
NDXP, including executions of NDXP orders that are routed to away 
markets in connection the Plan. For those NDXP orders that are routed 
away, the Exchange will also charge the $0.95 per contract route-out 
fee in addition to the $0.25 per contract license surcharge under this 
proposal.\10\
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    \9\ The Exchange applies a route-out fee to executions of orders 
in all symbols that are routed to away markets in connection with 
the Plan. Specifically, Non-Priority Customer orders in Non-Select 
Symbols (i.e., options overlying all symbols that are not in the 
Penny Program) pay a route-out fee of $0.95 per contract. NDX is a 
Non-Select Symbol. See Schedule of Fees, Section IV.F. See also 
Securities Exchange Act Release No. 80249 (March 15, 2017), 82 FR 
14586 (March 21, 2017) (SR-ISE-2017-23) (establishing the $0.25 per 
contract Non-Priority Customer license surcharge for NDX, among 
other pricing changes); and Securities Exchange Act Release No. 
81024 (June 26, 2017), 82 FR 29964 (June 30, 2017) (SR-ISE-2017-54) 
(applying the Non-Priority Customer license surcharge to orders in 
licensed products, including NDX, that are routed to away markets in 
connection with the Plan).
    \10\ NDXP is a Non-Select Symbol.
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Section IV.E: Marketing Fee
    By way of background, the Exchange administers a marketing fee 
program that helps Market Makers (i.e., Primary Market Makers and 
Competitive Market Makers) establish marketing fee arrangements with 
Electronic Access Members (``EAMs'') in exchange for those EAMs routing 
some or all of their order flow to the Market Maker. This program is 
funded through a fee of $0.70 per contract, which is paid by Market 
Makers for each regular Priority Customer contract executed in Non-
Select Symbols. This fee is currently waived for NDX orders. As 
proposed, the marketing fee will similarly be waived for NDXP orders.
Section IV.H: Crossing Fee Cap
    Today, the Exchange caps Crossing Order fees at $90,000 per month 
per member on all Firm Proprietary and Non-Nasdaq ISE Market Maker 
transactions that are part of the originating or contra side of a 
Crossing Order. Surcharge fees charged by the Exchange for licensed 
products (e.g., the $0.25 per contract license surcharge for NDX) and 
the fees for index options as set forth in Section I (e.g., the $0.75 
per contract fees for NDX) are currently excluded from the calculation 
of this monthly fee cap. As proposed, the license surcharge and fees 
for NDXP will likewise be excluded from the calculation of the monthly 
Crossing Fee Cap.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\11\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ 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. In general, the Exchange 
believes that its proposal is reasonable, equitable and not unfairly 
discriminatory because NDX and NDXP represent similar options on the 
same underlying Nasdaq 100[supreg] Index and the Exchange therefore 
desires to apply pricing for NDXP in a similar manner as NDX.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4) and (5).
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Section I: Transaction Fees for Index Options
    The Exchange's proposal to assess the same transaction fees for 
NDXP as it currently assesses for NDX is reasonable as NDXP will be an 
exclusively listed product on Nasdaq, Inc.-owned exchanges only.\13\ 
Similar to NDX, the Exchange seeks to recoup the operational costs for 
listing proprietary products.\14\ Also, pricing by symbol is a common 
practice on many U.S. options exchanges as a means to incentivize order 
flow to be sent to an exchange for execution in particular products. 
Other options exchanges price by symbol.\15\ Further, the Exchange 
notes that with its products, market participants are offered an 
opportunity to either transact NDXP or separately execute PowerShares 
QQQ Trust (``QQQ'') options.\16\ Offering products such as QQQ provides 
market participants with a variety of choices in selecting the product 
they desire to utilize to transact the Nasdaq 100[supreg] Index.\17\ 
When exchanges are able to recoup costs associated with offering 
proprietary products, it incentivizes growth and competition for the 
innovation of additional products.
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    \13\ NDXP is also currently listed on ISE's affiliated exchange, 
Nasdaq PHLX LLC (``Phlx'').
    \14\ For example, in analyzing an obvious error, the Exchange 
would have additional data points available in establishing a 
theoretical price for a multiply listed option as compared to a 
proprietary product, which requires additional analysis and 
administrative time to comply with Exchange rules to resolve an 
obvious error.
    \15\ See pricing for Russell 2000 Index (``RUT'') on Chicago 
Board Options Exchange, Incorporated's (``CBOE'') Fees Schedule and 
on CBOE C2 Exchange, Inc.'s (``C2'') Fees Schedule.
    \16\ QQQ is an exchange-traded fund based on the Nasdaq 
100[supreg] Index.
    \17\ QQQ options overlie the same index as NDX, namely the 
Nasdaq 100[supreg] Index. This relationship between QQQ options and 
NDX options is similar to the relationship between RUT and the 
iShares Russell 2000 Index (``IWM''), which is the ETF on RUT.
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    Furthermore, the Exchange believes that its proposal to assess a 
$0.75 per contract transaction fee for Non-Priority Customer orders in 
NDXP and no fee for Priority Customer orders, in each case identical to 
NDX, is reasonable because the fees are in line with its affiliate, 
Phlx. Phlx assesses a $0.75 per contract electronic options transaction 
charge for all non-customer orders in NDX and NDXP, and does not assess 
an electronic

[[Page 20109]]

options transaction charge for customer orders in NDX and NDXP.\18\
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    \18\ See Phlx's Pricing Schedule, Section II.
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    The Exchange believes that the proposed transaction fees for Non-
Priority Customer orders in NDXP are equitable and not unfairly 
discriminatory because the Exchange will uniformly assess the $0.75 per 
contract fee to all such market participants. The Exchange also 
believes that it is equitable and not unfairly discriminatory to assess 
no transaction fees to Priority Customer orders in NDXP because 
Priority Customer orders bring valuable liquidity to the market, which 
in turn benefits other market participants.
Section II: Priority Customer Complex Rebates
    The Exchange believes that its proposal to eliminate the Priority 
Customer Complex Rebates for NDXP, similar to NDX, is reasonable 
because even after the elimination of the rebate, Priority Customer 
complex orders in NDXP will not be assessed any complex order 
transaction fees. By contrast, public customer executions on C2 in RUT 
are subject to a $0.15 per contract transaction fee.\19\
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    \19\ See C2's Fees Schedule, Section 1.C.
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    The Exchange's proposal to eliminate the Priority Customer Complex 
Rebates for NDXP is equitable and not unfairly discriminatory because 
the Exchange will eliminate the rebate for all similarly situated 
members.
Section IV.C: Non-Priority Customer License Surcharge
    The Exchange believes that its proposal to charge a $0.25 per 
contract Non-Priority Customer license surcharge for NDXP, similar to 
NDX, is reasonable because it is in line with the options surcharge of 
$0.25 per contract for non-customer transactions in NDX and NDXP on 
Phlx,\20\ and is lower than the $0.45 per contract surcharge C2 applies 
to non-public customer transactions in RUT.\21\ The Exchange also 
believes that its proposal to apply the Non-Priority Customer license 
surcharge to all executions in NDXP orders, including those orders that 
are routed to away markets in connection with the Plan, is reasonable 
because it will offset the costs associated with executing orders on 
away markets as well as the operational costs associated with listing 
proprietary products.
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    \20\ See Phlx's Pricing Schedule, Section II.
    \21\ See C2's Fees Schedule, Section 1.D.
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    Further, the Exchange believes that its proposal to charge the Non-
Priority Customer license surcharge for all executions in NDXP orders, 
including those orders that are executed on away markets in connection 
with the Plan is equitable and not unfairly discriminatory because the 
Exchange will apply the same surcharge for all similarly situated 
members in a similar manner. The Exchange also believes that it is 
equitable and not unfairly discriminatory to not assess the surcharge 
to Priority Customer orders in NDXP because Priority Customer orders 
bring valuable liquidity to the market, which in turn benefits other 
market participants.
Section IV.E: Marketing Fee
    The Exchange believes that its proposal to exclude NDXP from the 
$0.70 per contract marketing fee is reasonable because the purpose of 
the marketing fee is to attract order flow to the Exchange. Because 
NDXP will be an exclusively listed product, a marketing fee whose 
purpose is to attract order flow to the Exchange is no longer necessary 
for NDXP.
    The Exchange's proposal to exclude NDXP from the marketing fee is 
equitable and not unfairly discriminatory because the Exchange will 
apply this exclusion to all similarly situated members.
Section IV.H: Crossing Fee Cap
    The Exchange believes that its proposal to exclude the Non-Priority 
Customer license surcharge and transaction fees for NDXP from the 
calculation of the monthly Crossing Fee Cap is reasonable because NDXP 
will be an exclusively listed product. Similar to NDX, which is also 
excluded from the Crossing Fee Cap, the Exchange seeks to recoup the 
operational costs for listing proprietary products.
    The Exchange further believes that the proposed exclusion of NDXP 
from the Crossing Fee Cap is equitable and not unfairly discriminatory 
because the Exchange will apply the exclusion all similarly situated 
members.

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. All of the proposed changes are 
to adopt the current pricing applicable to NDX to NDXP, and the 
Exchange believes that the pricing for its proprietary products remains 
competitive with other options exchanges, as discussed above. In 
addition, the Exchange notes that with its products, market 
participants are offered an opportunity to either transact NDXP or 
separately execute QQQ options. Offering products such as QQQ provides 
market participants with a variety of choices in selecting the product 
they desire to utilize to transact the Nasdaq 100[supreg] Index.\22\ 
Furthermore, the proposed pricing changes will apply uniformly to all 
similarly situated market participants, as discussed above. For the 
foregoing reasons, the Exchange does not believe that the proposed 
changes to apply the current pricing applicable to NDX to NDXP will 
impose an undue burden on competition.
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    \22\ See note 17 above.
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    The Exchange notes that it operates in a highly competitive market 
in which market participants can readily favor competing venues if they 
deem fee levels at a particular venue to be excessive, or rebate 
opportunities available at other venues to be more favorable. In such 
an environment, the Exchange must continually adjust its fees to remain 
competitive with other exchanges and with alternative trading systems 
that have been exempted from compliance with the statutory standards 
applicable to exchanges. Because competitors are free to modify their 
own fees in response, and because market participants may readily 
adjust their order routing practices, the Exchange believes that the 
degree to which fee changes in this market may impose any burden on 
competition is extremely limited.

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,\23\ and Rule 19b-4(f)(2) \24\ 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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    \23\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \24\ 17 CFR 240.19b-4(f)(2).

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[[Page 20110]]

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-2018-38 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-2018-38. 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ISE-2018-38 and should be submitted on 
or before May 29, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Eduardo A. Aleman,
Assistant Secretary.
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    \25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2018-09574 Filed 5-4-18; 8:45 am]
 BILLING CODE 8011-01-P