83 FR 2265 - Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Price Level Protection Rule

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 10 (January 16, 2018)

[Federal Register Volume 83, Number 10 (Tuesday, January 16, 2018)]
[Notices]
[Pages 2265-2268]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-00529]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82472; File No. SR-ISE-2018-03]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the Price 
Level Protection Rule

January 9, 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 January 2, 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 Rule 714(b)(4) (Price Level 
Protection) to clarify the operation of the Price Level Protection.
    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

[[Page 2266]]

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 Rule 714(b)(4) 
(Price Level Protection) to specify that the Price Level Protection: 
(1) Only applies when there is no away market best bid or offer 
(``ABBO''), (2) does not apply to quotes on the complex order book, 
which are not eligible to trade with bids and offers for the component 
legs, and (3) determines the maximum number of price levels by 
reference to the component leg(s) where the protection has been 
triggered. The proposed changes will increase transparency around the 
operation of the Exchange with respect to the Price Level Protection, 
and no changes to the Exchange's trading or other systems are being 
proposed.
    Currently, Rule 714(b)(4), which applies to complex orders executed 
on the Exchange, provides that ``[t]here is a limit on the number of 
price levels at which an incoming order or quote to sell (buy) will be 
executed automatically with the bids or offers of each component leg.'' 
Furthermore, as currently written, Rule 714(b)(4) also provides that 
``orders and quotes are executed at each successive price level until 
the maximum number of price levels is reached, and any balance is 
canceled.'' The number of price levels for the component leg, which may 
be between one (1) and ten (10), is determined by the Exchange from 
time-to-time on a class-by-class basis.\3\
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    \3\ Currently, this limit is set to five price levels. The 
Exchange will provide at least a two week notice to members via an 
Options Trader Alert prior to changing the price level limit to 
allow members the opportunity to perform any system changes. Any 
change to the price level limit would be subject to consultations 
with members.
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    Previously, this rule, which applied to both simple and complex 
orders executed on the Exchange, provided additionally that the 
protection applied ``when there are no bids (offers) from other 
exchanges at any price for the options series.'' This language was 
inadvertently removed in SR-ISE-2017-03, when the Exchange adopted its 
Acceptable Trade Range (``ATR'') protection for simple orders and 
retained the Price Level Protection for complex orders in connection 
with the migration of the Exchange's trading system to Nasdaq INET.\4\ 
The Exchange proposes to re-introduce this language to clarify that the 
trading system continues to apply this protection only when there is no 
ABBO available.
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    \4\ See Securities Exchange Act Release No. 80432 (April 11, 
2017), 82 FR 18191 (April 17, 2017) (SR-ISE-2017-03) (Approval 
Order).
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    Furthermore, Rule 714(b)(4) also contains references to quotes that 
were not removed when the Exchange filed SR-ISE-2017-03 to apply the 
Price Level Protection solely to complex orders. Although the previous 
version of the Price Level Protection for simple orders applied to both 
orders and quotes, quotes have never been included in the Price Level 
Protection for complex orders. Specifically, quotes are excluded from 
the Price Level Protection for complex orders because quotes are not 
permitted to leg into the regular market to trade with bids and offers 
on the Exchange for the individual legs of the complex strategy.\5\ 
Because quotes on the complex order book do not leg into the regular 
market, they are excluded from the Price Level Protection, which 
applies when a complex order is executed with bids and offers for the 
component legs of the complex strategy. The Exchange therefore proposes 
to amend Rule 714(b)(4) by removing outdated references to quotes. In 
addition, to further reinforce that the Price Level Protection applies 
to complex orders and not simple orders, the Exchange also proposes to 
add the word ``complex'' before references to orders contained in Rule 
714(b)(4).
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    \5\ See Supplementary Material .03 to Rule 722.
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    Finally, the Exchange proposes to add language to the rule that 
specifies that complex orders are executed at each successive price 
level until the maximum number of price levels is reached on a 
component leg where the protection has been triggered. For example, 
assume a member enters a complex order to buy 20 contracts of series A 
and 20 contracts of series B. If there is no ABBO at any price in 
series B and the complex order legs into the regular order book, the 
complex order would be able to trade up to five price levels in series 
B (e.g., $1.00, $1.05, $1.10, $1.15, and $1.20 but not $1.25 or 
greater).\6\
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    \6\ See footnote 3 supra.
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    The complex order would also trade with the corresponding number of 
contracts of series A but there would be no restriction on the number 
of price levels that could be traded in series A if there is sufficient 
quantity available at the five price levels permitted to trade in 
series B and the executions in series A are at or inside the ABBO for 
the series (e.g., if the ABBO in series A is $1.30 and all 20 contracts 
can be traded at permitted prices in series B, the corresponding 20 
contracts in series A could be executed at $0.95, $1.00, $1.05, $1.10, 
$1.15, $1.20, $1.25, and $1.30 without triggering the protection). 
Although currently implied by the rule, the Exchange believes that it 
is appropriate to explicitly reference that the number of price levels 
is determined based on a component leg where the protection has been 
triggered to avoid any potential member confusion. Although a complex 
order that legs into the regular market must trade with all component 
legs to satisfy the complex order, the Price Level Protection is 
applied solely on component legs that trigger the protection--i.e., 
where there is no away market as discussed earlier in this proposed 
rule change. As such, the maximum number of price levels discussed in 
Rule 714(b)(4) is computed by reference to component legs where the 
protection has been triggered.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\8\ in particular, in that it is designed to promote 
just and equitable principles of trade, 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. 
The Exchange believes that the proposed rule change is consistent with 
the protection of investors and the public interest as it will increase 
transparency around the operation of the Exchange and, in particular, 
the Price Level Protection for complex orders.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Price Level Protection is designed to ensure that complex 
orders that leg into the regular order book and trade against bids and 
offers for the component legs are protected from trading at 
unreasonable prices when there is no away market. Thus, this protection 
only applies when there are no bids (offers) from other exchanges at 
any price for the options series, as stated in the previous version of 
the rule. The Exchange believes that applying this protection when 
there is no away market promotes just and equitable principles of trade 
as executions are prevented only when there is no ABBO to establish 
reasonable execution bounds. When there is an away market, the Exchange 
believes that this

[[Page 2267]]

protection is not necessary, as executions on the regular order book, 
including the execution of complex orders that leg in to access 
liquidity on the bids and offers for the individual legs, must occur at 
or inside the ABBO. The Exchange believes that it is appropriate to re-
introduce the proposed language described above so that members are 
properly apprised of when the Price Level Protection will prevent the 
execution of complex orders that leg into the regular order book.
    The proposed rule change also clarifies that the Price Level 
Protection applies only to complex orders and not to quotes entered on 
the complex order book. The Exchange believes that this change is 
consistent with the protection of investors and the public interest 
because quotes are not permitted to leg into the regular market \9\ and 
therefore are not eligible to trigger the Price Level Protection, which 
only affects complex orders that trade with bids and offers for the 
component legs. The Exchange therefore believes that this change better 
reflects functionality offered on the Exchange and will increase 
transparency for members.
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    \9\ See Supplementary Material .03 to Rule 722.
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    Finally, the proposed rule change makes clear that the maximum 
number of price levels described in Rule 714(b)(4) is determined by 
reference to component leg(s) where the protection is triggered. 
Although all legs of a complex order must be executed in order for the 
complex order to be traded, the Price Level Protection is designed to 
prevent executions at unreasonable prices when there is no away market 
in one or more component legs. As such, the maximum number of price 
levels is determined by reference to the component leg(s) that trigger 
the protection by virtue of there being no away market prices to 
constrain executions in that particular options series. Once this limit 
has been exceeded on a component leg where the protection has been 
triggered, no further executions can take place, and any remaining 
balance of the complex order is cancelled. The Exchange believes that 
adding the proposed language will increase transparency and avoid 
potential confusion about when a complex order that legs into the 
regular market will trigger the Price Level Protection. The Exchange 
therefore believes that this change is consistent with the protection 
of investors and the public interest.

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. The proposed rule change would 
increase transparency around the operation of the Exchange and, in 
particular, the Price Level Protection by re-introducing inadvertently 
deleted language about when the protection is triggered, eliminating 
outdated references to quotes, and reinforcing that the maximum number 
of price levels is determined by reference to the component leg(s) that 
trigger the protection. The Exchange therefore believes that the 
proposed rule change will have no impact on competition.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \10\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \11\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \12\ normally does not become operative prior to 30 days after the 
date of the filing. However, Rule 19b-4(f)(6)(iii) under the Act \13\ 
permits the Commission to designate a shorter time if such action is 
consistent with the protection of investors and the public interest. 
ISE has asked the Commission to waive the 30-day operative delay so 
that it may implement the proposed rule change immediately. In support 
of its request, ISE notes that the proposed rule change would clarify 
the operation of the Exchange by re-introducing inadvertently deleted 
rule language indicating that the Price Level Protection only applies 
when there is no away market, eliminating outdated references to 
quotes, and reinforcing that the maximum number of price levels is 
determined by reference to the component leg(s) that trigger the 
protection. The Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. By re-introducing inadvertently deleted rule language 
indicating that the Price Level Protection applies only when there is 
no ABBO, eliminating references to quotes, which do not execute against 
the individual legs of a complex strategy, and indicating that the 
maximum number of price levels is determined by reference to the 
component leg(s) that trigger the protection, the proposal will correct 
errors and provide additional clarity to the rule, thereby helping to 
assure that ISE's rule clearly and accurately describes the operation 
of the Price Level Protection. Accordingly, the Commission waives the 
30-day operative delay and designates the proposed rule change 
operative upon filing.\14\
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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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.

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-2018-03 on the subject line.

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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-2018-03. 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-2018-03, and should be submitted on 
or before February 6, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12) and (59).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00529 Filed 1-12-18; 8:45 am]
 BILLING CODE 8011-01-P