Document ID: SEC-2016-2327-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: ISE Gemini, LLC
Posted Date: 2016-12-29T05:00Z

[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Notices]
[Pages 96114-96123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31489]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79677; File No. SR-ISEGemini-2016-17]

 Self-Regulatory Organizations; ISE Gemini, LLC; Notice of Filing 
of Proposed Rule Change To Amend Various Rules in Connection With a 
System Migration to Nasdaq INET Technology

December 22, 2016.
    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 December 16, 2016, ISE Gemini, LLC (``ISE Gemini'' 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend various rules 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 the 
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

[[Page 96115]]

the most significant aspects of such statements.

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

1. Purpose
    The purpose of this rule change is to amend certain rules to 
reflect the ISE Gemini technology migration to a Nasdaq, Inc. 
(``Nasdaq'') supported architecture. 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'') and 
NASDAQ BX, Inc. (``BX'') (collectively, ``Nasdaq Exchanges''). The 
migration of ISE Gemini to the Nasdaq INET architecture would result in 
higher performance, scalability, and more robust architecture. With 
this system migration, the Exchange intends to adopt certain trading 
functionality currently utilized at Nasdaq Exchanges. The functionality 
being adopted is described in this filing.
    The Exchange is also separately filing \3\ a rule change to amend 
the Exchange's Opening Process. ISE Gemini will replace its current 
opening process at Rule 701 with Phlx's Opening Process.\4\
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    \3\ See SR-ISEGemini-2016-18 (not yet published).
    \4\ See Phlx Rule 1017. See also Securities Exchange Act Release 
No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR-
Phlx-2017-79) (notice of Filing of Partial Amendment No. 2 and Order 
Granting Approval of a Proposed Rule Change, as Modified by Partial 
Amendment No. 2, to Amend PHLX Rule 1017, Openings in Options).
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    The Exchange intends to begin implementation of the proposed rule 
changes in Q1 2017. The migration will be on a symbol by symbol basis, 
and the Exchange will issue an alert to members in the form of an 
Options Trader Alert to provide notification of the symbols that will 
migrate and the relevant dates.
Generally
    With the re-platform, the Exchange will now be built on the Nasdaq 
INET architecture, which allows certain trading system functionality to 
be performed in parallel. The Exchange believes that this architecture 
change will improve the member experience by reducing overall latency 
compared to the current ISE Gemini system because of the manner in 
which the system is segregated into component parts to handle 
processing.
Trading Halts
Cancellation of Quotes
    The Exchange proposes to amend ISE Gemini Rule 702 entitled 
``Trading Halts.'' Specifically, the Exchange proposes to amend Rule 
702(a)(2) to note that during a halt, the Exchange will maintain 
existing orders on the book, but not existing quotes prior to the halt, 
accept orders and quotes, and process cancels and modifications for 
quotes and orders, except that existing quotes are cancelled. Today, 
ISE Gemini maintains existing orders and quotes during a trading halt. 
With respect to cancels and modifications, this behavior will not 
change. ISE Gemini does not have a quote purge today, so this 
functionality will be changed with the adoption of this trading rule. 
The Exchange believes that purging quotes upon a halt will remove 
uncertainty for market participants.
    The Exchange proposes to conform the treatment of quotes and orders 
on ISE Gemini to Phlx Rule 1047(f) in conjunction with the replatform 
of ISE Gemini. The Exchange desires to handle halts in a similar manner 
as Phlx.
Limit Up-Limit Down
    The Exchange also proposes to add new ISE Gemini Rule 702(d) to 
replace rule text currently contained in ISE Gemini Rule 703A entitled 
``Trading During Limit Up-Limit Down States in Underlying Securities.'' 
Proposed ISE Gemini Rule 702(d) is similar to language currently in 
Phlx Rule 1047(d), which provides for Exchange handling due to 
extraordinary market volatility. Currently ISE Gemini Rule 703A(a) and 
(b) provides modified order handling procedures when a security 
underlying an options class traded on the Exchange enters a Limit State 
or Straddle State under the Plan to Address Extraordinary Market 
Volatility (the ``Plan'').\5\ Specifically, during a Limit State or 
Straddle State: (1) Incoming Market Orders are automatically rejected, 
and all unexecuted Market Orders pending in the System are cancelled, 
and (2) incoming Stop Orders (which become Market Orders if elected) 
are automatically rejected, and unexecuted Stop Orders pending in the 
System cannot be elected and will be held until the end of the Limit 
State or Straddle State. In addition, ISE Gemini Rule 703A(c) provides 
that when the security underlying an option class is in a Limit State 
or Straddle State, the maximum quotation spread requirements for market 
maker quotes contained in ISE Gemini Rule 803(b)(5) and the continuous 
quotation requirements contained in ISE Gemini Rule 804(e) shall be 
suspended.\6\
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    \5\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan. As set forth 
in more detail in the Plan, Price Bands consisting of a Lower Price 
Band and an Upper Price Band for each NMS Stock are calculated by 
the Processors (Section V(A) of the Plan). When the National Best 
Bid (Offer) is below (above) the Lower (Upper) Price Band, the 
Processors shall disseminate such National Best Bid (Offer) with an 
appropriate flag identifying it as unexecutable. When the National 
Best Bid (Offer) is equal to the Upper (Lower) Price Band, the 
Processors shall distribute such National Best Bid (Offer) with an 
appropriate flag identifying it as a Limit State Quotation (Section 
VI(A) of the Plan). All trading centers in NMS stocks must maintain 
written policies and procedures that are reasonably designed to 
prevent the display of offers below the Lower Price Band and bids 
above the Upper Price Band for NMS stocks. Notwithstanding this 
requirement, the Processor shall display an offer below the Lower 
Price Band or a bid above the Upper Price Band, but with a flag that 
it is non-executable. Such bids or offers shall not be included in 
the National Best Bid or National Best Offer calculations (Section 
VI(A)(3) of the Plan). Trading in an NMS stock immediately enters a 
Limit State if the National Best Offer (Bid) equals but does not 
cross the Lower (Upper) Price Band (Section VI(B)(1) of the Plan. 
Trading for an NMS stock exits a Limit State if, within 15 seconds 
of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the market does not exit 
a Limit State within 15 seconds, then the Primary Listing Exchange 
would declare a five-minute trading pause pursuant to Section VII of 
the Plan, which would be applicable to all markets trading the 
security. The primary listing market would declare a Trading Pause 
in an NMS stock; upon notification by the primary listing market, 
the Processor would disseminate this information to the public. No 
trades in that NMS stock could occur during the trading pause, but 
all bids and offers may be displayed (Section VII(A) of the Plan). 
In addition, the Plan defines a Straddle State as when the National 
Best Bid (Offer) is below (above) the Lower (Upper) Price Band and 
the NMS stock is not in a Limit State. For example, assume the Lower 
Price Band for an NMS Stock is $ 9.50 and the Upper Price Band is $ 
10.50, such NMS stock would be in a Straddle State if the National 
Best Bid were below $ 9.50, and therefore unexecutable, and the 
National Best Offer were above $ 9.50 (including a National Best 
Offer that could be above $ 10.50). If an NMS stock is in a Straddle 
State and trading in that stock deviates from normal trading 
characteristics, the Primary Listing Exchange may declare a trading 
pause for that NMS stock if such Trading Pause would support the 
Plan's goal to address extraordinary market volatility.
    \6\ The time periods associated with Limit States and Straddle 
States are not considered by the Exchange when evaluating whether a 
market maker complied with the continuous quotation requirements 
contained in Rule 804(e).
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    With the re-platform, the Exchange will adopt opening limitation, 
Market Order and Stop Order handling consistent with handling today on 
Phlx.\7\ Specifically, proposed ISE Gemini Rule 702(d) will provide 
that during a Limit State and Straddle State in the Underlying NMS 
stock: (i) The Exchange will not open an affected option, (ii) provided 
the Exchange has

[[Page 96116]]

opened an affected option for trading, the Exchange shall reject Market 
Orders, as defined in ISE Gemini Rule 715(a), and shall notify Members 
of the reason for such rejection, and (iii) provided the Exchange has 
opened an affected option for trading, the Exchange will elect Stop 
Orders if the condition is met, and, because they become Market Orders, 
shall cancel them back and notify Members of the reason for such 
rejection. The language in proposed ISE Gemini Rule 703(d)(iv) 
concerning the maximum quotation spread requirements for market maker 
quotes and the continuous quotation requirements suspensions are the 
same language currently contained in ISE Gemini Rule 703A(c).
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    \7\ See proposed ISE Gemini Rule 702(d)(ii) and (iii) [sic].
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    These amendments differ in certain respects from the manner in 
which ISE Gemini operates today during a Limit State or Straddle State. 
The current ISE Gemini rule does not address the opening. The Exchange 
proposes to adopt rule text to provide for how the Exchange shall treat 
the opening rotation.\8\ The opening in an option will not commence in 
the event that the underlying NMS stock is open, but has entered into a 
Limit State or Straddle State. If this occurs, the opening will only 
commence and complete if the underlying NMS stock stays out of a Limit 
or Straddle State. Accordingly, proposed ISE Gemini Rule 702(d)(i) 
[sic] will provide that the Exchange will not open an affected option. 
As a result, if an opening process is occurring, it will cease and then 
start the opening process from the beginning once the Limit State or 
Straddle State is no longer occurring.
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    \8\ See note 3 above.
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    In addition, ISE Gemini currently cancels Market Orders pending in 
the System upon initiation of a Limit or Straddle State. Under the 
proposal to adopt the Phlx rule and implementation of the Limit Up-
Limit Down procedures, Market Orders pending in the System will 
continue to be processed regardless of the Limit or Straddle State. The 
Exchange believes this is a reasonable handling of Market Orders in the 
system since these orders are only pending in the System if they are 
exposed at the NBBO pursuant to Supplementary Material .02 to Rule 
1901. If at the end of the exposure period the affected underlying is 
in a Limit or Straddle State, the Market Order will be cancelled with 
no execution occurring. If at the end of the exposure period the 
underlying is no longer in a Limit or Straddle State, the Market Order 
will be handled under the normal operation of the rules.
    Lastly, ISE Gemini does not currently elect Stop Orders that are 
pending in the System during a Limit or Straddle State. Under the 
proposal, and in-line with the Phlx implementation, Stop Orders that 
are pending in the System during a Limit or Straddle State will be 
elected, if conditions for such election are met, however because they 
become Market Orders will be cancelled back to the Member with a reason 
for such rejection.
    While the implementation of Market and Stop Order handling varies 
from ISE Gemini today, both the current and proposed Rule provide for 
protections from erroneous executions in a highly volatile period.\9\ 
The Exchange believes consistency across the six options markets 
operated by Nasdaq, Inc. provides clarity for Members as to how their 
orders, as well as the opening process, will be handled in a Limit or 
Straddle State.
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    \9\ The Exchange is introducing a Phlx protection, Acceptable 
Trade Range, into ISE [sic] Rules as discussed within this rule 
change.
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Auction Handling During a Trading Halt
    The Exchange proposes to amend various rules to add detail to ISE 
Gemini rules to account for the impact of a trading halt on the 
Exchange's auction mechanisms. The Exchange proposes to memorialize 
within ISE Gemini Rule 723, entitled ``Price Improvement Mechanism for 
Crossing Transactions'' the manner in which a trading halt will impact 
an order entered into PIM once it is migrated to the INET architecture.
    Today, if a trading halt is initiated after an order is entered 
into the Price Improvement Mechanism (``PIM'') on ISE Gemini, such 
auction is terminated and eligible interest is executed. The Exchange 
proposes to amend today's current behavior and instead terminate the 
auction and not execute eligible interest when a trading halt occurs. 
In the event of a trading halt, terminating the auction and not 
executing eligible interest will provide certainty to participants in 
regard to how their interest will be handled. Memorializing the manner 
in which the system will handle orders entered into PIM during a 
trading halt will provide transparency for the benefit of members and 
investors.
    The Exchange proposes an amendment to ISE Gemini Rule 716, entitled 
``Block Trades'' to memorialize that if a trading halt is initiated 
after an order is entered into the Block Order Mechanism, Facilitation 
Mechanism, or Solicited Order Mechanism, such auction will also be 
automatically terminated without execution. This is the current 
behavior today on ISE Gemini and will not be changing.
    As discussed above, Phlx Rule 1047(c) provides that in the event 
the Exchange halts trading, all trading in the affected option shall be 
halted. This is interpreted to restrict executions after a halt unless 
there is a specific rule specifying that such trades should take place. 
The Exchange is proposing to add more specificity into the relevant 
rules. With respect to Block Order Mechanism, Facilitation Mechanism, 
or Solicited Order Mechanism, the Exchange notes that the current 
behavior is consistent with Phlx Rule 1047(c) generally, where all 
trading in the affected option shall be halted.\10\ In the event of a 
trading halt, terminating these auction mechanisms and not executing 
eligible interest will provide certainty to participants in regard to 
how their interest will be handled. Memorializing the manner in which 
the system will handle orders during a trading halt will provide 
transparency for the benefit of members and investors.
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    \10\ See Phlx Rule 1047(c).
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Market Order Spread Protection
    The Exchange proposes to amend ISE Gemini Rule 711, entitled 
``Acceptance of Quotes and Orders'' to adopt a new mandatory risk 
protection entitled Market Order Spread Protection. ISE Gemini does not 
have a similar feature today. This mandatory feature is currently 
offered on NOM to protect Market Orders from being executed in very 
wide markets.\11\
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    \11\ See NOM Rules at Chapter VI, Section 6(c). NOM's current 
rule states, ``System Orders that are Market Orders will be rejected 
if the best of the NBBO and the internal market BBO (the ``Reference 
BBO'') is wider than a preset threshold at the time the order is 
received by the System.'' NOM has two order types, Price-Improving 
and Post-Only Orders, which result in non-displayed pricing that may 
cause the internal market BBO to be better than the NBBO. ISE Gemini 
does not have similar non-displayed order types and therefore the 
reference to the internal market BBO is not necessary.
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    Pursuant to proposed ISE Gemini Rule 711(c), if the NBBO is wider 
than a preset threshold at the time a Market Order is received, the 
order will be rejected. For example, if the Market Order Spread 
Protection is set to $20.00, and a Market Order to buy is received 
while the NBBO is $1.00-$50.00, such Market Order will be rejected. The 
proposed feature would assist with the maintenance of fair and orderly 
markets by mitigating the risks associated with errors resulting in 
executions at prices that are away from the Best Bid or Offer and 
potentially erroneous. Further the proposal protects investors from 
potentially receiving executions away

[[Page 96117]]

from the prevailing prices at any given time. The Exchange proposes 
this feature to avoid a series of improperly priced aggressive orders 
transacting in the Order Book.
    Today, the NOM threshold is set at $5. ISE Gemini will initially 
set the threshold to $5. Similar to NOM, the Exchange will notify 
Members of the threshold with a notice, and, thereafter, Members will 
be notified of any subsequent changes to the threshold. NOM set the 
differential at $5 to match the bid/ask differential permitted for 
quotes on the Exchange.\12\ ISE Gemini has a similar $5 
differential.\13\ Thus, the presence of a quote on the Exchange will 
ensure the NBBO is at least $5 wide. The Exchange believes the presence 
of a quote on the Exchange, or a bid/ask differential of the NBBO, 
which is no more than $5 wide affords Market Orders proper protection 
against erroneous execution and in the event a bid/ask differential is 
more than $5, then a Market Order is rejected. The threshold is 
appropriate because it seeks to capture improperly priced Market Orders 
and reject them to reduce the risk of, and to potentially prevent, the 
automatic execution of Market Orders at prices that may be considered 
erroneous. The Exchange's proposed threshold is a reasonable measure to 
ensure prices remain within the reasonable limits. This protection will 
bolster the normal resilience and market behavior that persistently 
produces robust reference prices. This feature should create a level of 
protection that prevents Market Orders from entering the Order Book 
outside of an acceptable range for the Market Order to execute.
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    \12\ See Chapter VII, Section 6(d)(ii) of NOM Rules which 
describes the bid/ask differentials. Options on equities (including 
Exchange-Traded Fund Shares), and on index options must be quoted 
with a difference not to exceed $5 between the bid and offer 
regardless of the price of the bid, including before and during the 
opening. However, respecting in-the-money series where the market 
for the underlying security is wider than $5, the bid/ask 
differential may be as wide as the quotation for the underlying 
security on the primary market. The Exchange may establish 
differences other than the above for one or more series or classes 
of options.
    \13\ See ISE Gemini Rule 803(b)(4).
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    Finally, the Market Order Spread Protection will be the same for 
all options traded on the Exchange, and is applicable to all Members 
that submit Market Orders.
Acceptable Trade Range
    The Exchange proposes to amend Rule 714, entitled ``Automatic 
Execution of Orders,'' at ISE Gemini Rule 714(b)(1) to remove the 
current Price Level Protection rule and adopt Phlx's Acceptable Trade 
Range.\14\ The Exchange is proposing to adopt similar functionality 
which is currently utilized on Phlx in connection with the replatform 
of ISE Gemini. Today, ISE Gemini places a limit on the number of price 
levels at which an incoming order or quote to sell (buy) will be 
executed automatically when there are no bids (offers) from other 
exchanges at any price for the options series. Orders and quotes are 
executed at each successive price level until the maximum number of 
price levels is reached, and any balance is either handled by the 
Primary Market Maker pursuant to Rule 803(c)(1) (in the case of 
Priority Customer Orders) or canceled (in the case of Professional 
Orders). The number of price levels, may be between one (1) and ten 
(10). The Exchange determines the number of price levels from time-to-
time on a class-by-class basis.
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    \14\ See Phlx Rule 1080(p).
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    ISE Gemini proposes to replace the current Price Level Protection 
with Phlx's Acceptable Trade Range.\15\ The proposed Acceptable Trade 
Range is a mechanism to prevent the system from experiencing dramatic 
price swings by creating a level of protection that prevents the market 
from moving beyond set thresholds. The thresholds consist of a 
reference price plus (minus) set dollar amounts based on the nature of 
the option and the premium of the option.
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    \15\ The Exchange notes that the version of Acceptable Trade 
Range to be implemented on ISE Gemini will not include the posting 
period functionality available today on Phlx. The proposed rules 
reflect this change.
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    The system will calculate an Acceptable Trade Range to limit the 
range of prices at which an order or quote will be allowed to execute. 
To bolster the normal resilience and market behavior that persistently 
produces robust reference prices, ISE Gemini is proposing to create a 
level of protection that prevents the market from moving beyond set 
thresholds. The Acceptable Trade Range is calculated (upon receipt of a 
new order or quote) by taking the reference price, plus or minus a 
value to be determined by the Exchange (i.e., the reference price - (x) 
for sell orders/quotes and the reference price + (x) for buy 
orders).\16\ Upon receipt of a new order, the reference price is the 
National Best Bid (``NBB'') for sell orders/quotes and the National 
Best Offer (``NBO'') for buy orders/quotes. If an order or quote 
reaches the outer limit of the Acceptable Trade Range (the ``Threshold 
Price'') without being fully executed, then any unexecuted balance will 
be cancelled. The proposed Acceptable Trade Range would work as 
follows: Prior to executing orders received by ISE Gemini, an 
Acceptable Trade Range is calculated to determine the range of prices 
at which orders/quotes may be executed.\17\ When an order is initially 
received, the threshold is calculated by adding (for buy orders/quotes) 
or subtracting (for sell orders/quotes) a value,\18\ as discussed 
below, to the National Best Offer for buy orders/quotes or the National 
Best Bid for sell orders/quotes to determine the range of prices that 
are valid for execution. A buy (sell) order or quote will be allowed to 
execute up (down) to and including the maximum (minimum) price within 
the Acceptable Trade Range.
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    \16\ The Acceptable Trade Range settings are tied to the option 
premium.
    \17\ The Acceptable Trade Range will not be available for all-
or-none orders. Today, ISE Gemini's Price Level Protection rule is 
not available for all-or-none orders. The Exchange has determined 
that it would be difficult, from a technical standpoint, to apply 
this feature to those orders because their particular contingency 
makes it difficult to automate their handling.
    \18\ The value that is to be added to/subtracted from the 
reference price will be set by ISE Gemini and posted on its Web 
site.
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    For example, in a thinly traded option:
    Away Exchange Quotes:

----------------------------------------------------------------------------------------------------------------
                    Exchange                         Bid size        Bid price      Offer price     Offer size
----------------------------------------------------------------------------------------------------------------
NOM.............................................              10           $1.00           $1.05              10
NYSE Arca.......................................              10            1.00            1.05              10
NYSE MKT........................................              10            1.00            1.10              10
BOX.............................................              10            1.00            1.15              10
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    ISE Gemini Price Levels:

[[Page 96118]]

----------------------------------------------------------------------------------------------------------------
                    Exchange                         Bid size        Bid price      Offer price     Offer size
----------------------------------------------------------------------------------------------------------------
ISE Gemini orders...............................              10           $1.00           $1.05              10
ISE Gemini orders...............................  ..............  ..............            1.10              10
ISE Gemini orders...............................  ..............  ..............            1.40              10
ISE Gemini orders...............................  ..............  ..............            5.00              10
----------------------------------------------------------------------------------------------------------------

    If ISE Gemini receives a routable market order to buy 80 contracts, 
the System will respond as described below:

 10 contracts will be executed at $1.05 against ISE Gemini
 10 contracts will be executed at $1.05 against NOM
 10 contracts will be executed at $1.05 against NYSE Arca
 10 contracts will be executed at $1.10 against ISE Gemini
 10 contracts will be executed at $1.10 against NYSE MKT
 10 contracts will be executed at $1.15 against BOX

After these executions, there are no other known valid away exchange 
quotes. The National Best Bid/Offer (``NBBO'') is therefore comprised 
of the remaining interest on the ISE Gemini book, specifically 10 
contracts at $1.40 and 10 contracts at $5.00. In the absence of an 
Acceptable Trade Range mechanism, the order would execute against the 
remaining interest at $1.40 and $5.00, resulting in potential harm to 
investors.
    ISE Gemini will set the parameters of the mechanism at levels that 
will ensure that it is triggered quite infrequently. Importantly, the 
Acceptable Trade Range is neutral with respect to away markets, an 
order may route to other destinations to access liquidity priced within 
the Acceptable Trade Range provided the order is designated as 
routable.
    The options premium will be the dominant factor in determining the 
Acceptable Trade Range. Generally, options with lower premiums tend to 
be more liquid and have tighter bid/ask spreads; options with higher 
premiums have wider spreads and less liquidity. Accordingly, a table 
consisting of several steps based on the premium of the option will be 
used to determine how far the market for a given option will be allowed 
to move. This table or tables would be listed on the NASDAQTrader.com 
Web site and any periodic updates to the table would be announced via 
an Options Trader Alert.
    For example, looking at some SPY May 2013 Call options on May 1st 
of 2013:

Bid/Offer of SPY May 160 Call (at or near-the-money): $1.23 x $1.24 
(several hundred contracts on bid and offer)
Bid/Offer of SPY May 105 Call (deep in-the-money): $54.10 x $54.26 (11 
contracts on each side)

The deep in-the-money calls (May 105 calls) have a wider spread ($54.10 
- $54.26 = $0.16) compared to a spread of $0.01 for the at-the-money 
calls (May 160 calls). Therefore, it is appropriate to have different 
thresholds for the two options. For instance, it may make sense to have 
a $0.05 threshold for the at-the-money strikes (Premium < $2) and a 
$0.50 threshold for the deep in-the-money strikes (Premium > $10).
    To consider another example, the May 2013 ORCL put options on May 
1st of 2013:

Bid/Offer of ORCL 33 May Put (at or near-the-money): $0.33 x $0.34 (100 
x 500)
Bid/Offer of ORCL 44 May Put (deep in-the-money): $10.40 x $10.55 (50 x 
200)

    Even though ORCL has a much lower share price than SPY, and is a 
different type of security (it is a common stock of a technology 
company whereas SPY is an ETF based on the S&P 500 Index), the pattern 
is the same. The option with the lower premium has a very narrow spread 
of $0.01 with significant size displayed whereas the higher premium 
option has a wide spread ($0.15) and less size displayed.
    The Acceptable Trade Range settings will be tied to the option 
premium. However, other factors will be considered when determining the 
exact settings. For example, acceptable ranges may change if market-
wide volatility is as high as it was during the financial crisis in 
2008 and 2009, or if overall liquidity is low based on historical 
trends. These different market conditions may present the need to 
adjust the threshold amounts from time to time to ensure a well-
functioning market. Without adjustments, the market may become too 
constrained or conversely, prone to wide price swings. As stated above, 
the Exchange would publish the Acceptable Trade Range table or tables 
on the Exchange Web site. The Exchange does not foresee updating the 
table(s) often or intraday, although the exchange may determine to do 
so in extreme circumstances. The Exchange will provide sufficient 
advanced notice of changes to the Acceptable Trade Range table, 
generally the prior day, to its membership via an Exchange alert.
    The Acceptable Trade Range settings would generally be the same 
across all options traded on ISE Gemini, although ISE Gemini proposes 
to maintain flexibility to set them separately based on characteristics 
of the underlying security. For instance, Google is a stock with a high 
share price ($824.57 closing price on April 30, 2013). Google options 
therefore may require special settings due to the risk involved in 
actively quoting options on such a high-priced stock. Option spreads on 
Google are wider and the size available at the best bid and offer is 
smaller. Google could potentially need a wider threshold setting 
compared to other lower-priced stocks. There are other options that fit 
into this category (e.g. AAPL) which makes it necessary to have 
threshold settings that have flexibility based on the underlying 
security. Additionally, it is generally observed that options subject 
to the Penny Pilot program quote with tighter spreads than options not 
subject to the Penny Pilot. Currently, ISE Gemini expects to set 
Acceptable Trade Ranges for three categories of options: (1) Penny 
Pilot Options trading in one cent increments for options trading at 
less than $3.00 and increments of five cents for options trading at 
$3.00 or more, (2) Penny Pilot Options trading in one-cent increments 
for all prices, and (3) Non-Penny Pilot Options.
    The Phlx rule contains language that references a posting 
period.\19\ Specifically, the Phlx Rule provides if an order/quote 
reaches the outer limit of the Acceptable Trade Range (the ``Threshold 
Price'') without being fully executed, it will be posted at the 
Threshold Price for a brief period, not to exceed one second (``Posting 
Period''), to allow more liquidity to be collected, unless a Quote 
Exhaust has occurred, in which case the Quote Exhaust process in Phlx 
Rule 1082(a)(ii)(B)(3) will ensue, triggering a new Reference 
Price.\20\ The Exchange

[[Page 96119]]

will not post interest that exceeds the outer limit of the Acceptable 
Trade Range, rather the interest will be cancelled. Only if the order 
limit does not exceed the Acceptable Trade Range will it post on the 
Exchange, if not otherwise executed. Further, the Phlx rule provides 
for the re-pricing of that order or quote and calculation of a new 
Acceptable Trade Range. Consistent with the current treatment of orders 
and quotes under ISE Gemini rules, the Exchange is not adopting the 
posting period. Unlike Phlx, ISE Gemini does not offer a general 
continuous re-pricing mechanism, and does not consider iterations in 
its current functionality.\21\ ISE Gemini would cancel rather than 
reprice orders which exceed the outer limit of the Acceptable Trade 
Range. Orders which do not exceed the outer limit of the Acceptable 
Trade Range will post to the order book and will reside on the order 
book at such price until they are either executed in full or cancelled 
by the Member. Additionally, resting orders do not re-price on the 
order book as they do today on Phlx. For these reasons, the unexecuted 
balance which exceeds the outer limit of the Acceptable Trade Range 
will be cancelled, rather than posted to the order book.
---------------------------------------------------------------------------

    \19\ See Phlx Rule 1080(p)(1)(B).
    \20\ The Quote Exhaust process occurs when the Exchange's 
disseminated market at a particular price level includes a quote, 
and such market is exhausted by an inbound contra-side quote or 
order, and following such exhaustion, contracts remain to be 
executed from such quote or order through the initial execution 
price.
    \21\ With respect to trade-throughs and locked and crossed 
markets, a Phlx order will not be executed at a price that trades 
through another market or is displayed at a price that would lock or 
cross another market. If, at the time of entry, an order that the 
entering party has elected not to make eligible for routing would 
cause a locked or crossed market violation or would cause a trade-
through violation, it will be re-priced to the current national best 
offer (for bids) or the current national best bid (for offers) and 
displayed at one minimum price variance above (for offers) or below 
(for bids) the national best price. See Phlx Rule 1080(m)(iv)(A). In 
the instance that the System automatically reprices an order or 
quote, the System would assign the orders or quote a new timestamp 
and the order or quote will be reprioritized within the Order Book 
in accordance with the priority rules in Phlx Rule 1014 (g).
---------------------------------------------------------------------------

PMM Order Handling and Opening Obligations
    Today, PMMs are responsible for handling Priority Customer orders 
that are not automatically executed pursuant to ISE Gemini Rule 
714(b)(1), i.e., the Price Level Protection, and to initiate the 
opening rotation in each series pursuant to ISE Gemini Rule 701. This 
responsibility is described in each of those rules, as well as in ISE 
Gemini Rule 803(c), which provides that:
    In addition to the obligations contained in this Rule for market 
makers generally, for options classes to which a market maker is the 
appointed Primary Market Maker, it shall have the responsibility to: 
(1) As soon as practical, address Priority Customer Orders that are not 
automatically executed pursuant to Rule 714(b)(1) in a manner 
consistent with its obligations under paragraph (b) of this Rule by 
either (i) executing all or a portion of the order at a price that at 
least matches the NBBO and that improves upon the Exchange's best bid 
(in the case of a sell order) or the Exchange's best offer (in the case 
of a buy order); or (ii) releasing all or a portion of the order for 
execution against bids and offers on the Exchange. (2) Initiate trading 
in each series pursuant to Rule 701.
    As described in more detail in the sections above, with the re-
platform to Nasdaq technology, the Exchange is adopting Acceptable 
Trade Range and opening rotation functionality currently offered on NOM 
and Phlx, which do not contain similar requirements for the PMM. The 
Exchange therefore proposes to eliminate the PMM order handling and 
opening obligations in Rule 803(c).
    The Exchange believes that the elimination of the PMM obligation to 
initiate the opening rotation in this rule is appropriate because the 
proposed opening process \22\ is initiated by the receipt of an 
appropriate number of valid width Primary Market Maker or Competitive 
Market Maker quotes as outlined in proposed ISE Gemini Rule 701(c)(i). 
Similarly, the Acceptable Trade Range functionality will continue to 
provide an important protection to members without imposing any Primary 
Market Maker obligations. Today, Phlx does not have similar roles for a 
Specialist on its market. In connection with the replatform, the 
Exchange will conform its rules with those of Phlx with respect to the 
manner in which it operates the Opening Process.
---------------------------------------------------------------------------

    \22\ See note 3 above.
---------------------------------------------------------------------------

Back-Up PMM
    The Exchange also proposes to amend ISE Gemini Supplementary 
Material .03 to Rule 803 to eliminate its Back-Up Primary Market Maker 
program. Today, any ISE Gemini Member that is approved to act in the 
capacity of a Primary Market Maker may voluntarily act as a ``Back-Up 
Primary Market Maker'' in options series in which it is quoting as a 
Competitive Market Maker. A Back-Up Primary Market Maker assumes all of 
the responsibilities and privileges of a Primary Market Maker under the 
Exchange's rules with respect to any series in which the appointed 
Primary Market Maker fails to have a quote in the System except that a 
Back-Up Primary Market Maker's quoting obligations are the same as the 
quoting obligations for Competitive Market Makers as described in ISE 
Gemini Rule 804(e)(2)(iii) and .02 of Supplementary Material to Rule 
804.\23\ If more than one Competitive Market Maker that has volunteered 
to be a Back-Up Primary Market Maker is quoting in an options series at 
the time that a Primary Market Maker ceases quoting, the Competitive 
Market Maker with the largest offer at the lowest price in the series 
at that time will be chosen to be the Back-Up Primary Market Maker. In 
the event of a tie based on price and size, the Competitive Market 
Maker with time priority will be automatically chosen. The Back-Up 
Primary Market Maker is automatically restored to Competitive Market 
Maker status when the appointed Primary Market Maker initiates quoting 
in the series. The obligations of a Primary Market Maker include the 
initiation of a trading rotation pursuant to ISE Gemini Rule 701, 
quoting and other obligations pursuant to ISE Gemini Rules 803 and 804, 
and financial requirements pursuant to ISE Gemini Rule 809. The 
Exchange is proposing to amend the obligations of a PMM only with 
regard to the initiation of a trading rotation pursuant to ISE Gemini 
Rule 701. The quoting and financial requirements rules shall remain the 
same.
---------------------------------------------------------------------------

    \23\ The Exchange notes that the current rule text for Back-up 
Primary Market Maker on ISE Gemini does not indicate that quoting 
obligations for Back-up Primary Market Makers are the same as for 
Competitive Market Makers. This, however, has been the Exchanges 
practice, and the practice of its affiliated exchanges, including, 
the International Securities Exchange, LLC. See Securities Exchange 
Act Release No. 76936 (January 20, 2016), 81 FR 4347 (January 26, 
2016) (SR-ISE-2016-02).
---------------------------------------------------------------------------

    With the re-platform, a Back-Up Primary Market Maker is no longer 
necessary since the order handling obligations present on ISE Gemini 
today are not going to be present in the new system. Furthermore, the 
proposed Opening Process,\24\ obviates the importance of such a role. 
The Opening Process describes the entry of quotes by both a Primary 
Market Maker and a Competitive Market Maker, provided they are Valid 
Width Quotes.\25\ The Opening Process further describes alternative 
methods to open the market if such quotes are not entered at the 
opening by either of these market makers.\26\ The reliance on a market 
maker to initiate the opening process is

[[Page 96120]]

no longer present within the proposed rule.\27\
---------------------------------------------------------------------------

    \24\ See note 3 above.
    \25\ A Valid Width Quote is a two-sided electronic quotation 
submitted by a Market Maker that consists of a bid/ask differential 
that is compliant with ISE Gemini proposed Rule 803(b)(4). See note 
3 above.
    \26\ See note 3 above.
    \27\ Id.
---------------------------------------------------------------------------

Market Maker Speed Bump
    The Exchange proposes to amend ISE Gemini Rule 804, entitled 
``Market Maker Quotations'' to establish default parameters for certain 
risk functionality. The Exchange offers a risk protection mechanism for 
market maker quotes that removes a member's quotes in an options class 
if a specified number of curtailment events occur during a set time 
period (``Market Maker Speed Bump''). In addition, the Exchange offers 
a market-wide risk protection that removes a market maker's quotes 
across all classes if a number of curtailment events occur (``Market-
Wide Speed Bump'').\28\ ISE Gemini Rule 804(g) currently requires that 
market makers set curtailment parameters for both the Market Maker 
Speed Bump and the Market-Wide Speed Bump. Today, if a market maker 
does not set these parameters their quotes are rejected by the trading 
system for each of the speed bumps mentioned herein.
---------------------------------------------------------------------------

    \28\ Market makers may request the Exchange to set the market 
wide parameter to apply to just ISE Gemini or across ISE Gemini and 
ISE.
---------------------------------------------------------------------------

    With the re-platform, the Exchange has determined to provide 
default curtailment parameters to assist market makers when they do not 
enter their own parameters into the system. The default parameters will 
be determined by the Exchange and announced to members. Rather than 
rejecting quotes, the default parameters would be instituted. The 
default parameters are important because market makers at ISE Gemini 
have quoting obligations as specified in ISE Gemini Rule 804. When a 
market maker's quotes are removed from the system, the time does not 
count toward the continuous quoting obligations. The Exchange believes 
that allowing for default settings would cause quotes not to be 
rejected and would assist market makers in meeting their quoting 
obligations because they would not have their quotes removed from the 
market. Today, Phlx indicates default parameters for its detection of 
loss of communication settings.\29\
---------------------------------------------------------------------------

    \29\ Phlx Rule 1019(c).
---------------------------------------------------------------------------

Anti-Internalization
    The Exchange proposes to amend the ISE Gemini Supplementary 
Material at .03 to Rule 804, entitled ``Market Maker Quotations'' to 
adopt an Anti-Internalization rule. Today, ISE Gemini's functionality 
prevents Immediate-or-Cancel (``IOC'') \30\ orders entered by a market 
maker from trading with the market maker's own quote.\31\ As 
implemented, if an IOC order entered by a market maker would trade with 
a quote entered by the same market maker, that order will instead be 
allocated to other interest at the same price, and the balance 
cancelled. The Exchange proposes to replace this self-trade protection 
functionality with Anti-Internalization functionality currently offered 
on Phlx.\32\
---------------------------------------------------------------------------

    \30\ An IOC order is a limit order that is to be executed in 
whole or in part upon receipt. Any portion not so executed is to be 
treated as cancelled. See Rule 715(b)(3).
    \31\ This functionality is not memorialized in ISE Gemini's 
rules.
    \32\ Phlx Rule 1080(p)(2).
---------------------------------------------------------------------------

    Today, Phlx provides anti-internalization (``AIQ'') functionality 
to Specialists and Registered Options Traders (``collectively market 
makers''). Quotes and orders entered by Phlx market makers using the 
same badge \33\ are not executed against quotes and orders entered on 
the opposite side of the market using the same badge. This 
automatically prevents these quotes and orders from interacting with 
each other in the System. On Phlx, the system cancels the resting quote 
or order back to the entering party prior to execution. This 
functionality does not apply in any auction or with respect to complex 
transactions.
---------------------------------------------------------------------------

    \33\ A badge is the same as a market participant identifier 
(``MPID'').
---------------------------------------------------------------------------

    The Exchange proposes to adopt a similar rule that provides that 
quotes and orders entered by Market Makers using the same member 
identifier will not be executed against quotes and orders entered on 
the opposite side of the market by the same market maker using the same 
member identifier. In such a case, the system will cancel the resting 
quote or order back to the entering party prior to execution. This 
functionality shall not apply in any auction. AIQ is difficult to apply 
during auctions, and there is limited benefit in doing so. There is 
limited benefit because, generally speaking, auctions do not raise the 
same policy concerns for wash sales and ERISA \34\ due to the semi-
random manner in which trades are matched.
---------------------------------------------------------------------------

    \34\ AIQ also is designed to assist market participants in 
complying with certain rules and regulations of the Employee 
Retirement Income Security Act (``ERISA'') that preclude and/or 
limit managing broker-dealers of such accounts from trading as 
principal with orders generated for those accounts. It can also 
assist Market Makers in reducing trading costs from unwanted 
executions potentially resulting from the interaction of executable 
buy and sell trading interest from the same firm when performing the 
same market making function.
---------------------------------------------------------------------------

    This functionality does not relieve or otherwise modify the duty of 
best execution owed to orders received from public customers. Market 
Makers generally do not display public customer orders in market making 
quotations, opting instead to enter public customer orders using 
separate identifiers. In the event that a Market Maker opts to include 
a public customer order within a market making quotation, the Market 
Maker must take appropriate steps to ensure that public customer orders 
that do not execute due to anti-internalization functionality 
ultimately receive the same execution price (or better) they would have 
originally obtained if execution of the order was not inhibited by the 
functionality.
    This Anti-Internalization functionality can assist Market Makers in 
reducing trading costs from unwanted executions potentially resulting 
from the interaction of executable buy and sell trading interest from 
the same firm when performing the same market making function.
Minimum Execution Quantity Orders
    The Exchange proposes to amend ISE Gemini Rule 715, entitled 
``Types of Orders'' at 715(q) to remove minimum quantity orders. Today, 
the Exchange allows members to enter minimum quantity orders, which is 
an order type that is available for partial execution, but each partial 
execution must be for a specified number of contracts or greater. If 
the balance of the order after one or more partial executions is less 
than the minimum, such balance is treated as all-or-none. Like all-or-
none orders, minimum quantity orders are contingency orders that are 
not displayed in the Exchange's best bid or offer. However, the 
Exchange disseminates to market participants an indication that a 
minimum quantity order has been entered. The Exchange has found that 
the utilization of minimum quantity orders by its members has been very 
limited, and therefore proposes to remove this functionality.\35\ 
Furthermore, the Exchange proposes to remove two references to minimum 
quantity orders in other rules. Specifically, the Exchange proposes to 
remove references to minimum quantity orders in ISE Gemini 
Supplementary Material .02 to Rule 713, which notes that minimum 
quantity orders are contingency orders that have no priority on the 
book, and in ISE Gemini Supplementary Material .04 to Rule 717, which 
explains that non-marketable minimum quantity orders are deemed 
``exposed'' one second following a broadcast notifying the market that 
such an order to buy or

[[Page 96121]]

sell a specified number of contracts at a specified with a specified 
minimum quantity has been received in the options series.
---------------------------------------------------------------------------

    \35\ This functionality is currently being utilized to transact 
less than 1% of ISE Gemini's volume.
---------------------------------------------------------------------------

Delay of Implementation
    The Exchange proposes to delay the implementation of Directed Order 
\36\ and the Qualified Contingent Cross Order \37\ functionalities on 
ISE Gemini. The Exchange proposes to continue to offer both of these 
functionalities on the current platform. The Exchange however would 
propose not to launch these functionalities on ISE Gemini at the same 
time as proposed herein for the proposals to amend other trading 
functions. The Exchange would instead issue an alert which specifies a 
different date for these two functionalities to commence on ISE Gemini. 
This functionality will remain the same on the new platform.
---------------------------------------------------------------------------

    \36\ ISE Gemini currently operates a Directed Order system in 
which Electronic Access Members (``EAMs'') can send an order to a 
DMM for possible price improvement. If a DMM accepts Directed Orders 
generally, that DMM must accept all Directed Orders from all EAMs. 
Once such a DMM receives a Directed Order, it either (i) must enter 
the order into the Exchange's PIM auction and guarantee its 
execution at a price better than the ISE best bid or offer (``ISE 
BBO'') by at least a penny and equal to or better than the NBBO or 
(ii) must release the order into the Exchange's limit order book, in 
which case there are certain restrictions on the DMM interacting 
with the order. See ISE Gemini Rule 811.
    \37\ A Qualified Contingent Cross Order is comprised of an order 
to buy or sell at least 1000 contracts that is identified as being 
part of a qualified contingent trade, as that term is defined in 
Supplementary Material .01 to ISE Gemini Rule 715, coupled with a 
contra-side order to buy or sell an equal number of contracts. See 
ISE Gemini Rules 715(j).
---------------------------------------------------------------------------

    The Exchange proposes to amend the rule text in Rules 721 (Crossing 
Orders) and 811 (Directed Orders) to note that these functionalities 
will not be available as of a certain date in the first quarter of 2017 
to be announced in a notice. The Exchange will recommence these 
functionalities on ISE Gemini within one year from the date of filing 
of this rule change to be announced in a separate notice.
    The Exchange intends to begin implementation of the functionality 
for Directed Orders and Qualified Contingent Cross after Q1 2017. The 
migration will also be on a symbol by symbol basis, and the Exchange 
will issue an alert to members in the form of an Options Trader Alert 
to provide notification of the symbols that will migrate and the 
relevant dates. The Exchange will introduce the Directed Orders and 
Qualified Contingent Cross on ISE Gemini within one year from the date 
of this filing, otherwise the Exchange will file a rule proposal with 
the Commission to remove these rules.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\38\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\39\ 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 for the reasons stated below.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78f(b).
    \39\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

Trading Halts
    The Exchange's proposal to amend ISE Gemini Rule 702 concerning 
Trading Halts to specifically note that during a halt the Exchange will 
maintain existing orders on the book but not existing quotes is 
consistent with the Act because it provides market participants with 
clarity as to the manner in which interest will be handled by the 
system. During a trading halt, the market may move and create risk to 
market participants with respect to resting interest. The Exchange 
believes that cancelling existing quotes protects investors and the 
public interest by removing potentially stale quotes during the halt 
process.
    The Exchange's proposal to amend its rules on order handling during 
Limit up-Limit Down states and trading halts is consistent with the Act 
because it will harmonize the way the Exchange treats orders during a 
Limit State or Straddle State in the equity market, or a trading halt 
in the option, with how those orders are handled on other Nasdaq 
Exchanges. The proposed rule text should provide certainty about how 
options orders and trades will be handled during periods of 
extraordinary volatility in the underlying security. Specifically, 
under the proposal, market participants will be able to continue to 
trade options overlying securities that are in a Limit State or 
Straddle State, while addressing specific order types that are subject 
to added risks during such periods. The Exchange believes that the 
rejection of options Market Orders (including elected Stop Orders) 
should help to prevent executions that might occur at prices that have 
not been reliably formed, which should, in turn, protect, in 
particular, retail investors from executions of un-priced orders during 
times of significant volatility. The Exchange believes that harmonizing 
these rules will provide a better experience to members that trade on 
multiple markets operated by Nasdaq, Inc.
Cancellation of Quotes
    The Exchange's proposal to amend ISE Gemini Rule 702 concerning 
Trading Halts to specifically note that during a halt the Exchange will 
maintain existing orders on the book but not existing quotes is 
consistent with the Act because it provides market participants with 
clarity as to the manner in which interest will be handled by the 
system. During a trading halt, the market may move and create risk to 
market participants with respect to resting interest. The Exchange 
believes that cancelling existing quotes protects investors and the 
public interest by removing potentially stale quotes during the halt 
process.
Limit Up-Limit Down
    The Exchange's proposal to add new ISE Gemini Rule 702(d) to 
replace rule text currently contained in ISE Gemini Rule 703A entitled 
``Trading During Limit Up-Limit Down States in Underlying Securities'' 
is consistent with the Act because the proposed rules provide for 
protections from erroneous executions in a highly volatile period. The 
proposed rule text in ISE Gemini Rule 702(d) is similar to language 
currently in Phlx Rule 1047(d), which provides for Exchange handling 
due to extraordinary market volatility. As noted within this proposal, 
the Exchange will adopt opening limitation, Market Order and Stop Order 
handling consistent with handling today on Phlx. The Exchange proposes 
to adopt rule text to provide for how the Exchange shall treat the 
opening rotation.\40\ If an opening process is occurring, it will cease 
and then start the opening process from the beginning once the Limit 
State or Straddle State is no longer occurring. The Exchange believes 
that this treatment at the opening will protect investors and the 
public interest by halting trading to prevent unintended executions. 
Also, with this proposal, Market Orders pending in the System will 
continue to be processed regardless of the Limit or Straddle State. The 
Exchange believes that this treatment of Market Orders is consistent 
with the Act because these Market Orders are only pending in the System 
if they are exposed at the NBBO pursuant to Supplementary Material .02 
to Rule 1901. If at the end of the exposure period the affected 
underlying is in a Limit or Straddle State, the Market Order will be 
cancelled with no trade

[[Page 96122]]

occurring. If at the end of the exposure period, the affected 
underlying is no longer in a Limit or Straddle State, the Market Order 
will be handled pursuant to the normal operation of the rules.
---------------------------------------------------------------------------

    \40\ See note 3 above.
---------------------------------------------------------------------------

    Lastly, ISE Gemini does not currently elect Stop Orders that are 
pending in the System during a Limit or Straddle State. Under the 
proposal, and in-line with the Phlx implementation, Stop Orders that 
are pending in the System during a Limit or Straddle State will be 
elected, if conditions for such election are met, and, because they 
become Market Orders, will be cancelled back to the Member with a 
reason for such rejection. The Exchange believes that this is 
consistent with the Act because it affords the appropriate protections 
to an elected Stop Order once it becomes a Market Order after election. 
The Exchange believes that this approach provides the market 
participant with the intended result.
Auction Handling During a Trading Halt
    The Exchange's proposal to amend various rules to add detail to ISE 
Gemini rules to account for the impact of a trading halt on the 
Exchange's auction mechanisms is consistent with the Act for the 
reasons which follow. The Exchange's proposal to amend today's current 
behavior and instead terminate the PIM auction and not execute eligible 
interest when a trading halt occurs is consistent with the Act because 
during a trading halt, the market may move and create risk to market 
participants with respect to resting interest. The Exchange believes 
that terminating the PIM auction protects investors and the public 
interest by providing certainty to participants in regard to how their 
interest will be handled. Memorializing the manner in which the system 
will handle orders entered into PIM during a trading halt will provide 
transparency for the benefit of members and investors.
    The Exchange's proposal to amend ISE Gemini Rule 716, entitled 
``Block Trades'' to memorialize that if a trading halt is initiated 
after an order is entered into the Block Order Mechanism, Facilitation 
Mechanism, or Solicited Order Mechanism, such auction will also be 
automatically terminated without execution is consistent with the Act 
because in the event of a trading halt, terminating these auction 
mechanisms and not executing eligible interest will provide certainty 
to participants in regard to how their interest will be handled. 
Memorializing the manner in which the system will handle orders during 
a trading halt will provide transparency for the benefit of members and 
investors.
Market Order Spread Protection
    The Exchange's proposal to amend ISE Gemini Rule 711 to adopt a 
mandatory risk protection entitled Market Order Spread Protection is 
consistent with the Act because it provides a protection for Market 
Orders that may encourage price continuity, which should, in turn, 
protect investors and the public interest by reducing executions 
occurring at dislocated prices. Further, the Exchange believes that 
this rule proposal will mitigate risks to market participants.
Acceptable Trade Range
    The Exchange's proposal to amend ISE Gemini Rule 714 to remove the 
current Price Level Protection rule and adopt Phlx's Acceptable Trade 
Range is consistent with the Act and will 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 by 
making the Exchange's market more efficient, to the benefit of the 
investing public. Further, it should prevent the system from 
experiencing dramatic price swings by creating a level of protection 
that prevents the market from moving beyond set thresholds. The 
proposed rule change will reduce the negative impacts of sudden, 
unanticipated volatility in individual options, and serve to preserve 
an orderly market in a transparent and uniform manner, enhance the 
price-discovery process, increase overall market confidence, and 
promote fair and orderly markets and the protection of investors. 
Specifically, the Exchange believes that the NBBO is a fair 
representation of then-available prices and accordingly the proposal 
helps to avoid executions at prices that are significantly worse than 
the NBBO.
    With respect to the posting information, which is described in the 
Phlx rule, but not contained in the proposed ISE Gemini rule, the 
Exchange believes that it is consistent with the Act to cancel 
unexecuted interest which is priced through an Acceptable Trade Range. 
Today, the Exchange does not have an iterative process wherein the 
Exchange will attempt to execute unexecuted balances for a period of 
time while that interest is automatically re-priced on the order book. 
Phlx has this type of functionality for Acceptable Trade Range, while 
the Exchange does not re-price interest on the order book. The Exchange 
transparently describes the cancellation of the interest within its 
rules.
PMM Order Handling and Opening Obligations
    The Exchange's proposal to eliminate the PMMs order handling and 
opening obligations is consistent with the Act because PMMs will no 
longer have these obligations due to the introduction of Acceptable 
Trade Range and opening rotation functionality that is offered today on 
NOM and Phlx. Because the PMM will no longer have these obligations, 
the Exchange believes that it is appropriate to remove these rules.
Back-Up PMM
    The Exchange's proposal to remove certain responsibilities of 
Primary Market Makers with respect to Back-Up Primary Market Maker 
assignments is consistent with the Act because the Exchange believes 
this function is not necessary. Today, in addition to market making 
obligations, the Primary Market Maker has certain order handling and 
other obligations as prescribed by Exchange Rules. Specifically, the 
obligations of a Primary Market Maker include the initiation of a 
trading rotation pursuant to ISE Gemini Rule 701, quoting and other 
obligations pursuant to ISE Gemini Rules 803 and 804, and financial 
requirements pursuant to ISE Gemini Rule 809. The Exchange is proposing 
to amend the obligations of a PMM only with regard to the initiation of 
a trading rotation pursuant to ISE Gemini Rule 701. The quoting and 
financial requirements rules shall remain the same. With the re-
platform, a Back-Up Primary Market Maker is no longer necessary since 
the order handling obligations present on ISE Gemini today are not 
going to be present in the new system. Furthermore, the proposed 
Opening Process,\41\ obviates the importance of such a role. The 
Opening Process further describes alternative methods to open the 
market if such quotes are not entered at the opening by either of these 
market makers.\42\ The reliance on a market maker to initiate the 
opening process is no longer present within the proposed rule.\43\
---------------------------------------------------------------------------

    \41\ See note 3 above.
    \42\ Id.
    \43\ Id.
---------------------------------------------------------------------------

    In addition, the Exchange does not believe there is an interest 
among market participants for the back-up assignment.
Default Settings for Market Maker Risk Protections
    The Exchange's proposal to amend ISE Gemini Rule 804(g) to 
introduce default curtailment settings for the Market Maker Speed Bump 
and Market-

[[Page 96123]]

Wide Speed Bump is consistent with the Act as it will allow market 
makers to use Exchange set default values for these risk protections. 
Today, these market makers would have their quotes rejected if they 
fail to enter the required curtailment parameters. The default settings 
provide an alternative for market makers that have not entered their 
curtailment settings. Default settings will be announced to members who 
will have the opportunity to avoid the defaults by entering their own 
curtailment settings as required under the rule.
Anti-Internalization
    The Exchange's proposal to amend the ISE Gemini Supplementary 
Material at .03 to Rule 804 to add Anti-Internalization is consistent 
with the Act because it is designed to assist market makers in reducing 
trading costs from unwanted executions potentially resulting from the 
interaction of executable buy and sell trading interest from the same 
firm when performing the same market making function.
Minimum Quantity Orders
    The Exchange believes that removing minimum quantity orders would 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system by simplifying functionality 
available on the Exchange and reducing complexity of its order types.
Delay of Implementation
    The Exchange believes that delaying the implementation of the 
Directed Order and the Qualified Contingent Cross Order functionalities 
on ISE Gemini is consistent with the Act because the Exchange desires 
to rollout this functionality at a later date to allow additional time 
to rebuild this technology on the new platform. The Exchange is staging 
the replatform to provide maximum benefit to its Members while also 
ensuring a successful rollout. This delay will provide the Exchange 
additional time to implement this functionality, which is not being 
amended. Members have been given adequate notice of the implementation 
dates. The Exchange will continue to provide notifications to Members 
to ensure clarity about the delay of implementation of this 
functionality. The Exchange will note the applicable dates within the 
rule text.
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. As explained above, the 
Exchange is re-platforming it's trading system onto the Nasdaq INET 
architecture, and is making certain other changes to its trading 
functionality in connection with this migration.
    A majority of the functionality that is being added with the 
proposed rule change already exists on one or more Nasdaq Exchanges. As 
a result, the Exchange does not believe that the proposed rule change 
will impact the intense competition that exists in the options market. 
In fact, the Exchange believes that adopting this functionality on ISE 
Gemini will allow the Exchange to more effectively compete for order 
flow with other options markets.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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-ISEGemini-2016-17 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-ISEGemini-2016-17. 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 on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
Copies of such filing also will be available for inspection and copying 
at the principal offices 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-ISEGemini-2016-17, and should be 
submitted on or before January 19, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
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    \44\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31489 Filed 12-28-16; 8:45 am]
 BILLING CODE 8011-01-P