Document ID: SEC-2012-0766-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2012-05-16T04:00Z

[Federal Register Volume 77, Number 95 (Wednesday, May 16, 2012)]
[Notices]
[Pages 28914-28917]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11795]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66961; File No. SR-ISE-2012-38]

Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend Transaction Fees and Rebates for Certain Complex Orders 
Traded on the Exchange

May 10, 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 May 9, 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 transaction fees and rebates for 
certain complex orders traded 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 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 Exchange currently assesses per contract transaction fees and 
rebates to market participants that add or remove liquidity from the 
Exchange (``maker/taker fees and rebates'') in a number of options 
classes (the ``Select Symbols'').\3\ The Exchange's maker/taker fees 
and rebates are applicable to regular and complex orders executed in 
the Select Symbols. The Exchange also currently assesses maker/taker 
fees and rebates for complex orders in symbols that are in the Penny 
Pilot program but are not a Select Symbol (Non-Select Penny Pilot 
Symbols) \4\ and for complex orders in all symbols that are not in the 
Penny Pilot Program (``Non-Penny Pilot Symbols'').\5\ The purpose of 
this proposed rule change is to amend the maker/taker fees and rebates 
for complex orders in the Non-Select Penny Pilot Symbols traded on the 
Exchange.
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    \3\ Options classes subject to maker/taker fees are identified 
by their ticker symbol on the Exchange's Schedule of Fees.
    \4\ See Exchange Act Release No. 65724 (November 10, 2011), 76 
FR 71413 (November 17, 2011) (SR-ISE-2011-72).
    \5\ See Exchange Act Release Nos. 66084 (January 3, 2012), 77 FR 
1103 (January 9, 2012) (SR-ISE-2011-84); and 66392 (February 14, 
2012), 77 FR 10016 (February 21, 2012) (SR-ISE-2012-06).
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    For complex orders in the Non-Select Penny Pilot Symbols, the 
Exchange currently charges a ``taker'' fee of: (i) $0.34 per contract 
for ISE Market Maker,\6\ Market Maker Plus,\7\ Firm Proprietary and 
Customer (Professional) \8\ orders; and (ii) $0.38 per contract for 
Non-ISE Market Maker \9\

[[Page 28915]]

orders. Priority Customer \10\ orders are not charged a ``taker'' fee 
for complex orders in the Non-Select Penny Pilot Symbols. For complex 
orders in these same symbols, the Exchange currently charges a 
``maker'' fee of: (i) $0.10 per contract for ISE Market Maker, Market 
Maker Plus, Firm Proprietary and Customer (Professional) orders; and 
(ii) $0.20 per contract for Non-ISE Market Maker orders. Priority 
Customer orders are not charged a ``maker'' fee for complex orders in 
these symbols.
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    \6\ The term ``Market Makers'' refers to ``Competitive Market 
Makers'' and ``Primary Market Makers'' collectively. See ISE Rule 
100(a)(25).
    \7\ A Market Maker Plus is an ISE Market Maker who is on the 
National Best Bid or National Best Offer 80% of the time for series 
trading between $0.03 and $5.00 (for options whose underlying 
stock's previous trading day's last sale price was less than or 
equal to $100) and between $0.10 and $5.00 (for options whose 
underlying stock's previous trading day's last sale price was 
greater than $100) in premium in each of the front two expiration 
months and 80% of the time for series trading between $0.03 and 
$5.00 (for options whose underlying stock's previous trading day's 
last sale price was less than or equal to $100) and between $0.10 
and $5.00 (for options whose underlying stock's previous trading 
day's last sale price was greater than $100) in premium across all 
expiration months in order to receive the rebate. The Exchange 
determines whether a Market Maker qualifies as a Market Maker Plus 
at the end of each month by looking back at each Market Maker's 
quoting statistics during that month. If at the end of the month, a 
Market Maker meets the Exchange's stated criteria, the Exchange 
rebates $0.10 per contract for transactions executed by that Market 
Maker during that month. The Exchange provides Market Makers a 
report on a daily basis with quoting statistics so that Market 
Makers can determine whether or not they are meeting the Exchange's 
stated criteria.
    \8\ A Customer (Professional) is a person who is not a broker/
dealer and is not a Priority Customer.
    \9\ A Non-ISE Market Maker, or Far Away Market Maker 
(``FARMM''), is a market maker as defined in Section 3(a)(38) of the 
Securities Exchange Act of 1934, as amended (``Exchange Act''), 
registered in the same options class on another options exchange.
    \10\ A Priority Customer is defined in ISE Rule 100(a)(37A) as a 
person or entity that is not a broker/dealer in securities, and does 
not place more than 390 orders in listed options per day on average 
during a calendar month for its own beneficial account(s).
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    The Exchange now proposes to increase the ``taker'' fee for complex 
orders in the Non-Select Penny Pilot Symbols to (i) $0.35 per contract 
for ISE Market Maker, Market Maker Plus, Firm Proprietary and Customer 
(Professional) orders; and (ii) $0.39 for Non-ISE Market Maker orders.
    Further, the Exchange currently provides volume-based tiered 
rebates for Priority Customer complex orders in the Non-Select Penny 
Pilot Symbols when these orders trade with non-Priority Customer orders 
in the complex order book. Specifically, the Exchange currently 
provides a rebate of $0.26 per contract, per leg, for Priority Customer 
complex orders when these orders trade with non-Priority Customer 
complex orders in the complex order book. Additionally, Members who 
achieve certain average daily volume (ADV) of Priority Customer complex 
order contracts across all symbols executed during a calendar month are 
provided a rebate of $0.28 per contract per leg in these symbols, if a 
Member achieves an ADV of 75,000 Priority Customer complex order 
contracts, and $0.30 per contract per leg in these symbols, if a Member 
achieves an ADV of 125,000 Priority Customer complex order contracts. 
The highest rebate amount achieved by the Member for the current 
calendar month applies retroactively to all Priority Customer complex 
order contracts that trade with non-Priority Customer complex orders in 
the complex order book executed by the Member during such calendar 
month.
    In order to enhance the Exchange's competitive position and to 
incentivize Members to increase the amount of Priority Customer complex 
orders in the Non-Select Penny Pilot Symbols that they send to the 
Exchange, the Exchange now proposes to increase the base amount of the 
rebate to $0.28 per contract. Additionally, the Exchange proposes to 
increase the amount of that rebate even further, on a month-by-month 
and Member-by-Member basis, if such Member achieves an ADV of Priority 
Customer complex order contracts across all symbols executed during the 
calendar month, as follows: If the Member achieves an ADV of 75,000 
Priority Customer complex order contracts, the rebate amount shall be 
$0.30 per contract per leg; if the Member achieves an ADV of 125,000 
Priority Customer complex order contracts, the rebate amount shall be 
$0.32 per contract per leg.
    Additionally, ISE Market Makers who remove liquidity in the Non-
Select Penny Pilot Symbols from the complex order book by trading with 
orders that are preferenced to them are currently charged $0.32 per 
contract. With the proposed increase to the ``taker'' fees for complex 
orders in the Non-Select Penny Pilot Symbols noted above, the Exchange 
also proposes to increase the fee charged to ISE Market Makers who 
remove liquidity in these symbols to $0.33 per contract when trading 
with orders that are preferenced to them.
    Further, pursuant to Securities and Exchange Commission (``SEC'') 
approval, the Exchange currently allows Market Makers to enter 
quotations for complex order strategies in the complex order book.\11\ 
The Exchange has adopted maker fees that apply to transactions in the 
complex order book when they interact with Priority Customer orders in 
a number of option classes, including XOP.\12\ Specifically, the 
Exchange currently charges $0.30 per contract in XOP for ISE Market 
Maker orders when these orders interact with Priority Customer orders. 
ISE Market Makers who add liquidity in XOP from the complex order book 
by trading with Priority Customer orders that are preferenced to them 
are charged $0.28 per contract. In order to maintain the two cent 
differential, the Exchange proposes to amend the rule text in footnote 
12 on page 20 of the Exchange's Schedule of Fees. Specifically, the 
Exchange proposes to remove ``(excluding XOP)'' from the first sentence 
of footnote 12 in order to specify that the two cent discount for ISE 
Market Makers who remove liquidity from the complex order book by 
trading with orders that are preferenced to them applies to XOP. 
Further, the Exchange proposes to remove ``remove or'' from the second 
sentence of footnote 12 since the discounted fee for ISE Market Makers 
who remove liquidity in XOP is already addressed in the first sentence. 
As a result, the second sentence of footnote 12 will only address the 
fee for ISE Market Makers who add liquidity in XOP from the complex 
order book by trading with orders that are preferenced to them and that 
rate is currently $0.28 per contract, which is two cents less than the 
rate currently charged to non-preferenced ISE Market Makers, which is 
$0.30 per contract.
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    \11\ See Securities Exchange Act Release No. 65548 (October 13, 
2011), 76 FR 64980 (October 19, 2011) (SR-ISE-2011-39).
    \12\ See Securities Exchange Act Release Nos. 65958 (December 
15, 2011), 76 FR 79236 (December 21, 2011) (SR-ISE-2011-81); and 
66406 (February 16, 2012), 77 FR 10579 (February 22, 2012) (SR-ISE-
2012-07). The Exchange notes that XOP is currently a Non-Select 
Penny Pilot Symbol.
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2. Statutory Basis
    The Exchange believes that its proposal to amend its Schedule of 
Fees is consistent with Section 6(b) of the Exchange Act \13\ in 
general, and furthers the objectives of Section 6(b)(4) of the Exchange 
Act \14\ 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 
interact with and respond to certain types of orders.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that it is reasonable and equitable to 
provide rebates for Priority Customer complex orders when these orders 
trade with Non-Priority Customer complex 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 these types of rebates, and is now merely proposing to 
increase those rebate amounts. The Exchange believes that the proposed 
rebates are competitive with rebates provided by other exchanges and 
are therefore reasonable and equitably allocated to those members that 
direct orders to the Exchange rather than to a competing exchange.
    The Exchange believes that its proposal to assess a $0.35 per 
contract ``taker'' fee for ISE Market Maker, Market Maker Plus, Firm 
Proprietary and Customer (Professional) orders in the Non-Select Penny 
Pilot Symbols that are subject to the Exchange's maker/taker fees and 
rebates is reasonable and equitably allocated because the fee is

[[Page 28916]]

within the range of fees assessed by other exchanges employing similar 
pricing schemes and in some cases, is lower that the fees assessed by 
other exchanges. For example, NASDAQ OMX PHLX, Inc. (``PHLX'') 
currently charges $0.37 per contract for removing liquidity in complex 
orders for Specialist orders and $0.38 per contract for Firm and 
Professional orders.\15\ Therefore, while ISE is proposing a fee 
increase for ISE Market Maker, Market Maker Plus, Firm Proprietary and 
Customer (Professional) orders, the resulting fee remains lower than 
the fee currently charged by PHLX for similar orders. ISE's proposed 
increase for Non-ISE Market Maker orders to $0.39 per contract is a 
nominal increase over the rate currently in place at PHLX. PHLX 
currently charges $0.35 per contract for these orders.\16\ In addition, 
the Exchange believes that charging Non-ISE Market Maker orders a 
higher rate than the fee charged to ISE Market Maker, Firm Proprietary 
and Customer (Professional) orders is appropriate and not unfairly 
discriminatory because Non-ISE Market Makers are not subject to many of 
the non-transaction based fees that these other categories of 
membership are subject to, e.g., membership fees, access fees, API/
Session fees, market data fees, etc. Therefore, it is appropriate and 
not unfairly discriminatory to assess a higher transaction fee on Non-
ISE Market Makers because the Exchange incurs costs associated with 
these types of orders that are not recovered by non-transaction based 
fees paid by members.
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    \15\ See PHLX Fee Schedule at http://www.nasdaqtrader.com/content/marketregulation/membership/phlx/feesched.pdf.
    \16\ Id.
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    The Exchange believes that it is reasonable and equitable to 
provide a two cent discount to ISE Market Makers on preferenced orders 
as an incentive for them to quote in the complex order book. The 
Exchange notes that PHLX currently provides a similar discount. 
Accordingly, ISE Market Makers who remove liquidity in the Non-Select 
Penny Pilot Symbols from the complex order book will be charged $0.33 
per contract when trading with orders that are preferenced to them. For 
XOP, which is a Non-Select Penny Pilot Symbol, ISE Market Makers who 
remove liquidity in this symbol from the complex order book by trading 
with orders that are preferenced to them will also be charged $0.33 per 
contract while ISE Market Makers who add liquidity in this symbol from 
the complex order book by trading with Priority Customer orders that 
are preferenced to them will be charged $0.28 per contract. ISE notes 
that with this proposed fee change, the Exchange will continue to 
maintain a two cent differential that was previously in place.
    The complex order pricing employed by the Exchange has proven to be 
an effective pricing mechanism and attractive to Exchange participants 
and their customers. The Exchange believes that this proposed rule 
change will continue to attract additional complex order business in 
the Non-Select Penny Pilot Symbols traded on the Exchange.
    The Exchange further believes that the Exchange's maker/taker fees 
and rebates 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 the 
proposed fees are consistent with price differentiation that exists 
today at other option exchanges. 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 in the Non-Select Penny Pilot Symbols.

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.\17\ 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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    \17\ 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-2012-38 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-2012-38. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-

[[Page 28917]]

2012-38 and should be submitted on or before June 6, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-11795 Filed 5-15-12; 8:45 am]
BILLING CODE 8011-01-P