Document ID: SEC-2017-0489-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2017-03-23T04:00Z

[Federal Register Volume 82, Number 55 (Thursday, March 23, 2017)]
[Notices]
[Pages 14932-14934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05744]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80274; File No. SR-ISE-2017-27]

Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to ``Tick-Worse'' Functionality

March 17, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 15, 2017, the International Securities Exchange, LLC (``ISE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III, 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 (i) request the decommission of ``Tick-
Worse'' functionality and (ii) amend Rule 713 (Priority of Quotes and 
Orders) relating to the priority of split price transactions.
    The text of the proposed rule change is available on the Exchange's 
Web site at www.ise.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to (i) decommission the 
``Tick-Worse'' functionality and (ii) amend Rule 713 (Priority of 
Quotes and Orders) as it relates to the priority of split price 
transactions. The proposed changes are discussed below.
``Tick-Worse'' Functionality
    The Exchange currently provides market makers \3\ with Tick-Worse 
functionality, which allows market makers to pre-define the prices and 
sizes at which the system will automatically move their quotation 
following an execution that exhausts the size of their existing 
quotation.\4\ As such, when a market maker's quote is traded out, it 
can be automatically reinstated into the Exchange's order book at the 
next best price.\5\ This optional feature is intended to help market 
makers meet their continuous quoting obligations under the Exchange's 
rules \6\ when their displayed

[[Page 14933]]

quotations are exhausted. When a market maker's quote is traded out and 
automatically reinstated into the Exchange's order book using the Tick-
Worse functionality, the reinstated quote will be given priority 
pursuant to the Exchange's split price priority rule as discussed 
below.
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    \3\ The term ``market makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See Rule 
100(a)(25).
    \4\ Tick-Worse functionality is not currently memorialized in 
the Exchange's rulebook. In addition, the Exchange will not offer 
Tick-Worse on the new Nasdaq INET system going forward. On September 
30, 2004, International Securities Exchange, LLC (``ISE'') filed 
with the Commission a proposal to codify this functionality in its 
rulebook, but inadvertently deleted the rule as obsolete rule text 
in a subsequent proposal filed on December 21, 2012. See Securities 
Exchange Act Release No. 51050 (January 18, 2005), 70 FR 3758 
(January 26, 2005) (SR-ISE-2004-31); Securities Exchange Act Release 
No. 68570 (January 3, 2013), 78 FR 1901 (January 9, 2013) (SR-ISE-
2012-82).
    \5\ Market makers may choose to set Tick-Worse parameters by 
specifying how many price ticks back, and for what size, the quote 
is to be reinstated.
    \6\ Specifically, Primary Market Makers (``PMMs'') are required 
under Rule 804(e)(1) to enter quotations in all of the series listed 
on the Exchange of the options classes to which they are appointed 
on a daily basis. Supplementary Material .01 to Rule 804 further 
requires PMMs to quote 90% of the time their assigned options class 
is open for trading on the Exchange. As provided in Rule 804(e)(2), 
Competitive Market Makers (``CMMs'') are not required to enter 
quotations in the options class to which they are appointed, but in 
the event a CMM does initiate quoting, such CMM is generally 
required to quote 60% of the time its assigned options class is open 
for trading on the Exchange.
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    Due to the lack of demand for the Tick-Worse feature, the Exchange 
proposes to decommission the use of this functionality as it migrates 
symbols to INET no later than in July 31, 2017.\7\ As discussed above, 
the Exchange offers the Tick-Worse feature as a voluntary tool for 
market makers to assist them in meeting their continuous quoting 
obligations under the Exchange's rules. As such, market makers are not 
required to use the Exchange-provided functionality and can program 
their own systems to perform the same functions if they prefer. The 
Exchange has found that almost all market makers use their own systems 
rather than the Exchange's Tick-Worse feature to send refreshed 
quotations when their displayed quotations are exhausted, and therefore 
members have discontinued use of this functionality. Because the Tick-
Worse functionality is currently not memorialized in the Exchange's 
rules as noted above, there is no text of the proposed rule change. The 
Exchange will provide advance notice to its Members through an Options 
Trader Alert of the intent to decommission the Tick-Worse 
functionality.\8\
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    \7\ Currently, this functionality is being used by one market 
maker on the Exchange.
    \8\ The Exchange notes that it similarly decommission Tick-Worse 
on ISE Gemini on February 21, 2017. See Market Information Circular 
2017-10.
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Split Price Priority
    The Exchange is proposing to delete ISE Rule 713(f), which relates 
to the priority of split price transactions, because this priority rule 
currently only applies in the context of the Tick-Worse functionality, 
as described above, which the Exchange proposes to decommission. The 
Exchange proposes to delete this rule no later than July 31, 2017, 
along with the decommissioning of the Tick-Worse functionality.
    ISE Rule 713(f) provides that if a Member purchases (sells) one (1) 
or more options contracts of a particular series at a particular price, 
it shall at the next lower (higher) price at which there are 
Professional Orders or market maker quotes, have priority over such 
Professional Orders and market maker quotes in purchasing (selling) up 
to the equivalent number of options contracts of the same series that 
it purchased (sold) at the higher (lower) price, but only if the 
purchase (sale) so effected represents the opposite side of a 
transaction with the same offer (bid) as the earlier purchase (sale). 
Although the language of Rule 713(f) is more general, the Exchange's 
intent was to apply split price priority solely to the Tick-Worse 
functionality.
    Example:

--Primary Market Maker has opted into tick worse functionality and 
selected to tick worse and post 10 contracts at a penny worse than 
their original quote.
--Primary Market Maker quote for 10 contracts bid at $1.00 and 10 
contracts offered at $1.02
--Additionally, there is a Priority Customer order to buy 5 contracts 
at $0.99, and a Competitive Market Maker quote for 10 contracts bid at 
$0.99 and 10 contracts offered at $1.02
--A member enters a sell order for 20 contracts at $0.99
--This order will trade as follows:
     10 contracts trade at $1.00 with the Primary Market Maker 
bid quote, and Primary Market Maker is ticked worse to 10 contracts bid 
at $0.99
     5 contracts trade at $0.99 with the Priority Customer 
order due to customer priority
     5 contracts trade at $0.99 with the Primary Market Maker's 
ticked worse quote due to the split price priority rule; 0 contracts 
trade with the Competitive Market Maker bid quote

    The Exchange represents that Tick-Worse has historically only ever 
applied in the context of the split price priority rule in ISE Rule 
713(f). Furthermore, the Exchange has historically only ever awarded 
priority pursuant to ISE Rule 713(f) for split price transactions that 
occur in the Tick-Worse functionality, and the existing rule should 
have been clarified to more accurately reflect its current application. 
Nonetheless, the Exchange is now proposing to delete the rule text in 
its entirety along with decommissioning the Tick-Worse functionality, 
as proposed above.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general to protect investors and the public 
interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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``Tick-Worse'' Functionality
    As noted above, the Exchange originally offered Tick-Worse as an 
optional feature to help market makers meet their continuous quoting 
obligations under the Exchange's rules. The Exchange believes that its 
proposal is consistent with the Act because it has found that the Tick-
Worse feature is rarely used today \11\ as almost all market makers use 
their own systems to send refreshed quotations when their displayed 
quotations are exhausted. The Exchange therefore believes that it is 
consistent with the Act to propose to discontinue use of this 
functionality prior to the migration to INET. Because one member 
continues to utilize the functionality, the Exchange believes that 
providing advance notice of the intent to decommission of this 
functionality will serve to prepare Members as to the upcoming change 
with INET.
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    \11\ It is only being used by one market maker.
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    As discussed above, the Exchange originally offered Tick-Worse as 
an optional feature to help market makers meet their continuous quoting 
obligations under the Exchange's rules. The Exchange has found, 
however, that the Tick-Worse feature is rarely used today as almost all 
market makers use their own systems to send refreshed quotations when 
their displayed quotations are exhausted. The Exchange therefore 
believes that decommissioning Tick-Worse and providing advance notice 
to its members, is consistent with the Act because it eliminates any 
investor uncertainty related to the status of this functionality.
Split Price Priority
    The Exchange also believes that its proposal to delete the split 
price priority rule in Rule 713(f) protects investors and the public 
interest because it removes rule text that became obsolete with the 
decommission of the Tick-Worse functionality. As described above, the 
split price priority rule only applies to the Tick-Worse functionality. 
Because the Rule is more general than its current, specific 
application, however, the Exchange believes that the continued presence 
of Rule 713(f) in its rules even after retiring the Tick-Worse 
functionality will be confusing to its members and investors. By 
removing obsolete rule text that only applies in the context of Tick-
Worse, the Exchange is eliminating any potential for confusion about 
how its systems operate.

[[Page 14934]]

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change is not 
designed to have any competitive impact but rather request the 
decommission of a rarely-used functionality on the Exchange and 
relatedly, to remove the rule text that this functionality supports 
from the Exchange's rulebook, thereby reducing investor confusion and 
making the Exchange's rules easier to understand and navigate.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2017-27 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ISE-2017-27. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2017-27 and should be 
submitted on or before April 13, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05744 Filed 3-22-17; 8:45 am]
 BILLING CODE 8011-01-P