Document ID: SEC-2017-0562-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: ISE Mercury, LLC
Posted Date: 2017-04-07T04:00Z

[Federal Register Volume 82, Number 66 (Friday, April 7, 2017)]
[Notices]
[Pages 17051-17053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-06909]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80362; File No. SR-ISEMercury-2017-06]

Self-Regulatory Organizations; ISE Mercury, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change to ``Tick-Worse'' 
Functionality

April 3, 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 28, 2017, ISE Mercury, LLC (``ISE Mercury'' 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 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). The Exchange imported Rule 713 from ISE's rulebook when 
the Commission granted the Exchange's application for registration 
as a national securities exchange, which was after the Tick-Worse 
functionality rule was inadvertently removed from ISE's rules. See 
Securities Exchange Act Release No. 76998 (January 29, 2016), 81 FR 
6066 (February 4, 2016) (Order Granting Registration as a National 
Securities Exchange).
    \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 2017 Q3.\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 decommissioned Tick-
Worse on ISE Gemini, LLC on February 21, 2017. See Market 
Information Circular 2017-10.

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[[Page 17052]]

Split Price Priority
    The Exchange is proposing to delete 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 2017 Q3, along with 
the decommissioning of the Tick-Worse functionality.
    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 Rule 713(f). 
Furthermore, the Exchange has historically only ever awarded priority 
pursuant to 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 this 
functionality will serve to prepare Members as to the upcoming change 
with INET. As such, the Exchange believes that decommissioning Tick-
Worse prior to the migration to INET 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.
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    \11\ It is only being used by one market maker.
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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 will become 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.

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

[[Page 17053]]

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-ISEMercury-2017-06 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-ISEMercury-2017-06. 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-ISEMercury-2017-06 and 
should be submitted on or before April 28, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\

    \14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-06909 Filed 4-6-17; 8:45 am]
 BILLING CODE 8011-01-P