Document ID: SEC-2013-1804-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Topaz Exchange, LLC
Posted Date: 2013-10-22T04:00Z

[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Notices]
[Pages 62785-62787]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-24645]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70644; File No. SR-Topaz-2013-06]

Self-Regulatory Organizations; Topaz Exchange, LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Related to 
Market Maker Risk Parameters

October 9, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on September 30, 2013, the Topaz Exchange, LLC (d/b/a ISE Gemini) 
(the ``Exchange'' or ``Topaz'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes changes to mitigate market maker risk by 
requiring market makers to enter values in the Exchange-provided risk 
parameters.
    The text of the proposed rule change is available on the Exchange's 
Internet Web site at 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 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 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, Proposed Rule Change

 1. Purpose
    Pursuant to Topaz Rule 804, the Exchange currently provides 
functionality that will automatically remove a market maker's quotes in 
all series of an options class when certain parameter settings are 
triggered. Specifically, there are four parameters that can be set by 
market makers on a class-by-class basis. These parameters are available 
for market maker quotes in single options series. Market makers 
establish a time frame during which the system calculates: (1) the 
number of contracts executed by the market maker in an options class; 
(2) the percentage of the total size of the market maker's quotes in 
the class that has been executed; (3) the absolute value of the net 
between contracts bought and contracts sold in an options class; and 
(4) the absolute value of the net between (a) calls purchased plus puts 
sold, and (b) calls sold plus puts purchased. The market maker 
establishes limits for each of these four parameters, and when the 
limits are exceeded within the prescribed time frame, the market makers 
quotes are removed.\3\
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    \3\ The Exchange is proposing certain non-substantive changes to 
the text of Rule 804 for clarity. The changes shorten the first 
sentence in Rule 804 by deleting ``if the market maker trades, in 
the aggregate across all series of an options class during a 
specified time period'' and to delete ``(established by the market 
maker), within a time frame specified by the market maker'' as the 
text might be confusing in its current form and is redundant with 
other text within the Rule. To assure clarity, the Exchange also 
proposes to specify that the first parameter is a number of 
``total'' contracts ``in the class,'' and to specify that the fourth 
parameter is a net value based on puts and calls purchased and sold 
``in the class.'' Finally, the Exchange proposes to use a uniform 
construction of ``the specified . . .'' for each of the four 
parameters. The Exchange is not proposing to alter the operation of 
the functionality, other than to make use of the parameters 
mandatory.
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    The purpose of this functionality is to allow market makers to 
provide liquidity across potentially hundreds of options series without 
being at risk of executing the full cumulative size of all such quotes 
before being given adequate opportunity to adjust their quotes. For 
example, if a market maker can enter quotes with a size of 20 contracts 
in 150 series of an options class, its total potential exposure is 3000 
contracts in the options class. To mitigate the risk of executing all 
3000 contracts without evaluating its positions, the market maker risk 
functionality will automatically remove its quotes in all series of the 
options class after it has executed a specified number of contracts 
(e.g., 100) in series of that options class during a specified time 
period (e.g., 5 seconds).
    To assure that all quotations are firm for their full size, the 
parameter calculations occur after an execution against a market 
maker's quote takes place. For example, if a market maker has set a 
parameter of 100 contracts during a 5 second interval for an options 
class, and has executed a total of 95 contracts in the options class 
within the previous 3 seconds, a quote in a series of that class with a 
size of 20 contracts continues to be firm for all 20 contracts. In this 
example, an incoming order could execute all 20 contracts of the quote, 
and following the execution, the total size parameter would add 20 
contracts to the running total of 95. Since the total size executed 
within the 5 second time frame exceeds the 100 contracts established by 
the market maker for the options class, all of the market maker's 
quotes in the options class would be removed. The market maker would 
then enter new quotes in the class.
    Use of these risk management tools is voluntary under the rules. 
Similarly, from a technical perspective, market makers currently do not 
need to enter

[[Page 62786]]

any values into the applicable fields, and thus effectively can choose 
not to use these tools. The Exchange proposes to amend the rule to make 
it mandatory for market makers to enter values into all four of the 
quotation risk management parameters for all options classes in which 
it enters quotes. The purpose of the rule change is to prevent market 
makers from inadvertently entering quotes without risk-management 
parameters. In this respect, the Exchange notes that all Topaz market 
makers currently use the parameters when entering quotes.\4\ However, 
it is possible that a market maker could inadvertently enter quotes 
without populating one or more of the risk parameters, resulting in the 
member being exposed to much more risk than it intended. Accordingly, 
at the request of Topaz market makers, the Exchange proposes to modify 
the trading system to reject quotes if there are any missing risk 
management values for the options class.
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    \4\ The Exchange notes that with the exception of one market 
maker, all Topaz market makers are currently also market makers on 
the International Securities Exchange (``ISE'') and ISE recently 
amended its rules to make it mandatory for market makers to enter 
values into all four risk management parameters for classes in which 
ISE market makers enter quotes. Topaz market makers are therefore 
accustomed to using these risk parameters because they are required 
to use them when trading on ISE. The Exchange therefore does not 
believe the proposed rule change will have any impact on the way 
members currently trade on the Exchange. Additionally, the Exchange 
will provide notice to members before making use of the parameters 
mandatory.
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    While entering values into the quotation risk parameters will be 
mandatory to prevent an inadvertent exposure to risk, the Exchange 
notes that market makers who prefer to use their own risk-management 
systems can enter values that assure the Exchange-provided parameters 
will not be triggered.\5\ Accordingly, the proposal does not require 
members to manage their risk using the Exchange-provided tools.
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    \5\ For example, a market maker could set the value for the 
total number of contracts executed in a class at a level that 
exceeds the total number of contracts the market maker actually 
quotes in an options class.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \6\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \7\ 
in particular, in that it is designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
for a free and open market and a national market system, and, in 
general, to protect investors and the public interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that requiring market makers to enter values 
into the risk parameters provided by the Exchange will not be 
unreasonably burdensome, as all Topaz market makers currently utilize 
the functionality. Moreover, the Exchange is proposing this rule change 
at the request of its market makers to reduce their risk of 
inadvertently entering quotes without populating the risk parameters. 
As discussed above, the Exchange will be modifying the trading system 
to automatically reject quotations unless the parameters are populated 
with values, which will protect market makers from inadvertent exposure 
to excessive risk. Reducing such risk will enable market makers to 
enter quotations with larger size, which in turn will benefit investor 
through increased liquidity for the execution of their orders. Such 
increased liquidity benefits investors because they receive better 
prices and because it lowers volatility in the options market.

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

    The proposed rule change does not impose any burden on competition. 
This proposal is based on a recently approved rule change by the 
International Securities Exchange, LLC (``ISE'') and is identical to 
the ISE proposal.\8\ The proposed rule change to make it mandatory for 
market makers to populate the quotation risk management parameters is 
being made at the request of Topaz market makers to prevent the 
inadvertent entry of quotes without risk-management parameters. Market 
makers who prefer to use their own risk-management systems can enter 
out-of-range values so that the Exchange-provided parameters will not 
be triggered. Accordingly, the proposal does not require members to 
manage their risk using an Exchange-provided tool.
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    \8\ See Securities Exchange Act Release No. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
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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 Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to 
Section19(b)(3)(A) \9\ of the Act and Rule 19b-4(f)(6) thereunder \10\ 
because the foregoing proposed rule change does not (i) significantly 
affect the protection of investors or the public interest, (ii) impose 
any significant burden on competition, and (iii) become operative for 
30 days after its filing date, or such shorter time as the Commission 
may designate.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-Topaz-2013-06 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-Topaz-2013-06. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your

[[Page 62787]]

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 
such filing also will be available for inspection and copying at the 
principal office of the ISE. 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-Topaz-2013-06 and should be submitted on or before 
November 12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-24645 Filed 10-21-13; 8:45 am]
BILLING CODE 8011-01-P