Document ID: SEC-2015-0660-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: International Securities Exchange, LLC
Posted Date: 2015-04-16T04:00Z

[Federal Register Volume 80, Number 73 (Thursday, April 16, 2015)]
[Notices]
[Pages 20522-20525]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-08700]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74706; File No. SR-ISE-2015-11]

Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Amend the Schedule of Fees

April 10, 2015.
    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 March 26, 2015, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission the proposed rule change, as described in Items I, II, and 
III below, which items have been prepared by the self-regulatory

[[Page 20523]]

organization. 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 ISE proposes to amend the Schedule of Fees to introduce a 
Member Order Routing Program. 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 purpose of the proposed rule change is to amend the Schedule of 
Fees to introduce a Member Order Routing Program (``MORP'') that will 
provide enhanced rebates to order routing firms that select the 
Exchange as the default routing destination (as described below) for 
unsolicited Crossing Orders.\3\ The MORP is intended to compete with 
similar programs offered by competitor options exchanges. The Exchange 
designates this filing to become effective on April 1, 2015.\4\
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    \3\ A `` Crossing Order'' is an order executed in the Exchange's 
Facilitation Mechanism, Solicited Order Mechanism, Price Improvement 
Mechanism (``PIM'') or submitted as a Qualified Contingent Cross 
(``QCC'') order. For purposes of the fee schedule, orders executed 
in the Block Order Mechanism are also considered Crossing Orders.
    Solicited Crossing Orders will not qualify for MORP as they are 
already eligible for the QCC and Solicitation Rebate. See Schedule 
of Fees, Section IV.A.
    \4\ The Exchange notes that members must opt in to MORP by March 
31, 2015 to be eligible to participate in the program on April 1, 
2015. See note 7 infra.
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MORP Qualifications
    To be eligible to participate in MORP, an Electronic Access Member 
(``EAM'') must: (1) Provide to its clients, systems that enable the 
electronic routing of option orders to all of the U.S. options 
exchanges, including ISE; (2) interface with ISE to access the 
Exchange's electronic options trading platform; (3) offer to its 
clients a customized interface and routing functionality such that ISE 
will be the default destination for all unsolicited Crossing Orders 
entered by the EAM,\5\ provided that market conditions allow the 
Crossing Order to be executed on ISE; (4) configure its own option 
order routing functionality such that ISE will be the default 
destination for all unsolicited Crossing Orders, provided that market 
conditions allow the Crossing Order to be executed on ISE, with respect 
to all option orders as to which the EAM has routing discretion; and 
(5) ensure that the default routing functionality permits users 
submitting option orders through such system to manually override the 
ISE as the default destination on an order-by-order basis.\6\
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    \5\ An unsolicited Crossing Order is a Crossing Order entered by 
a member that has not solicited the contra side of the trade.
    \6\ The Exchange notes that these requirements are based, in 
part, on similar programs offered by other options exchanges. See 
notes 15 and 19 infra and accompanying text.
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    EAMs that wish to participate in the program must certify that they 
meet the above MORP requirements, in writing, on a monthly basis and in 
a form to be determined by the Exchange. The relevant notice must be 
provided by the last business day of the month for members to be 
eligible to participate in the MORP effective the first business day of 
the following month.\7\
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    \7\ Members must provide this notice by March 31, 2015 to be 
eligible to participate in MORP when the program becomes effective 
on April 1, 2015.
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Rebate for Unsolicited Crossing Orders
    An EAM that is MORP eligible will receive a rebate for all 
unsolicited Crossing Orders of $0.05 per originating contract side, 
provided that the member executes a minimum average daily volume 
(``ADV'') in unsolicited Crossing Orders of at least 30,000 originating 
contract sides. This rebate is increased to $0.07 per originating 
contract side, provided that the member executes a higher ADV in 
unsolicited Crossing Orders of 100,000 originating contract sides. The 
rebate for the highest tier achieved will be applied retroactively to 
all eligible contracts traded in a given month. As is ISE's current 
practice with respect to ADV calculations, any day that the Exchange is 
not open for the entire trading day may be excluded from such 
calculation; provided that the Exchange will only remove the day for 
members that would have a lower ADV with the day included. The Exchange 
will provide a notice, and post it on the Exchange's Web site, to 
inform members of any day that is to be excluded from its ADV 
calculations in connection with this proposed rule change.
Facilitation and Solicitation Break-Up Rebate
    In addition, any EAM that qualifies for the MORP rebate by 
executing an ADV of 30,000 originating contract sides or more will also 
be eligible for increased Facilitation and Solicitation break-up 
rebates. Currently, the Exchange provides a Facilitation and 
Solicitation break-up rebate of $0.15 per contract for regular and 
complex orders in Select Symbols. This rebate applies to all Non-ISE 
Market Maker,\8\ Firm Proprietary \9\/Broker-Dealer,\10\ Professional 
Customer,\11\ and Priority Customer \12\ orders submitted to the 
Facilitation and Solicited Order Mechanisms that do not trade with 
their contra order, except when those orders trade against pre-existing 
orders and quotes on the Exchange's order books. For MORP eligible 
members that execute a qualifying ADV in unsolicited Crossing Orders of 
at least 30,000 originating contract sides, the Exchange now proposes 
to increase this Facilitation and Solicitation break-up rebate to $0.35 
per contract for regular and complex orders in Select Symbols. In 
addition, the Exchange proposes to adopt a Facilitation and 
Solicitation break-up rebate in Non-Select Symbols and FX option 
classes specifically for members that meet the MORP qualifications 
described above. The rebate in Non-Select Symbols will be $0.15 per 
contract for regular orders and $0.80 per contract for complex orders. 
For FX option classes, the rebate will be $0.15 per contract for both 
regular and complex orders. With this proposed

[[Page 20524]]

change, the Exchange notes that eligible members will receive the same 
break-up rebates for their Facilitation and Solicitation orders as they 
currently do for orders submitted to the PIM.
2. Statutory Basis
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    \8\ A ``Non-ISE Market Maker'' is a market maker as defined in 
Section 3(a)(38) of the Securities Exchange Act of 1934, as amended, 
registered in the same options class on another options exchange.
    \9\ A ``Firm Proprietary'' order is an order submitted by a 
member for its own proprietary account.
    \10\ A ``Broker-Dealer'' order is an order submitted by a member 
for a broker-dealer account that is not its own proprietary account.
    \11\ A ``Professional Customer'' is a person or entity that is 
not a broker/dealer and is not a Priority Customer.
    \12\ A ``Priority Customer'' is 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), as defined in Rule 100(a)(37A).
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    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\13\ in general, and 
Section 6(b)(4) of the Act,\14\ in particular, in that it is designed 
to provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and other persons using its facilities.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(4).
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    The Exchange proposes to provide the MORP rebate and higher break-
up rebates to EAMs that connect directly to the Exchange and provide 
their clients with order routing functionality that includes all U.S. 
options exchanges, including ISE. Order routing firms are already 
provided enhanced rebates by some of the Exchange's competitors, 
including, for example, NYSE Amex Options (``Amex''), which provides 
volume based rebates to members that provide access and connectivity to 
their market.\15\ The Exchange believes that it is appropriate at this 
time to offer a similar rebate to order routing firms on ISE in order 
to compete with these programs on other options markets.
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    \15\ See Securities Exchange Act Release No. 71532 (February 12, 
2014), 79 FR 9563 (February 19, 2014) (SR-NYSEMKT-2014-12).
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    The Exchange believes the proposed fee program is reasonable and 
equitable because it is designed to encourage order routing firms to 
execute additional unsolicited Crossing Order volume on the ISE. The 
Exchange notes that it currently offers other incentive programs to 
promote and encourage growth in specific business areas, including, for 
example, rebates for Market Makers that routinely quote at the national 
best bid or offer,\16\ and volume-based Priority Customer complex order 
rebates.\17\ The proposed rule change is targeted towards Crossing 
Orders, and, in particular, unsolicited Crossing Orders, which is yet 
another segment of order flow that the Exchange seeks to encourage 
members to execute on ISE. The Exchange believes that it is reasonable 
and equitable to tailor the proposed rule change to unsolicited 
Crossing Orders. ISE already charges fees and provides rebates for non-
Crossing Orders that are effective in attracting that order flow to the 
Exchange. In addition, solicited Crossing Orders already benefit from 
the QCC and Solicitation Rebate, which applies to all QCC and/or other 
solicited Crossing Orders, including solicited orders executed in the 
Solicitation, Facilitation or Price Improvement Mechanisms. The 
Exchange believes that the QCC and Solicitation Rebate has proven to be 
an effective incentive for members to send solicited crosses to the 
ISE. The proposed rule change would supplement this incentive by 
encouraging eligible firms to send unsolicited Crossing Orders to the 
Exchange as well, which will benefit all market participants on ISE by 
creating additional liquidity and increased opportunity to trade on the 
Exchange.
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    \16\ See Schedule of Fees, Section I, Regular Order Fees and 
Rebates, Market Maker Plus.
    \17\ See Schedule of Fees, Section II, Complex Order Fees and 
Rebates.
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    The Exchange notes that the proposed MORP rebate levels are within 
the range of rebates currently offered by Amex, whose market access and 
connectivity subsidy ranges from $0.04 per contract to $0.08 per 
contract based on a member's volume tier.\18\ In addition, the Exchange 
notes that the proposed Facilitation and Solicitation break-up rebates 
are equivalent to break-up rebates already provided for PIM orders 
traded on ISE.
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    \18\ See supra note 15.
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    As a condition for participating in MORP, an EAM must configure its 
option order routing functionality so that ISE will be the default 
destination for all unsolicited Crossing Orders, and must offer to its 
clients a customized interface and routing functionality that similarly 
defaults such orders to ISE. Defaulting to ISE will not be required if 
market conditions do not allow the Crossing Order to be executed on the 
Exchange. In addition, MORP eligible firms must allow users to manually 
override ISE as the default order routing destination on an order-by-
order basis. The Exchange believes that these proposed requirements are 
reasonable and equitable as they protect investors, while allowing 
member firms to qualify for enhanced rebates that reduce their trading 
costs on ISE. Furthermore, the Exchange notes that members that set ISE 
as their default routing destination will not be relieved of complying 
with their best execution obligations. If, based on its regular best 
execution analysis, a MORP eligible member determines that the routing 
functionality described above would conflict with its duty of best 
execution, such member may discontinue participation in the program. 
The Exchange believes that the safeguards described above will ensure 
that client orders are appropriately protected under MORP. In this 
regard, the Exchange notes that the proposed protections mirror 
protections previously adopted by NASDAQ OMX PHLX, LLC (``Phlx''), 
where a similar program was introduced in 2007.\19\
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    \19\ See Securities Exchange Act Release No. 56274 (August 16, 
2007), 72 FR 48720 (August 24, 2007) (SR-Phlx-2007-54).
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    Finally, the Exchange believes that the proposed program is both 
equitable and not unfairly discriminatory because any qualifying EAM 
that offers market access and connectivity to the Exchange will be able 
to participate in the program on an equal and non-discriminatory basis. 
While there will be two tiers of MORP rebates, the sole basis for 
differentiation among the tiers will be participant volume in 
unsolicited Crossing Orders.\20\ The Exchange believes that it is 
equitable and not unfairly discriminatory to provide higher rebates to 
members that execute a higher volume of order flow on ISE. With respect 
to break-up rebates, the Exchange notes that all members that qualify 
for a MORP rebate will also receive enhanced break-up rebates.
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    \20\As explained above, the proposed rule change is targeted 
towards unsolicited Crossing Orders as this is the segment of order 
flow that the Exchange is seeking to encourage members to execute on 
ISE. The Exchange does not believe that this is unfairly 
discriminatory as all MORP eligible members can achieve the 
applicable rebates by executing unsolicited Crossing Orders on the 
ISE.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\21\ the Exchange 
does not believe that the proposed rule change will impose any burden 
on intermarket or intramarket competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. To the contrary, 
the Exchange believes that the proposed rule change evidences the 
strength of competition in the options industry. Specifically, the 
Exchange believes that the proposed fee change will enhance the 
competiveness of the ISE relative to other options exchanges, such as 
Amex, that offer similar programs under their respective fee schedules. 
In doing so, eligible order routing firms will benefit from an 
innovative program that reduces trading costs by providing a valuable 
rebate for their unsolicited Crossing Orders. The Exchange operates in 
a highly competitive market in which market participants can readily 
direct their order flow to competing venues. In such an environment, 
the Exchange must continually review, and consider adjusting, its fees 
and rebates to remain competitive with other exchanges. For the reasons 
described above, the

[[Page 20525]]

Exchange believes that the proposed fee changes reflect this 
competitive environment.
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    \21\15 U.S.C. 78f(b)(8).
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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 foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \22\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\23\ because it establishes a due, fee, or other charge 
imposed by ISE.
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    \22\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \23\ 17 CFR 240.19b-4(f)(2).
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    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 Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ISE-2015-11 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2015-11. 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 such 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-2015-11, and should be 
submitted on or before May 7, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-08700 Filed 4-15-15; 8:45 am]
 BILLING CODE 8011-01-P