Document ID: SEC-2012-0292-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2012-02-21T05:00Z

[Federal Register Volume 77, Number 34 (Tuesday, February 21, 2012)]
[Notices]
[Pages 10016-10019]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-3859]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66392; File No. SR-ISE-2012-06]

Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Fees for Certain Complex Orders Executed on the 
Exchange

February 14, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the '' Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on January 31, 2012, the International Securities 
Exchange, LLC (the ``Exchange'' or the ``ISE'') filed with the 
Securities and Exchange Commission (the ``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 ISE is proposing to amend fees for certain complex orders 
executed on the Exchange. The text of the proposed rule change is 
available on the Exchange's Web site (http://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 self-regulatory organization 
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

[[Page 10017]]

of these statements may be examined at the places specified in Item IV 
below. The self-regulatory organization has prepared summaries, set 
forth in sections A, B and C below, of the most significant aspects of 
such statements.

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

1. Purpose
    The purpose of this proposed rule change is to amend fees charged 
by the Exchange for complex orders in all symbols that are not in the 
Penny Pilot Program (``Non-Penny Pilot Symbols''). The fee change 
proposed herein is similar to fees the Exchange recently adopted for 
complex orders in two of the most actively-traded index option 
products, the NASDAQ 100 Index option (``NDX'') and the Russell 2000 
Index option (``RUT'').\3\ This fee change, however, differs from the 
NDX/RUT Fee Filing in that the fees proposed herein are lower than 
those adopted for complex orders in NDX and RUT. With this proposed 
rule change, the fees proposed below for Non-Penny Pilot Symbols shall 
now also apply to NDX and RUT as each of those symbols are Non-Penny 
Pilot Symbols.
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    \3\ See Securities Exchange Act Release No. 66084 (January 3, 
2012), 77 FR 1103 (January 9, 2012) (SR-ISE-2011-84) (``NDX/RUT Fee 
Filing'').
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    For trading in Non-Penny Pilot Symbols, for both regular and 
complex orders, the Exchange currently charges $0.20 per contract for 
firm proprietary orders and Customer (Professional Orders),\4\ and 
$0.45 per contract for Non-ISE Market Maker \5\ orders. ISE market 
maker orders \6\ in Non-Penny Pilot Symbols are subject to a sliding 
scale, ranging from $0.01 per contract to $0.18 per contract, depending 
on the amount of overall volume traded by a market maker during a 
month. Market makers also currently pay a payment for order flow (PFOF) 
fee of $0.65 per contract when trading against Priority Customers. 
Priority Customer orders are not charged for trading in Non-Penny Pilot 
Symbols.
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    \4\ The term ``Professional Order'' means an order that is for 
the account of a person or entity that is not a Priority Customer. 
See ISR [sic] Rule 100(a)(37C).
    \5\ The term ``Non-ISE Market Maker'' means a market maker as 
defined in Section 3(a)(38) of the Securities Exchange Act of 1934 
(the ``Act'') registered in the same options class on another 
options exchange. See Schedule of Fees, page 4.
    \6\ The term ``market makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
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    The Exchange currently assesses a per contract transaction fee to 
market participants that add or remove liquidity in the Complex Order 
Book (``maker/taker fees'') in symbols that are in the Penny Pilot 
Program. Included therein is a subset of 101 symbols that are assessed 
a slightly higher taker fee (the ``Select Symbols'').\7\ Additionally, 
pursuant to SEC approval which allows market makers to enter quotations 
for complex order strategies in the Complex Order Book,\8\ the Exchange 
recently adopted maker/taker fees and rebates for orders in the 
following three symbols: XOP, XLB and EFA.\9\ And, as noted above, the 
Exchange most recently adopted new fees for complex orders in NDX and 
RUT.\10\
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    \7\ The Select Symbols are identified by their ticker symbol on 
the Exchange's Schedule of Fees.
    \8\ See Securities Exchange Act Release No. 65548 (October 13, 
2011), 76 FR 64980 (October 19, 2011) (SR-ISE-2011-39).
    \9\ See Securities Exchange Act Release No. 65958 (December 15, 
2011), 76 FR 79236 (December 21, 2011) (SR-ISE-2011-81).
    \10\ See note 1 [sic].
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    The Exchange now proposes to extend its maker/taker pricing 
structure to complex orders in all Non-Penny Pilot Symbols. 
Specifically, for Customer (Professional Orders), firm proprietary and 
ISE market maker orders, ISE proposes to adopt a ``make'' fee of $0.10 
per contract and a ``take'' fee of $0.60 per contract. For Non-ISE 
Market Maker orders, ISE proposes to adopt a ``make'' fee of $0.10 per 
contract and a ``take'' fee of $0.65 per contract. As Priority 
Customers are not charged for trading in Non-Penny Pilot Symbols, no 
fee will apply to Priority Customer complex orders.
    For crossing complex orders in Non-Penny Pilot Symbols, i.e., 
orders executed in the Exchange's Facilitation Mechanism, Solicited 
Order Mechanism, Block Order Mechanism and Price Improvement Mechanism, 
and for Qualified Contingent Cross orders, the Exchange currently 
charges a fee of $0.20 per contract. The Exchange proposes to continue 
charging a fee of $0.20 per contract for crossing complex orders in the 
Non-Penny Pilot Symbols. The Exchange currently does not charge 
Priority Customers for crossing complex orders executed in the Non-
Penny Pilot Symbols. The Exchange proposes to continue not charging 
Priority Customers for crossing complex orders executed in the Non-
Penny Pilot Symbols. For responses to special complex orders,\11\ ISE 
proposes to adopt a fee of $0.60 per contract for Customer 
(Professional Orders), firm proprietary and ISE market maker orders. 
For Non-ISE Market Maker orders, ISE proposes to adopt a fee of $0.65 
per contract for responses to special complex orders in the Non-Penny 
Pilot Symbols. Priority Customers will not be assessed a fee when 
responding to special complex orders.
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    \11\ A response to a special order is any contra-side interest 
submitted after the commencement of an auction in the Exchange's 
Facilitation Mechanism, Solicited Order Mechanism, Block Order 
Mechanism and Price Improvement Mechanism. This fee applies to 
Market Maker, Non-ISE Market Maker, Firm Proprietary and Customer 
(Professional) interest.
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    A number of Non-Penny Pilot Symbols are index options that are 
traded on the Exchange pursuant to license agreements for which the 
Exchange charges license surcharges. The Exchange charges the following 
license surcharges for all orders other than Priority Customer orders: 
$0.02 per contract for options on NXTQ; $0.05 per contract for options 
on FUM, HSX, POW, TNY and WMX; $0.10 per contract for options on BKX, 
MFX, MID, MSH, SML and UKX; $0.15 per contract for options on RMN, RUI, 
RUT and MVR; and $0.22 per contract for options on NDX and MNX. The 
license surcharge fees, which are charged by the Exchange to defray the 
licensing costs, are charged in addition to the transaction fees noted 
above. Because of competitive pressures in the industry, Priority 
Customer orders are not charged these surcharge fees, while 
Professional Orders are subject to the fee. For clarity, the Exchange 
is proposing to restate these surcharges in the notes applicable to 
complex orders in Non-Penny Pilot Symbols.
    For Priority Customer complex orders in symbols that are in the 
Penny Pilot program, the Exchange currently provides a per contract 
rebate when these orders trade with non-Priority Customer orders in the 
Complex Order Book. The Exchange proposes to extend this rebate 
incentive for the Non-Penny Pilot Symbols. As such, the Exchange 
proposes to adopt a rebate of $0.50 per contract for Priority Customer 
complex orders in the Non-Penny Pilot Symbols when these orders trade 
with non-Priority Customer orders in the Complex Order Book.
    Additionally, the Exchange currently provides ISE market makers 
with a two cent discount when trading against orders that are 
preferenced to them. The Exchange proposes to extend this discount for 
preferenced complex orders in the Non-Penny Pilot Symbols. Accordingly, 
ISE market makers who remove liquidity in the Non-Penny Pilot Symbols 
from the Complex Order Book will be charged $0.58 per contract when 
trading with orders that are preferenced to them.
    With the proposed migration of the Non-Penny Pilot Symbols to the 
Exchange's complex order maker/taker pricing structure, the Exchange

[[Page 10018]]

proposes to no longer charge a PFOF fee for complex orders in these 
symbols. The cancellation fee, however, which only applies to Priority 
Customer orders, will continue to apply.
    The Exchange also notes that:
     Fees for orders in Non-Penny Pilot Symbols executed in the 
Exchange's Facilitation, Solicited Order, Price Improvement and Block 
Order Mechanisms are applied to contracts that are part of the 
originating or contra order.
     Complex orders in Non-Penny Pilot Symbols executed in the 
Facilitation and Solicited Order Mechanisms are charged fees only for 
the leg of the trade consisting of the most contracts.
     As noted above, the PFOF fees will not be collected for 
complex orders in the Non-Penny Pilot Symbols.
     As noted above, the cancellation fee, which only applies 
to Priority Customer orders, will continue to apply to the Non-Penny 
Pilot Symbols.
     The Exchange currently has a fee cap, with certain 
exclusions, applicable to transactions executed in a member's 
proprietary account. The cap also applies to crossing transactions for 
the account of entities affiliated with a member. The Exchange also has 
a service fee applicable to all QCC and non-QCC transactions that are 
eligible for the fee cap.\12\ This fee cap will continue to apply to 
executions of complex orders in the Non-Penny Pilot Symbols.
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    \12\ See Securities Exchange Act Release No. 64270 (April 8, 
2011), 76 FR 20754 (April 13, 2011) (SR-ISE-2011-13).
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     The Exchange currently has tiered rebates to encourage 
members to submit greater number of QCC orders and Solicitation orders 
to the Exchange. Once a member reaches a certain volume threshold in 
QCC orders and/or Solicitation orders during a month, the Exchange 
provides a rebate to that member for all of its QCC and Solicitation 
traded contracts for that month.\13\ These tiered rebates will continue 
to apply.
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    \13\ See Securities Exchange Act Release Nos. 65087 (August 10, 
2011), 76 FR 50783 (August 16, 2011) (SR-ISE-2011-47); 65583 
(October 18, 2011), 76 FR 65555 (October 21, 2011) (SR-ISE-2011-68); 
65705 (November 8, 2011), 76 FR 70789 (November 15, 2011) (SR-ISE-
2011-70); 65898 (December 6, 2011), 76 FR 77279 (December 12, 2011) 
(SR-ISE-2011-78); and 66169 (January 17, 2012), 77 FR 3295 (January 
23, 2012) (SR-ISE-2012-01).
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     The license surcharge noted above will continue to apply 
to all orders except for Priority Customer orders in the Non-Penny 
Pilot Symbols.
    With this proposed rule change, all non-customer orders will be 
assessed similar fees, thus eliminating the gap that currently exists 
between market makers and non-market makers when trading complex orders 
today. The proposed fees are consistent with the fees and rates of 
payment for order flow commonly applied to symbols that are not part of 
the Penny Pilot program. At the proposed levels, ISE market makers will 
in fact see their fees lowered compared to current levels, which 
include a transaction fee and a $0.65 per contract PFOF fee, while at 
the same time equitably distributing the costs of attracting complex 
orders. The Exchange's maker/taker fees and rebates for complex orders 
in Penny Pilot Symbols has proven to be an effective method of 
attracting order flow to the Exchange. The Exchange believes that 
extending its maker/taker fees and rebates for complex orders to the 
Non-Penny Pilot Symbols will assist the Exchange in increasing its 
market share in these symbols. The Exchange believes this proposed rule 
change will also serve to enhance the Exchange's competitive position 
and enable it to attract additional complex order volume in these 
symbols.
    The Exchange also proposes to make a non-substantive, clarifying 
change in footnote 3 on page 18 of the Schedule of Fees, footnote 11 on 
page 19 of the Schedule of Fees and footnote 2 on page 21 of the 
Schedule of Fees by replacing the word `non-customer' with `non-
Priority Customer' to accurately reflect that the rebate referenced in 
these three footnotes are payable when Priority Customer complex orders 
trade with non-Priority Customer orders in the Complex Order Book.
    The Exchange proposes to make these fee changes operative on 
February 1, 2012.
2. Statutory Basis
    The Exchange believes that its proposal to amend its Schedule of 
Fees is consistent with Section 6(b) of the Act \14\ in general, and 
furthers the objectives of Section 6(b)(4) of the Act \15\ in 
particular, in that it is an equitable allocation of reasonable dues, 
fees and other charges among Exchange members and other persons using 
its facilities. The impact of the proposal upon the net fees paid by a 
particular market participant will depend on a number of variables, 
most important of which will be its propensity to add or remove 
liquidity in the Non-Penny Pilot Symbols in the Complex Order Book. 
Further, with this proposed rule change, and in an effort to 
standardize fees for complex orders, the Exchange is adopting fees that 
are lower than those previously adopted for two other Non-Penny Pilot 
Symbols, i.e., NDX and RUT. Approval of this proposed rule change will 
result in complex orders in the Non-Penny Pilot Symbols, including NDX 
and RUT, being charged the same fees.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes it is reasonable and equitable to charge all 
market participants (except Priority Customers) trading in complex 
orders in Non-Penny Pilot Symbols a standardized `make' fee of $0.10 
per contract. The Exchange currently charges a standardized `make' fee 
of $0.32 per contract for complex orders in certain symbols when these 
orders trade against Priority Customer orders.\16\ The Exchange further 
believes it is reasonable and equitable to charge ISE market maker, 
firm proprietary and Customer (Professional) orders a `take' fee of 
$0.60 per contract ($0.65 per contract for Non-ISE Market Maker orders) 
for complex orders in Non-Penny Pilot Symbols in order to equitably 
distribute the cost of attracting order flow (similar to PFOF). The 
Exchange believes it is reasonable and equitable to charge ISE market 
maker, firm proprietary and Customer (Professional) orders a fee of 
$0.60 per contract ($0.65 per contract for Non-ISE Market Maker orders) 
when such members are responding to special orders because a response 
to a special order is akin to taking liquidity, thus the Exchange is 
proposing to adopt an identical fee for taking liquidity in these 
symbols. The Exchange has historically maintained a differential in the 
fees it charges ISE market makers from those it charges to Non-ISE 
Market Makers. The Exchange believes it is reasonable and equitable to 
treat these two groups of market participants differently because each 
has different commitments and obligations to the Exchange. ISE market 
makers, in particular, have quoting obligations and pay the Exchange 
non-transaction fees. Non-ISE Market Makers do not have any such 
obligations or financial commitments.
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    \16\ See note 7.
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    The Exchange further believes it is reasonable and equitable for 
the Exchange to charge a fee of $0.20 per contract for complex orders 
in the Non-Penny Pilot Symbols executed in the Exchange's various 
auctions and for Qualified Contingent Cross orders because these fees 
are identical to the fees the Exchange currently charges for similar 
orders in the symbols that are subject to the Exchange's maker/taker 
fees.
    Additionally, the Exchange believes its proposed fees remain 
competitive with fees charged by other exchanges

[[Page 10019]]

and are therefore reasonable and equitably allocated to those members 
that opt to direct orders to the Exchange rather than to a competing 
exchange. For example, the $0.60 per contract complex order `take' fee 
in Non-Penny Pilot Symbols proposed by the Exchange for market maker, 
firm proprietary and Customer (Professional) orders remains 
considerably lower than that charged by the Boston Options Exchange 
(``BOX''). For a similar order, BOX charges both a transaction fee, 
which ranges anywhere from $0.13 per contract to $0.25 per contract, 
and a fee for adding liquidity in non-Penny Pilot classes of $0.65 per 
contract, for an `all-in' rate of $0.90 or more per contract.\17\
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    \17\ See BOX Fee Schedule, Sections 4 and 7.
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    The Exchange believes that it is reasonable and equitable to 
provide a rebate for Priority Customer complex orders when these orders 
trade with non-Priority Customer orders in the Complex Order Book 
because paying a rebate would continue to attract additional order flow 
to the Exchange and create liquidity in the symbols that are subject to 
the rebate, which the Exchange believes ultimately will benefit all 
market participants who trade on ISE. The Exchange already provides 
this rebate and is now proposing to extend the rebate for the Non-Penny 
Pilot Symbols, which the Exchange believes will attract greater order 
flow of complex orders in these symbols.
    The Exchange also believes that it is reasonable and equitable to 
provide a two cent discount to ISE market makers on preferenced orders 
because this will provide an incentive for market makers to quote in 
the Complex Order Book.
    The complex order pricing employed by the Exchange has proven to be 
an effective pricing mechanism and attractive to members and their 
customers. The Exchange believes that adopting maker/taker fees and 
rebates for complex orders in the Non-Penny Pilot Symbols will attract 
additional complex order business in these symbols. The Exchange 
further believes that the proposed fees are not unfairly discriminatory 
because the fee structure is consistent with fee structures that exist 
today at other options exchanges. Additionally, the Exchange believes 
that the proposed fees are fair, equitable and not unfairly 
discriminatory because they are consistent with price differentiation 
that exists today at other option exchanges. The Exchange believes it 
remains an attractive venue for market participants to trade complex 
orders as its fees remain competitive with those charged by other 
exchanges for similar trading strategies. The Exchange operates in a 
highly competitive market in which market participants can readily 
direct order flow to another exchange if they deem fee levels at a 
particular exchange to be excessive. With this proposed fee change, the 
Exchange believes it remains an attractive venue for market 
participants to trade complex orders.

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

    The proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Exchange Act.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Exchange Act.\18\ At any time within 60 days of 
the filing of such proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Exchange Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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 Exchange 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-2012-06 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2012-06. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 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-2012-06 and should be 
submitted on or before March 13, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-3859 Filed 2-17-12; 8:45 am]
BILLING CODE 8011-01-P