Document ID: SEC-2017-0695-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Nasdaq ISE, LLC
Posted Date: 2017-05-01T04:00Z

[Federal Register Volume 82, Number 82 (Monday, May 1, 2017)]
[Notices]
[Pages 20405-20408]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08702]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80525; File No. SR-ISE-2017-33]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Delay the 
Implementation of Simultaneous Complex Order Auctions

April 25, 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 April 17, 2017, 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 delay implementation of simultaneous 
complex order auctions in the same complex strategy in connection with 
a system migration to Nasdaq INET technology.
    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
    ISE offers various complex order auctions that are designed to 
provide members an opportunity to trade and to potentially receive 
price improvement for complex orders that are entered on the Exchange, 
including an ``Exposure'' auction pursuant to Rule 722(b)(3)(iii), a 
Complex Price Improvement Mechanism (``PIM'') pursuant to Supplementary 
Material .09 to Rule 723, a Complex Facilitation Mechanism pursuant to 
Supplementary Material .08 to Rule 716, and Complex Solicited Order 
Mechanism also pursuant to Supplementary Material .08 to Rule 716.
    The purpose of the proposed rule change is to delay implementation 
of simultaneous complex order auctions in the same complex strategy in 
connection with a system migration to Nasdaq INET technology.\3\ No 
other changes to the complex order auction mechanisms are being 
proposed, and these auctions will continue to function as they do 
today, with the exception

[[Page 20406]]

that after the migration to the INET platform a member will not be 
permitted to initiate a complex order auction in a particular complex 
strategy if another complex order auction is already ongoing in that 
complex strategy. With this proposed change, the Exchange will handle 
multiple complex order auctions in the same complex strategy in a 
manner that is consistent with implementation on other options 
exchanges,\4\ and will reintroduce simultaneous complex order auctions 
in the same complex strategy at a later date within one year of this 
filing.
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    \3\ See Securities Exchange Act Release No. 80432 (April 11, 
2017 (SR-ISE-2017-03) (Order Approving Proposed Rule Change, as 
Modified by Amendment No. 1, to Amend Various Rules in Connection 
with a System Migration to Nasdaq INET Technology). INET is the 
proprietary core technology utilized across Nasdaq's global markets 
and utilized on The NASDAQ Options Market LLC (``NOM''), NASDAQ PHLX 
LLC (``Phlx''), NASDAQ BX, Inc. (``BX''), and introduced recently on 
Nasdaq GEMX, LLC (``GEMX''). The migration of ISE to the INET 
architecture would result in higher performance, scalability, and 
more robust architecture.
    \4\ See infra notes 6-8 and accompanying text.
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    Today, only one PIM may be ongoing at any given time in a series or 
complex strategy, and PIMs are not permitted to queue or overlap in any 
manner; \5\ however, there are no similar restrictions for non-PIM 
auctions, and any such auctions may be processed concurrently, 
including in parallel with a PIM auction. For example, while the 
trading system would prohibit a member from entering a PIM auction when 
another PIM auction is already ongoing in a complex strategy, if there 
was an Exposure auction already running a member would be able to start 
a PIM, Facilitation, Solicitation, or even another Exposure auction in 
that strategy. This allows maximum ability of members to express their 
trading intent on the Exchange by permitting multiple complex order 
auctions in the same complex strategy to be ongoing at any particular 
time.
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    \5\ See Supplementary Material .04 to Rule 723.
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    Nevertheless, other options exchanges do not offer the same 
functionality for simultaneous complex order auctions in a complex 
strategy provided by the Exchange. The Exchange's affiliate, Nasdaq 
Phlx, LLC (``Phlx''), for example, does not allow the initiation of a 
Complex Order Live Auction (``COLA'') when there is already a Price 
Improvement XL (``PIXL'') auction already ongoing in the strategy.\6\ 
Similarly, MIAX can limit the frequency of Complex Auctions by 
establishing a minimum time period between such auctions,\7\ and 
permits only one Complex Auction per strategy to be in progress at any 
particular time.\8\
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    \6\ See Phlx Rule 1098(e)(2). Phlx would also similarly not 
allow a PIXL auction to be initiated if there is a COLA already 
ongoing in the complex strategy.
    \7\ See MIAX Rule 518(d)(2).
    \8\ See Securities Exchange Act Release Nos. 78620 (August 18, 
2016), 81 FR 58769, 58799 (August 25, 2016) (Notice); 79072 (October 
7, 2016), 81 FR 71131 (October 14, 2016)) (Approval) (SR-MIAX-2016-
26).
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    In order to give the Exchange additional time to develop and test 
this functionality, the Exchange proposes to delay the implementation 
of simultaneous complex order auctions in the same complex strategy in 
connection with the migration of the trading system to the INET 
platform. With the proposed change, only one complex order auction may 
be ongoing at any given time in a complex strategy, and such auctions 
will not queue or overlap in any manner. For PIM, Facilitation, or 
Solicitation auctions, the Exchange will reject a complex order auction 
of the same or different auction type in a complex strategy that is 
initiated while another complex order auction is ongoing in that 
complex strategy.\9\ In the case where a complex order auction has 
already been initiated in a complex strategy, an Exposure auction for 
an order for that strategy will not be initiated and the order will be 
processed as a complex order that is not marked for price 
improvement,\10\ instead of rejecting the complex order. If the member 
requested the order to be cancelled after the exposure period, then the 
complex order will be cancelled back to the member. Simultaneous 
complex order auctions in the same complex strategy will be 
subsequently rolled out on the INET trading system within one year of 
the date of filing of this proposed rule change. The Exchange is 
staging the re-platform of its trading system to provide maximum 
benefit to its members while also ensuring a successful rollout. This 
delay in implementing simultaneous complex order auctions in the same 
complex strategy will provide the Exchange additional time to test and 
implement this functionality on the INET platform.
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    \9\ The rejection message sent to the member will contain an 
appropriate reason code indicating that the auction was rejected due 
to another ongoing complex order auction in the same complex 
strategy.
    \10\ Currently, an Exposure order auction is automatically 
initiated when a member submits an eligible complex order that is 
marked for price improvement. See Rule 722(b)(3)(iii). Pursuant to 
Rule 722(b)(3)(iii), complex orders may be marked for price 
improvement, and if so marked, the complex order may be exposed on 
the complex order book for a period of up to one-second before being 
automatically executed. Members can also request that their complex 
orders be cancelled after the exposure period.
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    The Exchange believes that implementing simultaneous complex order 
auctions in the same complex strategy at a later date will not have a 
significant impact on members as it is rare for multiple complex order 
auctions in a complex strategy to be ongoing at a particular time. This 
is particularly the case today due to the recent decrease in the 
Exchange's auction timers to 100 milliseconds.\11\ The Exchange notes 
that simultaneous complex order auctions in a strategy only occur 
approximately 0.5% of the time that an auction runs on the Exchange. 
The Exchange therefore believes that the impact on members will be 
insignificant, and if a member does have auction eligible interest to 
execute when another complex order auction is ongoing, the member can 
either re-submit that order to the Exchange, after the auction has 
concluded, or submit it to another options market that provides similar 
auction functionality. In this regard, the Exchange notes that its 
market data feeds provide information to members about when a complex 
order auction is ongoing, and members can therefore use this 
information to make appropriate routing decisions based on applicable 
market conditions.
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    \11\ See Securities Exchange Act Release No. 79733 (January 4, 
2017), 82 FR 3055 (January 10, 2017) (SR-ISE-2016-26) (permitting 
the Exchange to determine auction timers for PIM, Facilitation, and 
Solicitation within a range of 100 milliseconds and one second). 
Each of these auction timers are currently set to 100 milliseconds--
i.e., the bottom of the range approved in the filing. Exposure 
auctions can be any duration up to one second (See Rule 722(b)(3)), 
and are also currently set to 100 milliseconds.
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Implementation
    The proposed rule change will be implemented on the Exchange's new 
INET trading system, which is scheduled to launch in Q2 2017.\12\ The 
INET migration will take place on a symbol by symbol basis \13\ as 
specified by the Exchange in a notice to be provided to Members.\14\ 
The Exchange is proposing to implement this rule change on the INET 
platform as the symbols migrate to that platform. As such, the proposed 
change will be rolled out in symbols as they migrate to the INET 
platform, at which point only one complex order auction will be 
permitted to be ongoing in a complex strategy. Members will still be 
able to use all of the Exchange's complex order auctions, provided that 
there is not another auction already ongoing in the complex strategy. 
The Exchange will issue an Options Trader Alert to all members 
notifying them that simultaneous complex order auctions will no longer 
be available with the symbol migration to INET. The Exchange proposes 
to launch the simultaneous complex order auction functionality on the 
INET platform within one year from the date

[[Page 20407]]

of filing of this rule change to be announced in an Options Trader 
Alert.
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    \12\ See supra note 3.
    \13\ When a symbol is migrated to INET, all strikes and 
strategies will migrate with that symbol.
    \14\ The Exchange will issue an Options Trader Alert prior to 
the migration and will specify the dates that symbols will migrate 
to the INET platform.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder that are applicable to a national securities exchange, and, 
in particular, with the requirements of Section 6(b) of the Act.\15\ In 
particular, the proposal is consistent with Section 6(b)(5) of the 
Act,\16\ because it is designed to promote just and equitable 
principles of trade, remove impediments to and perfect the mechanisms 
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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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is consistent 
with the Act as it will provide additional time for the Exchange to 
rebuild this technology on the INET platform. By delaying the 
implementation of simultaneous complex order auctions in a complex 
strategy, the Exchange will have additional time to test and implement 
this functionality. The Exchange will provide members with ample notice 
of the delayed implementation of this functionality in an Options 
Trader Alert, and will continue to provide notifications to members to 
ensure clarity about the availability of this functionality with the 
symbol migration. The Exchange will also issue an Options Trader Alert 
indicating when simultaneous complex order auctions in a complex 
strategy will become available on the INET platform.
    The Exchange does not anticipate that the proposed rule change will 
have any meaningful impact with respect to members' ability to execute 
complex order auctions as similar restrictions are already in place on 
other options exchanges.\17\ Simultaneous complex order auctions in a 
complex strategy are rare, and therefore the vast majority of the time 
members will be able to enter a complex order auction notwithstanding 
the temporary delay of the implementation of concurrent auctions. With 
respect to Exposure auctions, in the case where another complex order 
auction in the same strategy has already been initiated, the Exchange 
proposes to allow the complex order to continue to be processed without 
an auction in the same manner as complex orders that are not marked for 
price improvement. If the member has marked the complex order to be 
cancelled after the exposure period, however, the Exchange will cancel 
the order back to the member consistent with that instruction. If the 
member is not able to initiate a complex order auction because another 
complex order auction in the same strategy has been initiated, the 
member may either re-initiate the auction after the auction concludes 
or submit the order to another options market that offers similar 
functionality. Thus, members will be able to continue to express their 
trading intent regardless of the proposed delay in concurrent auction 
functionality. When the simultaneous complex order auction 
functionality is rebuilt and appropriately tested, the Exchange will 
then reintroduce this functionality.
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    \17\ See supra notes 6-8 and accompanying text.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\18\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change is designed to prevent simultaneous complex order auctions 
in a complex strategy in connection with the migration of the trading 
system to INET technology, and is not designed to have any significant 
competitive impact. Similar restrictions are already in place on other 
options exchanges.\19\ The Exchange does not believe that the proposed 
rule change will impose any burden on intra-market competition because 
all Members uniformly will not be able to initiate simultaneous 
auctions in the same complex order strategy.
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    \18\ 15 U.S.C. 78f(b)(8).
    \19\ See supra notes 6-8 and accompanying text.
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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 \20\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\21\
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    \20\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \21\ 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-2017-33 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-2017-33. 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

[[Page 20408]]

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-2017-33 and should be submitted on or before May 22, 
2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08702 Filed 4-28-17; 8:45 am]
 BILLING CODE 8011-01-P