[Federal Register Volume 78, Number 55 (Thursday, March 21, 2013)]
[Notices]
[Pages 17462-17464]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-06481]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69148; File No. SR-ISE-2013-20]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Related to Limit Up/Limit Down
March 15, 2013.
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 March 4, 2013, the International Securities Exchange, LLC (``ISE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II, below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules proposing changes to its
rules in light of the implementation of limit-up/limit-down procedures
for securities that underlie options traded on the ISE. The text of the
proposed rule change is available on the Exchange's Web site
www.ise.com, at the principal office of the Exchange, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
On May 31, 2012, the Commission approved the Plan to Address
Extraordinary Market Volatility (the ``Plan''),\3\ which establishes
procedures to address extraordinary volatility in NMS Stocks. The
procedures provide for market-wide limit up-limit down requirements
that prevent trades in individual NMS Stocks from occurring outside of
specified Price Bands. These limit up-limit down requirements are
coupled with Trading Pauses to accommodate more fundamental price
moves. The Plan procedures are designed, among other things, to protect
investors and promote fair and orderly markets.\4\
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\3\ Securities Exchange Act Release No. 67091 (May 31, 2012), 77
FR 33498 (June 6, 2012) (File No. 4-631) (``Plan Approval Order'').
\4\ Id. at 33511 (Preamble to the Plan).
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ISE is not a participant in the Plan because it does not trade NMS
Stocks. However, the ISE trades options contracts overlying NMS Stocks.
Because options pricing models are highly dependent on the price of the
underlying security and the ability of options traders to effect
hedging transactions in the underlying security, the implementation of
the Plan will impact the trading of options classes traded on the
Exchange. Specifically, under the Plan, upper and lower price bands
will be calculated based on a reference price for each NMS Stock.\5\
[[Page 17463]]
When one side of the market for an individual security is outside the
applicable price band, the national best bid or national best offer
will be disseminated with a flag identifying it as non-executable
(i.e., a ``Straddle State''). When the other side of the market reaches
the applicable price band, such national best bid or offer will be
disseminated with a flag identifying it as a Limit State Quotation.\6\
If trading for a security does not exit a Limit State within 15
seconds, a Trading Pause will be declared by the Primary Listing
Exchange.\7\ The Trading Pause will last at least five minutes \8\ and
will end when the Primary Listing Exchange disseminates a Reopening
Price.\9\
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\5\ The reference price equals the arithmetic mean price of
eligible reported transactions for the NMS Stock over the
immediately preceding five-minute period. See Section I(T) of the
Plan.
\6\ See Section I(D) of the Plan. The Limit State will end when
the entire size of all Limit State Quotations are executed or
cancelled.
\7\ See Section VII(A) of the Plan. The Primary Listing Exchange
is the market on which an NMS Stock is listed. If an NMS Stock is
listed on more than one market, the Primary Listing Exchange is the
market on which the security has been listed the longest. See
Section I(O) of the Plan. A trading pause may also be declared when
the national best bid (offer) is below (above) the lower (upper)
price band and the security is not in a Limit State, and trading in
that security deviates from normal trading characteristics. See
Section VII(A)(2) of the Plan.
\8\ A Trading Pause may last longer than 5 minutes if, for
example, the Primary Market declares a Regulatory Halt, or if there
is a significant order imbalance. See Section VII(B) of the Plan. If
the Primary Listing Exchange does not report a Reopening Price
within ten minutes after the declaration of a trading Pause and has
not declared a Regulatory Halt, all trading centers may begin
trading the security. Id.
\9\ The Reopening Price is the price of a transaction that
reopens trading on the Primary Listing Exchange following a Trading
Pause or a Regulatory Halt, or, if the Primary Listing Exchange
reopens with quotations, the midpoint of those quotations. The
Exchange notes that under ISE Rule 702(c), trading on the Exchange
is halted whenever trading in the underlying security has been
paused by the primary listing market. Accordingly, the Exchange need
not adopt any rule changes to address this aspect of the Plan.
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When the national best bid (offer) for a security underlying an
options class is non-executable, the ability for options market
participants purchase (sell) shares of the underlying security and the
price at which they may be able to purchase (sell) shares will become
uncertain, as there will be a lack of transparency regarding the
availability of liquidity for the security.\10\ This uncertainty will
be factored into the options pricing models of market professionals,
such as options market makers, which will likely result in wider
spreads and less liquidity at the best bid and offer for the options
class. In light of these unusual market conditions, when the national
best bid or offer for a security underlying an options class traded on
the Exchange is non-executable or when the underlying security is in a
Limit State, the Exchange proposes to reject incoming and pending
orders that do not have a limit price. This proposed change is
consistent with the views of the Securities Industry and Financial
Markets Association's (``SIFMA'') Listed Options Trading Committee.\11\
The Exchange believes that all of the options exchanges are considering
similar rule changes so that there will be a uniform approach across
the exchanges.\12\
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\10\ See Letter to Boris Ilyevsky, Managing Director, ISE, from
Thomas Price, Managing Director, Securities Industry and Financial
Markets Association, dated October 4, 2012 (``SIFMA Letter''). A
copy of the letter is provided in Exhibit 2 to this filing.
\11\ Id.
\12\ Id. (recommending that the options exchanges and the
Commission work together to assemble a uniform set of rules).
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Specifically, the Exchange proposes to automatically reject all
incoming orders that do not contain a limit price to protect them from
being executed at prices that may be vastly inferior to the prices
available immediately prior to or following a Limit State or Straddle
State. Such un-priced orders include market orders and stop orders,
which become market orders when the stop price is elected.\13\ The
Exchange will also cancel any unexecuted market orders and unexecuted
stop orders.\14\
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\13\ ISE Rule 715(e).
\14\ Cancelling such orders is consistent with the views
expressed by SIFMA. SIFMA Letter, supra note 10. Market orders may
be unexecuted at the time that a Limit State or Straddle State is
initiated for a number of reasons, such as they are being handled by
the Primary Market Maker (see ISE Rule 803(c)), they are being
exposed (see ISE Rule 716(c), ISE Rule 722(iii); and ISE Rule 803,
Supplementary Material .02)), or they have been directed to a market
maker (see ISE Rule 811). The Exchange will not reject pending
transactions in the Exchange's Facilitation, Solicited Order,
Crossing Order or Price Improvement Mechanisms, as all such
transactions are initiated with a limit price. ISE Rule 716(d)
(Facilitation Mechanism); ISE Rule 716(e) (Solicited Order
Mechanism); Rule 721 (Crossing Orders); and Rule 723 (Price
Improvement Mechanism). Allowing such transactions during a Limit
State or Straddle State is consistent with the views expressed by
SIFMA. SIFMA Letter, supra note 10.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \15\ in general, and furthers the objectives of Section
6(b)(5) of the Act \16\ in particular, in that it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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As discussed above, when an underlying security enters a Limit
State or Straddle State, the best bid and offer in the options class is
likely to widen considerably, and the liquidity available at those
prices may be greatly reduced. In such circumstances, orders entered
without a price could receive executions at prices that are vastly
inferior to the market price just prior to the initiation of the Limit
State or Straddle State and vastly inferior to the market price
following the conclusion of the Limit State or Straddle State. Given
that these states may be resolved very quickly, the Exchange believes
that rejecting un-price orders will protect investors from receiving
poor executions and provide a more fair and orderly market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposal will have any
impact on competition, and that it is likely that all of the other
options exchanges will adopt similar order protection rules.\17\
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\17\ SIFMA Letter, supra note 10.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written comments from members or other interested parties on this
proposed rule change, however, the Exchange received a written request
to adopt the rule changes contained in the proposal.\18\
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\18\ Id.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \19\ and Rule 19b-4(f)(6) thereunder.\20\
Because the 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 prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
[[Page 17464]]
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\19\ 15 U.S.C. 78s(b)(3)(A)(iii).
\20\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires the Exchange to give the Commission written notice of the
Exchange's intent to file the proposed rule change, along with a
brief description and text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission. The
Exchange has satisfied this requirement.
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
Section 19(b)(2)(B) of the Act \21\ to determine whether the proposed
rule change should be approved or disapproved.
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\21\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File No. SR-ISE-2013-20 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-ISE-2013-20. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-ISE-2013-20 and should be
submitted on or before April 11, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-06481 Filed 3-20-13; 8:45 am]
BILLING CODE 8011-01-P