[Federal Register Volume 77, Number 5 (Monday, January 9, 2012)]
[Notices]
[Pages 1103-1106]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-99]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66084; File No. SR-ISE-2011-84]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Fees for Certain Complex Orders Executed on the 
Exchange

January 3, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that, on December 20, 2011, the International 
Securities Exchange, LLC (the ``Exchange'' or the ``ISE'') filed with 
the Securities and Exchange Commission (the ``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 ISE is proposing to amend fees for certain complex orders 
executed on the Exchange. The text of the proposed rule change is 
available on the Exchange's Web site (http://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 self-regulatory organization 
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 self-regulatory organization 
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 this proposed rule change is to amend fees charged 
by the Exchange for certain orders on two of the most actively-traded 
index option products, the NASDAQ 100 Index option (``NDX'') and the 
Russell 2000 Index option (``RUT'').
    For trading in NDX and RUT, for both regular and complex orders, 
the Exchange currently charges $0.20 per contract for firm proprietary 
orders and Customer (Professional Orders), \3\ and $0.45 per contract 
for Non-ISE Market Maker \4\ orders. ISE market maker orders \5\ in 
these two symbols are subject to a sliding scale, ranging from $0.01 
per contract to $0.18 per contract, depending on the amount of overall 
volume traded by a market maker during a month. Market makers also 
currently pay a payment for order flow (PFOF) fee of $0.65 per contract 
when trading against Priority Customers. Priority Customer orders are 
not charged for trading in NDX and RUT. Options on NDX and RUT are 
traded on the Exchange pursuant to a license agreement entered into by 
the Exchange with index providers for NDX and RUT. In addition to the 
fees noted above, the Exchange currently charges ISE market maker 
orders, Non-ISE Market Maker orders and firm proprietary orders $0.22 
per contract and $0.15 per contract for NDX and RUT, respectively, to 
defray the licensing costs. Because of competitive pressures in the 
industry, certain customer orders are not charged this surcharge fee. 
The Exchange's current fee schedule notes that Public Customer Orders 
are excluded from this surcharge fee. Historically, Public Customer 
orders were synonymous with retail customer orders. The Exchange now 
distinguishes retail customers from professional customers, the latter 
being professional traders who are not market makers or broker/dealers 
but behave the way that market makers and broker/dealers do. Orders 
from these customers are identified on the Exchange as Professional 
Orders. Orders from retail customers are identified on the Exchange as 
Priority Customer orders. Thus, for the sake of clarity, the Exchange 
proposes to replace the words ``Public'' with ``Priority'' for all the 
surcharge fees that appear on the Exchange's fee schedule. Thus, 
Priority Customer orders will remain exempt from this fee, while 
Professional Orders will be subject to the fee.
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    \3\ The term ``Professional Order'' means an order that is for 
the account of a person or entity that is not a Priority Customer. 
See ISR Rule 100(a)(37C).
    \4\ The term ``Non-ISE Market Maker'' means a market maker as 
defined in Section 3(a)(38) of the Securities Exchange Act of 1934 
(the ``Act'') registered in the same options class on another 
options exchange. See Schedule of Fees, page 4.
    \5\ The term ``market makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
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    The Exchange currently assesses a per contract transaction fee to 
market participants that add or remove liquidity in the Complex Order 
Book (``maker/taker fees'') in symbols that are in the Penny Pilot 
program. Included therein is a subset of 103 symbols that are assessed 
a slightly higher taker fee (the ``Select Symbols'').\6\ Additionally, 
pursuant to SEC approval which allows market makers to enter quotations 
for complex order strategies in the Complex Order Book,\7\ the Exchange 
recently adopted maker/taker fees and rebates for orders in the 
following three symbols: XOP, XLB and EFA.\8\
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    \6\ The Select Symbols are identified by their ticker symbol on 
the Exchange's Schedule of Fees.
    \7\ See Securities Exchange Act Release No. 65548 (October 13, 
2011), 76 FR 64980 (October 19, 2011) (SR-ISE-2011-39).
    \8\ See Securities Exchange Act Release No. 65958 (December 15, 
2011) (SR-ISE-2011-81).
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    The Exchange now proposes to extend its maker/taker fees and 
rebates to complex orders in NDX and RUT. Specifically, for Customer 
(Professional Orders), firm proprietary and ISE market maker orders, 
ISE proposes to adopt a ``make'' fee of $0.25 per contract and a 
``take'' fee of $0.70 per contract. For Non-ISE Market Maker orders, 
ISE proposes to adopt a ``make'' fee of $0.25 per contract and a 
``take'' fee of $0.75 per contract. For crossing complex orders in NDX 
and RUT, i.e., orders executed in the Exchange's Facilitation 
Mechanism, Solicited Order Mechanism, Block Order Mechanism and Price 
Improvement Mechanism, and

[[Page 1104]]

for Qualified Contingent Cross orders, the Exchange currently charges a 
fee of $0.20 per contract. The Exchange proposes to continue charging a 
fee of $0.20 per contract for crossing complex orders in NDX and RUT. 
The Exchange currently does not charge Priority Customers for crossing 
orders executed in NDX and RUT. The Exchange proposes to continue not 
charging Priority Customers for crossing orders executed in NDX and 
RUT. For responses to special orders,\9\ ISE proposes to adopt a fee of 
$0.70 per contract for Customer (Professional Orders), firm proprietary 
and ISE market maker orders. For Non-ISE Market Maker orders, ISE 
proposes to adopt a fee of $0.75 per contract for responses to special 
orders in NDX and RUT.
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    \9\ A response to a special order is any contra-side interest 
submitted after the commencement of an auction in the Exchange's 
Facilitation Mechanism, Solicited Order Mechanism, Block Order 
Mechanism and Price Improvement Mechanism. This fee applies to 
Market Maker, Non-ISE Market Maker, Firm Proprietary and Customer 
(Professional) interest.
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    Further, for Priority Customer complex orders in symbols that are 
in the Penny Pilot program, the Exchange currently provides a per 
contract rebate when these orders trade with non-customer orders in the 
Complex Order Book. The Exchange proposes to extend this rebate 
incentive for NDX and RUT also. As such, the Exchange proposes to adopt 
a rebate of $0.50 per contract for Priority Customer complex orders in 
NDX and RUT when these orders trade with non-customer orders in the 
Complex Order Book.
    The Exchange currently provides ISE market makers with a two cent 
discount when trading against orders that are preferenced to them. The 
Exchange proposes to extend this discount for preferenced complex 
orders in NDX and RUT. Accordingly, ISE market makers who remove 
liquidity in NDX and RUT from the Complex Order Book will be charged 
$0.68 per contract when trading with orders that are preferenced to 
them.
    With the proposed migration of NDX and RUT to the Exchange's 
complex order maker/taker pricing structure, the Exchange proposes to 
no longer charge a PFOF fee for complex orders in these two symbols. 
The cancellation fee, however, which only applies to Priority Customer 
orders, will continue to apply.
    As the Exchange is proposing to adopt a new table for this proposed 
fee change, the Exchange notes that:
    <bullet> Fees for orders in NDX and RUT executed in the Exchange's 
Facilitation, Solicited Order, Price Improvement and Block Order 
Mechanisms are for contracts that are part of the originating or contra 
order.
    <bullet> Complex orders in NDX and RUT executed in the Facilitation 
and Solicited Order Mechanisms are charged fees only for the leg of the 
trade consisting of the most contracts.
    <bullet> As noted above, the PFOF fees will not be collected for 
complex orders in NDX and RUT.
    <bullet> As noted above, the cancellation fee, which only applies 
to Priority Customer orders, will continue to apply to NDX and RUT.
    <bullet> The Exchange currently has a fee cap, with certain 
exclusions, applicable to transactions executed in a member's 
proprietary account. The cap also applies to crossing transactions for 
the account of entities affiliated with a member. The Exchange also has 
a service fee applicable to all QCC and non-QCC transactions that are 
eligible for the fee cap.\10\ This fee cap will continue to apply to 
executions of complex orders in NDX and RUT.
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    \10\ See Securities Exchange Act Release No. 64270 (April 8, 
2011), 76 FR 20754 (April 13, 2011) (SR-ISE-2011-13).
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    <bullet> The Exchange currently has tiered rebates to encourage 
members to submit greater number [sic] of QCC orders and Solicitation 
orders to the Exchange. Once a member reaches a certain volume 
threshold in QCC orders and/or Solicitation orders during a month, the 
Exchange provides a rebate to that member for all of its QCC and 
Solicitation traded contracts for that month.\11\ These tiered rebates 
will continue to apply.
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    \11\ See Securities Exchange Act Release Nos. 65087 (August 10, 
2011), 76 FR 50783 (August 16, 2011) (SR-ISE-2011-47); 65583 
(October 18, 2011), 76 FR 65555 (October 21, 2011) (SR-ISE-2011-68); 
65705 (November 8, 2011), 76 FR 70789 (November 15, 2011) (SR-ISE-
2011-70); and 65898 (December 6, 2011), 76 FR 77279 (December 12, 
2011) (SR-ISE-2011-78).
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    <bullet> As noted above, the Exchange currently charges a license 
surcharge fee of $0.22 per contract and $0.15 per contract for trading 
in options on NDX and RUT, respectively. This license surcharge will 
continue to apply to all orders except for Priority Customer orders.
    With this proposed rule change, all non-customer orders will be 
assessed similar fees, thus eliminating the gap that currently exists 
between market makers and non-market makers when trading complex orders 
today. The proposed fees are consistent with the fees and rates of 
payment for order flow commonly applied to symbols that are not part of 
the Penny Pilot program. At the proposed levels, ISE market makers will 
in fact see their fees lowered compared to current levels, which 
include a transaction fee and a $0.65 per contract PFOF fee, while at 
the same time equitably distributing the costs of attracting complex 
orders. The Exchange's maker/taker fees and rebates for complex orders 
in Penny Pilot symbols has proven to be an effective method of 
attracting order flow to the Exchange. The Exchange believes that 
extending its maker/taker fees and rebates for complex orders to NDX 
and RUT, which are two of the most actively-traded index option 
products, will assist the Exchange in recovering lost market share in 
these two products. The Exchange believes this proposed rule change 
will also serve to enhance the Exchange's competitive position and 
enable it to attract additional complex order volume in these two 
symbols because both NDX and RUT are high-priced index options and a 
very substantial portion of the volume traded in high-priced index 
options occurs in complex orders.
    The Exchange also proposes to make a non-substantive, clarifying 
change in two footnotes on the Exchange's Schedule of Fees. 
Specifically, the Exchange recently adopted language in footnotes 7 and 
12 on pages 19 and 20 of the Exchange's current Schedule of Fees, 
respectively, related to rebates and fees for certain complex orders 
executed on the Exchange.\12\ The Exchange now proposes to add the 
words `Priority Customer' in front of `orders' to clarify that ISE 
market makers will receive a discounted rate when they trade against 
Priority Customer orders that are preferenced to them.
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    \12\ See Securities Exchange Act Release No. 65958 (December 15, 
2011) (SR-ISE-2011-81).
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    The Exchange proposes to make these fee changes operative on 
January 3, 2012.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Schedule of 
Fees is consistent with Section 6(b) of the Act \13\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \14\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees and other charges among Exchange members and other persons using 
its facilities. The impact of the proposal upon the net fees paid by a 
particular market participant will depend on a number of variables, 
most important of which will be its propensity to add or remove 
liquidity in NDX and RUT in the Complex Order Book.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes it is reasonable and equitable to charge all 
market

[[Page 1105]]

participants (except Priority Customers) trading in complex orders in 
NDX and RUT a standardized `make' fee of $0.25 per contract. The 
Exchange currently charges a standardized `make' fee of $0.32 per 
contract for complex orders in certain symbols when these orders trade 
against Priority Customer orders.\15\ The Exchange further believes it 
is reasonable and equitable to charge ISE market maker, firm 
proprietary and Customer (Professional) orders a `take' fee of $0.70 
per contract ($0.75 per contract for Non-ISE Market Maker orders) for 
complex orders in NDX and RUT because the Exchange is seeking to recoup 
the cost associated with paying an increased rebate of $0.50 per 
contract to these market participants. The Exchange believes it is 
reasonable and equitable to charge ISE market maker, firm proprietary 
and Customer (Professional) orders a fee of $0.70 per contract ($0.75 
per contract for Non-ISE Market Maker orders) when such members are 
responding to special orders because a response to a special order is 
akin to taking liquidity, thus the Exchange is proposing to adopt an 
identical fee for taking liquidity in these two symbols. The Exchange 
has historically maintained a differential in the fees it charges ISE 
market makers from those it charges to Non-ISE Market Makers. The 
Exchange believes it is reasonable and equitable to treat these two 
groups of market participants differently because each has different 
commitments and obligations to the Exchange. ISE market makers, in 
particular, have quoting obligations and pay the Exchange non-
transaction fees. Non-ISE Market Makers do not have any such 
obligations or financial commitments.
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    \15\ See Securities Exchange Act Release No. 65958 (December 15, 
2011) (SR-ISE-2011-81).
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    The Exchange further believes it is reasonable and equitable for 
the Exchange to charge a fee of $0.20 per contract for complex orders 
in NDX and RUT executed in the Exchange's various auctions and for 
Qualified Contingent Cross orders because these fees are identical to 
the fees the Exchange currently charges for similar orders in the 
symbols that are subject to the Exchange's maker/taker fees.
    Additionally, the Exchange believes its proposed fees remain 
competitive with fees charged by other exchanges and are therefore 
reasonable and equitably allocated to those members that opt to direct 
orders to the Exchange rather than to a competing exchange. For 
example, the $0.70 per contract complex order `take' fee in NDX and RUT 
proposed by the Exchange for market maker, firm proprietary and 
Customer (Professional) orders remains lower than that charged by the 
Boston Options Exchange (``BOX''). For a similar order, BOX charges 
both a transaction fee, which ranges anywhere from $0.13 per contract 
to $0.25 per contract, and a fee for adding liquidity in non-Penny 
Pilot classes of $0.65 per contract, for an `all-in' rate of $0.90 or 
more per contract.\16\
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    \16\ See BOX Fee Schedule, Sections 4 and 7.
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    The Exchange believes that it is reasonable and equitable to 
provide a rebate for Priority Customer complex orders when these orders 
trade with non-customer orders in the Complex Order Book because paying 
a rebate would continue to attract additional order flow to the 
Exchange and create liquidity in the symbols that are subject to the 
rebate, which the Exchange believes ultimately will benefit all market 
participants who trade on ISE. The Exchange already provides this 
rebate and is now proposing to increase the rebate for NDX and RUT, 
which the Exchange believes will attract greater order flow of complex 
orders in these two symbols.
    The Exchange also believes that it is reasonable and equitable to 
provide a two cent discount to ISE market makers on preferenced orders 
because this will provide an incentive for market makers to quote in 
the Complex Order Book.
    The complex order pricing employed by the Exchange has proven to be 
an effective pricing mechanism and attractive to members and their 
customers. The Exchange believes that adopting maker/taker fees and 
rebates for complex orders in NDX and RUT will attract additional 
complex order business in these two symbols. The Exchange further 
believes that the proposed fees are not unfairly discriminatory because 
the fee structure is consistent with fee structures that exist today at 
other options exchanges. Additionally, the Exchange believes that the 
proposed fees are fair, equitable and not unfairly discriminatory 
because they are consistent with price differentiation that exists 
today at other option exchanges. The Exchange believes it remains an 
attractive venue for market participants to trade complex orders as its 
fees remain competitive with those charged by other exchanges for 
similar trading strategies. The Exchange operates in a highly 
competitive market in which market participants can readily direct 
order flow to another exchange if they deem fee levels at a particular 
exchange to be excessive. With this proposed fee change, the Exchange 
believes it remains an attractive venue for market participants to 
trade complex orders.

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

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 Exchange Act.\17\ At any time within 60 days of 
the filing of such proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Exchange 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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    \17\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5e2c2b323b733d3133333b302a2d1e2d3b3d70393128"><span class="__cf_email__" data-cfemail="89fbfce5eca4eae6e4e4ece7fdfac9faeceaa7eee6ff">[email protected]</span></a>. Please include 
File Number SR-ISE-2011-84 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.


[[Page 1106]]


All submissions should refer to File Number SR-ISE-2011-84. 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 
a.m. and 3 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-2011-84 and should be 
submitted on or before January 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-99 Filed 1-6-12; 8:45 am]
BILLING CODE 8011-01-P


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