[Federal Register Volume 78, Number 225 (Thursday, November 21, 2013)]
[Notices]
[Pages 69923-69925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-27899]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70884; File No. SR-ISE-2013-59]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Address the Treatment of Certain Stop Orders During a Limit 
State or Straddle State

November 15, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 7, 2013, the International Securities Exchange, LLC 
(the ``Exchange'' or the ``ISE'') filed with the Securities and 
Exchange Commission (``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules to address how certain 
stop orders are handled during a Limit State or Straddle State.
    The text of the proposed rule change is available on the Exchange's 
Internet Web site at http://www.ise.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The self-regulatory organization has prepared summaries, 
set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to amend Exchange rules 
to address how stop orders are handled during a Limit State \3\ or 
Straddle State.\4\ On May 31, 2012, the Commission approved the Plan to 
Address Extraordinary Market Volatility (the ``Plan''),\5\ 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.\6\ 
The Plan has been implemented, as a one year pilot program, in two 
phases.\7\ Phase I of the Plan became effective on April 18, 2013 and 
applies to Tier I NMS Stocks per Appendix A of the Plan, with Phase II, 
which would apply to all NMS Stocks, scheduled to become effective six 
months later.
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    \3\ Limit State means the condition when the national best bid 
or national best offer for an underlying security equals an 
applicable price band, as determined by the primary listing exchange 
for the underlying security. See ISE Rule 703A(a)(2).
    \4\ Straddle State means the condition when the national best 
bid or national best offer for an underlying security in non-
executable, as determined by the primary listing exchange for the 
underlying security, but the security is not in a Limit State. See 
ISE Rule 703A(a)(3).
    \5\ See Securities Exchange Act Release No. 67091 (May 31, 
2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (``Plan Approval 
Order'').
    \6\ Id.
    \7\ Id.
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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 impacts the trading of options classes traded on the Exchange.
    When the national best bid (offer) for a security underlying an 
options class is

[[Page 69924]]

non-executable, the ability for options market participants to purchase 
(sell) shares of the underlying security and the price at which they 
may be able to purchase (sell) shares becomes uncertain, as there is a 
lack of transparency regarding the availability of liquidity for the 
security. This uncertainty is factored into the options pricing models 
of market professionals, such as options market makers, which then 
results in wider spreads and less liquidity at the best bid and offer 
for the options class. To address trading during limit up-limit down 
states, the Exchange adopted rules to govern the handling of market 
orders and stop orders.\8\ Specifically, the Exchange currently 
automatically rejects 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.\9\ Such un-priced orders include market 
orders and stop orders, which become market orders when the stop price 
is elected.\10\ The Exchange also currently cancels any unexecuted 
market orders and unexecuted stop orders.
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    \8\ See Securities Exchange Act Release No. 69148 (March 15, 
2013), 78 FR 17462 (March 21, 2013 (SR-ISE-2013-20).
    \9\ See ISE Rules 703A(b)(1) and (2).
    \10\ See ISE Rule 715(e).
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    After discussions with, and at the request of members, the Exchange 
now proposes to amend the treatment of unexecuted stop orders. 
Specifically, the Exchange proposes to hold, rather than cancel, all 
unexecuted stop orders pending in the trading system until the end of a 
Limit State or Straddle State, at which point the order will become 
eligible to be elected if the market for the particular option contract 
has reached the specified contract price. The Exchange believes that it 
is unduly burdensome for members to have stop orders cancelled back to 
them without their affirmatively choosing to do so, particularly when 
these orders have not become eligible to be elected and therefore are 
not at risk of being executed at inferior prices. The Exchange further 
believes it is appropriate, in the interests of promoting fair and 
orderly markets, to hold unexecuted stop orders rather than cancel 
them, until the end of a Limit State or Straddle State. The Exchange 
believes that when investors enter a stop order, they have an 
expectation that the stop order will be traded at the elected price 
once a Limit State or Straddle State has ended, and that the order will 
not be cancelled back to them. Investors send stop orders because they 
do not want to continuously monitor them and expect that the order will 
execute once the stop price has been reached. The Exchange believes it 
is onerous for investors to have these orders cancelled back to them 
when they expect these orders to trade at their stopped price. The 
Exchange is not proposing any change to how unexecuted market orders 
are treated and, per Rule 703A(b)(1), these orders will continue to be 
canceled upon the initiation of a Limit State or Straddle State in the 
underlying security. The Exchange believes that holding unexecuted 
market orders until the underlying security comes out of a Limit State 
or Straddle State could result in these orders being executed at prices 
drastically different from the time when these orders were first sent 
to the Exchange for execution. As noted above, orders that do not 
contain a limit price are at risk of being executed at inferior prices 
if the Exchange were to hold such orders in the system until the 
underlying security comes out of a Limit State or Straddle State. 
Canceling such orders therefore provides investors the opportunity to 
submit their orders for execution at their expected price.
    While the proposed treatment of unexecuted stop orders is a 
departure from how these orders are currently addressed, the Exchange 
believes this rule change will promote fair and orderly markets as 
investors will have greater certainty that these orders will be 
executed once they become eligible rather than be cancelled. The 
proposed rule change is also consistent with how such orders are 
treated on other exchanges.\11\
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    \11\ See Chicago Board Options Exchange, Inc. (``CBOE'') Rule 
6.53, Interpretation and Policies .01(C).
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Securities Exchange Act of 1934 (the ``Act'') \12\ in 
general, and furthers the objectives of Section 6(b)(5) of the Act \13\ 
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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    \12\ 15 U.S.C. 78f(b).
    \13\ 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. Given that a Limit State or a Straddle 
State may be resolved very quickly, the Exchange believes holding 
unexecuted stop orders in the trading system until the end of a Limit 
State or a Straddle State, rather than canceling them, will provide 
market participants a greater opportunity to have their orders executed 
when the market for the particular option contract reaches its 
specified price.

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

    The Exchange does not believe that the proposal will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Specifically, the Exchange 
believes the proposed rule change will not impose any burden on 
intramarket competition because it will apply to all market makers 
equally. The Exchange does not believe the proposed rule change will 
impose any burden on intermarket competition as the proposed change is 
made for the protection of investors.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange believes that the foregoing proposed rule change may 
take effect upon filing with the Commission pursuant to 
Section19(b)(3)(A) \14\ of the Act and Rule 19b-4(f)(6) thereunder \15\ 
because the foregoing proposed rule change does not (i) significantly 
affect the protection of investors or the public interest, (ii) impose 
any significant burden on competition, and (iii) become operative for 
30 days after its filing date, or such shorter time as the Commission 
may designate.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in

[[Page 69925]]

furtherance of the purposes of the Act. If the Commission takes such 
action, the Commission shall institute proceedings to determine whether 
the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ISE-2013-59 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ISE-2013-59. 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 20549-1090, 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 offices of ISE. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ISE-2013-59, 
and should be submitted on or before December 12, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-27899 Filed 11-20-13; 8:45 am]
BILLING CODE 8011-01-P