Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules Related to Complex Orders With Respect to a System Migration

Published date11 August 2023
Record Number2023-17208
Citation88 FR 54672
CourtSecurities And Exchange Commission
SectionNotices
54672
Federal Register / Vol. 88, No. 154 / Friday, August 11, 2023 / Notices
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b–4.
3
See Securities Exchange Release Act No. 97726
(June 14, 2023), 88 FR 40344 (June 21, 2023) (SR–
MRX–2023–10) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change To Amend
Complex Order Rules) (‘‘SR–MRX–2023–10’’).
MRX’s rules are not yet operative.
4
The term ‘‘Stock-Option Order’’ refers to an
order for a Stock-Option Strategy as defined in
Options 3, Section 14(a)(2). A Stock-Option Strategy
is the purchase or sale of a stated number of units
of an underlying stock or a security convertible into
the underlying stock (‘‘convertible security’’)
coupled with the purchase or sale of options
contract(s) on the opposite side of the market
representing either (A) the same number of units of
the underlying stock or convertible security, or (B)
the number of units of the underlying stock
necessary to create a delta neutral position, but in
no case in a ratio greater than eight-to-one (8.00),
where the ratio represents the total number of units
of the underlying stock or convertible security in
the option leg to the total number of units of the
underlying stock or convertible security in the stock
leg. See ISE Options 3, Section 14(a)(2).
5
The term ‘‘Stock-Complex Order’’ refers to an
order for a Stock-Complex Strategy as defined in
Options 3, Section 14(a)(3). A Stock-Complex
Strategy is the purchase or sale of a stated number
of units of an underlying stock or a security
convertible into the underlying stock (‘‘convertible
security’’) coupled with the purchase or sale of a
Complex Options Strategy on the opposite side of
the market representing either (A) the same number
of units of the underlying stock or convertible
security, or (B) the number of units of the
underlying stock necessary to create a delta neutral
position, but in no case in a ratio greater than eight-
to-one (8.00), where the ratio represents the total
number of units of the underlying stock or
convertible security in the option legs to the total
number of units of the underlying stock or
convertible security in the stock leg. Only those
Stock-Complex Strategies with no more than the
applicable number of legs, as determined by the
Exchange on a class-by-class basis, are eligible for
processing. See ISE Options 3, Section 14(a)(3).
6
A Complex QCC with Stock Order is a Qualified
Contingent Cross Complex Order, as defined in
subparagraph (b)(6) of Options 3, Section 14,
entered with a stock component to be
communicated to a designated broker-dealer for
execution pursuant to ISE Options 3, Section 12(f).
7
A QCC with Stock Order is a Qualified
Contingent Cross Order, as defined in Options 3,
Section 7(j), entered with a stock component to be
communicated to a designated broker-dealer for
execution pursuant to Options 3, Section 12(e). See
Options 3, Section 7(t).
8
See note 3 above.
9
The Trade Value Allowance permits Stock-
Option Strategies and Stock-Complex Strategies at
valid increments Options 3, Section 14(c)(1), Stock-
Option Strategies and Stock-Complex Strategies to
trade outside of their expected notional trade value
by a specified amount, in order to facilitate the
execution of the stock leg and options leg(s). The
Trade Value Allowance is the percentage difference
between the expected notional value of a trade and
the actual notional value of the trade. The amount
of Trade Value Allowance permitted may be
determined by the Member, or a default value
determined by the Exchange and announced to
Members; provided that any amount of Trade Value
Allowance is permitted in mechanisms pursuant to
Options 3, Sections 11 and 13 when auction orders
do not trade solely with their contra-side order. See
Supplementary Material .03 of ISE Options 3,
Section 14.
Commission a USPS Request to Add
Priority Mail Express International,
Priority Mail International, First-Class
Package International Service &
Commercial ePacket Contract 14 to
Competitive Product List. Documents
are available at www.prc.gov, Docket
Nos. MC2023–212 and CP2023–216.
Tram T. Pham,
Attorney, Ethics and Legal Compliance.
[FR Doc. 2023–17237 Filed 8–10–23; 8:45 am]
BILLING CODE 7710–12–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98066; File No. SR–ISE–
2023–13]
Self-Regulatory Organizations; Nasdaq
ISE, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend ISE Rules
Related to Complex Orders With
Respect to a System Migration
August 7, 2023.
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 July 25,
2023, Nasdaq ISE, LLC (‘‘ISE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Options 3, Section 7, Types of Orders
and Order and Quote Protocols; Options
3, Section 11, Auction Mechanisms;
Options 3, Section 12, Crossing Orders,
Section 13, Price Improvement
Mechanisms for Crossing Transactions;
Options 3, Section 14, Complex Orders;
Options 3, Section 15, Simple Order
Risk Protections; and Options 3, Section
16, Complex Order Risk Protections.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/ise/rules, 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
Exchange 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
In connection with a technology
migration to an enhanced Nasdaq, Inc.
(‘‘Nasdaq’’) functionality in 2024, the
Exchange intends to adopt certain
trading functionality currently utilized
at Nasdaq affiliate exchanges. Also, the
Exchange intends to remove certain
functionality. Specifically, the following
sections would be amended: Options 3,
Section 7, Types of Orders and Order
and Quote Protocols; Options 3, Section
11, Auction Mechanisms; Options 3,
Section 12, Crossing Orders, Section 13,
Price Improvement Mechanisms for
Crossing Transactions; Options 3,
Section 14, Complex Orders; Options 3,
Section 15, Simple Order Risk
Protections; and Options 3, Section 16,
Complex Order Risk Protections. Each
change will be described below. The
proposed stock-tied functionality is
identical to Phlx Options 3, Sections
13(b)(10)(ii) and 14(a)(i) with respect to
utilizing NES to process and report
stock-tied functionality with two
differences which are explained in the
proposal. Additionally, MRX recently
adopted identical rules to those
proposed herein.
3
Stock-Related Strategies and
Elimination of Trade Value Allowance
Today, ISE Members are able to trade
certain Stock-Option Orders as
described in ISE Options 3, Section
14(a)(2),
4
Stock-Complex Orders as
described in ISE Options 3, Section
14(a)(3),
5
Complex QCC with Stock
Orders as described in ISE Options 3,
Section 14(b)(15),
6
QCC with Stock
Orders
7
as described in Options 3,
Section 7(t) and 12(e), as described in
Supplementary Material .03 of ISE
Options 3, Section 14 (‘‘Delayed
Functionalities’’).
8
Additionally, today,
ISE offers a Trade Value Allowance.
9
At this time, in connection with a
technology migration in 2024, ISE
proposes to amend its stock-tied
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10
See Supplementary Material .02 to Options 3,
Section 14.
11
Id.
12
ISE members may also trade QCC Orders and
complex QCC Orders. See Options 3, Section 12(c)
and (d). For those orders, the parties to the trade
will arrange for the execution of the stock
component of the order.
13
See Securities Exchange Act Release No. 79994
(February 9, 2017), 82 FR 10837 (February 15, 2017)
(SR–ISE–2016–27) (Order Granting Approval of
Proposed Rule Changes, as Modified by
Amendment No. 1 Thereto, To Amend the
Exchange’s Rules Regarding Routing of Orders,
Cancellation of Orders, and Handling of Error
Positions, and Permit Nasdaq Execution Services,
LLC To Become an Affiliated Member of the
Exchange To Perform Certain Routing and Other
Functions).
14
Id. ISE is subject to certain limitations and
conditions such as maintaining a Regulatory
Services Agreement with FINRA, as well as an
agreement pursuant to Rule 17d–2 under the Act,
among other limitations and conditions.
15
See Phlx Options 3, Sections 13(b), 14(a) and
16(b).
16
See Securities Exchange Act Release No. 63777
(January 26, 2011), 76 FR 5630 (February 1, 2011)
(SR–Phlx–2010–157) (Order Approving a Proposed
Rule Change, as Modified by Amendment Nos. 1
and 2, Relating to Complex Orders) (‘‘Phlx Complex
Order Approval’’). NES assumed the stock
execution functionalities that were previously
performed by NOS. Phlx subsequently filed to
permit both inbound and outbound orders to be
routed through NES instead of Nasdaq Options
Services LLC (‘‘NOS’’). See Securities Exchange Act
Release No. 71417 (January 28, 2014), 79 FR 6253
(February 3, 2014) (SR–Phlx–2014–04) (Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change to Outbound Routing) and 71416
(January 28, 2014), 79 FR 6244 (February 3, 2014)
(SR–Phlx–2014–05) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Inbound
Routing of Options Orders). See also SR–MRX–
2023–10 which rules are not yet operative.
17
See proposed Supplementary Material .08(b) to
Options 3, Section 11, proposed Options 3, Section
12(b)(2), proposed Supplementary Material .09(b) to
Options 3, Section 13, proposed Supplementary
Material .02 to Options 3, Section 14 and proposed
Options 3, Section 16(d). See also Phlx Options 3,
Section 13(b)(10)(ii), Options 3, Section 16(b).
18
The term ‘‘cNBBO’’ means the best net debit or
credit price for a Complex Order Strategy based on
the NBBO for the individual options components of
a Complex Order Strategy, and, where the
underlying security is a component of the Complex
Order, the National Best Bid and/or Offer for the
underlying security. See Phlx Options 3, Section
14(a)(vi).
19
As proposed, NES will only execute Stock-
Option Strategies and Stock-Complex Strategies if
the underlying covered security component is in
accordance with Rule 201 of Regulation SHO.
functionality. Today, ISE Members
desiring to execute an order with stock
or an ETF component are required to
enter into a brokerage agreement with a
broker-dealer designated by the
Exchange and are permitted to enter
into such an agreement with one or
more other broker-dealers to which the
Exchange is able to route stock orders.
10
The Exchange proposes to amend its
rules to instead require that a Member
desiring to execute a Stock-Option
Order or a Stock-Complex Order enter
into a brokerage agreement with Nasdaq
Execution Services, LLC (‘‘NES’’) which
will execute the stock or ETF
component of the order.
11
The stock
component of a Qualified Contingent
Cross (‘‘QCC’’) with Stock Order or a
Complex QCC with Stock Order will
continue to be handled by a third-party
broker as provided in Options 3,
Sections 12(e) and (f).
12
NES is a broker-
dealer owned and operated by Nasdaq,
Inc. NES, an affiliate of the Exchange,
has been approved by the Commission
to become a Member of the Exchange
and perform inbound routing on behalf
of the Exchange.
13
Additionally, NES is
permitted to route outbound orders
either directly or indirectly through a
third party routing broker-dealer to
other market centers and perform other
functions regarding the cancellation of
orders and the maintenance of a NES
error account.
14
NES currently acts as agent for orders
to buy and sell the underlying stock or
ETF component of a Complex Order on
Nasdaq Phlx LLC (‘‘Phlx’’).
15
The
functions performed by NES on Phlx
today are identical to the functions that
ISE proposes for NES to perform for ISE
Members as well as rules recently
adopted by MRX.
16
Identical to Phlx,
after ISE’s System determines that a
Complex Order execution is possible
and identifies the prices for each
component of such Complex Order, ISE
will electronically communicate the
stock or ETF component of the Complex
Order to NES for execution.
17
NES,
acting as agent for the orders to buy and
sell the underlying stock or ETF, will
execute the orders in the over-the-
counter (‘‘OTC’’) market and will handle
the orders pursuant to applicable rules
regarding equity trading, including the
rules governing trade reporting, trade-
throughs, and short sales. This function
is currently performed by a third-party
broker-dealer. The proposed stock-tied
functionality is identical to Phlx
Options 3, Sections 13(b)(10)(ii) and
14(a)(i) with respect to utilizing NES to
process and report the stock or ETF
component of a Complex Order.
However, there are two differences in
the way Phlx and ISE handle stock-tied
option orders.
First, while both Phlx and ISE have
certain risk protections for complex
orders, they differ. With respect to ISE,
the execution price of the Complex
Order must be within a certain price
from the current market, as determined
by the Exchange pursuant to Options 3,
Section 16(a). Specifically, today, ISE
Options 3, Section 16(a) provides that
the System will not permit any leg of a
complex strategy to trade-through the
NBBO for the series or any stock
component by a configurable amount
calculated as the lesser of (i) an absolute
amount not to exceed $0.10, and (ii) a
percentage of the NBBO not to exceed
500%, as determined by the Exchange
on a class, series or underlying basis. In
contrast, Phlx Options 3, Section
16(b)(i) describes Phlx’s Acceptable
Complex Execution (‘‘ACE’’) Parameter
which defines a price range outside of
which a complex order will not be
executed. On Phlx, a complex order to
sell is not executed at a price that is
lower than the cNBBO
18
bid by more
than the ACE Parameter. Conversely, on
Phlx, a complex order to buy will not
be executed at a price that is higher than
the cNBBO offer by more than the ACE
Parameter. While ISE’s and Phlx’s price
checks differ, both markets seek to
prevent executions from occurring at
certain prices and at certain percentages
from the NBBO. ISE’s proposal would
require NES to apply the same price
check for stock-tied functionality that
are being applied today by a third-party
broker-dealer that executed the stock or
ETF component of a complex strategy
on behalf of ISE Members. ISE Members
would continue to be subject to the
same price check which is applied to all
Complex Orders executed on ISE.
Second, ISE and Phlx differ with
respect to the manner in which their
systems handle Stock-Option Strategies
and Stock-Complex Strategies that
would execute against interest on the
Complex Order Book at a price that does
not meet the price checks in their
respective rules or do not meet
Regulation SHO provisions as provided
for in proposed Options 3, Section
16(e)
19
are handled by their respective
systems. As proposed, ISE will hold
orders on the Complex Order book that
cannot be executed because of
Regulation SHO or price check
restrictions, unless the Member requests
the order to be cancelled. If an ISE
Member elects to have the order held on
the Complex Order Book, the order
would await other matching
opportunities, otherwise at the
Member’s election the order would be
returned to the Member. In contrast,
Phlx only provides for a cancellation of
the order. ISE’s proposed approach
would provide the Member with
optionality as to the handing of the
order. The Exchange believes providing
the choice to have the order held on the
Complex Order Book provides Members
with an opportunity for an execution.
NES
NES is a registered broker-dealer and
member of various exchanges and the
Financial Industry Regulatory Authority
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20
The Commission’s approval order for Phlx
stated that NOS (now NES) ‘‘. . . as a facility of the
Phlx, NOS is subject to oversight by the
Commission and by the Phlx. In addition, NOS, a
member of FINRA, is responsible for compliance
with applicable rules regarding equity trading,
including rules governing trade reporting, trade-
throughs and short sales, and is subject to
examination by FINRA. Because NOS will execute
the stock or ETF component of a Complex Order in
the OTC market, the principal regulator of these
trades will be FINRA, rather than the Phlx or
Nasdaq.’’ See SR–Phlx–2010–157 76 FR 5630 at
5625, footnote 20. Phlx originally set up its
affiliated broker-dealers as two separate entities,
NES and NOS. When Phlx replaced NOS with NES,
it noted in the rule change that NES will operate
the same way as NOS operated, in terms of routing
options orders to destination options exchanges.
See SR–Phlx–2014–04, 79 FR 6253 at 6254.
21
Similarly, the Exchange does establish and
maintain procedures and internal controls
reasonably designed to adequately restrict the flow
of confidential and proprietary information between
the Exchange and NES. Additionally NES
undertook all NOS’ responsibilities with respect to
the execution and reporting of the underlying
security component of a Complex Order. See SR–
Phlx–2014–04 at note 20. Therefore, members of
FINRA or the NASDAQ Stock Market (‘‘NASDAQ’’)
who were required to have a Uniform Service
Bureau/Executing Broker Agreement (‘‘AGU’’) with
NOS in order to trade Complex Orders containing
a stock/ETF component and firms that are not
members of FINRA or NASDAQ who were required
to have a Qualified Special Representative (‘‘QSR’’)
arrangement with NOS in order to trade Complex
Orders containing a stock/ETF component were
required to have such arrangements with NES. See
Securities Exchange Act Release No. 71417 (January
28, 2014), 79 FR 6253 (February 3, 2014) (SR–Phlx–
2014–04) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Outbound
Routing) and 71416 (January 28, 2014), 79 FR 6244
(February 3, 2014) (SR–Phlx–2014–05) (Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change to Inbound Routing of Options
Orders).
22
Once the orders are communicated to the
broker-dealer for execution, the broker-dealer has
complete responsibility for determining whether
the orders may be executed in accordance with all
of the rules applicable to execution of equity orders.
23
Specifically, the trades will be reported to the
FINRA/Nasdaq TRF which is a facility of FINRA
that is operated by Nasdaq, Inc. and utilizes
Automated Confirmation Transaction (‘‘ACT’’)
Service technology.
24
17 CFR 242.611(a).
25
See Securities Exchange Act Release Nos.
57620 (April 4, 2008), 73 FR 19271 (April 9, 2008)
(‘‘QCT Exemptive Order’’). See also Securities
Exchange Act Release No. 54389 (August 31, 2006),
71 FR 52829 (September 7, 2006). The QCT
Exemption applies to trade-throughs caused by the
execution of an order involving one or more NMS
stocks that are components of a ‘‘qualified
contingent trade.’’ As described more fully in the
QCT Exemptive Order, a qualified contingent trade
is a transaction consisting of two or more
component orders, executed as principal or agent,
where: (1) At least one component order is an NMS
stock; (2) all components are effected with a
product or price contingency that either has been
agreed to by the respective counterparties or
arranged for by a broker-dealer as principal or
agent; (3) the execution of one component is
contingent upon the execution of all other
components at or near the same time; (4) the
specific relationship between the component orders
(e.g., the spread between the prices of the
component orders) is determined at the time the
contingent order is placed; (5) the component
orders bear a derivative relationship to one another,
represent different classes of shares of the same
issuer, or involve the securities of participants in
mergers or with intentions to merge that have been
announced or since cancelled; and (6) the
Exempted NMS Stock Transaction is fully hedged
(without regard to any prior existing position) as a
result of the other components of the contingent
trade.
(‘‘FINRA’’). NES will be responsible for
the proper execution, trade reporting,
and submission to clearing of the
underlying stock or ETF component of
a Complex Order.
20
Because these
trades will occur off-exchange, the
principal regulator is FINRA.
Furthermore, today, NES is responsible
for compliance with FINRA rules
generally and is subject to examination
by FINRA. Specifically, NES is subject
to FINRA Rule 3110, which generally
requires that the policies and
procedures and supervisory systems of
a broker-dealer be reasonably designed
to achieve compliance with applicable
securities laws and regulations and with
applicable FINRA rules, including those
relating to the misuse of material non-
public information. To this end, today,
NES has in place policies related to
confidentiality and the potential for
informational advantages relating to its
affiliates, intended to protect against the
misuse of material nonpublic
information.
21
In particular, NES will
have in place policies and procedures
designed to prevent the misuse of
material non-public information related
to stock-tied executions. Of note, NES
only receives information about the
stock or ETF portion of the order from
the Exchange. As mentioned herein,
today, NES is responsible for the proper
execution, trade reporting, and
submission to clearing of the underlying
stock or ETF component of a Complex
Order on Phlx. ISE will adopt identical
policies and procedures for its stock-
tied functionality as are in place on Phlx
today.
In addition, because the execution
and reporting of the stock/ETF piece
will occur otherwise than on ISE or any
other exchange, it will be handled by
NES pursuant to applicable rules
regarding equity trading,
22
including the
rules governing trade reporting, trade-
throughs and short sales. Specifically,
NES will report the trades to the Trade
Reporting Facility.
23
Firms that are
members of FINRA are required to have
a Uniform Service Bureau/Executing
Broker Agreement (‘‘AGU’’) with NES in
order to trade Complex Orders
containing a stock/ETF component.
Firms that are not members of FINRA
are required to have a Qualified Special
Representative (‘‘QSR’’) arrangement
with NES in order to trade Complex
Orders containing a stock/ETF
component. This requirement is
codified in proposed Supplementary
Material .08 to Options 3, Section 11,
proposed Options 3, Section 12(b)(1),
proposed Supplementary Material .09 to
Options 3, Section 13 and proposed
Supplementary Material .07 to Options
3, Section 14. Accordingly, this process
is available to all ISE Members and the
stock/ETF component of a Complex
Order, once executed, will be properly
processed for trade reporting purposes.
Phlx has identical requirements within
its Options 3, Sections 13(b)(10) and
14(a)(i).
With respect to trade-throughs, the
Exchange believes that the stock/ETF
component of a Complex Order is
eligible for the Qualified Contingent
Trade Exemption from Rule 611(a) of
Regulation NMS. A Qualified
Contingent Trade is a transaction
consisting of two or more component
orders, executed as agent or principal,
that satisfy the six elements in the
Commission’s order exempting
Qualified Contingent Trades (‘‘QCTs’’)
from the requirements of Rule 611(a),
24
which requires trading centers to
establish, maintain, and enforce written
policies and procedures that are
reasonably designed to prevent trade-
throughs.
25
The Exchange believes that
the stock/ETF portion of a Complex
Order under this proposal complies
with all six requirements. Moreover, as
explained below, ISE’s System will
validate compliance with each
requirement such that any matched
order received by NES under this
proposal has been checked for
compliance with the exemption, as
follows:
(1) At least one component order is in an
NMS stock: The stock/ETF component must
be an NMS stock, which is validated by the
System;
(2) all components are effected with a
product or price contingency that either has
been agreed to by the respective
counterparties or arranged for by a broker-
dealer as principal or agent: A Complex
Order, by definition consists of a single net/
debit price and this price contingency
applies to all the components of the order,
such that the stock price computed and sent
to NES allows the stock/ETF order to be
executed at the proper net debit/credit price
based on the execution price of each of the
option legs, which is determined by the ISE
System;
(3) the execution of one component is
contingent upon the execution of all other
components at or near the same time: Once
a Complex Order is accepted and validated
by the System, the entire package is
processed as a single transaction and each of
the option leg and stock/ETF components are
simultaneously processed;
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26
A trading center may demonstrate that an
Exempted NMS Stock Transaction is fully hedged
under the circumstances based on the use of
reasonable risk-valuation methodologies. The
release approving the original exemption stated: To
effectively execute a contingent trade, its
component orders must be executed in full or in
ratio at its predetermined spread or ratio. ‘‘In ratio’’
clarifies that component orders of a contingent
trade do not necessarily have to be executed in full,
but any partial executions must be in a
predetermined ratio.
27
17 CFR 242.200 et seq.
28
The Exchange also accepts short sell exempt
orders as described herein.
29
See Securities Exchange Act Release No. 61595
(February 26, 2010), 75 FR 11232 (March 10, 2010)
(‘‘Rule 201 Adopting Release’’).
30
For purposes of this paragraph, the term
‘‘covered security’’ shall have the same meaning as
in Rule 201(a)(1) of Regulation SHO.
31
See proposed Options 3, Section 16(e). In
contrast, Complex Orders in an auction mechanism
that cannot be executed in accordance with
Regulation SHO will be cancelled back and will not
rest on the Complex Order Book as provided in
Supplementary Material .08 to Options 3, Section
11 and Supplementary Material .09 to Options 3,
Section 13.
32
See proposed Options 3, Section 16(e).
33
See proposed Options 3, Section 16(e).
34
This intra-day high-low range check does not
occur for Complex PIM Orders, Complex
Facilitation Orders and Complex SOM Orders, and
also does not occur for Complex Customer Cross
Orders.
(4) the specific relationship between the
component orders (e.g., the spread between
the prices of the component orders) is
determined at the time the contingent order
is placed: Complex Orders, upon entry, must
have a size for each component and a net
debit/credit, which the System validates and
processes to determine the ratio between the
components; an order is rejected if the net
debit/credit price and size are not provided
on the order;
(5) the component orders bear a derivative
relationship to one another, represent
different classes of shares of the same issuer,
or involve the securities of participants in
mergers or with intentions to merge that have
been announced or since cancelled: under
this proposal, the stock/ETF component must
be the underlying security respecting the
option legs, which is validated by the
System; and
(6) the transaction is fully hedged (without
regard to any prior existing position) as a
result of the other components of the
contingent trade: Under this proposal, the
ratio between the options and stock/ETF
must be a conforming ratio (8 contracts per
100 shares), which the System validates, and
which under reasonable risk valuation
methodologies, means that the stock/ETF
position is fully hedged.
26
Furthermore, proposed
Supplementary Material .08 to Options
3, Section 11, proposed Options 3,
Section 12(b)(1), proposed
Supplementary Material .09 to Options
3, Section 13 and proposed
Supplementary Material .07 to Options
3, Section 14 provide that Members may
only submit Complex Orders with a
stock/ETF component if such orders
comply with the Qualified Contingent
Trade Exemption. Members submitting
such Complex Orders with a stock/ETF
component represent that such orders
comply with the Qualified C vontingent
Trade Exemption. Thus, the Exchange
believes that Complex Orders consisting
of a stock/ETF component will comply
with the exemption and that ISE’s
System will validate such compliance to
assist NES in carrying out its
responsibilities as agent for these orders.
With respect to short sale regulation,
the proposed handling of the stock/ETF
component of a Complex Order under
this proposal should not raise any issues
of compliance with the currently
operative provisions of Regulation
SHO.
27
When a Complex Order has a
stock/ETF component, Members must
indicate, pursuant to Regulation SHO,
whether that order involves a long or
short sale. The System will accept
Complex Orders with a stock/ETF
component marked to reflect either a
long or short position; specifically,
orders not marked as buy, sell or sell
short will be rejected by ISE’s System.
28
The System will electronically deliver
the stock/ETF component to NES for
execution. Simultaneous to the options
execution on ISE’s System, NES will
execute and report the stock/ETF
component, which will contain the long
or short indication as it was delivered
by the Member to ISE’s System.
Accordingly, NES, as a trading center
under Rule 201, will be compliant with
the requirements of Regulation SHO. Of
course, broker-dealers, including both
NES and the Members submitting orders
to ISE with a stock/ETF component,
must comply with Regulation SHO.
NES’ compliance team updates, reviews
and monitors NES’ policies and
procedures including those pertaining
to Regulation SHO on an annual basis.
Further, proposed Supplementary
Material .08(c) to Options 3, Section 11,
and proposed Options 3, Section
12(b)(3), proposed Supplementary
Material .09(c) to Options 3, Section 13,
and proposed Options 3, Section 16(e)
provide that when the short sale price
test in Rule 201 of Regulation SHO
29
is
triggered for a covered security, NES
will not execute a short sale order in the
underlying covered security
component
30
of a Complex Order if the
price is equal to or below the current
national best bid. However, NES will
execute a short sale order in the
underlying covered security component
of a Complex Order if such order is
marked ‘‘short exempt,’’ regardless of
whether it is at a price that is equal to
or below the current national best bid.
If NES cannot execute the underlying
covered security component of a
Complex Order in accordance with Rule
201 of Regulation SHO, the Exchange
will hold the Complex Order on the
Complex Order Book, if consistent with
Member instructions (Members may
always elect to cancel the order).
31
The
order may execute at a price that is not
equal to or below the current national
best bid.
32
This proposed rule is similar
to Phlx Options 3, Section 16(b) except
that unlike Phlx, ISE will not cancel
back the Complex Order to the entering
Member unless the Member requests
that the order be cancelled. As noted
above, ISE and Phlx differ with respect
to the manner in which their systems
handle Stock-Option Strategies and
Stock-Complex Strategies that do not
meet requisite price checks in their
respective rules or do not meet the
requirements of Regulation SHO. As
proposed, ISE will hold orders on the
Complex Order book that cannot be
executed pursuant to Regulation SHO
restrictions, unless the Member requests
the order to be cancelled.
33
If an ISE
Member elects to have the order held,
the order would await other matching
opportunities, otherwise at the
Member’s election the order would be
returned to the Member. In contrast,
Phlx only provides for a cancellation of
the order. ISE’s proposed approach
would provide the Member with
optionality as to the handing of the
order. The Exchange believes providing
the choice to have the order held
provides Members with an opportunity
for an execution.
For these reasons, the processing of
the stock/ETF component of a Complex
Order under this proposal will comply
with applicable rules regarding equity
trading, including the rules governing
trade reporting, trade-throughs and
short sales. NES’s responsibilities
respecting these equity trading rules
will be documented in NES’s written
policies and procedures. NES’
compliance team updates, reviews and
monitors NES’ policies and procedures
regarding equity trading rules on an
annual basis. NES is regulated by
FINRA and as such, NES policies and
procedures are subject to review and
examinations by FINRA.
As part of the execution of the stock/
ETF component, NES will ensure that
the execution price is within the intra-
day high-low range for the day in that
stock at the time the Complex Order is
processed and within a certain price
range from the current market pursuant
to Options 3, Section 16(a),
34
which the
Exchange will establish in an Options
Trader Alert. If the stock price is not
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35
See proposed Options 3, Section 16(d). In
contrast, Complex Orders in an auction mechanism
that cannot be executed in accordance with
Regulation SHO will be cancelled back and will not
rest on the Complex Order Book as provided in
Supplementary Material .08 to Options 3, Section
11 and Supplementary Material .09 to Options 3,
Section 13.
36
The stock/ETF price is, of course, included
within the net debit/credit price of the Complex
Order.
37
See Phlx Complex Order Approval supra at
5633.
38
See ISE General 2, Section 4(b) which provides
that Nasdaq, Inc., which owns NASDAQ Execution
Services, LLC and the Exchange, shall establish and
maintain procedures and internal controls
reasonably designed to ensure that NASDAQ
Execution Services, LLC does not develop or
implement changes to its system on the basis of
non-public information regarding planned changes
to the Exchange’s systems, obtained as a result of
its affiliation with the Exchange, until such
information is available generally to similarly
situated Exchange Members in connection with the
provision of inbound routing to the Exchange.
39
However, Trade Reporting Facility and clearing
fees, not charged by ISE or NES, may result.
National Securities Clearing Corporation (‘‘NSCC’’)
and ACT will bill firms directly for their use of the
NSCC and ACT systems, respectively. To the extent
that NES is billed by NSCC or ACT, it will not pass
through such fees to firms for the stock/ETF portion
of a Complex Order under this proposal. ISE’s fees
applicable to Complex Orders appear in its Fee
Schedule and may change from time to time.
40
Existing Complex Order mechanisms at Cboe,
Inc. (‘‘Cboe’’) offers a similar end result. See Cboe
5.33(l).
within these parameters, the Complex
Order is not executable and would be
held on the order book or cancelled,
consistent with Member instructions.
35
Today, the third-party broker-dealer
would ensure the execution price is
within the intra-day high-low range.
With the transition to NES, the
Exchange would commence performing
this check. Members who transact stock-
tied functionality on ISE would
therefore continue to be subject to the
same execution price check with NES as
today.
The Exchange believes that the
continued electronic submission of the
stock/ETF piece of the Complex Order
to NES for execution should help ensure
that the Complex Order, as a whole, is
executed timely and at the desired
price. In addition, the Exchange’s
electronic communication of the stock
or ETF component to NES for execution
eliminates the need for each party to
separately submit the stock component
to a broker-dealer for execution. The
execution of the stock/ETF portion of a
Complex Order will be immediate; the
Exchange’s System will calculate the
stock price based on the net debit/credit
price of the Complex Order,
36
while also
calculating and determining the
appropriate options price(s), all
electronically. The Exchange continues
to believe that this practice would not
require the Exchange to later nullify
options trades if the stock price cannot
be achieved. Accordingly, like Phlx, the
Exchange is not proposing to adopt a
rule permitting such option trade
nullifications because the trade would
not occur at a price that later required
nullification due to the unavailability of
the stock/ETF price. The Exchange
further believes that the certainty
associated with such electronic
calculations and processing will
continue to be an attractive feature for
Members transacting Complex Orders
with a stock or ETF component.
Likewise, Phlx does not have a rule for
options trade nullification for similar
transactions. Phlx reasoned in its
proposal to similarly use an affiliate to
execute the stock or ETF component of
a Complex Order that because such
execution would be immediate, with
Phlx’s system calculating the stock or
ETF price based on the net debit/credit
price of the Complex Order while also
calculating and determining the
appropriate options price(s), that it
believed that its approach would not
require Phlx to later nullify options
trades if the stock price cannot be
achieved.
37
The Exchange also believes that it is
appropriate to construct a program
wherein its affiliate, NES, is the
exclusive conduit for the execution of
the stock/ETF component of a Complex
Order under this proposal, similar to
Phlx.
38
As a practical matter, complex
order programs on other exchanges
involve specific arrangements with a
broker-dealer to facilitate prompt
execution. NES does not intend to
charge a fee for the execution of the
stock/ETF component of a Complex
Order.
39
The Exchange believes that is
consistent with the Act for such an
arrangement to involve one broker-
dealer, even one that is an affiliate,
particularly to offer the aforementioned
benefits of a prompt, electronic
execution for Complex Orders involving
stock/ETFs. Specifically, offering a
seamless, automatic execution for both
the options and stock/ETF components
of a Complex Order is an important
feature that should promote just and
equitable principles of trade and remove
impediments to and perfect the
mechanism of a free and open market
and a national market system by deeply
enhancing the sort of complex order
processing available on options
exchanges today. Nevertheless,
Members could, in lieu of this proposed
arrangement with NES, choose, instead,
the following alternatives: (i) avoid
using Complex Orders that involve
stock/ETFs, (ii) use a trading floor to
execute Complex Order with stock, or
(iii) go to another options venue, several
of which offer a similar feature.
40
In line with the proposed
amendments, the Exchange proposes to
remove language within Supplementary
Material .02 of Options 3, Section 14
which states,
Members may also indicate preferred
execution brokers, and such preferences will
determine order routing priority whenever
possible. A trade of a Stock-Option Order or
a Stock-Complex Order will be automatically
cancelled if market conditions prevent the
execution of the stock or option leg(s) at the
prices necessary to achieve the agreed upon
net price. When a Stock-Option Order or
Stock-Complex Order has been matched with
another Stock-Option Order or Stock-
Complex Order that is for less than the full
size of the Stock-Option Order or Stock-
Complex Order, the full size of the Stock-
Option Order or Stock Complex Order being
processed by the stock execution venue will
be unavailable for trading while the order is
being processed.
As noted herein, Members will no
longer be able to indicate preferred
execution brokers which makes the first
sentence within Supplementary
Material .02 of Options 3, Section 14
unnecessary. The second sentence
within Supplementary Material .02 of
Options 3, Section 14 is being removed
because the Exchange is replacing this
rule text with proposed Options 3,
Section 16(d) and (e) which describes
price checks that will be performed for
Stock-Option Orders or Stock-Complex
Orders by NES. The third sentence
within Supplementary Material .02 of
Options 3, Section 14 is being removed
because the Exchange’s proposal to
replace the third-party broker with NES
will remove a delay that currently exists
in the workflow to process a Stock-
Option Order or Stock-Complex Order.
NES will perform the stock leg
validations proposed in Options 3,
Sections 16(d) and (e) for Stock-Option
Orders or Stock-Complex Orders.
Thereafter, NES would print the stock
components onto the Trade Reporting
Facility and ISE would print the option
component executions. This new
workflow in which the stock or ETF
component of the order will be routed
to NES for execution instead of a third-
party broker-dealer will obviate the
possibility that the stock execution
venue will be unavailable for trading
while the order is being processed
because ISE would no longer be reliant
on a third-party broker-dealer to
conduct the appropriate checks and,
thereafter, relay information to ISE.
With the proposed change, NES, the
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41
The derived NBBO for the Stock Option
Strategy was calculated as follows: Stock Option
Strategy Derived Bid =
1
4
(2.00 × 8) +
1
4
(50) = 16.50
and Stock Option Strategy Derived Offer =
1
4
(2.10
× 8) +
1
4
(50.20) = 16.75. The Stock Option Strategy
is normalized by ISE’s System by dividing the legs
by the greatest common denominator of four (4).
The normalized ratio was applied to the option leg
price and stock leg price to determine the net price
strategy.
42
See Supplementary Material .06 to ISE Options
3, Section 14.
43
The Trade Value Allowance is the percentage
difference between the expected notional value of
a trade and the actual notional value of the trade.
See Supplementary Material .03 of ISE Options 3,
Section 14.
44
MRX issued such an alert indicating it would
when it decommissioned its Trade Value
Allowance. See Options Trader Alert #2023–3. See
also SR–MRX–2023–10. No MRX Member
expressed concern with this functionality being
eliminated.
Exchange’s affiliate, would conduct the
necessary price checks and would make
Stock-Option Orders or Stock-Complex
Orders available to ISE in the same way
that it does for Phlx. The Exchange
believes that this new workflow would
increase the efficiency of the entire
transaction, including stock component
validation and reporting.
Complex Opening Process
Similarly, the Exchange proposes to
amend Supplementary Material .04 to
Options 3, Section 14 to provide that
Stock-Option Strategies and Stock-
Complex Strategies will open pursuant
to the Complex Opening Price
Determination described in
Supplementary Material .05 to Options
3, Section 14 instead of the Complex
Uncrossing Process described in
Supplementary Material .06(b) to
Options 3, Section 14. Similar to the
discussion above, the applicable price
checks for the stock/ETF component of
a Stock-Option Strategy and Stock-
Complex Strategy are being performed
by a third-party broker-dealer, which
causes a delay that prevents these
strategies from participating in the
Complex Opening Process. With the
proposed change to utilize NES in lieu
of a third-party broker-dealer, Stock-
Option Strategies and Stock-Complex
Strategies would be able to participate
in the Complex Opening Process
because there would be no delay as
NES, the Exchange’s affiliate, would
conduct the necessary checks (i.e. the
price checks Options 3, Section 16(d)
and (e)). Thereafter, NES would make
Stock-Option Order or Stock-Complex
Order available to participate in the
Complex Opening Process.
For example, assume that an
underlying equity is in a Regulation
SHO State, the underlying equity
component is open on the primary
underlying market, and the following
strategy is created prior to the option leg
being opened on ISE:
D Assume Stock Option Strategy: Buy 8
puts and buy 100 shares
D Stock Leg NBBO: 50.00 × 50.20
D Option leg opens on ISE and the NBBO
is 2.00 × 2.10
D Stock-Option Strategy derived NBBO:
16.50 × 16.75
41
D Firm A Customer Stock-Option Order
to buy 5 strategies for 16.50 arrives
D Firm B Stock-Option Order to buy 5
strategies for 16.50 arrives
D Firm C Stock-Option Order to sell 7
strategies for 16.50 arrives with
instructions to short the stock
component
D Firm D Stock-Option Order to sell 3
strategies for 16.50 arrives with
instructions to Sell the Stock
component
In the above scenario, only Firm A
(buying 5 strategies) and Firm D (not
shorting 3 strategies) can actually trade
at the Opening Price despite it
appearing there is a fully matched cross.
Firm C (selling 7 strategies) cannot trade
because the underlying is in a
Regulation SHO state and the only price
the stock leg can be matched at, is on
the National Best Bid, which is not a
permissible price to short sell for an
underlying in a Regulation SHO state.
ISE does not attempt to match Stock-
Option Orders and Stock-Complex
Orders during the Complex Opening
Price Determination because the
Exchange cannot ensure that all parties
in the cross are able to match at the
proposed stock leg price because the
checks are performed by a third party.
If the third party is unable to match part
of the cross, executions on the options
components are busted, therefore the
Exchange does not consider Stock-
Option Orders and Stock-Complex
Orders in the Complex Opening.
With this proposal, the price checks
would be conducted by NES, an affiliate
of the Exchange. Once ISE determines
the stock and option leg prices, ISE will
communicate the stock price and
quantity to NES, who will conduct the
necessary price checks. The proposed
workflow provides efficiencies for the
stock component execution as compared
to the current process which involves a
third-party broker-dealer. With this
process, ISE would be able to process
the option component and match the
strategies during the Complex Opening
Price Determination without the need
for ISE to await a response from a third-
party broker-dealer.
The ability to attempt this match
opportunity earlier in the Complex
Opening Price Determination is critical
because the market can move between
the Complex Opening Price
Determination and the Complex
Uncrossing Process
42
in such a way that
the trade could no longer be possible.
By way of example, if the Stock
Component adjusts to 53.00 × 54.00
before this strategy can attempt a
Complex Uncrossing Process, the Stock
Option Strategy derived NBBO would
be 17.25 × 17.70 and there would no
longer be a match possible for the
interest willing to buy and sell at 16.50.
If the System instead had utilized the
Opening Price Determination, the
execution would have occurred in this
instance.
Trade Value Allowance
Trade Value Allowance is a
functionality that allows Stock-Option
Strategies and Stock-Complex Strategies
to trade outside of their expected
notional trade value by a specified
amount (the ‘‘Trade Value
Allowance’’).
43
After calculating the
appropriate options match price for a
Stock-Option or Stock-Complex Order
expressed in a valid one cent increment,
the System calculates the corresponding
stock match price rounded to the
increment supported by the equity
market.
The Exchange no longer desires to
offer the Trade Value Allowance. The
Exchange will issue an Options Trader
Alert indicating its intent to
decommission this functionality to
provide notice to Members.
44
Very few
Members have opted to utilize the Trade
Value Allowance and even a smaller
percentage of trades were subject to the
allowance. Phlx does not have a similar
allowance today. In an effort to
harmonize its complex order
functionality across its Nasdaq affiliated
markets, the Exchange proposes to no
longer offer the Trade Value Allowance
functionality. With the proposed change
to utilize NES, the Exchange would
determine the stock leg prices, and NES
would be able to execute the stock leg
at two different prices to ensure that the
net price of the execution is within the
notional value of the original order, thus
eliminating the need for the allowance.
Options 3, Section 7
The Exchange proposes to make a
clarifying change to ISE Options 3,
Section 7, Types of Orders and Order
and Quote Protocols. The Exchange
proposes to amend ISE Options 3,
Section 7(t) related to QCC with Stock
Orders to make clear that QCC with
Stock Orders may only be entered
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45
‘‘Financial Information eXchange’’ or ‘‘FIX’’ is
an interface that allows Members and their
Sponsored Customers to connect, send, and receive
messages related to orders and auction orders to the
Exchange. Features include the following: (1)
execution messages; (2) order messages; (3) risk
protection triggers and cancel notifications; and (4)
post trade allocation messages. See Supplementary
Material .03(a) to Options 3, Section 7.
46
‘‘Nasdaq Precise’’ or ‘‘Precise’’ is a front-end
interface that allows Electronic Access Members
and their Sponsored Customers to send orders to
the Exchange and perform other related functions.
Features include the following: (1) order and
execution management: enter, modify, and cancel
orders on the Exchange, and manage executions
(e.g., parent/child orders, inactive orders, and post-
trade allocations); (2) market data: access to real-
time market data (e.g., NBBO and Exchange BBO);
(3) risk management: set customizable risk
parameters (e.g., kill switch); and (4) book keeping
and reporting: comprehensive audit trail of orders
and trades (e.g., order history and done away trade
reports). See Supplementary Material .03(d) to
Options 3, Section 7.
47
‘‘Ouch to Trade Options’’ or ‘‘OTTO’’ is an
interface that allows Members and their Sponsored
Customers to connect, send, and receive messages
related to orders, auction orders, and auction
responses to the Exchange. Features include the
following: (1) options symbol directory messages
(e.g., underlying and complex instruments); (2)
system event messages (e.g., start of trading hours
messages and start of opening); (3) trading action
messages (e.g., halts and resumes); (4) execution
messages; (5) order messages; (6) risk protection
triggers and cancel notifications; (7) auction
notifications; (8) auction responses; and (9) post
trade allocation messages. See Supplementary
Material .03(b) to Options 3, Section 7.
48
See Options 7, Section 6, Ports and Other
Services.
49
QCC with Stock Orders are processed in
accordance with Options 3, Section 12(e).
50
The Member’s allowable order rate for the
Order Entry Rate Protection is comprised of the
parameters defined in (1) to (3), while the allowable
contract execution rate for the Order Execution Rate
Protection is comprised of the parameters defined
in (4) and (5).
through FIX
45
and Precise.
46
ISE has 3
order entry protocols, FIX, OTTO
47
and
Precise. Members only require one order
entry protocol to enter orders onto ISE.
While Members only require one order
entry port to submit orders into ISE, the
Exchange offers Members a choice
between 2 different types of ports to
utilize to submit QCC with Stock
Orders.
48
All Members would have the
ability to enter QCC with Stock Orders
through FIX or Precise. Members are not
required to subscribe to both FIX and
Precise. QCC with Stock Orders may not
be entered through OTTO.
Additionally, the Exchange proposes
to amend Supplementary Material .02(d)
to Options 3, Section 7 related to
Immediate-or-Cancel Orders. The
Exchange proposes to specifically
amend Supplementary Material
.02(d)(3) to Options 3, Section 7 to add
QCC with Stock Orders and Complex
QCC with Stock Orders to the list of
order types that have a Time in Force
or ‘‘TIF’’ of Immediate-or-Cancel or
‘‘IOC’’. Because QCC with Stock Orders
and Complex QCC with Stock Orders
have a TIF of IOC, these order types will
either execute on entry or cancel.
Adding these order types to
Supplementary Material .02(d)(3) to
Options 3, Section 7 will make this
clear.
Options 3, Section 12
The Exchange proposes to amend
Options 3, Section 12(e)(4) to clarify the
manner in which a Member may submit
a QCC with Stock Order.
49
Today,
Options 3, Section 12(e)(4) provides
that, ‘‘QCC with Stock Orders can be
entered with separate prices for the
stock and options components, or with
a net price for both.’’ The Exchange
proposes to amend this rule text to
instead reflect the current manner in
which QCC with Stock Orders may be
entered into ISE’s System. The proposed
rule text would provide, ‘‘QCC with
Stock Orders must be entered with a net
price for the stock and options
components through FIX. Separate
prices for the stock and options
components, or a net price for both may
be entered through Precise. The System
will calculate the individual component
prices.’’ The current language of
Options 3, Section 12(e)(4) is not correct
because it does not specify the
protocols. The Exchange proposes to
amend this language to make clear the
current System functionality. The
proposed language does not result in a
change to the Exchange’s System. As
noted above, QCC with Stock Orders
may not be entered through OTTO. The
Exchange notes that requiring QCC with
Stock Orders to be submitted through
FIX or Precise is consistent with
proposed Options 3, Section 7(t) which
requires Members to enter QCC Orders
through FIX or Precise. Additionally,
the Exchange is specifying how the
System calculates the individual
component prices. Members may elect
to enter orders through either FIX or
Precise. Members do not need to
subscribe to both protocols.
Options 3, Section 15
The Exchange proposes to amend its
Market Wide Risk Protection within
Options 3, Section 15(a)(1)(C) to add
certain additional information
concerning the current Market Wide
Risk Protection along with new
language that would apply as a result of
the proposed changes to stock-tied
functionality.
Today, the Exchange offers a Market
Wide Risk Protection which is
comprised of an ‘‘Order Entry Rate
Protection’’ which protects Members
against entering orders at a rate that
exceeds predefined thresholds, and an
‘‘Order Execution Rate Protection,’’
which protects Members against
executing orders at a rate that exceeds
their predefined risk settings. Both of
these risk protections are detailed in the
‘‘Market Wide Risk Protection.’’ Today,
pursuant to the proposed Market Wide
Risk Protection rule, the Exchange’s
System maintains one or more counting
programs for each Member that count
orders entered and contracts traded on
ISE. Members can use multiple counting
programs to separate risk protections for
different groups established within the
Member.
ISE Options 3, Section 15(a)(1)(C)
currently states, that the counting
programs will maintain separate counts,
over rolling time periods specified by
the Member for each count of:
(1) the total number of orders entered in
the regular order book; (2) the total number
of orders entered in the complex order book
with only options legs; (3) the total number
of orders entered in the complex order book
with both stock and options legs; (4) the total
number of contracts traded in regular orders;
and (5) the total number of contracts traded
in complex orders with only options legs.
Today, the counting programs
maintain separate counts over rolling
time period for the total number of
orders entered in the regular order book,
complex order book with only options
legs; and the complex order book with
both stock and options legs.
Additionally, the risk protection counts
the total number of contracts traded in
regular orders and Complex Orders with
only options legs.
50
The Exchange
proposes to amend ISE Options 3,
Section 15(a)(1)(C) within (2) through
(5) to use the defined terms Stock-
Option Order, Stock-Complex Order,
and Complex Option Order. The
Exchange notes that the stock portion of
QCC Orders, Complex Qualified QCC
Orders, QCC with Stock Orders, and
Complex QCC with Stock Orders are not
counted in (3) because ISE’s System
does not handle the stock portion of
these orders. ISE would not represent
the stock leg through NES as it would
for other Stock-Option Orders and
Stock-Complex Orders as described
herein. The Exchange notes that QCC
Orders, Complex Qualified QCC Orders,
QCC with Stock Orders, and Complex
QCC with Stock Orders are considered,
where applicable, in Options 3, Section
15(a)(1)(C)(1), (2), (4) and (5).
Today, the Exchange does not include
a complex execution count for Complex
Orders with a stock component as the
execution counts maintained by the
Order Execution Rate Protection are
based solely on options contracts
traded. At this time, as a result of
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51
15 U.S.C. 78f(b).
52
15 U.S.C. 78f(b)(5).
53
As proposed, the execution price of Stock-
Option Strategies and Stock-Complex Strategies
must be within the high-low range for the day in
that stock at the time the Complex Order is
processed and within a certain price from the
current market pursuant to Options 3, Section 16(a),
as determined by the Exchange.
54
See supra note 19.
55
See supra note 13.
amending the stock-tied functionality,
the Exchange proposes to add a new
number (6) to ISE Options 3, Section
15(a)(1)(C) to note that the counting
programs will maintain separate counts,
over rolling time periods specified by
the Member for each count, of the total
number of Stock-Option Order and
Stock-Complex Order contracts traded.
The Exchange is adding new number (6)
because it is introducing NES in place
of a third-party broker-dealer. As a
result, the Exchange will guarantee a
stock-tied execution. Today, the stock-
tied execution is not guaranteed by the
third-party broker-dealer. Because of the
ability to guarantee the execution, the
Exchange is amending Options 3,
Section 15(a)(1)(C) to add (6) to the list
of contracts counted by the Market Wide
Risk Protection because the Exchange is
able to perform the risk check since NES
will be handling the stock for Stock-
Option Orders and Stock-Complex
Orders. This risk protection will reduce
risk associated with system errors or
market events that may cause Members
to send a large number of orders, or
receive multiple, automatic executions,
before they can adjust their exposure in
the market. Without adequate risk
management tools, such as those
proposed in this filing, Members could
reduce the amount of order flow and
liquidity that they provide on ISE. As a
result, the functionality promotes just
and equitable principles of trade.
Finally, the Exchange proposes to add
the defined term ‘‘DNTT’’ to the end of
Options 3, Section 16(a) to define the
instruction on a Complex Order to price
each leg of the Complex Order to be
executed equal to or better than the
NBBO for the options series or any stock
component, as applicable as a ‘‘Do-Not-
Trade-Through’’ or ‘‘DNTT’’. This is not
a substantive amendment, rather this
change is meant to assist Members in
locating this functionality within ISE’s
rules.
Implementation
The Exchange intends to begin
implementation of the proposed rule
change prior to December 20, 2024. The
implementation would commence with
a limited symbol migration and
continue to migrate symbols over
several weeks. The Exchange will issue
an Options Trader Alert to Members to
provide notification of the symbols that
will migrate and the relevant dates.
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,
51
in general, and furthers the
objectives of Section 6(b)(5) of the Act,
52
in particular, in that it is designed to
promote just and equitable principles of
trade and to protect investors and the
public interest for the reasons discussed
below.
Stock-Related Strategies and
Elimination of Trade Value Allowance
Stock-Tied Functionality
The Exchange’s proposal to amend its
stock-tied functionality as described
above promotes just and equitable
principles of trade and removes
impediments to and perfect the
mechanism of a free and open market
and a national market system because it
will permit the Exchange to streamline
its stock-tied processes as discussed
more fully below. Further, the
amendments to require that a Member
desiring to execute an order with stock
or an ETF component enter into a
brokerage agreement with NES, a
broker-dealer owned and operated by
Nasdaq, Inc., protects investors and the
general public because Members will be
required to comply with NES’
requirements and those requirements
will be uniform for all ISE Members.
The proposed stock-tied functionality is
identical to Phlx Options 3, Sections
13(b)(10)(ii) and 14(a)(i) with respect to
utilizing NES to process and report
stock-tied functionality with two
differences.
First, while both Phlx and ISE have
certain risk protections for complex
orders, they differ. With respect to ISE,
the execution price of the Complex
Order must be within a certain price
from the current market, as determined
by the Exchange pursuant to Options 3,
Section 16(a). Specifically, today, ISE
Options 3, Section 16(a) provides that
the System will not permit any leg of a
complex strategy to trade-through the
NBBO for the series or any stock
component by a configurable amount
calculated as the lesser of (i) an absolute
amount not to exceed $0.10, and (ii) a
percentage of the NBBO not to exceed
500%, as determined by the Exchange
on a class, series or underlying basis.
Phlx Options 3, Section 16(b)(i)
describes Phlx’s ACE Parameter which
defines a price range outside of which
a complex order will not be executed.
On Phlx, a complex order to sell is not
executed at a price that is lower than the
cNBBO bid by more than the ACE
Parameter. Conversely, on Phlx, a
complex order to buy will not be
executed at a price that is higher than
the cNBBO offer by more than the ACE
Parameter. While ISE’s and Phlx’s price
checks differ, both markets seek to
prevent executions from occurring at
certain prices and at certain percentages
from the NBBO. The Exchange believes
that this proposal promotes just and
equitable principles of trade because
NES would apply the same price check
for stock-tied functionality that was
being applied previously by a third
party that executed the stock or ETF
component of a complex strategy on
behalf of ISE Members. Additionally,
ISE Members would continue to be
subject to the same price check which
is applied to all Complex Orders
executed on ISE.
Second, ISE and Phlx differ with
respect to the manner in which their
systems handle Stock-Option Strategies
and Stock-Complex Strategies that
would execute against interest on the
Complex Order Book at a price that do
not meet price checks as provided for in
proposed Options 3, Section 16(d)
53
or
do not meet Regulation SHO provisions
as provided for in proposed Options 3,
Section 16(e)
54
are handled by their
respective systems. As proposed, ISE
will hold orders on the Complex Order
book that cannot be executed because of
Regulation SHO or price check
restrictions, unless the Member requests
the order to be cancelled. If an ISE
Member elects to have the order held on
the Complex Order Book, the order
would await other matching
opportunities, otherwise at the
Member’s election the order would be
returned to the Member. In contrast,
Phlx only provides for a cancellation of
the order. The Exchange believes that
this proposal promotes just and
equitable principles of trade because
ISE’s proposed approach would provide
the Member with optionality as to the
handing of the order. The Exchange
believes providing the choice to have
the order held on the Complex Order
Book provides Members with an
opportunity for an execution.
NES, an affiliate of the Exchange and
a registered broker-dealer, has been
approved by the Commission to become
a Member of the Exchange and perform
inbound routing on behalf of the
Exchange.
55
Additionally, NES is
permitted to route outbound orders
either directly or indirectly through a
third party routing broker-dealer to
other market centers and perform other
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56
See supra note 14.
57
See Securities Exchange Act Release No. 63777
(January 26, 2011), 76 FR 5630 (February 1, 2011)
(SR-Phlx-2010–157) (Order Approving a Proposed
Rule Change, as Modified by Amendment Nos. 1
and 2, Relating to Complex Orders) (‘‘Phlx Complex
Order Approval’’). NES assumed the stock
execution functionalities that were previously
performed by NOS. Phlx subsequently filed to
permit both inbound and outbound orders to be
routed through NES instead of Nasdaq Options
Services LLC (‘‘NOS’’). See Securities Exchange Act
Release No. 71417 (January 28, 2014), 79 FR 6253
(February 3, 2014) (SR-Phlx-2014–04) (Notice of
Filing and Immediate Effectiveness of Proposed
Rule Change to Outbound Routing) and 71416
(January 28, 2014), 79 FR 6244 (February 3, 2014)
(SR-Phlx-2014–05) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Inbound
Routing of Options Orders).
58
See proposed Supplementary Material .08(b) to
Options 3, Section 11, proposed Options 3, Section
12(b)(2), proposed Supplementary Material .09(b) to
Options 3, Section 13, proposed Supplementary
Material .02 to Options 3, Section 14 and proposed
Options 3, Section 16(d). See also Phlx Options 3,
Section 13(b)(10)(ii), Options 3, Section 16(b).
59
See supra note 20.
60
NES is subject to FINRA Rule 3110, which
generally requires that the policies and procedures
and supervisory systems be reasonably designed to
achieve compliance with applicable securities laws
and regulations and with applicable FINRA rules,
including those relating to the misuse of material
non-public information.
61
See supra note 21.
62
See supra note 23.
63
See supra note 24.
64
See Phlx Options 3, Sections 13(b)(10) and
14(a)(i).
65
The six requirements include: (1) At least one
component order is in an NMS stock: The stock/
ETF component must be an NMS stock, which is
validated by the System; (2) all components are
effected with a product or price contingency that
either has been agreed to by the respective
counterparties or arranged for by a broker-dealer as
principal or agent: A Complex Order, by definition
consists of a single net/debit price and this price
contingency applies to all the components of the
order, such that the stock price computed and sent
to NES allows the stock/ETF order to be executed
at the proper net debit/credit price based on the
execution price of each of the option legs, which
is determined by the ISE System; (3) the execution
of one component is contingent upon the execution
of all other components at or near the same time:
Once a Complex Order is accepted and validated by
the System, the entire package is processed as a
single transaction and each of the option leg and
stock/ETF components are simultaneously
processed; (4) the specific relationship between the
component orders (e.g., the spread between the
prices of the component orders) is determined at
the time the contingent order is placed: Complex
Orders, upon entry, must have a size for each
component and a net debit/credit, which the
System validates and processes to determine the
ratio between the components; an order is rejected
if the net debit/credit price and size are not
provided on the order; (5) the component orders
bear a derivative relationship to one another,
represent different classes of shares of the same
issuer, or involve the securities of participants in
mergers or with intentions to merge that have been
announced or since cancelled: under this proposal,
the stock/ETF component must be the underlying
security respecting the option legs, which is
validated by the System; and (6) the transaction is
fully hedged (without regard to any prior existing
position) as a result of the other components of the
contingent trade: Under this proposal, the ratio
between the options and stock/ETF must be a
conforming ratio (8 contracts per 100 shares), which
the System validates, and which under reasonable
risk valuation methodologies, means that the stock/
ETF position is fully hedged.
66
See Supplementary Material .07 to Options 3,
Section 14.
67
17 CFR 242.200 et seq.
68
The Exchange also accept short sell exempt
orders as described herein.
functions regarding the cancellation of
orders and the maintenance of a NES
error account.
56
The functions
performed by NES on Phlx today are
identical to the functions that ISE
proposes for NES to perform for ISE
Members.
57
Identical to Phlx, after ISE’s
System determines that a Complex
Order is possible and identifies the
prices for each component of such
Complex Order, ISE will electronically
communicate the stock or ETF
component of the Complex Order to
NES for execution.
58
NES, acting as agent for the orders to
buy and sell the underlying stock or
ETF, will execute the orders in the OTC
market and will handle the orders
pursuant to applicable rules regarding
equity trading, including the rules
governing trade reporting, trade-
throughs, and short sales. Today, this
function is performed by a third-party
broker-dealer that executes the stock or
ETF component of a complex strategy
on behalf of ISE Members. As proposed,
this structure will promote just and
equitable principles of trade because
NES will be responsible for the proper
execution, trade reporting, and
submission to clearing of the underlying
stock or ETF component of a Complex
Order.
59
Furthermore, today, NES is
responsible for compliance with FINRA
rules generally and is subject to
examination by FINRA.
60
Finally, today,
NES has in place policies related to
confidentiality and the potential for
informational advantages relating to its
affiliates, intended to protect against the
misuse of material nonpublic
information.
61
In particular, NES will
have in place policies and procedures
designed to prevent the misuse of
material non-public information related
to stock-tied executions which will
protect investors and the public interest.
NES only receives information about the
stock or ETF portion of the order from
the Exchange. As mentioned herein,
today, NES is responsible for the proper
execution, trade reporting, and
submission to clearing of the underlying
stock or ETF component of a Complex
Order on Phlx. ISE will adopt identical
policies and procedures for its stock-
tied functionality as are in place on Phlx
today.
In addition, the execution and
reporting of the stock/ETF piece will
occur otherwise than on ISE or any
other exchange, and will be handled by
NES pursuant to applicable rules
regarding equity trading,
62
including the
rules governing trade reporting, trade-
throughs and short sales. The
Exchange’s proposal also promotes just
and equitable principles of trade as NES
will report the trades to the Trade
Reporting Facility.
63
Further, all ISE
Members may execute stock-tied
transactions. All stock-tied transactions
will have the stock/ETF component of a
Complex Order, once executed, properly
processed for trade reporting purposes.
Phlx has identical rules for processing
and reporting.
64
With respect to trade-throughs, the
Exchange believes that the stock/ETF
component of a Complex Order is
eligible for the Qualified Contingent
Trade Exemption from Rule 611(a) of
Regulation NMS. The Exchange believes
that the stock/ETF portion of a Complex
Order under this proposal complies
with all six requirements of the
Qualified Contingent Trade
Exemption.
65
In order to promote just
and equitable principles of trade, ISE’s
System will validate compliance with
each requirement such that any matched
order received by NES under this
proposal has been checked for
compliance with the exemption.
Members may only submit Complex
Orders with a stock/ETF component if
such orders comply with the Qualified
Contingent Trade Exemption.
66
Members submitting such Complex
Orders with a stock/ETF component
represent that such orders comply with
the Qualified Contingent Trade
Exemption. Thus, the Exchange believes
that Complex Orders consisting of a
stock/ETF component will comply with
the exemption and that ISE’s System
will validate such compliance to assist
NES in carrying out its responsibilities
as agent for these orders.
With respect to short sale regulation,
the proposed handling of the stock/ETF
component of a Complex Order under
this proposal should not raise any issues
of compliance with the currently
operative provisions of Regulation
SHO
67
and therefore promote just and
equitable principles of trade. When a
Complex Order has a stock/ETF
component, Members must indicate,
pursuant to Regulation SHO, whether
that order involves a long or short sale.
The System will accept Complex Orders
with a stock/ETF component marked to
reflect either a long or short position;
specifically, orders not marked as buy,
sell or sell short will be rejected by ISE’s
System.
68
The System will
electronically deliver the stock/ETF
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69
See supra note 30.
70
See proposed Options 3, Section 16(e). In
contrast, Complex Orders in an auction mechanism
that cannot be executed in accordance with
Regulation SHO will be cancelled back and will not
rest on the Complex Order Book as provided in
Supplementary Material .08 to Options 3, Section
11 and Supplementary Material .09 to Options 3,
Section 13.
71
See supra note 35.
72
Similar to other order types, the Member may
elect to enter the order as an Immediate-or-Cancel
to avoid resting on the order book or as Day order
which could rest on the order book.
73
A Complex PIM Order is an order entered into
the Complex Price Improvement Mechanism as
described in Options 3, Section 13(e). See ISE
Options 3, Section 14(b)(18).
74
A Complex Facilitation Order is an order
entered into the Complex Facilitation Mechanism
as described in Options 3, Section 11(c). See ISE
Options 3, Section 14(b)(16).
75
A Complex SOM Order is an order entered into
the Complex Solicited Order Mechanism as
described in Options 3, Section 11(e). See ISE
Options 3, Section 14(b)(17).
76
See Options 3, Section 12(b).
77
See Options 3, Section 12(d).
78
Supplementary Material .01 to Options 3,
Section 22 applies to Complex Customer Cross
Orders.
79
See supra note 39. See proposed
Supplementary Material .02 to ISE Options 3,
Section 14. In addition to amending Supplementary
Material .02 to ISE Options 3, Section 14 to require
Members to enter into a brokerage agreement, the
Exchange proposes to make conforming changes to
Supplementary Material .02 to ISE Options 3,
Section 14 to delete provisions that allow Members
to enter into a brokerage agreement with one or
more brokers to route stock orders. See MRX
Supplementary Material .02 to ISE Options 3,
Section 14.
80
See supra note 40.
81
See supra note 41.
82
The second and third sentences of
Supplementary Material .02 of ISE Options 3,
Continued
component to NES for execution.
Simultaneous to the options execution
on ISE’s System, NES will execute and
report the stock/ETF component, which
will contain the long or short indication
as it was delivered by the Member to
ISE’s System. Accordingly, NES, as a
trading center under Rule 201, will be
compliant with the requirements of
Regulation SHO. Of course, broker-
dealers, including both NES and the
Members submitting orders to ISE with
a stock/ETF component, must comply
with Regulation SHO. NES’ compliance
team updates, reviews and monitors
NES’ policies and procedures including
those pertaining to Regulation SHO on
an annual basis.
Further, proposed Options 3, Section
16(e) provides that when the short sale
price test in Rule 201 of Regulation
SHO
69
is triggered for a covered
security, NES will not execute a short
sale order in the underlying covered
security component of a Complex Order
if the price is equal to or below the
current national best bid. However, NES
will execute a short sale order in the
underlying covered security component
of a Complex Order if such order is
marked ‘‘short exempt,’’ regardless of
whether it is at a price that is equal to
or below the current national best bid.
If NES cannot execute the underlying
covered security component of a
Complex Order in accordance with Rule
201 of Regulation SHO, the Exchange
will hold the Complex Order on the
Complex Order Book, if consistent with
Member instructions (Members may
always elect to cancel the order).
70
The
order may execute at a price that is not
equal to or below the current national
best bid. This proposed rule is similar
to Phlx Options 3, Section 16(b) except
that unlike Phlx, ISE will not cancel
back the Complex Order to the entering
Member unless the Member requests
that the order be cancelled back. The
proposal is identical to MRX Options 3,
Section 16(b).
For these reasons, the processing of
the stock/ETF component of a Complex
Order under this proposal will comply
with applicable rules regarding equity
trading, including the rules governing
trade reporting, trade-throughs and
short sales and is consistent with the
Act. NES’s responsibilities respecting
these equity trading rules will be
documented in NES’s written policies
and procedures. NES’ compliance team
updates, reviews and monitors NES’
policies and procedures. NES is
regulated by FINRA and as such, NES
policies and procedures are subject to
review and examinations by FINRA.
Further, as part of the execution of the
stock/ETF component, the Exchange
will ensure that the execution price is
within the intra-day high-low range for
the day in that stock at the time the
Complex Order is processed and within
a certain price range from the current
market pursuant to Options 3, Section
16(a) which will protect investors and
the general public.
71
If the stock price is
not within these parameters, the
Complex Order is not executable and
would be held on the order book or
cancelled, consistent with Member
instructions.
72
Today, the third-party
broker-dealer ensures the execution
price is within the intra-day high-low
range. With the transition to NES, the
Exchange would commence performing
this check. Members who transact stock-
tied functionality on ISE would
therefore continue to be subject to the
same execution price check with NES as
today. This intra-day high-low range
check does not occur for certain
Complex Orders auctions (e.g. Complex
PIM Orders,
73
Complex Facilitation
Orders
74
and Complex SOM Orders
75
)
and also does not occur for Complex
Customer Cross Orders
76
or Complex
QCC Orders.
77
The Exchange believes
that this exception for auctions is
consistent with the Act because these
auctions have their own rules for
auction eligibility, entry checks, and
offer price improvement all of which are
distinguishable from execution of orders
on the Complex Order Book. Complex
Customer Cross Orders are
automatically executed upon entry so
long as: (i) the price of the transaction
is at or within the best bid and offer for
the same complex strategy on the
Complex Order Book; (ii) there are no
Priority Customer Complex Orders for
the same strategy at the same price on
the Complex Order Book; and (iii) the
options legs can be executed at prices
that comply with the provisions of
Options 3, Section 14(c)(2). Complex
Customer Cross Orders will be rejected
if they cannot be executed.
78
Finally, the Exchange also believes
that it is appropriate to construct a
program wherein its affiliate, NES, is the
exclusive conduit for the execution of
the stock/ETF component of a Complex
Order under this proposal, identical to
Phlx and MRX.
79
As a practical matter,
complex order programs on other
exchanges involve specific
arrangements with a broker-dealer to
facilitate prompt execution. NES does
not intend to charge a fee for the
execution of the stock/ETF component
of a Complex Order.
80
The Exchange
believes that is consistent with the Act
for such an arrangement to involve one
broker-dealer, even one that is an
affiliate, particularly to offer the
aforementioned benefits of a prompt,
electronic execution for Complex Orders
involving stock/ETFs. Specifically,
offering a seamless, automatic execution
for both the options and stock/ETF
components of a Complex Order is an
important feature that should promote
just and equitable principles of trade
and remove impediments to and perfect
the mechanism of a free and open
market and a national market system by
deeply enhancing the sort of complex
order processing available on options
exchanges today. Nevertheless,
Members could, in lieu of this proposed
arrangement with NES, choose, instead,
the following alternatives: (i) avoid
using Complex Orders that involve
stock/ETFs, (ii) use a trading floor to
execute Complex Order with stock, or
(iii) go to another options venue, several
of which offer a similar feature.
81
The Exchange’s proposal to remove
the second and third sentences within
Supplementary Material .02 of Options
3, Section 14
82
is consistent with the
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Section 14 states, ‘‘A trade of a Stock-Option Order
or a Stock-Complex Order will be automatically
cancelled if market conditions prevent the
execution of the stock or option leg(s) at the prices
necessary to achieve the agreed upon net price.
When a Stock-Option Order or Stock-Complex
Order has been matched with another Stock-Option
Order or Stock-Complex Order that is for less than
the full size of the Stock-Option Order or Stock-
Complex Order, the full size of the Stock-Option
Order or Stock Complex Order being processed by
the stock execution venue will be unavailable for
trading while the order is being processed.’’
83
See Options 7, Section 6, Ports and Other
Services.
Act in that it protects investors and the
general public because this new
workflow in which the stock or ETF
component of the order will be routed
to NES for execution instead of a third-
party broker-dealer will obviate the
possibility that the stock execution
venue will be unavailable for trading
while the order is being processed
because of the efficiency created in
executing the entire transaction,
including stock component validation
and reporting, without the need for ISE
to utilize a third-party broker-dealer and
await a response from the third-party
broker-dealer. ISE would no longer be
reliant on a third-party broker-dealer to
conduct the appropriate checks and,
thereafter, relay information to ISE.
With the proposed change, NES, the
Exchange’s affiliate, would conduct the
necessary checks and thereafter the
Stock-Option Order or Stock-Complex
Order would be available for execution.
Proposed Options 3, Sections 16(d) and
(e) describe the System price checks that
will be performed for Stock-Option
Orders or Stock-Complex Orders by
NES.
Similarly, the Exchange’s proposal to
amend Supplementary Material .04 to
Options 3, Section 14 to provide that
Stock-Option Strategies and Stock-
Complex Strategies will open pursuant
to the Complex Opening Price
Determination described in
Supplementary Material .05 to Options
3, Section 14, instead of the Complex
Uncrossing Process described in
Supplementary Material .06(b) to
Options 3, Section 14, is consistent with
the Act. Similar to the discussion above,
today the applicable checks for the
stock/ETF component of a Stock-Option
Strategy and Stock-Complex Strategy are
being performed by a third-party broker-
dealer, which causes a delay that
prevents these strategies from
participating in the Complex Opening
Process. With the proposed change to
utilize NES, in lieu of a third-party
broker-dealer, Stock-Option Strategies
and Stock-Complex Strategies would be
able to participate in the Complex
Opening Process as NES, the Exchange’s
affiliate, would conduct the necessary
price checks and would be able to make
Stock-Option Order or Stock-Complex
Order available to participate in the
Complex Opening Process without the
need for ISE to await a response from a
third-party broker-dealer. This
amendment is consistent with the Act as
it serves to protect investors and the
general public by improving the
Exchange’s processes to make Stock-
Option Strategies and Stock-Complex
Strategies subject to the Complex
Opening Price Determination similar to
other order types. The Complex
Opening Process seeks to maximize the
interest which is traded during the
Complex Opening Price Determination
process and deliver a rational price for
the available interest at the opening.
The Complex Opening Price
Determination process maximizes the
number of contracts executed during the
Complex Opening Process and ensures
that residual contracts of partially
executed orders or quotes are at a price
equal to or inferior to the Opening Price.
Trade Value Allowance
The Exchange’s proposal to no longer
offer Trade Value Allowance is
consistent with the Act because very
few Members have opted to utilize the
Trade Value Allowance and even a
smaller percentage of trades were
subject to the allowance. MRX recently
removed its Trade Value Allowance as
described in SR–MRX–2023–10. Phlx
does not have a similar allowance today.
In an effort to harmonize its complex
order functionality across its Nasdaq
affiliated markets, the Exchange
proposes to no longer offer the Trade
Value Allowance functionality. In
addition, the Exchange believes that this
proposal removes impediments to and
perfect the mechanism of a free and
open market and a national market
system because the proposal removes an
allowance that is no longer necessary;
other options exchanges, like Phlx, do
not offer such an allowance. With the
proposed change to utilize NES, the
Exchange would be able to determine
stock leg prices, and NES would be able
to execute the stock leg at two different
prices to ensure that the net price of the
execution is within the notional value of
the original order, thus eliminating the
need for the allowance.
Options 3, Section 7
The Exchange’s proposal to make a
clarifying change to ISE Options 3,
Section 7, Types of Orders and Order
and Quote Protocols is consistent with
the Act. The Exchange proposes to
amend ISE Options 3, Section 7(t)
related to QCC with Stock Orders to
make clear that QCC with Stock Orders
may only be entered through FIX or
Precise. ISE has 3 order entry protocols,
FIX, OTTO and Precise. QCC with Stock
Orders may not be entered through
OTTO. Members only require one order
entry protocol to enter orders onto ISE.
While Members only require one order
entry port to submit orders into ISE, the
Exchange offers Member a choice
between 2 different types of ports to
utilize to submit QCC with Stock
Orders.
83
All Members would have the
ability to enter QCC with Stock Orders
through FIX or Precise. Members are not
required to subscribe to both FIX and
Precise. The Exchange’s proposal to add
rule text to Options 3, Section 7(t) will
clarify the functionality, thereby
protecting investors and the general
public.
Additionally, the Exchange’s proposal
to amend Supplementary Material .02(d)
to Options 3, Section 7 related to
Immediate-or-Cancel Orders is
consistent with the Act. The Exchange
proposes to specifically amend
Supplementary Material .02(d)(3) to
Options 3, Section 7 to add QCC with
Stock Orders and Complex QCC with
Stock to the list of order types that have
a Time in Force or ‘‘TIF’’ of Immediate-
or-Cancel or ‘‘IOC’’. Because QCC with
Stock Orders and Complex QCC with
Stock have a TIF of IOC, these order
types will execute either execute on
entry or cancel. This amendment will
make clear the manner in which the
aforementioned order types trade,
thereby protecting investors and the
general public.
Options 3, Section 12
The Exchange’s proposal to amend
Options 3, Section 12(e)(4) to clarify
that a Member may submit a QCC with
Stock Order with a net price for the
stock and options components through
FIX or Members may submit separate
prices for the stock and options
components, or a net price for both may
be entered through Precise. This
amendment is consistent with the Act
because the amended rule text makes
clear the format in which these orders
may be submitted to the System
depending on the protocol. Today, the
Exchange does not allow FIX to accept
QCC with Stock Orders with separate
prices for the stock and options
components but does permit Members
to do so through Precise. Each exchange
may specify the manner in which
certain order types may be submitted to
an exchange and the format for
submitting those orders. The proposal
protects investors and the general public
by clarifying the manner in which
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84
See supra note 41.
85
See Phlx Options 3, Sections 13(b)(10) and
14(a)(i). See also MRX Supplementary Material
.08(b) to Options 3, Section 11 Options 3, Section
12(b)(2), Supplementary Material .09(b) to Options
3, Section 13, Supplementary Material .02 to
Options 3, Section 14 and Options 3, Section 16(d).
86
Supplementary Material .02 of Options 3,
Section 14 states that, ‘‘Members may also indicate
preferred execution brokers, and such preferences
will determine order routing priority whenever
possible. A trade of a Stock-Option Order or a
Stock-Complex Order will be automatically
cancelled if market conditions prevent the
execution of the stock or option leg(s) at the prices
necessary to achieve the agreed upon net price.
When a Stock-Option Order or Stock-Complex
Order has been matched with another Stock-Option
Order or Stock-Complex Order that is for less than
the full size of the Stock-Option Order or Stock-
Complex Order, the full size of the Stock-Option
Order or Stock Complex Order being processed by
the stock execution venue will be unavailable for
trading while the order is being processed.’’
Members may submit QCC with Stock
Orders. The proposed language does not
result in a change to the Exchange’s
System. As noted above, QCC with
Stock Orders may not be entered
through OTTO. The Exchange notes that
requiring QCC with Stock Orders to be
submitted through FIX or Precise is
consistent with proposed Options 3,
Section 7(t) which requires Members to
enter QCC Orders through FIX or
Precise.
Options 3, Section 15
The Exchange’s proposal to amend its
Market Wide Risk Protection within
Options 3, Section 15(a)(1)(C) to add
certain additional information
concerning the current Market Wide
Risk Protection along with new
language that would apply as a result of
the proposed changes to stock-tied
functionality is consistent with the Act.
The proposed changes to ISE Options 3,
Section 15(a)(1)(C) protect investors and
the public interest by clearly describing
the operation of the Market Wide Risk
Protection by using defined terms.
Proposed ISE Options 3, Section
15(a)(1)(C)(6) adds the total number of
contracts traded in Stock-Option Orders
and Stock-Complex Orders to the
Market Wide Risk Protection. This
change protects investors and the
general public because this risk
protection by expanding the scope of
the Market Wide Risk Protection to
include additional contracts which will
reduce risk associated with system
errors or market events that may cause
Members to send a large number of
orders, or receive multiple, automatic
executions, before they can adjust their
exposure in the market. The Exchange
notes that QCC Orders, Complex
Qualified QCC Orders, QCC with Stock
Orders, and Complex QCC with Stock
Orders are considered, where
applicable, in Options 3, Section
15(a)(1)(C)(1), (2), (4) and (5). Members
will continue to be provided with the
flexibility needed to appropriately tailor
the Market Wide Risk Protection to their
respective risk management needs.
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.
Re-Introduction of Stock-Related
Strategies and Elimination of Trade
Value Allowance
Stock-Tied Functionality
The Exchange’s proposal to amend its
stock-tied functionality does not impose
an intra-market undue burden on
competition as all Members may utilize
the stock-tied functionality and would
be uniformly subject to the requirements
associated with executing a stock-tied
transaction. Also, in lieu of this
proposed arrangement with NES,
Members could choose, instead, the
following alternatives: (i) avoid using
Complex Orders that involve stock/
ETFs, (ii) use a trading floor to execute
Complex Order with stock, or (iii) go to
another options venue, several of which
offer a similar feature.
84
The Exchange’s
proposal to amend its stock-tied
functionality does not impose an inter-
market undue burden on competition as
other options exchanges today may offer
a similar process for handling stock-tied
transactions. Today, Phlx and MRX offer
an identical process for handling stock-
tied transactions.
85
The Exchange’s proposal to remove
rule text from Options 3, Section 14 that
states, ‘‘When a Stock-Option Order or
Stock-Complex Order has been matched
with another Stock-Option Order or
Stock-Complex Order that is for less
than the full size of the Stock-Option
Order or Stock-Complex Order, the full
size of the Stock-Option Order or Stock
Complex Order being processed by the
stock execution venue will be
unavailable for trading while the order
is being processed,’’ does not impose an
undue burden on intra-market
competition because the proposed new
functionality will apply equally to all
Members transacting Complex Orders
on ISE. All Stock-Option Orders and
Stock-Complex Orders will be handled
in the same manner by the System. The
Exchange’s proposal to remove rule text
from Options 3, Section 14 does not
impose an undue burden on inter-
market competition as the scope of this
change is limited to ISE and its
relationship with a broker-dealer
handling the stock component of the
order.
The Exchange’s proposal to remove
the rule text within Supplementary
Material .02 of Options 3, Section 14
86
does not impose an undue burden on
intra-market competition because all
Members will have the ability to use the
new workflow in which the stock or
ETF component of the order will be
routed to NES for execution instead of
a third-party broker-dealer. The
proposed new functionality will apply
equally to all Members transacting
Complex Orders on ISE. All Stock-
Option Orders and Stock-Complex
Orders will be handled in the same
manner by the System. Additionally,
this proposed amendment will not
impose an undue burden on inter-
market competition because all market
participants that direct orders to ISE
will have their orders handled in a
similar manner. The proposed stock-tied
functionality is identical to Phlx
Options 3, Sections 13(b)(10)(ii) and
14(a)(i) with respect to utilizing NES to
process and report the stock or ETF
component of a Complex Order. MRX
Supplementary Material .08(b) to
Options 3, Section 11 Options 3, Section
12(b)(2), Supplementary Material .09(b)
to Options 3, Section 13, Supplementary
Material .02 to Options 3, Section 14
and Options 3, Section 16(d) also permit
MRX to utilize NES to process and
report the stock or ETF component of a
Complex Order.
Similarly, the Exchange’s proposal to
amend Supplementary Material .04 to
Options 3, Section 14 to provide that
Stock-Option Strategies and Stock-
Complex Strategies will open pursuant
to the Complex Opening Price
Determination described in
Supplementary Material .05 to Options
3, Section 14, instead of the Complex
Uncrossing Process described in
Supplementary Material .06(b) to
Options 3, Section 14, does not impose
an undue burden on intra-market
competition because all Stock-Option
Strategies and Stock-Complex Strategies
will be subject to the same process. All
Stock-Option Orders and Stock-
Complex Orders will be transacted in
the Complex Opening by the System.
The Exchange’s proposal to amend
Supplementary Material .04 to Options
3, Section 14 to provide that Stock-
Option Strategies and Stock-Complex
Strategies will open pursuant to the
Complex Opening Price Determination
described in Supplementary Material
.05 to Options 3, Section 14, instead of
the Complex Uncrossing Process
described in Supplementary Material
.06(b) to Options 3, Section 14 does not
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87
See Options 7, Section 6, Ports and Other
Services.
88
15 U.S.C. 78s(b)(3)(A)(iii).
89
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.
impose an undue burden on inter-
market competition because other
options markets may also elect to permit
similar order types to trade in their
complex opening process.
Trade Value Allowance
The Exchange’s proposal to no longer
offer Trade Value Allowance does not
impose an undue burden on intra-
market competition because no Member
would be able to utilize the Trade Value
Allowance. The proposed stock-tied
functionality is identical to Phlx
Options 3, Sections 13(b)(10)(ii) and
14(a)(i) and MRX Supplementary
Material .08(b) to Options 3, Section 11
Options 3, Section 12(b)(2),
Supplementary Material .09(b) to
Options 3, Section 13, Supplementary
Material .02 to Options 3, Section 14
and Options 3, Section 16(d). with
respect to utilizing NES to process and
report the stock or ETF component of a
Complex Order.
The Exchange’s proposal to no longer
offer Trade Value Allowance does not
impose an undue burden on inter-
market competition because other
options exchanges could choose to offer
a similar functionality.
Options 3, Section 7
The Exchange’s proposal to make a
clarifying change to ISE Options 3,
Section 7, Types of Orders and Order
and Quote Protocols does not impose an
undue burden on intra-market
competition because all Members may
enter QCC with Stock Orders through
FIX or Precise. While Members only
require one order entry port to submit
orders into ISE, the Exchange offers
Members a choice between 2 different
types of ports to utilize to submit QCC
with Stock Orders.
87
The Exchange’s proposal to make a
clarifying change to ISE Options 3,
Section 7, Types of Orders and Order
and Quote Protocols does not impose an
undue burden on inter-market
competition because other options
exchanges may also create order entry
protocols for their markets.
Additionally, the Exchange’s proposal
to amend Supplementary Material .02(d)
to Options 3, Section 7 to add QCC with
Stock Orders and Complex QCC with
Stock to the list of order types that have
a Time in Force or ‘‘TIF’’ of Immediate-
or-Cancel or ‘‘IOC’’ does not impose an
undue burden on intra-market
competition because this amendment
reflects the description of these
particular order types which will either
execute on entry or cancel. All QCC
with Stock Orders and Complex QCC
with Stock that are entered on ISE will
be handled in the same manner.
Further, all Members may trade QCC
with Stock Orders and Complex QCC
with Stock Orders. Additionally, the
Exchange’s proposal to amend
Supplementary Material .02(d) to
Options 3, Section 7 related to
Immediate-or-Cancel Orders does not
impose an undue burden on inter-
market competition because other
options markets may adopt a similar
requirement for such orders.
Options 3, Section 12
The Exchange’s proposal to amend
Options 3, Section 12(e)(4) to clarify
that a Member may submit a QCC with
Stock Order with a net price for the
stock and options components through
FIX or they may submit separate prices
for the stock and options components,
or a net price for both may be entered
through Precise does not impose an
intra-market burden on competition
because all Members are required to
uniformly submit QCC with Stock
Orders in this fashion.
The Exchange’s proposal to amend
Options 3, Section 12(e)(4) to clarify
that a Member may submit a QCC with
Stock Order with a net price for the
stock and options components through
FIX or they may submit separate prices
for the stock and options components,
or a net price for both may be entered
through Precise does not impose an
inter-market burden on competition
because each exchange may specify the
manner in which certain order types
may be submitted to an exchange and
the format for submitting those orders.
Also, requiring QCC with Stock Orders
to be submitted through FIX or Precise
is consistent with proposed Options 3,
Section 7(t) which requires Members to
enter QCC Orders through FIX or
Precise.
Options 3, Section 15
The Exchange’s proposal to amend its
Market Wide Risk Protection within
Options 3, Section 15(a)(1)(C) to utilize
defined terms along with new language
does not impose an undue burden on
intra-market competition because the
counting programs within the Market
Wide Risk Protections will apply
equally to all Members. The proposal to
amend the Market Wide Risk Protection
does not impose an undue burden on
inter-market competition because other
options exchanges may adopt similar
risk protections for their members.
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
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 from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act
88
and
subparagraph (f)(6) of Rule 19b–4
thereunder.
89
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 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 (https://www.sec.gov/
rules/sro.shtml); or
Send an email to rule-comments@
sec.gov. Please include file number SR–
ISE–2023–13 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–2023–13. This file
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90
17 CFR 200.30–3(a)(12).
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b–4.
3
15 U.S.C. 78s(b)(3)(A).
4
17 CFR 240.19b–4(f)(4)(ii).
5
Capitalized terms used but not defined herein
have the meanings specified in the Delivery
Procedures or, if not defined therein, the ICE Clear
Europe Clearing Rules.
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 website (https://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 website 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. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–ISE–2023–13 and should be
submitted on or before September 1,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
90
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–17208 Filed 8–10–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98072; File No. SR–ICEEU–
2023–017]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of Filing
and Immediate Effectiveness of
Proposed Rule Change Relating to
Amendments Part O of Its Delivery
Procedures
August 7, 2023.
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 July 26,
2023, ICE Clear Europe Limited (‘‘ICE
Clear Europe’’ or the ‘‘Clearing House’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule changes described in
Items I, II and III below, which Items
have been prepared primarily by ICE
Clear Europe. ICE Clear Europe filed the
proposed rule change pursuant to
Section 19(b)(3)(A) of the Act
3
and Rule
19b–4(f)(4)(ii) thereunder,
4
such that the
proposed rule change was immediately
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
ICE Clear Europe Limited (‘‘ICE Clear
Europe’’ or the ‘‘Clearing House’’)
proposes to amend Part O of its Delivery
Procedures
5
(for Financials and Softs
Cocoa Contracts) to provide for use of a
new Softs Delivery Platform, make
certain changes to the delivery timetable
and delivery documentation, and
address certain matters relating to
allocation and the conversion of lots.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICE
Clear Europe 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. ICE
Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C)
below, of the most significant aspects of
such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(a) Purpose
ICE Clear Europe is proposing to
amend Part O of its Delivery Procedures
to amend certain delivery specifications
for ICE Futures Europe Financials and
Softs Cocoa Futures Contracts (‘‘Cocoa
Contracts’’) to reflect the
implementation of a new Softs
Deliveries Platform to be used for
deliveries under the Contract. A
conforming change would also be made
in the introductory section of the
Delivery Procedures. Certain other
provisions in Part O relating to the
delivery timetable and allocation and
conversion of lots would also be
amended, as described herein, in
connection with the implementation of
the Softs Delivery Platform.
In the General Provisions section of
the Delivery Procedures, in paragraph
21, references to the new Softs Delivery
Platform as the electronic system used
for making and taking delivery under
cocoa contracts would be added
(alongside the existing Guardian system,
which will continue to be used for
deliveries under coffee contracts). The
amendments would also remove an
incorrect reference to bonds (for which
neither Guardian nor the new Softs
Delivery Platform is used).
The proposed amendments in Part O
of the Delivery Procedures would
replace relevant references to the
Guardian delivery system throughout
Part O with the new Softs Delivery
Platform and otherwise remove
references to the Guardian delivery
system, such that transfers of warrants
would be made through the Softs
Delivery Platform and applicable
delivery notices and other specified
delivery documentation relevant to
Sellers and Buyers would be provided
or made available through the Softs
Delivery Platform.
Procedures for allocations of cocoa,
including notifications and reports
relating to allocations would be
reorganized and consolidated into a
single provision for simplicity and
clarity. As proposed to be revised,
reports relating to allocation details
would be made available to both Sellers
and Buyers through the Clearing House
MFT system.
The amendments also update the
content of reports made available to
Seller and Buyer to remove general
references to ‘‘delivery details’’
throughout Part O, as the relevant
information is provided in the specific
referenced reports provided through the
Softs Delivery Platform. The names of
certain reports would also be updated
throughout Part O, specifically with
references to final account sale reports
changed to account sale reports and
references to final invoice reports
changed to Buyers invoice reports.
The timing for certain notifications
related to the conversion of lots would
be moved from by 16:00 LPT (in the
case of certain directions by the Clearing
House) and after 16:00 LPT (in the case
of the availability of conversion details
for Sellers), to after 10:00 LPT in both
scenarios. The amendments would also
remove an incorrect reference about
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