[Federal Register Volume 88, Number 237 (Tuesday, December 12, 2023)]
[Notices]
[Pages 86162-86171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27163]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99092; File No. SR-ISE-2023-31]


Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend Legging 
Orders

December 6, 2023.
    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 November 29, 2023, Nasdaq ISE, 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 Options 3, Section 7, Types of 
Orders and Order and Quote Protocols, and Options 3, Section 16, 
Complex Order Risk Protection.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/ise/rules, 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 proposes to amend Options 3, Section 7, Types of 
Orders and Order and Quote Protocols, and Section 16, Complex Order 
Risk Protections. Each change is described below.
Options 3, Section 7
    The Exchange proposes to expand the description of Legging Orders 
to add detail to describe the current System \3\ functionality. The 
proposed amendments reflect the way the System handles Legging Orders 
today. The Exchange is not amending its current System functionality 
with respect to Legging Orders, rather, the proposed rule text is 
intended to add more detail to ISE Options 3, Section 7(k) to conform 
the level of detail to Nasdaq Phlx LLC (``Phlx'') Options 3, Sections 
7(b)(10) and 14(f)(iii)(C), which describes Phlx's legging orders, as 
well as The Miami International Securities Exchange, LLC (``MIAX'') 
Rule 518(a)(10), which describes derived orders.
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    \3\ The term ``System'' means the electronic system operated by 
the Exchange that receives and disseminates quotes, executes orders 
and reports transactions. See Options 1, Section 1(a)(49).
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    Generally, the Exchange proposes to amend the phrase ``regular 
limit order book'' in ISE Options 3, Section 7(k) to ``single-leg limit 
order book'' to conform the rule text to the manner in which that order 
book is described in ISE Options 3, Section 14, Complex Orders.
    Currently, ISE Options 3, Section 7(k) provides,

    Legging Orders. A legging order is a limit order on the regular 
limit order book that represents one side of a Complex Options Order 
that is to buy or sell an equal quantity of two options series 
resting on the Exchange's Complex Order Book. Legging orders are 
firm orders that are included in the Exchange's displayed best bid 
or offer.
    (1) A legging order may be automatically generated for one leg 
of a Complex Options Order at a price: (i) that matches or improves 
upon the best displayed bid or offer on the regular limit order 
book; and (ii) at which the net price can be achieved when the other 
leg is executed against the best displayed bid or offer on the 
regular limit order book. A legging order will not be created at a 
price that locks or crosses the best bid or offer of another 
exchange or during a Posting Period in progress on the same side in 
the series, pursuant to Options 3, Section 15 regarding Acceptable 
Trade Range.
    (2) A legging order is executed only after all other executable 
orders (including any non-displayed size) and quotes at the same 
price are executed in full. When a legging order is executed, the 
other portion of the Complex Options Order will be automatically 
executed against the displayed best bid or offer on the Exchange.
    (3) A legging order is automatically removed from the regular 
limit order book if: (i) the price of the legging order is no longer 
at the displayed best bid or offer on the regular limit order book, 
(ii) execution of the legging order would no longer achieve the net 
price of the Complex Options Order when the other leg is executed 
against the best displayed bid or offer on the regular limit order 
book, (iii) the Complex Options Order is executed in full or in part 
on the Complex Order Book, or (iv) the Complex Options Order is 
cancelled or modified.

    The Exchange proposes to amend the first paragraph of ISE Options 
3, Section 7(k) to instead provide,

    A Legging Order is a Limit Order on the single-leg limit order 
book in an individual series that represents one leg of a two-legged 
Complex Options Order that is to buy or sell an equal quantity of 
two options series resting on the Exchange's Complex Order Book. 
Legging Orders are firm orders that are included in the Exchange's 
displayed best bid or offer. Legging Orders are not routable and 
have a TIF of Day.

    Generally, the Exchange proposes to capitalize the terms ``Legging 
Order'' and ``Limit Order'' throughout ISE Options 3, Section 7(k). The 
Exchange also proposes to amend the term ``one side of a Complex 
Options Order'' to more specifically state, ``one leg of a two-legged 
Complex Options Order.'' The Exchange also proposes to add a new 
sentence to the end of the paragraph which provides, ``Legging Orders 
are not routable and have a TIF of Day.'' Specifying that Legging 
Orders, which are an individual component of a Complex Options 
Order,\4\ are also not

[[Page 86163]]

routable will add detail to the description of the order type and make 
clear the current System handling. Similarly, specifying that Legging 
Orders will be Limit Orders \5\ with a TIF of Day makes clear the way 
these orders are currently handled by the System. Legging Orders are 
not based on Member instruction and are intended to facilitate more 
interaction between the single-leg order book and the Complex Order 
Book, resulting in increased execution opportunities and better 
execution prices for Complex Orders and for orders resting on the 
single-leg order book. For this reason, Legging Orders do not route and 
have a TIF of Day to permit Members to interact with this order type. 
The Exchange believes the amended rule text proposed in the first 
paragraph of ISE Options 3, Section 7(k) more accurately describes a 
Legging Order and provides Members with greater information regarding 
this order type. Phlx's rules at Options 3, Section 7(b)(10) similarly 
describes a Legging Order as ``one leg of a two-legged Complex Options 
Order'' and specifies that Phlx's Legging Orders are not routable and 
have a time-in-force of Day.
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    \4\ The terms ``Complex Options Order,'' ``Stock-Option Order,'' 
and ``Stock-Complex Order'' refer to orders for a Complex Options 
Strategy, Stock-Option Strategy, and Stock-Complex Strategy, 
respectively. The term ``Complex Order'' includes Complex Options 
Orders, Stock-Option Orders, and Stock-Complex Orders. See ISE 
Options 3, Section 14(a)(5). See also ISE Options 3, Section 
14(a)(1)-(3).
    \5\ A Limit Order is an order to buy or sell a stated number of 
options contracts at a specified price or better. See ISE Options 3, 
Section 7(b).
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    The Exchange proposes to add a new second paragraph to ISE Options 
3, Section 7(k) to specifically explain the way the System will 
generate a Legging Order. The Exchange proposes to state,

    The System will evaluate whether Legging Orders may be generated 
(1) when a Complex Options Order enters the Complex Order Book, and 
(2) after a time interval (to be determined by the Exchange, not to 
exceed 1 second) when the NBBO or Exchange best bid or offer in any 
component of a Complex Options Order changes. The Exchange may 
determine to limit the number of Legging Orders generated on an 
objective basis and may determine to remove existing Legging Orders 
in order to maintain a fair and orderly market in times of extreme 
volatility or uncertainty. Legging Orders are treated as having no 
Priority Customer capacity on the single-leg order book, regardless 
of being generated from Priority Customer Complex Options Orders.

    The Exchange proposes to make clear that the System will evaluate 
whether Legging Orders may be generated, which occurs at the time a 
Complex Options Order enters the Complex Order Book or after a time 
interval (to be determined by the Exchange, not to exceed one second) 
\6\ when the NBBO or Exchange best bid or offer in any component of a 
Complex Options Order changes. The Exchange proposes to state that it 
may determine to limit the number of Legging Orders generated on an 
objective basis and may determine to remove existing Legging Orders, 
and cease the creation of additional Legging Orders, to maintain a fair 
and orderly market in times of extreme volatility or uncertainty. Phlx 
has similar rule text in Phlx Options 3, Section 14(f)(iii)(C).\7\ This 
limitation assists the Exchange in managing the number of Legging 
Orders generated to ensure that Legging Orders do not negatively impact 
the Exchange's System capacity and performance so that ISE may maintain 
a fair and orderly market in times of extreme volatility or 
uncertainty. Of note, the Exchange does not limit the generation of 
Legging Orders on the basis of the entering Member or the Member 
category of the order (i.e., Professional or Priority Customer). Phlx 
similarly made this representation when it proposed to adopt rules 
related to the generation and execution of ``legging orders.'' \8\
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    \6\ Today, the time interval is set to one hundred milliseconds.
    \7\ Phlx's rule states, in part, in Options 3, Section 
14(f)(iii)(C) that, ``. . . The System will evaluate the CBOOK when 
a Complex Order enters the CBOOK and at a regular time interval, to 
be determined by the Exchange (which interval shall not exceed 1 
second), following a change in the national best bid and/or offer 
(`NBBO') or Phlx best bid and/or offer (`PBBO') in any component of 
a Complex Order eligible to generate Legging Orders, to determine 
whether Legging Orders may be generated. The Exchange may determine 
to limit the number of Legging Orders generated on an objective 
basis and may determine to remove existing Legging Orders in order 
to maintain a fair and orderly market in times of extreme volatility 
or uncertainty.''
    \8\ See Securities Exchange Act Release No. 73545 (November 6, 
2014), 79 FR 67498 (November 13, 2014) (SR-Phlx-2014-54) (Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 1, To Add a New 
Complex Order Process Called Legging Orders).
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    Finally, the Exchange proposes to provide that Legging Orders are 
treated as having no Priority Customer capacity on the single leg order 
book, regardless of being generated from Priority Customer Complex 
Options Orders. A Legging Order is handled in the same manner as other 
orders on the single-leg order book except as otherwise provided in ISE 
Options 3, Section 7(k), and is executed only after all other 
executable orders and quotes at the same price are executed in full. 
When a Legging Order is executed, the other component of the Complex 
Order on the Complex Order Book will be automatically executed against 
the best bid or offer on the Exchange. The Exchange believes that a 
Legging Order, created for the execution of a Complex Order, should not 
be afforded priority over resting orders and quotes on the single-leg 
order book, and therefore has determined to protect the priority on the 
single-leg order book of such resting orders and quotes. MIAX similarly 
executes a derived order only after all other executable orders and 
quotes at the same price are executed in full.\9\
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    \9\ See MIAX Rule 518(a)(10)(iv). See also Securities Exchange 
Act Release No. 79072 (October 7, 2016), 81 FR 71131 (October 14, 
2016) (SR-MIAX-2016-26) (Order Approving a Proposed Rule Change to 
Adopt New Rules to Govern the Trading of Complex Orders).
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    The Exchange proposes to amend ISE Options 3, Section 7(k)(1) and 
add the title ``Generation of Legging Orders'' to describe the contents 
of the paragraph. The Exchange proposes to amend the first sentence 
which currently states,

    A legging order may be automatically generated for one leg of a 
Complex Options Order at a price: (i) that matches or improves upon 
the best displayed bid or offer on the regular limit order book; and 
(ii) at which the net price can be achieved when the other leg is 
executed against the best displayed bid or offer on the regular 
limit order book. A legging order will not be created at a price 
that locks or crosses the best bid or offer of another exchange or 
during a Posting Period in progress on the same side in the series, 
pursuant to Options 3, Section 15 regarding Acceptable Trade Range.

    The Exchange proposes to instead provide in Options 3, Section 
7(k)(1),

    A Legging Order may be automatically generated for one or both 
leg(s) of a Complex Options Order resting on top of the Complex 
Order Book at a price: (i) that matches or improves upon the best 
displayed bid or offer on the single-leg limit order book; and (ii) 
at which the net price can be achieved when the other leg is 
executed against the best displayed bid or offer on the single-leg 
limit order book, excluding other Legging Orders. Legging Orders 
will be generated and executed in the minimum increment for that 
options series.

    The Exchange is proposing to add ``or both leg(s)'' to the first 
sentence of ISE Options 3, Section 7(k)(1) to make clear a Legging 
Order may be generated for each leg of a two-legged Complex Order. The 
Exchange notes that Legging Orders may be generated for each leg of a 
two-legged options orders with the same quantity on both legs. 
Automatically generating Legging Orders, which will only be executed 
after all other executable interest at the same price (including non-
displayed interest) is executed in full, will provide additional 
execution opportunities for Complex Orders, without negatively 
impacting any investors in the single-leg market. In fact, the 
generation of Legging Orders may enhance execution quality for 
investors in the single-leg market by improving the price and/or size 
of the ISE BBO and by providing additional execution opportunity for 
resting orders

[[Page 86164]]

on the single-leg order book. The generation of Legging Orders is fully 
compliant with all regulatory requirements. In particular, Legging 
Orders are firm orders that will be displayed at the ISE BBO. Also, a 
Legging Order will be automatically removed if it is no longer 
displayable at the ISE BBO or if the net price of the Complex Order can 
no longer be achieved. Finally, the generation of Legging Orders is 
limited in scope, as they may be generated only for Complex Options 
Orders with two legs. Additionally, as noted herein, the Exchange will 
closely manage and curtail the generation of Legging Orders to assure 
that they do not negatively impact system capacity and performance. 
Phlx's Legging Orders differ from ISE's Legging Orders in that, on 
Phlx, where two legging orders may be generated, only one of those can 
execute as part of the execution of a particular complex order.
    The addition of ``resting on the top of the Complex Order Book'' in 
the first sentence of ISE Options 3, Section 7(k)(1) will make clear 
that the priority of orders in the Complex Order Book controls with 
respect to the generation of Legging Orders. The addition of this 
language is intended to provide greater detail with respect to the 
generation of Legging Order.
    The Exchange proposes to amend the second sentence of ISE Options 
3, Section 7(k)(1) to add ``excluding other Legging Orders'' to the end 
of the sentence to make clear that the price of a Legging Order is not 
considered in the BBO for purposes of determining whether the net price 
of a Complex Order could be achieved were it to generate a Legging 
Order. Below is an example of the manner in which the System calculates 
the net price and excludes a Legging Order.
Example #1
Assume

Leg A is quoted 4.20 (100) x 4.25 (100)
Leg B is quoted 4.00 (100) x 4.10 (100)
Leg C is quoted 3.80 (100) x 3.90 (100)

Create A-B strategy, ratio of 1. cBBO \10\ for A-B is 0.10 x 0.25
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    \10\ The cBBO is the net best bid or offer comprised of the best 
bids and offers of the individual legs of the complex strategy.
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Create B-C strategy, ratio of 1. cBBO for B-C is 0.10 x 0.30

Generation of Legging Orders:

Complex Order is entered to Buy A-B 10 @ 0.20
System generates Legging Order on leg A's bid @ 4.20
System generates Legging Order on Leg B's offer @ 4.05

Complex Order is entered to Buy B-C 10 @ 0.20
System generates Legging Order on leg B's bid @ 4.00
System generates Legging Order on Leg C's offer @ 3.90

Executions:
    If Complex Order B-C sold leg C @3.90, it would have to buy leg B 
for 4.10 or less to satisfy its net price of 0.20. Given that a Legging 
Order is available on Leg B's offer at 4.05, this Legging Order on leg 
C would have been able to generate at 3.85 instead of 3.90 if the 
Legging Order at 4.05 was included in the calculation of possible net 
execution price, but since it is not, the Legging Order is generated at 
3.90 on Leg C's offer instead of 3.85.\11\
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    \11\ Furthermore, if a single-leg order arrives to buy for 3.90 
on Leg C, the B-C strategy trades with the 4.10 offer of Leg B and 
the 4.05 Legging Order is removed.
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    The Exchange is removing the last sentence of ISE Options 3, 
Section 7(k)(1) \12\ because that concept is being relocated to 
proposed new paragraph Options 3, Section 7(k)(2) as described below.
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    \12\ The last sentence of ISE Options 3, Section 7(k)(1) states, 
``A legging order will not be created at a price that locks or 
crosses the best bid or offer of another exchange or during a 
Posting Period in progress on the same side in the series, pursuant 
to Options 3, Section 15 regarding Acceptable Trade Range.''
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    Finally, the Exchange proposes to add a sentence to ISE Options 3, 
Section 7(k)(1) which states, ``Legging Orders will be generated and 
executed in the minimum increment for that options series.'' Options 3, 
Section 3 describes the minimum increments for options traded on ISE. 
This rule makes clear that the minimum increment rule in ISE Options 3, 
Section 3 is applicable to Legging Orders. MIAX Rule 518(a)(10)(iii) 
similarly provides that ISE's derived orders will not be created at a 
price increment less than the minimum established by Rule 510.\13\
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    \13\ MIAX Rule 510 specifies the minimum increments for options 
traded on MIAX.
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    The Exchange proposes to add proposed new paragraph ISE Options 3, 
Section 7(k)(2) with the title ``When Legging Orders Will Not Be 
Generated'' to describe the contents of the paragraph. The Exchange 
proposes to state in proposed ISE Options 3, Section 7(k)(2),

    When Legging Orders Will Not Be Generated. A Legging Order will 
not be generated: (i) at a price that locks or crosses the best bid 
or offer of another exchange, (ii) if there is a complex auction on 
either side in the Complex Options Strategy, or a single-leg auction 
on either side in any component of the Complex Options Strategy, or 
a Posting Period in progress on the same side in the series, 
pursuant to Options 3, Section 15 regarding Acceptable Trade Range; 
(iii) if the price of the leg(s) of a Complex Options Order is 
outside of the price limits described in Options 3, Section 16(a); 
(iv) if there is already a Legging Order in that options series on 
the same side of the market at the same price; or (v) for Complex 
Orders with 2 option legs, where both legs are buying or both legs 
are selling and both legs are calls or both legs are puts, as 
described in Options 3, Section 14(d)(3)(A); or (vi) if the Exchange 
has not opened; or a particular option series has not opened or such 
options series is halted.

    This paragraph will describe when Legging Orders will not be 
generated.
    First, a Legging Order will not be generated at a price that locks 
or crosses the best bid or offer of another exchange as stated in the 
last sentence of ISE Options 3, Section 7(k)(1). This concept is 
consistent with ISE Options 5, Sections 2 and 3 which describe order 
protection and locked and crossed markets.\14\
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    \14\ ISE Options 5 is incorporated by reference to ISE Options 
5. Specifically, ISE Options 5, Section 2 and 3 apply to ISE.
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    Second, the Exchange proposes to add a provision which states that 
a Legging Order will not be generated if there is a complex auction on 
either side in the Complex Options Strategy,\15\ or a single-leg 
auction on either side in any component of the Complex Options 
Strategy, or a Posting Period in progress on the same side in the 
series, pursuant to ISE Options 3, Section 15 regarding Acceptable 
Trade Range (``ATR'').\16\ The last part of this proposed sentence 
concerning ATR was relocated from the last sentence of ISE Options 3, 
Section 7(k)(1).
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    \15\ A Complex Options Strategy is the simultaneous purchase 
and/or sale of two or more different options series in the same 
underlying security, for the same account, in a ratio that is equal 
to or greater than one-to-three (.333) and less than or equal to 
three-to-one (3.00) and for the purpose of executing a particular 
investment strategy. Only those Complex Options Strategies with no 
more than the applicable number of legs, as determined by the 
Exchange on a class-by-class basis, are eligible for processing. See 
ISE Options 3, Section 14(a)(1).
    \16\ ATR is a risk protection which sets dynamic boundaries 
within which quotes and orders may trade. ATR is designed to guard 
the System from experiencing dramatic price swings by preventing the 
immediate execution of quotes and orders beyond the thresholds set 
by this risk protection.
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    Third, the Exchange proposes to add a provision which states that a 
Legging Order will not be generated if the price of the leg(s) of a 
Complex Options Order is outside of the price limits described in ISE 
Options 3, Section 16(a). In the instance where a Legging Order 
generated is currently outside the price parameter (because the ABBO 
has moved), the System will remove the Legging Order that was outside 
the price

[[Page 86165]]

limits pursuant to proposed ISE Options 3, Section 7(k)(2)(iii) and 
will attempt to re-generate a new Legging Order that is in the price 
limits described in ISE Options 3, Section 16(a) as proposed in ISE 
Options 3, Section 7(k)(4)(v). Today, ISE Options 3, Section 16(a) 
would restrict the execution of a Legging Order through price limits 
for Complex Orders. By adding the aforementioned rule text in proposed 
new paragraph Options 3, Section 7(k)(2), all limitations related to 
the generation of Legging Orders will be memorialized in Options 3, 
Section 7(k).\17\
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    \17\ Phlx's rule similarly indicates that a Legging Order is 
subject to certain price parameters by stating that a Legging Order 
will not be generated if the price of the Complex Order is outside 
of the relevant ACE Parameter. See Phlx Options 3, Section 
7(b)(10)(2). The ACE Parameter differs from the price limits 
described in ISE Options 3, Section 16(a). Phlx's ACE Parameter 
defines a price range outside of which a Complex Order will not be 
executed. The ACE Parameter is either a percentage or number as 
defined by Phlx and may be set at a different percentage or number 
for Complex Orders where one of the components is the underlying 
security. The ACE Parameter price range is based on the cNBBO at the 
time an order would be executed. A Complex Order to sell will not be 
executed at a price that is lower than the cNBBO bid by more than 
the ACE Parameter. A Complex Order to buy will not be executed at a 
price that is higher than the cNBBO offer by more than the ACE 
Parameter. A Complex Order or a portion of a Complex Order that 
cannot be executed within the ACE Parameter pursuant to this rule 
will be placed on the CBOOK. See Phlx Options 3, Section 16(b)(i).
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    Fourth, the Exchange proposes to add a provision which states that 
a Legging Order will not be generated if there is already a Legging 
Order in that options series on the same side of the market at the same 
price. This provision addresses a situation of overlapping Legging 
Orders. Phlx has a similar sentence in Phlx Options 3, Section 
7(b)(10)(2).\18\ The addition of this rule text will make clear an 
existing limitation to the generation of orders in ISE Options 3, 
Section 7(k).
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    \18\ Phlx Options 3, Section 7(b)(10)(2)) states, in part, that 
Legging Order will not be generated if there is already a Legging 
Order in that series on the same side of the market at the same 
price (unless it has priority based on the participant type, under 
existing Exchange rules). The phrase ``unless it has priority based 
on the participant type, under existing Exchange rules'' is not 
being added to ISE's Rule as Options 3, Section 10 which describes 
allocation on the single-leg order book, because as stated in 
proposed ISE Options 3, Section 7(k), ``Legging Orders are treated 
as having no Priority Customer capacity on the single-leg order 
book, regardless of being generated from Priority Customer Complex 
Options Orders.''
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    Fifth, the Exchange proposes to add a provision which states that a 
Legging Order will not be generated for Complex Orders with two option 
legs, where both legs are buying or both legs are selling and both legs 
are calls or both legs are puts, as described in ISE Options 3, Section 
14(d)(3)(A). This limitation is currently provided for in ISE Options 
3, Section 14(d)(3)(A) and is being added to proposed new paragraph ISE 
Options 3, Section 7(k)(2) to provide Members with a complete list of 
when Legging Orders will not be generated in Options 3, Section 7(k).
    Sixth, the Exchange proposes to add a provision which states that a 
Legging Order will not be generated if the Exchange has not opened; or 
a particular option series has not opened or such options series is 
halted. Since a complex strategy must be available for trading to 
generate a Legging Order, the failure of an options series that is a 
component of the complex strategy to open or a subsequent halt would 
cause Legging Orders not to generate. Phlx has a similar rule in Phlx 
Options 3, Section 7(b)(10)(1).\19\
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    \19\ Phlx Options 3, Section 7(b)(10)(1) states, in part, that 
Legging Orders will not be generated if the Exchange or a particular 
option has not opened, is halted or is otherwise not available for 
trading. ISE believes that not opening and a halt are the two 
possible scenarios and therefore Phlx's rule and ISE's rule are 
substantively the same in this regard.
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    The Exchange proposes to renumber current ISE Options 3, Section 
7(k)(2) as (k)(3) and add the title ``Execution of Legging Orders'' to 
describe the contents of the paragraph. The Exchange proposes to state 
in proposed ISE Options 3, Section 7(k)(3) that,

    A Legging Order is executed only after all other executable 
orders (including any non-displayed size) and quotes at the same 
price are executed in full. When a Legging Order is executed, the 
other leg of the Complex Options Order will be automatically 
executed against the displayed best bid or offer on the Exchange and 
any other Legging Order not executed as part of the Complex Options 
Order will be removed. Two Legging Orders related to the same 
Complex Options Order can be generated, and both can execute as part 
of the execution of a particular Complex Options Order.

    The Exchange's proposal, similar to Phlx Options 3, Section 
7(b)(10)(3)describes current System handling when a Legging Order is 
executed and subsequently the other leg of the Complex Order will be 
automatically executed against the displayed best bid or offer on the 
Exchange, and any other Legging Order based on that Complex Order will 
be removed. The Exchange proposes to replace the word ``portion'' with 
``leg'' to make the rule text more explicit. The Exchange proposes to 
add the phrase ``and any other Legging order not executed as part of 
the Complex Options Order will be removed'' to the end of the second 
sentence in proposed ISE Options 3, Section 7(k)(3). Phlx has a 
substantively similar sentence in Options 3, Section 7(b)(10)(3).\20\ 
The addition of this phrase is intended to provide additional 
information regarding the treatment of unexecuted Legging Orders in ISE 
Options 3, Section 7(k). By way of example,
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    \20\ Phlx Options 3, Section 7(b)(10)(3) states, ``A Legging 
Order is executed only after all other executable orders (including 
any non-displayed size) and quotes at the same price are executed in 
full. When a Legging Order is executed, the other leg of the Complex 
Order will be automatically executed against the displayed best bid 
or offer on the Exchange and any other Legging Order based on that 
Complex Order will be removed.'' ISE explicitly states ``not 
executed as part of the Complex Options Order'' where Phlx says 
``based on that Complex Order.''
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Example #2
Assume:

Complex A-B (ratio 1:1) strategy, ratio of 1 is created
MM Quote for leg A 4.20 (100) x 4.50 (100)
MM Quote for leg B 4.00 (100) x 4.10 (100)
A-B Derived BBO: 0.10 x 0.50
Complex Order to Buy A-B 10 @ net price of 0.45
System generates a Legging Order on leg A's bid for quantity of 10 @ 
4.45
System generates a Legging Order leg B's offer for quantity of 10 @ 
4.05
Single-leg order to sell 10 @ 4.45 on Leg A arrives
Execution:

Complex Order A-B Legging Order trades 10 with Single leg order on Leg 
A @ 4.45
Complex Order A-B other leg trades 10 with MM Quote on Leg B @ 4.00

Removal of Legging Order:

    Legging Order that was generated for quantity of 10 on Leg B @ 4.05 
is removed from the order book.
    Next, the Exchange proposes to add a new sentence to ISE Options 3, 
Section 7(k)(3) which states, ``Two Legging Orders related to the same 
Complex Options Order can be generated, and both can execute as part of 
the execution of a particular Complex Options Order.'' As noted above, 
two Legging Orders related to the same Complex Options Order can be 
generated, and both can execute as part of the execution of a 
particular Complex Options Order. This behavior differs from Phlx where 
two legging orders may be generated, but only one of those can execute 
as part of the execution of a particular complex order. The Exchange 
believes that permitting both Legging Orders to execute as part of the 
execution of a particular Complex Options Order will allow more Complex 
Orders to execute while the price of the leg(s) will continue to be 
bounded by

[[Page 86166]]

the price limits described in ISE Options 3, Section 16(a). By way of 
example,
Example #3
Assume:

Complex A-B strategy, ratio of 1 is created
Complex 2A-B strategy, ratio of 2:1 is created
MM Quote for leg A 4.20 (100) x 4.50 (100)
MM Quote for leg B 4.00 (100) x 4.10 (100)
Complex BBO for A-B is 0.10 x 0.50
Complex BBO for 2A-B is 4.30 x 5.00

Leg Generation:

Complex Order to Buy A-B 10 @ 0.45
System generates a Legging Order on leg A's bid @ 4.45
System generates a Legging Order on leg B's offer @ 4.05

Execution:
Complex Order to Sell 2A-B 5 @ 4.85
2A-B Order trades with Legging Order on leg A 10 @ 4.45
2A-B Order trades with the Legging Order on leg B 5 @ 4.05
A-B trades with MM Quote on leg B 5 @ 4.00

    The Exchange proposes to renumber ISE Options 3, Section 7(k)(3) as 
(k)(4) and title the paragraph, ``Removal of Generated Legging Orders'' 
to describe the contents of the paragraph. This paragraph describes 
when a Legging Order is automatically removed from the single-leg limit 
order book. The Exchange proposes to add a clause to the end of 
proposed ISE Options 3, Section 7(k)(4)(i) so that the sentence would 
state, ``A Legging Order is automatically removed from the single-leg 
limit order book if: (i) the price of the Legging Order is no longer at 
the displayed best bid or offer on the single-leg limit order book or 
is at a price that locks or crosses the best bid or offer of another 
exchange . . .''(emphasis added). Current ISE Options 3, Section 
7(k)(1) already notes that a Legging Order will not be created at a 
price that locks or crosses the best bid or offer of another exchange. 
Adding the same rule text to proposed ISE Options 3, Section 7(k)(4) 
will make clear that a Legging Order that locks or crosses an away 
market would be removed from the limit order book.
    The Exchange proposes to add a clause to proposed ISE Options 3, 
Section 7(k)(4)(ii) to provide that ``A Legging Order is automatically 
removed from the single-leg limit order book if. . . (ii) execution of 
the Legging Order would no longer achieve that net price of the Complex 
Options Order when the other leg is executed against the best displayed 
bid or offer on the single-leg limit order book, excluding other 
Legging Orders'' (emphasis added). Phlx has a similar sentence in 
Options 3, Section 7(b)(10)(4).\21\ A Legging Order is removed if the 
BBO on the other leg worsens such that the Complex Order limit price 
could no longer be achieved by trading with the quote, even if it could 
be achieved by trading with a Legging Order generated by another 
Complex Order. The Exchange would not rely solely on the price of 
another Legging Order when calculating the net price of the Complex 
Options Order for purposes of determining at which price a Legging 
Order will execute. In the below example this point is illustrated in 
that the Legging Order could not rely on the 4.05 offer on Leg B 
derived from the other Legging Order, rather it must rely on the 4.10 
offer on Leg B derived from the quote.
---------------------------------------------------------------------------

    \21\ Phlx Options 3, Section 7(b)(10)(4)provides, ``if execution 
of the Legging Order would no longer achieve the net price of the 
Complex Order when the other leg is executed against the Exchange's 
best displayed bid or offer on the regular Limit Order book (other 
than another Legging Order).'' This language is substantively the 
same as ISE's proposed rule text.
---------------------------------------------------------------------------

Example #4
Assume:

Leg A is quoted 4.20 (100) x 4.25 (100)
Leg B is quoted 4.00 (100) x 4.05 (100)
Leg C is quoted 3.80 (100) x 3.90 (100)
Create A-B strategy, ratio of 1 with a cBBO for A-B is 0.15 x 0.25
Create B-C strategy, ratio of 1 with a cBBO for B-C is 0.10 x 0.30

Generation of Legging Orders:
Complex Order is entered to Buy B-C (Buy B, Sell C) 10 @ 0.20
System generates Legging Orders on Leg B's bid @4.00 & Leg C's offer @ 
3.85.

Complex Order is entered to Buy A-B (Buy A, Sell B) 10 @ 0.20
System generates Legging Orders on Leg A's bid @ 4.20 & Leg B's offer @ 
4.05

Removal of Legging Order:

Market Maker updates their quote for Leg B with a worsened offer: 4.00 
(100) x 4.10 (100)

    Even though the displayed best offer for Leg B did not change in 
price, it is derived from a Legging Order which is excluded from the 
System's calculations in determining whether the net price of this 
Complex Order can be achieved if its Legging Order trades. The Legging 
Order at 3.85 on Leg C can no longer achieve the Complex Order's net 
price were it to execute in addition to the quote for Leg B. The System 
will remove the Legging Order at 3.85 on Leg C and will regenerate a 
new Legging Order on Leg C at 3.90 and this would allow the Legging 
Order to achieve the net price of the Complex Order if it trades along 
with the quote on Leg B.
    The Exchange proposes to add a new section ``(v)'' to proposed ISE 
Options 3, Section 7(k)(4) which states, ``A Legging Order is 
automatically removed from the single-leg limit order book if. . . (v) 
the price of the leg(s) of a Complex Options Order is outside of the 
price limits described in current ISE Options 3, Section 16(a).'' This 
limitation is currently described in ISE Options 3, Section 16(a) and 
is being added to this order type to complete the list of cases where a 
Legging Order would be removed from the order book in Options 3, 
Section 7(k). Phlx has similar rule text in Options 3, Section 
7(b)(10)(4).\22\
---------------------------------------------------------------------------

    \22\ Phlx Options 3, Section 7(b)(10)(4)states that ``A Legging 
Order is automatically removed from the regular order book: . . . 
(v) if the price of the Complex Order is outside the ACE Parameter 
of paragraph (i).'' As noted above, Phlx and ISE have different 
price parameters.
---------------------------------------------------------------------------

    The Exchange proposes to add new section ``(vi)'' to proposed ISE 
Options 3, Section 7(k)(4) which states, ``A Legging Order is 
automatically removed from the single-leg limit order book if . . .(vi) 
the System receives a complex auction on either side in the Complex 
Options Strategy, or the System receives a single-leg auction on either 
side in any component of the Complex Options Strategy.'' Phlx has 
similar language in Options 3, Section 7(b)(10)(4).\23\ As noted above, 
the Exchange believes from a System processing and user acceptance 
standpoint, the best practice is to remove the System-generated Legging 
Order from the order book during the course of the auction, as that 
time is minimal, then the System can attempt to re-generate a Legging 
Order once the auction has concluded.
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    Finally, the Exchange proposes to add new section ``(vii)'' to 
proposed ISE Options 3, Section 7(k)(4) which states, ``A Legging Order 
is automatically removed from the single-leg limit order book if . . . 
(vii) a Legging Order is generated by a different Complex Options Order 
in the same leg at a better price or the same price for a participant 
with a higher price priority.'' As noted in ISE Options 3, Section 
7(k)(1), a Legging Order may be automatically generated at a price that 
matches or improves upon the best displayed bid or offer on the single-
leg limit order book. The System removes the Legging Order because it 
would have been at an inferior price. Phlx Options 3, Section 
7(b)(10)(4)has similar language.\24\
---------------------------------------------------------------------------

    \24\ Phlx Options 3, Section 7(b)(10)(4) states that ``A Legging 
Order is automatically removed from the regular order book: . . . 
(vii) if a Legging Order is generated by a different Complex Order 
in the same leg at a better price or the same price for a 
participant with a higher price priority. . .''. While Phlx's 
Options 3, Section 14 has priority overlays for different market 
participants within its allocation model, whereas ISE does not have 
similar priority overlays and the remainder of the language is not 
necessary.

---------------------------------------------------------------------------

[[Page 86167]]

    As revised, the rule text proposed in ISE Options 3, Section 
7(k)(4) is intended to cover all circumstances where a Legging Order 
would be automatically removed from the single-leg limit order.
Options 3, Section 16
    The Exchange proposes to amend the language in ISE Options 3, 
Section 16(a) related to price limits for Complex Orders. As provided 
in ISE Options 3, Section 16(a)the legs of a complex strategy may be 
executed at prices that are inferior to the prices available on other 
exchanges trading the same options series. Notwithstanding the 
foregoing, the System will not permit any leg of a complex strategy to 
trade through the NBBO for the series or any stock component by a 
configurable amount calculated as the lesser of (i) an absolute amount 
not to exceed $0.10, and (ii) a percentage of the NBBO not to exceed 
500%, as determined by the Exchange on a class, series or underlying 
basis. A Member can also include an instruction on a Complex Order that 
each leg of the Complex Order is to be executed only at a price that is 
equal to or better than the NBBO on the opposite side for the options 
series or any stock component, as applicable (``Do-Not-Trade-Through'' 
or ``DNTT''). The addition of the words ``on the opposite side'' is 
intended to make clear the manner in which the System will handle a 
DNTT instruction. That is, the System will check that the price is 
equal to or better than the NBBO on the opposite side of the options 
series or any stock component.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\25\ in general, and furthers the objectives of section 
6(b)(5) of the Act,\26\ in particular, in that it is designed to 
promote just and equitable principles of trade and to protect investors 
and the public interest.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b).
    \26\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Options 3, Section 7
    The Exchange's proposal to amend ISE Options 3, Section 7(k), 
Legging Orders, is consistent with the Act because the proposal expands 
the description of Legging Orders to describe in more detail the 
current legging functionality, thereby increasing transparency with 
respect to this order type. The proposed amendments reflect the way 
Legging Orders work today. The Exchange is not amending its System 
functionality with respect to Legging Orders, rather, the proposed rule 
text is intended to be more descriptive and conform the level of detail 
in the order type to Phlx Options 3, Section 7(b)(10)which describes 
details of Phlx's legging orders and MIAX Rule 518(a)(10), which 
describes derived orders.
    Specifying that Legging Orders, which are an individual component 
of a Complex Options Order, are ``one leg of a two-legged Complex 
Options Order'' and are not routable in the first paragraph of ISE 
Options 3, Section 7(k) is consistent with the Act because these terms 
better describe a Legging Order. Similarly, specifying that Legging 
Orders will be Limit Orders with a TIF of Day makes clear the way these 
orders are handled by the System. Legging Orders are not based on 
Member instruction and are intended to facilitate more interaction 
between the single-leg order book and the Complex Order Book, resulting 
in increased execution opportunities and better execution prices for 
Complex Orders and for orders resting on the single-leg order book. For 
this reason, Legging Orders do not route and have a TIF of Day to 
permit Members to interact with this order type. The Exchange believes 
the amended rule text more accurately describes a Legging Order and 
makes clear to Members the behavior of Legging Orders. Also, 
capitalizing the terms ``Legging Order'' and ``Limit Order'' and 
referring to a ``single-leg'' order book throughout ISE Options 3, 
Section 7(k) conforms terms with those of ISE Options 3, Section 14, 
Complex Orders.
    The proposed text in the new second paragraph of ISE Options 3, 
Section 7(k) makes clear the current System processing for Legging 
Orders. Specifically, the proposed rule text makes clear that the 
System will evaluate whether Legging Orders may be generated, which 
occurs at the time a Complex Options Order enters the Complex Order 
Book or after a time interval (to be determined by the Exchange, not to 
exceed one second) \27\ when the NBBO or Exchange best bid or offer in 
any component of a Complex Options Order changes. Further, the Exchange 
proposes to state that it may determine to limit the number of Legging 
Orders generated on an objective basis and may determine to remove 
existing Legging Orders, and cease the creation of additional Legging 
Orders, to maintain a fair and orderly market in times of extreme 
volatility or uncertainty. Phlx has similar rule text in Phlx Options 
3, Section 14(f)(iii)(C).\28\ The proposed limitation is consistent 
with the Act because it assists the Exchange in managing the number of 
Legging Orders generated to ensure that Legging Orders do not 
negatively impact the Exchange's System capacity and performance so 
that ISE may maintain a fair and orderly market in times of extreme 
volatility or uncertainty. Of note, the Exchange does not limit the 
generation of Legging Orders on the basis of the entering Member or the 
Member category of the order (i.e., Professional or Priority Customer). 
The Exchange proposes to limit the number of Legging Orders, remove 
existing Legging Orders, and cease creation of additional Legging 
Orders, in order to permit the Exchange to maintain a fair and orderly 
market in times of extreme volatility or uncertainty. This discretion 
is consistent with the Act because it assists the Exchange in managing 
the number of Legging Orders generated to ensure that Legging Orders do 
not negatively impact the Exchange's System capacity and performance.
---------------------------------------------------------------------------

    \27\ Today, the time interval is set to one hundred 
milliseconds.
    \28\ Phlx's rule states, in part, in Options 3, Section 
14(f)(iii)(C) that, ``. . .The System will evaluate the CBOOK when a 
Complex Order enters the CBOOK and at a regular time interval, to be 
determined by the Exchange (which interval shall not exceed 1 
second), following a change in the national best bid and/or offer 
(``NBBO'') or Phlx best bid and/or offer (``PBBO'') in any component 
of a Complex Order eligible to generate Legging Orders, to determine 
whether Legging Orders may be generated. The Exchange may determine 
to limit the number of Legging Orders generated on an objective 
basis and may determine to remove existing Legging Orders in order 
to maintain a fair and orderly market in times of extreme volatility 
or uncertainty.''
---------------------------------------------------------------------------

    The Exchange's proposal to provide that Legging Orders are treated 
as having no Priority Customer capacity on the single leg order book, 
regardless of being generated from Priority Customer Complex Options 
Orders is consistent with the Act and the protection of investor and 
the public interest. A Legging Order is handled in the same manner as 
other orders on the single-leg order book except as otherwise provided 
in ISE Options 3, Section 7(k), and is executed only after all other 
executable orders and quotes at the same price are executed in full. 
When a Legging Order is executed, the other component of the Complex 
Order on the Complex Order Book will be automatically executed against 
the best bid or offer on the Exchange. The Exchange believes that a 
Legging Order, created for the execution of a Complex Order, should not 
be

[[Page 86168]]

afforded priority over resting orders and quotes on the single-leg 
order book, and therefore has determined to protect the priority on the 
single-leg order book of such resting orders and quotes. MIAX similarly 
executes a derived order only after all other executable orders and 
quotes at the same price are executed in full.\29\
---------------------------------------------------------------------------

    \29\ See MIAX Rule 518(a)(10)(iv). See also Securities Exchange 
Act Release No. 79072 (October 7, 2016), 81 FR 71131 (October 14, 
2016) (SR-MIAX-2016-26) (Order Approving a Proposed Rule Change to 
Adopt New Rules to Govern the Trading of Complex Orders).
---------------------------------------------------------------------------

    The Exchange's proposal to amend ISE Options 3, Section 7(k)(1) to 
make clear a Legging Order may be generated for each leg of a two-
legged Complex Order is consistent with the Act. Legging Orders may be 
generated for each leg of a two-legged options orders with the same 
quantity on both legs. Automatically generating Legging Orders promotes 
just and equitable principles of trade because these orders will only 
be executed after all other executable interest at the same price 
(including non-displayed interest) is executed in full. This behavior 
is consistent with the Act because it will provide additional execution 
opportunities for Complex Orders, without negatively impacting any 
investors in the single-leg market. In fact, the generation of Legging 
Orders may enhance execution quality for investors in the single-leg 
market by improving the price and/or size of the ISE BBO and by 
providing additional execution opportunity for resting orders on the 
single-leg order book. The generation of Legging Orders is fully 
compliant with all regulatory requirements. In particular, Legging 
Orders are firm orders that will be displayed at the ISE BBO. Also, a 
Legging Order will be automatically removed if it is no longer 
displayable at the ISE BBO or if the net price of the Complex Order can 
no longer be achieved. Finally, the generation of Legging Orders is 
limited in scope, as they may be generated only for Complex Options 
Orders with two legs. Additionally, as noted herein, the Exchange will 
closely manage and curtail the generation of Legging Orders to assure 
that they do not negatively impact system capacity and performance. 
Phlx's Legging Orders differ from ISE's Legging Orders in that, on 
Phlx, two legging orders may be generated, but only one of those can 
execute as part of the execution of a particular complex order.
    The addition of ``resting on the top of the Complex Order Book'' in 
the first sentence of ISE Options 3, Section 7(k)(1) is consistent with 
the Act because it is consistent with existing Legging Order 
functionality that considers the best price on Phlx's order book. This 
addition will make clear that the priority of orders in the Complex 
Order Book controls with respect to the generation of Legging Orders.
    The Exchange's proposal to amend the second sentence of ISE Options 
3, Section 7(k)(1) to add ``excluding other Legging Orders'' to the end 
of the sentence is consistent with the Act because it makes clear that 
the price of a Legging Order is not considered in the BBO for purposes 
of determining whether the net price of a Complex Order could be 
achieved were it to generate a Legging Order.
    Finally, the Exchange's proposal to add a sentence to ISE Options 
3, Section 7(k)(1) which states, ``Legging Orders will be generated and 
executed in the minimum increment for that options series'' is 
consistent with the Act because ISE Options 3, Section 3 describes the 
minimum increments for options traded on ISE. Adding this rule text 
will make clear that the minimum increment rule in Options 3, Section 3 
is applicable to Legging Orders. MIAX Rule 518(a)(10)(iii) similarly 
provides that ISE's derived orders will not be created at a price 
increment less than the minimum established by Rule 510.\30\
---------------------------------------------------------------------------

    \30\ MIAX Rule 510 specifies the minimum increments for options 
traded on MIAX.
---------------------------------------------------------------------------

    Amending proposed new paragraph ISE Options 3, Section 7(k)(2) to 
note that a Legging Order will not be generated at a price that locks 
or crosses the best bid or offer of another exchange is already 
provided for in the last sentence of current Options 3, Section 
7(k)(1). This concept is consistent with the Act in that the Exchange 
will not trade through away markets as specified in Options 5, Sections 
2 and 3 which describe order protection and locked and crossed markets 
rules.
    Adding a provision to proposed new paragraph ISE Options 3, Section 
7(k)(2) which states that a Legging Order will not be generated if 
there is a complex auction on either side in the Complex Options 
Strategy, or a single-leg auction on either side in any component of 
the Complex Options Strategy, or a Posting Period in progress on the 
same side in the series, pursuant to Options 3, Section 15 regarding 
ATR is consistent with the Act. The Exchange believes from a System 
processing and user acceptance standpoint, the best practice is to wait 
for an auction in that options series to be complete, or for the ATR 
Posting Period to complete, as that time is minimal. Phlx's legging 
order rule in Options 3, Section 7(b)(10)(2)has the same restriction as 
proposed to be added to ISE's Legging Orders rule.\31\
---------------------------------------------------------------------------

    \31\ Phlx Options 3, Section 7(b)(1)(2) provides that ``A 
Legging Order will not be created . . .``(ii) if there is an auction 
on either side or a Posting Period under Options 3, Section 15 
regarding Acceptable Trade Range on the same side in progress in the 
series.'' Phlx's rules describe an auction on either side of the 
Legging Order while ISE's auction breaks down the auction into 
either a complex auction or single-leg auction. Of note, Phlx's 
Acceptable Trade Range rule has a Posting Period described in 
Options 3, Section 15. ISE does have an Acceptable Trade Range rule 
as well in Options 3, Section 15, but that rule differs from Phlx as 
there is no Posting Period.
---------------------------------------------------------------------------

    Adding a provision to proposed new paragraph ISE Options 3, Section 
7(k)(2) which states that a Legging Order will not be generated if the 
price of the leg(s) of a Complex Options Order is outside of the price 
limits described in Options 3, Section 16(a) is consistent with the 
Act. Today, ISE Options 3, Section 16(a) would restrict the generation 
of a Legging Order through price limits for Complex Orders, by adding 
this rule text in Options 3, Section 7(k)(2) all limitations related to 
the generation of Legging Orders will be memorialized in Options 3, 
Section 7(k).\32\
---------------------------------------------------------------------------

    \32\ Phlx's rule similarly indicates that a Legging Order is 
subject to certain price parameters by stating that a Legging Order 
will not be generated if the price of the Complex Order is outside 
of the ACE Parameter of paragraph in subparagraph (i) of Options 3, 
Section 14. The ACE Parameter differs from the price limits 
described in ISE Options 3, Section 16(a).
---------------------------------------------------------------------------

    Adding a provision to proposed new paragraph ISE Options 3, Section 
7(k)(2) which states that a Legging Order will not be generated if 
there is already a Legging Order in that options series on the same 
side of the market at the same price is consistent with the Act. This 
provision addresses a situation of overlapping Legging Orders and 
Legging Order dependencies in other components. Phlx has a similar 
sentence in Phlx Options 3, Section 7(b)(10)(2). Of note, the phrase 
``unless it has priority based on the participant type, under existing 
Exchange rules'' from Phlx Options 3, Section 7(b)(10)(2) is not being 
added to ISE's Rule as Options 3, Section 10 which describes allocation 
on the single-leg order book, because as stated in proposed ISE Options 
3, Section 7(k), ``Legging Orders are treated as having no Priority 
Customer capacity on the single-leg order book, regardless of being 
generated from Priority Customer Complex Options Orders.'' The addition 
of this rule text will make clear an existing limitation to the 
generation of orders in Options 3, Section 7(k).
    Adding a provision to proposed new paragraph ISE Options 3, Section 
7(k)(2) which states that a Legging Order will

[[Page 86169]]

not be generated for Complex Orders with two option legs, where both 
legs are buying or both legs are selling and both legs are calls or 
both legs are puts, as described in Options 3, Section 14(d)(3)(A) is 
consistent with the Act. This limitation is already provided for in 
current ISE Options 3, section 14(d)(3)(A) and is being added to 
proposed new paragraph Options 3, Section 7(k)(2) to provide Members 
with a complete list of when Legging Orders will not be generated in 
Options 3, Section 7(k).
    Adding a provision to proposed new paragraph ISE Options 3, Section 
7(k)(2) which states that a Legging Order will not be generated if the 
Exchange has not opened; or a particular option series has not opened 
or such options series is halted is consistent with the Act. Since a 
complex strategy must be available for trading to generate a Legging 
Order, the failure of an options series that is a component of the 
complex strategy to open or a subsequent halt would cause Legging 
Orders not to generate. Phlx has a similar rule in Phlx Options 3, 
Section 7(b)(10)(1).
    Amending proposed ISE Options 3. Section 7(k)(3), similar to Phlx 
Options 3, Section 7(b)(10)(3)to describe current System handling when 
a Legging Order is executed and subsequently the other leg of the 
Complex Order is automatically executed against the displayed best bid 
or offer on the Exchange, and, therefore, any other Legging Order based 
on that Complex Order is removed is consistent with the Act. This 
example demonstrates that the Exchange will execute against the best 
bid or offer on the Exchange and will remove Legging Orders. The 
proposal to replace the word ``portion'' with ``leg'' will make the 
rule text more explicit. Adding the phrase ``and any other Legging 
order not executed as part of the Complex Options Order will be 
removed'' to the end of the second sentence in proposed Options 3, 
Section 7(k)(3) is consistent with the Act because the phrase will 
provide additional information regarding the treatment of unexecuted 
Legging Orders in Options 3, Section 7(k). Phlx has a substantively 
similar sentence in Options 3, Section 7(b)(10)(3).\33\
---------------------------------------------------------------------------

    \33\ Phlx Options 3, Section 7(b)(10)(3) states, ``A Legging 
Order is executed only after all other executable orders (including 
any non-displayed size) and quotes at the same price are executed in 
full. When a Legging Order is executed, the other leg of the Complex 
Order will be automatically executed against the displayed best bid 
or offer on the Exchange and any other Legging Order based on that 
Complex Order will be removed.'' ISE explicitly states ``not 
executed as part of the Complex Options Order'' where Phlx says 
``based on that Complex Order.''
---------------------------------------------------------------------------

    Amending proposed ISE Options 3, Section 7(k)(3) to add a new 
sentence to Options 3, Section 7(k)(3) which states, ``Two Legging 
Orders related to the same Complex Options Order can be generated, and 
both can execute as part of the execution of a particular Complex 
Options Order'' is consistent with the Act. As noted above, two Legging 
Orders related to the same Complex Options Order can be generated, and 
both can execute as part of the execution of a particular Complex 
Options Order. This behavior differs from Phlx where two legging orders 
may be generated, but only one of those can execute as part of the 
execution of a particular complex order. The Exchange believes that 
permitting both Legging Orders to execute as part of the execution of a 
particular Complex Options Order will allow more Complex Orders to 
execute while the price of the leg(s) will continue to be bounded by 
the price limits described in ISE Options 3, Section 16(a).
    Amending proposed ISE Options 3, Section 7(k)(4)(i) to state, ``A 
Legging Order is automatically removed from the single-leg limit order 
book if: (i) the price of the Legging Order is no longer at the 
displayed best bid or offer on the single-leg limit order book or is at 
a price that locks or crosses the best bid or offer of another exchange 
. . .'' (emphasis added) is consistent with the Act. Current Options 3, 
Section 7(k)(2) already notes that a Legging Order will not be created 
at a price that locks or crosses the best bid or offer of another 
exchange. Adding the same rule text to proposed Options 3, Section 
7(k)(4) will make clear that a Legging Order that locks or crosses an 
away market would be removed from the limit order book.
    Amending proposed ISE Options 3, Section 7(k)(4)(ii) to add a 
clause to current Options 3, Section 7(k)(3) at (ii) to provide that 
``A Legging Order is automatically removed from the single-leg limit 
order book if . . . (ii) execution of the Legging Order would no longer 
achieve that net price of the Complex Options Order when the other leg 
is executed against the best displayed bid or offer on the single-leg 
limit order book, excluding other Legging Orders'' (emphasis added) is 
consistent with the Act. A Legging Order is removed if the BBO on the 
other leg worsens such that the Complex Order limit price could no 
longer be achieved by trading with the quote, even if it could be 
achieved by trading with a Legging Order generated by another Complex 
Order. Phlx has a similar sentence in Options 3, Section 7(b)(10)(4).
    Amending proposed ISE Options 3, Section 7(k)(4) to add a new 
section ``(v)'' to this paragraph which states, ``A Legging Order is 
automatically removed from the single-leg limit order book if . . . (v) 
the price of the leg(s) of a Complex Options Order is outside of the 
price limits described in current Options 3, Section 16(a)'' is 
consistent with the Act. This limitation is currently described in ISE 
Options 3, Section 16(a) and is being added to this order type to 
complete the list of cases where a Legging Order would be removed from 
the order book in Options 3, Section 7(k). Phlx has similar rule text 
in Options 3, Section 7(b)(10)(4).
    Amending proposed ISE Options 3, Section 7(k)(4) to add a new 
section ``(vi)'' to this paragraph which states, ``A Legging Order is 
automatically removed from the single-leg limit order book if . . . 
(vi) the System receives a complex auction on either side in the 
Complex Options Strategy, or the System receives a single-leg auction 
on either side in any component of the Complex Options Strategy'' is 
consistent with the Act. As noted above, the Exchange believes from a 
System processing and user acceptance standpoint, the best practice is 
to remove the System-generated Legging Order from the order book during 
the course of the auction, as that time is minimal, then the System can 
attempt to re-generate a Legging Order once the auction has concluded. 
Phlx has similar language in Options 3, Section 7(b)(10)(4).
    Amending proposed ISE Options 3, Section 7(k)(4) to add a new 
section ``(vii)'' to this paragraph which states, ``A Legging Order is 
automatically removed from the single-leg limit order book if . . . 
(vii) a Legging Order is generated by a different Complex Options Order 
in the same leg at a better price or the same price for a participant 
with a higher price priority.'' As noted in proposed Options 3, Section 
7(k)(1), a Legging Order may be automatically generated at a price that 
matches or improves upon the best displayed bid or offer on the single-
leg limit order book. The System removes the Legging Order because it 
would have been at an inferior price. Phlx Options 3, Section 
7(b)(10)(4) has similar language.
Options 3, Section 16
    The Exchange's proposal to amend the language in ISE Options 3, 
Section 16(a) related to price limits for Complex Orders is consistent 
with the Act and protects investors and the general public by ensuring 
that the DNTT instruction causes a Complex Order is to be executed only 
at a price that is equal to or better than the NBBO on the opposite 
side for the options series or any stock component. The proposed rule 
text

[[Page 86170]]

makes transparent the manner in which the System is currently handling 
the DNTT instruction.

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.
Options 3, Section 7
    The Exchange's proposal to amend ISE Options 3, Section 7(k), 
Legging Orders, does not impose an intra-market burden on competition 
because all market participants may interact with Legging Orders on the 
single-leg order book. The Exchange's proposal to amend ISE Options 3, 
Section 7(k), Legging Orders, does not impose an inter-market burden on 
competition because other options exchanges may offer Legging Orders 
with similar functionality. Enhancing the description of the Legging 
Orders functionality will allow ISE to compete effectively with other 
options exchanges that offer similar functionality.
    The Exchange's proposal to limit the number of Legging Orders and 
the ability to remove existing Legging Orders does not impose an intra-
market burden on competition because the functionality will permit the 
Exchange to maintain a fair and orderly market in times of extreme 
volatility or uncertainty. Further, the Exchange does not limit the 
generation of Legging Orders on the basis of the entering Member or the 
Member category of the order (i.e., Professional or Priority Customer). 
The Exchange's proposal to limit the number of Legging Orders and the 
ability to remove existing Legging Orders does not impose an inter-
market burden on competition because this discretion is consistent with 
the treatment of Legging Orders on other options exchanges.\34\
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    \34\ See Phlx Options 3, Section 14(f)(iii)(C).
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Options 3, Section 16
    The Exchange's proposal to amend the language in ISE Options 3, 
Section 16(a) related to price limits for Complex Orders to specify 
that a Complex Order must be executed at a price that is equal to or 
better than the NBBO on the opposite side for the options series or any 
stock component does not impose an intra-market burden on competition 
because the System applies this price check to all Members executing 
Complex Orders in the same manner. The Exchange's proposal to amend the 
language in ISE Options 3, Section 16(a) does not impose an inter-
market burden on competition because any options exchange could offer 
similar functionality.

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 Exchange has filed the proposed rule change pursuant to section 
19(b)(3)(A)(iii) of the Act \35\ and Rule 19b-4(f)(6) thereunder.\36\ 
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 \37\ and subparagraph (f)(6) of 
Rule 19b-4 thereunder.\38\
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    \35\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \36\ 17 CFR 240.19b-4(f)(6).
    \37\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \38\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of 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 \39\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \40\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the Exchange may immediately update its rules to provide greater 
detail with respect to the generation, execution, and removal of 
Legging Orders. The Commission believes that the proposed rule change 
presents no novel issues and that waiver of the 30-day operative delay 
is consistent with the protection of investors and the public interest. 
Accordingly, the Commission hereby waives the operative delay and 
designates the proposed rule change operative upon filing.\41\
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    \39\ 17 CFR 240.19b-4(f)(6).
    \40\ 17 CFR 240.19b-4(f)(6)(iii).
    \41\ 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).
---------------------------------------------------------------------------

    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#addfd8c1c880cec2c0c0c8c3d9deeddec8ce83cac2db"><span class="__cf_email__" data-cfemail="b8cacdd4dd95dbd7d5d5ddd6cccbf8cbdddb96dfd7ce">[email protected]</span></a>. Please include 
file number SR-ISE-2023-31 on the subject line.

Paper Comments

    <bullet> 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-2023-31. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the

[[Page 86171]]

Exchange. Do not include personal identifiable information in 
submissions; you should submit only information that you wish to make 
available publicly. We may redact in part or withhold entirely from 
publication submitted material that is obscene or subject to copyright 
protection. All submissions should refer to file number SR-ISE-2023-31 
and should be submitted on or before January 2, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12), (59).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-27163 Filed 12-11-23; 8:45 am]
BILLING CODE 8011-01-P


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