[Federal Register Volume 79, Number 125 (Monday, June 30, 2014)]
[Notices]
[Pages 36849-36851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-15202]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72455; File No. SR-ISE-2014-09]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Instituting Proceedings to Determine Whether to Approve or 
Disapprove Proposed Rule Change Relating to Market Maker Risk 
Parameters

June 24, 2014.

I. Introduction

    On March 10, 2014, the International Securities Exchange, LLC 
(``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend ISE Rules 722 and 804 to 
mitigate market maker risk by adopting an Exchange-provided risk 
management functionality. The proposed rule change was published for 
comment in the Federal Register on March 26, 2014.\3\ The Commission 
received no comments on the proposal. On May 7, 2014, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to either approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to

[[Page 36850]]

disapprove the proposed rule change.\5\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change.\7\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71759 (Mar. 20, 
2014), 79 FR 16850 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 72117 (May 7, 2014), 
79 FR 27360 (May 13, 2014). The Commission determined that it was 
appropriate to designate a longer period within which to take action 
on the proposed rule change so that it has sufficient time to 
consider the proposed rule change. Accordingly, the Commission 
designated June 24, 2014 as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ Relatedly, the Commission is also instituting proceedings 
under Section 19(b)(2)(B) of the Act to determine whether to approve 
or disapprove a proposed rule change filed by ISE's affiliated 
exchange, ISE Gemini, LLC (``ISE Gemini''), that mirrors the rule 
change proposed by ISE. See Securities Exchange Act Release No. 34-
72454 (June 24, 2014).
---------------------------------------------------------------------------

II. Description of the Proposal

    As described in the Notice, the Exchange proposes to amend ISE 
Rules 722 and 804 to mitigate market maker risk by adopting an 
Exchange-provided risk management functionality. Currently, pursuant to 
ISE Rules 722 and 804, the Exchange automatically removes a market 
maker's quotes in all series of an options class when certain parameter 
settings are triggered. Specifically, there are four parameters that 
can be set by market makers on a class-by-class basis and are available 
for market maker quotes in single options series and in complex 
instruments on the complex order book. Pursuant to the rules, market 
makers establish a time frame during which the system calculates: (1) 
The number of contracts executed by the market maker in an options 
class; (2) the percentage of the total size of the market maker's 
quotes in the class that has been executed; (3) the absolute value of 
the net between contracts bought and contracts sold in an options 
class; and (4) the absolute value of the net between (a) calls 
purchased plus puts sold and (b) calls sold plus puts purchased. The 
market maker establishes limits for each of these four parameters, and 
when the limits are exceeded within the prescribed time frame, the 
market maker's quotes in that class are removed or curtailed.\8\ 
Separately, the Exchange recently adopted another risk management 
parameter that permits market maker quotes in all classes to be 
automatically removed from the trading system if a specified number of 
curtailment events are exceeded within the prescribed time period 
across the ISE market.\9\ It is mandatory for market makers to enter 
values into all of the quotation risk management parameters for all 
options classes in which it enters quotes.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 70132 (August 7, 
2013), 78 FR 49311 (August 13, 2013) (SR-ISE-2013-38).
    \9\ See Securities Exchange Act Release No. 71446 (January 30, 
2014), 79 FR 6951 (February 5, 2014) (SR-ISE-2014-04).
---------------------------------------------------------------------------

    In the Notice, the Exchange proposes to further enhance its risk 
management offering by implementing an additional functionality that 
would permit market maker quotes to be automatically removed from the 
trading system if a specified number of curtailment events occur across 
ISE and its affiliated exchange, ISE Gemini. According to the Exchange, 
a single trading system governs the trading activity on both ISE and 
ISE Gemini.\10\
---------------------------------------------------------------------------

    \10\ See Notice, supra note 3.
---------------------------------------------------------------------------

    As proposed, market makers who choose to use this functionality 
would be able to set market wide parameters to govern its trading 
activity across both ISE and ISE Gemini. Once the parameter is set, the 
trading system would count the number of times a market maker's pre-set 
curtailment event occurs on each exchange, as specified in ISE Rule 
804(g) (for regular orders) and ISE Rule 722, Supplementary Material 
.04 (for complex orders) and aggregate them. Once the specified number 
of curtailment events across both markets has been reached, the trading 
system would automatically remove all of the market maker's quotes in 
all classes on both ISE and ISE Gemini. The Exchange believes this 
functionality would reduce market maker risk in the event the market 
maker suffers from a systems issue or the occurrence of an unusual or 
unexpected market activity. As proposed, any quotes sent by the market 
maker after the market-wide parameter across both markets has been 
triggered would be rejected until the market maker notifies each 
exchange--in a non-automated manner, such as email or telephone--that 
it is ready to come out of its curtailment. Once notified by the market 
maker, the market operations staff for each exchange would reactivate 
the market maker's quotes and the market maker would again be active in 
on both ISE and ISE Gemini.\11\
---------------------------------------------------------------------------

    \11\ See Notice, supra note 3 for examples illustrating how the 
Exchange's market wide risk management parameter would be applied 
under the proposal.
---------------------------------------------------------------------------

    According to the Exchange, the proposed risk management 
functionality would operate consistently with the firm quote 
obligations of a broker-dealer pursuant to Rule 602 of Regulation NMS. 
The Exchange anticipates that any marketable orders or executable 
quotes received before the proposed functionality is triggered would 
automatically execute at the price up to the market maker's size, 
regardless of whether such execution would result in executions in 
excess of the market maker's pre-set parameters. Further, the Exchange 
states that the proposed cross-exchange market wide parameter will not 
be mandatory and that market makers who prefer to use their own risk 
management systems can set the Exchange parameters to not be triggered.

III. Proceedings to Determine Whether to Approve or Disapprove SR-ISE-
2014-09 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \12\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide additional comment on the proposed rule 
change.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    As discussed above, the Exchange proposes to amend ISE Rules 722 
and 804, which would expand the current risk management offerings by 
ISE and provide for cross-exchange risk management functionality. The 
Commission believes that the proposal, which seeks to allow removal of 
a market maker's quotes in all classes on both ISE and ISE Gemini once 
an aggregated pre-set number of curtailment events on both exchanges is 
reached, raises important issues that warrant further public comment 
and Commission consideration. Namely, the Commission believes that 
proceedings are appropriate to consider, among other matters, whether 
the proposal is unfairly discriminatory to any member of the Exchange 
and the impact of the proposal on competition among exchanges.
    Pursuant to Section 19(b)(2)(B) of the Act,\13\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be

[[Page 36851]]

``designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to perfect the 
mechanism of a free and open market and a national market systems; and 
not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.'' \14\ The Commission is also instituting 
proceedings to allow for additional analysis of the proposed rule 
change's consistency with Section 6(b)(8) of the Act, which requires 
that rules of a national securities exchange ``do not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of'' the Act.
---------------------------------------------------------------------------

    \13\ Id.
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Sections 6(b)(5) and 6(b)(8) or any other provision of 
the Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\15\
---------------------------------------------------------------------------

    \15\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by July 21, 2014. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by August 4, 
2014.
    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-2014-09 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-2014-09. 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 filings also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ISE-2014-09 and should be 
submitted on or before July 21, 2014. Rebuttal comments should be 
submitted by August 4, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15202 Filed 6-27-14; 8:45 am]
BILLING CODE 8011-01-P